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Saturday, December 29, 2012

Mario Monti: Succumbing to Power?

He was supposed to have been reluctantly pushed into briefly stepping in as prime minister in Italy to push austerity measures through the state legislature.  According to Deutche Welle, “The 69-year-old former European Commissioner was appointed to lead Italy’s government . . . to restore Italy’s finances following Berlusconi’s departure.” The technocrat was not supposed to so interested in power that he would want to stay on. At the end of December 2012, Mario Monti announced that he would lead a centrist group of politicians against the Democratic Party and Berlusconi’s People of Freedom party in the upcoming election.  Had the former bureaucrat “found religion” in some political cause, or had he developed a taste for power? If the latter, we might ascribe the motive to the human propensity to resist giving up power willingly.
                                                   Mario Monti at the European Commission. A launching point for Italian politics?    source: nytimes
After meeting with centrist politicians, Monti went on to claim, “The traditional left-right split has historic and symbolic value” for the state, but “it does not highlight the real alliance that Italy needs—one that focuses on Europe and reforms. “  He added that his group could win a “significant result” in the upcoming election, paving the way for his possible return to the office. Was it the taste of victory or a mission for reform that was behind his new-found interest in staying on in office?  Or was he being pushed by E.U. leaders and those of other states? He would retain his senator-for-life office in the state senate regardless.  
This case could be illustrative of the difficulty that people have with walking away from power. Even a technocrat, sensing a political opportunity, may find it difficult to say no.  The example of George Washington, who refused to run for a third term as president of the U.S., may be particularly noteworthy. In the constitutional convention, Hamilton had urged a president for life. Moreover, Europe was still populated by ruling (rather than merely reigning) kings and queens. Washington could easily have argued that the new union needed the stability of leadership that only he could provide. He could have died in office and still been regarded as a hero.
In European terms, Washington would correspond to a European with tremendous stature willing to put his or her reputation on the line for the E.U. That union, being still in development in 2012, was at the time hardly “out of the woods” in terms of viability, and thus could use such leadership. A problem with relying so much on state leaders at the federal level is that the interests of one or a few dominant states can dictate the union’s policy. In turning to Italy after having pushed through the critical austerity legislation, Monti was unwittingly contributing to this risk. Just as in the early U.S., the state offices were the most sought. Put another way, as Monti was preparing to run for the office of prime minister in Italy, Europe needed him more, even if the power was still in the governor’s office at the state level.  Unlike in even the early U.S., in the E.U. he could affect both federal and state policy as prime minister of Italy, given the salience of the European Council (whose members are the state governments) at the federal level.
Statesmanship can be defined as turning down an opportunity for greater power in order to contribute to the greater good.  Such a duty is civic and moral in nature.  In contrast, the desire for a continuance of power represents a more convenient path. It is not as though self-interest is absent in the loftier route, for falling on one’s sword (and being able to tell the tale afterward) gives rise to valuable reputational capital, which can be leveraged for power and money.  To be credible, leadership cannot simply be a reflection of the simple path to power. Put another way, credible leadership must be oriented to governing rather than campaigning. In the European context, governing oriented to reforming the system itself has been a valuable, if not rare, commodity.


Reuters, “Italy’s Outgoing Prime Minister Confirms Election Bid,” Deutsche Welle, December 28, 2012.

Friday, December 28, 2012

Averting the "Fiscal Cliff": A Solution Overlooked

With just days to avert the beginning of automatic, across-the-board cuts in the U.S. federal budget and the end of the Bush tax cuts and payroll tax reductions, President Obama met with Congressional leaders at the White House following a brief respite over Christmas. The discussion was doubtless on what could pass Congress in time. The U.S. Secretary of the Treasury was also attending, so the upcoming debt-limit could also have been part of the discussion. It could be argued that the perspective itself at the meeting must have been too narrow—too small—even though the crisis demanded leadership.
Speaking after meeting with Congressional leaders, President Obama could have used the crisis to propose a seismic shift in American federalism in line with reducing the federal debt. Getty Images

On the floor of the U.S. Senate the day before, Harry Reid of Nevada, the majority leader, criticized Republicans for failing to act. “We are here in Washington working while the members of the House of Representatives are out watching movies and watching their kids play soccer and basketball and doing all kinds of things. They should be here. I can’t imagine their consciences.” A day earlier, the Speaker of the U.S. House of Representatives, John Boehner, had urged the Democratic-controlled Senate to act first. With this kind of bickering, the failure of Congressional leaders and the president to reach a deal is all easy to understand.

However, beyond the immaturity, we should also bear in mind that the delegates at the U.S. constitutional convention in 1787 designed the federal government so as to impede agreement. Most of government was understood to be rightly conducted in the member states, rather than at the federal level. Specifically, the separation of powers between the executive and legislative branches, and the bicameral legislature, provide ample opportunity for one political party to obstruct the proposals of another. Given this design, the underlying problem behind the fiscal mismanagement at the federal level can be said to be the increase in power, or competencies (in European terms), of the federal government. If legislating is difficult by design at the federal level, then adding powers to the federal government exacerbates the weakness. Put another way, the federal government was not designed to carry so much of the weight. So the problem is not just simply the particular office-holders at the federal level.

