Throw Them All Out (2 page)

"They seem to know something that other people don't know," said Jens Hainmueller, coauthor of the study and an assistant professor of political science at the Massachusetts Institute of Technology.
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The winners are the politicians who possess insider knowledge, or who are most likely to receive favors from wealthy supplicants.

That's one side of the crony-capitalist spider web. On the other side are the political entrepreneurs and private investors. There is disturbing evidence that politically connected hedge funds perform dramatically better than those without Washington contacts. One study found that politically connected hedge funds beat their equivalent nonpolitical counterparts by about 2%
per month.
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In short, the Permanent Political Class has clearly figured out how to extract wealth from the rest of us based solely on their position and proximity to power. If you have a seat at the table, you are in for a feast. If you don't have a seat at the table, you are probably on the menu. Exactly how crony capitalists are consuming public wealth and fattening themselves is the subject of this book.

Ideology and political philosophy matter in Washington, but often less than you might think. Honest graft is generally bipartisan. Complex bills that are hundreds or even thousands of pages long can contain a single sentence or word that translates into money and that can influence how a politician votes. One study by scholars at the University of Pennsylvania's Wharton School of Business and the University of Chicago found that during the critical votes on the subprime-mortgage bailout and subsequent matters related to the financial crisis of 2008, a key factor in how members of Congress voted was whether they held stock in banks and in the financial sector. Personal equity ownership also influenced congressional committee decisions on the amount of bailout money particular financial institutions received and how quickly they got it. Apparently the vote had less to do with your politics and more to do with your pocketbook.
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Is it any surprise that Washington lawmakers are staying in office longer than they did before, and that in recent years we've had the oldest Congress ever?
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Long gone are the days when Thomas Jefferson could write, as he did in 1807 to Count Jules Diodati, "I have the consolation of having added nothing to my private fortune during my public service, and of retiring with hands as clean as they are empty."
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Now, politicians' fortunes are rising, and they are clinging to their jobs for all they're worth.

But hasn't it always been this way? Graft has a long and sordid history in America. In 1789, Alexander Hamilton, the first U.S. secretary of the Treasury, announced plans to pay off both the federal Revolutionary War debt and the debt obligations of the individual states, all at 100%. The deal was preceded by massive insider trading in federal and state government bonds. Members of Congress were among the speculators who traded these bonds, based on advance knowledge of the Treasury's intent. According to Senator William Maclay, Democrat of Pennsylvania, speculators sent people in stagecoaches all over the country to buy up federal and state notes at a fraction of their face value.
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Crony capitalism is not new, but it has become a dominant force in Washington. The amount of money to be made is much larger. And the opportunities have become more frequent. In fact, it is now threatening the health and integrity of our entire economic system. "Crony capitalism" is a term that used to be applied almost exclusively to developing countries that were rife with corruption. Now the label can be applied to many sectors of our economy. It is an important part of the reason we face the economic crisis that we do.

 

One of the best-known chroniclers of crony capitalism in the nineteenth century was one of its participants. George Washington Plunkitt was a party boss of the infamous Tammany Hall, the corrupt political machine that ruled New York City for decades. Plunkitt was born in poverty, in a squatter's hut in what is now Central Park. He left school at the age of eleven and became a multimillionaire through elective office. He explained quite candidly in a series of newspaper interviews in the 1870s how he did it.

Plunkitt's philosophy was that politics is a business. How did he begin his career? "Did I get a book on municipal government ... ? I wasn't such a fool. What I did was get some marketable goods. What do I mean by marketable goods? Let me tell you: I had a cousin. I went to him and said, 'Tommy, I'm goin' to be a politician, and I want a followin', can I count on you?' He said, 'Sure, George.' That's how I started in business. I got a marketable commodity—one vote."
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Plunkitt continued with the classic description that has kept his name alive long after his death:

"There is a distinction between honest graft and dishonest graft. I've made a big fortune out of the game, and I'm getting richer every day, but I've not gone in for dishonest graft—blackmailing gamblers, saloonkeepers, disorderly people, etc.—and neither has any of the men who have made big fortunes in politics. There's an honest graft, and I'm an example of how it works. I might sum up the whole thing by saying: 'I seen opportunities and I took 'em.'"

He goes on: "Just let me explain by examples. My party's in power in the city, and it's going to undertake a lot of public improvements. Well, I'm tipped off, say, that I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particular for before. Ain't it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that's honest graft."
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More recently, Lyndon Johnson, while he served in the House and the Senate, told people to purchase advertising on his Austin radio station, KBTC, in order to get his attention.
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LBJ also frequently used his power at the Federal Communication Commission to obtain licenses for his radio and television stations and to block competitors from invading his markets in Texas. His company, needless to say, prospered. An initial investment of $17,500 grew into a media empire worth millions.
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Or consider the case of the late Congressman Tom Lantos of California. He was one of the most respected representatives and a champion of human rights. But no mention has ever been made of the glaring conflict of interest that was central to his personal financial life. A former economics professor at San Francisco State University, he served in the House for more than twenty-five years. Through much of his later public life, Lantos invested heavily in the stock of a single company. He never worked for the company. Indeed, the company was not even in his district.

