The Case Against Tax Breaks for Private Equity

May 23, 2012Jeff Madrick

Private equity disproportionately rewards privatization companies while others are burdened with the risks. 

Private equity disproportionately rewards privatization companies while others are burdened with the risks. 

I wanted to wait a few days before commenting on Newark Mayor Cory Booker’s spontaneous criticism of Barack Obama for picking on Mitt Romney's experience at Bain Capital. Booker doesn’t know much of anything about private equity, but many financial services donors have his ear. He took in nearly half a million dollars in campaign donations from the industry over the last nine months, and he frankly sounded like its mouthpiece.

Booker backtracked, but it would be nice if he knew something about the private equity business before he spoke publicly about it. This expectation of knowledge should also apply to widely read columnists like David Brooks, who, as usual, reflexively defended the Wall Street practice without presenting evidence. He issued a piece of public relations diatribe that no doubt soothed the right but contributed nothing to our understanding. The contention is that these buyouts turned fat American companies into lean and productive ones since the 1970s. Other pundits less well known for their conservative reflex responses have also given partial defense of private equity.

So let’s begin with one point: there is a place for private equity. In a privatization or leveraged buyout, a company is bought by an investment partnership with moneys borrowed against the company itself. The new money can be used productively even when levels of debt against the company’s assets and profits soar. A smaller company that cannot raise adequate equity can raise money by being bought by a private equity partnership. A company that is doing poorly can benefit from added capital and new management. Sometimes trimming labor costs in the process makes sense, of course. 

But the record of leveraged buyouts and private equity reflects its excesses, and most importantly, the lopsided nature of the financial incentives for doing the deals in the first place. Companies like Romney’s Bain or Steve Schwartz’s Blackstone or Kohlberg Kravis Roberts, the early industry leader when privatizations were called leverage buyouts (LBO), take advantage of a major government-provided benefit. The interest on debt is tax-deductible, and high levels of debt are the source of profits in these transactions. It is just like buying a house with a small down payment; if you can sell as the value goes up, the return on the down payment is high and the interest was deductible all along. In the meantime, the house is collateral for the loan. Similarly, partners are rarely if ever on the line for the debt; the company being privatized is. The one difference is that if the collateral value of the house falls, as it has recently, the homeowner is on the line. This is usually not so with privatizers.  

Great deal? You bet. The owners of the privatizing firm put up very little capital; it is their limited partners who put up more.  Then they borrow like mad from banks, pension funds, hedge funds and so on. If the new company can be sold or brought to market again at a higher price, they make a bundle compared to their equity down payment. The CEOs of the company, or the new executives brought in, are given huge amounts of stock. They too make a bundle. Are these incentives conducive to good business decisions?

Most likely, the investment decision is based not on how much the company can be improved, but how much can be borrowed against its assets. The second concern is the interest rate on the debt. There is no evidence that privatizers mostly buy struggling companies to resuscitate them.

Moreover, companies with high levels of debt are subject to great risk of bankruptcy. Macy’s did one of the first leveraged buyouts of its size, the CEO made out wonderfully, and soon Macy’s was in bankruptcy. It reorganized and reemerged successfully due to its retailing skills, but these were not enhanced by the LBO partners.  

Data shows the newly bought firms create fewer new jobs—or result in more lost jobs—than firms that are not subject to private takeover. But what about the much-lauded productivity gains? On balance, these target firms mostly increase productivity by selling or closing low-productivity units. Arguably, they also make their employees work harder. The fear of lay-offs can enhance productivity. There is no evidence that these firms improve productivity mostly by investing in new technologies, new managerial methods, and so on, which is often their claim.

And of course what productivity gains they have had (overall they are small) did not reinvigorate the American economy. The two main sources of productivity gains in the U.S. were high-tech companies and the retailing behemoths led by WalMart. Many retailing targets of privatizations eventually went bankrupt.

The best recent paper on private equity was written by Eileen Appelbaum of the Center for Economic and Policy Research and Rosemary Batt of Cornell University. The David Brookses of the world will cry that these researchers are of a liberal bent. But read the paper to see how carefully it is done. The exegeses of much of the right in defense of private equity are essentially outright propaganda.   

However, the basic point comes back to government and regulation. A major tax advantage gives rise to these buyouts. The privatization partnerships are lightly regulated. After-fee returns to the limited partners seem to be below average. But as for their benefits to society, privatization rewards investors by cutting short-term costs. For a long time, the stock market pushed up the stock prices of companies that kept short-term earnings growing. The influence of such corporate governance has been to keep downward pressure on wages and stoke fear in employees for three decades.

Let’s be clear; some private equity investments were healthy and some of these partnerships do a good job. But all in all, it is clear most are simply exploitations of tax law, market fashions, and their power to borrow money. There is no reason America should reward these investors with a tax break on their huge loans.   

Privatizers didn’t rebuild America. They were rarely the people who planted the garden, watered it, or designed it.  They were by and large the ones who weeded it, sometimes recklessly, throwing out the gorgeous roses in the process. Gardens do need to be weeded, but should those who do the weeding, often heedlessly, make so much more money than those who do the planting? And with the added help of government tax breaks?

