Tuesday, October 18, 2016

A Housing Bubble in China: A Rationale for Government Intervention

As of October, 2016, China was in the midst of a dizzying housing bubble. A month before, “economists at the Bank of China warned in a report that worsening asset price bubbles were adding to a frothy market that could result in trouble.”[1] Shanghai’s average housing price was up nearly one-third from a year before; prices in major cities like Beijing and Guangzhou were not far behind.[2] The recognition of the bubble—which does not come easily—should have triggered counter-cyclical measures by the Chinese government.

For example, the government could have increased the minimum requirements for down-payments and even increased tax on purchases of additional properties to counter the impact of speculators. Rumors alone of these measures was enough in 2016 for many couples to file for divorce “so that one partner could still be treated as an independent buyer” so as to be able to buy additional properties as investments.[3] That people would go to such an extreme based on rumors points to how carried-away market bubbles can get. For this reason, increasing the minimal down-payment and associated taxes even on a couple’s purchase of one property may not be excessive.

Adding to the difficulty in curtailing the boom was the “growing amount of American-style debt.”[4] Long-term household loans (mostly mortgages) doubled as a share of total official bank lending in 2016 through mid-October. In August, the loans accounted for about 40 percent of all new loans, contrasted with just 20 percent at the start of the year. The value of new home-loans as a percentage of all housing sales surged to a record high. Underground lenders were also feeding the boom. Unfortunately, the loans facilitated the role of speculators in the market, whom I submit play a crucial role in any market-bubble.

Unfortunately, the loans stemmed from the lending oriented to keeping the Chinese economy growing. As long as the government wanted to use leverage as a fiscal stimulus for the economy, clamping down on bubble-facilitating, long-term loans could only be difficult at best. Hence the need for tightened government-regulations making the loans less easy to get, especially but not limited to additional properties. One challenge for regulators in such a context is to enable the poor to become homeowners even as unnecessary home-buying is stymied until the bubble has been shrunk.  In other words, regulators should have distinguished home-ownership as a basic human right (and in this sense not a commodity) from home-ownership as an investment—and these two in turn from overall economic growth.

1. Neil Gough and Carolyn Zhang, “In China, Property Frenzy, Fake Divorces and a Bloating Bubble,” The New York Times, October 16, 2016.
2. Ibid.
3. Ibid.
4. Ibid.

Monday, October 17, 2016

U.S. Government adds $587 Billion to Its Debt in 2016: Revealing a Fault-line in Democracy

The U.S. federal-budget deficit for the fiscal year that ended at the end of September, 2016, represented a reversal on the six-year run of declining deficits. The $587 billion deficit is equivalent to 3.2% of GNP; the previous year’s deficit had been $438 billion, which is 2.5 percent of the GNP.[1] The underlying reason for the altered trend has to do with democracy itself—something notoriously difficult to budge.

The revenue loss from the extension of tax breaks for businesses and individuals, plus the refusal of Congress to “pair the tax cuts with some tax increases on wealthy Americans” is the immediate cause.[2] To be sure, President Obama’s proposed tax could be viewed as being unbalanced given the emphasis on the wealthy; refuting this imbalance came at the expense of a larger fiscal balance, given Congress’s extension of the tax breaks. Yet Congress could have substituted another sort of tax to counter the deficit-increasing effect of the tax-cut extension. The refusal to mandate such balance may be due to democracy itself.

In short, elected representatives have a political incentive to provide fiscal benefits to constituents and a political disincentive to extract corresponding fiscal costs. The decoupling itself can be viewed as a vice of democracy. With elected representatives legislating, it is not clear whether they can employ enough self-discipline to couple tax increases or spending cuts to tax cuts. With a federal debt just short of $20 trillion at the time, the systemic imbalance can be said to be inherent to democracy itself, and ultimately to the refusal of an electorate to insist that fiscal benefits be paid for in a reasonable time. Outside of dire emergencies, such as the Great Depression and World War II in the twentieth century, the abstract ideal of balanced government revenue and expenditures should not be so difficult to achieve in practice; so that it is testifies to the difficulty of self-government, whether within the psyche or the polis. The difficulty, in other words, is systemic—in human nature itself—and thus particularly onerous to being corrected.

