Three Solutions to the Oligarchy Problem

A few years back, Simon Johnson wrote a brilliant and important piece in The Atlantic, called "The Quiet Coup." Johnson's basic point was that the United States, like a banana republic, has been taken over by oligopolistic powers. Looking at the financial crisis, he saw how concentrated, elite business interests took risks with government backing, got bailed out by the government, and were then protected by the government. Instead of a representative democracy, you had a quasi-oligopolistic political system. Since his article, the concentration and power of those financial institutions has only grown, despite some important legislative reforms in Dodd-Frank.

Johnson's analysis is fairly widely shared by people across the political spectrum. But those who agree with his analysis of the political economy have different views of the solution. There are two mainstream views about how to solve the problem, and one traditional American view that has not gotten enough attention:

  1. Change the way campaigns are funded
  2. Shrink the size of government
  3. Rejuvenate antitrust and break up big companies

My goal in this post is simply to lay out the three ways of thinking about the problem and look at a few core premises. This is something I'm thinking about a lot and I'd welcome a response, feedback, and suggestions.

Change the Way Campaigns are Funded

The first view tends to be associated with Democratic and progressive views, although public support is broad. The logic goes like this: Politicians are currently dependent on the richest Americans, and that dependency leads them to effectively work for them. Sometimes they are doing so consciously; they don't dare support a financial transactions tax that might poll well because of fear of retaliatory spending at reelection. Sometimes they do so unconsciously; in order to ask for campaign money, they spend a great of time with the lobbyists and the wealthiest Americans, so they believe the lobbyists' stories and internalize the world-view of the wealthy. Natural human empathy, combined with ongoing contact with a particular subset of society, makes the politician see the world through totally distorted lenses.

We can change both the conscious and subconscious subservience to the oligarchs if we change the way campaigns are funded. A citizen-funded elections model does that. If a candidate is going to raise more money talking about popular and populist issues, then she does that to get reelected. She doesn't have to provide access to lobbyists in order to get funded, so she can hear the lobbyists' "fact-sheets" more objectively, and when needed. (One of my favorite anecdotal stories about citizen-funded elections, from Connecticut, is that the "lobbyists hang outside the bathrooms now," trying to get access to politicians who they used to be able to schedule meetings with because of implicit relationship of access to campaign cash).

I find this argument very persuasive. It does not address independent spending, or the role of media, or other non-campaign-finance related ways in which concentrated financial power exerts political power, but it does not pretend to; it changes the core behavior of political representatives, and in so doing radically diminishes the oligarchic risk.

Shrink the Size of Government

This view tends to be associated with the Republican Party, although depending upon how you poll it, there is broad cross-partisan support for it. The theory behind this is that if government is smaller, business interests won't go to it for favors. If you are a businesswoman who sells soap in a small-government world, and have a million dollars to spend, you are going to spend it on making better soap. If you are the same businesswoman in a big government world, you are going to spend 70 percent of it on making soap, and 30 percent on trying to extract money from the government through subsidies. A government with lots of disposable income will encourage a flood of money to go into buying government, instead of into improving the economy -- thereby creating oligarchs.

Therefore, if you can shrink the total size of government, you will keep business people from turning into oligarchs. However, there is a flaw in the model. As I understand it, the model generally assumes a relatively low upper level on gains from governmental favors. Returning to the strategies faced by the soap manufacturer, she would want to know the potential value of the gain from government before deciding what money to spend on government and what money to spend on making better soap. In his classic 1983 paper modeling this kind of behavior (which is generally called rent-seeking), Gary Becker writes, "The total amount raised from taxes, including hidden taxes like inflation, equals the total amount available for subsidies, including hidden subsidies like restrictions on entry into an industry." However, the creative rent-seeker, like the entrepreneur in any area, will not look at present flows to determine potential flows, but will look at possible flows given political limitations. The potential value of a tax reduction is up to the total amount of taxes currently levied; the potential amount the soap maker can get for her political contributions is constrained by the existing size of the tax. When it comes to regulations, the potential gain is the absolute removal of all soap regulations. The potential value of intellectual property laws and other favors could lead to a government grant of monopolization in her own field, or, if she's ambitious, a grant of monopoly across several fields. All of those are huge potential values, even with a "small" government. But they are all constrained and somewhat related to government size.

There is no theoretical constraint, however, on the potential size of a soap subsidy. The potential value of the subsidy is not defined by existing taxes. More taxes can be levied; the existing population of the country does not define it, because levies (direct and indirect) can be brought to bear on other countries' populations. This is, of course, one of the stories of empire. As a theoretical matter, then, the upper limit of a subsidy from a government is the maximum revenue it can generate through the use of its police power. There are plenty of real-world examples where rents are sought and created despite the absence of existing revenue. The bailout of the financial institutions is just one example: The country did not already have a pot of money to give the financial giants, but it created one. The "size" of the government did not limit the political efforts to take it over.

Having said that, there are certain areas where there is real truth in this analysis, in particular in the area of earmarks and other highly discretionary funds that are relatively easy to extract. In general, the less public involvement in a decision, the easier it is to spend money to get money from government.

Break up the Big Companies

This third view does not traditionally have the same partisan affiliations as either of the others. The very little polling done of this view suggests overwhelming public support -- 70 percent for breaking up banks -- but the general question of breaking up big companies is unfortunately not being asked often enough. At different times, different parties have been more or less involved in both building up and destroying antitrust. The Sherrod Brown-David Vitter alliance on breaking up big banks is not unusual; it is part of a long tradition of left-right populist agreement on antitrust.

The theory behind this view is that smaller companies don't create oligarchs, and truly competitive industries invest in the economy, not government. If our soap seller, above, has less than a certain amount of total employees and total cash, she is far less likely to spend a dime on trying to get something out of Congress. This is in part because of the high costs of setting up and maintaining political relationships, which larger companies regularly do. This is in part because the small or medium-sized business doesn't have the additional "Too Big to Fail" threat, which makes each dollar they spend on campaigns or advertisements worth more, backed as it is by the implicit threat that company failure leads to societal breakdown. Furthermore, if our soap seller is in a truly competitive industry, as opposed to an industry with a handful of powerful soap companies, she will have to turn her energies to her product.

If we want a society of smaller and medium-sized firms, we can have it -- there are no constitutional constraints. We need a strong antitrust regime and stronger antitrust laws, and the capacity to enforce those laws located in people who aren't tied into the oligopoly.

This view has the advantage of simplicity and if the laws are well and simply crafted with bright lines, it also has the advantage of taking government out of most business decisions (therefore also reducing the incentive for soap sellers to spend their time trying to be oligarchs.

This is not the first time we've faced an oligopoly problem, and the amazing thing is that we solved it -- not perfectly, but fairly impressively. In 1902, Teddy Roosevelt started his trust-busting career, and in 1907, corporate donations to federal campaigns were banned for the first time.