Your Pol Has Been Bribed--And It's Worse Than You Think

The previous post discussed the role of what is called, in polite society, "campaign financing", in buying the votes of politicians. Your politician has been bought, and you have not voted for a candidate; you have voted for the lobbyists and special interests who have purchased that candidate.

But those are the big boys. The medium-sized boys have their roles to play, too, and thanks to OpenSecrets.org, we can see exactly how our politicians have been bribed to sponsor earmarks. That's right, there is a direct link between organizations' bribes of politicians and their reception of pork. It's very simple: an organization bribes a candidate via "campaign contributions", and in return, the politician sponsors some porky bill that funnels money right back to the bribing organization.

As an example, let's look at one of the worst offenders, Congressman Jim Moran (D-VA-8). You can see here, in Jim Moran's Bribes, how, for instance, Hampton University gave Moran $2,000 and in return Moran sheparded $4,000,000 of pork to 'ol Hampton U. Or, how a company called Dynamic Animation Systems stuffed $6,800 in Moran's back pocket in return for Moran to somehow find it in his heart to shovel $2,000,000 of pork to that company.

Here's Congressman C. W. Bill Young Republican of Florida. Raytheon gave him $10,500 in the dead of night in return for Young stuffing pork into a bill to the tune of $4,000,000, while National Interest Security Co (no irony there...) only had to pay Young  $4,800 for their $1.6 million.

OpenSecrets.org has created a searchable database but few are paying attention. But these smaller bribes are just as pernicious as the big ones. They create immeasurable needless wasteful spending and divert your politicians from funding worthwhile projects.

So remember: When you vote for a candidate, you're voting for their wasteful spending. Worse yet, your pol has no interest in you, the voter; they're too busy paying off bribes.

Your Politician Has Been Bribed

I hate to break it to ya, Mr and Mrs Voter, but you don't vote for a politician. You vote for the special interests who own that politician.

Since McCain/Feingold the barriers to nearly unlimited "campaign donations" have gradually broken down. The courts have consistently ruled that the First Amendment guarantees the right for people to use money for advertising on behalf of (or against) a candidate. And the Citizens United decision by the Supreme Court extended that right to companies and unions -- in effect, saying that companies and unions have the First Amendment rights of individuals.

That opened the floodgates. The amount of money that can be spent on behalf of a candidate is now essentially is unlimited. And it cements the ability of special interests to buy access and influence.

Let's look at a couple of examples, courtesy of OpenSecrets.org. Here are the top donors to John McCain's 2010 Senate campaign; here are the top donors to Charles Schumer's. What you see is an assortment of various banking, lawyer, media and industrial interests. Here's what you don't see: individuals.

The politicians spend much of their time soliciting these bribes while the special interests spend much of their time trying to bribe politicians. With such a happy conflation of interests, it's a simple matter for monied interests and politicians to erect relationships both symbiotic and parasitic. The politician is now elected, with the use of the bribes to pay campaign costs; in return, he or she is now owned and told how to vote by organizations that could care less about you.

In the next post: It's Even Worse Than You Think.

On Debt and Deficit: Part IV -- The Solution

In the three previous posts I've demonstrated why the deficits and debt are so harmful. Now, for the solutions.

1. It is quite clear that Washington does not have the discipline to stop wasting more of our money than they already tax. The only way to bring this discipline is a Balanced Budget Amendment.

     a. It is true that if the budget was balanced in one year it would tank the economy. Therefore, and also because there will be no political will to do it immediately, the budget should be balanced gradually over ten years, at 10%/yr. The latest CBO estimate is that the deficit will be $606 billion; over ten years, this would require lowering the deficit by $60.6 billion/yr.

     b. The healthiest way to reduce the deficit is to grow the economy--fewer people living off the economy, more people paying income tax. And the simplest way to do that is to distinguish between government "spending" and government "investment". See below.

     c. The BAA would require that Congress meet the budget goal with any combination of decreased spending and tax increases if economic growth doesn't meet the goal by itgself. The former is much less harmful and much more desirable.

     d. The BBA would also require that two additional years of deficit reduction by achieved, for a total of 12 years. This would generate a surplus of about $121 billion per year. The law would require that half of this be set aside for a "rainy day" fund to be released at times of recession -- plenty of states do this already -- and the other half be used to pay off the debt.

