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Saturday, June 18, 2011

Political Staying Power: Ethanol Subsidies

“A broad bipartisan majority of the Senate voted [on June 15, 2011] to end more than three decades of federal subsidies for ethanol. . . . [At the time,] Gasoline blenders [received] a tax credit of 45 cents for every gallon of ethanol they blend[ed] with motor fuel. The amendment would have repealed that as well as a tariff of 54 cents a gallon on imported ethanol. . . . The tax breaks . . . cost about $6 billion a year. The House [was] expected to reject the repeal as unconstitutional because tax bills must originate in that chamber, and the White House opposes it. But the 73-27 vote signals that once-unassailable programs could be vulnerable.  [The intent was] to end subsidies for wealthy interest groups and [to make some] cuts before slashing social-welfare programs. [Thirty three] Republicans joined 40 Democrats and Independents in supporting [the] repeal. (E)thanol has come under increasing fire from diverse groups, including food industry groups concerned about rising corn prices and environmentalists who had concluded corn ethanol wasn't an effective way to reduce greenhouse gas emissions.”

At the time of the vote, much of the gasoline sold at service stations across the U.S. contained up to 10% ethanol, in part because of federal regulations that effectively require it. The Obama administration “proposed pushing the blend limit to 15%, despite objections from auto makers worried that higher ethanol levels would damage engine components in cars. Auto makers design many so-called ‘flex fuel’ vehicles to run on ethanol blends up to 85%. But few service stations outside the Midwest offer such fuels.”

“The ethanol industry and its supporters, who have been bracing themselves for an end to the tax break, were critical of the vote. ‘We need a glide path, and not a cliff, for the only alternative to oil,’ said Sen. Amy Klobuchar (D., Minn.). ‘We're talking about pulling the rug out from an industry that provides 10% of the nation's fuel supply.’ . . . The Renewable Fuels Association, an ethanol industry group, criticized the action, noting that the Senate ‘voted less than one month ago to preserve billions of dollars in taxpayer handouts to the oil industry.’ . . . The tax break benefits the ethanol industry, which is dominated by commodity giants” such as Archer-Daniels-Midland “by sweetening the financial incentive for gasoline retailers to use ethanol.”

“Repeal supporters said the $6 billion-a-year subsidy amounts to wasteful support for a fuel whose promises of cost savings, lower pollution and energy efficiency have not materialized. ‘This industry has been collecting corporate welfare for far, far too long,’ said Sen. John McCain (R., Ariz.), who's been fighting the subsidy for years. Mr. McCain offered another measure, to block federal funding for ethanol pumps and storage facilities, which failed 41-59. The House adopted a similar amendment.”


“Food companies and livestock farmers “have complained that their costs have exploded as five billion bushels, or 40% of all the corn grown in the U.S. last year, was consumed in ethanol production. The price of corn has traded above $7 a bushel for much of the spring [of 2011], twice the year-ago level. Some economists doubt that the tax credit is now crucial for the industry. The ethanol industry only began to grow rapidly five years ago when new energy legislation required gasoline retailers to use corn ethanol: 12.6 billion gallons [in 2011], moving to 15 billion gallons in 2015. The tax credit is part of the reason the gasoline industry buys more than one billion gallons a year than required by federal mandate. But if it expires, ethanol demand wouldn't fall below the mandate, preventing financial calamity for producers, said Bruce Babcock, an Iowa State University economist. ‘The ethanol industry doesn't need the tax credit anymore,’ he said.”

It is remarkable that even though the ethanol industry did not need the tax credit, it could still count on the White House and the U.S. House of Representatives to keep the benefit around. This was in spite of the inefficiency of ethanol, the negative impact of ethanol on food prices, the existence of the duplicative mandate, a U.S. budget deficit of over $1 trillion, and a contentious budget-cuts/debt-ceiling debate going on in which cuts were being sought by legislators. The size of the deficit alone (and the accumulated U.S. debt) should have made the affordability of the tax credit a foregone conclusion, yet astonishingly denial seemed sufficient to enable the status quo to continue unabated. That is to say, if a current U.S. Government deficit of over $1 trillion didn’t make the non-essential subsidy a non-starter, what could suffice to do so? To be sure, that the U.S. Senate voted by a substantial margin of senators to end the credit was notable. Politically, however, it merely reflected the split of the agricultural interest on the issue due to the impact of ethanol on the price of corn.

