The Plaintive Wail Of The Not-Quite-As-Obscenely-Rich

There's a new sub-genre in journalism, tracking the travails and hardships of the not-quite-as-obscenely-rich. Inequality is still at its highest level since the Gilded Age, mind you, and the top 1% still rakes in 35% of all compensation, but selected still-rich individuals lost a little of their fortunes. This is the stuff of front-page news.

Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine. In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million. Mr. McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.

“I had no clue,” he said, “that there would be this tandem collapse.”

You really have to be kidding me with this. The stock market dropped 40%, so we're talking about paper value, not real but imagined wealth. And none of it was real anyway. That same stock market is now at a 52-week high at today's close, so the first thing to come back in this so-called recovery has been the fortunes of these same lamented rich people. The jobs for everyday Americans, not so much.

The ostensible premise of the article, that lesser yields for the rich may lead to a flattening of income distribution and maybe some relief for the middle and lower classes, is proven wrong by the middle of the article.

Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 percent, its level as recently as 1980. Market forces that have increased inequality, like globalization, are also not going away.

No, the real reason for this article is so super-rich people can read about other super-rich people and not feel so bad about poor people dying in the streets because of their hoarded fortunes. For example, here's Mike Bloomberg, of all people, singing a dirge for the poor little rich people.

Billionaire Mayor Michael Bloomberg defended multibillion-dollar pharmaceutical companies and their chief executives on Friday, declaring that they "don't make a lot of money" and shouldn't be scapegoats in the health care debate.

The mayor – and wealthiest person in New York City with a fortune estimated at $16.5 billion – made the comments on his radio show Friday during a discussion about health care.

"You know, last time I checked, pharmaceutical companies don't make a lot of money, their executives don't make a lot of money – not that they couldn't be better," Bloomberg said.

Pharmaceutical CEOs are known to make millions, with generous salaries, stock options and other perks.

This is a guy who bought the Mayoralty in New York for $100 million dollars over two terms, talking about people who routinely make tens of millions of dollars and hold hundreds of millions more in stock options, telling the public that the plebes shouldn't revolt because things are tough all over and those pharmaceutical CEOs are barely scraping by.

Well, tell you what then. As long as CEOs from the insurance and drug industries are basically pikers, they should have no problem adhering to Henry Waxman's request and providing readouts of their salaries and perks, so they can prove to the world once and for all that they're in this for the saving of lives and not the filthy lucre. Surely they'll agree to that.

Maybe they'll even tell the New York Times what a bad year they're having.

Wait Until The Masters Of The Universe Hear About This

Interesting if true:

Kenneth Feinberg, the Obama administration's pay czar, said on Sunday he has broad and "binding" authority over executive compensation, including the ability to "claw back" money already paid, and he is weighing how and whether to use that power.

Feinberg told Reuters that Citigroup Inc (C.N) included the contract of energy trader Andrew Hall in submissions due Friday by seven major companies still locked in the federal government's TARP Program.

Feinberg said he hasn't looked at Hall's contract, which reports have said could pay him as much as $100 million this year.

"Whether I have jurisdiction to decide his compensation or not, we will take a look and decide over the next few weeks," Feinberg said after speaking at a public forum in Martha's Vineyard, Massachusetts, part of a newsmaker series hosted by the Martha's Vineyard Times newspaper.

I agree that we have to do something about the problem of rampant income inequality, which is an epidemic that, if unchecked, will absolutely destroy the greater economy. But I'm not sure I find claw-backs like this to be the best method, especially when we've seen banks react to rules on bonuses by turning them into salary. Rather, the best way for government to encourage greater equality is not through after-the-fact takings, which can be scammed anyway, but through large marginal tax rates at the high end. This created massive productivity and prosperity in the 50s and 60s. Doing it through claw-backs feeds this notion that Democrats are illegally taking money out of the pockets of the wealth creators. Why not stop the hoop-jumping and just tax heavily at the top end? Also, you could make banking a much more staid and boring business through regulation and leave the ability to make lots of money to the risk-takers whose risk will actually create middle class jobs.

CA-10: An Interview With Sen. Mark DeSaulnier

Mark DeSaulnier has had a rapid ascent through the state legislature and now, potentially, into Congress. Within three years, this former restaurant owner won elections to the State Assembly (in 2006) and the State Senate (in 2008), with a Congressional primary scheduled for September 1. Prior to that, he was a 3-time member of the Contra Costa County Board of Supervisors and the California Air Resources Board. A former liberal Republican in the mold of Edward Brooke, DeSaulnier switched parties several years ago and compiled a liberal voting record in the State Legislature. His first ad of the campaign covered the topic of health care, and I asked him about this and several other issues in an interview conducted last week. Having taken place before the crucial budget vote, I spent a good deal of time asking DeSaulnier about that, and you can see his responses here. Depending on your perspective, he either did or did not fulfill the promise to vote against "most" of the budget, by the way, voting no on 11 of 26 bills, including all of the more controversial ones.

I'll pick up with a paraphrased transcript of the rest of the interview below:

DD: So, other than the budget, how's it going with your campaign?

Mark DeSaulnier: Well, this is a tough campaign, with a big field and a lot of good candidates. The polls we've done show us winning. We've got 70% of the money that we need to compete, and a lot of great endorsements. I would say we have the most local endorsements inside the district. And we're going to be able to put together a great ground campaign, with people I've worked with for 20 years in the district. I think we're going to be concentrated in Contra Costa County, where we can post a big number. I think we're putting ourselves out there as the local candidate, who has represented the district for a long time. And we have people out there walking and phoning, putting forward that message.

DD: As long as we're on California, obviously you've seen the dysfunction at the local level. What do you think you can do at the federal level to remedy this situation?

MD: You know, I read a lot of Paul Krugman, and I agree with him that we're going to need a second stimulus package. And I think we need it sooner and not later. I think we can take what's been learned from the stimulus package that we're doing now. I think the problem is that the banks like Citi and Bank of America aren't lending, and so we need to require the banks to lend, with relief for the credit worthy who are falling behind on their payments, and more money out to the credit unions who have done a better job handling this crisis. Next, I think we have to do some sort of fiscal stabilization. I see it in this state, people who need to access the safety net go up when the economy goes down. And so we have to break that cycle, and I think we can by providing some relief. Finally, we should say that we can do things more efficiently. There shouldn't be this silo mentality. I'll give you an example. We put together these "one-stops," places where you can go for unemployment and job training. And people tell me that you have to get out of one line and pick up a phone in the office to get your unemployment benefits. That just doesn't seem like good government to me. And I think we have an opportunity to make government work better.

DD: Let's move on to health care. Seems to be a big issue for you. What are the principles you carry in this debate?

MD: To me, the gold standard is single payer. We have the problem of getting health care to those who need it, and also how we get control of costs. I think the public option is the first step, and if we do it right, it could be, and really I think it should be, single payer. The question is what are the Democrats willing to give up to get moderates on board, and I think there have to be some lines we cannot cross there. In the end, it has to be about flexibility and more choice. That's the way you're going to sell this thing. It's telling that the moderates want firewalls in their plan, they don't want the people to have more choice, they want to preserve something for the insurance companies.

DD: Will you commit to not vote for anything that doesn't have a quality public plan available on day one, not a trigger, open to everyone, and with the kind of rates necessary to force the insurance companies to compete?

MD: Yes. I think as liberals, as progressives, something we don't do a lot but which we can learn from Republicans, sometimes we've just got to say no.

DD: Congress has started to debate the regulatory reform ideas put forward by the Obama Administration, and they're getting a ton of pushback from the banking industry, particularly on the concept of the Consumer Financial Protection Agency. It's the same way on a lot of these issues, the banks just won't relent. How do we solve this problem?

