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The Great Grift


The Great Grift

Courtesy of Scott Galloway, No Mercy/No Malice@profgalloway

The federal response to the pandemic has been massive — a $5 trillion effort. It has also been a con. Under the cloud cover of Covid-19, the shareholder class has used its outsized influence over government to toss a few loaves of bread at those suffering, all the while accruing trillions of dollars in wealth financed on the backs of younger, and future, generations.

How did we get here? In a healthy capitalist economy, wealth is always at risk. Competition spurs innovation, which disrupts the established order, creating winners — and also losers. Joseph Schumpeter called this the “gale of creative destruction.” Over the long term, the spoils (ideally) fund both a more empathetic society and the infrastructure for more innovation and prosperity — but this only happens if the gale is permitted to blow.

Naturally, the winners tend to lose enthusiasm for this process when their own wealth is creatively destroyed. So they fight back. And one of their preferred weapons of entrenchment is government policy.

Government by the Rich, for the Rich

The influence of money in politics is well known. Just 400 wealthy families provide about half the funding for presidential campaigns, and they speedball their influence through think tanks, legal advocacy groups, and friendly media. Rupert Murdoch, the Mercer family, Michael Bloomberg, Mark Zuckerberg, and Jeff Bezos all shape our views and influence national policy. 

The wealthy use this influence to expand their wealth and power. Consider the tax code: Income gained from selling stock in a firm is taxed at a lower rate than income gained from actually working at that firm. A second transfer from poor to rich: A homeowner may deduct mortgage interest on a first and second home, while the less wealthy pay non-deductible rent. If it makes no sense that we’ve functionally decided money (and the money it makes) is more noble than sweat … trust your instincts. 

These transfers are pitched to the American public as how to get wealthy (when in reality, it’s how to stay wealthy) and achieve the American dream (i.e., homeownership). But this messaging is nothing more than propaganda brought to you by the 10% of people who own 80% of the stocks in this country. The result is that since 1989, the wealthiest 1% of American households have increased their share of the nation’s wealth by a third, while the bottom 50% have seen their share halved. 

And that was before the pandemic.

Cloud Cover

A crisis is a terrible thing to waste, and Covid-19 provided the wealthy with the opportunity for the greatest economic grift in history. 

The pandemic and the measures taken in response to it have created an economic crisis of historic proportions. Unemployment leapt to 15% in April, and while it has gradually recovered, it remains twice as high as it was before the pandemic. Job losses and many other forms of harm have been concentrated among the lowest earners, and to a much greater degree than in other recent crises.

The response by the federal government has also been historic, and massive. But of the $5 trillion spent (so far), only around $1.5 trillion came in the form of direct aid to individuals. A quarter of that funded $1,200 and $600 stimulus checks, many of which went to people who had not suffered financially (only 15% of recipients of the first round of checks said they planned to spend the money). Read that last sentence: more than four in five recipients of money borrowed from future generations (debt) did not urgently need it. Another $1 trillion or so went to pandemic response (medicine, PPE, medical services), and while this was necessary, the money ended up largely in the pockets of health care company shareholders. 

The remaining $2.5 trillion came via mostly forgivable loans and handouts to businesses. But don’t let the name “paycheck protection program” fool you — recipients were not required to actually protect any paychecks. The final tally is about $1 trillion in direct aid to those who truly needed it, $1 trillion to the actual pandemic response … and a $3 trillion wealth transfer to the rich and powerful. We’re calling it: The Great Grift.  

What did we accomplish? $1 trillion in unemployment, food assistance, and other aid to those directly hit by the pandemic is an unalloyed good. We helped many of our most vulnerable American brothers and sisters. But it wasn’t enough. Huge swaths of America continue to suffer. In December, 18% of U.S. households with children could not meet their food budget, and 26% of renters with children were behind on their rent. These non-economic impacts have likewise fallen harshly on lower earning households (not to mention people of color, who have suffered disproportionately by every measure). 

Meanwhile, $3 trillion in new money and historically low interest rates have been the nitro and the glycerin, respectively, of the stock market’s ascent. The dirty secret is that there are two pandemics. While a quarter of America is food insecure and behind on rent, the shareholder class has experienced an explosion in net worth and spends less time commuting, more time with family and Netflix.  

A secondary effect is the underwhelming fight against the virus itself. Had Covid-19 preyed on wealthy white people and cut the Nasdaq in half, our response would have made the South Korean and Taiwanese responses appear amateur. Instead, the wealth of billionaires is correlated to infections and deaths, and we continue to see a death toll greater than 9/11 every 18 hours.

In the longer term, we have suppressed the creative destruction of capitalism. That $3 trillion will build thousands of piers — not bridges — for firms that are not viable for a post-pandemic economy. Once we stop propping them up, they’ll still reach the end. 

