Winner-Take-All Politics

Chapter 9

Democrats Climb Aboard

In May 2000, a few months before Al Gore and George W. Bush shared the stage at the Al Smith dinner in New York, Democrats held their own big-money event. They knew that Gore—buoyed by Clinton’s high-charged economy but burdened by his tarnished personal reputation—faced an extremely well-financed Republican challenger. The month before, the GOP had held a black-tie event that shattered previous single-event fund-raising records, bringing in over $21 million. Terry McAuliffe, the tireless head of the DNC, responded by waving the party’s populist flag. The Democrats would fill Washington’s MCI Center with fourteen thousand guests wearing jeans and dining from plastic plates on barbecue flown in from the best rib joints in Little Rock and Memphis. At the event, McAuliffe evoked laughter and catcalls when he read the GOP’s upscale fund-raiser menu: “Karnut and colusuri rices with wheatberry, whatever all that is… In Syracuse, New York, where I grew up, Millie McAuliffe never made this kind of food.”

In his memoir, What a Party!, McAuliffe gleefully recounts how the Democrats’ populist symbolism not only upstaged the GOP, but managed to raise a new record of $26 million. What he spares us is the underlying math. If, as he says, thirteen thousand of the guests paid only $50, it means they contributed less than a million to the party’s haul (truthfully, there probably wouldn’t have been much left after paying for the ribs’ airfare). The rest came from the more select group McAuliffe introduces a few pages earlier, where he recounts how he and Gore sat in a room full of big donors, including prominent lobbyists, as each of them committed to raising $500,000 a piece for the event. The barbecue, jeans, and middle-class audience were just a photo op.1

By the end of the 1990s, the true culinary metaphor for the Democrats’ new posture on the economy was not barbecue, but the English one journalist Robert Kuttner has employed: a horse-and-rabbit stew. This fictitious dish is nicely balanced, consisting of one horse and one rabbit. The rabbit, in this case, would be the few remaining elements of social investment that the Clinton administration had been able to get through a mostly gridlocked Congress. The horse was the almost complete adoption of Wall Street’s economic agenda: a heavy dose of budgetary austerity, combined with a ringing endorsement of the radical restructuring of the financial sector that would soon send the American economy over a cliff.

What happened to the Democrats? Over the course of the 1990s, the party first accommodated and eventually embraced the winner-take-all economy. Its populist tradition more and more appeared like a costume—something to be donned from time to time when campaigning—rather than a basis for governing. The Democrats not only lost their ability to articulate the case for policies that would provide meaningful checks on concentrated economic power. As many of the party’s elected officials tilted increasingly to the moderate right on economic matters, they also lost their capacity to deliver legislative victories on lunch-pail issues. And on critical struggles related to the spectacular expansion of Wall Street, powerful Democrats chose to fully support the new economic order.

Positively Wall Street

We began the last chapter with Phil Gramm, who epitomized, spearheaded, and profited from the Republican Party’s increasingly vigorous championing of the winner-take-all economy. We can introduce this chapter with a parallel story of a figure whose rise to prominence tracked the arc of the evolving Democratic Party, and whose actions in Washington encapsulate the Democrats’ equally significant, if distinctive, contribution to the new balance of economic power. There are many candidates for this part—Joe Lieberman, Dianne Feinstein, Robert Rubin, Bill Clinton himself—but since the epicenter of the new economy was Gramm’s “holy place” of Wall Street, it seems appropriate to focus on the senior senator from New York, Charles Schumer.

There were certainly a lot of connected people in the elegant Fifth Avenue apartment across from the Metropolitan Museum where Schumer spoke. It was owned by his hosts, financier Steven Rattner and Maureen White, former finance chair of the Democratic National Committee. Both of them were prominent fund-raisers for the nascent presidential campaign of then-Senator Hillary Clinton of New York. She was there as well, along with New York Mayor Michael Bloomberg, who had made his billions providing sophisticated equipment that had helped turbocharge the vast new financial empires of Wall Street.

The gathering of luminaries was indicative not only of Schumer’s growing political stature, but also of his long-standing and intimate ties to the nation’s greatest concentration of staggering wealth. From the moment he entered Congress in 1981, Schumer had aligned himself closely with Wall Street. He began by seeking a seat on the House Financial Services Committee. For an ambitious New York politician, it was a sensible move. Indeed, it is common practice for legislators to gravitate to specializations that match the concerns of powerful local economic interests. Of course, it also turned out to be an extraordinarily good time to hitch one’s wagon to the financial industry. Like Wall Street, Schumer was slated for a rapid ascent.

Schumer quickly established himself as an aggressive and extremely adept fund-raiser. You may recall that we encountered him in chapter 7, where in his very first term in Congress he was one of just two House Democrats who rallied to the leadership’s plea to transfer campaign cash to underfunded challengers in the run-up to the 1982 election. As he rose through the ranks in the House, he played a critical role in helping Democrats build strong ties to the financial industry. In the words of a detailed New York Times profile, “Mr. Schumer became a magnet for campaign donations from wealthy industry executives, including Jamie Dimon, now the chief executive of JP Morgan Chase; John J. Mack, the chief executive at Morgan Stanley; and Charles O. Prince III, the former chief executive of Citigroup. And he was not at all reluctant to ask them for more. Donors describe the Schumer pitch as unusually aggressive.”3

Apparently so. Over the five election cycles from 1989–90 to 1997–98, Schumer raised $2.5 million in contributions from securities and investment firms—more than triple the haul of the runner-up in the House, Republican Dick Zimmer. In 1999, following a successful (and very well-funded) campaign, Schumer moved to the Senate, where he maintained his focus on issues crucial to Wall Street. He took a seat on the powerful Banking and Finance Committee, an excellent site to hone his prodigious fund-raising skills. From 1999–2000 through 2005–2006, only one member of Congress raised more money from securities and investment firms than Schumer’s $3.7 million. That was John Kerry, whose presidential run doubtless boosted his totals just a wee bit.

