OurFuture.org Blogs: Sam Pizzigati

What Ever Happened to the Good Times the Tax-Cutters Promised?

Sam Pizzigati — Sun, 22 Nov 2009 08:30:37 -0800

Don't expect an answer from the ranters and ravers who frequent 'Tea Parties' — or the politicians who egg them on.

You don’t have to dig particularly deep, in the United States today, to find some striking similarities between today’s virulently anti-Obama “Tea Party” crowd and the media darlings who birthed the “Tax Revolt” phenomenon back in the late 1970s.

The Tax Revolters burst onto the national scene amid an inflation-battered economy. They blamed “big government” for what ailed America, and they offered a simple remedy: cut taxes. Lower taxes, they promised, would get average Americans back on track.

The Tea Party zealots have, like the Tax Revolters, also coalesced in tough economic times. They attack “big government,” too. They even make the same promises about taxes.

But the Tea Party types, so far at least, haven’t scored any early political success. The Tax Revolters did. In 1978, in a ballot-box stunner, they passed a statewide initiative in California known as Prop 13, an unprecedented cap on property taxes.

Within a few short years, almost half America’s states had followed suit with tax cuts and caps of their own. In 1980, at the national level, this Tax Revolt surge would carry Ronald Reagan into the White House. One year later, a pliant Congress would give President Reagan the biggest across-the-board federal tax cut in U.S. history.

Tax relief had become, in the wink of an eye, America’s most potent political creed. Tax cutting and capping would go on to dominate the nation’s political discourse for the next three decades, an entire generation.

And what do we have to show for all this cutting and capping? Last week, researchers offered up two new studies that offer up a useful assessment.

The first, funded by the Social Security Administration, looks at the wealth of American families. That wealth, the Tax Revolters assured us,would start amassing again once taxpayers yanked “big government” out of our pockets.

The second new study zeroes in on state and local taxes. After years of tax revolting, this Institute on Taxation and Economic Policy report asks, who exactly is paying taxes at the state and local level? Who has benefited the most, in tax terms, from the Tax Revolt the Tea Party zealots are now so fervently seeking to extend?

The answer: The rich have benefited the most. The Tax Revolt that began back in the late 1970s has, in state after state, let the affluent off the tax hook.

In fact, notes the new Institute on Taxation and Economic Policy analysis, “nearly every state and local tax system takes a much greater share of income from middle- and low-income families than from the wealthy.”

In the entire United States, the analysis adds, “only two states require their best-off citizens to pay as much of their incomes in taxes as their very poorest taxpayers must pay, and only one state taxes its wealthiest individuals at a higher effective rate than middle-income families have to pay.”

America’s most affluent 1 percent now pay, on average, just 6.4 percent of their incomes in state and local taxes. But they actually pay even less than that, since they can deduct their state and local taxes from their federal tax bill. The state and local tax burden on America’s rich, after taking this offset into account, drops to 5.2 percent.

Middle-income families — to be precise, those families who make up the middle fifth of America’s income distribution — pay, after the federal offset, 9.4 percent of their incomes in total state and local taxes.

America’s poorest families pay even more. Tax collectors take 10.9 percent of the incomes of households in the nation’s bottom 20 percent, more than double the share they take from the incomes of the nation’s top 1 percent.

The Institute on Taxation and Economic Policy paper, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, covers non-elderly households. Incredibly, the study details, some states “ask their poorest residents — those in the bottom 20 percent of the income scale — to pay up to six times as much of their income in taxes as they ask the wealthy to pay.”

Now you could argue that none of this matters. The Tax Revolters, after all, didn’t claim that their tax cutting and capping would have low- and middle-income people paying taxes at a lower rate than the rich. They claimed, instead, that massive tax cuts, taken as an amorphous whole, would help just about everybody get considerably richer.

That hasn’t happened, as Brookings Institution researchers Barry Bosworth and Rosanna Smart document in a paper just published by the Boston College Center for Retirement Research, with funding support from Social Security.

Bosworth and Smart “explore the consequences of the housing price bubble and its collapse for the wealth of older households.”

Along the way, the two investigators dive into the overall family wealth data the Federal Reserve has been collecting since the early 1980s. Tapping into another federal data set, they bring the family net worth picture up-to-date for 2009.

For low- and middle-income families, their numbers tell a depressing story.

All American households — poor, middle, and rich — have lost wealth since the subprime mortgage collapse and last fall’s financial meltdown. On average, since 2007, Americans have lost 26 percent of their total net worth.

But low- and middle-income households under age 50 haven’t just lost a big chunk of the wealth they held in 2007. These households have actually lost all the wealth they had gained since 1983, the first year with Federal Reserve family wealth data available.

Back then in 1983, the bottom third — by income — of U.S. families under age 50 had an average $24,000 in net worth to their names, as measured in year 2000 dollars. The housing bubble helped boost this bottom-third average net worth to $27,000 in 2007.

Today, in the wake of that bubble’s collapse, researchers Bosworth and Smart put average bottom-third net worth at just $17,000, in those same year 2000 dollars.

Middle-income households under age 50, meanwhile, held an average net worth of $50,000 in 1983. The current net worth of this middle third, after adjusting for inflation: $45,000.

Older households in the bottom and middle income thirds — those over age 50 — have, to be sure, seen their after-inflation net worths increase between 1983 and 2009. But these households have lost at least 22 percent of the wealth they held in 2007. As older families, Bosworth and Smart note, they now “have less time to recover.”

That recovery may take some time.

Back in the middle of the 20th century, governments in the United States routinely taxed the rich to pay for the programs that built a vibrant middle class. The Tax Revolt that began three decades ago, by demonizing taxes, gave the rich a free ride and gutted those programs.

