Many Americans know that our government is run by and for the rich. But few understand just how dramatically the game is rigged. Investigative reporter and specialist in tax and economic issues David Cay Johnston describes in his 2007 book, Free Lunch, How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick you with the Bill), the extent to which the levers of power in this country have been utterly corrupted and manipulated by the superrich. Nothing goes untouched. Every industry has been subverted. Each branch of government has been transformed into a tool for the powerful to further enrich themselves and consolidate control. And nearly every celebrity millionaire and billionaire, such as Warren Buffet and, until he died, George Steinbrenner, steals money from the nanny state while preaching the wonders of the free market.
Free Lunch offers a graphic description of how the great philosophers in political economy, primarily Adam Smith and Karl Marx, were right. They understood that the wealthy and powerful always conspire to enrich themselves at society’s expense. They do so by securing massive government subsidies, tax breaks, and using eminent domain to kick people out of their homes and steal public land, among others. And they will continue to succeed unless we resist.
Small business owners and normal Americans have to pay tax rates they cannot afford, while the top hedge fund managers, who earn $11 million a week according to Johnston, ship their profits to offshore accounts in the Cayman Islands and pay 15 percent in capital gains taxes on the relatively little earnings they report in the United States. What’s more, Johnston reports that, “The chance that you contributed to the gargantuan payday of at least one hedge fund manager is 100 percent. If you live in America you are in a hedge fund. But what is far more significant is that you are at risk for losses, possibly decimating losses, when a single hedge fund, or the entire industry, encounters the inevitable losing streak.”
Hedge fund managers are speculators who pool massive sums of money against obscenely high leverage in extremely risky deals. They buy and sell any and every commodity they can turn a profit on, from stock options to pork bellies to scrap steal. It is organized gambling with the entire economy as the chips. And they do this with no regulation and maximum secrecy. The payoff is extraordinary, and if they fail the government simply bails them out. We saw this play out during the 1990s when the Long-Term Capital Management firm went under, forcing the government to intervene, lest the global economy collapse, and of course we saw a replay in 2007 and ‘08 in a Wall Street-wide version of this with the sub-prime mortgage crisis.
To give you an idea of just how thoroughly the political system has been hijacked, consider the following. Johnston writes that, “Out of their average incomes of nearly $174 million, under the Bush tax cuts the top 400 taxpayers would have paid the government 17.5 percent in income, Social Security and Medicare taxes. For people who make $100,000 to $200,000, the tax burden is much higher at 20.6 percent.” Both political parties have been completely overtaken by morally bankrupt oligarchs, who are simply doing what they are paid and legally required to do—maximize short-term profits. We hear a lot about how George W. Bush helped the rich, but people often fail to realize that Bill Clinton was in some cases even worse: “During Clinton’s two terms, the effective income tax rate of the top 400 fell from almost 30 percent to 22.2 percent. Applying the Bush tax cuts yields a rate of 17.2 percent for income taxes only. That means Clinton gave the richest of the superrich a much bigger tax cut than Bush. Under Clinton, their effective tax rate fell by almost eight cents on the dollar; under Bush, it fell only five.” And Obama has been no better, keeping the Bush tax cuts in place while effectively raising taxes for the poor.
Indeed, the wealthiest Americans generally do whatever they can to cheat on taxes. Many hire “fixers.” Johnston explains, “The big accounting firms, and the specialty tax boutiques, are stocked with former IRS managers and executives who know how to go to bat for clients inside their former agency… Like generals and colonels who approve inflated bills from military contractors and then retire into lucrative new careers, the tax world also has its public-private revolving door.” Johnston adds, “Fixing a case is easy under government rules, because secrecy is the overarching principle. Congress gives the IRS broad discretion to overrule what its auditors recommend. It can settle for pennies on the dollar. All a supervisor has to do is show that the case is so complicated or costly that litigation would tie up too much in resources to make it worth the fight.”
But tax breaks are only part of the story. Particularly during the past 30-plus years, with the rise of strategic organization among big business in 1978 and the Reagan revolution, government has been radically transformed into an instrument that only serves powerful interests and redistributes wealth upwards. This manifests itself in every way imaginable.