In the end, Romney’s Bain made money even though its takeover target, American Pad & Paper, went out of business. Consult Appelbaum and Batt on how some of these strategies work, involving mortgaging real estate holdings and transfer pricing to reduce taxes. Privatization was mostly, if not entirely, about working the system, not building capitalism.  On balance, evidence suggests it hurt more than helped. Any way you read the evidence, it is clear the rewards for private equity firms clearly exceeded the risks. That’s not good for free markets.  

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Growing a Better Farm Bill From the Roots Up

May 17, 2012Rajiv Narayan

A project that will fight the power of special interests and craft a truly democratic Farm Bill.

Dear Majority Leader Reid and Minority Leader McConnell,

A project that will fight the power of special interests and craft a truly democratic Farm Bill.

Dear Majority Leader Reid and Minority Leader McConnell,

Nearly half the Senate delivered a letter to you both on Tuesday urging you to bring the Agriculture Reform, Food and Jobs Act of 2012 to floor consideration "as soon as possible." Better known as the Farm Bill, and what really ought to be known as the Food Bill, this legislation is projected to cost a half trillion dollars over five years. With the current iteration of the bill set to expire in September, this letter heralds itself as a model for action, a "bipartisan way to craft meaningful, yet fiscally responsible, policy."

But the bipartisan way is no substitute for the democratic way.

While this letter says the Senate can consider the bill in a "fair and open manner," it is unclear that anything about this process has been so. A handful of legislators have sent members of their staff to constituent listening sessions, and many of these sessions are currently underway. But because the Senate Agriculture Committee has already released its version of the bill, the best the public can hope for (should their opinions be heeded at these sessions) is tinkering with a nearly finished product.

Furthermore, public comment is generally only sought from particular groups. While the letter points out that the bill impacts more than just farmers and farming communities, it still devotes most of its attention to the legislation's impact on agricultural jobs. Less than a third of the bill's budget directly impacts this sector. The lion's share of the funding (about 70 percent) is allocated in precisely the place where the larger public would have the most to say: nutrition.

This is not to say that farmers and what the letter calls "other stakeholders" are at odds. Limited listening sessions and strategic framing that targets one group over others are tactics to reduce overall discussion and debate, tactics of expediency rather than good governance. There's great benefit in having all the parties at the table so that they can learn from each other.

Students at the Roosevelt Institute | Campus Network are trying to craft this bill the right way. We're on a mission to build a Food Bill from the ground up instead of through closed-door sessions that only invite a select few. We'll be talking to students and young people across the country, asking them to share their values and priorities in an initial survey, and inviting them to participate in work groups with professionals and policy experts to draft a better plan for spending hundreds of billions of dollars over five years. Through this process we'll be searching for students from all regional, socioeconomic, professional, and educational backgrounds. Once we have their responses, our workgroups will outline a series of recommendations ready for discussion. Then we'll take it to farmers, policy experts, and budget analysts. Because our political leadership has not come to us, we're going to create our own seat at the table and bring youth policy priorities to them.

A legislative package so large that it will impact the food process from sowed seed to second serving deserves better than both sides of the aisle.


Rajiv Narayan 


Rajiv Narayan is the Senior Fellow for Health Care Policy at the Roosevelt Institute | Campus Network and a graduating senior at the University of California, Davis.

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Vitters and Shelby Blocking of Federal Reserve Nominees and Previous Conservative Candidates

May 10, 2012Mike Konczal

Chris Hayes, guest-hosting for Rachel Maddow, had a great segment on the hold Senator David Vitters placed on President Obama's Federal Reserve nominees where he talks with economist Betsey Stevenson.

Chris Hayes, guest-hosting for Rachel Maddow, had a great segment on the hold Senator David Vitters placed on President Obama's Federal Reserve nominees where he talks with economist Betsey Stevenson.  The nominees, Jay Powell and Jeremy Stein, were nominated as a bi-partisan move after Peter Diamond was blocked by the Senate (records have Powell donating to the Romney and Hunstman campaigns in 2011).

Vitters' reasoning? "I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed's activist policies."  This is consistent with Richard Shelby, who blocked Nobel Prize award winning economist Peter Diamond for the Federal Reserve because of “Dr. Diamond’s policy preferences…He supports QE2…He supported bailing out big banks during the financial crisis.”  Republican Senators are giving themselves a de facto seat on the FOMC, and they are casting multiple votes against further monetary easing, without being held accountable for their logic or the subsequent results.

Here's an important point on how far to the right conservatives have moved on monetary policy.  The natural way reporters cover this is to note that the back-and-forth blocking of Federal Reserve nominees have been escalating for several years, especially since Democrats blocked Republican-nominee Randy Kroszner.  Indeed Shelby notes in his letter that "For those who say that policy preference should not be considered, I will only point out that the re-nomination of Dr. Randy Kroszner to the Fed was blocked by the majority party because he was viewed as being too free market."  Democrats blocked conservative, free-market Randy Kroszner's nomination to the Federal Reserve, and so the Republicans are going to block those who support QE2.

