Some apologists for this extraordinary accumulation of income and wealth at the top attribute it to “risk taking” by courageous entrepreneurs. Mitt Romney defines free enterprise as achieving success through “risk taking.” The president of the Chamber of Commerce, Tom Donohue, explains that “this economy is about risk. If you don’t take risk, you can’t have success.” But in fact the higher you go in today’s economy, the easier it is to make a pile of money without taking any personal financial risk. The lower you go, the bigger the risks and the smaller the rewards.
Partners in private-equity firms like Romney’s Bain Capital don’t risk their own money. They invest other people’s money and take 2 percent of it as their annual fee for managing the money regardless of how successful they are. They then pocket 20 percent of any upside gains. Partners like Romney pay taxes on only 15 percent of what they make—a lower rate than that paid by many middle-class Americans—because of a loophole that treats this income as capital gains. The ostensible reason capital gains are taxed at a much lower rate than ordinary income is to reward investors for risking their money, but private-equity managers usually don’t risk a dime.
In fact, rather than taking any real risks, they get government to subsidize them. Having piled the companies they purchase with debt, private-equity managers then typically issue “special dividends” that repay the original investors. Interest payments on that mountain of debt are tax deductible. In effect, government subsidizes them for using debt instead of incurring any real risk with equity. If the companies are subsequently forced into bankruptcy because they can’t manage payments on all this debt, they dump their pension obligations on the Pension Benefit Guaranty Corporation (PBGC), a federal agency, which picks up the tab. If the PBGC can’t meet the payments, taxpayers are left holding the bag.
It’s another variation on Wall Street’s playbook of maximizing personal gain and minimizing personal risk. If you screw up royally, you can still walk away like royalty. Taxpayers will bail you out. Personal responsibility is completely foreign to the highest echelons of the Street. Citigroup’s stock fell 44 percent in 2011, but its CEO, Vikram Pandit, got at least $5.45 million on top of a retention bonus of $16.7 million. The stock of JPMorgan Chase fell 20 percent, but its CEO, Jamie Dimon, was awarded a package worth $22.9 million.
The higher you go in corporate America as a whole, the less of a relationship there is between risk and reward. Executives whose pay is linked to the value of their firm’s shares get a free ride when the stock market as a whole rises, even if they didn’t lift a finger. On the other hand, to protect their wallets against any risk that their firm’s share price might fall, they can place countervailing bets in derivatives markets. This sort of hedging helped the head of AIG, Hank Greenberg, collect $250 million in 2008, when AIG collapsed.
Other CEOs are guaranteed huge compensation regardless of how their companies do. Robert Iger’s arrangement as head of the Disney Company netted him $52.8 million in 2011 and guarantees him at least $30 million a year more through 2015—regardless of company performance. The swankiest golf courses of America are festooned with former CEOs who have almost sunk their companies but been handsomely rewarded. Gilbert Amelio headed Apple for a disastrous seventeen months while the firm lost nearly $2 billion, but he walked away with $9.2 million anyway. William D. McGuire was forced to resign as CEO of UnitedHealth over a stock-options scandal but left with a pay package worth $286 million.
It doesn’t even matter how long you’re at the helm. Thomas E. Freston lasted just nine months as CEO of Viacom before being terminated with an exit package of $101 million. Scott Thompson lasted only four months as CEO of Yahoo!, but that was long enough for him to pocket $7 million. His predecessor, Carol Bartz, lasted twenty months and left with an exit package of $10.4 million.
You can push your company to the brink and still make a fortune. Robert Rossiter, the former CEO of Lear, landed his company in bankruptcy, which wiped out his shareholders along with twenty thousand jobs, but he walked away from the wreckage with a $5.4 million bonus. In early 2012, The Wall Street Journal looked into the pay of executives at twenty-one of the largest companies that had recently gone through bankruptcy. The median compensation of those CEOs was $8.7 million—not much less than the $9.1 million median compensation of all CEOs of big companies. The reason CEOs get giant pay packages for lousy performance is that they stack their boards of directors’ compensation committees with cronies who make sure they do.
Even if you commit fraud, your personal financial risk is minimal. Starting in 2009, the Securities and Exchange Commission (SEC) filed twenty-five cases against mortgage originators and securities firms. A few are still being litigated, but most have been settled. They generated almost $2 billion in penalties and other forms of monetary relief, according to the SEC. But almost none of this money came out of the pockets of CEOs or other company officials; it came out of the companies—or, more accurately, their shareholders. In the one instance in which company executives appear to have been penalized directly—a case brought against three former top officials of New Century Financial, a brazenly fraudulent lender that subsequently collapsed—the penalties were tiny compared with how much the executives pocketed. New Century’s CEO had to disgorge $542,000 of his ill-gotten gains, but he took home more than $2.9 million in “incentive” pay in the two years before the company tanked.
Yet as economic risks are vanishing at the top and the rewards keep growing, the risks, as I said, are rising dramatically on almost everyone below, and the rewards keep shrinking. Full-time workers who put in decades with a company can now find themselves without a job overnight—with no parachute, no help finding another job, and no health insurance. More than 20 percent of the American workforce is now “contingent”—temporary workers, contractors, independent consultants—with no security at all.
