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And Why it’s Unlikely to Work

It is a no-brainer, basically: a progressive rate in income taxes, along with estate taxes that target the super wealthy.

In a new book, the British economist, Anthony Atkinson, leaves no doubt these are the keys to fixing the problem. According to a review by Thomas Piketty: “the spectacular lowering of top income tax rates has sharply contributed to the rise of inequality since the 1980s, without bringing adequate corresponding benefits to society at large. We must therefore waste no time discarding the taboo that says marginal tax rates must never rise above 50 percent.” (See his review of Inequality: What Can Be Done?.)

He calls it a “taboo,” suggesting that he knows resistance to the idea is beyond logic or reason – and would be very hard to change.

Reagan in the US and Thatcher in the UK were responsible for drastically lowering the tax rate on the wealthy back in the 80’s. In the UK the top rate was reduced from 83% to 40%. In the US, it was reduced to 28%. But how did the idea of changing these rates become taboo? Why did economists fall into line behind this idea?

With Reagan and Thatcher, the wealthy began their contemporary, sophisticated effort to dominate the political process, as corporations and their associations learned how to influence congressmen, regulators, and other government officials, while getting more involved in political campaigns. That, together with the new power of the investment industry, essentially made economists into agents of business. They have become, with some rare exceptions, the advisors, philosophers, and courtiers of our new elite, making it hard for them to challenge what their patrons want to hear. That is what makes it taboo

Piketty, in his review, notes other reforms that could affect inequality. “At the core of [Atkinson’s] program is a series of proposals that aim to transform the very operation of the markets for labor and capital, introducing new rights for those who now have the fewest rights. His proposals include guaranteed minimum-wage public jobs for the unemployed, new rights for organized labor, public regulation of technological change, and democratization of access to capital.”

The point is that the rules, the policies and ideas that underlie income inequality are neither unworkable nor unthinkable. They can be challenged. They may be taboo to other economists who know what side their bread is buttered on. But others are coming along with newer ideas and different constituencies.

The public conversation is changing, but up until now silence from mainstream economists not only signaled disapproval, but also proscribed conversation and debate. Taboo is a somewhat strong way to describe the limits on talk, usually implying the risk of disgust or horror or revulsion. That may apply to economists, and sometimes it may also rub off on the public who would usually not feel that level of intensity.

But perhaps a new tradition of populist economists is in the making, not only less easily intimidated, but actually eager to change the terms of debate and confront what have been “taboos.” Perhaps the issue will be raised in the un-coming U.S. election.

Too Much Money

If money is our universal solvent, allowing us to exchange anything for anything else, we seem to have reached the point where virtually all other values are dissolved as well.

The financial industry, awash with cash, is desperately looking for ways to use it to make more money, and the banks, staffed with smart, ambitious bankers, are ceaselessly searching for new ways to outdo their competitors. Fraud, insider trading, manipulating rates, cronyism, etc. etc. have become standard practices.

Reflecting on this, recently, The New York Times noted that “for the world’s biggest banks, what seemed like the perfect business turned out to be the perfect breeding ground for crime. The trading of foreign currencies promised substantial revenues and relatively low risk. It was the kind of activity that banks were supposed to expand after the 2008 financial crisis.”

“But like so many other seemingly good ideas on Wall Street, the foreign exchange business was vulnerable to manipulation, so much so that traders created online chat rooms called ‘the cartel’ and ‘the mafia’.”

Even worse, a new report suggests, corruption is increasingly accepted:
“Nearly one in five respondents feel financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment. One in 10 said they had directly felt pressure ‘to compromise ethical standards or violate the law.’ And nearly half of the high-income earners say law enforcement and regulatory authorities in their country are ineffective ‘in detecting, investigating and prosecuting securities violations.’”

Add to this the fact that those who regulate the industry are largely hamstrung by a political process dominated by donors to political campaigns, not to mention the lobbyists who eviscerate efforts to impose restraints. Moreover, they know that when they leave their under-funded government jobs, lucrative opportunities await them as they work to thwart their successors.

The larger picture includes how money is overwhelming other values in our society. Scientists succumb to the temptation to falsify data to make a splash. Job seekers amplify their resumes. Cheating on campuses is on the increase.

Recent indictments of FIFA officials for bribery, point to the fact that soccer, like other sports, has become a huge and profitable industry. To be sure, the players make good money but the billions generated by TV coverage eventually filter down to the officials changed with regulating the business, selling their votes to those who stand to make yet more money from the game.

