The beneficiaries of all this largesse? Rich areas, like Longboat Keys, Florida, and Hilton Head Island, South Carolina, which USA Today found had “some of the largest numbers of second homes and rentals getting the discounts.”26 In other words, it is taxpayer-subsidized insurance for the beautiful people … or at least the fortunate few who have managed to get other people to bankroll their affluent lifestyles.
The Institute for Policy Integrity notes that there are occasional claims that the program primarily benefits poor regions of the country. But the institute reports that more careful analysis calls those claims into question. Hurricanes Rita and Katrina in 2005 skew the historic numbers dramatically. The institute’s researchers found that if 2005 is excluded from the decade 1998–2008, “the wealthiest counties in the country filed 3.5 times more claims and received over a billion dollars more in claim payments than the poorest counties.” Their conclusion: “Taxpayer-subsidized [flood] claims thus represent a significant wealth transfer from middle-income counties to relatively wealthy and poor counties.”27 Nationwide, the median value of a single-family home is roughly $160,000. But the Congressional Budget Office (CBO) says that more than 40 percent of the coastal properties benefiting from subsidies of their insurance rates because they were grandfathered into the federal insurance program are worth more than a half million dollars; 12 percent are worth more than a million dollars. Nearly a quarter of the homes in the CBO analysis were vacation homes. “While the CBO analysis is not exhaustive,” the institute notes, “it strongly suggests that the benefits of subsidized flood insurance provided by the NFIP accrue primarily to wealthy households.”28
This, of course, makes perfect sense. Who, after all, is most likely able to afford oceanfront properties? As the institute points out, “The most expensive homes are those directly on the beach, followed by homes with a view of the ocean, then those within walking distance of the ocean, and finally those homes without easy access to the water.” The only thing that ruins the view from the deck is the prospect of being flooded out, the financial cost of which ocean-viewing property owners, mai tai in hand, do not have to worry about, thanks to taxpayers who likely have to make do with more prosaic views.
Many of the subsidized rich could, of course, afford this lifestyle themselves. Others might think twice about building in floodplains or in coastal areas where their investments would be swept away if they had to do it on their own dime. If they were forced to pay full price for their insurance or bear the financial risk of their decisions, presumably, many of the subsidized ocean dwellers would choose different, more prudent venues. But as long as the federal government offers the cut-rate policies, why not take them? The lure of government cash is as powerful for a celebrity building a dream home on the Florida coast as it is for the farmer pocketing disaster aid for losses he didn’t suffer, or Aunt Zeituni taking advantage of government handouts. If they are giving away money, who am I to say no?
In the case of flood insurance, there is an additional wrinkle: Like farmers and other corporate moochers, the owners of beach homes tend to have the sort of political juice needed to keep a boondoggle of this size and scope afloat. Thus, despite the ongoing transfer of wealth from middle-income taxpayers to wealthy beach communities, recipients can still count on defenders to justify the payments on “compassionate” grounds.
But does “compassion” really describe why a Mississippi home worth just $69,900 could be flooded thirty-four times and generate $663,000 in insurance payments?29 Wouldn’t “delusional” be more appropriate? Federal taxpayers are subsidizing both the homeowner’s lifestyle and his refusal to acknowledge the realities. But the subsidies keep on rolling in with the tide.
For the beneficiaries of the cut-rate insurance—who can afford to have repairmen on speed dial after every flooding—this is a sweet deal. But it spells financial disaster for the taxpayers. “The program, as currently structured,” says the Institute for Policy Integrity, “will never repay its debt.”30
Translation: The taxpayers will get to bail them out as well.
Moocher’s Dilemma II
Some thought experiments:
If you steal $8,000 in cash from your neighbor, it is theft. The act is universally condemned as an instance of dishonesty as well as breaking the law, and if caught you are likely to be jailed.
If you compel your neighbor to pay $8,000 so you can buy a house (via the transfer of wealth through tax credits), it is perfectly legal. The transfer is celebrated as both socially beneficial and necessary for the recovery of the housing market.
If you steal a car, it is a crime. The theft is not only constrained by the power of law, it is also clearly immoral and, thus, condemned by social norms.
If you force your neighbor to buy you a car (via Cash for Clunkers or tax subsidies for hybrids and electric vehicles), it is perfectly legal and applauded by the political class as stimulative.
Explain the differences: Why is the appropriation of another’s property condemned in the first and third instances, but embraced as a matter of public policy and social good in the other two? Is this a distinction without a difference? Or does plunder under the color of law make it no longer plunder?
Bonus:
You arrive at a potluck dinner empty-handed, but you proceed to feed deep at all the tables, groaning under homemade quiches, pot pies, casseroles, and desserts. You are considered a freeloader.
You pay no money in federal income tax, but you benefit from hundreds of federal programs, including national defense and dozens of antipoverty programs that pay for your housing, transportation, heating, and food, and provide you with cash. What should you be considered?
