Gregg Easterbrook

Governments in Greece, Portugal, the United States and elsewhere are borrowing, and often wasting, money at a reckless pace. Why do banks and financial markets cooperate? Because there’s something in it for them.

They keep a little slice of the public money being borrowed or wasted. Only a sliver. But the more that is borrowed, the larger the sliver becomes.

This is the Sliver Strategy, and it underlies the ways many of the Western world’s wealthy institutions relate to government.

Here’s how the Sliver Strategy works. If government spends a moderate sum and an interest group gets a large share, this will be noticed and denounced. If government spends a gigantic amount  and the interest group gets a sliver, this won’t be noticed. But a sliver of a gigantic amount may be more than a large share of a moderate sum.

Many sovereign bonds and similar securities, for instance, are accompanied by credit-default swaps, which may amount to around half a percent of the amount borrowed. That’s just a sliver. But the more borrowed, the larger the sliver.

Half a percent of the low-end estimate on default swaps for bad Greek debt is $35 million.  Half a percent on the high-end estimate of the roughly $600 billion that Greece, Ireland, Portugal, Spain and Italy are — let’s just say in arrears on —  is $6 billion. Quite a sliver!

In the case of default swap fees, these proceeds go directly to the bottom line of financial companies, boosting short-term profits and pumping up executive bonuses. The more that is borrowed — by governments directly, or by quasi-government entities such as Fannie Mae — the bigger the sliver, and the bigger the executive bonuses.

In the case of many kinds of swaps, the fees are pure profit since if the loan defaults or otherwise goes south, the swap issuer will just shrug and claim penury. This is what happened in 2008 when AIG, the world’s largest issuer of default swaps, simply refused to cover the debts it had claimed to insure, handing a $182 billion bailout tab to U.S. taxpayers. Amusingly, AIG called its products “collateralized” default swaps, though it turned out there was little or no collateral. What a sense of humor those AIG crooks had! The swaps were pure profit — AIG took rich fees for providing nothing at all, other than a blessing that securities firms could use to pretend their issuances were backstopped against default.

How many AIG-like or Lehman-like slivers are out there right now in bad European debt? Nobody really knows. If it’s any consolation, the professional organization of derivatives and similar all-but-unregulated financial instruments promises “safe, efficient markets.”

Other kinds of Sliver Strategies have corrupting impacts on finance and government.

Why did big banks underwrite the liars’ loans that caused the housing bubble? Because they took origination fees and other payments, then passed the toxic debt along to taxpayers. The greater the loan volume the larger the sliver — and most of the slivers ended up in the pockets of the banks’ top management.

Why do defense contractors and  companies that build roads, rail and bridges love cost overruns? The more bloated the final bill, the larger their sliver. If the Godzilla attack helicopter program cost $10 billion and the contractor kept a third as profit, the public would be outraged. If exactly the same program cost $50 billion and the contractor got a tenth as profit, the public will be quiet — though the former is a far more cost-effective buy than the latter.

Why does the U.S. Congress support obvious boondoggles, such as $6 billion a year in  subsidies for corn ethanol production? A reverse Sliver Strategy is at play. The more money Congress wastes on corn ethanol, the more the ethanol lobby donates to members of Congress. The donations are but a sliver of the total subsidy — meaning the total subsidy must be large for the sliver to matter.

This incentive to hand out very large sums, in order to get back small sums as donations, is a hidden factor in many congressional decisions about agriculture policy, Social Security benefits and other issues. If members of Congress simply awarded themselves a couple hundred thousand dollars each for campaign expenses, the public would be furious. But if Congress gives away hundreds of billions of dollars, in order to ensure a couple hundred thousand dollars per member comes back as donations, the Sliver Strategy goes unnoticed.

The experience of Greece and Portugal — and perhaps the United States — shows that undisciplined borrow-and-spend depresses economic performance. So you’d think institutions with a major stake in national economic success, such as banks and industrial sectors, would resist government’s impulse to borrow.

Instead they are enablers, because the Sliver Strategy puts a cut directly into their pockets. It is one of the insidious reasons many nations’ balance sheets look steadily worse.

