American Culture

The “War On Wealth” is a class war – and you’re on the wrong side

By Martin Bosworth

The other day at the gym, I was listening to the talking heads on CNBC yammer on about the usual, and I heard one classify the recent moves in Congress to tax private equity fund managers’ fees as income as “a war on wealth.” If you think I’m kidding, watch this video (the exact news clip I saw) and judge for yourself.

There is indeed a “war on wealth,” but the war is about making sure that only a select few have wealth while the rest of us slave away in the fading hope of ever generating any. The Post article about the “Blackstone Tax” is a perfect example of what I mean–how insane is it that Charles Grassley, one of the most ardently fiscally conservative Senators and the author of the draconian new bankruptcy laws, is fighting for the populist side, while Chuck Schumer is defending corporate welfare for Manhattan’s financial elite?

The vast majority of us will never have access to the kind of multibillion-dollar sums being tossed around in these private equity firms that supposedly generate jobs and investment, but seem chiefly designed to fatten the managers’ pockets. For most of us, owning a home or having a rich relative croak on us is the only way to generate significant assets beyond our income. Indeed, David Lereah, the former chief economist for the National Association of Realtors, once said that people who paid off their mortgages were “unsophisticated” and should have used the equity from their homes to invest, consume, etc. Lereah has been largely disgraced by the army of housing bubble bloggers who tracked his many contradictions and pronouncements, and he recently left the NAR.

The problem is though Lereah is a hack and a shill, he wasn’t wrong–home equity IS the only way many people will ever have wealth. And because of the failing housing market, which is pushing a record number of homes into foreclosure, and crushing the property values of neighborhoods all over the country, even that’s no longer a safe bet.

Ironically, because so many of those homes were purchased with now-delinquent subprime loans, the failures are causing many subprime lenders and mortgage holders to go belly-up, and if it hadn’t been for Bear Stearns providing some last-minute bailouts, we’d be a lot closer to market collapse–and we may still be on that path.

Americans’ personal savings rates are at miserable levels for a variety of reasons–massive credit card debt, high gas prices, soaring college tuition costs, increasing daily expenses, and wages that don’t rise fast enough to handle any of this (though they are improving of late). The reasons behind this have caused econbloggers such as Hale “Bonddad” Stewart
and Max Sawicky to spar and discuss what it will take to fortify the middle class and keep us from devolving into a new Gilded Age.

The basic problem to me is that we venerate conspicuous consumption and encourage debt in order to promote the illusion of wealth. When consumer spending accounts for 2/3 of our GDP, it’s no wonder we’re told to spend, spend, spend, and put it on credit. We don’t make anything in this country any more, and our economy has transited so completely into a service/retail/management paradigm that the only thing left to do is make ourselves into commodities, to be bought, sold, and traded by the whims of the job market.

There’s no excuse for why it took Congress almost thirty years to raise the minimum wage to the pitifully low level of $7.25–and that only by offering a sweetener of tax breaks for businesses to get it passed, AND attaching it to legislation to keep the Iraq debacle funded. Ridiculous. And yet, this is the framework we live in.

There is indeed a “war on wealth, ” but the war is being waged to ensure the “haves” get more and keep more, while the “have-nots” have even less. And right now, the “haves ” are very much winning.

30 replies »

  1. The real estate issues you point to are precisely why we’re not about to buy a house until either the bubble pops or we get so damned rich we can buy into a bubble-proof enclave. Nobody’s holding their breath on that last one.

    Right now I can’t see a safe place to buy. Foreclosures at an all-time high around here, everything is supported by gimmick financing (which means entire subdivisions are just waiting to collapse all at once) and they’re STILL BUILDING LIKE CRAZY. Beats anything I’ve ever seen.

    So for now, call me Renter Boy….

  2. Sam,

    Same here, man. D.C. is horrendously overpriced and there’s way too much inventory on the market–it’s the worst of both worlds. I know friends of mine who have gotten lucky, but they either knew someone in the real-estate field who helped them out or bought in a “transitional” (i.e. ghetto) neighborhood, with all the crime and grime that entails.

    I’d been initially planning to buy in by the time I was 35, but depending on how long it takes the market to flatten out, that may go even longer. You either have to be dead broke and getting Federal assistance, or wealthy enough to buy with your own means. Those of us in the middle are pretty much squeezed out.

  3. Don’t get so melodramatic … “we don’t make anything here anymore” … do you have any idea how big the US economy is relative to the rest of the world? And you guys only make up 6.5% of the world’s population.

    As for that lovely tax-dodge that allows Private Equity firms to avoid tax on their income? Nasty one. It’s only a matter of time before that gets rectified. It’s not just a US problem. It’s a legal loop-hole that no-one thought about until PE became astonishingly large over the last few years. The UK is in the process of closing it and the US isn’t far behind. But it does take a while, not least because of the complexity of the deals involved. Many deals, amounting to billions of dollars, were closed based on the low tax overhead.

