Reason Magazine - Contributors

Electrifying Performances

lochheadc@nationalpress.com (Carolyn Lochhead) — Fri, 01 Jun 2001 00:00:00 EDT

It was a great Di Fi Moment.

On January 31, Dianne Feinstein, the senior senator from California, gazed down from the dais of the Senate Energy and Natural Resources Committee and lambasted out-of-state electricity producers for charging outrageous prices to Golden State utilities during the wee hours of the morning.

California consumers, living for weeks on the edge of rolling blackouts, were mostly asleep at 3 a.m. and demand should have been low, Fein-stein argued. But wholesale electricity prices went as high as $2,400 a megawatt-hour.

Feinstein wants temporary federal price controls on wholesale electricity. She says that will give California breathing room during its energy debacle. The reactions of Feinstein and her junior colleague, Sen. Barbara Boxer, to California’s energy woes are instructive. Though neither had a direct hand in the misguided restructuring plan, they nonetheless suggest why it will be a long time before things get back to normal.

Finding little traction that day, Feinstein delivered one of her signature blasts, developed during her days as mayor of San Francisco and honed by years on the political stage. It was part threat to the producers, veiled in a call for moderation, and part plea, clothed in an offer of mediation.

She acknowledged, as everyone does now, that California went astray when it freed wholesale electricity prices but left consumer rates fixed. She listed things the state has done, from increasing retail rates 9 percent to speeding approval of power plant construction. She said she had urged Cisco Systems chief executive John Chambers and the mayor of San Jose to drop their opposition to a new generating plant in their backyard.

"However," Feinstein continued, in a soliloquy aimed squarely at placing the chief blame with the producers, "when spot power at 3 a.m. in the morning is 500 times higher than it would be normally, that to me, in my simple self, is price gouging, any way you look at it. So I am making a request -- which you can ignore -- as the senior senator from the state involved, that you go back to your CEOs, and you ask them, ‘Please, don’t price gouge. Please, California is trying to work their way out of this situation. Give them an opportunity to do so.’ I’m going to be around here for six years. I’ll be on this committee, and I’m going to watch the situation.

"All of you have made a lot of money off of this. And I don’t begrudge that. All I’m asking -- you can ignore it -- is to please give this state an opportunity to work its way out. Please recognize that if you’re going to sell power at 3 a.m. in the morning and charge 500 times the going rate, that there are some of us that might look at that as very real and very profound price gouging."

"Now, you may say, ‘Well, she’s very naive to say this.’ But in my nine years as mayor of San Francisco, I had a relationship with CEOs, that anytime I went to them, and asked them to do something voluntarily for the city, I never was turned down.

"[Pacific Gas & Electric] knows that."They always responded. And Chevron responded. Bank of America responded. Every big corporation in the city.

"This is really the first industry I’ve seen -- the power generation industry -- that really is willing not to care what happens, not to care about the people that are being thrown out of jobs now, about the small businesses whose rates are going up dramatically.

"All I want to do is ask you to relay that message to your CEO. He can tell me to get lost -- that’s OK -- but if you just do me the favor, just relay that message, I’d appreciate it."

After Sen. Feinstein wrapped up, Keith Bailey, president and CEO of The Williams Companies, an Oklahoma energy supplier, responded. "Senator," he said, "I don’t have to go home to relay it to the CEO because I am the CEO of Williams." Bailey insisted that costs are "driven by competitive markets"and that’s the reality."

Sen. Boxer has been less engaged than Feinstein in the power fiasco. Still, she has been quick to side with the consumer groups that wield enormous clout in California. Boxer introduced a flurry of legislation that she said would "bring an end to chronic electricity shortages, while providing Californians with much- needed financial relief."

One bill would impose a windfall-profits tax on energy suppliers. The 100 percent tax on any profits deemed "unreasonable" by regulators would go into a trust fund to provide rebates to consumers. Another would require utilities to tell consumers how much electricity they use during peak hours and how much that power cost the utilities.

At the same hearing, Boxer said she wanted "to expose the myth that environmental laws are responsible for the electricity crisis," placing a New York Times editorial into the record. But even she acknowledged that faux deregulation was a mistake. "You’re right, Mr. Chairman [Sen. Frank Murkowski (R-Alaska)], when you say that the deregulation that was pushed in California by Pete Wilson -- and the legislature, Democrats and Republicans together -- didn’t fully deregulate," she said. "It said you can’t pass the price on to consumers. However, Mr. Chairman, I would say to you, if in fact [utilities] could, prices could go up, you know, 1,000 percent, 600 percent. So I ask you, whether in the real world, consumers would accept that kind of increase?"

Consumers surely would rather not see that sort of price hike. Politicians, despite their role in creating such problems, want to be associated with soaring energy costs even less. But they may ultimately have little choice, and the paralysis that the prospect of rate increases inspires in California’s politicians now may only exacerbate problems later.

"The last thing elected officials in general want to be associated with is outrageous electric bills or outages," says John Fielder, a senior executive with Southern California Edison. "But both of those are certain."

Plane Deal

lochheadc@nationalpress.com (Carolyn Lochhead) — Wed, 01 Jul 1998 00:00:00 EDT

If you had booked a last-minute flight from Los Angeles to Denver on United Airlines last February, it would have cost you $622. But on the same day, you could have booked the same flight on Frontier Airlines, which was trying to lure passengers away from United, and spent only $189, saving yourself 70 percent.

It's been 20 years since Jimmy Carter deregulated the airline industry, and by any measure the experiment has been a huge success. Since 1978, fares have dropped by 40 percent in real terms, while the number of flights has increased by 50 percent. Passenger boardings have soared, from 275 million to 581 million. Jet travel, once limited to those with expense accounts or a lot of money, has become accessible to ordinary people. Consumers have saved billions of dollars.

Naturally, the federal government is preparing to intervene. Small airlines like Frontier, which fear that the large carriers are using unfair practices to crush them, and business travelers, who pay high fares when they book flights at the last minute, want to put Washington back behind the ticket counter. The Justice Department, the Transportation Department, and the chairman of the Senate Commerce Committee all appear to agree that a renewed federal presence is warranted there.

With the recently announced proposals by six of the nation's biggest airlines to consolidate their marketing operations, a regulatory crackdown on airlines--building in Washington for months--is now a certainty. The only remaining question about reregulation is what form it will take--and whether federal intervention will help or make matters worse.

The proposed marketing consolidations announced in April between Delta and United (the nation's biggest carrier), and between American and USAirways, stop short of outright mergers. But like the similar proposed agreement announced last January between Northwest and Continental, these marketing partnerships would involve sharing passengers and frequent flier programs, and achieve much the same results that mergers would.

What's the problem? Government officials contend that the big carriers have entrenched themselves at "fortress hubs"--United in Denver, Northwest in Detroit and Minneapolis, and Delta in Atlanta--where they dominate 80 percent or more of all flights. From these hubs, critics say, the big airlines can attack anyone who dares enter "their" airports to compete. The big airlines can flood the routes of upstart rivals with rock-bottom fares--but just long enough to kill the intruder. After that, the big airlines can jack up their prices again.

Such "predatory pricing," officials say, has caused business fares (typically booked at the last minute) to soar, low-cost airlines to disappear, and small cities, especially in the Southeast, to lose service. Critics, including government officials, representatives of smaller airlines, and some economists, claim that unless the new ticketing and marketing arrangements are stopped by federal intervention, the major airlines and their hubs will become ever more forbidding to competition.

Even the architect of deregulation, economist Alfred Kahn, believes that airline monopolies now are driving out competitors with unfair practices. After a big carrier destroys a competitor, Kahn says, "it puts up a no trespassing sign" that scares off any potential new ones. The number of new carriers has dropped sharply since peaking in the mid-1980s, he notes. Kahn and many other airline deregulators assumed in 1978 that the government would prevent direct competitors such as Republic and Northwest, and TWA and Ozark, from merging. But it didn't.

Critics of the airlines point to other competitive problems. One is that hub dominance is reinforced by such marketing strategies as frequent flier programs and special commissions to travel agents. Another involves the bottlenecks at airports left over from the pre-1978 regulatory regime: At many airports, airlines hold exclusive-use gate leases for as long as 20 years, effectively locking out competitors.

A further complicating factor is that the federal government restricts entry to four highly congested airports--Chicago's O'Hare, Washington National, and New York's LaGuardia and Kennedy. The number of landings and takeoffs, known as "slots," was fixed in 1969 and awarded to a handful of major carriers. Despite two modest expansions of these slots since then, it has remained nearly impossible for competing airlines to fly into those four airports.

There is a trade-off in the hub-based flight system. While it fosters airline dominance at certain airports, it has proven extremely efficient. By routing passengers through a connecting hub, airlines have been able to slash costs and vastly increase the number of flights available to travelers, especially in smaller cities. The challenge facing would-be reregulators is how to aid small airlines without hurting passengers.

The government may end up undoing the benefits of deregulation, prompted by small airlines screaming foul. Frontier Vice Chairman Paul Dempsey told Congress in March that United is on a "homicidal mission" to eliminate his airline. This sort of rhetoric has caught the attention of politicians, and federal action is possible on several fronts:

* The Justice Department this spring opened an antitrust investigation of possible "predatory pricing" by big airlines. The department will also be investigating the Delta-United and American-USAirways alliances.