MD: Honestly, the politics will never get totally fixed without a public finance system in this country. And then people say, "why should we pay for elections?" The truth is that the average American is paying disproportionately already, when the giveaways to businesses and corporations are factored in. They buy elections fairly cheaply, and they get the rewards. So that's something we have to pursue. As far as your question, yes, I think we need a Consumer Financial Protection Agency, in fact I think it should be cabinet-level. A Secretary of Consumer Protection. The point to all of this is that if middle income people don't have wealth, democracy ends. That's just the bottom line. And one way to ensure that is by protecting consumers, so you don't see all their wealth go into someone else's pockets. Inequality is just killing us right now. Kevin Phillips wrote about this years ago, in Bad Money, and he was very prophetic. I also think that you can't reform the financial system without holding people accountable. And so I would involve the Department of Justice right at the beginning. That's the only way to really ensure it doesn't happen again.

DD: You mention inequality, it's something Democrats don't talk about enough. A recent Wall Street Journal story talked about the top 1% earning 35% of all the compensation in the country.

MD: It's stunning. And our tax structure, by the way, rewards the accumulation of wealth, not work. This happens when you get a financial services economy, which is completely not sustainable. We don't have manufacturing, we just have this financial services giant, and it trades in bubbles. So one way to reduce that inequality is to retool the financial services sector, make it smaller, make it more boring.

DD: OK, last question. I wanted to ask you about SB375, the smart growth measure that you played a big part in passing last year. This bill doesn't get a lot of attention, but it really offers a blueprint to how to achieve smart growth policies with the statewide authority working in concert with local communities. Do you plan to scale that up if you make it to Congress?

MD: Oh, absolutely, and this is where I think my background really suits me to replace Ellen Tauscher. I chaired the Transportation Committee in the Assembly as a freshman, I think the first person to do that. I spent ten years on the California Air Resources Board, and I co-authored SB375. I'm pretty sure there's a companion bill in Congress right now. Doris Matsui (CA-05) is carrying it right now. I have honed in throughout my career on the changing transportation and mobility side of the energy issue. We accomplish this, in part by reducing miles, and also finding new energy sources for transportation. We need more transit, and a move away from single-occupancy vehicles and long commutes. It's about bringing the work space closer to the living space, and creating livable communities. So I think I'm naturally suited for such a task. I'd like to get on the Transportation Committee if I get to Congress.

DD: Thanks for your time today.

MD: No problem, thank you.

Compensating

The elephant in the room when it comes to the sinking economy is out-of-control inequality. It strains the social safety net through programs like Social Security which cap contributions at the $100,000 income level, and it cycles money out of the economy instead of circulating it through the broad base of people. Unequal societies rarely reach their economic potential, and often slip into recessions, depressions, and most troubling, social and political unrest. We're talking banana republic stuff. At the root is a compensation structure on Wall Street and for business executives that results from a handpicked board giving the CEO whatever he wants in the belief that they will get the same largesse in return. Yesterday a House panel approved a fix that would give shareholders a role in determining executive compensation.

The approval by the House Financial Services Committee, on a party-line vote of 40 to 28, clears the way for the measure to be considered by the full House later this week, when it is likely to be adopted.

The bill does not set pay limits. Instead, it gives shareholders the right to vote on pay and requires that independent directors from outside of management serve on compensation committees.

The shareholder votes would not be binding on company management.

The measure tries to reduce the potential conflicts of interest involving compensation consultants who play a central role in blessing pay packages. Many of those consultants also provide other services to the companies, putting them in a conflicting role for issuing fairness opinions about pay.

The measure also gives regulators the authority to prohibit inappropriate or risky compensation practices for banks and other regulated financial institutions.

This is weak. Nonbinding votes on CEO pay seem unlikely to have a great effect. And yet, shareholder revolts over the past few years have had an impact on corporate behavior. I believe the bigger fix here is the mandating of independent directors from outside management. How about shareholders chosen by lot? In this day and age of fiber optics, they don't have to live in New York.

The business world will fight this tooth and nail, I expect. But if they stepped back, and saw how their own personal greed not only helped cause this deep recession, but negatively impacted their businesses for years, maybe they would submit to these relatively minor changes.

America Is Worth Paying For

The Wall Street Journal today takes a look at inequality and produces a startling statistic.

The nation's wealth gap is widening amid an uproar about lofty pay packages in the financial world.

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data -- without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries.

Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available.

So much for trickle-down economics. Incidentally, the same people who tell you that the top 1% pay 30% of the taxes won't tell you that they also make 30% of the money, or that the after-tax income, adjusted for inflation, of the top 1% grew 256% over the past 25 years, compared to just 21% for those in the middle. So the rich are doing pretty well, and they can probably pony up so that nobody goes without health care in this country.

This brings us to a larger point about the success of the conservative movement in this country. Despite this extreme inequality, which causes asset bubbles, threatens programs like Social Security that cap payroll deductions at $100,000 a year and invariably destroys national economies, talk about progressive taxation - indeed, any taxation - is considered heresy.

One of the bigger, but more under-reported, sea changes in American politics is how any kind of tax increase -- whether in war or peace, good economic times or bad ones -- has become absolutely unacceptable. After all, Ronald Reagan raised taxes. So did every modern American president involved in war, until George W. Bush. But not anymore. Indeed, as one of us pointed out on Nightly News last night, only 29% (or 157) of the 535 and House members and senators serving in Congress were around the last time -- 1993! -- the federal government raised taxes, and that was on gasoline. Think about that for a moment: Congress hasn't really had a TOUGH vote in 16 years, if one defines a "TOUGH" vote as the government asking for a financial sacrifice from the American people. This is the political climate that President Obama faces in trying to pay for health reform. Republicans and some Democrats are opposed to a tax on the wealthy, and unions and Obama's political strategists are against taxing health benefits.

Congress raised the tobacco tax this year to pay for expansion of children's health care, but the point is basically true.

Barack Obama has not been a profile in courage on this front, stressing a tax cut for "95% of all Americans" and failing to act definitively to roll back the Bush tax cuts on the wealthy. Joe Biden made one statement during the campaign about how it's patriotic to pay taxes and he got rapped on the skull for it, and we never heard it again.

But look. If Democrats cannot stand up and say that America is worth paying for, that we have an overclass in this country that's had it very good for a long, long time, that rampant inequality threatens economic stability, and that the way to a sustainable future includes paying for the commons that we all share, we'll really never get anywhere. Republicans have made taxes more of a four-letter word than liberals, to the extent that they threw an entire round of tax "tea parties" despite Obama having cut taxes in the stimulus for practically everyone. Conservatives since the Reagan era have determined that America has an innate selfishness that they can exploit, to claim "the other guy" is getting your tax money, and everyone should resist it. As government has provided little of perceived tangible value since the invention of Medicare in the 1960s, they've been able to get away with this. But it's not a path that can hold.

It starts by making the argument that while nobody likes taxes, nobody builds their own roads, or schools, or police and fire departments, or health care infrastructure, and government needs to act as a provider of services. This is basic stuff that has been pushed aside in our national debate for far too long. In the final analysis, we have a selfish and cruel segment of society that has been allowed to rule the roost for decades, promising their constituents endless services and endlessly low taxes forever. Democrats have the choice of accepting that and permanently nibbling around the edges the few times they get into power, or making the argument that we can have a better society.

Your Eight Weeks Waiting Tables Don't Matter

This New York Magazine article about the whines of the Wall Street rich officially marks a trend in journalism, wherein a writer finds a bunch of Wall Street guys and turns on the tape recorder while they speak a bunch of cringe-inducing quotes into it. It's not very revelatory after the 5th or 6th article, since by now we know pretty well that these are a collection of Randian jerks with a massive entitlement complex who think they rule the world by selling worthless pieces of paper to one another. Sure, it's good to know that they never gave charity out of a sense of, you know, charity, but for the tax cut and the hope of accumulating more power, and it's telling to recognize that the same people so concerned with being personally denigrated by the White House and the public decided not to publish their names. But all in all, this story has been told, and while I guess I understand why establishment media would want to run the same "poor, poor rich people" story over and over, it's certainly telling that you couldn't find a story quoting all members of the middle class that live in Manhattan (the median salary in NYC is about $65,000, so you have 4 million or so making less) if you sat in front of Lexis Nexis every day for a week.

