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Jeffrey Sommers and Michael Hudson: The Koch Brothers’ Governors

By Jeffrey Sommers and Michael Hudson. Sommers is an associate professor at the University of Wisconsin – Milwaukee and visiting faculty at the Stockholm School of Economics in Riga. His book with Charles Woolfson, The Contradictions of Austerity: The Socio-economic Costs of the Neoliberal Baltic Model is available from Routledge.

Michael Hudson is the visiting distinguished research professor at the University of Missouri – Kansas City. He is also author of The Bubble and Beyond. Hudson is an associate professor at the University of Wisconsin-Milwaukee, and a distinguished professor at the University of Missouri-Kansas City respectively, who have both advised members of Latvia’s government on alternatives to austerity. Originally published at Michael Hudson’s website.

The Koch Brothers are the closest thing the United States has to Russia’s oligarchs. They fuse ownership of the economy and state, using the latter to enrich themselves while making private gains through the public’s losses. Their idea of a “market economy” is to buy government officials and the assets they privatize at giveaway prices.

The top three butlers at the Koch’s nouveau riche ‘Downton Abbey’ are Governors Sam Brownback of Kansas, Wisconsin’s Scott Walker, and Chris Christie of New Jersey. All three ran elections based on the anti-Keynesian oxymoron of promoting job creation by balancing budgets with regressive tax plans. All declared that cutting taxes (chiefly on their wealthy campaign contributors) was the way to achieve their goal (more campaign contributions). All have served at least one term in office and the results are in: Their rates of job creation and income growth are way below the national average. Rather than closing budget deficits, tax cuts create them – providing more excuse to privatize state assets, post-Soviet style.

Brownback simply hopes to stay on the job as governor of the state where the Kochs’ corporate headquarters are located. Despite flagging poll numbers, he remained in office thanks to a mildly tawdry incident involving his Democratic opponent’s youthful visit to a strip club (in the era of talk radio and Fox News, anything can be manufactured into a scandal). Christie and Walker, by contrast, have presidential aspirations and are raising funding as the two top prospects from the Kochs’ political farm team.

The looming public danger ahead is how these Koch governors will ‘repair’ the fiscal potholes their tax policies are creating. Chanting the GOP refrain of ‘lower tax rates good, higher taxes bad’ as their stage-magic abracadabra, they proselytize Arthur Laffer’s cocktail napkin ‘Laffer Curve’ depicting lower tax rates delivering higher tax revenues as a sacred scroll – its inevitable failure leading to privatization of rent-extracting opportunities in a Yeltsin-like post-Soviet policy under the banner of free markets.

All three Koch Governors are following this fiscal folly of widening budget deficits. The effect is to force more cutbacks in public services, with sermons exhorting voters to tighten their belts while the Kochs gorge themselves on the tax cuts enacted by their pet governors.

Christie and Walker are the two governors with the most to lose by reciting the same tax-cutting catechism that Brownback parroted while driving Kansas into insolvency. Walker ran for re-election largely on having eliminated a $3.6 billion budget shortfall while cutting taxes and – more to the point – by cutting public employee benefits while holding most state wage increases below the rate of inflation. Christie likewise originally ran on closing deficits. Both now find themselves big budget deficits after serving a term with the policy they would like to impose on the nation at large.

Christie and Walker both sought to finance budget deficits and tax cuts (chiefly for the wealthy) by reducing living standards for public sector workers. But the deficits have re-appeared, while the cuts to public worker compensation have reduced consumer spending at local restaurants, taverns, car dealers and the innumerable goods and services tendered by New Jersey and Wisconsin businesses.

Christie and Walker pretended that cutting inflation-adjusted wages and benefits would not reduce consumer demand if the ‘savings’ were spent by the taxpayers enjoying lower tax bills. This argument ignored the obvious fact that the tax cuts go disproportionately to the wealthiest. As every economic textbook for the past century has taught, the rich typically spend and invest more of their money out of state, or simply buy more Wall Street stocks and bonds and foreign luxuries. The supposed savings thus escape Wisconsin, slowing economic growth – and hence, state tax revenue!

