Unremitting hostility to regulation that serves the public does not create more efficient business—just the opposite. Weak government oversight of transnational corporations rewards bloated enterprises that use political power to dump their inefficiencies off their balance sheets and onto society, at the expense of new and more efficient enterprises.
Coal is a good example. Corporate and investor calculations about energy production will differ if the cost of coal does not include the cost of preventing the destruction of what belongs to other people—water, air, mountains and valleys, fish ponds, and house foundations. Coal appears “cheaper” than wind, solar, or other sources of power only if its costs do not include the very large costs—externalities—that coal corporations and coal burning utilities can, in the absence of effective regulation, displace onto others outside of the business. This is the corporate “externalization” problem.
Robert Monks, a businessperson, investor, and former chair of the Republican Party in Maine, says, “The corporation is an externalizing machine in the same way a shark is a killing machine.”4 That is just what it does. If it is legal to dump untreated waste or toxic pollutants into a river or the air, corporations will do so. They will do so not because corporations are evil or because the people who work for corporations are bad; they will do so because it is legal. If it is legal to dump pollution onto others, then the market price assumes “free” pollution disposal. If one corporation does not do that, another will. The one that dumps wastes and emits pollutants may have lower costs than the one that spends money to treat or prevent pollution. The one with higher costs will go out of business because it cannot compete, and “the market” then will require dumping waste into rivers and toxins into the sky.
In theory, this is a human problem, not a corporation problem. In the real world, it is a corporation problem. Corporations fund campaigns against the “out-of-control EPA” and “regulatory jihad” because they seek more profit. If allowed, coal corporations pour money into electing whomever they consider “friends of coal” and to defeating whomever they regard as enemies, because the corporations seek more profit. Without government regulation to control greenhouse gas emissions, the destruction of mountains, the poisoning of streams, and so on, we can be sure that someone else (or everyone else) will bear the cost while the corporation reaps the profit.
What makes the hostility to regulation more perverse is that those problems—global environmental catastrophe, for instance—are caused in large measure by government’s creation of the corporate entity and its advantages. Without the laws permitting incorporation, conferring limited liability and other advantages, it would be difficult to marshal the scope of investment and operations capable of eliminating five hundred mountains in a few years (unless the government itself coerced the capital for such operations, as in the Soviet Union or other state-enterprise regimes). Would you invest in Massey Energy or the Alpha Natural Resources coal corporation if you were personally held responsible for its actions?
That is not to say that we should not have corporations. Rather, we should not pretend that corporations are natural products of “the market” and that government has no business regulating them. As Theodore Roosevelt wrote about corporations a century ago, it is “folly to try to prohibit them, but … also folly to leave them without thoroughgoing control.”5
So crony capitalism may be un-American, but do not fall for the idea that “government” or “regulation” is un-American. A true libertarian might not want any government or any regulation, but such a libertarian would not stoop to ask government for a corporate charter and would not hide behind limited liability and other government favors. Maybe we could live with a true libertarian society if we could get there, but we cannot live with a government that creates, protects, and serves corporate power but leaves corporations unsupervised and unregulated.
Jobs, Taxes, and Wealth
A lot of data suggest that the success of the corporate drive to power in our country over the past three or four decades has helped transform our economy from a broad-based growth engine for all into a plutocracy. It now is very difficult for any but the rich to prosper in healthy, strong communities.6
In the corporate era, most Americans no longer make enough money. Per capita income is now around $27,000, and “household” income (i.e., husband and wife both working in many cases) is around $50,000.7 Wages for most people have been flat for three decades. Personal savings have plummeted, and debt has soared.
This was not true in the previous thirty years: from 1950 through 1980, when the economy was growing, wages for most people grew too. The average income for nine out of ten Americans grew from $17, 719 to $30,941 in that period, a 75 percent increase in constant 2008 dollars. Since 1980, however, the economy continued to grow but the gains went overwhelmingly to the top fraction of Americans. The top 1 percent received 36 percent of the income gains between 1979 and 2008. The top sliver (again, 1 percent) received 53 percent of income gains from 2001 to 2006.8 Wealth now is more concentrated in the top 1 percent of American incomes than at any time since 1928.9
For average Americans, income went from $30,941 in 1980 to $31,244 in 2008, a gain of only $303 dollars in twenty-eight years.10 Total household income rose a little more than that, but only because most households required two paychecks and more women entered the workforce.11
The top 1 percent of income-earning Americans now takes a larger share of income—24 percent of the total—than ever before, and they own a larger share of total net worth—34 percent—than ever before. Ninety percent of Americans own just 29 percent of total net worth.12 Between 1993 and 1997, “corporations enjoyed double-digit profit increases for five years in a row…. Meanwhile, over the 1990s, hourly wages fell for four of every five workers.”13 CEO pay rose 600 percent in the same decade.14
In the past decade, the United States has lost thousands of factories, and thousands more are on the precipice.15 By 2009, fewer Americans worked in manufacturing jobs than at any time since 1941.16 Most other measures of the American middle class are just as bad. Hours worked? Since 1979, married couples with children are working an additional five hundred hours (equivalent to more than sixty-two eight-hour days).17 Vacation time? We have by far the lowest standard for vacation time in the developed world. Debt? With incomes stagnating, savings rates are near zero, and most Americans live under pressing burdens of credit card, mortgage, auto, school, and other debt. Affordability of housing? Ability to pay for college? Retiring with a safe pension? Health care? Most people have it much worse on these measures than thirty years ago.
