The Boy Who Could Change the World (21 page)

Some find even this implausible. Instead, in desperation, they've turned to the outside world—with ideas for new technology, like ActBlue, that makes it easier for average Americans to donate money to political candidates over the Internet.

There's an unresolved theoretical question that would determine whether such a path is actually practical. If the more money you raise, the more likely you are to win, then it's hard to imagine ever raising enough from individuals to be able to take on the hundreds of millions a major corporation can spend. But the stories of failed self-funding candidates suggest this isn't the case. Senate candidate Jeff Greene (D-FL) spent over $23 million trying to win the primary, while his opponent Kendrick Meek won by 26 points after spending closer to $7 million. Meg Whitman (I) spent $173 million trying to become governor of California, but still lost by 11 points to Jerry Brown (D), who spent $40 million.

A more hopeful answer is that there's some “threshold of viability” above which more money doesn't make a significant dent. In a $200 million race every voter has undoubtedly heard from every candidate, even if they hear from one candidate three times more than the other. If this were true, our new fund-raising technique would only need to get decent candidates up to that threshold. (This would also be good news for public financing techniques that only provide candidates with base funds.)

The truth is probably somewhere in between—increasing amounts of money has diminishing returns, but they're still nonzero. And even raising Meek's $7 million would be difficult to do from independent donors. But perhaps it would not be impossible—small donors contributed hundreds of millions to the Obama campaign (although he picked up an equal amount from big donors). Figuring out how to harness that potential is a key goal for the campaign finance community going forward.

Campaign Tactics

Others, especially Sen. Ron Wyden (D-OR), have focused on changing the tenor of campaigns. Wyden's “Stand by Your Ad” provision attempted to discourage negative campaigning by forcing each candidate to say “I'm [STATE YOUR NAME] and I approved this message” once during each commercial. This doesn't seem to have done much to change the tenor of campaigns, although it does shorten ads by a few crucial seconds.

Wyden has also proposed limiting the amount of time during which members of Congress can fund-raise. This proposal has been much less successful and while it may help somewhat in lightening Capitol Hill's moneygrubbing culture, it's difficult to picture how it could have a significant impact on the overall problem.

There is room, however, for an outside revolution in campaign tactics. It's not enough to bring more people into the process if they're simply left as suckers to be ripped off by the existing pack of campaign strategists. Instead, someone needs to help them run innovative, cost-effective campaigns that give them a real shot even on a limited budget. The new science of effective campaigns can provide key guidance on what works and what doesn't, and innovative new technology can help lower the cost of campaign tactics.

Staff Selection

If, as I've argued, the cult of expertise is a key reason why the congressional offices of even courageous members are so timid, then the solution is simple: bringing more bold people from the outside world into the halls of Congress. This could be done with a large-scale
cultural campaign to make working in Congress seem appealing, or with a smaller-scale campaign aimed at pressuring new members to hire from outside the inner circle.

Staff Ethics

Within the halls of Congress, staff behavior is regulated even more heavily than campaigns. But while requiring every political staffer to carry two phones may preserve some façade of decency, it seems difficult to say it's seriously lessened the amount of politics that occurs in Capitol office buildings. Nor is it at all clear that too much politics is a major cause of this democratic deficit.

As odd as it seems, I haven't seen anyone propose that Congress prohibit the dual-employment system of political/congressional staffers. Of course, the major problem with any such reform is that the man at the top—the member himself—inevitably has both jobs.

There are some constraints on “revolving-door” activity—including some outright prohibitions on becoming a lobbyist within a particular time and some “cooling-off” periods requiring delays before you go to lobbying your old colleagues. As with most such restrictions, these regulations help lessen the most egregious aspects but don't even come close to solving the problem. But revolving-door staffers seem like a minor enough phenomenon that even a total ban on the practice probably wouldn't make much of a dent in the democratic deficit.

