Essentially Contested America

Last week, the Supreme Court heard the oral argument Citizens United v. FEC, which could become a landmark First Amendment case. At issue is the constitutionality of the FEC’s ban of anti-Hillary documentary sponsored by corporate funds. The Court could decide the issue narrowly, on the grounds that this particular commercial speech was clearly political and thus warrants the highest level of First Amendment scrutiny. However, comments by several justices at the oral argument hint that the Court may use this case as a vehicle for establishing a new rule – that commercial speech merits the same strict scrutiny as does political speech. Until now, the Court has applied a lower level of scrutiny to commercial speech. The reason for this practice is that because commercial speech is for profit, there is less of a danger of chilling that speech than there is for political speech. If the Court does use Citizens United v. FEC as a vehicle for establishing a new level of review for commercial speech, thousands of statutes that currently regulate business and commercial speech will fall under attack, and may be struck down. Monied interests, which are already far too powerful in our political system, would become even more powerful.

If the Court issues a broad ruling in Citizens United v. FEC, that would be consistent with a trend on the Court to protect the interests of property owners and businesses. The Court has established a new regulatory takings doctrine which makes it considerably more difficult for the government to regulate property in the public interest (though the Court’s ruling in Kelo was a step backwards in this line of cases). The Court has established new limits on punitive damages in tort cases brought against multi-national corporations like Exxon. If the Court, as expected, issues a broad ruling in favor of corporate commercial speech in Citizens United v. FEC, it will be just another Supreme Court ruling in favor of the “haves” at the expense of the “have nots.”

Some folks seems surprised that the stimulus package, its infrastructure spending and the high deficits that will come along with them will eventually lead to higher taxes.  Folks ought to be surprised if the spending does not lead to higher taxes.  Indeed, folks ought to hope that the spending does lead to higher taxes as a reminder of who is being aided by much of the spending.  Infrastructure spending is necessary to guarantee that the America we give to the next generation is as prosperous as the America our parents gave us.  Infrastructure is the platform on which we build to make our lives, the lives of those who live in America, and even the lives of those who do not live here better.  As importantly, infrastructure is the often unseen subsidy that allows high earners and even some non-high earners to make life as comfortable as possible for themselves and their children.  That subsidy can be sensibly paid back by higher future taxes, to the extent that a superior infrastructure is a large subsidy for the incomes of future generations.

Simply put, many people who make large salaries in the future will do so because of the wonderful infrastructure that will be built on the back of today’s stimulus and today’s deficits.   Indeed, many people who make large salaries now do so because of the wonderful infrastructure that was built on the back of yesterday’s stimuli and deficits.  Of course, many will claim that this ignores uniquely talented individuals who made it all on their own.  Those many are simply wrong.  An example of the supremely talented individual who did not make it on his own would be a professional athlete who happens to work in a building that has been paid for by taxpayers.  That athlete may well be highly paid because of his talent.  However, the amount of his salary may depend in significant measure on the size of the subsidy that has been given to the athlete’s team through tax breaks or a publicly financed stadium or the infrastructure of the airwaves that allows for lucrative television contracts.   To be clear, Athlete A may get paid much more than Athlete B because of Athlete A’s talent.  However, without the infrastructure, Athlete A’s paycheck might be quite a bit lower.  This story can be played out in nearly every industry, from the trucking industry that relies on our interstate highway system to the direct mail industry that relies on the postal system to many others.   The story plays out in part because starting from scratch rarely requires that one create the infrastructure that leads to profits.  Rather, success often results from plugging into the infrastructure that helps one turn one’s skills into large salaries or profits.  The payment of higher taxes as a recognition that the infrastructure into which one is plugging is superior to the one that would be available without stimulus and infrastructure building that leads to large deficits is reasonable.

Claims that high deficits for today’s projects constitute generational theft are misguided.  If we want to tax ourselves to pay for infrastructure, we are giving future generations a large gift.  Gifting is fine, but the refusal to give a gift is not theft.  Though some may suggest that those who will have to pay for the infrastructure might prefer to keep their money and forgo the infrastructure, history suggests that when infrastructure is properly completed, the investment is worth the price.