The only solution I can see is the body politic setting for itself an automatic “coupling” mechanism for “the future” (and thus not so scary). Such a device of parchment would have to be sufficiently protected from the urge for “something for nothing today” and yet flexible enough should an emergency occur. The key might be a constitutional amendment that is sufficiently rigid that it would hold under normal circumstances (including even minor wars), and sufficiently flexible when it really matters. Therein would lie the rub: the possibility that the accommodative feature(s) would be exploited. A constitutional amendment subject to jurisprudence from the judiciary might capture the balance in terms of solidity and flexibility that so alludes fiscal balance in representative democracy.

1. Jackie Calmes, “U.S. Deficit Increases to $587 Billion, Ending Downward Trend,” The New York Times, October 14, 2016.
2. Ibid.

Tuesday, October 11, 2016

The E.U.’s Border-Control and Coast Guard: Held Hostage by Confederalism

In policing its borders as late as 2016, the E.U. suffered the same plight as the U.S. did under its Articles of Confederation—only whereas in the case of the U.S. the States retained all of their governmental sovereignty under the Articles, some governmental sovereignty in the E.U. was already lodged at the federal level. I contend that this perplexing disjunction between extant federal competencies and state rights in the E.U. is not sustainable.

On October 6, 2016 when the E.U. opened its Boarder and Coast Guard Agency to police the E.U.’s borders given the refugee crisis stemming from Syria’s civil war, the state governments were not required to provide guards and equipment. Those governments had “proved slow in delivering on their pledges to the agency’s predecessor, Frontex.”[1] Accordingly, E.U. Migration Commissioner, Dimitris Avramopoulos, warned, “Everyone must join in and implement it as soon as possible. We have no time to lose.”[2] He was not the first federal official to face such a frustration. Similarly, Alexander Hamilton had had so much difficulty getting the U.S. States to send their quotas of men and equipment to General Washington’s Continental Army that he would later push for a large transfer of governmental sovereignty to the federal level of the U.S. Fortunately, that level had few enumerated powers under the Articles of Confederation, whereas the E.U. Commission has a substantial number of competencies in 2016.

Therefore, having to rely on voluntary contributions from the state governments really does not fit in the case of the E.U.’s border-control and coast guard agency. Even just getting to the goal of 1,500 border-guard officers could be difficult if state officials decide to hold their government’s quota hostage for some other political purpose, for example. Moreover, that a state could fall short and yet get the benefit of border-control agents sent from other states gives such a state an incentive to fall short. Exactly the opposite should be the incentive.

The underlying problem is structural in nature: the federal level of the E.U. had at the time sufficient competencies (i.e., enumerated powers) that the extent of remaining state sovereignty was too much for the federal system itself to function viably. Put another way, state and federal officials, and the European electorate, had stood by in desiring both more federal competencies and substantial state sovereignty—proverbially wanting their cake and eating it too.

[1] Valentina Pop, “EU Launches Effort to Police Its Borders,” The Wall Street Journal, October 7, 2016.
[2] Ibid.

Thursday, October 6, 2016

Political Ideology in the U.S. Supreme Court: Undercutting the Court’s Legitimacy

As the U.S. Supreme Court began its 2016 term with eight justices, the Court stood “at the threshold of an ideological transformation unmatched in nearly a half century.”[1] Not since 1968, when Richard Nixon was elected U.S. President, had such an opportunity presented itself. Nixon’s four nominations ended the liberal majority begun by Franklin Roosevelt’s eight.[2] The conservative majority begun with Nixon’s nominations was up for grabs with the 2016 presidential election. I submit that the legitimacy of the ideological dimension itself dwarfs the matter of which ideology is dominant on the Court.

