Reclaim Democracy!

Too Big to Fail is Too Big to Prosecute? Increasingly, Legislators Think Not

by

the death star was also too big to fail

By Matt Taibbi
Originally published in Rolling Stone, April 3, 2013

First, a quick housekeeping note: About a month ago, I got a call out of the blue from Vermont Senator Bernie Sanders, who’s one of my favorite people and something of a political hero of mine. Bernie helped me many years ago, back when he was still a congressman, by letting me tag along for weeks for a story about how the House works that ultimately was called “Four Amendments and a Funeral” – an experience that taught me an enormous amount about how our government operates, and also in a weird way left me less cynical, as it showed there were still plenty of avenues where a determined individual could work the system.

In any case, Bernie a month or so ago asked me to join him in Vermont for a pair of town meetings on Wall Street issues. It’s a tremendous honor and both events will be happening next Friday, one at the University of Vermont in the afternoon, the second in downtown Burlington in the evening. Entitled “Taking on Wall Street and the Big Banks,” Bernie and I will join in a public discussion about a lot of things, including the power of the 사설 토토사이트 financial sector and what can be done about it. It’s a very cool thing and I’m really looking forward to it – if you live in the area, please come by.

I mention this as a backdrop to some news I didn’t get a chance to post last week. Since part of the Sanders discussion is going to be about “What we can do about it,” it’s worth noting that at least as far as the Too Big to Fail issue is concerned, there’s been a bit of an interesting development of late – some momentum is building in Washington toward reforming the banks.

Start with the most recent news: last week, Sanders announced plans to introduce an interesting new bill, one that’s a direct response to comments made recently by the likes of Eric Holder about the difficulty in prosecuting big banks. Holder said some institutions have grown so large that prosecuting its executives may have a “negative impact on the national economy, perhaps even the world economy.”

This was an extraordinary statement to come out of the mouth of the Attorney General – essentially announcing in advance a disinclination to prosecute a whole class of people. It’s Minority Report in reverse – pre-noncrime. What was even more bizarre was that this wasn’t an inadvertent comment or a slip of the tongue, it was absolutely consistent with comments made by other DOJ officials late last year after the slap-on-the-wrist HSBC (money-laundering) and UBS (rate-fixing) settlements. Worse, after Holder and other prosecutorial pushovers like Lanny Breuer made these comments, there was utter silence from the White House, making it crystal clear that this is a coordinated policy.

What the Sanders bill would do is force Holder and the White House to actually spell out the policy. It would give Treasury Secretary Jack Lew 90 days to compile a list of all the financial institutions that they think are too big to prosecute. The list would include “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.”

But this isn’t an isolated thing. Bernie’s bill comes on the heels of a series of developments that, to me anyway, signal a shift in thinking on this issue on the Hill.

Back on February 20th, Bloomberg published a piece called “Why Should Taxpayers Give Big Banks $83 Billion a Year?” The piece cited new research (which backed up a previous study by Dean Baker and Travis McArthur a the Center for Economic and Policy Research) showing that the Too-Big-to-Fail status of certain big banks provides a massive silent subsidy. Because lenders know the government will never let companies like Chase or Goldman fail, they charge them less to borrow money. From the Bloomberg piece:

Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers – Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz – put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

Apply that 0.8 percent advantage to America’s ten biggest banks, and you’re talking about an annual subsidy of about $83 billion. As the Bloomberg writers noted, that’s tantamount “to the government giving the banks about 3 cents of every tax dollar collected.”

Fast forward a few weeks. The Senate is in full budget-debate fury, with members pulling all-nighters and people on the Hill generally losing their minds. In the middle of all of this, Republican Senator David Vitter and Democrat Sherrod Brown – the same Senators who have been planning legislation to cap the size of banks, a revived version of the failed Brown-Kaufman amendment from the Dodd-Frank bill – offered a non-binding amendment to the budget that would direct the government to end the subsidies and advantages banks derive from the perception that they are Too Big to Fail.

The key word in this story is “non-binding,” but here’s the cool thing: the amendment passed unanimously. By a vote of 99-0, the entire Senate agreed, at least in principle, that the banks should not be getting that extra $83 billion a year.

Right after that, Oregon’s Jeff Merkley proposed a similar amendment, calling for the creation of a deficit-neutral reserve fund that would facilitate the prosecution of “Too Big to Jail” companies. The non-binding amendment, which basically piggybacked on the sentiment of the Vitter-Brown resolution, passed in a voice vote with, I understand, no opposition.

These symbolic votes came in the wake of other significant defections on this issue. For instance, eyebrows raised all over Wall Street toward the end of last year when Bill Dudley, the chief of the New York Fed, gave a speech sharply rebuking the TBTF banks.

The New York Fed, remember, helped create the TBTF problem, through the policies of its former chief Tim Geithner. The bailouts and Fed-brokered mergers (like the Bear-Chase deal, the Wells Fargo-Wachovia deal, etc.) that Geithner quarterbacked led to the creation of many of the super-sized companies we’re talking about now as problem firms.

Yet Dudley in this speech came out, if not swinging exactly, at least not with his arms wrapped in Geithner-esque fashion all the way around those firms:

I am going to focus my remarks today on what is popularly known as the “too big to fail” (TBTF) problem. In particular, should society tolerate a financial system in which certain financial institutions are deemed to be too big to fail? And, if not, then what should we do about it?

The answer to the first question is clearly “no.”

Dudley went on to lay out more specific problems. Most notably, the Fed had asked all of the TBTF companies to draw up “living wills,” i.e. plans for how they would unwind in the event of a bankruptcy or some other disaster. It seems the Fed was shocked when those “living wills” started trickling in – reading between the lines of Dudley’s speech, one guesses that the banks basically scribbled half-assed plans on napkins and dropped them through the Fed’s mail slot.

“This initial exercise,” Dudley announced, “has confirmed that we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society.”

