Wednesday 7 March 2012

The Trouble With Billionaires

The Trouble
Yes, more of a book report than a review. I found a great deal of info here.

 The Trouble With Billionaires; Why too much money at the top is bad for everyone, by Linda McQuaig and Neil Brooks, is an excellent analysis of economic and historical influences, which led to the 2008 market crash.
Muskoka cottage/boathouse

What is the trouble with billionaires?

Many don't share the wealth, although some do, but the big deal is that they don't pay their share of taxes.

Tax havens, unfair tax rates, and lobbying; using their money to control politicians = plutocracy.

In a democracy, in a free market, with unemployment a disaster, it's just the wrong thing to do to hide your money under a basket.
PM Harper is wrong, lowering taxes for big business doesn't result in investments in Canadians and Canada.

Money at the top in this one!
Lake Muskoka cottage
Current situation with billionaires
  • Virtually all income growth of the past 30 years has gone to the top 10%
  • Canadian billionaires have gone from 25 to 55 in ten years
  • World-wide: there are 1011 billionaires
  • The average CEO makes 250 times that of the average worker
  • Stock market crash of 2008, whereby $4 billion in executive bonuses, after a net loss of $27 billion, triggered the economic meltdown
  • Hearkens back to the 1920s, and feudal times, when those with power (read money), resulted in a plutocracy, in which the rich lords and landowners, controlled society. 
  • Hedge funds: pools of capital available only to the rich, increased exponentially since 1980
  • Tiger Woods made $100,000,000 a year before his fall
  • millionaires spend lavishly, living off the interest of their fortunes, buying $3 million cottages
  • Michael Lazaridis, CEO of RIM, take-home pay of $51 million
  • Jerry Bruckheimer, (CSI: Crime Scene Investigation, et al), $145 million
  • Red Leaves Resort, in Muskoka
    cost: $100 million in a two-season economy.
    It went bankrupt in 2009. Perfect place for a prom!
  • John Paulson, worth $12 billion, a hedge fund manager, 2007 income of $3.7 billion
What happened?
If we go back to the Stockmarket crash of 2008, we must look at the crash of 1929, the since repealed Glass-Steagull Act, tax rates post-war and present day, the separation of the monied and the elected, financial rewards in sports, business, and the entertainment industry. We saw a more equal distribution of income in postwar years (1950-1980), when high tax rates and more equal pay meant more equal distribution of income and wealth.

Big men with big money and big lobby efforts - Post WW 1

It makes a lot of sense, this premise. Post- WW I, many made money off the war, especially with large tax breaks for 'investing' in the war effort.  I've been watching Bomb Girls, it is a little bit of gender and war history, when the men let the working class women out of the kitchens and into the bomb factories. No more just barefoot and pregnant. The working men went to war. The profiteers went to work to build and make money.

John D. Rockefeller, J.P. Morgan lobbied President Taft in 1911 to fight antitrust laws, which would limit the power of banks, and they won deregulation. As a result, with money controlled by a few very rich men. These men, Morgan controlled companies worth $17 billion, were influential by sitting on the board of directors and executive committees of various utilities such as steel, American Telegraph & Telephone, railroads, power, gas companies. Collectively known as Wall Street.

The plutocracy prevailed. These men controlled Congress, and the three Rebublican presidents of the 1920s: Harding, Coolidge and Hoover, were able to meet the demands of the wealthy. They worked to reduce the taxes, through, for example, the 1926 revenue bill whereby someone earning $1 million, had taxes reduced from $600,000 to $200,000. (McElvaine, The Great Depression: America, 1929-1941, NY:Times books, 1984.) 

Stockmarket Crash of 1929
lakeside cottages
There was a fever to fulfill the American Dream; to become rich quickly. The middle-class, who could taste money and power, began to borrow money to buy into the new technologies: cars, washing machines, that purportedly made lives better and easier. 

Buying stocks on spec
The middle-class were able to put down $10 to buy an $85 share in a particular stock, borrowing $75 from a Wall Street broker. By year's end, the stock was worth $420, the client paid back the load to the broker with interest, and made a profit of $330. We know what happened when stocks, artificially inflated, began to fall and loans were called in, when stock holders did not have the money to pay for them. No one could pay for anything. Businesses and employers went bankrupt. Not the big boys, though. By 1933, there were 13 million unemployed (25% of the labour force), homeless men road the rails or lined up at soup kitchens.

Roosevelt signed this act in 1933, which restored government regulations repealed in 1911. The commercial banks were kept out of the stock market, having learned their Depression lesson. With these changes, while the middle-class rose in income, Wall Street brokerage firms and big banks were no longer able to gamble with public money. Ordinary folks, although not women or blacks, began to juggle economic power more equally. 