In the meantime, however, we are denying the younger generation the opportunity to open their own businesses at a lower cost. If a restaurant or movie theater is allowed to fail, the cost of rents and other inputs falls, which creates opportunities for a new generation of entrepreneurs. When I started L2 in 2009, for instance, I was able to secure office space in SoHo for $27/foot because a printer or an apparel manufacturer had gone out of business years earlier, leaving its building behind for the next generation. 

Consider what else we could have done with that money:

I’m not advocating for all of these (cancelling all student loan debt, for example, would be yet another unearned wealth transfer) but they show the scale of the Grift. Anyway … if these programs seem too big-government liberal, consider this: Instead of $3 trillion in handouts to the wealthiest Americans, we could have given $30,000 to every single one of the 100 million Americans who reported pandemic-related wage losses in 2020. Thirty. Thousand. Dollars. Or, we could have just given every American adult $15,000. This would have gone much further toward repairing the economy, as more money would have ended up in the economy, rather than in the markets. And who better to determine which firms deserve to survive and are prepared for a post-corona economy than consumers? 

The Bill Will Come Due

Where are these trillions of dollars coming from? Some will come from working people. It is a lie that lower income people don’t pay taxes. Because while nearly half of Americans don’t pay much or any federal income tax, lower income people nonetheless carry a higher tax burden. Payroll and sales taxes, along with any income tax they do pay, eat up a much greater share of their income than do the shareholder class’s taxes. 

In a sense, our democracy is working too well, as the mark for the Great Grift are people who don’t vote: young people and the unborn. In 1989, people under 40 owned 13% of the wealth in this country. In 2019 — before the pandemic — they owned just 6%, despite representing nearly the same share of population. The younger you are, the more you’ve been grifted. While savings rates have reached an all-time high, a fifth of Gen Z-ers report needing to use the entirety of their life savings to weather the pandemic. Young people, and our children, will be paying off the debts of the Great Grift for decades. We have borrowed trillions to not fund the war against the virus, and have taken debt levels to those not seen since World War II.   

What Should be Done 

Going forward, our pandemic response, including any additional stimulus packages, should be limited to supporting people who are food and housing insecure — not Delta Airlines, or your neighbor who owns seven dry cleaners. 

But since we’re already $3 trillion in the hole, we need to recover some of those losses. That calls for taxes. A pandemic occurs once every several decades — what is unprecedented is the explosion of wealth … that too few of us have actually experienced. So why are we so quick to discuss bailouts and stimulus, while seemingly allergic to the idea of increased taxes, in the face of extraordinary events?

We should end the favorable tax treatment of capital gains income. Capital appreciation has been the primary vehicle of both our 40-year wealth transfer and of the Great Grift. When the grifters cash out these assets, they should at a minimum be paying the same tax rates on that income as working people pay on theirs, so we can begin to chip away at the debt(s) incurred. 

We should impose a one-time wealth tax. A 2% tax on the richest 5% of households would raise up to $1 trillion. (The initial stock market bump triggered by the CARES Act’s passage led to the richest American-stock owners accruing an additional $2 trillion.) 

These measures only address the symptoms. How do we arrest the ongoing wealth transfer, and prevent the shareholder class from future grifting? 

The classic conservative answer to this problem is to weaken the government so it cannot be used in this way. It’s an attractive theory, but the reality of our modern world is that there are simply too many challenges that require collective solutions. From ensuring access to clean air, soil, and water to breaking up big tech, big(ish) government is here to stay, so we need it to be more robust, and more effective. 

We must reduce the impact of money on politics. Money is not speech, and if we can’t convince the grifters on the Supreme Court of that, we should override them with a constitutional amendment. We need greater transparency from our elected representatives about who they meet with and where their money comes from.  

Stop, Stop … It Hurts So Good

Finally, if we don’t align financial reward and penalties with the health of our commonwealth and its citizenry, we are doomed to a pattern of failed responses to crises. The explosion of wealth among the already wealthy has created unprecedented moral hazard, as the arbiters of policy haven’t even felt the real pain of this pandemic. 

Case in point: Doordash, a beneficiary of the explosion in meal delivery brought on by the pandemic went public last month, and is now valued at more than FedEx at $68 billion. In contrast, the TA-125, an index of the 125 largest companies in Israel, was down for 2020. And Israel has vaccinated its citizens at 7 times the rate of the U.S. If Amazon stock had been cut in half — vs. accelerating 87% since March lows — the 82% of households who are Prime members would be vaccinated by an Amazon delivery person and Chick-fil-A would offer to stick your arm at their drive-throughs. Let’s admit it: We’ve been conned.

Life is so rich,

P.S. Registration for my next Brand Strategy Sprint, where I teach the frameworks and strategies leveraged by the world’s most successful brands, closes on Tuesday. There are only a few spots left -- Sign up now before it fills up.

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