Leveraged Returns, Election Style

If you could make a 50/50 bet for a dollar, and the payoff was 10 dollars each year for the next four, would you take that bet? In option-speak, that’s like buying a call option for a dollar with an expected value of $20. Of course you would, and that’s exactly why the 2012 presidential campaign has been the most expensive in history.

Political ads and contributions are cheap call options on the taxpayers’ collective purse, and it won’t just be defense contractors, agribusinesses, oil and gas, utilities and pharmaceutical companies draining us through subsidies, tax breaks and taxpayer-provided services unless we fix this problem.

Wall Street is convinced it can get more out of us, and they know how to get it: by reforming Social Security. Security companies, software contractors, telecoms, hospital companies, real estate developers and law firms are all angling to get “their” pounds of our flesh, too.

It’s all a matter of maximizing shareholder value, after all.

Consider what Massey Coal did—spending $3 million to elect its very own state Supreme Court judge (in a race where total spending other than Massey was around $2 million). Once elected, that judge cast the deciding vote to reverse a $50 million judgment against Massey on a case that was already on its way to that very court.

That’s a nicely asymmetric return profile, risking $3 million and getting $50 million back.

Not all cases are that simple. For example, the majority of the state legislators who voted to support Arizona’s “show me your papers” law had gotten campaign contributions from Corrections Corp of America, the same company that wrote most of the law, and not coincidentally, has the Arizona contract to hold detainees awaiting Immigration Department disposition or deportation. I guess they thought of it as a kind of marketing plan. Pretty clever, when you think about it. State legislators are probably very grateful for contributions of even a couple thousand dollars. CCA could probably get their private meetings and/or support from a decent majority for less money than the profit from holding a couple of extra “privatized” inmates.

Once again, a single company stood to make millions or even tens of millions by making political contributions that were just a tiny fraction of the upside.

With Citizens United making anonymous unlimited direct political spending the law of the land, any company or union can affect the outcome of elections, and they won’t have to deal with the potential trouble their shareholders or customers or the public might give them if they knew who was spending.

Today’s strange crop of conservative politicians all say they want to reverse a “socialist agenda,” but that’s just good old fearmongering, and not rooted in reality. After all, the two most hated items passed by the “Pelosi” Congress were a cap-and-trade energy bill and a private health insurance mandate that follow almost to the letter proposals that came out of those famously Marxist organizations, the American Enterprise Institute and the Heritage Foundation. In case you’ve been too busy trying to live your life and provide for your family to watch where far-right policymakers go when not on government payrolls, the Heritage Foundation and AEI are where the neocons who ginned up the plans for the Iraq war and Bush tax cuts went to collect nice salaries funded by tax deductible contributions after we voted out their political bosses.

If we were actually “going socialist”, we’d be launching a free national health service supported by general tax revenues, as they have in other democratic countries. Or we would at least pay for everyone to go to private doctors as they do in most developed economies. Of course, that might actually give us more freedom and a stronger free market economy by having insurers and health care providers compete, and by freeing entrepreneurs to strike out on their own and start new businesses. It doesn’t escape my notice that Germany has more of its citizens working for small companies than we do. Without the burden of health insurance to worry about, they are free to start businesses when many of us can’t take the risk.

The energy bill, the other big “government takeover” so hated by Tea Partiers, is another example of distinctly un-socialist action. As Newt Gingrich said in a one-hour interview with PBS way back in 2007, cap and trade is a “free enterprise” solution to the carbon emission problem modeled after the successful sulfur dioxide cap and trade system the first President Bush put in place to deal with acid rain—again, hardly the stuff of Lenin and Mao.

So let me suggest that we put every politician who claims to support free markets and cutting government “interference” to a simple test. I know that they all (and most other people in the country) find something inherently distasteful about limiting profits, except in the cases where a company has a government-enforced monopoly.

The question is, are those same “free marketeers” willing to let the free market give the private enterprise unlimited losses?

If they don’t want government dictating to business through regulations and oversight (see Rand Paul’s statements on mine safety regulations for the extreme version), then they should also let anyone damaged by a corporation or person have unlimited potential to extract compensation for their damages. In other words, every politician who claims to support free markets but wants tort reform to limit damage awards is simply lying, and using the free market banner to hide their agenda: supporting government-imposed limits to corporate liability. In the cases of mine owners, literally giving them a license to kill, if the economics favor that.

Leveraged returns, in other words. In the vernacular, “Heads, they win; tails, we lose.” Not a bit different from the Wall Street bailouts, in my mind, and certainly not consistent with the claims of every Tea Party supporter I’ve met.

