Shocking Ways Capitalism Is Failing

Shocking Ways Capitalism Is Failing Working America

Without a dramatic rethink, our "free-enterprise" system may never again provide enough decent jobs for those who need them.

January 31, 2012  |  

 

 

Capitalism is coming apart at the seams and the middle-class is paying the price. This week’s news alone bombards us with examples of how, absent a dramatic rethink, our "free-enterprise" system may never again provide enough decent jobs for those who need and want them. 
1. iSlavery
Apple is arguably the world’s most successful company. Yet most of the 700,000 jobs needed to produce its cherished products are located abroad, especially in China. Why doesn’t Apple manufacture in the United States? Charles Duhigg and Keith Bradsher writing for the New York Times reveal that Apple is looking for a cheap, “flexible” workforce that can be put to work whenever and wherever it is needed on the company's terms. 
One chilling example concerns the manufacture of glass screens for the iPhone to replace plastic screens which are easily scratched. With only weeks to go before the phone’s release in 2007, the late Steve Jobs demanded a switch to glass. But to get that done on time required deploying the pliable workforce of the giant Chinese manufacturing firm, Foxconn:

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?” 

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.  

Little wonder that Apple just announced that it doubled its already enormous profits over the Christmas holidays. Like the Pharaohs of old, it’s always paid to build great things on the backs of slave labor. 
2. The Bain of Our Middle-Class Existence
A day doesn’t go by without suffering through another Mitt Romney defense of his career at Bain Capital, his highly profitable leveraged buy-out firm. Mitt repeatedly tells us that Bain created tens of thousands of jobs at Staples, Domino’s Pizza, Sealy, Brookstone, Sports Authority, Burger King, Burlington Coat Factory, Dunkin’ Donuts, and Toys 'R' Us.
For a moment let’s put aside the fact that Bain also drove a large number of companies into bankruptcy while loading them up with debt and extracting enormous profits along the way. Instead, let’s focus on the type of jobs that Staples, Domino’s et al. produce for the American middle-class. While these jobs are not as slavish as those sought after by Apple in China, most Bain companies pay so little and have so few benefits that it is impossible to support a middle-class existence from the jobs they create. 
Since Romney likes to brag about Staples, we took a closer look at its average hourly pay (as reported on Glassdoor.com). Out of 61 job classifications listed, only three provide starting salaries of $20 or more per hour. The vast majority of those 61 jobs categories have pay scales that begin at $7 and $8 per hour and scale up over time to $13 or $14 an hour. I’d like to see Mitt raise his dog on that. 
But wait! There really is some fairness in our economy when it comes to taxes. If you work at Staples and somehow climb your way up to a middle-class salary, you might be paying the same tax rate as Mitt who earns $20 million a year. Then again, since Mitt paid only 13.9% on his 2010 taxes, you might even pay a little more counting all your state and local taxes. (More on how he does it below.) 
3. Surprise! Federal Auditors Find Big Pay for Bailed-Out Bankers
While the middle-class suffers, top executives are raking it in yet again, even at the companies bailed out by our tax dollars. You may recall that the Obama administration demanded that executives at the top seven bailed-out firms receive no more than $500,000 a year. Congress complied by passing a law to set up a “special master” to administer the salary cap. Well, this week we discovered that the special master got mastered, according to federal auditors. 
Apparently, the bailed-out companies teamed up with Treasury Secretary Timothy Geithner and company to pressure the special master to allow salaries 10 times as high for these failed executives. “Forty-nine people received packages worth $5 million or more from 2009-2011,” according to the auditor’s report. (What the auditor failed to mention is that the law only applies to direct bailout money. It does not cover the big Wall Street firms that took trillions in hidden loans from the Federal Reserve to avoid collapse. Those top bankers earn much more than those at the seven bailed-out firms.)
So what was the excuse for busting the pay cap? Without fatter paychecks, these poor executives would...quit. 
Here’s the argument one bailed-out company used to claim a “hardship” exemption so the employee could receive at least $1 million in cash: “This individual is in their early 40s, with two kids in private school, who is now considered cash-poor.” Such people “would not meet their monthly expenses” if the $500,000 a year cap were applied to him. Ouch!
Why not let this executive walk? After all, his or her firm was a failure. It was only saved from destruction because of the generosity of the taxpayer. Where’s that executive going to go anyway, and couldn’t a suitable replacement be found at $500,000 a year?
Just count all the alleged “laws of capitalism” that are broken in this example: 1) the original bailout instead of bankruptcy; 2) the irreplaceable executive in an economy with massive layoffs even in the financial sector; and 3) a financial wage scale having no connection to real value produced (especially since the firm produced negative value and needed to be bailed out).
So while the Apple workers in China get up in the middle of the night from their company dorms to assemble phones, and while Staples workers try to live on $8 an hour, we the taxpayers are supporting financial executives who can’t make ends meet on $500,000 a year?
4. Economically Addicted to War
The news is hot this week with military strife. Iraq is drifting back to civil war. Afghanistan is already there. Iran is threatening to close the Straits of Hormuz, and the New York City police got nabbed using an anti-American Muslim training film on 1,400 of its officers. What does this all add up to? Spending trillions on the military and then asking the middle-lass to tighten its belt to make up for deficits.
Since W.W.II pulled the U.S. out of the Great Depression, massive military expenditures have been used repeatedly to keep the economy near full-employment. During the Cold War, these expenditures contributed mightily to a new form of state capitalism where public funds were used to subsidize private corporations which supplied the military. Along the way, this process also helped prop up the middle-class in defense industry jobs. 
