The caption is: (top) Let’s not discuss the Dreyfus Affair. (bottom) They discussed it.
- Was the election stolen? That’s being asked wherever I turn on the Internet. Actually, the first election in which I voted was 1960 (JFK vs. Nixon). It was generally agreed that, thanks to an understanding between JFK’s father and Chicago Mayor Richard Daley, the graves of Cook County had opened, releasing thousands of spirits onto the voter rolls who then voted Democratic. I think the argument could be mad that the rampant gerrymandering since 2010 amounts to rigging an election before voting ever takes place.
- I noticed this on FB (it’s why I keep FB – if you’re a connoisseur of blind human stupidity, it’s essential). This sort of thing is why I never read Slate. http://www.slate.com/articles/news_and_politics/politics/2016/11/there_is_no_such_thing_as_a_good_trump_voter.html
- My principal worry about Trump is that he saw the election – getting elected – as another deal. Dealmakers say whatever needs to be said to whomever is need to get a closing. Down the road, they reckon, terms can always be renegotiated – and certainly Trump’s career seems to prove that out. But I don’t think the presidency works that way.
Busy day. No real chance to post, but as always I turn to Kunstler for his take: http://kunstler.com/clusterfuck-nation/what-now/
There are few political commentators I respect less than Elizabeth Drew. Here she trots out all the usual excuses. http://www.nybooks.com/daily/2016/11/12/trump-victory-how-it-happened/
How about this? Despise him or not, Trump puts it all out there. His lies are patent and transparent. With HRC, there’s always the feeling that something’s hidden underneath. Of course, Trump’s now showing something that concerned me from the get-go: an apparent lack of understanding how consuming and complicated a job the presidency is. You don’t commute to 1600 Pennsylvania Ave. three days a week!
3. amazing what crap sells for: http://www.bloomberg.com/news/articles/2016-11-16/allen-s-jet-painting-sells-for-25-6-million-at-phillips-auction
4. High up on my “Detest” list is Schumer, a real whore: http://wallstreetonparade.com/2016/11/protesters-target-senator-chuck-schumers-office-along-with-trump-tower/
5. I’m a huge fan of Ritholz. More and more grownups of my acquaintance are quitting or seriously cutting back on Facebook: http://ritholtz.com/2016/11/the-trouble-with-facebook/ Also this: http://www.thedailybeast.com/articles/2016/11/16/48-hours-in-facebook-s-unreality.html?via=newsletter&source=DDAfternoon
6. And this: http://www.thedailybeast.com/articles/2016/11/14/get-ready-for-the-worst-thanksgiving-ever.html
This should go in just before “Envoi”
PRESCRIPTIONS FOR POSTERITY:
RECLAIMING THE ONCE AND FUTURE AMERICA
In 1986, as the insider-trading ripples were beginning to spread, I participated on a panel on business ethics convened by the Young Presidents Organization, a vigorously overclass outfit which has raised self-congratulation to the level of a fine art. The symposium was held at a superswank hotel in Laguna Niguel, California, fifty miles south of Los Angeles.
There were two other panelists. One was a business school professor then in the process of putting together a lucrative consulting practice in business ethics, for which there was a sudden demand in the wake of Dennis Levine’s arrest. The professor bristled with charts and tables and jargon, as if matters of ethical behavior were reducible to the calculus of input-output or the boxes and lines of organizational diagrams. The other participant was Laurence Shames, the author of The Class, an account of the legendary Class of 1950 at the Harvard Business School.
At one point in the proceedings, the panel was asked for its thoughts as to why HBS ’50 had compiled such a notable record as managers, innovators and motivators. When my turn came, I opined that it had more to do with wartime experiences and values than with anything these men, contemporaries of the Class of ’40, would have specifically learned at the B-School, especially at a time before the computer, when figures had to be massaged by hand and everything was perforce simpler.
I noted a certain blankness on the faces of the audience. By the 1980s, I continued, people had lost touch with the significance of World War II in shaping the attitudes and values of the two or three generations it most directly affected. There had been, over time, an erosion of a sense of country and duty and national mission in which every individual was expected to suppress his self-interest and contribute to the general effort, to play his or her assigned part in winning the war. It was an attitude we could still see in Japan, which had lost the war, but not in our own country.
Winning the war required shared, mutual dependence. Which I do not believe is the same as “co-dependence.” To those at the top, it imparted a way of thinking which taught that those in command looked out for their men and captains went down with their ships. The moral and material logic of society was defined by an institutional order of battle and a known relationship between individuals. The war could not be fought and won on the strength of of the random spinning of a hundred-odd millions of self-interest which an invisible hand was supposed to dispose for the collective good. As Paul Volcker has written (of Bretton Woods), “the enormous burdens of war effectively silenced more parochial concerns.”
Eventually, after an educational pit stop, officers returned to executive suites and enlisted men to lesser jobs. But the bond forged in wartime held. Qualities, habits and aptitudes that had helped us win the war now helped us win the peace, to extrapolate military supremacy into commercial hegemony . No doubt it also greatly helped that the factories of our enemies and allies, our prospective competitors in their home markets let alone our own, were rubble, but there was something alive in the American spirit then, call it communitarian feeling, that seems lacking now. I do not think this is just nostalgia. The idealism of people my age about the postwar years is rooted in the idealism of the postwar years. One commentator has said of Marshall that he made us think we were better than we were, and I think that’s probably what leaders do. Ike did the same, and Mrs.Roosevelt, and gritty Harry Truman.
There are other proofs of individualism than the arrant self-expression which the present pursues in search of a transcendent self-esteem. A certain degree of conformity never hurt man or beast. We might joke about “the (1950s) man in the grey flannel suit,” but people used to wearing khaki accepted IBM’s stringent dress code of dark suit, black shoes and white shirt, an earnest of internal discipline which Ross Perot would also install at EDS during the anything-goes ’60s.
To most people in that conference room at Laguna Niguel, the war was a remote fact of history – as irrelevant to the true business of the day, the mock combat of high finance, as the war in which he never fought was Ronald Reagan’s phony quotations from the script of The Bridges at Toko-Ri. The average “Young President” would by definition have been born after MacArthur signed the Japanese surrender in Tokyo Bay. The long bloody slog to victory could not compete with the illusion of effortless national revival on which we were gorging ourselves in the 1980s, led by a president whose bitterest campaigns had been fought on the dance floors of Hollywood nightclubs.
Eighty percent of HBS ’50 had attended the B-school on the GI Bill, and that is something to think about. That was truly remarkable legislation, foresighted, deeply equitable. Every prior postwar period in American history had involved social and economic disruption as huge numbers of demobilized soldiers were cast loose on an economy itself demobilizing. In the general election of 1945, the British repudiated Winston Churchill and voted in Labour; it was, said one observer, a case of the enlisted men voting against their officers.
This would not occur in the United States. While the demobbed British enlisted man returned to the coal pits; his American counterpart went off to Harvard or Ohio State. The philosopher Robert Nisbet has noted:
“It is unlikely, I have always thought, that America would not have escaped something like the bitterness and internecine civilian-political strife of Germany and France and Great Britain after the First World War, had not the vast cornucopia of Veterans benefits been opened immediately after VJ Day. The intelligent, ambitious young who might otherwise have exploded, were of course welcomed to the universities, colleges and vocational institutes, many expenses paid by the government, thus ensuring a significant and honorable chapter in the history of American higher education…It is not too much to say that Our Boys were bought off, wisely, shrewdly and humanely from what could well have happened in different circumstances.” (The Present Age)
The G.I. Bill was not “means-tested,” as we say today, but neither it was it a free lunch. It provided for a year of schooling for each year of active service. Many well-off veterans elected not to accept benefits to which they were entitled — but then in those days noblesse oblige was still something of which to be proud.
The economic and political wisdom of the G.I.Bill seem indisputable. As Nisbet argues, it “absorbed” in education a large number of demobilized veterans, permitting the peacetime economy to gear up in a more or less orderly manner without the overhang of a potentially troublesome cadre of unemployed. When the universities began to disgorge these veterans in 1947 and therefter, they constituted an engine for economic growth on their own, not to mention that the economy enjoyed the infusion of a workforce, no matter what the color of its shirt collar, better educated than any in this country’s history. It should be noted, however, that the G.I.Bill had excellent material with which to work: literacy levels back then were by today’s standards extraordinary: of the approximately eighteen million men tested for military duty in World War II, only three to four percent could not read. This was a level roughly equivalent to that of Japan in 1990.
The G.I. Bill is still in existence, as part of an overall program instituted at the end of the 1970s by the military to deal with the same sort of racial problems and tensions that today confront civilian society. The military, the Army in particular, has been singularly successful in defusing these problems, which suggests that if we really want to get serious about the racial confrontation poisoning American society, we would do well to begin by consulting our officers and NCOs, and lock the politicians, educationalists, privatizers (and other Public Capital opportunists), and Op-Ed experts away to babble at each other.
Today, the G.I.Bill is much discussed as a solution to our problems today, but that seems to me to be putting the cart before the horse. First must come the wartime and a rejuvenation of the values it requires of a nation and its citizens.
Paramount among these must be sacrifice, the single element of the equation of personal and collective leadership which seems most conspicuously missing in public life today. Bernard Knox, who fought in Spain and Europe in the ’30s and ’40s, and taught Classics when I was at Yale, has written: “(war) calls out in men resources of endurance, courage and self-sacrifice that peacetime, to our sorrow and loss, can rarely command.”
World War II obliged Americans to put aside even the few gratifications the Depression had left within reach. They learned to wait their turn and say “Thank you” when served. They accepted rationing and shortages. They acquired a respect, however grudging, for the space, place and precedence of others. On every citizen certain duties were thrust. Right down to the humblest units of American society, “The War Effort,” spoken as of some deity, imposed collective social and economic disciplines, and gave a profound personal resonance to the word “patriotism.” It was a truly national enterprise. No one was excused from the sacrifice and obligations expected of him, and for each those obligations were defined – by the government, by the community, by the family. No one was untouched by it. Everyone played, everyone paid, everyone was in for the duration. Each did his or her bit: Hollywood stars sold war bonds, schoolkids collected tinfoil. The entire country was mobilized.
I exaggerate to a degree, of course. There was a black market and there was always “a man” who get nylon stockings or a side of beef or fifty gallons worth of gasoline stamps.
Without getting into the question whether any war is wise in its conduct or benign in its consequences, what is noteworthy about World War II is that the American people were obliged to forego certain historical norms of “American” behavior. Individuals were assigned roles, told where to take their place, had limits placed on their self-indulgence and accepted all these things – in many cases presumably only out of a concern with community opinion or fear of punishment under law, but does that really matter? The process worked, irrespective of the pros and cons of the circumstances which occasioned it.
There are sectors of present-day American life where something approaching a wartime footing seems about the only answer. Public education is one. Dealing with the explosive mixture of alienation, disassimilation, weapons, drugs and poverty present in the underclass is another. Behind these should be a larger set of goals, to which every American should be able to connect, if only as a matter of pride.
What should those goals be?
In 1944, with victory at hand if not in hand, FDR spelled out an “Economic Bill of Rights,” which is a pretty good place to begin.
“The right to useful and remunerative job in the industries or shops or farms or mines of the nation.
“The right to earn enough to provide adequate food and clothing and recreation.
“The right of farmers to raise and sell their products at a return which will give them and their family a decent living.
“The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad.
“The right of every family to a decent home.
“The right to adequate medical care and the opportunity to achieve and enjoy good health.
“The right to adequate protection from the economic fears of old age, and sickness and accident and unemployment.
“And finally the right to a good education.”
These are fine sentiments, the sort a President can afford to enunciate when about to emerge not only victorious from the greatest war ever fought, but as the only combatant left on his feet. In 1992, were I asked to construct a set of overriding goals to plce within reach of all Americans in a more sceptical age, they would number just five:
– A shot, mainly through education, at a minimum, attainable level of personal dignity.
– A user-friendly government comprehensible to its customers
– A postindustrial society skewed toward individual accomplishment and self-sufficiency, emphasizing the small unit as against the large.
– A commitment to equity – no gain without pain, no lunch without a check – with the understanding that “equitable” and “egalatarian” are not synonymous
– An end to hostility and the establishment of functional cooperation between the public and private sectors.
To achieve these, certain habits of mind will have to be put aside. The gang which brays the old Schumpeterian rag of “creative destruction” to the contrary, most change takes time. Time equals patience, and patience is the least American of man’s habits of mind. Our passion for instant gratification extends to problem-solving. As I tried to suggest to the Class of ’40, we let our problems build up over decades, and then expect to solve them in months. If we don’t see an immediate way out, we flap our hands and squawk futilely about the political barnyard like George Bush. In trying to fix the underclass, for example, it may be that we’ll have to put our money, our ingenuity and our moral backing behind only one or two generations, and fight a holding action (probably a euphemism for “abandon”) with respect to the rest. Of course, anyone willing to sign up and fight the good fight will obviously be welcome. The same may be true of the overclass. In both cases, the sins of the present may have to come out of the hide of the future, nice as it would be to have it the other way round.
What follows are a few ideas about what we might do. Think of them as “for-instances” rather than proposals set in ideological or intellectual concrete. None are statistically demonstrable. Most are more in the way of hunches. One or two might strike readers as facetious, but there is often more truth in humor than humor in truth.
Let’s begin with tax and financial policy.
We premise our economic and fiscal affairs as if we were a labor-intensive, manufacturing and agricultural polity when the reality is that the “legerdemain tricks on paper” of which Jefferson complained, most notably credit-driven speculation in real estate, are the natural tendency of American commerce, its driving force. We surrender to Wall Street promiscuously, as if in the grip of financial nymphomania, even when it is clear that the seduction will only bring us harm. No nation on earth can show a comparable history of credit-driven boom and bust; when I was researching my novel Hanover Place, I counted at least a dozen; if we throw in spikes of extreme but short-lived financial discomfort, the number is probably twice that.
In our public discourse, we equate “income” with “wealth,” which is exactly wrong, but exactly the way the truly wealthy (and those who service them) want us to think of it. We complain that our savings are inadequate unto our need for investment, but during the 1980s over half-a-trillion dollars in private-sector (public-sector backed) capital was available to perform “legerdemain tricks on paper” in the form of stock buybacks, leveraged buyouts and such. Another quarter-trillion went into ventures, mostly real estate, which busted the thrift system and hobbled the banks. That comes to $750 billion, before interest on debt incurred to finance various bailouts, which would have replaced every obsolete machine tool or production facility in the country. But machine tools are boring, hardly capable of engaging the mind of a thoroughly modern (finance-driven) CEO as he boards the company Gulfstream bound for a huddle with Wall Street about an LBO of his company or a failsafe rejiggering of his stock options. To sink a million dollars into a drill press with a ten-year payout is as boring (and unlucrative) for a hotshot money manager as it is for a bigtime CEO and his PR cadre.
