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Friday, March 2, 2012

Putin’s Pals: Billionaire Junkies

Arkady Rotenberg, a former judo coach, became a billionaire industrialist by selling pipe to the state-owned gas monopoly, Gazprom. Meanwhile, owning a minority state in a small bank in St. Petersburg that won control of another of Gazprom subsidiaries, Yuri Kovalchuk gained a net worth of $1.5 billion. Gennady Timchenko, “once the little-known sales manager of a local oil refinery,” went on to become one of the richest men in the world by co-owning “a commodity trading company that moves about $70 billion of crude oil a year, much of it through major contracts with Rosneft, the Russian national oil company.” What these billionaires shared besides getting rich was a certain connection—namely to Vladimir Putin in particular.

                           Vladimir Putin arrives for a campaign rally in Moscow.  Agence France-Presse/Getty Images

The New York Times goes on to observe that “these relationships are evidence of deeply entrenched corruption.” Critics view the billionaires as examples of what was essentially government-sanctioned theft connected to Russia’s abundant natural resources. “The basic point is that these guys have benefitted and made their fortunes through deals which involved state-controlled companies, which were operating under the direct control of government and the president,” said Vladimir Milov, a former deputy energy minister who turned into an opposition leader. For his part, Putin denied any role in enriching his friends into billionaires. He also denied involvement in their project to build him a “palace” on the Black Sea—a “sprawling resort complex” costing as much as $1 billion. Even so, Sergei Kolesnikov, one of Putin’s former associates from St. Petersburg, fled Russia with a trove of documents that support the contention that Putin was connected to the resort being built for him. Kolesnikov has also described other business dealings in which money had been funneled, often as loans, to businesses controlled by Putin’s friends or relatives.

According to the New York Times, the dealings between Putin and his acquaintances would likely come under even more scrutiny with the growth of the opposition and its increased pressure for governmental reforms. At the same time—just before the Russian presidential election in March 2012—the Western media was reporting that Putin was almost certain to win the election even in spite of the huge protests. Even though this could simply mean that conservatives across Russia greatly outnumber the protesters, I suspect that the election of a man amid such documented corruption says something more generally about the strength of accountability in a democracy.

Meanwhile in the U.S., the Huffington Post was running a headline saying that people who invest in SuperPacs for Mitt Romney could see their “investments” in him pay off handsomely. As the story goes, a campaign contribution buys the ability to get the office-holder’s ear (or that of an aide). The examples of new wealth in Russia conveniently connected to Putin suggests that far more is involved in the return on investment. Neither Putin nor Romney seemed hurt by the (at the very least) unseemly mix of contributors or connections already having benefitted or expecting huge “dividends.” In Romney’s case, his close ties with Wall Street both personally and in business as well as political contributions did not seem to bother many people even though Wall Street had been culpable in the financial crisis of 2008. It is enough, it seems, to be a pretty boy with connections in the establishment; the lack of ideological substance, or vision, in a candidate-fixated electoral culture enables such candidates. Their support becomes a self-fulfilling prophesy, with well-connected backers in it with the expectation of a huge economic payoff.

The real culprit, I’m afraid, is neither Putin nor Romney. Rather, it may go back to the premise of John Adams and Thomas Jefferson that a viable republic depends on an educated and virtuous self-governing citizenry—that is to say, an electorate that is not easily manipulated or hoodwinked. How Putin could be poised to win even on the first round in spite of the corruption, and how the Republican Party establishment (rather than the rank and file) could manage the primaries with the Wall Street candidate being favored so soon after 2008 suggests to me that democracy is either weak or deeply flawed—conveniently tilted to the establishment rather than the people. Yet it could also be that too many voters, both Russian and American, vote as though the three blind men in the opening of James Bond’s Dr. No. I suspect the tilting toward the “men on top” dovetails with an enabling electorate, and this in turn provides a default wherein corruption is the norm. In other words, the corrupt are too ensconced—too comfortable as they know they are beyond being touched.

