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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
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Bernanke on the U.S. Economy “Going Over the Cliff”

As the U.S. Government faced down its own deadline before the Bush tax cuts would expire and across-the-board budget cuts would commence, the Federal Reserve, which had been struggling to prop up the economy by buying bonds and keeping interest rates low, would, according to the Chairman, Ben Bernanke, be largely powerless to do more in the face of a recessionary policy on taxes and spending. "We cannot offset the full impact of the fiscal cliff," he said of the Fed. "It's just too big." That he had written a doctoral dissertation on the Great Depression and had specialized on it as a professor at Princeton lends a lot of weight to his judgment on the matter. However, he had also managed to be re-appointed to the Fed and thus knew how to play the game. In the case of the automatic budget cuts, major power-brokers, specifically in the military industrial complex, had a lot riding on Congress and the White House making a deal that would obviate the cuts in defense spending. The chairman of the Fed could have been carrying their water.
Ben Bernanke, Chairman of the Federal Reserve, in front of the lights.   Reuters
In September 2012, Bernanke had announced an open-ended mortgage-backed-security purchasing program that would put $40 billion a month into the economy. At the time, he said, “If we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do. We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment.” Presumably the Fed would continue the mortgage-bond purchases were the automatic budget cuts and end of the Bush tax breaks to forestall a “broad-based growth in jobs and economic activity.”
In terms of economic impact, a stimulus of $40 billion a month, or $480 billion annually, would just about match the anticipated $500 billion hit from the “cliff.” How is it then, that the latter is “just too big”? Were the $480 billion insufficient, the Fed would be free to increase its purchases.  Time magazine describes the stimulus mechanism as follows: “Open-ended purchases of mortgages will have the effect of lowering interest rates, helping more people qualify for mortgages or refinance. But more importantly it will — in theory — have the effect of creating an expectation of generally higher asset prices in the future, which will motivate people to get off their duffs and spend money now. If companies and individuals are indeed convinced that prices will rise in the future, that would encourage them to spend, hire, and jump-start the economy out of its chronic underperformance.” Whereas monetary policy was contracted in response to the Great Depression, the scholar of that mistake could presumably do the opposite should we—in his words, “go over the cliff.” His $480 billion mountain of money could turn his $500 billion cliff into a mere bump.
To be sure, purchasing mortgage-bonds can only do so much. As David Dayen of Firedoglake argues, there’s only so much the lifting of asset prices can do without appropriate fiscal policy to accompany it: “(Y)ou have to question the role of monetary actions by themselves to generate an economic boost, especially at this time. Lower mortgage rates may or may not prove helpful . . . without fiscal stimulus and a reversal of the current trajectory of deficit reduction, we will never get to the desired trend for growth.” However, the Fed could presumably buy up more than mortgage-bonds, freeing banks up to lend more in the process.
Most telling is Bernanke’s claim that the Fed could not increase its stimulus enough to counter the anticipated $500 billion hit from sequestration and the end of the Bush tax breaks—and yet the Fed was already on record that it would spend $480 billion in 2013 unless the economy improved in the meantime. His inflexibility seems arbitrary, or dogmatic, in other words, given what the Fed can do, and this leads me to the alternative explanation that the chairman was actually doing someone else’s bidding rather than proffering a judgment steeped in decades of study. The real task would be one of locating the real power-brokers whose financial interests were so threatened.
Whereas the expiration of the Bush tax cuts and cutting entitlement programs had been perennially on the block for years, the sacred-cow of defense spending was all of a sudden susceptible as well. Hence, I believe, all the dire doomsday warnings coming out of Washington to the contrary, the pressure on a political deal was oriented to protecting the status quo of the military-industrial complex rather than obviating certain economic collapse. That is, even more fundamental than the interest of politicians and the media to over-dramatize “going over the cliff” in order to gain attention, the subterranean financial interest of the American military-industrial complex may have been pulling many strings—many puppets—to veer the debate toward a deal. Even as the major players on stage were posturing, a two-step could have been going on behind the scenes—dancing around the sacred cows. Perhaps the real news behind the Bernanke’s warning is that even the “non-politicized” central bank was “doing the dance.”

John Cushman, “To Bernanke, ‘Cliff’ Says It AllThe New York Times, December 12, 2012.