Strikingly, while Kerry and Schumer ran first and second, numbers three, four, and five were all Democrats as well—Joe Lieberman, Hillary Clinton, and Chris Dodd. Schumer’s success was part of a major development in the evolution of the Democratic Party’s finances: a big push to gain support on Wall Street. The financial services industry has come to represent one of the Democrats’ most reliable donor bases, especially during the crucial early stages of the campaign, when fund-raising prowess culls the list of viable contenders.4

The increasing reliance of Democrats on finance-industry donations, in turn, reflected Wall Street’s growing economic and political clout.⁵ In a list of the country’s top corporate givers, twenty-five of sixty-five come from the financial services industry, according to the Center for Responsive Politics. Since 1989, individual employees of the financial services industry and finance-industry PACs have contributed $2 billion to federal campaigns. If one looks at the 100 biggest contributing firms since 1989, the financial sector totals more than the contributions of energy, health care, defense, and telecoms combined.⁶ Deep-pocketed individuals associated with financial firms are also extremely well-represented among the big bundlers who now provide the majority of early financing for many presidential campaigns. Hedge funds have become increasingly prominent, and increasingly lean Democratic. In the past few years of Democratic congressional control, the financial services industry has contributed nearly a third of all the campaign money going to the chairs of the House and Senate committees charged with monitoring the bank bailout.⁷

Schumer was the perfect person to broker the strengthening relationship between Democrats and Wall Street. Following the party’s disappointing showing in the 2004 elections, he became head of the Democratic Senatorial Campaign Committee (DSCC). Over the next two cycles, he helped orchestrate the Democrats’ impressive comeback. Schumer turned out to be an exceptional recruiter, convincing prospective candidates that the time was right to take on the GOP. Yet his greatest talent was fund-raising. Over the course of his two cycles at the helm of the DSCC, it raised an unprecedented $240 million. Funds from Wall Street increased 50 percent, and in the 2007–2008 cycle the DSCC raised four times as much from Wall Street as its GOP counterpart did. Even as the DSCC vastly expanded its fund-raising, the share of DSCC funds coming from Wall Street tripled over the course of a decade.⁸

Observers of banking and finance, as well as lobbyists, have regularly identified Schumer as a “go-to” guy on Capitol Hill—not unlike Phil Gramm. Indeed, while their voting records on most issues could not have been further apart, Schumer often teamed with Gramm in advancing positions favorable to Wall Street. Schumer was a supporter of Gramm-Leach-Bliley, the bill that finally repealed the Glass-Steagall Act. In 2001, the two senators launched a successful bipartisan effort to sharply reduce the fees Wall Street paid the federal government to finance regulatory activity, cutting the financial sector’s anticipated costs by $14 billion over the coming decade. They achieved this success at a time when the SEC and other agencies were scrambling (and, it soon became clear, failing) to keep up with the rapidly expanding speed, complexity, and volume of Wall Street activity. As apprehension over Wall Street’s practices grew, Schumer was well positioned to limit or channel such efforts. In 2006, for instance, he supported the successful efforts of the credit-ratings agencies to limit SEC supervision of their activities.

Gramm and Schumer’s roles in the changing regulation of finance nicely fit the respective roles of their two parties in fostering Wall Street’s post-1990 bonanza. GOP’s Gramm was more often the battering ram. Although he knew how to play defense as well, he was the guy who could lead conservative majorities to pass legislation sought by economic elites. Schumer, by contrast, was more often the master of drift. He was the one who made sure that his party—the one most likely to push for serious oversight of Wall Street—remained as friendly as possible to the interests of the captains of finance.

Nothing signals how this worked more clearly than Schumer’s sustained efforts to protect the favorable tax treatment of private equity and hedge fund managers. Within the lofty heights of the winner-take-all economy, hedge fund managers hold the highest perches of all. In 2007, the top twenty-five hedge fund managers earned nearly $900 million on average.9 Despite their awe-inspiring incomes, some of these financiers have been able to exploit features of tax law that predate the rise of hedge funds to pay only a 15 percent federal tax rate. Yes, 15 percent. “Carried interest” provisions allow fund managers to treat some of the spectacular fees investors pay them as capital gains—a favorable treatment supposedly reserved for those who are putting their own investments at risk. Warren Buffett used to say that it was outrageous that he and his secretary paid the same tax rate. Those benefitting from the “carried interest” loophole can do him one better. They pay a dramatically lower rate than their secretaries.

As egregious as this loophole is, the defense game of Wall Street supporters like Schumer kept it firmly in place. Adopting the Scarlett O’Hara defense, he insisted that he supported reform but wanted to get it right—something that, hopefully, would happen tomorrow. On grounds of “fairness,” he maintained that any reform must also apply to executives at energy, venture capital, and real estate partnerships. Coincidentally, this happened to be precisely the position advanced by leading lobbyists for the financial industry. It was a poison pill that Schumer knew would stall the legislation—which it did. A reform that failed to meet Schumer’s requirements passed the newly Democratic House in 2007, only to die in the Senate. As we write midway through the fourth year of Democratic control of Congress, the rules governing taxation of hedge funds look more vulnerable than ever but remain unchanged.

Schumer’s policy role, combined with his success in fund-raising, has garnered scathing criticism from many close observers of Wall Street practices. John Bogle, founder of the Vanguard Group and a passionate advocate for ordinary shareholders, bluntly concludes that Schumer “is serving the parochial interest of a very small group of financial people, bankers, investment bankers, fund managers, private equity firms, rather than serving the general public… It has hurt the American investor first and the average American taxpayer.”10

Yet one could also say Schumer has simply followed a time-honored American practice. As Tip O’Neill, who ran the House when Schumer began his Washington career famously said, “All politics is local.” In a political system organized around geographic representation, public officials can be expected to protect local economic powerhouses. Recall that the share of finance in the economy had roughly doubled during Schumer’s tenure in Washington. By 2007, more than a third of all wages in New York City were being earned on Wall Street—up from one-eighth in 1972.¹¹ For a New York official, one could argue that not protecting the interests of that industry would be political malpractice. But Schumer was hardly alone. Plenty of Democrats were embracing, rather than resisting, the winner-take-all economy.

Chronic Enablers

Schumer’s story is dramatic, but it reflects a deeper shift in the Democratic Party. With the rewards at the top spiraling upward, Democratic politicians faced growing incentives to accommodate the winner-take-all economy. Many of the trends described in chapter 7 intensified after 1990. The organizational heft of business continued to grow. Perhaps reflecting a growing confidence about what organized expenditures could accomplish in Washington, spending on lobbying shot upward during George W. Bush’s time in office. Democrats thus faced greater incentives than ever to be responsive to the new economy’s big winners. Equally important, there was almost no organized force in American society pressuring them to do anything else.