But here's the funny part (and I'm cannablizing one of my posts, which lays out the case in more detail): Randy Kroszner supported QE2.  He urges people to seriously consider QE3.  To give you a sense of how off-center the Republican Party has gone in terms of the economy, if Kroszner was to show up as a nominee from President Obama for the Federal Reserve tomorrow the conservatives in the Senate would block him because of his policy preferences.

Here's Kroszner, in January 2011, saying: ”I think [QE2] was the right policy when they put it forward. I think the right policy now, and I think the data has been very much supportive of what the Fed’s been doing...It depends on where we are four or five months from now. If the unemployment rate has not ticked down at all, if we haven’t seen a little bit more job creation, then of course the Fed will have to see if it needs to do more support [with QE3].”  That now appears to be sufficient to get blocked by the conservatives in the Senate.

Even better, Kroszner spent March 2011 arguing not only that inflation wasn't spinning out of control but the real threat was Japanese-style deflation.  Bloomberg TV, March 2011: “It’s hard to see a lot of inflation pressures right now. If you look at the recent numbers that came out on inflation just earlier this week, the core rate, stripping out food and energy, is less than 1%. That’s dangerously close to Japan-style deflation problems. An even the headline rate, which includes food and energy is less than 2%. So we aren’t seeing enormous inflation pressures right now…inflation is well-anchored."  The real threat is not inflation but Japan-style's like you are reading a Krugman column.

(For fun, here's Kroszner saying that even glancing at the evidence shows that the Community Reinvestment Act didn't cause subprime lending: "the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.”  Given how important that the "CRA -> Crisis" argument is to think-tank based conservative intellectuals, Kroszner is practically a socialist in the political landscape.)

There is no neutral in monetary policy.  If Republicans in the Senate think that the Federal Reserve is doing too much, then they think the Federal Reserve can't accomplish anything, or that unemployment is too low or they think that unemployment should not come down because it would get in the way of other political projects - from passing the Ryan plan to taking the Senate as a result of a weak economy.  Some people on the right are explicit about the third - “The more we offer accommodative monetary policy, the less incentive they have to pull their socks up and do what’s right for the American people,” was the argument Richard Fisher used for dissenting.  I wish more would just come out and say that.

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Social Security: It’s for Young People, Too

May 9, 2012Elisa Walker

Social Security is not just for the elderly, it's an important investment for everyone. 

I’m a young American; I value Social Security; and this week in particular, I’m feeling reassured that Social Security is on solid footing and will be there for me when I need it. In fact, I see it as a great investment. 

Social Security is not just for the elderly, it's an important investment for everyone. 

I’m a young American; I value Social Security; and this week in particular, I’m feeling reassured that Social Security is on solid footing and will be there for me when I need it. In fact, I see it as a great investment. 

To some, these statements might seem unrealistic, especially given all the negative media coverage that followed the release of the 2012 Social Security Trustees Report last week. But despite the doomsday responses, the reality is actually reassuring–especially for today’s young people, who are used to hearing misleading accounts to the contrary.

Social Security is fully financed until 2033–in other words, its ongoing income plus accumulated savings can cover all of the benefits due until then. And over the next 75 years (through 2086, the end of the trustees’ estimates), it’s 85% solvent, or able to pay 85% of its obligations without any changes. That’s a pretty solid base to build on.

There’s much to celebrate: 

  • Social Security is one of the most successful government programs in history. Since 1935, it has collected $15.5 trillion and spent $12.8 trillion, leaving a balance of $2.7 trillion in its reserves.
  • The reserves will continue to grow to about $3.1 trillion by 2020. If Congress acts by then, there may be no need to spend them down.
  • Social Security has responded to the recession and the slow recovery by performing exactly as it was designed to do. In fact, Social Security is an unsung hero of the recession: by pumping out benefits on time and in full, it has helped keep the national economy–not to mention the personal finances of the 56 million people who receive benefits–in better shape. The Center for Rural Strategies has documented that Social Security benefits provide a crucial chunk of total personal income at the local level, especially in rural counties. This makes a real difference to the small businesses and local economies in America’s towns and cities.

Everyone knows that Social Security is critical to today’s seniors, but in fact it’s critical to all generations. It’s the largest federal benefit program for children, with nearly 7 million children receiving part of their family income from Social Security, mostly after the death or disability of a working parent. And if it weren’t for Social Security, how many more of the elderly would have to move in with their adult children? How many disabled workers or surviving widows would face even greater difficulties feeding their families?

Although it may come as a surprise to many of today’s young workers, Social Security is critical for us too. Besides supporting our parents when they retire, it will provide an essential foundation for our own retirement, as far down the road as that seems. Of course we all hope to do well, but think: today, to buy insurance paying a lifelong annuity (a fixed annual amount) at age 65 that would match the average Social Security retirement benefit ($1,230), plus partially keep up with inflation and continue to pay a widowed spouse, you’d have to pay about $430,000 up front in a lump sum. That’s an inconceivable amount for most people. Plus, other sources of retirement income, like pensions, savings, and housing values, are increasingly uncertain–so there’s a good chance that by the time today’s young adults are ready to retire, reliance on Social Security will be even greater than it is today.