The furor revolving around the AIG bonuses continues.  Mention was made of the situation yesterday in President Obama’s second nighttime press conference.  Though the press has continued to fan the flames and the Obama Administration has not done all it could to put the controversy to rest, blame for the continuing story should be laid directly at AIG’s feet.  AIG has failed to end the story by failing to treat the public like grown-ups.  Rather than search for whatever tack it thought could allow it to weather the storm, AIG should have explained for what purpose the bonus money was paid and stood by the rationale.  By treating the public like it could not possibly understand a supposedly complex issue like compensation at AIG’s Financial Products Division (AIG-FP) and declining to explain why the bonuses were acceptable, AIG allowed the press and public to continue to paint the story as one more example of corporate greed and stupidity financed by the taxpayers.  Consequently, a number of extraordinary actions have occurred.  The House of Representatives voted to tax the bonuses at 90%.  The head of AIG has suggested that the executives who received bonuses return them.  Government officials have expressed outrage that particular individuals were paid particular amounts of money based on contracts signed between the individuals and their employer.  If only AIG had explained for what purpose the bonus money was paid, the public might have accepted the explanation.  The public can digest the fact that people who work for faililng entities may yet be paid significant amounts of money.  However, the why has to be explained.

The AIG bonuses can likely be explained in one of four ways, each of which a sentient grown-up ought to understand.  First, the bonuses may be for a job well done.  If AIG explained the relevant job as being the winding up of the business that caused the company to crater and explains that the quality of the job done really was extraordinary given the circumstances, the public might have been unhappy with the size of the bonuses, but might not be so unhappy with the existence of the bonuses.  At least, the press and Congress might not have been willing to fan the flames.  Nonetheless, the bonus as bonus is likely the least palatable explanation, though getting it out might have been a single-news-cycle event.  Second, the bonuses might have been retention payments.  Put differently, the promise of a bonus at the end of the year may have been what got people to stay and wrap up AIG-FP.  Of course, the public would still ask, “Who was going to hire these people?”  However, the ready response would be that the point of retaining the people is to get them to work for AIG-FP, not to stop them from working for someone else.  Again, there may have been some grumbling about the size of the “bonuses”, but not much legitimate complaint about the existence of the “bonus pool.”  Third, the bonuses could be thought of as deferred salary.  Even though AIG lost incredible amounts of money, no one would expect its workers to work for free or even for below market rate.   If the bonuses were really deferred salary, structured to be paid later so that AIG could alter the amount up or down based on final receipts, the public’s problems would again likely be with the size of the pool rather than its existence.   Of course, such an explanation would make the claims in the New York Times letter to the editor written by a resigning AIG executive that he worked for a $1 a year salary ring hollow.  Working for a $1 a year while expecting a seven-figure bonus does not really qualify as working for $1 a year.  Fourth, the bonuses might be thought to be deferred commissions.  If AIG could make the argument that its workers were winding up trades that would bring lots of money into the firm and that those workers were being paid a standard Wall Street commission on the money they recouped.  Of course, the money would be paid at the end of the year.  Public outrage may have been nonexistent if this really is the reason the bonus pool existed and was paid as it was.  Presumably, one of these explanations or a combination of all four explains some, if not all, of the bonuses paid.  Had AIG just explained for what purpose the money was paid, rather than merely claiming that the money had to be paid pursuant to contracts, the firestorm might be over.

The American public can deal with automobile company executives who make more than $10 million annually while their companies collapse.  It can deal with coaches at public universities who resign after a string of bad years receiving seven-figure contract buyouts.  It can deal with the real estate agent who make 6% on the sale of a home that has lost significant value.  The American public can understand that compensation may come in many forms and may be justified in many ways.   However, the American public will not understand justifications that are never put forth or that appear to be conveniently fabricated.  That lack of understanding will be supplanted with the kind of outrage that AIG is still seeing.  For that, AIG has no one but itself to blame.

