NINE

The Modern Robber Barons

THE BANKS of the Rhine are dotted with medieval castles—some just yards from the river, others perched majestically on nearby cliffs. Romantic as they appear, they tell a story of private gain and social pain that remains all too relevant. For these castles once housed the infamous robber barons: princes who took advantage of the vacuum of papal authority in the thirteenth century to extract tolls along Europe’s most important trade route. Wrote one English observer in 1269: “Any boat which carried food or goods of any sort on this river was forced by these castles, unless it could avoid them, to cast anchor. Not deterred by the fear of God or king, [the barons] extorted from each and everyone new and intolerable payments, generally called tolls, as a result of which the goods had to be sold at intolerably high prices.”¹

The Rhine had fewer than twenty toll stations at the end of the twelfth century. By the end of the fourteenth, more than sixty flanked the mighty waters. Sailors described seeing the next station soon after losing sight of the last. Along a nearby river, a shipment of sixty timber planks would be reduced to six by the time it reached its destination.

The costs imposed by the robber barons were enormous. Trade fled from waterways to sinuous overland routes that, in the absence of the tolls, never would have competed with river transport. Adam Smith argued correctly that “one of the principal causes” of Great Britain’s growing economic advantage was its free internal movement of goods, “every great country being necessarily the best and most extensive market for the greater part of the production of its own industry.”

Private efforts to remedy the problem proved partial and fragile: Everyone had an interest in renewing trade but not in paying for the soldiers. It was not until the Congress of Vienna in 1815 that European states finally banded together to stop the robber barons—but not before five hundred years of faster economic progress had been lost.

Roughly a century later, in 1934, the muckraking journalist Matthew Josephson revived the robber baron epithet with his indictment of the captains of industry and finance who had come to dominate America’s economic landscape. “These men,” wrote Josephson, in his book The Robber Barons, “were robber barons as were their medieval counterparts, the dominating figures of an aggressive economic age.”² Of course, many of these “dominating figures” provided real value to the economy. Like the barons of the Rhine, however, the barons of the new industrial age used their vast reserves of money and influence to extract economic returns much larger than they would have received otherwise.

Today our economy also has barons. They are harder to see and harder to identify with a single name. And yet there are huge sectors of our economy—health care, finance, energy, mining, petrochemicals, defense, agribusiness, key areas of telecommunications and computing, and many more—where a twenty-first-century feudalism reigns. Like the barons of old, those of our day receive extraordinary gains that a less distorted market would not permit. Like them, too, today’s barons impose costs on society even bigger than their private gains. Above all, the modern robber barons benefit from the same basic formula exploited by their predecessors: the conversion of undue power into excess profits—into tolls along America’s river of economic progress.

As we saw in chapter 2, economists have a name for these tolls: rents—above-market returns that reflect market or political power (or, more often, both). Influential corporations have always been able to obtain some rents. Yet over the last generation, the scale of their gains has exploded—during an era in which many have assumed the American economy has become more competitive and efficient. One sign of the change is the increasing consolidation of many sectors of the economy. In markets for everything from health insurance to home appliances, mergers have reduced competition to just a few dominant companies. According to a recent Wall Street Journal analysis, nearly a third of industries now compete in markets that meet the federal antitrust standard for “highly concentrated”—up from a quarter in the mid-1990s.³

Even more important, the modern robber barons have become increasingly adept at converting their growing market power into political power. In some cases, the modern robber barons manage to obtain policies that distort markets. More often, they manage to prevent government from fixing distorted markets that create above-market returns. With critics of rent seeking focused narrowly on active government policies, these sins of omission are hard to see. But they are frequently far more lucrative than more visible giveaways. Just as papal weakness allowed private extortion to flourish in the thirteenth century, the failure of government to respond to failing markets allows private toll taking to flourish in the twenty-first.

Why have the modern robber barons been able to build so many castles alongside the river of American commerce? The Great Enablers introduced in the last two chapters deserve plenty of blame. Neither contemporary business organizations nor today’s Republican leaders have done much to temper the modern robber barons’ demands, as moderate corporate groups and GOP leaders once did. Quite the opposite. In their enabling role, they have encouraged and backed those demands and stood in the way of efforts to limit their impact. At the same time, the gravely weakened capacity of the American political system to overcome gridlock (a transformation we will explore in the next chapter) has proved a particular boon for the barons and their enablers. The costs for the rest of us, from higher prices to higher taxes, from lost growth to severe environmental and financial risks, continue to climb.

Although the modern robber barons can be found in many parts of our economy, three stand out: health care, finance, and energy. Other sectors have barons, but none rivals these big three in the scale of the tolls they extract or the scope of their political influence. They have not gone unchallenged: Each sector faced a concerted pushback after President Obama’s election in 2008. (Indeed, each was highlighted in his New Foundation speech.) Yet their castles remain standing even as the threat they pose to the mixed economy continues to rise.

Let’s meet the new robber barons.

Overcharged

American health care costs a lot. US health spending accounts for one-sixth of the domestic economy, compared with around one-tenth or less in other rich nations. At the personal level, health expenditures per capita (more than $9,000 in 2013) are roughly twice the levels found in our richest trading partners.

These cost differences add up. In 1980 Switzerland and the United States had comparable per capita spending. Yet Switzerland then moved to control costs while universalizing coverage. By 2010, the Swiss were spending about a third less per person than we were, while producing enviably good health outcomes. A third might not seem impressive. Yet had the United States followed the same trajectory, Americans would have saved $15 trillion collectively over these three decades. That remarkable sum could have financed a four-year college degree for more than 175 million Americans. It could also have eliminated all federal deficits over the same period and left a healthy surplus.⁴

Indeed, America’s deficit problem is basically a health spending problem. Take out rising medical expenditures, and the federal budget is more or less balanced as far as the eye can see. No other budget item comes close.⁵ After the 2010 midterm elections, Republicans made cutting food stamps the centerpiece of their agenda for fiscal restraint, calling for $40 billion in cutbacks over five years.⁶ The federal government spends more than that on health care every three weeks.

The Health Care Prices Are Too Damn High

You might wonder if it’s unfair that we picked Switzerland as a comparison. It is: Switzerland has about the worst cost-containment record in Europe. The gap between US spending and the spending of most other rich democracies is considerably larger. We can see this disparity at every level of spending but perhaps most clearly in American medical prices. Each year, the International Federation of Health Plans, a trade group of insurance companies in twenty-five countries, publishes a list of prices paid by insurers (public and private) for common drugs and services across the advanced industrial world. And each year, the numbers tell the same story: Health care prices in the United States are off the charts.

Suppose you or someone close to you has just had a normal, uncomplicated delivery. On average, US insurers pay over $10,000 when a patient gives birth. Compare that with a standard price of $2,824 in the Netherlands—the country with the next highest share of its economy devoted to health care (12 percent versus the United States’s 17 percent). American women who require Cesarean section surgery will be charged an average of more than $15,000. Women who have a C-section in the Netherlands? Their insurance will pay $5,500.⁷

Not only are American prices sky-high, they also vary enormously. In other rich nations, charges are generally standardized. Not so in the United States. Just within Atlanta, for example, hospital and physician charges for a routine colonoscopy range from less than $1,000 in the least expensive tier of hospitals to more than $4,000 in the most expensive. Using a unique dataset of private claims, the health economist Zack Cooper finds almost unbelievable discrepancies across and within regions.⁸ If you live in the San Francisco Bay Area, for example, a new knee will cost you more than $100,000, on average. In Fresno, approximately 150 miles away, it will cost you less than $14,000. By comparison, Medicare—which bases its rates on labor and supply costs in a particular region—pays around $22,000 for knee replacements in the Bay Area and around $15,000 in Fresno.

The Elephant in the Operating Room

Within circles of elite opinion, there is much hand-wringing about high health spending. Yet there is extraordinary resistance to the idea that prices are the problem. As the head of one of America’s biggest health care foundations, Drew Altman, observes in the Wall Street Journal,

People in the US go to the doctor less frequently and have much shorter hospital stays than people in other countries that spend far less per capita on health care. But health services are consistently more expensive here than in comparably wealthy countries.

