Feeds:
Posts
Comments

principle-4

Chomsky’s fourth principle of the concentration of wealth and power is to “Shift the Burden.” He uses the word “burden” in the sense of the responsibility for maintaining and managing the society in which one lives. Morality demands that people who have greater wealth and bigger incomes ought to be held responsible at a higher level for meeting the needs of their community—they should contribute more to society because they’ve taken more from society. This means that the rich ought to pay a larger percentage of their wealth and income in the form of taxes. The idea behind the fourth principle is that, in violation of basic social ethics, the rich try to shift their tax burden onto the middle and lower classes. They do this by paying less than their fair share of taxes, thereby forcing everyone else to pay more than their fair share.

In “Requiem,” Noam Chomsky explains that wealthy individuals and business corporations used to pay very high taxes in the United States all the way up to the 1960s. Over the subsequent fifty years or so, however, they have succeed in changing the tax codes and other regulations so that today they are able to get away with paying only a tiny fraction of their fair share.

The higher taxes on corporations were put in place by President Roosevelt in the 1930s, despite vehement opposition from some sectors of the business class. The American economy expanded considerably during this period of high taxation. In the quarter-of-a-century following the Second World War, when Japan and much of Europe were struggling to recover from the devastation of war, United States experienced a period of rapid economic growth. This generated new wealth, which, coupled with the various welfare state policies established by Presidents Roosevelt and Johnson, led to increasing prosperity for large parts of the population. Even though economic disparities remained, they were prevented from growing out of control through government regulations. People generally felt that anyone who was willing to work hard would be able to escape poverty and achieve a relatively comfortable lifestyle.

Chomsky notes:

The American Dream, like many [other] ideals, was partly symbolic, but partly real. So in the 1950s and 60s, say, there was the biggest growth period in American economic history—the Golden Age. It was pretty egalitarian growth, so the lowest fifth of the population was improving almost as much as the upper fifth. And there were some welfare state measures which improved life for much of the population. It was, for example, possible for a black worker to get a decent job at an auto plant, buy a home, get a car, have his children go to school, and so on. And the same across the board.

In fact, many business leaders understood that their profits depended on the ability of ordinary people to buy their products, and therefore paying higher salaries made perfect business sense. They knew that if they didn’t pay good wages to their workers, those workers wouldn’t have enough money to spend, and that lower spending would mean lower consumption, which would mean lower profits. But this was true only when the workers and the consumers were essentially the same people. As Chomsky explains, for the super-rich in the United States, that is no longer the case.

When the U.S. was primarily a manufacturing center, it had to be concerned with its own consumers, here. Famously, [in 1914] Henry Ford raised the salary of his workers so they’d be able to buy cars. When you’re moving into an international “plutonomy,” as the banks like to call it—the small percentage of the world’s population that is gathering increasing wealth—what happens to American consumers is much less a concern, because most of them aren’t going to be consuming your products anyway, at least not on any major basis. Your goals [if you’re a business executive] are: profit in the next quarter, even if it’s based on financial manipulations; high salary, high bonuses [for yourself and your friends]; produce overseas if you have to and produce for the wealthy classes here and their counterparts abroad.

In the above quotation, notice the keyword “plutonomy.” Chomsky says that this is the word that banks use to describe an economy where only the super-rich matter, for they’re the main investors and the main consumers. What he doesn’t say is where that word came from, which is an interesting and very revealing story in its own right. Simply google the phrase “Citibank Memos” and you’ll find the information that’s missing from the film.

What about the rest? Well, there’s a term coming into use for them, too. They’re called the “precariat”—precarious proletariat. The working people of the world who live increasingly precarious lives.

Chomsky is referring to the term that was first used by French sociologists in the 1980s to describe the class of temporary workers. More recently, the term has been popularized by Guy Standing, an economist at the University of London, through his book The Precariat: The New Dangerous Class (2011). According to Standing, the precariat is a new class produced by the neoliberal policies of the last thirty or so years. This new class is defined by the precarious, uncertain life conditions of its members; they are forced to do a great deal of hard work that is neither recognized nor properly compensated, with no sense of security about their immediate or long-term future. Writing for Policy Network in 2011, Standing defined the precariat as follows:

It consists of a multitude of insecure people, living bits-and-pieces lives, in and out of short-term jobs, without a narrative of occupational development, including millions of frustrated educated youth who do not like what they see before them, millions of women abused in oppressive labour, growing numbers of criminalised tagged for life, millions being categorised as ‘disabled’ and migrants in their hundreds of millions around the world. They are denizens; they have a more restricted range of social, cultural, political and economic rights than citizens around them.

In Requiem, Chomsky goes on to talk about the issue of taxation.

During the period of great growth of the economy—the 50s and 60s, but in fact earlier—taxes on the wealthy were far higher. Corporate taxes were much higher, taxes on dividends were much higher, simply taxes on wealth were much higher. The tax system has been redesigned [during the subsequent decades], so that the taxes that are paid by the very wealthy are reduced, and, correspondingly, the tax burden on the rest of the population is increased.

