Throw Them All Out (20 page)

And who were the senators sitting across from England at those hearings? The same senators who wrote the defense bills, added earmarks, determined which military systems were bought or rejected. The same senators who were privy to private conversations with contractors and Pentagon officials, and received classified briefings on defense contracts, military systems, and Pentagon strategy. In other words, the very people who controlled the federal budget. They were free to buy and sell as many shares of defense stocks as they wanted to. Indeed, 19 of the 28 senators on that committee at the time held stock in companies that do business with the Pentagon.

The Permanent Political Class tells us they are concerned about financial corruption and financial crimes. They applaud legal crackdowns on corporate criminals and berate corporate executives for their huge salaries and tax shelters. The Permanent Political Class believes that everyone needs to be policed on this front. Everyone, that is, except for themselves. Why did the Tammany Hall political machine gain so much power in New York City? Why was it a dominant force for more than a century? You could point to the patronage system, or the payoffs. But in the end the machine survived
because the public came to accept it.
New Yorkers came to tolerate the idea that you could use "legal graft" to get rich from "public service" because that was just the way things were done. Sadly, the same attitude holds true today when it comes to crony capitalism. We get outraged when members of Congress or the President breaks the law, but we ignore the legal graft that is far more prevalent.

As long as the Permanent Political Class gives us what we want, we are happy. This was precisely the goal of Tammany Hall: make people dependent on us. Plunkitt explained that the fondest dream of bosses like himself was a situation where "the people wouldn't have to bother about nothin'. Tammany would take care of everything for them in its nice quiet way."
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America is supposed to be a nation ruled by laws, not by men. Central to that idea of America is the notion that we are equal before the law. That means that the laws should apply equally to everyone.

For one of the chief architects of the Constitution, this notion of equality before the law was the "genius of the whole system." As James Madison wrote in
Federalist
No. 57: "I will add, as a fifth circumstance in the situation of the House of Representatives, restraining them from oppressive measures, that they can make no law which will not have its full operation on themselves and their friends, as well as on the great mass of society. This has always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together. It creates between them that communion of interests and sympathy of sentiments, of which few governments have furnished examples; but without which every government degenerates into tyranny."

Why do the American people feel detached from Washington? Why are they fed up? Why do they feel little connection to their elected leaders? Why do our lawmakers in Washington seem to show so little urgency? Part of the answer lies in the fact that politicians are allowed to operate by a different set of rules. And that is a dangerous place for a representative government to find itself.

The Permanent Political Class is unresponsive to our concerns and needs because it is partly immune to the economic realities the rest of us face. Its business has, in a phrase popular with money managers, downside protection and guaranteed upside potential. For crony capitalists, there is a business cycle, but they control it and can make money no matter how and when it turns. This means socialism for the Permanent Political Class and its friends—and capitalism for the rest of us.

The Permanent Political Class offers all sorts of arguments to justify its special status and its exemption from conflict-of-interest and insider trading laws. Members of Congress will argue, for example, that they are required to disclose their financial transactions and assets, and voters can boot them out at the ballot box. Never mind that those financial disclosure forms are often filled out incompletely or incorrectly. According to the congressional newspaper
Roll Call,
25% of them contain significant errors.
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The point is, many lawmakers believe they must be kept above the fray, beyond the reach of the executive branch. They regularly exempt themselves from the level of scrutiny placed on other national leaders. They have even exempted themselves from Freedom of Information Act (FOIA) laws and open-document requirements. Their documents are as legally inaccessible as secret documents of the CIA—in fact, they are more difficult to obtain. At least some CIA documents become declassified and see the light of day. Congressional records never do. Congress passed the FOIA in 1966 because it believed that informed citizens would be better watchdogs. But Congress didn't want them looking into its own backyard.

Financial disclosure forms are required for elected state legislators, state judges, and county or city commissions around the country. But public officials are also required to abide by conflict-of-interest and insider trading laws and restrictions. If elected state judges, for example, were held only to the standards of federal lawmakers, they would be free to rule on cases in which they had a financial stake, as long as they faced reelection and filed financial statements. Would anyone like that idea?

In forty-five states, one or both state legislative bodies have a requirement that if a financial conflict of interest exists, a member legislator "shall not vote on the matter."
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American city councilors and county commissioners often have stricter rules than members of Congress, even though they have far less power and influence. In California, for instance, if you serve on a city council or county commission, you are subject to conflict-of-interest laws. As the state defines it, "You have a conflict of interest with regard to a particular government decision if it is sufficiently likely that the outcome of a decision will have an important impact on your economic interests." California has an oversight body, the Fair Political Practices Commission. One of the standards it uses is the "personal financial effect." If voting on a bill will cause you to gain or lose $250 or more in a twelve-month period, you should abstain.

The commission offers this hypothetical example: "The Arroyo City Council is considering widening the street in front of council member Smith's personal residence, which he solely owns. Council member Smith must disclose on the record that his home creates a conflict of interest preventing him from participating in the vote. He must leave the dais but can sit in the public area, speak on the matter as it applies to him and listen to the public discussion."
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In other words, he can voice his opinion like any other citizen, but he cannot help make a ruling on the matter.

For members of Congress, not only are they allowed to vote in similar circumstances, they can also quietly insert an earmark into any big bill in order to widen the road in front of their house. As long as one other person lives on that road, the ethics committee will sign off on it.