* The Transportation Department has issued proposed rules calling for steep fines against any airline engaging in predatory pricing, although for legal reasons it does not use that term.

* The DOT also granted slot exemptions at Chicago's O'Hare airport and New York's LaGuardia to six small carriers.

* Arizona Republican John McCain, chairman of the Senate Commerce Committee, introduced a bill to sell off landing slots at the four federally restricted airports. These slots would be available only to start-up or low-fare airlines, and only if they use the slots for flights to "underserved" destinations. McCain would also require the Transportation Department to act on predatory pricing complaints within 60 days. A similar bill has been introduced by House Democrats.

* Two Tennessee Republicans, Rep. John Duncan, chairman of the House Aviation Subcommittee, and Sen. Bill Frist, have introduced a similar bill that would guarantee aircraft loans to airlines serving "underserved" airports. It would also give $10 million a year to help small airports market themselves.

The Transportation Department's proposals identify several actions that would trigger government intervention: if a carrier offered "very low fares" that return less revenue to the airline than "a reasonable alternative response," for example. The department's rules would also prohibit an established carrier from selling more seats at low fares than a competing carrier offers. But the department does not attempt to define such key terms as "very low fares" or "reasonable alternative response." Many analysts believe the rules are so vague as to be unenforceable.

Does the airline industry need such federal fixes? Some economists think so. Irwin Steltzer, head of regulatory policy for the American Enterprise Institute, says, "[T]here is something called predation out there, no matter what the Chicago economists tell you. The major airlines are capable of it, and [the Transportation Department proposals], while not easy to apply, certainly make sense."

Others are not so sure. Michael Boyd, a Denver aviation consultant, agrees that the big airlines engage in predatory pricing (and even uses that term), but warns that the proposed remedies, "aside from making....Transportation look foolish, will do very little." In fact, he says, most of the proposals will end up raising fares and reducing flight availability.

The major airlines vow a fight. "All of these in some form or another are attempts at reregulating the pricing structure of the industry," says David Fuscus, spokesman for the Air Transport Association, an industry trade group.

Transportation Secretary Rodney Slater denies that. "This is not an effort to reregulate commercial aviation" he says, but rather an effort to preserve competition.

Whether the Transportation Department's proposed rules "preserve competition" or are "attempts at reregulating" may turn on the issue of fare competition. Industry experts say that the rules could actually prohibit fare wars. If an established airline meets a competitor's fares on too many seats, the airline would be fined by the government. "The way those rules are written," says consultant Boyd, "immediately Northwest is guilty of predatory actions because it has more seats than the smaller carrier does at low fares. That's anti-consumer."

Jim Burnley, a former secretary of transportation whose law firm represents American Airlines, adds, "The most amazing thing of all is they're going to use administrative law judges to investigate airlines for setting low fares. There is something very wrong with that scenario."

By design the rules would shield new airlines from competition, critics say, probably leading to higher, not lower, fares. "This is a fare-floor proposal," says Northeastern University economist Stephen Morrison. "The problem is, can you fix what looks to be broken without breaking what is not broken?"

The Supreme Court thinks not. "The mechanism by which a firm engages in predatory pricing--lowering prices--is the same mechanism by which a firm stimulates competition," the Court wrote in 1986. Unsuccessful predatory pricing--fare wars that do not drive out competitors--are "a boon to consumers," the Court said, and the government must be very careful not to "chill the very conduct the antitrust laws are designed to protect."

McCain's bill is subject to similar charges of reregulation. The Arizona senator says he is "amused" by charges that his bill would reregulate the airlines. "The whole purpose of our bill is to increase competition," he says.

But critics say his legislation could also backfire. "Senator McCain might want to learn about the airline business before he starts to try to fix it," Boyd says.

The problem with the McCain legislation is that selling slots will mean taking them away from existing routes that are popular and profitable--say, from Syracuse to New York City--and awarding them instead to less popular routes--say, from Knoxville to New York--that most likely cannot generate the revenue that the low-cost airlines will need to stay in business. One result could be reduced access to four of the most popular airports in the country. Moreover, the new flights from supposedly "underserved" cities will not connect to anywhere else.

"For all those folks in Dickinson, North Dakota, who have a hankering to visit Queens, this bill is a godsend," Boyd told Congress. Boyd also predicts that defining "underserved" will create "a field day for paid consultants and politicians at cities that can barely support a 7-Eleven, let alone jet service."

Giving away extra slots, as the Transportation Department is doing with its slot exemption program at the busy airports, is not necessarily a viable alternative. Members of Congress are already complaining about the potential for more noise and pollution at these airports.

As far as underserved airports go, even the Transportation Department concedes that they are underserved primarily because there is not enough traffic to justify jet service. Moreover, the market is already responding, without government subsidies, by producing small regional jets that are economical to fly on low-traffic routes.

The federal government doesn't seem to be able to make up its mind about airlines. The new initiatives are "symptomatic of the [failure] of policy makers to take a long-run view of this industry," says Clifford Winston, a Brookings Institution economist. Fewer than five years ago, Winston notes, the Clinton administration worried that the big airlines were going broke and appointed a commission to figure out how to help them. The commission recommended, Winston said, "a financial advisory board to advise the carriers about how to run their business."

The government is probably experiencing a mood swing now because the booming economy has increased demand for air travel. Learning from their near-death experience in the 1980s, the major carriers have let fares rise rather than add capacity.

In 1996, after the ValuJet crash, the government was less concerned about the survival of small airlines than it was about the survival of their passengers. Now the Transportation Department frets openly and often about how the crash of ValuJet--which in fact had a poor safety record--scared passengers away from low-cost airlines, hastening their general demise.

But Boyd says the failure rate of start-up airlines may have little to do with large carrier monopolies. Of the 30 new airlines launched prior to 1993, all but five failed, "taking enormous amounts of investors' and consumers' money with them." In nearly every instance, he contends, those failures were due to bad management and shoddy service.

There are several steps that industry analysts agree could improve competition. Some, such as freeing up gates, are already being taken by the airports. At San Francisco International, for example, long-term leases have been replaced by 30-day permits that give the airport the flexibility to shift gates and add new carriers.

"There is no one that is sitting out on the ramp with their engines running and 400 people on board waiting to get into a gate because all of them are tied up with airlines that have long-term exclusive leases," says San Francisco airport spokesman Ron Wilson. "A new airline entering the market in San Francisco has the freedom to come in and apply, and we will give them entry."

United has 40 percent of the operations at San Francisco, but it cannot exclude other carriers by tying up gates. Los Angeles has similar gate flexibility.

Another possibility is getting rid of slot controls altogether, and letting airlines bid against each other for space at the four congested airports. Competitors could enter freely, and landing rights would go to the flights that passengers, rather than Tennessee politicians, demand.

Analysts also commend McCain's move to eliminate the "perimeter rule," which diverts long-distance flights from Washington National to Dulles, and from Love Field to Dallas/Fort Worth. The rule has resulted in reduced competition.

But one of the surest and quickest ways to increase competition is not even being considered: lifting the ban on foreign carriers serving the domestic market and allowing them to carry passengers not just to but between U.S. cities. "It would be a source of instant competition by very powerful entrants," says AEI's Steltzer. Kahn calls it "our main hope" for greater competition.

It is unlikely that a tiny startup like Detroit-based Spirit Airlines will ever pose a serious threat to a big carrier like Northwest. It would be a very different story if a competitive challenge were offered by, say, Lufthansa, Air France, or British Air.

Maintaining the ban appears to reinforce the monopoly power that the government is otherwise trying to dilute. Rather than competing with U.S. carriers, foreign airlines have begun forging marketing alliances with them, sharing seats, routes, and frequent-flier programs.

McCain says he would love to end the U.S. ban on foreign carriers, but only if foreign countries reciprocate. That may never happen. "Powerful political forces prevent it," AEI's Steltzer says. "British Air doesn't have any U.S. senators."

Wallet Surgery

lochheadc@nationalpress.com (Carolyn Lochhead) — Fri, 01 May 1998 00:00:00 EDT

A terrible oversight has occurred. Last November 14, "a tremendous victory for all Americans" was achieved. Yet most Americans don't know about it, even though they've made a $500,000 down payment on it and will be paying a lot more down the road.

The victory was a law creating a "National Health Museum." The museum's promoters have assured the public that a National Health Museum is just what America needs, and Congress and President Clinton have agreed. Backers hope to spend $200 million to build
a grand structure on or near the Washington Mall.

In Washington, $1 billion is pocket change, so $200 million goes completely unnoticed. Still, it would take 20,000 taxpayers paying $10,000 each to come up with the cash. It's also enough money to buy up all the remaining rain forest in Costa Rica.

The health museum's main promoter is the irrepressible C. Everett Koop, the former surgeon general whose bold public stances made him such a household figure that Civil War-style goatees and sideburns threatened to come back in fashion.

The whole venture started when the Pentagon wanted to dump its medical history museum at Walter Reed Medical Center. Koop determined not only to save the museum but to remake it in truly Washingtonian proportions: "Configured at the nexus of the medical and communications worlds of the next century, the Museum will share the triumphs and accomplishments that comprise our nation's medical heritage and provide a glimpse of our collective future," says a Koop press release.

Funny thing, though. Museum promoters avoided publicity when seeking public funds, quietly tucking the item into the "secretary's budget" of the health appropriations bill, where it would have remained unseen were it not for a tip from some killjoy on the House appropriations staff. Backers promise that private money will also be raised.

