Archive for January, 2012

Conventional Wisdom

Tuesday, January 31st, 2012

So what can we do to change the way elections are funded in order to eliminate the “gift” economy that is corrupting our government?

Summary of the Problem

The “gift” economy is one where those seeking to influence decisions by our elected officials donate large sums to the re-election campaigns of those officials.  With the recent Citizens United decision by the Supreme Court, these donations don’t have to be direct.  They can be to political action committees (PACs) set up to support these elected officials.  Giving to these Super PACs is unlimited and anonymous.  In the current republican primary cycle, for example, two of the candidates, Newt Gingrich and Rick Santorum, are each supported almost exclusively by one individual.

This is entirely legal as is the larger “gift” economy.

We are not talking about corrupt individuals.  Instead we are talking about a form of corruption which weakens the integrity of the institution of Congress.  Congress was designed by the framers of the Constitution to be “dependent on the People alone”.  Instead we have an institution where even the most well intentioned members are distracted and ultimately compromised by the challenge of raising campaign funds.

The solution is not to throw them all out and elect a new set of representatives who are somehow immune from this influence.  This dependency, as Lawrence Lessig points out, is “among the most human of reactions that evolution has produced.  We all reward those whom we depend upon, whether or not such reward is consistent with our ideals or objectives.  And we are especially prone to reward those whom we depend upon when our conduct is viewed as justified within the institution with which we are affliated.”

The only individuals who may be immune from this sort of influence are those so wealthy that they don’t need the help of others to fund their campaign.  It doesn’t seem like that is a viable long term solution to this problem either.

The real solution is to design institutions that are immune to these conflicting dependencies – voters versus contributors.  That design is unlikely to come from the current Supreme Court who has exacerbated the situation, so let’s look at what Congress can do.

Fair Elections Now Act

This promises to create a funding alternative for those running for Congress.  It would not eliminate the “gift” economy.  Instead it would give voters a choice between candidates who funded their campaigns privately and those who used public funds.  Those who used public funds would agree to take voluntary small-dollar contributions from citizens which the federal government would match.  If the math is done well, this would provide candidates sufficient funds to be competitive.  Each candidate could raise as much money as they wanted but the limits on individual contributions would eliminate the influence of any individual contributor.

Akerman-Ayers Democracy Vouchers

In this system, the Federal government would create a fund based on a nominal amount (e.g $50 per voter).  Every voter would have the option to designate their amount to the federal office candidate(s) or party of their choice.  The significant difference between this proposal and the Fair Elections Now Act is that all donations are anonymous.  So the recipient would not know who provided funds or who didn’t.  Any unspent funds would expire either when the candidate quit the race or the election occurred.

Akerman-Ayers does not eliminate private donations either.  They simply impose a limit and require these to be anonymous too.  The Federal simply government serves as the broker for all donations.  Individuals who wanted to give more could do so (up to a limit), but the candidate would have no way of knowing for sure who actually provided the funds.  Very large donations would be disbursed in smaller amounts over time to further obscure the source of funds.

This does create the possibility of a sort of Liars Poker where large donors can claim that they provided funds to candidates but don’t actually fulfill their promise. Since the candidates are never really sure where the money came from, the expectation is that this will break the current dependency on large private donors.

Eliminate the Lobby Jobs

These two public funded options could curb the influence of campaign contributions, but don’t address the other big incentive for elected officials to respond to the requests of special interests.  That other incentive is the lucrative lobby jobs that await many members of Congress once they leave elected office.  Effective reform would also ban any member of Congress from working in any lobbying or consulting capacity in Washington for seven years after their last term in Congress.

Implementation

This problem is not going to go away on its own.  Elected officials are not going to voluntarily adopt a new system that will likely be bitterly opposed by the forces that created the “gift” economy.

