Many Americans no doubt still believe in the American dream, and thus “buy in” to the rhetoric and policies put forward by the political parties to nurture it (and them). One wonders how long they can maintain that illusion, for America is transforming itself into one of the most unfair, most rigid, and least socially mobile of the industrialized countries. In the US, parental income now has about a 50 percent weight in determining a child’s lifetime economic prospects. Germany, Sweden, and even class-ridden France are now fairer and more upwardly mobile societies than the US—on average, parental incomes have only about a 30 percent weight in determining the next generation’s outcomes. The truly equitable, high-mobility societies are Canada, Norway, Denmark, and Finland, where parental income accounts for only about 20 percent of a child’s lifetime earnings. Even many “developing” nations, such as Taiwan and South Korea, now have levels of opportunity and fairness that exceed America’s. For example, someone born into a poor family in South Korea or Taiwan now has a much higher probability of graduating from school, and exiting poverty, than someone born into a poor family in America. Many of these nations’ citizens also have longer life expectancies than Americans.6
Now, having squandered trillions on mismanaged wars, tax cuts designed especially for the rich, a gigantic property bubble, and massive bailouts for its banks, the US government and its allies are confronting major fiscal problems. At the same time, America’s fundamental economic competitiveness has declined severely, as its physical infrastructure, broadband services, educational system, workforce skills, health care, and energy policies have failed to keep pace with the needs of an advanced economy—yet its policies for encouraging free enterprise are inexplicably held as a standard. However, as we shall see later, this decline is not solely, or even primarily, a matter of money; it is a matter of policy and priorities. In some areas, insufficient government spending is indeed an issue. But in many areas, such as health care, the US as a society is spending far more than other nations, without obtaining the same results.
The principal reason for this is that politically powerful interest groups in the US have been able to block reform: the financial services, energy, military, telecommunications, pharmaceutical, and processed-food industries; the legal, accounting, and medical professions; and to a lesser extent, several unions—these and other groups, including, of course, lobbyists and politicians, have ferociously resisted efforts to improve our future at their expense.
Meanwhile, both political parties are ignoring, lying about, and/or exploiting the country’s very real economic, social, and educational problems. This process is starting to generate an additional danger: demagoguery. As America deteriorates, religious and political extremists are beginning to exploit the growing insecurity and discontent of the population. Thus far, this has principally taken the form of attacks on the government, taxes, and social spending. However, sometimes it is also taking more extreme forms: antiscientific fundamentalist Christianity; attacks on education, the teaching of evolution, vaccines, and scientific activity; and demonization of various groups such as immigrants, Muslims, and the poor.
Presiding over all this is an impressive, though utterly cynical, innovation on the part of American politicians: the political duopoly. Over the past quarter century, the leaders of both the Democratic and the Republican political parties have perfected a remarkable system for remaining in power while serving the new economic oligarchy. Both parties take in huge amounts of money, in many forms—campaign contributions, lobbying, revolving-door hiring, favours, and special access of various kinds. Politicians in both parties enrich themselves and betray the interests of the nation, including most of the people who vote for them. Yet both parties are still able to mobilize support because they skilfully exploit America’s cultural polarization. Republicans warn social conservatives about the dangers of secularism, taxes, abortion, welfare, gay marriage, gun control, and liberals. Democrats warn social liberals about the dangers of guns, pollution, global warming, making abortion illegal, and conservatives. Both parties make a public show of how bitter their conflicts are, and how dangerous it would be for the other party to achieve power, while both prostitute themselves to the financial sector, powerful industries, and the wealthy. Thus, the very intensity of the two parties’ differences on “values” issues enables them to collaborate when it comes to money.
Since the 2008 financial crisis, US policy has subsidized banks and bankers enormously, while extending the Bush administration’s tax cuts for the wealthy. With their bonuses and their industry restored, the fake humility of the bankers who begged for government assistance has now been forgotten. So, unfortunately, has the fact that when the banks were desperate and dependent in 2008 and 2009, the US government had an unparalleled opportunity to finally bring them under control—an opportunity that both the Bush and Obama governments completely wasted and ignored. These same bankers are now among the first to warn about national deficits, to insist on more tax cuts to stay competitive, and to warn darkly that any further regulation will strangle the “innovation” that made them rich, even as it destroyed the world economy.
But they can be expected to behave that way. Over the last thirty years, the economic interests of the top 1 percent, who now control the country’s wealth, businesses, and politics, have diverged sharply from the rest of us.
The Canopy Economy
CANOPY ECOSYSTEMS ARE worlds of flora and fauna that occur at the tops of very tall trees and exist largely apart from the multiple biosystems layered beneath them. They do this in part by getting the best access to sunlight, but in so doing they block the sun from reaching everything below.
The vast income accumulated by the narrow slice of super-elite at the top of the wealth pyramid has created a kind of global “canopy economy” that has lost its connections to the nations and people they sprang from. At the very top, the most senior executives, rainmakers, and traders at global banks and corporations routinely pull down eight-figure pay packages. These are people with four or five mansions around the world, yachts, private jet services anywhere at any time, limousines, servants, access, power. They are able to indulge any little personal whim—like Blackstone chief Steve Schwarzman’s penchant for having $400 stone crab legs flown to him wherever he’s on holiday.
