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October 20, 2008 |
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Wealth is like manure, the great philosopher of science Sir Francis Bacon noted four long centuries ago. It only does good when you spread it around. A week ago Sunday, in his now famous encounter with “Joe the plumber” Wurzelbacher, Barack Obama channeled his inner Sir Francis. The channeling started when Joe, at a Toledo campaign stop, complained personally to Obama about his plan to up taxes on incomes over $250,000. “I think that when you spread the wealth around,” Senator Obama politely responded, “it’s good for everybody.” Senator John McCain’s campaign quickly — and vehemently — disagreed and turned Joe the plumber into a national celebrity. In this week’s Too Much, we look back at the first White House hopeful who pulled a “Joe the plumber” number against a spread-the-wealth rival. Also this week: We dive into the deepening hedge fund collapse and offer a cautionary tale about what happens when we let wealth stop spreading. |
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In Germany, meanwhile, government officials are taking quite a tougher line on pay for bailed-out bankers. German Chancellor Angela Merkel last Wednesday said bailed-out banks will face “very concrete” limits on executive pay. Her finance minister, Peer Steinbrueck, had two days earlier called for a strict executive pay limit set at 500,000 euros — $683,100 — per year, with no added bonuses, dividends, or severance pay. Noted Steinbrueck last week in a parliamentary debate: “When a fire's burning in the global financial markets, it has to be put out, even if it's a case of arson. But then the arsonists have to be held responsible and spreading the flames must be outlawed.” What has Angela Merkel, the leader of Germany’s top conservative party, so eager to rein in executive pay excess? Merkel may just be trying to catch up with a outraged German public. One sign of that outrage: the demonstrations last week at the Munich opening of Germany’s first “Millionaire Fair.” The four-day shopping extravaganza offered luxuries that ranged from cigars with gold-leaf wrapping to a 550-diamond tablecloth. But the curious who forked over $52 for an entry ticket had to make their way past protestors from the Munich Sozialforum, a local economic justice coalition. The fair, protest leader Walter Listl told reporters, represents “an obscene display of perverse wealth.” Globally, he noted, a child is dying every five seconds from malnutrition or easily treatable disease — at the same time the fair is “showcasing mobile phones studded with precious gems.” Summed up the protest organizer: “We can’t just sit back and ignore that.” In Dallas last week, no protestors showed up for the unveiling of the annual Neiman Marcus Christmas catalog at Texas Stadium, the home of the famed Dallas Cowboys pro football franchise. The luxury catalog, a seasonal fixture since 1926, this year features a personal three-hole golf course that all-time champ Jack Nicklaus will custom design for whatever acreage you happen to have available. The price: $1 million. For $10 million, a Neiman Marcus shopper can have a dozen thoroughbreds bought and stabled in Kentucky Bluegrass Country. The 155-page catalog, notes Neiman Marcus CEO Burt Tansky, went to press before Wall Street started stumbling in September . . . If you haven’t yet placed an order for Aston-Martin’s new One-77 — the “most expensive road car in the world” — you’re probably out of luck. Aston-Martin is only producing 77 of the $2.1 million motorcars, and over 100 people, the company has announced, have so far signed up. The new Aston-Martin will reportedly cruise along at 200 miles per hour. Deep-pockets who’d rather cruise in a more environmentally sound fashion will likely opt instead for the world’s first “hybrid” luxury yacht, a 75-foot three-decker from Ferretti, an Italian luxury shipyard. Ocean-lovers who pick up one of $4 million yachts, says Ferretti, will “enjoy the exclusive, unique experience of entering a bay, lying at anchor for several hours with full on-board functionality, then leaving, secure in the knowledge that the entire operation has been carried out in total silence and with zero emissions.” |
Quote of the Week “The Gilded Age is ending. Americans will no longer tolerate an economy in which only the few boats rise while many boats are sunk in oceans of corruption, scandal, and economic injustice.”
