Tag Archives: Tea Party

Conservatives, Liberals, and Privilege

Utah Senator Mike Lee (R) delivered an important, and timely address at the Heritage Foundation this week. It was focused squarely on what he called “America’s crisis of crony capitalism, corporate welfare, and political privilege.”

It is a problem, he said, that “simultaneously corrupts our economy and our government.” He pointed to a number of ways in which it manifests itself, including “direct subsidies,” “indirect subsidies, like loan guarantees,” “tax carve-outs and loopholes,” “bailouts,” the implicit bailout of “too big to fail,” and “complicated regulations.”

The Senator is careful to point out that the problem has a long history:

Just like the crises of lower-income immobility and middle class insecurity, the crisis of special-interest privilege is not Barack Obama’s fault. It predates his presidency. And though his policies have made it worse, past Republican presidents and Congresses share some of the blame.

He also stresses that the problem is bipartisan:

Too many in Washington have convinced themselves that special-interest privilege is wrong only when the other side does it.

And he’s willing to call Republicans to task for the part they have played:

We [Republicans] have tried being a party of corporate connections and special-interest deal-making. And we’ve lost five of the six presidential popular votes since [Reagan left office].

But though he believes Republicans bear some blame, the Senator contends that government-granted privilege is fundamentally incompatible with conservatism:

Properly considered, there is no such thing as a conservative special interest.

While I agree, I have a more ecumenical view of the issue.

Yes, privilege is incompatible with properly-considered conservatism, but I also think it incompatible with properly-considered progressivism (and properly-considered libertarianism, for that matter). The Senator, on the other hand, believes that “Liberals have no problem privileging special interests, so long as they’re liberal special interests.” As evidence, he quotes progressive thinker Herbert Croly, who wrote:

In economic warfare, the fighting can never be fair for long, and it is the business of the state to see that its own friends are victorious.

I won’t dispute that many progressives continue to view things this way. But I think there is value in framing the elimination of government-granted privilege in terms that attract progressives to the cause rather than in terms that seem destined to repel them.

And there is plenty of evidence that many progressives are at least open to the anti-privilege agenda. As I note in the beginning of the Pathology of Privilege, both the Tea Party and the Occupy movements oppose corporate bailouts. Consider the way progressive economist and Nobel Laureate Joseph Stiglitz framed the issue in Zuccotti Park:

Our financial markets have an important role to play. They are supposed to allocate capital and manage risk. But they’ve misallocated capital and they’ve created risk. We are bearing the cost of their misdeeds. There’s a system where we socialized losses and privatized gains. That’s not capitalism, that’s not a market economy, that’s a distorted economy and if we continue with that we won’t succeed in growing, and we won’t succeed in creating a just society.

Those words could have come out of Milton Friedman’s mouth.

Or consider the way progressives Mark Green and Ralph Nader framed regulatory capture in 1973:

The verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful.

The result, they wrote, is a system which “undermines competition and entrenches monopoly at the public’s expense.”

Green and Nader’s concern about regulatory capture wasn’t just an academic exercise. It helped propel one of the most successful eliminations of government-granted privilege in U.S. history: the deregulation of trucking, air travel, and freight rail in the late 1970s. To the considerable benefit of consumers, these industries were substantially deregulated and de-cartelized. And it happened because liberals like Ted Kennedy and Jimmy Carter eventually joined the cause.

Our task today is to get modern libertarians, conservatives, and progressives to once again rally against government-granted privilege.

How Cronyism is Hurting the Economy

LearnLiberty.org has a great new video by Georgetown University professor of philosophy, Jason Brennan. He makes the case that the “simple” solution to cronyism–giving government more power to regulate industries–may actually make matters worse since the rich and well-connected are more likely to game the political system than the relatively weak and unknown.

In the Pathology of Privilege, I note (p. 25-6) that “objective criteria for dispensing privilege are hard to come by. Without objective standards, politicians may end up picking winners and losers on the basis of personal connections and political expediency.”
The data suggest these suspicions are well-founded. For example, the previously cited study by Faccio, Masulis, and McConnell found that politically connected firms were far more likely to be bailed out than similar firms without political connections. A new study by Utah State University professors Benjamin Blau, Tyler Brough, and Diana Thomas offers further confirmation. They studied the lobbying expenditures and political activities of the 237 firms that received TARP funds. Controlling for other factors, they found that more intense lobbying and political activity made firms more likely to receive TARP funding, likely to receive a larger amount of it, and more likely to receive it sooner. To be precise, they found that “for every dollar spent on lobbying during the five years before the TARP bailout, firms received between $485.77 and $585.65 in TARP support.”

