Wednesday, September 26, 2012
Peter Schweitzer: Crony Capitalism is Yielding Compromised Policy and Terrible Economics (video)
Crony capitalism is compromising policy and the economy. In the United States now, the city with the highest per capita income in America is Washington, DC. They passed Silicon Valley last year. Seven of the ten wealthiest counties in America are counties that border Washington, DC. Government is big business. There is serious money to be made. That is leading a lot of young and talented people into influence-peddling. And it is changing the entire incentive structure. Look at hedge funds, for example. Funds that invest in lobbyists and make a lot of campaign contributions consistently outperform hedge funds that don't. It's not because they're smarter – it's because they're getting access to information in terms of legislation or trends that gives them a leg up. It is distorting the entire nature of our "free-market" economic system.
Interviewed by Alex Daley
Alex: Hello, I'm Alex Daley, and welcome to another edition of Conversations with Casey. Today our guest is Peter Schweizer, founder of the Government Accountability Institute and author of Throw Them All Out. That's a big statement, Peter. All of them?
Peter: Yeah, I think all of them. That's not to say that there aren't some honest people in Washington, but I think what we're dealing with is a cultural problem. This is not a problem of just a few bad apples. This is a problem that the entire culture in Washington has gravitated towards cronyism and crony capitalism; and I think that unless we change that, we're in for some very, very difficult times when it comes to prosperity and economic growth in this country.
Alex: We've all heard stories about the connections – lobbyists and whatnot with the Congressmen and the president and such – but really, how bad is the problem? Is it really affecting policy?
Peter: It is. It's affecting policy, and I think it's affecting the entire economy. Think about this, for example. In the United States now, the city with the highest per capita income in America is Washington, DC. They passed Silicon Valley last year. Seven of the ten wealthiest counties in America are counties that border Washington, DC, so government has become big business. There's a lot of money to be made. And not only is that leading a lot of young and talented people into influence-peddling in industries where I'd rather have them doing something more productive, it's also changing the entire incentive structure. We know for example now that if you look at hedge funds, hedge funds that invest in lobbyists and make a lot of campaign contributions actually consistently outperform those hedge funds that don't. It's not because they're smarter – it's because they're getting access to information in terms of legislation or trends that gives them a leg up. So I think that's extremely troubling, and it's distorting the entire nature of our free-market economic system.
Alex: And that kind of influence-peddling is legal and condoned?
Peter: It is. There are restrictions on lobbying, but there's so much else that goes on that people don't realize. One of the biggest growth industries in Washington right now is something called "political intelligence." I know that sounds like an oxymoron – political intelligence – but what it really means is that instead of an ex-politician or an ex-Senator going to work and trying to influence legislation, what they do is they get hired by hedge funds or by large investors, and they actually literally go to the Senate floor, and they find out if a certain amendment or a certain piece of legislation is going to be introduced. And that piece of legislation can have a huge effect on markets – everything from timber prices to the healthcare system. And if you are an investor who has a short-term informational advantage, you know what kind of bill is going to pass and that it's going to have a dramatic effect on the sector, again it's going to be based on your crony access, not based on your superior knowledge about investment decisions. And that's a big growth industry in Washington, and again, it's further distorting and corroding the nature of our system and, I think, our financial markets.
Alex: Ah, so it's not what you know, it's who you know.
Peter: [Laughs] Unfortunately, it is, and I think that's very troubling, because it may seem naïve, but I think that having a meritocracy when you're talking about an economic system or whether you're talking about a political system is the way to go. We should try to reward those creative types in the private sector, whether it's a Steve Jobs at Apple or somebody else who creates products and services that people enjoy. Those are the people who we want to see succeed, not people who are gaining access to inside information by paying off ex-politicians and seeing them prosper, because that ultimately doesn't create prosperity, it simply is an informational advantage that they use to manipulate the markets.
Alex: And how are they able to do this? What are the kinds of techniques that you see employed by the Wall Streeters to try to gain their advantage in these markets?
Peter: Well, that's a great question. There are all kinds of ways in which they do it, because this is an area that really both political parties engage in, and it's very profitable for them. So, for example, we know that there are individuals that sit on advisory boards that are unpaid at the Department of Education or other government sectors, and they will undertake an initiative. There was an investor in New York who sat on the Department of Education's board relating to for-profit colleges. He went on a very aggressive campaign to say that we needed greater regulation of for-profit colleges that advertise – trade schools and things like that. Well, as he was doing that, he actually was shorting stocks in several of those companies. And of course the prices went down when the markets heard that regulation might be around the corner. What he did, apparently, was completely legal. There was nothing unethical about it, but it was sheer manipulation; and this is what happens when you see the intersection of government and private finance. If you look at the way that government loans and grants are passed out that are designed to do something positive for our country – let's say, lessen our dependency on foreign oil – those decisions are really made by a political calculus rather than who has the best technique or who has the best technology.