ECB as Bank Supervisor: States in the Driver's Seat

Although the establishment of a federal regulator of major banks in the E.U. was as yet not approved by the European Parliament or ratified by the governments of states using the euro as well as any other states opting in, the European Council of Ministers signed off in December 2012 on an amendment that would give the European Central Bank authority over banks that have at least €30 billion in assets, make up more than 20% of their state’s economic output, or operate in at least two states (i.e., interstate banking). At the very least, three banks per state would come under the central bank’s oversight. Other banks would remain the responsibility of state regulators. This is an interesting “working out” of federalism, distinctively European-style.
For one thing, that the Council of state finance ministers—representing their respective governments—formulated the proposal while the representatives of E.U. citizens would then presumably have only an “up or down” say on the matter reflects the salience of the state governments at the E.U. level relative to the elected representatives of the people. That is, appointees of elected representatives at the state level have more power at the federal level than do the federal legislators who directly represent the people (i.e., without respect to state).
                                                            German Finance Minister Wolfgang Schäuble at the E.U. Council of Ministers discussing the bank supervisor amendment.             WSJ
One implication of the imbalance of the “confederal” chamber based on international principles over the federal chamber based on national principles (i.e., representing citizens rather than states) is that the interests of the whole can be held up by the vested interests of a particular state government (e.g., Germany).
Another implication is that of a democracy deficit because the directly elected federal legislators are essentially in the back seat. To be sure, the state leaders who are driving the union are elected too, but to state office. Put another way, the legislators elected specifically to the E.U. level are playing second fiddle to officials elected to act in the interest of their particular state. This mismatch is a deficit in democratic terms.
Therefore, rather than focusing only on the substantive powers proposed for the ECB, attention might be given to the process by which the amendment to the E.U.’s basic law (i.e., constitutional) was formulated and sent through to be officially proposed and ratified. At a fundamental level, the states both designed and would ratify the proposal—a conflict of interest due to the relative subordination of the E.U. Commission and Parliament. It is as if the state legislatures would sit in judgment of what they themselves designed, effectively patting themselves on the back while the people’s federal representatives merely nod as though a footnote.


Gabriele Steinhauser and Laurence Norman, “EU Reaches Deal on Bank Supervisor,” The Wall Street Journal, December 13, 2012.

Wednesday, December 12, 2012

How to Beat the Rap, HSBC Style

In HSBC’s settlement with the U.S. Government, the bank has to pay $1.9 billion—about half a quarter’s profit—but avoids criminal charges. The New York Times quotes government officials who said they were hesitant to indict the bank because formal charges could mean bankruptcy, which in turn could roil the financial system itself owing to the bank being too big to fail. That is to say, one of the advantages of being TBTF is apparently that of effective immunity from criminal charges.
 The full essay is in Cases of Unethical Business, which is available at Amazon.

Sunday, December 9, 2012

Luring Business: “Job Creators” in Texas

As of December 2012, Texas was giving out more financial incentives—mainly in the form of tax breaks and subsidies—to business than was any other American state. The government was handing out around $19 billion annually, while at least $80 million was being spent in the U.S. overall, according to the New York Times. Although at the time Texas had half of all the private-sector jobs created in the U.S. during the preceding decade, the Times points to “a more complicated reality behind the flood of incentives.” It cannot simply be assumed that good jobs will be created.
For example, Texas had the third-highest proportion of hourly jobs paying at or below minimum wage. In fact, Texas had the 11th-highest poverty rate in the union. “While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,” Dale Craymer of the Texas Taxpayers and Research Association said. In other words, one might ask how much the benefits from the financial incentive extend beyond the recipients themselves to the general public and Texas. Even though businesses cite “job creation” as a benefit of government help, one might ask what kind of job as well as how many?
That the government may have been relying on the businesses themselves or their “consultants” even as they would stand to gain suggests that a conflict of interest may have blurred the line between decision-maker and beneficiary. Indeed, political contributions from companies to re-election campaigns may have exacerbated the problem.
For example, Brint Ryan, a tax consultant specializing in finding incentives for large companies, was “a familiar presence at the state comptroller’s office . . . which must sign off on many tax breaks”—potentially blurring the line between beneficiary (agent) and decision-maker. He also donated $250,000 to Gov. Rick Perry’s ill-fated run for the White House. Texas had been largely bereft of financial incentives for big business when Perry became the head of state in 2001. He had smarted when Texas lost out to Illinois on a new Boeing plant and he was not going to repeat that mistake. Years later, he could point to expansions by Facebook, eBay and Apple in Texas. “They’re coming because it is given, it is covenant, in these boardrooms across America, that our tax structure, regulatory climate and legal environment are very positive to those businesses,” he said. This does not mean, however, that they deliver on well-paying jobs for Texans. There is also the opportunity cost to the government. As Texas spent more to lure big business, the education budget took a hit. Brint Ryan may have had Gov. Perry’s ear when students and even the poor probably did not.
In short, government officials engaged in industrial policy would be wise to distinguish corporate welfare from “economic stimulus.” The influence of money in the American political system doubtless created a conflict of interest blurring the line between the beneficiaries and the decision-makers. The temptation for policy makers might therefore be to lapse into corporate welfare at the expense of basic services. CEOs who are looking for financial incentives from the government as a way to make more money may claim that their respective companies are “job creators,” but the reality is that those companies are “profit creators” with jobs being a byproduct of sorts. The case of Texas suggests that market equilibrium may naturally be well short of full-employment. If so, government officials should not go overboard with the financial incentives in the mistaken belief that some full-employment market utopia is possible, even if providing corporate welfare does not hurt their own political welfare either.


Louise Story, “Lines Blur as Texas Gives Industries a Bonanza,” The New York Times, December 3, 2012.