All of this is part of an ongoing narrative in which more and more people in positions of power are being shocked to action by the apparent incorrigibility of the major banks. The Hey, blow me, fellas attitude that guys like Jamie Dimon keep bringing to the Hill and/or to regulatory meetings is starting to lose its charm, apparently.

On the Fed side, Dudley’s speech was just the latest in a succession of forceful statements by regional Fed chiefs about the TBTF problem, with the most well-publicized and articulate arguments coming from the Dallas Fed and its outspoken president, Richard Fisher.

On the Hill, the revival of the Brown-Kaufman amendment through the Brown-Vitter efforts was just one sign of a change in the weather. A January PBS Frontline special on Wall Street and the lack of prosecutions of major banks apparently infuriated members on both sides of the aisle. Particularly infuriating, apparently, were remarks by Lanny Breuer about the government being reluctant to prosecute for fear of upsetting the economy. Days after the program aired, Sherrod Brown and Iowa Republican Chuck Grassley sent a letter to Eric Holder demanding an explanation.

That set the stage for the non-binding resolutions in March, which in turn is followed by this Sanders bill, which is floating around in the Senate atmosphere alongside the Brown-Vitter concept.

A lot of people are skeptical that any of this is meaningful, but there was similar skepticism about the effort to secure a public audit of the Federal Reserve, which ultimately did take place thanks to a bipartisan coalition built by Sanders and Ron Paul. Although many Paul supporters were disappointed with the narrowed scope of the final legislation – the audit was one-time-only and only covered a brief period – it still did happen and it was a major victory, considering that members of Congress have been trying to put a leash on the Fed for years without much success (famed Texas congressman Wright Patman spent much of a long career trying in vain to force open the Fed’s kimono).

All of this, plus the recent hearings on Chase and the London Whale episode led by Carl Levin and John McCain, are just hints that more and more elected officials are a) genuinely freaked out by the potential disaster these companies could cause, and b) catching on to the fact that the public increasingly favors breaking these companies up. According to a recent Rasmussen poll, for instance, 50 percent of Americans favor breaking up Too Big to Fail banks (crucially, only 23 percent oppose; 27 percent were undecided). A HuffPo/YouGov poll from a few days ago showed similar sentiment.

What does that mean? At minimum, it means politicians will see an angle in talking about breaking up the big banks. The math on how that leads to real action always involves figuring out just how much the fear of offending a major fundraising and lobbying power will push elected officials off the track of following public sentiment. It takes more than a 50-23 poll to knock the U.S. Congress off the Wall Street teat.

It’s a testament to the silent power of the 1 percent lobby that it’s taken even this long for even the faint possibility of bank breakups to pop up on the horizon. But if you squint, you can see it now – just barely, but it’s there.

Death Star image courtesy of jeffisageek

Corporate Welfare Grows to $154 Billion even in Midst of Major Government Cuts

by

The Embodiment of Corporate Welfare Himself - Mr. Moneybags

Editor’s Note: Even as the federal government executes major cutbacks, it’s giving huge subsidies in the form of tax breaks to industry, a fact legislators rarely acknowledge. The Boston Globe recently published a thorough and eye-popping report detailing the nature and extent of these breaks. We think it’s a must-read. 

By Pete Marovich
First published in the Boston Globe

WASHINGTON — Lobbying for special tax treatment produced a spectacular return for Whirlpool Corp., courtesy of Congress and those who pay the bills, the American taxpayers.

By investing just $1.8 million over two years in payments for Washington lobbyists, Whirlpool secured the renewal of lucrative energy tax credits for making high-efficiency appliances that it estimates will be worth a combined $120 million for 2012 and 2013. Such breaks have helped the company keep its total tax expenses below zero in recent years.

The return on that lobbying investment: about 6,700 percent.

These are the sort of returns that have attracted growing swarms of corporate tax lobbyists to the Capitol over the last decade — the sorts of payoffs typically reserved for gamblers and gold miners. Even as Congress says it is digging for every penny of savings, lobbyists are anything but sequestered; they are ratcheting up their efforts to protect and even increase their clients’ tax breaks.

‘It’s not about tax policy, it’s about benefiting the political class and the well-connected and the well-heeled in this country,’ Said Senator Tom Coburn of Oklahoma.

The Senate approved tax benefits for Whirlpool and a host of other corporations early on New Year’s Day, a couple of hours after the ball dropped over Times Square and champagne corks began popping. A smorgasbord of 43 business and energy tax breaks, collectively worth $67 billion this year, was packed into the emergency tax legislation that avoided the so-called “fiscal cliff.’’

In the days that followed, the tax handouts for business were barely mentioned as President Obama and members of Congress hailed the broader effects of the dramatic legislation, which prevented income tax increases on the middle class and raised top marginal tax rates for the wealthy.

Yet the generous breaks awarded to narrow sectors of the American business community are just as symptomatic of Washington dysfunction as the serial budget crises that have gripped the capital since 2011. Leaders of both parties have repeatedly declared their intention to make the corporate income tax code fairer by lowering rates and ending special breaks, while intense lobbying, ideological divides, and unending political fights on Capitol Hill block most progress.

The result: sweeping bipartisan tax reform of the sort negotiated in 1986 by Republican President Ronald Reagan and Democratic House Speaker Thomas P. “Tip’’ O’Neill Jr. is rated a long shot once again this year. In fact, the most visible signs of cross-party cooperation on corporate taxes are among regional groups of lawmakers who team up, out of parochial interest, to maintain special treatment for businesses in their home states.

In the absence of meaningful change, corporations like Whirlpool continue to pursue the exponential returns available from tax lobbying. The number of companies disclosing lobbying activity on tax issues rose 56 percent to 1,868 in 2012, up from 1,200 in 1998, according to data collected by the nonpartisan Center for Responsive Politics.

