From Two Political Junkies - http://2politicaljunkies.blogspot.com/2005/09/absolut-corruption.htmlSo yeah, some authors would have titled this post with something like “Department of D’uh”, but the fact that Congress is beyond corrupt (and I mean “beyond” not just as hyperbole) is something I think needs to be repeated, over and over again. So let’s take the occasion of a study which found….

Companies that give money to political campaigns have better-performing stocks, according to a new study, than companies that don’t contribute. It’s no small gap, either. Corporations that give the most have beaten the market by 2.5 percentage points a year over the past 25 years.

… to talk about it a bit. The study just looked at direct giving from people in companies through PACs and not at favours, soft money or cutouts, and thus found that it only took an average of 2K per PAC per candidate per cycle to make a different, which just goes to show that Congresscritters aren’t just corrupt – they’re cheap – albeit not as cheap as the study suggests.

Still 2.5% over 25 years, while it may seem small, is actually huge, thanks to the power of compound interest. The vast majority of fund managers underperform the market, if you can routinely beat it by 2.5%, you’d be one of the best around.

Corruption in the US stands out so clearly to me, I think, because I’m Canadian. That’s not to say that we don’t have corruption up in the Great White North (we recently had a scandal which involved envelopes of cash being passed back and forth), but it’s so much less at the Federal and Provincial levels, as a general rule, than in the US, that I’m always astounded in the US at how open, and legal, bribery is. The institutional difference, I think, is this – in Canada there’s really only one person at the provincial and federal levels really worth bribing – the Prime Minister or the Premier. And if you aren’t already in good by the time he makes it to the top, well it’s far too late. A Prime Minister or Premier with a majority is practically an elected dictator. He has all the power he needs, he’ll be taken care of monetarily when he quits – he doesn’t need your stinking money. Or, as much money as he does need to spread around, he doesn’t need that much. And really, no one else is worth buying except the top man (and it is almost always a man) or someone with a lot of influence over him. Members of Parliament, our version of your Congressmen, are essentially eunuchs, since we have such strong party loyalty – it is very rare for an MP to vote against their leader or party on a bill, and the consequences are severe for doing so. Buying an MP, unless you think he might eventually make it to the top or close (senior Cabinet Minister) just isn’t worth it. You might get a little bit of pork, but you’d probably get the same amount by giving directly to the party and letting them give to the MP. And while we do have private fundraising, most election costs are covered by public funding (and our Supreme Court, unlike yours, upheld strict limits on 3rd party advertising during elections.)

Congresscritters in the US, on the other hand, need a lot of money for reelection. You walk in the door, as a freshman House member, and they tell you you need to raise $10,000 a week, for the next two years, to have 1 million in your war fund. If you can raise more, well, that earns you a lot of influence. Nancy Pelosi didn’t get to be House Leader because she’s a nice old grandmother – she got huge amounts of friends, power and influence because she raises piles of cash – over 100 million for other members since 2002. They owe her. Rahm is powerful in part because of his ability to fund raise and to direct DCCC money to his favored candidates, and so on.

Democratic Votes on Gulf Oil Lease BillSo candidates need money, and thanks to electoral reform in the 70′s, which capped how much money they can be given by any one individual, they need to get a lot of money from a lot of people. The result of this was that rather by being owned by a few very rich billionaires, they are owned by people who have the rolodexes to round up large numbers of donations – thousands of $2,000 a pop donations.

The people who can do that are senior corporate management. They make enough money to afford it, it is understood that when they are asked they are expected to give (oh, it can never be said, but it’s very well understood) and the returns – the ROI – is very good. Perhaps the average is 2.5% extra profit, but it can be much, much, more than that, as all the Iraqi contractors can tell you.

A good bill to examine the effects was the one to end the royalty free leases that oil companies drilling in the Gulf obtained because of a legal error in setting up the leases. Oil companies in 2006 were making record profits, the public had no sympathy at all, and the House took it up (it passed, though as far as I can tell it never made it past the Senate). Larry Makinson at the Sunlight Foundation ran the numbers, and his charts are on the left.

Republican Gulf Oil Lease Bill VotesWell, well, well. Imagine that. Those who received more money from the oil companies were more likely to vote against it.

