Month: February 2012

CRONY CAPITALISM AND WINNER TAKE ALL POLITICS

Here’s issue #21 of my Policy and Politics Newsletter, written 2/29/12. This issue will begin to link the issues of corporate power, great inequality of income and wealth, and campaign finance. It is a bit long, as it is a summary of the first three shows of Bill Moyers’ return to public TV.

In case you haven’t heard, Bill Moyers is back on public television. (In theBostonarea, he’s on Sunday at 4:00 on channel 2. Or you can do what I do, download the podcasts from billmoyers.com or other sources.)

His first show back on (Jan. 13) was on Winner Take All Politics, the title of a recent book by Hacker and Pierson, whom Moyers interviews. The book and show document that the huge income disparity in the US (see issue #4 of my newsletter) is, in large part, the result of government policies over the last 30 years. Although globalization, technological change, and other changes in our economy have been factors, the real culprit is our public policies and how they have responded to these challenges. Other countries face these same challenges but have not experienced the dramatic increase in inequality that has occurred in theUS.

Over the last 30 years, the top income tax rate has been reduced from 70% to 35% (see issue #7 of my newsletter) with even lower rates for unearned (i.e., investment) income. As we’ve heard recently, multi-millionaires like Presidential candidate Romney are paying less than 15% of their income in taxes. If you were making around $20 million a year as he is, every one percentage point reduction in your tax rate puts $200,000 in your pocket. And with your tax rate cut in half, you are saving $3 million or more a year, or over $90 million over the last 30 years. Specifically, the Bush tax cuts of the early 2000s have given $50 to $100 million to each of the 400 richest Americans over the last 10 years.

This sets up a reinforcing cycle as some of these riches are funneled back into our political system through campaign contributions and Super PACs, further increasing the influence of the well-off and getting them favorable treatment. In addition, the lobbying capacity of the corporations and very rich has grown, while that of the middle class, particularly unions, has shrunk, further expanding the gap in political power and influence.

Hacker and Pierson note that politicians have learned that they can get re-elected despite ignoring or only giving symbolic support to the middle class, while moving the agenda of the corporations and very rich forward.

On Moyers’ second show (Jan. 20), David Stockman, President Reagan’s budget chief, was a guest. Stockman is writing a book entitled The Triumph of Crony Capitalism. He defines crony capitalism: using political power such as campaign contributions and lobbying to get returns that can’t be gotten in the market. He states that in theUS we do not have free market capitalism or democracy, but crony capitalism.

Stockman believes that we need to re-institute and strengthen the separation of the investment business and its risks from the banking system, as was in place prior to 1999 under a law called Glass-Steagall. Otherwise, he predicts that we will have recurring economic crashes. He says that financial institutions that are too big to fail are too big to exist and he advocates for banning corporate money from our political system and capping all campaign contributions at $100.

Moyers’ third show (Jan. 27) was with John Reed, who retired as CEO of Citigroup in 2000 after presiding over the merger of Citibank with Travelers Insurance. This merger led to and actually required the repeal of the Glass-Steagall law. The mantra at the time was that the new, enhanced financial system could handle the increased risk better than before and therefore repealing the separation of banking from the investment business wouldn’t be a problem. There was an extensive public relations and lobbying campaign to deliver this message, which ultimately skewed almost everyone’s thinking about this deregulation.

Reed, in retrospect, says that it’s amazing that everyone was so wrong and that the system as a whole went so far off the tracks that it caused the great recession we are now experiencing. He states that this was the result of crony capitalism between Wall Street executives andWashington politicians.

In other countries, including Canada, the crisis in the financial institutions wasn’t nearly as bad as here in the US. Our financial deregulation allowed financial institutions (including banks) to take great risks and to provide huge rewards to their people, an important part of our income and wealth inequality. And ultimately, these institutions and individuals did not bear the risk when things went wrong; the government and the public bailed them out.

Reed calls for re-regulation of the financial system, noting that regulations are need so that appropriate risks can be taken. He makes the analogy that cars have brakes (regulation) so that we can drive fast (take risks), but control our speed as needed. If cars did not have brakes, we’d all drive only very slowly. He is amazed that those lobbying against re-regulation and strengthening of oversight of financial institutions have any credibility given the crash they caused with deregulation. He notes that when corporations and the wealthy can buy the rules (or lack thereof), the situation is unstable.

