Spin cycle taints politics, economy

I've never met, or even spoken with, Scott McClellan. But I'm fairly confident that, this time, he's speaking the truth.

McClellan may have a detail or two wrong about who knew what when, but he pretty much nailed it when he described how Washington has been overtaken by a “permanent campaign culture” with its constant spin and exaggeration and shading of the truth, all in the service of “manipulating the narrative” to partisan advantage.

What McClellan is describing is a dynamic in the political marketplace that can be found in other competitive markets – labor markets, product markets, financial markets – a dynamic often referred to as an “arms race” or “race to the bottom.” It's the kind of competition in which players – acting rationally to maximize income, or to defend, attack or push a policy agenda – wind up producing an irrational outcome that leaves everyone worse off.

In the classic military arms race, for example, no country achieves a lasting military advantage but all wind up wasting lots of money on huge arsenals.

Or think of instances in which countries, in an effort to create jobs, get sucked into trade wars in which they try to win market share by continually cutting wages and allowing working conditions to deteriorate.

Sports teams bidding tens of millions of dollars a year for superstars, price wars for flat-screen TVs, consumers buying bigger and bigger SUVs to protect themselves in case of collision – all these are classic arms races.

The problem with these competitive strategies isn't that they never work – in the short run, they often produce a temporary advantage. But it is too easy for competitors to copy the strategy and match the latest move, creating a new stalemate.

Though it would be an exaggeration to say that arms races created the recent credit bubble, they certainly contributed to it.

The documentary evidence that has emerged so far confirms that many people in the financial world were aware of a significant deterioration in underwriting standards and that they were taking on unusual risks. But because of the competitive imperative, once one company demonstrated that it could boost short-term profit and grab market share by lowering underwriting standards, the others felt they had no choice but to follow it right off the cliff.

Why? Certainly pride is a big part of it – you'd be shocked by how fixated Wall Street has become with the annual “league tables” that rank the investment houses on their volume of initial stock offerings, bond issues or collateralized debt obligations (CDOs). How investors later fare is barely noticed.

Perhaps most significantly, any bank or investment house that decided to hold the line on underwriting standards would have run a real risk of quickly losing its top-performing employees, who are constantly being recruited by rivals. Once those key players go, so go their clients, whose loyalties tend to run to individual investment bankers and fund managers rather than the financial institutions.

This arms race for talent extends to top executives on Wall Street who, because of their employment contracts, have a built-in incentive to take undue risks. These contracts make it impossible for these top executives to be fired for making bad business judgments, no matter how costly they may prove. As a result, boards of directors are forced to negotiate “voluntary” retirements, like the one that allowed Stan O'Neal to walk away from Merrill Lynch with $161.5 million in cash and stock after presiding over the loss of tens of billions of dollars of shareholders' money.

Boards of directors aren't stupid – they know such contracts are ridiculously one-sided. But once one or two leading companies agree to them, the others figure they have no choice but to follow suit, or they risk losing the ability to attract and retain top executives.

The fix for this kind of destructive competition is not more competition, but collaboration. In the military sphere, that means an arms control agreement. In sports, it's a salary cap for each team. In finance, it means tough new regulations and regulators. In corporate governance, it suggests a new set of “best practices” for corporate directors that set reasonable standards on executive pay and accountability.

Which brings us back to Scott McClellan and the “culture of deception” here in Washington.

As Terry Hunt, the Associated Press's veteran White House reporter, noted last week, spinning is nothing new to Washington, but it “accelerated markedly” during the Clinton and Bush years. The reason everyone did it was, it worked – or so it appeared. The conventional wisdom was that the only way to defeat spin was with more and better spin.

Somewhere around 2006, however, that began to change. An increasingly cynical public began to see through the deception, to discount the spin and to turn on politicians who practice it. Republicans lost control of Congress, President Bush lost the support of the American public and even Democratic congressional leaders saw their poll numbers decline. More recently, presidential primary voters rejected candidates who excelled at spin and partisan pandering to favor challengers more inclined toward honesty and bipartisan cooperation.

Now that McClellan has stepped forward to add his voice to this chorus clamoring for collaboration, the Washington of spin and deception has responded in the only way it knows how: questioning his motives and integrity. Bush loyalists see a sleazy effort to sell books, while cynics in the media are outraged that it took him so long to speak up. What nobody has yet challenged, however, is the essential truth of what McClellan has to say about the dysfunctional nature of American politics and the urgency of re-establishing a culture of candor at the highest levels of government.