Some people say that this steady decline is just the way it is, due to “globalization and all that,” as if globalization were a meteor from outer space rather than a trend that democratic societies can shape. The intentional offshoring of American jobs to low-cost countries has taken a terrible toll. An accountant in India makes $5,000 per year, compared to an American accountant’s average salary of $63,000. And as one well-paid CEO noted, “If you can find high-quality talent at a third of the price, it’s not too hard to see why you’d do this.”18 Even if that is true as a mathematical calculation, should our government really enable, encourage, and reward so richly those who “do this”?
Could the struggles of American workers be a productivity problem? That might be an explanation; if American productivity (how much is produced per unit of labor, capital, and other inputs) steadily declined in those years, then noninflationary income gains for American workers would be unlikely. The problem with that explanation is that American productivity did not decline but instead continued to improve. Productivity continued to rise after 1979, but we distributed the gains from that rise differently in the corporate era than we did before. According to a 2005 analysis of data from the Bureau of Labor Statistics, between 1947 and 1973, productivity and the median income rose by almost exactly the same amount (productivity increase, 100.5 percent; median income increase, 100.9 percent). Bet
ween 1973 and 2003, however, things changed. Now, even though productivity continued to increase (71.3 percent), median incomes increased much less (21.9 percent). In other words, the gains were no longer going to all Americans but were increasingly going disproportionately to a very few people at the top.19
This did not “just happen.” Gains from economic growth that used to be widely shared now go disproportionately to the extraordinarily wealthy because government chooses that outcome. The crony capitalist “intermingling” of political and economic elites and the corporate campaign envisioned by Lewis Powell have built an antiregulation, antigovernment theology that works to enrich a very few individuals and to prevent choices that previously distributed wealth and opportunity more evenly. Tax policy is a good example.
Corporations, People, and Taxes
Although corporations are not people, people control corporations, and a very few people control the largest, richest corporations. As Stephen Haber noted regarding crony capitalism elsewhere in the world, “The intermingling of economic and political elites means that it is extremely difficult to break the implicit contract between government and the privileged asset holders.” That intermingling is on full display in Washington and state capitals when government allocates the tax burden.
The idea that the United States of America is a place where people can work hard and have a chance at getting rich is very strong, but so is the idea that people should pay their fair share and that graduated, progressive tax rates fairly balance the burden of funding the nation’s continued progress. Indeed, we have a progressive income tax only because Americans of all parties came together to amend the Constitution in 1913 to overturn a Supreme Court case that struck down the federal progressive income tax law.
Gross income disparities are an enemy of successful market economies.20 Nevertheless, shifting income to the very top lies at the heart of the corporatism agenda. In fact, the first of the modern corporate rights decisions arose from organized corporate opposition to a modest proposal in Massachusetts to tax the wealthy at a slightly higher rate than the middle-class and the poor. The 1978 decision in First National Bank of Boston v. Bellotti (written by Justice Lewis Powell) struck down a Massachusetts law banning corporate funding for or against citizen referendum campaigns. The referendum at issue in that case would have allowed Massachusetts to have a progressive, graduated income tax instead of one where the poor paid the same rate as the rich. That was the question that galvanized corporations such as Bank of Boston, Gillette, and Digital Corporation to sue for corporate speech rights to block a citizen referendum.
These corporations demanded that the Supreme Court guarantee them the right to spend as much corporate money as their executives decided was necessary to block the citizen tax referendum. Otherwise, the people might vote for progressive income taxes. According to the argument used by the corporations in the case, progressive income taxes would make it more difficult for corporations to recruit talented executives in Massachusetts. The corporations won. Now, thirty years later, Massachusetts still does not have progressive income taxes.21
What happened to the companies that got the Supreme Court to give corporations “speech” rights to spend unlimited money to defeat a citizen vote in Massachusetts? They presumably went on to recruit those talented executives whom the corporations claimed would not have come to Massachusetts if the state had progressive income taxes—right?
Massachusetts should have been so lucky. Here’s an update since the 1978 Bellotti decision. Gillette sold itself to Procter & Gamble in 2005, with the loss of more than one thousand jobs.22 The Gillette CEO who engineered the deal, James Kilts, made $188 million on the sale.23 Bank of Boston sold itself to Fleet (five thousand lost jobs; $25 million for the CEO), which then sold itself to Bank of America (thirteen thousand lost jobs; $35 million for the CEO).24 Digital sold itself to Compaq in 1998 (fifteen thousand lost jobs; $6.5 million for the Digital CEO who sold the company).25 The tax rate for those CEOs and the laid off employees remains equal.