That demonization today continues, with politicos beholden to that rich cynically fanning the Tea Party flames. They don’t care who gets burned. The rest of us should.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Inequality's Death Toll: A New Calculation

Sam Pizzigati — Wed, 18 Nov 2009 12:05:33 -0800

What has the potential to save more lives, the insurance reforms in the House health care bill or the higher taxes on the rich the bill imposes to pay for those reforms? This rather odd question, suggests a new study on inequality and health, really does merit asking.

Over the past year, Americans have been heatedly debating how best to help people who get sick. But why do people get sick in the first place? Why do some developed nations seem to have much healthier populations than others? Why do people in Japan live much longer, on average, than people in the United States?

Epidemiologists — the scientists who study the health of populations — have been busily exploring these questions for decades now, and they’ve fixed upon a reality that has stimulated an enormous scholarly debate within the public health community. Equal societies, the researchers have found, consistently exhibit better health than unequal societies.

Why should this be so? Last week, in the British medical journal BMJ, an editorial by epidemiologists Kate Pickett and Richard Wilkinson neatly identified the two competing explanations.

The first explanation suggests “that more unequal societies have worse health simply because they have more poor people.” If poor people had more money, they would likely spend more on “things that benefit health” — better food, for instance, or warmer housing.

But the problems inequality creates, other epidemiologists contend, go far beyond poverty. Income gaps, these scientists argue, corrode social bonds and create a chronic stress that wears away at the health of all people who live in deeply unequal societies, not just the poor.

This second explanation has just gained significant new support — from a new “meta-analysis,” also published last week in BMJ, of previously conducted inequality and health studies.

The new paper’s authors, epidemiologists from Japan’s University of Yamanashi and the Harvard School of Public Health, subjected these studies to a series of complex statistical analyses. Their goal: to offer “quantitative evaluations on the association between income inequality and health.”

Their principal finding: Individuals “living in regions with high income inequality have an excess risk for premature mortality independent of their socioeconomic status, age, and sex.”

In other words, if you’re a middle-income person in an unequal society, you’re going to have shorter life than a similarly situated middle-income person in a more equal society.

How powerful an impact does inequality have on health? In the world’s top 30 industrial nations, the Japanese and American research team concludes, “upwards of 1.5 million deaths” — nearly 10 percent of total mortality in the age 15-to-60 age group — could be prevented by reducing income inequality.

The impact of inequality on the United States turns out to be even more stunning, not surprisingly since no developed nation sports wider gaps in income and wealth. Of the deaths the new BMJ study ties to inequality, almost 900,000 came in the United States.

That total, University of Washington epidemiologist Stephen Bezruchka pointed out last week, amounts to a sizeable share of America's annual death toll.

“We can say,” he calculates, “that one in four deaths can be attributed to our high rates of income inequality.”

Such numbers have, of course, enormous political implications. An unequal society, as last week’s BMJ editorial noted, amounts to a “broken society.” Political leaders, the editorial continued, ought now endeavor to repair that break — “by undoing the widening of inequalities that has taken place since the 1970s.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Against Wall Street, Prosecutors Are Striking Out

Sam Pizzigati — Mon, 16 Nov 2009 08:10:36 -0800

Unfortunately, lawmakers aren't doing too well either — and the big bank bonus grab has once again shifted into overdrive.

The bankers at Goldman Sachs, Goldman's CEO pronounced last week, are doing “God’s work.” God, these days, must truly be working in strange ways. Take what happened a few short years ago, right before the bubble burst on the market for subprime-backed securities.

The power suits at Goldman Sachs saw that pop coming. Late in 2006, expecting the worse, they began “selling off” their own inventory of subprime securities and, as the McClatchy newspapers detailed earlier this month, betting against subprimes “in secretive swaps markets.”

Meanwhile, at the same time, Goldman Sachs insiders merrily continued to collect huge fees helping their clients buy up the same subprime paper the insiders knew had no future.

The chair of the theology department at your local university might not consider this sort of duplicitous behavior “God’s work.” Professors at your local law school might even wonder whether behavior this brazen qualifies as criminal.

Last week, in a federal courtroom in Brooklyn, jurors gave Wall Streeters worried about their potential criminal liability some most welcome news. They acquitted two hedge fund managers at the failed Lehman Brothers banking empire on charges they had defrauded their clients — by encouraging them to keep their money in a fund the traders knew to be stuffed with junk securities.

Those clients eventually lost $1.6 billion. The senior of the two Lehman Brothers defendants, Ralph Cioffi, took home $32 million managing their money.

That money ensured the 53-year-old Cioffi the finest lawyering money could buy, and those lawyers did their jobs. They painted a vivid picture of the defendants as “scapegoats” for Wall Street’s nosedive. By the trial’s end, the jurors saw Cioffi more as the valiant captain of a sinking ship than a simple swindler.

One juror, in an interview after the acquittal, even said she’d be happy to invest her money with the defendants — if she had any money to invest.

The jurors didn’t just acquit the defendants. They returned their verdict in a lightning-quick nine hours. Jurors, in a complicated white-collar case, typically take four or five days just to sort out the evidence.

Federal prosecutors will now likely take far longer than that licking their wounds. Indeed, the surprising outcome of the trial — the first against Wall Street high-flyers since last fall’s meltdown — may mean that no one will ever go to jail for cooking up the deals that drove the global economy into the ditch.

Federal prosecutors, news reports last week agreed, will now be “less likely to bring criminal charges against Wall Street executives for their role in the financial crisis.”

In other words, the American public can no longer count on the threat of criminal prosecutions to scare Wall Street straight.

Americans, unfortunately, can’t seem to count on legislative action either.

Last week, Senate Banking Committee Chairman Chris Dodd introduced “sweeping and long overdue” financial reform legislation that he vowed would protect “consumers and our economy as a whole from another crisis like the one we are now in.”