Christie and Walker are now facing deeper deficits after their tax cuts. Governor Walker no longer has a balanced budget. New Jersey’s shortfall for this year was close to $1.6 billion. Christie was counting on revenues from the state lottery to serve as income transfer from the poor and working class to pay for his tax cuts to the rich. But lottery revenues have fallen short. So he is trying to make up by cutting state payments to the pension system. As for Wisconsin’s state deficit, it is projected to widen to $2.2 billion.

Just as important as how much tax is collected, is how it is collected. The aim should be to structure tax policies in ways that maximize wealth creation. But Governor Christie and Walker’s tax policies cut the bone, not the fat.

Their political dilemma is that their ‘tools’ of income and property tax cuts have not ‘repaired’ their respective budgets. The danger is that their pursuit of the 2016 GOP presidential nomination will lead them to use the next ‘tool’ in today’s class war arsenal: weaponizing fiscal policy to sell off the public domain.

Governor Walker has led the way by trying to sell state land and power plants in no-bid contracts. The idea is for privatization sell-offs to raise enough short-term revenue to allow the Koch Governors to wave the banner of fiscal rectitude, just in time for the 2016 presidential primaries.

But this will sell their states’ ‘family silver’ of land, power plants and other basic infrastructure. This has been kept in the public domain to benefit taxpayers by keeping their basic infrastructure prices low. Selling off this public property, currently owned free of debt, would provide rent-extraction opportunities for the buyers. It would turn their taxpayers into rent payers for the services of the assets they formerly owned free and clear. The new prices for hitherto public services will include debt servicing charges, management charges, the cost of stock dividends, and whatever rack-renting the new owners can squeeze out of the public.

To be sure, there is room for investigating whether a private vender could better manage our state-owned power plants, or if a private developer should construct and manage buildings on public land to maximize revenue. But this is different than selling the underlying assets owned by taxpayers.

Tax rates can be lowered or raised in response to budgetary needs – and to pay for errors by past political office holders. But once public assets are sold, they cannot easily be re-acquired. The long-term fiscal damage from their sale is permanent. That is what England learned from the devastating wave of Thatcherism. It raised the fees that taxpayers must now pay for transportation, water and other public services that have been privatized and financialized. They lose more paying such rents than they saved in the tax cuts (financed by much higher public debt levels).

The problem with New Jersey and Wisconsin is that unlike Britain, whose economy was saved by North Sea oil revenues coming online just when Thatcher’s policies were cutting demand in the economy, these states have no such natural resource windfall to save them from the short-term fixes to the budgetary shortfalls that have been created by tax cuts benefiting the most affluent.
Beyond New Jersey and Wisconsin, the whole country needs a more enlightened discourse on wealth creation. Blanket lowering or raising taxes will not balance our state budgets or deliver prosperity. The aim should be to make the tax structure more progressive, and to incentivize investment over speculation. What must be avoided at all costs is selling off public infrastructure.

This Koch ‘tool’ will not ‘repair’ our budgets. It risks shattering budgets, and also the middle class. Selling off public property returns the public to their role as peasants on the Kochs plantation.

But here’s the real nightmare: President Obama has been giving speeches warning about the nation’s deteriorating bridges, roads and other infrastructure. This sounds like a Grand Bargain in the making by the Democratic ‘Rubinomics’ and Koch crowds to raise the funds to ‘fix’ America by privatizing bridges and other infrastructure that have been starved of maintenance. Such austerity measures were a means to balance local budgets in the face of cutting taxes for the rich. A Democratic Congress might block Koch tax cuts on the national level – but a Democratic presidential victory could restore Obama-Clinton style neoliberal policies. They could out-Koch the Koch brothers by engaging in privatizations as a means to both restore our infrastructure, while levying a de facto tax on the middle class in the form of tolls and fees going to private investors for infrastructure currently paid for by general government revenues.

In short, the 2016 presidential election could be another example of ‘heads you lose, tails you lose’ with either the Democrats or Republicans. The best chance of staving off the ‘casino fix is in’ is to focus on electing progressives to the Congress rather than ‘investing’ in a Hillary victory for 2016.

