Whether American business will hold its own in the competitive global economy or continue its steady decline will depend in large part on what the Clinton administration does about financial markets, foreign investment, and trade. Although decisions on these issues are the subject of fierce lobbying in Washington, much of the debate occurs behind closed doors, and most Americans never hear it unless they read publications like American Banker and New Technology Week.
Unfortunately, the early signs from the Clinton administration are not good. Three men whom Clinton placed in key economic positions have backgrounds that suggest that they will be ill-suited to preside over the reform of America’s trade and investment policies.
Although they are highly capable and intelligent, National Economic Council Chairman Robert Rubin, Deputy Secretary of the Treasury Roger Altman, and Commerce Secretary Ron Brown represent the culture and interests of the Wall Street financiers and Washington lawyer- lobbyists who have had a singularly deleterious impact on the American economy over the course of the last decade.
As co-chairman of Goldman, Sachs & Co., one of Wall Street’s most formidable investment banking firms, and as head of its risk arbitrage division, Rubin was a leader in the battle against financial reform. Altman was vice chairman of The Blackstone Group, an investment banking company specializing in Japanese takeovers of American firms. And Brown worked for Patton, Boggs, & Blow, the most powerful lobbying firm in Washington, where his clients included Sony, Toshiba, and other Japanese electronics giants determined to block changes in American trade policy.
For the next four years, Clinton will be confronting the trade deficit with Japan, a rising tide of foreign investment in the U.S., and a financial system that rewards speculation and punishes productive investment. Asking Brown, Rubin, and Altman to deal with these problems is like putting well-known narcotics traffickers at the head of the war against drugs. Here’s why.
I. GIVING AWAY THE STORE
While the Bush administration was obsessed with the GATT and NAFTA agreements, the United States continued to suffer from a disastrous trade deficit with Japan. Some of that deficit resulted from American firms’ failure to make competitive products, but much of it was the result of informal Japanese trade barriers that kept out high- technology goods in which the U.S. still enjoys superiority.
The K Street connection. In addition to Brown, Clinton appointed two other veterans of Washington’s K Street law firms to positions that oversee U.S.-Japan economic relations. Clinton named Samuel Berger the deputy national security advisor and made Mickey Kantor the U.S. trade representative. Like Brown, both come from firms that do a significant part of their business representing foreign companies and governments.
The law firms established on K Street in the 1930s generally represented American companies affected by the new laws and regulatory agencies created by the New Deal. Up until the 1970s, K Street was essentially an arm of American state capitalism, and its representatives in public service, from Dean Acheson to Clark Clifford, encountered relatively little conflict between their private aims and their appointed positions. But during the 1980s, as K Street became a battleground over trade and foreign investment, the Japanese spent more than a billion dollars hiring Washington lawyers and public relations flacks to argue their case.
Buying access. The Japanese did not discriminate between political parties. While hiring Bush and Reagan campaign officials Charles Black and James Lake and former Nixon aide Leonard Garment to gain clout with the Republican administrations, they also tapped former Iowa Senator John Culver, former Carter aide Stuart Eizenstat, and Ron Brown to lobby the Democratic Congress.
In addition to representing several Japanese corporations, Brown worked for a number of foreigngovernments, including “Baby Doc” duvalier’s Republic of Haiti. Meanwhile, Samuel Berger, who had served in the Carter State Department (and to whom Anthony Lake, the economically inexperienced National Security Advisor, will likely cede most trade questions), was working for Hogan and Hartson, where he not only lobbied for Toyota but was reportedly their chief American strategist. And although Mickey Kantor, unlike Brown and Berger, never personally lobbied for a foreign corporation, he was a partner in a law firm with prominent Japanese clients.
If their past practices are any guide to their future conduct, Brown, Berger, and Kantor will not make any bold moves to put U.S.-Japan relations on a new footing. They will, however, provide the trade lobbyists with whom they worked access to the White House and government departments. And in Washington, access is everything.
II. DISCOURAGING INVESTMENT
In appointing Brown and Kantor, Clinton seems to have followed long- held precedents of using the jobs at Commerce and Trade to pay off campaign officials. Nixon and Bush both appointed their chief campaign fundraisers to head the Commerce Department, and Carter and Reagan both elevated campaign officials to the post of U.S. trade representative.
Clinton probably had a different purpose in appointing Rubin and Altman. While both had raised money for his campaign, their appointments reassured Wall Street. John Kennedy similarly made Republican Douglas Dillon his treasury secretary, and Carter named Paul Volcker to be chairman of the Federal Reserve Bank. But by installing Rubin in the White House and Altman at Treasury, Clinton did more than send a signal. He gave Wall Street virtual veto power over his economic initiatives.
Blind spots. Of course, it’s possible that these two men will turn into exceptional public servants. When Franklin Roosevelt appointed Wall Street trader Joseph Kennedy director of the Securities and Exchange Commission in 1933, many people expected him to use the office to subvert the New Deal. Instead, he used his intimate knowledge of Wall Street’s shady dealings to promote measures to curtail corruption.
But Kennedy had been looked down upon by Wall Street and had a score to settle. Rubin and Altman, in contrast, are regarded as models of Wall Street deportment. They have nothing to prove because they, like their peers, don’t feel that they’ve done anything wrong. Like Plato’s cave-dwellers, who mistook shadows for reality, they have seen their own institutions entirely from the inside and may be blinded to their overall role in the American economy.
