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The Trump Campaign (and Republican Party) in Historical Context: Capitalism and Democracy: (Part T)
The Ring of Sauron Effect
Today I'd like to talk a little bit about a phenomena I call the "Ring of Sauron Effect" in the political-economy of the United States of America.
What is the Ring of Sauron Effect, you ask?
First of all, I am indeed referring to the Lord of the Ring films. I am referring to Dark Lord, Sauron, who lost his ring during some great battle --- the ring that wound up with the Golem and then with Bilbo and Frodo Baggins, the Hobbits. Slip it onto your finger and it will turn you invisible.
We all know the story: The wizard, Gandalf, commissions the formation of a diverse band of adventurers to go on a mission to destroy or un-make the ring.
Over time, as the band of adventurers are having their adventure, a split of opinion develops. You see, a minority of our heroes are starting to get the idea that they need not destroy the ring. In fact, according to this view, they can use the ring to destroy the evil of Sauron.
Of course, the orthodox, Gandalfian view, if you will, is that this cannot be done. Mortals cannot wield the ring because its dark, seductive power overwhelms. To attempt to wield it is to put one's own soul at risk; each time you use it, you risk losing who you are. You risk becoming evil.
In other words, mortals cannot wield the Ring of Sauron. It cannot be used by the Good to destroy Evil. Rather, the ring's (ultimately Sauron's) evil will, instead, destroy your good.
The other side of the debate is neither impressed nor convinced by that argument.
I will define the Ring of Sauron Effect like this: It is when a Great Being of some kind (immortal being, extraterrestrial, wizard, etc.) "loses" a piece of jewelry or other trinket that contains a small fraction of his power.
This object then comes into the hands of an unsuspecting mortal, who soon finds that this object gives him a fabulous, extraordinary, even supernatural capability of some kind, which gives him a tremendous advantage over all other mortals of his kind.
This idea is not an unknown feature in fantasy fiction. Such tales usually end with the mortal being destroyed by the power he thought he could control.
The Ring of Sauron Effect Translated To The American Political-Economy
How does this relate to the American political-economy? What does any of this have to do with placing the Trump campaign (and the Republican party) in historical context?
I'd like to start with a quote I have used before, from economics journalist David Cay Johnston. As I say, this is a repetition, but Mr. Johnston's message cannot be stressed enough. In his book Free Lunch he wrote:
"In the intensifying competition between the states to attract new investment or to just retain existing jobs, state and local government giveaways flourish like weeds on Miracle-Gro. Corporations have become masterful at playing one city, county, or state against one another. No one knows just how many consultants earn their fees playing the subsidy card, but state economic development officials in North Carolina say they have a mailing list of more than 250 such consultants seeking a handout for their clients" (1).
According to Forbes, nine out of ten start up companies fail (2). The article gives all kind of reasons, and things to look out for, and all that. But a more straightforward and honest explanation may simply be the following: If you were one of the nine failures, it could simply be because you do not have the political clout to get hooked up to the government-to-big business subsidy pipeline.
If you read David Cay Johnston's book, you will understand that the corporate rich put just as much time and effort into getting those government subsidies, as they do in any other industry-related activity.
By the way, the mortal with the mystical object is destroyed because he does not have the necessary immortal durability to survive the backlash of the dark powers he tries to control. In other words, anything that goes wrong kills him.
Hold that thought!
The Genius of Warren Buffet -- Two Tales
Once upon a time Warren Buffet owned the Buffalo News, a newspaper in Buffalo, New York. Mr. Buffet got a $100 million subsidy to open a call center for his GEICO -- General Insurance Company. The call center only cost $40 million, which means the genius made a $60 million "profit" right away, a gift from local and state taxpayers (3).
The call center may have, strictly speaking, "created" 2,500 jobs --- in one sense. But as the GEICO center opened, another call center, owned by a Canadian firm, shut its doors. Thus, there was no net job gain for the community. Still, the Buffalo News published story after story about how GEICO was a wonderful economic development (4).
Okay, that was kid stuff. Let move on to the second tale. This story involves "hardball," as they say; and it pits capitalism against democracy.
This Warren Buffet tale is a bit complicated, so hold on!