So it’s interesting that most efforts in this country to address health care costs don’t focus on price much at all. Instead, they focus on reforming the delivery of health care and provider reimbursement to reduce the volume of health care Americans use and to weed out unnecessary procedures and hospitals days.⁹

“Interesting” is one way to put it. “Revealing” would be another. Focusing on price means taking on the robber barons, and that appears to be something that most of America’s leaders—especially America’s Great Enablers—don’t want to do.

Consider the most persistent explanation for why we spend so much more: Americans just don’t have enough “skin in the game.” Senator Rand Paul, an ophthalmologist, never tires of pointing out that LASIK eye surgery—not generally covered by insurance—has gotten more affordable over time. House Budget Committee chair Paul Ryan also frequently cites the LASIK example as proof that market forces would work if insurance just got out of their way.¹⁰

Never mind that LASIK is an elective procedure that always costs only a small fraction of even a single day in the hospital, or that it usually ends up costing a lot more than the teaser rates on billboards. Never mind that the problem it addresses is never an emergency, or that, in actual emergencies, shopping around for care is prohibitively difficult. There’s an even bigger logical hole: Americans actually have more “skin in the game” than do citizens of other nations. In cross-national surveys, they are much more likely to put off care because of its cost. Medical bankruptcies are shockingly common in the United States, yet almost unheard of in other rich nations.¹¹ Whatever the proper level of cost sharing, the huge gap between health prices here and those in other rich nations can’t be blamed simply on Americans’ greater insulation from medical costs.

More than that, it’s fanciful to think that if everyone just paid for care out of pocket, the health care market would suddenly work. We need insurance to pay for the biggest costs in health care. And the sickest patients, who incur the overwhelming majority of US health expenditures, need insurance the most. (Half of costs are incurred by the sickest 5 percent of patients; two-thirds, by the sickest 10 percent.)¹² Saying that the market for health care would be more efficient without insurance is like saying the housing market would be more efficient without mortgages.

But let’s imagine that insurance is perfectly designed to make people price sensitive without bankrupting the sick. There’s still the problem of information asymmetry that we learned about in chapter 3: Patients simply don’t know what they need as well as medical professionals do. This asymmetry is why we go to such providers in the first place. But it also gives them the capacity to pursue their own aims, including charging more for services than better policy arrangements would allow.

In short, the normal price mechanism breaks down in health care. In both the public and private sectors, prices are set mostly through negotiations between providers and insurers. The main difference, it turns out, is that public price setting is significantly more effective. The Medicare program has grown substantially faster than the economy, partly because of rising enrollment and partly because of rising costs. Yet, comparing coverage for the same benefits, it has grown substantially slower than private insurance spending.¹³ In recent years, private plans’ costs have increased by about 4 percent a year, Medicare’s by around 1 percent.¹⁴ This comparative edge is all the more remarkable because private plans have adopted many of Medicare’s payment techniques. What they lack is its enormous bargaining power.

The Best Health Care in the World?

The second common explanation for why American costs are so much higher is that American health care is just so much better than the rest of the rich world’s. In explaining why he wanted to repeal the ACA in 2012, House Speaker John Boehner echoed many critics in claiming it would “ruin the best health care delivery system in the world.”¹⁵

If we have the best health care system in the world, however, we’re not doing a very good job of using it. American health outcomes are rarely better and often much worse than those of the best-performing countries. Across regions within the United States, prices have little or no relationship to the quality of care received.¹⁶ They’re higher where providers are more concentrated and high-tech equipment and hospital beds are more plentiful.¹⁷ These might be compelling motives for providers to charge more, but they’re not very compelling reasons for patients to pay more.

True, higher-income Americans with generous insurance receive care that is very good—and in some situations, yes, the best in the world. The United States performs quite well, for example, with regard to screening and care for many cancers. Even for these services, however, patients are paying much more than they would if US prices were closer to the international norm. More important, the United States often ranks poorly on direct measures of care effectiveness. Our in-hospital fatality rates for heart attacks and strokes, to name two crucial areas, are middling.¹⁸ And remember amenable mortality: deaths that could have been prevented with the provision of timely and effective care? On this measure, the United States ranks last among nineteen wealthy countries.¹⁹

The New York Times reporter Elisabeth Rosenthal has written a series of compelling articles showing just how weakly prices correlate with quality. Among other revealing investigations, she tells the story of a patient who was quoted a price of $78,000 for a hip replacement, not including the surgeon’s fee. The patient got the same hip in Belgium, where the total bill was $13,660, including all provider fees, operating room costs, five days in the hospital, a week in rehab, and round-trip airfare. The risks were, if anything, lower than if he’d stayed home, because hospital-acquired infections are less common there. As he told Rosenthal, “We have the most expensive health care in the world, but it doesn’t necessarily mean it’s the best. I’m kind of the poster child for that.” A prominent orthopedist was more pointed: “Manufacturers will tell you it’s R&D and liability that makes implants so expensive and that they have the only one like it. They price this way because they can.”²⁰

And yet like many informed commentators on America’s cost crisis, Rosenthal seems baffled by the exorbitant, irrational pricing that she finds. In a 2014 interview on National Public Radio’s Fresh Air, host Terry Gross pressed her to explain who or what was responsible. Rosenthal replied, “I think it’s everyone. And it’s partly our expectations in the sense of, wow, we want a private delivery room with good Wi-Fi and great coffee. Some of these hospitals, they’re competing the way universities compete. ‘We have a great gym.’ ‘We have room service.’ That’s not really the essence of health care. So if that’s what we demand, we’re really tracking our health care dollars in the wrong direction.”²¹

Good Wi-Fi and great coffee. The simpler explanation is the one that Rosenthal’s stories highlight repeatedly: Those who receive the biggest rents are doing everything they can to preserve them. Again, it’s a measure of how reluctant we are to talk about this reality that Rosenthal backs away from her own clear findings. Unfortunately, many don’t even probe deep enough to back away.

Political Malpractice

Which brings us to the third common argument about why our health care costs so much: It’s all about malpractice. To hear some commentators, the top cost driver is the threat of litigation. Even Steven Brill, the author of a powerful 2013 cover story in Time about high US prices, succumbs to the temptation to feign evenhandedness by suggesting that Democrats’ failure to curb lawsuits is a major cost driver.²² Yet this position has no support in the vast research on health spending. Estimates of the amount of defensive medicine vary, but they’re always tiny—perhaps 1 percent to 2 percent of total spending.²³ More telling still, Texas and California have both placed significant caps on damages, and their costs have grown just as quickly as costs in states without such measures.²⁴

That malpractice is cited as a big cause of runaway spending shows just how unwilling many observers are to understand or confront the real causes. No doubt the United States is doing something with the extra trillions that it has poured into the medical sector over the last few decades. On the available evidence, however, what it is mainly doing is paying higher tolls to the robber barons.

Victor Fuchs, a distinguished health economist, puts the point with unusual bluntness: “If we . . . ask why health care costs so much less in other high-income countries, the answer nearly always points to a larger, stronger role for government.” In other nations, Fuchs explains, authorities use their buying power to bargain down prices. Even America’s less extensive programs cover enough of US medical costs to “confer considerable bargaining power, but the government is kept from exerting it by legislation and a Congress sensitive to interest-group lobbying.”²⁵

And there is certainly plenty of such lobbying. Since federal lobbying disclosure began in 1998, pharmaceutical manufacturers, medical device makers, health insurers, hospitals, and medical professionals have reported spending more than $6 billion.²⁶ Only Wall Street rivals the health care industry as a lobbying superpower. On top of hundreds of millions in lobbying each year, it pours hundreds of millions more into federal campaigns and tens of millions more into state and local races. And none of these totals includes the enormous sums spent on political advertising, grassroots (or more often, faux-grassroots “Astroturf”) mobilization, and state-level political activity.

