III. The Stimulus, The Bailouts, and Obamacare
The Obama Administration’s policies, in action, provide copious examples of both a broader inclination towards collectivism and a specific pattern of corporatism. Over and over, Obama has attempted to use federal spending, tax and regulatory powers to coopt institutions and mute competition in pursuit of greater government ability to redistribute wealth. Part III looks at the three main areas in which this has played out in the Administration’s policies: the stimulus, the bailouts, and Obamacare.
A. The Stimulus
The 2009 stimulus bill was Obama’s first major legislative initiative. An economic “stimulus” bill is a cat that can be skinned in a number of different ways, ranging from the free-market approach of permanent cuts in income tax rates to the old-time big-government solution of just laying out taxpayer money to hire a whole lot of people who are out of work (think of FDR’s makework WPA projects).
Obama’s stimulus incorporated some tax rebates, albeit mostly in the form of temporary credits, and a good deal of direct government spending (although Obama would later bemoan that there were fewer “shovel-ready” projects than he expected). But significant portions of the bill were corporatist endeavors: having the government invest in private ventures that cultivated government favor, and distributing funds designed to coopt potential political adversaries. Let’s consider an example of each.
1. Green Jobs
Typically, in a corporatist system, the businesses that get capital, subsidies and contracts are those that have the favor of the government. Obama’s wastes of taxpayer money on “green jobs” companies like Solyndra, Abound Solar, and A123 – many of them, not coincidentally, politically connected – are perfect examples of this. To see how the process works up close, consider, as a specific example, Al Gore:
Fourteen green-tech firms in which Gore invested received or directly benefited from more than $2.5 billion in loans, grants and tax breaks, part of President Obama’s historic push to seed a U.S. renewable-energy industry with public money….
Before the election, Gore launched a public campaign known as “Repower America,” aimed at encouraging the public and the next administration to support government investments in clean energy. His Alliance for Climate Protection was running numerous ads…
At the same time, Gore’s venture partner, Doerr, had been raising money for Democrats to take back the White House, holding big-check receptions with Silicon Valley investors. He and fellow Kleiner partners and spouses donated more than $800,000 to Democrats, much of it for Obama and state efforts to get out the vote.
At GIM, five of Gore’s principals, including co-founder David Blood, wrote $130,000 in checks to aid Obama’s bid, according to the Center for Responsive Politics.
As Obama was preparing to take office, it was clear his public agenda supporting clean energy aligned with Gore’s personal agenda. Obama held a highly publicized meeting with Gore at transition headquarters in Chicago to talk about energy policy. Later, Obama closely echoed several of Gore’s talking points and his plan for public investment in clean energy. Obama even adopted Gore’s campaign catchphrase for the effort, “Repower America.”…
Gore’s orbit extended deeply into the administration, with several former aides winning senior clean-energy posts. Among them were Carol Browner, a former Gore political operative who became the president’s climate change czar, and Ron Klain, Gore’s former chief of staff who went to work for Vice President Biden overseeing the stimulus.
Those connections were underscored in October 2009, when Jonathan Silver, under consideration to head the $38 billion clean-energy loan program, hosted a party to help Gore raise money for the Alliance for Climate Protection.
Silver invited the Department of Energy’s chief financial officer, days before the official was scheduled to meet Silver to discuss the job.
How valuable was all this influence? Well, “[a]n administration official said more than 80 percent of applicants the first year were turned away,” but “[o]f the 11 companies [Gore] mentioned in his 2008 slide show, nine received or directly benefited from stimulus or clean energy funding” – an 82% success rate.
On the whole, the green jobs agenda was (predictably) a fiasco as far as efficient use of public funds. The Energy Department estimated that, rather than the projected 5 million jobs, it ended up spending $21 billion on projects that employ 28,854 people – a cost of $728,000 per job. But the real point of the endeavor was a combination of Obama’s belief that the government could pick winners in the energy sector of the economy, a misguided hope that investment could be profitably directed to serve a public purpose (environmentalism) and, of course, the familiar desire to reward political allies. A free market system of energy investment would be burdened by no such illusions or designs.