The problem of cronyism is compounded by the phenomenon of the “revolving door,” or the tendency for ex-government officials to find jobs in the industries they once oversaw and for industry insiders to find regulatory jobs overseeing their former colleagues. According to data from the Center for Responsive Politics, among those federal legislators who left office in 2010 and found new employment, nearly 33 percent went to work for lobbying firms and another 20 percent went to work for a major client of a lobbying firm. Former Speaker of the House Newt Gingrich famously did some work for Freddie Mac after he left office in 1999. Between 1999 and 2007, Gingrich’s firm received $1.6 million from the mortgage giant. According to the nonpartisan Congressional Budget Office, annual federal subsidies to the firm were about $4.6 billion during this time period. The former speaker maintains that he was paid for his expertise and not for his connections. But it is hard to believe that an equally knowledgeable person without his connections could command such a salary.

(see the paper for citations)

Progressives and Libertarians Agree: Cronyism Stinks

Last week, I came across this photo. In my view, it succinctly and accurately sums up our greatest economic and social problem: government-granted privileges to the wealthy and well-connected.

Laura S., Movement To Strengthen Progressive Values


Brilliant though the point is, it is not novel. Market-oriented economists from Adam Smith to  Milton Friedman to Luigi Zingales have been making this point for decades (and in some cases, centuries). What is remarkable, however, is that the photo appeared on MoveOn.org’s website. They, in turn, attribute it to the Movement To Strengthen Progressive Values’ Facebook page. A similar sentiment was expressed by the left-of-center Nobel Laureate Joseph Stiglitz at an OWS rally several months ago.

It is heartening that self-described progressives and self-described libertarians can agree on matters so central to our political and economic ailments. My new paper explores these issues in greater depth. Here is the introduction (I plan to blog parts of the paper over the next few weeks):

Despite the ideological miles that separate them, activists in the Tea Party and Occupy Wall Street movements agree on one thing: both condemn the recent bailouts of wealthy and well-connected banks. To the Tea Partiers, these bailouts were an unwarranted federal intrusion into the free market; to the Occupiers, they were a taxpayer-financed gift to the wealthy executives whose malfeasance brought on the financial crisis. To both, the bailouts smacked of cronyism.

In this paper, I show that the financial bailouts of 2008 were but one example in a long list of privileges that governments occasionally bestow upon particular firms or particular industries. At various times and places, these privileges have included (among other things) monopoly status, favorable regulations, subsidies, bailouts, loan guarantees, targeted tax breaks, protection from foreign competition, and noncompetitive contracts. Whatever its guise, government-granted privilege is an extraordinarily destructive force. It misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.

Should the Tea Party Hope for a Government Shutdown?

Last week, yet again, Congress passed a short-term continuing resolution, funding the federal government for another few weeks while Republicans and Democrats attempt to work out some sort of compromise to get an actual bona fide budget passed. This pushed off the prospect of a government shutdown a few more weeks.

Also last week, CNN released a poll finding that 73 percent of Americans believe a government shutdown that lasted a few weeks would be a bad thing. This general opinion seems to cross ethnicity, age, income, geographic region, and political party affiliation (though a little more than half of Republicans would be okay with a shutdown if it lasted only a few days). There was, however, one exception to the near-universal opposition to a shutdown: Tea Partiers. Fifty two percent of those who self-describe as Tea Party supporters thought a government shutdown that lasted a few weeks would actually be a good thing. I should note that 46 percent of Tea Partiers opposed such a shutdown and that the margin of error was plus/minus 5.5 percentage points. Still, this suggests that those who support the Tea Party are far more sanguine about the possibility of a shutdown than other Americans.

As advocates of limited government, are the beliefs of Tea Partiers justified?

As is often the case, we can look to the American states for some guidance. It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rules, David Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally-conservative Tea Partiers stand to lose the most if the federal government shuts down.

Perhaps it is time for them to rethink their support of a shutdown.

The Wrong Line in the Sand

There are many in policy circles these days who believe that newly-empowered House Republicans – especially those that were elected with Tea Party backing – ought to draw a line in the sand on raising the debt ceiling. This is the wrong line in the sand. Excessive debt is indeed bad. But it is a symptom of the disease, not the disease itself. To treat the real disease, I believe we need to get serious about addressing the spending problem.  

What is Wrong With Debt?

It used to be that Republicans focused almost-exclusively on taxes instead of on their root cause: spending. This, of course, biased policy in favor of huge deficits. When deficits are large but manageable, they drive up interest rates and crowd-out private investment. And when deficits are large and unmanageable, they can up-end a country’s entire economy.

Economists Carmen Reinhart and Kenneth Rogoff examined the implications of debt in 44 countries over a 200 year period. They found that in economically-advanced countries, when debt-to-GDP ratios moved from around 30 percent of GDP to 90 percent or more, economic growth rates tended to halve. Now the US isn’t a typical country and investors may be willing to let our government get away with debt-to-GDP ratios that are higher than 90 percent.

