Familiarity, Contempt, Pension Envy, and the 1%

David Atkins, writing at Hullabaloo, has an interesting post up examining why stoking pension envy isn’t “class warfare” in the same way it’s “class warfare” to point out the stunning imbalance in wealth distribution in our country. The short answer is that pensioners don’t have nearly as much money invested in PR campaigns as the Koch Brothers and their brethren.

But, a more interesting angle is that we know the types of people who have pensions, and we can see directly that they’re no better, smarter, or industrious than we are. We basically know what their job entails and have a pretty good notion that we could do that job. We can grasp what it means to have health insurance and a pension even if we don’t have those things. Therefore, it understandably rankles that they should be spared the anxiety of having insecure access to healthcare or an uncertain retirement when we work just as hard as them. Hell, there is a whole political movement busily telling us that, because they work for government and we don’t, we’re better than them. In fact, they should probably be kissing our collective butts because we’re taxpayers!

Contrast that with hedge fund managers or the Koch Brothers or the Romneys. We have no concept of that level of wealth. A four car garage with an elevator in one of our many houses, just for the hell of it? Might as well ask us what it’s like to live on the moon as ask us to relate to that kind of wealth. And, as Atkins points out, with transportation and communications being what it is, we don’t exactly rub shoulders with these people; or, when we are, we don’t know it. Their jobs are esoteric and many among us may feel that maybe it’s orders of magnitude harder than ordinary people jobs.

And it’s this separateness, I think, that makes it easy to pit the recently middle class against the diminishing middle class in order to distract them from what’s going on with the upper class. “There are no classes in the United States,” says Rick Santorum. “We are a nation of haves and soon to haves,” says Mitch Daniels. “The greatest trick the Devil ever pulled was convincing the world he didn’t exist,” says Verbal Kint.

The very wealthy have learned a trick or two since the days of Jay Gould who allowed himself to be quoted as saying, “I can hire one half of the working class to kill the other half.” Instead, they provoke agitation in the economically insecure against the barely secure. It’s astounding that in the richest country in the history of the world we should come to regard health care and worker pensions as unsustainable extravagance instead of things we ought to aspire to provide to everyone willing to work hard and play by the rules.

“He took money from people’s pensions and spent it on fun things.”

As reported by Cory Schouten in the IBC, that was a quote from a potential juror in the Tim Durham case. But darned if that doesn’t seem to capture so much of what’s wrong with our economy and our culture generally.

Durham, as I understand it, was a young lawyer who married for money and power – money and power surrounding Beurt SerVaas who served as the President of the Marion County/Indianapolis City-County Council for an eyebrow raising thirty years. This is all rumor to me, I’m obviously not privy to any of these people’s personal feelings. But, I’ve heard that, while in law school, Durham was one of those douchey guys talking about how rich he was going to be. Jim Mackinnon and Cheryl Powell, writing for the Akron Beacon Journal, had a very good investigative piece about how Durham managed to acquire his money. (h/t Advance Indiana). The short version is that he got his start managing companies acquired by SerVaas. After he divorced SerVaas’ daughter, Durham started living lavishly by highly leveraging companies in which he took an interest. He acquired Fair Finance, an Ohio based company.

Fair Finance, which did business as Fair Financial, had a solid business model, Fair said. The company managed accounts receivable for other businesses and provided consumer loans. To provide the necessary capital, the company sold high-interest investment certificates to Ohio residents.

Once Durham took over, he appears to have raided the investments to paper over the losses in his other business interests. Those losses pretty much had to include supporting Durham’s big houses, fleet of fancy cars, yacht, and parties with hired, lingerie-clad models.> Eventually the bubble burst and now he’s facing a federal criminal trial. (Advance Indiana added the detail that Durham seems to have played fast and loose with the Carpenter Bus Company retirement funds while he was managing the company for SerVaas.)

It’s in the course of selecting a trial that the potential juror said, “He took money from people’s pensions and spent it on fun things.”