Most families face the mounting risk of receiving giant hospital bills yet having no way to pay them. Fewer and fewer large and medium-sized companies offer their workers full health-care coverage—74 percent did in 1980; under 10 percent do today. As a result, health insurance premiums, co-payments, and deductibles are soaring.
Most people also face the increasing risk of not having enough to retire on. Three decades ago more than 80 percent of large and medium-sized firms gave their workers “defined benefit” pensions that guaranteed a fixed amount of money every month after they retired. Now it’s fewer than 10 percent. Instead, the employers offer “defined contribution” plans, where the risk is on the workers. When the stock market plunges, as it did in 2008, 401(k) plans plunge along with it. Meanwhile, people at the top are socking away tens of millions for their retirements while paying little or no taxes—in effect, enjoying a huge government subsidy. By 2011, Mitt Romney’s IRA was worth between $20 million and $100 million, including Bain Capital holdings in offshore havens like the Cayman Islands.
Romney is right: free enterprise is on trial. But he’s wrong about the question at issue in that trial. It’s not whether America will continue to reward risk taking. It’s whether an economic system can survive when those at the top get giant rewards no matter how badly they screw up while the rest of us get screwed no matter how hard we work.
GOVERNMENT’S SIZE ISN’T THE REAL ISSUE—IT’S WHOM GOVERNMENT IS FOR
Americans have never much liked government. After all, the nation was conceived in a revolution against government. But the surge of cynicism engulfing the country isn’t about government’s size. The cynicism comes from a growing perception that government isn’t working for average people. It’s seen as working for big business, Wall Street, and the very rich—who, in effect, have bought it. In a recent Pew Research Center poll, 77 percent of respondents said too much power is in the hands of a few rich people and corporations. That view is understandable.
Wall Street got bailed out by American taxpayers, but by 2012 one out of every five homeowners with a mortgage was still underwater, caught in t
he tsunami caused by the Street’s excesses. The federal bailout wasn’t conditioned on the banks helping these homeowners, and after the bailout direct federal help to homeowners was meager. The government’s settlement of claims against the banks was tiny compared with how much homeowners lost. As a result, millions of people have lost their homes or simply walked away from homes whose mortgage payments they could no longer afford.
Homeowners couldn’t use bankruptcy to reorganize their mortgage loans, because the banks have engineered the bankruptcy laws to prohibit this. Young people can’t use bankruptcy to reorganize their student loans either, because the banks have barred it. But big businesses now routinely use bankruptcy to renege on contracts with their workers. American Airlines entered bankruptcy in 2012 and promptly announced plans to fire thirteen thousand workers—16 percent of its workforce—while cutting back the health benefits of current employees. It had intended to terminate its underfunded pension plans, threatening the largest pension default in U.S. history—much of whose cost would be borne by taxpayers if the Pension Benefit Guaranty Corporation took them over. (The airline subsequently backed down, freezing but not terminating the pensions.)
By 2012, long after the economic collapse, average consumers and small businesses were still hurting, but corporations large enough to finance fleets of Washington lobbyists were raking it in. Big agribusiness continues to claim hundreds of billions of dollars in price supports and ethanol subsidies, paid for by American consumers and taxpayers. Big Pharma gets extended patent protection that drives up everyone’s drug prices, plus the protection of a federal law making it a crime for consumers to buy the same drugs at lower prices from Canada. Big oil gets its own federal tax subsidy, paid for by taxpayers.
Not a day goes by without Republicans decrying the federal budget deficit. But the biggest single driver of the yawning deficit is big money’s corruption of Washington. One of the federal budget’s largest and fastest-growing programs is Medicare, whose costs would be far lower if Medicare could use its bargaining leverage to get drug companies to reduce their prices. It hasn’t happened, because the lobbyists for Big Pharma won’t allow it. Medicare’s administrative costs are only 3 percent, far below the 30 percent average administrative costs of private insurers. So it would seem logical to tame rising health-care costs for all Americans by allowing any family to opt in. That was the idea behind the “public option.” But health insurers’ representatives stopped it in its tracks.
The other big budgetary expense is national defense. America spends more on our military than do China, Russia, Britain, France, Japan, and Germany combined. The “basic” defense budget (the annual cost of paying troops and buying planes, ships, and tanks—not including the costs of actually fighting wars) keeps growing. With the withdrawal of troops from Afghanistan, the cost of fighting wars is projected to drop, but the base budget is scheduled to rise. It’s already about 25 percent higher than it was a decade ago, adjusted for inflation. One big reason for that is the near impossibility of terminating large defense contracts. Defense contractors have cultivated sponsors on Capitol Hill and located their plants and facilities in politically important congressional districts. Lockheed Martin, Bechtel, Raytheon, and others have made spending on national defense into America’s biggest jobs program.
