Economic Costs of Income Inequality

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.

When Ideology Confronts Personal Reality

January 17th, 2014

Increasing Healthcare Costs

I was getting my hair cut the other day. The guy doing the work owns the salon. He was complaining that his bill for healthcare insurance almost doubled from last year. He purchases his insurance through a well-respected local insurance broker. He has conservative verging on libertarian political views, so his immediate reaction was to blame the Affordable Care Act in general and President Obama in particular.

He was also upset at what he felt was poor service form his broker. They met in November and the broker couldn’t provide any detailed information about what it would cost for him and his wife to renew their policy. The next thing he knew, he received a bill in the mail in late December that he had to pay immediately if he wanted to continue his coverage.

I asked him some questions about the nature of his previous coverage. From his description, the silver plans might work just fine for him. I asked if he had gone to healthcare.gov to check out other options. He was surprised that you could do that sort of comparison shopping without creating an account. I assured him that he could and that he could also probably cancel his existing plan if he found something better. We agreed to check back in a couple of weeks.

Just out of curiosity, I checked the site too. I found that the MOST expensive plan listed there from his current insurance company was $200 less a month than the bill that he received. I found silver plans from other companies could REDUCE what he paid LAST YEAR by as much as $300/month.

It will be interesting to see what he thinks about the Obamacare the next time I see him and who he feels is to blame now for the sticker shock he experienced in December.

Long Term Unemployment Insurance

As we’ve been discussing in previous posts, Republicans are opposed to extending long term unemployment benefits because they feel that those benefits reduce the incentive of the unemployed to find a job. They believe that those who are unemployed CHOSE to collect their benefits rather than look for another job. They argue that eliminating those benefits will be just the encouragement that the unemployed need to get back to work.

Republicans have been under a lot of pressure from Democrats who don’t share their beliefs and feel that cutting off benefits is both cruel and bad economic policy. Republicans said they would consider passing an extension if the Senate could find a way to pay for it. Senate Democrats did find a way to pay for it, but Republicans didn’t like it. So now I guess the Republicans are saying that they would consider passing an extension if the Democrats could find a way to pay for it that caused the Democrats some pain. The result is another impasse with more people every week finding themselves without any benefits. Not surprisingly, some of those people are Republicans.

Here are a couple of quotes.

The standoff infuriates people such as Lita Ness, who lost her job as a civilian contractor at Peterson Air Force Base in August 2012 and just received her final check from the unemployment office.

“I’m registered as a Republican, but if they continue to use this not extending our (aid) I’m probably changing to Democrat,” Ness, 58, said as she took a break from a computer training class at the Pikes Peak Workforce Center. “People in our district who vote `No’ on this, I’m not going to support them.”

And

Others feel that after having contributed to society, they are now being abandoned by the government. “I paid my taxes. I’ve helped people my whole life,” said Barbara Greene, 59, who lost her job as a medical secretary in a hospital last year and expects her jobless benefits to end in March, “and now they’re just throwing me to the side.”

The spokesman for Republican Rep. Doug Lamborn who represents that district said, “It’s $6 billion, doesn’t do anything to create jobs. House Republicans remain focused on creating jobs and improving the economy.” It is easy for him to say this because he HAS a job. His constituents who are losing their benefits don’t share his belief that money spent on unemployment benefits is wasted on the unemployed.

The unemployed know this claim isn’t true. So do economists. The data that I quoted in an earlier post shows that unemployment insurance actually DOES create jobs. That’s because the benefits are spent immediately on goods and services. That spending flows into the hands of grocers, landlords, gas station owners, and other retailers. Every dollar of unemployment insurance generates $1.55 dollars of benefit to the local economy where that dollar is spent. No other private or government program is as efficient.

Rep Lamborn may still be re-elected to represent Colorado Springs in November, but fewer people are going to vote for him because they are beginning to realize that his ideology (smaller government and lower taxes) is not delivering the prosperity for middle class folks that he told them it would.

Climate Change

Three interesting studies came out recently with regard to climate change.