Accordingly, President Obama missed a great opportunity at the meeting at the White House with Congressional leaders. Rather than being oriented to what minimal legislation could pass both chambers to avert the tax increases and budget cuts that would significantly reduce the federal deficit in 2013, the president could have presided over the system as a whole. Specifically, he could have proposed that much of the domestic functions of the federal government be transferred entirely to the states. The federal budget could be slashed, and taxes held firm so any resulting surpluses could be used to reduce the federal debt.

To be sure, the media would doubtless claim that the federal leaders had admitted failure in handing power back to the states. Obama could have made the point, however, that he and the others were working against a federal design designed for them to meet obstruction after obstruction—swimming up-stream, in effect. “We are not super humans,” he could have pleaded.

A more serious criticism would be that whether or not a given state takes over a certain federal domestic program would be up to the state government. Some programs, such as social security, foodstamps, Medicare and Medicaid, may be too important to be applied only in some states. The shift here could be in terms of the federal contribution. The real obstacle is the fallacious assumption that in a federal system each state must be on the same level economically and in terms of what residents get from government. This assumption violates the dual-sovereignty attribute of modern federalism. In other words, the assumption treats a federal system as if it were merely a state.

Another objection would be that state taxes would be likely to rise while federal taxes stay constant to generate the surpluses to pay down the federal debt. However, this is merely to say we should no longer live beyond our means. That some states would have more government than others means that state taxes would increase to various extents, depending on the state. As of the end of 2012, California had a 10% income tax while Florida, Texas and Alaska had none. It could be argued that given state differences, the tax difference should be even more—with Oklahoma relying on private health insurance, for example, while Massachusetts goes on with universal health-care subsidized by the government. The addition of other domestic policy areas to state government would likely increase the difference in terms of government between states like Oklahoma and Massachusetts.

The resulting increase in political diversity in the U.S. would more closely fit the different political/ideological cultures—Oklahoma’s being quite distinct from Oregon’s and New York’s being distinct from Nevada’s. The one-size-fits-all assumption underlying so much of the federal encroachment does not fit with the scale of the United States—a virtual empire. In fact, the fiscal imbalance at the federal level can be viewed as a manifestation of the political imbalance between the federal and state governments.

The federal system is out of balance. In addressing this problem rather than merely symptoms such as the "fiscal cliff," the debt-ceiling, and the huge deficits themselves, President Obama could have transcended the fixation on averting the fiscal cliff by enacting transformational leadership in order to restore balance to American federalism. While not a perfect or flawless solution, realigning the federal balance of power could have set the United States on a more viable trajectory forward in the long term, as evinced in reductions in the federal deficits and accumulated debt. If we do not trust the states to pick up the slack (as envisioned by the American founders), then we do not trust ourselves, in which case not even a federal government can save us from ourselves.


Reuters, “U.S. Congressional Leaders Meet President Over Fiscal Cliff,” Deutsche Welle, December 28, 2012.

José Manuel Barroso: Picking Romania’s Government?

On December 9, 2012, Romanian voters approved of the coalition of the then-current Prime Minister Victor Ponta, by a two-thirds majority. However, because Ponta had been in a bitter political feud with President Traian Basescu—Ponta’s coalition tried and failed to impeach the president—it was not clear that the president would nominate Ponta for prime minister even though that post must be approved by the parliament. Basescu did wind up nominating Ponta. The interesting point here is that President Barroso of the European Commission publicly waded into the choice on behalf of Ponta. This is interesting because in a federal system, the internal politics of the state governments are, or should be, off limits to federal officials. Otherwise, the risk is that the state governments might become creatures of the federal government. In the E.U., however, this risk was at the time negligible.
                                                                                               Prime Minister Ponta of Romania: Propped up by Barroso?           exclusivnews.ro
In a statement that came after the official election results were published, European Commission President José Manuel Barroso sent a clear signal that Brussels believed Mr. Ponta should remain head of government. “President Barroso congratulates Victor Ponta for his electoral victory and that of the USL coalition. The Romanian people have made a clear choice in a democratic way,” he said. Barroso said he “looks forward to working with Prime Minister Victor Ponta and President Basescu, during the coming challenging years.” One EU official said that the statement was indeed a warning from Brussels that Basescu should not throw Romania back into a political crisis. Ponta won an “overwhelming victory” last weekend, the person said. Barroso “is essentially saying you now should nominate this person.” To be sure, there was a warning for Mr. Ponta too. Barroso said he welcomed “the commitment by all Romania’s political actors to consolidating the rule of law and respecting democratic checks and balances.”
The European Union has a legitimate interest in the state governments being based on the rule of law and having a democratic basis. In the U.S., each state must be a republic. Whether in the basic law or de facto, this requirement also applies in the E.U. The assumption is that a dictator running a state would hardly put up with “meddling” from the federal level. Also, the state leaders have a powerful role at the federal level, so the processes by which the states select their leaders are important from the E.U.’s standpoint. Moreover, both the E.U. and U.S. are ensconced in democratic values, and the respective unions have a legitimate role in cementing this basis. Even so, for Barroso to “remind” the president of a state of his duty to nominate a particular person as prime minister is too invasive. Barroso would have been wiser to watch from the side and make the statement after Basescu’s decision. Since Ponta’s coalition had won two-thirds of the vote, another person being nominated would probably have simply been rejected by the parliament and the president would have to nominate someone else. If at that point Basescu would have decided to ignore the parliament’s vote, then the “rule of law” and “democratic basis” interests of the E.U. would have given Barroso ample legitimacy to pressure Basescu.