Lobbyists

There's a further game of cat-and-mouse when it comes to taking gifts from lobbyists. With every scandal the rules get tighter and the lobbyists get cleverer. At the moment, for example, lobbyists are prohibited from buying members of Congress expensive meals, but there is a so-called appetizer exemption, with the ridiculous result that lobbyists are now forced to serve members of Congress expensive meals in small pieces while everyone stands up.

Lobbyists have similarly been forced into a system of restriction and disclosure. The restrictions are much more minor, amounting merely to a prohibition on outright bribes (strong restrictions on lobbying would presumably run afoul of the First Amendment) while
the disclosure seems even more pointless (what is anyone going to do with the fact that Lobbyist X has been paid by Special Interest Y?).

An outside strategy again seems to have more promise. Just as the power of small contributions can be harnessed to make them more powerful in elections, they can be combined for lobbying purposes as well. A congressman doesn't owe a favor to a donor who gave him $15, but he does owe one to an online group that raised him $200,000 in $15 contributions. Existing online groups have been reluctant to take advantage of this influence, possibly because their natural transparency makes it harder for them to pretend they're not violating ethics rules, but it's a promising avenue for the future.

The alternative would be to figure out some way of severing campaign contributions from lobbying, but it's difficult to imagine how to do this practically. Even if lobbyists weren't permitted to touch campaign contributions themselves (and even that requirement is of dubious constitutionality), there's no reason their clients couldn't make contributions which the lobbyists could then call in as favors. Like campaign contribution caps, any regulation is likely to be full of loopholes.

Members have their own revolving door—and revolving-door restrictions. But as with staffers, the problem seems minor enough that even tough restrictions wouldn't make much difference. A cushy lobbying job is a nice dessert for a career well served, but the campaign contributions are the financial meat of the meal.

Conclusion

The good news, for those of us outside the Beltway, is that we don't need to wait for Congress to fix itself. The most effective solutions outlined here can be done by any outside group—and there are a number of people starting to do them. What's needed is not some final law that will solve our problems, but a group of outside activists creating their own reform. It may not be easy, but that just means we better get to work.

Keynes, Explained Briefly

http://www.aaronsw.com/weblog/keynes

September 24, 2009

Age 22

If you read the economic textbooks, you'll find that the job market is a market like any other. There's supply (workers) and demand (employers). And the incredible power of market competition pushes the price (wages) to where those two meet. Thus massive unemployment is about as likely as huge unsold piles of wheat: if people aren't buying, it's just because you're setting the price too high.

And yet, as I write, 17.5% of the country is unemployed. Are they all just insisting on being paid too much? Economists are forced into the most ridiculous explanations. Perhaps people just don't know where the jobs are, some say. (Maybe the government should run ads for Craigslist.) Or maybe it just takes time for all those former house-builders to learn new jobs. (This despite the fact that unemployment is up in all industries.) But they're typically forced back to the fundamental conclusion of the textbook: that people are just demanding to be paid too much. It might be for the most innocent of reasons, but facts are facts.

John Maynard Keynes' great insight was to see that all of this was nonsense. The job market is a very special market, because the people who get “bought” are also the people doing all the buying. After all, why is it that people are hired to farm wheat? It's because, at the end of the day, other people want to buy it. But if lots of people are out of a job, they're doing their best to save money, which means cutting back on purchases. And if they cut back on purchases, that means there are fewer people for business to sell to, which means businesses cut back on jobs.

Clearly something is badly wrong with the basic economic theory. So let's go through
Keynes' masterpiece,
The General Theory of Employment, Interest, and Money
, and understand his theory of how the economy works.

When you get your paycheck at the end of the week, you spend it. But presumably you don't spend all of it—you put some money away to save, like you were told as a child. Saving is seen as a great national virtue—thus all those Public Service Announcements with talking piggy banks. Everyone knows why: put some money away today and it'll be worth more tomorrow.

But there's a kind of illusion involved in this. Money isn't worth anything on its own; it's only useful because it can buy things. And it buys things because it pays other people to make them for you. But you can't save people in your bank account—if fifteen million people are out of work, they can't put their time in a piggy bank for when things are looking up. The work they could have done is lost forever.

