The following is an excellent excerpt from the book “PLUTOCRATS: The Rise of the New Global Super-Rich and the Fall of Everyone Else” by Chrystia Freeland from Chapter 5 on page 222 and I quote: “Emerging market oligarchs who owe their initital fortunes to sweetheart privatizations are perhaps the most obvious beneficiaries of rent-seeking. But through financial deregualtion, Western Governments, expecially in Washington and London, played an even greater role in the rise of the global super-elite. As with the sale of state assets in developing economies, the role of deregulation in creating a plutocracy turns classic thinking about rent-seeking upside down. Deregulation was part of a global liberalization drive whose goal was to pull the state out of the economy and let market forces rule. But one of its consequences was to give the state a direct role in choosing winners and losers–in this case, giving financial engineers a leg up.
Christopher Meyer, a management consultant at the Monitor Group, recently wrote a book about emerging market businesses and how they will reshape the global economy. Rent-seeking is obviously a big part of his story. But when I asked him which country’s businesspeople were the world’s champion rent-seekers, his answer surprised me: “In the financial industry, the United States has the most co-opted regulatory apparatus.” He went on to explain” “They are so innovative. They are driven to do it, and they’re doing a great job of what they’re paid to do. I don’t think this comes out of evil. I think this comes out of what we call runaway effects. The more you get incented to do it, the more you do it. And because so much of our incentive system is financial, then that’s what we got. We’re getting what we pay for, literally. And so Wall Street’s done a fabulous job of making the world safe for Wall Street.”
One telltale sign the state is deciding who gets rich is how much time and money plutocrats spend on selecting their government and influencing its decisions. As before, the answer is hardly contrarian. But when IMF economists Deniz Igan, Prachi Mishra, and Thierry set out to document how powerful the influence of Wall Street was on Washington, Their conclusion, framed in sober academic language, was as incendiary as any agitprop from the Tea Party or OWS. The killer fact was their finding that between 2000 and 2006 laws increasing regulation of the finance and real estate sectors had just a 5 percent chance of passing. Laws that deregulated were three times more likely to pass.
One Russian oligarch told me that a pleasant surprise for him during the privatizations of the 1990s was that you didn’t have to bribe many of the country’s most senior technocrats. “Well, of course, I wrote the law myself, and I took special care with it,” Konstantin Kagalovsky told me, still, a couple of years later, delighted at the power of ideas. That was also true in the first decade of this century in Washington: Igan and Mishra found, predictably, that more conservative politicians, who were ideologically broadly in favor of less regulation, were more likely to back legislation that loosened the rules.
But direct intervention played a key role, too. Igan and Mishra found that the finance and real estate sectors spent $.2.2 billion lobbying Washington between 1999 and 2006, reaching a peak of $720 million in the 2005-2006 period. In keeping with the sector’s relatively increasing weight within the super-elite overall, its lobbying spending grew faster than that of business generally, and accounted for more than 15 percent of all lobbying spending in D.C. by 2006. Good news for Wall Street’s government relations officers–their money worked: “Lobbying expenditures by the affected financial firms were significantly associated with how politicians voted on the key bills.”
What’s especially important about this study is that it documents the relationship between Wall Street and Washignton before the 2008 financial crisis and subsequent multitrillion-dollar bailout. That rescue is what prompted populist anger on both right and left and claims, as Sarah Palin put in an op-ed in the WALL STREET JOURNAL, that Washignton had occupied Wall Street. But the real government capture actually happened in the three decades before 2008, with the long steady, bipartisan rollout of financial deregulation.
Dani Kaufmann grew up in Chile. He was studying at Hebrew University when Pinochet seized power in a coup in 1973, and elected not to return, ending up instead at Harvard, where he eventually earned a PhD in economics. His next stop was the Wrold Bank, where he worked on Africa and then, after the collapse of the Soviet Union, the transition to capitalism in what used to be the Warsaw Pact states. By the time Kaufmann returned to World Bank headquarters in Washington, he knew that his life’s project would be to study corruption and its opposite, good governance, two themes he knew well from his work in Africa and the former Soviet Union, and viscerally from his Latin American roots.
But as Kaufmann looked further into rent-seeking around the world, the ways that it slowed eocnomic development, and how it could be stopped, he discovered something that surprised him. The naked forms of corruption that development organizations and NGOs agonized over most–bribes demanded by government officials with coercive power, like policemen, or required for ordinary state services, like teaching, or even despots extracting their nation’s wealth and sending it to numbered Swiss bank acocunts–were only part of the story.