2. Strings Attached
As discussed above, part of the strategy of collectivists in America’s federal system is not just to coopt private institutions, but also to place state and local governments under more nationally uniform management. Where Louis Brandeis once wrote that “[i]t is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country,” today’s liberals almost invariably see dissenting states as obstacles to nationally uniform plans, engaged in a “race to the bottom” to reduce taxes and regulation in order to steal business from other states. This leads to ridiculous endeavors like trying to set a national minimum wage.
Many of the provisions of the stimulus bill involved doling out money to states for unemployment benefits, Medicaid, transportation and education. But those funds came with major strings attached – strings that seemed directly designed not just to force a one-size-fits all solution from Washington on the states, but perhaps specifically to prevent any state governor from operating a competing model that could be presented to the voters later on as an example of how to do things better than Obama. The crop of potential presidential challengers among sitting governors at the time included Sarah Palin, Tim Pawlenty, Rick Perry, Mark Sanford, Haley Barbour, Jon Hunstman and Bobby Jindal; it was clear from the outset that the Administration made it a goal to handcuff Obama’s political rivals from campaigning against the strimulus if it failed. (The DNC ran ads against Sanford for turning down stimulus money, and Democrats in other states blasted the other GOP governors on a similar basis). And lest some governors reject those funds, the bill contained unprecedented provisions allowing state legislatures to override their governor and accept the funds.
Perry, for example, complained that the stimulus bill required Texas to change its rules for unemployment eligibility, in ways it wouldn’t be able to change back when the temporary federal money ran out:
Provisions in the federal bill allow Texas to receive $556 million if it broadens its eligibility – for instance, lets part-time workers collect benefits even if they search for less than full-time work, and grants extended benefits to people in retraining programs.
The state also would have to consider recent wages in calculating a laid-off worker’s income, not the current method that can go back nearly 18 months.
Palin similarly rejected funds containing “strings that will bind the state in the future.” Jindal rejected new Medicaid funding on similar grounds, leading Obama to pivot into campaign mode even back in 2009.
In the end, the coercive power of the federal government was hard for even sovereign states to resist, as most of the Republican governors were compelled by state legislatures to scale back their opposition. In the short term, Obama got what he wanted: fewer states that could promote themselves as competing models. Perhaps not coincidentally, he ended up with a general election opponent who’d been out of government since before Obama’s term started.
B. The Auto Bailout and TARP
Corporatism is not solely a Democratic phenomenon, although wherever it exists in our government, the Democrats will press for a wider scope for its activities. A perfect example is the TARP and auto bailouts. Both began under George W. Bush as short-term programs; both were supported at the time by Obama and other Democrats; and both were expanded and prolonged under Obama.
Treasury Secretary Paulson’s initial meetings with the CEOs of the major banks actually provides a fairly perfect example of the corporatist-collectivist approach. Wells Fargo CEO Richard Kovacevich didn’t want to accept TARP funds, believing that his bank didn’t need them and didn’t want the strings that would be attached, the scope of which were not entirely clear at the time. Here’s what happened next:
“As my comments were heading in that direction in the meeting, Hank Paulson turned to Fed Chairman Ben Benanke sitting next to him and said, ‘Your primary regulator is sitting right here. If you refuse to accept these funds, he will declare you ‘capital deficient’ Monday morning,'” Kovacevich recalled. “‘Is this America?’ I asked myself.”
“This was truly a ‘godfather moment.’ They made us an offer we couldn’t refuse,” Kovacevich said, adding that he might have put up more of a fight if the San Francisco bank had not been trying to acquire troubled Wachovia at the time.