The sad part of this whole equation is that the benefit of not having a single corporation or concentrated industry rip us off is so diffuse that no one can economically justify spending the big bucks it takes to counter the efforts of the profiteers.

In the 2012 presidential campaign, the numbers make it obvious. The top five contributors to the Obama campaign have ponied up an average of just over $2 million apiece. Since Obama’s policies tend to favor very wide constituencies, it’s unlikely any of those big contributors will get anywhere near $2 million in benefits from an Obama second term. On the other hand, Sheldon Adelson and the other top four Romney supporters have donated tens of millions, and the tax policies, promises to roll back regulations and future government contracts will most likely give every one of those big fish a huge return on investment, personally.

The outsize political spending under the 501(c) rules has provided both tax deductibility and cover from exposure for very large, very profitable corporate welfare queens that make Ronald Reagan’s imaginary Cadillac owners look like pikers. And let’s not kid ourselves about the reason that today’s Super PACs, with their megabucks, give cover to companies that might lose half their customers if their political activism were known the public. It’s all about the profit they’ll get from owning the government and milking the taxpayer. Just like Massey Coal buying its own judge, today’s corporate and billionaire funded Super PACs exist for the same reason the companies themselves exist—to maximize profits.

Protecting the public and the public resources is not something we do on an individual basis. Teddy Roosevelt recognized this when he broke up the industry trusts.

In a way, TR recognized it also by establishing national parks, monuments and forests owned by all of us. That doesn’t stop the asymmetric economics from tempting companies to ruin even that legacy. In the last year of the Bush presidency, a proposal that was not subject to Congressional approval was making its way through the Bureau of Land Management. That proposal was to permit “hard rock” mining in the upper reaches of the Grand Canyon National Park. But for an organized protest of those “leftist” anti-American conservationists, we almost got the chance to see an accidental toxic mine waste spill come flooding down the Grand Canyon. But at least the mining companies took their shot at maximizing shareholder value.

The same goes for giving all these new political entities tax exemptions. Since when should all of us subsidize their politicking? They need to disclose who their donors are, and how much they gave. They need to disclose when those donors dictate where the money gets spent. They need to pay sales and property taxes like the rest of us, and the donations that support them shouldn’t lower the tax bill of the person or company signing the checks.

It still won’t level the playing field, because the concentrated benefits of a government handout for a company so outweigh the benefit of not getting ripped off once it’s spread across the entire population.

Much of what our government does is protect and improve private property. If the Tea Partiers get their way, that’s all the government will do. That concentrated benefit can and should be paid for by the beneficiaries as much as possible, and in proportion to the benefit they gain. It worked pretty much that way until 1913. Tariffs and taxes on commercial activities paid for our federal government until the income tax was introduced, so the customers for imported goods basically paid for our Navy, and so on.

But the conservatives I’ve spoken with don’t like the idea of oil companies paying tariffs to support the U.S. Navy. They would much rather have all of us pay that corporate subsidy with a gigantic sales tax. It would, after all, maximize shareholder value.

Same goes for selling our jointly owned resources to the highest bidder to exploit as they see fit. Can we really say that removing one mountaintop only affects the value of that mountain, and not the surrounding mountains, valleys and downstream watershed? Give me a break. And if a holding pond of tailings and toxic water lets go, it will turn out that a special purpose company was formed for just that mountain, letting the people who made the decisions walk away. Asymmetric economics at its finest.

The right wing really doesn’t seem to like Article 1, Section 8 of the Constitution, where it explicitly gives the Congress the ability to levy taxes to provide for the common welfare of our citizens. Yet there seems to be no problem at all when it levies taxes to provide for the specific welfare of non-breathing corporate “persons.”

The problem is, while “competition” sounds good to all of us, in a lot of industries competition was replaced by collusion a long time ago, and there’s simply no customer more ripe for the fleecing than the taxpayer. And the cost is pennies on the dollar, as long as those pennies buy the right ads for the right candidates.

Leveraged election returns, indeed.

So here’s the law or Constitutional amendment we need to fix this problem:

If we limit advertising and spending for any election to those who can vote in that election, we can stop out-of-state money from swinging a small state’s Senate race their way by overwhelming the resources of the people in that state. If we limit spending to actual voters, with one stroke we roll back spending by corporations or unions.

I have no doubt that such a rule will cut our government spending, since the pigs sidling up to the taxpayer trough will be lobbying for their goodies with legislators they didn’t put into office in the first place. And we’ll all get some relief from the endless stream of political ads on TV.

Wouldn’t that be nice?

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at mindonmoney.wordpress.com. Follow on Twitter: @hhill61


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