Archive for the ‘Finance’ Category

The New Party of NO

Tuesday, December 2nd, 2014

“We need to quit, you know, kind of rattling the economy with things that are perceived by the voters as disturbing,” Mitch McConnell

A funny thing just happened.

After six years of obstruction, the Republican Party is finally in the position where they can be blamed for their own misconduct.

The result is that they are starting to change their behavior.

History
Mitch McConnell has acknowledged that he is the author of the obstructionist strategy that Republicans adopted in 2009. They were fresh off an historic loss to the nation’s first African American President. At the time, there was plenty of discussion of a post-partisan post-racial era that would recapture the golden New Deal age of Democratic dominance.

McConnell’s insight was that if Republicans refused to participate in the process of government, they could convince enough of the public that this new charismatic leader was at least partly to blame. He recognized that when an idea enjoys the support of both parties, it also receives the equivalent to the Good Housekeeping Seal of Approval from mainstream voters. Anything that passed without that seal was suspect.

Republicans rode that suspicion to a 2010 victory.

Effectively grinding government to a halt was risky. It meant that Congress would fail at even routine tasks. It created the most dysfunctional government since the Civil War with historically low approval ratings for Republicans. But it also succeeded.

Republicans intended to destroy the American legislative process, and they did. Republicans set out to exacerbate partisan tensions, and they did. Republicans hoped to make Obama less popular by making it vastly more difficult for him to get anything done, and they did. Republicans hoped to parlay public discontent into electoral victories, and they did. Republicans made a conscious decision to prevent the president from bringing the country together, and they successfully made the national chasm larger.

Obama went from a figure of hope and change to the president who hasn’t signed a major bill into law since 2010. In 2014, Democrats were running for cover and Republicans were rewarded for their strategy.

Now What
The real reward from the 2014 elections is an opportunity to govern. On closer investigation, voters did not reject Obama’s policies. Many of those policies either in direct ballot initiatives or exit polling reports are very popular.

Voters also did not endorse McConnell’s obstructionist strategy.

Quite the opposite. Voters want a government that works and they have now put Republicans in a position where they have to demonstrate that they can do a better job.

Obama again has demonstrated his acute political sense. Rather than play the traditional role of powerless executive, he realizes that he is finally free to enact large portions of his agenda. He is betting, just like Mitch McConnell did, that the voting public will reward whichever party gets the most done in the next two years, and he has a head start.

He has already taken landmark action on immigration and the environment. He has a huge Pacific Trade agreement in the works. There is also the possibility of a nuclear agreement with Iran. The economy is recovering faster than the rest of the world and the Saudi’s will keep oil prices low for the next two years to discourage competition. He can’t move on things that require appropriations like infrastructure or legislation like tax reform. But there are plenty of other areas where he can and has been active, all the while calling out the Republican majority to do their job and pass something substantive that he can sign.

The incoming Republican majority now has a choice. They can focus all of their energy on slowing Obama down, or they can take up the challenge that Obama has given them and begin passing their own legislation to address the issues that concern voters.

Both strategies have risk. In the first case, they are ignoring voters and hoping that there is still some life in the obstructionist strategy. In the latter case, they have to demonstrate that government CAN be a force for good, but only if Republicans are in charge. To accomplish that, they will need the same thing that they have withheld for the past six years from Obama – bi-partisanship.

Summary
Actions speak much louder than words. The actions of the incoming Republican majority suggest that the message of the last election was not a rejection of Obama’s policies as they have said. It was instead an opportunity to demonstrate that they can in fact govern, and a warning that they will be punished again in 2016 if they fail.

While it is interesting that John Boehner can describe a nine month spending bill as “long-term”, what it does say is that the new Republican controlled Congress will forgo holding the government hostage at least until September, 2015. That is a good sign.

Fix the Roads

Friday, September 12th, 2014

The elder Mayor Daley’s political credo was that as long as you picked up the garbage, plowed the snow, and fixed the roads, Chicago voters wouldn’t care what other political shenanigans went on. He was a practical politician in a city that famously “worked”.

The same can’t be said for the current state of Michigan. Even though Republicans control the Senate, the House, and the Governor’s mansion; they can’t seem to come up a plan to fund road reconstruction.

This is not a new problem.

The whole country went into recession in 2001 but the Michigan economy didn’t start growing again until 2009. Road funding suffered during that period of time as did funding for many public services.

Then there is the general trend of more efficient vehicles. That means the state is effectively getting less money in fuel taxes per mile driven on the roads. Michigan is not, however, the only state with that problem.

Last year’s severe winter, however, elevated Michigan’s problem to a crisis.

Experts say that many of the deteriorating roads in the state have now passed the point where they can be effectively repaired. Instead they must be completely rebuilt.

The estimated additional cost to simply keep the current situation from getting worse is somewhere around $1B.

The cost to bring the roads back to a national standard is twice that.

Part of the problem in Michigan is that we have some of the lowest tolls and fines for overweight vehicles in our part of the country. We charge overweight vehicles a $50 flat fee while all of the surrounding states charge fees based on weight, mileage, and even bridges crossed. This situation is part of the “friendly” auto manufacturing climate that has grown up in this state over decades.

Paradoxically, Michigan also has the sixth highest gas taxes in country.

But it ranks last in per capita road spending.

That’s because, at least in Michigan, the sales tax on gas goes into the general fund rather than the road fund.

While this makes funding more challenging, the basic realities remain. The state has to spend significantly more money on the roads than it has been spending. Fortunately the citizens in Michigan recognize this and overwhelmingly support increased taxes to fix the roads.

The solution is obvious. You’ve got to raise taxes on somebody to generate another $1B – $2B in revenue. So why isn’t it getting done?

In simplest terms – Ideology

The republican legislative majorities occurred during the Tea Party wave election of 2010.

They are now faced with the reality that there is no practical way to fund the roads without raising taxes. They already cut funding to schools and eliminated senior citizen state tax breaks to fund a billion dollar business tax reduction – knowing that they still had this issue to deal with.

The governor, to his credit, put a tax hike proposal on the table.

So did the Republican Senate Majority leader, who happens to be term limited and as a result can’t run for election again.

They all received the support of the Democrats, but all failed to get sufficient Republican votes to pass.

It is now so bad, that the Senate Majority Leader has admitted that he is out of ideas.

“We’ve come close to getting the votes necessary to fix this longstanding problem. But quite frankly, we’re looking at all ideas now – newer ideas,” said Richardville. “And we’re not afraid to entertain anything from anyone.”

So faced with a real crisis regarding Michigan roads and the prospect of another brutal winter that will damage even more roads beyond the point of repair, Tea Party Republicans refuse to vote for any plan that raises taxes or fees on anybody.

I can’t think of any clearer example of the folly of the ideology that has overtaken the Republican Party. There are consequences to a philosophy that believes no tax can be justified and economic growth will offset any loss of revenue. It is impossible for economic growth to generate sufficient additional tax revenue to solve this problem. The deteriorating roads are impacting economic growth today preventing the promised stimulation from low business taxes.

As Mayor Daley understood, voters expect government to provide a set of basic services. Voters are also wise enough to realize that they have to pay for these services.

Hopefully voters will recognize that this party is unable to govern because of their “no tax” philosophy and vote them out.

Magic Thinking and Personal Interest

Thursday, June 19th, 2014

We’ve talked about confirmation bias in the past and how we are all susceptible. Confirmation bias is when we accept those things that support our particular view of the world and reject those things which call that view into question. A version of this is Moral Intuition. That’s when we respond to a particular issue emotionally and then use our rational brain to create arguments supporting what we have already decided must be true because it aligns with our moral foundations.

These biases lead to Magic Thinking. That is when we invent or accept views completely unsupported by science or fact because this particular view is consistent with our world view.

Here’s an example of Magic Thinking.