Even if a victory by Hillary Clinton would “shake the foundations of the court’s marble palace, leading to [the] first liberal majority since the Vietnam [War] era,”[3] it is even more astounding that the result of a U.S. presidential election would have such an impact on the highest court in the United States. In other words, the importance of political ideology in the judicial deliberations and decisions is itself worthy of recognition. I submit that there being politically conservative and progressive justices on the bench gradually wears down the Court’s legitimacy as an institution premised on specialized legal education and training.

Politically ideological opinion is something that any person can have, so if it is salient in judicial opinions at the highest level, the question arises from a democratic standpoint: Why shouldn’t the people or their elected representatives decide the questions? Why should the political ideologies of nine people have such extraordinary influence? The democracy deficit here stems from the fact that the people or their elected representatives are not able to impart their political ideologies directly. Even if the Court’s nine justices were elected, the question would still be why should the political ideologies of just nine people have such influence relative to the political ideologies of the electorate or at least its representatives?

In short, if a political election can have a judicial impact as large as in 1968 and 2016, then it follows that the Court is at least in part political rather than fully judicial [i.e., of jurisprudence]. Just because justices can make rational arguments in legalese does not legitimate the power of the associated political ideologies. That is to say, the political ideologies of U.S. Supreme Court justices are not better or more legitimate than are the ideologies of the popular sovereign (i.e., the People) simply because the justices are skilled in oral and written legal argumentation.

The U.S. Supreme Court could be limited to oral arguments and the writing of majority and minority opinions, while the deciding of the cases is done by popular referendum or Congressional majority (or supermajority). In other words, the high Court could be willowed down to performing its unique skills, while the People or their elected representatives would function like a jury—hence being able to use the Court’s oral and written arguments in making a ruling. The Court’s justices would then be charged with writing the majority and minority opinions. Hence, the justices would serve the People, rather than imposing a few ideologies. Put another way, the Court’s legal oral and writing skills could be used to justify the ideologically-tinged decisions made by the People or at least their elected representatives.  

[1] Richard Wolf, “Court at Brink of Transformation,” USA Today, September 30 – October 2, 2016.
[2] Ibid.
[3] Ibid.

Monday, October 3, 2016

Americans Can Sue Saudi Arabia over 9/11 and the Saudis Accept Lower Oil Production by OPEC: The Unraveling of a Deal?

On Wednesday, September 28, 2016, the U.S. Congress voted overwhelmingly—97-1 in the Senate and 348-77 in the House of Representatives—to override President Obama’s veto of a bill that allows the families of the September 11, 2001 World Trade Center bombings.[1] As a result, American courts can seize Saudi assets to pay for any judgment obtained by the families. Saudi officials in turn warned that their government might need to sell off hundreds of billions of dollars in holdings in the United States to avoid such an outcome. In another place in the world, Saudi officials were dropping their resistance to OPEC—an oil cartel—cutting production. Even though positive correlation does not in itself indicate causation, the timing may point to the impact of political calculations by Obama. That is to say, the timing may suggest a political deal gone bad.

Generally speaking, low gas prices and the related fall in the prices of foodstuffs favor the reelection of the party in power. Such economics play well with the American electorate voting for U.S. President. So President Obama, being in favor of Hillary Clinton, another Democrat-centrist, may have told Saudi officials that he would make sure a law allowing U.S. citizens to sue the Saudi Government over 9/11 would not be enacted, and in return the Saudis would continue to pressure OPEC to keep oil supply at the high level. Keeping such a deal from falling apart may have been why the White House proffered “fierce objections” to Congress overriding the president’s veto. To be sure, the override could pose a danger in that the Saudis could sue the U.S. Government on matters related to the U.S. military presence in the kingdom, but would Obama have been so “fierce” just for that possibility when a more pressing concern was likely keeping the White House in Democratic hands to insure his legacy (e.g., Obamacare).

