The Largest Welfare Check Ever Written
The Rise of the Wall Street Ruling Class
By THOMAS VOLSCHO
Who rules America? Sociologists and political scientists have debated this question since C. Wright Mills published his 1956 book The Power Elite. Writing in the 1950s, Mills argued that the United States was ruled by a triangle of power between the federal government, large corporations, and the military industrial complex (with many people moving between these sectors). Robert McNamara went from CEO of Ford Motor Company to Secretary of Defense under the Kennedy-Johnson administrations (modern examples include Dick Cheney, Henry Paulson, Robert Rubin, Larry Summers, etc). Since the late 1960s, sociologist G. William Domhoff has revised, updated, and increased the sophistication of power elite theory. If we look at the composition of cabinet-level and other White House appoints since the Reagan administration, it is clear that there is a significant movement between Wall Street and the Federal Reserve Bank and Treasury Department. But why? The answers are found in the social and economic crises of the 1960s and 1970s.
The rate of profit in the non-financial sector fell after peaking in 1966 and continued its fall into the mid 1970s. At the same time, the Civil Rights, anti-war, feminist, brown power, black power, American Indian Movement, student revolts, prison riots, and other rebellions against the establishment were taking place. Regulatory victories by Ralph Nader and other challenges to the power of the capitalist establishment were increasingly seen as a threat in the 1970s. Lewis F. Powell (a corporate lawyer, board member, and future Supreme Court Justice) wrote a memo to the Chamber of Commerce in 1971 and opened the document by stating, “No thoughtful person can question that the American economic system is under broad attack.” But what was most alarming was that “ Although New Leftist spokesmen are succeeding in radicalizing thousands of the young, the greater cause for concern is the hostility of respectable liberals and social reformers.” The great fear was that mainstream liberals were becoming more radical. A further fear was that Yale's graduating classes (composed of old and new money and elites-to-be) in the late 1960s and 1970s included those who were versed in the “politics of despair.”
In response capitalists mobilized politically and ideologically. By 1976, the U.S. Chamber of Commerce's membership started increasing rapidly and doubled by 1980. In 1975, there were just under 200 Corporate Political Action Committees (PACs) but about 1400 by 1981. The ideological factions of the right in the late 1970s included Supply-Siders, Monetarists, and Neoconservatives. Each of these factions were in power at the Treasury Department, White House, and Federal Reserve Bank beginning in 1979. While they didn't necessarily always get along, they put policies into place that led to the rise of the Wall Street Ruling Class.
Supply-siders argued that radical tax cuts would increase economic growth so much that it would actually increase government tax revenues. This theory (known as the “Laffer Curve”) was drawn on a napkin at a bar and then presented in editorials in the Wall Street Journal. One of Reagan's wunderkind, Office of Management and Budget David Stockman, confided to a Washington Post reporter (William Greider) that Reagan's tax cut was really a “trojan horse” for cutting taxes on the rich.
At the same time, monetarists believed that the only cause of inflation was the money supply. Beginning in October 1979, one of the first applications of the “shock doctrine” came in the form of very high interest rates. The vague proclamations of the Federal Reserve Banker, Paul Volcker, that the Fed was only focusing on M1 (a measure of money supply) and that the Fed's hands were tied such that it was “the market” that determined interest rates was sold to the public. What this really was, was “bitter medicine” and Volcker was quoted in the New York Times as saying that Americans must get used to declining living standards. In essence, the Federal Reserve Bank was implementing the “shock and awe” phase of the first-strike of a thirty year class war.
In 1981 Reagan signed the “Kemp-Roth” tax bill about a week after he had taken the radical step of firing 11,000 striking federal air traffic controllers. This was accomplished within the context of the highest interest rates and subsequent unemployment rates of the postwar era (in 1981-1982). This strategy, as explained by Naomi Klein in her book The Shock Doctrine, requires that radical policy shifts must occur when the public is disoriented and confused. High interest rates, business failures, foreclosures, plant closures, downsizing, and rising unemployment can have this effect. The interest-rate shocks enabled elites to pursue radical anti-union policies and radically reduce taxes on the rich. At the same time, neoconservatives argued that “missile gaps” and “acoustic submarines” (the inability to detect them being given as evidence for their existence) developed by the Soviet Union were posing a major threat to the United States. This justified unprecedented defense spending increases. One of the failed moments of the Reagan revolution, of course, was the decision not to pursue “Social Security reform” while only having limited success at cutting other social programs. This left a problem. Tax cuts for the rich reduced the tax revenue of the Federal government while a defense-spending spree threatened to create the largest federal deficit in history.
In a widely ignored 2000 book, Wall Street Capitalism: A Theory of the Bondholding Class, economist E. Ray Canterbery explains what happened. The tax cuts drastically increased the incomes of the rich and they used their newfound money from the tax cuts to buy the Treasury bonds, notes, and bills that the Treasury Department had to issue in order to finance Reagan's deficits. The combination of monetarism (high interest rates), supply-side tax cuts, and the phantom Soviet threat created the bondholding class. In essence, a Wall Street Welfare institution known as the bond market came to dominate politics in the United States. Instead of using taxes to fund the federal government (and increasingly state and municipal governments), taxes on the rich were cut and they were handed an “investment opportunity” so that working and middle-class taxpayers now pay a “bondholder's tax” to firms like Goldman Sachs and JP Morgan Chase (as well as Japan and China). The domination had become quite apparent in early 1993 when President-elect Bill Clinton remarked "You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?" Clinton ditched his 1992 campaign promises to the whims of the Wall Street Ruling Class and the Federal Reserve Bank.
http://www.counterpunch.org/volscho12102010.html
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