2. In considering what line items to cut or eliminate, Congress should use two criteria:

     a. What spending is "spending" and what spending is "investment"? First, there is plenty of pure waste already, and putting pressure on Congress to balance the budget would force it to actually root out some of the waste. Second, there is spending that yields no (or negative) multiplier effect; defense spending is one well-documented example. It literally subtracts from the economy. On the other hand, unemployment relief (more on that later) is stimulative; 100% of those dollars are returned to the economy and have a multiplier effect estimated to be near 2.0. In a different sense, Head Start is also an investment rather than "spending", even though it has a much lower multiplier rate.

Government appropriations need to be tilted towards "investment" and away from "spending".

     b. What does Washington (as opposed to the states) really need to spend on? Education is one area that where investment is best determined at local levels. Washington has no business spending taxpayer money on a local issue, much less also incorporating the inevitable waste that goes into a bureaucracy.

3. Aside from the non-stimulative effects of defense spending, we simply don't need a "defense" budget nearly equal to that of the rest of the world. In fact, "Defense" isn't defense; it's Offense, perpetuated by the military-industrial complex that Ike warned about 50 years ago. Nearly half of the current deficit could be eliminated by reducing "defense" alone.

4. Unemployment benefits should be capped at 26 weeks. Anyone who can't find a job within 26 weeks doesn't want to work. Extending unemployment benefits beyond that point simply enables people to be non-productive, and costs everyone because they aren't paying taxes. In the short-term, unemployment benefits are stimulative; in the long-term, they kill the economy by providing a disincentive to work. Unemployment benefits were meant to be a helping hand, not a lifestyle.

5. Any surplus generated beyond $121 billion would be devoted 50/50 to building the "rainy day" fund and paying off debt.

6. Medicare and Medicaid costs would be held down if the government simply decided to grow a spine and pay doctors and hospitals a lower price per procedure, and force the health-care industry -- perhaps the least efficient private enterprise in the country, thanks to government largesse -- to cut costs.

These are only the largest items. Social Security is a different issue because it has its own trust fund. There are plenty of other opportunities.

Of course, the odds that Congress will adopt this idea or anything like it are nearly zero. This is because nearly all politicians in Washington have been bribed. That's the subject of the next post.

On Debt and Deficit: Part III

In the previous two posts I looked at the basic facts behind our debt and argued that it is an issue deserving attention. In this post I'll state why I think we need to act to reduce our deficit and debt -- quickly.

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1. We are now paying $360 billion a year just in interest on our debt. There are far better ways to spend taxpayers' money than lining the pockets of people who can afford to invest in (tax free) government bonds.

2. Interest on our debt is now the 4th-largest component of our budget, behind Defense, Medicare, and Medicaid. We spend twice as much paying off debt interest as we do on education.

3. Interest rates are at a historic low. When they rise to normal levels, as they inevitably will, the cost of debt interest will at least double, maybe triple, and that doesn't include interest in the additional debt issued in the meantime. 

4. You can see where this is going. Indeed, the CBO has projected that debt interest and Medicare/Medicaid will chew up 100% of all national tax revenue around 2025. 

Here are the arguments that people who aren't concerned about the budget deficit make: 

1. Deficit spending is necessary to stimulate the economy during recession: False: increased spending is often desirable, but if we were running a surplus, that increased spending needn't create a deficit. 

2. Debt as a percentage of GDP is within reasonable bounds: False. Comparing debt to GDP is ridiculous. The government doesn't own GDP and can't use any of it (other than the part of it for which it accounts--about 20%) to pay either interest or principal. When homeowners take out a mortgage, the bank doesn't ask how much money your relatives own; the bank cares about whether you can repay your own mortgage. 

3. If we cut the deficit, we'll tank the economy: False. It depends on how the deficit cutting is done. The way the GOP is (pretends they are trying) to do it seems to portend a draconian, dystopian economy. But if it is done gradually, with an eye towards distinguishing between "spending" and "investment", it will actually stimulate the economy. More on that in Part IV. 

