This is the second installment of a 3-part essay about the current American dilemma by The Rights Factory author Kamal Gupta, author of PLAY IT RIGHT. Click here to read Part 1.

A Fine Mess

The revolving door between big business and the U.S. government has ensured that there is no public service in America anymore (at least at the top). A stint in government has turned into either a tax payoff for past earnings (Hank Paulson) or a prelude to post-retirement riches (Timothy Geithner). The door at the Securities Exchange Commission (SEC) is especially fast-spinning and has led to corporations rarely being held to account for their misdeeds. When caught, they simply pay a fine and go back to conducting business as usual, a luxury that is almost never afforded to an individual. It almost makes one wonder if CEOs consider fines to be just another cost of doing business.

Not a single Wall Street chief executive was held to account for their role in the great financial crisis of 2008. This is particularly shocking in light of the fact that the companies they ran paid crisis-related fines in excess of fifty billion dollars! In fact, the roots of the financial crisis can be traced back to an April 2004 SEC change in the net capital rule that allowed investment banks to sharply increase their risk taking. Not surprisingly, the change was championed by a gang of broker-dealer CEOs led by Hank Paulson of Goldman Sachs himself. By a supreme irony the three men charged with steering the US out of the 2008 financial crisis — Paulson, Bernanke and Geithner — all played a role in igniting the conflagration in the first place.

One financial institution in particular, HSBC, incurred fines repeatedly from 2007 to 2019 for abuses ranging from laundering money for drug traffickers to manipulation of the foreign exchange market. And yet, the company itself never faced any criminal charges. In a particularly cruel twist, the authorities arrested two of HSBC’s currency traders for an insider trading scheme that generated a whopping eight million dollars in profits even as the bank itself was paying fines by the billions. Likewise, Boeing resolved the 737 Max-related criminal charges — “conspiracy to defraud the United States” — by paying $2.5 Billion. The Department of Justice claimed that this “agreement holds Boeing and its employees accountable,” when it did no such thing. The company’s CEO, Dennis Muilenberg, was allowed to walk away with a $58 million payoff despite being partly responsible for the deaths of 346 innocents.

Any doubts about how CEOs perceive these fines were removed in a 2013 conversation between Senator Elizabeth Warren and Jamie Dimon, the CEO of the banking giant J.P. Morgan. When confronted by the senator about his company potentially breaking the law, he replied, “So hit me with a fine. We can afford it.” I doubt if Dimon would have been quite so smug if any of his compatriots had been imprisoned after the 2008 financial crisis.

The supreme court has also come down on the side of corporations, giving them the first amendment right to make unlimited political expenditures (Citizens United v. Federal Election Commission). The idea of corporate personhood is not a new one and the 2012 Republican presidential candidate, Mitt Romney, embraced it while saying, “corporations are people too.” If corporations are people too then, in a country with the world’s highest per-capita incarceration rate, why don’t we see more corporations (or at least their CEOs) being jailed for their crimes?

Corporations are not people. They are a structure created by mankind for profit and to hide behind whenever any wrongdoing comes to light. Not a single Wells Fargo executive was jailed for fraudulently creating millions (millions!) of accounts without the bank’s customers’ consent or knowledge. As always, the company simply paid a fine and moved on. That fine, several billion dollars, might have appeared large on the surface but it represented a small fraction of the corrupt bank’s annual pre-scandal profits.

It wasn’t always this way. I believe that America’s slide into corporatism began with a bill passed in the early days of the Clinton administration. Here is a description of the law from the U.S. treasury’s website:

This legislation capped a public company’s corporate income tax deduction at $1 million per year for amounts paid to each of its top five executives. This $1 million limit includes income from salary, bonuses, stock grants, and other compensation, but it does not include income that relates to performance pay such as a non-equity incentive plan, stock options, stock appreciation rights, pensions, and deferred compensation (if deferred until after retirement).

The gaping loophole in the law relating to performance pay set the stage for a dramatic shift in CEO pay — from salary, bonuses, and stock, to stock options. With their compensation now highly levered to the price of their company’s stock, CEOs set about maximizing their pay with gusto.

Simply speaking, the price of any stock boils down to the price-to-earnings (PE) ratio multiplied by profits (revenue minus expenses). The PE ratio is determined by the market at large and is beyond a CEO’s control. And, for the most part, so is revenue. An increase in demand comes from either building better products or a growth in population, both of which happen slowly. The fastest way for a chief executive to boost profits, and by extension his stock price, is to cut expenses.

