The Predator Class and the Predator State

[Time for change]

When the top 1% of individuals in a nation own 38% of its wealth and the bottom 40% own just 1% – when the average individual in the top 1% owns 1500 times as much wealth as the average individual in the bottom 40% – it is worth asking the question: Why? Do these people own so much more wealth than other people because they earn it by contributing to society in some way? Or are they predators? Or does the answer lie somewhere in between?

James K. Galbraith, in his book “The Predator State”, notes that the concept of a predator class is not new, and he introduces the concept by first discussing Thorstein Veblen’s “Theory of the Leisure Class”, published in 1899:

The leisure classes do not work. Rather, they hold offices. They perform rituals. They enact deeds of honor…The leisure class is predatory as a matter of course… The relation of overlords to underlings is that of predator to prey. Vested interests… live off the work of others by right and tradition, and not by their functional contribution to the productivity of the system… Predators rely on prey for their sustenance, but they also require and must motivate their assistance…

Some perspectives on today’s predator class

There are many economists and others who have written about the phenomenon of predation – with or without using that word. Here are some examples:

Jared Bernstein
In his book “Crunch – Why Do I Feel So Squeezed”, Jared Bernstein discusses the apparent paradox of why the financial situation of so many Americans during the Bush/Cheney years could be so poor in the presence of such healthy “economic indicators”:

Over the course of this highly touted economic expansion, poverty is up, working families’ real incomes are down…. By 2007, 44% said they lacked the money they needed “to make ends meet”…

If you feel squeezed, chances are it’s because you are squeezed. Most of the indicators that matter most to us in our everyday lives… are coming in at stress inducing levels, but GDP… keeps on truckin’. Something’s wrong, something fundamental…

The name of the problem is economic inequality… It’s a sign that something important is broken: the set of economic mechanisms and forces that used to broadly and fairly distribute the benefits of growth… unions, minimum wages… full employment… quality jobs, safety nets, and social insurance…

James Petras
In his book “Rulers and Ruled in the US Empire”, James Petras also discusses the disconnect between rising productivity of the American worker and our economic health:

Within the ruling class, the financial elite is the most parasitical component… One measure of the enormous influence of the financial ruling class in heightening the exploitation of labor is found in the enormous disparity between productivity and wages. Between 2000 and 2005, the US economy grew 12 percent, and productivity (measured by output per hour worked) rose 17 percent while hourly wages rose only 3 percent. Real family income fell during the same period… Three quarters of Americans say they are either worse off or no better off than they were six years ago…. The growth of vast inequalities between the yearly payment of the financial ruling class and the medium salary of workers has reached unprecedented levels….

Petras explains the process that has led to that disconnect:

A vast army of workers, peasants and salary employees produce value which becomes the basis for… speculative financial instruments. The transfer of value from the productive activities of labor up through the trunk and branches of financial instruments is carried out through various vehicles… credit, debt leveraging, buyouts and mergers… The financial sector acts as combined intermediary, manager, proxy-purchaser and consultant, capturing substantial fees, expanding their economic empires…. Finance capital has moved from exacting a larger and larger ‘tribute’ (commission or fee) on each large-scale financial transaction, toward penetrating and controlling an enormous array of economic activities…

Or, to summarize it in my unsophisticated economic language, producers produce goods and services and the financial elite, through a variety of complex financial mechanisms, find a way to have the money transferred to themselves.

Petras explains that the political basis for this process is rooted in the fact that the financial elites:

are linked to the judicial and regulatory authorities, through political appointments and contributions…. They organize and fund both major parties… They pressure, negotiate and draw up the most comprehensive and favorable legislation… They pressure the government to bail out bankrupt and failed speculative firms and to balance the budget by lowering social expenditures instead of raising taxes on speculative ‘windfall’ profits… Finance capital and its associated conglomerates wield uncontested political power in the US in comparison to their counterparts in any country in Europe…

Joseph Stiglitz
Joseph Stiglitz explains how predation has been at work in the bailout of Wall Street by the American taxpayer:

The TARP bailout has so far been a dismal failure. Unbelievably expensive, it has failed to rekindle lending. Former Treasury Secretary Henry Paulson gave the banks a big handout…The taxpayers put out $350 billion and didn't even get the right to find out what the money was being spent on, let alone have a say in what the banks did with it.

TARP's failure comes as no surprise: incentives matter. Bankers won't restart lending unless they have a reason to do so or are forced. Receiving billions of dollars in bonus pay for racking up record losses is a peculiar "incentive" structure….

