The Revolving Door At Wall Street & Pentagon

Liberal activist Ralph Nader is famous for his "Capture Theory of Regulation": government employees/regulators are promised future lucrative jobs in the private sector if they aid the industry while in office and/or once they leave state employment they use their internal contacts to procure benefits for their new private employer. Thus the regulatory agencies are "captured" through corruption by the very industry they are supposed to oversee and regulate.

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The theory has a lot of credibility and in one arena in particular: the Pentagon. The military headquarters of the United States is, of course, is not a regulatory body. But it is coveted by the private defense contractors who seek to expand the military budget and shift contracts to themselves in order to boost their revenue and profits. A peace dividend is sorely detested at Boeing, Lockheed Martin and Northrup-Grumman.

And one novel manner they have done this is through the "capture theory". Retiring generals are now being cultivated to serve as highly-paid consultants for defense firms. Their consulting as minimal. Defense firms need engineers and other highly skilled specialists. Generals are more often than not lacking those fields. Suffice to say they are not hired to advice on weapons-building or management but to serve as a consultant on how to navigate the bureaucracy in order to boost a firm's standing and contract potential. And they are expected to call upon their former colleagues to serve the interests of a private firm.

It is becoming a revolving door:

"But almost as soon as he closed the door that day in 2005 his phone rang. It was an executive atNorthrop Grumman, asking if he was interested in working for the manufacturer of the B-2 stealth bomber as a paid consultant. A few weeks later, Martin received another call. This time it was the Pentagon, asking him to join a top-secret Air Force panel studying the future of stealth aircraft technology. Martin was understandably in demand, having been the general in charge of all Air Force weapons programs, including the B-2, for the previous four years. He said yes to both offers...The Globe analyzed the career paths of 750 of the highest ranking generals and admirals who retired during the last two decades and found that, for most, moving into what many in Washington call the “rent-a-general’’ business is all but irresistible. From 2004 through 2008, 80 percent of retiring three- and four-star officers went to work as consultants or defense executives, according to the Globe analysis. That compares with less than 50 percent who followed that path a decade earlier, from 1994 to 1998."

The solution to this is not some ethics law banning retired generals from defense firm employment, which would be illiberal and prohibitive to the ideals of freedom.

But a vast reduction in the military budget which will reduce the incentives for such rent-seeking by private firms as the gains will be far less. The corruption is a mere symptom of a excessive military budget unwarranted during this time.

President Eisenhower - one of the greatest generals in world history who lead at D-Day - warned in his final address to the nation about a military-industrial-complex. We should heed that warning.

Wall Street is just as bad:

The president's recently departed budget director is joining Citigroup.

The New York Federal Reserve Bank's derivatives expert is joining Goldman Sachs.

And numerous investigators from the Justice Department and the Securities and Exchange Commission are joining Wall Street's top law firms.

The vast overhaul of financial regulations and the renewed intensity of investigations into white-collar crime has been a boon for regulators, prosecutors and financial policymakers looking to cash in on their government experience and contacts.

In recent months, prominent officials from the White House, Justice Department, SEC, banking regulators and other agencies, both federal and state, have been walking through the proverbial revolving door to join Goldman, Citi, other financial companies and top law firms in Washington and New York.

It is just awful. But as I wrote:

The solution to this is not some ethics law banning retired generals from defense firm employment, which would be illiberal and prohibitive to the ideals of freedom.

But a vast reduction in the military budget which will reduce the incentives for such rent-seeking by private firms as the gains will be far less. The corruption is a mere symptom of a excessive military budget unwarranted during this time.

Reduce state intervention in the free market and such incentives for revolving doors will be obviated.