Monthly Archives: February 2013

Vernon Bowman

Vernon Bowman

Last month the University of California intervened in a high stakes U.S. Supreme Court case on the side of the agribusiness giant Monsanto Company by filing an amicus brief stating that the university would be harmed materially if Monsanto doesn’t prevail. On the receiving end of UC’s legal argument is Vernon Bowman, a 75 year-old grain farmer from southern Indiana who has been battling Monsanto in court for several years now. It was already a David v. Goliath kind of fight, pitting an elderly guy in overalls against a global corporation with a bottomless pocket for legal expenses; the entry of UC into the court’s deliberations makes that two Goliaths.

Monsanto alleges that Bowman stole from the company years ago when he purchased soybean seeds from a local grain elevator and planted them in his fields. The seeds were second generation crop from a previous year’s harvest, the original seeds of which had been purchased from Monsanto by a different farmer. This second generation seed stock was found to contain genes that made the soybeans resistant to glyphosate-based herbicides, known to the public as Roundup, making them “Roundup Ready” in Monsanto’s lexicon of trademarked phrases and proprietary industrial farming systems. Monsanto, after deploying agribusiness spies to detect the genes in Bowman’s fields, took the farmer to court. The handful of big biotech companies like Monsanto that dominate the trade in GMO seeds have prosecuted dozens of similar cases, winning nearly every time in lower courts, exhausting the legal resources of their opponents, and building support in case law for the idea that intellectual property ownership can extend into the very DNA of life, and that the legal owners of genetic “technologies” should have full control over the total reproductive power of the organisms they alter. Bowman is the farmer who fought back, all the way to the Supreme Court.

On February 19 the Supreme Court heard oral arguments in Bowman v. Monsanto. The tenor of the discussion, which lasted for just over an hour, was decidedly hostile to Bowman and his counsel, letting the lawyers from WilmerHale, Monsanto’s billion dollar law firm, sit back and relax. Chief Justices Roberts, Scalia, Breyer, and Ginsberg interrogated Bowman’s lawyer, often with obvious contempt in their voices, as he struggled to lay out an argument against Monsanto’s interpretation of US patent law. Under the law, Monsanto seems the clear favorite to win. US property laws have been molded for over two centuries by a profoundly anti-social doctrine emphasizing private control over technology and the financial gains to be made from invention. What’s relatively new is the extension of these propertarian doctrines into the essence of life itself, but thus far the courts and legal profession haven’t allowed the contradictions inherent in this obstruct their valorization of capital over life.

The University of California’s intervention is a big deal, even if it was to be expected. UC’s amicus brief (which was actually spearheaded by a Wisconsin university research foundation) was co-signed by other schools that have close ties to big agribusiness such as the universities of Iowa, Illinois, Florida, and Nebraska. Joining them are the lobbying organizations of these schools which work to influence intellectual property laws, and to obtain research subsidies for their institutions. The entry of this academic gang into the case creates the appearance of a broad public interest in upholding Monsanto’s legal position in part because these are mostly major public land grant universities.

UC and its co-signatories argue in their brief that Bowman’s seed saving stands to undermine scientific and technological “progress,” and could even harm the public welfare. By failing to penalize Mr. Bowman for buying and using saved seeds that contained a patented gene, UC argues that the Supreme Court:

“would impair technology transfer operations and ultimately deny the public the benefits of existing and yet-unknown artificial, progenitive technologies.  The first buyers of artificial, progenitive technology could make an unlimited number of identical copies of the invention without having to compensate the patentee for those subsequent copies.  In a short period of time, the market for the technology would become saturated with copies.  The patent owner and its licensees would effectively lose the right to exclude others from practicing the patented technology over the full statutory term of the patent—which is a fundamental right conferred by the patent system.  This would devalue existing patents directed to artificial, progenitive technologies and remove any incentive for private sector entities to license and develop future technologies of this kind.  Ultimately, the public may never benefit from such inventions.”

Surprised the UC would make such pro-privatization arguments? You shouldn’t be.

The University of California is a behemoth in the biotech industry, and behaves more like a for-profit corporation such as Monsanto, than a public college with a broadly social mission when it comes to research and technology. UC owns more patents than any other university in the world. In fact UC owns so many patents, and files for so many new applications each year, that only a few major corporations rank above it in the yearly quest to monopolize new ideas and creations.

