A Nation of Moochers (15 page)

Out in the Cold

In Moocher America, success often turns on who you know. Chrysler bond holders discovered the downside of cronyism when they were forced to take a much bigger hit than the politically well-connected United Auto Workers when the government bailed out the company.
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After the government takeover of General Motors, nonunion workers at supplier Delphi discovered the same thing.

In an extraordinary and unprecedented move, the federal government took over Delphi’s pension plans at a cost of more than $6 billion, a move that potentially put taxpayers on the hook for the Pension Benefit Guaranty Corporation’s growing deficit. The bailout marked a sharp reversal for the feds, who had insisted that Delphi and GM cover some of the costs and who had relied on GM’s promise to cover the union plan if needed.
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But, as
The New York Times
noted, the bailout had an additional “unusual twist.”

“Normally, when a company pension fund is taken over by the government, workers may lose part of their benefits because pension insurance is limited. But it appears in Delphi’s case that one group of workers and retirees will be spared cuts—the ones represented by the U.A.W.”
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Under pressure from the Obama administration, GM “topped up” the pension benefits for union members who might otherwise have seen their payouts shrink. The government-owned car company agreed to make up the estimated $4.3 billion pension shortfall for union workers who had been with Delphi as of 1999, but pointedly declined to do the same for the $2.5 billion pension deficit for Delphi’s nonunion retirees.

Nonunion Delphi retirees were also out of luck when it came to health and life insurance. “Thus,” wrote Carl Horowitz of the National Legal and Policy Center, “some 15,000 former administrators, purchasing managers, engineers, bookkeepers and other white-collar employees, many with the company for decades, are being hung out to dry.”
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“The U.S. government is taking care of a select group of people and tossing the rest of us under the bus,” Peter Beiter, a retired financial manager, told the
Times.
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“These people are getting a first-hand lesson in the drawbacks of not being politically connected,” noted Horowitz.
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Columnist Nolan Finley of
The Detroit News
took the lesson to heart. In the new economic order, workers fell into two categories, “those who are worthy of the president’s energies, and those who aren’t.”
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The division between those favored by the government and those who find themselves out in the cold, wrote Finley, was not determined by “what they do or whether they slip their feet into wingtips or steel-toed boots in the morning. His sole interest is in whether they have a union card in their wallet.”

He could just as easily have said that the government’s favor was determined by those who had “suckage,” and those who lacked it.

Green Mooching

So-called green energy has proven a fertile field for the next generation of corporate welfare as the federal government steps up its efforts to single out favored companies for tax benefits and political blessing.

In August 2010, for example, President Obama visited a “clean energy” company, which he praised for “pointing the country toward a brighter economic future.” He backed up the kind words with federal dollars. In January 2010, his administration had announced that ZBB Energy Corporation was one of 183 recipients of “clean energy tax credits” worth $14 million.

“As it happens,”
The Wall Street Journal
noted the next day, “Mr. Obama couldn’t have chosen a better company to demonstrate the risks that taxpayers are taking with their billions in green stimulus investment.… Since going public in June of 2007, ZBB has been hemorrhaging money. It explained it had a ‘cumulative deficit’ of $44.1 million and informed shareholders that it ‘anticipates incurring continuing losses.’”
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Less than a month later, the company announced that its losses had widened and that they “reported no sales in the quarter just ended.”
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Other grants of taxpayer largesse appear to be somewhat more incestuous. On the list of tax credits for green companies, for instance, the administration included only one window company: Serious Materials, an especially well-connected corporation. Serious won plaudits from Vice President Joe Biden, who credited the company with “inspiring a better tomorrow,” and from the president himself, who praised the company for “producing some of the most energy-efficient windows in the world.”

“This,” noted John Stossel, “must be one very special company.” Indeed.

As Stossel later reported, Cathy Zoi, the federal official who was appointed in April 2009 to oversee “$16.8 billion in stimulus funds, much of it for weatherization programs that benefit Serious,” was married to Robin Roy, “who happens to be vice president of ‘policy’ at Serious Windows.”
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The federal government’s inability to pick winners or substitute its judgment for that of the marketplace was illustrated by its Cash for Clunkers program, which was partly intended to help bail out the automakers and partly to meet green energy goals. On both counts it failed, while transferring $3 billion from the taxpayers to buyers of new cars. Under the program, car buyers could receive a direct subsidy of up to $4,500 for trading in an old car and buying a more fuel-efficient new car. In an orgy of green piety, the older—often perfectly usable—used car was then crushed.

The program, wrote journalist Carney, “captured every aspect of Obamanomics: big government, high spending, running up debt, rewarding special interests, claiming environmental benefit, claiming economic stimulus and displaying ignorance of basic economics.”
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On a superficial level, Clunkers was a success, taking credit for the sale of about 360,000 cars in July and August of 2009. But in a working paper for the National Bureau of Economic Research, Atif Mian and Amir Sufi concluded that almost all of the sales were “pulled forward from the very near future; the effect of the program on auto purchases is almost completely reversed by as early as March 2010—only seven months after the program ended.” Not only was the program’s effect extraordinarily short-lived, they concluded, but they could “find no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.”
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Concluded columnist Jeff Jacoby: “When all is said and done, Cash for Clunkers was a deplorable exercise in budgetary wastefulness, asset destruction, environmental irrelevance, and economic idiocy. Other than that, it was a screaming success.”
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The Biggest Piggy

