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Friday, July 8, 2011

The Keynesian Drug: America’s Achilles' Heel

Keynes posited that government deficit-spending could boost an economy’s output of goods and services when it is short of full-employment. In the context of an economy near full-steam, tax cuts and/or more government spending could trigger inflation while adding little to GDP. To maintain balance in the government accounts, government surpluses during the ensuing upswing are used to pay off the accumulated debt. This is the theory. Unfortunately, it seems to be at odds with representative democracy. Specifically, a systemic bias exists in favor of recurrent deficits, and thus accumulating debt.

As one example, the surpluses in the U.S. Government in the late 1990s were not devoted entirely to debt reduction; even if they had been, the debt would not have been wiped out, given the economic downturn in 2001. Clinton’s assumption of 15 years of surpluses turned out to be wildly idealistic, and his decision to spend portions of the surpluses in the late 1990s imprudent. Besides the natural human preference for immediate gratification over paying down debt and the associated enabling by elected representatives who are easily distracted by other goals, the tendency of an economy to stay well below full-employment means deficits will continue to be called for more often than surpluses. In other words, on economic terms alone, Keynesianism is inherently unbalanced, and political dynamics rooted in human nature extenuate the imbalance.

The propensity of government officials to supervene other agenda items such as “size of government” and “jobs” in the face of deficits over $1 trillion and an accumulated debt of over $14 trillion boggles the mind. To be sure, those other items are important; but if they are allowed to eclipse or block the achievement of fiscal balance, it can be asked whether a people (and elected representatives) are sufficiently mature for to manage public debt.

For example, referring to the two-year extension of the Bush tax cuts in 2010 in the midst of a huge deficit (and accumulated debt), Alan Simpson (WY-R) bemoaned, "It's a great disappointment, a tremendous disappointment, because—what is it, $858 billion in two years added to the deficit? I mean, that just breaks your heart. What the hell do you think we've been talking about?" The former U.S. Senator was pointing to the immaturity involved in placing other priorities, even his own (i.e., smaller government), above reducing deficits running over $1 trillion and a debt of over $14 trillion. He was being an adult, bracketing other priorities dear to him while talking to irresponsible children who ought not be allowed to play with debt, especially when it is at a dangerous level.

Speaking on the possibility of the Chinese pulling out as a creditor of the U.S. Government Treasury bonds, Alan Simpson warns, "It will be precipitous. It won't be six months, might not even be six weeks. It might be six days when they suddenly start the flight. And I know how bankers are: once the flight starts, and the money and rumors, it'll be fast and difficult. . . . We don't know the tipping point. But the tipping point will come if you fail to address the long-term problem of debt, deficit, and interest." Given this danger, it is foolish, in other words, not to throw everything we have—including more revenue and lower spending—at the problem and then debate jobs and the size of government later.

In short, the American people ought to stay away from the Keynesian drug—finding a better way—or we must enact mechanisms by which we will enforce fiscal balance on ourselves. A balanced budget amendment would disallow Keynesianism rather than apply balance by limiting deficits to what a government stipulates itself to paying off in a few years’ time.

Even if modern Americans are in a convenient denial, the Anti-federalists saw the danger in sustained government borrowing (and the possibility of an associated increase in the U.S. Government’s power). Brutus (p. 151), for example, observes: “The power to borrow money is general and unlimited . . . By this means, they may create a national debt, so large, as to exceed the ability of the country ever to sink. I can scarcely contemplate a greater calamity that could befal this country, than to be loaded with a debt exceeding their ability ever to discharge. If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction. (I)t would certainly have been a wise provision in this constitution, to have made it necessary that two thirds of the members should assent to borrowing money—when the necessity was indispensible, this assent would always be given, and in no other cause ought it to be.” War stemming from being invaded is likely what Brutus was thinking of—rather than stimulating the economy. Lest it be assumed that the latter would necessarily be excluded, two-thirds of the U.S. House members and U.S. Senators could vote for borrowing to stimulate the economy to create jobs that are necessary. To be sure, the likelihood of such a vote would be less than under the hurdle of a mere majority, but Keynesianism would not be theoretically excluded. The matter of enforcing balance in using the Keynesian drug is difficult in terms of design because of the gravity of the addiction and the associated enabling rationalization of slippage.

Click to add a question or comment on the Keynesian drug in a laggard economy.

Sources:

Brutus, Letter 8, January 10, 1788, 2.9.95, in Herbert J. Storing, ed., The Anti-Federalist, (Chicago: University of Chicago Press, 1985).

Alan Simpson, Newsweek, December 27, 2010, p. 28.

An Ethical Meltdown in Japan: On the Toxicity of Tepco's Nuclear Power

According to The Wall Street Journal, Japan’s largest power provider, Tokyo Electric Power Co. (Tepco), faced the biggest challenge of its 50-year-history in "recovering from the damage done to its nuclear facilities and power systems by a devastating earthquake and tsunami." The New York Times reported on March 17, 2011, that "foreign nuclear experts, the Japanese press and an increasingly angry and rattled Japanese public are frustrated by government and power company officials’ failure to communicate clearly and promptly about the nuclear crisis. Pointing to conflicting reports, ambiguous language and a constant refusal to confirm the most basic facts, they suspect officials of withholding or fudging crucial information about the risks posed by the ravaged Daiichi plant."