In the first, researchers found that opposition to the concept of climate change varied based on the weather. The hotter it was, the more support there was for the concept of human driven climate change. The colder it was, the more opposition to the concept. This has to do with the discovery that when it is hot, our memory reminds us of all of the other times we’ve experienced heat. Same thing when it’s cold.

What climate scientists predict, however, is that climate change will drive more extreme weather. Here in the upper Midwest that means MORE precipitation particularly in the winter and particularly at night.

But clearly that didn’t stop climate change deniers like Donald Trump who proved the studies point by tweeting, “We are experiencing the coldest weather in more than two decades-most people never remember anything like this. GLOBAL WARMING anyone?”

The reality, however, is that climate change is threatening Donald Trump’s home in NYC, his Casino’s in Altantic City, and his golf courses in Florida.

A second study documents the dramatic rise of sea levels on the east coast. They rose eight inches over the past 130 years. They are projected to rise another eight inches in the next 35 years. By 2100 that eight inches will become 36-39 inches.

Hurricane Sandy had a peak storm surge of 14 feet and caused $65B in damage. As the sea levels rise, less powerful hurricanes will cause similar damage more frequently.

Rising sea levels have already inundated barrier islands which protect the mainland from storm damage. An additional three feet of sea level change will eliminate most of the barrier islands on the east coast including Hatteras.

We are already seeing the financial consequences of this creeping disaster. Those with property in the expanding flood zone can’t get 30 year mortgages. Flood insurance has already going up dramatically and in some areas is no longer available from private sources. The federal flood insurance program is $24B in the red. Some Republicans, in an interesting turnabout, are demanding that the government DO MORE to protect commercial and residential interests in their districts.

The reaction in states like NC is to simply deny these changes. In 2012, the state legislature passed a bill banning state agencies from reporting sea-level data. Two weeks after that bill passed, a study from the US Geological survey documented that sea levels along the coast line from Cape Hatteras to Boston were rising at four times the global rate. You may have guessed by now that since 1980, NC leads the world in disappearing shoreline.

Same thing is going on in Virginia where the legislature budgeted money to study the problem, but only after all references to sea-level rise and climate change had been removed. In towns like Norfolk — where neighborhoods are already flooding repeatedly even in the absence of storms, and where some homes have become unsaleable — people are starting to pay attention.

“In the last couple or three years, there’s really been a change,” said William A. Stiles Jr., head of Wetlands Watch, a Norfolk environmental group. “What you get now is people saying, ‘I’m tired of driving through salt water on my way to work, and I need some solutions.’ ”

In the third study, an Iowa state poll of farmers added a question last year about whether or not farmers believed that climate change was real and human caused. Clearly this is a group that is politically conservative, deeply religious, and highly dependent on weather patterns for their living. Last year 67.7% answered yes. This year that jumped to 74.3%

Conclusion

We are finally seeing what happens when political positions arrived at through emotional decisions based on moral choices confronts undeniable reality.

Obamacare DOES save people money regardless of whether you are a liberal, a conservative, or a libertarian. The only difference is that it is difficult for conservatives and libertarians to accept that fact.

The unemployed AND the economy benefit from assistance. During times of economic downturn when job seekers outnumber jobs, unemployment benefits do not increase the unemployment rate. Putting money into the hands of the unemployed actually REDUCES the unemployment rate. Unemployment benefits help everyone regardless of whether you are a liberal, a conservative, or a libertarian. The difference is that it becomes increasing difficult for conservatives to claim that the long term unemployed have only themselves to blame, when they themselves join the expanding ranks of the long term unemployed.

Increasing sea levels is a fact. The sea doesn’t care if you are a liberal, a conservative, or a libertarian. The people who do care are those who finance and insure property. Their actions speak volumes about whether or not climate change is real. Property values in the affected zones are dropping. Banks are unwilling to make new long term loans. Insurance companies are raising rates, or canceling policies. Conservative evangelical Iowa farmers are including climate change predictions in their agricultural and livestock planning. Conservatives and libertarians are having to come to grips with the reality that ideology cannot hold back the tide or make it rain no matter how hard you try.