About $1 trillion, by Kaufmann’s estimate, was paid in outright bribes around the world every year. But orders of magnitude more money was being made thanks to what he dubbed “legal corruption”: “The cost to society of bribing a bureaucrat to obtain a permit to operate a small firm pales in comparison with, say, a telecommunications conglomerate that corrupts a politician to shape the rules of the game granting it monopolistic rights, or an investment bank influencing the regulatory and oversight regime governing it.”
As he developed the idea, Kaufmann started to try to measure it. One idea he had was to ask global business leaders themselves, as identified by the World Economic Forum, to rate levels of both explicit corruption, such as bribery, and legal corruption, like campaign contributions and lobbying, in 104 countries. The results confirmed his hunch, especially when it came to the United States. Predictably, the United States was ranked one of the least nakedly corrupt countries in the survey, coming in at twenty-five, just below Canada and well above countries like Italy, Spain, and South Korea. But when it came to legal corruption, the business leaders put the United States at fifty-three, squarely in the middle of the global pack, and worryingly close to countries like Russia, in position seventy-four, and India, at seventy.
Suggestively, the countries where the surge in income at the very top has been most marked–the United States, the United Kingdom, and fast-growing emerging markets like Russia, India, and China–also rank relatively high in Kaufmann’s legal corruption table. That connection is most marked when you compare the high-inequality countries with nations with comparable levels of GDP but less inequality. In most such pairs–Norway or the Netherlands compared to the United States or United Kingdom, for instance; or Estonia compared to Russia–less legal corruption goes along with a smaller gap between the 1 percent and everyone else.” (IT’S INTERESTING TO HEAR THE UNITED STATES BEING DISCUSSED ON A CORRUPTION TABLE AND WHAT GROUP OF PEOPLE WILL BENEFIT MOSTLY FROM IT AND THAT IS THE WEALTHIER GROUP INVESTING IN WALL STREET AND THE STOCK MARKET. NOW, FOR EXAMPLE, WHERE ARE THESE ISSUES BEING TALKED ABOUT? HOPEFULLY IN OUR CONGRESS BUT HOPEFULLY AT THE WORLD ECONOMIC FORUM IN DAVOS, SWITZERLAND. NOW, WHAT THEY SHOULD BE DISCUSSING IS HOW TO STOP CORRUPTION ON THE BANKS AND STOCK MARKET, THROUGH BETTER REGULATIONS ON WALL STREET AND NOT LESS THAT SOME INSTITUTIONS WANT, THAT LEADS TO MORE CORRUPTION. I CAN UNDERSTAND WHY A SMALLER GAP BETWEEN THE RICH AND THE POOR WOULD LEAD TO LESS CORRUPTION. I’VE HEARD THAT JAPAN HAD A RATIO OF 10 TO 1 OF MANAGEMENT OVER LABOR AND IN THIS COUNTRY, THE RATIO IS OVER 400 TO 1 AND WITH THAT RIDICULOUS MARGIN IS A GOOD REASON WHY THEY SHOULD PAY MORE INCOME TAX, LIKE PRESIDENT OBAMA IS TRYING TO PROMOTE. THE REPUBLICANS, ON THE OTHER HAND, ARE ADVOCATING LOWER INCOME TAXES ON THE BILLIONAIRES, CREATING EVEN A WIDER GAP BETWEEN THE RICHEST AND THE POOREST, WHICH I FEEL IS CREATING A LOT OF UNREST IN THIS COUNTRY, AS WELL AS AROUND THE WORLD, EVEN WITH THE ARAB COUNTRIES. THIS IS ONE THING THIS BOOK HAS BEEN EXCELLENT ON GIVING THE APPROXIMATE GROWTH OF BILLIONAIRES AROUND THE WORLD, EVEN IN COUNTRIES SUCH AS CHINA AND INDIA. SOME OF THE PEOPLE MADE IT HONESTLY BUT MORE AND MORE MADE IT THROUGH MORE TAX LOOPHOLES THAT BENEFITED JUST THEIR CLASS GROUP AND A LOT OF IT THROUGH INSIDER TRADING TO BOOT. THAT’S WHY I’M GLAD THIS BOOK AND MANY OTHERS WERE WRITTEN.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer & Public Citizen & AARP Members