Authors: David Cay Johnston
Free Lunch (38 page)
What does it profit us if we remove from our land the jobs of the many who work with their hands? How do
we benefit as a society when government rules tell the owners of factories, patents, and copyrights to go offshore?
Why do we allow less and less competitionâthere are only four major accounting firms, for exampleâwhen
there is clear evidence that this results in higher prices and worse service? Do we want to become a society mostly of service
workers, when for many that means being a servant? Will it all fall apart, as Scott Cook, the one-armed Oregon entrepreneur, warns,
because we pursue short-term profit, focus on service jobs, and subsidize the rich while diminishing the bounty nature provides
us?
Do we really want to tax ourselves so that rich men can spend less flying in luxury to play
golf? Must we be forced by the coercive power of government to give part of our sustenance to the mass opiate of our age,
commercial sports? How much are you willing to give up from your paycheck so that Dick Cabela and Johnny Morris can sell
fishing tackle and guns from stores that you bought for them with your taxes? How many hours are you willing to work each year
so that Tyco and General Electric and Honeywell can get free labor to check out burglar alarms?
How much more are you willing to pay each month for electricity on the theory that competitive markets are
superior to regulation, when the evidence shows that regulated utilities and municipally owned systems provide reliable power at
lower cost? Do you want more markets that are easily manipulated?
Do you want a
government that allows trillions of dollars of borrowed money, wrapped in veils of secrecy by unregulated hedge funds, to
influence the markets in which government says you must keep your 401(k) nest egg? Are you willing to give the government a
much larger share of your income than do the hedge fund managers who every few days make more than you will in a
lifetime?
The gifts, favors, and tax breaks we bestow on the rich would shock the conscience
of Andrew Mellon, the oil man and banker whose words are often invoked in support of current policies favoring the rich. As with
Adam Smith, Mellon's words are often quoted selectively by those who shill for the rich. Consider what Mellon wrote in his 1924
book
Taxation: The People's Business
:
The fairness of taxing more lightly income from wages, salaries or from investments is beyond
question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it;
in the other, the source of income continues; the income may be disposed of during a man's life and it descends to his
heirs.
Surely we can afford to make a distinction between the people whose only capital
is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean
much to millions of American workers and would be an added inspiration to the man who must provide a competence during his
few productive years to care for himself and his family when his earnings capacity is at an end.
“People.” “A man's life.” Mellon shows empathy when he employs those wordsâa moral sensitivity missing
from the acts of our elected officials who embrace the policies of taking from the many to benefit the few. As our government has
focused increasingly on riches, its leaders have lost sight of our people.
The problem of taking
from the many to further enrich the few will change only when we begin to address it. We must start by acknowledging our failures,
just as the founders did when the Articles of Confederation proved unworkable.
For starters,
look at what we have done to health care. America spends more and gets back less from its system than any other industrial
country. We rank by various measures down with Cuba, of all places. That alone should scream at us that our policy of corporate
health insurance does not work. That one in seven of us has no health coverage at all should shame us. Even apart from shame,
on a practical level having so many people without health care coverage is a drag on our economy through lost productivityâfrom
injuries and illnesses not properly treated, lives shortened, and financial devastation caused to families who played by the rules,
but were not winners in a system that makes caring for people a profit-driven business.
Just as
counterproductive is our policy of driving up the cost of housing through government policies. The result is making us poorer, not
richer, by adding enormously to debt burdens. The official data show that for every additional dollar of home equity people added
since 1980 they took on two more dollars of debt. We have replaced the ideal of home ownership with a hamster wheel, with most
citizens working harder and harder to pay mortgage interest and saving ever less for retirement. This is folly.
And all of the welfare we shower on the rich, from Warren Buffett to George Steinbrenner to Dick Cabela? The
market cannot work its magic when Buffett gets a freebie. Competition cannot set the price when an industry is exempted from the
laws of competition. Honest businesses like Gander Mountain cannot succeed when the government slips money to the
competition. Bad money drives out good.
Regulation by detailed rules has not worked. A
century ago the reformers of the Gilded Age believed that if we just got the rules right, a just society would follow. Instead, the rules
became ever more finely diced, creating unintended opportunities for mischief and often creating loopholes and favors for those
whose conduct the rules were supposed to constrain.
Those rules work best which are
self-enforcing, rules that by their nature reward proper conduct and punish misconduct. A good example can be found in the rules
that for many decades governed lawyers and accountants. Under the old partnership rules, each partner was fully responsible for
the deeds of every other partner. This created an incentive for lawyers and accountants to police their partners, to stick in their
noses at any hint of misconduct, out of pure self-interest. The rule created a simple reality: look the other way, lose your
house.
But at the start of the current era of government for the rich, those rules were changed.
Now we have “limited liability partnerships.” The LLP structure rewards those who look the other way. Under these new rules, you
may lose your investment in the firm itself, but that is all your liability. Given the brazen misbehavior by the major accounting firms,
and by more than a few law firms, it is time to go back to the old rules.
