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Friday, November 23, 2012

Mexico’s Name-Change: A United States No Longer?

Shortly before leaving office, Mexican President Felipe Canderón sent to the Mexican legislature a proposal to amend the state’s constitution by renaming the country “Mexico,” from the “United Mexican States.” His rationale was that Mexico didn’t need “a name that emulates another country and which none of us Mexicans uses on a day-to-day basis.” Indeed, the emulation evinces a category mistake in that it treats what was province in an empire, that of New Spain, as an empire.
 
                                   Mexico's head of state, Felipe Calderon, who proposed the name-change.  
 
After Mexico’s independence from Spain, Mexico adopted the name in the new country’s first constitution in 1824. The name reflected not only admiration Mexicans felt at the time for the new republics created to the north and their Union, but also the extent to which Mexico appropriated from the United State. Notably, the Mexican regions became “states,” which constructed legislatures accordingly, and Mexico’s legislature was given the name, “Congress.”
In the case of the United States, which was originally and then still in part an international alliance—the U.S. Senate being the main institutional element and dual-sovereignty being the main constitutional element—the term Congress fits because it had been used for alliances’ conferences. Le congress veut dire “conference” en Anglais. Whereas the Continental Congress was attended by delegates of sovereign states (and before 1776, of colonial legislatures…the colonies, like Ireland, being “members” of the British empire), the Mexican “Congress” is simply a national legislature without any international component. The Mexican “states,” in other words, are not states in the sense of states in the U.S. or E.U.
In short, by emulating an empire-level union, the kingdom-level policy mixed up levels—inadvertently applying constitutional paraphernalia oriented distinctly to managing kingdom-level polities even though Mexico itself was itself commensurate with other early-modern kingdoms. That is to say, whereas the United Colonies had been viewed on both sides of the pond as a (potential) empire within an empire, Mexico was a province of New Spain.
Put another way, the semi-sovereignty of the U.S. states is governmental sovereignty—the states having been fully sovereign before they gave up enumerated domains of sovereignty and retained residual sovereignty—and hence the states’ sovereignty is legally valid in terms of international recognition. In contrast, the nexus of Mexico’s sovereignty recognized abroad is its federal government. That is to say, any “sovereignty” the Mexican states may hold is actually decentralized or delegated power.
To be sure, federalism can indeed be applied to kingdom-level countries. The Netherlands, Germany, and Switzerland are examples of medieval alliances that in early-modern terms were commensurate to the enlarged kingdoms in Europe. Particularly diverse polities on that level in the U.S., including California, Illinois, New York, and Florida, would each benefit greatly by adopting federalism by turning their regions into “states.” In using this term, however (as Mexicans did in the nineteenth century), confusion or an outright category mistake could ensue if Illinois’s 15 states (Illinois has 15 economic zones, which can be taken as regions) were likened to the E.U.’s 27 states rather than Germany’s 16 lander (which translates to “regions” or “lands” rather than “states,” or Staaten).
To apply federalism to a state in an empire-level union does not render that state itself such a union, as a sub-unit cannot be equivalent to the genus of the unit—a part cannot be equivalent to the whole or another such whole. Federalism applied to a state can be termed national federalism whereas the application to hybrid national-international union has been termed modern federalism in the literature on federalism. Put another way, the autonomy of “states” in national federalism is not sovereignty in the sense recognizable by international law, whereas the residual sovereignty of states in modern federalism is recognizable as such because the federal level is quasi-international.
That the Mexican federal senate represents the “states” and the German Bundesrat represents die lander is a feature of federalism rather than the international standing of the “states.” To be sure, the autonomy of state governments from the federal government in at least one domain is a key attribute of federalism (as distinct from confederal alliances, wherein the members are completely sovereign). Yet national federalism applies to the kingdom-level, below which sovereignty is not recognized internationally. This is a real problem for federalism, which had been applied only to international alliances (e.g., the Articles of Confederation), when it is applied domestically.
Interestingly, the U.S. Government would not recognize the semi-sovereignty of Chicagoland were it a “state” or land or canton of the Federal Republic of Illinois because to the U.S. Constitution that sovereignty would still be assigned to the government of Illinois. The recognition would pertain to the constitution of Illinois, hence the government of Illinois would have to recognize the autonomy specified for Chicagoland (the metro region is actually called “Chicagoland”). I grew up in the north-central region, which I can attest is very different culturally and in daily life (you can assume that the regions in Southern Illinois are even more different). Lest Europeans contend that differences between the E.U. states are great so the E.U. is somehow not therefore a federal system of dual-sovereignty, I would point to differences even within an American state—differences need not be linguistic in nature.  I digress.
The semi-sovereignty of Chicagoland in Illinois would not be of the sort to be recognized internationally, including by the quasi-international United States, whereas the semi-sovereignty of Illinois is of the sort that independent states in the world have. I contend that the Mexican “states” are akin to Chicagoland rather than to Illinois, so the appropriation of “Congress” and “state” from the U.S. Constitution evinces a misappropriation on account of the category mistake involved. Put simply, Mexico is not a United States, but, rather, would itself be a state were it to join the U.S. In other words, Mexico in the U.S. would not be a case of an empire within an empire (as Mexico was a province in an empire, as was Virginia).
A European official once put the matter of Turkey becoming a state in the E.U. in the form of the following question: “Wouldn’t it be difficult for the U.S. to integrate Mexico as the fifty-first state?” I immediately noticed the official’s assumption that Mexico would be a state, rather than there being a merger of two unions, such as the U.S. and E.U. Comparing “apples with apples” and “oranges with oranges,” the official could proceed to make a useful comparison that enlightened my understanding of the problems with Turkey’s accession. Hence a fundamental maxim of comparative politics can be stated as the following:
Ridding one’s comparative premises of category mistakes is requisite to accurate prescription.
Treating Mexico as if it were another United States is apt to result in flawed prescriptions. For one thing, the international element applied would not pertain and may even result in sub-optimal results for Mexico. Treating the United States as though it were simply France with a large back yard would not address the empire-level dynamics in the U.S. that are not in France. Put another way, the heterogeneity that exists between (member) states should be addressed governmentally at the imperial level, whereas this is not necessary at the state (kingdom, or imperial province) level.
 