CEO Pay, Political Spending, and Corporate Government
It approaches a state of what Robert Kerr has called “cognitive feudalism” to imagine that there are no connections among corporate power, wealth disparity, and the erosion of democracy.26 The same CEOs and executives who decide to spend corporate lobbying money and corporate “independent” campaign money also make substantial personal contributions directly to candidates. They also decide how much to pay themselves, advised by a sympathetic board compensation committee. In the corporate era of today, that pay is now much, much more than it used to be, so that millions of dollars in CEO personal campaign contributions are relatively easy to make.
Between 2000 and 2008, CEO pay ranged from 319 to 525 times the average employee’s pay. In 1980, the average CEO made only 42 times the salary of the average employee.27 Even after the 2008 financial meltdown, the average CEO salary (nearly $10 million) remains 263 times higher than the average employee salary.
The nonpartisan Center for Responsive Politics (CRP) has pulled together data showing contributions to candidates and political parties from individual “heavy hitters.” The CRP defines a heavy hitter as someone who has given federal political candidates and parties more than $50,000 during a single election cycle. That $50,000 giveaway to politicians is more than the annual income of 75 percent of Americans.
The CRP heavy hitter list includes dozens of CEOs and executives of global financial corporations that received billions of dollars in taxpayer-funded bailouts or other government aid during the recent financial crisis, including Goldman Sachs, Citigroup, AIG, JPMorgan Chase, UBS, Credit Suisse, Wachovia, Merrill Lynch, and Bank of America. The list of $50,000 campaign contributors also includes executives from global energy, media, tobacco, telecommunications, and pharmaceutical corporations that benefit from government policy decisions (or inaction) to the tune of billions of dollars in corporate profit.28
These “investments” seem to pay off for the companies and for the executives. Both receive coddling tax treatment that makes no sense from the perspective of national interest or sound fiscal policy in times of high deficits. Despite large profits and multimillion-dollar executive payouts, bailed-out Bank of America has paid zero taxes since 2009. GE ($14 billion in profits) paid zero taxes and instead claimed a $1 billion tax credit. The wars go on, Medicare and school budgets are cut, and “temporary” tax cuts for those making more than $250,000 (2 percent of American households) remain sacrosanct.
Then there’s the “hedge fund loophole.” In 2009, twenty-five hedge fund managers paid themselves a total of $25.3 billion—yes, that is billion, with a b. If these twenty-five billionaires paid income taxes like everyone else, one would expect those billions in earnings to be taxed at 35 percent, the federal income tax rate for the highest-paid Americans, or at 38 percent if the “temporary” tax cut enacted after the September 11 attacks had been allowed to expire in 2010. As the late billionaire Leona Helmsley famously said, however, “Only the little people pay taxes.”
Hedge fund managers do not pay income taxes like other people do. Hedge fund managers take a fee in the form of a “carried interest” in the performance of the fund or, in other words, a designated percentage of the profits from investing other people’s money. Hedge fund managers call this a “gain” rather than “income” and hence claim the right to pay a low capital gains tax rather than a normal income tax. The top capital gains tax rate is 15 percent, the same as the lowest income tax rate possible, available only to those with income of $34,000 or less. To put this in perspective, 75 percent of Americans make less than $50,000 per year. Say you are doing much better than most or have a high combined income with your spouse, and you make $100,000 per year. You would pay federal income tax at a 28 percent rate. Yet if you are a hedge fund manager who makes $1 billion, you pay a 15 percent tax. That’s the hedge fund loophole.
Unsurprisingly, this loophole outrages regular taxpayers (that is, almost ev
eryone). Perhaps good arguments may be made, as a general proposition, for taxing capital gains at a lower rate than general income taxes. Lower capital gains taxes may encourage investment, generating economic growth, jobs, and wealth. The lower rate reflects risk-taking: investments might result in a gain, but they might also result in a total loss. But do hedge fund managers who make billions of dollars need the additional encouragement of a tax discount to do what they do? Are they going to stop making billions of dollars unless we promise not to tax them at more than 15 percent? Hedge fund managers do not have a risk of loss because they are investing other people’s money, not their own. Hedge fund managers’ compensation is in fact much closer to income than it is to investment gain.
Congress considered proposals to close the hedge fund loophole in 2007, 2009, and 2010. Each time, people thought that the loophole did not have a chance to survive because it is so indefensible. Undaunted, the hedge fund and private equity industry drove millions of dollars in lobbying expenses, up 800 percent and 560 percent, respectively.29 The U.S. Chamber of Commerce rushed out “studies” claiming that economic disaster would befall America if the hedge fund managers paid taxes like other people, and corporate-funded front groups with names like American Crossroads and Crossroads GPS shouted “liberty” and inveighed against “taxes and wasteful government spending.” With that snap of the leash, Congress did nothing.30 At the end of 2010, a hedge fund manager paid himself $5 billion for the year’s work or, as he would prefer, a year’s “gain.”
Corporations Are Not People Page 13