The Dark Side of Sunshine

ECONOMICS OF INEQUALITY - How a single change in our approach to lobbying has fueled a 40-year rise in inequality.

November 22st, 4PM
Harvard Kennedy School
Carr Conference Room (Rubenstein R219)

  David King                James D'Angelo                Brent Ranalli

DRAFT - June 16th, 2017 - Do not cite

We live in unequal times.

Over the last five decades, the US has been shaped by one trend above all others – the inexorable rise in inequality. In 1940, income in America was as equally distributed as at any time in the country's history, and it remained that way, as if in a slumber, until the 1970s.

Then, it awoke.

And for the next forty years, inequality (of both wealth and income) rose furiously and relentlessly upward through the administrations of Jimmy Carter, Ronald Reagan, George H. Bush, Bill Clinton, George W. Bush and Barack Obama. Immune to Reaganomics, the Internet boom, stagflation, various bubbles and a number of crippling recessions, wealth disparity is now higher than it has ever been in the nation's history.

As a result, today's richest Americans have now surpassed the Robber Barons of the Gilded Age as the wealthiest group of elites in history.

In the wake of this rise, the middle class has been eviscerated, resulting in one of the largest transfers of wealth in world history – over the last thirty years, more than two trillion dollars has shifted from the bottom 90% to the top 10% – each year. Over the same period personal debt, poverty and job insecurity have risen dramatically, fueling the ascendency of two improbable presidencies, Barack Obama and Donald Trump.

Overlooked in the mudslinging of the recent campaign, income inequality was the central failing point of the Democrats, as the poorest of America's counties voted overwhelmingly for Trump. This was likely not a shock to Obama. In 2011, in the wake of Occupy Wall Street, the President had labeled wealth disparity as the "defining issue of our time." Yet, three short years later, in a 2014 CNN interview, the President conceded that, like the five presidents before him, 95% of all financial gains under his watch had gone once again to the top 1%.

Obama's best efforts, like everyone else's, had failed.

Surprisingly, the rest of the world has not followed pace. Indeed, while the inequality in the United States pushes ever higher, countries like France, Hungary and Belgium have suffered no significant change. As if alone on a sinking ship, the United States is fast approaching a level of disparity that marks societies as dysfunctional as Iran, Jamaica, Uganda and the Philippines.

Fortunately, however, this uniqueness of the American experience might guide us in the search for a solution. In an era of globalization, America's exceptionalism with respect to inequality has pushed a number of prominent economists to leave their comfort zone, compelling them to consider a thorny, outsider variable – US policy. And this change in tactics has been a rude awakening.

When the economist Joseph Stiglitz changed his focus to policy in 2012, he could see the roots of inequality virtually everywhere. From patent legislation, to health care, corporate law, and regulation governing banks and monopolies, Stiglitz appeared almost overwhelmed at the discovery. Still, having long poo-pooed the idea of Adam Smith's invisible hand, he was particularly primed for embracing the powerful and visible hand of U.S. legislation.

Better still, this revelation (which Bill Clinton might suggest to be "the politics, stupid") has made the culling of other, purely economic ideas trivial. Previously, economists have suggested that our inequality has been driven by technological change, globalization, the gig economy, the conversion away from a gold standard, etc. And while these ideas had long been picked apart for various other reasons (e.g. these same factors do not cause inequality in other advanced economies), they now crumble under this new rubric of policy. This is because no other proposed solution can explain the vast changes in legislation, but these changes in legislation go a long way toward explaining the rise in inequality.

Indeed, the policy changes of the 1970s were as stark as at any point in American history. Whereas the 1960s brought legislation of inclusion and tough regulations, the 1970s and early 1980s became a free-for-all (the block buster movie, The Big Short, notes this change in the very first line of the movie claiming that "banking in the 1970s was boring"). By 1980, everything from consumer protections to banking regulations to environmental regulations appeared to suddenly turn soft. Indeed, with so many changes in so many areas, it appears as if powerful special interests were directly re-writing the laws or just as importantly preventing them from being enforced, written or upgraded (as is the case with the declining value of minimum wage since its high in the late 1960s).

