The American Prospect

Hedge Fund Follies

David Dayen | Justin Miller

liberal intelligence

What A New High Behind Court Can Do VW’s Big Lie

Public Schools Under Siege

Rachel M. Cohen | Gabrielle Gurley

The spring of our

Spring 2016

Discontent Republicans & the Trump Factor Eliza Newlin Carney The Democrats as a Movement Party Paul Starr The Future of Bernie’s Army Harold Meyerson Elizabeth Warren: The Other Woman Robert Kuttner The Real Stakes in the Veepstakes Paul Waldman

We don’t buy gun stocks.

We never have.

We don’t need to finance violence in our communities to pursue our retirement goals.

Let us rededicate ourselves to the notion of taking responsibility for our investments, for our communities, and for our fellow human beings.

Investing for Good Scan to learn more about our policy on firearms manufacturers

SM

DominiFunds.com 1-800-582-6757 Available for IRAs

Before investing, consider the Funds’ investment objectives, risks, charges and expenses.

Contact us for a prospectus containing this information. Read it carefully. The Domini Funds are

not insured and are subject to market risks such as sector concentration and style risk. You may lose money.

DSIL Investment Services LLC, Distributor. 12/15

contents

volume 27, number 2 Spring 2016

Page 20

Page 9

Page 78

5 prospects The Democrats as a Movement Party by Paul Starr

notebook 9 Crashing the Party by Eliza Newlin Carney 11 Toward a 21st-Century Labor Movement by David Rolf 14 Heights of Privilege by James A. Parrott 17 Left and Lefter by Nathalie Baptiste

Features 20 The Long March of Bernie’s Army by Harold Meyerson 26 The other Woman by Robert Kuttner 32 What Good are Hedge Funds? by David Dayen 39 Hedging Education by Justin Miller 43 The Real Stakes in the Veepstakes by Paul Waldman 48 School Closures: A Blunt Instrument by Rachel M. Cohen 54 The Great Diversion by Gabrielle Gurley 58 special report: Funding Government Fairly 59 We’re going to need more tax revenue by Jared Bernstein 63 International tax evasion and avoidance by Reuven S. Avi-Yonah 68 The multiple ways that plutocrats cripple the IRS by Martin Lobel 72 Dangerous Bedfellows by Rena Steinzor 78 Volkswagen’s Big Lie by Chris Iovenko 84 Will Workers and Consumers get their Day in Court? by Katherine V.W. Stone 90 Our Beleaguered Planet by Marcia Angell

culture 95 Can the Working Family Work in America? by Stephanie Coontz 101 Worlds of Inequality by Miles Corak 104 A Class Act? by Rich Yeselson 106 The Bankers’ Bank by Mike Konczal Cover art by Victor Juhasz

1

Page 48

from the Editors

I

n 1997, the Prospect launched a Writing Fellows program. The idea was to offer promising young writers two years of intensive mentoring and showcasing, so that they could become first-rate public affairs journalists while still early in their careers.

We resolved to pay decent salaries, so that the fellowship wouldn’t be just for kids subsidized by parents. We encouraged fellows to supplement their Prospect work with other writing—both to top up their incomes and to build what was then called a clip file.

The results have been remarkable.

We have graduated some three dozen fellows. Some, like Josh Marshall of Talking Points Memo and Ezra Klein of Vox, have created not only new publications, but entirely new media forms. The roster includes Nick Confessore of The New York Times; Dana Goldstein, author of The Teacher Wars; Jamelle Bouie and Michelle Goldberg of Slate; Mark Greif, founding editor of n+1; Kate Cambor, author of Gilded Youth; Chris Mooney, author of The Republican War on Science; Kate Sheppard, environment reporter and editor for The Huffington Post; Drake Bennett of Bloom­berg BusinessWeek; Baptiste Tim Fernholz, business and political writer at Quartz; Adam Serwer of Buzzfeed; Matthew Yglesias, who went from Slate to join Ezra Klein at Vox; and Richard Just, former editor of The New Republic.

At any given time, we’ve had between two and four fellows, depending on available funding. We currently have three fellows: Nathalie Baptist concentrates on women’s rights, racial inclusion, climate change, and criminal justice reform. Nathalie grew up in the Miller Washington, D.C., area, the child of Haitian immigrants. She has a B.A. from Graceland University and an M.A. from East Carolina University, both in international studies. Nathalie’s notable pieces have addressed sea-level rise and the development boom in Miami; the profusion of campus police forces; and the mixed success in the reform of policing in Cincinnati. In this issue, she writes on the Maryland Democratic Senate primary. Nathalie’s fellowship is supported by the Surdna Foundation.

Cohen Justin Miller covers democracy and money, as well as workers’ rights and the labor movement. Justin’s fellowship is supported by the Puffin Foundation. He graduated from the University of Minnesota, majoring in journalism, and began his career at the Prospect. Justin contributes to weekly newsletters on money and politics and on labor. Recently, he reported on labor organizing in the South and campaign-finance reforms at the city and state level. In this issue, Justin investigates how hedge fund supporters of charter-school expansion are manipulating local school board elections.

Rachel M. Cohen has contributed two cover pieces for the Prospect, the first on the larger transportation scandal of Chris Christie’s governorship, and the second on Planned Parenthood and its leader, Cecile Richards. Rachel also covers the intersection of education, housing, racial isolation, and inequality. In this issue, she has a feature on the politics of public school closures. Rachel grew up outside Philadelphia and is a graduate of Johns Hopkins University. She is supported by the Stoneman Foundation, which also helps defray costs of the fellowship program generally.

All of the fellows are prolific writers for web as well as print. They are the core of our newsroom. We thank the funders who support them, and the fellows themselves for their exuberance, productivity, and sheer talent.

2 WWW.Prospect.org Spring 2016

co-editors Robert Kuttner and Paul Starr co-founder Robert B. Reich Executive editor Harold Meyerson Senior Editor Eliza Newlin Carney Deputy Editor Gabrielle Gurley art director Mary Parsons managing editor Amanda Teuscher associate Editor Sam Ross-Brown Writing Fellows Nathalie Baptiste, Rachel M. Cohen, Justin Miller proofreader susanna Beiser editorial Assistant P.R. Lockhart editorial intern Julian Notaro Digital Engagement intern Isaac Park contributing editors Marcia Angell, Gabriel Arana, Jamelle Bouie, Alan Brinkley, Jonathan Cohn, Ann Crittenden, Garrett Epps, Jeff Faux, Michelle Goldberg, Gershom Gorenberg, E.J. Graff, Bob Herbert, Arlie Hochschild, Christopher Jencks, Randall Kennedy, Bob Moser, Karen Paget, Sarah Posner, Jedediah Purdy, Robert D. Putnam, Richard Rothstein, Adele M. Stan, Deborah A. Stone, Michael Tomasky, Paul Waldman, William Julius Wilson, Matthew Yglesias Director of Business Operations Ed Connors Development Manager Annie Diner Publishing assistant Stephen Whiteside board of directors Michael Stern (Chair), Sarah Fitzrandolph Brown, Lindsey Franklin, Jacob Hacker, Stephen Heintz, Randall Kennedy, Robert Kuttner, Mario Lugay, Miles Rapoport, Janet Shenk, Adele Simmons, William Spriggs, Paul Starr Fulfillment Palm Coast Data subscription customer service 1-888-MUST-READ (1-888-687-8732) subscription rates $19.95 (U.S.), $29.95 (Canada), and $34.95 (other International) reprints permissions@prospect.org

advertisement

advertisement

TRANSFORMING CITIZENSHIP DEMOCRACY, MEMBERSHIP, AND BELONGING IN LATINO COMMUNITIES Raymond A. Rocco

“The foundation of this outstanding book is the high-quality data utilized in each analysis, but its topical content, brand new information and excellent insight provided into the thoughts, behaviors, and ramifications of the ever-increasing Latino electorate is what readers will most remember. This is a must-read for everybody interested in American politics.”

—Valerie Martinez-Ebers, editor of the American Political Science Review

978-1-61186-065-8 | $29.95

978-1-61186--113-6 | $29.95

“Rocco makes the urgent claim that political theory must develop accounts of citizenship that put the history and experiences of Latinos at the center of its analysis. It’s a demand political theorists should take to heart.”

—Cristina Beltrán, author of The Trouble with Unity: Latino Politics and the Creation of Identity

LATINOS AND THE 2012 ELECTION THE NEW FACE OF THE AMERICAN VOTER Edited by Gabriel R. Sanchez

CONFESSIONS OF A PRESIDENTIAL SPEECHWRITER Craig R. Smith “Smith shares with readers an exceptionally candid, instructive, and fascinating memoir….

His thoughts are joyful, always insightful, at times quite humbling, and certainly courageous.”

—Michael J. Hyde, Wake Forest University

THE DIALECTICS OF CITIZENSHIP EXPLORING PRIVILEGE, EXCLUSION, AND RACIALIZATION Bernd Reiter “Reiter has written an insightful and important book, capturing an underanalyzed phenomenon in modern democracy—the restructuring of citizenship as an act of participation to citizenship as a set of entitlements.”

—David Jacobson, founding director of the USF Citizenship Initiative

michigan state university press

978-0-87013-769-3 | $64.95

THE CHARACTER OF JUSTICE RHETORIC, LAW, AND POLITICS IN THE SUPREME COURT CONFIRMATION PROCESS Trevor Parry-Giles “Parry-Giles’s study employs sound historiography, with the stage well set for his focus on 20th century advice and consent processes through significant attention to their predecessors. Throughout the analysis, ample documentation bolsters Parry-Giles’s argument, and the book is both well written and a good, engaging read.”

—Law and Politics Book Review

978-1-61186-099-3 | $59.95

978-1-61186-133-4 | $34.95

978-1-61186-160-0 | $29.95

TITLES for the TIMES

THE GOOD NEIGHBOR FRANKLIN D. ROOSEVELT AND THE RHETORIC OF AMERICAN POWER Mary E. Stuckey “Very few scholars, dead or alive, have the talent and the tenacity to offer a synoptic yet detailed understanding of FDR’s remarkable rhetorical presidency. Mary Stuckey’s The Good Neighbor is an extraordinary gift to a reading public still living in a world Roosevelt made.”

—Davis W. Houck, Florida State University

| MSUPRESS.ORG

Prospects

The Democrats as a Movement Party

by Paul Starr

P

olitical parties in the United States are typically broad coalitions that bring disparate groups together to win elections. In a two-party system, those coalitions are usually the only way the different constituencies and their leaders can hope to gain a share of power. At times, however, parties become closely aligned with social movements that shift the base of party support, or the parties themselves take on the character of a movement. Much of American history is remembered this way—as a series of movements that inspired change in parties, won elections, and transformed the nation.

But that historical memory is selective: Movements haven’t always produced electoral majorities. Their leaders have sometimes miscalculated and brought on their own defeat by driving out elements of the previous party coalition. Since movements bring new energy to parties and imperil old alliances, there is no general rule as to whether they lead to electoral success. They are indispensable to transformative change, but sometimes the transformations they bring about are not the ones they intend and come from victories they hand the opposition.

During the past half-century, the Republican Party has been transformed by the rise of the conservative movement in its various forms, including the Christian right of the 1970s and 1980s, the Tea Party of this decade, and the two insurgencies that have

roiled the party this year: Donald Trump’s nativist and protectionist campaign and Ted Cruz’s evangelically based conservatism. If Trump or Cruz and their supporters take control of the GOP, they could radically alter America’s direction from the Obama years and redefine what kind of country this is—or drive enough Republicans out of the party’s coalition in 2016 to hand Democrats a victory.

As the Republicans have moved to the right under movement pressure, the Democrats have shifted to the left, though not to the same degree. To be sure, the party has old ties to the labor, civil rights, and women’s movements and newer ties to movements representing immigrants and LGBT people. Each of these is a distinct constituency with its own agenda.

In recent decades, there has been no equivalent on the progressive side to the decisive ideological influence the conservative movement has had on the GOP. Believing they need moderate support to win, state and national Democratic leaders have sought to occupy the middle ground that the GOP’s rightward shift has opened up.

In 2016, however, just as the Republicans face pressure from a party base disappointed with its leaders, so the Democratic Party faces pressure from Bernie Sanders’s surprisingly strong challenge to Hillary Clinton. Clinton is the candidate of center-left party continuity. She falls in the direct line of her husband’s and Barack Obama’s presidencies and has the backing of most of the party’s

elected leaders, including most of the progressives in Congress who have endorsed a candidate.

Sanders is a movement candidate, an outsider to the party who has throughout his career identified himself as a socialist rather than as a liberal. He’s a man of the left rather than the center left. Until this election, he had always run for office as an independent, frequently denouncing the Democrats as corrupt and beholden to corporate interests and the “ruling class.”

she would favor tax increases only for those making more than $250,000 a year.

As I write in mid-March, Clinton seems likely to be the Democratic nominee. But regardless of how this year’s election turns out, Sanders and his campaign have raised a question about the future beyond 2016—whether the Democrats, like the Republicans, are going to become more of a movement party and what that would mean for American politics.

What would it take to get the “broken engine of progressive politics” working again?

Although many observers have downplayed the difference between Clinton’s and Sanders’s positions, the gulf is considerable. The two candidates’ tax proposals are the clearest measure.

To finance free health care, free public college tuition, and other programs that would, in total, expand the size of the federal government by about 40 percent to 50 percent, Sanders has called for 11 different tax increases that would bring top marginal rates on income and capital gains to levels higher than in the two countries he frequently mentions as models, Sweden and Denmark. Clinton wants to extend the Affordable Care Act and other recent Democratic achievements, but she has been cautious on taxes, saying

Movement, Party, and President

The barriers to transformative political change are exceptionally high in the United States. In a parliamentary democracy like Great Britain, a party that wins an election can generally carry out its program because it controls the executive branch as well as the legislature and will not face the voters again for four or five years.

In the United States, the separation of powers, the midterm elections for the House, the staggered election of senators, and the role of the Supreme Court all create additional obstacles to large-scale reform. A party intent on transformative change has to win congressional majorities as well as the presidency—and not just once, but repeatedly, in order to carry

spring 2016 The American Prospect 5

Prospects

out a program and, if necessary, shift the ideological balance of the Supreme Court. Control of state governments may also be critical, not least of all because of their power to set rules for elections, gerrymander legislative districts, disempower unions and other bases of opposition, and entrench the status quo.

If the obstacles to transformative change are so great, how have Americans ever brought it about?

In “The Broken Engine of Progressive Politics,” a brilliant article published in these pages in 1998, Yale Law professor Bruce Ackerman argued that “the American change machine” has historically had three moving parts. The first has consisted of political movements that “catalyzed sweeping transformations,” from the expansion of democracy in the early republic to Reconstruction, the New Deal, and the civil rights revolution. Second, movements

movements in the 20th century sought influence through one or the other of the major parties, and often both. The role of parties as agents of change diminished. “As parties have grown weaker,” Ackerman writes, “the change engine has worked mainly with two parts— movements and presidents. Today only conservatives seem capable of recreating the classic movementparty-presidency. Progressives will continue to lack a comparable engine for change unless they learn how to put movement, party, and presidency back together again.”

To put “movement, party, and presidency back together” means revitalizing the missing element— party— and giving it the impetus of a movement. There is little hope for transformative change from electing a president alone without also electing a congressional majority and winning control of major states. Although presidents have considerable power

been prone to magical thinking about the presidency, imagining that presidents can effect change if only movements put enough pressure on them. Activists often illustrate how movements work by telling a story about a delegation of movement leaders who presented their case to Franklin D. Roosevelt while he was president.

Sometimes the story is told about labor leaders, sometimes civil rights leaders. Supposedly, FDR responded: “I agree with everything you have said. Now, make me do it.” The quotation is almost certainly fictitious (there do not appear to be any references to it before the 1990s), but like other oft-told tales, the story says more about those who tell it than about its subject. The assumptions are presidentialist. The key word in the line “Make me do it” is “me”— the idea that Roosevelt would urge movement leaders to focus pressure on him rather than Congress

The hopes that ride on presidents are destined for disappointment if there isn’t a party capable of carrying them to fruition. have been linked to parties. Early in American history, rising movements organized new parties— “movement-parties,” Ackerman calls them—from Jefferson’s Democratic-Republicans and Jackson’s Democrats to the Republican Party before the Civil War and William Jennings Bryan’s Populists. The third key element has been the presidency as the focus of transformative leadership.

The central mechanism of political transformation in the 19th century, according to Ackerman, was the combined “movementparty-presidency,” but after the defeat of Bryan and the Populists in 1896, insurgent movements no longer developed into new parties.

Instead, the turn-of-the-century Progressives and the feminist, labor, civil rights, and other

6 WWW.Prospect.org Spring 2016

to determine foreign policy, they have little capacity on their own to institute new domestic policies and no power to do so if those involve new taxes. The sustained power necessary to effect change in the American political system—and to avoid devastating midterm reversals and state-level opposition—requires more than campaigns built around an individual presidential candidate. Yet the rise of freelance candidacies and diminished organizational role of parties encourages a focus on building up individuals rather than building institutions.

The preoccupation with personalities and presidents is so strong in America that it even affects those who ought to have a more institutional understanding of politics. Progressives have

and that the president would be the one with the power to do whatever needed doing.

With the benefit of overwhelming Democratic congressional majorities, Roosevelt did bring about a great deal of lasting change. Nonetheless, the New Deal went only as far as Southern Democrats in Congress allowed it to go; when they deserted Roosevelt and allied with Republicans, he was stymied. FDR’s failed purge of conservative Southern Democrats in 1938 ended the possibility of thoroughly remaking the party and recreating the full “movement-party-presidency” Ackerman talks about.

In the next transformative era, the civil rights revolution depended on support from moderate and liberal Republicans in

both the judiciary and Congress.

When conservative Republicans overreached and nominated Barry Goldwater in 1964, they handed liberals a transformative opportunity, enabling Lyndon Johnson to win a landslide that brought in a large enough Democratic majority in Congress to pass the major programs of the Great Society. Of course, as a previous Senate majority leader, Johnson had a singular ability to get what he wanted out of Congress, and as a Southern successor to John F. Kennedy, he had a lot to prove about his liberal bona fides.

The productive relationships of Roosevelt and the labor movement and of Johnson and the civil rights movement provide the main models for today’s understanding of how progressive movements and presidents bring about change together.

But it was only because of big Democratic congressional majorities in 1935 that Roosevelt could pass the Wagner Act and enable industrial unions to organize. It was only because of the breadth of the Democratic landside in 1964 that LBJ was able to pursue the War on Poverty. If recent Democratic presidents haven’t delivered comparable reforms, their personal qualities aren’t the primary explanation, nor is it because movements haven’t made them do it. They haven’t had the sustained congressional majorities they would need, much less the partisan mobilization in the states that would make reform a reality throughout the country.

The hopes that ride on presidents are destined for disappointment if there isn’t a party capable of carrying them to fruition.

Building the Party under the Presidency

Despite winning the popular vote in five of the past six presidential elections, the Democratic Party has been in decline for the past two decades. In their first midterm elections, Bill Clinton in 1994 and Obama in 2010 both lost control of Congress and major states to the Republicans and were severely

pete souza / white house

Prospects

hamstrung from then on. In his second term, Clinton was able to secure some modest but important policy goals, such as the Children’s Health Insurance Program. But Obama has faced resolute GOP obstruction, and on his watch Democrats have suffered big losses at both the federal and state levels.

Barring a major Democratic sweep, Republican control of the House may be baked into congressional districts until at least 2022, when states will redistrict in the wake of the 2020 census. Currently, of the 99 state legislative chambers, Republicans control 69, a historical record (I count the unicameral legislature in Nebraska as Republican, though it is officially nonpartisan). The GOP has undivided control of 24 state governments, Democrats of only seven—and Republicans are using their power in the states to enact voter-ID and anti-union laws, stack the judiciary, and adopt other measures that will make it difficult to reverse what they have done.

This is the reality that Democrats confront. Electing a president obviously matters for foreign policy, Supreme Court and other judicial appointments, budget appropriations, and the interpretation and enforcement of environmental, civil rights, and other laws. Given the huge gulf between the parties and their presidential candidates, no one should minimize the significance of those differences. But if progressives want large-scale institutional change, the prerequisite is rebuilding the Democratic Party under the presidency and animating it with a progressive agenda.

That is not what’s happening, however, at least not yet. If 2016 were a genuine transformative moment comparable to those in the past, we would be seeing a lot more than a contested presidential primary. We would be seeing more progressive candidates running for Congress and state government; indeed, some of those progressives would already have won office and used their states as

“laboratories of democracy” to test out new policies. There are some examples of progressive innovation in cities, but not many in the states. Democrats with those ambitions have yet to show in significant numbers that they can win statewide office, carry out an expansive program, and—in the critical test—get re-elected.

While Sanders and some of his followers are clearly interested in building a movement that lasts beyond 2016, movement-building and party-building are not the same thing. Throughout his career, Sanders has taken pride in not having anything to do with party politics. “Outsider” is his self-description in the title of his autobiography; for decades, he described Democrats and Republicans as Tweedledee and Tweedledum. As recently as 2013, he told The Progressive magazine, “I am not a Democrat.” The writer Ignazio Silone once said the crucial political judgment is “the choice of comrades.” Sanders has had his comrades, but they haven’t been in the Democratic Party. He initially planned to run in 2016 as an independent for president, but in an interview on MSNBC on March 14 he said he became convinced to run as a Democrat because of the media coverage he would get. “In terms of media coverage, you have to run within the

Democratic Party,” Sanders told Chuck Todd.

That history of not just standing apart from the Democratic Party but frequently denouncing it helps explain why Sanders has had so little support from elected Democratic leaders. On a practical level, they owe him nothing.

He hasn’t raised money for Democrats, and the same arguments he uses against Hillary Clinton for her fundraising would apply to most of them, too.

Beyond 2016, the question is how the model of the Sanders campaign could work as a strategy for party rebuilding on a national scale. The party undoubtedly could use the grassroots-organizing capacity the Sanders campaign has developed. But winning national elections does require raising a lot of money. If money weren’t a factor in the outcome of elections, campaign finance wouldn’t be something to worry about. Sanders’s purism on campaign finance—no super PACs, no big financial donors—can work in states like Vermont with low-cost media markets and in congressional districts with lopsided Democratic majorities. It might even be enough to win a presidential nomination, thanks to all the free media coverage. But it is not feasible in most congressional and statewide elections. Candidates who follow that approach are likely to be outspent by a wide margin, and the difference will doom many of them. That’s why most Democrats who want to reverse Citizens United and see more public financing have nonetheless decided to work within the regime the Supreme Court has established.

This contrast in thinking about campaign finance highlights a broader difference in theories of change. One approach insists on observing ideal alternative rules even if they lead to defeat; the other seeks to make gains under the existing rules in order to get into a position to change those rules. If you want public financing of campaigns, you still have to

get legislators elected in a world with private financing. If you want to pass laws strengthening labor and voting rights, you still have to win elections under laws that have weakened labor and voting rights.

Before you can change the institutions, you have to use the available resources to your best advantage.

If you get ahead of yourself, you may enjoy an initial flash of success, only to suffer a crushing defeat in the end.

The Democrats do need an infusion of movement energy to confront the deepening inequalities in American life. They also need to take advantage of the opportunities in the center that a radicalized Republican Party creates for them.

Taking advantage of those opportunities in 2016 may be the best way to create the preconditions for more substantial change; Supreme Court nominations are the first and most obvious way. If one party goes to an extreme and hands the other side the chance of a big victory, the other party would be foolish to miss its chance. The precedent for 2016 could turn out to be 1964.

And in the long run, it’s a close call as to whether America would benefit more if Democrats became more of a movement party or if the GOP reacted to a loss in 2016 by becoming less of a movement party.

The tumult of the 2016 presidential primary season has led to some brash judgments about the parties’ future. I am reluctant to jump to any conclusions. There isn’t enough confirming evidence from trends in congressional or state elections or public opinion surveys to demonstrate that the two major parties are moving for the long term in the directions represented by Trump and Cruz, on one side, and Sanders on the other.

But there is no doubt about how big the immediate choices are. The voters this year are not just choosing between different candidates and parties. They are choosing between different Americas. After November, we should have a much clearer idea about what kind of country we live in.

Spring 2016 The American Prospect 7

Perplexed Perplexed and and frustrated frustrated by by the the spin spin doctoring doctoring swirling swirling around around every every issue? issue?

Alarmed Alarmed by by the the crazy crazy state state of of debate debate today today in in general? general?

Find out how discussion and debate have been replaced Find out how discussion and debate have been replaced by antagonistic public relations and pseudoscience; how by antagonistic public relations and pseudoscience; how manufactured doubt and controversy are used to stall the manufactured doubt and controversy are used to stall the growth of public concern and block public policy solutions. growth of public concern and block public policy solutions.

I’m Right and You’re an Idiot I’m Right and You’re an Idiot The Toxic State of Public Discourse and How to Clean It Up The Toxic State of Public Discourse and How to Clean It Up James Hoggan James Hoggan

“This engaging and important book “This engaging and important book offers a blueprint toward empathy, offers a blueprint toward empathy, flexibility, and creativity instead of flexibility, and creativity instead of narrow-minded demagoguery.” narrow-minded demagoguery.”

—Scott Slovic, coeditor of —Scott Slovic, coeditor of Numbers and Nerves: Information, Emotion, Numbers and Nerves: Information, Emotion, and Meaning in a World of Data and Meaning in a World of Data “I’m Right and You’re an Idiot is a “I’m Right and You’re an Idiot is a sound resource for self-evaluation. sound resource for self-evaluation.

The book’s call for more sound, less-polarized The book’s call for more sound, less-polarized public conversations is a wonderful public conversations is a wonderful challenge I intend to take up.” challenge I intend to take up.”

—Evangeline Lilly, —Evangeline Lilly, Canadian author and actor Canadian author and actor

US/Can $19.95 US/Can $19.95 ISBn: 978-086571-817-3 ISBn: 978-086571-817-3 I’m Right and You’re an Idiot: The Toxic State of Public Discourse and How to Clean I’m Right and You’re an Idiot: The Toxic State of Public Discourse and How to Clean it Up by James Hoggan, examines the sorry state of today’s public square, showing it Up by James Hoggan, examines the sorry state of today’s public square, showing how polluted, polarized conversations discourage people from taking action on how polluted, polarized conversations discourage people from taking action on critical social issues and demonstrates how we can clear the air and become more critical social issues and demonstrates how we can clear the air and become more powerful and effective communicators. powerful and effective communicators.

JAMES HOGGAN spent four years travelling the globe and conducted more JAMES HOGGAN spent four years travelling the globe and conducted more than 60 interviews. He sat down with an expert on public trust in the House of than 60 interviews. He sat down with an expert on public trust in the House of Lords lunchroom, spent a week with Zen Buddhist monk Thich Nhat Hanh and Lords lunchroom, spent a week with Zen Buddhist monk Thich Nhat Hanh and travelled to the Himalayas to speak with the Dalai Lama. Insights of political travelled to the Himalayas to speak with the Dalai Lama. Insights of political pundits, philosophers, moral psychologists, brain scientists, scholars, media pundits, philosophers, moral psychologists, brain scientists, scholars, media gurus and corporate analysts are all included. gurus and corporate analysts are all included.

I’m Right and You’re an Idiot outlines real solutions, how to open up space for I’m Right and You’re an Idiot outlines real solutions, how to open up space for healthy conversations again, frame our arguments more convincingly and become healthy conversations again, frame our arguments more convincingly and become better communicators by tapping into deeply held values. better communicators by tapping into deeply held values.

“This book should be required reading for every person “This book should be required reading for every person engaged in the most polarizing issues of our time.” engaged in the most polarizing issues of our time.”

—John Ruffolo, CEO, OMERS Ventures —John Ruffolo, CEO, OMERS Ventures

www.newsociety.com www.newsociety.com

Follow us on Facebook & Twitter, visit www.newsociety.com, or call 800-567-6772 for our full catalogue.

Follow us on Facebook & Twitter, visit www.newsociety.com, or call 800-567-6772 for our full catalogue.

notebook

Crashing the Party An earthquake has hit the GOP, and it’s shaking up Democrats as well.

The election poses dangers for both parties, but Republicans face the greater peril; even if they win the White House, they will have lost their party.

By E l i z a N e w l i n C a r ne y

victor juha sz

I

n an election defined by Donald Trump, the polarizing billionaire poses the ultimate political Rorschach test. Trump has thrust the GOP into pandemonium, a civil war, a realignment, an existential crisis—so we hear.

To some, Trump is sui generis, a blank slate who offers no clue to where the Republican Party is going. To others, Trump is the GOP ’s “Frankenstein monster,”

the natural end point of the party’s long and self-destructive slide.

Trump is a “wrecking ball” swinging through both political parties.

Trump will prevail by winning over working-class whites; Trump will go down in flames and take his party with him.

Whatever the Trump cards say to you, however, a few consensus points are coming into focus.

Whether or not Trump wins the

GOP nomination—or even the White House—the Republican Party will never look the same.

He has forced his party into a long-overdue reckoning. Depending on the outcome, Republicans could recalibrate toward the center, or gravitate further toward the extremes, making the GOP look more like the farright parties gaining traction in France, Germany, and the United

Kingdom. At the same time, the forces roiling the GOP are also stirring up Democrats. Amid globalization and rising economic inequality, both parties are being forced to answer to populist voters angry at public institutions and elites who have failed to help struggling workers.

The crisis is far more acute, however, for the GOP, which has fallen badly out of touch with its electorate. A mere 30 percent of Republican voters are “enthusiastic about” or “satisfied” with their elected politicians, according to a recent Huffington Post/YouGov poll. Just 41 percent say they are “enthusiastic” or “satisfied with” the future of the party.

By contrast, Democratic voters report a much sunnier outlook— notwithstanding the burst of outrage that has buoyed Senator Bernie Sanders. A full 72 percent of Democratic voters are “enthusiastic” about and “satisfied with” both their elected politicians and the party’s future. Democrats will face challenges reconciling volatile voters’ conflicting demands, but have a long history of straddling fractious coalitions.

GOP voter anger has only been stoked by party leaders’ increasingly desperate campaign to stop Trump. And Republicans’ primary fallback candidate is an even more doctrinaire conservative, the widely disliked Texas Senator Ted Cruz.

Both Trump and Cruz are riding a tsunami of GOP discontent that has been building for years.

The GOP coalition between social conservatives and free-market Republicans built so successfully by Ronald Reagan in the 1980s has been tested repeatedly since the Tea Party burst onto the scene in 2009. Galvanized by the Wall Street bailouts following the 2008 financial crisis, Tea Party activists challenged the GOP establishment and triggered the foreshocks of the Trump earthquake.

Spring 2016 The American Prospect 9

notebook

These included the Tea Party’s opposition to immigration reform, its suspicion of trade deals, and its hostility to corporate welfare and “crony capitalism.” Cruz captured the Tea Party mood in 2013 when he led a government shutdown to protest Obamacare.

But Tea Party gains on Capitol Hill have failed to mollify angry GOP voters, in part because the party’s economic agenda has continued to ignore working-class Republicans. Fixated on shrinking government, destroying labor unions, cutting taxes for the wealthy, and protecting their big corporate donors from regulation, GOP leaders failed to notice that their electorate had other worries. Substantial numbers of GOP primary voters support tax increases, labor unions, and a higher minimum wage, according to research this year by the RAND Corporation.

Trump has captured these voters with a faux-populist message—even though his actual policies would hurt the working class. Trump promises “major tax relief” for middle-income Americans, but his tax plan would actually favor the wealthy and send the deficit soaring. Nevertheless, Trump has built a robust populist coalition, including voters who are both concerned about immigration and supportive of progressive economic policies, according to RAND’s 2016 Presidential Election Panel Survey. The survey found that 51 percent of primary voters backing Trump support raising taxes on those earning more than $200,000 a year; 38 percent favor labor unions, and 86 percent agree that “people like me don’t have a say in government.”

But if Trump has gathered new voters under his party’s umbrella, he has also fractured the GOP still further with his direct challenges to Republican orthodoxy, including his defense of Planned Parenthood, protectionism, and vow never to touch Social Security or Medicare. Some Republicans have rallied behind him, noting that the party has long aspired to win over working-class voters. But other Republicans have recoiled in horror at Trump’s flimsy grasp of foreign policy, attacks on

10 WWW.Prospect.org Spring 2016

Mexicans and Muslims, and tacit promotion of violent protest.

The dilemma for anti-Trump Republicans is that Cruz may prove even more polarizing. For better or worse, Trump’s core beliefs have been hard to pin down. Cruz, by contrast, is unapologetically rightist. Like Trump, he would build a wall along the U.S.Mexico border—then go one step further by halting increases in legal immigration. Cruz would eliminate the Internal Revenue Service and four other major federal agencies, defund and prosecute Planned Parenthood, and slash taxes for the wealthy. He denies climate change, opposes gay marriage and even civil unions, and promises to “carpet bomb” terrorists.

His nomination would lead to “cataclysmic” and “wholesale losses” for the GOP, predicts former Kansas senator and unsuccessful presidential candidate Bob Dole.

Its not the first time that Repub-

licans—or Democrats, for that matter—have faced a political identity crisis. Trump’s campaign has been widely compared to Barry Goldwater’s 1964 presidential bid. Goldwater lost by a landslide to Lyndon B. Johnson, but he is credited with mobilizing a generation of younger conservatives who later rallied behind Reagan in 1980. Some wonder whether 2016 is what MIT political scientist Walter Dean Burnham calls a “critical election” that brings about a political party realignment every 30 or 40 years. Such shifts occurred after the elections of 1932, when Democrats built a majority coalition around black and ethnic Americans, farmers, and Southern whites; and again after 1968, when civil-rights advances drove Southern whites toward the GOP. Now the electorate is shifting yet again, and no one knows where the political landscape’s plates will lock.

Republicans face a basic math problem amid the accelerating growth of what Democratic pollster Stanley Greenberg calls “a new majority coalition of racial minorities, single women, millennials, and seculars.”

Greenberg calculates that these groups formed 51 percent of the

The Republicans “have to avoid two mistakes.

Number one is ignoring the Trump phenomenon.

Number two is embracing the Trump phenomenon.”

electorate in 2012, and will comprise 63 percent in 2016. Republicans’ rightward lurch could mobilize progressives and even produce a “wave” election for Democrats this year, Greenberg predicts, with substantial GOP losses down ballot. GOP leaders have repeatedly warned that demographic shifts threaten to shrink their party over the long term, but the presidential hopefuls best equipped to diversify the GOP—Jeb Bush and Marco Rubio—left Republican voters flat this year.

At the same time, the populist outrage roiling the GOP could come back to bite Democrats, too. Hillary Clinton has struggled to fend off questions about her trustworthiness and her Wall Street ties, and has failed to excite the white working-class voters flocking to Sanders. Sanders’s success in the primary with young and blue-collar voters, many of them upset about the same issues firing up the pro-Trump crowds, has stirred fears in the Clinton camp that the former first lady would lose key voting blocs in a matchup with Trump.

Whoever wins this fall will preside over an uneasy and unstable majority. The nation itself remains deeply polarized, a state of unsteady equilibrium that argues for a party recalibration in 2016, as opposed to a realignment. Democrats have won the popular vote in five of the last six presidential elections, while leaving Republicans firmly in charge of Congress and the legislatures. If that pattern holds in 2016, expect government gridlock and dysfunction to continue or even worsen, and voter resentment to grow.

Where that leaves the political parties, and particularly the fractured GOP, will depend on what happens on Election Day. A GOP rout would intensify the Republican soulsearching already under way, forcing the party to address its failure to promote economic policies responsive to its electorate. Many Republicans complain that their party suffers from a dearth of new ideas, and some are calling for a platform that’s more conciliatory and tilted toward economic fairness. Just as Goldwater, while unsuccessful, paved the

notebook

conservative way for Reagan, some speculate that some of Trump’s ideas will be picked up in the future by a more polished candidate.

“They have to avoid two mistakes,” says John J. Pitney Jr., an American politics professor at Claremont McKenna College who’s written extensively about the Republican Party. “Number one is ignoring the Trump phenomenon. Number two is embracing the Trump phenomenon. The smart path is figuring out what Trump supporters are worrying about, and find some sensible way to address it.”

A GOP disaster on Election Day could present openings for Democrats, helping cement Obama’s legacy and favoring the progressive agenda.

If Republicans win the White House and/or retain control of Congress, however, the GOP may move even further to the right. This would continue the party’s current trajectory, as Tea Party orthodoxy has increasingly locked down the Republican agenda on Capitol Hill. That could mean a Republican Party that bears increasingly little resemblance to today’s GOP. This is what worries many longtime Republicans, who bemoan what they see as the party’s dwindling intellectual rigor and dignity.

“Something important is ending,” writes Peggy Noonan in The Wall Street Journal. “It’s hard to believe what replaces it will be better.” Many Republicans look at the anti-immigrant, anti-trade, anti–Wall Street rhetoric of their leading candidates, and no longer recognize their party. Similar populist messages are resonating around the globe. But in the parliamentary democracies of Europe, rightist parties may win a voice in government even with the backing of only a minority of voters. In our nation’s two-party system, only an electoral majority delivers the White House. That may leave the GOP playing an all-or-nothing game in 2016— and beyond. For Democrats, this year’s political turbulence presents both danger and opportunity. Republicans, however—at least those associated with the GOP’s establishment wing—face mostly danger. Even if they win the election, they will have lost their party.

Toward a 21st-Century Labor Movement The old model of collective bargaining can’t be resurrected. Herewith, some new models of how workers can win and wield power.

by David Rol f

B

etween the 1930s and the 1970s, unions and collective bargaining helped to power the creation of America’s vast middle class. Unions smoothed the distribution of wealth over the entire economy, constraining the percentage of wealth and income concentrated at the top of the economy while lifting up the bottom and the middle. But union strength has been on the wane since the 1950s and, beginning in the 1980s, suffered a catastrophic free fall in the private sector that continues to this day. The ability to form a union and bargain collectively is inaccessible to more than 93 percent of private-sector workers—a major reason why working people have experienced 40 years of wage stagnation even as the economy grew and the rich got richer.

Most progressive economists, scholars, think tank analysts, and centrist or left-of-center politicians in the United States agree: The scale has tipped too far in favor of business and away from workers. Generally, they support government measures to rebalance the power of capital and labor by improving the conditions for union organizing. Such measures include banning the permanent replacement of striking workers, increasing penalties for labor-law violations by employers, allowing workers to achieve union representation more quickly and simply, requiring binding arbitration in labor contract disputes, and repealing the 1947 Taft-Hartley Act (which restricted or banned many effective union tactics and permitted states to go “right to work” and thereby cripple many unions financially).

But these sorts of federal legislative strategies, which attempt to augment or restore America’s collective-bargaining framework, have

failed repeatedly for the past 50 years: Unions have never been able to secure both a majority in the House and the required supermajority in the Senate, even when both bodies have had substantial Democratic majorities. And as union density fades with each passing year, the probability of gaining support from senators in states with no real union presence declines accordingly.

Underlying this failure is a more fundamental problem: American enterprise-based collective bargaining is an inherently weak model of industrial and labor relations compared with the possible alternatives.

Under America’s current “enterprise bargaining” framework, agreements are reached between a single union and a single employer. Under enterprise bargaining, the right to a voice in the workplace is considered an optional right that workers must opt into on a workplace-by-workplace basis via a majority vote. This means that only a minority of workers is ever likely to benefit from collective bargaining, a fact that weakens political support for unions and worker bargaining rights. It also means that employers are highly incentivized to avoid unions before they form or to crush them once they exist. Where unions do form and exist, employers who agree to union demands often perceive that they have been placed at a competitive disadvantage on price or flexibility within their industries— unless a supermajority of their competitors is also unionized. In addition, under the current system of enterprise bargaining, unions can’t require that employers negotiate over some of the most important factors in worker prosperity, such as the overall strategic direction of a firm; worker equity in a firm; or worker control of health, pension, and training funds.

Spring 2016 The American Prospect 11

The confluence of these facts means that unions are hard to form, difficult to maintain, and limited in the scope of their bargaining. It means they face constant workplace and political opposition from employers. That political opposition in turn leads to the repeated failure of labor-law reform in Congress. As Marx once speculated about capitalism, we can now say with some certainty about our system of collective bargaining: It sowed the seeds of its own destruction.

Organized labor’s legislative strategy since the 1950s—restoring the old model of union bargaining—is unlikely to prevail in the 21st century.

That model thrived in an era of standardized industrial production, longterm or even lifelong employment in an industry or firm, and the relative geographic immobility of both workers and capital. This was also a period that witnessed mass worker militancy, industrial strikes, and rampant interunion competition—overlaid with fears of communism abroad. Added to this mix was a domestic Communist Party that trained skilled anti-capitalist organizers; organized-crime syndicates that cynically promoted unions so they could loot union treasuries and extort employers; and a federal government broadly committed to using collective bargaining to maintain industrial stability during world wars, cold wars, and depressions. One could no more bring back such a unique set of historical factors and conditions than one could repeal refrigeration, globalization, or the Internet (each of which also in its own way helped hasten union decline).

But workers still need mechanisms to exercise power and to do so at a scale that improves the lives of millions of workers. They need to build organizations that can sustain worker bargaining power for the long haul.

If 20th century–style unions as we knew them aren’t going to play that role, we’ll need to invent new forms of powerful, scalable, sustainable worker organizations if any effort to rebuild the middle class is going to succeed.

Such organizations might take several forms. Borrowing from labor law in other countries, from U.S. history, and from promising experiments

12 WWW.Prospect.org Spring 2016

happening in the United States today, there are several potential overlapping strategies for how future forms of worker power might operate and that suggest what U.S. labor policy might eventually look like.

Geographic and/or sectoral bargaining. With changes in federal

law, unions could represent workers throughout an entire industry and not on a firm-by-firm basis, eliminating much of the dysfunction of firm-byfirm bargaining. But even without federal statute changes, cities or states could develop stakeholder or tripartite (government, company, and union) bargaining by geography or by industry. Wage-setting boards, for example, were commonplace at the state and municipal levels in the early 20th century. Representatives of workers, employers, and government could determine legally binding standards for wages and benefits throughout an industry or within a geographic area.

This is similar to the stakeholder process we used in Seattle for the minimum-wage negotiations, and is exactly how New York’s fast-food workers achieved a $15 wage policy in 2015.

Co-determination. Common in Europe, co-determination allows employees a greater role in the management of a company, increasing worker voice and aligning incentives for quality and productivity between labor and management. Germany

Florida tomato workers led by the Coalition of Immokalee Workers have had some success in their fight to improve working conditions.

is home to the most successful example of this model, but a variation is used in the United States by health giant Kaiser Permanente. Under co-determination, labor agreements are made at the national level by unions and employer associations, and then local plants and firms meet with “works councils” to adjust the national agreements to local circumstances. In Germany, large firms are required to have worker representation on their boards of directors and workers elect works councils to solve problems at each worksite.

Since 1997, Kaiser and its 28 unions, which represent more than 100,000 workers, have partnered to give unions and individual workers a seat at the table in management decisions over quality, efficiency, and performance. Bargaining over employment conditions happens nationally. And in each facility, managers, unions, frontline workers, and physicians form thousands of UnitBased Teams empowered to make patient-care decisions together. Two goals of the Kaiser Labor Management Partnership are to continuously improve the quality of health care Kaiser delivers while also becoming the employer of choice in the healthcare industry.

Worker ownership. Through worker-owned cooperatives, or employee stock ownership plans (ESOPs), workers gain an equity stake in the firms where they work and gain control over the selection of a management team, reinvestment in the firm, and compensation. Neither model has yet been perfected in the U.S.: co-ops have proven hard to scale, in part because many co-op leaders adhere to “small is beautiful” principles of economics, and some ESOPs that formed in the 1980s effectively dumped poorly performing stock onto their employees.

wilfredo lee / ap images

notebook

notebook

But both models hold promise. Cooperative Home Care Associates in the Bronx, the nation’s largest employee cooperative, provides employees with superior wages and training compared with industry norms, and has cut employee turnover in half. Veteran hourly employees at the Publix grocery chain, an ESOP, can accumulate hundreds of thousands of dollars of equity in the company and earn tens of thousands of dollars in dividends.

Such experiments should be encouraged. With no federal statute changes, cities and states could provide tax breaks and other incentives to help these sorts of businesses grow and expand.

Control of work-distribution platforms. The majority of the new

on-demand applications are similar to technologically enhanced union hiring halls—a mechanism for selling labor to consumers and distributing work among workers. Through bargaining, co-determination, or co-ownership, these work-distribution apps could be transformed from mechanisms for suppressing wages into ones for fairly allocating the proceeds of labor, maximizing hours, and collaborating on multi-worker tasks.

One could even imagine algorithmbased smartphone applications that allow on-demand-economy workers to effectively bargain with—or strike against—work-distribution platforms.

Labor standards enforcement.

Voluntary worker associations could develop the capacity to “represent” workers through onsite worker-led enforcement of labor standards and employment laws within a geographic area or an industry. This could take the form of publicly financed organizations that advocate for workers under municipal law. Experiments with these sorts of worker-community organizations are already happening in San Francisco and Seattle to help enforce those cities’ minimumwage ordinances and other laws. San Francisco’s Office of Labor Standards Enforcement distributes enforcement dollars to community-based worker centers and immigrant-advocacy groups to educate workers on their rights. In Seattle, the newly formed Fair Work Center receives city funds

Now is the time for risktaking and experimentation in search of a new model that can replace traditional union collective bargaining.

to do outreach, education, case management, and run a workers’-rights legal clinic, all in partnership with a network of community organizations and unions. The hypothesis underlying both programs is that culturally competent, bottom-up, community organizing–style worker outreach is both empowering to workers and a more effective law enforcement strategy than a top-down, complaint-based system that’s hard to access for workers who are often high school–educated, have limited English language proficiency, or are undocumented.

Other examples empower workers to set and enforce labor standards across private-sector employers with no government role. Promising efforts of this sort are already under way among Florida tomato workers led by the Coalition of Immokalee Workers, among Austin construction-industry employees led by the Workers Defense Project, and among California janitors led by SEIU’s Maintenance Cooperation Trust Fund, in each case paid for by contributions from employers or upstream purchasers.

Certification and labeling. The LEED standard signifies excellence in environmental design for new construction, and the Fair Trade label indicates ethical supply-chain practices for coffee, tea, and chocolate.

Similarly, a worker organization could develop, or a government could even require, an ethical workplace certification and labeling system for consumerfacing brands, businesses, products, and services. As with a health department letter grade on a restaurant, consumers would know to what extent an employer, manufacturer, or service provider follows best practices in paying living wages, offering benefits and paid leave, implementing fair scheduling procedures, practicing gender and racial equity in hiring and promotion, and adhering to labor and employment laws. As with LEED and Fair Trade, businesses could earn such a label (let’s call it a WorkScore) by registering with a worker-led nonprofit organization, adhering to certain minimum standards, and agreeing to workplace audits by the worker organization.

Consumers could then easily “vote with their feet” and economically reward

businesses for doing the right thing.

Benefits administration. In a world of increasingly short-term, temporary, and employer-less employment, worker organizations could replace employers as the primary provider and administrator of worker benefits that are universal, portable, and prorated.

Nick Hanauer and I proposed a Shared Security System in 2015, which we now refine one degree further to add that these universal, portable benefits would be administrated by workeradvocacy organizations. The system would be similar to the health and welfare funds administered by unions in the construction industry, which provide workers with health, pension, and training benefits, and to the Ghent system of collective unemployment insurance in several northern European countries. Under the Ghent model, unions in Belgium, Denmark, Finland, Iceland, and Sweden—rather than those governments—administer unemployment insurance for workers.

When it comes to how workers exercise collective power over wages, benefits, hours, and working conditions, now is the time for risk-taking and experimentation in search of a new model that can replace traditional union collective bargaining. Rather than throwing up their hands in frustration or wishing for the resurrection of a collective-bargaining regime that peaked in 1958, progressives (and conservatives too, if any pro-worker conservatives still exist) in all levels of government should promote, finance, encourage, and protect such experiments. Just as 20th-century labor law was originally prototyped at the city and state levels, today’s workers and their supporters should demand that mayors and city councils, governors and state legislatures enlist in the search for the next labor movement.

David Rolf is president of Local 775 of the Service Employees International Union and the architect of Seattle’s $15 minimum-wage victory—the nation’s first. This article is an adaptation of a chapter that originally appeared in his book The Fight for Fifteen: The Right Wage for a Working America, published by The New Press. Reprinted here with permission.

Spring 2016 The American Prospect 13

notebook

Heights of Privilege How the rich get relief on property taxes— and what to do about it

By J a me s A . Pa r r o tt

I

f you want to learn about the latest manifestations of inequality in urban America, read the realestate sections of newspapers and magazines and check out the photo spreads on luxury condos in new residential skyscrapers. The palatial size, lavish finishes, and breathtaking price tags of these properties are advertisements of our new Gilded Age. In the area immediately south of Central Park in Manhattan now known as Billionaire’s Row, condos at a half-dozen towers for the super-rich list for an average of $14.5 million.

Buyers from abroad are common. The penthouse at 432 Park Avenue—the tallest residential building in the Western Hemisphere—went for $95 million to a Saudi. At One57, a residential skyscraper on 57th Street, the luxury penthouse was sold for $100.4 million, the buyer reported to be the prime minister of Qatar. About onethird of Manhattan condo sales since the 2008–2009 recession have been to foreign buyers or to a limited liability corporation (LLC) often used to shield the identity of the ultimate owner.

Such properties also epitomize the privileges of the global one percent in a less publicized way: They are dramatically undertaxed. According to New York City’s Independent Budget Office, property taxes on the condos at One57 are discounted by 95 percent. Although that’s extreme, it’s consistent with a general pattern of underassessment of high-end real estate that ends up leaving low- and middle-income families with a disproportionate tax burden.

The public policy decisions that have promoted and subsidized luxury development are getting new attention, thanks to concerns about the surge of foreign buyers in the top tier of the market in New York, Miami, Los Angeles, and other cities. As New York’s mayor in 2013, Michael Bloomberg argued that the influx of foreign wealth was a good thing. “If we could

14 WWW.Prospect.org Spring 2016

get every billionaire around the world to move here, it would be a godsend.

They’re the ones that spend a lot of money in the stores and restaurants and create a big chunk of our economy, and we take tax revenues from those people to help people throughout the rest of the spectrum.”

Unfortunately, however, not only do the super-rich pay little in property tax relative to market value; since most of the foreign owners don’t live or work in New York even half the time, they also don’t pay city or state income tax. In fact, some of those buyers aren’t eager to pay taxes in their home countries either. A New York Times series in early 2015 tracked down some of the LLC buyers and their beneficial owners, uncovering oligarchs and other shady characters who have amassed great fortunes all across the globe, often under questionable circumstances. To no one’s surprise, such buyers have had no difficulty tapping an army of local enablers in the real-estate business eager to facilitate such transactions.

Concerned about the potential for money laundering, the Treasury Department announced in early January that it would start requiring title insurance companies to reveal the beneficial owner in all-cash purchases in Manhattan and Miami that “may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.” A Treasury official stated, “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.”

Other concerns have also arisen about the wave of purchases of urban properties by often-anonymous nonresident buyers—domestic as well as foreign—who may be mainly interested in the properties as investments. Full-time residents of chic

The stunning condos in luxury skyscrapers epitomize the privileges of the global one percent in a little-publicized way: They are dramatically undertaxed.

neighborhoods now complain about a “ghost town” feel in their area because so many apartments are unoccupied most of the time. In some census tracts in Manhattan, government data confirm that 60 percent or more of apartments are vacant for ten or more months each year. Ironically, many of the complaints about nonresident owners and the low taxes they pay come from wealthy residents whose own condos are also underassessed.

The controversy over luxury realestate development has begun to produce a political response. New York State has started phasing out one of the subsidies benefiting luxury real estate owned by nonresidents. But more substantial reforms are necessary in New York and other cities, and those changes should reflect an understanding of how property taxes came to be skewed in favor of the people who need tax relief the least.

Property taxes are typically the

largest local funding source for public schools and other services—amounting to $1.8 trillion nationwide, nearly one-seventh of total taxes collected at all government levels. Since property is usually taxed in relation to its value, the wealthy ought, in principle, to pay more. In practice, however, the ratio of property taxes to income invariably declines as you go up the scale. That’s the definition of a regressive tax. The Institute on Taxation and Economic Policy—a leading state and local tax justice think tank—reports that, as a percentage of their income, middleincome families pay property taxes four times higher than the wealthiest 1 percent, and the poorest fifth pay property taxes five times higher.

With its reputation as a bastion of progressive politics, New York City might be expected to have a progressive tax system, taking all taxes into account. Nonetheless, the overall tax burden is regressive, largely due to the property tax that hits homeowners in poor neighborhoods and renters throughout the city with higher effective tax rates than others pay. And while New York’s Mayor Bill de Blasio has worked overtime to build more affordable housing, his main approach is to give property tax breaks to luxury

m a c k lo w e p r o p e r t i e s

notebook

housing developers on condition that they include a portion of affordable housing in their construction projects.

The leaders of both the city and state haven’t put as much effort into making the property tax more equitable.

Analysts across the political spectrum in New York agree that systematic inequities in the city’s property taxes are traceable to legislation passed by the state in 1981 to protect small homeowners. As a result of peculiar provisions of the 1981 law, effective property tax rates (taxes paid as a percent of true market value) are now highly skewed. Most owners of one-, two-, and three-family homes pay the lowest effective rates, followed closely by owners of co-op and condo apartments. The owners of rental properties pay much higher effective rates, which

Fortune Magazine calls it “the house that inequality built”: 432 Park Avenue is the tallest residential building in the Western Hemisphere.