Source:
Juan Montes, “Just ‘Mexico’: Leader Seeks to Shorten Country’s Official Name,” The Wall Street Journal, November 22, 2012.

Thursday, November 22, 2012

Moody’s: Statist France Lagging in the E.U.

Bashing the French in a major article on their lack of business competitiveness, the Economist was the target of la colère en Paris in November 2012. Just after the magazine’s warning that France could be the next danger-zone for the euro due to relatively high labor costs and unemployment, Moody’s cut the state’s rating to Aa1 from Aaa and kept a negative outlook on the rating. Moody’s cited the state’s economic weakness and the risks to the finances of the state government “posed by” France’s “persistent structural economic challenges.” In this way, Moody’s analysis dovetails with that of the Economist. Both pointed to a sort of impotence in French industrial policy. Moody’s decision excluded factors from the broader debt crisis in the E.U., focusing instead on the French government’s continued “reliance on borrowing to finance generous social-welfare programs” even as businesses in the state were laying-off employees. In other words, Francois Hollande had not gone far enough in his policies to make a dent in the state’s deficit as well as the downward trajectory of French competitiveness in the E.U. Meanwhile, deteriorating economic conditions in the E.U. were effectively closing the window of opportunity on even a one-party government being able to enact substantive reform. I contend that the gap between what the Socialist party could do, given its absolute majority in the legislature, and what it was actually doing contributed to the criticism.
 
 
                                 Changes in real GDP in the state of France. A general downward trend-line is apparent.     Source: World Bank
 
One could easily get the impression that Hollande’s government was somehow too timid generally-speaking, or even paralyzed, in spite of the absolute majority of the Socialist party enjoyed at the time in the state legislature. For instance, Hollande had passed through a tax increase only on people making over a million euros a year. He proposed 20 billion euros ($25.5 billion) of tax breaks over three years so firms could cut labor costs by 6 percent. The revenue to the state would be made up by spending cuts and an increase in a sales tax. Moody’s pointed to the negative impact on consumer demand; it could also be said that a mere 6 percent in lower labor costs is marginal at best, particularly when a party has an absolute majority.
 
In Wisconsin in 2011, Walker and the state legislature passed a major piece of legislation limiting the collective bargaining rights of public-sector employees. There too, in spite of having an absolute majority in the legislature, Walker did not push for more systemic change, such as eliminating the income tax. Lest this reform seem to radical, I contend that even such a feat does not go far enough for a government finally able to act decisively. In such a context, major constitutional reform oriented to improving the system of governance rather than for partisan purposes is also ripe to be picked from the tree. As one example of such a proposal, the Senate could represent the counties or regions (i.e., the provincial heads) rather than essentially duplicate the Assembly in being directly elected.
 
