The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  We also need to get two words at the center of our discussion of the corruption in banking and mortgages: control fraud. That is when the CEO is a crook who uses his control of the company to run a fraud to enrich himself. We saw that William Black’s diligent public service helped bring more than a thousand felony convictions of high-level insiders in the savings and loan scandals; in comparison, hardly any bankers have been indicted in the mortgage-market meltdown. That an FBI deputy director parrots the language of the banking industry—banks are the victims of dishonest customers—shows how blinded our government is to the obvious criminal activity of bankers, brokers and bailed-out Wall Street traders.

  That our government isn’t seeing what’s before its eyes illustrates a much deeper problem about crony capitalism, corruption and Chicago School theories.

  We have become a society where commas (it takes three to be a billionaire) count more than character. At the core of this bias in favor of the already rich is something economists call a Pareto improvement. It is named for Vilfredo Pareto, a brilliant Italian economist of the nineteenth century. A Pareto improvement means that when the distribution of goods or income changes, at least one person is better off, but no one is worse off.

  Taken to its logical conclusion, it would be a Pareto improvement if the American economy doubled and one person enjoyed all of the gains. In fact, something not unlike that has happened in America since Reagan’s presidency, with the gains going entirely to the top 20 percent and very heavily to the top tenth of one percent.

  Contrast this with the economics of Adam Smith, who recognized that competitive markets, and the signals they send about price, are at the heart of economic improvement. Smith saw competition as the great enforcer that harnessed the human desire to improve one’s lot for the good of the whole society. And both he and his successor in the next great generation, Jeremy Bentham, argued for policies that benefit the majority, not the politically connected few.

  If trickle-down is such a great philosophy, how do we explain the fact that after spending more than 40 percent of all the money in the world devoted to health care, we rank thirty-seventh in the quality of our health care and we still have roughly 50 million people without health insurance? In 1981, when Ronald Reagan took the oath of office, per capita health-care costs equaled 23 percent of the average salary of the bottom 90 percent of Americans. By 2007 it had risen to 49 percent with all signs pointing to a growing share of the economy going to big, inefficient but stunningly profitable health companies.

  How is it that the United States ranks forty-seventh out of 224 countries in infant mortality, doing far worse than Canada, Japan, the European Union and even Cuba? Why are we forty-seventh in life expectancy at birth, according to the CIA, behind Japan, most of Western Europe and even Jordan?

  Why are we forty-sixth in the world in the share of our economy spent on public education?

  Why is it that forty years ago we were the greatest creditor nation in the world and now we are the biggest debtor nation?

  Why is our current account deficit, measuring how much more we import than export, so large that in 2009 we ranked dead last among 190 countries? Our $378 billion shortfall is the equivalent of taking $5,000 a year from every American family of four and sending it overseas. This shortfall was greater than the combined current account deficits of Australia, Brazil, Canada, France, India, Italy, Spain and the United Kingdom.

  At the other end, the top three current account surpluses were in China ($297 billion), where our manufacturing base has moved; Germany ($168 billion), which uses a competitive market philosophy to keep its economy both robust and fair; and Japan ($142 billion).

  That we rank from middling to dead last among nations by so many measures represents poor choices, especially letting big business damage and destroy competition, escape tax burdens and push down wages.

  RESTORE INTEGRITY

  Our challenge is to restore rules and infuse our business culture with respect for integrity. Honesty benefits not just customers, but honest businesspeople who understand the real costs they must bear and are willing to do so. But when government makes it possible for some employers to avoid paying promised wages and to ignore environmental, safety and other rules, then the bad practices of the greedy few become the norm.

  The typical problem is abuse of power while pursuing profit. The world isn’t black and white, but our policies should aim for the lightest possible shades of gray. We have far too many executives who destroy shareholder wealth and shortchange hardworking subordinates while enriching themselves beyond reason. We have too few effective remedies for victims of abusive pricing, as we saw in the story of Barbara Keeton, her overpriced car and the threats by Wells Fargo to take away her home. We have too many big business structures that strip resources from utilities, making them more costly, less reliable and sometimes downright dangerous. And we should never have a hands-off “make your numbers” management ethos like Warren Buffett’s that prompts people far down below to ask Bob Manning or anyone else to die.

  The concepts we need to reintroduce into our culture to avoid sinking into an unprincipled pit—in which all that matters is money—can be summed up simply.

  We need companies (and executives) who are candid. Fair. Forthright. Honest. Loyal. Prudent. Reasonable. Transparent. Reliable. Responsible.

  We need to acknowledge that rules define society. When the absence of rules allows businesses to lower their standards toward the lowest common denominator, then, in time, that is what we will get. Accounting rules that lack integrity may produce short-term gains, but the whole market will gravitate toward these bad practices—as it has done.

  Under the banner of deregulation, many of the rules that protected customers against abusive practices, from price gouging to unreliable service, have been swept away. The idea that profits should bear some relationship to costs is under attack. So is access to justice, as we saw with the arbitration system. We need to reverse those trends.