It may require the growth of a new single issue consortium of voters.  We’ve already seen similar sorts of spontaneously organized grass roots movements spring up on the right with the Tea Party and on the left with the Occupy movement.  This new campaign finance reform group could easily draw support from across the spectrum because their only issue is campaign reform and not the politics of the individual candidates.  This group would support candidates who promise that their only commitment is to implement election reform as the first and only thing that they do.  If the Congress fails to take up their legislation, they will abstain or resign rather than participate in any other vote.  These candidates will campaign on a very simple reform platform that is independent of party but likely supported via individuals and Super PAC money.

Given the narrow margins of victory in some legislative districts as well as on a national scale, the campaign reform group could gain some momentum because it embraces several themes that are very popular with voters right now.  The first is the deep distrust of the Federal government in general and Congress in particular.  The second is the dismay by moderate voters at the level of partisanship displayed by both parties.  This is a long pull, but may be the only legislative way to get this done.

Constitutional Convention

It is possible, even if we are able to pass laws in Congress, that all of these reforms may not pass muster in the current Supreme Court.  So the ultimate resolution of this problem may be a Constitutional Convention.  There is certainly risk for all sides because once this convention convenes; they can produce anything including requirements for balanced budgets or bans on abortion.  The framers of the constitution understood this risk when they convened the first constitutional convention.  The original articles of confederation were not working.  Their stated goal was to tweak them.  What they did instead was come up with a whole new structure which became the foundation for a great nation.

It may be time to take just as bold a step to strengthen our institutions of government against the corrupting influence of money that has effectively crippled it.

 

Super Adelson

Saturday, January 28th, 2012

The Supreme Court Citizen’s United case which essentially stripped away any practical limits on political campaign funding was initially hailed by conservatives as a win for free speech.  They viewed this as their way to combat the funding that liberal candidates received from unions.

Instead it appears the first reverberations of this transformative bit of Supreme Court social engineering is being felt in the current republican primary.

Newt Gingrinch’s rise to power is being fueled by one just one man – billionaire, Sheldon Adelson.  He and his wife have given $10M to Gingrinch’s Super Pac.  The Super Pac purchased attack advertising that is widely credited for Newt’s win over Mitt Romney in South Carolina.  That win may turn out to be the turning point in this year’s campaign for the Republican presidential nomination.

Turn about, in this case, is fair play because the Romney Super Pac ad buys in Iowa are widely credited for Romney’s surge and Gingrich’s fall in the Iowa Caucuses.

Now both Super Pacs are engaged in Florida.  What looked like a sure thing for Romney several weeks ago has turned into an ugly street brawl of a primary fight.

Both candidates have weaknesses and their respective Super Pacs are hammering away mercilessly at those weaknesses.  In the case of Gingrich, his Super Pac is not only funding advertising, but actually running his on-the-ground get-out-the-vote operations.  That’s because Gingrich himself has not been able to raise sufficient funds in his own campaign to build much of any organization.

This again raises an important question.  Romney has been successful raising a lot of money from a lot of donors over a long period of time to build his organization.  His success reflects much broader and deeper support than Gingrich.  Romney’s organization should be enough of a tactical advantage that it prevents fringe candidates with narrow bases of support from even entering the race.  The new funding rules have allowed Gingrich to nullify Romney’s advantage with just one very wealthy backer.

This raises the next big question.  What sort of influence does an individual donor like Sheldon Adelson have over a campaign if he is their primary source of revenue?  In this case, Adelson is a self-proclaimed Zionist.  He and his wife first met Gingrich in Washington.  They were lobbying for a bill that would move the US Embassy from Tel Aviv to Jerusalem.  Gingrich recently said that on his first day in office he would issue an executive order to do just that.  He has also called Palestinians an “invented people”.  More troubling, of course, are the aggressive positions Gingrich has taken with regard to Iran’s nuclear development.  To be fair, he is not alone in the Republican ranks in that regard.