For an example of the payoffs, look no further than the fight over prescription drug coverage under Medicare in the early 2000s. With Democrats pushing for the benefit to help seniors cope with soaring drug prices, Republicans took advantage of their control of the House, Senate, and White House to push through their own plan: a costly expansion of a program many had once opposed. Why? Former Reagan adviser Bruce Bartlett offers a frank account:

Republicans were keen to make sure that the legislation enacted was theirs, because the Democrats were certain to include cost containment for drugs in their legislation. It was widely believed that if the federal government used its buying power to pressure drug companies to cut drug prices, the cost of providing drugs to Medicare recipients would be substantially reduced.²⁷

But forcing down drug prices would diminish the drug companies’ profits, and Republicans were adamantly opposed to that. Consequently, despite their oft-repeated opposition to new entitlement programs, they got behind the new drug benefit, now known as Medicare Part D, and made sure there was no cost-containment provision.

Not long thereafter, the chair of the House committee that designed the legislation, Billy Tauzin of Louisiana, retired and became the drug industry’s new top lobbyist, with a reported annual salary of $2 million.²⁸

Tauzin was not the only beneficiary of Washington’s revolving door. In late 2011, the Center for Responsive Politics reported that an impressive 370 members of Congress had become lobbyists for or “senior advisers” to groups seeking to sway public officials.²⁹ In recent years, more than half the representatives and senators who retire or lose elections have become lobbyists, up from just 3 percent in 1974.³⁰ (Since the early 1990s, nearly half of senators have also served on at least one corporate board since leaving office—a lucrative part-time job paying, on average, around a quarter million dollars a year.)³¹ Congressional staff and executive branch officials are also more likely than ever to lobby. In 2012, forty former staff members of Senator Max Baucus, the Montana Democrat who chaired the Senate Finance Committee during the debate over the Obama plan, were registered lobbyists.³²

Standing Up for the Barons

The Great Enablers—business groups and the Republican Party—haven’t made reigning in health care costs any easier. Since the Chamber of Commerce’s reversal on the Clinton health plan in 1993, business groups have rarely challenged the self-interested stances of the major medical interests. Even before Tom Donohue perfected his pay-to-play model, most prominent corporate leaders seemed content to either sit on the sidelines or parrot the medical industry line. Donohue’s innovation—exemplified by his dark money lobbying on behalf on the insurance industry during the debate over the Affordable Care Act—was to get paid for the parroting.

To some extent, this is just a collective action problem. Corporations that provide health insurance would benefit from cost restraint, but it’s the health care industry that has the biggest financial stake. For the same reason, the medical industry members of business associations such as the Chamber have an outsized influence on those groups’ stances on health policy issues. And even when they don’t, the general antigovernment leaning of business leaders makes them skeptical of the kinds of public policy solutions that have contained costs in other rich democracies.

But the biggest enablers aren’t in the business community. They’re in the Republican Party. As chapter 8 discussed, the GOP could once be counted on to work with Democrats to restrain the growth of federal health spending. After 1994, however, it retreated from these bipartisan approaches. “Controlling health care costs” now meant cutting Medicaid and Medicare. To make matters worse, while advocating sharp benefit cuts on the grounds of fiscal responsibility, Republicans began to pursue changes in Medicare that increased, rather than restrained, costs. In particular, they were the driving force behind the growing role of private plans within the program. Although Medicare payments to private plans are supposed to reflect how much it costs to insure beneficiaries who sign up, a combination of aggressive lobbying and sophisticated gaming of the reimbursement formula have resulted in excess payments that, in the aggregate, cost Medicare nearly $300 billion between 1985 and 2012.³³

Not surprisingly, insurers love this arrangement, and they have increasingly thrown their support behind the GOP. Republicans have repaid the love by defending these lucrative giveaways aggressively. Remember Republican charges that funding the Affordable Care Act would destroy Medicare, which helped them rack up huge vote margins among older Americans in 2010? Remember irresponsible talk of “death panels” that would kill the old and disabled? These accusations were directed at Medicare savings provisions in the legislation that targeted mostly the subsidies for private plans. No one was actually threatened, and no killing was involved—except the private insurance executives making a killing off Medicare.

One has to marvel at the perverse brilliance of this political strategy. Medicare’s difficulty controlling costs, Republican leaders argued, proved that the government was less efficient than the private sector. Yet one of the main reasons Medicare wasn’t able to do more to control costs—despite, let’s remember, outperforming the private sector—was that the GOP was blocking or undoing all the necessary legislative steps to control costs. Republicans managed to make the case for markets by delivering more rents to the rent seekers.

Amazingly, however, health care isn’t where the language of markets is most abused. The bigger offender is a financial sector that has sold itself as the height of market rationality and efficiency while charging tolls that would make the Rhine’s medieval extortionists blush.

Wall Street: Too Big, Period

Those tolls are now painfully visible. Eight years after the collapse of Lehman Brothers in 2008, economic production and employment remain far below where they would have been otherwise. When an economy persistently falls short of its potential, economists speak of “output losses”—the prosperity we’ve missed out on because of slow growth. Based on the long-term trend prior to the crisis, UC Berkeley economist Brad DeLong estimates that America’s output losses already exceed $13 trillion and could well reach $35 trillion by the time the economy fully recovers—more than twice America’s entire GDP.³⁴ And this mind-blowing number doesn’t account for the crisis’s enormous human and social fallout, from the emotional toll of persistent unemployment to the social dislocation of broken communities to the lost opportunities and shortened lives that accompany severe economic downturns to the permanent loss of earning power for the cohort of young Americans who unluckily entered the job market during the slump. “Great Recession” doesn’t do this damage justice; DeLong suggests we call this decade-plus disaster the “Lesser Depression.”

The (Out-of-)Balance Sheet

Against these and other costs of a large financial sector, what are the benefits? What besides bigger financial crises have we gained from trading in the staid financial system of a generation ago? Among political and economic elites, the conventional wisdom prior to the crisis was that finance was all upsides—faster growth, better capital allocation, lower-cost financial transactions—and for a surprisingly large chunk of those elites, it still is.

But the big upsides look elusive. Researchers have dissected contemporary finance every which way. They have yet to find knockdown evidence of large gains. Luigi Zingales, the iconoclastic Chicago School economist whom we met in chapter 3, summarizes bluntly the findings of finance experts like him: “Although academics can offer plenty of evidence that some financial activities benefit society, we cannot assert that all or even most do.”³⁵ Far from it: The more research that’s done, the more it seems that Wall Street’s most-touted benefits are mostly a mirage.

Start with the biggest potential benefit: faster growth. You might think bigger financial sectors mean bigger GDP (at least when they’re not crashing the economy), but economists who have compared financial systems across rich nations have found no convincing evidence that more finance equals more growth. Indeed, the relationship appears to be more like an upside-down U than an upward line. That is, growth increases with the size of the financial sector until a point of diminishing returns, and then it might even turn negative. Where is that inflection point? According to one study, it’s where the amount of private credit is about equal to total GDP.³⁶ America’s financial sector is roughly twice that large.

Why might supersizing finance hurt growth? Well, there’s the ugly truth that big financial sectors beget big financial crises. Big financial sectors may also divert productive investments in the real economy that could produce faster growth into activities that reward mostly shareholders and executives.³⁷ For example, over 90 percent of the profits earned by companies that were in the Standard & Poor’s (S&P) 500 from 2003 through 2012 went to stock buybacks (54 percent) and dividends (37 percent).³⁸ That left less than 1 in 10 dollars of profit to be invested in future growth or higher worker pay. Supersized finance might not be so super at getting capital where it’s needed for the long term.

And let’s not forget about human capital. Even if financial activities were net neutral economically, Wall Street would still be sucking some of the nation’s best and brightest from science, education, and other fields that clearly make our society more prosperous. We are very far from the corporate world described by Peter Drucker in chapter 6, in which the top college and graduate degree holders shunned Wall Street for Main Street. At Harvard, for example, the share of college graduates entering finance rose from 4 percent in the 1960s to nearly a quarter in recent years.³⁹ The story is the same or more extreme at other top universities. Even recipients of the Rhodes scholarship, once the quintessential path to public service, have been going into finance at record rates. Observes the American secretary of the Rhodes Trust, Elliot Gerson, “Nothing is wrong with this picture if one believes that changed career paths of a few privileged people is not of any larger significance. Never mind that some have gifts that realistically could be expected to lead to world-changing breakthroughs, cures, or innovations; to greater respect for politics; or to hundreds of profoundly moved and inspired students.”⁴⁰

But isn’t finance at least successful on its own terms? Surely it’s doing whatever it does at a lower per unit cost. The (still fragmentary) evidence suggests otherwise. Finance is certainly better than ever at making money. But according to new research, the cost of financial intermediation—what households and businesses pay for what finance does, such as making loans or insuring against risk—has actually increased over the past thirty years.⁴¹ Indeed, it now appears to be as high as it was in 1900, before not just computers but modern communications and transportation.