New Wisdom Thom Hartmann, Roll Back the Reagan Tax Cuts, Air America, October 14, 2008. The case for restoring the top tax rate on America's top tax bracket, currently 35 percent, back to the 70 percent level in effect before the Reagan White House tax cuts. Dan Rodricks, It's a 30-year sneak attack in America's class war, Baltimore Sun, October 19, 2008. A veteran columnist urges Americans to “look at the numbers and follow the money.”
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Another Reason Wealth Needs Spreading Jack Nash, a key pioneer of the global hedge fund industry, passed away this past summer. Much of the rest of the industry may soon join him six feet under. The industry, one insider told the Financial Times last week, has embarked on “a sort of death march.” Hedge funds now appear to be the next chunk of high finance headed for meltdown. They may actually do their melting before most Americans even know what they are. A quick primer: Hedge funds have been operating in the financial world’s immensely lucrative shadows ever since Jack Nash co-founded Odyssey Partners, the granddaddy of the modern hedge fund, in 1982, just one year after Ronald Reagan slashed tax rates on America’s highest incomes. The new tax rates — the lowest the rich had seen since the early 1930s — meant that wealthy Americans suddenly had plenty of new cash sloshing in their pockets. Nash promised these affluents high annual returns if they gave him their money to invest — and then delivered. Over the next 14 years, Odyssey delighted investors with a 24 percent average annual return. Nash started up Odyssey with a mere $50 million in capital. By 1997, his fund was managing $3.3 billion. The hedge fund gold rush had begun. The number of funds would ultimately soar to about 10,000, with close to $2 trillion, as of last year, in total assets. Over half these funds sat in the United States. All these funds operated with virtually no regulatory oversight — because they accepted funds only from wealthy investors, not the general public. They then “leveraged” this capital, borrowing billions more that they invested exotically, often “hedging” their bets by making investments set up to pay off when stocks and other assets lost value. No one benefited more from all this hedging legerdemain than hedge fund managers themselves. They became the planet's highest-paid power-suits. In 2002, 25 hedge fund managers pulled in over $30 million each. In 2006, reports the trade journal Alpha, the top 25 hedge fund managers each made at least $230 million. Last year, 43 of them walked off with at least that many millions. But now the hedge fund bubble is bursting. High-leverage strategies don't work when banks aren't lending. And new regulations have put a crimp on “short selling,” the betting on assets to fall in value. The result? Last month ended up as the hedge fund industry’s second-worst year on record. So far this year, the industry’s top index has dropped 13.9 percent. Some analysts are predicting that as many as half the world’s hedge funds may shut down before the current crisis ends. That has wealthy investors spooked. In September alone, investors yanked $43 billion out of U.S. hedge funds, shifting their cash to investments less risky. Hedge fund managers have become so alarmed they’re offering to slash their standard — and exorbitantly high — fees if investors agree not to ask the funds to redeem their investments. Taking a little pleasure from all this angst among the hedge fund set? Don’t. Hedge funds may be crashing, but the prime victims won’t be either hedge fund managers or wealthy investors. These hedgers and hedgees will all walk away still worth mega millions. Average Americans won’t be so lucky. How can the hedge fund collapse be hurting average Americans who’ve never invested a nickel in a hedge fund? Here’s how. With nervous wealthy investors demanding their money back, hedge funds are having to sell off vast quantities of the stock they own to raise cash. This stock sell-off is contributing mightily to the stock market’s current plunge, and millions of about-to-retire average Americans are feeling that plunge intensely — in their 401(k) retirement plans. What about those average Americans still fortunate enough to have a traditional pension plan? They’re feeling the hedge fund implosion, too. Pension funds have become enthusiastic hedge fund investors. A year ago, public and private sector pension funds had $76.3 billion invested in the industry, well over double their hedge fund investment in 2005. The industry’s growing losses are putting pressure on these funds to downgrade benefits. Why have pension funds put so much money in investments as risky as hedge funds? Many pension fund managers feel they don’t have much choice. The revenues they used to count on — the annual contributions from employers — have been shrinking. In the public sector, for instance, budget-squeezed state and local governments haven’t been contributing into pension funds as much as they should to meet their actuarial obligations. With employer contributions down, public employee pension fund managers have had to seek out nontraditional investments — like hedge funds — that promise high returns. One more question: Why have state and local governments been shortchanging their pension funds? One prime answer: They’re not collecting the revenues they should from wealthy taxpayers. Governments in the United States, at all levels, have spent the last 30 years cutting taxes on the rich. We’ve come, in effect, full circle. Tax rate cuts on America’s highest incomes created the hedge fund bubble. Those same tax cuts are now going to make average Americans the biggest victims of that bubble’s bursting. |
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Joe the Plumber, Meet Alf's Butcher Marjorie Kornhauser, Remembering the 'Forgotten Man' (and Woman): Hidden Taxes and the 1936 Election, Boston College Tax Policy Workshop Series, October 16, 2008. The 2008 Presidential election may now be destined to go down in history as the campaign of the plumber. Seventy-two years ago, in the race between Franklin D. Roosevelt and Alf Landon, the starring role went to butchers.
