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Thursday, December 15, 2011

Leadership in Europe: A Recipe for Reducing Legal Uncertainty

Concerning the legal environment of business, the lawyers who teach as full-time instructors in American business schools affirm that managers would rather have a challenging environment that they know than one that is characterized by headlines such as, “Legal Uncertainty Imperils EU Agreement.” At the E.U.’s parliament, which represents the E.U.’s citizens, the president of the European Council, Herman Van Rompuy, said in the wake of the agreement, “An intergovernmental treaty was not my first preference, nor that of . . . most of the member states . . . It will not be easy, also legally speaking. I count on everybody to be constructive, bearing in mind what is at stake.” Meanwhile, the Wall Street Journal was also reporting that investors were “largely dismissive” of the Council meeting  at which the extra-E.U. agreement on strengthening the enforcement mechanism of state deficit and debt limits had been reached at the end of the previous week. Alan Brown, chief investment officer at Schroders Investment Management, which had at the time almost $300 billion under management, said of the results of the Council meeting, “Yes, it was what I expected, and yes, I was disappointed.” Schroders was backing up this view with a modest bet against the euro. Relatedly, Barclays was forecasting the currency to fall from $1.30 on December 13, 2011 to $1.25 by June 2012. Besides the pessimism on the “intergovernmental treaty” as well as a possible increase of funds from the $500 billion cap on the agenda at a Council meeting in March 2012, the sheer uncertainty described by Van Rompuy lowers the value of the announced agreement and the outlook concerning the viability of the euro as well as the E.U. itself.



              Federalismus in Action: Jose Barosso of the E.U. Commission and Angela Merkel of Germany / NYT

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

Monday, December 12, 2011

The Visible Hand: Markets Forging a Stronger E.U.

Joschka Fischer, a former foreign minister of the state of Germany, said the agreement under which 17 state governments accept more oversight and control of their budgets by the European Union “was a big step, which was pushed on the Europeans by the markets.” Such pressure was necessary, given the conflict of interest bearing on state officials working at the federal level on a deal that would add a new competency to the E.U. “(I)n the end,” Fischer added, “the markets have limited the options of the political leaders, especially of Merkel, and pushed her into giving more support for the euro.” Giving more support for the euro meant giving more power to the E.U. at the expense of the state-level where Merkel has most of her power. From this vantage point (i.e., the power that state officials have at the E.U. level), it is amazing that the E.U. has been able to acquire any additional competencies.


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

Monday, December 5, 2011

The Democracy Deficit in Nominating Presidential Candidates

“Newt Gingrich is up, Herman Cain is out, and the attacks are getting sharper as the GOP primary campaign enters the final month.” The final month, that is, before “Iowa launches the contests that will choose the challenger to President Obama.” This has the ring of before time began, or before the beginning. That anything is decided before the beginning may seem metaphysically impossible even if it applies politically. One might demur, claiming that anything without a foundation ought not to be able to exist, let alone to stand. Can Americans borrow anything from the E.U.'s presidents that might improve how the U.S. president is selected?

The full essay is at Essays on Two Federal Empires.


Sunday, December 4, 2011

A Dilemma for the E.U.: A Convention or an Amendment?

In November 2011, European leaders began to talk about amendments to the E.U. that would “change the fundamental structure of the union.” Complicating the talks was ambiguity concerning the nature of the E.U. itself at the time. Foremost among the changes being discussed was the idea of a form of centralized oversight of the budgets of the state governments, with “sanctions for the profligate.” The existing E.U., while more than the American Articles of Confederation, was at the time found to be insufficient in keeping the debt crisis from spreading from state to state and engulfing the union itself and its currency. “The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.” In this respect, the pressure for “ever closer union” was like that facing the Americans in the mid-1780s. Because the nature of the union was itself an issue, a convention composed of delegates—not state officials—directly elected by the people for the purpose might seem best suited. However, I contend that while rethinking the E.U. was not without merit at the time, the specificity of the planned amendment argues against the idea.


Tuesday, November 29, 2011

An American President Meets the E.U.: Corrective Exigencies of a Debt Crisis

Political protocol can take some time to catch up to changed political realities. For over two hundred years, it has been assumed that U.S. presidents have met with their counterparts in E.U. states such as Britain, France, and Germany. During the European debt crisis, the New York Times reported, “in numerous private conversations and increasingly forceful public statements, [American] policy makers are urging their European counterparts to take big steps and move fast to reassure markets.” It was undoubtedly assumed that the counterparts were at the state level in the E.U., rather than in E.U. governmental institutions. So how are we to situate Barak Obama’s meeting on November 27, 2011 with José Manuel Barroso, president of the European Commission; Herman Van Rompuy, president of the European Council; and Catherine Ashton, the European foreign policy chief? 

                                                                                  Doug Mills/NYT

Monday, November 21, 2011

The African Customs Unions and the E.U.: On Currencies

The East African Community (EAC) is Africa’s “most advanced regional trade bloc,” according to the Wall Street Journal. As of the journal’s report in late 2011, the EAC was already a customs union that guaranteed the movement of goods and the right to work across Kenya, Uganda, Rwanda, Burundi and Tanzania. The parliaments were working at the time on synchronizing immigration and tariff laws. “We want to develop this corridor vigorously and collectively,” Mugo Kibati, director of a Kenyan government program, said. The journal notes, however, that the EAC and other trading blocs in Africa, such as the Southern African Development Community, were “backing away from one prominent aspect of Europe’s economic union: a common currency.” Aside from any vague similarities that the fiscal differences between Greece and Germany may have to those between Zimbabwe and South Africa, the currency question itself is out of place for a NAFTA-like trade agreement.


