Is America Becoming a Third World Country?

Author: Ted Baumann
Created: 29 August, 2014
Updated: 15 October, 2022
6 min read

I often ask myself: “Is America becoming a Third World country?” I’ve traveled all over the world and seen the ins and outs of developed and undeveloped nations, observing economic and political structures that work and many that don’t. And what I too often see in the Third World is that fair and equal treatment under the law often goes amiss.

And it’s what’s lying beneath the surface in American politics — the nefarious deals made between corporations and the politicians that are supposed to keep them in check — that makes me think the Third World is where we’re headed as a nation.

In my global travels, I often find myself in a hotel room, bar, or restaurant with only a local newspaper for company — at least in those places where I speak the language. A scan of the headlines gives me a pretty good indication of the state of local politics and business.

One of my personal indicators of the local environment is the nature and frequency of articles describing government investigations into businesses. It’s a great way to see who is aligned with whom, and who isn’t.

For example, The Times of India, a venerable journalistic outfit in that country, reliably reports at least three to four front page articles every day on the state of conflict between various government ministries and the economic sectors they oversee.

You can always tell which businesspeople are on the outs with the political elite by who gets charged with some crime … and by omission, who’s in their good books. It’s thus an essential guide to Indian investment decisions.

In a country where cricket is a popular sport, several of the metaphors used to describe these struggles tend to adopt some of the game’s terminology. “Minister X bowls Firm Y for a duck.” “Firm Y hits Minister X for six.” And so on.

Yes, you may say, a sound method of analysis suitable to Third World countries, where the rule of law is weak, and corruption endemic. But when you apply it to the United States, things get very interesting very quickly …

In recent months, the Justice Department and the New York Attorney General’s Office have trumpeted their alleged “crackdown” on Wall Street. JP Morgan Chase, for example, agreed to pay $23 billion in fines in 2013. And Bank of America has recently settled for a $16.7 billion “fine” over mortgage abuses. That’s in addition to a $9.5 billion BoA fine levied by courts in March. (All tax-deductible as “losses,” naturally.)

Of course, being admissions of criminal guilt, you might expect some jail time, too, but I’m not holding my breath on that one, and neither should you. Even so, this proves that our government is impartially enforcing the law, right? After all, this isn’t chump change. So isn’t America still safely in the First World column in the global governance sweepstakes?

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Not quite.

It’s Not About Who Gets Charged … It’s About Who Doesn’t

A recent study by the London Business School (LBS) examined more than 7,300 instances when U.S. corporations issued significant corrections to their financial statements between 1996 and 2006. Such restatements typically trigger Security and Exchange Commission (SEC) enforcement actions, because they often imply internal accounting, share trading, and other shenanigans.

The LBS study cross-referenced these restatements with campaign contributions and lobbying expenditures by the firms and their executives. It found that “politically connected firms are on average less likely to be involved in an SEC enforcement action, and face lower penalties if they are prosecuted by the SEC.” Specifically, firms that increased their political contributions by $1 million over 5 years cut their chances of being prosecuted in half.

Why would the supposedly impartial SEC enforce the law so lopsidedly?

The LBS study suggests that it’s all about the SEC’s fear of political consequences when choosing enforcement targets. The more money a firm has donated to key lawmakers, the more likely it is that those lawmakers will become upset by SEC prosecution, leading them to try to punish the agency by reducing its budget.

“The presence of an established, public relationship between the firm and key politicians could be sufficient because the SEC might be aware of the increased costs of initiating an investigation against such a firm,” the study says.

Strike one against First World standards of the rule of law. Now for the next pitch.

A 2013 Project on Government Oversight research report found that since 2001, more than 400 former SEC officials have taken jobs representing firms facing SEC action. The LBS report found that companies that employ ex-SEC lobbyists “experience a larger reduction in the probability of enforcement and in penalties than those that do not.”

Strike two.

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Definitely, the SEC has to pick and choose its targets. But surely they’re targeting the worst violations, such as the pay-to-play scandal, in which Wall Street firms bribe state and local politicians to give them pension fund business. After all, the SEC established an unambiguous rule banning Wall Street firms from donating money to politicians who give those firms contracts to manage public pension money.

Here comes the windup…

major investigation was conducted earlier this year into donors associated with 43 financial firms managing New Jersey pension funds, including Goldman Sachs.

The investigation found that they have spent a total of $11.6 million on contributions to state politicians, including Gov. Christie’s election campaign and the New Jersey Republican State Committee. Many of these contributions came either just before or just after the Christie administration awarded massive pension management contracts to the firms.

That’s in direct violation of the SEC rule, but there’s been no mention of an investigation. Indeed, the SEC has prosecuted just one case under the now three-year-old rule.

Strike three.

And… You’re Out!

Shortly after the 2008 financial crisis hit, ex-IMF Chief Economist Simon Johnson wrote that the U.S. had undergone “quiet coup” and become a “banana republic.” Like many developing countries, the U.S. political system had melded its financial and political elites into one — an elite that regards itself as above the law.

From 1973 to 2009, the financial sector’s share of domestic corporate profits climbed from 16% to over 40%. Donations flowed to Congress and hundreds of SEC officials became rich shills for Wall Street. So when the U.S. economy’s day of reckoning came in 2007-2008, the only policy options adopted — indeed, the only ones on the table — were those that bailed out America’s fat cat financiers. The rest of us were left to suffer.

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When a batter strikes out, they’re supposed to leave the plate. But in today’s America, when the elite that have dragged us down to Third World status strike out, they just keep on batting...

Editor's note: This article originally published on The Sovereign Investor Daily on August 26, 2014, and has been edited for publication on IVN.

Photo Credit: Lisa S. / Shutterstock.com

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