How corporations are crippling U.S. prosperity
A dearth of competition in major U.S. industries and a government with policy making that has been severely corrupted by moneyed interests have led to depressed wages and stifled innovation, a Pulitzer Prize-winning journalist says in a new book.
In essence, you're being ripped off, and those responsible are taking everyone's money while assuming very little risk.
David Cay Johnston was awarded the Pulitzer Prize for reporting the inequalities and loopholes that exist in the U.S. tax code and exposing corporate tax evasion. His latest work, The Fine Print: How Big companies Use "Plain English" to Rob You Blind, examines his findings about how the U.S. economy has strayed away from capitalism and into "corporate socialism," where the free market, its engine of prosperity, has stalled.
Some argue that globalization has caused a smoothing of salaries as developing economies grow. We asked Johnston to make his case about how the alleged subversion of competitive markets could actually be what's responsible. Here's our interview with David Cay Johnston:
SmartPlanet: Are our markets competitive or is the game fixed?
David Cay Johnston: A growing number of industries are monopolies, duopolies and oligopolies even as they claim to be in highly competitive markets. Cable, Internet and telephone provide a good example of this. In most places you have one phone company and one cable company offering similarly slow, by world standards, Internet speeds and very similar prices. Computers make it possible for companies to match prices quickly, as airlines do in just a few minutes for millions of fares when one airline changes its pricing structure.
SP: Are we paying too much for goods and services?
DCJ: We pay four times what the French do for a triple play package of cable, Internet and telephone -- and they get worldwide TV, not just domestic; their Internet is ten times faster and instead of two country calling, they get long-distance to 70 countries at no extra charge. All that for $38 compared to the U.S. average of $160 including taxes. By one measure we pay 38 times as much as the Japanese per bit of information on the Internet. In states where the electric utilities were broken up so power generation could be a competitive business prices did not fall. Instead since 1999 they rose 48% more than inflation, compared to just 8 percent in states that retained traditional regulation. Everywhere there is a lack of competition, or only the appearance of competition, we pay way too much.
SP: Which companies and industries owe taxpayers their success? Which are the biggest offenders?
DCJ: Wall Street and the Too Big To Fail Banks are, for now, by far the worst offenders. We put $14.7 trillion, the entire economic output of the nation in 2009, at risk under the George W. Bush administration bailout instead of letting these firms suffer the consequences of their own mismanagement. The 401(k) system has generated huge profits for investment firms even as many accounts shrivel, becoming what I call 201(k)s. We have pipelines earning as much as 55% annual profits on their assets, eight times the average for all business. And even though pipelines are exempt from the corporate income tax, they get to collect the corporate income tax in their monopoly rates, inflating profits. The telephone companies collected $360 billion in rate hikes to build an Information Superhighway, but all we got was a two-lane Irish country road where you have to stop now and then while the sheep graze, our Internet having fallen from first to 29th in the world.
SP: Why would big businesses attempt to escape the rigors of the free market, and what effect does that have on the economy and the standard of living?
DCJ: Big companies are escaping the rigors of competitive markets. When Adam Smith wrote about "the invisible hand" he was pointing out that it is competitive markets, which create efficiencies, innovation and economic growth. But Smith also warned us in The Wealth of Nations in 1776 about how business owners are always conspiring to raise prices and reduce wages, which makes them better off but undoes the benefits of capitalism and slows economic growth. This is a major reason the real median wage (half make more, half less) has been stuck at just over $500 a week since 1999. It explains why the bottom 90 percent had higher incomes in 1973 than now when you adjust for inflation -- and back then most families with children had only one parent working outside the home. In 2010, the year after the Great Recession, the bottom 90 percent say their incomes decline. And of the increase going to the top 10 percent, 37 percent went to the top one percent of the top one percent.
SP: In your book, you single out telephone carriers -- is it really in their interests to hold back universal broadband services? Can you quantify the impact?
DCJ: Remarkably we have created a system in which the AT&T - Verizon duopoly makes bigger profits by holding back the Internet. Verizon will make fiber optic service, the Information Superhighway, available to just 16 million households, not all of whom will buy. AT&T provides fiber to the street, then old-fashioned coaxial cable to your home or business. And if you live in a rural area or even cities like Rochester, where I live in Western New York, your region is never scheduled to get fiber optic service. Building the universal fiber optic service out economic competitors are all building or have built would encourage the invention of new services and products in America, but instead those will be developed in other countries. After all, if there is no way to use a service why would it be invented? In making rules for business we forget that nothing in our Constitution speaks to riches and profits, but the Preamble cites, as one of the six noble purposes of the United States of America, promoting the general Welfare (upper case in the original).
One study, and it is only one study, says that a universal Information Superhighway at the fastest speeds in the world (we average about 5 percent of the top speeds) would increase economic output by two-thirds. That seems too much in my mind, but then look at how much richer America became after the Industrial Revolution took hold in the last third of the 19th century.
"The average family of four now spends $900 per year on state and local subsidies to corporations, more than a week's average take-home pay for the typical family of four."