In the following graph from Wikipedia, notice the ups and downs in the marginal tax rate for the lowest and highest earners over a hundred year period. According to Investopedia, “A marginal tax rate is the amount of tax paid on an additional dollar of income.” Taxpayers are divided into various tax brackets depending on their income; as they move from lower tax brackets to higher ones, the rate at which they are taxed goes up. In other words, “As income increases, what is earned will be taxed at a higher rate than the first dollar earned.” The exact rates of increase from one tax bracket to another is up to the legislature to decide, which is where the influence of the affluent comes into play. The trends are clear, or, as Chomsky puts it, “the numbers are striking.”

tax-rates

There is a crucial distinction between the marginal tax rate and the effective tax rate. According to Investopedia, “The marginal tax rate refers to the tax bracket into which a business’s or individual’s income falls.” This, however, does not reflect the actual rate at which the income of the said business or individual is taxed, which depends on numerous factors, rules, and loopholes besides the income. For this reason, it is the effective tax rate that is “a more accurate representation of tax liability than an individual or business’s marginal tax rate.”

The tax on corporations is essentially a burden on members of the upper classes who own the most stocks and shares, which is why they invest considerable time and money to get the government to reduce the effective corporate tax rate. In practice, however, there are plenty of ways that allow the corporations to avoid paying even the reduced effective tax rate—such as hiding their wealth in tax havens like Delaware or the Cayman Islands.

The following graph from Wikipedia shows the ups and downs in the effective corporate tax rates over a sixty year period. Notice the downward trend.

us_effective_corporate_tax_rate_1947-2011_v2

Compare the downward trend in the effective corporate tax rate shown above with the upward trend in corporate profits over the same period. The latter is depicted in the following graph, also from Wikipedia.

us_corporate_profits_1947-2011

Chomsky then goes on to say:

Now the shift is towards trying to keep taxes just on wages and on consumption—which everyone has to do—not, say, on dividends, which only go to the rich.

Dividend is basically the cash payment that a company pays on a regular basis out of its profits to those who own the company’s stocks; such income is taxable. When the value of an investment or real estate increases above its purchase price, that’s called a “capital gain.” When that asset is sold, a capital gains tax is applied. Taxes on both dividends and capital gains are to be paid only by the wealthy, which is why there has been a trend towards lowering these taxes. When the tax burden is reduced on the upper classes, it has to be shouldered by the rest of society. As a result, taxes on wages and salaries are increased, as well as the consumption taxes that the government imposes on the sale of goods and services. These latter taxes are collected mainly from the middle and lower classes.

The unfairness of the U.S. tax system is pretty obvious. The top 0.1% of the population gets to increase its wealth while bankrupting the working classes. Worker productivity has consistently increased since the 1970s, but the wages during the same period have been stagnant or declining (when corrected for inflation). Corporations are earning record amounts of profits but are refusing to pay their fair share of taxes to sustain the very society that is allowing them to earn those profits. The public bailouts and stimulus packages after the crash of 2008 helped create an “economic recovery,” but almost the entire new wealth generated during this period has gone to the super-rich, leaving a few crumbs for the rest of the population.

class-warfare-color

By considering the above facts, anyone can reach the conclusion that the U.S. system of taxation is basically unacceptable and needs to be dismantled. Yet, we don’t see masses of people in the streets carrying the proverbial pitchforks and torches. This is so because while there is a great deal of discontent, there is very little clarity on allocating responsibility. It is all too tempting under such circumstances to look for saviors and to blindly follow charlatans and false prophets.

An important cause for the lack of clarity has to do with how our ideology has been shaped by powerful interests, as discussed under Principle #2. Whenever a grossly unjust arrangement is put into place, some form of justification is required to make this unfairness palatable to the exploited masses. Even when large numbers of people do not swallow the given ideology, those who do tend to make substantial change that much harder.

photo

The most common justification for lowering taxes on wealthy individuals and business corporations, while increasing it on wages and consumer goods, is called “trickle-down economics.” But this is sheer falsehood, since there is no concrete evidence that cutting taxes on the rich somehow “increases investment and increases jobs.” As already mentioned, the exact opposite seems to be the case: the period of maximum economic growth in the United States was a period with some of the highest marginal and effective tax rates. As Chomsky explains: “If you want to increase investment, give money to the poor and the working people. They have to keep alive, so they [will] spend their incomes. That stimulates productions, stimulates investment, leads to job growth, and so on.”

 

principle-5

Noam Chomsky’s fifth principle of the concentration of wealth and power is “Attack Solidarity,” which is basically refers to the same idea as “divide and conquer.” Chomsky defines the word solidarity simply as “caring for others,” but it’s a little deeper than that. Solidarity is the social form of altruism.