In France in 2012, Hollande could have increased the income tax for rich people who make less than 1 million euros. Going down to even 200,000 euros a year would have greatly enhanced the revenue side, and thus reduce the deficit, without hurting the middle class. A person making 500,000 euros a year, for example, could presumably be taxed more without going to the poor house, and the negative impact on consumer demand would be dampened due to the saving/investment activity at that bracket. At the same time, the safety-net could have been protected and distinguished from government spending that could be tagged as more discretionary, and thus cut. These reforms would be in line with the principles of the Socialist party and more substantial than reducing labor costs by a mere six percent.
 
In short, although the Economist points to the lack of competitiveness of French business and the failure of the state to encourage it, the sense of weakness in a party having the reins of government and yet for some reason not fully using the power it has to enact significant reform may be more to the point. Weakness where there should be great power—bureaucrats hampering around where there is an opening for visionary leaders to take the helm—produces pessimism and pugnacity in place of pride and prosperity. To enact legislation that is in line with one’s principles but only gets at the margins of one’s aims is as though to be impotent. Given the deteriorating business climate in the E.U. and the importance of the state governments in that union, the opportunity costs in Hollande’s holding back from acting boldly and systemically were particularly high in 2012.
 
It is as if Hollande had talked for years of getting a sports car so he could drive at high speed in the country with his hair blowing in the wind. When he finally is able to buy such a car he tells his complaining passenger on a drive that he is going below even the speed limit so he doesn’t get in an accident. Why get the car in the first place unless one is willing and determined to take it out for a spin? Why go through all the hassle of running for high office unless one is willing and determined to take it out for a spin, especially when there is an opening, rather than merely practice parking?  Given his party’s absolute majority in the state legislature, Hollande could have expanded downward his “tax the rich” platform for more revenue, made more cuts to spending while protecting the most vulnerable, reduce the deficit, and act much more aggressively in terms of an industrial policy.
 

Source:

William Horobin, “France Loses Another Top Rating,” The Wall Street Journal, November 20, 2012.

Wednesday, November 21, 2012

House of Commons Undercuts Cameron on E.U. Budget

In 2012, David Cameron of Britain “suffered his first major House of Commons defeat” in governing  “when some in his party failed to back his position on the budget negotiations and urged him to secure deeper cuts” in the pending 1 trillion euros E.U. budget for 2014-2020.  Although Cameron had stated he would veto the European Commission’s proposal to increase the overall E.U. budget by 5% annually for the seven-year period, he did not support cutting the federal budget. Because the vote in his state legislature for cuts in the federal budget was non-binding, the governor was free to ignore it in the European Council, where the state governments are represented. The European system of public governance suffered from at least two major weaknesses here.

 David Cameron representing his state at the E.U.         AFP/Getty

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

Tuesday, November 20, 2012

States Pull Ahead of E.U. on Syria: A Compromised Foreign Policy?


In November 2012, the New York Times reported that the European Union was offering “crucial support for the new Syrian political opposition,” which the E.U. referred to as the “legitimate representative for the Syrian people.” The E.U. stopped short of “conferring full diplomatic recognition” to the new group—the National Coalition of Syrian Revolutionary and Opposition Forces—even though one of the E.U.’s states, France, had conferred such recognition one week earlier, and another state, Britain, would soon do likewise.
 
In the early U.S., foreign policy was transferred to the union because of the greater political muscle the combined forces would have, and out of fear that European states would “divide and conquer” the new American union as state would turn against state according to their different alliances. In the early E.U., at least as of late 2012, a state could have a different foreign policy than the union itself without fear that the difference could be a threat to the union itself. Years earlier, divisions between E.U. states on Iraq had kept the E.U. from being a check, or counter-posing power, on the American-led invasion and occupation. The presence of state militia and union troops on the ground could have enabled the Europeans to effectively counter the American terms of the occupation, including its duration.
 
In general terms, the states’ rights “euro-skeptic” forces within E.U. states—particularly in the “red states” such as Britain and the Czech Republic—outweighed the prospect of more political influence abroad from foreign policy being a competency of the union. That the difference between the policies of the states of France and Britain and the policy of the E.U. as a whole could possibly be exploited by foreign powers to weaken European integration was in large ignored in Europe at the time. For one thing, the states were still generally assumed to be the proper guardians of foreign policy. The staying power of this residual assumption came with a cost.  Just as divergent fiscal policies at the state level could put pressure on the euro, differences in foreign policy between a state and the union, or even between states, could detract from the E.U.’s aim to be taken seriously on the world stage as a major player, even in the economic domain, and detractors abroad could exploit the differences to compromise the E.U. itself.
 
