Why the Tea Party is Wrong
History has proven beyond any doubt that capitalism works. When reasonably regulated to moderate excess no other system of economic organization can better create wealth, promote stability and improve lives. Capitalism is successful because it appeals to rather than fights our basic human instinct for self-survival.
But like any complex system of human organization, capitalism has inherent flaws. We saw from the robber-baron era that unbridled capitalism leads to monopolies, which crush any potential benefits of competition, which in turn undermines the basis of capitalism – the cold and efficient application of free market forces to match supply and demand. Left to its own, capitalism destroys itself and devolves into an oligarchy. At one point in our history, around 1900, an amazing 45% of all wealth was held by just one percent of the richest households. John D. Rockefeller's personal fortune once equaled 1.53% of the entire U.S. economy. In today's dollars his worth would be on the order of $600 billion, about 10 times that of today's wealthiest American. Andrew Carnegie was once the wealthiest man in the world as a consequence of his domination of steel.
A reasonable question about Rockefeller (or Carnegie, Gould, Mellon, Vanderbilt), is, "so what?" Why is having that much concentrated wealth detrimental to society? Consider this: Rockefeller's fortune came from a monopoly that forced virtually all grocery and hardware stores across the United States that sold kerosene or any lubricants to stock only Standard Oil products. We can hardly imagine this today, but nearly 80% of Americans were served by Standard Oil – and by no other oil company.
Without regulation capitalism behaves like the Tacoma-Narrows Bridge in which cycles of instability add to each other cumulatively until the system collapses. The most recent example is the disintegration of the banking and housing industries following a decade of careless deregulation of Wall Street. The bottom line is that capitalism works, but needs to be modified from it purest form to be most effective.
As with capitalism, history has proven beyond doubt that democracy – a government of, by and for the people, is the best form of political organization. Or as Winston Churchill more aptly said in quoting an unknown predecessor, "It has been said that democracy is the worst form of government – except for all others." But in anything other than a small country, democracy does not work well in its purest form in which every citizen votes directly and freely for his or her representative to national government. After all, we citizens in the United States, the best shining example of constitutional democracy, do not vote for our president; instead we indirectly elect members to the electoral college, which was created as a compromise by our Founding Fathers between election of the president by the Congress and election by popular vote. Our form of government is a messy compromise among deeply divided factions at the Constitutional Convention. Early on our government was of, by and for the landed gentry. Certainly not all citizens could vote; slaves and women come to mind. Many of our practical tweaks to the purest form of democracy, from the onset and as evolved over the past 200 years, are meant to protect the voice of the minority (small states initially, then minority individuals later on). Just as unfettered capitalism leads to monopolies, which destroy capitalism, our founders understood that unfettered democracy leads to tyranny of the majority, which destroys democracy.
Like capitalism, democracy works, but needs to be adjusted from the ideological purest form in order to reach its full potential. Ronald Reagan famously said that "government is not the solution to our problems, government is the problem." Even ignoring the irony that he was at that moment seeking to lead the very government he argued was the problem, he was fundamentally wrong in his claim. The problem is not government per se, but the deep and inevitable flaws in any complex human organization, private or public.
We have developed an American myth about the magical efficiency of market forces and in doing so we have nearly deified entrepreneurs. We have at the same time developed a growing disdain for government as inefficient and an obstacle to progress. Neither is entirely true or false: capitalism is not wholly good and government is not entirely bad. Both the private sector and government are essential, and both are deeply flawed. Our future lies in our ability to balance one against the other, extracting the best from both and minimizing the worst from each. And this is where the Tea Party specifically, and conservative Republicans generally, have utterly failed. They have lost all sense of balance, relying solely on a mythical private sector that has no counterpart in the real world.
The Tea Party myth fails at two levels: in demonizing government as the problem; and in looking to the private sector as our savior. Let's look briefly at each.
Government as the Devil
Experience shows that privatizing what should legitimately be a government function rarely has a good result. The two most obvious examples are education and the armed forces.