The easiest way to cut costs was to move factories and call centers overseas, a process aided by the passage of the North American Free Trade Agreement (NAFTA) which also went into effect in 1993. Since then, it seems like every factory in America has moved to China or Mexico and every call center to India, a shift that has left the American worker stranded. This so-called “globalization” was championed as much by Democrats as it was by Republicans (The two parties may not agree on much but they are united in their love for corporate cash). Globalization bears a significant responsibility for the hollowing out of the US middle class and the ensuing opioid crisis in the heartland. It is also to blame for America’s massive trade deficits. The US trade deficit with China alone ballooned from a meager $10 billion in 1990 to a whopping $418 billion in 2018 (It has come down since but is still over $300 billion). Likewise, the trade deficit with Mexico has gone from zero to over $100 billion.

The CEO of the world’s most valuable corporation, Apple, earned $98.7 million in 2021, the vast majority of which came from stock options. Even though every iPhone proudly states “Designed by Apple in California,” it is public knowledge that the company manufactures virtually all of its products overseas. By Apple's own account, it supports almost five million jobs in China as opposed to just two million in America. A 2012 article in Harvard Business Review — a publication not exactly known for defending workers’ rights — claimed that Apple has to (has to!) manufacture in China because “There is simply no factory capable of employing 250,000 workers day and night in the USA.” The article concludes that Apple's location decision “isn’t really about labor costs” but about managing manufacturing risk, as if the two can ever be separated. The write-up is also mute about the political and social climate in China that makes such a marshalling of resources possible.

While all of this is bad news for the American worker, it has been nothing but roses for the U.S. stock market. Over the last three decades, the S&P 500 has climbed ten-fold, creating tens of trillions of dollars in wealth. The overwhelming majority of these trillions have gone to the top 1% whose net-worth has increased lockstep with the stock market, from $5 trillion in 1990 to $44 trillion in 2021. The one-percenters today own an astonishing one-third of total wealth in America while the bottom half’s share amounts to an embarrassing 2%.

It would be difficult to argue therefore that the institutions of America are working for the benefit of its population. The rage against the state of affairs is understandable but, instead of directing it against each other, it needs to be channeled towards bringing about real change.

Interested in reading more from Kamal Gupta? PLAY IT RIGHT is on sale now.

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Updated: 3 days ago

We are pleased to present the first of a 3-part essay about the current American dilemma by Kamal Gupta, author of Play it Right.

Part 1: The Real Fight in America

There is a great deal of talk these days about the U.S. sliding into a modern-day civil war. The discourse, so far, has largely focused on the polarization of American society along political, racial, and geographical lines. While these rifts are significant, they also obscure the one struggle that unites us all. The real fight in America is not between Democrats and Republicans or between the Trumpers and the never-Trumpers. Nor is it between the two coasts and the heartland or between the North and the South. The urban-rural divide is also not the primary obstacle standing in America’s way.

The most consequential battle in the U.S. today is the war that large corporations have been quietly waging upon the country’s population. These behemoths have used their ever-increasing political and financial clout to chip away at the fabric of American society. During the 1990s, a dangerous new ethos took hold in America — CEOs are only accountable to their shareholders. This mindset absolved the titans of industry of any responsibility towards their employees, consumers, or the country itself. Profit became the be-all and end-all of a corporation’s existence and its share price the only metric of success.

The sharp rise in corporate power during the past quarter-century has come at the expense of the institutions that made America truly great — the presidency and the congress, an independent media, the supreme court, the federal reserve, and the universities, to name a few.

Politics in America has become a race for money. The 2020 election cycle saw a mind-boggling 14 billion dollars worth of campaign spending, only a fifth of which came from small donors. The majority of the funds came from the wealthy and from big business — two entities that are frequently indistinguishable from each other. Large contributors oftentimes don’t even pick sides (on the basis of issues, heaven forbid) and donate money to both sides in the contest. Heads they win, tails they also win.

The rich and the corporations don’t make political contributions out of the goodness of their hearts. They expect a return on their investment and, far more often than not, they get it. In addition to continually passing laws that benefit big business (deregulation anyone?), the U.S. government has looked the other way as a wave of mergers dropped the number of publicly listed companies in America by half — from 8090 in 1996 to around 4000 today. As a result, almost every major industry in the U.S. — from airlines to media to finance — is dominated by a handful of large corporations. The resulting lack of competition has reduced choice for consumers and taken away the workers’ ability to negotiate.

A rise in corporate power has contributed to the inflation-adjusted median household income remaining stagnant in the U.S. for a quarter century (1989 - 2014), even as the real GDP doubled and the stock market surged by nearly 600%. Virtually all of the economic gains of this twenty-five year period went to capital at the expense of labor. Unions could have helped rectify this imbalance but they are a dying force. Currently, only about ten-percent of American workers belong to a union, down from a peak of thirty-five percent in the 1950s.