It is certainly possible that Gingrich formed all of these Pro-Israel opinions on his own and independent of any influence from the Adelsons.  But it certainly doesn’t pass the smell test.  And to some degree it doesn’t matter.  What is disturbing is that Newt may end up getting the Republican nomination without the bulk of the Republican primary voters being aware of the agenda that he shares with the Adelsons and how that agenda is directly related to the funding that helped him succeed.

The politics of the current situation do not bode well for Romney.  That’s because Santorum is still in the race.  Gingrich and Santorum have been splitting the conservative vote, and Gingrich is still able to make a race of it.

Santorum is hoping that the battle between Gingrich and Romney will sufficiently sour voters that they will go looking for an alternative.  Santorum’s PAC is also funded by one man – Foster Friess.  That guy says he is willing to provide funding through Super Tuesday on March 6th.  There is an interesting alignment between Santorum and Friess as well.  Friess has also financed the distribution of a controversial documentary entitled Obsession: Radical Islam’s War Against the West.  Santorum’s shameful failure to correct a Florida supporter’s claim that President Obama “is an avowed Muslim” and “has no legal right to be calling himself president” reveals a willingness to fan the flames of prejudice for his own benefit.

If/when the Santorum campaign fails, most of those votes are going to go to Gingrich.  Since Gingrich has already survived revelations concerning his previous marriages, his tumultuous reign as House Speaker, and his time since as a Washington influence peddler – it’s hard to imagine anything worse coming up which will damage his campaign.  As a result, he can portray himself as the stronger candidate because he has overcome all these negatives.

The Republican establishment is certainly taking the whole thing very seriously because they have come out in full force in an effort to stop Gingrinch before he does any more damage to Romney’s campaign.

The fact that Santorum votes are out there waiting for Gingrich should be enough to allow Gingrich to continue to raise money until either Santorum exits or Santorum somehow manages to leapfrog Gingrich as the preferred conservative candidate.

Romney on the other hand is going to have to deal with the potential narrative of a failed front runner.   He won’t necessarily run out of money, but he may find it difficult to win the conservative votes he was getting from those who just want the primary season to be over.  Romney has thrown just about everything he could to slow Gingrich.  Newt not only survived – he got stronger.  The reality is that there just aren’t enough moderate republican primary voters out there to get Romney the nomination.  He has to have at least some support of the conservative wing of the party too.

Romney’s latest attack supported by the Republican establishment is that Newt is unelectable.  That, combined with Newt’s poor performance in the last two debates,  seems to have gained some traction over the last week or so.  It also forces Romney to align himself with the very establishment that many of the social conservative and Tea Party Republicans blame for Obama winning the White House in the first place.

My prediction is that the race will continue until conservative voters abandon Santorum.  That could last at least until March 6th.

Romney’s best hope is that he and Gingrich will split the Santorum votes and Romney can win the ensuing trench war for delegates.

Otherwise, we should all prepare for the fireworks that will accompany a Gingrich nomination.

It would also mark the first time in recent history where two wealthy individuals, Sheldon Adelson and Foster Friess, were able to have such a dramatic affect on a presidential race.

What the Apple Looks Like

Saturday, January 21st, 2012

“And when the woman saw that the tree was good for food, and that it was pleasant to the eyes, and a tree to be desired to make one wise” Gen 3:6

Before we get into what we can do about the corrupting power of money in politics, let’s just look at a couple of examples of how the “gift” economy plays out in politics.

President Obama pledged on the election trail to eliminate the power of lobbyists to warp policy.

One of his signature campaign issues was healthcare reform, and appropriately so because the growth in healthcare spending was undermining our ability to compete globally and our ability to provide care for our elderly and poor.

One key component in that reform was to introduce a government option into the private healthcare insurance system.  The intent here was not to replace the private healthcare insurance system.  The intent was to introduce some needed competition into the system.  That only seemed fair given the fact that the individual mandates associated healthcare reform were going to hand the industry a huge windfall in the form of new customers.

The second key component was that the government would be able to use its vast purchasing power under Medicare and the VA to bargain for best price from the drug companies.  This best price would help set the pricing bar across the industry.