The Business Week article linked above describes him as “The Madoff of the Midwest.” The reference to Madoff (and the way Madoff himself was covered) strikes me as an effort to portray Durham as an outlier. While Madoff and Durham may have gone further than, say, Romney and Bain Capital; I think the problem is endemic, not isolated. The wealthy and well-connected have figured out how to appropriate for themselves and buy “fun stuff” with the value created by others.

Chris Hedges Hayes had an interesting column in the Nation entitled “Why Elites Fail” about what he views as the inevitable decline of meritocracies. The problem is that, at some point, the meritocracy needs governance. That gives a small group of people access to disproportionate power which, sooner or later, starts to get used reflexively to preserve and promote its own. Eventually the talented children of the poor no longer ascend to positions of power and prestige while the mediocre sons of the wealthy stop falling back to the bottom of the social pyramid.

You see that a little bit of reflexive preservation of their own in Durham’s case where SerVaas stepped in to post $1 million bond.

Anyway, Hedges notes the recent stagnation and aggregation of wealth at the top:

One of the most distinctive aspects of the rise in American inequality over the past three decades is just how concentrated the gains are at the very top. The farther up the income scale you go, the better people are doing: the top 10 percent have done well, but they’ve been outpaced by the top 1 percent, who in turn have seen slower gains than the top 0.1 percent, all of whom have been beaten by the top 0.01 percent. Adjusted for inflation, the top 0.1 percent saw their average annual income rise from just over $1 million in 1974 to $7.1 million in 2007. And things were even better for the top 0.01 percent, who saw their average annual income explode from less than $4 million to $35 million, nearly a ninefold increase.

It is not simply that the rich are getting richer, though that’s certainly true. It is that a smaller and smaller group of über-rich are able to capture a larger and larger share of the fruits of the economy. America now features more inequality than any other industrialized democracy. In its peer group are countries like Argentina and other Latin American nations that once stood as iconic examples of the ways in which the absence of a large middle class presented a roadblock to development and good governance.

He also notes the decline of mobility – in the 70s, 36% of families stayed in the same income decile. By the 90s, it was more like 40%.

So, you see guys like Durham taking pensions to buy Playboy bunnies, cars, and yachts (no word on a car elevator in his garage). You see Social Security getting spent on wars and tax cuts for the wealthy. Perhaps taking their cues from their Galtian overlords, on the small end, you see people with little income and a great deal of debt spending what income they have on fancy phones and big screen TVs.

And it’s only the chumps in the ever-shrinking middle who forego a good deal of the fun stuff in order to save for retirement, maybe just to have it raided by guys like Durham or Congress. Perhaps because we weren’t smart enough to be born into a rich, influential family or marry into one.

Toll Road: With 90% of Lease Term Left, Money Almost Gone

Niki Kelly, writing for the Fort Wayne Journal Gazette, reported last week that the toll road money is almost gone. You might recall that, back in 2006, instead of proposing to raise the tolls ourselves, pay off the bonds, and owning the Indiana Toll Road outright, Gov. Daniels proposed a long term lease to a private consortium. (Mixing incompetence with pandering, the Democrats attacked the fact that the consortium was a foreign operation, sort of missing the point about what made this a questionable idea.)

I had a brother at Khe Sahn
Fighting off the Viet Cong
They’re still there, he’s all gone

The $3.8 billion payout for the lease was, according to Aaron Renn, a good trade; he knows more than I do about such things, so I’ll trust him on the price. But, the fact remains that the tolls remain much higher than they were, and we’ve lost control of the asset for another seven decades. And, according to Nikki Kelly, the money is mostly gone.

As of Jan. 1, the state had $1.7 billion still in the Major Moves Construction Fund.

But Will Wingfield, spokesman for INDOT, said several major projects are being awarded this year and next – obligating most of the money to be paid when construction is done in the next two years.

That means all the money should be spoken for at the end of June 2013.

That leaves two main questions: 1) Will the return on those projects be great enough to justify the higher tolls on the motorists of Northern Indiana for the next seventy years; and 2) What adjustments (higher taxes or more road deterioration) will be made now that the asset has been sold and the money’s all gone?

