Rahm’s Rule of Crisis Management: A Footnote to the Theory of Regulation

First Published: 2013-02-17

First published in The Freeman February 11, 2013 and is reposted here with the kind permission of Dr. Yandle. Support fee.org here…

Rahm Emanuel, the mayor of Chicago and former White House chief of staff, is famous for a lot of things. But perhaps his most celebrated claim to fame has to do with the politics of crises.

“You never want a serious crisis to go to waste,” he said. Why? Because “it’s an opportunity to do things you could not do before.”

Rahm’s Rule gives a whole new meaning to the term “crisis management.” It also helps us understand how opportunistic politicians can both establish and respond to crisis-based circumstances—ensuring that pork gets delivered to favored constituents while everyone else is distracted by the looming crisis. The rule forms a footnote to theories that help us understand the regulatory state.

The situation is akin to a fire-stoking arsonist who is also a volunteer firefighter. But there’s more to the matter than this. A few examples of crisis-enabled pork production will illustrate just how complicated things can become.

The Price of Avoiding the Fiscal Cliff

The recent political deal to avoid the “fiscal cliff” is a case in point. To appreciate the full impact of Rahm’s Rule in this case, we must return to July 2011—to the heated-but-unsuccessful budget negotiations that took place between House Speaker John Boehner and President Barack Obama.

Mr. Boehner’s efforts to get a deficit deal—one that would cut spending dollar-for-dollar with every increase in revenues—went nowhere, though the two protagonists did agree on a final package that contained more revenue and cuts than the later fiscal cliff agreement. But the deal the two reached then was not acceptable to those who held power on either side of the aisle.

According to writer Bob Woodward’s account of the July negotiations in The Price of Politics—which is based on personal interviews with the key players—when things finally collapsed and the deficit summer soldiers were returning home, the White House put forward the idea of “sequestration.” This would be a spending freeze on previously appropriated funds of $1.2 trillion if it turned out that the next Congress was unable to put forward a deficit reduction package acceptable to Mr. Obama.

The sequestration was to be triggered on January 1, 2013, with equal cuts to come from defense and discretionary spending. To the surprise of many, the sequestration poison pill was a part of the 2011 budget resolution signed by the President in August 2011. Therein were planted the seeds of the major budget crisis that bloomed forth in all its glory at the end of 2012.

But as Mr. Rahm so wisely stated: “You never want a serious crisis to go to waste.” How might the canny politicians make the most of a crisis they themselves concocted?

With uncertainty assumed away for a moment, politicians on both sides knew that a crisis was brewing, since they helped form it, and that ultimately some kind of last-minute legislation would be passed. They also knew they’d be able to pack pork into it as it passed through, without the mourners or cheerleaders noticing.

Making Pork Sausage into the Night

Of course, no one knew for sure whether Congress would fail to come forward with a deficit deal that Mr. Obama would sign. And even the President admitted during his reelection campaign that sequestration would never happen. But as 2012’s calendar pages fell to the floor and December beckoned, there were many lobbyists in Washington hoping that the sequestration crisis would indeed become real. With the debate between Congress and the White House growing more heated by the day, the possibilities of converting crisis to pork became better by the hour.

But this was destined to be no ordinary crisis. It unfolded against a backdrop of U.S. debt rating cuts, new turmoil in Europe, serious Middle East disruptions that heightened defense budget concerns, and an economy that just couldn’t seem to gain traction. Serious tinkering with taxes and spending at times like these raised almost vital questions about the nation’s current and future well-being. At least, this was the way the situation was described by wise and seasoned political spokesmen who frowned as they stared into the TV cameras.

The more serious the crisis, the greater the media outcry; and the tighter the calendar for resolving it, the better the chances that members of Congress could attach special interest promises to a final bill that would be passed at the very last minute. In fact, forcing any resolution to the last minute made it possible to hang even more meat on the hooks, since few critics would have the time or interest to look for it, much less take it out. Remember: At the zero hour, all eyes are focused elsewhere.

Free Riders, Dead Weight, and a Goodie

So when the fiscal fix train left the station, how much pork stood packed in the last car?  According to a Wall Street Journal analysis, there was $12 billion in benefits for producers of windmill energy, $222 million in tax rebates for liquor makers, some $78 million in writeoffs for NASCAR track owners, a special $62 million tax credit that will keep StarKist operating the only meaningful industrial plant in American Samoa, and—best of all—a $410 million special tax treatment gift to Hollywood movie studios. But even as these porcine free riders sat front and center in the fiscal train’s caboose, there was an even bigger political goodie hidden among the bill’s baggage.

According to the New York Times, drug maker Amgen may have won the blue ribbon for rent-seeking. The fiscal cliff legislation contained language that delayed limits on drug prices that had been a part of previous legislation intended to bring down Medicare costs. When politicians regulate prices, all kinds of things can happen. That goodie is worth $500 million over the next 10 years, we are told. Without mentioning the word "Amgen," the last-minute legislation exempted one of the firm’s major products from previously mandated price controls. It is reported that Amgen had 74 lobbyists working on the deal. You read that right. That’s 74 people working the halls of Congress while the fiscal cliff battle was being fought. So, do the math: 74 people produced $500 million in future net revenues. That’s $6.75 million per worker. With gains that big, the Amgen government affairs office must surely be counted as a major profit center along with other Amgen divisions.

