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I don’t often do book reviews, but having just finished Luigi Zingales’ book, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, I think it is worth writing about. For the last four years I have suggested that there might be common ground between liberals and libertarians. But every time I have tried to advance the notion, either the liberals have savaged the idea or the libertarians have complained of half steps and put forth their “anarcho-capitalist” solution, which is just plain stupid. Zingales offers a middle ground.

Zingales is a free market Professor at the University of Chicago’s Booth School of Business and his main fear is that Crony Capitalism is destroying the competitive nature of America’s economic system. He believes that government has an important role to play in society, but that as corporations become more dominant in financing politics, they “capture” the regulators who are supposed to control them. Similarly, the corporations lobby the congress to put through special subsidies for their industry, thus distorting competition. Zingales sees the cronyism on both sides of the political aisle, such as when Clinton Treasury Secretary Robert Rubin lobbied hard to get the Glass-Stegall Act repealed, in order to help Citigroup, which had already violated the law.

Rubin left the Treasury in July 1999, the day after the House passed its version of the bill by a bipartisan vote of 343 to 86. Three months later, on October 18, 1999, Rubin was hired at Citigroup at a salary of $15 million a year, without any operating responsibility. It is hard not to see the connection between these two events.

Zingales’ prescriptions for fixing this mess are pretty straight forward. Cut all government subsidies and special tax breaks to corporations. Eliminate all tax deductions for individuals, which “would reduce the marginal tax rate for all taxpayers by at least five percentage points, except for taxpayers making more than $500,000, who would see their marginal tax rate unchanged. Use Pigouvian taxes to correct distorted incentives and negative externalities. Examples of this are a progressive tax on payments to lobbyists by corporations; a tax on short term debt held by financial institutions (which he believed caused the 2008 crisis) and a tax on pollution flowing from industry.

It is on various social policies that liberals will find Zingales pushing them into uncomfortable areas. On K-12 education he advocates a progressive voucher system. All schools would have to compete for all children with schools getting paid more to take on under privileged kids. If schools hired bad teachers, they would face the possibility of going out of business. I for one think this idea is worth trying. The K-12 system is so screwed up in this country, we really need to shake it up and perhaps vouchers is the way. But it is in the area of healthcare that I find Zingales ignoring the obvious because of his attachment to the free market. He says that the reason American per capita healthcare costs are so out of control is that “healthcare, unlike most goods and services, is not purchased in a free market.” What this ignores is that the per capita healthcare costs that are so much lower in every other developed nation are directly accountable to their adoption of a single payer system that has the muscle to negotiate with doctors, hospitals and drug companies.

Ultimately taking on Crony Capitalism should be the main task of the next era of reform. Both political parties are so beholden to the corporation that this seems like an almost impossible task. Perhaps we have to start with getting the money out of politics as proposed by Larry Lessig’s Rootstrikers campaign. I know the Republicans are too in the bag to big business to take this on, but if Obama gets a second term, his first act should be to fire Tim Geithner and hire someone like Joe Stieglitz. That would send an unmistakeable message.

Kim Dotcom is the alias of a modern day digital mafioso, who made more than half a billion dollars in the last few years by selling advertising on a site filled with stolen movies and music. Like any mafia lord, Kim hangs out with various low talent artists hoping that a little blow might be left on the coffee table. So today Kim and his lame ass disco music friends have released a song that is on a par with Triumph of The Will for those who study propaganda. The master of the field was Joe Goebbels who wrote “It would not be impossible to prove with sufficient repetition and a psychological understanding of the people concerned that a square is in fact a circle. They are mere words, and words can be molded until they clothe ideas and disguise.”

In his brilliant attempt to square the circle of his fortune built on stealing from artists, Kim equates his struggle with that of Martin Luther King. He attempts to hijack the whole Occupy movement to aid in his redemption. But in deciding that he could make $ million by selling advertising on Megaupload–with an inventory of quantities of stolen digital content–it’s easy to think that Kim Dotcom believed he was above the law. And the sad thing is that huge corporations like Google and Yahoo—some of Kim Dotcom’s early advertising partners–support this kind of conduct by enabling an underground advertising market that funds both piracy and pornography (usually on the same site) in the huge “remnant ad business” on the web. Read more…

It seems to me that Mitt Romney is in a real Jam. As George Will so cogently put it, you have to assume that the cost of releasing the  earlier tax returns was greater than Mitt’s perceived cost of not releasing them. I think his greatest fear, that for instance, if the returns show him paying an effective tax rate of 4.5% in some year or he has a list of 50 off shore partnerships in the Caribbean and 20 tax shelters; these might be hard to explain to the 99%. It might be so hard to explain that his “firm delegate count” begins to soften and the convention turns into the Tet Offensive, where there is no where to hide. So maybe he ends up saying he will release five years in September after he is nominated. Could he get away with that?

