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The Grinches Who Stole Christmas

Essential holiday reading for anyone who's had it up to here with thieving politicians and bureaucrats.

By 12.13.11

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Two stellar books have been published this year examining the "Political Class," that group of people which includes politicians and bureaucrats, but also and the businesses and labor unions that enable and benefit from them. They are Stealing You Blind: How Government Fat Cats Are Getting Rich Off of You by Iain Murray and Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison by Peter Schweizer. They make excellent books for Christmas even though they are far more likely to generate outrage than good cheer.

Murray's book focuses largely on the bureaucracy and why they have become an increasing threat to our freedom and our pocketbooks. Bureaucrats have a huge incentive to increase costs. In government, a bureaucrat's success -- his pay raises and promotions -- is determined not by solving problems but by finding more problems to justify ever larger budgets and staff.

Murray, a Brit by birth, saw this first hand when he went to work for the Department of Transport. "In government, performance is judged by increases in funding. The cost-cutting boss is viewed with suspicion, even outright hostility, by his peers, as letting his side down," Murray, who works at the Competitive Enterprise Institute, writes.

The success that the political class has had is evidenced by the fact that the wealthiest Congressional District in America is not in Manhattan or Beverly Hills, but in Northern Virginia. It is Virginia's 11th District, a suburb of Washington, D.C. that is home to many top-level federal workers. The district has a median household income of $80,397, nearly double the national average of almost $42,000. 

Bureaucrats are now paid, on average, more than the private sector, have top-notch health and retirement benefits, and virtually iron-clad job security. The justification for this is that such people are in "public service" and good wages and benefits are needed to attract good people. But it is a myth that so-called public servants are any less self-interested than anyone else. Indeed, they often serve themselves at the expense of the public.

Murray provides numerous examples, from the federal down to the local level. One agency that looks like a disaster waiting to happen is the Transportation Safety Administration. "TSA is a reactive security operation, always fighting the last battle. Yet it doesn't even fight those battles particularly well," Murray writes. Post 9/11, TSA failed to detect Richard Reid, the shoe bomber, and Umar Farouk, the underwear bomber, both of whom were fortunately subdued by passengers on their planes. But TSA's failure means more inconvenience for passengers, as we now have to take off our shoes and go through either body-scan machines or pat downs on our private areas. Despite this, testing has found that TSA screeners may miss up to 60%-75% of simulated explosives. Testing at airports that employ private security companies perform much better, with a failure rate of 20 percent. The reason is that screeners from private companies "know they will be picked on with constant covert tests and are therefore 'more suspicious.'"

TSA has grown into a 67,000-employee bureaucracy, and in February of this year the Obama administration gave TSA the right to unionize. A unionized TSA could mean even more headaches for travelers as unionized government employees are nearly impossible to fire and union contracts tend to favor pay scales based on seniority rather than performance. Some members of Congress have urged airports to take their "opt-out" option and hire private security firms. But that requires TSA approval, and like any bureaucracy protecting its turf, the agency has declared that "unless a clear and substantial advantage to do so emerges in the future, the requests will be denied." TSA Administrator John Pistole has said that he doesn't think there's any advantage to private security firms.

On the local level, there is no better example in Murray's book of the lengths to which a union will go to get its way than the Uniformed Sanitationmen's Association in New York City. A major blizzard hit New York in December 2010. Wanting to send a message to the mayor about staff cutbacks and reduction in the ranks of supervisors, union heads told snow crews go slow in snow cleanup. Several neighborhoods such as Borough Park and Middle Village were targeted for poor snow removal since the residents there are wealthier and have more influence with their politicians. This may have led to the death of one three-year-old boy as the ambulance could not get to him in time. However, priority cleanup was given to the neighborhoods of agency heads and other city bigwigs.

Schweizer looks at another part of the political class: politicians and crony capitalists. Schweitzer, who works for the Hoover Institution, dubs this group "the Government Rich" for whom "insider deals, insider trading, and taxpayer money have become a pathway to wealth. They get to walk this exclusive pathway because they get to operate by a different set of rules from the rest of us. And they get to do this while they are working for us, in the name of the 'public service.'"

Members of Congress are often privy to private information, such as the likelihood that a bill that impacts a particular industry will pass, or that the SEC will approve a merger, or which private companies are in trouble. They can turn this information into lucrative stock transactions. Studies have shown, for example, that members of Congress increased their net worth by 84 percent from 2004-2006, while the rest of America averaged about 20 percent. Another study found that the average hedge fund beats the market by 7-8 percent a year, while the average Senator beats it by 12 percent.

The two examples of this behavior that have received the most press attention upon the release of Throw Them All Out are Republican Spencer Bachus, now chairman of the House Financial Services Committee, and Nancy Pelosi, House minority leader. During 2008, Bachus was ranking member of the Committee. Since all of the bailout legislation had to pass through his committee, he was intricately involved in discussions regarding which financial institutions were in trouble and the likely impact on the economy. According to Schweizer, Bachus used his inside information to make thousands on stock options, betting that stocks would go up or down at various times. 

