The U.S. House of Representatives: An Aristocratic Democracy-Deficit?

The abrupt resignation of Jesse Jackson, Jr., from the U.S. House of Representatives in 2012 only weeks after being re-elected gave Democratic politicians in Chicago a rare opportunity to get their hands on a Congressional seat. The New York Times observed at the time that such seats “in Democratic strongholds” of Chicago “do not come open very often, and when they do, a line forms fast.” According to Debbie Halvorson, who ran against Jackson, “If someone is thinking of becoming a congresswoman or congressman, this might be their only chance. Whoever gets this will have it forever, they say. That’s why everyone wants to take a chance.” In other words, the office is a sort of personal entitlement. From a democratic standpoint, this represents “slippage.”

The reason for the two-year term in the U.S. House is to render the representatives responsive to their respective electorates or constituents. The six-year term in the U.S. Senate was chosen for precisely the opposite reason—that such a term would give the senators some breathing room from the “real-time” demands of their respective states. The bicameral result would ideally be a check and balance of the people’s momentary passions and deliberation on the country’s best interests beyond today. Having a House seat “forever” renders its occupant immune, at least potentially, from having to respond legislatively to contemporary demands “back home.” Indeed, having the job for life, an incumbent might even move to Washington, D.C., with only occasional visits “back home.” With only 435 members representing a combined population of about 310 million (as of 2012), the U.S. House is already aristocratic in nature; a re-election rate for incumbents up for re-election of over 90% and certain seats being virtually life-time appointments render the “people’s House” akin to a House of Lords.

Because the U.S. Senate was intended to represent the propertied interest as well as the states, an aristocratic House gives the elite too much institutional power in the U.S. Government. Other things equal, the democratic element—that of the people—will in theory eventually revolt. Were the imbalance in favor of the masses, the propertied would soon “opt out” too. Hence, the delegates at the U.S. constitutional convention in 1787 intentionally fashioned a federal government reflecting “the one, the few, and the many” in a sort of balance.

The U.S. President is “the one”—the antecedent being the imperial monarch. The U.S. Senate and the U.S. Supreme Court both refer to “the few.” The U.S. House, being at first the sole repository of democracy in the U.S. Government, was to represent “the many.” As in juggling, if one ball joins one of the others rather than there being three separated equidistantly, the balance is off and all of the balls are likely to be dropped. At the very least, the pernicious impact of the imbalance can be lessened by shifting domains of authority back to the governments of the member-states.

                                    Even though the U.S. House Chamber looks large, it represents 310 million people.   Source: Britannica

Additionally, the U.S. House could be enlarged to the size of the European Parliament—both containing representatives of a people spanning an empire in scope. Lest it be concluded that such a size is nonetheless unwieldy for a legislative body, it could be argued that the “extended republic” has become too big for even a “repository of democracy,” in which case we are back to the notion that power could be transferred back to the states—many of which have populations equal to or exceeding that of the United States when the U.S. Constitution was formulated and ratified.

Accordingly, several of the states might consider adopting federalism—the states’ “states” (i.e., provinces, “countries” (in UK), cantons, or lander in European terms) might be as the early state legislatures were in the early United States (i.e.., citizen representatives serving for a time). Put another way, the large and medium republics in the U.S. as of the end of the twentieth century at least may themselves be commensurate with the early U.S. as a whole from the standpoint of population and representative democracy. Even so, the diversity within a given state is not as great as that which exists even in 2012 from state to state. Europeans who travel from New York to Miami and on to San Francisco and maybe Utah discover that the United States do indeed differ cultural, albeit in different ways perhaps than the member-states do at home in the European Union. Even though less diverse internally than interstate, some of the United States are internally diverse enough—and populous enough—to warrant the application of federalism to those republics such that legislatures covering a number of counties could be formed and given a portion of the state’s remaining sovereignty. Just as the E.U. deals directly with regions of states, the U.S. could as well.

In short, the U.S. House of Representatives, being in many respects an aristocratic body—the advent of which some of the founders, particularly the anti-federalists, anticipated back in 1787—enlarging that chamber democratically AND extending federalism down into the states could lessen the democratic deficit in the system overall.  

Source:

Steven Yaccino and Monica Davey, “Illinois Sets Election Dates to Replace Jackson in House,” The New York Times, November 27, 2012.

Pressuring Employees to Act as Lobbyists on the U.S. Debt: Ethical?