According to The Wall Street Journal, when Tepco said early in the morning of March 16th "that a fire had broken out at the Daiichi plant’s No. 4 reactor, a reporter naturally asked how the fire had begun, given that just the day before the company had reported putting out a fire at that same reactor. The executive’s answer: ‘We’ll check. . . . We don’t have information here,’ he explained. After about two hours, the Tepco representative had the information: Turned out the smoke was coming not from reactor No. 4, but from reactor No. 3. If Tepco’s information had been delayed and vague, the reporters’ response was quick and direct. ‘You guys have been saying something different each time!’ one shouted. ‘Don’t tell us things from your impression or thoughts, just tell us what’s going on. Your unclear answers are really confusing!’"



                Tepco executives leave one of the many press conferences held during the disaster in 2011

The Wall Street Journal reported that "the fire confusion followed Tepco’s failure to confirm that the water level in at least one of its fuel-rod storage pools had plummeted, which the media had started reporting citing government sources. Only after several hours, by which point it had started pumping in new water, did the company finally confirm that the level was low. . . . (W)hen the company changed its explanation of conditions at the reactor, one frustrated reporter said, ‘You guys think we’re ignorant [about nuclear operations] so you can make your explanation very vague, but we are not!’ The government may not be any more satisfied than the press is with Tepco’s disclosure practices. Local media reports say the prime minister scolded the company’s executives for not calling him after an explosion at the plant. He had to learn about it from the TV.” On March 20th, The New York Times reported that questions had arisen on whether Tepco executives had "waited too long before pumping seawater into the plant, a measure that would ruin a valuable investment."

Analysis at: "An Ethical Meltdown"



Thursday, July 7, 2011

Voluntary Greek-Debt Maturity Extensions: A Rush for the Exits?

As the E.U. was working out more loans for Greece in summer 2011, rating agencies looking at the state’s debt indicated that default would be pronounced should the decision of bond-holders to continue to hold Greek bonds be anything less than voluntary. Germany had been pushing for something less than voluntary so taxpayers would not have to bear so much of the risk and cost. France, doing the bidding of its banks, effectively used the rating agencies’ default-guidelines to insist that additional E.U. loans do not require then-current bond-holders to agree to later maturities. Given the extent of Greece’s debt-load relative to the state’s GDP, a private sector bond-holder, such as a bank, would naturally loose little time in getting out of holding Greek debt, even given the high interest rates (which reflect the risk).  


Accordingly, Adam Lerrick, a sovereign-debt specialist and a scholar at the American Enterprise Institute , predicts that “by 2013, the official sector will own more Greek debt than the private sector. By 2016, the official sector will own four times what the private sector owns.” In other words, the private sector would be nuts not to run for the doors. According to Stephen Fidler, “By the time of the crossover between public and private creditors, Greece's debt will be around 160% of gross domestic product. The threshold for a sustainable sovereign debt burden is usually considered about 80% of GDP. Greek government bonds maturing in two years yield more than 26%, a sure sign that investors don't think they'll be paid back anywhere near in full.” Lerrick adds, “The more the official sector owns, the harder the debt becomes to restructure.” In other words, the 26% yield is not worth the risk—not worth the headache.

Therefore, the E.U.’s reliance on a voluntary extension of maturities by private bond-holders was rather unrealistic. By extending additional loans, the E.U., with international help from the IMF, was taking on appreciably more of the risk and cost on the Greek debt question.  Relative to this, a contained default of one E.U. state might not be so bad, not to mention catastrophic

Accordingly, Jan Kees de Jager, the Dutch finance minister, called for private-sector holders of Greek government debt to be forced to participate in a second debt-relief support package. De Jager said it was "unrealistic" to expect significant voluntary participation in such a plan, and said mandatory participation should be considered even if it led to rating agencies downgrading Greece's credit rating. "I think we have to accept that a voluntary contribution is unrealistic," Mr de Jager told the Dutch newspaper Financieele Dagblad after a meeting on July 6, 2011 in London with George Osborne, the British chancellor. "If a mandatory contribution from the banks leads to a short-term and isolated rating event, that is not so bad,” de Jager said, “because Greece cannot go to the credit markets anyway now or in the near future." With private bondholders unlikely to extend maturities voluntarily, the E.U. could rationally prefer a contained default of Greece over continued bailouts with taxpayers increasingly on the hook.

Click to add a question or comment on whether the E.U. should have made maturity extensions voluntary.


Sources

Stephen Fidler, “Move Buys Time for Greece, but Growing Debt Looms,” The Wall Street Journal, July 1, 2011.

 
Matt Steinglass, “Voluntary Greek Debt Plan Unrealistic,” Financial Times, July 8, 2011.




Wednesday, July 6, 2011

Gandhi as a Model for the Arab Spring

After two weeks of mass protests in Egypt for representative democracy and the ouster of President Mubarak, the Egyptian government agreed to concessions including allowing freedom of the press, releasing of political prisoners arrested during the protests, and commencing a committee with the opposition to consider constitutional amendments. According to The New York Times, the "regime also pledged not to harass those participating in the anti-government protests." Gandhi would have been proud, though the protesters left room for improvement on this score. Understanding how they could have done so can be of use to pro-democracy protesters not only in the Middle East, but also around the world.

To be sure, the Egyptian protesters could have done worse. Fortunately, they did not emulate the strategic orientation of the Obama administration. According to the Times, the Obama administration was "struggling to determine if a democratic revolution can succeed while President Hosni Mubarak remains in office." The man whom Obama had sent to persuade Mubarak not to run for re-election eight month later, Frank Wisner, told a group of diplomats and security experts that “President Mubarak’s continued leadership is critical — it’s his opportunity to write his own legacy.” Meanwhile the U.S. Secretary of State, Hillary Clinton, "gave a strategy overview that stood at odds with that assessment." Earlier, she had "made the case at a gathering in Munich that the entire process would take time, and must be carefully managed." Revolutions must be managed? This approach can be viewed as an oxymoron.

When Mubarak resigned after eighteen days of protests, the Obama administration tried to catch up from its public position that Mubarak could another seven months until the regularly-scheduled elections would be held. The New York Times observed, "It is hardly the first time the Obama administration has seemed uncertain on its feet during the Egyptian crisis. . . . The mixed messages have been confusing and at times embarrassing — a reflection of a policy that, by necessity, has been made up on the fly. 'This is what happens when you get caught by surprise,' said one American official, who would not speak on the record. 'We’ve had endless strategy sessions for the past two years on Mideast peace, on containing Iran. And how many of them factored in the possibility that Egypt,' and presumably whatever dominoes follow it, 'moves from stability to turmoil? None.'"  However, it could be that the reason was less being caught by surprise and more being too technocratically- or bureaucratically-minded. "Administration officials insist their responses have been more reaction to fast-moving events than any fundamental change in objective."  In other words, Barak Obama and his advisors might have been too occupied with strategy to act on the basis of principled, big-picture, leadership. Obama, it turned out, was no Gandhi during the Arab Spring.

As an alternative to Obama's timid and incremental approach, Gandhi's approach is a better example for the courageous and non-violent Egyptian protesters in early 2011. Indeed, they were generally in Gandhi’s camp already; they only needed to more completely apply his strategy of active non-cooperation. This occurred to me during the twelfth day of protests, when the film, Gandhi (starring Ben Kingsley) was being fortuitously aired on the Turner Classic Movie channel on television. It occurred to me that rather than having responding in violence to the pro-government violence, the protesters could have taken the higher moral ground by not cooperating. The non-activity and normative message alone could have won the day even over the government’s raw force. This is the incredible thing about moral power--it can affect even governmental power and the related force of the sword, or rock. This is something the protesters in Arab Spring could have taken more to heart.

Gandhi proffered a new way to fight. "We will fight against their anger--not provoke it," Gandhi says in the movie. Non-violent non-cooperation is indeed fighting. As in all fighting, there is pain.  Only rather than inflicting physical pain, Gandhi took others' anger and though his pain the others would feel pain. "Through our pain, they will see their injustice. This will call them pain." It prompts them to as questions about themselves--uncomfortable questions with even more unpleasant answers. This new way of fighting is not in the interest of governments. If their opponents do not turn to violence, governments such as the Egyptian will be inclined to actually tempt the non-violent protesters to violence because it is a government's currency. Ironically, governments are on firmer ground when their opponents turn violent because government is fundamentally a means of legitimately ordering societal violence. In dealing with non-violent civil disobedience, governments are not in control; rather, the protesters are acting at their choosing to provoke a reaction that will make the injustice transparent to all. This locus of control gives the non-violent the upper hand. Rather than joining government on its axis, non-violent civil disobedience fights not to punish for weaknesses that we all possess, but to change minds and hearts. It is thus active rather than passive.

In terms of character, particular traits are necessary for one to remain non-violent even when tempted to strike back. According to Gandhi, turning the other cheek is not just figurative; it requires courage to take the anger of those having the power of government. Relatedly, firmness is also required. It is to defy "not with violence that would provoke anger," but, rather, "with firmness that will open their eyes." In contrast, an eye for an eye "only makes the world blind." Gandhi looked back at history to find that even as tyrants might for a time seem invincible, they have all fallen in the end. He felt that noncooperation with evil is a duty. A sense of this duty is also required.  Strategizers, such as those in the Obama administration, would be like seeds on rock in terms of Gandhi's approach. That is to say, Gandhi preached and engaged in principled leadership rather than in what was most comfortable for him at the moment. His approach also called upon self-respect. One must willingly take others' blows without either hitting back or retreating, and this involves keeping one's head held high with a sense that what one is doing is the alternative worthy of self-respect. Such respect is worth something to the protester, for pain is indeed involved in making injustice visible.