The financial needs of ever more expensive campaigns added to the imperatives. Despite the efforts of organizational entrepreneurs like Tony Coelho, the 1980s DCCC head who kicked off the Democrats’ big hunt for corporate cash, the party continued to trail badly in the money chase. In the 1991–92 cycle, the Democratic committees pulled in $140 million in hard and soft money, compared with $244 million for the GOP.12 This financial weakness hurt the Democrats three times over. First, it put them at an electoral disadvantage. Second, it increased the need of the Democratic Party to adopt stances that would appeal to big donors. Finally, the party’s shaky finances continued to create incentives for individual politicians to chart their own course—which again was likely to lead them to seek favor with those who could bankroll campaigns.

All of these tendencies grew even stronger after the electoral cataclysm of 1994. In a flash, Coelho’s trump card—you need to deal with us because we’re in charge—was gone. The GOP already possessed a formidable fund-raising edge, rooted in its organizational prowess and the natural affinity between the party’s policy agenda and the interests of corporations and the wealthy. To this, the GOP could now add the blunt advantage of incumbency—an advantage it quickly exploited with Tom DeLay’s aggressive K Street Project.

As a result, Democratic politicians found themselves cross-pressured on economic matters, and the tension increased over time. Issues that smacked of redistribution, or threatened to impinge on the autonomy of executives or their firms, placed Democrats in the awkward position of needing to reconcile conflicting party identities: Were they the party of the little guy and organized labor or a reliable partner of business? For Republicans, the economic wish lists of corporations and the wealthy were rarely viewed as threatening by the other major organized players within their party alliance. Democrats were not so lucky.

The Clinton Solution

As in so many areas, it was Bill Clinton who pointed the way for Democrats trying to resolve this conundrum. Clinton is sometimes portrayed as a stalking horse for the Democratic Leadership Council, which advocated a swing to pro-business stances within the party. Clinton, however, was always a master triangulator, able to strike a balance between mildly populist campaign rhetoric and a set of policy prescriptions that were largely unthreatening to the business community. Even his signature liberal initiative after his election in 1992, health-care reform, had been carefully crafted to appeal to business—although at the end of the day the Business Roundtable and the Chamber of Commerce came out against it, while the NFIB went into strident opposition.13

After his 1992 election, and especially after the 1994 midterm elections, Clinton the populist messenger mostly gave way to Clinton the moderate manager. The administration’s 1993 decision to place the highest priority on deficit reduction and jettison its plans for social investments marked the critical moment in the Democrats’ broader economic repositioning.¹⁴ At the time, Clinton faced considerable pressure from strong economic voices like Robert Rubin (then head of Clinton’s National Economic Council) and Fed Chair Alan Greenspan. In both 1992 and 1996, he also faced political threats from Ross Perot’s surprisingly effective third-party effort. And in a foreshadowing of the circumstances that would face the next Democrat to occupy the White House, Clinton knew that even if he adopted a more progressive policy stance, it would assuredly be blocked in the Senate by his own party’s moderates.

Forced to scrap his plans for significant social investments, Clinton’s populist side recoiled. “Where are all the Democrats?” he asked his aides. “We’re all Eisenhower Republicans… We stand for lower deficits and free trade and the bond market. Isn’t that great?”15 Clinton eventually decided that, great or not, it was the best option he had—and in 1993 he proposed a budget plan that looked remarkably like the one his predecessor had signed off on in 1990.

In effect, Clinton replaced his social investment strategy with an “interest rate” strategy. Restored fiscal responsibility was to be the mechanism for generating economic growth. Eisenhower Republicans indeed. Over time, and especially as the economy recovered, Clinton would come to embrace what was termed “Rubinomics” with greater enthusiasm. Its pillars were tight budgets with strict constraints on domestic spending, combined with sustained support for the reconstruction and vast expansion of Wall Street that was under way—horse-and-rabbit stew.

The political rewards were limited. Democrats suffered a historic, calamitous defeat in the midterm elections immediately after Clinton’s tough budget. By 1996, however, the economy had improved sufficiently to ensure Clinton’s own reelection and bolster the party’s position on economic management. Yet the attempt to rebrand the party as a sound economic steward came at a serious cost. Most obviously, by accepting very tight budget constraints, Democrats gave up the opportunity to offer significant direct support to the middle class. Social expenditures that would have improved education, health care, and energy independence, or restored public infrastructure, had to be sacrificed. The Democrats were now committed to the management of austerity.

Yet this was not the only cost. Ironically, the more Democrats committed themselves to austerity, the more they allowed Republicans to play Santa Claus. As one of the godfathers of the conservative renewal, Irving Kristol—the founder of the neoconservative journal the Public Interest and father of the contemporary conservative writer Bill Kristol—had anticipated, Republicans could exploit the Democrats’ fiscal self-restraint. In May 1980, Kristol had rejected concerns that “supply-side” tax cuts would lead to budget deficits by stressing the higher political logic of tax cuts:

And what if the traditionalist-conservatives are right and a… tax cut, without corresponding cuts in expenditures, also leaves us with a fiscal problem? The neo-conservative is willing to leave those problems to be coped with by liberal interregnums. He wants to shape the future, and will leave it up to his opponents to tidy up afterwards.16

Although Republicans suddenly became apoplectic about deficits after they lost the White House in 2008, the record of the previous quarter-century suggests they took Kristol’s advice to heart. Under Reagan and the second President Bush, deficits and debt skyrocketed. And for much the same reason: increased defense spending without adequate revenues to fund it, along with massive tax cuts for the well-off. Clinton and, later, Obama, were left to “tidy up afterwards.” This partisan division of labor had long-term consequences for the two parties’ economic reputations.

All Hat and No Cattle

Two gifted wordsmiths, Malcolm Gladwell and Michael Lewis, have shared a fascination with the gap in the world of sports between reputation and reality. Increasingly sophisticated statistics suggest that some “stars” have reputations that way outdistance their true value to their teams. Gladwell targeted the basketball player Allen Iverson. The former MVP looked great on the court, but wasn’t.¹⁷ In Moneyball, Lewis generalized this observation.¹⁸ He identified a key characteristic of innovative organizations in professional sports: their capacity to see beyond conventional metrics of player evaluation in order to exploit hidden value. Lewis’s hero was Oakland A’s general manager, Billy Beane. Beane built a squad capable of competing with far richer teams like the Yankees, because he saw past superficial flash and inflated reputations. He understood the underlying characteristics—including boring ones like the ability to patiently accept a base on balls—that made particular players valuable to their teams.