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Total patents issued to UC on a yearly basis. (Source: UC, “Technology Transfer Annual Report, 2011.”)

Most of UC’s patents are medical and biotechnology-related, and many of them are leased to for-profit corporations to generate income for the different campuses, and the UC system as a whole. UC claims ownership of 3,900 different patents registered with the U.S. Patent Office, and another 3,729 patents registered with foreign authorities, according to the most recent report from the university’s Technology Transfer Office. Its even worth pointing out that the source I just cited, the UC’s Technology Transfer Office, is itself a direct product of UC’s voracious appetite to patent and sell its technological properties. Tech transfer is a full-time task run out of the UC president’s office, and through offices on each UC campus where staff and lawyers are busy finding ways to monetize the university’s knowledge production, and to penalize anyone who attempts to use UC inventions without a fee.

Over 1,477 of UC’s patented technologies are licensed, mostly to businesses which have commercialized them into various medical, agricultural, and consumer products. UC licenses patents to Monsanto, among many other biotech companies.

Since 2007 UC has pulled in about $100 million annually from royalty and fee income on these properties, and another $20 million from settlements with those who infringe on UC’s patents. Among UC’s most lucrative patents are GMOs modifying several kinds of strawberries, a citrus fruit, and a patent for recombinant DNA used to make somatotropin, the bovine growth hormone used in industrial cattle farming.

Total plant licenses issued by UC to biotech companies, including Monsanto. Many of UC's patented plant products involve transgenic manipulation of food crops.

Total plant licenses issued by UC to biotech companies, including Monsanto. Many of UC’s patented plant products involve transgenic manipulation of food crops. (Source: UC “Technology Transfer Annual Report, 2011.”)

In fact in 2004 UC sued Monsanto over the company’s use of the DNA material used to produce bovine growth hormone. In 2006 Monsanto agreed to pay UC $100 million to settle the case. UC’s royalties from its bovine growth hormone patent, about $5 million in 2011, are on top of the $200 million settlement, and UC’s patent runs until 2023. UC has also sued Genentec and other lesser-known biotech and pharmaceutical corporations over multi-million dollar patent issues.

UC spends about $28 million each year employing a team a outside lawyers to manage its intellectual property portfolio. Most of their work involves enforcement of patent infringement claims against companies like Monsanto.

UC and its fellow universities filled their amicus brief with appeals to the public good, and advancement of noble goals like feeding the world. Specifically they argue that “In the coming years, artificial, progenitive technologies [like Monsanto’s GMO soybeans] promise to positively impact many aspects of Americans’ lives.  Reversal [allowing Vernon Bowman to use saved seeds containing Roundup Ready genes] here would undermine those positive impacts.”

The universities aren’t the only parties to file briefs with the court. Numerous other biotechnology companies, the lawyers who represent them, and other intellectual property proponents filed briefs supporting Monsanto. One of these briefs, offered by BayhDole25, illustrates the degree to which the partisans of GMO technology have confused their legal arguments with ethical and moral appeals:

“This compensation [from patents] in turn supports long-term investment in new technologies for the continued vibrancy of U.S. agricultural biotechnology, where the private sector now provides the lion’s share of R&D critical to continuing agricultural productivity gains. Like never before, innovative agricultural biotechnology companies play a key role in the commercialization and assimilation of advanced technologies for creation of economic and social value in the United States, as well as to meet global challenges associated with population growth and climate change.”

Similarly impossible to prove value-laden language permeates the other briefs in support of Monsanto. For whatever reason these corporations, including the university-corporations like UC, feel their case must rest on more than just the letter of U.S. patent law, which does read in their favor.

It’s perhaps worth noting here that BayhDole25, a group founded to promote technology transfer between universities and corporations, is run by a pharmaceutical industry lobbyist and a university researcher who claims to have been “the first person to receive a patent for a transgenic organism.” The Bayh Dole Act from which they take their name was passed by Congress in 1980. It was a watershed moment in terms of the incentives it created toward further privatization of U.S. universities. Prior to Bayh Dole university researchers using federal funds were required to hand over any patentable inventions to the U.S. government. After Bayh Dole schools could take out the patents on technologies arising from federal research conducted under their auspices.