Although it has more than 400,000 square feet of interior space, it has only 104 living units, and if patterns in the area are an indication, 60 percent of the units will be vacant 10 months or more a year.

they pass on to their tenants. In fact, rental properties now carry effective tax rates about five times the effective rates for condos and one-, two-, and three-family homes. These property tax inequities have a marked class and race dimension. The median income of renters is only half that of home and apartment owners; racial minorities account for slightly more than half of home and apartment owners but for three-quarters of renters.

Two major problems with the 1981 law are at the root of growing inequities. First, the law imposed assessment caps to keep taxes from rising too fast for one-, two-, and threefamily homes, but it didn’t apply those caps to multifamily structures with ten or more units, whether co-op, condo, or rental buildings. As a result,

the effective tax rates on one-, two-, and three-family homes declined relative to those on large apartment buildings. Second, the 1981 law required that co-op and condo buildings be valued as if they were incomeproducing properties—that is, rental buildings. New York City has long had “rent stabilization” protections that limit rent increases, a benefit to renters. But the valuation for tax purposes of co-ops and condos as if they were rental units resulted in assessments of those properties far below their market value. In 1997, the City Council also enacted a partial tax abatement for co-ops and condos that doesn’t apply to rental properties. Since rental buildings were subject to neither the assessment caps nor a valuation method that discounted their market

Spring 2016 The American Prospect 15

notebook

value, the effective tax rate on rentals kept climbing relative to all forms of owner-occupied units.

Another source of property tax inequities is variation in effective tax rates by neighborhood. The assessment caps have had a bigger impact on assessments in higher-income and gentrifying neighborhoods than in predominantly working-class neighborhoods, where prices haven’t grown as fast. For example, the Independent Budget Office estimates that condos in swanky parts of Manhattan such as the neighborhood south of Central Park pay effective tax rates one-third those of condos in many parts of the Bronx.

m a c k lo w e p r o p e r t i e s

The inequities in New York City’s

property taxes have been widely recognized ever since the passage of the 1981 state law, but reform has remained elusive. David Dinkins, mayor from 1990 to 1993, and Rudy Giuliani, mayor from 1994 to 2001, had some interest in reform but were never able to follow through. During his three terms, which ended in 2013, Bloomberg seems not to have lost any sleep over tax inequities or income disparities.

Nevertheless, the patent absurdity of subsidizing wealthy nonresident owners has finally opened up possibilities for change. In 2013, the state legislature passed a measure to phase out the 1997 co-op/condo partial tax abatement for nonresident owners. Proposals for a “pied-à-terre” tax have also received some attention. One proposal calls for a graduated 4 percent tax on the true market value in excess of $5 million on co-ops and condos owned by nonresidents. Although it would only apply to the top 2 percent or so of nonresident-owned New York City apartments, the tax would generate $300 million to $400 million a year—enough to cover most of the cost of universal pre-kindergarten in the city.

Every effort to tax high-end real estate draws fierce opposition. The mere mention of the “pied-à-terre” tax proposal was enough to generate howls of protest from the real-estate community. Tackling the larger problem of property tax fairness inevitably means confronting even wider resistance. For years, property tax reform has been considered untouchable in New York

16 WWW.Prospect.org Spring 2016

City because middle-class owners of one-, two-, and three-family homes have some of the lowest effective rates and likely would end up paying more.

Still, in a city where two-thirds of households rent, there could be a base of support for change.

In New York, three key ingredients will be needed for true property reform. The first is a blueprint to correct the problems I’ve described in current state law. Second, to ensure that no home-owning family pays an inordinate amount in property taxes, reform should include a “circuit breaker”—a provision that limits taxes in relation to family income, administered through the local income tax.

Third, tenants in units under rent stabilization need guarantees that savings will be passed on to them if property taxes decline on rental properties. Since New York City’s property tax system is established in state law, the city government cannot change that system by itself. The city and state need to act together—a difficult process even when both the mayor and the governor are Democrats.

The goal should be to reduce the disparities in effective property tax rates among residential properties.

Changes should be phased in gradually—a transition period of 10 to 15 years might be necessary. Lessening the burden on rental properties can only help the city’s considerable challenge in providing affordable housing. At the same time, reforms ought to curtail unnecessary property tax breaks that have favored the biggest developers and corporate real-estate owners.

Looking across the country, two approaches top the progressive agenda for property tax reform. States and localities should introduce or expand circuit breakers (31 states and the District of Columbia already have them) or institute a homestead exemption that reduces a homeowner’s property taxes by exempting a portion of a home’s value from tax. Another commonsense step is to increase state aid to localities in order to lessen the reliance on regressive property taxes. Both the circuit breaker and the increased local aid approaches shift the tax system toward broader-based state taxes, especially the income tax. Forty-three

A proposed New York “piedà-terre” tax on nonresidentowned condos worth more than $5 million would be enough to fund most of the cost of universal pre-K in the city.

states have an income tax, and rates are graduated in 33 of those.

Graduated real-estate transaction taxes with rates that rise along with property values also make a lot of sense. To help fund an ambitious affordable housing agenda, New York Mayor de Blasio last year proposed a supplementary “mansion tax” of 1 percent on the first $5 million of a transaction and 1.5 percent on the value over $5 million. (This would be in addition to an existing top state and local transaction tax rate of 2.825 percent.)

Pied-à-terre taxes on nonresident owners also make a lot of sense in light of the increase in the ownership of second and third homes and the acquisition of properties primarily as investments. Occasional residence by itself doesn’t contribute much to the local economy or to a sense of community. Nonresidents who don’t contribute much in other ways ought to help fund the services and infrastructure that underpin the value of the assets they acquire.

An idea dating back to the 19th-century reformer Henry George is a land value tax. This is a way to both discourage speculation and to capture some of the value that is socially generated and not the narrow result of the property owner’s investment. The progressive element here is that government reaps a dividend associated with collective contributions that make a community a profitable site for market activities.

Without a land value tax or similar mechanism, re-zonings for highdensity commercial or residential uses simply put billions of dollars into the pockets of big developers in cities while transportation systems and other public needs are starved for resources.

As hard as property tax reform is, it is too big a source of inequity—and of frustration with government—for progressives to ignore. Less-regressive property taxes would help make real progress in the effort to reduce the racial and class inequalities in urban America.

James Parrott is the deputy director and chief economist of the Fiscal Policy Institute. He teaches at the Roosevelt House Public Policy Institute at Hunter College.

notebook

Some of the issues of contention that have arisen between Clinton and Sanders have also surfaced in the Van Hollen–Edwards race. Last April, in the midst of the battle over fasttrack authority for the Trans-Pacific Partnership, the Edwards campaign criticized Van Hollen’s voting record on free-trade deals. Though Van Hollen came out in opposition to the fast-track bill, the Edwards campaign called his record “inconsistent.”

Her campaign pointed to Van Hollen’s support in 2011 for trade deals with South Korea, Colombia, and Panama. Edwards and the majority of Democrats in the House voted against these deals.

The race between the two candidates has been tight from the beginning, with polls showing them either neck and neck or with one candidate slightly ahead. Both candidates remain popular in their respective home districts. The real fight is in Maryland’s other population center: Baltimore.

Left and Lefter:

Maryland’s upcoming Senate primary pits an establishment progressive against a more progressive outsider. Sound familiar?

by N atha l i e Ba pt i s te

j a b i n b o t s f o r d / wa s h i n g t o n p o s t v i a g e t t y i m a g e s

T

he atmosphere in the room feels more like an old-school black church than it does a campaign event. The crowd that has assembled in Baltimore’s Charles North neighborhood—mostly black women greeting each other like long-lost friends and making small talk—is awaiting the arrival of Democratic Representative Donna Edwards of Maryland’s Fourth District, which is centered in the Washington, D.C., suburbs of the predominantly African American Prince George’s County.

Edwards is running for the U.S. Senate seat being vacated by Barbara Mikulski, who, after serving 30 years, announced her retirement last March.

Since Maryland is a reliably blue state (the election of Republican Larry Hogan for governor notwithstanding), the winner of the April 26 Democratic primary will likely go on to win in November. Edwards burst onto the Maryland political scene in 2008 after defeating longtime Democratic Representative Albert Wynn. That contest—in which an African American woman challenged a member in good standing of the Congressional Black Caucus—was notable enough. Her victory was even more so.

At the campaign event in the Chesapeake Building, a murmur persists throughout the introductory remarks from campaign surrogates, as attendees discuss Edwards’s opponent and the presidential race. The chatter is replaced by cheers upon the congresswoman’s arrival.

Dressed in a stylish suit, Edwards is small in stature but has a big presence—and a populist message. “We live our lives on the ground where people work for minimum wage,” she tells the crowd, “and they can work 40, 60 hours in a week and still not make it to the poverty line.”

“We live our lives on the ground where you have to juggle the rent, and

the mortgage,” she continues. “Maybe you’re late picking your kid up from day care and you get charged a dollar per minute,” Edwards says of the rising cost of child care and the rules that can overburden parents.

“In Maryland and across the country, our average student ends up with $25,591 in student loans. Student debt restricts young people’s ability to start a business,” she says, “or buy a house or even pay rent.”

“Or forget that,” she says, changing her tone. “It constrains their ability to get out of your basement.”

Just as Edwards terms herself a “true-blue progressive,” her opponent, Representative Chris Van Hollen, terms himself a progressive who can get things done. Van Hollen came to prominence in the 1990s as a delegate and then state senator in the Maryland General Assembly. Since he first won election to the U.S. House of Representatives in 2002 to represent Maryland’s Eighth District encompassing Montgomery County (home, probably, to more highly politicized liberal professionals than any other American suburb), Van Hollen has handily defeated his opponents in subsequent elections. He has held several leadership positions in the House, including ranking member on the House Budget Committee, and leadership positions in the Democratic Caucus.

In several ways, the Democratic primary race for Mikulski’s seat mirrors the Democratic primary race for president. Hillary Clinton and Chris Van Hollen represent their party’s establishment wing, while Donna Edwards and Bernie Sanders are newcomers to a larger stage who are known more for their leftist policies than for their ability to make deals.

Maryland Democrats will choose between Sanders and Clinton on the same day they choose between Edwards and Van Hollen.

Challenging the established order, Donna Edwards won election to Congress by unseating a fellow African American Democrat.

Donna Edwards is a divorced single

mother who raised her now-27-yearold son on her own, a facet of her life she’s not afraid to relate to her politics.

“We have to have a voice in the United States Senate who understands how we live our lives,” she told the women who came to the Charles North event.

“I want you to know that there will be somebody in the United States Senate

Spring 2016 The American Prospect 17

who has walked in those shoes.”

Edwards knows that her life story will resonate with a lot of Marylanders.

She struggled at times, she says, raising her son as a single mother, and she acknowledges this is something voters may connect with. Maryland voters, she says, will step up and say, “Yes, they want somebody in the United States Senate who has walked in their shoes.”

Now that police brutality has moved to the forefront of national conversation after several high-profile incidents, including the death of Freddie Gray in Baltimore, Edwards feels that her presence in the Senate will matter even more. “It will be critically important to have a voice like mine at the table,” she says. “We don’t need people talking about us, and fixing things for us; we need to be at the table, fixing it for ourselves.”

The 57-year-old Yanceyville, North Carolina, native is one of 20 black women (including the District of Columbia’s non-voting delegate, Eleanor Holmes Norton, and Stacey E. Plaskett of the Virgin Islands) serving in the 114th Congress. If she prevails on April 26 and goes on to win the general election in November, Edwards would become the second black woman to serve in the Senate, after Carol Moseley Braun, who served one term as senator of Illinois from 1993 to 1999.

Edwards’s record in Congress places her clearly on the left. Representing a predominantly African American district that bore the brunt of the foreclosure crisis in the Washington, D.C., area, she initially opposed the House version of the $700 billion bailout bill, saying it didn’t do enough to help underwater homeowners.

A supporter of single-payer health care who was disappointed when it was taken off the table in 2009, she authored a provision that would hold insurance companies accountable for exorbitant premium increases—a provision that made it into the final text of the Affordable Care Act. Before entering electoral politics, Edwards headed several progressive organizations, including the National Network to End Domestic Violence and the Arca Foundation, which funds a range of liberal groups. In 2006,

18 WWW.Prospect.org Spring 2016

Edwards began her first political campaign mounting a challenge to Wynn, who proved vulnerable in part because of a record that included supporting repeal of the estate tax and backing oil- and gas-industry subsidies, not to mention his desire to bring gambling to Prince George’s County. Edwards narrowly lost to Wynn by 2,731 votes.

But two years later, Edwards defeated Wynn handily with 59 percent of the vote to Wynn’s 37 percent. She

went on to win a special election in June 2008 after Wynn resigned early.

In much the same way that Bernie Sanders has attacked Hillary Clinton, Edwards accuses Van Hollen of being part of the in-crowd. “Van Hollen has been kind of an establishment go-along-to-get-along Democrat,” she says. She acknowledges that their voting records are fairly similar. “But the question is, where are you going to put your energy and your resources?” she says, positioning herself as a tribune for Maryland’s poor and minority communities.

Chris Van Hollen is one of the stars of the Democratic Party. Born to diplomat parents in Karachi, Pakistan, the 57-year-old legislator—like Edwards, an attorney—worked as a legislative staffer, then served in the Maryland House of Delegates from 1990 to 1994 and the Maryland State Senate from 1994 to 2002. When he ran for

Within a few years of taking office, Chris Van Hollen was the House Democrats’ election point person.

Congress in 2002, Maryland’s Eighth District was heavily Democratic, but represented by Republican Connie Morella—who often broke with her party to vote with Democrats.

That year, Van Hollen won a competitive primary over Mark Kennedy Shriver and former Bill Clinton aide Ira Shapiro; he then went on to defeat Morella in the general election. Just three years later and after the Democrats won back control of the House, then–Speaker of the House Nancy Pelosi appointed Van Hollen to chair the Democratic Congressional Campaign Committee—the political arm of the House Democrats in charge of recruiting and supporting Democratic candidates. In 2010, stepping down from the DCCC, Van Hollen was elected the chair of the House Budget Committee.

In the House, Van Hollen has played a leading role in promoting campaign-finance reforms. In response to the Supreme Court’s 2010 Citizens United decision, he authored the DISCLOSE Act, which would have compelled corporations to inform shareholders of their campaign contributions, as well as forbid corporations from contributing to campaigns if they had more than 20 percent foreign ownership or were recipients of Troubled Asset Relief Program funds.

In 2010, while the Democrats controlled the House and had a majority but not a 60-vote supermajority in the Senate, the bill passed the House but fell one vote short of achieving cloture in the Senate, and hence never made it to the president’s desk.

In 2011, Van Hollen sued the Federal Election Commission, alleging that “regulatory capture” had caused it to fail to do any significant regulation of election laws. (Required by law to have three Democratic and three Republican members, the FEC has essentially been paralyzed for years.)

Another of Van Hollen’s signature issues has been gun control. In 2000, while a member of the Maryland General Assembly, he successfully championed Maryland’s safety trigger-lock law. Eight years later in the House, he voted against repealing portions of the Washington, D.C., firearm ban.

Van Hollen pushes back on the idea that the Maryland race provides any

bill cl ark / cq roll c all / ap images

notebook

notebook

kind of microcosm of the Democratic presidential primary. “It’s nothing like the presidential race,” he told The American Prospect. “If you’ve spoken to the Maryland progressive community, they’re strongly backing me.” He argues that his endorsements from progressive groups like the Sierra Club and labor unions like the Service Employees International Union, along with his agenda, validate his credentials as a progressive—and not a corporate Democrat.

The difference between the two candidates isn’t to be found in their admittedly similar voting records, he says, but in results. “I think in Maryland, the issue isn’t voting records.

The issue is, who is the candidate who has been able to advance a progressive agenda? If you really want to make a difference, it’s not enough to talk about these issues. You’ve got to get results at the community levels.”

The Washington Post—by far the most widely read paper in D.C.’s populous Maryland suburbs—made a similar argument in endorsing Van Hollen.

“The main difference is that Mr. Van Hollen—pragmatic, detail-oriented, agile—could be a real force for accomplishment,” said the editorial board’s endorsement. “By contrast, Ms. Edwards, whose many attributes do not include a gift for team play, would reinforce Congress’s tendency toward stalemate along partisan lines.”

Whatever Edwards’s skills, or lack thereof, in “team play,” she hasn’t been able to win the backing of a number of her African American colleagues —including black Democrats from her district in Prince George’s County.

Among the Maryland black elected officials supporting Van Hollen is State Senator Joanne Benson, who said, “We are looking for somebody who has the fire in their belly to serve, and that’s Chris Van Hollen.”

More striking still is the decision of the Congressional Black Caucus Political Action Committee (CBC PAC) not to endorse Edwards. The 21-member board includes Wynn, whom Edwards unseated in 2008.

The PAC’s decision to not endorse Edwards came on the heels of its endorsement of Hillary Clinton for president. In response, ColorOfChange,

With support from African Americans and the white left, Edwards may benefit from both the Clinton and Sanders campaigns.

a progressive organization, sent out an email blast to its supporters calling out the CBC PAC ’s decision. By declining to endorse Edwards, the email said, it was ignoring her “historic bid to become only the second Black woman to be elected to the Senate.”

“We elevated both the Clinton endorsement and the sitting out of the Donna Edwards endorsement, because they created confusion for people around who speaks for black people,” ColorOfChange Executive Director Rashad Robinson told The American Prospect.

The Congressional Black Caucus PAC and the CBC Foundation have been criticized for taking large corporate donations, and some critics have made a connection between that corporate money and odd votes by some caucus members on regulatory issues favored by big business. Formal caucus endorsements in contested primaries appear to be relatively rare, though the PAC has sometimes made donations to primary contenders, including California U.S. Senate candidate Kamala Harris.

Edwards has won support from a range of feminist organizations, among them Emily’s List. Despite that, she lags Van Hollen in fundraising. According to FEC filings, Van Hollen had $3.6 million in cash on hand at the end of 2015, while Edwards had only $300,000. Van Hollen claims that the majority of his monetary support comes from Maryland, while Edwards’s support comes mostly from outside groups.

As the primary approaches, the Van

Hollen–Edwards race is shaping up to be a conundrum for liberal voters.

Sebastian Johnson, a young progressive running for the Montgomery County Board of Education, has been a Van Hollen supporter for nearly a decade. Johnson was an intern in Van Hollen’s congressional district after graduating from high school in 2006.

“That experience was part of what inspired me to become involved in policy and politics,” he says.

The 27-year-old Takoma Park, Maryland, native currently works at a progressive tax-policy institute. “Van Hollen has been great on those issues,

making sure corporations are paying their fair share of taxes and that they aren’t hiding their profits offshore,” he says of the congressman’s stance on corporate taxes.

Valerie Ervin, the former chair of the Montgomery County Council who briefly ran for the congressional seat being vacated by Van Hollen, endorsed Edwards last November.

Ervin, who is part of the Working Families Organization, is also a steering committee member of the Maryland for Bernie Sanders campaign.

Edwards’s team considers both the Sanders campaign and the Clinton campaign a boon for Edwards’s prospects. Clinton will turn out African American voters and women, which Edwards considers her base, while Sanders will turn out more progressive voters, also part of her base.

Edwards fares much better with black voters than the senator from Vermont. A January 11–16 Gonzales Research and Marketing Strategies poll found that 65 percent of Maryland African Americans were supporting Edwards, compared with Van Hollen’s 15 percent. The same poll showed that African Americans in the state supported Clinton over Sanders by 61 percent to 6 percent. Sanders’s backing has surely risen since January, but a high Hillary turnout among black Maryland voters would almost surely benefit Edwards. In that poll, white Democrats favored Sanders over Clinton by 43 percent to 25 percent—suggesting that in order to win, Van Hollen will have to do well among Sanders supporters.

In the Maryland Senate race, the generational divide isn’t as clear-cut as it is in the contest between Clinton and Sanders. Van Hollen won a straw poll at the Young Democrats of Maryland convention; the candidates have split union support, like the presidential candidates; and while the CBC PAC declined to endorse Edwards, neither did it endorse Van Hollen. Polls have varied for the Maryland Senate race, but a March 4–8 Baltimore Sun/ University of Baltimore poll showed Edwards leading Van Hollen by six points. If Edwards wins, she may well be the one candidate this year to have benefited from both Clinton’s and Sanders’s campaigns.

Spring 2016 The American Prospect 19

The Long March of

Bernie’s Army Where it came from; where it’s headed B y Haro ld Mey ers o n

N

ow that Bernie Sanders has lost most of the once-industrial Midwest to Hillary Clinton, now that it’s vanishingly unlikely that he’ll become the Democratic nominee, the most important period of the Sanders insurgency has finally begun. The senator from Vermont has astonished both his fiercest critics and his (relatively few) longtime fellow socialists by mobilizing millions of voters, becoming a hero to the young, and being on track, by the time this year’s primaries are done, to capture roughly 40 percent of the Democratic vote—all while running as a democratic socialist and scourge of Wall Street in this most capitalist of countries.

But Sanders’s is not a campaign that history will judge by the number of votes he won. Like only a handful of predecessor campaigns, like no presidential campaign since Barry Goldwater’s, his will be judged by whether it sparked a movement that transformed America. That’s the metric by which Sanders himself measures his success: Whether his campaign can build what he calls a revolution, inspiring his supporters (and some of Hillary Clinton’s, too), once this

20 WWW.Prospect.org Spring 2016

year’s campaign is done, to build the political power and social movements that can break the hold that wealth exerts on politics and policy, and thereby re-create the mass prosperity that was once America’s calling card to the world.

Problem is, electoral campaigns don’t create enduring organizations, much less social movements. Though Barack Obama’s 2008 presidential campaign likely mobilized more volunteers and donors than any that came before, the organization through which it sought to keep its activists active once Obama became president—Obama for America— lacked all autonomy or organizational life; it failed even to exert any pressure on Democratic members of Congress who were cool to Obama’s agenda. Democracy for America, which sprang from the wreckage of Howard Dean’s 2004 presidential bid, has never been more than a liberal pressure group of modest scale. Out of the more ideologically defined presidential campaigns of Jesse Jackson in the 1980s, the Rainbow Coalition emerged, but the Rainbow’s goals were so consistently subordinated to Jackson’s own political needs

that progressive activists soon abandoned it.

This spring, however, leaders and activists from all manner of progressive movements and organizations are rolling this stone up the hill one more time. They can recite all the reasons why Obama for America never got off the ground; some of them even worked for the Rainbow until they realized there were better places to make social change. Most of them are painfully familiar with the tragic-comic history of the American left, a largely marginal tendency in American politics that has often squandered its moments of opportunity with displays of purity and rigidity that have only left it more marginal.

And yet, many progressives believe this time may be different. It’s not that the Sanders campaign itself has incubated some kind of permanent left formation. “Bernie hasn’t built an organization; he’s built a campaign,” says one left leader. “That isn’t something that endures.”

The task of building that enduring something, they understand, falls to them—though Sanders himself can help them along.

Leaders of unions, community-organizing groups, minority organizations and student

jim cole / ap images

groups, prominent environmentalists and Sanders activists, precinct walkers and online campaigners—some longtime allies, some total strangers to one another—are “all in one large, shifting conversation,” in the words of one such leader, to figure out how to build the Revolution once the Sanders campaign is done.

Some are planning national conclaves, like the “People’s Summit” in Chicago in mid-June, where the disparate groups in the Sanders universe will gather to lay out a common agenda.

Some are planning how to prod the delegates at the Democratic Convention (including some pledged to Clinton) to shift the party well to the left. More fundamentally, they are debating ideas on how to create something—organizations, coalitions, networks, local, state, national—that can capture and build on the energy and politics that the Sanders campaign has unleashed.

The challenge of creating an enduring left out of Sanders’s young supporters, who have brought the passion, energy, and numbers to his campaign, is particularly daunting. “Presidential elections generate excitement unlike

any other,” says a veteran union leader. “They ignite a level of energy and self-activity that’s hard to capture and transfer. We can’t assume that 100,000 young people who have self-organized in the campaign are going to respond to being told, ‘Here’s the next big thing.’ They won’t come over if it’s presented that way.”

Will they come over at all? Are all these experienced activists even right in hoping that this time will be different, that this time a powerful social democratic left might just take root in America’s political soil?

I think they are. Chief ly because Bernie Sanders’s campaign didn’t create a new American left. It revealed it.

In 1906, German sociologist Werner

Sombart wrote an essay entitled “Why Is There No Socialism in the United States?” Sombart was just the first of numerous commentators— among them Daniel Bell and Seymour Martin Lipset—who sought to explain why the United States, alone among industrialized democracies, never developed a major socialist movement.

(Sombart’s answer to this conundrum was that

the upward mobility and higher living standards that European immigrants found here meant that socialism in America was stillborn.)

In the wake of the Sanders campaign, however, we suddenly need to pose quite a different question: Why are there socialists in the United States? Who are all these people who now not only flock to Bernie’s banner but deem themselves socialists? What do they even mean by socialism?

The numbers astonish. In a Des Moines Register poll on the eve of the Iowa caucuses, 43 percent of likely Democratic caucus attendees said they were socialists. In a Boston Globe poll on the eve of the New Hampshire primary, 31 percent of New Hampshire Democratic voters called themselves socialists; among voters under 35, just over half did. And in late February, a Bloomberg poll of likely voters in the Democratic primary in South Carolina—South Carolina!—showed that 39 percent described themselves as socialists.

Favorable views of socialism aren’t limited to Sanders supporters. The 39 percent of South Carolina Democrats who call themselves

Spring 2016 The American Prospect 21

socialists exceeded by 13 percentage points the number who actually voted for Sanders. In a New York Times poll last November, 56 percent of Democrats—including 52 percent of Hillary Clinton supporters—said they held a favorable view of socialism.

Nor was this sway toward socialism triggered by Sanders’s candidacy. In 2012, a Gallup Poll showed that 53 percent of Democrats had a positive image of socialism, as did 62 percent of liberals. One year earlier, a Pew poll revealed that fully 49 percent of Americans (not just Democrats) under 30 had a positive view of socialism, while just 47 percent had a favorable opinion of capitalism. In 2011, the percentage of Americans under 30 who could have picked Sanders out of a police lineup was probably in the low single digits.

This is something new under the political sun. At no time in U.S. history have so many Americans supported a socialist presidential

bestseller status of Thomas Piketty’s Capital in the Twenty-First Century, by the success of the Fight for 15 movement in prompting cities and states to raise the minimum wage, and by two movements (in themselves, nonsocialist, but nonetheless radicalizing) of the minority young: the Dreamers, demanding citizenship for undocumented immigrants, and Black Lives Matter, demanding an end to discriminatory criminal justice. More broadly, it was foretold by the rise of a distinct civic left: With millennials and minorities reshaping urban America, 27 of the nation’s 30 largest cities now have Democratic mayors—the greatest urban partisan imbalance in the nation’s history. Many of those cities have enacted groundbreaking progressive legislation—instituting and raising the minimum wage, mandating paid sick days, forbidding their police forces from cooperating with federal immigration authorities, giving collective-

The Sanders campaign didn’t create a new left; it revealed it. In a recent New York Times poll, 56 percent of Democrats said they held a favorable view of socialism. candidate, much less called themselves socialists. The apogee of socialists’ electoral performance came in 1912, when Eugene V. Debs won 6 percent of the vote running for president on the Socialist Party ticket. What’s more, the mystery of this socialist emergence is deepened by the fact that there is no visible organization in the United States that is recruiting people to socialism. The Democratic Socialists of America (of which I’m a vice-chair) has just several thousand members, and is almost entirely absent from many American cities. At first glance, this new socialist presence just seems to have sprung up, unsummoned, unannounced.

And yet, it clearly has been building for years.

Its emergence was foretold by Occupy Wall Street, and the polls that showed most Americans looked positively upon its message—that the 1 percent has flourished at the expense of the 99 percent—if not on the protesters themselves. It was foretold by the surprising rise to

22 WWW.Prospect.org Spring 2016

bargaining rights to independent contractors.

What’s the substance of the new American socialism? I know of no surveys asking this newly hatched brood to define what they mean when they call themselves socialists, but we can make some educated guesses. First and foremost, they don’t counterpose socialism to a militant liberalism. Indeed, the rising number of people who identify as socialists coincides with a rise in the number who call themselves liberals. Whereas in 2000, only 27 percent of Democrats told Pew they were liberal, by 2015 that figure had risen to 42 percent, and among millennials it had increased from 37 percent in 2004 to 49 percent today. In Bloomberg’s poll of South Carolina Democrats, while 39 percent described themselves as socialist, 74 percent called themselves progressive, and 68 percent liberal: They weren’t asked to pick just one.

That suggests one key to Americans’ embrace of socialism: They’ve not been asked

to choose among left-of-center political identities. By running as a Democrat rather than as a third-party alternative, Sanders has made it possible for progressives to back socialists and to call themselves socialist without worrying that they’re voting for a Naderesque spoiler or marginalizing themselves from political life. As well, it’s likely that when Americans call themselves socialist, they mainly have in mind the social democratic policies—a decent welfare state, more power for workers, and diminished devotion to the gods of the market—of Western European nations.

While this mass self-identification as socialists is new, the substantive conflation of social democracy with American liberalism is not. In his 1972 book Socialism, Michael Harrington, the brilliant American socialist leader, called the American labor movement “an invisible social democracy”—the functional equivalent of openly social democratic Europe, sharing many of the same beliefs and goals (once the European social democratic parties had abandoned their commitment to nationalizing the means of production). To be sure, the U.S. unions were constrained to advancing social democratic policies within the Democratic Party, and only occasionally did they prevail.

And it was precisely those occasions that were viewed as the high points, not of American socialism, but of American liberalism: Social Security and Medicare, and the Wagner Act, which legalized collective bargaining.

For its part, the American right always alleged that these were really socialist programs—and last November, Bernie Sanders said that the right was right. In a speech at Georgetown University in which he offered his definition of socialism, Sanders said it was precisely those policies, advanced by two liberal presidents, Franklin Roosevelt and Lyndon Johnson, which illustrated his vision of socialism. Indeed, there’s little in Sanders’s own program that hasn’t been supported by many liberals who aren’t Sanders supporters.

While only six Democratic House members have endorsed Sanders, more than 60 favor single-payer health insurance.

Still, Americans on the left have almost always overwhelmingly preferred the liberal to the socialist label. Why, then, this sudden shift? One reason is the collapse of Soviet com-

awa k e n e d e y e / i s t o c k

munism, that ferocious pretender to the socialist throne, has allowed younger Americans to identify socialism with the social democratic policies of Western Europe.

But the prime mover of millions of Americans into the socialist column has been the near complete dysfunctionality of contemporary American capitalism as it affects all but the top. Where once the regulated, unionized, and semi-socialized capitalism of the mid20th century produced a vibrant middle-class majority, the deregulated, deunionized, and financialized capitalism of the past 35 years has produced record levels of inequality, insecurity, a shrinking middle class, and scant economic opportunities (along with record economic burdens) for the young. A recent study published in The Guardian revealed that the share of millennials describing themselves as middle class has fallen steadily since the turn of the century: from 45.6 percent in 2002 to a record low 34.8 percent in 2014, when 56.5 percent said they were working class, and 8 percent lower class.

Therein lies what’s new: The young women who are backing Sanders, for instance, are probably as feminist as their pro-Clinton elders, but their daily grievances against capitalism are as deep as those they hold against patriarchy, unlike many of their elders. In earlier times, many who backed programs such as those Sanders champions identified as liberal; but today, by calling yourself a socialist, you signal a break with and critique of an economic and political order that is rigged against you.

“On the reefs of roast beef and apple pie,” Werner Sombart wrote in 1906, all socialist utopias run aground. To the immigrants who formed America’s industrial working class, he argued, the living standards they found here so exceeded those they had left behind that going socialist became unnecessary. There are many other reasons why a mass socialist movement never came to America, but if, as Sombart contended, the reality and expectation of rising economic conditions, and the sense that this was a nation that rewarded work, was the key to socialism’s absence, then the reality and expectation of today’s declining economic conditions, and the sense that this is a nation that rewards only the rich, is the key to socialism’s—or, more accurately, socialists’—surprising presence.

In 1967, as the ranks of the anti-war

movement swelled both within and without the Democratic Party, a liberal activist named Allard Lowenstein took as his mission finding a prominent Democrat who would challenge Lyndon Johnson for the presidency the following year. Robert Kennedy kept putting him off, so eventually Lowenstein persuaded Minnesota Senator Eugene McCarthy to run.

If there’s a Lowenstein in the Sanders saga, it’s two left activists, Charles Lenchner and Winnie Wong. Both were in Zuccotti Park on the first day Occupy Wall Street was formed. Both were

Occupy Wall Street: Where it all began

digital activists—Lenchner putting his digitalorganizing chops at the service of unions and other progressive groups, Wong using hers to build the Occupy movement. With a group of Occupy alumni, Lenchner founded Ready for Warren, building a nationwide organization to persuade Massachusetts Senator Elizabeth Warren to run for president. “We wanted an alternative candidate even if we didn’t yet have a candidate who wanted to run,” Lenchner says, echoing a sentiment that Lowenstein once could have voiced. “It became a real force, but Ready for Warren didn’t entice her.”

Sanders, however, was interested. Lenchner and Wong transferred their energy to preparing a digital platform, People For Bernie Sanders, independent of Sanders’s campaign, through which progressives could organize their own pro-Sanders activities. “We launched the day he declared,” Lenchner says. Wong came up with a hashtag: #FeelTheBern.

They were not the only self-activating Sanderistas. The Sanders campaign’s decision to focus its early organizing on the first four caucus and primary states left his supporters in other states to find their own way to help his candidacy. In Chicago, a progressive municipal coalition that had been organizing against police violence and for racial and economic justice issues, Reclaim Chicago, hosted the city’s Sanders debate parties. In Seattle, says longtime labor activist Paul Bigman, the tens of thousands who flocked to a Sanders rally last fall were “not springing up from nowhere.

There are a lot of strong movements here which naturally gravitated to Bernie, which we saw back in 1999 at the WTO demonstrations. The movement was already here.” It simply hadn’t had a presidential candidate to call its own.

Just as the anti-war movement preceded and shaped the insurgent presidential candidacies of 1968 and 1972, so a diverse movement for a range of progressive causes—economic justice most centrally—preceded and shaped Bernie Sanders’s campaign. “This was somebody’s base to have and to grow, from Occupy to Ready for Warren to Bernie,” says George Goehl, the director of National People’s Action, a nationwide organization of local working-class groups, with which Reclaim Chicago is affiliated. “Now Bernie’s taken it to a whole new level.”

The trajectory of the young people who came out of the anti-war movement and worked for the presidential candidacies of McCarthy, Kennedy, and George McGovern offers one template for where Sanders’s supporters might end up. Many stayed active in Democratic politics, spearheading changes in party rules (most importantly, requiring delegates to be elected in primaries or caucuses rather than appointed by party bosses), forming organizations that favored a less militaristic foreign policy in the wake of Vietnam, winning over the Democratic Party to their position (over the opposition of the more hardline cold warriors in the party’s

Spring 2016 The American Prospect 23

the same; so will racial justice activists. That’s all going to happen in the next four years. This is a guarantee.”

Can they count on Sanders supporters to help them into office? Sanders’s campaign has amassed a list of millions of donors and volunteers. Yet candidates almost invariably husband their lists. Characteristically, they refuse to share them when their campaigns are over and tightly control the uses to which their lists are put. Given Sanders’s commitment to a revolution, and given the likelihood that he’ll not run a national campaign again, the hope throughout progressive circles is that this will be yet another convention that Sanders will shatter.

“The list is on everybody’s mind,” says one leader of an organization that’s endorsed Sand-

Stepping Out: Bernie Sanders and supporters in Milford, New Hampshire, on Labor Day 2015

nourished face a more fundamental challenge than the anti-war young of the 1960s confronted: transforming not just a party or a foreign policy, but the economic and political order of the past four decades. The Sanders campaign has called the young to the barricades, but what will they do when it ends? “All these people who are starting to question capitalism and the role of the superrich,” wonders Stephen Lerner, who led the campaign that successfully organized thousands of big-city janitors in the 1990s, “how do they dig into campaigns that substantively address those problems?”

Some in the Sanders generation will surely turn to electoral politics. “Environmental justice activists will run candidates for city council,” Wong predicts. “Housing activists will do

24 WWW.Prospect.org Spring 2016

ers. “There’s not a great history of this sort of thing working out. We’re all curious to see how willing Bernie will be to say that there are a range of vehicles, groups, and campaigns that will carry on the revolution, or whether he will just form his own thing,” which would monopolize the list.

“If all we end up with when the campaign is over is Bernie for America,” says a leader of another pro-Sanders group, “I’ll shoot myself.”

The group that’s had the most success

in building a vibrant left electoral force is the Working Families Party, which recruits, trains, and runs campaigns for hundreds of progressive candidates at the state and local level.

Its name notwithstanding, the WFP-backed

candidates generally run in Democratic primaries, frequently against more centrist opponents. While well established in New York, where it dominates New York City government, the WFP is only active in ten states.

National People’s Action, another group that mobilizes working-class voters for progressive candidates and causes, also has a presence in multiple states, though it has yet to develop a WFP-level of electoral expertise.

“Networks like the Working Families Party and People’s Action can be a home for some of the folks coming out of the Sanders campaign,” says Dan McGrath of Take Action Minnesota, a People’s Action affiliate that has waged successful local and statewide electoral campaigns. “But they are not all going to move to one place. It will require state-by-state negotiations to capture what Bernie has built.”

Some of the most vibrant and important organizations on the left today—Black Lives Matter, the Dream Defenders—either don’t have a history of electoral involvement or see their work as entirely separate from electoral activity. Stephen Lerner, whose organizing preferences run to the non-electoral, believes that Sanders’s electoral activists may nonetheless find some direct-action campaigns that address their particular needs. “The young Bernie supporters could take all the skills they used in the campaign,” he posits, “to build a list of five million student debt holders who would demand to bargain with the Department of Education and the banks over the debt or else refuse to pay.”

The leaders and activists of People For Bernie have no trouble, obviously, with electoral activity, but aren’t that keen on traditional organizational forms. “Nobody can centralize the energy” that young people have exhibited on Sanders’s behalf, says Wong. Adds Lenchner, her colleague, “These people’s inclination is not to ask whom should I join, but what should my friends and I do? There’s a move away from formal structures; it’s a marriage between technology and the needs of this generation.”

“There is a political culture clash,” says one labor leader who’s worked closely with the People For Bernie activists. “They would opensource this whole project and have individual activists do what they wanted. We believe in everyone marching together. It’s like the anarchists meet the Stalinists.”

jim cole / ap images

ranks), and in time taking over much of the Democratic Party themselves.

It requires no imaginative leap to see the Sanders generation taking a similar course— fighting to change Democratic Party rules and positions, working to marginalize the sway that Wall Street has held in party councils. Larry Cohen, the former president of the Communications Workers of America who founded Labor for Bernie, is building support among delegates to this summer’s convention for a resolution that would condemn the practice of Democratic candidates taking super PAC funds in future party primaries or caucuses. “Philadelphia has to make clear that this is now a populist party, not a finance-led party,” Cohen says.

But the forces that Sanders’s candidacy has

“Political change happens slowly until it

doesn’t,” says Working Families Party National Director Dan Cantor. “Bernie has changed what it’s possible to say.”

It’s precisely because the limits of the possible have so suddenly expanded, in ways that make possible the construction of a genuine democratic left, that the discussions on how to build that left have become so intense. At a moment when self-proclaimed socialists are suddenly to be found on street corners—not, as in olden days, on soap boxes, but simply on the corners, likely fiddling with their phones—they need to find ways to come together, to find their voice, to build a force, or forces, for a more egalitarian America.

“We’re one of many groups trying to figure out if there’s some way to extend at least some of this energy sparked by Sanders into enthusiasm for down-ballot progressive candidates and issue campaigns,” says Cantor. “We have to get the balance right between the energy of a swell of volunteer activity and the need to do long-term planning to mount a successful campaign. We don’t have to figure out everything to figure out something.”

Cantor has a clear sense of the challenge, at once electoral and doctrinal. “What we have to do is create a program that shows the contrast between what most working people want out of their government and what more corporateminded Democratic members of Congress are willing to do,” he says. “It’s not conceptually complicated, but it’s a lot of work.”

That challenge would grow steeper if the most left-wing (or just most intransigent) Sanders supporters declined to support Hillary Clinton in a general election against Donald Trump or Ted Cruz, thereby estranging the vast majority of progressive institutions and individuals. It’s inconceivable that Sanders himself or any of the traditional organizations that have backed his campaign would take that position, but some Sanders supporters have argued that Clinton is no better than the neofascist or extreme right-winger against whom she’ll likely face off. (The one historic antecedent for such lunacy is that of the German communists of 1932 and 1933, who argued that their rival left party, the Social Democrats, were a greater danger than the Nazis. That they were proven wrong was small consolation.) True to its open-source principles, Wong

says, People For Bernie won’t endorse a candidate, but she makes clear that the group plans to “release explainers” on the candidates and how close the race is in various states. “We’ll say, ‘Here’s why this is important if you live in a swing state.’ We’ll be responsible for, and to, the constituency we’ve created.”

As polling makes clear, the leftward movement of the Democratic Party is not confined to Sanders supporters. When Democrats gather in Philadelphia in July, Sanders delegates are likely to put forth a range of proposals— Cohen’s resolution that could take big money out of Democratic primaries, platform planks to further clamp down on Wall Street and oppose corporate free trade—that may well win the support of Clinton delegates and perhaps the nominee herself.

Whatever the organizational forms they may take, the Sanders forces will surely play a role that’s critical—in both senses of the word—

Economic upheaval has redefined the

Democratic Party before. In the 1920s—like the 1990s, a time when business dominated policy and regulation was shunned—the Democrats’ national chairman was John J. Raskob, a financial lieutenant of the Du Pont family, whose ownership of General Motors he helped secure. In the 1930s, as general strikes and an emboldened left pushed Franklin Roosevelt to enact groundbreaking economic reforms, Raskob helped found and fund the Liberty League, which opposed Roosevelt’s re-election.

If the Sanders revolution is going to roll on, it must begin with a kindred redefinition of the Democratic Party—likely estranging in the process such Wall Street figures as Robert Rubin, whose deregulatory, pro-corporate preferences dominated Democratic policy in the 1990s just as Raskob’s did in the 1920s. Indeed, when the Democrats convene in Philadelphia, the Sanders forces are likely to proclaim that theirs

Some Sanders delegates want to submit a resolution to the national convention condemning the use of super PAC funds in future Democratic primaries and caucuses. to a Clinton presidency. Sanders himself and Elizabeth Warren will doubtless endeavor to ensure that Clinton’s economic policies aren’t formulated by or infused by the spirit of the usual suspects from Goldman Sachs. The Sanders left will stomp on anything resembling the kind of grand compromise that cuts into such core commitments as Social Security, should Clinton seek the same kind of across-the-aisle deal that Obama did in 2011. Their own solution to breaking congressional gridlock, Cantor argues, should be waging campaigns to win back purple House districts from the Republicans, not with centrist Blue Dogs but with economic populists—a task that will require much on-the-ground organizing by Bernie’s legions.

Should Trump or Cruz end up in the White House, the entire Democratic Party will shift to a militant oppositionist mode—a form of politics at which Sanders supporters, more than any other quadrant of the party, excel.

is just the latest in the occasional revolutions that have propelled the nation and the party forward, including the one that the Democrats held in Philadelphia 80 years before. In accepting the party’s 1936 nomination for his second term as president, Franklin Roosevelt made clear how far the nation and the party had come from its corporate conservatism of the previous decade. Terming financial and corporate leaders “the privileged princes of these new economic dynasties, thirsty for power,” he warned that they “sought control over Government itself,” that “the political equality we once had won” was becoming “meaningless in the face of economic inequality,” and that the preservation of “American institutions requires the overthrow of this kind of power.”

If the Sanders generation can speak to America as boldly as Roosevelt did, and build their power once Bernie’s campaign is done, they may just make their revolution yet.

Spring 2016 The American Prospect 25

The Other Woman Elizabeth Warren is not running, but she will be a major influence this year.

pa b lo m a r t i n e z m o n s i va i s / a p i m a g e s

By Ro bert Kuttne r

26 WWW.Prospect.org Spring 2016

S

he is the other woman of American politics—an unabashed progressive with a compelling life story, a woman who made it from hardscrabble roots on her own, not in partnership with a husband president. She made it all the way to teach at Harvard Law School, and she did it as a single mom by way of Oklahoma.

Notwithstanding the Sanders campaign, Elizabeth Warren is widely recognized as the leader of the progressive wing of the Democratic Party in Congress. She has defined, in a compelling phrase, why the economy is not serving ordinary people—the rules are rigged.

Warren is a hybrid of the breakthrough appeal of Hillary Clinton as a woman leader and of Bernie Sanders as a progressive straight-talker.

Unlike Sanders, she is a shrewd legislator with major practical accomplishments to her credit, one who knows how to play both an inside and an outside game, and how to lead from the left.

More than one Democratic strategist has suggested that if Warren had chosen to run, she might have handily beaten both Clinton and Sanders for the nomination. She has many of the strengths of Clinton and of Sanders without the blemishes. But of course, Warren did not run. At this writing, however, she is playing a fascinating behind-the-scenes role that could yet significantly influence this year’s outcome.

For starters, Warren is continuing to

stoke the progressive base and to articulate themes well to the left of Clinton. At the Netroots Nation convention in Phoenix last July, she declared: Insider Washington watched one of its own representatives nearly die from a gunshot to the head—just a hundred miles away from here—then refused to hear the country’s calls for commonsense gun reform.

Insider Washington worries that we’ve been too tough on Wall Street while the American people know that the banksters who broke our economy belong in jail.

Insider Washington labels any idea with a hint of spunk or ambition as “radical and outside the mainstream,” while millions of Americans show up for rallies or chip in ten bucks to support a democracy that reflects our true values.

Well I’m here to make an announcement to Insider Washington: America is far more progressive than you are!

Warren is one of the few Senate Democrats and the only woman not to have endorsed Hillary Clinton. She has resisted public and private pressure from the other women senators to get on board. Early on, when Sanders seemed a pure protest candidate, her holdout struck some as almost churlish. Now it seems shrewd.

Warren’s purpose was and is clear—to influence Clinton to become more of a full-throated progressive. Whether the credit is due to Warren, to Sanders’s broad appeal, or to the leftward shift of most rank-and-file Democrats, Clinton has indeed moved left with each succeeding primary. Now, as the likely nominee, Clinton will sorely need not just the support but the enthusiastic backing of both Sanders and Warren, and their active efforts to rally what will be a somewhat dispirited progressive base.

However, Warren’s efforts are not just aimed at influencing Clinton on the issues. Warren’s recent speeches suggest that her pressure on Clinton is substantially directed at what sort

of economic team Clinton would appoint. It obviously galls Warren that two Democratic presidents in a row have picked senior officials who came straight from Wall Street and soon went back to Wall Street. During 2009 and 2010, when drastic overhaul of a calamitous financial system was possible and necessary, and a Democrat was newly in the White House just as Franklin Roosevelt was in 1933, it was the influence of those officials that kept reform modest and preserved the business model of the big banks (see the accompanying interview).

Warren was a major player in those battles, the most influential leader of the loyal opposition to Obama and his economic team, first as head of the Congressional Oversight Panel that Congress created to monitor the bank bailouts, and then as a senator from Massachusetts. It is a mark of her tactical brilliance and toughness that she simultaneously did battle with Obama’s top two financial officials, economic chief Larry Summers and Treasury Secretary Tim Geithner, and yet persuaded the president to personally champion her own prime legislative goal, a strong and independent Consumer Financial Protection Bureau. When Obama, prodded by

Banking As Usual

An interview with Elizabeth Warren Robert Kuttner: Since the financial crisis of 2008 and the enactment of Dodd-Frank, what has changed and what hasn’t changed in the business model of the big banks?

Elizabeth Warren: The big banks have not fundamentally changed their business model. They’re still looking for the maximum profits, however they can wring them out, and they are willing to absorb high risks in order to produce those profits. That’s how they got the economy into trouble in 2008, and that’s what makes me very nervous about where we are today.

The good news is that Dodd-Frank has backed the banks out of some very risky practices. The Consumer Financial Protection Bureau means that building multibilliondollar businesses around tricking families doesn’t work anymore. Dodd-Frank has also forced the banks to take on higher capital requirements, which means they can absorb

more risk. So there are real changes, and Dodd-Frank is worth defending, but it simply hasn’t gone far enough.

Where hasn’t it gone far enough?

Part of it is how the banks take on these risks. And we are talking about the biggest banks; this is not about the community banks. In 2014, lobbyists working for Citigroup got a provision passed to blast a hole in Dodd-Frank by repealing the socalled swaps pushout rule. The idea behind the rule was simple: If a big bank wanted to enter into certain risky deals—like the credit default swaps that had been at the heart of the 2008 crisis—they had to bear all of that risk themselves instead of passing it along to taxpayers. Citigroup got that repealed.

As a result, banks can now take nearly $10 trillion in additional risks onto their balance sheets. For American taxpayers, that’s pretty scary. It means the banks have more

Spring 2016 The American Prospect 27

Wall Street types, decided not to appoint her as permanent head of that bureau, Warren found herself an even more influential job, winning a Senate seat from Massachusetts. In that role, more than any other senator, she made sure that Summers would not succeed Ben Bernanke as chairman of the Federal Reserve.

By all accounts, Warren is looking for firm commitments that Clinton would not be the third Democratic president in a row to hand the top economic and financial portfolios to Wall Streeters. This is doubly challenging, since the first of those presidents was Clinton’s own husband; and Hillary, like Bill Clinton, famously raises a ton of money from the financial industry. A line that repeatedly finds its way into Warren speeches and op-eds is “personnel is policy.” It is an astute observation.

In the speech to Netroots Nation, Warren declared: Three of the last four Treasury secretaries under Democratic presidents have had close Citigroup ties. The fourth was offered the CEO position at Citigroup, but turned it down.

risk, and it also means that regulating those banks is now much harder. Instead of a regulator just following basic banking practices— is there adequate capital, are their loans performing—the regulators have to know a lot about the derivatives market, which is much more complex. It’s a much darker market, meaning there’s not a lot of visibility into what’s happening, and it’s far harder for regulators to police. It’s both extremely profitable for the banks and extremely risky for the taxpayers.

So in effect, the so-called shadow banking system—products like derivatives—got taken inside the big banks.

Exactly right. Traditional shadow banking activities have been pulled inside the biggest financial institutions. Another problem is that the banks are just too damn big. The six biggest banks in this country

28 WWW.Prospect.org Spring 2016

The vice chair of the Federal Reserve system is a Citigroup alum.

The undersecretary for international affairs at Treasury is a Citigroup alum.

The U.S. trade representative is a Citigroup alum.

The person nominated to be deputy U.S. trade representative—who is currently an assistant secretary at Treasury— is a Citigroup alum.

A recent chairman of the National Economic Council at the White House is a Citigroup alum.

A recent chairman of the Office of Management and Budget went to Citigroup immediately after leaving the White House.

Another recent chairman of the Office of Management and Budget is also a Citi alum—but I’d be double counting here because now he’s the secretary of the Treasury.

And those are just the most visible parts. The revolving door spins for all the deputies and assistants and special assistants, too. …

are now 36 percent larger than the six biggest banks were in 2006— before the crash.

And with more concentration and more market share than before the collapse.

Yes, the American people were told they were too big to fail; and, despite Dodd-Frank, they are now even bigger. Dodd-Frank did not break those big banks apart.

Is there an analogy between the run-up to the housing bubble and the role that the big banks played in it, and the current situation with bank investments in an energy bubble?

In a structural sense, yes. But the energy exposure is not nearly as wide as the housing exposure was. For banks that have deep exposure in the energy industry, there’s real reason for concern.

They could lose a lot of money if low oil prices continue. But the risk is less systemic. In 2008, all

How would the world be different today if, when the economic crisis hit, Joe Stiglitz had been Secretary of the Treasury and Simon Johnson and Robert Reich had been key economic advisers? It’s time to wake up and smell the coffee. Personnel is policy. [emphasis added] In January, Warren’s office released a report about 20 notable enforcement and prosecution failures in recent flagrant cases of corporate crimes (see “Dangerous Bedfellows: The Stalemate on Criminal Justice Reform,” Rena Steinzor, page 72). In a New York Times op-ed, Warren wrote: Presidents don’t control most day-today enforcement decisions, but they do nominate the heads of all the agencies, and these choices make all the difference.

Strong leaders at the Environmental Protection Agency, the Consumer Financial Protection Bureau and the Labor Department have pushed those agencies to forge ahead with powerful initiatives to protect the environment, consumers and work-

the big banks faced the same kind of risk—up to their eyeballs in the housing market and mortgagebacked securities.

So, on balance, is there less systemic risk in the banking system today than on the eve of the 2008 financial collapse?

We do have greater capital requirements, which reduces systemic risk. But with six of the biggest banks now being a third bigger than the biggest banks were before the financial crisis, it’s hard to say there’s less systemic risk. And with those half-dozen banks pursuing very similar business models, if one fails then several of them are likely headed over the cliff together.

Also, the regulatory capacity of our regulators to keep up with these ever-more complex institutions and financial products is not adequate, which means that the risk in the system is very difficult to identify.

Size, parallel business models, weak regulatory oversight—each risk magnifies the others.

What about consumer rip-offs?