One person who loudly warned of the dangers and, as Glass-Steagall was being repealed in 1999, predicted that in 10 years we would all come to realize that a big mistake was being made, was Senator Byron Dorgan of North Dakota. He noted that the deregulation was designed by those with a self-interest and that the complex securities, i.e. “derivatives,” that have been created are casino gambling with trillions and trillions of dollars. He states that the Dodd-Frank re-regulation law, which is being heavily lobbied against by Wall Street, is too weak to prevent the next collapse.

Another Moyers guest was Gretchen Morgenson of The New York Times who has written a book entitled Reckless Endangerment. She noted that there have been no meaningful penalties for the individuals or institutions that caused the collapse of the financial system and no one has gone to jail. Furthermore, the same people who drove the ship into the iceberg are still in leadership roles on Wall Street and in the federal government.

Moyers closes by calling the Supreme Court’s Citizens United decision, which allows unlimited spending by corporations in our political campaigns, “grotesque,” stating that it corrupts our political system and means that those with no (or little) money have no speech. He calls Winner Take All Politics immoral and notes that we have experienced a deep undermining our democratic institutions.

He cites a sign he saw at Occupy Wall Streetas telling it like it is: “The system isn’t broken, it’s fixed.”

I encourage you to listen to the podcasts of these three shows. They are 52 minutes each and will provide you the richness and depth that I can’t in this summary.

CORPORATE POWER (Part 2): HEALTH IMPACTS

Here’s issue #20 of my Policy and Politics Newsletter, writtten 2/26/12. The last issue looked at the mortgage foreclosure settlement that was very favorable for the corporations involved. Here are some different examples of corporate interests trumping the greater good.

Corporations frequently find ways to avoid costs and risks, while maximizing profits and paying huge amounts to corporate executives. These include avoiding paying for the costs of impacts on the environment and on public health.

One example is air pollution that is bad for health. Another is the use of antibiotics in animals for non-medical reasons (they grow more quickly) that jeopardizes public health.

The Environmental Protection Agency recently issued standards for the release of mercury into the air by power plants. As you probably know, mercury, even at very low levels, harms brain and nervous system development in young children and fetuses. More than 300,000 children are born each year with exposure to unsafe levels of mercury. Because airborne mercury accumulates in fish, pregnant women are advised to avoid eating many types of fish.

These regulations have been delayed for 20 years by corporate power, through campaign contributions, lobbying, and inside influence. The utility companies and their allies in Congress are continuing to try to block them today. A cost-benefit analysis shows that the public benefits are huge, $90 billion per year is a very conservative estimate, and the costs relatively small, $10 billion per year in slightly higher electricity costs. Despite this, the companies claim the regulations would kill jobs, disrupt electricity supplies, and lead to soaring electricity rates. These are the same arguments they made when acid rain regulations went into effect and none of these things happened. [1]

In a similar situation, the US Food and Drug Administration recently dropped plans to regulate the use of human antibiotics in animal feed. Livestock consume roughly 80% of the antibiotics sold in the US. This practice contributes to the presence of drug resistant bacteria. This problem was first identified in 1977 and it was recommended then that approval for the non-therapeutic use of penicillin and tetracycline be rescinded, but no action has been taken. The European Union has banned the use of antibiotics in animal feed for healthy animals. Many scientific and medical organizations have called for similar action by theUS, including the American Medical Association, the Infectious Diseases Society of America, the Pediatric Infectious Disease Society, and the World Health Organization.

Over 100,000 Americans die each year from bacterial infections and 70% of these involve bacteria resistant to the commonly used treatment drugs. Last summer over 36 million pounds of turkey was recalled after it was found to contain drug resistant salmonella. Outbreaks of disease from drug resistant E.coli have also occurred in the last year. [2]

These two are particularly egregious examples of corporate interests trumping public health. Other examples will be presented in future newsletters along with examination of the ways corporations obtain and wield this kind of influence and power, for example through campaign contributions, lobbying, and the revolving door where public officials move between government positions and positions working for or with corporations.

[1]       Krugman, P., 12/26/11, “Springtime for toxics,” The New York Times

[2]       McVeigh, K., 12/29/11, “FDA draws criticism after U-turn on antibiotics in animal feed,” The Guardian

CORPORATE POWER (Part 1): THE MORTGAGE FORECLOSURE SETTLEMENT

Here’s issue #19 of my Policy and Politics Newsletter, written 2/20/12. The last issue looked at Supreme Court decisions that favor corporations. Here’s an example of a legal settlement that favors corporations.