Dodd’s bill would certainly make some “long overdue” changes. One example: The legislation would yank from big private banks the authority to handpick the officials who run the nation’s regional Federal Reserve banks.

“It's insane,” the New Republic's Noam Scheiber observed last week, “that big Wall Street firms get to choose the directors of the New York Fed, which is often their chief regulator.”

But Dodd’s bill takes a tougher line on Wall Street than the “White House-blessed” legislation that has emerged from the House, and that leaves any “sweeping” new regulation of Wall Street “unlikely to pass this year.”

And Dodd’s bill, even if enacted this year, would do nothing to limit the huge windfall rewards that give Wall Streeters the incentive to behave recklessly in the first place. Those rewards, as Forbes analyst Matthew Goldstein noted last week, drove the distasteful behavior of the two indicted Bearn Stearns hedge fund managers acquitted last week.

Those two, says Goldstein, didn’t behave any differently than their counterparts elsewhere on Wall Street. They all “got greedy on the easy money that was made off of collateralized debt obligations and other subprime-related securities.”

A half-century ago, high tax rates on high incomes — the top tax rate on income over $400,000 stood at 91 percent for most of the 20 years after World War II — effectively kept “easy money” greed in check. Why bother scheming to make “easy money,” after all, if the tax collectors won't let you keep it?

For a brief moment this past spring, Congress seemed eager to consider a similar cap on “easy money.” In March, as a recent Institute for Policy Studies report reminds us, the House of Representatives actually passed a bill that placed a 90 percent tax on bonus windfalls at an assortment of bailed-out banks.

That bill has sunk without a trace — and bank bonuses are already soaring back to pre-recession levels. In fact, says newly released research from the Financial News and Wealth Bulletin, the 20 largest banks in the United States and Europe have so far this year set aside $224 billion for 2009 pay and bonuses.

At this rate, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, and the other 16 financial institutions the new research tracks will stuff the pockets of their leading lights with more than $300 billion in 2009, enough to break their all-time annual pay record.

“God’s work” has never paid so well.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

A Do-It-Yourself Giant Does It to Workers

Sam Pizzigati — Mon, 09 Nov 2009 12:33:58 -0800

Amid double-digit joblessness, two top U.S. corporations cut still another mega merger deal that enriches execs and tosses workers, by the thousands, out onto the street.

You don’t have to be a high-flyer in high finance to get a kick — and a fortune — out of wheeling and dealing. Greed and grasping, we need to remind ourselves every so often,are still thriving right down on the ground, in America’s oh-so pedestrian manufacturing sector.

The latest case in point: the just-announced $4.5 billion merger deal that will fold the 99-year-old Black & Decker tool-making powerhouse — the folks who brought us the world’s first pistol-grip power drill — into its chief tool-making rival, Connecticut's Stanley Works.

“It’s a match made in heaven,” Stanley flack Tim Perra told reporters last week.

Heaven for who? Not consumers. The new “Stanley Black & Decker” may soon have enough marketplace dominance, says Morningstar business analyst Anthony Dayrit, “to raise prices” on do-it-yourself gizmos that range from from power tools to window locks.

And workers won’t find much heaven in the merger either. Black & Decker and Stanley together currently employ a workforce just over 40,000. The merger the two companies announced last week will eventually cost an estimated 10 percent of those workers their jobs, starting with staff at the Black & Decker headquarters just outside Baltimore.

No surprise there. In any big-time merger, at least some employees will always become “redundant.” A newly merged company, after all, doesn’t need two sets of headquarters staff.

But redundancies, after a big-time merger, never seem to show up in executive suites. Top execs at firms getting swallowed up either get cushy positions in the new firm or golden parachutes that ensure them a gentle landing when they leap out into the cold hard world.

Black & Decker CEO Nolan Archibald had to choose between the two. By contract, Archibald could have walked away from the new Stanley Black & Decker with a severance package worth $20.5 million.

Archibald has chosen instead to stay on as the new company’s “executive chairman” for the next three years. The 66-year-old won’t have to do much heavy lifting in this new slot, except to cart his ample paychecks to the bank.

How ample? For attending board meetings and “advising” — and playing no role whatsoever in the new company’s day-to-day management — Archibald will collect a $1.5 million annual salary. He’ll also pocket a $35.5 million pension and another $15.7 million from his Black & Decker supplemental retirement plan.

On top of all that, the Associated Press reported last week, Archibald may grab as much as $45 million in bonus “if cost savings goals are met in three years.”

Meeting those goals shouldn’t be too difficult. Archibald and Stanley CEO John Lundgren have plenty of experience cutting costs. They know the secret. They just slice away at jobs and wages.

Last year, for instance, Black & Decker sales dropped 7 percent. Black & Decker paid CEO Archibald $12.1 million anyway, then announced plans to cut worker salaries by up to 5 percent.

Stanley CEO Lundgren, for his part, took home only $4.6 million in 2008. Last December, Stanley took steps to pump up that disappointing take-home — by closing three manufacturing facilities and axing 2,000 jobs.

Wall Street cheered that move. And Wall Street is also cheering Stanley’s takeover of Black & Decker. For good reason. The deal will mean a quick 22 percent profit for Black & Decker shareholders. The investment banks that shepherded the merger deal along — Goldman Sachs for Stanley, JPMorgan for Black & Decker — stand to do even better.

Investment bankers typically cream off fees that equal at least 0.1 percent of a merger deal’s total value. On multi-billion-dollar deals, these fractional percents can add up fast.

So far in 2009, not counting last week’s blockbuster Stanley-Black & Decker action, JPMorgan has pulled in $1.26 billion advising clients on 156 merger-and-acquisition deals. Goldman Sachs has grabbed $1.22 billion, over the same time span, on 142 deals.