How far a boss can ethically become involved in an employee’s political role as a citizen is a question perhaps more important than whether a business should make demands regarding what an employee does in the privacy of his or her own home (e.g., smoking or drinking products that are legal). It would obviously be objected, for example, were a supervisor to insist on accompanying a subordinate into the voting booth to verify the vote. What about pressuring an employee to lobby as a private citizen in the company’s interest without being paid for that work? Is it even work when it is “voluntarily” done on “off-time”? Finally, would it make a difference if the issue held systemic importance—meaning if it were vital to the country itself or at least the economic system—and the particular stance being advocated by the boss had value in solving the systemic problem (i.e., not just in the company’s interest)?

Federal U.S. deficits as a percentage of GDP from 1792 (2012-2016 projected). Notice that the projections take the deficits down from 2008-2010 levels. Notice also 1960-2010 as differing significantly from the "episodic" pattern in the 1792-1930 period. Why?

As 2012 wound down, Congress and the American president found themselves embroiled in difficult negotiations to avoid the across-the-board budget cuts and the end of the Bush tax-breaks scheduled to begin with the new year. Both sides were using the media to (over)dramatize what was at stake, even calling the scheduled deficit-reduction a “fiscal cliff”—as if $500 billion in 2013 out of an economy of annual GDP of over $16 trillion were a cliff rather than an impediment to growth. Into that hypertrophy, CEO’s were making their positions known in meetings with Congressional leaders and the president.

Morgan Stanley’s CEO, James Gorman, sent an email to his company’s 16,000 financial advisors and branch managers in the U.S. urging them to contact their members of Congress to urge them to reach “a bipartisan compromise” on a deficit-reduction deal that would override the across-the-board cuts and the end of the tax breaks across all income levels subject to federal income tax. “No issue is more critical right now for the U.S. economy, the global financial markets and the financial well-being of our clients,” he wrote, “which is why I am asking you to participate in the democratic process and make your voice heard.” The CEOs of Caterpiller and Honeywell International also urged their respective employees to pressure their representatives in Congress to reach a compromise.

On the one hand, that Gorman explicitly asks his employees to participate suggests that the request is extrinsic to the employees’ jobs. No employee could be penalized for refusing, and the CEO did not have the right to verify a particular employee’s “participation.” Moreover, participation in the democratic process pertains to citizens, and is thus extrinsic to the role of employee at a company. That is to say, it could be argued that a boss has no business involving himself what, if anything, an employee does in the democratic process—that domain being off limits. The pressuring could be viewed in terms of that process as one citizen trying to pressure others to do his will politically—something any citizen on the receiving end has a right to be without. This stance can be modified, or mediated, however, by the substance of the request.

That no “issue is more critical right now for the U.S. economy [and] the global financial markets” means that the value of the request is not merely to the company or even its customers—there is a larger stake involved. The larger element implies a civic duty of sorts, which even CEOs—being human after all—can feel and act on with a sense of higher calling than merely protecting their jobs and companies. Were an asteroid heading for Earth, no one would complain should the CEO of even an asteroid-destruction company urge his or her employees to pressure members of Congress to act on the threat—even if it would mean that the company gets a lucrative contract as a result. Of course, if the “fiscal cliff” rhetoric were outsized relative to the actual threat at hand, the play for democratic participation would be over-played from this standpoint and employees should feel any civic obligation in turn. In fact, employees could refuse their CEO’s request as a way of “just saying NO” to the constructed theatrics in Washington.

Beyond the question of “higher purpose,” the substance of the CEO’s favored remedy is also relevant to whether he or she is “crossing the line.” In general, the more partisan the intimated or explicit recommendation to be lobbied, the more suspect the attempt to pressure employees to participate in the democratic process on the issue at hand. Gorman was on pretty solid ground in this respect, urging only that a bipartisan deal be reached. Better still, he could have suggested that employees use their own judgment in recommending particular solutions but urge their members of Congress to be sure to come to a deal at the end of the day.

However, if the “fiscal cliff” rhetoric was exaggerated theatrics designed by politicians to get more attention, Gorman’s assumption that the important thing was that a deal be reached could have been wrong. From the standpoint of reducing the federal deficit in 2013, the “cliff” could be preferable to any deal likely to come at the end of 2012. Such a deal could be a two-parter that would have less overall impact on the deficit. In this case, Gorman should have urged his employees to pressure their federal representatives not to compromise on deficit-reduction, even if that means “going over the cliff.”

Perhaps the least legitimate plea for participation is that which is highly partisan or self-serving. Were Gorman to urge employees to support President Obama’s position on tax rates, for example, the employees could rightly object to their boss’s interference into their politics. As an example of a self-serving position, Lloyd Blankfein—the CEO of Goldman Sachs who had told a journalist that Goldman was doing “God’s work”—was urging Congress to cut entitlement programs to the poor while retaining subsidies (including in taxation) for business including Goldman Sachs. He told CBS, “You’re going to have to do something, undoubtedly, to lower people’s expectations of what they’re going to get.” Of course, the Wall Street executive was referring to other people.