Solidarity is quite dangerous, from the viewpoint of the masters. You’re only supposed to care about yourself, not about other people. This is quite different from the people they claim are their heroes, like Adam Smith, who based his whole approach to the economy on the principle that sympathy is a fundamental human trait, but that has to be driven out of people’s heads. You’ve got to be for yourself, follow the vile maxim, don’t care about others—which is okay for the rich and powerful but is devastating for everyone else.

The economic ideology that has been dominant over the last half-a-century is known as “neoliberalism.” According to neoliberal doctrine, individuals are naturally selfish and, if everyone is allowed to follow his or her own (narrowly defined) self-interest then the whole society ends up benefiting. Exactly how does selfish behavior on the part of a society’s individual members lead to the overall benefit of that society is a mystery, usually explained by the magic of the free market as orchestrated by the “invisible hand.” In popular mythology, the eighteenth century Scottish philosopher Adam Smith (1723–1790) is believed to have discovered this phenomenon. For anyone who takes the trouble of actually studying Smith’s work, neoliberal ideology turns out to be the exact antithesis of everything he stood for.

Adam Smith was a moral philosopher and one of the first political economists; he was also a leading figures of the Scottish Enlightenment. His two most important books are titled The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). Smith’s economic theory is grossly misunderstood, or deliberately misinterpreted, primarily because the relationship between his two books is not widely appreciated, and also because he is frequently quoted out of context. Smith believed that sympathy, or benevolence, which is the foundation of solidarity, is one of the most basic human sentiments. We are the kind of creatures who’re naturally inclined to help our fellow human beings. While we often act from self-interest, no society can function if its members are lacking in sympathy.

In sharp contrast, neoliberal ideology emphasizes the pursuit of self-interest as the main human motivation. Since it gets human nature wrong, neoliberalism has to convince people through education and propaganda that they are supposed to be individualistic in their goals and that emotions like sympathy, benevolence, and altruism are to be shunned. We’re told that a society functions best when its individual members act entirely or almost entirely in their own self-interest, and that any attempt by society to restrain that motive is counterproductive to its own well-being. When people are brainwashed into thinking that they have no obligation to help their fellow human beings, they turn against each other and lose their capacity to resist and oppose the powers that be.

In “Requiem,” Chomsky discusses two major American institutions that are based on the principle of solidarity, both of which are under relentless attack—Social Security and public education.

Social Security means, I pay payroll taxes so that the widow across town can get something to live on. For much of the population, that’s what they survive on. It’s of no use to the very rich, so therefore there’s a concerted attempt to destroy it. One of the ways is defunding it. You want to destroy some system? First defund it. Then, it won’t work. People will be angry. They want something else. That’s a standard technique for privatizing some system.

In the United States, the Social Security Act was originally signed into law by President Franklin Roosevelt in 1935, and is now codified as U.S. Code, Title 42, Chapter 7. It is the foundation of the welfare state measures established in the wake of the Great Depression. The two Social Security Trust Funds are funded through payroll taxes collected by the IRS. It is the major source of income for the elderly, people with disabilities, and families needing temporary assistance. Attacks on Social Security include the argument that it reduces private ownership and redistributes wealth through government intervention rather than through free markets. Conservative and libertarian think tanks have been lobbying for the privatization of Social Security since the 1990s. In 1997, President Bill Clinton and Speaker of the House Newt Gingrich reached a secret agreement to “reform” Social Security. Clinton was supposed to make the announcement in his State of the Union address in January 1998, but this was derailed due to the Monica Lewinsky scandal. President George W. Bush also tried to privatize Social Security at the beginning of his second term, but he failed to receive sufficient popular support, while the Democratic victories in the 2006 midterm election basically killed Bush’s proposal in the Congress. Even though Social Security has so far survived privatization attempts, proposals for reducing benefits in a variety of ways keep appearing on a regular basis.

Another way in which the principle of solidarity has been institutionalized is public education, including K-12 schools and state funded colleges and universities. Chomsky calls public education “one of the jewels of American society.” Both sets of institutions are under attack. Writing in the Indypendent, scholar and activist Lois Weiner notes that the neoliberal assault on K-12 public education includes such tactics as “privatization of schools and services; charter schools, public-school closings, fragmentation of the school system’s administrative apparatus; budget cuts, high-stakes standardized testing and the destruction of the teacher unions.”

According to Chomsky:

Public schools are based on the principle of solidarity. I no longer have children in school; they’re grown up. But the principle of solidarity says, I happily pay taxes so that the kid across the street can go to school. Now that’s normal human emotion. You have to drive that out of people’s heads. I don’t have kids in school. Why should I pay taxes? Privatize it. The public education system, all the way from kindergarten to higher education is under severe attack.

Chomsky then goes on to discuss how public support for college education has declined in the United States and how this decline has contributed to huge student debt that only serves the interests of the wealthy elite.

