Inside Job (42 page)

But how and why was all this permitted to occur? It’s complicated,
of course. But a very big part of the answer is that an effective response to internal industrial
decline and foreign challengers required major changes in government as well as industry. It required major improvements in the educational system, aggressive pressure to force incompetent
industries to reform, deployment of advanced broadband infrastructure, and a variety of regulatory changes.

But those measures had no focused, powerful, well-financed interest group to lobby for them. There is no wealthy, powerful industry that has an urgent, immediate need to improve the education
and skill levels of the bottom half of the American population. In contrast, there were many other things that powerful, well-financed groups
did
want, and started to lobby for. When faced
with internal decline and global competition, the executives in charge of large, concentrated industries decided to start using money to get what they wanted. But only what
they
wanted,
individually
—not what the country as a whole needed. Indeed, what was good for their company’s profits was quite often bad for the nation. If the CEO and senior management were
lazy, outdated, and incompetent, then they wanted protection from antitrust policy, proper corporate governance, and competition. If the company and its industry were run by competent but predatory
management, then additional lobbying goals might include evisceration of regulatory oversight and white-collar law enforcement.

And once they started down this path, executives in incompetent companies discovered that corruption was a brilliantly easy, effective way to forestall, or at least delay, their
personal
day of reckoning. Later, their highly predatory friends in financial services realized that the same techniques would enable them to rape the entire country, even the entire world. And the rest of
us have been paying for it ever since.

LET’S BEGIN WITH
a case study: broadband infrastructure.

As noted above, the US has fallen far behind other nations in broadband deployment. Broadband service in much of Asia is now vastly superior to US services in speed, cost, and universality; the
same is true for parts of Europe, as well. To cite just one example among many, as of early 2012, 60-megabit per second Internet access was available in Taiwan for $30 per month, and by the time
this book is published in mid-2012, 100-megabit per second service will be available for the same price.
⁴
Japan, South Korea, Singapore, and even portions
of mainland China now have far better broadband service than most of the US. America, home of Silicon Valley and inventor of the Internet, does not have universal broadband access, for either
landlines or Wi-Fi, and its services are slow, unreliable, and expensive. This situation has now existed for over a decade, and the lag relative to Asia and Scandinavia is if anything worsening.
Why?

The reason is that both the traditional telecommunications and cable TV industries are tight, powerful oligopolies deeply threatened by high-speed Internet services. They view as particularly
dangerous a nationwide infrastructure of universal high-speed Internet service combining both wireline and Wi-Fi access. This would sharply reduce the cost of data services; it would also enable
universal, inexpensive Internet telephony and streaming Internet video that would render traditional telephone service, cable TV, and broadcast television completely obsolete. In the case of
AT&T and Verizon, this would destroy the majority of their current revenues. In the case of the cable TV companies, advanced Internet infrastructure would also threaten them by allowing new
competition in video content production and distribution.

While there exists some real competition between AT&T, Verizon, the cable industry, and smaller competitors such as Sprint and T-Mobile, the competition is very limited. After the breakup of
the AT&T monopoly in the 1980s, there were about a dozen major telecommunications
companies in the US. There are now two; instead of competing with each other, they
merged. They are still trying to consolidate further. The American phone company AT&T recently tried to acquire T-Mobile; the acquisition was blocked by the US Justice Department, the one and
only time in the last decade that the department has halted the industry’s consolidation, which is still continuing. In late 2011 Verizon signed a major deal with America’s three
largest cable TV companies, allowing them to cross-market each other’s services.
⁵

Despite very rapid progress (50 to 100 percent per year) in underlying digital technologies (routers, fibre-optic cable, software, digital wireless systems), the industry exhibits very low rates
of improvement in its price-performance ratios. The US now lags behind Scandinavia, Japan, and South Korea by a factor of ten or more.

The reason is money and politics. Lobbying is this industry’s real core competence. It spends more on lobbying, political contributions, and other political activities than it does on
R&D. For example, the incumbents have successfully lobbied for state laws prohibiting municipalities from constructing their own fibre-optic networks, and they are probably the largest
industrial users of antitrust “consulting” from academic economists.

A decade ago, my last project while a senior fellow at the Brookings Institution in Washington, DC, was to write a book about this issue. As a condition of publishing the book, Brookings
censored my manuscript in exactly one place: the passage in which I had named the academic economists who had consulted for the telecommunications incumbents—including Brookings’s own
Robert Crandall, as well as Laura Tyson, Peter Temin, Daniel Rubinfeld, Rich Gilbert, Jerry Hausman, Carl Shapiro, and the Law and Economics Consulting Group.