Utilities are legal monopolies which must recover all of their costs from customers. These can range from the price of fuel to the CEO's expense account lunches and income taxes on profits. Red flag: These taxes don't always make it to the government (5).
Stay with me.
When the state utility board sets electric rates, they assume that the utility will file its own tax return. But the utility company often has a corporate parent --- Red flag #2. Anyway, the parent company files the tax returns and may or may not... uh... "remember" to pass along the taxes (6).
Now, between 1997 and 2004, Portland General Electric was the only operating business owned by Enron. Each year between 1997 and 2004, Oregon residents --- because Portland is in the great state of Oregon --- paid about $92 million to cover Portland GE's income taxes. But Portland GE, like virtually all utilities with a corporate parent, did not file its own tax returns (7).
Enron filed the returns, and with the aid of hundreds of shell companies in the Cayman Islands and other tax havens, paid no taxes. In other words, Enron pocketed the $92 million during the time it owned Portland GE (8).
So far, so good?
We haven't gotten to the heavy stuff yet. Just wait until Mr. Buffet hits the scene!
In response to the Enron outrage, in 2005 the Oregon legislature passed a law requiring that any taxes embedded in utility rates be turned over the government where they belong. Portland GE fought the law, as did Warren Buffet, who had just acquired Oregon's other big corporate-owned utility, PacificCorp (9).
Got that? Warren Buffet hits the scene fighting a law passed by the Oregon legislature, which required that utility companies actually pass along the tax money they have collected to the government.
At that time, Mr. Buffet's MidAmerican Energy Company owned electric and natural gas utilities, with operations from Oregon and Utah through Iowa to Britain. MidAmerican Energy paid just 4 percent of its American profits in federal corporate income taxes in 2006, far less than most Americans paid on their incomes. On its overseas profits, the company paid a 21 percent tax (10).
MidAmerican will have to pay the rest of its American taxes, but not for a very, very long time. By 2035 it will have paid about half of those taxes. It deferred $666 million in taxes in 2007. When the government finally does get its money, it will still only get 40 cents on the dollar. Taxpayers will have to make up the other 60 percent (11).
But that's not even the interesting part.
The interesting part is that this steep discount did not result in lower electric power rates for customers. No, the savings were not passed along to consumers (12).
Follow closely here.
- For several years, Iowa had nine corporate-owned electric utilities, plus a few city-owned systems that sold power at lower rates (13).
- Then Warren Buffet's MidAmerican and another company, Alliant Energy, consolidated the nine other corporate-owned utilities into two entities. Nine became two (14).
- People in Johnson City and five smaller towns tried, without success, to negotiate with the two monopolies for lower rates (15).
- When that failed, the citizens tried to organize to buy out MidAmerican and run municipal systems so they could get lower rates (16).
Here comes the pain!
Warren Buffet's "agents" responded by pushing all kinds of legislation that would have: required the existing city-owned systems to pay taxes; prevented them from making changes as technology and the times always require; blocked them from offering new services such as municipal Internet or cable television service (17).
In a farewell to democracy, Buffet's lobbyists bluntly told the Iowa Association of Municipal Utilities that they would make the legislation go away on one condition: that they stop giving people advice about how to switch to municipal power (18).
Mr. Buffet's people must have had them over a barrel, because the Association agreed; and actually adopted a resolution promising never to help any Iowa citizen switch to municipal power (19).
Don Corleone would have been proud. The only thing that's missing from this story is the severed horse's head in somebody's bed.
If you were one of the nine out of ten start ups that failed last year, it may be because you do not have the resources to threaten, bully, coerce, and strong arm communities into giving you their business --- on an exclusionary basis no less.
Let us call the corporate rich, in our society, "Sauron."
Who are the "mortals"? What is Sauron's "ring"?
Those of you old enough to remember, may recall the late-1980s. I believe it was around this time that thirty-minute infomercials started to come on television, offering uh.. uh... uh... well, "get-rich-quick schemes," you might call them.
Remember? You might buy some tapes or CDs and booklets featuring a chap called Carleton Sheets, teaching us how to buy real estate with no money down. There was tutorials on how to make lots and lots and lots of money placing ads in newspapers and online for... I don't really know what. The guy's name is Don Lapre.