Chapter 8
* * *
CRONY CAPITALISM (BIG BUSINESS AT THE TROUGH)
* * *
In the HBO series The Wire, the ability to influence power is referred to colloquially as “suckage.” Those who have it stand to gain favors, indulgences, and protection from the political class; those who lack sufficient “suckage” are left out in the cold. The concept may go by different names but the principle dominates the nation’s capital, giving rise to a new aristocracy of clout.
Consider the new Lobbying Class: They neither sow nor build; they manipulate; they curry favor with legislators; they cajole regulators; they appease administrations; and they multiply as government expands. Even as the rest of the economy stagnated, the new class has flourished. A machinist might find his job outsourced to India or China, but for the seeker of political clout all roads lead to Washington, D.C.
“Lay out a picnic, you get ants,” explains the Cato Institute’s David Boaz, “hand out more wealth through government, you get lobbyists.”1 As The Washington Post noted in 2008, the explosion in the lobbying industry was “an extension of the growth and reach of government,” which increasingly “has its tentacles in every aspect of American life and commerce.” As a result, “No serious industry or interest can function without monitoring, and at least trying to manipulate, Washington’s decision makers.”2
Although the Great Bailout of 2008–09 defined a new high-water mark, corporate cronyism is responsible for the transfer of tens of billions of dollars of OPM every year. The influence lobby employs hundreds of thousands and pays out billions of dollars in salaries and fees. The list of corporate welfare queens reads like a Who’s Who of American Capitalism: Pfizer, Boeing, General Electric, Archer Daniels Midland, Goldman Sachs, AT&T, AIG, and General Motors. They employ vast armies of favor seekers who lobby for bailouts, pork, tax credits, mandates, waivers, and even new regulations on their own industries.
One of the dirty little secrets in the culture of “suckage” is that many in business and the lobbying class, including those who espouse free market principles, actually like Big Government. In his letter to shareholders after the 2008 election, General Electric’s CEO, Jeffrey Immelt, wrote that the Democratic victories that year meant the economy had been “reset.”
“The inte
raction between government and business will change forever,” he explained. “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.”3 He could have been writing a manifesto for the new corporatism in which business looked not only for subsidies, handouts, and cash to pad their bottom lines, but also for rules, regulations, and bureaucratic trip wires that benefit companies like GE.
Given the usual complaints about such regulations from business, this might seem counterintuitive, but many of the largest companies actually welcome the new regimes. More regulations make it harder for competitors to horn in on market share because the very complexity and opacity of the spiderwebs of rules give insiders special access to the keys to the kingdom. Since the 1970s, “public choice” theory economists have recognized that “regulation is acquired by the industry and is designed and operated primarily for its benefit.”4 This is known as “capture theory,” which describes how business seizes and uses the regulatory regimes for its own bottom-line benefit and is far from hostile to government intervention. Capture theory explains how the push for ever-increasing regulation “is influenced by the incentives of legislators seeking campaign funding, bureaucrats seeking to expand their budgets and prestige, and business interests seeking advantages over their competitors.”5
Only Little People (and Companies) Pay Taxes
General Electric’s coziness with power and its ability to work the system has paid off handsomely for the company. Despite global profits topping $14 billion in 2010, the company managed to pay minimal federal corporate taxes.*
While other businesses and individuals struggle with paying income and corporate taxes, GE has managed to turn the tax code into a giant engine of corporate welfare, largely by pulling the levers of political power. “Over the last decade, G.E. has spent tens of millions of dollars to push for changes in tax law, from more generous depreciation schedules on jet engines to ‘green energy’ credits for its wind turbines,” reported The New York Times. The corporation’s success in winning special tax benefits has proven exceptionally valuable for both executives and shareholders.6
GE’s executives understand where all this munificence comes from, spending millions on lobbying and besieging Washington at the first sign that the taxpayer largesse might be in jeopardy. In 2008, when the corporate giant was briefly threatened with a loss of some of the tax favors, for example, “the company came out in full force. G.E. officials worked with dozens of financial companies to send letters to Congress and hired a bevy of outside lobbyists.”
The Times recounted this touching vignette:
The head of its tax team, Mr. Samuels, met with Representative Charles B. Rangel, then chairman of the Ways and Means Committee, which would decide the fate of the tax break. As he sat with the committee’s staff members outside Mr. Rangel’s office, Mr. Samuels dropped to his knee and pretended to beg for the provision to be extended—a flourish made in jest, he said through a spokeswoman.
Whether in jest or not, Rangel reversed his position and decided to back the tax break sought by GE. The next month, reported the Times, “Mr. Rangel and Mr. Immelt stood together … as G.E. announced that its foundation had awarded $30 million to New York City schools, including $11 million to benefit various schools in Mr. Rangel’s district.”
Few companies have more lucrative “suckage.”