The rents on Wall Street have been rising. American finance isn’t just too big to fail. It’s too big, period.

Friends in High Places

The best evidence of rampant rents on Wall Street might be the investment strategies of major financial firms. Not their investments in the economy but their investments in the political system. Whenever we see industries or firms spending enormous amounts to sway government, we should suspect strongly not only that rent seeking is taking place but also that its rewards exceed—and likely vastly exceed—the investment. After all, we typically assume that corporations are rational investors when it comes to economics. Why should we think differently when it comes to politics? To find the barons, look for the castles.

Wall Street has built many castles. Between 1998 and 2014, the finance, insurance, and real estate sectors (again, FIRE) spent more than $6 billion combined on lobbying. Campaign spending by PACs and people associated with FIRE exceeded $3.8 billion—placing Wall Street in a league of its own with respect to campaign donations.⁴²

That money has gone to both parties. In the 1980s, FIRE leaned heavily Republican. Recall Reagan’s first Treasury secretary, Donald Regan, who went from Merrill Lynch to leading the charge against regulation. The top Republican on the Senate Banking Committee, Phil Gramm of Texas, was another warrior for deregulation. He reversed Regan’s trajectory, going from government service into a high-paid position in the industry. Politically, backing finance was low risk for Republicans, providing reliable campaign cash and lucrative post-politics employment, with little or no prospect of voter backlash. Because so much of the largesse toward Wall Street was due to increasingly inadequate regulation, Republicans could decry government giveaways even as they gave away the store. And because so many of the policies that aided finance were low profile and complex—including the lowest-profile policy of all: doing nothing—the GOP maintained plausible deniability even as it lent a helping hand to the new robber barons. Once again Republicans got their cake of free-market rhetoric and ate their share of the rents, too.

Starting in the 1990s, however, Wall Street tilted increasingly—if, it turned out, only temporarily—toward the party traditionally hostile to it. By the late 2000s, as Democrats clawed their way back into the congressional majority, the party of FDR enjoyed a small but significant edge in the chase for Wall Street donations. This arrangement was fateful: Friends in high places is good. Friends among your prior antagonists is even better.

The connections were personal as well as financial. The “Wall Street–Washington corridor,” as financial experts Simon Johnson and James Kwak term it, is now so well trod and lucrative that it is noteworthy when someone in a top economic policy job has not made millions on Wall Street.⁴³ Take Gene Sperling, the lawyer-turned-policy-insider who headed President Obama’s National Economic Council (NEC). He earned respect for his independence from Wall Street because he had received only around $1 million from the financial sector and restricted his main work to Goldman Sachs’s philanthropic activities. By contrast, Sperling’s predecessor in the job, Larry Summers, made close to $8 million consulting for and giving speeches to financial institutions between his stint as Clinton’s Treasury secretary and his return to official Washington.⁴⁴

And Summers was a piker compared with his predecessor, Robert Rubin, the crucial soft Randian introduced in chapter 6. Rubin had spent the previous twenty-six years at Goldman Sachs, and he brought to the Clinton White House strong commitments to deficit reduction and financial deregulation. When the head of a financial regulatory agency called the Commodities Future Trading Corporation (CFTC) pushed for tighter supervision of derivatives—the risky securities that Warren Buffett labeled “weapons of mass financial destruction”—Rubin and Summers sidelined the effort and pushed to restrict the agency’s jurisdiction.⁴⁵ Rubin left the Clinton administration to become a senior adviser to Citigroup, a megabank that could not have existed before the deregulatory wave. By the time of Citigroup’s collapse, he had netted himself more than $120 million.⁴⁶

Along the way, Rubin served as a mentor to many other Democratic economic insiders with strong Wall Street ties, including Gary Gensler (from Goldman Sachs to the Clinton Treasury Department to head of the CFTC), Peter Orszag (from head of the White House Office of Management and Budget to a lucrative post at Citigroup), Michael Froman (from Citigroup to Obama’s transition staff, where he helped pick Obama’s economic team even while remaining on Citigroup’s payroll), James Rubin (Rubin’s son, who went from Citigroup to the NEC under Obama), and David Lipton (from Citigroup to the NEC). Beyond Rubin’s circle, Obama’s acerbic chief of staff, Rahm Emanuel, had gone from the Clinton White House to a Chicago hedge fund to Congress, where he had used his Wall Street ties to help Democrats out-fund-raise Republicans on their way to recapturing Congress in 2006.⁴⁷

The bustling traffic along the Wall Street–Washington corridor has had two major effects. Most obviously, it has encouraged public officials to remain on friendly terms with the industry they are supposed to keep in check. Yet greater than this traditional problem of political capture may be what is sometimes termed “cultural capture”: the acceptance of contestable assumptions that justify a hands-off approach. Perhaps the most destructive of these was that “financial innovation” was always beneficial. So long as new products met the market test, they had to be making the economy stronger. Summers even compared financial innovation to the development of jet airplanes. We wouldn’t stop jet travel because planes sometimes crash. Why should we stifle financial innovation merely because bigger financial markets sometimes go awry?

Because financial markets are not jet planes. The finance industry is rife with conflicts of interest and information asymmetries that allow insiders to profit at the expense of outsiders. Indeed, a major part of the reason Wall Street developed ever more complex products was precisely because it was so hard for clients—and regulators—to figure them out. As the noted economist Alan Blinder asks, “Didn’t anyone remember the KISS principle? (Keep it simple, stupid.) The answer is, in fact, simple, and not at all stupid: Complexity and opacity are potential sources of huge profit.”⁴⁸

More important, the financial sector poses uniquely large threats to the whole economy. Unlike an airplane crash, the risk of financial crises is borne by all of us. It is a negative externality—a cost society bears that Wall Street firms don’t take into full account. The problem is only worse when industry leaders know that government must come to the rescue if things go bad. As the systemic risk created by financial speculation increased in the 1990s and 2000s, large banks received a huge implicit subsidy because they were able to pay lower interest rates to investors who believed they were too big to fail. With banks growing bigger and bigger—by the mid-2000s, the combined assets of the six biggest US banks represented around 55 percent of US GDP, up from less than 20 percent in 1995—these hidden giveaways grew larger and larger.⁴⁹ In 2009, according to one calculation, the too-big-to-fail subsidy represented roughly half of the total profits of the eighteen largest US banks.⁵⁰

The distinguished jurist Richard Posner, a founding father of the generally conservative law and economics field, sums up the lesson: “We need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience—the self-healing powers—of laissez-faire capitalism.”⁵¹

Inside Job

So why have we not seen more of an organized pushback? As in all economic baronies, the weakness of ordinary consumers and small investors is easy to explain—though we’ll see that such broad groups can get their act together under the right conditions. But what about corporations that aren’t in the FIRE brigade? After all, a big, freewheeling Wall Street poses obvious risks to Main Street. Moreover, many traditional corporations resisted initially the growing aggressiveness of the financial sector, arguing that the increased focus on immediate shareholder returns was at odds with their long-term growth strategies.

Yet after this early pushback, corporations outside the financial sector largely acquiesced to and then actively supported the expansion of Wall Street. Put more bluntly, they joined the party. Between 1980 and the early 2000s, the share of corporate profits due to financial investments ballooned from 10 percent to 40 percent.⁵² As nonfinancial corporations went deeper and deeper into finance themselves, they understandably became less and less eager to criticize the activities they had once questioned.

