Aftershock: The Next Economy and America's Future (14 page)

As lobbying has become more lucrative, an ever larger portion of former federal officials has turned to it. In the 1970s, only about 3 percent of retiring members of Congress went on to become Washington lobbyists. But by 2009 more than 30 percent did, largely because the financial incentives from lobbying had become so large. Starting salaries for well-connected congressional or White House staffers had ballooned to about $500,000. Former chairs of congressional committees and subcommittees commanded $2 million or more to influence legislation in their former committees.
According to the Center for Public Integrity, between 1998 and 2004 (years picked because they straddled Democratic and Republican administrations) more than twenty-two hundred former federal officials registered as lobbyists, as did more than two hundred former members of Congress.
When Dick Gephardt ran for president in 1988, he said, “I’m running for president because I’ve had enough of the oil barons, the status-quo apologists, the special-interest lobbyists running amok.” By 2009, the former House majority leader was heading up a major Washington lobbying firm that counted among its clients Goldman Sachs, multiple insurance companies, and Peabody Energy, which proclaimed itself the “world’s largest private-sector coal company.” When Democratic congressman Elijah Cummings threatened
to investigate Goldman Sachs, it was Gephardt who ushered Goldman’s president to a Capitol Hill meeting. A longtime advocate of universal health care when he was in Congress, by 2009 Gephardt was chairing the Council for American Medical Innovation, a group sponsored by the pharmaceutical industry.

I do not mean to pick on Gephardt, whom I admire for his accomplishments as a dedicated public servant. The point is that a staggering amount of money from big corporations, executives, and other wealthy individuals lies like a thick fog over the nation’s capital, enveloping everyone and everything. Not only has it enriched Washington lobbyists, lawyers, and public relations professionals, and seduced thousands of ex-congressmen, but it has also transformed Washington into a glittering city of high-end restaurants and exquisite hotels. It has boosted the price of Washington real estate. Even home prices in its surrounding counties proved remarkably resilient during the Great Recession. Seven of Washington’s suburban counties are listed by the Census Bureau as among the nation’s twenty with highest per capita incomes.

In order to be enacted, almost all major legislation now requires payoffs to powerful corporations and industries. President Obama felt it necessary to guarantee the executives of big health insurers and pharmaceutical manufacturers that they’d come out ahead—with tens of millions of new customers, along with generous federal subsidies—lest these powerful moneyed interests use their clout to kill his proposed health care legislation, as they had Bill Clinton’s. Yet this payoff would necessarily mean higher health care costs for middle-class Americans. Similarly, in order to get off first base with legislation to cap greenhouse gases and allow companies to trade permits to pollute within the cap, Congress had to promise generous subsidies for the nuclear industry and big agribusiness’s ethanol, and for the development of so-called clean coal. (Wall Street was supportive, one expects, because the Street would collect billions of dollars on the “trade”
part of cap-and-trade, and the market for trading permits would include derivatives and be open to speculators.) Here again, the middle class would be left with much of the tab.

A middle class devoid of coping mechanisms, feeling poorer and more vulnerable than before, is bound to be more sensitive to what has become a commonplace occurrence: government’s advancing the interests of large American companies—using taxpayer dollars to subsidize their basic research and development, opening foreign markets to them, giving them lucrative government contracts—thereby raising their share prices. This richly awards their executives and dominant shareholders. Yet these same companies outsource more and more of their production abroad, leaving behind American workers with fewer jobs and lower pay.

The distressed middle class is also likely to take more notice of the regressive direction of tax policy. Although Democrats raise taxes on the rich more readily than Republicans do, they provide generous exceptions. In 2001, President George W. Bush gutted the estate tax by dramatically increasing the amount of money that could be passed on to heirs tax free (from $1 million in 2001 to $3.5 million by 2009, or $7 million per couple), and then scheduling its repeal in 2010. But rather than restore the tax and return the exemption to $1 million, the Obama administration, abetted by congressional Democrats, chose to keep the exemption at $3.5 million. Only the richest 2 percent of Americans benefit from this alteration, but it is expensive.
Between 2012 and 2021 it will drain $485 billion from the federal treasury. If federal expenditures don’t drop, that $485 billion will have to come from the rest of us.