The fundamental policy
for those on whom we confer power as lawyers, accountants, executives, and stewards of other people's money should be rules
that make the costs of misconduct so high that no rational person would violate them. As
New York
Times
columnist Gretchen Morgenson says, if you add up all the fines imposed on Wall Street and compare them to
the profits these firms earn, the penalties get lost in the rounding. Fines, whether imposed on railroads for safety violations or on
Wall Street for cheating investors, are meaningless unless they are so large that they take back all of the ill-gotten gains and then
take even more to make the price of misconduct too dear to risk.
We should not allow the fact
that many issues today challenge normal human understanding and as a result create opportunities for cheats. We need to
strengthen law enforcement to thwart thievery by contract or computerized calculation. We need to vote out officials, even ones we
like for some emotional reason, when they work against our interests. When it comes to handouts to the rich, we need to just say
no.
So what to do?
The solution lies not in changing this
rule or that, but in altering our attitude about our power to shape our democracy. We are not powerless to address any of these
problems or the many others that confront us. It may seem that the problems are so large, and individually we are so insignificant,
that we must just accept things as they are. We are encouraged in this beliefâthat we lack the power to change the course of
historyâby those who profit from our meekness. But the notion that we cannot shape our own destiny is nonsense. It is also
profoundly un American.
It is also morally reprehensible for the rich to take from those with
less. If our hearts do not tell us this is so, the Bible does again and again and again. So do all of the other great religious and moral
texts that have come down to us through the ages. In this the ministers, rabbis, imams, and other moral leaders can exert great
influence by preaching from the religious texts, citing the myriad references to how it is wrong to give to the rich, wrong to take
from the poor, wrong to build up great wealth by taking even from the merely prosperous to add to the fortunes of the
rich.
To fail to do this is to push us back to the time when property was theft, when the rich
were so only because of what they took from others by force or threat. The creation of wealth through the concepts of ownership,
trade, insurance, the time value of money, and the rise of mass manufacturing and now digital design has been an enormous
benefit to mankind. So have the advances from our knowledge of how to manipulate the physical and conceptual worlds, from
vaccines and clean water to algorithms. No good can come from undermining the legitimacy of property, but much damage can be
done by abusing the coercive power of government to take from those who have less to benefit those who have
more.
As part of this, we need to restore the ethos that cheating is wrong. Period. If we honor
athletes who take steroids to pump up their performance, how can we complain when business owners pocket subsidies?
Cheating, like pregnancy, is not a halfway condition.
Taking a stand will no doubt be difficult
for those organizations that purport to favor free markets, because so many of their donors are on the dole. They should ask
themselves how much they are willing to sully their reputations, where they will draw the line. Would they take money from a drug
lord? An embezzler? From those who solicit subsidies? Better to fold with integrity than press on with dishonest
money.
What of those who assert, as many business owners interviewed for this book did, that
if the rules allow them to take subsidies then there is nothing wrong with doing so? Indeed, one billionaire argued that failing to
take a subsidy could be seen as a wrong in itself, a failure to maximize profit for shareholders. Must one take money left on the
counter by a merchant? Just because you
can
do something does not mean you
must, or even should. Their attitude serves to reinforce the importance of rules in shaping behavior.
There is one major reform that could speed the return of a government that cares more about its people than
the bottom lines of a few. It goes to the corrupting influence of money in selecting who rises to elective office, gaining the power to
make the laws, administer and interpret them. Our Supreme Court has sanctioned this legalized bribery, saying we can do little to
reduce the influence of money on elections. In that case, let's forget about campaign finance reform and focus instead on politician
finance reform.
Americans seek a free lunch when they do not pay the real costs of
government, but instead expect elected officials generally, and members of Congress in particular, to rely on the kindness of
strangers. Free rides in the company jet, golf outings, dinners, and a host of other emoluments naturally exert a tug on the system,
pulling it toward those who do the giving. In recent years, we have seen politicians hire their spouses as fund-raisers and pay them
a portion of the donations they raised. Others see their family members hired by the very groups who lobby them.
We cannot stop all of these abuses. But we can stop many of them by taking a principle in our Constitution
and expanding on it. We allow every representative and senator to send out all the mail they want for free. It's called the
franking privilege.
Let's extend that concept to their expenses.
Let each member of Congress spend however much he or she deems necessary to do his or her job. If we
can imbue representatives and senators with the power to make laws, surely we can give them the authority to manage their own
expense accounts.
This would come at a price: No more free trips, no more free meals, and no
more gifts. Senator, if you need to inspect the cleanliness of the sink behind the bar at a resort in Tahiti, go right ahead, just give us
the receipts with an explanation of the costs. We will collect the receipts from every elected representative monthly and post it all
on the Internet in a format that makes for easy analysis.
Every dollar, and every meeting, must
be disclosed. And we will pay for it all, subject only to the usual penalties for embezzling, the punishments accorded by the full
House or Senate because of their exclusive right to judge the fitness of members, or the decision by voters to oust a
spendthrift.
In this we can move politics back toward the people and away from monied
interests. The penalties for taking anythingâeven a free shot of whiskeyâshould be swift, certain, and severe. Take a gift, go to jail.
Call it zero tolerance for lawmakers.
Let us also pay the real costs of maintaining two
households, one back home and one in Washington, as well as going back and forth as often as the lawmaker chooses. Sure, the
Congresswoman from Hawaii will spend more on travel than the one from Northern Virginia, but people are smart enough to figure
that out.