HOW TO REIN IN FACEBOOK’S THREATS TO OUR CHILDREN, OUR DEMOCRACY, AND ALL OF US

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Facebook IS a serious threat to our children, our democracy, and all of us, as my previous post documented. Facebook is finally getting the attention and scrutiny it deserves, with a former insider turned whistleblower being the catalyst. Without government regulation Facebook and other social media sites will facilitate a race to the bottom driven by our basest proclivities and instincts. This will occur because there is greater profit in spurring anger, encouraging extremism and violence, promoting false information, and triggering emotional responses than there is in creating a safe place for people to have healthy relationships and to engage in civil discourse based on facts. [1] Facebook has consistently chosen profits over the health and safety of children, the sharing of factual information, and the public good, so it isn’t going to fix itself. Meaningful action by Congress will take time, so regulatory action by the executive branch is needed now. [2]

Here are possible actions that could be taken to address the problems with Facebook and its harmful behaviors: [3]

  • Require Facebook to publicly share its internal data and algorithms. This transparency would allow independent experts to analyze how its algorithms prioritize and promote content so we would know what messages they are amplifying and if they have toxic effects and bias. This would also allow monitoring of Facebook’s use of consumer data and its adherence to privacy standards. These data are also necessary to be able to design effective regulation. [4] They are also important for monitoring and ameliorating toxic effects on children and for the protection of children’s privacy – areas where Facebook does not have a good track record.
  • Break up Facebook through use of antitrust laws, forcing it to spin off Instagram, WhatsApp, and perhaps other business units, while prohibiting it from making acquisitions of other companies. (See rationale for this below.)
  • Institute a fairness or balance standard requiring Facebook to show users content with opposing views. (Prior to deregulation in the 1980s, there was a “fairness doctrine” that applied such standards to TV and radio stations.)
  • Investigate Facebook for withholding or distorting significant financial information provided to investors.
  • Require Facebook to substantially expand its efforts and meet standards for success in blocking harmful and inaccurate content (i.e., engage in effective content moderation).
  • Strengthen or pass laws regulating Facebook’s pushing of inappropriate content and inappropriate marketing on children, e.g., strengthen the Children’s Online Privacy Protection Act (COPPA) and pass the KIDS Act.
  • Make Facebook and other social media sites liable for promoting, and perhaps even for allowing users to post, hateful, threatening, violence-promoting, and other harmful content.
  • Create and invest in public Internet sites that provide news and human interaction opportunities as an alternative to Facebook. These public sites would not have profit-driven motives and, therefore, would adhere to consumer and ethical standards, as well as a commitment to serving the public good.

Regulating Facebook and other social media will not be easy and multiple iterations of regulatory steps and efforts will be needed as regulators learn what works and adjust to changes by Facebook and other social media. Given Facebook’s tremendous financial resources, its fight against efforts to control and regulate it will go on in the courts, in regulatory agencies, and in Congress for years.

Breaking up Facebook (and other huge corporations) is necessary to:

  • Reduce monopolistic power and allow the power of the marketplace and competition to rein in harmful practices on privacy, misinformation, manipulation of users, etc.
  • Reduce the almost limitless financial resources of huge corporations, which are used to overwhelm (or buy) our policymaking, regulatory, and judicial processes.
  • Reduce the massive aggregation of consumer data that allows the manipulation of users, including children.

I encourage you to pay at least some attention to the unfolding expose of how Facebook (and social media generally) works and what its effects are, because it has a significant impact on each of us and our families, as well as broad impacts on our society and democracy.

Government regulation of social media is needed to protect children, our democracy, and all of us. Facebook and its CEO Mark Zuckerberg have been skillful at ducking accountability. This must end. For example, Facebook knows of the harm it does to children and how to mitigate it, but it has chosen not to take action because it prioritizes profits over the safety of children (and everything else). Moreover, internal documents disclosed by the whistleblower reveal that in 2020 Facebook studied better ways to market products to preteens, even though it supposedly bars anyone under 13 from having an account. [5]

I encourage you to sign up for the Facebook boycott on November 10 here. Staying off of Facebook and Instagram for a day or two is probably the best way to send the message that we’re not happy with their behavior.

I also urge you to let your U.S. Representative and Senators, along with President Biden, know that you support strong regulation of Facebook (and other social media) to reduce the harm it is doing to us, our children, our society, and our democracy.

You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Hubbell, R., 10/6/21, “Today’s edition: Progress, at last” (https://roberthubbell.substack.com/p/todays-edition-progress-at-last)

[2]      Verma, P., 10/8/21, “What’s next for Facebook,” The Boston Globe

[3]      Bernoff, J., 10/7/21, “Facebook must be stopped,” The Boston Globe

[4]      Ghaffary, S., 10/5/21, “Facebook’s whistleblower tells Congress how to regulate tech,” Vox (https://www.vox.com/recode/22711551/facebook-whistleblower-congress-hearing-regulation-mark-zuckerberg-frances-haugen-senator-blumenthal)

[5]      Boston Globe Editorial Board, 10/12/21, “If Facebook won’t protect kids, Congress should force the company’s hand,” The Boston Globe

FACEBOOK IS AN EXISTENTIAL THREAT TO ALL OF US, OUR CHILDREN, AND OUR DEMOCRACY

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

This title is NOT an exaggeration: Facebook IS an existential threat to all of us, our children, and our democracy. I’ve been meaning to write a series of blog posts about Facebook and social media in general – and the harm they are doing – for almost a year. I recommend that you watch the award-winning documentary, “The Social Dilemma” (which is free on YouTube until October 31st). It’s produced by the Center for Humane Technology and was an eye-opener for me. (The documentary is 1 hour 34 minutes; there’s also a 2 ½ minute trailer.) The Center provides great resources for parents, teachers, and all of us on how to be intelligent users of social media – and how to protect our children from social media’s potential negative influences.

Facebook is finally getting the attention and scrutiny it has warranted for some time, with a former insider turned whistleblower being the catalyst. The whistleblower, Frances Haugen, had been a product manager at the Civic Integrity unit at Facebook. The unit was dissolved after the 2020 election. She subsequently left Facebook and has shared documents and her personal experiences with the Wall Street Journal, which has done a series of articles based on her information that are called The Facebook Files. She appeared on the 60 Minutes TV show on October 3, 2021. A blog post by Whitney Tilson, an investment professional, includes a series of links to segments of Haugen’s interview on 60 Minutes, links to the Wall Street Journal articles (which are behind a paywall unless you have a subscription or can access them through a library), and a letter from Tilson, as an investor, to Facebook COO Sheryl Sandberg. [1]

I hope you’ve been following, at least at some level, the recent revelations that have laid bare the incredible influence Facebook has on us, including on what we believe and how we feel. We are both the product that Facebook is selling and the customers who are being influenced by the most sophisticated and manipulative marketing strategies and capabilities humankind has ever experienced. [2]

I provide here a very high-level overview of the information about Facebook that’s been uncovered and reported lately, while providing links to the detail. I have written previously about the intentional promotion of disinformation by Facebook, but that is just the tip of the iceberg, as current revelations are making starkly clear.

Facebook is single-handedly controlled by Mark Zuckerberg, who owns the majority of the controlling stock of the corporation. It seems clear that his commitment to generating profits (and increasing his wealth of $134 billion) outweighs everything else. Actions (e.g., likes and shares) and time on Facebook are money in his pocket and the recent revelations indicate that every time a decision was made where accuracy or any other social good was pitted against more clicks and money, Zuckerberg went for the money – despite knowing the  downsides. Facebook’s revenue has soared to $119 billion and the corporation’s market value is up to almost $1 trillion.

Facebook has internal studies and statistics that show, for example, that misinformation gets six times more clicks than factual news and that right-leaning sites produce more misinformation than any other sites. Facebook and Zuckerberg have been promoting misinformation and right-wing sites because more clicks mean more money in their pockets.

Facebook also knows how to elicit emotional responses and how its users respond to likes, shares, clicks on emoji buttons, and other actions on its site. It’s happy to use this knowledge to manipulate its users. Its internal research has concluded that its algorithms, which determine what to promote and show to whom, contribute to mental health and emotional problems among teens, particularly girls. However, it has done nothing to ameliorate this harm. [3]

Facebook seems to be immune to any sense of civic obligation to its roughly 3 billion users. It appears to have no qualms about helping undermine elections and democracies, the free and factual media, and accurate information about Covid and vaccination, which has literally deadly consequences. Zuckerberg has allowed terrorist recruitment, human trafficking, abuses by authoritarian governments, and promotion of hate, violence, genocide, and racism on Facebook. Is it any wonder that in the Russians’ efforts to disrupt U.S. elections and sow discord in our society that Facebook was their most frequently employed tool? [4] Facebook’s negative effects are probably even greater in countries other than the U.S., particularly in authoritarian ones, where the effects may be literally deadly for regime opponents.

Although the concerns that have been raised about Facebook are relevant to all of social media, Facebook is the dominant entity. Its algorithms govern the news we receive and what is promoted and prioritized, which shapes our society and affects our well-being and our democracy. Without government regulation Facebook and other social media will facilitate a race to the bottom driven by our basest proclivities and instincts. This will occur because there is greater profit in spurring anger, encouraging extremism, promoting false information, and triggering emotional responses than there is in creating a safe place for civil discourse and human interactions based on facts and healthy relationships. [5]

My next post will present some options for reining in Facebook, as well as social media in general.

[1]      Tilson, W., 10/5/21, “Facebook whistleblower Frances Haugen; An open letter to Sheryl Sandberg,” (https://empirefinancialresearch.com/articles/facebook-whistleblower-frances-haugen-an-open-letter-to-sheryl-sandberg-come-work-with-enrique-barcelona-pictures)

[2]      Hubbell, R., 10/7/21, “Today’s edition: Nine months of silence,” (https://roberthubbell.substack.com/p/todays-edition-nine-months-of-silence)

[3]      Bauder, D., and Liedtke, M., 10/4/21, “Facebook fed Capitol riot, former manager alleges,” The Boston Globe from the Associate Press

[4]      Alterman, E., 10/1/21, “Altercation: The Facebook threat to democracy – and us all,” The American Prospect (https://prospect.org/politics/altercation-facebook-threat-to-democracy-and-us-all/)

[5]      Hubbell, R., 10/6/21, “Today’s edition: Progress, at last” (https://roberthubbell.substack.com/p/todays-edition-progress-at-last)

REGULATION OF THE FINANCIAL INDUSTRY IS BADLY NEEDED Part 2

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

My previous post made the case for strong regulation of the financial industry to protect consumers with a strong Consumer Financial Protection Bureau (CFPB). The financial industry needs strong regulation because it has repeatedly shown that without regulation it will rip off consumers and engage in practices that put our economy and our whole financial system at-risk.

In addition to the Trump administration’s weakening of the CFPB and other regulation of the financial industry, pro-business judicial decisions have also weakened consumer protections from abusive financial industry practices. However, Congress can restore these consumer protections through appropriate legislation.

First, the Supreme Court ruled that the Federal Trade Commission (FTC) cannot seek monetary compensation for consumers defrauded by payday or other short-term lenders. The Consumer Protection and Recovery Act has been introduced in Congress and would make it clear that the FTC can seek financial compensation for these consumers. [1]

Second, the Comprehensive Debt Collection Improvement Act would strengthen a variety of protections for borrowers that were weakened by judicial decisions. For example, it would limit email and other electronic harassment by debt collectors and restrict abusive practices by medical debt collectors.

Finally, the Non-judicial Foreclosure Debt Collection Clarification Act would regulate any business involved in home foreclosures without a judge’s authorization as a debt collector under the Fair Debt Collection Practices Act. In 30 states and D.C., lenders can foreclose and repossess a home without going to court and getting a judge’s ruling. A Supreme Court ruling limited home owners’ rights in these states. This legislation would give these home owners the protections of the Fair Debt Collection Practices Act.

The Securities and Exchange Commission (SEC) is an independent federal regulatory agency responsible for protecting investors and maintaining the fair and orderly functioning of securities markets. It works to ensure full public disclosure of information so all investors are on an equal footing. To that end, it works to prevent, identify, and punish insider trading, where some people have information that is not available to the general public and therefore have an unfair advantage in making decisions about buying and selling securities. [2]

Classic insider trading was in the news a year ago. Some members of Congress, who had received private, closed-door briefings on the coronavirus, made substantial stock market trades that appeared to be informed by this non-public information. Similarly, some executives of firms working on coronavirus vaccines, who had knowledge of the progress of their vaccine development that was not public, made substantial stock market trades that appeared to be informed by this non-public information. There were also situations where an insider shared non-public information with an outsider who then appears to have made investment transactions based on this non-public information.

However, there is another type of insider trading that may be more insidious – using sophisticated computers to make large trades moments before other trades that are in the pipeline are executed and become public knowledge. This is referred to as “front-running” and is a systemic problem in securities markets. It allows those with these sophisticated computer systems to make profits at the expense of everyone else who’s buying and selling securities.

Although the SEC has the power to address these problems under existing laws, it has failed to stop these practices which unfairly disadvantage run-of-the-mill buyers and sellers of securities.

The SEC is also charged with preventing large-scale speculation, particularly with borrowed money, that puts banks and financial corporations at-risk of bankruptcy if a large speculative investment goes bad. This is exactly what caused the 2008 financial collapse. This type of systemic risk is substantial today in large part because the financial industry has created “investments” that are called derivatives – financial instruments that are derived from or based on other financial instruments. In 2008, for example, the core problem was derivatives based on home mortgages. These were packages of home mortgages, and portions of them (e.g., the interest and principal portions of payments), and speculation on how interest rates would change, etc. These and many other derivatives are hard for most investors to understand, can be very volatile, are hard to put a value on, are hard to regulate, and it’s almost impossible to predict how they will perform as an investment. Therefore, investing in them is basically gambling and the securities market for them is basically a casino.

The laws and regulations that were put in place after the 2008 collapse to prevent a recurrence have been watered down or unenforced to the point that many experts believe we are likely to see a repeat of that collapse, and possibly a worse one. The largest 40 banks across the world are larger than ever and so interconnected through derivative “investments,” loans, and other financial transactions, that governments would have no choice but to bail them out again to prevent a total collapse of the financial system if any piece of this complex, opaque, and highly speculative financial casino were to crash in value.

I urge you to contact your U.S. Representative and Senators and to ask them to support strong, effective regulation of the financial industry through federal agencies such as the Federal Trade Commission and the Securities and Exchange Commission. Consumers and our financial markets need to be protected from the no-holds-barred greed and hubris of those in the financial industry. The consistent, aggressive, and risky practices across the financial industry, including by its largest corporations, require no less. You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to appoint individuals who will implement strong regulation of the financial industry at the Federal Trade Commission, the Securities and Exchange Commission, and other federal agencies. This is important because Biden has not always supported strong regulation of corporations and the financial industry. He is from Delaware, which is the legal home of many U.S. corporations because of its lax regulation of corporations. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Cohen, R. M., 4/27/21, “Congress looks to judicial overrides to strength consumer protections,” The Intercept and The American Prospect (https://theintercept.com/2021/04/27/supreme-court-ftc-consumer-debt/)

[2]      Turner, L., & Kuttner, R., 2/18/21, “The financial reforms we need,” The American Prospect (https://prospect.org/economy/financial-reforms-we-need-lynn-turner-interview/)

REGULATION OF THE FINANCIAL INDUSTRY IS BADLY NEEDED

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The financial industry needs strong regulation because it has shown time and time again that without regulation it will rip off consumers and engage in practices that put our economy at-risk. Apparently, greed and hubris are endemic in the financial industry – from the CEOs on down. However, many Members of Congress resist strong regulation because of the campaign money they get from the industry. In addition, some members of the Executive Branch have opposed strong regulation of the financial industry, particularly those who have come through the revolving door from the industry.

Enforcement of existing regulations was quite lax under President Trump’s administration and needs to be strengthened. Furthermore, new regulations are needed to rein in problems that weren’t previously addressed and ones that have newly cropped up. The industry is always inventing new ways to circumvent regulations and developing new, risky, financial transactions. It remains to be seen whether President Biden and the Democratically controlled Congress will implement strong regulation of the financial industry.

Federal regulators asked the financial industry to forego overdraft fees because of the financial hardships of the pandemic. Despite this, the industry collected $4 billion in overdraft fees from consumers during 2020. JPMorgan Chase alone collected almost $1.5 billion in overdraft fees, which contributed to its $29 billion in 2020 profits. Overall, the financial industry collected $17 billion in overdraft fees in 2019. Clearly, regulation is needed of overdraft fees and the circumstances in which they are charged. Both have been the subject of abuse by financial corporations.

To protect consumers from abusive financial industry practices, the Consumer Financial Protection Bureau (CFPB) needs to be powerful and aggressive. It was created in the aftermath of the 2008 financial collapse, which revealed huge fraud by the financial industry in the home mortgage market. The lack of any agency focused specifically on protecting the public from abusive financial practices was a key contributing factor. However, the financial industry has lobbied hard to weaken the CFPB. As a result, both Republicans and Democrats in Congress and many in the Executive Branch, particularly under President Trump, have worked to weaken the CFPB.

As an example of lax enforcement under President Trump, the CFPB recovered just $700 million for consumers in 2020, down from $5.6 billion in 2015. Meanwhile, consumer complaints to the CFPB rose to record levels in 2020. In the four years of the Trump administration, the CFPB recovered an annual average of less than $600 million for consumers, while under President Obama it had recovered an average of $2.1 billion a year, three and a half times as much. Furthermore, under Trump the focus was on small firms rather than the major financial industry corporations. [1]

Fortunately, the Consumer Financial Protection Bureau is being revitalized under President Biden and will:

  • Enforce legal protections for debtors, including renters behind on their rent and student borrowers, while limiting abusive debt collection practices,
  • Strengthen regulation of payday lenders, including requiring them to assess a borrower’s ability to repay a loan,
  • Strengthen regulation of overdraft fees, and
  • Seek systemic change in the industry not just penalties for individual cases.

Wells Fargo is one of the notoriously bad actors in the financial industry. For example, in 2016 it admitted to creating millions of unauthorized accounts for customers to meet high sales and revenue targets. This led to the resignation of CEO John Stumpf, who was replaced by Tim Sloan, the bank’s president and chief operating officer. Sloan, four months earlier, when the fake accounts scandal was well known and had been going on for years, said in an interview that Wells Fargo’s aggressive sales tactics were appropriate and were not going to change. After Sloan took over as CEO, the bogus accounts scandal worsened and Wells Fargo also admitted to fraud in other business areas from car insurance to mortgages, as well as using faked customer signatures to satisfy anti-money laundering rules. Regulators imposed fines and took the dramatic step of prohibiting Wells Fargo from growing its business. [2]

When CEO Sloan left Wells Fargo in March 2019, he had been paid $40 million in his 2 ½ scandal-laden years as CEO and tens of millions of dollars in his previous 30 years at Wells Fargo. Now, he wants to collect another $20 million in deferred compensation. Government regulators could block this compensation under a law allowing them to limit “golden parachute” payments to senior executives who were involved in illegal activity at a financial institution. Whether they will do so remains to be seen.

I urge you to contact your U.S. Representative and Senators and to ask them to support strong regulation of the financial industry and a strong Consumer Financial Protection Bureau. Consumers and our economy need to be protected from the no holds-barred greed and hubris of those in the financial industry. The consistent, repeated fraud and risky practices across the financial industry, including by its largest corporations, requires no less. You can find contact information for your U.S. Representative at  http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to appoint individuals who will implement strong regulation of the financial industry and to fully support Rohit Chopra, the strong regulator he has nominated to lead the Consumer Financial Protection Bureau. (Confirmation is pending in the Senate.) This is important because Biden has not always supported strong regulation of corporations and the financial industry. He is from Delaware, which is the legal home of many U.S. corporations because of its lax regulation of corporations. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1]      Newmyer, T., 1/28/21, “CFPB muzzled under Trump, prepares to renew tough industry oversight,” The Boston Globe from the Washington Post

[2]      Rucker, P. 3/10/21, “Bank regulator could block disgraced ex-Wells Fargo CEO from $20 million payout,” The American Prospect (https://prospect.org/power/bank-regulator-could-block-disgraced-ex-wells-fargo-ceo-from-payout/)

THE GAMES OLIGARCHS PLAY

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

In three previous posts, I’ve summarized the three major systemic changes identified by Robert Reich in his latest book, The System. These systemic changes have occurred since 1980 and have shifted power, both economic and political, to a small group of very wealthy Americans. As a result, our democracy operates in many ways like an oligarchy. (Oligarchy “refers to a government of and by a few exceedingly rich people or families who … have power … . Oligarchs may try to hide their power … . But no one should be fooled. Oligarchs wield power for their own benefit.” pages 13-14) [1]

Reich’s three systemic changes have shifted power:

  • From a broad set of corporate stakeholders to shareholders (see this previous post for details),
  • From workers and their unions to large employers (see this previous post for details), and
  • From manufacturing and a broad set of stakeholders in our economy to the financial sector and Wall Street (see this previous post for details).

A dramatic result of these shifts in power has been rapidly growing inequality in income and wealth. A cause and symptom of this inequality is that a small number of wealthy people dominate as the sources of funding for the campaigns of elected officials. These are the oligarchs. In the 2016 election cycle, the wealthiest 25,000 people in America (0.01% of the population) made a record-breaking 40% of all campaign contributions – up from 15% in 1980. Over the period from 2009 through 2020, twelve very wealthy individuals and their spouses gave a total of $3.4 billion to federal candidates and political groups. This is over 7% of the total money raised. The 100 highest giving zip codes hold less than 1% of the U.S. population, but were responsible for 20% of the $45 billion that federal candidates and political groups raised from 2009 through 2020. The increasing amount and share of campaign money coming from oligarchs was accelerated by a series of U.S. Supreme Court decisions, including the 2010 Citizens United decision. [2]

This high level of campaign spending gives these oligarchs access to our elected officials that you and I don’t have. When one of them calls or requests a meeting, that call is answered or that meeting is scheduled. Because their voices are heard and elected officials want the money to keep flowing to them, these oligarchs generally get the policies they want and that benefit them.

Throughout the book, Reich uses Jamie Dimon, the CEO of JPMorgan, as an example or case study of how the oligarchs operate; how they have abandoned public responsibility and advance their self-interest. Dimon appears to believe that corporations do have social responsibilities and not just responsibility to maximize returns for shareholders (as pure shareholder capitalism asserts). Dimon touts JPMorgan’s financing of $2 billion in affordable housing annually, its lending in low- and moderate-income neighborhoods and to small businesses, its 5-year $350 million job training program, and its $500 million AdvancingCities initiative to help financially-strapped large cities.

Although JPMorgan’s social responsibility efforts are notable, they are small relative to the size of the problems they are tackling and small in comparison to JPMorgan’s yearly profits of $30 billion. Moreover, they are contradicted by other actions of JPMorgan and Dimon. Dimon has not supported raising the minimum wage or paying all JPMorgan workers a livable wage, which would do a lot to help many of the people targeted by JPMorgan’s philanthropy, despite his 2018 compensation package worth $31 million and his wealth of around $1.5 billion. In addition, JPMorgan paid $55 million in 2017 to settle charges that it discriminated against minority mortgage borrowers.

Furthermore, Dimon personally lobbied hard for the 2017 tax cut that reduced the corporate tax rate from 35% to 21% and increased JPMorgan’s profits by billions of dollars annually. The tax cut increased the federal deficit by $190 billion annually; a figure that has to be covered, sooner or later, by cuts in federal government programs or increased taxes on others.

JPMorgan, with Dimon in charge, paid $13 billion to settle claims that it defrauded borrowers and investors in the mortgage scandal that led to the 2008 economic collapse. In 2019, it required forced arbitration for credit card disputes, preventing aggrieved customers from suing in court or through a class action lawsuit.

Although Dimon publicly opposed President Trump pulling the U.S. out of the Paris Climate Agreement, JPMorgan is the biggest bank investor in fossil fuels, to the tune of $196 billion between 2016 and 2018. A 2019 report by an environmental coalition named Dimon the “world’s worst banker of climate change.” JPMorgan is also the largest U.S. bank providing financial services to the gun industry and loans to gun buyers.

So, a few hundred million dollars a year of philanthropy is a good investment in public relations for a wealthy Wall Street bank that has had numerous ethical lapses and that was a significant contributor to the economic collapse in 2008, resulting in millions of people losing their jobs, homes, and savings, while it got hundreds of millions of dollars in bailouts.

However, Dimon and JPMorgan are just one example. In 2019, the Business Roundtable, in an effort to counter unfavorable publicity about corporations being solely focused on benefiting shareholders, issued a highly publicized corporate responsibility statement signed by CEOs of 181 major U.S. corporations (including Dimon) stating they believed in “a fundamental commitment to all our stakeholders.” The statement included a commitment to treat employees fairly, support communities, and embrace sustainable practices. [3]

However, actions speak louder than words. Just weeks after the statement appeared, Whole Foods, a subsidiary of Amazon, announced it would cut health benefits for its part-time workers, despite multi-billionaire Jeff Bezos, CEO of Amazon, having signed the corporate responsibility statement. During the pandemic, billionaires did very well and big corporations did well (45 of the 50 biggest were profitable). Despite this, 27 of the 50 big corporations laid off workers, totaling more than 100,000 workers. For example, Walmart, whose CEO was a corporate responsibility statement signer, distributed $10 billion to shareholders while laying off over 1,200 workers. [4]

If the CEOs (i.e., oligarchs) signing the corporate responsibility statement were serious about their commitment to all stakeholders, they would support federal legislation to make those commitments laws (i.e., legally binding). Or, at least, they’d pay a fair share of taxes to the federal government so it could support workers, communities, and a sustainable economy. However, in 2020, 55 of the largest U.S. corporations paid no federal income tax on $40 billion in profits. Moreover, they received more than $3 billion in federal tax rebates, giving them an effective tax rate of negative 9%; a bit different than the stated tax rate of 21%. Twenty-six of them have paid no federal income tax since the 2017 tax cut (and received $5 billion in rebates) while generating $77 billion of profits.

In actuality, the corporate responsibility statement appears to be part of a PR campaign by oligarchs that, along with corporate philanthropy, is designed to slow or stop proposed legislation and regulations that would require oligarchs and their corporations to:

  • Share their power and wealth by treating workers and communities more fairly, and
  • Engage in sustainable business practices.

Reich quotes the theologian Reinhold Niebuhr as noting that “ The powerful are more inclined to be generous than to grant social justice.”

These are the games that oligarchs play to try to hide their power and to try to fool the rest of us into believing that they care about fairness and social responsibility.

[1]      Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

[2]      Beckel, M., retrieved 4/21/21, “Outsized influence,” Issue One (https://www.issueone.org/wp-content/uploads/2021/04/Issue-One-Outsized-Influence-Report-final.pdf)

[3]      Business Roundtable, 8/19/19, “Statement on the Purpose of a Corporation,” https://system.businessroundtable.org/app/uploads/sites/5/2021/02/BRT-Statement-on-the-Purpose-of-a-Corporation-Feburary-2021-compressed.pdf

[4]      MacMillan, D., Whoriskey, P., & O’Connell, J., 12/16/20, “America’s biggest companies are flourishing during the pandemic and putting thousands of people out of work,” The Washington Post

OLIGARCHY OR DEMOCRACY: THE FINANCIAL INDUSTRY RULES OUR ECONOMY

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Robert Reich’s latest book, The System, presents his analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to fix it. Oligarchy “refers to a government of and by a few exceedingly rich people or families who … have power … . Oligarchs may try to hide their power … . But no one should be fooled. Oligarchs wield power for their own benefit.” (pages 13-14) [1]

Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:

  • The shift of big corporations from stakeholder to shareholder capitalism (see this previous post for a summary of this shift),
  • The shift in bargaining power from unions to large employers and corporations (see this previous post for a summary of this shift), and
  • The shift in power in our economy and politics to the financial sector and Wall Street (see below).

The dramatic increase in power and influence of the financial sector and Wall Street began in the 1980s. It included two components:

  • The increased size and marketplace power of large financial corporations, and
  • The increased influence of these large financial corporations in our economy and politics.

The increased size and marketplace power of financial corporations, starting with banks, began in 1980 as the federal government began deregulating banking. After the financial crash of 1929, which was a significant contributor to the Great Depression, laws were enacted to prevent banks from crashing the financial system and the economy again. Laws and regulations banned banks from operating in more than one state and prohibited mergers of banks. A law named the Glass-Steagall Act separated consumer and commercial banking (i.e., taking deposits and making loans) from investment banking (i.e., making investments that were speculative with significant risks of losses).

In 1980, the ban on interstate banking and bank mergers was repealed and banks quickly began merging. This, of course, meant that there were fewer banks and bigger banks, and eventually we got the too-big-to-fail banks of 2008. As the banks and financial corporations increased in size and wealth, they also gained political power through campaign spending, lobbying, and the revolving door. The repeal of the Glass-Steagall Act under President Clinton in 1999 alone was the subject of $300 million of lobbying by the big financial corporations. Clinton’s Treasury Secretary from 1995 – 1999, by the way, was Robert Rubin, a former senior executive at Wall St. powerhouse Goldman Sachs, who returned to Wall St. at Citicorp in 1999.

Starting in the mid-1980s, federal regulators began easing the restrictions separating consumer and commercial banking (where customers’ deposits were insured by the federal government) from investment banking. The favorable policies and deregulation the financial sector was able to get led to the Savings and Loan crash of the late 1980s that cost taxpayers billions. The bursting of the dot.com stock market bubble and the collapse of various hedge funds were just bumps on the road to the huge financial collapse of 2008 which caused the Great Recession and cost homeowners trillions of dollars and taxpayers trillions more to rescue the too-big-to-fail financial institutions.

Between 1980 and 2008, $6.6 trillion in wealth was captured by the big financial corporations, sucked out of consumers and others, as the U.S. economy shifted from a focus on making things (i.e., manufacturing) to creating new, speculative financial instruments and from product entrepreneurship to financial entrepreneurship and vulture capitalism.

The big financial corporations’ control of our economy and politics was so profound that they, with an assist from their banker friends at the Federal Reserve, could tell President Clinton that he had to balance the federal budget and could not spend money on programs to benefit the American people as he had promised during his campaign. Today, the financial sector represents over 8% of our economy, while in the 1950s it was just 2.5% of the economy.

The big financial corporations made money funding corporate raiders and vulture capitalists. They made money aiding and abetting multi-national corporations as they moved jobs and facilities overseas, undermining U.S. workers. They made money providing debt to consumers on credit cards, student loans, and mortgages, while often not so secretly hoping that borrowers would fall behind on payments so they could collect big fees and escalated interest rates. Along the way, the financial corporations got bankruptcy laws written so that consumers could not escape mortgage or student debt in bankruptcy and had limited ability to reduce credit card debt. (Meanwhile, corporations can eliminate all debt and break contracts, including union contracts and retiree benefit contracts, when they file for bankruptcy and can be back on their feet in literally no time.)

The big financial corporations fueled the dramatic rise in home values – the average home cost $64,600 in 1980 and $246,500 in 2006 – by handing out more and more mortgages on more and more risk terms. They knew that the default rate on these riskier mortgages would be higher and, in some cases, very high because they made some of these loans using fraudulent lending practices. Nonetheless, they continued to sell securities backed by these mortgages as low risk investments.

In 2008, when homeowners started to default on their risky and sometimes fraudulent loans, the whole financial system built around these mortgages and securities based on them collapsed. This caused a collapse in home prices, causing many more homeowners to default on their mortgages. Millions of homeowners lost their homes and, as a result in many cases, lost all their savings – to the tune of trillions of dollars.

The federal government and we, the taxpayers, bailed out the too-big-to-fail financial institutions to the tune of trillions of dollars. For example, the financial giant Citigroup (parent of Citicorp and Citibank) received $45 billion in cash and a guarantee against any loss in value for an additional $300 billion of speculative investments.

The shift of wealth to the big financial corporations and their executives and traders (i.e., their high stakes gamblers using speculative financial instruments) has exacerbated economic inequality in America. For example, the typical bonus paid on Wall Street in 2020 was $184,000 and the total bonus pool was $31.7 billion for the roughly 170,000 people receiving bonuses. [2]

Huge and wealthy companies, as well as their extremely wealthy executives and shareholders, are a threat to workers, our economy, and our democracy. Policies that were put in place as part of the New Deal in the 1930s maintained a balance in our economy, including a reasonable level of economic inequality, and protected our democracy from oligarchy. Since 1980, these policies have been changed, economic and political power has shifted, and we are suffering for it. We need to reinstitute policies similar to those of the New Deal to preserve our democratic principles of equal opportunity and promotion of the general welfare.

The bottom line of Reich’s book is that, as Supreme Court Justice Louis Brandeis (1916-1939) said, “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” Similarly, H.D. Lloyd, in his 1894 book, Wealth against Commonwealth, wrote, “Liberty produces wealth, and wealth destroys liberty.”

I urge you to read Reich’s book and/or check out his writing and videos at https://robertreich.org/ and/or https://www.inequalitymedia.org/. His analysis of the current economic and political landscape is always insightful and clear, and often entertaining as well.

[1]      Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

[2]      Surane, J., 3/26/21, “Wall Street bonuses rose 10% in 2020, N.Y. Comptroller says,” Bloomberg News (https://www.bloomberg.com/news/articles/2021-03-26/wall-street-bonuses-rose-10-last-year-n-y-comptroller-says)

CORPORATE INVOLVEMENT IN POLITICS & VOTER SUPPRESSION

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The role of large, wealthy corporations in our political system is coming under scrutiny again, this time in relation to voter suppression laws in states. Advocates for democracy and its basic principle that all citizen should vote are urging corporations and their executives to speak out against states’ voter suppression efforts. Given that these voter suppression efforts target black, brown, and/or low-income citizens, advocates for racial and economic justice are also urging corporate opposition to these efforts.

As-of March 24, 361 bills that would suppress voting have been introduced in state legislatures in 47 states. Five bills have already passed, including, perhaps most notably, in Georgia. In 24 states, 55 bills are actively moving through the legislative process; 29 have passed in one chamber and 26 have seen action in a legislative committee. These bills would restrict absentee and by-mail voting, cut back on early voting, impose strict, onerous voter ID requirements, make registering to vote harder, and / or expand purges of voter rolls. [1]

The rationale for these efforts is, of course, the big lies that the 2020 presidential election was stolen from Trump and that there was extensive voter fraud. As I imagine you know, the number of cases of voter fraud is miniscule and totally insignificant in terms of election outcomes. Furthermore, the voting restrictions in these bills do NOT specifically address the kind of rare fraud that does occur.

After the January 6th attack on the capitol, at least 123 corporations and corporate trade associations announced a rethinking of their political spending – a pause in political spending by their corporate political action committees (PACs), a cutoff of donations to the 147 members of Congress who voted against certifying the presidential election results, or a review of their corporate PAC spending.

However, they did not announce a rethinking of their giving to politically active non-profits, including industry trade associations (such as the Chamber of Commerce). Twenty-four of the corporations that announced a rethinking their PAC spending have given more than $100 million to politically active non-profits since 2015. These “dark money” non-profits (so-called because they don’t have to disclose their donors) spent $750 million on the 2020 elections. [2] (Note: Tracking the money flowing to these non-profits is difficult and slow because they don’t have to report donors and only infrequently report any information at all.)

In 2019 alone (the latest data available), many of the corporations announcing a rethinking of their PAC spending gave more to politically active non-profits than their PACs spent in the whole two-year 2020 election cycle. For example, CVS Health spent less than $1 million through its corporate PAC in the 2020 elections but disclosed giving nearly $9.6 million to political non-profits in 2019 alone. From 2015 to 2019, CVS Health gave over $31 million to political non-profits, Intel gave $18 million, Anthem Blue Cross Blue Shield health insurance $16 million, Dow $16 million, AT&T $9 million, and Microsoft $6 million.

Corporations have also been active political spenders at the state level. An analysis of the legislators supporting 245 state voter suppression bills found, as of March 1, 2021, corporate campaign spending of over $22 million in the 2020 election cycle to benefit state legislators who supported voter suppression. These legislators wrote voter suppression bills, co-sponsored them, or voted for them. Of the 100 largest U.S. corporations, 81 gave money to these state legislators, and of the 500 largest corporations, 225 did so. In addition, corporate trade associations gave $16 million to these state legislators in the 2020 election cycle. Of the 123 corporations or corporate trade associations that announced a rethinking of corporate PAC spending after January 6th, 94 have given money to state legislators who supported voter suppression. Among the top 12 of these corporate spenders are Altria / Philip Morris, AT&T, United Health, Comcast / NBC, Walmart, Pfizer, Koch Industries, State Farm, and Verizon. [3]

By the way, when some corporations and their leaders made statements opposing voter suppression, Senator McConnell (Republican of KY and Senate minority leader) called on them to stay out of politics. This is beyond disingenuous as McConnell and his Republican colleagues have been the beneficiaries of hundreds of millions of dollars of corporate campaign contributions and spending. If the corporate leaders actually heeded McConnell’s call, the Republican Party would be bankrupt.

I urge you to speak out against voter suppression whenever and wherever you get the chance – with state-level elected officials, with national office holders, and with business leaders. Ask them to support efforts to make it simple and easy for every citizen to vote, and to oppose all efforts to make voting harder. Please also speak out in support of full disclosure of all political spending by corporations and others and in opposition to efforts to hide the identities of donors, particularly through the use of  “dark money” non-profits.

If you would like to email the CEOs of companies with a significant presence in Georgia to ask them to speak out against the voter suppression bill just passed in Georgia, here’s a list courtesy of Robert Hubbell’s daily newsletter of 4/5/21. (Sign up for his “Today’s Edition” newsletter here.)

  • The Home Depot               Craig Menear           craig_menear@homedepot.com
  • United Parcel Service         Carol B. Tomé           carol@ups.com
  • Delta Air Lines                    Ed Bastian                bastian@delta.com
  • Arby’s                                 Paul Brown               pbrown@inspirebrands.com
  • The Coca-Cola Company   James Quincey         asktheboard@coca-cola.com
  • Cox Media Group              Daniel York                york@cmg.com
  • Genuine Parts Company    Paul D. Donahue       paul_donahue@genpt.com
  • Georgia Pacific                   Christian Fischer       cfischer@gapac.com
  • Porsche                              Oliver Blume             blume@porsche.de

[1]      Brennan Center for Justice, 4/1/21, “Voting laws roundup: March 2021,” (https://www.brennancenter.org/our-work/research-reports/voting-laws-roundup-march-2021)

[2]      Massoglia, A., 1/15/21, “Corporations rethinking PACs leave the door to ‘dark money’ open,” OpenSecrets.org, Center for Responsive Politics (https://www.opensecrets.org/news/2021/01/corporations-rethinking-corporate-pacs-leave-dark-money-open/)

[3]      Tanglis, M., Lincoln, T., & Claypool, R., 4/5/21, “The corporate sponsors of voter suppression,” Public Citizen (https://www.citizen.org/article/corporate-sponsors-of-voter-suppression-state-lawmakers-50-million/)

OLIGARCHY OR DEMOCRACY: CORPORATIONS VS. WORKERS

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Robert Reich’s latest book, The System, presents his analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to fix it. Oligarchy “refers to a government of and by a few exceedingly rich people or families who … have power … . Oligarchs may try to hide their power … . But no one should be fooled. Oligarchs wield power for their own benefit.” (page 13-14) [1]

Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:

  • The shift of big corporations from stakeholder to shareholder capitalism (see my previous post for a summary of this change),
  • The shift in bargaining power from unions to large employers and corporations (see below), and
  • The shift in power in our economy and politics to the financial sector and Wall Street.

The shift in power from workers and their unions to large employers and corporations began in the 1980s. It included three components:

  • The increased size and marketplace power of corporations,
  • The increased influence of large corporations and employers in policy making, and
  • The weakening of the power of workers and their unions.

The increased size, marketplace power, and political influence of corporations has occurred in large part because the federal government has, starting in the 1980s under President Reagan, basically abandoned enforcement of anti-trust laws limiting mergers and acquisitions. As a result, two-thirds of the business sectors of our economy have become more concentrated since the 1980s. This means that ever larger corporations have gained monopolistic power, allowing them to raise prices or reduce customer service or quality without losing business to the competition, because there is little or no competition in many local markets.

The resultant large companies have the resources to engage in extensive political activity including lobbying, making sizable campaign donations and expenditures, and moving employees through the revolving door to positions in government (and often back again). This has provided them with substantial political power and influence.

Because payroll costs are typically 70% of a business’s costs, reducing personnel costs is the quickest way to increase profits and share prices, the goals of shareholder capitalism. The increased size and reduced number of employers inherently suppress worker pay by leaving workers fewer choices of whom to work for in many locales. This means there is less competition among employers in hiring workers, and therefore less need to increase pay or benefits to attract workers.

On the policy front, a central focus of large companies’ political influence has been on undermining and weakening enforcement of laws supporting unionized workers. In addition, relaxed laws governing international trade have allowed employers to shift jobs overseas to cheaper labor markets. Finally, a bankruptcy filing, a technique frequently used by vulture capitalists (i.e., private equity investors and corporate raiders), allows employers to void union contracts, as well as benefits for retirees. Simply the threat of bankruptcy has become enough to get unions and workers to agree to cuts in pay and benefits. All of these factors mean that large employers have gained the ability to undermine and eliminate unionized workers, as well as to block the formation of new unions.

As a result, unionization of private sector U.S. workers has dropped precipitously from 35% in the 1950s to 6% today. Reduced unionization leaves employees with less power to bargain for good pay and benefits. It also means employers are able to effectively require workers to agree to disadvantageous employment conditions such as signing agreements prohibiting them from working for a competitor (i.e., non-compete agreements) and agreeing to engage in arbitration rather than going to court with a lawsuit when mistreatment or other grievances occur. Moreover, the economy-wide boost to pay and benefits due to employers having to compete against unionized jobs to attract workers, has effectively disappeared as unionization has dropped to today’s very low levels.

In addition, large employers have gotten states to enact so-called “right-to-work” laws. These laws allow workers at a unionized workplace to refuse to pay union dues, even though they benefit from the union’s negotiation of pay, benefits, working conditions, and grievance procedures. This undermines the financial resources and bargaining power of unions.

The increased size and reduced number of businesses has increased corporate profits and economic inequality. It has also stifled innovation as large companies block access to customers for newer companies and buy up smaller companies that are seen as threats to their monopolistic dominance. The rate of new business formation today is half of what it was in 1980.

The economic result is that today a greater share of businesses’ income goes to profits and a smaller share to workers’ compensation than at any time since World War II.

The societal result is that workers are economically insecure, frustrated, and angry. Therefore, they are susceptible to demagogues like Donald Trump selling racism, xenophobia, and oligarchic authoritarianism as the solution to their insecurity and anger.

The declining value of the minimum wage since 1968 is indicative of the decline of workers’ power and compensation. Increasing the federal minimum wage to $15 an hour in 2025, as is currently being proposed in Congress, would be a step in the right direction but would still not give workers the full value of their increases in productivity. Using 1968 as the reference point, today’s current federal minimum wage of $7.25 would be roughly:

  • $11.00 if it had kept up with inflation. (In other words, the minimum wage today has roughly 1/3 less purchasing power than it had in 1968.)
  • $22.00 if it had kept up with the increases in workers’ productivity, i.e., the increases in the value of the output of today’s workers over those in 1968. Instead, this increased value is going to profits and shareholders. [2]

I will summarize Reich’s book’s description of the shift in power in our economy and politics to the financial sector and Wall Street, the last of his three big systemic changes, in a subsequent post.

In the meantime, I urge you to read Reich’s book or check out his writing and videos at https://robertreich.org/ and/or https://www.inequalitymedia.org/. His analysis of the current economic and political landscape is always insightful and clear, and often entertaining as well.