The Consumer Financial Protection Bureau, which you successfully got included in Dodd-Frank, has helped, yet there are still all these sources of fee income and interest income at the expense of consumers. That’s a big source of bank profits.

I’m deeply impatient for change, but the signs of change are real.

And I’ll give you a couple. The consumer agency has only been up and operational for a little over four years, but it has already forced the largest financial institutions to return more than $11 billion directly to consumers—directly to the 25 million consumers they cheated. And that starts to matter, not only because—you know $11 billion here, $11 billion there, pretty soon you’re talking about real

ers. The Special Inspector General for the Troubled Asset Relief Program, a tiny office charged with oversight of the postcrash bank bailout, has aggressive leaders—and a far better record of holding banks and executives accountable than its bigger counterparts.

Meanwhile, the Securities and Exchange Commission, suffering under weak leadership, is far behind on issuing congressionally mandated rules to avoid the next financial crisis. It has repeatedly granted waivers so that law-breaking companies can continue to enjoy special privileges, while the Justice Department has dodged one opportunity after another to impose meaningful accountability on big corporations and their executives.

Each of these government divisions is headed by someone nominated by the president and confirmed by the Senate.

The lesson is clear: Personnel is policy. [emphasis added] There is also an ad hoc coalition of reform groups, including Public Citizen, Americans

money, playing off the old Everett Dirksen line—but because the banks themselves are starting to realize that consumer lending is no longer the Wild West, that it is no longer a lawless space where they can sell any piece of trash they can put together and they won’t get caught. So we’re starting to see some progress on that front.

And the other part that gives me hope is that the consumer agency has continued to lean forward. It has not been a tentative agency. It’s been careful to document everything that it does, to dot every ‘i’ and cross every ‘t,’ but even so, it stays hard and true in pursuit of its mission to level the playing field, to give families a fighting chance. I think that’s starting—starting—to change the whole consumer finance market. Cheating people just isn’t as profitable as it used to be.

One of the criticisms of the big

for Financial Reform, the Revolving Door Project, Bold Progressives, and others that are directing the same message at Clinton, using the website PresidentialAppointmentsMatter.com. They have petitioned both Clinton and Sanders to commit to not appointing Wall Street people to key top economic posts.

It’s hard to know how such commitments would be enforced, but Clinton will be under pressure to introduce her senior economic team well before the election. Obama appointed his in June 2008, and it disappointed many progressives because it included a lot of the usual suspects. If Clinton is elected president, Warren (and Sanders) will also be voting on confirmation of appointees, in what is likely to be a closely divided Senate.

The three most powerful such positions

are Treasury secretary, head of the National Economic Council, and chair of the Federal Reserve. Robert Rubin and Larry Summers held both of the first two jobs, and Summers coveted the Fed position. Janet Yellen has a 14-year term as a member of the Fed Board of Governors, but her tenure as chair expires in

banks is that instead of lending money to the real economy, they take risk-free money from the Federal Reserve and make risk-free investments in Treasury securities, for risk-free profits.

That’s exactly right.

And yet, in a somewhat depressed economy, are traditional lending opportunities out there?

There’s a circular problem here.

If the big banks won’t lend to smalland medium-sized businesses, small- and medium-sized business start to dry up and the big banks say, “Hey, there aren’t many small- and medium-sized businesses to lend to.”

The real problem is that the business model for the big banks has shifted. They now do two kinds of lending: at one end, make loans to the corporate giants. Those loans have to be handcrafted, but they’re very profitable, so it pays off. On the other end, they’ll lend

2018. The second-tier economic jobs are director of the Office of Management and Budget (OMB) and chair of the Council of Economic Advisers (CEA). In the Bill Clinton and Obama administrations, people who were safely pro– Wall Street got all four of the top jobs, and a liberal sometimes chaired the CEA—a staff position rather than one with direct power.

Who is jostling for the top economic posts in a Hillary Clinton administration? The possible candidates include former OMB Director Peter Orszag, a Rubin protégé now vice chair of investment banking at Citi and soon to take a similar job at Lazard; Antonio Weiss, a former head of mergers and acquisitions at Lazard, counselor to current Treasury Secretary Jack Lew (Weiss’s appointment to be a Treasury undersecretary, subject to Senate confirmation, was blocked by one Elizabeth Warren); Gene Sperling, who has held several senior economic posts in the Clinton and Obama administrations as well as stints on Wall Street, but never Treasury secretary; and Gary Gensler, currently chief financial officer of the Clinton campaign. Another Wall Street man very close to the Clintons is Tom Nides, who left his job as chief operating officer

to consumers. Those are much smaller loans, but they are all done based on the numbers—you know, on FICO scores, number of years living in the same residence, and so on. So consumer lending becomes a mass business that’s driven by spreadsheets. Caught in between are the small businesses, which require the same kind of careful, handcrafted look before the lending decision is made, but there’s not enough profitability in those loans to sustain the overhead. So the middle is thinning out. There’s credit available at the two ends, but not in the middle, and the real Main Street economy suffers. Over the long run, that shift in lending will have a devastating effect on our economy.

And meanwhile, the big bucks are also made from the capital market activity, from trading rather than investing.

Yeah, and that’s exactly why we need a new Glass-Steagall Act to break up the biggest banks. Breaking the banks apart would have two profound consequences. First, just to make them smaller. Second, to change a business model that lets giant banks use the low-cost, FDICguaranteed funds in grandma’s savings account to fund high-risk activities in the shadow banking market. Right now, giant banks have a big competitive advantage over everyone else in shadow banking and over everyone else in traditional banking. This is how the big banks beat out the community banks even though they often offer an inferior product to consumers.

That’s still there despite Dodd-Frank.

It’s not only there despite DoddFrank, it is there in part because of the swaps pushout repeal that Citigroup and their friends were

Spring 2016 The American Prospect 29

at Morgan Stanley to be a deputy secretary of state under Clinton and is now back at Morgan Stanley as vice chairman. Ron Bloom, investment banker and adviser to trade unions and architect of Obama’s auto rescue, has also been rumored as a Clinton cabinet pick, but much more likely as Commerce or Labor secretary than for one of the power positions.

Of these, Gensler is the one who might be acceptable to both centrists and progressives.

He is a onetime Wall Street insider (co-head of finance at Goldman) who got religion as an unexpectedly tough regulator at the Commodity Futures Trading Commission and became an ally of Warren. He has both the Wall Street experience and the anti–Wall Street experience.

Clinton goes out of her way to let it be known that she also consults Joseph Stiglitz, the rare progressive to have held senior posts including chair of the Council of Economic Advisers and senior vice president of the World Bank, and who is even more of a progressive now than then. It would be truly revolutionary if Clinton were to appoint him as either Treasury Secretary or chair of the National Economic Council.

I have no knowledge of any direct conversa-

able to drive through in 2014 that we fought against. Also, by keeping commercial banking and investment banking together—which used to be prohibited by GlassSteagall—regulatory oversight is more slipshod. It’s not because the regulators are bad people; it’s because they are bank regulators trying to regulate giant financial conglomerates that are involved in commodities trading [and] other activities that are almost impossible to fully police. Today, a bank regulator needs to know whether there’s adequate insurance on a ship in the Strait of Hormuz in order to evaluate whether or not there’s adequate capital set aside against the risk of loss. So one of the consequences of this big, complex system is that neither the banking nor the shadow banking is adequately regulated.

What would a new Glass-Steagall

30 WWW.Prospect.org Spring 2016

tions between Warren and Clinton about any of this. It seems to be all about signaling. Clinton has obviously heard the message, though she has kept commitments vague. During the March 9 Democratic presidential debate, she did say in response to a question about her economic team, “I will be looking for people who will put the interests of consumers first, who will do more to try to make sure Main Street flourishes. And I will very much reach out and ask for advice as to who should be appointed, including to Senator Warren and many of my other former colleagues in the Senate.”

One other name that keeps coming up is Larry Summers. According to several sources, Summers is banging on the door of the Clinton campaign but the campaign is keeping him at a prudent distance. What does Summers want?

He has held every top economic policy job except chair of the Federal Reserve, a careercapping post that was snatched away from him when the nomination proved toxic to Senate liberals, led by Warren—one of the very few times in presidential history that senior figures in a president’s own party, in a public spat, dissuaded him from making a high-profile nomi-

for the 21st century do? Would it simply restore the law that was repealed in 1999, or are there new tricks that Messieurs Glass and Steagall didn’t anticipate in 1933 that need further regulation?

The financial markets have become much more complicated since the 1930s. The new 21st-century Glass-Steagall Act that I introduced with Senators John McCain, Angus King, and Maria Cantwell would cover new types of complex and risky financial products that have emerged. It also fills in the holes that the regulators punched in the original Glass-Steagall.

Also, our proposal includes some discipline for shadow banking. Right now, certain instruments that trade on the shadow market get preferential treatment if a debtor fails. The bill eliminates that, which would have the sobering effect of requiring those trading

nation before it was even sent to the Senate.

Summers, at 61, is almost a decade younger than Yellen. But it would take some doing for a President Hillary Clinton to dislodge the first woman chair (and a successful one) of the Fed in favor of a contender who has already been blocked once by Senate Democrats.

Summers, lately, has been highly visible, in op-eds and at events not far from the Clinton campaign, geographically or ideologically. In the last few months, he has spoken at the Peterson Institute, Brookings, and the Washington Center for Equitable Growth, which is a spin-off of the Center for American Progress, the think tank closest to the Clintons. In these speeches and op-eds, he has expressed concerns about wage stagnation and long-term slow growth and made the case for public investment. He has even offered qualified praise for a Sanders op-ed complaining about excessive financial industry influence on the Fed. Summers seems to be rebranding himself as more of a progressive, in keeping with the times and the shift in the Clinton campaign. So far, say my sources, despite the intervention of Robert Rubin, Summers’s longtime patron and confrere,

in the shadow markets to pay more attention to credit risks.

What other measures that were either not included in Dodd-Frank, or that were watered down by the regulations carrying out Dodd-Frank, would you like to see strengthened?

There are two basic principles we should be focused on when we’re talking about financial reform. First, financial institutions shouldn’t be allowed to cheat people. Second, financial institutions shouldn’t be allowed to force taxpayers to bail them out.

On both fronts, Dodd-Frank made real progress. But there’s work left to do. The consumer agency made it much harder to cheat people—but cheating still happens. Take a look at the carloan market, which looks increasingly like the predatory pre-crisis housing market. But the CFPB doesn’t have oversight over auto

dealers who may offer deceptive car loans. We should fix that.

And I already mentioned that while the capital requirements in Dodd-Frank made us safer, there’s still too much risk in the system.

Beyond a new Glass-Steagall to break up the biggest banks, we need the Justice Department and the SEC to get serious about enforcing our laws against financial fraud—and that includes holding executives responsible. I keep pointing out that it is not legally possible for a corporation to break the law unless individuals within the corporation broke the law. If we want to see real changes on Wall Street, break out the handcuffs.

You and other critics have called for a drastic simplification of the financial system, both to increase its transparency to regulators and to consumers, and to reduce its market power and tendency to pile on systemic risk.

the Clintons have not put out a welcome mat.

Summers and I had a revealing email exchange about the Wall Street revolving door that so troubles Elizabeth Warren. The exchange began with a pained message from Summers, objecting to the fact that a Prospect article by David Dayen on hedge fund speculators and Puerto Rico mentioned that Summers worked for the financial firm D.E. Shaw, one of the players in the speculation in the possible default of various kinds of Puerto Rico bonds. Summers pointed out that he does no work on Puerto Rico for Shaw, and characterized the reference to him in the piece as “drive-by character aspersion.”

In the course of the exchange, Summers objected to the revolving-door criticism and wondered what sort of post-Washington financial consulting work would be legitimate, adding that he continued to do the kind of lecturing and consulting that he did before entering government: “I’ve turned down opportunities of the kinds pursued by Paul Volcker and by most former treasury secretaries at substantial cost. What former financial official in your view has behaved appropriately since leaving a high position in the USG [U.S. government]?”

What would a simplified financial system look like? Could it serve the real economy with merely normal profits rather than super profits?

It’s not only possible—we’ve done it before. After the last major financial crisis—the Wall Street Crash of 1929—policymakers diagnosed what had gone wrong and changed the laws to make sure that excessive speculation and risk-taking on Wall Street couldn’t push the economy over a cliff. They put a cop on the beat—the SEC—to enforce basic marketplace rules.

They created a targeted government safety net—FDIC insurance— to make it safe to put money in banks, creating security for depositors and stability for the banking system. And they implemented Glass-Steagall.

What was the result? For half a century, those creative new rules worked. There wasn’t a single seri-

Well let’s see. Three who immediately come to mind are Sheila Bair, the former pro-reform chair of the Federal Deposit Insurance Corporation, who then went to the Pew Charitable Trusts and is now president of Washington College; Michael Barr, the Assistant Treasury Secretary who drafted much of what became the Dodd-Frank Act and is now back teaching law at the University of Michigan; and the late Harvey Goldschmid, perhaps the most effective progressive SEC commissioner, who returned to Columbia to teach law after his term expired.

But Summers is right—these are the exceptions. The revolving door is the norm. Summers is paid about $600,000 as a university professor at Harvard, and makes several million dollars a year on the side from speeches and Wall Street affiliations. Most people would consider his regular gig at Harvard a pretty good full-time job.

My guess is that Warren will endorse

Clinton when her nomination becomes inevitable. But there is plenty of room between an endorsement and deciding to work hard for a ticket. One could even imagine Warren on the

ous financial crisis. No crises, and the financial sector did its part to help produce sustained, broadbased economic growth that benefited millions of people across the country.

Then the 1980s swept in political change. “Deregulation” became the watchword of the day—less oversight of Wall Street and no more Glass-Steagall. And not long after the cops were blindfolded and the big banks were turned loose, the worst crash since the 1930s hit the American economy.

The moral of this story is simple: Without basic government regulation, financial markets don’t work.

I’d add one other thing. A simpler financial system wouldn’t just help consumers and regulators—it would help investors in financial firms. Many of these big firms are too opaque for investors to truly understand. Simpler structures and

ticket, especially if Clinton gets the nomination and is eager—desperate—to enlist the support of the Warren-Sanders wing of the party, where most of the excitement now is. A ticket comprised of two women would be a breakthrough and a risk. The calculus would have to be that such a ticket would balance the enthusiasm gap now enjoyed by Trump, and that an even wider gender gap would cut in Clinton’s favor.

It would also set up Warren as Clinton’s likely successor, something that would surely excite the base. However, this is a long shot because it would shift Warren’s Senate seat from Democrat to Republican, since Massachusetts now has a Republican governor who would appoint a successor to serve for two years.

It is a mark of Warren’s influence and political acumen that, as someone yet to endorse a candidate, she could well have significant influence over the next president’s economic team. She is surely right that personnel is policy, a phrase that is original to her. I know of no other case of a senator from a potential president’s own party pursuing this sort of strategy. Elizabeth Warren plays progressive hardball and plays it well.

clearer business lines would give investors a better chance to monitor the firm’s risk-taking and sound the alarm when they think management is going too far. In many ways, smart investors with millions at stake should be our best regulators.

What is the connection between the financial industry’s concentrated economic power and its political power?

This is how the game is rigged.

Armies of lobbyists and lawyers flood the hallways of Congress and regulatory agencies, urging that every law and every rule tilt just a little bit more in favor of the rich and the powerful. Corporate executives and government officials spin through a revolving door, making sure that the interests of powerful corporations are carefully protected. Powerful Wall Street businesses pay barely disguised bribes, offering millions of dollars to trusted employees to

go to Washington for a few years to make policies that will benefit exactly those same Wall Street businesses. And corporations and trade groups fund study after study that just so happen to support the special rule or exception the industry is looking for.

Washington works just great for a handful of wealthy individuals and powerful corporations that manipulate the system to benefit themselves. But for everyone else, Washington’s not working so well.

And if we don’t change that, this rigged political game will break our country.

Are there any other comments you’d like to add?

Washington can keep on working for the rich and powerful—at least for a little while longer. But the American people are onto them, and I believe that change is in the wind.

Spring 2016 The American Prospect 31

What Good Are

Hedge funds ?????

Hedge funds make big returns by manipulating markets in ways that are illegal for small investors.

Remind us: Why are they permitted?

By David Dayen

32 WWW.Prospect.org Spring 2016

Hedge

Hog$

opposite: na stco / istock ; t h i s pa g e : j e f f n e u m a n n / s h o w t i m e

I

n the pilot episode of the Showtime drama Billions, a CNBC host grills Bobby Axelrod (Damian Lewis), founder of the hedge fund Axe Capital, at a public forum. “How do you respond to the criticism that hedge funds are the scavengers of the financial sector, and that a select few have undue influence on the markets?”

“We’re not scavengers,” Axelrod replies. “We’re white blood cells scrubbing out bad companies, earning for our investors, preventing bubbles. A hedge fund like mine is a market regulator.”

This claim invites an important debate: Do hedge funds represent an asset to the larger economy, or a menace? Do they really help make markets more efficient and transparent, or do they just exploit opportunities at the expense of other investors?

There are roughly 11,000 such funds—investment vehicles that control a mix of client dollars and borrowed money, with a corporate structure that exempts them from most investment-company regulations. We know that hedge funds have made a small subset of financial titans fabulously wealthy. The top hedge fund executives make a billion dollars a year or more. Hillary Clinton and Bernie Sanders are fond of saying on the campaign trail that the top 25 hedge fund managers earn more than all of America’s kindergarten teachers combined. But does this orgy of wealth create value, or merely extract value, at the expense of workers, companies, and other investors?

A fictional television show with revenge plots and emotional tumult and the usual allotment of Showtime-mandated soft-core pornography has more pressing concerns than these. It’s beyond the show’s scope to explain how hedge funds became such a disruptive force in our economy and our politics, or to distinguish them from other investment firms, rather than using them as a signifier for “Wall Street jerk.” In fact, amid the twists and turns, Billions barely even begins to explain what a hedge fund does.

Hedge funds actually sprang from the widening

of a small loophole in New Deal reforms meant to stop companies that trade on behalf of investors from ripping off their clients and threatening economic stability.

The Investment Company and Investment Advisers Acts of 1940 prohibited firms operating with pools of investor money from engaging in risky practices like short sales (bets that a stock will go down instead of up), leverage (investing with borrowed funds to amplify returns

and heighten risk), and corporate takeovers. Meanwhile, investment companies had to register with the Securities and Exchange Commission (SEC), disclosing their portfolios and their corporate structures. The 1940 laws also restricted certain types of fund manager compensation.

The purpose was to eliminate the kind of speculative risks with pools of capital that generated the Great Depression.

These rules remain in place for the $30 trillion mutual-fund industry, which also invests large pools of client funds. But wealthy families secured a loophole in the 1940 Acts for their own private investment managers. The law exempted advisors with fewer than 100 clients who didn’t offer services to the general public from complying with the regulations. Policymakers justified this by reckoning that “sophisticated investors” can handle the risks, while retail investors—“widows and orphans”—needed to be protected more stringently.

It took less than a decade for Alfred Winslow Jones, a former Fortune magazine scribe, to capitalize on the exemption, creating the first-ever hedge fund. A.W. Jones & Co., a limited partnership, employed two strategies, both explicitly banned by the 1940 Acts: leveraged purchases of certain stocks with borrowed money, and short sales of other stocks. Jones believed that these two techniques in tandem created a conservative, “hedged” portfolio, one that didn’t simply go up or down based on the vicissitudes of the market. “Hedge funds originally were all long/short equity,” says Rob Johnson, president of the Institute for New Economic Thinking and a former managing director at George Soros’s hedge fund. “You own equities, but the long ones are balanced by the short ones.

There’s no net exposure to equities.”

Legendary Lucre: Pretend hedgie Bobby Axelrod, on the Showtime series Billions

Spring 2016 The American Prospect 33

Loophole Exploiter: Alfred Winslow Jones, inventor of the very first hedge fund

Jones also invented the compensation structure used by modern hedge funds: an annual fee of 2 percent of all assets under management, and a 20 percent take of all profits above a certain threshold. Jones claimed he came to this figure because Phoenician sea captains paid themselves one-fifth of the profits after a successful voyage. In reality, that was a fiction to cover a tax dodge; by taking a share of investment profits, Jones could justify the earned income as capital gains, which had a far lower tax rate in 1949 (the top rate on capital gains then was 25 percent; the top marginal income tax rate was 82.13 percent). Today, the same dodge still operates, allowing hedge fund income to be taxed at lower capital gains rates.

Hedge funds claim to be able to beat the market—to achieve above-average returns, known in financial jargon as “alpha.” The fee structure, termed “two and twenty,” theoretically incentivizes and rewards hedge funds for attaining alpha.

The experimental A.W. Jones fund created a new class of money managers outside the regulatory restrictions of the 1940 Acts, with no requirement to disclose positions, even to its own investors. But this largely remained a privilege for the ultra-rich. Over the first 50 years of existence, hedge funds grew slowly; according to research firm BarclayHedge, by 1997 hedge funds only held $118 billion in worldwide assets under management.

But institutional investors, like university endowments and pension funds, wanted to get in on the action. They were attracted by the prospect of earning alpha, and they saw value in alternative investments uncorrelated with market performance. If hedge funds can go up even when the market drops, it diversifies their portfolios.

In 1996, President Bill Clinton signed the National Securities Markets Improvement Act (NSMIA), which overhauled state and federal responsibility for securities market oversight. It was part of a series of market deregulations in the Clinton era, advanced with broad Wall Street support and almost no resistance in Congress: After bipartisan agreement, the House and Senate finalized NSMIA with a voice vote. “We bring the financial markets of this country into the 21st century,” said lead bill sponsor Representative Jack Fields, who shortly thereafter left Congress to found a corporate lobbying shop.

Section 209 of NSMIA , largely unnoticed at the time, expanded the number of clients hedge funds could handle while escaping the 1940 Acts’ rules, from 99 to an unlimited number of “qualified purchasers.” This included individuals with $5 million in investments, and more important, insti-

34 WWW.Prospect.org Spring 2016

tutional investors with assets of $25 million or more. While the SEC wanted to raise that threshold, Congress “believed that investor protections could be maintained” at $25 million, according to a statement from conferee Representative John Dingell. Clinton didn’t even refer to this part of the law in his signing statement. But hedge funds salivated at the prospect of an entirely new funding source, including tens of billions in retirement savings from ordinary workers.

After NSMIA passed, hedge fund assets increased tenfold to $1.2 trillion within seven years, and they have doubled again since then. One out of every five university endowment dollars are now invested in hedge funds, according to the National Association of College and University Business Officers. BarclayHedge now estimates hedge fund assets under management in the third quarter of 2015 at $2.7 trillion. And that doesn’t count the borrowed money also invested by the same firms.

Meanwhile, a close cousin of the hedge fund industry, private equity firms, also proliferated. These outfits, previously called leveraged buyout firms (LBOs) until they rebranded after several celebrated scandals in the 1980s, use borrowed money to take control of companies, transform them, and spin them back out. There is overlap in what some hedge funds and some private equity companies do; both can benefit from stripping corporate assets, for example. But in general terms, private equity takes companies private, while equity hedge funds seek trading profits through the purchase and sale of public stock.

What the two have in common is that they live on exemptions from New Deal regulations. With hedge funds, these loopholes sprang from legislation. Private equity firms took advantage of pliant regulators who ignored actions that would not have been tolerated in an earlier era. Though they control companies and sell shares to investors (known as limited partners), private equity firms need not comply with SEC public-company disclosure requirements, because the offerings are considered private. Therefore, in different ways, a large subset of investment companies are exempt from rules requiring disclosures and prohibiting speculative plays—regulations that were created for very good reasons.

This expansion of unregulated investment companies— and the rise of “funds of funds” that allow institutional investors to place money into collections of hedge funds— put at risk the retirement savings of teachers, firefighters, and police officers, and rendered all but meaningless the “limited investor” rule to qualify for regulatory forbearance.

As a consequence, hedge funds are among the largest storehouses of aggregated wealth in the financial system. These loopholes also facilitated an expansion in hedge fund investing strategies, where long/short equity became just one technique among many. Most hedge funds no longer hedge; at least, that is not their net investment strategy. On the

contrary, most take big risks in pursuit of big rewards. And this transformation underscores how hedge funds stopped being a relatively conservative element of a niche investment strategy and started bigfooting the entire economy.

Hedge fund managers traffic in myths, all of which

fall apart on close examination. The first myth is that they make financial markets more efficient by betting against unsustainable or anomalous trends. A related claim is that they play a kind of regulatory function by policing markets and by putting salutary pressure on corporate executives.

For the most part this is nonsense.

For example, in the movie and book The Big Short, the heroes are hedge fund guys who perceived before others did that the housing market, pumped up by subprime loans, was a bubble that would soon burst. The protagonists made a lot of money by betting on a crash before others did. But did this make markets more efficient? The bubble kept inflating and the crash was still horrific. In fact, by creating a market in credit default swaps of housing bonds, hedge funds magnified the impact of the collapse to the financial sector, elevating it from a localized event to a global credit crunch.

Or take the case of William Ackman, whose Pershing Square hedge fund has waged a public battle with the Herbalife Corporation. Ackman contends that Herbalife, a direct marketing company of nutritional supplements, is a pyramid scheme. He has made massive bets against Herbalife, and has spent a small fortune trying to discredit the company so that his bet pays off. So far, the loser has been Ackman. But if Herbalife really is a pyramid scheme, shouldn’t regulators rather than speculators with conflicts of interest be the ones to investigate that allegation? Indeed, there’s a fine line between hedge fund managers disciplining markets and manipulating them; the FBI is investigating whether Ackman made false statements to deliberately tank Herbalife’s stock.

Hedge funds are able to carry out self-fulfilling prophecies. By making big bets against a healthy company’s stock, they can take that company down—as a side effect of the speculation. So the claim that hedge funds function as quasi-regulators, or that this should be an acceptable delegation of responsibility, is preposterous. It’s the opposite of what they do.

Hedge fund managers also argue that they earn supernormal returns through superior knowledge of the global economy, creating the “secret sauce” that allows them to outpace the market. In addition to deciding which companies will succeed or fail, they discover market inefficiencies and identify global trends. They use this knowledge to bet on changes in sovereign bonds, spreads on a country’s corporate bonds, currency fluctuations, or commodity prices like oil. If they see trouble ahead for Asia, they’ll short anything with export exposure to Asian countries. If they

think the Eurozone will take off, they’ll make moves there.

Some hedge fund managers do make a lot of money by exploiting such knowledge. For example, George Soros once made more than a billion dollars by crashing the British pound, accurately sensing that it was overvalued.

And the business press has bought into the idea of superior insight, treating every pronouncement by hedge fund superstars like Ray Dalio or David Einhorn with the same reverence of a Treasury secretary or finance minister.

But often, the trading edge can come not from immersive study but simply by speaking to the right source. A number of hedge funds have been cited for illegal trading on inside information; the plot of Billions closely resembles the investigation of SAC Capital’s Steve Cohen for illegal trading activity. Recent court rulings threaten to make insider trading putatively legal, but do reveal that, for all the assumptions about deep economic knowledge inside hedge funds, they often get by with tips and rumors.

Most of the other hedge fund money-making strategies

By making big bets against a healthy company’s stock, hedge funds can take that company down—as a side effect of the speculation. involve pure financial engineering: using tax laws, speculative plays, regulatory forbearance, or opportunistic legal maneuvers to hoover up profits from almost anywhere.

For example, distressed-debt hedge funds specialize in finding corporations or sovereign entities in trouble and scooping up their bonds at a discount, and then pursuing aggressive courtroom strategies with the hope that they will be repaid at par, enjoying a huge payday. So-called “vulture” funds like Aurelius Capital Management and NML Capital have moved from Greece to Argentina to Detroit to Puerto Rico, picking at the carrion along the way. This creates huge rewards: In his holdout play in Argentina, Paul Singer of NML won 369 percent of principal on bonds he purchased for pennies on the dollar. Bracebridge Capital did even better, securing eight times the principal value. And winning for the vulture funds equals losing for citizens and workers, who must deal with austerity budgets and public employee layoffs as debt repayment takes precedence.

A handful of hedge funds use high-frequency trading to gain minuscule timing advantages over the market and convert them into profits. An SEC report from last October identified close to four dozen funds employing highfrequency trading, with 28 using it exclusively. These pure arbitrage plays, involving massive cancellations of orders and trades within a microsecond, create little value than

Spring 2016 The American Prospect 35

36 WWW.Prospect.org Spring 2016

ment, R&D, job creation. A recent study from three international researchers finds that activist campaigns decrease the long-term value of the firms they target.

But here is the most revealing false claim of all. Despite all these methods, and despite all the money pouring into the industry, the stark truth about hedge funds is this: On average, most of them don’t beat the market. Their net alpha is zero, or less.

It’s hard to precisely quantify this reality, because hedge funds don’t have stringent disclosure requirements, making it hard to be sure about average performance. For example, the HFR index, designed to track hedge fund performance, likely overstates returns because reporting is voluntary, meaning underperformers could simply opt to hide their numbers. Hedge funds that lose money and close don’t report results either. So the statistics are often skewed in favor of winners. But look at these estimates for last year, provided by LCH Investments. The top 20 hedge funds—out of 11,000— made $15 billion. The rest of the industry lost $99 billion.

Even bigshots like Pershing Square’s Bill Ackman lost money in 2015. And this year has begun even more disastrously.

If you go outside the top 20 super-managers, you find that hedge funds underperform in the S&P 500, index funds with a diversified mix of companies, balanced mutual funds, and, according to a Cambridge University study, a collection of stocks picked at random by monkeys.

According to other estimates, in 2014, hedge funds overall returned 3 percent; the S&P returned 11 percent. The spread was even worse in 2013.

In fact, hedge funds have lagged the S&P index and other benchmark portfolios going back to the early 2000s. Many investors and even hedge fund managers have acknowledged this for years. And there are analysts who believe that, if you adjust for leverage (the ability to use borrowed money to magnify returns), you can explain virtually all the alpha going back to the original hedge funds in the 1940s.

And of course, leverage magnifies the downside as much as the upside. “During the financial crisis a lot of hedge funds went out of business,” says Josh Pollet, associate professor of finance at the University of Illinois. “That tells us a lot about their exposure to risk.”

If most hedge funds don’t outperform the market

averages, why do they continue to grow? Why do investors and institutions around the world continue to pay higher fees for lower performance, making a handful of managers notoriously rich?

Practically every expert whom I asked that question had a different rationale. Some chalked it up to investor inertia, a refusal to reckon with the lack of alpha. Related to that is investors’ “reach for yield” in a low-interest-rate environment, where they will sign up with anyone promot-

kevin wolf / ap images

Robin Hood: Hedge fund manager and philanthropist George Soros. He crashed the pound—and crashed the party.

placing fractions of a penny into hedge fund accounts millions of times a day. Under the New Deal regulatory schema, this is a modern-day version of a venerable and illegal abuse known as trading ahead of markets. It merely produces profits for the high-frequency traders at the expense of ordinary investors.

So-called “activist” hedge funds accumulate stock in poorly performing companies (or companies with large cash surpluses) to dictate strategies to boards of directors and corporate management that will increase the stock price.

Activists have become so feared that just making public statements about management can boost shares, on the assumption that the board will cave. “It’s closer to intimidation by the Mafia than sophisticated business theories,” said Michael Kink, executive director of the union-backed Strong Economy for All Coalition. “Make us rich or we’re going to throw you out the window.”

This is a funhousemirror version of the work of private equity companies, which load up operating companies with tax-deductible debt and make their money by extracting dividends, often at the expense of workers or pensioners or investments that the company needs. Activist hedge funds keep the company public, but encourage the board to undertake similar schemes.

Hedge funds forced General Motors to buy back $5 billion in stock last year, leaking money to investors instead of improving the company. Activist fund Starboard Value wants to break Yahoo into pieces to extract value. Last year, they forced Darden Restaurants, which owns Olive Garden and other chains, into a sale/leaseback scheme to monetize the value of the company’s real-estate holdings—and hand them to investors.

Exerting pressure on firms to improve management and boost the stock price might seem like a mutually beneficial strategy for investors and companies alike. But higher stock returns, while enriching hedge fund investors, don’t necessarily yield rewards for a company or its workers.

When activist hedge funds counsel closing an unprofitable factory, outsourcing to a country with lower labor costs, increasing dividends, or buying back shares, they suck out future earnings. Companies must then cut back on the very strategies that make them healthy for the future—invest-

ing high returns, regardless of the veracity of the claims.

Others believe that even sophisticated investors can be seduced by eye-popping returns at the very top. Large university endowments like Harvard and Yale, for example, have invested in hedge funds for decades, reporting double-digit increases. But that longevity, and the size of their investments, gives them access to top funds like Bracebridge Capital, Yale’s secretive trading firm, and special fee rates available to longtime investors. Other endowments have to settle for smaller shops, and unlike Lake Wobegon, all hedge funds are not above average. A study of the University of California’s endowment shows that their hedge fund investments underperformed the rest of their assets in 10 out of 12 years, costing the university $783 million. Even the Ivies should worry about hedge fund exposure to risk; for all of Harvard’s endowment success, it lost 27 percent in 2009.

Other theories are more sinister. The actual returns from individual hedge funds remain maddeningly opaque, making it hard for investors to know whom to trust.

The sales job extends to third-party investment consultants, who have business relationships with the hedge funds to which they funnel investors. The International Business Times has reported on Angeles Investment Advisors counseling the pension fund of San Francisco to invest in hedge funds, when they reserve the right to collect additional fees if the pension fund agrees. Callan Associates, another adviser, has been sued by the retirement fund of Beaumont, Texas, by a private pension fund in New York State, and by others for receiving undisclosed annual payments from the investment funds they pitched to clients. In 2009, Consulting Services Group recommended that the pension fund of Shelby County, Tennessee, invest in a hedge fund that they ran themselves.

The most recent disclosure brochure from Lyxor Asset Management, another adviser, states openly that they have a conflict of interest, from a 0.35 percent fee they charge pension funds when they invest in affiliated managers.

Other strategies to rake in public investment capital resemble pay-to-play schemes. “Say I’m an elected official or an appointed official like a pension fiduciary, who needs campaign contributions to prevail in an election,” says INET ’s Rob Johnson. “The hedge fund guys say, if you arrange for me to manage $200 million from your pension pool, I’ll put a good portion of the fees into your campaign war chest.” Republican New Jersey Governor Chris Christie passed hundreds of millions in state pension money to hedge funds, and received millions in donations for his gubernatorial and presidential campaigns. As state treasurer of Rhode Island, Democrat Gina Raimondo performed the same trick with over a billion in state resources, using hedge fund donations to help become governor.

Simply projecting outsized returns for hedge fund investments allows a cash-strapped state to provide fewer

resources for pensions. Rhode Island can plan to put less into its pension fund if they assume a 10 percent return rather than 5 percent. If they miss the target, that’s the next governor’s problem; what matters is making a projection in the short term that allows them to shortchange public employees. So workers and teachers lose pension money they’re owed so they can make billionaires richer.

The two-decade explosion of hedge funds translates into manager triumphs regardless of returns: 2 percent off the top of the $2.7 trillion invested in 2015 is $54 billion. As author Les Leopold puts it, top managers routinely make a million dollars an hour. A bit of that wealth goes into philanthropy, and plenty more into ostentatious shows of privilege—mansions, yachts, private jets. But significant amounts get poured into the political system, much of it to retain a lax regulatory environment and build a force field around those profits.

Despite a decade of bipartisan support—from Donald Trump to Hillary Clinton—for ending “carried interest,” the

Most hedge funds have lagged the S&P index and other benchmark portfolios going back to the early 2000s. term for the maneuver that allows hedge fund managers to take their 20 percent share of profits above benchmark as capital gains instead of earned income, saving billions of dollars in taxes, the loophole remains intact. Various trade organizations and individual hedge funds have spent millions to ensure that. They’ve similarly fought to protect a separate tax loophole for their 2 percent management fees, which involves cycling money through offshore shell companies pretending to sell specialized insurance.

Overall, hedge funds spent $7.34 million in lobbying last year, according to the Center for Responsive Politics.

In addition to tax rules, hedge funds have been active in pressing to weaken regulations on derivatives, one of their key trading instruments. Defending the industry from disclosure requirements and limits on activities allows them to gouge their clients with hidden fees. Incredibly, most major institutional investors do not know precisely how much hedge funds charge them. A report from the Roosevelt Institute and the American Federation of Teachers looking at 11 pension funds’ hedge fund investments found that they paid 57 cents in fees for every dollar in net return.

Campaign contributions by hedge funds dwarf their lobbying outlays, as fund managers have become some of the most reliable mega-donors in America. Hedge funds delivered $52 million to candidates during the 2014 mid-

Spring 2016 The American Prospect 37

terms, and have already eclipsed that in this cycle. Political reporters herald hedge fund managers siding with presidential candidates, like the $11 million from Renaissance Technologies’ Robert Mercer to support Ted Cruz or the millions Elliott Management’s Paul Singer raised for Marco Rubio, as if they were blue-chip prospects in the NFL Draft. Hedge funds also bankroll think tanks and dark-money groups that seek to privatize public education, among other aims. “They are wildly distorting democratic governmental processes for their own benefit,” says Michael Kink of Strong Economy for All. All of this would be hard enough to take if hedge funds didn’t also represent a systemic risk. The funneling of massive amounts of wealth to a small collection of billionaires boosts inequality, and activist funds’ extraction of value out of companies hobbles communities and destroys jobs. But for the University of Illinois’s Josh Pollet, it’s hedge funds’ ability to use leverage that hooks them into the broader system, potentially producing a negative shock. While the

As political players, hedge fund managers have become the most reliable mega-donors in America.

Dodd-Frank Act did reduce direct sponsorship of hedge funds by big banks, it didn’t limit the ability of hedge funds to borrow capital from banks and engage in risky trades. “If a bunch of hedge funds try the same strategy at the same time, the concern is that hedge funds will do badly, pull down the banks, and the banks are vital for other activity,” Pollet says. Regulators take pride in their efforts to limit leverage by banks. But simultaneously allowing leverage to build in outside investment companies is like boasting about the new lock on the front door while leaving the back door wide open.

they acquire 5 percent of a company (known as a 13D disclosure). But they can wait up to ten days to disclose. The Baldwin bill would shrink that to two days, limiting the ability for the activist to tip off allies to rush into the fund at a lower stock price, profiting from the spike when the 13D disclosure goes public. This was supposed to be updated as part of Dodd-Frank, but the SEC has dragged its feet.

The bill would also restrict “wolf packs” of activist funds from individually buying just under the 5 percent threshold to skirt disclosure rules. If the wolf pack works together, Baldwin’s bill would count them as a single group and trigger disclosure. Finally, the bill would crack down on how hedge funds use derivatives to mirror their position in a stock, allowing them to amass larger stakes in companies and intimidate management. Often activists will create a “net short” position in a stock, designed to depress the price and expand the windfall. The legislation would put these derivatives under the auspices of the 13D law, forcing disclosure sooner.

Tax reform and tighter controls on high-frequency trading, while broader fights, would attack elements of the hedge fund industry. Reformers like Hedge Clippers, the anti–hedge fund coalition formed last year, also support banning placement agents that cajole investors into funds with which they have a mutual arrangement.

States and municipalities, particularly those with pension investments in hedge funds, can drive change. Last October, Scott Evans, the chief investment officer of the New York City Retirement Systems, demanded full fee disclosure for its hedge fund investments as a condition for future business. Fee disclosure can accelerate a trend of hedge funds cutting fees for investors to limit exits during the current downward cycle; “two and twenty” has increasingly become “one and fifteen.” Hedge Clippers has also called for a cap on exposure to hedge funds and other alternative

Shining Sunlight: Representative Tammy Baldwin of Wisconsin wants tighter regulation and better disclosure.

American life that solutions for minimizing their risk have proliferated in parallel. Dodd-Frank forced hedge funds to register with the SEC, but virtually nobody believes that having them give their name, rank, and serial number will make much of a difference. “The SEC doesn’t have the manpower or the technology to regulate hedge funds or any other part of the markets,” says Rob Johnson. Even with registration, hedge fund disclosure is minimal, and their activities, many of which would be banned under the Investment Company Act, can continue freely.

Senator Tammy Baldwin recently introduced legislation that specifically targets activist hedge funds. For more than 50 years, investors have had to disclose to the public when

38 WWW.Prospect.org Spring 2016

bill cl ark / cq roll c all / ap images

Hedge funds have pushed into so many aspects of

investments for pension funds and university endowments.

A more radical strategy is to force fiduciaries for institutional investors, bound to operate in the best interest of their clients, to rethink the entire purpose of the hedge fund investment. Currently, most fiduciaries still have this idea that so-called alternative investments like hedge funds enable them to diversify their portfolios and hedge risk, as well as increase yields. But as we’ve seen, hedge funds don’t really hedge anymore. More important, research from analysts as varied as Morgan Stanley, the French business school IPAG, and even the hedge fund AQR shows that hedge fund returns increasingly correlate with the broader market, particularly since the 2008 financial crisis.

If hedge funds go up and down alongside the market, and all but the top performers don’t even beat the market, the rationale for investing in them vanishes. A fiduciary recognizing this would have a duty to investors to step away from hedge funds. That’s already starting: The California Public Employees’ Retirement System, the nation’s largest, pulled out of hedge funds in September 2014, followed by a Dutch health-care workers’ fund the next year.

The quickest way to eliminate the risk to the economy associated with hedge funds is to reclassify them under the 1940 Acts. Their emergence was an accident of history, a gift to wealthy families. But the by-product of that gift has now grown to outsized proportions and shoved itself into practically every aspect of economic life. Putting hedge funds under the 1940 Acts would mandate disclosure, alter fee structures, and eliminate the use of leverage. It would extend the regulatory perimeter in a far sharper way than Hillary Clinton, whose campaign has vowed to rein in “shadow banks” like hedge funds, has so far promised.

In effect, putting hedge funds under the wise regulatory structure adopted in 1940 would put them out of business.

Though market forces take a very long time to correct damaging mistakes, sometimes they purge malefactors.

For close to a decade, quantitative analysts have built computer programs that mimic hedge fund alpha strategies, generating similar returns through passive rather than active investment, with far lower fees. These have grown to $50 billion in assets, a pittance compared to the hedge fund industry but a 25-fold increase since 2010. Robotraders come with their own potential abuses and require careful study. But maybe in a few years, outsourced factory workers and hedge fund managers can hold hands in solidarity and demand an end to having their jobs taken away by robots.

David Dayen is a contributing writer to Salon.com. His forthcoming book Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud will be published in May.

Hedging Education

How hedge funders spurred the pro-charter political network

By J u s t in M ille r

N

ot too long ago, school board races were quaint affairs. Even in big school districts, candidates usually only had to raise a few thousand dollars to compete.

But as the movement to marketize public education gained momentum, advocates broadened their focus from the federal level to state and local governments.

There, where campaign costs were substantially lower than in federal elections, the well-funded movement could more effectively leverage its political money.

One of the starkest casualties of that strategic shift has been the American school board election. A network of education advocacy groups, heavily backed by hedge fund investors, has turned its political attention to the local level, with aspirations to stock school boards— from Indianapolis and Minneapolis to Denver and Los Angeles—with allies.

In recent years, this powerful upstart operation has had tremendous, albeit somewhat stealthy, success playing politics at the local level, by cultivating reform leaders in areas with disappointing schools and a baseline desire for change. They have looked to building a state philanthropic infrastructure that can sustain local efforts beyond one election.

The same big-money donors and organizational names pop up in news reports and campaign-finance filings, revealing the behind-the-scenes coordination across organizational, geographic, and industry lines. The origins arguably trace back to Democrats for Education Reform, a relatively obscure group founded by New York hedge funders in the mid-2000s.

The Hedge Fund Connection

The hedge fund industry and the charter movement are almost inextricably entangled. Executives see charterschool expansion as vital to the future of public education, relying on a model of competition. They see testing as essential to accountability. And they often look at teacher unions with unvarnished distaste. Several hedge fund

Spring 2016 The American Prospect 39

managers have launched their own charterschool chains. You’d be hard-pressed to find a hedge fund guy who doesn’t sit on a charterschool board.

Consider Whitney Tilson. Straight out of Harvard, Tilson deferred a consulting job in Boston to become one of Teach For America’s first employees in 1989. Ten years later, he started his own hedge fund in New York. Soon after that, Teach For America founder Wendy Kopp took him on a visit to a charter school in the South Bronx. It was an electrifying experience for him. “It was so clearly different and so impactful,” Tilson says. “Such a place of joy, but also rigor.”

The school was one of two original Knowledge Is Power Program schools—better known as KIPP—which has since grown into a prominent charter network with nearly 200 schools in 20 states plus the District of Columbia, serving almost 70,000 students, predominately low-income and of color.

But back then, charter schools were still a rather unfamiliar novelty to most people. Tilson, however, was convinced that they were the future of education. He started dragging all his friends, most of whom were hedge fund investors, from Wall Street up to the South Bronx to see the KIPP school. “KIPP was used as a converter for hedge fund guys,” Tilson says.

“It went viral.”

Many critics of the corporate educationreform movement are quick to accuse proponents of seeking to cash in on the privatization of one of the United States’ last public goods.

And while there certainly are those in edreform circles who stand to benefit from a windfall of new education technology, testing, and curriculum services, hedge funders by and large do not fit that stereotype. Theirs is more of an ideological and philanthropic crusade, rather than a crude profit-seeking venture.

As Tilson explains it, hedge fund managers almost exclusively come from well-off backgrounds and got the best educations in the world. “I personally never knew what the situation was like for families forced to attend their local school in the South Bronx, or Brooklyn,” Tilson says. “I didn’t know of anyone who dropped out of high school or college—much less that there were high schools where half the students dropped off.”

40 WWW.Prospect.org Spring 2016

In the mid-2000s, Tilson was on what he says was his 100th visit to KIPP. Dave Levin, KIPP’s co-founder, told him that Levin was trying to open up more schools but was running into political resistance. The fact that KIPP had been succeeding without unionized teachers was threatening to many in the Democratic Party, Tilson recalls Levin telling him.

Tilson was shocked that anyone would try to stymie the growth of KIPP, which had had some promising signs of success early on; he was even more shocked that it was mostly Democratic politicians opposed to charter expansion. Why, he wondered, would the party that’s supposed to be for the less well-off be standing in the way of educating disadvantaged children?

He directed his anger at what he says is the most powerful special-interest group in the Democratic Party: teachers unions. So in 2005, Tilson got together with a number of other highly educated, wealthy investors to build a political instrument to simultaneously advance pro-charter education reform and beat back what they saw as oppressive teachers unions.

“Our public school system—including charter schools—is a governmental system, and that means at the end of the day, it’s run by politicians,” Tilson says. “And politicians respond to votes and they respond to money. That means if you want to change a governmental system you’ve got to play the political game.”

The list of original funders is chock-full of Wall Street A-listers. There was Joel Greenblatt, head of Gotham Asset Management and author of the seminal high-finance book You Can Be a Stock Market Genius. There were Charles Ledley and James Mai of Cornwall Capital, perhaps most well known for betting big against the subprime-mortgage market, which was depicted in the book-turned-blockbuster The Big Short. There was David Einhorn, head of Greenlight Capital, who has drawn scrutiny on more than one occasion for financial wrongdoing.

Basically, if you were anybody who was anybody in hedge funds, you probably chipped in.

Tilson called the group Democrats for Education Reform (DFER), and set it with a mission “to break the teacher unions’ stranglehold over the Democratic Party.”

Early on, DFER identified then-Senator Barack Obama and then–Newark Mayor Cory Booker as promising politicians willing to break with teachers unions. DFER was instrumental in convincing Obama to appoint charter-friendly Chicago Superintendent Arne Duncan as secretary of education, and it spent a lot of time and money lobbying the administration to pursue reformist education policies like Race to the Top and Common Core. Tied to Obama’s coattails, DFER was now one of the most influential political players in the ascendant education-reform movement.

“All of a sudden, there were politicians all over the country who were willing to back education reform,” Tilson says. “We were able to raise more money, but there were also a lot more fields to play on.” As it found tremendous success at the federal level, DFER tried to maximize its newfound influence to leverage reform in local politics.

The Indianapolis Track

Beginning around 2010, charter advocates set their sights on Indianapolis. In 2011, the newly Republican state legislature passed a law that made it easier for new charter schools to open, quickly fueling their growth. Most new charters opened in Indianapolis, home to a struggling urban district that serves roughly 30,000 students. Many schools were failing to meet state standards, enrollment numbers were dwindling, and the clamor for a solution was growing.

At the epicenter of the city’s reform push was the Mind Trust, a local education-reform group that promotes more school choice, autonomy, and charter partnerships. To do those things, the district needed a friendly superintendent and a sympathetic school board. The Mind Trust helped bring in DFER , the advocacy group Stand For Children, and the network of political money that came with them.

Annie Roof was first elected to the Indianapolis Public Schools board in 2010, aspiring to bring a parent’s perspective and substantive change to the school district. She was fed up with poor communication from the district and what she says were unfair school spending patterns. She raised about $3,000 and won a seat. At first, Roof was the “reform” member on a board that featured a number

of strong supporters of the superintendent, Eugene White, who resisted integrating charter schools into the district.

Then the 2012 school board elections brought in a new wave of reformers. One was Gayle Cosby. She and her kids had attended the city’s public schools, and she had taught in the district.

Several months before the election, Cosby decided to run against a longtime incumbent for a seat on the district’s school board. “When I ran, I felt pretty strongly about the idea of autonomy in a broad sense and felt as a teacher, a lot of what I wanted to achieve with my students was limited by a top-down feeling of control,” she says.

She was independently running her campaign for several months, trying to build a rapport with local voters. Then, as the election neared, her openness to “reform” attracted the attention of DFER , which had recently launched an Indiana chapter to build off of the state’s recent changes to public-education law.

It quickly zeroed in on building a pro-charter majority on the school board.

DFER pumped more than $40,000 into Cosby’s campaign, hiring her a campaign manager, orchestrating several direct-mail flyer blasts, and buying up radio spots. This was unheardof in Indianapolis school board races.

“At that point, I felt a loss of control in certain respects,” Cosby recalls.

“The way they were able to win was through the money, through the messaging,” says Cosby, adding that about ten mailers were sent on her behalf. “That’s a huge sum of money; that’s pretty insurmountable when the public lacks understanding about these issues. The average voter saw the potential for something shiny and new.”

By the end, Cosby had raked in a total of nearly $80,000. Two other reform candidates were elected with more than $60,000 in support, including $10,000 checks from former New York City Mayor Michael Bloomberg.

Before she was even sworn in to her seat on the board, it became apparent that Cosby’s idea of reform was different than DFER’s. She and the other new board members were invited to what she describes as a secret meeting at Eli Lilly, an Indiana pharmaceutical company with major philanthropic initiatives. The meet-

ing featured a presentation pitching a plan to expand and fully integrate charter schools into the Indianapolis Public Schools system.

“It hit me fully in the face that the expectation of my role was to support a much larger, clandestine agenda in the city,” Cosby says.

“That’s when I realized that this role I was stepping into was going to be filled with problems.”

One of the new reformers was Caitlin Hannon, a Teach For America alum who had taught in IPS for two years before running. After she was elected to the board, she became the executive director of Teach Plus Indianapolis, a Bill Gates–backed organization that amplifies the voices of young reform-minded teachers, often at the expense of teachers unions. Hannon raised nearly $40,000, including contributions from Bloomberg, DFER funder Charles Ledley, and hedge funder Alan Fournier.

DFER , Stand For Children, and the Mind Trust

by refusing to play ball. Her idea of “reform” did not mesh with the organized reformers’.

“What money has made that word, I’m not a part of.”

So the network reached into its bench and recruited one of its own. Education consultant Mary Ann Sullivan was a former Democratic state legislator in Indiana who co-authored bills to expand the state charter-school law and revamp the teacher-evaluation and licensure process. She also sits on DFER’s national advisory board.

In her campaign to oust Roof, who had been elected board president, from Roof’s at-large seat, Sullivan raised more than $70,000, inundating the city with mailers, phone-banking, and paid media. She trounced Roof by more than 25 percentage points.

In Indianapolis, “school board races used to be run by those around the kitchen table. Now it’s no longer a local election.”

In 2013, the new school board bought out the superintendent’s contract and began looking for a turnaround expert who prioritized charter-school expansion, autonomy, and innovation. They unanimously chose Lewis Ferebee, who had previously worked in the Durham, North Carolina, public school district, overseeing a number of struggling schools.

Ferebee quickly unveiled a plan that would cut the size of the district administrative office and begin liquidating school buildings and renting out space to outside groups—including charters. Soon after, he was lobbying for a state bill that would allow IPS to form compacts with charter schools to operate autonomously within the district. Much to the dismay of many state Democrats and the state teachers union, the bill passed.

By 2014, the floodgates of outside money were wide open. Though DFER’s Indiana operation had shuttered due to poor local leadership, its presence was still strong in the school board elections.

By this time, Annie Roof had ticked off the local education reform organizations like

As Roof puts it, they took out parents and replaced them with politicians.

“I was incredibly disappointed with the city of Indianapolis to buy into such tactics of cheap mailers and phone calls,” Roof says. “School board races used to be run by those around the kitchen table. It’s no longer a local election.”

Elected along with Sullivan was LaNier Echols, an Indianapolis charter-school dean (who was promoted to principal after getting elected) who raised $65,000, and Kelly Kennedy Bentley, a former IPS board member who had also served as DFER Indiana’s treasurer.

With a near-unanimous reform majority now sitting on the board, Ferebee continued expanding charter-school partnerships— including handing control of one struggling elementary school over to a charter school favored by local charter advocates.