My own guess is that the savings of the country are more than adequate, but that for a number of reasons they are subject to a bias, both psychological and financial, against basic investment. I can think of no incentives within our present set-up to alter that behavior. Everything proposed seems more of the same. Which suggests that possibly it is the basic set-up that needs alteration. Since we are dealing with questions of economic equity, taxation, the fiscal working-out of the moral and political tendencies of a society, is the place to start.
Taxation shuld be at least notionally designed to encourage what is socially productive and to inhibit what is wasteful. It is only commonsensical to suggest, as many have, that taxes should be set at a level sufficient to cover annual current expenditures plus a reasonable annual share of the amortization of longer-lived public assets financed by public borrowing which spreads the burden equitably over the taxpaying generations which benefit from the use of the asset. The corollary is that public debt, in a properly-ordered world, will only in the most extreme and contingent circumstances, such as a war or a depression, be employed to finance a shortfall in the current accounts of a nation.
Obviously this has not been the case over the last decade. The Federal debt has expanded by a factor of three; the borrowing of other public entities by equally as much. The traditional tax base has proved insufficient at rates which beggar some Americans, squeeze most others, and barely touch the overclass. Few Americans feel undertaxed, but the resentment is most acute at around $50,000 of gross taxable income, which official statistics locate in the upper-eightieth income percentile, and yet which is a number which the truly wealthy barely sniff at.
Although much has been written on the subject, pro and con, it is hard to appreciate the extent of the massive transfer of wealth, surely the greatest (in terms both absolute and proportionate) in the nation’s history, to the overclass. It continues every day. Taxing $50,000 incomes to pay $200 billion of annual interest on the Federal debt represents a massive redistribution to the holders of government bonds. At the same time, the annual realizations, interest, dividends, capital gains and rents, on several trillion dollars of private-sector savings, principally pension funds, remain outside the tax orbit.
The solution seems obvious. Money contributed to endowments, pension plans and the like should continue to go in free of tax, and be deductible at its source, for one time only. Realizations thereafter should be taxed like any other money. This could lead to a reduction of middle-bracket rates to reflect a broadening of the tax base.
The justice in this seems unarguable. Why should pension fund money managers play leveraged-buyout games tax free? Why should Henry Kravis become a centimillionaire thanks to tax-free leverage? One of the reasons for the disastrous bias against small investors which we built into our investment markets beginning in the ’60s, with the push toward institutionalization, has been the influence of discriminatory tax differentials on investors’ freedom of action. Tax-exempt pension funds blow in and out of stocks willynilly, while individual investors, locked in by the capital-gains holding period, are stuck. The answer put forward by the Hayek-Schumpeter crowd is to eliminate capital-gains taxes altogether, but I question the wisdom of doing this in the face of present deficits. I also question if a political system which exempts capital from taxation while it taxes labor (including brainpower) won’t soon have to find another word than “democracy” to describe itself.
There is also the matter of the inequity of a policy which borrows on the backs of its averagely-advantaged taxpayers while exempting from tax the financing sources of its best-advantaged. There could be no greater encouragement toward “long-termism” than to bring the speculative market’s biggest players back into the tax orbit.
An ideal tax system would tax each dollar of realization – wages or profit – once only, at the point at which it finally comes to rest. Thus corporations would pay tax, at the corporate rate, on retained profits but not on distributed profits. This would end the double taxation of dividends and eliminate one much-touted bias toward debt financing as against equity. I might add, parenthetically, my belief that a more persuasive bias toward debt financing is chartered into our principal credit-granting institutions by favoring bonds over stocks as a cornerstone of “prudent” investment. In fact, junk “bonds” – which qualify as “prudent man” investmens – are nothing more than monetized stocks, offering contractual rather than contingent rates of return equivalent to the “imputed” returns money managers look for on the equity side of their portfolios. It is the contractuality that makes the difference, but as we have seen, this is about as binding as a cardsharp’s promise.
I also think that if we understand how wealth creation is subsidized by the mass of taxpayers, the case for progressive taxation seems ironclad. Simple equity suggests that wealth created with the Public Capital should be compensatorily taxed.
The question is how amd where: at what stage? The process of wealth creation, broadly considered, occurs in two steps: accumulation and consolidation. It is in the accumulative stage that great enterprises are hatched and brought to bloom. Here individual genius holds sway, and should be encouraged (or its discouragement minimized). At the consolidative stage, the object is less to build than to hang on.
The long-term interests of a dynamic economy suggest that – when it comes to paying for the decade-long party we have thrown for the overclass – it is more important to stimulate wealth-getting than wealth-maintaining. It is obvious that any number of people have emerged with a great deal more money than they need or is probably good for them. To the extent this rentier wealth has been financed or leveraged with Public Capital, it should be repatriated – returned to the common wealth, through progressive income taxes. At the ultimate consolidative stage, death, such wealth should probably be subject to near-confiscatory rates after a reasonable provision for living heirs and dependents.
When it comes to setting tax rates and brackets, however, the important thing is tax as rich only what is rich. We need to change our thinking and begin to judge wealth not by the standards of the poor, but by those of the authentically wealthy. We tend to follow the typical tabloid headline: “Man Slain in $100,000 Mansion!” – notwithstanding that anyone who’s recently priced a house knows that $100,000 buys something one step up from a tenement. An income of $100,000 a year is no longer “rich” by any standards except the statistical tables nor is a net worth, if you include the net value of a house, of three times that sum. In today’s America, “rich” – the financial capacity to exercise most high-cost economic options – probably begins at income and net worth levels of between 5% and 10% of the bottom-most rung of the Forbes “400,” or at about $150,000 and $500,000 respectively.
This is not to say that Uncle Sam should get the windfall. The private sector appeared to work better and more responsibly when we had progressive taxation, and I cannot but think that progressive taxation had something to with it. I find it strange, difficult to explain, that at the end of a decade when more personal wealth has been created than at any other time, the nation’s great private-sector institutions – universities, churches, hospitals, centers of high culture – should be comparatively worse off than ever before. Yale, currently in the business of eliminating or sharply reducing academic departments, boasts every year of receiving a higher level of alumni benefaction. Perhaps, but I would be very interested to see what percentage of aggregate alumni financial firepower those record benefactions represent; my instinct says a trendline plotted over the last fifteen decades would be sharply down.
Americans by an large mistrust government, when they don’t hate it outright. This is especially true of the overclass, which rallies around the statist flag, as they did around Roosevelt in 1932, only when it needs to be bailed out politically. As soon as the coast is clear, however, it is back to business as usual; only five years after the overclass poured out of clubrooms and boardrooms to vote for FDR, Peter Arno would draw the famous New Yorker cartoon in which a Panama-hatted, tuxedo-clad plutocrat invites another: “Come on, we’re going to the Trans-Lux to boo Roosevelt!”
The question of friction between the public and private sectors is an issue to which I will return. Considered in a tax context, however, this antipathy strikes me as being subject to socially productive mitigation through graduated tax rates. Indeed, it is through graduated tax rates that a powerful, competent private sector was built in the postwar years. Today, every major private or quasi-private cultural, educational or healthcare institution has let itself become dependent on public-sector funding or financial support, to a degree unknown a dozen years ago. These are, need I add, quintessentially overclass institutions; in a way, their evolution toward dependence on public funding illustrates the ability of the patron class’s ability/propensity to take care of itself.
The equation is simple. Under present tax rates, a dollar given to Yale represents seventy cents out of pocket; under the old top rate of 70%, the loss was thirty cents. In that forty cent difference lies an attitudinal gulf difficult to appreciate. It is a great deal more palatable to take an entrepreneurial risk: to drill an oil well, or make a true venture capital investment, with seventy cents of Uncle Sam’s money, as it were, than with seventy cents of one’s own. The same applies to philanthropy.
What might such a tax system look like? Perhaps something like the following:
1) No tax up to subsistence level, say $25,000. This would leave room for the enactment of sales taxes (such as on gasoline) and would become the standard deduction, replacing all others.
2) One bracket, say 25%, between $25,000 and the level (say $100,000) at which savings become – as a practical matter – feasible.
3) Broadly spread (to encourage savings) brackets after that, with tax rates on income rising on incremental bands of $150,000 at 3 percentage points per band to a top rate of 61%. Thus $1 million in taxable income would pay $338,250. Only income above $1,900,000 would be taxed at 61%, which seems an adequate comfort zone. Those needing more than that to live high on the hog could dip into wealth/savings, thus recycling into the economy hoarded wealth.
I have heard it argued that high progressive rates discourage enterprise. Perhaps they do: but only if you are unable to grant that there is more to life than can be set forth in a Dun & Bradstreet report. I grew up in a family where tax-complaining was as regular a feature of daily life as the second martini before dinner, but despite the litany, I never saw a slackening of enterprise. Commerce is as inbred an drive in an American as degustation in a Frenchman. Moreover, not every hour spent chasing Mammon is an hour best spent, especially by the young. When I was running the industrial (corporate finance) department at Lehman Brothers at the end of the 1960s, a period when Wall Street was hardly starving, I saw to it that my people were out of there by six o’clock: to nurture their families, attend a play or a concert, go nightclubbing, read a book. They returned to work refreshed. People seemed younger than they were, as opposed to the 1980s, when forty-year-old LBO magnates affected the wizened dignity of eighty-year-old dukes.
Sometime in the mid-1980s I found myself after dinner next to a man I’d known a long time, an executive, CEO of his company and not a good one, soon in fact to be fired. It was an August evening, fine and fair; the living room in which we sat was a few hundred yards from the sea. He began, as fathers will, to talk of his daughter, then twenty-three. Why right now, he boasted, I could pick up this phone and get her at Goldman, Sachs – and to prove his contention, he direct-dialled and indeed there she was. How sad, I thought, how ridiculous, for a young girl who should at that moment have been walking hand-in-hand along a moonlit beach with a swain, to spend Saturday night staring at a VDT in connection with some idiotic merger that would doubtless do more harm than good to all but a very few people.
Rich men’s poodles like the editor of The Wall Street Journal are fond of ratcheting up our generalized, innately American tax antipathy with scarewords suggestive of socialism, such as “redistribution” and “transfer payments.” When, however, the rich do the redistributing themselves, by their own lights, to the beat of their own drummer, they redistribute to the sorts of institutions they favor. The result is that Peter leaves more money in Paul’s pocket to be spent for public services essential to the general good. Progressive taxes are an excellent means, one of very few, of constructively mobilizing anti-government feeling, and for guiding the invisible hand toward the right chords. In a strictly commercial context, they encourage risk-taking, that key element of leadership, but not the kind of recklessness engendered by the socialization of credit risk.
Given the systematic abuse of Public Capital which occurred during the 1980s, a very good, indeed an overwhelming case can be made that what the supplyside, free-market propagandists condemn as “redistributive” may with equal justice be justified as “recompensatory.”
And then there is another argument that can be validly turned back on the laissez-faire crowd. This was propounded by TK Coase, a recent Nobel economics laureate much admired and hymned by the crypto-Schumpeter crowd. Professor Coase defines as private “property rights,” and therefore freely transferable, existing private rights to public-sector benefices such as pollution control easements (and, presumably, subsidized landing slots and airport gates). It is Coaseian theory that unerlies the current market in corporate “rights to pollute.”
I would argue the flip side of Professor Coase’s proposition: that there are also public, or collective, “property rights,”which enjoy – under the “takings” clause of the Fifth Amendment – equal protection from unfair seizure by (or transfer to) private parties as any private or personal property does from the tentacles of the state. If the people – via the state – may not seize the economic property of the overclass, by what right does the overclass – via the state – make free of the economic property of the people?
The answer is: by no right. And yet, see what happens!
Here (I quote from Washinton Post economics correspondent Hobart Rowen) is an example:
“Under an 1872 mining law which still governs extraction of minerals from federal lands, a miner can stake a claim and hold it for a pro-forma payment of $100 a year. When minerals are produced, the profits belong to the miner, and the government – that is, the taxpayer – receives nothing.
“One egregious example…involves land patents to be issued to (a joint venture) of Manville Corporation and Chevron…The total payment to the federal government will be $36,000 but the company expects to extract more than $36,000,000,000 from the site. Taxpayers will get about $1 (to cover paperwork) for every $1,000,000 in receipts to the company…if the federal government charged royalties comparable to practices in the private sector, it would earn between $2,000,000,000 and $5,000,000,000 every year- no small contribution toward reducing the deficit.” (italics mine)
I am not arguing for an extension of state control. The great task before us, to which our best and brightest must wholly commit themselves, is a massive reorientation of public and private interests and equities, as they stand in relation to each other, to meet the needs of the public sector without inhibiting the energies of the private sector. Public Capital – its exploitation by private interests – is a fact of American economic life which has been with us practically from Day One of the young Republic. We cannot hope to seal up all the chinks and crevices, nor string mile upon mile of legal and legislative barbed wire around it without causing more harm than cure.
The solution should be participatory rather than exclusionary, collaborative rather than adversarial. For the sake of discussion, let us agree that progressive levies are called for by a combination of equity and necessity. Deficits do matter; contrary to received opinion, deficits don’t matter only if they don’t have to financed. The trick is to find a way to raise the levies needed to restore fiscal balance without crippling capital and business formation.
Why, for instance, shouldn’t taxes be payable in kind, valued at market, possibly subject to a 10% “haircut” to cover secondary distribution costs? When a Sam Walton dies, leaving a $6 billion estate, rather than a big valuation dispute, with high-paid investment bankers lying in their teeth about “adjusted” values, why shouldn’t the government accept Wal-Mart shares in payment of tax? For valuation purposes, the 10% “haircut” would nicely split the difference between the current, wholly-inequitable step-up in tax basis on estate assets, and a capital-gains charge at full rates.
The tricks that can be played with the accounting of large estates are extraordinary, the ratiocinations would do a mediaeval scholastic proud. One of my earliest jobs at Lehman Brothers was to value for estate tax purposes a block of Texaco worth roughly $25 million. I managed to get it down to $13 million, by applying creative reasoning and argumentation that would later stand me in good stead as a novelist. One of the largest quasi-monpolistic enterprises in this country has been financed with what some think is the greatest estate-tax swindle in our history.
Shares accepted in payment of estaste tax would be placed in the Public Trust I described earlier: formed to hold and manage the people’s “pieces of the action.” The Trust would be a quasi-private entity patterned on the Federal Reserve. Into this Trust would be paid user fees on Public Capital, in-kind payments as above and so on. As these are liquidated, the proceeds would by law be exclusively applied to the extinguishment of the Federal Debt, just as New York City sales taxes were segregated to service the debt of “Big MAC” in the New York bailout.
