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Railing Against the Rich: A Great American Tradition
Excerpt from The Wall Street Journal - 2009-02-07; Page W1Efforts to limit pay of the wealthiest gained traction in the 1930s; 'economic royalists'
The Great Depression of the 1930s created hardship and suffering among millions of Americans. It also created populist resentment of elites. Among the many signs of this anger was the astonishing popularity of Huey P. Long, governor of Louisiana and then U.S. senator, a figure so dominant in his own state that his enemies called him a dictator. But to the ordinary people of Louisiana -- and later to millions of ordinary people across the U.S. -- Mr. Long was a heroic figure, fighting for the "common man" and challenging the right of elites to monopolize power and wealth.
Starting in 1933, Mr. Long created a national organization called the "Share Our Wealth Society." He publicized it through his frequent national radio broadcasts (with time provided free by timid network executives), and through his many speeches before many audiences. His goal, he claimed, was a radical redistribution of wealth. Every needy American would receive a "household estate" of $5,000 (almost $80,000 in 2008 dollars), an annual wage of $2,500 ($40,000 in 2008 dollars), and other benefits. This great boon would be financed by high taxes on people making over $1 million. There would be an $8 million cap, with everything above that confiscated for redistribution. The plan was economically, and probably politically, impossible. But the inability of a wealthy nation to provide jobs and support to millions of citizens made Mr. Long's proposal appealing and persuasive. "Let no one tell you that it is difficult to redistribute the wealth of this land," he told a radio audience in 1934. "It is simple."
Whether or not we are now entering a new Great Depression, we are almost certainly entering a period in which resentment of financial and corporate titans will increase, and in which many politicians will feel they have no choice but to join the chorus of denunciation -- perhaps even a president with almost unprecedented approval ratings as he begins his term. In the 1930s, the popularity of "big business" -- high in the prosperous 1920s -- dropped dramatically, even catastrophically, and did not revive until the corporate world recovered its wealth in World War II. In the meantime, the wealthy and powerful encountered challenges that make President Barack Obama's $500,000 salary cap on companies seeking federal assistance seem pale by comparison.
In the 1930s, plans similar to Mr. Long's proliferated and attracted broad support. Francis Townsend, an aging physician in Long Beach, Calif., launched the Townsend Plan, a promise to everyone over 60 of a guaranteed $150 to $200 a month from the government "on condition that they spend the money as they get it." A nationwide "transaction tax" (similar to a V.A.T.) would, he improbably argued, provide enough money to finance the system. Dr. Townsend claimed that he had up to 25 million followers two years after launching his plan -- an unverifiable but not impossible number. The novelist Upton Sinclair almost won election as governor of California in 1934 by proposing the seizure of idle factories and farms from their capitalist owners. The properties would be managed as cooperatives to give work to the unemployed and to replace the profit system with what he called "production for use." Father Charles Coughlin of Detroit, known as the "radio priest" for his weekly political broadcast, chastised bankers and financiers and demanded a radical inflation of the currency -- an old populist proposal that Father Coughlin insisted would redistribute wealth.
Franklin Roosevelt himself, trying to steal the thunder of the populists, proposed the so-called "soak-the-rich" tax, passed in 1935, which targeted high corporate salaries and investment income, even though it did little to increase government revenues or reduce the real wealth of those required to pay. He made a series of speeches in 1936 excoriating the selfishness and greed of the "economic royalists." He had struggled, he said, "with the old enemies of peace, business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering?Ķ. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me, and I welcome their hatred." This polarizing rhetoric was greeted with some of the most enthusiastic responses of any of his speeches.
In the end, this powerful, anti-capitalist populism had relatively little impact on economic life. Mr. Long was assassinated in 1935. Mr. Sinclair lost his election. Father Coughlin and Dr. Townsend joined forces in a third-party presidential challenge in 1936, an effort that received less than 2% of the vote in an election Roosevelt won by a landslide. Few New Deal measures bore any significant relationship to the proposals from these populist movements, although some historians believe that the Townsend Plan helped spur passage of the 1935 Social Security Act. A few years later, the New Deal abandoned its anti-business rhetoric in the face of a deepening recession. Instead, the government began to embrace Keynesian solutions, which promised economic growth through increased government spending, a strategy that required no significant intrusion into the prerogatives of capitalists.
The Great Depression may not have significantly weakened the power and wealth of the "economic royalists," but the animus toward them was not without consequences. The utilities magnate Samuel Insull fled the country to avoid prosecution for fraud, only to be extradited back to the U.S. to stand trial, where he was marched in and out of court in handcuffs. (He was ultimately acquitted.) Sewell Avery, the president of Montgomery Ward, was carried out of his office by police during a 1944 labor dispute; a photograph of the event was one of the most widely published in the nation. There was a special gleefulness among much of the public in seeing once-powerful titans fall, as many of them did. Even those who flourished bridled at the rhetoric used against them.