The industry’s political connections are superb. Laura Tyson isn’t just on the board of Morgan Stanley; she’s on the board of AT&T, too. In May 2011 Meredith Baker resigned
as one of the five members of the Federal Communications Commission to become the chief lobbyist for the media conglomerate NBC-Universal, four months after voting to approve its merger with
Comcast. Verizon’s board includes a former chief accountant of the SEC, a former secretary of transportation, and a
former Treasury secretary. And Bill Daley, who
replaced Rahm Emanuel as chief of staff in the Obama administration from 2011 to 2012, was formerly the president of SBC, one of the regional phone companies acquired by AT&T. The political
situation is further worsened by the fact that the industry’s trade union, the Communications Workers of America, has consistently sided with the incumbents in opposing antitrust actions and
other measures to improve competition and technical progress.

As a result, the total cost of using Internet services, smartphones, tablets, and personal computers in the US is dominated not by hardware or software costs, but by the high cost of data
services. The economic consequences of this situation are enormous. In economic policy debates, nearly all discussion of “infrastructure” concentrates on modernizing highways, airports,
bridges, sewage systems, electric power, and the like. Those things are important too. But future economic welfare depends heavily on competitive broadband infrastructure. Education and Internet
technology are the two principal drivers of productivity growth in advanced economies. Improved broadband services could also play a major role in reducing greenhouse emissions and dependence on
fossil fuels through telecommuting, videoconferencing, and intelligent energy management systems. Moreover, universal broadband deployment would be an enormous physical construction project, an
ideal stimulus for the economy in its weakened state. And finally, competitive broadband services are important to both the quality and the affordability of distance (online) education.

In other words, we are s now paying a very high price for the rise of money-based politics in America. It’s not just unethical, it’s economically disastrous; and it’s not just
in financial services.

BEGINNING IN THE
late 1970s, America’s major industries discovered, and began to exploit, a critical weakness in the American national system, one
that enabled them to escape or at least soften competitive
discipline. Stated bluntly, they discovered that buying people off was much easier than doing their job properly.
It turned out that American politicians, academics, regulators, auditors, and political parties were highly corruptible. Their governance systems had been designed for an earlier age, and were not
equipped to withstand serious efforts to corrupt them.

So, beginning in the 1980s, the senior management of America’s declining incumbents became ever more aggressive in paying off their boards of directors, placing former government officials
on those same boards, hiring former politicians as lobbyists, contributing to political campaigns, hiring academic experts to testify in antitrust cases, and so on. They merged with each other,
sent production offshore, and cut the wages and benefits of their employees. They sought and obtained weaker antitrust enforcement, exemptions from environmental regulations, tax breaks, favourable
accounting standards, protection from foreign competition via domestic content requirements. For example, despite the fact that US corporate earnings reached a historical record of over 14 percent
of GDP in 2011, national corporate tax receipts were near historical lows, at less than 1.5 percent of GDP.
⁶
American companies also resisted attempts to
strengthen corporate governance. They kept public sector salaries low, thereby increasing their ability to subvert policy through revolving-door hiring. They weakened regulations, enforcement, and
penalties for violations, and virtually eliminated any risk of criminal prosecution.

And to accomplish all this, since the beginning of this process several decades ago, America’s largest businesses, banks, and wealthy individuals have sent money into American politics in
a completely unprecedented way, first in rivers, then floods, and now in
oceans
. The money came in several forms: political contributions; lobbying; employment, through the revolving door;
sometimes, outright bribery; and, often, access and connections for many purposes, ranging from private schools to personal loans to great parties to rides on private jets.

The money is often nonpartisan, bipartisan, or to use a recent term,
post
-partisan. Many wealthy individuals now give simultaneously to
both
parties, and to incumbents regardless
of their party. Goldman Sachs has a deliberate policy of maintaining equal numbers of Democrats and
Republicans in top management, including one of each at the very top.
Companies choose lobbyists and board members from among former government officials of both parties in roughly equal numbers. Democrats now receive nearly as much money from business as Republicans
do, although some industries, such as oil, still heavily favour the Republicans.

Here are some numbers.

In 1974 total campaign expenditures by all Senate candidates were $28.4 million. In 2010, they were $568 million. For the House of Representatives, total campaign spending in 1974 was $44
million; in 2010, it was $929 million.
⁷
The presidency has become even more expensive. Campaign expenditures since 1976 are shown in Table 4 below:

Source: OpenSecrets.org, http://www.opensecrets.org/pres08/totals.php?cycle=2008

The increase in campaign spending is starting to produce another dangerous effect: weakening media oversight of political dishonesty. Thankfully, America still has a very robust and independent
free press. But the media industry, especially television and print, has been under increasing financial pressure as a result of the shift of both audiences and advertising to the Internet. In this
period, there has been one sector whose advertising in the media has continued to grow very sharply: politics. In US presidential election years, the combined advertising expenditures of all
campaigns, including political action committees and so-called “super PACs”, probably now exceeds $5 billion. As financial services and other large industries have become more
concentrated, the advertising spending of individual firms has also grown larger. The combined effect of higher political advertising and more concentrated corporate advertising has begun to
generate pressure on big publications and news programmes.