But certainly they are not going to let us get away with debt-to-GDP ratios of 200+ percent (which is what the CBO projects for 2035), let alone 300+ percent (2047) or 800 percent (2078).

At some point, the federal government will have accumulated too much debt for investors to feel comfortable lending at current rates. At that point, they will demand higher interest rates which will undermine economic growth.

In a best-case scenario, we will join the list of countries that have seen excessive debt severely hamper their economic growth rates. In a worst-case-scenario, the increased interest-cost will further add to the government tab, consuming the whole budget and causing the whole edifice to collapse under its own weight.   

What is Wrong with Taxes?

Now you might think we ought to draw a line in the sand and not borrow anymore. The problem is that if we refuse to raise the debt limit, it might cause the government to default on its existing debt, hastening the day when investors will lose confidence in the full faith and credit of the government.

An even more-likely scenario is that a refusal to raise the debt limit will trigger a massive tax increase. Some critics, of course, have blithely suggested that a tax increase is just what we need. The problem here is that taxes can also inflict great economic harm. Economists Christina and David Romer examined over 60 years of U.S. data to understand the impact of taxes on GDP. They carefully disentangled the tax-effect from other effects, and concluded that a tax increase of 1 percent of GDP lowers real GDP by almost 3 percent.

The CBO projects that if we were to meet our current long-term spending promises without more borrowing, all taxes would need to roughly double. If the Romers’ estimate is anywhere near accurate, a doubling of all tax rates would trigger one of the worst economic contractions in US history.  

So what should we do? I’d say the first thing we need to do is focus on spending. Its two symptoms — excessive debt and excessive taxation — are both economically damaging. Only by focusing on the disease can we avoid both symptoms.

Spending is where the line should be drawn.

The non-protesting kind come to Washington, D.C. Tea Party 9/12

D.C. Tea Party Sign 9/12/09 Penn Ave

D.C. Tea Party Sign 9/12/09 Penn Ave

It will be a loss for future historians if today’s chroniclers brush aside The Tea Party that came to Washington D.C. on 9/12 with brute characterizations.

I have watched, in the streets, several protest marches in D.C. over the years. The swell of people who stood outside the Supreme Court during Bush v. Gore in December 2000 debating chads was drawn by partisan fidelity (and some by the historic nature of the case).

During the protest following George Bush’s second inauguration there was a personal target and myriad complaints, hot rage, edge, but no uniting philosophical theme.

The remarkable features of 9/12 from my view:

  • These are everyday people who showed up as the result of a viral, decentralized spontaneity sustained since April 15.
  • The size. While estimates are debated on crowd size (and there must have been in the upper hundreds of thousands). I was struck by its calmness – the steady flow of the crowd. Deliberately paced. The tone among marchers – neighborly and of good cheer, yet entirely serious. They made a tradeoff to be here.
  • The signage. I think Matt Welch at Reason has it exactly right. A handful of Ayn Rand, several pro-life, a scant few tasteless. I saw only one of the “Must-have-at-all-protests-no-matter-what-you-are-protesting” – the  Reductio ad Nazium. I saw far more tri-cornered hats, colonial attire, two Statues of Liberty, and several grim reapers.
  • The overwhelming sea of signage was hand-drawn. Topics: health care, the debt, taxation, Congress, the Administration (no love for either). Signs of the Constitution and Gadsden flags were abundant. If one sign summed up the mood it was, ”Don’t Make Me Come Up There”,  stamped  over the Constitution, held by a middle-aged woman standing by the reflecting pool in front of the Capitol.

These were ordinary people. The non-protesting kind from your neighborhood, organized via technology, the internet, blogs, message boards, Facebook, and Twitter. As the Wall Street Journal noted on April 15th, in the old days coordinating people required a union or a church. As the last decade and half of protesting has demonstrated, today people can coordinate themselves.

To know if the Tea Party movement is an ideological marker with the power to re-shape politics (not unlike the anti-war or environmental movements) it must be followed in seriousness – a difficult charge, since ideological behavior provokes ideological reactions in those observing.

Robert Higgs in his book, Crisis and Leviathan, writes on the nature and role of ideology in altering society.

“To understand ideology, one must study symbols, paying special attention to rhetoric. How the ideologue expresses himself may be as important as what he says. Imagery holds the key to the identification of ideological motivation and program. Language is an important political resource…By taking linguistic symbols seriously one opens a window for viewing ideologies in action.”

It is a foggy window, Higgs notes, but nonetheless it is still a picture to be studied.

For another first-hand account, read the notes of my colleague, Veronique de Rugy, at The Corner.

UPDATE: Added photo.