Where do all these billions in fee revenue go? Roughly half the revenue investment banks make from merger deals traditionally goes straight into banker bonus pools.

Into the communities these mergers devastate, a top U.S. labor leader charged late last month, goes nothing.

“Too often,” says United Steelworkers president Leo Gerard, “we’ve seen Wall Street hollow out companies by draining their cash and assets and hollow out communities by shedding jobs and shuttering plants.”

Gerard’s union has just announced a merger “deal” of its own — to help put an end to that hemorrhaging of jobs and futures. The Steelworkers will be joining with the Spanish-based Mondragón International, the world’s largest network of industrial worker cooperatives, in a bid to “transform manufacturing practices in North America.”

“We need a new business model,” Gerard explains, “that invests in workers and invests in communities.”

Mondragón may just fit that bill. The Mondragón network, launched 53 years ago by a visionary Basque priest, has become Spain’s seventh-largest business group and currently operates 260 enterprises in over 40 countries — making everything from high-tech tools to refrigerators.

Workers in Mondragón cooperatives own their enterprises. They each have an equal share and an equal vote in key enterprise policy decisions. Workers in Mondragón businesses, notes long-time progressive analyst Carl Davidson, “themselves decide on the income spread between the lowest-paid worker and the highest-paid manager.”

That spread, across the Mondragón universe, averages 4.5 times. In the United States last year, CEOs averaged 319 times the pay of average U.S. workers.

The United Steelworkers, the biggest union of manufacturing workers in the United States, will now be looking to apply Mondragón principles to “viable small businesses in appropriate sectors where the current owners are interested in cashing out.”

“We see Mondragón’s cooperative model with ‘one worker, one vote’ ownership,” says Steelworkers president Gerard, “as a means to re-empower workers and make business accountable to Main Street instead of Wall Street.”

For thousands of workers at Black & Decker, and millions of consumers, that accountability may come a little too late.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

A Rich University's Mad Dash to Get Richer

Sam Pizzigati — Sun, 01 Nov 2009 09:38:32 -0800

Investing recklessness at Harvard is making 'the best and the brightest' look awfully silly — almost as silly as a nation that lets staggering quantities of wealth continue to concentrate.

Wild chases after vast riches, last fall’s global meltdown reminded the world, can destroy economies — and corrupt entire societies. Great universities, in theory at least, can serve to slow these chases. They offer a refuge from marketplace passions, a place where sober scholars can reflect thoughtfully on the damage frenzied speculation can do and how that damage can be undone.

America’s greatest university — Harvard — hasn’t enabled much of that reflection lately. The reason? Harvard has been too busy chasing riches.

Now that chasing has left Harvard, the world’s wealthiest university, enveloped in an embarrassing financial debacle that has cost hundreds of university employees their jobs, frozen the salaries of many others, and stopped campus development projects dead in their tracks.

“Harvard's investment managers played some of the same reckless games as the big banks,” says historian David Kaiser, a Harvard alumnus. “The difference is that Harvard isn’t eligible for a bailout.”

Kaiser and other Harvard grads from the class of 1969 have been critiquing Harvard investment practices since they learned six years ago that officials in the Harvard Management Co., the university office that invests Harvard’s endowment, were pulling in enormous Wall Street-style bonuses. In 2002, just six of these investment managers pocketed a combined $107.5 million.

To go about grabbing those millions, Harvard’s financial managers were investing university endowment dollars in exotic “derivatives” that promised high, double-digit annual returns. The higher the returns, the higher the rewards for the investment managers — and the greater the incentive to keep plowing endowment dollars into even shakier investments.

But the risk taking went beyond endowment dollars. Harvard actually began investing general operating funds in the same risky investments, in the process, observed the Boston Globe, violating “one of the most basic rules of corporate or family finance: Don’t gamble with the money you need to pay the daily bills.”

And what were Harvard’s grown-ups doing while all this was happening? They were looking the other way. In May 2002, a staffer at Harvard Management wrote then Harvard president Lawrence Summers a confidential letter to warn about the investing recklessness she saw all around her. Nothing changed. Two months later, she was fired for making “baseless allegations.”

Summers, a controversial figure at the university in his own right, would leave Harvard in 2006. He resurfaced, after last November, as the director of the new Obama administration's National Economic Council.

By that time, the global financial industry had collapsed. In the wake of that tumble, Harvard’s celebrated endowment — worth $36.9 billion at its peak two years ago — lost nearly $11 billion in just a year. The Harvard general operating fund lost another $1.8 billion.

More bad news came earlier this month. Harvard officials revealed they had shelled out just under $500 million, in the university’s last fiscal year, to a host of big Wall Street banks to cover a “failed bet that interest rates would rise.”

University officials, notes the Class of 1969 Ad Hoc Committee on Harvard’s Endowment, have responded to some alumni complaints. The university, for instance, significantly increased student financial aid several years ago. But Harvard, alumni critics charge, is still refusing to “acknowledge any fundamental mistakes.”

These alumni now want the university to cap investment manager earnings.

“We continue to believe,” the Class of 1969 committee related in a recent letter to Harvard president Drew Faust, “that no Harvard employee should earn more annually than the president of the university and that multi-million dollar bonuses are inappropriate in nonprofit institutions.”

The alumni critics also want Harvard to report how many university dollars have gone to the outside investment firms that have, in recent years, managed as much as two-thirds of the university’s endowment investing.

Outside investment managers typically receive a flat 2 percent annual fee on the billions they invest and a 20 percent cut of the profits they make buying and selling invested assets.

Absolutely “no one,” adds the alumni letter to Harvard’s president, “should be compensated on such an enormous scale for managing nonprofit funds.”

