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The American Dream works best for the super-rich

“It’s called the American Dream because you have to be asleep to believe it.”
George Carlin

The “rags to riches” mythology of Horatio Alger was always better suited for fiction than reality, but such “rugged individualism” of lore has now become increasingly dubious and seemingly preposterous in the face of a fading American Dream.

For the past few decades, the policies coming from Washington, combined with the high stakes gambling of Wall Street, have contributed largely to a country that has become beholden to the interests of the mega-rich and megalithic corporations at the expense of the American community at large.

Those familiar with the Occupy Wall Street movement have probably heard the protesters refer to themselves as the “99 percent.” The “99 percent” refers to the top 1 percent of the super-rich elite in this country as opposed to everyone else.

It also refers to the huge, widening gulf of disparity growing between the rich and poor in this country while the middle class shrinks.

This is the fourth and penultimate installment of my series on the Occupy Wall Street movement. In the previous installments I have explored the shady criminal practices of Wall Street and how Washington enables such behavior through deregulation.

In this installment, I would like explore where these policies have left the average American.

Income inequality 

The top 1 percent owns 42 percent of the nation’s overall wealth (when counting income as well as assets) according to a study done for New York University by economist Edward N. Wolff.

And according to a study by the Center on Budget and Policy Priorities, when it comes to pure income, the top 1 percent owns about 17 percent the nation’s income, the highest level since 1979, “while the share going to the middle one-fifth of Americans shrank to its lowest level during this period (14.1 percent).”

Forbes magazine reported that the net worth of the top 400 richest families in America alone is $1.37 trillion, which is more than the bottom 60 percent in this country combined.

Income inequality is at all-time high in the United States, as a study by Berkeley Professor Emmanuel Saez found income inequality to be at its highest rate since 1913 (when the income tax was instituted).

Furthermore, Saez states in his study, “The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007.”

A report released last week by the Congressional Budget Office found that, since 1979, the top 1 percent saw income grow by 275 percent, whereas the average middle class income grew by less than 40 percent, and the bottom 20 percent of the population’s income grew by only 18 percent.

The report concluded: “As a result of that uneven income growth, the distribution of after-tax household income in the United States was substantially more unequal in 2007 than in 1979.”

The Organization for Economic Cooperation and Development found that the United States has the fourth overall worst income inequality of developed countries in the world. Only Turkey, Mexico and Chile have worse income inequality. 

Wage stagnation

But as the rich keep getting richer, the middle class is shrinking and the poor are getting poorer.

According to the Economic Policy Institute, in 1965, the average CEO earned 24 times what the average worker made, and by 2006, the average CEO earned 262 times the pay of the average worker.

Also, the Bureau of Labor Statistics found that union membership has fallen to just 12 percent of workers, which is one of the lowest rates of all developed countries according to the World Economic Forum. In 1983, union membership in America was 20 percent. In 1954 it was almost 30 percent.

By studying data from the Bureau of Labor Statistics, Les Leopold, the author of the book “The Looting of America,” found that wages for the average worker in the United States have stagnated and, at times, even fallen over the past several decades while, at the same time, productivity has risen.

Leopold concluded: “By 2007, real wages (in today’s dollars) had slid from their peak of $746 per week in 1973 to $612 per week — an 18 percent drop. Had wages increased along with productivity, the current average real wage for nonsupervisory workers would be $1,171 per week-$60,892 per year instead of today’s average of $31,824.”

So, for the past several decades, the lower and middle class have been getting paid about the same, and at time even less, for more work, while the upper-management’s compensation has skyrocketed.

The U.S. Census Bureau reports that the median household income in America is $50,221.

But almost half of the members in Congress count themselves as among the rich in this country. According to the Center for Responsive Politics, the median income for a member of Congress is $911,510, and 261 members are millionaires. Is it any wonder why many of the the policies coming from Washington the past few decades have favored the rich?

Poverty and homelessness

Meanwhile, more Americans are now on food stamps than any other time in our nation’s history, some 43 million people or more than 14 percent of the population.

And according to the Census Bureau, a record number of Americans are now living in poverty: 46.2 million people, over 15 percent of the population, which is the highest number the bureau has found since it began studying poverty rates 52 years ago.

A new study conducted by the Foundation for Child Development also found that child poverty has reached its highest level in 20 years, with nearly 22 percent of children now living in poverty in the United States.

The report found that 15.6 million children are estimated to be living in poverty, and that as many as 500,000 children are homeless.

The most recent Annual Homeless Assessment Report to Congress found that, across the country, approximately 650,000 people are homeless, and approximately 1 million people live in homeless shelters.

Tax aversion

Well, the rich may be getting richer, but at least they pay their fair share in taxes, right? Not hardly.