So yes, some people can save while others borrow from them—you can let your neighbor buy two iPods in exchange for letting you buy four next year—but the country, as a whole, cannot. At the end of the day, someone has to buy the things we can make. But if everyone's saving, that means people aren't buying. Which means the people making stuff are out of a job.

It's a vicious cycle: if people buy less, companies make less, which means people get paid less, which means people buy less. And so on, until we're all out of work. (Thankfully it doesn't get that bad—but only because some people are refusing to lower their wages. The thing that mainstream economists said was causing unemployment is actually preventing it!)

But this cycle can be run in reverse. Imagine Donald Trump hires unemployed people to build him a new skyscraper. They're suddenly getting paid again, which means they can start spending again. And each dollar they spend goes to a different business, which can start hiring people itself. And then those newly hired people start spending the new money they make, and so on. This is the multiplier: each dollar that gets spent provides even more than one dollar's worth of boost to the economy.

Now let's look at things from the employer's side—say you run a truck factory. How do you decide how many trucks to make? Obviously, you make as many as you think you can profitably sell. But there's no way to calculate something like that—it's a question about what customers will do in the future. There's literally no way to know. And yet, obviously, trucks get made.

It used to be, Keynes says, that wealthy men just thought investing was the manly thing to do. They weren't going to sit around and calculate what kind of bonds yielded the greatest expected return. Bonds are for wusses. They were real men. They were going to take their money and build a railroad.

But they don't make rich people like that anymore. Nowadays, they put their money in the stock market. Instead of boldly picking one great enterprise to invest in, they shift their money around from week to week (or hire someone else to do it for them). So these days, it's the stock market that stimulates most new investment.

But how does the stock market figure out what profits are supposed to be? In truth, it has no more clue than you do. It's really just based around a convention. We all pretend that whatever the stock price is now is a pretty decent guess and then we only have to worry about the various factors that will cause the stock price to change. We forget about the most basic fact: that nobody has any clue what the stock price should be to begin with.

So instead of people trying their best to figure out which businesses will make money in the future, and investing in those, we have people trying to figure out which stock prices will change in the future, and trying to get there first. It's like a giant game of musical chairs—everybody's rushing not to be the one left standing when the music stops.

Or, you could say, it's like those newspaper competitions where you have to pick the six prettiest faces from a hundred photographs. The prize goes to the person who picks the faces that are most picked, so you don't pick the faces you find prettiest, but instead the faces you think everyone else will find prettiest. But it's not even that, since everyone else is doing the same thing—you're actually picking the faces you think everyone else will think everyone else will find prettiest! And no doubt there are some people who take this even further.

You might think this means that someone who actually did the work and tried to calculate expected profits would clean up, taking money from all the people playing musical chairs. But it's not so simple. Calculating expected profits is really quite hard. To make money, you'd have to be unusually good at it, and it seems much easier to just guess what everyone else will do.

And even if you were somehow good at guessing long-term profits, where would you get the money to invest? It's in the fundamental nature of your strategy that your investments seem crazy to everyone else. If you're successful, they'll write it off as a lucky fluke. And when your stocks aren't doing well (which is most of the time—they're long-term picks, remember), people will take this as evidence of your failures and pull their money out.

The scary thing is that the more open our markets get, the faster people can move their money around and the more trading is based on this kind of speculation instead of serious analysis. And that's scary because—recall—the whole point of the stock market is to decide the crucial question of what we, as a society, should build for the future. As Keynes says, “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

The best solution is probably a small tax on each trade. Not only would this raise a ton of money (modern estimates suggest even a tiny tax could raise $100 billion a year), it would help redirect all the brains on Wall Street from these wasteful games of musical chairs to something actually useful.

