Category: Elites

Harnessing monopoly for the common good

by Karl Fitzgerald

All other things being equal, the owners of the earth have a comparative advantage over those in business or earning a wage. With $21 trillion hidden in global tax havens revealed this year (), and Starbucks, Amazon and Google being grilled in the UK Parliament this week, the need for a fairer tax system is growing.

The clamour for the expansion of the GST is at fever pitch here in Australia. What are the motivations behind this?

Few have noted the spree of government reports advocating for a fairer system via the ‘transfer of tax bases’ – the move from mobile to fixed tax bases. Such a move would wipe out the ease of using tax havens and tax trickery. This is code for saying ‘those who own the land must pay for the governing of the land’.

Ken Henry’s Australia’s Future Tax System, the NSW Lambert report, the ACT’s Quinlan Report, the UK’s Mirlees Report and the NZ Tax Working Group have all advocated to some extent the need to move to fixed tax bases.

In effect they are discussing the ability of people like Gina Rinehart to make $2 million an hour whether she gets out of bed or not.

In economic parlance, this is a discussion about economic rents – in broad terms the naturally rising value of the earth (or licensed monopolies). Bureaucrats are trying to awaken the people to the fact that the tax system can be used to harness these powers of monopoly for the common good.

But what have been the policy responses?

With austerity pressures blindsiding the people in mass sackings, the IMF has been busy installing the next layer of inequality. The global land bubble has blown the world economy apart but yet the answer has been to hit the consumer with regressive sales taxes. Someone earning $20,000 pays the same amount as someone on $20 million. Sounds great right?

This is the plan set out by far right think tanks such as the Cato Institute and the Heritage Foundation.

Rising sales taxes have occurred in the UK, France, NZ, and Japan to name a few. American consumers experienced 542 increases across jurisdictions in (2010).

However, this won’t stop the property speculation that was the catalyst to these problems.

It is only a matter of time until the same bubble mentality takes hold of the most precious asset – our homes. This is in effect what Bernanke’s QE3 is trying to trigger – the next land bubble.

Economists have long acknowledged that ‘asset bubbles always end in tears’. Why then are we encouraging the same mistakes?

Considerable resources must be spent educating society about the advantages those with monopoly rights have over the rest of the economy. Similar to climate sceptics, property bubble sceptics see nothing wrong with First Home Owners committing to a lifetime of historically high mortgage payments. A blind eye is turned from the $100′s of extra dollars fleeing local communities each week and heading towards deep pockets in the banking and real estate industries. The multiplier effect of such behaviour is damaging small local business, our largest employer.

TV shows such as Location, location location feverishly promote the value of prime locations as an investment strategy.

Why then does the economics profession ignore the role of location?

The advantage of living near a new train station or public hospital is delivered in higher land values. These publicly funded advantages result in private windfalls, leading to the deadweight losses of inefficient taxation. The recent Committee of Melbourne’s Moving Melbourne report identified the need for ‘value capture policy’ to finance the infrastructure deficit. Lucy Turnbull has advocated for similar policies in Sydney’s Cities Expert Panel.

Meanwhile small business struggles with rising rents, while surrounding them here in Melbourne is a commercial vacancy rate of some 24% (PDF, Appendix C). Such speculative supply kept off the market forces up rents, undermining our export competitiveness.

Treasurer Swan’s recent business tax reform initiative asked the corporate community to orchestrate their own tax cuts. They threw in the towel early when competing lobbyists couldn’t come to an agreement within the terms of reference. The stalemate was a call out to government to tax those without a strong lobby group – the consumer, with a higher GST. Chris Jordan, the head of this body, has now been appointed the lead of the ATO.

Those locked out of the housing market see some $2.6 billion per year given to negative gearing property investors over the last decade, 92% of which is spent on existing housing. The latest addition to Treasurer Swan’s ‘price of inequality’ is the booming Self Managed Super Fund industry. All other things being equal, those who already own a home are now permitted not just negative gearing write-offs, but a capital gains tax exemption for residential property investments via an SMSF vehicle.

Gen X, Y and Z will soon realise that baby boomers own nearly half of housing wealth. The latest empowerment of SMSF’s announced in the MYEFO will only enhanced this generational inequity. Treasurer Swan seemed genuine in his pre-budget moves to remove the capital gains exemptions for SMSF’s barely two years after their introduction into the residential sector. Unfortunately the lobbyists cornered him and single mums were hit with the cutbacks instead.

The power of organised oligopoly was dramatically demonstrated in the challenge to pokie reform when PM Julia jumped at the thought of a $20 million campaign across marginal seats by the Australian Hotels Association. The blight on democracy was compounded by the revelation that only $3 million was required for the desired policy outcome.

Lest we forget – the Victorian pokie licence auction, slammed by the auditor general as a $3 billion giveaway.