Sure enough, OPEC’s 14 oil-producing nations, including Saudi Arabia, agreed on Wednesday, September 28, 2016, “to modestly cut their collective oil output later this year in an effort to bolster sagging prices.”[2] Although the cuts probably would not take place until after the U.S. presidential election in early November, the “decision sent global oil prices soaring by more than 5 percent.”[3] The question for Obama might have been: How long will it take for the increase to be reflected “at the pump” and in grocery stores? Perhaps he might have considered opening up more of the U.S.’s strategic reserves, though he might have felt that the override itself was close enough to the election that any price-implications by election day would not diminish Clinton’s chances.
A major difference separates the motive of not wanting to open the U.S. Government up to being sued in Saudi Arabia on the one hand and not wanting Clinton to lose the upcoming election; whereas the former is acting in the interest of these United States, the latter desire is partisan and personal. Making a deal with a foreign government for the latter motive would essentially put the United States second, as well as having the sordid taste of trying to manipulate the American People—the popular sovereign to which the government and its elected and appointed officials are agents rather than principals.

1. Jennifer Steinhauer, Mark Mazzetti, and Julie H. Davis, ,“Congress Allows Saudis to Be Sued Over 9/11 Attacks,“ The New York Times, September 29, 2016.
2. Clifford Krauss and Stanley Reed, “Oil Prices Rise 5% on OPEC’s Tentative Deal to Cut Production,” The New York Times, September 29, 2016.
3. Ibid.

Thursday, September 29, 2016

Fraud in Selling Sub-Prime Mortgage-Based Bonds: Beyond Accountability

“In December 2011, the S.E.C. publicized its civil securities fraud charges against top executives from Fannie Mae and Freddie Mac for understating their exposure to subprime mortgages, which resulted in the government taking them over.”[1] Robert Khuzami, then the head of the S.E.C.’s enforcement division, said at the time that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”[2] Pursuing even senior ranks has the air of fairness economically as well as in terms of the dictum, no one is above the law. So much for words; how about the accompanying deeds?

According to The New York Times, “Five of the executives settled in 2015 by arranging for modest payments to be made on their behalf by the companies and their insurers, amounts that were never even described as penalties in the settlements. Each also agreed not to hold a position in a public company that would require signing a filing on its behalf for up to two years.”[3] Payments made “on their behalf” means that the money did not come out of their pockets. As for being barred, “(t)hat is far short of the director and officer bar the S.E.C. usually seeks in such cases, but at least it had the sound of something punitive regardless of whether there was any real impact.”[4] I submit that such a sound is insufficient to count as real accountability.

Fast-forward to August 22, 2016: On that date, the Securities and Exchange Commission settled its last remaining case. The charge against Daniel H. Mudd, a former chief executive of Fannie Mae, was related to the insufficient disclosure of the company’s subprime mortgage exposure. Again, the SEC “accepted a mere token payment that will not even come out of the individual’s own pocket.”[5] Fannie agreed to make a $100,000 donation on Mudd’s behalf to the U.S. Treasury Department—a payment that both put the department in a conflict of interest and enabled Mudd to avoid sacrificing any of his own wealth. Curiously, there was to be no ban on him holding an executive position at another public company, “something that at least resulted from the cases against the other executives.”[6] So, incredibly, the S.E.C.’s enforcement results had become more dilute. In short, the former CEO was able to keep his compensation even though the fraud took place under his watch. So much for deterrence and accountability.

Moreover, “(W)hat the S.E.C. accomplished in settling the cases against Mudd and the other executives hardly sends a message to other executives to be careful about how they act in the future. No money came out of the pockets of any of the defendants, and the prohibitions on future activity were token requirements.”[7] Also on August 22nd, “a federal appeals court refused to reconsider its May ruling that Bank of America’s Countrywide mortgage unit and one of its former executives did not commit fraud by failing to disclose to Fannie Mae and Freddie Mac that the subprime loans it was selling to them did not come close to the contractual requirements for such transactions.”[8] It seems, therefore, that financially and organizationally senior managers would get the message that millions of dollars in compensation are not subject to civil accountability. In other words, the fortunes would continue to come as a sort of entitlement, come hell or high water. The price in terms of systemic risk could be through the roof.