The United States for its part has adopted von Clausewitz’s statement that war is an extension of foreign policy in a very limited form: war seems to be the only lever that the United States is using in its foreign policy these days. But that does not mean that all wars have a long-term policy in mind. It seems to be war without policy – military force (from the air only) in itself, making America only a paper tiger when it comes to ground troops. Lacking an ability to mount a ground invasion, its only real threat is to tear economies apart by aerial bombing, as it has done to Iraq, Afghanistan, Libya and now Syria – and in its proxy war in Ukraine. It can smash and grab, but not build.

There is only one conclusion of such strategy: to drive enemies together, to drive neutral countries to join them in order to stop the threat to grab all the world’s resources and destroy all governments that act independently in their own interest. Old Europe has not reached that stage yet, so is safe. But the rest of the world is pulling together.

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40 comments

  1. McWatt

    I like Michael Hudson. However, Hudson and Sommers together are wonderful. Here, laid
    out for all to see, is the game plan of the uber rich. Thank you for such a concise and well
    thought out piece of journalism.

    “Catch-22 says they can do anything we can’t stop them from doing.” Heller

    1. sgt_doom

      Let us never forget (along with this wonderfully enlightening article) that Chris Christie, prior to being elected governor of NJ, was a lobbyist for the securities industry and successfully lobbied to exclude securities fraud from the New Jersey state fraud crimes legislation.

    1. NOTaREALmeican

      Only by electing the nice people supported by the nice bazillionaires is there any hope at all. The Kock brothers are meanies who don’t like the children, but if we make the government bigger and run by the nice people all our problems will be solved.

  2. Crazy Horse

    “They fuse ownership of the economy and state”
    The description of the Koch Brothers exercise of power fits Beniio Mussolini’s definition of fascism to a T.

      1. savedbyirony

        The above article doesn’t mention it, but the Koch Bros have been buying up economic deptartments in catholic colleges for some time. Catholic University (the closest tied catholic university to the U.S. Council of Catholic Bishops and their annointed educational mouthpiece) recently received a large “donation” from the Koch’s for their economics dept. to “study” labor issues in particular. Also the school recently held a days long forum on economics that had abundant praise and justification for capitalism and precious little for what what would properly be understood as catholic economic social justice beliefs, despite what Pope Francis has recently been saying about capitalism and neolib. economics. (As reported by the NCR, it also had the common trappings and policing intimidations of a GOP fundraiser.) And Catholic University is not the only “religious” school receiving funds, materials and walking orders from the Koch’s.

        1. TheraP

          If the Kochs ever get a financial hold over the Opus Dei, then they have a way of influencing the Supreme Court too (3 or 4 of the conservative Justices have Opus ties). The Opus was very powerful under Franco, very allied with the regime.

          The election of Pope Francis effectively neutralized the Opus’ power in Rome (for now); it had worked against Vatican II, hand in hand with the two popes prior to Francis. We rejoiced when a Jesuit was elected as it meant the Opus lost that battle – at least.

          Your comment about Koch attempts to infiltrate or influence Catholic universities is helpful though alarming info.

          Additionally, let us recall that Paul Ryan is a conservative Catholic with a nutty economic agenda, possible Opus ties, and an eye on the Speakership down the road … And Ways and Means Chair within sight.

          And don’t forget conservative calls recently for an authoritarian leader. All of this lines up in a very worrying way.

          1. savedbyirony

            Well, i won’t disagree with what your saying about Francis at least trying to decrease Opus Dei’s power in the RCC and that his being a Jesuit gives him a well organized, widely dispersed and probably very loyal base of support for such efforts (and other reforms) in the church. But one need not be a member of Opus Dei to be neolib “Pharisee” Bishop, certainly not as a Bishop in the U.S.A. I don’t know how closely people here tend to follow the developments in the RCC (Naked Capitalism has run a number of articles on Francis and the Vatican since his election), but it is very clear that the USCCB is not supportive of his refoming efforts nor his economic views and is fairly blatantly acting to counter act and water-down both his word and actions. How all this applies to the above article is just that the USCCB and its members would be far more down with the Koch’s than they are with the present Pope. (Contrary to what people might be led to believe, it is actually very difficult to remove a Bishop, even for the Vatican/Pope. Transfer is easier, but they have ways to fight that, too. They basically have to be “convinced” to resign and plenty put up an effective fight. Bishop Finn is a good example of that situation at present.)