No story of crony capitalism would be complete without a mention of Archer Daniels Midland (ADM), a company whose pursuit of clout and special favor made it almost a cliché of corporate mooching. What makes ADM so extraordinary has been its success in padding its bottom line in good times and in bad, through Democratic and Republican administrations alike. ADM greased the wheels of political influence with such abandon that John Stossel named them the Biggest Piggy, despite the fierce competition from other corporate welfare queens.
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ADM’s relentless advocacy of government support for ethanol has been described as “a sad torrid affair of crony capitalism and green fantasies.”
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As such, it is something of a template for much of the crony capitalism that followed. Dwayne Andreas, ADM’s longtime CEO, orchestrated decades worth of government favoritism that benefited his company, beginning with Jimmy Carter and extending through the Bush years. He lavished campaign contributions on politicians of both parties, seamlessly moving from supporting Hubert Humphrey to Richard Nixon to George H. W. Bush to Bill Clinton. Carter had exempted gasohol from taxation; the first Bush exempted ethanol from the Clean Air Act; Clinton repealed Bush’s exemption, but rewarded Andreas for his support by imposing the country’s first ethanol mandate.
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ADM also benefits richly from federally mandated minimum prices for sugar because the policy encourages huge companies like Coca-Cola to buy corn sweetener (sold by ADM) as a substitute. But it is ethanol where the company relies almost totally on federal policy: Companies that use ethanol get a large tax break, and because ADM makes about half the ethanol in the country, it stands to profit handsomely from federal rules mandating ethanol’s purchase by consumers (who have been otherwise resistant to the charms of the questionable gas).
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“Why does ADM get these special deals?” asked Stossel. “Bribery. Okay, it’s not bribery—that would be illegal. ADM just makes ‘contributions.’”
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Actually, ADM went well beyond traditional, run-of-the-mill “contributions.” Andreas flew politicians on the company’s private jets, hosted influential politicians and media types at his lavish Florida retreat, and even arranged for Elizabeth Dole, wife of Senator Bob Dole, then the Senate majority leader, to buy a three-room apartment at a significant discount.

In a profile of Andreas in 1995,
Mother Jones
described the interlocking relationship between ADM and the federal government, noting that “no other U.S. company is so reliant on politicians and governments to butter its bread.”
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Confronted about his influence peddling, Andreas is as shameless as any moocher in this book. Stossel recounted this exchange:

Stossel:
Mother Jones
[magazine] pictured you as a pig. You’re a pig feeding at the welfare trough.

Andreas:
Why should I care?

Stossel:
It doesn’t bother you?

Andreas:
Not a bit.
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And why should he be embarrassed? Although he retired in 1999, Andreas was still bringing home the bacon. In October 2010, the Obama administration granted a waiver allowing for a higher blend of ethanol known as E15 to be used in cars, light trucks, and sport utility vehicles, despite questions about its effectiveness, safety, and impact on food prices.
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ADM won big. Again.

Chapter 9

THE TWO AMERICAS

During his 2008 presidential run, candidate John Edwards frequently cited what he called the two Americas, a reference to what he saw as the gap between the rich and the poor. But the term applies equally to the gap between average America and the new privileged class of public employees, who enjoy expensive fringe benefits and lavish pensions that increasingly define a growing divide among Americans. Even as private-sector workers struggle to find and keep jobs and pay their bills, politicians have lavished expensive perks on public employees under the baleful eyes of ever more powerful public employee unions. As a result, one America (generally private-sector taxpayers) is now tasked with saving and funding their own retirements, while also paying in to the pensions of public employees, many of whom can retire in their 50s (or even in their 40s), sometimes with six-figure pensions. In California more than fifteen thousand former government workers have pensions that pay them more than $100,000 a year, a number that is growing by 40 percent a year.
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To match a pension of that size, a private-sector worker would have to accumulate roughly $2.5 million in savings. (More about that later.)

As he wages his own quixotic war against bloated public pensions, New Jersey governor Chris Christie relates the story of one 49-year-old retiree who had paid a total of $124,000 toward his retirement pension and health benefits. “What will we pay him?” asked Christie. “$3.3 million in pension payments and health benefits.” A retired teacher who contributed $62,000, says Christie, will get $1.4 million in pension benefits plus $215,000 in health care benefit premiums over her lifetime.
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“[There are] two classes of people in New Jersey: public employees who receive rich benefits and those who pay for them,” said Christie.
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As compelling as the anecdotes of excess are (and there will be many in this chapter), they do not begin to capture the full picture of the public-pension tsunami
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bearing down on taxpayers. The unfunded liabilities for bloated state pensions is generally a mystery, but Joshua Rauh, a professor of finance at Northwestern University’s Kellogg School, sees deficits of between $3.2 and $5.2 trillion—a massive burden that will inevitably be shifted onto the taxpayers and perhaps lead to a new round of bailouts. Even if they manage to earn a generous return of 8 percent on their investments, Professor Rauh warns that seven states will have run out of money by 2020. By 2027 fully half will have exhausted their pension assets.
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How have we gotten here?

During flush times, politicians have also rushed to fatten benefits, with the argument that higher stock prices will pay for the increased pensions and that taxpayers have nothing to worry about. By the time the public is faced with massive unfunded liabilities and escalating contributions, it is often too late to stop the hemorrhaging. When, for example, the California legislators voted to jack up state pensions in 1999, they were told in a brochure from the California Public Employees’ Retirement System that the increase wouldn’t cost the state any additional money—they were assured that the pension hikes would all be covered by investment earnings. At the same time, the system’s own actuaries tried to warn that if the markets did not follow a rose-colored scenario, the cost to the state could explode, from $159 million in 1999 to more than $3.9 billion in 2010–11. As blogger Ed Mendel points out, that forecast “scored a near bulls-eye” on the $3,888 billion state payment for a recent fiscal year.
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Unfortunately those warnings were ignored, as they were in states and cities across the country.