Laurence Norman, “Barroso Wades Into Romania,” The Wall Street Journal, December 24, 2012.

Thursday, December 27, 2012

Pot in Colorado: Getting High on American Federalism

On November 6, 2012, Colorado’s citizens approved with a 55% majority a marijuana-legalization measure that allows residents over the age of 21 to possess up to an ounce. The measure also allows for the commercial growing and selling of pot. More than a month later, the government of Douglas county in Colorado passed a law prohibiting companies from growing or selling cannabis. Meanwhile, the U.S. law continued to make the growth, sale, possession or use of pot illegal. Over all, it would seem to be a case of federalism as a pretzel of sorts, all twisted up into itself. This case study can be used to point to a more perfect union in terms of federalism.
The pot leaf.   source: Mother Jones (who else)
The complete essay is at "Is the E.U. a Federal System?"

Morsi: Presiding or Partisan on the Constitution?

Appealing for unity after the controversial ratification of a draft constitution in December 2012, President Morsi of Egypt pledged in a televised address to respect the one-third of the electorate that had voted against the proposed constitution. He claimed that “active patriotic opposition” should not annoy the president or the people in a democracy. I contend that the office of president should not be of the sort that would have partisan opposition, ideally at least. That is to say, presiding means safeguarding the process itself, as well as the good of the whole, rather than pushing a partisan agenda. That Morsi was on record in support of the partisan-drafted proposal undercut his role as presider in chief. Given the innate instability of a nascent democracy, the role for a presider “above the fray” was particularly valuable in Egypt at the time. Morsi fell short in this regard, and thus put the fragile democracy at risk.
                                                                    President Morsi speaking behind the seal of Egypt, suggesting a "good of the whole" orientation.     source: csmonitor
In his address, Morsi said, “We don’t want to go back to the era of the one opinion and fabricated fake majorities.” Such an era is the extreme of a partisan president. The presiding president, in contrast, transcends opinions and even majorities, being oriented to the long-term interest of the republic itself. Literally, to preside means to “stand before,” as exemplified by George Washington’s officiating role at the constitutional convention in the United States in 1787. He resisted the urge to “trade on his stature” to advance one or another proposal until the last day, when he suggested that a U.S. House district of 40,000 rather than 30,000 would be insufficiently representative.  Had Morsi followed Washington’s example as the draft Egyptian constitution was being proposed and ratified, Egypt might have had a more credible person to hold up the fragile democracy so it would take root rather than succumb to partisan strife.
While pursuing a partisan path is undoubtedly tempting for a president, the costs are often ignored or hardly transparent. In Morsi’s case, his invitation for the opposition to join a dialogue was met by Husseain Abdel Ghani’s comment that the invitation was merely Morsi’s “dialogue with himself.” Only by standing above the proposed draft could the president have had enough credibility to effect a reconciliation. It was not enough for him to move to the political center after the ratification had been secured.
Instead of being invested in the draft, Morsi could have focused on “the big picture” in terms of how much consensus is necessary for a constitution to be something more than a partisan-approved document. Put another way, Morsi could have been oriented to the process by which the partisan-dominated draft could have been further modified such that at least part of “the opposition” would have been on board. Unlike a law, a constitution should have more than a majority faction’s stamp on it. Because most of a society should be behind a convention, it should not be dominated either in its formulation or ratification by the majority faction, or else follow-up work is warranted. Here is where a presiding president can come into the picture, being oriented to the society as a whole—to which a constitution rightly corresponds.
In short, Morsi may have approached the draft constitution as though it were a law rather than a constitution. Advancing the document that was dominated by his party in being formulated, he missed the opportunity to seek a wider massaging of the document into a final form. A similar mistake occurred in the American case as the convention there refused to consider proposed amendments from the countries’ ratifying conventions—some of which had sizable anti-federalist representation. Had this minority been assuaged, perhaps the resulting document might have had more safeguards against political consolidation at the expense of the governments of the member states.
Washington, himself a federalist, missed the opportunity to suggest on the last day of the convention that it would be in the long-term interest of the United States for the states to send new delegates to another convention for the purpose of considering amendments proposed by the ratifying conventions because a viable constitution should be something more than reflecting one perspective—as any one perspective contains blind spots. Moreover, incorporating a minority’s concerns could provide a check against the tyranny of the cultural artifacts of the age. A resulting document would be more likely to stand the test of time.
Similarly, by the way, an academic treatise can only be determined to be a classic after the scholar’s age has passed because only then—in another culture, in effect—can the artifacts of the author’s own be fully transparent. Like a good scholar being oriented at least in part to readers not yet born, a presiding president is oriented to a process most likely to render a constitution into a classic. Of course, it would be impossible for such a presider to ever know if he (or she) has been successful. The best such a president can do is to take pains that the process not succumb to expediency. Having such a perspective, such a president should be indifferent toward the various partisan agendas, even that of his (or her) own party. From the standpoint of such a presidential viewpoint, partisan agendas are merely the fleeting vanities of vanities.


David Kirkpartick, “Morsi Admits ‘Mistakes’ in Drafting Egypt’s Constitution,” The New York Times, December 27, 2012.


