Tuesday, August 18, 2015

The Trump moment.

Each week it just keeps getting better. The production values, the element of surprise, the buy-in. We have reached the capitulation phase of the Trump bubble. The punditocracy now believes not only that he might win Iowa, but that he probably will. And New Hampshire. Of course, no one casts a ballot for another five months, and we have seen many people take victory laps this early in the process who were never heard from again.

This week, the Fox News Poll put Donald Trump way out front in the Republican contest with 25% of the sample of registered voters. In second place is Johns Hopkins University neurosurgeon Ben Carson at 12%. Then, sliding into first place among actual politicians running for the Republican nomination for President, is Texas Senator Ted Cruz with 10%. The poll had several notable results. First, the continued stammering performance of the presumptive nominee, Jeb Bush, whose numbers fell from 15% to 9%. Second--though "notable" might be an overstatement--was Marco Rubio leading the pack in the race for "who would be your second choice" with 13%.

There are reasons that people like Donald Trump. Listen to him when he calls into Morning Joe or some other political gabfest, and he will really tell you what is on his mind. Listen to Scott Walker--who has probably suffered the greatest decline from borderline frontrunner status to where he is on the brink of being lapped by Carly Fiorina and John Kasich--drone on about how he won three races in four years (really, Scott, do you realize that just makes you an average Congressman) or Jeb stumble over exactly why it is he wants his brother to be his foreign policy advisor, and the Donald seems in contrast to be straightforward, confident and unscripted. Given the contrast with his cautious and highly scripted peers, it is no wonder that his supporters forgive the highly flexible nature of his positions on most any issue.

Whether you love him or hate him, or are just along for the entertainment value, Trump speaks with a clarity that is not typically part of our political discourse. At the first Republican debate, he startled people when he pointed to his fellow candidates on stage and commented not just that he had made political contributions to several of them, but that as a businessperson when he made those contributions he fully expected to receive something back in return--comments about campaign finance that the trendy news website Vox.com declared to be "shockingly insightful:"

"I will tell you that our system is broken. I gave to many people. Before this, before two months ago, I was a businessman. I give to everybody. When they call, I give. And you know what? When I need something from them, two years later, three years later, I call them. They are there for me. And that's a broken system."

Speaking to a crowd at the Iowa State Fair over the weekend, Trump expounded on how the system works:

"Many of the people that gave to Jeb, and to Hillary, and to everybody else, they're friends of mine, or enemies of mine, but they're people I know. These are not people that are doing it because they like the color of his hair, believe me. These are highly sophisticated killers. And when they give $5 million or $2 million or a $1 million to Jeb, they have him just like a puppet. He'll do whatever they want. He is their puppet. Believe me. And with me, I had yesterday a lobbyist call me up, it's a friend of mine, good guy, smart as hell. He's for his client. I don't blame him. He said, 'Donald, I want to put $5 million into your campaign.' I said, I don't need it, I don't want it. He said, 'No, no, I want to put five million in.' I said 'I don't want it. Because when you come back to me in two years and you want help for a company that you're representing or a country that you're representing, I'm going to do the right thing for the people of the United States. And I don't want to have to insult you.'"

Trump has upended the traditionally cautious political debate. In a campaign with well over a dozen candidates--many, if not all, with credible resumes boasting years of service as governors and senators, plus two prominent figures from industry and medicine--it is the reality show celebrity, birther and huckster extraordinaire who is leading the pack. But more than just leading the pack, Donald Trump has proven his ability to do what each of the others can only dream of: he can tap into the zeitgeist of a disenfranchised electorate and thumb his nose at big money fat cats--all while standing in front of a Butter Cow and giving kids helicopter rides at the Iowa State Fair. In a year where political money has been a driving narrative of the race--Jeb's $100 million war chest vs. Sheldon Adelson backing Marco Rubio vs. the Koch brothers picking Scott Walker vs. the Clinton money machine--Trump has asserted a scathing critique of our entire campaign finance system in words that everyone can understand.

Over the past several decades, the magnitude of spending on federal elections and lobbying has grown dramatically. Built upon the words of the First Amendment protecting freedom of speech and the right to petition the Government, a series of federal court decisions--including the Supreme Court decision in Citizens United--now provide the legal infrastructure supporting what Trump suggests is a massive influence peddling industry. The root of the problem has been the Supreme Court fixation on corruption as a function of quid pro quo relationships, while the art of lobbying and contributions in our nation's capital is not about quid pro quo contributions for official acts, but instead is about relationships that keep the quid and the pro quo separated in time but still deliver the goods.

