Wall Street Is Strip-mining America

4-chart handout Leopold

How Wall Street Is Strip-mining America

a review of Les Leopold’s Runaway Inequality: An Activist’s Guide to Economic Justice (New York: Labor Institute Press, 2015)

by John M Repp

On the back cover of the Runaway Inequality, from a shop steward:

“Look, I’m not a reader. In fact, I hate to read. But I love reading this book. It’s written for people like me. I can’t put it down.”

Runaway Inequality tells us that economic inequality is much, much worse that we think it is. The wage-gap ratio is the ratio between the income of the 200 highest paid CEOs of large American corporations and the income of the average non-supervisory worker at those companies. Leopold cites an opinion survey that asked average Americans what they thought the wage-gap is and what they thought the wage-gap should be. In 2013, the answers were respectively 36 to 1 and 7 to 1. The actual wage-gap in 2013 was 829 to 1!.. In1970, it was 45 to 1. Despite political affiliation or educational level, most Americans wildly underestimate the size of income inequality. Leopold writes “if the typical American knew the real numbers, they would be outraged”. (p.12)

Leopold’s book is full of over 100 easy-to-read charts and clear analysis. He is giving us many of the facts we need to start constructing a platform that can unite the different movements. Such a platform needs to be more a vision than just a list of demands, but an understanding of the facts and solid analysis is necessary for the vision to emerge.

Something happened around 1980 that set runaway inequality into motion. At the time the media named the problem “stagflation.” The U.S. experienced both rising prices and rising unemployment at the same time, something many economists thought was impossible. Conservative economists argued that freer markets would solve the problem. Their policy ideas were adopted. The new economic philosophy was called “neo-liberalism” and it is still the reigning philosophy of both political parties. The prescription of this model has three parts: cut taxes on large corporations and the wealthy, cut government regulations and cut government spending on social programs. We now have almost 40 years of evidence that these policies triggered runaway inequality and ripped the social fabric of our country.

Leopold cites a study that suggests that of the many causes of runaway inequality, the financial sector also known as “Wall Street” is the main driver. For example, after deregulation, corporate raiders, now called private equity and hedge fund managers, would buy a company with borrowed money, reward themselves with huge fees for the raid, get the management to do the investors bidding by making most of their pay in stock options, and use company revenues to buy back the stock to raise the stock price. In 1982, William Simon, who was Treasury Secretary under Nixon, Ford and Carter, put up $333,000 and with two other partners, borrowed $79 million to buy Gibson Greetings, a greeting card company. Sixteen months later, the three partners sold the company for $290 million, making an 870% profit. The deal left the company with a massive debt. The revenue that in the past would have gone to grow the firm and pay decent wages was instead siphoned off into the financial sector. By 2002, the financial sector was gobbling up 42.5 percent of all corporate profits. Leopold calls this the financial strip-mining of America. And corporate raiding was but one way the financial engineers used to indebt corporations, individuals and governments to take wealth out of productive sectors of the economy. Others include the real estate bubble that popped in 2007-8 and the high fees cities and states pay to Wall Street when they borrow money.

We hear often that American corporations must move jobs to lower wage countries to stay competitive. But the more Wall Street loads up our corporations with debt, the less competitive they become. Germany, with almost $10 an hour higher wages in manufacturing than the U.S., remains competitive with China i.e. their trade balance with China is even, while ours is a huge deficit. Germany keeps its financial sector in check, in part by supporting public banking.

So how have these Wall Street policies affected the standing of our country relative to other developed countries? We have the highest CEO/average worker income gap of all the developed countries.(p.64) In median wealth, we ranked 27th in 2012.(p.65) We are number 20 in the ranking of average life span, almost 5 years behind the leader, Japan.(p.72) The odds of a person rising above the station of their parents i.e. upward mobility, is about 50/50 in the U.S., while in Denmark, the chances are 7 to 1.(p.75) We are 34th in the percent of children living in poverty.(p.86) We were the first country to put freedom of the press into a Bill of Rights. However, today we are ranked 42nd in press freedom. (p. 87) After reading all these statistics and those cited here are but a few, we can no longer say we are the “greatest country in the world”. In 2010, 80% of the American people still believed that idea. In 2014, fewer believed, especially among the young.