[1] Peter Henning, “Prosecution of Financial Crisis Fraud Ends With a Whimper,” The New York Times, August 29, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.

Thursday, September 22, 2016

Russian Electoral Fraud: A Threat to Constitutional Governance

In spite of Ella Pamfilova’s appointment in March, 2016 to “clean house and oversee transparent, democratic elections,” . . . “a statistical analysis of the official preliminary results of the country’s September 18 [2016] State Duma elections points to a familiar story: massive fraud in favor of the ruling United Russia party.”[1] “The results of the current Duma elections were falsified on the same level as the Duma and presidential elections of 2011, 2008, and 2007, the most falsified elections in post-Soviet history, as far as we can tell,” physicist and data analyst Sergei Shpilkin said to The Atlantic.”  In 2008, Shpilkin estimated that United Russia actually won 277 seats in the Duma instead of the constitutional majority of 315 that it was awarded.[2] This means that Putin’s party could unilaterally amend the Russian constitution. From a constitutional standpoint, either the hurdles in the amendment process are too low or the election fraud has been so massive the entire form of government is impaired.

The official turnout for the 2016 election “was 48 percent, and United Russia polled 54.2 percent of the party-list vote—about 28,272,000 votes. That total gave United Russia 140 of the 225 party-list seats available in the Duma. . . . In addition, United Russia candidates won 203 of the 225 contests in single-mandate districts, giving the party an expected total of 343 deputies in the 450-seat house.”[3] With the “projected 343 deputies in the new parliament, United Russia once again has enough votes to unilaterally alter the constitution.[4]

“By my estimate,” Shpilkin said, “the scope of the falsification in favor of United Russia in these elections amounted to approximately 12 million votes.”[5] He “shows that almost all ‘extra’ votes from polling stations reporting higher-than-average turnout went to United Russia. That is, a party such as ultranationalist Vladimir Zhirinovsky’s LDPR received virtually the same number of votes from polling stations reporting a turnout of 95 percent as it did from stations reporting turnouts of 65 percent. United Russia, by contrast, received about four times as many at the 95 percent stations.”[6]

Fraud at around 12 million votes is indeed massive, and it is clearly enough to render the existing constitutional amendment process dysfunctional. A constitution should not be a document that one party can unilaterally change. The crime, ostensibly committed by Putin’s party, is sufficient, therefore, to impair the rule of law from a democratic standpoint. 

The problem with reform of the elections has to do with lessor powers being able to thwart the efforts of the hegemonic party, whose power could easily block even small reforms. It may well take a huge groundswell of Russian people uniting to push for meaningful change that would rid United Russia of its overwhelming claws. For this to occur, the groundswell would have to be non-partisan rather than going through the extant other parties; enough solidified power that is yet widespread would have to coalesce to overpower the power of the United Russia party. Such a cause would naturally be to safeguard the constitutional system itself from the reach of even the largest party. This is a formidable feat not only because of the continuing power of United Russia, but also the power needed to concentrate the diverse and decentralized power of the people—the popular sovereign, to whom the Russian government and the constitution should rightfully defer, as an agent defers to his principal.

[1] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.
[2] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.
[3] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.
[4] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.
[5] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.
[6] Valentin Baryshnikov and Robert Coalson, “12 Million Extra Votes for Putin’s Party,” The Atlantic, September 21, 2016.

Wednesday, September 21, 2016

Tech Industry Self-Regulation: Sufficient to Handle the Ethics of A.I.?

Five of the world’s largest tech companies—Google’s Alphabet, Amazon, Facebook, IBM, and Microsoft—had by September 2016 been working out the impact of artificial intelligence on jobs, transportation, and the general welfare.[1] The basic intention was “to ensure that A.I. research is focused on benefiting people, not hurting them.”[2] The underlying ethical theory is premised on a utilitarian consequentialism wherein benefit is maximized while harm is minimized. The ethics of whether the companies should be joining together when the aim is to forestall government regulation is less clear, given the checkered pass of industry self-regulation and the conflict of interest involved.

