Saturday, September 28, 2019

Book Review: 'The Finance Curse: How Global Finance is Making Us All Poorer' by Nicholas Shaxson


A bright light goes on while reading The Finance Curse. Nicholas Shaxson connects a number of phenomena around the world that collectively oppress billions of people. He likens it all to the petroleum curse, where developing nations’ citizens end up worse off for the discovery of oil. In this case, it is big finance running amok. Only this is global and far worse.

The book documents the decline and fall of all but the 1% thanks to the race to the bottom (the most commonly repeated phrase in it). It works at all levels: towns compete in a race to the bottom, so do counties, states and whole countries. Everyone is afraid of being abandoned by companies seeking less taxation, less regulation and more power, all in the name of competitiveness. They are winning it, everywhere – without becoming more competitive. The ones who suffer for it are the locals who are losing schools, clinics, clean water, parks, community - everything so that business can be more profitable. There is no trickledown; it is all one way by design.

The facts are stark. The median American is actually poorer than median Italian. Wages are stagnant, savings less than minimal. Outlooks are grim. Hope is rare. The reason is that nearly $23 trillion has been extracted (Shaxson’s word) and sequestered in offshore accounts.

Offshore is attractive is because of trusts. By putting assets in trusts managed by lawyers, neither the donor nor the inheritor can be called the owner. So not only are they hidden, but even upon discovery, taxing and justice authorities are unable to seize them or tax anyone. By this trick they exist outside the reach of any authority or law. This massive moneypile does not contribute to the economies or the welfare of citizens or countries. Rather, its missing in action status is detrimental to the state of affairs in the countries it was removed from. The 99% lower classes have to make up the difference in their taxes.

Possibly the most important chapter concerns Bretton Woods, the postwar agreement that separated nations, controlled finance and currencies, and allowed everyone to grow. Shaxson shows the greatest universal growth occurred in the fifties and sixties thanks to Bretton Woods: “The countries participating in the Bretton Woods system would collectively enjoy the strongest, most broad-based, and most crisis-free expansion in history, with growth running at nearly 4 percent in the advanced economies and 3 percent in developing nations, more than twice the rate that had been attained in a thousand years of history.” But since then: “Once this awesome intellectual land grab by corporate and financial interests began to enter mainstream politics in the late 1970s, it would lead inevitably to corruption, oligarchy, bank bailouts and the growth of international organized crime,” he says.

The finance business is all about wealth extraction, not wealth creation. The shenanigans are legendary. The current madness on Wall Street is share buybacks. Analysts are actually insistent that companies spend every dollar they can buying back their own shares rather than investing in upgrades or expansion. Shaxson uses the example of the venerable IBM, a company currently valued at $100 billion. It has spent $160 billion buying back its own shares rather than investing in itself. The return is, rather obviously, not so great. Similarly, the Trump tax cut has not resulted in general betterment as promised. Worker salaries have risen by $7 billion, it is true, but companies have also spent $850 billion buying back their own shares, with little to show for it.

Shaxson has not a single good word for London. It is the sleaze capital of the world, the home of all shady and underhanded schemes and scams. The USA (ie Wall Street) is in a constant race (to the bottom) with London to attract more financial firms. The result is near anarchy. Little oversight, no prosecutions and freedom of movement for cash mean all kinds of dirty money floods in to be laundered and made legitimate. The situation encourages criminality and rewards it handsomely. Scammers can fly in in the morning and be in business by the afternoon, he says. As Americans saw in the financial crisis, bankers are above the law and will not be jailed or sanctioned personally, no matter how many lives they destroy in their endless quest to hoard more money. The UK imposed no fines whatsoever for the financial crisis, though American authorities have fined several British firms. London is Shaxson’s poster child for what is wrong with the world.

It is all supposedly about competitiveness, but it really about hoarding cash. He quotes Paul Krugman as early as 1994: “A government wedded to the ideology of competitiveness is as unlikely to make good economic policy as a government committed to creationism is to make good scientific policy.”

He tackles situations like the Celtic Tiger period when the Irish economy soared – right into the pockets of Charles Haughey, the prime minister. But Ireland is no worse than USA, the biggest tax haven in the world. States like Delaware and Nevada collect companies like trading cards as they continue to offer more protection, less and less regulation, less prosecution and less taxation. Shaxson also exposes the lengths and depths of private equity, the new name for the disgraced LBO (Leveraged BuyOut) firms. In this case, vulture capital buys up a company with the company’s own money (so the buyers can’t be taxed), raised by asset sales and massive debt offerings. It then gets its money back by paying itself huge dividends, strips out any saleable assets like intellectual property, and closes the remaining shell, throwing hundreds or thousands out of work, but profiting handsomely for its trivial risk. This is currently the sad fate of almost the entire newspaper industry, Shaxson shows, closely examining a key player in the destruction of value in local journalism.

There is a fascinating portrait of Iowa, in which Big Ag has taken over farmers as if they were sharecroppers. They provide the raw materials, the financing, the sales deals – and control everything so that the farmer is trapped into sticking with them because of the debt they incurred in signing up. For example, they get ten-year contracts on sales of their pigs, but 20-year debt on their facilities, so they are frantic to re-up lest they be shut down and lose everything. At that point, Big Ag lowers its prices for their pigs and imposes new restrictions on the trapped farmer. Local banks and agencies all disappear, as the Big Ag companies run Iowa operations remotely, spending not a cent inside the state. This is why Iowa is angry.

Laws covering these situations are ignored, lessened, or repealed. Anything and everything must be made available for the smooth operation of big finance. Shaxson focuses in particular on antitrust laws that gave governments the power to regulate industry and protect customers. But no one fears antitrust any more. They just threaten to move. Customers are just a cost of doing business. Employees are a thorn in their sides.

The unusually excellent Conclusion alone is worth the price of admission. Shaxson is clear and sharp in his criticism and his solutions. US companies are already sitting on a $1.7T cash hoard – tax cuts will not stimulate investment by them, and in fact, investment is down despite the cuts and (record) low interest rates.  Importantly, he says a tax is not a cost to an economy, it is a transfer within it. In other words, taxes are a good thing, not something to be jettisoned in the race to the bottom. “There is no tradeoff between financial regulation and economic growth. More democracy means more economic prosperity.” This of course flies in the face of everything we read, see and hear in the news every day, an indoctrination campaign to tranquilize the 99%.

The Finance Curse puts everything wrong with the political world into neat, tidy perspective. This is a rare book of substantive answers, even if Shaxson’s disgust shows from time to time. We now know the cause, the effect and the solution. Finance is by itself ruining the world. That’s big.

Editor's note: This review has been published with the permission of David Wineberg. Like what you read? Subscribe to the SFRB's free daily email notice so you can be up-to-date on our latest articles. Scroll up this page to the sign-up field on your right.