Even considering the U.S. Senate’s action, the staying-power of the status quo in the face of the unsustainable U.S. Government debt of over $14 trillion is truly remarkable in what it says about the ability of a political union based on representative democracy and federalism to deal seriously with dire problems. In other words, one might reasonably ask whether a republic is capable of change sufficient to avoid a train-wreck. Can a people govern themselves when it really counts, or is democracy a matter of convenience? Perhaps part of the problem lies in priorities.

As the U.S. Senate was voting on the ethanol subsidies, the U.S. House was simultaneously rejecting attempts to reduce farm subsidies while cutting the Women, Infants and Children program, “which offers food aid and educational support for low-income mothers and their children,” by $868 million (which represents a 13% cut), and an international food programs that provides emergency aid and agricultural development by $50 million (which represents a 33% drop), according to USA Today. In a governmental context in which budget cuts were very much in the air, the staying power of the ethanol subsidies in the House even as food for the hungry was deemed expendable reveals questionable priorities in terms of budget policy, unless it is the case that large corporations are more in need than women and children. That is to say, if House Republicans were voting in line with an ideological preference for less government, wouldn’t that proclivity apply to corporate subsidies as well as food aid?

Ethanol subsidies, international food-aid, and aid to impoverished people domestically can be prioritized in terms government. For example, it can be argued that feeding citizens (or residents) who are otherwise without enough food is more of a government’s responsibility than is either giving corporations subsidies or sending food aid abroad in exchange for influence in foreign governments. The distinctions between foreign and domestic and necessity and profit are useful in isolating core from peripheral functions of government. In times of budget-cutting, the core should be treated differently than the peripheral. Additionally, it might be asked whether in a federal system the subsidies and food-aid are properly federal or state domains. It could be that federal food aid should be cut completely in order to be picked up differentially at the state level.



Sources:



Naftali Bendavid and Stephen Power, “Ethanol Suffers Rare Loss in Senate,” The Wall Street Journal, June 17, 2011.

The Associated Press, “House Spares Farm Subsidies, Targets Food Aid,” USA Today, June 17, 2011.


Real or Incremental Change?

On October 13, 2010, Fox News reported a poll that found that women are turning on Obama.  The reason cited was that they feel there has been too much change—that it has been “jarring.”  I was stunned—wondering if I was listening to a broadcast from another planet. I remembered that when I had been sampling a food item in a grocery store and the old woman who gave me the sample, said, “We have lots of devils here.”  She was referring to the array of food samples in the store that day.  My reaction, which I charitably did not share with her, was to wonder what century she was from (probably Calvin's, I concluded privately as I downed a “devilish” olive). At the time, I wondered, moreover, why some people can’t seem to let go of what is to the rest of us so utterly antiquated and get with it. That is, why are some people so resistant to change? Why do they perceive small, incremental changes as somehow momentous—even jarring?
In a preface to one of his books, Milton Friedman wrote, "Only a crisis—actual or perceived—produces real change. When the crisis occurs[,] the action taken depends on the ideas that are lying around.” That is to say, human nature is not exactly designed in favor of substantial change—being more inclined to the incremental variety. When a culture says that real change is to be feared and people don’t bother to come up with a broad array of ideas, even a crisis may not result in real change. Such can be said of modern American society, even as “change” shows up consistently in American political campaigns.

In terms of the jarring change being reported on Fox News, the journalist pointed to the health-insurance reform law as a case in point.  In spite of its purported “socialism,” the law relies on private health-insurance companies, whose lobby pressured Obama into dropping his “public option” requirement and adding a mandate that requires Americans to become customers of those companies.  If relying on extant private companies—giving them a guaranteed and vastly enlarged customer base—is somehow “jarring” change, I have to start wondering about whether some people have a pathological issue with change itself.

One need only point to the Dodd-Frank financial regulation law of 2010, which subjects banks deemed too big to fail to additional capital requirements and requires the banks to develop liquidation contingency plans. This “change” pales in comparison to breaking up the banks having $1 or more trillion in assets so they do not pose a danger while extant. That some people might find increasing capital requirements as jarring boggles the mind. Are such people familiar with real change—even if they voted for it in 2008? I suspect they would not recognize it if it jumped up and bite them on their asses, and yet political campaigns are ostensively all about change—or the illusion thereof—but just enough to tell people what they want to hear.

Not surprisingly, much of the campaigning in the 2010 midterm elections was oriented to incremental change on a variety of issues, rather than to real change, even though the latter would have been more fitting given the systemic negative effects of the financial crisis of 2008. Even in states bordering on bankruptcy, like California, Florida and Illinois, campaigning as usual belied any purported crisis. 