In terms of Egypt, the protesters could have recalled Gandhi's strategy of a general strike throughout British India, with Indians at prayer rather than work such that the entire country just stopped. Gandhi’s strategy is morally superior and more effective than answering government troops with rocks. A people willingly stopped of their own accord cannot be governed because there is no activity to stop. A government cannot cope with such a strategy of non-violent non-cooperation.  Hence it is no coincidence that in Egypt the pro-government forces on the street lured the protesters into engaging in violence. The protesters might have looked to Gandhi rather than take the bait. Even though tyrants might seem invincible for a time, one can have faith that the apparently-mighty in terms of worldly power will eventually face their own downfall. When their injustice has been suffered in a way that exposes it, that downfall can be facilitated. Ironically, returning violence for the violence of the state actually extends the current regime's tenure as providing order in the context of violence is a government's foremost rationale to exist.

Not taking the bait is  precisely where self-discipline and moral courage become so crucial in Gandhi's approach. Resisting "an eye for an eye" was on the mind of Hussein Ramadan, a political activist and organizer who helped lead the protests in Bahrain the week after Mubarak had fallen in Egypt. “The people are angry, but we will control our anger, we will not burn a single tire or throw a single rock. We will not go home until we succeed. They want us to be violent. We will not.” The "they" here refers to the government.

When a people spurs its own government's instigations to be violent, the legitimacy of that government is compromised and the people gain the upper hand, even if this is not apparent at the time.  When soldiers working for the British beat unarmed protesters at the Salt Works in India, any moral right that the British had had to maintain order in India was lost. Of course, changes in government policy can lag, but in the end a government that has lost its moral basis to government must fall.  It is like a romantic relationship that ends. At one point before it actually ends, one of the two people in it has the sense that the relationship will end because of something intrinsic to it. Even so, the other person may be stunned when it does end—not having had the same sense. One could also use the analogy of jets. Once one has run out of fuel, it must inevitably fall back to earth. So too, a government that has lost its moral legitimacy on account of illegitimate violence exacted on its citizens must fall, sooner or later. If such a government takes its time in succumbing to this natural law, citizens can simply sit and do nothing.

In other words, active non-violent non-cooperation can be viewed simply as waiting for nature to do its work on the human organization that still takes itself as immortal. Protesters resisting the temptation to return violence know and have faith in this natural law, so they are not so desperate to hit back. It is the comparative lack of desperation that gives the protesters the upper hand in being able to provoke a government to overstep.  Unlike such protesters, government officials typically attach urgency to protests and thus feel compelled to act under the assumption: "before things get out of hand." Ironically, it is such a mentality that causes things to get out of hand. The lack of order is in the government rather than the protesters who foreswear violence.


Click to add a question or comment on the applicability of Gandhi to the pro-democracy protests in the Middle East.


Sources:

David E. Sanger, “As Mubarak Digs In, U.S. Policy in Egypt Is Complicated,” The New York Times, February 5, 2011.

Michael Slackman, “Bahrain Takes the Stage with a Raucous Protest,” The New York Times, February 15, 2011.

Msnbc.com, “Mubarak Still in Power as Government, Opposition Talk.”

Tuesday, July 5, 2011

The Tail Wagging the Dog: Congress under the Influence

Congress may be like a drunk, unaware that it is being handed one drink after another by vested interests oriented to legislation with specific financial objectives. On February 28, 2010 on CNN’s State of the Union, Nancy Pelosi, Speaker at the time of the U.S. House of Representatives, said that the health insurance companies didn’t want a government-financed and operated "public option" for American citizens, so it was off the table. Her statement resonates with the earlier one by U.S. Senator Richard Durbin just after his forclosure-assistance amendment failed: "The banking lobby owns Congress." That the health insurance companies and Wall Street banks were generally viewed as at least partially culpable even as they still had Congress in their pockets points to a serious corruption in American government.

Even when companies (or an industry) are at fault, they can still call the shots in Congress when their interests are at stake. At the very least, they can encourage diversions that enable them to safeguard planks in legislation that protect their interests. Consider, for example, Representative Dennis Cardoza, a Democrat of California in the U.S. House. The husband of a family practice physician, he is intimately familiar with the failings of the American health care system. His wife “comes home every night,” he said, “angry and frustrated at insurance companies denying people coverage they have paid for.” Even so, he is on the fence on the Democratic health-care reform proposal because he wants stronger anti-abortion language and more cost control. Were he really angry like his wife, he would be pushing for the public option and for real restrictions on the insurance companies, rather than allowing secondary issues to get in the way.

I don’t believe Dennis Cardoza was all that angry at the companies that have been refusing to fuffill their responsibilities to their customers who have paid premiums. Moreover, he was allowing himself to succumb to the self-interested manipulation of the insurance companies that had purported sparked his anger. It is in the health insurance companies' interest that costs are reduced because then their expenses are reduced. If he were really angry like his wife, he would not be so willing to do something that would benefit them so much; rather, he would be working to take power and money away from them by insisting on a public option.