You’ve probably heard about the recent $26 billion settlement of the mortgage foreclosure fraud case against 5 large financial institutions: Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial. This settlement, agreed to by 49 of the 50 states, is for foreclosures that occurred fraudulently, without proper documentation or where it was unclear that the institution foreclosing on the homeowner was the owner of the mortgage and had the legal right to foreclose. (This settlement has nothing to do with the creating of risky and fraudulent mortgages or the selling of them to investors as high quality investments, which are the two key elements of the financial fraud that crashed our financial system in 2008 and caused our current recession.)

Although $26 billion sounds like a lot, it isn’t very much when viewed from the perspective of these 5 companies’ $425 billion in revenue in 2010 and their $39 billion in profits (even though they hadn’t fully recovered from the financial collapse they and others created). Furthermore, they are only actually paying $5 billion. The other $21 billion comes from reducing the amount owed (principal) on mortgages where homeowners owe more than their house is worth. These costs will be borne largely by the investors who bought the mortgages or by the government’s Making Home Affordable Modification Plan that subsidizes principal reductions by banks. This latter piece means that we, the taxpayers, are again bailing out these banks! [1] [2]

If you were illegally foreclosed on by one of these 5 companies and have lost your home, you will get between $1,500 and $2,000. This doesn’t seem like much compensation for the trauma you’ve experienced! Looking at it another way, this settlement sets the penalty for forgeries and fabricating documents at a maximum of $2,000 per loan. [3]

Some other points that help put the $26 billion settlement in perspective: [4]

  • Financial institutions, including these 5, received a $700 billion bailout and $1.2 trillion in low cost loans from the Federal Reserve to keep them afloat when they crashed our financial system.
  • The federal government’s track record of enforcing consent decrees in settlements such as this one is poor. In consent decrees, companies, without admitting guilt, state that they won’t engage in specific illegal activities in the future. In the current settlement, there is essentially no penalty for Countrywide Mortgage (now owned by Bank of America) for failing to comply with a previous consent decree over some of the same practices.
  • This settlement has been reached before there has been a full investigation of what occurred. The President just announced a new federal task force to investigate the financial sector in his State of the Union speech. It may uncover more extensive or egregious fraud than is currently known.

In this settlement of “this remarkable fraud that the banks and the [mortgage] servicers have created … the only big losers are the taxpayers and, of course, the homeowners.” [5] This is a “raw demonstration of who wields power in America.” [6]  This is a great deal for the companies because no one is going to jail and the $5 billion cost may well be less than what it would have cost them to do things right in the first place. Hence, they can simply view this $5 billion as a cost of doing business.

This settlement is an example of corporations getting off easily, while people suffer. One piece of this is the not unusual practice of corporations, without admitting guilt, consenting not to engage in illegal activity in the future. As occurred here with Countrywide, there is typically little enforcement when they engage, again, in similar illegal activity. As is the case with this settlement, financial penalties are typically small and provide no significant disincentive for engaging in illegal activity.

Future newsletters will examine other examples of corporate interests trumping the greater good and ways corporations obtain and wield influence and power. One way, which has been documented in past newsletters, is through the substantial investments the business community makes in our public officials through campaign contributions.

[1]       Common Dreams staff, 2/17/12, “Mortgage settlement ‘whitewash’: US taxpayers will pay for big bank settlement, mortgage deal or not; abusive foreclosures continue,” http://www.commondreams.org/headline/2012/02/17-0

[2]       Levitin, A., retrieved 2/17/12, “The servicing settlement: Banks 1, public 0,” http://www.creditslips.org/creditslips/2012/02/the-servicing-settlement-banks-1-public-0.html

[3]       Smith, Y., 2/16/12, “The top twelve reasons why you should hate the mortgage settlement,” Naked Capitalism

[4]       Bond, B., 2/10/12, “A bad deal,” Credo Action

[5]       Common Dreams staff, see above

[6]       Smith, Y., see above

THE CORPORATE SUPREME COURT

Here’s issue #18 of my Policy and Politics Newsletter, written 2/5/12. Recent issues have looked at the Supreme Court’s Citizens United decision that gives corporations freedom of speech rights to spend unlimited amounts of money in our elections. This issue takes a look at some other Supreme Court decisions that also favor corporations.

