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Wed Mar 06, 2013 at 08:40 AM PST

Three Solutions to the Oligarchy Problem

by zeeps

(cross-posted at Huffpo)

A few years back, Simon Johnson wrote a brilliant and important piece in The Atlantic, called "The Quiet Coup." Johnson's basic point was that the United States, like a banana republic, has been taken over by oligopolistic powers. Looking at the financial crisis, he saw how concentrated, elite business interests took risks with government backing, got bailed out by the government, and were then protected by the government. Instead of a representative democracy, you had a quasi-oligopolistic political system. Since his article, the concentration and power of those financial institutions has only grown, despite some important legislative reforms in Dodd-Frank.

Johnson's analysis is fairly widely shared by people across the political spectrum. But those who agree with his analysis of the political economy have different views of the solution. There are two mainstream views about how to solve the problem, and one traditional American view that has not gotten enough attention:

1) Change the way campaigns are funded
2) Shrink the size of government
3) Rejuvenate antitrust and break up big companies

My goal in this post is simply to lay out the three ways of thinking about the problem and look at a few core premises. This is something I'm thinking about a lot and I'd welcome a response, feedback, and suggestions.

Change the Way Campaigns are Funded

The first view tends to be associated with Democratic and progressive views, although public support is broad. The logic goes like this: Politicians are currently dependent on the richest Americans, and that dependency leads them to effectively work for them. Sometimes they are doing so consciously; they don't dare support a financial transactions tax that might poll well because of fear of retaliatory spending at reelection. Sometimes they do so unconsciously; in order to ask for campaign money, they spend a great of time with the lobbyists and the wealthiest Americans, so they believe the lobbyists' stories and internalize the world-view of the wealthy. Natural human empathy, combined with ongoing contact with a particular subset of society, makes the politician see the world through totally distorted lenses.

We can change both the conscious and subconscious subservience to the oligarchs if we change the way campaigns are funded. A citizen-funded elections model does that. If a candidate is going to raise more money talking about popular and populist issues, then she does that to get reelected. She doesn't have to provide access to lobbyists in order to get funded, so she can hear the lobbyists' "fact-sheets" more objectively, and when needed. (One of my favorite anecdotal stories about citizen-funded elections, from Connecticut, is that the "lobbyists hang outside the bathrooms now," trying to get access to politicians who they used to be able to schedule meetings with because of implicit relationship of access to campaign cash).

I find this argument very persuasive. It does not address independent spending, or the role of media, or other non-campaign-finance related ways in which concentrated financial power exerts political power, but it does not pretend to; it changes the core behavior of political representatives, and in so doing radically diminishes the oligarchic risk.

Shrink the Size of Government

This view tends to be associated with the Republican Party, although depending upon how you poll it, there is broad cross-partisan support for it. The theory behind this is that if government is smaller, business interests won't go to it for favors. If you are a businesswoman who sells soap in a small-government world, and have a million dollars to spend, you are going to spend it on making better soap. If you are the same businesswoman in a big government world, you are going to spend 70 percent of it on making soap, and 30 percent on trying to extract money from the government through subsidies. A government with lots of disposable income will encourage a flood of money to go into buying government, instead of into improving the economy -- thereby creating oligarchs.

Therefore, if you can shrink the total size of government, you will keep business people from turning into oligarchs. However, there is a flaw in the model. As I understand it, the model generally assumes a relatively low upper level on gains from governmental favors. Returning to the strategies faced by the soap manufacturer, she would want to know the potential value of the gain from government before deciding what money to spend on government and what money to spend on making better soap. In his classic 1983 paper modeling this kind of behavior (which is generally called rent-seeking), Gary Becker writes, "The total amount raised from taxes, including hidden taxes like inflation, equals the total amount available for subsidies, including hidden subsidies like restrictions on entry into an industry." However, the creative rent-seeker, like the entrepreneur in any area, will not look at present flows to determine potential flows, but will look at possible flows given political limitations. The potential value of a tax reduction is up to the total amount of taxes currently levied; the potential amount the soap maker can get for her political contributions is constrained by the existing size of the tax. When it comes to regulations, the potential gain is the absolute removal of all soap regulations. The potential value of intellectual property laws and other favors could lead to a government grant of monopolization in her own field, or, if she's ambitious, a grant of monopoly across several fields. All of those are huge potential values, even with a "small" government. But they are all constrained and somewhat related to government size.