Faced with such corrupt people in power beyond the reach of an electorate, the ordinary person is understandably frustrated, as there is literally nothing that can be done about it. While staying at a Days Inn once, I was repeatedly awakened in the middle of the night by noise coming from the room above mine. The hotel’s manager must have told his front desk employees to ignore noise complaints because mine were ignored—one employee said as much (this is how arrogant corruption can be). Meanwhile, the franchisee had likely paid off the local police department—with the possible knowledge of the corporate headquarters at Wyndham Group—because my noise complaint to the police was inexplicably delayed—the dispatcher having forgotten where the hotel was located in the small town—and then evaded. I was stunned when the local manager went after me for pursuing the complaint with customer service. He refused to give me any refund—even threatening a penalty should I physically leave his hotel before the last day of my paid stay.

When I have told the Days Inn story to people, they have inveritably blurted out something like, “How could that even happen? How could they get away with treating customers that way and stay in business?” Exactly my point, though Days Inn continues right along (and that local hotel is presumably still in business). I was stunned too, particularly in recognizing that the system of corruption was so engrained and beyond reproach not only within Days Inn but also in that particular hotel’s locality. It occurs to me that the local officeholders must have known of the franchisee’s way of doing business, and could even shield the franchisee without fear of being voted out of office. Indeed, I would not be surprised if the franchisee had made political contributions as well as “contributions” to the local police department. From the standpoint of being a customer and a citizen, I felt utterly unprotected during my stay and frustrated at the utter lack of accountability—even the brazenness of the local manager lying about me in order to cover up for his refusal to act on noise complaints.

Beyond giving business ethics a bad name, the Putin billionaires, the Romney contributors from Wall Street, and the Days Inn division of the Wyndham Group reflect badly on democracy because they take advantage of its lapses in accountability. Ultimately, We the People could do much better were we to get off our sofas, turn off the remotes, and vote the bastards out and put in people who would go after the connections and bad businesses that have been enabled for far too long. This would undoubtedly take more than one election cycle of replacements before those in power get the message that maintaining the status quo is no longer sufficient. Yet even as I write these lines, I can feel the weight of the status quo bearing down on me. I can sense the herd-like mentality of the vast majority of the voters in any country continuing to chew the cud even if they do happen to hear bits and pieces on how established connections enrich themselves and even attack other people with impunity.


Andrew Kramer and David Herszenhorn, “Midas Touch in St. Petersburg: Friends of Putin Glow Brightly,” The New York Times, March 2, 2012.

Wednesday, February 29, 2012

Corporate Legal Personhood in the Kiobel Case

In Kiobel v. Royal Dutch Petroleum, the U.S. Supreme Court waded into the murky waters of corporate legal personhood, at least potentially, in hearing oral arguments in late February 2012. The issue in the case is whether corporations can be held liable to the extent that they are complicit in a foreign government’s human rights abuses. Legal personhood would say that they could be. This would represent an obligation that goes with legal personhood. The question is whether the justices who conferred in the Citizens United decision the right of corporations, based on their legal personhood, to make unlimited political donations would also be willing to view obligations as “part and parcel” with such personhood. If not, then legal persons, unlike human persons, would have the benefits of personhood without any of the obligations—an oxymoron to corporations to be sure. In other words, such an asymmetry would render the legal personhood doctrine itself as akin to a one-sided coin—which cannot exist, let alone stand.

As in any legal analysis, it is best to include a bit on the particular case itself. “In Kiobel, about a dozen Nigerians contend that Shell Oil's parent company aided and abetted their government in its torture and extrajudicial killing of environmental and human rights protesters resisting Shell's operations in Nigeria in the 1990s. . . . The plaintiffs brought their suit under a law, commonly called the Alien Tort Statute, passed by the first Congress in 1789 to allow foreign nationals to bring civil suits in federal courts ‘for a tort only, committed in violation of the law of nations or a treaty of the United States.’” The law is silent on whether corporations can be sued under the law. Because of this silence, the U.S. Supreme Court can decide the case on the basis of whether corporations are legal persons, and, if so, whether obligations go with such personhood.

