Who Stole the American Dream?

by Hedrick Smith

  McCain in Opposition

  No less a conservative than Arizona Republican John McCain voted against the Bush tax cut. McCain had advocated tax relief for “millions of hardworking Americans.” But when he saw that the Bush package was stacked against the middle class, he voted no. “I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief,” McCain protested.

  When economists did the numbers, they found that 52.5 percent of the Bush tax cuts went to the richest 5 percent of U.S. households, while 80 percent of Americans got one-fourth of the tax breaks through 2010. Bush had abandoned the “compassionate conservatism” of his 2000 campaign. Backed by the Gang of Six, he had rammed through a tax bill that ran contrary to public opinion.

  “Far from representing popular wishes, the size, structure, and distribution of the tax cuts passed in 2001 were directly at odds with majority views,” noted political scientists Jacob Hacker and Paul Pierson. Instead, they observed, the Bush White House was rewarding its political base—“the partisans, activists, and moneyed interests that are their first line of support….”

  Business vs. Labor: 16-to-1 Odds

  What powered the business community’s ability to persuade Congress to buck public opinion on the Bush tax cuts was a political machine with unparalleled clout in political campaigns and influence deep in the tax-writing committees of Congress—a machine that far outstripped that first business coalition after the 1971 Powell memo.

  The media still treat business and labor as rough equals in the Washington power game, but that image is forty years out of date. Business vastly outguns organized labor in its ability to marshal money and political muscle. The gap between the two is far, far greater than the public realizes or than most political reporters reflect.

  Not only did business respond to the Powell memo by dramatically expanding its lobbying presence in Washington, but it has moved aggressively into campaign politics. Unions were the first to form PACs, or political action committees, to funnel dollars to friendly candidates. But once corporate PACs got the green light, they surged ahead.

  The explosive growth of corporate PACs dates from a 1975 ruling by the Federal Election Commission, which approved not only company PACs, but the right of corporate management to solicit funds from employees and to use company funds to manage their PACs. Before that, labor PACs outnumbered corporate PACs by 201 to 89. Today, business PACs have an overwhelming advantage. Companies and business trade associations have set up 2,593 PACs to 272 for labor unions.

  Important as they are, PACs are only part of the story in the changing balance of power. PACs are subject to specific legal limits on donations from individuals to candidates. Really big donors look for ways to get around those legal limits. One way is through “bundling”—the kind of fund-raising that business lobbyists like Dirk Van Dongen specialize in. They gather lots of individual donations from their friends and business colleagues and put them together in a “bundle.” That gives them credit—and political chits with officeholders who receive those “bundles.”

  But the biggest campaign donations come in the form of what is known in campaign argot as “soft money”—“soft” because the donations are not subject to fixed, hard, legal limits. Soft money donations cannot go directly to candidates, but they can be contributed to parties or to independent groups, including Super-PACs, which are not legally supposed to have any direct connection with candidates. Until the last couple of years, when Super-PACs took off in size and activity, soft money donations were typically designated for organizational and educational efforts by the political parties—to the Republican National Committee or the Democratic National Committee, or to state and local party committees, or the party committees that back campaigns for the U.S. Senate, Congress, and so on, down the line, for get-out-the-vote efforts or TV issue ad campaigns. Party organizations at all levels are forever on the hunt for soft money, and with no legal limits on the size of donations, the financial floodgates are wide open. The checks can run into the hundreds of thousands and even the millions.

  In the pivotal congressional elections of 2010, business interests pumped in $972 million in soft money contributions mostly to the Republican Party vs. $10 million for labor—a staggering 97-to-1 business advantage. In PAC donations, the business tilt was significant, too: Business PACs outdid labor PACs by $333 million to $69 million, according to the Center for Responsive Politics. Add it all together, the center says, and business outspent labor 16 to 1 in the 2010 elections.

  The Shadow Government on K Street

  Corporate money has also fueled the explosive growth of the Washington lobbying industry. In fact, while most of America was mired in economic stagnation during the zero decade, lobbying enjoyed boom times. The banner years were 2009 and 2010, when Washington was busy doling out taxpayer bailout money to troubled banks and Congress was writing laws on health care and regulating Wall Street. In all, $7 billion was spent on lobbying—$3.5 billion a year—in 2009 and 2010, and $6 billion, or more than 87 percent, was spent by business interests. No other lobbying interest was even a close second. Business outspent labor on lobbying by 65 to 1. Not surprising, since business lobbyists as early as 2006 had outnumbered labor lobbyists by more than 30 to 1 (12,785 business lobbyists to 403 for labor). In fact, business leaders did not even bother to mention labor or public interest lobbyists when they were asked to name their primary targets or opponents. They seemed not to regard labor or public interest lobbyists as serious competition.