For young workers and their families, Social Security also provides critical life and disability insurance. Consider a sample young family: a 30-year-old worker earning around $30,000 a year, with a spouse and two young children. For that family, Social Security disability and life insurance protection are each valued at close to $475,000. And it’s an unfortunate fact that a 20-year-old worker has a 3 in 10 chance of becoming disabled before reaching full retirement age. Again, Social Security is there, especially for those life-changing tragedies we can’t plan for.

That’s the crux of why Social Security is a worthy investment for young people, and indeed for everyone. It’s insurance, on a national scale: you pay in over your working career, in exchange for monthly income if you face work-ending retirement, disability, or death. Plus, it has everything you’d want from an ideal pension plan, including the fact that it pays benefits as long as you live, and those benefits keep up with inflation.

So let’s not let today’s young people, or workers of any age, be misled about this vital program. The truth is that we can be confident in Social Security’s future. Social Security is sound, facing only a fixable long-term revenue shortfall, not insolvency. And it will be there in the future for our generation, and for the generations that follow us. In the words of one blogger, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

Politicians who want to cut Social Security benefits always stress that current seniors should be held harmless, unaffected by any cuts. (They’re not dumb; they know seniors vote.) Instead, they talk about cutting benefits “out in the future.” While that may sound innocuous, it’s not. Young people, take note: it’s our benefits (not their own) that they propose to cut.

Instead of talking about benefit cuts, how about benefit improvements? Minor changes to Social Security–such as lifting the cap on taxable earnings, or gradually increasing the contribution rate–could more than cover the program’s long-term shortfall, with money left over to improve benefits (PDF). Now that’s the kind of future that we as young people should be investing in.

Elisa Walker is an Income Security Policy Associate at the National Academy of Social Insurance, where she has co-authored several briefs and fact sheets on Social Security policy.

This piece was originally posted in the National Academy of Social Insurance blog, on May 3, 2012.

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A Message to World Leaders: Ignore the Financial Markets

May 7, 2012Jeff Madrick

A solution for the eurozone? Listen to the people, not to the markets.

For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

A solution for the eurozone? Listen to the people, not to the markets.

For 40 years, there has been a tug of war between government in democracies and what we may call “the other government.” By the latter I mean, of course, the financial markets. James Carville highlighted his concerns when he announced that in the next life he would want to be a bond trader. Alan Greenspan followed the bond markets religiously for signs of increased or reduced inflationary expectations.

Now Europe faces the threat of a financial market rebellion. Democracy has spoken loudly in this weekend’s elections on the Continent and in England. Voters said, "We have had all the austerity economics we can take."  They threw over Sarkozy in France and many Conservative and Liberal candidates in England. In Greece they ran for the extremes. The moderate liberal Pasok party won the least votes in memory, but it may yet form a coalition to run a new government. Italian election results will be in soon.

And democracy is working! The instinct among those in the financial markets is that democracy usually reflects the weak-willed demands of the public. But the public is generally right this time, and it has been many times before. Austerity economics is self-destructive when economies are so weak.   

Yet of course the financial markets’ initial reaction to the European elections was to sell, as if austerity economics was actually working to make nations' bond payments easier to handle. It was not! But the markets fear that a new strategy will make matters worse.

Political leaders should ignore the financial markets in the short run, pure and simple. This may drive up financing costs for a while, but the eurozone should absorb those and adjust policies. The European Central Bank (ECB) ought to accommodate its needs. The right policies are stimulus from the current account countries and the end of extreme austerity in the periphery. Wages should rise in the eurozone core and stabilize in the periphery; they can even rise from their current lows in places like Greece. The 17-nation Eurozone or the 27-nation EU should issue jointly backed bonds to provide social safety net support to the financially weak nations, to raise demand for them and get their economies going, while reducing the extreme financial pain and sacrifice that now jeopardize social stability. As examples, the Greeks voted for extremist parties, the Le Pen party did well in France, and the Tea Party runs amok in the U.S. Austerity fever even grips Washington, which makes the November election especially important.

What the crisis requires is elected government, not bond trader government. Any idea that the financial markets are rational should have been discarded four years ago. They have been absurdly wrong for decades. In the U.S., they persistently overestimated future inflation by driving interest rates too high compared to the CPI and the GDP deflator. Greenspan treated them as the height of rational forecasting, when indeed they were simply following the latest conventional wisdom. In my informal opinion, he used long-term rates as a guide to policy. Now the ECB remains too tight as well. In the U.S., the “rational” bond traders actually traded what they thought the market would think, rather than what rational foretellers of the future would think. It was Keynes’ beauty contest analogy—choose the woman you think others believe is beautiful. The belief that the markets were right was the fallout of extreme efficient markets theory.

The media too often treated the markets as rational as well. Bond traders implicitly endorsed austerity economics until fairly recently, and the media usually reported them as being right. The supposedly sophisticated financial media (with some noted columnists as exceptions) wondered what could possibly work if not austerity. Now there are signs that the press is waking up to reality and realizing that it, along with the financial markets, is not working.