The top tax bracket in this country (those making over $379,150) is supposed to be 35 percent. Even though this tax rate is one of the lowest in the history of our country, the super-rich don’t actually pay anywhere near that.

Billionaire Warren Buffett wrote a now-famous piece for the New York Times this summer showing that he actually only paid 17.4 percent in taxes in 2010, far below the 36 percent his far less wealthy employees paid.

And Buffett’s experience is about average. According to the IRS, the top 1 percent now has an average tax rate of about 17 percent. In 1995, the average tax rate for the mega-rich was about 30 percent. 

Why do the rich pay so little? That’s because most of their income (over 80 percent according to the IRS) comes from long-term capital gains, dividends and carried interest, all of which are taxed at a maximum rate of 15 percent.

So, while the rich may pay the majority of the taxes in this country, they are not paying their fair share. Much of the same can be said for corporations.

The corporate tax rate for the largest corporations in the United States is 35 percent. It’s one of the highest corporate tax rates in the world — or it would be, if American corporations actually paid their taxes.

With the clever use of subsidies, tax benefits, foreign subsidiaries and overseas tax havens the effective corporate tax rate in 2008 was just 5.3 percent according to a report by Forbes Magazine.

In 2009, General Electric raked in over $10 billion in profits but paid exactly zero in taxes. Bank of America not only paid zero in taxes but actually received a tax benefit of $1 billion.

And these corporations are not alone. Boeing, Citigroup, Exxon-Mobil, and Wells Fargo also paid no federal income taxes, to name just a few companies.

A study by the Government Accountability Office found that two out of every three American corporations paid no federal income taxes from 1998 to 2005.

So, not only are corporations not paying their fair share, but some are simply paying no share at all.

Something is seriously wrong here, folks. Every statistic shows that over the past several decades, the gap between the rich and poor is widening, the middle class is shrinking and the American Dream is fading.

The great Hunter S. Thompson often used to write about what he referred to as “The Grim Slide” — the concept that the American ideals we once held so high were slipping away, becoming awash in a country bought and sold to the highest bidder. But what Thompson feared so many years ago has only exacerbated.

However, I still think there’s light at the end of the tunnel, and next week, in my final installment of this series, I will explore what, if anything, can be done to reverse the slide.

W. Paul Smith
Opinions Editor

Occupy Wall Street Series:  Part 1   Part 2   Part 3   Part 4   Part 5

Cartoon courtesy of Andy Marlette/amarlette@pnj.com

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How Washington does the bidding of Wall Street

Everybody knows the worst kept secret in Washington is that many, if not most, politicians work more at the behest of the interests of Wall Street than the interests of the American people.

It’s not just hyperbole. It’s not a conspiracy. It’s simply business as usual.

This is the third installment of my series on the Occupy Wall Street movement, the protest movement that has grown around the country and the world expressing dissatisfaction with the status quo and the way Wall Street operates.

I promised last time to explore the collusion between Washington and Wall Street and to try to explain how politicians paved the way for the financial crisis with their mantra of deregulation.

Wall Street lobbying

According to Wall Street Watch, a non-partisan consumer advocacy group, the financial services industry spent over $5 billion to peddle its lobbying influence in Washington from 1998 to 2008, 55 percent of which went to Republicans and 45 percent went to Democrats.

In 2007, the year before the financial crisis, there were approximately 3,000 officially-registered Wall Street lobbyists who influence policy makers in Washington — that’s five lobbyists for every one member of Congress.

Wall Street is also the lead contributor to presidential campaigns. In 2008, Wall Street firms made up the top contribution slots of both the Obama and McCain campaigns.

Goldman Sachs was the largest private contributor to Obama’s campaign and the second largest contributor overall, while JPMorgan Chase, Citigroup, Morgan Stanley and UBS AG all made Obama’s top 20.

The top contributor to the McCain campaign was Merrill Lynch with JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs taking the next top slots, and Bank of America, Wachovia, UBS AG and Lehman Brothers all made the top 20.

Through the revolving door

There’s also an endless revolving door between Wall Street and Washington.

President Clinton’s Treasury Secretary Robert Rubin had once worked at Goldman Sachs and after leaving office, went to work for Citigroup, even serving as the chairman of the company from 2007 to 2009.

Larry Summers, who succeeded Rubin as Treasury Secretary, later worked as managing director for the hedge fund D. E. Shaw and, in 2008, was paid $2.7 million in speaking fees by Wall Street firms such as JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch.

Henry Paulson, who served as Treasury Secretary under President George W. Bush, had worked at Goldman Sachs since 1974 before taking office, even serving as the company’s chairman and CEO from 1998 to 2006.