  Since the early 1990s, a shadow government has taken root along K Street, the Washington corridor that is home to block after stately block of law firms and lobbying offices. Over the years, this army of influence peddlers has gone well beyond the hunt for votes on Capitol Hill. Smart lobbyists know that it is not just the final vote on a bill that counts, but every step along the way. Business enjoys huge political advantages by having its lobbying agents meet day in and day out with key legislators and their staffs, either to kill bills or provisions in them that business considers hostile or to insert arcane subparagraphs that its lobbyists have drafted and tailored to specific corporate interests, often with multibillion-dollar bottom-line consequences.

  Most of the time, lobbying is done in private, but sometimes it emerges in public view. In 2007, for example, the Business Roundtable dug in its heels when Barney Frank, then Democratic chair of the House Financial Services Committee, proposed giving shareholders the right to vote on CEO pay, bonuses, and options. For a decade, shareholder groups and investor advocates had complained that CEO pay packages were far too lavish and that Congress should give shareholders a vote on executive pay. But despite the corporate mantra about CEOs working for shareholder interests, CEOs were up in arms at the thought that shareholders might get a deciding voice on their pay.

  The Business Roundtable, representing the CEOs of America’s 180 largest corporations, sent its president, John Castellani, to inform Congress that the nation’s most powerful corporate leaders objected vehemently—even to a nonbinding advisory vote. “Corporations were never designed to be democracies …,” Castellani told a House Finance Committee hearing. “While shareholders own a corporation, they don’t run it.”

  Barney Frank and his fellow Democrats were unmoved. The Democratic majority in the House passed a pro-shareholder bill. But typical of the power of stealth lobbying in Washington on a relatively low-profile issue, the Business Roundtable and its allies in the Gang of Six found ways to stifle the shareholder bill in the Senate Banking Committee. Without a vote being taken, the bill died in its legislative crib. The investing public was largely unaware that its interests had been suppressed. It took the financial collapse of 2008 finally to get Congress and the Securities & Exchange Commission to authorize shareholder votes on executive pay—but even those were nonbinding.

  The Mystery of High-End Tax Cuts

  As
we saw on the Bush tax cuts, public opinion often gets ignored and special financial interests prevail when Congress and the White House make policy, even though that runs counter to our notions of how American democracy is supposed to work.

  Political scientists, tracking votes in Congress since the 1980s, have developed broad evidence that this is fairly typical—that senators and House members simply tune out the opinions of average Americans when voting on legislation, especially when powerful financial interests get engaged.

  On issues as varied as civil rights, the minimum wage, abortion, and government spending, Princeton professor Larry Bartels found that in the 1980s senators were “vastly more responsive to affluent constituents than to constituents of modest means.” Two decades later, in 2005, another Princeton professor, Martin Gilens, found an even stronger upper-class impact on policy makers on a wide range of policy questions. “Influence over actual policy outcomes appears to be reserved almost exclusively for those at the top of the income distribution,” Gilens concluded.

  After citing a series of public opinion polls from 1998 through 2007, in which significant majorities said they favored higher taxes on the wealthy, two other scholars asserted, “The mystery is how politicians can get away with tax policies that are so out of harmony with the wishes of the American public.”

  Do High-End Tax Cuts Generate Growth?

  The political and economic rationale for tax cuts for the rich made by President George W. Bush and other Republican leaders is that the wealthy are the prime source of job-creating investments that stimulate the nation’s economic growth. That argument is based on classical economic theory, dating from the British economists Adam Smith and David Ricardo in the late eighteenth and early nineteenth centuries.

  Classical economists advocate lowering taxes on the wealthy on grounds that only the wealthy can provide large sums of capital for business investment to drive the economy because the rich can afford to save a larger portion of their income than hard-pressed middle-class families. Accordingly, classical economists and business leaders have seen high concentrations of wealth as justified and have argued that wide income inequalities are actually desirable because they promote growth.

  But a host of modern economic studies contradict the old classical theories. Several studies have analyzed American economic history in twenty-five-year segments, and as Boston College Law School professor James R. Repetti reported, they “are remarkably unanimous in suggesting that high concentrations of wealth correlate with poor economic performance in the long run.” Other studies have examined the modern economic performance of eighty different countries and have come to a similar conclusion that “a more unequal size distribution of income is bad for growth in democracies.”

  Other analysts point to the hesitancy of American businesses to invest in growth during America’s painfully slow economic recovery from 2009 to 2012 as evidence that offering low tax rates to promote investment did not work. Even former Fed chairman Alan Greenspan was moved to comment in 2011 that Corporate America was sitting on nearly $2 trillion in idle capital. Greenspan asserted that the reluctance of business leaders to spend on new plants and equipment and on hiring more workers “accounted for almost all of the rise in unemployment” from 2007 to 2011.

  Economic historians such as Professor James Livingston of Rutgers University contend that it is not business investment but consumer demand that actually drives economic growth. According to Livingston, America’s twentieth-century history shows that businesses don’t invest heavily in growth without strong and growing consumer demand. As if in confirmation, many American businesses, from major banks to big pharmaceuticals, were laying off workers in 2011 while collectively allocating $445 billion of their cash flow to buy back their own stock, thus delivering a payoff for investors while adding to unemployment.