Paulson’s logic was that if some banks made it known that they didn’t need TARP money, their success would reflect badly on those who did – a dynamic that repeated itself with the auto bailout. Ford ran ads touting the fact that it hadn’t needed a bailout – but pulled them swiftly after the White House complained that they reflected poorly on Ford’s bailed-out competitors (Ford, needing to stay on the White House’s good side, then denied that the ad had been pulled as a result of political pressure). In an industry that depends so heavily on government favor, none of the major players can speak their mind freely, even at the risk of kneecapping their own willingness to compete with what are supposed to be their competitors.
The auto bailout under Obama was headed by Steve Rattner, who – speaking of corporatism – was later sanctioned by the SEC for a pay-to-play scheme to steer New York state pension business his way. And it – like TARP – undeniably involved the government in picking winners and losers among the various players in the industry based upon whether they were politically favored:
In moving to get Chrysler through bankruptcy and into the hands of Fiat CEO Sergio Marchionne, the president’s auto task force bullied Chrysler bondholders and managed successfully to place the unsecured claims of the UAW ahead of secured creditors.
In moving to get GM back to independence, the Treasury Department sold part of its equity stake in the automaker at an initial public offering. But the shares now trade consistently lower than their offer price, meaning taxpayers stand to lose as much as $15 billion on the government’s remaining 26.5-percent stake in GM, according to Treasury estimates.
In moving to get GM through bankruptcy, the task force and its bosses at Treasury effectively shafted 22,000 salaried retirees of the former Delphi Corp., the long-time GM parts supplier the automaker spun off in 1999. Despite an 85 percent funding level in its pension fund, Treasury urged the Pension Benefit Guaranty Corp. to seize the Delphi pension plan.
The net effect: Many retirees saw their annual payouts cut by as much as two thirds, even as union members were “topped up” with taxpayer dollars from the Troubled Asset Relief Program; their former colleagues at GM saw comparatively minor cuts to their pensions; and key members of the auto task force still won’t tell congressional investigators who made the call to treat Delphi’s salaried retirees differently than everyone else.
In moving to get both GM and Chrysler through bankruptcy, the task force essentially ordered the automakers to cut thousands of independent dealers from their distribution networks, irrespective of the dealers’ profitability, customer service performance and even location.
The Delphi investigation is continuing, with emails showing political involvement in the relevant decisions. Meanwhile the Administration has been resisting GM’s requests that the Treasury sell its multibillion-dollar stake in the company, out of concern for showing a loss on its investment. GM’s fate remains at the mercy of politics.
A similar dynamic played out in the TARP program, with powerful House Committee chairs like Barney Frank and Maxine Waters intervening to steer TARP funds to favored banks, part of a broader pattern of influence:
U.S. banks that spent more on lobbying were more likely to get government bailout money according to Ran Duchin and Denis Sosyura at the University of Michigan’s Ross School of Business. Their study reveals a twisted correlation between a bank’s bailout and its proximity to an elected politician.
Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP, and those with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.
Members of the House of Representatives were also a good way in — the study showed that more funds went to banks with headquarters in the district of a member who served on a committee or subcommittee related to TARP.
Not content with playing favorites among large banks, Obama then tried to pivot to getting smaller banks on the take, pledging in his 2010 State of the Union to tax the big banks and “take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.” It requires little imagination to picture the precise same process of lobbying and favoritism playing itself out on the community-bank level.
Of course, these and other bailouts reduce the risk in investing in large corporations – and that’s one of the reasons why we see soaring stock markets even as corporate earnings plunge. Financial instruments like stocks, after all, are all about taking risks to earn rewards – and the less the risk involved, the less rewards you require to make it worthwhile.
(For professional reasons, I can’t get further into financial-industry issues, but suffice it to say that not only have there been many more specific complaints lodged against the corporatist tendencies of TARP in action, but of the labrynthian Dodd-Frank bill as well, see here and here).
Obamacare, of course, is the granddaddy of all collectivist, corporatist programs under Obama. Just a few examples will show how.
1. The Insurance Mandate
The core, controversial heart of Obamacare is the idea that – in order to give uninsured people health insurance coverage – all Americans would be mandated to buy coverage (the “individual mandate”), and all insurers would be required to take all comers regardless of their insurance risks (“guaranteed issue”) and would be regulated in their ability to price for those risks (“community rating”).
