A Further Perspective

Beware the Election Year Populist

A losing proposition for all concerned, starting with our country itself.

By 2.7.12

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Seeing pictures of Mitt Romney doing his laundry reminded me why I am not a populist. If I were a populist, I'd actually care if a presidential candidate did his own laundry. Though I want my president to have a strong grasp of how an economy operates, I'm really not that concerned whether he knows how to get out those really tough stains, or knows the proper way to fold a shirt. To be honest, I really don't spend much time considering if the multi-millionaire former venture capitalist and governor is more "in touch" with the average American than is the multi-millionaire consultant and former congressman, or how either one of them stacks up in this regard with the multi-millionaire Harvard-educated lawyer who has never attempted to make a living outside of government.

The problem with populism, whether on the left or right, is that it tends to play to the prejudices of the "common man" whether or not those prejudices are based in fact. Both the "Tea Party" and "Occupy" rail against Wall Street as a symbol of corporate greed that has fleeced the common man. Now it is true that the focuses are a bit different. Occupy argues for Wall Street's destruction; the Tea Party argues against government "bailouts." But both tend to portray Wall Street (by which they usually mean investment bankers, mortgage bankers, and commercial banks generally) as inherently corrupt, a leach on society whose members are paid more than they "deserve." Occupy, apparently not following the stock prices of Bank of America or Morgan Stanley, argues that Wall Streeters actually engineered the financial collapse for their own benefit. Newt Gingrich, taking on the mantel of conservative populist, portrays successful private equity firms, responsible for the growth of numerous business enterprises (like Mitt Romney's Bain Capital) as "vulture capitalists" and argues that owning stock in Goldman Sachs is evil.

People involved in finance, especially those who make a lot of money at it, are inherently far removed from the common man and hence an easy populist target. Aside from making money, many people have very vague notions of what the financial industry actually does. Even Democratic Senator Max Baucus, chairman of the Senate Finance Committee, commented that the financial industry is not part of the "real economy." Everyone knows that manufacturing (idealized as it is) is "real" but services are a bit harder to grasp. But the fact is that those ghouls on Wall Street who make the flow of equity and debt capital remarkably efficient play a key role in bringing together those who need capital to expand businesses and those who have capital to invest, and thus are responsible for keeping the cost of capital (a major cost to most every business) significantly lower than it otherwise would be. It might not play well on Main Street to defend Wall Street, but demonizing Wall Street is not good economic policy.

The so-called bailouts to banks and other financial institutions may be hard to swallow, particularly given the culpability of many of those institutions in engaging in bad lending practices, not understanding financial instruments they were buying or insuring, and doing a poor job of managing risk. But many were more sinned against than sinners -- victims of government policies that essentially mandated risky lending, corrupted rating agencies that routinely gave AAA ratings to securitizations they knew carried far greater risk, and being blindsided by the ripple effect of forced deleveraging and imploding home prices resulting from the collapse of the bubble caused by other, more reckless lenders. Stepping in with support to prevent the financial collapse from wiping out most of Wall Street and the banking industry, and with it a good deal of Main Street, may not have been popular, but it was nonetheless imperative (though certainly the execution by the government and the Federal Reserve may have been far from perfect).

Good economic policy, however, does not usually make for good populist politics. Take for example President Obama's push for the so-called "Buffett Rule" that would effectively double the tax rate on capital gains on those who do the most investing by taxing anyone who makes more than $1,000,000 a minimum tax rate of 30%. Raising the tax rate on capital gains from 15% to 30% effectively raises the cost of capital to all those businesses that need that capital. There could hardly be a more effective job killer. But this is "fair," argues Obama, because millionaires and billionaires shouldn't pay a lower rate than their secretaries. Fairness is a big populist war cry. The problem is that fairness is rather subjective. It's easy to argue that a billionaire shouldn't have a lower effective tax rate than an average office worker. The reality, however, is most high income people pay effective average tax rates well above those paid by the middle class. In fact, according to the CBO, the average effective average federal income tax rate (federal income tax paid divided by total taxable income) in 2007 for middle America -- the middle 60% of Americans -- was 4.2%, well below the 14% paid by Romney. So, is that "fair"? Is it "fair" to have one person paying many multiples of what another person pays in taxes simply because he works more hours, or took his education more seriously, and/or put a lot of capital at risk in a business enterprise that prospered? Fairness is a tricky issue when you get beyond populist rhetoric and actually look at the facts.

Obama, however, is merely playing the populist card. Does he really believe that sticking it to the rich is more important than creating jobs? Probably not. But he knows that much of the voting populace can not make the connection, and so he can potentially win needed votes with a populist rallying cry against the rich, knowing full well that the "Buffett Rule" has no chance of passing in either the House or Senate. Obama also knows that even if a "Buffett Rule" became reality, the effect on revenue to the Treasury would not make a dent in his trillion dollar deficits. There simply are not that many Buffett's and Romney's out there.

Sticking it to some bogeyman should not be an end in itself, regardless of how satisfying it might feel. Yes, I understand that politics is politics and populist pandering will always be a part of it. It is far easier to play to a crowd than to educate a crowd. But we should always understand that playing the populist card is inherently dangerous, particularly when it seeks to place the blame of our problems on some small group of people who we deem to be not much like ourselves. Conservatives have always competed well in the realm of ideas, and that's where we should strive to keep any political debate. When government becomes more beholden to populist politics than to sound policy considerations, we all lose in the long run.

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About the Author
Brandon Crocker is the chief financial officer of a commercial real estate development and management company in San Diego.