Friday, December 21, 2012

John Kerry as U.S. Secretary of State

Just after President Barak Obama announced that he would nominate Sen. John Kerry of Massachusetts to be the U.S. Secretary of State, the occupant of the corresponding office in the E.U., Catherine Ashton, welcomed the prospect of working with Kerry.
"I am delighted by the nomination of Senator John Kerry to succeed Hillary Clinton as US Secretary of State. I have had the privilege of meeting Senator Kerry on a number of occasions. His considerable experience, not least as chair of the Senate Foreign Relations Committee, makes him an ideal candidate for this crucial position. Pending Congressional confirmation, I look forward very much to working closely with him, and continuing the excellent cestablished with Secretary Clinton."
I, too, have had the privilege of meeting Senator Kerry. He struck me as a warm yet very ambitious man. At the time, I was on a deficit-reduction kick, so I asked him how his “big government” ideology was consistent with reducing the federal deficit. “I’m a fiscal conservative!” he insisted as he put his arm around my shoulder and smiled. “Oh, come on,” I countered in rather obvious disbelief. “I believe that government programs should be run efficiently,” he explained. “That’s good, but I don’t think that’s fiscal conservativism,” I said, “and it doesn’t necessarily make a dent in the deficit because you could simply add more programs that are efficiently run.” Perhaps Kerry as the U.S. Secretary of State might put his arm on Katherine Ashton’s shoulder and mollify her with something like, “Of course the E.U. is not a federal system,” or “the U.S. is firmly in support of the E.U. and ready to help.” Bill Clinton could even provide background music by playing his sax. Would the European succumb to the “I’m essentially whatever you want me to be”?

                                              U.S. President Obama nominates U.S. Sen. John Kerry to be U.S. Secretary of State.    Reuters
I would like to think that at least behind closed doors, politicians are capable of real talk rather than appearance and manipulation. What is the essential nature of a person who would make his or life that of politics? Do we ever really know them? Is there substance under the shells? Moreover, are the best people ruling? Does the democratic process proffer the best or merely the most pleasing appearance? As the E.U. struggles with the appearance of suffering from a democratic deficit, Europeans might want to reflect a bit on whether “technocrats” are really so bad. At least they don’t have quite the skill to conflate themselves into chameleons. Ashton might indeed have had Kerry’s number, yet no one would ever glimpse this from her glowing statement. Are she and Kerry two of a kind—both politicians managing appearances? How would the rest of us ever know? And yet we are the ones who are tasked with pulling the levers on election-day.




ICE Buys NYSE: Profiting from the Rules

“Tell me what the rules are, and I’ll make money with them.” This statement, made by Jeffrey Sprecher of Intercontinental Exchange, captures well the attitude that business practitioners should have toward government regulation in a republic. That is to say, businesses should be regulation-takers rather than makers. For the regulatees to make regulation to which they themselves would be subject is an oxymoron, or contradiction in terms. At the very least, it involves a conflict of interest. At the macro level, business as “regulation-maker” effectively turns a democracy into a plutocracy. Accordingly, the strategic use of regulation should pertain to the use side, rather than the regulating side. Crafting regulations—essentially dictating them to legislators or regulators—in order to make money from them takes the strategic use of regulation too far.
                                                                                                        Jeffrey Sprecher of ICE.  Making money playing by the rules.  (nypost)
Sprecher began by working at electric companies. He picked up on the need of those companies to hedge energy contracts so he bought a small exchange and built it up around derivative trading. Eventually, he did away with the exchange’s trading floor—preferring 24 hour computer trading. In 2010, the passage of the Dodd-Frank Act of financial reform requires that derivative trading be done through a clearinghouse. Sprecher’s company stood in a position to take advantage of the new rule. In fact, the intent of the new regulation being that regulators could have a better idea of the volume of derivatives “out there,” Sprecher created a derivatives database in his company. In other words, he anticipated in a way that meant more profits, and he did so without trying to manipulate legislators or regulators with a huge lobbying effort. Rather, he anticipated weaknesses in the market and devised company-based solutions that would be profitable. It is no surprise that the Dodd-Frank Act essentially adopted his business model regarding derivatives—effectively forcing it on the industry as a whole.
In fact, observing the heightened scrutiny of swap contracts under Dodd-Frank, Sprecher decided to convert them to futures contracts. Here again, profit was also in the mix. “The reality is that there are incentives to convert swaps into futures, where there’s less competition,” according to Richard McVey of MarketAxess. “There’s no requirement for [Sprecher’s company] to open [its] futures clearinghouse to other exchanges.” This restriction of competition to increase profit is ironic for ICE because in late 2012 came the announcement that the company would purchase the New York Stock Exchange, which had capitalized on monopolizing the trades of its members. Ironically, Sprecher’s actions had undercut this monopolization and here he was exacting his own version in turning “insurance” swaps into garden-variety futures contracts. Business skill can be regarded as the art of knowing when to ride a wave—and which wave to ride.
It should be noted that both the computer-trading and derivative-trading trends furthered by Sprecher’s very company enabled it to buy the vaunted New York Stock Exchange for $8.2 billion rather than something much higher. According to the New York Times in late 2012, the “transformation of the New York Stock Exchange from its position at the apex of the world financial system to an asset to be bought and sold like any other—and one that is not deemed to be worth as much as it would be if it traded more modern derivative securities rather than old-fashioned stocks—has been going on for decades, but has accelerated in recent years.” Essentially, Sprecher took advantage of this trend by making the purchase, and he would capitalize on owning the “temple of commerce” through intra-company synergies even while committing to keep the NYSE floor up and running.
In short, business acumen has no need of being sidetracked into manipulating lawmakers and regulators into formulating rules favorable to one’s particular company. The strategic use of regulation is most profitably accomplished over the long run on the use side. Take the rules as given and make money with them. This is entirely consistent with business in a viable republic. An implication of this thesis is that it’s the bad—both in terms of business intuition and moral disapprobation concerning manipulating public policy for private gain—manager who represents the plutocric threat to a republic.  The business practitioners knocking on Congressional doors are not the brightest guys in the room as regards innate business skill, and they are not the most forthright concerning getting what they want, whether by money or even information. Unfortunately, turning opportunities into profit is instinctive only for some practitioners, while it is forced or contrived in many others, who therefore feel compelled to circumnavigate business by pressuring public officials. It is significant—and telling—that ICE did not have a substantial lobbying presence in Washington, as Sprecher and his subordinates undoubtedly “kept to the knitting,” being good at it, and thus they did well in profiting from gaps in the market and the related regulatory changes.