Our corruption is deeper, more complex, and far more damaging. As the Donald observed--while the Butter Cow stood by in rapt attention--once you take the money, "they have him just like a puppet." And the money in question is huge. According to OpenSecrets.org, the finance industry alone paid out $507.3 million to federal candidates and parties in the 2014 campaign cycle, and that was an off year. The largest single recipient was New Jersey Democratic Senator Cory Booker, who received just over $4.1 million, with Republican leaders Mitch McConnell and John Boehner close behind at $3.7 million and $3.3 million, respectively. And that is just contributions from one industry.

The simple fact is that none of this money is contributed without a purpose. A lot of money is contributed because in Washington, DC, a lot is at stake, whether in legislation, in regulatory rulings or in other ways. As noted on OpenSecrets, the money that industries, companies, unions and issue groups spend on lobbying is often just a drop in the bucket compared to what they can reap in return if their lobbyists are successful.

The notion that access and influence are part of an economic relationship between donors and public officials that is comparable in its long-term effect to quid pro quo corruption--as OpenSecrets and Trump each suggest--is the theory that was specifically rejected by Supreme Court Justice Anthony Kennedy in his majority opinion in Citizen's United. While Kennedy rejects explicit quid pro quo relationships as bribery, he embraces the notion that a natural alignment exists between elected officials and their contributors where "It is well understood that a substantial and legitimate reason, if not the only reason, to cast a vote for, or to make a contribution to, one candidate over another is that the candidate will respond by producing those political outcomes the supporter favors." 

From where Anthony Kennedy sits, the politician who delivers the goods is being appropriately responsive to the interests of contributors, while to Donald Trump that politician is a puppet. Trump's casual allegory of sophisticated killers and puppet-masters poses a challenge to Kennedy's central conclusion in Citizen's United that "The appearance of influence or access... will not cause the electorate to lose faith in our democracy." 

Many have argued for years that political money is a destructive force, but perhaps when Trump says it--and says it as a candidate speaking in plain English to an adoring crowd from the base of the Republican Party--people will begin to pay attention.  If Trumps words are "shockingly insightful" it is only because people have not been paying attention. The shocking part is that a majority of Supreme Court justices still seems to be unwilling to acknowledge that our nation's capital is plagued by a systemic corruption that is rooted in money.

When Donald Trump's moment ultimately fades--which it must--and the Republican primary season returns to script, we will see whether his comments about political money have any lasting impact. One might imagine that when the mega-donors reassert their control over the process, people will demand to know exactly what those donors expect to get for their money. Or perhaps Anthony Kennedy is correct, and while people may claim to be shocked they nonetheless accept that money is an eternal fact of life in our democracy.

Saturday, August 15, 2015

It's not about the politics.

When the Puerto Rico debt crisis burst into the news, Puerto Rico Governor Alejandro García Padilla pronounced that the Commonwealth's debt crisis "is not about politics." Of course, to paraphrase H.L. Menken, when a politician says something is not about politics, chances are it's all about politics. That is not to say that Puerto Rico's massive debts are payable or that the math is not suffocating, but long before the debts were massive, and long before the math became intractable, there were the politics. To put in place a plan to address Puerto Rico's debt crisis without taking account of the long simmering witch's brew of island and federal politics and policies that led us to this point would be folly.

While federal and island officials alike are loath to use the "c" word, Puerto Rico has been a colony of the United States for just over one hundred years. Like colonies across the globe that traded hands among European powers as the spoils of one war or another, Puerto Rico was ceded to the United States--along with Guam and the Philippines--by Spain in 1898 after its defeat in the Spanish-American War.

Americans are generally not comfortable with the notion that we are a colonial power. Global hegemon or imperial nation perhaps, but not colonial overlord. Maybe it is because we were once a colony ourselves. Perhaps our struggles to overcome our legacy as a slave power left us uncomfortable with the idea that through much of the 20th century we ruled over Caribbean sugarcane plantations where the descendants of slaves continued to toil.