The challenge for GOP campaign strategists then and now: getting average Americans as angry about that spending and those taxes as they were and are. The solution these strategists came up with 1936: a full-throttled, multimedia campaign against a menace they tagged “hidden taxes.” Kansas Governor Landon launched the “hidden taxes” effort in a widely publicized August 1936 speech. Americans were paying, his argument went, “hidden taxes” on the staples of life, everything from food and clothes to tickets for movies and baseball games. “Soaking the rich,” Landon charged, could never raise all the money the New Deal was spending so wastefully. That’s why, he claimed, the “hidden tax” burden on average Americans had actually increased since FDR’s election. GOP operatives, notes Arizona State University historian Marjorie Kornhauser in this fascinating new monograph, gave professional PR and ad men the responsibility for carrying this “hidden taxes” message to every corner of the country. And they did so admirably, innovatively replacing “old-style oratory” with “humanized” advertising. That humanization came via all the most modern communications tools of 1930s America: film, radio talks, even cartoons. But the most successful stratagem in the “hidden taxes” campaign would be distinctly low-tech. The GOP campaign's most brilliant idea revolved around blackboards and butchers. The Landon forces had special “hidden taxes” campaign blackboards stuck in butcher shops all across the United States. Each blackboard listed the prices of various cuts of meat, the taxes on those cuts, and the total prices. Each blackboard also bore a slogan across the top. “Don’t blame your butcher,” the slogan read, “meat is low, taxes are high.” So did this brilliant butcher pitch work? Did American housewives — the prime target of the hidden taxes campaign — buy Landon’s assault on FDR’s “pretense that only the rich will pay” the New Deal bill? Not exactly. FDR swept to a landslide election victory. Many Americans, despite the butcher blitz, came to see “hidden taxes” as a misleading distraction. These taxes had indeed increased during Roosevelt’s first term — largely because prohibition had ended on Roosevelt’s watch and the government was now collecting taxes on liquor. Landon had no intention of ending that taxation. But in a broader sense, historian Kornhauser notes, the “hidden taxes” campaign has had a powerful and lasting impact on American politics. “Modern anti-tax campaigns, using populist rhetoric and exploiting modern media, are remarkably similar,” she concludes, “to those used in the 1936 campaign.” The butcher has become the plumber. The assault on progressive taxation continues. |
Stat of the Week Executives and staff at Wall Street’s top six banks will be receiving over $70 billion in pay deals for their labors so far in 2008, a review of their latest financial statements reveals. Citigroup, the financial colossus that is collecting $25 billion in taxpayer bailout dollars, has accrued $25.9 billion for salaries and bonus over the year’s first nine months, 4 percent more than the bank shelled out for compensation for the comparable period last year.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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U.S. taxpayers, Treasury Secretary Henry Paulson pronounced last week, will shortly own major chunks of America’s nine biggest banks. What will this ownership mean for executive pay rewards at the nine banking giants? Not much. Goldman Sachs CEO Lloyd Blankfein took home $70.3 million last year. He “could still make tens of millions of dollars” next year, 
Back then, as today, the Republican candidate was facing a popular Democrat not at all shy about taxing the rich. Back then, as today, the Republican candidate wanted taxes on the rich — and overall federal spending — cut back substantially.