God makes political choices
This is a simple one to work through. God, as described in the Bible, is all-loving, all-knowing, all-powerful, and perfect. He created us in His image and likeness which means in His eyes we are perfect too. He supplies our every need. So why would this God involve Himself in politics at all? It is akin to praying that God influence the outcome of a sporting event. Why would He bother? It is our responsibility to “work out our own salvation with fear and trembling”. Then Paul goes on to say, “For it is God which worketh in you both to will and to do of his good pleasure.” Events unfold to further God’s will, not to satisfy our own particular personal plan. That will is His desire for us to increase in grace and in our understanding of Him. So the unfolding of God’s plan is generally the path that does the most good and blesses everyone. There are no losers in God’s plan. Winning is strictly a human concept. It is Magic Thinking to expect a prayer for victory to be answered. A much more effective prayer is one that humbly seeks direction and alignment with the plan that is already in place for us.

Magic Thinking is dangerous for our democracy because it transforms important issues from facts to belief. Beliefs are highly emotional subjects. So any attempt to debate them is divisive. That’s because beliefs by their nature are personal. So when you question a belief, you are also calling into question the intelligence and honesty of the person holding that belief.

Some who seek to manipulate the public in order to advance their own agendas put a lot of effort into transforming political positions into beliefs.

Here are some other examples.

Climate Change
From a scientific perspective, there is wide agreement that the climate is changing and that the change is PRIMARILY caused by human activity. That doesn’t mean that all scientists agree on everything. There are certainly a small number of climate scientists who have dissenting views. It also doesn’t mean that the scientific models are perfect. They aren’t because our planet is a complex system. But those models continue to improve as climate scientists better understand how our planet is responding to the increased heat being retained by our atmosphere.

Magic Thinking claims that climate change is some sort of liberal conspiracy. The politics of personal interest is the best way to disprove that. Self interest in the scientific community is strongly biased toward disproving accepted theories. That’s how scientists make a name for themselves in their peer community. The scientific method REWARDS the person who is able to demonstrate that a popular theory is flawed. That reward is shared with those who can duplicate the experiments which support the new theory. In other words, a dissenting view supported by good research is always welcome in the scientific community.

There is also no proof that scientists who disagree with the generally accepted theories about climate change suffer financially. In fact, it is much the opposite. Those small number of dissenters from the majority view are richly rewarded for their positions by the powerful interests who oppose actions restricting the use of fossil fuels.

The politics of personal interest also provide a simple explanation for conservative opposition to any government actions to reduce emissions of greenhouse gases. The majority of the money financing conservative politicians who deny climate change comes from organizations linked to the Koch Brothers. Their wealth is based on fossil fuels. Their personal interests are opposed to any restrictions on the use of fossil fuels.

They have successfully deployed the same techniques originally developed by the Tobacco Industry to create doubt and confuse science and belief. If anything, it is testimony to the ethics of the scientific community that most climatologists have resisted the temptations of participating in the lucrative practice of junk science.

Free Markets
The Magic Thinking here is that free markets can regulate themselves. So any failure for free markets to operate successfully is attributed to too much government intervention rather than companies that have become too big to fail.

The reality is that while it is certainly possible for government to overreach, there is no evidence that free markets can effectively operate without regulation.

The politics of personal interest are a reliable measure of where this argument came from too. Who stands to benefit the most from a deregulation? Those entities that had been previously regulated, their management, and their stock holders. Who back the conservative politicians who promoted the agenda of deregulation? The same group.

One need look no further than China for examples of how industries behave in economies where there are no regulations. The environment is polluted. Workplaces kill workers. Products kill customers.

The Magic Thinking is on the part of individuals who have been convinced by these larger monied interests that deregulation benefits them. Just ask the people in Charleston, West Virginia where “business friendly” state regulations allowed a toxic chemical storage facility to be built upstream from their drinking water intake pipes. Magic Thinking in this case is the Libertarian view that the marketplace will punish bad corporate behavior. The facts are that at least in our version of capitalism, short term profits always trump long term unfunded liabilities (externalities).

What happens instead is that the offending company profits from their bad behavior. Those profits flow to company management and shareholders. When the externalities finally catch up with the company, the real costs of production are revealed. The cost of the damage done to either the environment, the workers, or the customers far outweighs the assets of the company. The company declares bankruptcy and taxpayers are often left holding the bill. Lawyers may make a little money attempting to recover some costs from those who profited, but most of those profits are long gone and will never be recovered.

Immigration
Just like climate change, this country is facing an undeniable demographic reality. Our population is aging. If we fail to embrace immigration, we will suffer the same bleak economic outlook that Japan has been struggling with the past decade. Combine that with the major demographic shifts in the electorate that were the foundation for Obama’s two Presidential victories and Republicans are facing a stark choice. Either embrace immigration reform or die as a relevant national party.

The Magic Thinking is that conservative Republicans can continue to be a force in the House because of gerrymandering and the lower voter turnouts during off year elections. As long as they can retain that majority, they don’t need the White House or the Senate. They can do this by suppressing the vote, preventing immigrants from becoming citizens, playing wedge politics with their base, and outspending the opposition.

The reality is that conservatives are simply going to run out angry white voters. When they do, it will be hell to pay for the tactics that they employed to hold onto the power that they had.

Abortion
The facts are the no one can say when life begins. We can recognize when something is living, but there is no agreement when something starts living.

The rest of the facts are that Roe V. Wade did not decide when life begins. It also had nothing to do with personhood. It was decided based on the rights of the mother. Her rights take precedence until the point in time that the fetus can survive independently. There is NOTHING that the current right to life movement can do to change that perspective short of a constitutional amendment.

Magic Thinking, however, suggests that the Justices make a bad decision. They simply didn’t have the facts that we have today. If we just get some different justices on the bench, the decision will get reversed. It’s not going to happen.

The politics of self interest call into immediate question why this issue continues to fester for decades after this decision was made. The people who benefit from this continued controversy are the advocacy groups (for both sides) and the politicians who are able to raise money by aligning themselves with one group or the other. It is not unlike divorce lawyers to make their money asserting the rights of their client, when they know full well that judges are loath to give one parent sole custody of the children, support an inequitable property split, limit child support, or these days provide alimony. If both parties in a divorce were told what the likely settlement would be, they would start to work out the details on their own rather than invest money in lawyers attempting to “win”. The same is true here. No one will win. It will instead be a trench war that will only stop when the next generation refuses to continue to fund special interest groups.

The Poor
Poverty is a complicated subject. The facts are that programs like Social Security and Medicaid have dramatically reduced poverty among the elderly. We already dug into the economic costs of poverty and the benefits to reducing it.

The Magic Thinking, however, is that poverty is the fault of the poor. They must have made a bad decision somewhere in their lives for them to end up in the position that they now find themselves. As a result, any attempt to help them escape poverty does nothing to resolve the more fundamental character weakness that got them in this condition to begin with.

Ayn Rand has written the “Bible” for this particular form of Magic Thinking. The challenge is that those who advocate this gospel of “personal responsibility” and “greed is good” are also dealing in belief rather than fact.

Conclusion
Magic Thinking masks the politics of personal interest. Those special interests are well versed in the tactics required to transform political points of view into beliefs. Once a political position becomes part of an individuals belief system, they are no longer open to a fact based discussion. Those who embrace these beliefs will only accept the facts that support their beliefs. They will reject the facts that call those beliefs into question. They will defend their positions using the stock arguments of Moral Intuitionism. Those include media bias, conspiracy theories, flawed polling, and junk science.

The result is an increasingly polarized electorate, gridlocked government, and crumbling economic and physical infrastructure. The only times that we are able to make any changes are during the first two years of any new administration when the majority party can actually pass parts of their agenda by imposing their will on the minority.

This is no way to run a country.

The Crime of Poverty

Sunday, April 27th, 2014

There was a rich man who dressed in purple garments and fine linen and dined sumptuously each day. And lying at his door was a poor man named Lazarus, covered with sores, who would gladly have eaten his fill of the scraps that fell from the rich man’s table. Dogs even used to come and lick his sores. When the poor man died, he was carried away by angels to the bosom of Abraham. The rich man also died and was buried, and from the netherworld, where he was in torment, he raised his eyes and saw Abraham far off and Lazarus at his side. Luke 16:19-23

There was a cost to income inequality even in Jesus time. This cautionary tale, however, seems to have been forgotten today, just as it was over 2000 years ago.