And yet, they’re still trying to get more:

The financial wizards are turning to tried and true gimmicks – the same ones that got us into the mess. One strategy is to hide the costs in nontransparent accounting… The other combines this trickery with the magic of leveraging and pretends that leveraging carries no risk… Long experience has taught us that when banks are at risk of failure, their managers engage in behaviors that risk losing even more taxpayer money. They may, for instance, undertake big bets: if they win, they keep the proceeds; if they lose, so what?--they would have died anyway…. Because the government is on the hook for so much money, it has to take an active role in managing the restructuring…

James Galbraith
Galbraith describes the takeover of our country by predators, the process that made it into a predator state:

In the late 1970s and 1980s… business leadership saw the possibility of something far more satisfactory from their point of view: complete control of the apparatus of the state. In particular, reactionary business leadership, in those sectors most affected by public regulation, saw this possibility and directed their lobbies – the K Street corridor – toward this goal. The Republican Party… became the instrument of this form of corporate control. The administration… of George W. Bush became little more than an alliance of representatives from the regulated sectors seeking to bring the regulatory system entirely to heel. And to this group was added… those who saw the economic activities of government not in ideological terms but merely as opportunities for private profit on a continental scale…

This is the predator state. It is a coalition of relentless opponents of the regulatory framework on which public purpose depends, with enterprises whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal. It is a coalition, in other words, that seeks to control the state partly in order to prevent the assertion of public purpose… They are firms that have no intrinsic loyalty to any country… They assuredly do not adopt any of society’s goals as their own, and that includes the goals that may be decided on by their country of origin, the United States. As an ideological matter, it is fair to say that the very concept of public purpose is alien to, and denied by, the leaders and the operatives of this coalition… In the predator state, the organization exists principally to master the state structure itself.

None of these enterprises has an interest in diminishing the size of the state, and this is what separates them from the principled conservatives. For without the state and its economic interventions, they… could not enjoy the market power that they have come to wield. Their reason for being, rather, is to make money off the state – so long as they control it. And this requires the marriage of an economic and a political organization…

Some specific examples of predation

Health care
A major reason for the sorry state of health care in the United States today is the activities of predators. There is simply no reason for private health care insurance. Their sole purpose is to make a profit. In their attempt to do that, they spend vast amounts of money to screen prospective clients for pre-existing diseases, so that they are able to offer their services only to relatively healthy people, on whom they are likely to profit. Many of them are also are predisposed to deny benefits to their clients whenever they think they can get away with it. Yet, to dissuade Americans from supporting a program of government sponsored health insurance, the predators try to scare us by calling it “socialism” at every chance they get. James Galbraith explains the situation:

A major liberal goal is to extend the coverage of health insurance, particularly to children. The private insurance companies are opposed to this. Why? Because they stand to lose part of their existing clientele… Their economic function is uncomplicated: it consists in marketing to people who are relatively unlikely to need health care, while also not selling it to those most likely to get sick…

Does the country benefit in any way from… having any families under private insurance? No. To insure the whole population without screening would be economically efficient. It would save the resources now devoted to screening… More resources could then go to actual health care… Medical economists… estimated the bureaucratic waste from private medical insurance to be around $350 billion per year…

George Bush’s Medicare prescription drug law is another good example. There is only one conceivable reason for the specification in that law that our government may not negotiate drug prices with pharmaceutical companies: It was a gift to the pharmaceutical industry, paid for by the American taxpayer, and delivered by George W.

Education
The Bush administration’s attempt to push the idea of school vouchers was just one more attempt to funnel public money into private hands, taking money from the public school system and channeling it to vouchers for private schools. Galbraith explains the tactics Bush used when that didn’t work:

The Bush team switched its emphasis to No Child Left Behind, a program that expanded federal spending on public schools while imposing an intense testing regimen on them. Forms of predatory free enterprise in which certain Bush family members participated quickly emerged. But the larger effect of NCLB was to foment middle-class flight from the system, for three reasons. First, the testing regimes cut deeply into the flexibility and creativity in the classroom, discouraging creative professionals from becoming teachers and demoralizing many who remained. Second, the emphasis on teaching to the test undermined educators’ attention to and the resources available for untestable programs… And third, the harsh evaluation regime behind the tests themselves worked to label, and therefore to stigmatize, certain schools as failing… A bad test result could have serious, even catastrophic effects on reputation and funding, precipitating middle-class flight from the system…

The Bush administration also funneled money from public student loan programs into the hands of predators:

At the university level, what had been a low cost, publicly administered student loan program was devolved onto private companies, whose marketing programs quickly assimilated imaginative elements of bribery (i.e. bribery to student loan officers to persuade them to choose their company).