It’s worth pointing out that what corporations want from legislators often isn’t what you think it is. One example in terms of regulation:

Anheuser-Busch also benefits from a three-tier distribution system that deliberately places wholesalers between producers and retail outlets — a hangover from the Prohibition days that retailers such as Costco Wholesale (COST, news, msgs) want to see go the way of bathtub gin.

Anheuser-Busch benefits because the system makes it harder for smaller competitors to get access to retail shelves because they have to convince distributors that sales will be robust enough, Reilly says. “Distributors can be a significant barrier to entry if you are a small guy,” he says.

Barriers to entry are a big, big deal. What businesses want, above all, is not competition – it is the reverse of competition. They want less competition and sure profits. Much government regulation works this way. The more rules there are that a business has to follow, the harder it is for anyone else to get into the business. This can be pro-active, as in the case of Anheuser Busch, as above, or it can be passive – as when the Bush administration, after winning in 2000, ended the anti-trust suit against Microsoft. So today, when I go to my local computer store, and I say I want a computer without Microsoft Windows ™ on it, he won’t do it, because he’s scared of the consequences of selling a computer to me without it on it. (But I can’t get him to tell me exactly what they are. Perhaps a reader knows?) He’s turning down business, he’s so worried. Likewise sheer weight of regulations can make the barrier to entry very high – if you want to start a bank, an insurance company, a drug company, the requirements are so heavy, just in lawyer time, that they are a major expense.

The most naked benefits, of course, come from so-called cost-plus contracts, as we’ve seen in Iraq. With cost plus you get a percentage on top of what you claim are your expenses. As Haliburton Watch notes:

The LOGCAP contract is the most lucrative contract being performed in Iraq today. Under the cost-plus provisions of LOGCAP, the U.S. government pays KBR 1 percent of every purchase KBR makes with the possibility of an additional 2 percent as an incentive bonus that is paid if the company is operating efficiently and honestly. When KBR buys food for the troops, it is paid 1 percent of the cost of that food. When KBR constructs a new military housing facility, it is paid 1 percent of the construction costs. When KBR houses its staff at hotels or purchases trucks and equipment to carryout its duties, it is paid 1 percent of those costs.

Or, indeed, as was the case with Custer Battles, where they simply did not provide the services they billed for… and got paid anyway. Then there was the case where, immediately after the war, a bridge had to be fixed up. The Iraqi company that built the bridge offered to do it for half a million. The contract was given to a US company for 10 million.

Or here are some more examples from Brush:

  • FedEx (FDX, news, msgs) and United Parcel Service (UPS, news, msgs) benefited last year from a postal bill that outsources some mail delivery, Gabriel says.
  • Big insurers Aflac (AFL, news, msgs) and MetLife (MET, news, msgs) would like to see a single, national charter to do business, like the kind that banks have, says Merkel, who tracks insurance companies at Hovde Capital. That’s not likely for property and casualty insurers, Merkel says, but for other lines such as life insurance, “there are always rumblings,” he says.
  • Wal-Mart Stores (WMT, news, msgs), which buys many of its goods from low-labor-cost countries such as China, wants to influence trade policy. It’s also seeking a banking charter to save on processing transactions, a move opposed by segments of the banking industry, says Gabriel.
  • Verizon Communications (VZ, news, msgs) and AT&T (T, news, msgs) want to have a say in cable regulation as they roll out entertainment services through fiber-optic networks. They’d also like to be able to charge content providers a premium for superior access to their networks, which would end the current convention of “Internet neutrality” that treats all traffic equally.
  • Bank of America (BAC, news, msgs) could gain if Washington lifted a cap on how big banks can grow by acquisition, says Morningstar analyst Craig Wolker. The current 10% market share limit serves as an obstacle to its long-term strategy of expanding by purchasing smaller banks.
  • Energy companies such as ExxonMobil (XOM, news, msgs) want to have a say in how Washington rules on lots of issues, including how much oil companies pay in royalties on federal land leases and changes in alternative-energy policies. They also are opposed to proposals that would eliminate tax breaks they receive. Having pocketed $40 billion in profit last year, ExxonMobil may have a few dollars left over to spend on trying to influence those decisions.