Despite propaganda about how deregulation has decreased the size of government, the nanny state has been greatly expanded since the Reagan revolution, especially under Bush. But it’s expanded only for the rich. Everyone else has seen government shrink. As Johnston says, “The number of federal government workers shrinks, but the ranks of people who are hired on contract at much greater cost increases. In 2000 workers hired on contract cost our federal government $207 billion. By 2006 this had swelled to $400 billion—rivaling the expense of either Social Security or interest on the federal government’s growing debt,” and it’s gotten much worse since. The military-industrial-complex in particular has benefitted enormously from this trend, but corporate welfare has been radically increased in almost every industry.
Nothing is off limits. All items are viewed by the corporate elite as commodities to be bought and exploited. Public assets are being privatized across the country, with disastrous consequences. Johnston writes that, “Citigroup, the Carlyle Group, Goldman Sachs, and Morgan Stanley are among those creating investment pools to acquire public assets. Their sales agents are out proposing to take over everything from the Brooklyn Bridge to the Golden Gate Bridge, as well as parks, parking garages, water mains, and even sewer systems. BusinessWeek estimates that a hundred billion dollars worth of public assets will be sold in 2007 and 2008.”
We pay the cost: “The losers in this scenario are the taxpayers who bought and paid for these facilities. Now, more than a third of their value will be used to reduce revenues to the government, easing the burden on wealthy investors and adding to those of everyone else. And they will have to pay for them all over again through user charges. And those tolls? Expect them to go up faster than government would have raised them.” This may also explain why our crumbling infrastructure might never be adequately repaired.
These are far from the only industries that must be kept public to avoid a countrywide fleecing but are nonetheless being privatized. When it comes to energy, many believe that Enron’s fraudulent schemes were practiced exclusively by that firm and died with the company’s meltdown. They are gravely mistaken. Enron was Bush’s biggest supporter until it collapsed according to Johnston, donating over $700,000 in campaign contributions, and the powerhouse corporation spent years restructuring America’s energy policies to allow for privatization, which is really just a euphemism for corporate welfare and government-backed monopoly.
In over 20 different states across America, Enron and other big energy corporations lobbied for years to “deregulate” utilities and abolish price caps. This created the opportunity for companies to engage in price gouging, permitting them to charge as much as they want. The price of energy varies during the day according to demand. The new laws permit energy companies to pick which price they want to pocket, so naturally they choose the highest price. This is why when price caps were abolished in California at the beginning of the century prices skyrocketed from $30 to $600, and the state experienced rolling blackouts. People were stuck in elevators for hours, others got into car accidents because traffic lights failed, millions had to rely on candles for light, which would doubtless cause fires and kill small children, and widows on fixed incomes had to choose between starvation and forgoing their medication because the electricity bills were outrageously expensive.
When the public protested Bush and Dick Cheney, their buddy Ken Lay (leader of Enron) at first refused to act. Cheney, in a special touch of evil, ridiculed representatives such as Jay Inslee for confronting him with the tragic cost of removing price caps: “You just don’t understand economics” Cheney snapped, when Inslee, an economics major from the University of Washington, handed the Vice President a fax from Robert McCullough, a utility economist and vice president of Portland General Electric in Oregon, explaining that California had more than enough power but was experiencing an artificial crisis.
Shortly thereafter, Bush’s chairman of the Federal Energy Regulatory Commission, Enron crony Pat Wood, conducted a pseudo-investigation in which he deliberately ignored all criminal conduct by Enron and eventually imposed price caps that were so lenient that Enron and others were able to circumvent the system by temporarily diverting energy to other states to increase demand in California and jack up prices. This was a huge factor in Enron’s ability to maintain its fraud because it inflated stock prices through artificial profits.
Ultimately, Enron’s legacy lives on, and with a vengeance. More than 25 states have incorporated Enron’s rules of privatizing energy through government-backed monopolies and price gouging according to Johnston. Only it’s not as outrageous as California’s initial experience. Now there are price caps, but only at a rate designed to prevent the public from revolting. So while we may not pay $600 for only $30 worth of energy, we’re still getting screwed. Johnston reports that “Data showed that in the 12 months ending in May 2007, electricity in states that adopted Enron-style laws cost $48 billion more than the average cost in states that retained traditional regulation, which ties prices to the costs of production. That is $132 million per day in excess costs that act like a tax on the customers paying the bill.”
On top of all this, we also have to pay taxes that go directly to the energy corporations who are stealing from us. Johnston writes, “Across the country, electricity customers pay taxes that are embedded in the rates they pay. Because utilities are legal monopolies, they must recover all of their costs from customers, ranging from the price of fuel and the chief-executive’s expense-account lunches to income taxes on profits.” And these tax dollars usually go into the pockets of corporate executives because utility boards assume the utility companies will file their own tax returns, leaving plenty of room for tax evasion.