For example, I watched a candidate forum that was being held in Illinois and one of the main questions was why a candidate’s business was so successful.  Meanwhile, the last governor had been impeached and removed from office by a nearly-unanimous vote in the legislature, and the government was borrowing $18 billion in 2010 alone.  The forum struck me as an exercise in “rearranging the deck chairs on the Titanic” as if the ship of state was not on the verge of sinking.  In other words, it was business as usual in a context that demanded substantial change. Clearly, the candidates knew of Illinois’s fiscal (and corrupt) condition. It occurred to me that they were either bereft of ideas or too accustomed to going along on the track of status quo to proffer any real alternatives. Lest one heap all the blame on the candidates at the forum, it is important to note that it was a citizen of Illinois who asked about the candidate’s business. Perhaps the society in Illinois is too entranced by custom and thus insufficiently equipped for real change—ironically even as one of Illinois’ former U.S. senators was serving as the “real change” president of the United States.

Lest the pallid phenomenon be presumed to be limited to the heartland, the California Governor’s race between Jerry Brown and Meg Whitman also evinced politics as usual. The two candidates had a chance in their debates to persuade a California-wide audience that they could turn around the economically-troubled republic. Instead, they resorted—at least in their third debate—“to many of the personal attacks that have dominated the last few weeks of the campaign,” according to MSNBC, whose verdict can be said to apply to American politics even in the wake of a crisis: “Neither candidate presented any new ideas.”

Source:

Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

Obama and the War Powers Act: On Libya

In June 2011, a bipartisan group of members of U.S. House of Representatives objected to the refusal of the Obama administration to obtain Congressional approval in line with the War Powers Act of 1973 for the U.S. military’s continued involvement in Libya. On June 17, 2011, The New York Times ran a story which indicated that Barak Obama had gone against the views of the top lawyers at the Justice Department and the Pentagon in his decision not to seek Congressional approval.

“Jeh C. Johnson, the Pentagon general counsel, and Caroline D. Krass, the acting head of the Justice Department’s Office of Legal Counsel, had told the White House that they believed that the United States military’s activities in the NATO-led air war amounted to ‘hostilities.’ Under the War Powers Resolution, that would have required Mr. Obama to terminate or scale back the mission after May 20 [2011].” The president went instead with the view of the White House counsel, Robert Bauer, and the State Department legal adviser, Harold H. Koh , “who argued that the United States military’s activities fell short of ‘hostilities.’ Under that view, Mr. Obama needed no permission from Congress to continue the mission unchanged.”

According to the Times, “Presidents have the legal authority to override the legal conclusions of the Office of Legal Counsel and to act in a manner that is contrary to its advice, but it is extraordinarily rare for that to happen. Under normal circumstances, the office’s interpretation of the law is legally binding on the executive branch.”

The U.S. House speaker, John A. Boehner, said. “The White House says there are no hostilities taking place. Yet we’ve got drone attacks under way. We’re spending $10 million a day. We’re part of an effort to drop bombs on Qaddafi’s compounds. It just doesn’t pass the straight-face test, in my view, that we’re not in the midst of hostilities.”

It is indeed difficult to imagine that dropping bombs does not constitute or contribute toward hostilities. To parse the War Powers Act as not applying to dropping bombs does not give one much faith that the president has much common sense (or aptitude as a constitutional lawyer). Also raising concern is the possibility that Barak Obama had succumbed to the lust for power. Furthermore, ethically speaking, it is troubling that he would be fine with the conflict of interest wherein the commander-in-chief has the power to decide whether the U.S. military and those of the states (i.e., the militias) will be drawn into a new action. The commander-in-chief has a power-interest in making the policy decision in a direction favoring military activity. The War Powers Act was designed to prevent this conflict of interest. “Hostilities” is simply one way of referring to the military doing what it is designed to do, whether as troops on the ground, ships, or planes (or drones). To split hairs like a micro-managing lawyer not only enables the conflict of interest, it also falls short of the big-picture presiding role of a U.S. president. In other words, Obama's parsing makes him look small and self-serving.