The City of London, the world’s most central financial hub and site of the biggest Eurodollar money market which LIBOR was created to govern.

The importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

It’s been five years since a few academics and journalists began to dig up evidence that something was wrong with the London Inter-Bank Offered Rate, or LIBOR (pronounced appropriately as “lie-bore.”) The data that curious researchers were compiling couldn’t be explained using the prevailing definition of what LIBOR supposedly was: a trustworthy interest rate that accurately gauged the market price of borrowed US dollars held overseas by the world’s biggest banks. Instead, their findings pointed toward something other than an idealized neoliberal market, influenced only by impersonal supply and demand forces. Many began to realize that the data could easily be explained if the banks were rigging the LIBOR rate in their favor. Strange discrepancies in LIBOR’s correlation to other rates, and to the economic fundamentals of the bank companies responsible for formulating the rate, showed something seriously amiss, but it made sense if the banks were cheating.

The motives of the banks have been clear from the beginning. A few banks that dominate the marketplace for derivatives stand to make billions if LIBOR moves in their favor on particular days when contractual payments between them and their customers come due. They therefore suppressed the rates in order to skim billions of dollars off derivatives and investments. Later these same banks suppressed LIBOR rates to create the illusion that their balance sheets were robust during the financial crisis. This also allowed them further rounds of money-siphoning from their unwitting derivatives customers.

Barclays-logoUntil recently LIBOR rates have been set by a panel of banks that are members of the British Bankers Association (BBA). The BBA is a private industry group established almost 100 years ago to lobby for the financial industry in one of its global hubs, London. The BBA really came into power in the mid-1980s with the creation of LIBOR. LIBOR was created to further integrate the giant global money market in US dollars held in overseas banks or holding companies, and therefore unregulated by the US Federal Reserve. Called “Eurodollars,” because they originally were dollar savings accumulated in European banks, especially banks in London, these funds quickly became a de facto global currency. LIBOR began as a way for the banks to standardize investment products for these vast pools of American dollars flowing through Europe, and later Japan, the Middle East, and Latin America. By the 1990s LIBOR had become such an important set of interest rates, and US dollars held overseas had becomes such an important source of credit for US consumers, that LIBOR became the key global interest rate around which many financial products were pegged. As LIBOR became more and more important to the globalization of finance, it accrued a sort of official, trusty gloss; nearly everyone assumed that LIBOR was a market rate reflecting competition. Instead, LIBOR has probably all along been a fudged rate, determined less by vast market forces and invisible hands, and more by the vulgar self-interest and power of the elite banks that set LIBOR rates.

citiLast year government investigations into this globe-spanning crime —rightly called the biggest financial scam in all of history— led to multi-billion dollar fines against Barclays, the Royal Bank of Scotland, and UBS, the 7th, 8th, and 20th largest banks in the world, respectively. Criminal investigations spearheaded by US, UK, Japanese, Canadian, Swiss, and Singaporean authorities are ongoing and aimed at other banks such as Citigroup, JP Morgan, Bank of America, and other “too big to fail” institutions. More details of the crime will be forthcoming as e-mails, internal documents, phone tapes, text messages, and other evidence, is made public, and as the banks are forced to pay significant fines, and sign plea agreements.

While this scandal might seem worlds away, concerning complex financial concepts and obscure money market instruments dealt by bankers out of skyscraper offices in the City of London, the importance of uncovering the complete truth about the LIBOR rigging conspiracy cannot be overstated for local communities across the United States, especially here in California.

ubsWhy? First, LIBOR has been used since the 1990s to determine cash flows on interest rate swaps that local governments have purchased from banks to insure themselves against wild swings in variable interest rates owed on billions of municipal debt. Messing with LIBOR messes with the payments due on these instruments.