The public, through support from Roosevelt and the union movement, began to share in the profits from industrialisation and technology. UAW and General Motors agreed upon wage hikes and benefits that followed productivity gains (The Treaty of Detroit - 1949). With more workers with more buying power, companies were motivated not to play the stocks, but to invest capital into development, research, products and services. 

Banks were forced to divest themselves of their investment divisions, where they were using public dollars without regulation. This meant that they were not susceptible to the panic of the fall of the markets anymore. This resulted in economic growth, more equally, for all. This act was repealed in 1999, after much lobbying. It is this deregulation, as well as other factors, to which the 2008 crash is attributed.

Medicare - sharing the wealth 1962
Not all were hoarding their wealth. Tommy Douglas, credited as the father of Medicare, took his Saskatchewan medicare program to the feds in 1962. In Canada, Prime Minister John Diefenbaker decreed in 1958 that any province with a universal medicare plan, would receive 50 cents on the dollar from the Federal government. Lester Pearson, in 1966, with a Liberal minority government, created the program for Canada, based on Douglas' 50% rule. This is what differentiates us from the US, where many cannot afford healthcare.

Progress in equality in sports, entertainment, business and finance -1970s

It was during this time, the 1970s, that many of us began to examine the impact of big business, and industry, on the natural world around us. Cheapmart was created, with profits trumping quality, big box stores on the increase, malls taking our well-established small business owners.
Big box stores are still ruining small towns. 
People want more, bought on credit, with less. This means cheaper goods, poorly made, in quantity, not quality. Outsourcing, not crowdsourcing, is the name of the game. Paying a poor wage to a citizen overseas, in an unregulated factory. Places with high accident rates, and poor safety practices, to do the work traditionally done by workers paid according the fair wages of the developed world. Look at the product recalls from China, the pollution and the poverty in outsourced countries, like India. 

Scraping the forest from the land
to build a hardware store.

Tax Rates  & Tax Havens 1920s - Present day
The history of tax rates is one of money, conviction, and power. In the 1920s, the top marginal tax rates were 24%. 
In Canada, we follow similar patterns. In periods of high taxes, productivity growth increased, and topped 90% in tandem with the US rates. 
Tax havens protect those who fail to pay fair taxes, leaving the rest of us with the burdens. 

Huge deductible tax donations to large educational, medical and cultural facilities, allow the very rich to have power and influence over our institutions. Regular folk, like us, who raise money for our communities: for hospices, volunteer firefighters, food banks, local libraries, the poor and the homeless, do not have the ear of our politicians. PM Harper is sucking up to the Chinese, while we have bake sales for services necessary to show our humanity.
Plot of top bracket from U.S. Federal Marginal Income Tax Rates
for 1913 to 2009. Data are from Wiki
In 1991, one Canadian family (the Bronfmans, they think - see Smith, How to tax a billionaire, 2002) moved more than $2 billion into the US to escape the $700 million they should have paid in taxes in Canada.
How to tax
  • F.D. Roosevelt (1933 - 1945) pushed this up to 63%, and then 79%.  
  • Under Eisenhower (1953 - 1961), this rose to 91%. Estate taxes went from 20% in the 20s, to 77% in the 1950s. That is, these wealthy families, who lived the dream, were forced to pay inheritance taxes, sharing the wealth with all, on money made by those who worked 9 -  5. 
  • Tax rates 1944 - 1964 were 80+%, then 70%, dropping to 50% in 1980.
  • Reaganomics (1981 - 89) led to a 28% tax rate in 1988.
  • Clinton (1993-2001) pushed it up to 39%.
  • George Bush (2001-2009) dropped it to 35%.
The Right to Bear Arms and Earn Huge Profits -1980
Then what happened? The Glass-Steagull Act was repealed in 1999.
The NY Stock Exchange formerly prohibited investment banks from being listed on the stock exchange. Bankers could now reward themselves with huge pay packages, they were not liable for their firms' debts. They had no personal risk gambling with other's money.
Merrill Lynch (joined NYSE in 1971), Bear Stearns (1985), Morgan Stanley (1986), Lehman Brothers (1994), Goldman Sachs (1999) were raising money through the stock exchange.
(Lehman Brothers went bankrupt in 2008, with a debt of $600 BILLION.)

With the economy improving, infrastructure, designed to look after those without, no longer envying an emulating the upper classes, people understood the need to allow the middle-class and upper-classes to increase profits. 
In the US, to quote McQuaig and Brooks (p.65), by the 1990s, "A virtual revolving door now connects the power corridors of Wall Street and Washington..." As in the past, those with money and power began again to influence government and shifting the power from the people elected to those  billionaires able to take risks with other people's money.

Subprime Mortgages - financial deregulation, lower taxes, and monetary policies
Ah, here is the beginning of the 2008 crash. Billionaire wannabes, seeing an opportunity for making money, were offering homeownership to those without the means or the skills to carry a mortgage. From a need to scare up a 20% down payment, Wall Street began to offer mortgages without any downpayment at all. Unfortunately, for the world, people unable to navigate their way around property taxes, handling credit, saving for retirement, were offered a home with no need to determine their ability to carry a mortgage.