Much more statesmanlike would have been for the president to have addressed Congress in a joint session at the beginning of the involvement of the U.S. military in Libya and asked for a resolution. In other words, the War Powers Act should never have been allowed to become an issue. In standing for the Union, the president could have presided over the question by asking Congress for its yea or nay, proffering his view as a secondary consideration for the Congress. To be sure, acting on a human rights basis to stop a brutal dictator is a worthy cause. I can emphasize with the president for wanting to carry through this agenda. Even so, he should not have allowed what he wanted to eclipse his role in presiding and Congress’ role in forestalling his conflict of interest and representing the people.

I suspect that the typical American on the street read the story and concluded that Barak Obama had succumbed to the elixir of power—not an uncommon occurrence in official Washington. To get a president who is immune from this drug of choice, the Electoral College would have had to draft a duty-bound citizen into serving in the office for a term rather than select among the candidates chafing at the bit to get it. There is something unseemly about someone tooting his or her own horn in order to gain the office, particularly if a lot has to be done to get it. We ought not to be surprised, therefore, when such a candidate gets attached to the power while in office.


Source:

Charlie Savage, “2 Top Lawyers Lost to Obama in Libya War Policy Debate,” The New York Times, June 17, 2011.

Friday, June 17, 2011

British Banking Regulation in the E.U.

Before the financial crisis of 2008, the British government was light on banking regulation compared to other E.U. state governments. Oddly, some Europeans imagined an “Anglo-American” connection or likeness, as the American states had been on a deregulation kick since Carter’s airline and thrift deregulatory laws in the late 1970s. Reagan and the second Bush in particular extenuated the movement, which applied to the entire U.S. common market. After the crisis, however, even as Republicans in the U.S. House of Representatives, which is commensurate to the E.U. Parliament, were still voicing support for still more deregulation as though 2008 had not happened, the regulatory tussle in the E.U. reflected the greater involvement of the state governments (i.e., the stronger federalism than the lop-sided variety in the U.S.), with the British government in particular pushing for stronger banking regulation—if not at the E.U. level, then in the state of Britain. “British officials are waging an increasingly aggressive fight to impose banking regulations as they see fit, even if they go further than rules elsewhere in the European Union,” according to The Wall Street Journal. From this quote, we can unpack two distinct though interrelating strains: a desire for tougher banking regulation and an anti-federalism wherein the state governments of the E.U. can go beyond the federal government in terms of the regulation. Both of these points are significant.

The complete essay is at Essays on Two Federal Empires.

Long Term Capital Management

By 1997, “after three years of strong profits for LTCM, the opportunities were drying up. There was too much money chasing the same investments. . . . In early 1998, LTMC decided to give a large portion of its capital back to its original investors because profitable opportunities were so hard to find. At the end of 1997, LTCM had nearly $7.5 billion under management, compared to $1 billion when it started, and it now returned $2.7 billion of that to investors. The partners also figured that they could, if necessary, simply leverage their portfolio further to compensate for the loss of capital, which would compound their personal gains. Greed was at the heart of what turned out to be a disastrous decision. . . . Unable to reproduce the returns of the first three years, LTCM took increasingly more risk, abandoning its purer arbitrage for the kinds of ‘directional’ investments Soros made and LTCM had so long disdained—such as trying to forecast interest rate and currency movements. More and more of these trades were unhedged.” Furthermore, “LTCM’s risk models—VAR and related statistical tools . . . –were misleading.” For example, diversification was little protection if there was a run on the banks. When Russia defaulted on August 17, 1997, LTCM’s hedges against its Russian investments were worthless. Furthermore, because all fixed income assets fell sharply in value, “diversification, it turned out, did not matter. The finely calculated relationships on which LTCM was built and which the firm always believed would hold started to come apart. VAR could  not account for such an unlikely but sweeping event—an event in which everyone wanted out at the same time and almost all investments fell significantly in price. The use of VAR itself precipitated much of the selling. Commercial banks under the jurisdiction of the Basel Agreements, which . . . set capital requirements based on the level of VAR (the lower the VAR, the lower the capital required), were forced to sell assets to raise capital.” LTCM lost $1.9 billion that August. Eventually, fourteen banks, organized by the Fed, put together loans of more than $3.5 billion to purchase 90 percent of the firm.” LTCM “did manage to sell down assets in an orderly fashion and by early 2000 it was essentially out of business” (Madrick, pp. 277-81).


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.