Second, LIBOR has also been used as a main interest rate of reference for an array of investment products that yield a variable return, dipping and rising in concert with LIBOR. Local and state governments have used these investment products, called “municipal derivatives reinvestment products” to temporarily park public funds, while pension systems and government enterprises like utilities use them make investments. Governments and public agencies earn LIBOR rate returns on their dollars invested in numerous kinds of municipal derivatives, so if LIBOR is illegally fixed downward, they earn less income.

jp_morgan_chase_logo_2723Through both of these forms of exposure, local governments have potentially been harmed by LIBOR-fixing perpetrated by the banks, often times the very same banks that have sold them swaps or municipal derivatives investment products.

California is fast emerging as a center of investigation and litigation into the LIBOR-fixing conspiracy. California is the largest single municipal debt market in the United States, and one of the largest in the world. Last year alone the state of California and its cities, counties, school districts, and other public entities issued $65.7 billion in total public debt. Because of California’s regressive tax structure and chronic budget crises, the state’s multitude of governments have been among the most aggressive in issuing variable rate debt hedged with interest rate swaps.

The Golden State’s local governments have also been the largest purchasers of municipal derivatives contracts from banks because streams of tax and fee revenues often don’t match up with the dates that payments to public employees and contractors come due. Collusive suppression of LIBOR rates by the 16-member panel who were trusted to provide accurate quotes could mean that California local governments have paid untold millions to their interest rate swap counterparties (the banks) that should otherwise have remained in budgets and used to fund school construction, bus lines, street paving, water and sewerage services, etc.

In the 1990s and 2000s local governments across California increasingly issued bonds with variable rates. Investment bank underwriters and municipal debt advisers from the private sector encouraged variable rate bond financing because it promised lower interest rates for California’s cash-strapped municipalities. To hedge against the risk that variable rates might explode, as they did in the 1980s, the banks sold interest rate swaps to local governments. The swaps effectively converted floating rate debt into a fixed rate. Under a typical swap contract the bank seller agrees to pay a floating rate designed to mimic the variable rate interest on the bond debt, and in return the local government agrees to pay a fixed rate. I’ve written elsewhere about how this deal blew up and created a financial injustice when variable interest rates plummeted during and after the Financial Crisis, but the LIBOR rigging conspiracy adds to these harms. The US government bailed out the banks and assisted them in taking “toxic” derivatives assets off their hands, but stood idly by while cities, counties, and public agencies suffered without aid during the Financial Crisis, allowing derivatives instruments on the public’s books to blow up and drain budgets. At this very moment the banks perpetrated an illegal scam to suck even more money from the public via further depression of LIBOR.

Barclays, RBS, UBS, and other banks worked together to suppress LIBOR below even the depths to which it sank after 2008. A number of lawsuits filed by various cities, counties, and public agencies in California asserts the banks did this to skim off an unknown, but very large, amount of money from their public victims, and also to bolster their own balance sheets during the crisis. By suppressing LIBOR the banks ensured that the net difference between the variable rates they owed, and the fixed rates the public was paying on swaps, was wider than it would otherwise have been. This net difference meant that the public owed the banks higher amounts when the interest rate swap payments came due (usually twice a year).

For San Francisco this could mean that millions have been stolen from the capital budget of its Airport. SFO currently has seven interest rate swaps it has purchased to convert variable rate bond debt into synthetic fixed rates. The airport’s counterparties on its swaps included JP Morgan Chase, Merrill Lynch (owned by Bank of America), and Goldman Sachs. Each of these banks likely benefited from conspiratorial suppression of LIBOR, even if it was by just a few basis points (hundredths of a percent). JP Morgan Chase and Merrill’s parent Bank of America are both members of the panel that sets LIBOR, and are both believed to have played a role in the conspiracy.

San Francisco’s pension system may have also been raided by the banks through its speculative investments in swaps. According to the most recent audit of the San Francisco Retirement System’s portfolio, the city’s pension system holds two interest rate swaps on its books with a notional value of $15 million. In prior years, SFERs held other swaps. In 2010, the Retirement System’s audit showed three interest rate swaps with a total notional value of $41 million. Over the last two years these swaps drained $5.3 million from the pension system, and some of these losses might have been due to the downward manipulation of LIBOR. Also on the Retirement System’s books are other investments in bank loans, options, and other securities that might have been impacted by the LIBOR fraud.