But even if we solve the problem of the stock market, there's still some irreducible uncertainty. Because whether new investment makes sense always depends on whether the economy will be doing well in the future. And whether the economy is doing well depends on whether there's new investment. So, at the end of the day, investment doesn't depend simply on a careful calculation of future expected yield, but on our “animal spirits,” our optimism about the future. It's this factor that exaggerates booms and deepens slumps and makes it hard to get out of a bad situation.

Even more perversely, it means economic performance depends in no small part on keeping businessmen happy. If electing Obama
gets businessmen depressed, they might pull back their investments and send the economy into a slump. It doesn't even have to be intentional—they may very well believe that a President Obama is bad for the economy. But when you have a system that only works when businesspeople feel good, their fears become a self-fulfilling prophecy.

The result, Keynes suggests, is that the government will have to step in to prevent the economy from crashing every time rich people get a bit of indigestion.

So that's how we calculate the income side of things, now what about costs? Most costs are pretty clear—you need to buy equipment and hire people. But since you need to make stuff now that you can only sell in the future, one of your big costs is going to be money to use in the meantime. And the cost of money is just the interest rate. (If you get a loan for a million dollars at 5% interest, you're essentially paying $50,000 for the right to use the money now.)

Thus lowering interest rates increases investment—it reduces the cost of getting money, which reduces the cost of making stuff, which means more things can make a profit. And if more things can make a profit, more things get made, which means more people get hired. So what determines the interest rate?

Well, if the interest rate is the cost of money, the obvious answer is the amount of money in circulation. If there's a lot of money lying around, you can get some pretty cheap. Which means that, fundamentally, unemployment is caused by a lack of money: more money (assuming people don't hoard it all) means lower interest rates, lower interest rates (assuming expected profits don't crash) means higher investment, higher investment (assuming people don't stop buying) means more employment, and more employment means higher prices, which means we're going to need more money.

Money is created by the central bank (the Federal Reserve in the U.S.), which decides what they want the interest rate to be and then prints new money (which they use to buy up government debt) until the interest rate is where they want. To get the economy back on track, all they have to do is keep lowering interest rates until investment picks up again and everyone has a job.

But there's one catch: the interest rate can't go below zero. (Keynes didn't think this problem was very likely, but in the U.S. we're facing it right now.) What do you do if the interest rate is zero and people are still out of work?

Well, you can pray that billionaires will start hiring us all to build them giant mansions, but that's no way to run a country. The government has to step in. Instead of waiting for billionaires to build pleasure domes, the government can hire people to build things we all need—roads, schools, houses, high-speed Internet connections. Although, honestly, it doesn't have to be things we all need. They could hire people to do anything. This is why inspecting the stimulus money for waste is so ridiculous—waste is perfectly fine, the important thing is to get the money into circulation so that the economy can get back on track.

Another good solution is redistributing income. Poor people are a lot more likely to spend money than billionaires. If we take some money from the billionaires and give it to the poor, the poor will use it to buy things they need and people will get jobs making those things.

Remember that money is just a kind of illusion. In reality, there are just people who want things and people who make things. But we're stuck in a completely ridiculous situation: there are lots of people who desperately want jobs making things—they're literally not doing anything else—while at the same time there are lots of people who desperately want things made. It seems ridiculous not to do something about this just because some people have all the little green sheets of paper!

Capitalism seems to go through frustrating cycles of booms and busts. Some people say the solution is just to prevent the booms—raise interest rates so the party doesn't get out of hand and we won't all be sorry the next morning. Keynes disagrees: the remedy “is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.”

Think back to the dot-com era, when venture capitalists were spending all their money laying fiber-optic cable under the street. The right solution wasn't for the Fed to raise interest rates until even
punch-drunk venture capitalists could realize all this investment in fiber wouldn't be profitable. The right solution was to take their money away. Give it to the poor, who will spend it on something useful, like food and clothing.

So those are Keynes' prescriptions for a successful economy: low interest rates, government investment, and redistribution to the poor. And, for a time—from around the 1940s to the 1970s—that's kind of what we did. The results were magical: the economy grew strongly, inequality fell away, everyone had jobs.