Income Inequality Facts

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.

Men (and Women) for Others

January 8th, 2014

First a little bit of disclosure. I graduated from an all-boys Jesuit prep school in Omaha called Creighton Prep. Among other things, they taught me to be a man for others.

This term represents the basic educational philosophy of the Catholic Jesuit order. What it means is that those who attend Jesuit schools are taught that love of God includes love for the poor. You can’t have one without the other. They are also taught that this love is best expressed in action rather than talk. That action is characterized by the term “Social Justice”. What that means is that Jesuit philosophy regards ANY system that oppresses the poor as unjust. That includes both political and economic oppression.

The term “Social Justice” was coined by Jesuit Priest Luigi Taparelli in the 1840’s. It refers to the ability people have to realize their potential in their particular country or society. In broader terms those who advocate for Social Justice are encouraging the creation of institutions which ensure fair distribution of wealth and equality of opportunity. Those institutions typically include education, health care, social security, labor rights, as well as a broader system of public services, progressive taxation, and regulation of markets.

Gross income inequality is an example of a condition which exists in a society which lacks Social Justice. Racial discrimination, political oppression, and religious persecution also occur in some societies which lack Social Justice.

This brings us around to the discussion of Pope Francis and Social Justice.

Pope Francis is a Jesuit. He is the first Jesuit to ever be elected Pope. This is a big deal in the politics of the Catholic Church. The basic reason is that the Jesuits, in simplest terms, are fearless take-no-prisoners warriors. They are beloved because of their willingness to go anywhere and do anything to advance the cause of Christ and the poor. Jesuits have typically recruited the best and brightest in Catholic clergy because of this “no hold barred” attitude. These sorts of people are also attracted to the Jesuit order because Jesuits believe in education and scholarship. They believe that you can better understand God through academic study of His creation. Since the Jesuits operate some of the best colleges in the world, those who go through the Jesuit system have access to the institutions which prepare them to be intellectual “shock troops”. This commitment to a fact-based life of action as well as a faith-based life of prayer regularly put the Jesuits at loggerheads with the Vatican. The most recent example of deep disagreement between Jesuits and the Vatican was the emergence of Jesuit Liberation Theology in Latin America in the ‘70’s.

The fact that the Catholic Church has finally embraced a philosophy that as little as 50 years ago they condemned as radical is truly breath taking. It also speaks to the Catholic Church’s recognition that they need to be leading the charge for Social Justice.

In the finest tradition of the Jesuits, Pope Francis “walks the talk” and as a result is a fearless man on a mission. It is no accident that this man chose the patron saint of the poor, St. Francis as his namesake. In Brazil he visited the poorest most dangerous sections of Rio on foot by himself almost daily. He took public transportation rather than a chauffeured car. He lived in a modest apartment a short walk from the grand Cathedral rather than in the opulent archdiocese residence next to it. He has continued that policy in Rome where he lives in a simple guest house rather than the opulent papal palace.

His economic message regarding the poor is also simple, direct, and undeniable. It’s based on what Jesus told the righteous man in Matthew 25. If we care about our own salvation, we should welcome the stranger, clothe the naked, visit the sick and imprisoned, feed the hungry, and provide water to the thirsty. We are supposed to do these things without reservation or concern about need, worthiness, or consequence. God will take care of that.

He criticized “trickle down” economics as an ““opinion, which has never been confirmed by the facts, [that] expresses a crude and naïve trust in the goodness of those wielding economic power.” He also criticized the “idolatry of money” and unbridled capitalism as “a new tyranny.” As far as the benefits that supposedly were going to accrue to the poor from de-regulation and free markets, Pope Francis observed that the poor are “still waiting”.

Clearly this populist message flies in the face of anti-spending, anti-big government conservative Republicans who appear more concerned about fraud than hunger and dependency than poverty.

Here’s how some of representatives of conservatism responded to Pope Francis’ call for generosity and compassion.