For the level playing field to truly exist, the power of monopoly must be broken down for all to see. The cheekily titled ‘digital dividend’ Senator Conroy is proposing could well hold the key. Instead of a fee simple auction of the electromagnetic spectrum’s 700 khz bandwidth, an annual lease could be charged for what is described as ‘the waterfront real estate’ of the EMS. This lease would be based on an annual valuation of the bandwidth’s value. The value of these property rights is destined to escalate once iphone 10 allows individuals to holographically transport themselves to the other side of the globe. Over time, government could share in the rising value of the earth, the economic rent, to keep price overheads low as classical economists once championed.

Within this lease could be a caveat that X amount of free airtime be provided to each political party in a campaign year, as New Zealand allows. Politicians would then face less pressure to pawn their principles as they wouldn’t have to pay for advertising on the once public airwaves.

The scientific community have been very open in accepting its failure to simplify core messages to the public over climate change, allowing breathing room for climate sceptics to control the debate. Similarly in the economics profession, some responsibility must be taken for the current situation where the global property bubble has been ignored as a catalyst for the credit crisis (falling land prices → bank write downs).

To be a science, economics must relate to reality. Thankfully economists such as Joseph Stiglitz, Michael Hudson and Martin Wolf are raising the flag as we re-frame economics as the essential science, never dismal.

In closing, the pot of gold at the end of each property flip must face closer scrutiny if we are to give equal opportunity to future generations. The tax system must be directed to equalise the opportunities between those who own our common wealth and those who are contributing to the community. Otherwise, rent seeking in the race for the rising value of the Earth will distort both economic and political decision making.

Karl Fitzgerald is the Projects Coordinator for Earthsharing Australia.

This article was first published at www.onlineopinion.com.au

Loud thunder, little rain: China’s new leaders target corruption

by Kenneth Chern

China’s new leaders are aware of the danger that corruption poses to the nation’s social stability and economic development.

But entrenched corruption at the local and national levels, including among the families and friends of those very leaders, will make it difficult for them to break the link between money and power that frustrates the masses but sustains the power of a Communist Party that long ago abandoned political belief for economic gain.

A 2007 report of the Carnegie Endowment for International Peace by Minxin Pei called the level of Chinese corruption “astonishing,” noting that it cost $US86 billion a year, more than China’s annual education budget. Things have not gotten any better. The Bo Xilai affair – Bo’s wiretapping of other top Chinese leaders, his son’s privileged lifestyle abroad, and his wife’s murder conviction — was but the most lurid case of rampant corruption that has shaken the trust of the Chinese people in their government.

Other high-profile cases have left the public seething: the melamine-laced milk that poisoned hundreds of infants; the Wenchuan earthquake that toppled “tofu schoolhouses” onto pupils while government buildings stood firm; the bullet train crash in Wenzhou that disgraced railway czar Liu Zhijun; and the sale by Wukan officials of prized farmland to real estate developers that triggered villager demonstrations and violence.

In his speech to the 18th Party Congress last week, outgoing President Hu Jintao stressed the need to fight corruption, warning that if the issue is not addressed, “it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.” Significantly, he warned leading officials to “strengthen education and discipline over their family and staff.” Along the same lines, incoming Party general secretary Xi Jinping in 2004 instructed, “Rein in your spouses, children, relatives, friends and staff, and vow not to use power for personal gain.”

But Chinese leaders have made similar warnings for years without making serious headway. That’s because of what Kenneth Lieberthal of the Brookings Institution terms the “marriage of wealth and political power” which supports an economic strategy based on rewards to local officials for “producing rapid GDP growth while keeping a lid on social unrest.” Put another way, the breakneck speed of Chinese economic development provides wealth that is distributed as patronage and provides support for the Party’s continued political monopoly. And campaigns against corruption evoke the Chinese proverb, “Loud thunder, little rain.”

More specifically, Minxin Pei cites two characteristics of corruption — the corruption of local state institutions through the purchase and sale of government appointments, and “collusion among local ruling elites” or “groups of local officials who cooperate and protect each other.” These practices drain the economy and feed public cynicism but they nurture the political and economic ambitions of entrepreneurs and government officials who thrive in a poorly defined regulatory and policy environment.

This is the social context in which Chinese leaders and their families operate, which is why the calls of Hu Jintao and Xi Jinping for discipline of families and staff is so interesting. Politicians, their relatives, staff, and friends use their political clout to build businesses and line their pockets. The average wealth of the richest 70 members of the National People’s Congress in 2011 was over US$1 billion. China’s central bank reportedly has evidence that up to 18,000 officials and employees of state-owned firms have fled China since the mid-1990s, taking $127 billion with them.