Business associations might have proved another counterweight. In theory, they represent the broad interests of corporate America and stress the long-term needs of the business community. And indeed, the Business Roundtable, National Association of Manufacturers, and Chamber of Commerce all entered the 1980s with their dominant membership alarmed about finance’s growing role. In 1984 a spokesman for the Business Roundtable told the SEC: “Hostile takeovers threaten the well-being of the country by causing corporations to react to intense pressures for short-term results.”⁵³

Imagine corporate groups today taking on Wall Street so directly. You have to imagine it, because today every major business association is on the other side. The revitalized Chamber of Commerce has become particularly hostile to financial regulation. The Chamber’s Center for Capital Markets Competitiveness—dedicated to “promoting a modern and effective regulatory structure that fosters robust and diverse sources of capital, investment, liquidity, and risk management for our nation’s job creators”—funnels huge contributions from financial firms into targeted legal and political action against federal regulatory oversight.⁵⁴ Like the barons of health care, financial firms have also used the Chamber as a key lobbying arm, quietly slipping millions to the Chamber to fund attacks on regulation while proclaiming publicly their support for effective rules. The Chamber and, with even greater focus, the Business Roundtable, are also energetic defenders of high executive pay without increased investor or federal oversight—as we saw in the fights over stock options and proxy access discussed in chapter 7.

And so we come to the final and most important reason that America’s corporate elites backstopped Wall Street: They benefited handsomely from doing so. As CEO pay increased and increasingly reflected stock movements, the interests of CEOs grew more aligned with the interests of Wall Street. This shift was not always good for American corporations, much less American capitalism. As a rule, compensation packages are poorly designed to reward CEOs for long-term success. (The way stock options are designed, for example, tends to reward share price increases driven by industry-wide trends over which individual CEOs have no control—that is, by, say, lower oil prices or better exchange rates—making it “pay for luck” rather than “pay for performance.”)⁵⁵ Indeed, companies whose top executives extract a larger share of managerial pay tend to perform worse, not better, on a range of performance measures, including profitability.⁵⁶ But there is one group for which these arrangements work very well: top executives. And as those executives extracted more and more, they also grew more and more favorable toward the unrestricted expansion of the financial sector.

The barons of Wall Street brought the world’s largest economy to its knees and still had faithful and formidable defenders. The barons of energy have done them one better: They are threatening the very future of our planet, and yet so far have successfully resisted reforms on the scale necessary to restrict the enormous tolls they are charging.

“The Greatest Market Failure the World Has Ever Seen”

Two numbers, 6 and 16, capture the heart of the rent-seeking realities in the energy sector.

The first number, 6, is the estimated value in trillions of dollars of fossil fuel reserves that would be “unburnable” if the world committed itself to preventing global temperatures from rising more than 3.6 degrees Fahrenheit. The second number, 16, is the estimated number of degrees Fahrenheit that the earth’s temperature could be expected to rise if all these resources were actually consumed.⁵⁷

A sixteen-degree temperature increase is an unthinkable prospect. Even increases below the 3.6 degrees (2 degrees Celsius) that scientists believe is the upper bound of tolerable global warming are worrisome. Beyond that, the climate science community anticipates devastating effects: “cataclysmic and irreversible consequences” for the Earth, as the British newspaper the Independent sums up recent scientific reports. Increases far less than a 16-degree temperature rise would render our planet unrecognizable.⁵⁸

But six trillion is also a crazy number. Financial analysts now speak of “stranded assets”—private holdings that must be left in the ground, their value written off. No private company wants to see its assets “stranded.” Just as that 16-degree temperature rise is unimaginable, so is it unimaginable that private firms will voluntarily forgo opportunities to turn hugely valuable holdings into profits.

The basic story is 16 versus 6. At the beginning of the twentieth century, private actors treated our streets and rivers as open sewers—until someone with political authority told them they couldn’t. Today private actors continue to treat the atmosphere as an open sewer, and they will keep doing so until someone with political authority tells them they can’t. Without external coercion, private companies will follow the incentives that drive markets. It is, as Nicholas Stern, former chief economist of the World Bank, put it, “the greatest market failure the world has ever seen.”⁵⁹

Critics of rent seeking in the coal, oil, and natural gas sectors sometimes focus on tax breaks and special deals (such as cheap access to public lands), which add up to many billions in transfers every year. Just as with the financial sector, however, the big subsidies are the huge rents that stem from insufficient regulation. Some of these rents are associated with traditional air pollution from fossil fuels, which remain too lightly regulated despite the large and important steps that governments have taken. An International Monetary Fund study recently estimated the subsidy value to the oil, natural gas, and coal industries of these hidden costs (related largely to local pollution, contributions to wasteful congestion, and global warming) at an astonishing $600 billion a year in the United States.⁶⁰ But climate change due to the underregulation of carbon dioxide (CO₂) is in a category of its own. Nothing else so reveals the tragic tilt of our current politics in favor of concentrated private interests—or the mercenary role of the Great Enablers in protecting those political advantages.

Obstruction, Obstruction, Obstruction

Climate change is not a new discovery. In 1965, just one year after the surgeon general’s famous report on smoking, President Lyndon Johnson’s Science Advisory Committee sent the president another warning. This one concerned carbon emissions: “Man is unwittingly conducting a vast geophysical experiment . . . [that] will almost certainly cause significant changes in the temperature.”⁶¹ The committee warned of melting polar ice, rising sea levels, and more acidic oceans. Just three weeks after his 1965 inauguration, LBJ made a special address to Congress, in which he noted, “Air pollution is no longer confined to isolated places . . . This generation has altered the composition of the atmosphere on a global scale through . . . a steady increase in carbon dioxide from fossil fuels.”⁶²

The issue lay dormant for two decades. First, environmentalists tackled immediate challenges of conventional air and water pollution. (In the process, they unwittingly set the stage for future action on climate change through language in the Clean Air Act of 1970 that gave the EPA broad authority to act.) Then, starting in the mid-1970s, rising energy prices and corporate political resistance discouraged attention to carbon emissions. Still, climate science continued to develop, and the warnings of climate scientists only grew more urgent. By the late 1980s, the issue reemerged on the national policy agenda—and the battle over the energy industry’s risky rents was launched.

The conflict reached a new scale in the early 1990s, following the Intergovernmental Panel on Climate Change (IPCC) report of 1990. It then returned in even more intense form following increased attention to the issue in the mid-2000s. In both cases, major legislation (a new levy on fossil fuels known as a Btu tax in 1993; a much more ambitious cap-and-trade initiative in 2009) passed the House but died in the Senate.⁶³ Since then, the Obama administration has made considerable progress exploiting its authority under the Clean Air Act to regulate carbon dioxide as a pollutant, but its efforts remain contested, and the eventual outcome remains in doubt—vulnerable to legal challenges and potential reversals by a future administration.⁶⁴

Obstruction has relied on a range of now-familiar techniques. Those producing and relying on fossil fuels are among the busiest influence peddlers in America—in the peak year of 2009, oil and gas interests spent a total of $175 million on lobbying, narrowly defined. (ExxonMobil and Chevron alone reported almost $50 million in lobbying expenditures.)⁶⁵ These interests have powerful allies in Congress—and not just within the GOP. When a concentrated interest is also a prominent local constituency, its voice will be loud regardless of a politician’s party affiliation. Geographically based representation in Congress means that there will be “coal state” and “oil state” Democrats.

Nonetheless, the GOP has long been the primary home of fossil fuel interests, and the centrality of this alliance has grown stronger. When Republicans have controlled the White House, the grip of the energy industry there has been particularly evident—on vivid display in the strong and lucrative attachments to the industry of the first national leaders of the twenty-first century, George W. Bush and Dick Cheney. Climate science had crystallized over the course of the 1990s, but the Bush administration marginalized the issue. Following his election, Bush quickly reneged on the pledge he’d made as a candidate to place a cap on power plant carbon emissions. Instead, he opened the White House to the robber barons, appointing lobbyists from the industry to prominent positions where they could oversee the climate issue.

