Hi,

Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

Today’s issue is on the surprising and increasingly heated Republican debate over the role of finance in shaping business and justice.

The debate is taking place a decade after the 2008 crisis, and parallels the dialogue going on in the Democratic party. We can see that argument playing out in the Democratic primary. Farhad Manjoo in the New York Times placed it front and center in his column titled “Obama’s Biggest Mistake,” which both notes the schism among Democrats, and profiles my upcoming book Goliath.

The same debate, about the legacy of the financial crisis and what that revealed about the stories we told ourselves about business, finance, and justice, is taking place in the Republican Party as well. So that’s what I’m writing about today…

Mitt Romney: It’s Not the 1970s Anymore

One of the more shocking political trends of the last year has been a sharp turn in political economy thinking by Republicans. It’s not just Trump and trade policy, it’s an increasing belief among thinkers within the GOP that the party strategy of pursuing unfettered rights for capital no longer delivers for the American economy, and increasingly opens up our communities to attacks from both an authoritarian China and domestic big tech progressives (what they sometimes call ‘woke capital’).

This debate remained largely hidden, with the important exception of Tucker Carlson’s populist turn on Fox News, but it is becoming explicit as Republican elected leaders start making the case. Senator Marco Rubio, for instance, has written reports on financialization and China, Senator Josh Hawley is taking on big tech and increasingly Wall Street, and Congressman Doug Collins and Texas Attorney General Ken Paxton are investigating Google for antitrust violations. We can now add another Republican to the anti-libertarian and pro-business trend, and this one’s as important as they come.

Last week, Utah Senator and former Presidential nominee Mitt Romney wrote a letter to Donald Trump, a letter in which Romney argued against Trump pursuing a capital gains tax cut. There is a debate within the administration, with Wall Street-friendly advisors like Larry Kudlow and Steve Mnuchin encouraging Trump to try and loosen tax obligations for investors who want to sell assets with a capital gain. They sought to have Trump go around Congress and issue a controversial executive order to index capital gains taxes to inflation, which would effectively reduce capital gains taxes. Trump has so far refused.

It was surprising enough to have a prominent Republican arguing against a capital gains tax cut. But the argument itself was far more important than the politics. Romney made several points in his letter, but this was the driving rationale.

Investors are not starved for capital, but rather productive investments are increasingly difficult to find. This retroactive tax cut creates a windfall for those who have already invested in capital assets based on past decisions, rather than encouraging future capital formation.

Essentially, Romney is saying that such a cut would be bad for business, because the current finance-friendly model of capital deployment isn’t helping capital formation anymore. Romney’s correct on this point. I’ve discussed what excessive financialization does to companies like Boeing, destroying engineering integrity and ultimately the corporation itself. Romney’s making a broader argument, that such a tax cut no longer helps put capital together in productive ways. His point on capital formation is shocking not only because he’s a Republican, but because he’s a former private equity baron, one of the early pioneers of the industry.

To understand why this is such a big deal, you have to understand the context for the entire move towards finance-friendly politics in America. Private equity’s rationale for existence was the idea that there was a “capital shortage” hindering American business. In my piece from late July on the origin of private equity in the late 1970s, I noted that PE was a financial model largely created by a conservative Republican Nixon official and financier named William Simon in response to inflation and a lack of incentives for financiers to put capital to work. In 1978, a Democratic Congress and a Democratic President accepted Simon’s arguments, and cut capital gains taxes.

These tax cuts were in the context of a society in which politicians perceived there wasn’t a lot of capital to invest because of the high-inflation environment. But that was forty years ago. Romney’s arguing that not only is there no more capital shortage, but that there is a capital glut. We don’t lack capital, we lack productive areas in which to place that capital. To paraphrase, Romney is saying that this ain’t the 1970s anymore.

Romney is also making the case that such a tax cut would be bad for workers.

I also welcome President Trump’s focus on the welfare of American workers, and share his notice that the proposed change would accrue primarily to high-income Americans. In 2018, 91.4% of Americans reported no long-term positive gains, while the top 1% of income earners paid 72.0% of all capital gains tax. The average tax paid on gains for taxpayers in the middle quintile is $280 – far less than the top 1% that pays $157,890 on average. Furthermore, all contributions and earnings taxpayers withdraw from traditional retirement accounts, such as a 401(k) or an IRA, are taxable as ordinary income and do not stand to directly benefit from indexing capital gains.

My jaw is honestly on the floor at a Republican Senator who helped create the private equity industry making the (accurate) case that increasing financial power in our political economy is good for wealthy rentiers and bad for entrepreneurs and workers. Private equity was driven by an idea, and Romney is saying that this idea, while it used to make sense, has gone too far. The implication is that our real economic need at this point is to focus on production and innovation rather than just the financing.

