Graphs And Corruption: The Swamp And How To Drain It

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Includes: BOND, DIA, EEM, EFA, EMB, GLD, IAU, IEF, MTIPX, SPY, TLT, UUP, VGK, XLE, XLV
by: Kevin Wilson

Summary

Corruption is a worldwide phenomenon, but it has reached distressing proportions in the US government, and people are upset about it.

The country is literally being sold to the highest bidder; this has resulted in complete political dysfunction and immense voter frustration.

One solution is to get past the vulnerabilities of Congress with an "Armey Commission" like the one used in the 1980s to close 350 military bases.

Another solution might be an Article Five Constitutional Convention to balance the federal budget; 34 states are needed, and 29 are already on board.

The first idea would favor SPY, DIA, XLV, MTIPX, and UUP; the second idea would possibly favor TLT, IEF, and BOND; either idea would be bad for IAU, GLD, EEM, EMB, EFA, and VGK.

"The more corrupt the state, the more numerous the laws."

- Tacitus

"I weep for the liberty of my country when I see at this early day of its successful experiment that corruption has been imputed to many members of the House of Representatives, and the rights of the people have been bartered for promises of office.:

- Andrew Jackson

"When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it."

- Frederic Bastiat

"Nearly all men can stand adversity, but if you want to test a man’s character, give him power."

- Abraham Lincoln

"We have the best government that money can buy."

- Mark Twain

"When they call the roll in the Senate, the Senators do not know whether to answer 'Present' or 'Not Guilty.'"

- Theodore Roosevelt

As the quotes above suggest corruption in government is not a new thing, or even an unusual thing: It’s actually standard operating procedure. It is also a worldwide problem (Chart 1). But what counts in my mind is the fact that in the good old USA, people have been so put off by the huge amount of political corruption and are so disgusted with the complete dysfunction of American politics that many are in danger of giving up on the whole idea of representative democracy. Not only is voter apathy a problem but so is the current slide into a completely polarized society in which no one listens to anyone else, polite discourse is impossible, no one is willing to compromise, and nothing useful ever gets done. The hard left and the hard right speak in tongues now, and most of us don’t care about what either end of the spectrum thinks. But the majority opinion is almost always ignored with respect to major legislation. In fact, a recent academic study at Princeton University found that public opinion has a “near-zero” impact on US law (act.represent.us blog, 2014).

Members of Congress spend on average 30-70% of their time on fundraising, and in the 2014 by-election, the average candidate for the US Senate had to raise $14,351 every day to keep pace. Indeed, US Senator John S. McCain has admitted that lobbying and election contributions are “nothing less than an elaborate influence-peddling scheme in which both parties conspire to stay in office by selling the country to the highest bidder” (Samuel Spitale, 2016). Meanwhile the actual passing of laws has declined steadily for decades (Chart 2), suggesting that all that money is being spent to preserve the status quo ante for those at the top. But that status quo includes a Federal Register that weighed in at 81,640 pages in 2016 (Zero Hedge blog, 2016); a Federal Tax Code that weighed in at 74,608 pages in 2016 (Jason Russell, 2016); and a series of individual laws (e.g., the Energy Bill of 2007, the ACA of 2009, the Defense Authorization Act of 2010) that numbered 157,835 words, 234,812, and 119,960 words, respectively (D.M. Katz, M. Bommarito, & J. Zelner, 2009). The tax laws and regulations alone run to over 10 million words (Chart 3) and interpreting them costs the economy $150 billion per year (Tax Foundation, 2015). This level of complexity in law makes a mockery of fair play and is itself strong evidence of pervasive corruption, as the historian Tacitus pointed out 2,000 years ago.

Chart 1: Map of the Global Corruption Index

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Chart 2: Actual US Laws Passed by Each Congress Have Declined Sharply Since 1965; Is That Good or Bad?