Cosby has since taken up the role as the board’s main dissenter. She believes that charter special interests have completely co-opted the desire for change in the schools and have promoted an agenda that sees charter schools and privatization as the only way to fix India-

Spring 2016 The American Prospect 41

napolis Public Schools. Four seats will be up in 2016, including Cosby’s, who has decided not to seek re-election as she focuses on a doctoral program.

A National Crusade

The same scenario playing out in Indianapolis has become increasingly common in school districts around the country, as national organizations—mirroring DFER’s strategy—have expanded into more and more states.

DFER currently has active operations in 13 states and the District of Columbia. Students First, a group launched by former D.C. schools chancellor Michelle Rhee, is operating in ten states. Stand For Children has 11 state chapters. The 50-State Campaign for Achievement Now (50 CAN) works in seven states so far. All of the groups have

Colorado super PAC, which went on to spend $90,000 running ads and mailing flyers in support of Happy Haynes, the incumbent atlarge member, and Lisa Flores, a former Gates Foundation program officer who was running for an open seat. Both won.

The flood of outside money that’s become a new normal in many school board elections is troubling for several reasons. And the stakes of 2016 couldn’t be higher. This year alone, 640 of the country’s largest school districts by enrollment are holding elections, with nearly 2,000 seats up for grabs, according to Ballotpedia.

All together, these districts educate around 17 million students—about 34 percent of all the K–12 students in the nation.

Compared with other political races where a campaign will stretch over the better part of a year (or more), school board races are

Behemoth groups sponsored by mega-billionaires have spent hundreds of millions to launch charter schools, sponsor think tanks, and define school reform. put school board races in their crosshairs.

Just weeks before the Minneapolis school board elections in 2014, which were expected to largely influence who the next superintendent would be, reports surfaced that detailed a massive influx of outside money in the race for two board seats. Both 50CAN’s Minnesota operation and Students for Education Reform (SFER , an astroturf offshoot of DFER) were campaigning for former Minneapolis City Council member and charter booster Don Samuels. The reports showed that the 50CAN Action Fund had raised $15,000 and SFER had raised $36,000. SFER board member Adam Cioth, who manages the Rolling Hills Capital hedge fund, provided the majority of SFER’s money—about $23,000.

Charter advocates also set up a PAC that raised more than $200,000 from three donors— Michael Bloomberg, Teach For America board member and venture capitalist Arthur Rock, and financier Jon Sackler, who sits on 50CAN’s and SFER’s boards. Samuels won his race.

Last year in Denver, DFER contributed a quarter-million dollars to launch the Raising

42 WWW.Prospect.org Spring 2016

unique. Filing deadlines are much closer to Election Day, meaning that the field of candidates doesn’t fully materialize until quite late and the actual races don’t heat up until about two months out.

That makes it more difficult to vet candidates and learn about connections. Campaignfinance reports exposing big money often pop up late—that’s if the locality even includes school board candidates in its database.

The coordinated and tangled web of charteradvocacy groups’ political activity makes their financing hard to track. National groups and big individual donors will often funnel money to local PACs, which in turn spend money independently from a candidate’s campaign.

Many of these organizations operate as 501(c)(4)s and thus don’t have to disclose donors or, depending on state law, even fully disclose independent expenditures. For instance, Stand For Children, which was the main funder in the 2014 Indianapolis school board races, still won’t disclose how much they independently spent, though local watchdogs have gathered that it was a huge sum.

“There’s significant spending happening below the surface,” says Ballotpedia’s Daniel Anderson. “It’s hard to gauge whether that spending balances the scales between unions and ed-reform groups or if the scales are still tilted significantly [toward unions].”

Behemoth groups sponsored by mega-billionaires like Eli Broad, Bill Gates, the Koch brothers, and the Walton family have spent hundreds of millions to launch charter schools, sponsor think tanks, and more broadly steer the ideological DNA of reform. In recent years, newer organizations have positioned themselves adjacently to that machine while focusing more explicitly on politics. Critics, though, say there’s little difference between groups like DFER and those on the right. DFER has taken heat for teaming up with the Koch brothers and the American Legislative Exchange Council (ALEC) in backing California referendums that attacked public education and unions, and in opposing a ballot measure to impose a tax on millionaires. They’ve also given money to a right-wing group that was a booster of Wisconsin Governor Scott Walker’s anti-union agenda, and took out an ad in 2012 blasting the Chicago Teachers Union in the lead-up to a strike.

For his part, Whitney Tilson insists, “We’re writing the checks, but we’re not dictating everything that’s going on.” In a written statement to the Prospect, DFER National President Shavar Jeffries added: “Our state chapters are not run by people flying in from Washington. They are staffed by local political organizers and education experts that are overwhelmingly from the communities they work in.” But the financial influence of the outside charter-boosters is an ill-kept secret.

The pushback against outside pro-charter money in local races has been steadily growing as more and more cities are impacted.

That anger likely becomes more visceral when it becomes clear to voters that out-of-state billionaires are trying to tip the scales in their own backyard.

“Now that we’ve seen two election cycles with huge sums of outside money, I’m hopeful that voters in Indianapolis have become enlightened to what’s really happening,” says Indianapolis Public Schools board member Gayle Cosby. “It could affect some change in 2016.”

The Real Stakes in

the Veepstakes Here’s what the Democratic nominee—and all of us— should consider in thinking about the vice presidency.

B y Paul Wa l d ma n

S

ometime in July—assuming nothing derails her nomination—Hillary Clinton will announce to the country the man or woman she has selected to be her running mate.

There will then ensue a flurry of biographical news stories about this newly famous politician, a passel of polls taken to gauge the public’s first impressions, and a virtual tsunami of chin-stroking and speculation about how the choice will affect the race. The more contrarian commentators will repeat some version of the disputed quote from John Nance Garner, the 32nd vice president, comparing the office to “a bucket of warm piss” (or in the more polite version, “warm spit”).

We seem to swing wildly back and forth between two extremes when talking about the vice presidency: We become briefly fascinated with the running mates when they’re named and act as though they might transform the race; then we quickly go back to treating the office as though it’s all but meaningless. Both of those perspectives are misguided. The truth is that the choice of a running mate matters very little for the final tally on Election Day, but can be critical to the administration’s success.

Garner’s was hardly the first insult tossed at the vice presidency. John Adams, America’s first vice president, complained in a letter to his wife Abigail, “My country has in its wisdom contrived for me, the most insignificant office that ever the invention of man contrived or his imagination conceived.” Nearly half a century later, Daniel Webster would turn down the office by saying,

“I do not propose to be buried until I am really dead.” To a great degree, however, the image of the vice presidency is stuck in the earlier ages those men occupied. Their evaluations may have been true at the time, but the vice presidency is different today in ways that make Clinton’s choice extraordinarily important.

In true Washington style, the modern vice presidency was born in a memo. Addressed from Walter Mondale to Jimmy Carter on December 9, 1976 (and actually written by Mondale’s chief of staff, Richard Moe), the memo laid out for the president-elect what his vice president demanded from the job. Mondale dismissed the only official duty of the vice president, serving as president of the Senate, as peripheral (“I assume this responsibility will take a minimum amount of time”) and laid out an ample list of requirements. He wanted full access to intelligence briefings; staff resources; attendance in key meetings of the cabinet and the National Security Agency, and with congressional leaders; and most critically, direct access to the president at a weekly meeting of the two men.

Carter accepted, and according to historians, Mondale became probably the most influential vice president up to that point in American history. He was smart enough to demand what he did from his boss, and with 12 years experience in the Senate, knowledgeable enough about Washington’s ways to help guide the former Georgia governor who had been elected precisely because he was an alien to the nation’s capital. Carter’s presidency may not have been a success, but Mondale changed the assump-

tion that the vice president would exert little or no influence over the administration’s course.

As of this writing, the Democratic primary campaign is still under way, though Hillary Clinton has taken a commanding lead in delegates. By the time you read this, she will likely be the nominee in all but name. In order to consider not just whom Clinton might choose to join her on the ticket but how she ought to think about the selection, a brief look at recent history is in order.

It is sometimes said that the choice of a running mate is the first important decision a president makes, but all too often we barely consider what that decision will mean for the presidency. During the campaign, we almost act as though the running mate will blink out of existence the moment the polls close. Vice presidential nominees are judged not on their potential relationship with the president or even their experience and skill in governing, but almost entirely on the politics of the campaign itself: how they’ll perform on the stump, what constituencies they might energize, how they’ll do in their one debate with their counterpart from the other party, and whether, in the end, they help the ticket or hurt it.

“All presidential nominees say the same thing, that they’re going to pick the one most qualified to be president,” says Jules Witcover, longtime Washington journalist and author of The American Vice Presidency: From Irrelevance to Power. “But how often do they do it? Not that often.” The idea that the running

Spring 2016 The American Prospect 43

mate could ascend to the presidency is often a throwaway line (“a heartbeat away”) but seldom explored in too much depth. “There have been too many cases where irresponsible choices have been made,” Witcover says.

He finds it particularly appalling that George H.W. Bush, who had nearly ascended to the presidency when Ronald Reagan was shot less than three months after taking office, picked a running mate in Dan Quayle who seemed so unready to lead the nation. “To me, [it] was astonishing” that the possibility of his running mate becoming president wouldn’t weigh heavily in making his choice.

Then there’s Sarah Palin, whose selection reflected more poorly on John McCain than anything else he did in 2008. It wasn’t merely the fact that Palin turned out to be a spectacular nincompoop; McCain might be forgiven for not having realized that in advance. What really shocks is the minimal thought he put into the selection. A man approaching his 72nd birthday might have considered seriously the idea that his vice president would have a good chance of being thrust into command of the federal government. Yet he selected a 44-year-old with zero experience in Washington who had been governor of Alaska for barely a year and a half.

Not only that, McCain made the selection with what appeared to be little or no deliberation. Up until the few days before the selection, when a phone call and meeting were hastily arranged, his contact with Palin had consisted of one 15-minute conversation at a meeting of the National Governors Association. “By the time he announced her as his choice,” Jane Mayer reported later in The New Yorker, “he had spent less than three hours in her company.” By all indications, Palin was selected because the campaign was facing the prospect of defeat and she seemed like a dynamic, unusual figure who could shake up the race—which she certainly did, at least for a while. How she might help McCain govern was an afterthought, if that.

Just a month before McCain plucked her from her frozen tundra of obscurity, she had told an interviewer: “I still can’t answer that question until somebody answers for me. What is it exactly that the V.P. does every day?”

It’s to Barack Obama’s credit that when he chose Joe Biden as his running mate, the selection was unlikely to affect his prospects for vic-

44 WWW.Prospect.org Spring 2016

tory much at all. Biden had waged two failed presidential runs, and on the stump was more likely to make a string of head-shaking gaffes than bring in some large number of votes. He hailed from Delaware, both tiny and reliably Democratic, so that wouldn’t make a difference. But Biden turned out to be an unusually good choice. Not only have the two men developed a strong personal relationship, but Biden has effectively performed many tasks that have gone largely unnoticed by the public.

For example, one of the great unsung accomplishments of Obama’s tenure is the 2009 Recovery Act, in which the administration not only stopped the economy’s bleeding, but also successfully distributed $787 billion in a rela-

The VP choice matters little for the tally on Election Day but can be critical to the administration’s success. tively short time with barely any of that famous “waste, fraud, and abuse” everyone talks about in Washington—not to mention no major corruption scandals. Biden oversaw and coordinated that implementation. As Michael Grunwald writes in his book about the law, The New New Deal, in the two years after it was passed, Biden “would convene twenty-two cabinet meetings on the Recovery Act, more than the president would convene on all topics, and visit fifty-six stimulus projects. He’d host fifty-seven conference calls with governors and mayors, and spend countless hours checking in, buttering up and banging heads to keep the cash flowing. He’d speak about the stimulus with every governor except Sarah Palin, who abruptly resigned to pursue a career in punditry and reality TV before he had a chance. He’d also block 260 Recovery

Act projects that didn’t pass his smell test.”

But how many Americans know it was the vice president who undertook this enormous project and completed it with unusual energy and skill? Barely any. But inside the government, people know, and even more important, they understand the close relationship Obama and Biden have. That makes it possible for the vice president to move with authority throughout the government, which means he can better accomplish the goals the president sets for him.

“As long as people think that he has access to the president, they’re going to take it seriously” when the vice president calls or tells them to do something, says Joel Goldstein, a professor at the Saint Louis University School of Law and the author of The Modern American Vice Presidency. Witcover agrees, and says that the relationship between the two is even more important than the skill in working government’s levers that the vice president brings to the job. “If the relationship is strong and close, the vice presidency itself rises in esteem,” he says.

So ideally, Clinton (or any other party nominee) would pick a running mate who 1) is ready to become president if the need arises; 2) knows the federal government well enough to navigate its complexity to accomplish difficult tasks; 3) has the political skills that are required both internally and externally, so as to act as an effective spokesperson for the administration; 4) is smart and thoughtful enough to give good advice; and 5) has a strong personal relationship with the president.

That’s a tall order, and as Goldstein says, “Most people who are elected president don’t really have a sense of how things are going to run until they start putting together their administration.” By then, they’ve already made their choice. Hillary Clinton probably has a better idea than most candidates of how her administration will run, but there’s no question that the political considerations of the campaign will figure strongly in her decision on a running mate.

That’s certainly the case with the one name that has been mentioned more often as a potential vice presidential candidate than any other, that of Julián Castro, the former San Antonio mayor who now serves as secretary of Housing and Urban Development. If you’ve read anything about Castro, it was probably

e r i c g ay / a p i m a g e s

Housing Secretary Julián Castro, often mentioned as a possible VP, speaks at a Clinton rally in San Antonio in October.

an article asking whether he might one day be vice president. “Julián Castro could be VP next year—or out of a job. He’s ready either way,” read a recent headline in The Washington Post.

“Julián Castro stumps for Clinton in Iowa, fueling VP chatter,” said the Dallas Morning News. “Hillary Clinton-Julián Castro 2016: An already inevitable Democratic ticket?” asked The Christian Science Monitor.

While other potential candidates are occasionally mentioned, only Castro has been discussed in this way, and for so long. It began in earnest when he was selected to give the keynote address at the Democratic convention in 2012, an honor that eight years before had been bestowed on another rising star, that one a state senator from Illinois. Though Castro was still mayor of San Antonio at the time, he was immediately seen as a future leader of the party: young, Latino, telegenic, and ambitious.

There’s no doubt that Castro looks like a candidate with a future. He and his identical twin brother Joaquín (who is now a congressman) were raised by a single mother and went on to

attend Stanford and Harvard Law. After being the youngest person ever elected to the San Antonio City Council, Julián became mayor of San Antonio when he was just 34; five years later, President Obama tapped him to head the Department of Housing and Urban Development.

The problem is that Castro’s resume is fine for someone who is up-and-coming, but not so much for someone who’s already arrived. He’ll be only 42 on Election Day. While San Antonio is America’s seventh-largest city with a population approaching 1.5 million, the mayor’s job is part-time; a city manager is the one really running things. And HUD is not exactly a glamorous outpost from which to become a national figure.

Castro didn’t come to the job as a housing expert (unlike his predecessor Shaun Donovan, now the White House budget chief), and while he seems well liked, he hasn’t brought about any stunning transformation in American housing policy.

There’s also a tautological aspect to all the discussion about Castro being on the Democratic ticket: People say he might be a future vice president for the simple reason that so

many people say he might be a future vice president. Once a few articles speculating about the possibility appeared, they seemed to generate their own momentum; now Castro can’t be interviewed without the subject coming up. In a January appearance on The Late Show with Stephen Colbert, Colbert gave Castro a series of flash cards with Spanish words on them to translate, since Castro did not grow up speaking Spanish at home and is less than fluent.

The last card read, “Yo soy el vicepresidente.”

But Castro’s central role in the VP speculation actually highlights a dearth of Latinos at the highest levels of Democratic politics.

If Clinton wants to pick a Latino as her running mate, she has a limited number of choices. Right now, there are no Latino Democrats serving as state governors, and the only Latino Democrat in the Senate is New Jersey’s Bob Menendez, whose corruption troubles make him radioactive. There are over two dozen Latino Democrats in the House, but none of them are nationally known, and House members don’t have a very good record as running mates.

Spring 2016 The American Prospect 45

So perhaps it isn’t surprising that the national Hispanic Chamber of Commerce formally endorsed Castro for vice president in January, even though it hadn’t yet endorsed anyone for president. Without any other obvious choices, it looks like if there will be a Latino on the ticket, it’s going to be Castro—unless Clinton considers the other Latino in Obama’s cabinet, Labor Secretary Tom Perez, who is widely respected among liberals for his work both at Labor and as head of the civil-rights division at the Justice Department.

But how much would either one matter to the election? Latinos are obviously a critical voting bloc, and Republicans’ inability to appeal to them is making it somewhere between difficult and impossible for them to win the White House. “Republicans need to hit at least 40 percent of the Latino vote” in order to win a popular majority, says Sylvia Manzano, a political scientist who is a principal at the polling firm Latino Decisions. Mitt Romney got 27 percent. But Manzano cautions that large numbers of voters won’t change their votes just because they see someone of their ethnicity on a ticket; they have to find agreement on policy issues as well. “Co-ethnic candidates can increase turnout and increase vote share when you have a case where it’s a co-ethnic candidate who also shares the issue priorities and the interests of the voter,” she says. But turnout could be affected, she notes, imagining that some voters might say, “I’m probably a Clinton supporter anyway, but I’m a little bit more excited to go out and vote because I also have the chance to elect a Hispanic vice president.”

There’s a broader context, which is that the Democratic ticket might already have secured a huge majority of Latino votes simply because of what the Republicans have been up to lately, in a primary campaign that featured candidates competing to see who could be harshest on undocumented immigrants, and a front-runner who said of Mexican immigrants, “They’re bringing drugs, they’re bringing crime, they’re rapists,” and who promises to build a wall on our southern border.

Nor was that much of a surprise for Latinos, Manzano says. “Frankly, for Latino voters this is more of the same. Before [Trump], there was Representative [Steve] King. Before him, there

46 WWW.Prospect.org Spring 2016

was Joe Arpaio. Before him, there was Tom Tancredo. We have heard this before. We got it. We understand. You don’t say those things because you want to win Latino voters.” Selecting Castro might reinforce those impressions, but it probably wouldn’t be necessary to keep Latinos in the Democratic fold.

But if Julián Castro or Tom Perez might

only affect Clinton’s electoral fortunes at the margins, that would make them no different from any other potential vice president. That’s because for all the momentary attention we pay to the choice, the running mate has only the tiniest effect on the election’s outcome.

For some time, political scientists have tried

All that time spent trying to find the perfect balance of age and geography and ideology is probably wasted. to determine how much difference running mates make to election outcomes, and the general conclusion is: not much. Even in 1992 with Dan Quayle and 2008 with Sarah Palin, the most derided running mates in recent years, most studies find the typical effect of a running mate on the ticket’s eventual vote to be tiny, on the order of less than 1 percent. One study did estimate that Palin cost McCain 1.6 percent of the vote, which could have been significant in a different year—but not in 2008, when Obama beat McCain by seven points.

And critically, the largest of those small effects are negative ones, meaning a running mate could hurt you, but probably won’t help you. It’s hard to imagine that Hillary Clinton will pick a running mate who has as profound an effect as Palin did, barring some kind of

shocking scandal that emerges too late to find a replacement. “You might get an initial bump” in the polls when the VP choice is announced, says Democratic pollster Anna Greenberg, “but generally it doesn’t make that much of a difference overall.” So all that time candidates spend trying to find the perfect balance of age and geography and ideology is probably wasted.

Nor do voters have much of a conception of what the vice president might actually do in office. “They see it as a largely ceremonial position,” says Greenberg, and they don’t even spend too much time thinking about the possibility of the vice president taking over for the president “unless there’s some reason to worry”—as in the case of a candidate like John McCain, who was perceived as elderly.

And in case Hillary Clinton is worried about seeming too old—she’ll be 69 in January 2017, older than any president except Ronald Reagan—voters don’t appear all that concerned. “I haven’t heard a focus group where anyone talks about her age,” Greenberg says. “People think she’s strong and energetic, she looks good—I don’t think anyone’s looking at her and thinking she doesn’t have the stamina to be president.” So a potential running mate’s youth shouldn’t be too much of a concern.

But more important, Hillary Clinton has been such a vivid public figure for so long that her choice of running mate may matter even less to the final election result than it would for other candidates. And if the vice president won’t make a difference in the polls that lasts more than a few news cycles, it could be liberating. Clinton could choose a young politician or an elder statesman, someone boring or someone exciting, someone from a red, blue, or purple state, and the outcome of the election will likely be the same. Which frees her up to think carefully about what kind of relationship she’d have with her vice president, and how effective that person would be at the tasks she sets out for them.

This raises a thorny question: Is there any Democratic politician whom Clinton might name as a running mate whom she’d see as, if not an equal, at least as having some breadth or depth of knowledge and perspective she lacks, so as to make them a truly trusted adviser?

Obama could benefit from Biden’s 35 years in Washington and deeper relationships with Congress; Bush could call on Cheney’s under-

standing of the executive branch. But Clinton has an unusual combination of experience: eight years in the White House as an unusually involved first lady; eight years in the Senate; four years as Secretary of State; and more broadly, more than four decades in politics and public life, dating back to Bill Clinton’s first run for office in 1974. It’s a little hard to imagine Hillary Clinton feeling like there’s a decision she can’t make until she hears what Julián Castro has to say about it.

j. scot t applewhite / ap images

If not Castro, who else is Clinton likely to

choose? Clinton might wait until the Republican candidate makes his pick, since the GOP is holding its convention first and the entire Republican ticket may not be known until the convention. Something about that ticket may call out for a particular kind of Democratic combination as a contrast.

Presidential nominees have also used the choice of a running mate to placate a party faction that the nominee does not represent, so it’s conceivable that Clinton could try to find someone who would bring Bernie Sanders’s supporters out to vote. Short of picking Sanders himself (which is somewhere between unlikely and impossible), the logical choice for a gesture in that direction would be Elizabeth Warren, who is worshipped by many of the party’s liberals. Besides exciting those base voters, Warren has built her career on advocacy for struggling Americans, and is closely identified with the issues of economic inequality and financial regulation, which could do at least a little to defuse some of the suspicions around Clinton being too close to Wall Street.

Apart from a few articles here and there (The Washington Post’s Dana Milbank wrote one in early March titled “Clinton must make Elizabeth Warren her vice president”), the idea of Warren as the running mate hasn’t gotten as much discussion as one might have expected given her popularity in the Democratic Party.

That may be because the idea of two women on the ticket seems radical to many people or risky in the face of a testosterone-laden Donald Trump candidacy. There are other potential female vice presidents, including senators Amy Klobuchar of Minnesota and Kirsten Gilli-

brand of New York (the Constitution doesn’t actually forbid the president and vice president coming from the same state, though it would require some tricky maneuvering with the Electoral College). But Clinton, cautious as always, may decide that an all-female ticket would focus too much attention on gender and alienate some male voters she needs.

Among the men, the class of potential vice presidents is already beginning to take shape.

Virginia Senator Tim Kaine may be the one mentioned most often after Castro; a former governor and mayor of Richmond who speaks fluent Spanish from his time as a Catholic missionary in Honduras, Kaine has a deep résu-

Senator Tim Kaine of Virginia: another possible Clinton pick

mé and well-tested political skills, even if he isn’t anybody’s idea of an exploding volcano of charisma. He was vetted by the Obama campaign as a possible running mate in 2008 but passed over in favor of Biden, and now has eight years more experience, particularly on national security issues (he sits on the Armed Services and Foreign Relations committees).

Naturally, other senators make up most of those likely to be considered. New Jersey’s Cory Booker is a more dynamic personality and could help keep African Americans motivated to maintain the high turnout they achieved in Barack Obama’s two elections. Sherrod Brown of Ohio is widely admired among progressives, so picking him could be another move (even if unnecessary) to bring Sanders voters into the

fold. Sheldon Whitehouse of Rhode Island, a former U.S. attorney and state attorney general, is the kind of solid, uncontroversial pick one might want in an unusually volatile election year.

Although other senators will be mentioned, one must keep in mind that control of the Senate will be in the balance on Election Day—the Republicans currently hold a majority of 54 seats but this year are defending many more seats than Democrats are. Which means that Clinton would be unlikely to pick a vice president from any state that has a Republican governor who would appoint a temporary successor when the running mate has to give up his or her seat. That would scratch Booker and Brown off the list.

What about a pick from outside Washington? There aren’t many obvious candidates, particularly after former Massachusetts governor Deval Patrick took a job at Mitt Romney’s old haunt, Bain Capital, which may have made picking him awkward. Clinton could select another governor (current or former), but if she thinks carefully about the job, she’ll want someone with a deep understanding of the federal government. Before Sarah Palin, the only running mate from either party in the last half-century without Washington experience was Spiro Agnew, and we saw how both of them worked out.

The truth is that for all that we deride the office of the vice presidency, doing the job well requires an unusual combination of talents and experience, something very few people possess. And it requires someone whom the president will respect and trust enough to build and maintain a close working relationship. Clinton could make a purely political selection, then shunt the vice president off to do nothing more than attend funerals and ribbon-cuttings. But if she did, her success as a president would suffer for it. So Democrats should hope she makes her first presidential decision with the care it demands.

Paul Waldman is the Prospect’s senior writer and weekly columnist. He also writes for The Week and the Plum Line blog at The Washington Post. He is the author of Being Right Is Not Enough: What Progressives Must Learn from Conservative Success.

Spring 2016 The American Prospect 47

School Closures: A Blunt Instrument Shuttering “failed schools” can have painful consequences for children and neighborhoods.

By Rac he l M . C o he n

I

n 2013, citing a $1.4 billion deficit, Philadelphia’s state-run school commission voted to close 23 schools—nearly 10 percent of the city’s stock. The decision came after a three-hour meeting at district headquarters, where 500 community members protested outside and 19 were arrested for trying to block district officials from casting their votes. Amid the fiscal pressure from state budget cuts, declining student enrollment, charter-school growth, and federal incentives to shut down low-performing schools, the district assured the public that closures would help put the city back on track toward financial stability.

One of the shuttered schools was Edward Bok Technical High School, a towering eightstory building in South Philadelphia spanning 340,000 square feet, the horizontal length of nearly six football fields. Operating since 1938, Bok was one of the only schools to be entirely financed and constructed by the Public Works Administration. Students would graduate from the historic school with practical skills like carpentry, bricklaying, tailoring, hairdressing, plumbing, and as the decades went on, modern technology. And graduate they did—at the time of closure, Bok boasted a 30 percent–higher graduation rate than South Philadelphia High School, the nearby public school that had to absorb hundreds of Bok’s students.

The Bok building was assessed at $17.8 million, yet city officials sold it for just $2.1 million to Lindsey Scannapieco, the daughter of a local high-rise developer. On their website, BuildingBok.com, Scannapieco and her team envision repurposing the large Bok facility into

48 WWW.Prospect.org Spring 2016

“a new and innovative center for Philadelphia creatives and non-profits.” They describe the “unprecedented concentration of space” in the Bok building for “Do-It-Yourself innovators, artists, and entrepreneurs” to congregate.

In August 2015, Scannapieco launched Bok’s newest debut, a pop-up restaurant on the building’s eighth floor, which served French food, craft beers, and fine wines. The rooftop terrace was decorated with student chairs and other school-related items found inside the building. Young millennials dubbed the restaurant “Philly’s hottest new rooftop bar,” while longtime residents and educators called it “a sick joke.” Situated in a quickly gentrifying community where nearly 40 percent of families still have incomes of less than $35,000, there was little question about who would be sipping champagne and munching on steak tartare on Bok’s top floor.

When it comes to closing schools, Philadelphia is not alone. In urban districts across the United States—from Detroit to Newark to Oakland—communities are experiencing waves of controversial school closures as cashstrapped districts reckon with pinched budgets and changing politics.

The Chicago Board of Education voted to close 49 elementary schools in 2013—the largest mass school closing in American history.

The board assured the distressed community that not only would the district save hundreds of millions of dollars, but students would also receive an improved and more efficient public education.

Yet three years later, Chicago residents are still reeling from the devastating closures— a policy decision that has not only failed to

bring about notable academic gains, but has also destabilized communities, crippled small businesses, and weakened local property values. With the city struggling to sell or repurpose most of the closed schools, dozens of large buildings remain vacant, becoming targets of crime and vandalism throughout poor neighborhoods. “These schools went from being community anchors into actual dangerous spaces,” says Pauline Lipman, an education policy professor at the University of Illinois at Chicago.

African Americans have been hit hardest by the school closings in Chicago, Philadelphia, and elsewhere. While black students were 40 percent of Chicago’s school district population in 2013, they made up 88 percent of those affected by the closures. In Philadelphia, black students made up 58 percent of the district, but 81 percent of those affected by closures. Closure proponents insist that shutting down schools and consolidating resources, though certainly upsetting, will ultimately enable districts to provide better and more equitable education.

It’s easier to get more money into the classroom, the thinking goes, if unnecessary expenses can be eliminated. But many residents see that school closures have failed to yield significant cost savings. They also view closures as discriminatory—yet another chapter in the long history of harmful experiments deployed by governments on communities of color that strip them of their livelihood and dearest institutions.

Today “the pain is still so raw, it’s not business as usual,” Reverend Robert Jones told me, speaking inside the Kenwood Oakland Community Organization, the oldest black grassroots center in Chicago. Indeed, threats

m. spencer green / ap images

West Pullman Elementary was one of 49 elementary schools the Chicago Board of Education closed down in 2013—the largest mass school closing in American history.

of further closures have not abated since 2013.

Jones was one of 12 local residents to go on a highly publicized hunger strike late last summer, starving himself for 34 days to prevent another beloved school from being shut down.

Their dangerous efforts proved successful; the district reversed its decision and pledged to reopen Walter H. Dyett High School, located on the South Side of Chicago.

Rather than shutter schools, residents argue, districts should reinvest in them. They point to full-service community schools, a reform model that combines rigorous academics with wraparound services for children and families, as promising alternatives. The effort to fight back against school closures has grown more pronounced in recent years, as tens of thousands across the country begin to mobilize through legal and political channels to reclaim their neighborhood public schools.

To talk about school closures, one must talk about school buildings. The average age of a U.S. public school facility is nearly 50 years old, and most require extensive rehab, repair, and renovation—particularly in cities. None of the school buildings constructed before World War II were designed for modern cooling and heating systems, and many schools built to educate baby boomers in the 1960s and 1970s were constructed hurriedly on the cheap.

Studies find that poor and minority students attend the most dilapidated schools today.

But the federal government offers virtually no economic assistance to states and local districts trying to shoulder the costs of building repairs. And things don’t look much better on the state level, either. Jeff Vincent, the deputy director of the Center for Cities & Schools at University of California, Berkeley, says that state spending has failed to keep up with the

needs in schools following the recession, leaving local districts to take on those capital costs even if they can’t afford to.

Despite contributing next to nothing toward school facility spending, the federal government encourages public-school closure and consolidation as a strategy to boost academic performance. Such school improvement interventions for “failing” schools began during the controversial No Child Left Behind era, but financial incentives to close schools and open charters really ramped up under the Obama administration.

“Our communities have been so demonized to the point that nobody thinks they’re good.

But no, our institutions have been sabotaged,” says Jitu Brown, the executive director of Journey For Justice (J4J), an alliance formed in 2013 that connects grassroots youth and parents fighting back against school closures. “These

Spring 2016 The American Prospect 49

districts—Newark, Chicago, Detroit—they all cry ‘broke’ as they shift major portions of their budget towards privatization while neglecting and starving neighborhood schools.”

Besides pointing to low performance, districts often justify closing schools on the basis of the facilities being “underutilized.” This refers to buildings deemed too large for the number of students enrolled, and thus too expensive for districts to operate. Critics of school closures say that how districts determine “utilization” insufficiently accounts for the variety of ways communities use and rely on school facilities.

Moreover, Mary Filardo, executive director of the 21st Century School Fund, says that urban districts tend to “completely underestimate” how much space is needed for special education and early childhood learning.

focus on how school closures impact school district budgets and student academic achievement. On both of these fronts, though, the record has not been impressive.

Researchers find that what districts promise to students, staff, and taxpayers when preparing to close schools differs considerably from what actually happens when they close. For example, most students who went to schools that were closed down in Chicago, Philadelphia, and Newark—whether for fiscal reasons or for low academic performance—were transferred to schools that were not much better, and in some cases even worse, than the ones they left. In Chicago, for example, 87.5 percent of students affected by closures did not move to significantly higher-performing schools. Children also frequently encounter bullying and

An alternative to school closings is creating full-service community schools that offer more than academics—a broad range of social supports that help anchor a neighborhood.

“When you’re resource-starved, you tend to take a defensive approach,” says Ariel Bierbaum, a Ph.D. student in the Department of City and Regional Planning at UC Berkeley.

“You’re in a crisis mode, you’re looking to balance your books, so you’re not necessarily thinking the most creatively” about how to use some of the seemingly excess facility space.

Public schools have always impacted communities in ways that go beyond just educating young people. Well-maintained school facilities can help revitalize struggling neighborhoods, just as decrepit buildings can hurt them. And whether it’s attracting businesses and workers into the area, directly affecting local property values, or just generally enhancing neighborhood vitality by creating centralized spaces for civic life, research has long demonstrated the influential role schools play within communities.

Yet most existing research on school closures has failed to explore the ways in which shuttering schools impacts these civic spheres; instead researchers have adopted a narrower

50 WWW.Prospect.org Spring 2016

violence at their new schools, while teachers are often unprepared to handle the influx of new students.

Moving students around can negatively impact student achievement, and closures exacerbate such mobility. In some cities, students have been bumped around two, three, four times—as their new schools were eventually slated for closure, too.

Not all research casts school closures in a uniformly negative light. One study found that New York City school closures had little impact—positive or negative—on students’ academic performance at the time the schools were shut down, yet “future students”—meaning those who had been on track to attend those schools before they closed—demonstrated “meaningful benefits” from attending new schools. Another study found that while most children experienced negative effects on their academic achievement during the year they transitioned to new schools, such negative effects were impermanent, and student performance rebounded to similar rates as their unaffected peers the following year.

Essentially, researchers find that there can be substantial positive effects if students are sent to much better schools than they ones they left; however, the reality is that most students do not go to such schools.

In addition to overselling academic gains, districts also tend to overstate how much money they’ll save from shutting down schools.

When Washington, D.C., closed down 23 schools in 2008, the district reported it would cost them $9.7 million. A 2012 audit found the price was actually nearly $40 million after taking into account the cost of demolishing buildings, transporting students, and the lost value of the buildings, among other factors.

Another study conducted by the Pew Charitable Trusts in 2011 found that cost savings are generally limited, at least in the short term, and such savings come largely through mass employee layoffs.

Bierbaum, however, has been studying Philadelphia’s school closures from a broader community-development and urban-planning perspective to understand how school closures, sales, and reuses are related to larger issues of metropolitan-wide racial and class inequality.

This means examining school closures in the context of neighborhood change, like gentrification or disinvestment, and in relationship to the city plans and policies that help facilitate that change.

In some cases, Bierbaum says that residents feel closures are “necessary” responses to dramatic demographic shifts, even if “draconian”; city officials are “doing the best they can to deal with things out of their control” in terms of fiscal management, she says. But in other cases, residents see closures as yet another manifestation of systemic oppression, closely related to other kinds of disinvestment within neighborhoods. “In this way, not only closures but also school building disposition is actually experienced as dispossession,” Bierbaum explains.

A majority of closed schools are converted into charter schools, with a second significant chunk repurposed into residential apartments.

Other buildings are demolished or left vacant.

Interviews with experts in several cities reveal that school district officials have not prioritized urban-planning questions, like those Bierbaum is asking, when deciding whether to close schools.

Clarice Berry, the president of the Chicago Principals and Administrators Association and member of a state legislative task force focused on Chicago school facilities, says the Chicago public school district was simply uninterested in discussing those sorts of civic topics. “At no time have they wanted to study that, or even been interested in discussing it,” she says. “The district spends all their time trying to keep us from getting data [on school closures] that could show us how they could make improvements.” While the task force has repeatedly asked the district to track kids who have been shuffled around from school to school, by and large Chicago and other urban districts have not carefully tracked how school closures have impacted students, families, and communities.

country, lifting up particularly successful examples and offering strategies on how to replicate their success. One such school was Reagan High School, a poor and minority school in northeast Austin, Texas, which adopted a community schools strategy five years ago. In 2008, the local district was threatening to close Reagan due to its declining enrollment and its below–50 percent graduation rate. Parents, stu-

Some states and local districts have been much more amenable to these types of partnerships than others. “Yes, there’s complexity. But my response is ‘welcome to modern life.’ Stop whining, we know we can do this,” says Filardo of 21st Century School Fund.

Political support for full-service community schools is also on the rise. Philadelphia’s new mayor, Jim Kenney, has pledged to create 25

b o b b r a u n ’s l e d g e r

Shortly after J4J began organizing,

another network formed—the Alliance to Reclaim Our Schools (AROS)—comprising ten national organizations, including the American Federation of Teachers, the National Education Association, and J4J. Through weekly email newsletters and support for on-theground organizing, AROS has helped mobilize individuals looking to fight for public education. Parents and community groups hope they can agitate districts to think creatively about facility space, and invest more in neighborhood schools.

In mid-February, AROS helped stage the first-ever national day of “walk-ins,” where students, teachers, and parents at 900 schools in 30 cities across the country rallied in support of increased school funding, local schools with wraparound services, charter school accountability, and an end to harsh discipline policies, among other demands.

Their action built on momentum that’s been brewing over the past two years around the idea of “full-service community schools,” or schools that offer not only academics but also medical care, child care, job training, counseling, early college partnerships, and other types of social supports. This school model, which dates back more than a century, can be particularly beneficial for low-income residents who face challenges like accessing transportation.

In February, the Center for Popular Democracy released a report on the roughly 5,000 self-identified community schools across the

Antoinette Baskerville-Richardson, a member of Newark’s elected advisory school board, taught in the city for more than 30 years.

dents, and teachers began organizing around a community schools plan to save Reagan from closure, and the district gave them permission to give it a shot. After expanding supportive services, like mobile health clinics and parenting classes, after changing its approach to discipline, and after expanding after-school activities, among other things, graduation rates at Reagan have now increased to 85 percent, enrollment has more than doubled, and a new Early College High School program has enabled many Reagan students to earn their associate’s degree before they graduate.

Implementing community schools can be difficult, particularly to the extent that it requires schools to adopt joint-use policies so that facility space can be shared with other public agencies and nonprofits, many of which have no prior experience working together.

new community schools by the end of his first term. New York City Mayor Bill de Blasio aims to create 200 community schools during his tenure. The new federal education bill passed in December even authorizes grant-funding for community schools, which has incentivized many other cities and states to begin thinking about how to take advantage of this opportunity.

I sat down with Antoinette BaskervilleRichardson, a member of Newark’s elected advisory school board, to learn more about her interest in expanding community schools.

With more than one-third of Newark’s children living in poverty, Baskerville-Richardson says local leaders have been looking for ways to address the harms of poverty while also supporting student achievement and school success. After five years of controversial education reforms pushed by Republican governor Chris

Spring 2016 The American Prospect 51

Christie and his appointed superintendent, Baskerville-Richardson says the Newark community is just plain tired.

“There was a period when all our efforts were basically just fighting against these reforms being imposed on our communities,” she explains. “At the same time, we realized that the conversation could not just be about what we were against, and we had to mobilize

are set to open up in Newark’s South Ward, its poorest area.

On the 60th anniversary of Brown v.

Board of Education in 2014, parents and community organizations in New Orleans, Chicago, and Newark filed federal complaints under Title VI of the Civil Rights Act of 1964. They alleged that school closures in their cities have

Jitu Brown, executive director of Journey for Justice (J4J), organizes grassroots education groups across the country.

around what we were for.” And so, a little over two years ago, public school leaders and local advocates began to really home in on the idea of full-service community schools.

“We began to do a lot of research, we got in touch with experts, talked with people from the Center for Popular Democracy, the Children’s Aid Society, and people involved on the national level,” Baskerville-Richardson recalls.

“We also started visiting community schools like in Paterson, New Jersey—which is also a state-controlled district—[and] in Orange, New Jersey, which has similar demographics as ours. We visited Baltimore, New York City; some of our people visited Cincinnati; we talked to people in Tulsa, Oklahoma. …

We’re really looking to dig into a model that has been proven to work.” Starting in the fall of 2016, five full-service community schools

52 WWW.Prospect.org Spring 2016

had a racially discriminatory impact on children and communities of color. The groups received legal assistance from the Advancement Project, a civil-rights organization.

Jadine Johnson, an attorney with the Advancement Project, says they chose to file Title VI complaints because they wanted to raise disparate impact claims. “When districts are making these decisions they don’t say ‘we’ll close black and Latino schools.’ They’ll say ‘we’ll close schools that are under-enrolled or under-achieving,’” she says. “But those decisions can still have discriminatory effects on black and brown students.” In Newark, for example, during the 2012–2013 school year, white students were nearly 20 times less likely than black students to be affected by school closures, despite what would be predicted given their proportions of student enrollment.

Ariel Bierbaum says her field research demonstrated that many Philadelphians understood school closures as symbols of continued and consistent disrespect and disinvestment for poor communities of color. “Many of my interviewees tied school closures to urban renewal, to their parents’ experience, … [to] the Jim Crow south and migrating north,” a legacy that dates back to slavery, she says. “For them, these closures are not a ‘rational’ policy intervention to address a current fiscal crisis.

School closures are situated in a much longer historical trajectory of discriminatory policymaking in the United States.”

J4J has also helped to bring a racial-justice lens to the school-closure conversation, namely by forcing the public to discuss it within the context of discrimination, segregation, underfunding, and marginalization—both inside and outside of schools. In some respects, there’s a seeming irony around efforts to save schools in poor and racially segregated neighborhoods—these are the same schools that were treated as expendable during the desegregation era. But residents understand that their schools aren’t closing for integration purposes, and if one looks closer, it is clear that aims to create more diverse neighborhood schools are still very much on the table.

In December, the Office for Civil Rights (OCR) at the Department of Education reached a groundbreaking resolution with Newark Public Schools to aid those who may have been negatively impacted by Newark’s closures.

Johnson, the Advancement Project attorney, says she believes the Newark OCR resolution “sends a loud message” to school districts that may be considering similar types of school closures. “We see this [as] a multi-year strategy,” she explains. “This resolution is hopefully the first of many agreements, and the first step to sounding the alarm for why public schools should remain public.”

Meeting with some parent activists who helped to file the Newark Title VI complaint, I wanted to see how they were feeling about the OCR resolution. Sharon Smith, the founder of Parents Unified for Local School Education (PULSENJ), thinks that irrespective of whatever remedies their superintendent proposes, it will take generations until Newark’s South Ward heals.

“It’s always very scary to me when people who are guilty of something, like the district is, say ‘Yes, we are guilty, but we’re going to fix this our own way without the input of the people who were hurt,’” says Darren Martin, another parent involved with PULSENJ. “We’re happy the OCR took our complaint seriously, but it feels almost like the police are policing themselves. How do you allow the person who helped design all these destructive policies [to] also design the remedy?”

In February, I visited Kelly High School, a

full-service community school on the southwest side of Chicago, serving a student body that’s more than 90 percent low-income. Kelly used to draw a large Italian, Polish, and Lithuanian population, but now predominately serves Hispanic students. With the help of the Brighton Park Neighborhood Council, a local community organization, Kelly offers all sorts of programs for parents and children, ranging from tax-prep classes and English-language instruction, to tutoring and political organizing. The academic improvement Kelly students have shown over the past decade has also been substantial— targeted interventions have helped more atrisk students stay on track to graduate, and the school is now ranked as a Level 2+ in the district’s rating system—where the highest possible score is a 1+ and the lowest is a 3.

But Kelly’s progress, both academically and as a civic institution, is threatened by increasing budget cuts, declining student enrollment, and the growth of charter schools in the surrounding area. In July 2015, the Noble Network of Charter Schools, the largest charter chain in Chicago, submitted a proposal to open a new high school a few blocks away from Kelly.

Students, parents, and teachers began mobilizing against the proposal, concerned that this new project would siphon even more resources from their already-pinched school, which had been forced to slash programs and teaching positions over the last few years. In October, 1,000 Kelly High School students walked out of class to protest the proposed new school.

Yet despite overwhelming local opposition, the unelected Chicago Board of Education voted unanimously to open the new charter.

It’s possible that over the next few years, Kelly High School’s fiscal strain will become just too

much to manage, and the school will be slated for closure, too. “The narrative to close schools is essentially a budget one, which can be extremely powerful,” says Filardo. Even if the budget savings turn out to be fairly small, or nonexistent.

One way to reduce budgetary pressures on schools, thereby helping prevent school closures, would be for states and the federal government to pay more, particularly toward local capital budgets. Decades of social-science research have shown how unsafe and inadequate school facilities can negatively affect students’ academic performance—particularly when a school has poor temperature control, poor indoor air quality, and poor lighting. Researchers also find that the higher the percentage of low-income students in a district, the less money a district spends on the capital investments needed to

district capital budgets, just as it contributes 10 percent to district operating budgets.

“Schools belong to the entire community, and it should be the state and federal government’s job to find the right policy levers so that we can really advance our educational and economic development together in the best, most equitable way,” she says.

Battles about how best to save and improve public education are sure to intensify in the coming months and years. No researcher has been able to conclusively say what the optimal policy intervention is for students in terms of boosting academic achievement. And some individuals are certainly more sympathetic to closing schools, particularly if it means their children could attend higher-performing district schools or charters. Even on the question

Schools belong to the entire community, and it should be the government’s job to advance our educational and economic development together in the best, most equitable way. keep school facilities in good repair. The most disadvantaged students tend to receive about half the funding for school buildings as their wealthier peers. And often, low-wealth districts spend more from their operating budgets on facilities—paying for large utility bills, more demanding maintenance for old systems, and the high costs of emergency repairs. It’s not a coincidence that affluent communities invest more in their public school buildings. “They improve and enhance their school facilities because it matters to the quality of education, to the strength of their community, and the achievement and well-being of their children and teachers,” says Filardo.

In other words, increasing state and federal spending could both help struggling urban schools, and also help fortify communities more broadly. Filardo thinks districts should be able to leverage up to 10 percent of their Title I funds to help pay for capital expenses— right now, Title I funds can only go toward local operating spending. Or, even better, Filardo thinks the federal government should start contributing at least 10 percent toward

of school governance, researchers have reached no clear consensus on whether state takeovers or local control is better for student outcomes or fiscal management. Nevertheless, there’s consensus that any system which generates uncertainty and distrust is a recipe for disaster.

Reflecting on the past four years in her city, Lauren Wells, the chief education officer for Newark Public Schools, notes that reformminded leaders expanded charter schools quickly without really taking into account the impact such decisions would have on existing schools. A recent report from the Education Law Center, a legal advocacy group, found that the combination of the state’s refusal to adequately fund New Jersey’s school aid formula, coupled with rapid charter-school growth, has placed tremendous strain on district finances, forcing Newark to make significant cuts to district programming and staff. “We really want to move the conversation away from charters versus district schools,” Wells says. “We’re trying instead to build a coalition around this idea that we are the guardians of all children. That should be the basis of any decision that we make.”

Spring 2016 The American Prospect 53

The Great Diversion Charter schools may or may not improve student outcomes—but they divert funds from other public schools.

B y Ga br ielle Gur l ey

W

hen Boston Mayor Marty Walsh learned of plans by the city’s public high school students to walk out to protest proposed budget cuts, he told them to stay in class. They didn’t. On a cool, sunny March afternoon, thousands of young people marched through Boston Common and converged on the Massachusetts State House, where the legislature’s Joint Committee on Education was holding a hearing on a ballot question that would significantly increase the number of charter schools.

Brighton High School senior Christopher Gayle left school, too, but he went into the building to testify. Gayle told state lawmakers that he had nothing against charter schools, but he blamed them for the cuts. “They’re taking away money from the Boston Public Schools,” Gayle said.

54 WWW.Prospect.org Spring 2016

Boston’s majority-minority public school system is the largest in the state, with nearly 57,000 students. The Massachusetts Board of Elementary and Secondary Education, the sole authorizer of charter schools, recently approved the addition of more than 1,000 seats in several of the city’s existing charter schools.

That expansion means that the district will have to transfer millions more in new charterschool tuition payments, on top of the nearly $120 million that already flows from district schools to the publicly financed, independently run charter schools.

Supporters of the Bay State’s traditional public schools have launched a new fight against a bifurcated system that they argue steers public dollars away from district schools across the commonwealth. It’s the state government that charters the new schools, so school district and municipal officials have

little say in whether a charter opens in a community and diverts funds.

When a student leaves a school district to attend a charter, that district transfers a tuition payment based on a district’s average per-student expenditure. To mitigate the financial impact of this transfer, a district receives a 100 percent tuition reimbursement from the state the first year but only 25 percent in each of the next five years.

Massachusetts currently has 81 charter schools. (Current state law caps the permitted number at 120.) Of the more than 950,000 public school students in the state, 40,200 (4.2 percent) attend charter schools. A school district’s payments to these schools are designed to not exceed 9 percent of its net expenditures.

In the state’s poorest-performing districts, the amount cannot exceed 18 percent. But that could change with the ballot initiative, and Massachu-

d av i d l . r ya n / b o s t o n g lo b e v i a g e t t y i m a g e s

Boston public school students protested budget cuts in front of the Massachusetts State House in March.

setts’s Republican governor, Charlie Baker, is a big supporter of charter-school expansion.

Charters were originally conceived as incubators that would germinate innovative practices that could be duplicated in traditional public schools. But the emergence of specialized for-profit education-management organizations, which approach running schools as a business, has alarmed some educators.

While a for-profit company cannot apply for a charter to run a school in Massachusetts, they can contract with a successful nonprofit applicant to handle a range of administrative matters, from hiring and firing teachers to dealing with facilities issues.

Today, Bay State superintendents, local school committee members, and even some public officials who support charters warn that an unprecedented expansion by way of the ballot box would further erode the resources available for the schools that the vast majority of students attend and would threaten the very schools that they were supposed to help save. Many fear that Massachusetts school districts have reached a tipping point that a sudden, substantial increase in charter schools could easily upend. the utility of charter schools in bringing

the students in underperforming districts up to the level of the highest achievers elsewhere in the state has been a theme of the public education policy debate in Massachusetts. The state’s public schools consistently come out on top of national education surveys and assessments, and charter schools have helped boost the state’s reputation for K­-12 excellence. But that paradigm coexists uneasily with one of the largest achievement gaps in the country, a situation that has fueled the expansion of charter schools, especially in urban areas.

One of the most divisive issues is how state dollars are allocated to charter schools. According to a Massachusetts Teachers Association statewide analysis of fiscal 2016 net tuition payments to charter schools, traditional public school districts are losing nearly $409 million to charters, out of total net school spending by these districts of about $11.6 billion. Tuition transfers hit small districts, which have little room for cost efficiencies, the hardest.

The Triton Regional School District serves 2,700 students in the northeast Massachu-

setts coastal towns of Salisbury, Newbury, and Rowley. Last year, the district transferred nearly $630,000 in tuition for 51 students who attended Newburyport’s River Valley Charter School. The final budget included $1.5 million in cuts to a nearly $40 million budget.

With a similarly sized school budget in the works for next year, the district currently faces roughly $632,000 in cuts. That means 11 teachers will go. There will be only one math specialist, instead of three, to oversee the debut of a brandnew elementary and middle school math curriculum. Some class sizes in kindergarten through sixth grade will increase. Even those cuts might still not be enough, which leaves the three towns hoping for either an increase in state school

Massachusetts charter schools must be nonprofits, but they can contract with for-profit management companies to operate them. assistance or more funds from local taxpayers.

Triton has shed a few hundred students over the past several years, but the enrollment decline masks an even more worrying indicator in the predominantly white district, which directly impacts the district’s budget. The numbers of special-needs students with the greatest challenges have increased. Those children are the most expensive to educate since they require specialized programs and services. District schools continue to grapple with the difficulties posed by having fewer dollars and higher percentages of students who require specialized education. Traditional public schools must provide instruction for every student. Charters, however, are not required to accept the same proportion of low-income or special-needs students that the district schools typically enroll.

“Charters filter out certain kids,” says Christopher Lubienski, a University of Illinois education professor. Low-income students who attend charters “tend to be the advantaged of the disadvantaged,” he says. “The poorest kids and the kids with the most costly special needs still go to public schools.”

A 2015 Massachusetts Association of School Committees study found that although charters do enroll some challenging groups like English-language learners, they are not doing so at the same rates as traditional public schools. Bay State charters also continue to under-enroll poor students, while children with more profound types of disabilities were also under-enrolled or not enrolled at all.

The public schools in the central Massachusetts city of Fitchburg serve about 5,000 students; nearly 50 percent are Latino. An analysis of this year’s state Department of Elementary and Secondary Education data found that while students whose first language was not English comprised more than 30 percent of the district’s students, the three charters that accepted Fitchburg students served lower percentages of those children, ranging from a high of nearly 20 percent at the Advanced Math and Science Academy Charter School in Marlborough to just 3.1 percent at Sizer School in Fitchburg, and a paltry 1 percent at the Francis W. Parker Charter Essential School in Devens.

The rates for English-language learners, which make up 10.4 percent of district students, were even lower: Roughly 2 percent of Sizer students were English-language learners; the Academy enrolled 0.1 percent; and Parker, zero percent.