San Francisco’s LIBOR damages are probably small in comparison to other local governments and public agencies. The East Bay Municipal Utility District has already filed a lawsuit in federal court alleging damages from bank rigging of LIBOR. The water district’s complaint, filed in January of 2013, alleges that LIBOR suppression drained potentially millions, again from interest rate swap agreements with some of the very banks that sit on the LIBOR-panel: Citibank, JP Morgan Chase, and Bank of America. East Bay MUD lists nine interest rate swaps potentially affected by LIBOR rigging in its lawsuit.

East Bay MUD’s swaps had a total notional amount of $481 million in 2012, according to the utility’s most recent financial report. Downward manipulation of LIBOR by just 10 to 50 basis points (1/10th to 1/2 of a percent) could have drained between $481,000 to $2,400,000 through East Bay MUD’s swap payments every six months. Over a few years, say the conspiracy’s 2007-2010 time-frame alleged in EBMUD’s lawsuit, this would add up to millions of dollars stolen by the banks.


The cities of Richmond, San Diego, and Riverside, and the County of San Mateo, are other California governments that have now filed lawsuits against the banks responsible for setting LIBOR. All of these lawsuits have been consolidated into a larger class action case currently being heard in the U.S. District Court, Southern District of New York, before Judge Naomi Buchwald. There are now about two dozen LIBOR manipulation lawsuits that have been filed and consolidated in New York. The lead case is the City of Baltimore and the New Britain Firefighters’ and Police Benefit Fund lawsuit against the 16-bank LIBOR panel, filed in April of 2012.

More California cities, counties, and public agencies are expected to file their own lawsuits soon, however. CalPERS, which has numerous investments that fluctuate in value and yield with LIBOR, is also said to be investigating its own exposure to rate rigging.

The top five percent of America’s income earners make roughly $150,000 a year and up. That’s a lot of money compared to what most U.S. workers earn. The median household income in the states is currently $50,000 a year. Other economic inequalities separate the top 5 percent from the bottom half of America, especially the ownership of wealth – assets such as stock, real estate, bonds, mutual funds, and other securities and investments that aren’t strictly income, but which accrue enormous value over time.

In Oakland income inequality is very stark. California trends above the nation with a median household income of about $57,000, but the cost of living is higher too. Oakland’s median household income is still just plain old $50,000, even though the cost of living in Oakland is much higher than in other places in the state, say Fresno, or Redding, for example. The result is lots of poverty amid affluence. One in ten households in Oakland has had to resort to food stamps for nutritional security in the last year. About one in ten adults are unemployed. Oakland’s poverty rate is about 20 percent. Most Oaklanders can hardly claim to be middle class, let alone among the top five percent.

    Source: US Census, American Community Survey, city of Oakland, CA, "DP03: SELECTED ECONOMIC CHARACTERISTICS,"

Source: US Census, American Community Survey, city of Oakland, CA, “DP03: SELECTED ECONOMIC CHARACTERISTICS,”

Some of Oakland’s elected officials, however, can claim to be among the top five percent of income earners in the U.S. The city’s most ascendant politicians are in fact wealthy compared to their constituents.

City Council president Patricia Kernighan had a total city compensation package of $113,942 in 2011, the last year for which the figure is readily available. Kernighan’s husband, Paul Gordon, a lawyer who works in San Francisco, is likely making a six figure salary, and it’s probably not a figure that begins with a one. Even assuming it was a dismal year for Mr. Gordon in 2011 and he only cleared $100,000, that would already lift the Kernighan household at above $200,000 in pre-tax income, putting them solidly in the top five percent of America’s income earners. There’s more though.

kernighangordonIn 2011 Kernighan reported to the state Fair Political Practices Commission earnings of between $26,000 to $180,000 from the sale of stock in Apple Computer, Loopnet, Inc., Diageo, Netflix, Ebay, Netgear, Proctor & Gamble, Rofin-Sonar Technologies, and Toyota Motor Corp. It’s worth pointing out here is that most American’s don’t own direct stock, and only about half own any kind of stock, much of this indirectly through mutual funds. It’s really the top strata of American income earners and wealth holders who own direct, multi-thousands dollar stakes in companies like these, and who regularly trade and sell of these shares to harvest gains such as what Kernighan reported in 2011.