The biggest industry plant was Philip Cooney. A longtime official from the American Petroleum Institute, Cooney became chief of staff at the White House Council on Environmental Quality. His boss would be James Connaughton, a lobbyist also moving through the revolving door from the power industry. In 2002 and 2003 Cooney rewrote portions of an EPA report on climate change “to exaggerate or emphasize scientific uncertainties.”⁶⁶ The White House made so many objections to a draft EPA report on the environment that the exasperated EPA administrator, Christine Todd Whitman, dropped the climate change section entirely. When a prominent news story about Cooney’s efforts appeared, he resigned—only to resurface two weeks later working for ExxonMobil.⁶⁷

Merchants of Doubt

The industry attacks on climate science have a clear and simple logic. Despite many disputes on the specifics, scientists have reached a broad consensus on key points: Climate change is real, caused largely by humans, and threatens substantial negative effects. If this consensus comes to be accepted widely—that is, if climate scientists are seen as legitimate guides to the key facts—action to constrain carbon emissions is much more likely. Frank Luntz, the GOP messaging expert, captured the essential point in a 2002 memo to potential GOP candidates: “Should the public come to believe the scientific issues are settled, their views about global warming will change accordingly. Therefore, you need to continue to make the lack of scientific certainty a primary issue in the debate. The scientific debate is closing [against us] but is not yet closed. There is still a window of opportunity to challenge the science.”⁶⁸ Remarkably, even as the scientific evidence accumulated over the next decade, Luntz and his allies would succeed in prying that window wide open.

“Merchants of doubt” have emerged wherever rent seekers resist regulation.⁶⁹ But their role was especially heightened in the climate change fight because of several distinctive characteristics of the issue. Not only does reducing emissions require societies to sacrifice short-term benefits to avoid long-term pain, but the costs of action are concentrated on some powerful losers. To make matters worse, we can’t see the problem (unlike, say, a bulging waistline).⁷⁰ Though some effects have become increasingly manifest—record temperatures, extreme weather events, disappearing ice sheets—the biggest dangers continue to lie over the horizon.

Rent seekers and their supporters recognized these political openings. To undermine the credibility of climate science, they trotted out a range of themes: The scientists and environmentalists were “extremists” or “alarmists” with a secret (“Marxist” or “socialist”) ideological mission; they were corrupt because they stood to gain from their efforts; they were elitist hypocrites because they lived lives of carbon-consuming luxury, jetting off to fancy international conferences; or they were simply fools (because “sound science” suggested that warming was not occurring, or took place for natural reasons, or would have minimal or even positive effects). The lines of attack were flexible, but the focus remained consistent: shoot the messengers.

As the Bush administration staggered toward the exit, the critical fight over proposals to limit carbon emissions gathered steam. By this time, however, there was a flourishing counternarrative of “denialism” or “skepticism.” That effort involved a range of specialized groups focused on climate change and funded in part by the fossil fuel industry, including the Information Council on the Environment, given the reassuring acronym ICE. The organization operated initially out of the offices of the National Association of Manufacturers, and included as members Exxon, Chevron, and other oil giants, the big three auto companies, and the Chamber of Commerce.⁷¹ A pollster’s strategy paper for the group outlined the goal of “reposition[ing] global warming as a theory (not fact)” through efforts targeted at “older, less educated males” and “younger, lower-income women” in districts reliant on coal-generated electricity.

The countermovement involved over one hundred distinct organizations that include expressions of skepticism about climate change as a central part of their agenda.⁷² Every one of the major conservative think tanks—including Cato, Heritage, and the American Enterprise Institute—was a part of this effort. So were smaller or more specialized organizations such as the Heartland Institute and the Competitive Enterprise Institute. After the mid-1980s, there was a large increase in books advancing denialist claims; the overwhelming majority of these books were linked to and promoted by conservative think tanks, which provided a veneer of respectability.⁷³

Tracing where the money for these efforts came from is difficult. Much of it was given anonymously; even more was channeled through middlemen organizations that created at least some ambiguity about the donors’ intent. The fossil fuel industry was a central contributor, especially in the early years. Exxon and the Koch network were prominent and generous supporters, as were some leading conservative foundations, including the Sarah Scaife Foundation (previously, the Richard Mellon Scaife Foundation) and the John William Pope Foundation (linked to Art Pope, the “third Koch brother”).

By 2007, some prominent supporters, including Exxon and the Koch network, seemed to pull back. Exxon, in fact, announced that it would no longer fund such efforts. Yet as the sociologist Robert Brulle has documented, it is very hard to tell whether this repositioning reflected a change of heart or just a tactical adjustment to escalating criticism.⁷⁴ The decline in outlays by the Koch network, Exxon, and a few other prominent funders coincided with a marked rise in funding from Donors Trust and Donors Capital Fund—third-party, pass-through foundations with untraceable sources of revenue. Brulle demonstrates that by 2010, these two entities alone accounted for a full 25 percent of funding within the countermovement.

A Coalition of Necessity

The sudden reticence of some funders to leave fingerprints was not the only sign of change. The years 2005 to 2007 marked a new peak in attention to global warming. In 2005 Hurricane Katrina left the city of New Orleans flooded and more than 1,800 people dead. The following year Al Gore’s documentary An Inconvenient Truth was a success at the box office and the Academy Awards. In 2007 Gore and the IPCC jointly received the Nobel Peace Prize for their work directing attention to climate change. By then, belief in the seriousness of the climate challenge reached a new high, with 41 percent of Americans saying they worried a great deal about global warming, up from 26 percent in 2004.⁷⁵

As evidence continued to accumulate, elements of the business community began to adjust. It was not just that traditional obstructionists lowered their public profiles. Most striking was the emergence of the United States Climate Action Partnership (USCAP), a group combining several leading environmental groups and some of the nation’s biggest companies. Corporate involvement included giant firms such as General Electric as well as, strikingly, some of the biggest polluters in the world, like Pacific Gas and Electric Company. USCAP launched in early 2007, coming out in favor of mandatory restrictions on carbon emissions, utilizing a version of the cap-and-trade design that (with bipartisan support) had effectively tackled the acid rain problem in the 1990s.

Though some businesses sensed opportunities to profit from carbon reduction technologies, USCAP was more a coalition of necessity than of opportunity. Environmentalists concluded that to achieve bipartisan support—essential given the inevitable defection of some coal- and oil-state Democrats—they needed substantial business backing.⁷⁶ And many big polluters could see that regulation was coming. Given this, it was better to try to influence the legislation—better, as they say, to be at the table than on the menu. According to one report, GE’s chief executive officer Jeffrey Immelt’s interest in USCAP grew when he “met with a group of power executives and asked for a show of hands from those who thought carbon regulation was coming. Most of the hands went up.”⁷⁷ Among the early converts was Jim Rogers, CEO of Duke Energy, the third largest corporate emitter of CO₂ in the United States. “Legislation is coming” Rogers said. “We can help shape it, or we can stand on the sidelines and let others do it.”⁷⁸

This imperative mounted when the Supreme Court issued a 5-to-4 ruling in Massachusetts v. EPA in April 2007. The court held that the EPA not only had the authority to regulate carbon emissions but was required to do so if it found (as it surely would) that these emissions “may reasonably be anticipated to endanger public health or welfare.” Those worried about regulation could no longer simply obstruct legislation. If they wanted to preempt or channel EPA actions along acceptable lines, they needed to offer an alternative.

False Dawn

The stars seemed to be coming into alignment for a grand bargain. If it had been American politics circa 1987, maybe they would have aligned. But it wasn’t. Even as parts of the energy sector toyed with compromise, the GOP’s conservative wing doubled down. Tom Donohue swung his organization’s immense lobbying capacity into action. Responding in 2008 to the emerging target of an 80 percent reduction in emissions by 2050, Donohue was adamant: “There is no way this can be done without fundamentally changing the American way of life, choking off economic development, and putting large segments of our economy out of business.”⁷⁹ A year later, the Chamber’s vice president for environment, technology, and regulatory affairs, William Kovacs, would notoriously call for a “Scopes monkey trial of the twenty-first century” to put “the science of climate change on trial.”⁸⁰

While the Chamber lobbied Congress, the broader movement worked to fortify the base. The allegiance of conservative elites to unfettered markets was intensifying. For many of the GOP’s activists and voters, environmentalism was now a form of socialism or a prelude to world government. The alarm about global warming was environmentalism’s Trojan horse. Even as Al Gore was applauded from Hollywood to Stockholm, opponents redoubled their efforts. They also redirected them—knowing that Gore and his allies were investing unprecedented amounts in mass persuasion. Gore himself might have raised inconvenient truths, but he was a convenient target for the Republican base.