Ensuring that we offer free (and mandatory) public education for all children is inherently a governmental responsibility, and one to which our founders devoted much thought. Yet some have proposed that the deplorable state of our education can be cured by the magic of the market - competition. Unfortunately, attempts to improve education by creating competition among select charter schools has resulted in fraud, abuse and nepotism – and even lower standards of education – where such systems have been tried in California, Texas, Ohio and Pennsylvania. There have also been some great successes with charter schools, but the failures undermine the claim that an appeal to market forces is always the answer.
We have attempted to privatize our military to some significant degree with decidedly mixed results. Blackwater is one example of things gone wrong when we slice off from our government tasks that should remain in the hands of our elected officials and armed forces. We could easily anticipate that hiring men and women to act as soldiers but without the oversight, training, or discipline so essential to a professional military force would lead to trouble. Remember that Blackwater operatives were involved in a deadly shootout in the streets of Baghdad in 2007 that left 17 Iraqis dead and 20 or so wounded. The actions by Blackwater were so egregious that the incident lead to murder charges. While those charges were later dismissed by a judge in the U.S., nobody can be proud of what was done that day. We also have to worry about the agenda of those mercenaries. Case in point, a former employee of Blackwater alleges that Erik Prince, the company's founder, "views himself as a Christian crusader tasked with eliminating Muslims and the Islamic faith from the globe," and that Prince's companies "encouraged and rewarded the destruction of Iraqi life."
Too much government is bad, but so is too little. We must strive for a government that is as big as necessary, and no bigger. The Tea Party is blind to that critical balance; they seek to diminish government without maximizing its essential and necessary good. Members of the Tea Party revere our founders but miss the subtleties of their genius and contort their ideas to fit their ideology. Nothing in the extensive writings of our founders would indicate that even one would support the Tea Party today.
The Private Sector as Savior
After wading through multiple menus and dozens of options, does anybody waiting on hold or sitting at home all day to meet the repairman "any time between 8 am and 5 pm" view cable providers or telephone companies as the ideal example of efficiency? Our government is inefficient by design to prevent precipitous action; companies large and small are inefficient through incompetency and mismanagement (which of course also contribute to government inefficiency).
So getting government "out of the way" of entrepreneurs, a popular Tea Party idea, has failed miserably. This idea is based on the false assumption that all government regulation, by definition inefficient in their view, is a brake on economic growth. But history has proven that claim naive. Adam's invisible hand of the market (originally put forth in a discussion restricted to domestic versus foreign trade, but later generalized to the economy at large) works because the players are pursuing their own gain but in doing so promote a broader good. But this works best if all the players have access (ideally of course) to "perfect information" about the market in which they are operating. Such transparency however is inherently counter to the interests of any one player (individual or industry). Only through government regulation can we approximate an even, open and honest playing field that encourages rather than impedes economic growth by creating common expectations of transparency and integrity in information exchange. Yes, too much government regulation is clearly detrimental and stifling; but too little is equally deleterious. We need balance. A quick look at Wall Street provides plenty of evidence of what happens when we lose that balance.
Major stock exchanges are openly manipulated to favor large investment banks and brokerage houses at the expense of tax payers and individual investors. Think not? Note that you missed out on the recent trillion dollar bailout offered to Wall Street's biggest banks and brokers. Our personal risk is privatized while their losses (corporate and individual) are socialized. Bluntly put, Wall Street is institutionalized fraud, an elaborate scam sanctioned by a society eager to believe in financial miracles. A stock exchange is in the end nothing but a casino rigged against small players sold false hope by unscrupulous companies authorized by government to deceive and bilk customers. Unconvinced by my unsubstantiated tirade? Let's see what we know as fact.
