How Wall Street and Unions Are Destroying the Economy

Public unions and Wall Street don't return the wealth they take from society.

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James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisis from Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.

A most frequent lament about American politics is that there is no middle ground between the two major parties and bipartisanship is dead. Republicans are portrayed as heartless capitalists bent on pursuing private gain as public needs go unmet. Democrats are said to possess an unfounded belief that entitlements can expand forever. The result is gridlock at a time when action is needed to address unemployment and unsustainable deficits.

As a result, the cry goes up for a third party that will pursue a policy of moderation. This ideal policy is encapsulated in the Bowles-Simpson Plan that would cut entitlements (anathema to Democrats) and raise taxes (anathema to Republicans) in a spirit of shared sacrifice. Neither the Democratic nor Republican bases have supported candidates who whole-heartedly endorse this path. However, political insiders expect this is where the parties will end up once the gridlock becomes unbearable.

Yet, what if this narrative is wrong? What if there already exists a powerful third party in America operating in plain sight? What if this third party represents not the moderation of Bowles-Simpson but a dark force that is destroying the economy? This party exists, but it lacks a name. Call it the Party of Institutionalized Rent Seekers.

[See a collection of political cartoons on the Republican Party.]

"Rent seeking" is a technical term in economics. It refers to people and entities that gain wealth from society by extracting it without adding more value in exchange. People like Steve Jobs and Bill Gates are not rent seekers. They gained enormous wealth but they created far more wealth for society than they took in return. The rent seekers are typically not found in Silicon Valley, the industrial heartland, or most private sector jobs. They are found in public sector unions and on Wall Street. Jamie Dimon, Lloyd Blankfein, and the members of AFSCME and the teachers unions are the Rent Seekers par excellence. They are all masters of the rigged game. They enrich themselves at the expense of savers, retirees, everyday Americans, taxpayers, and whatever suckers can be conned into buying the latest derivative or supporting the latest unfunded mandate.

The Rent Seekers not only leech off society but they have attached themselves to both major parties. The public sector unions are the backbone of Democratic Party fundraising and operational logistics. Wall Street is a font of cash for the Republicans. Admittedly, Wall Streeters sometimes align with the Democrats when the prospects for loot seem brighter. Wall Streeters are as pragmatic as they are parasitic.

The Rent Seekers blind the major parties to their own better angels. Democrats really do have a strong case for the importance of educational outcomes and investment in critical infrastructure. Republicans really do have a case for the tonic effect of lower taxes and sound money. Democrats could work with a Republican like Dwight Eisenhower who invested public funds in highways and technology. Republicans could work with a Democrat like Jack Kennedy who cut taxes and confronted Communism. This kind of bipartisanship could be revived but for the cancerous role of the Rent Seekers.

[See a collection of political cartoons on the Democratic Party.]

To invest in education we need efficiencies that are blocked by teachers' unions who siphon off the kids' cash for their own inflated pensions, free lifetime medical insurance, and double dipping—collecting from multiple school districts after a phony "retirement" from one. To invest in infrastructure we need the kind of banks that financed the Alaska pipeline and not Jamie Dimon-style casinos engaged in "heads-I-win, tails-you-lose" bets on structured credit derivatives. The inflated pensions are great for teachers and the casino gambling is great for bankers, but they are both poison for society.

What the Rent Seekers have in common is greater than what sets them apart. This is why they are a united party despite their different affiliations. Both public sector unions and Wall Street banks thrive on government subsidies and lack of competition. A nationwide system of school vouchers would improve educational outcomes and break the teachers' union monopoly, but this is unthinkable for Democrats. Breaking up the too-big-to-fail banks and a strong Volcker Rule would increase competition in banking and force banks to find productive uses for funds, but this is unthinkable for Republicans. As each major party protects its Rent Seekers within, they destroy themselves just as the Rent Seekers destroy society.

[See a collection of political cartoons on Occupy Wall Street.]

In this world of entrenched parasites, concerned politicians like Mayor Rahm Emanuel and Rep. Ron Paul have a lot in common. Rahm Emanuel is an honest liberal who is now confronting the power of government unions in his position as mayor of Chicago. Ron Paul is an honest conservative who has continually confronted the power of big banks. They are a distinct minority within their parties and we wish them well. We need more politicians who understand that the interests of their constituents are being crowded out by the demands of the Rent Seekers.

Instead of Bowles-Simpson, what we really need is an old-fashioned sit-down of Rahm and Ron once they have purged the parasites in their parties. Now there's a meeting I'd like to attend.

Corrected on : Corrected on 12/18/2012: A previous version of this blog misspelled Rahm Emanuel’s name.