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A Short Essay on Wealth, or, Is America a Kleptocracy?   (January 13, 2007)

Covers of magazines often telegraph the end of a trend. The Economist is famous for its covers bemoaning the decline of the dollar, as the dollar inevitably jumps the week after the magazine hits the newstands. Time and Newsweek also tend to highlight a trend at its end, most recently, the housing boom.

The Wall Street Journal recently launched a feature devoted to the gaudier displays of the nouveau riche entitled The Wealth Report. I humbly submit this new summit of sycophancy presages the destruction of the very extravagances the column covers.

We are so inured to the media's breathless detailing of talentless "celebrities" excesses that this obsession with new heights of conspicuous consumption barely raises an eyebrow. The fact that one of the nation's premier "old line" newspapers has stooped to scoop "news" from the same foul gutter as the lowest levels of television is perhaps the "real news."

An obsession with extravagant wealth is not only an American phenomenon. The PBS series China from the Inside (I recommend it) noted that officials and insiders have fled China with $50 billion embezzled from government companies or other public coffers. Knowing as we do that unfavorable statistics are always under-reported in China, let's assume the real number is more like $100 billion.

This is not an insubstantial sum. Where has all this stolen wealth gone? Anecdotal evidence suggests real estate in Los Angeles and Vancouver B.C., paid in cash, and the usual array of offshore banks. Not unsurprisingly to those in the know, very little remains in China. The elites in China always maintain a backdoor should their position become tenuous: a child with Canadian or U.S. citizenship, a home in California, Manhattan or British Columbia, and all the personal wealth skimmed off in China's boom safely deposited in the West or offshore banks.

Recent reports reveal that the Iraqi leaders placed in power after the U.S. took control absconded with billions, and now reside very comfortably in London. A young man in the PBS program on China who embezzled $500,000 from a government-owned company (and was actually caught, proving he had no guanxi or was incredibly incautious) observed that his theft was remarkably easy; there was no accounting oversight within the state-owned firm. Clearly, a similar lack of control and oversight has plagued the U.S. mission in Iraq from Day One of the occupation.

Could someone explain the difference between the kleptocracy in Iraq and the African kleptocracies so roundly criticised in the West? Or the difference between the "bandit state" which is China from other Third World countries in which the elites plunder the "development" loans, the natural resources, the public coffers and every other available source of wealth?

A number of Americans recall the 1950s as the heyday of financial security and rock-solid economic growth. Is it coincidence that an individual who earned, say $10 million in that golden time (in 1956 dollars, or about $100 million in today's money) would have paid 70% or $7 million in Federal income tax? Yet how many of the financial moguls, hedge fund managers and cashiered CEOs who take home "compensation packages" of $100 million or more are paying $70 million in Federal income tax?

Memories of what made the 50s a boomtime are indeed selective. Income disparities were much flatter, corporate taxes were much higher as a percentage of GDP and tax receipts, and the tax rates paid by high-income earners were much higher. Yet in today's America, corporate taxes (which recently declined as a percentage of revenues and GDP to all-time lows) and indeed, "confiscatory" personal income taxes on the wealthy, are viewed as the work of the Devil. The 21st century boom, we are constantly hectored, is caused by lower taxes and higher productivity.

But if high corporate and personal income taxes are so deadly, then how do you explain the 1950s boom? Did it occur despite higher taxes on wealth, or because of higher taxes on wealth? Yes, I know all the "answers": we had little global competition, etc. But none of those explanations address the domestic economy's health in a climate of higher tax rates on the wealthy.

Exactly what did hedge fund traders and the recently fired CEO of Home Depot produce that was worth $100 million each? Profits for their shareholders is the answer, of course, but one has to wonder if these incredible personal "earnings" result from productivity or a barely-cloaked American version of a kleptocracy.

Here is the wikipedia definition of kleptocracy.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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