Don't Discount the Money

Don’t Discount the Money

Editorial comments on an article entitled “Don’t Follow the Money,” by David Brooks, Op-Ed columnist for The New York Times, published on October 19, 2010.

Part of a series entitled “The Blue Pencil,” providing textual commentary in the manner of an editor wielding a blue pencil.

Mr. Brooks’s article as published is in normal type. The editorial comments are bracketed and in bold.

Over the past few months, there’s been a torrent of commentary about political donations and campaign spending. This lavish coverage is based on the premise that campaign spending has an important influence on elections.

I can see why media consultants would believe money is vitally important: the more money there is the more they make. [Is this the only reason they might believe money is vitally important?] I can see why partisans would want to believe money is important: they tend to blame their party’s defeats on the nefarious spending of the other side. But I can’t see why the rest of us should believe this. The evidence to support it is so slight.

Let’s start with the current data. The vast majority of campaign spending is done by candidates and political parties. Over the past year, the Democrats, most of whom are incumbents, have been raising and spending far more than the Republicans.

According to the Center for Responsive Politics, Democrats in the most competitive House races have raised an average of 47 percent more than Republicans. [What do you mean by “most competitive races.” How many are you referring to? Which ones are they? Has money perhaps helped make them competitive?] They have spent 66 percent more, and have about 53 percent more in their war chests. According to the Wesleyan Media Project, between Sept. 1 and Oct. 7, Democrats running for the House and the Senate spent $1.50 on advertising for every $1 spent by Republicans. [Again, specificity would be helpful: big spending by Democrats in a few large-state Senate races could easily skew the statistics.] [Note that in the print version of this article, the word “House” was omitted from the first sentence of this paragraph and the phrase “running for the House and Senate” was omitted from the last sentence of the paragraph, rendering the paragraph even more confusing.]

Despite this financial advantage, Democrats have been sinking in the polls. I suppose they could argue that the conditions could be even worse if they didn’t have the money edge, but this is a weak case. [Why is it a weak case?] It’s more plausible to argue that the ad buys just didn’t make that much difference. [Why is it more plausible?]

After all, money wasn’t that important when Phil Gramm and John Connally ran for president. [Can you find better examples for this year’s general election than isolated instances from decades ago involving unstated amounts in primary election campaigns for an office not currently in play?] In those and many other cases, huge fund-raising prowess yielded nothing. [Do you mean the prowess yielded limited funds or that the funds raised did not produce a winner? Might there have been other factors? And since you’re obviously including primaries, it’s a foregone conclusion that a substantial majority of candidates will lose.] Money wasn’t that important in 2006 when Republican incumbents outraised Democrats by $100 million and still lost. [What races are you referring to? Also, the aggregate difference doesn’t tell anything about the impact of money in specific races.] Money wasn’t that important in the 2010 Alaska primary when Joe Miller beat Lisa Murkowski despite being outspent 10 to 1. It wasn’t that important in the 2010 Delaware primary when Mike Castle, who raised $1.5 million, was beaten by Christine O’Donnell, who had raised $230,000. [Aren’t these races well known for being exceptional? Certainly not typical or representative.]

The most alarmed coverage concerns the skyrocketing spending of independent groups. It is true that Republicans have an edge when it comes to outside expenditures. This year, for example, the United States Chamber of Commerce is spending $22 million for Republicans, while the Service Employees International Union is spending about $14 million for Democrats. [What is the relevance of the examples chosen? Do they reasonably indicate the overall volume of the Republicans’ “edge”?]

But independent spending is about only a tenth of spending by candidates and parties. Democrats have a healthy fear of Karl Rove, born out of experience, but there is no way the $13 million he influences through the group American Crossroads is going to reshape an election in which the two parties are spending something like $1.4 billion collectively. [Is the $13 million the only amount Mr. Rove influences? Isn’t he perhaps only one of several working in the same manner for the same purpose? Mightn’t their spending be focused and thus disproportionately influential in a few specific close races?]

Moreover, there’s no real evidence that independent expenditure is any more effective than candidate expenditure. Year after year, independent money follows passion but doesn’t ignite it. In 2008, Democrats had a huge independent advantage; now the Republicans do.

The main effect of this money is to make the rubble bounce. Let’s say you live in Colorado. Conservative-leaning groups have spent $6.6 million attacking Michael Bennet, the Democratic candidate for U.S. Senate, according to OpenSecrets.org, a nonprofit site that monitors spending in politics. Liberal-leaning groups have spent $6.9 million attacking his Republican opponent, Ken Buck. Over all, there have been 5,358 pro-Democratic ads and 4,928 pro-Republican ones in their race, according to the Wesleyan Media Project.

This isn’t persuasive; it’s mind-numbing. No wonder voters tune it all out. [How do you know voters tune it all out?] Amid this onslaught, there is no way a slightly richer ad campaign is going to make much difference. [You don’t need to make much difference. Just enough to win. And what about a much richer ad campaign on one side than the other?]

Political scientists have tried to measure the effectiveness of campaign spending using a variety of methodologies. There is no consensus in the field. One large group of studies finds that spending by incumbents makes no difference whatsoever, but spending by challengers helps them get established. Another group finds that neither incumbent nor challenger spending makes a difference. Another group finds that both kinds of spending have some impact. [What studies are you talking about? There’s no way for the reader to evaluate your opinion without knowing. Are there any other studies?]

But there’s no evidence to suggest that campaign spending has the outsize role that the candidates, the consultants and the political press often imagine. [Do the observations and experiences – often gruelling and emotionally draining – of just about everyone in the system, as well as those who avoid it for explicitly financial reasons, not constitute evidence?]