                                   The E.U. has had difficulty standing above its states in foreign policy.  euobserver.com
 
Whereas in the early U.S., the states transferred all of their foreign policy competencies to officials at the union-level, the tradition in the early E.U. has been to keep state officials “in the game” at the federal level. The European adaptation makes for a stronger federal system, I believe. In determining whether to shift more foreign-policy sovereignty to the E.U., state officials would not have to reconcile themselves with their own exclusion. The political benefits abroad from foreign policy at the federal level would not be at the cost of relegating the states completely—only their refusal to have foreign policies very closely fitting to their specific state interests.
 
Put another way, E.U. foreign policy could be fashioned by state officials (i.e., heads of state, and foreign ministers) meeting at the European Council or the Council of Ministers, so the “transfer” would really only be in terms of the ability of a state to have its own foreign policy. With a veto essentially emasculating any federal foreign policy, any given state could be on the losing side of a vote by qualified majority voting. This fact, by the way, illustrates in an important way why the E.U. even as of 2012 constituted a federal system (rather than an alliance)—dual sovereignty being among the critical attributes of modern federalism (as distinct from a network and even a confederation).  The question at the time of the policy-making with respect to Syria can be put as whether different foreign policies within the E.U., or between the E.U. and a state, undercuts the level of integration that is requisite to supporting the dual-sovereignty already achieved. This question is similar to that of how much fiscal integration was needed for the E.U. to meet its responsibilities to support the euro.
 
Sources:
Tim Arango, “European Union Backs Syrian Opposition Coalition,” The New York Times, November 20, 2012.
Neil MacFarquhar and Hania Mourtada, “Citing a ‘Credible Alternative’ to Assad, Britain Recognizes Syrian Rebel Group,” The New York Times, November 21, 2012.

Monday, November 19, 2012

Off-Shore Drilling off Virginia’s Coast: Stakeholder Framework Applied

By the early 1990’s, the U.S. had banned drilling off the Atlantic coast. In the wake of BP’s deep-water-drilling disaster in the Gulf of Mexico in 2010, President Obama cancelled his go-ahead of drilling leases off Virginia’s shore. A few years later, Doug Domenech, the Secretary of Natural Resources in Virginia, and that republic’s head of state, Bob McDonnell, teamed up with Virginia’s two delegates in the U.S. Senate to “put Virginia’s coast on the energy map through an act of Congress.” Domenech said, “I personally believe that the East Coast of the U.S. does have the ability to be the prolific economic basin.” The Bureau of Ocean Energy Management estimated based on two-dimensional seismic surveys that 3.3 billion barrels of recoverable oil exist under the Atlantic’s outer continental shelf and 31.1 trillion cubic feet, or 886.3 million cubic meters, of natural gas. However, the executive arm of the U.S. Government alone is more than that bureau. Moreover, lest this conflict over drilling be viewed as primarily between Virginia and the U.S. Government, it should be noted that the East Coast is not exclusive to Virginia.

Although the dispute would seem to be based on federalism, the opposing interests involved were really those of seven oil companies, including Global Geo Services in Texas, up against the U.S. Navy in Norfolk and some endangered whales fervently represented by some environmental groups. The oil companies may even have been behind Virginia’s role. “The energy industry, eager to find out how much oil and natural gas exists under the Atlantic sea floor,” was “pushing the [Obama] administration to allow seismic companies to survey the area.” Strangely omitting the matter of his company’s profit, a spokesperson for Exxon Mobil said, “With the right policies, development of those resources can provide substantial new energy supplies to power our economy while supporting millions of new jobs.” Even though Virginia was “a vocal supporter of drilling,” hoping it “could become the gateway for Atlantic production,” the oil companies were likely in the driver’s seat in pushing the Obama administration to allow seismic tests at the very least. In other words, the question of federal encroachment on Virginia’s vested or residual sovereignty is not particularly salient in the dispute. Rather than being centered on conflicting interests between a state and a federal union, the question of allowing drilling leases off the east coast of the United States pitted big business against the U.S. military and environmental groups—plus a federal president doubtlessly determined that something like the BP explosion in the Gulf not be repeated, at least under his watch.