Some narrow-minded lowbrows like Tom Schatz of Citizens Against Govern-ment Waste deride Koop's grand vision as being "laughable if it weren't true." Oh but it is.

Armey of the Right

lochheadc@nationalpress.com (Carolyn Lochhead) — Tue, 01 Jul 1997 00:00:00 EDT

Republicans are increasingly pondering the post-Newt age. As one former leadership aide puts it, "Gingrich is dead but he doesn't know it yet." Indeed, disgust with the speaker is so deep among House Republicans that many have nicknamed him "Toast." As the GOP starts looking around for Gingrich's successor, all eyes are falling on House Majority Leader Dick Armey of Irving, Texas.

As second-in-command, Armey has assumed far more power than past majority leaders, making critical decisions about which bills come up and when. First elected to the House in 1984, Armey has carved out a legislative reputation for himself as an outspoken advocate of limited government, lower taxes, and free enterprise.

"I'm acutely aware of who I am," announces Armey in an interview in his Capitol office. "I'm a free-market economist. That is my self-definition. Freedom is my highest value, in life as in politics. I let my economics define my politics, and I'm discouraged by the number of people who I think get it the other way around."

As the current speaker's fortunes wane, Armey's are likely to wax. "He's spent the last six years really building a base of support by doing a lot of fundraising and a lot of campaigning for Republicans who are now in the House," says Stephen Moore, director of fiscal studies at the Cato Institute, who worked with Armey as a staff member of the Joint Economic Committee. "To put it very bluntly, a lot of these guys owe Armey." Indeed, according to The Hill newspaper, Armey's political action committee has raised more than $1.6 million, of which $733,000 was given to 150 House candidates during the 1996 election cycle. He donated another $500,000 of his own campaign money to the Republican National Committee. Although Armey denies interest in the speakership, one loyalist says, "He's just killing time until he can really lead."

As improbable as it seems, the country is close to having a speaker of the House who publicly claims freedom as his highest value, has worked with some success to shrink government, and considers Ludwig von Mises's Human Action and Milton Friedman's Capitalism and Freedom important books. How all that would affect an Armey-led House is not immediately clear: The Republicans hold slim majorities in both houses of Congress and can expect little support from a Democratic White House; certainly, any dreams of "revolution" have been banished by political reality. Perhaps more interestingly, there have been some grumblings among conservative Republicans that Armey has "grown in office," that he is beginning to accommodate Washington's reigning left-liberal orthodoxy.

Whatever questions may exist about Armey's dedication to principles, his support among Republicans remains strong and wide--and runs far deeper than his pockets. Since coming to Washington, he has been a consistent spokesman for minimal government, castigating Medicare as a program he would have "no part of in a free world," denouncing corporate and social welfare alike, and relentlessly stumping for a 17 percent flat tax. When the Clinton health plan was unveiled, it was Armey who drew the devastatingly Byzantine chart full of arrows and boxes to illustrate so vividly its bureaucratic morass.

The former economics professor has backed up such fiery rhetoric with legislative substance. Last year, for instance, he played a key role in passing the Freedom to Farm Act, which began phasing out the nation's 60-year-old system of agricultural price supports. Two years ago, Armey led the quick-step march through the Contract with America. A decade ago, he masterminded legislation that resulted in the country's largest reduction of military bases.

Armey's appeal reaches beyond fiscal conservatives, too. His vociferous opposition to abortion has long commended him to social conservatives (even as it distances him from most libertarian conservatives), and his recent conversion to born-again Christianity only strengthens the tie. About a year and a half ago, "I finally got over being stubborn and prideful and accepted Christ as my savior," says Armey, who adds, "Yeah, it's been a remarkable change in my life." "There's nobody else in the leadership who is going to be able to draw the support that Armey does from conservatives," says Dave Mason, congressional analyst for the Heritage Foundation.

To a significant degree, then, Armey unites fiscally and socially conservative Republicans. He insists that what a spokesperson calls his "renewed" religious commitment doesn't signal a tectonic change in his political philosophy. That is true enough: He has long lent support to social-conservative causes (for instance, he voted for the Defense of Marriage Act and supports the drug war), but his primary legislative focus has always been reducing taxes, spending, and regulations. Too readily perhaps, Armey brushes aside the differences between the Christian and libertarian flanks of the GOP, calling the sides "freedom's choir" because both, he says, share a deep interest in limited government and individual liberty.

To his credit, Armey's current leadership role--much less the possibility of a Speaker Armey--discomfits much of the Washington establishment, even some Republicans. In a recent piece, for instance, The New Republic called Armey a "two-note bore." The magazine quoted an unnamed "senior conservative staffer": "Less government, lower taxes, that's about all you ever hear from him....His notion of coming up with a new idea is 'Call Milton Friedman.'" An anonymous moderate House Republican bemoaned Armey, along with fellow Reps. Tom DeLay and John Boehner, as "real reptile conservatives."

Armey has long garnered such glib dismissals--The Almanac of American Politics wrote him off (soon after he arrived in Washington) as "hardly likely to be a power in the House." (It has since changed its opinion.) But his 10-year ascent from nowheresville novice to House majority leader reveals a savvy politician and tactician whom people have repeatedly underestimated.

Born in 1940 to an independent grain dealer in North Dakota, the fifth of eight children, Armey was the first in his family to go to college. He began his career as a lineman for a utility company and went on to become chairman of the economics department at the University of North Texas. He ran for Congress in 1984, beating a one-term Democrat by a 1 percent margin. (He has been re-elected ever since by majorities sometimes topping 75 percent.)

In his second term, Armey pulled off a stunning legislative victory with passage of military-base-closing legislation. Base-closing bills had languished for years. But applying public choice theory, he constructed a unique mechanism to overcome parochial log rolling--a base-closing commission whose decisions had to be accepted or rejected by Congress and the president without amendment. He pursued the bill relentlessly with colleagues from both parties, and it became one of the great political successes of modern government, closing over 100 bases around the country.

"It didn't look like it was going anywhere, but once he put it in place, I mean, all of a sudden you have a huge number of bases closed," recalls Rep. Bob Matsui, a California Democrat who fought to preserve an Air Force facility in Sacramento.

When Armey first came to Washington, "He had a strong personal philosophy but he had a lot of trouble getting things done," recalls Bill Frenzel, a former GOP congressman of 20 years. "He sat down to figure out why he had not been successful and really thought it through himself without a lot of help. He decided he had to figure out how to make majorities. In passing the base-closing bill," Frenzel says, Armey "became in the space of less than two years one of the premier legislators in the House."

Armey began his climb to majority leader when he became ranking member of the Joint Economic Committee in 1991. He turned a moribund minority post into a GOP communications center, instituting "rapid response" faxes and issuing reports and charts for Republicans to attack opposition policies.

Disgusted by the 1990 budget deal where President Bush reneged on his read-my-lips pledge not to raise taxes, Armey made a run for the Republican conference chairmanship, the third-ranking slot in the GOP congressional hierarchy. He took on Jerry Lewis, a moderate, deal-making Californian. It was a defining moment in Armey's rise to power. He won by four votes, using a highly organized member-lobbying system, touting his work at the JEC, and arguing that Lewis was part of the old guard that was going to keep Republicans in a permanent minority.

The clincher, recalls former aide Ed Gillespie, came when Armey sent House freshmen a how-to binder called Hitting the Ground Running. "It gave new members basic advice on how to set up their offices, their press operations, their staffs, their newsletters, their town meetings. The freshmen got this thing and they said, 'Wow, this is great, this is what I need, this is what I've been looking for,'" Gillespie says. "That same day in the mail they got from Jerry Lewis--the House Republican Conference Chairman--a photo album that had everybody's Christmas cards in it, with pictures of their families. It was the silliest thing. The contrast between what Armey had given them and what Jerry Lewis had given them really kind of sealed the deal for him."

It surprised no one that when the Republicans took over the House in 1995, Armey ran unopposed for majority leader. "There's a substance to him," says John J. Pitney, a political scientist at Claremont McKenna College who has written extensively on the contemporary Republican Party. (Pitney is also a REASON contributing editor.) "He knows what he's doing. He knows his policy, and that does count for something on the Hill. He has a very clear intellectual construct and he works to put that into policy." Far more than most politicians, what drives Armey is his belief in ideas and their power. He's quick to quote Adam Smith, Friedman, and economist Thomas Sowell, and he has written a respected textbook called Price Theory: A Policy-Welfare Approach.

Less-sympathetic observers use different terms to convey Armey's style and points of reference. Biographical sketches typically describe him as gruff, rough-edged, a crude ideologue, a "political brawler" of "impolitic bluntness."

"He is ideological," grants former aide Gillespie. "But only in [Washington] is it pejorative that you actually believe in something."

In fact, it's not even necessarily pejorative in Washington. Armey's forthrightness is seen by many members as an asset in a town where evasion is an art form. "Frankly, I would rather deal with a Dick Armey, where you know where he is on the issues and he's true to his program," says Rep. Nancy Pelosi, a liberal California Democrat for whom Armey is an arch ideological enemy. "There's no illusion and no misrepresentation in terms of what he stands for," Pelosi says. "He doesn't mince words."