There has always been corruption, and, no doubt, there always will be. But the financialization of our world, the sheer scale and complexity of global business, along with the inexorably growing disparity between the rich and poor, has dramatically changed the problem.

Just as global warming has crept up on us to the point where now we are virtually helpless against the storms and floods that wreak havoc on our lives, corruption has become pervasive, and we are in danger of simply accepting it as a feature of normal life.

Many have been concerned about the effect of the growing wealth gap: cynicism, hopelessness, resentment, the erosion of ambition – and the potential rise of class warfare and revenge. But here is yet another effect: the normalization and increase of crime and corruption.

No Shame

All “10 of the top-paid C.E.O.s received at least $50 million last year,” according to Equilar, a firm that tracks executive compensation. Much of the “overall compensation came in the form of stock.” But, in addition, many “chief executives received generous cash bonuses, a form of compensation that does little to incentivize long-term performance.”

“It’s really an outmoded way of paying,” notes Robert Jackson Jr., a professor of corporate governance at Columbia Law School.

According to The New York Times, these ballooning payouts occur “despite sustained efforts to restrict excessive executive compensation . . . . Employers are no longer footing the tax bills for departing C.E.O.s who enjoy golden parachutes. Supplemental pension plans, which heaped benefits on executives regardless of how well the company did, are largely a thing of the past. Stock awards are mostly tied to performance, not simply awarded at regular intervals.” Moreover, there is more public disclosure of executive compensation, because, it was believed that if “companies have to report C.E.O. pay that is 1,000 times that of the average worker or justify growing pay in spite of weak results, perhaps shame will kick in.” A recent study concluded that C.E.O pay as “a multiple of the typical worker’s pay rocketed from an average of 20 times in 1965 to 295.9 in 2013.”

But The Times concluded, shame “hasn’t worked.” (See, “For the Highest-Paid C.E.O.s, the Party Goes On.”) We have to wonder why?

C.E.O.s actually form a club, a tight-knit oligarchy, and in that group there is only one measure of success. C.E.O.s know where they stand relatively to each other, and they want to be treated with respect. For one thing, many of them sit on the boards that determine the salaries of other C.E.O.s, and the boards make a point of knowing what the “standards” are. They may actually believe that compensation works as an incentive, but it’s probably more a matter of playing by the rules and being “appropriate” and “fair” to members of their group – in that rarefied world.

But there is another factor: the status and power of the oligarchy depends on large sums of money required to sustain their social position. In paying each other such immense sums, they are also ensuring the continuation and power of their class.

It takes a lot of money to pay for the armies of lawyers, accountants, advisors, consultants, lobbyists, and others enabling them to protect the wealth through which they maintain control of the political process, and guard their wealth against taxation. To be sure, they also spend a great deal of cash on their private homes and planes, their art collections, and so forth. And they also want to donate hospital wings, museum galleries, while funding their favorite charities. But the essential expense is about preserving the power and control of the oligarchy itself.

It sometimes seems as if our growing wealth inequality is a mystery, an insoluble problem. But simple changes in the tax code could do much to levy reasonable rates on the income of oligarchs’, eliminate tax shelters, and deplete the estates the super-wealthy pass onto their children.

The “invisible hand” of oligarchy keeps that from happening.

Can Anything Be Done?

Given the amounts of money involved and the sprawling global landscape within which it occurs, it’s no surprise how much insider trading, bribery, deception, and just plain theft occurs in business. This is been augmented by the powerful role played by the financial industry, promoting mergers, acquisitions, restructurings, and divestments, without much interest in making more reliable goods or providing truly useful services. The sums of money involved are irresistible.

Recently, The Economist looking into the effort of containing bribery, noted that “the cost and complexity of investigations are spiraling beyond what is reasonable.” It cited the fact that Siemens, convicted of handing out bribes in developing countries, has “spent a staggering $3 billion on fines and internal investigations” while Walmart “will soon have spent $800m on fees and compliance stemming from a bribery investigation in Mexico.” (See “Daft on Graft.”)

It complained of “a ravenous ‘compliance industry’ of lawyers and forensic accountants” as well as “competing prosecutors” in different jurisdictions getting into the act and, in the process, inflating costs.