But the angry alumni are seeking an even broader change. They want Harvard to start acting as a great university should.

The reckless investment moves that have cost the university so dearly, the alumni note, essentially mirror “the practices that in the same period brought down most of our major financial institutions, with enormous short-, medium and long-term costs to the United States and the entire world economy.”

“Surely Harvard,” they note, “can find the intellectual, moral, and financial capital to face this fact squarely and begin a public discussion of the weaknesses of our financial practices, not only for the sake of the institution, but to help the society which it serves.”

In the end, the Harvard financial fiasco helps make clear, financial maneuvers that pump up endowment jackpots — and rewards for endowment investment managers — don’t contribute to academic greatness. They undermine it.

Indeed, the staggering concentration of wealth in the Harvard endowment — from $4.7 billion in 1990 to $36.9 billion in 2007 — has taken place over years that have witnessed the overall deterioration of American higher education.

The public colleges and universities that deliver most of that education have been steadily cutting academic services and raising tuition beyond the means of average working families, in no small part because tax cuts for America’s wealthy — the same wealthy who donate so prodigiously to their elite alma maters — have helped drive down state budget support for higher education.

The total average annual cost of attending a public four-year college, the College Board reported earlier this month, has now hit $15,213.

“The level of debt we’re asking people to undertake,” agonizes Patrick Callan of the National Center for Public Policy and Higher Education, “is unsustainable.”

The lesson in all this? In both academe and society at large, as the most learned Sir Francis Bacon pointed out over four centuries ago, wealth — like manure — only does good when you spread it around.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

The Pay Czar's Pay Cut Ruling: The Hype, the Hoax

Sam Pizzigati — Sun, 25 Oct 2009 17:26:06 -0700

The White House pay czar isn't reforming Wall Street. He's cutting deals with it. We need to understand the difference.

Responsible people can do reckless things, most often when emotion clouds their better judgment — and no emotion probably clouds judgment any more regularly than greed. Wave enough dollars in our faces, and we’ll be tempted to do what we shouldn’t.

Over recent years, to grab those waving dollars, America’s top execs and bankers have done plenty of what they shouldn’t. In the process, they crashed the economy.

So how best to fix the economy — and prevent more crashing? Stands to reason we ought to curb the rewards that create all those incentives for reckless behavior, right?

At first glance, the pay plan that White House “pay czar” Kenneth Feinberg unveiled last week seems to do that curbing. “U.S. to Order Steep Pay Cuts at Firms That Got Most Aid,” read one early headline on Feinberg’s plan. “U.S. takes aim at executive pay,” read another.

Headlines like these undoubtedly brought cheer to White House PR types. The reality behind those headlines, unfortunately, makes for disappointing public policy. The new pay czar pay ruling does precious little to throttle the cascade of dollars pouring into America’s executive suites.

One reason: The pay czar has jurisdiction over executive pay at just seven firms — Citigroup, Bank of America, AIG, General Motors, Chrysler, and automaker financing arms GMAC and Chrysler Financial.

Wall Street’s most profitable players — Goldman Sachs and JPMorgan Chase — don’t fall under the pay czar’s purview. Neither do any of the rest of the companies, outside the pay czar’s less-than-magnificent seven, that make up the Fortune 500.

But the problem with the new pay czar ruling goes well beyond its limited scope. The numbers that kept turning up last week in articles about the ruling — an average 90 percent reduction in cash compensation, an average 50 percent drop in total pay — turn out to conceal more than they reveal.

Typical executives at the seven bailed-out firms under the pay czar’s thumb will see cutbacks nowhere near that severe, mainly because special cases have “skewed” the pay cut averages.

The most glaring of these special cases: Citigroup last year awarded trader Andrew Hall $98 million in bonus. He was due to receive this year another $100 million. But Citi has sold the subsidiary where Hall does his wheeling and dealing. He’ll still get his $100 million, but Citi’s pay outlays for 2009 now show up as $98 million less than last year.

For most top execs, pay czar Feinberg’s plan will shift pay more than cut it. Executives at the seven firms will have to take less pay in cash and more in stock.

At Citigroup last week, top officials assured worried execs and traders that “the net impact of Mr. Feinberg's rulings will be minimal because the cut salary will be shifted from cash to longer-term stock grants.”

One Citi executive, in comments to the Wall Street Journal, would be more blunt. He called claims about a 50 percent cut in total executive pay “a bit of a hoax.”

The fine print in the pay czar’s new plan helps explain the absence of pay panic at Citi. The bank’s three top earners, under Feinberg’s ruling, will this year each collect $475,000 in salary, at least $5.6 million in company stock that they can start cashing out the year after next, and another $3 million in “long-term restricted stock” — a $9 million total for each of the three.

The bottom line: Despite the pay czar's ruling, big-time executives and bankers in the United States will still have ample incentive to pump up their enterprise earnings by any means necessary. They’ll continue to “perform” by squeezing consumers and plotting merger deals that trigger super paydays for executives and pink slips for workers.

Indeed, last week’s media scrum around pay czar Feinberg totally ignored the latest of these pink-slip merger blitzes: Sun Microsystems will shortly be laying off 3,000 employees, 10 percent of its workforce, to get set for its impending takeover by business software giant Oracle.

Oracle's top “performer,” CEO Larry Ellison, just happens to currently rank third on the Forbes list of America’s 400 richest, with a fortune estimated at $27 billion.

The pay czar’s new pay plan does, to be sure, sport some welcome provisions. Executives, for instance, will have to gain pay czar approval before they can get over $25,000 in perks like country club memberships and free personal rides on corporate jets.

But the pay czar’s overall plan, as New York Times analyst Louise Strong notes, “will not bring an end to big paydays.”