And recent reports have shown how relatives of top Chinese officials have grown wealthy. Xi himself reportedly has sisters and brothers-in-law with “huge interests in China’s real estate, minerals and telecommunications sectors.” And the family of Premier Wen Jiabao, perhaps the strongest reform advocate of all China’s top leaders, has been reported by the New York Times to have US$2.7 billion in wealth.

The reality is that Chinese leaders, even those who call for (and may sincerely believe in) reform and a crackdown on corruption, find themselves in a social web of political influence and enrichment that sustains the status quo. That reality will make it just as hard for the new leaders as it was for their predecessors to make a serious tilt at corruption.

Corruption and influence peddling are as old as the Chinese nation, and as old as human history. What is new is the demand of poor farmers, workers, and China’s growing middle class for a level playing field and a fairer chance for opportunity. Growing social tensions and environmental stresses make the current system unsustainable for the long term.

How Ji Xinping and the new Politburo meet that test will determine history’s verdict on whether they are authentic leaders with the courage to take the needed steps for the common good of the Chinese people and the welfare of the Chinese nation.

Kenneth Chern is Professor of Asian Policy at the Swinburne University of Technology and Executive Director of the Swinburne Leadership Institute.

This article was first published at www.theconversation.edu.au

 

The ‘Self-Made’ Myth and Our Hallucinating Rich

In real life, working hard only takes you so far. Those who go all the way — to grand fortune — typically get a substantial head start. So documents an entertaining, baseball-themed new analysis of the Forbes 400.

Let’s cut Mitt Romney some slack. Not every off-the-cuff comment the GOP White House hopeful made at that now infamous, secretly taped $50,000-a-plate fundraiser last May in Boca Raton reveals an utterly shocking personal failing. Take, for instance, Mitt’s remark that he has “inherited nothing.”

A variety of commentators have jumped on Romney for that line. They’ve pointed out that Mitt, the son of a wealthy corporate CEO, has enjoyed plenty of privilege, everything from an elite private school education to a rolodex full of rich family friends he could tap to start up his business career.

On top of all that, the young Mitt also enjoyed $1 million worth of stock his father threw his way to tide him over until big paydays started arriving.

Not quite “nothing.” But no reason to pick on Mitt either. Most really deep pockets, not just Mitt, consider themselves entirely “self-made.” The best evidence of this predilection to claim “self-made” status? The annual September release of the Forbes magazine list of America’s 400 richest.

Each and every year Forbes celebrates the billionaires who populate this list as paragons of entrepreneurial get-up-and-go. The latest top 400, Forbes pronounced last week, “instills confidence that the American dream is still very much alive.”

Of America’s current 400 richest, gushes Forbes, 70 percent “made their fortunes entirely from scratch.”

Forbes made the same observation last year, too, and most news outlets took that claim at face value. Researchers at United for a Fair Economy, a Boston-based group, did not. UFE analysts stepped back and took the time to investigate the actual backgrounds of last year’s Forbes 400. They released their findings last week, on the same day Forbes released its new 2012 top 400 list.

The basic conclusion from these findings: Forbes is spinning “a misleading tale of what it takes to become wealthy in America.” Most of the Forbes 400 have benefited from a level of privilege unknown to the vast majority of Americans.

In effect, as commentator Jim Hightower has aptly been noting for years, most of our super rich were born on third base and think they hit a triple.

In its just-released new report, United for a Fair Economy extends this baseball analogy to last year’s Forbes 400. UFE defines as “born in the batter’s box” those Forbes 400 rich who hail from poor to middle-class circumstances. Some had nothing growing up. Others had parents who ran small businesses.

About 95 percent of Americans, overall, currently live in these “batter’s box” situations. Just over a third, 35 percent, of the Forbes 400 come from these backgrounds.

Just over 3 percent of the Forbes 400, the United for a Fair Economy researchers found, have left no good paper trail on their actual economic backgrounds. Of the over 60 percent remaining, all grew up in substantial privilege.

Those “born on first base” — in upper-class families, with inheritances up to $1 million — make up 22 percent of the 400. On “second base,” households wealthy enough to run a business big enough to generate inheritances over $1 million, the new UFE study found another 11.5 percent.

On “third base,” with inherited wealth over $50 million, sit 7 percent of America’s 400 richest. Last but not least, the “born on home plate” crowd. These high-rollers, 21.25 percent of the total Forbes list, all inherited enough to “earn” their way into top 400 status.

Last year, a rich American had to be worth at least $1.05 billion to make the Forbes 400. This year’s entry threshold: $1.1 billion, the highest ever.


Forbes
, the United for a Fair Economy researchers sum up, has glamorized the myth of the “self-made man” and minimized “the many other factors that enable wealth,” most notably the tax breaks and other government policies that help the really rich get ever richer.

The narrative of wealth and achievement that Forbes is pushing, the new UFE study adds, “ignores the other side of the coin — namely, that the opportunity to build wealth is not equally or broadly shared in contemporary society.”