Rush Limbaugh said the Pope’s comments were “pure Marxism”.

Fox News’ Adam Shaw called him the “Catholic Church’s Obama.”

Worst of all, Sarah Palin called him a “liberal”.

Others took another common conservative tack. People that disagree with them must either be confused, ill informed, or the victim of some liberal media distortion.

Rep. Peter King, a devout Catholic, said of the Pope’s use of the term “trickle-down” that a “liberal speechwriter stuck it in.”

Sen. Pat Toomey, who is also Catholic, said “It’s easy to draw I think what could be mistaken, superficial conclusions from some of the things that he said. I think he’s a wonderful leader for the church.”

Finally, Paul Ryan, also a devout Catholic simply suggested that Pope is confused. “The guy is from Argentina, they haven’t had real capitalism in Argentina,” Ryan said. “They have crony capitalism in Argentina. They don’t have a true free enterprise system.”

The Pope isn’t confused, misinterpreted, uneducated, or being manipulated by his speech writers.

One example is his response to being accused of being a Marxist. Pope Francis said, “The Marxist ideology is wrong, but I have met many Marxists in my life who are good people, so I don’t feel offended.”

The Pope is simply commenting on the facts. We are now three decades into a failed experiment in this country with unregulated capitalism. The results shouldn’t surprise anyone. There has been a massive transfer of wealth from the poor and middle class to the wealthy.

In the future, I’ll discuss some of the underlying moral structures which support these points of view. We’ll also examine the economic consequences of some of these choices.

Functionally Irrational

December 17th, 2013

Before we dig into the respective political positions on unemployment, let’s revisit this concept of moral intuitionism.

This is the condition experienced when people confront something that they consider objectionable from an emotional point of view. Their primitive emotional brain passes judgment and then hands that decision off to the rational brain. The rational brain then constructs a logical argument to defend what otherwise was an emotional decision.

Here’s an example drawn from social psychologist Johnathan Haidt’s book “Righteous Mind”.

The person conducting the experiment places a paper in front of the subject. The paper says, “I the undersigned, agree to sell my soul to the individual designated as the buyer for the sum of (blank) dollars.” Next to the paper is a crisp $100 bill. The question is will you sign it?

For those who say no, the person conducting the experiment adds several additional clauses. One says that this agreement is strictly for experimental purposes and is not binding in any theological sense. Will you sign now?

Then they also add that once the agreement is signed and the money paid, the signer can have the agreement back. They can keep the money and do whatever they want with the agreement. Will you sign now?

Do you have a dollar amount that would change your mind?

What about if the agreement includes a similar amount of money donated to the signer’s church? Would you sign then?

There are some (roughly 17%) who simply refuse under all circumstances. That’s because their emotional brain has already decided that this is wrong and under no circumstances are they going to participate. It doesn’t matter what anyone else says.

We are dealing with a similar circumstance in the Republican Party with regard to long term unemployment insurance.

Before some reader suggests that I only pick on conservatives, yes it is true that EVERYONE has some sort of social taboo that can trigger an attack of moral intuition. Conservatives, however, appear more susceptible than liberals because conservatives care more about rules while liberals care more about people.

The challenge in today’s political climate is that we have to make sound financial decisions to deal with issues like debt, unemployment, and economic growth. Because of moral intuition, conservative Republicans continue to find themselves on the wrong side of the data when it comes to their emotional responses to these issues.

Unemployment insurance is just one example. Republicans believe that unemployment insurance INCREASES unemployment because it removes the incentive to go find a job.

In their defense, there is some research that suggests during times of high EMPLOYMENT, unemployment insurance does increase the unemployment rate slightly.

Unfortunately that’s not the case right now.

There are still three times more people looking for work than there are available jobs.

As researchers at the Federal Reserve Bank of San Francisco recently concluded, “Our estimates suggest that extending unemployment insurance benefits in weak labor markets has virtually no effect on the rate of job finding.”

But let’s go ahead, just like with the soul-selling experiment, and discuss some of the other reasons Republican rational brains have come up with to support this emotional position.