America’s Health Insurance Plans, a lobbyist for the insurers, announced in March 2010 as Congress was considering health-insurance reform that the organization was buying more than a million dollars’ worth of television advertising time in order to "explain" why insurance premiums had been rising. Such a claim of educating the public is a subterfuge behind a financially-induced intention to manipulate public opinion to shape the health insurance law in the interest of the insurers (even as their practices of exclusion had been part of the problem). The week before, the White House had indicated that the industry’s rationale for the raised premiums was unconvincing, but how many people got this information through the din of the lobbyist's commercials?

All too often without realizing it, citizens allow industries to get away with their misrepresentations that are geared to thwart reform. The health insurance industry’s ads convince us that the companies really aren’t sharks; we ignore Sen. Rockefeller’s likening of the companies to sharks—you don’t know there is a shark until you see its fin and feel its sharp teeth. In other words, our anger is too easily (and conveniently…for the sharks) dissipated. In other words, we let the bad kids off the hook and go on as if the problem were somehow no longer out there. This puts the misbehaving kids in a position to thwart any parenting. We ignore the inherent conflict of interest in this scenerio as the kids steer public policy to our detriment.

I suppose it is only natural that sick kids would not feel culpable for their illnesses. Even so, the sick kid sitting on the table in a physician's office does not get to decide on his own treatment even if he or she is from a rich family. If there is an adult in the room, the kid is overruled in his own case and the shot is given over the kid’s objection. In the case of health reform, one might reasonably ask: where are the adults, or are the sick insurers in the driver's seat even as they are on the table?


 Source:

 David M. Herszenhorn and Robert Pear, “Parliamentary Hurdle Could Thwart Latest Health Care Overhaul Strategy,” The New York Times, March 9, 2010.

Banning Corporate Earmarks: Too Broad?

In March 2010, the U.S. House Appropriations Committee banned earmarks to for-profit companies. Had such a ban been in place in 2009, it would have meant the elimination of about 1,000 awards worth a total of about $1.7 billion. Many of those earmarks went to military contractors for projects in lawmakers’ home districts. The committee seemingly meant to end a practice that has steered billions of dollars in no-bid contracts to companies and set off corruption scandals. However, it is also possible that the vote was a “dog and pony show” not meant to result in any eventual law. Such a show would give the American public the illusion of Congressional effort to reduce the impact of business on the elected representatives.

Most likely as the House Committee anticipated, the U.S. Senate balked. The allure of earmarks is simply too great for a ban to have survived intact. The confluence of projects being in representatives’ respective districts and corporate campaign donors being reinforced is too hard for reform-minded legislators to crack. According to the Office of Congressional Ethics, there is a “widespread perception” among the private-sector recipients of earmarks that giving political contributions to lawmakers helps secure appropriations.

I contend that banning earmarks misses the mark in thwarting the corruption that naturally stems from corporate political campaign donors being able to receive Congressional largess. The root of the problem is a conflict of interest wherein campaign contributors are allowed to benefit financially from government appropriations. To ban all projects in a district does not target this conflict of interest. It would be interesting to see whether corporations would contribute to political campaigns if there could be no financial benefit from the public purse from the legislative body.

 Click to add a question or comment on the conflict of interest in corporate donors getting earmarks.

 Source:

 Eric Lichtblau, “Leaders in House Block Earmarks to Corporations,” The New York Times, March 10, 2010.

The Conflict of Interest in a Silent Oligarchy Being Engaged in Its Public Policy

Goldman Sachs, which had played a role in enabling Greece to hide its public debt, urged investors in March of 2010 to buy shares in two big health insurance companies, UnitedHealth Group and Cigna. The reason: their rates were sharply up and competition was down. According to The New York Times, the White House claimed, “ the Goldman Sachs analysis shows that while insurers can be aggressive in raising prices, they also walk away from clients because competition in the industry is so weak.” Rate increases ran as high as 50 percent, with most in “the low- to mid-teens” — far higher than overall inflation.

Kathleen Sebelius, the U.S. Secretary of Health and Human Services, stated on March 10, 2010, that she was left unconvinced after meeting with health insurance company executives at the White House the previous week because medical cost increases could not justify the rate increases. Furthermore, she pointed to the profit increases—some as high as 50%--in 2009 over 2008, and the large executive salaries as evidence that the health insurance companies could have absorbed more of their cost increases than they did. Cutting off customers when it is time for a firm to pay up while recording higher salaries and profits indicates that something is structurally wrong with the industry (and with the firms, ethically speaking). If the health insurance company managers lied at the White House in citing costs that “had to be passed on,” is it wise to reply exclusively on private health insurance companies in health care policy? Moreover, is it wise for a republic to have such a powerful oligarchy that can potentially dictate its terms to government officials?

Witness Obama giving into industry demands that he give up his support for a public option and his opposition to a mandate. The health insurance companies wanted a guaranteed customer base without competition from the government, and the Obama administration complied with this wish list even though those companies were a significant part of the problem. “The concept that insurance companies would even seek to deny children coverage exemplifies why we fought for this reform,” said Representative Henry A. Waxman, Democrat of California and chairman of the Energy and Commerce Committee. Senator John D. Rockefeller IV, Democrat of West Virginia and chairman of the Senate commerce committee, observed: “The ink has not yet dried on the health care reform bill, and already some deplorable health insurance companies are trying to duck away from covering children with pre-existing conditions. This is outrageous.”  This is what happens when the industry’s lobby is invited to participate in writing the legislation. That is to say, this is what happens when a structural conflict of interest is ignored, particularly when dealing with a very powerful interest.