There are some signs of the ice breaking. The German finance minister announced it was okay for German wages to rise. They have actively restrained wage growth to make their exports more competitive for over ten years. The main sources of their demand were the European periphery, where wages were rising a bit due to a property bubble caused by irrationally low interest rates offered in the financial markets. But there are still signs of backward thinking. Many in Europe think of growth policies as nothing more than making labor markets more competitive through deregulation and reduced wages. As if the more flexible labor markets in the U.S. are leading to rapid recovery.

In sum, what’s needed in Europe is fiscal stimulus, a more accommodative ECB, social transfers from rich states, higher wages in many nations, a change in the silly EU agreement to keep deficits absurdly low, and industrial policy to gear capital investment across the continent, free of prejudice and nationalistic tendencies. The elections may bring some of this about. Then, once policies are working to support growth and reduce financial burdens as tax revenues rise, the financial markets will at last respond constructively. They must be waited out for now.

To put it most simply, what’s needed is the will of the government of the people to ignore the financial markets and stop treating them like a more rational government than democracy itself.   

Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.

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Mark Schmitt: Are Think Tanks Too Politicized?

May 3, 2012

In the latest episode of our weekly Bloggingheads series, "Fireside Chats," Roosevelt Institute Senior Fellow Mark Schmitt sat down with Tevi Troy from the Hudson Institute to talk about the history of think tanks and whether or not they've become too politicized.

In the latest episode of our weekly Bloggingheads series, "Fireside Chats," Roosevelt Institute Senior Fellow Mark Schmitt sat down with Tevi Troy from the Hudson Institute to talk about the history of think tanks and whether or not they've become too politicized. Tevi thinks they are, but Mark points out that there are different types of think tanks and not all are out to buttonhole politicians into switching their votes five minutes before they walk onto the floor of Congress. However, in the clip below, he argues that those that do intend to shape policy play an increasingly important role in our national debate.

Mark notes that the recent Cato Institute controversy has drawn attention to the politicization of think tanks, but how did they become politicized in the first place? Tevi points to 1984, when Democrats' loss to Ronald Reagan inspired the creation of the Progressive Policy Institute, which would eventually develop many of President Clinton's ideas and policies. Once the Democrats won in 1992, Republicans responded by creating their own think tank, Project for the Republican Future. Tevi calls this the "Lose an Election, Gain a Think Tank" pattern that has developed over the past 30 years. 

Are these politicized versions of think tanks healthy? While Tevi argues that we have gotten further and further away from the original non-partisan think tanks that value expertise over politics, Mark points out that there is a place for both the advocacy-focused think tank and the ones more involved with influencing policies, and that most are actually not involved with policy outcomes. Mark talks about his time on Capitol Hill and remembers that some think tanks were very open about the fact that they solely wanted to influence legislation. He saw firsthand that many Republican think tanks were incrediblly influential with politicians, which led progressives think tanks to decide that they needed to offer their own legislative response. Mark agrees with Tevi in the changing nature of think tanks that "part of it may be the simple polarization of American politics, but that for example, "in the founding of the Heritage foundation" they decided that they needed "something that's in the game." It's hard to not play the game if that is the only road to success.

The question remains, as Mark and Tevi discuss, how much of an effect the various sources of funding for each think tank shape the way the research is done and the final outcomes of proposed legislation. For more of this conversation, check out the full video:

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The French Turning Point?

Apr 26, 2012Robin Blackburn

The results of the French presidential election could be a critical turning point in the European economic crisis.

The results of the French presidential election could be a critical turning point in the European economic crisis.

The first round of the French presidential election confirms that Europe is gagging on the austerity demanded by the German government of Angela Merkel, and endorsed as recently as March by 25 European Union states. Francois Hollande, the Socialist, narrowly beat Nicholas Sarkozy, but parties of the French Left garnered 43 percent of the vote. A further 18 percent of the electorate voted for Marine Le Pen, candidate of the far-right, fiercely anti-EU and anti-immigrant National Front. Since this was very much a vote of protest, Sarkozy will find it difficult to win those voters over, and many could abstain.

 Sarkozy himself has stopped backing austerity, and vowed to defend the French model from the ravages of free market capitalism. Francois Hollande now has to appeal to the 30 percent of the electorate that is radically opposed to the eurozone austerity pact that Sarkozy initially supported. Beyond the second round run-off on May 6th lie elections for the National Assembly in June.  

Whoever wins—and polls suggest it will be Hollande—the victor will face further tough tests. The ‘Merkozy’ recipe of fiscal autocracy devised at the EU summit is in deep trouble. Insistence on balanced budgets as the continent tips back into recession has already raised the official unemployment rate to 10.6 percent.  The Dutch government, Berlin’s closest ally, has collapsed. Cutbacks have weakened the Spanish economy and raised its cost of borrowing, swelling the country’s public deficit, and demonstrating austerity’s counterproductive results. Technocratic governments in Italy and Greece enjoyed a brief honeymoon, but Mario Monti, the Italian prime minister, warns that a storm is brewing both at the ballot box and in the street.

If the coming weeks produce a new French president and government, then the ‘Merkozy’ formula will have failed. The German chancellor will doubtless find this difficult to accept. But the EU may not have completely lost its will to live; it could at least adopt growth as its formal priority. A new stimulus package could win support in the leading eurozone states, including the Social Democratic Party (SPD) opposition in Germany that has long advocated greater flexibility. The euro elite is prone to accept the diktat of the financial markets, but even market sentiment is now worried by the specter of collapse.