Wall Street has taken a beating in the press regarding the estimated $18.4 billion in bonuses firms paid out in 2008.  Just for the math challenged, $18.4 billion in bonuses amounts to $10 million bonuses for 1,840 people or $1 million bonuses for 18,400 people or $100,000 bonuses for 184,000 people.  Some argue that the beating is unjustified and reflects a lack of understanding about how Wall Street pays its workers.  One argument suggests that what is considered a bonus to the outside world is really just salary on Wall Street.  The amount of the extra “salary” is unknown until the end of the year, but it is clear to those on Wall Street that the additional salary will be substantial.  Another argument claims that bonuses are really retention payments necessary to keep firms from losing top talent to other firms.  There are problems with using either claim to support the argument that the bonuses paid were perfectly acceptable given the magnitude of losses Wall Street has racked up in the last few years.  The salary argument is backward looking and suggests that bonuses are for past performance.  Of course, it is somewhat unclear how past performance would justify bonuses given that some many of the firms paying bonuses lost billions of dollars last year.  Certainly one could argue that specific individuals still deserve bonuses based on their performance.  However, the sheer magnitude of the bonuses paid makes the argument dubious until more information – that is almost certainly not forthcoming – is released.  The retention argument is forward looking and suggests that bonuses constitute partial payment for future services to be rendered.  Of course, it is unclear what firms will be hustling to poach top talent given the number of layoffs at all levels that Wall Street firms have endured.  Certainly, it is possible that the retention argument is a little more subtle and that the payments are also meant to keep the top talent from deciding to go home and sit on the couch.  However, if that is the argument, it is unclear why the top talent’s base salary is not substantially higher that it is now, possibly in the range of what the top talent would be expected to earn in an average year.  This would create a different public relations problem, one that would require that firms justify to shareholders and others why traders, some of whom have no idea what they are selling or how much money they are making or losing for the firm, ought to be guaranteed a high-six-figure or seven-figure salary.

I suspect that what has happened on Wall Street is that an ethos has run into an irony.  The ethos is that high salaries are anathema on Wall Street because they make people soft and complacent.  Real money is made on Wall Street by hustling and nobody hustles when they do not have to to “make” money.  In theory, bonuses reflect how much you hustled and how much you made.  The irony is that now everybody expects to get paid whether their hustling made money or not.  The mere act of hustling plus the existence of money in the firm’s bank account is supposed to lead to the same bonuses as in prior years.  The problem is that when the money in the firm’s bank account comes from the taxpayers getting hustled in the form of TARP funds, the public is in no mood to see bonuses get paid to folks whose “low” base salaries still dwarf the average salary of those in the middle class on Main Street.

During last night’s debate, John McCain unveiled a new bailout proposal called the McCain Resurgence Plan.  That plan would require that the Treasury Department buy certain individual subprime mortgages then reissue affordable fixed-rate, government-backed mortgages to homeowners based on the home’s current market value.  McCain’s stated goals, to stabilize home prices and help people who may otherwise lose their house, are laudable.  However, the Resurgence Plan is nothing new.

McCain’s proposal is no bold stroke.  The Emergency Economic Stabilization Act of 2008 (the Bailout) already allows the Treasury Department to buy troubled assets – including mortgages - when the Secretary deems such a purchase to ”promote[] financial market stability.”  Presumably, Sen. McCain’s point is to issue a plan that reflects his priorities.  He appears to want to guarantee that much of the $700 billion for the bailout goes directly to help homeowners stay in their houses.  Helping people who could afford to stay in their home if their mortgages reflected the market price of their homes is a good idea.  However, it is a good idea that many people have had for a long time and was on the table when he suspended his campaign to ostensibly help Congress deal with the economic crisis.   Ironically, had he pushed to guarantee that some of the money would be spent in this way, as a number of others – including Barack Obama – already had, he could have been seen as a maverick who reached across the aisle to put country first.  Of course, many in the Republican Party would have disowned him, but such is life.  

One can only ask if it would be too Palinesque to suggest that John McCain would rather lose an economy than lose an election.      

 UPDATE

It looks like I was both overly fair and somewhat unfair to John McCain in my prior post.  I was overly fair because I assumed that his Resurgence plan was structured to buy mortgages at or near their market value then replace the old mortgages with new mortgages issued at market value.  As noted in the original post, that plan would be unoriginal and tardy, but sensible at heart.  Conversely, I was unfair to McCain because his plan is to buy homes at their souffle prices with taxpayer money then issue new mortgages on those homes at their current deflated market value.  In fairness to McCain, his plan (as I understand it) is new and mavericky.  Of course, it is also bizarre and gimmicky given the current economic climate.  It is a gift to banks that bet on the souffle and lost.    

In fairness to myself, when I heard McCain propose his Resurgence plan during the debate, I asked my wife if she could hear the sound of thousands of economists screaming.  I had assumed that the plan he proposed was in fact the plan he proposed.  However, I convinced myself during the debate that a fiscal conservative or even a sane person could not possibly have proposed what I thought he had proposed.  Hence, I wrote the original post.  Now that I know that McCain really proposed what he said he proposed,  I wonder how long it will take for some number of his economic advisers to fold up their tents and go home.  Conversely, how long will it take for McCain to distance himself from his Resurgence plan by claiming that he really meant something completely different than what he said?         