The Fitchburg charters also enroll far fewer economically disadvantaged students: More than 50 percent of Fitchburg students fall into this category in the current academic year. At Sizer, only about 30 percent do. The numbers are even lower at the Advanced Math and Science Academy (5.7 percent) and Parker (3 percent).

Massachusetts does not distinguish between district schools that enroll more challenging children and the charter schools that do not, according to Fitchburg school committee member Sally Cragin. “They get a pass on needing to educate children with the same degree of needs that we have,” she says.

Fitchburg transfers roughly $2 million in tuition payments to the area charter schools.

Spring 2016 The American Prospect 55

The district also spends about $240,000 annually to transport the Fitchburg students to charter schools. But Fitchburg has more flexibility in its budgets than a small, rural regional district like Triton does. In his decade as superintendent, Andre Ravenelle matched charter competitors’ offerings with programs designed to keep academically talented students in the district, such as the Fitchburg Honors Academy at the city’s high school where students take only honors/pre­–Advanced Placement and Advanced Placement courses.

Pursuing grants and cutting energy and health-care costs has allowed Ravenelle to spare teachers from cuts. Instead, the district has laid off administrators: 12 in the past decade, with three cut just last year. Nevertheless, the district still faces annual deficits between $1 million and $2 million. (He also laments additional fiscal pressures from other district tuition payments that go to vocationaltechnical schools and other public schools in neighboring communities that Fitchburg students can attend.)

“If the money had not left the district, we wouldn’t be looking at deficits every year,” says Ravenelle, who was named Massachusetts Superintendent of the Year for 2016.

Thus the irony: Charters were intended as a gateway to better public education for the poor.

In practice, some of them, especially outside large cities, end up as taxpayer-funded, quasiprivate schools for the middle class.

In February, the state Board of Elemen-

tary and Secondary Education approved a charter school serving grades 6 through 12 that would accept students from Brockton, a small city south of Boston with high rates of poverty that has been lauded for the academic achievements of its minority students and has long resisted charter proposals.

Brockton Superintendent Kathleen Smith joined forces with Brockton public officials, including the mayor and the members of its State House delegation, for what proved to be a contentious and unsuccessful effort to convince the board to derail a new charter school proposed for the city. Smith, a 40-year veteran of the school system, is incredulous that the state board approved the New Heights Charter School given what she viewed as its lack of

56 WWW.Prospect.org Spring 2016

supports for English-language learners and students with disabilities, and an “appalling” middle school curriculum.

She estimates that 315 students would leave for the school and that the district would lose tens of millions of dollars to the charter over a decade—in a district that has already laid off 50 teachers and faces a significant deficit going into the next school year. Because of its weak local property-tax base, the school district relies heavily on state education aid.

Meanwhile, a large urban school district like Boston can find economies of scale in other sections of its $1 billion budget in order to avoid cutting core staff and programs. In the wake of Boston’s student protests, Mayor

“I just find it amazing that the conversation we have is about charter schools and not about fully funding public schools.”

Walsh backtracked from plans to cut a wide swath through high school teachers, support staff, and programs. Instead, district officials plan to look for savings in other areas.

But as charters continue to expand, Boston may run out of options. With statewide expansion currently capped, the Boston district schools have avoided the devastation that has radically reshaped public school districts in places like Cleveland, Detroit, and Washington, D.C. A 2013 Moody’s Investors Service analysis noted that one of the biggest threats to school district stability is continuing to carry certain operations costs as dollars shift away from the traditional public schools. Districts can close schools and move students, but pressure from parents, public officials, and teachers-union leaders may stand in the way of realigning costs to respond to student population declines.

“When you aggregate all the charter provid-

ers, I do think that it is accurate that a disproportionate share of resources are going on a per-pupil basis to charters,” says State Senator Sonia Chang-Díaz, who co-chairs the legislature’s education committee and is investigating ways to address the charter cap and other issues before a possible November vote. “It is also the case that money is being drawn away from district schools, not because necessarily too much is going to charters, but because where you once had one schoolhouse … you have two.”

Even a charter advocate like Walsh, a Democrat who testified before the education committee, conceded that under the ballot question, the proposed expansion of up to 12 schools each year would have severe repercussions on the municipal and the school system budgets.

“If you give us more charter schools without giving us the resources to pay for them, can you imagine what the budget problems will be in the next three, four, five, six, seven years?”

Walsh told reporters after the hearing. “It will be daunting.”

Charter schools in Massachusetts were

established under the 1993 Education Reform Act. That act was passed in the wake of a ruling by the Supreme Judicial Court, the state’s highest court, which found that Massachusetts had failed to educate “all its children, rich and poor, in every city and town of the Commonwealth at the public school level.”

Property taxes had been the primary sources of school funding, which meant that wealthier municipalities could make the investments in teachers, programs, sports, extracurricular activities, and facilities that less-affluent districts could not. So state lawmakers established a “foundation budget” to furnish each school district with a baseline of annual state aid based on a complex formula designed to level the playing field between districts.

The state Board of Elementary and Secondary Education has the authority to oversee the creation of two types of charter schools: Commonwealth charters, which are established and operated by independent boards of trustees, and Horace Mann charter schools that require approval of local school committees and teachers unions.

To fund charter schools, state officials devised a funding formula whereby the per­

pupil expenditure moves from the public school district to the charter school when a student leaves one for the other. This direct competition with district schools continues to be a major issue, according to Paul Reville, a charter-school supporter who served as secretary of education under Governor Deval Patrick and is now an educational policy and administration professor at Harvard’s Graduate School of Education.

“Those who introduced [competition] for the most part claimed that it would spawn a virtuous cycle, and it has some virtuous aspects to it, but it has also spawned a competition between the charter schools and the mainstream schools for scarce public resources,” Reville says. “If we are going to have an extended experiment with making competition available in this space, I think that’s how you have to do it,” he adds.

“People want to have competition without pain; well, pain is what drives competition.”

Massachusetts devised a generous reim-

bursement formula to mitigate the early effects of the tuition transfers for districts. But the dirty little secret of charter-school tuition reimbursements is that the state legislature no longer fully funds them, creating a situation that results in charter schools receiving their full per-student allotment, while district schools do not receive a full reimbursement.

Yet municipal and school officials’ dissatisfaction with charter-school funding is also rooted in frustration with a deeper systemic flaw. The formula that determines how much state education aid flows to school districts has not been updated since 1993, so aid has failed to keep pace with major cost drivers like employee health care and special education.

In a 2011 report, the Massachusetts Budget and Policy Center estimated that schools are underfunded by at least $2 billion. “I just find it amazing that the conversation we have is about charter schools and not about fully funding public schools,” says Barbara Madeloni, the head of the Massachusetts Teachers Association, the state’s largest teachers union.

But even though a state commission recently recommended rebooting the foundation budget formula, the overwhelmingly Democratic and tax-averse state legislature has been slow to respond, since the real culprit is the lack

of new revenues. Under House Speaker Robert DeLeo, a charter proponent who is also opposed to new taxes, proposals to restructure the formula to reflect current costs go nowhere.

Given the magnitude of the problem, Governor Charlie Baker’s proposals for small increases in education funding and tuition reimbursements were greeted with a notable lack of enthusiasm. A separate Baker administration proposal to compress tuition reimbursement payments into a three-year period down from the current six-year cycle has not allayed fears that state lawmakers may not live up to that schedule either, which is why many municipal and school district officials view proposals to increase the number of charter schools with apprehension.

If the state lawmakers fail to craft a compromise on the charter-cap dilemma in the coming months, charter-school advocates are poised to move the question to the November ballot where both sides are likely to spend unprecedented millions to influence voters.

That’s a scenario that most educators and public officials would prefer to avoid. A procharter public awareness campaign, supported by the governor, drew a rare rebuke from the state auditor over the use of “incomplete” state education charter-school waiting-list statistics. Baker’s strong support for lifting the cap continues to alarm charter-school opponents.

Senate President Stanley Rosenberg designated a group of senators, including ChangDíaz, the education committee co-chair, to consider a broader slate of charter-school reforms, including controversial issues like serving high needs students in addition to lifting the cap on the number of charter schools. It’s a risky move, since both the House and advocacy groups on either side of the issue really do not want to re-open a wider debate on charters.

As Massachusetts lawmakers study their options, what is clear is that lifting the cap on charter schools without new revenues, or even tinkering with the current tuition-reimbursement formula, is a recipe for further fiscal distress in the school districts. Chang-Díaz believes that state lawmakers can do right by both groups and would like to see a mechanism that ties together a modest lift in the charter-school cap with full funding of the district impact mitigation formula. The statewide

school superintendents’ association came up with a proposal to substitute a flat per-student rate that matches the tuition districts pay under “school choice,” a program that allows parents to send children to traditional public schools in participating neighboring communities. The state would make up the difference between that flat amount (currently $5,000) and the per-pupil expenditure. Having the state assume more of the costs that school districts currently face is a pragmatic answer to this funding question, but it requires more state funds.

This emerging crisis is not unique to Massachusetts. In the first decision of its kind in the country, the Washington State Supreme Court ruled last year that charters were unconstitutional: Since charters were not locally controlled or governed, they were therefore ineligible for state funds. The high court noted that “money that is dedicated to [public] schools is unconstitutionally diverted to charter schools.” The court decision set off a scramble by lawmakers in Olympia to find another way to fund the charter schools currently operating in the state. State courts in Arizona and Texas have also ruled against charter-school advocates seeking equal funding with traditional public schools.

However, in Washington, D.C., the script has been flipped. The D.C. Association of Chartered Public Schools and two charter schools filed a lawsuit alleging that the District of Columbia spends less on charter-school students than it does on other students. Last year, the U.S. District Court for the District of Columbia agreed to hear arguments in the case.

Meanwhile, after the Massachusetts state education board’s decision to approve the Brockton charter school, Brockton Superintendent Smith vowed to press ahead with a new lawsuit that would revisit how public education gets funded—now that there are two types of schools that are trying to co-exist. Such a development would hark back to the more than twodecades-old court case that originally helped pave the way for the charter schools. The ironies abound. The lead plaintiff in that case was a Brockton student who went on to become a teacher in a district public school.

“This is a broken system,” Smith says. “Funding should not be about ‘them’ and ‘us.’”

Spring 2016 The American Prospect 57

Funding Government Fairly We’re going to need more tax revenue. Here’s how to raise it.

By Jared Bernstein Trickle-down is nonsense and “revenue neutrawlity” is insufficient

A Prospect Report on Tax Reform

Special thanks to Bill Parks for underwriting this series

58 WWW.Prospect.org Spring 2016

We’re going to need more tax revenue.

Here’s how to raise it.

By Jared Bern s tein

erh u l1979 / is to ck

I

Trickle-down is nonsense and “revenue neutrality” is insufficient.

recently testified before the House Committee on Ways and Means, the people who write tax law. The alleged topic of the hearing was how to generate faster economic growth, but what they really wanted to talk about was “tax reform.”

As you might expect, those two words mean different things to different people. To many Republicans, tax reform means cutting taxes. Despite reams of evidence to the contrary, they’re still deeply enthralled by supply-side, trickle-down economics.

So the Republicans had their witnesses testify about the growth-inducing impacts of tax cuts. One witness argued that anyone who didn’t get this was a “science denier.” I half expected the climate-change deniers on the panel to take umbrage at that accusation (“Hey, you’re talking to actual science deniers!”).

Most of the Democrats on the committee rightly and soundly objected to the supply-side fairy dust, pointing out that no evidence exists to support that case. As nonpartisan tax economist Bill Gale and colleagues recently wrote, “At the federal level, there is virtually no evidence that broadbased tax cuts have had a positive effect on growth. … That has been amply demonstrated at the national level, where tax cuts have eroded revenue without discernable effect on economic activity.”

To the extent that most Democrats on the committee wanted to reform taxes, it was to “lower the rates and broaden the base”—a mantra in Washington. The idea is to collect the same amount of revenues—to maintain “revenue neutrality”—by closing some of the loopholes and wasteful subsidies in the tax code. Once the taxable income base is larger, you can get the same amount of revenue with lower tax rates.

While I applaud the Democrats’ realism on the folly of trickle-down, revenue neutrality is the wrong goal. Based on demographic pressures alone, we need more tax dollars. And if we want to improve our infrastructure, push

back on global warming, fight poverty and inequality, and improve health and retirement security, we’re going to need still more revenue. As the table on page 61 shows, I identify almost $2 trillion in new tax revenues that could be collected over the next decade, based on a subset of ideas that progressives should consider.

Two criteria for raising more tax revenues Broadly speaking, two things matter when it comes to the tax system: First, as just noted, the system needs to raise enough revenues to cover the fiscal obligations and economic challenges we face. Second, our tax system should reduce, not exacerbate, market-driven inequality. Those with the highest incomes should face the highest tax rates, and the public tax collection infrastructure should protect the code’s progressivity by blocking tax avoidance and prosecuting tax evasion.

How does the U.S. stack up on these criteria? Our federal system is moderately progressive, while state taxes tend to be pretty flat. Changes to the federal code under President Barack Obama have made it somewhat more progressive.

Marginal rates on high income earners went up in 2013, as did rates on capital gains. But the system is less progressive than it first appears because of the code’s numerous credits, deductions, and exemptions—loopholes that mostly favor the wealthy. Outright illegal tax evasion, when last checked, amounted to some $385 billion a year, or about 10 percent of the federal budget and 2 percent of today’s GDP. Thus, we need to raise more revenues in a way that is progressive and reduces tax avoidance and evasion. What changes might be made that are consistent with these criteria? While most tax increases should be directed at the top, it’s a mistake to limit tax hikes to the very wealthy.

However, Democratic presidential candidate Hillary Clinton has pledged not to raise taxes on the 97 percent of households below $250,000. Obama, in his re-election, made the same promise. But in the subsequent negotiations, the $250,000 cap got bumped up to $450,000.

No question, in an economy where so much of pretax

Spring 2016 The American Prospect 59

growth has gone to those at the top of the income scale, the high end is the right place to start collecting the revenue we need. But it’s not the right place to end. For instance, it violates no sacred, progressive principle to ask people of all income levels to pay a more realistic price for fossil fuels (e.g., a carbon tax).

In fact, one reason our tax debate is so cramped is because Democrats have bought too far into Republican anti-tax ideology. The right won’t raise taxes on anyone. But the left won’t raise taxes on anyone other than the top 3 percent (households with incomes over $250,000). Again, the high end is absolutely the right target to start with. But it’s ultimately bad politics and bad policy to believe we can raise the revenues we need exclusively from the top few percent.

With that said, here’s what I’d recommend to progressively raise more revenue, both on the individual and business side of the tax code. My goal is not to be exhaustive—there are many good ideas I don’t explore, some of which are contained in the recent Obama budget—but

A great place to start broadening the base and raising revenue is with the estate tax, which currently taxes only the wealthiest 0.2 percent of estates. to set forth more of a modular framework (as opposed to all-out “tax reform,” a recipe for an endless, fruitless, muddled debate) and provide numerous examples of the type of ideas that fit neatly into it.

Progressive ideas to raise more revenue, reduce tax avoidance, and reduce the tax gap 1. Raise high-end tax rates. The current top rate on

earned income is about 40 percent for filers with incomes over $400,000. According to recent research on “optimal taxation”—which in our context means maximizing revenues while minimizing distortions (like tax avoidance or reduced labor supply)—income tax rates could be raised significantly, by as much as half again (to around 60 percent) or more.

Surely that would hurt growth, no? Not according to this research, which not only documents responses to high-end tax changes, but also provides evidence of what actually happens when you lower top rates: It isn’t more growth, it’s more inequality.

The Congressional Budget Office tells us that raising rates by 1 percentage point on the top tax brackets would

60 WWW.Prospect.org Spring 2016

return about $100 billion in revenues over a decade. You can’t multiply that by ten and get a cool trillion because these things aren’t linear. That’s partially because the more you tax ordinary income, the more the wealthy taxpayers reduce their liabilities by redefining their income to avoid the new, higher rates.

Unless our goal is to create a lot more work for crafty tax lawyers, we’ll have to close a boatload of loopholes and avoidance opportunities before we’ll see the desired impact of higher rates on the wealthy. As you’ll see, that boatload is where I think the revenue-raising action should start.

2. Stop favoring one type of income over another. Allow me to formally define J.B.’s first law of

tax avoidance: When the tax code favors one type of income over another, every rich person with a tax lawyer all of a sudden discovers that—who knew?—that’s the very type of income they have gobs of.

Investment income is the most obvious culprit. Capital gains and most stock dividends are taxed at a rate far below that of the top rate for earned income (generally speaking, capital income is taxed at 24 percent instead of 40 percent). So, under JB’s first law, you’d expect wealthy people to be going through lots of machinations to define their income as deriving from investments, not earnings.

Which is precisely what they’re doing.

You’re probably wondering why anyone would want to privilege asset-based income in the first place. Since such holdings are concentrated among the wealthy, this practice violates the criterion above regarding tax policy not exacerbating inequality. The ostensible justification is that investment is highly “elastic” (i.e., responsive) to tax changes, so you’ve got to tax it gingerly or it will flee the country (or hide under a rock or whatever). There’s some evidence to support that claim, but small changes of a few percentage points either way have never been found to amount to much. I’m down with Warren Buffett on this one: “I have worked with investors for 60 years and I have yet to see anyone—not even when capital gains rates were 39.9 percent in 1976-77—shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

Equalizing these rates would thus raise revenue and dampen the incentive for tax avoidance.

3. Raise the estate tax. When it comes to wealth and death, they say “you can’t take it with you.” But because our current estate-tax base is so extremely narrow, the IRS doesn’t get hardly any of it, either. Thus, a great place to start broadening the base is with the estate tax, which right now reaches only 0.2 percent of estates (that’s about 2 of every 1,000 people who die). The Obama administration’s new budget would lower the estate-tax exemption thresh-

Funding Government Fairly old from $10.9 million to $7 million for couples (and from $5.4 million to $3.5 million for individuals); increase the top rate of the estate tax from 40 percent to 45 percent; and close a few estate and gift-tax loopholes, one of which allows an estate to put an investment in a trust to avoid paying capital gains (the Grantor Retained Annuity Trust loophole). Under these changes, which would raise $226 billion over 10 years, the estate tax would still affect only about 0.3 percent of decedents.

Note that this tax is not only a progressive revenue-raiser; because it reduces the size of intergenerational wealth transfers, it can also push back on economic immobility.

There are a lot of people out there who were born on third yet think they hit a triple.

4. End “step-up basis.” This one’s very much in the same spirit of the estate-tax recommendation, but is more narrowly targeted at a particularly egregious tax avoidance loophole that allows the wealthy to pass capital gains on to their heirs, tax-free. Suppose I were to expire and leave one of my kids a property that I bought for $10,000 that’s now worth $100,000. If I had sold it before I croaked, I’d pay capital gains taxes on the $90,000 of the property’s appreciation. But because I passed it on to an heir, the appreciation is untaxed; for tax purposes, the property is treated as if my heir bought it for $100,000. There is no good economic rationale for this loophole. Worse, it creates a “lock-in” effect, an incentive to hold onto such assets until death even if the capital gains from selling the asset might be more productively deployed somewhere else in the economy. Obama’s recent budget proposes to close this loophole (while leaving in significant exemptions so that the change only affects wealthy heirs). Combined with his proposal to raise the capital gains rate from its current 23.8 percent to 28 percent (consistent with my recommendation above about equalizing rates), ending step-up basis raises $235 billion over ten years.

5. Cap deductions on high-income taxpayers.

There’s a very simple reason why even revenue-neutral, broaden-the-base/lower-the-rate tax reform is so hard to pull off: It creates losers (winners, too, of course, but they’re not the problem). That is, somebody’s effective tax rate (their tax liability as a share of their income) will go up when you end a subsidy or close a loophole, and behind every loophole is a lobbyist whose salary depends on defending that tax break as a treasured “job creation” program. Well, here’s an idea that cuts through myriad fights engendered if we try to go after these loopholes one at a time: For everyone over a certain income level, limit deductions to 28 percent instead of the top income tax rate of almost 40 percent. It avoids picking winners and losers, and it would boost economic efficiency by reducing the extent to which we subsidize behaviors that would occur

anyway among the wealthy, like saving for retirement or buying a home. Applied to incomes of $250,000 or more, this cap would generate savings of more than $640 billion over ten years. Even in D.C., that’s real money.

6. Minimum foreign earnings tax. Multinational companies avoid U.S. taxation on their foreign profits though an avoidance method called “deferral.” That is, as long as they “book” their profits in far-off lands—not actually keep them there, but make it look like they’re there— they don’t have to pay U.S. taxes on them. There are all kinds of schemes to shut down deferral (or conversely, to give up on it), but the simplest one is a minimum tax that multinationals must pay on their foreign earnings when they earn them, after which they could repatriate their earnings without further taxation. And trust me on this one: when it comes to international taxation, “simple” is very, very good. The Obama administration plugs 10-year SOURCES OF NEW in 19 percent for this tax, which raises $350 bilincrease TAX REVENUE (billions) lion over ten years.

7. Financial transactions tax. Much Reduce the value of certain tax expenditures of the above is designed to close loopholes or minimize avoidance, typically by tweaking the Reform the taxation of capital income existing system. But here’s an idea for something new: a very small tax on securities trades, also Modify estate and known as a financial transaction tax (FTTs exist gift tax provisions in numerous other countries). Because the base 1 basis point financial is so large here—literally hundreds of trillions transaction tax worth of securities are traded every year—a tiny FTT, say, just a few hundredths of a percent, could Impose an oil fee raise real money for the Treasury. A one-basisIncrease gas tax by 12 point tax on $1,000 worth of stock would cost cents a gallon over two the stock trader a dime; a $100,000 trade would years & index for inflation generate a tax of only $10. Yet an FTT of this 19 percent minimum tax magnitude could raise $185 billion over ten years. on foreign earnings In a world of mobile capital, won’t traders just find offshore exchanges by which to avoid the FTT? Surely sources: treasury greenbook, tax policy center (ftt), crfb some will, which is why it would be good to “hold hands (gas tax increase). note that gas tax increase and oil and jump together” on this tax by enacting it in concert the fee should be considered as with other advanced economies. The European Union has mutually exclusive options. been seriously considering an FTT for a few years now, but continues to delay implementation. As you can imagine, the politics of this are rough, as its opponents have awfully deep pockets. However, the Congressional Budget Office points out that with adequate international coordination, offshore transactions by United States taxpayers could still be captured by a transaction tax, just as an out-of-state Internet purchase can face the sales tax that prevails in the purchaser’s state. Moreover, many busy exchanges exist today with small FTTs, in large part because they remain safe and liquid exchanges.

However, research suggests that the response to a small FTT is more likely to come through fewer trades on domes-

$646 $235 $226 $185 $319 $180 $350

Spring 2016 The American Prospect 61

tic markets than shifting to offshore markets. Even so, I suspect even a small FTT would reduce trading volumes somewhat, but that could actually be a good thing. Thanks to high-speed, computer-driven trading, financial markets today suffer from too much trading, not too little. The turnover volumes have grown enormously over the past four decades, with no evidence of more efficient capital allocation (to the contrary, I worry about increased misallocation). An FTT could increase economic efficiency and even produce an increase in average investor returns.

When it comes to the epidemic of computer-driven high-speed trading, the FTT is a benefit, not a bug. It’s what economists call a Pigouvian tax (a tax on some economic activity that we want to reduce, like pollution or secondhand smoke, because of negative externalities).

This automated, algorithmically driven trading is used to make windfall profits through millisecond price arbitrage (taking advantage of small differences in price), and even a tiny FTT would likely make it unprofitable. As you might imagine, high-speed trading often hurts ordinary investors, can destabilize financial markets, and provides no useful information through price signals. So here’s a chance to do well by doing good.

8. A tax on carbon. This one is obvious and essential. Yes, it would raise taxes on non-rich people (and many such taxes include a rebate to lower-income people who spend more of their income on energy). But it’s a defensible tax increase.

The Obama administration recently proposed a $10-perbarrel tax on oil, which raises $319 billion over ten years.

Especially given how cheap oil has recently become, I appreciate their motivation, but I’d rather raise the federal gas tax.

This tax is how we fund both highway infrastructure and the federal contribution to public transit, and it has been stuck at 18.4 cents a gallon in nominal terms since 1993. Meanwhile, the costs of maintenance have gone up, as has vehicle mileage, so no wonder the Highway Trust Fund is always broke.

We and our politicians have conspired to create a magical world where we can maintain our roads and bridges and support our urban mass transit without paying for it.

Moreover, and this is of course the other huge reason we need to raise the tax liability on fossil fuels: They’re socially underpriced. This is an opportunity to tax a seriously threatening negative externality, breaking the curse of magical thinking on transportation infrastructure, and raise needed revenues. There’s even been a touch of bipartisan support for the idea. (That’s why I’d go for this over the oil surcharge.) One such plan raises the gas tax by 12 cents a gallon over two years (6 cents per year) and then indexes it to inflation. That would raise $180 billion over ten years.

9. IRS funding. While Republicans would love to do the opposite of pretty much everything you just read about,

62 WWW.Prospect.org Spring 2016

they’ve consistently been blocked by the White House and congressional Democrats. They have, however, with help from many a Democrat, cut discretionary spending, including the budget of the Internal Revenue Service. As The New York Times explains: “Between 2010, the year before Republicans took control of the House of Representatives, and 2014, the I.R.S. budget dropped by almost $2 billion in real terms, or nearly 15 percent. That has forced it to shed about 5,000 high-level enforcement positions out of about 23,000, according to the agency.” (See companion piece by Martin Lobel, page 68.)

What it all amounts to: As the table shows, these ideas (counting the increase in the federal gas tax but not the oil surcharge or new revenues from increased tax enforcement) get you $1.8 trillion over ten years, about 1 percent of GDP. In other words, this is far from a radical reach.

And yet, the politics of all this is anything but forthcoming.

To put not too fine a point on it, none of these ideas has any traction in the current Congress, in no small part because many members have pledged never to raise taxes and would block any such legislation. And yet, not that long ago, after his re-election, Obama managed to pass legislation that raised income tax rates on high-income households, as well as the rate on capital gains. How did that happen?

Observation suggests that, somehow, newly elected or even re-elected presidents can sometimes get Congress to make some of the tax changes on which they ran for office.

Think Reagan, Clinton, George W. Bush, Obama—and they didn’t all have pliant Congresses by a long shot. The implication is that if there’s any hope to get any of these ideas through, candidates have to run on them.

So, especially given the climate out there in the electorate today, progressives’ best play is to make the other side defend favorable rates for investment income (even Trump has said he wants to close the carried-interest loophole, where hedge fund managers face favorable asset-based rates on their earnings at a cost of $19 billion over ten years), as well as step-up basis, overseas deferral (and the related corporate inversions), other forms of tax avoidance, and fattening up the tax gap by defunding the IRS. Many members of Congress won’t help because they’re funded by the beneficiaries of the current system. But there are a lot of voters on both sides of the aisle rightfully outraged by the unfairness in the tax code. A good place to start would be to try to tap their energy by picking off some of the ideas above and running with them.

Jared Bernstein is the former chief economist to Vice President Joe Biden and a senior fellow at the Center on Budget and Policy Priorities. He is the author of The Reconnection Agenda: Reuniting Growth and Prosperity and is a regular contributor to The Washington Post and CNBC.

Funding Government Fairly

International tax evasion and avoidance: What can be done?

By Reu v en S. Av i-Yona h

S

am Wyly is a rich Texas businessman. In 2006, Forbes estimated his net worth as $1.1 billion.

He and his brother Charles made their money in computers, a steakhouse chain, and Michael’s Arts and Crafts, which they bought in 1982 and sold in 2006 to a group of private equity firms, including Bain Capital, for $6 billion. Sam is a major philanthropist: A $10 million gift resulted in the naming of Sam Wyly Hall at the University of Michigan Ross School of Business.

He is also an avid Republican. In 2004, Sam Wyly helped finance the “Swift Boat” ad campaign that scuttled John Kerry’s bid for the presidency.

But Sam Wyly is now bankrupt. In 2006, a hearing of the U.S. Senate Permanent Subcommittee on Investigations (PSI) revealed that he had been evading U.S. tax laws by hiding his money in trusts in the Isle of Man, a notorious tax haven. He began by transferring stock options from his various companies to the trusts, which were managed

by Isle of Man trustees. The nominal trust beneficiaries were two foreign charities, but the six Wyly children were contingent beneficiaries, and the trustees understood that at Sam’s death the children would become the true beneficiaries and collect the funds.

In the meantime, the trusts were free to exercise the stock options and use the stock for investments, with the understanding that ten years down the road they would have to make annuity payments to Sam. Sam obtained an opinion from a law firm that this arrangement worked to defer taxes on the income gained from exercising the options until he began receiving annuity payments years later. But the linchpin of the legal opinion was that the offshore trusts were independent actors when, in fact, Sam exercised total control over the trust assets, secretly using the investment profits to operate businesses and buy real estate, jewelry, and artworks in the United States. The Wylys’ secret control over their offshore funds was revealed in the PSI hearing.

In 2010, the SEC charged Sam and Charles Wyly with securities fraud based on Sam’s hidden control of the offshore trusts. In 2014, a jury found him liable. To avoid

paying a $300 million judgment, he filed for bankruptcy, which triggered a tax assessment for his failing to pay any taxes on hundreds of millions of dollars in offshore income since 1992. He is currently battling the IRS in bankruptcy court over a tax assessment totaling more than $2 billion.

How many Wylys are hiding their money from the IRS, with no PSI hearing to bring their misdeeds to light? We will probably never know. A recent estimate of the global costs of illegal tax evasion by the economist Gabriel Zucman was $200 billion, but this is probably too low since estimates for the U.S. alone range from $20 billion to $70 billion. Every time a Swiss banker talks, many billions in U.S. tax evasion are revealed. The IRS Offshore Voluntary Disclosure Program has netted over $6 billion and counting.

And this is only for illegal tax evasion by individual taxpayers. Because the evasion hides taxable income, it’s hard to quantify with any precision.

Corporations are another story, because what they are doing is legal tax avoidance—manipulating their books to avoid taxation—and therefore the magnitudes can be better quantified. As of the end of 2015, U.S. multinationals had more than $2 trillion in offshore profits in lowtax jurisdictions. This amount, which translates to about $700 billion in U.S. taxes avoided, is mostly income that was economically earned in the U.S. and shifted offshore to jurisdictions like Singapore, Ireland, or Luxembourg, which have effective tax rates in the single digits.

The Corporate Tax Dodge How do the multinationals do it? A couple of examples can suffice. Apple Inc. is the world’s largest company by market capitalization. Most of its billions in profits relate to intellectual property developed at its headquarters in Cupertino, California. But for tax purposes, most of the profit is booked in its Irish subsidiaries—let’s call them Apple Ireland.

Some of the profit-shifting is achieved through a “cost sharing agreement.” Cost sharing is a concept developed in IRS regulations in the 1980s, but it became more significant due to the increasing importance of intellectual

Spring 2016 The American Prospect 63

because the royalties received by Apple Ireland would have triggered a tax in the U.S. under so-called Subpart F, which was designed to prevent foreign corporations from taking advantage of inconsistencies between U.S. and foreign tax law. But in 1997, the Clinton administration adopted a rule called “check the box.” Under “check the box,” Apple Ireland can, for U.S. tax purposes, treat all of its foreign affiliates as if they did not exist as separate entities, and treat the money they paid to Apple Ireland as income earned in Ireland. The result is that, for U.S. tax purposes, there are no royalties and no U.S. tax triggered by them, because Apple Ireland treats the money as its own sales income.

The Obama administration came in promising to repeal “check the box”; this was the biggest international revenue raiser in the first Obama budget. But by its next budget in 2010, the administration recanted under pressure from the multinationals. Recently, Obama signed into law a five-year extension of a provision (first enacted by a Republican Congress as a “temporary” measure in 2006) that enshrines “check the box” in the tax law.

Finally, the Senate hearing revealed two Irish-specific tricks used by Apple. Ireland has a tax rate of 12.5 percent, far below the U.S. rate of 35 percent. But Apple did not want to pay even 12.5 percent. Its solution was ingenious: For U.S. tax purposes, Apple Ireland is treated as an Irish company because it is incorporated in Ireland, so it is not taxed by the U.S. But for Irish tax purposes, Apple Ireland was treated as an American company because it is “managed and controlled” from California. As a result, Apple Ireland claimed it was a tax resident nowhere. On top of that, it negotiated a sweetheart tax deal with Ireland for its Irish income, which resulted in its paying a tax rate of less than 2 percent.

offshore, the more deductions would be at risk. So the IRS thought there was a natural limit to taxpayer willingness to share costs with offshore affiliates.

That analysis may have been true for Big Pharma, which usually waits to enter into cost sharing with an offshore affiliate until a drug has passed its initial trials and is well on its way to a patent, and then battles the IRS over valuation issues at the time the cost-sharing agreement was executed. But the same analysis makes no sense for Apple, since if there is anything certain in business, it is that a new version of the iPhone will sell.

There is another trick involved in Apple Ireland’s profitability. Another portion of its profits derive from countries where Apple sells the iPhones. Apple Ireland licenses the right to use Apple’s brand and intellectual property to Apple affiliates in other countries. Those affiliates in turn pay Apple Ireland hefty royalties, which operate to shift the sales profits gained in those countries to Ireland.

Before 1997, such a scheme would not have worked,

These types of tricks are used by most U.S. multinationals. If the primary driver of value of a U.S. multinational is intellectual property developed in the U.S., the Apple scheme can simply be replicated.

But what if the value derives from more traditional, tangible items? Some U.S. multinationals do pay higher taxes (e.g., the car companies). But others try to avoid tax nevertheless. Caterpillar Inc. is a good example.

Caterpillar does not make a lot of money on the heavy equipment it manufactures. But it makes a bundle on replacement parts, because once you buy a Caterpillar bulldozer, you will need parts, which you can obtain only from Caterpillar at a huge markup. Caterpillar prides itself on its ability to deliver parts within 24 hours anywhere in the world, including the Arctic tundra (where its equipment is used in mineral extraction).

Before 1999, Caterpillar bought the parts from unrelated manufacturers and stored them at its warehouse in Morton, Illinois. When a dealer requested a part for a

64 WWW.Prospect.org Spring 2016

k at h y w i l l e n s / a p i m a g e s

Wily Tax Avoider: Entrepreneur Sam Wyly walks into federal court on May 6, 2014, to face securities fraud charges. After conviction, he filed for bankruptcy to duck paying back taxes and fines totaling $2.2 billion.

property. The idea behind cost sharing is this: When a U.S. multinational begins a new research project (for example, a search for a drug to treat a certain disease), it can agree to share the costs of development with its offshore subsidiaries. Then, if the project is successful, the parties share the profits in the same proportions. For example, if Apple Ireland contributed 80 percent of the costs of developing the iPhone 6, it would get 80 percent of the profit. Importantly, none of the actual work is done by Apple Ireland.

Apple just gives Apple Ireland the money and Apple Ireland pays it back as its contribution to the research costs.

Why would the IRS regulations permit this? Because if the research failed, then the taxpayer would lose its ability to deduct the costs sent offshore. The more of the cost sent

Funding Government Fairly customer overseas, Caterpillar “sold” (but did not actually ship) the part to a Swiss subsidiary, which in turn sold the part to the unrelated dealer.

The problem, according to accounting firm PricewaterhouseCoopers, was that Caterpillar’s sale of the part to its Swiss subsidiary triggered U.S. taxes. Much better, PwC said, would be if the parts were sold by the manufacturer directly to the Swiss subsidiary, which could then sell them to the dealer.

Fine, said Caterpillar, but we do not want to change our operations. So in exchange for more than $55 million in fees, PwC came up with a way to lower Caterpillar’s U.S. tax without changing its operations. PwC’s solution was for the manufacturers to bill the Swiss subsidiary for the parts but continue to ship them to the Illinois warehouse, which continued to transport them to Caterpillar’s foreign customers. If the parts were shipped overseas, they were deemed to have been “owned” by the Swiss subsidiary, and PwC devised a virtual inventory to track them, even though the parts were indistinguishably commingled in the warehouse. The result was that Caterpillar continued to run its parts business from the U.S., but declared 85 percent or more of the parts profits in Switzerland.

The IRS has now challenged this billing arrangement, which resulted in shifting some $2.4 billion in Caterpillar profits from the United States to Switzerland. A grand jury has issued subpoenas under a criminal investigation for tax fraud.

But the disturbing fact is that the whole story would not have come to light but for a whistleblower, who alerted both PSI and the IRS. And while Caterpillar is facing a court challenge, in most cases of corporate tax avoidance, like Apple, the IRS’s hands are tied, because what Apple did may have been legal under the U.S. tax code.

Addressing Tax Evasion What might be done to reform this massive loss of revenue?

Consider first outright tax evasion. In the case of tax evasion like Sam Wyly’s, Congress has acted decisively. In 2010, it enacted the Foreign Account Tax Compliance Act (FATCA).

Under FATCA , any foreign bank or other financial institution has to report to the IRS accounts held by American citizens and residents. The penalty for failure to comply is a hefty 30 percent tax on the foreign bank’s U.S. income.

FATCA has real teeth, as the chorus of complaints by foreign banks and their governments shows. It also led to real developments. The Offshore Voluntary Disclosure Program, which has netted more than $6 billion in taxes, is a child of FATCA . So are more than 100 “intergovernmental agreements” (IGA s) that the U.S. Treasury has negotiated with various countries. Under the IGA s, the foreign banks can disclose the information about U.S. account holders to

their government, which can turn it over to the IRS. This avoids legal problems from the banks dealing directly with the IRS, which is illegal in most countries. Even Switzerland has signed an IGA .

In addition, more than 80 countries (including the U.S.) have signed a Multilateral Agreement on Administrative Assistance in Tax Matters (MAATM), which envisages automatic exchange of tax information among the signatories, using a common reporting standard developed under FATCA. But problems remain. First, FATCA itself is vulnerable because it can be avoided by using a foreign bank with no U.S. exposure. In addition, its disclosure obligations apply only to larger accounts and can be avoided by tax cheats opening smaller accounts at multiple banks. So secret offshore accounts are still possible, although the cost of tax evasion and the risk of discovery have increased. Second, these agreements depend on compliance by long-standing tax havens, an outcome that is far from certain. In addition, the IGA s require reciprocity from the U.S., and while U.S. regulations

Apple pretends it is an Irish company for U.S. tax purposes—and a U.S. company for Irish tax purposes. Result: Apple pays very low taxes everywhere. that require U.S. banks to collect the information for reciprocal exchanges have prevailed in initial court proceedings, they are still subject to vigorous judicial challenges.

Third, the U.S. has signed, but not ratified, MAATM, and it seems unlikely that it can be ratified in a Republicancontrolled Senate.

Finally, the entire edifice rests on an uncertain foundation. For exchange of information to work, every single tax haven needs to cooperate, because otherwise the funds will flow to the non-cooperating havens. Total tax haven cooperation seems unlikely, to say the least, absent stiff sanctions that go beyond the U.S. 30 percent FATCA tax, such as a mechanism to cut off an offending tax haven’s banks from the international wire-transfer system. In the past, world leaders have threatened sanctions against uncooperative tax havens, but never actually imposed them. Economists like to imagine universal solutions to the tax-evasion problem (such as the global tax on wealth proposed by Thomas Piketty, or the universal registry of financial assets advocated

by Gabriel Zucman), but in the world we have, such solutions are utopian. Automatic universal exchange of information is likewise a nice ideal that may be implausible in practice.

Spring 2016 The American Prospect 65

Rotten Core? Apple is one of the world-champion corporate tax-avoiders. For sheer elegance, its creative accounting ranks with the iPhone 6.

tal gains, or declaring the income to their home jurisdictions and paying a net tax at that jurisdiction’s rates.

What prevents this obvious solution from happening is that the U.S. is willing to aid and abet tax evasion by Europeans, while the EU is willing to aid and abet tax evasion by Americans. This reflects the political power of corporations on both sides of the Atlantic. (In contrast, Japan already imposes such a tax, demonstrating its feasibility.) What may change the status quo is that both sides have come to realize that U.S. residents can pretend to be Europeans, and EU residents can pretend to be Americans, widening the incidence of tax evasion in both countries. To stop the tax cheating, the EU is willing to impose anonymous withholding taxes on foreign account-holders; even Switzerland entered into such an agreement with the U.K. The U.S. should go along. Importantly, given likely Republican control of Congress, no change in law is necessary: The U.S. code already provides that withholding taxes can be imposed on payments to countries that do not have effec-

66 WWW.Prospect.org Spring 2016

tive exchange of information. The Obama administration could apply this provision tomorrow if it had the political courage to do something about tax evasion.

Battling Tax Avoidance Ideally, the solution to tax avoidance by multinationals is for each country to tax the value that was economically generated by them in their locale. Many such proposals have been advanced. Most call for some type of “unitary taxation” in which the global profit of the multinational is allocated by formula, like the way American states allocate profit among themselves for corporate tax purposes, based on where sales are generated and where property and personnel are located. The most recent proposal along those lines is from the European Commission.

The problem is that such unitary-tax/formulary-apportionment proposals face fierce opposition. The recent Base Erosion and Profit Shifting (BEPS) project of the G20 and the Organisation for Economic Co-operation and Development has summarily rejected the idea of unitary tax solutions. Moreover, unitary tax would require rewriting more than 2,500 tax treaties that are based on treating each company in a corporate group as a separate taxpayer.

This is a tall order. Some progress along these lines can be made under BEPS, such as the new requirement that multinationals reveal to tax administrations (but not to the public) how much profit they made in each jurisdiction they operate in. But it will take many years to develop a workable unitary tax proposal. The EU proposal is only for operations within the European Union. While unitary taxation is technically feasible and may be the best long-term solution to taxing multinationals, the fierce political opposition means that it is not likely to happen in the near term.

What can be done in the meantime about the $2 trillion that U.S. multinationals report in low-tax jurisdictions?

The multinationals themselves are clear: They want to be able to bring this money back to the U.S. without paying taxes on it. This is the point of recent bipartisan proposals, like the one developed by Senators Chuck Schumer and Rob Portman, for a “territorial” tax system.

But this makes no sense. Even if the U.S. should care primarily about the competitiveness of its multinationals, competitiveness clearly is not affected when the U.S. taxes income that has already been earned. The U.S. can and should tax the $2 trillion in full. $700 billion is a lot of revenue, even in Washington.

For the future, the best solution is for the U.S. to cut its corporate tax rate but apply it to all the earnings of its multinationals currently. Abolishing “deferral,” as the ability to delay tax on offshore earnings is called, can enable a revenue-neutral corporate tax reduction from the current nominal rate of 35 percent to about 30 percent. If we also abolish other useless

n i a l l c a r s o n / p r e s s a s s o c i at i o n v i a a p i m a g e s

There is an easier solution. The key observation is that funds cannot be invested in tax havens because they are too small (even Switzerland is a small economy if one ignores the banking sector). And they must be invested in the U.S., the EU, or Japan to avoid undue risk since most portfolio investors do not invest directly in emerging markets because of the political and economic risk.

Therefore, if the U.S., the European Union, and Japan were to agree to impose a tax on income flows to tax havens, the tax-evasion problem would largely be solved without the need for cooperation from the havens. Using a 30 percent tax (the U.S. rate under FATCA) will do the trick. Investors will be faced with the choice of paying 30 percent on their gross interest, dividends, or capi-

Funding Government Fairly tax expenditures, like accelerated depreciation and the credit for domestic manufacturing, the rate can be brought down to 28 percent, which is about average for the G20.

This proposal has bipartisan support as well. But the multinationals are predictably opposed, arguing that taxing them currently would harm their ability to compete and lead more of them to expatriate to places like Ireland— Pfizer recently announced its plans to do so by merging with Allergan, a formerly U.S.-based multinational that expatriated to Dublin.

In my opinion, the economic threat of such expatriations, or “inversions,” is a red herring—if Congress will only act to prevent the tax losses. Most of these inversions involve mergers with other U.S. corporations. In reality, nothing much changes in these transactions, because the corporate headquarters and the jobs that go with it remain in the U.S. So I do not think the threat of inversions is something the U.S. should really care about, although the U.S. could prevent revenue loss by, for example, defining any corporation whose headquarters is in the U.S. as a U.S. resident for tax purposes. (This would also prevent the Apple Ireland “tax nowhere” residency trick.)

Moreover, reducing the corporate rate and even adopting “territoriality” will not stop inversions, because there will always be lower rates somewhere. The main reason to invert is to shift profits from the U.S. to the new residency jurisdiction. Even if the U.S. rate is 25 percent and we have territoriality, as the Republicans have proposed, a U.S. multinational can still cut its tax bill in half by inverting to Ireland and shifting profits there.

The advantage of imposing a lower U.S. corporate tax rate on all the profits of U.S. multinationals is that it would solve the “lock-out” problem, in which the $2 trillion is “trapped” offshore because the multinationals will not pay the 35 percent tax on bringing the money home. If the offshore income were taxed currently, then they could bring it home at any time without further tax consequences.

Taxing U.S. multinationals at 28 percent on worldwide income is unlikely to put them at a competitive disadvantage, for two reasons. First, the effective tax rate on worldwide income of their main competitors from the EU and Japan is similar, because these countries have tougher rules about profit-shifting than the U.S. They do not have “check the box,” and, in general, they tax currently any subsidiary that does not have real operations in its country of residence and that is subject to a low effective tax rate there. Apple Ireland or Caterpillar Switzerland would have been taxed in full had they been owned by parent corporations from France, Germany, or Japan.

Second, the Japanese already apply this rule to all their subsidiaries, and the European Commission has proposed it for all subsidiaries of EU-based multinationals. Under

the EU proposal, any subsidiary would be taxed currently in full on income that derives from investments or from sales to related parties if it is subject to an effective tax rate below 40 percent of the home-country tax rate.

Therefore, if the U.S. taxed its multinationals currently at 28 percent on worldwide income, the other G20 nations (none of which have a corporate tax rate below 20 percent) are likely to go along. No competitive disadvantage would result.

A useful analogy is the prohibition on overseas bribes.

Prior to 1977, there were no domestic limits on multinationals paying bribes overseas to obtain contracts from corrupt government officials. In 1977, following several scandals, the United States enacted the Foreign Corrupt Practices Act, which imposed criminal sanctions on such bribes by U.S.-based multinationals and their executives. Predictably, U.S. multinationals complained that this ban put them at a competitive disadvantage, especially when other countries like Germany permitted

Ideally, we could solve tax avoidance by multinational corporations if countries taxed the economic value generated in each respective jurisdiction. foreign bribes to be deducted for domestic tax purposes.

Somewhat surprisingly, the outcome was not relaxation of the U.S. law. Instead, the Clinton administration successfully pushed the OECD to adopt the same provisions as part of a binding, multilateral treaty, which eliminated the competitive disadvantage issue. A similar coordinated move in the tax area would solve the tax-avoidance problem once and for all.

If nothing is done about these two problems, the rich will continue to evade the progressive income tax, and multinationals will avoid the corporate tax. If that happens, ordinary middle-class Americans will be reluctant to pay their taxes. Our tax system is built around voluntary cooperation; if most Americans refused to cooperate, the IRS could not force them to do so. As the Greek experience has recently demonstrated, once a tax culture of non-payment is established, it is very hard to change. We need to do something about both evasion and avoidance before it is too late.

Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law and director of the International Tax LL.M. Program at the University of Michigan.

Spring 2016 The American Prospect 67

The multiple ways that plutocrats cripple the IRS

By M artin Lo bel

F

or every dollar appropriated to the Internal Revenue Service, the public collects more than $4 in taxes. Nonetheless, Congress has cut the IRS appropriations by $1.2 billion since 2010 while expanding the service’s administrative burdens by giving it responsibility for enforcing laws extraneous to tax collection, such as the Affordable Care Act. The IRS is also responsible for administering innumerable socioeconomic incentives in the tax code, including tax preferences for health care, retirement, social welfare, education, energy, housing, and economic stimulation, none of which are related to the IRS’s primary function of raising revenue—all with reduced funding.

Plutocrats, the richest 0.1 percent of Americans, get the most benefit from a weakened IRS. Because they have the money, the lawyers, the lobbyists, the accountants, and the secret campaign funds, they are able to ensure that the IRS won’t have the resources to effectively collect the money they owe to it. Plutocrats do this by devising tax shelters too complex for the IRS to challenge at an acceptable cost, and by having allies in Congress who intimidate the IRS from issuing tough regulations and who cut IRS funding to prevent adequate enforcement. (The top 0.1 percent consists of 115,000 individuals and families with an average income of $9.44 million. 40.8 percent of the top 0.1 percent are executives, managers, or supervisors of non-finance firms, and 18.4 percent are in the financial professions.)

All this weakened enforcement shifts the tax burden onto middle-income taxpayers whose income generally is reported by their employers, in contrast to the rich who derive most of their income from more complex and less visible sources. The IRS estimates that only about 1 percent of wages reported by employers to the government are underreported, but underreporting could be as high as 56 percent where there is no outside reporting of income to the IRS. That describes most of the income of the very rich, which comes from capital income and very complex financial plays designed to maximize profits and minimize taxes. The plutocrats’ wealth grew from 7 percent of all U.S.

68 WWW.Prospect.org Spring 2016

wealth in 1978 to 22 percent in 2012. Failure to enforce tax collection was not the primary reason, but it intensified the trend. Far more important were the tax expenditures (subsidies) that only benefited the very rich, enacted by Congress at the behest of the plutocrats’ lobbyists.

One way the IRS encourages taxpayers to pay what they owe is by helping them determine how much they should pay. Unfortunately, because of the 10 percent cut in IRS appropriations since 2010, there are fewer employees to respond. In 2015, only 38 percent of taxpayers could get through to the IRS on the phone. What does that do to a citizen’s respect for the IRS? In response to pleas from seven former IRS commissioners, Congress did approve a $290 million increase in appropriations for customer service in FY2016, which should allow the hiring of up to 1,000 customer-service personnel. This should increase the number of calls answered this year from 38 percent to 60 percent, according to IRS Commissioner John Koskinen. Unfortunately, there was no increase in the IRS enforcement budget.

The other way the IRS encourages Americans to pay their taxes is by auditing, or by making taxpayers fear being audited. Cheating increases significantly when no one is looking. Overall, the budget cuts reduced IRS staffing by 15 percent since 2010. That budget cut translated into a reduction of more than 2,200 revenue agents. The result: Tax fraud investigations plummeted by 43 percent for individuals and 58 percent for businesses. And that trend is accelerating. In 2014 alone, almost 1,000 enforcement personnel were lost, resulting in 11 percent fewer examinations in FY2014 than FY2013. And the IRS expects to lose between 2,000 and 3,000 employees this year. What makes it even worse is that many of those departing are experienced employees who will have to be replaced by inexperienced ones who won’t get sufficient training—budget cuts have forced an 85 percent cut in employee training.

For all taxpayers, the average risk of being audited in 2014 was just under 1 percent. Interestingly, if you reported no adjusted gross income, the risk of being audited was

pgiam / istock

Funding Government Fairly

5.26 percent. Why? Because of Congress’s demand for more audits of Earned Income Tax Credit recipients—who are low-income earners. Meanwhile, the audit percentage for those who reported between $500,000 and $1 million in adjusted gross income was 3.62 percent. At the very top, the audit figure did rise to 16.22 percent for those who reported adjusted gross income of over $10 million a year.

But many such investigations into plutocrats’ creative tax accounting were aborted because a great deal of sophisticated manpower is required to breach the walls hiding tax avoidance or evasion that are erected by the plutocrats’ army of financial advisers, lawyers, and accountants. A relatively simple example is a maneuver in which an investor swaps dividend-paying stocks with a bank, which lends the stocks to a third party in a country with a low tax on dividends. This transaction provides no economic benefit except to the lawyers, accountants, and bankers; its sole purpose is tax avoidance. The bank earns a fee for arranging the transaction, and the original owner still owns the stock but receives more money than he would have if he just held the stock and had to pay taxes on the dividend income. Everyone wins but the IRS—and the other taxpayers who have to make up the difference.

The IRS could have gone after this kind of scheme for being

a sham with no economic benefit except the avoidance of tax.

But because of its lack of resources and political vulnerability, the IRS hasn’t made challenging swaps a priority—even though such swaps generated about $259 million in fees for Bank of America alone in 2013. The most that the IRS was willing to do was suggest that these dividend arbitrage deals were essentially risk-free, had no economic substance, and might be considered tax evasion. That declaration and the threat of possible action by the IRS did dampen the enthusiasm for such deals, but still left many deals intact, leaving the plutocrats with the benefit of lower taxes. According to sources within the IRS, the agency temporized by making an oblique threat of possible action; otherwise they would have to expend too many scarce resources litigating one case and making an example out of a “respectable” company with a lot of friends in Congress and the administration. Fortunately, the Federal Reserve Board and the Securities and Exchange Commission are looking into these activities and may take action even if the IRS doesn’t.

Another example is carried interest—a method that hedge fund managers use to convert ordinary income into capital gains. It has been cited by the press for years as a prime example of an unjustified tax loophole, but nothing has been done to close it—even though it could be closed

Shrinking Service: Deliberate cuts in the IRS enforcement budget make tax cheating easier and honest compliance harder.

Spring 2016 The American Prospect 69

by a simple revision to the IRS regulations. Why? Because too many powerful members of Congress have threatened holy war if the IRS tried to close it, by eviscerating appropriations and having donor allies cut off campaign contributions to those who support closing the loophole.