Accordingly, the stakeholder framework used by business is a closer fit to this case study than is federalism. This does not necessarily open the flood-gate to “shared decision-making,” even as particular stakeholders are identified in the process. Pointing to one major stakeholder, the New York Times observed, “Virginia is home to Naval Station Norfolk, the world’s largest naval base, with 75 ships and 134 aircraft. A February 2010 Defense Department report said oil drilling in the area off Virginia that had been designated for leasing would interfere with military operations.” The U.S. military is thus a stakeholder. Also, “(a)dvocates for marine mammals” wrote “thousands of letters and testified at public hearings, arguing that seismic surveys of the outer continental shelf would hurt endangered whales.” A major oil gusher obviously would not do the animals any good either. Therefore, environmentalists constitute still another stakeholder.

To get at the societal relations between the stakeholders, the stakeholder framework from strategic management must be modified structurally to remove the focal firm at the hub to occupying instead one of the spokes. Concerning societal problems, a web-like framework wherein several entities, including corporations, governments, interest groups, the military, and even whales, is more fitting than the stakeholder model that has a firm in the center. Next, I discuss the stakeholder concept after which I relate the stakeholder framework used in societal leadership to the stakeholder framework in strategic management. Lastly, I apply the resulting model, which can be regarded as one of societal and strategic leadership, to the case study of off-shore drilling.

Stakeholder entities are those which can either materially affect, or would be affected by, the U.S. Government granting of drilling leases off the Atlantic coast. This definition is not perfect, as it could invite a seemingly endless list of groups that are indirectly affected or could have at least some impact on the leases. Adding “directly” to the definition would exclude groups that are affected greatly, albeit indirectly. Perhaps it is advisable to add to the definition that a stakeholder is an entity of significant importance to the decision as well as the decision-maker using the framework. Although most advocates of the stakeholder framework who come from the standpoint of corporate social responsibility assume (or prescribe) that consensus or a right of co-decision is implied in the framework or even the very notion of stakeholder as if having a stake in something includes a sort of power-sharing right, the model itself implies no such prescriptions and could therefore be used by a person or group that has exclusive decision-making authority on the problem.

The web-like adaption of the stakeholder framework comes from shifting the “unit of analysis” (i.e., scale) from that of a firm to the societal level. Whereas an oil company would use the “hub and spokes” structure, a government official, being oriented to a societal level (e.g., Virginia, or the U.S.), would want to view the players arranged as they are in society (i.e., without a focal organization at the “hub”) to get a sense of the political forces and interests involved and how they interact as well as how they would interact under alternative decisions. At the same time, the government official would want to keep an eye of his own interests, as well as that of the government of which he is a part. For this purpose, the “hub and spoke” structure works well, with the government at the “hub.”

Strategic leadership attends to the interests of the decision maker’s organization (or organizations where decision-making is shared) while also providing a view of the societal interplay of the contending interests without the distortions of one’s own position being “front and center.” In other words, both frameworks should be used where strategic leadership has a societal component. This can apply not only to governments. A CEO, for instance, may find that taking a societal rather than firm-centric perspective—bracketing it off from, while relating it to, the firm’s strategic “hub” interests—can result in a balancing of societal credibility, a long-term intangible asset, with more immediately-pressing strategic interests. While not relevant to every decision, this “dualistic” approach, depicted structurally in my diagram below, is most valuable where a decision involves a problem that is salient at the societal level.
 
Respecting the integrity (i.e., valid claims) of both frameworks requires integrity, or self-discipline.   Worden 
 