The sin of speculation. Since the early 1970s, investment bankers have been shifting their attention away from investment and toward speculation. Goldman, Sachs, for instance, made $1.45 billion of its $1.91 billion in revenues for the first half of 1992 from stock, bond, and currency trading.
These activities serve no useful social or economic purpose other than enriching those who perform them skillfully. (Rubin, for example, is now worth about $130 million and has pulled in as much as $30 million a year.) Moreover, these activities increase the volatility of the stock market and precipitate wide swings in stock prices, forcing corporate managers to fixate on their stockholders’ short-term profits rather than on their companies’ long-term viability. As George Hatsopoulos, chairman of Thermo Electron Corporation, put it at Clinton’s Economic Summit in December, American companies have been caught in a “capital squeeze” because of their efforts to satisfy “short-term traders.”
Bad mergers. Although financing mergers has long made millions for investment bankers, historically these mergers tended to strengthen the American economy by giving U.S. companies the scale to compete with large foreign producers. The mergers of the 1980s were decidedly different. Wall Street investment banks encouraged leveraged buy-outs (LBOs), in which a group of investors took out huge loans at high interest rates to buy up a company in the hope of selling it off in parcels for an overall profit. By burdening companies with intolerable levels of debt, these ventures have substantially weakened the U.S. economy.
And the solutions. If Clinton is serious about economic reform, he will attack these practices, and there is no lack of proposals for how to do so. Two recent commissions have advocated bringing representatives of workers, suppliers, and customers onto the boards of corporations; allowing banks to own and underwrite securities; and giving investors incentives to take active, long-term roles in corporate governance.
Economists such as Nobel Prize winner James Tobin have also proposed a transactions tax on the purchase and sale of securities, which would encourage investors to view stock purchases as long-term investments. Speculators could similarly be dissuaded from undertaking LBOs and other mergers by removing the tax deduction for the interest corporations pay on their loans. Any one of these reforms would have a significant impact, yet Clinton has nominated two investment bankers who have specialized in the very practices that need changing. Rubin, in fact, personally lobbied against just these kinds of reforms (see Rubin bio, page 49).
III. OTHER COUNTRIES’ MONEY
The older generation of investment bankers underwrote American overseas expansion. Although powerful Wall Street firms such as the House of Morgan began as branches of European firms, by the 1920s some of the continental parent companies had become branches of their former American subsidiaries.
Buying American. Now the relationship is turning backwards. Since 1977, the assets of foreign firms in the U.S. have increased almost 20 percent per year. As America has ceded economic dominance in manufacturing, Japanese firms, fattened by a decade of large trade surpluses, have become particularly interested in buying American companies. These takeovers have given Japanese manufacturers newfound power over critical areas of world trade. Between October 1988 and October 1992 alone, for example, Japanese companies acquired 426 American high-tech companies.
Altman’s association with The Blackstone Group is particularly troubling in this regard. A firm that specializes in facilitating foreign acquisition of American companies, Blackstone has been uniquely useful to Japanese corporations looking for American investments. Among the several blockbuster deals that Blackstone brokered with Japanese companies was Sony’s acquisition of Columbia Records and Pictures, probably the best-known Japanese purchase of an American company and perhaps the most dangerous (see Altman bio, below).
Rubin and Altman’s former investment banks have one other link to Japanese business–they’re both partially Japanese-owned. In 1986, Sumitomo Bank Ltd. purchased 12.5 percent of Goldman, Sachs for $500 million. And in 1988, Nikko Securities bought 20 percent of The Blackstone Group for $100 million. As this has happened, American investment bankers like Rubin and Altman have become, to some degree, agents for Japanese rather than American corporate expansion.
At the Treasury, Altman will be under Lloyd Bentsen (himself a patsy for the securities industry), but sources on Capitol Hill and Wall Street believe that the seventy-two-year-old Texan will let Altman run the department. “Bentsen is not weak, just lazy,” says one top Senate aide. “He’s closing out his career. He wants his picture on the wall on the line that begins with Alexander Hamilton.” His lack of initiative could put Altman and Rubin in a good position to mute any attempt to reform American financial practices or to regulate foreign takeovers.
IV. THE PUBLIC’S NEED TO KNOW
The real problem is that the public does not even know this is happening. Over the next several months, Clinton and Congress are likely to be preoccupied with reducing the budget deficit, enacting national health insurance, and undertaking new spending in infrastructure and education. These are important concerns, but they are not enough to halt America’s economic decline. Britain, after all, has demonstrated that it is quite possible to balance the budget and control health costs, and still continue to suffer a falling standard of living.
To succeed in reviving America’s economy, Clinton has to go beyond conventional front-page programs. He has to change the way investments are made, and he has to change America’s foreign economic policy, bringing it in line with a post-Cold War world in which industrial competition is more important than military competition. Clinton may eventually decide to do these things, but by bringing Rubin, Altman, Brown, Berger, and Kantor into his administration, he’s gotten off to a bad start.
John B. Judis’s latest book is Grand Illusion: Critics and Champions of the American Century. He is a contributing editor to the New Republic, and Washington correspondent for In These Times.