In February 2010, the U.S. House of Representatives passed a bill to repeal the anti-trust exemption for the health insurance industry. Armed with fresh retained earnings, the oligarchic industry was in a good place to fight the same bill in the U.S. Senate. Once an industry has such clout and power that it can effectively veto legislation it doesn’t want—even as the firms cut kids out when they get sick (not to mention pre-existing condition abuses)—the republic itself may be in danger.

In the literature on government regulation, the regulated controlling the regulators is called “capture theory.” This theory postulates that even a regulatory agency’s reliance on information from the regulated can result in the agency being unwittingly captured by the concentrated (and vested) business interests of the regulated. The plight of financial sector regulatory reform in the wake of the financial crisis of 2008 is one case in point wherein the biggest banks evaded being broken up on account of their inherent risk to the system and then set about reducing additional reserve requirements.

That government officials give such vested interests as the health insurance companies and Wall Street banks a role at the table constitutes a structural conflict of interest due to the extent of the vested interests. In other words, managers representing companies whose interest is so strongly at odds with the public regulatory interest can be expected to warp the public policy or regulation such that the aim of the legislation or regulation is thwarted. This conflict of interest ought to be sufficient to keep the intensely vested interests from the table, with legislators or regulators relying on their own staffs for viable information. Ironically, better regulation--meaning more in line with the public interest--can result from passing on the interested industry's own information. 


Problematically, the conflict of interest is apt to be ignored precisely where an oligopoly is already so well entrenched that its power is invisible in the republic. A viable republic is presupposed, or necessary, in even the recognition of conflicts of interest involving sacred cows. The problem, from the standpoint of representative democracy, is the very existence of private companies that are so powerful that they (or their oligarchy) can subvert government officials with impunity. If the conflict of interest of a vested interest being at the table cannot be removed, such futility may itself be indicative of the subversion the republic. Indeed, a republic may be so far gone that such a conflict of interest is kept from even been made transparent.

Click to add a question or comment on the conflict of interest in involving the regulated in legislative and regulatory decisions that significantly affect the regulated.

Sources:

 David Herszenhorn, “Obama Wields Analysis of Insurers in Health Battle,” The New York Times, March 6, 2010.

Robert Pear, “Coverage Now for Sick Children? Check Fine Print,” The New York Times, March 28, 2010.

Monday, July 4, 2011

On the Aristocracy and Rule of Wealth

The "ardent glow of freedom gradually evaporates;—the charms of popular equality . . . insensibly decline; —the pleasures, the advantages derived from the new kind of government grow stale through use. Such declension in all these vigorous springs of actions necessarily produces a supineness. The altar of liberty is no longer watched with such attentive assiduity; —a new train of passions succeeds to the empire of the mind; —different objects of desire take place: —and, if the nation happens to enjoy a series of prosperity, voluptuousness, excessive fondness for riches, and luxury gain admission and establish themselves—these produce venality and corruption of every kind, which open a fatal avenue to bribery. Hence it follows, that in the midst of this general contagion a few men—or one—more powerful than all others, industriously endeavor to obtain all authority; and by means of great wealth—or embezzling the public money, —perhaps totally subvert the government, and erect a system of aristocratical or monarchic tyranny in its room. What ready means for this work of evil are numerous standing armies, and the disposition of the great revenue of the United States! . . . All nations pass this parokism of vice at some period or other; —and if at that dangerous juncture your government is not secure upon a solid foundation, and well guarded against the machinations of evil men, the liberties of this country will be lost—perhaps forever!"

Analysis:

The rule of a few—aristocracy. The rule of the wealthy—plutocracy. Where the few, being valued above the many, are determined principally on account of wealth, the two forms of government fuse into the aristocracy of the moneyed interest. The cardinal virtue is the fundamental desire for more—otherwise known as greed. Justice is limited to peerage, or amicitia (friendship) based on having wealth. This sort of justice, which can be derived from Cicero, is antithetical to justice as caritas seu benevolentia universalis (love, that is, universal benevolence), which comes from Plato, Augustine, and Leibniz.

 A society wherein aristocracy is defined in terms of money can be likened to an old industrial city wherein the masses are boorish and the few are refined. The latter spend their spare time at the two or three country clubs in town. On July 4th, the masses have a motorcycle parade and fireworks downtown while the wealth-aristocrats enjoy golf and swimming followed by dinner in the dining room and then a separate fireworks show on the golf course. It is literally the tale of two cities—only one of which is gated, though some of the many can watch the clubs’ fireworks from outside.

 In an aristocratic plutocracy, business executives and the moneyed of the professional class (e.g., CPAs, physicians and lawyers, but not clerics and professors—the Brahmans who have been uneasily professionalized but not as well compensated) are valued and thus they rule. In other words, the country clubs rule the strip malls. It is not only that money is allowed to buy political power; wealth is valued so much that is presumed to have the right to govern.