Cap-and-trade opponents pursued the emerging strategies of conservative obstruction. The new wave of opposition targeted conservatives, largely ignoring the political mainstream. In 2007 the conservative media, especially Fox News, expanded their coverage of climate change, with the twin themes of hypocrisy (Gore) and fraud (the fake “Climate-gate” scandal, which received saturation coverage).⁸¹

Conservative concern about global warming collapsed. In 2007 half of conservatives believed that global warming had already begun. Three years later, less than 30 percent did. Of course, polarization was increasing across many policy issues, but on no major issue was the transformation so fast and so sweeping as on environmental policy.⁸² Moreover, the new dynamics on the political right relied much less on nudging the less educated than on exploiting the growing power of the conservative echo chamber. Tellingly, among conservatives, education no longer helped the scientists. The more informed that conservatives said they were about environmental issues, the more dismissive they were of climate science. If they were paying attention, they were listening to the skeptics.

With the GOP base moving into strong opposition, the GOP leaders who were not already there followed. John McCain, Newt Gingrich, and Mitt Romney all reneged on previous expressions of interest in regulating carbon emissions. On no other issue was the extreme-outlier status of the modern GOP so evident. As the veteran Washington reporter Ronald Brownstein observed, “[I]t is difficult to identify another major political party in any democracy as thoroughly dismissive of climate science as is the GOP here.”⁸³ When the forces of USCAP would later seek their carefully crafted bipartisan consensus, with the backing of considerable elements of the business community, they would find no GOP takers.

Assault on the Castles

The battle over climate legislation wasn’t the only struggle that involved the modern robber barons. President Obama entered office promising to wage the most concerted assault on large-scale rent seeking in modern American history. The targets will be familiar by now: the medical-industrial complex, high-risk finance, and the fossil fuel industry. Between his inauguration and the GOP capture of the House twenty-two months later, a trio of epic battles played out that showed the chinks in the modern robber barons’ armor—as well as the formidable defenses they still possessed.

For all the differences in course and outcome, these battles were waged on similar terrain with similar armaments. In each, the robber barons deployed enormous resources to block or divert efforts at reform. In 2009, reported lobbying expenditures—which do not include organization building, public relations campaigns, or election-related activities—ramped up to $3.5 billion and ticked just above this record level in 2010. Leading the charge were general business groups such as the Chamber, which spent over $300 million on its own between the start of 2009 and the end of 2010. But after general business spending, three giant sectors led the way, spending approximately $1 billion each on lobbying across the two years. They were health care, finance, and energy.⁸⁴

In each of these epic battles, too, the Great Enablers did what they do best: stand up for the big guys. Republicans presented an almost unbroken wall of opposition, which, given the narrow Democratic edge and the inevitable wavering of cross-pressured Democrats, created a daunting hurdle for the Obama administration and its allies. Not a single Republican voted for the final passage of the health care bill in either house of Congress. Not a single Republican voted for the financial reform bill in the House. And while eight House Republicans crossed party lines in the House to vote for the energy legislation—which still barely passed because of the expected Democratic defections in districts dependent on fossil fuel production—the bill died in the Senate well short of the sixty votes needed to overcome the inevitable GOP filibuster, having failed to gain the committed support of a single Republican Senator.

Throughout, the GOP was almost perfectly united in opposition. The House and Senate Republican leadership fought all three bills tenaciously, hauling in campaign dollars from the threatened industries as they did. Between 2008 and 2014, the share of campaign spending from commercial banks that went to Republicans increased from 52 percent to 72 percent; from securities and investment firms, from 42 percent to 62 percent; from health insurers, from 39 percent to 55 percent; from hospitals and nursing homes, from 38 percent to 52 percent; and from mining, from 71 percent to 93 percent.⁸⁵

The Republican resistance was all the more notable because in two of the reform drives, Democrats designed their opening bids around previous Republican proposals: the cap-and-trade legislation that the 2008 GOP nominee for president, John McCain, had supported; and the proposal for mandatory private insurance that the 2012 GOP nominee, Mitt Romney, had actually helped pass in Massachusetts as governor. McCain’s and Romney’s stances were not isolated positions. They represented the establishment GOP alternatives to more far-reaching Democratic proposals—not the center of the party, but the expressed preferences of what remained of its more moderate and pragmatic wing. And, in both cases, they were unceremoniously repudiated.

What about finance? In the wake of the financial crisis, even Wall Street–friendly Democrats conceded the need for new rules. Against a backdrop of widespread outrage, the Republican resistance to reform was audacious. GOP leaders pilloried the Democrats’ legislation for not doing enough to end “too big to fail.” Meanwhile, they courted financial-sector contributions from those too-big-to-fail institutions. In early 2010 John Boehner met for drinks with Jamie Dimon, head of JPMorgan Chase and a longtime Democratic donor. His message was that Republicans had “stood up” to Democrats’ efforts to “curb pay and impose new regulations,” reported the Wall Street Journal, and Boehner said he was “disappointed” that Wall Street hadn’t given more to its true allies.⁸⁶ A month later, Boehner urged a roomful of bankers, “Don’t let those punk staffers take advantage of you, and stand up for yourselves.”⁸⁷ At the time, over 1,500 lobbyists for the financial sector were swarming Capitol Hill.⁸⁸

For their part, corporate leaders and business associations either deferred to or defended the barons. Even as the big banks expressed some public contrition, they took a cue from the health insurance industry and plowed tens of millions into opposition efforts spearheaded by the Chamber of Commerce.⁸⁹ This spending was secret at the time, which might have helped the banks in their rehabilitation effort if they hadn’t also been lobbying against every new rule, or if they hadn’t started trying to undo the regulations the second the ink was dry on the law. The Chamber never said a kind word about health care reform; the Business Roundtable, more sympathetic but also much less influential, said barely anything. With regard to clean energy alone, as we’ve seen, a serious business constituency for reform did emerge, and it was far weaker than the fossil fuel industry that led the opposition.

Yet in each of these struggles, there were also powerful forces pressing for change—a reminder that the modern robber barons do not enjoy unchallenged supremacy. The president and Democratic leaders in Congress mustered outside support among labor unions, environmental groups, and targeted reform campaigns, such as Americans for Financial Reform and Health Care for America Now! (a group that, as the exclamation point implied, really wanted to expand health coverage). These groups had sway only among Democrats, but that was potentially enough. Democrats had the majority in the House, and they had reached the magical number of sixty in the Senate that allowed them to overcome a filibuster—if they stayed united.⁹⁰

Moreover, a strong case could be made in each of these areas that reform would deliver long-term benefits that outweighed the costs. The president insisted, for example, that his health plan would slow the growth of costs enough to offset much of the expense of expanding coverage. Indeed, the Congressional Budget Office concluded (to GOP dismay) that the plan more than paid for itself with a combination of new taxes and lower projected federal spending. The CBO also concluded that the climate change bill would result in modest new costs and even a small benefit for poorer Americans. House Republican leader John Boehner complained, “They didn’t factor in the millions of jobs that will move overseas if the United States imposes this tax . . . I don’t know what color the sky is in a world where that won’t happen, but I’m sure you can ask the unicorns.”⁹¹

Still, reformers faced a steep climb. The rent seekers merely had to gum up lawmaking gears already filled with sand by the Republicans’ gridlock strategy. And so a final common element of all three battles was that the president and congressional Democrats made enormous preemptive concessions to the barons. The simplest financial reforms—tight leverage requirements, breaking up the largest banks, restored regulatory firewalls between banking and investment—were also the ones fought most vigorously. The president’s team, generally favorable toward Wall Street, pooh-poohed the most ambitious options from the start. But if they’d made it to Congress, they would have faced withering resistance from Republicans, finance-friendly Democrats, and Wall Street’s lobbying juggernaut. In April 2009, with the financial crisis still roiling, Democrat Dick Durbin of Illinois—the second in command in the Senate at the time—blurted out on a local radio station, “And the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.”⁹²

As groundbreaking as it was, the health legislation also incorporated concession after concession. Revealingly, most of them stripped out tougher cost controls or moved authority to the states, which were viewed as less threatening to the rent seekers. Whenever the administration tried to put in place serious cost controls, observes the journalist Steven Brill, “They were stopped by the lobbyists. . . . The only way that a bill this big will pass in Washington is if the powers that be decide that it should pass.”⁹³ The powers that be are the modern robber barons.