You go back to the Golden Age again, the great growth period in the 50s and 60s. A lot of that was based on free public education. One of the results of the Second World War was the GI Bill of Rights, which enabled veterans, and remember, that’s a large part of the population then, to go to college. They wouldn’t have been able to, otherwise. U.S. was way in the lead in developing extensive mass public education at every level. By now, in more than half the states, most of the funding for colleges comes from tuition, not from the state. That’s a radical change.

 

principle-6

Perhaps the most important means for preventing huge concentrations of wealth and power involves appropriate government regulations on business, banking, and finance. The sixth principle, “Run the Regulators,” is meant to circumvent that problem. Chomsky explain the phenomenon of “regulatory capture,” whereby the foxes become guards at the hen house.

If you look over the history of regulation—say, railroad regulation, financial regulation and so on—you find that quite commonly it’s either initiated by the economic concentrations that are being regulated, or it’s supported by them. And the reason is because they know that, sooner or later, they can take over the regulators. And it ends up with what’s called “regulatory capture.” The business being regulated is in fact running the regulators. Bank lobbyists are actually writing the laws of financial regulation—it gets to that extreme. That’s been happening through history and, again, it’s a pretty natural tendency when you just look at the distribution of power.

Regulatory capture occurs when the government agencies responsible for ensuring that businesses follow the regulations allow themselves to become complacent; instead of actively preventing problems from arising in the first place, they lose interest in anticipating or detecting possible problems. They become “captured,” in effect, by the very entities they’re duty bound to keep under control. As Scott Hempling points out, regulatory capture is not the same thing as corruption. Illegal acts like “financial bribery, threats to deny reappointment, promises of a post-regulatory career” do occur, but they are examples of corruption carried out by the entity being regulated. In contrast, regulatory capture describes the attitudes, actions, and non-actions on the part of regulatory agencies that prevent regulations from being fully or properly enforced. According to Hempling:

A regulator is “captured” when he is in a constant state of “being persuaded”: persuaded based on a persuader’s identity rather than an argument’s merits. Regulatory capture is reflected in a surplus of passivity and reactivity, and a deficit of curiosity and creativity. It is evidenced by a body of commission decisions or non-decisions—about resources, procedures, priorities, and policies, where what the regulated entity wants has more influence than what the public interest requires.

In “Requiem,” Chomsky explains that the enormous expansion of lobbying in the 1970s constitute a direct response of the business elite to the restrictions imposed on them by government regulations, the purpose of which was, and continues to be, the control of legislation so that it serves the interests of businesses, and not those of workers, the general public, or the natural environment.

The business world was pretty upset by the advances in public welfare in the 60s, in particular by Richard Nixon. It’s not too well understood that he was the last New Deal president, and they regarded that as class treachery. In Nixon’s administration, you get the consumer safety legislation, safety and health regulations in the workplace, the EPA (the Environmental Protection Agency). Business didn’t like it, of course. They didn’t like the high taxes. They didn’t like the regulation. And they began a coordinated effort to try to overcome it. Lobbying sharply increased.

Business corporations have learned that the money they spent on lobbying is part of their normal cost for doing business in American.

riselobbyists

The success of the lobbying initiative could be seen almost immediately, as deregulation began in the Carter administration and gained tremendous momentum during the Reagan era. Chomsky notes how President Reagan bailed out banks like Continental Illinois. Instead of letting the bank fail, the FDIC spent $4.5 billion to bail it out; this was the largest government bailout at the time. That’s also when the term “too big to fail” became popular, after it was used by Congressman Stewart McKinney during a 1984 Congressional hearing. A company that’s “too big to fail” is basically too strong to be regulated by any government agency; it can indulge in questionable practices with the assurance that the taxpayers will rescue it if it starts to go down. One of the highlights of the Reagan presidency was the Savings & Loans crisis, which led to large bailouts. Financial regulations were weakened even further when the Glass-Steagal Act was dismantled under President Clinton, as already discussed under Principle #3. In 2008–09, the Bush and Obama bailouts of Wall Street set a new record. As a result of the Savings & Loans scandal of the 1980s, however, more than a thousand bankers were jailed. Nothing like that happened after the global financial meltdown of 2008. As Matt Taibbi explains here, the individuals and institutions responsible for the suffering of millions of people were never held accountable, let alone convicted or punished, mainly because of their deep financial ties with the Washington elite.

rs-19081-rectangle

Illustration by Victor Juhasz

According to Chomsky, all of these bailouts violate the ideology of neoliberal capitalism, since governments are not supposed to intervene in the functioning of the “free markets.” Conservatives use the term “nanny state” to criticize public assistance like Social Security or publicly funded programs like schools. In practice, however, they are eager to ask for taxpayer bailouts every time a major corporation is about to go bankrupt or an investment bank is about to face the consequences of its own irresponsible behavior.

In a capitalist economy, you wouldn’t do that. In a capitalist system that would wipe out the investors who made risky investments. But the rich and powerful, they don’t want a capitalist system. They want to be able to run to the nanny state as soon as they’re in trouble, and get bailed out by the taxpayer. That’s called “too big to fail.”