In addition to Citizens United, the Supreme Court has made a number of decisions that appear to indicate a strong slant in favor of corporations. Typically, these rulings have been decided by a 5 – 4 vote with the “conservative” bloc prevailing. It’s interesting to note, that while the “conservative” bloc describes itself as strictly interpreting the Constitution and adhering to its intent, corporations are not mentioned in the Constitution and, at the time, were entities chartered by state governments, generally for specific and limited purposes, and subject to state laws. [1]

Here are other examples of the Court’s pro-corporate decisions: [2]

  • After 20 years of litigation on the Exxon Valdez oil spill inAlaska, the Supreme Court reduced the punitive damages awarded by the trial court from $5 billion to $507.5 million. This is a slap on the wrist (less than 1.5% of annual profits) for a company that has averaged $36 billion a year in profits over the last 7 years.
  • In Sorrell vs. IMS Health, Inc. in 2011, the Court declared Vermont’s Prescription Confidentiality Law unconstitutional because it required a physician’s consent before his or her history of prescribing drugs could be sold by pharmacies and health insurers to pharmaceutical companies. The Court ruled that the state’s attempt to protect this information illegally discriminated against the pharmaceutical companies’ free speech rights – namely their ability to use this information in marketing and advertising “speech”. The supposedly conservative, states’ rights Court, ruled that federal law and Courts supersede state law and a physician’s individual right to privacy. [3]

Disallowing class action lawsuits against corporations on behalf of consumers and workers has been a recurring theme in this Supreme Court. [4]

  • In AT&T Mobility LLC vs.Concepcionin 2011, the Supreme Court overruled federal courts inCaliforniaand a number of state Supreme Courts. The lower courts had ruled that a consumer contract that prohibited class action lawsuits and required arbitration was unconscionable and therefore unenforceable. The US Supreme Court ruled that federal law preempted state law and that the contracts were valid and enforceable.
  • In Wal-Mart Stores, Inc. vs. Dukes in 2011, the Supreme Court invalidated the class action suit of 1.5 million women who contended that they had suffered sexual discrimination in pay and promotions at Wal-Mart. The Court concluded they were not a “class” eligible to file a class action lawsuit because they did not all have the same supervisor and that a class action lawsuit cannot be brought against a corporate policy or practice, but only against an individual supervisor.

In other cases, the Court has ignored precedents in ruling against injured workers, whistleblowers, and shareholders. In Ledbetter vs. Goodyear Tire & Rubber Co. in 2007, the Court ruled that employers cannot be sued for race or gender pay discrimination if the claims are based on decisions made by the employer more than 180 days ago. In this case, Lilly Ledbetter learned after years of employment that she had been paid less than male workers but was denied her ability to sue because she had not brought the suit within 180 days of when her employer first discriminated against her, obviously without her knowledge. [5]

The dissenting opinions from the other justices on the Supreme Court often clearly underscore the five “conservative” justices’ – Roberts, Scalia, Thomas, Alito, and Kennedy – departure from precedents and the contortions of their legal reasoning. In the Citizens United decision, the Court went out of its way to find a way to make its broad ruling on corporate freedom of speech and political spending, rather than focusing on the issues of the much narrower case that was presented to it. Previous conservative Justices Rehnquist and Byron White have made statements that quite clearly indicate they would have disagreed with the Court’s decision in Citizens United. White, for example, wrote in an earlier case that corporations are “in a position to control vast amounts of economic power which may, if not regulated, dominate not only the economy but also the very heart of our democracy, the electoral process.” [6]

The decisions highlighted here, among others, reveal the dramatic judicial activism of these five justices. Rather than being driven by the merits of each case, precedents, and the intent of lawmakers, their decisions involving corporations appear ideological and results-oriented, with a clear intent to benefit corporations, while being hostile to government laws, rules, and regulations on corporate behavior.

[1]       Raskin, J., 2010, “The Citizens United Era: How the Supreme Court continues to put business first,” People for the American Way Foundation

[2]       Nader, R., 7/18/11, “The corporate Supreme Court,” CommonDreams.org

[3]       Raskin, see above.

[4]       Raskin, see above.

[5]       Wikipedia, retrieved 2/1/12, “Ledbetter v. Goodyear Tire & Rubber Co.,” http://en.wikipedia.org/wiki/Ledbetter_v._Goodyear_Tire_%26_Rubber_Co.

[6]       Nader, see above.