Because of its size, its traditions, and its continuing areas of strength, France plays an important role in the economy, and the outcome of its presidential contest will be a crucial turning point.  For the French, a stimulus package will mean not just a general boost for demand. It will include a public development bank and large-scale investment in R&D, infrastructure, and human capital as well.

Robin Blackburn is a professor at University of Essex, and author, most recently, of Age Shock: How Finance Is Failing Us.     

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Keeping Them Honest: What Politicians Say vs. What We Make Them Do

Apr 25, 2012Tim Price

By dismissing politicians’ promises as meaningless, we let ourselves off the hook for making them take action.

By dismissing politicians’ promises as meaningless, we let ourselves off the hook for making them take action.

Politicians are big, fat liars. It’s a belief so deeply ingrained in American culture that we’re taught to revere George Washington as the one-of-a-kind exception who narced himself out for chopping down a cherry tree, and even that story is completely made up. Like many things we believe, it’s not necessarily true that politicians produce lies the way plants produce oxygen. As political scientist Jonathan Bernstein has noted, presidents do basically try to fulfill their campaign promises, but they make more headlines by breaking them. And the 40-year-long effort to discredit government, which Roosevelt Institute Senior Fellow Jeff Madrick has highlighted, has also probably contributed to the belief that our politicians are up to no good. But our constant and perhaps justified skepticism poses some big problems during a presidential election, which is at least partly about whose story of America we find more convincing.

But what if we focused on a different story? One of the most oft-cited incidents from FDR’s presidency is a policy meeting he held with labor leaders shortly after his election, which he concluded by telling them “I agree with you, I want to do it, now make me do it.” Did Roosevelt ever actually say those words? Who knows? Like Washington and his cherry tree, what matters is why we tell the story and what it says about how we view the man in question. FDR understood that regardless of what he personally believed, change had to happen from the bottom up, not just from the top down. He was a bold leader who was never afraid to take on a fight as long as he had the American people on his side. If we stop assuming that politicians will simply deliver progress without our involvement or that the process of policymaking is out of our hands once our votes are cast, then we might start to see elections in a very different light.

This question of trusting what politicians say is a tricky one for both of the major presidential candidates this year. As Mitt Romney makes his 97th pivot from the primaries to the general election, he may try to recant or alter positions he took to please the right-wing base that would send moderates screaming for the hills. A recent Wall Street Journal op-ed noted that “[a]ccording to a Romney adviser, his private view of immigration isn't as anti-immigrant as he often sounded” during the primaries. This prompted Washington Post columnist E.J. Dionne to ask, “Does [that] mean Romney said things that he doesn’t really believe? …How many other ‘private’ positions does Romney hold that we don’t know about?” Romney has been plagued by such accusations of insincerity throughout the campaign, with opponents referring to the presumptive Republican nominee as a “well-oiled weather vane” and piling on an ill-judged remark comparing him to an Etch-A-Sketch.

Likewise, President Obama has come under fire from the left for promising “change you can believe in” and delivering only a handful of heavily compromised victories. Some progressives are especially frustrated because they believe Obama secretly agrees with their policy prescriptions but lacks the courage or political support to advocate for them. One such issue is gay marriage, where Obama claims his views are “evolving” in favor of legality despite the fact that he openly supported it 16 years ago and conveniently devolved just in time to run for higher office. Others see it as naïve to think that Obama has done anything other than what he wants to do. Roosevelt Institute Fellow Matt Stoller wrote that by blaming the president’s failures on management rather than ideology, “all the media boosters and center-left validators of Obama in 2008 let themselves off the hook for mistakes. Instead, they ask, ‘where did our inspiring Obama go?’”

Stoller’s point about the president’s critics letting themselves off the hook hints at the real answer to whether candidates tell us what they honestly believe or what they think we want to hear: We can’t know unless we read their minds, so we have to take them at face value, exercise our own best judgment, and either keep pushing them forward if we agree or stop them in their tracks if we don’t. Sure, all else being equal, it makes sense that progressives and conservatives alike want a man or woman of principle representing them in the White House. And obviously we don’t want chief executives so dishonest that they risk leaving office in handcuffs. But by focusing all our attention on the failings of our leaders, we absolve ourselves of responsibility for shaping and implementing the policies we want to see. Sometimes we’ll find a dream candidate, although more often we’ll have to settle for the closest match and work to move them in the right direction. But either way we need to go in with our eyes wide open, not simply trust that they’ll one day emerge from their campaign cocoons to become the beautiful butterflies we want them to be.

Elections are not, or at least should not be, a “fire-and-forget” affair in which we vote for our favorites and send them off to govern while we cross our fingers and hope for the best. As New York Attorney General Eric Schneiderman said at the launch conference for the Rediscovering Government initiative, “great strides in social justice don't come out because of politicians; they come out because of movements.” Even if Barack Obama’s views were far enough left to make Bernie Sanders look like a member of the John Birch Society, it would still be incumbent on progressives to keep the pressure on him and the members of Congress to make sure real change was made.