As the wealthy and the big corporations pay less tax, government at all levels must borrow more. The wealthy would rather loan money to our cities, states and Federal governments than pay taxes. We are told we do not have the money to address climate change while high finance is extracting more and more from our personal, corporate and government budgets through debt. Wages have stagnated since 1973 even though worker productivity has been rising. As manufacturing jobs have disappeared from the cities, (Detroit is a good example) racial discrimination has left some neighborhoods of our cities devastated. They now resemble militarized occupation zones. The wealth gap between whites and Black and Hispanic Americans is huge: whites having about 10 times as much net worth as Blacks and Hispanics. Black neighborhoods were red lined until 1968, so Blacks could not get FHA loans to buy homes. Wall Street targeted Black and Hispanic buyers for high interest rate sub-prime mortgages that lead to foreclosures and the crash of 2007/8. Blacks and Hispanics fell even further behind.

Finally, we get to a discussion of some solutions. Leopold mentions restoring Glass-Steagall, which would prevent federally insured banks from speculating. Breaking up the big banks is also mentioned. But a whole chapter is devoted to public banking with the little-known Bank of North Dakota (BND) as the model. BND did not need bailout money during the 2008 crash and unemployment did not skyrocket in North Dakota after the crash. This was before the fossil fuel boom in that state. In states besides North Dakota, large city and state governments deposit their taxes and fees in the too-big-to-fail Wall Street banks. With public banking, that money would be deposited in those jurisdictions own banks, which would be required to invest in real wealth producing capital projects or businesses in their locale. With 50 public state banks like BND, Leopold writes “we could create up to 10 million new jobs”. (p.264)

Leopold discusses a maximum wage policy. Swiss activists got on the ballet a measure to limit the wage-gap to 12 to 1. It did not pass, but efforts continue. A maximum wage for high earners was the effect of the 91% marginal income tax rate for people earning more than $200,000 – – or $2 million in today’s dollars – in the U.S. from 1946 to 1951.

Leopold writes that a financial transaction tax (Tobin tax) will put the brakes on the rapid buying and selling of stocks, bonds, options and derivatives. After all, we the 99% pay a tax when we buy something. Wall Street does not. Other developed nations provide free higher education for their citizens. This policy would produce more knowledgeable and productive citizens. Single-payer health care – Medicare for All – would be less costly and would cover everyone. Funding education and health-care is a real investment, not a cost, and is not carbon-producing.

“To tame runaway inequality, we need full employment.” (p 280) The private sector cannot produce enough jobs even with the huge government stimulus like military spending. Leopold writes that real unemployment is at least 11.3 million in February 2015. 20 million people want full time work and cannot find it 7 years after the financial crash. Finally, we must support coal, oil, and gas industry workers who must sacrifice as we move away from fossil fuel; otherwise they can be recruited by the fossil fuel companies to push back on the needed move away from fossil fuels.

Trump and the Republican right-wing want to blame our countries’ social and economic problems on minorities, immigrants and other countries. Stagnant wages are blamed on immigrants. The loss of manufacturing jobs is blamed on China. Deflecting anger away from Wall Street is a classic divide-and-rule strategy by the 1%

Leopold finishes his book with “An Open Letter to New Movement Organizers” (p. 299)

He says people are waiting for something defiant. He discusses the limits of “silo” or one issue organizing. He analyses the strengths – the idealism – and the failure of Occupy Wall Street. The leaders seemed to believe only a “spontaneous” uprising was necessary to make social change and a sustainable organizational structure was not needed. They also did not provide a way for people to participate who did not want to sleep in the occupied public spaces.

Leopold recommends we study and learn from the original populist movement of the 19th century, the last time an American movement tried “to take control of the money supply away from private bankers while at the same time building new cooperatives”. (p. 303) Sometime soon he hopes that a national movement and organization (or coalition of organizations) will be organized “to forge a new agenda that takes on runaway inequality and climate change”. (p.308)

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