So we keep spending billions on Cold War weapons systems like nuclear attack submarines, aircraft carriers, and manned combat fighters that pump up the bottom lines of defense contractors but have nothing to do with twenty-first-century combat. In 2012 the Pentagon said it wanted to buy fewer F-35 Joint Strike Fighter planes than had been planned—the single-engine fighter has been plagued by cost overruns and technical glitches—but the contractors and their friends on Capitol Hill vowed to fight the decision.
Meanwhile, government regulators who are supposed to protect the public too often protect the profits of big companies that supply regulators with good-paying jobs when they retire from government and that give key members of Congress fat campaign contributions when they run for reelection. Consider the safety of nuclear reactors. General Electric marketed the Mark 1 boiling-water reactors that were used in Japan’s Fukushima Daiichi plant as cheaper to build than other reactors because they used a smaller and less expensive containment structure. The same design is used in twenty-three American nuclear reactors at sixteen plants. But are Mark 1 reactors safe? In the mid-1980s, Harold Denton, then an official with the Nuclear Regulatory Commission (NRC), said Mark 1 reactors had a 90 percent probability of bursting should the fuel rods overheat and melt in an accident. Japan tragically experienced that probability a quarter century later. But so far, the NRC has done nothing except examine the issue.
The national commission appointed to investigate BP’s giant oil spill in the Gulf of Mexico concluded that BP failed to adequately supervise Halliburton’s work on installing the well. This was the case even though BP knew Halliburton lacked experience in testing cement to prevent blowouts and hadn’t performed adequately before on a similar job. Neither company bothered to spend the money to ensure sufficient testing. It was much the same story at Massey Energy, owner of the West Virginia coal mine where an explosion in April 2010 killed twenty-nine miners. Massey wouldn’t spend the money needed to ensure its mines were safe. It had a history of safety violations but did nothing in response other than fighting them or refusing to pay the fines.
No company can be expected to build a nuclear reactor, an oil well, a coal mine, or anything else that’s 100 percent safe under all circumstances; the costs would be prohibitive. It’s unreasonable to expect corporations to totally guard against small chances of every potential accident. Inevitably, there’s a trade-off. Reasonable precaution means spending as much on safety as the probability of a particular disaster occurring, multiplied by its likely harm to human beings and the environment if it does occur.
But profit-making corporations have every incentive to underestimate these probabilities and lowball the likely harms. This is why it’s necessary to have government regulators and why regulators need enough resources to enforce the rules. And it’s why moves in Congress to cut the budgets of agencies charged with protecting public safety are so wrongheaded. One such proposal would reduce funding for the tsunami warning system. Another would ban the Environmental Protection Agency from regulating air pollution, including cancer-causing contaminants.
It’s also why regulators must be independent of the industries they regulate. A revolving door between a regulatory agency and an industry makes officials reluctant to bite the hands that will feed them. In Japan, it’s common for regulators to retire to better-paying jobs in the industries they were supposed to have regulated, a practice known there as amakudari. The United States, sadly, is no different. Remember the Department of the Interior’s Minerals Management Service, whose officials were supposed to regulate offshore drilling? Many of them now occupy cushy jobs in oil companies. Remember the financial regulators who were supposed to oversee Wall Street before the Street almost melted down, and others who were supposed to oversee the taxpayer-funded bailout of the Street afterward? Many of them are now collecting fat paychecks on the Street.
Protecting the public doesn’t have to be wildly expensive. But regulators and regulatory agencies have to be independent and smart. The public cannot be safe as long as big corporations—including GE, BP, Halliburton, Massey, and the biggest Wall Street banks—are allowed in effect to bribe legislators and entice regulators. Here again, the game is increasingly rigged, and most Americans are paying the price.
“Big government” isn’t the problem. The problem is the big money that’s taking over government. Government is doing fewer of the things most of us want it to do—providing good public schools and affordable access to college, improving our roads and bridges and water systems, maintaining safety nets to catch people who fall, and protecting the public from dangers—and more of the things big corporations, Wall Street, and wealthy plutocrats want it to do.
Some conservatives argue, like my composite e-mail correspondent, that we wouldn’t have to worry about big money taking over government if we had a smaller government to begin with. They say the reason big money is swamping our democracy is that a large government attracts big money. When I debated with Congressman Paul Ryan on ABC-TV’s This Week, he said that “if the power and money are going to be here in Washington, that’s where the influence is going to go … that’s where the powerful are going to go to influence it.” Ryan has it upside down. A smaller government that’s still dominated by money would continue to do the bidding of Wall Street, the pharmaceutical industry, oil companies, big agribusiness, big insurance, military contractors, and rich individuals. It just wouldn’t do anything else.
THE BIG-MONEY TAKEOVER
Millionaires and billionaires aren’t making huge donations to politicians out of generosity. Corporations aren’t spending hundreds of millions of dollars on lobbyists and political campaigns because they love America. These expenditures are considered investments, and the individuals and corporations that make them expect a good return. The reason that the oil industry gets $2.5 billion a year in special tax subsidies, for example, has nothing to do with the public’s interest and everything to do with the $150 million a year big oil spends on political campaigns. A $2.5 billion return on $150 million isn’t bad, especially considering added benefits that come in the form of votes to expand oil drilling rights and pipelines.
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