Income inequality is real and is larger now than in any other time in our industrialized history.

In practical terms, this is the result of government policies which favor the rich.

We’ve already discussed ways that income inequality can be reversed – primarily by reversing the government policies which caused its rise in the first place.

Let’s look for a moment at the other end of the spectrum – the real costs of poverty.

The direct result of concentrating more of the nation’s income in the hands of the wealthy is that less money is going into the hands of the poor.

Less money in the hands of the poor has caused an increase in crime, specifically homicides and robbery in poor neighborhoods. In the 2002 report entitled “Inequality and Violent Crime”, the World Bank says,

Income inequality … has a positive and significant effect on homicide rates … the results for robberies are similar to those for homicides.

AND

…when poverty falls … either because income growth rises or the distribution of income improves, then crimes rates tend to fall.

Seems a simple conclusion – poverty and crime are connected.

But the conservative response based on the “fairness” moral foundation, is that the poor are responsible for their own condition because of bad choices. If they break the law they should go to jail. The reality, however, is that our prisons are now overcrowded with people convicted mostly of non-violent minor drug crimes.

The United States has 25% of the world’s prisoners but only 5% of the world’s population. Incarceration rates over the last 20 years have risen while crime rates have dropped 40%. The direct taxpayer cost is $64B/year. The indirect costs are a generation of primarily minority men who are absent from their families and have difficulty finding work when they have served their time. That’s because, though drug use has no racial preference, 75% of the people in prison for non-violent drug offenses are black.

As a precursor to the rest of this discussion. It costs between $30K and $60K a year to house, feed, and guard each prisoner in our prison population. Roughly 50% of those released from prison will return within three years.

Criminologists have found that the single most effective tool to reduce recidivism is education. If we took the money that we are currently spending to keep non-violent offenders behind bars and spent it instead to provide support for them while they learned the skills necessary to secure a living-wage job, everyone benefits. Everyone, that is, except the corporations who profit from the prison industry.

The prison industry is only one example of the economic forces that are arrayed against the poor. The poor have no control over the economic bias that exists in this country. Their opportunity to change their circumstances is dramatically limited by violence, poor nutrition, poor schools, poor transportation, limited low wage jobs, single parent families, the high cost of child care, and all of the companies who have figured out how to profit from these conditions.

The conservative response is that we shouldn’t “reward” the poor for making bad decisions. Any attempt to level the playing field is regarded by many conservatives as “enabling” poverty rather than empowering the poor. The result is government programs “designed” to encourage work which actually punish the poor for having children. Support, for example, is tied to the number of children in the house rather than adults. But that support does not include the cost of child care and support is reduced by the amount of money earned. So many families find that when the costs of childcare are factored in, they can’t afford to work and also put food on the table. The supports are also not enough to allow one adult to work and the other to stay home with the children. The choice for many single mothers is to kick fathers, who may not be able to find a job because of past criminal records, out to support themselves while they stay home with the kids at least until they are old enough to go to school.

These programs could certainly be improved, But let’s look for just a moment at a more radical solution. What would it cost us as a country to simply eliminate poverty?

It is an intriguing idea. Just provide everyone sufficient support that they are no longer encumbered by the basic issues of survival in our society. Every adult, regardless of their background, is guaranteed a minimum stipend sufficient to support themselves.

In a September 2013 article for the American Prospect, Matt Bruenig stated:

Eradicating or dramatically cutting poverty is not the deeply complicated intractable problem people make it out to be. The dollars we are talking about are minuscule up against the size of our economy.

It would take only 1 percent of GDP, or a fourth of what we spend on defense every year, to lift every American below the poverty line up above it… In 2012, the number was $175.3 billion. That is how many dollars it would take to bring every person in the United States up to the poverty line.

What would happen if everyone in this country suddenly had enough to eat, had a safe place to live, and could afford to work and raise a family?

Violent crime rates would fall. That would save on what we currently invest in medical services, law enforcement, prison systems, and other civic support systems.

Corporations win because without poverty, Americans have more purchasing power. Democrats win because income inequality is credibly addressed. Republicans win due to a combination of reduced government costs and credible fiscal responsibility at all levels of income.

It is a simple, pay me now or pay me later, discussion. The challenge with this discussion, however, is that it touches the conservative moral foundation of “fairness”. Somebody getting something that they didn’t deserve.

Therein lies the fundamental challenge of our political age.

Conservatives believe that poverty in and of itself is a crime. Those who find themselves in poverty have no one but themselves to blame. The hardships associated with poverty are both a just punishment for bad choices as well as the disincentive that the poor need to change their circumstance.

If anyone doubts this, we need look no further than those who defended Mitt Romney after his famous “47%” speech.

In the rest of the Bible story, the rich man, now in eternal torment, begged Abraham that if he couldn’t be saved, at least warn his five brothers who still had time to mend their ways. Sending someone to them from beyond the grave would certainly do the trick.

He said, ‘Then I beg you, father, send him to my father’s house, for I have five brothers, so that he may warn them, lest they too come to this place of torment.’ Luke 16:27,28.

Abraham replied that Moses and the prophets HAVE been warning people.

Then Abraham said, ‘If they will not listen to Moses and the prophets, neither will they be persuaded if someone should rise from the dead.’ Luke 16:31

What we know now is that God did ALSO send someone who DID return from beyond the grave and DID provide the same warning.

Then shall they also answer him, saying, Lord, when saw we thee an hungered, or athirst, or a stranger, or naked, or sick, or in prison, and did not minister unto thee? Then shall he answer them, saying, Verily I say unto you, Inasmuch as ye did it not to one of the least of these, ye did it not to me. And these shall go away into everlasting punishment: but the righteous into life eternal. Matthew 25:44-46

And you know what? Abraham was right, the wealthy and the politicians and voters who support them have not listened to Jesus either.

The choice is really simple.

You can defend the position that poverty is the incentive that the poor need to alter their circumstances – but you do so at great peril to your own salvation.

OR

You can follow Jesus commands, embrace the poor, and generously tend to their needs. Great rewards have been promised those who follow this path.

Economic Costs of Income Inequality

Saturday, January 25th, 2014

As a quick summary, the huge gap between the rich and poor is a fairly recent phenomena driven by changes in government policy that started with Ronald Reagan. We are now in uncharted territory. We have never had the level of income inequality that we are currently experiencing. There has been a huge transfer of wealth from poor and middle class families with no end in sight. Poor and middle class wages over the past 15 years have gone down while the wages of the wealthy have increased.

I will do my best to stay away from discussions of morality in this post and focus on how this affects our economy.

Narrow Spending Base

A majority of economists surveyed by the AP in December felt the current level of income inequality was unhealthy.

“What you want is a broader spending base,” said Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

That’s because discretionary spending by the wealthy tracks the stock market. When the market is up, they spend. When the market is down they don’t. This makes consumer spending much more volatile than it has been in decades past. This volatility leads to slower economic growth because businesses are less willing to invest as demand increases for fear that the demand spike is only temporary.

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

Scott Brown agrees that the current levels of income inequality are slowing economic growth, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

Warped Economy

It isn’t only that the spending base has narrowed.

The way that the wealthy spend their money is different from the way that middle and lower classes consume. That difference tends to increase the concentration of wealth at the top of the income range rather than spread it throughout the whole economy.

Here’s how that works.

Because the wealthy have already satisfied their basic needs, they spend their discretionary income on goods whose value stems from the talent of other top earners. Let me say that again in a slightly different way. The wealthy spend their discretionary income on goods and services that only they can afford. The producers of those goods and services are able to charge a premium for their services because they produce the best of whatever it is that differentiates them for everyone else. As a result, these “best of breed” producers also become wealthy.

Here’s how the NYT describes it.

Wealthy people don’t choose just any architects, artists, lawyers, plastic surgeons, heart specialists or cosmetic dentists. They seek out the best, and the most expensive, practitioners in each category. The information revolution has greatly increased their ability to find those practitioners and transact with them. So as the rich get richer, the talented people they patronize get richer, too. Their spending, in turn, increases the incomes of other elite practitioners, and so on.