Were the companies necessary at all? Was any efficiency gained? Was anything except private profit served by moving the provision of guaranteed student loans from the public to the private sector? Of course not.

Social Security
The destruction of Social Security would serve two goals for the predators: By privatizing the program it would create lucrative economic opportunities for them; and, by taking money out of the system, it would lower their taxes. Galbraith explains the predators’ goals and their strategies:

Social Security presents a target for predators on a far larger scale… Sharp private financial operators with good political connections have long seen the opportunity inherent in diverting the payroll tax into private investment accounts. Such accounts would create, overnight, millions of inexperienced investors, needing advice and other services that could be sold to them for a fee. A new group of players – expensive private providers of what had been a cheap public service – would be cut in on the deal. Correspondingly, a group of currently protected players would be cut out of the relatively stable retirement incomes that they can now rely on…

Efforts to cut benefits to the impending baby boom retirees are a way, simply put, of taking back the 1983 bargain (which included a major increase in payroll tax rates). If they were enacted, the very same people who overpaid their payroll taxes to “prefinance” their Social Security benefits would find that they had been given a dishonest bargain. Having paid a lifetime of higher payroll taxes, subsidizing the income tax cuts enjoyed by the investor classes of the 1980s and 1990s, they would come to the end of the rainbow and find the pot of gold empty… If that doesn’t sound fair, well – it isn’t. The issue however has nothing to do with any intrinsic crisis, except the ever-vigilant efforts of the influential to keep tax rates on themselves as low as possible.

Why then the talk of an “impending Social Security crisis”? Because… it is a means to an end: toward the privatization of the Social Security system. It is perfectly predictable that once deep benefit cuts are on the table, the “alternative” of private investment accounts will then resurface… to “ease the pain of the adjustment”…Social Security offers perhaps the clearest, simplest, and most transparent large-scale example of the Predator State at work on a long-term project.

The home foreclosure crisis
Galbraith describes the scams that brought on the home foreclosure crisis:

Here we see today, in pure and unalloyed form, the consequences… leading to rampant predation against both a public system and the public itself, and on a colossal scale. The housing finance system had been from the 1930s a protected sector offering low rate, long term mortgages to the middle class…

In the early years of the new century, a new type of home lending took hold, eventually exploding … This was the subprime sector, adjustable rate mortgages made to borrowers who would never under previous standards have qualified for a mortgage loan. Subprime loans were abusive, if not fraudulent, on their face, for they typically involved a low teaser rate that would reset after two or three years… Lenders knew, as borrowers did not, that in the wake of 9/11, short term rates were unprecedentedly low, and these conditions would not endure. They therefore deliberately substituted adjustable rate mortgages for fixed rate mortgages – with the endorsement of then Federal Reserve chairman Alan Greenspan, to reassure the naïve public that the exercise was sound. Interest rates then rose, the mortgages started to reset, and hundreds of thousands of borrowers found themselves unable to meet the required payments.

When state governments stepped in to try to protect consumers against this fraud, the Bush administration jumped in to tie their hands. Eliot Spitzer was one of our country’s most vocal critics of this practice. He wrote in an editorial titled “Predatory Lenders’ Partner in Crime: How the Bush Administration Stopped the States from Stepping in to Help Consumers”:

For the first time in its history, the Office of the Comptroller of the Currency (OCC) was used as a tool against consumers. In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 states… actively fought the new rules.

Shortly thereafter, the Bush administration exposed Spitzer’s relationship with a prostitute. William Engdahl explains, in an article titled “Why the Bush Administration ‘Watergated’ Eliot Spitzer”:

Curiously, Spitzer… has been not charged in any crime…. Prostitution is illegal in most US states, but clients of prostitutes are almost never charged, nor are their names usually leaked in a case in process…. underscoring the clear political nature of the Spitzer "Watergate."

Galbraith characterizes the Bush/Cheney predator state in a nutshell

I don’t believe I’ve ever seen a better concise description of the Bush administration than the one that James Galbraith wrote in his book. Here are some excerpts:

The second Bush administration simply and systematically nominated the most aggressive anti-environment, anti-safety, anti-consumer protection advocates it could find – business lobbyists in most cases – to every regulatory position that it could not afford to leave unfilled… The result was an empowerment not of business in general, but of the reactionary wing – the predatory wing – within each branch of business…

Under George W. Bush, a narrow coalition of the high plutocracy would rule, mainly from the resource industries… combined with big media, insurance, and the pharmaceuticals. For popular support, this alliance found itself entirely dependent on noneconomic issues: national security and the social issues directed at low-income working Americans through the one social institution that effectively reached most of them: their churches…