Ben Protess and Nathaniel Popper, “Exchange Sale Reflects New Realities of Trading,” The New York Times, December 21, 2012.

Floyd Norris, “A Temple of Commerce that Failedto Keep Up with Change,” The New York Times, December 21, 2012.

Michael J.de la Merced, “At the Big Board, Seeking Rejuvenation in Consolidation,” The New York Times, December 21, 2012.

Thursday, December 20, 2012

Referendum on Euro in Latvia: Core of Europe

Two decades after leaving the Soviet Union, Latvia was in 2012 an E.U. state preparing to adopt the euro currency. “We want to be a part of the core of Europe,” Prime Minister Valdis Dombrovskis said. Noting that the GDP was forecast to rise 5% in 2012, he could boast that his state would be an asset to the “Eurozone.” Indeed, only three of the 17 states using the euro—Finland, Luxembourg and Estonia—were expected to have budget deficits of less than 3% of GDP and debt of less than 60 percent—the two key requirements for joining the euro, which Latvia was poised to meet.
                                                   Latvia's PM Valdis Dombrovskis wants to push forward on the euro without a referendum. At what cost politically though?         Getty Images
Therefore, it was not the European Commission that was getting in the way. Rather, Harmony Center, a party with support from the Russian minority population in Latvia, was intent that a referendum be held on whether the state should adopt the currency. Even though Dombrovskis claimed the real reason for the referendum was so the state would move closer to Russia, his argument that the referendum in 2003 on accession affords him with sufficient popular legitimacy to move forward with the euro is problematic. On such a vital matter as a currency, the popular sovereign rather than its agents in government should have a definitive say.
Furthermore, because non-euro states can subscribe to the enhanced integration geared to the “Eurozone,” Latvia would not necessarily be on the periphery of the E.U. should a referendum on the euro give a negative answer. The E.U. is much more than the euro. Indeed, fears that the union itself would somehow unravel should the euro collapse have been overblown and even fallacious.
Because the E.U. has been criticized for its “democratic deficit,” state governments desirous of ceding still more state sovereignty to the federal level should not shy away from a democratic basis. This is true for Latvia regardless of the motives of the leaders of the Harmony Center party. Rather than react to them, the coalition ruling the state would be on a firmer basis in seeking the direct voice of the people. On account of the salient role (and power) of the state governments at the federal level in the E.U., a democratically-strengthened state government can be strengthen the democratic strength of the E.U. itself, and thereby be at the core of the union. For democracy, rather than the euro, is what furnishes the E.U. with its foundation.


Ben Seeder, “Latvian Premier Seeks Euro Membership in 2014,” The Wall Street Journal, December 20, 2012.

Is a Stronger E.U. in America’s Interest?

Is a stronger E.U. necessarily in the interest of the U.S.? According to Ed West of the Telegraph, “it’s not clear whether a united Europe would necessarily be more pro-American, automatically siding with the US against the rest. European countries have their own interests with regards the Middle East, Africa and China, which often don’t coincide with America’s, and on a range of world issues European public opinion is fairly hostile to America, decades of American military protection having inspired not gratitude, but resentment. Britain is something of an anomaly in Europe, popular opinion being unusually hostile to the EU and warm to America.” This passage can be taken to task on at least two points.

The full essay is at "E.U. & U.S."

Wednesday, December 19, 2012

The U.S. Trade Deficit: Bad American Labor and Management?