People at the companies were concerned at the time that regulators would “create rules around their A.I. work,” so the managers were “trying to create a framework for a self-policing organization.”[3] I submit that the self-policing itself is problematic. For one thing, industry self-regulation can be less than fully effective, as companies have an immediate self-interest in colluding so the industry body lays off from enforcing all the planks agreed-to, even as the self-regulatory body presents a solid front to outsiders. Put another way, people’s faith in companies notwithstanding, senior managers of an industry’s companies can all agree to let the industry’s own regulatory body ease up on enforcement so all of the companies—or even just the market-leader—will benefit. Hence, industry self-regulation can devolve into the proverbial story of the wolf guarding the hen house.

More broadly, the intention to forestall government regulation (with or without industry self-regulation) is ethically problematic in that it presupposes a lawlessness, or inherent weakness, beyond the companies and their industry themselves. Put another way, the pernicious mentality that government control is for the other guy can be behind such an intention. Incredibly, Wall Street bankers still felt that financial deregulation was needed after the subprime-mortgage based bond scandal that nearly brought down the American and perhaps even the global financial system. Image such a mentality—of not needing government regulation in spite of known industry flaws—going with self-regulation. The mentality that the other guy is to blame—in that case, the mortgage borrowers—is conducive to intentional lapses in self-regulation.
Back to the tech companies, also in September, 2016 the Stanford Project issued a report that was funded by a Microsoft researcher. The report “attempts to define the issues that citizens of a typical North American city will face in computers and robotic systems that mimic human capabilities.”[4]  The report is a mixed bag.

On the one hand, the report claims that attempts to regulate A.I. would be misguided due to the lack of any clear definition of A.I. and “the risks and considerations are very different in different domains” of it.[5] Regulations are naturally oriented to specifics, however, so they could indeed be tailored to fit the distinctiveness of any given domain of A.I.

On the other hand, the report’s authors wanted to “raise the awareness of and expertise about artificial intelligence at all levels of government,” according to Peter Stone, one of the authors of the report.[6] “There is a role for government and we respect that,” said David Kenny of IBM’s A.I. division. Therefore, the attempt to stave off government regulation would be foolish. Yet a sustained practice of giving information to a regulatory agency can risk regulatory capture, wherein the agency comes to rely on the information so much that the regulated wind up manipulating (via slanted “information”) the agency—and even controlling it. So all levels of government should keep their information sources diverse such that none—especially those of the industry—get in a position of being able to manipulate or control the government on the matter of A.I.

Ideally, the industry and government should work together to keep the companies within acceptable boundaries, yet crucially without the government giving up alternative sources of information, by which the veracity of the industry’s own information can be checked and the government kept from being captured. There is indeed a legitimate role for government regulation, as opposed to relying on an industry to regulate itself; the profit-motive is just too strong for going exclusively with self-regulation. Even Adam Smith maintained that there is a role for government even in a perfectly competitive industry. Now, just how many truly competitive industries are there?

[1] John Markoff, “Devising Real Ethics for Artificial Intelligence,” The New York Times, September 2, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.

Thursday, September 15, 2016

What Fabricating Dumb Lies Says about a Corrupt Public Official and Corruption Itself

You would think that a prime minister of a country would not cover an accusation of corruption with ludicrous lies. For one thing, the lies easily made transparent by fact-checking journalists would reflect back on the statement of innocence itself. Just being accused in public should prompt carefully thought-out lies because the failure to sustain the lies would naturally cause people to conclude that the corruption charge is valid. The connector here is bad character, plus the assumption that it is easy to obviate charges of corruption. This assumption itself may indicate that the office-holder believes that corruption is widespread—and from this belief can come the assumption that it is easy to get away with taking money benefitting the office-holder and spouse. The conduct of Malayia’s prime minister Razak Najib and his wife Mansor Rosmah between 2008 and 2015 bear out my thesis.