There is the free market argument. That one suggests that intensifying the competition for the available jobs will drive down the cost of labor. Driving down the cost of labor will encourage businesses to hire more, which will result in a virtuous economic recovery.

The problem is that in at least this economy, growth is driven by consumption. If we drive down the cost of labor, that affects both the employed as well as the unemployed. When wages stagnate, consumption stagnates, and growth slows. That’s because businesses don’t hire because labor costs are low. They hire because demand for their goods exceeds their ability to supply those goods/services.

The only groups who benefit in this scenario of flat demand and decreasing labor costs are businesses, their investors, and their CEO’s. That’s because they are able to cut costs, demand higher productivity, and keep the profits for themselves.

The economic truth is that long term unemployment benefits act as an economic stimulus. They keep people in their homes, keep families together, and pump money into the consumer economy. Unemployment benefits PRESERVE jobs by propping up consumption during times of economic downturn. Moody’s estimates that every dollar of unemployment benefits delivers $1.55 dollars in economic benefit. Cutting $25B in benefits results in an estimated $39B economic loss. Next year when another 3.9M unemployed will qualify for long term unemployment benefits that are no longer there, the economic loss will be closer to $100B. The CBO recently estimated that extending the benefits through the end of 2014 would increase GBP by .2% and DECREASE unemployment by the same amount. In other words, long term unemployment benefits CREATE jobs.

The problem is that when you mention unemployment benefits to a conservative Republican, their moral intuition goes directly to the scenario of the government paying people NOT to work. That leads to the moral outrage of conservatives over any form of government assistance because it creates a culture of dependency.

It doesn’t matter that statistics show that of the 4.1M long term unemployed, only 1.3M are still receiving benefits. So for those 2.8M unemployed who have already lost benefits, that loss doesn’t appear to have made any difference in their ability to find a job.

Also 20% of the long term unemployed had at least a bachelor’s degree and 40% had household incomes between $30K and $75K. These are clearly not people whose previous history suggests dependency. What it does suggest is that the longer you are unemployed, the harder it is to re-enter the workforce.

From a political perspective, we then find ourselves in the position where moral intuitionism can’t be argued. The facts honestly don’t matter. All that matters is that we as a country refrain from doing whatever set of things causes the moral intuition of a conservative to fire off. That’s what is important in today’s politics. That’s the political challenge that we face as a country. How can a democracy function effectively when 30% of the voters are fundamentally irrational?

Merry Christmas

The Road Not Taken

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

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

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.

Big Lies and Big Tobacco

November 23rd, 2013

I am a big believer in democracy. What often baffles me though, is why we go through periods of time when a large number of people believe things that aren’t true.

I can appreciate how people might have believed that the world was flat, because until people were able to sail around it, astronomers where the only people with personal experience to dispute what the senses told us. Very few people could actually read and fewer still had access to a telescope.

But science and the personal experiences of sailors soon convinced everyone else that the world was in fact round and orbited around the sun. Those who continued to dispute that fact were ridiculed.

That’s not the case today. Information is widely available. Most people, at least in this country can read. And most people in this country get a basic education that includes mathematics and science. Yet we seem to be living in age when facts are optional and science is relative.

What happened?

I believe that it has a lot to do with politics and in particular the strategy called the Big Lie.

John Boehner’s quote about the US health system being the best in the world is an example of the Big Lie. It works because those who already agree with his position that Obamacare is ruining the country will accept also accept this lie without question. It also works for those who inherently fear change, because Obamacare is all about change. Finally it works because those who stand to lose money or power as Obamacare rolls out are happy to support the claim that the current system is a better choice.

It didn’t use to be this way though. In the 50’s when the John Birch Society claimed that Eisenhower was a communist agent, the vast majority of the country just laughed. Now when the Tea Party (direct decedents of the Birchers) claimed that Barack Obama was born in Kenya – almost half the Republican Party agreed with them.