Coming in at 2.7% of GDP, the U.S. trade deficit fell to $107.5 billion in the third quarter of 2012—down 9 percent from the second quarter’s $118.1 billion, which was 3% of the economy at the time. The current account includes merchandise, services, and investment flows. The surpluses in services and investment were out-done by the deficit in merchandise to produce the overall trade deficit. According to the New York Times, the “improvement in the current account in the third quarter reflected a decline in the deficit on goods and a small increase in the surplus on services, led by a gain in foreign earnings made by financial services, insurance and professional services provided by companies in the United States. The surplus on investment earnings narrowed to $50.8 billion, down from $52.1 billion in the second quarter.” Most of the decline in the deficit on goods reflected a decline in the foreign oil bill, according to Paul Ashworth at Capital Economics.
Lest we get bogged down in the purportedly significant differences between 2.7% and 3.0%, $107.5 billion and $118.1 billion, and $50.8 billion and $52.1 billion, respectively, we might take note of the rather stark difference between goods on the one hand (i.e., sustained deficits) and services and investment (i.e., sustained surpluses). Although it was no doubt true that the economic slow-down in China and the debt/austerity-induced recession in the E.U. were reducing demand for American exports, a basic imbalance between exports of American-made and imports of foreign goods is clear from the numbers year after year. Indeed, in 2006 the current account deficit had reached a record $800.6 billion—suggesting that something fundamental was “out of whack.”
                                               This graph isolates the deficits in goods imported/exported.   source: thismatters.com 
The question may be whether Americans were importing too many foreign goods or were too uncompetitive in making goods. Regarding the former, being able to buy a relatively inexpensive television made in China is not in itself a bad thing, particularly to the consumer. The question is perhaps whether the price was artificially low, due for instance to a relative lack of environmental regulations, lower labor costs, or government/bank subsidies. However, even if due to these factors, a low price is undoubtedly welcome to any consumer.
Regarding American competitiveness, was it hampered by labor and environmental standards or simply by unmotivated workers and bad management? Whereas American consumers benefit from cheap imported products, no such benefit can be found in the U.S. to any sector from a relative inferiority in competitiveness.
There is, however, the argument that an “advanced” economy oriented to professional, business and financial services rather than manufacturing can enjoy a higher standard of living if the services are more premium than the goods would be. The pristine notion of the “knowledge economy” captures this point very well. That not all Americans are willing or even able to participate at this level suggests that the term could never completely cover an entire economy. Hence, it is necessary even in an “advanced,” or “high tech” and “professional,” economy to tackle the problem of competitiveness in manufacturing.  Does it come from high regulatory costs (which can be viewed as part of a demand by Americans for a certain “standard of living” writ large), a lack of product development, or an inefficient labor or management force?  Whereas wanting a decent wage-floor or environment as a condition of manufacturing has merit—the cost being that society may have to support people who would otherwise be working in manufacturing—a dearth of ingenuity, bad employee attitudes, and inept management have no such positive aspect.
I was born and raised in a medium-sized industrial city in the “rust belt.” Furniture was the first industry, following which machine tools were the dominant manufacture until competition from Europe took out most of the factories. Speaking a few years ago with a European who had been sent over to oversee a factory that had been taken over by a European company, I was not surprised when he admitted, “the workers here just are not good. They are not motivated and they don’t pick up on the training very good.” Years before that, I had watched a program on the American public broadcasting network about a man’s effort to prepare inner-city black people for job interviews. Midway through his talk, the man admitted to the folks attending, “from your attitude even here, I have to admit I can’t see how anyone would hire you, so I don’t see any reason to continue here.” The man ended the workshop at that point. Doubtless his decision prompted little if any self-criticism from the participants. A bad attitude is perhaps almost impossible to correct from the outside—even with the inducement of money!—given the nature of a bad attitude. Regarding people under thirty, perhaps a year or two at a military “boot-camp” might break down the attitude’s intransience and build up self-confidence and self-respect, not to mention basic civility. Absent such a strategy, perhaps the segment of the American population unwilling (or able) to become part of the “knowledge economy” is inevitably lost—not being able to compete even on a factory floor. The cost to the rest of society goes well beyond money.
While visiting Miami, I witnessed repeated incidents on the buses from the mainland to Miami Beach of black men shouting and even hitting each other, as well as bumping into (and even falling on!) tourists. The black drivers ignored the shouts (including a drunk black man loudly and repeatedly calling a pregnant white woman a “fucking bitch”) and even fist-fights. Even with tourists begging the drivers that the aggressive passenger be dismissed from the bus, the drivers just drove on. In two cases, the drivers asked the men being hit if they wanted to press charges. They replied that they did not, so rather than get the aggressor off the buses or call the police, the drivers simply started driving again. This happened twice in the last 24 hours of my visit!  Near the beginning of my visit, I myself was pushed against the open bus door of a bus at a rail station while I was attempting to board a bus because I had not allowed all of the black passengers to enter first. The black driver refused to call the police or even tell the aggressive black man who had squeezed me to leave the bus. The driver simply replied to me—as I was pinned to the open front-door—“no, I won’t call the police. You shouldn’t have gotten on then. That’s how it is here.” I should have called the police! I was so stunned at the violence and systemic cover-up that I simply wanted to get to my destination. Just after I took my seat, a nice older black woman asked me where I was from. I told her that I had grown up in Illinois. “It must be worse in Chicago,” she remarked. “No,” I countered, “it is worse here. The blacks there are better.” In spite of being the only white person on the bus, I went on. “Even with the blacks killing each other in south Chicago, the people are better there.” She asked if north Chicago was white and the south part black. “No, the north part of the city itself is integrated, while I think the south is black. I was referring to the north—the blacks there are much better than the ones here. Here—I can’t leave soon enough.” Silence . . . complete silence. It then occurred to me that the entire bus—which still had not left the tri-county rail station—had been listening to this white guy talk about blacks very directly.
As it happened, a month or so later I was in Chicago taking a bus when a black man tried to enter the bus by pushing three old white women in line in front of him. The driver, who was also black, saw the attempt and quickly said, “Hey, what do you think you are doing? Get back out of the bus and let those women on first. Who do you think you are?” Then the driver turned to us in the bus and remarked, “It’s all about him, isn’t it?” The offender must have been startled, for he merely replied, “But it is cold out.” The driver pointed out that it was cold for the women too. The three women ended up sitting near me, and I told them (and the front half of the bus) about what I had witnessed in Miami on the buses there—and that it really was better in Chicago and even warmer despite the cold—even in terms of people moving past each other in the isle. “In Miami, the driver would not have intervened and you all would have been pushed out of the way of the guy who was behind you in line. Even complaining to the driver would have had no effect, and the man would have gotten away with it—whereas here that attitude is an exception. It was therefore countered, or pushed back, and therefore not allowed to become the default.” I don’t know whether the driver heard my compliment.
While it is easy to point to the bad attitude of many of the black passengers in Miami, I contend that the incompetence and attitude of the bus drivers there were just as problematic, and my anecdote from a bus in Chicago demonstrates that the attitude need not be enabled rather than challenged. The fact that the drivers in Miami all reacted the virtually the same way suggests that the decadence is systemic there. Put another way, the rudeness and aggression had become the norm and thus could not be checked. Perhaps this is why the drivers simply ignored even the violence—though this is hardly a viable excuse.
In terms of passive aggression, I witnessed drivers of buses going between downtown and Miami Beach regularly and knowingly cram too many passengers (even tourists!) on the buses and then demand that the extra passengers (who had already paid) shout back into the bus for others to step back so the extras could “get behind the yellow line.” To allow passengers known to be beyond capacity on board and then put them in an impossible situation while refusing to take control of the bus by making an announcement for people standing to move back evinces not only incompetence, but also an almost-sadistic mindset. On several occasions, I saw order itself fall apart on buses there as frustrated passengers—even tourists!—openly challenged the unjust and incompetent drivers on this very point.
Leaving Miami, my overall conclusion was that that county should not be part of the United States of America because of the rudeness, aggression and even the break-down in order—all tacitly sanctioned by county managers and employees. The rudeness, by the way, was nearly everywhere, rather than just on buses. I could not imagine any of the aggressive passengers or enabling drivers lasting more than a few days working in a factory, and the bus company managers (who knew of the incidents, according to local passengers) were doubtless virtually unemployable in the private sector too.
In short, the serial merchandise trade-deficits may point to an America that even many Americans do not know exists. That is, the structural imbalance may reflect a decline in American society—both in terms of labor and management—that manifests in a significant number of Americans compromising manufacturing or even being virtually unemployable. Put another way, I suspect that the condition in the American factory was at least as of 2012 part of a much more serious problem wherein even the social contract itself was under threat, or at the very least the American empire was in decline.