Alex: Wow. I mean, we've all heard of Congressmen and even the president sort of being bought out. You can understand that, when it costs a hundred million dollars or a billion dollars to get elected at some level, but all the way down to individual unpaid contributors at the Department of Education? This really goes through the whole system, doesn't it?
Peter: It does, and they've gotten very creative in what I call "legal graft." We think of the Congressman who's getting a shoebox full of cash – that that's really what we really need to be concerned about. That's not what we need to be concerned about. They're far too smart by and large to do that. But, for example, instead of taking a pile of cash, they might have somebody come in and say, "Look, I need a favor, and in exchange for that favor, I'll give you access to IPO shares of stock, and you're going to make a hundred thousand dollars in a day, because you can buy this stuff before it goes public, and when it spikes, you can sell it." Well, that has gone on in Washington and does, and it's completely legal. So there are all sorts of forms of legal graft that the permanent political class in Washington are able to engage in and do so legally and "ethically." I'll put that in quotation marks – at least by the standards of Washington it's considered ethical.
Alex: Yeah, I was going to say, aren't there at least ethics rules for say, Senators and Congressmen that prevent them from doing these kinds of things, even if it's not yet – and probably should be – illegal? Aren't there some rules that will at least cost them their jobs?
Peter: You know, unfortunately not. When it comes to Congress, for example, they're basically policing themselves. And any time you give teenagers or politicians the opportunity to police themselves, you're asking for trouble. So, for example, one of the things I talk about in my book is what I call the "land deal," and I give the example of Speaker of the House Dennis Hastert, who with some friends bought farmland in rural Illinois, and then two months later, put an earmark in the transportation bill for $220 million to build something called the Prairie Parkway highway. And of course that parkway was going to run right by the property that he just purchased a couple of months ago. He made about $2 million in that deal, but the reality is the ethics committees looked at it, and said that basically as long as he can show at least one other person in the community benefited from seeing that highway built, it was okay for him to do this. That's how low the ethical standards are, and that's what happens when you allow them to police themselves.
Alex: This sounds like the railroad barons at the beginning of the 1800s, buying up swaths of lands and creating towns out of nowhere, because they knew where the railroad was going to run. It's absolutely incorrigible. What can we do about this? Is there anything the average person can or should do to help police this, enforce this?
Peter: Absolutely. I'm a big believer in transparency, and what's happening is we have had some positive reforms that have come out as a result of this book, and other media related to this, so you now have politicians have to disclose their personal finances every 45 days, any stock trades. So for example, if they're debating reforming 20% of the economy, like health care in 2009, and they're trading healthcare stocks, like they were in 2009, now we will know at the time. So ultimately it's going to reside in people policing their elected officials. If we expect somebody in Washington to do it – some ethics czar or other politicians or the news media – it simply is not going to happen.
Ultimately, if we're going to be about self-government, I would encourage people to find out what their elected officials are doing. It's very easy to find. You can go to something called "OpenSecrets.org." It's not a website that I own, but they put up the financial disclosures of all politicians, and you can see what their investments are and how that serves their interests in terms of the political decisions they're making.
Alex: Well, sunshine is the best disinfectant, as they say –
Alex: – but is there anybody in government, are there any Congressmen or Senators now trying to take action to limit some of this or maybe even to make some of this illegal?
Peter: There are. There are some Congressmen that came in. There's a Congressman from Wisconsin, he's only been there a couple of years – Congressman Sean Duffy; he was elected in 2010 – who is committed to trying to reform the system. There are people on both sides of the political aisle that are trying to do this, but honestly, it's not going to happen unless, in Washington, they feel like they have to do it. They're only going to do it if they feel the pressure from the American public. And the reason that I titled the book Throw Them All Out is not to say that there aren't any honest people there, but I do believe we have to have a zero-tolerance policy. If you have an elected official who you like or maybe sees this world the same way that you do or is a member of your political party, my view is, if they're doing this, you have to tell them you're going to vote against them, and you have to vote against them. Because unless we have a zero-tolerance policy, they're going to continue to manipulate the system, enrich themselves, their family members, and their friends in such a way that continues to undermine the health of our entire economy. So find out what your Congressman is doing. Even if you agree with him on the issues, tell him you're going to vote against him because of what they are doing.
Alex: Yes, power is the currency in Washington, so I guess the one way to hold them accountable is to threaten to take away their power.
Peter: That's right. That's exactly right, and voting – a lot of people may think that voting doesn't make a difference. It makes a huge difference, because at the end of the day, these individuals, they want to get wealthy, but they want to keep their jobs, they want to stay in office. And so if they feel that is at risk, they will make change.
Alex: That's great. Well, thank you very much for talking with us today, Peter.
Peter: It's great to be here. Thanks for having me.
at 12:54 PM