Amgen was not the only Medicare price manipulation winner. According to The Wall Street Journal, Senate Majority Leader Harry Reid adjusted some prices to accommodate California-based Varian Medical Systems, Inc. Varian, a maker of radiation tools for battling brain tumors, received a bonus when its arch rival, Swedish firm Electa AB, found its Medicare reimbursement rate was cut by 58 percent—all at the very last minute—while Varian’s rate held firm. Electa’s U.S. chief said that he was shocked when he heard the news.

Rahm’s Rule, TARP, and Dodd-Frank

Of course, the fiscal cliff is not the first recent crisis that enabled politicians to pack pork into last-minute legislation. Consider the Troubled Asset Relief Program (TARP), the emergency program that funded bailouts for banks, insurance companies, automobile companies, and a host of other enterprises following the 2008 financial crisis. With the sky falling, Wall Street financial institutions failing, and national leaders suggesting that another Great Depression was in the offing, Treasury Secretary Henry Paulson on September 19, 2008, delivered to Congress a three-page piece of legislation that would authorize him to purchase $700 billion in sharply depreciated mortgage-related assets from troubled banks and financial institutions, thereby pumping new money into trembling credit markets and financial institutions.

Even with the crisis becoming more serious by the hour, Paulson’s bill went nowhere. But on October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008, which contained the TARP program. Included in the rear car was an exemption from excise taxes for wooden arrows produced in the United States for use by children, a special seven-year cost recovery period for a racetrack operator, duty suspensions on wool products, special depreciation rules that favored ethanol producers, and new incentives for movies produced in the United States. Mr. Paulson’s three-page bill became a 451-page statute, which was signed into law by President George W. Bush a few hours after it was passed. After all, the nation was facing a serious crisis.

More recently, Rahm’s Rule ran rampant in the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010. Yet another crisis-generated product, Dodd-Frank’s main legislative thrust was to establish a host of far-reaching rules affecting financial institutions. Many of these regulations are still being written. But while the legislation’s main theme addressed such things as banks that are too big to fail and related regulatory schemes, there in the bill’s more remote corners rest major pieces of special interest pork that have little or nothing to do with financial institution reform. The Durbin Amendment to the bill is an example: It requires the Federal Reserve Board to cap the debit card fees banks can charge retailers. The mandate shifted costs from retailers to bank consumers, who pay higher service fees that banks charge to offset their debit card losses. Retailers appear to have won concentrated benefits paid for by rationally ignorant bank customers who have no idea why the fees they pay went up at about the same time.

Probing deeper into Dodd-Frank, one finds a package of special interest benefits that, even with a stretch, cannot be related to the legislation’s principal purposes. That is, these provisions have nothing whatsoever to do with financial institutions and markets. Title XV of the law contains requirements that apply to the mining and marketing of metals in the Democratic Republic of the Congo that might be used to provide Congo warlords with the means to wage war. Under the legislative mandate, firms that produce listed metals and minerals must report to the Securities and Exchange Commission—including the results of an independent audit—the steps taken to maintain production and supply security.

According to a New York Times opinion piece, the law has shut down legitimate producers and devastated local economies that depend on income from related jobs. But one producer has thumbed his nose at the law. The leading warlord, General Bosco Ntaganda, nicknamed “The Terminator,” provides security to the bootleggers who now deal in contraband metals. And who was it that lobbied for the law? The Times reports the special provision was sought by human rights advocates Global Witness and Enough, among others. Some metal bootleggers won, while lobbying “Baptists” helped with crisis legislation. The terrible outcome was undoubtedly not intended. But intentions rarely align with consequences.

Final Thoughts

Rahm’s Rule is a useful accessory to a body of theory that seeks to explain the political economy of regulation. The rule tells us that major crises can provide cover for distributing benefits to targeted special interest groups. The greater the magnitude of a given crisis and the shorter the interval for forming legislation to deal with it, the larger the spread of pork that can be packed into the final legislation. Rahm’s Rule is a guarantee that efforts to resolve a deadline-based crisis will go on to the very last minute. We might keep this in mind for the next deadline-driven crisis.

In today’s economy, regulation is found at every meaningful margin. Politicians set and rearrange prices for important services and products for consumers nationwide. They open and close market entry and give advantage to favored groups by altering taxes, depreciation schedules, and other regulatory schemes. Doing all this in the full light of day and with full and open debate would be a challenge. But then there are crises to serve the politicians’ interests. Some arise spontaneously and some are created or magnified consciously by the politicians themselves. The sequestration element in the fiscal cliff story is an example. The shouts of crisis and the end of western civilization that preceded TARP are another. In all cases, Rahm’s Rule applies: “You never want a serious crisis to go to waste.”

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