For its part, the U.S. Government submitted a brief stating in part, “Corporations have been subject to suit for centuries, and the concept of corporate liability is a well-settled part of our 'legal culture.'" In other words, corporate personhood entails obligations, one of which is to refrain from contributing to human rights abuses abroad. On the other side, corporations and their allies have been submitting briefs arguing that they should not be subject to the law. It is only natural to want benefits without obligations. Corporate power could indeed enable “legal persons” to shamelessly enjoy the benefits without being subject to any of the obligations—even as such “persons” extoll their “corporate citizenship” for public relations purposes. That is to say, the U.S. Supreme Court could maintain the legal person doctrine for corporate contributions and essentially ignore it in refusing to include corporations as the “persons” subject to the Alien Torts Statute.

Indeed, in oral arguments, the high court seemed split five to four, with the conservative majority looking to exempt corporations even as it had cited their personhood in granting them the right of “wealth as free speech” in political contributions. Justice Kennedy, for example, said that “the case turns in large part” on the point that “international law does not recognize corporate liability.” However, U.S. law is not limited to what is recognized in international law. In fact, the U.S. does not even recognize the International Criminal Court. Chief Justice Roberts and Justices Alito and Scalia expressed hostility toward the Alien Tort Statute itself. Alito noted that the lawsuit had been brought by foreign plaintiffs against a foreign defendant for acts that took place in a foreign country. “What business does a case like that have in the courts of the United States?” Justice Ginsburg noted that the U.S. Supreme Court had already allowed such cases to be brought under the Alien Tort Statute. She reminded the Court that the question was whether only individual defendants or also corporate defendants are liable—not whether the law itself is constitutional. Alito’s ploy at subterfuge—subtly attempted by pivoting on “the issue”—had been rendered transparent by the veteran justice. Unfortunately, however, the doctrine of legal personhood itself was not given center stage in the oral arguments.

In my view, rather than focus on the relationship between U.S. and international law, the justices should have used the oral arguments in Kiobel to decide in a definitive way whether “personhood” extends to corporations. Given the Court’s Citizen’s United decision, which allows corporate “persons” to give unlimited amounts to political action committees, a decision on Kiobel could have “laid down the law” not only on “abstract” legal personhood, but also more specifically on whether both benefits and obligations go along with personhood in a legal system based on laws. If corporations are able to cherry-pick legal opinions through inconsistent conservative justices in the majority—the Court itself reflecting a more general partisanship rather than the coherency that law itself must have—then we are no longer a people based on law rather than the power of the most powerful of our institutions. In other words, corporations may indeed be able to get away with all of the benefits of personhood without any of the obligations, with the cost being “passed on” in terms of the viability of the United States themselves.

Mike Sacks, “Corporate Personhood Case Forces Supreme Court to Hack New Path,” Huffington Post, February 27, 2012. http://www.huffingtonpost.com/2012/02/27/corporate-personhood-supreme-court-alien-tort-statute_n_1305226.html

Mike Sacks, “Corporate Immunity Looks Likely: Supreme Court Seems Ready to Side with Shell in Human Rights Suit,” The Huffington Post, February 28, 2012.

Prognosis for the Chinese Economy

At the end of February 2012, the World Bank released its “China 2030” report in Beijing. The bank’s president, Robert Zoellick, said that China’s economic growth model is unsustainable, so significant reforms are needed. The report projects growth down to five or six percent annually by 2030, down from the ten percent annual growth in the thirty years up to the issuance of the report. Given the nature of the reforms, the Chinese government officials have their work cut out for them.

For instance, the report calls for “further reforms of state enterprises,” including “separating ownership from management.” Even in the case of the private sector in the U.S., such a separation has been daunting, as CEO’s typically control their respective boards—even being chairman of the board. For state enterprises, management may blur into the government officials under whom the enterprises are run. Moreover, the public or state interest is typically more salient in state enterprises, so separating management from the ownership can raise problems of legitimacy and accountability. Furthermore, lacking an independent judiciary, China is not exactly the sort of system wherein the checks and balances of a separation of ownership and management could viably function. In other words, hierarchical accountability wherein a boss tells a subordinate what to do is more in keeping with the macro political economy of China.

Secondly, the report urges China to build several “world-class research universities.” Here again, the lack of an independent judiciary may make foreign scholars wary of living in China. On the plus side for China, strengthening research domestically may relieve the pressure to pirate technology from foreign companies (sharing technology is often a condition of foreign direct investment). More research done in China may result in relaxed FDI requirements and less industrial spying. The result could be higher economic growth rates both in the short term and beyond.