Audits get even more complex and more subject to political resistance when a multinational corporation is involved. A classic case is the use of so-called inversions, where a U.S.-based company shifts its nominal headquarters overseas to avoid U.S. taxes. The most recent examples include Pfizer and Johnson Controls. In 2014, the IRS issued regulations intended to stop inversions by requiring taxes to be paid if U.S. shareholders owned 60 percent or more of the new nominally “foreign” company, but this provision has failed to stop them. For example, Johnson Controls, which has $8.1 billion in untaxed profits offshore, just announced it was going to claim Irish citizenship, although its production facilities in the U.S. will remain. All they had to do was shuffle some more paper

With its current audit force, the IRS cannot police corporate creative manipulation because it is outgunned by battalions of company accountants and lawyers. and redraft the terms of the deal so that only 56 percent of the shareholders in the Irish company are technically considered former shareholders in the U.S. company.

These are the same “American” multinationals that have pleaded for and received huge tax subsidies, only to abandon American citizenship when they discovered they could save taxes by claiming foreign citizenship. Johnson Controls, for example, got over $300 million in taxpayer subsidies before abandoning its U.S. citizenship. What we should do is eliminate deferral of taxes on income earned abroad and the deductibility of interest in these transactions that are designed to avoid U.S. taxes. (See companion piece by Reuven Avi-Yonah, page 63.)

Among the more egregious examples of tax abuses are those in which companies use transfer-pricing to shift profits to low- or no-tax jurisdictions. Transfer-pricing is a technique in which different units of the same corporation charge one another for services or goods, so as to book profits mainly in tax havens. According to the latest IRS data, U.S.-based corporations claimed that their subsidiaries earn $51 billion a year in the Cayman Islands. Not bad for a country with only 59,000 people and an economy

70 WWW.Prospect.org Spring 2016

of just $3 billion. Clearly this makes no economic sense, except as evidence of artificially shifting the locus of transactions to avoid taxes. Every IRS commissioner has admitted that the IRS cannot police transfer-pricing because of the complexity and the fact that, when challenged, they are outgunned by the battalions of accountants and lawyers hired by the companies. To make matters worse, the Treasury continues to fight to preserve transfer-pricing.

Indeed, Robert Stack, the U.S. Treasury deputy assistant secretary for international tax affairs, recently flew to Brussels to personally attack the European Commission’s attempt to collect taxes from “American” multinationals that have hidden profits in tax havens.

This abuse is widespread in the drug industry. Typically, a pharmaceutical company expenses (or deducts) the cost of developing a drug, and then, when it looks like the FDA will approve it, transfers ownership of the patent to a Bermuda affiliate. It then deducts from its U.S. profits the “royalty” it pays to its Bermuda affiliate, where it is not taxed. The same problem manifests itself in the computer industry because of the difficulty of valuing something intangible like a patent or copyright. This is one of the main reasons why Facebook paid only 4 percent in taxes on its worldwide income.

While more resources would help, the real problem is that companies know far more about their business and markets than does the IRS. We need to shift to a unitary tax system in which profits are apportioned for tax purposes by formula, reflecting such factors as the location of sales, property, or personnel—an approach the U.S. Supreme Court has already ruled is an effective, if not more effective, way of determining where profits are really earned.

However, this would require legislation that would be directly contrary to the territorial taxation being proposed in Congress by Republican leaders.

In 2006, the IRS was unable to collect about $385 billion in taxes, according to the Government Accountability Office, equivalent to roughly one-third of total federal discretionary spending. According to Koskinen, this has accelerated because of the recent IRS budget cut. These estimates of underreporting are probably too low. The Senate Permanent Investigations Subcommittee reported in 2008 that 95 percent of the 20,000 bank accounts held

by Americans in the UBS bank in Switzerland were hidden from the IRS. Indeed, Gabriel Zucman, an economist at the University of California, Berkeley, estimated that about 8 percent of the world’s financial wealth is stashed in offshore accounts, resulting in a global loss of $200 billion in income-tax revenue, and that, since 1980, the volume of U.S. equities held by tax-haven investors has more than quadrupled. America’s rich now have at least $1.2 trillion in financial wealth offshore.

Funding Government Fairly These numbers do not include the approximately $2.1 trillion in profits that are not taxed because they are kept offshore by multinational corporations. A 2015 economic analysis by Reed College Professor Kimberly A. Clausing estimates the amount of taxes being avoided by multinational companies shifting profits offshore to be between $77 billion and $111 billion each year. This results in increased budget deficits, lower government spending, and higher taxes on other taxpayers, including domestic companies that have to compete against the multinationals.

The theme underlying all these problems is that they primarily benefit those in the top 0.1 percent income category, at the expense of the rest of our nation’s taxpayers.

If the top income earners don’t pay their fair share of our taxes, the middle-income folks, who have been convinced that cutting taxes is a good thing, will have to fill the void left by the plutocrats. While trying to appeal to lower- and middle-income voters who feel, correctly, that the government is in large part responsible for their economic and social problems, the Republicans are proposing solutions that will add to the middle-class tax burden and encourage the rich to fill their campaign coffers.

Everyone admits the tax code is too complex, but the reason is that it was designed by the best-connected (and best-paid) lobbyists to exempt the rich and powerful from paying taxes. Lee Sheppard, one of the world’s leading tax experts, estimated that our so-called business tax code hands out twice as much in tax expenditures (subsidies) as it collects. A classic example of the plutocrats’ power is the so-called “reform” being pushed by multinational corporations and the Republican leadership to adopt a “territorial” tax system. Under a territorial tax system, all the profit the multinationals claim they earn offshore would be 100 percent exempt from U.S. taxation. Talk about a job-killing tax proposal! It would accelerate the multinationals’ shifting of profits and jobs offshore, and increase their competitive advantage over domestic companies that would have to pay taxes the multinationals don’t pay. Note that I used the term “multinationals,” rather than “American multinationals,” because they will invest wherever in the world they can make the most profit. They are called multinationals for a reason.

You would never know that the IRS is essential to funding the government we want by listening to the Republican presidential candidates. Senator Ted Cruz wants to abolish the IRS. Former candidate Carly Fiorina promised to reduce the tax code to three pages. Unfortunately, many of their supporters believe those promises are possible, thanks to the tax-cutting theology spewed out by “think tanks” funded by plutocrats like the Koch brothers. This represents a failure of our educational system and the media, which all too often merely report the most outrageous statements without analyzing whether those prom-

ises are based on a tax-cutting theology—or on evidence that shows that such a solution doesn’t work. Ironically, Cruz, for example, is trying to shift the burden of funding the government from the plutocrats, who are financing his campaign, to the disaffected and clueless middle class, which has lost income and social status over the last 30 years because of just such policies. And each of the tax-cut proposals by the Republican candidates would increase the deficit significantly. So much for fiscal responsibility!

Many Democrats are not much better. Senator Chuck Schumer, who is the chief fundraiser for Democratic senators, is proposing a territorial tax to exempt the “foreign” profits of multinationals from taxation. Deputy Assistant Secretary Stack, the lead U.S. delegate to the OECD’s Committee on Fiscal Affairs, was named 2015 “Tax Person of the Year” by Tax Notes* because he successfully protected the interests of “U.S.” multinationals. He proudly claimed *By way of full disclosure, I he preserved their ability to shift income to tax havens am chairman of the board of Tax Analysts, which through transfer-pricing, and prevented the OECD from publishes Tax Notes. While adopting an apportionment system for allocating prof- I may not agree with their its—the only effective way to prevent multinational cor- choice, I respect their independent judgment that he porations from hiding income in low- or no-tax countries. was the most important tax The importance the plutocrats and their campaign player in 2015. Our staff is recipients attach to crippling or intimidating the IRS is wonderfully independent! clearly seen in the hysterical attacks on Lois Lerner, then the IRS director of exempt organizations, whose office decided to investigate whether some conservative secret fundraising groups were entitled to tax-exempt status.

After millions of dollars were wasted in congressional investigations, it turned out that the decision to look into these groups was made by mid-level IRS employees, and was not targeted at “conservatives” as alleged. But that hasn’t stopped the attacks, which were aided by IRS inability to produce emails—because of the very budget cuts imposed by its congressional attackers. Indeed, the chair of the House Oversight Committee, Republican Jason Chaffetz of Utah, and 18 of his Republican colleagues are now trying to impeach Commissioner Koskinen.

The media need to do a better job of informing the public of what is at stake and what needs to be done. Voters have to know who has been selling them out to the plutocrats so they can hold them accountable. Those politicians who have hidden behind the tax-cutting theology so as to feed off the plutocrats’ money have to understand that opposing an effective IRS and opposing real tax reform will result in lost elections. Otherwise, the shift of wealth to the top 0.1 percent, away from the middle class, will continue to undermine our economy.

Martin Lobel is chairman of the board of Tax Analysts and a partner at Lobel, Novins & Lamont, LLP. His views are not necessarily those of Tax Analysts.

Spring 2016 The American Prospect 71

Dangerous Bedfellows The stalemate on criminal justice reform

By Re na S t e inz o r

I

n February 2015, a startling collection of strange political bedfellows assembled to promote mass-incarceration reform at all levels of government. The U.S., with less than 5 percent of the world’s population, incarcerates more than 20 percent of all prisoners. Sixty percent of the imprisoned are racial and ethnic minorities. Between 2001 and 2010, eight million people were arrested on marijuana charges; African Americans were 3.73 times more likely to be arrested for possession as whites.

Fiscal and libertarian conservatives (Koch Industries, FreedomWorks, and Right on Crime) joined the group to emphasize the urgency of cutting prison spending, which is about $80 billion annually and unsustainable for many states, as well as the importance of freeing nonviolent offenders from government control. Liberals (the Leadership Conference Education Fund, the NAACP, the ACLU, and the Center for American Progress) hoped to rebuild communities by preventing lengthy prison terms for people who commit nonviolent drug offenses. Some of the organizations had worked together at the state level, establishing a modicum of trust that they hoped could survive a presidential election year.

With a $2 million annual budget provided by the Laura and John Arnold, the Ford, and the MacArthur foundations, as well as Koch Industries, they formed the Coalition for Public Safety, which has an executive director, a paid staff, and a website. The ACLU also received a $50 million grant from George Soros’s Open

72 WWW.Prospect.org Spring 2016

Society Institute to reduce incarceration rates.

Denis Calabrese, long-time communications expert for conservative causes and now the president of the Arnold Foundation, described the coalition to The New York Times as “putting dogs and cats together in the same room.” The group’s first executive director, Christine Leonard, a former staffer for Senator Ted Kennedy, promised that the group would mobilize behind comprehensive proposals that could achieve consensus among its broad-spectrum members.

The coalition began with the low-hanging fruit: reforms designed to eliminate mandatory minimums for nonviolent drug offenders and to give judges more discretion in sentencing other defendants. Its members worked closely with Democratic Senator Cory Booker and a bipartisan group of Senate Judiciary Committee members, including Democrats Patrick Leahy, Charles Schumer, and Sheldon Whitehouse, and Republicans John Cornyn, Lindsey Graham, Charles Grassley, and Mike Lee. They had the enthusiastic support of President Barack Obama, who used his bully pulpit to promote these issues.

But then, after months of closed-door negotiations to craft an acceptable compromise and on the eve of a Senate Judiciary Committee vote, what Whitehouse describes as a “Trojan horse” rumbled noisily onto the stage in the form of demands by Republican Senator Orrin Hatch that the bipartisan group add provisions to weaken white-collar criminal enforcement. This hidden agenda was the central goal of business conservatives, led by Charles and David Koch. The senators refused the provi-

sions, and the committee passed the legislation without the amendment.

Conservative lobbyists persisted. And in the House, the dynamics turned out to be quite different. Succumbing to Judiciary Committee Chairman Bob Goodlatte’s threat to kill sentencing reform unless white-collar relief was added, ranking Democrats John Conyers of Michigan and Sheila Jackson Lee of Texas, long-standing members of the Congressional Black Caucus, voted to bundle the two measures. As a sweetener, Goodlatte agreed with Conyers and Jackson Lee to consider other criminal justice reforms—for example, provisions easing inmates’ re-entry into society— with the goal of assembling a comprehensive package of legislation known as a “manager’s amendment” that would then move to the House floor. Such large packages make it virtually impossible for individual members to change any specific aspect of the deal.

House Speaker Paul Ryan has promised to schedule floor time for the package “this year,” a vague commitment that could include a potential lame duck session after the presidential election. The Senate’s schedule for a floor vote on the legislation developed by the bipartisan group is unclear. Senior prosecutors at the Department of Justice are fiercely opposed to the Hatch bill and the Goodlatte-Conyers deal. Obama has done what he can without Congress, using executive orders to ban solitary confinement for juveniles in federal prison and compulsory disclosure of prison records on federal job applications. Given acute congressional dysfunction in an age of

Senators supporting bipartisan criminal justice reform, from left: Cory Booker, Richard Durbin, Charles Grassley, John Cornyn, Charles Schumer, Patrick Leahy, Sheldon Whitehouse, Tim Scott, and Mike Lee

j a c q u e ly n m a r t i n / a p i m a g e s

extreme vituperation, a stalemate could persist until a new president is inaugurated.

Criminal law establishes two tests for culpability: whether the defendant committed an actus reus, or an illegal act, and whether he possessed mens rea, or a guilty mind. Conservative advocates of higher bars to corporate prosecutions have directed their fire primarily at the second test. They argue that Congress has been both wanton and sloppy in criminalizing behavior, allowing prosecutors to avoid proving that defendants knew they committed a crime, a loophole that supposedly leads to widespread abuse.

Conservatives argue that traditionally harsh punishments apply to people who murder, steal, or assault. These penalties are appropriate because everyone knows such behavior is malum in se, or obviously, almost without exception, wrong. But the supposed “over-criminalization” criticized by the right largely targets acts or omissions that are malum prohibitum, meaning they are deemed illegal under highly technical statutes and regulations that are unintelligible to the average person, including such statutory schemes as Dodd-Frank banking reform and complex environmental laws. Well-meaning corporations and their hard-working managers should not be prosecuted when they stumble over abstruse rules they cannot understand.

John Malcolm, director of the Heritage Foundation’s Edwin Meese III Center for Legal and Judicial Studies and the architect of mens rea reform, made these points in a September 2015 call to arms:

Today, nearly 5,000 federal criminal statutes are scattered throughout the 51 titles of the U.S. Code, and buried within the Code of Federal Regulations, which is composed of approximately 200 volumes with over 80,000 pages, are an estimated 300,000 or more (in fact, likely many more) criminal regulatory offenses or socalled public welfare offenses. In fact, it is a dirty little secret that nobody, not even Congress or the Department of Justice, knows precisely how many criminal laws and regulations currently exist. Many of these laws lack adequate, or even any, mens rea standards—meaning that a prosecutor does not even have to prove that the accused had any intent whatsoever to violate the law or even knew he was violating a law in order to convict him. In other words, innocent mistakes or accidents can become crimes.

Malcolm especially condemns so-called strict liability offenses that deal with what are known as public welfare offenses, which harm public health, consumer safety, or the environment. Virtually all of these provisions are misdemeanors, punishable by no more than one year in jail. Unlike other statutes, strict liability provisions do not specify a state of mind (mens rea) standard on their face and they have been interpreted to mean that the government must only prove a defendant was conscious of his bad behavior without proving that he knew it was illegal. The justification for such

prosecutions is that anyone engaged in transactions with the public that have the potential to threaten people’s lives or well-being must be especially careful to understand all the steps that must be taken to prevent harm.

The conservative solution to the over-criminalization problem is to pass legislation that would insert a new definition of “knowledge” into any provision of law that happens to omit an explicit standard for the mens rea part of the prosecutor’s burden of proof. The new definition would override decades of judgemade laws that interpreted what constitutes a guilty mind for each statute. In their place, conservatives would substitute a far higher burden of proof for prosecutors. Under the Hatch bill, the government must prove that a defendant was “practically certain” his acts or omissions would have a specific result. The Goodlatte-Conyers deal would require 1) proof that a “reasonable person” would have known that what he was doing was wrong, and then require prosecutors to double back and deliver, and 2) proof that the defendant also harbored that knowledge, in effect eliminating the longstanding legal principle that ignorance of the law is no defense. These new hurdles will confuse judges and juries and could chill prosecutors from even attempting many white-collar prosecutions—which seems to be the point.

For a variety of historical reasons, especially the so-called war on drugs, the country has an acute overkill problem with regard to street crime. In the white-collar

Spring 2016 The American Prospect 73

crime arena, the problem is the opposite. Not a single financial institution or executive has ever been charged criminally for the activities that produced the 2008 recession. DOJ has even blinked regarding cases where workers and consumers lost their lives as a direct result of criminal behavior. Two vivid, recent examples are cited in a January 2016 report released

by Massachusetts Senator Elizabeth Warren, titled “Rigged Justice: How Weak Enforcement Lets Corporate Offenders Off Easy.”

In 2003, General Motors was in a rush to get the Cobalt, its new subcompact car, into showrooms for the 2004 model year. Compliance with fuel-efficiency standards is calculated based on the average achieved by an automaker’s entire fleet. Company executives needed the efficient little cars to offset highly profitable sales of the fuel-guzzling trucks that are its major source of profits in the American market. But the new subcompacts had a fatal design flaw. Their ignition switch systems were so low on torque that they would rotate into the “accessory” position, stalling the engine, if the driver did nothing more than brush the key fob with a knee. An on-road stall meant the loss of power steering, brakes, and functioning airbags. If the cars were traveling at any speed, a sudden stall could cause drivers to lose control.

As the evidence mounted that the stalls were causing serious accidents, GM engineers resisted acknowledging the switch defect; instead they categorized it as an “annoyance,” the lowest level of severity for glitches in a vehicle’s design, as opposed to the severe safety defect it undoubtedly was. By 2006, Raymond DeGiorgio, the engineer in charge of the ignition switch system in the Cobalt, fixed the defect so that a better switch could be installed in new cars. But he also made sure that the part number did not change, leaving admittedly dangerous cars on the road. DeGiorgio finally admitted to this cover-up in a 2013 deposition taken by plaintiffs’ lawyers. Still, executives resisted until 2014, when GM finally agreed to a recall. GM has provided compensation to the families of 124 people killed in ignition switch accidents, but the final number of fatalities and injuries is likely to be significantly larger when all the pending cases are resolved. DeGiorgio and 14 other senior managers were fired.

The case would seem ripe for a criminal pros-

74 WWW.Prospect.org Spring 2016

In a left-right coalition, the Koch brothers are holding hostage reform of mass incarceration—to block corporate prosecutions. ecution, and DOJ opened such an investigation.

But in September 2015, prosecutors announced a “deferred prosecution agreement” with GM, suspending any criminal charges so long as the company pays a fine of $900 million and otherwise behaves itself for three years. No individual was charged, and none are expected to be.

In fact, deferred prosecution agreements have become the norm in big corporate settlements.

The second example occurred in May 2015, when the Justice Department settled a big case against five of the world’s largest banks—Citigroup, JPMorgan Chase, Barclays, the Royal Bank of Scotland, and UBS—for crimes extending over five years that involved daily efforts to manipulate the foreign currency market and defraud their clients. The conspiracy was coordinated among the banks by traders using Internet chat rooms. The gist of these criminal activities was price-fixing: The banks cheated their clients by manipulating market prices of currencies. One bank would build its investment position in a currency and then dump the currency all at once, moving prices down.

Other banks, warned in advance about such maneuvers through the chat room, would cooperate, allowing the perpetrator to cover up its windfall. Together, the banks paid $2.7 billion in fines. No individual—trader or supervisory executive—was charged.

The Warren report describes an additional 16 cases of comparable size and ramifications where DOJ white-collar enforcement was inexcusably weak; all occurred in 2015, and she has promised annual updates. They show that far from having a white-collar over-crim-

inalization problem, the legal system suffers from a severe under-criminalization problem.

Conservative advocates of white-collar crime reform point to an entirely different galaxy of examples to prove their case. The Heritage Foundation has produced a glossy publication entitled “USA vs. YOU” that sets forth the sad stories of several ill-fated individuals who were persecuted by federal prosecutors without justification. Several of these anecdotes do not stand up to scrutiny. The behavior targeted by the indictment had harmful consequences, however sympathetic the defendant appeared as an individual person.

Punishment was typically light—payment of a small fine or probation. The anecdotes are not supported by independent sources, defeating even diligent efforts to evaluate them.

Take, for example, the poster child for the Heritage roster of victims. Lawrence Lewis served as the director of engineering for Knollwood, a nursing home in Washington, D.C. He is African American. Lewis is featured on the Heritage website, has testified before Congress, and has visited the offices of members who now support the reforms Heritage advocates. No question, Lewis is a sympathetic figure. According to the memorandum his attorneys prepared prior to sentencing, he went to night school to gain engineering skills, was the sole supporter of his 91-year-old mother and two teenage daughters, did not have a criminal record, and had three brothers, all of whom were victims of homicide at an early age.

But Lewis’s crime was far less sympathetic.

The sewage system at Knollwood repeatedly backed up because adult diapers were stuffed down the toilet. On several occasions, Lewis dealt with the backups by flushing the raw sewage through a hose down the driveway of the nursing home and into a storm drain that had an outfall pipe feeding into Rock Creek, the central feature of one of the most beautiful urban parks in the country. Lewis said he was unaware of the fact that the storm drain led directly to the creek and instead thought it conveyed the raw sewage to a wastewater treatment plant. Court records do not explain why, as chief engineer, he neglected the sewage backup problem for so long.

Lewis was indicted on a single misdemeanor count for negligently violating the Clean Water

Act. He was represented by an experienced criminal defense attorney and advised to plead guilty. He received probation. If this kind of story is the best Heritage can manage, it’s far from persuasive evidence for a wholesale gutting of standards for white-collar prosecutions.

Digging deeper, it turns out that self-interest of America’s most powerful conservative donors explains a lot of this crusade.

pa u l v e r n o n / a p i m a g e s

As discussions of the creation of the

Coalition for Public Safety progressed, the involvement of the Koch brothers signaled a remarkable new form of bipartisanship. A month before the coalition’s launch, the Kochs announced that the political network of conservative donors they created had budgeted $889 million to influence the 2016 election, covering both the presidency and seats in Congress. This astoundingly large amount of money follows the $400 million they spent unsuccessfully in 2012 to defeat President Obama for a second term.

Although political influence and embedding conservative principles into the structure and content of governing is their primary interest, according to New Yorker writer Jane Mayer, author of Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right, the Kochs are also in the midst of a campaign to change their public image. They have consciously adopted causes that demonstrate concern for the welfare of the poor, including and especially proposals to ameliorate mass incarceration. Fraser Seitel, a public-relations expert, told Mayer, “They’re waging a charm offensive to reset the image of the Kochs from bogeymen shrouded in secrecy to philanthropists who are supporting black colleges and indigent defense.”

On the day the coalition launched, Neera Tanden, president of the Center for American Progress (CAP), told The New York Times: “We have in the past and will in the future have criticism of the policy agenda of the Koch brother companies, but where we can find common ground on issues, we will go forward. I think it speaks to the importance of the issue.” Tanden’s pragmatism seems reasonable given the dual realities that criminal justice reform must be accomplished through legislation and that nothing much can move through Congress these days without wide-spectrum political support.

Liberal members were aware that conservatives, including the Kochs, had long advocated white-collar criminal reform. What they may not have grasped was that the Kochs were harboring a deep-seated commitment to vengeance over an Environmental Protection Agency (EPA) enforcement action brought more than 15 years before. In an interview with The New York Times in November 2015, Mark Holden, general counsel and senior vice president of Koch Industries, acknowledged that these efforts were “inspired in part” by that case—the only one mentioned—which involved environmental violations at a Koch Industries refinery in Texas.

Selective Libertarian: Serial polluter David Koch

The indictment in U.S. v. Koch Industries, Inc. was filed on September 28, 2000, about three months before President Bill Clinton left office. The government alleged that the company and four of its employees had deliberately violated a rule issued under the Clean Air Act that restricts the amount of airborne benzene emitted by oil refineries. The facility at issue was the “West Plant,” a unit within the Kochs’ sprawling refinery in Corpus Christi, Texas. Even back at that time, which was during the heyday of environmental criminal prosecutions, charging individual employees was unusual, and indicated a serious case.

None of the four employees were low-level employees. David L. Lamp was the plant manager; Vincent A. Mietlicki was an in-house attorney designated as the “environmental manager” for the refinery as a whole; John C. Wadsworth was a company vice president and refinery manager in Nueces County; and James W. Weathers

Jr. was an environmental engineer for the West Plant. Or, in other words, they were collectively responsible, compensated, and trained to figure out how to comply with the allegedly hypertechnical rules that protect public health.

Benzene is a potent carcinogen and can cause acute respiratory distress when inhaled.

Emissions are heavily regulated in the workplace and the ambient environment. At the Koch plant, benzene was part of an aqueous (water-based) waste stream, but the chemical is not soluble in water and quite volatile, properties that meant it easily off-gassed from the waste stream and was released into the air.

Because the level of benzene in the waste generated by the plant was above the EPA’s cutoff of ten tons annually, the plant was required to install equipment that would capture it before it vaporized, preventing public exposure. Everyone involved knew what the equipment was and everyone knew it needed to operate properly.

The company’s first step was to apply for a waiver of these control requirements; the request was granted by Texas regulators who implement the rules drafted by the EPA . The waiver went into effect in 1993, ostensibly to give plant managers time to purchase appropriate pollution-control equipment and install it by 1995, when the waiver would expire. But 1995 came and went without activation of the equipment. A whistleblower named Sally Barnes-Soliz reported to Texas regulators that the company had released at least 91 metric tons of benzene during this time period, an amount that was 15 times the legal limit.

The federal indictment alleged that the four men conspired to disconnect the malfunctioning control equipment, which was known as a “Thermatrix thermal oxidizer.” It was designed to operate as a high-temperature furnace that would transform the benzene into carbon dioxide and water. Instead of traveling through the oxidizer, the waste stream containing the benzene was diverted into other equipment—an oil/water separator, a sewage pipe, and tanks— that were not equipped to control off-gassing.

At the end of the line, the benzene vapor vented into bypass stacks where it was released into the ambient air. These arrangements violated not just the Clean Air Act but also the Comprehensive Environmental Response, Compensation and Liability Act, the federal statute that

Spring 2016 The American Prospect 75

76 WWW.Prospect.org Spring 2016

wart conservative John Ashcroft as his attorney general. During the 2000 presidential campaign, conservatives had singled out the case, arguing that it represented politically motivated retaliation for the Koch brothers’ contributions to Bush. Michele Davis, a spokesperson for former Republican House Majority Leader Dick Armey, told the Associated Press, “He’s concerned the timing is so fishy, coming at a time when this administration is playing political football with anything doing with Texas.”

Years later, after the Kochs became more prominent politically, The Texas Observer ran a story in 2012 called “Kochworld,” written

Enabler: House Judiciary Chair Bob Goodlatte

by veteran reporter Melissa del Bosque. It described how the two giant refineries in Corpus Christi, the one owned by the Kochs and a second owned by Citgo, affected the health of a poverty-stricken, African American neighborhood that adjoins the plants. Koch Industries immediately attacked del Bosque and the magazine, accusing them of “dishonest and distorted” journalism. Not satisfied with posting this criticism on its own website, the company took out an ad excoriating del Bosque on the website of the Poynter Institute, a respected journalism center. She responded via Twitter that she was “proud to join New Yorker, Bloomberg and others,” a reference to similar Koch Industries attacks on critical reporting. The 2010 attack on The New Yorker’s Jane Mayer had been quite intense. The Kochs went so far as to hire investigators to comb through her life, and they also leveled unfounded accusations of plagiarism, a professional sin for

reporters. These accusations were unfounded.

The incidents are telling not only in their dark tone, but because they occurred in 2010 and 2012, presumably after the re-branding effort was conceived and initiated.

According to Heritage’s John Malcolm, Congress has gone on a crazed spree of lawmaking over the past several decades, adding thousands of new criminal offenses throughout the U.S. Code, to the point that the government has lost track of how many and what kinds of criminal culpability confront the average citizen. Far worse, federal regulatory agencies possess delegated authority to define the behavior that triggers such culpability, an outrageous usurpation of authority that the framers of the U.S. Constitution intended to limit to Congress. According to Edwin Meese III, the 75th attorney general of the United States, who testified before the Senate Judiciary Committee in January:

No person with a family to feed and a mortgage to pay has time to pore through the Code of Federal Regulations to ensure perfect compliance with 300,000 criminal regulations, just as no small business owner can afford to hire the army of lawyers necessary to understand the intricacies of the U.S. Code. Criminal intent requirements protect these individuals when they make honest mistakes or run afoul of obscure provisions that a more sophisticated company with an in-house compliance department might know about.

Of course, the number of laws on the books does not give any indication how they are enforced in the real world. Fortunately, more reliable statistics about the kinds of white-collar crimes that dominate federal dockets are available. According to a study by University of Texas Law Professor Susan Klein and her student, Ingrid Grobey, 80 percent of federal criminal prosecutions deal with offenses involving controlled substances, immigration, and weapons. Defendants charged with socalled “regulatory offenses” (like the Koch brothers in Texas) now make up 2 percent of all federal criminal defendants, down from 7 percent in 1980. “Crime remains as much a

j. scot t applewhite / ap images

requires reporting of toxic chemical releases.

According to the indictment, the conspiracy among the four individual defendants included a cover-up with the dual goals of averting private lawsuits by residents and workers who became ill after exposure to the excess emissions and thwarting government enforcement action seeking civil or criminal penalties. A third goal was to “avoid or delay the financial expenditures necessary to comply with the law and to avoid shutting down the West Plant until it could be brought into compliance.”

The case was on its way to trial before federal District Court Judge Janis Graham Jack, a Clinton appointee, in the spring of 2001. But on April 9, DOJ announced it had settled the case. Charges against the four Koch employees were dropped. The indictment was reduced from 97 counts to nine. The company was placed on probation for five years and assessed $10 million in criminal fines, payable to the U.S. Treasury, and $10 million to support “special projects” that would improve air quality in Corpus Christi. The Justice Department’s press release repeated the key charges in the indictment, including the failure to operate pollution-control equipment and the cover-up that, not incidentally, involved making false statements to the government. The $20 million penalty was high in comparison to other settlements at the time, but in relationship to the revenue generated by the refinery and the wealth accumulated by the Koch brothers, it was a trivial cost of doing business.

One reason the prosecutors settled is that Judge Jack signaled that she was on the defendants’ side before a jury got anywhere near the evidence. Claire Poole, a reporter for Texas Monthly, reported that Jack scolded prosecutors at a motions hearing: “What I’m sitting here wondering is how on earth you all are going to explain this to a jury and how you expect to actually get a conviction on this.”

Judges sympathetic to white-collar defendants who look like them are a perennial problem in such cases, and renewed efforts to reach settlement must have seemed like the only response to Jack’s intemperate remarks.

But prosecutors were also under considerable political pressure because, by then, President George W. Bush had been inaugurated and had nominated former governor and stal-

local matter today as it did in 1913,” they write.

“Overall, federal felony convictions have comprised around 5% of all felony convictions (state and federal combined) since at least 1992.”

But just because such prosecutions are few and far between does not mean that the changes advocated by conservatives would have little effect on the future of white-collar criminal prosecutions across the nation. Leslie Caldwell, assistant attorney general for DOJ’s Criminal Division, warned when testifying alongside Meese at the January hearing that pending default mens rea legislation would cause “extreme and very harmful disruptions” in “essential federal criminal law enforcement operations.” The legislation would “create massive uncertainty in the law” and allow defendants charged with serious crimes “to embroil federal courts in extensive litigation and potentially escape liability for egregious and very harmful conduct.”

What kinds of cases would be affected?

“Terrorism, violent crimes, sexual offenses, immigration violations, and corporate fraud,” Caldwell recited. She explained that the legislation would “frustrate” law enforcement with respect to violent terrorist assaults on U.S. citizens undertaken outside the country, because prosecutors would be forced to prove that the terrorist knew their victims were in fact U.S. citizens. Similarly, in a case involving an assault on a federal officer, prosecutors might be asked to prove that the defendant knew the identity of the officer at the time, and in cases involving sexual exploitation of children, that the rapist knew his victim’s age. Caldwell added that the legislation would make it far more difficult to prosecute corporate fraud on the scale of the behavior of WorldCom CEO Bernard Ebbers, who was convicted in 2005 and is now serving a 25-year prison sentence. Or, as another witness, Robert Weissman, president of Public Citizen, said after the hearing, “DOJ would essentially have to have smoking-gun evidence regarding every single element of a crime.”

As Goodlatte was issuing his ultima-

tum to Conyers and Jackson Lee, liberal members of the Coalition for Public Safety faced a tough and unexpected decision. Civil-rights groups like the Leadership Conference and the NAACP, civil-liberties advocates at the

Liberal coalition members faced an agonizing decision: cave on corporate prosecutions or risk losing mass incarceration reform.

ACLU, and CAP staff, who enjoy easy access

to the White House, understood only too well that cooperating with conservatives in the House was the only way to get the law passed.

Given their conviction that mass incarceration caused devastating harm to their core constituencies, and the many hours they had spent working to push the legislation forward, the temptation to accept some form of compromise was powerful. But these groups had broader interests, including economic equity and environmental protection policies, which could be undercut by weakening criminal enforcement.

In the weeks leading up to the House Committee markup in November 2015, CAP led the liberal groups to break with their coalition partners and eased the way for Justice Department prosecutors to prevail within the White House. By the time of this turning point, Koch Industries Senior Vice President Mark Holden had held no fewer than four meetings on criminal justice reform with Valerie Jarrett, one of Obama’s most senior and trusted advisers, apparently to no avail, for the White House did not move to overrule Justice Department opposition to the deal.

Todd Cox, CAP ’s director of criminal justice policy, told me that the decision was a combination of principle and pragmatism: “The criminal justice reform movement is responding to the discredited war on drugs policies that affect poor communities and communities of color ravaged by mass incarceration, and involve overreach by prosecutors, removal of discretion from judges regarding sentencing, and situations where communities are

over-policed. The mens rea reform proposals involve an entirely different system dealing with white-collar criminal offenses. In that system of justice, we have a lack of effective law enforcement, well-resourced corporations that helped develop the law, and defendants typically situated socially in [the] same place as judges and prosecutors.”

ACLU Executive Director Anthony Romero, in a letter to The New York Times, wrote, “Advocates of all political persuasions working to bring meaningful criminal justice reform would do well to keep our eyes on the prize of getting meaningful legislation passed and not let mens rea become the poison pill for the solutions our country so desperately needs.”

Like so many other social problems of grave importance, progress on criminal justice reform seems likely to remain stalemated until after the presidential election. Koch Industries’ Holden has stated publicly that he does not insist on any linkage between sentencing and white-collar crime reform. But House Judiciary Committee Chairman Goodlatte does not appear to have internalized this pronouncement. Democratic candidates Hillary Clinton and Bernie Sanders both pledge to be tough on white-collar crime, translating the commitment into the sound bite that “no one is too big to jail.” Republican frontrunner Donald Trump has ridiculed Clinton, saying that she is the prime example of someone “big” who should be indicted over State Department emails and other offenses.

This campaign theater remains largely irrelevant to the millions of young people consigned to spend their most productive years in prison for nonviolent offenses, except in one respect.

The gaping dichotomy between street crime injustice and white-collar non-justice is a powerful validation of their widening cynicism and underlying rage. Abusive policing in communities of color is the civil-rights issue of this generation. Its infuriating backdrop is the impunity of well-heeled corporate executives held harmless for far more harmful crimes.

Rena Steinzor is a professor at the University of Maryland Carey Law School and was president of the Center for Progressive Reform.

She is the author of Why Not Jail? Industrial Catastrophes, Corporate Malfeasance, and Government Inaction.

Spring 2016 The American Prospect 77

Volkswagen’s

Big Lie How VW’s decision to double down on a fossil-fuel technology led it into deceit and disaster B y C hris Iov enko

78 WWW.Prospect.org Spring 2016

I

n September 2015, Volkswagen shocked the automotive industry and the world by admitting publicly that, since 2008, it had duped consumers and violated U.S. federal and state emission laws by using a “defeat device” or “cheatware” in its diesel automobiles. The cheatware detected when the car was being put through an emissions test cycle and made the exhaust emissions compliant only during the test.

Under actual driving conditions, emissions of certain toxic pollutants shot up to as much as 40 times more than the tests found. The cheatware had been installed in some 11 million VW vehicles worldwide, as well as Audis and Porsches, including nearly 600,000 vehicles in the United States.

The impact of this disclosure on VW has been calamitous. VW stock has lost a third of its value since the scandal broke. Its new-car sales in the United States are plunging, due in part to a mandated stop-sale on all new diesels, even as U.S. car sales overall are reaching decade highs. If that weren’t bad enough, VW is facing numerous civil suits as well as enforcement measures and fines from both the Environmental Protection Agency (EPA) and the state of California. VW is also under investigation by regulators in Europe.

The scale and audacity of the deception are especially stunning given VW’s prominence in the automotive industry. VW is not only Germany’s largest automaker; in the first half of 2015, it briefly surpassed Toyota to become the largest automaker in the world, a position it might have maintained if not for the scandal. VW’s nearly 600,000 employees produce about 41,000 vehicles a day. VW owns 12 subsidiaries, including such renowned and highprofile names as Audi, Skoda, Bentley, Bugatti, Lamborghini, Ducati, and Porsche.

The scandal highlights two broader problems.

The first involves automakers that have lagged behind their rivals in developing electric and hybrid cars and in adjusting to global concerns about air pollution and climate change. German car manufacturers have long been leaders in diesel engines, which can generate high levels of pollution. Even as other automakers developed hybrids in the 1990s and early 2000s, the German automakers stuck with what they knew best. Instead of developing cleaner and more

fuel-efficient cars, they produced ever more powerful engines and focused exclusively on growth. This was the context of VW’s deception: The company doubled down on diesel and sought to evade environmental regulation rather than take on the challenges of innovation in an environmentally conscious age.

The second issue highlighted by the scandal has to do with regulatory enforcement. Like other regulatory agencies, the EPA has faced budget cuts that have affected its enforcement capabilities; VW’s deception came to light only as a result of a privately funded research project. This is a story not just about an incidental failure to enforce environmental standards, but about the vulnerability of regulatory agencies to deliberate and systematic corporate evasion.

Volkswagen’s story has an infamous beginning: The company originated as the brainchild of Adolf Hitler and made extensive use of slave labor during World War II. Very few Germans owned cars in 1934, when Hitler hired Ferdinand Porsche to design a small and inexpensive “people’s car” for the masses.

Porsche designed a streamlined, rear-engine, air-cooled small car that was forward-thinking, fuel-efficient, and inexpensive to produce.

However, the completion of the factory, located in present-day Wolfsburg, coincided with Germany’s invasion of its neighbors and the start of World War II, so very few VW passenger cars were actually produced (Hitler received one of the few made as a gift on his 50th birthday).

The factory instead turned to producing military vehicles and would eventually depend on a workforce of more than 15,000 slave laborers from Nazi concentration camps. In response to a lawsuit from survivors in 1998, VW set up a $12 million restitution fund.

In the late 1940s, VW emerged from the ashes of the Third Reich to launch the Porsche-

designed VW Beetle. Over 21 million of the cleverly marketed and beloved original Beetles would be sold by the time it was taken off the market in 2003, making it the bestselling car in the world. As Volkswagen grew, it absorbed other companies and brands. This focus on growth and global market share increased in the last decade as VW set its sights on surpassing Toyota to become the largest automaker in the world. One barrier to VW’s global ambition was its trouble selling vehicles in the United States, then the world’s most lucrative car market.

The problem, says John Voelcker, an industry analyst and senior editor for Internet Brands Automotive Group, is that Volkswagen didn’t dedicate the time and resources to strategizing how to best design cars to fit the needs and desires of the U.S. consumer. VW largely ignored America’s love affair with minivans and SUVs, and until recently scoffed at the burgeoning interest in hybrids and electric cars.

Instead, Volkswagen wanted U.S. consumers to buy the same kind of cars it was so successful selling in Europe, namely diesels. In Europe, half the new cars sold are diesels and much of that market belongs to VW. The diesel engine, which relies upon compression instead of spark plugs for ignition, appeals to Europeans because it gets excellent mileage while providing sporty performance.

In many European Union countries such as England and Germany, diesels also benefit from government incentives and subsidies.

In the United States, diesel has had a much harder time capturing the interest of passenger-car buyers, though it’s popular with truck buyers. Cheap gas prices and a generally tepid interest in fuel economy have been a big part of the problem. Diesel was also dealt a setback by General Motors’ misguided foray into diesel-engine production in the late 1970s and early 1980s. GM produced such notable flops as the diesel Oldsmobile Cutlass and the diesel Cadillac Eldorado, which cemented in many minds a stereotype of diesels as being unreliable, underpowered, and smoky.

Thanks to technological advances in the 1990s, however, many foreign manufacturers such as VW, Volvo, and Mercedes began to make modest inroads into the U.S. market with their diesel passenger cars. The incorpo-

Spring 2016 The American Prospect 79

ration of turbochargers and direct rail injection significantly enhanced performance and efficiency and overcame the major consumer complaints about earlier diesel cars. The main problem with diesels, especially for well-regulated and emission-sensitive markets like the United States, is that they can create more local pollution than their gasoline-powered equivalents. While diesel engines have lower CO2 emissions, diesel’s efficiencies at combusting fuel rely on high combustion temperatures and high engine compression ratios that also create excessive amounts of certain pollutants, especially nitrogen oxides (NOx). NOx contributes to smog and ground-level ozone; diesels also emit fine particulate matter, which is linked to lung disease and cancer. According to the EPA , exposure to these pollutants can cause respiratory illness, especially in children, as well as premature death.

Public concern about air quality and tailpipe emissions first emerged as a public issue in California. In the years after World War II, Los Angeles began to suffer from periods of dense smog as car ownership soared and the metropolitan region became heavily suburbanized. National concerns about air pollution grew in the 1960s, resulting in the passage of the Clean Air Act of 1963. A strengthened Clean Air Act in 1970 and the establishment of the EPA the same year further empowered the federal government to regulate air pollution. By 1975, federal exhaust emission standards required carmakers to install catalytic converters. California had even tougher standards. The California Air Resources Board, established in 1967, had its own program to regulate tailpipe emissions, and the federal government gave the state a recurring waiver to enforce stricter emissions standards than those dictated by federal law.

Regulations aimed at controlling air pollution have proven to be effective at protecting public health. Reductions in airborne pollutants from cars, trucks, power plants, and factories have extended life expectancy, preventing hundreds of thousands of premature deaths and cases of bronchitis and other diseases since 1970. Requirements for leadfree gasoline, which the EPA began imposing in 1978, are one of the greatest success

80 WWW.Prospect.org Spring 2016

stories of public health, responsible for dramatic reductions in blood lead levels known to cause brain, kidney, and cardiovascular damage. The improvements in air quality are most stark in large cities. In Los Angeles, smog-causing pollutants have been reduced by 98 percent since 1960 despite a tripling of fuel consumption. The bulk of the gain in air quality comes from cleaner cars. If nothing had been done about auto emissions, many major metropolitan areas in the United States would now have third-world levels of air pollution rivaling Manila or even Delhi, the most polluted city in the world.

Other automakers were impressed but baffled. VW proclaimed itself an innovator leading the way with its supposed “Clean Diesel” technology.

More stringent U.S. air pollution regulation began to affect German automakers in 1994, when the EPA had phased in significantly reduced permissible levels of emissions for cars and trucks. The agency phased in even stricter standards from 2004 to 2009. The new regulations significantly increased diesel emission standards. These far exceeded existing European standards, and required the passenger diesel manufacturers such as BMW, Mercedes, and VW to add new and potentially expensive exhaust treatment systems to their diesel vehicles. In fact, all new diesels were pulled off the market in 2008 because they couldn’t be certified, but the next year, the German automakers began reintroducing passenger diesels outfitted with new regulation-compliant emission controls.

The emission system used by both BMW

and Mercedes is called a selective catalytic reduction system, or SCR . This system, which requires a fair amount of plumbing and bulky hardware, reduces NOx by squirting automotive-grade urea, otherwise known as diesel exhaust f luid, into the exhaust stream. An effective and proven process, this method can remove up to 90 percent of NOx while reducing the level of other pollutants as well. The downside of SCR is that it is expensive, takes up trunk space, and requires a separate tank for the diesel exhaust fluid. The inconvenience of making a trip to the dealer to refill this separate tank is regarded as a big negative for many consumers who might otherwise consider diesel. Refilling the tank is not optional; if the tank runs dry, the car will not operate. This equipment can be engineered to fit in larger sedans such as those produced by BMW and Mercedes, but it poses a bigger challenge for compact cars.

Initially, VW opted for a different system called a lean NOx trap. It’s a compact, inexpensive system that uses an exhaust trap combined with complicated adjustments to the fuel mixture to reduce NOx emissions. VW asserted that its cutting-edge engineering had created an entirely new combustion process that solved its diesel emissions challenges while maintaining fuel efficiency and performance.

Other automakers, car magazines, and industry analysts were generally impressed, though a little baffled.

“None of the other automakers could figure out how Volkswagen did it,” says John Voelcker.

“Infiniti, Subaru, and Honda were all looking to launch diesels. None of those makers could get their diesels to comply and still provide suitable acceleration, performance, and fuel economy. So basically for eight years, engineers at other companies scratched their heads and finally said, ‘You know, Volkswagen must just have really good engineers.’”

Impressed by the achievement, Green Car Journal named the 2009 VW Jetta TDI Green Car of the Year, the first time a diesel had garnered that honor. VW parlayed this recognition into a successful marketing campaign that branded VW as an innovator leading the way with its self-proclaimed “Clean Diesel” technology. The company’s ads focused on redefining diesel as clean; one ad featured three

presumptive “old wives” arguing about diesel.

The ad dismissively labeled the idea of diesel being dirty as an old wives’ tale.” VW also waged an online campaign through their interactive site tditruthordare.com, which challenged consumers on their “misconceptions” about diesels as being polluters and pitted VW diesels in an “eco-conscious car showdown” against cars such as the Prius.

Although diesel cars remained a small niche market in the United States, Volkswagen soon dominated it. VW’s overall U.S. sales did very well, too; it doubled its vehicle sales from 2009 to 2012 and seemed like it might be on track to meet its ambitious goal of selling a million cars a year in the United States by 2018. Volks­ wagen’s aggressive and often clever marketing campaigns were successful in both raising its brand profile and attracting a specific type of car buyer for its diesel line of cars equipped with turbocharged direct injection. VW’s diesels appealed to a segment of the market as an iconoclastic kind of anti-Prius, a very sporty but environmentally responsible car that boasted not only great performance but also enviable gas mileage. In 2009, as a further incentive, VW’s diesels each qualified for an advanced lean-burn federal tax credit of $1,300.

has a large proportion of all the diesels in the United States as well as a wide variety of terrains and conditions to test car performance.

Three diesel passenger vehicles were tested: a VW Jetta, which used a lean NOx trap to treat its emissions, and a BMW X5 and VW Passat, both of which used selective catalytic reduction exhaust systems. The California Air Resources Board provided lab testing equipment. Before road testing, all three cars passed emissions tests at a state testing facility.

The researchers then fitted the cars with portable emissions monitors and drove them

fr ank augstein / ap images

VW’s deceit began to collapse in the fall of

2013 with a study of diesel cars by the International Council on Clean Transportation (ICCT), a nonprofit organization that supports cleaner and more efficient vehicles. The purpose of the study, according to Drew Kodjak, the executive director, was relatively simple and straightforward.

“It started in Europe, where half of the vehicles sold are diesels,” says Kodjak. “A variety of different testing sources showed that passenger diesel vehicles in Europe were emitting many times the legal limits. We decided to do some testing in the U.S. on light-duty vehicles in order to demonstrate that it was possible to achieve low emissions not only on the test cycle but also under normal operating conditions.”

ICCT contracted with West Virginia University to do the actual road tests, which were anticipated to provide data on how diesels can be both fuel-efficient and low-emitting. The West Virginia researchers chose California as the testing site for the cars because the state

Before being sacked, CEO Martin Winterkorn said VW was “endlessly sorry we betrayed the trust of customers.”

extensively over a number of days on changing terrain and in a wide variety of driving conditions. Although vehicles are expected and allowed by regulators to perform differently under changing driving conditions, a disturbing pattern soon emerged for both Volkswagens. Even when the Passat and Jetta were in optimal conditions for low emissions, such as steady highway speeds, both VWs unexpectedly emitted a huge amount of NOx tailpipe pollution. The emissions were so high as to be virtually uncontrolled.

“A vehicle manufacturer is not required to meet any on-road emissions standards, but you shouldn’t see such a magnitude of difference between what is being performed on the test cycle and on the road,” explains Arvind Thiruvengadam, an assistant professor at

West Virginia University and a member of the research team. “The magnitudes we observed, such as 30 times or 40 times [the legal limit], were alarming.”

This problem applied only to the VW diesels.

The diesel BMW, which used the same SCR emission system as the VW Passat, showed only the expected emissions variation between its test cycle and real-world testing. When ICCT published its report in May 2014, the dominoes suddenly began to fall. The EPA and the California Air Resources Board began doggedly to investigate the problem on their own and to demand answers from VW. A year later, discussions between the regulators and VW became heated, and the EPA pushed VW to come clean about what had happened.

On September 22, 2015, VW’s chief executive, Martin Winterkorn, declared in a video statement that he was “endlessly sorry we betrayed the trust of customers” and that “the irregularities with these engines contradict everything for which Volkswagen stands. To make it very clear: Manipulation at VW must never happen again.” Winterkorn also promised swift action and full transparency. That a company as huge and important as VW would design its cars to cheat on emission standards stunned and outraged not only consumers but regulators and the automotive industry as well.

VW’s mea culpa was a very unusual move; it’s virtually unprecedented for a major corporation to admit full culpability in its immediate response to a huge scandal.

“As any good American businessman knows, you never admit anything, you never apologize for anything,” says Steve Lehto, a consumer protection attorney. “You can’t take that back.

Nobody will believe you.”

Nonetheless, VW tried to do precisely that.

Winterkorn resigned soon after his statement to be replaced by Matthias Mueller. In January, when Mueller visited the Detroit Auto Show, he did little to endear himself to American consumers or address their concerns about the scandal. Instead, when interviewed

by NPR , Mueller denied that VW had lied to the EPA and instead implausibly insisted VW had simply misunderstood American emissions regulations.

“It’s very interesting at the very beginning of this that they owned the problem when it came

Spring 2016 The American Prospect 81

82 WWW.Prospect.org Spring 2016

sand dollars a car if you can even get the plan signed off on.”

Each model of car would likely require a separate and specific engineering fix, and each model would also have to be retested and approved by the federal government. Another looming issue for VW is how it would incentivize customers to bring their cars back in for a “fix” that would likely negatively affect performance and gas mileage. Further, except for California and a few other states, most states don’t require car owners to comply with vehicle recalls to maintain vehicle registration; as

Volkswagen’s 2016 diesels sit unsold and unsellable on dealers’ lots all over the U.S.

Rachel Cohen has shown in the Prospect, millions of cars recalled as a result of safety defects remain on the road. Low consumer compliance with recalls raises the specter that even if VW provides a fix, many of its cars will remain on the road and continue to pollute at high levels.

Some countries, such as Germany, mandate that owners fix vehicles under recall; the U.S. ought to move toward a similar policy on both public-safety and environmental grounds.

The other option for VW, and perhaps the cheaper and certainly simpler alternative, is to just cut its losses and buy back the earlier diesels that would need hardware retrofitting.

Then the troubling question arises about what VW would do with the unsalable bought-back cars. Would the company crush them or re-sell them in a less-regulated market like Mexico,

where they can continue to spew out pollutants?

As daunting and expensive as the technical fixes may be, the legal issues facing Volkswagen may prove even more cataclysmic for the company. Ironically, VW’s short-lived burst of honesty and integrity may deny it the familiar corporate course of plausible denial or of scapegoating one or more low-level malefactors before settling with the concerned parties.

Indeed, the scale and duration of VW’s lawbreaking as well as the apparent forethought and effort put into perpetrating the fraud seem to indicate that the malfeasance may have had high-level approval, either tacit or explicit.

Regardless of who thought up, engineered, or approved the fraud, VW’s post-scandal behavior hasn’t sat well with regulators, nor will it work to its advantage as the company tries to fend off the rising number of class-action suits. These lawsuits stem primarily from diesel-car owners but include investors as well.

VW fought to have the cases consolidated and heard in Detroit, a city generally friendly to car manufacturers. Instead, the cases will be heard in California, where judges and juries are not expected to be especially lenient.

Only time will tell how financially damaging those civil lawsuits will ultimately be. The legal outcome on the civil side pivots in large part on how VW decides to deal with the existing problem diesels. If VW is capable of fixing all the diesels concerned, even the earlier models, the damages any individual owner can claim will likely be very limited. Even if the aftermarket application of new emission-control equipment or another fix reduces gas mileage, owners will be entitled only to damages they suffered—in this case, the money they would lose at the pump over the remaining lifetime of the vehicle. For any individual, this might not amount to much money, maybe not even enough to fight over, though in a class-action suit it could still be significant. If the company can’t or won’t fix the problem, the story changes and the door opens to potentially much wider damages.

The criminal charges Volkswagen is facing are another matter entirely. Even if Volks­ wagen somehow manages to fix every one of its problem diesels, the criminal charges are not going to go away. As a company, VW has admitted to breaking federal law by violating the Clean Air Act, and in a suit filed by

rick bowmer / ap images

to light,” says Mark Stevenson, an auto analyst and managing editor at The Truth About Cars. “Ever since that moment, they’ve been trying to find legal ways to get out of doing things. They had this amazing opportunity where they could have said, ‘Yes we did it, and in two months we are going to tell you exactly what we are going to do about it.’”