Elizabeth Warren, just appointed a special advisor to President Barack Obama for consumer protection, says we are witnessing the “death of the middle class.” Slate’s Timothy Noah, a terrific writer and thinker, believes the rich are running away with the country. This new Census Bureau report, showing a nearly 5 percent decline in middle-class household income, received banner-headline treatment, with news stories suggesting typical people are being clobbered.

Middle-class life is the soul of the American experiment. Are things really so bad?

All the angst is focused on pretax income — not after tax.
Stated in today’s dollars, median household income was $45,000 in 1985, peaked at $52,500 in 2000 and is $50,000 now. (Absurd precision such as the “$46,269” median for 1991 doesn’t appeal to me.) Nearly all the decline from $52,500 to $50,000 has occurred since 2007 — that is, during a recession. Most likely that loss will bounce back.

But the key point is that the numbers in the Census Bureau report, and in nearly all alarmism about the middle class, are pre-tax income.

Federal income tax rates for the middle class were cut in 2001 and again in 2003. Because of the cuts, in 2000, 29 percent of American households paid no federal income taxes; today, 44 percent pay none. The result is that slightly lower middle-class incomes are being taxed less — and all that matters to the individual is buying power. The Tea Party crowd, which claims taxes are rising, doesn’t like to talk about the reality that taxes are falling. (Tax cuts, not spending increases, are the main reason for rising deficits.) The left doesn’t like to talk about after-tax income — only pre-tax numbers are used, because they’re the only numbers that are disturbing.

After-tax and adjusting for consumer prices, middle class household income is about the same today as a decade ago. That’s not fabulous — but it’s also not the emergency being claimed.

The angst also ignores rising benefits.
A generation ago, about 30 percent of Americans lived in a household where at least one member was drawing federal benefits — now 48 percent do.

In his important new book Rebound, Stephen Rose shows that when middle-class tax cuts, very low inflation, declining real-dollar prices in sectors such as food and electronics, and most of all rising government benefits are taken into account, most middle-class Americans are slightly better off than a decade ago. Nearly all are substantially better off than their parents.

Who is Rose, some Fox News apologist? He’s a labor economist at Georgetown University and a lifelong lefty. Rose has been taking a beating on the hard left for refusing to toe the party line. His work deserves wide attention.

Ever-rising federal benefits may be good or bad for the country’s fiscal management. In most cases, they smooth out income trends for the middle class, leaving most households about where they were previously. Warren, in my experience, doesn’t like to talk about rising benefits, because this subject undercuts alarmism (which can be used to rationalize more benefits).

Federal benefits to typical people are about to take a huge leap.
The new health care rules will function like an income-redistribution plan. The well-to-do will be taxed more, with the proceeds used to reduce health-care costs for average people. This is defensible as social justice. But it sure doesn’t jibe with the trendy notion of average people being shafted by the affluent: the Obama health care legislation represents a fantastic victory for average people over the affluent.

What if we’d done things differently?
Those who believe the middle class is being destroyed generally have two policy prescriptions: soak the rich, and stop globalization. Whether globalization even could be stopped now is far from clear. But if liberal international trade had never happened — say, tariff walls had been erected in the 1970s, a time Warren curiously depicts as the best-ever for the middle class — it’s likely typical people would be worse off today. Economic growth would have been lower, inflation surely higher: and inflation harms typical people more than stagnant wages.

Since roughly 1975, when middle-class income gains began to stagnate, lifespans have improved, material living standards have risen (safer cars, nearly universal air conditioning), education levels have gone up dramatically, women’s freedom and gay and minority rights have expanded — a lot of good things have happened for average people during a period that, to hear some talk, was dominated by a conspiracy against average people. Some conspiracy!

It’s true many European Union nations accomplished about the same with less increase in inequality. But since 1975, the United States has accommodated more than 40 million immigrants, allowing most to escape poverty, whereas European Union nations have accommodated less than a tenth as many immigrants in the same period. Which of the two regions has, in recent decades, produced the greatest good for the greatest number?

It must be sweet to be super-rich and also bathed in public adulation, as were the 40 super-rich people who just pledged to give away at least half their wealth. This was prominent news around the country, and most coverage was sheer hero worship.

What the coverage missed and should have reflected is disdain. The super-rich being showered with praise — such as John Doerr, Paul Allen, David Rubenstein — haven’t necessarily given away half of their wealth. They only said they planned to make fantastic donations in the future. The media coverage suggests something important has happened. All that’s happened is promises.