Lastly, the report urged more of a focus on environmental technology and more spending on social programs (ironic advice given to a communist country). Just months before the report, Beijing had agreed to make public the measurements of finer pollutants in the city (as the U.S. embassy had been publishing its own numbers there anyway). While environmental technology could make a dent, the ultimate problem for the Chinese concerning not just pollution, but economic sustainability as well, is the huge population—over a billion. Simply put, having more people means more must be consumed. Whether in terms of food or more cars on the road, the population itself may not be sustainable, especially as more of it has become densely-packed in urban centers. Ultimately, sustainability for our species has to do with whether we can limit ourselves, not just individually or even in our cities, but also as a species.

Bob Davis, “World Bank Chief Urges Reforms for Beijing,” The Wall Street Journal, February 27, 2012.

Monday, February 27, 2012

Ailing the E.U.: Unbalanced Federalism and the Euro

Lest it be thought that the economic safety net for the neediest led some of the E.U. states into excessive public debt toward the end of the first decade of the twenty-first century and beyond, the existence of some counter-examples suggest that the actual culprit was misapplied modern federalism.

In early 2012, Sweden still had a very generous welfare state and yet had the fastest economic growth of any E.U. state. Leaving Malta and Cyprus aside, ranking the 15 E.U. states that were using the euro at the time by the percentage of GDP that they were spending on social programs before the debt crisis shows that of Greece, Ireland, Portugal, Spain and Italy, only the latter was in the top five—and with a welfare state smaller than that of Germany. In other words, an economic safety net for the poor does not necessarily translate into unsustainable government debt.

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

Sunday, February 26, 2012

Moral Hazard in Mortgages

“The cherished American ideal of self-reliance has a flip side,” according to the New York Times. Before getting to the implications, or flip side, I want to fill out what informs this ideal. One could add to it the ideological stance that came into its own in 1980 with the election of Ronald Reagan, who declared that government is the problem. This implies that government should be minimized, and otherwise corrected as much as possible. Government is hardly to be viewed as the solution. This is the legacy of the Kennedy assassinations of the 1960s, the Vietnam War, and Watergate as well as Ford’s pathetic “WIN” buttons and Carter’s micromanagement and failure in regard to the hostages in Iran. I was not old enough for the Kennedys’ truncated optimism (and that of Martin Luther King) to resonate; I knew the political (and economic) pessimism of the 1970s and the energizing “fix it” mentality of the early 1980s. Of course, Reagan’s “new federalism” failed, as did his aim to balance the federal budget, and the jury is still out on whether “peace through strength” pushed the USSR off the cliff.

Reagan is perhaps best known to historians and political theorists for having formally shifted the political paradigm’s default to “government is the problem” after at least a decade of political and economic paralysis. Dovetailing with the American ideal of self-reliance, the default on government was still a headwind for Barak Obama as he found he had to capitulate even on a “public option” for health insurance—relying instead on the same private insurers who had been excluding pre-existing conditions and otherwise cancelling policies at the advent of a new illness. In other words, that the health-insurance lobby could still call the shots at the White House suggests the continuance of the headwind running against government. Relatedly, in the 1990s Bill Clinton had to give up on his vision of using government for grand purposes because the American people were “not there.” Clinton found in the presidency instead a plethora of smaller accomplishments, such as adding to local police forces and otherwise acting as the mayor of an empire as if it took a village. He had figured out how to avoid the headwinds.

With this background in mind, we can now get to the matter of the implications of self-reliance and “government is the problem” as regards moral hazard. In economic terms, it refers to “the undue risks that people are apt to take if they don’t have to bear the consequences. In other words, if the money is free, why not spend it on a designer purse?” Because of moral hazard, backed up by the ideal of self-reliance and the default of “government is the problem,” there is significant discomfort with the idea of bailouts and safety nets in American society. According to the New York Times, the notion that even a small portion of aid even to homeowners who are “under water” (i.e., they own more on their mortgages than their houses are now worth in terms of equity on the market) might find its way to the undeserving (or cheats) “can be enough to scuttle support, or restrict help so drastically that few can use it.” Adding to this sentiment, typically by vested interests, is the sanctity of contract dogma. This means that a mortgage borrower is obligated to pay whatever he or she had agreed to pay regardless of changed circumstances either of the borrower or the housing market.