Blankfein was taking part in the “Fix the Debt” group, the CEO members of which were publicly urging cuts to Social Security, Medicare and Medicaid to reduce the federal deficit for 2013. Whereas those CEOs had amassed personal retirement assets averaging more than $9.1 million, less than 60 percent of the publicly-traded companies represented offered pension plans for their employees at the time. Of the 41 companies that did, the Huffington Post reports that 39 of them had not contributed enough to their workers’ pension funds to enable the plans to pay out their anticipated obligations. For the CEOs to be advocating austerity for others—while the executives’ own companies slacked on pensions for their employees even as they received government subsidies (including tax deductions)—without also advocating austerity for themselves—such as by reducing subsidies to business and corporate deductions—goes beyond garden-variety selfishness to include a certain callousness toward others. Were those CEOs also pressuring their employees to “participate in the democratic process” to “Fix the Debt,” those employees would have been fully justified ethically and politically to “just say NO.”

Besides the point that those who can afford to do with less should not demur from placing their chits on the table too when it comes to reducing the deficit, cutting sustenance-benefits from the most vulnerable could be argued to be ethically unfair, if not sociopathic, particularly from the perspective of Rawls’ theory of justice. From the standpoint of this theory, Blankfein’s prescription is simply a reflection of his standpoint. It follows that employees could justifiably object to pressure from Blankfein to “participate in the democratic process” so the bank could continue to get its subsidies while citizens who are the most vulnerable, including fired bankers whose unemployment compensation expires, take the hit.

In short, a boss urging his or her employees to participate in the democratic process is a controversial question. Generally speaking, employers should regard their employees’ democratic participation as being in another domain from that of their work. More generally, that which pertains to a person’s employment role should not encroach onto other domains in a person’s life, and an employer should respect the limitations. However, extenuating circumstances can modify or mediate this stance. Most significantly, the more dire a problem is to the system as a whole, the more legitimacy a boss has in encouraging employees to “participate” in a solution. However, even in such a context, the more partisan and/or self-serving the stance being advocated is, the less legitimacy the employer has in applying the pressure.

Sources:

Damian Paletta and Kristina Peterson, “CEOs Flock to Capital to Avert ‘Cliff,” The Wall Street Journal, November 28, 2012.

Christina Wilkie, “’Fix The Debt’ CEOs Underfund Employee Retirement, Demand Cuts For Elderly,” The Huffington Post, November 27, 2012.

Ethan Rome, “Goldman Sachs CEO Lloyd Blankfein Wants Seniors to Get Less,” The Huffington Post, November 27, 2012.

Massey Mining: Beyond Regulations

Massey Energy Co. owned the mine in West Virginia where 29 minors were killed in an explosion in 2010. Faulty water nozzles failed to stop a spark from setting a pocket of methane gas on fire, which in turn led to an explosion of coal dust. Other safety violations, such as not cleaning up extra coal dust, contributed to the accident too.

In their criminal investigation, prosecutors allege that between 2000 and 2010, David Hughart, former president of a Massey operating unit, and other managers ordered workers to violate standards for maintaining airflow through minds and limiting combustible coal dust. Indeed, Hughart may even have told employees to cover up  violations while inspectors were on their way. While it is unfortunately not unusual for managers to cut corners on regulations, the attitude evinced at Massey may point to a deeper problem in how business practitioners view law itself.

Booth Goodwin, the U.S. attorney in Charleston, West Virginia, observed, “Some mine officials, unfortunately, seem to believe health and safety laws are optional.” If true, this statement is extremely important, for it suggests that the business calculus itself views government regulation—and even law—as an obstacle to get around if possible. That is, rather than being a contour of the system, a regulation (or law) is one of many obstacles—costs—that are potentially manipulated in the interest of greater profit. The mentality thinks in terms of how to reduce any impediment to profitability.

Moreover, the political power of large companies (or big companies in a small pond, such as West Virginia) may mean that for practical purposes, government regulations are malleable rather than given. Just as a monopoly or oligopoly is a price-setter rather than taker, a large company with politicians and even judges “up its sleeves” may be a regulation-setter rather than taker. Regulations and even laws would from this standpoint be de facto optional. This political “reality” can reinforce the squalid mentality that “the laws don’t apply to me.” The result, at least respecting (or disrespecting) OSHA regulations, is that people other than the managers could become sick or even die, as was the case in West Virginia in 2010. The very logic as well as mentality of modern management may have been at the root of the accident, and thus of tragedies yet to occur.