No one talks about it any more, but the concept of a “people’s piece of the action” – a charge for the use of Public Capital – was once alive and well in this country, notably in the Chrysler bailout of 1980. At that time, in return for various guarantees and subventions to the stricken automaker, Uncle Sam extracted a cut of the deal in the form of stock-purchase warrants. When Chrysler temporarily recovered, these warrants were worth real money, approximately $115 million, which seemed a fair price for the American taxpayer to charge for making him “cosign” Chrysler’s paper. Lee Iacocca, then riding high, insisted that the government give back the warrants. Uncle Sam, acting in this instance more responsibly for his principals than Henry Kravis seems to have for his in the Beatrice and Storer deals, rejected Iacocca’s attempt and cashed the warrants.
The Chrysler arrangement should have been a model for the bailout-pockmarked decade to follow. It would be restored as a central feature of my own fiscal program. Time after time during the Era of Reagan-Milken-Bush I read (and still do) of deals dependent for their execution on Public Capital in one form or another, transactions – RJR being the most blatant – where any intelligent or prudent private-sector guarantor or investor would have insisted on a handsome cash or contingent “sweetener” or fee as the price of his backing. It is a disgrace that Uncle Sam does not own 20% of Fannie Mae, since, if a big mortgage pool unwinds, as may be the case with the paper sold to Fannie Mae by Citicorp and then returned, the taxpayer may get stuck with the bill. In a perfect world, the taxpayer would retain a permanent 10%-20% “carry” in any public asset transferred to private ownership or any undertaking financed to any significant degree with Public Capital. Conversely, taxpayer-backed institutional investors would have the right to “deinsure” portions of their investment capital.
The Trust would be administered professionally, by a competitively-paid staff working under a board drawn from the top private-sector names in investments and finance. These would work, hopefully, pro bono publico on a rotating basis, much as the Art Dealers Association of America works hand-in-hand, through a rotating panel, with the IRS in establishing the fair estate and tax value of works of art. The objective of the Trust, administratively and consultatively, would be to realize the optimum prices for its assets within reasonable time horizons. As I have said, all proceeds would be applied – as a matter of intergenerational equity – to reduce the national debt.
The Trust would be a vibrant example of what is absolutely necessary to get this country back on the tracks: the bringing to public issues of a greater degree of private-sector expertise. I have mentioned the Art Dealers Association. The employment of the leading Wall Street law firm of Cravath, Swaine & Moore to consolidate and prosecute various matters in connection with Michael Milken and Drexel Burnham produced a far greater economic return (upwards of $1.5 billion) to the government than is likely to have been achieved by Federal attorneys working alone. That is simply the way things are, and no reflection on the competence of the government. I can think of at least one estate tax proceeding where, if the government had been able to draw on the same level of expertise as the defense, the outcome in favor of We the Taxpayers would likely have been several hundred million dollars higher, enough to rebuild a fair piece of Los Angeles.
There are any number of other areas in which the overclass can make the running. In some cases, its commitment might be conscripted through, for example, “means-testing.” In areas such as health care, the overclass should act as the thin edge of the wedge. The well-off are better equipped, financially and intellectually, to negotiate the cost of care than the poor. Health care rates, if driven down, will be so only from the top. A tax bracket-based series of high deductibles with respect to health insurance might have the same effect on medical costs as institutional pressure did on stock exchange commissions: push them down from the top rather than nibble away at them from the bottom. Right through the entitlement\benefit system, it is from the top down that thresholds should be calculated – as much in the interest of efficiency as equity.
Everywhere one turns we seem to have got it backwards, however: probably an inevitable consequence of remaining constant in our approaches and delusions in the face of a dramatically changed world. Every tendency in modern life suggests that the small unit is the key to economic growth and innovation, not to mention unemployment, but the terms of American commercial life today are powerfully biased against the smallholder, the small businessman, the individual in a garage with an idea, and the family.
Our slogan, and objective, ought to be “Every American His or Her Own Bottom Line,” which would entail a massive effort to make the country user-friendly for its citizens and to encourage and equip the individual to make his own way. To begin with, there should be no legislated advantage which favors the big over the small. If the market, within monopolistic constraints, wants to decide certain economic outcomes that way, so be it, but let the starting line at least be level. This means the same tax breaks for large and small, same ease of entry, same this, same that – above all, same right to the use of Public Capital.
The present deposit insurance scheme, a central element of Public Capital, is in my judgment absolutely topsy-turvy. Given our native propensity for labelling things in terms quite opposite from the purpose for which we intend to use them, we forget – as James Grant has pointed out – that deposit insurance was essentially created to encourage lending. In 1992, as a result of an understandable revulsion to the ’80s, and because interest-rate spreads are uniquely interesting, lending has dried up, since their is such good money to be made by simply taking in cheap deposits and investing them in Treasuries: a practice which a strapped government is hardly likely to discourage.
If we are to encourage lending, we should extend the principle embodied in Fannie Mae and Freddie Mac, scrap deposit insurance altogether, and extend Federal loan insurance to the banking/savings system as part of the banking process (eliminate the cumbersome Small Business Administration). Loan insurance would cover commercial and personal (non-mortgage) loans up to $500,000, to encourage small business and small capital formation. Let the big boys come to terms on billion-dollar financings on their own, in the open market. At the same time, premiums for Federal loan insurance should be what they have to be, calculated on a bank-by-bank basis; these would presumably be built into loan-pricing on a more efficient and realistic basis than was the case with deposit insurance.
Taxpayer-guaranteed loans should be completely differently structured than conventional debt transactions. The truly pernicious debt-bias built into our existing tax structure is the fact that collection of interest is favored over the repayment of principal. This goes against the cardinal principle of banking: you lend money to get it back. Cash-on-cash thinking argues that interest or principal, it’s all cash, and thus all the same, except that interest is profit, which makes all the difference to post-Wriston bankers fixated on profit-driven stock prices. Paul Volcker’s Draconian interest-rate policies of 1981 may have wrung inflation out of the economy, to the notable benefit of the creditor and possessor class of 1985, but those 20% interest rates imposed on debts already outstanding also wrung out more than a few promising small businesses. I know; I owned one. Money borrowed years earlier to finance a growth plan calculated at 10% suddenly cost 20%. We were dead, and so were many larger businesses, making them easy game for the LBO crowd. Volcker was acclaimed a hero. He should have been shot.
Under my plan, payments on guaranteed loans would be applied entirely to principal until 50% of the initial debt had been repaid; the balance, along with accrued interest, would be amortized thereafter. These payments would be tax -deductible to the debtor, and untaxed to the recipient.
An additional incentive toward small business formation might come in the form of a reshaping of the capital-gains tax on qualified new ventures, simply by giving a credit for the full amount of any residual investment (cash or value put in, less cash or value taken out) against any tax due on realized gains. Thus if I sink $1 million into a brand-new widget business and sell my interest down the line for $5 million, I would pay tax of only $200,000 on the gain of $4 million (at a 33% projected rate, notional tax due would be $1.2 million, offset by my $1 million investment). If I sold the business for $10 million, my tax would be $2 million, a reasonable levy on a 10X profit.
A simpler country would require less government. Less Washington, that is. Too much of our money goes to Washington, but not enough, in my opinion, to government. Congress costs $5 billion a year to run, but the salaries of the 535 members of the Senate and House aggregate roughly $60 million.
You get what you pay for. Here again, I would apply the principle of Every American His Own Bottom Line. Why not simply budgeted every Senator and Member of the House at $2,000,000 annually for compensation, staff and other direct costs, and let the legislator allocate it? Eliminate franking and other such free rides, including the abuse of The Congressional Record. Eliminate or reduce grotesquely overblown staffs and support systems. Let Congress organize these out of its stipend. Congress today is 90% perks and 10% pay. It ought to be exactly the reverse. The fact is, we don’t compensate members of Congress adequately, measured against their responsibilities, or against comparable private-sector jobs. A Wall Street bond trader with five years’ experience would consider the $140,000 we pay our Representatives a derisory sum. The surest sign of undercompensation is the growing presence of inherited wealth on Capitol Hill. There are exceptions, but inheritors are exactly the wrong people for the job. Noblesse oblige is a fine private-sector attitude, but it has no place in government beyond a generalized concern for the wellbeing of the people. If we paid our Congresspersons and Senators – say – $250,000, leaving $1,750,000 to run the office, we could begin to compete with our private sector in attracting really capable people. On the evidence of C-Span, this is certainly not the case today.
We might also give thought, over time, to breaking up Washington. Leave the Legislative, Judiciary and core Executive departments in place, but relocate other executive departments and commissions elsewhere. Federal employment was a much under-estimated engine of the vaunted growth of the 1980s; why not spread the wealth? Having the Securities and Exchange Commission in Washington entails a frightful waste of public and private money (every messengered document is someone’s tax deduction). Why shouldn’t the Department of Agriculture be out where the crops are? Why not put some of these employment engines to work in areas where employment is a problem – especially since Uncle Sam is a notable creator of black middle-class jobs.
This would be a very long-term program: shrinkage through attrition in Washington, growth through relocation and job creation elsewhere. It is a plan that has worked in Germany, where government is dispersed across the country (the legislature in Bonn; finance in Frankfurt; judiciary in Karlsruhe etc. Gains in communications technology and elsewhere obviate the need for Beltway centralization, centralization which now approaches ossification. Dispersion of the limbs of government would be powerfully rejuvenative, not least since it would oblige lobbyists to maintain three or four expensive offices where they can now get away with one. As for the subject of lobbying, we might take a leaf from the book of the Venetian Senate, which for several centuries required that any petitioner for a public dispensation make application on a special form for which he was handsomely charged. The Federal Government could bring the Venetian system up to date by requiring lobbyists and other favor-seekers to use such forms, charging them at the rate of 20% of the assessed real-market value of the slice of the public pie being coveted. One problem we have in this country is that government is too cheaply corrupted. It is truly a case of our deserving more bang for our buck.
Of course, we seem to expect that government will be corrupt. This expectation, furthered by best-selling smartass writers like P.J. O’Rourke, arises from our built-in antipathy to government. It is a stupid, unproductive attitude, but it is highly profitable to those who know their way around. John Adams noted it barely twenty years after the signing of the Constitution and spoke up: “The declaration that our People are hostile to a government made by themselves, for themselves, and conducted by themselves, is an insult.” I hate to imagine what Adams would have thought of two presidents in succession decrying as “the problem” the very government they strove mightily (and expensively) to be elected to lead. But then Adams was hardly a spinach freak.
Reflexive railing against government has become a central article of public opinion at large, but it represents, I believe, essentially the metastasis of the overclass’s thin-spirited complaint about taxes. It’s a way of diverting public wrath from what should be the true objects of political fury.
The trick is to depict government as an alien in our midst. When the extent of the S&L crisis was finally becoming plain, I remember reading a letter to Barron’s which fulminated “Let the government pay for it!” That’s about as stupid as you can get.
It’s very easy to be angry with bureaucracies. The real danger lies extrapolating alienation from the process of government to the very idea of government. From there, it’s but a short leap of unbelief to estrangement from the very idea of the primacy of law – – since in a nation of laws the government is the embodiment of law. These are the most lawless times I can remember, at every level of American society, and this lawlessness seems rooted in an general antipathy to government encouraged even from the bully pulpit. It seems unarguable true that nations get the government they deserve. A people encouraged by its tax-phobic overclass to detest the government, in order to weaken that government’s resistance to overclass depradations (ranging from commercial larceny to usurpation by pundits) will get a government which – at the interactive level – detests them. This, I think, is what has happened.
There is much talk these days about “industrial policy,” in the spirit if not to the degree pracrticed in Europe and Asia, but I suspect we are not far enough along the perceptual road for that, even if industrial policy is an idea that could ever work in America, so against our peacetime grain does it seem. We should point toward what we achieved in wartime: the interim – as opposed to long-term – crisis recruitment to the public interest of the best private-sector talent, and not simply to blue-ribbon, blue-chip commissions which grandly address the problems of the day.
A privately-supervised Public Trust to negotiate and manage the people’s piece of the action is what I have in mind. Although it might produce enhanced economic returns on Public Capital, its symbolic importance would be much, much greater. Animosity to government by, of and for the people is the most disfiguring element in American political life today. It breeds noxiousities by the score. If the wound is to be healed, the people at the top must demonstrate concern about the larger dimensions of American life by putting their mouths behind our money.
ENVOI: THE NEW AMERICAN DEMOCRAT
Like Martin Luther King, I have a dream. Unlike his, mine is a nightmare. In my dream, an angel, white-skinned and white-robed, bearing the regalia and insigna of the Republic, appears to lead me to the heart of the heart of the American spirit: to show me the real America, the true America made flesh. It takes my elbow, this angel, and we rise from earth, like Christopher Reeve transporting Margot Kidder in Superman, to travel through space and time, across galaxies and centuries, alighting finally in a broad, pacific, landscape like those found in 19th Century American paintings. Pictures which wear a warm, probably misleading glow of sun-drenched innocence.
The angel leads me along a narrow street wending between pristine picket-fences, as in a old New England town, past a square anchored by two churches, centered on a monument to the fallen, then past solemn, garden-fronted, shuttered white houses, spic and span in the late afternoon light. At last, at the end of the street, we find ourselves before a tabernacle, a shrine, a mausoleum, a small temple – it’s difficult to say which – with impressive bronze doors incised with depictions of heroic episodes in the history of the nation. We pause, then the angel lifts a hand and the doors slowly swing open, revealing a blazing penumbra in the midst of which stands a figure. At first my eyes, half-blinded by the brilliant glare, can barely make this figure out, but gradually its features come into focus- and they are those of Michael Milken.
Or of George Bush. Or Ronald Reagan. Or Donaldtrumphenrykra-vistinabrownnancyreraganmadonna: a phantasmagoric dreambeast with a thousand changeable, greedy faces.
These have been bad years for the nation. For a decade and a half the country has been run pretty much as Wall Street has wished, and the results are plain to see. We have in all meaningful respects surrendered to the magnetic pull of the downmarket, because the downmarket is where the quickest buck is. In many ways, what we saw in Los Angeles in the spring of 1992 was the working-out to extremes of pop culture, rap culture, mass culture, vox populi escalated to an unspeakable decibel level. It was the sociopathic whirlwind predictably reaped by a nation which has cast its economic and cultural lot with the purchasing decisions of young people who routinely display ignorance, violence and attention-deficiency. It is thus that empires become ashes.
A friend who is a curator at a leading museum not long ago deplored to me: “We’ve prostituted ourselves to lure millions of people into museums, in the course of which we’ve just about ruined the museums for the people who really care about art, and the sad thing is: it doesn’t seem to have done one damn bit of good for our society!” Museums are just one more thing to see, one more thing to do. They have bartered board seats for comparative pittances to business types whose comercial view of life has in many instances all but eviscerated the spiritual core of the institution.
The same could be said of politics, publishing, air travel, education. A lot of money has been pushed around, to the immense profit of those few people whose business is money-pushing, but everything else seems to have gone to hell in a handbasket. Not only American commerce, but the whole of American life, have been enslaved to the calculus of the money markets. There seems to be no issue, episode or decision not dominated by economic considerations based entirely on the findings of polls etc, as to the broad public’s proven tastes. It is why American culture seems repetitive, self-imitating, why we have no avant-garde to speak of, why a culture of creators has been supplanted by one of commission-men in everything from politics to perfume. An odd byproduct of this tendency has been the rise of the “inexpert expert,” highly-paid to advise on and implement great affairs for which he has demonstrably shown no ability: the leading (over a million a year in receipts) lecturer on filmscript technique has never sold a screenplay; one of the best-known firms of political consultants is better known for losing (but dirty) campaigns here and abroad; I can think of a hand’s worth of prominent “spin doctors” whose clients seem to staggger from worse to worst; executives in a dozen fields who move blithely, like bloated, worsted-clad bullfrogs making their way to greener lilypads, from lofty plateaus of compensation to ones higher still. I have seen more enterprises ruined by $500-an-hour management consultants than improved – largely because at the end of the day, it is the wishes of the individual who signs off on bills calibrated at $500-an-hour which have shaped the consultants’ objective advice.
At the end of the day, I cannot escape the notion that this is all somehow cockeyed. Certainly there is nothing in the Constitution or Bill of Rights, which is principally where I derive my sense of what this country is supposed to be about, that stipulates that it is the obligation of the ordinary citizen, gullible, complaisant and dutiful, to underwrite the speculative drive for wealth and advantage of an overclass. Quite the contrary, in fact: as I read the intention of Jefferson and his colleagues, as glossed by the likes of Fenimore Cooper in word, and FDR and LBJ in deed, it is the obligation of the privileged to do what lies within their reasonable power to make the idea of America something of a reality for everyone.
This is not to say that I expect a class of saints suddenly to spring from the American soil. Human nature is what it is. It is, however, bad enough when an overclass behaves like pigs, as ours has these last dozen years. When that behavior is subsidized – which amounts to being sanctioned – by the tax liability of the mass of American citizens, we have passed not only beyond equity, but beyond decency. Thus it is that I find a certain indisputable logic in the notion that those who have taken the greatest private profit from the financial undermining of the public economy should bear the brunt of whatever fiscal and tax policy is necessary to set things to rights.
Our immediate problem is economic. To deal with it, we have got to understand exactly how money is earned and accumulated in this country and devise an appropriate tax policy. Such a policy would (if necessary to reduce the debt) retroactively recapturing visible and invisible subsidies, encourage enterprise and fresh investment, stimulate savings, and bring every individual and institution into the tax orbit. If the Public Capital is to be deployed – directly or indirecxtly – for private profit, then it must be done only on the same hard-nosed basis that a private-sector capitalist would participate, negotiated and overseen by the same quality of expertise that the biggest players in the private sector (dwarfs by comparison with Uncle Sam!) are able to command. The socialization of credit at the deposit end must cease. At the lending end, let Uncle Sam guarantee small, business- and employment-generating loans, but let the origination and processing and administration of those loans remain with the private sector (get rid of the Small Business Administration), and let them be made on terms which emphasize repayment of principal rather than interest. Tax policy should also reflect (as with a gasoline tax) some general public commitment to the welfare of the globe and its atmosphere.
I have read that the reclaiming of America cannot be top-driven. This I don’t understand. How can it be otherwise accomplished? The overclass must rejoin the nation. Its anti-government antipathy must be stood on its head by powerfully stimulated volunteerism or converted into a powerful force for private philanthropy. History suggests that progressive tax rates can be an effective agent in the latter regard. Some kind of high- or highest-level National Service, or pro bono contribution of expertise, compensated at market rates, might work to secure for the common wealth the skills and powers which the private sector can command. It would be great to pursue an economic state of things whose investment markets treated sweat equity if not with the same deference as cash equity, at least without disdain. One can also pray for a resurgence of altruism, of the kind exhibited by Eugene Lang or Long Island developer Jefry Rosmarin, who have guaranteed the college education of dozens of schoolchildren, and shown black kids that there really are white people on their side.
As I write, my mind goes back to my ill-starred evening with the Class of ’40, a group educated, as I had been, to the assumption that the country does best when its most advantaged citizens behave best. The prosperity so evident on that June night flowed from an economic policy which assumed that the larger the slice of pie for those at the top, the bigger and more nourishing the crumbs which would descend to those below.
The irony is that practically everything else in American culture has become bottom-driven (although at times with a very slick finish). The mass-market may have been where the money was, but the broader interests of the country require that those who can afford the ticket to the high ground lead the way. It is easier to build a broad bridge back across a ravine than to achieve the first narrow span.
Only the overclass can afford not to put money at the top of its list in the great business of living. Only the overclass can afford “the willingness of heart” which Scott Fitzgerald claimed to be the big difference between America and other nations.
It will not do for our best-treated citizens to sit idly by, on cushioned bottoms made fat by feeding at the public trough, and watch the rest of America go to hell. If nothing else, the American overclass must not be permitted to display so little civic pride or public spirit. There are many ways to discourage this spiritual shrinkage; I have suggested a number.
The last ten years have tested the proposition whether unfettered capitalism can serve as the principal bonding agent of a great nation, one which loudly but visibly undeservedly claims to be the last best hope of mankind. To all but a few diehards huddled in the disconsolate lee of The Wall Street Journal‘s editorial page, the answer seems clear: it cannot. Which is not to deny the felicities and benefits of private enterprise.
I often ponder how I would have wound up my remarks to the Class of ’40 had I been permitted to finish. At the top of the homestretch, I might have quoted from Tocqueville’s famous speeches (“We are slumbering on a volcano”) to the French Chamber of Deputies on January 27 and 29, 1848, when France, and indeed all Europe, stood perched on the cusp of revolution:
“…I think that public mores and public spirit are in a dangerous state…When, gentlemen, I look carefully at the class which governs, at the class which has political rights, and then at the governed, what is happening…disturbs and frightens me: public mores are changing…common opinions, feelings and ideas are more and more being replaced by particular interests, particular aims, and pints of view carried over from private life and private interests…Because interest has replaced disinterested feelings in public life, interest sets the tone in private life…” Two days later, Tocqueville got his feet again: “Think, gentlemen, of the old monarchy: it was stronger than you are, and yet it has fallen into dust. And why did it fall? …Do you think it was by the act of some man, by the deficit? No, gentlemen, there was another reason: the class that was then the governing class had become, through its indifference, its selfishness and its vices, incapable and unworthy of governing the country…”
At this point, the Class of ’40 might also have decided to toss me out on my ear, but at least I would have said more of my say.
If still let standing, I would have next urged them to read Fenimore Cooper and ponder the duties which go with advantage and education. In fact, I would probably have suggested they begin by pondering the fact that, in reality, not in the claims of laissez-faire propaganda, the money which financed that advantage and that education came to be available as much as a consequence of public policy as of private enterprise.
We should all read Cooper. Sure, he speaks for an elite, but ours is an elitist country; our ladderlike society resembles that of every other polity, although the qualifications we set for ascent may differ.
Elitism is always suspect. But if not the elite, who else? To return for a last time to the central question: in an age of diminishing expectations, who else can afford public spirit and the implied expectations of self and nation that goes with it?
At the end of the day, we cannot escape the ultimate charge laid upon us by those overclassmen who gave this country its grand design. An obligation to ourselves and our posterity. The latter is not merely time future in general, but a specific afterlife richly colored by the esteem of those then living for those who paved the yellow brick road. What hue exactly that rich color may be, I’m not quite sure, but my instinct tells me that if you peer into the eyes of a child, you will get an idea.
By now I’m having trouble pulling the book together. Best to read as a series of discrete essays
SABLES AT THE TROUGH: PRIVATE WEALTH AND PUBLIC CAPITAL
A interesting subject for contemplators of contemporary popular culture would be the emergence in the ’80s of It’s A Wonderful Life, the Frank Capra film starring Jimmy Stewart, Donna Reed, Lionel Barrymore and Edward Everett Horton, as America’s Christmas movie of preference. It seems fair to say the film is one of the iconic “nostalgifacts” of the Era of Feeling Good.
It’s enlightening to compare Life to the other great Anglo-Saxon Christmas parable: Charles Dickens’s A Christmas Carol – which old-fashioned souls might think more in the redemptive spirit of the season. Unlike Life‘s George Bailey, established as a prince among men in practically the first frame, Ebenezer Scrooge is a greedy grasping man who is literally transformed by his experiences with the three Spirits and redemptively renounces Mammon for the Victorian gospel of good works.
By contrast, George Bailey suffers no such spiritual alteration, although to hear adherents of the film talk, you would think he does. He is simply relieved of the momentary if intense suspicion that he might be less than the apple-pie good guy we meet as the film begins. He mends no ways and changes no spots, but in the end he prevails. The message is the same in Life‘s pendant Christmas film, Miracle on 34th Street (TK-date), with its affirming message that no matter how you cut it: there’s always a Santa Claus, at least if you’re an American.
As everyone knows, in Life an angel is dispatched to help George with his predicament: the bankruptcy of the family savings bank as a result of George’s good-hearted credit policies. It’s strictly a bailout operation run by God instead of the Resolution Trust Corporation. George is “preredeemed” in the best Calvinist sense, he just doesn’t know it; the angel’s mission is to point this out to him.
The fact is, when Life was filmed, George’s notional sin wasn’t a threat to anything except his self-esteem. By the time the film was released, Federal deposit insurance had been in effect for over a decade, so George’s depositors weren’t at risk and the run on the bank was a straw possibility. So what was at risk? George’s Godgiven entitlement to feel good about himself, it appears, which makes Life the first authentically post-modern, “pop-psych,” feel-good, Bradshaw-Bly film. Then substitute “America” for “George Bailey” and you have an enticing metaphor for the phony American triumphalism of the Reagan-Milken-Bush variety.
Ronald Reagan greatly admired the Capra film. It figures: to Reagan, life was mainly a metaphor for the movies. Among the roles in which the President mentally cast himself, the agreeable, consoling angel of It’s A Wonderful Life was surely one. He bore the same message to the people that the Angel did to George Bailey: don’t feel bad about yourself; there’ll always be an angel in the wings – in Mr.Reagan’s case, equipped with the key to the printing presses of the U.S.Treasury.
Capra’s earlier pictures, Mr.Deeds Goes to Town (1936), You Can’t Take It With You (1938), Mr.Smith Goes to Washington (1939), Meet John Doe (1941) were cut from tougher cloth. They came out of a less upbeat era, when God’s unqualified endorsement of the American Way must have seemed in doubt. There are no angels in them, no divine instruments of prepackaged redemption. Only men and women trying to work things out by hanging together and – on matters of principle – hanging tough on the notion that principles matter. They console and inveigh and support each other; the films have a distinctly anti-capitalist, anti-plutocratic moral tinge. Life, by contrast, is quintessentially “postwar.” It asks no hard questions – because by the time it was made the hard questions had been very satisfactorily answered.
These were the same questions Tocqueville had essentially asked in 1836: “In the half century since the Union took shape, its existence has only once been threatened, during the War for Independence. (Tocqueville apparently regarded the War of 1812 with the same gravity some present-day observers reserve for the Gulf War) At the beginning of that long war, there were extraordinary signs of enthusiasm for the country’s service. But as the struggle was prolonged, habitual selfishness reappeared: money no longer reached the public treasury, men no longer volunteered for the army, the people still wanted independence but recoiled before the measures necessary to gain it…To judge what sacrifices democracies are capable of imposing on themselves, we must await a time when the American nation will be forced to put half its income into the hands of the government, as England has done, or is bound to throw a twentieth of its population onto the battlefield, as has been done by France.” (Democracy in America, Vol.I, Part II, Ch.5)
By V-J Day, in August, 1945, at more or less the time when the cameras started rolling on Life, America could congratulate itself on having given a profoundly satisfactory answer to M. de Tocqueville.
It’s interesting to speculate what It’s A Wonderful Life II: The 1990s , would look like. I doubt George Bailey would be propelled to the brink of suicide by disgrace and shame, since these emotions have been virtually declared illegal by our theraphy-driven headlong search for self-esteem. I rather suspect that George would have little time for breast-beating. Instead, I suspect he’d hop his bank-owned Gulfstream to Washington and have a talk with his Capitol Hill lawyer (played by the late Ralph Bellamy, who resembled Clark Clifford) and then his Senator (played by Joe Pesci, who visually and vocally resembles Alfonse d’Amato); if that failed to yield results, it would be back to New York City, to confer with George’s specialist in bankruptcy at $500 an hour, and his $1000-a-day public-relations consultant, in order “to position the truth,” should George elect to “take a chapter,” as they say (probably Chapter 11 of the Federal Bankruptcy Code – which would let George keep the jet).
When Life was made, bankruptcy still meant an absolute loss of face, but that was when “face” meant something outside of Japan. Today, bankruptcy is merely a convenient, accepted legal ploy – a momentary court stop. Soon George will back and getting on with his life: doing deals on a cellular phone from a BMW, both leased through a Cayman Island shell corporation, while an appropriate deus ex machina, no longer a winsome guardian angel but a down-at-heels Uncle Sam figure, picks up the tab, using the taxpayers’ money.
It would be interesting if Adam Smith could be present at the screening of Life II. Smith, the posthumously shanghaied “patron saint” of Reagan-Milken-Bush, famously noted that “there is a deal of ruin in a country.” The great debate of our era – indeed of American political economy throughout our history – has been how much and who pays. The answer is, depressingly, always the same.
Doubtless, by “ruin, Smith meant pounds, shillings and pence – but perhaps not exclusively. These are indeed a measure of the net worth of an individual or a nation, but so is its stock of virtue. It follows that it is one thing to say that the soul of a nation can be read in its attitude toward property, quite another to accept that the soul of a nation is its property.
Smith surely considered that moral imagination counted in a man or society as much as a talent for financial prestidigitation. He would have judged a nation’s reserves of public spirit to be among its resources. He might have agreed that public spirit is as critical to the life of a nation as all the treasure stored up in its rich men’s vaults; that the gross product of a culture’s heart and soul could be as crucial to its political and economic survival as the output of its banks and factories.
This “Gross Moral Product” or “Moral Capital” is impossible to quantify. It cannot be effectively limned by MBAs in graphs and spreadsheets, cannot be symbolically reproduced by Lotus 1-2-3, although not for lack of trying (by the overclass’s statistical auxiliary). No system of double-entry bookeeping has yet succeeded in breaking down the ways of the heart into debits and credits.
In financial terms, however, Smithian “ruin” seems most nearly measurable on the terms expressed to me years ago by a veteran Texas banker. “Son,” he said, “you ain’t broke ’til no one’ll lend you any more money.” Walter Wriston to the contrary, nations, like men, can exhaust their ability to borrow. There is no such thing as infinite collateral.
America, however, is used to conducting its financial affairs as if there were. A cornerstone of this ultimately self-abusive behavior is what I call “the Public Capital.” There are other names for it. One historian calls it “the People’s Money,” another “the Common Wealth.” It is only indirectly what is generally meant by “the public purse;” therein lies a confusion which is most helpful to the designs of private citizens on the Public Capital – which in the past decade has been the key element in the socialized creation of private wealth.
The great 1980s financial inflation – when the value of something was a function of how much could be borrowed against it -and the personal wealth spun off from that inflation were largely financed with the Public Capital, as had been other notorious speculative booms: in the 1830s, in the decade after Appomattox and in the 1920s.
By “financial inflation,” I mean an increase in the price levels of pieces of paper not because of commensurate increases in the utility, scarcity or intrinsic value of the underlying assets and financial streams. Ironically, a prize example of the destructive effects of financial inflation was Paul Volcker’s much acclaimed attack on commodity inflation in 1980-81. If this sounds like a paradox, it is not. The prices of goods and services, and the price of capital are two distinct streams which may flow parallel, may even now and then come together, but not necessarily. Recent markets have shown this in spades: the worse the economic news has been, the better the financial markets have behaved.
Like the apocryphal Viet Namese hamlert which had to be destroyed to be saved, the American industrial landscape was as much decimated as rejuvenated by Volcker’s fight against inflation. By increasing the rate of interest on debts already outstanding, while the problem lay with the creation of credit, Volcker’s action was every bit as inflationary as the financial scourge he proposed to eradicate. At the end of the day, businesses, especially small ones vulnerable to their banks, had stripped themselves bare paying interest, were still as badly in debt as at the outset of the Volcker “corection,” and were thus fair game for the cheap-money leveraged buyout vultures borrowing for the first time. If I speak with some passion, it is because I lost a good little business and a lot of my own money to Mr.Volcker’s 20% interest rates. The way to attack inflation fiscally is by limiting new credit and reducing outstanding debt. Raising interest rates may achieve the former, but discourages the latter. The cost is borne wholly inequitably.
Economists state that true inflation is a decline in the commodity value of money resulting from a supply-demand imbalance: too much money chasing too few goods. In the 1980s, however, there was no shortage of deals and there was certainly no shortage of money, and yet the outcome was inflationary,. A package of Oreos costs more today, because spread in there with the creamy white filling is a scintilla of the RJR buyout cost. The inflationary bias of the 1980s was psychological: everyone wanted to be a “player,” to be in on the action, and not everyone could be, because there were too many players for too few deals, largely the consequence of taking “risk” out of the ratio – risk to reward – which supposedly underlies 99.9% of credit and investment decisions. When this happens, any idiot can be a world-class dealmaker.
And how does it happern? In the 1980s: by giving private speculators virtually unlimited drawing rights on the Public Capital.
I define “Public Capital” as financial and commercial resources, including the taxpayers’ full faith and credit, which, directly and indirectly, on one pretext or another, through executive or legislative gift, are made available for private-sector exploitation and profit. In most cases, the taxpayer bears the ultimate risk while the speculator keeps the reward, hence the rubric: “Socializing the risk, and privatizing the profit.”
On one level, these resources consist of quite specific assets and rights of franchise: broadcasting frequencies, airport landing and “gate” slots, rights of way, permits to cut, mine or drill on public land. Usually some form of licensing (occasionally a royalty) fee is written into the deal as compensation; almost never at the level which would apply if the same arrangement had been negotiated between two private-sector parties. In addition, the public seldom shares in the huge sums which accrue to private interests upon the purchase and sale of such properties. If Carl Icahn bankrupts TWA through reckless financial adventuring, and seeks to dig himself out of a hole by selling valuable landing and gate rights at publicly-financed airports, no part of the proceeds accrues to the public, although the public bears ultimate bailout liability for loans to TWA made by taxpayer-insured institutions along with the airline’s pension fund obligations, should these be defaulted. In addition, deals like the TWA takeover are invariably structured – by expensive, fully-deductible attorneys, accountants and financial maguses – to generate tax losses which can shield the income of other Icahn enterprises, adding to a shortfall which the Treasury will then paper over with additional borrowing against the taxpayers’ credit. And what has the public gotten in return for its “investment” in Icahn’s adventure? The right to fly TWA hardly seems adequate recompense.
City dwellers will recognize Public Capital in the form of special-purpose easements, tax abatements and zoning and pollution forgivenesses designed to encourage real-estate development and employment in the building trades unions, bastions of ethnic preference in dead opposition to public policies of affirmative action. Donald Trump’s brief, flaming career was founded on the Public Capital, could not have existed without it. In rural or farming areas, the Public Capital will take the form of agricultural and related subsidies, to which size seems the critical if not the sole criterion of access.
Then there are “rate base” gimmicks. Years ago, I found myself in a Texas nightclub with a high official of a regulated public utility and two young women whose company was living proof of the unfettered free market’s dictum that everything should be for sale at a price. At a propitious interval, with the ladies absent to powder their noses, my companion winked and said, “Don’t worry, boy, we’ll just stick ’em in the rate base.”
His gist was not anatomical but economic: referring to the defined corpus of assets and costs on which a fair rate of return for his company would be calculated by various utility commissions. Such calculations would set the price of light and heat, or the cost of moving so many million cubic feet of natural gas from point A to point B. “Rate base” gimmickry is in fact a hidden subsidy; without it, I suspect a great many fewer private jets would be crisscrossing the skies. But then, the Federal Highway Program, along with steadfast Washington resistance to an appropriate tax on gasoline, not only subsidizes people who make automobiles and trucks as much as those who drive them, but is a critical hidden subsidy to shopping-center development.
On another level, the Public Capital consists of write-offs, exemptions and such which have a discernible public cost in the form of foregone revenues. Below the corporate level, access to these is esentially limited to people possessing or having access to substantial amounts of private-sector cash capital or credit. If the share of national wealth claimed by the top one percent is extraordinary, that top percentile’s share of meaningful tax breaks is probably even more outrageous, although I have never seen the calculation made. A great deal that is wrong with this country could probably be set to rights by extending the Freedom of Information Act to tax returns on gross annual incomes of over $500,000.
We make a great mistake to equate “income” and “wealth.” This produces a crucial misperception about most choice tax issues. For example, although tax-avoidance schemes are no onger as mouth-watering as at the beginning of the decade, the most generous require a significant upfront investment. To get the deductions, you must have at least the price of the equity, whether you are drilling for oil and gas, making a movie, acquiring a cable television system, bounding on to the cutting edge of genetic R&D, buying and leasing out a boxcar or computer, or engaging in any other speculation with a mandated attractive tax flavor.
It is important to know what The Public Capital is not. As I define it, it does not include direct disbursements from the public purse, such as defense or healthcare spending, or other blatant but unavoidable forms of “Public Choice” porkbarrel such as recently-disclosed off-budget subsidies by the Defense Department to keep McDonnell-Douglas alive. Companies such as Ross Perot’s EDS, which grew into a billion-dollar enterprise on the back of contracts to process Medicaid, fall in this category. Huge profits are earned, but presumably from services for which the public has a direct, calculable need. I define the Public Capital, by contrast, as direct or indirect investment on which the taxpayer receives no economic or utilitarian return commensurate with the ultimate financial exposure. accrues is Somebody is going to get the business.
It is in “government-sponsored enterprises” such as the Federal National Mortgage Association (“Fannie Mae”) and its cousins “Freddie Mac” (Federal Home Loan Mortgage Corp.) and “Sallie Mae” (Student Loan Marketing Association) that the Public Capital is given perhaps its most splendid institutional form. Fannie Mae was chartered to finance low- and moderate-income housing. To help it accomplish that worthy goal, its approximate $500 billion in private-sector borrowing is backed by the implicit guarantee of We the Taxpayers.
Worthy the goal may be – the problem is that making cheap loans available to poor people does not produce the 33% returns on equity which have made Fannie Mae one of the hottest stock-market successes of recent years. The company has been a major milk cow for Wall Street, which packages and “securitizes” its mortgage portfolio, deals in its shares, and otherwise capers with its best girl Fannie Mae in a merry dance while in the shadows stands “the guy she come with,” the American taxpayer with his everpresent bucket. As the financial columnist Hobart Rowen has pointed out, Fannie Mae maintains its own Political Action Committee to bribe members of Congress and has a “philanthropic” arm to deal with community groups that get in its way. Fannie Mae’s way may not be the “American Way” as we like to think of it, but it incarnates the American Way as it truly is – including the $27.5 million retirement package bestowed on its chief executive for lending the Public Capital.
In such cases as Fannie Mae, however, we know what’s going on, even if we are powerless to exact an adequate quid pro quo for our implicit guarantee. The United States of America, aka We the Taxpayers, does not own a single share of Fannie Mae, which has a total mrket value of TK. The return to the taxpayers is supposed to be a nebulous “social good.” In an era when cash is king, and Uncle Sam is strapped, that does not seem fair or adequate, although if someone will pay me $27.5 million to oversee “social good,” I am prepared to rethink the matter.
Most of the time, financing through the Public Capital does not appear “on budget” – at least not until it is too late. The Public Capital is usually drawn upon to buy a new door after not only the horse but pretty much everything else in the barn has been stolen, as in the Savings and Loan and bank “bailouts.”
In a world deemed to be made of money, the money markets exert a lunarlike pull on the tides in which most of us thrash helplessly. Wall Street and its sibling centers of globalized finance are where it all comes together. These are the seats of “Money Manager Capitalism,” without which the ’80s as we knew them would simply not have been possible.
Every boom rides on the back of a massive reconcentration of the control of capital. “Money Manager Capitalism” was the great accomplishment of the ’60s, my salad days on the Street. The feat stemmed from the Archimedean realization that, under commission schedules then in effect, an order for 25,000 shares placed by a Hartford insurance company or a Manhattan mutual fund produced the same commission per share as an order for 100 shares placed by a little old lady in Dubuque. This splendid state of affairs continued in force right up to the mid-1970s, when negotiated commissions – a synonym for “volume discounts” – were forced on Wall Street by the big Money Managers – who by then effectively controlled publicly-traded American business.
Money Manager Capitalism is the great overclass flagship: its Victory, Tirpitz, “Old Ironsides.” Its keel, as I have said, was laid in the 1960s but its Golden Age is the present, from 1982 right through this writing. The bridge of the vessel is manned by an oligarchy, a few thousand people and firms at most, in whose gift lies the disposition of literally trillions in financial assets, the fungible savings of an abstract mass of millions of people. The deployment of these resources impinges on the lives and expectations, all the qualities of existence, of still more millions.
The leveraged buyout boom showed how Money Manager capitalism works. Fifty money managers – some convinced by bribes thrown their way by Milken – might decide to commit X billions to a leveraged-buyout targeting company Y, whose controlling interest was in the gift of another fifty money managers, some doubtless overlapping. Y would have no more chance than a rowboat taking on the Bismarck. The steel in the wave-carving prow of the great ship “LBO” would be alloyed from a variety of financing sources: fee-driven commercial bankers using funds committed risk-free thanks to deposit insurance and the policy of Too Big To Fail (see below, p ), mutual funds, and the nation’s pension and benefit funds, public and private. The latter hold investible assets of roughly $3 trillion. Exactly what percentage of those is subject to some form of insurance, from contractual to moral, is unclear. At least 40 million people are contractually covered by pension insurance, and it is safe to assume additional tens of millions who think they are, notably the beneficiaries of $900 billion in state and public-sector pension funds. The mere existence of the Federal Pension Benefit Guaranty scheme inclines everyone to think themselves covered – and why not: if the full faith and credit of the taxpayer was extended through “Too Big To Fail” to cover the Arab bondholders of the Continental Illinois Bank holding company, mustn’t Uncle Sam also stand behind the working stiff’s retirement mite?
The government has tried to make it clear that every pension account is not insured, notably those corporate pension funds which have been raided in junk-bond leveraged buyouts, resulting in a substitution of gimmicks like the “guaranteed investment contracts” peddled by Executive Life(one of the showier blossoms in Milken’s defunct “daisy-chain”) for high-grade pools of liquid stocks and bonds. The depredations of the late Robert Maxwell – who stole some $800 million of his UK pensioners’ money – has also raised a warning flag throughout industrial society.
As was the case with bank and thrift deposits, the existence (actual or presumed) of Federal (taxpayer) insurance of principal is a powerful disincentive for prudence, a powerful impetus to swing for the fences. Without the bailout backup, for example, one doubts that the General Retirement System of the city of Detroit would have sunk $43.3 million into a northern Michigan golf restort with 450 hotel rooms, 350 condominiums and two golf courses. Apart from the fact that the resort development is bankrupt, there is a terrible unseemliness about Detroit, resonant with every inner-city sociopathology imaginable, buying into a posh rural golf resort.
Seemliness – another quality affordable only by the overclass even if as lightly regarded as noblesse oblige – isn’t bankable, however. Money managers are paid to perform. They’re compensated relatively: on how they do this quarter versus that, or versus the market averages. If this didn’t produce a powerful enough impulse toward “short-termism,” pension funds are exposed to a double-dose of the fashionable American disease. By their charters, they must meet actuarially-set targets to make sure the money will be there for the pensioners when the time comes. The better the existing portfolio performs, the less the sponsoring entity will be obliged to contribute: either out of cash flow, if a private company, or from tax revenues, if a public entity. The less that is required to be contributed, the more there is to play with, to gratify the desires of oneself, one’s chums or one’s constituencies and patrons as well as to compensate the parasites (investment bankers, tax accountants, actuarial consultants etc) who have succeeded in getting their fat fees mandated into law and regulatory practice. I have first-hand experience of the latter through a small benefit plan; I am told by my accountant, a sterling fellow who earns his $200-an-hour by interpreting tax forms Euclid could not make sense of, that unless I pay an actuary $1500 to make and sign off on computations of which my six-year old son is capable, I risk being fined $1000 a day.
As we now know from at least one recent court case, involving Patricia Ostrander, the investment suprema of a Fidelity junk-bond fund, the leveraged-buyout promoters weren’t above adding an agreeable fillip to investment incentives: bribery. Michael Milken may have kept the pig’s share of the warrants issued in the Storer and Beatrice LBOs, but some of those precious pieces of paper found their way into the personal portfolios of money managers as an inducement to those managers to put slices of the deals into third-party capital pools under their control. Knowing Wall Street’s taste for bandwagons, I suspect the practice was not exclusive to Milken or to Drexel Burnham.