The economic impact of this inequality is now astonishingly high. The wealth and power of the new super-elite is both a clue to and a cause of our very tepid recovery from the financial crash. Companies are wallowing in cash, but average workers don’t have money to spend. Labour productivity has improved dramatically, growing in the US by an almost unheard-of 5.4 percent in 2009. So why won’t companies start to hire, and why are average wages declining?
In part, the answer is that the education and skills of the general population are losing two races—one with technological progress, and another with the skill levels of workers in lower-wage nations. Education is the critical variable here. In the Internet age, one can be a high-income, full-employment nation only if most of the workforce has education and skills superior to those available in India, China, and elsewhere at far lower wages.
But another huge reason for the decline of the economy, and of average wages, is the shifting balance of power between the new economic oligarchy, government leaders, and the rest of the population. Investment decisions, wage rates, and government policies are determined largely by people in the canopy economy. This has two very deep consequences.
The first is that well-run, successful companies are indeed investing, but not in people, and not at home. CEOs see far better opportunities in purchasing information technology systems and in using inexpensive overseas labour.
Large companies such as GE, Boeing, Caterpillar, Ford, and Apple now have, on average, about 60 percent of their sales overseas. (For Intel, it’s 84 percent.) Since the days when Ronald Reagan was its spokesman, GE has seemed like the quintessential American company. But more than half of GE’s employees, revenues, and
assets are on distant shores. The heavy equipment manufacturer Caterpillar’s foreign revenues are about 68 percent of its total. Its recent major acquisitions and investments include two engine plants, a backhoe plant, and a mining equipment factory, all in China; an engine plant in Germany, a truck plant in India, and a pump and motor factory in Brazil. Ford, GM, IBM, and almost any other top manufacturing or services company have much the same profile. Of the $2 trillion in cash sitting on American corporate balance sheets, about $1 trillion is actually parked overseas.7
GE was a pioneer in outsourcing, starting with data-processing services, using low-cost vendors like India. President Obama’s choice of Jeffrey Immelt, the company’s CEO, to head a new White House economic advisory council in early 2011 came just a few months after Immelt had shut down a string of American lightbulb factories to shift production to China. Like many other firms, GE has also used its global operations to shield income from taxes, helping it to pay no US corporate income taxes for the last several years despite having billions of dollars per year in profits.
Over the last decade, moreover, what is still called “outsourcing” has become something else. The shift to overseas purchasing and investment has spread from low-wage, labour-intensive activities to extremely high-technology, high-skill activities in both manufacturing and services. This development has serious implications for our economic future.
It would probably not surprise many people to learn that most personal computers, laptops, tablets, and smartphones are now manufactured in Asia, not in Silicon Valley, California. However, most of those devices are also now designed in Asia, and by Asian firms, not American ones. The US retains its high-technology lead in advanced research, systems design, software, and systems integration, but has largely lost the capability to design and manufacture information-technology hardware. The employment and competitive implications of this development are profound. For example, Apple has about 70,000 employees worldwide, including its retail stores. But its largest supplier, Foxconn, a Taiwanese company, has 1.3 million employees. The US has already become a net importer of high-technology goods, and high technology actually employs a smaller fraction of the total domestic workforce than it does in many other nations.
But canopy-economy executives don’t care about any of that. They see the whole world not only as their market but also as a source of products, services, labour, and components. For them, the workforce available to nominally “national” companies is much bigger, and much less expensive, than it was ten or twenty years ago. The canopy is a world of calculation: Indian and Chinese workers have much lower living standards than Americans or Britons or Europeans, so they will work for lower wages. Increasingly, many nations also have broadband systems and logistics infrastructure (such as ports, airports, and rail systems) superior to those of the US or UK, if not all of the EU. But it doesn’t make sense for CEOs, either personally or professionally, to lobby for government policies that would improve their national educational or infrastructure systems, particularly if this would also increase their taxes. The benefits of such public investment are society-wide and long-term, not specific to the elite or their companies. And CEOs and bankers have the money and connections to send their children to expensive private schools, to use private jets, to invest their assets globally, and to otherwise avoid the problems of economic decline.
But how did the new financial oligarchy get so amazingly rich, particularly during a period of relatively low economic growth and stagnant income for everyone else? Here we come to the second profound consequence of the new power structure that rules America and shapes the world.
The full answer involves a series of economic and political processes that began in the 1970s and are the subject of the final part of this book. But in one regard the answer is very clear. With a few major exceptions—most notably high technology—we can say with great confidence that the principal source of the new canopy elite’s wealth was not providing greater value to society. In fact, a significant fraction of our economic decline can be attributed directly to the entrenched power of American executives who destroyed their own industries. Thanks to many excellent studies, some of which I describe in this book, we now know beyond any doubt that for most of the last forty years America’s car, steel, mainframe computer, minicomputer, and telecommunications industries were very incompetently run. Their oblivious and/or self-interested senior management was protected from replacement by complacent boards of directors, lax antitrust policy, political influence, and outdated, ineffective systems of corporate governance.