For Gladwell and Lewis, sports provided an entertaining and revealing point of entry into a broader social phenomenon: We can often be blinded by flash. Even when smart people are closely observing something they care about, there can be a chasm separating reputation from true performance. Two talented political scientists, Larry Bartels of Princeton and Mark Smith of the University of Washington, have separately made this case with respect to the two political parties and economic performance.19 It turns out that over the past few decades, with respect to economic policy, the Republican Party looks a lot like Allen Iverson—all hat and no cattle, as George W. Bush might say. Careful examinations show that on all the major indicators, the economy has performed notably better under Democratic presidents than under Republican ones. And yet, as Smith’s research shows, Republicans, with their simple, consistent message of tax cuts, generally maintained a reputation as the more effective party on economic issues.

The fallout was most clear in the declining fortunes of Democrats with a critical component of the New Deal coalition: the white working class. The white working class is generally defined as white voters without a college degree, though sometimes analysts use the simpler definition of white voters who tell pollsters they’re working class. Defined either way, this traditional backbone of the Democratic Party has shifted away from Democrats and toward Republicans. This is true within the South and outside it, and among both religious and nonreligious voters. Across the board, white working-class voters are about 20 percentage points less likely to say they’re Democrats than they were a generation ago.

Even before Barack Obama infamously speculated about how such voters were so “bitter, they cling to guns or religion” during the 2008 campaign, this defection had become the subject of endless speculation and hand-wringing among Democrats—and a growing number of sophisticated analyses among political experts. These studies have zeroed in on a verdict at odds with the conventional diagnosis of cultural backlash. While evangelicals moved away from the Democrats on cultural grounds, that is not true among the white working class as a whole. Instead, Democrats lost ground among white working-class voters not in spite of economic issues, but because of them. As New Yorker writer George Packer ably sums up the findings: “Social issues like abortion, guns, religion, and even (outside the South) race had little to do with the shift. Instead… it was based on a judgment that—during years in which industrial jobs went overseas, unions practically vanished, and working-class incomes stagnated—the Democratic Party was no longer much help to [the working class].”20

The shifts in the Democratic Party didn’t just decrease the momentum for economic activism. They also diminished the capacity of the party to reach out to voters on economic grounds. Internal conflicts have made it more difficult to take a clear, coherent posture toward fundamental economic issues, including ones that would signal concretely what the party could do for the middle class. Repeatedly, stalemate on high-profile issues soured voters on government and fueled cynicism about politics. Repeatedly, Democrats faced demands to tone down their populist appeals and shift to economic messages that might resonate with upscale voters and business interests. Deficit reduction, embraced initially by Mondale and then again by Clinton, represented just such an accommodation. This ambivalent posture, of course, is in stark contrast to the clear, consistent stance of the GOP regarding markets, low taxes, and deregulation. However limited the effectiveness of the Republicans’ economic strategies have been, their straightforward anti-Washington message has resonated—especially since the message has jibed with the polarized gridlock that voters have seen play out before them.

Democrats and the Politics of Drift

In contemporary discussions of the parties, commentators oscillate between two poles: seeing the parties as both equally hopeless or seeing one as fundamentally wrong and the other as basically sound. In the former view, both parties wear black hats. In the latter, one wears black, the other white.

The story of Republicans and Democrats is not black and white, but black and gray. In promoting the winner-take-all economy, Republicans proved the zealots. When legislation directly promoted the upward redistribution of income—from the Reagan and Bush tax cuts to the key laws deregulating financial markets—Republicans could generally claim primary authorship. Democrats, by contrast, were more likely to be implicated in the part of winner-take-all politics that we have termed drift. As economic change undercut existing public policies designed to limit inequality and insecurity, Washington’s dominant response was to do nothing. Since the Democratic Party was where we would expect some kind of response to come from, its failure to act is a central part of winner-take-all politics. If Republicans wore black hats, increasingly the Democrats wore gray ones.

The political attraction of drift to Democrats grew in close accordance with the weight of organized economic interests within the party. Businesses saw the wisdom of donating to Democratic incumbents not just for political access, but because it offered them low-profile political protection. And no form of protection was more low-profile than drift. After all, drift allows policy change to occur silently, through what political scientists have termed “nondecisions”—that is, without visible legislative choices. Drift is far less likely to attract the notice of voters, who pay only sporadic attention to politics and have limited information about policy. For cross-pressured politicians in a tight spot between voters and interest groups, drift is often the easiest and safest solution.

Drift wasn’t only the path of least political resistance for Democrats. It was often the only path. The radicalizing Republican Party and the worsening institutional hurdles threw up daunting barriers to meaningful legislative change. The most formidable of these hurdles was the Senate filibuster. Given the overrepresentation of rural, typically Republican states in the Senate, getting to fifty-one (on budget matters) or sixty (on just about everything else) represented an enormous challenge. Thus, a profound if little appreciated asymmetry developed between the two parties. To win, the GOP often needed only stalemate. To renew the federal government’s commitment to the middle class, Democrats needed to pass multiple pieces of substantial, ambitious legislation. Always, as we know, they would do so in the face of fierce Republican opposition. Perhaps less expected, but just as important, was the resistance they typically faced within their own party.

The Moderate Morass

The first source of potential resistance within the party came from “moderates”—a term that reflects the up-for-grabs status of these Democrats’ votes, rather than any particular ideological position. For Democrats, securing the allegiance of their most reluctant members for meaningful reform became a recurring, massive structural problem. Nowhere was this problem more vexing than in the U.S. Senate.

In part, this reflects the way the Senate is composed, with its astonishing bias in favor of small states. When the Constitution was adopted, the ratio of the most populous to the least populous state was about 20–1. Today it is about 70–1. At some times, the divide between large and small states has conferred no particular advantage on one party or another, but over the last few decades it has given a substantial edge to Republicans.21 It has also meant that racial and ethnic minorities, concentrated disproportionately in a few big states, are wildly underrepresented in the Senate.

Given the contemporary contours of American politics, a bias toward small states is, quite simply, a bias toward conservatism. After the 2004 elections, for example, Republicans held fifty-five of the one hundred senate seats, even though Democrats had won considerably more overall votes in those one hundred elections.²² When George W. Bush was wooing Democrats for his tax cuts, his targets were often senators from rural states whose constituents had voted overwhelmingly for him. After the 1992 and 1996 elections, Clinton could rarely exert this kind of pressure—certainly not on members of the GOP and often not even on members of his own party.