Before the debate even began in earnest, for example, the White House and congressional leaders brokered a peace treaty of sorts with the health care barons, promising not to regulate drug prices directly or significantly restrain hospital charges. In return, the hospital and drug organizations promised some modest policy concessions, but everyone knew what the real giveback was: They wouldn’t use their huge war chests and lobbying arms to take on the health plan. The deal was the parting achievement of PhRMA head Billy Tauzin, who had brokered the Medicare drug legislation that also kept price negotiation at bay. He would soon leave PhRMA, but not before taking home $11.6 million in pay in his final year.⁹⁴

The White House also signaled it would jettison the so-called public option, which would have created a public plan using rates based on Medicare’s that would compete with private insurance plans. The CBO had projected big savings from a strong version of the plan, which was popular with the public.⁹⁵ But by the end of 2009, it was gone. The news sent health care stocks shooting upward.

Meanwhile, the clean energy legislation came to include so many provisions exempting or “grandfathering in” big carbon emitters that some environmentalists began to question whether the game was worth the candle. The truth was that no bill would pass without such concessions. In energy, just as with health care and finance, reform required considerable compensation to the rent seekers. The initial giveaways were never sufficient, however, and as legislation wended through Congress—to victory in the cases of health and financial reform, and defeat in the case of clean energy—the protections for the barons multiplied. Only financial reform, the cause linked most to the economic crisis, grew stronger between proposal and passage, and even then the tightened law was significantly weaker and more dependent on future regulatory will than Wall Street had feared.⁹⁶

Which brings us to the final similarity: The passage of bills into laws, as difficult and crucial as it was, did not signal the end of the epic battles. The next steps—rule making by regulators, lawsuits and appeals in the courts, struggles in the states—determined whether the new laws would achieve their promise. And these were the kinds of fights the barons knew how to win, grinding down their opponents during the long, low-visibility path from grand ambitions to ground-level achievements.

Nowhere was this guerrilla warfare more evident than in financial reform. Five years after the 2010 law squeaked through Congress, nearly 40 percent of regulations scheduled to be in place were still in limbo.⁹⁷ Many—including crucial regulations that would increase the ability of investors to police excessive executive pay—remained tied up in court battles that were likely to end with the rules either weakened or overturned. Meanwhile, the big banks were bigger than ever, and risky practices such as the trading of exotic derivatives by federally insured financial institutions were on the rise.

The Great Enablers had no change of heart, either. As we saw in chapter 7, the Business Roundtable waged a successful war against so-called proxy access rules, which would have allowed institutional investors and other shareholders to challenge corporations’ nominees to their supposedly independent boards. The Republicans were even more aggressive. Contributions from FIRE donors ramped up to nearly a half billion dollars in the 2014 election cycle, and the spending, previously split between the parties, tilted dramatically toward the GOP. This friendly financial infusion helped Republicans take control of the Senate and enlarge their House majority. The party’s first item of business? Passing a budget that included a provision written by Citigroup to allow insured banks to start trading in derivatives again.⁹⁸

The Rent Is Too Damn High

Health care, finance, and energy represent a substantial share of our economy. But they’re by no means the only places where the modern robber barons practice their dark arts. Before we turn to the bigger picture of American institutional dysfunction, let’s meet a few more of the people who are robbing us:

• Got a License for That? The most noted change in the American labor force is the precipitous decline of organized labor, from over 30 percent unionization in the 1950s to less than 12 percent in recent years—and less than half that in the private sector. But another, less noticed trend has moved in the opposite direction: occupational licensure. Seventy years ago, fewer than 5 percent of workers were licensed. Today roughly 30 percent work in fields that require some kind of certification (almost always state level and generally enjoying bipartisan support, though this is an area where Democrats are arguably the greater enablers).⁹⁹ Sometimes there are good arguments for such requirements—we want our surgeons to be well trained—but many forms of licensure are both overly restrictive and costly, preventing more efficient use of workers with lower but sufficient levels of training. For example, nurses, dental hygienists, and paralegals are often prevented from doing work that they could do as well as doctors, dentists, and lawyers—raising prices for consumers, increasing incomes for highly paid professionals, and lowering earnings for these typically less-well-paid professions.¹⁰⁰

• We’re Number Thirty! The internet is the great general-purpose technology of our time. And the federal government made it possible. Unfortunately, our leadership role does not extend to making it possible for people to use this resource. American broadband is vastly more costly on a per-megabyte basis than internet access in many other nations. In a recent study, we ranked thirtieth in the world for broadband value, behind such technological powerhouses as Bulgaria, Romania, and Russia.¹⁰¹ The problem isn’t that we lack the know-how to do better. Nor is it simply that we are a big nation: Speeds aren’t much better in dense regions of our country, and Russia isn’t exactly tiny. The problem is that the big cable companies have little incentive to invest in better infrastructure or compete on price. Broadband requires physical infrastructure, and the physical infrastructure of the internet is not only private but also controlled by a highly concentrated industry. One way to tackle the problem would be to create public Wi-Fi networks, as cities such as Chattanooga have done, with impressive results. Guess who’s against such efforts? Business groups and Republicans.

• Fat Profits. Obesity now rivals smoking as a preventable health crisis. In response, policy makers are thinking about creative ways to encourage physical activity and discourage the excess consumption of fattening foods. These ideas, however, have run headlong into the big agribusiness corporations and food manufacturers that reap the greatest profits from our nation’s expanding waistlines. Spending on campaigns and lobbying by the food industry has shot up as the issue has risen on the agenda, with most of the money going to Republicans, who insist that obesity is entirely about “personal responsibility.” The Obama administration rolled out rules that would reduce salt and sugar in school lunches, which the federal government largely finances. Responding to industry pressure, congressional Republicans (with plenty of Democrats in tow) declared French fries and pizza “vegetables.” Twenty-four states and five cities considered a small tax on sodas—a major culprit in the obesity epidemic. But only two, Washington State and the city of Berkeley, overcame the lobbying juggernaut, and the Washington law was overturned in a referendum in which the soda companies spent $16 million, more than anyone had ever spent on an initiative campaign in the state.¹⁰²

• Crony Colleges. Chapter 1 reminded us that the United States has lost its lead in the higher-education race, due in part to insufficient state and federal investment. But there’s one part of the higher-education sector that has received more and more largesse: for-profit colleges. Almost a seventh of college students are now enrolled in for-profit schools; in 1993 the figure was just 1.6 percent.¹⁰³ And for all their emulation of the private commercial sector, these profit-making enterprises are basically creatures of the federal government: The fifteen biggest firms receive, on average, 86 percent of their revenue from the feds.¹⁰⁴ All this would be less troubling if they were revolutionizing education in the ways their rhetoric suggests. But the outcomes are dismal: Fewer than a quarter of students graduate in six years; the median debt of students who actually graduate is $33,000; tuition is twice what public institutions charge; and job market outcomes are bleak, which makes those big debts more of an economic yoke than a smart investment.¹⁰⁵ But the industry has become a major lobbying power in the higher-education arena, and Republicans have garnered most of the industry’s campaign donations. Once upon a time, Republicans criticized the for-profits: Reagan’s education secretary, William Bennett, rightly called them “diploma mills designed to trick the poor into taking on federally backed debt.”¹⁰⁶ Since the mid-1990s, however, GOP leaders—and plenty of Democrats on key congressional committees who have raked in the for-profits’ donations—have eagerly backed the rent seekers.

For-profit colleges are mini–robber barons: bottom-feeders in America’s rising sea of rents. The biggest of the barons don’t need public dollars or the slightly more hidden giveaways of federal loans. They just need the federal government to let them impose tolls on American society. They don’t have to ply Washington for visible handouts. They just have to keep Washington tied up in knots. The costs they impose, then, are not just economic. In undermining essential public authority, they threaten effective democratic governance itself.