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Op-Ed Thu Oct 13 2011
by Peter Huff
Part of the challenge in assessing the Occupy protests is that it requires one to separate the optics of the moment and the media narrative that follows, from the substance of the positions being put forward by the group.
The people involved that I have spoken to have varying degrees of economic comprehension, but there are some points that have merit. For each "End the Fed" sign that hints at a certain level of sophistication and understanding the role of central bankers in our economic malaise, there is a "Tax the Rich" slogan that cheapens the debate to the point of indifference.
I'm skeptical about the Occupy protests. They have a staged feel to it; long on theatrics, short on a primary focus. If this was ever a grass roots movement, it is no longer. As I write this, there are now fundraising efforts on the back of the protest. The unfortunate involvement of unions, socialists, communists and anarchists will likely end any meaningful contribution by the more rational part of the protest. If there was a time for this movement to advance ideas that would be met with agreement by the majority of Americans, it has passed, and has now devolved into an expression of left-wing politics that could have been transplanted from any recent year.
As a result of the incoherence, the best way to describe this nascent scene is by the cognitive dissonance found in its message.
Tax the Rich
It sounds so simple -- tax the rich. Take the "1%" and make them pay more in taxes. That will create enough revenue to plug the deficit, and allow the economy to grow.
The CBO score of President Obama's latest jobs bill [PDF] estimates that the highly touted tax increases on the "rich" would result in $453 billion over 10 years. That is an impressive figure. However, it is wholly insignificant when compared with the current level of deficit spending.
The US government added $1.23 trillion in debt in 2011, or about $103 billion per month. Taxing the rich, this panacea of policy and justice, would, over the next 10 years, increase revenue to offset only four months of current spending.
Ten years vs. four months. This is not a solution. It's not even a serious attempt at a solution.
Wall Street & Labor
As unions position their organizations in support of the "Occupiers," an unnatural balance is struck in order to achieve the image of supporting the protest while disregarding the substance of "Wall Street's" involvement with unions. Consider that a standard part of organized labor's appeal is their benefit plan, which among other things, includes a worker's retirement pension. A multitude of these pension plans are defined benefit, i.e., the retirement compensation owed to an individual upon their retirement is defined in advance. This requires the fund to be managed according to cash flow requirements and forecasts benchmarked to an expected rate of return. Of course, the unions do not manage the pension funds themselves, financial management companies, generally referred to as Wall Street, manage those funds.
It is commonplace for many pension funds to benchmark an annual return of 8 percent. In order for a pension plan to continually gain 8 percent ROI, year over year, they must rely on the best money managers Wall Street has to offer. In order to maintain that high standard of return, especially in down years, money managers must venture further into riskier investments.
An insightful look into this can be found here regarding the Illinois Teachers Retirement System.
Is this the "greed" that the Occupy protesters are protesting? Whose "greed" is the primary driver in this relationship? The investment manager, whose role is tactical, or is it the pension fund, which is strategic in its demands for 8 percent returns?
It strikes me as duplicitous that these organizations seek to demonize the group of professionals upon whose labor and performance their own promises and obligations to their members are dependent.
One area where the Occupy protesters and the vast majority of Americans find themselves in agreement is opposition to a growing relationship between governments and business interests. Most people inherently see the risks of allowing these relationships to become symbiotic, at the expense of the broader population. However, the Occupy protesters seem to identify this nexus only on ideological grounds.
Let us look at some recent examples:
Solyndra: The now bankrupt solar panel company exemplifies a political economy, where the formation and capitalization of a company is a function of ideology and political connections rather than the merit of the business model. However, no matter what political leverage it had, the company could not compete in a global market for its products. New emails show that this was clear for several years, but the risks were ignored by Obama administration officials in charge of lending.
Comcast/FCC: Earlier this year the FCC abdicated its responsibility as a neutral arbiter in judging whether the Comcast-NBC merger violated anti-trust laws. In exchange for agreeing to special favors, including subsidizing the cost up to 80 percent of their services to low-income consumers (creating annual $100 million structural loss that will be borne by either shareholders or existing customers), mandating increased content specific to minorities (regardless of whether there is a market for this content), etc., the FCC approved the merger [PDF].
The Occupy protesters are clearly proponents of regulators given their stated goal of increasing regulatory authority for government agencies. Would an example of a regulatory body expanding their jurisdiction into legislative authority temper this enthusiasm? Likely not.
Obamacare: The creation of a maze of legislation so numerous and complex that thousands of companies, labor unions, and entire states have been granted waivers from the law. Waivers have been granted to politically connected organizations and now represent a competitive advantage over firms who are subject to the healthcare law. The law institutionalizes the value of political clout over market competition. This favors larger organizations over smaller firms, and promotes the infusion of corporate money rather than discourages it.
It is true that many of the protesters are supporters of a single payer health system. It should be noted that a single payer healthcare system consolidates more decision making power to a small group of officials, which increases the susceptibility of corruption.
Given these examples, it would seem likely for a protest opposing corporatism to acknowledge that the current administration has increased the opportunities for businesses to take advantage of government access. With the protesters I have spoken to (all in Chicago), they are supportive of the Obama administration and assign very little culpability to its policies.
This seems to be the most specific demand from the Occupy protests. It makes sense that it would be. The vast majority of protesters are under 30 years old and many are unemployed. Many feel that, given the investment in their education, they are underemployed. In any case, many are struggling with the ability to pay the accumulated student loan debt, so the debt should be forgiven.
This demand is incredibly shortsighted. They don't understand what this demand would mean for future students who need access to capital in order to go to college. Debt forgiveness would mean that every future student would be highly scrutinized and the loan amount would be determined by their ability to pay the debt back (much like the real world). This would obviously reduce access to loans for students who chose degrees that led to less lucrative careers. For a protest that deploys signs such as "people before profits" this would surely be an unintended consequence of its demands. How long until we hear of the menace of sub-prime student lending?
But of course we needn't worry when the government is there to back the paper that no one else wants. Over the last decade, congress has positioned the US government as a major provider of student loans and last year made itself the sole provider. It should be reassuring that the US treasury is adding more debt to its balance sheet when the holders of this debt are pushing for payment adjustments. This sounds eerily familiar to the beginning of the housing collapse we have yet to live through.
So again, it is incomprehensible why the protesters are targeting Wall Street when they should be directing their anger at the federal government and their educational institutions.
"The 99% vs. 1%." It likely polled well in a focus group. It certainly sounds better than "the 20%." It is reminiscent of the way all armies believe that God is on their side, and I'm sure it was chosen for that effect on the left base of the democrat party. However, the message doesn't match the reality.
The Occupy protests are still a big-government movement. We have enacted big government policies with each political party in power over the last several decades. In fact, I'm not sure if I have lived through an era of a small government movement.
It is apparent over the last decade, where government authority has become omnipresent in more aspects of our lives, the less we find satisfaction in this arrangement. It is the saying, the bigger the state, the smaller the man. In that we believe we have the answers for ourselves, we make the mistake of thinking that our answers can and should apply to others. In practice, as citizens in a democracy, we can agree on general laws and conduct, but when our laws and regulations focus on applying preferences rather than upholding standards to which all are subject, then the probability of the law satisfying anyone is reduced to zero.
It is because of this understanding that I do not begrudge the Occupy protests in their entirety.
Peter Huff has worked in the capital markets industry for the last eight years in business development and consulting roles.