But this part, as DougJ notes, was crucial to understanding the mindset of these people, and also reveals the nexus between the financial establishment and the DC Village establishment:

Jake DeSantis, a 40-year-old commodities trader at AIG, was an unlikely face of Wall Street greed. Stocky and clean cut, with an abiding moral streak, he’d worked summers for a bricklayer in the shadow of shuttered steel mills outside Pittsburgh; he was valedictorian of his high-school class and attended college at MIT.

He laid bricks one summer as a teenager, and so he simply deserves million-dollar bonuses for a company effectively owned by the federal government. I'll turn it over to DougJ at this point.

It’s striking how much we now see the idea that a working-class childhood justifies an adulthood of careerist whoring. Somerby’s been all over this for years, but I think the most blatant example I’ve ever seen is this bit from a chat with Howard Kurtz recently:

Reader: Much of the scalding tone many of your writers on these chats are subjected to from readers is based on this premise. We know that the Post, the Times, the networks are working to support the establishment at all cost. (In Broder’s famous and haughty dismissal of Bill Clinton “this is not his town”). But the problem is that you guys don’t like to portray yourselves as defenders of the establishment. You are the “little guy.” No you are not. Be honest with your audience.

Howard Kurtz: Talk about sweeping generalizations! Evan Thomas declares himself part of the establishment and suddenly every member of the major newspapers and networks are pillars of that establishment as well?

That would be news to Brian Williams, who was a volunteer fireman as a young man and washed out in his first job at a tiny Kansas station. And news to me, a guy who went to a state university. And news to Katie Couric, who started out on the University of Virginia’s student paper and washed out in her first national job, at CNN. And news to longtime Post editor Len Downie, who went to Ohio State University and started here as an intern. And also news to me, a kid from Brooklyn who never met a professional journalist until my junior year at a state university.

If you want to say these are big corporations, if you want to criticize what they do, be my guest. But let’s not assume that everyone in the business grew up in the bosom of the establishment.

An even more amazing example is George Bush’s claim (from a 2000 Nick Lemann piece that’s subscription only) that the biggest difference between him and Al Gore is that Bush went to San Jacinto Junior High.

How did this idea of humble, or humbler, beginnings become so important? It’s worth noting that it’s Randian as well—her heroes usually come from the working class, even if they spend their adult lives spitting on it.

It's mixed up with the idea of virtuous selfishness, that if you "picked yourself up by your bootstraps" that it's necessary and good to cut the bootstraps of everybody else. After all, if they can't make it they lack character. And this imagined "rough childhood" gets used by the establishment to delude themselves into thinking they are jus' folks, in touch with the needs and concerns of the people and just like everyone else. There was a study a while back (can't find it now) showing that something like 80% of the public considers themselves middle class, which is functionally impossible. But these biographical data points have nothing to do with present circumstance. As far as I know, robbery remains robbery whether or not you preceded that robbery with a stint landscaping in the heat.

In fact, we have a grossly unequal society, with little upward mobility, and dangerous implications from such inequality, creating the bubble-based economy which is now bursting. In the past 25 years, top salaries have increased by 256% while low-income salaries increased by 11%. In real dollars that's an obscene difference in income. It's also a major difference in access to media and raw power, which is why we have to endure multiple waves of articles about the persecuted overclass.

Somebody spare us.

A Graph-Heavy Guide To Tax Day

Happy Tax Day! Today we recognize that taxes are the price we pay for a free society, and that America is worth paying for. So you're armed with the facts in case you get randy and go out for some teabagging, here's a little primer:

First of all, people are more satisfied with the level of income tax that they pay than at any time since 1956 - with 48% believing the amount they pay is "just about right," and 61% regarding the amount of tax they pay as fair. Since a good amount of people pay no income tax, this means that the majority of people who pay anything think they're paying too much, which stands to reason, but the shift from previous years is significant, and anyway people don't necessarily differentiate between the different kinds of taxes they pay. Gallup surmises, and I agree, that the reason for this satisfaction is the Making Work Pay tax credit in the stimulus, the largest tax cut on the middle class in history, and the idea that people finally might get something in exchange for those taxes.



Now, the real problem conservatives have with taxation is that the code is too progressive and too many lucky duckies don't pay anything. And they manipulate statistics to show how terribly burdened the overclass is (the top 10% pay 72% of the taxes is a common statistic used). But the more important statistics are the percentage of total income earned by the top 10%, and therefore the effective tax rate.

When I look at the CBO's dataset on long-term tax trends, I see plenty of things that are important besides the share of federal tax liabilities. Most important is the top decile's share of the national income. In 2001 the top decile earned 37.5% of the national pretax income. In 2006 the same decile earned 41.6% of the income. In 2001, households in the top decile earned an average pretax income of $294,700. In 2006 it was $366,400.

Why should we be surprised that this group pays more in taxes? It earns more money.

Another trend is the effective tax rate. Between 2001 and 2006, the top effective income tax rate fell from 18.7% to 16%. The top rate for all federal taxes fell from 28.5% to 27.5%. So while the top decile is paying a larger share of federal taxes, it is being taxed at a lower rate.

When you add state and local taxes, most of which are flat or regressive, the share of total income and the share of total taxes match up pretty evenly. Conservatives conveniently leave this out.



And of course, a lot of these numbers don't take into account the multitude of tax breaks, loopholes and work-arounds that have made the actual tax receipts collected less fair over time.

Thirty years ago, the tax code was broadly progressive, reflecting shared contributions to public investments and our common good. Loopholes were fewer and covered such items as home mortgages that everyone could understand and appreciate.

Now the tax code is a scam. Billionaire hedge fund managers pay taxes at lower rates than their receptionists. Corporations get tax breaks for moving jobs overseas. Oil companies with the largest profits in corporate history receive annual tax breaks worth $14 billion, roughly twice the budget of the Environmental Protection Agency.

While rich people reap tax breaks, working people struggle just to keep even. Adjusted for inflation, weekly wages were lower in 2007 than they were in 1979 [...]

Income inequality is rising — measured by the ratio of after-tax income of the top one percent (1.1 million people) to after-tax income of the whole middle 60 percent (68.3 million people). Top-end taxes are declining — measured as the average effective tax rate of the top one percent. The trend lines for top-end tax cuts and income inequality since 1980 form the X in the chart on this page and in the report.

Our report explains the X. Inequality rose 144 percent; top-end taxes dropped 15 percent.

One way we could make the tax code more fair, and make the broad majority of people even more satisfied with their taxes by giving them more and better services, is by adding more marginal brackets.

It’s well known that tax rates on top incomes used to be far higher than they are today. The top marginal rate hovered around 90 percent in the 1940s, ’50s and early ’60s. Reagan ultimately reduced it to 28 percent, and it is now 35 percent. Obama would raise it to 39.6 percent, where it was under Bill Clinton.

What’s much less known is that those old confiscatory rates were not as sweeping as they sound. They applied to only the richest of the rich, because yesterday’s tax code, unlike today’s, had separate marginal tax rates for the truly wealthy and the merely affluent. For a married couple in 1960, for example, the 38 percent tax bracket started at $20,000, which is about $145,000 in today’s terms. The top bracket of 91 percent began at $400,000, which is the equivalent of nearly $3 million now. Some of the old brackets are truly stunning: in 1935, Franklin D. Roosevelt raised the top rate to 79 percent, from 63 percent, and raised the income level that qualified for that rate to $5 million (about $75 million today) from $1 million. As the economist Bruce Bartlett has noted, that 79 percent rate apparently applied to only one person in the entire country, John D. Rockefeller.

Today, by contrast, the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change is especially striking, because there is so much more income at the top of the distribution now than there was in the past. Today a tax rate for the very top earners would apply to a far larger portion of the nation’s income than it would have years ago.

It's even worse at the state level - in California, you pay the same income tax rate on every dollar from $47,500 to $999,999. The genius of the marginal tax rate system, lost on conservatives, is that it rewards work over wealth, and only taxes those dollars earned above that particular marginal rate at the higher number. More than any cap on executive compensation or bonuses, this would actually promote the highest standard of living for the most Americans, and discourage the rampant inequality that helped this crisis along.

