Tailspin: Book Review

July 9, 2018

Tailspin: The People and Forces Behind America's Fifty-Year Fall--and Those Fighting to Reverse it, Steven Brill (2018). I've written about the last fifty years, mainly dealing with business scandals and corruption. Brill is a lawyer and writes mainly from that perspective, much of which was new to me. The period from the New Deal (or perhaps after World War II) until the 1970's is called the Great Convergence because middle class wages and living standards grew while the top 1% or so (in income and wealth) remained roughly the same. Part of this was the "greatest generation" of World War II and a focus on the country as a whole. The period from about the 1980's and continuing is the Great Divergence as the top has seen extraordinary growth in income and wealth, while the middle/working class has been hollowed out and wages stagnant. This is the period of Brill's book, how to explain this bad turn of events.

 

Brill largely blames the change on the meritocracy of the best and brightest; they have been in it for themselves, succeeded beyond their wildest dreams to the detriment of the rest of America (and perhaps the world). Brill is one of the top dog lawyers from Yale and thus part of the meritocracy. With this introduction, Brill concentrates on specific case after case. He does not claim the people are villains or criminals (at least some are both and a smaller subset are in jail), but blames self-interest and basics of capitalism (which is amoral) and the evolution of American democracy--the result was a "moat nation," as group after group protected themselves economically and politically. These included all kinds of knowledge workers involving defense contractors, civil service employees, financial engineering, corporate mergers, tax shelters and other tax preferences, corporation executives (especially to increase short-term compensation), drug manufacturing and other parts of healthcare using a capitalist model, politicians (especially at the federal level), plus all kinds of problems which defy solution given a broken political system. 

 

The demand for lawyers exploded in the 1970's because of hostile takeovers, other forms of mergers, tax shelters, and law firms became more hard-edged, required longer hours, cutting ethical corners, and serviced the high-paying clients. Corporations suffered from "short-termism," partly because hostile takeover artists created an environment that focused on the current quarter and how to make money by firing workers, cutting wages and benefits, moving operations overseas, cutting long-term requirement such as maintenance and research & development, plus all kinds of manipulation (partly involving accountants), all  bad long-term (and for long-term investors). Libertarian Milton Friedman stressed the focus on current profits, as companies abandoned what's called "stakeholder capitalism," that is, focusing on all interested parties including customers, employees and the public as a whole. Jensen and Meckling stressed agency theory models, again stressing short-term profits and also encouraging the need for external rewards for executives (heaven forbid executives would be driven by personal satisfaction for a job well done). Jensen and Murphy developed the executive compensation agency model, requiring substantial external rewards including stock options and bonuses. From an accounting perspective, this invites manipulation to present the numbers (especially profit) to maximize compensation.

 

Brill claimed that meritocracy started at Yale in the 1960's, with primary focus on standardized tests to determine admittance. An early example was Joseph Flom, a top Harvard law graduate who could not get an elite job because he was Jewish. He became the leading hostile takeover specialist, specialized in raids on successful businesses with clean balance sheets and undervalued. Thanks to Flom and other raiders, corporations were forced to think short-term and create strategies that made them less desirable--making it difficult to maintain a stakeholders capitalism perspective. Michael Milken created a corrupt junk bond empire to support raider activities. Part of the growing income/wealth divergence was this form of corrupt capitalism. Jack Welch of General Electric was another poster boy for savage capitalism, known for firing the bottom 10% (rank and yank) of employees and called "Neutron Jack" (from the neutron bomb that kills only people) for sacking employees. GE also was known for accounting manipulation to meet or beat earnings expectations. It worked for short-term profits, to the detriment of shareholder capitalism and social responsibility. While others went to jail (think Enron), Welch became rich and famous.

