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The Illusions of Choice

June 1, 2012

Now that primary season is over, the general presidential election has fully and officially begun, and the Republican party and its famously disciplined message is finally beginning to congeal around Mitt Romney. And with that unification returns the rhetorical tactic that, over the last few decades, has defined the Republican party and undermined America’s analytical and epistemological foundations: the wedge.

The true insight of the Republican party (and by this I mean the G.O.P., the party organization, not conservatism as a movement or anything like that) over the last few years has been that Americans are psychologically, spiritually, and emotionally primed to treat almost anything as a binary choice. Whether it’s a political choice (e.g., Democrat vs. Republican, the black guy vs. the white guy, us vs. them), a policy choice (e.g., foreign aid vs. spending at home, tax reform vs. jobs creation, passing a budget vs. cutting down the national debt), or even a factual “choice” (e.g., evolution vs. intelligent design [or pure creationism, depending on your religious affiliation], accepting humanity’s role in contributing to global warming vs. calling it scientific mumbo-jumbo, abortion with informed consent vs. abortion with an increased chances of developing breast cancer [requiring a demonstrably incorrect warning that an abortion may increase chances of breast cancer]), these issues are perceived as “choices” that allow for “legitimate” disagreement and debate. And whenever someone gets upset that there is any such debate or that the debate is so unnuanced as to be insulting and dangerous to the process, a Republican gets his wings. Politicians thrive on false dichotomies.

False dichotomies have been a mainstay of politics, logic, and rhetoric since the ancient Greeks, so it should come as no surprise that in the most highly polarized and moderate-less Congress since the Civil War, they are freely and easily used. Lately, the Republicans have taken to calling each and every policy discussion a distraction from the issue of job creation (even if it is directly related to jobs) as though Congress only conducts one piece of business at a time.

But what this election will really come down to is some serious and wide-ranging false dichotomies that lie at the heart of the currently perceived political divide. The Republicans have staked their chances on Mitt Romney, but are ironically unable to rely on his tenure as governor of Massachusetts as relevant experience because Obama has largely adopted the positions Romney took during those years. Romney can’t quite credibly attack the center-right Health Care Act that contained no individual mandate since it was Romneycare before it was Obamacare. And he can’t criticize Obama for raising taxing (though he probably will) or say that he would have let the banks fail, because Romney has largely the same positions as Obama since Obama has governed from the right of Nixon.

Instead, Republicans are set to cast Romney as distinct from Obama because he is a capitalist par excellence, as a result of his time in private equity with Bain Capital. Republicans are therefore pinning their hopes on the “economic freedom” and “jobs creation” narratives in a weak economy. Mitt, both implicitly and explicitly, promises to bring back American-style capitalism in the wake of that “over-burdensome regulatory system” wrought by the “communist” regime of President Obama. Trading on the latent misinformation regarding Obama’s policy choices, Mitt offers to Restore Our Future (actually, that’s the name of the Super PAC created to spend $150 million in support Romney, and therefore is in no way affiliated with him).

The problem, therefore, is that this election does not offer the binary choice between capitalism, with Romney on the one hand, and communism, with President Obama on the other. However, Republicans have cast the Obama economic agenda as the equivalent of communism because he seeks any regulation at all. Regulation is a dirty word, uttered only with invective, and bandied about as though it is presumptively antithetical to both liberty and the American way of life.

Of course, Obama didn’t have anything to do with the regulatory regime with which most Americans have any experience; he’s only started to bring some oversight to the bankers that, through purportedly rational behavior, found themselves exposing the global economy to some of the pitfalls of assuming perfect capitalism in a world of information asymmetries and other systematic and pervasive market failures. What is more odious to the 0.0001% that is Romney’s true constituency is that Obama wants to unwind some of the divergent treatment written into the law that makes private equity so profitable:

Private equity typically entails borrowing money to acquire underperforming companies, which firms like Bain Capital then try to improve and flip for a profit. The US tax code subsidizes and encourages this borrowing by privileging corporate debt over equity — it’s fully deductible. This gives private equity an incentive to lever up their acquisitions with debt, yielding big profits when things work out, but destabilizing and bankrupting companies when they don’t.

Obama has proposed two measures that would affect private equity. The first is eliminating the carried-interest loophole that allows executives like Romney to pay an extremely low rate of tax by claiming their earnings as capital gains rather than ordinary income. The second measure, not even a formal proposal but a suggestion contained in the president’s Framework for Business Tax Reform last February, is to address the tax disparity between debt and equity, which would give firms like Bain less incentive to borrow.

Therein lies the wedge. Obama wants to take away certain competitive advantages that can be utilized only by wealthy investors, and may try to eliminate abuse of the tax system by making the economic reality of a transaction the more relevant indicator of how that company is treated. The Republicans are poised to characterize a vote for Obama as vote for “additional regulation” and “higher taxes that will stifle productivity, ingenuity, and profitability of American companies.” Republicans will say that any form of increased regulation costs jobs, even when that regulation may require some more long-term thinking than the quick lever-up-and-flip maneuvers for which private equity is famous.

What Republicans really want to say is that Republicans are pro-capitalism and Democrats are anti-capitalism. That may be true in certain strict senses, but what Americans fail to see is that Democrats rarely concern themselves with markets that are functional under pure capitalism; instead they are seeking to interdict and correct market failures (where pure, unrestrained capitalism does not work), which even textbook and classical economics agrees requires some kind of intervention. And yet, according to the Republican rhetoric, correcting a market failure is “big government stepping in where it doesn’t belong.”

Sadly, a nuanced conversation about why the wedge is wrong takes up a lot of time. And because time and attention are transaction costs that most Americans cannot afford, they consume less information than would be consumed in the absence of those transaction costs, as per the basic model for positive externalities. As a result, we have a pervasive failure in the market for ideas. Who is in the running to intervene and correct this one?

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