In addition, although it is called a “charitable deduction,” very little of this public subsidy ends up with the poor. A 2005 analysis by Indiana University’s Center on Philanthropy showed that even under the most generous assumptions only about a third of “charitable” giving is targeted to helping poor people. A large portion is allocated to operas, art museums, symphonies, and theaters—all worthy enterprises, to be sure, but not “charities” as we normally use the term. A while ago, New York’s Lincoln Center held a fund-raising gala supported by the charitable contributions of hedge-fund industry leaders, several of whom take home $1 billion a year. Poor New Yorkers rarely attend concerts at Lincoln Center.
Another portion goes to the elite prep schools and universities that benefactors once attended or want their children to attend. (Such institutions typically give preference in admissions to applicants and legacies whose parents have been notably generous, a kind of affirmative action for the wealthy.) Harvard, Yale, Princeton, and the rest of the Ivy League are important institutions, but they do not educate large numbers of poor young people. (The University of California, Berkeley, where I teach, has almost as many poor students eligible for Pell Grants as the entire Ivy League put together.) Moreover, as I have noted earlier, these elite universities are far less likely to graduate aspiring social workers and legal aid attorneys than aspiring investment bankers and corporate consultants.
Private university endowments in 2014 totaled around $550 billion, centered in a handful of prestigious institutions. Harvard’s endowment is more than $32 billion, followed by Yale at $20.8 billion, Stanford at $18.7 billion, and Princeton at $18.2 billion. (In 2013 Harvard launched a capital campaign for another $6.5 billion.) Because of the charitable tax deduction, the amount of government subsidy to these institutions in the form of tax deductions is about one out of every three dollars contributed. A few years back, Meg Whitman, now CEO of Hewlett-Packard, contributed $30 million to Princeton. In return she received a tax break estimated to be around $10 million. In effect, Princeton received $20 million from Whitman and $10 million from the U.S. Treasury—that is, from you and me and other taxpayers who made up the difference. Add in these endowments’ exemptions from taxes on capital gains and on income they earn, and the total government expenditure is even larger. Divide by the relatively small number of students attending these institutions, and the amount of subsidy per student is huge. The annual government subsidy to Princeton University, for example, is about $54,000 per student, according to an estimate by economist Richard Vedder. Other elite private universities aren’t far behind.
Dean Henry Brady of the Goldman School of Public Policy at Berkeley has pointed out the stark contrast with public universities, responsible for educating more than 70 percent of students pursuing higher education. Public universities have little or no endowment income. Instead, they get almost all their funding from state governments. But these subsidies have been shrinking. State and local financing for public higher education came to about $76 billion in 2013, nearly 10 percent less than a decade before. Since more students attend public universities now than ten years ago, that decline represents a 30 percent drop per student. That means the average annual government subsidy per student at a public university comes to less than $6,000, about one-tenth the per-student government subsidy at Princeton. This is another cause and consequence of the squeeze on the middle class and the poor and the soaring wealth of those at the top.
We are the authors of our own fates. But, as I have made clear, we are not the producers or directors of the larger dramas in which we find ourselves. Other forces are at work in determining not only what we are able to earn but also what we are able to accomplish, as well as the strength of our voices and the efficacy of our ideals. Those who are rich and becoming ever more so are neither smarter nor morally superior to anyone else. They are, however, often luckier, and more privileged and more powerful. As such, their high net worth does not necessarily reflect their worth as human beings.
By the same token, the vast majority who work hard for a living, and struggle against currents that are often pulling them backward and causing them to fear for themselves and their families, are not blameworthy, nor are they alone. Their voices, however, have become muted and many have grown disillusioned or cynical. The laborer who told me that he could have earned more if he “had the brains for it” saw his low pay and lowly status as the product of his own failings rather than of an economic system that has failed him by denying him sufficient bargaining power to do better. Meanwhile, the poor who cannot find their way out of poverty are not losers or failures, either, although that is how many of them view themselves. The far more significant fact is they are utterly powerless in society.
To state it another way, no one should confuse income for virtue, net worth for worthiness. The underlying reality is that capitalism is not working as it should or as it can. The mythology that one is paid what one is worth must be seen for what it is.
I am not accusing the wealthy of doing anything nefarious or intentionally harmful. There is no reason to suppose that top corporate executives, the successes of Wall Street, and other “high-worth” individuals have conspired to hijack the American economy for themselves. Each has merely behaved rationally in pursuit of his or her private interests. As their wealth has increased, so has their political power, and they have quite naturally used that power to enlarge and entrench their wealth. We can criticize them for being selfish and greedy, but they are no more selfish or greedy than are most other people. And some have been enormously generous with their wealth.