So why is there so much money in politics? Well, every consultant has an incentive to tell every client to raise more money. [Are they all unprofessional?] The donors give money because it makes them feel as if they are doing good and because they get to hang out at exclusive parties. [Not, of course, because it gives them access and influence in policymaking.] The candidates are horribly insecure and grasp at any straw that gives them a sense of advantage. [Are these reasonable and sufficient explanations for the most influential industry in the country?]

In the end, however, money is a talisman. It makes people feel good because they think it has magical properties. It probably helps in local legislative races where name recognition is low. It probably helps challengers get established. [Aren’t you undermining much of your overall argument? Doesn’t name recognition start out “low” in many, if not most, federal races, as well as in many state and local races other than legislative ones? How low must name recognition be for you to acknowledge that money might be useful in raising it?] But these days, federal races are oversaturated. [Is this article intended to be primarily about federal races? If so, that should be made clearer at the outset. In any case, note that, including primaries, most federal candidates are challengers, whom you have acknowledged that money helps to get established. Also, “oversaturation” doesn’t mean money is unnecessary or unimportant to each side in getting its message out.] Every federal candidate in a close race has plenty of money and the marginal utility of each new dollar is zero. [But how does any candidate have plenty of money, except by raising it?]

In this day and age, money is almost never the difference between victory and defeat. [As long as each candidate has as much as his or her opponent and both have plenty.] It’s just the primitive mythology of the political class. [Dubious: see above comments.]

Monitoring Executive Compensation

The attention being given these days by various federal regulatory agencies to the subject of executive compensation is healthy. However, the variety of circumstances in which such scrutiny is warranted, as well as the difficulties of monitoring those circumstances and fashioning consistently appropriate standards, are likely to render the effort piecemeal, unpopular, and potentially counterproductive. Wouldn't it be fairer, simpler, and more effective to instead reenact a meaningfully progressive income tax structure, such as the nation had during much of the twentieth century, when -- not incidentally -- prosperity was more evenly shared among all the people than it has been in recent times?

Securitization of Mortgages

Reflecting upon securitization of mortgages: It has seemed that one of the hallmarks of banking has been knowing one's customer, being able to work with him or her to encourage success or limit losses. Securitization, where mortgages are bundled and sold to third parties, eliminates this potentially enabling relationship.

So where is any value created in securitization? Perhaps there is a little in expanding the markets for debt, but it would seem this could be accomplished by sales of whole loans. And any enhanced market liquidity would seem more than offset by (a) the utter opaqueness of the securities (i.e., the inability to predict the likelihood of default by individual borrowers) and (b) the complexity involved in working with borrowers in the event of default.

The real "value" of securitization appears to be in throwing the bundled instruments into the realm of the credit rating agencies, substituting their second-hand, generalized, and dubious analyses and opinions for those of the original lenders.

Of course this doesn't create any real value whatsoever, but just an impression of value. Indeed enough credibility during the late financial boom to permit both originators and bundlers to extract substantial fees before the credit rating agencies were discredited and the emperor's nakedness was exposed.

It's hard to see a role for such instruments in a stable financial future.

Refinancing One's Home

I saw an article in the news this week of an unfortunate woman who had lost her home after refinancing. She had apparently been unable to make the payments on the refinancing loan.

It is remarkable how many people seem to think that once a home has appreciated in value, the increased equity is somehow the equivalent of free money. It isn't. As long as the owner lives in the home, he or she is using the appreciation. To both live in the home and borrow against the equity is to use the appreciation twice, and the second use is an additional burden that must be repaid, usually beginning right away in the form of monthly payments. The home equity loan is a burden just as a personal loan of a similar amount and terms would be if the property had not appreciated. Indeed the appreciation tends to make homeowners more giddy and banks more accommodating, so home equity loans are likely to be larger and thus more burdensome than unsecured personal loans. And of course it's easier for the homeowner to lose the house in case of default.

Reducing the Principal of Underwater Home Mortgages

I see today in a widely respected newspaper an editorial referring to home mortgages, calling for "reducing principal balances for millions of people who owe more on their homes than they are worth." That would likely require hundreds of billions of dollars. Who, pray tell, should pay for this program? The banks, whom we've just bailed out? The taxpayers themselves, who are already incurring record deficits? Should principal reductions apply irrespective of the size or value of the home or its suitability for the owner's circumstances? Should it be public policy of this nation to protect people from the unfortunate circumstance of a decline in the value of their property? Where might this lead? Should it be an ongoing policy, or just a one-time thing? Should we consider additional reductions if the property value keeps falling? Should it apply to personal property as well as real estate? Should it be extended to include circumstances in which the property was overvalued and thus in a deficit position when the property was initially encumbered? And who is to make the determination as to what the value of the property is? Wouldn't it be more prudent to encourage people who can't afford to hold on to their homes to trade down or rent until their circumstances vis-a-vis the market improve?

Home Loan Deficiency Judgments

Most discussions in the media of homeowners whose mortgage balances exceed the value of their homes proceed on the premise that an option available to those homeowners is to walk away from their mortgages. However, it appears to be the law in many states that a lender may obtain a deficiency judgment for the amount by which the loan value exceeds the amount realized upon foreclosure of the mortgage. Why would lenders not seek to obtain and enforce such deficiency judgments where there is at least some prospect of even partial recovery on them? It hasn't been traditional that borrowers can escape liability on unsecured debts. So why on these? And such judgments generally last a long time, so even the prospect that the borrower might some day come into some money should be enough to encourage lenders to pursue them.

Marginal Federal Income Tax Rates

I saw an article recently by a prominent national business journalist in which he referred to the top marginal federal income tax rate in the 1950's and 1960's of 90% as "now unthinkable." What about our political culture has changed that would cause him to say such a thing? Is it a credit or a shame that what was once the law might be now "unthinkable"? Why?