As late as 1940, 11 years after the Depression began, images of brutal and greedy capitalists remained staples of popular culture. John Steinbeck's 1939 novel "The Grapes of Wrath," and the John Ford film adaptation a year later, were great popular successes, not despite but because of their harsh denunciations of capitalists and their flunkies. Tom Joad, a young man politicized by the Depression, leaves his family after killing a strikebreaker (an act neither Steinbeck nor Ford condemned), but not before making a classically radical-populist prophecy: "Wherever there's a fight so hungry people can eat, I'll be there. Wherever there's a cop beatin' up a guy, I'll be there?Ķ. An' when our folks eat the stuff they raise an' live in the houses they build -- why I'll be there."
Few 21st-century Americans have any real experience with economic populism. That appears to be changing fast. In the 1930s, the demonization of the upper class did not really begin until almost two years after the stock-market crash. We are now six months into our own economic crisis, and signs of populist resentment are already visible: in the perverse fascination with Bernard Madoff's remarkable fraud, the popular outrage at the tax problems of public officials, the growing contempt for the many overseers of the credit markets, the ruined investments of millions of ordinary people, the growing army of the unemployed (still far below the 15% to 25% unemployment of the 1930s, but 7.6% in January and growing fast), the likelihood of a recession that could last not just for months, but for years. These are the preconditions of populist revolts. Mr. Obama's chastisements of bankers and CEOs have been relatively mild compared to the routine denunciations of "economic royalists" in the 1930s. But the longer the crisis goes on and the deeper it grows, the more Huey Long-like challenges to those in power will arise, and the more pressure there will be for national leaders to launch populist battles of their own.
Whether that would help or hurt the Obama administration is hard to predict. In 1896, in the midst of another great depression, the Democratic party chose as its candidate the great populist hero William Jennings Bryan. His crushing defeat ushered in 36 years of almost unbroken Republican rule. In 1936, at the height of Franklin Roosevelt's populist rhetoric, his landslide re-election helped solidify a comparable period of Democratic dominance. Cultural populism has been a staple of the right since at least 1968, and it has alternately helped, and badly hurt, conservative candidates and causes. Economic populism has the same capacity either to bring down the president's ambitious agenda or, if handled skillfully, to open up opportunities for greater change than he may yet have imagined.
Alan Brinkley is the Allan Nevins professor of history and the provost at Columbia University.
By ALAN BRINKLEY
Tom Daschle's Washington
Excerpt from The Wall Street Journal - 2009-02-04; Page A12His riches illustrate the expanding power of the political class.
Just as Tom Daschle's Senate pals were preparing to grant absolution for his six-figure tax-free limousine -- could've happened to anyone -- the former Majority Leader yesterday withdrew his nomination to be Secretary of Health and Human Services. Give Mr. Daschle credit for making the honorable choice, and sparing President Obama from a bipartisan populist revolt.
Before this episode vanishes into Beltway lore, however, it's worth drawing a few lessons. Especially because the political left seems to want to make this a morality play about Mr. Daschle's $5.2 million post-Senate windfall as lobbyist and speaking-circuit regular, notably in front of the health-care industry. Apparently these people expected Mr. Daschle to return to Sioux Falls after his 2004 re-election defeat and eke out a hardscrabble existence as a farmer.
But Mr. Daschle's embarrassment of riches is a typical story, and in fact is the result of the liberal ideology his critics have been advocating for decades. The main story of the Obama Presidency so far isn't the contradiction between Mr. Obama's campaign promises and the messier reality of his nominees. That was always inevitable. The real story is the massive transfer of power and wealth now underway from the private sector to the political class. Mr. Daschle could make so much money and achieve such prominence because he was expected to be a central broker in that wealth transfer.
Alston & Bird, the white-shoe law firm that took in Mr. Daschle, is a lobbying shop. Any normal person would therefore consider Mr. Daschle, who does not have a law degree, to be a lobbyist. But he was not technically a lobbyist under Beltway rules, and while it is still unclear exactly what services he performed as "Special Public Policy Advisor" to pile up $2.1 million, we do know he consulted for the insurance conglomerate UnitedHealth Group.
Mr. Daschle cashed in to the tune of nearly a quarter million dollars from various health-care businesses. The Health Industry Distributors Association paid $14,000 to hear him speak in March 2008 about "the impact an Obama administration will have on the industry." America's Health Insurance Plans, the insurers' lobby, gave $20,000 for another speech, as did health-care consulting firms, hospital systems and pharmacy boards.
Mr. Daschle's critics say he breached some fanciful code of honor separating corporate America and government. Please. Business groups spend to get intelligence and minimize political risk. In the case of Mr. Daschle, he was trading less on his career in "public service" than his proximity to and early support for Mr. Obama. While he was the recipient of industry generosity, the going wager was that he'd be White House Chief of Staff.
What Mr. Daschle's lucrative career as influence peddler really illustrates is how much Washington is now expanding its reach over the economy. Politicians and their staffers can make or break fortunes by slipping a rider into a "must pass" bill or dispensing billions of dollars in subsidies to favored constituencies. Naturally businesses are going to protect their interests and hire lobbyists to get the decisions to come out their way.
Had Mr. Daschle been confirmed, he would have been the most important man in a health-care industry expected to be worth $2.5 trillion in 2009, which is larger than the economy of France. With merely a torque to this or that regulation -- to say nothing of the "reform" he was to oversee as White House "health czar" -- he would have channeled all this wealth in one direction or the other. Just another day at the office.