There has been so much written on the bailout/rescue plan that it almost seems pointless to write anymore.  However, the confusion that has accompanied much of the writing on the bailout suggests that a quick post is in order. 

The point of the bailout can be understood by recognizing two simple points.  First, if you are in business to make money, you do not loan someone money unless they believe they will return it with interest.  When people start defaulting on loans at a much higher level than banks projected, banks lose a lot of money and they stop loaning so much money or they stop loaning it at such low rates.  Second, borrowed money often fuels useful economic activity.  Whether it is buying a house or starting a small business or investing in eco-friendly technology, unless the purchaser has cash, economic activity will be fueled with borrowed money.  Less money to lend and less money to borrow tends to lead to less economic activity.  Certainly, less economic activity will lead to less unprofitable economic activity.  However, it will also lead to less profitable economic activity. 

Less economic activity may not lead us into another Great Depression, but given how recessions and depressions are defined – as less economic activity than in prior quarters – it is much more likely to lead us in that direction than more economic activity would.

At base, lending requires capital plus the confidence to loan it.  The bailout is designed to help both the capital part and the confidence part.  Could Congress get the bailout horribly wrong?  Certainly.  Could taxpayers be left holding the bag?  Certainly.  However, we should not kid ourselves.  The bailout of toxic assets, if done correctly, will inflict some pain (though possibly not enough) on Wall Street while also helping to avoid a certain amount of pain on Main Street.

There is a myth–a dangerous myth–that we can choose between regulating and not regulating economic and financial institutions. At the center of this myth is the idea that there is something called a “laissez faire” market place. Although this is a controversial and complex subject, one necessary feature of social and political life is regulation. There no escaping regulation.  The only choice we have is the number and kind of regulations imposed. If we could only escape the domination of this myth, we could begin serious and necessary discussions about which regulations benefit a concern for wealth maximization, wealth distribution, and stability in markets. If the current proposal to socialize our financial markets fails to convince us that government is inextricably intertwined with markets, nothing will. The point is that markets cannot exist without regulations of one sort or another. If this point fails to register, our persistent conflicts over regulating or not regulating will continue unabated to the detriment of the economy, our financial institutions, and the stability of American society.

Check out a recent article at TomPaine.com on the death of Conservatism. Here’s the introduction: “Modern conservatism is dying. There’s still an electionto be held, but conservatism as we’ve known it since Ronald Reagan is failing–ground down in the desert of Iraq, drowned in the floods of Hurricane Katrina, foreclosed by the housing crisis and poisoned by toys imported from China. . . . The American people are figuring this out. While conservatives repeat their time-worn slogans–’small government, low taxes, high security’–the American people are living the consequences. . . . We’ve seen eight years of a conservative presidency, six years overlapping with a conservative Congress, and 30 years of broadly conservative ideology. Now reality is showing how the values embodied in those slogans have been betrayed. . . . Conservatives say “shrink government.” We get inadequate levees, exploding steam pipes and schools without textbooks. Conservatives say ‘deregulate,’ and now Thomas the Tank Engine is painted with toxic lead. Conservatives say ‘low taxes,’ but it primarily applies to millionaires, billionaires and crony corporations. . . . What follows is a history of these problems, and the direction people want to go instead.” For the complete article click here.

However, unless the offspring of Reagan conservatism–neoconservatism– dies also, liberation is incomplete. Economic conservatism rests on the shibboleth that when the wealthy accumulate more wealth, everyone
benefits. Wow! Over the last several years the gap between the wealthy and the poor has expanded exponentially. So much for that virtue. Economic conservatism also rejects regulation because it inhibits efficiency and growth. Tell that to people injured by a collapsing infrastructure, poisonous food, or products made with dangerous
ingredients. Neo-conservatism champions imposing “democracy” on other nations through the barrel of a gun. The debacle in Iraq, which seems to be on the brink of another surge in violence, can be laid at the doorstep of these miscreants. Oh yes, neo-conservatives give short shrift both to sustaining democracy here at home and the
egalitarianism that makes democracy possible.

