Throw Them All Out

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.⁸ A federal judge dismissed these criticisms, arguing that Jefferson had turned his office into 'a taxpayer-subsidized sanctuary for crime.'⁹ 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.'¹⁰

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?'¹¹

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 9.¹²

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.'¹³ More and more, corporate leaders are coming to agree.

Researchers who have studied politicians and bureaucrats who retired and then joined corporate boards have found that government officials usually accept board seats within a month or two of leaving office. However, when a former government official's political party is out of power, 'he or she [is] significantly less likely to gain a board appointment.' In other words, this is about access, not about experience.¹⁴ James Kristie, editor of the Directors and Boards Journal (yes, there is such a thing), says that ex-politicians on corporate boards are 'very prevalent.' What they offer is 'knowledge of how government works, and access to a high-level network of leadership structure that many of the other board members do not.' Sarah Teslik, executive director of the Council of Institutional Investors, notes that former politicians 'have not brought any particular expertise that we can measure from the outside.' She also finds that they are less likely to speak up at corporate board meetings and less likely to challenge CEOs than other directors.¹⁵

Ideally, the economy should be based on competition—companies competing for customers. But for many companies the 'customer' that matters most is the government, and competing in Washington means political connections and access. The integrity of our markets is threatened when political influence trumps sound financial decisionmaking, and that is precisely what we face. A study that looked at the political connections of board members of S&P 500 companies found that the price of a stock rose an unusual amount following the announcement of the nomination of a politically connected individual to any given board of directors. In response to the Republican win in the 2000 presidential election, companies with connections to the Republican Party increased in value, and companies connected to the Democratic Party decreased in value.¹⁶

Another study by academics found that in the United States when powerful political figures died, companies to which they had strong connections saw their stock prices drop an average of 6% on news of their passing.

Journalist Ira Stoll conducted a more recent exercise centered around the first couple of years of the Obama presidency. He investigated the stock prices of corporations closely aligned with the administration—those whose CEOs were frequent guests at White House dinners or served on advisory boards. Was this hobnobbing a smart financial move? Did those connections help? Stoll writes: