One Percent Capitalism

In 2011 President Obama appointed Jeffrey Immelt, CEO of General Electric, to lead the President’s Council on Jobs and Competitiveness.  Not surprisingly, the appointment raised eyebrows among those concerned about jobs since GE (per The New York Times) eliminated a fifth of its US workers in the last decade and now (per Bloomberg) employs more people abroad than in the US.

Nonetheless, Immelt’s record on competitiveness is impressive.  He refocused GE’s operations (and employment) from domestic manufacturing to more profitable overseas financing.  In the 1990s, according to the Times article, three-quarters of both revenue and profit came from domestic operations.  Today more than half of its revenue and more than four-fifths of its profit are earned overseas.  In 2011, in the midst of a worldwide economic slump, GE’s revenue, 150 billion dollars, was 6th highest of all US corporations and produced a profit of 11½ billion dollars.

Thomas Edison’s manufacturing powerhouse has become a very profitable international bank.  How does this bank compete?

The Times concluded that “one of the most striking advantages of General Electric is its ability to lobby for, win and take advantage of tax breaks.”  Much of that ability is embodied in GE’s tax law firm, said to be the best in the world.  What’s different about it is its size – almost a thousand people – and the fact that everyone works exclusively for GE.  The “firm” is GE’s tax department. 

GE encourages these employees to spend half their time on complying with tax laws and the other half on finding ways to avoid them.  The second half makes the GE tax department a profit center with its own lobbyists.

One significant tax break, called “active financing,” allows GE and other banks to avoid US taxes on interest income earned abroad as long as the income remains abroad.   When in 2008 the Democratically controlled Congress was considering letting the tax break expire, GE sent in the head of its tax department and its lobbyists to preserve it.  A key convert was Representative Charles Rangel of New York City.  A month after his conversion, Immelt announced in his presence that GE was donating 30 million dollars to New York City schools including schools in Rangel’s district. 

By tax expert David Kay Johnston’s reckoning, over the period 2008-2010, GE received 56 dollars and 40 cents in tax refunds for every dollar that it spent on lobbying.  That’s 56.40 times 80.4 million dollars—its lobbying expenses—for a total of 4½ billion dollars in tax refunds.  According to another report, GE received almost 8½ billion dollars in tax subsidies of all kinds during this period, making its effective tax rate minus 45 percent.  The tax rate for business corporations is supposed to be plus 35 percent.

But as the late Chicago economist Milton Friedman instructed us, there is

"one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

Spending corporate resources to engage in open and free competition to influence Congress through lobbying is not only lawful but constitutionally protected as an exercise of any corporation’s First Amendment right to petition the government.  If such activities are designed to increase its profits, then according to the Friedman doctrine the business corporation has a social responsibility to engage in them.

By this standard GE, led by the President’s new chief of jobs and competitiveness, is one of the best.  Its investors are surely grateful, if not so much the US job holders that it fired.  And not so much, perhaps, the group of investment professionals who want GE and other public corporations to disclose their spending on political activities.  Their reasoning is in part economic (read closely):

“Political spending disclosure helps prevent corporations (and unaccountable corporate executives) from using corporate treasury funds to obtain competitive advantages through political means, rather than by adding value in the marketplace. . . .  Secret political giving undermines free enterprise and creates unearned advantages in the marketplace.  These activities distort the workings of the market, and result in misallocations of capital.  Mandatory corporate political spending disclosure would further a marketplace where companies compete and win based on superior products and services, rather than by superior access to lawmakers.”

So in the view of these professionals, using corporate money to obtain competitive advantages through political means—which surely include lobbying Congress even when it’s disclosed—undermines free enterprise, creates unearned advantages and distorts the workings of the market.  But of course they’re talking about the free market guided by Adam Smith’s invisible hand.  In the 1% capitalism of Milton Friedman, Jeffrey Immelt and Corporate America, the invisible hand has been replaced by money and competition by the political advantages that it buys.

To change back to free-market capitalism, forget the likes of GE—change Congress.

Peak Denial

When I was 11 or 12, I started worrying about what would happen if the world ran out of natural resources.  I can’t remember which I had in mind, but this was during World War II when availability of resources was talked about.  My father’s response was reassuring: we would invent some substitute, as we invented synthetic rubber during the war when natural rubber supplies were cut off.  Necessity is the mother of invention, as the phrase went.

I can imagine that I might have given my son the same answer -- but not my grandson.

One difference between now and when I was 11 or 12 is world population.  It was 2.4 billion then and 2.5 billion in 1950 when I entered college.  Today it’s seven billion, almost three times larger.

But in the same time period the world economy has grown almost ten times larger.  The Earth Policy Institute tells us that “consumption has begun to outstrip natural assets on a global scale."  Leaving aside non-regenerative assets like oil and fossil aquifers,

“demand has surpassed the earth’s regenerative capacity.  We are overharvesting forests, overplowing fields, overgrazing grasslands, overdrawing aquifers, overfishing oceans, and pumping far more carbon into the atmosphere than nature can absorb.”

Again leaving out oil, the demand for and growing scarcity of all important commodities in the last decade has led to a surge in prices that erased the benefits of a century of declining prices.  Investment guru Jeremy Grantham believes that rising prices are very probably here to stay, representing a “Paradigm Shift” that is “perhaps the most important economic event since the industrial Revolution.”

 

“We all need to develop resource plans,” he concludes, “particularly energy policies.  There is little time to waste.”