According to Biti Codes, Whirlpool had plenty of company on New Year’s, including multinational corporations with offshore investment earnings, Hollywood companies that shoot films in the United States, railroads that invest in track maintenance, sellers of energy produced by windmills and solar panels, and producers of electric motorcycles.

Their special treatment is a fraction of a broader constellation of what the federal Joint Committee on Taxation estimates will be $154 billion in special corporate tax breaks in 2013, contained in 135 individual provisions of the tax code.

Watchdogs and tax analysts denounce these favors as a hidden form of spending that amounts to corporate welfare. In essence, these “tax expenditures’’ are no different than mailing subsidy checks directly to companies to pad their bottom lines.

Congress reduced the number of tax breaks in 1986 as part of the broader reform package. The breaks steadily crept back, particularly in the last decade, as lawmakers heeded requests from advocacy groups and business lobbyists to lower taxes as a way of subsidizing particular industries.

“There’s a justification and rationale for virtually every one of these. They have their intellectual advocates, and they have their political advocates, and that’s how they get in the law,’’ said Lawrence F. O’Brien III, an influential lobbyist and a top campaign fund-raiser for Senate Democrats who represents financial industry clients and other interests.

Whirlpool has a powerful Michigan delegation behind it, including key committee chairmen of tax-writing and energy committees in the House. In response to questions from the Globe, the company said its special tax breaks led it to save “hundreds’’ of American jobs from the effects of the recession.

“Energy tax credits required that Whirlpool Corporation make significant investments in tooling and manufacturing to build highly energy-efficient products,’’ Jeff Noel, Whirlpool’s corporate vice president of communication, said in an e-mail. “If you look at our 101-year history, we have definitely paid our fair share of US federal income taxes.’’

But its federal income taxes have been minimal in recent years, thanks in large part to tax credits and deferrals, according to public filings. Its total income taxes — including foreign, federal, and state — were negative-$436 million in 2011, negative-$64 million in 2010, and negative-$61 million in 2009. It carries forward federal credits as “deferred tax assets’’ that it can use to lower future tax bills.

The renewed tax breaks granted by Congress in January, which were retroactive to the beginning of 2012, will not be recorded until Whirlpool pays its 2013 taxes. Because of the absence of that tax credit, and because of greater earnings and changes in foreign taxes, the company estimated its total 2012 tax expenses will be $133 million.

Whirlpool did not provide a specific number of jobs retained. The benefits were not sufficient to protect Whirlpool’s employees at a refrigerator manufacturing plant in Arkansas. Last summer, the company laid off more than 800 hourly workers, closed the factory, and moved manufacturing of those refrigerators to Mexico. It was part of an overall reduction of 5,000 in its workforce announced in 2011 in North America and Europe.

Congress “made a big mistake,’’ by authorizing hundreds of millions of dollars in tax credits for Whirlpool based on arguments that the company would retain domestic jobs, said Howard Carruth, a machine maintenance worker and union official who began work at the plant in 1969 and lost his job last year when the plant closed.

“They really hurt the economy around here,’’ he said. “I blame the corporate greed.’’

The closing also transformed Carruth from loyal to embittered customer: “We bought Whirlpool for our own house, for family and friends. If one of those goes out in my house right now, it will not be replaced by Whirlpool.’’

Many companies would probably pay much higher taxes — including Whirlpool — if Congress eliminated special breaks and lowered the income tax rate to 25 percent from the current 35 percent.

An extra benefit of winning government subsidies through the tax code: Recipients remain immune from spending cuts like the automatic “sequester’’ imposed on March 1.

Called the “tax extenders,’’ 43 credits, deferrals, and exceptions for general business and energy firms were lumped into the fiscal cliff legislation. The returns on lobbying investments companies realized when the Senate passed its fiscal cliff bill helps explain why Washington tax lobbyists remain in demand:

  • Multinational companies and banks, including General Electric, Citigroup, and Ford Motor Co., with investment earnings from overseas accounts won tax breaks collectively worth $11 billion — a return on their two-year lobbying investment of at least 8,200 percent, according to a Globe analysis of lobbying reports.
  • Hollywood production companies received a $430 million tax benefit for filming within the United States. As a result, companies like Walt Disney Co., Viacom, Sony, and Time Warner — with the help of the Motion Picture Association of America, chaired by former Connecticut senator Christopher J. Dodd — realized a return on their lobbying investment of about 860 percent.
  • Railroads lobbied on a broad array of issues, a portion of which yielded $331 million for two years’ worth of track maintenance tax credits. Return on investment: at least 260 percent.
  • Even at the low end of the economic scale the returns can be large. Two West Coast companies that manufacture electric motorcycles — Brammo Inc. of Oregon, and Zero Motorcycle Inc. of California — reported combined lobbying expenditures of $200,000 in 2011 and 2012. They won tax subsidies payable to the consumers who buy their products worth an estimated $7 million. The electric motorcycle market stands to receive a return on that investment of up to 3,500 percent.

Like each of the industries that won special treatment in the Jan. 1 “extenders’’ corporate tax measure, the electric motorcycle lobby argued that tax breaks would protect or create jobs. Electric motorcycle manufacturers only employ hundreds of workers now, said Jay Friedland, Zero Motorcycles vice president, but could employ thousands in the future.

“There are definitely provisions in the extenders that people scratch their heads at, but if your goal is to build a replacement for the pure oil economy, this is the kind of industry you want to make an investment on,’’ he said.

Measuring the rewards for lobbying on individual tax provisions is by nature imprecise, especially for large corporations that weigh in on dozens of issues. Companies file blanket disclosure reports that do not break down their lobbying expenditures by individual issue.

Publicly traded companies like Whirlpool with narrower lobbying agendas, and who publish their annual tax credit benefits in shareholder disclosure reports, are easier to track.

In addition to seeking tax breaks, corporate lobbyists also seek to protect favorable elements that are already baked into US tax policy. Private equity firms, for instance, fight each year to defend the tax treatment of “carried interest’’ payments for investment managers. Those payments are treated as a capital gain by the Internal Revenue Service, and thus taxed at a much lower rate, 20 percent in 2013, than the top income-tax rate of 39.6 percent.