 During the seven years, Mansor racked up $6 million in credit-card debt on purchases of clothing, shoes and jewelry. At the time, she had no income other than her husband’s $100,000 a year as prime-minister pay.[1]  After all this became public knowledge, she “said she saved that money since she was small,” but that is impossible, an organizer of an anticorruption protest said.[2] Mansor is the only child of school-teachers and she had not had a regular-paying job in years. Even so, Mansor wrote in her autobiography that she had a habit of saving, and that she bought jewelry and dresses with her own money. The prime-minister’s office commented in 2015 that Mansor’s spending is commensurate with Razak’s inheritance from his father, a former prime minister. Nevermind that Razak’s four brothers subsequently “denied that their father had left a big estate.”[3] So the prime minister was lying about his inheritance and his wife was claiming that she had saved $6 million of her own money.

The allegations are very serious, hence not easily brushed off, at least ideally. They include the claims that 1) the prime minister received hundreds of millions of dollars between 2009 and 2015 from 1Malaysia Development, a state investment fund that he had set up, 2) large amounts of which wound up in the prime minister’s personal account via intermediaries, and 3) at least $1 million of his wife’s spending were paid for by her husband using credit cards that drew on 1MDB funds.[4] The prime minister’s attorney general counter-claimed that the money from 1MDB was a legal political donation from Saudi Arabia, and the prime minister had returned most of the money.[5] So the prime minister had not returned at least $1 million, and his wife had not used her own savings to pay for all her purchases as she claimed.

Taking a step back, it looks like the couple encapsulated themselves in a web of faulty lies, which in itself is audacious considering what the couple were up against. Why would the two think that such terrible lies would proffer the sort of defense that would put the corruption allegations to rest? Wouldn’t the two be especially careful in crafting a defense, given the money involved in the alleged corruption? They must have thought that simply making statements would be sufficient, and this in turn is based on the assumption that it is easy to get away with corruption. This is an indictment not only on the corruption itself, but on the couple’s character and their perception of corruption itself—as being easy to get away with either because the enforcers are not doing a good job or corruption is so widespread that chances are slim that even most of it will face prosecution. Just because modern society has progressed in some ways, such as in technology and medicine, does not mean that we have progressed against corruption. Perhaps we do not allocate enough money to enforcement, or corruption has been getting worse.

1. Tom Wright, First Lady Draws Scrutiny in 1MDB Affair, The Wall Street Journal, September 12, 2016.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.

Wednesday, September 14, 2016

Corporate Money in Politics: Undue Influence and Conflicts of Interest

Indications of “the pervasive influence of corporate cash in the democratic process, and the extraordinary lengths to which politicians, lobbyists and even judges go to solicit money” can be seen in sealed but leaked court documents in Wisconsin.[1] This glimpse in to the real money-game in business and government shows just how much corporate money is in play. “The files open a window on a world that is very rarely glimpsed by the public, in which millions of dollars are secretly donated by major corporations and super-wealthy individuals to third-party groups in an attempt to sway elections.”[2] In addition, the files show just how easy it is for public officials to deny having been subject to conflicts of interest. The combination of a lot of money and the ability to get away with exploiting a conflict of interest is toxic to a viable representative democracy (i.e., a republic).

Beginning in 2012, five Wisconsin prosecutors investigated alleged criminal campaign-finance violations by the campaign committee of Scott Walker, the Wisconsin governor and, in 2016, a Republican U.S. presidential candidate. The investigation was launched after Scott Walker was recalled after his anti-union measure, Act 10, became law. “The prosecutors alleged that the governor’s campaign committee had operated a coordinated network involving outside lobby groups through which unlimited amounts of corporate money could be channeled without public disclosure.[3] This means that had the files not been leaked to The Guardian, the Wisconsin citizens would have been none the wiser concerning how much corporate money is donated even to state-level public officials through lobby groups.