Yet the issue is not just how votes in the Senate are allocated. A stance in the middle is a stance that generates leverage—and that leverage attracts the attention of savvy political actors. As we have seen, it is these senators, holding the potentially pivotal votes, who have the most sway. Alas for middle-class voters, they are also the ones whom affected interests most assiduously seek to cultivate.

Consider the case of Max Baucus, the powerful Democratic chair of the Senate Finance Committee. An unassuming Montana rancher, Baucus attracted little attention in Washington until he rose to be the senior Democrat on the powerful Finance Committee in 2000. Interest groups were not slow to notice. Between 1999 and 2005, according to a Public Citizen report, Baucus took in more interest-group money than any other senator with the exception of Republican Bill Frist, who was Senate majority leader for much of that time. Baucus received more money from business PACs than any other senator.23

Baucus’s office also became a training camp for lobbyists—only three other senators had more former staffers working on K Street. When he became finance chair, their stock went up: According to Congressional Quarterly, “Former aides of Baucus, in particular, have been in demand on K Street by companies that hope to limit damage to their business interests.”²⁴ While Baucus was playing a critical role in developing the 2003 Medicare Prescription Drug Bill, his former chief of staff and a legislative aide were part of the high-octane lobbying team from PhRMA (Pharmaceutical Research and Manufacturers of America). After the bill passed, his top staffer at Finance left to open his own lobbying outfit with a host of health and drug industry clients, including PhRMA.

In his critical role at Senate Finance, Baucus has provided support for business-friendly legislation. He supported the Bush tax cuts (with very modest revisions), and despite his expressed concerns about budget discipline, advocated their extension. He has backed the elimination of the estate tax. In the lead-up to the prescription drug bill, Baucus had no difficulty signing onto the GOP’s plans, which is why he and fellow moderate John Breaux were the only Democrats invited to join the conference committee meetings where the legislation was crafted.

Being that last vote—the one that needs to be “rented,” in Breaux’s immortal telling—has other benefits as well. As we saw in the career of Breaux himself, or more recent cases like Evan Bayh or Joe Lieberman, it can elevate one to a status of statesman in the eyes of pundits who see being in the middle as intrinsically virtuous. Of course, it is also the best bargaining position, giving these legislators a steady stream of chips to cash in for other purposes. One can’t but appreciate the appeal of a posture that simultaneously attracts media kudos and pork.

In an individual case it may be impossible to pin down what is making a particular moderate’s vote hard to get. Is it genuine conviction? The constraint of a conservative local electorate? A desire for leverage or attention? The favors of lobbyists? What is clear is that Democrats in the gridlock-prone Senate repeatedly found themselves dealing with a small, shifting, but crucially placed swing group that made it exceptionally difficult to craft a legislative coalition.

Republicans for a Day

On critical economic issues, business interests could often count on a handful of moderate Democrats to complement the expected solid bloc of Republicans. In many cases, this was more than enough. Yet there was another group that expanded the conservative coalition, potentially making up for any losses from groups one and two: Republicans for a Day.

“Republicans for a Day” were Democrats, even “fighting liberal” Democrats like Chuck Schumer, who defected from the party on specific economic issues in deference to powerful local interests. Here the geographic foundation of Capitol Hill played a critical role. All representatives must balance multiple constituencies. Yet in every state some economic interests play such a formidable local role that they demand special attention. Each state economy has its 800-pound gorillas who command respect. That state’s Democrats, if they hope to survive, will provide it.

From Michigan (autos) to Delaware (corporate governance) to Oregon (timber) to Pennsylvania (coal), examples abound. Blanche Lincoln of Arkansas included among her constituents much of Wal-Mart’s Walton family (which boasts four of the ten largest fortunes in America, according to Forbes), making her support for estate tax repeal unsurprising. Dianne Feinstein and Barbara Boxer, often seen as quite far apart among Democrats on economic issues, were both strong defenders of Silicon Valley’s implacable hostility to restrictions on stock options. The financial industries of banking, insurance, and real estate could generally count on extensive support from Democrats in New York, Connecticut, and New Jersey.

How much can a handful of lost votes mean? A lot. In a system already prone to inertia, a few lost votes can mean the difference between action and inaction. Moreover, Republicans for a Day were generally most influential on precisely those issues where they were most likely to defend powerful economic interests. They would frequently gravitate to the committees (often eventually becoming chair) where their local interests needed representation.

The importance of Republicans for a Day was amplified by the shifting character of Republicans for a Lifetime. On economic issues, fewer and fewer Republicans proved willing to depart from the party line. The demise of moderate Republicanism made it nearly impossible to substitute a Republican vote for a Democratic one. Party polarization on economic issues meant every Democratic vote was increasingly critical.

The GOP confronted no real parallel to this challenge. Serious economic reform often means going after concentrated economic interests. And going after concentrated economic interests activates opposition in the particular localities where those interests are powerful. This is what makes the behavior of Republicans for a Day like Boxer or Schumer kick in. The Republican economic agenda of redistributing resources through deregulation and high-end tax cuts usually didn’t require it to go after powerful local interests. It involved instead providing concentrated benefits to attentive constituencies, with the costs broadly diffused across the public.

In short, as with so many aspects of winner-take-all politics, the impact of local economic power on the parties was not symmetrical. Rather, it systematically weakened the prospects for Democratic populism. Revealingly, it was a Democratic leader, Speaker Tip O’Neill, who insisted that “all politics is local.” Dick Armey, Republican majority leader, offered a quite different aphorism: “Never offend your base.”25

Waiting for Sixty

The outsized power of moderate Democrats and Republicans for a Day is directly connected to the practices of the contemporary Senate. These include a toxic combination: intense polarization and the prolific use of the filibuster—a perfect recipe for winner-take-all politics.

The filibuster is now used so relentlessly that it has become common to treat it as a natural, quasi-constitutional feature of the political landscape. The idea that you need sixty votes to approve legislation is treated as equivalent to the idea that you need sixty-seven to override a veto. Yet the latter provision is written into the Constitution; the filibuster is not.