This is going to take a couple of posts to work through, but I think the train started to jump the track, in terms of these Big Lies, when tobacco companies realized two things – their products were killing people and if voters found out, they were out of business.

Background

Excerpts from a Stanford study by historian Robert Proctor

Cigarettes are “the deadliest artifact in the history of civilization” – more than bullets, more than atom bombs, more than traffic accidents or wars or heroin addiction combined. They are also among “the most carefully and most craftily devised small objects on the planet.”

“The industry has spent tens of billions designing cigarettes since the 1940s – that’s from the industry’s own documents,” he said.

The cigarette represents the perfect business model. “It costs a penny to make. Sell it for a dollar. It’s addictive,” says investment guru Warren Buffett. Proctor notes that “by artfully crafting its physical character and chemistry, industry scientists have managed to create an optimally addictive drug delivery device, one that virtually sells itself.”

Operation Berkshire

In 1977 the CEO’s of all of the major tobacco companies met in secret in the UK to “develop a defensive smoking and health strategy, to avoid our countries and/or companies being picked off one by one, with a resultant domino effect.” They created a front organization first called International Committee on Smoking Issues (ICOSI) (renamed the International Tobacco Information Centre, INFOTAB, in 1981), to prevent efforts to reduce smoking. That included not only identifying opposition, but promoting research supporting their position, and rebutting the claims of research opposing their position. This organization, code named Operation Berkshire, continued to operate in secret for twenty years. In 1998 as part of a Master Settlement Agreement between tobacco companies and states attorney generals the activities of this organization came to light.

The plan formed when major tobacco companies met together to form a unified defense against anti-smoking legislation. They agreed that they would not voluntarily make certain concessions about smoking and, if legislation was passed to force them, they would agree to sue. In particular, they decided that they would not concede the point that smoking has adverse health effects and would instead attempt to create controversy, lest they be held legally liable for the deaths of smokers. They also formulated coordinated activities to promote the social acceptability of smoking.

Similar behavior was demonstrated by the top seven biggest U.S. tobacco company CEOs, dubbed the “seven dwarfs”, testifying together before the U.S. Congress during a hearing on the regulation of tobacco products on April 14, 1994, in which they collectively denied, under oath, the addictive nature of nicotine, despite at least one published New York Times report at the time claiming that it has the ability to be more addictive than heroin, cocaine or amphetamines.

Here are some of the strategies described in the documents shared with the courts.

Partners in Crime

Co-operation between the manufacturers of tobacco and candy cigarettes to effectively promote smoking in children is described by Klein and St Clair. They show that some tobacco companies granted confectioners permission to use cigarette pack designs, tolerated trademark infringement and suppressed research showing the potentially harmful effects of candy cigarettes in promoting smoking to children.

Astroturfing

This is the process of creating fake grass roots organizations to suggest that a particular political position has strong support among the people.

As health advocates began winning legislation to raise taxes and increase regulation of smoking in the US, Philip Morris, Burson-Marsteller and other tobacco interests created the National Smokers Alliance (NSA) in 1993. The NSA and other tobacco interests initiated an aggressive public relations campaign from 1994 to 1999 in an effort to exaggerate the appearance of grassroots support for smoker’s rights. According to an article in the Journal of Health Communication, the NSA had mixed success at defeating bills that were damaging revenues of tobacco interests.

Junk Science

A small group of retired cold-war libertarian nuclear physicists pioneered the political use of junk science. They developed their techniques in defense Reagan’s seriously looney Strategic Defense Initiative. Their techniques included demanding equal air-time in the media every time a mainstream physicist or engineer criticized SDI. They also published fear mongering articles in conservative publications suggesting that within 5 years the US would suffer an ICBM nuclear attack. As a result of their success, several including Fredrick Seitz were hired by RJ Reynolds. They perfected their doubt-mongering strategy defending smoking. They insisted that the science was unsettled and therefore that it was always premature for the US government to act to control tobacco use.

As one tobacco company memo noted: “Doubt is our product since it is the best means of competing with the “body of fact” that exists in the mind of the general public. It is also the means of establishing a controversy.”