Some people argue that members of Congress shouldn't be forced to comply with the same laws as the rest of us, because if they were, good candidates wouldn't run for office. Or that if they were required to recuse themselves, voters back in their districts would be disenfranchised. This is true, in the narrow sense that each recusal means certain voters' interests are not spoken for. But the grand claim of disenfranchisement should not be overused. Does anyone complain about disenfranchisement when a legislator skips a vote?

Members of Congress love to raise the banner of "separation of powers." When the FBI obtained a warrant to search Congressman William Jefferson's office in 2006, both Speaker of the House Dennis Hastert and Majority Leader Nancy Pelosi denounced the move as dangerous and unconstitutional. Jefferson was at the center of a fourteen-month investigation into charges that he accepted bribes. The FBI already had video evidence of Jefferson taking $100,000 in bribe money, and the Bureau found $90,000 in cash in his apartment freezer. But on Capitol Hill, the Permanent Political Class saw the raid as an outrage. Congressmen complained that FBI agents showed up at the Rayburn Office Building unannounced (imagine that!) and demanded that the Capitol Police let them into Jefferson's office immediately or they would "pick the office door lock." Some in Congress even threatened to retaliate by cutting the budget of the FBI and the Justice Department.
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A federal judge dismissed these criticisms, arguing that Jefferson had turned his office into "a taxpayer-subsidized sanctuary for crime."
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Of course, the judge was correct. It is understandable that members of the legislative branch would bristle at the use of coercive force by the executive branch against them, but not every example denotes a return to the civil wars of the British monarchy against Parliament.

Our legislators cling to the Speech or Debate Clause of the Constitution. Article 1, section 6 states that members of Congress "shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of the respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place."

That clause is not a get-out-of-jail-free pass for wrongdoers. It was designed as a safeguard against politically motivated legal action by the executive branch. British monarchs had used civil and criminal laws to block legislators who opposed the king. Who knew that over two hundred years later the legislative branch would use this as a shield against searches for criminal evidence?

If our elected representatives in Washington really want to cite the Constitution, they might begin with the Preamble: "We the People ... ordain and establish this Constitution." We, the people of the United States, contractually grant Congress its rights. The Constitution is a contract between the people and the elected. When members of the Permanent Political Class use their public office for personal interest, they have breached that contract.

 

It was in the 1940s when the word "crony" was first applied to modern American politics. Arthur Krock, the famed
New York Times
reporter nicknamed "the dean of the Washington newsmen," used it to criticize the political machine—like methods of the Truman administration, and later applied it to others. Alluding to President Truman's former connections to the Kansas City political machine of Tom Pendergast, Krock wrote in 1946 that "the Missouri flavor is strong around the White House itself ... and this has led to talk of government by crony." Harold Ickes, Truman's secretary of the interior, resigned from the administration in February of that year, saying, "I am against government by crony." Renowned journalist Walter Lippmann also used the term to criticize the Truman administration in a 1952
New York Times
article, making reference to "the amount of politically entrenched bureaucracy that has earned for Mr. Truman's regime its sorry reputation for corruption, cronyism, extravagance, waste and confusion." After Truman retired from Washington, the word "cronyism" came up frequently in American politics—the Eisenhower, Kennedy, and Johnson administrations were all subject to charges of "influence peddling, conflict of interest, gift giving, and the like."
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We have seen waves of hearings, from Truman to Johnson to Nixon and so on, over scandals now mostly forgotten. Does anyone other than political junkies remember Abscam or the Keating Five? There have also been waves of reform efforts and rules changes, including the Ethics in Government Act (provoked by Watergate). Yet politicians continue to enrich themselves, their families, their friends, and their supporters through the practice of cronyism.

 

Montesquieu wrote in
The Spirit of the Laws,
"Commerce is the profession of equals." But not in an era of crony capitalism, where politicians increasingly call the shots and where better access is often more important than a better idea or better business plan. Business has often resembled a meritocracy: the entrepreneur with the best idea, the best product, the best business strategy, wins. People vote with their purchases to select winners and losers. And investors looking to help a budding company will make their evaluation on the merits. Cronyism is the antithesis of a meritocracy.

Andrew Redleaf is the CEO of Whitebox Advisors, a highly regarded investment advisory service. Redleaf has had a long career running investment funds. He argues that crony capitalism isn't just unfair, it is a serious threat to our economic system, because "crony capitalists do not depend upon the general success of the economy to achieve their larger goals ... The crony capitalist is instinctively satisfied with the notion of a zero-sum game, which, for his purposes, is better than a rising tide that lifts all boats. What good is it to the crony capitalist to see all boats lifted?"
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The crony-capitalist system is self-perpetuating. When they leave office, politicians become cronies of their former colleagues. Consider this simple statistic concerning the number of government bureaucrats and ex-politicians serving on corporate boards. In 1973, only 14% of Fortune 1000 companies had people with "government service experience" on their boards. By 1992, it had jumped to 39%. Since 2002, it has been over 50%. These numbers are even more stunning when you discover that during the same period the average number of outside directors on corporate boards has shrunk from 16 to 9.
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As one unnamed corporate executive put it, "We need someone on the board who is a veteran of the Washington scene, who knows and understands the people involved in the executive and legislative branches of the government, and who keeps an eye on what is going on in Washington. Somebody who has had Washington experience does make a great contribution to our board."
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More and more, corporate leaders are coming to agree.