Both of these initiatives could be viewed as disruptive economic events.  In the first case, the government would enter the private insurance market with the express purpose of defining what a competitive price point should be in the industry.  In the second case, the government would also define what a competitive price should be for volume purchases of medication.

Neither of those things made it into the final bill.

The government insurance option was bitterly opposed by Republicans.  It was characterized as a government takeover of the insurance industry.  These forces backed by the Insurance lobby ultimately took the public option off the table.  They replaced it with state-based exchanges where consumers could at least compare and contrast private offerings.

In the case of Big Pharma, Obama early on bargained away the government’s option to negotiate a volume price in return for Big Pharma’s promise to stand on the sidelines during the debate – which they more or less did.

This process was so contentious and the “horse trading” so obvious, that the country recoiled in horror.  A significant portion of the population continues to view this landmark legislation as a serious spending boondoggle even though GAO number consistently say otherwise and the individual portions of the bill (pre-existing conditions, coverage for children up to 26, disconnecting insurance from employers, etc.) are very popular.

These compromises were necessary, however, because of the number of legislators who actively represent the interests of Big Insurance and Big Pharma and depend on campaign contributions from these industries as part of their re-election strategy.

Next up Rick Santorum and the earmarks authored to secure a $3.5 million federal grant to Piasecki Aircraft to help it test a new helicopter propeller technology and another $3.5 million to JLG Industries to bolster its bid to build all-terrain forklifts for the military.  These were part of the $1B in earmarks that Santorum authored during his time in Congress from 1995 to 2006.

Here are the particulars.  The Piasecki family were early supporters of Santorum but stopped contributing to his campaign in the late 90’s.  In June, 2005 they send a $3000 donation and followed that up with a letter asking for help in an appropriations process.  Less than a week later, Santorum wrote a letter to Alaska Senator Ted Stevens who was then chairman of the Defense Appropriations Subcommittee.  He then added the $3.5M earmark for Piasecki Aircraft to the Defense Appropriations Bill.  During the next election cycle, the family contributed $16,000 to Santorum.

In same Defense Appropriations bill, Santorum secured $3.5M for JLG Industries.  They had paid a lobby firm $100,000 to help them secure this support.  That firm spent a lot of time with Santorum.  Donors associated with the lobby firm contributed $12,000 to Santorum’s 2006 campaign.   Executives from JLG also contributed $6,000 to the lobby firm.  When Santorum left office, he joined that same lobby firm.

From a return on investment point of view, Paisecki Aircraft spent $19,000 and received $3.5M.  That a 185 x ROI.  JLG spent$106,000 for $3.5M.  That’s a 33 x ROI.  That’s pretty good when the ROI in manufacturing is generally in the low single digits.

The bottom line is whether it is overt or coincidental, the fact that there appears to be a conflict of interest in each of these cases erodes the confidence of the voters that our elected representatives can be trusted to make decisions in the best interests of the electorate rather than special interests.

So what can we do about it?

We’ll cover that in an upcoming post.

Paradise Lost

Wednesday, January 11th, 2012

Now the serpent was more subtil than any beast of the field which the LORD God had made. And he said unto the woman, Yea, hath God said, Ye shall not eat of every tree of the garden?  And the woman said unto the serpent, We may eat of the fruit of the trees of the garden: But of the fruit of the tree which is in the midst of the garden, God hath said, Ye shall not eat of it, neither shall ye touch it, lest ye die.

And the serpent said unto the woman, Ye shall not surely die: For God doth know that in the day ye eat thereof, then your eyes shall be opened, and ye shall be as gods, knowing good and evil.

And when the woman saw that the tree was good for food, and that it was pleasant to the eyes, and a tree to be desired to make one wise, she took of the fruit thereof, and did eat, and gave also unto her husband with her; and he did eat.  Gen 3: 1-6

In the second Genesis creation story, the serpent “beguiles” Eve into taking a bite of the fruit of the Tree of Knowledge and then sharing that bite with Adam. What causes her to take that bite was the promise of knowing what God knows. The serpent lied and Adam and Eve were banished from Eden.