We know that while subprime lending precipitated the financial meltdown, credit default swaps drove us over the cliff. Greedy and unscrupulous lenders are easy to blame, and rightfully so, but pinstripe suits are in fact minor players in the crisis. The proximate villains are government deregulators working in conjunction with commercial banks to create a grand Ponzi scheme of hiding risk to bilk taxpayers out almost $1 trillion. However, even these obscene self-proclaimed masters of the universe and criminally compliant feds are not the real problem. We the American people, individual investors, families struggling to fund retirement accounts, are the ultimate cause of this crisis. We allowed this to happen by pretending we could have something for nothing, that we could create wealth with no risk, that we could invest with impunity no matter how weak the underlying fundamentals. We were had, but we let ourselves be taken on the false hopes of empty promises. We believed the myth of unregulated market efficiency.
We know that the trading system is inherently corrupt, weighted in favor of brokers who only make money by encouraging more trading. But something more sinister than just commission padding is involved. The SEC now alleges, for example, that Goldman Sachs deliberately misled gullible and trusting clients by selling them mortgage securities that Goldman Sachs was itself shorting. The media is full of wild and ridiculous analogies, but we can do better in three easy steps using the fictional auto company "GMS" as an example to explain the scam: 1) GMS built a car with fatal flaws intentionally integrated into the design so that the car would blow up a few blocks from the dealer lot; 2) GMS sold the car fraudulently to a faithful buyer as brand new, reliable, and long-lasting; 3) GMS had the car insured so that when the vehicle inevitable self-destructed after the sale GMS would earn a huge payout. GMS made money when selling the car and made money when the car exploded, which GMS knew it would because the car was designed specifically to do so. Only the buyer was hurt. He purchased an automobile from a dealer he trusted, confident in his choice, unaware that the car was rigged for a short life on the road and clueless that his investment was worthless. GMS created a double win by engineering a guaranteed loss for the duped client. Such behavior would be clearly illegal in car sales, not to mention highly unethical. But this might not be illegal under current regulations on Wall Street. Have any bankers gone to jail?
We know that dubious ethical behavior is embedded into the fabric of Wall Street. In the case of Goldman Sachs, peddling rotten mortgage securities was not a first foray into problems selling short. The company paid a fine of $450,000 to settle SEC allegations (without admitting wrongdoing) for violating short-selling rules in 2008 through 2009. That trifling amount does not even constitute a hand slap and predictably, in the face of such miniscule fines, no lesson was learned.
We know that even giant Goldman Sachs is just a tiny drop in a vast sea of corruption, just the latest in an unbroken chain of malfeasance to make the news. Does the name Bernard Madoff or the amount of $50 billion ring a bell? Remember Kenneth Lay, Andrew Fastow, and Jeffrey Skilling of Enron? How about Dennis Kozlowski, Tyco's ex-chairman and chief executive? Remember WorldCom? That company had the fine distinction of perpetrating accounting fraud that led, at the time, to one of the largest bankruptcies in history. Let us not forget the Rite Aid executives who were accused of securities and accounting fraud that forced the drugstore chain to restate more than $1 billion in earnings. Executives at the company were charged with colluding in overstating Rite Aid's income in every quarter from May 1997 to May 1999, forcing the company to restate results by $1.6 billion, the largest restatement ever recorded at the time, according to the SEC. And who can forget the Adelphia Communications scandal? In that sordid case, the company inflated earnings to meet Wall Street's expectations, falsified operations statistics, and concealed blatant self-dealing by the founding family, the Rigas, who collected $3.1 billion in off-balance-sheet loans backed by Adelphia.
We know that six years ago Morgan Stanley, promoting a staid image of conservative trustworthiness, agreed to pay $50 million to settle federal charges that investors were never informed about compensation the company received for selling targeted mutual funds. Dick Strong of the Strong Funds admitted to skimming his investors to benefit himself. What was his punishment? Strong was allowed to sell his fund business for hundreds of millions of dollars.