But when our system is viewed as a whole—as a political-economic arrangement for allocating rewards for the work people do—there is reason for concern. The meritocratic ideal with which our form of capitalism has been justified does not match the reality in which most of us live and work. The playing field is tilted toward those who have had the resources and power to tilt it in their direction. And as they gain steadily more resources and power, it tilts further.
Globalization and technological changes are real, and they have shaken the economy to its roots—dividing the workforce between a relatively small group that has been able to use these changes to its advantage and a larger number that has not. But that is only a part of the story. The nation could have responded and still can respond to these changes in ways that nonetheless spread prosperity, enlarge the middle class, and provide avenues of upward mobility for the poor. The fact that we have not—that we have instead allowed a relative few at the top to organize the market in ways that have had the opposite effect—is partly our own doing. Reversing this state of affairs is our own responsibility, the topic to which I now turn.
· PART III ·
Countervailing Power
16
Reprise
A summary once again is in order. For what seems like an interminable period of time, the central political debate in American politics (as well as in much of the rest of the capitalist world) has been over the seeming choice between the “free market” and “government.” Those on the political right have argued for more market and less government, which normally means lower taxes and less public spending. Those on the political left have wanted more government and less market, which typically has meant higher taxes (at least on the wealthy) and more public services. This debate hides a larger reality: the necessary role of government in designing, organizing, and enforcing the market to begin with. It therefore obscures the myriad choices facing legislators, administrators, and judges in carrying out this basic task, a task that never ceases because ongoing changes in market conditions as well as innovations and technological advances continuously require that new choices be made and old ones be reconsidered.
By ignoring these underlying choices, the old debate over “free market” versus “government” diverts attention from how these decisions are made and hides the growing influence of large corporations, Wall Street, and wealthy individuals over them.
As those at the top have gained economic power, their political influence over these basic rules of the game has also increased—which in turn has enhanced their economic power still further. Many of those who most loudly and adamantly celebrate the “free market” are among the largest beneficiaries of this hidden process. By removing the central reality of power from public understanding of how the economy functions, they conveniently remove themselves.
In consequence, the only readily observable phenomena are explicit redistributions by government from the rich to the poor through taxes and transfer payments. These have grown in recent decades as the income gap between the top and the bottom has widened. As a result, inequality after taxes and transfer payments is not as wide as it would be without them.
Yet these downward redistributions constitute only a small part of the overall picture. In reality, most redistribution in recent years has been in the other direction—upward from consumers, workers, small businesses, and small investors to top corporate and financial executives, Wall Street traders and portfolio managers, and the major owners of capital assets. But this upward redistribution is invisible. The main conduits for it are hidden within the rules of the market—property, monopolization, contract, bankruptcy, and enforcement—rules that have been shaped by those with substantial wealth and political clout. It is, in this sense, a predistribution upward that occurs inside the market mechanism itself, a small portion of which government later redistributes downward to the poor through taxes and transfer payments.
As the economy has shifted toward ideas and away from tangible products, these underlying rules (and the choices they reflect) have become even more obscure—and therefore even more easily manipulated by those with the resources to do so. The most valuable property is now intellectual property, such as patents and copyrights, which have quietly been enlarged by giant corporations through patent “product hopping”; “pay-for-delay” agreements between pharmaceutical manufacturers and generic drug companies; and changes in copyright laws that now extend ninety-five years.
Similarly, the most important forms of market dominance now occur over networks such as broadband, genetic seed traits, standard digital platforms, and financial systems controlled by a handful of Wall Street banks. And here, too, large corporations and Wall Street have used their political influence to enlarge their market power and avoid economic incursions by small competitors or legal threats from antitrust law.
Likewise, modern contracts are less about things than about data and ideas. This has enabled powerful interests to use insider information against small investors and to require that employees, franchisees, and customers agree to mandatory arbitration or forced waivers of their legal rights. By the same token, bankruptcy laws entail increasingly complex processes that systematically favor large corporations and big banks over workers, homeowners, and those with student debt obligations. Finance has become so opaque that CEOs can time corporate buybacks to coincide with when they cash in their stock options and awards, thereby expropriating value from small shareholders. Meanwhile, workers’ negotiating power has eroded through state right-to-work laws, inadequate enforcement of collective bargaining rights, and trade agreements that protect intellectual property and financial assets but not the economic value of jobs.
All of this has been accompanied by enforcement strategies that systematically understaff agencies charged with inspecting and monitoring large corporations and Wall Street, fail to uphold laws or impose inadequate corporate penalties and fines, fail to hold individual executives criminally liable, provide insufficient legal resources relative to corporate and Wall Street lawyers intent on settlements often amounting to mere slaps on the wrist, limit private rights of action, and narrow standing for class actions.