While happily accepting government bailouts, the American oligarchs continue to preach the free market ideology and the need for small government to everyone else.

Meanwhile, for the poor, let market principles prevail. Don’t expect any help from the government. “Government is the problem, not the solution.” That’s essentially neoliberalism. It has this dual character which goes right back in economic history: one set of rules for the rich; opposite set of rules for the poor.

It didn’t have to be that way. When President Obama took office in January 2009, he could have listened to the advice of experts on how to fix the financial sector. Some even thought that the tremendous mandate that Obama had received in the elections meant that the had a once-in-a-lifetime chance of bringing about real change—that he could become a worthy successor to FDR. It soon became apparent that these hopes for change were illusory, as the President surrounded himself with the same people whose policies and actions had previously produced one crisis after another.

There are Nobel laureates in economics who significantly disagree with the course that we’re following. People like Joe Stiglitz, Paul Krugman, and others, and none of them were even approached. The people picked to fix the crisis were those who created it—the Robert Rubin crowd, the Goldman Sachs crowd—they created the crisis [and] are now more powerful than before.

Chomsky is fond of saying that the increasing concentration of wealth and power should not surprise anyone. It is not by accident or bad luck. It is the natural and expected result of the policies that our representatives have supported for decades. If the individuals who run large corporations and financial institutions end up as chief government regulators, there is no reason to think that they would suddenly become defenders of the rights and interests of the general population.

Nothing surprising about this. It’s exactly the dynamics you’d expect. … Everywhere you look, policies are designed this way, which should come as absolutely no surprise to anyone. That’s what happens when you put power into the hands of a narrow sector of wealth, which is dedicated to increasing power for itself, just as you’d expect.

Members of the United States Congress are responsible for safeguarding the rights and interests of the American people whose votes elect them. In practice, they tend to pay a lot more attention to what lobbyists want than what their voters need. Every member of the Congress has to spend about 30% of his or her time asking people for money, and each of them must raise about $10,000 a week for the next election campaign. Most lobbyists represent the biggest donors, and the policies they favor cannot be ignored. American business has certainly taken the advice of the Powell Memorandum. Writing in the Atlantic, Lee Drutman points out that business corporations spend approximately $2.6 billion on lobbying. “Of the 100 organizations that spend the most on lobbying, 95 consistently represent business.” Large corporations often have more than a hundred lobbyists working for them in Washington DC, “allowing them to be everywhere, all the time.” Which citizens’ group can possibly match the spending power and ubiquitous reach of Exxon Mobile or Goldman Sachs? “For every dollar spent on lobbying by labor unions and public-interest groups together, large corporations and their associations now spend $34.” Is it any wonder, then, that laws and policies are made that consistently increase the wealth and power of business corporations? Or that regulatory agencies like the EPA or the SEC are essentially powerless to enforce public interest regulations? No surprises here. You can’t put the foxes in charge of guarding the hen house and still hope to see your brood cackling in the morning.

3

The third principle of the concentration of wealth and power is “Redesign the Economy,” i.e., use your political influence to change the rules of the economic system, so that it favors the already advantaged class in new and more powerful ways. Noam Chomsky identifies two major factors under this principle: (1) financialization of the economy and (2) the offshoring of production.

Financialization

Writing in Forbes, Mike Collins defined the term financialization as “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.” In the film, Chomsky says that financial institutions—”banks, investment firms, insurance companies, and so on”—have a legitimate role to play in the economy, but starting in the 1970s they started to expand their power and influence beyond that legitimate role, thereby enriching the wealthy and making the economy vulnerable to crashes. During this period, the U.S. economy weakened due to the shift from manufacturing to finance, until, in the words of Mike Collins, “The emphasis was no longer on making things—it was [on] making money from money.” According to Chomsky:

By 2007, right before the latest crash, they had literally 40% of corporate profits—far beyond anything in the past. Back in the 1950s, as for many years before, the Unites States’ economy was based largely on production. The United States was the great manufacturing center of the world.Financial institutions used to be a relatively small part of the economy, and their task was to distribute unused assets, like bank savings, to productive activity. That’s a contribution to the economy. Regulatory system was established. Banks were regulated, the commercial and investment banks were separated [to] cut back their risky investment practices that could harm private people. There were, remember, to financial crashes during the period of regulation. By the 1970s that changed.

In the United States, the history of growing inequality is really a history of the systematic dismantling of the New Deal. Chomsky points out that Richard Nixon was the last New Deal President, though he is rarely recognized as such. Starting from Franklin D. Roosevelt in the early 1930s all the way to Richard Nixon in the early 1970s, the United States Government’s domestic spending shows a continuous upward trend. This trend started to reverse with Jimmy Carter, who was also the first President to increase the social security tax, reduce the capital gains tax, and started the process of deregulation. The dismantling of the New Deal became an increasingly important priority in the successive administrations of Ronald Reagan, George H. W. Bush, and Bill Clinton. Since the mid 1970s, both the Republicans and the Democrats have played an active role in this dismantling.