Warren Buffett is the king of tax evasion and energy consolidation, as his MidAmerican Energy Company “paid just 4 percent of its American profits in federal corporate income taxes in 2006” according to Johnston. Furthermore, in consolidating the energy system of Iowa, Buffett spent vast sums of money to lobby for legislation ensuring total control and maximum utility prices. He also worked to punish all who opposed his bid to turn Iowa into “Iowa Inc,” in the words of the chief director of Iowa Association of Municipal Utilities. This is on top of the fact that he received a $100 million dollar handout, of which he kept $60 million for himself, to build a Geico call center in an affluent suburban town in Buffalo while a business owned by another company in the city, which badly needed jobs, was shuttered.
Buffett is not the only outspoken proponent of free markets who has enriched himself through the nanny state. When George Steinbrenner died the corporate media went to great lengths to promote him as a champion of capitalism. In fact, as with George W. Bush, Steinbrenner was a hardcore socialist. A corporate socialist, that is. During the Reagan administration he made a fortune by ripping off the Navy for nearly half a billion dollars to build defective ships through a company he inherited from his father, according to Johnston.
Steinbrenner was therefore used to receiving massive handouts from the government when he built the new Yankee Stadium a few years ago. Because of his connections he was able to get every level of government to help him orchestrate the project, from the mayor to state councils to federal officials. To build the stadium Steinbrenner used eminent domain to kick people out of their homes, forcing them to sell below market value, and seize public parks. He then received over $600 million dollars from the state to build the stadium. And when the Yankees opened their new ballpark they jacked up ticket prices.
Johnston explains that the reason almost every major league baseball team has built a new stadium during the past two decades is because the owners, who are already filthy rich, get government subsidies. Once the new stadiums are finished they raise ticket prices by over 40 percent on average. Accordingly, the taxpayer gets fleeced in every way imaginable—those who like baseball have to pay more to attend games at stadiums they paid for, and the majority of people who don’t care about baseball are nonetheless forced to pay. The state claims the subsidies benefit the city by creating jobs, but this is a ruse—most of the jobs are seasonal, part-time and low wage, there are, after all, only 81 home games a year; and I can say, as someone who grew up in the Bronx, that Yankee stadium has not brought prosperity to the surrounding community, which is a shit hole.
The real motive is crony capitalism: Former mayor Rudy Giuliani played a crucial role in helping Steinbrenner secure the deal and has been handsomely rewarded in return. According to Johnston, “After almost every Yankee home game, Giuliani… loaded up the trunks of his and his entourage’s city cars with free warm-up jackets, signed baseballs, and other valuables, despite a city law that prohibits gifts of more than $50. And Giuliani received Yankees World Series rings worth $200,000 but that Wayne Barrett of the Village Voice reported cost him only $16,000.” Of course Giuliani fired other government workers who took gifts like Broadway show tickets, but the rules apply only to those who are not “important.”
More broadly, Major League Baseball, like the other three major sports leagues, is yet another government backed monopoly funded mainly by subsidies, immune to anti-trust laws because of a Supreme Court ruling decades ago. (The NBA is going through a lockout because the recession has dried up tax revenues and hence subsidies, leaving the owners to try to compensate by reducing players’ salaries.) This enables team owners to steal from states because the executives decide who can and cannot start a new team and where teams are allowed to play. Johnston reports that Los Angeles doesn’t have a football team because owners use that fact to blackmail state governments to give them handouts by threatening to move to LA.
George W. Bush understands how this works very well. Another charlatan spouting free market propaganda, he made his only real fortune before entering politics by organizing a group of wealthy investors to take over the Texas Rangers for $86 million. Once they bought the team Bush threatened to move the Rangers elsewhere unless the government subsidized a new stadium. After securing the handout of $202 million, the owners sold the Rangers nine years later for $250 million, earning $164 million; Bush received almost $17 million and cheated on taxes to boot, Johnston says.
The effect of all this is that public libraries and public parks are being destroyed. Government money is being redistributed to rich oligarchs like Steinbrenner (and now his family) and Bush instead of to the people. Without public libraries poor people have almost no way to educate themselves. Without public parks poor children have almost no recreational activities to occupy themselves with and more readily turn to gangs and drugs. Communities are ripped apart, and inequality expands. Johnston reports that when asked how he feels about the morality of the subsidies, Yankees president Randy Levine simply said it may be coercive, but it’s “the way government works today.” And as Art Modell, former owner of the Baltimore Ravens once said, “The pride and the presence of a professional football team is far more important than thirty libraries.”