Money-managers stand in an odd, quasi-fiduciary relationship to the money they manage. Their only real risk is loss of the account. The true fiduciaries (trustees), technically answerable to the law, are the ones really at risk, but invariably they prefer to know little about day-to-day investment operations, usually meeting quarterly (and frequently less often) with their money managers. It is common practice to speak of cracks into which things fall: here is a fissure large enough to swallow up a veritable universe of evaded responsibility. Of course, these days evaded responsibility, what we might call “the Rudman Syndrome,” after the Senatorial quitter who also appears as a name partner in the much-invoked, never-enforced balanced budget legislation, is all the rage in the public sector here and overseas (the prize example being the British government’s letting the parity of sterling be determined by the Bundesbank). Small wonder that when big insider leveraged buyouts like Metromedia take place, literally billions of dollars belonging to entrusting stockholders are “left on the t are tax-exempt and can go in and out of the market as they please uninhibited by capital-gains considerations. (So, incidentally, can individuals – as long as the rate of tax on long-term gains and current income is more or less equivalent, which in real life it generally is for anyone able to afford first-class tax advice. In nine cases out of ten, in my experience, the “onerous” holding period noisily complained of by proponents of capital-gains taxes is merely symptomatic of a generalized anti-tax pathology which really has other fish to fry. But I’ll come back to that.)
A “core” holding of our hypothetical manager’s hypothetical portfolio is in a “big stock” (as they say): a $10 million position in a hypothetical multinational U.S. pharmaceutical company very like Merck.
Our money manager likes this Merck clone a lot. It is “earnings-driven,” with its stock price tracking rapidly-rising profits flowing from a stream of established and new proprietary products. The company’s earnings, we should also note, are prescription-driven rather than generic (Prozac as opposed to Alka-Seltzer). This is the fat part of the market, thanks to a medical system which dispenses expensive treatment with a hand made enviably free by the knowledge that someone else – a company HMO, Medicaid, Blue Cross/Blue Shield, a major medical plan underwritten by a private insurer – is going to pick up the bill. It’s like selling pills to A using B’s credit card.
Profits are also high thanks to artful corporate tax management. For example, our imaginary company has set up a subsidiary in Puerto Rico, under a special scheme to create employment and bolster the island economy. Of course, it helps that the tax benefits amount to twice the incremental payroll. On every level, great and ingenious pains have been taken to assure that We the Taxpayers see to it, with subsidies, exemptions, guaranties and incentives for which the ultimate cost is put to our account, that our hypothetical company earns the maximum under law, which translates into a better stock price, which translates into higher money management fees and drinks all around.
Naturally, none of this can be achieved without the complicity of several levels of Washington – acting in flagrant disregard of its responsibilities as fiduciary for the full faith and credit of the taxpayer.
Perhaps no more egregious example of this exists than the policy, already mentioned, known as “Too Big to Fail” (TBTF), which grew out of the wake of the price increases demanded by OPEC beginning in 1973. OPEC invoiced in dollars, which put the squeeze on most countries. To those with no dollar reserves or dollar-generating home industries, OPECs demand for dollars put the blocks.
It was a bluff and should have been called, militarily if necessary. OPEC should have been told to stuff it, to take payment in dinars, cruzeiros, zlotys or whatever, or in chickens or lace tablecloths if it came to that, to work it out in the foreign exchange and barter markets. This would have forced OPEC’s hand – the Third World represented that marginal demand where prices are ultimately determined. Absent sales to the Third World, OPEC’s fiat price structure would have fallen apart.
Enter Walter Wriston, that eloquent advocate of the private sector’s ability to cope with every crisis, nothwithstanding (as James Grant reminds us in Money of the Mind) that when Citibank’s neck was on the Penn Central chopping block in 1970, Wriston had hustled down to Washington to plead for a $200 million loan guarantee under an obscure provision of the Defense Production Act of 1950. Here again was demonstrated that abiding, recurrent pattern of American high finance: the private sector soiling its own nest and looking to Washington to supply the towels and cleaning fluid.
Wriston hatched the dubious strategy which was known as “petrodollar recycling.” This involved lending dollars to beleaguered oil consumers to pay their OPEC bills; OPEC would deposit these payments with Citibank, which would relend them to the Third World for the next round of oil purchases and so on. Round and round and round it would go, with the banks extracting fat loan fees every time the money passed “Go.”
What this amounted to was no more “factoring,” or buying a vendor’s accounts receivable at a discount. Wriston factored the entire economies of less-developed, oil-dependent nations. Of course he didn’t call it “factoring;” that’s not the sort of word they use at the Grenbrier or the Council on Foreign Relations. Hence: “petrodollar recycling.”
What a grand game that was! It basically amounted to the big banks printing, on presses located in that unregulated Magic Kingdom of finance known as “Offshore,” a trillion US dollars without so much as a by-your-leave from the Treasury, the Comptroller of the Currency or the Federal Reserve. By 1980, I remember vividly, no one had could come within $350 billion of an accurate estimate of how many Euro/Petrodollars were out there, a circumstance which caused the writer Martin Mayer to observe that a nation which can’t control the creation of its own currency is unlikely to be able to control much else about itself. Eventually these leaked into the domestic money supply and aggravated the inflation of the late 1970s. Along the way, Walter Wriston and the banking rats that followed his piping visited more unnecessary misery on more innocent people than was ever dreamt of in the philosophies of Hitler or Stalin.
Inevitably, the game had domestic aftereffects. Petrodollars leached into the money supply and into the insured deposit base. As petrodollar deposits flowed to large U.S. banks – such as Citibank and Continental Illinois – they became Public Capital. Not under any deposit insurance then in legislative being, which limited insurance per account to $10,000, or about five minutes of an oil sheikh’s time, but under a policy slouching toward Lasalle Street -the heart of Chicago’s financial district – to be born.
When Continental Illinois failed in 1982, Uncle Sam elected to pay off all the bank’s deposit accounts, irrespective of Federal insurance limits. Moreover, under TBTF, it was decided to make whole the bonds and other debt securities of the bank’s holding company, many of which had ended up with overseas investors. Not only was this a blatant perversion of public policy, it was probably illegal. But it stuck. Not until 1992, long after the horrors of the S&L debacle became known, would Uncle Sam limit his willingness to pay to deposits which fell within legislated limits. How did TBTF become public policy? Very simply: because an economy in the process of running deficits which over the next ten years would aggregate $3 trillion has only three ways in which to bridge the shortfall. It can cut outlays. It can raise taxes. It can borrow. The first two are problematical because they largely affect people who vote. People return to office those who gratify them. This not exactly earth-shattering insight goes by the buzzword “Public Choice” – a better name might be “Consumer Politics” – and actually garnered a Nobel Prize in economics for James Buchanan.
Lenders, however, look at things differently from voters. Political principle is less important than safety of principal, but more important than both is the payment of interest, which translates into earnings, into higher stock prices, into fame and acclaim for management. Banks used to lend with a view toward getting their money back; when modern bankers of the Wriston mould discovered the concept of earnings-per-share, they began to lend with a view toward making profits through interest and loan-origination fees, especially now that the money they were putting out was insured.
Bankers will tell you, as J. Pierpont Morgan famously claimed in an era before deposit insurance, that they look at character – that of nations as well as individuals – but in reality the character they look to is Uncle Sam. A nation that stands behind its banks is a good place to put money and a fun place to lend money from. America has since the war operated the largest, most hospitable, guest-friendly money hotel in the financial universe. Since around 1970, when the first cracks first appeared in our postwar financial hegemony, we have spared no effort to make our guests as comfortable as possible in the hope that they will keep coming back and coming back.
This is the way financiers want politicians to see things. As in so much of life, it is a matter of managing perceptions. The way the world actually works is quite a bit subtler. I remember back in the mid-1960s there was a moment when the Arabs suddenly soured on sterling and pulled their money out of London, sending it to Switzerland, which at that time actually charged interest on deposits. The canny Swiss appraised the situation, evaluated and priced the sterling risk, and sent the money right back to England, pocketing a very handsome spread.
TBTF was an act worthy of Ringling Brothers Barnum & Bailey, with the ringmaster now clad in Arab dress, now in Kabuki costume, but always wearing that familiar star-spangled topper. I might add that, according to an unnamed Federal official quoted in the financial pages, the policy of “Too Big to Fail” in 1992 acquired, in the case of Citicorp, a cousin in disingenuous official doublespeak: “Too Big to Criticize.” (TBTC).
TBTF was an ex post disastro Federal initiative. Others, such as Garn-St.Germain in 1982, which increased the deposit insurance level to $100,000 and licensed the nation’s savings banks to take a hand in any financial game Wall Street or anyone else could concoct, made future disaster inevitable. Like a pride of lions watching a herd of particularly lip-smacking wildebeest moving into range, everyone from the Mafia to Michael Milken watched Garn-St.Germain make its stately way through the halls of Congress toward Ronald Reagan’s signature. This was a truly egalatarian piece of legislature, enabling unseasoned lending shops to compete overnight with lordly institutions which had spent a century or better building up reputation and judgment.
In effect, what Washington did to finance the Reagan-Milken-Bush boom was to print a half-trillion dollars in what might as well be called “Federal collateral certificates.” These were issued virtually on demand to a new generation of financial adventurers and used to secure financing, much raised through Wall Street in the form of “brokered deposits,” a new form of bounty-hunting. The taxpayer-in-the-street, whose name had been, essentially, forged on those certificates as guarantor, wasn’t told that this was happening until he was handed the bill for the overclass’s free lunch. A more egregious distortion of public policy in favor of the money interest would be hard to imagine. It was like being allowed to play Monopoly with an unlimited supply of play money under the table.
From a practical point of view, this call on the Public Capital enabled certain institutions and individuals to take the lead in the new, high-risk/fast turnaround types of finance with which the ’80s will forever be identified. Without Public Capital, the loans and investments which in particular underwrote the LBO mania would have been unlikely, certainly not in a sufficiency to get the bigger deals done.
Much is made of how the tax code, thanks to the deductibility of interest payments, skews deals toward debt financing. The very fact of Public Capital is in my opinion at least equally responsible for this bias. By its terms, Public Capital is available to back any investment vehicle with “debt” stamped on its face.
Then there is the question of where the money came from. Because we are currently concerned with “cleanups,” “bailouts,” and such, we tend to concentrate more on where money went than where it originated. Recoveries made on behalf of the taxpayer are to be generated by asset sales, rather than by looking at and possibly denying dubious insurings. We concentrate on unoccupied condominiums, half-finished strip malls and fly-blown office buildings rather than the sources of the money that went into these. Paine Webber raised over $600 million in “deposits” for Charles Keating’s S&L. We the Taxpayers are plugging that hole. Whose money are we making whole? Swiss widows and orphans? Medellin drug barons? We need to be told. Without Public Capital behind Keating, would Paine Webber have been able to broker – for nice commissions paid by Keating – $600 million? I think not.
The key to a phenomenon like Michael Milken’s junk-bond “daisy chain” was the existence of institutions willing and able to be petals. Legally enabled to invest in almost anything and – thanks to deposit insurance and TBTF – with limitless money to invest. Prior to Garn-St.Germain, TBTF, and similar commitments which lent the backing of the Public Capital to the most speculative private-sector forays, notably leveraged buyouts, funding for economically doubtful deals simply wasn’t there in size. In the 1980s, however, thanks to institutions sprang into prominence which might well have been called “Goodfellas National Bank” or “Wiseguy Savings and Loan,” there was no shortage of money to play with, thanks to Public Capital.
A great many surprising people grew surprisingly rich during the decade. An inflowing tidal wave of credit will lift all boats before it gets about its work of destruction on the ebb. Many will outlast the storm, even if they end up riding it out in a rowboat. To a drowning man – We the Taxpayers – a rowboat looks like Morgan’s yacht. Hardly a week goes by when I’m not informed that so-and-so “has given” a building or a deal “back to the banks,” or that the banks “have taken” so-and-so’s building or deal “back.” Like much else, the language of foreclosure is drenched in softening euphemism. The followup litany is always the same. “Don’t worry,” I’m told, “so-and-so’s OK. He’s still worth $50, $60, $100 million personally. He wasn’t ‘on the paper’.”
The problem is that it may well be that it’s the taxpayer, of which I’m one, who’s “on the paper.”
We know also that a ton of money is being made in the private sector from the bailout, much of it by quintessential ’80s financiers like Ronald Perelman, whose own financial empire is structured to permit “tax sharing” which renders the Perelman financial cosmos virtually tax-exempt. Typically these “bailout buyouts” sieve out the bad loans and investments and leave them with the taxpayer, while the Perelmans, Robert Basses and so on pay bargain prices for the good assets: franchises, premises, deposits and such.
It is profitable work. While this book was being worked on, a collection of Texas banks was “flipped” after eighteen months for a price which netted the investors in the “bailout buyout” roughly three-plus times their investment. In this instance, the Washington wheels were greased by consummate insider Robert Strauss. It is difficult to imagine a more classic case of the overclass getting the mine and the taxpayers the shaft.
And this was not an exceptionally profitable deal, although on a money-for-time basis it must rank in the top decile. So many of these transactions are turning out to be so rich for the private sector that one is compelled to ask: how come a piece of the down-the-line profit – a carried contingent interest – hasn’t been reserved for the taxpayer by his proxies and fiduciaries at the RTC or FDIC? A Perelman or Bass would insist on such a hedge, if only to avoid appearing the fool. A carried interest in future windfalls seems only equitable, especially if the taxpayer may be left with a bagful of contaminated “assets”.
Adam Smith would agree, I think. In a passage not much quoted by the Reaganauts, he observed: “The subjects of every state ought to contribute toward the support of government as nearly as possible in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”
Paraphrasing Smith, I would argue that the taxpayer is entitled to a piece of the action proportionate to his exposure. What the taxpayer lacks is someone to negotiate on his behalf with the same hard-nosed knowledgeability as the people on the other side of the table routinely employ.
For a fine, full picture of the Public Capital at work and play, it is worth looking at the paradigmatic LBO transaction of our era, the $25 billion acquisition of RJR Nabisco by Kohlberg Kravis and Roberts (KKR). KKR was the emblematic LBO firm of the decade. The junk bond financing which got the RJR deal done was the last hurrah – or gasp – of that other epicenter of convulsive ’80s finance, Drexel Burnham & Co.
The deal is described in a prospectus issued in connection with a 1991 refinancing. It is a daunting document: 85 pages of text followed by 33 pages of financial “footnotes”, which consist mainly of tables of figures – not the sort of document readily available – or comprehensible – to the American taxpayer.
A lot of high-priced talent worked at the making of this Delphic brochure – orhaps. But certainly many of the biggest players in RJR were tax-exempt and others adroitly tax-sheltered. The fact is, we don’t know. The fact is, we really don’t understand enough about how wealth is accumulated and consolidated – and by whom – to design an intelligent tax policy.
