ECB Bond-Buying: Democracy Deficit

In September 2012, the European Central Bank unveiled the Outright Monetary Transactions program in which the central bank would purchase bonds from debt-laden E.U. states that use that euro and agree to “strict and effective” budget policy. The bank’s head, Mario Draghi, insisted that the program is within the bank’s mandate to protect the value of the euro. Indirectly, if a state government that uses the euro were to default, the currency itself would face downward pressure that could cascade into the collapse of the currency.

Will the ECB be the one to save the euro?     Estonian Free Times

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

Aid to Egypt vs. Paying Down Debt

The debt of the U.S. Government—some $16 trillion in 2012—can be difficult even to grasp conceptually. One does not run into a trillion of anything in daily life, much less sixteen times a trillion. Without any tangible examples that can give us some inkling of the magnitude of the number, “sixteen trillion” can easily become a number one rattles off as if a “oh, by the way,” as in, “Oh, by the way, that sort of number will never be paid off.” One can point to the debt as a symptom of a systemic imbalance, as in that of consolidation over the constitutional federalism. That is to say, the magnitude of the debt can point to the lack of limitations facing Congress in its appropriating capacity. It could be argued that the ballot box is such a limitation, but what if the electorate themselves have a similar imbalance in terms of spending what they don’t have. With student loan debt at $1 trillion as of 2012 and a third of the amount in default, the federal debt can easily be seen as a manifestation of a more basic or fundamental imbalance of the psyche that transcends yet subtly fuels policy.

 

 

In reading of the Obama administration’s preparation of a pact to cut $1 billion from what Egypt owes the U.S. Government for agricultural purchases, I was stunned to read that “money that would otherwise pay down the American debt” would instead be spent on “training and infrastructure projects in Egypt intended to attract private investment and create jobs.” To be sure, rising unemployment in Egypt could undermine the democratically-elected Morsi government, so a strategic argument could be made on behalf of the American aid. However, the almost cavalier attitude toward paying down the federal debt is rather strange, and misplaced, given the gravity of the problem. Put another way, to put a strategic objective primarily oriented to the unemployment of a state that is not in the U.S. above paying down U.S. debt can be viewed as a questionable priority. It seems to indicate a desire to fix another’s problems at the expense of making a dent in one’s own. The scenario of the homeowner who lets his own grass grow out of control yet lends his mower to his neighbor whose lawn is has become “unbecoming” captures this sort of mentality.

 

In short, the debt of $16 trillion can be read as a mirror of sorts of a certain mentality—one that falls far short of that which a virtuous and responsible citizenry would have. It is no accident that Jefferson and Adams agreed in their later correspondence that such a citizenry is necessary for a republic to remain viable.

Source:

Steven Myers, “U.S. Is Near Pact to Cut $1 Billion from Egypt Debt,” The New York Times, September 4, 2012. http://www.nytimes.com/2012/09/04/world/middleeast/us-prepares-economic-aid-to-bolster-democracy-in-egypt.html?pagewanted=all

 

Facebook Holds Employees to Declining Stock

With Facebook’s stock trading at $17.73 a share just after Labor Day 2012, down more than half from the IPO issue-price of $38, further downward pressure was anticipated due to the upcoming expirations of the lock-up. Employees would be able to cash in approximately 220 million shares at the end of October, 780 million shares in mid-November, and still more in December and then in the following May 2013. Experts were not putting much stock in Mark Zuckerberg’s decision to hold onto his options for at least a year. Rather than trying to assess the impact of the downward pressure on where the price might go, a business ethicist would be apt to notice a subtle point of fairness by class pertaining to when the options can be sold.

                                                                                     
The full essay is at Taking the Face Off Facebook, available at Amazon.

Bulgaria Shrugs Off the Euro

In early September 2012, Reuters reported that Bulgaria had “abandoned plans to adopt the single currency in response to deteriorating economic conditions and rising uncertainty over the prospects of the European Union. Finance Minister Simeon Djankov was quoted as saying as much.  Bulgaria was at the time the poorest state in the E.U. (similar perhaps to Mississippi in the U.S.). It is significant that Bulgaria was one of the least indebted states and was “trying to stick to tight fiscal discipline to avoid risks to the lev currency, which [was at the time] pegged to the euro.” In this regard, Bulgaria was like Finland and Germany in that it faced the prospect of paying for other states’ profligacy and lack of self-discipline. From this vantage point, it makes perfect sense for Bulgaria to demur. However, the perspective may be short-sighted in another respect. Specifically, Bulgaria risked missing the boat on the E.U.