 Although wealth is the defining difference in a society wherein aristocracy is a function of money, refinement itself tend to go with the upper classes; and yet for all the lubricating manners, the country club set is limited by its value on wealth. In other words, corruption can coexist with the superficial manners typically found on the putting green. True refinement, it turns out, comes not from wealth, but, rather, from being educated. Hence, the greatest difference in a society, it turns out, exists between the pedestrian mall and the scholar rather than between the poor and the rich. Even so, in a society wherein aristocracy is defined in terms of wealth, the distance between the rich and poor is exaggerated, which in turn is seen as justifying plutocracy. Once a society can be characterized as an aristocratic plutocracy, it may be that only a mass rebellion can bring back the demos in governance; for the propertied will only consolidate their rule, and their property, unless or until they are forced to relent.


Source:

The Impartial Examiner, Essay (March 5, 1788), 5.14.15, in Herbert J. Storing, ed., The Anti-Federalist (Chicago: University of Chicago Press, 1985), pp. 290-91.

Corporate Influence in the West Wing: A Daley Occurrence

President Obama's chief of staff, William Daley, was a top executive at JPMorgan Chase, where according to The New York Times, he was paid as much as $5 million a year and supervised the Washington lobbying efforts of the nation’s second-largest bank. Daley also served on the board of directors at Boeing, the giant military contractor, and Abbott Laboratories, the global drug company, which "has billions of dollars at stake in the overhaul of the health care system." Although some argue that the White House needed someone on the inside who has the ear of business, the conflict of interest in having someone so tied to vested commercial interests decide who gets into the Oval Office and determine the President's agenda ought to be troubling. Just one year earlier, a Wall Street reform bill had been passed that sidestepped the question of whether banks too big to fail should be allowed to exist. Also, the enacted health-care reform law both included a mandate and excluded a public option...as per the interests of the heath insurance lobby. Rather than worry that well-financed private interests might already have too much clout in Washington, some people suggest the need for more corporate influence in the West Wing.

In terms of the Obama administration, the appointment of Mr. Daley represents "staying the course." Larry Summers, for example, had been instrumental in the Clinton Administration in keeping derivative securities from being regulated. Like Clinton, Obama is a pro-business Democrat, at least in practice--the charges of socialism notwithstanding. I contend that the fear over socialism is overplayed, while the ease with which corporate executives (such as Hank Paulson--Bush's Treasury Secretary and former CEO of Goldman Sachs--and William Daley) encase themselves in the White House is cause for concern. Yet there appears to be a societal blind spot with respect to some rather obvious ways in which corporations can capture our federal government. For instance, no one suspects a tie between Daley coming on board leading up to the re-election campaign and his corporate ties. It may be that Obama did not press "too big to fail" and the public option more because he knew he would draw on corporate campaign contributes. I suspect that we are blind to this possibility because our values are largely in line with corporate interests.

Whether corporate capture is from design or not, our corporate-friendly societal-orientation provides a bedding of sorts for structural conflicts of interest that must seem strange elsewhere in the world. William Daley is a beneficiary of a friendly American culture that enables looking the other way, or even cheerleading on behalf of greater corporate influence in Washington.

 Click to add a question or comment on corporate influence in the White House.

 Source:

 Eric Lipton, “Business Background Defines Chief of Staff,” The New York Times, January 6, 2011.


Presidential Leadership Standing up to Wall Street

“What haunts the Obama administration is what still haunts the country: the stunning lack of accountability for the greed and misdeeds that brought America to its gravest financial crisis since the Great Depression. There has been no legal, moral, or financial reckoning for the most powerful wrongdoers. Nor have there been meaningful reforms that might prevent a repeat catastrophe. Time may heal most wounds, but not these.”
 “After the 1929 crash, and thanks in part to the legendary Ferdinand Pecora’s fierce thirties Senate hearings, America gained a Securities and Exchange Commission, the Public Utility Holding Company Act, and the Glass-Steagall Act to forestall a rerun. After the savings-and-loan debacle of the eighties, some 800 miscreants went to jail. But those who ran the central financial institutions of our fiasco escaped culpability (as did most of the institutions).”

“The weak Dodd-Frank financial-reform law that rose from the ruins remains largely inoperative, since the actual rule-writing was delegated to understaffed agencies now under siege by banking lobbyists and their well-greased congressional overlords.”

“Rather than purge the crash’s crimes, Wall Street’s leaders are sticking to their alibi: Everyone was guilty of fomenting this “perfect storm,” and so no one is. Too-big-to-fail banks are bigger than ever, and ­Masters of the Universe swagger is back.”

Analysis:

 The hegemony of the moneyed interest in any republic renders the public weal subject to a plutocracy—rule by wealth. In the wake of the credit crisis of 2008, U.S. Senator Richard Durbin of Illinois observed that the banking lobby still owned Congress even as the public regarded the banks as at least partially culpable for the crisis. Durbin made his remark after the Senate defeated his amendment that would have allowed foreclosure judges to modify mortgages in trouble. Even though mortgage companies had written steep interest rate hikes into the subprime mortgages that the mortgage writers must surely have known the borrowers could not afford, the servicers stood by the vaunted sanctity of contract doctrine—a faithfulness conditioned, no doubt, by the article serving their interests. Financial influence over elected representatives enabled the U.S. Government to provide cover, or at least to refrain from going after the financial institutions that had been so culpable. That government also refused to break up the banks too big to fail, whose very concentrations of wealth, increased by the TARP program, stood even more as systemic risk.