When you teabag, it's good to have the facts. Consider yourselves armed.

The Most Important Part Was Off-Book

So I decided to take in the President's economic speech this morning. Ultimately, speeches mean far less than actions, and right now the actions still reflect a mixed picture. But a speech can move the public, can get them comfortable with the big picture of the President's program aside from the day-to-day ups and downs, and on that front I think Obama did a solid job. He stressed the five pillars for economic recovery - investments in clean energy, education and health care, new financial regulations, and long-term deficit reduction, all of which is fine. These were the key set of paragraphs:

It is simply not sustainable to have a 21st century financial system that is governed by 20th century rules and regulations that allowed the recklessness of a few to threaten the entire economy. It is not sustainable to have an economy where in one year, 40% of our corporate profits came from a financial sector that was based too much on inflated home prices, maxed out credit cards, overleveraged banks and overvalued assets; or an economy where the incomes of the top 1% have skyrocketed while the typical working household has seen their income decline by nearly $2,000.

For even as too many were chasing ever-bigger bonuses and short-term profits over the last decade, we continued to neglect the long-term threats to our prosperity: the crushing burden that the rising cost of health care is placing on families and businesses; the failure of our education system to prepare our workers for a new age; the progress that other nations are making on clean energy industries and technologies while we remain addicted to foreign oil; the growing debt that we’re passing on to our children. And even after we emerge from the current recession, these challenges will still represent major obstacles that stand in the way of our success in the 21st century.

There is a parable at the end of the Sermon on the Mount that tells the story of two men. The first built his house on a pile of sand, and it was destroyed as soon as the storm hit. But the second is known as the wise man, for when “…the rain descended, and the floods came, and the winds blew, and beat upon that house…it fell not: for it was founded upon a rock.”

We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity – a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad.

That's a very strong perspective, particularly the highlighted portion, addressing inequality and the out-of-balance economy. But the very best part of the speech didn't appear in the prepared remarks. Talking about education, he paused to say that we need American students to make things again. Here's a rough transcript:

And by the way, one of the changes that I'd like to see, and I'm going to be talking about this in the weeks to come. It's once again seeing our best and our brightest commit themselves to making things. Engineers, scientists, innovators. For so long, we have placed at the top of our pinnacle folks who can manipulate numbers. And engage in complex financial calculations. And that's good, we need some of that. But you know, what we could use are some more scientists and engineers who are building and making things that we can export to other countries.

This is the rot at the heart of the American economy right now, a sinking feeling that we are no longer creative, that we no longer have the same spirit in the 21st century that we assumed to hold in the 19th and 20th, the feeling of sloth, the idea that the world is passing us by, the unease as we try to sustain ourselves through selling each other lead-filled Chinese toys and pushing numbers around on a page. This is exactly the risk at the center of an unbalanced economy, much like an unbalanced stock portfolio. Having given away innovation, having given away industry, we turned Wall Street into the manufacturing capital of the nation, much to our peril. The jobs of the future cannot remain in the same fields as the jobs of the past. We need a continued focus on green jobs, not just at the level of engineering and innovation and technology, but at the lower levels of building and creating from raw materials the new energy devices and smart grids and high speed rail cars.

And we can only do this by shrinking the size of the financial sector relative to the overall economy, and diversifying our economic picture so we are not at the mercy of the banksters. For the first time, I get the sense that the President recognizes this imbalance and is committed to reversing course. I don't completely agree with his methods - he dismissed nationalization of the insolvent banks by saying that it would prove too costly, which is a debate we need to have, but which neglects the cost of throwing money into a black hole aimed at recapitalization, only to have to go back and nationalize eventually - but I can now fairly judge his desired end state. And I like what I see.

No, The Economic Crisis Is Not Over

I guess all it took was one decent earnings forecast, and the collapse of the global financial system has been called off. Nothing to see here, everyone go home.

But, the great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup (C) traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup (C) and Bank of America (BAC). The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

The writer of this piece's tongue is halfway in cheek, and at the end he acknowledges the major changes bringing us to this so-called "resolution." But the cheery tone can be seen in other big panorama articles today, suggesting that the traditional media has as much of an attention-deficit disorder as a daytrader, and all the depth of an evening with the cast of Hee Haw. The wild swings in mood mirror the volatility in the markets, which actually doesn't portend well. Some context can be provided by Dean Baker:

In the case of bank profits, much of the profit was driven by a surge in mortgage refinancing which produces large fees for banks. This surge will continue for the near term, but before long most of the people who are able to refinance their mortgages will have done so. Banks have also opted not to declare large write-downs of bad loans in the current quarter. They have apparently decided, possibly for political reasons, to defer write-downs of bad debts for future quarters.

It is important to put reports on chain store retail sales in some context. First, the same store sales are higher relative to overall chain sales because the chains have opened fewer new stores over the last year and in some cases actually have fewer stores in March of 2009 than in March of 2008. More importantly, there will be some upward bias in the chain store sales overall since there are fewer alternatives stores in 2009 than in March 2008.

Many stores that might have provided competition for the chains in March of 2008 no longer exist in March of 2009. Therefore, we should expect to see an increase in chain store sales even if there had been no change whatsoever in overall retail sales.

The President was more circumspect today, announcing that he sees "glimmers of hope" but that "the economy is still under severe stress" and talk of the crisis lifting is easily mocked given the spectre of double-digit unemployment before the year is out. I'm sure that people who don't fear job loss can have no problem announcing an end to the crisis, but others are not so lucky.

I think Simon Johnson made an excellent point discussing this at the New York Times' website:

Some stock market rallies are reassuring. Others provide at least temporary respite. And a third kind, more commonly seen in emerging markets, actually expose deeper underlying problems and contribute to a further downturn.

We seem to be experiencing this third kind of rally in the U.S. right now. Equity prices are up sharply, but the debt market continues to indicate a high probability of default. In particular, the level and recent trajectory of credit default swap spreads suggest that, as the financial system as a whole stabilizes, market participants expect increasing odds of failure (and failed bailout attempts) for the very largest banks.

The fact that the Federal Reserve won't let the banks release the stress test results just doesn't augur well. And even if we escape without more bank failures and a period of stagnation until the economy kicks back in, the biggest potential problem would be to see the establishment wipe their brow, thank their lucky stars for the bailouts and go back to the same exact practices that got us into this mess. I don't think the White House will lack assertiveness and take their eye off of the problem, but I do think they will decline to fundamentally restructure the economy in such a way that the finance sector shrinks to a level that cannot harm the greater economy in a systemic way. Paul Krugman gets to the heart of this need for restructuring today, the idea that banking must become boring.

Much of the seeming success of the financial industry has now been revealed as an illusion. (Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself.) Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.

But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.

Krugman charts how we followed the exact same course in the period from 1920-1970; the bankers got rich, speculated madly, caused the Depression, and the tight regulations on the industry that followed reduced both the excitement of banking and the lucrative nature of it. "Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans," he concludes.

We're in that Second Gilded Age right now, and the return of banking to the staid reallocation of capital that is its core function must follow the hash that's been made of the economy. The banks had too much money to play with and ended up nearly gambling away the whole system. They bought the political process and it came relatively cheap compared to the largesse it allowed them to reap. The incentives created were perverse. The risks taken were unconscionable. And they cannot be repeated.

But by calling an early end to the crisis and not wrestling with the fundamental shift that is needed, we only set ourselves up for future failure. And the Bush-era retreads manning the TARP desk are not likely to recognize this or work toward such a solution. In fact, nobody in the political class is, unless we make them.

Tomorrow, A New Way Forward demonstrations will be held in over 70 cities across the country. I'm not sure a set of protests is necessarily the right thing to do to mass political pressure, but I do know that this is a genuine grassroots effort - unlike the Fox News-promoted, lobbyist-driven tea parties - and the message of structural change, not an exhale and relief that the crisis has lifted, is the exact message that our representatives need to hear right now.