Obama could have chosen just to subsidize the uninsured to buy insurance. But instead, the entire pricing mechanism of the insurance market for everyone is altered by the requirements of guaranteed issue and community rating, the first of which massively increases insurers’ costs, and the second of which prevents them from passing those costs on to high-risk insureds. This ensures that those insureds receive coverage that is worth more than they paid for it. Instead, those costs are imposed on everyone who has insurance, by means of the individual mandate. The Supreme Court explained how the mandate works as a subsidy:
By requiring that individuals purchase health insurance, the mandate prevents cost-shifting by those who would otherwise go without it. In addition, the mandate forces into the insurance risk pool more healthy individuals, whose premiums on average will be higher than their health care expenses. This allows insurers to subsidize the costs of covering the unhealthy individuals the reforms require them to accept.
Here we have the perfect match of collectivism (i.e, raising the cost of insurance across the board to subsidize high-risk insureds) and corporatism (rather than create a “public option” by which government would service those high-risk insureds directly, it forces individuals to buy policies from private companies). Its defenders used explicitly collectivist arguments to justify its constitutionality. And lest the insurers misbehave, the public option or a straight-up single payer plan (which Obama has previously described as his ultimate goal, but for now uses as the bad-cop threat) looms as a threat down the road.
In the meantime, insurers and employers are under an ever-increasing web of regulatory control that will continue to sap their independence. The most controversial example is the HHS contraceptive mandate, which requires employer-provided coverage to include contraception, and fails to exempt many Catholic and other religious institutions that object to being compelled to provide something that violates their religious principles. The number of employees actually affected by the HHS contraceptive mandate, and the amount of money involved, is minuscule in comparison to the health care system as a whole; one would ordinarily think that the issue is far too small for a president facing re-election to justify an open breach with the Catholic Church over it. The heavy emphasis placed on the fight by the Obama campaign, all the way down to having Sandra Fluke speak at its convention, suggests that perhaps this was all just a deliberate campaign strategy, and that’s one possible interpretation. But it also signals something more deeply troubling in this Administration: a determination to impose its will on the Church. The whole fight is nothing if not a test of who has power over one of the terms of employment at Catholic institutions. This effort to bring the Church to heel at the federal government’s command is a textbook example of how corporatist systems inevitably demand that all the major free institutions be reminded that the government calls the tune. Obama’s own defense of the mandate is, again, revealing of his tendency to draw everyone into the web of owing the government:
[W]e did say that big Catholic hospitals or universities who employ a lot of non-Catholics and who receive a lot of federal money, that for them to be in a position to say to a woman who works there you can’t get that from your insurance company even though the institution isn’t paying for it, that that crosses the line where that woman, she suddenly is gonna have to bear the burden and the cost of that. And that’s not fair.
You took the money, whether you originally wanted it or not. And now Uncle Sam has the leverage to make you violate even your religion.
[UPDATE: I neglected to mention here one of the most egregious examples of the corporatist tendencies of the various mandates – the fact that the Administration has been profligate handing out waivers to unions and other favored constituencies, exempting them from Obamacare’s requirements. This is the corruption of the system at its finest: the passing of onerous laws, from which major donors and political allies are exempted]
2. The Backroom Deals
Legislation, especially big, complicated legislation, invariably involves all sorts of backroom wheeling and dealing and favor-trading among legislators and industry and labor or other interest group lobbies (this is one good reason to avoid such legislation whenever possible). There is, of course, nothing inherently wrong with lobbyists getting a hearing when their industry’s ox is potentially about to be gored, but the more a bill hands out rewards and punishments among different economic interest groups, the uglier this process gets. Liberals complained – and not without reason – about the drug companies’ involvement in the Medicare Part D bill in 2003, but Obamacare took that to the next level; not only was the bill written with the substantial involvement of lobbyists for the insurance and drug companies, but the negotiations included a quid pro quo connecting the legislation to the behavior of private businesses, while putting on the sham public appearance of Obama being tough with business:
[D]rug lobbyists, White House officials and aides to Sen. Max Baucus hammered out a deal that formed the backbone of Obamacare. The final bill would subsidize prescription drugs, force states to include drug coverage in Medicaid, and expand private insurance coverage of drugs. Also, the White House pledged to oppose policies that Obama had promised on the campaign trail: allowing reimportation of prescription drugs and empowering Medicare to negotiate for lower prices on the drugs Medicare is paying for. In return, drug companies would offer a discount to some senior citizens, and would spend millions of dollars on ads supporting the bill and the lawmakers who backed it.