Technology has also made the best performers far richer than they could have been even a decade ago. That’s because the best musicians, athletes, and artists can now reach audiences of virtually unlimited size. Artisans can ship their products anywhere in the world. Which allows them to dominate their markets in ways never imagined possible.

Education markets are warped because the wealthy can afford the tutors, camps, travel, and exclusive prep schools that provide their children a distinct advantage in the competition for slots at the world’s best colleges and universities. Hunter Prep School in NYC was created to provide a public alternative to private prep schools for NYC children. In the 70’s the demographics of Hunter pretty much reflected the demographics of NYC. Now almost 80% of the Hunter students are children of alums. Their parents DID succeed because their Hunter education got them into Ivy League schools which turned into lucrative jobs on Wall Street. They were able to send their children to exclusive elementary schools and after school programs to prepare them for the Hunter entrance exam. It’s a perfectly understandable response, but that response is effectively destroying the meritocracy on which Hunter was originally based. In its place is an oligarchy, which is what Hunter was supposed to weaken.

Finally income inequality is warping the political process. The wealthy have more access to legislators than the middle class or the poor. The 2012 Republican Primary is a great example. Two of the three candidates in the final run for the nomination (Santorum and Gingrich) received virtually all of their funding from just one person. Gingrich from Sheldon Adelson. Santorum from Foster Friess. Not surprisingly, Gingrich’s platform reflected Adelson’s strong support for Isreal. Santorum’s platform reflected Friess’ conservative Christian views.

Summary

Income inequality is real.

It has accelerated over the past 30 years to the point that the wealthy represent the only group enjoying an increasing income share. Everyone else is financing that increase with their own decreasing shares.

Concentrating so much purchasing power in the hands of such a small number of people weakens our economy and slows economic growth.

It warps the consumer economy by creating a feedback loop where the rich only spend their money with organizations and individuals who are also rich. This isn’t necessarily the overt intent of the rich, but it is the practical outcome of their rigging the system for their own benefit.

It warps our educational system by limiting access to the best schools to those who parents can afford to send them to the best elementary and prep schools. The wealthy aren’t any smarter than anyone else. They are just way better educated, financed, and connected.

It warps our political process by making the votes of the wealthy more valuable that the votes of everyone else. Those votes have supported a system of lower taxes and reduced regulation which became the foundation for their success.

Next up, a brief analysis of how moral foundations also warp our view of the rich. Then a discussion of the economic value of a more level playing field and then finally what government can do to encourage a more level playing field.

Income Inequality Facts

Monday, January 13th, 2014

I’ve been looking for a way into this whole discussion of income inequality.

The challenge, based on what I’ve already discussed regarding liberal and conservative moral foundations, is that it can’t be solely a fact-based discussion.

That’s because the fundamental reason why there is the largest gap between the rich and poor in our history is BECAUSE conservatives believe in the concept of a Utopian Free Market. More importantly, they believe that it is the solution to ANY economic or political challenge we face in this country.

Too many people unemployed? Cut long term unemployment benefits and the unemployed will be forced to find a job or starve. This satisfies the moral “cheating” outrage conservative feel when it seems somebody is getting something they don’t deserve. Conservatives feel comfortable eliminating unemployment benefits because they believe that the Utopian Free Market will automatically create jobs because supply will drive down wages. Everyone who wants a job will be able to find one in this system. The only reason why people are unemployed is because they are lazy or stupid, in which case it’s their own fault if they starve.

But I’m putting the cart before the horse. There will be plenty of time to examine the emotional arguments about things like this.

The first thing we need to establish are the facts about economic inequality. Then we can discuss the causes and remedies.

The facts are best displayed in these graphs. They show how income was distributed between rich and poor from when we first started to collect income tax in 1917 up through the latest data available in this study, 2008. All of this data comes from a study done by Cal Berkeley economist, Emmanual Saaz.

These graphs are wonderful snap shots from an interactive graph posted by the Economic Policy Institute. Feel free to go there yourself and move the start and end points to see how income over that period was distributed.

The math on the first graph looks OK. Income gains over 90 years are basically split between the top 10% and the bottom 90%. That means that the top 10% got 5x more money than their demographics would command.

income-inequality-1917-2008

But the graph itself isn’t flat. If you look at the flat part of the graph from 1917 – 1981, the top 10% got only 31% of the income growth over that period of time. 69% of that growth went to the bottom 90%. That distribution was pretty consistent over that whole period. After 1981, this began to change dramatically.

income-inequality-1917-1981

From 1981 to 2008 the top 10% got 96% of the income gains generated by the economy. The bottom 90% got 4%.

income-inequality-1981-2008

Now here’s the real story, and it only tracks to 2008. The last six years it has only accelerated.

From 1997 – 2008 ALL of the income growth went to the top 10%. The incomes of everyone else DECLINED.

income-inequality-1997-2008

What is so important about 1981? That’s when Ronald Reagan and “voodoo” economics showed up. That’s when this whole unregulated low tax conservative economic experiment started. 30 years later, we are witness to the outcome. A massive transfer of capital from the middle class and the poor to the wealthy.

Middle class wages have been more or less flat for 45 years, but costs continue to go up. The result is that all except the top 10% are becoming poorer even though they are working hard and playing by the rules.

There are likely a whole list of causes besides the economic theories typified by de-regulation, low taxes on the rich, and erosion of labor rights. The issue is not cause, at this point, but simply the fact that this condition exists.

Next up, the economic perils of income inequality.

The Road Not Taken

Friday, December 6th, 2013

We’ve just gone through how the Great Recession caused a predictable populist uprising and how that uprising was hijacked by conservative Republicans and became the Tea Party.

In the interests of full disclosure, the Democrats had something to do with this too.

Here’s a short summary of how the Democrats missed the opportunity of a lifetime to make the case for government as the protector of the working man and the middle class. By failing to engage in a vigorous defense of the New Deal, Democrats lost an opportunity to re-educate another generation of voters on why free markets can’t be trusted to regulate themselves.

Background

After 8 years of Bush’s version of trickle-down economics, two wars, Halliburton, Black Water, Abu Grebe, an unfunded expansion of Medicare, Enron, torture, wiretapping, outing of CIA agents, a politically motivated purge of the justice department, Katrina, the housing bubble, and the inevitable burst of that bubble, ballooning deficits, dramatic job loss, the resultant rash of foreclosures, the collapse of the housing market, and the collapse of the domestic auto industry; the country was ready for a change. The collapse of the global financial markets only put an exclamation point to the cry for CHANGE!

The country selected a young bright Ivy League-educated African American who promised change. He promised to end the wars in Iraq and Afghanistan. He promised to expand healthcare. He promised immigration reform. He promised a new era of political cooperation and focus on rebuilding the middle class. More than anything else, he promised that a vote for him was a vote AGAINST everything that the Bush administration stood for. Shortly after his election, however, he was handed a global financial crisis.

Bad Optics

His reaction was to retain many of the people that Bush had put in place to deal with the crisis and pass the basic recovery package that had been crafted by that team. From a financial point of view, you can’t argue with the results. The plan worked. The global financial system stabilized. Bad financial institutions were consumed by good ones. The domestic auto industry was restructured. Five years later the stock market is setting records and job growth is finally hitting numbers that will reliably reduce unemployment.

The optics, however, were bad. You had Larry Summers and Tim Geithner leading the charge. Summers was the guy under Clinton who had championed the repeal of the Depression-era Glass-Steagall law which prohibited financial institutions from mixing securities trading and FDIC-insured banking. Geithner was a disciple of Alan Greenspan who had famously believed that the captains of Wall Street could regulate themselves. The focus of this team was on restoring confidence in the markets.

The collapse of the mortgage derivative market had left many financial institutions holding assets of questionable value as collateral for loans that they weren’t sure were collectible. In self-defense most banks stopped lending and started hoarding cash to protect against having their own loans called. That caused the economy to essentially seize-up as we transformed overnight from a credit economy to a cash economy. Getting the credit economy going again while avoiding the panic bank runs we’ve seen in the past was a masterful accomplishment.

