Free Lunch, by David Cay Johnston

by Polly Cleveland

Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill) by David Cay Johnston

Remy Welling, an IRS tax auditor, had a problem. In December 2002, her boss asked her to sign off on an audit that hadn’t yet begun, essentially giving a company an advance free pass. She refused, and began investigating. Pretty soon, she discovered what the company was up to: changing the issue date of options granted to top executives to maximize their value, at the expense of unwitting stockholders. The practice was widespread, lucrative, and totally illegal. In one instance, it delivered a $70 million bonus to Apple founder Steve Jobs. Unable to interest her superiors in the issue, Welling went to the FBI and the Senate Finance Committee, in vain. Finally, she turned to New York Times reporter David Cay Johnston. When the Times broke the scandal, her boss first threatened to prosecute her, then fired her, and then banned her from working as a tax advisor.

Liberals like to blame growing US inequality on greed and globalization. The explanation doesn’t make much sense, because other modern trading economies, like our neighbor Canada, haven’t experienced our upsurge in wealth at the top coupled with stagnation at the bottom. Although Johnston sometimes slips into the conventional rhetoric, he tells a very different story--often approvingly quoting Adam Smith: Ronald Reagan called for liberating business from government interference, in order to let the free market work its wonders. But in practice, Reaganite policy has jiggered the system to redirect money, resources, and power upward. It is not the free market that creates inequality; it is the thousand little ratchets--taxes, subsidies, regulatory loopholes, failed enforcement, giveaways and outright graft--that direct a free lunch to the top 0.1%.

Johnston’s new book, Free Lunch, catalogs ratchets, old and new, big and small, familiar and unfamiliar: Local and state governments give away land and tax privileges to national chains--at the expense not only of taxpayers, but of local businesses. Unregulated hedge funds, playing with investments from our pension funds, threaten our financial security. CSX Railroad, under former Bush Treasury Secretary John Snow, deliberately cut back safety inspections and repairs, at the cost of hundreds of deaths and injuries a year in railway accidents. Burglar-alarm companies connect clients to local police stations, forcing police at taxpayer expense to spend hours of police time checking false alarms. Enron rigged the energy markets while regulators looked away. State regulators allowed insiders to privatize non-profit health insurance organizations like Blue Cross of California, buying them from the public at a small fraction of their value, and then raising premiums and cutting service.

Johnston has missed a few ratchets. One is the privatization of the military, which has fattened defense contractors in the Iraq fiasco. Another is the giveaway of natural resources, notably electromagnetic spectrum. Yet another is the war on drugs, enriching the private prison industry at the expense of taxpayers and of the many unfortunate poor non-violent offenders. (The US now locks up one in one hundred adults, by far the highest rate among developed countries.) And now it seems we will be giving polluters the right to dump into our air. (See Peter Barnes’ Capitalism 3.0 for an alternative.)

Free Lunch makes a rousing sequel to Johnston’s prior book, Perfectly Legal, an expose of tax loopholes. There’s plenty of material for the next installment.

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3/01/2008 11:10:00 PM