If we were to get over our learned helplessness and take charge of our political process, what would that look like? Ideally, as Roosevelt Institute Fellow Sabeel Rahman wrote recently, it would involve thinking of citizenship not simply as a chore we’re reminded of every two to four Novembers but as a kind of office with duties that extend far beyond the ballot box. It would also involve engaging in dialogue with people we do and don’t agree with and getting our message out as broadly as possible and through as many channels as we can, I say as I write this blog post.

Perhaps most importantly, it would involve good old-fashioned organizing. When Barack Obama implemented spending policies that conservatives didn’t like, they donned their finest colonial period costumes, took to the streets, and helped derail most of his domestic policy agenda. When Wisconsin Governor Scott Walker gutted the rights of public workers, union members and activists rallied against him and gathered support for a recall election. And when Americans from all walks of life got fed up with our leaders ignoring the deepening divide between the haves and the have-nots, they sparked a worldwide movement that has put inequality front and center in our political debate. By taking on these and other big fights, ordinary Americans can prove that governing is what happens while politicians are making other plans.

None of this is easy. Faced with billionaire-funded Super PACs trying to bludgeon their ideological opponents into submission, political institutions so polarized and paralyzed as to be functionally useless, and an entrenched two-party system that often boils down to a choice between right and really far right, it’s very tempting to just give in to cynicism and retreat. But regardless of how much our leaders’ rich buddies chip in for their next campaign, dollars aren’t votes (at least until the Roberts Court says otherwise), and the nice part about being part of the 99% is that we outnumber them. By working together, we have the power to set the agenda and make sure our policymakers don’t keep their jobs unless they keep their promises. In other words, it’s on us to make them do it. This story might seem more implausible than the one where we’re all long-suffering martyrs who are constantly deceived and betrayed by cunning politicians, but it’s almost guaranteed to have a much better ending.

Tim Price is Deputy Editor of Next New Deal.

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Our Brave New Service Economy

Apr 23, 2012Bryce Covert

More low-wage, dead-end jobs might sound good to business owners, but is that what we want for our country?

More low-wage, dead-end jobs might sound good to business owners, but is that what we want for our country?

One of Romney’s big selling points is that he knows the “real economy” (much like some conservatives know “real America,” I guess) because he has experience as a businessman. Conservatives have started substituting business acumen for political acumen, making the mistake of comparing what’s required to run a country to what’s required to run a company. At first blush it almost makes sense: both oversee groups of people, both deal with budgets, both make decisions. But not only does that experience not necessarily translate to the White House, it also belies a deeper problem about the kind of economy we’re trying to recreate in the aftermath of the Great Recession. Viewing the country, and its economy, as a private business isn’t likely to create solid middle-class jobs.

“This American Life” had a recent episode called “What Kind of Country” that explored what kind of country Americans want this to be, but parts of it had more to do with what kind of economy we want. Take the example they give in act three: Colorado Springs. With a stretched city budget, local businessman Steve Bartolin, CEO of the Broadmoor Hotel, decided to look and compare it to running his hotel. After all, he tells the reporter on the story, “We have the same number of employees as the city… I look at us as a service delivery organization,” just like the city, apparently. They are both concerned with “how do you deliver the highest quality of service in the most efficient, cost effective manner.”

His main focus became how much both entities spend on their employees. “They’re running a 70 percent labor cost and we’ll run a 35 percent labor cost,” he says. “Any business person can look at that and say, ‘Jesus, we’re going to be out of business by 2014 at this pace.’” He writes a manifesto to the city council that ends up being circulated all over town: the city should lower starting wages for its employees, require them to pay more for their health insurance, and start contracting out anything it can to private businesses.

A city councilwoman explains that payrolls for the city government are higher than the hotel’s because it doesn’t control its own pension costs, which are mandated by the state. But she also makes a very important point: it has to hire people with more training and experience. City engineers and police officers can’t be hired on the cheap like the service industry workers at the Broadmoor.

And herein lies a big problem. What Bartolin proposed, basically, is to make government employees more like service employees. This is highly problematic, particularly for the black Americans and women who have long relied on public employment because it paid decently, offered good benefits and stability, and enabled them to move up the economic ladder. Public employment has been credited with helping to create the black middle class. If we make these jobs as unstable and low-benefit as service jobs, we’ll be taking away a huge boon from groups who have historically benefitted from it.

But we’re not just dragging public employees down to the level of service workers. In fact, the jobs our economy is best at producing these days are service jobs. As Harper’s recently tweeted, the chances that an employed American works in the service industry are six in seven. Those jobs have been growing very quickly: from 2010 to 2011, occupations like salespersons, cashiers, and food preparation workers grew by 3.2 percent. As Nona Willis Aronowitz recently reported, one in 10 employed Americans works in food service, making up 9.6 million people. And young people are taking a lot of those jobs: a quarter of people ages 16 to 29 who have a job work in hospitality, meaning travel, leisure, and food service. “A study of 4 million Facebook profiles found that, after the military, the top four employers listed by twentysomethings were Walmart, Starbucks, Target, and Best Buy,” she writes.