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

Saturday, November 19, 2011

On the Role of the European Central Bank in Ending the Debt Contagion

According to the Wall Street Journal, “That the [ECB] has been forced to step into the power vacuum left by a fractious political class underscores the increasing centrifugal forces unleashed by the debt crisis.” Yet that pressure was being applied to the central bank to issue Eurobonds and buy more state government bonds in spite of the objections of German officials suggests that there were also centripetal forces acting on the center at the expense of the state capitals, even Berlin. It is important to view the E.U.’s “management” of its debt crisis through the prism of the history of European integration since the Shuman Plan in 1951, which called for ever closer union so as to obviate war and give Europe a stronger economic and diplomatic power in the world. The history of the European project can be characterized as a series of fits and starts, punctuated by momentary crises—each proffering potential ruin to the union itself. For example, France’s veto of Britain’s accession as a state must surely have struck some people as portending the end of the EC—the forerunner to the E.U. Yet from the vantage point of 2011, the conduct of the accession seems a mere hiccup on a much longer road of hills and valleys. Regarding the extent of integration by 2011 (e.g., monetary union), the question is whether European efforts to come to grips with the contagion of over-burdened state debt signify merely another valley, or an inherent contradiction or fault-line in the E.U. itself. Whatever the answer, the outcome will no doubt come about incrementally, as one might expect from E.U. history.

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

Monday, November 14, 2011

Monti and Papadernos in the E.U.: Leadership in Technical Expertise or Democratic Deficit?

“The moment of truth has come.” This was said by the head of state of the E.U.’s third largest state, Italy, in a televised address just after Berlusconi had resigned as the prime minister. Although the statement could be interpreted as referring to the need to reign in the Italian profligate system of public-sector patronage (which includes private contractors), Giorgio Napolitano could also have been referring to the credibility of his state at the E.U. level. “We need to restore confidence with investors and European institutions,” he continued before turning to the more tangible point that the state would need to refinance nearly 200 billion euros in government bonds before May, 2012.



                             Monti and Barroso                                    John Thys/Agence France-Presse/Getty

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

Tuesday, November 8, 2011

Greco-Roman Achilles’ Heel: Democracy or Leadership?

In assessing the abilities of the E.U. states of Greece and Italy to manage their respective debt-loads as expected by E.U. leaders, the impacts from the governance systems can be distinguished from the impact from compromised or failed leadership. In general terms, a forceful, visionary leader can leverage an existing governance system to “produce.” However, it is also true that a faulty system can make transformational leadership difficult if not nearly impossible.

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


Monday, November 7, 2011

Greece & Italy: Undercutting Market Confidence in the E.U.

As a federal system, the E.U. can be expected to contain a certain amount of economic disparity. The state bond yields in October 2011, for example, were—one could say—“diversified.” Investors relishing high risk-return could partake in Greek bonds while retired investors could safely stick to the German variety. A healthy federal system proffers something for nearly every taste, while constraining the outliers for the sake of unity.


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

Sunday, November 6, 2011

On the E.U. Debt Crisis: Lessons from the Early U.S.

In the March 2, 2010 issue of the New York Times, Roger Cohen illustrates how useful EU-US comparisons can be. He is careful to compare the E.U. of his time not to the contemporaneous U.S., but, rather, to it a few decades into its founding. In other words, he corrects for the impact of time on political development. This is not to say that the E.U. in 2010 was akin to the U.S. under its Articles of Confederation. The Articles treaty evinced far less integration politically and economically. For example, whereas the Articles sported only a common council of delegates from the states, the E.U. in 2010 had a presidency (the European Council, whose president was Van Rompuy), an executive branch (the E.U. Commission, whose chief executive was Barroso), a bicameral legislature (the E.U. Council (of Ministers) and the E.U. Parliament), and a supreme court (the European Court of Justice, or ECJ). In fact, whereas under the Articles the American republics held governmental sovereignty, the ECJ held in 1963 and again in 1964 that E.U. law is supreme over state law and state constitutions. In short, whereas the Articles did not split the atom of governmental sovereignty, the E.U. in 2010 was a federal system of dual sovereignty. Like that of the U.S., the E.U.'s federal system is itself on the empire level; its republics being commensurate with the early modern kingdoms.


The complete essay is at Essays on Two Federal Empires.

Friday, November 4, 2011

GlaxoSmithKline: Born Again Ethically?

GlaxoSmithKline, a drug company based in the E.U., agreed in 2011 to pay $3 billion to settle the U.S. Government’s civil and criminal investigations into the company’s Medicaid pricing practices and sales practices, including illegal marketing of Avandia, the diabetes drug linked to coronary problems. The settlement amount surpassed the previous record of $2.3 billion paid by Pfizer in 2009. Even so, it is doubtful that $3 billion proffered enough of a punch to motivate either Glaxo’s board or CEO to do what would be necessary to extirpate a corporate culture perhaps too comfortable with cutting corners.

The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

Tuesday, November 1, 2011

Europe's Political Elite Takes on Popular Sovereignty in Greece

As October 2011 was coming to an end, George Papandreou, prime minister of Greece, “stunned Europe by announcing a referendum” on the latest bailout from the E.U. and set the vote for January 2012. Shocked E.U. leaders were doubtless shaking their heads with a mix of incredulity and frustration, as they had not even been consulted on the prime minister’s proposal. Meanwhile, the yields on Italy’s bonds continued to increase, as did the spread between German and Greek 10-year bonds. The world was left to whether the Greek voters would reject their government’s austerity plans and, relatedly, whether the E.U. would augment its bailout of the state as per the agreement reached only days before the prime minister’s announcement.


                                     Greek Prime Minister George Papandreou announcing the referendum    AP

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

Saturday, October 29, 2011

European Banks’ 50% Write-Down: Discounting Debt Insurance (CDS)?