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Chart 3: Growth of Federal Tax Laws and Regulations

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The 200 most politically active companies in the US reportedly spent $5.8 billion on influencing government policy in the five years to 2014 and appear to have gained as much as $4.4 trillion in tax subsidies over that time. That’s a heck of an ROI! Recently it was estimated by an expert tax attorney and CPA that a full $1.4 trillion per year in tax preference items have been granted by Congress to various special interests (Annette Nellen, 2016), which is equivalent to 75% of the total federal revenue (!) generated in 2016 by the income tax. No wonder we can’t balance the budget, with so many pigs lining up at the trough. And almost every issue of importance to the nation is now at the mercy of the corruption that pervades all branches of the US government nowadays, making it almost impossible to solve any of our more pressing problems (Chart 4). The list of House, Senate, and Administration members who’ve been convicted of corruption-related offenses includes 32 Democrats and 21 Republicans since 1961 (Wikipedia, 2017); these figures do not include the many other convictions for tax evasion, assault, sexual assault, bank fraud, conspiracy, perjury, obstruction of justice, etc. It’s no surprise then that the public’s level of confidence in Congress has plummeted to all-time lows recently (Chart 5).

Chart 4: Money Spent to Buy Votes 1998-2014, Freezing Action on Most Issues

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Chart 5: Decline in Public’s Confidence in Congress Since 1973

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Given the declining reputation of politicians in general, and the obvious dysfunction of our political system, it is somewhat amazing that the cost of electing people who generally achieve nothing keeps rising steadily (Chart 6). It is also somewhat demoralizing to see that spending by super-PACs was up 20-fold in 2016 compared to 2010 (Chart 7). This is a very nasty trend and it suggests that the meaning of the election laws is now pretty wide open to interpretation, and there is almost no transparency or accountability left. Certainly, big donors have become increasingly dominant (and powerful) with time (Chart 8). But don’t just accept, either, the common claim that the Citizens United case of 2010 gave a huge advantage to one side over the other. Over a 25-year period, the largest donors were predominately unions (Chart 9; Veronique de Rugy, 2014), and spending by unions in the election cycle ending in 2014 was in excess of $683 million (Jack Spencer, 2016).

Chart 6: Total Election Spending Now More Than Double the Level Seen in the Election of 2000

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Chart 7: Super-PAC Spending Up 20-Fold Since 2010

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Chart 8: Big Donors Becoming More Dominant Over Time

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Chart 9: Over 25 Years, Political Donations by the Top Contributors Were Dominated by Unions

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To be fair though, businesses are now spending absolutely huge amounts as well, especially Wall Street firms (at least $800 million spent by the financial sector alone in 2016; cf. Chart 10). In aggregate then, normalized (as to inflation, population growth, and income growth) data indicate the two parties raised about the same amounts with their super-PACs in the last two presidential election cycles (Chart 11), with Republicans dominating in 2012 and Democrats dominating in 2016. This suggests that it is likely no one has an advantage over the long run. So we can rest easy knowing that our politicians of whatever stripe are being bought off equally (in the long run) by their respective donors in each party.

All kidding aside, it is disturbing to see also that, since 2012, we’ve now witnessed 10 electoral races that exceeded $20 million in spending for individual seats in the House of Representatives (Chart 12). One shudders to think of the degree of corruption that must naturally follow in the wake of many of these fantastically expensive contests. Yet, there was surprisingly a ray of hope in the most recent presidential election, as massive contributions to a wide range of candidates yielded a very poor result for almost everyone in 2016. Indeed, a relatively poorly funded populist renegade won the prize in spite of all the influence brought to bear in favor of a different result (Chart 13).

Chart 10: Financial Sector Election Spending Reached $800 Million in 2016

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Chart 11: Normalized Presidential Campaign Spending by Party, 1960-2016

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Chart 12: Huge Cost of Individual Races in the US House

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Chart 13: Surprisingly, All of the Biggest Fund Raisers Lost in 2016

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A recent survey by Chapman University found that the number one concern of Americans in 2016 was their fear of government corruption (Chart 14). This may well explain why the maverick tycoon (Donald Trump) with few formal party ties won the presidential race, with one of his winning slogans being that he would soon “drain the swamp.” Unfortunately, it is never easy to govern, and outsiders have often struggled to get things done in Washington, DC. Now the forces causing our national polarization, political dysfunction, and widespread government corruption are actively aligned against the new administration, regardless of their actual party affiliation. Of course Democrats will fight Mr. Trump because they fundamentally disagree on virtually all Republican policy, especially regarding the size of government and the growth of spending. But the political assault on the Trump Administration is coming from all sides, and it is nearly unprecedented. In my opinion, the last president to face this much hostility had to be Lincoln - hardly a reassuring observation. This hostility appears to be present in part because of how outrageous President Trump’s words and behavior have been on frequent occasions, and in part because no one wants to upset the steady progress of the gravy train, and it is feared that Mr. Trump will do just that.