Many of the financial regulations put in place by President Roosevelt under the New Deal were intended to prevent risky behavior on Wall Street, and these regulations functioned well in preventing financial bubbles and crashes.The most of famous of these was the Glass–Steagall legislation (named after Senators Carter Glass and Henry Steagall), also known as the Banking Act of 1933 (revised in 1935). Among other financial reforms, the Glass–Steagall Act established a firm separation between commercial and investment banking. Commercial banks could issue short-term loans but were prohibited from speculating with depositors’ money, while investment banks could invest in equity and long-term loans but were not allowed to take deposits. These provisions of the Glass–Steagall Act were repealed under Bill Clinton as part of his drive towards deregulating the financial sector.

glass-steagall_1933

President Franklin Roosevelt at the signing of the Banking Act in 1933.

 

The role of the United States Congress in the dismantling of the Glass-Steagall Act is especially instructive. Since the mid 70s, no fewer than 25 attempts were made to repeal that law. In 1991, the George H. W. Bush administration tried to amend the law so that commercial banks could participate in investment activities. The House voted 216–200 against the proposed amendment. Seven years later, in 1998, the House passed a very similar legislation 214–213. However, these numbers don’t tell the full story.

As Roslyn Fuller explains in her book Beasts and Gods: How Democracy Changed its Meaning and Lost its Purpose (2015), there was a critical difference between the two pieces of legislation. The 1991 reform effort favored banking interests while the one in 1998 favored insurance and investment interests. The latter were against the 1991 reform, and so they gave substantial donations to Congressional Democrats, who were in the majority, in order to prevent the law from being passed. Their spending paid off, as 74% of Democrats opposed the amendment, as compared to only 22% of Republicans. The same interests then supported the 1998 version of the legislation and, to ensure success, significantly increased their financial contributions to Congressional Republicans, who were now in the majority. As a result, this time 77% of Republicans supported the amendment, as compared to only 38% of Democrats.

Out of the 182 representatives who voted in both 1991 and 1998, two-thirds switched their votes depending on which way the wind was blowing. In 1991, Democrats voted in favor of the insurance and investment companies from whom they were receiving substantial sums of money, but by 1998 the money supply had shifted in favor of the Republicans, which made it rational for the Democrats to start favoring their more reliable donors from the banking industry. On the other hand, the Republicans supported the banking interests in 1991, but changed their votes seven years later in response to the increased generosity of the insurance and investment interests.

Finally, in 1999, the Congress passed the Financial Services Modernization Act with bipartisan support, putting the final nail in the coffin of the Glass-Steagall Act. By this time, the interests of both banking and investment companies had converged, and this was reflected in how the House voted: 362–57 in favor.

clintonrepeal

President Bill Clinton signing the Gramm–Leach–Bliley Act in 1999.

As the New York Times reported at the time, Treasury Secretary Larry Summers was ecstatic when the Congress passed  the Financial Services Modernization Act (also known as the Gramm–Leach–Bliley Act) : “This historic legislation will better enable American companies to compete in the new economy.” Senator Charles E. Schumer (D-New York) praised the new legislation: “There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.” In contrast to these optimistic assessments, Senator Byron L. Dorgan (D-North Dakota) made the following prescient comment: “I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010.” Today, President Clinton’s repeal of the Glass-Steagall Act is widely believed to have paved the way for conditions that made the financial meltdown of 2008 much worse than what it might have been; others believe that the meltdown would not have happened if that New Deal legislation were still in place.

As already mentioned, however, the trend toward financial deregulation had started much earlier—specifically, during the Carter administration. The landmark event was a 1978 decision by the US Supreme Court that practically ended all limits on interest rates. In Marquette National Bank v. First of Omaha Service Corp., the Supreme Court ruled that national banks did not have to follow the interest rate regulations of the borrower’s state but only those of their own home states. This decision provided a powerful incentive for financial companies to relocate to the states with the least onerous regulations, thereby encouraging states to do abolish anti-usury laws and end interest rate ceilings. Two years later, the U.S. Congress passed the Depository Institutions Deregulation and Monetary Control Act, which included a provision exempting federally chartered savings banks, installment plan sellers, and chartered loan companies from state mandated anti-usury laws. As a result, both the federal judiciary and the legislature effectively ended the age-old practice of capping interest rates. The resulting competitive pressure led to an explosion of financial services, since a lot more money could now be made through lending than through investing in the real economy.

Writing in Harper’s, Thomas Geoghegan explained “how the dismantling of usury laws” produced such as results as “the loss of our industrial base” and “the loss of our best middle-class jobs.”