Current Treasury Secretary Timothy Geithner worked as the head of the New York Federal Reserve before taking office. And who took Geithner’s place at the New York Fed? That would be William C. Dudley, the chief economist for Goldman Sachs from 1984 to 2007.

Geithner’s current Chief of Staff is Mark Patterson, who before taking office worked as a lobbyist for Goldman Sachs.

How about Gary Gensler, the current chairman of the Commodity Futures Trading Commission, the federal regulatory agency tasked with regulating futures and options markets?

Gensler spent 18 years of his life working for — yep, you guessed it — Goldman Sachs.

Is it really any wonder why these Wall Street firms got the largest government bailout in history following the financial crisis of 2008? And the Obama administration has surrounded itself with the very same architects of said bail-out.

Now let’s look at some of the ways Washington has done the bidding of Wall Street.

Repeal of Glass-Steagall

In 1998, the banking giant Citicorp merged with the insurance giant Travelers Group to create Citigroup. At the time, this merger was illegal under the Glass-Steagall Act of 1933.

Congress passed the Glass-Steagall Act after the Great Depression, in part, to create firewalls between commercial banks, investment banks and insurance companies.

Part of the idea of this act was to prevent conflicts of interest that could arise from lending institutions using their customers’ credit to make risky investments. It also hoped to prevent the consolidation of these industries into megalithic investment companies.

But in 1999 Congress passed the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, which repealed key provisions of the Glass-Steagall Act.

Congress drafted and passed this legislation, in part, to retroactively make the Citigroup merger a legal consolidation. It also paved the way for endless Wall Street mergers and acquisitions to come.

In the wake of the financial crisis of 2008, many have cited the repeal of the Glass-Steagall Act as the catalyst that created the legal framework for investment banks becoming “too big to fail.”

Leverage ratios

In 1975, the Securities and Exchange Commission, the federal regulatory agency tasked with enforcing securities laws, instituted what was known as the “net capital rule,” a financial regulation that, among other things, dictated the leverage ratio of lending institutions.

Leverage is the ratio of a bank’s debt or assets to a bank’s equity, basically meaning how much cash they keep on hand in accordance with how much cash they borrow.

The SEC used to cap the leverage ratio at 12-1. But in 2004, the SEC succumbed to pressure from the financial services industry’s campaign, led by Goldman Sachs, to authorize investment banks to develop their own capital requirements.

In the run-up to the financial crisis, some of the largest investment banks were operating with a leverage ratio of 40-1, meaning for every $40 in assets, there would only be $1 to cover potential losses.

The Financial Crisis Inquiry Commission’s report noted that “less than a 3 percent drop in asset values could wipe out a firm.”

The FCIC report characterized the situation as such using the investment bank Bear Stearns as an example: “Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day.”

It was another egregious example of government regulators failing to do their job and, instead, surrendering to pressure from the financial services industry and their lobbyists.

Deregulating derivatives

As I explained in the last installment, it was Wall Street’s investment in the derivatives market that perhaps contributed to the financial crisis more than anything else.

Also recall that in 2002, Warren Buffett referred to derivatives as “financial weapons of mass destruction,” and as “time bombs” that could be “potentially lethal.”

But even before Buffett’s dire warning,  in 1998, Brooksley Born, who was the then-head of the Commodity Futures Trading Commission, pleaded with Congress to allow the CFTC to regulate the derivatives market.

Born warned Congress about the risk derivatives “might pose to the U.S. economy and to financial stability around the world.”

But Born was rebuffed in her efforts by none other than Alan Greenspan (who has been wrong about nearly every prediction he ever made), then-chairman of the Federal Reserve, who told Congress, “the degree of supervision of regulation of the over-the-counter derivatives market is quite adequate to maintain a degree of stability in the system.”

Greenspan was joined by then-Treasury Secretary Robert Rubin to applaud the stability of derivatives and fight against regulation. Of course, they would prove to be disastrously wrong and Born would prove to be presciently correct.

However, Congress didn’t listen to Born, and in 2000, it passed the Commodities Futures Modernization Act, which ensured the deregulated of the derivatives market, and laid the groundwork for the creation of the complex, unregulated financial derivatives instruments such as collateralized debt obligations and credit default swaps that were so instrumental in the financial collapse of 2008.

When it comes to Wall Street, Washington should act as watchdogs with government oversight to protect the American people against these financial schemes and machinations instead of kowtowing to its corporate sponsors.

It may be business as usual, but this business model has become dangerously unsustainable. And this is part of what the Occupy Wall Street movement is about, to begin to untangle the stranglehold Wall Street has on our democratic process and return Washington to the people.

W. Paul Smith
Opinions Editor

Occupy Wall Street Series:  Part 1   Part 2   Part 3   Part 4   Part 5


Cartoon courtesy of Andy Marlette/amarlette@pnj.com

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