Today we live in a corporate republic, where the methods, norms, culture, and corruption of government have become those of the corporation… Republican (small r) government, with its checks and balances, exists to limit the abuse of power… Modern corporate decision structures exist, on the contrary, to permit senior executives to do what they want. This is the culture that Richard Cheney brought back into government from Halliburton, and that George Bush imbibed… The operational result is a government by cliques operating in secret, indeed with their very membership unknown outside…

The corporate propaganda machine

In the corporate republic, external review is suppressed. We have instead a governmental public relations apparatus whose purpose is not to persuade but to deflect, deter, and frustrate inquiry into the operations of government. These are the distinct characteristics of a corporate propaganda machine… easily identified by the inability, or studied unwillingness, to tell a truthful story that is consistent from one day to the next…

Elections in a corporate republic

In the corporate republic, elections likewise converge to their corporate counterpart… The outcome is predetermined… A common thread runs through the policies of voter intimidations, voter machine rationing, phony voter fraud investigations, purging of voter lists, caging of African American voters, ex-felon disenfranchisement… The common thread is to maintain political control for as long as possible… The rebellion of 2006 may possibly have signaled the defeat of this strategy, but time will tell. In any event, the work was done: without it, Al Gore would have become President in 2000 or John Kerry in 2004…

The purpose of the corporate predator state

The predator state is an economic system wherein entire sectors have been built up to feast on public systems built originally for public purposes… The corporate republic simply administers the spoils system… The business of its leadership is to deliver favors to their clients. These range from coal companies to sweatshops operators to military contractors. They include the misanthropes who led the campaign to destroy the estate tax… the “Benedict Arnold” companies that move their taxable income to Bermuda… They include the privatizers of Social Security… Everywhere you look, regulatory functions have been turned over to lobbyists. Everywhere you look, public decisions yield gains to specific private persons…. This is not an accident: it is a system. In the corporate republic that presides over the predator state, nothing is done for the common good… The concept of competence has no relevance: to be incompetent, you must at least be trying. But the men in charge are not trying… We are their prey. Hurricane Katrina illustrated this perfectly, as Bush gave contracts to Halliburton and at the same time tied up efforts to restore the city…

A variant of class war?

Is this class war? No. In a strict sense it is not, for not everyone who is successful under capitalism is a fan of the predator state… Many rich and successful people came to hate the Bush administration… Predation is the enemy of honest and independent and especially of sustainable business, of businesses that simply want to sell to the public and make a decent living over the long run. In a world where the winners are all connected, it is not only the prey who lose out. It is everyone who has not licked the appropriate boots. Predatory regimes are, more or less exactly, like protection rackets… They cannot reward everyone, and therefore they do not enjoy a broad political base…

The end result of the predator state

It is reasonably obvious that to tolerate the predator state is a formula for eventual national economic failure. It will lead, over time, to the crowding out of advanced, innovative, and useful businesses… by their reactionary and backward counterparts. Where the reactionary branches of business – the worst polluters, the flagrant monopolists... – are given control over the system and capital markets reward them, their more progressive counterparts will eventually give up, disappear, or move away. Bad business practices will drive out good… It is the race to the bottom, driven forward by government itself.

The “incompetence” label as a distraction from the real problem

Predators do not mind being thought incompetent: the accusation helps to obscure their actual agenda. But if the government is predatory, then it too will fail in every substantial way. Government will not cope with global warming, or Hurricane Katrina, or the occupation of Iraq, or Election Day chaos, or avian influenza, or the proliferation of nuclear weapons. Nothing will work, and nothing will be done about the fact that nothing works. Failure on that scale is not due to incompetence. Rather, it is intended…. Inside government, no one cares. The attention of the people in charge is focused on other goals.

Are we done yet?

It’s tempting to believe, now that we’ve elected a new President with infinitely more integrity than his predecessor, that he will simply kick the predators out and we will be free of them. But there are so many questions on that score. How much courage will it take to do that, when much of our news media is controlled by the predators? How much political skill will be required? What risks will be involved? Will it even be possible to accomplish in a mere four or even eight years? I can’t answer those questions.

A recent article by Robert Reich, titled “The Real Scandal of AIG”, highlights these questions. Reich notes that the real scandal is that “Even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money”.

That poses an obvious question: WHY? Reich partially answers that question:

To whom should they be accountable? When taxpayers have put up, and essentially own, a large portion of their assets, AIG and other behemoths should be accountable to taxpayers. When our very own Secretary of the Treasury cannot make stick his decision that AIG's bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken.

So, if AIG, as well as so many of our other financial institutions, is accountable to no one, then what is our government for, and why is it pouring hundreds of billions of dollars of our money into their coffers?