4. Isn't government debt the same as homeowners taking out a mortgage?  Well, yes, with one very important difference: When you take out a mortgage, your very first bill and all the others require that you pay a portion of both interest and principal. But when the government takes out debt, it can pay off both --and in fact it does this every day -- by simply issuing more debt.

The arguments for deficit spending -- mostly variations on Keynesianism -- aren't totally wrong, but they really are one way, with a ratcheting effect. Somehow, it seems OK to deficit spend when the economy goes into recession, but we never pay the debt off. Thus, both the debt and interest payments grow over time, and the interest payments themselves become a leading cause of both deficits and debt.

Last Comment: Running a deficit is simply morally wrong. It amounts to the current generation having a party and sticking our children with the bill. "Oh, no, I'm a good person; I would never do that." Well, if you're not concerned with deficits, you just did.

On Debt and Deficit: Part II

In Part I I laid out some of the basic facts about our national debt and deficit. In Part II, we look at some of the thinking around these issues. 

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There seems to be great relief with the latest CBO projections that the deficit (now projected at $600 billion) is falling quickly. It is such as it ever was: deficits rise with recessions and fall with recoveries. But the deficits never "fall" enough during recoveries (into surplus) to make up for the deficits that accumulated during recessions. And so, we find ourselves $17 trillion in debt.

Further, there seems to be a ratcheting effect: over time the deficits that arise during recessions get larger and larger, while there are hardly any surpluses to speak of, so that the debt grows at an accelerating rate. 

Discussing the deficit seems to be like discussing global warming: The data is murky, the analyses endless, the opinions cover the spectrum and no one really understands the issues. Nonetheless, many in our country believe that the weight of the evidence favors the conclusion that global warming is both real and man-made, and further, that our one and only planet isn't worth taking chances with. Regarding the deficit, many have come to the opposite conclusion: They believe there is no harm from deficit spending and don't seem to be concerned that there might be a point of no return. 

It is a paradox, but I think one that can be explained. Ignoring the deficit is "easier" in that it forestalls the tough decisions that would have to be made to eliminate the deficit; further, backing away from these decisions allows our pols to keep greasing the creaky wheels of government with pork. By contrast, the costs of dealing with global warming seem, to the average individual, to be indirect and borne by others, even though there may be an intellectual understanding that at some point, the costs will be at least partly passed on to consumers.

The net result is that very few people are motivated to look at the facts and fewer yet to deal with the issue -- even though it may be easier to fix than many think.

In Part III, we'll look at the reasons the debt has to be addressed.
In Part IV, I'll present a solution. 

On Debt And Deficit: Part I

Our national debt is now near $17 trillion. The annual deficit rose to $1.7 trillion three years ago, but is now falling. The latest CBO estimate for this fiscal year is $606 billion.

Is this good news or bad? Is it OK to run a deficit? A debt? How much is too much? And what, if anything, should we do about it?

Part I: Background

 The national debt began to rise in a big way only during WWII. By the end of the war, it stood at $258 billion. By the time Reagan entered office, the debt had just reached $1 trillion, and by the time he left in 1988 it had grown 2 1/2 times during his tenure to $2.6 trillion. It continued to grow under the first Bush and also --albeit more slowly--under Clinton, then doubled again under the second Bush to $10 trillion and has grown another 70% so far under Obama to nearly $17 trillion. 

The national budget has been balanced just six times in the last 56 years -- four times under Clinton, and twice under Johnson. The last GOP president with a balanced budget was Eisenhower, in 1957. 

In theory, servicing this debt means paying the interest due and also the principal portion of whatever debt has come to maturity. In practice, the interest has been paid, and so has the principal -- but all of the latter, and some of the former, only by issuing more new debt to cover the cost. 

The interest cost of our national debt is a function not only of the debt, but of interest rates, and secondarily the length of maturity of the debt issued by the Treasury. The Treasury tries to extend maturities when interest rates are low so as to lock them in, and shorten them during times of high interest rates, but it is always a guessing game. The point is that the interest cost on the debt is not a direct function of the amount of debt outstanding, and often lags changes in general interest rates. 