Source:
Kris Maher, “Mine-Safety Probe Expands," The Wall Street Journal, November 29, 2012.

U.S. Government Debt: A Constitutional Moment?

The Congressional Budget Office (CBO) issued a report in June 2011 indicating that the debt of the U.S. Government had reached a dangerous level—that is, one likely to trigger a financial crisis. This characterization ought to have garnished close attention by the American people, for the viability of the Union itself may have been at stake. I submit that such a condition, moreover, warrants a constitutional moment—that is, a time when the citizenry focus on solving a basic governmental problem. In other words, the matter of the publicly-held U.S. Government debt may have justified popular sovereignty stepping in. Of course, how this would have been done is itself a problem, particularly because government officials had no interest at the time in relinquishing their power as our agents. This may explain in part why the debt would go on to reach $20 trillion by 2017.

Here, in a nutshell, was the problem. According to The Wall Street Journal at the time, “Most analysts say the borrowing cap [of $14.29 trillion] would have to be raised by more than $2 trillion to carry the government through the 2012 election. . . . The Congressional Budget Office estimates the cumulative deficit for 2012-21 at $7 trillion. . . . Treasury Secretary Timothy Geithner, speaking at The Wall Street Journal's CFO Network conference in Washington, said there is broad agreement that the country needs $4 trillion to $5 trillion in deficit-reduction over 10 years, but budget negotiators haven't agreed on how those reductions should be structured. . . . Geithner said it would be politically impossible to reach a final agreement unless the package included some tax increases, though many Republicans have said they won't support such a plan.”

Given the basic disagreement concerning revenue, government officials involved in negotiations were considering using a chain-weighted CPI to adjust entitlement benefits. However, such a change would have resulted in only incremental change—a mere $300 billion over ten years saved out of a cumulative expected deficit of $7 trillion. In other words, the agents of the people, finding themselves in a basic disagreement, turned to incremental, rather than systemic, change. The magnitude of the problem warranted more than incremental changes. 

I contend that a basic or fundamental structural imbalance inheres in a debt that is 70% of GDP. That is, for a government’s debt to reach a level that could trigger a financial crisis, something rather basic must surely be wrong with the way that government handles money. Such a basic, or systemic, problem justifies, and indeed requires, a momentary return to popular sovereignty. To rely exclusively on agents gives them too much power as agents and essentially relegates the importance of the problem. That the U.S. debt could go on to reach $20 trillion by 2017 demonstrates that the incremental approach did not work years earlier. 

In the American context, popular sovereignty traditionally operates not only by electing candidates for office, but also through referendums and through holding constitutional conventions. The use of a Union-wide referendum could answer whether tax revenue increases should be part of the solution, as well as whether entitlements ought to be cut. Additionally, the people could be asked whether any major federal programs should be transferred both in revenue and spending to the states.

The use of constitutional conventions, albeit rarely invoked historically, could address a possible constitutional amendment mandating a balanced budget (the problem being any loopholes, which would inevitably be exploited by the agents). Moreover, conventions could address the question of whether the U.S. Government’s debt is a symptom of a more basic imbalance between the U.S. Government and those of the several states. In other words, the crisis may go beyond the fiscal kind—political consolidation itself needing to be addressed if the U.S. Government is simply doing too much. 

To be sure, some of the American states, such as California, Florida and Illinois, have been dealing with sovereign debt of their own, just as Greece, Spain and Ireland have as well. However, whereas the revenue capability of the E.U. states has not been crowded out by the E.U.’s revenue authority, the U.S. states have been hampered by the financial “needs” of the General Government.  

Redistributing competencies or domains toward a balance in terms of federalism could ironically unburden the state governments even as more is laid at their laps. This is a matter for the popular sovereign—the people—to decide, given the foundational nature of the question.

Lest the duty of the popular sovereign be ignored in favor of the more convenient agent-driven debates on a chain-weighted CPI (a “managerial”-level concern), the United States may inadvertently hit the consolidated iceberg ahead because the rudder of the consolidated ship of state is too small for the ship. If that ship were not relied on so much, smaller ships could go around the stolid floe. 

Source:

Janet Hook and Corey Boles, “House GOP Digs In on Debt Ceiling,” The Wall Street Journal, June 22, 2011.