 

Free speech rights of corporations were turned into a political debacle, the fault of lawyer Martin Redish according to Brill. First Amendment free speech rights applied to corporations including political campaign spending claimed Redish and convinced the courts. The key case was Citizens United v. the FEC, the result being no restrictions on corporation political spending (the case was based on a documentary attacking Hillary Clinton): money was speech. This was non-partisan, Democrats and Republicans could be bought, resulting in unwarranted tax cuts, regulation cuts, and recurring financial catastrophes (especially the 2000 tech meltdown and the 2008 subprime debacle). The role of campaign contributions and lobbying was so entrenched that the bad guys (especially big banks) were rescued while the rest of the economy suffered the Great Recession.

 

Brill claims that regulations  by the early 1970's had gone too far, the result of LBJ's Great Society and Nixon add-ons such as the Environmental Protection Agency. The Chamber of Commerce and Corporate America would fight back by storming Washington with campaign contributions and lobbying on a vast scale. Focus on the bottom line, forget "externalities" like a clean environment. Unions started opposing free trade when it became obvious that increased imports meant fewer domestic jobs, creating a business backlash against unions. Business power increased: tax cuts claimed to benefit the middle class became big winners for business and rich folk. 

 

The Administrative Procedures Act of 1946 meant new regulations required due process (umpire theory), meaning that corporations increasingly tied the agencies in knots delaying final rules for years, plus business-friendly attachments. Business also could delay final regs until business-friendly regimes took power. To a large extent, government capture by big business prevailed. Many businesses broke laws intentionally when penalties were limited to relatively paltry fines considerably less than overall profitability. Textile manufacturer JP Stevens illegally fired union-supporting workers during the 1960's-1980's, lost in court and paid the fines.  

 

Corporations favored free trade (the concept of fair trade was a political rather than a business concern). Labor, especially unions, got increasingly slapped down and lost power (both political and economic) as manufacturing companies moved operations the the business friendly south and to foreign countries, a disaster for the working class. Jobs fell, as did wages and benefits. One idea that worked in other countries was job retraining, which was attempted based on legislation like the 1962 Trade Adjustment Act. US governments and other institutions proved poor at it, in part due to lack of interest, perhaps lack of funding. Brill points out that a number of nonprofits were good at it, at no cost to the government (such as coding and other technology training). In any case, wages for high school graduates has fallen over time. The knowledge economy demands higher education. [Note that the German model has technical training for the equivalent of high school and been successful.] One point Brill mentions is that politicians focused on winning, meaning that the other side looses, thus problem-solving took a back seat to partisanship. 

 

Chapter 7 is on "dysfunctional democracy." Checks and balances built into the Constitution were turned in weaponized no-compromise, no agreement on virtually any topic. New legislation was based on one party control. Because this switched from election to election, public policy could radically move back and forth (thing banking or healthcare). Republican politicians with support from Frank Luntz vowed to block anything Obama. Obamacare was an attempt (based on a Republican plan) to move toward universal healthcare, but did not control costs and promoted "capitalistic healthcare" (providing care for profit doesn't work well)--ironically with no Republican support. Their propaganda machine drove average America to detest Obamacare and sweep Republicans into office in 2010. Given no interest in truth telling or promoting public policy, this was a brilliant campaign--apparently, integrity has no place in politics. The Budget Control Act of 2011 provided doomsday cuts for federal budgets. Note that one method for showing government as incompetent is to decrease budgets until departments cannot operate effectively.

 

Chaos syndrome: decline in political capacity for self-organization. Politicians, activist and voters become individualistic and unaccountable. Current gerrymandering set up for Republican domination, because they concentrated over many years at the state level rather than presidential level. Brill estimates 22 extra Republican seats in Congress in 2016 because of gerrymandering. This was partly the result of the Citizens United decision allowing corporation to pour money in politics and effective software for predicting voting patterns. Brill gives Newt Gingrich for replacing effective public policy with winner take all politics, meaning reelection at all costs (with propaganda plus lying and shameless behavior particularly effective). News media became effective allies. Key point in this perspective: the middle no longer matters. That means both the middle class and the classic median voter. 