The team completely ignored the need to also restore voters’ confidence. This opened the door for movement conservatism to put their own spin on events.

The AIG Moment

The stage was set when the news broke that AIG planned to pay out $165M in exec bonuses, and company-wide bonuses that could exceed $1.2B. This after the government provided AIG a huge bailout (a credit line from the Fed and Treasury of up to $182B). The President and Congress expressed outrage, but the die was already cast.

It didn’t matter that the AIG bailout turned out to be a ridiculously good deal for taxpayers netting almost $23B dollars in two years.

It also didn’t matter that AIG was the lynch-pin in the financial structure supporting the derivative trading market that was at the core of this collapse. If AIG was allowed to collapse, the financial meltdown could have easily become a depression. That’s because virtually every financial institution holding mortgage-backed derivatives in their portfolio also had an insurance policy from AIG to hedge against the performance of those derivatives. If AIG failed to pay their insurance claims, ALL of those institutions would be forced to unravel the value of their holdings to determine what they were worth. In the meantime, no one would lend to them; and they wouldn’t lend to anyone else.

While the Obama team of financial all-stars worked feverishly behind the scenes to keep the fragile interconnected network of international financial institutions from collapsing, the public saw something very different. They didn’t see all of the deals and personal promises required to keep the all the leaks in the dike from becoming a flood that would drown the world. Instead they saw what appeared to be obvious evidence that those who had caused the financial meltdown had successfully gamed the bailout too. They saw a system that was still rigged to benefit the wealthy at the expense of everyone else.

What mattered to them was not that President Obama and his team of Wall Street insiders had masterfully kept the whole system afloat by propping up AIG. They saw a “crony” deal that ALLOWED AIG to reward themselves when they should have been punished.

The right were able to capture this sense of anger with “let it burn” irrationalism.

The Democrats were caught flat footed because they had lost their ability to speak to or empathize with the working man.

President Obama in Audacity of Hope describes the “modern” Democrats that he has met on the fund-raising trail.

As a rule they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing . . . in exchange for their checks. But they reflected, almost uniformly, the perspectives of their class. . . . They believed in the free market and an educational meritocracy. . . . They had no patience with protectionism, found unions troublesome and were not particularly sympathetic to those whose lives were upended by the movements of global capital. Most were adamantly pro-choice and anti-gun and were vaguely suspicious of deep religious sentiment.

The financial meltdown frightened these people too, but they did not lose their jobs or their homes. They had a deep and sophisticated understanding of the financial markets because they are generally well educated and well off. They knew why you couldn’t simply “let it burn”. They could probably even empathize with those who were losing their jobs and their homes, but they could not appreciate the abject terror, vulnerability, and rage that comes from having your future stolen. These Democrats simply could not understand why so many people were obsessed with finding and punishing the criminals when first priority had to be stabilizing the financial system.

Herbert Hoover or FDR

History has lost track of the fact that Herbert Hoover used bailouts extensively to try to jump start the economy after the 1929 stock market crash. They were massively unpopular because of blatant cronyism. FDR won the presidency in 1932 because he campaigned against them. It was FDR’s genius that he understood the plight of the working man even though he himself never experienced it. He was able to gain their confidence because he laid the blame for the Great Depression squarely on the shoulders of greedy business men and the unregulated free market.

His actions supported his words.

He used government to get money flowing again rather than working through financial institutions. He closed corrupt banks and regulated the rest. He created new investment regulations and imposed wage and cost controls. He supported the growth of unions. When that wasn’t enough to put everyone back to work, he printed money and hired the unemployed himself to build roads, develop parks, write books, record songs, and create public art. He was able to create the grand New Deal bargain between business and the workers because workers believed in him.

Instead, Obama and his team trusted their own expertise and intelligence. Their message to the public was that we’ve got the best economic minds in the world engaged in the managing this recovery. The recovery plan is based on solid Keynesian economic principles, so trust us. It’s going to work. It may take some time, but it’s going to work.

They were right. It did work.

They were wrong in assuming that people who were terrified, would feel better knowing that smart people were in charge. For many it was exactly the opposite.

What people were hungry for was a leader who not only told them that everything was going to be OK, but who also demonstrated by his actions that he understood their righteous wrath. They needed someone to take out after Wall Street, punish those who misbehaved, regulate the industries that couldn’t regulate themselves, and place the blame squarely on the failed philosophy of unregulated free markets. Democrats should have been promoting the role that government plays in times like this. Instead they found themselves protecting Wall Street from a larger collapse that could have plunged the world into depression. The recovery plan required cooperation from the insiders who helped cause the problem. The Obama administration secured that cooperation by reassuring insiders that the government’s primary concern was recovery rather than prosecution.

Instead of FDR, Obama became Hoover.

Elites

Movement conservatism took advantage of the opportunity that they helped create. Just as a segment of the population in the 1930’s turned to communism as the utopian alternative to capitalism, movement conservatism began promoting utopian market populism as the cure of our economic ills today. Market populism is the answer for everything and a potent defense against relativism. Whatever shortcoming conservatives confront, whether it be math, or science, or political reality can be explained away through the fiction of a “Randian” free economy.

The challenge that this presents for Democrats is, just as Republicans are becoming more fictional and conservative, Democrats have become more professional and pragmatic. Democrats live in the world of facts. Republicans live in the world of ideology. The world of ideology will trump the world of facts every day because ideology is about religion. You can’t argue religion.

The emergence of the cult of utopian market populism also made it much easier for Democrats to dismiss right wing zealotry as hysterical and illogical. That’s because Democrats themselves were becoming the equivalent of political atheists. Democratic political positions were grounded in fact rather than belief. Democrats trust and self-identify with academia and subject matter experts because that’s where facts come from.

Republicans identify with the conservative meme of revolting against the ruling elite class who are imposing an ideology (the world of facts) on them. They see themselves as heroic revolutionaries storming the barricades of conventional wisdom.

It doesn’t matter that overturning the status quo, as represented by the scientific method, is a the heart of virtually all academic research.

It also doesn’t matter that holding up the free market as the example of a revolt against the ruling class is completely backwards. The free market CREATES the ruling class. The ruling class use their wealth and power to warp the free market and preserve their position. The dramatic growth in a fabulously wealthy ruling class in this country is only the most obvious result of our willingness to give them free reign. The fact that Republicans chose a poster child for the ruling class as their nominee in 2012 was no accident. The religion of the right, however, tramples these facts with the free market fantasy that EVERY man could achieve the wealth of Mitt Romney if the market were simply allowed to function without limit.

What matters to movement conservatives is that there is an elite in this country who dare to question their religious beliefs in a free market utopia. They ASSOCIATE this elitism with academia. In a fit of moral intuitionism, they reject science and research that contradicts their views as part of a vast conspiracy to hide the truth and brainwash the unconverted. They attribute cronyism and self-serving classism to any political influence gained by those who live a fact-based life. They infer from that that the great ills in the economy today flow from the attempts by the elite to control and manipulate the otherwise pure and dependable free market to their own ends. These elites engage in this behavior because they fear what would happen to them in a truly free market utopia.

Healthcare Reform

Obama made a fateful choice when he decided to pivot from financial recovery to healthcare reform. Rather than engage in a battle to promote fundamental Democratic beliefs about the role of government to protect the little guy against the excesses of the market, Obama chose to fulfill his campaign promise of universal healthcare. Unfortunately this played right into the hands of movement conservatism. The government that was already guilty of cronyism on a massive scale, and racking up debt of historic proportion in the process, was now planning to take over the largest segment of the economy. What started as a populist backlash to the financial meltdown turned into a political movement called the Tea Party. That movement recaptured the House in 2010.

If healthcare reform does come close to its enrollment targets, significantly reduce the rolls of the uninsured, and sign up enough young healthy people to support its business model – the politics in this country will change again.