John Gregg is apparently favoring the deterioration option; advocating for elimination of the gas tax. Gregg says he’d pay for the shortfall by reducing government inefficiency elsewhere. But, I think by this time most people recognize “reduce government waste” as a candidate’s dodge; meaning they don’t want to alienate potential voters by saying they’d have to raise taxes elsewhere or by specifying cuts to a particular program which someone inevitably regards as valuable.

You can see a an overview of the distribution from gas tax revenues here (pdf – p.26), but a lot of it goes to maintain roads and highways. It’s easy for me to criticize John Gregg, because I expect him to be at least somewhat responsible about governing. I find myself being less disappointed in Mike Pence because I don’t even expect real solutions for governing from him – just vague conservative slogans and an indifference to whether application of those slogans actually improves the lives of Hoosiers.

At any rate, it looks like the roads are likely to get bumpier in Indiana in the near future.

FSSA Welfare Eligibility Privatization Contract Trial Draws to a Close

Niki Kelly has a story on the State’s lawsuit against IBM in the FSSA welfare eligibility privatization contract. The story is entitled IBM, state make closing arguments.

It was a story of Niki Kelly’s long ago, back in September 2005, about Mitch Roob that was entitled “Math geek grabs FSSA challenge with gusto” that prompted me to make this prediction:

My prediction is that a shift toward privatized social services will result in a somewhat reduced cost to the State, decent to big profits for politically connected businesses, reduced services for the needy, and increased costs to local government which ultimately has to deal with these folks in one way or another.

How did I do?

Taibbi: Obama Administration Selling Out Cheap on Mortgage Crisis Wrongdoing

Matt Taibbi is reporting that the Obama administration is attempting to negotiate a resolution to potential liability on the part of major banks for their wrongdoing leading up to the mortgage crisis. According to Taibbi, compared to the damage caused, the settlement amount looks to be cheap. Standing in the way is New York Attorney General, Eric Schneiderman.

This second camp has all gotten together, put their heads together, and cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.

The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.
. . .
But New York’s Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR.

Taibbi describes some of the subsidiary things the banks are accused of (e.g. robo-signing perjury, MERS-related tax evasion) but identifies the central crime as dressing up junk bonds as AAA rated investments.

The banks lent money to corrupt companies like Countrywide, who made masses of bad loans and immediately sold them back to the banks. The banks in turn hid the crappiness of these loans via certain poorly-understood nuances in the securitization process – this is almost certainly where Scheniderman’s investigators are looking – before hawking the resultant securities as AAA-rated gold to fools in places like the Florida state pension fund.

Taibbi figures Obama’s motive in this to be fat campaign contributions if he can make the foreclosure mess go away for the banks.

Everybody Knows

Whenever I read one of these stories about the financial markets lately (see also, Taibbi on the SEC), I start hearing Leonard Cohen.

The latest is an analyst from Moody’s talking about how its rating system was rotten to the core. (As John Cole puts it, “What are they alleging the ratings agencies did? Everything we already know but if you say it out loud you hate the free market and are a dirty socialist.”)

The primary conflict of interest at Moody’s is well known: The company is paid by the same “issuers” (banks and companies) whose securities it is supposed to objectively rate. This conflict pervades every aspect of Moody’s operations, Harrington says. It incentivizes everyone at the company, including analysts, to give Moody’s clients the ratings they want, lest the clients fire Moody’s and take their business to other ratings agencies.

Moody’s analysts whose conclusions prevent Moody’s clients from getting what they want, Harrington says, are viewed as “impeding deals” and, thus, harming Moody’s business. These analysts are often transferred, disciplined, “harassed,” or fired.

In short, Harrington describes a culture of conflict that is so pervasive that it often renders Moody’s ratings useless at best and harmful at worst.

I don’t know how you can look at our system and conclude that one’s compensation is primarily a function of the labor or other value they create. Seems more like there is a fire hose of money blasting out there, and your take depends on how successful you are at elbowing your way into close proximity. Maybe the hose is fed by created value, but the distribution system has little or nothing to do with the inputs.

A bit of Mr. Cohen:

Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died