[1]      Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

[2]      Lee, T.M., 2/25/21, “Our deeply broken labor market needs a higher minimum wage,” Economic Policy Institute (https://www.epi.org/publication/our-deeply-broken-labor-market-needs-a-higher-minimum-wage-epi-testimony-for-the-senate-budget-committee/)

OLIGARCHY OR DEMOCRACY: THE SYSTEM BY ROBERT REICH

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

Robert Reich’s latest book, The System: Who rigged it, how we fix it, presents his pointed, insightful, and relatively succinct analysis of how our democracy is more like an oligarchy these days, how it got that way, and how to get back to democracy. Oligarchy “refers to a government of and by a few exceedingly rich people or families who control the major institutions of society and therefore have power over other people’s lives. Oligarchs may try to hide their power behind those institutions, or … through philanthropy and ‘corporate social responsibility.’ But no one should be fooled. Oligarchs wield power for their own benefit.” (page 13-14) [1]

Reich identifies three major systemic changes that have occurred since 1980 that have shifted power, both economic and political, to a small group of very wealthy Americans. They are:

  • The shift of big corporations from stakeholder to shareholder capitalism,
  • The shift in bargaining power from unions to large employers and corporations, and
  • The shift in power in our economy and politics to the financial sector and Wall Street.

The shift of big corporations from stakeholder to shareholder capitalism began in the 1980s with “corporate raiders,” who were wealthy investors who would buy enough shares of a corporation’s stock to force the Chief Executive Officer (CEO) to make changes to increase the stock price or lose his job due to the raider taking control of the Board of Directors in what was called a hostile takeover. There were 13 hostile takeovers in the 1970s of corporations worth over $1 billion; there were 150 in the 1980s.

In addition, financial entrepreneurs or engineers, as they were referred to then and who more recently have been labeled vulture capitalists, developed the leveraged buyout technique that has been widely adopted by private equity funds. This technique, made possible by our tax and financial laws and regulations, allows the “investor” to borrow the huge sums of money needed to buy a corporation and then put the debt and risk on the corporation that was purchased, while receiving favorable tax treatment for the huge interest payments on the debt. In the 1980s, there were more than 2,000 leveraged buyouts of corporations worth over $250 million.

During the 1980s and 1990s, almost one out of every four U.S. corporations was the target of a hostile takeover and another quarter were the target of a takeover that was not deemed hostile because the CEO supported it (sometimes reluctantly).

As a result of all of this, CEOs shifted to focusing solely on maximizing the short-term price of the corporation’s stock and, therefore, the wealth of shareholders. Previously, the CEO’s job had been seen as having responsibility to a range of stakeholders, including employees, customers, the communities employees lived in, and the public, in addition to shareholders.

This shift from stakeholder to shareholder capitalism could not have occurred without tax and financial laws and regulations that allowed it or without lax enforcement of laws and regulations that could have stopped it. Some laws and regulations were changed to allow the corporate raiders’ practices. President Reagan’s administration in the 1980s failed to take enforcement actions that could have stopped or slowed corporate raiders and leverage buyouts, such as enforcement of anti-trust laws or a crackdown on large, risky loans by federally regulated and insured banks. Furthermore, the Reagan administration testified before Congress in opposition to laws that would have curbed the practices used by the corporate raiders.

Starting in the 1970s and growing in the 1980s, academic economists including Milton Friedman (University of Chicago) and Michael Jensen (Harvard Business School) gave academic and theoretical support to the takeovers (and threatened takeovers), asserting that they were increasing economic efficiency. They ignored the costs to workers and communities, focusing narrowly on the corporation, its profits, and its stock price. In other words, their focus was benefits to stockholders while ignoring costs to other stakeholders.

As a result, the mantra for CEOs, the business community, and many economists has become that the sole purpose of the corporation and its management is to maximize shareholder value at the expense of any and all other stakeholders.

Under the shift to shareholder capitalism, the “efficiency” gains go to shareholders, who are generally wealthy investors (including CEOs), while other stakeholders suffer the costs and burdens. This “efficiency” ignores any acknowledgement of a broader common good or the general welfare (which the preamble to the Constitution says our country was created to promote).

I will summarize Reich’s book’s description of the other two big systemic changes in subsequent posts:

  • The shift in bargaining power from unions to large employers and corporations, and
  • The shift in power in our economy and politics to the financial sector and Wall Street.

In the meantime, I urge you to read Reich’s book or check out his writing and videos at https://robertreich.org/ and/or https://www.inequalitymedia.org/. His analysis of the current economic and political landscape is always insightful and clear, and often entertaining as well.

[1]      Reich, R.B., 2020, The System: Who rigged it, how we fix it. NY, NY: Alfred A. Knopf.

CRACKING DOWN ON CORPORATE CORRUPTION AND SHELL COMPANIES

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

There’s a piece of very good news in the battle against corporate corruption and the use of shell companies to engage in criminal and unsavory activity. You may recall the defense spending bill, called the National Defense Authorization Act, that Congress passed last December and then, on New Year’s Day, overrode President Trump’s veto of it. (Trump vetoed it because it renames military bases currently named for Confederate generals and because it doesn’t repeal the liability protection for social media platforms when third parties post offensive or libelous material.) Given that it was one of a very few pieces of legislation actual passed by Congress, a number of unrelated items (called riders) were attached to it as the only way to get them passed.

One of the riders attached to the recent defense spending bill was the Corporate Transparency Act (CTA), which will significantly inhibit the use of shell companies for money laundering and other illegal or unsavory activities. A shell company is a legal entity established without any actual business operation or significant assets that is typically used to obscure ownership and hide financial transactions from law enforcement and/or the public. The CTA is the most significant financial industry reform addressing money laundering since the Patriot Act, which was passed after the Sept. 11, 2001, terrorist attacks. [1]

The CTA will require a company to disclose the names of its owners, i.e., anyone with a 25% or greater ownership share or who exercises substantial control over the company. This information will be in a confidential registry maintained by the Financial Crimes Enforcement Network (FinCEN) at the U.S. Treasury Department. FinCEN captures and analyzes financial transactions in order to combat money laundering, terrorism financing, drug trafficking, and other illegal activity. Its data is available only to law enforcement and to financial institutions (that use it to scrutinize the entities involved in financial transactions). The CTA also increases penalties for money laundering, streamlines cooperation among banks and foreign law enforcement, and significantly expands the rewards for whistleblowers, allowing them to receive up to 30% of money seized by law enforcement. [2]

The CTA responded to a decade of disclosures of the abusive uses of shell companies led by the reporting of the International Consortium of Investigative Journalists (ICIJ). The ICIJ has repeatedly documented how criminals and the rich have used shell companies to hide their wealth and move their money. It investigated and reported on the use of shell companies based on the leaked Panama Papers in 2016, the 2017 Paradise Papers leak, and its Secrecy for Sale project, which began in 2012 and continues to today. ICIJ reporting has disclosed that Delaware, Wyoming, and Nevada are favorite locations to set up shell companies, in addition to offshore tax havens. [3] Its analysis in 2020 of leaked FinCEN reports of suspicious financial transactions identified shell companies transferring money through U.S. banks for criminals in Russia, China, Iran, and Syria.

ICIJ’s reporting has made it clear that the U.S. has been the country of choice for criminals and wealthy individuals to set up anonymous shell companies that, in addition to tax evasion, have facilitated bribery and other illegal payoff schemes, as well as money laundering for terrorism, political corruption, and a variety of criminal enterprises including drug, arms, and human trafficking.

The U.S. political system is a swamp of money and increasingly the true sources of political contributions and campaign spending are hidden, a trend exacerbated by the use of shell companies. While it is illegal for foreign individuals or entities to contribute to U.S. campaigns, a shell company makes the true source of campaign spending anonymous. Therefore, it is highly likely that illegal foreign money has been going into U.S. political campaigns via shell companies.

The Trump campaign created a shell company, American Made Media Consultants, that spent more than $759 million of Trump’s campaign funds (over 50% of the campaign’s spending). This obscured the flow of money including who was paid when and how much. Nonetheless, it is clear that at least eight individuals who were paid by the Trump campaign were also paid in connection with the January 6, 2021, rally that led to the storming of the Capitol. [4] Previously, Trump had personally used shell companies, including to pay off Stormy Daniels, the pornography actress who says Trump had an affair with her. [5]

The Corporate Transparency Act is an important step forward in increasing the transparency of financial transactions. It will, among other things, reduce corporate and political corruption, inhibit criminal and terrorism finances, and reduce tax evasion. This is a good step but there’s lots more to do, such as strengthening prosecution of white-collar crime. More on that in a future post.

[1]      Talking Points, 1/11/20, “New law cracks down on shell companies to combat corruption,” The Boston Globe from the Associated Press

[2]      Cox Richardson, H., 12/27/20, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/december-27-2020)

[3]      Mustufa, A., 12/11/20, “Advocates celebrate major US anti-money laundering victory,” International Consortium of Investigative Journalists (https://www.icij.org/investigations/paradise-papers/advocates-celebrate-major-us-anti-money-laundering-victory/)

[4]      Massoglia, A., 1/22/21, “Shell companies and ‘dark money’ may hide details of Trump ties to DC protests,” Center for Responsive Politics (https://www.opensecrets.org/news/2021/01/trump-tied-to-dc-protests-dark-money-and-shell-companies/)

[5]      Cox Richardson, H., 12/27/20, see above

EXAMPLES OF CORRUPT CAPITALISTIC BEHAVIOR Part 4

Here are eight recent examples of corporate corruption and of the overall corruption of our current system of capitalism, in which a lack of regulation of large corporations and Wall Street allows greed to run rampant. The frequency of these incidents is astounding; they are reported on a daily basis. The varied examples below document a breadth of greed-driven corruption that puts lives in danger, destroys news reporting that is essential to a well-functioning democracy, and makes the stock market vulnerable to manipulation and our financial system vulnerable to criminal money laundering. (This previous post highlighted three other examples of corrupt capitalistic behavior.)

Example #1: The power outage in Texas has dramatically illustrated what happens when the private sector is not properly regulated. This is, of course, particularly important when we rely on the private sector to deliver a vital public service (e.g., electricity or water) or an essential public product (e.g., health care supplies or food). In Texas, the private electric power generation companies and the private electric grid manager decided in the 1930s to avoid federal regulation by refusing to participate in the national power grid. Then, they got Texas regulators to let them cut corners to maximize profits. The result is an electric power system that doesn’t have the capacity to respond in an emergency and, therefore, left millions of people in the dark and cold, jeopardizing their health, safety, and, indeed, their lives, during a recent mid-February cold snap. [1]

Example #2: The wild fluctuations in GameStop stock, a small, previously little-known company, have focused attention on weaknesses in the regulation of the stock market and of the companies that facilitate stock trading. GameStop stock shot up from $4 to $5 a share in August to $20 in mid-January to $483 in late January. It then fell back to $41 by mid-February. This roller coaster ride has highlighted the risks and often unfair environment that individual investors face in the stock market, which is dominated by sophisticated, powerful, and wealthy traders, who too often are further advantaged by access to inside, non-public information. [2]

Example #3: Three big drug distributors (Cardinal Health, AmerisourceBergen, and McKesson) and Johnson & Johnson are paying big fines (a total of $26 billion) as part of the settlement for fraudulently marketing and selling opioids, which led to drug addictions, overdoses, and tens of thousands of deaths. However, they are deducting these fines from their taxes, reducing what they owe the government by a combined $4.6 billion. Under the settlement, the four companies will avoid having to admit to any guilt, wrongdoing, or legal responsibility. Many people involved with this case feel that the fines are too low based on the damage that was done and that the tax deductions and the lack of any admission of guilt are insulting to the victims. [3]

Example #4: Tribune Publishing, one of the last newspaper chains not already owned and gutted by private equity or hedge fund vulture capitalists, is being bought by the Alden Global Capital (AGC) hedge fund. AGC, along with other vulture capital newspaper purchasers, has consistently maximized financial returns by cutting the newspapers’ staffs, selling their real estate, busting their unions, and eliminating their pension liabilities, while pocketing as much cash as possible and loading debt onto the newspaper companies, often pushing them toward bankruptcy. The Tribune papers that will almost certainly be similarly decimated are in Chicago, Baltimore, Hartford, Orlando FL, New York (the Daily News), Annapolis, Allentown, Newport News, and Norfolk VA. AGC now owns over 200 newspapers. This purchase (and the others like it) is possible because of a lack of antitrust enforcement and special tax law provisions that favor debt-financed acquisitions and payment of special dividends from companies operating at a loss. [4]

Example #5: An investor lawsuit against Boeing is moving forward based on claims that the Board of Directors and management failed to uphold their responsibilities to shareholders relative to the safety issues and crashes of the 737 Max airplanes. Two of the planes crashed in the spring of 2019 killing 346 people. The suit questions the Board’s and management’s roles both in the initial testing of the plane and its software, and their actions after the crash of the first plane, when they decided not to ground all the 737 Max planes. Boeing has already agreed to pay more than $2.5 billion to resolve criminal charges that it conspired to defraud the Federal Aviation Administration (FAA) during the plane’s safety review and certification. The Board did fire Boeing’s CEO in 2020, but gave him a $62 million severance package. [5]

Example #6: Bristol-Myers Squibb and Sanofi, who jointly market the blood-thinning drug Plavix, were ordered by a judge to pay the State of Hawaii over $834 million for illegally marketing the drug. For 12 years, they failed to properly warn consumers about health risks and didn’t disclose that the drug was ineffective for up to 30% of users, both of which put some users’ lives at risk. They engaged in these practices in order to maximize their profits. [6]

Example #7: Google has agreed to pay a $1.3 million fine to French fraud and competition regulators for displaying misleading rankings for French hotels on Google Maps and in Search results. [7]

Example #8: Citigroup, parent of Citibank, was fined $400 million for deficient financial controls and related technology. In an ironic example of its lack of controls, Citibank, in what it says was a mistake, transferred over $500 million to a client’s lenders while intending to make a much smaller interest payment. A judge recently ruled that the lenders do not have to return the money. [8]

[1]      Cox Richardson, H., 2/16/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/february-16-2021)

[2]      Rosen, A., 2/18/21, “Mass. Investor ‘Roaring Kitty’ says he wasn’t part of any coordinated effort to boost GameStop,” The Boston Globe

[3]      MacMillan, D., & Schaul, K., 2/12/21, “Drug companies seek billion-dollar deductions from opioid settlement,” The Washington Post

[4]      Kuttner, R., 2/17/21, “Private equity swallows up yet another newspaper group,” The American Prospect blog (https://prospect.org/blogs/tap/private-equity-swallows-up-yet-another-newspaper-group/)

[5]      MacMillan, D., 2/17/21, “Boeing directors misled on safety, investor lawsuit claims,” The Boston Globe from the Washington Post

[6]      Bloomberg News, 2/16/21, “Bristol-Myers, Sanofi must pay $834 million over Plavix,” The Boston Globe Talking Points

[7]      Associated Press, 2/16/21, “Google fined $1.3M for misleading French hotel rankings,” The Boston Globe Talking Points

[8]      Bloomberg News, 2/17/21, “Citigroup loses $500 million legal battle over transfer blunder,” The Boston Globe Talking Points

EXAMPLES OF CORRUPT CORPORATE BEHAVIOR Part 3

Here are three recent examples of corrupt corporate behavior in the financial industry, where corruption is persistent and seems to know no bounds. The exposure of corruption and its triggering of the 2008 financial crash doesn’t seem to have changed anything. It seems that every week there’s another report of serious corruption in the financial industry. Here are three examples that show the depth and breadth of that corruption: one of long-term systemic corruption at a major bank, one of a specific example of corruption from a different major bank, and one from a small, relatively new member of the industry. (This previous post highlighted three other examples of corporate corruption, two from the pharmaceutical industry and one from the financial industry.)

Example #1: Deutsche Bank has fallen from the second largest bank in the world in 2008 to the 21st largest in 2020 due to a wide range of corrupt behavior that finally caught up with it. It postponed its financial collapse and shrinkage by overvaluing its assets, among other fraudulent accounting strategies. Its history of corruption is meticulously detailed in the book, Dark Towers. [1] In 2018, its long-time involvement in tax evasion and money laundering for wealthy individuals resulted in police raiding its Frankfurt, Germany, headquarters. This wasn’t the first time this had happened. In 2012, hundreds of government police had raided its office to gather evidence in a different tax evasion scheme that involved permits for carbon dioxide emissions.

Since 2012, Deutsche Bank has paid over $15 billion in settlements for illegal activities. As-of 2016, it was involved in over 7,000 legal cases and had set aside over $5 billion for the potential impact of those cases. It was a major contributor to the 2008 financial crash, which led to its payment in 2017 of over $7 billion in settlements for fraud in its sales of mortgage-backed securities. In 2015, it agreed to pay a fine of $2.5 billion for manipulating international interest rates, pleading guilty to fraud and agreeing to fire 29 employees who had been involved. (Not a single individual was charged with a crime, however.) In 2017, it was fined over $600 million for money laundering that moved over $10 billion of suspicious money out of Russia. In 2018, it agreed to pay $75 million to settle charges of improperly handling U.S. transactions involving foreign securities.

Deutsche Bank is or has been investigated for numerous other corrupt behaviors including manipulating foreign currency exchange rates and violating international sanctions by engaging in over $10 billion of illegal financial transaction with Iran, Syria, Libya, Sudan, and other sanctioned countries. Some of these transactions involved funding for terrorism and drug trafficking. It is under investigation for participating in a criminal cartel in Australia, $150 billion of money laundering with a Danish bank, and a multi-billion fraud scheme with a Malaysian development fund. And by the way, it has engaged in illegal spying on its critics. Its corruption goes back at least to the 1930s when it cooperated with the Nazis and funded their activities, which it tried to hide for many years thereafter.

Example #2: Goldman Sachs, the fifth largest U.S. bank, has agreed to pay $3 billion to regulators in multiple countries for a massive bribery scheme that stole hundreds of millions of dollars from the Malaysian government. Goldman Sachs took in $593 million in unusually large fees for its role in the underlying transactions. Although two of its executives have been indicted (a partner and a managing director) and its Malaysian subsidiary has pleaded guilty to bribery, many have criticized the settlement as not being a meaningful punishment both because of the scale of the criminal activity and the dollar amount of the settlement, which is less than 3 months of profits. Furthermore, Goldman Sachs has only partially cooperated with the investigation, delayed providing crucial information, and failed to self-report illegal activity that it knew about and is required by law to report. [2] By the way, this will bring the fines it has paid out since 1998 to over $10 billion. [3]

Example #3: Robinhood Financial LLC, a 2015 start-up that provides a smart phone app for buying and selling stocks, has agreed to pay a $65 million penalty to the federal Securities and Exchange Commission for misleading customers and costing them an estimated $34 million. Robinhood advertised no commission trades, however, it generated revenue by executing customers’ trades through companies that paid it fees for the trades. It failed to disclose this to its customers. It had an incentive to select companies that paid it the most for those trades even if customers got worse prices on the stocks they were buying. Nonetheless, Robinhood claimed the quality of its execution of its customers’ trades was as good or better than its rivals. [4] In addition to this federal settlement, Massachusetts regulators are pursuing a complaint against Robinhood for violating state securities laws by not providing accurate information to customers. The complaint also states Robinhood’s website has had several outages that have prevented customers from trading during important periods when stock prices were shifting significantly. [5]

To put financial industry corruption in a larger perspective, often federal cases of financial misbehavior, as in the Deutsche Bank and Goldman Sachs cases above, result in the financial corporations signing a Deferred Prosecution Agreement (DPA). This requires the corporation to pay a fine and agree to a period of probation (during which it promises not to repeat its bad behavior), but usually the corporation and its executives avoid criminal prosecution. However, there are multiple examples of money laundering cases against big banks where the corporations had already signed DPAs in previous money laundering cases, repeated their bad behavior, and received the same lenient treatment all over again. As a result, the big financial corporations appear to view fines for corrupt behavior as a routine cost of doing business. [6]

The persistence of corruption in the financial industry makes clear the need for stronger steps to deter future illegal behavior. Stronger government regulation and significant financial and criminal punishments for the corporations (e.g., truly significant fines and, ultimately, revocation of their corporate charters, putting them out of business) and for their executives (e.g., jail time and personal fines) are needed. The industry and its supporters among our elected officials have fought back hard and largely successfully against efforts to strengthen regulation and consumer protection in the wake of the 2008 financial collapse, so not only is there much work to do but, in addition, it will be a tough fight.

[1]      Enrich, D., 2020, “Dark Towers,” HarperCollins Publishers, NY, NY.

[2]      Woodman, S., 11/2/20, “Goldman Sachs 1MDB settlement: a meaningful punishment for major financial crimes?” International Consortium of Investigative Journalists (https://www.icij.org/inside-icij/2020/11/goldman-sachs-1mdb-settlement-a-meaningful-punishment-for-major-financial-crimes/)

[3]      Collins, C., 11/30/20, “Petulant plutocrat of the week,” Inequality.org weekly blog post from the Institute for Policy Studies (https://inequality.org/wp-content/uploads/2020/11/inequality-newsletter-november-30-2020.html)

[4]      Michaels, D., & Osipovich, A., 12/17/20, “Robinhood Financial to pay $65 million to settle SEC probe,” The Wall Street Journal

[5]      Denham, H., 12/18/20, “Robinhood agrees to $65m penalty to resolve SEC charges,” The Boston Globe from the Washington Post

[6]      Woodman, S., 11/2/20, see above

EXAMPLES OF CORRUPT CORPORATE BEHAVIOR Part 2

Here are three recent examples of corrupt corporate behavior. They show the breadth of greed-driven corporate corruption from seriously harming public health to illegal market manipulation to criminal money laundering. (This previous post highlighted three other examples.)

Example #1: As one of the most egregious cases of corporate corruption moves toward an end, Purdue Pharma (the maker and incredibly corrupt promoter of the addictive, opioid pain killer OxyContin) has pleaded guilty to criminal charges. It has admitted to:

  • Impeding the Drug Enforcement Agency (DEA) in its efforts to stem the crisis of opioid addiction,
  • Failing to have effective procedures to prevent diversion of prescription OxyContin to the black market while assuring the DEA that it did,
  • Lying to the DEA to get approval to produce greater amounts of OxyContin, and
  • Paying kickbacks to doctors and engaging in other illegal schemes to get doctors to increase their prescribing of OxyContin.

These guilty pleas were part of a settlement of criminal and civil charges with the federal Department of Justice that will require the company to pay $8.3 billion in penalties and forfeitures over a number of years. The majority of this money will go to state, local, and tribal governments to pay for treatment and prevention of opioid addiction. Over the last 20 years, the opioid crisis has contributed to over 470,000 deaths in the U.S. and it appears to be getting worse during the coronavirus pandemic. [1] The $8.3 billion amount, if calculated on a per death basis, values each death at less than $18,000, without including any calculation of the harm to those who have or are suffering from OxyContin-related drug abuse but have, so far, survived.

Attorneys general of about half of the states are opposing the settlement, asking for harsher penalties for the company and particularly for the members of the Sackler family who owned and controlled Purdue. Under current settlement provisions, the very wealthy Sackler family will pay only $225 million to settle civil charges. No criminal charges have been filed against them, although that is still a possibility. (Here’s a previous post with more details about Purdue.)

Example #2: Teva Pharmaceutical has been charged by the U.S. Department of Justice with conspiring to fix prices and manipulate the market for generic drugs. The criminal charges allege that these actions resulted in at least $350 million in overcharges over a 3 ½ year period. Five other generic drug makers that were also part of this investigation have pleaded guilty and have agreed to pay a total of $426 million to settle the charges against them. Teva and these other companies are also facing civil lawsuits by states’ attorneys general and others. [2]

Teva fills 10% of the generic drug prescriptions in the U.S. and a criminal conviction could lead to it being banned from doing business with Medicare and Medicaid. A conviction would also weaken its defense against the civil lawsuits.

Example #3: At least $100 billion a year of cash flows through U.S. banks that is abetting tax dodging, fraud, corruption, or money laundering for drug dealers, terrorists, and other unsavory individuals and entities. Banks are required to file Suspicious Activity Reports for transactions that may involve criminal activity. Typically, these reports are not public but over 2,000 of them were recently leaked and they identified over 18,000 suspicious transactions between 1999 and 2017. And this may just be the tip of the iceberg. Banks report these suspicious transactions but go ahead and process them (instead of blocking them) because they earn significant fees on them. Almost half of the suspicious money flowed through Deutsche Bank’s U.S. subsidiary, but just about every prominent U.S. bank was involved. [3]

Exacerbating the problem is the fact that often the corporations that conduct these cash transfers are created and registered in states, notably Delaware, or offshore tax havens (e.g., Cayman Islands and the Virgin Islands) where disclosure of the true owner(s) of the corporation (those who will benefit from its activities) is not required. This combination of corrupt banks, weak banking regulations, and lax corporate registration requirements has led to the U.S. being one of the preferred global destinations for tainted money.

One of the frequent activities of these shell companies (i.e., companies with unidentified owners and no purpose other than to facilitate anonymous movement of cash) is to purchase high-end real estate. A large portion of luxury real estate in Boston and Seattle, for example, is purchased by shell companies, often with cash (i.e., no mortgage loan). Experiments with temporary local transparency rules, such as requiring the disclosure of the true owners on cash real estate transactions of over $1 million, has resulted in declines in such transactions of 70% to 95%. Legislation has been introduced in Congress to require full disclosure of the beneficial owner(s) of all corporations but it is not making any progress.

Clearly, to prevent corrupt corporate behavior, the U.S. needs stronger regulation of corporations, from its biggest banks to drug companies to shell corporations. Without it, greed runs wild and corrupt U.S. corporations will aid and abet drug dealing, terrorism, and harm to the health and financial well-being of mainstream Americans. These corrupt activities also, of course, result in the rich in getting richer at the expense of everyday Americans.

[1]      Mulvihill, G., 11/25/20, “OxyContin maker Purdue pleads guilty to criminal charges,” The Boston Globe from the Associated Press

[2]      Griffin, R., 8/27/20, “Teva fights US claims of price fixing,” The Boston Globe from Bloomberg News

[3]      Collins, C., 9/21/20, “FinCen files shine spotlight on suspicious bank transfers,” Common Dreams (https://www.commondreams.org/views/2020/09/21/fincen-files-shine-spotlight-suspicious-bank-transfers)

FACEBOOK KNOWINGLY PROMOTES DISINFORMATION

Facebook (FB) facilitates an accelerating spread of disinformation; this is widely recognized and well-documented. (See my previous post on this.) Facebook allows toxic speech and dangerous misinformation to spread unchecked on its monopolistic platform. This affects and infects our public discourse and knowledge base, undermining the health of our democracy. However, stopping it runs counter to Facebook’s economic interests because increased activity, regardless of its content, is what increases its revenue. [1]

Recently, damning evidence has come to light of Facebook’s manipulation of its News Feed to favor right-wing sources that are known to be deceptive over trustworthy news sources.

In late 2017, Facebook was in the process of making significant changes in the computer programming code or algorithm it uses to determine which of the overwhelming plethora of sources each of us is shown in our Facebook News Feed. It claimed it was working to bring people together and to prioritize trusted and informative news sources.

It was uncovered recently that FB ran experiments with its first iteration of a revised News Feed algorithm that revealed it would dramatically curtail the dissemination of right-wing, less-than-trustworthy sites, such as Breitbart, the Daily Wire, and the Daily Caller. FB’s software engineers were told to modify the algorithm to reduce the negative effects on these right-wing sites.

A second iteration of the new algorithm was ready in January 2018 and its effects were presented to senior executives at FB. The data showed that it reversed the curtailment of right-wing, less-than-trustworthy sites and instead curtailed distribution of progressive-leaning, credible news sources. The presentation included bar charts showing the impact on a dozen or so specific news sources.

This second iteration of the new News Feed algorithm was, nonetheless, put into use, based in part on support from FB’s Vice President of Global Public Policy, Joel Kaplan, and right-wing-leaning employees working for him. (Kaplan would later loudly support his friend Brett Kavanaugh during Kavanaugh’s Supreme Court confirmation hearings.) This was not the first time Kaplan had acted to promote right-wing disinformation. For example, in December 2016, when an internal investigation found that a group of FB accounts, mostly based overseas, were behind a lot of the promotion of right-wing disinformation, Kaplan objected to disabling these accounts because “it will disproportionately affect conservatives.” He also has defended and protected right-wing sites that violated FB policies, opposing sanctions on them. [2]

The new News Feed algorithm expanded dissemination of content from the right-wing Daily Wire that routinely shares false content and spreads malicious stories such as ones describing being transgendered as a “delusion,”  calling abortion providers “assassins,” and labeling progressive members of Congress as not “loyal to America.” On the other hand, the new algorithm reduced dissemination of content from left-leaning Mother Jones magazine that provides rigorously fact-checked reporting and investigative journalism that has won it numerous journalism awards, including seven National Magazine Awards (three times for General Excellence). It has also been a National Magazine Award finalist 24 other times. In 2017, it won the Magazine of the Year award from the American Society of Magazine Editors.

In the six months after implementation of the changes in Facebook’s News Feed algorithm, FB traffic to trustworthy, left-leaning Mother Jones articles declined 37% from the previous six months. This means that the over one million Mother Jones followers and others on FB saw fewer of its articles in their News Feeds. On the other hand, over the summer of 2020, the deceptive right-wing Daily Wire had more Facebook engagement (i.e., likes, comments, and shares) than any other English-language publisher in the world. [3]

These data belie Zuckerberg’s claim when he announced the News Feed changes in January 2018 that the goals were “bringing people closer together” and fighting “sensationalism, misinformation and polarization.” He didn’t mention that he and FB were tipping the scales to favor less-than-factual right-wing sources.

Why did this happen? Facebook was tweaking its News Feed algorithm because user engagement was falling, which threatened its revenue and stock price. Zuckerberg and FB may also have wanted to avoid antagonizing Trump and the right-wing Republicans in power in the federal government, thereby reducing the likelihood that they would attack FB either verbally or through government investigations and regulations. Right-wing and “conservative” politicians had been criticizing FB for “liberal” bias (without evidence). A former Facebook employee said that it was made clear  that changes to the News Feed algorithm could not hurt Breitbart, Trump-advisor Steve Bannon’s mouthpiece.

Facebook uses its monopolistic power to determine which publishers’ content the public sees. This power of selective partial censorship and propaganda promotion is Big Brother-type power that we all should be concerned about and fear. Free speech in today’s America  is relative; it is based on how much money one has to broadcast one’s voice or on how FB treats you. Zuckerberg’s claim that he supports unfettered free speech is disingenuous given that FB tips the scales to favor certain sources and disfavor others.

FB’s marketplace power and dissemination of harmful disinformation need to be addressed by government policies and regulations. Slowing the spread of  misinformation and malicious content from a handful of the most active and therefore most harmful sites would have a dramatic effect.

Facebook should be held accountable for disseminating false, misleading, or inflammatory content. Regulation is one way to do this and competition is another. As a monopolistic platform lacking competition, FB has no incentive to do anything but pursue profits and/or Zuckerberg’s personal agenda. FB should be regulated like a monopolistic utility as the phone company once was or as private electricity and gas utilities are. Anti-trust laws should be used to stop FB’s anti-competitive practices and its acquisitions of Instagram and WhatsApp should be reversed. Competition should be facilitated, for example, by creating a not-for-profit, free to users, Internet platform for responsible information sharing and journalism akin to public radio and TV.

I’m not a heavy FB user so my expertise on its on-the-ground operation is limited. Therefore, I welcome your suggestions on how we can send a message to Facebook and Zuckerberg that will be heard loudly and clearly on the issue of the quality of content in its News Feed as well as other issues such as its repeated violations of users’ privacy. Would a one-day boycott where we don’t log into FB be effective? Or would a week where we never click on a FB ad be more meaningful? What else can we do? In addition, of course, to lobbying our elected officials to rein in Facebook and Zuckerberg with regulations and anti-trust laws.

[1]      Alba, D., 10/13/20, “False info thriving on social media,” The Boston Globe from The New York Times

[2]      Bauerlein, M., & Jeffrey, C., 10/21/20, “Facebook manipulated the news you see to appease Republicans, insiders say,” Mother Jones (https://www.motherjones.com/media/2020/10/facebook-mother-jones/)

[3]      Bauerlein, M., & Jeffrey, C., 10/21/20, see above

FACEBOOK’S DISSEMINATION OF DISINFORMATION ACCELERATES

 Facebook’s (FB) spreading of disinformation is accelerating, despite any claims to the contrary. Its CEO, Mark Zuckerberg, repeatedly says that he does not want FB to be an arbiter of free speech, but it is the arbiter of what information or speech FB users see.

Zuckerberg also asserts that the best way to fight offensive bad speech is with good speech. [1] However, this is a false equivalency as good speech that tries to counter bad speech has to mention the bad speech which furthers its presence in our public discourse. This has been shown by research to further embed the bad or false speech in people’s minds. For example, reporting on Trump’s tweets and stating they are false or misleading, still puts Trump’s tweets in front of the viewing or reading audience.

Facebook’s current stated standard is that posts that are not calling for harm or violence, however offensive, should be protected as free speech. Its new policy announced in October will finally ban posts that deny or distort the Holocaust. This is a very small and belated step forward against some of the worst and most obviously harmful disinformation that FB has spread. Almost a quarter of Americans between ages 18 and 39 say they believe the Holocaust either didn’t happen or was exaggerated. It may be difficult to link this directly to FB or to harm or violence but it’s hard to believe there is no linkage. [2]

Facebook allows toxic speech and dangerous misinformation to spread largely unchecked on its monopolistic platform. Engagement with FB posts (i.e., liking, sharing, or commenting on them) that are from sources that routinely publish misleading or false content tripled from 2016 to 2020, exceeding the rate of increase for outlets that uphold traditional journalistic standards.

This affects and infects our public discourse and knowledge base, undermining the health of our democracy. However, stopping it runs counter to Facebook’s economic interests because increased activity, regardless of its content, is what increases FB’s revenue. [3]

Over the summer and early fall of 2020, the Digital New Deal (DND) project examined engagement with posts on FB and analyzed the reliability of the posts’ sources. It partnered with NewsGuard, a non-partisan service that rates news and information sources for their accuracy. (See note on its methodology at the end of this post.) The DND project focused on 721 deceptive information sources and compared them with a selected group of non-deceptive sources. It categorized the sources into three types:

  1. False Content Producers: repeatedly publish verifiably false content (396 sources)
  2. Manipulators: fail to gather and present information responsibly (325 sources)
  3. Trustworthy Outlets (46 selected sources for comparison)

Engagement with posts from type 1 and 2 sources (referred to as deceptive sources) has grown 242% since 2016. Engagement with posts from Manipulators (type 2 sources) represents 84% of all deceptive source engagement and has grown from 390 million engagement actions in the 3rd quarter of 2016 to 1,520 million in the 3rd quarter of 2020 (almost fourfold). The deceptive sources with the most engagement on FB, including the top five in each of types 1 and 2, promote right-wing or “conservative” politics.

These deceptive sources, masquerading as news outlets, are spreading false information, manipulative messaging, and concocted conspiracies that degrade democratic discourse. This harms the health of our democracy because it undermines informed participation by citizens and voters. [4]

The top ten deceptive sources are all of the Manipulator type and account for 62% of FB engagement interactions with deceptive sources, while the other 711 deceptive sites are responsible for 38% of these interactions. Fox was the most frequent source in the Manipulator category. It is rated more positively by NewsGuard than many other deceptive sources because it sometimes does correct errors, avoids deceptive headlines, labels advertising, and discloses its ownership and financing. Other examples of Manipulators are the Daily Wire, Breitbart, and The Blaze.

My next post will provide even more damning evidence that FB’s goal is not to bring people together, to provide accurate information, or to fight sensationalism, misinformation, and polarization as Zuckerberg has said, but rather to maximize user engagement and profits, and perhaps to promote right-wing politics and curry favor with those in power in Washington, D.C. The post will highlight FB’s 2018 changes to its News Feed algorithm that determines what information or disinformation is presented to FB users. It will also present some ways to address FB’s monopolistic power and its dissemination of false and harmful content.

Note on the methodology for rating information sources used in the DND study summarized above: NewsGuard rates online news outlets based on nine criteria of responsible journalism including:

  • Does not repeatedly publish false content (22 points)
  • Gathers and presents information responsibly (18 points)
  • Regularly corrects or clarifies errors (12.5 points)
  • Handles the difference between news and opinion responsibly (12.5 points)
  • Avoids deceptive headlines (10 points)
  • Website discloses ownership and financing (7.5 points)
  • Clearly labels advertising (7.5 points)
  • Reveals who is in charge, including any possible conflicts of interest (5 points)
  • The site provides the names of content creators, along with either contact or biographical information (5 points)

Outlets receive points for passing a given criteria or they receive zero for failing. A total score of less than 60 merits a Red rating, meaning the site fails to adhere to basic journalistic standards.

[1]      The Associated Press, 10/12/20, “Facebook bans Holocaust denial, distortion posts”

[2]      Frenkel, S., 10/13/20, “Facebook bans Holocaust denial content,” The Boston Globe from The New York Times

[3]      Alba, D., 10/13/20, “False info thriving on social media,” The Boston Globe from The New York Times

[4]      Kornbluh, K., Goldstein, A., & Weiner, E., 10/12/20, “New study by Digital New Deal finds engagement with deceptive outlets higher on Facebook today than run-up to 2016 election,” Digital New Deal, German Marshall Fund of the United States (https://www.gmfus.org/blog/2020/10/12/new-study-digital-new-deal-finds-engagement-deceptive-outlets-higher-facebook-today)

HOW THE RICH GET RICHER Part 1

I’m planning on doing a series of, hopefully, short posts (although this one’s on the long side) with anecdotes on how the rich get richer, often at the expense of the rest of us. Here’s the first installment with three examples.

Example #1: At least 18 large companies have given executives large payouts just before filing for bankruptcy. These companies have laid off tens of thousands of workers but gave a collective $135 million to executives just before filing for bankruptcy. Bankruptcy attorneys note that the payouts were timed to skirt a 2005 law intended to prevent executives from prospering as their companies failed. The intent was to ban payouts that unfairly enrich the executives who drove their companies into bankruptcy. Such huge payouts are particularly egregious during an economic crisis when employees of the companies are suffering severe hardships. [1]

Example #2: Some members of Congress and some Trump administration supporters, who were privy to private early briefings on the seriousness of the coronavirus, made investment decisions that appear to have  been based on this non-public, inside information. Under the Stock Act of 2012, members of Congress are barred from using non-public information they get as a member of Congress to buy or sell personal stock holdings. However, at least four members of Congress made significant stock transactions in late February just before the stock market crashed. The private briefings they received on the potential seriousness of a pandemic would be considered insider information because this information was not available to the public. Moreover, at that time, the public information from the Trump administration and from an Op-Ed written by Senator Burr was reassuring the public that the U.S. was well prepared for a pandemic and had the coronavirus under control.

Senator Burr of North Carolina, as chair of the Senate Intelligence Committee, had received multiple briefings on the seriousness of the coronavirus. On February 13, 2020, less than a week after publishing his upbeat Op-Ed, he sold 33 stocks worth over $600 thousand (and perhaps as much as $1.7 million) in several industries likely to be hard hit by a pandemic. Senator Kelly Loeffler of Georgia made 29 stock transactions in late February, including buying over $100,000 worth of a company providing software tools for working remotely. Senator Inhofe of Oklahoma sold up to $750,000 worth of stock and Senator Dianne Feinstein of California sold millions of dollars of stocks. All four Senators have denied doing anything illegal. Senator Burr’s brother-in-law also sold significant stock holdings on the same day as the Senator. Providing investment tips to others based on inside information is illegal. [2]

On February 24 and 25, at a private meeting of the conservative Hoover Institution’s board, senior members of Trump’s economic team expressed uncertainty about how the coronavirus would affect the economy. However, on these same days, President Trump and the same economic advisers were saying publicly that the coronavirus was under control and that the economy and the stock market looked good. The president’s advisers appear to have been giving an early warning to wealthy party donors that contradicted their public statements. A hedge fund consultant, William Callanan, who is a Hoover board member and attended the meeting, circulated a memo about this to a hedge fund founder and others that gave them the ability to make investment decisions based on this non-public information. [3] This would appear to be illegal insider trading facilitated by the Trump administration’s private briefings.

Example #3: Insiders at companies developing COVID vaccines and treatments have been selling their companies’ stock and making millions of dollars. Insiders, including executives and board members, at a dozen of these companies have sold more than $1.3 billion in company stock since March 2020 when the seriousness of COVID became evident. In the same period last year, insiders at these companies sold just $74 million of stock, less than 6% of 2020 sales. Over $1.1 billion of these stock sales occurred at just three companies – Moderna, Regeneron Pharmaceuticals, and Vaxart. In particular, the chief medical officer (CMO) at Moderna is systematically liquidating all his stock, including stock obtained by exercising stock options granted to him, through planned weekly trades that are making him $1 million a week. Moderna’s chief executive officer (CEO) has sold nearly $58 million in stock, although he still retains substantial company stock.

Insiders are not allowed to sell company stock based on insider information, but can legally sell company stock under plans that schedule the stock sales in advance. However, these plans are relatively easy to change on short notice, which can make them at least appear to be an end run around illegal insider trading. Moderna’s CMO modified his plan on March 13 and its CEO did so on May 21 shortly after the company announced positive preliminary results from its vaccine development. Insiders have an incentive to exaggerate and hype good news while downplaying possible challenges or uncertainties in order to inflate their company’s stock price and increase their personal profit from sales of company stock. Vaxart is being sued by shareholders for misleading them while a hedge fund with ties to a board member was selling hundreds of millions of dollars of company stock.

This insider stock selling at companies working on COVID responses is particularly concerning because many of these companies have received substantial funding from the federal government under Operation Warp Speed, the government’s initiative to accelerate development of a COVID vaccine. Moderna is receiving $1 billion to support the clinical trial of a possible vaccine and has been promised another $1.5 billion to manufacture and distribute a successful vaccine. Taxpayers are paying for the risky up-front investments while executives and shareholders are (already) reaping the financial benefits even though no vaccine has yet completed testing. [4]

These last two examples indicate that selling (and buying) stocks based on non-public information is not uncommon. Some of it is clearly illegal but enforcement is sometimes difficult or lax and some of it either isn’t illegal or has been given a gloss of legality by allowing company insiders to engaged in scheduled stock sales.

In any case, it appears that the Trump Administration and federal government regulations have effectively institutionalized insider trading. Those investing in the stock market without insider connections should stand forewarned.

[1]      Washington Post, 10/28/20, “Failing firms’ executives got millions,” The Boston Globe

[2]      Burns, K., & Millhiser, I., 5/14/20, “Sen. Richard Burr and the coronavirus insider trading scandal, explained,” Vox (https://www.vox.com/policy-and-politics/2020/5/14/21258560/senator-richard-burr-coronavirus-insider-trading-scandal-explained)

[3]      Kelly, K., & Mazzetti, M., 10/15/20, “As virus spread early on, briefings from Trump administration fueled sell-off,” The Boston Globe from The New York Times

[4]      Wallack, T., 10/24/20, “Drug company insiders are profiting handsomely from the world’s desperate hope for a COVID-19 vaccine,” The Boston Globe

THE REST OF THE POST OFFICE STORY Part 2

The scandalous behavior of Louis DeJoy, the Trump administration’s new Postmaster General for the U.S. Postal Service (USPS), has gotten quite a bit of attention in the mainstream media, but there’s more to the story than they have been reporting. This post and my previous post present at least some of the rest of the story. (My previous post described DeJoy’s Friday night massacre of personnel and the role of Treasury Secretary Mnuchin, who obtained sweeping operational control over the USPS and unprecedented access to its information through negotiation of a $10 billion line of credit for the USPS from the Treasury. [1] [2] )

Despite the current characterization of the USPS has operating at a loss, the postal service wasn’t viewed as a profit-making business by our country’s founders or throughout most of its history. Moreover, Congress has put requirements and restrictions on it that mean it can’t be run like a business.