This degradation of policy is the central idea of Stiglitz's book, where he writes "how and why money should be so powerful in a democracy where each person has a vote, has remained a mystery." Indeed, traditional economics, according to Stiglitz, suggests that if the government controls the forces of the market (by limiting monopolies and rent seeking) it should be impossible for individuals to amass growing fortunes. Further, in a democracy, where most of the voters are poor or middle class, one would expect better laws of redistribution. But, since 1970, the redistribution has been shooting upward, not down.

Lee Drutman, who specializes in research on lobbying, noticed a couple peculiar changes at this time as well. Suddenly, in the 1970s, the lobbying industry exploded, shooting up in both the dollars invested and the number of registered lobbyists. K-Street appeared to grow out of nowhere, creating vast fortunes for the employees of an industry that was struggling to survive and had never paid shiny wages before.

At the same time, Drutman notes, the size of congressional staffs began to dwindle (even as the complexity of legislation and the US population increased), and the number of high-budget Senate investigations seemed to drop off entirely. Just as peculiar, certain members of Congress, to conserve their budgets, had started sleeping in their offices. While it is often suggested that our representatives don't serve the people, it seems exceedingly paradoxical to think of representatives voluntarily sleeping on Wal-Mart pullout beds and authoring laws that make their own lives worse.

Further, around the same time, the members of Congress had converted themselves into petty beggars. While it is not clear how much time members of Congress spent groveling for campaign finance in the decades before 1970, the evidence suggests that it was next to nothing – a stark contrast to the four hours of daily phone time many members pander today. And a simple review of the hard-nosed legislation of 1970 (limiting the scope of the most powerful interest groups) would suggest there wasn't a lot of quid-pro-quo.

Amazingly, one of the biggest gripes in the early 1970s was that the government was so concerned with protecting consumers and the environment that they stepped all over big business in the process. Clearly, something had changed. Almost overnight our representatives had transformed from powerful leaders to a nervous lot of legislators that catered to the powerful.

As Paul Krugman said this past February, "to this day we really don't fully understand why inequality skyrocketed the way it did," but one thing seems clear, the most powerful special interests had somehow gotten inside Congress and rattled the cupboards.

Interestingly, a simple look at the very first Congress and James Madison's harsh views of legislators might suggest a way out of this jam. In the 1780s, when Madison set about designing our government, he did not think of Senators or Representatives as honest or well-meaning individuals. In fact, he thought of each of them as single-minded, selfish rogues looking to bring as much pork home to their district as possible – i.e. special interests. And so, his idea to curb potential corruption was to put all these special interests into one big room, close the door and let them fight it out. In this way, each district would receive equal representation. And with so many representatives and so many interests, no lone actor or small group of individuals could hold sway.

However somewhere along the line, Madison's blueprint got redrawn.

This change can be seen vividly in the etymology of the word 'lobbyist.' It turns out that from the very first sessions of Congress (of which Madison was a member) until 1970, congressional committees regularly met in closed sessions. This meant that the lobbyists were forced (like everyone else) to wait outside in the lobby – hence their name 'lobbyists.'

And while these outside lobbyists tried desperately to figure out what was happening inside (by peering through the keyholes or attempting to listen through the door), more often than not, they failed. For all practical purposes, the most powerful lobbyists had about as much access to pending legislation as a polar bear. So without information to act upon, lobbyists accomplished very little and were paid accordingly. As such, lobbying was often practiced by not-so-skilled part-time journalists, drifting about the Capitol in their cheap suits looking for real work.

Indeed, Madison's closed-door policy meant that the only special interests allowed inside the chamber were the ones chosen by the people themselves – their elected representatives. And what happened behind the closed doors went entirely unrecorded, forming a secrecy that was essential to protect legislation from those with the most power. As such, not a single committee vote, motion or proposal by John F. Kennedy, James Madison or Lyndon B Johnson (they were all congressmen at one time) has ever seen the light of day. Unlike today, they drafted their legislation in tiny, private rooms, which expressly rejected the inclusion of outsiders paid by Big Oil, Big Pharma, the banks or others.

Then, in January of 1971, without a bit of fanfare, the Legislative Reorganization Act of 1970 was enacted, and Congressional committees started playing by different rules. But by 1977 watchdog groups and lobbyists had assured that virtually every congressional committee was thrust open.