Chart 14: Americans Fear Government Corruption

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For various reasons, Mr. Trump has failed to pass significant legislation so far, although he has signed many executive orders and gotten a conservative Supreme Court justice appointed. One of President Trump’s executive orders restricted members of the Administration from joining a lobbying group for at least five years after their government service. This obvious measure was never done before, as far as I know, so to some extent Mr. Trump has actually tried to drain a little corner of the swamp. However, his Republican colleagues do not appear to be very interested in helping him drain the swamp any further (since many are up to their necks in it). Trump’s Democratic adversaries mostly give lip service to the idea of draining the swamp while generally being on the take pretty much across the board, just like most Republicans. So for a variety of reasons, one of which happens to be the dysfunction associated with government corruption, there is some danger now that Mr. Trump will end up with a lame duck presidency, and he may not be able to drain much of the swamp after all.

What can be done to save the Republic from the clutches of all of these corrupt politicians? Can’t we just throw the bums out? If Trump can’t do it, are we doomed to go on like this forever? Unfortunately, there’s so much money driving politics that “throwing the bums out” over the last few years has merely given us a new set of bums to deal with. I don’t believe it all comes down to only one man, at least not now. No, the Republic can survive (and even thrive) if we really want it to, and we in fact already have in our hands the means of making things much better. It turns out that there are at least two potential fixes for what ails the body politic. Either one could help a great deal with the corruption problem, and either one could very likely be used to turn things around and get government functioning properly again. Finally, both are completely constitutional and have been used successfully before.

The first of these ideas involves setting up a bipartisan commission of Senate-confirmed members to deal with some of our more intractable problems. This idea was proposed by Congressman Dick Armey (R-Texas) in 1987 as a means of solving the political impasse over the closing of excess military facilities. Many members of Congress feared the loss of military bases in their districts and therefore would not allow legislation to pass. Mr. Armey got the Base Re-Alignment and Closure (“BRAC”) Commission established by bipartisan legislation, and it was a brilliant success. Under this law the “BRAC” Commission reviewed and modified the Defense Department’s recommendations for base closures; these recommendations then automatically went into effect unless vetoed by the President, or rejected by a Joint Resolution of Congress within 45 days. The result was the closure of 350 facilities over a period of years, saving taxpayers tens of billions of dollars per year. The “BRAC” or Armey process “works for the simple reason that it counteracts every one of Congress’s vulnerabilities” (Christopher Mellon, 2016). President Trump could get action on healthcare, tax reform, and infrastructure spending by proposing legislation setting up Armey-style commissions on each of these topics. Mr. Trump could then go straight to the American people and ask them to pressure Congress to approve each commission, or face the consequences in the next election. This would naturally meet with political resistance, but if the people responded forcefully, it would happen.

The second idea is a Constitutional Convention of the States, or Amendments Convention, as laid out under Article Five of the US Constitution. This was last done in 1787, when the original constitution was drafted. I’d say it was pretty successful over about 230 years. This idea popped up again circa 1975 and in 1981 there were 30 states on board; however, the required amount to force a convention was never attained (Wikipedia, 2017). The idea popped up yet again in 2009 due to frustration in both parties, although the leadership on this has now been taken on by some enthusiastic Republicans (Doug McKelway, 2017). Many of the states never withdrew their 1980s resolutions, so things took off pretty quickly this time around. The requirement is that at least 34 states must vote in favor of a Constitutional Convention resolution; there are already 27 states that have voted in favor, according to reports (AP, 2017). Republicans now control 32 state legislatures, so it is possible that they can develop enough momentum to get to 34 states approving and force a convention to be seated. There is no time limit on how long the states have to get to the magic number of 34 (2/3rds of the states) for calling a convention to order; however, states can also rescind old votes, which was recently done in Maryland, New Mexico, and Nevada. Nine additional states have passed a resolution in one chamber, so they are halfway there. Another 22 states have legislation under consideration in 2017 (Convention of States blog, 2017).