It would be instructive to take a deal like RJR and be able to anatomize it completely. Not after the fashion of Barbarians at the Gate which concentrated on what Linda Robinson (Mrs. James III) was wearing at various parties (an off-the-shoulder cellular phone, mostly), but in terms of where the money came from (who were the investors and lenders) and who got how much, and what the consequences to the broad taxpaying polity were.
THe top layers of the financing pyramid consisted of $12 billion in bank loans, protected – and thus riskable – thanks to deposit insurance and TBTF. Public Capital.
The lowewr stratifications consisted of various kinds of junk securities, designated as “Second Subordinated Increasing Rate Notes,” “Payment-in-Kind Subordinated Debentures” and “Subordinated Extendible Reset Debentures.” Names dreamt up by Humpty Dumpty wearing his “financial engineer” hard-hat.
Junk debt draws on the Public Capital in several ways. To begin with, such securities don’t actually pay interest in cash, but they are accorded a tax deduction as if they did and the people who own them report them as income for showing-off but not for tax purposes. Imagine that when the monthly mortgage payment comes due, instead of writing a check to the bank, you simply send in an IOU, to be added to last month’s and the month’s before that, and when tax time comes, you take a deduction, just as if you’d paid cash; in the meantime, the bank pretends it’s current as to the interest due on a mortgage on which it so far hasn’t received a nickel. Great companies (including those whose core financeable business provably kills people) can be bought for tens of billions on this basis, but just you try doing it with a $100,000 house!
Then there is the matter of who buys this stuff. In the LBO game, pension funds were notably important players. It has been estimated that state and public-employee pension plans provided as much as half of the money raised by Kohlberg, Kravis & Roberts in a series of annual LBO funds put together in the mid to late ’80s. New York State alone put up $500 million. Washington and Oregon each invested close to a billion dollars.
The justification was that LBO rates of return were spectacular. In the early going, the KKR funds averaged around 25% annually: not up to the returns on equity generated by that other pillar of Public Capital, Fannie Mae, but more than sufficient to elevate Henry Kravis and George Roberts to decently high ranking in the Forbes “400”. Of course, such rates of return gleam even brighter when not subject to taxes, and earned on funds backed by the taxpayer’s full faith and credit. Public Capital.
And then there is the tax effect. According to the prospectus, in 1988, the last full year before its acquisition by KKR, RJR Nabisco paid $250 million in Federal taxes. In cash. Following its acquisition by KKR, the company qualified in 1989 and 1990 respectively, for refunds (or credits) of $1.1 billion and $680 million respectively. That’s a swing of $2.3 billion; Uncle Sam, instead of taking in $500 million in those two years, paid out $1.8 billion. These are just numbers, of course, and don’t take in the costs to society of lung cancer, Joe Camel’s stock in trade, but then the cash flow generated by cigarette sales is needed to amortize the taxpayer-insured junk debt.
And how were these tax losses generated. Well, in 1990, post-buyout, RJR Nabisco “paid” $1.6 billion in non-cash interest. The year before acquisition, the equivalent figure was $31 million. At RJR’s pre-buyout tax rate of 35.8% , this is $640 million of taxes covered by phony (non-cash) interest. That’s a lot of hot meals for poor children, or about the sum appropriated in the aftermath of the Los Angeles riots. Interestingly, while all this was going on, RJR’s foreign tax payments remained constant, which suggests that the powers that be in Europe and Asia, both good markets for Joe Camel, don’t feel the compulsion to subsidize LBOs with their own Public Capital.
In the prospectus, RJR Nabisco’s pension plan is shown as half a trillion dollars under water (as of December 31, 1990, the present value of consolidated future benefits payable exceeded consolidated net plan assets by $483 million). You can bet its beneficiaries sleep soundly nontheless, as secure as those whose money is actually invested in the buyout, in the certainty that, in addition to Matthew, Mark, Luke and John, the bed on which they slumber is watched over by a kindly bewhiskered gent in a star-spangled topper. After all, the participants in the LTV pension plans, which includes Youngstown Sheet and Tube of fond memory, ransacked by successive waves of leveraging Visigoths over roughly a fifteen-year span, will be paid off. To triage pension claimants will require a level of fiscal courage which no politician I have seen in thirty years is likely to display.
Elimination of the risk factor on the funding end obviously helps to escalate deal values, with sublimely happy results for the parasitic financial culture of the ’80s. In the first stage of the RJR Nabisco buyout, before the final mopping-up of dissident or recalcitrant stockholders, $18.925 billion was raised; $18.169 billion was paid out to RJR stockholders, leaving $756 million unaccounted for, so to speak. We know, however, that most of this amount, say half a billion cash, went off the top to the deal’s promoters and to the various experts, consultants and other wizards who vetted it and put it together. This was standard operating practice among the LBO. One of Kravis’s noisiest, most petulant critics, the pious Theodore Forstmann, did a buyout of Borg-Warner in which the fees exceeded the equity in the deal.
Without having had the use of Public Capital, how many names would vanish from Forbes‘ coveted list? I would guess a great many. Without Public Capital, gone would be the Park Avenue apartments, the English sporting pictures, the brand new friends, the trophy second and third wives, the butlers, the maids, the hogsheads of Chateau Petrus.
If RJR had cratered, as seemed likely early in 1992, all hell might have broken loose and the reality of what the ’80s meant to him might at long, long last been driven home to the American taxpayer. But, like George Bailey, RJR made it. Instead of an angel, Alan Greenspan flew in and drove down interest rates. It took a recession to save RJR. In order to save the deal, the country had to be destroyed.
And what of the taxpayer? What has he gotten out of this? Nothing. Zilch. Nada.
Strictly on business terms, this makes no sense. No private financier would do a deal on this basis. A quid pro quo would be demanded; that is what capitalism is all about.
The fiscal hole created by deficits and aberrations like the savings-and-loan crisis has been plugged with debt. Interest on that debt today can be said to account for the deficit, since they are roughly alike in amount: on the order of $300-odd billion. Thus the further, grating irony that taxes are recirculated to the holders of Treasury bonds, in many instances people whose private wealth was very likely subsidized with Public Capital. The taxes they pay come back to them as interest. Robert McIntyre of Citizens for Tax Justice puts it as follows: “Tax cuts for the very richest people and interest on the debt that was built up to pay for those cuts can explain the entire increase in the federal deficit over the past fifteen years. (The New Republic, September 30, 1991)”
The abuse of the Public Capital is the Big Lie at the heart of the supplyside boasts about the economic growth of the last decade. It is the big untruth at the core of overclass self-reliance and self-esteem. The sooner we can be made to understand this, the sooner we can set about fixing what’s broke – in both senses of the word. Obviously, the Public Capital needs to be built back up again, so that if there’s ever a will, there’ll be a wallet too. That means the claims and depradations made on the Public Capital by the overclass, both existing and potential, have to be restudied and, if necessary, renegotiated and refinanced after the fact. That’s what junk bond meisters do, after all, when a deal goes sour on them. The deals made on the Public Capital have gone sour on us.
The fact is, most money managers (I include bankers in this) seem inclined to dispense the taxpayers’ money with a freer hand than they would ever lend out their own. Years ago, I happened to single out a particularly egregious piece of new issue garbage to a friend who ran money. “I’ll say,” he agreed, adding “that’s the sort of crap I only put in fiduciary accounts.” He was kidding, but those were the days before pension insurance.
One does not expect bankers to throw open the vault doors and go out to lunch, just because whatever’s in the vault happens to be insured, and yet that is exactly what happened. H.L.Mencken saw this coming fifty-five years ago and wrote: “The insurance of small deposits, even if the insurance is actually paid when it is needed, will certainly not suffice to prevent wildcat banking…What is to be done about crooked banks, nitwit banks, bad banks in general?” Mencken’s alternative made sense: “(One approach) is that, when a bank suspends payment, it would simplify matters to hang (or, in any case, to jail) all its officers and directors at once, whether its suspension be due to its roguery, to their stupidity, or only to their bad luck.”
That appeared in The Baltimore Sun on June 22, 1936, two months after I was born, forty-six years before the promulgation of Too Big To Fail. Diligent application of Mencken’s remedy in the 1980s would have strung a financier from every lamp-post between Boston and Tacoma.
The fact is, when Mencken wrote that, the purpose of deposit insurance was as much to encourage lending as it was to protect the small saver. It is a way the government can increase the money supply without the by-your-leave of the Federal Reserve.
Hardly a week goes by without some ardent defender of laissez-faire market capitalism invoking the “taking” clause of the Fifth Amendment, which protects against the unlawful seizure of private property. Shouldn’t it also work the other way? Isn’t the taxpayer’s creditworthiness – notwithstanding that the government enjoys power of attorney – a “legitimate property” right entitled to protection under law – or at least reasonable compensation. The ’80s saw the overclass stand the “taking” clause on its head for its own benefit.
Go back to Tocqueville’s time, to Andrew Jackson’s veto of the charter renewal of Biddle’s Bank of the United States. In the end, Jackson beat the bank and Biddle. Hid did so not with speeches, but by withdrawing the public (government) deposits. It was – in the last analysis – the only sure way. It still is.
- These numbers (taken from an article by Ashe Schow in the Observer) provoke reflection:
“Under Mr. Obama, Democrats have lost 13 net Senate seats, 69 House seats, 11 governorships, a whopping 913 state legislature seats and 30 state legislature chambers, according to analysis from the Washington Post.”
First of all, the implications for successful gerrymandering are staggering. Second, while the Washington Post analysis indicates that every administration from Eisenhower to the present has sustained losses in the same categories, I think these numbers suggest how utterly this administration, the President and his party have failed at the local level. A conclusion supported by the disgracefully low turnout. Mrs.Clinton garnered 6.6 million fewer votes than Obama did, while Trump fell short of Romney’s total by only 1.9 million. Some of this disparity can probably be traced to disgruntled Obama followers crossing over – as I considered doing, but in the end couldn’t – but probably not enough.
2. Here some other numbers to think about. http://www.forbes.com/sites/eriksherman/2016/03/08/wall-street-bonuses-are-more-than-all-minimum-wage-worker-earnings/#7df4b52c5d1a You expect this in Zimbabwe. In the USA?
3. Another example of why I think Naked Capitalism is the smartest blog going: http://www.nakedcapitalism.com/2016/11/three-myths-about-clintons-defeat-in-election-2016-debunked.html
In the summer of 1987, Arthur Carter and John Sicher asked me to write a column for a new weekly paper that Arthur was backing. I agreed – and in October of that year the adventure began. I would go on to write the column, which I called “The Midas Watch,” after the notional transmutational power of money that seemed to be afflicting American life, until 2009, with one or two interruptions and absences along the way. It was quite a trip.
At first, the Observer was a serious paper, in keeping with Arthur’s prior service as publisher of The Nation. John Sicher was a lawyer, not a journalist. I saw that as a kind of a strength, but the paper didn’t seem to be going anywhere. Then Graydon Carter succeeded John and the tone of the paper changed. The focus became lighter and sharper, so to speak. The writing acquired personality. Sex in the City was born. And so it went.
Today, the Observer is revered as one of the great journalistic enterprises of all time. Its alumni’s bylines are everywhere. But this needs to be understood. The paper had a lifestyle influence but little else. Conrad Black put it best. At one point the Canadian newspaper entrepreneur was exploring buying the paper. A mutual friend, Arthur Ross, thought it made sense for Conrad and me to meet. After the usual pleasantries, I asked what he thought of the Observer as a newspaper. “The Observer isn’t a newspaper,” Conrad replied, “it’s a mascot.”
I’m afraid that’s true. We made a fair amount of sound and fury, but signified relatively little. In all my time there, we never unmade a politician, unmasked a swindler, uncovered an important scandal, brought about an important reform. Our circulation remained stuck. The truth was, at least as I saw it, our readers outgrew us. Once they found themselves having to get and spend in a grownup world, they dropped the paper. Our writers outgrew us, too. They moved on to media that people who had real influence took seriously.
There has to be more to a paper than smartass young journalism. In spirit and style, the Observer often seemed to be a kind of postgraduate Harvard Crimson. Still, I salute it as it lowers its print flag for the last time. It was a fun ride and I’ll never regret having been on board.
- Chris Hedges is a fine writer and a terrific polemicist. Sometimes, however, he goes a bit over the top, as here: http://www.truthdig.com/report/item/its_worse_than_you_think_20161111
2. I find this interesting and worth thinking about. And very probably accurate: https://hbr.org/2016/11/what-so-many-people-dont-get-about-the-u-s-working-class
3. I’ve been trying to understand why I voted for HRC: it was all negative. Trump himself seemed no worse, although I felt there was a greater likelihood of him being forced out of office – impeached, shot, sentenced in court – and that did matter to me. I felt Trump had asked a number of the right questions, although come up with wrong or dubious answers. Then, this morning, reading the Times, I felt a shiver of Pauline revelation and knew what really had tipped my scales anti-Trump. It was the ascendancy of Giuliani in the Trump campaign/machine. I think Rudy Giuliani is one of the five worst people in the world. Someone who should never ever again be allowed near any levers of power or influence. And here he was, next to Trump. Enough, already, said my Id last Tuesday.
THIS IS A REWRITE THAT I THINK READS BETTER
LORDS OF MISRULE,
OR A CHILD’S GARDEN OF SPINACH:
THE OVERCLASS IN THE ERA OF REAGAN, MILKEN AND BUSH
In England and Scotland, at the end of the mediaeval era, says The Encyclopedia Brittanica (15th Edition, Vol. 8, p.186). the Lord of Misrule “was specially appointed to manage…festivities…at court, in the houses of great noblemen, in the law schools of the Inns of Court and in many of the colleges of Cambridge and Oxford…” The Brittanica notes that in earlier times the Lord of Misrule had “presided over the Feast of Fools.” REMINDS OF PARADE OF EMPEROR. They make a tremendous uproar, and bring to mind a description of the Lords of Misrule from Stubbs Anatomie of Abuses (1595): “each had twenty to a hundred officers under them, furnished with hobby-horses, dragons and musicians…(And) paraded in church with such a babble of noise that no one could hear his own voice.”
In America, at the end of the twentieth century, “Lord of Misrule” is the title conferred on the personage chosen to preside over the annual ovrclass gathering known as the Bohemian Grove. Each summer, to a cluster of rustic camps set in a dramatic grove of redwoods some hundred miles northeast of San Francisco, America’s great and good, its male great and good, that is, the only women approximately present being the hookers who throng the motels in nearby towns, congregate for a fortnight devoted to amateur theatricals, speeches, good fellowship and that singular, exalted form of self-congratulation which is summoned, like a genii from his bottle, by rubbing the right elbows.
The Bohemian Grove-variety overclass is the end of the socioeconomic spectrum I know best. I have written about it in five novels and roughly a million words of what I would loosely describe as social commentary. I am myself, by every conceivable measure, a member of the American overclass.