Getting in Line
As government increasingly tries to pick winners and losers in the marketplace, the stakes continue to rise. Journalist Timothy Carney notes, “When government is discussing making some products (such as health insurance) mandatory, some (such as the incandescent light bulb) illegal, some (such as a trip to the tanning bed) more heavily taxed, some (such as wind-mills) more heavily subsidized, and granting others (such as biologic drugs) lengthy government-enforced monopolies, you can expect businesses to lobby up.… Even if Washington isn’t threatening your industry, but is instead only handing out goodies, you still suffer by not investing in K Street, because your competitors will just get your share of the loot.”7
Not only has the allure of billions of taxpayer dollars changed the rules and expectations of corporate America, but also the dollars have proven to be highly addictive. “Once executives get a taste of corporate welfare, they want more,” notes Barry Ritholtz. “Do you have any idea how hard it is to earn $30 billion in a year? Flying commercial—or even driving—to Washington, DC, for an afternoon of hostile Q&A is a lot easier than having your company make $30 billion. The return on investment (ROI) on the day trip is fantastic.”8
Even iconic and profitable companies like Disney have gotten in on the rush. In 2008, The Washington Post devoted a lengthy profile to the Mouse’s campaign to tap in to hundreds of millions of dollars of corporate welfare. To access the stash, the Post detailed, the company planned to “remake its lobbying capabilities on a man-to-the-moon-like scale.” The goal: $200 million in taxpayer money to promote tourism. “Getting taxpayers to underwrite overseas commercials had been the travel industry’s Holy Grail for decades,” reported the Post, and the industry was prepared to pay handsomely for the subsidy.9 In the 2006 campaign alone, the lodging, tourism, gambling, and recreation industries donated more than $20 million to federal candidates in the hope that, in return, grateful politicians would quadruple the amount of money the government spent to promote their businesses. With the strong support of Senate Majority Leader Harry Reid (D-Nev.), they succeeded. The Travel Promotion Act was signed into law in March 2010.10
Strictly speaking, none of this is new. The modern-day lobbying class has historical antecedents, most notably the class of courtiers who danced attendance on princes, seeking their favor and avoiding their frowns. But it is a type that flourishes only when power is concentrated and when kissing up pays more handsomely than doing or making. And kissing up to power pays richly indeed. A well-connected Washington lobbyist can expect to be paid twice, even three times, what he or she could make working for government and, as a result, reported The Washington Post, “government is now viewed by many on Capitol Hill as a steppingstone to a lucrative career in bending government to the whims of paying clients.” Increasingly the industry of influence peddling has become a sort of shadow government, complete with “a bureaucracy, with its own language, its own peculiar ways of doing business and, most important, its own instinct to survive.”11
Again, this is a familiar pattern. Economist Mancur Olson described the shift in the values of cultures that are destined for stagnation and decline: “Every society … gives greater rewards to the fittest—the fittest for that society.… If a society mainly rewards production of the capacity to satisfy those with whom one engages in free exchange, it stimulates the development of productive traits.” On the other hand, if a society rewards clout and political juice, and politics replaces productivity as the source of prosperity, Olson noted drily, “this encourages the development of different attitudes and attributes.”12
The result is not a kinder and gentler society. “Competition about the division of income is not any nicer than competition to produce or to please customers,” wrote Olson. “The gang fight is fully as rough as the individual duel, and the struggle of special interest groups generates no magnanimity or altruism.”
The Squeeze
In the fall of 2010, a lobbyist checked his voice mail and found a message from a then-powerful member of Congress.
This is, uh, Eleanor Norton. Congresswoman Eleanor Holmes Norton. Uh, I noticed that you have given to, uh, other colleagues on the Transportation and Infrastructure Committee. I am a, um, senior member, a 20-year veteran and am chair of the subcommittee on Economic Development, Public Buildings and Emergency Management. I’m handling the largest economic development project in the United States now, the Homeland Security Compound of three buildings being built on the, uh, old St. Elizabeth’s hospital site in the District of Columbia along with, uh, 15 other, uh, sites here for, that are part of the
stimulus.
I was, frankly, uh, uh, surprised to see that we don’t have a record, so far as I can tell, of your having given to me despite my, uh, long and deep, uh, work. In fact, it’s been my major work, uh, on the committee and subcommittee it’s been essentially in your sector. I am, I’m simply candidly calling to ask for a contribution. As the senior member of the, um, committee and a subcommittee chair, we have [chuckles] obligations to raise, uh, funds … we particularly, uh, need, uh, contributions, particularly those of us who have the seniority and chairmanships and are in a position to raise the funds.13
It was as close to a pure shakedown as you could come without actually breaking the law, but what was most striking about the call was how unshocking it really was. “If you’ve been paying attention,” wrote longtime Washington insider Bill Kristol, “you know this is what politics in Washington, D.C., has come to. If you set up a casino of welfare statism, crony capitalism, and big government liberalism, this is what you’re going to get.”
Offense and Defense
In fairness, much of the lobbying explosion is defensive, part of the push-pull between currying favor and fending off damaging political interventions. In the halls of corporate America, the story of Microsoft is a cautionary tale. Perhaps assuming that its success would speak for itself without paying court to the powers in Washington, the software giant made no effort to mount a serious political presence. In 1999, the Clinton Justice Department smacked the firm with a massive antitrust suit that would eventually cost Microsoft billions of dollars and force it to change the way it did business. “Before then,” noted The Washington Post, “it had mostly ignored the nation’s capital.”14
A Nation of Moochers Page 9