Another glaring example: Some hedge-fund managers and most private-equity fund managers (who often take home tens of millions of dollars) pay only slightly more than 15 percent of their income in taxes each year—a lower rate than that paid by many
middle-income Americans earning barely a tiny fraction of such incomes. This bizarre disparity is the result of an obsolete tax loophole allowing certain money managers to treat their hefty fees as long-term capital gains rather than as ordinary income. Even after repeated attempts by the administration and House Democrats to close the loophole, Senate Democrats and Republicans joined forces to preserve most of it. The reason was their dependence on the hedge-fund and equity-fund managers for generous campaign donations.

Meanwhile, starved of revenues, state and local governments have been increasing sales taxes. Such taxes fall disproportionately on the middle class and the poor, who devote a larger portion of their incomes to purchases than do the wealthy. (Astonishingly, some Washington politicians and pundits are pushing what amounts to a
national
sales tax to replace the federal income tax.) At the same time, local governments are relying to an ever greater extent on property taxes, which fall disproportionately on middle-class taxpayers, who have most of their assets in their homes, rather than on the wealthy, whose assets are mainly in financial instruments.

A tilted playing field might be tolerable if Americans felt they could get ahead eventually nonetheless. But as I pointed out earlier, access to a good education has become the prerequisite to top-paying positions (and to valuable networks of well-connected friends and parents), and the wealthy’s increased lock on excellent schools and colleges has stacked the deck in favor of their children. Once, America was a place of rapid social mobility where anyone could get ahead. Now, many of the children of the middle class attend public primary and secondary schools that are falling behind, or make their way to public universities whose funding has been slashed, as states are forced to trim budgets.

Perhaps the most convincing evidence that the game is rigged
is the deafening silence about all this. You would think political leaders would talk about the nation’s surging inequality and the flattening of middle-class incomes. But as the divergence in income and wealth has grown to stunning proportions, it is rare to find even a Democratic politician who dwells on it.

As a result, some Americans already have moved from distrust to anger. Given the intransigence of high unemployment and the near certainty of lower real wages for a large portion of Americans, it seems likely that more will join them in the years ahead. And because politics abhors a vacuum almost as much as nature does, the Independence Party, or something like it, could be expected to fill the void—bringing with it nationalism, isolationism, intolerance, and paranoia. Unless, that is, there is an alternative.

There is an old Russian story about a suffering peasant whose neighbor is rich and well connected. In time, the rich neighbor obtains a cow, something the peasant could never afford. The peasant prays to God for help. When God asks the peasant what he wants God to do, the peasant replies, “Kill the cow.”

In Russia, the game was often rigged, and peasant uprisings were more commonly directed at bringing down the rich than at bringing everyone else up. Unless present trends are reversed, we could find ourselves in a similar position. The Independence Party or its facsimile will kill the cow.

Social psychology has shown that people gain almost as much
satisfaction from reducing the winnings of those who seem to have gotten them unfairly as from receiving a modest portion of such winnings for themselves. For years I’ve conducted a simple experiment in my classes that proves the point. I ask my students to join with the person sitting next to them to form a two-person team. I then announce that I’m going to give one member of the team a simulated thousand dollar bill, and will ask that person to write down on a piece of paper how much of it will be shared with his teammate, and then silently pass the paper over. I make it very clear to both that unless the teammate accepts the offer, neither of them will receive anything.

Some recipients willingly accept a small amount, as little as $1. After all, they reason, they’re better off than they were before, regardless of how much their teammate has ended up with. But most of my students on the receiving end refuse anything short of $250, and a surprising number refuse any offer less than $500. They’d rather end up with nothing—sacrificing quite a lot—than have their teammate “get away with” far more.

Are such students being vindictive? Are they allowing feelings of envy and spite to get in the way of rational thinking? When I ask them why they’re willing to sacrifice so much, they often say it’s worth it to them in order to avoid what they consider to be an unfair outcome and disrespectful treatment.

It is no great leap from my simple classroom exercise to a national movement. Americans who would slash trade and investment with other nations, for example, might fully understand that this would deny all Americans access to cheaper goods from abroad. Yet they might still support such a move if they believed it would cause people at the top even greater loss. Likewise, they’d support confiscatory taxes on the wealthy, even understanding that such rates will discourage investment and thereby hurt everyone, because such taxes would hurt the rich most of all. They
would get behind all sorts of policies that slowed the economy and reduced efficiencies if those at the top would lose out to a greater extent than they did. In short, they’d opt to kill the cow.