To fend off its steadily mounting legal challenges, VW has hired Kirkland & Ellis, the U.S. law firm that defended BP against criminal charges resulting from the Deepwater Horizon oil spill disaster. In a goodwill gesture, VW has offered a $500 Visa prepaid gift card as well as a $500 VW dealership gift card to owners of the affected diesels. VW hasn’t yet offered a clear explanation of why it installed the cheatware, who made the decision, and who knew about it.

Most important, VW has also failed to announce a sufficient technical fix for any of the implicated 2009–2015 diesels, probably because the technical solution is likely to prove very thorny from an engineering as well as a logistical standpoint, and will no doubt be financially punishing for the company. Two versions of VW’s diesel engines are under stopsale. The first is the larger 3.0-liter TDI diesel, which can be found in VW, Audi, and Porsche SUVs and affects around 85,000 vehicles.

These vehicles violate EPA regulations because they contain software that was not disclosed as is required by law. These should be fixable by a software tweak.

VW’s more prevalent 2.0-liter TDI diesel engines from the model years 2012 to 2015 are equipped with an SCR system. They should be able to pass emissions tests once the offending cheatware is removed. The first generation of diesels sold from 2009 to 2011 poses the biggest dilemma for VW. Unfortunately for VW, this engine comprises the bulk of the 2.0-liter engines in question, an estimated 365,000 of the roughly 485,000 problem passenger cars.

These earlier cars have a NOx trap emissions system as opposed to the SCR system. An SCR system would probably have to be retrofitted to make the cars compliant.

“It’s a nightmare,” says John Voelcker.

“You’re effectively talking about retrofitting into 365,000 old cars something that they were never designed to have. It’s easily several thou-

the Department of Justice in January, VW faces a fine of up to $37,500 per vehicle as well as additional fines that could total $48 billion. VW also violated California state law as well as the laws of other states that follow California’s emission standards, although it’s less clear what fines it is facing for those violations. VW continues to submit proposals to both the EPA and the California Air Resources Board, but as of this writing, all the proposed fixes have been rejected as being insufficient. If that weren’t enough bad news for VW, it is also being investigated by the Senate for falsifying emissions claims and unjustly benefitting from more than $50 million in federal tax credits.

The clock is ticking for VW. Enormous damage has been done to VW’s brand and credibility, and every day that VW postpones decisive action its 2016 diesels sit unsold and unsellable on dealers’ lots. The burden of all the unresolved legal and technical issues, not to mention the mounting anger and frustration of those who bought a car under false pretenses, will continue to drive potential customers away.

As severe as the damage is that VW has inflicted on itself as well as on VW owners, dealerships, and investors, there are two other big losers in this scandal as well. The first is the concept of diesel engines as being a greener or better alternative to gasoline engines. Europeans adopted diesel in the 1990s partly as a way to combat greenhouse emissions since diesels emit less CO2 than gas engines. More recently, however, there has been growing alarm in Europe about the level of smog and particulate matter in large cities; in fact, Paris and London may ban diesels. Even though VW denies violating Europe’s laxer emission regulations, the scandal accentuates public concerns about the high levels of diesel-generated pollutants in the continent’s large cities and may well change how European governments and consumers make decisions about cars.

In the United States, the future of diesel is not in debate. Barring a miracle, the diesel passenger car in America is dead, except for a small number of high-end Mercedes and BMWs. VW was the only seller and proponent of mid-level diesel cars, and without its market presence, diesel now lacks both a major sales platform and an advocate. Many environmentalists see the collapse of diesel as a

positive development, potentially accelerating the trend away from combustion engines to hybrid and plug-in electric vehicles. Elon Musk, founder of the electric car company Tesla Motors, has proposed that California not fine VW but instead require it to ramp up the rollout of zero-emission cars. The writing may be on the wall for not just diesel engines but combustion engines in general. Although hybrid and electric cars currently account for only a fraction of new-car sales in the United States, new standards mandate that automakers meet a fleet average of 54 miles per gallon by 2025. To achieve these numbers, automak-

The VW scandal reveals limits in the enforcement of emissions regulations.

The EPA’s staff level is now the lowest it has been since 1989. ers will have to commit to selling many more low- or zero-emission automobiles.

Some companies are meeting the challenge head-on; BMW recently announced that by 2025, its entire line of vehicles will be plug-in hybrids or electric. In the wake of the scandal, VW said it will move away from diesel toward hybrids and plug-in electrics. However, given its late start, VW faces an uphill battle to catch up with the Japanese and U.S. automakers that currently dominate the market.

The public is the other big loser in this scandal. It’s difficult to attach a hard number to VW’s misdeeds, but estimates put the excess pollution created by the outlaw diesels annually at between 10,000 and 40,000 extra tons of NOx in the United States alone. EPA studies have priced the health burden of NOx emitted from vehicles at $7,300 per ton, which

puts a low-end value of $100 million a year in health-related damages from the excess emissions. These numbers rise drastically when calculating the global environmental damage.

The Guardian estimates the 11 million cars affected globally will create up to an additional 948,691 tons of NOx emissions annually.

Behind those numbers is the human cost of more cases of lung disease, cancer, and premature death. It’s clearly urgent for VW to find a fix for its polluting diesels as quickly as possible before more damage is done.

The VW scandal also reveals limits in the enforcement of federal and state emissions regulations. For years, VW was able to get away with brazen cheating; its misdeeds were discovered accidentally by a third party, not a regulatory agency. Since Republicans took control of Congress in 2010, the EPA’s budget has been slashed by more than 20 percent; as a result, the agency’s staff level is now the lowest it has been since 1989. Unable to do complete testing and enforcement of emissions standards and other rules, the EPA and other agencies have increasingly relied on selfcertification by automakers.

“Our system has been based on a certain level of trust,” says John Swanton, a communications specialist at the California Air Resources Board. “When you’re deliberately trying to get around things and fool people, that throws the whole process into question.”

In the wake of the scandal, both the EPA and the California board announced that they will do more road-testing and spot-checking of vehicles to make sure that they are compliant under real-world conditions. New enforcement measures by the EPA will likely require additional appropriations, which may be hard to come by if Republicans hold power over the budget.

If there is a silver lining to the VW scandal, it may be to persuade other corporations that skirting governmental regulations isn’t worth the short-run gain and that doubling down on old fossil-fuel technology could boomerang and prove financially disastrous. Through their duplicity and lust for profits and growth at any cost, Volkswagen’s leaders killed the thing they wanted most: a growing and lucrative American market for their cars.

Chris Iovenko is a Los Angeles–based writer.

Spring 2016 The American Prospect 83

Will Workers and Consumers Get Their Day in Court?

With a new high court majority, the era of mandatory arbitration could end.

T

he death of Antonin Scalia and the prospect of several new appointments to the Supreme Court in the next few years have led progressives to hope for a more worker-friendly Court. One area where much-needed change could come is arbitration law.

The pervasive use of mandatory arbitration by employers and retailers in their dealings with their workers and consumers is rapidly destroying innumerable rights that were legislated

by Congress over more than a century. Those rights include overtime pay, safe working conditions, safe products, as well as protections against employment discrimination, predatory lending, and overcharges by telecommunications and credit card companies. I have addressed the widespread use and frequent abuse of mandatory arbitration in previous articles in the Prospect (see “Signing Away Our Rights,” March 2011; “The Feeble Strength of One,” Summer 1993).

The issue was also spotlighted recently in a three-part series in The New York Times.

How might the situation be fixed, and worker and consumer rights effectively restored?

84 WWW.Prospect.org Spring 2016

One strategy is legislation. Each year for the past several years, an Arbitration Fairness Act has been introduced in Congress. The act would exempt employment, consumer, antitrust, and civil-rights cases from the operation of the Federal Arbitration Act, effectively eliminating the use of mandatory pre-dispute arbitration in those areas. The most recent iteration was introduced in April 2015 by Senator Al Franken. Like its predecessors, Franken’s Arbitration Fairness Act is languishing in committee, fiercely opposed by business. Unless a Democratic Congress is elected in November, such legislation is unlikely to gain traction.

A second possible strategy is executive action. For example, in July 2014, President Barack Obama signed the Fair Pay and Safe Workplaces Executive Order. It included a provision banning the use of mandatory pre-dispute arbitration by defense contractors for employment disputes alleging sexual assault, sexual harassment, or workplace discrimination claims. The business community has mounted fierce opposition, and plans several legal challenges when the order goes into effect later this year. The

ta r e k e l s o m b at i / i s t o c k

B y K at he r in e V. W. S ton e

Consumer Financial Protection Bureau has proposed a regulation that would prohibit mandatory arbitration coupled with class-action waivers to prevent class-action lawsuits in consumer financial transactions. They are encountering a barrage of opposition from the American Bankers Association, the Financial Services Roundtable, the Consumer Bankers Association, and other business groups.

That leaves the courts. Until now, courts have been the primary force enabling corporations to use mandatory arbitration to strip workers and consumers of their statutory rights. However, the death of Justice Scalia and the possibility of a more liberal Court allow for a revisiting of these issues.

How We Got Here

The current arbitration assault has its origins in the 1980s, when the Supreme Court reinterpreted a little-known federal law called the Federal Arbitration Act (FAA) and gave it expansive scope. Today, courts allow mandatory arbitration, substantially on corporate terms, to settle disputes of all types, overriding contractual claims and statutory rights, whether brought in a federal or a state court. The expansive interpretation of the FAA dates entirely from the era of conservative domination of the Supreme Court.

The FAA was originally enacted in 1925, before the enactment of broad consumer and worker rights. The statute was the result of a lengthy campaign by the commercial bar of New York to convince the courts, the legal profession, and legislatures of the superiority of arbitration for business disputes. In that era, trade associations were proliferating, and they promoted arbitration systems, which they required their members to use. The business community advocated self-regulation by insiders. Thus they wanted courts to move business disputes out of the courts, force recalcitrant parties to arbitrate, and use courts to enforce arbitral awards and otherwise keep out.

The FAA provides that when a dispute involves a contract that has a written arbitration clause, a court must, upon motion, stay litigation so that the dispute can go to arbitration. The FAA narrows the power of courts to review an arbitral award, no matter how erroneous it might be.

An award can only be set aside on four grounds: It was procured by fraud, the arbitrator was biased, the arbitrator refused to hear relevant evidence, or the arbitrator exceeded his or her power as set out in the parties’ arbitration agreement. There is no provision for overturning an award based on errors of fact, contract interpretation, or law.

When it was drafted, the legislators, commentators, and courts assumed that the FAA applied only to commercial disputes in federal courts. However, in the 1980s, the Supreme Court radically expanded the scope of the statute far beyond its initial business-related purposes. The

Supreme Court’s arbitration decisions that decade were the hidden revolution of the Reagan Court. Both liberal and conservative justices favored expanding the scope of the FAA , but in different ways. The liberal wing wanted to expand federal control of arbitration and ensure that the FAA would preempt any state law that restricts arbitration.

The conservative wing favored expanding arbitration to disputes over federal statutory rights.

In 1983, the Supreme Court set the stage for the revolution that followed with a pronouncement, in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., that courts, when deciding whether a particular dispute comes within an arbitration clause, should resolve all doubts in favor of arbitration. It said that a presumption in favor of arbitration furthered the “liberal federal policy favoring arbitration agreements.” The case itself was a business-to-business dispute over charges for delay in a hospital construction contract; it did not concern consumer or worker rights.

The second pivotal development was a preemption case. In 1984, in Southland Corp. v.

Keating, the Court rejected the view that the FAA only applied to cases brought in federal courts under federal law. Once again, labor and consumer rights were not at issue. The dispute was between a California 7-Eleven franchisee and the behemoth franchisor, Southland Corporation. Keating sued Southland in state court, alleging several state law violations, including violation of the California Franchise Investment Law (CFIL), which was designed to protect small franchisees from overreach and misconduct by powerful franchisors. The CFIL also had a provision requiring judicial, not arbitral, consideration of all claims. The Supreme Court held that the state law was preempted. Thereafter, any state’s efforts to regulate arbitration to protect weaker parties would be preempted by the FAA . Southland was decided 7–2. Chief Justice Warren E. Burger wrote the majority opinion to which Justices William J. Brennan Jr., Byron White, Thurgood Marshall, Harry Blackmun, Lewis F. Powell Jr., and John Paul Stevens joined. Only Justices William Rehnquist and Sandra Day O’Connor dissented.

The third pivotal development of the 1980s concerned the types of disputes subject to the FAA . Whereas previously the FAA had been found to apply only to contractual disputes, in 1985, in Mitsubishi Motors v. Soler ChryslerPlymouth, the Supreme Court held that the FAA also compelled arbitration of statutory disputes. In the case, an auto dealer accused the manufacturer and its joint venture partner of conspiring to destroy its business, in violation of the federal antitrust law. The Supreme Court ruled

It Began With Burger: The string of cases restricting consumers’ and workers’ rights started in the Warren Burger era.

Spring 2016 The American Prospect 85

The Intensifiers: More extreme anti-worker and anti-consumer rulings were spearheaded by Justices Antonin Scalia and Chief William Rehnquist.

5–3 that the antitrust issue had to go to arbitration. The Court’s liberal members, Justices Stevens, Marshall, and Brennan, dissented.

The majority opinion in Mitsubishi by Justice Blackmun added an important caveat. Arbitration can only be ordered, he wrote, if the complaining party can vindicate his or her statutory rights in the arbitration forum. Subsequently, lower courts applied this “effective vindication doctrine” to ensure that parties that were forced to go to arbitration would still have an adequate opportunity to enforce their statutory rights. But that doctrine was recently called into question by the high court.

In 1991, the Court ruled for the first time that the Arbitration Act could be used to undermine workers’ rights. Robert Gilmer was hired by the Johnson Lane stock brokerage firm in 1981 and was fired in 1987 at the age of 62. He sued, alleging that he had been fired in violation of the Age Discrimination in Employment Act (ADEA). Johnson Lane moved to compel arbitration on the basis of an arbitration provision contained in the standard securities industry registration form that Gilmer had been required to complete when he was hired. Gilmer argued that compelling arbitration of his age discrimination claim was inconsistent with the statutory framework of the ADEA because the statute embodied important social policies that should not be determined in a private tribunal.

In Gilmer v. Interstate/Johnson Lane Corp., the Supreme Court disagreed and ruled that Gilmer had to assert his age-discrimination complaint in arbitration.

That majority opinion in Gilmer was written

by Justice White. A dissent by Justices Stevens and Marshall contended that Congress did not intend ADEA claims to be subject to mandatory arbitration. Since Gilmer, lower federal courts have upheld arbitration for disputes concerning all types of employment-related statutes, including Title VII of the Civil Rights Act, the Whistleblower Protection Act, and the Employee Polygraph Protection Act. The Gilmer decision thus opened the door for extensive use of arbitration in non-union employment settings.

The Assault on Workers’ and Consumers’ Rights

In the decades that followed, the Supreme Court further expanded the scope of the FAA and repeatedly rebuffed attempts by states to enact legislation to protect consumers and workers from unfair arbitration agreements. For example, in 1996, the Court applied Southland to strike

86 WWW.Prospect.org Spring 2016

down a Montana law designed to ensure that consumers gave “knowing consent” to arbitration clauses in their contracts with large corporations. Paul Casarotto, a Subway franchisee in Montana, sued the owner of the Subway chain in state court for fraud. The Subway corporation’s standard franchise agreement called for arbitration of all disputes, with arbitration to be held in Bridgeport, Connecticut. Casarotto contended that it would be prohibitively expensive for him to travel to Connecticut and retain a Connecticut lawyer. Fortunately, Montana had a law that required all arbitration clauses in contracts to appear in capital letters on the first page of the contract. In this case, the arbitration clause appeared on page nine, a violation that would have rendered the arbitration clause invalid.

Unfortunately for him, though, in Doctor’s Associates, Inc. v. Casarotto, the Supreme Court held that the Montana law was preempted because it was restrictive of arbitration.

In 2000, the Court went even further, requiring a complaining party to arbitrate a claim even when she could not afford to do so. In Green Tree Financial Corp.Ala. v. Randolph, Larketta Randolph had purchased a mobile home with financing from Green Tree Financial Corporation. The contract called for binding arbitration.

Subsequently, when Green Tree attempted to repossess the mobile home, Randolph argued that the loan agreement violated the Truth in Lending Act, a federal statute designed to protect individual borrowers in their dealings with large financial institutions. She also claimed that the lender’s arbitration procedure was so expensive that, if she were required to arbitrate, she would not be able to bring her claim at all. She lost 5–4 in the Supreme Court. The majority opinion was written by Chief Justice Rehnquist; Justices Ruth Bader Ginsburg, Stevens, David Souter, and Stephen Breyer dissented.

The Supreme Court has also curtailed the ability of consumers and employees to avoid arbitration on the grounds that a contract is illegal, fraudulent, or otherwise unenforceable. Through a sleight of hand known as the “separability doctrine,” the Court has held that even if an entire contract is invalid, the promise to arbitrate is enforceable because it is separable from the rest of the contract. To add insult to injury, the arbitrator, rather than a court, gets to decide whether the contract is valid. The Supreme Court has applied the separability doctrine to require arbitration of contracts that were alleged to be fraudulent, illegal, and unconscionable.

Until recently, the Court allowed an exception to separability in cases where illegality, fraud, or some other fatal defect was alleged in the arbitration clause itself. But even that escape hatch was recently narrowed to a vanishing point in 2010, in a 5–4 opinion authored by Justice Scalia in Rent-A-Center West, Inc. v. Jackson.

Antonio Jackson worked at a Rent-A-Center in Nevada, where he repeatedly sought a promotion. After one rebuff, he complained to his store manager. He was subsequently promoted, but then fired two months later. He sued, alleging he had been denied a promotion because of his race and fired in retaliation for complaining. There was an arbitration clause in his employment contract. Jackson resisted arbitration on the grounds that the arbitration clause was unconscionable under existing state law, due to its coverage, excessive cost, and lack of rights of discovery.

Unconscionability is a well-established contract doctrine that says when a contract is grossly unfair in its terms and/or in the manner in which it was procured, it will not be enforced. Unconscionability claims are often lodged against arbitration clauses that specify procedures that prevent parties from engaging in adequate discovery, impose onerous burdens of proof, or otherwise make it difficult for a complaining party to prevail.

The Supreme Court ruled that Jackson had to arbitrate his discrimination claim. Writing for the majority, Scalia announced a new principle—a party who claims the arbitration clause itself is unconscionable under state law has to bring that claim to arbitration in most circumstances.

The decision drew a strong dissent. Justice Stevens explained, in a dissent that was joined by Justices Ginsburg, Breyer, and Sonia Sotomayor: [The separability doctrine] allow[s] a court to pluck from a potentially invalid contract a potentially valid arbitration agreement. Today the Court adds a new layer of severability—something akin to Russian nesting dolls—into the mix: Courts may now pluck from a potentially invalid arbitration agreement even narrower provisions that refer particular arbitrability disputes to an arbitrator. [Emphasis in original.]

After Rent-A-Center, it is almost impossible for a party to challenge a one-sided arbitration clause on unconscionability grounds, no matter how unfair it is.

And it has gotten even worse.

The most egregious expansion of the FAA has been to undermine class actions. Employers have aggressively used the “liberal federal policy favoring arbitration” from the Moses H. Cone case to eliminate class-action lawsuits. Whereas previously, employers had faced massive potential liability from class actions based on employment legislation designed to protect individual employees, they found they could design arbitration systems that would ban class actions and thus stack the deck in their favor. It has become common for corporations to impose on their consumers and workers a clause that requires arbitration of all disputes and provides that no claim can be taken

to arbitration or a court on a collective or class basis.

Composite arbitration and class-action waiver clauses are nearly universal in contracts required by credit card companies, banks, cell phone providers, and providers of many other common services. They are also used with increasing frequency in employment contracts. Composite clauses are designed to prevent lawsuits in which large numbers of plaintiffs each have small dollar-amount claims—claims so small that no individual can afford to sue by themselves but which can cost a corporation a lot of money when brought as a class action. When a composite class-action waiver/arbitration clause is enforced, plaintiffs are forced to arbitrate claims on an individual basis, even if it is prohibitively expensive for them to do so, effectively destroying their remedies.

In 2011, in AT&T Mobility LLC v. Concepcion, the Court struck down a California doctrine that made classaction waivers in most consumer cases unenforceable. In that case, Vincent and Liza Concepcion purchased a cell phone service package that was advertised as including free phones. When they were subsequently charged a $30

The Court has upheld clauses prohibiting class-action remedies, which are now nearly universal in contracts required by credit card companies and cell phone providers. sales tax on the “free” phones, they brought a lawsuit alleging that the company had engaged in fraudulent practices.

They filed a class action on behalf of themselves and other customers similarly situated. The AT&T standard customer agreement included a mandatory arbitration clause and a ban on class actions and class-wide arbitration. The Ninth Circuit refused to enforce the ban because they found the composite arbitration/class-action waiver clause to be unconscionable under its Discover Bank rule, named for an earlier Ninth Circuit case. The Discover Bank rule says when there is a class-action waiver in a consumer contract and “when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then ... the waiver [is] unconscionable under California law and should not be enforced.”

AT&T Mobility appealed to the Supreme Court, where Scalia, writing for the majority, held that the California Discover Bank rule was preempted by the FAA . Justices Breyer, Ginsburg, Sotomayor, and Elena Kagan dissented.

This represented an important departure for the liberal jus-

Spring 2016 The American Prospect 87

tices, who had previously supported broad FAA preemption.

In yet another recent case, American Express Co. v. Italian Colors Restaurant, several small merchants claimed they had been overcharged by American Express. Each merchant’s contract with AmEx contained a clause that mandated arbitration and required that all disputes be arbitrated on an individual basis. The merchants brought a federal antitrust suit on a class-action basis. When AmEx moved to compel individual arbitration, the merchants argued that if they had to arbitrate the antitrust claim on an individual basis, it would cost each one hundreds of thousands of dollars, whereas each one’s average recovery would be only $5,000. Hence, they claimed, without the ability to bring a class or collective action, they would lose their substantive rights. They based their argument on the “effective vindication” doctrine from Mitsubishi that says arbitration is only appropriate when a party can vindicate his or her substantive rights in arbitration.

The merchants won in the Second Circuit Court of Appeals, but in June 2013, the Supreme Court reversed the decision. The Court upheld the class-action waiver so

Arbitration rules crafted by courts to serve corporations have destroyed fundamental rights created by a century’s worth of hard-won labor, civil-rights, and consumer laws. that the merchants had to take their antitrust claims to arbitration on an individual basis. It did so despite irrefutable evidence that the cost of bringing an antitrust case was so high that without the ability to proceed as a class action, the case could not be brought.

Writing for the majority, Scalia challenged the effective-vindication principle. “The fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

Kagan delivered a powerful dissent that was joined

by Ginsburg and Breyer. The overall effect of the opinion, she explained, is that “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.” She argued that the effective-vindication rule was essential to prevent stronger parties from using these and other means to eviscerate statutory protections.

Although the Italian Colors case itself involved a dispute brought by merchants, the majority’s decision has important consequences for employment and consumer cases.

By narrowing the effective vindication doctrine, the Court

88 WWW.Prospect.org Spring 2016

has potentially undermined all challenges to class-action waivers in arbitration clauses.

The National Labor Relations Act (NLRA) of 1935 made protection for worker collective action a central pillar of our national labor policy. The core of the statute, Section 7, protects employee efforts to engage in “concerted activities for … mutual aid and protection.” The protection attaches when two or more employees act together to attempt to form a union, take political action, or engage in litigation to improve their wages, hours, and conditions. However, in light of the Supreme Court’s class-action arbitration cases, employers increasingly insert a composite arbitration/class-action waiver clause in employment contracts and use them to prevent employees from acting collectively to pursue legal action.

The conflict between mandatory arbitration and workers’ rights under the NLRA is currently very much alive in the lower courts. In 2012, the National Labor Relations Board ruled in D. R. Horton, Inc. that an employer’s mandatory arbitration policy prohibiting collective or class actions violates Section 7 of the labor law, and that enforcing the arbitration/class-action waiver would interfere with the workers’ substantive right to engage in collective action. Its decision was overturned by the Fifth Circuit Court of Appeals, and several other appeals courts have likewise disagreed with the NLRB. This issue may come to the Supreme Court in the near future. Although the Court has not yet considered this precise question, it has ruled on a similar issue in the context of consumer credit.

It held in 2012’s CompuCredit Corp. v. Greenwood that private arbitration trumps any rights granted under the consumer protection statute, which augurs poorly for the protection of collective labor rights.

Reversing the Arbitration Revolution

This string of cases provides vivid examples of Senator Elizabeth Warren’s oft-stated declaration that “the rules are rigged.” In this instance, rules crafted by courts to serve corporations have destroyed fundamental rights of redress created by a century’s worth of hard-won labor, civil-rights, and consumer laws. Since many of the key cases were decided by 5–4 votes of the Supreme Court, a new court could make a huge difference.

Foremost, it is important to reverse the broad preemption doctrine of Southland that operates to nullify any state law that regulates enforcement of an arbitration clause. Secondly, it is necessary to reverse Green Tree and Italian Colors, which have narrowed the effective vindication doctrine, making it nearly impossible for parties to enforce federal rights in the face of an arbitration clause.

In addition, the Court should narrow the separability doctrine so that state law challenges to arbitration are decided

by a court, not an arbitrator. And it should either refuse to enforce class-action waivers altogether or approve the use of class arbitration as a substitute, particularly for cases involving large numbers of claimants who each have small amounts at stake. And finally, the Court should reverse the 2001 Circuit City v. Adams case, which held that the FAA’s employment-dispute exemption only applied to a narrow group of employees, and reinstate the actual intent of the FAA to exclude employment disputes from arbitration altogether. These proposals are not merely wishful thinking.

Preemption. While overruling a 30-year precedent may sound like a daunting challenge, one conservative member of the Court—Justice Clarence Thomas—has advocated overturning Southland consistently, most recently in 2015 in DIRECTV, Inc. v. Imburgia. Moreover, it appears that the liberal justices who previously supported broad FAA preemption have changed their position, as evidenced by Justices Breyer, Ginsburg, Sotomayor, and Kagan’s dissent in AT&T v. Concepcion. Thus it might be a propitious time to revisit the issue of preemption under the FAA and restore the ability of states to protect consumers and workers from harsh and unfair arbitration agreements.

Restore a robust effective vindication doctrine. In the Italian Colors case, the Court narrowed the effective vindication doctrine practically out of existence. At the present time, it appears that Justices Kagan, Ginsburg, Breyer, and possibly Sotomayor (who did not participate in Italian Colors) would support a robust effective vindication doctrine. Here, too, one more vote on the Court could be decisive.

Eliminate or narrow the separability doctrine. In RentA-Center, separability was used to deprive the plaintiff of his rights under state law to challenge an unconscionable arbitration clause in court. In that case, Stevens, Ginsburg, Breyer, and Sotomayor dissented. Again, one more justice could preserve workers’ and consumers’ state-law protections against the enforcement of illegal, fraudulent, or unconscionable contracts.

Restore class actions. If these other cases are overturned, then parties would be more likely to succeed in invalidating arbitration clauses that are coupled with bans on class actions. Most composite clauses would either be found unconscionable on state-law grounds or unenforceable because they make it impossible for parties to vindicate their substantive rights.

Restore the FAA’s exclusion for contracts of employment. There is one other Supreme Court case that, if

reversed, would instantly restore workers’ rights. Section 1 of the FAA contains an exemption for “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In Circuit City, the Court read the exemption practically out of existence. In that case, employee Saint Clair Adams

sued his employer, a national electronics retailer, for sexual harassment, constructive discharge, and discrimination.

He sued in state court, alleging he had been fired because of his sexual orientation. Circuit City moved to dismiss because there was an arbitration clause in his initial contract of employment. Adams argued that he should not have to arbitrate his claims because the FAA did not apply to employment contracts. The Supreme Court disagreed.

Kennedy, writing for the majority, read the exemption narrowly to only exclude workers who were like seamen and railroad employees—i.e., transportation workers whose work literally took them across state lines.

Four justices dissented in Circuit mentioned in this article City: Stevens, Ginsburg, Breyer, and Souter. They argued that the legislaAmerican Express Co. v. Italian Colors tive history of the FAA demonstrates Restaurant, 570 U.S. ___, that Congress intended to exclude all 133 S. Ct. 594 (2013) employees over whom it had power AT&T Mobility LLC v. Concepcion, to legislate. In 1925, before the New 563 U.S. 333 (2011) Deal, courts had held that Congress Circuit City Stores, Inc. v. Adams, only had the power to regulate the 532 U.S. 105 (2001) employment of seamen and railroad CompuCredit Corp. v. Greenwood, workers, not workers in manufactur565 U.S. ___, 132 S. Ct. 665 (2012) ing or other sectors. The dissenters in DIRECTV, Inc. v. Imburgia, Circuit City contended that as Con577 U.S. ___, 136 S. Ct. 463 (2015) gress’s commerce power was broadly Doctor’s Associates, Inc. expanded during the New Deal periv. Casarotto, 517 U.S. 681 (1996) od, so too should the meaning of the Gilmer v. Interstate/Johnson Lane exclusion. Under their view, the statCorp., 500 U.S. 20 (1991) ute, by its explicit terms, excludes Green Tree Financial Corp.-Ala. from its scope all workers engaged v. Randolph, 531 U.S. 79 (2000) in interstate commerce.

Mitsubishi Motors v. Soler ChryslerAlthough Stevens and Souter are Plymouth, 473 U.S. 614 (1985) no longer on the Court, their replaceMoses H. Cone Memorial Hospital ments—Sotomayor and Kagan— v. Mercury Construction Corp., together with one more liberal justice 460 U.S. 1 (1983) would constitute the five votes necRent-A-Center West v. Jackson, essary to overturn that precedent.

561 U.S. 63 (2010) If that were done, the FAA would no Southland Corp. v. Keating, longer apply to most employees.

465 U.S. 1 (1984) For more than three decades, the expansion of arbitration by conservative courts has upended consumer and worker rights. Now, with a vacancy on the Supreme Court and the prospect of one or two more during the next presidential administration, the high court could remedy the situation.

At stake are the fruits of a century’s struggle for worker and consumer rights.

Supreme Court Cases

Katherine V.W. Stone is Arjay and Frances Fearing Miller Distinguished Professor of Law at the UCLA School of Law.

Spring 2016 The American Prospect 89

Our Beleaguered Planet The interaction of global climate change, poverty, affluence, and overpopulation

By Marcia Angell

A municipality worker fumigates for Aedes aegypti mosquitoes that transmit the Zika virus in the Petare neigborghood of Caracas, Venezuela

90 WWW.Prospect.org Spring 2016

Z

fernando ll ano / ap images

ika, the mosquito-borne virus that is spreading rapidly in South America and heading north toward the U.S. as summer comes, shows how a previously isolated and sporadic illness can suddenly become a frightening pandemic because of the combined effects of global warming and overpopulation. Carried by the Aedes aegypti mosquito, Zika apparently arose in Uganda in the 1940s and occurred only episodically until 2015, when it began to spread explosively in Brazil, mainly in densely crowded urban areas.

Like other mosquitoes, which are vectors for many diseases, Aedes aegypti thrives in a warm climate, and, as nearly all experts now agree, the world’s climate is steadily growing warmer because of human activity. In addition, this particular mosquito has evolved to live in close proximity to humans, and breeds in small amounts of water in human trash, such as bottle caps and plastic containers. The transmission of the virus occurs in both directions—from mosquitoes to people and from infected people back to mosquitoes. The more densely packed the population, the more easily Zika spreads, and that is particularly so in slums where there are few screens or air conditioners, and even mosquito repellent is rare— and where trash collection is even rarer. Thus, Zika is the poster child of a pandemic resulting from both climate change and overpopulation.

Nearly everyone now acknowledges that global warming is real and caused by human activity. There are very few “deniers” left, except among paid consultants to oil companies and on the Republican side of the aisle in Congress. Since the Industrial Revolution, carbon emissions have grown right along with population and the use of fossil fuels. The resultant increase in greenhouse gases, which trap heat in the atmosphere, causes the climate to warm, and sea levels to rise as glaciers melt. Atmospheric carbon dioxide, the most important of the greenhouse gases, reached a record 398 parts per million (ppm) in 2015, up from 285 ppm in 1850. Much of the carbon dioxide is absorbed by the oceans, which causes them to become more acidic and threatens the marine food chain on which we all depend. Droughts are more frequent and deserts are expanding.

Floods and severe storms are also more frequent as the atmosphere warms.

But the cause of global warming is not just our “carbon footprint”—that is, the amount

of greenhouse gases emitted per capita—but the number of humans contributing to it. The world population is now more than 7.3 billion, compared with 2.5 billion in 1950, when I was growing up, and 1.3 billion in 1850 during the Industrial Revolution. It will reach about 9.5 billion in 2050. Yet, while there is much discussion of climate change, very little is said these days about population growth. It seems almost to have been ruled off the table as a legitimate topic, even though it is an essential part of the equation.

How many people can the planet support?

The carrying capacity for any species is defined as the maximum number that can be sustained indefinitely, and in the case of humans is usually said to be about ten billion, albeit with a wide range of estimates. But humans are not just any species; we are increasingly divided into rich and poor, both within and across countries, and the effects of overpopulation are seen unevenly, and well before any theoretical carrying capacity is reached. For nearly all of human history, the risk has instead been under-population—the lack of communities large enough to foster human progress, and even at times, the threat of extinction. We didn’t reach the first billion until about 1800.

But with better sanitation and living standards, especially since the Industrial Revolution, global population grew rapidly, with shorter and shorter doubling times. In addition to fossil fuels, we are now exhausting other natural resources, as well as despoiling the environment in trying to extract them. And we have created what is known, somewhat misleadingly, as the “great Pacific garbage patch” by dumping into the oceans vast amounts of discarded plastic containers, which tend to break into small particles that remain suspended in certain regions just beneath the water’s surface.

In 1798, Thomas Malthus famously pre-

dicted that population growth would soon lead to mass starvation. After he was shown to be stunningly wrong, not much public attention was given to the subject until 1968, when Paul R. Ehrlich published his best-selling book, The Population Bomb—at a time when the global population was a mere 3.6 billion. Like Malthus, Ehrlich predicted imminent mass starvation, and argued for stringent population control. But in the last half of the 20th century, remarkable technological improvements in agriculture—the “green revolution”—greatly increased food supply, and Ehrlich’s predictions, like those of Malthus, were off the mark.

The fact that dire predictions had proved wrong may have been one reason that overpopulation largely disappeared from public discourse in the 1980s. The decade saw a renewed confidence in technology to solve nearly any problem. And with growing economic inequality, it was easy for wealthy populations to conclude that they were immune to the effects of overpopulation. There was also an element of “political correctness,” in that the problems of overpopulation were mainly the problems of poor people in poor regions of the world, and many in the developed world felt that family size is a private matter and it was unseemly to suggest that disadvantaged populations should have fewer children. (No one had anything good to say about China’s one-child policy, quite apart from the methods used to achieve it.)

Moreover, the 1980s was the decade when climate change first became widely recognized, not only by scientists, but increasingly by the larger public, and that concern supplanted concern about overpopulation. In 1988, James E. Hansen, Director of NASA’s Goddard Institute for Space Studies, testified before Congress on the dangers of global warming, and about the same time, the World Meteorological Organization established the Intergovernmental Panel on Climate Change. The focus shifted from population to carbon emissions, even though they were, and are, related. It was as though if we could all cut down on the use of fossil fuels and be better stewards of the environment, the total number of people wouldn’t matter. But it does matter, of course. There is a limit, even though one can argue what that is,

Spring 2016 The American Prospect 91

and how much suffering people on the fringes should endure before we recognize it.

The threats, then, are twofold and interrelated: First, the number of people, and second, the way we live. However, there is an inverse and paradoxical relationship. In general, areas of the world with the fastest population growth are those with the smallest per capita carbon footprint and consumption of resources. But poorer regions are hardly going to be satisfied to remain that way. Underdeveloped regions of the world aspire to the life of affluent regions, which means that even as their birthrates decline, which they inevitably do with economic development, their environmental footprint will grow. With poverty still widespread, their populations will also continue to grow. Even if we stabilized the population at its current level, it is likely that consumption per capita would continue to increase because of rapid,

childhood immunizations, and other health care. Even while much of the earth is growing more arid, some places are now experiencing disastrous floods. But that water is of little use, because of contamination with sewage.

The rainfall in the growing megacities is also largely wasted, since it doesn’t reach the soil and is quickly contaminated.

These effects are bad enough, but what may be most threatening is epidemic disease. The slums of the new, rapidly growing megacities are breeding grounds for disease. In Lagos, Nigeria, for example, a city of some 21 million people, about two-thirds of the inhabitants live in slums. Contamination from sewage causes cholera, but there is also the likelihood of the spread of other infectious diseases that have previously been contained in small geographic areas or by seasonal cool weather. For example, for many years Ebola outbreaks have occurred

Areas with the fastest population growth are those with the smallest per capita carbon footprint. But that will change as consumption of resources increases. often uncontrolled, development—exactly as happened in China and is happening in India.

A grave effect of overpopulation and climate change is the scarcity of clean water, either to drink or for sanitation. Much of the available water is used for irrigation, and as conditions become warmer and more arid, more water is required for crops. The scarcity is particularly acute in North Africa and the Middle East, but we can see it also in the American Southwest and southern California. For example, the Colorado River, the source of much of the water there, is depleted before it can reach its original outlet to the Sea of Cortez. The rivers and aquifers of Africa are similarly becoming exhausted. The larger the population, the worse the problem.

One result is mass migration in search of water and arable land, and this probably underlies some of the unrest in North Africa and the Middle East. Migrants are especially vulnerable to starvation and violence of all kinds, in addition to disruption of education,

92 WWW.Prospect.org Spring 2016

sporadically in isolated villages, but did not reach epidemic proportions until there were large and mobile populations.

Before Zika, several other pandemics—defined as worldwide epidemics—have appeared in recent years. They arose in one part of the world, but because of crowding and easy travel, they were able to spread widely.

A new disease (or new to the broader world) called SARS (severe acute respiratory syndrome) arose in southern China in 2002 and was carried to some two dozen countries by infected travelers. Another apparently new disease called MERS (Middle East respiratory syndrome) arose in Saudi Arabia in 2012, but spread to many countries, including the United States, and to South Korea, where it is still causing serious, sometimes fatal, illness.

So far, we have not had a pandemic on the scale of the 1918 flu pandemic or the bubonic plague of the 14th century. But conditions are ripe for it. Probably the most likely cause would be an influenza virus, transmitted to humans

from birds or other animals. In a recent op-ed about Zika in The New York Times, Michael T. Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, wrote, “Even more than these viruses, we should be afraid of a planet-wide catastrophe caused by influenza.”

Flu viruses mutate often, and can shift in both their host targets and their virulence. Bird flu, which is often fatal, is not readily transmissible between humans, but that could change.

Moreover, because transmissible flu viruses are airborne, they spread easily and quickly from person to person. Most important, people can spread the virus before they have symptoms, unlike the case with other diseases such as Ebola. Thus, someone can get on a plane feeling quite well, but still spread the virus to everyone around him by talking or coughing.

The 2011 film Contagion illustrated the dangers very well: A flu-like virus causes a deadly pandemic, starting with a young Minneapolis woman (Gwyneth Paltrow) who had just returned from a trip to Hong Kong. At the end of the film, we learn that she was probably infected by shaking hands with the chef at a restaurant. His hands were contaminated with the blood of a pig that had been infected by a bat that dropped a piece of banana into the pig pen. Parts of the film were unrealistic, but this idea of the origin of a flu epidemic was not. The

Makoko slum in Lagos, Nigeria

h a n n i b a l h a n s c h k e / d pa / a p i m a g e s

ability to monitor or contain such outbreaks is limited, particularly in sub-Saharan Africa.

As Keiji Fukuda, then the assistant directorgeneral for health security at the World Health Organization (WHO), said in 2013, “The world is not ready for a large, severe outbreak.”

To deal with the twin threats of overpopulation and climate change, we will need to get busy. Small, incremental efforts will not be enough. Much is made of the fact that as living standards and urbanization increase, and as women in particular become better educated, fertility rates drop. In fact, in some countries, including Japan, Russia, much of Eastern Europe, Germany, Italy, and Spain, population is either static or declining. But population growth is not evenly distributed. These small declines in the wealthy countries will be more than offset by continued growth in other parts of the world. The population in Africa, for example, is expected to double by 2050—from about 1.2 billion to 2.5 billion. Although the rate of growth worldwide has slowed in recent years, it has not reached zero, so the population will inexorably grow, albeit more slowly. The United Nations Department of Economic and Social Affairs predicts continued growth for the remainder of this century, with a projected population of about 11 billion in 2100.

What can be done? There are two non-coer-

cive and constructive ways to bring the rate of population growth to zero or less. First, we need to provide enough economic security to families in developing countries to reduce the incentive to have large numbers of children. It is often assumed that providing better birth control is the answer, and that may be partially true. But it is likely that many families want a large number of children because they need them for farm labor or to contribute otherwise to family income, and also to provide for their parents when they reach old age. Unlike families in the developed world, these families see children as a “profit center,” not a “cost center.”

People need to be protected against illness, extreme poverty, and the infirmities of old age to be willing to have fewer children. They need a minimum social safety net.

Second, we need to make stronger efforts to ensure that girls are educated. The evidence is overwhelming that maternal education, regardless of income, correlates with smaller family size. It is essential, then, to focus on the education of girls and more generally the status of women, for moral reasons as well as population control.

In 1994, when the global population was 5.6 billion, the International Conference on Population and Development met in Cairo and issued a lengthy Programme of Action that was widely heralded and adopted by a special

session of the U.N. General Assembly in 1999.

It was notable for its strong, and I believe warranted, emphasis on human welfare and the status of women. In fact, it was a veritable Christmas list of all the things that make life worth living, even including a fulfilling sex life within an egalitarian marriage. But it said little about the harms of overpopulation, nor how to bring about, and pay for, the undeniably better world it called for. And it included this in its opening statement: “The implementation of the recommendations contained in the Programme of Action is the sovereign right of each country, consistent with national laws and development priorities, with full respect for the various religious and ethical values and cultural backgrounds of its people, and in conformity with universally recognized international human rights.” Anyone who has read Katherine Zoepf’s January 11 New Yorker article “Sisters in Law,” about the legal status of women in Saudi Arabia, or the February 5 New York Times article by Pam Belluck and Joe Cochrane about female genital cutting in Indonesia, where it is performed on nearly half of Indonesian girls, will see the problem with the deference to sovereign rights, religious and ethical values, and cultural backgrounds.

Even though bringing population growth under control is crucial, global warming and the wanton consumption of natural resources

Spring 2016 The American Prospect 93

are still primarily caused by the way we in the developed world live. It is still our carbon footprint that is doing most of the damage. Three years ago, New York Times reporter Elisabeth Rosenthal wrote an article titled “Your Biggest Carbon Sin May Be Air Travel.” It concerned the industry-inspired U.S. law that forbids American airlines from participating in the European Union Emissions Trading System, which charges airlines for excess carbon emissions generated by flights in or out of European airports. She pointed out that for many Americans, air travel is probably the largest contributor to their individual carbon footprint. And she added: “It is for me. And for people like Al Gore or Richard Branson who crisscross the world, often by private jet, proclaiming their devotion to the environment.”

It is for me, too. Air travel emissions account for about 5 percent of global warming, accord-

Yet, some European countries are now actually arguing for increasing population growth, because they see the aging and decline of their population as a national threat. They would like to create more young people to support the old ones, and generally to grow their way out of their problems. For similar reasons, China has announced an end to its one-child policy.

But no country is alone on the planet. Not only would these countries add to the global problems, but even within their own borders, the policy simply delays the effects of an aging population for another generation.

To provide enough security to families in developing countries to reduce their incentive to have large numbers of children will take money, not only from the governments of these countries, but even more from developed countries. The concept of a subsidy for basic needs is not new. Some European countries

Just as the notion of the supreme nationstate needs modification, so does our devotion to unfettered capitalism and the grail of GDP growth. ing to Rosenthal, but that fraction is projected to rise. Unless there are required changes in our habits that apply to everyone, analogous to the rationing of gasoline for cars during World War II, Al Gore and I will probably continue to live pretty much the way we have, with only small changes at the margins. People will embrace restrictions in the way they live only if they are shared.

To tackle the problem seriously means to tackle it at the national level, and paradoxically to do so by modifying our allegiance to nationhood. We all breathe the same air, and depend on the same oceans. Because we have no international body with sufficient authority, we will have to rely on nation-states to join together to modify their behavior for the good of the planet, and that means blunting the super-patriotism that afflicts most countries.

Just as the formation of the U.S. required the 13 colonies to modify their sense of sovereignty for the greater good, so must the countries of the world do that for the sake of the planet.

94 WWW.Prospect.org Spring 2016

are currently considering providing a small income to all their residents for that reason.

A similar scheme could be set up by which wealthy nations contribute to a global fund to ensure basic needs for impoverished regions of the world. Contributions could be based on a small percentage of GDP. A portion might be earmarked to support education for girls.

Developed countries also need to subject themselves to the same constraints we ask of developing regions. Large families could become socially unacceptable in the same way that cigarette smoking gradually became less acceptable in the U.S. But the real job for affluent countries is to rein in overconsumption, profligate waste, and the use of fossil fuels.

This requires a transition that is far beyond anything now being seriously discussed in mainstream politics or global diplomacy. The much-celebrated U.N. Climate Change Conference, held in Paris late last year, merely pledged participating countries to work toward a goal and revisit the subject in five years. Proposals

to accomplish a serious transition to a sustainable economy are invariably countered by massive lobbying by business elites and more general objections that this will cost jobs and limit economic growth. We need a shift that radically reconceives prosperity and how we define it. To survive as well-functioning, civilized communities in a static global population, there will inevitably have to be some redistribution of wealth, both within countries and across them. We might have to make do with less—certainly with less as traditionally understood—and distribute it more equitably.

Just as the notion of the supreme nation-state needs modification, so, too, does our devotion to unfettered capitalism and the grail of GDP growth. While politically, my solutions are a nonstarter, that could change. They are certainly more palatable than pandemics, starvation, and wars as a means of population control and resource allocation, and we could come to that realization fairly suddenly.

I am very much aware that I have not laid out a political road map—that is, a route to building a mass movement and the leadership to deal adequately with the problems. I simply don’t know how that is to be done, and I’m pessimistic that it will be. After all, our Congress can’t pass even the simplest, most uncontroversial legislation, and much of the rest of the world is not only ungovernable, but committed to tribal warfare of one sort or another. But I do know that we cannot continue as we are now, and that small efforts at the margins are not enough. My purpose is to convey a sense of urgency and the reasons for it.

The first step is to begin talking candidly about the issues. Overpopulation cannot continue to be the problem that dares not speak its name. Humans are not just fouling their nest, but crowding it beyond its capacity. Only when both problems are taken seriously and become part of respectable discourse will we be able to move ahead on the steps necessary to deal with the self-destructive way we are treating our planet.

Marcia Angell, a physician, was editor-inchief of the New England Journal of Medicine and is a member of the faculty of the Department of Global Health and Social Medicine at Harvard Medical School.

c u

l

Can the Working Family Work in America?

America still hasn’t adjusted to family realities in the 21st century.

Here’s what needs to be done and why we need to do it. By Stephanie Coontz

anna elena balbusso

b

T

he male-breadwinner family is arguably the least traditional family form in all of world history. For thousands of years, husbands, wives, and children worked together to provision the household. In the United States, it wasn’t until the 1920s that a bare majority of children

o o

k

s

lived in homes where the mother was not working beside her husband in a family enterprise or earning income in other ways, with the children exempted from labor to go to school.

Receding in the Great Depression and World War II, the malebreadwinner family roared back

once the war ended. At the end of the 1950s, only 19 percent of married mothers with children under age six were in the labor force.

Two-thirds of children under age 15 lived in married families in which the husband had a job and the wife stayed home.

But by that time, wives and

t u r

e

mothers were already re-entering the labor force, and by 2014, 64 percent of married women with children under six were employed.

Today, only 22 percent of all children under age 15 in the United States live in married families where the husband is the sole breadwinner. That’s a lower percentage than the 26 percent living with a single parent.

Yet America’s work policies, pay and promotion practices, school schedules, and caregiving ideals continue to be based on that very nontraditional and fleeting family model, assuming that every employee has a full-time, stay-athome partner to handle the homemaking and caregiving tasks that are incompatible with the evergrowing demands of work. Only 13 percent of American full-time workers have access to paid family leave, and 44 percent don’t even have the right to unpaid leave. A 2008 study by the Department of Health and Human Services revealed that the average length of maternity leave then was just ten weeks, and a 2012 survey by the Department of Labor found that nearly one-quarter of the women they surveyed returned to work within two weeks of having a child!

Furthermore, in contrast to every other comparably developed country in the world, the United States has no mandated paid sick days, vacation time, or limits to the length of the workweek. This poses a serious burden on parents, but also on the more than 40 million Americans providing unpaid elder care, more than 60 percent of whom hold down a job. The United States doesn’t even have a law prohibiting employers from discriminating against workers just for requesting work-life accommodations.

With most women in the workforce today and most men eager to participate more at home, we need a new set of arrangements to coordinate work, family, and community needs. Growing numbers

Spring 2016 The American Prospect 95

advertisement

Perfect Choice HD™ is simple to use, hard to see and easy to afford…

Invention of the Year PERSONAL SOUND AMPLIFICATION PRODUCTS (PSAPs)

THEY’RE NOT HEARING AIDS

Personal Sound Amplification Products use advanced digital processing to amplify the frequencies of human speech.

Thanks to the efforts of a doctor who leads a renowned hearing institute, this product is manufactured in an efficient production process that enables us to make it available at an affordable price.

Virtually impossible to see.

WEIGHT SOUND QUALITY

The unit is small and lightweight enough to hide behind your ear... only you’ll know you have it on.

Less than 1 ounce Excellent: Optimized for speech

FITTING REQUIRED?

No

ONE-ON-ONE SETUP

Free

RETURN POLICY COLOR

Full refund of product purchase price within 60 days Beige, Brown or Silver

It’s comfortable and won’t make you feel like you have something stuck in your ear.

It provides high quality audio so soft sounds and distant conversations will be easier to understand.

Try it for yourself with our exclusive home trial. Some people need hearing aids but many just want the extra boost in volume that a PSAP gives them. We want you to be happy with Perfect Choice HD, so we are offering to let you try it for yourself. If you are not totally satisfied with this product, simply return it within 60 days for a refund of the full product purchase price.

Don’t wait… don’t miss out on another conversation… call now!

Call toll free now for our lowest price.

1-888-232-0129 Please mention promotional code 102956.

1998 Ruffin Mill Road, Colonial Heights, VA 23834 Perfect Choice HD is not a hearing aid. If you believe you need a hearing aid, please consult a physician.

81038

NEW

Now with more power and clarity!

Perfect Choice HD is NOT a hearing aid. It is a Personal Sound Amplification Product (PSAP). Hearing aids can only be sold by an audiologist or a licensed hearing instrument specialist following hearing tests and fitting appointments.

Once the audiologist had you tested and fitted, you would have to pay as much as $5000 for the product.

c

of Americans believe it is time to bring our outmoded social policies into line with our changing workforce. Polls show widespread support for instituting paid family leave and expanding children’s access to high-quality child care and preschool. By the end of 2015, four states and about a dozen cities had legislated paid family leave, with another 18 states considering such measures.

The authors of two recent books hope to increase support for such family-friendly measures. Anne-Marie Slaughter’s Unfinished Business: Women Men Work Family emphasizes the need to change our cultural values and gender-based assumptions about work and caregiving, while Heather Boushey’s Finding Time: The Economics of Work-Life Conflict stresses the economic benefits of reform. Both argue that the modern workforce needs a new infrastructure of caregiving, comparable to the transportation and energy infrastructure the government built in the first two-thirds of the 20th century, which was crucial to the expansion of postwar productivity and the improvement in living standards during that era.

Slaughter’s book had its roots in an article she published in The Atlantic in 2012 titled “Why Women Still Can’t Have It All.” Within a week, her article had a million views, and following what has become a new template for publishing, she soon received a contract to expand the article into a book.

Normally, I dread reading books that have been spun out of a popular article.

All too often, the authors feel compelled to take what started as an interesting, provocative observation and pad it with repetitive anecdotes and selective statistics designed to prove that they have produced a new paradigm or identified a revolutionary shift in social, political, or family relations.

Slaughter offers a refreshing contrast. She has produced a book that adds heft and nuance to the original article, which had several weaknesses, starting with her description of how she became disillusioned with the “feminist credo” that you can “have it all.” Many women took umbrage at that, since “having it all” had never been a goal of the women’s liberation

movement. The phrase first gained traction as the title of a 1982 book by Cosmopolitan editor Helen Gurley Brown about how women could use feminine wiles to get “love, success, sex, and money.”

Slaughter’s original article treated work-family conflict as predominantly a woman’s issue, stemming in part from “a maternal imperative,” a description that offended many men as well as women. Additionally, it focused almost exclusively on issues facing elite women in demanding high-powered careers, ignoring the problems of overwork facing men in similar careers and devoting only a paragraph to the issues facing middleand low-wage workers.