In “Europe’s Rescue Plan,” The Economist (October 29, 2011) opines on the “fixes” that had been announced just days before by E.U. leaders on the public debt crisis. I find three points of note that are particularly worth elaboration. "Bond markets may be suspicious of guarantees made by countries that would themselves be vulnerable if their over-indebted neighbours suffered turmoil." This downside is that of systemic risk. When Wall Street banks began to tank as the value of their CDOs declined, so too did AIG, which was to fund the insurance policies (CDSs) on those CDOs. In other words, we tend to discount the possibility that the entire ship could tank.

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

Thursday, October 27, 2011

Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.” Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  


Tuesday, October 25, 2011

Britain at a Crossroads?

The prime minister of the state of Britain faced a “rebellion” in his own party on October 24, 2011 as eighty conservatives backed a nonbinding referendum on whether the state should secede from the union. “I don’t vote against the government lightly, but I think when there is a matter of principle then that must come first,” Nick de Bois said. “We have a considerably changing dynamic [in the E.U.] and given that . . . and the fact that anybody under 54 has not had a chance to vote on [whether Britain should secede from the E.U.], it is appropriate to set in motion that opportunity,” he said. De Bois’ sentiment mirrors that of Thomas Jefferson, who argued that each generation should have the opportunity to affirm or cancel the social contract of the generation before.

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

Friday, October 21, 2011

Conflicts of Interest at the Federal Reserve

The Huffington Post reports that “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.” Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

Thursday, October 20, 2011

E.U. Agenda: Taming Bloated Greek Patronage

As E.U. leaders wrestled in the fall of 2011 with how to bail out those state governments that had been amassing relatively large semi-sovereign debt loads, residents in relatively solvent states such as Germany were frustrated with what they perceived as profligate over-spending in Greece. It is possible that even the Germans did not realize how engrained the excessive politically-based Greek bureaucracy had become. I suspect that for many Greeks, news of their living beyond their means was met more with denial and utter disbelief than an attitude-adjustment. In other words, a vast disparity in perspective exists on the ground as the E.U. struggled to come to grips with the debt crisis. The “ever closer union” necessary for the E.U. to rise to the occasion has as its foremost obstacle the disparate perceptions existing within the union (and enforceable by state governments).

The full essay is at Essays on the E.U. Political Economy: Federalism and the Debt Crisis, available at Amazon.

Limited Tenure For CPA Firms?

Arthur Levitt, who headed the Securities and Exchange Commission from 1993 to 2001, “sought to root out conflicts of interest at audit firms in 2000, and urged Congress to adopt auditor term limits in 2002 after the Enron and WorldCom scandals.”  The Wall Street Journal also reports that Levitt did not buy the argument made by companies that it would cost them a lot of money to change audit firms. To be sure, he acknowledged that some added cost would be entailed in a system of mandatory auditor “term limits,” but a long auditor relationship “raises the perception,” he maintained, “that the auditor is very much beholden to the company and not totally independent. An environment of skepticism should trump the fraternal environment that tends to occur after a relationship has developed over a period of years.” Indeed, Arthur Andersen’s people were well ensconced at Enron by the time the energy giant went bust. In fact, the auditors even approved the questionable “partnership” accounting (used to hide debt).  Nor did the auditors communicate any misgivings to the audit committee of the company’s board of directors. The auditors were “in” with a rancid management. 


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

Tuesday, October 18, 2011

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm,” according to The New York Times. “In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, according to the Times, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”

The full essay is at Institutional Conflicts of Interest, available at Amazon.

Wednesday, October 12, 2011

Slovakia Stands Up, Caves to the E.U.

On October 11, 2011, Slovakia’s Parliament failed to approve the expansion of the euro rescue fund, a development, the New York Times reports, that “brought down the government.” Although the vote makes good copy, it was not at all as dire as the headline suggests. According to the Times, the state’s “leading opposition party said after the government fell that it would be willing to discuss support for the fund, pointing to the eventual approval of the deal. European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.” In other words, the vote had to do with state politics as well as resistance to bailing out a richer state. Once the state government fell, pressure from the E.U. and the new politics in the state government quickly coalesced by the next day to produce a deal in support of expanding the bailout fund. According to the Washington Post, "opposition leader Robert Fico, head of the Smer-Social Democracy party, announced he had struck a deal with the remnants of Radicova’s coalition, promising to back the fund in exchange for early elections that analysts say Fico’s party is well positioned to win." Doubtless that pressure from the E.U. was also in the mix, as E.U. officials were already hinting that the bailout fund could be expanded over the tiny state's objection. “We call upon all parties in the Slovak parliament to rise above the positioning of short-term politics and seize the next occasion to ensure a swift adoption of the new agreement,” European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso said in a joint statement, according to the Washington Post. In other words, hey guys, get your act together over there in Slovakia or else.

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


Thursday, October 6, 2011

Foreclosing on Freddie and Fannie

Three years after the financial crisis of 2008, nearly half of the people in Arizona with mortgages owed more than their homes were worth; those people were “underwater.” Only three homeowners had been approved for debt reduction since the debt-reduction program in Arizona began in September 2010. “It is extremely difficult for the principal reduction program to be successful” when Fannie and Freddie opt out, according to Shaun Rieve of the Arizona Department of Housing. Even though Arizona would pay up to half of the principal reduction, up to $50,000 of a $100,000 principal reduction, the two housing entities that were taken over by the U.S. Government have been obstructing taxpayers from re-emerging from “underwater.”

The full essay is at "Foreclosing on Freddie and Fannie."

Wednesday, October 5, 2011

The Tyranny of the Veto: Syria’s Friends at the U.N.

Russia and China vetoed a U.N. Security Council resolution on October 4, 2011, effectively tossing a life preserver, according to the New York Times, to Syria’s president. The toothless proposal would have condemned the Syrian government for its violent crackdown of popular protests in which more than 2,700 had been killed. The proposal’s language had been softened from targeted financial sanctions; the council would merely have been charged with considering unspecified measures after a 30-day period. Two reasons can be cited for the two vetoes: commercial ties and a vested interest in forestalling any more threats to the doctrine of national sovereignty.