Our founding fathers also struggled to create their version of Eden – a more perfect union where individuals had rights, everyone was free to practice whatever religion they chose, a federal government managed the affairs of the country, and states retained the rights to manage activities within their borders.

Their first attempt at that government failed because the federal government was too weak, states had too much power, and corruption at a state level rendered the confederation unworkable. They responsibly went back to the drawing board in 1787 to fix the problems they discovered in the Articles of Confederation. What they came up with is the Constitution that has served us in good stead.

Recently a different sort of corruption has run rampant through our federal government. It has brought us to a similar inflection point that the founders of this government faced in 1787.

Our federal government no longer works for the good of the people it was elected to serve. It has been “beguiled” by the money that corporations and wealthy individuals use to influence government policy.

This isn’t to say that our elected representatives are taking bribes. That’s generally not the case any more than there is any evidence the Eve bribed Adam. She simply offered to share the same information with him that the serpent shared with her. In the same way today a lobbyist offers information to a Congressman or Senator about the point of view that a particular client has on a particular policy. Those elected representatives that are receptive to that point of view receive generous donations to their re-election campaigns. This “gift” economy has thoroughly infiltrated our electoral system because campaign funds are the life blood of every member of congress.

During the early days of the new constitutional government of our founding fathers, fully 50% of incumbents either retired or lost their re-election bids. Today that number is less than 10%. The ability of incumbents to raise campaign funds is one of the reasons why so few are actually defeated.

This is a Republican problem, a Democratic problem, and most importantly a crisis in confidence that the whole country has in the ability of our government to operate in the interests of the electorate rather than the moneyed minority.

This “gift” economy is profoundly apolitical. Its only goal is to make those who have the best connections the most money.

This also is not an attack on the rich in general. It is an attack on a particular subset of the wealthy – those who secure their wealth through the manipulation of elected officials and government. Rather than invest their time and energy in creating new products or investing in new ideas, these folks focus their attention on how they can be the broker between influence and money. They earn their wealth by securing an unfair share of the government budget.

Again just to be clear, we are NOT talking about bribery. This isn’t wads of cash stored in a freezer. That sort of crude corruption is miniscule to the point of being non-existent compared with the larger forms of blatant obvious corruption that we seem willing to accept.

The first type of corruption is when the interests of the majority are ignored. Power to influence government policy is instead exercised by a minority to promote the specific interests of that minority. This often presents itself in policies that preserve the status quo during times of economic disruption, or policies which shield the minority in one way or another from the costs of government regulation.

The second is that this obvious corruption damages the trust that the majority has in the ability for the government to accomplish anything.  When the government is seen standing in the way of change or protecting the profits of those who appear to be shifting cost to the public, those in the middle of the political spectrum disengage and spend their time and energy elsewhere. That only leaves the committed extremists to represent what would otherwise be a much more moderate and thoughtful electorate.

Some examples are in order.

Whenever there is the potential of a disruptive economic event, there are winners and losers.

The microcomputer revolution is a great example. The winners were those small startup companies who created new price points for computing that eventually killed established mini and mainframe companies including IBM, at the time one of the largest technology companies in the world.

But what happens if the potential losers were able to artificially alter the economic playing field in a way that preserved their market dominance? How much would that be worth to those entrenched players? Clearly in our previous example, it would have been worth billions of dollars.

There is also the issue of externalities. Those are the costs (or benefits) that are not immediately reflected in the price of a good or service. Rather than a disruptive economic event, this is a case where a business or industry can enhance their profit by shifting some of the cost of their process to the public or recovering some of the benefit from their process from the public.

A great example from my own home town is paper production. At one time there were four paper mills operating along the River Raison which runs through my little town of Monroe, MI. The manufacturing process produced toxic chemicals including PCB’s. The paper companies did not include the cost of capturing those toxic chemicals in their manufacturing process. Instead they just dumped them in the river. Those companies are now long gone, but the mouth of the River Raisin is an EPA hot spot.