But over the next few years Slaughter engaged thoughtfully with her critics as well as her admirers, deepening her analysis and delving further into the existing body of work-family research. She has produced a book with a persuasive and at times passionate argument about why we need to rethink work and elevate the value of care. She now urges us to stop seeing this as a women’s issue, citing evidence that men are equally distressed by policies that make it difficult to combine work and family obligations, and noting that if women want to be treated as valued equals in the competitive realm, they must learn to treat men as valued equals in the caring realm. She suggests that women and men should plan ahead so that both can alternate intervals of intensive work with periods where they step back (but do not drop out) to focus more on other aspects of life.

Much of the advice in the book (“train your boss,” for example) is more relevant to professional women than to low-wage workers, who seldom have much leeway in planning their career or negotiating their working conditions. But Unfinished Business also devotes considerable attention to the issues facing low-wage and middle-income workers, both those who need to purchase caregiving and those who provide it for pay. She argues that the “devaluing of and discrimination against caregiving … provides the common thread linking the experiences of women at the top and at the

Unfinished Business: Women Men Work Family

By Anne-Marie Slaughter

Penguin

Finding Time: The Economics of Work-Life Conflict

By Heather Boushey

Harvard University Press

The Tumbleweed Society: Working and Caring in an Age of Insecurity

By Allison J. Pugh

Oxford University Press

u

l

t

u

r

e

bottom,” and she clearly lays out the differences in the dynamics and consequences of that discrimination.

While Slaughter critiques the way “the competitive mystique” deforms work and family life, Heather Boushey goes after the “job-killer” mystique— the notion that any interference with a firm’s short-term profits acts as a drag on the economy. Finding Time builds upon the groundbreaking work she did with Joan Williams in 2010 in a report for the Center for American Progress (“The Three Faces of WorkFamily Conflict: The Poor, the Professionals, and the Missing Middle”) analyzing the distinctive issues facing different kinds of workers and suggesting a mix of policies that could help them all.

Boushey aims to convince policymakers, business leaders, and the public that instituting fair, flexible, and universally available caregiving support systems for all three of these groups is not just the humane thing to do but also the efficient thing to do.

Having support systems in place for caregiving needs increases the productivity, reliability, and loyalty of workers and decreases costly labor turnover, saving businesses money. Such programs also enhance the ability of families to purchase the goods and services that businesses create. Equity and efficiency can work together, Boushey insists. Programs that improve the coordination of work and family life should be seen not as welfare, but rather as something very close to a progressive version of workfare.

Boushey and Slaughter both present evidence that workplaces with flexible, accommodating schedules are more productive than those that emphasize long hours and rigid schedules. They each provide examples of successful innovations such as telecommuting and “results-only” work environments. Boushey pays particular attention to the economic case for family leave, showing that despite the initial fears of business leaders, the implementation of paid leave in California benefited businesses as well as working families.

Both books note that countries with extensive work-life policies have higher social mobility and are often more

Spring 2016 The American Prospect 97

c

u

l

t

u

r

e

competitive than the United States.

Both authors also critique the current caregiving arrangements of the unregulated private market, whereby middle-income families can often afford child care and elder care only by turning to low-paid caregivers—a dynamic that puts the caregivers’ own families at risk, impairs the quality and consistency of the care they can offer, and ultimately costs the public dearly.

For example, almost half of America’s child-care and home health workers are paid so little that they have to rely on some sort of public assistance: Medicaid, Temporary Assistance for Needy Families (TANF), food stamps, and/or the Earned Income Tax Credit.

The high staff turnover and low staffto-child ratios that prevail in so many of America’s unregulated child-care settings do little to prepare children for future success. Boushey quotes a 2013 “Open Letter from Business Leaders to President Obama and Members of Congress,” stating that investment in early childhood education “is not a partisan issue. It is an American competitiveness issue.”

But what are the prospects for actually building a comprehensive infrastructure of work-life supports in a country with such a poor track record of investing in any infrastructure whatsoever over the past 40 years?

Slaughter is a little vague on this point. On the one hand, she recognizes the need for a universal government-mandated work-life policy that “establishes a new floor” and “levels the playing field” so that businesses providing good work-life benefits are not penalized by having to compete with less-scrupulous rivals. On the other, she suggests that we don’t have to choose between market-based and government solutions but can “encourage a little competition,” with different states and different cities trying different approaches and being willing to compromise as they find out what works best.

Even aside from the fact that some competing solutions are mutually exclusive, if not mutually destructive, such willingness to compromise depends upon forging a legislative commitment to caregiving issues. To that end, Slaughter calls for electing

98 WWW.Prospect.org Spring 2016

more women to public office, citing Christopher Karpowitz and Tali Mendelberg’s 2014 book, The Silent Sex: Gender, Deliberation, and Institutions. Karpowitz and Mendelberg argue that although American women are on the whole more supportive of government action to meet health needs, reduce poverty, and improve the lot of children than most American men (African American men are an exception), they are unlikely to articulate their views in groups where women constitute a minority.

Electing more women to public office in the United States is a worthy goal. But electing a few more senators or even a female president will not be sufficient to turn our current priorities around. Karpowitz and Mendelberg find that when a woman individually attains a position of power, such as a committee chair, this emboldens her to assert her own views, but it does not empower the other women in the room so long as they remain in the minority. Only when women make up the majority of a group do they present their preferences forcefully enough to influence men in the same direction.

Boushey believes that in this era of weakened labor unions and strengthened elites, it is essential to build a coalition that includes not only traditional workers’ rights groups but also groups that advocate for women, children, the elderly, and the disabled, along with people of faith and those businesses far-sighted enough to see that America’s long-term prosperity depends on improving the productivity and reliability of today’s workforce as well as ensuring the availability of future generations of educated, responsible workers. And she is adamant that the only way to build such a coalition is to get “all income groups on board.”

Boushey sees little hope in approaches such as tax relief, which normally benefits only higher earners, or welfare programs that are limited to the poorest sections of the population. Rather, she supports a social insurance program that spreads the costs and delivers the benefits to everyone, from the poorest Americans to the richest.

It should be noted that this

A wide range of evidence confirms that the long-run benefits of paid family leave far outweigh the short-term costs.

approach differs somewhat from that of Hillary Clinton, who has made a clear commitment to implementing paid family leave but has also promised not to raise taxes, even social insurance taxes, on anyone earning less than $250,000. According to the most recent Census data, $250,000 a year puts a household safely in the top 5 percent of the income distribution. Although it is tempting to go after the obscene wealth of the top 1 percent, I wonder if trying to finance a national paid leave and/or early childhood education system entirely through taxes on the top 4.5 percent is really practical.

More preferable, in my view, is Senator Kirsten Gillibrand’s Family and Medical Insurance Leave (FAMILY) Act, which Boushey supports. This would create an independent trust within the Social Security Administration to collect fees and provide benefits. Those benefits would be funded by employee and employer contributions of 0.2 percent of wages each, or 2 cents for every $10 earned by each employee. Gillibrand’s website calculates that “the average woman worker earning the median weekly wage would only need to contribute $1.38 per week (for a total of $72.04 per year) into the program, and even the highest wage earners would have a maximum contribution of $4.36 per week, or $227.40 per year.”

Whatever the details of financing, a wide range of evidence confirms that the long-run benefits of paid leave far outweigh the short-term costs, producing savings for business from increased staff retention, loyalty, and productivity, as well as savings for the public due to the improved infant health associated with paid parental leave and the decreased need for assistance by families who would otherwise have to turn to food stamps or TANF during unpaid leaves.

Boushey points out that instituting better early childhood education could be equally cost-effective. Funding President Obama’s current preschool program proposal for the next ten years, she notes, would cost about $24 per person annually—a minor cost compared to the benefits that families and society as a whole would receive.

mike groll / ap images

c

Indeed, other researchers estimate that every dollar invested in early childhood education saves between $3 and $7 down the road, because children exposed to such programs go on to complete more years of education, work more hours a year, and have lower rates of crime and teen pregnancy even years after the initial improvement in their test scores fades.

But there is stiff resistance to such long-term thinking in parts of America. One source of resistance comes from the top. Boushey is correct to argue that the short-term interests of a few firms are not the same as the long-term health of the economy. But as Colin Gordon shows on his meticulously researched website, Growing Apart: A Political History of American Inequality, deregulation and the “collapse of meaningful corporate governance” have allowed an extraordinarily bloated financial sector to become increasingly “detached from the rest of the economy, less interested in providing it liquidity or credit than in stripping it of its assets.”

The second source of opposition, much as we might hate to admit it, sits much closer to where most of us live.

Americans of all income groups have long been far more hostile to public levies and taxes than their European counterparts, stubbornly clinging to a doctrine of individualistic self-reliance no matter how often this ideology is contradicted by the realities of everyday life.

The roots of this outlook lie in the fact that since the end of the 19th century, America has had a very different pattern of work, community, and family relations than other developed countries. Americans with stable jobs have had access to more consumer goods than their European counterparts and a better chance of achieving a high income in any particular year. On the other hand, they have had higher job-injury rates, fewer public parks, less secure medical coverage, fewer municipal services, and more income volatility.

The New Deal and Great Society programs relieved some of these stresses, but the past 40 years have exacerbated them. In 2004, an international study found that among 31 countries

in the Organisation for Economic Cooperation and Development, the United States came in 25th in the overall economic security of its citizens.

Such lack of security creates a vicious cycle, in which families figure they will have to pay for their own medical care, transportation, and education and therefore resent deductions from their personal finances for taxes or levies. People fear that

Kirsten Gillibrand’s Family and Medical Insurance Leave (FAMILY) Act would provide paid leave out of a trust fund financed by employee and employer contributions of 0.2 percent of wages each.

increased taxation, even for goals they support, will diminish their personal capacity to circumvent problems they have no historical confidence in government to solve. Thus families confronting the lack of quality child care or preschool and the uneven quality of our public schools often resist proposals to invest in large-scale programs to improve those conditions and instead seek individual solutions, such as hiring low-wage workers to care for their children and saving up to move to a better school district or send their children to private schools.

In recent decades, growing inequality and insecurity have led many Americans to feel that hard work has ceased to pay off and that

u

l

t

u

r

e

undeserving Americans are taking more than their fair share. Allison Pugh’s new book, The Tumbleweed Society: Working and Caring in an Age of Insecurity, based on intensive interviews with 80 mothers and fathers in different occupations, provides some important insights into the ways people react when their faith in hard work and individual responsibility runs up against the realities of work instability. Many of the people she interviewed had responded to the new “on demand” economy by adopting a “one-way honor system,” holding themselves (and other workers) to a strong work ethic and sense of duty but not expecting the same from employers. Only a few of her subjects expected reciprocal obligations from their employers. Significantly, these were mostly firefighters, police, and public school teachers—government employees with experience of collective bargaining.

Among the others, some blamed themselves for their insecurity, some rose to heroic levels of helping those who were even more needy, and some redirected their disappointment and sense of betrayal away from employers onto others. Pugh’s account focuses on men who became embittered at their wives or ex-wives (often after driving them away), but the dynamics she describes illuminate some of the anger we see against immigrants, blacks, and welfare recipients among Trump and Tea Party supporters.

While her survey is hardly representative, it does show us how people are struggling to rework their notions of obligations and ethics in an insecure world. If we are to build the coalitions Boushey and Slaughter envision, we need to understand how people process their disappointment and fear when they lack social protections, and we must learn how to offer them a basis for working with rather than against other families struggling to find secure ground.

Stephanie Coontz is the author of the newly revised The Way We Never Were: American Families and the Nostalgia Trap, and is director of research at the Council on Contemporary Families.

Spring 2016 The American Prospect 99

advertisement

TECHNOLOGY SIMPLIFIED – BIGGER AND BETTER

Wow! A Simple to Use Computer Designed Especially for Seniors!

Easy to read. Easy to see. Easy to use. Just plug it in!

NEW

Now comes with...

Larger 22-inch hi-resolution screen – easier to see 16% more viewing area Simple navigation – so you never get lost ® Intel processor – lightning fast Computer is in the monitor – No bulky tower Advanced audio, Better speaker configuration – easier to hear Text to Speech translation – it can even read your emails to you!

U.S. Based Customer Service

FREE

Automatic Software Updates

Have you ever said to yourself “I’d love to get a computer, if only I could figure out how to use it.” Well, you’re not alone. Computers were supposed to make our lives simpler, but they’ve gotten so complicated that they are not worth the trouble. With all of the “pointing and clicking” and “dragging and dropping” you’re lucky if you can figure out where you are. Plus, you are constantly worrying about viruses and freeze-ups. If this sounds familiar, we have great news for you. There is finally a computer that’s designed for simplicity and ease of use. It’s the WOW Computer, and it was designed with you in mind. This computer is easy-to-use, worry-free and literally puts the world

at your fingertips. From the moment you open the box, you’ll realize how different the WOW Computer is. The components are all connected; all you do is plug it into an outlet and your high-speed Internet connection. Then you’ll see the screen – it’s now 22 inches. This is a completely new touch screen system, without the cluttered look of the normal computer screen. The “buttons” on the screen are easy to see and easy to understand. All you do is touch one of them, from the Web, Email, Calendar to Games– you name it… and a new screen opens up. It’s so easy to use you won’t have to ask your children or grandchildren for help. Until now, the very people who could benefit most from E-mail and the Internet are the ones that have had the hardest time accessing it. Now, thanks to the WOW Computer, countless older Americans are discovering the wonderful world of the Internet every day. Isn’t it

time you took part? Call now, and you’ll find out why tens of thousands of satisfied seniors are now enjoying their WOW Computers, emailing their grandchildren, and experiencing everything the Internet has to offer. Call today!

• Send & Receive Emails • Have video chats with family and friends • Surf the Internet: Get current weather and news • Play games Online: Hundreds to choose from!

Call now toll free and find out how you can get the new WOW! Computer.

Mention promotional code 102955 for special introductory pricing.

1-877-742-4135 © 2016 firstSTREET for Boomers and Beyond, Inc.

81059

“I love this computer! It is easy to read and to use! I get photo updates from my children and grandchildren all the time.”

– Janet F.

c

Worlds of Inequality The winners and losers of globalization.

Must it be this way? By Miles Corak

T

o o

his book begins by posing a question: “Who has gained from globalization?” Many thoughtful Americans have the confidence to answer in a sentence. The gains have been captured by the top 1 percent.

And the book ends with another question: “Will inequality disappear as globalization continues?” Many might be just as quick to answer: Of course not, the rich will get richer! But life is not so simple. Between these two questions Branko Milanovic offers us not just a plethora of facts about income inequality that will surely make his readers think twice. More importantly, he shows us the power of bringing the facts into focus by putting a new lens over these pressing issues—a global perspective. He takes more than 200 pages to answer the first question, and only a sentence to answer the second.

Milanovic is a senior scholar with the Graduate Center of the City University of New York, but he’s lived many interesting lives. Think of him as an intellectual refugee from the former Yugoslavia at a time when Belgrade was not exactly the most career-friendly place to express an interest in the measurement of inequality; imagine, say, an opposition figure like the famous dissident Milovan Djilas who had aspirations of being a statistician. Think of him as a World Bank apparatchik, data cruncher par excellence, not for any one country but for each and every country, for the world. And think of him as a reflective academic, deeply read in history and economics, and motivated by an abiding curiosity about how people lead their lives; a close student of the way people organize themselves politically (or don’t) and how that affects the material welfare of the majority, and sometimes bounds the powerful elite. You get the idea—his many interesting lives put Milanovic in the position to offer, in this tightly written book,

k

s

a global perspective on what is too often thought of as a national issue.

The most striking fact that motivates his book is a graph that the Twittersphere has already termed “the elephant curve.” This is the one-sentence, or rather one-picture, answer to the first question: “The gains from globalization are not evenly distributed.”

The elephant curve ranks the world’s citizens from those with the very lowest incomes to those with the very highest. It shows how much each group standing on the same rung of the 1988 global income ladder saw their income increase by 2008. The percentage increase in income over this period was significant for some, strikingly so for many others, but disappointing for others.

Clearly evident are the rise of a global middle class, in some important measure reflecting the great march out of poverty in China, and the equally amazing rise in the incomes of the top 1 percent globally.

The winners of globalization were many people who three decades ago were dirt-poor, and though a big percentage increase in a very low income

Global Inequality: A New Approach for the Age of Globalization Branko Milanovic

Belknap Press of Harvard University Press

Global Income Growth, 1988–2008 90% 80%

booming global elite

70%

rising incomes in emerging economies, mainly china

60%

real income growth

b

50% 40%

decline of developed-world middle class

30% 20%

very poorest locked out of growth

10% 0 -10%

5

15

POOREST

25

35

45

55

65

75

percentile of global income distribution

85

95 RICHEST

u

l

t

u

r

e

still amounts to a rather low income by the standards of the average person in the rich countries, it is a major movement in the right direction. But the great winners of globalization were also a relatively few people in the already-rich countries, a global plutocracy who also experienced income gains of over 50 percent, but from a much higher starting point. Both of these changes are without precedent in the history of humanity.

But the elephant curve also shows that even though some have gained, others have not seen their prospects improve at all—indeed, probably leading lives of more insecurity and more worry, not just about their prospects but also the prospects of their children. The big losers in these global income sweepstakes have been middle- and lower-income people of the rich countries—the part of the curve that shows the big dip. It is their plight, and its sharp contrast with the rich and richer minority in their countries that explains the increasing salience of inequality in American politics. As Milanovic makes clear, this puts public policy at a very caustic crossroads.

“Politicians in the West,” he writes, “who pushed for greater reliance on markets in their own economies and the world after the Reagan-Thatcher revolution could hardly have expected that the much-vaunted globalization would fail to deliver palpable benefits to the majority of their citizens—that is, precisely those whom they were trying to convince of the advantages of neoliberal policies compared with more protectionist regimes.”

To this group of Americans, Germans, Japanese, and others, the claim is all starting to ring hollow, and it is little comfort to be told that they still enjoy a standard of living vastly superior to many in the world. That was not supposed to be the deal, particularly when inequality within their own countries skyrocketed as a narrow slice of their countrymen got a much bigger slice of the pie.

Yet, global inequality has fallen; it has fallen in a major and unprecedented way; and it fell even as the income differences within countries increased substantially. It fell because the average difference between

Spring 2016 The American Prospect 101

There is no way that smartness can realistically be reduced to a single narrow measure like a standardized test score.

“This is a book about the fundamental purposes of college that should be read by those who work in, attend, or care about higher education.”

—ARTHUR LEVINE, President, Woodrow Wilson National Fellowship Foundation; and President Emeritus, Teachers College, Columbia University

“While it seems a simple point that American colleges and faculty value being [smart] and acquiring smartness over developing smartness, this observation proves a riveting and profound starting place for insights about rankings, test scores, admissions, grades, academic standards, remedial education, faculty culture, and reform.

This is a powerful and important book.”

—JOSÉ ANTONIO BOWEN, President, Goucher College; and author of Teaching Naked

In this fresh take on our educational system, Alexander W. Astin digs into how America’s obsession with “being smart” distorts the life of a typical university and leads to a system of higher education that shortchanges the majority of students.

Available April 1

$22.50 / 978 1 62036 448 2

TO ORDER:

CALL 1-800-232-0223 FAX 703-661-1501 E-MAIL StylusMail@PressWarehouse.com WEBSITE www.Styluspub.com

102 WWW.Prospect.org Spring 2016

countries shrank all the more. And that’s the rub. The forces driving income growth and its distribution are global, stretching well beyond the nation-state; yet our politics, and hence our policy imaginations, remain national.

The elephant curve lays this challenge out all too clearly, and the good Dr. Milanovic then engages us in a careful discussion of the nature, evolution, and forces behind inequality within countries, and then inequality between countries. These two chapters are the analytical heart of this five-chapter book.

Even the most expert readers should pause for a moment and marvel, in a way free of jaundice, at the apparatus and technical elegance. The standard measure of income inequality is the Gini coefficient, named after the Italian statistician who devised it about a century ago. Sure, it is only one of many possible measures in our toolbox, having particular strengths but also weaknesses, most notably not being terribly sensitive to a growing share of income going to a narrow slice of those already at the top. A colleague once whispered into my ear as the two of us listened to a conference presentation, “Branko’s never met a Gini he didn’t like.” And indeed, if you visit his website you can download a dataset affectionately called “All the Ginis.” He does mean all: an inequality statistic for all places, from many different surveys, over much of the postwar period. And while we can debate him about the meaning and measurement of incomes, the capacity to devise comparable purchasing powers across countries, and the best way to transform these numbers into measures of inequality, it is nonetheless amazing that we now have more and more high-quality, representative samples of individuals in almost all of the world’s countries. The building of this infrastructure, principally at the World Bank where Milanovic had a front-row seat, is something to be respected and nurtured by policymakers. We live in an information age full of noise, and this is one case in which we have signal, perhaps at times fuzzy and intermittent, but signal nonetheless.

I stress this because Milanovic’s thesis has to do with the disconnect between national politics and global economics. Surely the first step in making global policy for a global citizenry has to be a data infrastructure that is global in reach. The almost seamless flow of capital and the amazing capacity for incomes to be hidden from national authorities, and for that matter from some of the statistics Milanovic uses, raises big concerns that still need to be addressed. We can’t reasonably imagine policy being better if our information is not also better.

The elephant curve invites many more interesting questions about inequality within and between countries, and Milanovic takes a good deal of pride in putting forth a theory to explain the long-run trends of withincountry inequality. The starting point is the Kuznets curve, the 1950s idea from Simon Kuznets that economic growth first raises inequality, before causing it to fall. The transition from an agrarian economy to a manufacturing economy leads to higher incomes as workers move to betterpaying urban jobs, and as entrepreneurs make gains from the higher returns on their capital. But eventually labor becomes scarcer in the rural areas, switching the demand-supply calculus and lowering the margin for profits, both forces signaling the beginning of a slide down the Kuznets curve to lower inequality. Thomas Piketty did much to challenge this idea in his book Capital in the Twenty-First Century, suggesting it is contradicted by the major increase of inequality in countries like the United States since the late 1970s. Even if the earlier part of the century seemed to follow the predicted pattern, the longer timespan of data now lets us see the full picture.

Milanovic is subtler, suggesting that economic growth moves us through “Kuznets waves.” China is going through the first Kuznets wave in transitioning from agriculture to manufacturing, the U.S. through a second in moving from manufacturing to services. This second wave is all the more challenging from an inequality perspective because the returns to skills in a service economy

yo u t u b e

c

vary much more between individuals, who are more sharply differentiated by skills and power. It looks increasingly like the Chinese economy may have crested and begun its downward slide toward greater equality, or perhaps will be stuck for some time and not make the much harder transition to a fully participatory middleclass society. But it looks like the U.S. will continue to ride the uplift of its inequality wave.

Many economists may question how solidly this stands as a theory of growth and inequality. Milanovic is very close to the facts, and is offering up patterns seen and interpolated in the data with his careful eye. This does not lead to a theory that moves through logic from a few self-evident assumptions to a number of testable hypotheses. It is not apparent how the predictions he makes could in principle be falsified with the data. The Kuznets waves may have a tendency to shift to match any anomalous data point. But in my mind this is not terribly disconcerting. Let the theorists pick up this ball and add more rigor, and let’s see where it takes them.

But it clearly takes Milanovic into interesting territory, as the last two chapters of the book turn more speculative, written almost as opinion pieces. Here he turns his hand to forecasting where we are going, and assessing the malign and benign forces that will lower and raise inequality.

Wars, epidemics, and civil conflicts have all erupted, both before and after the Industrial Revolution, to decimate populations or destroy the capital stock, and in turn shrink the income differences between the elite and the rest. But social choices have also mattered in the democracies that have grown ever more influential after the Industrial Revolution, so that politics, widespread education, and technological changes that favor the less-skilled have also reduced inequalities. This leads Milanovic to a discussion of a series of policy challenges that many readers will find as the most insightful parts of these concluding chapters.

If we really can get into this global mindset that he is asking us to adopt, then we might think more creatively,

The great middle-class squeeze is not over, and will likely lead to more polarization in rich societies and their politics.

Branko Milanovic

and perhaps less dogmatically, about a series of challenges that we face as citizens of individual nations. There are a number of examples in the last chapter, but perhaps the most striking deals with citizenship and migration, examples that cut at the very core of the approach.

There remains a huge boost to incomes depending upon where an individual lives, and this creates big incentives for migration from poorer to richer countries. American politics has long been struggling with meaningful immigration reform, driven by the large inequalities between countries but also formed, informed, and misinformed by the large inequalities within the country. The refugee crisis now afflicting Europe is partly geopolitical but also deeply economic. Better lives are to be had if one can make it to Germany or Sweden. “Physical walls between jurisdictions,” Milanovic tells us, “are being built, in part, because there is a huge financial wall between being and not being a citizen of a rich country.” In his view, this is because our national politics ties us to a binary notion of citizenship. He speculates that Americans and other citizens of the rich countries might be more amenable to immigration if there were what he calls an intermediate level of citizenship, a level that would have less economic value than full citizenship because it would entail higher taxation, less access to social services, or perhaps an obligation to return to the country of origin.

In other words, put aside the idea of a “path to citizenship” as a right.

Americans have tolerated a de facto inferior form of residency, but in a way that keeps many immigrants and their children in the shadows.

Milanovic is advocating bringing them out of the shadows through, for example, a legally administered program for temporary foreign workers, giving migrants the right to work in the country but also the obligation to return home. This is something actually done in Canada, but the policy went afoul politically because it made the competition for jobs between natives and migrants more transparent. It may be a policy particularly appropriate to the European Union,

u

l

t

u

r

e

where the walls are something more than metaphorical. This is context that Milanovic probably has in mind.

But it is hard to imagine how much traction a temporary foreign-worker program, or the other variants he suggests, would have in the U.S., because the perception that immigrants compete for jobs and lower wages of the native-born will still bite.

Indeed, at the same time, Milanovic makes clear that he feels the “great middle-class squeeze” is not over, and will likely lead to more polarization in rich societies and their politics.

This will not only ensure immigration policy will continue to be challenging, it may also be all the more troubling for policy directed to equality of opportunity. In the coming years, the observed differences in the skills and abilities between the top echelons and everyone else will not be that great, with chance, family background, and inheritances playing a bigger role in allocating incomes. “The new capitalism will resemble a big casino, with one important exception: those who have won a few rounds (often through being born into the right family) will be given much better odds to keep on winning.” If this is so, then it will be harder and harder to sustain the story that inequality is somehow the precursor of opportunity, offering rewards and incentives for the more productive among us to contribute to higher growth and incomes for all.

And the status quo will become politically less and less sustainable.

We are left with one final question posed on the last page of the book: “Will inequality disappear as globalization continues?” It is easy enough for you to imagine a one-word, or perhaps one-sentence, answer without reading the book. But if you do read it, your focus will be sharper, you will be able to see further, perhaps even globally, and your image of a whole host of public policy challenges will be clearer and much more nuanced.

Miles Corak is a professor of economics with the Graduate School of Public and International Affairs at the University of Ottawa, and currently a visiting professor of economics at Harvard University.

Spring 2016 The American Prospect 103

c

u

l

t

u

r

e

A Class Act? If the new proletariat starts identifying as a class, it could transform politics. By Rich Yeselson b

T

o o

here is a classic sociological distinction between workers who are politically conscious of their economic class and those who are not.

Leftist theorists have spoken of the difference between “class in itself”—an objective category defined by a worker’s relationship to capital—and “class for itself.” The latter concept refers to a class having become consciously aware of its own exploitation, and its workers actively fighting to overcome it. Karl Marx alluded to the distinction in his early work The Poverty of Philosophy (1847). We can understand how the political economy works by studying class in a seminar room. Unjust economic and political conditions only change, however, when a class aggressively acts for itself.

Without using those words, Tamara Draut puts the “in itself”/“for itself” distinction at the heart of her valuable book, Sleeping Giant. The sleeping giant is the new, low-wage, postmanufacturing and post-mining American working class of caregivers, retail workers, office underlings, and supply-chain personnel in distribution and trucking. Draut argues that the giant may be ready to awaken and become a powerful source of social change. But she is an honest enough analyst to provide evidence that makes this contention less than certain. And the disjunction between the hopes of this self-proclaimed pessimist and her optimistic class analysis is a tension that runs throughout the book.

Via historical and social science research and interviews with dozens of workers and activists, Draut covers a lot of ground in a short book. Draut situates herself as the fortunate daughter of a unionized steelworker who retired after 29 years on the job “with a nice pension and a gold tabletop clock.” The labor movement of that earlier era, concentrated in manufacturing, mining, and transportation, enormously benefited its mostly white membership and their families. The new working class

104 WWW.Prospect.org Spring 2016

k

s

is overwhelmingly non-unionized and lacks the other workplace protections of a union contract. Draut describes her father’s dying days in a hospital and juxtaposes his own working life with the often low-paid health-care providers caring for him—members of the new American working class.

Draut notes that manufacturing is now down to 13 percent of the workforce (it’s actually about 8 percent), down from about 25 percent in the 1980s. Union density is under 7 percent in the private sector. Draut’s own definition of “class” is the reasonable one, though contested, of basing it upon education—thus employees without bachelor’s degrees are “working class.” The latest figures would put this at a bit over 60 percent of the workforce. And within that working class is what Draut says is its essence, composing about 25 percent of the workforce, and including most of the fastest-growing, albeit low-paying, jobs in the country.

This new working class is disproportionately composed of people of color and women. These workers include care providers like nurses’ aides and home health-care workers who tend to the sick and the elderly; retail workers; food preparers and servers; maids and housekeepers; day laborers; warehouse workers and the truck drivers who deliver goods to those warehouses; secretaries and other office workers who facilitate the “careers” of the professional and managerial college- and post-college-educated; and the building services people who clean those offices. These are the jobs that, as she puts it, are “feeding, serving, caring, and stocking America.” She doesn’t mention another characteristic, but it’s an important point that has political implications: These jobs, unlike manufacturing jobs, are not directly at risk from globalization; hotels, hospitals, warehouses, and fast-food outlets can sometimes close, but they cannot be moved, as part of

Sleeping Giant: How the New Working Class Will Transform America

by Tamara Draut

Doubleday

an overarching business strategy, to Mexico, China, or Vietnam.

Draut does a great job of describing, with miniature case studies, the many varieties of structural disempowerment that businesses have designed to ensnare these workers.

The jobs are already poorly paid, with lousy benefits and little opportunity for advancement. But, in addition, employers further diminish workers with practices such as wage theft, by misclassifying employees like truck drivers as if they are autonomous independent contractors like whitecollar consultants; “just in time” scheduling, which, at companies like Walmart, cuts hours with little notice from employees so as to respond to subtle shifts in customer traffic; and sub-contracting and franchising, which insulate major employers like McDonald’s from responsibility for wages and working conditions.

Relying upon the work of historians Nelson Lichtenstein and Kim Phillips-Fein, and political scientists Jacob Hacker and Paul Pierson, Draut races through a competent outline of the rise of the labor movement in the 1930s and the power of postwar labor, which, at its peak, represented about a third of the non-farm workforce.

Business elites and conservatives in Congress curbed labor power with the passage of the Taft-Hartley Act in 1947. Still, labor dominated the policymaking apparatus of the Democrats and was the Dems’ principal voting bloc. In 1964, a mostly white union membership gave 86 percent of its vote to Lyndon Johnson. (Today, labor provides only about 60 percent of its much smaller voting bloc to Democratic presidential candidates.) The critical inflection point was the countermovement of business interests and conservative politicians during the 1970s, when resources devoted to business lobbying increased overwhelmingly and labor law reform failed to pass during the Carter administration despite a Democratic Congress.

The decline of unions also corresponds with a labor market that, in the wake of the civil-rights and women’s movements, is more open to women and minorities than ever before, yet remains highly stratified by race and

csfotoimages / istock

c

gender. As Draut argues, the gender segregation of the labor market matters because, as with many of the jobs noted above, “any job that is performed primarily by women pays less than a similar job performed primarily by men.”

Draut sees a surge of working-class activism throughout the country epitomized by the “Fight for 15” movement, supported by SEIU, which has indeed, in just a few years, pushed cities, states, and even bête noire Walmart to raise wages for the working poor. But she also points to many smaller insurgencies around the country, such as the Texas Workers Defense Project (WDP), which, in one of the most anti-labor environments in the country, has improved pay and working conditions, first for minority construction workers, and now, with some success, in solidarity with unionized white construction workers.

Most of her stories are primarily about workers of color, but she also includes a discussion with a white Teamster based in Atlanta, Ben Speight, who has learned that black workers are more likely to militantly organize than are their white counterparts. (A few years ago, I was a guest on Speight’s radio program.) As with many of Draut’s examples, however promising, there is a question of scale.

The WDP, for example, has roughly 5,000 members in a state with almost 700,000 construction workers. It is funded partly by foundations. This demonstrates the value of a “liberal elite” for progressive change, but it

The gender segregation of the labor market matters because any job that is performed primarily by women pays less than a similar job performed primarily by men.

also leaves WDF and similar organizations vulnerable to the changing whims of its funders.

The book is mostly well grounded in careful research, but sometimes Draut is more wishful than persuasive. At one point, she has to concede that, despite the serious health and safety problems that continue to plague American workplaces, workplace deaths declined by two-thirds between 1970 and 2013, in a workforce that increased by about 65 million jobs during that time. There is a paradox in these figures that readers need to engage. In fact, the decline in oftendangerous manufacturing and coalmining employment, brought about more by productivity increases than globalization, is probably responsible for this encouraging trend. Wealthy, advanced societies do less and less dangerous work—even if the jobs still done are inadequately regulated.

She argues, in a passage that is, tellingly, not sourced, that a watereddown version of the Employee Free Choice Act (EFCA)—the so-called “card check” bill that would have facilitated union organizing and shielded it from the campaigns of anti-union employers—“had a chance of passing the Senate” but didn’t get a vote because President Obama asked the Senate’s Democrats to wait to consider the bill until the end of the healthcare fight. I worked in the labor movement during this time and, while some people imagined that the bill could have passed, there were eight to ten Democratic senators who would never have voted for it—recall there were then two Democratic senators from Walmart—Arkansas—alone.

These Democrats would have kept the bill far short of the 60 votes needed for passage. The one Republican who sought compromise, Arlen Specter, soon became a Democrat.

The ironic truth is that when labor is strong, it doesn’t need the state to intervene so much on its behalf. That’s why labor leaders in the 1950s, like Steelworkers legal counsel and later Supreme Court justice Arthur Goldberg believed, naïvely if understandably, that labor did best when the courts and legislatures left it alone to resolve differences with management.

u

l

t

u

r

e

But when labor is weak, as it is now, it lacks the political and economic juice required to win its own battles, much less to pass remedial legislation on its own behalf.

EFCA was worth a try, but there was never a chance that unions were going to persuade pro-business Democratic senators in low-union-density states like Louisiana, Virginia, Nebraska, let alone Arkansas, to vote against the pathological hatred of their business donors for unions, and support a law that would have made it easier to organize. A more promising avenue to assist passage of such a bill, when political conditions allow it, would be to continue to pressure Democrats to abolish the super-majority filibuster.

Throughout the book, Draut returns to what is her greatest fear— that despite the encouraging signs that this new working class is on the move, she is not certain “whether the racial, ethnic, and gender divides that have impeded solidarity can finally be dismantled.” She notes that polling shows that the less financially secure are the most worried about the economic impact of immigration. She accuses Republicans of having “deliberately used race to pursue their broader objectives of shrinking government and deregulating the economy.”

She is right to be worried. And she wrote this book before the rise of Donald Trump. We understand now, if we didn’t before, how significant it is that the social democracies of Western Europe were constructed when their populations were almost entirely homogeneous. Today, right-wing parties in several countries, with much stronger labor movements than that of the U.S., wish to maintain nativist social welfare states and reject a broader social solidarity. In the United States, we know from the rage so many white working-class people have toward Obamacare—even some who have benefited from it!—that the historical weight of racial and ethnonationalism is a great burden. Donald Trump’s campaign for president is an effect, not a cause, of this widespread ethno-nationalism of white workers who, justifiably, think they’ve been screwed, but see people of color not as colleagues and collaborators but as the

Spring 2016 The American Prospect 105

c

u

l

t

u

r

e

cause of their distress. Draut reminds us time and again that a solidarity is painstakingly being built, but from a movement of the new working class that is “primarily, but not entirely, of people of color and immigrants.” It has the support of what I have called the new “laborism” of mostly white, college-educated union staffers and other urban, professional leftists, but less so of the white working class itself.

Thus, this new working class— largely de-unionized, less prone to vote or otherwise participate in politics—remains less than fully “for itself.” Draut movingly sees agency in the shoots of activism from immigrant and African American workers and ancillary movements like Black Lives Matter. But she is more prone to invoke structural forces and (correctly) to cite the deliberate manipulations of conservative reactionaries when describing the passivity and, worse, outright racism of white workers.

Alas, in these cases, too, people make their own history, but not always in the humane ways we would hope—working-class agency isn’t always a positive social force. The weakness especially of private-sector unionism is critical here because, as Draut notes in a perceptive aside, when unions wane, “what’s also lost is the civic participation and political education unions provide.” While unions don’t guarantee interracial and ethnic solidarity—again, see Western Europe—they are, as of now, the only organizations we have that, in their normative goals and often their actions, encourage just that.

It is impossible to know if these antagonisms are merely the “morbid symptoms” that inevitably accompany the gestation of a new world. Tamara Draut is a sure and compelling guide to the circumstances of the new working class, which are profoundly unjust, and to its possibilities, which are already evident. But for now, it looks as if the sleeping giant is rolling over and stretching its underutilized muscles, and hasn’t yet jumped out of bed to greet the dawn.

Rich Yeselson is a Washington, D.C.based writer and contributing editor of Dissent.

106 WWW.Prospect.org Spring 2016

The Bankers’ Bank Does the Federal Reserve govern the banking system— or vice versa? By Mike Konczal b

T

o o

he periods after the destructive financial crises of the past century have traditionally been periods of reform; as a response, more democratic control was brought over money. Yet no such fundamental change has occurred in the wake of the financial crisis of 2008. This lack of movement has led to confusion and reaction, and academics are now trying to tease out the history and politics of how change happened before, and how it might happen again.

There were cries for changes in the aftermath of the devastating 1907 financial crisis. However, the path from an idea of reform to the Federal Reserve Act of 1913 is a complicated one, now told in Roger Lowenstein’s America’s Bank: The Epic Struggle to Create the Federal Reserve. Even that new system could not prevent the Great Depression. What was needed was a full assault on the gold standard and a complete reworking of what money meant. This swift and successful campaign is outlined in historian Eric Rauchway’s The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace.

We don’t face a depression, but instead a Great Recession, one where the deep political dynamics of the Federal Reserve play a central role.

These forces are examined in Fed Power: How Finance Wins, by political scientists Lawrence R. Jacobs and Desmond King. The recent chaos has put the Federal Reserve and monetary policy under a public spotlight in a way it hasn’t seen in decades. The debates over the bailouts, engineered by the Fed, dominated the beginning of Barack Obama’s presidency, and debates over whether the Fed has learned anything, or is even capable of providing sustained prosperity and full employment, dominate the end.

This moment, one where conservative presidential candidates can run for office on bringing back the gold

k

s

standard, is dangerous. Yet the long arc of history is encouraging for liberals, and the challenges now are an opportunity. At each earlier step, money and banking came under greater democratic control. Money itself used to be scarce, until the state made it elastic and able to respond to the economy.

The “barbarous relic” of the gold standard, in John Maynard Keynes’s famous phrase, was destroyed. Continuing this arc is essential for prosperity in the 21st century.

Banking was contentious from the founding of our country. President Andrew Jackson’s successful war against the Second Bank of the United States during the 1830s made establishing any type of central bank a political nonstarter for nearly a century. While trying to move the Federal Reserve Act that he sponsored through the Senate, southern Democrat Carter Glass would later write in his memoir, “the ghost of Andrew Jackson stalked before my face in the daytime and haunted my couch for nights.”

By the second half of the 19th century, as Roger Lowenstein writes in America’s Bank, “the United States was an industrializing nation with a banking system stuck in frontier times.” Thousands of banks, each with their own currencies and reserves, compounded the problems. The central problem was that “the system suffered a serious deficit: it consistently failed to generate enough money.”

The price of money rose rapidly in the late 19th century because money was scarce, leading to crippling deflation.

America was going to need a central bank going forward.

The crisis of 1907 was the breaking point. A group of bankers, economists, and a few politicians gathered informally at first, working to build a consensus plan that they could try to pass.

This group finally met at Jekyll Island in 1910, led by Senator Nelson Aldrich.

The meeting, which has become

libr ary of congress

c

the focus of conspiracy theorists ever since, created the Aldrich Plan, designed to create a central bank, controlled by private finance, that could pool deposits and fight off panics.

This plan immediately walked into the buzz saw of the 1912 presidential election and subsequent Woodrow Wilson administration. Lowenstein does a wonderful job explaining how even the more carefully constructed policy must be navigated through an endless maze of hearings, interest groups, and politicians. The wide cast of bankers, progressive reformers, populist agitators, muckrakers, and conservative Democrats, each wanting to push and pull reform in their own way, is still easy to imagine today.

At the core, however, were philosophical and political splits. Populists, led by William Jennings Bryan, saw banking as a public trust, where dollars backed by the government should be the dominant currency. He, like Wilson, wanted public supervision over the system. More-conservative supporters of central banking wanted private control; Wall Street wanted the biggest banks to have the most say, while midsized banks wanted regional control.

This book connects the creation of the central bank to the crosscurrent of European ideas that characterized, in historian Daniel Rodgers’s phrasing, the “Atlantic Crossings” of the Progressive Era. The Progressive movement itself was complicated and contradictory, and the Federal Reserve’s initial structure should be understood as a work of compromise.

The Federal Reserve system would be based in regional banks to ensure that Wall Street didn’t dominate it. However, there would be public accountability through a Federal Reserve Board centered at the federal level.

Though Lowenstein’s sympathies are rightfully with the people trying to make this work, he can be too dismissive of those worried about the power of the financial sector. The Pujo Commission, for instance, established to investigate Wall Street, is treated with a more skeptical tone than it deserves. William Jennings Bryan’s ideas are too easily dismissed—the abuses of Wall Street alongside the desire for a gold standard helped lead to the Great Depression.

FDR and President Herbert Hoover on their way to the Capitol for Roosevelt’s inauguration on March 4, 1933

that in his 1933 inaugural address, Franklin Delano Roosevelt told us “that the only thing we have to fear is fear itself.”

What they might not remember is that Roosevelt also described “an adequate but sound” currency as one of his core “lines of attack” against the Great Depression. Adequate was key there; putting it first, above sound, was a clear signal that Roosevelt would no longer let the supply of gold determine the amount of currency in circulation.

Two days after that address, Roosevelt suspended the convertibility of money into gold, effectively taking us off the gold standard.

The story of how this happened is told in excellent detail by Eric Rauchway’s The Money Makers. Rauchway provides both the particulars and an People may remember

u

l

t

u

r

e

entertaining story about the connection between the highlevel monetary ideas of Roosevelt and Keynes, and how they acted on them. The first “fireside chat” features Roosevelt arguing that there is something “more important than gold, and that is the confidence of the people themselves,” and the economy has never been the same since.

That it is portrayed as a clear decision consistently executed puts Rauchway’s account at odds with much of the recent New Deal scholarship. Historians tend to focus on the flailing and contradictory nature of what the New Deal wanted to accomplish with its economic policy. Economist Alvin Hansen stating that he doesn’t “know what the basic principle of the New Deal is” in 1940, and the more generous “chaos of experimentation” formulation of the historian Richard Hofstadter, tends to characterize the literature on New Deal economic policy.

Worse, tomes on the New Deal often spend a few sentences on this crucial decision to go off the gold standard, focusing more on government spending. When people looked to the New Deal to deal with the Great Recession, what to do about money was sorely lacking in public discussion. Rauchway provides a useful corrective here, showing that the major decisions weren’t an accident, but a conscious decision emanating from political commitments that would continue in the postwar order built at Bretton Woods.

Since then, the Federal Reserve’s

control over banking regulation and the money supply has been taken for

Spring 2016 The American Prospect 107

c

u

l

t

u

r

e

granted. And since then, it’s amassed a significant amount of institutional power. In Fed Power: How Finance Wins, Lawrence R. Jacobs and Desmond King use the tools of political science to examine the Federal Reserve as an institution. They find a “mutant institution of government” that is too comfortable with Wall Street and too detached from accountability and transparency to function well.

Jacobs and King seek to displace a type of common-sense wisdom that has gained strength among policymakers, one where the bailouts worked, the United States is doing well compared with Europe and especially in the wake of a financial crisis, and reform has been more than sufficient to the task at hand. At times, to fight this wisdom that lacks any nuance or concerns, they themselves push too hard on the Federal Reserve.

But their analysis shows the strengths and limitations of liberal criticisms of the Federal Reserve at this moment.

Jacobs and King argue that the democratic accountability of the Federal Reserve has suffered because of the bailouts. And it’s completely true that the Federal Reserve pushed their powers beyond what anyone had expected, extending loans to all kinds of financial institutions to quell the panic. But by the end, both Congress and two presidents signed off on the bailouts through the passage of the Troubled Asset Relief Program.

Obama’s Treasury secretary and a Democratic Senate were the ones who didn’t stop bonuses from being paid to failed bankers. The institutional failure goes well beyond the specifics of the Federal Reserve.

Jacobs and King argue that much of the weak recovery for Main Street was the result of the Federal Reserve being too close to banks. Yet the failures of mortgage refinancing and modification programs directly fell on the Treasury Department. There was more than sufficient room to think boldly there, and the Obama administration failed to act on it. The Federal Reserve was able to get 30-year-mortgage

America’s Bank: The Epic Struggle to Create the Federal Reserve

by Roger Lowenstein

Penguin

The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace

by Eric Rauchway

Basic Books

Fed Power: How Finance Wins

by Lawrence R. Jacobs and Desmond King

Oxford University Press

interest rates down to very low numbers; if the administration was interested in fixing the housing crisis, the Fed was already there to help.

Yet there’s a very important initiative Jacobs and King point to as a solution to their concerns: the way Canada regulates its banking system. Canada has large, universal banks, banks much larger than ours in terms of GDP. Yet they haven’t had the problems the United States has had, because their banking regulators are independent of their monetary authority. By separating the two, and having the banking regulators much more accountable, we can tame the financial sector.

There’s a lot to be impressed with in this approach. Certainly the Federal Deposit Insurance Corporation has been aggressive in pushing for financial reform, much more than the Federal Reserve in the wake of the passage of the Dodd-Frank Act. Since it is responsible for covering costs of bank failures through its insurance system, the FDIC ’s incentives to be a strict regulator are well aligned. Certainly the pre-crisis era also showed that fragmentation of regulators leads to a regulatory race to the bottom and a less coherent regime.

However, we should be careful about terms of accountability. The notion that the Federal Reserve had been “captured” by financial interests before the crisis is a major theme of the book. This argument is important, yet it deserves pushback. Congress and leaders of both political parties had been creating a deregulatory environment for decades before the crisis, pushing for a presumption of deference to the financial sector.

Elected officials took actions on this, such as firing individuals and cutting budgets of places seeking to check the financial sector, while passing laws and appointing people favorable to this project. That regulators took a hands-off approach shows the administrative state as responsive to and following democratic oversight and accountability, not removed from it.

Many of the features of financial

reform play on this very concern.

The Consumer Financial Protection Bureau, for instance, was deliberately funded in a way to prevent Congress from being able to tamper with its funding for political gain. The Federal Reserve absorbed new responsibilities on similar grounds, given the independence it is granted. Political scientists will need to think of the right ways for regulators to be accountable going forward, so that oversight helps, rather than hinders, their essential mission.

Indeed, the correct focus for Federal Reserve accountability is less the specific things they do and more whether they are achieving their goals. Much of the demand for accountability has been focused on the specific instruments they are using, such as the large-scale purchasing of long-term financial instruments called quantitative easing. Why not focus more on the Fed’s inability to bring about full employment? With that as the clear focus of accountability, it is easier to focus on the tools necessary to achieve it.

Those instruments are not clear yet.

They could be as simple as the Federal Reserve simply giving people money to make up for persistently weak economic recoveries. Economists often joke that the Federal Reserve should just throw money out of a helicopter as a means of boosting the economy if they have no other tools available. Why not make a version of that a reality, with the Federal Reserve directly giving people freshly printed money when the economy is weak? Perhaps the Fed could be directly funding infrastructure and necessary investments? If jobless recessions continue to be the norm, such actions have to move to the center of discussion. Though many would think these ideas silly, history tells us that such an expansion in what we think of as possible is both appropriate and necessary in the wake of our devastating crisis.

Mike Konczal is a fellow with the Roosevelt Institute, where he works on financial reform and inequality. He blogs at Rortybomb.

volume 27, number 2. The American Prospect (ISSN 1049-7285) is published quarterly by The American Prospect, Inc., 1225 Eye Street NW, Suite 600, Washington, DC 20005. Periodicals-class postage paid at Washington, DC, and additional mailing offices. Copyright © 2016 by The American Prospect, Inc. All rights reserved. No part of this periodical may be reproduced without the consent of The American Prospect, Inc. The American Prospect ® is a registered trademark of The American Prospect, Inc. Postmaster: Please send address changes to The American Prospect, P.O. Box 421087, Palm Coast, FL 32142. printed in the u.s.a.

108 WWW.Prospect.org Spring 2016

advertisement

Talking ’bout my—and your— generation

By Randi Weingarten, President AMERICAN FEDERATION OF TEACHERS here comes an uneasy moment in the life of a longtime, anti-establishment agitator when one realizes that she’s viewed as … the establishment.

While there’s no “Question Authority” T-shirt under my blazer, I still question and push back on (and sometimes get arrested by) the authorities. Still, when younger Americans look at my generation and how we’ve fallen short on important issues of opportunity, equality and justice, I find myself on an unfamiliar side of a generational divide.

Who can blame younger Americans, millennials in particular? They’re the most educated generation to date, but they’re drowning in student debt. Many entered the workforce during the Great Recession and its long hangover, and economists say they, as a group, may never fully recover. No wonder they’re anxious and angry—this generation may be the first in recent history to do worse than their parents. It’s now about freelancing and the sharing economy— not home ownership and job security. No wonder only 8 percent of millennials have much confidence in Congress—type “do-nothing” and “Congress” into a Google search, and you’ll get 51 million hits.

aged 18 to 29 surveyed by the Pew Research Center holds a favorable view of labor unions. Rightly so—union members earn better wages and benefits than nonunion workers. Unions allow workers to have a say in the workplace. And, where union membership is higher, children are better off.

Millennials are helping to shape the AFT, and the AFT is working to give this generation a leg up. The AFT has the longest-established graduate teaching and research assistant local unions in the country, and the leaders of those locals are among the youngest elected leaders of unions in the United States today.

The AFT has an array of teacher leader programs, including the Florida Education Association’s FYRE (Florida’s Young Remarkable Educators) program, which taps promising young educators and provides them with opportunities for mentoring and leadership roles in the union, and helps connect them with others interested in driving change in the profession.

The AFT also is working to make college more affordable. Some AFT affiliates are using tools developed

by Jobs with Justice to offer online guidance and workshops to help people pay off student debt,

which grows by an estimated $2,726.27 every second, according to MarketWatch. One workshop participant cut $600 from her monthly loan payment.

Both Democratic candidates for president also have proposals to address college affordability. We favor Hillary Clinton’s New College Compact, which translates the value of affordable college into a sustainable plan that allows students to attend a four-year public college without taking out loans for tuition or to attend a community college tuition-free, encourages states to invest in higher education, and reduces interest rates for people with student loans.

Bridging generational divides takes giving people voice and listening to things that might be hard to hear. My generation hasn’t left the world in such great shape, though not for lack of trying. So I’m asking my fellow baby boomer idealists to understand millennials’ frustration, to tap into their incredible energy, and to recognize their passion and altruism. Maybe if we work across generations, together we can create a better America that ensures opportunity, equality and justice for all.

For progressives’ fights to be effective, they must transcend generations.

That number may have risen since Justice Antonin Scalia’s death, when congressional Republicans and Republican presidential candidates put politics above principle and laced their “condolences” with defiant refusals to consider any candidate President Obama would nominate to fill the vacancy on the Supreme Court. How ironic for so-called strict constructionists to decide that, in an election year, they can flout Article II of the Constitution, which requires the president to nominate and the Senate to confirm Supreme Court justices.

It’s a reminder that for progressives‘ fights against injustice and intentional polarization to be effective, they must transcend generations. Take the civil rights movement, which at the height of its strength was a cross-generational movement. Ministers and rabbinical students, the Student Nonviolent Coordinating Committee and the Brotherhood of Sleeping Car Porters—young and old, of many races and backgrounds, pushed toward justice.

We must keep pushing toward justice together.

These are fights we all share: Standing up against unequal and inadequate education. Eliminating crushing college debt. Confronting discrimination, and making the economy work for everyone.

America’s labor unions wage these fights. Millennials understand that; a strong majority of people

Photo by Michael Campbell

Weingarten and fellow activists outside a 2013 Sallie Mae shareholders’ meeting, where they called on executives to meet with students about college debt.

Follow AFT President Randi Weingarten: www.twitter.com/RWeingarten

The country’s largest conference for progressives

JULY 14–17, 2016 H ST. LOUIS

Join thousands of fellow change makers for an action-packed conference featuring inspiring keynotes, thought-provoking panels, interactive trainings and master classes, and dozens of networking opportunities and social events. Make lasting connections, brush up on your activism and organizing skills, and connect with other progressives working on issues that matter to you. We’ll see you in St. Louis!

SPECIAL DISCOUNT FOR PROSPECT READERS: Visit netrootsnation.org/register and enter promo code PROSPECT at checkout for $50 off!