The best-known example of a millionaire benefiting from “carried interest’’ tax treatment was Mitt Romney, the 2012 Republican presidential nominee, who reduced his individual tax rate to below 15 percent by applying the provision to his extensive Bain Capital profits.

The publicity surrounding Romney’s tax returns fueled an onslaught by critics. The private equity industry’s trade group and the nation’s largest firms spent close to $28 million on lobbying in 2011 and 2012, according to public records. So far, they have won — a benefit that the Obama administration has estimated is worth at least $1 billion over two years. The return on investment for maintaining the status quo on the carried-interest tax rate over two years was at least 3,500 percent.

The returns show how cheap it is, relatively speaking, to buy political influence.

“It’s an end run around policy, and that makes it very efficient,’’ said Raquel Meyer Alexander, a professor at Washington and Lee University in Virginia who has examined the investment returns on lobbying. “Firms that sit on the sidelines are going to lose out. Everyone else has lawyered up, lobbied up.’’

Critics lament that fiscal combat between Republicans and Democrats is preventing serious reform of the business tax code.

“What we’re doing is running a Soviet-style, five-year industrial plan for those industries that are clever enough in their lobbying to ask all of us to subsidize their business profits,’’ said Edward D. Kleinbard, a former chief of staff at the Joint Committee on Taxation and now a law professor at the University of Southern California.

“These are perfect examples of Congress putting its thumb on the scale of the free market,’’ he said. “I’ll be damned if I know why I should be subsidizing Whirlpool.’’

Congress has the opportunity every two years to stop doling out a good portion of these favors. A peculiarity of many special tax breaks is that Congress places “sunset’’ provisions on them.

Some observers say passing temporary tax breaks gives lawmakers an ongoing source of campaign funds — from companies that are constantly trying to curry favor to get their tax credits renewed. Others say it’s because making these tax rates permanent would require a 10-year accounting method — a step that would show how much each provision is truly costing taxpayers.

Whatever the reason, Congress has made many of them quasi-permanent, by simply extending them again and again.

“It’s the same cowardice that Congress has on everything. They don’t want to be truthful about what they are doing,’’ said Senator Tom Coburn, an Oklahoma Republican and persistent critic of government waste and special deals in the tax code.

Coburn voted against the raft of “extenders’’ when they were previewed and approved by the Senate Finance Committee at a hearing in August 2012. He offered amendments to strip individual tax breaks out of the package — including the high-efficiency appliance tax credit for Whirlpool and GE — but they were shot down by the majority Democrats on the committee, led by chairman Max Baucus, of Montana.

“It’s not about tax policy, it’s about benefiting the political class and the well-connected and the well-heeled in this country,’’ Coburn said in an interview. “We’re benefiting the politicians because they get credit for it. And we are benefiting those who can afford to have greater access than somebody else.’’

Whirlpool pursues its Capitol Hill agenda from an office suite it shares on the seventh floor of a building on Pennsylvania Avenue that is loaded with similar lobbying shops and sits just a few blocks from the Capitol. Across the street, lines of tourists wait to view the original Declaration of Independence and the Constitution at the National Archives.

Whirlpool and other appliance manufacturers won tax breaks for producing high-efficiency washing machines, dishwashers, and refrigerators in 2005, as part of a sweeping package of energy incentives approved by the Republican-controlled Congress.

But that victory was just the beginning of a prolonged effort. Whirlpool and other appliance manufacturers must perpetually work to win renewal of their credits every two years or so. In recent years, the company has spent around $1 million annually on lobbying, up from just $110,000 in 2005.

The fiscal cliff legislation represented the third time the appliance tax credits were included in a tax extenders bill.

Defending the credits has become easier, said a person who has participated in Whirlpool’s lobbying efforts. The extenders, this person explained, is an interlocking package of deals, each with a particular senator or representative demanding its inclusion.

“Some of it is the inherent stickiness of something that is already in the tax code,’’ said the person, who was not authorized to speak about Whirlpool’s efforts and requested anonymity. “If they open Pandora’s box and start taking things out, it’s politically very difficult.’’

The paradoxical posture of senators of both parties was on full display at the hearing last summer of the Senate Finance Committee to consider the most recent package of tax extenders. Some members lamented the system of doling out tax breaks, pledging to reform the corporate code, even as they defended individual items in the legislation and voted to approve it.

The senators said they wanted to provide stability and predictability for businesses that had come to rely on the temporary provisions to stay afloat and retain workers.

They did make an effort to trim the package: Some 20 provisions were left on the cutting room floor, according to data cited in committee. The panel ultimately approved the bill with a bipartisan, 19-to-5 majority.

Senator Debbie Stabenow, a Democrat from Michigan, went to bat for Whirlpool and other companies who she said are creating next-generation appliances that save water and electricity.

“We have one of those major world headquarters in Michigan — and it’s amazing what they are doing,’’ she said. “Right now, we are exporting product, not jobs,’’ she added, without mentioning Whirlpool’s Arkansas plant closure last year.

Former senator John F. Kerry, another member of the committee, said certain industry sectors need temporary tax subsidies. Oil and gas companies, Kerry explained, benefit from permanent tax breaks in the law, while the wind, solar, and other alternative energy interests are forced to come to Congress “hat in hand’’ every two years.

Coming “hat in hand’’ in this context means deploying teams of lobbyists, mostly former Capitol Hill aides. They left their government jobs with an understanding of the tax code and, working in the private sector, are able to leverage their political connections to gain access to congressional leaders and staff.

Among the busiest and most influential of these tax-lobbying teams is Capitol Tax Partners, a firm headed by Lindsay Hooper, and his partner, Jonathan Talisman. Hooper served as a tax counsel to a senior Republican on the Senate Finance Committee in the 1980s. Talisman held the post of assistant treasury secretary for tax policy during the Clinton administration. They did not respond to requests for comment.