Amtrak’s Conflict of Interest

On June 15, 2011, U.S. House Republicans called for the breakup of Amtrak’s de facto monopoly of intercity and interstate passenger-rail transport in the United States. Specifically, Republican lawmakers proposed that the lucrative northeast routes be opened to private providers. For example, Richard Branson’s Virgin Trains had been seeking to provide service between Boston and Washington. Of course, letting one of the providers build and own the tracks even as other providers use the tracks would put that owner-provider in a conflict of interest in charging the other providers for their use of the track, so it would be preferable to have the U.S. Government supply the tracks and charge all of the private providers of train service.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.


Banks on Reserve Requirements: An Institutional Conflict of Interest

As regulators were getting close to an international agreement on how much additional capital large banks that are deemed too big to fail should hold. In 2010, international policy makers met in Basil and agreed to 7 percent. The Dodd-Frank law passed in that same year in the U.S. meant that the Federal Reserve Bank would have to “impose tougher capital standards on ‘systemically important financial institutions’,” according to The Wall Street Journal.  Hence, American officials wanted “to coordinate with global regulators so that U.S. firms aren’t put at a disadvantage.” Not wanting to divert more capital to protect themselves from losses, banks were busy lobbying the regulators to reject the proposed 2.0 to 2.5 percentage points above the 7 percent set at Basil.



The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.



Tuesday, June 14, 2011

The Tea Party on Congress & Popular Sovereignty

Mark Meckler, a co-founder of Tea Party Patriots, characterized the lame-duck session of the Congress at the end of 2010 as presumptuous because the Democratic-controlled House would be controlled by the Republicans in the upcoming session. In other words, the Democrats had just lost the right to control the House in the elections, so their continued control of the House was at odds with the “will of the American people.” According to Meckler, "For them to legislate when they've collectively lost their mandate just shows the arrogance of the ruling elite. I can't imagine being repudiated in the way they were and then coming back and saying 'Now that we've been repudiated, let's go pass some legislation. . . . I'm surprised by how blatant it was."

Meckler was undoubtedly reflecting a view of human nature with respect to the urge to power that was expressed by Anti-federalist opponents of the U.S. Constitution as it was being ratified in the several states.  Brutus, for example, writes, “This principle, which seems so evidently founded in the reason and nature of things, is confirmed by universal experience. Those who have governed, have been found in all ages ever active to enlarge their powers and abridge the public liberty” (Brutus, Letter 2, 2.9.25).  Brutus continues, "power, lodged in the hands of rulers to be used at discretion, is almost always exercised to the oppression of the people, and the aggrandizement of themselves; yet most men think if it was lodged in their hands they would not employ it in this manner" (Brutus, Letter 4, 2.9.54). In other words, there is not only a tendency in human nature to overextend political discretion; there is a built-in presumption whereby the drive is blind to itself. Presumption may be hardwired in human nature, such that we unknowingly walk on stilts made of empty straws.

Therefore, it is essential in a republic that the elected representatives be accountable to popular sovereignty. The Anti-federalist Brutus wrote back in 1788, "Perhaps no restraints are more forcible, than such as arise from responsibility to some superior power.—Hence it is that the true policy of a republican government is, to frame it in such manner, that all persons who are concerned in the government, are made accountable to some superior for their conduct in office.—This responsibility should ultimately rest with the People" (Brutus, Letter 16, 2.9.197, p. 187). Even so, the results of an election are not retroactive.

That is to say, the 2009-2010 Congress was not beholden to the election of 2010. Rather, the repudiation applied to the next Congress. Besides, the Democrats did not concur that their partyh had been totally repudiated.  It could be argued, for instance, that the moderate or conservative Democrats lost while the liberal Democrats such as Barney Franks and Dennis Kucinich survived. Nancy Pelosi was handily re-elected. Was she to view her votes in the lame duck session as inherently presumptuous? In other words, the foray of the Democratic Party onto Republican turf was pushed back--the Republicans taking back more of the Red states. To be sure, the Democratic Party certainly did not gain ground. At the same time, the resulting party may well be more coherent and thus on message.

In short, while Meckler is undoubtedly correct that elected representatives are beholden to their constituents, who can “toss the bums out,” he errs in holding the special session in 2010 to the election for the next Congress and he overstates the repudiation "message" of the 2010 midterm election. In general, so many factors go into elections that it is difficult to gleam one message from the outcome, especially if there are many races. Voters vote for a variety of reasons, even in one race. Superimposing one as a mandate may well be artifice.  Even so, Meckler can be forgiven for responding on the basis of the view of human nature espoused by the Anti-federalists, for it is only human nature to try to get as much passed as possible before losing control of a legislative body.