My life as an American has been blessed with every advantage the country has to offer. Years ago, in the course of a “Today Show” spot to promote a book, Jane Pauley ended our brief chat with the observatioon, “Exeter, Yale, Lehman Brothers. Hardly the school of hard knocks.” “No,” I heard myself say, “more like Fort Knox.”
I grew up and for forty years, at least until very recently, flourished in the inmost circles of this nation’s privileged elite: right parents, right schools, right clubs, right firms, right connections. White, well-off, educated and plugged-in to a fare-the-well. Anyone who could be in any way helpful was never more than a couple of phone calls away. I am, in a peculiar Episcopal fashion, “related” to George Bush. I have known at least two members of the Bush Cabinet for over twenty years. I have sat on the boards of large corporations and generally hung around Big Cheesedom. I’ve golfed there, drunk there, whored there (in several senseas), and, in the name of money, conspired there – often without a thought to the general good and sometimes contrary to the most elementary notions of right and wrong.
If, relatively late in life, I’ve gotten religion, it hasn’t been the knee-jerk revulsion to capitalism with which Schumpeter, currently head boy in the Pantheon of laissez-faire market capitalism, charged “intellectuals,” whom he singled out for the “the absence of direct responsibility for practical affairs…the absence of that first-hand knowledge which only actual experience can give.”
Unlike many of my colleagues in blahblahblah, on either side of the ideological table, I have had considerable “direct responsibility for practical affairs,” at least if you grant the (in my view) doubtful assumption that investment banking, to which I devoted a quarter-century of my life, has anything to do with “practical affairs.” These are just about the last words I would ever apply to the business of investment banking, or “financial engineering” or whatever other high-sounding euphemisms Wall Street prefers to confer on its dubious games whenver the game’s afoot and the sap’s (and the saps) running. I’ve scrambled amongst the Alps and Himalayas of high finance, and I can report that up there the air is as thin as at the summit of Everest: it breeds raptures of altitude which produce such delusions of the 1980s as: “You can borrow your way out of debt” or “You can lend your way out of credit problems.”
The world in which investment bankers and merger lawyers dwell, that Disneylandish realm of spreadsheets and teleconferencing, of Concorde, Crillon and Claridge’s, is as remote from ordinary life as the astrophysical sums in which they phrase their excellent adventures are from the economy of the average household. In these hermetic temples of self-regard, a single keystroke on a computer, the flick of a pencil point on a contract draft, can decree the closing of a plant or a line of business, the economic devastation of whole communities. This separation from everyday reality is intensified by the speed and ease with which the Street can move money in amounts so huge as to be abstract.
With due respect to Schumpeter, therefore, I have been there. I know how “it” is done, which only makes me respect all the more Richard Hofstadter’s statement of the thinking man’s predicament in market society: “Intellectuals in the twentieth century have…found themselves engaged in incompatible efforts: they have tried to be good and believing citizens of a democratic society and at the same time to resist the vulgarization of culture which that society constantly produces.”
This book began life as a commission for Whittle Communications’ “Larger Agenda” series. My subject then was “The Invisible Infrastructure.” I envisaged an extended essay on the need for America to refurbish and rehabilitate the framework of ideals, values, attitudes and standards which underpins our notion of what a great country we are. We acknowledge the dilapidation of the nation’s physical infrastructure, its schools, highways, hospitals and so on, but to my thinking the spiritual counterpart of that “plant” is every bit as dire, every bit as much in need of refurbishment and rejuvenation.
I felt that something had gone terribly wrong in and with America. Part of that feeling was a consequence of growing older, I recognized. It is in the normal, nostalgic order of things to imagine the past as better than the present and probably better than it actually was at the time. Still, the sorry evidence of the present day seemed incontestable. The America of Ronald Reagan, Michael Milken and George Bush confronted me with sights I never in my lifetime expected to see in America: filth, beggary, illiteracy, selfishness, effrontery and violence on a scale unimaginable to anyone alive and remotely sentient in, say, 1960, let alone the decade following V-J Day.
I am perfectly willing to accept that “my” America (1945-1963) was to some extent a myth, like James Thurber’s unicorn, but I would argue that it was a myth that had its uses. Were we better off with the myth of Camelot, or knowing, as we now do, that JFK had the sexual proclivities of an alleycat? Do we throw his exhortation “ask not…” out the window because he slept with Marilyn Monroe? Do we deny the lofty intentions and good deeds of a generation of Peace Corpsmen and Civil Rights activists because the President was naughty? Do we cancel out Charlayne Hunter Gault with Judith Exner?
I think not. I once described myself as an old-fashioned conservative: that is, as someone who examines the bathwater to see if there might be a baby in it. Harvard’s Judith Sklar has made the point that a certain amount of hypocrisy is necessary to the conduct of a civil society. Such myths – what George Eliot called the “ennobling illusions” – may be what she has in mind.
There were changes in social attitude I found particularly indigestible. A primary article of faith in the self-consciously, admittedly pretentiously patrician world in which I was raised was the notion of noblesse oblige: those who were fortune-favored were taught that personal privilege bred public obligation – in any number of ways ranging from simple discretion in the conduct of private advantages to outright philanthropy. Instruction came as much by example as by exhortation: from Dwight Eisenhower and George Marshall, Harry Truman and Eleanor Roosevelt. It flowed from the acknowledgement of interdependency and responsibility which underwrote the unconditional triumph of World War II in both the theaters of war and the home front. There was also a practical side to such behavior, flowing from the unarguable proposition that if you call attention to your money long enough and loudly enough, it may occur to someone to come and take it away from you.
It was not an age which proclaimed that “life isn’t fair” because it believed that life could be made fairer. Luck might be the residue of design, as the baseball magnate Branch Rickey held, but it wasn’t all our own doing: good fortune was what separated us from those to whom life had been more grudging with its advantages. Of course, back then, we were not privy to the great revealed truth of the 1980s: that luck is the residue of inside information.
I was born, raised, educated and for much of my life employed in a world nicely insulated from workaday concerns by money and access. When the Reagan-Milken-Bush Era got well and truly launched, in August, 1982, I was a veteran of twenty years on Wall Street. I had done Wall Street work at the highest levels at which such work gets done. I sat on boards and schemed in private dining rooms. I had learned a fair amount about how money was made in America, especially on and via the capital markets: the money that finances the deals that pay for the yachts, the jets and the groovy third wives, the apartments and country houses pictured in glitzy, glossy magazines, the deference of headwaiters and the acquaintanceship of dukes. I also got to know, and formed an estimate of the character and capabilities of, many of the defining figures of the last decade, the twentieth-century equivalents of the Victorian “Kings of Scrip,” as Carlyle called the promoters of his era. I was a member in good standing of Insiderdom: paid up, sought after, suitable to serve on the house committee. I belonged. It is an understatement to say that I found the ’80s uncongenial. I loathed the era and its values and was predisposed to do so. The fact was, I had set my face against the ’80s long before the decade actually arrived.
That would have been around 1970, during the final, gasping coda of the great ’60s boom: a time of ill-judged, speculative, difficult-to-do financings and deals, a desperate last-minute effort, more emotional than rational, to locate the lat remaining greater fool.
I was then one of two partners running the Industrial Department at Lehman Brothers. This was the firm’s corporate-finance arm, responsible for promoting and processing transactions.
One pleasant forenoon, I received a call from a financing client in the grip of a thoroughly bad idea. He had been seduced – a word I use advisedly, since the scheme had been promoted by a woman who was closest I have ever seen to an authentic siren on Wall Street, capable of inveigling sexually-befuddled, middle-aged Middle American chief executives into steering their corporate craft onto the fiscal rocks – into contemplating a bid for Youngstown Sheet and Tube. YB (its Stock Exchange symbol – known to traders as “Yellowbelly”) was one of the nation’s largest steel companies – and a mess.
My client wished us to represent him in the takeover: that is, to evaluate YB, which is to say, to come up with the accounting persiflage – in our brochures we called it “financial engineering” – that would permit him to justify the price he knew he was going to have to pay; to negotiate the terms, which is to say, to come up with a medium of payment, in the form of securities, which would permit both buyer and seller to claim having scalped the other; to get the deal done, in other words.
As he talked, I could tell my client had been talked – or whatever – into accepting one of the basic delusions peddled by Wall Street: namely, namely that financial sleight-of-hand can turn sows ears into silk purses; that financial cleverness can somehow offset basic commercial weakness. Time and again, especially with steel companies and airlines, the Street has successfully sold this notion – at great profit to itself, at great (often terminal) cost to everyone else concerned.
I told him I would think it over. I knew YB was running short of oxygen. Research in the financial manuals confirmed my general impression. The company was in desperate shape. To further encumber it with $300 million in debt, the price of buying it “with its own assets” (as they say), most of which were overage and close to obsolete, would kill it.
I called the client back and said thanks but no thanks: I wanted no part of a deal which was certain to bankrupt the company, cost thousands of people their jobs, and economically devastate a large part of the Ohio River Valley. Lehman Brothers, said I rather virtuously, will pass on this one.
Of course, the deal got done, another firm was willing to sign off on the paper – and that firm earned the fat fees and commissions that are the real rationale for ninety-nine percent of the deals promoted and implemented by Wall Street.
My partners were angry with me. A fee is a fee is a fee. I thought I had done the right thing, but there is no ticker symbol for right; it isn’t quoted in eighths and quarters. That YB went promptly down the toilet was no consolation. It would subsequently be merged into LTV, with more fat fees all around, and then, in a sublime instance of two and two adding up to something less than one, exactly as could be predicted, the entire house of paper collapsed at a cost to the American taxpayer of something on the order of $500 million.
By then, however, I had come to understand clearly what I had been dimly sensing for some time: that I was in the wrong business. I had left Wall Street, although it wouldn’t be until 1986 that I would cash my last fee check – as an independent “finder.”
It wasn’t a complete write-off, however. In due course, the ’80s arrived in all their flagrant glory, and my years on the Street equipped me to understand better than most other journalists what was in act going on: that what its apologists burnished with the name of “market capitalism” and “Schumpeterian creative destruction” was basically a rigged and dishonest inside scam played with socialized credit. That I might not be absolutely au courant on the latest in computer-driven trading techniques, or the legal stratagems which made literally billions in tax liability vanish just like that in ten-digit mergers, didn’t matter. The game changes ony in particulars, mass and velocity, but the underlying principles remain constant. The horticulture of peculation doesn’t change, whether we’re speaking of seventeenth-century Tulipmania or twentieth-century junk-bond “daisy chains.” I had priced – both honestly and “creatively” – enough securities and negotiated enough deals in my time to have a solid conceptual and mechanical grasp of what was happening.
Two things were different about Wall Street in the ’80s. The first was attitudinal, and largely a consequence of the actuarial tables. There had been a wholesale changing of the guard on Wall Street and in the nation’s executive suites. The Old Guard departed, and took with it its collective memory of the 1920s and the Depression. Only a few remained to raise a voice, and their protests were drowned out by the booming, surflike roar of easy money at floodtide.
And then there was the amount of money in the market. To say that the ’80s were simply the ’60s with three or four additional zeroes misses the point, because in high finance, “size” – to paraphrase the football coach Red Sanders (not Vince Lombardi) – isn’t the only thing, it’s everything. Under Ronald Reagan, policies were implemented which simply relieved the custodians of the nation’s capital from any obligation to exercise judgment or more than elementary investment prudence. These policies made literally billions available to rank, discriminatory and unproductive short-term speculation on terms which made long-term invstment uncompetitive. They encouraged what one student of the mania for railway speculation which swept England in the 1820s has aptly called “a madness of credulity,” a form of short-term insanity (with, however, abiding catastrophic side effects) that swept not only Wall Street and Washington, but spilled over into the press.
What the latter, in particular, failed to bring to the nation’s attention was the looming anomaly of the day: the extent to which this heralded outbreak of private enterprise was being underwritten, directly and indirectly, by the taxpayer-in-the-street, without the latter receiving anything like the compensation a private suretor or guarantor would have demanded for the use of his money or signature. The upward redistribution of the national wealth during the decade has been copiously written about, and needs no recapitulation by me. What has not been adequately grasped, as a political fact, is the extent to which this redistribution was state-subsidized through the overclass’s rank and cynical exploitation of what I call “the Public Capital.”
This is a sublime irony, for if the underclass has been the victim of misguided public policies, the overclass has been to an even greater degree the beneficiary of public policies even more misguided, policies which manifestly enhanced the comparative advantage of those who were more than well enough advantaged to begin with.
I say this paradox needs to be grasped “as a political fact” because that is how it must understood before it can be dealt with fiscally, with any degree of economic realism. It is not a matter of statistics, percentiles and so on. These display the facts with the intention of concealing the truth. The truth-hiders prefer that such issues be reduced to statistics, because it has been proven over and over again that the way to eviscerate an issue is first to anaesthetize statistically. This book contains few statistics and no tables, charts and graphs. In our time, statistics have become the enemy of truth. They can be adduced to prove anything in connection with any issue or assertion, so in the end they prove nothing, although they have their obvious uses in mentally anaesthetizing an electorate which knows nothing and thus can be made to believe anything.
Take the question of the deficit, for example. Defenders of the Reaganomic faith argue that the deficit doesn’t matter, because even at $400 billion it is reasonably small relative to the Gross National Product. This is crap. What matters about any shortfall in revenues versus outlays is not its relative statistical heft, but how that shortfall is financed. To dip into accumulated cash savings, or piled-up past profits is one thing; to borrow to meet the shortfall, as we have been doing for the last dozen years, is quite another.
If there is one immutable truth I have learned about finance, it is this: compound interest always wins. Today, interest on the debt piled up to financed the accumulated deficits accounts for roughly $300 billion annually, which is about the size of the deficit.
What matters about the deficit is just that. Financing it in ways politically and ideologically consistent with the spirit of the age has produced a Federal debt of $3-odd trillion. The longer this goes unpaid, the worse both the deficit (thanks to accrued interest) and the skewed upward redistribution of wealth become; more and more of the Federal income goes to bondholders, less and less to public services.
At some point, this simply cannot continue and a massive political and ideological shift occurs. A new spirit of a new age which demands that the debt be reduced on the backs of those who own it: paid off by expansion of taxation of capital, repudiated outright or inflated out of existence.
That the debt has risen as high as it has is generally laid at the feet of the government, but it was with the by-your-leave of the overclass, who were the principal beneficiaries of the explosion in public and (socialized) private borrowing.
I was vastly amused at the spectacle of so-called 1980s “private enterprise,” sucking away voraciously at the splendid lactations of the public teat and pausing between swallows to intone that we were living in a golden age of can-do private entrepreneurialism. I was dubious about the wisdom of using Public Capital to further enrich the already well-off. And I was flat