The same holds true for many Republican moderates--the ones who would ostensibly block Armey's ascent to the speakership. "I've been in meetings where the subject matter was, for example, a woman's right to choose, and he manages very effectively," says Rep. Tom Campbell, a GOP moderate from Silicon Valley. "No one doubts he is on the other side of the issue, but he tells people exactly what he can accomplish, how far he believes compromise is possible," says Campbell, who adds that he is "very high on Armey."

Whether one sees Armey's dedication to core principles as a sign of character or ideological inflexibility, no one disputes that this quality has translated into a fearsome reputation when it comes to legislation.

"The only way Armey ever gives in is when he's crushed," says one close observer. "They have to roll him. He doesn't go into meetings thinking, 'Let me see what I can get, let's get to the middle, let's compromise.' He goes in saying, 'This is what I want to win,' and the only way you beat him is when Democrats are united and there are enough Republicans to peel off to cause us to lose a vote. He's not a player like Gingrich, who wants adoration and can't wait to hear himself talk."

Ironically, of late Armey has had to defend himself against charges that, like Gingrich, his cutting edge has been dulled by power. Certainly, the torpor of the current Congress is in marked contrast to the first Republican-dominated session. It's a fair question: Is the GOP leadership, and Armey in particular, acting smarter these days, or have they just been whipped? Or, as one Republican member of Congress asks, When the choice comes down to cowardice or taking a risk, which route will Armey choose?

"Some of us are worried that Armey has 'grown in office,'" says The Weekly Standard's Bill Kristol, who recently wrote a piece urging rank-and-file insurrection against a "brain-dead Republican Party, cowering in the halls of Congress." Kristol says he understands that Armey, as majority leader, has to be responsible and cautious. "But he also wants to let friends on the outside know that he remains something of a firebrand at heart, and that he's sympathetic with the insurrectionaries," says Kristol.

On at least a surface level, there is a new, more-modulated Dick Armey in office. Gone are the incendiary phrases--he once called Hillary Clinton a "Marxist," ridiculed the Family and Medical Leave Act as "yuppie welfare," and labeled ClintonCare "a Dr. Kevorkian prescription for jobs." In late February, Armey issued a "Time to Get Moving on the 105th [Congressional] Agenda" memo. In it, he downplayed legislative "drama" and urged a "broad communications effort that must begin this year." The message was more caution than action. "We have settled in as the majority party, returning to regular order and recognizing that we have more than a two-year window to undo the policies that for 30 years have undermined families and institutions across America."

But the Texan vigorously disputes that he has "grown in office." He insists that his principles have not changed, but that as majority leader he must play a different role than he did as a simple representative. "You don't hear all the old hot firebrand rhetoric anymore," he concedes. "I know that I have moderated my public discourse, out of consideration for my colleagues. But my line is, just because you don't hear my thunder doesn't mean I'm not there."

Certainly, Armey has reason to cool divisive rhetoric. The GOP majority is razor-thin in the House, where Republicans outnumber Democrats 227 to 210. As majority leader, Armey must get 218 votes from moderates and conservatives, operating with a nine-vote margin of error. (The spread in the Senate, where Republicans outnumber Democrats 55 to 45, is five votes.) Clinton remains president, and despite talk of leaving a legacy, seems no more willing than before the election to take any unpopular steps on the budget. Under such circumstances, particularly with Gingrich still leading the House, Armey can do little more than push for smaller victories--such as reforming public housing, consolidating job-training programs, and trimming corporate welfare--until the larger ones grow within reach.

"At every juncture you've got to make a decision," he says, explaining his approach to legislation. "If I'm going to take this course of action, is the policy gain more than offset by the political loss? [In the last session], we were getting political losses and no policy gain. That's like saying, 'I'm ready to give my life to have all debts and no assets.' So we have to be smarter."

Armey points to the two government shutdowns in 1995 as examples of "big" political mistakes that led to no policy gains. "We telegraphed punches that sometimes we didn't even have to throw," he says. And, in the months leading up to the showdown, "we had Republicans out in the world talking about shutting the government down. Then we had the unbelievable circumstance where the president vetoed the bill, shut down the government, and we got credit for it. Why? Because the president never talked about it until the day it passed, and then he only said one thing: 'The Republicans are shutting down the government.'"

"The challenge facing Dick Armey," observes political scientist Pitney, "is that the strategies and tactics for winning a majority are not necessarily the same for exercising power. It's one thing to be confrontational when you're in the minority and another when you have to hold together a very narrow majority."

Armey is well aware of the difference. Indeed, as majority leader, he may now spend as much time forming a consensus within his own party as he does sparring with the opposition. He says he must serve as an "honest broker between the warring factions" within the party, which means scaling back the legislative agenda to areas of common agreement. "Nobody in the room doubts where I am on [any issue]. But they also need to know that I'm going to be there to facilitate them working out a point where they can stand with 218 votes on that point. Now that probably will not get me 100 percent of what I want, but from my personal point of view, it gets the ball someplace down the field," says Armey, alluding to William Bennett's observation that in politics you are either moving the ball on your opponents or they are moving the ball on you. "As long as I'm moving the ball on them," says Armey, "I think there's progress being made."

That said, it's not immediately clear that the House Republicans are gaining much yardage or even that they are headed toward the goal line of less government and more freedom. Certainly, the goals envisioned by Armey these days are a far cry from the heady early days of the Republican "revolution" when a dramatic downsizing of government seemed imminent. Armey insists he has not walked away from smaller-ticket items such as abolishing the National Endowment for the Arts and reducing the estate tax, or bigger-ticket items such as Social Security reform and the flat tax. The reality of leading, however, has changed the time line somewhat. "I still intend to get there," he says, "but I'm smart enough to know that I ain't going to get there overnight."

One lesson that the majority leader has learned is the need to explain an agenda to the public. Voters, he says, have to understand what Congress is doing and why, whether it's ending farm subsidies or introducing vouchers in Medicare. "You've got to do it in a methodical way, which is a hard concept for those of us who waited forever and ever to take over," says one Armey loyalist. So, for example, Armey says the time to have a "responsible public discourse" on Social Security has not yet arrived. Medicare, however, is now a different story, despite the whipping the GOP took on the issue before and during the last election. Because the system's insolvency is imminent, says Armey, serious debate is possible.

On the one hand, such a rationale comes dangerously close to justifying inaction and failure. Consider Armey's analysis of his opposition to last year's minimum-wage increase. "When I jumped up and said I will fight the minimum-wage increase with every fiber in my being, what I did--and frankly completely unnecessarily--was I gave [opponents] a sound bite," he says. "And that sound bite, remember, was not a policy victory, that was a political victory [for my opponents] that resulted in a policy loss. We allowed ourselves to be drawn on the political field of battle when we didn't have to be." Perhaps. But if a Ludwig von Mises-reading, Milton Friedman-quoting free-market majority leader does not publicly speak out against a minimum-wage increase, who will?

On the other hand, however, Armey's new approach could potentially lead to more productive, if less bombastic, legislative sessions. With arts funding, for instance, he predicts that as Congress searches for places to trim spending--a goal largely embraced by the voting public--"People will find their own way to the National Endowment for the Arts," he says, noting that the last Congress halved the NEA's budget. "But if I take them on head first, then I'm just some troglodyte who is opposed to art. And I lose that debate."

Similarly, Armey stresses that, as a majority party, Republicans must use new strategies to counter Democratic attempts to expand the welfare state through such warm and fuzzy proposals as mammogram requirements or expanded health care spending on children. Every time Democrats propose that the government provide some new entitlement such as a three-day hospital stay for new mothers, says Armey, the traditional conservative response has been to denounce the plan as costly and ill-considered. It's an argument, he says, that Democrats will always win, "because they've got love and compassion and heart on their side." What his side must do, says Armey, is recast its positions in terms that reach the heart as well as the head.

He uses Superfund as an example. Rather than harp on what a disaster it is and try to eliminate it, says Armey, Republicans plan to talk about doing a better job of protecting children from toxic waste. "We've poured $34 billion over 16 years into Superfund and got damned few clean sites out of it," he notes. "The traditional Republican way of going about that discussion is to say, 'Boy, we're really going to get those trial lawyers--they've been profiteering off this.' So everybody says, 'Oh, I get it. Republicans are mad at trial lawyers.' Who wants to get excited about that? So we say instead, 'We want to clean up these sites, we want to fix them.' If we talk in those terms, everybody says, 'Yeah, let's go do that.' And as trial lawyers see this train going down the track, they're going to jump up and say, 'No, no, no, don't do that.' They'll show themselves [as] the bad guys in a way that will be recognized."

What Republicans must do, says Armey, is to move beyond simple nay-saying toward presenting positive alternatives to past failures, whether in the environment, public safety, education, or anything else. The public, says Armey, wants a cleaner environment, safer communities, and better schools; to be successful, Republicans must demonstrate a better way to get them.

Public housing is an obvious target for Republicans, he says. Governmental failure is so obvious and so widely conceded--by the public, by Democrats, by big-city mayors, and by tenants themselves--that Republicans can step in with alternatives. Armey is calling for a repeal of the Housing Act of 1937 and a movement toward more local, flexible control and greater accountability on the part of both tenants and management. There needs to be more latitude, he says, in evicting bad tenants and rewarding good ones.

Reducing corporate welfare, expanding medical savings accounts, reforming product liability laws, deregulating utilities, reforming taxes--each offers similar possibilities and each has widespread political and public support, says Armey. Once enacted, such policies also can widen public experience with--and embrace of--more-market-oriented approaches to problems for which Democrats have always said bigger government was the only answer.

Armey's new tactics will be put to the test during the budget battle looming this summer. By politely receiving Clinton's plan and letting the press attack it, the Republicans are already off to a better start than last year, he says. "Rather than have Dick Armey jump up and say the president's budget is as phony as a $3.00 bill, the press says, 'We've got a problem--it's got net tax increases. We've got a problem--his plan for Medicare won't work.'" If the press reveals these things, he says, the GOP is in a better negotiating position to cut overall spending.

"We're still going to end up with a budget that we have prepared," Armey says. "There is nobody that I know of in our majority, House or Senate, who says, Let's go with a wink and a nod again. But in the meantime, why not have the public appreciate the way we're going about it, rather than thinking we're a bunch of mean-spirited naysayers just looking for a chance to criticize the president? Most of our folly is borne out of own sense of insecurity and impatience. We want everybody to know our virtues and to know it right now, today. And we live in fear that they may never know. So we try to force it. The truth will come out."

Maybe--although truth and the political process typically run in different directions. While the press has raised questions about the Clinton's budget, they are likely to pick apart the Republican alternatives as well. What happens then? Will the Republicans acquiesce in the face of press criticism and a relatively popular president who has demonstrated an ability to punch all the right sympathy buttons, such as increased funding for child care and tax credits for college tuition? The Republicans have long failed to put a human face on their plans to cut spending and it is far from certain they will succeed this time around. Given the reality of the GOP's narrow congressional majority and the general consensus--however vague and abstract--that government spending must be reined in, the best-case scenario for this budget includes modest spending cuts and perhaps some minor, heavily targeted tax relief.

The next few months may shape up as the most important in Dick Armey's political career. If he is able to engineer even modest success on his terms, it could prove enough to kick him up to the speaker's chair (or to consolidate greater power within his current post).

Faced with the wild ride of Gingrich's speakership, many Republicans now concede it was a mistake to centralize so much power in one person. Instead of a giant, they are now simply looking for a tall man. "Our misperception of this whole thing now that we're in the majority is that the speaker or majority leader or any of our legislative leaders ought to be the Ronald Reagans of the 21st century," says one high-ranking House Republican. "In looking for the perfect combination of legislator, philosopher, strategist, vote counter, TV talking head, best-selling author, and movie personality, we're overstating the job description." When former Democratic leaders held less-overwhelming majorities, says the member, they saw their main job as getting a majority on any given day, a strategy that worked pretty well to slowly secure the sort of government they sought.

Oddly, it may turn out that a figure with a reputation as an uncompromising ideologue such as Armey will prove to be the sort of leader who can most effectively take some small steps toward reducing government. When it gets down to a battle of inches, a Speaker Armey might prove more likely to stick to his game plan of less government and lower taxes. Certainly, such principles provide a philosophical consistency that Gingrich has always lacked. One assumes there would be no courting of Alec Baldwin and the NEA, no intoxication with faddish futurism, no sudden abandonment of tax cuts.

Improbably enough, if the Republicans slowly dismantle the entitlement state one step at a time--a process that will require intense conferencing and tactful negotiation--it may well be because they elect a speaker best known for his philosophical inflexibility and reactionary reliance on a "two-note" mantra of less government and lower taxes.

Clash of the Titans

lochheadc@nationalpress.com (Carolyn Lochhead) — Sat, 01 Mar 1997 00:00:00 EST

The baby boom is about to meet the New Deal, and one or the other is going to get crushed when it happens. Sometime around 2012, the 76 million member baby boom--a generation that equals the combined population of California and the New England states-- is going to run headlong into the New Deal's greatest legacy, Social Security. As these two giants lumber toward their inevitable collision, Washington's political forces are gearing up for the clash of the new century.

Arithmetic dictates one of two outcomes: Either baby boomers are going to see their Social Security benefits vaporize under tax increases, inflation, and benefit cuts (really "wither on the vine," to borrow a famous phrase), or Social Security is going to be transformed into something entirely different from what it is today.

That something is, in all likelihood, a partially privatized system, an idea dismissed as a libertarian fantasy less than five years ago, but one that has caught hold in Washington with stunning speed. Indeed, in January, President Clinton's own Social Security Advisory Council issued a report offering partial privatization as one of three options to deal with the program's impending bankruptcy. One option maintains the current structure and possibly calls for the government to invest some revenue in the stock market. The other uses mandatory individual savings accounts, but the plan would be administered by the government.

The left has taken notice.

"The party's not over," declares Jeff Faux, head of the labor-funded Economic Policy Institute, which in November held a press briefing to dismiss alarms about Social Security's solvency. The idea of privatization, Faux said, "is driven by a misunderstanding of the way the world works."

This marks the beginning of a battle for the popular mind that will determine what happens to Social Security, and with it, much of U.S. social and economic policy. Just as the New Deal shaped this century, the fight over Social Security will shape the next. Privatization of the nation's biggest government benefit program would have profound consequences--not least, transforming entitlement beneficiaries into stock-market investors.

"The stakes are very high," Faux said. "We're talking about the bedrock of the national social contract."

EPI, joined by a group called the Campaign for America's Future, The American Prospect magazine, the AFL-CIO, and former Sen. Howard Metzenbaum (D-Ohio), lately representing the Consumer Federation of America, have begun the public relations groundwork that will set the theme for impending debates in Congress and the media.

The Campaign for America's Future sent out faxes hailing a recent cover story in Mother Jones: "Stealth Campaign to Privatize Social Security Exposed: Wall Street, Conservative Ideologues and Some Heretical Democrats Backing Plan." Roger Hickey, co- founder of the Campaign for America's Future, predicted, "It's only a matter of time before 60 Minutes and Dateline expose the downside of privatization....our specific role is to build a political movement."

The anti-privatization groups outline a four-pronged attack:

The problem doesn't exist. Social Security's impending bankruptcy is a hoax perpetrated by scaremongers and right-wing ideologues, from the Concord Coalition to the Cato Institute.
If there are problems, they can be fixed by minor tinkering with the retirement age, cost-of-living increases, and other tweaks. And any tax increases would be a small price to pay to preserve the New Deal "social contract."
The Social Security trust fund is solid. It consists of government bonds, and the U.S. government will never default on its debt.
Greedy Wall Street profiteers are behind the push for privatization. Investment houses and mutual funds see a gold mine, but for beneficiaries there is only unwarranted and potentially disastrous risk.

The first claim lays the foundation of all the others. If it is true that there is no fiscal crisis, there is no need to reform the most popular government program in the nation's history and the one that does indeed protect all Americans from destitution in their old age.

EPI's Jerry Mashaw, a Yale law professor, calls the idea that Social Security is unsustainable "nonsense." Henry Aaron of the Brookings Institution called it a "myth." EPI economist Dean Baker argues that the bankruptcy projections are based on "extremely pessimistic assumptions," and that immigration and higher economic growth will bail out the system.

These are audacious claims, considering the array of experts and institutions who flatly contradict them. There are very few credible analysts who dispute the actuarial facts or their implications for Social Security. Indeed, the Social Security trustees themselves are the ones forecasting the impending bankruptcy of the trust fund in 2029. They include members of President Clinton's cabinet--Secretary of Labor Robert Reich, Secretary of Health and Human Services Donna Shalala, and Treasury Secretary Robert Rubin--none of them privatization-prone or even heretical Democrats. The Federal Reserve, the General Accounting Office, the Congressional Budget Office, and the Bipartisan Commission on Entitlement Reform each have warned of dire and possibly catastrophic problems if Social Security rolls along unchanged.

In a report last September, the World Bank charted the international dimension of the problem, warning that, across the globe, "old-age systems are in serious financial trouble and are not sustainable in their present form." Europe and Japan face the identical problem of a big postwar demographic bulge colliding with big social welfare programs. The impending debt problem is a worldwide one.

If the trustee projections are pessimistic, as Baker claims, it would be a first. Throughout Social Security's history, the trustees' forecasts have repeatedly proven wildly optimistic. Eight times in the past 10 years alone, the trustees have had to move the predicted bankruptcy date forward.

In 1983, Social Security was supposed to have been "fixed" for 75 years by a huge payroll tax increase that boosted workers' FICA tax to 12.4 percent of wages. Right now, workers are paying some $60 billion a year more in Social Security payroll taxes than the government is paying retirees; this reserve is deposited in the Social Security "trust fund," where it is supposedly resting until the money is needed to pay benefits to boomers. This so-called trust fund is at the root of Social Security's problems, because it simply does not exist in any real sense. In fact, the trust fund has never been more than an accounting fiction devised to perpetuate the myth of a funded pension. From day one, Social Security has been a pay-as-you-go system, where current workers finance the benefits of current retirees.

Nobel laureate economist Paul Samuelson once described Social Security as the world's biggest Ponzi scheme (no free market enthusiast, Samuelson meant it approvingly). Like any such scheme, it works wonderfully in the beginning, when there are many more people paying into the system than are drawing out of it. Those who get in early pay little and receive big benefits. But for those who get in late, the returns fall sharply and soon turn into losses.

The baby boomers are definitely latecomers. Their numbers present an unprecedented problem for Social Security, greatly compounded by other programs, such as Medicare, that are in even worse shape. Boomers have paid in big taxes that are funding generous benefits and cost-of-living increases for current retirees. But when boomers retire, the much-smaller generations that follow them will be unable to pay those benefits without a major tax increase. The future tax increase for Social Security is expected to raise the program's take to 17 percent of payroll; adding in Medicare and using more pessimistic projections could take it up to 33 percent as the bulk of the baby boom reaches retirement.

Payroll taxes of that magnitude are probably not politically feasible. By eating up paychecks, they would create major economic distortions and would undermine support for the programs. When Social Security started, it cost a modest 2 percent of payroll and churned out enormous returns for beneficiaries, ensuring its public popularity. But now those ratios are beginning to reverse. A 33 percent payroll tax that funds smaller benefits would hardly be as popular or easy to justify. As it is, Social Security payroll taxes are incredibly regressive, hitting relatively poor workers much harder than relatively wealthy ones. Higher rates would only boost that burden and create even more powerful incentives for low-wage workers to go on the dole.

In fact, the returns to Social Security payroll taxes have already fallen sharply, which helps explain why it has become politically possible to criticize the program. Workers who retired 20 years ago received all that they paid in, plus interest, and much more. Those who retire today get roughly a 2.2 percent return, adjusted for inflation. A 30-year-old worker will actually lose money in absolute terms when he or she retires.

The trust fund myth was deliberately perpetrated at Social Security's inception as a way to deceive middle-class taxpayers into thinking that they were contributing to their own retirement. Franklin D. Roosevelt famously crafted the illusion of a funded pension so that Social Security would not look like welfare, ensuring that "no damn politician" could repeal it. Every politician since, Republican and Democrat, damned or otherwise, has happily gone along with the deception.

The money that goes into the so-called trust fund is being spent as fast as it comes in. The current surplus of Social Security taxes over benefits is merely masking the size of the general government deficit. Instead of a pile of money for future benefits, the trust fund consists of a pile of government bonds, or IOUs. The money left to pay them has already been spent to cover government expenses. And the bonds can be redeemed only by more borrowing, higher taxes, or inflation.

The only way the government could set aside money in a trust fund would be to run annual surpluses. But the government instead has been running chronic deficits for the past three decades. As Sen. Daniel Patrick Moynihan (D-N.Y.) pointed out during the 1990 budget brawl between Democrats and the Bush administration, honesty would dictate that the Social Security tax be reduced to cover only current benefits. All that the 1983 "fix" did was massively raise taxes on workers and allow the government to mask the extent of its deficit spending.

The projected trust fund bankruptcy date--which even Social Security defenders concede is at least a minor problem--is 2029. That is when the trust fund is expected to run out of bonds. Defenders say that this faraway date allows ample time to make provisions, hence there is no immediate crisis warranting radical action.

Yet the 2029 date is hardly more relevant than the trust fund itself. Because the trust fund consists only of debt, the date to watch is 2012. That is when Social Security outlays are expected to start exceeding tax revenue. It is also, not coincidentally, when boomers begin retiring. At that point, current taxes will no longer cover current benefits, and the Social Security deficit will begin to escalate very rapidly.

The claim that the government will not explicitly default on its trust fund bonds is a legalistic point at best. The government will be facing unprecedented liabilities, estimated by the Social Security Administration at a present value of $8 trillion just for Social Security. This debt is the crux of the problem. The government has only three ways to finance it: borrow, raise taxes, or inflate away its value. All have terrible consequences for the public, including Social Security beneficiaries. The Congressional Budget Office recently warned that such unsustainable debt burdens pose the threat of economic catastrophe, including spiraling interest rates, inflation, and the collapse of the stock market and the dollar.

Social Security's defenders do have a valid point when they argue that relatively small adjustments such as pushing back the benefit age and lowering or withholding cost of living allowances in the system now could help. Due to compounding, any reduction in benefits now would save huge amounts of money later. However, such action would also worsen the rate of return the baby boom is getting on its "investment" in Social Security.

Tax increases would be even worse because they would go into the nonexistent trust fund and do nothing to remedy the long-term problem unless the government simultaneously begins running budget surpluses. If it does not, any extra taxes would simply mask current deficit spending, as they have been doing since 1983, while leaving less money for workers to save for their own retirement.

Privatization has caught hold with policy makers because it offers a way out of this box. Under a privatized system, workers would pay the same payroll tax, but the money would go into their own personal accounts, rather than into the so-called trust fund. Just like the payroll tax, the savings would be mandatory, but the money would be in annuities and other private financial assets.

This is the essence of privatization's appeal. Workers would still be required to pay for their retirement, but instead of their payroll taxes going to the government to finance current retirees, the money would go into a personal savings account that would be invested in private securities markets, and the returns from the worker's taxes would flow directly to the worker. Chile pioneered the model with enormous success, and Argentina, Peru, and Colombia are following suit. Chile's returns have averaged 12 percent since the program's inception. The other countries are leaving the old system intact and giving new workers the option of joining a privatized or state-run system.

The transition costs to a fully privatized system would be enormous, because payroll taxes would be diverted from current retirees into private accounts. A full privatization now would cost around $100 billion. To cover payments to current beneficiaries, the government would have to borrow the bulk of the money. Critics point to the transition costs as the killer of any full-scale privatization plan. However, the change-over merely makes explicit a debt that already exists. And over time, as economist Martin Feldstein notes, privatization would gradually transform Social Security from an unfunded, pay-as- you-go system to a fully funded pension with real assets instead of promises.

Because Social Security redistributes income from high earners to low earners, partial privatization, or a two-tier system that would preserve this redistribution function, is now under the most serious consideration in Washington. Under these proposals, a portion of the payroll tax, say 5 percent, would be invested in personal saving accounts. The rest would maintain a safety net under poor retirees, the disabled, and their dependents. The remaining 7 percent would go to current beneficiaries and the poor.

This points to the real reason why privatization has its critics up in arms, warning of the demise of the "social contract." Any privatization plan would make Social Security's redistributive function very explicit. Workers could clearly distinguish between their tax money that was being deposited in their private accounts and their tax money that was being diverted to current retirees, particularly poorer retirees. As soon as that distinction becomes clear, worker support for the current program would begin to dissolve. Social Security in its current form would be seen much more clearly as a welfare program, and for the first time in its existence would stand in danger of losing political support. That is why attacks on privatization so quickly shift to "Wall Street greed."

Without better facts to make the "no problem" case, Social Security's defenders will have to rely on emotional and political arguments, and Wall Street greed fits the bill. Such attacks will gain currency in the media and on the Senate floor and in the White House briefing room. Whether they will catch on with the millions of people who already traffic with Wall Street in their own stocks, bonds, and mutual funds, along with 401(k) and pension investments, remains an open question. There is no question that Wall Street financiers stand to benefit greatly if billions of dollars shift from the public sector to the private capital markets. Then again, future retirees similarly stand to benefit greatly.

As to stock market risk, it does indeed exist, but not in a vacuum. It must be viewed in the context of the equally real political risk to current Social Security benefits, including the potential for drastic cuts in benefits and increases in taxes that would hurt poor people most. A RAND Corporation study in 1995 found that the entire net worth of nearly all poor workers and about half of the middle class now consists of promises of Social Security and other old-age government entitlements. The risk those people face right now under the current Social Security system is enlightening.

Similarly, those who do have savings and 401(k) plans and have invested them in stocks and bonds and other financial instruments face big political risks if the system is not changed. Unless action is taken soon to reduce U.S. debt, there is clear potential for a debt- induced economic collapse as outlined in a May 1996 report by the CBO: Spiraling debt and soaring interest rates begin a vicious feedback cycle leading to economic contraction, inflation, and a collapse of the stock market and the currency.

Argentina, Brazil, and other Latin American countries in the late 1970s provide the model for ruin. Unsustainable debt burdens--fueled by populist promises and harangues against "capitalist greed"--destroyed the economies of once-rich countries, eviscerating their middle classes and leaving their poor in destitution.

In essence, the arguments over Social Security follow the same paths that for a century have divided right and left, between faith in individuals and faith in the state. As EPI's Mashaw warned, under privatization, "People would get to choose what to invest in and what to do with the money when they take it out." He predicted that people would take their life savings to Indian casinos.

One side sees casinos and the end of the social contract; the other sees booming capital markets and personal freedom and responsibility. Trust fund or mutual fund, which will it be? The race to decide is on, and the stakes are very high indeed.

Child's Play

lochheadc@nationalpress.com (Carolyn Lochhead) — Thu, 01 Feb 1996 00:00:00 EST

In the clash between Congress and President Clinton over balancing the budget, all the crucial policy details and factual depth have been swept away by two "talking points" that each side is desperately trying to drill into the public consciousness: Republicans say they will save America's children, while Clinton claims that he will save America's values.

Neither plan does anything of the sort.

Even if the two sides agree on an honest seven-year plan before the 1996 election, it will represent at best only a modest step toward forestalling a problem that will leave American children and American values alike wrecked on the shoals of today's potent elderly voting bloc.

For all the hand-wringing, even the GOP plan leaves the country hurtling off a fiscal cliff around 2010--just eight years after the budget would supposedly be balanced. That's when the 76 million-strong baby boom generation begins to retire and sign up for benefits in the big entitlement programs that now drive the federal budget: Social Security, Medicare, Medicaid, and civil service and military retirement.