            1. TheraP

              As you point out, Francis is up against a lot and he cannot single-handedly change the RCC. But there is no doubt that his economic views are at variance with many bishops currently in powerful positions here in the US. Though more in line with the gospel I might add.

    1. NOTaREALmeican

      The Blue Teamers who need a meany to blame for all the badness in the world will eat-it-up.

      It’s the Red Team’s variation of “those people”.

      1. Vatch

        Most of this article is excellent. It starts very strongly by comparing Russian and American oligarchs. Yes, both countries are ruled by the few, and most Americans and Russians are only slightly better than serfs. Unfortunately, the article weakens considerably in the final two paragraphs with a cheap shop about “proxy war in Ukraine”. No mention of the fact that this “proxy war” was started when Russia’s military seized Crimea in late February, followed by a completely unbelievable referendum result of 96% in favor of joining Russia. Boss Tweed of Tammany Hall would have been proud. This hardened the position of the Ukrainians in the western and central parts of the country, and encouraged the Ukrainians in the east to rebel, leading to protracted tragedy.

        1. Yves Smith Post author

          Huh? Where do you get this?

          The US destabilized Ukraine and had a large hand in the ouster of a Democratically-elected president, when elections were mere months away. The coup government had neo-Nazis in key posts, particularly Defense. The government announced a purge of ethnic Russians from government positions, banned the use of Russian, and the minister of Defense announced a plan for ethnic cleansing in the southeast, as in forced resettlement of ethnic Russians and giving permission to members of the military to confiscate their property.

          The annexation of Crimea took place after a referendum in which voters were asked if they wanted more autonomy within Ukraine or wanted to join Russia. The vote was overwhelmingly in favor of joining Russia.

    2. John Zelnicker

      I can’t find a definition of “hysterical”, in any sense of the term, strict or loose, that includes the words or concepts “factless and ludicrous”.

      Perhaps it is you who are suffering from hysteria: “1. a psychoneurosis marked by emotional excitability and disturbances of the psychic, sensory, vasomotor, and visceral functions”

      From: http://www.merriam-webster.com/dictionary/hysteria

  3. Jim Hannan

    I think this same strategy is playing out at the federal level. When Bill Clinton left office, there was an estimated $5.6 trillion budget surplus over 10 years. That surplus would have effectively paid off the national debt at the time. Instead, George W. Bush became President. We adopted massive tax cuts, particularly for the rich, started two unpaid for wars, and passed a Medicare Part D plan, also unpaid for. So, now we are at about $16 trillion in national debt. Right now, it’s not a big problem, because interest rates are so low. But when interest rates rise, the interest on the national debt will rise. For example, at a 3% rate, the interest on the debt is close to $500 billion per year, more than the entire nominal defense budget. We know that the Republicans in Congress are not going to raise taxes. So, we will have to cut the safety net to keep annual deficits at a reasonable level.

    1. Min

      Paying off the national debt would have been a disaster. Americans discovered that when Andrew Jackson did that and issued in a depression. Why a depression? Because paying off the debt drained money from the economy. Then, as now, money was created by issuing debt. The ways that Bush restored the national debt were not good, but that’s another matter. The failure to increase the national debt in the wake of the financial crisis so that we would have the money to fuel a more robust economic recovery can be blamed on the Obama administration and the Tea Party Congress. Arguably our deficits are still too low.

    2. John Zelnicker

      A nation, as the US, that issues its own sovereign currency can never have difficulty paying interest on debt issued in that currency (Treasury securities). Or paying off that debt if it was appropriate to do so. (We don’t need federal gov’t debt in order to have enough dollars in the economy; we do need appropriately large deficits.)