Lobbying

“My own view is that in many ways, the tobacco industry invented the kind of special-interest lobbying that has become so characteristic of the late 20th- and earlier 21st-century American politics,” said Allan Brandt, dean of Harvard’s Graduate School of Arts and Sciences.

Tobacco companies not only spent boatloads of money supporting politicians. They also sponsored game shows, cartoons, and sports. They hired celebrities, dentists, and doctors to endorse their products.

Altria (Phillip Morris) has spent more money since 1998 lobbying Congress than any other single business. In 1998 the Tobacco industry spent $125M lobbying for the defeat of the McCain Tobacco Control Bill.

Conclusion

The result of this campaign is that the rate of smoking in the US did not start to decline until 1985. It was as high as 45% in 1955. It is now at 19%. 2011 was the first time a majority of people supported banning smoking in public places.

In 2013, tobacco is still the leading cause of preventable death in this country. Tobacco kills more people than AIDS, Alcohol, car accidents, illegal drugs, murders and suicides combines. The 400,000 people who die and the 8.6M more who are ill cost the US $96B in healthcare costs and $97B in lost productivity.

But the tobacco industry was able to continue to produce and sell its products for decades AFTER the Surgeon General’s first report that smoking caused disease. Millions of people died. Several Trillion dollars were spent caring for those whom these companies killed. And they are still killing people today even though, at least in this country, their activities are severely limited.

That’s how effective their strategies have been.

These strategies are part of the reason why the Tea Party and movement conservatism exists today.

Next up, how some of those who learned these skills working for Big Tobacco, used them on behalf of the conservative political movement.

Big Republican Lie: The Best Health Care Delivery System in the World

November 15th, 2013

When the Son of man shall come in his glory, and all the holy angels with him, then shall he sit upon the throne of his glory: And before him shall be gathered all nations: and he shall separate them one from another, as a shepherd divideth his sheep from the goats: And he shall set the sheep on his right hand, but the goats on the left. Matt 25:31-33

Republicans have been trying to focus a lot of attention on President Obama’s promise to the American people. That promise was that under the Affordable Care Act, if you liked your current insurance you could keep it.

What has been lost in this conversation, however, are the bigger lies that Republicans have been telling since they decided to “bet the farm” on repealing this law.

It is true that healthcare.gov has problems.

It is also true that as many as 5M people who purchase their insurance on the open market may have received cancelation notices from their insurance provider because their plans were not compliant with the minimum requirements under the ACA.

Both of those things can be fixed. But Republicans don’t want to fix Obamacare. They want to repeal it. The reason they want to repeal it is because weakens their POLITICAL position. If it DOES ultimately deliver healthcare coverage to 20M people who can’t currently afford to purchase insurance on their own, those people will punish any future candidate or party who proposes to take it away.

Republicans also don’t want to offer an alternative BECAUSE they also know that it will NOT compare well to what already exists with Obamacare. The last time they tried in 2009, their alternative proposal covered 17M FEWER people and cost $36B more.

Instead, in order to leverage their political position that Obamacare should be repealed, they ALSO have to argue that the current healthcare system is just fine. That way they can also claim that Obamacare is making things worse, rather than making them better.

This argument has two added benefits. It appeals to those who fear change. They get to hear Republicans tell them that this particular change is unnecessary. And it appeals to those who make more money under the current system than they would under the new system. Their motivations are obvious.

So that’s why John Boehner, criticizing Obamacare, said yesterday, “This is going to destroy the best health care delivery system in the world,”

This is a BIG LIE. Easily on the same scale of “If you like your insurance you can keep it”.

Here’s why.

We DON’T have the best healthcare delivery system in world. Not even close.

What we DO have is the most EXPENSIVE and INEFFICIENT healthcare delivery system in the world.

Here is the proof with excerpts from NBC News.

Two studies out this week — and studies going back 15 years or longer — show quite the opposite. Americans pay more per capita for health care than people in any other industrialized country. In return, we are sicker, die younger and are unhappier with the system.

