Spiritual wickedness in high places

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.

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.

“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.

“We may have democracy, or we may have wealth concentrated in the hands of a few, but we cannot have both.” Justice Louis Brandeis

Justice Brandeis was concerned about the income inequality he saw growing in the years leading up to the great depression.  At that point, the top 1% average income was approximately 16x the median household income.  In 1980 this “Brandeis Ratio” was 12.5.  By 2006 (the most recent numbers) it had jumped to 36.

So let’s take this whole issue on.

First let’s document that income inequality is really growing.

Then let’s take up the conservative arguments for why we shouldn’t be concerned.

Let’s see if we can determine what the root causes are.

Finally, let’s dig into Justice Brandeis’ concern about the threats income inequality pose to our society.

Income Inequality

The following graph should do the trick.  The key inflection point to remember is 1980.  Up until that point the incomes of everyone in the economy from rich to poor grew at a rate that pretty much equaled the growth of productivity.  After 1980, incomes of the top 5% grew continued to track the productivity curve while the 50% percentile and the 30% percentile flattened out.  So there should be no question that income inequality has increased since Ronald Reagan took office.

It’s the Economy, Stupid

Conservative Republicans claim that the current income inequality is the result of the natural progression of economic forces.  The information revolution, globalization, and the growth of the service economy transformed the workplace.  Workers continued to be more productive, but the nature of work changed.  Manual labor was replaced by intellectual labor.  Manual labor and the manufacturing associated with it moved to those markets with the lowest cost workers.  The service economy created well paying jobs for highly skilled individuals, and low paying jobs in retail and entertainment markets for everyone else where unions were weak and workers expendable.

They also claim that the rich have earned their money through talent and hard work.  They are the ones who are creating the jobs that this economy needs.  Taxing them effectively punishes the sort of hard work and innovation we should be encouraging.  It also discourages the private sector job creation that we need.

Here are the problems with these narratives.

I’ve already posted that the majority of the top earners became rich either through inherited wealth, good fortune, or theft using unethical or pathological behavior.  I’ve also posted data which shows that the .1% and big businesses are not job creators.  Jobs these days are being created by medium size fast growing technology businesses.

As far as income inequality being the result of some natural economic evolution, the transformation we’ve seen in the US did not occur globally.  Germany for example kept its robust manufacturing-based economy complete with highly paid workers, strong unions, and a broad social safety net.  They did not experience the income inequality that we see in this country.  They also did not suffer the financial meltdown and deep recession that we experienced.

It’s the Government, Stupid

Political scientists Jacob Hacker and Paul Pierson in their book Winner Take All Politics studied why this transformation only occurred here.  They concluded that this skyrocketing inequality wasn’t the natural consequence of market forces but rather the direct result of public policy which concentrated and amplified the effects of economic transformation and directed those gains exclusively toward the wealthy.

Congress has cut tax rates on high incomes repeatedly during this period of time.  It relaxed the tax treatment of capital gains and the sorts of investment incomes that are disproportionately paid to wealthy investors.  This resulted in windfall profits that the middle class and poor didn’t see.

Workers’ rights to organize and bargain for a bigger piece of the pie were weakened while corporate power grew.  Corporations and wealthy individuals gained the sort of access to politicians that the middle class and poor do not have.  Based on recent Supreme Court decisions, corporations have inherited some of the same rights as individuals when it comes to funding political campaigns.  There are few practical limits to the amounts of money business and the wealthy can contribute and many of those contributions can be anonymous.

Corporate governance policies changed to enable extraordinary pay and benefits for top executives regardless of company performance.  Deregulation allowed financial institutions to merge and create organizations that were “too big to fail”.  These institutions created financial instruments that were so complicated that the market lost the ability to accurately value them.  Those managing these institutions walked away with hundreds of millions of dollars while taxpayers and homeowners paid the bill when the bubble burst.

Both parties were complicit.  Reagan and Bush cut taxes.  Clinton repealed the Glass-Steagal Act which allowed banks and investment companies to merge.

Hacker and Pierson also pointed out that the American system of separated powers makes it difficult to take the sort of dramatic and decisive action possible under parliamentary-style governments.  Once policies are enacted typically during times after the White House changes parties and voters give the new party a majority in both the House and the Senate, they become very difficult to change when government again becomes divided.

Allowing corporate execs to be compensated with stock options, for example, encouraged spikes in short-term stock price rather than long term growth.  This produced jaw dropping compensation for execs, but when these policies damage the company, it’s the employees who got laid off.  When these companies went bankrupt, it was the employee pension plans that get wiped out.  In the 1990s, the Financial Accounting Standards Board recommended changes to curtail this practice.  Corporate lobbying in general, and Joe Lieberman in particular stopped the FASB plans and ten years later we ended up with ENRON.

The following graph demonstrates that our representatives have much more in common with the .1% than they do the 99.9%

The bottom line from Hacker and Pierson’s point of view is that business interests have dominated both politics and policy for the past 40 years.  It’s that dominance, and not the natural progression of economic forces, which has produced the wealth-driven winner-take-all economy that we have today.

Inequality Damages Quality of Life

So now we come to the meat of this discussion.  We’ve established that income inequality is the result of policies that our government implemented in the transition from the FDR New Deal to Reagan-led conservatism.  It still leaves the question of so what?  What harm does income inequality cause?

The following data is taken from a wonderful talk on the subject by Richard Wilkerson.

He discovered that there is a direct correlation between income inequality in a country and life expectancy, math & literacy, infant mortality rates, homicides, imprisonment, teenage birth rates, trust, obesity, mental illness (including addictions), and social mobility.  In the industrialized world, low income inequality correlated strongly with better performance in all of these quality of life statistics.  The United States is by far the worst performing country and has one of the highest ratios of income inequality.  That same correlation exists if you use the UNICEF index of child wellbeing.  There is no correlation, by the way, between these quality of life measures and GDP.

What Wilkerson has discovered is that our quality of life depends on our relationships with others rather than our income.  The strength of this social fabric has a direct relationship to overall health of a society as well as the ability of that society to fully leverage the full potential of its members.  The converse is that social dysfunction driven by income inequality rips at the fabric of a society.  Status competition, envy, and anxiety increases stress at all income levels.  Stress damages health and increases violence.  A more equal society improves the quality of life for everyone across the income spectrum.

The expectation isn’t that every American has to become a millionaire to validate the American Dream.  The expectation is that every American who is willing to work hard and play by the rules will have access to both the education and those opportunities that will allow them to maximize their value in this society.

The fundamental problem is that the promise that America makes to all its citizens has been broken.  We have a pluralist democracy where every citizen has a vote.  Our promise to every citizen isn’t that they will become wealthy.  It’s that if they educate themselves and vote, this democracy will produce solid incremental changes that will inexorably move EVERY American forward toward security and a higher quality of life.  We were that country for the fifty years following FDR’s new deal.

In the last thirty years, the progress of the poor and middle class stalled.  The following graph shows how the stalled salaries of the poor and middle class ended up funding the dramatic growth of the wealthy class.

Conclusion

The unfortunate result is that the real American Dream is no longer possible in this economy because of income inequality.  Those who want to experience the American Dream today that the Greatest Generation created and lived,  have to move to one of those countries on the graph that have figured out that income equality is key to social mobility and quality of life  - Denmark.