We know that, in all, almost two dozen firms were implicated in scandal in 2004. Mutual fund firms agreed to fines totaling more than $2.6 billion in more than 100 settlements, almost none of which was returned to shareholders. The SEC settled for $40 million with Putnam Investments, at the time the fifth largest mutual fund company, which allegedly had allowed a select group of portfolio managers and clients to flip mutual fund shares to profit from prices gone flat. Other mutual funds allowed the favored few to buy and sell shares in rapid-fire fashion. Oddly, this practice is actually legal, but harmful to innocent shareholders not lucky enough to be included in the game. You and I do not get to play. In a preview of the trillion dollar bailout five years later, wealthy clients were given special treatment. Perhaps most annoying, the practice that led to the mutual fund scandal in the first place was never addressed by regulators, even as the foundation was collapsing underneath them. Well-connected investors still had the chance to trade after the market has closed long after the scandal broke. Any effort to increase shareholder power was and is vigorously fought. A proposal that would force the SEC to give shareholders a greater voice in selecting board members was defeated in October 2004. Commissioner Harvey J. Goldschmid, an advocate of the proposal, said "The commission's inaction at this point has made it a safer world for a small minority of lazy, inefficient, grossly overpaid and wrongheaded CEOs." The SEC filed criminal and civil charges against executives at Brocade Communications in San Jose, Ca., for back-dating stock options. Estimates had it that some 29% of 7,774 U.S. companies may have backdated option grants from 1996-2002. Nothing has changed since. Witness now the avalanche of lobbyist-funded wrath directed against Obama's efforts to tighten regulations.
We know that other forms of favored trading are common as well, designed to benefit insiders. Fund shares, unlike stocks, are priced only once daily at their 4 p.m. closing price. That is true for you, but not for those favored clients who keep getting special bennies. Some funds allowed a few big clients to lock in the closing price after 4 p.m., letting them profit from late-breaking news. That is the ultimate insider trading. Sure, even companies have the presumption of innocence until proven guilty, but the list of firms tied to the 2004 mutual funds investigation was impressive, and included Janus, Strong, Bank of America's Nations Funds, Bank One's One Group funds, Alliance Capital, Prudential Securities, Fred Alger Management, Merrill Lynch, and Wilshire Associates.
Corruption is not a rare anomaly on Wall Street, but the norm, a constant thread throughout history, but we continue to pretend otherwise. How can anybody review this truncated list of fraud and abuse on Wall Street and dismiss corruption as the outlier? This cauldron of waste, fraud, abuse and inefficiency is the private sector so beloved by the Tea Party. This is the perfect free market operating unshackled by evil government regulations. How many times do we have to be burned before realizing that without supervision (i.e. government regulation) these kids are going to break something (collapse our entire financial system)?
Capitalism and entrepreneurship drive our economy. But in the absence of reasonable government regulation they spiral out of control leading to collapse. Once again, we need balance, using the awesome power of market forces to promote growth and wealth, moderated against self-destructive excess with government oversight. The Tea Party has it all wrong. Their agenda is naïve, dangerous, ill-conceived and neglectful of all the history we know.
I would like to add a personal note. I worked in the federal government (State Department and White House) for 11 years, and for the past 15 years as a successful entrepreneur/business owner. Comparing those experiences, the smartest, most dedicated, hard-working and talented people I encountered were in government. By far the worst bureaucratic maze I ever encountered was in the private sector, engaging a large multinational corporation with which my company was to become a certified vendor. For three months we daily battled paperwork, unreasonable demands for documents already sent, conflicting or duplicate requests from different departments, and self-contradicting, inconsistent and ever-changing criteria for certification. Other vendors with fewer resources and less patience dropped out in frustration. Ronald Reagan was then, and the Tea Party is now, wrong, terribly wrong. The problem is not government; it is large complex organizations, which become inherently inefficient with size whether in the private or public sector. There is amazing talent in both sectors. Balance is the key to our future, but the Tea Party and their Republican sympathizers completely miss that point. We all suffer for their irrational fear of one and idolization of the other.
Jeff Schweitzer is a scientist, former White House senior policy analyst and author of Calorie Wars (July 2011) and A New Moral Code (2010). Learn more about Jeff at http://jeffschweitzer.com.