The USPS is a public good that supports our democracy, a civil society, and other economic activity, as roads and schools do; it shouldn’t be run like a business to make a profit. We don’t expect the military or the National Park Service to generate a profit, so why should we expect the USPS to generate a profit? Our country’s founders thought of the postal service as critical to ensuring that citizens of the new democracy were well informed and therefore believed it should, among other things, subsidize delivery of newspapers. According to the Postal Policy Act of 1958, the USPS provides an essential public service that promotes “social, cultural, intellectual, and commercial intercourse among the people of the United States”. The Act also states that the USPS is “clearly not a business enterprise conducted for profit.” [3]

However, in 1970, as the era of deregulation and privatization began under President Nixon, the Postal Reorganization Act made the USPS an independent federal agency (instead of a Cabinet agency like the Departments of Education or Defense) and required it to cover its costs. Nonetheless, the law limited the USPS’s ability to increase prices for its services, expected it to deliver mail to every household and business in America six days a week, and required it to keep postal rates the same across the whole country despite substantial differences in the costs of delivering mail in different areas. [4]

Since then, Republicans have been trying to privatize the USPS because it represents a large revenue stream, $71 billion a year, that they would like to see go to their friends and campaign contributors in the private sector. One strategy for doing this has been to undermine the USPS and make it look bad, to make it look like it’s poorly run, and to make it look like it’s operating at a deficit, in order to build an argument that privatizing it would make sense.

In 2006, in what many observers felt was an effort to make the USPS look financially unstable and therefore ripe for privatization, the Postal Accountability and Enforcement Act (PAEA) was passed. It required the USPS to pre-fund retiree health benefits far into the future, which no other federal agency or private business is required to do. Specifically, it required the USPS to pay $5 billion to $6 billion a year into a retiree health benefit fund from 2007 to 2017. This has made the USPS appear to be running a deficit, when, without these payments, the USPS would have reported operating surpluses from 2013 through 2018. [5]

The current slowing of mail service is just another tactic in the effort to make the USPS look bad. The resultant inability to deliver ballots or medicines in a timely fashion, not only makes it look bad, but also undermines its revenue because mailers and shippers are shifting their business to competing, private service providers. For example, the slowdown is forcing the Veterans’ Administration to use private shipping services to get medicines to patients in a timely fashion and Amazon is building up its in-house delivery capacity and its fleet of vehicles.

The USPS is prohibited by law from branching out into new business lines that could boost its revenue and its services to the public. Offering basic banking services is one example, for which there is historical precedent. From 1911 to 1967, the USPS offered savings accounts. In 1967, the Postal Savings System was terminated at the behest of private bankers who did not want its competition. Today, money orders are the only financial service offered by the USPS. [6]

Postal banking is now receiving renewed attention because there are sizable poor urban and rural areas where bank branches are scarce. In addition, private banks have a track record of charging high interest rates and fees to low-income account holders, as well as failing to provide equitable treatment in access to credit and other financial services. As a result, 9 million U.S. households are effectively excluded from banking services and are described as “unbanked”.

The payday lending business has emerged to fill this gap and has grown into a $90 billion business. However, its usurious interest rates and fees, and its business model of locking customers into a cycle of debt that it’s often difficult to escape from, have led to a search for more consumer-friendly alternatives. In 2014, the USPS’s Inspector General noted that the USPS could make profitable loans at a much lower costs to consumers than what payday lenders were and are providing.

In the presidential primaries, a number of the Democratic candidates proposed allowing the USPS to offer basic banking services and Senator Biden, the Democratic nominee for President, supports this policy proposal. It would make basic banking services more accessible and affordable, particularly for low-income households.

In the face of this revived interest in postal banking, which would help the finances of the USPS and benefit the public, Postmaster General DeJoy and Treasury Secretary Mnuchin have reportedly engaged in discussions with megabank JPMorgan Chase (JPMC) about putting its ATMs in post offices and giving JPMC the exclusive right to solicit banking business from postal customers. This is clearly a backdoor effort to eliminate the possibility of postal banking – competition private sector bankers and payday lenders vehemently oppose. (So much for the private sector’s belief in a free market and competition!) Moreover, this doesn’t address the issue of unbanked people because if they don’t have a bank account, they can’t use the ATM. JPMC has a particularly troubling track record in this regard as it has historically failed to provide branch services in low-income, minority, or immigrant neighborhoods. [7]

A postal banking system would provide free usage of Treasury Direct Express cards and other government payment services. This would have streamlined and simplified the distribution of the pandemic emergency relief funds to low-income households who badly needed the $1,200 but didn’t have bank accounts to which the money could be electronically transmitted. Furthermore, the privacy of users’ information would be much better protected by the USPS, which could only collect limited user information and is barred from sharing it. A private bank, on the other hand, will collect as much information as it possibly can and will use it, share it, and sell it for commercial, profit-making purposes.

Mnuchin and DeJoy are engaged in sabotage of the USPS, plain and simple. They want to discredit it as a public agency, undermine its union workers, and shift its revenue to private companies (namely their friends and campaign contributors).

My next post will review policy changes that would strengthen the USPS and better serve the public.

[1]      Dayen, D., 8/18/20, “Treasury’s role in postal sabotage,” The American Prospect (https://prospect.org/blogs/tap/treasurys-role-in-the-postal-sabotage)

[2]      Queally, J., 8/8/20, “ ‘Friday night massacre’ at US Postal Service as Postmaster General – a major Trump donor – ousts top officials,” Common Dreams (https://www.commondreams.org/news/2020/08/07/friday-night-massacre-us-postal-service-postmaster-general-major-trump-donor-ousts)

[3]      Editorial, 8/21/20, “The US postal service lost $0,” The Boston Globe

[4]      Morrissey, M., 8/11/20, “Trump’s war on the Postal Service helps corporate rivals at the expense of working families,” Economic Policy Institute (https://www.epi.org/blog/trumps-war-on-the-postal-service-helps-corporate-rivals-at-the-expense-of-working-families)

[5]      McCarthy, B., 4/15/20, “Widespread Facebook post blames 2006 law for US Postal Service’s financial woes,” PolitiFact, The Poynter Institute (https://www.politifact.com/factchecks/2020/apr/15/afl-cio/widespread-facebook-post-blames-2006-law-us-postal)

[6]      Shaw, C. W., 7/21/20, “Postal banking is making a comeback. Here’s how to ensure it becomes a reality.” The Washington Post (https://www.washingtonpost.com/outlook/2020/07/21/postal-banking-is-making-comeback-heres-how-ensure-it-becomes-reality/)

[7]      Carrillo, R., 8/30/20, “Postal banking: Brought to you by JPMorgan Chase?” Inequality.org (https://inequality.org/research/postal-banking-jpmorgan/)

EXAMPLES OF CONTINUAL CORRUPT CORPORATE BEHAVIOR

Here are three recent examples of corrupt corporate behavior. They show the breadth of the corruption – the leveraging of undeserved power and wealth – from corrupting government policy making to exacerbating economic inequality to corruptly maximizing profits.

U.S. Representative Richie Neal (Democrat of Massachusetts) received $54,000 in a two-month period from lobbyists for corporations with a financial stake in his actions that blocked meaningful control of health care costs. In December 2019, a bipartisan, House and Senate compromise on controlling health care costs was all set to pass as part of a larger appropriations bill. Among other things, the Lower Health Care Costs Act would have eliminated exorbitant surprise medical bills for out-of-network services by limiting their cost to that of equivalent in-network services. It also would have required pharmaceutical firms to disclose information related to increases in drug prices. [1]

Three days after the Lower Health Care Costs Act was finalized and on track to become law, Neal, Chairman of the powerful Ways and Means Committee, undermined it and got it dropped from the larger appropriations bill that was destined to pass into law. He did this by announcing that he and his Republican counterpart would draft a counterproposal, although no details were presented.

On February 7, 2020, less than two months later, Neal released his alternative bill. Key provisions of the Lower Health Care Costs Act had been eliminated or weakened. For example, rather than eliminating surprise medical bills, it included a weak substitute: voluntary negotiations and arbitration. The previous requirement for disclosures relevant to drug price increases was eliminated. In the two-month window from Neal’s blocking of the original bill to the release of his own much weaker bill, he collected $54,000 in donations from 12 lobbyists who worked for clients opposed to the original Lower Health Care Costs Act. These 12 donations represented two-thirds of his campaign contributions in the first quarter of 2020.

If this isn’t corruption, I don’t know what is. It appalls me that this is a legal and accepted campaign fundraising pattern. Clearly, we need to strengthen our campaign finance laws.

On a different front, a report from the Economic Policy Institute [2] found that in 2019 average pay was $21 million for Chief Executive Officers (CEOs) at the 350 largest corporations in the U.S. This is up 14% from the year before and 1,167% since 1978, while a typical worker’s pay has grown by only 14% since 1978. In other words, each $1.00 of a worker’s pay grew to $1.14 over those 40 years while each $1.00 of a CEO’s pay grew to $12.67. The ratio of CEO pay to the average worker’s pay is now 320 to 1, having grown dramatically from 61 to 1 in 1989 and 21 to 1 in 1965.

Skyrocketing CEO pay is a significant contributor to economic inequality, which continues to rise to unprecedented levels. The economy would not be harmed in the slightest if CEOs were paid less and/or taxed more.

There are many policy changes that would address excessive CEO pay if policy makers had the will to enact them, including:

  • The income tax rate on high incomes could be increased to previous levels (which in the 1970s were roughly double current rates),
  • Corporate tax rates could be increase for firms with high CEO-to-worker pay ratios, and
  • A vote by shareholders could be required annually to approve CEO pay.

And then there’s the pharmaceutical industry that continually engages in corrupt corporate behavior, which displays its greed, market power, and lack of concern for stakeholders other than shareholders and executives. Two recent examples are summarized below.

First, Teva Pharmaceuticals is being sued by the federal government for illegally funneling $300 million through two charitable foundations to support the price and sales of its multiple-sclerosis drug, Copaxone. The Justice Departments suit claims the company used the foundations to insulate some patients from big price increases in order to prop up the excessive price of Copaxone for others. From 2007 to 2015, Copaxone’s price more than quadrupled from roughly $17,000 per year to over $73,000. [3]

In addition, in January 2020, Teva had paid a $54 million settlement for bribing doctors with fraudulent “speaking fees” to prescribe Copaxone and other drugs it makes.

Second, Gilead Sciences announced recently that it will charge patients with private insurance $3,120 for the five-day course of treatment with the experimental COVID-19 drug remdesivir. Some government programs may get a lower price and other developed countries will pay about 75% of the U.S. price. Reaction to the price has been mixed with some advocates and members of Congress saying Gilead is taking advantage of Americans during a pandemic. Taxpayers have invested about $100 million in the drug and some feel it should be public owned and not in private hands as a result. The U.S. Department of Health and Human Services (DHHS) recently purchased 500,000 treatment courses, three months’ worth of Gilead’s production, for an estimated $1.5 billion. DHHS will distribute the drug to hospitals around the country. [4]

Clearly, the U.S. needs stronger regulation of pharmaceutical firms, including disclosures relevant to drug pricing (like those in the Lower Health Care Cost Act). We also need to allow and empower Medicare and Medicaid to negotiate drug prices paid to pharmaceutical corporations, as the U.S. Veterans’ Administration, private insurers, and other countries do.

[1]      Shaw, D., 5/5/20, “Neal took big bucks from lobbyists while killing a surprise medical bill fix,” Sludge (https://readsludge.com/2020/05/05/neal-took-big-bucks-from-lobbyists-while-killing-a-surprise-medical-bills-fix/)

[2]      Mishel, L., & Kandra, J., 8/18/20, “CEO compensation surged 14% in 2019 to $21.3 million,” Economic Policy Institute (https://www.epi.org/publication/ceo-compensation-surged-14-in-2019-to-21-3-million-ceos-now-earn-320-times-as-much-as-a-typical-worker/)

[3]      Bloomberg News, 8/19/20, “Talking points: Pharmaceuticals,” The Boston Globe

[4]      Lupkin, S., 6/29/20, ”Remdesivir priced at more than $3,100 for a course of treatment,” National Public Radio (https://www.npr.org/sections/health-shots/2020/06/29/884648842/remdesivir-priced-at-more-than-3-100-for-a-course-of-treatment)

WE CAN’T AFFORD OUR RIGGED TAX SYSTEM

Our unfair tax system is one piece of our rigged economic system. To put our tax system in some perspective, the Internal Revenue Service (IRS) collects nearly 95% of all the federal government’s revenue; it collected $3.5 trillion in taxes in 2018.

My previous post on how our overall economic system is rigged, noted that the CARES Act, the $2.2 trillion coronavirus pandemic response, tilted our tax system further in favor of the wealthy by providing $135 billion in tax cuts for the richest 1% of Americans. This is money that could have been used to provide aid to workers who lost their jobs or to buy personal protective equipment for front-line workers or other needs related to the effects of the pandemic. Ironically, Republicans are now complaining about the cost of the pandemic relief efforts!

Another example of the rigging of our tax system in favor of wealthy individuals and corporations is the substantial tax cuts for corporations and wealthy individuals that were at the center of the 2017 Tax Cuts and Jobs Act (TCJA). The Act failed to deliver any significant benefits to workers and the middle class, despite politicians’ promises. (See this post for more detail.)

However, the tax cuts of the TCJA weren’t enough for the big multi-national corporations, so they lobbied, quite successfully, to rig the tax system even further to their benefit by getting additional tax reductions in the rules and regulations that were written to implement the TCJA. (See this post for more detail.)

A year after the TCJA passed, a study of the largest corporations in the U.S. found that of 379 large, profitable corporations:

  • 91 (almost a quarter of them) paid no federal income tax including Amazon, Chevron, Halliburton, and IBM.
  • Another 56 of them (15%) paid less than 5% of profits in taxes.
  • The average effective federal income tax rate for these 379 large, profitable corporations was 11.3%, barely half of the reduced tax rate of 21% in the TCJA (down from 35%), and the lowest rate in the history of this analysis, which was first done in 1984. [1]

So, not only are wealthy individuals and corporations successful in getting politicians to cut the taxes they owe, but many of them then do everything they can to avoid paying even the reduced (I’m tempted to say, minimal) taxes they owe under our rigged tax system.

Some of them simply don’t pay the taxes they owe. According to a recent report from the Congressional Budget Office (CBO) [2] unpaid taxes averaged $381 billion per year (roughly 14% of federal taxes owed) from 2011 to 2013. The richest 1% of taxpayers are responsible for 70% ($267 billion) of this total. [3]

The amount of unpaid taxes is growing because the IRS’s budget has been cut by 20% since 2010 (after adjusting for inflation), reducing its capacity to crack down on tax avoidance. Audits of the tax returns of the highest income taxpayers have declined by 63% from 2010 to 2018 and now occur at the same rate as for the poorest taxpayers. This has happened because the IRS no longer has the capacity to engage in audits of the complex tax returns of the rich. The number of IRS personnel who handle these complex cases fell by about 40% between 2010 and 2018. [4] Enforcement action against high-income individuals who do not file a tax return has been reduced to simply mailing a notice to them.

The CBO report estimated that for every dollar added to the IRS budget for tax law enforcement, about three dollars in unpaid taxes would be collected. In addition to reduced auditing of wealthy individuals, the frequency of audits of the largest corporations (those with over $20 billion in assets) also dropped from 2010 to 2018; it dropped by roughly 50%.

In his reaction to the CBO report, Senator Sanders stated that “the primary beneficiaries of IRS funding cuts are wealthy tax cheats and large corporations.” [5] In response to an earlier study of audit rates, Senator Wyden stated that “We have two tax systems in this country, and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.” [6]

Our tax system is rigged from top to bottom – from reduced tax rates for wealthy individuals and corporations, to tax loopholes and subsidies for them, to tax dodging by them, to weak enforcement of tax laws to stop their tax avoidance. Hundreds of billions of dollars (actually probably well over a trillion dollars) of tax revenue from wealthy individuals and businesses are lost every year because of unfairly low tax rates, special interest tax breaks, and tax dodging.

When politicians say we can’t afford to support education or unemployment benefits or food assistance or whatever, don’t believe them. What we can’t afford is rich individuals and corporations who don’t pay their fair share in taxes due to our rigged tax system.

[1]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, “Corporate tax avoidance in the first year under the Trump tax law,” Institute on Taxation & Economic Policy (https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/)

[2]      Congressional Budget Office, July 2020, “Trends in the Internal Revenue Service’s funding and enforcement,” (https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-enforcement.pdf)

[3]      Johnson, J., 7/9/20, “‘An absolute outrage’: Sanders rips ‘wealthy tax cheats’ as CBO estimates $381 billion in annual unpaid taxes,” Common Dreams (https://www.commondreams.org/news/2020/07/09/absolute-outrage-sanders-rips-wealthy-tax-cheats-cbo-estimates-381-billion-annual)

[4]      Congressional Budget Office, July 2020, see above

[5]      Johnson, J., 7/9/20, see above

[6]      Kiel, P., 5/30/19, “It’s getting worse: The IRS now audits poor Americans at about the same rate as the top 1%,” ProPublica (https://www.propublica.org/article/irs-now-audits-poor-americans-at-about-the-same-rate-as-the-top-1-percent)

RECENT EXAMPLES OF A RIGGED ECONOMIC SYSTEM

Here are some recent examples of how our rigged economic system favors wealthy individuals and big corporations.

In the CARES Act, the $2.2 trillion coronavirus pandemic response, Republican Senators slipped in a tax break that will give each of 43,000 wealthy business owners a $1.6 million tax cut, on average. Hedge fund investors and owners of real estate businesses (including President Trump and his family) will receive the great majority of this tax cut windfall. [1]

Overall, the CARES Act provides $135 billion in tax cuts for the richest 1% of Americans. This is money that could have been used to provide aid to workers who lost their jobs or to buy personal protective equipment for front-line workers.

Moreover, the Trump Administration and Republicans in Congress are considering a variety of additional tax cuts for investors and businesses for the next pandemic relief bill. [2] Supposedly, these tax cuts will stimulate the economy and help it return to normal, but what they really do is make the rich richer. And while Trump and the Republicans claim that there should be no more spending on unemployment and payments to individuals because we’ve spent enough, tax cuts are simply spending before the fact of revenue collection rather than after the fact. Conceptually, there is no difference, other than who gets the money.

Perhaps the ultimate indication of how rigged our economic system is, is that the wealth of billionaires in the U.S. increased almost $600 billion or 20% between March 18 and June 17 as the pandemic crushed the lives and livelihoods of mainstream Americans. The 643 U.S. billionaires, who are overwhelmingly white males, saw their aggregate wealth increase from $2.9 trillion to $3.5 trillion, an increase of about $1 billion a piece, on average. [3] [4]

Meanwhile, working and middle-class households lost $6.5 trillion in wealth and over 45 million Americans applied for unemployment insurance. The 643 billionaires’ increase in wealth was twice as much as what the federal government spent on the one-time stimulus checks that went to 150 million Americans.

The billionaires and other wealthy individuals have used their incredible wealth to gain extraordinary influence over our politics and policy making. This led to the tax cuts in the CARES Act, in the 2017 Tax Act, and on numerous other occasions. As a result, the taxes paid by these billionaires decreased by 79% as a percentage of their wealth from 1980 to 2018. [5]

As another indicator of a rigged economic system, as the pandemic hit in early 2020 only the richest 20% of U.S. households had regained the same level of wealth that they had had prior to the Great Recession of 2008. The other 80% of households were still struggling with the economic hangover of the 2008 financial industry crash. The 400 wealthiest billionaires, on the other hand, recovered their wealth in three years and in ten years had increased their wealth by over 80%.

On the corporate front, corporations are rewarding their investors, i.e., shareholders, while laying off their workers. For example, Caterpillar closed three facilities in late March and two weeks later made a $500 million distribution to shareholders. Levi Strauss announced on April 7th that it would stop paying workers and furloughed about 4,000 over the following month. Nonetheless, it paid $32 million to shareholders in April. Stanley Black & Decker announced furloughs and layoffs on April 2nd, but within two weeks issued a $106 million dividend to shareholders. [6]

You may recall that in August 2019 the chief executives of 181 companies from the Business Roundtable released a statement announcing that companies should deliver value to customers, workers, and suppliers, as well as shareholders. To-date, three of the executives who signed that statement – ones from Caterpillar, Stanley Black & Decker, and Steelcase – have furloughed workers while paying dividends to shareholders.

In our rigged economic system, the capitalists in government bailout capitalists (i.e., business owners and investors), not workers, home owners, parents, students, schools, states and cities, our social services, or our so-called safety net. Even small businesses get left behind as wealthy investors and corporations are taken care of first and foremost. This was evident in the 2008 bailout after the collapse of the financial and mortgage sectors and it’s evident again in the response to this pandemic.

I urge you to contact your U.S. Representative and Senators and to tell them that pandemic relief should go to workers, middle-class and low-income households, and small businesses. Not only is this what would be fair and democratic, this would support our economy because two-thirds of economic activity is consumer purchases. If consumers can buy, they will keep the economy going and create demand for the goods and services businesses produce. Bailouts to corporations and investors will make them wealthier but will do little to keep the economy going and very little to help the mainstream residents of America.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Stein, J., 4/14/20, “Tax change in coronavirus package overwhelmingly benefits millionaires, congressional body finds,” The Washington Post

[2]      Tankersley, J., 5/6/20, “Trump considers tax-cut proposal for new bill,” The New York Times

[3]      McCarthy, N., 6/22/20, “U.S. billionaire wealth surged since the start of the pandemic,” Forbes

[4]      Americans for Tax Fairness, 6/18/20, “3 months into COVID-19 pandemic: Billionaires boom as middle class implodes,” (https://americansfortaxfairness.org/issue/3-months-covid-19-pandemic-billionaires-boom-middle-class-implodes/)

[5]      Collins, C., 5/11/20, “Billionaires are getting even richer from the pandemic. Enough is enough,” CNN Business (https://www.cnn.com/2020/04/28/perspectives/inequality-coronavirus-billionaires/index.html)

[6]      Whoriskey, P., 5/6/20, “Amid layoffs, investors reap dividends,” The Boston Globe from The Washington Post

CORONA VIRUS PANDEMIC HIGHLIGHTS ILLS OF U.S. ECONOMY AND SOCIETY

The corona virus pandemic has highlighted critical issues in the U.S. economy and society that have led to unnecessary hardship, suffering, and deaths. These include the economic inequality, insecurity, and instability of plutocratic economics, where the playing field is tilted in favor of wealthy corporations and individuals and workers struggle to survive, in some cases literally, with this pandemic.

The neglect of public infrastructure is another such issue highlighted by the pandemic, including the inability of the government to respond effectively to the crisis and the weakened safety net that is now literally leaving people at risk of dying. The pervasive racism of U.S. society has been highlighted by the disproportional rate at which Blacks, Latinos, and Native Americans have gotten ill with COVID-19 and have died from it.

Although the Trump administration’s disorganized and incompetent response to the pandemic (aided and abetted by some in Congress) bears significant responsibility for the high death rate in the U.S. (as documented in this previous post), the larger context is important and provides many lessons that should be learned.

The pandemic has highlighted the value of and risks to front-line workers who meet essential needs, such as providing food, transportation, and care services. They typically receive low pay and often limited benefits (such as paid sick leave and health insurance). They are disproportionately people of color. They interact with the public and therefore are disproportionately likely to be exposed to the virus. Increasing numbers of them are part-time or contract workers who have little if any job security and typically no benefits, including not being covered by unemployment insurance.

Over the last 40 years, safety, health, and economic protections for workers have been undermined. This includes the weakening of the Occupational Safety and Health Administration and more recently the Consumer Financial Protection Bureau (see previous posts on this here and here). Unions, which provide important protections to workers, and the ability to unionize have been weakened. This has resulted in stagnant wages, deteriorating working conditions, and increased economic insecurity for the middle- and lower-income households.

One result has been the highest level of economic inequality in the U.S. in one hundred years. Over 40% of households don’t have $400 for an emergency expense, let alone the savings to support months of self-quarantine. Furthermore, over 40% of full-time workers get no paid sick time. And, given the employer-based health insurance system, a worker (and often his or her family) has no health insurance once he or she loses a job – as over 20 million Americans have by early May 2020. [1] (By the way, the Trump administration has refused to allow these workers to enroll in health insurance through the Affordable Care Act’s insurance marketplaces.)

Plutocratic economics’ beliefs that the private sector is the best solution for all of society’s needs and that bigger businesses are better have led to policies that have benefited the private sector and corporate shareholders and executives over everyone else and over the greater public good. Examples include corporate-friendly trade treaties, the failure to enforce antitrust laws, and the relaxation of corporate regulation, or perhaps more accurately, the skewing of it to benefit large, often multi-national corporations.

Plutocratic economics have resulted in near-monopolistic corporations in everything from the food industry to medical equipment suppliers and medicine manufacturers. The pandemic has highlighted the lack of capacity in the U.S. to produce important goods, including reliance on China for medical supplies needed to respond to a pandemic, such as medical masks and ventilators. It has also highlighted dependence on a few huge corporations and their plants for key food items, such as meat.

In the health care industry, forty years of deregulation, lack of antitrust enforcement, and increasing numbers of for-profit entities have led to, among other things, mergers and closures of hospitals in search of greater profits. This has left the U.S. with some of the lowest numbers of both doctors and hospital beds per capita among countries with advanced economies. This is particularly surprising given that the U.S. spends almost twice as much per capita on health care as other wealthy nations. (The U.S. also has notably worse health outcomes than these other countries, even in good times.) Many localities now have a single provider of hospital services and many rural communities have no local hospital services. (See this previous post for more detail.)

Another example of the failure of this privatized, for-profit health care industry, is that the federal government’s plan to produce thousands of ventilators for pandemic preparedness collapsed in 2012 when the government’s contracted supplier was purchased by a large manufacturer that shut the supplier because it didn’t produce sufficient profit.

Another industry where the vulnerability of our dependence on large, dominant corporations has been exposed is meat processing. The presence of a few dominant meat processors and weak regulation has created the conditions for the inability to supply meat that we are now experiencing. The spread of COVID-19 in the huge processing plants is forcing them to shut down. Fourteen major slaughterhouses, each of which may process 10,000 animals a day, have had to close at least temporarily. The huge Smithfield Foods pork processing plant in South Dakota, which had to close, produces about 4% of the country’s supply of pork. [2]

In pork processing, after decades of mergers that receive little or no antitrust scrutiny, the four largest corporations control at least 70% of the market. This is bad for producers and consumers. Pig farmers often face a single local purchaser for their pigs, leaving them vulnerable to monopolistic business practices. Furthermore, U.S. Department of Agriculture (USDA) regulation favors large slaughterhouses over small ones. The USDA inspection regime for large slaughterhouses has been relaxed to the point that most health and safety inspections are self-performed. The regulation of speed on production lines has been rescinded and workers now report they must move so fast that they can’t stop to cover their faces if they cough or sneeze. In addition, it means they are working shoulder to shoulder, conditions that make it impossible to stop the transmission of disease, such as COVID-19. In the beef market similar concentration has occurred. As a result, the large slaughterhouses are now making a profit of about $550 per cow, while the ranchers make only about $25.

My next posts will discuss the neglect of public infrastructure and the pervasive racism in the U.S. and how they have been exposed by this pandemic.

[1]      Hanauer, N., 4/14/20, “Our uniquely American virus,” The American Prospect (https://prospect.org/coronavirus/our-uniquely-american-virus/)

[2]      Knox, R., 5/4/20, “Monopolies in meat: Endangering workers, farmers, and consumers,” The American Prospect (https://prospect.org/economy/meat-monopolies-endanger-workers-farmers-consumers/)

THE CONSUMER FINANCIAL PROTECTION BUREAU IS NEEDED TO PROTECT US FROM PREDATORY LENDING

The 2008 financial crash was triggered by predatory mortgage loans. As a result, the Consumer Financial Protection Bureau (CFPB) was created to protect consumers from dangerous financial products. There’s a Consumer Product Safety Commission to protect us from dangerous physical products, but prior to the creation of the CFPB, there wasn’t an agency dedicated to protecting consumers from dangerous financial products, such as predatory mortgages and other predatory loans.

Predatory loans are loans where the lender isn’t concerned about the borrower’s ability to repay the loan. In many cases, the lender is just as happy – and may benefit financially – if the borrower defaults on the loan. Predatory lenders usually target people who are desperate for cash or dying to purchase a home, a car, or a consumer product they can’t afford. The loans typically charge very high interest rates, as well as high fees for obtaining the loan and big penalties for failing to meet the terms of the loan, such as being late on a loan payment.

Unethical, deceptive, and/or blatantly fraudulent practices are almost inevitably part of predatory lending. These practices include lying to consumers about the interest rate, fees and other charges, or future payments. Borrowers are often convinced to accept unfair terms through deceptive, coercive, or unscrupulous statements and actions. A predatory lender may add costs for insurance or other services that the borrower doesn’t need or benefit from by presenting them deceptively or as a requirement for the loan.

Predatory lenders routinely target the poor, minorities, the elderly, people with low levels of education, those who don’t understand English well, and people who don’t understand loans or finances well.

Predatory lending is what free market capitalism looks like without regulation. It occurs across the financial industry when good regulation and enforcement aren’t in place, from student loans to car loans and from mortgage loans to payday loans.

Predatory lending is the bread and butter of much of the financial industry as it is a source of big profits. Therefore, the financial industry has fought hard against the CFPB and its efforts to regulate lending since the day the CFPB was conceived.

As a specific example, the predatory lending industry fought a CFPB rule known as the payday lending rule. Promulgated under the Obama administration, it required lenders to assess customers’ ability to repay their loans. This was unwelcome, to say the least, in an industry that makes huge sums of money by charging high fees when customers miss a loan payment (as the lender often expected they would) and then rolling the loan over into a new loan so they can repeat this process over and over. [1]

The predatory lending industry bought access to and influence in the Trump administration by making millions of dollars of contributions to Trump’s campaign and engaging in heavy lobbying. Trump replaced the Obama-appointed Director of the CFPB with a person who is much friendlier to the financial industry.

In addition to an industry-friendly Director, Trump further undermined the work of the CFPB by appointing Christopher Mufarrige as an “attorney-advisor” to the Director. Mufarrige had been the owner of a car dealership that used the “Buy Here Pay Here” model of selling used cars, which provides on-the-spot loans to buyers with poor credit ratings. The loans carry high interest rates and Mufarrige was quick to repossess the car if there was a default, i.e., a late payment. Then, he would sell the same car again and do the same deal all over again.

Mufarrige’s business was covered by the CFPB’s payday lending rule that required a lender to assess each borrower’s ability to repay. Mufarrige had stated that this rule was flawed and unnecessary. Nationwide, Buy Here Pay Here model car dealers were making $80 billion in loans annually and an investigation by the New Jersey Attorney General found that roughly one-quarter of their customers default on their loans.

Mufarrige and other political appointees at the CFPB used false statistics and manipulated evidence to claim there was no value to the requirement to assess a borrower’s ability to repay. This allowed the CFPB to justify proposing watered-down regulation of the payday lending industry that does not require it to assess customers’ ability to repay their loans.

Another example of the need for CFPB regulation of predatory financiers is Progressive Leasing, LLC, (a subsidiary of Aaron’s Inc.), which has as its mission “to provide convenient access to simple and affordable purchase options for credit challenged consumers.” It offers rent-to-own programs through major retailers at over 30,000 stores (including Best Buy, Lowe’s, Big Lots, and Kay Jewelers). In effect, its programs are predatory loans to consumers who can’t afford to pay for their purchases up-front.

Progressive Leasing, LLC, has just settled with the Federal Trade Commission (FTC) for the second time in three months over complaints that it uses deceptive practices. It leads customers to believe they are not being charged extra for financing their purchase. In reality, many customers end up paying more than double the sticker price of the item they purchased. In its training materials, Progressive Leasing instructs retail sales staff to say there isn’t an interest rate associated with the rent-to-own program because it is not a loan. They don’t inform customers of the fees and other charges that are part of the program. [2]

In April, Progressive Leasing paid $175 million to settle claims that it misled consumers after having paid another $175 million in February to settle claims about its disclosure practices. Despite tens of thousands of customer complaints, Progressive Leasing had continued to use the same practices. One FTC Commissioner said the most recent penalty did not go far enough, noting that customers had paid Progressive Leasing more than $1 billion in undisclosed fees and charges.

The Consumer Financial Protection Bureau is badly needed to protect consumers from the greed and unethical behavior of unrestrained lenders. Capitalism without regulation will prey on all of us when we are most in need of financial assistance. The financial industry has shown time and again that without good regulation and enforcement it will ruin people’s lives and our nation’s economy.

I urge you to contact your U.S. Representative and your Senators and ask them to support and protect the integrity of the Consumer Financial Protection Bureau. Encourage them to advocate for strong regulation and enforcement of responsible behavior in the financial industry.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Dayen, D., 5/4/20, “CFPB appointee who helped water down payday lending rule operated a high-cost auto lender,” The American Prospect (https://prospect.org/power/cfpb-appointee-helped-water-down-payday-lending-rule/)

[2]      Bhattarai, A., 4/21/20, “Leasing company agrees to pay $175m,” The Boston Globe from the Washington Post

BIG BUSINESS HAS FAILED US IN THE PANDEMIC

Big businesses and their executives have failed us in the coronavirus pandemic, but nonetheless they are standing at the public trough getting more bailout money than anyone else. This sounds just like what happened in 2008.

Big corporations and their so smart executives didn’t see the business opportunity and respond to the pandemic when it appeared in late 2019 in China. They could and should have seen what was coming and increased the production of ventilators and personal protection equipment (PPE). This was a great opportunity for them to make a profit and garner good publicity but with their short-term, finance-focused mentality, they totally missed the opportunity.

Corporate executives have failed to push back on the Trump administration and the right-wing movement in their disdain for science and expertise. At times, they have promoted it, for example in climate change denial. In the case of the coronavirus, shortly before Trump made his dangerous call for the country to get back to normal by Easter, he had been on a conference call with financial executives who apparently told him that ending social distancing would be good for the financial markets.

Corporate executives – supposedly leaders – have failed to stand up for rational policies and preparedness. In doing so, they have aided and abetted the right-wing anti-government, anti-knowledge, anti-truth movement. By doing everything they can to avoid paying taxes, corporate executives have undermined government capacity to respond to public health crises, among other things.

Lessons that were learned during the Ebola outbreak in 2014 have been ignored and undermined by the Trump administration and its enablers in Congress. They have weakened our public health system and undermined our global health security, including eliminating the key position that coordinates U.S. global health efforts. [1] The Trump administration ignored the plans the Obama administration gave them, developed based on the Ebola outbreak, on how to respond to a public health crisis.

The right-wing movement reflexively opposes government policies and programs, both because it wants unbridled, unregulated opportunities to make profits at any cost to the public good, and because they don’t want to take the chance that any government action would appear to be valuable or successful. They don’t want voters to ever get the sense that government does important things that serve the public interest. [2]

Deregulation, particularly of the financial industry and financial standards, has undermined the financial stability of multiple corporations and industries. There are many financially unstable corporations in the U.S. that are likely to be in or on the brink of bankruptcy without government assistance in the face of the coronavirus pandemic. This is the result of big banks making high-risk loans, vulture capitalists’ leverage buyouts (with high-risk loans), and corporations using virtually all their profits and even borrowed money to buy back stock and pay dividends (which enriches executives and wealthy shareholders). The systematic weakening of the regulation of the big banks since the 2008 crash, including the undermining of the Dodd-Frank law’s financial safeguards put in place after that crash, have contributed significantly to this dangerous situation. [3]

For example, over the last decade the airline industry has spent 96% of the cash generated by profits to buy back its own shares of stock. Therefore, it failed to build a reserve against tough times and is now standing at the public trough asking for a bailout of $50 billion. Coincidentally, the six biggest U.S. airlines spent $47 billion over the last ten years buying their own stock, endangering the financial stability and future of the corporations. [4]

A corporation buying its own stock boosts the price of its shares, which enriches big stockholders and executives. In 2012, for example, the 500 highest paid executives at public U.S. corporations received, on average, $30 million each in compensation with 83% of it based on stock options and stock awards. Therefore, a boost in the price of the corporation’s stock enriches these executives substantially. [5]

Over five decades, corporate executives have outsourced their supply chains to foreign countries, notably China, while ignoring the risks and hidden costs of being dependent on global trade. They did so to increase profits by dramatically reducing labor costs. The coronavirus pandemic has brought the risks and hidden costs of globalization home to roost. Manufacturing operations in China and other countries have shut down due to the pandemic, which has also made the shipping of goods problematic. Foreign governments, especially authoritarian ones like China, are controlling exports, including of critically needed supplies to respond to the pandemic. As a result, corporations dependent on global operations to produce goods for export to and sale in the U.S., don’t have products to sell and consumers can’t get things they need, including critical health care supplies and drugs.

The risks of global supply chains shouldn’t have come as a surprise to smart corporate executives. In the 1930s, when dealing with the Great Depression, economist John Maynard Keynes argued for the globalization of ideas and arts, but the retention at home of the manufacturing of goods. [6]

The bottom line is that corporate executives exacerbated the coronavirus pandemic by:

  • Failing to respond to the emergence of the coronavirus in a timely and effective manner,
  • Failing to support preparedness for a public health crisis and a knowledge-based response when the coronavirus hit,
  • Supporting deregulation of finances that have made their own corporations and our economy more vulnerable to economic stress, and
  • Outsourcing global supply lines making their own corporations and all of us more vulnerable to disruptions in global trade.

[1]      Warren, E., retrieved from the Internet 4/5/20, “Preventing, containing, and treating infectious disease outbreaks at home and abroad,” https://elizabethwarren.com/plans/combating-infectious-disease-outbreaks

[2]      Krugman, P., 3/28/20, “COVID-19 brings out all the usual zombies,” The New York Times

[3]      Warren, E., retrieved from the Internet on 4/5/20, “My updated plan to address the coronavirus crisis,” https://elizabethwarren.com/plans/updated-plan-address-coronavirus

[4]      Van Doorn, P., 3/22/20, “Airlines and Boeing want a bailout – but look how much they’ve spent on stock buybacks,” MarketWatch (https://www.marketwatch.com/story/airlines-and-boeing-want-a-bailout-but-look-how-much-theyve-spent-on-stock-buybacks-2020-03-18)

[5]      Lazonick, W., Sept. 2014, “Profits without prosperity,” Harvard Business Review (https://hbr.org/2014/09/profits-without-prosperity)

[6]      Prestowitz, C., & Ferry, J., 3/30/20, “The end of the global supply chain,” The Boston Globe

UNDER-TAXED CORPORATIONS AND WAYS TO MAKE THEIR TAXES FAIRER

A year’s worth of data on what corporations are actually paying in taxes under the 2017 Tax Cuts and Jobs Act (TCJA) is now available. The TCJA cut the stated federal corporate income tax rate to 21% from 35%, a 40% reduction. It created many new tax breaks and loopholes, while (supposedly) closing some existing ones. However, as a previous post highlighted, corporations have been lobbying vigorously, and in many cases successfully, to have the rules and regulations implementing the TCJA weaken or eliminate its closing of tax breaks and loopholes.

An in-depth review of the financial filings of the Fortune 500 largest corporations revealed that 379 of them were profitable in 2018 and found enough information to calculate an effective federal income tax rate for them. (Their effective tax rate is the portion of their profits they paid in federal income taxes.)

The average effective federal income tax rate for these 379 large, profitable corporations was 11.3%, which is barely half of the stated rate. Ninety-one (91) paid no federal income tax including Amazon, Chevron, Halliburton, and IBM. Another fifty-six (56) of them paid less than 5% of profits in taxes.

The 11.3% average rate is the lowest rate since this analysis was begun in 1984. [1]  The industries with the lowest effective federal income tax rates, all of which paid less than half of the stated rate, were:

  • Industrial machinery (which paid an average effective tax of a negative 0.6%, meaning that on average they got back money from the government)
  • Gas and electric utilities (-0.5%)
  • Motor vehicles and parts (1.5%)
  • Oil, gas, and pipelines (3.6%)
  • Chemicals (4.4%)
  • Transportation and also Engineering & construction (8.0%)
  • Miscellaneous services (8.3%)
  • Publishing and printing (9.8%)
  • Financial (10.2%)

Twenty-five very large corporations received the bulk of the tax breaks that led to these low effective tax rates. They received $37 billion in tax breaks, half of the $74 billion in tax breaks that all 379 corporations received. This is the result of their capacity to influence public policy through lobbying, campaign spending, and use of the revolving door. (Two previous posts here and here provide more details on corporate manipulation of public policies.)

Five of those very large corporations received more than $16 billion in tax breaks (22% of the total for all 379 corporations): Amazon, Bank of America, J.P. Morgan Chase, Verizon, and Wells Fargo.

Large corporations have succeeded in manipulating tax laws, including through the TCJA and its implementing rules and regulations, to unfairly reduce their taxes. This results in small businesses and individuals having to pay more taxes and to bear an unfair portion of the taxes needed to support government at the federal, state, and local levels. Furthermore, it means governments don’t have the resources they need to perform important functions that are in the public interest and desired by taxpayers.

Here are some examples of changes in tax laws that would lead to large corporations paying a fairer share of taxes: [2]

  • Remove tax incentives and loopholes that reward the shifting of profits and jobs to offshore entities. This includes effective implementation of provisions of the TCJA that were meant to address this problem but have been undermined by successful lobbying by multi-national corporations during the writing of implementation rules and regulations. (See this previous post for more details.)
  • Reinstate a corporate Alternative Minimum Tax to ensure that all profitable corporations pay a reasonable amount of income tax each year.
  • Repeal TCJA and previous tax law provisions that allow corporations to deduct expenses for equipment and other capital expenditures much more quickly than the equipment actually depreciates in value. This is an accounting “trick” that reduces profits and, therefore, income taxes.
  • Stop the fictitious creation of large expenses for granting stock options to executives. This is another accounting “trick” that reduces profits and, therefore, income taxes.
  • Require public disclosure of key corporate financial data, including profits and taxes paid, on a country-by-country basis as a routine part of corporate financial reporting. This transparency will allow policy makers and the public to understand whether corporations are paying a fair share of their income in taxes and to adjust policies accordingly.

I urge you to contact your U.S. Representative and Senators to ask them to fix corporate tax laws so that corporations, particularly large, multi-national corporations, are paying their fair share in taxes. Otherwise, you and I and the small businesses we patronize in our communities will continue to bear an unfair burden in funding the public services we need from our governments at all levels.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, “Corporate tax avoidance in the first year under the Trump tax law,” Institute on Taxation & Economic Policy (https://itep.org/corporate-tax-avoidance-in-the-first-year-of-the-trump-tax-law/)

[2]      Gardner, M., Roque, L., & Wamhoff, S., Dec. 2019, see above

CORPORATE LOBBYING AND WHAT THEY GET FOR IT

In 2019, corporate spending on lobbying the federal government grew to a nine-year high of $3.47 billion (yes, Billion).

The health industry spent a record $594 million on lobbying in 2019 as it fought against various proposed reforms of our health care system. Roughly half of this money was spent in opposition to controls on drug prices. As a result, proposals from both the Trump administration and Congress have stalled. [1]

The health industry also lobbied heavily against bipartisan legislation to control surprise medical bills. These are typically bills for services delivered by out-of-network providers that aren’t covered by insurance when patients had no idea this was occurring. New players in this industry, private equity vulture capitalists who have bought emergency medical providers and physician staffing services, opposed this legislation with a $54 million ad campaign funded by “dark money,” i.e., money whose actual source was obscured. As a result of this ad campaign and all the lobbying, despite bipartisan support in Congress and support from the Trump administration, this legislation to limit the dollar amount of surprise medical bills has stalled.