  In the world today, those who abuse markets get rich off their abuse and taxpayers are forced to correct the egregious errors and thefts that are enabled by unregulated securities, unregulated lending, unregulated insurance and unregulated derivatives. In all of these financial abuses and crimes it is fat fees that drive the deals, not noble stewardship of other people’s assets as a banker, broker or executive.

  Time-tested regulation of banks, securities firms and insurance companies can prevent disasters while fostering economic growth. Honest audits can catch control frauds early.

  We need to recognize that dogmas are bad for democracies. The Federal Reserve, U.S. Treasury and the major academic centers and foundations all reinforce neoclassical economics while paying little to no attention to its critics, known collectively as the heterodox economists. But it was the heterodox economists who spotted the high-tech and housing bubbles and warned of their dangers; they warned about control frauds and derivatives gone wild and numerous other problems. The neoclassical economists failed to issue warnings and, after the fact, insist that no one could have seen these disasters coming.

  Our economic dogma, our campaign finance rules and our failure to recognize the need for sound economic policies are leading us away from prosperity and into a poorer future. We need to make smarter choices based on more diverse thinking. We need policies that recognize the natural human tendencies to abuse power and to covet riches at the expense of millions of others. If we choose to, we can improve our lives, our economy and our future. We can have a robust economy in which there is plenty of work and in which everyone who wants to work can; and those who work hard and handle their money prudently will live long and prosper.

  If you doubt we can climb out of our deep hole, consider the end of World War II. In August 1945 Berlin lay in ruins, the work of generations lost in the mechanized horror of a war brought on by an evil regime, one in the thrall of both genetic “purity” and corporate power. Bombs had reduced Berlin and Munich and
Frankfurt and other political and industrial centers to ruins. Dresden was literally burned to a crisp. Yet within a generation the Germans were prospering. Today, just sixty-six years later, their society is by many measures doing better than ours. The average German works fewer hours for more pay, runs no risk of financial ruin because of ill health and has a guaranteed base income, while the country exports far more than it imports.

  The Germans achieved this by adopting economic policies that focus on competitive markets in which the government sets, and enforces, rules to keep competition vibrant. They also gave unions a real voice at the bargaining table, including a significant minority of seats on the boards of big companies.

  Visit Germany and look around. That society is by no means ideal, especially in the East, where the ravages of communism still mar the physical world as well as people’s souls. But in the western parts of Germany, you will not see rusty old bridges, potholed roads, and train stations where water pours down inside the building because the roof leaks, as exist everywhere in America. The trains are clean, fast, reliable and ubiquitous, just like the trains in the Netherlands, France and Italy.

  Explosions of steam tunnels (like the 2007 blast in midtown Manhattan that killed one person) and bursting water mains that wash away roads, a common event in America, are virtually unheard of in Germany. The cars on the roads are overwhelmingly shiny and sound, unlike the “beater” cars seen everyday everywhere in America, rusted hulks running on nearly bald tires and listing to one side. While 15 million Americans live in trailers and the euphemistically named “manufactured housing,” in Germany hardly anyone lives in trailers.

  So how did the Germans achieve this? The Germans call their economic system “ordoliberalism.”

  This German philosophy is a market theory of competitive economics that recognizes the need to limit power and the abuses that go with it. Ordo comes from a Latin word meaning “inner order” (as opposed to the idea of external control).

  As explained by one of its critics, ordoliberalism has “passionately affirmed competitive free markets, it was motivated from the historical observation that concentrations of power in both public and private spheres distorted functioning exchange economies. Thus, the long-term viability of free markets required a rule-bound and limited yet powerful form of government intervention.”

  The need for rules that ensure real competition has become an alien concept in America. As we have seen, the de facto policy in America, under the twin guises of Reaganism and the Chicago School, has allowed concentrated and largely unaccountable power, with only the most cursory government refereeing. The result has been minimal competition, oligopolies everywhere, and removal of regulations that foster candor, integrity, and a reasonable connection between cost and price.

  24…

  What It All Means

  America’s corporate and political elites now form a regime of their own and they’re privatizing democracy. All the benefits—the tax cuts, policies and rewards—flow in one direction: up.

  —Bill Moyers

  24. Now that we’ve seen that big businesses artificially inflate prices, limit competition, cut services, sell fraudulent loans and even put your life at risk, what, finally, in practical terms, does all of this mean to you and me?

  Perhaps you don’t use a telephone or the Internet, subscribe to cable television or power any of these electronic offerings with electricity generated by burning coal. Maybe you use neither natural gas to heat your home nor gasoline to fuel your car, so the fictitious taxes collected by pipeline companies do not take anything from your pocket. Maybe you even mulch your own garbage so the trash haulers do not gouge your wallet. If you are utterly healthy, you may not require any drugs. Maybe you have found a way to support yourself with a job independent of any corporation.

  Even so, sad to say, company policies and government rules that enable price gouging still cost you.