    If you change the deal in a hurry that instability you point out will become more so. Many companies will liquidate.

    So a few guys get horribly rich … fine. Same happened during dotcom. And we didn’t lynch them either.

  4. Gavin,

    This coming from the guy who basically accused America of taking food out of little African kids’ mouths a few posts back? 🙂 Don’t make me break out the “Open Source = fascist” quote. 😉

  5. Ooh, don’t misquote me 😉 Seriously, if anyone is taking food out of “little African kids’ mouths” it’s other Africans.

    I’ll say it clearly: Americans don’t get rich because they take stuff from poor countries. Americans get rich because they work hard and expect to do things for themselves. And, when you recognise unfairness, you yell and kick and scream.

    My gripe with Open Source is entirely different. It has become a religious mania similar to the anti-globalisation crowd.

    Restate: You cannot get rich by relying on charity. You cannot even break-even. Wealth is always a relative standing and charity exists at the benevolence of others. You can only get what they are prepared to give. No-one is ever going to give you more than they keep for themselves (unless they’re mad). Charity and aid cannot do more than give a short-term boost.

    Countries that rely on long-term aid to balance their budgets are not stable or sustainable. And Open Source Software projects that rely on the continued benevolence of their programmers and donors are in a similar bind.

    Of course, I digress 😉

  6. Martin,

    I hate to be a vampire about it, but honestly I’m waiting for the bubble to burst. It’s going to be ugly as hell, but I’m trying to get myself positioned so that when it happens I can buy what I want at a price that’s something like actual value. I’ve lost money on a couple houses so far and next time I’m going to be the guy taking advantage.

    It’s a godawful state of affairs when a guy who’s intellectually, emotionally and ethically constructed like I am winds up talking this way. I just hope a lot of stupid developers and the weasels behind all these mortgage gimmicks take the brunt of it.

  7. Sam,

    Again, we’re in the same boat. I’m hoping the bubble continues to pop big and flatten out cheap–buying a distressed property or cheap condo conversion is probably my only chance.

    It’s a horrible state of affairs that we can only prosper off others’ misery. Why do you think I’m so angry about it?

  8. Elaine,

    Very interesting article. I think the renewed drive towards urbanism comes not least from the fact that the jobs are in cities, and when there are not cities, they get created.

    Here in America, there’s a Virginia suburb called Reston–it’s a planned community that is host to a huge amount of government contractors, tech companies, human resourcers, etc. It was a planned community that was built to fete people who didn’t want to live in D.C. and worked for the government, and now it’s so big as to almost be a rival city itself.

    It’s also expensive, horrifically dull, comically bland, and built mostly on the backs of cheap undocumented labor that can be found in the lower-rent suburb of Herndon, next door. 😉 But the jobs are there, and particularly in my market, if you want to work, a lot of offers you will get are gonna be out there, rather than in the city core.

  9. Martin:

    The first home I bought was with my ex-husband at the height of the UK property boom. Prices shortly thereafter crashed, mortgage rates doubled, I fell pregnant and then chose to be at home. It was a complete and utter nightmare…

    The ex now lives in Virginia and he and his wife own three properties between them…(she owns 1, he owns 1 and the 3rd they jointly own).

    He does not live in Reston and although he works for the Government in the USA (via a contractor) I cannot say he is bland or boring. He is also a very good Dad… 🙂

  10. Welcome to Capitalism 😉 You have to feel sorry for the developers, don’t you? I mean, that’s what they do. They take these huge risks to get massive developments off the ground and then fling them out to buyers as rapidly as they can.

    Once the market stops then they’re stuck with all this stock. Prices plummet and everyone else who piled in gets caught too.

    Standard rule: buyer beware.
    Standard rule 2: past performance is no guarantee of future success.

    Anyone who gets into the game without doing their homework is no difference from some couch-potato who decides to – on a whim – run a marathon and then drops dead of a heart-attack half-way through. Democratic markets, like marathons, are easy to join.

    That doesn’t mean you should leap in there without a proper training regime.

  11. Yes, buyer beware!

    Property is for the long term – prices go up and down and I have now lived through two property booms/crashes. The first one emptied the joint financial coffers and the second one filled mine alone as a single, divorced woman raising two kids. I was lucky – for once. 🙂

    I will be glad to move into a mortgage free zone in two years time with my second husband. To own our own home without a mortgage is going to be fantastic.

    First I will have to sell our current home and relocate 2 1/2 hours drive away…

    …and houses are overvalued in the UK.