The full essay is in Essays on the E.U. Political Economy," available in print and as an ebook at Amazon.

The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
 

On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
 

On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
 

It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.
 

Source:

Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp

 

Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.

Source:

Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business

No Guilt at Citibank

In the days leading up to Labor Day 2012, Citigroup announced that the bank would pay $590 million to settle a class-action lawsuit by stockholders who contended that the bank’s management as well as some directors had misled the stockholders about the bank’s exposure to subprime mortgage debt in 2007. The bank had used improper accounting practices to show an inflated asset base. The shareholders claim that the bank assured them that it had sold billions of dollars in collateralized debt obligations based on subprime mortgages. However, the bank had actually guaranteed the securities against any losses. To further disguise the risks to the stockholders, the bank moved the guarantees to separate entities. Unfortunately, the settlement is insufficient as a means to thwart banks such as Citibank from misleading investors. Legislators might want to look at two reforms in particular.

The full essay is at "No Guilt at Citibank."

See: Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

The West Crawling on Syria

Those who laud the efficiency of the market mechanism are particularly wont to point to the slow mechanizations of government machinery. Cautiousness along with a subtle bias in favor of the status quo may be the culprit. For example, after perhaps a year of urgings by Western governments for Assad of Syria to step down, finally a lone governor of a large E.U. state ventured to say that his state would recognize Assad’s opposition as the legitimate government of Syria. “France asks the Syrian opposition to form a provisional government — inclusive and representative — that can become the legitimate representative of the new Syria,” Francois Hollande was quoted by news agencies as saying on August 27, 2012 during a speech at the Élysée Palace. “France will recognize the provisional government of Syria once it is formed.” It is perfectly reasonable to ask whether the statement would make any difference in Syria.
 

Part of the reason why European states formed a union was because a united front would have more power both economically and politically. Were the E.U. Parliament to offer to recognize Assad’s opposition as the legitimate government of Syria, the announcement would have more punch behind it. This is why the American states consolidated their foreign-policy power at the union level. Simply put, the world would be more likely to deem it as important.
 

Beyond the question of whether the E.U. should take on a greater role in foreign policy (the union does have a foreign minister) is the matter of why Western governments were so reluctant (or slow) to recognize Assad’s opposition as the government of Syria. American officials had stated that Assad had lost the right to rule because his government had turned on so many Syrian civilians in killing them. The recognition of another government is more or less implied. Why not make it official? Why hold on so to the status quo, even after it has been deemed to be illegitimate?  Put another way, why must so many people be killed before even an implied step is taken?
 

Strategic concerns typically weigh heavily in the formulation of foreign policy. The possible reactions of China and Russia were no doubt salient in the calculations of the foreign policy experts at the time. Even so, it seems that too much cautiousness (i.e., avoiding even a low-probability negative reaction) goes with the calculating orientation itself in the formulation of foreign policy, which can be at the expense of common sense. If Assad was no longer held as the legitimate ruler of Syria, it follows that some other person or group could (and should) be recognized as legitimate. Furthermore, that such recognition would trigger Russian military retaliation should have been regarded as a stretch at best. The result of the excess cautiousness is that Russia and China were essentially able to proclaim the status quo as the default (a default whose legitimacy had been explicitly refuted in the West).
 

Put another way, the desire not to rock the boat even just a bit by paddling can be self-defeating if the boat is filling up with water. The mechanism by which Western governments formulate and implement foreign policy may be too mired in statecraft at the expense of not only common sense, but also the human rights of a people elsewhere in the world.
 

Source:

Kareem Fahim and Rick Gladstone, “France Says It Would Recognize Provisional Syrian Government,” The New York Times, August 27, 2012. http://www.nytimes.com/2012/08/28/world/middleeast/rebels-claim-to-shoot-down-syrian-helicopter.html?_r=1&ref=world

 

 

Foe of Glass-Steagall: Break Up the Big Banks

A few years after the financial crisis of 2008, Sanford Weill, the man behind the $70 billion merger of Travelers and Citigroup in 1998, urged the separation of investment banking from commercial banking. “Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” Even though banks had been able to exploit loopholes such that Glass-Steagall had essentially been eviscerated by the mid-1980s, Weill’s lobbying helped take down the law formally in 1999.