Nature's Racial Melting-Pot: The American Empire

The 2010 U.S. census reignited the question of racial identity among multi-racial residents.  “I can’t fit in a single box on the census form” was the typical refrain among the fastest growing segment of the US population.  According to The New York Times in February, 2011, "when it comes to keeping racial statistics, the nation is in transition, moving, often without uniformity, from the old “mark one box” limit to allowing citizens to check as many boxes as their backgrounds demand." The number of mixed-race Americans was at the time rising rapidly, largely on account of increases in immigration and intermarriage. In 2010, for example, one in seven new marriages was interracial. Politically, some racial interest groups believed that the use of a catch-all category marginalized minority races in particular. As a result, the Census Bureau created 63 categories of possible racial combinations (a typical bureaucratic solution to a political problem).

Regardless of how the U.S. Government slices the deck, the reality on the ground was that the United States were finally turning the corner on racial-bonding in the beginning of the twenty-first century; the U.S. had gone from some states outlawing miscegenation (i.e., the mixing of different racial groups through marriage, cohabitation, or sexual relations) as late as the 1960s to the multiracial segment of the population being the fastest growing.  America in the late twenty-first century would undoubtedly look rather different than how it looked even at the turn of the twenty-first century. We should not be surprised at nature having overflowed the laws that  were designed to keep the races separate, and thus “pure.” What a strange adjective to apply to something like race!

The lesson here is that life is a fluid thing. The naturalist ethic in line with the flow of life tends to have the last word, even though particular laws can seem daunting in their hayday. Any generation can expect that the world it knows will be morphed by life's forces into yet another world even if it takes a few centuries. As strong as they may seem, governmental restrictions in the face of natural forces are doomed to fail, like sandcastles fending against a rising tide. In other words, nature has the last word. In terms of race, nature's instinct can be called a naturalistic ethic because it is in the direction of attraction rather than hatred.

That the multiracial “category” is the fastest growing in the American census can be regarded as the natural solution to racial problems that have plagued North America since the time of the colonies.  Whereas Cortez and his followers in New Spain quickly mixed the Indian, Black and Caucasian races, the British colonies further north quite intentionally kept the three groups separate and distinct. In spite of having some members out of parts of New Spain, the United States followed the British tradition until well into the second half of the twentieth century.

The courageous people who risked pain and even death in the Freedom Ride cracked the societal shell that had enabled the artificial laws to hold nature temporarily at bay. By the 1970s, attitudes in most of the United States were shifting, such that by the turn of the next century race relations in general bore scant resemblance to those back in 1960. Beyond changed race relations, a growing multiracial segment was tasked with making sense of themselves in the new society.

Cheryl Contee, for example, wrote in a CNN opinion piece in 2010, “When I look in the mirror each morning, my face epitomizes the American melting pot. I can’t ignore the pale skin of my white forebears, the slanted eyes of my Indian relatives nor the full lips and curly hair of my African blood.”  However, because there are many white Africans (e.g., in South Africa), her distinction of “white” and “African” is a false dichotomy.  She is treating two different categories as though they were one.  Better stated, Cheryl has Caucasian, Black, and Indian ancestors, hence she is multi-racial.  She puts it as follows: “When I look in the mirror each morning, my face epitomizes the American melting pot.”  Her melting pot constitution is something for her to be proud of because it instantiates the natural, rather than the governmental, solution to what has been an intractable problem in the U.S. for centuries. Looking forward, her situation is one of transition; her great grandchildren may look back at old pictures of Blacks and Whites as strange book-ends.

Sources:

Cheryl Contee, “I Can’t Fit in a Single Box on a Census Form,” CNN Opinion, March 30, 2010.

Susan Saulny, “Counting by Race Can Throw Off Some Numbers,” The New York Times, February 9, 2011.

Drug Companies as Feeding Machines: Don't Feed the Sharks

In 2008, drug companies raised the wholesale prices of brand-name prescription drugs by about 9 percent, according to industry analysts. That added more than $10 billion to the nation’s drug bill, which was on track to exceed $300 billion in 2009. By at least one analysis, this was the highest annual rate of inflation for drug prices since 1992. “When we have major legislation anticipated, we see a run-up in price increases,” says Stephen W. Schondelmeyer, a professor of pharmaceutical economics at the University of Minnesota.  A Harvard health economist, Joseph P. Newhouse, said he found a similar pattern of unusual price increases after Congress added drug benefits to Medicare a few years ago, giving tens of millions of older Americans federally subsidized drug insurance. Just as the program was taking effect in 2006, the drug industry raised prices by the widest margin in a half-dozen years.  “They try to maximize their profits,” Mr. Newhouse said. However, the drug companies claimed they were having to raise prices to maintain the profits necessary to invest in research and development of new drugs as the patents on many of their most popular drugs were set to expire in a few years. The drug makers were proudly citing the agreement they had reached with the White House and the Senate Finance Committee chairman to trim $8 billion a year — $80 billion over 10 years — from the nation’s drug bill by giving rebates to older Americans and the government. However, if realized, the price increases in 2009 would effectively cancel out the savings from at least the first year of the Senate Finance agreement. Moreover, some of the critics claimed that the surge in drug prices could change the dynamics of the entire 10-year deal. “It makes it much easier for the drug companies to pony up the $80 billion because they’ll be making more money,” said Steven D. Findlay, senior health care analyst with the advocacy group Consumers Union.