    A property owning democracy is something to be valued but it is not good here in the UK to know that without earning megabucks or inheriting lots of dosh my children will struggle to place a foot on the housing ladder. More so than any previous generation had to.

    Affordable housing is a hot issue for all of us.

  12. “Affordable housing is a hot issue for all of us.”

    No kidding. This is why economic indicators that don’t include housing (or food, basic utilities, and transportation) like the U.S. poverty rate are utter BS.

  13. Brian,

    Amen, brother. How you can not count the volatile costs of gas, food, housing, etc. in those so-called measurements is beyond me.

  14. At the time the official poverty rate was developed, food was found to be directly related to cost of living while the other factors were not so intimately related (the official poverty rate is based exclusively on average food prices). But that was then, and now things like transportation, housing, and utilities cost more as a percentage of income than they used to. In addition, the costs of living differ greatly from region to region when they used to differ less. So the current calculation of poverty rate was accurate for a while, but has become less so over the last 39 years.

    Unfortunately, as I pointed out a while back in this post, entrenched political ideologues who don’t want money to flow away from their states to other states, and who don’t want states that are traditionally opponents to their party, are preventing and updating of the way the federal poverty threshold is calculated.

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  16. As one who might benefit from it, all money is flowing back into the central cities. When gas was cheap, there was a mad rush to the suburbs, and the central cities fell apart. Now with gas and traffic problems, suddenly the inner city looks good and the explosion is imploding.

    Those renting and those late to the party, get cross roughed and either shipped out to the burbs, where amenities will be bad as everything is built around cheap transport, or expensive, small, intown diggs that are rapidly being bought up and turned to the tiny townhouses, and condos.

    By getting an awful house on a large property close to town, the value could go tenfold if I can hold out through this dip, and not get scavenged at only threefold, just before the dip some new construction was at 30fold what mine was ten years ago.

    Some greater fools who bought then, are hurting now, but may yet break even. Friends who bought big in the burbs are not doing so well, and even ten years after will be lucky to get what they paid, if they even get offers.

    The Sharks of course who can afford to sit, and scavenge the maimed, and the dead will end up with all the marbles, and proclaim themselves self made men, never admitting where they got all the parts.

  17. How could we eliminate ALL TAXES, stimulate small business and healthy capitalism, reduce unrestrained greed and the distortion of moral values – all in one bold step?
    Place a CAP on WEALTH!
    99.9% of the people on this Earth will never accumulate 50 million dollars of wealth, much less 50 billion.
    Let’s place a limit on personal wealth of, let’s say, 5 million dollars (excluding one’s primary residence). This could vary with the overall wealth of the population.
    All of the money above that would revert to a public pool that would then be used for things like defense, universal health-care etc.
    Of course it would mean the collapse of companies like Sotheby’s selling 100 million dollar paintings and the demise of 300 foot yacht building companies and sales of diamond studded collars for pets would probably vanish, but remember NO TAXES!
    You can’t call it communism or socialism, because the idea reinvigorates the concept of a free and competitive free market.
    It can be considered a moral argument, because it would practically eliminate a truly sinful waste of money on frivolous expenditures.
    It would be environmetally friendly, since it would place real restrictions on travelling to the far ends of the earth in private jets and yachts.
    At the very least, let’s introduce the idea to the Web community and get some discussion going!

  18. Mr John Smith. You’ve just invented … price-fixing. Please visit Comrade Bob in Zimbabwe and have a look at what wide-spread price- and wealth-fixing do to an economy.

    As for including property costs in a poverty line … very hard. It’s not like vegetables or fuel. It is a capital investment and it appreciates in value. (Try selling month old veggies.)

    House prices have always gone up and every generation has complained. The only time to worry is when salary inflation is dramatically exceeded by property inflation.

    However, then you have a bubble and you get a (sometimes dramatic) correction. Prices come down until they’re in line.

    You see, if a person is investing in property with the view earning a capital gain, the only time they can realise that capital gain is when they sell it. Sooner or later people have to sell. If there are no buyers (because prices are too high) then, like an oversupply of tomatoes on a hot summer’s day, the price must come down.

    Things that governments can (perhaps) do to make it easier for buyers … reduce death duties on houses, and increase the capital gains tax on property.

  19. Whythawk
    Price-fixing?? How do you figure? Remember NO TAXES. No sales taxes, no capital gains taxes, no death taxes. NO TAXES PERIOD.
    This will, according to every economic theory, be a great incentive to work I’m sure 95% of the population would be quite happy with 5 million dollars of net work, since 99% of the population, just in the U.S., will never see that much net wealth.
    This is no restriction on groups of people coming together to invest in businesses and while it certainly will reduce the number of super yachts in the water, and the number of Picassos hanging on living room walls, I fail to see how this fixes prices.
    The only downside I see is for the .6% of the population that has a net worth over 5 million dollars

  20. John Smith: I’m sympathetic to the principle, but ultimately it’s a moral one and not one that’s sound economically. You have to understand that a huge amount of opportunity is created by people with more than $5M. Does shutting them down open doors for others? Maybe. But your idea turns off the motivation to innovate for everybody who has hit the ceiling.

