Blaming Victims While Gambling Our Money: Economics in a World without Compassion

In truth, poverty is an anomaly to rich people. It is very difficult to make out why people who want dinner do not ring the bell.
~Walter Bagehot, The Waverley Novels (1858)

Perhaps it shouldn't surprise anyone that politicians like Robert MacDonald, Mayor of Lewiston, Maine, still breathe the same air as the rest of us. After all, the United States has a long history of producing public figures who crank up their derision of poor people as poverty itself increases. But MacDonald seems like a troglodyte even by contemporary standards: 

Lewiston Mayor Robert Macdonald, a longtime critic of public assistance programs, wants to publicize the names and addresses of Mainers on welfare by creating an online registry of recipients.Writing in his regular column in the Twin City Times, a Lewiston-Auburn weekly newspaper, Macdonald said if the public can get information about people who receive public pensions, they should be able to do the same for welfare recipients.

...

“I’m not sorry. [he said] I hope this makes people think twice about applying for welfare.”

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Asked if that might hurt other people receiving benefits, Macdonald said, “I don’t care. Some people are going to get harmed, but if it’s for the good of everybody, that’s the way it is.”

poorlazy.PNGNews of MacDonald comes on the tail-end of news of another winner, teenybopper CEO Martin Shkreli, whose company, Turing Pharmaceuticals, raised the price of an immune deficiency drug from $13.50 to $750.00 a couple of weeks ago. These individualized cases, however, can be mis-educational because they might make us think that the problem of economic injustice and indifference to the poor is really a case of "a few bad apples." 

In fact, the problem is the system itself. Jerks like MacDonald and profiteers like Shkreli are simply raindrops falling from a much larger cloud. Here at PBI, we identify one manifestation of that cloud as the abusive practices of private financial firms. Over the past several months, news has emerged of Wall Street banks and firms charging outrageous fees for debt servicing and, of course, losing public money (like Chicago's public education budget) in risky investments. The problem of fees alone is disturbing enough. New evidence suggests the fees are so high, and so ensconced in pension funds and other public monies, that states don't even know how much they're paying. 

A good number of state pension funds, which provide retirement income for state government employees, have their money managed by Wall Street firms including hedge funds.

According to one study, the more the manager takes in fees, the worse the fund is doing.
Jeff Hooke and John Walters of the Maryland Public Policy Institute, which has been described as a conservative-leaning group, tracked the returns of 33 state pension funds and found that those that paid higher fees recognized lower returns than those with low fees.
"The top 10 states in terms of Wall Street fees had lower pension fund investment performance over the last five fiscal years than the bottom 10 states," wrote Hooke and Walters.
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Hooke and Walters also said that some states may not even know what they are paying in fees.
"Based on our work, we conclude that a number of states are not reporting fees properly," they wrote. "Misreporting may be a particular problem with private equity and hedge fund investments, where managers often deduct fees before sending cash returns. California’s Public Employees’ Retirement System admitted as much in June 2015, when it said tracking such fees was complex."

"The more the manager takes in fees, the worse the fund is doing." This is the logic of private finance. The necessity of profit for shareholders and high salaries and commissions for fund managers outweighs the public good that is assumed to be foundational for public workers' pensions. Of course, if the pension money is gambled away by Wall Street, this creates a justification for policymakers to insist that the public can't afford pensions for public workers: another instance of economics in a world without compassion. 

Private banking is devastating communities because its frantic drive for profits leads it to coerce its clients into risky investments. This results in “deals of mass destruction.” Michael Snyder of Economic Collapse Blog notoriety explains

At their core, derivatives represent nothing more than a legalized form of gambling. A derivative is essentially a bet that something either will or will not happen in the future. Ultimately, someone will win money and someone will lose money. There are hundreds of trillions of dollars’ worth of these bets floating around out there, and one of these days this gigantic time bomb is going to go off and absolutely cripple the entire global financial system.

The same mindset is devastating individual retirees, not just communities, and not just public employee retirees: 

It’s yet another dirty little Wall Street secret: while financial advisers and brokers are ethically obligated to put the interests of their clients first, such obligations do not necessarily have the force of law. As a result, those advisers are steering clients into high-risk investments that generate big bucks in the way of commissions for themselves, while costing clients billions of dollars. Those clients include retirees who have worked for a lifetime to provide for themselves. Now, thanks to having put their trust in advisers who are motivated solely by greed, they are spending their “golden years” bagging groceries and greeting customers at Walmart.

The practices even cost cities control over their water supplies

In Baltimore City, access to water is no longer a given. That's because the city has begun the process of cutting off people who they say haven't paid . . . City leaders say their hands are tied. They need people to pay for much-needed infrastructure improvements, which can't move forward. Advocates counter that a series of steep increases in water bill rates have made access to a human right unaffordable . . . in fact Wall Street has cost the city water system just as much and possibly more than late bill payers. And even more troubling . . . exotic financial instruments sold by bankers to unsophisticated city officials may have drained the system of much-needed capital. 

And a common denominator in all of these disasters is that pundits are quick to blame poor and working people: They argue that it's poor people's fault they don't have water, because poor people aren't paying their water bills--when Wall Street costs taxpayers at least as much. The pundits blame retirees for demanding huge pensions--when the pensions aren't that big, and cities could afford them were it not for Wall Street fees. This blame-deflection is a more systematic and complex version of Lewiston, Maine Mayor Bob MacDonald's ridiculous belief that we should humiliate welfare recipients, and Wall Street's business practices are a sophisticated version of Martin Shkreli's indefensible inflation of drug prices. 

The shady practices exposed by Saqib Bhatti's "Dirty Deals" report have led Bhatti to call for cities to embrace a form of collective bargaining similar to the way community organizations negotiate community benefit agreements with businesses that want to operate in their cities. 

. . . collective bargaining does not have to be limited to the workplace. Student organizations such as United Students Against Sweatshops have forced university administrations to negotiate over labor standards for their merchandise vendors. Consumer unions press retailers over issues like pricing and safety standards. Community organizations are able to negotiate community-benefit agreements with major corporations in their cities and win benefits such as local hiring policies and community investment standards.
Similarly, public finance officials in cities, states and school districts across the country could apply collective bargaining practices to their financial relationships with Wall Street. While there is no established mechanism for them to do so, there are some creative options worth exploring. For example, cities could establish a nonprofit or publicly funded agency to set guidelines for municipal finance deals and refuse to do business with any bank that does not comply.

After all, if counties can announce that they won't do business with felon banks, and cities can pass non-discrimination ordinances that apply to private businesses, then surely cities can demand community investment standards and, in general, a promise that Wall Street firms won't overcharge on fees or put public money into risky investments. Local governments have the right to say, within constitutional limitations, what kind of entities can do business within their jurisdictions. 

But an even better idea would be public banks. Bhatti's Dirty Deals report recommends them specifically as a solution to irresponsible Wall Street fees and risky deals: 

Cities and states should establish public banks that are owned by taxpayers, can deliver a range of services, including municipal finance, and provide capital for local investment.

Of course, we agree. And thanks to the Bank of North Dakota, we already know it works. What has held up the implementation of public banks in the rest of the country has not been the force of better argument, or any kind of empirical evidence of their failure (the evidence goes hard in the other direction). What has held up their implementation is Wall Street-driven think tank propaganda and the lobbying of men in expensive suits. But this propaganda is abetted by the larger rhetorical swath of blaming poor people for being poor, public workers for wanting pensions, and cities for wanting to exist as cities. So there is a complimentary relationship between fighting against people like Mayor MacDonald and fighting for a better world through democratized finance. 


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