That the firms were trying to maximize their profits ought not be viewed as  new thing.  That is what they do.  To expect a shark not be be a feeding machine is at the very least highly unrealistic.  It is not fair to the shark that was designed to feed.  If a shark is able to feed, it will.  If a drug company is able to charge more for its products, it will.   It is interesting that the question of motive is deemed relevant.  I myself wonder whether the price increases are really motivated by the anticipated expirations of patents or the $80 billion to be paid as part of the health-care reform.  Can I trust the self-serving explanation of the firms in the face of the experts’ studies of historical price patterns before major pieces of legislation affecting the industry?  A shark will feed; we don’t ask about its motives.  Were a shark to have reasons, they would be whatever furthers its feeding. Whether it is lying would be irrelevant.  In fact, the normativity of truth-telling would not register, as it does not have a taste-element.   We project onto the shark when we presume a motive or that a normative judgment is pertinent.   If the shark can feed, it will.  It is a feeding machine. Social responsibility does not make sense to a feeding machine or to those humans in their capacities in running the machine. For them, it is a technical matter. To realize the wider social goals through business, the wider goals must be put in line with the feeding incentives. As the umpire and protector of the chessboard, the government can structure the rules of the game--and there must be rules for any game--such that the incentives match. The question is perhaps whether the rules might function as nets and suffocate the sharks, or channel them as mighty yet dangerous swimmers.

If we as self-governing citizens do not want the sharks to feed on a given plant, we could make it very costly for them to do so. Simply forbidding them is apt to be disobeyed, and thus costly to enforce. Telling them they shouldn’t feed on something tasty simply does not make sense to a shark. They will be like cats circling an open can of tuna, constantly trying to figure a way around the artificial barrior.  As an alternative, leaving the matter to the sharks themselves to regulate would be like having the wolves police the hen house. In terms of social responsibility, getting mad at a shark for having what we presume is the wrong motive is utterly futile.  We tend to assume or project motives on business managers other than simply to feed. If we want to delimit the feeding, we might look into how the tank we have designed permits or even encourages over-feeding. That is to say, we can change the tank. 

We can’t very well change the shark without making it no longer a shark.  We could pass legislation outlawing profits, then we would not have companies, and they produce our products that we consume.  We want some feeding.  We are convinced that we need some feeding in the tank.  We just don't want such feeding that compromises the tank (or us). The question is how to prevent over-feeding at our expense. Presuming the shark will respond to our charges of its immoral motive is a non-starter, but we can redesign the tank, which the shark must take as a required constraint. 

For example, we can apply anti-trust law such that any sharks that become too big for the tank get chopped up and become shark-food.  We can install steel bars in the tank to limit where the sharks can feed (i.e., maximum prices or profits).   That the drug companies are price-setters rather than takers strongly points to the need for anti-trust enforcement.  Of course, if the sharks are threatening to eat our representatives, we can’t count on our politicians to give us straight talk on significant reform of the tank any time soon.  Rather, they will try to convince us that they have sufficiently modified its structure, when in fact they are enabling the sharks to continue over-feeding.  Perhaps the officials are sharks themselves.  Sharks, whether in business or government, policing a tank of sharks while the rest of us wonder why the over-feeding goes on and on is simply a recipe to get gouged, or bitten.

Source:

Duff Wilson, "Drug Makers Raise Prices in Face of Health Care Reform," The New York Times, November 15, 2009.

Van Rompuy as the European Council's First Extended-Term President

“In a sense, Europe seemed to be living down to expectations. Earlier, the foreign minister of Sweden, Carl Bildt, warned against a 'minimalist solution' that would reduce the European Union’s 'opportunity to have a clear voice in the world.'"  Olivier Ferrand, president of Terra Nova, a center-left research institute in France, said, “It is quite astounding. . . . It is jaw-dropping. It is the end of ambition for the E.U. — really disappointing.”