Trade and tariff actions were the target of lots of corporate lobbying; 1,430 lobbyists reported lobbying on trade issues, a record high. The giant corporations with huge resources are lobbying for exemptions from tariffs, while smaller businesses, without the resources to engage in major lobbying campaigns, will probably suffer from the tariffs. One example of lobbying on trade issues is that the Semiconductor Industry Association succeed in getting the Trump administration to reverse its ban on the sale of computer chips to the Chinese corporation, Huawei. [2]

The communications and electronics industry spent a record $435 million on lobbying in 2019. Amazon, Apple, and Facebook all set new records for lobbying expenditures in response to concerns in Congress about their business practices and antitrust investigations in Congress and the Department of Justice.

Corporations are spending huge sums on lobbying because they know there will be a high return on their investment. Success in lowering taxes or tariffs, or in allowing higher prices and revenue, will result in higher profits generally well in excess of the amount spent lobbying.

One argument against allowing huge corporations to exist is that they have huge resources to pay for lobbying and to use to pursue legal actions that skew the balance of power in our society and overwhelm the voice of the people and the public interest.

[1]      Evers-Hillstrom, K., 1/24/20, “Lobbying spending in 2019 nears all-time high as health sector smashes records,” Common Dreams and the Center for Responsive Politics (https://www.commondreams.org/views/2020/01/25/lobbying-spending-2019-nears-all-time-high-health-sector-smashes-records)

[2]      Evers-Hillstrom, K., 1/24/20, see above

HOW CORPORATIONS MANIPULATE PUBLIC POLICY

Big corporations use a variety of techniques to manipulate public policies. The standard tactics that receive the most publicity are lobbying, campaign contributions and (supposedly) independent campaign spending, and the revolving door between jobs in corporations and related jobs in the public sector, including as regulators of the industry where the person formerly worked.

Less recognized and publicized techniques for affecting policy include funding think tanks and (supposedly) independent research and academic publications. Corporations also have funded (supposedly) grassroots organizations to advance their interests. Probably the most famous (or infamous) one is the National Rifle Association (NRA). Although it is a membership organization and is viewed and presented as a grassroots organization, it is heavily funded and supported by the manufacturers of guns and ammunition. It is what is called an “astroturf” organization, i.e., fake grass(roots).

Another tactic that is being adopted by the Big Tech corporations has more traditionally been associated with the military and the defense industry: putting jobs in the districts of key and powerful legislators. The military has for decades worked to have bases, other facilities, and contractors in every state and congressional district. The defense industry corporations have worked to spread their facilities and jobs widely across the country. This meant that when cuts to defense spending, such as closing of some bases, was discussed or when cutting funding for a specific weapon system was raised, it meant that congressional representatives considering voting to cut spending were painted as cutting jobs, often in their own districts. That’s a tough vote to make!

Recently, the four Big Tech corporations, Amazon, Apple, Facebook, and Google, all appear to have adopted this job placement strategy. In late 2017, Rep. Jerry Nadler of New York City became the ranking minority member of the House Judiciary Committee and became its chair when the Democrats won control of the House in the 2018 elections. The House Judiciary Committee is currently investigating the four Big Tech corporations for antitrust violations and anti-competitive behavior.

All four of the Big Tech corporations have announced they are opening offices and bringing jobs to the section of Manhattan which just happens to be in Judiciary Committee chair Jerry Nadler’s district. Amazon has recently signed a lease for space that will house over 1,500 employees. Not only does this put these jobs in Nadler’s district, but if the employees happen to live nearby, they will be voters in his district as well. (Remember that Amazon only months earlier had pulled out of a deal to locate its second headquarters in nearby Queens, despite having been promised (extorted?) $3 billion in public subsidies to locate a promised 25,000 jobs there.) [1]

Apple, Facebook, and Google have either opened new offices in New York City or announced plans to do so. All of them are on the west side of Manhattan in Nadler’s district. There is plenty of real estate elsewhere in the New York City area, so the fact that all four Big Tech firms happen to be locating in Nadler’s district is more than a little suspicious. (By the way, the runner-up for the position Nadler got on the Judiciary Committee was Rep. Zoe Lofgren, whose district includes a chunk of Silicon Valley.)

It is projected that by 2022 the four Big Tech corporations will have over 20,000 employees (and potentially voters) in nine different locations all on the west side of Manhattan in Nadler’s district.

The Judiciary Committee’s investigations, under Chairman Nadler, are the most significant antitrust investigations in decades and their outcomes could have significant effects on how the Big Tech corporations conduct their businesses and on their profits. Placing jobs in Nadler’s district, with the implicit or potential threat that those jobs might be at risk if Nadler and the Judiciary Committee take action that is viewed unfavorably by the Big Tech firms, is an escalation of these corporations’ on-going and persistent efforts to manipulate public policies in their favor. [2]

[1]      Dayen, D., 1/10/20, “Silicon Valley’s big apple gambit,” The American Prospect (https://prospect.org/power/silicon-valleys-big-apple-gambit/)

[2]      Dayen, D., 1/10/20, see above

NO BENEFITS FOR WORKERS FROM THE 2017 TAX CUT ACT DESPITE THE PR

The actual effects versus the claimed effects of the Tax Cuts and Jobs Act (TCJA) are becoming clearer all the time. (The TCJA is the December 2017 tax cut bill rushed into law by Republicans in Congress and President Trump.) A previous post provided a summary of what the TCJA did, the promises made about its effects, and the actual effects of the law. My last post reviewed the largely failed provisions that were supposed to tax the profits of multinational corporations more fairly.

Promised benefits for workers have failed to materialize and claims that the Tax Cuts and Jobs Act resulted in bonuses and wage increases for workers are unfounded. When President Trump signed the TCJA in December 2017, he stated that corporations would give “billions and billions of dollars away to their workers.” This has not happened.

Over the last two years, there has been no increase in workers’ compensation that can be attributed to the TCJA. In the short-term, to support the President and the rationale for the TCJA, some large corporations asserted that the bonuses they gave to workers in late 2017 were due to the TCJA. These bonuses were largely a public relations stunt. A few of those employers, such as AT&T and Walmart, engaged in major publicity around giving workers bonuses and then quietly laid off thousands of workers shortly thereafter.

The TCJA did incentivize the shifting of one-time bonuses from 2018 into 2017. Because expenses recorded in 2017 reduced 2017 profits when the tax rate was higher than it would be in 2018, it was advantageous to book as many expenses as possible in 2017. The value of the deduction of expenses, including the bonuses, from profits was more valuable under the 35% tax rate in place in 2017 than it would be in 2018 when the tax rate would only be 21%. In other words, it was cheaper for the corporations to pay the bonuses in 2017 than it would have been to pay them in 2018. Moreover, the TCJA provided a perverse incentive for the bonuses to be only a one-time occurrence, because in 2018 and beyond there would be increased incentives to maximize profits because of the reduced tax rate, which might not stay at that low level forever.

Nonetheless, bonuses accounted for only 2.7% of workers compensation in 2017, only a slight increase from 2.5% in 2016. Furthermore, this was a one-time blip as bonuses have declined since then.

If the TCJA were to have long-term or permanent effects on pay and the number of jobs, they would only be realized over a period of months or years, not immediately upon passage of the law, because making the necessary investments takes time. For the TCJA’s cut in the corporate tax rate to create a long-term, permanent increase in workers’ pay, corporations would need to use their tax savings for investments in improved equipment, worker skills training, or other steps that would improve workers’ productivity. To permanently increase the number of jobs, corporations would need to invest in increased production capacity. [1] Therefore, any compensation increases or growth in the number of jobs announced in late 2017 and early 2018 that were claimed to be results of the TCJA were public relations (PR) stunts, not effects of the TCJA.

Furthermore, corporate profits and cash reserves were high before the enactment of the TCJA, so corporations already had the resources needed to increase workers’ compensation or expand production if they wanted to. They weren’t increasing workers’ compensation or the number of jobs before the TCJA and they haven’t done so afterwards.

As background, corporate profits had risen dramatically from 5% of Gross Domestic Product (GDP, the total output of the U.S. economy) in 1990 to 9% in 2019, after having been largely in the range of 5% to 7% from 1952 to 1990. Furthermore, corporate taxes have been falling since the 1950s, so corporations have been keeping more of their profits. Taxes on corporate profits were 5% of GDP in 1952 and fell to 4% from the late 1950s to the late 1960s. They fell further to 3% of GDP from 1970 to 1980, and then to roughly 2% of GDP from 1982 until 2017. [2]

The bottom line is that the Tax Cuts and Jobs Act of 2017 has delivered none of the promised benefits for workers and low- and middle-income households, but has delivered much greater benefits than were promised (or admitted to) to wealthy individuals and to large, particularly multi-national, corporations. Increases in workers’ compensation that have occurred since the passage of the TCJA are ones that economic analysis indicates would have occurred anyway. Business investment and economic growth have not increased as promised. The promise of more fairly taxing multi-national corporations’ profits to increase tax revenue and discourage the shifting of profits and jobs overseas has been undermined. The multi-national corporations’ lobbying campaign got rules and regulations written for the implementation of the TCJA that significantly reduced the expected taxes on their profits. (See my previous post for more details on this.)

The truth about the Tax Cuts and Jobs Act is that despite the promises and public relations announcements that said otherwise, it has been a huge windfall for wealthy corporations and individuals, and of little or no benefit to workers. Historical experience and economic analysis indicated this would be the result in advance of TCJA’s enactment. The claims of benefits trickling down to workers from tax cuts for corporations and wealthy individuals had been convincingly rebutted. Nonetheless, proponents of the TCJA used this claim to argue for its tax cuts.

I believe many of the people who supported and voted for the TCJA knew what its actual effects would be. They lied about it because admitting that they wanted to enrich their political supporters and big campaign donors would have been unseemly and a political liability.

[1]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, “Still terrible at two: The Trump tax act delivered big benefits to the rich and corporations but nearly none to working families,” The Center for Popular Democracy and the Economic Policy Institute (https://www.epi.org/files/uploads/20191211_Trump-Tax-Bill-R6.pdf)

[2]      Corser, M., Bivens, J., & Blair, H., Dec. 2019, see above

VULTURE CAPITALISTS ARE IN OUR HEALTH CARE SYSTEM!

Private equity financiers (I described them as “vulture capitalists” in a previous post) have done extensive damage to individual firms (e.g., Toys R Us and Sears) and whole industries (e.g., food supermarkets and local newspapers). (See this previous post for more detail.) Private equity investing (i.e., “vulture capitalism”) is financial manipulation used to extract profits from companies without regard to the health or survival of the companies, or the welfare of their workers, customers, and communities. Vulture capitalism fails to produce benefits for anyone other than the rich private equity financiers.

Vulture capitalists, driven by profits and greed and nothing else, have taken a truly scary step: they are invading our health care system. The main focus has been on smaller community and rural hospitals.

Perhaps the most dramatic case to-date is the closing of Hahnemann Hospital by its private equity owner. The hospital was a 171-year-old institution in central Philadelphia that primarily served low-income patients of color. It closed in September 2019, 18 months after it was bought by a private equity vulture capitalist who apparently was only interested in harvesting some short-term cash and then closing it to sell the valuable downtown real estate to a developer. The land’s redevelopment will presumably further the gentrification of the area. [1]

Even without the entry of private equity money into the hospital industry, the industry has been consolidating, resulting in growing concentration and monopolistic power as has happened in so many industries in the U.S. in recent years. (See this previous post on the growth of monopolistic power in the U.S. economy.) By 2016, 90% of hospital markets were deemed to be highly concentrated. Nonetheless, in 2017, 115 more mergers and acquisitions were announced. Hospital executives tell antitrust regulators that their mergers and acquisitions will improve quality and increase efficiency (as executives do in other industries).

The result has been increased concentration and reduced competition. Even if costs do decline, consumers do not benefit from lower prices or reduced health insurance premiums. Increased concentration and monopolistic power allow hospitals to increase their profits by negotiating higher prices with health insurers. There is some evidence that with increased concentration health outcomes are worse and the quality of care is more inconsistent. [2]

The pattern of the vulture capitalists in the hospital industry is just like their mode of operation in other industries: buy hospitals using lots of borrowed money (i.e., a leverage buyout) and then make the hospitals pay off the loan and interest. Often the hospital’s real estate or facilities are sold to a separate entity (usually controlled by or affiliated with the vulture capitalist) and then leased back to the hospital, requiring it to pay rent. In addition, the private equity firm often takes large dividend payments and significant management or monitoring fees from the hospitals. (These actions are routine in private equity deals.)

Typically, these vulture capitalists plan to take their profits in 3 to 5 years and then sell off the hospitals or put them into bankruptcy. Rarely is there any commitment to making investments in technology, workers’ skills, or quality. Moreover, the costs the vulture capitalists load onto the hospitals (i.e., debt, rent, and other payments) often require them to cut costs elsewhere, such as through staff reductions or pay cuts, and the termination of services that aren’t the most profitable ones.

One somewhat unique feature of private equity firms’ purchases in the hospital industry is that the hospitals are usually small ones often in geographically dispersed areas. This means the mergers and acquisitions often fall under the radar of antitrust regulators. In some cases, the vulture capitalists will buy a bigger hospital first and then add several smaller ones.

When a private equity firm closes a whole hospital or specific services of a hospital, it can create real hardship for patients in the area. If the hospital, let alone a group of hospitals, is in a rural area, the result may be that hospital services are simply not available to residents without traveling substantial distances. For example, in 1996, the private equity firm Forstmann Little & Co. began building a portfolio of dozens of hospitals. In 2016, amid a series of restructurings and sales, it created Quorum Health Corp. that consisted of 38 small, mostly rural hospitals, 84% of which were the sole provider of acute-care hospital services in their areas. Quorum was saddled with roughly $1 billion in loans to repay. In the next three years, Quorum closed or sold 11 of these rural hospitals, often leaving area residents with no or limited access to acute medical care. [3]

The private equity industry’s model of vulture capitalism, where profits supersede any consideration of the well-being of companies’ workers, customers, communities, or the economy as a whole, might arguably be okay in retail businesses for non-essential goods, but in essential businesses vulture capitalism should not be allowed. It reduces the financial stability and resiliency of companies so they don’t have the resources to invest in innovation or quality and often are so financially stressed that they cannot survive.

In health care, this literally becomes a matter of life and death. The rules that govern our financial system must be changed to rein in the private equity industry and prevent its vulture capitalism from doing serious harm to individuals, communities, and our economy.

[1]      Applebaum, E., 10/7/19, “How private equity makes you sicker,” The American Prospect (https://prospect.org/health/how-private-equity-makes-you-sicker/)

[2]      Applebaum, E., 10/7/19, see above

[3]      Applebaum, E., 10/7/19, see above

WHY OUR MAINSTREAM MEDIA HAVE FAILED IN THEIR COVERAGE OF CLIMATE CHANGE

For decades now, our mainstream media have failed in their coverage of climate change. Earlier this year, Bill Moyers and the Schumann Media Center, which supports independent journalism, announced the creation of the Covering Climate Now project, a partnership of The Nation magazine and the Columbia Journalism Review (CJR). They hope to increase the coverage of climate issues and help journalism live up to its responsibility to connect the dots and tell important stories so that the public can understand them and act on the information presented. As Bill Moyers, the iconic journalist, said in his amazing speech (30 minutes) kicking off the project (there’s a 2.5 minute excerpt on the CJR website if you scroll most of the way down), “Reporting the truth is always the basis of any moral authority we can claim as journalists.” [1]

The first president to mention global warming was President Johnson in a speech to Congress in 1963. However, attention to it in public policy got lost due to a host of other hot issues (no pun intended). The fossil fuel industry, however, was paying attention and undertook a disinformation campaign that continues to this day.

In October 1970, the Mobil Oil Company began paying The New York Times to publish regular Op-Eds, also called advertorials, written by Mobil’s press office. Mobil viewed them as part of a major political campaign to prevent action against fossil fuels due to global warming. By 1983, Mobil’s press office felt they had succeeded in shifting the Times’ editorial positions to those Mobil had been espousing. [2]

Today, it is increasingly common for the mainstream media to present non-advertising “news” content that has been prepared by or for large corporations. For example, The New York Times and The Washington Post have received hundreds of thousands of dollars from fossil fuel companies and organizations, such as ExxonMobil, Shell, Chevron, and the American Petroleum Institute, to create the industry’s advertorials, which they then publish. [3]

The mainstream TV media haven’t done any better: combined coverage of climate change by the three major networks and Fox was just 142 minutes in 2018, down 45% from 2017. That’s an average of only 41 seconds per week per outlet! Not only have the major TV networks basically ignored this story, but they have failed to counter the false and deliberately deceptive propaganda promoted by the fossil fuel industry. [4] For example, extreme-weather events are linked to climate change, but the mainstream media almost never mention the climate change connection. Local weather forecasters are doing more to report the links between weather and climate change than the national networks.

The fight over climate change featuring environmentalists and scientists versus the powerful fossil fuel industry and its political supporters sounds like a David vs. Goliath story to which the mainstream media would love to give lots of coverage. But that has not been the case to say the least. [5] For example, in our general election presidential debates, the moderators who are from the mainstream media have not asked a single question about climate change in 2016, 2012, 2008, or ever.

The mainstream media, both TV and print, have been brainwashed by the fossil fuel industry’s propaganda to view climate change as a political story rather than a science story. The fossil fuel industry has successfully spread confusion and doubt about the science using the same public relations strategies and even some of the same “scientists” as Big Tobacco did in its campaign to spread doubt about the dangers of smoking. For example, Frederick Seitz, a physicist by training, received $45 million from Big Tobacco to obscure the risks of smoking and then, with funding from the fossil fuel industry, became the prominent US denier of human-caused climate change. [6]

The fossil fuel industry has bought enough politicians’ support through campaign spending and lobbying to make climate change appear to be a political issue rather than a scientific one. [7] The Republican Party in particular has bought into using climate change as a campaign issue (or perhaps it has been bought by the fossil fuel industry). Therefore, the mainstream media cover climate change as an issue of politics and not science.

As a result, the media typically give equal coverage to the scientific consensus that human activity is a major contributor to global warming and the fossil fuel industry’s propaganda that global warming is exclusively due to natural fluctuations in global temperatures and therefore not related to fossil fuel use.

Responsibility for the failure to accurately report and act on climate change goes beyond the mainstream corporate media and the fossil fuel companies. In many ways it includes much of corporate America, for example through the U.S. Chamber of Commerce. The Chamber is supported by most of the large corporations in the U.S. and has aggressively opposed action on climate change with multiple tactics: massive lobbying, substantial campaign spending, and extensive involvement in lawsuits and other legal actions. The Chamber spends roughly three times as much on lobbying as the next most active group. It has spent almost $150 million on congressional campaigns since 2010, when the Citizens United Supreme Court decision unleashed corporate campaign spending. In most congressional election cycles, the Chamber is the biggest “dark money” spender, meaning that it shields the identity of the donors for its spending. This provides corporations with a protective veil; they can oppose climate change action through contributions to the Chamber and no one will know. The Chamber is also active in court cases. In a three-year period during Obama’s presidency, it was involved in over 500 court cases. Although not all these court cases and all this spending is in opposition to climate change action, environmental issues were the third most frequent subject of its court cases and energy and environmental issues are a major part of its lobbying activities. The Chamber’s position on energy and environmental issues inevitably is in support of fossil fuels. [8] It would be hard to overstate the political clout of the U.S. Chamber of Commerce and the laundry list of major corporations that provide its funding.

In summary, the mainstream media have failed in their coverage of climate change in terms of both quantity and quality (i.e., accuracy) because of:

  • Their conflict of interest due to revenue from the fossil fuel industry for advertising and the preparation of advertorial Op-Ed pieces,
  • Brainwashing by fossil fuel industry propaganda, and
  • Being part and parcel of corporate America.

[1]      Moyers, B., 7/15/19, “What if reporters covered the climate crisis like Murrow covered World War II?” The Nation (https://www.thenation.com/article/climate-change-media-murrow-boys/)

[2]      Westervelt, A., May 6, 2019, “Why are The New York Times and The Washington Post creating ads for Big Oil?” The Nation (https://www.thenation.com/article/big-oil-pr-fossil-fuel-lobby-herb-schmertz/)

[3]      Westervelt, A., May 6, 2019, see above

[4]      Moyers, B., 7/15/19, see above

[5]      Hertsgaard, M., & Pope, K., 4/22/19, “The media are complacent while the world burns,” The Nation (https://www.thenation.com/article/climate-change-media-aoc-gnd-propaganda/)

[6]      Hertsgaard, M., & Pope, K., 4/22/19, see above

[7]      Hertsgaard, M., & Pope, K., 4/22/19, see above

[8]      Schumer, C.E., & Whitehouse, S., 11/21/19, “Climate change and dark money,” The Boston Globe

MEDICARE’S PROBLEMATIC PRIVATE OPTION

Medicare was created in 1965 when people over 65 found it virtually impossible to get private health insurance coverage. Medicare made access to health care a universal right for Americans 65 and over. It improved the health and longevity of older Americans, as well as their financial security. Initially, Medicare consisted solely of a public insurance program that included all seniors.

Today, a mixed public-private health insurance market exists under Medicare. An examination of it is very instructive in terms of how a mixed public-private system would be likely to work if extended to people under age 65. The Medicare-eligible population has been able to enroll in private health insurance plans since the 1980s. The private health insurance industry lobbied heavily for access to the large, Medicare market.

Private health insurers argued for a private option under Medicare, stating that they could deliver better quality services at lower cost due to their efficiencies, thereby saving Medicare money. Initially they were paid 95% of what a Medicare enrollee cost based on promised efficiencies. However, once they had their foot in the door, the private insurers successfully lobbied for their payment rate to be increased. In 2009, it was as high as 120% of what a senior enrolled in the traditional, public Medicare program cost.

Not only have private health insurers been getting paid more per enrollee than it costs the government to serve seniors in the traditional, public Medicare insurance pool, but they have healthier enrollees who cost less to serve! Clearly, these private Medicare plans, referred to as Medicare Advantage plans, have not been saving Medicare any money, but rather costing it more than it would have to serve these seniors directly. [1] [2] And there’s no evidence that they are providing better quality services that would justify such a high rate of reimbursement. The Affordable Care Act is now working to lower this over-payment to private insurers.

Since shortly after they began, the private Medicare Advantage plans have been getting over paid, and this is exactly what is likely to happen if private insurers are allowed to participate in a universal health insurance program for people other than seniors.

There are four main strategies the Medicare Advantage plans have used to get paid more than they should. Private insurers in a mixed market for non-seniors would be expected to do the same things: [3]

  • Cherry-picking: The private Medicare Advantage insurers have worked to enroll  healthier seniors who are less expensive to serve. Through targeted advertising, special benefits (e.g., subsidized health club memberships), and specialized outreach they have successfully attracted a healthier than average clientele. In the market for non-seniors, the private insurers can be expected to successfully work to attract younger, healthier, and therefore less expensive enrollees, leaving sicker and more expensive people for the public plan.
  • Lemon-dropping: The Medicare Advantage insurers have implemented strategies to get sick and expensive enrollees to drop out of their plans, even though this is ostensibly illegal under Medicare. For example, they limit access to providers of expensive specialty services, require high co-pays for expensive drugs, and put a complex approval process and other barriers in front of patients trying to access expensive care. The data from Medicare Advantage plans are clear, when patients need expensive services like dialysis or nursing home care they switch back to the public, traditional Medicare in large numbers because the private insurers make it difficult to access these services and get them paid for. In the market for non-seniors, the private insurers can be expected to drop or force out the sicker, more expensive patients, dumping this burden onto the public plan.
  • Over-reporting the seriousness of diagnoses: Medicare Advantage insurers report more and more serious diagnoses than they should. This makes their enrollees appear to be sicker than they are and therefore eligible for more or higher reimbursements from Medicare. For example, knee pain can be reported as arthritis and an episode of distress can be reported as major depression. Medicare’s occasional audits of Medicare Advantage insurers indicate that they are getting paid $10 billion annually for fabricated diagnoses and much more for what appear to be overly serious diagnoses. Private insurers in a non-seniors’ market can be expected to game the payment system this way too.
  • Lobbying Congress for generous payments: Over the 35 years of Medicare Advantage plans, the private insurers have cost Medicare more than it would have cost for Medicare to serve their enrollees directly because Congress has directed Medicare to pay the insurers higher premiums than are warranted. These higher premiums support Medicare Advantage plans’ 14% overhead (e.g., profits, advertising, and executive salaries), which is seven times more than Medicare’s overhead of only 2%. The over-payment of Medicare Advantage plans peaked in 2009 at around 120% of the per patient costs of traditional, public Medicare. Since then, the over-payments have been reduced by provisions of the Affordable Care Act (aka Obama Care). The private health care industry has lots of lobbying clout with Congress and can be expected to strongly and successfully lobby for favorable treatment under any expansion of health care coverage to non-seniors, as they did when the Affordable Care Act was being passed. At that time, for example, they were able to eliminate a public option plan from being offered because they were scared (perhaps even knew) that a public option like Medicare for All might well out-perform them.

As the debate about changing the U.S. health care system to a universal single-payer system, e.g., Medicare for All, has been unfolding, some opponents of a single-payer system have proposed a mixed system with both private health insurers and a public health insurance option, often referred to simply as a “public option.”

Unfortunately, a mixed public-private health insurance market for non-seniors won’t achieve the efficiencies and quality of a single-payer system as is evident in the Medicare Advantage experience. A single-payer system is the only way to both improve quality and control costs. (See this previous post for more details.)

I urge you to contact your U.S. Representative and Senators, as well as candidates in the 2020 election, and ask them where they stand on moving toward a single-payer health insurance system, e.g., Medicare for All. The health care and related industries will lobby strenuously against this, but in the end a single-payer health care system will provide better health care and health outcomes for Americans and will save us all a lot of money.

You can find contact information for your US Representative at  http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

[1]      Patel, Y.M., & Guterman, S., 12/8/17, “The evolution of private plans in Medicare,” The Commonwealth Fund (https://www.commonwealthfund.org/publications/issue-briefs/2017/dec/evolution-private-plans-medicare)

[2]      McGuire, T.G., Newhouse, J.P., & Sinaiko, A.D., 2011, “An economic history of Medicare Part C,” The Milbank Quarterly (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3117270/pdf/milq0089-0289.pdf)

[3]      Himmelstein, D.U., & Woolhandler, S., 10/7/19, “The ‘public option’ is a poison pill,” The Nation (https://www.thenation.com/article/insurance-health-care-medicare/

MONOPOLISTIC COMPANIES HARM THE ECONOMY AND DEMOCRACY

Forty years of plutocratic economics has resulted in monopolies and near monopolies in many business sectors due to the failure to enforce antitrust laws. This concentration of economic power, and, along with it, political power, has undermined our democracy both economically and politically. It has also contributed to rapidly growing income and wealth inequality. (For information on plutocratic economics in general, see this previous post. For more on the effects of its deregulation of business, see this post.)

The Sherman Antitrust Act of 1890 laid the groundwork for antitrust regulation. Its purpose was to reduce the size and economic power of large, monopolistic companies. It was based on the federal government’s responsibility to regulate interstate commerce. At the time, the conglomeration of companies under trusts had come to dominate several major business sectors, such as the oil industry under the Standard Oil Trust. These trusts were monopolistic and destroyed competition.

The Sherman Act banned business activity that was “in restraint of trade or commerce among the several states, or with foreign nations”. The Sherman Act sought to balance the power of commercial, for-profit enterprises and the public interest. [1] The Clayton Antitrust Act of 1914 built on the Sherman Act and states that any merger is illegal if “in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”. The reference to “any section of the country” is significant because when a few companies dominate an industry, they often have effectively divided the country up geographically so each one has a monopolistic position in some areas. Therefore, to effectively enforce antitrust laws, industry concentration should be analyzed in markets properly defined by product or service AND geography. Such an analysis often finds that market concentration is much higher than a nationwide analysis would suggest. [2]

In the 1960s, a concerted effort to undermine the historically broad economic and public interest goals of antitrust enforcement began. It was spearheaded by a group from the Chicago Law School with Robert Bork playing a leading role. (He was nominated for the Supreme Court by President Reagan in 1987 but was rejected by the Senate.) Bork and others argued that the only legitimate use of antitrust laws was to maximize consumer welfare, narrowly defined as low prices (often presumed to be the inevitable result of the economies of scale possible for large companies). This theory was adopted by pro-business economists, judges, and policy makers, including President Reagan.

Under President Reagan, antitrust enforcement was significantly scaled back and the Federal Trade Commission actually stopped collecting data on industry concentration. In eight years, President George W. Bush’s administration did not initiate a single antitrust case. [3] [4] The number of mergers grew from 2,308 in 1985 to 15,361 in 2017. [5]

Since 2000, three-quarters of U.S. industries have become more concentrated, including the technology, health care, communications, defense, and agriculture industries. This is perhaps most noticeable in the high-tech industry where Google and Facebook now control over 60% of all digital advertising and Amazon controls over half of all e-commerce. [6] From 1997 to 2012, the top four firms in any given industry saw their share of industry-wide revenue grow from 24% to 33%. [7]

There’s clear evidence that entrepreneurship and the number of start-up companies is down in the U.S. This is mostly due to dominant companies suppressing competition in multiple ways. They can block the entry of new firms simply by dominating the consumer and supplier markets. They can simply acquire competitors, especially given the lack of antitrust enforcement. Or these large companies can overwhelm start-ups in the market through fair and unfair competition using their vast resources. Among the evidence of reduced entrepreneurship and start-ups is that from 1987 to 2015 employment by companies under 10 years old has declined from 33% of the workforce to just 19%. [8]

Fewer, bigger employers have negative effects on workers and their compensation. Industry concentration means employees have fewer options, reducing their bargaining power. One reflection of this is the reduction in employment by newer companies. Furthermore, increasing numbers of companies, including low-wage, franchise businesses like McDonald’s, are forcing workers to sign non-compete agreements and franchisees to sign non-poaching agreements (banning solicitation or hiring of employees from other franchisees), further limiting workers’ options for employment, advancement, and wage growth. [9]

The growing size and reduced number of companies have exacerbated the economic divide between urban and rural areas. The large, highly profitable companies tend to be in urban areas, and people and economic vitality are drained from rural areas. Furthermore, the relatively small number of highly profitable, very large companies has made a handful of big cities the big economic winners, leaving many other cities behind.

The growing number of large, dominant companies also gives them power over suppliers. The condition of having a dominant buyer in a marketplace is called monopsony. It allows buyers like Wal Mart or Amazon to drive down suppliers’ prices, often forcing them to reduce the compensation of their workers, or in some cases, to drive the supplier out of business and take over the business for themselves. [10]

The result of industry concentration in the U.S. economy has been soaring profits, stagnant wages, and falling investment in companies’ equipment, research, and product development. In addition, service quality has fallen, along with entrepreneurship and innovation. This combination of rising profits with falling investment and stagnant worker pay violates the basic economic theory of competitive markets.

There is only one explanation: monopoly or near-monopoly conditions that allow companies to give their increased profits to owners while under-investing in human and physical capital, as well as service quality and innovation, because they can squelch competition, for example by buying up or crushing competitors and innovators. [11]

My next post will present solutions to the problem of large, monopolistic companies dominating our economy and democracy.

[1]      Paul, S., 6/24/19, “The double standard of antitrust law,” The American Prospect (https://prospect.org/article/double-standard-antitrust-law)

[2]      Abdela, A., & Steinbaum, M., Sept. 2018, “The United States has a market concentration problem,” The Roosevelt Institute (https://rooseveltinstitute.org/wp-content/uploads/2018/09/The-United-States-has-a-market-concentration-problem-brief-final.pdf)

[3]      MacGillis, A., Jan./Feb./March 2019, “Taking the monopoly threat seriously,” Washington Monthly (https://washingtonmonthly.com/magazine/january-february-march-2019/taking-the-monopoly-threat-seriously/)

[4]      Dayen, D., 6/24/19, “In the land of the giants,” The American Prospect (https://prospect.org/article/land-giants)

[5]      Abdela, A., & Steinbaum, M., Sept. 2018, see above

[6]      MacGillis, A., Jan./Feb./March 2019, see above

[7]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/16/18, “The state of competition and dynamism: Facts about concentration , start-ups, and related policies,” Brookings (https://www.brookings.edu/research/the-state-of-competition-and-dynamism-facts-about-concentration-start-ups-and-related-policies/)

[8]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/16/18, see above

[9]      Covert, B., 2/15/18, “Does monopoly power explain workers’ stagnant wages?” The Nation (https://www.thenation.com/article/does-monopoly-power-explain-workers-stagnant-wages/)

[10]     Abdela, A., & Steinbaum, M., Sept. 2018, see above

[11]     Covert, B., 2/15/18, see above

PLUTOCRATIC ECONOMICS HAS FAILED WORKERS

Forty years of right-wing, plutocratic economics (see this previous post for background) has produced stagnant worker compensation, decimating the middle class and leaving growing numbers of low-wage workers struggling to survive. The plutocratic economics of wealthy, elite members of society has intentionally and dramatically weakened public policies that provide support for workers and an economic safety net (including the minimum wage, unemployment benefits, and the right to join a union).

After adjusting for inflation, workers’ compensation has barely increased since 1980, in large part because:

  • The minimum wage’s value has been eroded by inflation and
  • Workers’ negotiating power with their employers has been decimated by concerted attacks on unionization and by the growing size and economic power of employers.

Currently, we are in the longest period since the establishment of the minimum wage, 12 years, without an increase in it. The $7.25 per hour federal minimum wage (about $15,000 per year for a full-time worker) has lost 17% of its purchasing power (or more than $3,000) over those 12 years. Since its peak value in February 1968 at about $22,000 per year for full-time work (adjusted for inflation), the federal minimum wage has lost 31%, or almost one-third, of its purchasing power ($6,800). [1]

As a result, minimum wage workers at Wal Mart, fast food outlets, and elsewhere do not earn enough to survive without public benefits such as food stamps, housing subsidies, subsidized health insurance, and the Earned Income Tax Credit. These public benefits for workers mean that the government and we as taxpayers are subsidizing large, very profitable companies when they pay their workers too little to live on. This is one example of government welfare for companies.

The proponents of plutocratic economics claim that raising the minimum wage will reduce the number of jobs and, therefore, hurt workers, but this ignores the obvious benefits for workers. A high estimate is that 1.3 million jobs might be lost – half of them for teenagers and many of those for adults being part-time jobs. On the other hand, wages would increase for over 27 million workers (roughly one out of every six workers). With an increase to $15 per hour (up from the current $7.25), workers would receive an overall increase in income of $44 billion. This would lift 1.3 million Americans out of poverty and significantly increase consumer spending in local economies. On the downside, companies would raise prices by an estimated 0.3% and business owners would lose $14 billion of profits (a small amount [0.07%] in a $21 trillion economy).

A study of the actual experiences in states and cities that have recently raised their minimum wages found no reductions in the number of jobs or hours at work. It did find that workers’ incomes increased and that poverty declined. [2]

Unionization is important because it allows workers to band together and increase their negotiating power when bargaining with employers for pay and benefits. The rate of unionization in the United States today is 10.5% overall (down from over 25% in the 1950s) and only 6.4% of private-sector workers are unionized. In the early 1950s, unions included over 40% of workers in manufacturing, over 60% in mining, and over 80% in the construction, transportation, communications, and utilities sectors. The attacks on unions have been very successful, to say the least, in reducing unionization and workers’ negotiating strength. By way of comparison, the rates of unionization in Scandinavia range from 81% in Iceland to 71% in Sweden to 52% in Norway. Under pressure from global trade, these rates have come down in recent years; for most of the postwar period the rate in Sweden was in the mid-80s, for example.

The disparity in unionization rates between the U.S. and the Scandinavian countries has produced a dramatic difference in economic inequality. The best measure of economic inequality is a nation’s Gini Coefficient, where a higher number indicates greater economic inequality. The scale is from zero to one with zero indicating complete economic equality (everyone has the same income) and one indicating that all of a nation’s income goes to just one person. In Denmark and Sweden, the Gini Coefficient is 0.25; in Finland and Norway, it’s 0.27; and in Iceland, it’s 0.28. However, in the United States, it’s 0.47. [3]

Employers’ power over workers has grown, not only due to reduced unionization, but also due to the growing economic power in the marketplace of fewer, larger employers. Overall, workers’ compensation has grown less than their increases in productivity since 1979 (productivity has grown 69.3% while compensation has grown only 11.6%). Previously, compensation tracked productivity growth quite closely (from 1948 to 1979 productivity grew 108.1% while compensation grew 93.2%). [4] In other words, workers are not receiving increases in pay despite increases in the value of their output per hour of work.

Instead of paying workers more for their increased output, companies have increased profits and, therefore, returns to shareholders, owners, and executives –  in other words, they have increased income and wealth for plutocrats. As a result, income and wealth inequality have increased dramatically. Just three white men ‒ Jeff Bezos of Amazon, investor Warren Buffett, and Microsoft’s Bill Gates ‒ now own more wealth (a combined total of $248 billion) than the least wealthy half of all Americans (160 million people with combined wealth of $245 billion). The wealthiest 1% of Americans own 40% of all wealth. This is the highest level in at least 50 years and is higher than in any other country with an advanced economy. (Germany is closest with 25% of wealth in the hands of the top 1%). The 400 wealthiest Americans own an astonishing $2.9 trillion. [5]

Government policies set the rules for our economic markets and balance the power and interests of various parties. For 40 years, plutocratic economic policies have put returns to owners (i.e., wealthy investors including executives) ahead of the interests of workers. The result of these policies has been a dramatic growth in income and wealth inequality; the U.S. has the most unequal income distribution of any well-off democracy. [6] Economic security and the standard of living for many in the middle class has fallen dramatically, while many low-income workers are struggling just to make ends meet.

Future posts will review the politics of plutocratic economics and how it has damaged our democracy. They will also identify progressive policies that are needed to reverse its harmful effects.

[1]      Economic Policy Institute, 7/15/19, “Minimum wage,” (https://www.epi.org/research/minimum-wage/)

[2]      Dayen, D., 7/9/19, “Conservatives grasp at straws after CBO minimum wage analysis shows clear benefits,” The American Prospect (https://prospect.org/article/conservatives-grasp-straws-after-cbo-minimum-wage-analysis-shows-clear-benefits)

[3]      Meyerson, H. 7/2/19, “How centrists misread Scandinavia when attacking Bernie and Elizabeth,” The American Prospect Today (https://prospect.org/article/how-centrists-misread-scandinavia-when-attacking-bernie-and-elizabeth)

[4]      Economic Policy Institute, 8/27/19, “How well is the American economy working for working people?” (https://www.epi.org/files/pdf/174081.pdf)

[5]      Anapol, A., 12/6/17, “Study: Wealthiest 1 percent owns 40 percent of country’s wealth,” The Hill (https://thehill.com/news-by-subject/finance-economy/363536-study-wealthiest-1-percent-own-40-percent-of-countrys-wealth)

[6]      Tyler, G., 1/10/19, “The codetermination difference,” The American Prospect (https://prospect.org/article/codetermination-difference)

DEREGULATION HAS FAILED

The failure of 40 years of right-wing, wealthy elites’ plutocratic economics (see my previous post for background) is evident from multiple perspectives. The outcomes for workers and the middle class, along with those for the economy as a whole, have been resoundingly negative.

Proponents of plutocratic economics’ “free” markets and deregulation promised that:

  • Markets would be more efficient without government regulation,
  • Businesses would regulate themselves for the good of all, and
  • Social goals could be more effectively achieved by using market forces. [1]

In concert with their economic and political theories, plutocratic economics’ proponents (aka neoliberals) pushed to eliminate government regulation, stop anti-trust enforcement (which had limited the size and marketplace power of companies), reduce progressive taxation, and dramatically weaken support for workers and the economic safety net (including the minimum wage, unemployment benefits, unions, and public assistance for the poor).

Deregulation of businesses has failed more often than not, perhaps most notably in the financial industry. There, deregulation led to a series of financial scandals and collapses since the 1970s including the Savings and Loan crisis, the Enron scandal and collapse, the bursting of the Dot-com bubble, and, of course, the 2008 financial industry collapse and Great Recession. Today, we are left with a handful of bigger than ever, too big to fail, financial corporations that still have taxpayer insurance and present a significant risk to our economy.

Electricity deregulation has, contrary to the promises, raised costs for consumers, failed to stimulate green power generation, failed to modernize and strengthen the power transmission grid, and failed to provide meaningful choice to consumers.

Airline deregulation has produced bankruptcies at every major U.S. airline, resulting in cuts in workers’ compensation and in many cases costing workers their pensions. In the airline industry and elsewhere, the federal government and taxpayers, through the Pension Benefit Guaranty Corporation, have frequently had to step in to pay pension benefits to workers of corporations that declared bankruptcy. Although airline ticket prices declined somewhat after deregulation, customers face a bewildering fare system, shrinking seats and legroom, declining food service and other benefits, increasing add-on costs for luggage and even seats, fewer non-stop flights, and exorbitant penalties when plans and tickets must be changed. Studies have found that fares declined more in the 20 years before deregulation than in the 20 years afterwards, in part because more fuel-efficient planes have been the primary source of cost-savings for the airlines. [2]

Deregulation of the fossil fuel industry has led to huge oil spills into our water and onto our land, as well as accidents that have caused huge fires with the loss of lives and toxic smoke at refineries and oil platforms at sea.

Rather than the increased competition and better deals for consumers that the neoliberals promised, anti-competitive market concentration has grown – and continues to do so – with consumers and workers ending up worse off. The number of mergers has increased from 2,308 in 1985 to 15,361 in 2017. [3] In industry after industry, without anti-trust enforcement to prevent it, monopolies or near monopolies have emerged. Large companies frequently buy up innovative competitors or crush them in the marketplace. In some cases, rather than using their innovations, competitors are simply eliminated after being bought.

For example, in the technology sector, the giants, Google, Amazon, and Facebook, use their market power, control of Internet platforms, and superior access to consumer data and other resources to out-compete or steal the markets of potential rivals. [4] They use theoretically illegal predatory pricing – the selling of goods and services at below cost – and their ability to sustain financial losses in the short-term to drive competitors out of business. [5] The financial services and airline industries are also highly concentrated, along with the beer, health insurance, and medical devices industries, to highlight a few. The telecommunications, telephone / smart phone, and entertainment industries have all experienced substantial concentration with little consumer-benefiting competition.

Market concentration makes it hard for new businesses to enter the market and for small businesses to compete because suppliers and customers are tied to the dominant firms in the market. Dominant firms increase profits not by increasing efficiency, but by minimizing employees’ compensation; reducing investment in research, development, and productivity improvement; and driving down costs by using their marketplace power to squeeze suppliers. [6]

Plutocratic economics has resulted in anti-competitive consolidation, resulting in many industries with a few large, dominant companies. This does not stimulate economic growth as without competition, companies control prices, hire fewer workers, produce less, and pocket more in profits for executives and owners. [7] Huge rewards have gone to large companies, their executives, and big shareholders. As a result, economic inequality has grown sharply, workers’ wages have stagnated, the middle class has been decimated, and the number of low wage workers struggling to survive has grown substantially.

Market concentration is not good for the economy, for workers, nor for consumers. It reduces healthy competition, decreasing the incentives for innovation and investment to keep up with competitors. It depresses wages and worker mobility because there are fewer employers to choose from. As a result, economic security has disappeared for many workers and much of the middle class. Furthermore, market concentration and marketplace power have reduced entrepreneurship and the number of start-ups. [8]

Concentrated economic power in the marketplace also leads to concentrated political power for large companies and their wealthy executives and shareholders. The result is a self-reinforcing feedback loop where political power produces policies that further expand and entrench marketplace power and economic inequality.

Subsequent posts will summarize other failures of neoliberalism and plutocratic economics.