  21. Thanks for doing this blog. The warriors against the destitute have all the means to their ends, don’t they?

  22. Big Bucks & Big Media

    It takes Big Bucks and Big Media to be a contender. Sometimes the People choose who they want for president, but not often. Truman and Dewey, come to mind. Our electoral process is tilted in favor of Big Bucks because Big Media pre-selects the contenders based primarily on their campaign donations. Candidates who don

  23. John Smith: it is price-fixing. You are creating a fixed ceiling. What incentive does the future Bill Gates have to cross US$5 million? Would you get any economies of scale? A nation of tiny, fragmented businesses with high costs is what you get.

    Hardly any person will choose to create a large company and, once they cross your threshold, work for the state.

    It has been tried. In India, in the soviet republics. It isn’t a good system. It bankrupts nations and chases innovators overseas – why do you think so many Indians and Chinese came to the US in the 70s and 80s? Why do you think so many are going back home now that things have changed?

    You may not like the .6% of your population who are super-rich, but I have to ask you … why are they so important to you?

    Why don’t you get as upset about people who are better looking than you? Maybe we should have appearance caps too? No-one is allowed to look really good and we enforce it with uglification surgery.

    Think it’s silly? So is a wealth-cap.

    And Rabblerowzer: since both congress and the senate are now democrat and the next president is likely to be a democrat, does this make you outrageously wrong?

  24. Whythawk
    How many times have I heard people like Ross Perot, Warren Buffet and yes, Bill Gates himself (and his father) say how unimportant their money is to them. According to them, they work for the joy of what they do and the challenge.
    Do you think George Clooney or Brad Pitt would stop acting once they reached 5 million? Remember, they get to spend money too! So, they invest 3 million in a house, they get to make another 3 million.

    And again I’m only suggesting this for private wealth. I’m not suggesting limiting the wealth of companies or corporations; only that their investors will have to comply with this ceiling.
    How many of the Chines and Indians who came to America have accumulated 5 million dollars of net worth? And do you really think they came to America because they knew they could have unlimited wealth?
    Oh, and how easily we forget that it is The People’s Republic of China, a COMMUNIST country that will soon surpass the economy of the United States. It amazes me how people simply ignore this fact!
    They me be allowing capitalism to flourish, but the Party still has ultimate and demonstrable control; witness the recent execution of the FDA minister who was accepting bribes from a Pharma company.
    Lastly, the .6 % are important to me, because I believe in democracy and not plutocracy, which is what you get when wealth, which equals power is concentrated in the hands of the few. It has been warned against by wiser men than you and for more than 2000 years.
    And yes, your comparison with an ugly ceiling is just that, silly.
    Wealth accumulation is not genetic.

  25. Sam Smith
    Innovation almost always comes from the bottom and not from the top.
    Millionaires constantly say it’s not the money that motivates them, see Bill Gates, his father, Ross Perot, Warren Buffet, George Soros, film stars etc., etc.
    Remember, I said NO TAXES! You don’t think this would stimulate work and innovation?
    There would eventually be many, many more millionaires who’d be looking for opportunities to create for their children and grandchildren.
    How many of our top scientists and engineers, the people who are really responsible for innovation, ever accumulate 5 million dollars?
    Do you think they would give up their pursuits if they reached that ceiling? I don’t think so.
    I don’t know if it would work, but the arguments I’ve heard here so far do not stand up to scrutiny.

  26. SAW THIS>
    Peter Peterson’s Personal Efforts to Increase the Budget Deficit

    Investment banker Peter Peterson is probably best known for his efforts to warn of the country’s long-term fiscal problems. He was one of the founders of the Concord Coalition and has published several books that purport to show how entitlement spending (Social Security and Medicare) will break the budget.

    This background makes David Cay Johnston’s article on the tax tricks of Blackstone Group especially entertaining. Johnston reports on a loophole that will allow the partners in the Blackstone Group to deduct $3.7 billion in depreciated “goodwill” over the next 15 years at the 35 percent tax rate assessed on ordinary income. By contrast, when the partners in the Blackstone Group took their partnership public, they were taxed at the 15 percent capital gains rate. As Johnston points out, this means that the partners will actually get back $200 million more from the government than what they paid in taxes.

    Oh yes, Peter Peterson is one of the partners in the Blackstone group. He is walking away both with a big haul from his Wall Street deal, plus the frosting from his tax scam. As he has said publicly many times, he doesn’t need his Social Security.

    –Dean Baker