Weill might be illustrative of the saying, “be careful of what you wish for; you might just get it.” By enabling Citigroup to be a financial supermarket, he also made the bank “too unwieldy to manage, hunched over by the weight of disparate businesses with little in common and with byzantine corporate structures that made running the behemoth incredibly difficult,” according to the New York Times. In such a condition and yet too big to fail, the bank needed bailouts by the U.S. Government in September 2008. Referring to breaking up banks like Citigroup, Morgan Stanley and Goldman Sachs, Weill told CNBC on July 25, 2012, “I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Why this thinking had not gone into the Dodd-Frank Act of 2010 may point to the inordinate influence of the regulated on law-making affecting them.

In other words, the public interest in U.S. law may be dependent on business coming to the realization that additional regulation is in the firms’ own financial interest. This does not bode well for the public interest, being so conditioned. For the regulated do not normally have such an enlightened self-interest. In the case of Weill, he may have realized that especially with the incentives in Dodd-Frank, banks could be more profitable were they smaller. For example, the law requires additional capital reserves for the biggest banks. Nevertheless, greater profitability can result from losing the disproportionate costs of integrating disparate businesses in a huge financial supermarket or combination (this was Rockefeller’s name for Standard Oil Co, as it replaced competition with coordination via a monopolistic organization). Dodd-Frank comes up short even in terms of why being big may not pay.

So why, one might ask, did Weill want a financial empire in the first place? Even if empire-building does not pay off financially in proportional terms, running a bigger company can pay off in terms of experiencing the pleasure of power over others. Moreover, one can feel that one’s hackneyed managerial tasks (even as a  CEO) are somehow significant, if only in terms of getting into the headlines. In explaining big business, more than a financial calculator is necessary. In the end, the bankers’ resistance to Dodd-Frank breaking up the biggies may have come down not just to ignorance, but also to the lust for power (rather than merely for money). Whatever the dominant motive, it is pretty clear that Congress has been following in its wake rather than molding or channeling it from out in front.

Source:

Michael J. De La Merced, “Weill Calls for Splitting Up Big Banks,” The New York Times, July 25, 2012. http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/

South Korea’s President: Emblematic of a Culture of Corruption

Mired in corruption, President Lee Myung-bak of South Korea reflected on the matter on television in July 2012. “The more I think about it, the more it crushes my heart,” he said. “But whom can I blame now? It’s all because of my negligence . . . . I bow before the people in apology.” He had offered a similar apology the previous January during his New Year’s speech. Although Kim himself was not as of July implicated, three relatives, four senior staff, and several former senior officials in the cabinet and government-run companies had been indicted or convicted.

According to the New York Times, “The president’s brother, a former lawmaker, has been charged with accepting bribes from two bankers. Prosecutors said the bankers asked him to help prevent regulators from shutting down their banks. The bankers have been charged with embezzlement and bribery, and their banks’ operations have been suspended.” Moreover, Kim was just the latest in a series of South Korean presidents politically damaged by corruption scandals. It would appear that personal profiting from one’s governmental (or business) position was at the very least a part of the South Korean culture, if not tacitly accepted in government circles.

In my albeit rather limited association with South Korean business, I have found the organizational culture to be extremely hierarchical in the sense that officials at the top have near carte-blanche (i.e., near absolute) power from the perspective of their subordinates. Additionally, the underlings tend to cover up any mistakes or failures from their bosses, whose world is thus held as though in the clouds. In such a context, corruption can be rife.

It should be noted that the extreme psychological distance in the organizational world in South Korea is not without a basis in fact. The mentality of an employee at a customer service call center is oceans away from that of even a mid-level manager, who in turn can be distinguished from an organizational leader. Often times, only the latter has the maturity to relegate the red tape by prioritizing common sense and even just that which is natural in human-to-human interaction. It is not uncommon, for instance, for people used to a certain height to instinctively sense and relegate the gate-keeping games of the herd. I suspect that in South Korea, the latter know they are eons away from their superiors. The latter can use this natural distance to their own advantage in covering up bribery and kick-backs. To this extent, the distance assumed by the underlings is unjustified, even if on a general mentality basis it is fully natural (and justified).

Therefore, even though the corruption in South Korean government and business is hardly justified from an ethical standpoint, a Nietzschean would quickly point out that distance is natural, even necessary, for the strong such that they not become infected by the narrowness of the herd. In the West, the organizational creature can be rather insistent that its mentality must be binding even on those above. In South Korean culture, by contrast, a lower mentality may have a better sense of its place, and thus of the inherently limited nature of its reach. That is to say, the presumptuousness of the herd animal is checked, whereas it roams like an undisciplined child in the West. The question regarding South Korea is thus how corruption may be checked without tossing the baby out with the bathwater. 