[1]      Kuttner, R., 6/25/19, “Neoliberalism: Political success, economic failure,” The American Prospect (https://prospect.org/article/neoliberalism-political-success-economic-failure)

[2]      Kuttner, R., 6/25/19, see above

[3]      Abdela, A., & Steinbaum, M., Sept. 2018, “The United States has a market concentration problem,” The Roosevelt Institute (https://www.ftc.gov/system/files/documents/public_comments/2018/09/ftc-2018-0074-d-0042-155544.pdf)

[4]      Kuttner, R., 6/25/19, see above

[5]      Sussman, S., July/August 2019, “Superpredators,” Washington Monthly (https://washingtonmonthly.com/magazine/july-august-2019/superpredators/)

[6]      Abdela, A., & Steinbaum, M., Sept. 2018, see above

[7]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/13/18, “The state of competition and dynamism: Facts about concentration, start-ups, and related policies,” Brookings (https://www.brookings.edu/research/the-state-of-competition-and-dynamism-facts-about-concentration-start-ups-and-related-policies/)

[8]      Shambaugh, J., Nunn, R., Breitwieser, A., & Liu, P., 6/13/18, see above

DRUG COMPANY PRICE GOUGING: THE INSULIN CASE

A quintessential case of price gouging by drug companies, with serious and sometimes fatal consequences, is that of insulin. Roughly 30 million Americans have diabetes, a chronic disease where the body’s mechanism for controlling blood sugar levels isn’t working properly. About 7 million of them must take multiple doses of insulin daily to control blood sugar. Those with Type 1 diabetes, formerly referred to as early-onset or juvenile diabetes, suffer from a pancreas that doesn’t produced adequate amounts of natural insulin so they must use three to four 20-milliliter vials of manufactured insulin a month (or other equivalent forms of insulin). Failure to use insulin regularly to control blood sugar levels can be fatal or have serious long-term impacts on health, including on vision and mobility.

Insulin is a 100-year-old drug whose three developers at the University of Toronto in 1922 sold their patent rights to the University for $1 apiece. They thought this would guarantee affordable access to those needing it in perpetuity. They sold manufacturing and distribution rights to Lilly in the U.S. and Nordisk in Europe. After a year, competitors were free to enter the market.

Today, three big pharmaceutical corporations make the worldwide supply of insulin: Lilly, Novo Nordisk, and Sanofi. Their prices for insulin have skyrocketed, tripling from 2007 to 2017, resulting in their making billions of dollars in profits from their insulin sales.

The U.S. market has 15% of global insulin users but generates 50% of worldwide revenue because prices here are so much higher than they are elsewhere. [1] For example, vials of insulin that sell for close to $300 in the U.S. sell for $30 in Canada.

Insulin for a Type 1 diabetic costs about $1,300 a month in the U.S. Because the U.S. does not regulate drug prices as other countries do, insulin’s manufacturers have increased U.S. prices dramatically in recent years. For example, a 20-milliliter vial of insulin that cost $175 fifteen years ago costs $1,487 today, eight and a half times as much. Because Medicare, the U.S. health insurance for seniors, is prohibited by law from negotiating drug prices (a gift to the industry from friendly Congress people and a friendly President), Medicare spending on insulin grew from $1.4 billion in 2007 to $13.3 billion in 2017. While some of this increase is due to increased numbers of patients using it, per patient Medicare spending on insulin increased 358% from $862 to $3,949. Out-of-pocket spending by Medicare patients themselves also increased, going from $236 million to $968 million. [2]

Estimates of the cost to produce a vial of insulin range from $2.28 to $6.16 depending on the version of insulin and other factors, [3] so the $300 retail cost represents a huge mark-up and huge profits for the drug makers. Until the 1970s, the price of insulin stayed relatively low. In the 1940s the U.S. Department of Justice leveled small anti-trust fines on entities in the Lilly supply chain, indicating the U.S. regulators would intervene if prices were jacked up. [4]

Starting in the late 1970s, changes in politics and laws created increased opportunities for drug makers to profit from the exclusive rights granted by patents on drugs and to effectively extend the longevity of patent protections by tweaking a drug or its delivery mechanism. This set the stage for the pharmaceutical industry to become the most profitable industry in America. For example, Sanofi filed for 74 different patents on its version of insulin, which meant that it could go 37 years without any competition. As of 2014, the three big insulin makers held 19 active patents on their insulin products.

Often the new, patented versions of insulin provide limited benefits to patients, despite their significantly higher prices. However, aggressive marketing campaigns and partnerships with improved delivery devices lead to prescriptions for the new more expensive, and more profitable, products.

A study published in the Internal Medicine edition of the Journal of the American Medical Association found that one in four insulin users (26%) in the U.S. had rationed their insulin use due to high costs; in other high-income countries the rate was only 6.5%. [5] Diabetics who couldn’t afford their insulin have died when they tried to do without or to ration their supply. Many others have endured financial hardships that have required them to use retirement savings, move to cheaper housing, sell possessions, or limit purchases of food and other drugs.

Even for individuals with health insurance, the high price of insulin is problematic because of increased co-payments for drugs and because deductibles they must pay before insurance coverage kicks in have, on average, quadrupled over the last 10 years.

The grassroots organizers of the #insulin4all campaign are working to change U.S. policies and make insulin affordable. Their campaign may prove to be the spark that leads to regulation and negotiation of all drug prices in the U.S. Advocacy is increasing in energy and urgency because diabetics are literally fighting for their lives as insulin makers jack up the price and they don’t see government standing up for them.

The issue of drug prices and particularly insulin prices is, finally, getting increased attention. Congress is holding hearings on insulin prices. Federal and state legislation is being considered. Colorado has passed legislation capping co-payments for insulin. Some advocates have called for nationalizing the insulin market and public manufacturing of generic drugs, including insulin.

I urge you to contact your state and federal elected representatives and to ask them to pass legislation to control the price of insulin and stop price gouging by the drug industry.

[1]      Shure, N., 6/24/19, “The insulin racket,” The American Prospect (https://prospect.org/article/insulin-racket)

[2]      Silverman, E., 6/22/19, “Insulin rationing high in US, survey finds,” The Boston Globe

[3]      Silverman, E., 6/22/19, see above

[4]      Shure, N., 6/24/19, see above

[5]      Silverman, E., 6/22/19, see above

WHO WAS BAILED OUT AFTER THE 2008 FINANCIAL CRASH?

The 2008 financial crash and resultant bailout have been in the news recently for two reasons: 1) some critiques have been leveled at Sen. Bernie Sanders’ statement on the presidential campaign trail that no Wall St. executives went to jail and that they got a trillion-dollar bailout, and 2) a new book has come out: Crashed: How a decade of financial crises changed the world by Adam Tooze. The book has been described as insightful and telling a story that is both “opaquely complex and dazzlingly simple.” [1] In terms of Sen. Sanders’ statement, it takes a real spin doctor to dispute the truth of it (see below).

In the aftermath of the 2008 implosion of the huge Wall St. corporations, the U.S. government and Federal Reserve Bank came to the rescue. The government quickly made $700 billion available to bailout the Wall St. firms. Otherwise, twelve of the 13 largest ones probably would have gone bankrupt in late September or October of 2008 (as Lehman Brothers did before the rescue was in place and the scale of the disaster was clear). The government also bailed out the auto industry, insurance companies (e.g., AIG), and the quasi-public mortgage-purchasers Fannie Mae and Freddie Mac.

In addition, the Federal Reserve Bank (Fed) made unprecedented purchases of assets from the technically bankrupt financial corporations under the innocuous-sounding banner of “quantitative easing”, to the tune of over $4 trillion. The six largest firms alone (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) also borrowed about $500 billion from the Federal Reserve Bank in peak periods of need. [2] Furthermore, the Fed extended what were effectively loans to the central banks of other countries of an also unprecedented $10 trillion. Estimates of the overall contribution of the Fed to the bailout range from $7.7 trillion to $29 trillion.

In addition, the U.S. government supported the big financial corporations in a variety of other ways. For example, short-selling of 799 financial stocks was banned in 2008 to protect these companies from free market speculation, which boosted their stock prices. Emergency bank charters were given to Goldman Sachs and Morgan Stanley on Sept. 21, 2008, so they could borrow from the Fed as only banks can do. In October, the Fed, for the first time in history, paid interest to the banks on required reserve deposits. Shortfalls in required reserves and failed stress tests were effectively ignored. And except for one relatively low-level officer at Credit Suisse, no one and no company was criminally prosecuted or went to jail. The value of all these benefits is truly incalculable.

Therefore, pinning down a single figure for the total bailout is impossible because there were so many different pieces and the amounts in some of them fluctuated daily, given that banks borrow money from the Fed daily to meet their reserve requirements. However, to state that it was a trillion-dollar bailout is definitely true and to say that no Wall St. executives went to jail is also true for all meaningful purposes.

With all this bailout money and support for the financial corporations and the financial system, one might think that some significant money or support would have been made available to bailout out the workers and homeowners caught in the maelstrom of Wall St. malfeasance. However, precious little assistance was made available to the millions of homeowners trying to pay mortgages on homes where the mortgage was now greater than the value of the home, given that many homes had lost half their value. Very little was done for the millions of homeowners who suffered foreclosure. And it was not only individuals who suffered; whole communities – usually minority and low-income communities – were underwater due to predatory and discriminatory mortgage lending by the big financial corporations and their agents. Moreover, millions were unemployed as the economy went into a severe recession due to the malfeasance on Wall St. [3]

Two things make all this truly galling. The first is that despite the massive intervention of the U.S. government and the Fed, the rescued financial corporations were not required to change their basic mode of operation. The instability of speculative financial transactions that is endemic in their model of profitability and the huge financial rewards for employees, especially executives, was left intact, along with public insurance against losses that threaten consumers’ deposits.

The second galling outcome is that no executives of the financial corporations were punished, either through significant loss of compensation or criminal prosecution, let alone jail time. Remember, that in the 1980s Savings and Loan crisis, which was much smaller in scale, nearly 900 executives of Savings and Loan banks went to jail.

“The contrast between the solicitous care shown the culpable financial sector and the negligence shown to the innocent homeowner was startling.” [4] As a result, class-based economic inequality in the U.S. was exacerbated and economic gaps in income and wealth between Whites and Blacks grew dramatically.

The bailed out financial corporations were expected to make loans available to help households and businesses, as well as to avoid foreclosures whenever possible. When foreclosure was unavoidable, it was expected that the financial corporations would promptly resell those homes. These actions would have helped individuals, businesses, and communities recover. However, no requirements were placed on bailed out banks to do these things and, therefore, they did not happen.

The programs that were supposed to assist homeowners typically had draconian rules to prevent “undeserving” homeowners from benefiting. The story line from Wall St. and its backers on Capitol Hill was that home buyers were the ones at fault; they should have known better than to be duped by the predatory practices of the mortgage brokers or that the home buyers were simply trying to live above their means. This concern about benefiting undeserving individuals clearly did not extend to the undeserving bank and financial sector executives responsible for perpetrating fraud in the mortgage business and crashing their companies and the economy.

Similar opposition blocked the expansion of unemployment benefits and job training for workers who had lost their jobs. On the other hand, there were no significant limits put on the pay of executives whose corporations were bankrupt without the bailout, let alone requirements that executives pay back compensation they had received based on profits generated by fraudulent activities.

As the Great Recession lingered on and jobs, homes, and economic security did not return (still true today for many people), the deep anger and discontent that set in was the breeding ground for support for Trump.

The 2008 financial crisis and the bailout of the financial corporations and their executives, but not the homeowners and workers who suffered from the resultant crash, are exhibit one in the indictment of the corporate takeover of U.S. policy making. I urge you to contact your elected officials and ask them to stand up against corporatocracy and demand democracy back. Our government should work for the people, the workers and homeowners of America, not the big corporations.

[1]      Bloom Raskin, S., Winter 2019, “Whose recovery was it?” The American Prospect (This article is a review and commentary on Tooze’s book.)

[2]      Taibbi, M., 3/18/19, “Turns out that trillion-dollar bailout was, in fact, real,” RollingStone

[3]      Bloom Raskin, S., Winter 2019, see above

[4]      Bloom Raskin, S., Winter 2019, see above, page 86

U.S. CAPITALISM KILLS COMPETITION

The theory of capitalism says that free market competition will ensure quality products and services at competitive prices. Unfortunately, that theory is not the reality of U.S. capitalism today.

Deregulation and our business laws and practices, from anti-trust to financing to patent protections, have destroyed competition. Without competition, businesses have no incentives to restrain price increases, to ensure quality, or to provide consumers the choices that free market theories assume. Furthermore, monopolistic employers and business owners have little incentive to fairly compensate workers or even invest in the future of their businesses. Instead, they can and have been keeping profits high and lining their own pockets.

Rather than free markets, the U.S. economy is sea of monopoly or, at least, oligopoly, where a small group of sellers or producers control a market. For example: [1]

  • Four airlines control the bulk of air travel
  • Two corporations produce the bulk of beer
  • Six enormous banks / financial institutions hold over 40% of deposits and 50% of assets
  • Drug companies find ways to extend patents or otherwise restrict competition so they can jack up prices and make huge profits (see previous posts here, here, and here)
  • Two corporations control all on-line travel bookings
  • Two companies make nearly all the intravenous saline solution used in hospitals
  • Two firms control the majority of on-line advertising
  • Three companies control the agricultural markets for seeds and pesticides
  • Four firms make 89% of baby formula
  • Two companies make 76% of coffins
  • The supermarket and media industries are continuing to consolidate so that a handful of corporations control these markets
  • Two companies control the mobile app market

Furthermore, the oligopolists find ways, such as carving up geography or colluding (for example, generic drug makers) to make themselves effectively monopolists and charge exorbitant prices and/or deliver low quality goods and services. For example, there are many Internet service providers (ISPs) in the U.S., but three dominant providers (Comcast, Charter Communications, and AT&T, each with over 15 million subscribers) and six midsize providers (with between 3.5 and 7 million subscribers). Every other provider has under 1.3 million users. The nine dominant and midsized companies have carved up the country so that 76% of households have only one choice of Internet provider making the ISPs effectively monopolies.

The monopolists and oligopolists have used political and market place power to restrict new entrants to their markets. The rate of new business formation today is half of what it was in the late 1970s. When competition does emerge, the big, dominant companies often simply buy up the competition, sometimes to use its technology or innovations, and other times simply to eliminate it as competition.

Our anti-trust laws and regulators have failed to stop anti-competitive acquisitions. In the last ten years, Amazon, Apple, Facebook, Google, and Microsoft have purchase 436 companies and startups without a single challenge from anti-trust regulators. [2] As a result, with almost every purchase consumers make, we are paying a toll, an excessive price, to one or another of the many monopolies or sets of oligopolies.

This trend of business and economic concentration, which allows companies to build high levels of market share and power, began in the 1980s under President Reagan and supposedly “conservative” Republicans. An important symbolic step in this trend was when the Federal Trade Commission stopped collecting data on market concentration in 1981.

Capitalism without real competition is not capitalism; it’s monopoly or oligopoly. The monopolists and oligopolists have very strong incentives to preserve their dominant status. Until the American public responds forcefully, and demands that its elected representatives do so as well, the number and size of monopolies and oligopolies are likely to grow.

Unfortunately, the mass media, which could provide the information to the public on the growing economic concentration, lack of competition, and harm to consumers and our politics, are highly concentrated corporations themselves. Therefore, our mass media have a vested interest in not telling us this story.

In the early 1900s, when the U.S. government fought back against the giant trusts such as Standard Oil and U.S. Steel, anti-trust laws and anti-monopoly regulatory actions were viewed as a check on excessive private power, and competition was seen as necessary to preserve opportunity, as well as human freedom and liberty. We need to fight back against the excessive private power of economic concentration again today.

An important piece of reclaiming our democracy from the plutocrats is reclaiming our economy from the monopolists and oligopolists. Some of the 2020 presidential candidates, especially Senator Elizabeth Warren, are talking about this and presenting policy proposals (e.g., here and here) to do so.

I encourage you to follow the presidential candidates’ proposals and the discussion of America’s Winner-Take-All, anti-competitive, faux free market, monopolistic capitalist economic system.

 

P.S. Sorry for the recent lack of posts to this blog. I was managing a campaign for the local Select Board (i.e., town council). The election was April 2 and we were successful! Over the last 3 years, we’ve replaced 4 of the 5 Select Board members with strong progressives, including two young mothers. A real turnaround!! All politics is local and political change does start at the grassroots.

[1]      Dayen, D., Winter 2019, “The new economic concentration,” The American Prospect

[2]      Dayen, D., Winter 2019, see above

WHY WE NEED EFFECTIVE GOVERNMENT REGULATION

The need for effective government regulation has been highlighted by recent events including the crash of an airliner in Africa and a mass shooting in New Zealand. We rely on federal regulators to keep us safe and to make informed and independent decisions about the safety of consumer products and services. Deregulation and privatization over the past 40 years, which have accelerated in recent years, have weakened federal regulation and increased risks for consumers and the public.

The Federal Aviation Administration’s (FAA) mission is to keep air travel safe. However, after the crash of a Boeing 737 in Africa, the second for that model airplane in four months, the FAA did not order this plane to be grounded, even though virtually every other airplane regulator in the world did. President Trump, of all people, overruled the FAA and ordered the plane to be temporarily grounded.

Because of the weakening of the FAA and privatization of some of its functions, the FAA relies on Boeing employees to certify that Boeing planes are safe. It’s hard to imagine a more obvious conflict of interest or lack of independent decision making, when the public’s safety should be the sole decision-making criterion.

The FAA’s regulatory mission has been compromised, at least in part, because Boeing is very active politically. It spent $15 million on lobbying in 2018. Its political action committee and employees have donated over $8 million to the election campaigns of members of Congress and presidential candidates since 2016. Trump’s decision was somewhat surprising because Boeing’s president and CEO frequently visits with Trump at his Mar-a-Lago resort and at the White House. He also gave $1 million to Trump’s inaugural committee. A former Boeing executive has also been appointed acting Secretary of Defense by Trump. [1] [2] All these activities by Boeing and its executives are meant to increase its influence over policy makers who oversee the FAA and its budget.

On a different front, Facebook allowed a mass shooting by a White supremacist in New Zealand to be live streamed and widely viewed over its platform. YouTube / Google and Twitter were guilty of allowing this shocking video to be broadly shared. Despite safeguards these companies claim to have in place to prevent this, it took them many hours to remove this video from their platforms. And this isn’t the first time violent, disturbing videos have been widely shared on these platforms. Furthermore, Facebook had been used by the shooter and other like-minded individuals to communicate and share ideas and plans. [3] [4]

Facebook has also faced strong criticism for its repeated failures to protect the privacy of individuals’ data – even after it had promised regulators that it would do so, including in a 2011 consent agreement with the Federal Trade Commission. [5] It has also faced criticism for allowing the spread of false information and inflammatory, racist, bigoted, and terrorist messaging by individuals and groups who were able to establish accounts on Facebook often with false identities or to hijack the accounts of legitimate Facebook users. It has also allowed groups that traffic in such mindsets and mis-information to flourish on its platform, exacerbating extremism and societal divisions, tensions, and hatred. [6]

Finally, Facebook blocked an advertisement by presidential candidate Elizabeth Warren that promoted her policy proposal to regulate and break up huge, monopolistic technology corporations, such as Facebook. Facebook relented and let the advertisement run after a firestorm of criticism.

Clearly, Facebook and other social media platforms need better and stronger government regulation. Government regulators need to figure out how to better protect citizens from mis-use of personal information; on-line sharing of violent videos, inflammatory content, and false information; discrimination by platform operators; and hackers, bullies, and trolls. Ultimately, if regulators can’t get these companies to correct these problems, the social media companies should be forced to shutdown services they can’t run responsibly, such as live-stream video sharing.

As a third example, the Consumer Financial Protection Bureau (CFPB) was created in the aftermath of the 2008 financial collapse in which millions of Americans lost their homes, their savings, and/or their jobs. The collapse occurred because Wall St. financial firms were weakly regulated and were able to engage in fraud and speculative investing that lost huge amounts of money. [7] The CFPB is an example of a federal regulator that was created in the wake of a huge scandal but is now being hampered and weakened by elected officials in response to campaign contributions and heavy lobbying from regulated industries. (See previous posts here, here, here, and here for more background.)

Recently, President Trump and many members of Congress, especially Republicans but including some Democrats, have been working to roll back regulation of payday lenders that the CFPB spent five years carefully crafting. These lenders exploit financially stressed individuals who need a short-term loan until their next payday. The lenders charge annual interest rates as high as 400% and make loans they know the individual is unlikely to be able to pay back on time. When the borrower defaults, the lender then renews the loan (often again and again), typically with additional fees each time, capturing the borrower as a perpetual revenue stream. The payday lending industry makes most of its profits from these financially distressed and desperate repeat borrowers. [8] [9]

Clearly, we need the CFPB to protect consumers from abusive, predatory, and fraudulent behavior by financial companies and to protect our economy from the likelihood of another financial collapse like the one in 2008.

We rely on, or perhaps at this point in time I should say that we should be able to rely on, these and other regulators, such as the Consumer Product Safety Commission, the Environmental Protection Agency, and the Department of Education, to protect us. However, due to regulatory failures, we are increasingly experiencing dangerous consumer products from manufacturers and importers, serious pollutants in our air and water, and fraudulent, for-profit colleges. Weakened federal regulators and increased influence of regulated industries over the regulators are to blame.

We, as citizens and voters in a democracy, and our elected representatives need to realize how important strong, independent regulation is to our health and safety. This is important to us individually and to the functioning of our economy. Regulators’ sole focus must be to protect the health and safety of consumers, workers, and the public. They must be truly independent of the industries they regulate and must have the necessary resources to effectively carry out their responsibilities.

[1]      Robinson, M. S., 3/15/19, “We shouldn’t depend on Boeing to tell us whether Boeing planes are safe to fly,” The Boston Globe

[2]      Lardner, R., & Lemire, J., 3/14/19, “Boeing packs massive lobbying arm,” The Boston Globe from the Associated Press

[3]      Editorial, 3/15/19, “New Zealand mosque attack should be a wake up call for big tech,” The Boston Globe

[4]      Pham, S., 3/15/19, “New Zealand shooting video,” CNN Business

[5]      LaForgia, M., & Rosenberg, M., 3/14/19, “US aims probe at Facebook’s data-sharing,” The Boston Globe from The New York Times

[6]      Schiffrin, A., Winter 2019, “The digital destruction of democracy,” The American Prospect

[7]      Warren, E., 9/17/18, “10 years after Lehman collapse, Washington is back to its old tricks,” The Boston Globe

[8]      Sweet, K., 10/27/18, “Federal agency eyes looser payday loan rules,” The Boston Globe from the Associated Press

[9]      Gordon, M., 3/8/19, “Fresh scrutiny for consumer watchdog,” The Boston Globe from t/he Associated Press

PRIVATE WEALTH IS MADE ON PUBLIC INVESTMENTS

Private companies and individuals benefit from public investments in many ways. You may remember Senator Elizabeth Warren saying back in 2014 that “Nobody got rich on their own. Nobody. People worked hard, they built a business, God bless, but they moved their goods on roads the rest of us helped build, they hired employees the rest of us helped educate, they plugged into a power grid the rest of us helped build,” they are protected by police and firefighters that we all pay for, and so forth. [1]

Clearly, successful companies and individuals owe their success in part to public infrastructure and investments. Therefore, they should pay their fair share in taxes to support public spending on both the infrastructure they depend on and also to invest in the future so other individuals and companies can succeed as they did.

Another way that public investment supports and benefits private individuals and companies is that the federal government invests heavily in basic research that is then used by the private sector to develop products and services.

One example of this is that the National Institutes of Health (NIH) spends $30 billion each year on drug research and development (R&D). The pharmaceutical industry routinely justifies the high prices of drugs by citing the high cost of R&D to bring new drugs to market. This rationale is overstated from many perspectives (see my previous blog on drug pricing), but Representative Ocasio-Cortez shed new light on this overblown claim in a hearing in Congress earlier this year.

Rep. Ocasio-Cortez asked Dr. Aaron Kesselheim [2] whether the public was receiving any return on the investments in drug R&D made by the NIH when they led to highly profitable drugs. His answer, “No, … when those products are … handed off to a for-profit company, there aren’t licensing deals that bring money back into the coffers of the NIH.” [3]

Every one of the 210 new drugs approved by the Food and Drug Administration (FDA) between 2010 and 2016 benefited from NIH funded R&D.

The U.S. government is the biggest venture capital investor in the world. Examples outside of pharmaceuticals abound. The Internet grew out of the 1960s ARAPNET program funded by the Defense Department. Touchscreen technology was developed at a publicly-funded university using National Science Foundation grants. GPS technology began as a 1970s Defense Department program. Voice recognition technology came out of a project of the Defense Advanced Research Projects Agency (DARPA). Every one of the 12 key technologies of smart phones grew out of government-funded research projects. The Department of Energy has made over $35 billion in loans to high-risk clean technology projects, including Tesla’s development of electric cars. [4]

Unfortunately, the U.S. public is not getting the return it deserves on these investments. One way to get a public return is to tax the profits of companies using technologies in which the government has invested. Currently however, some of these companies pay very little or nothing in taxes. Furthermore, the 2017 tax cuts reduced corporate taxes to a near-record low. In addition to taxes, in countries such as Germany and Finland, the government obtains partial ownership or royalty payments from companies that benefit from public investments.

Part of the reason the public does not get a return on public investments in the U.S. is that our political system has been skewed to favor the interests of the private sector through our campaign finance system, lobbying, and the revolving door between government and private sector jobs. For example, over the last ten years, the pharmaceutical industry has spent almost $2.5 billion lobbying Congress. This includes hundreds of millions of dollars spent to influence the drug coverage provisions of the Affordable Care Act, which produce about $35 billion in additional profits for the pharmaceutical corporations.

Our elected officials and government regulators need to begin insisting that private companies and individuals provide the public – the taxpayers – with a reasonable return on public investments, including everything from roads, bridges, and air transportation, to our education system, to research and development. Fair taxation is one way to do this, but other avenues, such as partial ownership and royalty payments, should be explored as well.

[1]      Senator Elizabeth Warren, August 2012, campaign event https://www.youtube.com/watch?v=AHFHznu-N-M (30 seconds in)

[2]      Dr. Kesselheim is a doctor and a lawyer. He is an Associate Professor of Medicine at Harvard Medical School. He is an expert on the effects of intellectual property laws and regulatory policies on pharmaceutical development, the drug approval process, the costs, availability, and use of prescription drugs, and bioethics. (https://bioethics.hms.harvard.edu/person/faculty-members/aaron-kesselheim)

[3]      Karma, R., 3/6/19, “Alexandria Ocasio-Cortez and the myth of American innovation,” The American Prospect (https://prospect.org/article/alexandria-ocasio-cortez-and-myth-american-innovation)

[4]      Karma, R., 3/6/19, see above

EFFECTS OF THE 2017 CORPORATE TAX CUTS

There are new data on the effects of the federal tax cuts enacted in December 2017 by the Tax Cuts and Jobs Act (TCJA). They are not what their Republican proponents promised. They promised that corporations would use their big tax cuts to create new jobs, hire new workers, and improve workers’ pay and benefits. And they promised the tax cuts would pay for themselves and not increase the federal debt. (See this previous post for some background information.)

The tax cuts did dramatically increase profits for corporations. Corporate profits for the biggest 500 corporations (the S&P 500) grew by almost 21% in 2018. At the six biggest U.S. banks, profits grew almost 30% to a record $120 billion. [1] AT&T projects profits will be up $3 billion in 2018 and Amazon doubled its profits to $11.2 billion.

So, what did corporations do with their record profits?

Corporations have rewarded shareholders, first and foremost. In 2018, they spent $1 trillion buying up their own shares of stock and paid out $500 billion in dividends to shareholders. Both figures are records. Because of foreign ownership of stock in US corporations and of corporations or subsidiaries in the US, a third of the money spent on stock buybacks and dividends goes to foreign nationals. Because this money doesn’t get spent in the US economy, the tax cuts probably made America poorer, not richer. [2] US corporations also spent a record $400 billion on cash acquisitions of other companies, which doesn’t add to the economy or benefit workers.  [3]

Stock buybacks boost a stock’s prices, rewarding shareholders (not workers) and corporate executives, whose pay is almost always tied to the price of the stock. Senators Sanders and Schumer have proposed a law that would ban stock buybacks for any corporation that pays workers less than $15 per hour. [4]

Stock buybacks were illegal until 1982, which is roughly (and probably not wholly coincidentally) the same time wages stopped rising for most Americans. Before then, a bigger share of corporate profits was used to increase workers’ wages, rewarding them for their increased productivity. [5]

Given that the great bulk of the corporate tax cuts have been passed through to stockholders via dividends and stock buybacks, and given that 84% of stocks are owned by the wealthiest 10% of the population, the other 90% of residents will see little if any benefit from the corporate tax cuts. Therefore, these corporate tax cuts contribute to growing income and wealth inequality.

The creation of new jobs and the growth in wages have been modest. There certainly hasn’t been the boom in the economy or wages that Trump and the Republicans claimed would happen. Moreover, the largest corporations, which benefited the most from the tax cuts, have NOT been creating jobs or boosting workers’ wages.

The 1,000 largest public corporations in the U.S. have CUT nearly 140,000 jobs since the passage of the tax cut law. For example, General Motors recently announced plans to close several plants and cut 15,000 jobs, despite receiving a roughly $500 million benefit from the tax cuts.

AT&T cut over 10,000 jobs in 2018 and is closing three U.S. call centers, despite an estimated $3 billion annual increase in profits due to the tax cut. Although AT&T’s CEO had promised to create jobs and bolster its workforce with the benefits of the tax cuts, AT&T has only paid a one-time, $1,000 bonus to its employees at a cost of $200 million, which is only 7% of one year’s increase in profits. Meanwhile, three-quarters of its overall 2018 profits were spent on dividends and stock buybacks that benefit shareholders, including executives, and not its workforce. [6]

For the Wall Street financial corporations, profits for the first half of 2018 were up 11% at $13.7 billion, after rising 42% in 2017. The average salary in these firms jumped 13% to $422,500. Jobs in the financial industry account for less then 5% of private sector jobs in New York City, but 21% of private sector wages. [7] Wages for these highly-paid workers are rising, but not for most workers.

Due to the tax cut, federal tax revenue on corporate income plunged $130 billion (45%) from 2017 to 2018, from $290 billion to $160 billion. [8] Furthermore, Amazon, for example, paid no federal income taxes for the second year in a row despite having profits of $17 billion over those two years. [9]

The federal deficit is increasing and is estimated to be $830 billion for 2018 and to climb to $1,000 billion next year (i.e., $1 trillion) and remain at that level for subsequent years. The annual deficit had been declining under President Obama both in terms of dollars ($585 billion in 2016) and as a portion of the overall economy (i.e., 3.1% percent of Gross Domestic Product [GDP]). Under President Trump, it has jumped in dollars ($830 billion) and to 4.0% percent of GDP. [10] So, clearly the tax cuts are not paying for themselves.

Moreover, the increase in the federal deficit and the cost of interest on the growing federal debt will result in future cuts to government programs or increases in other taxes. These cuts or increases are much more likely to fall on the less wealthy 90% of the population.

Therefore, it’s a near certainty that the great majority of Americans will be worse off due to the Trump and Republican corporate tax cuts of 2017.

[1]      Levitt, H., & Abelson, M., 1/16/19, “It’s official: Wall Street topped $100 billion in profit,” The Wall Street Journal

[2]      Krugman, P., 1/1/19, “The Trump tax cut: Even worse than you’ve heard,” The New York Times

[3]      Wursthorn, M., 12/16/18, “The rocky stock market stills pays dividends to investors,” The Wall Street Journal

[4]      Inequality Weekly newsletter, 2/18/19, Inequality.org (https://inequality.org/resources/inequality-weekly/)

[5]      Reich, R., 3/21/18, “The buyback boondoggle is beggaring America,” The American Prospect (http://prospect.org/article/buyback-boondoggle-beggaring-america)

[6]      Johnson, J., 1/7/19, “After promising more jobs from Trump tax cut, report shows AT&T has ‘done just the opposite’ by slashing over 10,000 jobs in 2018,” Common Dreams (https://www.commondreams.org/news/2019/01/07/after-promising-more-jobs-trump-tax-cuts-report-shows-att-has-done-just-opposite)

[7]      Talking Points, 9/18/18, “Wall Street salaries at highest level since 2008,” The Boston Globe

[8]      Krugman, P., 1/1/19, see above

[9]      Inequality Weekly newsletter, 2/18/19, see above

[10]     Amadeo, K., 2/12/19, “US budget deficit by year, compared to GDP, debt increase, and events,” The Balance (https://www.thebalance.com/us-deficit-by-year-3306306)

CONTROLLING DRUG PRICES

Clearly, we need better regulation of drug prices and the drug industry in the U.S. Unwarranted, steep increases in drugs’ prices and higher prices than in other countries are key indicators of the need for better regulation to lower prices. And, as recent investigations have uncovered, this applies to the generic drug makers as well as the brand name drug makers. It is estimated that if there were a truly free market for prescription drugs in the U.S., they would cost $80 billion instead of $430 billion, an annual savings of $350 billion. (See my previous post for more information.)

Three bills have been introduced in Congress to address the high and rapidly rising costs of prescription drugs in the U.S. They have been introduced in the Senate by Senator Sanders of Vermont and in the House by Representatives Khanna of California and Cummings of Maryland.

First, the Prescription Drug Price Relief Act would terminate patents, ending monopoly rights, for any drug whose price exceeded the median (middle) price among five comparable countries: Canada, the United Kingdom, France, Germany, and Japan. Drug prices in these countries are roughly half of what they are in the U.S., so our drug prices would come down substantially under this law. It is expected that drug companies would lower prices voluntarily if this law is passed; they wouldn’t want to lose their patent protections because, if they did, competition would likely drive prices even lower.

Second, the Medicare Drug Price Negotiation Act would allow Medicare to negotiate the prices it pays for drugs. Given that it spends roughly $100 billion a year on drugs, almost a quarter of all drug purchasing, it has substantial negotiating power. When the Medicare drug benefit was created, the Republicans in control of Congress and President George W. Bush did the pharmaceutical industry a huge favor by prohibiting Medicare from negotiating drug prices and also prohibiting the importation of drugs. The Veterans’ Administration and every private health insurance company, as well as every other country, save substantial amounts of money by negotiating drug prices with the drug manufacturers.

(In a classic case of the revolving door between government and industry, Representative Tauzin, chair of the committee that wrote the Medicare prescription drug law, resigned two months after the bill was signed into law to become the head of the pharmaceutical industry’s trade association at an estimated salary of $2 million. His pay would increase to $11.6 million five years later.)

Third, the Affordable and Safe Prescription Drug Importation Act would allow the importation of drugs from other countries with safety standards comparable to those in the U.S., such as Canada and Germany. This would be a step toward a truly free market, something our business community rhetorically supports, and would significantly reduce drug prices given that prices in these countries are roughly half of what they are in the U.S. The charge by opponents that this would let unsafe drugs into the country rings hollow because many of our drug companies themselves import the drugs they sell or ingredients for them – largely from China.

I urge you to contact your U.S. Representative and Senators to ask them to support these three bills. It is time to reduce the exorbitant profits of the drug makers by reducing the exorbitant prices of the drugs they sell. Furthermore, reducing their high profit margins would reduce the incentive to engage in fraudulent practices to promote additional sales of their drugs.

You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your US Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

BAD BEHAVIOR IS PERVASIVE IN THE DRUG INDUSTRY

The bad behavior in the drug industry that has gotten the most attention is price gouging on brand name drugs. However, the bad behavior is more pervasive than just that.

The solution to price gouging on brand name drugs has typically been to wait for their patents to expire and assume that competition from generic drug makers would then drive prices down. The pharmaceutical industry has fought back against this by finding ways to extend their patents, for example by tweaking their drugs or the way they are delivered (e.g., pill, gel, slow-release formulation, etc.). The brand name drug makers have also paid generic drug companies not to release generic versions of their drugs. (See my previous posts on 1/2/18 and 1/13/18 for more detail.)

Recently, it’s come to light that generic drug makers have apparently been engaged in “illegal price-fixing schemes of massive proportion.” [1] An anti-trust lawsuit based on two drugs began in 2016 and has now grown to include 300 drugs and 16 generic drug makers. Consumers, health insurers, hospitals, and taxpayers have been paying illegally set high prices for antibiotics and medications for diabetes, asthma, high blood pressure, arthritis, anxiety, and much more.

The alleged collusion appears to have transformed the generic drug industry from a highly competitive and price-driven business into one where coordinated price increases occur regularly for identical or similar drugs. These price increases occur for no reason (other than greed) and are reminiscent of price hikes by brand name drug makers. However, in the case of generic drugs, claims of high research and development costs are irrelevant and big price increases shouldn’t be possible because they aren’t protected by drug patents.

For example, the cost of insulin, the life-saving drug used to manage diabetes, doubled between 2012 and 2016. Price increases occurred in a near lockstep manner across different manufacturers and different types of insulin. In January 2019, one drug maker’s prices on its insulin products increased by between 4.4% and 5.2%, while another manufacturer, simultaneously, raised its insulin prices by 5.2%. [2] In another example, Albuterol, a decades-old generic asthma medication sold by drug makers Mylan and Sun, saw its price from both manufacturers jump simultaneously from 13 cents a tablet to $4.70. (Price spikes in other generic drugs, such as the EpiPen, were highlighted in previous posts on 9/22/16 and 10/16/16.)

Generic drugs are a $100 billion a year business and represent 90% of all prescriptions. Therefore, the costs of this price fixing are undoubtedly in the billions of dollars. Forty-seven states are now plaintiffs in the expanding civil lawsuit, where new information keeps emerging and defendants are being added. Two former executives of Heritage Pharmaceuticals have pled guilty and are cooperating with prosecutors in a parallel federal criminal case.

On a different front, bad behavior in the marketing of brand name opioids is the target of increasing legal action. Executives of Insys Therapeutics are facing federal charges of racketeering, conspiracy, and mail fraud for their tactics in selling highly addictive fentanyl spray. They are charged with conspiracy to bribe and incentivize doctors, clinicians, pharmacists, and other medical professionals to prescribe the powerful opioid, including to patients who did not need it. Insys employees also contacted insurers, fraudulently claiming to be employees of medical practitioners, to lie about patients’ conditions so the insurer would pay for their fentanyl. Two executives, the former CEO and the head of sales, have pled guilty and are cooperating with prosecutors. Several doctors, a physician’s assistant, a nurse, and a former Insys sales representative (the CEO’s wife) have already been convicted. Insys has agreed to pay $150 million to settle civil and criminal charges. [3]

Purdue Pharma, the maker of OxyContin, misled prescribers and patients about the risk of addiction to OxyContin and worked to blame patients for becoming addicted. It engaged in a sophisticated and extensive marketing campaign that “educated” doctors about undertreatment of pain. It failed to report illegal activity, including blatant over-prescribing of OxyContin that clearly indicated sales in the black market. The company and three executives pled guilty in 2007 to federal charges of fraudulent marketing, with the company paying $600 million in fines.

There are scores of on-going lawsuits by states, local officials, and individuals against Purdue and other opioid makers. The Massachusetts Attorney General’s lawsuit and investigative reporting by the media are publicly revealing evidence against Purdue that was previously kept secret under plea deals engineered by Purdue and its executives. [4]

Learning the full truth about the marketing of opioids by U.S. drug makers still has a long way to go. We know enough to conclude that tens of thousands of lives could have been saved if our drug makers had not engaged in fraudulent practices or if information from earlier court cases had been made public instead of being kept secret under the terms of plea deals. [5] (See previous posts on the opioid crisis and drug makers here, here, here, and here, with a post on solutions here.)

Patients in the U.S. bought $430 billion of prescriptions drugs in 2018 that probably would have cost less than $80 billion in a truly free market, without patents and other constraints. This $350 billion difference is five times what we spend on food stamps, over eight times what the federal government spends on K-12 education and two-thirds of all state and local spending on K-12 education, and over 20 times what the federal government spends on Head Start and child care combined. [6]

Clearly, the prescription drug market in the U.S. is ineffectively regulated. Drug manufacturers have such huge profit margins that there are enormous incentives to use fraudulent methods to increase drug sales. These methods include bribing those who write prescriptions, misrepresenting the safety and effectiveness of drugs, pushing their inappropriate use, and more. This type of inappropriate, aggressive marketing is a major cause of the opioid epidemic and thousands of deaths. Predatory price increases and illegal price fixing by drug manufacturers are costing consumers, health insurers, and others billions of dollars a year that are pure profit for the pharmaceutical industry.

My next post will present steps that can be taken to control drug costs.

[1]      Rowland, C., 12/10/18, “Price-fixing probes on drugs expand,” The Boston Globe from The Washington Post

[2]      Silverman, E., 1/25/19, “Feeling the needle,” The Boston Globe

[3]      Cramer, M., 1/10/19, “Former CEO pleads guilty to conspiracy in fentanyl marketing,” The Boston Globe

[4]      Joseph, A., 1/16/19, “Opioid maker sought to put blame on addicted,” The Boston Globe

[5]      Meier, B., 12/26/18, “Opioid makers are the big winners in lawsuit settlements,” The New York Times

[6]      Baker, D., 1/14/19, “Three Bernie Sanders bills to arrest the highway robbery in the prescription drug market,” The American Prospect (https://prospect.org/article/three-bernie-sanders-bills-arrest-highway-robbery-prescription-drug-market)

FIGHTING TAX AVOIDANCE BY THE WEALTHY

A recent Op Ed in the Boston Globe caught my attention and I couldn’t resist sharing it. If you want to understand how wealthy individuals and corporations use off-shore tax havens to avoid paying their fair share of taxes and what we can do about it, this article provides answers. [1]

  • The best estimate is that 11.5% of personal wealth (i.e., $8.7 trillion), globally, is stashed in off-shore tax havens.
  • This costs the U.S. government an estimated $32 billion a year in lost tax revenue from individuals. (Other countries’ governments probably lose $140 billion a year in tax revenue.)
  • In addition, corporations dodge about $70 billion a year in U.S. taxes by using off-shore tax havens. This represents about 20% (one-fifth) of what the U.S. does collect in corporate income taxes each year. (Other countries’ governments probably lose $60 billion a year in tax revenue.)
  • The roughly $100 billion per year the U.S. is losing to off-shore tax dodging is what the federal government spends on Food Stamps, other nutrition programs (such as school lunches), the Children’s Health Insurance Program (CHIP), Head Start, child care subsidies, and welfare COMBINED.
  • Taxing corporate income based on what is called formulary apportionment would stop this tax avoidance. Under this approach, a corporation would pay U.S. taxes based on the portion of its sales that are in the U.S., regardless of any accounting gimmicks or other strategies that made it look like the income from those sales was in another country. This tax approach is in wide use today; many states use it to calculate state corporate income taxes. It is a tax approach that has been used since the days of multi-state railroad construction in the 1800s.
  • Stopping individuals from using offshore accounts to avoid paying taxes would require international cooperation. Today, the IRS has a comprehensive system for tracking earned income. Even if you move from state to state or out of the country, the income you earn is reported to the IRS and you pay income taxes based on your total income. States with income taxes track income that you earn out-of-state and require you to pay state income tax on it. A similar approach should be applied to tracking other kinds of income and ownership of financial securities or assets that produce income. The U.S. passed the Foreign Account Tax Compliance Act in 2010 that requires foreign banks, including the notoriously secretive Swiss and Cayman Island banks, to share information with the IRS on accounts held by American clients. This is a starting point for the international cooperation needed to reduce tax dodging by the wealthy that hurts the U.S. and many other countries.