The Founders set forth the terms of America's dominion over its colonies under Article Four of the Constitution--aptly known as the Territories Clause--and directed that full plenary power and responsibility over America's territories was to be vested in Congress. For the better part of the century that Puerto Rico has remained an American colony, a series of legal cases have explored and defined the relationship of US territories to the United States, but over that time little has fundamentally changed. As set forth in the Territories Clause, and as confirmed repeatedly by the Supreme Court, Puerto Rico remains an unincorporated territory of the United States for which Congress remains fully and unambiguously responsible.

It is notable, then, that throughout the public discussion and debate over the past several months about the insolvency of Puerto Rico, there has been little or no discussion of the ultimate responsibility of Congress for events that have transpired. Congress has never been shy about exercising its oversight powers in areas that offer political opportunity--Benghazi and the IRS are recent examples--and is often swift to demand full accountability and point the finger of blame at others for any manner of controversy or scandal that might come up, but with respect to the territories, where the responsibility of Congress is clear, we have heard a deafening silence. There is no Committee on the Territories in either the House and the Senate through which it might have exercised its responsibility over the years, and none of the Tea Party members who carry a copy of the Constitution in their breast pocket have been seen thumbing through it in front of an assembled gaggle of reporters demanding that Congress be held accountable for its own failure of duty as the Puerto Rico crisis has escalated.

The economic and fiscal crisis now confronting Puerto Rico has been building for years, and is a direct outgrowth of political and policy decisions made at the local and national level. It was two decades ago that Congress--with the support of then-Governor Pedro Rossello of the pro-statehood party--legislated the end of the Section 936 tax benefit program that for decades had been the basis for a thriving manufacturing sector on the island and a domestic capital market that provided low cost funding for infrastructure and other purposes. And it was in the same timeframe that Puerto Rican activists demanded the curtailment of missile testing on the island of Vieques, which ultimately resulted in the closing of the Roosevelt Roads naval base on Puerto Rico.

The end of the 936 program and the closing of Roosevelt Roads both came to a head around 2006, which is generally viewed as the beginning of the long slide in employment on Puerto Rico, the outmigration of Puerto Ricans to the mainland, and the growth in debt that Governor García Padilla now deems to be unpayable. The end of the 936 program and the closing of Roosevelt Roads were political decisions for which Congress and Puerto Rican officials each bear culpability and that together laid the groundwork for the current crisis.

Puerto Rico politics have long been defined by differences over the preferred political relationship with the United States. Governor García Padilla's Popular Democratic Party stands for continued Commonwealth status while the New Progressive Party of former Governor Rossello stands for statehood. The third force in local politics, representing those who favor independence, has historically had a far smaller share of the vote--though Puerto Rican "nationalism" remains a powerful political and cultural force.

Much to the chagrin of the United States, the United Nations Special Committee on Decolonization--created to support self-determination for colonized peoples--instigated several plebiscites on the political status of Puerto Rico, beginning in 1993 when the Puerto Rico electorate voted 45%, 45% and 10% for statehood, current status and independence, respectively. Over the years, the preference for statehood has grown, with the most recent plebiscite showing a 60+% preference for statehood over the current territorial status, and just last month the Puerto Rico non-voting delegate to Congress, Pedro Pierluisi--a member of the statehood party--published an op-ed in the New York Times arguing that statehood is the only solution for what ails the Commonwealth.

But neither the United Nations nor Puerto Rico politicians can make Puerto Rico a state. That can only come about through an act of Congress, and Congressional approval of a new state that would more likely than not send two new Democrats to the US Senate and a half dozen or so new Democrats to the House of Representatives--projected to come primarily at the expense of red state delegations--is unlikely to win approval in a Republican-dominated Congress. Nonetheless, the political status of the former Spanish colony that would be the 17th largest state if admitted to the Union remains the dominant political subtext even as Puerto Rico careens into insolvency.

Today, Congress and the White House are largely speaking with one voice as they argue against a "bailout" for Puerto Rico. Instead--as evidenced by the support of both Hilary Clinton and Jeb Bush--the magic bullet that many support is to allow Puerto Rico to seek protection under the federal Bankruptcy Code, which is not currently available for US territories. Bankruptcy seems like a neat solution, though advocates conveniently ignore the fact that allowing Puerto Rico access to bankruptcy protection would also be a form of bailout, but one that would place the cost of the bailout on the backs of the millions of Americans that currently own Puerto Rico bonds--directly or through mutual funds--that would take a significant haircut in any debt restructuring mandated by a bankruptcy court.