Patents are an example of a positive externality. The US patent process encourages innovation by determining who the innovators actually are and providing those innovators a legal monopoly on this idea for a limited period of time. We have determined that the positive externality of innovation justifies the additional economic cost of the legal monopoly.

It is the role of government through regulation or tax to manage externalities. In the case of positive externalities, it is often serving as a referee. In the case of negative externalities, it’s making sure those individuals and companies who produce them are held accountable. Clearly there is also an opportunity here for those in power to influence the way that government manages their particular “externality”.

If you doubt that this is an active part of today’s political landscape, let’s just look at who has spent a lot of money lobbying lately.

How about the oil and gas industry? What do you think they are concerned about? How about the fact that their industries are currently subsidized directly and indirectly to the tune of billions of dollars? Tax breaks save the industry between $40B and $100B a year. Some of those tax breaks have been in place more than 100 years. Also the oil and gas industry bears none of the negative externality of the environmental damage caused when their fuels are burned. Government estimates put that cost at $.21 for every gallon of gas that is sold.

How about ethanol? The only reason that the ethanol market exists is because of government subsidies the tune of $6B. What started out as an effort to produce alternatives to fossil fuel has been turned into a huge subsidy for agribusiness. There is also the negative externality of rising global food prices because 24% of the US corn crop now is dedicated to fuel production.

Big Pharma got a big handout during the Bush administration with Medicare Part D and got another big handout from the Obama administration when the government agreed that they would not use the huge buying power of Medicare to bargain for better prices. Think this was an accident?

Wall Street is probably one of the best examples. They were able to get restrictions on banks relaxed during the Clinton administration and then grew too big to fail in the Bush administration. They took risks that nearly collapsed the world financial system because they knew that governments would have to bail them out. Promised financial reform has failed to address this fundamental “to big” problem. Banks are bigger now than they were at the time of the last financial collapse and are still engaging in the same sorts of risky derivative investments because they know that if they cause another collapse, world governments will again have to act until all of the capital has moved from public hands into private hands.

More money in the last decade has poured into the pockets of hedge fund managers than any other single profession. Why? Because they have secured a special tax break which treats their income as earnings taxable at 15% rather than normal earnings taxable at 30+%. In fact the tax code over the past 10 years has been tweaked almost 4500 times for the benefit of these sorts of special interests who were willing to take advantage of politician’s hunger for campaign funds.

In all of these cases, big money contributions from entrenched interests warped government policies and prevented the marketplace and the public from acting in ways that would have produced a different outcome.

Both George Will and David Brooks have recently written columns in an attempt to blame this on liberalism and/or the Democratic Party, but as I’ve said before, this is not a party issue. Lawrence Lessig’s Republic Lost does a great job of describing this for what it is – an addiction on the part of our elected officials across the political spectrum to campaign cash. This addiction has grown so severe that those on Congress report spending 70% of their time raising campaign funds. Is it little wonder that when approached to support an obscure tax break for a potential big donor, that these folks welcome it as a windfall?

The problem is that this influence is so pervasive, so obvious, and so entrenched that it has become part of the fabric of how things get done in Washington. It is what is euphemistically referred to as the sausage-making process of legislation. Rather than deliberation, however, this process is sorting out how the “spoils” from this particular piece of legislation can be most effectively distributed to insure its passage. When the American people see this process on display, however, they recognize it for what it is – the method that legislators use to maximize the benefits for their patrons and by implication maximizing the rent that they can extract from these patrons in the form of campaign contributions.

So it is no wonder that we have a dysfunctional government that has lost the confidence of voters. Turns out that even deep partisan divides and dysfunction also has the curious effect of increasing campaign contributions to incumbents. So it also should not be surprising that there are virtually no incentives built into the system that would cause it to change.

Next post is what we can do to fix this.