Thus the cost of interest -- which must be borne by each year's budget -- is quite variable, although over the long haul, it has certainly trended up. Interest costs actually fell from FY 2011 to 2012, from $454 billion to $360 billion and may yet fall farther in FY 2013, thanks to very low interest rates. The 2012 figure implies an average interest rate paid of just 2.1%, a historically low figure. In 1995 the average interest rate was 6.7%. 

At $360 billion, interest on debt is the fourth most-costly item in the entire budget, behind Defense, Medicare and Medicaid. And if the average interest rate paid today was equal to that of 1995, interest cost would be the single most costly line item, at well over $1 trillion by itself.

Next Post: Part II -- Why we Ignore the Debt.

On Unions

Unions are largely irrelevant -- now --  and there are good reasons for that. They have a chance to regain their clout, but they'll have to rethink their roles and tactics.

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My aunts belonged to the ILGWU back in the days when garment workers weren't allowed to use the bathroom before lunchtime. Unions helped bring us the 40-hour workweek, the weekend, and a host of other benefits that we now take for granted. Unions started at a time when capital held the power, both capitalistically and legislatively; there was plenty of labor available for the mostly unskilled jobs available, including millions of immigrants. Each unit of labor was expendable. And until 1933, when the NLRB was enacted, there was no legislative enforcement to speak of for the right to organize. 

Understandably, companies fought the unions and the history of those struggles is well-documented. Beginning in the late 1940s, however, the tone of the struggle changed: the fights were less about union rights and more about union wages and benefits. And by and large, those wages and benefits were generous. US manufacturing companies had the market to themselves (as late as 1965, the Big 3 owned 90% of domestic auto sales) and there was more to be lost from strikes than gained by bargaining down to the last penny. Too, much of the value of the benefits bargained for by the manufacturing unions were "future" benefits in the form of defined-benefit pension and medical plans.

By bargaining future benefits, both management and unions were kicking the can, same as today's pols kick the can on fiscal policy. Union leaders could wave those future benefits to their members as proof they were doing their jobs; management could wave them to their Boards as a way of preserving labor peace with a promise that would only have to be fulfilled long after all of them retired. Those future benefits were a collusion between labor and management leaders to keep the peace, and --this is crucial -- no one bothered to do the math.

By the time the chickens came to roost, it was too late. The investment returns were lower than expected, the demographics had turned as inexorably as the tides, medical costs were on the rise, and although GAAP has rules around the funding of defined-benefit plans, many plans were underfunded in the expectation that investment returns would make up the difference. Now, many companies (and governments, too --this is an even bigger problem for the public worker unions than the private) -- are simply unable to fulfill their promises, and are forced to either renegotiate them or go into bankruptcy.

Are managements (and governments) responsible? Yes. But so are the unions. Together, they buried their collective heads in the sand. Today's companies, governments and workers are holding the bag.

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What else happened to reduce union power? The obvious cause is globalization, and the access to low-labor cost markets such as China. I won't belabor that point, except to say that the impact of low-labor cost markets is already beginning to fall.

There are three other more important reasons. The first is that paradoxically, labor now holds the power over capital. Well... most labor. Not fast food workers or hotel maids. But all professionals and a growing number of blue-collar workers hold more power than ever. It's called brains. Business has become exponentially more complex and specialized, and one result of that is that companies realize the power of brains and must compete for the best -- worldwide. And while brawn (read: "old" manufacturing) lends itself well to union representation, brains do not. There are way too many specialties that don't lend themselves to broad representation. And many "brains" don't want any organization to represent them. They want to represent themselves and to compete in a meritocracy. And third, brains hold the power anyways. They don't need help and they don't want to pay dues.

By the way, if you don't believe that skilled blue-collar workers have "brains", try running a six-axis CNC machine tool, and good luck to you.

The second big reason that unions have lost power is the flip side of the first--the reduced power of capital. If you don't believe me, look at how little money it takes a bunch of teenagers with one good idea to start an internet company that's worth millions in a few months. Look at the disintermediation in the markets; look at Kickstarter; look at venture-capital and private equity funds and even micro-loan banks. I'm fond of saying that of all the resources that a business needs, money is the easiest to find. Like a rule of physics, capital flows to good ideas, and these days, ideas rule.