Our plan: Real structural change of Wall Street

Any bank that's "too big to fail" means that it's too big for a free market to function. The financial corporations that caused this mess must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place -- new banks, managed by new people. An independent regulatory body must protect consumers from predatory practices.

As Wall St. corporations grew bigger and bigger until they were “too big to fail,” they also became so politically powerful that they led to distorted and unfair policies that served companies, not citizens.

Its not enough to try to patch up the current system. We demand serious reform that fixes the root problems in our political and economic system: excessive influence of banks, dangerous compensation systems, and massive consolidation. And we demand that the reform happen in an open and transparent manner.

I've been banging this drum quite a bit, but I urge you to join these protests or at least get connected with what this group is trying to do. I really hope for it to be a beginning point and not an end point. Because until the financial sector has been fully decentralized, re-regulated and restructured, we're just going to go through this again and again.

Low Stress

Like Kevin Drum, I'm really trying to figure out what the hell this NYT article means.

For the last eight weeks, nearly 200 federal examiners have labored inside some of the nation’s biggest banks to determine how those institutions would hold up if the recession deepened.

What they are discovering may come as a relief to both the financial industry and the public: the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say.

....Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs “exceptional assistance,” the government, that is, taxpayers, will provide it.

....Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

If a bank needs "exceptional assistance," they either haven't passed the stress test, or the test isn't stringent enough to account for that possibility. If the banks need to be bailed out again, then they too have not passed the stress test, designed to see, as far as I can tell, that banks can survive on their own. In other words, the stress test isn't a stress test at all but a check of how much more money will need to be plowed into the system.

Here's Kevin:

So what have we learned here? First: all 19 banks will pass. Second: not all the banks can be winners. Third: the ones that pass — but aren't winners! — will be propped up by taxpayers. Fourth: no, they won't be propped up by taxpayers, they'll be forced to sell assets and raise private capital.

Huh? Which is it? If by "pass," regulators merely mean that a bank won't be instantly seized and its management defenestrated, then I guess this makes sense. Awards for all! On the other hand, the prospect of a bank getting a "needs improvement" grade and then successfully selling a big stock issue to raise private capital is just fanciful. Even banks that pass with flying colors will have trouble doing that.

So what's going on here? Why are Treasury officials privately telling reporters that everyone is going to pass but that some banks will receive a pass-minus and may be required to do things that are almost certainly impossible? Are they just trying to lay the groundwork for failure and temporary nationalization later on? Or what?

Any leak at this stage would of course give the impression that everything is fine. Wouldn't want to roust the "animal spirits" and get everyone panicking again. But just that very fact points to the outsized influence of the financial industry in driving US policy. The financial sector is simply too big relative to the rest of the economy, and the consequences are immense.

But what caused the fall and rise of inequality? A lot of very high incomes, both in the pre-1930 world and now, have been in the finance sector. A recent paper by Phillipon and Reshef (cited today by Gillian Tett in the FT) traces the path of relative compensation in finance, and ties it to regulation and deregulation. Here’s the key figure:



OK, correlation does not imply causation yada yada. The move to regulate in the 1930s was part of a broader crackdown on rampant capitalism, and the deregulation since 1980s was similarly part of a broader phenomenon. But it’s a good bet that finance is a key part of the story of how we got to where we are.

Over the past couple weeks, as this argument has become more prominent, the pushback from the banks is that the "level-headed" people must rein in the impulses of the "pitchfork" crowd, because economic recovery depends on a healthy banking sector. In other words, the same economic terrorism argument ("Keep us fat and happy or we'll blow this economy to bits!"). Simon Johnson deconstructs this nonsense.

You might think the “anti-pitchfork” strategy might work, particularly as it has in the past (e.g., in the early Clinton years). The problem for this strategy now is not just the fragile state of banks - by itself this can be ignored for a long while through forbearance, behind a smokescreen of complicated schemes with confusing acronyms - but the ways in which the markets they created now operate [...]

The technocratic options are simple, (1) assume a better regulator, of a kind that has never existed on this face of this earth, (2) make banks smaller, less powerful, and much more boring.

In other words, a dash of new regulation and a solemn promise from the banksters never to break the economy again won't cut it anymore, as the system has grown too big and too destructive. What we need is a different conception of the system of providing capital, one balanced against the size of the industries they can support, which actually produce goods and create jobs.

I know that the teabaggers have their own TV network and have sucked up all the political oxygen with their series of demonstrations, but the New Way Forward events happening this weekend are important. Not because street actions are necessarily valuable in the 21st century, but because the organizers behind this effort have a clear message that pushes against the simple left-right lens and really seeks a reinvention of our economic realities. Here's how honorary co-chair Mike Lux describes the effort:

I agreed this week to become an honorary co-chair of A New Way Forward, a spontaneous grassroots movement that is reminding me of the early days of Moveon.org. This impressive group of passionate organizers got involved because they were listening to progressive economists and business leaders talk about alternatives to the Geithner plan on re-building the banking system, and they decided to get involved. Some of these organizers are old hands like Joe Trippi (who truly is an old hand -- I met Trippi when he was helping Walter Mondale in Iowa in 1983, and he already seemed like an old hand then) and Zephyr Teachout of Dean campaign fame, and some are relative youngsters like Tiffiniy Cheng.

I agreed to become a co-chair in part (of course) because I strongly support the principles for banking policy that they have laid out -- the same ones supported by all of the economists and economic policy thinkers I respect the most, people like Paul Krugman, Dean Baker, Joe Stiglitz, William Greider, Simon Johnson, Jamie Galbraith, Leo Hindery, and Rob Johnson. But I also agreed to help because the spontaneous passion and obvious organizing skill, completely unsupported with money or institutional DC help, reminded me of the early days of Moveon.org. Before there was ever the online organizational giant of Moveon.org, it was a simple internet petition written and put online in the living room of Wes Boyd and Joan Blades and forwarded to a few of their friends. Wes and Joan didn't know anything about how Washington D.C. works, or how a PAC operated, or how a poll was conducted. They didn't have any money or institutional support when they started, although a few of us in DC recognized their potential and lent a helping hand. All they had was their passion about an issue (in that case, the impeachment fight), and great instincts about online organizing.

Somehow I got listed among their supporters, and it's a pleasure to be put in the company with the others on the list. Ultimately what will be important is not this series of rallies but what they spark. However, it would be nice to see a good counterpoint to next week's nonsense, so please join the demonstration in your area.

No Money, No College

This sounds like a good way to entrench a permanent overclass:

In the bid for a fat envelope this year, it may help, more than usual, to have a fat wallet.

Facing fallen endowments and needier students, many colleges are looking more favorably on wealthier applicants as they make their admissions decisions this year.

Institutions that have pledged to admit students regardless of need are finding ways to increase the number of those who pay the full cost in ways that allow the colleges to maintain the claim of being need-blind — taking more students from the transfer or waiting lists, for instance, or admitting more foreign students who pay full tuition.

Private colleges that acknowledge taking financial status into account say they are even more aware of that factor this year.

“If you are a student of means or ability, or both, there has never been a better year,” said Robert A. Sevier, an enrollment consultant to colleges.

Let's face it - this has ALWAYS been a criteria. We've always seen a preference for legacies at the major universities and Ivy League colleges, with special treatment for those scions whose parents have, say, donated a building. But this is far more overt and applies to the entire college population. At a time when the federal government tries to increase Pell grants and smooth delivery of financial aid, your best chance of getting into colleges which have inflated their prices in recent years is to be very rich.

Nice. No wonder the US is one of the least class-mobile societies in the world.

Geithner Meets The Press

President Obama sat down with Bob Schieffer on Face the Nation today, but I was actually more interested in Timothy Geithner's back-to-back appearances on Meet The Press and This Week With George Stephanopoulos. These were his first two appearances on the Sunday shows, coming out of a week where he announced major initiatives to engage in a public-private partnership to buy up toxic assets, and to re-regulate the financial sector. Both interviews had some interesting moments.