The veto-provision itself of the Security Council can be questioned here, as it allows allies to protect even a government that has, in the words of Gérard Araund of the E.U., lost its legitimacy in the world. The New York Times reports that the arms contracts that Russia had with the Syrian government at the time of the vetoes were valued at $4 billion. “Beyond jet fighters and tanks, Russia has varied interests in Syria, like oil and gas and cement.” Russia is Syria’s fifth largest trading partner. Accordingly, Russia’s foreign minister issued a statement condemning extremists in Syria who were engaging in “open terror” through violence. Russia was betting on Assad. Aleksandr Shumilin, director of the Center for the Analysis of Middle East Conflicts, told the media that as “soon as it seems that the opposition has become comparable to [Assad] in strength and there appears a possibility they will win, Russia will change its behavior.” One could add that such a change would occur if and only if Russia’s commercial interests with Syria are threatened. This approach is known as realism in international relations. States pursue their own strategic interests internationally, taking for granted rather than challenging the system of sovereign nation-states that permits realism to be the driver even though it does not take into account the broader public good.

The continued hegemony of the nation-state system and the impact of realism are both evident from the fact that even such a weak proposal could successfully be blocked against a government that had killed over 2,700 unarmed protesters. The message being sent by the U.N. is that a government can use its claim to legitimate force pretty much any way it wants. Put another way, an implication from realism in a nation-state system is that the U.N. is merely a conference, or discussion, without much attention to the broader (i.e., international) system of governance, at least in so far as the Security Council is concerned. We are thus left in a Bodinian/Hobbesian world wherein every government is looking out for its own narrow interests, which allow for governments to turn against their people.

To be sure, opponents of the resolution did have a leg to stand on. They claimed that the no-fly-zone resolution on Libya had been abused by NATO bombing pro-Gadhafi positions even when no civilians were in danger. There was a sense in both Moscow and Beijing that the West had been using economic sanctions and military actions under U.N. auspices to further Western-friendly regime change. According to the New York Times, there “is a sense in both capitals that the West in general, and the United States in particular, is feeding the protest movements in the Arab world to further its own interests.” Both Russia and China are “determined to reassert their long opposition to anything that smacks of domestic meddling by outside powers.” Lest it be thought that this is for the protection of other governments or for national sovereignty as a virtue or ideal, Russia faced outside pressure concerning Chechnya and China has Tibet. In other words, the national sovereignty doctrine is a manifestation of realism, wherein international consensus is the result of narrow national interests rather than a view of the good of the whole.

In defending Assad with the doctrine that ultimately protects them, Russia and China must also deal with the inconsistency in letting Assad get away with his killing spree while Gadhafi had killed less yet been stopped. In other words, why does Gadhafi’s opposition deserve help while those against Assad are “extremists”? If abuse of the Libya resolution by NATO were really the problem, then Russia and China could have insisted that U.N. officials oversee any action to defend Syrian protesters and report regularly to the Council, wherein Russia and China could nullify the resolution by a veto if either government suspected any abuse taking place. In fact, the U.N. Secretary General could designate Russia and China as coordinating the operation. The U.N. should not have delegated the Libyan operation so much to NATO, but this does not mean that the same thing would have to be accepted in an operation against Assad.

Going beyond the strategic interests esteemed in realism, the question of international governance can be broached, particularly as there are several truly global issues (e.g., global warming). The development of communications technology means that wholesale human rights abuses occurring on the other side of the world can be instantly seen. Out of this greater awareness, a greater groundswell of opposition to unfettered national sovereignty can be expected, with implications for how international governance is structured.

Given the greater need for international governance, the U.N. should be reformed from a confederation to a modern federation such that a few friends do not have sufficient influence to block a resolution against an abusive government. The veto itself should be eliminated, though this might require that a new organization be formed in lieu of the U.N. Otherwise, we will be left with a world in which Hobbesian sovereigns are allowed to violate their citizens’ basic human right to life while friendly government officials attend to their countries’ respective financial and political interests at the expense of the system as a whole and the general good. I contend that enabling violent, abusive dictators is not in our good, so their friends ought not be allowed to prevent the international community from policing its basic standards. National sovereignty should be limited, just as international governance itself would be subject to constraints.

Sources:

Joe Lauria, “Russia, China Veto U.N.’s Syria Move,” Wall Street Journal, October 5, 2011. http://online.wsj.com/article/SB10001424052970204524604576611443084688006.html


Neil MacFarquhar, “With Rare Double U.N. Veto on Syria, Russia and China Try to Shield Friend,” New York Times, October 6, 2011. http://www.nytimes.com/2011/10/06/world/middleeast/with-united-nations-veto-russia-and-china-help-syria.html

Tuesday, October 4, 2011

Deficit Reduction and Tax Breaks: Rhetoric and Priorities

Actions speak louder than words. A tree is known by its fruit. Where your treasure is, therein lies your heart. These three sayings each have at their root a value on integrity or authenticity that cuts through purported assertions designed to manipulate or otherwise mislead. Integrity here is consistency between word and deed.

When members of Congress cry that the sky is falling under the weight of the deficits and accumulated debt of the U.S. Government, one might ask whether the representatives and delegates really view the fiscal imbalances as so dire. If someone calls a friend to say that his house is about to explode but does not act accordingly, such as in running out of the house rather than finishing dinner, it is reasonable to doubt that the homeowner really believes that a blast is imminent. In protecting tax breaks even amid a deficit of over $1 trillion, members of Congress belie their own warnings concerning the American public debt crisis. For a crisis does not admit the luxury of granting the status quo a continuance. In other words, if the elected officials really did view the trajectory of deficits as unsustainable, continuing the tax breaks would be off the table. In protecting constituent interests by them, a member of Congress is saying that the deficit/debt problem is not really a crisis. Similarly, by the way, in insisting that spending but not revenues should be the only avenue, a legislator is saying that the deficit is not so much of a threat that all means should be engaged to reduce it.