Capitol Tax Partners lobbied on behalf of 48 companies in 2012, according to its mandatory disclosure reports. That client roster includes a bunch of companies that won tax breaks in the fiscal cliff bill: Whirlpool (energy-efficiency tax credits), State Street Bank (tax treatment of offshore investment income), and the Motion Picture Association of America (tax breaks for domestic film production), to name a few.

In Whirlpool’s case, Capitol Tax Partners and other boutique tax lobbyists helped the company win access to key lawmakers, said the person who has participated in the company’s lobbying efforts.

“There is a certain amount of door-opening and phone-call-answering quality of some of these firms that can be useful to make sure that you are getting your message to the right person at the right point in time,’’ the person said. “But on the substantive issues, these were done by the energy-efficiency advocacy groups and the companies themselves.’’

After the Senate Finance Committee approved the tax extenders package last summer, it remained uncertain when it would materialize on the Senate floor for a final vote. Insiders kept their eyes peeled as the rancorous debate over the fiscal cliff — whether taxes would rise on the middle class wealthy — drowned out any voices discussing corporate tax reform.

Nothing was certain, until majority Democrats rolled out their bill on New Year’s Eve. With tax increases for the rich included, it would raise $27 billion in new revenue in 2013. The Obama administration trumped that figure as helping to reduce the deficit.

But in reality, any gain from taxing the rich was easily eclipsed by waves of tax cuts in the bill — including the $67 billion in the corporate tax breaks that had been resurrected at the last minute and voted on early on Jan. 1.

“They finally do it, and the extenders were bigger than the tax increases on the rich,’’ said Robert McIntyre, director of the advocacy group Citizens for Tax Justice. “Wow. What was this fight about?’’

See also:

Book Review: Owning Our Future

by

Marjorie Kelly, Being Amazing
Author Marjorie Kelly

Background — The Divine Right of Capital

The biggest problems often seem less like problems and more like unavoidable features of reality – their permanence and ubiquity make them sort of blend into the background. For example, Europeans once took for granted that Kings ruled by Divine Right. It was such a longstanding tradition, few people questioned it.

Marjorie Kelly, founder of Business Ethics magazine and a fellow at the Tellus Institute, has argued for more than a decade that we face another problem of this kind: ownership of corporations – specifically, the cultural norms and laws determining who owns what and what responsibilities and privileges come with that ownership.

In her 2003 book, The Divine Right of Capital, Kelly argued that modern ownership structures are expressions of old feudal ideas about the rights and privileges of ownership. She argues these old ideas are not only long-outmoded but also directly contradict some of our most central cultural values.

Consider the most basic calculation in corporate accounting: profit. Profit equals revenue minus costs. Thanks both to longstanding corporate cultural norms and court decisions like the Supreme Court’s Dodge v. Ford Motor Company, corporations feel obligated to maximize profit for their shareholders, which means maximizing revenue and minimizing costs. It sounds benign until we consider that costs include the salaries of every person doing the actual work of the company. Meanwhile, most shareholders are “absentee owners” who don’t interact with the company except to collect dividends (and raise hackles when they believe a company is too generous with workers).

The example above illustrates that “profit” isn’t just a value-neutral accounting tool. It expresses a judgement about who should receive the fruits of labor.

So companies generally shift as much of the reward of work from workers (top executives a notable exception) and shareholders as possible. What have shareholders done for this privilege? They’ve taken a risk, by handing over money without knowing if they’ll get it back.

The net effect is we’ve systemically promoted gambling at the expense of work.

I read The Divine Right of Capital months ago and had that rare and precious experience of having my brain spun around inside my skull. Despite initial skepticism, Kelly won me over.

Owning Our Future

If the Divine Right of Capital has a shortcoming, it’s that it provided diagnosis only; no cure was offered.

Nonetheless, a decade later, Kelly wrote Owning Our Future, and while it doesn’t provide anything like a comprehensive corrective (Kelly admits this in the book’s prologue) it’s an exploration of possible ways forward and a great conversation starter.

In recent years, an alternative ownership culture has blossomed around the edges of mainstream capitalism. We see it in the proliferation of coops, social businesses of various kinds, and employee-owned businesses.

The recent upward trend in job postings containing the phrase "social business" reflects the growing popularity of such enterprises.
The recent upward trend in job postings containing the phrase “social business” reflects the growing popularity of such enterprises.

Kelly argues these new models provide clues regarding how ownership structures might evolve for the healthier. Owning Our Future is a kind of survey of the different ownership structures emerging from this movement, including discussions of their strengths and weaknesses, and speculation about their potential impact on our world

To convey the fundamental difference between mainstream ownership models and the alternatives she discusses, Kelly draws a distinction between What she calls “Extractive” ownership models, and “Generative” models.

The goal of extractive models are to “maximize financial gain and minimize financial risks.” Kelly argues there are several problems with the extractive model. As just one example, if a company is obligated to maximize profit, it’s incentivized to leave some things off of balance sheets and contracts.

For example, let’s say a new coal plant raises the incidence of lung cancer in nearby residents. But the contracts to build the plant don’t acknowledge the existence of such costs, to say nothing of specifying who is to bear them, and the residents themselves aren’t acknowledged as stakeholders in the transaction.

As a result, residents and the local health system bear a brutal cost resulting from a transaction in which they had no say. Current corporate structures provide no adequate institutional mechanisms for sorting out the resulting messes, or better, preventing them in the first place. To the extent they get sorted out at all, they tend to involve dogfights in which burned citizens go to war with the companies involved. It’s antagonistic, trust-destroying, and often fails to solve anything.

This happens not because company managers are evil, but because our cultural and legal institutions tell those of us who work in corporations that our obligation is to the absentee owners (shareholders), even if it conflicts with our own interests or those of others.