There’s pushback, of course. Kudlow, Mnunchin, 20 Republican Senators led by Ted Cruz, and the U.S. Chamber of Commerce supported the proposed capital gains cut. And Romney’s argument has been criticized by libertarian anti-tax activist Grover Norquist, who wrote a letter in response that accused Romney of using “regrettable left-wing rhetoric.” But Norquist made no real policy arguments. Other conservative movement operators made the argument that Romney might technically be correct on substance, but it’s politically inconvenient for Republicans to be as honest as Romney is in his letter to Trump.

I always thought of Norquist as a savvy political strategist with a long-term goal of reshaping society. But what is fascinating is to see how petty Norquist looks shorn of any intellectual rationale for what he’s doing. He seems silly and out of touch advocating capital gains tax cuts in today’s world, like the liberals in the 1970s seemed arguing from the premise America was endlessly affluent as stagflation was hitting. There’s a real lack of ideas within the libertarian right, and it shows.

Romney’s argument by contrast reflects a refreshed idea about what is driving our economy. He is contributing to a new and different intellectual framework for the GOP, and one that is fascinating to watch emerge. Republicans are beginning a shift towards a party that is socially conservative but economically heterodox. It’s still a tentative series of steps, but the party seems to be evolving its political economy thinking in the wake of the financial crisis. And it is driven by ideas. Rubio’s work on financialization is oriented around analyzing deep-seated economic trends. And Senator Hawley, for instance, who is another important leader in the GOP, wrote a very impressive book on 19th century intellectual history and the political creation of corporate America.

At this point, there’s something of a race between the Democrats and the GOP over who has something to say about the multiple combination of crises we as a society are facing. My best proxy is the quiet collapse at Boeing, which combines a corrupt defense and political establishment, monopolization, financialization, Chinese power, all leading to crashed civilian airplanes. So far, neither party has grabbed this problem directly, because neither has a totally coherent way to understand the breakdown of productive integrity. But Romney’s observation about the role of excess financial power is getting close to the core of the problem.

It may seem trite, it may seem naive, but what I’ve seen from over 15 years in politics is that ideas really do matter.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of Big, a newsletter on how to restore fair commerce, innovation and democracy.

cheers,

Matt

News Update

Last issue I asked about whether I should include a news section. Most of you seem to like it, but not everyone. So I will be including a news section, but below the main post. Here you go.

Curtis Hill: Is Google an illegal monopoly? 48 state attorneys general – including me – are investigating (Fox News)

Warren Probes Private Equity Owners of For-Profit Colleges (Republic Report)

Within the munitions and missiles sector, two prime contractors, Raytheon and Lockheed Martin, account for roughly 97% of the Department’s munitions and missile procurement funding." (Ok this isn’t news, but it’s a fun stat from this report).

When Big Business Won’t Let the Troops Repair Their Equipment (The American Prospect)

Federal Reserve intervenes for third day to ease market strains (Financial Times)

Buttigieg’s Health Plan Gets One Big Thing Right (Bloomberg)

4 Reasons Why News Media Will Thrive In The Wake Of Privacy Regulation (Ad Exchanger)

Crash Course: How Boeing’s Managerial Revolution Created the 737 Max Disaster (New Republic)

From the Mail Bag

I got this great observation from a reader. Lots of frustrated procurement experts and engineers out there. We could start a political movement, ‘People Who Want Things to Work Correctly.’ Keep ‘em coming.

Hi Matt, really enjoy your newsletter and following your work. I was struck in yesterday's BIG issue and in one of your tweets this morning about the pages of definitions in the House Judiciary Committee's document request letter.
In the past I wouldn't know what to make of defining words like "and", "any", and "each" - just lawyers being lawyers, and I don't have a law degree. But after transitioning into a regulatory position in state government last year, it is often just this kind of weaseling that I have to devote my time to litigating. We don't work with lawyers but we find ourselves acting like ones, with the consultants being paid by their clients to do the same.
Our unspoken mantra is to make them work for it but ultimately let them skate; this system is borne by years of management burnout and a keen understanding that a hard NO will be met by pleas up the line and orders to find a way to YES. Maybe once upon a time we exclusively deliberated on the merits of proposals and the impacts they imposed on society. Victory after victory has steadily moved the needle in the direction of questioning whether the reviews we're tasked with providing are necessary at all. Give an inch, take a mile...
If I had a stronger belief in my office's mission it would truly bum me out, but as it stands my job function is to turn what should be a political decision into an administrative one, and our results show that we're providing that cover faithfully. So I'm counting the days until I find something better and watching the powerful tools we could yield collect rust.

BIG by Matt Stoller

The Republican Debate Over Big Finance Heats…