Remember? Mr. Lapre really played up the idea that he was a high school drop out, but despite that, with the system he devised, he grew rich.
Actor Tom Bosley, the father on Happy Days, promoted something called SMC, Specialty Merchandise Corporation. Remember that? You were to buy a load of knick knack, novelty items, which you could sell and make lots and lots and lots of money. Remember? Google the words: Tom Bosley and infomercial.
You might also include: house flipping and Internet day trading.
Books like Rich Dad, Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not (1997), written by Robert Kiyosaki and Sharon Lechter.
If you Google Rich Dad, Poor Dad and hit the first entry, you will be taken to the website for Rich Dad Coaching: "Begin Building Your Passive Income."
Go to the website and you are greeted with an opening statement from Mr. Kiyosaki which reads:
"LEARN TO GET OUT OF THE RAT RACE FASTER" With Help From Your Own Rich Dad Coach
The statement reads:
"Having a Rich Dad Coach is like having your very own rich dad --- someone to give you feedback, hold you accountable, and to encourage your success. The focus is on you and how you will create a plan to get out of the rat race --- just like rich dad did for me.
"Take a look at where you are right now and then consider where you want to be. Your coach will help you get there. By going through this process, you will come away with a real, workable plan --- customized to your strengths and passions."
You know that Donald Trump "wrote" several books. One of the most famous, I suppose, is The Art of the Deal. If you go to Amazon, here's how the site describes the book:
"Here is Trump in action---how he runs his organization and how he runs his life---as he meets the people he needs to meet, chats with family and friends, clashes with enemies, and challenges conventional thinking. But even a maverick plays by the rules, and Trump has formulated time-tested guidelines for success. He isolates the common elements in his greatest accomplishments; he shatters myths; he names names, spells out the zeros, and fully reveals the deal-maker's art. And throughout Trump talks---really talks---about how he does it. Trump: The Art of the Deal is an unguarded look at the mind of a brilliant entrepreneur---the ultimate read for anyone interested in the man behind the spotlight."
There were blurbs for the book:
The New York Times: 'Trump makes one believe for a moment in the American Dream again.'
Chicago Tribune: 'Donald Trump is a deal maker. He is a deal maker the way lions are carnivores and water is wet.'
Boston Herald: 'Fascinating... wholly absorbing... conveys Trump's larger-than-life demeanor so vibrantly that the reader's attention is instantly and fully claimed.'
New York Post: 'A chatty, generous, chutzpah-filled autobiography.'
Got that? Are you starting to get the picture? Is it starting to come back to you? Are you starting to recall the ideological self-help stew, that had, say, Oprah and her associates on one end, Donald Trump and his ilk on another, and in religion, the so-called "prosperity gospel" somewhere in there?
But I want to focus on those infomercial-prescribed get-rich-quick techniques, marketed to Americans who were far from rich. These techniques, some of which I have mentioned, are, collectively, the Ring of Sauron.
Some of these techniques seem to be lower-level but parallel practices to the way the corporate rich do their "wheeling and dealing."
The corporate rich and powerful do a practice known as the leverage buyout of companies. Another term is "hostile takeover." In an earlier, more honest age, the practitioners were called corporate raiders. The technique has to do with borrowing lots and lots and lots of money, which you can use to buy up the stock of a targeted company; and if the operation is pulled off right, you can transfer the debt obligation (the money you borrowed to "raid" the company) to the company you have acquired.
The object is to pay down the debt by any means necessary, using the acquired company's resources. You sell off assets and properties, "renegotiate" worker salaries and benefits, layoff workers, and so forth. What you want to do is "refloat" the company, sell it again in the hopes of making a huge profit. You might say that the object is to "flip" the company, if you will.
Of course, working people do not have the wherewithal to do this. So, it seems to me that the lower-level, parallel, analagous procedure, available to the far-from-rich, is the technique of "house flipping."
A comparison of the techniques of leveraged buyout of companies and the "flipping" of houses, I think, reveals a closely corresponging similarity of method, as well as a common, central predatory element. To "flip" a house, you might look for a "distressed" property of some kind, a foreclosure, or something like that; you fix it up as cheaply as possible --- you know, you "reform" the property much the same way the corporate raider might "reform" or "turnaround" a captured company; and then you put the house back on the market; if things work out right, you come away with a profit; and then you move on to the next one: the next distressed property or vulnerable company.