And the difference is clear. The galleries of these now expanded committee rooms are attended almost exclusively by the burgeoning lobbying industry who actively pressure votes and influence legislation.

In the 1960s, this open door access would have been a lobbyist's dream, as nothing could have benefit them more. And once it was granted it gave powerful outsiders the ability make credible threats on representatives, giving corporate America and the nation's wealthiest individuals the leverage they needed to manipulate all legislation. And since the American economy is defined entirely by the laws written up by Congress, this change in access caused it to turn on a dime.

Just as quickly, Washington became awash with money. The lobbying industry boomed and the once ragtag CEOS became millionaires. Excited by these newfound riches, ivy-league lawyers and other skilled policy wonks flocked to DC to act as 'advocates for hire' (lobbyists) and draft legislation for billionaires. Thriving entirely on this new form of insider trading (transparency), the modern lobbying industry worked on intimidation and fear. Suddenly, representative's positions in committees (which had been almost entirely secret for 200 years) were used as ammunition against them. Terrified of standing out, members voted in unison and partisanship shot up. And so too did the return on investment (ROI) that businesses made on their lobbying investment. This grew quickly to the point where lobbying became the single most important investment of a number of firms.

So it is fascinating to think that Drutman's analysis of the rise of lobbying corresponds directly to meaninglessness of the word itself. When these outside special interests (the lobbyists) were no longer obliged to wait cluelessly in the lobby, they became instant and all-powerful insiders. And, as insiders, they actively participated in drafting and tweaking all the rules of the game. The wealthier the organization, the more negative advertisements and opponents they could fund, and hence, the more tweaks they could wrangle. It is as if each line of the law was suddenly opened up to the highest bidder.

It is no surprise then that the most substantial change in inequality was fueled by legislation drafted immediately in the wake of these open door policies. In 1976, just as the first conference committee on taxation was open to the 'public', the tax rates on the nation's wealthiest started its phenomenal drop, falling by almost fifty percent in just three years, never to recover again.

Where just a few years earlier, a few middling lobbyists stood outside the doors of the committees on taxation, the 1970s saw the exact opposite. Every committee was flooded with the most expensive private lawyers and accountants all demanding legislation specifically designed to benefit their wealthy clients. As Barlett and Steele note in their 1988 Pulitzer Prize report, some of these lobbyists were able to insert individual lines into the tax code that were designed to benefit the estate of a single family or individual.

So how big an effect do these changes have? Well in 2010, Hacker and Pierson claimed that all by themselves, these myriad changes in the tax code account for at least one third of the current rise in US income inequality (resulting in tens of trillions of dollars redistributed upward to the top 1%).

Therefore, it is no surprise, that the committees on taxation are still the most lobbied on Capitol Hill. And the tiny committee rooms of the 1960s have been overhauled to make room for the hundreds of lobbyists who now attend. Other besieged committees include health care, energy, banking, antitrust, education, prison reform, etc. – namely any committee that allows big companies to grant themselves subsidies and tax breaks or further stamp out the unions. As Stiglitz says "the effect of each decision may be small, but the cumulative effect of large numbers of decisions, made to benefit those at the top, can be very significant."

Indeed, the results are significant. Looking at nearly every economic or social timeline over the last fifty years shows a surprising, but familiar pattern – in the 1970s each graph has a hard elbow. In wages, the debt, health care costs, partisanship, cloture votes, the rise in lobbying, wealth disparity, CEO pay, incarceration rates (private prisons spend millions on lobbying), bank failures (linked to deregulation and risky behavior, omnibus bills, college tuitions and loans etc., we see a trend that, before 1970, is stable or moving in a positive direction that benefits the masses and then takes a sharp turn for the worse. Further, over the same period, we see the weakening of regulations, the decline of congressional investigations, the rise of gridlock, and the utter absence of proposals for tough legislation to support the environment or consumers.

So as modern pundits talk about 'face time' and how lobbying money buys access to Congress, they have somehow overlooked that fact that the most crucial form of access – the ability to actively participate in the law making process – costs nothing. It was simply granted on October 26th, 1970 when Nixon signed the Legislative Reorganization Act. But what is even more astonishing is that this specific change appears to have been entirely overlooked by historians, economists, reporters and political scientists. Open committees have simply been accepted wholesale under a mistaken belief that all forms of transparency are good.