  4. savedbyirony

    John Kasich of Ohio also qualifies as a Koch Bros. Gov. who has ideas about running for president.

    1. yancey

      You are absolutely right—-Kasich is a Koch surrogate. And Ohio is tracking along the same route of economic deterioration that Kansas is traveling. Although the local Ohio papers are creating a narrative of prosperity, the job growth is some of the worst in the country since the recession. Kasich’s re-election was the result of a thoroughly uninspired and disorganized state democratic party that threw the towel in early and retreated into the shadows.

  5. Banger

    Yes, but….

    Look granted that those governors are allied with the Koch brothers and others, but, the fact is that the people elect and re-elect these governors–they want what these guys offer no matter how foolish it appears to us on the left. And this the authors simply refuse to address. I think that we must understand that these guys know how to influence the public because they know what the public really wants or at least what that part of the public that votes wants.

    The public likes the idea of austerity because it is simple to understand–not enough money coming in, naturally, you cut spending. Of course this notion is crazy when applied to government or business for that matter. I can cut spending for my business but if I do I will cut my income as well–I may have to use credit to buy supplies because I’m somewhat certain that I will get that money back and more. But the majority of people who vote in those states don’t grasp that idea–or maybe they believe government is so corrupt that spending should be cut–less spending, less corruption, less damage.

    1. NOTaREALmeican

      Re: The public likes the idea of austerity

      The public likes austerity because they understand that cutting the leaches off of the government is the only way they can get their government back. Unfortunately, the “Progressives” haven’t got an idea that doesn’t involve more government and guess who benefits: (no NOT “those people”) the rich.

      It’s sad that the “Progressives” will never connect the dots between power and corruption and the inability of normal people to manage a government EXCEPT by withholding money from it (that’s ALL there is).

      But, I know, I know, think of the children and how lovely it will be when, next election, the nice people are running things (we must have HOPE).

      1. Sally

        You are deeply deluded. The Kochs play the small govt card and pretend they want to illiminate govt. Not true. They want to replace govt with themselves. That is not small govt, it’s still govt. Only a prvatised govt. And one that you never can remove.

        Study after study has shown that the most misinformed voters are those who watch Fox News. Fox News has only be going for a short period and when you add in citizens united ,and unlimited funding of elections, and gerymandying of districts you have the perfect storm. And that’s before you have electronic voting machines that count the votes and are owned by companies loyal to right wing parties. Non of this is a coincidence. It’s quite brilliantly and cleverly put together. The notion the rich are over taxed is laughable. The top rate of tax in America in 1920 was 90%’. Just see how many Fortune 500 companies pay no federal taxes for years and years. Yet they recieve huge hand outs from govt. They are the real welfare queens. The tax rates of the poor are going up. Sales taxes and all sorts of regressive taxes. The Kochs will recieve way more govt money than they pay in. After all, the Kochs daddy made his money doing deals with Uncle Joe Stalin. Govt has been good to them

        These people will soon join the dots between power and corruption. But it is a private corruption. And it will be too late. Welcome to the American Middle Ages.

    2. Carla

      Banger, you speak as if

      1. The Democrats offered something better than the Republicans. People have learned that they do not.

      2. The Democrats could offer even reasonably competent candidates to run against Republicans. Clearly, they seldom can. And I point to Ed FitzGerald, Democratic candidate for Governor of Ohio in Nov. 2014 as the most recent example of this pathetic crew.

      We do not have two parties. We have one: the Republicrats. Neocons? Neolibs? What’s the difference? In the end, precious little.

      http://www.movetoamend.org

      1. Banger

        The Democratic Party should be called the “Not Republican Party” (NRP). I don’t assume anything of the sort. The DP is a shell occupied by shifting series of organisms. We are forced through law and the Media Narrative to believe only two parties are possible. So the DP is the only vehicle available. I rarely vote DP these days because the current critters stink.