Nor will the pay guidelines that emerged last week from the Federal Reserve, to cover senior executives, traders, and loan officers at the nation’s top financial institutions. These new Fed principles aim to discourage risky behavior. But they “do not,” as one analyst relates, “impose caps on pay or prohibit multimillion dollar pay packages.”

The movers and shakers of the U.S. economy, in short, will still be seeing lavish rewards waving before their faces. Beware the consequences.

“Unless we change the incentives that drive Wall Street to take huge risks,” as venture capitalist and management consultant Peter Cohan put it last week, “we'll be back to those days in the blink of an eye.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Banker Bonus Bingo: Every Card's a Winner

Sam Pizzigati — Mon, 19 Oct 2009 08:21:08 -0700

Can excess on Wall Street ever be ended? Maybe. Some lawmakers in France have a plan that could end it.

America’s biggest banks, amid the shakiest economic times since the 1930s, last week announced record profits — and deposited record billions into bonus pools for their top executives and traders. How did U.S. lawmakers and officialdom respond?

In Congress, a pivotal House committee gave the green light to a Wall Street regulatory reform bill that “does not do enough,” disappointed consumer advocates quickly charged, “to protect taxpayers and our economy.”

The nation's top executive pay regulator did some disappointing, too. “Pay czar” Ken Feinberg, the White House pick to oversee pay at the nation’s biggest bailed-outs, last week convinced soon-to-retire Bank of America CEO Ken Lewis to give up his $1.5 million 2009 salary. Why did Lewis agree? He gets to walk away, at year end, with a retirement package worth $69.3 million.

Welcome to post-meltdown America. One year and counting after last fall’s high-finance collapse, average Americans are reeling and Wall Street is rejoicing. The boom's back!

In fact, for Wall Street’s premiere financial giant, business is booming better than ever. Goldman Sachs last week announced $3.19 billion in third-quarter earnings, about quadruple the firm's profit a year ago. Goldman now has $16.7 billion sitting in its bonus pool.

That pool, by the end of December, will likely top off close to $23 billion, enough to pay each and every Goldman Sachs employee over $700,000 if the bonus dollars were divided equally.

The bonus dollars, past practice makes clear, won’t be equally divided. In 2007, Wall Street's previous record year, Goldman CEO Lloyd Blankfein took home $68 million. In 2008, 212 Goldman Sachs power suits stuffed their pockets with over $3 million each.

This year figures to be even more lucrative. Goldman, as one financial analyst points out, has so far in 2009 “earned three times as much as it did in all of 2008.”

That's not, to be sure, all good news for Goldman. In a record recession, record earnings create a bit of a public relations problem. To forestall any serious political blowback, Goldman's movers and shakers have opened a “charm offensive.” Message: We feel your pain. Reality: Goldman feels no pain — and doesn't intend to start any time soon.

The $200 million Goldman is now donating to charity, as the first thrust in its charm offensive, equals a mighty 6 percent of the firm’s third-quarter profit.

No other U.S. financial firm is matching Goldman’s stunning success. But you won't find other firms complaining. One new survey, released last week, estimates that 23 top U.S. banks and hedge funds will shell out $140 billion in 2009 compensation, $23 billion more than their previous all-time record high set in 2007.

“We can't go back,” a resolute White House press secretary Robert Gibbs told the nation earlier this year, “to the type of pay structure that incentivized wild speculation, like we had before this economic collapse.”

We now have gone back. But could the situation have turned out any differently? Could U.S. officials be doing more, given the complexities of our globalized economy, to prevent a return to standard executive pay operating procedure? They surely could.

At a minimum, U.S. authorities could be insisting, as British officials did last Wednesday, that every big bank in the nation either agree to the modest executive pay reforms that surfaced at last month’s global economic summit in Pittsburgh or lose the right to do business with the government.

The reforms the UK is imposing will keep bankers from immediately collecting all the bonus dollars they “earn” this year. They'll have to wait several years, a delay intended to prevent bankers and traders from cashing in on risky short-term deals that later go sour.

But these UK reforms don't speak at all to the overall size of the rewards that can go to the world’s banking and corporate elite. They should. Governments, as Institute for Policy Studies analyst Sarah Anderson noted last week on the PBS News Hour, should be leveraging “the power of the public purse to encourage more rational pay practices throughout the economy.”

Congress and the White House could do that, Anderson explained, by “limiting how much companies can deduct from their taxes” for executive pay and “using procurement policies to give preferences to companies that have more reasonable gaps between what their executives and their workers are making.”

One day after Anderson’s comments, progressive lawmakers took a daring move in just the direction she was suggesting. Progressive lawmakers in France, that is. The legislators brought before the French National Assembly the world’s boldest executive pay reform package yet.

The new French legislation, if enacted, would cap executive pay, in companies subsidized by tax dollars, at 25 times the pay of a company’s lowest-paid worker.

In all other companies, boards of directors would set the executive-worker multiple that determines the executive pay ceiling, after a process that includes worker input. Shareholders would have the final say on what that multiple would be.

Support in France for an outright income cap — a “maximum wage” — has been building since last spring when the popular French weekly, Marianne, launched a petition campaign for a “salaire maximum.” How far politically can this campaign now go?

One appraisal came last week from Jean-Philippe Huelin, the editor of the French maximum wage campaign’s online presence.

“With a little perseverance — and luck,” says Huelin, the French maximum wage drive just might become a “flagship” issue in the next French presidential election.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Mending America's Torn Social Fabric

Sam Pizzigati — Sun, 11 Oct 2009 18:09:18 -0700

In closely knit communities, people care about each other and help each other, too. But healthy “social fabrics,” as the expression goes, can tear. Inequality can tear them. The wider the income gaps between us, the less we share in common, the less we care about those around us.