Sources:

Kate Zernike, "As New Congress Begins, Actions of G.O.P. Leaders Anger Tea Party Activists," The New York Times, January 2, 2011, p. 13.

Brutus quotes are from Herbert J. Storing, ed., The Anti-Federalist (Chicago: University of Chicago Press, 1985).

Monday, June 13, 2011

A Judicial Conflict of Interest: Walker on Prop. 8

 In 2010, Chief Federal District Judge Vaughn Walker issued a ruling that declared Proposition 8 (against gay marriage) an unconstitutional violation of gay Californians’ civil rights. After retiring in February of the next year, the judge revealed that he was in a 10-year-old relationship with a same-sex partner. The question is whether a reasonable belief that the judge would stand to benefit from the ruling means that there was a personal conflict of interest sufficient to have the judge’s ruling vacated. Amid the emotions swirling around issues such as gay marriage that involve the uneasy mix of personal matters and public scrutiny, an urgent need exists for ethicists and jurispruds to isolate the pernicious problems inherent in the conflict of interest phenomenon so we all can have faith that such issues are decided impartially in substance as well as appearance.

Andrew Pugno, one of the lawyers defending Proposition 8, has stated that the Judge Walker’s long-term relationship “creates this unavoidable impression that he was just not the impartial judge that the law requires.” That the judge withheld the information until well after his ruling suggests that even he may have thought the very existence of his relationship (even aside from any intention to wed) would be sufficient to trigger claims of a conflict of interest because he could stand to benefit personally from the ruling, according to the lawyer. Therefore, the conflict of interest lies not in the judge’s sexual orientation or in his particular state of mind, but, rather, in his being in a long-term relationship that could benefit from the option to marry. Obviating a personal conflict of interest based solely on one’s sexual orientation would be too general and it would constitute prejudice. Likewise, deciding another’s intentions is too subjective a basis for a judicial ruling on a conflict of interest.

A reasonable conclusion that a person stands in a particular position to gain a specific benefit can carry muster in a legal ruling dealing with a person’s conflict of interest. According to Pugno, it is “all about the fundamental principle that a judge really can’t sit to hear their own case when they have an interest in the outcome.”  

In deciding on whether Walker should have recused himself, Judge Ware conflates particular and general interests, arguing in effect that the former do not constitute a conflict of interest because the latter should not. "The presumption that Judge Walker, by virtue of being in a same-sex relationship, had a desire to be married that rendered him incapable of making an impartial decision, is as warrantless as the presumption that a female judge is incapable of being impartial in a case in which women seek legal relief," Ware wrote in his decision. Ware treats the specific connection of benefit between being in a 10 year same-sex relationship and having same-sex marriage legalized as equivalent to the general connection between a woman ruling on a case involving a woman.

Similarly, Ted Olson, whose wife died in 9-11, has argued that requiring judges to reveal elements of their personal lives sets a dangerous precedent. “What would a judge do who was Mormon knowing the Morman Church took such an active role” in campaigning for Proposition 8? What would a judge who had a nephew or niece or son or daughter who was gay or lesbian do? We have an unlimited number of permutations of what a judge might be asked to disclose.” In short, Olson sees a slippery slope toward a most undesirable outcome wherein recusals could be commonplace and at times for rather intimate reasons.

However, the slippery slope argument may be overdrawn, and it may be surmountable altogether, especially if one distinguishes between specific and general connections. Vikram Amar, a law instructor in California, argues that a recusal should be required because of “a specific and imminent benefit” rather than “some abstract and future benefit.”  According to Amar (and Ware), Judge Walker does not meet this test. I disagree.

That the judge was in a long-term relationship and was sufficiently old to retire means that the benefit would be both specific (i.e., him getting married) and imminent (i.e., given his age). For a couple discussing marriage, the discussion is not abstract. In fact, it can get down to whether a joint checking account would be opened and whether there would be a pre-nuptial agreement. Furthermore, couples who discuss marriage do not typically say, “maybe in ten or twenty years, we might get hitched.” The time frame is usually months or a few years, with a realistic expectation that a decision to marry would result in marriage.

One might counter that an intention must also exist—that it is not sufficient for a specific and imminent benefit to be possible.  For instance, in hearing the recusal case on June 13, 2011, Judge Ware asked the Prop. 8 lawyer, “I’m asking you to tell me what fact you would have the court rely on to suggest that Judge Walker wanted to change, not maintain, his relationship?” The mere fact that Judge Walker had been in a serious relationship “does not put him in the shoes of what the plaintiffs were doing, unless you cite to me some facts that he was desirous of the relief they were seeking,” Judge Ware said.