Indeed, until fairly recently, filibusters were rare occurrences. As the eminent legislative scholar David Mayhew has observed, for most of American history, filibusters were typically reserved for matters of vital interest to regional minorities—specifically (and most notoriously) southern defenders of Jim Crow. Filibusters were also used on occasion to signal the intensity of minority views, or to run out the clock at the end of a congressional session. Yet normally even hugely controversial pieces of legislation could pass by the narrowest of margins without provoking obstruction. Such was the case, for instance, with the fiercely contested tariff bills that were the late nineteenth and early twentieth century’s biggest brawls over economic governance—the equivalent to our tax and budget bills today.

Mayhew’s most striking example, however, is FDR’s 1937 court-packing plan—a proposal to remove the Supreme Court’s obstruction of his agenda by increasing its size and allowing him to appoint more malleable members. One can hardly imagine a more ambitious and controversial bill. The court-packing plan ultimately failed—but it did so because it could not gain a Senate majority. The accounts of contemporaries suggest that when its passage looked more likely, the head-counters were looking for a simple majority. Filibustering was not considered a significant part of the picture.

What we now take for granted as a feature of the “system”—that senators representing just a tenth of the U.S. population can potentially stop legislation from becoming law—is in fact quite new. The growing use of the filibuster dates to the 1970s. Only since the early 1990s has there been something approaching a de facto “rule of sixty.” As Mayhew concludes, never before has the Senate possessed “any anti-majoritarian barrier as concrete, as decisive, or as consequential.”26 According to the research of UCLA political scientist Barbara Sinclair, only about 8 percent of major bills in the 1960s were filibustered. By the first decade of the next century, that number would be about 70 percent.²⁷

What happened? The rise of the filibuster has spawned a cottage industry for congressional scholars, and we can offer only the briefest treatment here.²⁸ The first stage of the transformation, dating to the mid-1970s, involved two linked developments: the reduction of the vote total needed to end a filibuster from sixty-seven to sixty, and the introduction of a streamlined cloture process in which a simple vote indicating a willingness to continue debate (deny cloture) replaced “real” filibusters.

Ironically, the timing and content of these moves suggest they were designed largely to make filibusters less of a problem. The rule changes came at a time—the mid-1970s, amid liberal ascendance—when Congress was passing big laws at a rapid clip. Stopping all congressional business for endless debate on a single bill seemed too costly to allow. It was made doubly costly by the emerging realities of campaign politics. The opportunities of modern transportation and the imperatives of modern fund-raising were conspiring to abbreviate the legislative workweek. Politicians were eager to do their work and get out of town; real filibusters would get in the way. Cloture would make the legislative gears turn smoothly.

Obviously, it didn’t turn out that way. Over time, the reforms combined to make filibusters a much more, rather than less, important part of the political landscape. True, with the new cloture arrangement, filibusters were less costly to the legislative process. That also meant, however, that they became less costly to wage. Norms that had frowned on the use of the filibuster began to erode. Over the course of the 1980s, as turnover in the Senate produced more and more members who saw the filibuster as part of the routine, that erosion continued. The filibuster ceased to appear extraordinary.

So far, this has little to do with the core political story of this book. It is a relatively self-contained if cautionary tale of unintended consequences. In the early 1990s, however, all this changed. As the parties became more intensely divided, the incentives of the minority party to obstruct grew as well.29 The turning point—here, as in the rise of the small-business lobby—was the debate over the Clinton health plan. The astute journalist Mark Schmitt, a staffer for Democratic Senator Bill Bradley at the time, recalls: “Bob Dole, then the majority leader, made the phrase ‘You need 60 votes to do anything around here’ his mantra.” What Dole should have said is, “You need 60 votes to do anything around here now.” Many longtime senators, Schmitt remembers, had never seen some of the parliamentary maneuvers Republicans pulled “out of the dusty toolbox” of obstruction. Indeed, he witnessed Ted Kennedy “asking staffers for advice about how to break one of these tactics, which he had never seen in 34 years in the Senate.”³⁰

Regular resort to the filibuster may have been unprecedented, but it worked. It worked really well. You didn’t just block reform with a filibuster; you bloodied your opponent. Tying Washington up in knots made the majority look ineffectual and fueled popular disdain for politics, which was hugely beneficial to the minority. As Sinclair puts it, the Senate Republicans who blocked Clinton “not only didn’t pay a price, but they ended up gaining control… It is hard to make yourself popular, but to make the other guys look incompetent is not that difficult, and it worked for the Republicans in the first Clinton Congress, and the Republicans would argue the Democrats used these techniques as well.”³¹

For a political system already designed to encourage stalemate, the implications of this development are profound. Some budget matters aside, every significant piece of legislation must now garner sixty votes in the Senate. Obviously, getting to sixty is a lot more difficult than getting to fifty—especially when “reaching across the aisle” means reaching toward a party that is moving farther and farther away. For Democratic leaders, however, Republicans were just the beginning of their problems. Under the no-win rules of winner-take-all politics, passing reform required more votes than in the past and votes from the other party were harder to come by and even your cross-pressured supporters often had their own incentives to defect. A better combination for enforcing drift would be hard to find. With the continuing radicalization of the GOP, the revolutionary expansion of the filibuster, the imperious rule of moderate barons, and the regular appearance of Republicans for a Day, it was no wonder that when Clinton looked in the mirror he saw an Eisenhower Republican.

Enabling Tax Cuts

Democrats have faced an ever-steeper climb to overcome gridlock. At the same time, they have felt less pressure to take up the challenge. That’s not to say they never mustered the energy. Unfortunately, they were not always expending that energy on behalf of the middle class. In all the critical policy ventures enabling the winner-take-all economy, Democrats played a supportive part. Sometimes they did so actively and enthusiastically, sometimes just by failing to hold their ranks. But either way they critically contributed to the steady shift of government’s attention away from the middle class.

Tax policy presents the most surprising and revealing example—not least because it’s so clear that Republicans and Democrats differ here. Republicans have pushed intensively for tax cuts highly skewed to the top. The more progressive the tax, the more energetically Republicans have tried to cut it. When Democrats have had majorities, such cuts have not been a priority. When they have advocated tax cuts, they have been modest and focused on the middle class. Moreover, Democrats have been willing to support high-end tax increases (Clinton) or allow high-end tax cuts to expire (Congress after 2006 and President Obama after 2008). The differences between the two parties on this core issue have been stark.