Over time, in a deeply unequal society, we come to feel almost totally on our own — and unprotected. Our society becomes a place where people don’t help each. They fear each other.

This past summer, many Americans saw that fear — in TV footage of angry protestors at congressional “town hall” meetings — and wondered whether our horribly divided society is sliding toward a future where hateful demagogues are essentially calling the shots.

But small bands of other Americans weren’t wondering and worrying. They were busily building an infrastructure for an alternate future. The building block for this infrastructure: the “Common Security Club.”

This Common Security Club organizing, after spending the last nine months pilot-testing and fine-tuning mobilizing materials and strategies, is now ratcheting up to a new and higher level of activity..

Local Common Security Clubs have already started up in over four dozen communities. The clubs typically bring from 15 to 20 people together for face-to-face sessions where they can grapple with their personal financial stresses, learn more about why our economy isn't working, and explore what people can do, through mutual aid and shared action, to increase our economic security.

“It’s important we learn together,” says Chuck Collins, the director of the Institute for Policy Studies Program on Inequality and the Common Good and an organizer of the Common Security Club network. “We ceded too much power to the experts — and now it's time for us to think for ourselves.”

Common Security Clubs are drawing participants from a variety of sources. Some have formed out of church congregations or union locals, others from neighborhoods.

To help all these groups get up and running, a small national staff, assembled by the Institute for Policy Studies and the Massachusetts-based Grassroots Policy Project, has prepared a facilitator’s manual and made all sorts of other resource materials available.

What are the clubs doing? Their efforts vary.

In the spirit of mutual aid, clubs are helping people deal with immediate personal crises — like foreclosures. They're also raising issues around long-term family financial planning, through a club network partnership with Vicki Robin and Monique Tilford, co-authors of Your Money or Your Life, a widely respected program that helps people rethink how they relate to money matters.

These mutual-aid activities, says club organizer Andrée Collier Zaleska, are helping create “tremendous energy for local and community responses.”

But the clubs take that energy further.

“We can’t ignore,” says Zaleska, “how larger economic policy failures wrecked the economy — and the need for ordinary citizens to weigh in on the direction of future economic policy.”

Local Common Security Clubs are starting to do that weighing in. They’re campaigning, for instance, to beat back the Wall Street blitz against the proposed national Consumer Financial Protection Agency.

The club network currently extends from Massachusetts, where the first club formed in Boston, to Washington State, and the press is just beginning to take notice. Organizers see a steady expansion ahead. Want to learn more — and maybe start a Common Security Club within your neighborhood or organization? The Common Security Club Web site covers all the basics.

The current recession, club organizers note, will eventually fade. But the economic ground beneath us has shifted. We can’t return, they note, to the cheap energy and unlimited fossil fuels that used to “grow” our economy — and we don’t want to return to the “bubble” economics that grew our vast inequalities of income and wealth and triggered last fall's crash.

“We need to prepare ourselves and our communities,” sums up organizer Chuck Collins, “for more fundamental changes and a new economic model.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

The 2009 Forbes 400: The What-Me-Worry Gang

Sam Pizzigati — Sun, 04 Oct 2009 17:26:19 -0700

An average American family would have to work thousands of years to amass a billion-dollar fortune. America's super rich, the new data on our richest 400 make clear, can lose a billion and barely notice.

Tsunamis, we learned this past week, amount to equal-opportunity destroyers. Against a surging 20-foot wave, an opulent beachfront manse offers no more security than a cottage. But a recession, even a Great Recession, doesn’t work that way.

In a recession, as Forbes documents in its just-published latest report on America's 400 richest, most super rich do see a dip in that financial abstraction known as “net worth.” But, otherwise, life goes on, as comfortably as ever. The rich emerge unscratched out of whatever wreckage a recession may bring.

By contrast, as economist John Irons reminded us last week in a powerful new report on America's lean-pocket majority, recessionary tsunamis can leave average working families permanently scarred.

Let’s put some faces on that contrast. Start with Steve Wynn, the gaming industry “king of Las Vegas.” Wynn, along with 314 other billionaires on the list of America’s 400 richest that Forbes released this past Wednesday, has certainly lost “net worth” over the past 12 months.

In fact, Wynn has lost quite a bit of net worth since the financial industry meltdown one year ago. His fortune totaled $3.4 billion then and adds up to just $2.3 billion now, a $900 million fade. That’s a tidy sum. A typical American family, according to new Census Bureau figures, would have to work nearly 18,000 years to make $900 million.

But Wynn, despite that rather sizeable loss, hasn’t had to crimp his style over the last 12 months. He “rang in the New Year” skimming the Caribbean on a 183-foot megayacht he bought last summer. He went on to spend lovely winter days dodging gossip columnists on the Riviera and in the Alps.

Wynn has, to be sure, done some crimping over the last year, namely on wages and benefits for workers in his corporate empire. He slashed paychecks at Wynn Resorts by 10 percent last winter and, among other cutbacks, suspended matches to employee 401(k)s.

Overall, the total wealth of Steve Wynn and his fellow Forbes 400 ultra rich dropped $300 billion, or 19 percent, between September 2008 and September 2009, the fifth time the top 400’s net worth has registered an annual slide since Forbes started keeping count in 1982.

After all four previous slides, the top 400 quickly regained the lost ground and resumed their march to ever greater concentrations of personal wealth. In 1982, the top 400 together held only $91.8 billion. The Forbes 400 combined net worth today stands at $1.27 trillion.

Since 1982, the wealth of the top 400 has soared an amazing 12 times faster than inflation.

Some of America’s super rich are still soaring, even amid our current economic unpleasantness. The Great Recession has been, for them, an opportunity to scoop up some can’t-miss business opportunities.