To that I’d add a couple more examples – the MA and California health insurance bills. These bills mandate that consumers have to buy health insurance. That means not giving your money to an approved list of private health insurance companies would be illegal. That’s the best way to make money – use government coercive power to force people to buy from you. Car insurance companies have the same deal (and yes, government run car insurance, like health insurance, is cheaper).

In the United States today, the simplest, easiest and safest way to make money is to bribe the government to pass laws or subsidies favourable to you. It is not possible to state this strongly enough. The examples are legion – for just two more, particularly egregious cases, take the copyright extension law passed just before Mickey Mouse was going to go into the commons (thanks Disney) – or take the Bankruptcy bill, bought and paid for by the credit card industry…

Nearly $700,000 in debt and juggling two dozen credit cards, U.S. Rep. James P. Moran Jr. (D-Va.) had begun to slip behind on his payments. One bank had already rejected his application for a loan.

“I didn’t see any way out,” Moran said in an interview.

MBNA Corp., a credit card lender with critical legislation pending on Capitol Hill, came to his rescue.

On Jan. 30, 1998, MBNA gave its delinquent borrower Moran a $447,500 home refinancing package that consolidated much of his debt at a lower interest rate. It was the largest mortgage package MBNA reported giving to a single borrower that year, an analysis of Federal Reserve records shows.

Moran’s loan had a number of favorable aspects that permitted him to borrow more money at a lower cost than was standard for the industry, according to a review of his financial records and interviews with a dozen lending experts.

As Moran was negotiating the loan, he also was supporting a bill pushed by MBNA and others in the credit card and finance industry that would make it tougher for people to walk away from debts by declaring bankruptcy.

Moran said the loan had absolutely nothing to do with the legislation, and was an honest attempt to solve mounting financial troubles….

…On Feb. 3, 1998, four days after he received the loan, Moran became the lead Democratic sponsor of an even broader bankruptcy bill sponsored by U.S. Rep. George W. Gekas (R-Pa.).

Of course, I’m sure we all believe Senator Moran that there was no connection. I, for one, would never even think that that was a possibility. Nor would I find this, er, ironic:

Meanwhile, Moran’s support for bankruptcy reform was unabated. In March 2001, he railed on the House floor against credit-dependent consumers.

“Some people are taking these credit cards in, they sign up, they max it out, whatever they can charge,” he said. “They pile debt up, and then they get themselves relieved from paying off their debt, and oftentimes they can go right back to doing it all over again. It needs to be fixed.”

In the end, of course, MBNA got their bill. And that bill will make them a lot of money. A heck of a lot more than what they had to write off for Moran. Now that’s smart business – good return for the money.

Now, the problem with corruption isn’t just that public money is being wasted, though that’s bad enough. It’s that it hurts the economy. The bankruptcy bill was bad economics. When people have too much debt, you in fact want them to be able to shed that debt and get back in the game. Economic zombies, shackled to debt, unable to leave their jobs, unable to spend, unable to take economic risks like starting a business are not good for the economy. Since Solon forgave the debts of Athenians, inaugurating Athens’ golden age, this has been the rule – relatively easy bankruptcy is good for the health of the state. As for the lenders, as someone who has worked in an underwriting department, let me suggest the following – don’t lend more than you can afford to repay. It’s not hard, and responsibility flows both ways.

Conservatives often go on and on about the wonders of the free market, and there’s a lot of truth to it. For goods that aren’t natural monopolies (health insurance, power transmission, police services) competitive free markets work wonders. But one of the preconditions for a free market to exist is relatively low barriers to entry. When the FEC chose not to allow open access on high speed lines, as it had on the telephone lines – and when Congress also didn’t act, it made it so that most people in the US had access to what Americans laughably call “high speed internet” through two providers at most, and for many one – or none. When regulation is too high, that too is a barrier to entry. When sole-source contracts are awarded, without open competitive bidding, that too means new companies cannot rise.