Tell  that to the US Congress, and what do you get?  Policies that encourage overplowing, overdrawing and the pumping of more carbon into the atmosphere than nature can absorb without warming the globe and acidifying its oceans.

By way of explanation (or excuse), Grantham suggests that humans are genetically ill-disposed to dealing with “long horizon issues and deferring gratification,” possibly because “we could not store food for over 99% of our species’ career and were totally concerned with staying alive this year and this week.”  He also thinks humans are “optimistic and overconfident,” traits which may have been important to our survival.  Especially Americans.

In Collapse: How Societies Choose to Fail or Succeed (Viking Penguin 2005), Jared Diamond’s examination of human societies that succumbed to environmental problems and others that survived them, the author said that in planning the book he assumed it would just be about environmental damage.  But later he realized he had to add other factors including the only one that proved significant in every society’s failure or success -- “the society’s responses to its environmental problems.” 

The environmental issues for these societies, chiefly deforestation and soil and water problems, were similar to those we face today.  Global warming, however, is a modern issue, derived from industrialization and the growth in human population that it made possible.  President Johnson was officially advised of it in 1965, but neither he nor any of his eight successors nor any Congress in the almost half-century since has taken action.

Global warming is a long horizon issue, of course, though not so distant that it won’t affect our grandchildren.  It also requires a global response involving other nations.  But we acted with other nations to control toxic chemicals (another modern environmental issue) creating a hole in the ozone layer.  The fault is not in our stars but in our politics.

Since fossil fuel emissions account for most of the increase in greenhouse gases that cause global warming, an obvious first response to reduce and eventually reverse this increase is to raise the price of fossil fuels by taxing them or capping their use, thereby making non-fossil energy more competitive.  But enough members of Congress are indebted to corporate interests that profit from fossil fuels or depend on them to block any such response.

Most of these members claim to doubt global warming.  But considering “the consensus scientific view” that global warming is occurring and that greenhouse gases emitted by human activities are the primary cause, their claim seems more like self-induced self-delusion -- a fig leaf we could call Peak Denial hiding their representation of the corporate interests held by the 1% rather than the interests of the 99% among their voters and the public good.

Global warming, left unchecked, will eventually create an environment that’s different from the one to which both we as a species and the food that we grow are genetically adapted.  How the world society responds to it may determine whether the society succeeds or fails.

Congress is consistently choosing to fail.  To make sure that society succeeds, we must choose a Congress that is not dependent on the 1%.

Changing Congress

To get into the subject of this, my first blog post – changing Congress -- let me run through a few assumptions without stopping here to explain them or defend them.  As expounded in Federalist Article #39, written by James Madison in 1788 as he argued for the adoption of the Constitution, the United States of America is a “government which derives all of its powers directly or indirectly from the great body of the people,” making it (by design) a democracy, and is “administered by persons holding their offices during pleasure, for a limited period, or during good behavior,” making it (by design) a democratic republic.  Members of Congress and the President are administrators elected by the people for a limited period.

But Madison also recognized in Federalist #10 that “men of factious tempers, of local prejudices, or of sinister designs, may, by intrigue, by corruption, or by other means, first obtain the suffrages, and then betray the interests, of the people.”  In 2007 Martin Gilens of Princeton concluded from an extensive study that “whether or not elected officials and other decision makers ‘care’ about middle-class Americans, influence over actual policy outcomes appears to be reserved overwhelmingly for those at the top of the income distribution.”  If government of, by and for the great body of the people is (by definition) a democracy, government of, by and for those at the top of the income distribution is a plutocracy.

The US today is a plutocratic republic.  Members of Congress are addicted to nonstop campaign fundraising, and almost all of the funds are raised from those at the top of the income distribution.  As Ken Silverstein pointed out several years ago in Harper’s, “the most lavish benefit of winning a congressional campaign is, ironically enough, the right to keep on campaigning – and therefore to keep raising and spending donor money.”  Although Congress is not the sole cause of our drift from democracy to plutocracy, I agree with Lawrence Lessig and Joe Trippi that we should strike at the root of the problem and fix Congress first.

Fixing Congress means electing members who have “an immediate dependence on, and an intimate sympathy with, the [great body of the] people” (Madison again) rather than just those at the top of the income distribution.  The hard way to get there is to persuade incumbent members of Congress to cure themselves of their addiction.  Lessig believes that we have to go for a Constitutional amendment, which has to be initiated by a two-thirds vote of both the House and the Senate or by the approval of two-thirds of the States for a Constitutional convention.  Approval of an amendment in either case requires the approval of three-fourths of the States.  Tough sledding, especially for a Constitutional convention, which has never been tried.

I like a third approach – putting up candidates who are committed never to accept donations over a certain amount, like 100 dollars per contributor per year.  This is the scheme proposed by the Fair Elections Now Act, a bill now before Congress to provide public financing for Congressional campaigns.  Getting Congress to pass the bill is also tough sledding, although (perhaps) not as tough as a Constitutional amendment.  A nice feature of FENA is forbidding candidates who sign on to it from using any money in the campaign – including personal or family wealth – that is not raised by personal contributions of 100 dollars or less or by matching contributions under the Act.

Imagining a Congress controlled by members beyond the reach of the plutocrats makes sugar plum fairies dance in my head.  But what really energizes them (the fairies) is another thought: what if the 99 percenters became regular voters?  What if they came to believe that the surest route to economic freedom is through exercising the political freedom that they already have to vote for candidates who don’t accept large donations?

As  I indicated in my (also first) tweet today, if only 99 percenters became regular voters in elections and primaries.  They could change Congress, 50 States & the World.