That political change will weaken Republicans, strengthen Democrats, and relegate the Tea Party into a fringe opposition group. That’s because a majority of voters will realize that just as the Republicans were wrong about the free market’s ability to regulate itself, they were wrong about healthcare reform. It did not kill people. It did not destroy jobs. It did not add to the debt. The Republicans, because they have invested so much into Obamacare opposition, will get punished at the polls until they find another issue. The Tea Party because they are likely to continue in their obsessive opposition to a program that they are not going to be able to repeal, will lose their ability to influence the Republican Party.

While the Tea Party figures out how to move forward, Republicans and Democrats will engage in the next big ideological fight. That will be the unfinished business from Obama’s first term – Economic Justice and Income Inequality.

Villain of Choice

Saturday, November 30th, 2013

Let no man deceive you by any means: II Thessalonians 2:3

This is the final installment in our attempt to answer how the biggest financial collapse since the Great Depression fueled by decades of financial deregulation turned into a full-throated defense by the Tea Party of the free market economy.

Capitalism

Capitalism can be a wonderful economic system. One of its weaknesses, however, is the boom and bust cycle. If you look at the economic history of this country, we have had boom and bust cycles since the beginning of our democracy. Some blame the cycles on the Fed, but the modern Federal Reserve Banking system was created in 1913 in response to the Financial Panic of 1907. Before the creation of the Fed, the country experienced 25 depressions. Since then, we’ve only had one. So the Fed must be doing something right. We DO continue to experience periods of expansion and contraction (recession) – 40 in all since 1940. Some recessions are mild and some, like the financial collapse of 2008, are catastrophic.

These cyclic economic periods are primarily triggered by private sector investment. As the economy grows there are natural pressures on prices, wages, and capital. Those inevitably lead to inflation and rising interest rates as demand exceeds supply. That increases the costs to expand as well as making it more expensive for consumers and businesses to purchase goods. As demand and expansion slow in reaction to increased prices, investor and consumer confidence wanes until expansion stops. Businesses cut back, individuals spend less and contraction begins. Businesses reduce their labor force. Prices, labor costs, and interest rates come down as supply exceeds demand. The contraction continues until costs become so low that new investment and a new cycle of growth starts. Recessions driven by contraction in the financial sector take longer to recover from because access to capital is a key factor in our investment driven economy.

Democracy and Capitalism

The problem that capitalism presents for a Democracy is that these cycles of expansion and contraction in an unregulated market can be extreme. Expansions can turn into economic bubbles. Economic bubbles are highly speculative periods where expansion is being driven by trading activity rather than production or consumption. When these bubbles inevitably burst, as was the case in the housing bubble, many innocent people can find themselves out of a job for no fault of their own. There is also an understandable outrage that the unregulated and sometimes illegal activities of a few greedy speculators end up hurting the much larger number of hard working people who WERE playing by the rules.

The normal reaction in a democracy is that the injured demand that the government do a better job preventing the sorts of excesses that lead to these severe economic downturns. The New Deal is a perfect example of this trade off. In return for preserving the basic tenants of capitalism after it ran amok in the 1920’s, FDR promised workers a social safety net. He also created a set of banking and investment regulations that until the 2000’s effectively prevented speculative bubbles to grow to a size that would threaten the economy.

The Great Recession

The financial collapse of 2008 was the result of a deregulated financial industry that created a bubble in the mortgage market. Financial deregulation started with Reagan, but continued in every subsequent administration through Bush II.

The 2008 financial collapse was broad, deep, and terrifying. The expected response from those who lost their jobs and their homes would have been a populist uprising against the free market economy in general and the deregulated financial industry in particular. Those individual traders whose irresponsible actions caused banks to stop lending would also have been in the line of fire. If it had followed the arc of the Great Depression, there would have been universal agreement that the free market was not able to regulate itself. People would have looked to government to step in and make sure something like this never happened again. Even Alan Greenspan who famously ignored all of the warning signs of the impending collapse because of his belief in the self-regulating forces of the free market, had to apologize to the American people.

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform.

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry A. Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Mr. Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

The populist outrage did occur. It began with the election of Barack Obama, but it got hijacked by movement conservatism and became the Tea Party.

The Wrong Villain

In the 2008 Presidential election, the Republican Party and the whole politics of free markets and deregulation were rejected by the voting public. The Republicans were famously the party that drove the economy into the ditch and had the temerity to ask for another turn behind the wheel. There were many who said that it would take decades for the party to earn back the trust of the voters. It was so bad that even the reliable Southern Strategy and wedge politics failed to prevent an African American liberal from Illinois from winning.

In the aftermath, the Republicans had a choice. They could move more to the center and remake themselves as a more moderate party, or they could double down on the methods that had worked so well for them in the past and become even more conservative.

They chose to double down on their old strategies. Minority leader Mitch McConnell said that his goal was to make Barack Obama a one term President. This appealed to his base on both racial and political terms.

Republicans thought they could use the government’s recovery legislation to accomplish that goal but they also needed someone to blame. They found the villain in all of those victims who lost their homes.

The famous Rick Santelli rant from the floor of the Chicago Board and Trade was the spark that lit this particular fire. He didn’t mention the mega-billion dollar entities that had conspired with government to rig the system in their favor at the expense of ordinary Americans. Instead the Santelli rant was directed against a (quite modest) government program to help distressed mortgage holders and against the so-called “losers” who couldn’t pay their mortgages. In Santelli’s self-serving logic, the traders on the floor who helped create this mess were the real victims.

This was a triumph of the old Big Tobacco PR tactic and the tried and true “Willie Horton” strategy. When your side is unpopular seek to redirect public ire toward other villains. Reagan’s fictitious welfare queens reappeared as poor black people who were sold “liar” loans.

Even though the TARP and other financial recovery methods were originally crafted by the Bush White House, Obama was held responsible because he implemented these policies in the first few months following his election.

Even though it was unscrupulous predatory mortgage lenders like Morgan Stanley who broke the law, lied to their customers, and recruited people who clearly could not afford mortgages with the promise of home ownership – conservative ire was redirected. It was focused squarely on greedy neighbors, buying too much house; or on the liberal state, which according to myth forced banks to hand out bad loans to poor people; or on society generally for tolerating debt at every level.

As Thomas Franks summarized:

The (conservative) movement succeeded by capturing completely the one part of the story that was very clear: the bank bailouts, which instantly eclipsed the financial crisis proper when they happened and which immediately got people out of their armchairs sputtering with rage. The bailouts were not confusing. They were very clearly the deed of the federal government, apparently being operated by cronies of Wall Street. It was a spectacle of almost unbelievable corruption, the kind of thing that crushes the faith of a nation. What the public craved at that moment was a form of idealism that would allow us to scream a convincing “no” at the whole thing, and the free-market people—spotting the opportunity like any good entrepreneur—immediately stepped in and delivered exactly such an idealism. (Because, in a pure free-market system, they said, government would never rescue or bail out anyone. The market would decide who prospered and who failed.)

It didn’t matter that the bailout strategy actually worked. The global financial market melt-down did not become a depression. Trust WAS restored relatively quickly. The insolvent institutions were merged with the remaining stable institutions. The domestic auto industry was saved. The restructured companies led the country back out of recession. Five years later the stock market is hitting record highs. The government has fully divested itself of the remaining GM stock. The net cost to the taxpayers was a remarkably low $60B. In comparison, Reagan’s S&L crisis which was significantly less damaging to the economy cost six times as much to clean up.

But it didn’t matter. The Tea Party rage over the financial bailouts spilled over into deep opposition to the Affordable Care Act and the debt that the country was piling up as a result of high unemployment, low taxes, two wars, and an unfunded expansion of Medicare.

It also didn’t matter that the real financial risk was the 3x GDP growth rate in the cost of healthcare. The Affordable Care Act was the only option on the table to reduce this rate of growth and as a result reduce our potential long term unfunded liabilities. The Tea Party viewed it as another irresponsible expansion of government even though it actually saved $109B in its first decade.

It also didn’t matter that this administration committed to ending the wars that were putting a huge strain on our military and on the budget.