However, pegging desire is a tricky business, and far too subjective to serve as the linchpin of a judicial ruling; someone in a personal conflict of interest would only need to deny having been interested in one of the interests in conflict. When a conflict of interest is observed, the two interests involved are viewed as standing in themselves, rather than being conditional on being desired. That is, in recognizing a conflict of interest, the very existence of the interests is sufficient. Therefore, a recusal ruling should not stand on whether an intention or a desire was present. Given human nature, standing to gain is sufficient to make a conflict of interest situation sufficiently baleful that it should be eviscerated. Judge Walker stood to gain specifically and imminently even if he did not intend to marry. Therefore, we need not inquire as to his personal views or plans in order to conclude that his ruling ought to be vacated on account of his particular conflict of interest.

I would add, moreover, a criterion to Amar’s test for a personal conflict of interest in order to better counter the squalid slippery slope argument. Specifically, it is significant whether the benefit is to the person himself (or herself) or to a person or organization related to the person. To be sure, even having a relative or friend standing to benefit can be sufficient to give rise to a personal conflict of interest.

Indeed, on the very day of the recusal hearing on Judge Walker, the U.S. Supreme Court handed down a unanimous decision that state ethics rules that bar public officials from voting on matters because of a conflict of interest do not violate free-speech rights because voting is not the representative’s speech, but, rather, “a mechanical function of government.” In my view, treating voting (or  money) as speech evinces a category mistake, so Scalia’s opinion for the Court is “spot on” in this regard. For our purpose here, it is significant that the ruling approved the disputed Nevada law, which prohibits officials from “voting on an issue when their judgment could be affected by a relationship to someone in their household, a relative, business partner, or a person ‘substantially similar’ to those specified.” That is, a personal conflict of interest is assumed to extend to benefits to people bearing a significant relation to the person in the conflict.

The vagueness in the “substantially similar,” which was left to the state court to evaluate, may evince the possibility of a slippery slope in extending beyond benefit to the person himself. That is to say, extending the personal conflict of interest to include other people standing to benefit introduces a problem not present in a specific and imminent benefit to the person himself. Therefore, I contend that “benefit to the person” should be added to Amar’s criteria of specificity and temporality, with “benefit to others in a significant relation to said person” being added too, though secondarily and with receding importance as per the significance of the relation.

Even aside from the vague language, no clear boundary line exists between “significant” and “insignificant.” Nevada would have done better in using “significant relation to” and cited examples such as relative, friend, and business associate. Furthermore, a specific and imminent benefit to oneself can be localized, whereas one’s affinities to other people and organizations can be wide-open. Generally speaking, the bigger or broader the group/organization, the less an individual is apt to be invested in a benefit to it. For this reason, and because benefits to others are not as motivating as benefits to oneself (given the salience of self in self-interest, and self-interest in turn in human motivation), a distinction between “benefit to others” and “benefit to self” can and should be made in reference to personal conflicts of interest. To be sure, both are worthy of note in terms of personal conflicts of interest, but “benefit to self” ought not be held back due to problems associated with invoking “benefit to others.”

Therefore, in cases in which the person in a personal conflict of interest stands to benefit in a specific and imminent way, the slippery slope argument that can apply to “benefit to others” should not be invoked. In other words, “benefit to the person” should be added to Amar’s criteria, while “benefit to others” should be tailored so as to obviate any such slope and applied differentially depending on the degree of significance in the relation. Cases in which a spouse or close relative stands to benefit would come after “benefit to self” in importance, followed by cases involving friends and business associates. Similarly, a hierarchy can be established based on organizational affinities. For instance, a Republican would have more interest in a benefit to the Republican Party than to a more general organization such as the United Nations. My point is that discerning degrees of significance need not detract from the applicability of the “benefit to the person” criterion, or even from the secondary “benefit to others.”

Judge Walker himself stood to gain something specific and imminent that could reasonably be expected to benefit him even if he didn’t desire it at the time of the case on Proposition Eight. His standing to benefit is of more importance than had a significant relation to him, such as a gay son or daughter, stood to benefit. That is, he had a material vested interest in the ruling sufficient for him to have recused himself, given a judge’s deontological (duty-based) interest (i.e., responsibility) in being impartial—including having the appearance thereof. The latter is particularly important given the importance of legitimacy in judicial rulings (courts not having their own police force to enforce their rulings). Therefore, I contend that Vaughn Walker should have recused himself and that the Prop 8 advocates have a case in having his ruling vacated on the grounds of a conflict of interest particular to him.