This is all part of the same entitlement mentality that caused Mr. Daschle's former colleagues to barely raise an eyebrow over his "disappointing mistakes" on taxes, as Senate Finance Chairman Max Baucus put it. West Virginia Democrat Jay Rockefeller said Mr. Daschle's tax oversights had to be weighed against the value he brings "in terms of the moral necessity of getting universal health care." So tax avoidance is justifiable as long as you're saving mankind.
We have come a long way from liberal outrage over the "K Street Project," Tom DeLay's effort to strong-arm lobbyists into hiring more Republicans. True, when the DeLay GOP settled into incumbency, it dumped the spending restraint and reform that might have limited the ecosystem that allows the Daschles of the world to proliferate. Still, it's amusing to see liberals, who run as the party of government, get momentarily indignant when one of their own cashes in on the spoils of their system.
As for Mr. Obama, as recently as Monday night the President was saying he "absolutely" stood by his nominee before reluctantly accepting his withdrawal. So much for promising to vanquish the lobbyists before banishing the special interests. This was always an implausible bill of goods, considering that the major special interest in Washington is Washington itself.
Mad Men
Excerpt from The Wall Street Journal - 2009-01-07; Page A11Feeder funds appear to explain the Ponzi longevity of money manager Bernie Madoff. To pay off early investors, mostly family and business connections in New York, he stuck his siphon into the moneyed worlds of Western Europe, Palm Beach and Hollywood.
The biggest of these feeder funds appears to be the now famous Fairfield Greenwich Group, operated by Walter Noel with help from Colombian toff Andres Piedrahita, who prospected among the watering holes of London and Madrid. Another was Access International, run by an unfortunate Frenchman who killed himself.
That their proprietors weren't aware they were servicing a Ponzi scheme is plausible -- because they had money invested with Mr. Madoff too. Yet this may be a conclusion too far. A Ponzi scheme can be profitable for its "investors," and having their own money hostage would have been a fitting incentive for the feeder's role of pulling in new funds to keep the scheme going.
Inasmuch as they were essentially extracting fees simply for placing their clients' money with Mr. Madoff, who extracted no fees, they'd have every reason to puzzle out exactly what it was Mr. Madoff was allowing them to be paid so handsomely to do.
But here is the most interesting question. Mr. Madoff gained access to billions through the feeder funds, allowing two possibilities: A pile of money exists somewhere, and Mr. Madoff knows where, as do others. His spontaneous confession to his sons, and their prompt move to inform authorities, along with the pretense that Mr. Madoff acted alone, may have been one giant theatrical confection.
Or -- the other, more likely, possibility -- the many billions raised by feeder funds were paid out as fat profits to investors, such that hundreds of Madoff clients lived very well off the Madoff scam for decades.
Under the law, you can enter a Ponzi scheme through lack of diligence, but you can't exit through proper diligence. If you leave because you smell a rat, you are complicit. Mr. Madoff may have gone on for 40 years, and one suspects a certain folk knowledge existed among many participants that something was not quite right (which is not the same as deciding not to participate).
Indeed, a continuum of complicity will likely be found, extending from the truly duped to the not-so-duped. A place to start applying the screws would be Frank Avellino and Michael Bienes, the two accountants hauled before the SEC in 1992 for illegally raising $440 million for Mr. Madoff. In the most eye-popping of its missed opportunities, the agency never ventured to look directly at Mr. Madoff's books after he somehow coughed up cash to pay back Messrs. Avellino and Bienes's clients.
That said, Mr. Madoff was not running a public company or a Fidelity mutual fund or an FDIC-insured bank. His rarefied customers chose not to afford themselves the checks and balances of institutionalized finance that, while no guarantee against loss or fraud, engage and incentivize many watchful eyes.
Journalism follows its own well-trod folkways, of course, and some now insist on trying to make Mr. Madoff symbolic of all that's wrong with our financial system. Yes, the SEC could have done a better job, but policing side deals that rich investors make with money managers arguably is not central to its mission of ensuring fair and orderly markets. And the law is already well-equipped to clean up after fraud. Bankruptcy judges are versed in the peculiar justice of "fraudulent conveyance" that allows them to claw back Ponzi profits from some clients for the benefit of others. And tort lawyers and prosecutors will likely find it shooting fish in a barrel to hold various "advisers" liable for steering clients into the Madoff scam.
In no book of wise investing, however, is it written: "Entrust all your money to a magical figure who claims to produce uncannily consistent profits by means he refuses to explain."
Nor is it written: "Pay princely commissions to any perfumed popinjay who can open the door to this mystical kingdom."
Barney Frank didn't help by fibrillating on Monday that investors everywhere would be afraid to invest after Mr. Madoff. Mr. Frank would have done better to emphasize the many ways a recognized mutual fund, and even most hedge funds, are different from a Madoff scam, beginning with an independent custodian of the underlying assets.
Better yet, Washington might spend its time profitably examining its own role in the recent housing blowout, which has destroyed more wealth than a hundred Madoffs, and about which Mr. Frank himself is an expert.