SP: How could laws and rules have been written this way, and why wouldn't people notice it all happening? Was it a gradual shift or a more recent trend?
DCJ: Amendment by regulation by rule, one step at a time over many years, corporate lobbyists rewrote the rules. Had they done it all in one big bill we would have noticed. But who pays attention to when two words are changed in subsection q or Section 6108 of some federal or state statute. But some of this was done in the open and no journalists reported on it and no politician had an interest in pointing it out. So five states have taken away your legal right since 1913 to telephone service and put in rules that can literally mean you can only get cell telephone service. Worse, 19 states let corporations pocket the state income taxes withheld from their workers' paychecks -- you read that right, 2,700 big companies in 19 states get to keep the state income taxes of their employees. The best part, from the companies' point of view, is they don't have to tell the workers. All of the shift I identify in THE FINE PRINT began in either the 1980s or later, meaning when we abandoned the New Deal for Reaganism, which both parties now embrace.
SP: Is the government itself the problem or is it the lobbying?
DCJ: Government makes the rules, but when the only parties with an interest in writing those rules are rich people, corporations and their professional lobbyists then democracy is corrupted. Lobbying in the sense of a right to petition the government for a redress of grievances is a right guaranteed by the First Amendment. But there is no Constitutional right to give money to politicians so I would ban donations from anyone outside of a lawmaker's district, ban free travel and prohibit any either lobbying or working for companies a lawmaker's committees dealt with for life after leaving office, even if that means paying much bigger salaries to members of Congress and state legislatures. The price would be cheap to make sure our laws are balanced and take into account all interests, not just those of big corporations.
SP: Is the government's approach to regulation harmful to public safety as infrastructure ages? Your book noted how some gas and electric utilities are becoming dangerously dilapidated.
DCJ: Yes. High pressure gas pipelines laid when Truman was president still operate and with distressing results like the 2010 explosion south of San Francisco that blew up an entire city block and killed eight people -- and would have killed many more had it occurred just two hours later. Pacific Gas & Electric, the big Northern California utility, got rates to finance replacing its power poles on a 50-year cycle, but instead is replacing them on a 750-year cycle. Finance types are hollowing out many of our utilities, just as they stripped manufacturing companies and then threw out the shells.
SP: Do we already have a corporate socialist economy? Isn't that income redistribution upward?
DCJ: Large parts of our economy are corporate socialism, in which profits are privatized and losses socialized. And then there are the growing subsidies. The average family of four now spends $900 per year on state and local subsidies to corporations, more than a week's average take-home pay for the typical family of four. These policies all take from the many to give to the favored few at the top. New Yorkers are being taxed to give at least $1.4 billion to the hereditary ruler of Abu Dhabi, who is worth tens of billions of dollars. I show how taxpayers gave $5 billion to Goldman Sachs in one deal and billions more in other deals -- and Goldman makes more than one percent of all the profits of all six million corporations in America, so it hardly needs subsidies.
SP: If this has been such a dramatic occurrence, why has the media failed to cover what's happening?
DCJ: We used to cover more of this, but the fastest disappearing job in America is journalist. In some cities 75 percent of the reporting jobs are gone. These deals also require journalists with high levels of skills who understand government, regulation, taxes and lobbying, but journalism wages are falling fast. One study showed the average reporter pay is now the national average for all jobs. Consultants have also told newspapers for years that readers want soft features and beautiful layouts more than hard news, which is expensive to produce. That our society worships corporations and the rich also detracts from serious coverage.
SP: People aren't exactly revolting against the system. What would compel the American people who believe as you do to act to change how the marketplace works?
DCJ: Knowledge. If you do not know that you are being ripped off, and how, then you cannot focus yourself and others on a response. What I write about in THE FINE PRINT should have been page one news in papers across the country --and had it been many of these outrages would have been stopped. Information is power. The companies that profit from the new rules and laws know that so they work very hard to make things obscure and, if they become known to make them sound complicated. As I show, though, once you understand the principles it is all easy to understand.
SP: What do you suggest can and should be done?
DCJ: We need to restore government consumer advocacy offices, especially for utility regulation. We need to restore simple rules that were virtuously self-reinforcing. These include restoring the Glass-Steagall Act, which for seven decades required that the risky business of underwriting and (more recently) gambling in derivatives be done by companies separate from retail banking. That is, donut stop speculators, just make sure they are not speculating with your paycheck. We need to repeal laws that force secret contracts, including the rule that lets railroads with parallel tracks for all but the last mile of a thousand mike trip charge monopoly prices for the whole distance -- and keep the precise terms secret even when a government agency is the shipper. We need balance and we need to recognize that most regulations are sought by business to protect their turf, thwart competition, raise prices and limit the ability of customers to get redress from unfair deals.
SP: Are Americans too inclined to think they are all future millionaires?
DCJ: Only one in a thousand people can be in the top tenth of one percent, one in ten thousand in the top hundredth of one percent. The data show that these two tiny groups are getting more and more of the wealth and the income gains while those even at the 95th step on the income ladder are pretty much going nowhere. The super rich have gone in a generation from private jets to private jumbo jets; with one American name owning two personal 747s.