Students are drowning in debt because private firms are permitted to provide predatory loans that appear fair but ultimately cost a fortune, enslaving borrowers. Even programs that were once designed to benefit the public, such as Sallie Mae, have been transformed into privatized schemes. It is not unusual for a $30,000 loan to turn into a $112,000 loan after interest, and many for-profit colleges, including Columbia University, make under-the-table deals with lenders to solicit money in return for sending them students. Consequently, two-thirds of college graduates are in debt, Johnston says. And the government does its corporate masters’ bidding by enforcing repayment. The rich and powerful benefit greatly from the obscenely high and ever rising tuition rates; everyone else suffers.
When massive corporations like Wal-Mart and Cabela’s enter a new state they not only wipe out local mom and pop shops but also force their powerless competitors to pay for the destruction of their businesses through taxes. The new Wal-Mart or Cabela’s receives a massive subsidy from the state to build their store, in some cases taking in over $100 million, and they get huge tax breaks. In some cases they themselves pocket the sales taxes. On top of bankrupting their competitors they steal from the public on many levels by robbing them of the tax revenue smaller stores, who do not get massive tax cuts, would have paid. In Hamburg, Pennsylvania, Johnston says Cabela’s extracted $8000 per person for its subsidy, which cost far more than Cabela’s reported profits. This is the subtle price we pay for getting cheap deals on flat screen TVs at Wal-Mart. And with the John Roberts Supreme Court there is no recourse. Johnston explains that when one small business owner who was ruined by Cabela’s brought his case to the Supreme Court, Roberts and his other corporate cronies on the bench refused to even listen. Case dismissed.
On top of destroying small businesses and fleecing the taxpayer corporations have destroyed manufacturing. They have every incentive to ship jobs overseas, particularly to China, because they save millions by paying minimum wage with no benefits. And when corporate executives travel on their private jets they usually do so at the taxpayer and shareholders’ expense. That’s right, thanks to a law enacted by the Reagan Administration, corporate jets are considered taxable fringe benefits, according to Johnston.
This trend parallels the way workers have seen their pensions shortchanged. Thanks to laws put in place at the behest of corporate interests, pensions are now regularly introduced to the risky world of the stock market, instead of secure bonds, which is where they belong. Johnston writes that changes in pension rules enacted in 1974 “limit pension fund contributions in years when pension assets are high relative to the obligation to pay, which are also the years when companies are likely to enjoy their best profits.” Furthermore, during years when profits are down, “companies short on cash can ask for permission to delay making contributions. Thus, both the good years and the bad create opportunities for ‘contribution holidays’ in which little or no money is added to a pension plan, even as an additional year of work adds to the total eventually due to the workers.”
While the rich get much much richer, everyone else gets the shaft. So, when Steve Jobs stole $70 million from shareholders by backdating stock options he faced no serious repercussions, whereas a petty thief who stole a couple of DVD’s from Kmart has been sentenced to 50 years in prison, as the Supreme Court made sure to uphold, Johnston explains.
Indeed, the gulf between rich and poor in this country is the worst it’s ever been. We just lived through a new Gilded Age, and we are now going through a depression. The jobs that have been shipped overseas are not coming back. And, as the debt deal shows, our government will not help. They serve the rich and only the rich, which is why, in spite of the fact that the plutocrats have trashed the global economy, the only option for solving the deficit problem being considered is further cuts, not raising taxes or creating jobs through a stimulus. Instead of holding the gangsters on Wall Street responsible, the government is punishing teachers, women and the unemployed.
Why isn’t there a revolution? Why do people not stand up for themselves and resist corporate rape? The answer is largely simple ignorance. The corporations, who control the mass media and government, work very hard to keep the details of their lobbying efforts, subsidy extractions and price gouging secret. Their power lies in their anonymity. So long as the oppressor’s face remains hidden the public will not know whom to blame. This is why the Tea Party has been able to capture genuine populist anger. Those who have been neglected, those who have seen their jobs disappear and benefits evaporate at the same time that Goldman Sachs received billions in bailouts, should be angry. But because they have no idea why and how this has happened, because the corporate media shields them from the truth, they ironically seek solutions from the very people who have raped them, such as the Koch brothers, Dick Armey and Clarence Thomas.
—Marc Adler can also be found at thebloodycrossroads.com