A final stream of income for Kernighan was a $10,000 to $100,000 “trustee fee” paid to her by the Thelma Doelger Trust for Animals in 2011.

If we low-ball all of these sources of earnings and assume Kernighan’s husband took home a meager $100,000 in 2011, it would mean her household’s income was at least $250,000. This puts the new president of the Oakland city council above the 98th percentile of U.S. income earners, meaning only 2 percent of Americans made more money than Kernighan in 2011.

If we assume a more generous flow of income, let’s say her husband made a respectful $250,000 all by himself, and assume their stock sales to be worth half the maximum possible reported amount (for a total stock earnings of $90,000), and let’s say the Thelma Doelger Trust for Animals likes to make its trustees smile by paying them $50,000 for their services, then we might assume that Kernighan’s household income weighed in somewhere around half a million. That’s 1 percent material, putting Kernighan’s family in the upper echelons of U.S. income earners.

Up and coming city council member Libby Schaaf’s household income is decidedly less pillowed by stock earnings, but it’s still enough to easily place her in the top five percent. Schaaf reported her own income as a council member and her spouse’s income. In 2011 Shaaf took home base pay of about $70,000 and another $39,000 in medical and retirement benefits from the city. Her husband, Salvatore T. Fahey, is an employee of Gatan, Inc., an electronics company in Pleasanton. His income was reported as “over $100,000,” but because the Fair Political Practices Commission does not differentiate above that amount there’s no way of knowing if his income was just $101,000, or above $300,000. Even so, Schaaf’s household income is at least above $200,000, putting here in the top 3 percent of U.S. income earners.

Rebecca Kaplan reported her own pay as a council member ($110,000 in total compensation), her compensation as a member of the Alameda County Transportation Commission (between $1,000 to $10,000), Commission, and her partner’s pay (between $10,000 and $100,000) as income in 2011. A low-ball estimate that assumes her partner made only $10,000 that year would put this grand total at about $121,000. It’s likely, however, that Kaplan’s partner, a successful psychotherapist with an office in Farol Building along Bellvue Avenue near Lake Merritt, made something in the higher reaches of the range, say $80,000? That would put Kaplan’s household income at around $200,000, making her another top 3-4 percenter in America’s income pie, and also doing quite well by Oakland standards.

Oakland mayor Jean Quan reported two real estate holdings in her statement of economic interest for 2011, along with the income of her partner Floyd Huen. Quan’s total compensation as mayor amounted to $204,781. She reported that her husband earned above $100,000, and that two properties under her ownership, a house in Monterey, and an industrial plot in West Oakland, generated between $10,000 – $100,000, and $1,000 – $10,000, respectively.

801 Terry Street, Monterey, California generated between $1,000 - $10,000 dollars in 2011 for Oakland Mayor Jean Quan.

801 Terry Street, Monterey, California generated between $1,000 – $10,000 dollars in 2011 for Oakland Mayor Jean Quan.

A low-ball estimate of her total household income would therefore add up to about $315,000. Supposing Floyd Huen earned the same amount as Quan, and supposing that their real estate investments generated the maximum income within the range they reported, the Quan household would have raked in $514,000 in 2011, putting Quan in the top one percent of U.S. income earners.

Of course none of this is counting taxes, which would reduce these numbers considerably. Then again, the California Fair Political Practices Commission’s rules for disclosing sources of income for elected officials hardly measures all the money a politician earns in a given year. Potentially large sources of income, like diversified mutual funds, need not be disclosed. And none of this is counting wealth, the total assets held by Oakland’s politicians in real estate, stock, bonds, and other instruments, all of which could be in the millions of dollars.

future-generations-debtCalifornia Watch published a very important story last month about the massive debt loads that capital appreciation bonds have heaped upon at least 400 school districts in California. Called CABs for short, many cash-strapped districts have resorted to these types of bonds in order to finance necessary buildings and infrastructure upgrades. Unfortunately without CABs, and because of California’s gutted property tax and slack economy, it would otherwise have been impossible to fund school construction over the last half decade in many regions.

Unlike normal bonds used by local governments to finance capital projects, CABs allow for repayment of interest and principal spread over longer time frames, often with no need to begin paying back principal immediately. This means easy money here and now, but it also means that the borrower will pay back much more over the term of the bonds than a regular loan, sometimes as high as 23 times the original borrowed sum.