Economic anger could be detected in March 2009 when, after the government bailed out AIG with over $150 billion, the firm awarded its top executives $165 million in “retention bonuses” and a $440,000 spa retreat at the St. Regis resort. Angry citizens traveled by bus to the estates of AIG executives to tell them exactly what they thought. Others wrote threatening letters and e-mails. AIG executives were forced to hire private security guards to protect themselves and their families.
One, nicknamed “Jackpot Jimmy” by a New York City tabloid, complained, “I feel horrible. This has been a complete invasion of privacy. You have to understand, there are kids involved, there have been death threats.”

Such resentments have also come to the surface as voters penalize politicians too closely identified with the financial industry. In May 2010, Utah’s GOP refused to support the reelection of conservative senator Robert Bennett because of his vote in favor of the Wall Street bailout. In November 2009, New Jersey governor Jon Corzine lost his reelection bid despite spending a substantial fortune on his campaign; pundits assigned part of the blame to his being a former head of Goldman Sachs. In 2010, Connecticut senator Chris Dodd did not run for reelection in part due to voters’ disquiet over his history of cozy relations with the financial industry. Other politicians have paid the price of appearing to be privileged insiders. Former Senate Democratic minority leader Tom Daschle had to withdraw his name from nomination for Obama’s cabinet because after leaving the Senate he became a wealthy consultant to lobbyists and had profited handsomely from his connections and failed to pay taxes he owed.
New York City’s mayor Michael Bloomberg won a surprisingly narrow reelection in the fall of 2009 despite his creditable record and sizable campaign spending. Voters, it seemed, were turned off by his vast wealth and his willingness to spend it on the campaign. (Just prior to the election,
New York
magazine blared in a headline:
MICHAEL BLOOMBERG IS ABOUT TO BUY HIMSELF A THIRD TERM.
)

The stirrings of backlash can also be seen in Americans’ sharp turn against international trade and immigration. By 2010, the so-called Doha round of multilateral tariff reductions, initiated in 2001, was still on life support. President Obama’s single trade request during his first year of office—duty-free status on exports from Afghanistan and Pakistan, in order to boost employment in these countries and thereby counter terrorist groups—was shot down by Congress, despite its obvious importance. Pending trade agreements with South Korea, Colombia, and Panama were put on hold.
In a poll taken in December 2009 by the Pew Research Center, only 43 percent of Americans thought trade agreements benefited the U.S. economy. Mounting resentments toward immigrants were evident in state and local laws encouraging racial and ethnic profiling and banning ethnic studies.

Economic resentments lay behind the public’s growing suspicions of the Federal Reserve Board and its chairman. In early 2010, reflecting that backlash, the Senate nearly blocked Ben Bernanke’s confirmation to a second term. Members of Congress from both parties pushed legislation to make the Fed’s actions more transparent and open to political scrutiny. Bond traders on Wall Street feared the Fed’s independence would be compromised.

The shrillest part of the backlash could be heard in the increasing bitterness and virulence of the nation’s politics. During congressional recesses, senators and representatives have been harassed by voters at town meetings that have turned into shouting
matches and occasionally become violent; self-described “Tea Partiers” have derided “establishment” Republicans and threatened them with electoral defeat.
In early February 2010, at the first national convention of the “Tea Party Nation,” in Nashville, Tennessee, Tom Tancredo, a former congressman and presidential candidate from Colorado, brought the crowd to its feet by denouncing the “cult of multiculturalism” and accusing immigrants of threatening America’s Judeo-Christian values. “This is our country,” he declared to wild cheers.
“Take it back!” Later that month, at the Conservative Political Action Conference, Governor Tim Pawlenty of Minnesota attacked “the elites” who believe Tea Partiers are “not as sophisticated because a lot of them didn’t go to Ivy League Schools” and “don’t hang out at … Chablis-drinking, Brie-eating parties in San Francisco.”
After his son Rand Paul was selected for Kentucky’s Senate seat in May 2010, Congressman Ron Paul explained that voters wanted to “get rid of the power people who run the show, the people who think they’re above everybody else.”