A good reason to read Throw Them All Out is to arm yourself against the distortions about the book promulgated by various media outlets. To his credit, 60 Minutes correspondent Steve Kroft reported on Schweizer's finding that in 2008 Pelosi was able to buy VISA stock at its initial public offering (IPO) while credit card legislation that was troublesome to VISA was making its way to the House floor. Pelosi delayed the legislation so that it would not come up for a vote on the House floor in 2008.

George Zornick at the Nation was eager to obfuscate the matter in Pelosi's favor:

But this version of events leaves out a lot of key facts: that bill did pass through a House committee, on the very last day of votes before the House adjourned for the November elections. Kroft is heavily suggesting that Pelosi didn't bring the bill to the floor so that she might profit on her newly acquired stock, but doesn't mention that there was no time left to do so and that a new Congress was soon to arrive in Washington that January anyhow. Kroft also doesn't mention that the new Congress, with Pelosi leading the House, passed the Dodd-Frank financial reforms which were deeply opposed by credit card companies, and that before she bought her stock, she helped pass the Credit Cardholders' Bill of Rights, which was also opposed by the industry.

For anyone that knows Pelosi's tenure as a Congressional leader, it's near laughable to believe that she was helping Visa so that she could profit on a relatively small stock purchase -- it just doesn't fit with the reality of her legislative record. And as many liberal blogs were quick to point out, Kroft admits he based his story on a book by Peter Schweizer, a conservative think tank staffer who has worked for George W. Bush, Glenn Beck and Sarah Palin, and who has lobbed completely baseless charges at Pelosi before.

For starters, the bill didn't pass out of committee near the end of the 2008 session. It passed out of the Judiciary Committee in July 2008, more than enough time to get it to the floor for a vote. While it is true that Pelosi supported and got passed the Credit Cardholders' Bill of Rights in 2009, Schweizer shrewdly notes that it focused on the interest rates that banks charge on the credit cards they issue. That doesn't impact VISA at all since VISA makes its money by licensing its name and through interchange fees.

Nor was it a small stock purchase. Schweizer notes that the investment in VISA was at least 10 percent of Pelosi's stock portfolio. In the end, the IPO shares Pelosi purchased soared 203 percent, making her a hefty profit.

Zornick also tries to create a diversion by saying that this doesn't fit with Pelosi's "legislative record." What matters is if it fits with her financial record during her congressional career. Indeed it does. She has participated in at least 10 profitable IPOs since she has been in the House. And Zornick completely overlooks Pelosi's efforts at securing earmarks for public transit and construction projects that boost the value of her husband's real estate holdings. In one instance, Pelosi secured over $700 million from the federal government to build a section of light rail in San Francisco. Two stops on the line are three blocks from buildings the Pelosis own, thereby more than doubling their value.

Pelosi is hardly the only member of Congress to use earmarks to boost the value of her real estate holdings. Schweizer chronicles many others including Carolyn Maloney, Bennie Thompson, and former Speaker Dennis Hastert.

Schweizer also has chapters examining the crony capitalists who benefit from this arrangement, and none is better than the one dealing with the sanctimonious Warren Buffett. Schweizer notes that Buffett is a master of public relations often portraying himself as "above the rough and tumble of politics" and "above the folly and excess of finance." Yet that image provides cover for the fact that he "is very much a political entrepreneur, whose best investments are often in powerful political relationships, and who in recent years has used taxpayer money as an important vehicle to greater wealth and profits."

During the financial crisis of 2008, Buffett campaigned for the $700 billion TARP bailout. Buffet met with Speaker Nancy Pelosi and House Democrats to urge them to pass TARP. After the first vote on TARP failed, Buffett went on TV to say that he had "confidence in Congress to do the right things."

Buffett has been so effective with his image that journalists seldom ask him what financial interests he has in his policy positions. If they did they might have discovered that in September 2008 Buffett invested $5 billion in Goldman Sachs. His company, Berkshire Hathaway, "received preferred stock with a 10% dividend yield and an attractive option to buy another $5 billion at $115 a share." He also bought $3 billion in GE stock, and had large investments in Wells Fargo and U.S. Bancorp, all of who were struggling in the crisis. Getting TARP passed proved a windfall for Buffett and Berkshire Hathaway.

And it didn't hurt that key political players just happened to buy Berkshire Hathaway stock in the fall of 2008, such as Senators Dick Durbin, Orrin Hatch and Claire McCaskill.

In the end, none of this was illegal. Schweizer dubs it "honest graft," unethical business practices that don't violate the law. But more pernicious than the fact that it is unethical is that it doesn't create any new wealth. The political class isn't producing anything; it is living well off of other people's money -- and in the case of some politicians and crony capitalists, they are living very, very well. This system is self-perpetuating: more and more people will join the political class as they realize it is the means to wealth. However, it can't go on forever. The bigger the political class grows, the more resources that are sucked out of the productive sector of the economy. A society can survive only so long as its productive sector is productive.

Both Schweizer and Murray offer a number of reforms, but only Murray gets at the main solution, reducing the size of government. As the size of government shrinks, there will be less plunder for the political class. To paraphrase Ronald Reagan, it's a simple solution, but not an easy one. As we saw in Madison, Wisconsin earlier this year, the political class will fight tooth-and-nail to keep the gravy train going.

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David Hogberg is a senior fellow at the National Center for Public Policy Research.  Follow David Hogberg on Twitter.