Tax avoidance by the wealthy contributes to the astronomical and growing inequality of wealth and income. It also means that everyone else must pay more in taxes to make up for the lost taxes when wealthy individuals and corporations don’t pay their fair share.

[1]      Scharfenberg, D., 1/21/18, “A world without tax havens,” The Boston Globe

FIGHTING THE OPIOID EPIDEMIC

A recent Op Ed in the Boston Globe caught my attention and I couldn’t resist sharing. If you want to know what we can and should do to truly fight the opioid epidemic, it provides the answers.

Here’s a summary of its recommendations for fighting the opioid epidemic: [1]

  • To seriously tackle the opioid epidemic, the federal government needs to spend $4 – $5 billion a year on the effort for the next 10 years.
  • Laws and regulations at the state and federal levels must ensure that health insurance covers addiction treatment, mental health services, and other services that will reduce opioid addiction and successfully treat those who experience addiction.
  • Medicaid, the Affordable Care Act (aka Obama Care), and perhaps other initiatives need to ensure that as many Americans as possible have health insurance to pay for treatment.
  • Through oversight and research, addiction treatment must be as effective as possible.
  • Pharmaceutical corporations must be held accountable, financially and otherwise, for their significant role in creating the opioid addiction crisis. They should be required to make substantial contributions to treatment costs, including making addiction-related medications available and affordable.
  • Federal laws and regulations should prohibit direct-to-consumer marketing of prescription drugs. Only one other country in the world allows this and it is a relatively recent phenomenon in the U.S. The big pharmaceutical corporations spend over $5 billion a year advertising drugs, increasing sales but leading to inappropriate use and overuse of drugs.
  • Everyone, in the public sector and in private life, should address addiction as a health and public health problem, not a criminal justice issue, and should work to de-stigmatize it.
  • The federal government needs to increase the effectiveness of efforts to reduce the smuggling of opioids into the country, including diplomatic efforts with Mexico and China, particularly focused on stopping the flow of Fentanyl into the U.S.

[1]      Tamasi, R.V., 1/22/18, “How to fight the opioid epidemic,” The Boston Globe

THE GREED OF THE PHARMACEUTICAL INDUSTRY Part 2

The pharmaceutical industry can engage in the unethical and sometimes illegal practices that I’ve highlighted in previous posts [1] because they have:

  • Monopolistic power in the market place due to limited competition,
  • An absence of government regulation, and
  • Political power to block or weaken regulation and oversight due to campaign spending, lobbying, and the revolving door of personnel moving between these corporations and government regulatory positions.

The result is that the greed of the executives of these corporations is unconstrained by market place competition, government regulations, their ethics, or, in some cases, even legality. The examples presented in my previous posts have not been isolated incidents or past bad behavior that has been rectified. This behavior by the pharmaceutical corporations is an on-going pattern.

A 2010 study found that the U.S. prices of prescription drugs were, on average, double what those same drugs cost in Canada, Australia, and the United Kingdom. And things have only gotten worse since then. As a result, one out of five Americans was unable to afford medicines prescribed by their doctors, while the five largest drug corporations had profits of a combined $50 billion in 2015. As Bernie Sanders wrote, “people go to the doctor because they are sick, they get a diagnosis from their doctor, but they can’t afford the treatment. Then they get sicker. Does this make any sense to anyone?” [2]

As part of their price gouging strategies, drug companies will go to great lengths to block competition. For example, Allergan corporation has transferred six drug patents to the St. Regis Mohawk Indian tribe. Because the tribe is a sovereign entity, it is immune from a type of challenge to drug patents that low-cost generic drug makers sometimes use to get the right to produce a generic version of a drug. It is expected that this will become a popular strategy to delay the availability of cheaper, generic versions of drugs, unless Congress intervenes and changes the law. Allergan will pay the tribe only $15 million a year under the deal for the right to continue to sell the drugs, which had $1.4 billion in sales last year.

For a different drug, Allergan tried to avoid competition from a generic version by pulling the drug from the market and forcing patients to buy a new, more expensive version. This move was blocked by a federal appeals court. By the way, Allergan has also moved its headquarters to Ireland to avoid U.S. taxes. [3]

There is no reason to believe that the behavior of pharmaceutical corporations is going to change on its own. Clearly, the free market and competition are not going to stop it. Public outrage, negative publicity, and criticism from elected officials may blunt the worst of the behavior, but it will not stop it.

The behavior of the pharmaceutical industry (which is evident in other industries like the financial industry as well) is not the way the economy should work in a democracy. This behavior is that of a corporatocracy, where large corporations are in control of both our (supposedly free) market place and our (supposedly democratic) government.

Only strong legislation from Congress and strong leadership from regulatory agencies in the executive branch of government will stop these harmful and greedy business practices of the pharmaceutical corporations (and other large corporations). The opioid crisis and the fueling of it by illegal and irresponsible marketing of narcotic prescription drugs has made this absolutely clear.

I urge you to contact your U.S. Representative and Senators and ask them to:

  • Support strong legislation to regulate the pharmaceutical industry,
  • Only confirm executive branch appointees (include the Secretary of Health and Human Services) who have a clear track record of supporting strong regulation of the drug corporations, including their drug pricing and marketing of narcotics, and
  • Pass legislation that not only allows, but requires, Medicare and insurance companies participating in the Affordable Care Act to negotiate drug prices with suppliers to receive the best price based on what other countries pay. A good place to start would be to ask them if they support the Medicare Drug Price Negotiation Act of 2017, which would allow the government to negotiate directly with drug companies to lower drug prices for Medicare beneficiaries, much like the Veterans Health Administration and Medicaid do today.

As we approach the Congressional and state level elections of 2018, I encourage you to scrutinize and ask about candidates’ positions on these issues. Then we can elect candidates who support strong regulation of drug corporations, who will take meaningful steps to control drug prices, and who will seriously tackle the opioid crisis and the pharmaceutical industry practices that have led to it.

 

[1]      You can go to any of the blog posts on my site and click on the categories in the right hand column to find other posts on corporate behavior or corporate power and influence to read more about unethical and illegal practices by large corporations.

[2]      Sanders, B., 2016, “Our revolution: A future to believe in,” St. Martin’s Press, NY, NY. Page 327.

[3]      Silverman, E., 9/19/17, “This CEO’s latest move is raiding eyebrows,” The Boston Globe

THE GREED OF THE PHARMACEUTICAL INDUSTRY Part 1

The unconstrained greed of pharmaceutical corporations is abundantly clear on multiple fronts:

  • Huge price increases on existing drugs with no reasonable justification (See my previous posts on this here and here.)
  • Inhibiting competition however possible (See my previous posts that include this topic here and here.)
  • Blocking regulation and oversight (See my previous post here.)
  • Selling and distributing narcotics that are clearly being diverted to the black market (See my previous posts on this here, here, and here.)

Despite Trump’s campaign rhetoric about bringing down the cost of drugs, his administration has not taken any significant steps to make drugs more affordable. Roughly 45 million Americans don’t buy drugs that are prescribed for them because they can’t afford them.

President Trump has nominated Alex Azar to be Secretary of Health and Human Services. Azar was the CEO of the drug corporation Eli Lilly when it increased the price of an insulin product from $74 to $269. In Sweden, the same medicine is sold for the (still profitable) price of $18.38. Insulin is the life-saving drug needed by the 30 million Americans with diabetes. [1]

The production of insulin is effectively controlled by a cartel of three drug corporations, Eli Lilly, Novo Nordisk, and Sanofi, that produce more than 90% of the insulin products in the world. Because of the inflated prices in the U.S., the typical American with Type 1 diabetes spends about $571 each month on insulin. Many can’t afford the full amount they need, so they risk serious health consequences by stretching their supply and under-medicating their diabetes. Some die as a result. Worldwide, the leading cause of death for a child with Type 1 diabetes is lack of insulin.

The pharmaceutical corporations’ typical response to criticism of drug price increases is that they need the increases to pay for research and development (R&D). However, this is simply not true. [2] Insulin, for example, was developed at a publicly funded lab at the University of Toronto in 1921. Eli Lilly was a small company when it signed an agreement with the University for the right to sell insulin in 1922. Clearly, greed, not R&D costs, is fueling the insulin price increases.

Today, the U.S. National Institute of Health (NIH) annually spends $34 billion to fund university research. When researchers develop new drugs, corporate drug manufacturers typically purchase the rights to them, tweak them, patent them, and then market them to maximize their profits. The U.S. needs to legislate a new, public health-focused drug licensing system that prioritizes access and affordability, along with innovation, instead of profit.

Another example of price gouging by drug corporations comes from the response to the opioid crisis and the increased demand for the drug naloxone, the antidote for a narcotic overdose. With over 60,000 Americans dying of drug overdoses each year, emergency responders, not-for-profit human service organizations, and family members want to have naloxone readily available to save lives. However, the drug manufacturers have responded by jacking up the prices of naloxone and its various delivery systems. Kaleo corporation has raised the price of its easy-to-use, naloxone auto-injector from $690 in 2014 to $4,500 in 2016. Amphastar Pharmaceuticals has raised its wholesale price for naloxone from $20 to $40. Adapt Pharma’s new Narcan nasal spray came on the market in 2015 at $150. These prices and the opioid crisis have increased the drug corporations’ revenue from sales of naloxone from $12 million in 2011 to $274 million in 2016. Economics, specifically economies of scale, would suggest that the price should be going down with increased demand, not up.

As prices for naloxone have risen, first responders and community-based non-profits who provide services to people with drug problems, who are on the front-lines of the opioid crisis, are finding that their tight budgets do not allow them to have the number of naloxone doses they’d like to have. [3] Naloxone has been available since 1985, although new delivery vehicles, such as a nasal spray, have been developed recently. Public funding through the NIH has contributed to the development of and conducting of clinical trials for some of these products. Only five corporations make naloxone and they have been working to block competitors. One of them is Mylan Pharmaceuticals, infamous for its price gouging with its EpiPen product.

Some drug companies are simply investors, buying the rights to drugs, often life-saving ones, that they believe can deliver big profits, usually through dramatic price increases. A recent example is NextSource, a start-up with no research and development costs. In 2013, it bought the rights to a cancer treatment drug with low demand and therefore a single producer. It was priced at $50 per dose. In three years, NextSource has raised the price to $768 per dose.

Soaring cancer drug costs are driving the cost of treatment well over $100,000 a year in many cases. As a result, some patients delay treatment to figure out how they can get the treatments paid for. A study earlier this year found that 24 cancer drugs had, on average, quadrupled in price over the last 8 years. [4]

In an interesting example of how our corporate media sometimes cover increasing drug prices – putting a positive spin on outrageous corporate behavior – The Boston Globe recently had a big headline on the front page of its Business Section that read “Price hikes on top-selling drugs were a lot smaller this year.” The article began with “Average annual price increases have declined at least four years in a row for 20 of America’s top-selling brand-name prescription drugs.” Nowhere in the article does it mention that the 6.9% increase over the last year is three times the rate of inflation or that over the last 5 years the cost of these drugs is up 66%. On a subsequent page the article does note that “these drugs have increased by an average of 213 percent since their launch, well out-pacing inflation.” It also notes that many of these drugs are very expensive with seven having an average, annual cost per patient of between $59,000 and $92,000. [5]

In my next post, I’ll discuss why the pharmaceutical corporations can get away with this price gouging and what we can do about it.

[1]      Zaitchik, A., 11/28/17, “Beyond the planet of the pharma bros,” The American Prospect (http://prospect.org/article/beyond-planet-pharma-bros)

[2]      Kesselheim, A.S., Avorn, J., & Sarparwari, A., 8/23/16, “The high cost of prescription drugs in the United States: Origins and prospects for reform,” The Journal of the American Medical Association

[3]      Denvir, D., 12/15/17, “These pharmaceutical companies are making a killing off the opioid crisis,” The Nation (https://www.thenation.com/article/these-pharmaceutical-companies-are-making-a-killing-off-the-opioid-crisis/)

[4]      Berr, J., 12/26/17, “Price of 40-year-old cancer drug hiked 1,400% by new owners,” CBS News, MoneyWatch (https://www.cbsnews.com/news/cancer-drug-lomustine-price-hiked-1400-percent-by-new-owners/)

[5]      Robbins, R., 12/29/17, “Price hikes on top-selling drugs were a lot smaller this year,” The Boston Globe

U.S. FAILS TO PROSECUTE PRESCRIPTION OPIOID DISTRIBUTOR

After years of work by U.S. Drug Enforcement Agency (DEA) investigators building a case against a major drug distributor for fraudulently shipping millions of prescription opioid pills, high-ranking lawyers at the DEA and the US Department of Justice (DOJ) recently decided to settle the case and not pursue criminal charges. Instead, the lawyers settled for a $150 million fine (from a corporation with roughly $200 billion per year in revenue) and a temporary suspension of shipments of narcotics from four of its 30 distribution centers. The lenient settlement was agreed to despite the corporation having promised in a 2008 settlement to be diligent in preventing fraudulent shipments of controlled substances. However, rather than improving its oversight of narcotics shipments, its fraudulent shipments increased. [1]

The DEA team had compelling evidence that McKesson Corporation, the fifth largest public company in the U.S., had fulfilled and failed to report suspicious orders for millions of highly addictive painkillers from pharmacies, including Internet pharmacies. The nationwide DEA team, working with U.S. attorney’s offices in 11 states, wanted to fine the corporation over $1 billion and pursue criminal charges against the corporation and perhaps some of its executives. A senior DEA official stated that the corporation could have been put out of business through an indictment or a very large fine.

But when the team turned over the evidence to top lawyers at DEA and DOJ, the lawyers negotiated a settlement with the corporation and never even discussed possible criminal charges. They even allowed McKesson to keep its $31 billion federal government contract to supply drugs to the Veterans’ Administration, federal prisons, and the Indian Health Service.

Meanwhile, a pharmacy owner in a small town in Colorado that McKesson supplied was found guilty of drug trafficking and was sentenced to 15 years in prison. From 2008 (when McKesson had settled the first set of charges) to 2011, McKesson’s shipments of oxycodone (the narcotic drug that is OxyContin) to this small-town pharmacy had increased 15-fold.

The DEA team had convincing evidence that McKesson’s activities had fueled the nationwide opioid drug crisis. The $150 million fine was a slap on the wrist for a $200 billion corporation that paid its top executive $100 million last year, has 76,000 employees, and makes $100 million a week in profits. The DEA team felt insulted, undermined, and was demoralized.

This is another example of a powerful corporation, as well as its senior executives, getting off with a slap on the wrist for significant criminal activity that harmed hundreds of thousands of Americans. Purdue Pharma, the major player in the prescription opioid drug scandal, also has (so far) gotten off with a slap or two on the wrist, despite the deaths of over 200,000 Americans. (See my previous posts on Purdue Pharma here and here.) The Wall St. financial corporations and their executives have also gotten off with slaps on the wrist despite a long trail of criminal activity across many years and many business lines.

One must ask why this is happening today when in the late 1980s, during the savings and loan (S&L) bank scandal, 750 S&Ls were forced into bankruptcy and out-of-business and over 1,000 of their executives went to jail.

Since the 1980s, corporations have grown in size and power, while government regulation and oversight have been weakened. As corporations have grown, they have gained power in the economy and in the halls of government. In the economy, their size has led to monopolistic power, a lack of competition, and, therefore, the power to control prices and make huge profits.

In the halls of government, the deregulation of campaign financing now allows wealthy corporations and individuals (often business executives) to spend hundreds of millions of dollars on candidates’ campaigns for legislative, executive, and judicial branch offices. As a result, elected officials – legislators, governors, presidents, and judges – are indebted to wealthy donors. These wealthy special interests further influence government decision making by spending millions of dollars on lobbying and by having individuals move back and forth between government roles and private sector jobs, in what is referred to as the revolving door. An example of this is that one of McKesson’s lawyers negotiating the settlement with the DEA and DOJ was a former top DEA official.

Therefore, government decisions tend to favor the interests of wealthy corporations and individuals. Examples include the lack of meaningful punishment for serious wrong doing, favorable tax policies, a failure to protect the public from rip offs in the market place, and weak regulation of the safety of consumer products and our air and water.

In this environment of market place power and weak regulation, the greed of large corporations and their executives is unconstrained and ethics, morality, and often legality get pushed aside. The public interest is overwhelmed by the power of wealthy special interests. This power imbalance is exacerbated by the growing inequality of income and wealth.

We need to elect officials who will represent the public interest and not wealthy corporations and individuals. We also need to let our elected officials know that we are watching and that we know when they are doing the bidding of the wealthy interests, such as in the recent tax bill. And we need to hold them accountable by being informed and voting. That alone could create dramatic change in our country if more people did so.

Only 53% of eligible voters voted in the last presidential election. Many of them were understandably voting against the tilt in favor of the wealthy in Washington. However, they were hoodwinked by the promises of a con man who, now that he is in office, is tilting the scales even further in favor of the wealthy.

Hopefully, this election woke people up to the fact that democracy is NOT a spectator sport. We need a broad, informed, and engaged electorate for our democracy to deliver on its promise of government of, by, and for the people.

[1]      Bernstein, L., & Higham, S., 12/17/17, “‘We feel like our system was hijacked’: DEA agents say a huge opioid case ended in a whimper,” The Washington Post

PURDUE PHARMA AND OXYCONTIN CAUSED THE OPIOID EPIDEMIC Part 2

Purdue Pharma, a privately-owned corporation, and its narcotic pain-killer, OxyContin, caused the current opioid epidemic. My previous posts gave an overview of Purdue’s development and marketing of OxyContin, as well as of the complicity of Congress and the Executive Branch in allowing OxyContin to cause the national opioid epidemic.

This post describes Purdue’s efforts to conceal the harm that OxyContin is causing, while continuing to aggressively market – and profit – from it. The most detailed reporting of the role of Purdue and OxyContin in the opioid epidemic that I am aware of is the article that appeared in the October 30th issue of The New Yorker, “The family that built an empire of pain”. [1] This blog post is largely drawn from that article.

OxyContin is a large dose of oxycodone that can be taken all at once due to Purdue’s innovative time release formula, which means that the pain killer’s effect lasts for 12 hours (supposedly).

Purdue claimed that OxyContin’s time release formula made it virtually non-addicting and hard to abuse. However, ironically, the information sheet provided with it basically gave instructions on how to abuse it. The information sheet warned against crushing the pills and then ingesting them. Abusers quickly figured out that snorting the crushed pills gave a heroin-like high. The information sheet also warned against dissolving the OxyContin pills in liquids. Abusers quickly figured out how to dissolve the pills and inject the solution, which was just like shooting heroin.

Soon after OxyContin’s release, signs of abuse were evident in Maine and Appalachia. Purdue’s own sales data indicated that doctors were over-prescribing OxyContin and that some were engaged in writing large numbers of clearly fraudulent prescriptions. Evidence that patients were selling extra pills on the black market also surfaced.

Problems with the use of OxyContin as prescribed also quickly became evident. Some patients were displaying signs of addiction and withdrawal within the 12 hours between scheduled doses. Many patients were finding that the pain-killing effect didn’t last 12 hours, so they took the pills more often, which increased the likelihood of addiction. A 1999 study found that 13% of patients who used OxyContin for headaches became addicted.

Purdue said the concerns over addiction were overblown. It told sales reps to say that less than 1% of OxyContin patients became addicted. Purdue claimed that patients were not experiencing addiction and withdrawal symptoms, but were just feeling their underlying pain. It coined the term “pseudo addiction” to describe this supposed phenomenon. It claims there is no inherent problem with OxyContin, saying the problem is individuals who misuse it.

However, internal Purdue documents, which have emerged due to litigation, reveal that it knew, even before it got approval to market OxyContin, that not all patients achieved 12-hour pain relief and that more frequent use was a recipe for addiction. Purdue’s records show that in 1998 it was aware that taking OxyContin at 8-hour intervals was becoming more and more common. A Purdue employee called this “very scary.” It appeared that in some cases these more frequent doses were due to addiction and to keep the patient from going into withdrawal, rather than to treat pain.

In 2001, the Attorney General of Connecticut wrote to Purdue expressing his alarm over the growing abuse of OxyContin. Three years later, having received no response, he filed a lawsuit. In 2003, the Drug Enforcement Agency (DEA) found that Purdue’s aggressive marketing had “very much exacerbated OxyContin’s widespread abuse.” It concluded that Purdue had “deliberately minimized” the risks of OxyContin. The DEA sent Purdue a warning letter saying that its ads “grossly overstate the safety profile of OxyContin by not referring in the body of the advertisements to serious, potentially fatal risks”. Nonetheless, Purdue continued to aggressively market OxyContin and no government agency took steps to – or was allowed to – regulate its sale. (See my previous post for more detail on the lack of regulation.)

Purdue currently faces thousands of OxyContin-related lawsuits, including 10 from states and numerous ones from cities and counties. To-date, it has settled or pled guilty in the cases that have reached a conclusion. Many experts believe this is a strategy to avoid going to trial where it would have to disclose internal documents that would reveal very damaging information about what Purdue knew about the dangers and harm of OxyContin.

In 2006, Purdue paid $75 million to settle a case brought by 5,000 patients. In another case, it pled guilty to criminal misbranding and acknowledged marketing OxyContin “with intent to defraud or mislead.” Three senior officials pled guilty, but no one from the Sackler family that owns Purdue was punished. The 3 officials all got off with probation and fines totally $35 million. Purdue itself paid a $600 million fine.

The total of $700 million in fines and settlements to-date seems small and hardly a sufficient deterrent, let alone punishment, for Purdue’s blatantly irresponsible marketing and selling of OxyContin. It is only about 2% of the roughly $35 billion in revenue that Purdue has received from OxyContin. Furthermore, it is only about 1% of the $50 billion estimated cost of treatment for those with opioid addiction problems.

In 2010, Purdue reformulated its OxyContin pills, so they are harder to crush or dissolve and, therefore, to abuse. As a result, many of those who had become addicted to OxyContin have now turned to illegal drugs, such as heroin and fentanyl.

Many industry observers believe that an important motivation for the reformulation of OxyContin was not to make it safer, but to extend its patent, which would have run out in 2013. Purdue is now working to block sales of generic versions of the original OxyContin by claiming that they are unsafe.

Purdue continues to fight any restrictions on the prescribing of OxyContin, claiming that such steps would deny law-abiding patients needed pain medication. It has continued to spend heavily on lobbyists and campaign contributions to block enactment of restrictions by government regulators. And, taking a page from the tobacco industry, it is expanding its marketing of the original OxyContin overseas.

I urge you to contact your US Representative and Senators to ask them to support the regulation of prescriptions for opioid pain killers. The Centers for Disease Control (CDC) has introduced guidelines that would reduce the use of OxyContin and other opioid pain medicines. The guidelines state that “Opioids should not be considered first-line or routine therapy for chronic pain”. The guidelines recommend the use of non-drug pain treatment, such as physical therapy, and of non-opioid drugs as the first responses to pain.

Please urge your elected officials to support the implementation of the CDC guidelines on opioid pain killers and to fund opioid treatment, along with addiction prevention and education programs.

[1]      Keefe, P.R., 10/30/17, The family that built an empire of pain, The New Yorker (https://www.newyorker.com/magazine/2017/10/30/the-family-that-built-an-empire-of-pain)

PURDUE PHARMA AND OXYCONTIN CAUSED THE OPIOID EPIDEMIC Part 1

Purdue Pharma, a privately-owned corporation, and its narcotic pain-killer, OxyContin, caused the current opioid epidemic. The mainstream media have not provided much coverage of Purdue Pharma’s role in their reporting on the opioid epidemic, which is perhaps the worst health epidemic in US history. The most detailed coverage of the role of Purdue and OxyContin that I am aware of is the article that appeared in the October 30th issue of The New Yorker, “The family that built an empire of pain”. [1] This blog post is largely a summary of that article.

This story is a familiar, but particularly deadly one, of greed, the power of wealthy corporate executives, and the willingness of members of Congress and government to do the bidding of powerful, wealthy interests. Many facets of the story mirror that of the tobacco industry, such as denial of known deadly effects. However, the connection between OxyContin and death is much quicker and clearer.

Purdue Pharma developed OxyContin in 1995. It is oxycodone, a chemical cousin of heroin and twice as powerful a pain-killer as morphine. Purdue’s innovation was a time release formula that allowed a large dose of oxycodone to be taken all at once and whose effect would last for 12 hours (supposedly). This meant that a pill had to be taken only twice a day and that its effect would last through the night, so the patient could get a full night’s sleep. Other narcotic pain-killers come in pills with much smaller doses and must be taken more frequently.

Potent, narcotic pain-killers like OxyContin were, at the time, only used to treat the acute pain of cancer and end-of-life situations. However, Purdue’s marketing worked to broaden the use of OxyContin to less acute pain. It targeted both the public and prescribing doctors. It included hiring doctors, researchers, and other experts to downplay the risks of OxyContin and argue that pain was being under-treated.

Using this strategy, Purdue engaged in one of the most extensive marketing campaigns in the history of the drug industry. It built a salesforce of over 1,000 people who were strongly incentivized through commissions and bonuses to sell lots of OxyContin. Some salespeople made over $100,000 in commissions and in 2001 Purdue paid out over $40 million in bonuses. Within 5 years of its introduction, sales of OxyContin hit $1 billion.

Today, roughly 250 million opioid pain-killer prescriptions are being written each year. In Ohio, a state hard hit by the opioid epidemic, 2.3 million people, about 1 out of every 5 people in the state, received a prescription for an opioid in 2016.

It is estimated that 2.5 million Americans are addicted to opioids and over 300,000 people have died due to the opioid epidemic. An addicted baby is now born every 30 minutes in the US and 10% of newborns in Huntington, West Virginia, are born opioid addicted. According to the American Society of Addiction Medicine, 4 out of every 5 people who use heroin start opioid use with a prescription pain killer.

Purdue has realized about $35 billion in revenue from OxyContin and billions in profits. The Sackler family that owns Purdue is worth an estimated $13 billion.

In my next post, I’ll outline the fraudulent marketing Purdue engaged in to profit from OxyContin and its on-going efforts to block any restrictions on the prescribing of it.

[1]      Keefe, P.R., 10/30/17, The family that built an empire of pain, The New Yorker (https://www.newyorker.com/magazine/2017/10/30/the-family-that-built-an-empire-of-pain)

THE OPIOID CRISIS: SAVING LIVES VS. SAVING PROFITS

President Trump pledged months ago to declare the nationwide opioid crisis a national emergency. He now says he’ll do so this week. The crisis has claimed well over 200,000 lives and the death rate continues to climb.

Declaring opioid deaths a national emergency would be nice, but taking effective action is even more important. So far, the Trump administration and key Republicans in Congress have shown no interest in doing so.

Trump recently nominated Representative Tom Marino, a Pennsylvania Republican, to be his national drug czar. Marino withdrew his name from consideration last week after it was revealed that he had spearheaded a successful effort in Congress to block the Drug Enforcement Agency’s (DEA) efforts to stop fraudulent distribution of prescription opioids. [1]

In April 2016, as the deadliest drug epidemic in US history raged, Congress passed a bill stripping the DEA of its ability to stop the distribution of large quantities of prescription narcotics. Drug industry experts blame the origins of the opioid crisis on the over-prescribing, some of it fraudulent, of narcotic pain killers. [2] The pharmaceutical corporations’ marketing of these drugs has also come in for blame, as they downplayed the potential for addiction to the drugs and promoted the supposed under-treatment of pain.

At the behest of the drug industry, Representative Marino in the House and Senator Hatch in the Senate (a Utah Republican) led the efforts by a handful of members of Congress to undermine DEA enforcement efforts aimed at blocking the supply of narcotic pain killers to corrupt doctors and pharmacists who were selling them on the black market. They passed a law making it impossible for the DEA to freeze suspicious shipments of narcotics by drug distributors who had repeatedly ignored DEA warnings while selling millions of pills for billions of dollars. Marino had spent years working to pass such a law.

The drug industry contributed at least $1.5 million to the campaigns of the 23 members of Congress who sponsored the bill and spent over $100 million lobbying Congress.

Besides the sponsors of the bill and the drug industry, few members of Congress or others outside of Congress knew of the impact the bill would have. It was passed in Congress by “unanimous consent,” an expedited process supposedly reserved for non-controversial bills. Former White House officials say they and President Obama were unaware of the bill’s impact when it was signed into law. Requests for interviews with current and former officials, as well as dozens of Freedom of Information (FOI) Requests, have been submitted to the DEA and the Justice Department by the media to try and find out who knew what when. The interview requests have been declined or ignored, and the FOI requests have been denied or delayed; some have been pending for 18 months. [3]

This is a powerful example of the incredible influence and control our large corporations have over policy making in Washington, D.C. The large pharmaceutical corporations and their distributors have gotten Congress to make their profits from illegally selling narcotic painkillers more important than the 60,000 deaths that are occurring each year from opioid use. These deaths are roughly twice the number that occur due to gun violence or car accidents. The number of deaths last year was roughly 50% more than occurred at the peak of the HIV/AIDS crisis. Drug overdoses have become the leading cause of death among those under 50. [4]

I urge you to contact your US Representative and Senators and ask them to take real action to fight the opioid crisis. This includes spending money on addiction treatment and drug enforcement. And it requires repealing the 2016 legislation that undermined the DEA’s efforts to control the distribution of prescription, narcotic pain killers. We must assert that people’s lives, as well as recovery from and avoidance of addiction, are more important than profits for large pharmaceutical corporations.

[1]      Superville, D., & Daly, M., 10/18/17, “Marino pulls name from US drug czar consideration,” The Boston Globe from the Associated Press

[2]      Higham, S., & Bernstein, L., 10/16/17, “Drug industry quashed effort by DEA to cut opioid supply,” The Boston Globe from The Washington Post

[3]      Higham, S., & Bernstein, L., 10/16/17, see above

[4]      Katz, J., 6/5/17, “Drug deaths in America are rising faster than ever,” The New York Times (https://www.nytimes.com/interactive/2017/06/05/upshot/opioid-epidemic-drug-overdose-deaths-are-rising-faster-than-ever.html)

THE DEMOCRATS’ “A BETTER DEAL”

Congressional Democrats have announced a package of policy proposals they are calling “A Better Deal.” It’s apparently their policy platform for the 2018 Congressional elections and its focus is on re-establishing Democrats as the party that stands up for working people. It proclaims that too many American families feel that the rules of our economy are rigged against them. It notes that incomes and wages are not keeping up with the cost of living for many workers. It states that large corporations, the rich, and other special interests are avoiding paying taxes and meanwhile are spending huge sums of money to influence our elections. Democrats claim that A Better Deal will grow and strengthen the middle class and reverse the failure of so-called trickle-down economic policies (i.e., tax cuts for the wealthy) to do so.

A Better Deal has three overarching goals: [1]

  • Raise the wages and incomes of American workers and create millions of good-paying jobs,
  • Lower the costs of living for families, and
  • Build an economy that gives working Americans the tools to succeed in the 21st Century.

A Better Deal calls for raising the national minimum wage to $15 an hour by 2024 and then increasing it automatically so it keeps up with inflation. A Better Deal promises that Democrats will fight the offshoring of Americans’ jobs by penalizing corporations that move jobs overseas and by cracking down on unfair trade policies of other countries, including currency manipulation. It calls for renegotiating the NAFTA trade agreement with Canada and Mexico to increase US exports and jobs, while also improving wages. Federal contractors who move jobs to foreign countries would be penalized and there would be Buy American requirements in government purchasing.

The Democrat’s plan calls for $1 trillion in federal spending on the infrastructure, such as bridges, roads, railroads, airports, and waterways, that is the transportation backbone of our economy. The plan projects that 15 million good-paying jobs would be created by these investments. It would also support job creation by prioritizing support for small businesses and entrepreneurs over benefits for large corporations. It would invest in research and innovation, as well as making high-speed Internet service available to everyone. It pledges to ensure that workers will be able to “retire with dignity,” by protecting pensions, Social Security, and Medicare.

A Better Deal calls for lowering the costs of drugs, post-secondary education, child care, cable TV and Internet service, and credit cards. It promises a crackdown on big price increases by pharmaceutical corporations as well as their practices that drive up drug costs. Medicare would be allowed to negotiate drug prices (which it is currently barred by law from doing!).

A Better Deal would curtail the monopolistic practices of large corporations that lead to higher prices and reduced consumer choice. It notes that concentrated market power leads to great political power, which has been used by big corporations to obtain beneficial policies from government. Strengthening anti-trust laws and their enforcement are identified as key strategies for achieving these goals. A Better Deal calls for eliminating unlimited and/or undisclosed spending by corporations and the wealthy in our elections, as well as reducing the power and influence of lobbyists and special interests.

A Better Deal promises paid leave for workers when they are sick or when a family situation merits taking time off. Paid leave for a new child or a family member’s illness would be covered. It notes that this will keep families healthy, both medically and financially.

In A Better Deal, Democrats commit to expanding government investment in workers’ access to the education, training, and other tools they need to succeed in the 21st Century. In addition, employers would receive incentives to invest in their workers’ skills and knowledge. Apprenticeships would be expanded and training programs would be better coordinated with businesses’ needs for workers.

There is much in A Better Deal for workers to like. Democrats appear to be recommitting themselves to putting workers first, ahead of monied interests, reversing their mid-1990s decision to cozy up to those with big money to get the funding they needed for their campaigns. Despite its good points, there are notable weaknesses in A Better Deal and its presentation that I will outline in my next post.

[1]      Schumer, C., retrieved 8/20/17, “A better deal,” U.S. Senate Democrats (https://democrats.senate.gov/abetterdeal/#.WZydEbpFzIU)

PROTECTING CONSUMERS FROM WALL STREET

The collapse of the financial corporations in 2008 was due in large part to their predatory and illegal practices in pushing unaffordable home mortgages onto gullible home buyers. Congress and President Obama enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as Dodd-Frank) to help protect consumers from such abusive behavior.

Dodd-Frank’s most notable consumer protection provision was the creation of the Consumer Financial Protection Bureau (CFPB). The CFPB’s role is to protect consumers from illegal and predatory practices, as well as discrimination, by financial corporations and to work to ensure that consumers receive the information necessary to make good financial decisions and to avoid “unsafe” financial products and services.

Since its creation, the CFPB has been hard at work punishing financial corporations that violate the law, returning almost $12 billion to over 29 million victimized consumers. In less than 8 years, it has helped consumers by responding to over 1.2 million complaints and issuing, for example, new standards for home mortgage documents that are clearer and easier to understand. At CFPB’s website you can find information on understanding your credit score and to help you make a good decision about a car or student loan.

Given that financial products and services (such as bank accounts, credit cards, and car and student loans) are essential for individuals, families, and our economy, appropriate regulation of them is necessary. Before the creation of the CFPB, financial services regulation was spread among 6 federal agencies and state regulators. None of them had consumer protection as its sole or primary role nor had the power to establish a single set of regulations for the whole financial industry. The CFPB has this power and a sole focus on consumer protection, much as the Consumer Product Safety Commission does for non-financial products. [1]

In July, the CFPB finalized a rule prohibiting financial corporations from putting mandatory arbitration clauses in their customer contracts. These clauses, which are in most agreements consumers sign when they open a bank account or get a loan or credit card, prohibit customers from suing the financial corporation in court. (They are also in many contracts or agreements for other consumers products and services, such as cell phones and cable TV, Internet, and phone services.) They require the customer to submit any complaint, even one due to illegal activity, to an arbitrator, who is usually selected by the financial corporation. They eliminate the ability of customers to band together in a class action lawsuit, and require them to pursue any grievances only through individual arbitration cases.

In addition to preventing class action lawsuits, the mandatory arbitration clauses often prohibit customers from sharing their experiences with regulatory or law enforcement agencies and the media. Corporations know that consumers will rarely spend the time and money (the typical cost to file an arbitration claim is $161) to pursue arbitration, given that the amount of money at stake is usually small. The result is that corporations evade accountability and can hide illegal or unethical behavior. [2]

The CFPB rule banning mandatory arbitration clauses was put in place after 5 years of study and development pursuant to a Congressional directive to study mandatory arbitration clauses and restrict or ban them if they harm consumers. The CFPB study found that customers win only 1 out of 11 arbitration cases and when they win they receive an average of $5,389. However, when a financial corporation makes a claim or counterclaim against a customer, it wins 93% of the time and the customer is ordered to pay, on average, $7,725 to the financial corporation! [3]

The CFPB study also found that in an average year 6,800,000 consumers get cash awards due to class action lawsuits while only 16 do so in arbitration cases. Consumers in these lawsuits receive a total of $440,000,000 (after deducting lawyers’ and courts’ fees), while consumers across all arbitration cases receive a total of $86,216.

Three recent examples of practices by Wells Fargo & Company make clear the significance and importance of banning mandatory arbitration clauses and allowing class action lawsuits by customers. (By the way, Wells Fargo is the third largest US bank and a multi-national financial corporation headquartered in San Francisco with $22 billion in annual profits.) It recently paid $185 million to settle with the CFPB and other regulators for having illegally opened and charged customers for over 2 million unauthorized checking and credit card accounts. When customers tried to sue Wells Fargo for this starting back in 2013, it forced them to make their claims in individual arbitration cases. This allowed Wells Fargo to continue its illegal behavior and theft from customers for 3 more years (5 years in total) before its behavior came to the attention of regulators.

In July, another class action lawsuit was filed against Wells Fargo based on illegal behavior on car loans. Apparently, Wells Fargo was requiring customers with car loans to buy car insurance they didn’t need (it was typically redundant with insurance they already had). And Wells Fargo was getting kickbacks from the company selling the insurance. The extra cost of the unneeded insurance pushed 250,000 car loan customers into default on their loan payments and resulted in 25,000 cars being repossessed. If these customers are forced into arbitration and are unable to participate in a class action lawsuit, it’s likely that most of them will not receive any compensation from Wells Fargo for its illegal and harmful behavior.

Finally, Wells Fargo is the defendant in an on-going, 8-year-old case over overdraft fees and practices. It is arguing in court that these customers’ claims must be handled in individual arbitration cases rather than a class action lawsuit, despite complaints from customers in 49 states. [4]

Despite these examples, and the fact that Congress has banned mandatory arbitration in home mortgage agreements, members of Congress have quickly introduced legislation to repeal the Consumer Financial Protection Bureau’s new rule banning mandatory arbitration clauses in financial product and service agreements. [5] Weakening or eliminating the CFPB in general, not just its ban on mandatory arbitration, has been a goal of Wall St. corporations and their friends in Congress ever since its creation by the Dodd-Frank law.

I urge you to contact your US Representative and Senators and ask them to support the Consumer Financial Protection Bureau and its ban on mandatory arbitration clauses in consumer product and service agreements.

[1]      Servon, L.J., 7/17/17, “Will Trump kill the CFPB?” The American Prospect (http://prospect.org/article/will-trump-kill-cfpb)

[2]      Germanos, A., 7/12/17, “Serving Wall Street predators, GOP launches swift attack on new rule protecting consumers,” Common Dreams (https://www.commondreams.org/news/2017/07/12/serving-wall-street-predators-gop-launches-swift-attack-new-rule-protecting)

[3]      Shierholz, H., 8/1/17, “Correcting the record: Consumers fare better under class actions than arbitration,” Economic Policy Institute (http://www.epi.org/publication/correcting-the-record-consumers-fare-better-under-class-actions-than-arbitration/)

[4]      Brumback, K., 8/25/17, “Wells Fargo wants customer suits tossed,” The Boston Globe from the Associated Press

[5]      Germanos, A., 7/12/17, “Serving Wall Street predators, GOP launches swift attack on new rule protecting consumers,” Common Dreams (https://www.commondreams.org/news/2017/07/12/serving-wall-street-predators-gop-launches-swift-attack-new-rule-protecting)

PROTECTING OUR ECONOMY FROM WALL STREET SPECULATION

After the collapse of the financial corporations in 2008 due to their greed, predatory and illegal practices, and malfeasance, Congress and the President enacted legislation to try to prevent such a collapse in the future. This was the Dodd-Frank Wall Street Reform and Consumer Protection Act (known as Dodd-Frank).

The Dodd-Frank law is not as strong as many people thought it should be, because Wall St. executives, along with their lobbyists and friends in Congress, worked hard to weaken it as it was being written and passed. For example, it did not break up the “too-big-too-fail” financial corporations or limit their growth. (They are now all bigger than they were in 2008.)

A key provision of Dodd-Frank, known as the Volcker Rule, restricts banks from making certain kinds of speculative investments that do not benefit their customers and actually put customers’ deposits (and the banks and the economy) at risk if large investment losses result. Such speculative investments and big losses from them played a key role in causing the 2008 financial collapse. The Volcker Rule restricts but does not ban such investments, as many people thought it should and as had been the case from 1933 to 1999 under the Glass-Steagall Act. [1] In particular, many people believe that banks with deposits insured by the Federal Deposit Insurance Corporation (FDIC) should be prohibited from making such risky investments because these investments, which only benefit the bank’s executives and shareholders, are, in effect, insured against big losses by the FDIC, i.e., the federal government and taxpayers.

The Volcker Rule was supposed to be implemented in 2010, but continuing opposition from Wall St. and its supporters has continued to delay (and further weaken) the rule. It finally went into effect in 2015, but banks continue to be granted extensions for when they have to come into compliance with its provisions.

The Trump Administration, through the five agencies that regulate the financial industry, is currently working to rewrite and further weaken the Volcker Rule. They are moving to loosen the restrictions on risky investments, even though they were a major cause of the 2008 financial collapse. [2]

The Dodd-Frank law in general, not just its Volcker Rule, has been a target for weakening and delaying tactics ever since its original drafting and passage, as well as at every step in its implementation. The US House recently passed the so-called Financial Choice Act that would significantly weaken Dodd-Frank’s regulation of the financial industry.

I urge you to contact your US Representative and Senators and ask them to:

  • Oppose efforts to weaken the Volcker Rule and to support an outright ban on speculative investment activity by banks that have customer deposits and FDIC insurance, and
  • Oppose efforts to weaken the Dodd-Frank law in general and its regulations that reduce the likelihood of another financial industry collapse.

[1]      Wikipedia, retrieved 8/15/17, “Volcker Rule,” (https://en.wikipedia.org/wiki/Volcker_Rule)

[2]      Bain, B., & Hamilton, J., 8/1/17, “Wall Street regulators are set to rewrite the Volcker Rule,” Bloomberg News (https://www.bloomberg.com/news/articles/2017-08-01/volcker-rewrite-is-said-to-start-as-trump-regulators-grab-reins)

CORPORATE BEHAVIOR DRIVES INEQUALITY

Several corporate practices, particularly those of large, multi-national corporations, are major contributors to income and wealth inequality. One is their avoidance of taxes, which means other taxpayers must make up the difference. Another is their employee compensation practices.

The huge and growing differential between the compensation for corporate executives and workers needs to be reduced. Increasing the minimum wage is one step. However, taxing or limiting compensation for executives should also occur.

Wall Street gave out $24 billion in bonuses last year to 177,000 workers who got an average of $138,200 each. The average Wall Street bonus has increased 900% since 1985, while the minimum wage has increased a little over 100%. This $24 billion in bonuses for 177,000 workers is over one and a half times the total pay for the year for all 1,000,000 (1 million), full-time, minimum wage workers. [1]

This excessive Wall Street compensation not only contributes to overall inequality, it contributes to gender and racial income disparities. Roughly 85% of Wall Street executives and senior managers are white and over two-thirds are male. By contrast, 56% of minimum wage workers are non-white and almost two-thirds of them are female.

Huge Wall Street bonuses and “performance pay” provide incentives to Wall Street to engage in the kind of high risk, high return financial strategies that led to the 2008 financial collapse. The Dodd-Frank financial reform law called for regulation of these bonuses but these regulations have been blocked and delayed. Furthermore, the 20 largest US banks gave out over $2 billion in so-called performance pay to their top executives between 2012 and 2015. Not only do these huge amounts provide incentives for risky behavior, they are also tax deductible for the corporations, saving them $725 million in taxes.