According to the Commonwealth Fund Study, healthcare costs $8,508 a head in the US, compared to $5,669 per person in Norway and $5,643 in Switzerland, the next-highest-spending countries. New Zealanders spend just $3,182 per person. If we were getting better outcomes than everyone else, perhaps you can justify it, but we aren’t. The U.S. has the eighth-lowest life expectancy in the Organization for Economic Co-operation and Development, which groups developed nations.

The reason is simple. Too few people have access to healthcare services, particularly the sorts of services that can prevent the onset of expensive chronic conditions like diabetes and heart disease.

Access

In the latest survey of more than 20,000 people from Australia, Canada, France, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, Britain and the U.S., Commonwealth researchers found that 37 percent of Americans went without recommended care, did not see a doctor when sick, or failed to fill prescriptions because of costs, compared to as few as 4 percent to 6 percent in Britain and Sweden.

Cost

And 23 percent of U.S. adults either had serious problems paying medical bills or were unable to pay them, compared to fewer than 13 percent of adults in France and 6 percent or fewer in Britain, Sweden, and Norway, Commonwealth reported Wednesday in the journal Health Affairs.

The #1 cause of bankruptcies in this country (62%) is medical expenses. What’s worse, 78% of those filing for bankruptcy because of medical bills HAD some form of health insurance. In Europe the #1 cause of bankruptcy is living beyond your means or job loss.

Obamacare deals with the bankruptcy issue by putting annual and lifetime caps on medical expenses. This is one of several requirements that add cost to individual policies particularly for the young, healthy, and well off. But it also caps the premium cost to 8% of income, so those of more modest means can still afford to purchase insurance with some government help.

Satisfaction

75% of Americans polled said that our healthcare system needs fundamental changes or just rebuilt. Compare that to 50% or more of the Dutch, Swedes, and even Brits who are happy with their system.

Contrary to Republican claims, US patients wait longer to see a primary care physician than any other major industrialized country except Canada. That’s one of the reasons why we treat more people in our emergency rooms than any other country.

Waste

Even the U.S. Institute of Medicine says U.S. health care is a mess, with tens of thousands of Americans dying from medical errors and drug overdoses, and with the system wasting $750 billion in 2009.

Lifespan

While lifespans in all industrialized countries are increasing, US lifespans are not increasing as fast as European countries. Also there are huge regional differences in this country with poor Republican southern states lagging behind populous Democratic northern states.

Conclusion

This information is not new news to Republicans. They have described the growth in Medicare costs as a ticking time bomb. It’s ticking because until recently the cost of healthcare was growing at a rate 2-4 times GDP. Clearly that is unsustainable.

The Republican solution was to force seniors to pay more of the cost increase themselves. That is also unsustainable.

Obama’s solution is to restructure the way that healthcare is delivered in this country as a first step to bending the curve of healthcare cost. If we increase the number of people who can afford to visit their primary care physician where preventative care is practiced, we will reduce or at least delay the onset of chronic conditions like diabetes and heart disease which account for 80% of our costs. If we change the business model from transactions to outcomes, we have hope of physicians and their patients becoming aligned with the goal of better health rather than just treatment of disease. Finally, under Obamacare, the government is taking a more active role in regulating insurance companies. That has to expand to controlling costs particularly of pharmaceuticals.

And that’s the other basic problem. Restructuring 17% of the economy is going to create economic winners and losers. Those who feel that they are going to lose under the new system are pouring money into the campaign chests of Republicans. That money is being used to mount a cynical campaign of misinformation that easily rivals the worst of the tobacco industry.

Republicans know that the current system is unsustainable too. But they are more concerned with the precarious political position that they are in. They would prefer to preserve the current system that is bankrupting and ultimately killing innocent people, if that means that they can expand their political power.

There is a day of judgment coming though. Hopefully that day will come sooner rather than later. When it does, the goats will be separated from the sheep. The liars from the innocent. The punishment will be awesome, swift, and appropriate to the offense.