"Hitting a zero deficit in 2002 doesn't mean that beyond 2002 the deficit will be zero," says Laurence Kotlikoff, a Boston University economist. "The pain required to keep the deficit at zero is much, much bigger than anybody is talking about publicly."

But if Republicans are guilty of falsely painting their effort as salvation, they at least have taken the first vital step in the right direction. Playing by the conservative Congressional Budget Office rules that Clinton once advocated, they have proposed many very real and very significant changes in entitlement programs, including ending the entitlement to cash welfare benefits and block-granting Medicaid to the states.

They have walked through the political fire on Medicare, proposing to open the system to competition, introduce medical savings accounts, and most significant of all, cap its out-of-control spending growth. Following advice long urged by economists and long ago adopted by the private sector, the GOP plan "defines," or limits, the per-beneficiary payment, cutting off the blank-check approach for at least part of the vast Medicare program.

Democrats, led by President Clinton, have for their part stooped to a level of pandering that should make an honest person blush. Upon taking office, Clinton recognized that containing government health care spending was absolutely crucial to braking the deficit. Of course, Clinton proposed to put out the fire by dumping gasoline on it, calling for a government takeover of the private health care market and clamping down with price controls. But even Clinton proposed restraining Medicare spending, arguing cogently at the time that a slowdown of spending growth could not logically be construed as a cut.

Now, he accuses Republicans of planning "crippling cuts" in Medicare and Medicaid that are "bad for America." This can most kindly be described as a gross distortion. Per-beneficiary spending in both programs will continue to soar, which is exactly why the Republican plan falls so short of a fiscal rescue.

The administration has filled the air with glib half-truths and sound-bite discourse calculated to leave a false impression. It panders to the worst impulses of a public that often appears as ill-informed and prone to mood swings as a 13-year-old. (One CNN talk show flashed a "poll" during the partial government shutdown asking people to list themselves as "angry" or "not angry," as if their emotions were substitute for thought.)

People crave the abstraction of a balanced budget, but not its specifics. Even the well-informed have a hard time discerning the difference between Medicare (for the elderly) and Medicaid (for the poor), and wouldn't know what a block grant was unless one landed in their personal checking account. Most people seem to believe that budget deficits are driven by military spending, fraud and waste, and foreign aid, rather than the autopilot benefit checks going out to half the population.

If told the facts, however, voters seem quite capable of making rational decisions. Citizens--conservative and liberal alike--who participate in budget-balancing sessions run by the bipartisan Committee for a Responsible Federal Budget consistently produce a balanced budget in five years, two years faster than the Republican plan. They have no trouble cutting spending when they find out that interest on the debt--$257 billion--will this year surpass the entire defense budget.

One often hears the elderly claim that they "paid" for their Medicare benefits. Yet every one-earner couple who retires this year will receive a windfall of nearly $260,000 over their lifetime--more than a quarter of a million dollars--in Social Security and Medicare benefits above what they contributed in taxes for those programs, according to Eugene Steuerle of the Urban Institute.

Entitlement spending for the elderly and interest on the debt are rapidly crowding out everything else that politicians of all stripes say they want to protect: welfare, defense, crime fighting, education, scientific research, environmental protection, national parks, highways, courts, and every other federal function.

Crushing tax burdens are just over the horizon. When the baby boom generation retires, younger workers will have to pay 84 percent of their income to support federal spending, an obviously uncollectable amount. Even if the Republican balanced budget is enacted, that rate will fall only to the low 70s.

That tax level is untenable. So benefits will be slashed one way or the other, a big surprise for those counting on almost free medical care and a Social Security check to sustain them in retirement.

"It is hard to believe that responsible adults would leave this kind of mess for their children," Kotlikoff says. "People have to sit up and look at this tidal wave of baby boomers coming at us."

Which is why the current White House pandering is such a gross disservice. It robs the electorate of the facts on which to base rational choices. It is an especially devious argument to the poor and the lower middle class under whose banner it is made. Their entire net worths consist of bankrupt promises of future Social Security and Medicare/Medicaid benefits--worthless checks, in effect. Who will "protect" them when they retire, years after the 1996 election, when the debt is monetized and inflation eviscerates their living standards? Japanese bond buyers, maybe?

Clinton's veto of the stopgap spending bill on the grounds that it raised Medicare premiums was breathtaking. First he insisted that the elderly should pay a lower share of costs--25 percent rather than 31.5 percent--in a program that is structurally bankrupt and will begin going into the red this year. Democrats who created the program in 1965 set premiums at half of costs, itself a huge taxpayer subsidy. And Clinton himself had earlier proposed increasing premiums; the elderly would pay just $4.80 a month less under his plan by 2002 than Republicans propose.

Such tactics moved even the liberal Washington Post to blast Clinton and congressional Democrats for having "shamelessly used the [Medicare] issue, demagogued on it, because they think that's where the votes are and the way to derail the Republican proposals generally....If the Democrats play the Medicare card and win, they will have set back for years, for the worst of political reasons, the very cause of rational government in behalf of which they profess to be behaving. Politically, they will have helped to lock into place the enormous financial pressure that they themselves are the first to deplore on so many other federal programs."

In his brief televised veto message, Clinton repeated the words "balanced budget" or variations thereof 16 times. "We must balance the budget," Clinton said. "I proposed to Congress a balanced budget, but Congress refused to enact it."

Congress did refuse his budget--unanimously in the Senate, with not even California Democrat Barbara Boxer, related to the Clintons by marriage, in support. But Clinton never proposed any such thing as a balanced budget. His first official 1996 budget had the deficit rising to nearly $400 billion in 2004. In June he issued a 20-page press release that claimed to outline a balanced budget over 10 years. The CBO said it left deficits at $200 billion a year.

Democrats describe as a shop of horrors a Republican budget that will spend $12 trillion over the next seven years--$3 trillion more than over the past seven, including a $2,300 increase for every Medicare beneficiary.

White House Chief of Staff Leon Panetta well knows all these facts. He was a former chairman of the House Budget Committee and the director of the Office of Management and Budget who proposed similar entitlement restraints in the past. "The status quo is not acceptable morally," he said in 1992, "because it means that we will heap a larger and larger burden of debt on our children and their children and grandchildren." Yet now he stomps out of negotiating rooms in professed anger over GOP refusals to "protect" Medicare.

Panetta recently held a special "briefing" for regional reporters on a White House report titled "Impact of the Republican Budget Cuts on Children: A State-by-State Analysis." Such reports, tailored to generate regional news coverage, are frequently "unveiled" as part of a big public relations launch by top Clinton officials who suddenly become lavish in their attention to obscure reporters from the hinterlands.

Panetta declared that the dreaded GOP "cuts" will "expose children in [fill-in-the-blank-state] to hazardous waste," and "deny 236,900 children in California basic and advanced skills." If only the federal government were somehow endowing children with such skills.

The report, statistically specific down to the single-digit child in all 50 states, showed Republicans leaving no tender need unmolested. American children would be "forced to remain in poor and unsafe housing" and "go without basic housing needs"; disabled children would be forced into "institutions"; children will go without immunizations, without food even. The Republicans will "allow sewage to flow into waters where children in [Arizona to Wyoming, alphabetically] live and play" and "jeopardize the water that children in [fill-in-blank-state] drink," and expose children to "drugs and drug-related crimes," as if federal programs are protecting them now.

Even the weather, and its "impact" on children, made the list of GOP atrocities. Dastardly Republicans would deny "about 658 children in Nebraska protection from bad weather." Children in sunny, warm places are not immune. The GOP budget also "denies about 595 children in Florida protection from bad weather conditions." The vital aid referred to is the Low-Income Energy Assistance Program, created under the Carter administration in response to the government-induced energy "crisis." It now subsidizes air conditioning bills in the South. Panetta himself had once proposed slashing this relic.

But that was before his boss was running for reelection. Some day not too far away, those same children will wake up to an 84 percent tax rate, truly eviscerated "programs," including no money for courts and prisons and highways and defense and national parks, or a raging inflation that decimates their living standards and leaves their parents destitute. That's the price of Clinton's protection of them and "American values."

Hearing Impairment

lochheadc@nationalpress.com (Carolyn Lochhead) — Mon, 01 Jan 1996 00:00:00 EST

A portrait of near apoplexy, the veins in his red nose seeming about to pop, 75-year-old Florida Democrat Sam Gibbons glared from the dais of the House Ways and Means Committee. He called Republicans liars and denounced their Medicare plan as a pox and a fraud.

Medicare was born 30 years ago in the cavernous Ways and Means hearing room of the Longworth Building where Democrats ruled for 40 yearsand where Gibbons was now rel egated to obstructionism and outrage as Republicans held a one-day hearing on their makeover of the Great Society's biggest social program. One day of hearings, said Gibbons, a 33-year member of the House, was hardly enough "on a matter involving the life and perhaps death of so many of our seniors and disabled people."

Placing a two-foot-high stack of testimony on the table, Republican Chairman Bill Archer retorted that the committee had already held hearings on Medicare prior to introducing the GOP reform bill. Gibbons summarily picked up the stack of paper, dumped it into the arms of a staffer, and pronounced, "This pile of material you see here is absolutely useless."

Such was the opening scene for a day of high political theater on Capitol Hill, one centered on the notion that congressional hearings are of crucial importance to American democracy, the forum where the weighty "testimony" of learned, objective experts from the outside world informs legislation. Some congressional hearings may glide within the remote periphery of that noble purpose. But most hearings are more like stage sets for carefully choreographed propa ganda shows that seek to feed an ideology, build momentum for legislation, skewer political opponents, aid political allies, spin the press, catch C-SPAN, and create headlines.