 
In the off-shore oil-lease decision, the White House or a member of Congress could use the “societal leadership” framework to identify more stakeholders and assess how they relate to each other politically (the government being included among them, but merely as one, rather than being focal). Ideally, a vision of the society itself, improved in a way touching on the dispute, can come out of this “non-distorted” perspective. Abstractly speaking, a structural framework is merely the basic contours of a perspective. A perspective that reflects society in its own terms is consistent with, and perhaps can even trigger, a societal vision of the sort that is in visionary leadership.
A government official oriented exclusively to a societal vision that is “undistorted” by his or her own political interests and those of the government risks not being around long enough to “preach the vision.” Strategic interests must also be considered. Hence, the official(s) would want to use the traditional “hub and spokes” stakeholder framework.  In assessing how each stakeholder can affect or be affected by the government (and the official) politically, the self-protective and aggrandizing instincts of the decision-maker kick in even at the expense of a societal vision. In this regard, stakeholder management in government is actually a way of systematizing a political calculation akin to a position paper that lists the pros and cons on a particular piece of legislation, associating particular stakeholders to the various arguments for and against the legislation. Although the political relationships between the stakeholders can be considered, the primary emphasis here is on the bilateral relationships of power where the official or government is on one end—hence “the hub.”
After taking both perspectives—societal and strategic—the decision-maker optimizes the approach by weighing the importance of the societal vision (as well as the undistorted political relationships) against strategic imperatives of the official and/or the government. The vision is not merely societal implications of a government’s or corporation’s strategic interests. Rather, societal leadership is based in society’s own terms, and is thus not merely an implication or aspect of a firm- or government-centric perspective. Which level is given more weight by the government official or corporate executive can be expected to differ from decision to decision. Problems have different degrees of importance at the societal level. Additionally, a government’s or firm’s need for reputational capital or societal credibility relative to satisfying strategic interests can change both temporally and in terms of the matter under consideration. In short, the two frameworks can be managed such that both societal and strategic leadership are given their due—without viewing the former as a mere implication or aspect of the latter. Serving as a societal leader and tending after one’s own strategic interests are both legitimate; moreover, they can be managed such that an overall optimality can be achieved with respect to reputational capital and power or profit.
In the case of the off-shore drilling leases in the Atlantic off the U.S. east coast, including but not limited to Virginia, the White House could use the stakeholder frameworks as a basis to craft a policy that both improves society (even beyond “the sum of the parts”) and protects and perhaps even enhances the White House’s political power.
For instance, the U.S. Navy indicated it would allow drilling on a case-by-case basis. The White House could use this position as leverage to gain political power with the oil companies by accommodating them (and Virginia’s government officials) without compromising influence with the military chiefs, the cooperation of whom the White House would need to implement military policy. The case-by-case basis would take some of the wind out of the oil industry’s lobby and Virginia’s delegation pushing on Capitol Hill for legislation to allow unfettered drilling. Societally speaking, such drilling would introduce too much risk of catastrophe, including to the whales, and could make the U.S. less inclined to shift to cleaner sources of energy. At the other extreme, forbidding drilling altogether would work against the U.S. achieving less reliance on foreign oil-producing governments. A societal vision that represents an improvement for the society as a whole would thus be more in keeping with a case-by-case method to be decided by the military or a regulatory agency depending on the area at sea at issue.
Lest it be observed that I gave the environmental groups relatively little consideration, the political calculation of a second-term Democrat in the White House might play for more influence outside of his base instead of placating groups already in the fold. Here we can see a leaning on the strategic framework perhaps at the expense of that of societal leadership. Such a weighing has been implicit, however, throughout this example of the analysis. The resulting decision, while not shared, is apt to be hybrid of sorts that reflects at least some influence from each framework—that is, of societal and strategic leadership.
Sources:
Alison Fitzgerald, “Virginia Tries to Circumvent Obama to Allow Energy Drilling,” The New York Times, November 14, 2012.

Tennille Tracy, “Oil Industry Renews Push For Drilling in the Atlantic,” The Wall Street Journal, November 20, 2012.

Skip Worden, “The Role of Integrity as a Mediator in Strategic Leadership: A Recipe for Reputational Capital,” Journal of Business Ethics, 46, no.1 (2003): 31-44.

Sunday, November 18, 2012

CEOs Warn U.S.: Avoid the “Fiscal Cliff”

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

The difference is that a downturn from exaggerated rhetoric on the public airwaves would not inevitable, even were sequestration to occur. Even the sequestration alone was not in itself inevitable as 2012 was coming to an end, as Congress and the president had ample opportunity go beyond posturing to avert the $500 million hit by reaching a deal on budget-cuts and revenue increases. Making matters perhaps worse, the corporate executives who were discussing their plans publically in November 2012 may have been depicting their intentionsoverly pessimistically in order to manipulate the contours of an eventual deal between Congress and the White House, or just to press the federal officials to get to a deal—anything. In other words, as laudable as it is to pressure elected representatives to work together for the good of the entire economy, advertising exaggerated corporate plans to do it could play into the self-fulfilling prophesy.

Bank of America CEO Brian Moynihan said at an investor conference in New York in November that uncertainty about U.S. tax and spending policies had already prevented many clients from investing in 2012. At a meeting of CEOs hosted by the Wall Street Journal, Mark Bertonini of the health insurance company, Aetna, said, “The American people are going to suffer, because we’ll lay them off.” Besides the fact that stoking fears as a means to manipulate public opinion and federal lawmakers is ethically problematic, the CEO’s claim might be exaggerated, or at least overly simplistic even as it is in line with the financial interest of an insurance company that would be negatively affected by the budget cuts to hospitals.