 

This brings us to Chapter 9, Moot Nation, Brill's thesis that the meritocratic elite built systems to protect their own interests, working to the detriment of everyone else. The healthcare industry fought off all attempts at price controls. The drug companies proved imminently successful on multiple fronts. One area as "off-label promotion," promoting drugs approved for one use for another (it's the doctor's responsibility). Airlines have eliminated competition and regulations effectively, limiting routes, services and set space, while raising prices and charging new fees. Tax preferences expand such as "carried interest." Big banks have such vast moats that their greed caused the Great Recession of 2008 and then the government bailed out most of them completely. Dodd-Frank was a bill with some teeth to eliminate future financial malfeasance but the lawyering/lobbying has cut its effectiveness especially in the drafting of specific regulations to enforce the act. The Consumer Financial Protection Bureau had the potential for consumer protections, but now appears to be headed for failure under the Trump presidency. Wells Fargo opened millions of unrequested accounts for customers (generating millions in bonuses for the CEO and others). Legal actions limit class-action lawsuits by requiring arbitration. Substandard care in nursing homes appears more the standard, where lawsuits are difficult. In 2016 JP Morgan paid a large fine for violating the Foreign Corrupt Practices Act (bribing foreign officials). More and more corporations are charged and a fine is paid, while individuals escape prosecution, like all the big banks for 2008. This benefits the lawyers on both sides and each can claim victory, while individuals go unpunished. (Note that this is quite different from Enron at the turn of the century). Corporations have been given greater free speech rights by the courts. Because corporations have free speech rights, legislation to protect customers and others has been challenged. Plus Citizens United and other court cases where corporate money is speech. 

 

Chapter 9 on "Why Nothing Works" continues with example after example of government overspending (especially defense related) and poor decision making especially on foreign policy. Brill states: "the less effective the government gets, the more unfair the country becomes (p. 258)." The VA became a national scandal, in part because of the executive moat that protects senior officials (civil service, due process restrictions). More broadly, public employee unions are a political force protecting their own, often to the detriment of the public. Because mediocre workers are protected and much of the public does not want to pay adequately for talent, dedicated public servants are stuck in a system that does not reward them or respect their contributions. Brill refers to the Pentagon's bipartisan disasters. Satisfying 435 districts for production overshadows effective procurement, with the Iron Triangle (bureaucrats, contractors, Congress) a giant moat. Further criticism included Obamacare (beginning with disastrous roll out and use of technology generally. Finally were attempts to improve/reform the system (e.g., David Kappos at the patent & Trade Office), but somehow the concept of effective government is still a hard political sell.

 

Chapter 10 is "Broken"  with infrastructure an important component. Developing and maintaining infrastructure (roads, airports, education, health care and many more) is a fundamental government responsibility and a failing one especially since the 1980's. Republican tax cuts mean reducing government spending (plus a rising national debt). The concept that government do important stuff which must be paid for seems to elude Republican ideology. Brill's focus is the selfish meritocracy that protects its own interests with little or no regard to public interest, even when that interest involves themselves--good roads, education and health care would seem to benefit everyone. Much of the problem is the fallout from other issues (described in earlier chapters). States for example have rising health care costs (e.g., Medicaid) that must be funded whether roads or colleges do or not. Job training is difficult, an issue where government has been particularly ineffective (in the US, other countries such as Germany have good training systems). 

 

Chapter 11 is on "Protecting the Most Unprotected." Various federal programs existed, including LBJ's "War on Poverty," which included Medicare, food stamps, Medicaid, and Head Start--mainly bipartisan efforts. These reduced poverty rates to 23 million (11% of the population by 1973). As the working class became marginalized, these programs were cut (remember Reagan's attack on "welfare queens"). In 1996 12.6 million received welfare in some form, by 2016, 2.8 million. The last chapter is storming the moats, people attempting to improve public policy and administration. Perhaps they will make a difference sometime in the future.

 

 

 

 

 

 

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