The Associated Press, “US Shirks Trade Deficit As Oil Falls,” The New York Times, December 19, 2012.



Friday, December 14, 2012

Honeywell’s David Cote: Carrying the Water in Washington

In the midst of the talks in Washington to obviate the so-called fiscal “cliff” with a bipartisan deal, the Wall Street Journal reported that David Cote, the CEO of Honeywell, a $48 billion “industrial giant,” was at the time “the business executive most in the middle of the fiscal-cliff debate.” The Senate Finance Committee Chairman Max Baucus (D., Mont.) said, "People on both sides of the aisle are sending messages through Dave. He's become an active participant.” For a sitting CEO to have ensconced himself so deeply among the power-players in Washington did not come controversy-free. Even though his company had a vested interest that a deal be reached, the matter of his involvement raises larger implications, positive as well as negative.
                                             David Cote, CEO of Honeywell. Civic duty or getting "his people" back in line in Washington?       Bloomberg News
 "I'm being accused of all kinds of nefarious motives just because I'm a CEO," Cote claimed. He also conceded his cause diverts a lot of time from his job but says he tries to make it up from his personal time. In any case, "the best for my shareholders is a robust economy," he explained, "which can't happen if the country is gridlocked over debt." True enough—a rising tide benefits all boats. However, as the Wall Street Journal points out, “Cote's efforts could benefit his business. Absent a cliff deal, deep cuts in federal spending on defense and many other programs will kick in. Success in averting them could help Honeywell, an aerospace and defense contractor that draws 10% of its $38 billion in annual sales from the government.” This point could not have been lost on the CEO. Honeywell’s stockholders were not volunteering their CEO in a sort of civic duty or good “corporate citizenship.”
Moreover, that the CEO of a major defense contractor was spending so much of his time as a go-between in Washington so a deal that would obviate automatic cuts including defense spending might have a better chance of being reached by Republican and Democratic leaders points to the depth of interest by the military-industrial complex in the task. I would not be surprised to learn that various government officials, including the Federal Reserve chairman, Ben Bernanke, were not themselves “carrying the water” for the government-dependent sector in stirring up doomsday predictions lest a deal not be reached in time to avoid “falling off the cliff.” Besides influencing the debate itself through ads and other, less transparent means, the sector with the most to lose was “bucking up” to keep the defense contracts coming. From this standpoint, it is surprising that Washington’s political elite had not fallen into line and come up with a deal by November.
“We’re not confident that our guys can govern anymore,” Cote observed as he was carrying messages between Republican Congressional leaders and the White House. While this observation could be oriented to the lack of responsiveness to the “sway” of the military-industrial complex in the halls of power, he said his role as political-deal-facilitator has been a "revelation” on how dysfunctional Washington had become simply in terms of being able to get along. "I meet people on both sides I like and find reasonable,” he said, “but they aren't working together." This is particularly significant, given the interest of the complex that a deal be reached. Might it be that ideological differences on government (or even immaturity) can actually bristle at, or even resist the power of money in Washington?
For instance, has ideology in the Republican Party on the role of government in the economy gone against the interests of Wall Street or corporate America, or is the ideology effectively a reflection of the whatever that base determines is its rightful interest? I suspect that there was no way that Republican leaders were going to let a deal slip by, even given the appearances to the contrary in the meantime as the leaders sought to get better terms by waiting until the last possible moment to seal a deal. However, were such a resolution “in the cards” given the underlying “marching orders,” why would Honeywell’s CEO have been spending so much time “carrying the water” in Washington?
That there might have actually even been a chance that the military-industrial complex could be subject to budget cuts is amazing, considering the power of money in the United States. Put another way, why would a man whose total direct compensation in 2011 was $25 million and whose retirement package assets were at $78 million feel the need to carry anyone’s water—especially given that his “Fix the Debt” non-profit had raised $43 by mid-December 2012 and could unleash television ads against “dysfunctional” elected officials who had not “gotten the message.” Something is really up when a real insider feels compelled to get so explicitly and personally involved—even given Honeywell’s financial interest that a deal be reached.
In short, there are wider implications for David Cote’s involvement amid the political class in Washington. His own, his company’s, and his sector’s financial interests notwithstanding, that a person of his stature would roll up his sleeves and get to work in “dysfunctional” Washington suggests that he is exactly the sort of person to who the American Founders would have called on to serve his country out of a sense of civic duty. Even as Obama was being urged to put Cote in his cabinet as Treasury or Commerce secretary, the CEO was saying, "I can't wait to get out of here and back to my day job." This sentiment, rather than a desire to run for office, should be “just the ticket” needed for admission to a fixed term of “duty” in Washington—then freedom. This is what citizenship means—realistically in the context of even vested interests. Even as Cote doubtless had his in mind, he was also going beyond the pale as a CEO actively working to craft a deal in at the highest level of the U.S. Government.
To be sure, David Cote could have been a rare snapshot of the military-industrial complex getting  "its people" back into line in a Washington "unhinged" from its real principals. However, it could also be that the man deserves a lot of credit for stepping up to the plate in a ballpark not typically frequented by CEOs not only to protect his company, but also to tackle the systemic imbalance evinced in a public federal debt of over $16 trillion at the time. If so, the President would have been well advised to use him well—rather than too much—out of respect for the man’s public service. A restoration of the civic duty of citizenship can indeed be distinguished from the threat of plutocracy to a republic.