The complement to this is when monopolies are handed out to various private actors. When the Post Office is forced to give FedEx business; when people are forced to buy insurance; when the major telecom providers are given access to spectrum rather than letting everyone use it; when beer producers aren’t allowed to sell their product direct to retailers; when every drug is made prescription, so that people must use doctors and phamacists (and pay their fees) – when all of this is done, competition is stifled. It is not an accident that there are only four large telecom companies. It is not an accident that Microsoft still controls most of the desktop OS market, despite not having improved the UI in any significant way since the creation of Windows (which was just a rip off of the Mac, in any case.)

When you have monopolies or oligopolies innovation slows to a crawl. The Japanese and Koreans and most Europeans have far better high speed internet, for less, than Americans. This is an industry America created and it is falling behind. Why? Because the high speed internet companies in the US have no competition, and the government also refuses to provide high speed internet directly (the two methods that work). The US refuses to either have competition, or to have government provide the services, in other words. Instead it prefers to allow, even encourage, the formation of monopolies and oligopolies.

Likewise the US has crippled mobile phones – the big 4 literally turn off most of the features of the most advanced phones (the iPhone being a notable exception). Why would they want to allow real GPS, or real internet, or anything else, if they can’t charge for it? If they can’t figure out how to make a profit off a feature, they disable it.

America is not in the lead anymore in any technologies with the possible exception of biotech, and, of course, in military technology. The Japanese make better cars, and Toyota is now #1. The Japanese and Chinese and Europeans have far better trains. The Japanese make better consumer electronics, devices so advanced they don’t even sell them to stupid gaijin who they figure won’t appreciate them. The Europeans make the best phones. Tons of countries have better internet. The Japanese are far ahead in solar power. The Europeans are ahead in windpower.

Most of these industries were invented in the US, but the US has lost the lead. The US has lost the lead because US companies make their money by playing political games in an attempt to get the government to either give them money, force consumers to give them money, or allow them to form oligopolies or monopolies and extract economic rent. With a few exceptions, risk taking – creating new products – innovating, is not what the US does anymore. The last great revolution was the internet boom – it should have been followed by a telecom boom. We should be in the middle of that right now. But due to regulatory choices, and due to political choices like spending hundreds of billions on the military, it didn’t happen.

This is a problem for the US and not just for the obvious reasons. In the old days you held US dollars in part because the next technological revolution was going to happen there – and you needed dollars so you could buy up part of the future. If the next big tech revolution isn’t going to occur, what the heck are you going to spend all those dollars on? As countries and investors realize (and they are realizing already) that there isn’t enough in the US worth buying to soak up all those greenbacks they’ve got stored away, they may decide to get out while the getting is good. And the US, which relies on the rest of the world paying for its overconsumption and bloated lifestyle, simply can’t afford to be cut off. (My guess is that a real realignment to the standard of living the US can afford would lead to about a 20% collapse in general standards of living.)

A large part of the reason for the US’s problems is that Congress has become a money and favor dispensing machine. This is its main function at this time. Each time it does so it makes the US less competitive, drains money away from productive enterprises and makes the system more rigid, less responsive and less able to innovate.

If the business of America is to be business, then business must succeed or fail not because a favorable bill was passed, but because they have a great new product or service that people want and need – both in America and overseas. The role of Congress is not to pick winners and losers, but to set up incentive structures that create free and competitive markets in those industries that respond well to them, and in natural monopolies either to force them open (i.e. telecom) or if they don’t respond to competition (health insurance) to take them over and run them as efficiently (Medicare’s 2-4% overhead vs. private companies 20% at 30% – a system which eats up 5% more of total GDP than necessary), so that money is not being wasted and can be used in productive areas of the economy.

For far too long, the American system seemed impregnable. It produced surpluses and growth and kept on innovating, no matter what anyone did. The response to that was to decide that gaming the system – trying to get a bigger slice of the pie – was a better way to get rich than to try and create the future, or to compete with the rest of the world. And so everyone went to Washington and the State capitals and looked to get handouts and to use regulatory and legislative power to make themselves profitable and safe from competition.

To recover from this sclerosis will require changing the system so that money no longer buys nearly as much influence. Until this is done, no matter what other changes are made, the fundamental incentives of the system will encourage inefficiency, corruption and economic underperformance. And, frankly, will lead to disaster. The rest of the world cannot continue to send 80% to 100% of its savings to the US forever. If the US does not clean its own house, the house will be cleaned for them, probably by the neighbours condemning it…