And then there’s the financial services industry. What do we think of the quality of management in an industry that not only destroys itself but nearly brings down the world economy with it? Do we think that these people deserve great wealth for their achievements? And how about their lobbyists, lawyers, and accountants?
In other words, the new elite has obtained much of its extreme wealth not through superior productivity, but mainly via forced transfers from the rest of the world’s population. These transfers were frequently unethical or sometimes even criminal, and were enormously aided by government policies that reduced taxes on the rich, allowed industrial consolidation through lax antitrust enforcement, protected inefficient firms, impeded protests from trade unions, kept workers’ wages low, permitted massive financial sector frauds, bailed out the financial sector when it collapsed, and shielded corporate crime from law enforcement action. Those government policies were, with varying degrees of subtlety, bought and paid for by their beneficiaries.
In this process, one industry stands above all others: the US financial services. In no other industry has the amorality, destructiveness, and greed of the new elite been so naked. Much of the new wealth of the US financial sector was acquired the old-fashioned way—by stealing it. With each step in the process of deregulation and consolidation, American finance gradually became a quasi-criminal industry, whose behaviour eventually produced a gigantic global Ponzi scheme—the financial bubble that caused the crisis of 2008. It was, literally, the crime of the century, one whose effects will continue to plague the world for many years via America’s economic stagnation and Europe’s debt crisis.
The majority of this book is devoted to describing and explaining this pillaging in considerable detail, but a short overview is in order.
The Greatest Bank Robbery
ALTHOUGH SEVERAL LARGE, concentrated, and politically powerful industries have benefited enormously from deregulation and political corruption, the 2000s were undeniably the decade of the banker. The era of deregulation pioneered by the administrations of presidents Ronald Reagan and Bill Clinton had removed virtually all restrictions on trading, mergers, and industry consolidation; the few remaining restrictions were then quickly stripped away by the administration of George W. Bush, along with any threat of sanctions from either criminal prosecution or civil suits to recoup illicit gains.
Many steps of the deregulatory process were taken openly, often even proudly, for a majority of academic economists and finance experts were insisting that, once freed from obsolete regulatory constraints, the bankers would allocate the world’s capital flows with such skill and precision as to usher in a new golden age. Many of the professors doubtless believed in their recommendations, although as we shall see later, many of them also were paid handsomely to support the bankers’ positions. Doctors who are on retainer with pharmaceutical companies may also believe in the products they are pushing, but the money doubtless counts too, and it is wise to be sceptical.
And in fact, bad things started to happen almost immediately. Beginning in the 1980s, the US began to experience financial crises and scandals on a scale not seen since the 1920s. But deregulation continued, culminating in major laws passed in 1999 and 2000. Once completely freed, the bankers very quickly ran their institutions off the cliff, taking much of the global economy with them. Not only did they create and sell a huge amount of junk, but they turned the financial syste
m into a gigantic casino, one in which they played mainly with other people’s money. Consider the position of six large banks at the end of 2007—Citigroup, JPMorgan Chase, Goldman Sachs, Lehman Brothers, Bear Stearns, and Merrill Lynch. Their own proprietary trading accounts, in which traders and financial executives were risking their banks’—or more properly, their shareholders’ and bondholders’—money for their own profit, were in excess of $2 trillion. Indeed, their assets had grown by $500 billion in 2007 alone, almost all of it financed with borrowed money.
Leverage—the use of borrowed money to expand the investment banks’ businesses—roughly doubled between 2000 and 2007. Three of the largest banks—Lehman Brothers, Bear Stearns, and Merrill Lynch—were leveraged at more than thirty to one at year-end 2007. This meant that only 3 percent of their assets, many of which were very risky or even fraudulent, were paid for with their own money. This also meant that a mere 3 percent decline in the value of their assets would wipe out all of their shareholders’ wealth and throw these firms into bankruptcy. And, indeed, by early 2008 Bear Stearns was within days of bankruptcy and sold itself to JPMorgan; in September, Merrill sold itself to Bank of America, and Lehman Brothers went bankrupt. Many others failed too—Countrywide, New Century, Washington Mutual—and other even larger institutions, such as Citigroup and AIG, survived only by virtue of massive bailouts. Even Goldman Sachs, one of the strongest of the banks, could not have survived if the government had not saved AIG, and then forced AIG to pay its debts to Goldman and other major banks.
How could so many bankers be so reckless? Money and impunity, is the answer. The structure of personal compensation in the financial system had become completely toxic, and bankers correctly assumed that they would not be prosecuted, no matter how outrageous their conduct. Until the 1980s a combination of tradition, reputation, and tight regulation governed bankers’ compensation and prevented major systemic abuses. For example, investment banks were structured as partnerships, with the partners required to invest their own personal money, which constituted the firm’s entire capital. In fact, until 1971, only partnerships were allowed to join the New York Stock Exchange.
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