Monica Langley, “Honeywell CEO in the Middleof Fiscal Cliff Standoff,” The Wall Street Journal, December 13, 2012.

Thursday, December 13, 2012

A British Referendum on the E.U.

Legislators can make the task of getting instructions from the popular sovereign, the people, unduly difficult. In November 2012, the Florida legislature confronted its people with several proposed constitutional amendments written in legalese that even some lawyers found difficult to navigate through. The next month, Boris Johnson and Liam Fox of Britain pressured their state’s legislature to put forth a referendum that, unlike that of Florida, would present the people with a clear choice.

                                                                                                                     The flags of Florida and Britain             Source: allposters.com
Specifically, the question was whether Britain should stay in the E.U. as a state, share a common market with the E.U., or get out altogether. In short, the question that the prime minister was considering to put to his popular sovereign was “same, less, or none.” This is how a referendum should be put to an electorate. “If the choice is between the current trajectory towards ever closer union and leaving, then I would choose to leave, albeit reluctantly, ” Fox said. “If the choice is between a looser, more economic relationship and leaving, then I would choose to stay.” In short, the choice could be put as between remaining a state in the federal system (i.e., the E.U.), being a member in the common market (i.e., the EEA), or neither. To put the matter as one of whether to take back governmental sovereignty would needlessly add technical jargon. Instead, the question could be put as follows: Should the U.K. remain part of the federal system known as the European Union. If not, should the U.K. have a common market with the E.U. states? People know federal  as meaning political union and common market as meaning “just the economic, thank you.”
To complicate the questions with references to “dual sovereignty,” “competencies,” “subsidiarity,” “direct effect,” and “the EEA” would effectively disenfranchise the very people that the members of the House of Commons are meant to represent, or “work for.” Britain should not follow Florida’s atrocious (and just plain stupid) example.

Putting major questions of policy to the people in a direct and easily-understandable way enfranchises the people and thus energizes a democratic system. In the case of Britain as an E.U. state, consulting the British people as the E.U. heads toward “more perfect union” can be done in such a way that a clear mandate is gained in a timely manner.

At the end of 2012, the state of Britain was effectively in “no-man’s land” in Europe because the “economics only” view of the E.U. no longer fit the actual political nature of the union. Indeed, the latter was gradually strengthening with even more governmental sovereignty being transferred to the union, especially in the “euro-zone.” Acting as though the E.U. were merely a common market effectively had left Britain out in the cold of the North Atlantic even while being “in the room.” Something, in other words, had to give.

Was Britain as an E.U. state simply a mistake or had the British not gotten the memo on the nature of the union? Or had the union itself changed even as the Brits held firm to a “suddenly”-antiquated conception? In any case, the very different conception of the E.U. itself was enervating the union itself, as well as putting Britain in an uncomfortable and unsustainable position and therefore sapping the state too. It was past time, as of the end of 2012, for the House of Commons to put the matter to the people of Britain in a simple and concise way without confusing or manipulating the voters. In short, a very basic decision could and should have been put to the popular sovereign without meandering on in a virtual no-man’s land.

Stephen Castle, “Euro-Skeptics Turn Up Heat on Cameron," The New York Times, December 13, 2012.