The Tea Party was focused on the poor and big government as the villains of the financial meltdown. The fantasy of a utopian free market promised equity, justice, and prosperity for those who played by the rules. The fact that we weren’t seeing this utopia emerge was the fault of government. Worse yet, our exploding debt was at least in part due to the burden that the poor and unemployed were placing on the social safety net.

Tea Party Irony

What should have started out as a populist backlash to the failure of our decades-long experiment in free market deregulation was transformed into a protest movement demanding MORE of the free market that caused the problem and even LESS of the government that is the only solution.

Rather than complain that the government failed to keep the FDR’s promise to workers, this protest movement rejected whole premise. It wasn’t that the social contract the FDR made with the prosperous to support a social safety net wasn’t working. It was that the prosperous were able to convince those who benefited most from the social safety net, that it wasn’t fair to continue to expect the “winners” in our economy to pay for it.

Movement conservatism was able to convince small business owners that they were the backbone of a sort of free market populism instead of in a life and death struggle with larger and better funded competitors. In this conservative scenario, it’s the heroic small business person pitted against the parasitic elites who acquire their power through education or unfair government influence. It was the elites that were making it difficult for all businesses, large and small, to enjoy the fruits of their labors. The practical effects of this free-market idealism, however, is to bolster the power of big business. Big business is the real beneficiary of small business’s long war on organized labor and government regulation. It is big business that regularly feeds at the trough of government contracts, subsidies, and tax breaks that the rest of us including small business pay for. It is also big business that seeks to create monopolies which make it impossible for small business to compete.

The ultimate irony is that the Tea Party’s drive for fiscal responsibility has hurt the very people who support that movement. The states with the greatest concentration of Tea Party participation are the states that get the most money from federal programs. These are the states that have the highest numbers of people receiving Social Security and Medicare. These are the states with the largest amounts of people dependent on defense spending. These are the states that send the least amount of federal taxes to Washington and get the most amount of money coming back into their economies. These are the states where according to Thomas Frank, voters to struck a blow against elitism and received in return a social order in which wealth is more concentrated than ever before in our lifetimes, in which workers have been stripped of power and CEOs are rewarded in a manner beyond imagining.

The ultimate irony is that in the Tea Party’s eyes, CEO’s are the heroes and government is the villain. The reality is that the majority of the unprecedented growth in wealth that has occurred over the last 25 years has been in CEO pay. That pay came from a direct transfer of wealth from working people into CEO salaries combined with historically low taxes on the wealthiest people in this country. Those statistics are not an accident. This is the direct result of government policy. Government has in fact done exactly what the Tea Party has requested. It allowed the free market to operate without limit. That free market methodically suppressed middle class wage growth even though productivity, working hours, and profits hit all time highs. Under free market rules, CEO’s decided to keep all of those gains for themselves because they could.

Summary

The Tea Party is the construct of the same political operatives and tactics that gave us decades of tobacco company products that both those companies and the government knew were addictive and deadly. It is the same political operatives who promised from Reagan to Bush that showering tax breaks on the rich would result in economic gains for everyone else.

The Tea Party professes a deeply flawed looking-glass ideology that is ultimately the product of big business self-interest. That agenda is a continuation of the same unregulated free market capitalism that caused the Great Recession, unprecedented growth in wealth, and the largest income inequality in our history.

This agenda includes policies which have lead to an economy where only the very rich prosper, yet those supporting the Tea Party continue to insist that government is the problem.

Government is not the problem

Government is the solution. It is the only power left in this economy to oppose the influence of corporations and the wealthy. You don’t get to vote for how a corporation operates. Yet the agenda of the Tea Party trusts these corporations more than the only organization that they CAN influence – our government.

They portray government as the big evil, when in fact, government is us. It is teachers, first responders, and any number of middle class people trying to do the best job that they can. None of those who make up our government even come close to the 100 million dollar salaries of our top CEO’s.

Instead the Tea Party has allowed themselves to be manipulated by the same forces which caused government to relax regulations and implement a policy of allowing the free market to govern itself.

The ultimate irony is that Karl Rove, who helped create the Tea Party, no longer has use for them. While libertarian Koch money continues to support Tea Party causes, Tea Party shutdown and default tactics have terrified business leaders. As a result, Rove’s Crossroads fundraising juggernaut has announced that they will support moderate Republican candidates to oppose Tea Party incumbents in the 2014 and 2016 elections. It appears that at least Republican business interests have found a new villain.

The uncomfortable truth is that, though Republicans had both the motive and the means to hijack the populist uprising caused by the 2008 financial meltdown, the Democrats deserve some credit for the birth of the Tea Party too. Next up, how the Democrats fumbled what should have been a golden moment to reassert the basic tenants of Democratic Populism. In other words, we have met the enemy and he is us.

John Birch, Big Tobacco, Young Republicans and the Birth of the Tea Party

Wednesday, November 27th, 2013

The John Birch Society

The John Birch Society was founded in 1958 in Indianapolis, IN. One of the founding members was Fred Koch, founder of Koch Industries and father of David and Charles Koch. The Birch Society was viewed as a radical right wing organization because it espoused fundamental changes in government, eliminating institutions that they felt threatened their values or economic interests, and prosecution of those people who disagreed with them.

They opposed civil rights movement and subsequent legislation calling it communist. They opposed the United Nations calling it “one world government”. They opposed immigration reform and all free trade agreements. They accused both Eisenhower and Kennedy of being communist agents. They espoused a particular form of “frontier mentality” which incubated a virulent strain of reactionary thought.

Now, fifty years later, the Koch brothers are still the major funders of conservative and libertarian political movements including the Tea Party. The difference is that these organizations, who continue to advocate for smaller government, elimination of civil rights legislation, opposition to the UN, opposition to immigration reform, elimination of free trade agreements, and support of an unregulated free market; are now regarded as part of the mainstream political fabric. When they call a democratically elected President a socialist, a fascist (not sure how you can be both), or an illegal alien; it’s now accepted as part of normal political discourse.

What happened?

Big Tobacco

One of the lobbying strategies of the Big Tobacco in the 70’s was to assert that big corporations should have more political power. This strategy is reflected in the “market fundamentalism” that is one of the major pillars of Tea Party philosophy – unfettered capitalism is the best economic philosophy. This libertarian philosophy was embraced by Big Tobacco in an effort to prevent the sort of regulations that eventually limited their right to promote an addictive drug that kills people. One of the groups supporting this position and the Tobacco industry was Citizens for a Sound Economy founded by the Koch brothers in 1984. The primary funders of the Tea Party include FreedomWorks which is a spin-off of Citizens for a Sound Economy and Americans for Prosperity founded by David Koch.

Young Republicans

Karl Rove rose to fame in the Republican Party because of his reputation as a master of dirty tricks. Among other things his campaign for chairman of the College Republicans is legendary. It was during this period of time that he because friends with both the Bush family and Lee Atwater. Lee Atwater was an expert in the Southern Strategy that was the bulwark of successful national Republican campaigns starting with Nixon. That strategy was in stark display in the 1988 Bush election when Atwater said he would defeat Dukakis by making “Willie Horton his running mate”. Late is life, Atwater apologized and asked forgiveness.

In 1991 Rove began to work for Big Tobacco. In that role, he spearheaded a tort reform movement to weaken the ability for states attorney generals to litigate against the Tobacco industry. It was these legal cases that eventually brought down Big Tobacco. Rove’s activities included setting up state chapters of a tobacco industry funded astroturfing organization called Citizens Against Lawsuit Abuse. The Texas chapter of this group under the direction of Tom Delay was particularly effective in getting conservative judges elected and ultimately pushing through the gerrymandering that supported the 2010 Republican Congressional landslide.

The CALA blueprint honed in Texas included running TV and radio ads warning that the legal system was out of control, affecting the economy and the pocketbooks of average people. This blue print included generous funding from the Texas Chamber of Commerce and corporations seeking protection from consumer law suits. The Chamber of Commerce was running ads supporting Big Tobacco as late as 2002. This followed classic Tobacco Industry public relations rules – When your side is unpopular, as the tobacco industry is, seek to redirect public ire toward other villains – in this case, trial lawyers, taxes and big government. When the words “trial lawyers” are spoken in a spot aired by the U.S. Chamber of Commerce, the screen shows a black stretch limousine passing by the Capitol.