I think these are rather extreme positions on the selection of Herman Van Rompuy on November 19, 2009 as the first non-rotated president of the European Council.  Moreover, I don’t think the E.U. is going the way of the dinasaur just because Van Rompuy was not well known at the time of his selection.  He has written six books, is a writer of Japanese poems, has consensus-skills, and seems humble enough.  Would popular election have yielded a better candidate? As the election would have been E.U.-wide, it is doubtful that a high proportion of the voters would have been sufficiently familiar with him to make an informed decision. 

The New York Times continues, “The deal that produced the two choices emerged as a result of backroom negotiations among leaders jockeying for future and more important economic portfolios that could be more powerful in the enlarged European Union, which is still more of an economic union than a political one and looks to remain so.”  However, the E.U. includes a popularly-elected Parliament. Is a parliament not political? Is a parliament not a government body?  Perhaps, moreover, we should simply say that transfers of sovereignty are now economic in nature.

One might ask: who would have a vested interest in perpetrating such a subterfuge wherein governmental institutions, whether intergovernmental (e.g., the European Council) or national (e.g., the E.U. Parliament) are to be portrayed as solely economic in nature? According to The New York Times,  “The leaders of Europe’s most powerful countries, France and Germany, did not want to be overshadowed. Nor apparently did their foreign ministers.”   After the European Council elected Van Rompuy, Gordon Brown, the then-current British Prime Minister who had been pushing for Tony Blair (his precursor), told reporters that the posts are only ceremonial anyway since the state governments are still in control.  However, is Van Rompuy's role in presiding over the European Council merely for show? Is there not power in chairing a political institution? Furthermore, are the heads of the state governments in charge of the E.U. Commission, the E.U. Parliament, and the European Court of Justice? Even within the European Council where the governors of the states sit, qualified majority voting on most issues means that any given state government is not in control. We can conclude that E.U. level officials are not mere gloss on a window, and that the member states have indeed transferred some of their governmental sovereignty to the E.U. Government. Lest is be thought otherwise--that the E.U. does not have a government, there is a saying in English: If it quacks like a duck, walks like a duck, and swims like a duck, odds are it is a duck.  It might be useful to ask why it is in the interest of some that the obvious conclusion be withheld.

My only caveat concerning the selection of Van Rompuy is that the consensus maker was not the sort to make transparent the "duck" subterfuge and denial, which had gone unchecked at the expense of greater European integration. In other words, the E.U. needs its own leaders who can garnish attention for the E.U. itself (i.e., apart from its state governments) because if integration falters, the danger will be dissolution unless or until more governmental sovereignty is transferred to the E.U. As for Van Rompuy's low name recognition outside Belgium at the time of his selection, let’s not forget that few, if any, presidents of the U.S. Senate (the Vice President of the U.S.) have been known at the beginning of their respective terms. Of course, outside of breaking tie votes, the president of the U.S. Senate (whose members are the member states of the union) is more ceremonial than is the president of the European Council.  In fact, senators regularly stand in for the presiding officer when the U.S. Senate is in session, whereas Van Rompuy himself presides over sessions of the European Council.  Also, the European Council is possibly more powerful among E.U. governmental institutions than the U.S. Senate is in the U.S. This is probably so because the state governments in the E.U. have more power at the E.U. level than the American state governments do in the U.S. This could explain why Van Rompuy's position, the President of the European Council, is powerful (because the Council he chairs is powerful) even if Van Rompuy had been an unknown outside of Belgium and was not an attention-getter in the media (e.g., unlike Tony Blair).

Source:

Stephen Castle and Steven Erlanger, "Low-Profile Leaders Chosen for Top European Posts," The New York Times, November 19, 2009.

Goldman Sachs: Working It

Goldman Sachs’ (GS) board considered buying AIG in late June, 2008, so GS could use AIG’s premium float for capital (rather than becoming a bank holding company and using deposits to fund trades or as collateral for leveraged trading).  Strangely, GS’s board didn’t realize that another part of GS was questioning the “mark to market” valuations that AIG was making on its swaps.  Also, AIG had revised its November and December 2007 losses from $1 billion to $5 billion.  GS and AIG had the same public accountant (Price), which GS was using to get AIG to down-value the value of its assets. On that week in September, 2008, when Lehman went under, JP Morgan and GS were working to put together a loan of $50 billion to cover AIG’s deepening hole  At the same time, the two banks were demanding new collateral payments from AIG, pushing the insurance giant deeper into its hole.  The Fed and AIG wondered if the fees and interest rate being set by the two banks for themselves and other contributing banks wasn’t essentially stealing the company.