The Journal itself provides a reality-check in making the following observation: “To be sure, there is a difference between CEOs issuing warnings to influence a policy debate and actually making cuts. Companies juggle a range of factors when deciding whether to hire, fire or invest, and many say privately they are more influenced by broader shifts in technology and demand than the fiscal cliff.” Merely in using the term cliff, however, the Journal is unwittingly complicit in the game. About a week later, the Journal would blatantly state that for investors, the stakes   were high.

Bertonini’s claim of eventual layoffs could have very little to do with Aetna’s actual contingency plans—the claim being primarily to manipulate rather than inform. Even defense contractors and hospitals, which would be directly impacted by the sequestration (but also by a Congressional agreement, albeit less so), had probably already factored the possibility into their operations in 2012 so any further downturns in 2013 from the sequestration would probably be more muted than the cliff rhetoric would suggest.

Already in 2012, the eurozone’s quarterly GDP numbers, including the third-quarter “slump” of -0.2 percent, was “weighing on” executives at American companies in terms of their cautiousness in investing and hiring at a time when consumer demand in the U.S. was running at its highest level since mid-2007. That is to say, world events prior to the anticipated “fiscal cliff”were also playing a role in the business outlook in America.

Warren Buffett, the founder of Berkshire Hathaway, said the U.S. has a "very resilient economy" and so going over the so-called cliff would not be permanently crippling. To be sure, the senior statesman of business could have been trying to manipulate Democratic leaders to push for higher tax revenue from the rich. However, Seifi Ghasemi, CEO of Rockwood Holdings, a specialty chemical manufacturer, said in late 2012 that preventing another war in the Middle East and bolstering Europe’s economy were bigger concerns” at the time than avoiding the sequestration of across-the-board budget cuts. With the exception of Newt Gingrich saying on ABC This Week that the U.S. economy was big enough to handle a $500 million hit, Buffett and Ghasemi were lone wolves in the wilderness in downplaying the "cliff" theatrics that the sky would fall should the budget ax fall early in 2013. At the conference of CEO’s hosted by the Wall Street Journal in November 2012, 73 percent of the executives said they were more concerned about sequestration than even the E.U.’s debt crisis—this in spite of the fact that the Economist had just come out with a major piece on the uncompetitiveness of France representing a new danger to the euro.

The involvement of CEOs in the chorus of “the sky is falling” rhetoric in order to manipulate public policy for financial gain should strike us as nothing new. It is crucial to note, however, that the topic here was systemic in nature, meaning that the U.S. economy as a whole and the fiscal viability of the U.S. Government itself were presumably at issue. The stakes are perhaps too large where the risk is systemic for CEO’s to “hyper-drive” the public discussion into hysteria just so profit won’t be as negatively affected by government cuts.

Whereas corporate public affairs offices are typically oriented to getting favorable regulations (i.e., strategic use of regulation) or deregulation oriented to a particular industry, the “fiscal cliff” would impact the entire economy—the question being how much. Using the sequestration “debate” to eke out more financial gain or avoid a loss for one’s company can be dangerous for the system as a whole if the manipulation distorts the problem. In my view, fiscal cliff is inherently distortive, and thus any public manipulation based on it is also problematic. To “join in”for financial gain is not exactly being socially responsible.

Whether in public or “behind closed doors,” corporate involvement in the public policy process has more legitimacy ethically speaking when the effort is to “save the ship” where the “ship” is the system as a whole, and thus far from narrower benefits, such as to the companies themselves. To be sure, companies have a financial interest in the general condition of the macro economy, but the more systemic the suggestion, the less immediate the financial benefit to a particular firm. The more immediate the benefit is to a company, the less credible are its managers’ efforts to manipulate public opinion and officials.

Rather than “fear mongering,” the CEOs at the meeting hosted by the Wall Street Journal in November 2012 could have suggested possible ways that sequestration could be obviated by an agreement by Republicans and Democrats leaders in the U.S. Government. Specifically, the executives could have oriented their comments to suggesting new ways that Congress could raise revenue and cut the federal budget in ways that are wiser than simply across the board. Optimally, the suggestions would be oriented to the problem at the systemic level and thus reflect such a perspective.

Implying that a corporation’s particular financial interest is never completely overcome by a societal perspective, the Wall Street Journal reported in November 2012, “Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. . . . (S)ome say fears of the fiscal cliff are overblown.” The split by sector suggests that the prescriptions even at the macro, or societal level at the very least take into account an industry’s own financial interest. It is as if what is good for the part is presumed to be good for the whole. To be so inclined does not make a CEO or company look good in the public discourse.