  Everyone pays for a rigged economy, in myriad ways, as it extracts money from the many and concentrates it in the hands of the few. In doing so, it squanders opportunities, wastes valuable skills, costs more in taxes and adds risks. It also helps our economic competitors by making us less efficient. Just as poor health damages the quality of life, a weakened economy damages the quality of life for all, including even the few gorging on the stolen fruit of the nation’s economic output.

  The man on the street must deal with the availability of fewer jobs. You may be losing chances to tap your talents and abilities. You will earn less money than you would in a robust and competitive economy, where workers can bargain together for their pay without government giving companies subsidies to move jobs offshore. Every big merger hurts you as well, by destroying jobs, reducing competition and concentrating economic gains.

  In a rigged economy, you may be tricked into thinking you are paying less in taxes, when in reality you just pay privately, typically at higher prices, for what your taxes used to cover (as we have seen with garbage collection and health care). Add your taxes and higher personal spending, and your actual burdens are heavier than those of people in other modern countries who make less and pay higher taxes, but use the wholesale buying power of government to hold down costs.

  Under the false premise that tax cuts pay for themselves, when the actual numbers show they have not, government borrowing increases at every level. This means that more and more of your taxes get diverted from services to paying interest on our growing national debt.

  The official numbers showing how the fruits of the American economy are being harvested and distributed got little coverage three decades ago. As the differences between the vast majority and those at the top have widened into a huge chasm, more of this news is now being reported. Still, few Americans realize that the best-off 3 million Americans make about the same amount of money as all 150 million at the bottom. Hardly anyone knows that in 2010, the year after the Great Recession ended, in a nation of 312 million people just 15,600 households enjoyed 37 percent of all the income gains.

  The data on the damage being done to the vast majority to benefit the political-donor class is extensive. Let’s start with jobs.

  JOBS, JOBS, JOBS

  According to the U.S. Census and the Bureau of Labor Statistics reports, the population has grown about three times faster than jobs since the year 2000. The eight years of the Bush administration resulted in fewer than 3.6 million new private-sector jobs, fewer than when Eisenhower was president and the population was much smaller. This compares with 21 million jobs—six times more—created during the Clinton administration. The twenty combined years of the Reagan and two Bush administrations produced fewer new jobs than the eight Clinton years (19.4 million private-sector jobs under Reagan and the Bushes, 1.7 million fewer than under Clinton).

  INCOME TAX REVENUES FELL SHARPLY AFTER BUSH TAX CUTS

  The promise that lower tax rates would result in increased revenues did not turn out that way. Total individual income taxes fell and when adjusted for population growth (second column) the revenue drop was severe.

  YEAR INDIVIDUAL INCOME TAX (IN

  BILLIONS OF 2010 DOLLARS) INCOME TAX PER CAPITA

  (IN 2010 DOLLARS)

  2000 $1,276 $4,535

  2001 $1,228 $4,310

  2002 $1,044 $3,628

  2003 $944 $3,252

  2004 $937 $3,199

  2005 $1,039 $3,514

  2006 $1,133 $3,796

  2007 $1,228 $4,074

  2008 $1,164 $3,828

  2009 $934 $3,044

  2010 $899 $2,910

  CHANGE ($377) ($1,625)

  PERCENT -30% -36%

  Sources: OMB, Census, infl ation calculations by author.

  This leads to a larger political comparison. From 1940 through 2009, nearly twice as many jobs were created when a Democrat was in the White House compared to when a Republican was president. Republicans controlled the presidency for more years, thirty-six out of sixty-nine, but just 35.8 percent of the jobs were created
on their watch. During the thirty-three years when Democrats were in power, 64.2 percent of the jobs were created. A telling summary? The average number of jobs added per year was twice as high during Democratic administrations as Republican.

  Having more workers than jobs—our problem in 2012—tends to push down wages. At the end of 2011 there were five people seeking work for every job opening. That made for a cruel variation on the game of musical chairs, only in this version four of every five players were left without seats at the economic table. In 2010 about 6 million families had no cash income, only food stamps, Jason deParle of the New York Times reported, a number no one has knocked down.

  The job destruction caused by our faux free trade policies have so far hit factory workers hardest. What American factory workers make in an hour can be replaced with a week of labor in China, where environmental and occupational safety laws are both minimal and ignored, and independent union organizers are beaten, jailed and sometimes shot.

  No wonder every third manufacturing job in America has been eliminated since the North American Free Trade Agreement was adopted in 1994—and adopted in a way that ran counter to constitutional principles. The founding document gives Congress sole authority to regulate foreign trade, but since the Nixon era, a policy known as “fast track” has transferred this power to the White House, which in turn relies on a small group of financiers, multinational companies and their lawyers to craft rules for their benefit.

  If Congress had done its duty and undertaken the hard work of creating balanced, thoughtful trade policies, would 5.5 million factory jobs have gone abroad? Would we have allowed knowledge vital to understanding and improving manufacturing processes to be removed from our country?