Historically, the idea of secrecy fared much better. For starters, the Founding Fathers were furious advocates of secrecy. They drafted the Constitution in the steamy summer of 1789 in Philadelphia with all the windows of Independence Hall closed and covered (to prevent onlookers) and armed guards stationed at the doors. No outsiders allowed. Years later, Madison and others crafted the Bill of Rights in secret committees. And in 1985, just eight years after the first taxation committees were opened, the watchdog groups started to backtrack from their views on openness, as bill after bill left the open committees with the fingerprints of special interests. In 1984, Jeff Drumpta, who worked for Ralph Nader's organization, addressed the transparency of the taxation committees directly, saying "when you look at recent tax bills, the best ones have come out of closed sessions."

More recently, in 1990, Princeton scholar Douglas Arnold put it more bluntly: "Two decades later, after the advent of sunshine laws, we know better. Open markup sessions often give organized interests a powerful advantage over inattentive citizens, for they can monitor exactly who is doing what to benefit and to hurt them." Given such a perverse and insidious dynamic, it is no surprise that special interests universally endorse transparency. Indeed, Congressional transparency is the bread and butter of all the most powerful organizations and lobbyists. And the resulting increased accountability of our representatives allows powerful groups to skew and bend all the legislation that drives the economy, tilting everything in favor of the richest groups and individuals.

In no uncertain terms then, legislative accountability is the very antithesis of democracy. It is the proverbial Pandora's Box – the more accountable our legislators are (and the more transparency we provide) the more the rich are able to capture our government and seek rents by manipulating all legislation.

And we see this empirically.

For twenty years, from 1950 to 1970, safe behind the closed doors of legislative committees, the US experienced the Golden Age of Capitalism, where the poor and the middle class made enormous gains on par with the very rich. And then, to the surprise of nearly everyone, this egalitarian rise, turned on a dime. After decades of failing to sway policy (yes, the Koch family and other ultra-wealthy individuals were pouring millions into campaigns and propaganda before 1970), suddenly nearly everything the richest Americans did to sway policy succeeded fabulously.

By simply opening the doors to the committees, allowing the lobbyists to participate in the writing of every law, we have torn apart Madison's dream. We have shredded democracy, and we have designed a system that exclusively benefits the most powerful.

Ironically, for a brief moment in the mid 1980's (after years of preferential tax treatment for the wealthy), the heads of the tax committees in both the House and the Senate had enough of the furious lobbying and they shut the doors on the committees. This momentary reversal of transparency was likely too late to prevent all the damage wrought by the special interests up to that point, but it revealed something fundamental.

When informed of the closed-door sessions, many lobbyists began packing their bags. One real estate lobbyist claimed "it is demeaning standing here...and having little ability to impact (the legislation)." A terrified insurance lobbyist also head back home. He knew what closed-door sessions would do to his provisions and he didn't want to stick around to find out. When asked what he thought of the secret sessions, he responded, "it's equivalent to watching them build your gallows."

As the Congressional Quarterly reported in 1987, the new bills "were better when drafted away from lobbyist's watchful eyes." And "as some of these lobbyists sensed a slippage of their influence over the bill-writing process, they became the 1980s' proponents of sunshine in Congress"

This is worth repeating. The lobbyists themselves became the proponents of transparency. This is because sunshine had turned the industry from one that was, in the words of Drutman "clumsy and ineffective," fearing for its survival, into the multi-billion dollar juggernaut of today. So it is important to realize that while special interests push back against gun regulations, climate change, school lunches and other broadly supported issues, they have never pushed back on increased transparency. Indeed, they are transparency's biggest beneficiaries.

So, as the power of corporate lobbying grows, American power wanes, gridlock rises, incarceration rates soar and the approval ratings of Congress dip into the single digits, it might be time to reexamine one particular form of American exceptionalism, something that has attained a motherhood and apple pie status – transparency. An open door policy to lobbyists just might be the hidden cause of that most tragic and painful form of American exceptionalism – our relentlessly soaring inequality.