Finally Rove was also credited as the architect of the wedge politics that propelled George W. Bush into the White House. Thomas Frank, author of What’s the Matter with Kansas, summarized those politics.

Vote to stop abortion; receive a rollback in capital gains taxes. Vote to make our country strong again; receive deindustrialization. Vote to screw those politically correct college professors; receive electricity deregulation. Vote to get government off our backs; receive conglomeration and monopoly everywhere from media to meatpacking. Vote to stand tall against terrorists; receive Social Security privatization. Vote to strike a blow against elitism; receive a social order in which wealth is more concentrated than ever before in our lifetimes, in which workers have been stripped of power and CEOs are rewarded in a manner beyond imagining.

It was this policy of “deceive, divide, and conquer” that also sowed the seeds which later grew into the Tea Party.

Summary

The Tea Party and to a large degree the dysfunctional politics that the Tea Party represents were a long time coming.

It started with Big Tobacco’s desperate attempt to save themselves from the inevitable outcome of selling an addictive drug that kills people. They developed many of the political techniques now in common use particularly by movement conservatism. Those include Partners in Crime, Astroturfing, Junk Science, and Lobbying.

Radical conservatism in the form of the John Birch Society eventually joined forces with the Tobacco Industry. The common interest here was a particularly twisted form of libertarianism called free market capitalism. This appealed to the Tobacco Industry because they wanted to be able to continue to sell their products even though they were addictive and deadly. The libertarian capitalists liked the money that the Big Tobacco brought with them. They and organizations like the Chamber of Commerce were happy to make a deal with Big Tobacco if it meant advancing their own cause of smaller government and fewer regulations.

The Koch family has been underwriting libertarian and conservative causes for two generations. They are really the invisible hand manipulating this whole political movement. Fred Koch was a founding member of the John Birch Society. David and Charles Koch have become the bankers of the Tea Party movement, major funders of the movement to oppose climate science, and promoters of libertarian free market philosophy. Their fortune is closely tied to the fossil fuel industry.

Karl Rove became the chief apparatchik of this new philosophy of politics. He refined the political use of the tools that Big Tobacco created. He added Lee Atwater’s racial politics and expanded it with social issues which appealed to the evangelical right. He wrapped it all up in the flag and the Bible (even though he himself is an admitted agnostic) and used it to win two national elections for George W. Bush. In response to Obama’s election in 2008, Rove went to work for Fox News and helped start the astroturfing opposition movement that later grew into the Tea Party.

Next up, we’ll try to connect the dots to show how these historical forces have twisted an otherwise completely predictable populist uprising into what has become radical conservatism and the Tea Party.

Madness

Wednesday, October 16th, 2013

‘‘Of all the damage to be done politically here, one of the greatest concerns I have is that somehow John Boehner gets compromised,’’ said Sen. Lindsey Graham, R-S.C., a former House member and a Boehner supporter.

Something interesting happened over the past couple of weeks.

First a little bit of background.

Congress failed to pass a budget this year. The result of that failure was predictable. The government ran out of budget authority to continue to operate.

At the same time, the government was also exhausting its ability to borrow money through the sale of bonds in order to pay its bills. This was also predictable based on the rate at which the government was authorized to spend money compared with the rate at which tax revenues were coming in.

While these two things are related, they reflect two VERY different dynamics. In the first case, budget authority reflects the government’s ability to incur NEW debts. In the second case, the credit limit is the government’s ability to borrow money to pay bills that have come due as a result of the exercise of the budget authority that the government already had.

In other words, raising the government credit limit DOES NOT affect the deficit.

Giving the government more budget authority potentially DOES affect the deficit.

Ted Cruz seized on these two financial events as a political opportunity to enhance his standing with conservatives and perhaps position himself for a 2016 presidential run. He did this using the Madman Theory by suggesting that Republicans in the House and Senate were willing to shut down the government AND prevent the government from paying its bills if Senate Republicans and the President didn’t agree to their demands. They then made good on their first promise and shut down the government.

What happened next was also predictable.

Tea Party Republicans rallied around Ted Cruz.

More seasoned politicians questioned whether this plan would work based on past history and the fact that there weren’t even close to enough votes in the Senate to support the plan.

As the reality of the government shutdown spread throughout the country, Ted Cruz and his supporters including Glenn Beck and Fox News tried to convince the country that it was the fault of the President and the Democrats.

Everyone suffered losses in the polls, but Republicans suffered the most with historic new lows in popularity.

“The only reason why the Democrats don’t look terrible is we look even worse,” said Sen. Roy Blunt (R-Mo.), a member of Senate GOP leadership.

As it became obvious that the President and the Democrats were willing to call the Republican’s bluff, House Republicans began distancing themselves from this plan. At last count there were more than enough with Republican support to pass a simple bill to re-open the government and raise the credit limit.

Republican Senator Kelly Ayotte called the tactic of tying Obamacare to the shutdown legislation “an ill-conceived strategy from the beginning, not a winning strategy.”

“It’s very, very serious,” Senator John McCain, Republican of Arizona, warned on Tuesday. “Republicans have to understand we have lost this battle, as I predicted weeks ago, that we would not be able to win because we were demanding something that was not achievable.”

“We took some bread crumbs and left an entire meal on the table,” said Senator Lindsey Graham, Republican of South Carolina. “This has been a really bad two weeks for the Republican Party.”

“Let’s just say sometimes learning what can’t be accomplished is an important long term thing, and hopefully for some of the members they’ve learned it’s impossible to defund mandatory programs by shutting down the federal government,” Republican Senator Burr said.

The last steps are now playing out.

Boehner failed to craft a bill in the House because the 30 or so Tea Party Republicans were unwilling to support any compromise even though it would further weaken the political position of their party.

Democrats and Republicans will pass a bi-partisan bill in the Senate. Ted Cruz will vote against it, but he won’t filibuster it because he isn’t a Madman, just an opportunistic politician.

That bill will come up for a vote in House and will pass with a comfortable majority comprised of all the Democrats and a large number of Republicans.

This particular bill will set up another potential confrontation in six months, but it will not be a repeat of what we’ve just seen. Those who would threaten to use this strategy again will not have the support to even start.

Finally after five years of political dysfunction, Congress will start working again. That’s because more Republican members are now more afraid of the voters in their districts than they are opposition from Tea Party. Mitch McConnell will be the hero and emerge as the leader of “rational” Republicans. Compromise will become the new badge of honor with the Senate modeling that behavior. Getting things done will become the new measure of success.

It will prove, however, too little and too late. The Tea Party will run candidates in Republican primaries against those they feel betrayed them. It won’t matter whether they win or lose because voters in November are NOT going to re-elect anyone who behaved like a Madman. The Democrats will win the seats they need to take control of the House and retain control of the Senate and government will begin operating again. Unemployment will come down. The economy will grow robustly in the last two years of the Obama administration. Immigration reform will pass. Healthcare will roll out. The tax code will get re-written and address income inequality. We’ll fix Medicare and Social Security and take the first substantive steps to deal with climate change. Deficits will come down and debt as a percentage of GDP will drop to safe manageable levels. As long as the Democrats can avoid shooting themselves in the foot, they will be well positioned to retain their majorities and the White House in 2016 regardless of who Republicans choose.

On the Republican side, we’ll see if the Tea Party retains enough influence to get one of their candidates nominated in 2016. If so, it will be a Democratic landslide. If not, there is a very real possibility that the Tea Party may align with the libertarians or start their own third party. If that happens, it will virtually guarantee a Democratic win and confirm what we have known about the Tea Party from pretty much the beginning. They ARE mad.

Democracy will again begin to work in predictable ways as the Tea Party retreats back to the shadows of fringe politics. History will later attribute this moment in time as the point at which conservative radicalism was defeated by Obama’s firm resolve.