On both shows, Geithner was asked about the potential flaw in the plan for toxic assets, that the banks simply won't sell at the prices set by private investors, because taking losses would reveal the banks to be insolvent. Geithner didn't have the best answer for this other than to urge the banks to "take risk again." Indeed, there is no mechanism to force the banks to sell. In addition, on the issue of counter-party payments from AIG, Geithner demurred at any potential efforts to recover money from Goldman Sachs and other banks who were paid out whole on their credit default swaps instead of being forced to negotiate, pivoting instead to the need for more tools to step in and take over a firm like AIG:

GEITHNER: George, we came into this crisis as a country without the tools necessary to contain the damage of a financial crisis like this. In a case of a large, complex institution like AIG, the government has no ability, had no meaningful ability to come in early to help contain the fire, contain the damage, prevent the spread of that fire. Restructure the firm, change contracts where necessary, and helped make sure that the financial system gets through this...

STEPHANOPOULOS: But it would have been the right thing to do, right?

GEITHNER: If we had the legal authority, that's what we would have done. But without that legal authority, we had no good choices. We were caught between these terrible choices of letting Lehman fail -- and you saw the catastrophic damage that caused to the financial system -- or coming in and putting huge amounts of taxpayer dollars at risk, like we did at AIG, to keep the thing going, unwind it slowly at less damage to the ultimate economy and taxpayer.

STEPHANOPOULOS: So how about now, Goldman Sachs is taking other government money. They got this $13 billion whole from AIG. Congressman Brad Sherman and others have said, they should give that $13 billion back.

GEITHNER: George, the important thing is, we have no legal ability now. That's why I went to Congress last week, to propose a broad change in resolution authority so that we have the capacity to do what we do with banks now.

I suspect that will be a less-than-satisfying answer to most people. Basically Geithner is trying to keep the past in the past, particularly with respect to AIG.

On some other fronts, however, Geithner displayed a definite concern to reel in the massive financial sector and build a broad-based economy that can better manage systemic risk. Here is an answer from Meet the Press on his regulatory proposals:

SEC'Y GEITHNER: Core thing is to make sure that the institutions at the center of our financial system are subject to much more conservative, much tougher requirements on capital and leverage that are applied more evenly and more effectively, frankly. We need to make sure that hedge funds and derivatives come within a framework of oversight so we protect the system from the risks they may present. And we need to make sure the government has the authority it needs to come in more quickly, to help contain the damage, restructure the system, so we can have a stronger system going forward [...] We need a better model. What we're proposing to do is use a model that exists for small banks that was designed by the Congress in the wake of the S&L crisis, build on that model and give the government a capacity to act more quickly, more effectively to contain the damage at least risk to the taxpayer and the economy as a whole.

Certainly, over-leveraging caused a good deal of this crisis; other countries where the banks are leveraged more conservatively are in better shape. Obviously, the devil is in the details - there are currently no capital requirements for hedge funds in the Geithner proposal, for example, and the real issue is whether the regulation will be strictly enforced. Our experience with bank regulators who are too cozy with the subjects they regulate recently suggest that the real problem is a lack of will.

But I thought Geithner's willingness to talk about the need to restructure the American economy, at the macro and the micro level, was interesting.

MR. GREGORY: Time magazine this week has its cover, and it's very interesting. I want to put it up on the screen for our viewers to see. "The End of Excess: Why the crisis is good for America." And there's a big red "reset" button. And everybody talks about reset. Obviously this is not a good crisis for America right now. But take a longer view. In the long run, is this crisis necessary for this economy?

SEC'Y GEITHNER: I think the adjustment to a period of excess is necessary. You never, you never want to have a crisis to remind people of the importance of living within your means, not borrowing too much or why regulation of the...(unintelligible)...is important. You never want to have a crisis that's damaging to make that point. But we're going to emerge stronger than this. When we get through this people are going to care less about what they make, more about what they do, what they achieve with what they make, and that will help make this country stronger.

MR. GREGORY: Will the economy be fundamentally different? Will people own fewer homes? I mean, home ownership, will that go down? Will consumption change? Will our lives change in a meaningful way?

SEC'Y GEITHNER: I think people will be living within their means more, which is helpful. We want to have, you know, a stronger, more sustainable recovery. Not a recovery based on a artificial boom that's not going to be sustained. We need to end this, this, this pattern of having booms and busts at the kind of frequency we've seen. That has to change. And that'll make the, that'll make this a better place to live and a more productive economy going forward.

Further, Geithner understands the importance of active engagement with the crisis, not to ease up on the pedal because of a few positive indicators. And he talks about the need for a broader segment of society to share in the benefits of recovery than the wide gap between the rich and poor we've seen explode in the past decade.

GEITHNER: Now, the important thing, though, is that we keep at it. You know, the big mistake governments make in recessions is they put the brakes on too early.

STEPHANOPOULOS: Is that what happened during the depression? Is that what Franklin Roosevelt did?

GEITHNER: That's one thing that happened in the depression. It's happened in Japan, too. It's happened in a lot of countries in the world. They see that first glimmer of light, and the impetus to policy fades and people are putting on the brakes, and we're not going to do that.

STEPHANOPOULOS: So income inequality goes down?

GEITHNER: It should go down. Again, you know, if you look at the record of performance in the '90s, you know, we had very strong productivity growth during a period of fiscal discipline, fiscal responsibility, strong private investment, and the gains were shared much more broadly.

We can do that as a country, but it requires getting this government to do a better job of doing things only governments can do. That's why I assume important we get better outcomes. That's why fixing our health care system and get costs growing more slowly is so important. That's why we need a better energy policy. And that's why infrastructure needs to be improved.

This mirrors what the President has been saying about sustainable growth rather than feeding into the same boom-and-bust cycles and propping up the same elites who took these tremendous gambles. Or in the words of Joe Biden - "We need to save markets from free marketeers."

Obviously, words are less important than actions. But this perspective can hopefully guide the Administration through this crisis, and provide the kind of investments needed to ensure that everyone has the opportunity to share in the recovery. I'm not convinced that Geithner is the best advocate for reducing inequality and stopping the casino on Wall Street, so from the outside the work continues to keep pushing for a newer, safer, more durable economy.

The Truth Behind The Armchair Constitutionalists

Whenever I hear media stars like Lawrence O'Donnell and Howard Fineman pontificating over whether something is Constitutional or not, I get extremely wary, particularly considering they have spent several years arguing about detainee policy and wiretapping and torture in mostly POLITICAL terms instead of the constitutional aspects. Suddenly when Congress tries to set tax policy toward a particular class of wealthy people the media gets out their social studies texts. I imagine there can be a fair amount of reasonable argument around this, but Scott Lemieux, claims the Constitutional concerns are groundless.

Ed -- regrettably echoing the hapless Charles Krauthammer -- says that "Bills of attainder" and "ex post facto" are two phrases well-known to high school freshmen taking mandatory civics classes, so they must certainly be known to Congressmen." The ex post facto clause, however, has been held since the early 19th century to apply exclusively to criminal cases. The prohibition on bills of attainder is even less relevant; it certainly prohibits Congress from convicting AIG traders of criminal offenses without a trial, but says absolutely nothing about Congress's ability to set tax policy.

Another blogger, in addition to the clearly erroneous claims, asserts that the bill violates the equal protection clause. The obvious problem with this argument, however, is that it proves too much. The tax code discriminates in countless ways -- against renters and wage earners and in favor of homeowners and investment income earners, for example. It was been well-settled for decades that such discrimination require only some rational relationship to a legitimate government interest. The policy taxing bonuses for corporations that would have gone bankrupt without public support bears a much clearer relationship to a legitimate public objective than a law preventing anyone but an optometrist or ophthalmologist from putting lenses in glasses frames, which the Supreme Court upheld unanimously.