When he first went to Congress, Lantos had little in the way of Boeing shares. But he kept buying and buying, year after year. According to his last financial disclosures, Lantos ended up owning between $1 million and $5 million of stock in the airplane maker. This when his total net worth was between $1.9 and $11 million.
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Lantos did very well with his investment. When he first arrived in Congress, Boeing stock was trading at $5 a share. By the time he died in 2008, it was $85 a share. It's hard not to come to the conclusion that Lantos had something to do with Boeing's success.

So why did Lantos tie up so much of his wealth in the fortunes of one company? It probably had something to do with the fact that because of his congressional position, he had an extraordinary amount of influence over the health of Boeing. Lantos served as chairman and ranking member of the House Committee on Foreign Affairs, which had direct oversight of the Export-Import Bank, a little-known federal agency that operates as one of the most blatant examples of corporate welfare in America. (Both the libertarian Cato Institute and Senator Bernie Sanders, a self-professed socialist, have denounced the Export-Import Bank as "corporate welfare at its worst.") Created at the height of the Great Depression, the bank had the goal of boosting American manufacturing.

Today, the Ex-Im Bank is often referred to as "Boeing's bank." The bank helped fund more than 25% of the airliners Boeing delivered in 2009, for example. In 2008, the year Lantos died, Boeing deals accounted for almost 40% of the bank's $21 billion in business. Boeing is a major manufacturer in the United States, to be sure, but the amount of support it receives is totally out of proportion to its size. The recent Ex-Im investments are actually down from their height. In 1999, 75% of the Export-Import Bank's financing went to Boeing. That same year, shareholders like Lantos saw the stock price jump from $32 to $45 a share.
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About 2% of all U.S. exports get Ex-Im financing; about 20% of Boeing's business does. In other words, it's ten times more likely to get funds than are other exporters.
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As the
Wall Street Journal
put it, "No company has deeper relations with Ex-Im Bank than Chicago-based Boeing."
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Lantos was a champion of Ex-Im, fighting off efforts by conservative Republicans to end it and aggressively pushing for its reauthorization. He was a tireless advocate of a government program that was directly benefiting his largest single stock asset.

Honest graft is so insidious because it piggybacks on legitimate service, and cloaks both in the name of public good.

Give someone the chance to feel that they are serving the public and getting rich at the same time and you have created a nightmare. Always a practical observer of human nature, Benjamin Franklin in 1787 expressed concern to the Constitutional Convention that when you give politicians the opportunity to "do good and do well" you are asking for trouble: "There are two passions which have a powerful influence in the affairs of men. These are
ambition
and
avarice;
the love of power and the love of money. Separately, each of these has great force in prompting men to action; but when united in view of the same object, they have in many minds the most violent effects. Place before the eyes of such men a post of
honor
that shall at the same time be a place of
profit,
and they will move heaven and earth to obtain it."

Ben Franklin knew human nature. He would not have been surprised by the deep sense of entitlement claimed by the Government Rich. Because of their "public service" and "sacrifice" to us, they feel entitled to the manipulation of the business market for their own benefit. Their attitude is that the rules that apply to the rest of us—insider trading laws, conflict-of-interest statutes—don't apply to them
and never should.
The Permanent Political Class is, and expects to continue to be, untouchable.

 

The Permanent Political Class does not produce any goods or services. Their ability to make money rises from their ability to extract wealth by leveraging it from others. Politicians can write legislation that can destroy corporations or help them prosper. They can perform constituent services to benefit friends or punish enemies. They can intervene with bureaucrats in a way that can reap billions for a company. They have access to information that can dramatically affect the economy and financial markets, information that few other people have.

All of this crony capitalism comes at a high price for the rest of us. Under free market capitalism, the idea is that a rising tide lifts all boats. Henry Ford wanted Americans to become more prosperous because then he could sell them more cars. Crony capitalism is a zero-sum game. Crony capitalists don't care whether a rising tide lifts all boats. They just want to buy their way onto the big party boat.

All too often people assume that corporations and special interests have the real power and that politicians are mere corks tossed around in the rough surf of capitalism. The fact is that the Permanent Political Class has immense formal and informal powers that are both blunt and subtle. For example, your chance of getting audited by the Internal Revenue Service often depends on who your congressman is. One study found that the IRS actually shifts enforcement away from congressional districts represented by legislators who sit on committees with oversight of the IRS.
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A study by Stanford University's Rock Center for Corporate Governance found evidence that firms that make political contributions and hire lobbyists are less likely to face enforcement actions by the Securities and Exchange Commission. And if they are subject to an SEC enforcement action, they are likely "to face lower penalties on average."
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Two professors found that companies that hire lobbyists are, on average, much less likely to be detected for fraud, or they can evade detection for 117 days longer than average. These firms are also 38% less likely to be detected by regulators. The scholars note that "the delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares." Having friends in Washington can be extremely valuable.
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Washington's financial leveraging power can be found even in something as seemingly innocuous as the Endangered Species Act (ESA). The act can have an enormous economic effect on property owners and developers. Scholars at Auburn University found that the implementation of the ESA has been highly political. Politics determine which species gets listed as threatened or endangered and how quickly (or slowly) a certain species gets recognized and protected. The researchers found that states with House members on the budget oversight subcommittee responsible for funding the U.S. Fish and Wildlife Service and the Environmental Protection Agency had significantly fewer listings than other states. As the researchers put it, "Congressional representatives who sit on the Interior subcommittee of the House Appropriations Committee use their position to shield their constituents, at least partially, from the adverse consequences of ESA."
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