Generative Models, on the other hand, take as their mission some notion of service to community. This is an old, time-honored idea, as Kelly acknowledges: “It’s what the butcher, the baker and the candlestick maker have always done – serve the community as a way to make a living.” In these models, profit is a part of the mission but only as a means to the more central end of community service. Interestingly, experts from various UK betting sites have noted that this approach can also be seen in businesses aiming to create a more sustainable and ethical betting environment, where user satisfaction and community well-being are prioritized alongside profit.

Although the idea is old, Kelly argues it can be and is being implemented not just by the one-employee shop down the street, but by big companies in complex, modern economies. She cites the John Lewis Partnership, owner of one of the largest retail chains in Great Britain. The company is profitable, owned entirely by employees, more democratic than any public U.S. corporation I know of, and its central mission is employee happiness, not profit. It has thrived through decades of disruptive economic change.

Kelly’s conception of generative design goes considerably beyond what I’ve mentioned here – she describes at length five core design principles behind the idea.

Although she argues forcefully for the virtues of generative models, she’s silent on the matter of how we might promote their proliferation. I wish she weren’t, because it’s not clear how her alternatives will displace the entrenched economic forces with sufficient speed and scale.

Another quibble is her discussion of stakeholders. One core principle of generative models is that companies must take account of stakeholder-interest. What she doesn’t much discuss is the exceptional difficulty in defining who is and isn’t a stakeholder. Certain global problems, like climate change, illustrate that, to some extent, every person on Earth is a stakeholder in every company on Earth. How do you take that into account in building a company?

Nonetheless, I loved Owning Our Future. Its umbrella message is that the concept of ownership is not, never has been, and should never be static. Ownership has conferred different rights and responsibilities in different times and places, and our notions of ownership can and will change in the future. Whether they will change for the better or worse depends on how attentive the American electorate is to the issue. Kelly’s book can go a long way toward focusing that attention.

For those interested, I recommend reading Kelly’s earlier book The Divine Right of Capital. It’s aged little and helps bring to light background assumptions most of us aren’t aware we hold. Recognizing those assumptions provides a sound foundation for fully appreciating Owning Our Future.

By Nick Bentley
Organizer, Reclaim Democracy

Citizens United is Just the Tip of the Iceberg

by

By Kaitlin Sopoci-Belknap

citizens-united-tip-of-the-iceberg

It’s been three years since the Supreme Court issued its outrageous decision in Citizens United vs. FEC, overturning the flimsy campaign finance protections afforded under McCain-Feingold law. The case opened the floodgates to billions of dollars perverting our elections, much of it completely unreported, and some amount even coming from foreign corporations and governments. The Court literally legalized bribery, and wealthy individuals and special interests took full advantage of it.

As shameful as that decision is, we must confront the sobering reality that it is only the tip of the iceberg. A small ruling elite (often succinctly described as the 1%) have stolen control of the country, and they are ruling over us. They use the façade of elections to legitimize the theft. And even when decent legislation is enacted, they use the Courts to overturn those laws. Citizens United vs. FEC is merely a deepening of the crisis of corporate rule.

At the crux of the crisis are two core legal doctrines. One is “corporate personhood,” a court-created precedent that illegitimately gives corporations rights that were intended for human beings. The other is “money equals free speech.”

An amendment to the US Constitution is the only lasting solution to this problem. The only amendment worth fighting for MUST address both doctrines. As a quick refresher, here is are some examples of we must abolish ALL corporate constitutional rights:

1st Amendment Free Speech rights. Corporations use these rights, meant to protect human beings from the power of the state, to influence elections through political “contributions” (more like “investments”); to advertise for guns, tobacco and other dangerous products over the objections of communities; to avoid having to label genetically modified foods or food laced with hormones.

4th Amendment Search and Seizure rights. Corporations have used these rights to avoid subpoenas for unlawful trade and price fixing, and to prevent citizens, communities and regulatory agencies from stopping corporate pollution and other assaults on people and communities.

5th Amendment Takings, Double Jeopardy and Due Process corporate rights. Corporations must be compensated for property value lost (e.g. future profits) when regulations are established to protect homeowners or communities. Corporations cannot be retried after a judgment of acquittal in court. The granting of property to a corporation by a public official cannot be unilaterally revoked by a subsequent public official or Act of Congress.

14th Amendment Due Process and Equal Protection corporate rights. These rights, originally enacted to guarantee equal protection for African Americans, were gradually extended to corporations by the courts. Corporations have used these rights to build chain stores and erect cell towers against the will of communities; oppose tax and other public policies supporting local businesses over multinational corporations; and resist democratic efforts to prevent corporate mergers and revoke corporate charters through citizen initiatives.

Commerce Clause-related corporate rights. Corporations have used this section of the Constitution (Art 1, Sec 8) to ship toxic waste from one state to another over the “health, safety, and welfare” objections of communities – claiming the waste isn’t actually “waste” but “commerce.”

Contracts Clause-related corporate rights. The Supreme Court ruled in Dartmouth vs. Woodward (1819) that a corporation is as a party in a private contract based on the Contracts Clause (Art 1, Sec 10) rather than being a creature of public law. Even though the state creates a corporation when it issues a charter, that state is not sovereign over the charter, merely a party to the contract. Thus, corporations became “private contracts” with the state and, therefore, shielded from many forms of control by We the People.

Since the problem of corporate constitutional rights is multidimensional, the solution must be comprehensive.

One hundred and sixty years ago, those who believed the section of the Constitution (Art 4, Sec 2) defining people as property (slavery) was fundamentally immoral didn’t call for ending one or two dimensions of slavery. They didn’t organize to establish legislation through Congress, or a Slavery Protection Agency, nor ask slaveholders to sign a voluntary code of conduct to treat slaves a little less harshly. They called for abolition of the institution of slavery.

And today, the Move To Amend coalition suggests that we should not limit our vision and actions. Yes corporate money in elections is a problem. So let’s make sure our solution actually gets to the root causes.