A suggestion with even an indirect financial benefit to one’s firm can easily be discounted by public officials and even the general public as lacking sufficient credibility to be trusted. An executive’s venture into the public square can easily be for naught under such circumstances. It would be better to remain quiet than suffer the loss in reputational capital. The alternative to either one is for the CEO or public affairs director to limit the company’s particular benefit from a systemic-oriented suggestion to public relations, which is itself a valuable long-term intangible asset. That is to say, time and energy spent coming up with the most respectable (i.e., clever) suggestion can do much more for one’s own company than trying to profit more directly from manipulating public discourse in a self-interested way. The numbers will take care of themselves. Ever notice that when people recognize a clever suggestion made by someone, they don’t accuse the person of trying to manipulate things, but, rather, praise him or her for the insight? CEO’s wanting a share of the leadership podium at the societal level might keep this observation in mind.

Given the expertise and societal position, at least potentially, of CEO’s, contributing toward solving system-wide problems in the political economy can even be regarded as a part of corporate social responsibility, as long as the financial benefit implied by a given suggestion is not too direct or exclusive to the executive or his/her company. Financial self-interest exculpates the ethical merit that is inherent in the very notions of responsibility and duty that are salient in ethics. In public discourse, it is better to be oriented to mapping the general course of the ship (i.e., the political system and/or financial system as a whole) around icebergs rather than trying to reserve a deck chair with a better view. We expect people to wrangle for position, whereas we take notice when individuals take a stand in spite of themselves for the greater good of the system.


                                       J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com



Consider, for example, J.P. Morgan’s decision in 1907 to take the weight of the banking crisis on his own shoulders by leading banks to save Wall Street by infusing the needed capital into the system. Contrast this vaulting of business leadership to the societal level with the vaunted self-protective orientation of Wall Street bank CEOs in September 2008. Business leadership raised to the societal level is rare indeed, and thus particularly valuable—and yet countless CEO’s settle for strategic leadership of significantly less value.

It is not as though opportunities are rare. In November 2012, President Obama presented CEOs with just such a platform at the White House just as he was entering into negotiations with Congressional leaders on a possible deal that would avert the “sky from falling.”To have optimal credibility with the president, the CEOs would have had to treat the meeting as falling under “corporate social responsibility” in that they would have had to take the perspective of the U.S. as a whole, and thus be on the same page as the president, to be credible. Put another way, the president would hardly have been expecting this, so a CEO achieving such a height would have stood out above the crowd and thus have had the president’s ear.

As an example of a perspective oriented to the political system and at the same time justifying business leadership on the societal level, David Crane, CEO of NRG Energy, said in referring to members of Congress and the president,“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other. CEO’s, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.” This statement is more oriented to a systemic flaw—that of gridlock in the federal government—than to getting something for NRG. Furthermore, the pragmatism, and one could add experience, of CEO’s could come into play should executives feel like doing some “pro-bono” work for the American people.

In conclusion, distorting public discourse in order to gain financially can contribute toward the general sense that a cliff is just ahead. Such participation is not constructive. In contrast, being oriented to coming up with a clever suggestion geared to a societal problem even (and especially!) though one’s company would only rise or fall along with all the other boats (i.e., the benefit of which being systemic in nature), can raise a CEO from strategic leadership to societal leadership. Only at this level can duty be reconciled with benefit in terms of credibility and the related reputational capital. CEOs following JP Morgan’s example in 1907 in willing the leap to societal leadership wherein the focus is on saving the system could make all the difference on whether the U.S. survives its own accumulated icebergs. Regarding the question of survival and the related implicit call to CEOs to “step up to the plate” for the good of the “team” (or ballpark), the U.S. Government’s gigantic accumulated-debt of over $16 trillion and deficits of over $1 trillion stood out even in 2012 as huge red flags much more dire than any $500 million so-called “fiscal cliff.”

Sources:
Kate Linebaugh and Stobhan Hughes, “Companies Warn About Cutbacks,” The Wall Street Journal, November 14, 2012.

Damian Paletta and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” The Wall Street Journal, November 14, 2012.

Brian Blankstone and William Horobin, “Euro-Zone Economy Shrinks Again,” The Wall Street Journal, November 16, 2012.

Maureen Farrell, "Buffett Not Worried About Fiscal Cliff," CNNMoney, November 16, 2012.

Jonathan Cheng, “Investors Show Optimism That Cliff Will Be Avoided,” The Wall Street Journal, November 20, 2012.