These are low-wage, low-benefit jobs that rarely pay much more than minimum wage (if even that) and offer schedules that can change on a whim. A report from the Retail Action Project in New York found that over half of retail workers made under $10 an hour – and 12 percent earn the minimum wage. Less than a third get health benefits through their employer. The Restaurant Opportunity Centers United reported that the average yearly income for restaurant workers in 2009 was $15,092, and less than a third make a livable wage. And what about those hotel workers who might be under the employ of Batolin? Non-managers make less than $12 an hour on average.

And unlike government work, these jobs offer little training and room for advancement. The sector relies on employee churn to keep labor costs lower. (Just ask Barbara Ehrenreich.) Service careers aren’t designed to advance much farther than flipping burgers.

Is this what we want our economy to look like? Do we want most jobs to offer wages that don’t cover basic expenses and to deny workers the benefits they need to stay healthy? Businesspeople would call this cost effective. I call this unsustainable.

Bryce Covert is Editor of Next New Deal. courtesy of

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Rediscover Representative Democracy

Apr 18, 2012Herbert J. Gans

Vote HereTo create a more civilized economy and political debate, we need a democracy that represents more than just the rich and powerful.

Vote HereTo create a more civilized economy and political debate, we need a democracy that represents more than just the rich and powerful.

By now, common sense should tell us that whether our form of government is called a plutocracy or a corporate democracy, its three branches and the constituencies that control it are unlikely to solve the country's critical economic, political, and social problems. But what if we could enlarge the citizen constituency, and thereby rediscover representative democracy?

Representative democracy entitles all citizens to be properly represented by their elected officials, and right now, American democracy is clearly unrepresentative. Since the Reagan era, the already economically powerful have obtained more political clout than ever. As a result, many other citizens are deprived of their fair share of political voice and political power, as well as the help government can provide.

The economic and political power-holders will never surrender any powers voluntarily, and the recently emerged Occupy, union, and other protest movements have not yet raised national power-sharing issues.

Suppose, however, that new players could enter the electorate and other parts of the political playing field. They would add new issues and demands to the political agenda, remove some old political warhorses, and upset a variety of political applecarts. If more people feel that voting and other ordinary forms of political participation can do some good, they are likely to make themselves heard, and their elected representatives might then push the economy and politics in a more egalitarian direction.

Representative democracy will not come easily or quickly, and in a huge country like the U.S., it can never be fully achieved. Changing a political system long stacked to favor profit-seekers over rank and file citizens is politically very hard work, and neither the big corporations, other fat cats, or their organized allies are going to let go without a humongous struggle. Persuading larger numbers of citizens to vote, and to do so thoughtfully, may be no easier.

Still, representative democracy as an issue sits on high moral ground and opponents cannot reject it out of hand. Consequently, it is very much worth thinking about and publicly discussing it now, so that the right moves can be undertaken if and when the political time becomes ripe.

For example, if large and varied protest activities develop, or if the religious and cultural conservatives find they must vote their economic interests, the country might elect a liberally inclined populist president and Congress. If and when that happens, several essential first legislative and executive steps can be taken. One is to begin to rapidly enlarge the electorate by making voting faster, easier, and more pleasant. 

Another step is to require, or bribe, the relevant media to run political advertising free of charge, and at the same time start pressing for the public financing of elections.

These changes will take time and perhaps some political miracles as well, but when they can be accomplished, further progress might be a little easier.

For example, a larger and economically more representative electorate could well demand that government and private enterprise jointly become employers of last resort. Many more voters would also support progressive tax reform, especially if they understand that putting some money in more pockets will grow the consumer economy and thereby the rest of the economy. Even corporate executives that profit from the consumer economy might turn a bit more liberal.           

Eventually, however, a truly representative government will require reforming the governmental structure. In a properly democratic Senate, senators from the four smallest states, which have less than 1 percent of the population, would no longer cast the same number of votes as their colleagues from the four largest, which have nearly 33 percent of the population. Or maybe the Senate should be turned into the equivalent of the British House of Lords.

Fairer congressional districting is also needed, and the same reforms are needed in state and local government. A federally mandated recall procedure should be instituted for all levels of government. 

The Supreme Court needs reforming as well, for right now it is not accountable to anyone. At some point the country must figure out how to amend or revise the Constitution in order to modernize the intentionally weak and divided government with which the Founders saddled us. 

Meanwhile, and as soon as possible, the federal Department of Education should institute courses in everyday politics and economics, beginning in the first year of high school. The citizenry needs, and has always needed, all the help it can get to understand what politics and the economy do for and to them.

Greater representative democracy may take decades to realize fully, and even then it is no panacea; it will not eliminate economic or political injustice. It should do away with political polarization, but it will not eradicate political disagreement or economic conflict. In fact, if more people are politically involved, their elected officials will have to cope with a larger number of viewpoints, values, and interests among the electorate. However, if more people know they have a voice and a government that is really listening, America could end up with a more civilized economy and politics.

Herbert J Gans is the Robert S. Lynd Professor Emeritus of Sociology at Columbia University and the author of Imagining America in 2033.

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