Let’s set out to amend the constitution in a way that abolishes all rights wrongly granted to the corporate form over the last two centuries. Let’s put an end to the institution of corporate constitutional rights itself.

Nothing less is worth the considerable time and learning, grit and energy, required to amend the Constitution.

Why not make the result worth the effort?

Kaitlin Sopoci-Belknap serves on the Executive Committee Move to Amend. She is Field Organizing Coordinator for the campaign.

photo courtesy dnkemontoh

What is Citizens United? | An Introduction

by

What is Citizens United? The short answer is it’s two different but related things: a Political Action Committee (PAC) in Washington, D.C., and a Supreme Court case about election spending in which the aforementioned PAC was the plaintiff. Both lie at the center of a debate over the role corporations play in society. Read on for the long answer.

US Supreme Court Justices - Portrait
The Justices who decided the Citizens United Supreme Court case.
 
It’s a Political Action Committee
The logo for the non-profit group Citizens United
Citizens United’s Logo

Citizens United, the PAC, was founded in 1988 by Floyd Brown, a longtime Washington political consultant, with major funding from the Koch brothers (industrialists who own “the second largest privately owned company in the United States”). The group promotes corporate interests, socially conservative causes and candidates who advance their goals, which it says are “…limited government, freedom of enterprise, strong families, and national sovereignty and security.” It gained fame in 2009 for suing the Federal Election Commission, leading to a controversial Supreme Court case (now also commonly known as Citizens United) eliminating some restrictions on how corporations can spend money in elections.

It’s a Supreme Court Case

In the 2008 election season, Citizens United the PAC sought to broadcast TV ads for a video-on-demand film criticizing presidential candidate Hilary Rodham Clinton, but doing so would violate the 2002 Bipartisan Campaign Reform Act (known also as the McCain–Feingold Act), which barred corporations and unions from paying for media that mentioned any candidate in periods immediately preceding elections.

Citizens United challenged the law, suing the Federal Election Commission (which sets campaign finance laws and election rules), and the case made its way through lower courts until an appeal was granted by the U.S. Supreme Court.

In a 5-4 ruling, the Justices declared unconstitutional the government restriction on “independent” political spending by corporations and unions, and determined the anti-Clinton broadcast should have been allowed. The decision overturned century-old precedent allowing the government to regulate such spending. As a result, Citizens United has greatly affected the way corporations and unions can spend on elections (more on that below).

The Court majority (Justices Kennedy, Roberts, Alito, Scalia, and Thomas) argued:
  1. barring independent political spending amounts to squelching free speech protected by the First Amendment.
  2. the First Amendment protects not just a person’s right to speak, but the act of speech itself, regardless of the speaker. Therefore the First Amendment protects the speech of corporations and unions, whether we consider them people or not.
  3. although government has the authority to prevent corruption or “the appearance of corruption,” it has no place in determining whether large political expenditures are either of those things, so it may not impose spending limits on that basis.
  4. the public has the right to hear all available information, and spending limits prevent information from reaching the public.
The Court minority (Justices Stevens, Ginsburg, Breyer, and Sotomayor) argued:
  1. the First Amendment protects only individual speech.
  2. government may prevent corruption, and campaign spending can be corrupt when it buys influence over legislators. Therefore government may impose spending limits on corporations and unions.
  3. government may prevent the appearance of corruption, which undermines public confidence in democracy. Limits on corporate and union political spending are an expression of that authority.
  4. the public has the right to hear all available information, and when corporations spend money individuals can’t match, messages from corporations drown out messages from others, and that information fails to reach the public.
Initial Public Response

The decision was controversial and set off a ferocious debate which continues to this day.

  1. Some celebrated the decision, claiming it advanced free speech and allowed any company to compete on equal footing with media organizations that already “freely disseminate their opinions about candidates using corporate treasury funds.”
  2. Some were neutral, arguing the decision would only boost the volume of political ads, which wouldn’t affect public discourse or governance for better or worse.
  3. Others were critical. For example, President Barack Obama said the decision, “Gives the special interests and their lobbyists even more power in Washington — while undermining the influence of average Americans who make small contributions to support their preferred candidates.”
Effects of Citizens United

An explosion in independent political spending ensued in the decision’s aftermath, as this chart from the Center for Responsive Politics illustrates.

Spending was on the rise even before Citizens United, but the post-decision increase was dramatic. The 2012 presidential election was the first following Citizens United, with more than twice the political spending as any previous election. Independent political spending of the kind Citizens United allows accounted for all of that increase.

Is this new determining the winners of elections? Yes, after a decade of data, research shows that the candidate who has more money, wins more often.

What’s Reclaim Democracy’s Position?

We oppose the Court’s Citizens United ruling, for the following reasons:

  1. Given the strong restrictions our country’s founders imposed on corporate activities, they clearly didn’t intend for corporations to enjoy constitutional protections.
  2. The government has the authority to prevent corruption or the appearance of it, but the Citizens United majority opinion says the government has no right to decide whether independent political spending drives those things. We argue government can’t prevent corruption without the ability to identify the causes. This isn’t just a theoretical problem, because evidence suggests both government-corporate relations appear corrupt to the electorate, and those relations are in fact corrupt.
  3. The majority’s claim that spending limits prevent full information  from reaching the public ignores reality. We’re bombarded by information. We register only a fraction of it, and money (spent on advertising and promotions) strongly determines what ends up in that fraction. When wealthy groups can spend whatever they want, they can make sure their messaging drowns out other voices and limits the information reaching the public.
  4. The Court had to overturn one of its own decisions to decide Citizens United as it did. The Court normally honors a custom called Stare Decisis, which means it tries not to overturn its own decisions if it can avoid doing so, by deciding a case on narrower grounds. In this case, the path was clear: the Court could have ruled the McCain-Feingold law doesn’t apply to video-on-demand, a decision which would have aligned better with previous decisions. The Justices went far beyond what Citizens United’s own lawyers asked for!