And yet, many Democrats have been willing, in practice, to provide critical support for the GOP’s aggressive tax-cutting. This was not just a matter of providing bipartisan cover. In crucial cases, Democratic support made the initiatives possible. It is often forgotten that at the time George W. Bush’s extraordinarily skewed tax cuts passed, the GOP needed the votes of at least two Democrats, even when they could evade a filibuster by working through reconciliation. With Georgia’s Zell Miller already firmly supportive, they needed only one. Not a problem. A tightly organized White House and House GOP successfully framed the issue as “would you like a tax cut?” Once tax cuts were on the agenda, many Democrats were willing to join the effort. With powerful interests vigorously pushing the bill, Democrats like Baucus, Breaux, Landrieu, and Lincoln, whose sterling reputations for moderation hinged on their self-proclaimed vigilance in protecting budget propriety, were quick to sign on. Strikingly, even blue state Democrats like Dianne Feinstein were willing to do the same.

These weren’t modest defections—exceptions to be discounted against the backdrop of generally progressive voting records. The 2001 law was a once-in-a-decade event, a chance to shape the fundamental priorities of government. A senator’s vote on such a bill says more about his or her commitment to the middle class than one hundred votes on the minimum wage.

The behavior of moderate Democrats on the estate tax is particularly revealing. A surprising number of Democrats not only signed onto the 2001 bill, with its strange 2010 phaseout. They have also been willing to discuss, and on occasion vote for, permanent repeals or “compromises” that would cost hundreds of billions of dollars in federal revenue over the coming decade—revenue losses that would either show up as debt, taxes on the less affluent, or cuts in programs. Along with the GOP, these Democrats have defended such positions by stressing the trumped-up threat of the estate tax to small businesses and family farms, even though the overwhelming benefits of their proposed reforms would have flowed to the exceptionally wealthy.

Standing Up for Better Pay—for CEOs

Democrats also played a starring role in the number-one drama regarding executive pay in the 1990s: stock options. Over the decade, stock options rose from less than a quarter of executive compensation to half—before the stock market downturn of 2000 brought the good times to a temporary pause.32 Options were loudly touted by managers as a vehicle for linking pay to performance. The practice was a little different, to say the least: Options were generally designed to induce high payouts and lower their visibility. Crucially, these flaws stemmed from the particular manner in which most American firms structured options. Firms in other countries use stock options, too, but with restrictions (such as payouts depending on a company outperforming others within the same industry) that link pay much more closely to performance. In principle, nothing stopped the adoption of similar rules in the United States. In practice, CEOs and their defenders fought sensible regulations tooth and nail. For them, the pay-without-performance aspects of huge executive pay packages were a feature, not a bug.

To its credit, the Financial Accounting Standards Board (FASB)—the private-sector organization that, with SEC sanction, oversees the accounting practices of firms—recognized the problem early on. For executives, one of the great attractions of stock options was that they made it possible to hide the cost of massive pay packages, exploiting an accounting fiction that treated these lucrative payments as costless at the time of issue. In 1993, FASB announced plans to require the expensing of stock options. At the time options were issued, companies would be required to estimate the likely costs of this form of compensation. Adopting the practice of expensing would have dramatically increased the cost of issuing stock options and likely diminished their rapid growth.³³

It never happened. Managers, especially in the rapidly growing tech industry, mobilized. SEC Chair Arthur Levitt reported that during the first few months of his tenure in 1993, he spent an astonishing one-third of his time on this single issue, “being threatened and cajoled by legions of businesspeople who wanted to kill the proposal.” Led by Senator Joe Lieberman, Democrat of Connecticut (backed by California Democrats Barbara Boxer and Dianne Feinstein, whose Silicon Valley constituents were at the center of the options boom), elected officials moved quickly to block the proposed reform. By overwhelming margins, the Senate passed a resolution expressing its disapproval. Facing clear indications that FASB’s proposed action could lead elected officials to strip it of its authority, even the SEC’s sympathetic head, Arthur Levitt, advised the embattled board to retreat. He later called it the biggest mistake of his tenure at the agency. Besieged on all sides, FASB backed off.34

We need to be clear about what happened here. This is a striking example of drift, with the market racing off in a new direction and government failing to catch up. But this drift was not a matter of sloth or ignorance. Regulators saw a chance to moderate the explosion of CEO pay, not through burdensome interference but through the simple enforcement of honest, transparent accounting. Their efforts to do so were blocked through sustained and forceful interventions—with Democrats leading the way. The absence of legislative action does not mean the absence of politics. In this case as in so many others, Washington’s failure to respond to new economic realities resulted from systematic, organized political action by and in support of the wealthy.

Backstopping Deregulation

When it comes to fostering a winner-take-all economy, Democrats have generally played second fiddle to the Republicans. But there is one place where they can legitimately make a case for equal billing: support for Wall Street’s remarkable transformation. True, Phil Gramm was generally out in front. Yet with the financial industry realizing that most of what it wanted to do merely required that government stay on the sidelines, Democrats were not far behind.

Leading Democrats supported many of the deregulatory initiatives of the 1990s—for a variety of motives. Some genuinely believed freer markets would naturally police themselves, the long historical record to the contrary notwithstanding. Others embraced the political logic of cultivating Wall Street and were either unaware of or untroubled by the countervailing risks—risks not just to their standing as the party of ordinary workers, but also to the economy itself. Publicly, many Democrats insisted they were merely trying to “level the playing field.” Once deregulation had built up steam, parts of the financial industry that still faced regulation needed the same favorable treatment as their competitors. At the same time, perversely, the increased competition encouraged all the participants to pile on more (and more lightly regulated) risk. As the conservative jurist Richard Posner has argued, deregulation had “a built-in momentum.”35 Of course, new regulations would have leveled the field as well, but in a policy environment awash in lobbying money there was no chance of achieving majority support for that.

After the financial meltdown of 2008, many chastened Democrats suggested they were simply carried along by the intellectual tide in favor of unbound markets. But market triumphalism held sway not because of the lack of a case on the other side or the absence of expressed concerns, but because the pushback within the party was so much weaker than it once had been. With labor atrophied, mass-membership federations crumbling, and voters disorganized, the incentives for resisting the deregulatory wave were meager compared with the financial rewards. Revealingly, for all the talk of unfettered markets, Democrats proved more than willing to embrace dubious loopholes and subsidies, and to assist market insiders in hiding what they were doing, when lobbyists pushed hard enough.