There’s one error in how California Watch framed their story, however. Following State Treasurer Bill Lockyer, the reporters and editors imply that CABs shift the debt burden onto future generations – the kids. It’s right there in the story title, “Controversial school bonds create ‘debt for the next generation’,” and then it gets restated in the intro:

[School district administrators] have borrowed $9 billion that will cost taxpayers $36 billion to repay over the next 40 years, according to data compiled by California Treasurer Bill Lockyer. He called it “debt for the next generation.”

“The average tenure of a school superintendent is about three and a half years, so they aren’t going to be around in most instances to worry about paying that off,” Lockyer said in an interview. “Nor will the voters, probably, that enacted it in the first place.”

The idea that California’s children will be stuck paying the the debts of their irresponsible parents might be a catchy news frame, but it’s not economically accurate. It also de-politicizes the issue at hand and gives the story an uncontroversial gloss because it’s the “next generation” in the abstract that is losing out.

What’s actually happening is not a shifting of the burden to future Californians yet unborn, but rather an immediate transfer of income between classes and races, with the working and middle class residents of these various school districts being forced to pay out a greater share of their incomes to a small elite of rentiers who will come to hold these capital appreciation bonds when their investment managers purchase them in the bond market.

The idea that public debt is a burden to future generations rests on the idea that the current generation is acting as a spendthrift, carelessly buying what they want now in a fit of irresponsible pleasure seeking, and allowing the payments to come due in later years. This is wrong, however. We’ve known this generational theory of indebtedness to be wrong for over a century. One of the earlier logical refutations of the future-generations debt burden myth was provided by political economist Arthur Pigou. In his classic A Study In Public Finance Pigou wrote:

“It is sometimes thought that whether and how far an enterprise or enterprises ought to be financed out of loans depends on whether and how far future generations will benefit from it. This conception rests on the idea that the cost of anything paid for out of loans falls on future generations while the cost met out of taxes are borne by the present generations. Though twenty-five years ago this idea could claim some respectable support, it is now everywhere acknowledged to be fallacious.”

Twenty-five years prior to the time Pigou laid out this refutation was 1898.

Rather than constituting inter-generational transfers of wealth, Pigou explains how these are transfers of wealth in the present.

“[…]interest and sinking fund on internal loans are merely transfers from one set of people in the country to another set, so that the two sets together —future generations as a whole— are not burdened at all [….] it is the present generation that pays.”

Like a lot of liberal economists of his era, Pigou unfortunately also managed to obscure the inherently political nature of the problem by referring to “set[s] of people.” By “set” he really means that income and wealth is being transferred via debt between different classes. Large public debts tend to work as redistributive mechanisms that allow the truly wealthy to claim much larger shares of the total national income through the regressive taxes paid the working and middle classes.

This is exactly what’s happened with respect to California’s capital appreciation bonds. After decades of tax cuts, primarily via property taxes, and cuts to federal income and capital gains taxes passed on to local governments as cuts to federal aid to states, the wealthiest Americans now possess more of the income and wealth pie than they have since roughly the late 1920s. Lacking these untaxed dollars that have piled up in the bank accounts of the top 1 to 5 percent of America’s wealthiest residents, local governments have resorted to ever-increasingly desperate forms of debt financing to pay for everything from schools to healthcare. The wealthy have loaned their politically-gotten surplus of dollars to governments that no longer have the power to tax. The result is a current transfer of even more income and wealth to the rich in the form of higher interest rates paid back over longer periods.

Paul Krugman has commented on the fallacy of the future-generations debt burden trope also, and his take is worth reading for further clarity.

What the California Watch reporters did do well is name the names of some of the financial advisors and debt underwriters who have gotten rich off the fees they charge for recommending CABs to school districts. It will probably come as no surprise that the likes of Piper Jaffray and Goldman Sachs, among others, have made millions by facilitating the CAB boom. Financial advisors like Caldwell Flores Winters, Dale Scott & Co., and KNN Public Finance have reaped millions also.

Need I point out that the finance sharks who staff these companies are of course the same high net worth individuals who own the bond funds that gobble up CABs and other debt securities?