The Price of Civilization: Reawakening American Virtue and Prosperity (18 page)

Google instead found friends in the IRS. In 2006, Google and the IRS reached a secret agreement whereby a wholly owned Google subsidiary could keep the revenues and profits abroad. Specifically, Google was allowed to license its IP at a noncommercial rate to a foreign subsidiary called Google Ireland Holdings. Google’s foreign operations pay IP royalties to Google Ireland Holdings, which thereby books almost all of Google’s profits earned in Europe, the Middle East, and Africa. Specifically, Google’s operations for those three regions are headquartered in Dublin in another entity called Google Ireland Ltd. Google Ireland Ltd. takes in around 90 percent of Google’s $12.5 billion in revenues from those markets and then channels the profits to Google Ireland Holdings as royalty payments. The last step of this wonderful chain is that Google Ireland Holdings, despite its name, is based in Bermuda, where it avoids taxation on the billions of dollars of royalties paid to it.

There are many other tax shelters for the super-rich, including the so-called carried interest provisions for hedge fund managers. A typical hedge fund manager receives as compensation a fraction of the assets under management and of the profits earned on the portfolio, for example the standard 2 and 20 rule, meaning 2 percent of assets and 20 percent of profits. Under an obscure IRS rule, the profit earnings are not treated as ordinary income for the manager, taxable at 35 percent, but rather as capital gains, taxable at 15 percent.
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Incredibly, this provision has survived the recent public outcry over Wall Street behavior, a remarkably vivid testament to the power of hedge fund campaign financing to smooth over any inconveniences of noxious tax rules.

We in the public are of course innocents in this remarkable process. How many people aside from the tax lawyers and their clients know of the “Double Irish” tax shelter or many other gimmicks like it? And which advocates of “free markets,” as they hail the technological
wonders of Google (an admiration I share), realize that Sergey Brin’s ingenious work in creating Google’s search engine was supported by the National Science Foundation?

Google’s tax dodge exemplifies a vast system of corporate tax havens and tax shelters that operate with the connivance and support of the Internal Revenue Service. A recent report of the Government Accountability Office (GAO) on the subject makes frightening reading.
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Of the 100 largest public traded U.S. corporations, 83 reported operating in tax havens, and often in several simultaneously. A Congressional Research Service study suggested that tens of billions of dollars of revenues are lost per year as a result of shifting corporate profits out of the United States through transfer pricing and similar means.
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Whose Opinion Really Counts?

One of the most interesting insights about money in politics has come from studies examining how congressional votes are linked to the attitudes of constituents. Larry Bartels has studied how the votes of senators align with the survey attitudes of their constituents when divided into high-income, middle-income, and low-income groups. The results are clear, if not totally surprising:

For Republican senators there is no evidence of responsiveness to middle-income constituents, much less low-income constituents. The views of high-income constituents, however, seem to have received a great deal of weight from Republican senators [on the issues studied]—almost three times as much … as for Democrats. Meanwhile, Democrats seem to have responded at least as strongly to the views of middle-class constituents as to the views of high-income constituents—though, once again, there is no evidence of any responsiveness to the views of low-income constituents.
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The point is that even when translating the wishes of constituents into congressional votes, money counts and the poor are effectively dispossessed. This is more than a congressman aiming for the middle or the median voter. It is, instead, catering disproportionately to those who will finance their campaigns. At least the Democrats evidence some responsiveness to the middle of the income distribution.

We can see the results of this representation bias in case after case: the “temporary” tax cuts for the rich are extended; the unpopular war in Afghanistan continues; the public option for health care is dropped; alternative energy technologies are left undeveloped; the largest banks get megabailouts and use them to continue to pay outrageous subsidies. In all of these cases, public opinion has run strongly against the decisions made by the bipartisan congressional majority in Washington.

The Role of Corporate Spin

The power of the corporatocracy is supported not only by campaign financing and lobbying, but also by relentless public relations spin. A number of studies in recent years have deconstructed the ways in which key sectors—military contractors, oil and coal, health care insurers, and Wall Street–use public relations firms and disinformation campaigns to disguise the damage they are doing to society. Major corporate media outlets, led by Rupert Murdoch’s vast News Corporation empire of newspapers and television networks, aid and abet the process. Murdoch himself is a personal investor in the oil sector (together with former Vice President Dick Cheney) as well as other industries, so the PR interest is often direct personal gain as well as corporate gain.
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In many recent cases where industries are causing environmental and public health damage, such as acid rain from coal-fired power plants, ozone depletion from CFCs, and climate change from fossil fuel use, industry lobbyists have deployed slick, well-funded public
relations campaigns to spread antiscientific propaganda in order to forestall federal regulations. Big Oil and Big Coal are the most notorious abusers, and
The Wall Street Journal
has been the most consistent enabler of antiscientific propaganda. The main strategy has been for the industry lobby to sow confusion in the public mind by making it appear that well-established scientific findings are in fact open to major doubt and scientific dispute. Industry has shown time and again that it is possible to find people with a PhD in their title to sign off on just about any fraudulent scientific claim, if the fee is right. And experience has shown repeatedly that a poorly informed public is highly vulnerable to manipulation by a determined corporate lobby.

Climate change is the latest example of this relentless corporate assault on science. ExxonMobil, Koch Industries (the largest privately owned oil company in the United States), News Corporation, and other companies have conspired for years to spread unscientific nonsense about climate change, mainly around the theme that human-induced climate change is not yet an established scientific consensus. Several dogged journalists such as Ross Gelbspan and researchers such as Naomi Oreskes have laid bare the web of big corporate money that funds this ongoing PR effort. To a trained eye, the PR effort is rather pathetic: egregiously antiscientific and even puerile in its misuse of basic facts. Yet for a confused public, it works. Around half of the American people deny the reality of human-induced climate change despite the overwhelming scientific consensus that human actions have already dangerously disrupted the climate, with a lot more damage to come.