  Exhibit number one showing that there is no direct link between low taxes and high growth was America’s dismal economic record following the massive tax cuts enacted under George W. Bush in 2001, 2002, and 2003. The ten years following the Bush tax cuts, David Leonhardt wrote in The New York Times, were “the decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001–7.”

  What’s more, Bush was also wrong in promising that start-up businesses would create jobs and bring people back into the workforce. Just the opposite happened: The rate of start-up job creation fell, and so did workforce participation. As Princeton economist Alan Krueger reported, “The 2000s saw the worst record of job creation in 50 years, even before the recession that started in 2007.” By contrast, during Bill Clinton’s presidency, U.S. economic growth was strong even though Clinton had pushed through a significant tax increase. Going back further in time, growth was strong under Presidents Eisenhower and Kennedy when the personal income tax rate was more than double today’s rates.

  In short, the economic rationale for low tax rates on the wealthy was wrong.

  The Tax Cut Fight of 2010

  But the historical record had little influence on political Washington in December 2010 when President Obama, trying to help push economic recovery, proposed extending the modest Bush tax cuts for middle- and upper-middle-class Americans, 98 percent of all taxpayers, but letting the tax cuts for the top 2 percent expire. Obama argued that it made no sense to extend tax cuts for the rich because that would add heavily to the budget deficit and just “provide tax relief to primarily millionaires and billionaires. It would cost us $700 billion to do it. On average, millionaires would get a check of $100,000.”

  In opinion polls, a majority of Americans endorsed the Obama approach. As the president noted in a press conference on December 7, “The American people, for the most part, think it’s a bad idea to provide tax cuts to the wealthy.” That same day, a Bloomberg poll reported that 59 percent wanted to “eliminate tax cuts” given to the wealthiest Americans in recent years. Earlier, a CNN poll had reported that 64 percent opposed extending tax cuts for the wealthy.

  Even some Reaganite conservatives and billionaires called it folly to continue tax cuts for the rich. Bruce Bartlett, a senior Treasury Department official under President George H. W. Bush, said Republicans had fallen under the spell of an idea that he called “frankly, nuts—the idea that there is no economic problem that cannot be cured with more and bigger tax cuts….” Multibillionaires like Warren Buffett, head of Berkshire Hathaway, a multinational holding company and investment fund, Bill and Melinda Gates of Microsoft fame, and CNN founder Ted Turner came out in favor of letting taxes go back up for America’s superclass.

  “The rich are always going to say that, you know, just give us the money and we’ll go out and spend more and then it will all trickle down to the rest of you,” Buffett observed. “But that has not worked the last 10 years, and I hope the American public is catching on.”

  Reenter the Gang of Six

  But Buffett did not reckon on the power of Dirk Van Dongen and the Gang of Six to keep the low Bush tax rates. “We kept the coalition in business to protect those rates,” Van Dongen told me. “We activated again to extend the Bush tax cuts.” In July 2010, Van Dongen’s Tax Relief Coalition called for Obama and Congress “to immediately support at least a temporary extension of all [emphasis added] the tax relief passed in the prior decade.” All meant not only the huge 2001 personal income tax cuts, but lower capital gains taxes, a sharp cut in taxes on corporate dividends, a phase-out of the estate tax, and hundreds of business tax breaks, which Senator John McCain had derided as “the worst example of the influence of special-interest groups I have ever seen.”

  The Gang of Six got the jump on the Obama White House. In September 2010, when members of Congress were desperate for campaign dollars, the Gang of Six launched a lobbying blitz on Capitol Hill. The Chamber of Commerce generated seventy-five thousand letters to senators and House members pushing for the tax cuts. The Business Roundtable sent eighty
-seven CEOs knocking on doors on Capitol Hill. “Our position is that this is not the time to raise any taxes,” asserted Johanna Schneider, the Roundtable’s executive director for external affairs.

  In the lame duck session, after the Republican sweep in the midterm elections, President Obama urged congressional leaders to extend middle-class tax cuts, end high-end cuts for the rich, and use $700 billion in revenues from the rich to reduce the federal deficit. But Senate Republicans slammed the door. They refused “to proceed to any legislative item” on any issue, from arms control to food safety, until Obama and the Democrats agreed to extend tax cuts for the wealthy along with everyone else. Obama protested that middle-class tax cuts were being “held hostage to the high-end tax cuts,” and he was opposed to negotiating with hostage takers.

  But in the end, Obama felt compelled to agree to a two-year extension of all the Bush tax cuts in return for Republican acceptance of some added benefits for the middle class—an extension of jobless benefits for the long-term unemployed and a one-year payroll tax cut for most workers. But Republicans extracted a final concession for the super-rich—cutting the estate tax rate from 55 to 35 percent and exempting estates of married couples up to $10 million. Congress passed this package swiftly, and the Gang of Six, which had barely said a kind word about President Obama in months, applauded him for surrendering.

  And Dirk Van Dongen vowed that business forces would be ready to fight Obama again, when the tax cuts are scheduled to expire at the end of 2012.

  CHAPTER 10

  THE WASHINGTON—WALL STREET SYMBIOSIS