  6. Carla

    “The top three butlers at the Koch’s nouveau riche ‘Downton Abbey’ are Governors Sam Brownback of Kansas, Wisconsin’s Scott Walker, and Chris Christie of New Jersey. All three ran elections based on the anti-Keynesian oxymoron of promoting job creation by balancing budgets with regressive tax plans. All declared that cutting taxes (chiefly on their wealthy campaign contributors) was the way to achieve their goal (more campaign contributions). All have served at least one term in office and the results are in: Their rates of job creation and income growth are way below the national average.”

    Ohio’s John Kasich fits this mold, having equaled the achievements of Brownback, Walker and Christie as cited above. The only place he fell short (by conservative lights) was in his insistence on Medicare expansion as part of the “Affordable Care Act.”

    But Ohio ONLY gets attention in presidential election years. We’ll be hearing from y’all in 2016, and we’ve got the Republican convention coming to Cleveland, no less.

  7. NOMAS

    “The Koch Brothers are the closest thing the United States has to Russia’s oligarchs.’

    A myopic, typically American view is expressed in that comment (except, what about Americas Oligarkski vice president Joe Biden?) . Why would America necessarily have Russian Oligarchs ? America has its own exceptionally American kind of Oligarchs.

  8. Rob

    I’m a little confused.

    Of all the eligible lizards out there, why have the Kochs been given the honor of public enemy one? They helped found the libertarian Cato institute and generally hew to a libertarian line, certainly not mainstream Republican. Now perhaps this is all a clever false-flag operation on their part but it seems difficult to tie them ideologically to the very non-libertarian Republican party. They apparently don’t crack the top 50 political donors in the country according to some sources.

    I would have thought that someone like Sheldon Adelson would have made a better eminence grise for progressives. My very off the cuff feeling is that their libertarianism somehow presents a potential threat to progressives by peeling off some ideological agnostics.

    1. Yves Smith Post author

      Um, you need to bone up on this. Go read about Chapter 5 of my book, ECONNED, “How “Free Markets” Was Sold, or Google about the Powell memo.

      This is not just about political donations. The Kochs were the core members of and the largest consistent funders over time of a long-standing effort by what were then radical right wing businessmen (many were supporters of the John Birch society) to move the country to the right. The Powell memo (1971) lays out their plan and says among other things that the backers needed to be prepared to fund it on an open-ended basis.

      And has Mark Ames has written at considerable length, the Tea Party was in large measure created by the Kochs. The Tea Party has been successful in moving the Overton Window even further to the right.

      Now I will say it is really barmy that the Democratic Party pretends it just figured out who the Kochs were what, in the last 18 months?

      1. John Zelnicker

        Yves – IIRC, the Koch brothers’ father was a founding member and an initial financier of the John Birch Society.

        We had a particularly active and virulent chapter here in Mobile in the 1950’s and well into the ’70’s. Their local leader had his furniture shop just down the road from my house.

  9. Roquentin

    Yves is right, obviously, but there’s something to be said for this. Sheldon Adelson is at least as bad as the Kochs. He must be a lot better at keeping his name out of the papers. Adelson is also a more peculiarly American kind of oligarch. There’s something darkly funny about a sleazy casino mogul calling the shots from behind the scenes.

    1. Vatch

      There are two differences between Adelson and the Kochs:

      1. The Kochs have been heavily financing their agenda for several decades, whereas Adelson is a relative newbie to really big time political financing.
      2. The Kochs have a lot more money than Adelson.

      Still, despite these differences, there are a lot of similarities among Adelson and the Kochs. And let’s not forget the Waltons. They may not own as many politicians and university departments as the Kochs, but they still usually get their way in Arkansas and anywhere that there’s a Wal-mart.

  10. Rob

    I couldn’t help but notice a recent interview with David Koch by Barbara Walters tailor made for this discussion. In it Mr Koch stated plainly that he was pro gay marriage and pro choice, two prominent positions in clear conflict with mainstream Republican ideology. He was adamant about this when pressed by Walters and said the conflict was the Republican’s problem, not his.

    Again, perhaps this is all presented in bad faith, but he presents a credible libertarian front as far as I can see.

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