Congress plans to cut the deficit. Practically everyone plans to lose weight. FORTY PEOPLE ANNOUNCE THEY WILL LOSE WEIGHT IN A FEW YEARS would not make any front page. Yet the super-rich — who already enjoy too much of what society has to offer — are now warmly being praised for the trivial act of saying they might do something admirable at an unspecified future date.

If a super-rich person intends to give away half of his or her wealth, why not simply do it right now? Announcing you plan to do something admirable — rather than just doing it — is self-flattery, amplified by media hype.

Those signing the Giving Pledge got to pat themselves on the backs and get to pretend to be splendid benefactors. But their bank accounts appear to remain under lock and key.

The CEO of Oracle Corporation Larry Ellison, for instance, announced Wednesday his “intent” is to give away 95 percent of his net worth, adding he has already actually given away “hundreds of millions” of dollars. Giving away “hundreds of millions” would be highly admirable for a person whose net worth was $1 billion or less. Is it admirable in his case?

Forbes says Ellison’s net worth is $28 billion. That may not be correct, but it’s probably the right range. If Ellison has actually given away $500 million, that suggests he has parted with about 2 percent of his net worth. For a very rich man to have given away about 2 percent of his money does not make him deserving of praise. If Ellison actually gave away 95 percent, he’d become my hero. If he actually gave away 95 percent — $26.6 billion — Ellison would also still be a billionaire, retaining $1.4 billion. That’s more than what any one person requires. So why doesn’t he just give the money away now?

Perhaps Ellison simply calculates that by announcing his “intent” to engage in significant philanthropy in the indefinite future, he can enjoy the benefits of public adulation while keeping most of his wealth for himself. But until such time as he actually gives away 95 percent, what is there about him to admire?

Bill Gates has given away about $28 billion, a significant sum, yet should he be praised? Forbes puts his net worth (after the donations) at $53 billion. Let’s assume again it’s the right basic range. If so, Gates has kept for himself almost $2 for every $1 he’s donated to others. That’s not generosity. That’s glorified selfishness.

Yesterday, the Wall Street Journal ran a lavishly complimentary piece about several super-rich types involved in the announcement. Read carefully. Barron Hilton told the Journal he “pledged” $1.2 billion to the Conrad Hilton Foundation, Pete Peterson said he “pledged” $1 billion to his foundation. The Journal reported that New York mayor Michael Bloomberg and oil tycoon Boone Pickens “had previously stated their plans to give away the majority of their wealth but said calling attention to their plans will encourage others to follow suit.”

Why all this emphasis on plans, rather than just part with the dough?

Perhaps because many of the rich want the laudatory press, combined with no obligation to follow through. Development officers of universities, museums, dance companies and other worthy organizations know it is common for a wealthy person theatrically to announce a dramatic pledge, then bask in warm publicity, then never actually come through with all (or even any of) the gift.

Gates has often said he will give away more in the future, why doesn’t he do so immediately? I don’t mean in a crazed manner: rather, by donating to the endowments of his foundation and to the endowments of other philanthropies, research projects and schools.

If Forbes is correct and Gates is worth $53 billion, he could give away 95 percent, about $50 billion — in the process thanking the world that made him super-rich — yet still have $3 billion left for himself. Gates would need to spend $411,000 per day each day for 20 years to blow through $3 billion. Even with his house, he could squeak by on $3 billion. Yet Gates hoards vast sums that no one in his family ever will need.

Even the wonderful Warren Buffett, who in 2006 pledged stock then worth $30 billion to the Gates Foundation, hasn’t actually given many of the shares. Because Buffett is a man of high integrity, I feel confident his will is written to ensure the full gift happens. But the rest of this cast of characters — I wouldn’t trust them any farther than I could throw them.

This week’s announcement by the super-rich may be little more than a public-relations stunt. And note it is timed to political debate on increasing taxes at the very top. Why, don’t tax these noble rich people who plan to give away so much!

It is repellent that the Giving Pledge signatories continue to keep for themselves extreme amounts of money, when there is so much need, and much good that money can accomplish. And it is yet another media malfunction that people who did nothing more than claim they plan to act benevolently were exalted as if they had.