 Historically, Americans have looked to independently-minded occupants of the U.S. Presidency to stand up to powers of the day to protect the viability of the states. Andrew Jackson, for example, stood up to the moneyed interest before his reelection in 1832 in depleting the Second National Bank of the United States of funding (the bank ended in 1836). Doubtless Jackson spent many nights before the election worried that standing up to money might cost him the election. Of course, he won and enjoyed distinct respect.

 I suspect that Barak Obama did not enjoy respect in the wake of the credit crisis precisely because he did not stand up to the banking lobby. Relatedly, he caved to the demands of the health insurance industry lobby that he no longer push for a public option and resist a mandate for guaranteed customers. I suspect that people sense a lack of political courage and recalibrate their respect accordingly. The political weight of such a collective judgment at the ballot box is an open question; the reward such as Jackson received in 1832 is likely more certain even as it is thought less. Herein occupies the political trap wherein the path of least resistance may gain the upper hand in a president’s political calculation. Faith in the people rewarding courage against concentrated interests can be difficult to embrace even as such reward is perhaps germane to the office as it was designed and intended. Americans seem to innately know this, even as their collective judgment is difficult for politicians to discern.

 In the want of a Jacksonian presider standing for the public weal against being overrun by the private moneyed interest, the historical answer would have been to look to normative, even religious, constraints. Frank Rich includes this type among the more contemporaneously popular legalistic and economic ones where he writes, “There has been no legal, moral, or financial reckoning for the most powerful wrongdoers.” Even so, he concentrates on government regulation as essentially the only means available to constrain the unrepentant greed of Wall Street. Historically, ethical constraint against greed was thought to depend on religious, and specifically Christian, auspices. Frank Rich’s focus alone may be read as rendering a verdict on the efficacy of Christian ethics in countering the fundamental desire for more. Yet how many Jackson’s have the States seen that we may rely on presidential leadership and any ensuing regulation to constrain the moneyed interest?  Moreover, what if greed is so entrenched in human nature that virtually any bulwark must ultimately be found wanting?  

Click to add a question or comment on presidential leadership and the moneyed interest.

 Source:

 Frank Rich, “Obama’s Original Sin,” The New Yorker, July 3, 2011.

Related essay: “Godliness and Greed

Sunday, July 3, 2011

European Banks Ignoring the E.U.

As banks based in the E.U. state of Britain decided to pull back their operations around the world in mid 2011, the bankers may have overlooked key distinctions between their banks’ operations within the E.U. and internationally. Besides ignoring the converging impact of E.U. financial regulation within the E.U., the bankers were discounting the proposal of European Central Bank President Jean-Claude Trichet for a European rating agency. The proposal implies that certain advantages can be had for the E.U. as a whole—benefits that Lloyds, for example, implicitly discounted to the extent that the bank treated pulling back in the states of Ireland, the Netherlands, and Spain similar to pulling back in Dubai, which is not an E.U. state.

Adding to the problem of the inherent institutional conflict of interest in the issuer-pays method for rating agencies in the U.S. (retained even in the Dodd-Frank law of 2010), Trichet told E.U. Parliament representatives in June 2011 that those agencies constitute a “global oligopoly.” According to Michel Barnier, E.U. Commissioner for Internal Markets, “The ratings agencies did not see the crisis arriving . . . they were one of its causes because of their bad evaluation of risks. . . . At this moment, one can ask serious questions on the role that they are playing in the crisis affecting certain euro-zone [states of the E.U].” Presumably a rating agency based in the E.U. would approach European financial matters differently than would an agency based in the U.S.—an implication being that the E.U. states would have something distinctive in common. Ultimately, for a bank based in an E.U. state to regard its operations in another state as somehow like operations abroad (i.e., outside the E.U.) is to ignore the existence of the E.U. itself.

In short, denial based on a states’ rights "euroskeptic" ideology may be distorting strategic considerations at banks in the state of Britain. If operations in other states are conflated with operations outside the E.U., then the bankers may be retreating in-state excessively. The risk involved in banking in other states may be overstated (to that which exists abroad), resulting in a contraction of operations (and thus profit) that would not otherwise occur. That is to say, the anti-federalist stance may have  already interlarded banking in Europe at the expense of banking and business. Maintaining an antiquated worldview in the midst of a changed context can be rather expensive. Business, it turns out, can morph to include something more than business.

Click to add a question or comment on state bank strategy in the E.U.

Sources:

David Enrich and Sara Munoz, “Lloyds Joins Retreat of U.K. Banks,” The Wall Street Journal, July 1, 2011, p. C1.

Sebastian Moffett and Brian Blackstone, “Europe Pushes for Own Rater,” The Wall Street Journal, July 1, 2011, p. C3.