The debate about whether a large excise tax is good public policy ought to go forward. But let's be clear what these Constitutional questions are all about. The average salary of practically everyone you see on the teevee is well beyond the national average, and in most cases beyond the $250,000 a year cited in the House bill, and used as a dividing line in Obama's budget to reset marginal tax rates from 35% to 39%. And so, for Overton Window purposes, characterizing any effort to reduce income inequality as unconstitutional makes a whole lot of sense. Take a look at Mark Haines, CNBC's latest hero, arguing that no company can be "run well" by anyone making under $250,000 a year. Because they've been run so well by the overclass to this point.



Here's a separate interview between Haines and Rep. Brad Sherman (D-CA):

HAINES: It does not go far enough, sir?

SHERMAN: Absolutely -- it doesn't deal with the Merrill Lynch bonuses, since they were paid in December, and worse than that it doesn't deal with million-dollar-a-month salaries. More importantly, we should have AIG in receivership, they should've been put in receivership months ago, and we would have saved tens of billions of dollars. We wouldn't see tens of billions going to the richest on Wall Street, and overseas -- and of course, these bonus contracts would have been voided. We need receivership, and we need limits on salaries as well as bonuses.

HAINES: Well, receivership ... I think most people agree, that would have caused some systemic problems.

SHERMAN: Most people on Wall Street agree. But most people on Main Street do not.

HAINES: And what do the people on Main Street know about running a financial system?

SHERMAN: What do AIG executives know about running a financial system? [crosstalk] They only know how to destroy one.

HAINES: This is witch-huntery. I'll be perfectly honest with you.

SHERMAN: We don't have to hunt the witches. We know who they are.

HAINES: You and people who share your opinions seem to think, you know, let's hold salaries on Wall Street to $100,000. Do you have any idea what Wall Street would look like if you do that?

SHERMAN: Well, first of all, I wouldn't set the limit at $100,000.

HAINES: Well, whatever. $250[,000]. All the business would go -- all the business would go overseas, that's the bottom line.

SHERMAN: Obama's position is $500,000 plus unlimited restricted stock. That's where I'm at as well, although I was actually at a higher level before Obama's statement. But for you to assume that Wall Street is acting in the national interest flies in the face of recent reality.

There's a multi-pronged attack here. Congress cannot tax exorbitant bonuses of companies they bailed out because it's unconstitutional. Corporations can only be run well by the rich because greed is virtuous. Only investor participation can save the financial system, so government had better not get any ideas about capping executive compensation. And those executives must be kept happy and lavished with gifts because they are so wise in the ways of exotic financial instruments that they are the only ones who can defuse them, a fairly ridiculous idea.

Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.

In South Korea, cozy relationships between banks and the large conglomerates called chaebols were a major reason for the crisis. But after the crisis hit, Korean bankers and companies insisted that the complexity of chaebols like Samsung and LG — with their many separate but interwoven businesses — meant that outsiders would not be able to distinguish good loans from bad.

In Thailand, some argued that the preponderance of family-owned businesses — and the lack of clarity about precisely which family members were really in charge — meant that only bankers already working in big institutions like Bangkok Bank and Siam Commercial Bank could determine which borrowers were creditworthy.

The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses.

We have a major inequality problem in this country. Wages for workers have stagnated while the rich grow ever richer. It is well within the public interest to address that, and because this has become so extreme as to affect consumer spending and economic activity, it's more vital now than ever. Wall Street has decoupled salary from performance and perpetuated a culture of greed in the belief that such greed made sense for the overall economy. But an oversized financial sector that produces nothing but imagined wealth actually debilitates a country. Simply put, astronomical profits from making side bets on the economy should be discouraged, making the same profits from inventiveness and innovation would be encouraged in the exchange.

If it turns out that you can make a comfortable living at zombie institutions but can’t earn big bucks there, then smart, confident, ambitious, greedy people will leave their jobs and go do other things. In a good way! Maybe they’ll start small businesses. Maybe they’ll join non-enormous, better-managed firms and help them grow and prosper. That’s the kind of thing smart, confident, ambitious, greedy people ought to be doing. Putting their talents to work in the pursuit of profitable market exchanges. Not putting their talents to work trying to run scams at taxpayer expense.

There are promising signals that the Administration is taking concerns about executive compensation seriously, although there are far better ways than having a secretive institution like the Federal Reserve "oversee" giant corporations (which they failed to do in the run-up to this crisis). Perhaps one way is to actually tie pay to performance through Silicon Valley-style compensation schemes, but the best way is through the tax code with rates at the highest marginal levels (I'd insert an additional rate above $1 million or more) that look more like the pre-Reagan era. Which is why those who wed themselves to the establishment elite get so nervous with clawback provisions like the AIG bonus tax. They don't want anyone in Washington getting any funny ideas about marginal tax rates. After all, it's unconstitutional.

Why AIG Matters

I didn't think it was necessary to spell out why $165 million dollars in bonuses for individuals who tore down their companies is probably a bad thing. But there does appear to be a mild backlash against the over-the-top nature of the public anger, including from White House officials. And given that the numbers are a fraction of one percent compared to the bailout money AIG took from the government (that will never get paid back) or the Fed's huge program to buy up mortgage-backed securities, they may have a point. So, OK.

Obviously there's a political importance because the nation is following the issue so closely. But far more essential than that is how this is tied to income inequality and the stratifying gap between the rich and poor. Kevin Drum is absolutely correct to note that the standard practice in corporate boardrooms is to call bonuses a reward for performance right up until the moment that the performance tanks, at which point they become necessary for retaining talent.

Of course they got their comp locked down when they saw the storm ahead of them. This is what executives always do. Back during the dotcom bubble, corporations handed out trainloads of cheap stock options even though the practice was heavily criticized. Why? Because the stock market was going up and it was a nearly guaranteed way to make lots of money. After the bust, they suddenly took the criticisms to heart and largely stopped the practice. Why? Because the stock market was going down and it wasn't easy money anymore [...]

What happened at AIGFP is standard practice throughout corporate America. America's corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it's not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.

The AIG traders who got this sweetheart deal are nothing special. Management probably didn't even think twice about it. Of course you switch from performance bonuses to retention bonuses when the market looks stormy. What else would you do?

The decoupling of risk and profit is the issue here. Corporate titans never rise and fall on the merit of their superior intellect, and there has been a great shift to mke sure profits, both personal and corporate, are kept in private hands, while the risk is socialized. When times are flush nobody really cares about or at least pays attention to this; when the same people who wrecked the economy feel entitled to their ungodly profits, people get understandably upset.

And the tone-deafness on this from the Administration, therefore, while striking, does not surprise. The Treasury Secretary is now admitting that he asked Chris Dodd to take out the executive pay caps from the stimulus. His rationale? "We wanted to make sure it was strong enough to survive legal challenge." Actually, they wanted to make sure Wall Street didn't pull the pin out of the grenade.

If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains?

"It would become the biggest naked position on Wall Street," one longtime Financial Products executive said, "and everybody would exploit it." [...]

"Nobody is going to give (the bonus money) back and then stay," said one of the firm's employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG's counterparties."

The sense of entitlement to a system that rewards them regardless and shovels massive amounts of money and power in their direction. Heck, we learned today that 13 bailed-out companies owe $220 million in back taxes and lied to Congress about it. OF COURSE they did. That's the system they've created - protections for their corporate bottom line, riches for them personally, crumbs for everyone else. Reaganomics basically set this in motion 30 years ago, and the system has been in place for so long that any alternative path is like the true forms on the outside of the cave instead of the shadows on the inside we think represent reality. But the public knows intuitively that they've been getting a raw deal for decades, and the bonuses are only a small part of the story.

James Galbraith has an amazing piece about the limitations of the Obama economic team to reinvent a new economic ideal, rewarding work instead of wealth, returning the business of finance to its narrow role of facilitating capital flows, etc.

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) [...]

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work [...]

The government must take control of insolvent banks, however large, and get on with the business of reorganizing, re-regulating, decapitating, and recapitalizing them. Depositors should be insured fully to prevent runs, and private risk capital (common and preferred equity and subordinated debt) should take the first loss. Effective compensation limits should be enforced—it is a good thing that they will encourage those at the top to retire. As Senator Christopher Dodd of Connecticut correctly stated in the brouhaha following the discovery that Senate Democrats had put tough limits into the recovery bill, there are many competent replacements for those who leave.

Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now [...]

This cannot be made to happen over just three years, as we did in 1942–44. But we could manage it over, say, twenty years or a bit longer. What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to "normal," no going back to a world run by bankers—and no alternative to taking the long view.

The AIG scandal represents a reminder of the way things WERE, when Masters of the Universe ruled the world and dared anyone to challenge them. There are raw economic benefits to getting executive compensation under control - the economic burst that would come from a steep reduction in the inequality gap, with a concurrent stronger middle class, reindustrialization, and the rise of labor unions. But there are even bigger implications. It means wresting control over our country away from the ones who ruined it, who are trying to threaten, cajole and intimidate their way into maintaining control. For two years a campaign captivated America with the promise that the people have power, that mass collective action can create change. But we don't. And the bonus babies have proved it. Now there's a choice, that policymakers will eventually have to make but which can be pressured from the bottom.

Who runs this country?

Monster Chiller Horror Theater

Apparently, allowing workers making something approaching the minimum wage the ability to collectively bargain instead of having their rights trampled by management, their organizers fired, their workplaces shut down rather than stay a union shop, and their colleagues intimidated is the central threat to the very fabric of American life. Hearing these landed gentry talk using the language of end-times apocalypse is pretty nuts.



"Radical Islam and Employee Free Choice are the two fundamental threats to society" is my personal favorite.

Congress could take up this bill as early as next week, and clearly it's going to provoke a lot of opposition. But the media-hyped language of "smackdown" and "nuclear war" and "Armageddon" obscures the point - all this act would do is enforce the violations to labor law made routinely by management, and give employees the choice to decide how to have an election for unionization rather than having one imposed upon them. It's only "Armageddon" if you're absurdly wealthy and you want to and you want to preserve the extreme inequality, that is partly to blame for this economic crisis, far into the future. It signals the end times, all right, but only for this new Gilded Age in which we live.

The Fairness Doctrine

I was on Bill Scher's Liberal Oasis radio show this morning (it airs tomorrow - you can get the podcast on iTunes here) talking about the federal budget, and if there's one word I can use to describe it, I'd pick "fairness". Peter Orszag is simply soft-selling the implications. The budget returns us to an era of tax fairness where everyone in society invests according to their means for the greater good. There are certainly some on the right who would call that socialism - I hope they have no use for the police, fire department, libraries, post offices, or roads. The fact is that there are public goods that we all must contribute to because only government can provide them, and with this budget, we begin to engaging the whole country in that project once again.

Paul Krugman is pleased that progressive priorities on health care and the environment are pushed forward in this budget and will be paid for.

This budget allocates $634 billion over the next decade for health reform. That’s not enough to pay for universal coverage, but it’s an impressive start. And Mr. Obama plans to pay for health reform, not just with higher taxes on the affluent, but by putting a halt to the creeping privatization of Medicare, eliminating overpayments to insurance companies.

On another front, it’s also heartening to see that the budget projects $645 billion in revenues from the sale of emission allowances. After years of denial and delay by its predecessor, the Obama administration is signaling that it’s ready to take on climate change.

And these new priorities are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets, which insulted our intelligence on every page. This is budgeting we can believe in.

Krugman believes that eventually, taxes may have to be raised more broadly to deal with long-term budget snags, perhaps with a value-added tax. But for now, Obama is boldly creating a fairer vision for who pays in society.

The budget that President Obama proposed on Thursday is nothing less than an attempt to end a three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters.

The Obama budget — a bold, even radical departure from recent history, wrapped in bureaucratic formality and statistical tables — would sharply raise taxes on the rich, beyond where Bill Clinton had raised them. It would reduce taxes for everyone else, to a lower point than they were under either Mr. Clinton or George W. Bush. And it would lay the groundwork for sweeping changes in health care and education, among other areas.

More than anything else, the proposals seek to reverse the rapid increase in economic inequality over the last 30 years. They do so first by rewriting the tax code and, over the longer term, by trying to solve some big causes of the middle-class income slowdown, like high medical costs and slowing educational gains.

Reducing inequality is a major goal of this budget, and the right way to re-create a broad middle class to spur sustainable economic growth. In a tremendous post, Charles Lemos discusses how inequality has crushed us economically and why this budget is so hopeful.

Just how far have we fallen during that three-decade era of economic policy dominated by the ideas of Ronald Reagan and his supporters? Well, a UN report last year on urban poverty found that out of the world's 120 major cities New York was found to be the ninth most unequal in the world and Atlanta, New Orleans, Washington, and Miami had similar inequality levels to those of Nairobi, Kenya and Abidjan, Côte d'Ivoire. In western New York state nearly 40% of the black, Hispanic and mixed-race households earned less than $15,000 compared with 15% of white households. The life expectancy of African-Americans in the US is about the same as that of people living in China and some states of India, despite the fact that the US is far richer than the other two countries. Is this right? Is this America? It is the America that Reagan has wrought and that President Obama seeks to undo. Undoing Reagan, how sweet the sound.

Unequal societies have throughout history been prone not just to social upheaval but also to economic turmoil. Beginning in the 1970s and accelerating after 1980, the US began undoing a series of policies that dated to FDR led to what historians call the "Great Compression" a flattening of income so that by 1964 the ratio of CEO pay to average worker pay was 24:1, the narrowest in the nation's history. Before the financial meltdown the ratio was around 400:1, or back to levels last seen in the late 1920s. And this is actually down from a high of 525:1 in 2000 (the reason is that executive compensation is largely paid in stock). In 1970, the top 1% of Americans controlled 8% of the nation's wealth, by 2000 they controlled 15%. In 1973, the income of the top 20 percent of American families was 7.5 times that of the bottom 20 percent. By 1996, it was 13 times. By 2006, it was 18 times.

The last 30 years have ushered in a New Gilded Age, with all the trappings of the robber barons prevalent at the outset of the last Depression. The moral as well as economic implications of this have been tragic. Just as the reinvention of the middle class with shrinking inequality drove the tremendous expansion of the post-war era, so can too the radical change Obama is proposing here.

So of course, Republicans and so-called Democrats are blasting it, and using the same small-bore nonsense of twisting the meaning of a program to make it sound crazy ($200,000 for tattoo removal, when it's an anti-crime program), as well as the persistent lie that taxes on the rich hurt small businesses, which will never get old for them and also never be true.

bama is proposing to raise taxes on households earning over $250,000 by increasing the rate on the top two tax brackets and limiting deductions, starting in 2011.

Republicans and other critics, knowing they will get little mileage from defending the rich, instead are casting the plan as a tax hit on people who run industrious little companies driving job growth.

That's not likely, according to one in-depth analysis, which found that more than 95 percent of small business owners would be off the hook.

Then there are clueless Blue Dogs like Gene Taylor, who returns to his tried and true hobby horse of fiscal responsibility - but see if you can find the incongruity:

(CNN) – Mississippi Democratic Rep. Gene Taylor blasted the budget outline President Obama submitted to Capitol Hill today, saying “I don’t like it…change is not running up even bigger deficits that George Bush did.”

“That’s what George Bush did very well. Apparently that’s what President Obama is doing.”

Taylor, a conservative “blue dog” who voted against the stimulus bill, noted he was still reviewing the plan but was troubled by the additional amount of spending for many government programs on top of the recent increased funding many agencies received in the economic stimulus bill.

As a member of the Armed Service Committee, Taylor noted the budget only gives the Defense Department a “small increase,” which he said would barely cover the cost of living adjustments for the military.

Get that? Obama's running up huge deficits, but he deserves a scolding for only giving the Defense Department a "small increase." Because military spending is magic spending, the largest expenditure in the federal budget but one that somehow never hits the bottom line.

I don't want to paint too rosy a picture. The economy is in big trouble and we're probably going to have to go back for another round of stimulus. But the principles of this budget - with a focus on the middle class, and tax fairness, and investment in national priorities - is what will eventually lead us back to prosperity.