Indeed, those alarmed by the increasingly casino-like features of American capitalism found powerful Democrats distressingly unsympathetic. Schumer and other like-minded Democrats had strong allies at the other end of Pennsylvania Avenue. In the Clinton administration, Treasury Secretary Robert Rubin and his deputy (and, later, successor) Lawrence Summers headed a formidable cadre of Wall Street support. Rubin, of course, had come straight out of Wall Street, having spent the previous twenty-six years in the top echelons of Goldman Sachs. Summers was Rubin’s protégé and successor as treasury secretary, a fiercely brilliant economist who shared Rubin’s enthusiasm for financial deregulation if not his Wall Street pedigree.

The brief clash over derivatives provided a powerful example of what the two sides of Pennsylvania Avenue could do. By the late 1990s, concern over the massively expanding use of these new financial instruments was growing. Derivatives combined impressively varied forms of mischief—vastly expanded use of leverage, incredible opacity, and an ever-tightening web of invisible threads among firms—into a single perilous package. In one of his most famous warnings about the new Wall Street, Warren Buffett referred to derivatives as “weapons of mass destruction.” In 1998, Brooksley Born, Clinton’s chair of the Commodity Futures Trading Commission (CFTC), invited comment on whether certain swaps and derivatives needed to be regulated. Alarmed, Rubin and Summers, along with Fed Chairman Alan Greenspan, undercut Born at every turn and eventually forced her to retreat. Rubin followed up by seeing if he could reduce the CFTC’s jurisdiction, even as Gramm would initiate legislation to remove the threat once and for all.

Perhaps the most telling illustration of Democrats’ role in enabling Wall Street was the merger of the banking giant Citicorp and the financial conglomerate Travelers to form Citigroup in 1998. You will recall that this was such a blatant violation of the Glass-Steagall Act that Citicorp’s John Reed was asked about it at the merger’s announcement, where he replied that his partner in the deal, Sandy Weill, might need to talk to “his friend,” President Clinton. Reed and Weill apparently were confident. They had arranged their deal under a loophole that gave them a two-year window during which the Federal Reserve would review the merger. Within that period, Phil Gramm’s namesake legislation Gramm-Leach-Bliley removed the offending regulatory barrier. Though Weill would later insist that “we didn’t rely on somebody else to build what we built,” he was proud to display the pen Clinton used to sign the landmark bill in his Citigroup office.36

Shortly thereafter, Robert Rubin, who had been a tireless advocate of Glass-Steagall’s repeal, resigned as secretary of the treasury. He became a senior adviser at the newly formed financial giant. At Citigroup, Rubin would be instrumental in pushing the envelope of ever-greater risk. He would resign a decade later, after a series of quarterly losses totaling more than $65 billion had transformed his firm, the poster child of deregulation, into a ward of the state. Rubin personally had done somewhat better, having received in excess of $126 million in cash and stock over his time at the company.37

Mark Hanna Democrats

During the heyday of the winner-take-all economy, the Democrats’ capacity to improve the financial balance sheet of the middle class steadily deteriorated. The party’s own balance sheets, however, just kept looking better and better. The continued effort to reorient party practices to winner-take-all realities was accompanied by a slow march toward financial parity with the GOP’s national organizations.

By 1992, Democrats had reduced the GOP national party committees’ financial advantage to less than 2–1. From there—even as the party struggled against stiff headwinds from DeLay’s K Street Project and George W. Bush’s fund-raising prowess—the Democrats steadily cut into the Republican edge. Bill Clinton, of course, was a formidable source of cash. In 2004, Democrats, following Howard Dean, began to tap the extraordinary possibilities of online fund-raising. That in turn led to an astonishing development: For the first time in memory, the DNC actually raised slightly more money than the RNC. The combined GOP committees still had a nontrivial lead, but as the Bush presidency drew to a close, their financial edge was on the order of 25 percent, rather than the 3–1 or 6–1 advantages they had grown accustomed to.

The DNC’s financial success stemmed in significant part from the Internet, which greatly increased the organization’s fund-raising capacity among small and medium donors—the sorts of donors the RNC had so effectively targeted in the late 1970s and 1980s with direct mail. But the Democratic Party’s spectacular budgetary improvement also reflected a much more aggressive pursuit of large donors. There was, of course, Chuck Schumer’s tremendous fund-raising record, which focused on Wall Street and led the Democratic Senatorial Campaign Committee to far outpace its Republican counterpart. But it was on the House side where Democrats’ intense new focus on fund-raising represented the biggest departure.

Ever since the devastating loss of 1994, Democrats had sought a path back to control of the House of Representatives. The Republicans’ advantage never rivaled the big majorities Democrats had typically held before 1994. Yet their seats were well protected, and the prize of majority status persistently eluded the Democrats’ reach. When Democrats finally took back the House in 2006, the field general was Rahm Emanuel. Nancy Pelosi knew what she was getting when she picked the second-term congressman from Illinois to head the Democratic Congressional Campaign Committee (DCCC). Unlike most members of Congress, Emanuel had been a skilled political operative before he became an elected official. More specifically, he had cut his political teeth as a campaign finance specialist, first for Chicago Mayor Richard Daley and then for an aspiring presidential candidate, William Jefferson Clinton. A sympathetic biographer of the DCCC’s successful 2006 campaign describes what Emanuel brought to the table:

Emanuel spent more of his time courting cash than doing anything else. No matter how attractive a candidate or appealing his message, it meant little if he could not advertise on television, print brochures, or pay campaign workers to knock on doors… In the 2006 campaign, Emanuel and his staff were judging candidates almost exclusively by how much money they raised. If a candidate proved a good fund-raiser, the DCCC would provide support, advertising, strategic advice, and whatever other help was needed. If not, the committee would shut him out… Most of Emanuel’s fund-raising time was spent meeting with wealthy lawyers or financiers, telling them this was the year to give, even as Nancy Pelosi and other Democrats were also raising enormous sums.38

In between his stint as a top aide in the Clinton administration and his election to Congress, Emanuel had spent a few years making a large amount of money in the financial sector.39 This, too, fed into his education. By the time he reached Capitol Hill, his understanding of politics had crystallized. In a summary that would have warmed the heart of Mark Hanna, the great political fixer of the Gilded Age, Emanuel reportedly told staffers: “The first third of your campaign is money, money, money. The second third is money, money, and press. And the last third is votes, press, and money.⁴⁰

For those of you keeping score at home, that’s money 6, votes 1.