There is no theoretical constraint, however, on the potential size of a soap subsidy. The potential value of the subsidy is not defined by existing taxes. More taxes can be levied; the existing population of the country does not define it, because levies (direct and indirect) can be brought to bear on other countries' populations. This is, of course, one of the stories of empire. As a theoretical matter, then, the upper limit of a subsidy from a government is the maximum revenue it can generate through the use of its police power. There are plenty of real-world examples where rents are sought and created despite the absence of existing revenue. The bailout of the financial institutions is just one example: The country did not already have a pot of money to give the financial giants, but it created one. The "size" of the government did not limit the political efforts to take it over.

Having said that, there are certain areas where there is real truth in this analysis, in particular in the area of earmarks and other highly discretionary funds that are relatively easy to extract. In general, the less public involvement in a decision, the easier it is to spend money to get money from government.

Break up the Big Companies

This third view does not traditionally have the same partisan affiliations as either of the others. The very little polling done of this view suggests overwhelming public support -- 70 percent for breaking up banks -- but the general question of breaking up big companies is unfortunately not being asked often enough. At different times, different parties have been more or less involved in both building up and destroying antitrust. The Sherrod Brown-David Vitter alliance on breaking up big banks is not unusual; it is part of a long tradition of left-right populist agreement on antitrust.

The theory behind this view is that smaller companies don't create oligarchs, and truly competitive industries invest in the economy, not government. If our soap seller, above, has less than a certain amount of total employees and total cash, she is far less likely to spend a dime on trying to get something out of Congress. This is in part because of the high costs of setting up and maintaining political relationships, which larger companies regularly do. This is in part because the small or medium-sized business doesn't have the additional "Too Big to Fail" threat, which makes each dollar they spend on campaigns or advertisements worth more, backed as it is by the implicit threat that company failure leads to societal breakdown. Furthermore, if our soap seller is in a truly competitive industry, as opposed to an industry with a handful of powerful soap companies, she will have to turn her energies to her product.

If we want a society of smaller and medium-sized firms, we can have it -- there are no constitutional constraints. We need a strong antitrust regime and stronger antitrust laws, and the capacity to enforce those laws located in people who aren't tied into the oligopoly.

This view has the advantage of simplicity and if the laws are well and simply crafted with bright lines, it also has the advantage of taking government out of most business decisions (therefore also reducing the incentive for soap sellers to spend their time trying to be oligarchs.

This is not the first time we've faced an oligopoly problem, and the amazing thing is that we solved it -- not perfectly, but fairly impressively. In 1902, Teddy Roosevelt started his trust-busting career, and in 1907, corporate donations to federal campaigns were banned for the first time.

Poll

What is the best solution to the oligarchy problem?

32%8 votes
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| 25 votes | Vote | Results

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I was at a talk recently expounding on why everyone should give money to Fyvoh Wonzy Fors and I got a lot of blank looks--that's when you know you've descended into jargon. This blog post is for anyone who gives money, and especially for those who give a lot of money. What I was referring to were organizations incorporated under section 50(1)(c)(4) of the tax code.

Basically, this is to urge you to give to PCCC and Public Campaign Action Fund and other similar groups, even though you're not going to get a tax break. I recognize my timing is way off--its not late December--but when I saw a lot of chatter about how the sequester is going to hurt (or not?) charitable giving, I wanted to add a few cents.

The tax code gives you a tax break for giving to certain organizations designated as "charitable", known by lawyers as 501(c)(3)s. If you go to a lawyer, or to a party with your friends, or talk to your parents, they will assume that if you give away money, it is to a 501(c)(3). This seems like a good deal for you: you get to donate to the policy or service charity of your choice, and some of that money comes back to you. If you middle class, a $100 contribution costs you about $80 after tax (this is complicated, but let me be general). That means that if you give $1000, it costs you about $800.

What they will tell you to avoid are (501(c)(4)s). These organizations has a significant political component. If you give to one of these, you will not get a tax deduction. If you give $1000 to a 501(c)(4), it will cost you $1000. Instead of giving $1000, you'll give $800.

But it turns out, in many cases, its worth it to give $200 less (or $20 less if its a possible $100 contribution). Instead of giving to a hamstrung organization, you can give to a group like Progressive Change Campaign Committee, that actually moves votes and scares people. (Ironically, I just joined to 501(c)(3) board of PCCC, but put that aside). You can give to groups that directly get involved in races like Cecilia Tkaczyk in New York, who won by NINETEEN votes, and changed the balance of power in the New York legislature.