The presence of hedge funds--a category of opportunistic investors that is quite different from mutual funds--as owners of a share of Puerto Rico debts is going to complicate any proposed resolution. Puerto Rico bonds have been purchased by mutual funds for years, if not decades, and they are now among the most widely held securities in Americans' savings accounts. Hedge funds only became significant buyers of Puerto Rico debt over the past two years, most notably in 2014 when Puerto Rico issued $3.5 billion of bonds to pay operating costs and push the advent of the current insolvency crisis a year down the road.

At that time, Puerto Rico's traditional mutual fund investor community declined to participate in the new financing. That was the moment when the decade-long decline in Puerto Rico fiscal affairs had become fully evident and a tipping point had been reached. At that time, when access to capital looked to be precluded--forcing the Puerto Rico administration to come to grips with its fiscal problems--the hedge fund community saw an opportunity and purchased nearly all of the multi-billion dollar financing.

The $3.5 billion bond issue purchased by the hedge fund community seemed like a blessing at the time for the Puerto Rico administration of Governor García Padilla. It not only allowed the inevitable collapse to be pushed down the road, but more specifically it allowed the crisis to be deferred to a presidential election year, when a politically friendly solution would be more likely due to the large Puerto Rican representation in key electoral college states. Governor García Padilla showed his cards with respect to the deeply political calculus involved when he bluntly threatened both political parties if they fail to support Puerto Rico's preferred solution of achieving access to the bankruptcy courts: “Puerto Ricans decide the elections in Florida. That’s very important. By deciding the election in Florida, we can decide [who is the next] president of the United States.”

Hilary Clinton and Jeb Bush have read the electoral map, and are now each on record supporting Governor García Padilla's demand that Puerto Rico be allowed access to bankruptcy protection. And they are not alone. National publications from the New York Times to the Weekly Standard have made similar arguments, and the Obama administration seems to be heading in that direction.

Bankruptcy sounds like such a reasonable solution. After all, municipal governments across the country are allowed to use bankruptcy as a tool for renegotiating debts that have become unaffordable. Puerto Rico leaders believe that they have sufficient leverage over the national political parties to secure the legislative changes necessary to allow them to use bankruptcy as a means to renegotiate their outstanding obligations, while leaving their powers of self-governance--as enshrined in the 1952 Commonwealth Constitution approved by Congress--largely unaffected going forward. For their part, Democrats and Republicans in Congress seem to be embracing bankruptcy as a path of least resistance, one that allows them to wash their hands of the problem while others pay the bill.

However, despite the appeal of bankruptcy as an easy solution for Puerto Rico, it is unlikely to play out that way over time. The mutual fund community--the trustees for the millions of Americans that own Puerto Rico bonds--has indicated that it will fight efforts in Congress to change the bankruptcy code on an after-the-fact-basis. But it is the hedge fund managers--individuals with their own money on the line--who constitute the greatest threat to the easy solution envisioned by politicians in Puerto Rico and Washington. Those investors--whose money Governor García Padilla eagerly accepted when it seemed politically advantageous to do so--who will take the fight all the way to the Supreme Court to demand adherence to the law as well as Congressional accountability.

It may be appealing given the anti-Wall Street mood in the country to place some share of the burden on the backs of hedge fund managers--after all, they are highly compensated opportunists who bought Puerto Rico bonds after the insolvency was evident--but there will be considerable political blowback against that line of argument once it becomes apparent that the tens of billions of dollars that a Puerto Rico bankruptcy bailout is going to cost would primarily be seized from the retirement savings of tens of millions of ordinary Americans.

Ultimately, the problem with bankruptcy as a solution is that it will not solve the problem. The insolvency of Puerto Rico is not simply a fiscal crisis but is a constitutional one. Since the approval of its constitution in 1952, Puerto Rico has enjoyed significant powers of self-government, but as the Supreme Court has ruled, none of those powers has removed Congress from its position of ultimate responsibility, and like a parent that has ignored its responsibility for a wayward child, Congress may have looked the other way, but at the end of the day it remains responsible for the welfare of all of the US territories. If the failure of duty is placed on Congress--as the Constitution suggests that it must be--then at the end of the day the price of the Puerto Rico debt crisis is one that we all will be forced to pay, and Puerto Rico and the Congress will have to recraft their relationship going forward so that the current problems are not repeated in the future.