The influence of big corporations, Wall Street, and wealthy individuals over all these market-creating and market-enforcing decisions takes many forms: contributions to political campaigns or to groups that mount advertising campaigns for a candidate or against a politician’s opponent; revolving doors between government jobs and lucrative employment in lobbying firms or on Wall Street, or implicit offers of such jobs after government service; “think tanks” of paid experts and public relations campaigns to convince the public that a particular policy is in their interest; and squadrons of highly paid lobbyists and lawyers that engulf legislatures, administrative hearings, and the courts. Not even prosecutors and judges are immune.
The “free market” serves as a smoke screen for all this. Because of it, the system for distributing economic gains appears to be the natural and inevitable result of neutral forces. The meritocratic ideal presumes that people are paid roughly in proportion to their worth. Those who are paid very little for their work are assumed to be “worth” no more than they receive, and those who are paid a great deal are assumed to be worth no less. It is a small step to view such payments as corresponding to what people deserve in a moral sense. Within this preferred vision of an American meritocracy, the amount of one’s income is equated with one’s virtue, and net worth with moral worth. Attempts to constrain high incomes with taxes or supplement low incomes through government transfers are thereby seen as intrusions into the market that risk undermining efficiency, distorting incentives, and compromising the moral underpinnings of meritocracy. (Depending on one’s political point of view, such a risk may nonetheless be thought necessary in order to achieve fairness.)
But because the organization of the market increasingly reflects political decisions favoring moneyed interests, the system for distributing economic gains through the market does not necessarily correspond to what people are “worth” in any respect other than the tautological. A close examination of why the pay of top executives of large corporations has soared in recent decades and why the compensation of managers and traders on Wall Street has skyrocketed even further has less to do with any supposed surge in the value of their insights or skills than with their increasing power to set market rules that enrich themselves. Likewise, the declining incomes of the typical middle-class household, and the impoverishment of the working poor, are more related to their waning political and economic influence than to their personal shortcomings. Put simply, large corporations, Wall Street, and wealthy individuals have gained substantial power over market rules that generate outcomes favoring them—power that has been compounded as the additional wealth has accorded them even more influence over the rules. Meanwhile, those in the middle and below have lost much of the power they once had—a process that compounds in the opposite direction as their declining economic positions give them less and less influence over the rules.
As I have taken pains to make clear, I do not mean to suggest that those at the top who are shaping the rules are intentionally malevolent. They are acting out of the same self-interest that has been thought to guide the theoretical “free market” toward efficient, and therefore publicly beneficial, outcomes. But rather than a theoretical “free market” they are acting in the real political economy where economic power generates political influence over the rules of the game, which, in turn, serves to enlarge economic power. They are behaving entirely rationally within this system, although the aggregate consequence of their individually rational calculations is neither efficient nor otherwise rational for the system as a whole. To the contrary, it is gradually undermining the system.
As I will show in the following pages, the problem is not their power or influence, per se. It is the comparative lack of power or influence on the other side. There is no longer any significant countervailing power, no force to constrain or balance the growing political strength of large corporations, Wall Street, and the very wealthy. The middle class and poor—and the economic interests they encompass—have little or no agency.
We are then left with three questions. First, how will this trend threaten capitalism if countervailing power is not re-established? Second, how can the middle class and the poor regain sufficient countervailing power to reorganize the mark
et in ways that generate broader-based prosperity? And third, what might that reorganization look like?
17
The Threat to Capitalism
America has faced similar questions before. During eras of significant technological change, workers are typically displaced, social systems become destabilized, and the economy goes through rapid cycles of boom and bust. The owners of capital often reap vast rewards, financial elites gain ground, and economic and political power become highly concentrated. Notwithstanding the potential of the new technologies to create broad-based prosperity, the prevailing political and economic systems do not deliver it because those at the top gain increasing control over politics. Large numbers of people understandably feel the game is rigged. These anxieties and frustrations eventually fuel reforms that spread prosperity more broadly.
As I noted at the outset, this pattern characterized the first industrial revolution as it arrived in America and spawned the reforms of the Jacksonian era of the 1830s. President Andrew Jackson and his followers believed elites had accrued unwarranted privileges that had to be removed before average citizens could gain ground. “It is a fixed principle of our political institutions,” declared Roger B. Taney, Jackson’s attorney general and then Treasury secretary, who would also become the fifth chief justice of the Supreme Court, “to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation.” The Jacksonians sought to abolish property requirements for voting and allow business firms to incorporate without specific acts of the legislature, and they opposed the Second Bank of the United States, which they believed would be controlled by financial elites. They did not reject capitalism; they rejected aristocracy. They sought a capitalism that would improve the lot of ordinary people rather than merely the elites. (Notably, however, the Jacksonians, including Chief Justice Taney, did not include native Americans or African American slaves among those deserving protection from the nation’s elites.)
Saving Capitalism Page 16