Even The Nation was appalled by the way the process was handled. Given this modus operandi, it is not surprising that – as Tim Carney has noted – you can scarcely throw a rock around the Obama Administration without hitting a political appointee who has worked as a lobbyist.
Obamacare vastly expanded the Medicaid program, and in an echo of the stimulus program, ran so roughshod over independent state sovereignty that the Supreme Court, by a 7-2 margin – including Justice Breyer and Obama’s own former Solicitor General, Justice Kagan – found it the unconstitutional equivalent of a “gun to the head” of the states.
Medicaid is jointly funded between the federal government and the states, and already consumes an ever-increasing share of state spending. It used to be a voluntary program, and in its early years, some states opted out of some or all of the program. By now, all 50 states are in the program, but at least in theory they are still free to take or leave additional federal expansions.
Obamacare required participating states to enormously increase their Medicaid spending by relaxing eligibility, in part to fund Medicaid recipients’ ability to comply with the individual mandate. The federal government would cover these expenses in the short run, but as with the stimulus, with no promises to continue doing so once states were locked into the new system: “because the new Medicaid enrollees will now be dependent on the government, states won’t be politically or legally able to roll back their programs, leaving state taxpayers with the bill. The Wall Street Journal aptly compares this to ‘a subprime loan with a teaser rate and balloon payment.'”
Some states projected that under the new rules, Medicaid would consume around a quarter of their budgets (the average state’s share is already 20 percent). Many governors, especially Republicans, balked at a huge expansion of their budgets by a program outside their control at a time when state budgets are already deeply stressed, but Congress threatened in the bill that any state refusing to agree to the new eligibility rules would lose every penny of their funding. They complained to the Court that this was a threat to independent state self-government, and the Court agreed. Obama had gone too far.
4. The Regulatory Forest
Even beyond the best-known mandates and the Medicaid expansion, the blizzard of new regulations under Obamacare provides plenty of corporatism’s classic incentives towards bigness and a cozy relationship between government and large, captive private institutions. Ben Domenech explains:
The president’s health care law contains rafts of new regulations, benchmarks, and taxes for providers to deal with. Since these limit profit margins and create new administrative costs, they make it very appealing for health care providers to merge into gigantic, sprawling systems of care…
…Obama’s law …giv[es] these large entities even more incentive to merge through the creation of accountable care organizations (ACOs). These large health care entities will destroy any hope for competition in a marketplace, driving out or buying out independent doctors and extracting as much money as possible from taxpayer-funded entitlements and the privately insured.
We’ve already seen this happen under a system similar to Obama’s, in Massachusetts, where the state’s largest insurer and hospital system collaborated in a secret handshake agreement: The insurer promised to pay the hospital system more money in exchange for an agreement that the hospital would stick all other insurers with the same rate increases. This is classic cartel behavior, and it will only increase under Obama’s law. And thanks to government subsidies and our third-party payer system where patients and providers are insulated from price signals, costs will only continue to increase for the rest of us.
This is the corporatist model: reduce the number of players in the industry to a handful of powerful interest groups that could fit around a table, then have government treat them as its (decidedly junior) partners, leaving individuals and small businesses out in the cold.
See Part I and Part II. In Part IV, the same trends play out in other policy areas.