“I got $1m from John Menard today,” Walker says in one email, referring to the billionaire owner of the home improvement chain Menards.[4] Surely, the company’s executives wanted something in return—even if it was not in the public interest, hence the distorting of the democratic system. A clearer picture of this happening can be seen by tracing forward donations amounting to $750,000 from the owner of NL Industries, a company that historically produced lead paint, to a third-party group closely aligned to Walker. “Within the same timeframe as the donations, the Republican-controlled legislature passed new laws making it much more difficult for victims of lead paint poisoning to sue NL Industries and other former lead paint manufacturers (the laws were later overturned in the federal courts).”[5] To be sure, positive correlation does not constitute causation, but the tight temporal connection of the donation and the legislation clearly suggest private motives in Walker, the Republican legislators, and the company’s owner. Moreover, a conflict of interest is present here in that Walker and the legislators allegedly put the private interests of a company above the public duty of public office-holders to act in line with the public welfare rather than a private interest that is paying the officials. Substituting a private interest for a broader interest is one of the hallmarks of a conflict of interest.

The investigation uncovered an even clearer case of an exploited conflict of interest. Allies of Scott Walker sought to help financially a conservative member of the Wisconsin supreme court, David Prosser, hang onto his seat in a 2011 re-election. Specifically, “a network of like-minded groups and campaigners channeled $3.5m in undisclosed corporate funds to pay for TV and radio ads backing the judge.”[6] Viewers of the ads would have had no idea how much private money was going into them—how important that money was in the re-election of a judge. “The push was seen as vital, the documents disclose, as a means of retaining the [Republican] majority of the court and thereby preserving the anti-union measures introduced by Walker. ‘If we lose [Justice Prosser], the Walker agenda is toast,’ one ally writes in an email sent around to the governor’s chief of staff and several conservative lobbyists.”[7] Put another way, corporate funds may have made the difference in the retention of the Republican majority on the Wisconsin Supreme Court as well as Walker’s Act 10 and future legislation. If so, we could conclude that plutocracy—the rule of private money—had achieved the upper hand over democracy in Wisconsin.

Regarding the associated conflict of interest, Justice Prosser refused to recuse himself in 2015 from a case in which the Wisconsin supreme court sat in judgment over the investigation, “despite the fact that the investigation focused on precisely the same network of lobbying groups and donors that had helped him hang onto his seat. The judge joined a majority of four conservative justices who voted to terminate the investigation and destroy all the documents” that were subsequently leaked to the Guardian.[8] For an official who was subject to the investigation to sit in judgement of it is a clear conflict of interest to which human nature itself would be hard pressed to cave into temptation to exploit the conflict in favor of the official’s own private interest rather than the broader duty of the office to objectively and fairly adjudicate cases.

So it is astounding that Prosser told the Guardian that four years had passed since his re-election before he joined the decision to close the investigation, “over which time any potential conflict of interest had faded.[9] The judge’s argument is specious—even ludicrous—because people do not forget an intangible obligation to private interests after a few years. Generally speaking, the passage of time makes no difference in a conflict of interest unless circumstances bearing on the conflict have changed such that the conflict no longer exists. That Prosser had used such a flimsy defense points to how easy he thought it is to put to rest any concerns regarding a conflict of interest. In other words, he would have had to do better had he been worried that the public and federal and state investigators would be likely to go after his conflict of interest. I contend the underlying reason for the easy treatment of such conflicts is the commonly held belief that conflicts of interest are not inherently unethical, so they are fine as is unless they are exploited. This belief is dangerous to the viability of a republic. Moreover, the combination of the ease of getting away with exploiting such a conflict and the overwhelming amounts of corporate cash being spent to influence public officials and electorates is especially toxic to representative government.

[1] Ed Pilkington, “Leaded Documents Reveal Secretive Influence of Corporate Cash on Politics,” The Guardian, September 14, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.