Lest it be suggested that Walker should merely have made his conflict of interest known before the case, merely announcing a conflict of interest is not sufficient to nullify its force or appearance. Better than knowing that a judge has a personal conflict of interest, another can be assigned without such a conflict. As there are presumably other federal judges in California, the conflict of interest could have been easily obviated. That it was not tells me that we as a society discount the problems inherent in the conflict of interest phenomenon.

I suspect that we do not realize sufficiently the ethical problems that conflicts of interest can cause. Even if people do not always act unethically when in a personal conflict of interest, I contend that such conflicts are inherently unethical. Society seems not to agree. As a result, we do not do enough to avoid or otherwise deconstruct them. We believe that somehow such conflicts do not really matter, or that they lose their power if they are made transparent. In other words, we are a bit too naïve for our own good, and then we are surprised when someone in a conflict of interest acts unethically.



Sources:

The Associated Press, “Gay Judge Targeted for Same-Sex Marriage Ruling,” msnbc.com, June 13, 2011.

The Associated Press, “Judicial Bias Is Alleged in a Ruling on Marriage,” The New York Times, June 14, 2011.

Joan Biskupic, "High Court Says Ethics Rules Don't Violate Speech," USA Today, June 14, 2011.

Lisa Leff, “Gay Judge’s Same-Sex Marriage Ruling Upheld,” Associated Press, June 14, 2011.

Corporate Ethics Codes: A Waste of Time?

Ethics codes are not enough; that is to say, making applications of ethical principles explicit is not sufficient, even where they are grilled into employees in recurrent training sessions. Indeed, individuals or a dominant coalition can use a code’s existence as window-dressing. For example, in his letter on July 1, 2000 announcing Enron’s new and improved 65 page Code of Ethics, Ken Lay writes, “Relations with the Company’s many publics . . . will be conducted in honesty, candor, and fairness.” If Ken Lay can trumpet a code of ethics, who’s to say who is out there now acting unethically in business under the cover of an effervescent code.

Fundamentally, ethical conduct is a matter of individual character, the more questionable sort being readily influenced by a sordid corporate culture. Therefore, looking out for character in hiring is paramount. Lest it be thought that candidates will ignore social desirability and readily give clues as to an unethical predilection in answer to facile “what would you do if” interview questions, common sense may dictate that references should be followed up and permitted to go on at length on the candidate’s character as per ethical conduct. In getting a sense of one’s ethical character, it is not enough to rely on stock questions.

Of course, if the managers with power, such as Ken Lay, are unashamedly unethical in their conduct, there would be stiff intangible penalties involved in acting ethical further down the line, even if unethical candidates have been screened out. Furthermore, if the CEO is also chairman of the board of directors, the board itself may be compromised in policing ethics in upper management.

However, if a company’s dominant coalition is serious about bringing its ethical code to life in the organization, compensation for ethical conduct must go beyond “rewards” or prizes. That is to say, compensation for such conduct must rival compensation for profitability. To say that ethics is important and then to relegate its bearers to receiving praise and recognition, plus perhaps a prize, is to introduce hypocrisy into the organization, from which point an unethical culture can easily take root.

In terms of whistleblowers, not tolerating retaliation is just a start. Compensation for the whistleblowers must be upped, for they risk much and thus show tremendous courage and fortitude—qualities that can come into play in taking a profitable strategy and running with it to fruition against seemingly daunting obstacles.

In short, stockholders, directors and upper echelon managers must put their money where their mouths are to be taken seriously as having a credible code of ethics that is alive in their organization and not merely window-dressing that can serve as a viable subterfuge for nefarious conduct.


Sunday, June 12, 2011

Stakeholder Management: Part IV (Property Rights)

Stakeholder theory can be interpreted as containing a series of prescriptive leaps in the direction of giving stakeholders a greater and greater share in the property rights of stockholders. The final leap issues in what can be called radical stakeholder theory, for it represents a fundamental challenge (or usurpation) of property rights. Perhaps the most astonishing thing about how stakeholder theory unfolds is its presumptuous claim that its prescriptiveness is merely description (i.e., pertaining to what is the case, rather than what is ideologically desired).

The full essay is at "The Stakeholder Subterfuge."