Dallas banker Andrew Beal, for instance, has tripled his personal fortune, to $4.5 billion, since last September's meltdown. He gobbled up “loans and assets on the cheap last fall.”

Other billionaires, patiently waiting for their personal net worth bounce-back, are gobbling up great luxury deals. Natural Russian sable furs, Forbes notes, are selling at 30 percent off their price last fall. Custom-made black calf wing-tip men’s shoes from London, $5,075 a year ago, can now be had for a mere $4,686.

The wealthy of the Forbes 400, in short, are making do quite nicely.

“Somehow,” quipped Wall Street Journal wealth analyst Robert Frank last week, “I think they will be fine.”

Most of America’s chattering class believes average Americans will be just fine, too, just as soon as the recession ends and jobless Americans go back to work.

Don’t bet on that, says the Economic Policy Institute’s John Irons. EPI last week published his sobering new report, Economic Scarring: The long-term impacts of the recession.

Pundits and politicos, Irons notes, often portray recessions “as short-term events.” But in real economic life, his new study shows, “high unemployment, falling incomes, and reduced economic activity can have lasting consequences.”

The Irons study summaries the vast economic research that details these varied consequences: the college students who have to drop out when a parent gets laid off, the workers whose wages never regain pre-layoff levels, the young children who do poorly in school because a fall into poverty has left them undernourished and bouncing from one community to another.

For average families, sums up Irons, recessions can wreak havoc “for years to come.” But some observers see havoc up and down our economic ladder.

“The 400 richest Americans, just like the rest of us, have lost a lot of money in the past 12 months,” as Duncan Greenberg, the Forbes 400 list co-editor, pronounced last week.

“Just like the rest of us”? Not quite.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

GDP: Taking Aim at the Stat that Bamboozles

Sam Pizzigati — Mon, 28 Sep 2009 07:55:43 -0700

A conservative world leader and two world-famous economists who challenge conservative world leaders have joined up to call for a totally new global economic yardstick. And they want that yardstick to measure inequality.

Sometime early this fall, new statistics are almost certainly going to show “positive” growth in gross domestic product, or GDP, for 2009’s third quarter. Economists, in quick order, will solemnly pronounce that the Great Recession has finally ended. Average working people, just as quickly, will have one more reason to be deeply suspicious about officialdom.

“The world over, citizens think we are lying to them,” a prominent figure in that officialdom, French president Nicolas Sarkozy, noted earlier this month. “And they have reasons to think like that.”

Statistics can lie, and the world’s single most important economic statistic, Sarkozy believes, has become something of a truth-perverting whopper. This all-dominating stat, GDP, essentially measures only what people are making for the market — and ignores every economic reality that impacts how well or poorly real people, in their daily lives, are actually doing.

That’s why GDP can be rising at the same time jobs are disappearing, homes are foreclosing, and paychecks are shrinking.

Last year, in the early stages of the current recession, Sarkozy moved to begin a “statistical revolution” and end GDP's political dominance. The French president, a right-of-center politico, asked two left-of-center Nobel-laureate economists, Joseph Stiglitz and Amartya Sen, to lead a commission on the “measurement of economic performance and social progress.”

Two weeks ago, just before the meeting of the world’s 20 biggest economies in Pittsburgh, Stiglitz and Sen delivered the product of their commission’s deliberations, a thick report with recommendations for crafting a new yardstick for the world’s economies.

The report’s “unifying theme”: “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.”

And that shifting requires, the report goes on to make clear, a serious look at inequality and who has what. The world needs new economic yardsticks that “give more prominence to the distribution of income, consumption, and wealth.”

Current GDP statistics totally disregard questions of distribution. Policy makers addicted to GDP typically divide a nation’s domestic product by population to come up with a “per capita GDP” — and then use this per capita to rate how well off different nations may be.

But this per capita average can be incredibly misleading, as Australian business editor Ross Gittins pointed out last week. If income is rapidly concentrating at the top of a society’s economic ladder, per capita GDP averages can show a “rising” standard of living for that society even if incomes for great numbers of people at the bottom are sinking.

“Just as money can't buy happiness, per capita GDP can't measure it,” Martin Regg Cohn, a Toronto Star editor, agrees in his analysis of the Stiglitz-Sen recommendations.

“Per capita GDP,” adds Cohn, “doesn't take account of the unequal distribution of wealth, but faithfully measures conspicuous consumption as a net gain. GDP ignores environmental degradation, but counts the hospitalization costs of people poisoned by pollution as a positive.”

The Stiglitz-Sen report for French president Sarkozy doesn’t offer a specific statistical alternative to GDP. Sarkozy didn’t ask for one. The report, instead, explores what additional information needs to be collected to better measure real economic well-being — and compares various alternative approaches.

Alternatives already abound. GDP first emerged in the 1930s. The first serious attempt at generating an alternative surfaced in the 1970s. Since then, calculates French economist Christian Chavagneux, the number of “alternative indicators of human and economic well-being” has jumped to about 30.

But these alternatives have all sat at the policy-making margins. Sarkozy’s commission has now placed the challenge to GDP right in the laps of the world’s political leaders. About time, says Neal Lawson, the chair of a top British progressive think tank.

“The irony and frustration is that it takes a right-wing politician to say what left-wing politicians should be saying,” explains Lawson. “Sarkozy has turned the debate on its head. We should start to measure the quality of our lives, not the quantity of the rubbish we consume.”

The G-20 meeting in Pittsburgh, in its final communiqué, didn’t address the Sarkozy Commission’s work. But Stiglitz and Sen see their effort as only a beginning. Their commission, they write, is “opening a discussion rather than closing it.”

The world’s presidents and prime ministers need to join in. With only GDP in their pockets, the commission warns, these world leaders are steering “without a reliable compass.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.