I doubt it.

I think he is going to have to bite the bullet and get them out soon, knowing full well the game may be up.

Wow!

When a religious fundamentalist suffers a “crisis of faith” it is a mournful incident to witness. Such was the occasion when Alan Greenspan, former Chairman of the Federal Reserve appeared before Congress in the wake of the financial crisis of 2008. The man who had singlehandedly carried the faith of “the rational market” confessed that, “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in their firms.”

The revelations around the fraudulent LIBOR fix that are beginning to come forth have been greeted with half the outrage heaped on Bernard Madoff two years ago. Some would suggest that the reason Madoff seems to be the only corrupt financier behind bars is that he stole from the 1%, while the fixers at Barclays and the other banks that manipulated the $360 Trillion derivatives market got away with a mere dismissal and most of their bonuses intact. Eduardo Porter suggests the real reason for our non-chalance.

Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

What is so shocking is that most of what purports to be mainstream economic theory today is based on this notion of rational choice theory. The whole Potemkin Village of Libertarian Free Market theory is based on a concept that takes no account of the tendency of “rational actors” to cheat if they think they can get away with it. Porter again.

Company executives are paid to maximize profits, not to behave ethically. Evidence suggests that they behave as corruptly as they can, within whatever constraints are imposed by law and reputation. In 1977, the United States Congress passed the Foreign Corrupt Practices Act, to stop the rampant practice of bribing foreign officials. Business by American multinationals in the most corrupt countries dropped. But they didn’t stop bribing. And American companies have been lobbying against the law ever since.

Extrapolating from frauds that were uncovered during and after the dot-com bubble, the economists Luigi Zingales and Adair Morse of the University of Chicago and Alexander Dyck of the University of Toronto estimated conservatively that in any given year a fraud was being committed by 11 to 13 percent of the large companies in the country.

This is the basic flaw in the Republican argument that we need less regulation of the financial markets. As Simon Johnson wrote this morning, The Market Has Spoken and It is Rigged. This is the torch the Democrats must carry from now until the election. Mitt Romney is the poster child for Savage Capitalism. His election would signal the end of democracy and the beginning of Oligarchy.

When my flight from Los Angeles touched down in Aspen, Colorado I counted 80 private jets parked at the airport. I had come for the annual Aspen Ideas Festival and what follows is a critique written with some affection for the institution but with the full knowledge that I may never be invited to speak there.

Aspen aspires to be an American Davos–a meeting in the mountains of top government policy makers, important pundits, authors and academics; all interacting with the corporate elite. Thus the enormous private jet fleet. It seemed to this first time attendee that the whole program was built on three suppositions.

1. That the economics of globalization are as inevitable as water flowing downhill on Frying Pan River.
2. That technological innovation is the salvation of society.
3. That American politics are so polarized that nothing can be accomplished at a national level.

These assumptions lead to a kind of philosophy of inevitability. Leadership is reduced to management and so problems really can’t be solved, they can just be managed. The pundits, politicians and managers on the stages of Aspen are there to tell us they know how to manage through crisis. This leaves the audience feeling as if there are no choices left other than the personal choice between eating steak or fish, wearing khakis or Levis, buying a Gulfstream or a Bombardier corporate jet. The notion of the political choice of fundamentally changing our society seems to be in the realm of the Higgs Particle. Does such a choice really exist and if so, how would we know?

On the stage the pundit interviewers were obsequiously polite with the politicians. Gillian Tett of the Financial Times never bothered to ask Larry Summers if he regretted eliminating Glass-Steagel at the behest of Citibank’s Sandy Weill. Charlie Rose sat mute as Mitch Daniels poured forth Romney talking points about how government regulation inevitably inhibits growth and how Obamacare was a tax on all Americans. The Atlantic’s David Bradley never challenged Pervez Musharraf’s assertion that military Coups were necessary to save Pakistan’s fragile and corrupt democracy. Tom Friedman allowed Ehud Barak to ramble on for minutes on why Iran’s joining the nuclear club would be different than any other previous nuclear aspirant, despite convincing evidence to the contrary by Kenneth Waltz in this month’s Foreign Affairs. Read more…