The Corporate Sector Continues to Win Big

The main thing to remember about the corporatocracy is that it looks after its own. There is absolutely no economic crisis in corporate
America. Consider the pulse of the corporate sector as opposed to the pulse of the employees working in it:

• Corporate profits in 2010 were at an all-time high.
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• CEO salaries in 2010 rebounded strongly from the financial crisis.
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• Wall Street compensation in 2010 was at an all-time high.
  
• Several Wall Street firms paid civil penalties for financial abuses, but no senior banker faced any criminal charges.
  
• There were no adverse regulatory measures that would lead to a loss of profits in finance, health care, military supplies, and energy.
  

The creation of America’s rich class (those in the top 1 percent, with incomes above $400,000 per year) and super-rich class (those in the top 0.01 percent, with incomes above $8 million per year) has been the thirty-year achievement of the corporatocracy. We can now see the tools of the trade. It began with globalization, which pushed up capital income while pushing down wages. These changes were magnified by the tax cuts at the top, which left more take-home pay and the ability to accumulate greater wealth through higher net-of-tax returns to saving. CEOs then helped themselves to their own slice of the corporate sector ownership through outlandish awards of stock options by friendly and often handpicked compensation committees, while the Securities and Exchange Commission looked the other way. It’s not all that hard to do when both political parties are standing in line to do your bidding.

CHAPTER 8.
The Distracted Society

Most attempts to explain the current economic crisis put the spotlight on reckless financial deregulation, and a few link the disastrous regulatory choices to the corrupted politics of Washington. Very few put a spotlight on the citizenry as well. It is easy, and right, to blame our politicians and greedy CEOs. The public knows the score and detests it. Yet at the end of the day, Americans have elected their leaders. Americans have allowed themselves to be manipulated by corporate propaganda. And Americans have behaved in a very shortsighted way with their own budget management, falling dangerously into debt and eventually into bankruptcy. Tens of millions of Americans are repeatedly overconsuming today and regretting it tomorrow: whether by overeating, overborrowing, overgambling, excessive TV viewing, or indulging in yet other addictions.

Just as Washington has abandoned any long-term economic steering, households have abandoned clear thinking regarding their personal budgets. They tend to be inconsistent about the federal budget as well, poorly informed and often contradictory in position. Voters regularly support middle-class tax cuts and government spending increases while simultaneously professing deep concern over the budget deficit. They also sometimes give the rich a free pass, such as by supporting cuts in the inheritance tax on the wealthy. Voters are
easily enticed by promises of higher short-term income, seemingly without concern for the long-term consequences.

To understand such behavior and attitudes, we need to plow more deeply into our psyches to get a grip on our behavior both as consumers and as citizens. To retake political power from the lobbies, to establish meaningful solutions for America, we will need to take the long view. Yet taking that long view is exceedingly difficult, especially when much of the economy is working overtime to encourage us to succumb to temptation. The purpose of this chapter is to understand our psychological fragilities as thinkers, planners, and decision makers. By getting our heads cleared of deceptions, we can help to rebuild the economy as well.

The Psychology of Affluence

When a society is poor, consumer behavior is relatively straightforward. Consumers know what they need: food, shelter, and clothing. Local producers strive to meet those needs. Impoverished households can’t save very much if anything, since they depend on their incomes to stay alive, but when poor households exceed the subsistence threshold, they start to save in order to guard against disasters in the leaner years.

It’s when the society gets much richer and basic needs are met that consumer behavior becomes trickier. In high-income countries such as the United States, we can no longer properly speak of a consumer’s “needs” in the case of the middle class and the rich but only of a consumer’s “wants.” Economists pretend that those wants are real, stable, and based on deeply held preferences, almost a birthright. Brand managers and advertising executives know much better. A successful business not only manufactures products, it also manufactures wants. Businesses now spend an estimated $300 billion on advertising each year to create and manipulate consumers’ demands.
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In real sweat-and-blood decision making, consumers buy things
out of intense cravings, whims, addictions, confusions, come-ons, and quests for status. They may try to save, for example, but temptations often get the best of them. The problems of irrationality are actually multiplied by our affluence. The truly poor know what they need to stay alive: food, shelter, clothing, safe water, and health care. Affluent consumers may not have a clear idea ahead of time what will make them happy. Should they consume or save? Should they try to keep up with the Joneses across the street or with a work colleague or their favorite celebrity? Should they buy that new product just flashed across their TV or computer screen?

A considerable amount of American consumption spending is not for the enjoyment of consumption per se, but to show off wealth, status, or sexual allure. In the famous phrase of the economist and social critic Thorstein Veblen, this is “conspicuous consumption,” that is, consumption whose main purpose is to impress others rather than to be enjoyed by oneself.
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The phenomenon is very familiar from the animal world, where evolutionary competition leads males of a species to develop remarkable “ornaments” in order to rise in the pecking order and thereby attract the females. This so-called sexual selection has resulted in the male peacock’s brilliant plumage and the elk’s large antlers.

Conspicuous consumption is therefore akin to an arms race between two rivals. Most or all of the investments end up wasted as useless arms (or antlers or yachts). The economic arms race ends up as the proverbial “rat race,” in which everybody works to the point of exhaustion merely to keep up with others. Herein lies at least one reason why the good Lord commanded that everybody take the Sabbath off. If we had to do so on our own, we’d have to worry whether our neighbor-competitor would also do the same. More likely than not, we’d both end up working through the weekend. It’s a similar reason why many European governments (but not yet that of the United States) prevent this kind of “self-exploitation” by mandating a minimum of four weeks’ paid vacation each year for all workers.