Any amendments approved by a Convention of the States would have to be ratified by a 3/4ths super-majority (38) of the states. There is some legal debate about whether a convention could have an open-ended agenda, or would be restricted to a single issue. Some have expressed concern that a “runaway” convention could simply throw out the standing constitutional rules for ratification (dropping the number to a simple majority of 26 states) and lay waste to a whole range of existing constitutional provisions (Jacob Sugarman, 2017). However, there is a counter-argument (Sophie Quinton, 2017) that no convention could change the existing ratification requirement, and only one amendment to the constitution could be considered at any new Article Five Amendments Convention. Any attempt to conduct a “runaway” convention would then fail under the ratification rules that require 38 states to approve a new amendment. It may help to realize that 12 states have approved resolutions limited to one idea only. Whatever the legal case, the somewhat feverish idea that major portions of the existing constitution could be tossed out and then somehow ratified by a majority of states is balderdash and frankly, somewhat paranoid. What opponents actually fear is that the budget might get balanced and the huge federal gravy train would then be derailed.

The most popular amendment being considered for a possible Article Five Convention is a balanced budget amendment (Sophie Quinton, 2017). It is not hard to see why one is needed: we are currently at least $20 trillion in debt, and when you count unfunded liabilities, our cumulative debt amounts to at least $127 trillion. We don’t have this kind of money, and we will never get it without destroying the currency. Other countries faced with the same dilemma have traditionally done exactly that. Naturally there will be a great hue and cry over shutting off the main spigot at the feeding trough, but the alternative is extremely stark for the Middle Class in this country. I believe there will be tremendous popular support for a carefully written and fair balanced budget amendment. A planning convention will be meeting in Arizona this fall to get things going on an agenda for a possible Article Five Convention.

If either the Armey Commission idea or the Article Five Convention idea comes to pass, there will likely be decisive action in the markets. If, under a series of Armey Commissions, the President’s agenda were to be passed, Wall Street would absolutely go wild, so a bet on an index like the S&P 500 (SPY) or the Dow Industrials (DIA) might look pretty lucrative. We could easily see a new rally to significantly higher highs. With healthcare (XLV), tax reform, and infrastructure spending (MTIPX) all dealt with (even though it would take years to get it all done this way), the markets would probably ignore most other problems (like our huge deficits and crushing debts) and throw a party. In addition to stocks rallying, the US dollar (UUP) would rise dramatically, crushing gold (GLD, IAU) and other commodities, and also crushing emerging markets (EEM, EMB) along the way. This might eventually lead to a financial crisis in emerging markets, which would potentially be serious but might not impact the US all that much directly. However, European markets (EFA, VGK) might be fairly heavily impacted by such an event. Obviously, inflation expectations would also drop if the dollar rose and emerging markets collapsed. Bonds (TLT, IEF, BOND) might initially take a big hit due to changing money flows in an equity rally, but any emerging markets crisis might bring that money back again in a hurry.

If, on the other hand, an Article Five Convention comes to pass, and its work is ratified at some point, the budget will gradually be balanced. This would likely cause the strongest dollar rally we’ve ever witnessed, and gold (GLD, IAU) would plummet catastrophically; some commodities like oil would likely plummet as well, driving the associated equities (XLE) into historic declines. The chances of an emerging markets (EEM, EMB) meltdown would be very high, and Europe (EFA, VGK) would again likely be caught up in these troubles. I’m not sure that US equities (SPY, DIA) would react favorably at all. Given the variable correlation between the US dollar and the bond markets over time, it is hard to say what might happen with bonds (VETR.com blog, 2015). It is possible that yields would fall in response to a much safer and stronger currency. However, foreign buying of US Treasuries would likely decline sharply as well (Finance Banter blog, 2009), and that could generate a huge bond market (TLT, IEF, BOND) sell-off eventually, if it outweighed other factors.

Disclosure: I am/we are long BOND, IAU, GLD, MTIPX, TLT, AND IEF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks or other securities mentioned or recommended. This post is illustrative and educational and is not a specific recommendation or an offer of products or services. Past performance is not an indicator of future performance.