So when the U.S. Senate Republican leader, Mitch McConnell said he is open to ending tax breaks for special interests, he undermined his own statement as well as any claim that the deficit must be significantly reduced when he argued that the tax break that he secured in 2008 for the owners of thoroughbred racehorses is essential for the protection of jobs in Kentucky. Of course, the financial interests of racehorse owners are not necessarily in line with—or reduce to—the protection of jobs. So even here, subterfuge may be the name of the game. The same can be said of Senator John Kerry, Democrat of Massachusetts, who claimed to want to eliminate tax breaks except for a proposal for a tax cut for small breweries, such as Samuel Adams in Boston. The deficits must not be such a big problem if we can afford additional tax cuts. The New York Times points out that mega-wealthy “operations like oil refineries, Hollywood productions and hedge funds have all profited.” The tax breaks for industries in general add up to an estimated $123 billion a year—hardly chicken feed.

The New York Times claims that the “disconnect between the lawmakers’ words and deeds reflects the hurdles that Congress and the White House face as they look to cut at least $1.2 trillion from the nation’s debt. Talk of cutting tax breaks to raise money and reduce the debt has become a mantra in Washington, but it threatens sacred ground: such breaks are a favorite tool among both Republicans and Democrats to reward supporters and economic interests in their home states.” Given Fed chief Ben Bernanke's remarks on October 4, 2011 before the Joint Economic Committee of Congress that even reducing the debt by $1.2 trillion would not be enough, talk of protecting favorite tax breaks undercuts any claim that the public debt is a dire problem. To be sure, obviating another recession was also on Congressional minds. However, even as he was urging Congress to act in order to avoid a double-dip recession, Bernanke said of deficit-reduction efforts, "More will be needed to achieve fiscal sustainability." That is to say, the U.S. Government could lose even its AA rating. Risking this by protecting local interests is short-sighted; it is like a biker accelerating down a hill while looking only a few feet ahead. We might save a few deck chairs for weary passengers, but what about that iceberg ahead? Is anybody even looking?

I contend that we, the electorate, ought to accord claims of crisis as valid if sacred ground is given up. “Whether any of [the tax breaks] are scrubbed from the books may ultimately prove how serious Congress is about reducing the debt.” It is the price of admission, as it were, to having a legislator’s claim of a serious problem being recognized as authentic rather than as possibly just hyperbolic, attention-getting rhetoric.

Without a verifiable indication of some actual give on a sacred cow, a legislator should be told, “prove it!” regarding his claim on the “need” to reduce the deficit in order to avert a crisis. If no such sacrifice is proffered and made, then the politician ought to be ignored as if he or she were crying wolf. Otherwise, we enable two-faced Janus behavior that undermines public confidence in the government and misleads us into being too confident that the serious problems are being solved. The American electorates as well as the media companies are perhaps too accustomed to letting our elected legislators off the hook by taking their words at face value as if they were self-validating. In the case of the U.S. Government’s continuing deficits and accumulated debt, the United States can ill-afford other priorities (even in terms of presumed GNP and job increases) coexisting antithetically with the baleful platitudes of crisis if the imbalances truly are unsustainable and a danger to the American union and its republics. That is to say, given the magnitude of the problem, the members of Congress should be held closer to account in terms of deeds matching words. Priorities, the making of which is part of the job of a legislator, should match the rhetoric in front of the cameras.



Sources:

Ron Nixon and Eric Lichtblau, “In Debt Talks, All Tax Breaks Are Not Alike,” New York Times, October 3, 2011. http://www.nytimes.com/2011/10/03/us/lawmakers-want-to-end-tax-breaks-if-they-can-agree-what-they-are.html

Jon Hilsenrath and Luca Di Leo, "Bernanke Issues Warning, Urges Action on Economy, Wall Street Journal, October 5, 2011. http://online.wsj.com/article/SB10001424052970204524604576610712269716064.html




Friday, September 30, 2011

U.S. Government: Education Over Immigration

On page A16 of the New York Times issue of September 29, 2011, two stories read side by side make an interesting point concerning the plight of American federalism. Campbell Robertson reports that Alabama won a ruling by a federal judge on the republic’s immigration law. Across the page, Mark Landler reports on Barak Obama’s visit to a local high school in Washington, D.C.

“Our country used to have the world’s largest proportion of young people with a college degree,” the president said. “We now rank 16th. I don’t like being 16th; I like being No. 1.” The last sentence in particular is revealing if one takes it in a broader sense. Barak Obama likes being No. 1. He likes being the center of it all—I suppose like New York City relishes being in the center of the universe. So it is of little consequence to the president that education is not among the federal government’s enumerated powers.  Even by going to a local school, Barak Obama instantiates the federal government’s encroaching nature, albeit for a good cause. He did not stop with education policy; he lapsed onto a parental role of sorts, saying, “I want all of you to set a goal to continue your education after you graduate.” Interlarding himself in the students’ families, he told the students how they should react to their parents. “Don’t give them a hard time when they ask you to turn off the video games, turn off the TV and do some homework,” he urged. Lest it be thought that this is simply some good-natured remarks by a father who undoubtedly cares about kids, it was the second day in a row that he had spoken at a school. In other words, the over-reach involves an opportunity cost.