One story, told by McQuaig and Brooks, is appalling. Knowing that the subprime mortgages were unsustainable, one rich man, John Paulson, took our insurance on these loans. It's like taking out a loan on someone else's house, with education and experience know that they will fail to pay it off. He made $3.7 billion on the deal (p. 4-6, McQuaig & Brooks).

Hedge fun managers, gambling on these profits, sold these mortgages and Fannie Mae and Freddie Mac US subprime mortgage agencies were one of the factors leading to the horrific events of 2008. How could mortgages, carried by those with an inability to pay, at lower than fair market rates, continue to be held by those hoping to make a buck? These mortgages were 90% adjustable-rate mortgages, and as lending rates climbed, the homes were less than fair market value. Homes needed refinancing, and mortgagees, unable to handle their debts and higher mortgage costs, continued to forfeit their mortgages. With credit card debts soaring, then jobs being lost, the economy crashed.

Hedge fund managers sold these mortgages, with no collateral, and falling housing prices, by 2011, there were millions of defaulted mortgages. We can see the violence and the evidence of anger in countries, like Greece, where no hope, no work and few who believe in paying taxes, are facing a debt load beyond our ken.

Current Day- a case for increased taxes
Lake Rosseau cottage
We know that a sense of self-worth comes from the work we do, whether for pay or for love of humanity. Job losses have a huge impact on humanity. We are not our work, our income, our cars or our homes. We need a sense of pride in what we do and a sense of achievement and accomplishment, and fair wages for the middle classes.

With fair taxes for all, and a fair increase in wages for the bottom 90%, the economy will surely improve. But it will take political will, and a step back by the rich business owners, and economists, who control government policy. Those who paid to get them elected, will not want to pay higher taxes, no matter that it will benefit all of its citizens. That is a plutocracy in which we live and vote.

With anticipated job losses in public services, we face a further degeneration of our psyche. Without the 2% GST the Conservatives cut, the federal government has given a small amount to those who buy small, and lost a huge amount of money we depended upon from those who live large. History shows us that the disparities between the middle-class, the rich, and the 1% will only increase.

Local politician, Randy Hillier, making over $100,000 as MPP, was found negligent last election year, had not paid property taxes. As a practicing libertarian who wants to be free of taxes,

The capital gains tax cuts of 2009 in Canada cost the Canadian government $1.7 billion in lost revenue. Those with inherited wealth danced. These are taxes faced by the richest 1% of Canadians.

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@Barrie Summy


Linda McLaughlin said...

It's depressing, isn't it, Jenn? The old saw about those who do not study history being condemned to repeat it seems to apply here. I hope "we the people", in both the US and Canada, can finally get a clue and fix the problem. But we have to elect the right people, and the lackeys of the rich are well-funded (esp. in the US post-Citizens United) and glibly effective with their talk of the benefits of low taxes for all. Blogs like yours help to get the word out, so thanks for this review.

Red said...

I always like reading Linda McQuaig so I'll have to look for this one. Well. since you've written such a great summary maybe I don't have to read it!

Kay L. Davies said...

The old typo-hunter here, Jenn. I'm sure Tiger Woods made more than $100,000 a year. Did you mean $100 million?
You're so right about the unfairness of the tax structure. I remember hitting a different tax bracket after a certain number of hours of overtime in a week, so we'd end up taking home less than we would have if we'd worked no overtime at all. How fair is that to a worker on an hourly wage? Granted, it was a good wage, but why would we be penalized for working harder?
I am mathematically disabled, so I'll probably never understand the ins and outs of finance, but I do know the difference between right and wrong, the difference between fair and unfair.
It's too bad the workers of the world can't unite these days, because too many companies are union-busters. Instead, we should get together and hire lobbyists.

Sarahlynn said...

I especially love the Monopoly image. Thanks for such a thorough review/lesson on an interesting topic!

Sarah Laurence said...

Wow, that's almost more of a history lecture than a book review - well summed! I think the solution is more stock market regulation and closing loopholes along with better health care coverage for all.

Fastman said...

@Kay L. Davies
Your comment about taking home less income as a result of overtime. This is a fallacy that many people get confused over. When working OT depending how your payroll was setup and company source deductions were made, it would appear you made less money.

In Canada you are taxed on your annual income. More income - more taxes but not so much that you make less for working OT or when you get a raise.

Example: In Ontario 2010 tax rates
* $40,970.00 - 31.15% tax bracket
* $65,344.00 = 32.98% tax bracket
* $127,021.00 and up = 46.41% - highest amount

Barrie said...

Wow, Jenn. What an incredible amount of work you went to for this review. All the explanations and photos. Thank you!