A recent study of corporate taxes showed that many large, profitable corporations frequently pay no federal taxes. The analysis found that 258 large corporations that were consistently profitable from 2008 to 2015 and had $3.8 trillion in profits rarely paid the 35% tax rate that they, President Trump, and Republicans in Congress say needs to be cut. On average, the study found they paid only 21% of their profits in taxes – a lower rate than many individuals pay on their incomes.

In fact, 18 of these large, consistently profitable corporations paid no federal tax over the study’s 8-year period. And 100 of them paid no taxes in at least one year of the 2008 and 2015 period studied, despite reporting a profit. They did this by using tax loopholes and avoidance strategies such as shifting profits to overseas entities, depreciating assets very quickly, deducting the cost of huge stock options given to executives, and using special industry-specific tax breaks they’ve gotten slipped into our tax laws.

These tax breaks are highly concentrated with most of them going to a few, very large, multi-national corporations. Just 25 corporations received over half of the tax subsidies of all 258 corporations in the study. The study reported that the corporations with the biggest tax subsidies over the 8-year period were AT&T ($38 billion), Wells Fargo ($31 billion), JPMorganChase ($22 billion), and Verizon ($21 billion). [2]

The study refutes the argument that the US’s corporate tax rate is higher than that of foreign countries and that it makes the US an unfavorable location for doing business. The tax rates paid over the 8-year period by certain industries were quite low: gas and electric utilities – 3%, industrial machinery – 11%, telecommunications – 12%, oil, gas, and pipelines – 12%, and Internet services and retailing – 16%. The industry-specific tax breaks that lead to these low tax rates are unfair and unnecessary.

The study’s report recommends five changes to US tax laws to remedy these problems:

  • Repeal the tax exemption for overseas profits,
  • Limit the deduction for the phantom costs of executive stock options,
  • Eliminate tax provisions that allow for rapid, let alone immediate, depreciation of assets,
  • Reinstate a strong corporate Alternative Minimum Tax, and
  • Increase transparency by requiring full, country-by-country disclosure of corporate financial information. [3]

I urge you to contact your members of Congress and ask them to support these changes to our tax laws so that large, multi-national corporations pay their fair share of taxes. Please also ask them to support increasing the minimum wage and implementing regulations on Wall Street compensation to reduce incentives for risky behavior that could lead to another financial disaster.

[1]      Anderson, S., 3/15/17, “Off the deep end: The Wall Street bonus pool and low-wage workers,” Moyers & Company (http://billmoyers.com/story/wall-street-bonus-pool-2017/)

[2]      Cohen, P., 3/9/17, “Profitable companies, no taxes: Here’s how they did it,” The New York Times https://www.nytimes.com/2017/03/09/business/economy/corporate-tax-report.html?_r=0

[3]      Institute on Taxation and Economic Policy, 3/9/17, “The 35 percent corporate tax myth: Corporate tax avoidance by Fortune 500 companies, 2008 to 2015” http://itep.org/itep_reports/2017/03/the-35-percent-corporate-tax-myth.php#.WM6CaYWcHIU

STOP COMMERCIALIZATION OF OUR NATIONAL PARKS

Unfortunately, the National Park Service (NPS) has just enacted a policy that allows expanded commercialization of our national parks. Corporations have been pushing for years to commercialize our national parks with their names, logos, and products. The timing of the new policy is particularly inappropriate because this year is the 100th anniversary of our national parks. Their pristine beauty and intergenerational legacy were celebrated in the Ken Burns’ wonderful 2009 PBS special, “The National Parks: America’s Best Idea.” [1]

This new policy has been put in place despite overwhelming public opposition – hundreds of public comments in opposition and over 200,000 signatures on a petition opposing this policy. [2] The new policy will allow corporate sponsorships and partnerships, lift naming rights restrictions, allow advertising in parks (including for alcohol), and allow, if not require, parks to seek donations from corporations.

The new policy allows facilities from auditoriums to benches to have corporate names on them. Buses in national parks can now be plastered with advertising. Bricks or paving stones can have corporate names and logos on them. Educational programs and endowed positions can be branded by corporations. Large banners with corporate logos will now be allowed in the parks.

Even before this policy was in place, Coca-Cola, after donating $13 million to the NPS, blocked a proposed ban on bottled water in Grand Canyon National Park. The ban would have reduced trash in the park by 20%, saving money and employees’ time, while reducing litter and wasteful use of plastic. After public pressure, NPS allowed a park-by-park ban that requires a rigorous cost-benefit analysis and a multi-layered approval process. In another pre-policy example, Budweiser had a joint marketing campaign with NPS that allowed it to use the image of the Statue of Liberty on its labels and to co-sponsor a concert in a national park.

This is happening because our national parks are starved for money. While attendance at the parks has been up for three years in a row and is 20% higher than it was in 2013, Congress and the President have provided flat funding for operating the parks. [3] Despite the increased wear and tear, as well as the need for more parking and greater capacity on trails and roads, due to the increased number of visitors, the parks have received dramatically insufficient funding to maintain, let alone expand, infrastructure. It is estimated that there is an $11 billion backlog in maintenance projects. [4] Park superintendents struggle to meet their goals of preserving their parks for future generations, while providing a safe and enjoyable experience for visitors. They will now be put in the awkward position of needing to be involved in fundraising to support their park while being banned by federal law from directly soliciting donations.

As a poignant example of the problems commercialization can cause, Delaware North Corporation (DNC) is suing the NPS for $51 million for compensation for trademarks on the names of facilities in Yosemite National Park. DNC had been the concessionaire at the park since 1993, but recently lost the contract. Because this suit could take some time to resolve, Yosemite National Park has had to rename facilities in the park. The iconic Ahwahnee Hotel has been renamed, despite having operated under this name since 1927. It was named after the Native Americans who lived in the valley and whose descendants still work in the park. The Badger Pass Ski Area, among other facilities, has also been renamed and the trademark on the name “Yosemite National Park” may also be disputed. [5]

Commercialization is spoiling the pristine beauty of our national parks and detracting from the inspiring experience of visiting them. Conservationist and President Teddy Roosevelt envisioned our national parks as being preserved for future generations “with their majestic beauty all unmarred.” Commercialization of our national parks is antithetical to that vision and to the basic principle for creating national parks – to preserve our natural wonders and beauty for future generations in their natural, awe-inspiring state. We need to do a better job of protecting our national parks and the experience of visiting them.

I encourage you to contact your members of Congress and urge them to adequately fund our national parks and to ban commercialization of them. We must resist the efforts by corporate America and budget cutting politicians to commercialize and privatize these truly unique and irreplaceable public assets.

[1]      Burns, K., & Duncan, D., 2009, “The National Parks: America’s Best Idea,” Public Broadcast System, (http://www.pbs.org/nationalparks/)

[2]      Strader, K., 1/4/17, “Disregarding public concern, the National Park Service finalizes commercialism policy and opens parks to industry influence,” Public Citizen as reported by Common Dreams (http://www.commondreams.org/newswire/2017/01/04/disregarding-public-concern-national-park-service-finalizes-commercialism-policy)

[3]      Associated Press, 1/17/17, “National Parks set yet another attendance mark,” The Boston Globe

[4]      Rein, L., 5/9/16, “Yosemite, sponsored by Starbucks? National Parks to start selling some naming rights,” The Washington Post

[5]      Howard, B.C., 1/15/16, “National park advocates appalled by Yosemite name changes,” National Geographic (http://news.nationalgeographic.com/2016/01/160115-yosemite-names-ahwahnee-hotel-wawona-curry-badger-pass/)

THE RIGHT WAY TO STOP THE OFFSHORING OF US JOBS

The US needs to stop hemorrhaging jobs to other countries. For starters, we need to do three things:

  • Impose financial disincentives for offshoring jobs,
  • Change the mindset among corporate executives that offshoring jobs is the right and acceptable thing to do, and
  • Reverse the resignation among workers and the public who believe that the offshoring of jobs is inevitable.

To create financial disincentives, we should pass laws that place special taxes or restrictions on corporations that have offshored say 100 or more jobs in the last five years. Possible examples include:

  • Bar such corporations from receiving federal contracts. Or there could be demerits subtracted from the scores of proposals from such corporations in competitive bidding situations. Or there could be financial penalties on existing federal contracts such as the deduction of $10,000 per offshored job or of 1% of a contract’s annual payment per 1,000 offshored jobs, whichever is greater.
  • A corporation’s taxes could be increased by $10,000 per offshored job or its tax rate could be increased by 1% per 1,000 offshored jobs, whichever is greater – with no offsets to allow a corporation to avoid this tax.
  • Bar such corporations from receiving government tax breaks, loans, or grants.
  • Require such corporations to pay a special, unavoidable, and substantial tax on aggregate executive compensation that is over $1 million. [1]

Senator Bernie Sanders has announced that he will introduce a bill in Congress that will include provisions similar to these to discourage the offshoring of jobs. He is calling it the Outsourcing Prevention Act. [2]

To counter the mindset that favors offshoring jobs, we should pass laws or establish executive branch procedures that publicize a corporation’s offshoring of jobs. Possible examples include:

  • Require such a corporation to hold a public hearing in the community losing the jobs 90 days before the termination of the jobs. If the number of jobs is 500 or more, a hearing in Washington before a congressional committee should be required.
  • Establish a new anti-offshoring czar in the Office of the President who would visit any such corporation’s CEO to make it clear that offshoring jobs is viewed negatively.

Providing financial rewards to corporations to keep jobs in the US is not an efficient way to stop offshoring. Typically, state or local governments provide tax abatements or other tax benefits to corporations to keep jobs. However, state and local taxes are generally only 2% or so of a corporations’ costs. Labor costs are a far greater portion of operating costs. Therefore, tax abatements are not likely to offset the savings in labor costs provided by offshoring. For example, in the recent United Technologies / Carrier (UT/C) case in Indiana, the state will provide $7 million in tax benefits over 10 years. However, UT/C estimated was that it would save $65 million per year ($650 million over 10 years) for offshoring 2,100 jobs. [3]

Corporations’ demands for financial benefits from state and local governments to keep or create jobs are really just blackmail. To stop this job-based blackmail, which robs states or municipalities of needed tax revenue, the federal government should put a 100% tax on these financial benefits, so there is no overall financial incentive for the corporation. The federal government should also reduce grants to state and local governments that give financial incentives to corporations to keep jobs. For example, awards under the Community Development Block Grant or other economic development programs could be cut for states or municipalities that agree to pay job blackmail to corporations. The federal government has used a similar strategy in other instances to get states to change policies. For example, the federal Transportation Department used cuts in federal transportation grants to get states to raise their alcohol drinking ages to 21. This reduced car accidents and saved thousands of lives. [4]

I encourage you to contact your US Representative and Senators and ask them what they plan to do to reduce the offshoring of US jobs. Request that they support a systematic approach to discouraging offshoring such as that offered by Senator Sanders’ Outsourcing Prevention Act.

[1]       Greenhouse, S., 12/8/16, “Beyond Carrier: Can Congress end the green light for outsourcing?” The American Prospect (http://prospect.org/article/beyond-carrier-can-congress-end-green-light-outsourcing)

[2]       Sanders, B., 11/26/16, “Sanders statement on Carrier and outsourcing,” Press release from Senator Bernie Sanders (http://www.sanders.senate.gov/newsroom/press-releases/-sanders-statement-on-carrier-and-outsourcing)

[3]       Leroy, G., 12/7/16, “Can Trump’s wild one-off at Carrier combat corporate welfare?” The American Prospect (http://prospect.org/article/can-trumps-wild-one-carrier-combat-corporate-welfare)

[4]       Leroy, G., 12/7/16, see above

DRUG PRICE GOUGING CONTINUES

Valeant Pharmaceuticals is price gouging again. Having acquired the rights to the drug used to treat severe lead poisoning in 2013, it has increased the price from $950 to $27,000. There is no reason other than greed for this huge price increase on a decades-old drug. The cost is limiting availability of the drug to children with lead poisoning, including those from Flint, Michigan. [1] Lead poisoning can be life-threatening, but more often causes problems with growth and development, including anemia, neurological damage, and cognitive impairments.

Valeant is the corporation that acquired two heart drugs in 2014 and more than doubled the price of one and quintupled the price of the other. This was on top of a quintupling of their prices in 2013 by the previous owner (who had recently purchased the rights to the drugs). So, overall their prices have jumped to 10 and 25 times what they were in 2013.

Valeant has been one of the poster children for pharmaceutical greed. It has repeatedly purchased drug companies and then dramatically boosted the prices of their medicines. [2]

My previous post, Drug Prices: A Big Problem in Our Privatized Health Care System, provides more information on the problem of unrestrained drug price increases. It also gives 8 more examples of dramatic drug price increases where the only explanation is greed coupled with a lack of regulation.

Drug prices in the U.S. are not regulated or routinely negotiated as they are in other countries. Therefore, the pharmaceutical corporations, which often have monopolistic power, can increase drug prices more or less at will.

In September 2015, Senator Bernie Sanders filed a bill in the U.S. Senate to address price gouging by pharmaceutical corporations. The Prescription Drug Affordability Act would allow the Medicare prescription drug program to negotiate prices with drug companies, a practice that is currently banned by a 2003 law. It would also require the pharmaceutical corporations to report information about the factors affecting their drug pricing, such as research and development costs.

I encourage you to contact your U.S. Senators and Representative to urge them to support the Prescription Drug Affordability Act and efforts to control drug prices in general.

[1]       Prupis, N., 10/14/16, “As Flint suffers, big pharma slammed for lead poisoning drug price hike of 2,700%,” Common Dreams (http://www.commondreams.org/news/2016/10/14/flint-suffers-big-pharma-slammed-lead-poison-drug-price-hike-2700)

[2]       Silverman, E., 10/11/16, “Huge Valeant price hike on lead poisoning drug sparks anger,” Stat (https://www.statnews.com/pharmalot/2016/10/11/valeant-drug-prices-lead-poisoning/)

PROBLEMS WITH PRIVATIZED PRISONS

The problems with privatized prisons have come to public attention largely due to the investigative journalism of The Nation and Mother Jones. Their reporting underscores the importance and challenges of investigative journalism. It has become relatively routine for targets of investigative journalism to sue (or at least threaten to sue) the journalists and their publishers. Both corporate and government entities have built an ever stronger set of legal protections including employee non-disclosure agreements and other employer protection laws and legal precedents. The mainstream, corporate media have largely abandoned investigative journalism at least in part due to the threat of litigation and because news and reporting budgets have been slashed to increase profits.

When Mother Jones published its report based on a guard’s experiences at a private prison run by the Corrections Corporation of America (CCA, see overview and link below), it received a threatening letter from a law firm on behalf of CCA. It was the law firm that had represented a billionaire and large political campaign donor who had spent 3 years suing Mother Jones over its reporting of his anti-LGBT activities. Although the billionaire lost his case, the legal costs Mother Jones incurred in defending itself were a very serious financial burden. Furthermore, he pledged $1 million to support others who might want to sue Mother Jones over its reporting. [1] Needless to say, this type of aggressive behavior by the subjects of investigative reporting puts a chill on this valuable kind of journalism.

The Nation’s investigative reporting was based on reviewing a large number of documents from the Bureau of Prisons (BOP) in the US Department of Justice. The documents were obtained only after a lengthy and costly process using the Freedom of Information Act to gain access to these public records.

The records showed that the Bureau of Prisons’ monitors had documented, between January 2007 and June 2015, the deaths of 34 inmates who were provided substandard medical care in the BOP’s private prisons. Fourteen of these deaths occurred in prisons run by the Corrections Corporation of America, while fifteen were in prisons operated by the GEO Group. These two corporations are the largest operators of for-profit prisons. [2]

Despite this and other documentation of serious problems at the for-profit prisons, top BOP officials repeatedly failed to enforce the remediation of dangerous deficiencies and routinely extended contracts for the prisons. This was due, at least in part, to a cozy relationship between BOP leadership and the private-prison operators because of the revolving door of personnel between the BOP and the private providers. In 2011, for example, Harley Lappin, who had served as the Director of the BOP for eight years, left to join CCA as executive vice president. There he earned more than $1.6 million in one year; roughly 10 times his salary at BOP. Two previous BOP Directors, J. Michael Quinlan and Norman Carlson, had gone to work for CCA and the GEO Group, respectively. Five BOP employees recalled the former BOP Directors participating in meetings between the BOP and the contractor for whom they worked. The BOP employees felt this influenced decisions that were made and made taking disciplinary action against the contractors difficult.

Mother Jones magazine’s investigative reporting was done by Shane Bauer, a reporter who spent 4 months as a guard at one of CCA’s private prisons in Louisiana. [3] He found that cost cutting was a focus of both the state and CCA. Employee costs made up 59% of CCA’s operating expenses and therefore were a key target for cost-cutting. Starting guards at Bauer’s CCA facility made only $9 per hour while those at public prisons in the state made $12.50. To further save money and increase profits, the CCA facility was typically under-staffed. The facility’s guard towers were unmanned on a regular basis and staffing inside the facility was typically 10% – 20% below standard. Lockdowns, where prisoners can’t leave their wing of the prison, were supposed to be punishments for major disturbances, but they also occurred over holidays and other times when there simply weren’t enough guards to run the prison. Security checks on prisoners were logged as being done even when they weren’t because of understaffing. However, when the state’s Department of Correction was coming for an inspection, guards were required to work overtime so the facility was fully staffed.

As a result of under-staffing and perhaps under-training (another cost-cutting strategy), the use of force or chemical agents, typically pepper spray, occurred more often at the CCA prison than at comparable facilities: twice as often for force and 7 times as often for chemical agents. With 1,500 inmates, 546 sexual offenses were reported at Bauer’s prison in 2014, 69% higher than at a comparable government-run facility. Between 2010 and 2015, CCA was sued more than 1,000 times nationwide, with approximately 3% of the cases involving a death, 6% sexual harassment or assault, 10% physical violence, 15% injuries, 15% medical care issues, and 16% prison conditions and treatment.

Louisiana’s efforts to cut costs and use contractors to run cheap prisons was reflected in the $34 per inmate per day that it paid CCA, while funding for state-run prisons was about $52. In addition, the inflation-adjusted cost per prisoner at the CCA facility Bauer worked at had dropped by 20% between the late 1990s and 2014.

CCA has an incentive to keep prisoners in its prisons in order to maximize revenue. An inmate can be charged with an infraction of the rules and lose credit for good behavior. This can mean that an inmate stays in prison an extra 30 days and that CCA gets paid an additional $1,000.

In Louisiana, the state also had an incentive to keep the prison full because CCA’s contract with the state required that CCA get paid for a minimum of 96% of full occupancy. Occupancy guarantees are common in private prison contracts and are one aspect of privatization that leads to perverse incentives for the state. The state’s incentive to keep the prison full may mean that prisoners who could be released are kept in prison or that the criminal justice system is pressured to arrest and sentence enough people to ensure that the prison is full.

CCA has been very active politically through lobbying and campaign contributions. Since 1998, CCA has spent $23 million on lobbying the federal government. Since 1990, it and its employees have contributed more than $6 million to candidates and other political activity. It has lobbied for high levels of incarceration. It co-chaired the criminal justice task force of the American Legislative Exchange Council (ALEC), a corporate and conservative think tank that drafts and promotes state-level legislation. Among the pieces of legislation it has promoted are mandatory sentencing laws, punitive immigration reform, and truth-in-sentencing laws, all of which helped fuel the growing prison population of the 1990s.

CCA and other for-profit prison corporations aggressively lobbied Congress in 2009 for a minimum number of undocumented immigrants to be in private detention centers. They succeeded; US taxpayers are required by law to pay for a daily minimum of 34,000 beds in private detention centers. [4] These corporations have also lobbied against bills in Congress that would require private prisons to be subject to public information laws, such as the Freedom of Information Act. Such bills have been introduced at least 8 times in Congress, but have failed to pass each time.

These are examples of the problems and issues with private prisons, and with privatization in general. The problems with the private prisons were severe and intractable enough that the BOP concluded that it had to terminate its use of them. The BOP’s experiences and decision to end privatization should be kept in mind as other privatization efforts are reviewed or proposed.

[1]       Jeffery, C., July/August 2016, “Why we sent a reporter to work as a private prison guard,” Mother Jones (http://www.motherjones.com/politics/2016/06/cca-private-prisons-investigative-journalism-editors-note)

[2]       Wessler, S.F., 6/15/16, “Federal officials ignored years of internal warnings about deaths at private prisons,” The Nation (https://www.thenation.com/article/federal-officials-ignored-years-of-internal-warnings-about-deaths-at-private-prisons/)

[3]       Bauer, S., July / August 2016, “My four months as a private prison guard,” Mother Jones (http://www.motherjones.com/politics/2016/06/cca-private-prisons-corrections-corporation-inmates-investigation-bauer)

[4]       Editorial, 8/27/16, “Dump private prisons – all of them,” The Boston Globe

PRISON PRIVATIZATION: A FAILED EXPERIMENT

The risks of privatizing government services have been highlighted by the recent bad experience with private prisons. The Bureau of Prisons (BOP) in the federal Department of Justice (DOJ) recently announced that it will end its 20 years of using privately-run, for-profit prisons due to significant, clear cut problems.

A DOJ Inspector General’s report in August 2016 found that private prisons were less safe, less secure, and more costly than the BOP’s own government-run prisons. Among other problems, dozens of deaths linked to substandard medical care were documented. [1] Private prisons also had higher rates of assaults and 9 times more lockdowns (used to quell disturbances and punish prisoners) than government-run facilities.

Earlier reports on the BOP’s privatized prisons had found that any cost savings were negated by the costs of oversight and that the quality of services was lacking. These are common problems with privatization. Frequently, the cost of oversight is not factored into the cost-benefit analysis of privatization. Therefore, privatization may appear to save money when in actuality it doesn’t. Furthermore, the oversight that occurs is often unsuccessful in ensuring efficient and high quality performance by the private provider, as occurred with the BOP’s private prisons.

Despite these earlier findings, the use of private prisons grew and by fiscal year 2015 the BOP was paying private prison contractors $1.05 billion a year. [2] Today, the BOP houses about 22,000 of its prisoners in 13 private prisons out of a total of roughly 175,000 prisoners under its jurisdiction. Its announcement stated that it will phase out the use of these private prisons as their contracts expire over the next few years.

The US Department of Homeland Security, on the other hand, has said nothing about its future use of private detention facilities, which house about 25,000 immigrants. These detention centers have also been found to provide substandard medical care linked to deaths. They also have experienced high suicide rates. [3]

Turning over a public service to a private, for-profit corporation often creates perverse and counterproductive incentives. Privatization at the BOP, as in most cases, was focused on reducing public sector costs. The goals of minimizing cost and maximizing profit often conflict with the social mission of a public service. In the case of privatized prisons, the goals of humane treatment and rehabilitation are undermined.

In private prisons, the corporate providers cut costs (and increase profits) by increasing the number of inmates in a facility (resulting in overcrowding); decreasing the services provided to them (including rehabilitation, education, job training, and medical care); providing cheap (and sometimes unhealthy) food; using substandard facilities; and decreasing the number, pay, and training of staff (including guards, supervisors, and medical staff). In addition, to generate revenue, they charge fees to inmates and their families (that are often unaffordable), and also sell inmate labor typically without paying the inmates for it. [4] Another frequent problem with privatization is that private providers bill government for services that were not needed or in some cases were not actually provided in order to increase revenue and profits.

Because the for-profit prison corporations are private entities, they are not subject to public information laws. This lack of transparency is another frequent problem with privatization. Not surprisingly, the for-profit prison corporations tend to be quite secretive, which makes public scrutiny of them and their service delivery difficult.

The private prison business began in the 1980s. The war on drugs was underway; tough on crime and strict sentencing laws were in their political heyday. Between 1980 and 1990, state spending on prisons quadrupled and still many prison were over-crowded. [5]

At the federal level, detention of undocumented immigrants exploded in the 1990s. Until then, border crossing was treated as a civil offense, punishable by deportation. But then, as part of the tough on crime and anti-immigrant politics, Congress changed that. By 1996, crossing the border was a federal crime. Prosecutions for illegal entry rose from fewer than 4,000 in 1992, to 31,000 in 2004 under President George W. Bush, to a high of 91,000 in 2013 under President Obama.

Privatization of public services was a hot topic in the 1980s as it was purported to be more efficient, to reduce costs, improve quality, and reduce government expenditures. It also provided opportunities for private profit.

Therefore, it wasn’t surprising that privatization of prisons blossomed as a way to meet a growing need and, supposedly, reduce governments’ costs. To handle the flood of undocumented immigrants into its prisons, the BOP turned to private corporations to operate a new type of facility: low-security prisons designed to hold only non-citizens. As of June 2015, these facilities — which are distinct from immigration detention centers, where people are held pending deportation — housed nearly 23,000 people. Three private corporations now run 11 immigrant-only prisons for BOP: five are run by the GEO Group, four by the Corrections Corporation of America, and two by the Management & Training Corporation. [6]

The Corrections Corporation of America (CCA) began operation in 1983 and grew from 5 facilities in 1986 to 60 today. It houses 66,000 inmates and in 2015 reported revenue of $1.9 billion with net income of $221 million. Its main competitor is GEO Group, which has 70,000 inmates in its private facilities.

The problems with private prisons have come to public attention largely due to investigative journalism by The Nation and Mother Jones. My next post will provide an overview of their reporting. The failures of the BOP’s 20-year experience with private prisons hold many lessons for efforts to privatize other government services including roads, bridges, and public transportation; schools; water and sewer systems; and trash collection.

[1]       Wessler, S.F., 8/18/16, “The Justice Department will end all federal private prisons, following a ‘Nation’ investigation,” The Nation (https://www.thenation.com/article/justice-department-to-end-all-federal-private-prisons-following-nation-investigation/)

[2]     Wessler, S.F., 6/15/16, “Federal officials ignored years of internal warnings about deaths at private prisons,” The Nation (https://www.thenation.com/article/federal-officials-ignored-years-of-internal-warnings-about-deaths-at-private-prisons/)

[3]       Editorial, 8/27/16, “Dump private prisons – all of them,” The Boston Globe

[4]       Vanden Heuvel, K., 8/23/16, “On private federal prisons, a victory for independent journalism,” The Washington Post

[5]       Bauer, S., July / August 2016, “My four months as a private prison guard,” Mother Jones (http://www.motherjones.com/politics/2016/06/cca-private-prisons-corrections-corporation-inmates-investigation-bauer)

[6]       Wessler, S.F., 1/28/16, “ ‘This man will almost certainly die’,” The Nation (https://www.thenation.com/article/privatized-immigrant-prison-deaths/)

SOLVING THE PROBLEMS OF OUR PRIVATIZED HEALTH CARE SYSTEM

Clearly, the private market is not working well for health insurance or health care in the U.S. Costs are rapidly escalating in a system that is already the most expensive in the world, but that has mediocre to poor outcomes. Many private health insurance, pharmaceutical, and health care corporations are putting profits before patients.

Increasing premiums for health insurance and high drug prices (see my previous post on drug prices) are undermining efforts to control health care costs. The exorbitant and fast growing costs of U.S. health care are squeezing state and federal governments’ budgets, as well as employers and individuals. In many states’ budgets, increased costs for health care for poor families and seniors through Medicaid, as well as for employees and retirees, are eating up all the increases in revenue from economic growth – and then some. This means that without tax increases or other sources of increased revenue, states and the federal government are having to cut spending in other areas of their budgets.

Increasing costs for employees’ health insurance are hurting employers’ competitiveness with foreign companies and reducing their profitability. Some employers have dropped health insurance as an employee benefit, while others have increased the portion of health insurance premiums employees must pay or are offering insurance plans with less comprehensive coverage as well as higher deductibles and co-pays. As fewer employees get health insurance through their employers, the number of people in subsidized government health programs increases, further increasing costs for governments.

Individuals are not getting the health care they need because insurance is not making it accessible and affordable. Many people are suffering financial hardship and some file for bankruptcy because of the costs of health care.

The clear solution to these problems is to provide everyone access to what’s referred to as a “public option” or a Medicare-for-all type health insurance plan. This would be a government run insurance pool, which is what Medicare is for seniors. When the Affordable Care Act (ACA) was being considered by Congress, a public option was initially included. In other words, a government run insurance plan would have been offered by each of the ACA’s state-level health insurance marketplaces (aka exchanges) where people without health insurance would buy coverage. A public option was vehemently opposed by the private insurers and was eventually dropped from the ACA legislation. They opposed it because they didn’t want the competition from a Medicare-type program that would be likely to expose their inefficiencies – despite, of course, these private corporations’ dedication to free markets and competition whenever any government regulation is proposed.

With problems in our privatized health care system becoming increasingly apparent, including a public option in the ACA exchanges is gaining increased support. [1] With some private health insurers abandoning the exchanges, it is projected that 7 states will have only one private insurer offering coverage. [2] In these state, having a public health insurance plan as an option would mean that there was still competition. This would serve as a check on the sole private insurer, ensuring that its coverage and pricing remained competitive and that it didn’t exploit a monopoly situation.

More broadly, there have been numerous proposals over many years to allow anyone over 50 or 55 years old to “buy into” Medicare. In other words, although they hadn’t yet reached the normal Medicare eligibility age of 65, these individuals would be allowed to pay an appropriate premium to buy health insurance as part of the Medicare insurance pool.

Senator Sanders, in his presidential campaign, highlighted his proposal for Medicare-for-All. This proposal would allow anyone to pay an appropriate premium to buy health insurance as part of a large, Medicare-like, government insurance pool. This proposal received broad and often enthusiastic support. [3]

A public option in the ACA exchanges or a Medicare-for-All option for everyone is the only way to realistically address the shortcomings of our privatized system of health care. By providing real competition for the private insurers, this would ensure the quality and affordability of health insurance. By giving the public option or Medicare-for-All insurance pools the right to negotiate with the pharmaceutical corporations over drug prices, prescription drug costs could be brought under control. (The Medicare drug benefit should also be changed to allow Medicare to negotiate drug prices.)

If we want quality and affordability in our health care system, a public option or Medicare-for-All program is essential as a check on the private corporations that currently dominate our health care system. Currently, a proposal in the U.S. Senate would add a public option to the ACA exchanges. It already has the support of over 30 Senators, including Senators Bernie Sanders (VT), Elizabeth Warren (MA), Jeff Merkley (OR), Charles Schumer (NY), Patty Murray (WA), and Dick Durbin (IL).

I encourage you to contact your U.S. Senators and other elected officials to tell them you support a public option under the Affordable Care Act specifically and a Medicare-for-All program in general. The for-profit health insurance, pharmaceutical, and health care corporations will fight tooth and nail to stop this competition. They will make huge campaign and lobbying expenditures to try to maintain their ability to manipulate our health care system to generate large profits and exorbitant executive compensation. Only a huge outcry and sustained pressure from the grassroots – from we the people – will get our policy makers to enact the significant reforms needed to create a health care system that delivers affordable, high quality care for all.

[1]       Willies, E., 8/28/16, “Recent headlines signal need for single-payer Medicare for All – now,” Daily Kos (http://www.dailykos.com/story/2016/8/28/1563720/-Recent-headlines-signal-need-for-single-payer-Medicare-for-All-now)

[2]       Alonso-Zaldivar, R., 8/29/16, “Challenges mount for health law,” The Boston Globe from the Associated Press

[3]       Nichols, J., 9/16/16, “Make the public option a central focus of the 2016 campaign,” The Nation (https://www.thenation.com/article/make-the-public-option-a-central-focus-of-the-2016-campaign/)

HEALTH INSURANCE: A BIG PROBLEM IN OUR PRIVATIZED HEALTH CARE SYSTEM

The goals of health insurance are to provide affordable access to health care and to protect people from the catastrophic costs of serious health problems. The health insurance system in the US is failing to meet these goals for many Americans.

The most recent and newsworthy issues with private health insurance are occurring in the so-called health insurance exchanges. These are state-level marketplaces created by the Affordable Care Act (ACA, aka Obama Care) where individuals without health insurance can buy coverage.

Many of the private health insurers offering policies through the exchanges are increasing the premiums they charge; some by as much as 62%. This is happening in part because some insurers initially set premiums unrealistically low in order to attract customers and gain market share. In addition, health care costs for those enrolling through the exchanges have been greater than some insurers estimated. [1]

As a result of these increased premiums, customers may switch to less expensive policies with less comprehensive coverage as well as higher deductible and co-payment amounts. This will increase the costs of health care for these customers, leaving some of them under-insured and vulnerable to financial hardship or bankruptcy if a major medical expense occurs.

Some insurers are terminating their participation in the exchanges, ostensibly because they aren’t making money on the policies they are selling there. However, in the case of Aetna, apparently it is planning to withdraw from 11 of the 15 exchanges in which it participates as retaliation for the federal government’s opposition to Aetna’s proposed merger with Humana. Both Aetna and Humana are among the 5 largest health insurers in the country. If this merger and another one (between Anthem and Cigna) that the government is blocking were approved, the top 5 health insurers would become 3 huge corporations. These are exactly the kinds of mergers that are resulting in decreased competition, increased prices, and near monopolistic power. (See my earlier blog post for more details.)

Overall, the health insurance corporations are raising premiums and cutting their participation in the exchanges to cut losses or increase profits. Profits are more important to them than meeting the goals of health insurance for customers.

Furthermore, private insurers are much less efficient than Medicare, the public health insurance program for our seniors. This is well documented. Medicare spends over 95% of its budget on actual health care. Private health insurers spends as little as 67% of premiums on actual health care. They use money from premiums to pay for advertising, profits, and executives’ compensation. To ensure a reasonable level of efficiency, the ACA requires health insurance policies offered on its exchanges to spend 80% of their premiums on actual health care – as opposed to administrative and corporate expenses.

Private health insurance simply doesn’t make sense from two key perspectives. First, health insurance and health care are not “markets” as defined by economics. Consumers don’t have perfect and clear information about the competing products. Consumers can’t and don’t effectively shop around for health insurance plans or health care services. When one needs a medical procedure, one doesn’t have the time, information, or capacity to shop around and find the best combination of quality and price.

Second, the whole premise of insurance is that risk is shared among a large, random pool of people. However, the multiple health insurers fragment the pool and, furthermore, each one works to attract healthy people (who are less costly to serve) and avoid those who are sick. With one large, random pool, the unpredictable nature of health care needs and costs is shared. The financial hardship of a serious medical issue does not fall on one individual or family. However, our private health insurance industry fragments the pool and tries to only insure healthy people. They do this through advertising, which therefore becomes a major expense, along with special perks like coverage for membership in a fitness center. They do it by denying payment so sick customers get frustrated and leave. This is clearly documented in Medicare, where the private insurers that provide services under Medicare are clearly successful at attracting the healthier seniors but then dumping them back into the government insurance pool when they get sick.

In addition, the presence of multiple private health insurers also increases costs for doctors, hospitals, and other providers of health care. Each insurer has its own forms and procedures with which the providers have to cope.

Roughly 50 – 60 million adults struggle with health care bills each year and the great majority of them have health insurance. This includes roughly 20% of the adult population under 65, the age of eligibility for automatic health insurance under Medicare. [2] Nearly 2 million Americans will file for bankruptcy this year in cases where unpaid medical bills are a major factor. Overwhelming health care bills are the number one reason for personal bankruptcy filings. [3]

More Americans have health insurance today than ever before thanks to the ACA, which has provided health insurance to 15 million people. However, because of the dysfunction of privatized health insurance, this has not significantly reduced financial hardship due to medical bills. Notably, the easiest way for health insurers to reduce costs and increase profits is to refuse to pay for health care services. Having a health insurer deny authorization or payment for care is something almost all Americans have experienced. In addition, health insurers are increasing premiums while reducing coverage and raising deductibles and co-payments.

Clearly, private health insurance is not meeting the goals of affordability and protection from financial hardship. My next post will present solutions to the problems of our privatized health care system.

[1]       Alonso-Zaldivar, R., 8/29/16, “Challenges mount for health law,” The Boston Globe from the Associated Press

[2]       Sanger-Katz, M., 1/5/16, “Even insured can face crushing medical debt, study finds,” The New York Times

[3]       Mangan, D., 6/25/13, “Medical bills are the biggest cause of US bankruptcies,” CNBC (http://www.cnbc.com/id/100840148)

DRUG PRICES: A BIG PROBLEM IN OUR PRIVATIZED HEALTH CARE SYSTEM

A series of recent events have highlighted the problems with our privatized, for-profit health care system. First, there have been numerous cases of drug prices that have increased dramatically. I’ll discuss this topic in this post.

Second, health insurance corporations have been merging (and continue to try to) to create a few, enormous corporations that have monopolistic power, which leads to increases in health insurance costs. A similar pattern is occurring among health care providers, although this tends to be more regional than national. I’ll discuss these issues in my next post, followed by a post on solutions to the problems of our privatized health care system.

These recent events highlight that per capita health care spending in the U.S. continues to climb more rapidly than overall inflation. And they underscore that our health care spending is already exorbitant compared to every other country, while our health outcomes are worse.

The dramatic increase in the cost of EpiPens has been the most recent and perhaps most prominent of the extraordinary increases in drug prices. Perhaps this is because of its widespread usage and dramatic life-saving potential, especially for allergic reactions in children. The history here is that the EpiPen cost $50 in 2004. It was bought by Mylan in 2007, which began to steadily increase its price. It hit $250 in 2013 and then, in August, Mylan jumped the price to $600 – 12 times what it cost in 2004. By the way, the actual drug in the EpiPen costs about $1. [1]

The pharmaceutical corporations typically argue that their high drug prices are needed to pay for research and development. The validity of this argument is questionable at best and clearly false in many cases, such as the EpiPen case. A recent study found no evidence of a connection between drug research and development costs and prices. It concluded that drug prices are based on what the manufacturer can squeeze out of consumers and their insurance. [2]

For example, in August the price of Daraprim was raised to $750 per pill from $13.50. It had been $1 per pill in 2010. This is a 62-year-old drug that treats a life-threatening parasitic infection in babies and those with compromised immune systems, such as AIDS and cancer patients. In 2010, GlaxoSmithKline sold the drug to CorePharma, which quickly increased the price from $1 to around $10 per pill. In August, the drug was acquired by Turing Pharmaceuticals, a start-up run by a former hedge fund manager, and its price was immediately increased to $750 – 750 times its cost in 2010. [3] Turing is not a pharmaceutical company; it doesn’t do research and development. It is basically a hedge fund that buys the rights to drugs on which it believes it can dramatically increase prices to make a great return on its investment. Why the price increases? Greed coupled with a lack of regulation is the only answer.

Similarly, Rodelis Therapeutics bought Cycloserine, a drug to treat drug-resistant tuberculosis. It quickly increased the price per pill to $360 from about $17. Likewise, Valeant Pharmaceuticals acquired two heart drugs and more than doubled the price of one and quintupled the price of the other. This was on top of a quintupling of their prices in 2013 by the previous owner that had recently purchased them. So, overall their prices have jumped to 10 and 25 times what they were in 2013.

Per capita prescription drug spending in the U.S. is the highest in the world. U.S. drug spending is more than twice as high as the average for 19 other advanced countries and one-third higher than in the next most expensive countries, Canada and Germany.

Medicare, the huge health insurance plan for our seniors, is prohibited from negotiating with pharmaceutical corporations for lower drug prices. [4] This was written into the expansion of Medicare that added coverage of drugs by the George W. Bush administration at the behest of the pharmaceutical corporations. Meanwhile, the Veterans Administration, many health insurers, and health care systems in other countries negotiate far lower prices for drugs than what Medicare ends up paying.

U.S. patent laws and other market protections slow the availability of less expensive, generic versions of drugs, thereby supporting high prices for brand name drugs here in the U.S. Brand name drugs (as opposed to generics) represent 10% of prescriptions but 72% of drug spending.

The pharmaceutical corporations also use multiple business strategies to limit competition so they can maintain high prices for their drugs. One strategy is to use what the pharmaceutical industry calls “controlled distribution.” This means that the drugs are not distributed through drugstores but only directly by the corporation. Therefore, companies that want to make and sell a generic version of the drug, cannot get the samples they need to analyze, replicate, and test a generic version of the drug. Another strategy is to pay generic drug manufacturers not to make a generic version of a drug, even after its patent has expired. A third strategy is to make a minor modification to a drug, one that often has no functional impact, in order to obtain a patent extension based on the modification.

Dramatic increases in the prices of generic drugs (i.e., non-brand-name drugs that are no longer covered by a patent) are a relatively new phenomenon. Prices of generic drugs declined from 2006 to 2013. However, there are numerous examples of dramatic price increases over the past 3 years: [5]

  • Tetracycline (a common antibiotic): $0.06 to $4.60 per pill (77 times as expensive)
  • Amitriptyline (an antidepressant): $0.04 to $1.03 per pill (26 times)
  • Clobetasol (a prescription skin cream): $0.26 to $4.15 per gram (16 times)
  • Captopril (a blood pressure med): $0.11 to $0.91 per pill (8 times)
  • Digoxin (a heart med): $0.12 to $0.98 per pill (8 times)

Drug prices in the U.S. are not regulated or routinely negotiated as they are in other countries. Mergers of pharmaceutical corporations have reduced competition. Increasingly, the remaining large corporations have monopolistic power in the marketplace, and hence can increase prices more or less at will.

In California, the pharmaceutical industry, led by Merck and Pfizer, is spending over $80 million to defeat a ballot question that would limit state health plans to paying the discounted drug prices negotiated by the US Department of Veterans Affairs. Back in 2005, the pharmaceutical industry spent $135 million to defeat a ballot question that would have required it to provide discounted drugs for the poor. [6]

Perhaps not surprisingly, prescription drug costs represent the fastest growing portion of health care costs. Overall spending on prescription drugs has been growing at 10% per year, double the rate of increase of total health care spending, and roughly 5 times the rate of general inflation in the economy. Prescription drugs now account for 17% of all health care spending. [7]

[1]       Rosenthal, E., 9/2/16, “The lesson of EpiPens: Why drug prices spike, again and again,” The New York Times

[2]       Kesselheim, A.S., Avorn, J., & Sarparwari, A., 8/23/16, “The high cost of prescription drugs in the United States: Origins and prospects for reform,” The Journal of the American Medical Association

[3]       Pollack, A., 9/21/16, “Huge hikes in prices of drugs raise protests and questions,” The Boston Globe from The New York Times

[4]       Weisman, R., 8/24/16, “Exclusivity rule seen driving up drug costs,” The Boston Globe

[5]       McCluskey, P. D., 11/7/15, “The not-so-cheap alternative,” The Boston Globe

[6]       Robbins, R., 9/7/16, “A revolt against high drug prices,” The Boston Globe

[7]       Weisman, R., 8/24/16, see above

COUNTERACTING THE LOW-WAGE BUSINESS MODEL OF PARASITIC CORPORATIONS

The low-wage business model of Walmart and McDonald’s, for example, is a choice, both of corporations and of our policy makers. In the restaurant industry, there are restaurants in Seattle and San Francisco that are paying their servers $13 per hour and are doing fine. Costco successfully competes with Walmart and In-N-Out-Burger with McDonald’s even though the former eschew the low-wage business model of their competitor. [1]

Economists have a label for the behavior of corporations that rely on a low-wage business model where employees need public assistance to survive: it’s called “free riding.” It’s a free ride for the employer, as public assistance programs are subsidizing their payrolls. It’s anything but a free ride for taxpayers and the workers.

In the fast food industry, over half of employees are enrolled in at least one public assistance program. The estimated cost to taxpayers is $76 billion per year. Ironically, the taxes paid by high-wage businesses and their employees, including those competing with the likes of McDonald’s and Walmart, help to pay for the public benefits that subsidize the low wages of these parasitic corporations. Until recently, McDonald’s actually assisted its employees in signing up for public benefits – to the tune of $1.2 billion per year. Walmart employees are estimated to receive $6 billion per year in public assistance. By the way, in 2015 McDonald’s profit was $4.53 billion and Walmart’s was $130.2 billion.