It is not as though the president of the United States has a lack of things needing his attention within the enumerated powers of the U.S. Government. In fact, state officials have felt the need to step in to take up the slack concerning the U.S. Government’s failure to adequately enforce immigration law. But in what would be a twisted character flaw in a person, the federal government has fought such assistance while continuing to encroach in domains such as education. It is as if the person in charge of an association’s club house were resisting cleaning help by some of the members while going into their houses to take over their roles there. It is not as though the Obama administration were so consumed with visiting local schools that it would not have time or resources to resist state-level assistance on immigration. Moreover, it is not as though the administration were so focused to improve its own enforcement efforts that it didn’t have time or resources to involve itself in education and fight the states on immigration. The administration is making things far too difficult for itself as well as for others.

So while the president was acting as parent in chief at a local school, his administration lost a case in federal court against Alabama’s immigration law enforcing the federal law. Among other things, the Alabama law “nullifies any contracts entered into by an illegal immigrant.” Another section “forbids any transaction between an illegal immigrant and any division of the state,” and still another section “requires elementary and secondary schools to determine the immigration status of incoming students.” Nothing here violates or nullifies federal law; in fact, Alabama is helping said law. The motivation that resists help can and ought to be questioned. It is not as though states implementing federal law is unheard of. In the E.U., it is common for the states to be required to implement E.U. directives. If states cannot be trusted to implement federal law, why have a union at all? With respect to immigration, the orientation of every government in the American federal system ought to be to minimize illegal aliens within these United States. Fighting among ourselves, governmentally, only gives the law breakers more wiggle room to get through and live within the United States illegally—even enjoying benefits of citizenship without being citizens.

So rather than being educator in chief or parent in chief, the U.S. President ought to keep to his knitting—especially as there are some holes in it! Nor is he in a position to refuse help. Otherwise, the resultant encroaching nature of the general government will totally eviscerate American federalism with a one-size-fits-all imposition at the expense of the inherent diversity that exists in an empire-scale union.


Sources:

Campbell Robertson, “Alabama Wins in Ruling On Its Immigration Law,” New York Times, September 29, 2011. http://www.nytimes.com/2011/09/29/us/alabama-immigration-law-upheld.html

Mark Landler, “Obama Urges Students to Set Their Sights on College,” New York Times, September 29, 2011. http://www.nytimes.com/2011/09/29/us/politics/president-obama-urges-nations-students-to-set-sights-on-college.html

Tuesday, September 27, 2011

The Debt Crisis: A Conflict of Interest Hampers the E.U.’s Response

“As the European Union enters a financial crisis in slow motion,” a Huffington Post reporter avers, “the fragile American economic recovery hangs in the balance. With Greece almost certain to default on its debt, European political leaders need to take decisive action to prevent a resultant string of bank runs and government defaults, which could precipitate double-dip recessions in Europe and the United States.” If Greece suddenly defaults, Kavoussi reasons, other E.U. states “could leave the European Union to flee higher interest rates and to enable themselves to pay down their debt more easily by devaluing their currencies.” Such an outcome, she claims, “would almost certainly plunge Europe into a recession.” She observes, moreover, that “European politicians may lack the political will necessary to prevent the sovereign debt crisis from mushrooming into a global economic slowdown.”
 

The complete essay is at Essays on Two Federal Empires.

Friday, September 23, 2011

Meg Whitman at HP: Leader or Manager?

Referring to the appointment of Meg Whitman as CEO of HP, Ray Lane, chairman of the board, said, “We are at a critical moment and we need renewed leadership to successfully implement our strategy and take advantage of the market opportunities ahead.” On both scores, Lane was actually referring to management rather than leadership. Even the setting of strategy is within the purview of management, as in strategic management; implementing a strategy is the epitome of management. Similarly, recognizing market opportunities is strategic in nature, and thus a function of managing a company as a whole.

Material from this essay has been incorporated into The Essence of Leadership: A Cross-Cultural Foundation, which is available in print and as an ebook at Amazon. 


Wednesday, September 21, 2011

Bank One: Adding to Systemic Risk

How soon we forget. How soon the financial crisis in September 2008 was relegated or even forgotten. Exactly three years later, the New York Times reported that Republicans have been repeatedly invoking the Dodd-Frank Act’s 848-page length and rules on trading derivatives and swaps as instances of government overreach at the expense of much-needed jobs. “Dodd-Frank is adding safety margins to the banking system,” according to Douglas Elliott at the Brookings Institution. “That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer.” To scrap the new law in order to save few jobs would thus be short-sighted even with regard to jobs.

The New York Times points out that the Dodd-Frank law “aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff.” The banks themselves cannot be relied on to forestall such “cliff-diving” because they are looking out for their own financial interest rather than at the viability of the financial system as a whole.

For example, at the Federal Reserve hearing on September 20, 2011 on Capital One’s proposed takeover of ING, John Finneran, Capital One’s general counsel, said the “acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system.” But the combination would have around $200 billion in deposits (moving the bank from No. 8 to No. 5 in the U.S.), which the New York Times claims raises “questions about the deal’s impact on customers and the broader economy.” John Finneran’s claim of lower risk, being self-serving to the bank, requires further support. To be sure, he did argue that the deal would “not lessen competition or result in any undue concentration of resources.” But he is thinking in terms of restraint of trade more so than systemic risk. Regarding the latter, John Taylor of the National Community Reinvestment Coalition, pointed to the risky subprime loans in the bank’s credit card portfolio. Before the hearing, he had asked, “We already have four too-big-to-fail banks. Why make a fifth?”

That the proposal to carve up the four $1 trillion plus banks was summarily dismissed as Dodd-Frank was being written (with the help of the banking lobby, which Sen. Durbin said still owned Congress) was apparently not enough; preventing an increase in the number of mega-banks too big to fail would still go too far, at least from the vantage point of the banks and, presumably, the Republican party as well. This view was expressed by Dan Tarullo, a Federal Reserve governor. “While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks.” I contend that Tartullo’s stance is wrongheaded and even dangerous.