The charitable groups can't have a significant political component. That means they can't deal in power. They can't punish politicians who behave badly, or reward those that do. And power, as we all know, is where policy is actually made. Its not exclusively political, but if there is no political threat or promise, it is unlikely that things are going to change.

There's a second problem: if you give to the charitable groups, you are supporting an entire public sector that is committed to not being political. When people graduate from college, full of fire, and look for jobs, odds are they are going to be with a Three, not a Four, because for several decades that's where the money has gone. Those firey students will learn how to come out with great policy papers, provide services, and by the time they are 35, maybe they can be an Executive Director or start something of their own. But they wont learn how to write ads that make Boehner squirm, because they aren't allowed to write ads that make Boehner squirm. If they learn how to organize protests, they will be generalized protests, not specific, targeted protests that will put fear into the heart of power. In short, they will learn everything about politics except politics.

Most charities know that you think you have to give to a 501(c)(3), and so some that would rather have the freedom to spend more money politically go through great contortions to make everything they do count as charitable for 501(c)(3) purposes. But those contortions cost money too--those contortions, and the fear of being busted by the IRS, create a cost and a second tax on your contribution.

I've asked several groups recently whether they would rather get $800 in political dollars or $1000 in charitable, and almost all say they'd rather get the former. Granted, I'm interested in structural change, so this isn't true for all charities, but it is true for some, and you should check with your own charity before deciding. But don't feel bad about giving less when you actually may be giving more.

I've simplified a very complicated area--the rules governing political activity of charities are quite complex. But that is in fact part of my point--the complexity of the rules has an impact on the political imagination of our nonprofit sector.

(edits in diary based on responses)

Discuss

Fri Mar 01, 2013 at 06:54 AM PST

Banks, Food, and Telecom: Break them Up

by zeeps

Yesterday there was an eight-hour revolution going on in Washington. From 12 to 8, activists and politicians from across the political spectrum demanded a new economy and the breakup of big political-economic monopolies.

At at lunch the right-wing American Enterprise Institute hosted an event on consolidation in the food industry, and how it is hurting entrepreneurs. In the afternoon, Democratic Senator Sherrod Brown and Republican Senator Vitter gave powerful speeches about why we need to break up the biggest banks because they are undermining stability. And in the evening, the left-leaning New America Foundation hosted an event with Susan Crawford, formerly of the Obama administration. Crawford gave a talk about how the telecom mergers have led to monopolies that are driving up prices, hurting services, limiting innovation, and leading to inequality.

12 PM: Tim Carney, at the American Enterprise Institute, presented a panel from the perspective of the entreprenuer and the small, organic farmer. His argument, made elsewhere, is that big mergers lead to a merger between government and monopolistic power, and once in power, the monopolies try to outlaw their competitors.

2 PM: Sherrod Brown calls for breakup from the perspective of stable society. His argument is about security and fragility.  The banking system is now bigger than our GDP, entirely concentrated, and terrifyingly risky. There are now four banks with assets between $1.4 trillion to $2.3 trillion: a misstep by any one of these threatens the entire economy. And because they know that, the big banks can control and constrain American political choices.

Senator David Vitter is worried about the creation of oligarchies across the board. The idea of "systemically important financial institutions" could apply to other areas, where "systemically important" institutions could be designated and given unfair advantages in many sectors.

6 PM: Susan Crawford, a Cardozo Law Professor, spoke at New America last night about her new book on the extraordinarily powerful telecom monopoly. The effect of the concentrated power, as she said on Bill Moyers recently: "The rich are getting gouged, the poor are very often left out, and this means that we're creating, yet again, two Americas, and deepening inequality through this communications inequality."

Its not just food, banks and telecom--its books, beer, chickens, and airlines, as theMarkets, Enterprise and Resiliency Initiativehas been studying.

There was a lot of typical surface chatter yesterday--the sequester, the Pope, BW (Bob Woodward), BW (Business Week), Groupon--but under the surface something far more important was happening. Three totally unconnected groups all made an argument for a different vision of the American economy and American politics. They revealed an emergent, multi-sector urgency for breaking up concentrated power. Brown, Vitter, Carney, and Crawford each channel a broad public demand for a different kind of economy.

A little over a year ago I was on a conference call with the pollster Alan Greenberg, where he was talking about his recent poll, which had found that seventy percent of Americans believe that "the solution is to break up big banks and empower communities." I asked him what the polling was on breaking up all big monopolistic companies with new antitrust laws. He said, "we aren't asking for that, are we?" We weren't then. But maybe we should be.

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