Economic theory states that workers get paid what they are worth. Clearly, this is an over simplification given the variations in pay that exist among employers within an industry, such as within the fast food or restaurant industries. It is more accurate to say that workers get paid what they negotiate, and that some employers are friendlier negotiators than others. At the top end of the pay spectrum, some CEOs negotiate to get paid far more than they’re worth, while many ordinary workers get paid far less than they are worth because they don’t have the power to negotiate better pay.

The U.S. labor market has a dramatic imbalance of power. Unless a worker is a member of a union, he or she has little or no power to negotiate with an employer. The rate of union membership has fallen from roughly 1 in 3 private sector workers in 1979 to only about 1 in 10 workers today. Unions negotiate higher wages and benefits for union members and also, indirectly, for nonunion workers. This occurs for several reasons: union contracts set wage standards across whole industries and strong unions prompt employers to keep wages high in order to reduce turnover and discourage unionizing at non-union employers. The decline in union membership has resulted in reduced wages for both union and nonunion workers. It is estimated that this decline is costing non-union workers $133 billion a year in lost wages. [2]

Individual workers lack bargaining power because there are relatively few employers and job openings but lots of workers looking for a job. Furthermore, a worker has an immediate need for income to pay for food and shelter, while most employers can leave a job unfilled for a while without suffering any great hardship. They can take the time to search for someone willing to take the job at whatever pay they offer.

Since 1980, employers have aggressively exploited this imbalance of power, while our federal government has stood aside and, in many ways, supported them in doing so. As a result, $1 trillion per year that used to go to workers now goes to executives and profits. Workers’ rewards for their contributions to our economic output (gross domestic product [GDP]) has dropped from 50% of GDP to 43%.

There is truth to the argument that in very competitive, price-sensitive industries producers have to squeeze workers’ wages to remain in business. However, this is where the role of government and public policy is critical. If every producer in the industry is required to pay a minimum wage, then a floor is set and all producers are on a level playing field, but with workers getting better pay. Without a good minimum wage, the competition drives wages down to the point where workers are suffering and public subsidies are required.

Public policies and laws, as well as collective action (such as unions negotiating on workers’ behalf), regulate the marketplace and affect the balance of power among competing economic interests. A market economy cannot operate effectively without the rules put in place by policies and laws. They are not antithetical to capitalism; rather, they are essential for markets to function.

Rules are necessary to prevent cheating, such as regulation of weights and measures of goods sold, and to protect the health and safety of consumers and workers. Laws and court systems enforce contracts between parties for the exchange of goods and services for money. Rules are needed to prevent companies from gaining an unfair advantage by being a free rider or externalizing costs (i.e., shifting the costs to others such as by polluting public air and water or by paying such low wages that employees need taxpayer-funded support).

Our low-wage, parasite economy is a collective choice, made by corporations but allowed and abetted – and subsidized – by public polices enacted by elected officials. We, as voters, can change this by electing representatives who support:

  • Increasing the minimum wage,
  • Enforcing and strengthening laws that allow workers to bargain collectively through unions, and
  • Stopping the free riding and externalizing of costs by large, profitable corporations.

Increasing the minimum wage and strengthening unions are two key policies that would strengthen our economy and the middle class by reducing the prevalence of the low-wage business model of parasitic corporations. I encourage you to ask candidates where they stand on these issues and to vote for ones who support fair wages and bargaining power for workers.

[1]       Hanauer, N., Summer 2016, “Confronting the parasite economy,” The American Prospect

[2]       Rosenfeld, J., Denice, P., & Laird, J., 8/30/16, “Union decline lowers wages for nonunion workers,” Economic Policy Institute (http://www.epi.org/publication/union-decline-lowers-wages-of-nonunion-workers-the-overlooked-reason-why-wages-are-stuck-and-inequality-is-growing/)

A LARGE CORPORATION BLACKMAILS OUR GOVERNMENT

The U.S. Department of Justice (DOJ) is blocking two mergers, each of which would combine two of the five largest health insurance corporations in America. Aetna and Humana have plans to merge as do Anthem and Cigna. As a result, the big five health insurers would become three, reducing competition and choice for consumers, and, presumably, increasing the cost of health insurance. As I’ve written about in previous posts (here, here, and here), huge corporations with near monopoly power are bad for our economy and our democracy.

It appears in this case that Aetna is using its marketplace and political power to attempt to blackmail the federal government into approving its merger. On August 15, Aetna announced that it will withdraw from 11 of the 15 state health insurance marketplaces (called exchanges) in which it currently participates. These exchanges were created by the Affordable Care Act (aka Obama Care) and are where people without health insurance go to find and buy insurance.

Aetna claims it is dropping out of the exchanges because it cannot afford the losses it is experiencing on consumers from them. However, this is a dramatic reversal from the corporation’s statements four months ago when its CEO Mark Bertolini said that Aetna planned to stay in the exchanges and was “in a very good place to make this a sustainable program.” It appears the major reason for the shift was the DOJ’s decision to block its merger with Humana. [1]

Back in July, in a letter to the DOJ (obtained by The Huffington Post through a Freedom of Information Act request), Aetna CEO Bertolini stated that Aetna would reduce its participation in the health exchanges if the merger wasn’t approved. [2] Note that Bertolini would personally receive up to $131 million if the merger goes through [3] and that Aetna made a profit of $2.4 billion in 2015 on revenue of $60 billion.

The withdrawal of Aetna from the health insurance exchanges will force consumers to switch plans and will result in fewer choices and perhaps increased costs for Americans obtaining health insurance through the exchanges. Other health insurers, including regional Blue Cross Blue Shield plans, find their participation in the exchanges profitable or plan to continue their participation even if currently there are some losses. Obama Care has brought 20 million new consumers to the health insurers through its exchanges and subsidies.

Many people, including former presidential candidate Bernie Sanders, are pointing to Aetna’s action as an example of the unhealthy amount of power that giant corporations have. More specifically, many health advocates are concerned about corporate power in the health care arena and are citing this as another example of corporations putting profit before people’s health. Senator Elizabeth Warren wrote that “The health of the American people should not be used as bargaining chips to force the government to bend to one giant company’s will.” [4]

The need for a publicly sponsored alternative (sometimes referred to as Medicare-for-All) to the private, generally for-profit, health insurers in the health insurance exchanges, is being put forth as the solution to counter the pitfalls of for-profit health insurance. [5]

Corporations shouldn’t have the power – which largely comes with size and near-monopoly market share – to effectively blackmail our federal, state, and local governments. These large health insurers and other huge corporations have amassed unhealthy amounts of power. Fortunately, the DOJ is blocking the two proposed mergers that would only make the situation worse.

The “laws” of economics (more accurately economic theory) assume that markets have multiple small suppliers of goods and services. Therefore, there would be real competition and consumer choice that could constrain market prices and companies’ behavior. Small is beautiful (to revive an old saying).

However, major, critical sectors of our economy have one or a very few large corporate suppliers. Aetna’s actions provide a poignant example of how corporate power can harm consumers, our economy, and democracy.

[1]       Bryan, B., 8/17/16, “Now we know the real reason Aetna bailed on Obamacare,” Business Insider (http://www.businessinsider.com/aetna-humana-merger-reason-for-leaving-obamacare-2016-8)

[2]       Cohn, J., & Young, J., 8/17/16, “Aetna CEO threatened Obamacare pullout if Feds opposed Humana merger,” The Huffington Post (http://www.huffingtonpost.com/entry/aetna-obamacare-pullout-humana-merger_us_57b3d747e4b04ff883996a13)

[3]       Knight, N., 8/17/16, “Sanders: Aetna’s Obamacare threat shows what ‘corporate control looks like’,” Common Dreams (http://www.commondreams.org/news/2016/08/17/sanders-aetnas-obamacare-threat-shows-what-corporate-control-looks)

[4]       Knight, N., 8/17/16, see above

[5]       McCauley, L., 8/16/16, “Aetna’s greed proves that Medicare-for-All is the best solution,” Common Dreams (http://www.commondreams.org/news/2016/08/16/aetnas-greed-proves-medicare-all-best-solution)

BIG CORPORATIONS BEHAVING BADLY PART 2

In my previous post, I focused on the big Wall St. corporations’ efforts to weaken financial regulations and consumer protections. In this post, I’ll share two much less visible examples of the power of big corporations to tilt the playing field in their favor:

  • H-1B visas
  • Consumer agreements and employee contracts

First, large corporations are dominating and gaming the H-1B visa program set up to help US companies hire foreign workers with special skills needed for their businesses that they are unable to find among US citizens. Only 85,000 of these visas are issued each year and many small companies with such needs are being shut out by large corporations requesting tens of thousands of the visas. It used to be that companies could apply and get one of these visas at any point during the year when the need arose. Now, immediately after the application process starts on April 1 each year, big corporations request thousands of visas so that a week later applications have already exceeded the year’s supply. [1]

Just twenty corporations took nearly 40% of the visas last year, about 32,000 of them, with one company applying for over 14,000. Thirteen of these 20 corporations are global outsourcing operations that typically bring in their employees from India to fulfill large contracts with US corporations that are outsourcing customer contact, marketing, or other functions. Their dominance and gaming of the system mean that many of the 10,000 other companies, many of them small businesses, that want and need these visas can’t get them.

These large corporations’ claims that they can’t find US citizens to perform these jobs is somewhat suspect. It seems likely that in some cases they simply want to pay the foreign workers less than they would have to pay Americans to do these jobs. Furthermore, a number of these corporations aren’t actually US corporations; they have their headquarters in India or Ireland, for example.

On a different front, many of the agreements that consumers must sign or agree to to shop online, rent a car, put a relative in a nursing home, or to get a credit card, cell phone, or many other products and services, contain a clause that goes something like this: “the company may elect to resolve any claim by individual arbitration.” Increasingly, this language is also showing up in contracts individuals must sign to get a job. This means that the corporate employer or provider of the product or service can force employees and consumers to resolve any complaint, problem, or claim, including ones that may involve fraud, illegality, or serious risk to the individual, through a corporate-controlled arbitration process and as an individual (i.e., not through any group action such as a class-action lawsuit).

This prevents the individual from going to court, from suing, and from joining with others in a class-action lawsuit. Class-action lawsuits, where a group of individuals who have been similarly harmed by a corporation’s actions band together to bring a lawsuit, are often the only realistic way to fight the power and deep pockets of a large corporation. Many attempts to bring class-action lawsuits have been rejected by the courts due to such arbitration clauses, including ones against Time Warner Cable for unauthorized charges on customers’ bills, AT&T for excessive cancellation fees, a travel booking website for price fixing, and ones for predatory lending, wage theft, and multiple cases of race and sex discrimination. The evidence indicates that once a class-action suit is blocked, most individuals simply drop their claims because they aren’t worth pursuing on an individual basis given the time and effort required and the small likelihood of winning any significant compensation.

“This is among the most profound shifts in our legal history. Ominously, business has a good chance of opting out of the legal system altogether and misbehaving without reproach,” according to US District Judge William Young, a Reagan appointee. The effort to prevent class-action lawsuits was led by a coalition of credit card companies and retailers; it has been underway for 10 years. The Attorneys General of 16 states have written to the Consumer Financial Protection Bureau (CFPB) warning that “unlawful business practices” could flourish with the growing inability to use class-action lawsuits to seek compensation for victims. [2]

In October, the Consumer Financial Protection Bureau outlined rules to prevent financial corporations from banning class-action lawsuits in consumer agreements. Wall St. and the US Chamber of Commerce immediately mobilized to block the CFPB’s effort.

Large corporations are continuously working to gain benefits for themselves at a cost to consumers, workers, and small businesses. I urge you to contact your elected officials and tell them that big corporations don’t need or deserve a playing field that’s tipped in their favor. If anything, the field should be tipped in favor of the little guy – individuals and small companies.

[1]       Preston, J., 11/11/15, “Top companies ‘game’ visa system, leaving smaller firms out of luck,” The Boston Globe from The New York Times

[2]       Silver-Greenberg, J., & Gebeloff, R., 11/1/15, “Hidden in fine print, clause stacks deck against consumers,” The Boston Globe from The New York Times

BIG CORPORATIONS BEHAVING BADLY

FULL POST: One of the themes that runs through many of my blog posts is the prevalence of corporate power in our politics, policies, economy, and lives. The power of large, often multi-national, corporations is evident in:

as well as in consumer protection laws, workplace and labor law, and the topics that our corporate media cover and don’t cover.

In this post, I’ll focus on efforts to weaken financial regulations and consumer protections, including some that are likely to come up in Congress in the near future. In my next post, I’ll share some other examples of the power of big corporations to tilt the playing field in their favor.

The large Wall St. financial corporations are wielding their power in opposing regulations and oversight intended to prevent another financial sector collapse and bailout like the one in 2008. Much of the fighting is over provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the Consumer Financial Protection Bureau that it created. Wall St. has been working hard to delay, water down, and repeal regulations under the Dodd-Frank law, in spite of their success in weakening the original law.

One of their tactics is to slip provisions weakening regulations and oversight into unrelated legislation that must pass, hoping their provisions will pass with little or no attention in Congress or among the public. Last December, when a must-pass year-end budget bill was being considered, they slipped in a provision repealing the requirement that their trading of risky investments called swaps (a kind of derivative) had to be conducted by entities separate from those that held insured deposits from individuals. The budget bill passed as did the repeal of the swap regulation. This means that $10 trillion of risky trades are held by banks that have federal deposit insurance. If these risky trades turn sour and produce big losses, the Federal Deposit Insurance Corporation and perhaps other government agencies will have to bailout the banks to make sure depositors don’t lose their insured deposits.

More recently, in October, Wall St. lobbied hard as bank regulators set the amount of money banks have to keep in reserve to cover potential losses on these risky trades. They were able to reduce the amount of these reserves, called the “margin requirement,” which increases the likelihood of a bailout at taxpayers’ expense.

With two pieces of must-pass legislation coming up Congress, the expectation is that Wall St. will again try to slip additional provisions into these bills to weaken regulation and oversight. The two bills are the year-end budget bill and the bill funding highway construction and maintenance. [1] One target appears to be the Consumer Financial Protection Bureau, which was the target of a recent $500,000 advertising campaign that falsely accuses the CFPB of denying people loans. (The CFPB doesn’t make loans; it regulates lenders to prevent them from making predatory and fraudulent loans.)

We have a Consumer Product Safety Commission to regulate and protect us from dangerous consumer products and a National Highway Traffic Safety Administration to protect us from dangerous automobiles (e.g., ones with faulty air bags or ignition switches). However, until Dodd-Frank passed, we did not have an agency to protect consumers from unsafe or predatory financial products. In Canada, where they did have such an agency, the incidence of predatory lending and mortgages was a tiny fraction of what it was in the US in the years leading up to the financial crash. This is a key reason the impact of the crash on homeowners and consumers in Canada was minor compared to the trillions of dollars of losses suffered by Americans.

I urge you to keep an eye out for efforts by our large corporations to bend policies – laws and regulations – to benefit themselves at a cost to consumers, workers, citizens, and small businesses. Contact your Members of Congress and tell them you’re tired of big corporations making out like bandits (sometimes literally) and getting away with it at your expense.

[1]       Hopkins, C., & Brush, S., 11/11/15, “Lawmakers urge regulators to hold the line on risky trades,” The Boston Globe from Bloomberg News

THE UNDERMINING OF THE MIDDLE CLASS

ABSTRACT: Senator Elizabeth Warren gave a great speech recently in which she laid out how actions taken by corporations and related policy changes have undermined the middle and working class. She also spelled out what we need to do to change the rules of our economy so it works for everyone, not just the wealthiest. Up until the 1980s, our economy and the wages of the middle and working class grew together. But since the 1980s, all the growth of the economy has gone to the wealthiest 10%. Wages for the 90% of us with the lowest incomes have been flat, while our living expenses for housing, health care, and college have grown significantly.

This change in our economy, where all the benefits of growth go to the wealthiest 10%, represents a huge structural economic shift. It occurred because of cutting taxes; trade treaties; financial manipulation via leveraged buyouts and bankruptcies; minimum wage erosion with inflation; reductions in health care, unemployment, sick time, and overtime benefits; cutting of pensions and retiree benefits; and restrictions on employees’ rights to negotiate pay and working conditions as a group. Furthermore, corporations have been allowed to turn full-time employees into independent contractors or part-time workers who get no benefits and no job security.

These changes affect all workers, those in the private and public sectors, as well as both union and non-union employees. The changes were promoted by corporations and their lobbyists. Senator Warren states that it doesn’t have to be this way. We can make different choices and enact different policies that reflect different values. More on that next time.

FULL POST: Senator Elizabeth Warren gave a great speech recently in which she laid out how actions taken by corporations and related policy changes have undermined the middle and working class. She also spelled out what we need to do to change the rules of our economy so it works for everyone, not just the wealthiest. [1] She notes that up until the 1980s our economy and the wages of the middle and working class grew together. The rising tide of our growing economy did lift all boats. While the wealthiest 10% got more than their share of the growth (about 30%) in those years, the other 90% of us got 70% of the money generated by the growing economy.

But since the 1980s, all the growth of the economy has gone to the wealthiest 10%. The pay for Chief Executive Officers (CEOs) of corporations was 30 times that of average workers in the 1980s; today it is 296 times that of workers. And in the last 25 years, corporate profits have doubled as a portion of our economy, while the portion going to workers has declined. [2]

Wages for the 90% of us with the lowest incomes have been flat, while our living expenses for housing, health care, and college have grown significantly. Mothers have gone to work and parents are working more hours but this has not been enough to maintain a middle class standard of living. It certainly looks like today’s young people will be the first generation in America to be worse off than their parents.

Since 1980, the wages of the wealthiest 1% have grown by 138% (adjusted for inflation) while wages for the 90% with the lowest wages have received only a 15% increase (less than half of one percent per year). Workers have not received the benefit of their increased productivity, as was the case up until 1980. Since 1980, productivity has increased 8 times faster than workers’ compensation. If the federal minimum wage had kept up with productivity, it would be $18.42 instead of $7.25. And if it had kept up with inflation since 1968, it would be $19.58. [3]

This change in our economy, where all the benefits of growth go to the wealthiest 10%, represents a huge structural economic shift. So how did the economy get rigged so the top 10% get all the rewards of economic growth?

In the 1980s, government was vilified by politicians who were supported by corporate money. The supposed evils of big government were used to argue for deregulation and cutting taxes. This turned Wall Street’s financial corporations and other large multi-national corporations loose to maximize profits with no holds barred. Furthermore, trade treaties allowed corporations to manufacture goods overseas and bring them back into the U.S. with low or no tariffs, few U.S. regulations, and no regulations on how foreign labor was paid or treated. In addition, the U.S. corporations were allowed to cut benefits and pay for U.S. employees, including by undermining workers’ bargaining power in multiple ways, and through financial manipulation via leveraged buyouts and bankruptcies, as well as changes in tax laws.

Middle class workers have been undermined by corporations moving (or threatening to move) their jobs overseas and by changes in state and federal laws. The minimum wage has been eroded by inflation; workplace safety and legal protections have been weakened; health care, unemployment, sick time, and overtime benefits have been reduced; restrictions on child labor have been lifted; and it has become harder to sue an employer for discrimination. Pensions and retiree health benefits have been cut or eliminated. Just 34 of the Fortune 500 list of the largest corporations offered traditional pensions to new workers in 2013, down from 251 in 1998. [4] And wage theft through failure to pay the minimum wage or overtime wages, or through manipulation of time cards and other means, has spread. Meanwhile, enforcement of labor laws has been weak.

Employees’ rights to negotiate pay and working conditions as a group have been restricted. In addition, the middle class has been hammered by labor laws that allow corporations to turn full-time employees into independent contractors or part-time workers who get no benefits and no job security.

These changes affect all workers, those in the private and public sectors, as well as union and non-union employees. The changes were promoted by corporations and their lobbyists, along with corporate-funded think tanks, the Chamber of Commerce, the National Federation of Independent Business, the National Restaurant Association, the National Association of Manufactures, and other business groups. These efforts were also advanced by corporate-funded advocacy organizations such as the American Legislative Exchange Council (ALEC), Americans for Tax Reform, and Americans for Prosperity. [5]

Senator Warren states that it doesn’t have to be this way. We can make different choices and enact different policies that reflect different values. My next post will discuss those values and policies. In the meantime, I encourage you to listen to Warren’s speech (just 23 minutes while you’re doing something else) or to read the press release. (See footnote 1 for links to them.)

[1]     You can listen to and watch Warren’s 23 minute speech at: https://www.youtube.com/watch?v=mY4uJJoQHEQ&noredirect=1. Or you can read the text in the press release her office put out at: http://www.warren.senate.gov/?p=press_release&id=696.

[2]       Tankersley, J., 12/25/14, “Amid gain, middle class wages get no lift,” The Boston Globe from the Washington Post

[3]       Economic Policy Institute, 12/24/14, “The 10 most important econ charts of 2014 show ongoing looting by the top 1 percent,” The American Prospect

[4]       McFarland, B., 9/3/14, “Retirement in transition for the Fortune 500: 1998 to 2013,” Towers Watson (http://www.towerswatson.com/en/Insights/Newsletters/Americas/Insider/2014/retirement-in-transition-for-the-fortune-500-1998-to-2013)

[5]       Lafer, G., 10/31/13, “The legislative attack on American wages and labor standards, 2011-2012,” Economic Policy Institute (http://www.epi.org/publication/attack-on-american-labor-standards/)

THE CORPORATE EDUCATION INVASION Part 2

ABSTRACT: The most recent embodiment of the corporate efforts to capture (i.e., privatize) funding from public K-12 education is the new Common Core national curriculum standards and the testing that accompanies it. Common Core’s implementation will require public school systems to spend billions of dollars on new curriculum materials and on new testing, including software, hardware, and technology infrastructure as the testing is computer and Internet based. This comes at a time when school budgets are being cut, teachers and other staff are being laid off, and music, art, and extracurricular activities are being eliminated.

All the focus on privatization, on charter schools, on testing, and on the Common Core standards as the solutions to our supposedly failing public schools has diverted attention from the real failure of our public schools and our society. The failure of our public schools is their inability to close the gap in educational outcomes between well-off white children without special needs and everyone else. Low-income and minority students, along with those with special needs and English as a second language, typically arrive at school already well behind their better-off peers. Catching up is difficult and we don’t give our school systems the resources to have a realistic chance of closing the gap.

Expecting our schools to fix the pervasive impacts of poverty and inequality is a prescription for failure. To use that failure as an excuse to privatize schools and force public schools to spend billions on new curricula and testing is misguided (assuming the best of intentions) and only exacerbates the problem. It would be far more effective and efficient to use those billions of dollars to provide high quality early care and education (i.e., child care) and other supports to low income families with children under school age.

FULL POST: The most recent embodiment of the corporate efforts to capture (i.e., privatize) funding from public K-12 education is the new Common Core national curriculum standards and the testing that accompanies it. The corporations and their allies have convinced the public and policy makers that our public schools are failing through an extensive and inaccurate PR campaign. Their solutions are new education standards and accountability through testing.

The new Common Core standards have been widely adopted, in large part due to federal grants that effectively required their adoption. However, the pushback against Common Core is now taking hold with a broad and surprisingly varied set of opponents. The opposition includes working and upper class suburbanites, right wing Tea Partiers, and teachers. [1]

Common Core’s implementation will require public school systems to spend billions of dollars on new curriculum materials and on new testing, including software, hardware, and technology infrastructure as the testing is computer and Internet based. This comes at a time when school budgets are being cut, teachers and other staff are being laid off, and music, art, and extracurricular activities are being eliminated. [2]

It’s worth noting that the Gates Foundation spent over $200 million, given to a wide range of over 30 organizations (e.g., colleges and universities, for-profit and not-for-profit education corporations, states and local school systems, think tanks and advocacy groups, and teachers’ unions) developing and building support for the Common Core. [3] The Common Core standards were NOT developed and adopted through a democratic process that engaged the public and a broad set of stakeholders. The writers of the standards included no experienced classroom teachers, no educators of children with special needs, and no early childhood educators. The single largest group on the drafting committee was from the testing industry. Furthermore, the standards were not pilot tested in the real world and there is no process for challenging or revising them. [4]

While the stated goals of the Common Core are to improve student outcomes and produce a better prepared workforce, it’s hard to overlook the billions of dollars of immediate business for corporations. Therefore, it is not surprising that the Chamber of Commerce spent more than a million dollars promoting the adoption of the Common Core. [5]

All the focus on privatization, on charter schools, on testing, and on the Common Core standards as the solutions to our supposedly failing public schools has diverted attention from the real failure of our public schools and our society. The failure of our public schools is their inability to close the gap in educational outcomes between well-off white children without special needs and everyone else. However, this failure goes well beyond the school system. Low-income and minority students, along with those with special needs and English as a second language, typically arrive at school already well behind their better-off peers. Catching up is difficult and we don’t give our school systems the resources to have a realistic chance of closing the gap.

It would be much more cost effective and the likelihood of success would be higher if we addressed the root causes of the school readiness gap. This means supporting families and children in the years from birth until they enter school, and during pregnancy. However, our political leaders haven’t mustered the political will to seriously address these issues. And corporations haven’t figured out how to profit of off these services.

Expecting our schools to fix the pervasive impacts of poverty and inequality is a prescription for failure. To use that failure as an excuse to privatize schools and force public schools to spend billions on new curricula and testing is misguided (assuming the best of intentions) and only exacerbates the problem. It would be far more effective and efficient to use those billions of dollars to provide high quality early care and education (i.e., child care) and other supports to low income families with children under school age.

[1]       Murphy, T., Sept./Oct. 2014, “Tragedy of the Common Core,” Mother Jones

[2]       Ravitch, D., 6/9/14, “Time for Congress to investigate Bill Gates’ role in Common Core,” Common Dreams (http://www.commondreams.org/views/2014/06/09/time-congress-investigate-bill-gates-role-common-core)

[3]       Murphy, T., Sept./Oct. 2014, “Tragedy of the Common Core,” Mother Jones

[4]       Ravitch, D., 6/9/14, “Time for Congress to investigate Bill Gates’ role in Common Core,” Common Dreams (http://www.commondreams.org/views/2014/06/09/time-congress-investigate-bill-gates-role-common-core)

[5]       Murphy, T., Sept./Oct. 2014, “Tragedy of the Common Core,” Mother Jones

THE CORPORATE EDUCATION INVASION Part 1

ABSTRACT: Corporations covet public funding streams, especially large and consistent ones. A relatively recent example of a focused effort by corporations to capture public funding is evident in our public schools. These efforts have included an extensive public relations campaign aimed at convincing the public and elected officials that our public schools are failing. This is a standard corporate strategy: create a real or imagined crisis in a public service and push privatization as the solution.

This attack on our public schools is not only inaccurate, it diverts attention from the real issues underlying poor educational outcomes, which are poverty and inequality. Another key component of the PR strategy is to blame teachers for the supposed failure of our public schools. This undermines teachers and their unions, who are the most likely constituency that would stand up and oppose these privatization efforts.

The PR strategy has worked and privatized public education and testing are now multi-billion dollar corporate revenue streams. Charter schools, despite the promises of privatizers to produce better results, are no better on average than public schools with comparable populations of students.

Corporate efforts to profit off of public funding streams are not new. Eisenhower warned of the military-industrial complex back in the 1950s. The flow of money to private corporations, privatization in the broad sense, threatens to distort public services, decisions, and spending, because the interests and priorities of the corporations receiving the public funds are different from those of the public.

FULL POST: Corporations covet public funding streams, especially large and consistent ones. A relatively recent example of a focused effort by corporations to capture public funding is evident in our public schools. Although corporations have long sold textbooks and other curriculum materials to public schools, a lucrative business with a large and reliable funding stream, recent efforts have focused on privatizing the actual delivery of education, as well as designing and implementing testing.

These efforts have included an extensive public relations campaign aimed at making the public receptive to privatized spending in these areas. A major focus of this public relations (PR) campaign has been to convince the public and elected officials that our public schools are failing, that alternatives are necessary, and that the private sector is by definition more effective and efficient than the public sector. This is a standard strategy straight out of the playbook of corporate America and their political allies: create a real or imagined crisis in a public service and push privatization as the solution. (For more on this strategy, see my blog post, “Find a crisis, demand privatization,” of 6/5/14 [https://lippittpolicyandpolitics.org/2014/06/05/find-a-crisis-demand-privatization/].)

The PR campaign makes the case that our schools are failing by comparing US students to those from other countries. Although average scores indicate that US students perform worse than others, white children from well-off families do just fine in international comparisons. It is the gap between those students and less affluent and minority students that drags the average down. In actuality, a reliable nationwide test of student performance, the National Assessment of Educational Progress (NAEP), finds that US students’ performance is at the highest level on record. [1] So this attack on our public schools is not only inaccurate, it diverts attention from the real issues underlying poor educational outcomes, which are poverty and inequality in the US.

A second component of the PR strategy is the assertion that standardized, high stakes testing is necessary to measure the performance of US students and to establish accountability for improving results. Although testing is presented as part of a “no child left behind” goal, the commitment and funding to improve schools and education (including preschool education) for the students identified as being behind has never materialized. Meanwhile, policies and the funding to address poverty and inequality more broadly are not even on the radar screen.

A final component of the PR strategy is to blame teachers for the supposed failure of our public schools. This again diverts attention from the real underlying issues of poverty and inequality in the US. It also undermines teachers and their unions, who are the most likely constituency that would stand up and oppose these privatization efforts. Undermining unions (and the bargaining power and rights of workers in general) is an overarching goal of large corporations, so this kills two birds with and one stone from their perspective.

The PR strategy has worked and privatized public education and testing are now multi-billion dollar corporate revenue streams. Testing alone is a $2.7 billion a year industry in the US and the new Common Core standards will grow the testing business further. Wall Street investors, including private equity and hedge fund managers, are investing in for-profit corporations in the student testing and charter school industries because they are seen as opportunities for high profits and growth.

Charter schools, despite the promises of privatizers to produce better results, are no better on average than public schools with comparable populations of students. Many of the charter schools that show good results achieve them by attracting motivated students from motivated families. And they also cull students along the way, forcing or pushing out students who aren’t performing well, thereby improving testing results and other statistics. They also typically serve fewer students with special needs and with English as a second language than the public schools. [2]

Corporate efforts to profit off of public funding streams are not new. Eisenhower warned of the military-industrial complex back in the 1950s, when private corporations’ receipt of Defense Department funds was already distorting public policy making and spending. The corporate effort to tap into health care funding from Medicare and Medicaid is another example. For-profit prisons, water and sewer systems, and public education are more recent examples.

In all these cases, the flow of money to private corporations, privatization in the broad sense, threatens to distort public services, decisions, and spending, because the interests and priorities of the corporations receiving the public funds are different from those of the public. Most notably, the corporations are primarily interested in increased revenue and profit, while public goals such as quality and effectiveness of services, public health and safety, and equitable treatment of all service recipients, are typically secondary, at best, to the corporation. Furthermore, there is substantial evidence that private delivery of these services is NOT more effective or more efficient. Nonetheless, the advocates of privatization continue to assert that they are. (For more detail, see my previous posts on privatization, especially the ones on 10/16/12 and 10/23/12.)

[1]       Ravitch, D., 2/17/14, “Reign of error: The hoax of the privatization movement and the danger to America’s public schools,” as reviewed by Featherstone, J., in The Nation

[2]       Ravitch, D., 2/17/14, see above

REASONS FOR LACK OF PROSECUTIONS AFTER 2008 COLLAPSE

ABSTRACT: In Judge Rakoff’s article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [1] he discusses the reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations.

Finding the publicly presented explanations for the failure to prosecute unconvincing, Rakoff then proposes some other reasons. First, he suggests that law enforcement agencies had other priorities and limited resources. Another possible explanation is the government’s own involvement in setting the stage for the 2008 financial crisis. The de-regulation of banks and the financial industry was a contributing factor. The federal government also had for years encouraged the growth of home ownership and the availability of mortgages, including to low income home buyers. It had also supported less stringent documentation and underwriting standards for obtaining a mortgage.

Finally, Rakoff notes a 30-year trend toward prosecuting corporations rather than prosecuting individuals. He states that the traditional approach was based on the fact that organizations do not commit crimes, only their human agents do. Rakoff believes that prosecuting individuals has a much stronger deterrence value than prosecuting corporations. He also believes that prosecuting just the corporation and not any individual is both legally and morally wrong.

FULL POST: In Judge Rakoff’s * article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [2] (See previous post of 2/9/14 for more details:  https://lippittpolicyandpolitics.org/2014/02/09/too-little-punishment-for-misbehavior-in-the-financial-sector/), he discusses the reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations that were involved in causing the 2008 crisis. First, they argue that proving fraudulent intent is difficult. However, Rakoff points out that with clear evidence of mortgage fraud (e.g., numerous reports of suspected mortgage fraud from within the financial institutions themselves), executives couldn’t escape prosecution by claiming they didn’t know what was going on. Furthermore, convictions, despite claims ignorance, are well established in criminal law based on the doctrine that “willful blindness” or “conscious disregard” does not exonerate a defendant.

Second, Department of Justice (DOJ) officials sometimes argue that fraud couldn’t be proved because the buyers of the mortgage-backed securities were sophisticated investors who knew enough not to rely on any misrepresentations and deception by the sellers. Rakoff states that this “totally misstates the law.” The law says that if society or the market is harmed by the lies of a seller, criminal fraud has occurred.

Third, Attorney General Holder himself said in testimony to Congress that in considering a criminal prosecution the impact on the US and world economies had to be taken into consideration. This is called the “too big to jail” excuse. Holder has said that his comment was misconstrued. Rakoff notes that this rationale is irrelevant in terms of prosecuting individuals because no one believes that a large financial corporation would collapse if one or more of its high level executives was prosecuted.

Finding the publicly presented explanations for the failure to prosecute unconvincing, Rakoff then proposes some other reasons. First, he suggests that law enforcement agencies had other priorities and limited resources. He notes that in 2001 the FBI had over 1,000 agents assigned to investigating financial fraud. In 2007, there were only 120 agents working on financial fraud and they had more than 50,000 reports of possible mortgage fraud to review. The shift of agents to anti-terrorism after 9/11 and budget limitations are the two causes he cites for this reduced capacity to respond to financial fraud.

The Securities and Exchange Commission (SEC) has been focused on Ponzi schemes and misuse of customers’ funds. It too is experiencing significant budget limitations. The DOJ has been focused on insider trading cases. When the 2008 financial collapse occurred, it spread the investigation of financial fraud among numerous US Attorney’s Offices in various states, many of which had little or no previous experience with sophisticated financial fraud.

Another possible explanation of the failure to prosecute, according to Rakoff, is the government’s own involvement in setting the stage for the 2008 financial crisis. The de-regulation of banks and the financial industry, including the repeal of Glass-Steagall, was a contributing factor. Both the SEC and the Treasury Department had had their power and oversight weakened by de-regulation. The federal government also had for years encouraged the growth of home ownership and the availability of mortgages, including to low income (and therefore higher risk) home buyers. It had also supported less stringent documentation and underwriting standards for obtaining a mortgage. Hence, the federal government helped create the conditions that led to mortgage fraud and a corporate executive could, with some justification, claim in his defense that he believed he was only trying to further the government’s goals.

In addition, after the 2008 collapse, the government made little effort to hold the financial corporations accountable when it bailed them out.

Finally, Rakoff notes a 30-year trend toward prosecuting corporations rather than prosecuting individuals. He states that the traditional approach was based on the fact that organizations do not commit crimes, only their human agents do. In addition, prosecuting an organization inevitably punishes totally innocent employees and shareholders. However, in recent years “deferred prosecution agreements” and even “non-prosecution agreements” with corporations have become the standard fare. Under these, a corporation and its employees avoid prosecution by agreeing to take internal, preventive measures to protect against future wrongdoing, often while paying a fine.

Rakoff believes that prosecuting individuals has a much stronger deterrence value than the internal preventive measures of “deferred prosecution agreements” that are often little more than window dressing. He also believes that prosecuting just the corporation and not any individual is both legally and morally wrong. Under the law, a corporation should only be prosecuted if one can prove a managerial agent of the corporation committed the alleged crime. If so, why not prosecute that manager? Morally, punishing a corporation and many innocent employees and shareholders for crimes committed by an unprosecuted individual(s) seems unjust.

*    Jed Rakoff is a United States District Judge on senior status for the Southern District of New York. A full-time judge from 1996 to 2010, he moved to senior status in 2010. Senior status is a form of semi-retirement for judges over 65 where they continue to work part-time. Judge Rakoff is a leading authority on securities laws and the law of white collar crime, and has authored many articles on those topics. He is a former prosecutor with the U.S. Attorney’s office in New York. [3]


[1]       Rakoff, J.S., 1/9/14, “The Financial Crisis: Why have no high-level executives been prosecuted?” The New York Review of Books

[2]       Rakoff, J.S., 1/9/14, see above

[3]       Wikipedia, retrieved 2/5/14, “Jed S. Rakoff,” http://en.wikipedia.org/wiki/Jed_S._Rakoff

TOO LITTLE PUNISHMENT FOR MISBEHAVIOR IN THE FINANCIAL SECTOR

ABSTRACT: One person who has both spoken out and acted when he felt the punishment for misbehavior in the financial sector was too lenient or lacking is federal District Court Judge Jed Rakoff.* In 2011, he refused to approve a proposed settlement with Citigroup related to the 2008 financial crisis because he thought that it was too lenient. Currently, he is withholding approval of settlement of an insider trading case. The proposed settlement would allow two men to settle the case for $4.8 million without admitting guilt.

SAC Capital, a huge, $15 billion hedge fund, has been charged in what probably is the biggest insider trading scandal ever. Five employees of SAC have already pleaded guilty to insider trading and the company itself has agreed to a record $616 million settlement. However, it is unlikely that anyone will go to jail and the head of SAC, despite any fines and restitution he may be required to pay, is likely to remain a billionaire.

Judge Rakoff recently wrote an article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [1] Multiple authorities, including enforcement agencies, have describe what occurred in the run up to the 2008 financial crisis as fraud. Rakoff states that if the financial crisis was the result of intentional fraud, then “the failure to [criminally] prosecute those responsible must be judged one of the most egregious failures of the criminal justice system in many years.”

Rakoff notes that in previous financial crises individual perpetrators were successfully prosecuted. In the 1980s savings and loan crisis, which has strong parallels to the 2008 crisis but at a much smaller scale, over 800 individuals were successfully, criminally prosecuted.

Rakoff concludes by writing, “if it was [fraudulent misconduct] – as various governmental authorities have asserted it was – then the failure of the government to bring to justice those responsible … bespeaks weaknesses in our prosecutorial system that need to be addressed.”

FULL POST: One person who has both spoken out and acted when he felt the punishment for misbehavior in the financial sector was too lenient or lacking is federal District Court Judge Jed Rakoff.* For example, in 2011, he refused to approve a proposed settlement by the Securities and Exchange Commission (SEC) with Citigroup related to the 2008 financial crisis because he thought that it was too lenient.

Currently, he is withholding approval of settlement of an insider trading case where two men, acting on an illegal insider’s tip, bought $90,000 worth of securities a day before the announcement of the buyout of H.J. Heinz (the ketchup maker). The next day, when the buyout was announced, the securities became worth $1.8 million. The SEC’s proposed settlement would allow the two men to settle the case for $4.8 million without either admitting or denying guilt. Such settlement language had been standard practice for insider trading cases until a public debate erupted, prompted in large part by Judge Rakoff. In June 2013, the new chair of the SEC, Mary Jo White, announced a new SEC policy that would require some defendants to admit guilt. [2]

There have been a number of insider trading cases in the news lately. These are cases where an individual buying or selling securities benefited from illegally obtained, confidential information that gave him or her an unfair opportunity to profit from securities transactions. For example, SAC Capital, a huge, $15 billion hedge fund, responsible for about 1% of all US securities exchanges’ average daily trading, has been charged in what probably is the biggest insider trading scandal ever. Five employees of SAC have already pleaded guilty to insider trading and the company itself has agreed to a record $616 million settlement for more than 10 years of trading based on illegal tips from corporate insiders. More legal action is still to come, but it is unlikely that anyone will go to jail and the head of SAC, Steven A. Cohen, despite any fines and restitution he may be required to pay, is likely to remain a billionaire. [3][4]

However, Judge Rakoff’s primary focus has not been on insider trading but on the financial industry’s misbehavior that led to the 2008 financial crisis and the Great Recession. He recently wrote an article entitled “The Financial Crisis: Why have no high-level executives been prosecuted?” [5] In it, he explores why there have been no criminal prosecutions when multiple authorities, including enforcement agencies, have describe what occurred in the run up to the 2008 financial crisis as fraud (i.e., intentional deception for financial or personal gain). Rakoff states that if the financial crisis was the result of intentional fraud (and he makes clear that he has no personal knowledge of whether that was the case or not), “the failure to [criminally] prosecute those responsible must be judged one of the most egregious failures of the criminal justice system in many years.”

Rakoff notes that in previous financial crises – the junk bond scandal of the 1970s, the savings and loan (S&L) crisis of the 1980s, and the accounting frauds of the 1990s (e.g., Enron and WorldCom) – individual perpetrators were successfully prosecuted. Specifically, in the S&L crisis, which has strong parallels to the 2008 crisis but at a much smaller scale, over 800 individuals were successfully, criminally prosecuted.

There is strong evidence of criminal fraud in the events leading to the 2008 crisis. The federal government’s Financial Crisis Inquiry Commission uses the word “fraud” 157 times in its report describing what led to the crisis. Furthermore, indications that fraud was occurring emerged well before the 2008 collapse. There were 20 times as many reports of suspected mortgage fraud in 2005 as in 1996, and the number kept growing. In 2008, the number of fraud reports was double that of 2005. As early as 2004, the FBI was publicly warning of the “pervasive problem” of mortgage fraud. In the years before the 2008 crisis, sub-prime mortgages, in other words mortgages with more risk of default than normal mortgages, increasingly provided the underpinnings for mortgage-backed securities that continued to be sold with AAA ratings. This rating is supposed to identify securities of very low risk. It seems impossible that this could have occurred without fraud taking place.

Rakoff discusses reasons given by officials of the Department of Justice (DOJ) for the failure to criminally prosecute either individuals or corporations and finds them unconvincing. He then proposes some reasons that he finds more believable. I’ll summarize all of this in my next post.

Rakoff concludes by writing, “if it was [fraudulent misconduct] – as various governmental authorities have asserted it was – then the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.”

*    Jed Rakoff is a United States District Judge on senior status for the Southern District of New York. A full-time judge from 1996 to 2010, he moved to senior status in 2010. Senior status is a form of semi-retirement for judges over 65 where they continue to work part-time. Judge Rakoff is a leading authority on securities laws and the law of white collar crime, and has authored many articles on those topics. He is a former prosecutor with the U.S. Attorney’s office in New York. [6]


 

[1]       Rakoff, J.S., 1/9/14, “The Financial Crisis: Why have no high-level executives been prosecuted?” The New York Review of Books (http://www.nybooks.com/articles/archives/2014/jan/09/financial-crisis-why-no-executive-prosecutions/?pagination=false)

[2]       Raymond, N., 1/30/14, “U.S. judge takes on SEC again, questions Heinz insider trading pact,” Reuters

[3]       Editorial, 7/27/13, “Pursuit of SAC Capital sends needed message to Wall St.,” The Boston Globe

[4]       Lattman, P., 7/31/13, “Ex-analyst charged in insider-trading crackdown,” The Boston Globe (from The New York Times)

[5]       Rakoff, J.S., 1/9/14, see above

[6]       Wikipedia, retrieved 2/5/14, “Jed S. Rakoff,” http://en.wikipedia.org/wiki/Jed_S._Rakoff