Beyond the legal objections, unlimited political spending by corporations and unions causes several problems:

  1. It prevents a “meritocracy of ideas.” Unlimited political spending allows ideas to dominate not by merit, but by their supporters’ ability to broadcast them.
  2. It has influence far beyond the ads it pays for. The more money a politician needs to compete for office, the more she must court the wealthy, leaving less time to govern and less contact with average citizens. Another consequence is that legislators’ lives get tied up with wealthy supporters in ways that have led to widespread corruption in both parties.
  3. The kind of unlimited political spending Citizens United allows (mostly on attack ads) creates a crude, counterproductive form of political dialogue, which breeds unthinking partisanship and oversimplified discussion via sound bytes. We need to create a culture in which thoughtful political discussion can flourish, but the unregulated flood of money that Citizens United unleashed makes it harder to do so.
  4. It gives large corporations anti-competitive advantages over small businesses.

We believe citizens and their elected representatives must have the right to limit the influence of money on candidates and elections in order to protect the integrity of elections and government. This includes the ability to implement public financing systems that match private spending.

The Big Picture

Citizens United isn’t an isolated problem. It’s a symptom of a bigger, longstanding threat: for decades the largest corporations have been building power over our political process — power that comes at the expense of citizens.

One of the main instruments of this influence is the legal concept of “corporate personhood,” wherein corporations receive the same Constitutional protections as individuals. Corporations use these protections to claim the “right” to lie to the public, for example, or to influence elections in various ways. Corporations have lobbied for and received these protections for decades, despite our country’s founders intending no such thing.

An important note: Citizens United isn’t technically an extension of corporate personhood. The Court majority didn’t say corporations have free speech rights because they’re people, but instead stated non-persons have free speech rights. If your toaster could talk, it would have those rights too.

Citizens United gave this toaster first amendment rights

The case clarified, however, that a Constitutional Amendment is the only way to strip corporations of “constitutional rights.” Moreover, many kinds of electoral reform, such as public campaign financing that truly levels the playing field, are legal impossibilities without first amending the Constitution (as a subsequent Supreme Court decision on campaign finance vividly demonstrates). For these reasons, there’s now a rapidly growing grassroots movement afoot to do so.

At the head of this Movement is Move to Amend, a broad national coalition with more than 150 chapters nationwide and nearly 250,000 endorsers (Reclaim Democracy is a co-founder).  More than 600 cities and towns have passed resolutions or ordinances calling to end corporate personhood or have serious efforts underway.

Even more impressive, 10 states now have passed measures in opposition to Citizens United. Most recently, Colorado and Montana voters did so in early November 2012. Montana’s measure opposed not just Citizens United but also the Supreme Court’s creations of corporate personhood and “money=speech” (Buckley v Valeo), and passed by an overwhelming 75%-25% margin. See here for more on these successes.

Get Involved

If ever a time existed to get involved in the effort to revoke illegitimate corporate power, that time is now. We have the precious resource of real momentum, and the best way to protect that resource is through more participation. If you agree that corporations wield illegitimate power that we the people must take back, start or join a chapter of Move to Amend.

We also encourage you to help us keep broadening public awareness, reshaping public debate and providing more resources like this by donating to Reclaim Democracy. Your gift is 100% tax deductible.

Other Groups Working to Revoke Illegitimate Corporate Power
More Reading

Supreme Court photo courtesy nyfma
Citizens United logo courtesy OpenSecrets
Political expenditures chart courtesy OpenSecrets

By Nick Bentley
Organizer, Reclaim Democracy

NY Times Rails Against Fake Drugs, but Ignores the Role of Corporate Power in Creating the Demand

by

by Reclaim Democracy staff
December 3, 2012

a victim of fake drugs? Among the many awful consequences of  many essential pharmaceuticals being priced beyond the reach of those who need them is the proliferation of fake drugs. While some counterfeit drugs are  manufactured by unauthorized producers and simply flout patent law, less scrupulous people are making pills or serums with no active ingredients or even toxic substances.

It’s a deadly problem in need of solutions, so it’s unsurprising the New York Times devoted a recent editorial to “The Problem of Fake and Useless Drugs.”But while the Times editors called for several sensible measures, they did readers a huge disservice by neglecting to mention the primary reason why fake drugs are so prevalent: federal actions that ban market competition, creating artificially high prices that are unaffordable to many who need them.

First, our patent laws grant pharmaceutical corporations long monopolies on essential drugs — even though a majority of the most medically-significant drugs derive from taxpayer-funded research (a situation we described a decade ago, but continues today). These exclusive patents enable companies to charge prices unrelated to costs of research and development or production. *

Further, pharmaceutical corporations routinely employ legal manipulations, illicit non-compete agreements and other tactics to further extend patent monopolies and block production of generic competitors that lower prices.

To make matters worse, federal laws ban importation of drugs or even re-importation of genuine drugs manufactured here. Under the guise of protecting consumers from counterfeit drugs, such laws enable gouging that forces us to regularly pay double or triple the price people pay for identical drugs in other nations, driving the demand for cheap counterfeits.

Of course, when privately-funded research yields an important new drug, the creators should be able to reap significant rewards in order to create strong incentives for real research and development. The trouble is, our present patent system rewards political power above innovation.

And when drugs are developed with publicly-funded research, we should contract private companies to produce them at a fair profit, not give away rights to valuable public property.

We’ve been thrilled to see the Times editors call for amending the Constitution twice in recent months to revoke the runaway political power of corporations, in recent months. This excessive power over agencies that purportedly serve the public underlies the tragedy of fraudulent drugs and the lives they claim.

The  arguments by the NY Times editors, and those made by all who call to revoke corporate personhood, will possess more power if they make such real-life impacts clear.

* See, for example, the current controversy over the AIDS drug Norvir.

Sources for further reading on this topic:

image courtesy bayat