The continued existence of banks with assets of over $1 trillion is itself allowing for enough systemic risk to tank the system. Increasing such risk by permitting Bank One to continue “amassing a big national banking franchise” ignores the risk of there being too much systemic risk in the system already. It is highly unlikely that merely increasing capital requirements for the biggest banks and providing for their possible liquidations has reduced the systemic risk in the system to a tolerable level. Therefore, the last thing we should be doing is adding to such risk by enabling another giant to form.  We do have control over whether more systemic risk is loaded on the system, unless we want to pretend that the concern itself is government encroachment on banks that are somehow no threat to the system itself. Is it too much to ask for some learning curve in the wake of September 2008, or is history destined to repeat itself from short-sightedness and continued greed? That the anti-regulation argument has been made at all in the three years following the financial crisis of 2008—as if in utter denial—does not bode well for American democracy (or plutocracy).



Sources:

Edward Wyatt, “Dodd-Frank Act a Favorite Target for Republicans Laying Blame,” New York Times, September 21, 2011. http://www.nytimes.com/2011/09/21/business/dodd-frank-act-is-a-target-on-gop-campaign-trail.html

Ben Protess, “Capital One Denies ING Takeover Would Make It ‘Too Big to Fail’,” New York Times, September 21, 2011. http://dealbook.nytimes.com/2011/09/20/capital-one-defends-ing-direct-deal/


Monday, September 19, 2011

Taxing A Few Millionaires: Symbolic?

 According to the Wall Street Journal, the top 1% of U.S. taxpayers had 19.4% of the total income in 2007 and paid 28.1% of all federal taxes. In 1987, the top 1% had 11.2% of the total income and paid 16.2% of all federal taxes. In other words, the share of total income going to the wealthy (income over $353,000 in 1987) and the share of federal income taxes they paid increased. That the poverty rate hit 15% in 2011 while the real wages of the middle and lower classes were back to mid-1990s levels suggests that the rich were getting richer as the poor were getting poorer. That is to say, income and wealth inequalities were increasing. With the top 1% having more in income and the lower 60% taking in a smaller share, it makes sense that the top 1% would pay a larger share of the total federal income taxes. The question is whether the increase in taxes was sufficient, considering the increased amount of income. The 15% rate on dividends and capital gains put in place during the second Bush administration suggests a negative answer. According to the New York Times, “many wealthy Americans pay considerably less because their earnings are derived from dividends or capital gains.” Also, advantageous itemized deductions are more likely to be useful to a wealthy taxpayer, enabling a lower effective rate lower than that of a middle-class taxpayer.


There is another reason why 28.1% of all federal taxes may be too low for those who earn nearly 20% of all income. The income of those taxpayers near or below the poverty line may be exhausted by sustenance expenses so it could be argued that no tax ought to be paid on said income. Few if any low-income taxpayers benefit from itemizing deductions. It could be that the standard deduction (and exemptions) are not sufficient to reflect the actual and necessary expenses—especially relative to income. So to claim that the bottom 1% should pay the same share of taxes as the top 1% ignores the fundamental difference between surplus and necessity. In other words, not everyone’s income should be taxed. The symmetry of a bell-shaped curve does not apply because the incomes at the respective tails are qualitatively (i.e., not just quantitatively) different (e.g., relative to survival).

As for the effective rates, the unjust inversion with the middle class is not universally the case. For example, the top 400 taxpayers saw their effective federal income tax rate drop from 29% in 1993 to 18% in 2008. By comparison, households with income between $50,000 and $75,000 had an effective rate of 15% in 2008. These are averages, so there were doubtless cases of inversion where middle class taxpayers had a higher effective rate than wealthy tax payers. Depending on restoring justice to such cases does not go far enough in deficit reduction. That is to say, as just as it is, making sure millionaires are at least at the effective rate of the middle class may not go far enough, considering the seriousness and magnitudes of the U.S. deficit and accumulated debt. Given the sheer magnitudes, those who can afford to contribute more should be required to do so. It is doubtful that merely correcting for the effective rate injustice on a case by case basis would go far enough.

In 2009, for instance, 238,000 households filed returns with adjusted gross incomes of at least $1 million. Twenty-five percent of them paid an effective federal income tax rate of less than 15 percent, and 1,470 paid no federal income tax at all. Although the money involved dwarfs the number of taxpayers concerned, focusing on this “effective rate” injustice need not blind us to the fact that the increase to the treasury would fall well short of what is necessary to eliminate a deficit of over $1 trillion (not to mention paying down a debt roughly equal to the annual GNP of the U.S.). A macro justice matter concerns the role of the wealthy in reducing the deficits and debt—beyond the question of effective rates to address the inconvenience to the wealthy versus the pain from cuts to the poor.

To claim that the effective tax rate on the top 1% or even 5% of all taxpayers should be higher than the rates on lower incomes is not “class warfare.” Neither is the claim that those who can afford to contribute more money to reduce the deficit (and debt). The notion that those who can afford to contribute more follows from the principle that those who have means, rather than those who do not, should be relied on disproportionately, given the qualitative difference between surplus and sustenance. To suggest that everyone except those who are able should sacrifice to reduce a deficit is antipodal to the ethical principle of fairness. In other words, it is unfair to try to squeeze blood from a turnip while leaving the watermelons alone.

As easy as it may be to get bogged down on the percentages and dollar amounts, charts and graphs, pros and cons, the debate about taxation, spending cuts, and deficit reduction comes down to values. This is why the debate can get so heated, only we don’t take the cue and cut to the chase. We are perhaps too instrumental and utility-oriented; we miss the broader question of what we as a society value—who we are—things that are even if we don’t make it explicit. I submit, therefore, that the final paragraph below is much more significant than any of the figures and analysis above. Statistics can be manipulated to support virtually any point, whereas values go to the core in defining a society and its members.