Source:

Choe Sang-Hun, “South Korean President Apologizes for Corruption Scandals,” The New York Times, July 24, 2012. http://www.nytimes.com/2012/07/25/world/asia/lee-myung-bak-of-south-korea-apologizes-for-corruption-scandals.html?ref=world

Facebook Selling Users’ Personal Data: Unethical?

With advertising accounting for more than 85 percent of its revenue, Facebook has faced great pressure in the wake of its lackluster IPO to translate its unique asset, the pile of personal data it collects from 900 million users, into advertising revenue. I contend that Facebook’s handing over that data without first grouping it is unethical on a gut level.

The full essay is at "Taking the Face Off Facebook."

Economic Inequality in the U.S.: A Conflagration of Accumulated Dead Wood

According to the Congressional Research Service, the share of total net worth held by the less affluent half of American households dropped from 3.6% in 1995 to 1.1% in 2010. Meanwhile, the share held by the top 10 percent increased from 67.2% to 74.5 percent. That is to say, ten percent of the American population holds three-quarters of all of the wealth. The top 1 percent went from holding 30.1% to 34.5% of the wealth. According to the report, "Inequality is the term commonly applied to the concentration of total net worth among the relatively few households at the top of the wealth distribution." The study shows that inequality increased in the U.S. during the 1990s and 2000s.

Perhaps of all the statistics listed in the report, the one that leaps off the page as a harbinger of future problems in terms of democracy concerns the fact that half of the American population holds only one percent of the wealth in the United States. This means that half of the population has little at stake and therefore little to lose. It is a feat of the sheer breadth and depth of propaganda from the top one percent via the corporate media companies that the bottom fifty percent continue to buy into the system, figuratively speaking, rather than revolt. At the very least, to have half of a population excluded is dangerous, even if only potentially at the moment. In terms of quality of life, society itself would have a much better feel to it were the wealth not confined to 50 percent of the population (with the top ten percent of the population owning 75% of the wealth).

No one likes to have one’s property taken, even if one would not be inconvenienced by the removal.  Hence the dreaded term of “redistribution” is excoriated. However, trends such as those described above can come from systemic biases rather than by outright taking from the poor; similarly, a design could “lean” in the direction of economic equality without overtly taking from the rich. To be sure, the super-rich, or multi-billionaires, could legitimately be subject to direct redistribution because after a certain point a person’s additional wealth exceeds that which can be spent. To play investment games with wealth while half of a population goes without (including many without healthcare) can be subjected to critique as evincing a rather warped sense of priorities in terms of values.

Therefore, both the design of the American political economy and the assumption that no amount of wealth can ever be too much from the standpoint of societal values could be subjected to critique. Raising such basic questions after the twenty-year trend of increasing inequality could in turn be part of a wider societal awakening in the context of not only a new century underway by a decade, but also a new millennium. Even back in 2000, the recognition could have been that a new status quo should at least be attempted in a “spring cleaning” of sorts during the first decade of the new millennium. It was not already too late even in the second decade for a wholesale re-consideration by society at large of that which had been taken for granted in the status quo.

In addition to subjecting the corporate capitalist system and the related amount of economic inequality to a fundamental debate, a constitutional convention in each of the fifty republics, and one for the U.S. constitution itself could be called on the basis that a new millennium calls for fundamental re-examination of the status quo, which is no longer rightfully the default. For example, the long trend of declining federalism could finally be subject to a decision either to restore that system or make the de facto near-consolidation de jure too, constitutionally.

Admittedly, my suggestion is a pretty tall order, and therefore very unlikely to see the light of day. Instead, the unquestioned hegemony of the antiquated default is likely to go on, unthreatened by any societal awakening, especially from the half of society with a vested interest in upsetting the apple cart. Indeed, human nature itself my strongly favor tomorrow being rather like today, instead of being rid of all the dead wood (which can easily catch fire).

The 1988 fire in Yellowstone spread “like wildfire” in large part because of the years of Interior Department policy against allowing contained fires to incrementally consume the accumulating dead wood. Similarly, the dead wood of economic inequality (and political consolidation) renders the American empire extremely vulnerable. One indication of this sort of unthinking build-up is the $16 trillion imbalance represented by the debt being held by the U.S. Government as of 2012. The less tangible dead wood may be even more dangerous.