In his recent book, Too Big to Jail, Brandon Garrett notes that many efforts to get companies to reform themselves have inevitably backfired. Many regulators and watchdogs tried an approach of “rehabilitating” companies, based on a legal strategy developed with youthful, first-time offenders. The idea is that punishment is deferred, pending efforts by offenders to fix themselves.

Garret notes that some companies really try, but the record is mixed, to say the least. The essential problem is that changing a company’s culture is truly difficult, and even those that set out with good intentions have little idea of the complexities and resistances they will inevitably run into. Moreover, in only 25% of cases is any over-sight provided, and, even when monitors are charged to track compliance with reforms, seldom is any real effort made to check that the monitors are trained, adequately motivated or free from bias.

Fundamentally, the incentives for corruption usually remain in place. In the cases of Siemens and Walmart, western companies were dealing with officials in Africa and parts of Asia where bribery is an accepted way of doing business. No doubt, the company officials charged with managing their entry into those markets felt they had no choice but to go along with those culture’s practices. To be sure, they could have refused to engage in “corruption,” but almost certainly they would have been replaced by others less troubled by the unorthodox requirements of the job.

Corruption is not acceptable, but it will never be fully eradicated. Like the weather, it is something we have to understand and monitor if we are going to be able to cope effectively and limit the damage it can do. It requires constant vigilance, oversight, and, yes, money. It needs regulatory agencies and ambitious (even over zealous) prosecutors, expensive trials, and punishments that target the perpetrators.

Garrett notes the vital role of whistle blowers and informants in calling attention to corruption. Those who go public with their company’s crimes play an indispensible role, though often vilified and shunned by “loyal” co-workers. But he also notes the valuable effects of a simple hot-line to report ethical abuses, something many companies fail to offer.

Among other things we have to over come our own ambivalence about the battle. And he gives a nicely detailed account about how Siemens did finally engage in a massive and successful effort to change its culture. It replaced most of it top management and hired a former minister of finance in Germany to over see its efforts at reform.

Progress is not impossible – just very, very hard.

Our Problem with the Wealthy

It has been a bedrock idea of modern democracy that those who have more should pay more, but throughout history the rich have been remarkably successful in beating back attempts by the poor to dip into their pockets.

To start with, the rich usually have more authority and power. In more recent times, armies of lobbyists and donors to political campaigns, advisors, accountants and lawyers have worked tirelessly behind the scenes to ensure that the tax laws remain favorable to the rich. Oddly, though, the poor themselves seem at best ambivalent about taxing the rich. Why don’t they clamor for a more equitable tax system?

One reason is that so long as America remains “the land or opportunity,” even when that opportunity is increasingly restricted, the poor feel that money is being taken away from them – or will be taken away, that is, when they finally realize their dream of getting rich. It is hard for them to think of government as ever being on their side. They resent the taxes they do not yet have to pay.

In other words people find it hard to give up their illusions about this country even though it has long since ceased to offer what they want and need.

Another explanation was offered recently by a commentator on The Daily Kos, a liberal internet site. “I felt my own poverty was a moral failure . . . . To make up for my own failures, I voted to give rich people tax cuts, because somewhere deep inside, I knew they were better than me. They earned it. My support for conservative politics was atonement for the original sin of being white trash.”

Not everyone feels such depth of self-contempt, but many do feel inferior, inadequate, or self-blaming for their “failures” to achieve their goals. They avoid blaming the system stacked against them, crediting others with the superior qualities they lack.
Both sets of reasons speak to the fact that people have trouble accepting their own shortcomings and weaknesses, and engage in irrational projections onto others in order to protect themselves from deeper feelings of shame and inadequacy.

We are infatuated with wealth; we dream of it in our movies and TV shows. On the other hand, much work is increasingly dysfunctional, under-rewarded, unsatisfying and insecure. Moreover, those who do not have skilled jobs with good pay and mobility when their companies are restructured or bought out, face chronic poverty. The recent groundswell to shore up the minimum wage speaks to our grudging awareness of this problem.

And then there are those in the middle, with skills that are being gradually replaced by robots and smart machines that are cheaper, more reliable, and don’t get sick or protest.
These trends seem inexorable, but they seem to take place in the half-lit world of the unconscious. They are things we don’t really want to face squarely. To be sure, there are statistics, headlines, and occasional news items that refer to these trends, but we seem to prefer to keep the big picture blurry.