Here is the point: These lower-level, parallel, analagous, corresponding financial practices, made available to the far-from-rich, are designed to make them feel like the kind of "big shots" that the corporate rich are; and to, perhaps, further fuel the hope of the far-from-rich that they, themselves, will indeed become genuine "big shots" someday. These practices and the expectation that attends them, are what I metaphorically call the Ring of Sauron Effect.
As I said before, with the actual Ring of Sauron, there is a school of thought that believes Sauron's evil can be overcome by using the Dark Lord's very ring against him. This is a common theme in fantasy; but it is dangerous because mortals do not have the necessary divine durability to safely withstand the effect of possible backlash of the dark forces they think they can control.
Stay with me now.
As for the lower-level, parallel, analogous, corresponding financial practices made available to the far-from-rich --- there seems to be a school of thought that sees these techniques (Ring of Sauron) as effectively usable against economic uncertainty --- an economic uncertainty that many would argue (and I would include myself) has created the very economic uncertainty in question.
I would say that these techniques are equally dangerous for the far-from-rich for the same reason I have deployed on the other side of this analogy.
Should you make a mistake, do something wrong that, God forbid, brings the authorities to your door (this is the backlash of dark Sauronic forces), you do not have the means to protect yourself from prison, if it comes to that.
What I'm saying is that you do not have the political, economic, and therefore legal armor to protect yourself from backlash. This is why you should not attempt to wield the ring.
The (Sauronic) corporate rich do their wheeling and dealing, but they have a safety net in the very way the system is set up; and they have armor, not least in the form of access to high-powered lawyers.
As the Sauronic corporate rich do their wheeling and dealing, doing special arrangements to "minimize" their taxes, let's say, they can preemptively avoid any adverse backlash with, for them, a very basic device.
You see, "most big tax sheltering deals," according to economic journalist, David Cay Johnston, include a fifty-page letter from another tax lawyer, expressing his professional opinion that the deal complied in "excruciating exactitude" with the tax code. Oh and by the way, this consulting lawyer might charge a fee of one million dollars for the letter (20).
My clients didn't do it, your honor. And if they did do it, judge, they still really didn't do it; because whatever they did, they did in good faith upon the advice of learned counsel.
Let's call the aforementioned tax lawyer's letter, the armor of the Sauronic corporate rich. The "safety net" is the fact that government prosecutors like slam dunk sure thing cases, that give them a high conviction rate. They don't like complicated cases against defendants who have the money to hire the finest legal talent for the defense.
The Safety Net
By 1990, the IRS understood that tax fraud was growing among the wealthy (21).
But yet, in 2001 only 1,445 federal indictments were handed up for tax evasion. This is a figure that had been declining for years. And by 2002, the figure fell to 954 indictments nationwide. On top of that, "[m]ost of those indicted were small fry who had failed to report income on their tax returns" (22).
You see, the big tax shelter operators know better than to make such a glaring, rookie mistake. They tend to report the income, "however misleadingly" (23).
Here is my question and I'll close with this: Do you, House Painter Henry and his wife, Piano-tuner Patricia, have, laying around your home, a million dollars in spare change with which to purchase a bulletproof-making, stay out of prison pass, in case anything goes wrong with your house-flipping, buying real estate with no money down, Rich Dad, Poor Dad, ad placing, knick knack patty wack SMC selling?
Thank you for reading!
1. Johnston, David Cay. Free Lunch: How The Wealthiest Americans Enrich Themselves At Government Expense (And Stick You With The Bill). Portfolio, 2007. 87
2. Patel, N. (2015, January 16). 90% Of Startups Fail: Here's What You Need To Know About The 10%. Retrieved September 27, 2016, from forbes.com
3. Johnston, D.C. Free Lunch. 121
5. ibid, 194
7. ibid, 195
11. ibid, 195-196
12. ibid, 196
19. ibid, 196-197
20. Johnston, David Cay. Perfectly Legal: The Covert Campaign To Rig Our Tax System To Benefit The Super Rich --- And Cheat Everybody Else. Portfolio, 2003. 171
21. ibid, 176
22. ibid, 171