A society that cuts its way to eliminating a deficit is saying something quite different regarding itself than a society that includes a solidarity tax on the wealthy. Solidarity itself can mean different things to different people, particularly when self-interest is consulted. How do we weigh society as dog-eat-dog relative to society as solidarity? In other words, is solidarity something more than society as an aggregation? Is it ethical to exempt the rich from paying more while making cuts to the sustenance of the poor? Is solidarity implicit or renounced in extending the Bush Tax Cuts while cutting food stamps and unemployment compensation? Do we go to the alter in the name of the trinity of Me, Myself, and I, or of the solidarity of my brother and me? Squaring the values in a Trinitarian “cuts only” approach with teachings ascribed to Jesus of Nazareth regarding the poor (and the rich man) seems a bit like getting a camel through the eye of a needle. It is from such questions, rather than simply measuring differences in effective rates and counting dollars—and even eliminating minor injustices—that the answers may be found. Are we afraid to look in the mirror, for fear of we might find—possibly too much comfort with convenience, with selfishness, or even pettiness? If we don’t like what we see, can we change?


Sources:

John D. McKinnon, “Millionaire’s Tax To Be Tough Sell,” Wall Street Journal, September 19, 2011.http://online.wsj.com/article/SB10001424053111904106704576579082751681762.html?mod=googlenews_wsj

David Kocieniewski, “A Tax Others Embrace, U.S. Opposes,” New York Times, September 21, 2011. http://www.nytimes.com/2011/09/21/business/obamas-tax-on-millionaires-faces-obstacles.html




Monday, September 12, 2011

Fiscal Training-Wheels for the E.U.

The government of the E.U. state of Greece announced on September 11, 2011 that its cabinet had decided to impose a new property tax to cover a 2 billion euro ($2.7 billion) projected revenue shortfall for the year. The government expected the state to meet its deficit goals of 17.1 billion euros (8.2% of GDP) in 2011 and 14.9 billion in 2012. Earlier in September, talks between the state government and the E.U. Commission, the European Central Bank, and the International Monetary Fund had broken down in a dispute over whether Greece had done enough to meet its deficit targets. Pressure to assuage the “troika” amid popular protests in Greece apparently trumped questions on the legitimacy of a tax increase enacted by a cabinet without the approval of the state legislature.

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

Sunday, September 11, 2011

Corporate Federalism: AOL

Citing twelve past and present AOL employees, the Wall Street Journal characterizes AOL as a “culture of clashing fiefs and personalities created by a rapid series of acquisitions that haven’t jelled.” Just in managing the likes of Michael Arrington and Arianna Huffington, Tim Armstrong has had his hands full as CEO. Both Arrington and Huffington have been streadfast defenders of editorial independence in their respective units, even as Arrington has started a venture capital firm partly financed by AOL to invest in tech firms even as Arrington’s division at AOL, TechCrunch, writes on technology firms. The problems for AOL go beyond acquiescing in a structural conflict of interest of TechCrunch writing on particular tech companies while investing in some of them but not others. The Journal cites a person familiar with AOL as saying that Armstrong “had a macro vision that was right but didn’t have the right plan to implement it.”

In terms of corporate governance and leadership, vision is determined or decided on by a board of directors while the CEO is charged with devising and implementing a plan or strategy based on the vision. Too often, the vision is associated with the CEO simply because he or she enunciates it. Selling the vision is perhaps better handed by the president, who ideally presides over the management (i.e., representing the board). Even if the CEO is tasked with coming up with and selling a vision, he or she is better suited as chief executive to formulating and implementing a strategy or plan.

At AOL, the board should have focused on changing the corporate vision (and holding the management accountable on devising and implementing a strategy), while Tim Armstrong should have focused less on vision and more on coming up with a better strategy. At some level, the clash of egos that is involved in integrating or coordinating acquired businesses that had been stand-alone is itself a formidable task for any CEO. Reconciling or constraining previously-autonomous editors in the interest of corporate coordination without creating conflicts of interest is a difficult task. Personalities can exacerbate the difficulty involved in the turf wars.

AOL might be a good candidate for a federal system of governance, wherein publishing units need some autonomy from the pressures of corporate coordination. In such a system, each division or acquisition is like a semi-sovereign state with some autonomy from the general government. Editors at TechCrunch and the Huffington Post could use this limited autonomy to protect their respective publishing units from being swayed by financial interests either of another division or AOL as a whole. At the same time, AOL’s enumerated powers could give it the ability to achieve synergy from the otherwise disparate divisions. These domains should be such that conflicts of interest are obviated.

The key to such a corporate federal system of governance would be having a “third party” within the company or perhaps consisting of outside directors to hear contested cases of division or company over-reach. It could be that such a judiciary consists of an equal number from headquarters and the divisions, or of outsiders who are not even on the board—though the problem of aligning incentives to the long-term interest of the company would have to be addressed. 

The federation form—similar to the Japanese conglomerate “family” of businesses centered around a banking division though with each division having some autonomy from headquarter—is perhaps ideally suited to a publishing company in which pressure exists to tailor articles to particular companies favored financially by a division or the publishing company as a whole. In other words, reconciling editorial freedom (and credibility) with the synergy possible from corporate coordination (otherwise why make the acquisitions in the first place?) may be well-suited to the federal form wherein the parts and whole each of some areas of autonomy from the other. The limited autonomy itself must be in the stockholders’ long-term financial interest; this is not difficult, as sacrificing editorial freedom for immediate financial gain is typically detrimental in the long run. AOL’s vision should include such matters as governance structure as long as the company retains separate though related publishing enterprises.


Source:

Jessica E. Vascellaro and Emily Steel, “Culture Clashes Tear at AOL,” Wall Street Journal, September 10-11, 2011. http://online.wsj.com/article/SB10001424053111904836104576558993970961586.html?mod=WSJ_hp_LEFTWhatsNewsCollection