Bellowing at Populism

During the end of the 2008 Presidential campaign, Republicans attempted to besmirch Democratic candidate Obama as an economic socialist. The charge seemed too excessive and desperate. It never caught on outside the GOP core.

However, since the widespread public backlash over AIG and other TARP recipients paying out bonuses, as well as the backlash against the backlash by pro-business pundits, conservatives may have found a more effective brush with which to tar the Obama Administration by accusing them of radical populism.

If you are a Republican governor and considering a run for President in 2012, the latest way to demonstrate rock-solid conservative principles is to refuse part of the federal TARP funds – even in the face of criticism from others in your state and Party.

Back on March 11, Governor Mark Sanford of South Carolina was the first to announce his intention to accept only some federal money. Now Governor Sarah Palin of Alaska, writing in the Anchorage Daily this past weekend, will turn down some of the funds for her state.

In my own state of Ohio, the Campaign to Protect Ohio’s Future, a coalition of health, human-services and education organizations, commissioned Hart Research Associates to conduct a poll about voter attitudes toward state taxes and social services. Ohio has cut income tax rates by twenty-one percent since 2005. Fifty-seven percent of those surveyed favored “a budget proposal that would roll back some recent cuts in state income taxes, increase income taxes on those with incomes over $200,000, and increase some business taxes to avoid service cuts.”

Under the state budget currently under consideration, there would be cuts in aid for mental-health services, child protective services, home nurse visits to at-risk infants and subsidized childcare for working poor parents. What is more, many consider aid for food banks insufficient to meet the unprecedented demand.

Rather than embracing majority support for a potentially politically unpopular move, the Columbus Dispatch reports Democratic Governor Ted Strickland has recoiled from it instead. “The Governor does not believe a tax increase at this time would be productive,” stated a spokesperson. “He believes we have to live within our means.”

One of the things Republicans have done very successfully over the past three decades is to caste populism as foolish and irresponsible, rooted in extremist fringe viewpoints and militant rage. Almost on cue, Washington Post columnist E.J. Dionne pops up this morning to defend the Obama Administration against such a charge. Despite a plethora of new regulations on business proposed by Treasury Secretary Tim Geithner last week, Dionne reassures that Obama and his crew are not practicing a form of anti-capitalism but rather pragmatism.

For example, Geithner’s plan to get billions of dollars in toxic assets off bank ledgers involves extending huge low-risk loans to private investors so they can buy high-risk assets at a discount with the chance of making big profits. Yet leverage is exactly what ended up making these assets so toxic in the first place. What gives?

Economist John Geanakoplos of Yale University argues the economy regularly experiences “leverage cycles.” When credit tightens, the market overreacts to the easy borrowing and repayment terms prevalent during better times. Per Geanakoplos, we are currently in the midst of the harshest leverage cycle since World War II. Geithner’s approach is to avoid trading one extreme for another, instead, replacing previously out-of-control borrowing with pragmatic levels that would have prevented a panic-driven collapse.

It all sounds good in theory but many progressives worry that Democratic politicians are too in love with the idea of moderate sensibility and this may be holding back the Obama Administration from doing enough to enact the change they promised and won election to deliver.

Columnist Paul Krugman continued his grump in the New York Times last Friday. “It has become increasingly clear over the past few days that top officials in the Obama Administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.”

Charles Geisst, the author of several book on Wall Street and debt, suggested in the Washington Post two Sundays ago that just as there are leverage cycles, so there may be populist cycles as well. Public outcry against greedy businesspeople and corporate behemoths is nothing new but companies usually seem to weather hostile periods without any permanent harm. Cycles of greedy stupidity by business, followed by short periods of excoriation by the public, and completed by a broad amnesia that allows repetition are common and perhaps unavoidable.

Conservative policies of recent decades, whatever else they may have done, were beneficial in failing to demonstrate beyond repute that small government and deregulation would cause business to police itself, a phenomenon the increased competition of globalization would only encourage. Why then are so many finding support when resisting increased government regulation and intervention? One answer is the effective demonization of populism by the right.

Another answer may be the perversion of one of the most useful inventions of capitalism and free markets – the publicly held/traded corporation. A Board of Directors is the ultimate authority in such businesses, meant to ensure that management remains answerable to ownership (i.e. shareholders). In practice, Boards have often become buffers, used to obfuscate management intentions and place obstacles before owners’ attempts at intervention.

Billionaire financier Carl Ichan, noted in Saturday’s New York Times, “Perhaps one silver lining to [the AIG] debacle is that it will finally alert Washington to the lamentable state of corporate governance in America . . . the rights of the shareholders are quite circumscribed . . . The legal landscape is filled with devices designed by state legislators and courts to prevent shareholders from influencing how companies are run and so allow management free rein.”

Ichan believes three simple changes could cut through much of the red tape. First, the SEC should allow “proxy access,” whereby shareholders could solicit votes for the election of their nominees to a company’s Board of Direction by including the names and other relevant information about those nominees in the company’s annual proxy statement. Second, allow “say on pay” resolutions, voted upon by shareholders, which would more than merely advisory. Third, permit shareholders to move the corporations they own to another state, one with less entangling laws designed to protect management, by a simple majority vote.

Granted, there are dangers involved in moving from free-market capitalism to a kind of social democracy. Crowds are easy to sway in the tumult of the moment in ways that contracts and long-established procedure resist.

What is more, the unwashed masses are no less likely than the privileged and powerful to desire having things both ways. For example, Rasmussen Reports recently found that eighty-one percent of Americans oppose Congress raising taxes retroactively. Yet fifty-seven percent simultaneously favor enacting taxes designed to wipe out AIG and other bailout bonuses.

Still, conservatives eager to save us from ourselves fiscally have seldom shied from populism when it favored them. Even as courts, reflecting changing social norms, steadily affirm equal rights and equal protections for homosexuals, social conservatives have been quick to jump on hot button issues, such as gay marriage, in populist state constitution referendums, often in the name of protecting values or higher moral standards.

Opening up the misbehavior that sometimes happens in business to greater transparency and oversight is likely to catch it more quickly and deal with it more effectively than attempting to restrict it out of existence, as columnist Gordon Crovitz argues in today’s Wall Street Journal.

And as his liberal colleague Thomas Frank wrote last Wednesday, “The mountebanks and charlatans are not the populists but the responsible-looking CEOs who ran the country's financial institutions into the ground . . . and who will demand to do business the old way as long as they have breath to bellow.”