But over the last decade this military Keynesianism got a new wrinkle. The U.S. went to war without paying for it, thereby racking up nearly a trillion dollars in new debt. At the same time an enormous tax cut was handed over to the super-rich which proceeded to spend a good deal of it in the Wall Street casino which then crashed. In total, the unfunded wars, the tax cuts and the economic crash account for the entire deficit problem. Let me repeat, there would be no deficit at all were it not for the Bush tax cuts, the two unfunded wars and the Wall Street crash.  
Nevertheless the middle-class must pay. We are told that the real problem is “entitlements,” including public support for healthcare, education, unemployment benefits and Social Security. Therefore we must cut, cut, cut, to pay for military adventurism and the lifestyles of our financial oligarchs. 
5. Mitt Slithers Through the “Carried Interest” Loophole
Of course, one of the big news items of the week was Mitt’s tax returns, which revealed that he paid only 13.9 percent in federal taxes instead of the 30-plus percent high-income earners are supposed to pay. Like Warren Buffett, Mr. Romney probably pays a lower tax rate than his secretary at Bain Capital. How does he get away with that?
It’s not just that he has a legion of tax sharpies who know how to hide his money in secret Swiss accounts and in the Grand Cayman Islands. The real culprit is a gigantic tax loophole called “carried interest” that allows private equity moguls and hedge fund honchos to essentially lie about what they do for a living.
You will hear Mitt wax euphoric about how hard he worked at Bain to obtain his riches. What he doesn’t tell you is that he used the carried interest loophole to hide all that hard work from federal taxes. Instead of paying himself an income for the real work he performed (which would be taxed at 35 percent), he hid his income within a slice of the profits so that he could claim it as capital gains (which is taxed at 15 percent). If he worked at a big bank doing exactly the same kind of work and got big stock options as his bonus, he would have to pay 35 percent. But thanks to the largess of Congress, he and billionaires in the private equity and hedge fund rackets pay only 15 percent. And of course, every effort to remove this loophole has been stalled by both Democrats and Republicans in Congress. 
This loophole is the poster child example of how the super-rich enhance their wealth at the expense of the rest of us. And the rest of us do indeed make up the difference either through increased taxes or decreased services. 
6. How the Gringrich/Freddie Tryst Distorts History
This week also treated us with the release of Newt’s $600,000 a year consulting contract with Freddie Mac. Did he get paid for influence-peddling or for his prescient historical insights? Who cares? As sordid as his deal may have been, the real damage comes from the analysis of the financial crash that accompanies the story. We hear again and again by all, including the media, that Fannie Mae and Freddie Mac, the two troubled government housing agencies, caused the financial meltdown. 
Not true!
Let’s start with some basic facts about these corporations. They are not government agencies. They are private corporations that have the implicit backing of the government to help provide a massive mortgage market for middle-class Americans (or they were before the crash). The big mistake was allowing these agencies to become for-profit organizations in the first place. But that’s another story.
The widely repeated erroneous analysis claims that Fannie and Freddie caused the crash by underwriting risky housing mortgages. Ron Paul, in particular, blames the Community Reinvestment Act for pushing Fannie and Freddie to buy up “risky” loans that enable underserved minorities in particular to obtain mortgages. 
But Paul, who should know better, has it dead wrong. CRA mortgages were standard mortgages and not risky ones. Their default rates are just like other standard mortgages given to Anglo home buyers. CRA, in short, had absolutely nothing to do with Wall Street’s reckless gambling as big banks and hedge funds bought up risky mortgages and sold them in even riskier mortgage-related securities.
Fannie and Freddie also wanted in on that enormously profitable Wall Street derivative game. But they got there very, very late just as the crisis was starting to unfold. These flawed private/government backed agencies didn’t cause what already was fully developed. Instead they were left holding the bag. You can’t blame them for the mess that Wall Street already created.
Who suffers? The middle-class homeowner who is already underwater due to the housing crash, and those who will purchase homes in the future. The drumbeat of attacks on Freddie and Fanny will surely lead to the privatization of those functions, which in turn will drive up the costs of mortgages for the rest of us. 
How do we put America back to work?
These recent examples demonstrate yet again that "free-enterprise" on its own can not create enough middle-class jobs. Neither Apple, nor Bain-Staples, nor Wall Street, nor deficit reduction will get us there. By the way, neither will small business. 
We need to recognize that modern financialized capitalism is deeply flawed. Without enormous government support, it cannot function. Without enormous government support, there will be no sizable middle-class. 
The solution is both simple and difficult for us to accept. We need to use public money to create jobs and decent wages doing the things that need doing!  

• We need more education? Then make higher education virtually free as we did at the end of W.W.II. 
• We need alternative energy? Then use government funds to perfect the technology as we did with the Manhattan Project to build the A-bomb, and as we did with NASA’s moon shot.
• We need to rebuild our crumbling infrastructure? Then hire a million workers to do it as we did during the Great Depression.

How do we pay for it? By now that should be conceptually easy: Wall Street should pay for the damage it has done. (A financial transaction tax would be a good first step.) And while we’re at it, get rid of the carried interest loophole so that Romney and the rest of his gang pay the same rates as the rest of us. 

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).