Check out Tony Judt’s review–”The Wrecking Ball of Innovation”–of Robert Reich‘s most recent book Supercapitalism appearing in the December 6th issue of the New York Review of Books: Here are the first two paragraphs: “Supercapitalism is Robert Reich’s account of the way we live now. Its story is familiar, its diagnosis superficial. But there are two reasons for paying attention to it. The author was President Clinton’s first secretary of labor. Reich emphasizes this connection, adding that “the Clinton administration–of which I am proud to have been a part–was one of the most pro-business administrations in American history.” Indeed, this is a decidedly “Clintonesque” book, its shortcomings perhaps a foretaste of what to expect (and not expect) from another Clinton presidency. And Reich’s subject–economic life in today’s advanced capitalist economy and the price we are paying for it in the political democracies–is important and even urgent, though the “fixes” thatthe proposes are unconvincing. Reich’s theme goes as follows. During what he calls the “Not Quite Golden Age” of American capitalism, from the end of World War II through the 1970s, American economic life was stable and in comfortable equilibrium. A limited number of giant firms–like General General–dominated their predictable and secure markets; skilled workers had steady and (relatively) safe jobs. For all the lip service paid to competition and free and civic health of markets, the American economy (in this respect comparable to the economies of Western Europe) depended heavily upon protection from foreign competition, as well as standardization, regulation, subsidies, price supports, and government guarantees. The natural inequities of capitalism were softened by the assurance of present well-being and future prosperity and a widespread sentiment, however illusory, of common interest. “While Europeans set up cartels and fussed with democratic socialism, America went right to the heart of the heart of the matter–creating democratic capitalism as a planned economy, run by business.” [Citations Omitted] See also Robert Frank’s review “Invisible Handcuffs” in the NY Times.

For decades Milton Friedman and his cadre of “free market” economists insisted that freedom was inseparable from capitalism and that regulating the market was anathema to freedom. Two remarks are in order. First, there’s nothing unregulated about free markets. They are regulated to the teeth. It’s the kind of regulations that matter, not regulation versus non-regulation. Second, if capitalism is necessary for liberty, what is the effect of capitalism on equality. Doesn’t the so-called “free market” sacrifice equality at the alter of capitalism? And doesn’t democracy require equality? If these relations are correct, capitalism is good for liberty, but not democracy. Are these the choices with which we’re stuck?

The Insidious Right has mastered the art of demonizing critics for speaking the truth. Whenever anyone points out that the American political system has permitted, even encouraged, the wealthy to oppress the poor, the Insidious Rights condemns that critic for advocating class warfare. So even if it is true that the wealthy oppress the poor, it becomes impossible to say so. What a trick! The problem, of course, is that this “trick” prevents the justifiable criticism of political-economic structures that stand in the way of America fulfilling its promise of equality. And that’s precisely the malevolent genius behind this tactic. The possibility of the wealthy oppressing the poor cannot even be raised. However, Senator Bernie Sanders (I-Vermont) will not be silenced. Consider his words:

Class warfare is being waged in America and the wrong side is winning. It is time for the new Democratic majority in Congress to stand with the working families of our country. It is time we offer a budget that reflects the needs of working people instead of the wealthy.

And it is time for citizens across the nation to stand up and demand that their representatives and senators, Democrats and Republicans, do so and thereby represent the interests of all Americans, not a select few.

We must ask: Which side are we on?
Are we for the rich and the powerful or the middle class and working families?

As a member of the Senate Budget Committee, I see a pretty clear answer. I will not be voting for more tax breaks for the outgoing CEO of Home Depot, who recently received a $210 million golden parachute. Rather, I will be voting to substantially increase financial aid for low and middle class families so that every American, regardless of income, can receive a college education.

I will not support a tax cut for the former CEO of Pfizer, who received a $200 million compensation package. Instead, I will vote to substantially increase funding for childcare so that families can find affordable and quality care for their children.

The former CEO of ExxonMobil, who managed to get a $400 million retirement package, does not need more tax relief. It is far more important that we keep our promises to the veterans of this country who now find themselves on waiting lists to get the health care they need.

If we as a nation are serious about creating a more egalitarian society, we need to invest more federal resources in education, health care, housing, infrastructure, environmental protection and sustainable energy. We also have to reduce our national debt. Given that reality, Congress must develop the courage to stand up to the big money interests and roll back the tax breaks for the wealthiest one percent, stop corporate welfare, eliminate unneeded defense weaponry, and demand that the wealthy and powerful rejoin American society. We should do nothing less.

The role money plays in politics, guaranteeing the dominance of corporate interests over human interest, is scandalous. Unless we can address the issue of class domination without being silenced, a corporate monarchy will rule American society unabated. Bernie Sanders deserves credit for daring to speak out against a monarchy infinitely more oppressive than the monarchy our irrepressible Revolutionary generation overthrew.