First, thanks to the uncapping of interest rates, we shifted capital into the financial sector, with its relatively high returns. Second, as we shifted capital out of globally competitive manufacturing, we ran bigger trade deficits. Third, as we ran bigger trade deficits, we required bigger inflows of foreign capital. We had “cheap money” flooding in from China, Saudi Arabia, and even the Fourth World. May God forgive us — we even had capital coming in from Honduras. Fourth, the banks got even more money, and they didn’t even consider putting it back into manufacturing. They stuffed it into derivatives and other forms of gambling, because that’s the kind of thing that got the “normal” big return; that is, not five percent but 35 percent or even more.

As the financial sector became more profitable than manufacturing, it started to bloat up in unprecedented ways. In the documentary, Noam Chomsky describes the results of financialization as follows:

You started getting that huge increase in the flows of speculative capital—just astronomically increase—enormous changes in the financial sector from traditional banks to risky investments, complex financial instruments, money manipulation, and so on. Increasingly, the business of the country isn’t production, at least not here. The primary business here is business. … By the 1970s, [U.S. corporations], say General Electric, could make more profit playing games with money than you could by producing in the United States. You have to remember that General Electric is substantially a financial institution today. It makes half its profits just by moving money around in complicated ways. And it’s very unclear that they are doing anything that’s of value to the economy.

The following graphs tell the story of how the decline of American manufacturing has been accompanied by the rise of American finance.

manufacturing_finance

Finance & Manufacturing share of domestic corporate profits.

Offshoring of Production

The second factor in how the economy was redesigned to suite the wealthy was the offshoring of production. This consists of two basic components: (1) lobbying governments to deregulate the movement of goods and capital across national borders; (2) moving factories out of countries that have strong labor and environmental protection laws to countries were workers can be made to work longer hours and at lower wages.

2010-09_cartoon

Chomsky explains:

The trade system was reconstructed with a very explicit design of putting working people in competition with each other all over the world. And what it’s led to is a reduction in the share of income on the part of working people. It’s been particularly striking in the United States, but it’s happening worldwide. It means an American worker is in competition with the super-exploited worker in China. Meanwhile, highly paid professionals are protected. They are not placed in competition with the rest of the world—far from it. And, of course, the capital is free to move. Workers aren’t free to move; labor can’t move, but capital can. Well, again, going back to the classics like Adam Smith, as he pointed out, the free circulation of labor is the foundation of any free trade system. But workers are pretty much stuck. The wealthy and the privileged are protected, so you get obvious consequences.

As the world is increasingly integrated into the global economy, large business corporations are able to lower their labor costs by manufacturing their products in relatively poor countries. This allows them to bypass the rights that working people have won in more developed countries, as well as avoid the various environmental regulations. Exploitation of labor goes on in places like India, China, Bangladesh, and Mexico, while unemployment rises in the United States. Capital can move anywhere in the world in search of higher profits, but workers aren’t allowed to go from one country to another in search of higher wages or better working conditions.

chinese_factory

Workers in a Chinese iPhone factory.

Globalization protects the owners of capital while further degrading those who have nothing to sell but their labor. The consequences include increasing wealth for the already wealthy and diminishing prospects for the working class. Chomsky notes that such consequences are not accidental; they are the intended goals for which offshoring of production is pursued in the first place. Indeed, it is not uncommon for economic policy-makers to proudly take credit for institutionalizing policies that intensify the financial insecurity of the lower and middle classes. Such insecurity helps maintain obedience on the part of the population.

Alan Greenspan, when he testified to Congress [in 1997], he explained his success in running the economy as based on what he called “greater worker insecurity.” Keep workers insecure, they’re going to be under control; they’re not going to ask for, say, decent wages or decent working conditions, or the opportunity of free association, meaning unionize. Now, for the “masters of mankind,” that’s fine—they make their profits, but for the population it’s devastating.

The Greenspan quotation that Chomsky is referring to is from “Monetary Policy Report to the Congress,” dated February 26, 1997. Greenspan, who was chairman of the Federal Reserve from 1987 to 2006, had made the following comment: “Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity.”

buckley_chomskyAt this point in the narrative, the film digresses a bit from the main discussion to provide an introduction of Noam Chomsky himself. We learn about Chomsky as a groundbreaking intellectual who transformed the field of linguistics in the 1950s before becoming famous for his public opposition to the Vietnam war during the mid 1960s. We watch a short clip from William F. Buckley’s interview of (and/or debate with) a much younger Noam Chomsky that took place in New York on April 3, 1969, as part of the TV show “Firing Line.” The video of the debate is available here, while a complete transcript can be found here. In “Requiem,” Buckley is seen introducing a younger Chomsky as follows:

Professor Noam Chomsky is listed in anybody’s catalog as one of the half-dozen top heroes of the New Left. This standing he achieved by adopting over the past two or three years a series of adamant positions rejecting at least American foreign policy, at most America itself.

