Notes: Washington Economic Privilege

The following are notes concerning Peter Schweizer’s (author of “Throw them all out”) talk on the corrupting influence of politics, given at the Navigating the Politicized Economy Summit in San Diego.

Washington D.C. has been the fastest growing city, with per capita income higher than anywhere else in the U.S. In this system of crony capitalism it matters more who you know than what you know. Statistically members of Congress accumulate wealth at a rate 150% better than average folk, using their insider knowledge, they are able to beat the market by 12% (compared to hedge fund average beating DOW Jones by 7-8%). Either they are remarkably intelligent, or they’re benefiting from their insider info.

IPO translates to Invest in Politicians Often, many times politicians are bribed with pre-IPO shares, and receive their bribe money through the market. The rest of us have to play by SEC rules, for example armed service personnel must sell their Coca-Cola shares before assuming the position, because the military contracts with Coca-Cola, and it represents a conflict of interest. Congress is not subject to these rules, and were found guilty (both parties) of trading health insurance companies with remarkably good timing during the drafting of health care reform. The permanent political class, also purchase cheap real estate, and then earmark for construction projects next to that property. The ethics committee says it’s OK if at least one other person benefited also from that deal.

Dodd Frank is so large and complex that not even professionals really know what it means. However, the staffers that drafted the legislation do know, so they quit their job and opened up a consulting firm. Ex-politicians also sit on over 50% of the top company boards. Schweizer therefore supports free markets, but is not pro business. Politically connected hedge funds also beat, consistently on a month-to-month basis, the non-connected funds. Former Senators often deal in political intelligence, getting paid by top wall street firms for the tips.

Geitner, on the way to becoming Treas. Secretary, was associated with some large firms. Those firms outperformed their competitors by 15% on the announcement, and underperformed 6% when their was doubt about Geitner’s appointment. This change is equivalent to that seen in still developing countries. As government increases its scope, the market becomes increasingly tied to political news. For example, during the green energy push, Solyndra bankrupted in spite of it’s vast subsidy. Schweizer is bothered by how the money is apportioned, not that it is wasted. 80% of the companies receiving funds had politically connected (to the Obama campaign) large share holders.

Until we can change Washington’s influence, our economic fortunes will continue to decline. People got mad, and there was a bill the Stock Act, which is intended to limit stock trading by congresscritters. However, it’s supposed to be enforced by the SEC, which is not going to shoot itself in the foot. However, now congress must disclose their stock portfolio’s every 45 days. There is also the fear factor. Washington is scared about having an angry, aware public. They are frightened by transparency. He ends on optimistic note.