The New York Times reports that bankers “say that generously easing loan terms or reducing mortgages outright would only encourage homeowners who can pay to pretend they can’t. It would also, the bankers say, send a dangerous message: a financial commitment isn’t really a commitment.” Additionally, homeowners “who keep paying their mortgages, even if their homes have lost value, reasonably wonder why neighbors who weren’t as responsible are getting help.” Behind both of these concerns is resentment that someone else might get something too easily (i.e., beyond that which is deserved and what one can get oneself). It is not a very laudable mentality, psychologically and ethically. In other words, it is rather small. Even worse, bankers who themselves received bonuses paid for in part from bailouts were keeping borrowers from also being bailed out. It is as if the financial crisis of 2008 hit only one side of the ledger.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, said that although there is was a “nugget of truth” to the moral hazard argument, “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt. Most troubled homeowners, like the Katrina victims, are genuinely hard up.” Accordingly, the bank bailout should have been oriented to them. Had it been, the banks’ balance sheets would not have been toxic and “two birds” would have been “killed” with “one stone.”

According to the New York Times, the “specter of moral hazard haunts a basic tension in American life: to what extent are people responsible for their own problems? The more trouble you’re in, moral hazard suggests, the less we should help.” This relationship is the inverse of what it should be. That is, moral hazard should not apply as if survival itself were conditional. I am perhaps as innately American as they come, being born and raised in the Midwest, or “heartland of America.” Even so, when I hear politicians or others refer to others’ survival as somehow conditional (typically as based on a work history), I sense that the ideological belief is distinctly American. I revolt at the sheer self-centeredness of the people expressing the view and I reject the validity of the claim itself. For a society in which survival is deemed to be inherently conditional (as defined by people whose survival is not an issue) is no society at all. Put another way, if we all knew in the back of our heads that were we to fall on hard times and not be able to provide for our own shelter and food without taking them from others (i.e., remaining in society), life for all of us would be a little lighter and less existentially anxious. This is not to say that everyone has a right to a t-bone steak once a week or a mansion. The moral hazard argument conflates these with sustenance needs.

If a person is seriously under water, the sheer depth naturally dwarfs any consideration of culpability. If someone is barely breathing or starving, a natural sentiment of sympathy orients others to the question of how the plight may be quickly assuaged. I submit that the bailed out banker actively resisting any assistance for homeowners near foreclosure has a rather unnatural “hardness of heart,” or hardness more generally. To make aid conditional where basic necessities like shelter, food and medical care hang in the balance is to apply moral hazard beyond its ken. This overreach operates at the expense of human rights.

Essentially, applying moral hazard conditionality where survival itself is at issue for others is to presume a godlike position for oneself. In other words, the propensity to judge others’ extent of deservingness is premised on self-idolatrous pride. Given the nature of self-idolatry, it is no surprise that bankers who have benefited themselves (as well as their banks) would apply moral hazard to their counterparties but not to themselves. The conditionality does not apply to those bankers, whose lobby—which Sen. Durbin said owns Congress—makes sure of it. The resulting asymmetry can be interpreted as a reflection of the bias in the “self-reliance” and “government is the problem” default—a game-board that is tilted toward the rich because they can afford to be self-reliant and scoff at government as part of any solution to societal ills.

Ideally, a social contract, and thus a society, should be in balance, with basic human rights being beyond the reach of the inevitable swings in the political-ideological pendulum (i.e., the headwinds). Where the latter are definitive (and exclusive), sustenance needs, being an inherent human right, become valid outside of societal limits. In other words, where moral hazard is applied to basic shelter and food needs, people needing them have the inalienable human right to take them without regard to societal rules bearing on them. Even in political theory, possession of property is salient. Thomas Hobbes refers to the right of self-preservation as going beyond any law. Is extending moral hazard to cover necessities worth making society (and its laws) conditional?

Shaila Dewan, “Moral Hazard: A Tempest-Tossed Idea,” The New York Times, February 26, 2012. http://www.nytimes.com/2012/02/26/business/moral-hazard-as-the-flip-side-of-self-reliance.html