Democrats invented and perfected the formula during their four decades in power. Now, like Dr. Frankenstein, they express horror that their brainchild has turned against them. Some, like Gibbons, seem genuinely shocked that Republicans are overtly using hearings to promote their own ideology and undermine the huge entitlements and programs that make up the status superstructure Democrats have built. "What a desecration to this room," Gibbons intoned at the Medicare hearing. Others, like Minority Leader Richard Gephardt, seem eager to create a com peting sideshow that shamelessly plays to the lowest common denominator of public emotion and revanchist politics.

Like all hearings, the GOP Medicare panel was stacked with favorable witnesses, with the "star" appearances scheduled first to catch the press pack that usually evaporates after the open ing round. They included Guy King, Medicare's former chief actuary, who has long warned of the program's structural bankruptcy, and Peter Ferrarra of the National Center for Policy Analy sis, the lead brain and provocateur behind the GOP plan.

But Democrats know the formula, and they were not so easily flummoxed. The National Council of Senior Citizens, a union-backed lobbying group largely funded by the federal govern ment, had planted a group of yellow-shirted seniors in the back of the hearing room. After first sending a note to ask how they might get arrested, the seniors marched to the front of the room, carrying signs saying "Some Cuts Don't Heal" and "No Health Cuts for Tax Cuts for the Rich." It was a strange coincidence that the signs carried by these concerned grassroots citizens parroted the chief Democratic attack theme, but no matter. Cameras flashed and indignation rose as these beleaguered commoners stood with tape over their mouths, declaring that they had been silenced and that House Speaker Newt Gingrich ought to be arrested. Rep. John Lewis, a Georgia Demo crat and former civil rights leader, rose from his committee seat and solemnly walked down the line to shake their hands as a comrade in courage against this ghastly assault on their status quo.

Archer warned the group that House rules do not brook such disturbances, and the seniors were led from the room by Capitol police. "No party has a monopoly on compassion for the elderly," Archer said. In fact, he said, "We are on the verge of compassioning Medicare to death. Explosive entitlement spending has threatened the very solvency of these programs that we deeply cherish, not to mention the solvency of the nation itself."

Every Democrat and every Republican, from President Clinton and Newt Gingrich on down, knows that Archer is right. Medicare and Medicaid are bankrupting the Treasury and will themselves collapse when the baby-boom generation begins retiring in just 15 years. The sacro sanct Social Security program will implode at the same time, making the problems with the health care entitlement look like chicken feed.

But on Capitol Hill, politics must prevail. While Republicans were conducting their hear ing, Gephardt announced that his Democratic troops would hold their own rump Medicare hearings under a tree outside the Capitol to expose the GOP fraud to the American people. So out they went into the drizzle on the muddied East Lawn, complete with yellow umbrellas embla zoned with the word "Shame," microphones, a witness table and witnesses, a press table, a backdrop of huge black-and-white blow-ups of grizzled old folks, and a makeshift dais.

Although the Democrats insisted they were denied a room (Republican staffers hotly dispute the charge), they issued a fax announcing that their "alternative Medicare hearings" would take place in the Rayburn Building in case of heavy rain. But a light drizzle, it seemed, would suit their purposes nicely, keeping them out on the lawn in camera-ready demonstration of the GOP conspiracy to deny the public the facts.

The facts aired out on the lawn, however, turned out to be testimony from the yellow -shirted denizens of the National Council of Senior Citizens, who had traipsed across the street from the Longworth Building. Secretary of Labor Robert Reich led the "witnesses," accusing Republicans of turning the working class into the "anxious class." The Democrats also heard testimony from Harry Krantz of the National Capital Area Trade Union Retirees Club.

Bob Hug, listed as a Medicare beneficiary from Milford, Connecticut, provided tales of woe from America's elderly. Seniors, Hug said, "have high prescription drug costs that are not covered by the Medicare," and their automatic Social Security cost-of-living adjustment has been offset by higher Medicare premiums. "It is not fair to balance the budget on the backs of our senior citizens," he told the dwindling group of Democrats. (As they often do at hearings, mem bers had to leave early for more pressing appointments.) "I am sure there are other ways
to balance the budget," Hug said confidently. "Is this the way we should be treating our senior citizens, who paid their taxes all their lives, and who fought wars for this country? So you and I can live in freedom? I don't think so."

Republicans say they eschew such tactics. "What Democrats did was slide into a show trial, agitprop approach to hearings," says Eric Ueland, spokesman for the Senate Republican Policy Committee. "We're trying to get away from that. We don't browbeat witnesses, we don't intimidate witnesses, we don't write witnesses' statements for them, we don't stage witness -member interactions. We don't do any of that stuff."

It is true that so far Republicans have avoided some of the tawdrier hearing spectacles, in part because their anti-government ideology does not lend itself to hauling forth capitalism's victims to testify on their dire need for this or that government program. And they have not yet sunk to the depths of calling up movie stars and rock singers to educate them on federal policy.

Democrats are famous for bringing forth such experts as Sally Fields (to explain the neces sity for farm programs) and Bonnie Raitt (to explore the spirituality
of California redwoods). Ben Hur star Charlton Heston, a Republican, did testify last spring, but it was to beg for continued funding of the National Endowment for the Arts. And at a recent meeting of the House Commerce Committee, the Seniors Coalition, a Republican-inspired group, adopted the techniques of their Democratic counterpart, marching to the front of the room and dumping bags of direct-mail-generated telegrams in support of the GOP plan.

Although they have generally gotten the hang of things, the novice Republicans had a few rough starts. At a hearing on
securities litigation reform last spring, Democrats exposed the GOP's star witness as a litigant, while Republicans were outwitted by the witness they intended to skewer. The toughest question that Bill Lerach, king of class-action securities litigation, had to answer was how much money he made. And he cleverly brought with him two of his own clients, supposed victims of securities manipulation, from whom he managed to wring heart-wrenching testimony for his own cause. "It was painful to watch," said a tort-reform lobbyist. "It was obvious these guys didn't know what they were doing."

Hearings do serve some useful purposes. They are the primary means by which Congress pursues its constitutional duty to oversee the executive branch. The most interesting ones explore important public issues or unanswered questions, whether over Ruby Ridge and Waco or Watergate. Sometimes, as with the hearing on the nomination of Supreme Court Justice Clarence Thomas, they spin out of control, and in so doing illuminate the great ideological fissures of the time and the dirty inner workings of political warfare.

When he was baron of the House Commerce Committee, Michigan Democrat John Dingell made the investigative hearing an art form, calling in alleged miscreants from industry or Repub lican administrations and excoriating them with carefully researched accusations developed by a staff of more than 100. "If he heard or saw something that someone was doing that he didn't like," says Frederick Graefe, a lobbyist with Baker and Hostetler, a Washington law firm, "he'd subpoena them and make them testify, make them squirm under the lights, put them under oath and make them hire a lawyer."

Hearings can be quite significant in manipulating the news and focusing public debate. The new Republican majority has brought a radical switch in the subject of congressional hearings, elevating topics that never before had been discussed in such a prominent forum. "This was a big change for me," says a Democratic staffer on a Senate committee. "If there was some issue we wanted to shine a spotlight on, we'd just call a hearing when we were in the majority, and we can't do that anymore. Now Republicans can use hearings to shine a spotlight on something, like their revolutionary tax schemes, and next year, believe me, there will be tons of hearings on revolutionary tax schemes."

While most members relieve their boredom at hearings by reading their mail, going through papers, signing letters, or reading documents, sometimes they actually do try to avail themselves of the opportunity to question experts. But "with very few exceptions, most members of Congress have had their minds made up on a particular issue, whether Medicare or anything else, before the hearings are ever held," Graefe says. "The hearing satisfies their obligation to have a public airing of what they proposed. And the Republicans in the House this year aren't approaching hearings, in my judgment, any differently than House Democrats have done. There were hearings held, a bill was drafted, it had a markup, and it passed. I mean, that's been the process up here for many, many, many years."

Lobbyists fill hearing rooms, mainly because they often are the ones actually running the hearing. A former congressional staffer and trade-association lobbyist says most lobbyists show up because "to be honest, they feel they have to do it for their trade association, to show you're making some sort of effort to get your word in there." Lobbyists help find witnesses, write their testimony, and make up questions for members to ask. A common tactic, the lobbyist says, is to find a witness who personally touches a member.

When lobbying for health-research funding, she says, "sometimes you can perk up their attention if it's a discussion of a disease one of the committee members has or if his mother died of it. In that case, it can be influential." Lobbyists are "not at all shy to seize any kind of opportu nity to jump on someone," she says. "I'm sure it took all of 15 seconds for
the spinal-cord injury association to call Christopher Reeve to get him on their board, and I'm sure he'll be coming in his wheelchair to testify. You can evoke a lot of sympathy if you have someone come in a wheelchair or someone who evokes tearsfrom members."

So are laws written and policy shaped in a great democracy. But the Democratic staffer thinks hearings can educate members and the public. "You do learn stuff here," he says. "You learn from experts, and when they're testifying before Congress, people get up for it. You can attract some of the best people in various fields to give their expertise. And even if I'm not learning something, my guess is the press table is."