Mainstream media, also corporate owned, tries its hardest to keep America divided. Much like how the cable providers have carved the country into mafia-type territories (how many options do you have for cable TV in your town?), so have large media companies. It would be impossible for anyone to argue that MSNBC and FOX are taking any steps to poach viewers from each other. The battle lines have been drawn and the population has been focus-grouped to the point that viewers of MSNBC inhabit a different universe from those tuned into FOX. A relentless search for profits has led to outrage being permanently dialed to eleven at all of these channels, albeit at different targets. The head of CNN, Jeff Zucker, famously said, “Chaos is good for CNN,” while the head of CBS, Les Moonves, was quoted as saying (about the money being spent in the 2016 presidential election), “It may not be good for America, but it’s damn good for CBS.” It stands to reason, therefore, that these corporations have chosen profits over the good of the country. In fact, I doubt if the greater good ever enters the equation in America’s boardrooms.

The Federal Reserve, another pillar of American greatness, has also thrown its lot in with the stock market, which is just another term for corporations. The S&P 500 has somehow become a proxy for the health of the US economy and any sharp drop in stock prices is met with swift action by the Fed. For well over a decade now, the Fed has been involved in quantitative easing (QE) of some sort or another. Simply put, QE is a mechanism by which the Fed buys trillions of securities (usually bonds) in a bid to prop up the stock market and, by extension, the American economy. Or so the thinking goes. In reality, stock prices embody the fear and greed of market participants and are not a reliable indicator of economic strength or weakness. The highest inflation numbers in forty years have finally forced the Fed to raise interest rates recently. However, with consumer prices rising at an annual rate of 8.5%, it feels like the Fed is attempting to close the barn door long after the horse has bolted. The federal funds rate in May 2022 is still below 1%.

The Fed’s maintaining interest rates below the rate of inflation is a direct consequence of its corporate capture. All else equal, the lower the interest rates the higher the stock market. Stanley Fischer, the vice-chairman of the Federal Reserve from 2014-2017, confirmed as much in an August 2016 interview. While admitting that negative interest rates (where the bank charges you interest!) are “difficult to deal with” for those that save money, he added that they “go along with quite decent equity prices.”

It doesn’t help the American public that departing Fed chairpersons can look forward to a substantial payday upon retirement. Ben Bernanke pocketed a cool $250,000 a night for a series of dinners after leaving the Fed chairmanship in 2014. Likewise, Janet Yellen collected over seven million dollars from big business (in “speaking” fees) during the two years she spent between her low-paying jobs as Fed chairperson and the U.S. Treasury secretary. Just one corporation, Citigroup, paid her almost a million dollars in 2019 and 2020. The question, therefore, arises; who exactly is the chairperson serving while in office? The taxpayer that pays them $203,500 a year or corporations that pay them more in just one evening?

The universities of America have also become a part of the problem. The cost of higher education has risen almost eight-fold over the past four decades, leading to an explosion in student debt. This is especially cruel in light of the fact that, during the same period, it has become increasingly difficult to get a blue-collar job in America. A college degree that was once a luxury has now become a necessity.

Under normal circumstances, no one would accuse Harvard, arguably the most prestigious of U.S. universities, of being a corporation. However, with an actively managed $53 billion endowment, it is easy to think of Harvard as a small university attached to a large hedge fund. For four decades, Harvard undergraduate freshman enrollment has been stuck around 1600 even as America’s population rose by almost fifty percent and the university’s endowment grew ten-fold to reach a jaw-dropping $33 million for every entering freshman.

The sharp increase in endowments at top universities across the nation is a direct result of increased inequality in America. Once you’ve acquired all the material possessions that your heart desires, you might as well shoot for immortality — by buying the naming rights to a museum wing or a university building. Those who consider these donations to be an act of charity only need to look at the Lincoln Center in New York. The venerable institution bought back the naming rights to Avery Fisher Hall by paying $15 million to the Fisher family while selling the same rights to David Geffen for $100 million. These were both financial transactions plain and simple, not charity.

If I had to pick one phenomenon that has allowed corporations to run amok over the past two decades, it would have to be the fact that they are almost never held accountable for their misdeeds. Corporate sins, no matter how flagrant or repetitive, are almost always wiped away with money.

To hear more from Kamal, you can listen to him on The Create Your Own Life Show and The Bruce Cook Conversation.

Part 2: A Fine Mess and Part 3: The Way Forward, will be coming soon!

thom vernon’s I MET DEATH & SEX THROUGH MY FRIEND, TOM MEULEY has sold to Michael Mirolla at Guernica.

This book takes place over 24 hours as a blizzard pummels the city. A beloved Toronto high school teacher gets a teenage boy to assist in his gruesome suicide. This forces the boy, his best friend and mother, and a down-low cop to go to any lengths to hide the body and to save each other.

"I am deeply in love with thom's writing, the characters he creates, and the depth of emotion infused in his prose,” says The Rights Factory agent Stacey Kondla. “Readers will think about Milk, Sessy, and 'Ton for a long time after reading this intense and heartfelt novel."

I MET DEATH & SEX THROUGH MY FRIEND, TOM MEULEY is scheduled for publication in 2024.

Learn more about thom on his website.

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