And many of those who do have that opportunity — like the mega millionaires in Boca Raton who applauded so warmly when Mitt Romney asserted he had “inherited nothing” — see absolutely no reason to turn that coin over.

Sam Pizzigati edits Too Much, the online Institute for Policy Studiesweekly on excess and inequality. 

The Unrepentant And Unreformed Bankers

By Phil Angelides

Money laundering. Price fixing. Bid rigging. Securities fraud. Talking about the mob? No, unfortunately. Wall Street.

These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America [2] tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct , HSBC and Standard Chartered Bank  facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008.

Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it’s clear that the unrepentant and the unreformed are still all too present within our banking system.

A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.

That too much of Wall Street remains unchanged is not surprising. Simply stated, the banks and their leaders have paid no real economic, legal or political price for their wrongdoing and thus have not felt compelled to change.

On the economic front, the financial sector has rebounded nicely from its brush with death, thanks to an enormous taxpayer bailout. By 2010, compensation at publicly traded Wall Street firms had hit a record $135 billion.

Last year, the profits of the nation’s five biggest banks exceeded $51 billion, with their chief executives all enjoying pay increases. By 2011, the 10 biggest U.S. banks held 77 percent of the nation’s banking assets.

On the legal front, enforcement has been woefully inadequate. Federal criminal financial fraud prosecutions have fallen to a two-decade low. Violations are settled for pennies on the dollar – the mere cost of doing business, with no admission of wrongdoing and with the bill invariably picked up by insurers or shareholders. (When it’s shareholders, that’s not someone else far away, that’s your 401(k), pension fund or mutual fund.)

When Goldman Sachs was charged with failing to set policies to prevent insider trading, it was fined $22 million, an amount the bank collects in about seven hours of trading. Goldman’s record $550 million penalty for securities fraud in 2010 amounted to less than 2 percent of that year’s revenue.

On the political front, after a brief stint in the penalty box, the big banks have resumed the political muscling that got them two decades of deregulation.

To block reform, the financial industry has spent more than $317 million on lobbying in Washington over the past two years and more than $230 million in federal political contributions in the 2010 and 2012 election cycles.

It’s been to good effect. Two-thirds of the regulations called for in the financial reform law passed two years ago are still not in place. And the House Republicans, the banks’ sturdiest allies, have slashed at the budgets of the Securities and Exchange Commission and theCommodities Futures Trading Commission to impede their ability to investigate wrongdoing.

Clearly, the present order is unsustainable. We need to demand fundamental changes now, breaking up the big banks to snap their stranglehold on our markets and our democracy, ensuring that the newly minted financial reform laws are implemented, and wringing out rampant speculation.

But true reform can only occur if we root out the corruption that has distorted our banking system and undermined the productive work of the many good people in the financial sector.

The system of financial law enforcement is clearly broken. Think of it this way: If someone robbed a 7-Eleven of $1,000 but could settle a few days later for $25 and no admission of guilt, would they do it again?

Only enforcement with real consequences will work. That means vigorous pursuit of criminal cases against individuals involved in wrongdoing, the surest method to deter malfeasance.

It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution and executives forfeiting their jobs. And, it means tougher financial fraud laws. In that regard, the bipartisan proposal by Sens. Jack Reed, D-R.I., and Charles Grassley, R-Iowa, to increase fines for securities fraud is a place to start.

To make any of this a reality, the U.S. Department of Justice and the federal regulators must have the will and the resources to do the job. President Obama has asked for additional funds for the Department of Justice, the SEC and the Commodities Futures Trading Commission.

Giving these agencies the tools to detect and prosecute wrongdoing will more than pay for itself – the Commodities Futures Trading Commission’s fine against Barclays for interest rate manipulation alone will pay for almost an entire year of that agency’s budget.

None of these changes will come easily, but this much is clear: We cannot allow Wall Street to continually flout our sense of right and wrong, to erode faith in our legal and political systems, and to put our financial system and economy in jeopardy.

Originally published in The San Francisco Chronicle.

The Precariat – The new dangerous class

by Guy Standing

For the first time in history, the mainstream left has no progressive agenda. It has forgotten a basic principle. Every progressive political movement has been built on the anger, needs and aspirations of the emerging major class. Today that class is the precariat.

So far, the precariat in Europe has been mostly engaged in EuroMayDay parades and loosely organised protests. But this is changing rapidly, as events in Spain and Greece are showing, following on the precariat-led uprisings in the middle-east. Remember that welfare states were built only when the working class mobilised through collective action to demand the relevant policies and institutions. The precariat is busy defining its demands.

The precariat has emerged from the liberalisation that underpinned globalisation. Politicians should beware. It is a new dangerous class, not yet what Karl Marx would have described as a class-for-itself, but a class-in-the-making, internally divided into angry and bitter factions.

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