And third, most important: Unions lost their own way, a dozen times. They were greedy beyond reason. A unionized printing plant I ran paid its pressmen over $24/hr plus benefits -- in 1988, four years before we had to close the plant because our costs were outrageous -- and went on strike, for more. As union membership fell, the union leadership became corrupt; in 1993, at a metals service center plant I ran, I personally reviewed union documents that stated no receipts were required for "reimbursement" of union leaders' "expenses". Unions started to do more to try to preserve themselves as institutions than to represent their members; the rank and file in the second union plant I ran, with whom I generally got on well, told me every week how much they resented the weekly dues. The leadership of that union actively fought safety measures that I introduced at the request of the rank and file. 

The biggest mistake the unions made, though, was ignoring a truism of economics: Thou Shalt Not Demand An Increase of Compensation Without Helping To Pay For It. At first blush, this may seem like something out of Alice in Wonderland, but workers and unions do (sometimes) contribute to their own increases in compensation by improving productivity. Companies can well afford to pay higher wages per hour if productivity increases drive down the unit cost of labor per output. But when collective bargaining work rules are set in cement, productivity can't increase. The looniest example of this occurred back in the printing plant, which had three unions under the same roof. The unions got into a fight with each other over jurisdictional work rules, and one of the unions actually threatened to strike the others, until the three of them arrived at an agreement where a single piece of work, involving a simple transfer of printed materials from one pallet to another, was shared by all three unions. Meanwhile, as plant manager, I watched helplessly as the three unions slugged it out with each other, only to get to a solution that satisfied all them -- and which lowered our productivity and raised our costs. That was Alice in Wonderland.

The response of most unions was to circle the wagons -- to respect seniority regardless of merit, to protect the weakest in the name of representing all, to demand ever-higher compensation without offsetting productivity improvements. And they learned a painful lesson that some businesses (and some of today's governments) have yet to learn: you can't cut your way to greatness.

If there is one thing I hope the reader comes away with, it's this: Companies can afford higher wages and benefits if and only if workers, unionized or not, help to improve productivity by enough to pay for that compensation.

Of course, there are plenty of examples where this rule wasn't respected, but you don't read about them any more. Those companies are dead. 

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So, to where now for unions? It seems that there are opportunities. As the middle class becomes skived into the haves and the have-nots, the ranks of the have-nots grow. Many of the have-nots work in service industries which starkly resemble the manufacturing industries of old: it doesn't take a lot of brains to stock shelves at WalMart or to make beds at hotels, and there is a seemingly inexhaustible supply of labor for these jobs, thanks to a host of domestic factors and immigration.

The lower-paying service industries represent a huge opportunity for unions but only if they don't repeat the mistakes of the past. They need to do the math on "future" payments promises, they need to understand and account for the effects of globalization, and most importantly, they need to collaborate with management to improve productivity enough to make up for increases in compensation.

For its part, management needs to consider the possibility that a better-compensated work force might be good business. Indeed, WalMart's cost of retraining because of its huge turnover must be staggering; Costco has a completely different business model including much higher wages, and it's a successful company by any measure.

And government, and the voters, need to understand that they literally subsidize WalMart's business because so many WalMart employees can't subsist on their wages and need public help. Since when is our government in the business of subsidizing public business?

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Lastly, a teaser: There is yet another business model which flies under the radar. It's called employee ownership. Indeed, after my disastrous forays in unionized companies, I have for the last 19 years worked at a company which was partially employee owned when I arrived and which, in 2001, became 100% employee owned. 

Yup, that's right. Owned 100% by the employees; every employee who's been with the company for one year owns shares. You don't think that drives productivity? You don't think our customers aren't impressed with the quality of service they get from our machine operators? Our little American manufacturing company has seen its shares rise by an average of 16% annually over the last ten years. Some of our machine operators are retiring with multiple six-figure accounts; it's possible that in the future, some will retire as millionaires. 

I certainly hope so. More on this in a later post.