The older Chomsky then responds to the charge of “anti-Americanism,” which is fun to watch. He points out that in all societies anyone who criticizes the status quo usually becomes a target of various types of attacks, but it is only under totalitarian rule that the critics of concentrated wealth and power are accused of being enemies of their own countries—as in “anti-Soviet” or “anti-American.” The very existence of such forms of verbal abuse in a “democratic” society is rather revealing.

Systemic Problems (2)

The following discussion is based on, and inspired by, the work of Jack Harich and associates, which can be accessed here.

A systemic problem is one that originates in the structure of a system rather in the behavior of individuals participating in the system. This does not mean that individuals play no role in causing the problem; rather, it means that replacing the individuals or attempts at changing their behavior, without changing the system’s structure, will not solve the problem. This is because in any social system there is a dynamic and dialectical relationship between the structure of the system (including all the interconnections, feedback loops, explicit or implicit rules, goals, etc.) and the individuals who participate in the system. The human factor is important—it is, after all, the people whose aggregate behavior is largely responsible for bringing the structure into existence and whose continuing participation is what maintains that structure over time. The structure, however, tends to acquire a reality of its own—becoming stronger than its individual participants in many ways—that both influences and limits the behavior choices of the people operating within the system. The structure not only encourages and rewards certain behavioral tendencies but also makes alternative choices harder to imagine, let alone implement.

social-system-diagram

A social problem that persists—and often gets worse—over time, despite the application of various intuitive or commonsense solutions, is likely to be a systemic problem whose root causes lie in the structure of the system. Such a problem cannot be solved unless its root causes are accurately identified and the appropriate solution elements devised to push at high leverage points in order to address those root causes. A root cause is defined as the deepest element in a causal change that is susceptible to resolution.

When a social system operates in a way that produces desirable outcomes, we can say that it is functioning in the right mode; when it operates in way that produces undesirable outcomes, we can describe it as functioning in the wrong mode. Solving a social problem is therefore a matter of shifting the mode of the relevant social system from wrong to right. But the persistence of a social problem over a long period of time, despite huge efforts to solve it, indicates not only that the relevant social system is operating in the wrong mode, but that it has somehow become locked into that undesirable state. In other words, structural mechanisms such as feedback loops have developed that prevent the system from changing in the desired direction. As soon as any effort to shift the system’s mode starts to succeed, these mechanisms spring into action and immediately reverse those gains. When effort after effort fails to change the mode of the system, activists ought to realize that trying harder is not the solution. They need to go back to the drawing board and examine their own assumptions about the causes of the problem. In most cases of stubborn social problems, the lack of success is not due to a deficiency of effort on the part of the activists but due to their incorrect diagnosis.

To arrive at the correct causal analysis of a persistent large-scale problem, social diagnosticians must consider three types of causal forces: (1) root cause forces, (2) superficial solution forces, and (3) fundamental solution forces. These forces (as well as new root cause forces) appear in blue text in Jack Harich’s “Standard Social Force Diagram” depicted below.

Standard-Social-Force-Diagr

When a social system is locked into the wrong mode, that’s because root cause forces arising from root causes are operating to keep the system in that mode and to oppose and defeat any and all efforts to bring about a mode change. A system operating in the wrong mode produces undesirable outcomes or symptoms, such as deforestation, high morbidity, ineffective government, too many industrial accidents, lack of sufficient housing, and so on. Concerned citizens, who find these outcomes disturbing and unacceptable, reason their way backwards from the symptoms to their possible causes. Most of the time, however, they end their analysis prematurely—as soon as they have identified what appears to them as a plausible explanation for the symptoms but is, in reality, only a set of intermediate causes. Thinking that they have found what they were looking for, they focus their efforts at unleashing superficial solution forces, which leads them to devise superficial solutions that push on low leverage points in order to address the intermediate causes. As expected, their strategy fails to solve the problem since superficial solution forces are, by definition, weaker than the root cause forces. The error, of course, lies in the incorrect diagnosis.

A successful strategy to bring about a systemic change must begin with the correct diagnosis. Instead of ending their analysis as soon as they’ve found the first plausible explanation, activists must keep digging until they have identified the root causes of the problem that lie hidden in the system’s structure, sometimes deep underneath the intermediate causes. Once the activists have identified the root causes, they will be able to focus their efforts at unleashing fundamental solution forces, which will lead them to devise fundamental solutions that push on high leverage points in order to address the root causes. Since fundamental solution forces are, by definition, stronger than root cause forces, this is the only strategy that can bring about an actual mode change in the system. As the fundamental solution forces introduce into the system new root causes, the latter give rise to new intermediate causes, which, in turn, produce new symptoms (or desirable outcomes). The new root cause forces will also give rise to new structural mechanisms including feedback loops that will keep the system locked into the right mode.The persistence of the desirable outcomes over time, and the ability of the system to maintain itself in the right mode despite any opposing efforts, will indicate that the system has, in fact, permanently shifted from being in the wrong mode to being in the right mode. This is the definition of a systemic change. Anything short of that does not deserve to be called a “success.”