Once a fire starts (e.g., higher interest rates or small riots), it could quickly get out of control before anyone has any idea that the ship called America will founder as if by some mathematical certainty. Fifty-one percent on one end of a balancing scale is by definition a majority. To put it another way, what goes around comes around. Lack of concern for the other half is likely to have its own consequences, even if only for one’s posterity.

Source:

Dan Froomkin, “Half of American Households Hold 1 Percent of Wealth,” The Huffington Post, July 19, 2012. http://www.huffingtonpost.com/2012/07/19/households-wealth-american-1-percent_n_1687015.html#slide=more217997

Capital One: Enter Ethicist

The Consumer Financial Protection Bureau announced in July 2012 findings that a vender working for Capital One “had pressured and deceived” credit-card customers into buying products “presented as a way to protect” the customers from identity theft and hardships like unemployment and disability. In a related action, the Office of the Comptroller of the Currency required the bank to reimburse customers “harmed by unfair billing practices” from 2002 to 2011. The bank had billed customers even though it had failed to provide full use of the products sold. “Unfair and deceptive practices will not be tolerated,” Thomas J. Curry, the comptroller, said.

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

Poorest at Risk: U.S. States Cut Lifelines

“State finances are teetering with $4 trillion in unfunded liabilities to cover pensions and health care for state workers, along with revenue shortfalls, antiquated financial practices and skyrocketing Medicaid costs.” This according to the Huffington Post, based on a report in July 2012 by State Budget Crisis Task Force, which was organized by former Federal Reserve Chairman Paul Volcker (R) and former New York Lt. Gov. Richard Ravitch (D). Volcker and Ravitch said that unfunded state government pension obligations could total as much as $3 trillion, triple the $1 trillion estimate produced by the states. This is in addition to the $1 trillion in unfunded health care obligations for retired state employees. This does not include the rising Medicaid costs. The report notes that state governments have been borrowing to pay for operating expenses in order to comply with state constitutional mandates for balanced budgets. Those loans and the practice of shifting spending between budget categories make balanced budgets "illusory," the report said. Lastly, Volcker and Ravitch point out that "one-shot" financial measures are common in state governments, including those that pile up debt for the future.

The most striking thing concerning the finances of the states studied (California, Illinois, New Jersey, New York, Texas and Virginia) is the noted threat to the social order itself. "The thing that worries me is the threats to the social order," Ravitch told The Huffington Post, noting that "cultural and social bankruptcy precede financial bankruptcy." "You can't cut human services and cut the ability of government to take care of the people"—meaning without expecting the collapse of the social order. Such a slide tends to be gradual, sliding below the radar screen of the general public.

For example, during 2011 over 500 people in the U.S. died every week because they were without access to health care. That’s like having a full A380 (the double-decker jumbo-jet, larger than the 747) crash every week of the year, albeit without the headlines. The collapse of a social contract happens gradually, without much fanfare because enough of the electorate is unaffected.

Furthermore, the changes that led to an increased reliance on government entitlement programs by the most vulnerable in society were gradual as well. The increasing divorce rate beginning in the 1970s and the increasing geographical distance permitted by air travel during the last quarter of the twentieth century are just two factors making it less likely that families would care for their own. The daily demands of sustenance mean that charitable organizations could not possibly pick up the slack. As a result, government entitlement programs became the default. Compromising them without providing for an alternative could not but put the social order (a.k.a. social contract) at risk, even if this risk is not shared or even noticed by the majority of the electorate.

To obviate the collapse of its social order, a government would have to distinguish between sustenance programs and the other budget categories. To give but one simplistic example, a town can do without its municipal pool for a summer, but a homeless man needs food every day. Cutting ten percent from both categories ignores this vital distinction, and thus puts the social order at risk, even if people do not notice that the man is no longer sleeping on the bench but has died.

Source:

John Gelock, “Paul Volcker, Richard Ravitch Say State Budget Crisis Threatens ‘Social Order,’” The Huffington Post, July 17, 2012. http://www.huffingtonpost.com/2012/07/17/paul-volcker-richard-ravitch-budget_n_1677739.html

HSBC: A Bad Corporate Citizen

In a report issued by the Permanent Subcommittee on Investigations in the U.S. Senate on July 16, 2012, HSBC stands accused of helping Mexican drug cartels looking to get cash back into the United States, Saudi Arabian banks that needed access to dollars despite their terrorist ties, and Iranians who wanted to circumvent United States sanctions. These lapses by the largest financial institution in the E.U. are indicators of a broader problem, according to The New York Times, “of illegal money flowing through international financial institutions into the United States.” 

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