As it turned out, AIG received funding from the Federal Reserve in exchange for the government taking warrants on a 79.9% ownership of the company.  Goldman had bought $20 billion of insurance from AIG and received as much as $13 billion from AIG when the Fed funded AIG with $90 billion.  The counterparties were paid in full, rather than the sixty cents on the dollar that AIG negotiators had been pressing. Even though GS was hedged because it had purchased credit default swaps in case AIG were to default, one has to ask whether Blankfein at GS used Paulson to have the government pay GS through AIG.  Blankfein claims that his bank would not have gone under had AIG imploded, but surely GS relies on there being a financial market. Also, when the Fed essentially took over AIG, Paulson wanted to appoint a new CEO.  Paulson was of course an ex-CEO of GS.  Paulson had one of his advisors, also a GS alum, look at candidates.  The aid favored Ed Liddy, who was on GS’s board.   GS would be running AIG.  Hence, the insurance giant would not run interferance on the $13 billion going to GS.

Besides these conflicts of interest, Goldman trades securities for big firms and pension funds. It also acts as adviser to many of the companies whose securities it trades.   In other words, the problem is in its core business. So a person could be excused for wincing at Lloyd Blankfein’s statement that his bank is performing not only a social function in providing capital to firms so they can expand, but is “doing God’s work” as well.   John D. Rockefeller used the same expression in regard to his Standard Oil monopoly that offered its remaining competitors the choice to be bought up or drowned.  According to Rockefeller, Standard Oil was Noah’s Ark, saving the oil refining industry from destructive competition.   So what if the uncooperative were put under?  They deserved it. Besides, the industry would be saved.  In this regard, the monopolist viewed himself as a Christ figure.   Are the golden boys the incarnation of this figure?   It goes without saying, but I will anyway, that Blankfein has no misgivings in paying (and being paid) record bonuses in 2009.    The presumptuousness of those bankers aside, Jefferson’s dictum that a national bank would be more dangerous than a standing army to democracy seems apt.  We, the American citizens, have an amazing ability not to see things, and then to tacitly enable that which is in actuality hardly a savior.

Private Financial Interests in the Public Square: Crowding Out by Design

Is the typical American self-centered and greedy, or is there a civic-mindedness that yearns to bracket one's own interests?  In other words, is there more to American society than being the sum of the parts? Is there something more than the aggregate?  I don’t mean to criticize individualism here; creativity and liberty, for example, are individualistic traits that highlight a person's character and virtue. Nor do I mean to point to one of the two major parties. One could point to the democrats protecting unions at the expense of a free market for labor just as one could point to rich republicans holding tax cuts hostage unless they are included even though they could afford higher taxes.  If there is something more to American politics than asserting one's own interests, who is to represent the civic component?

The American Founding Fathers assumed that a given republic requires a certain level of disinterestedness or impartiality among the citizenry. The Founders thought that gentlemen freed up from the pressures to make money were obliged to serve in government precisely because selfish monetary pressures would be less pressing among the already rich. So the Founders were startled when common folk began winning more state legislative seats.  The concern was that the immediate economic interests of the folks would carry the day over what would be needed legislatively for the public good.  Reading this, a modern American is apt to be surprised that the Founding Fathers might not have been so populist as the American mythos might have suggested. The Founders might also be critiqued for being blind to the possibility that moneyed gentlemen might legislate in the interest of their class at the expense of the folks. In short, American populism may not have been an ideal at the inception of the union of states. The question here is less historical, however, than on how and by whom the pubic good might be asserted.

Lest one look to the presidency, the sheer amount in financial backing renders the occupant captive to the financial elite, which in turn has a vested interest in its own interest and the status quo in which it has done so well.  Real change in the public good at odds with the status quo is not likely to come from the White House. Lest one look to the U.S. Supreme Court in protecting individual rights, the fact that justices are nominated by the president and confirmed by the U.S. Senate, which among other things represents wealth, suggests that the high court will stamp rather than impede extensions in Congressional and presidential power, which in turn has a strong financial-interest backing.

The question of standing up for the public good where the financial elite such as Wall Street has a direct financial interest in perpetuating systemic risk was at the fore in the wake of the financial near-meltdown in September of 2008.  The subsequent banking regulation reform was highly watered down by Wall Street's involvement in the very writing of the law. For example, the existence of investment and commercial banks that are too big to fail was not seriously questioned, not to mention confronted. Instead, "incentives" not to increase further in size were included. Whereas in history monoliths such as Standard Oil and ATT were broken up by the high court, Congress could not bring itself to break up the still risk-prone banks even in the wake of the banks' self-induced crisis.

So the question remains: what of the public or common good--the public square that goes beyond the sum of the parts?  Who, if anyone, is to stand up to the vested interests to push through real change that is necessary to the survival of the United States as a going concern?  I suspect that the usual suspects have the American public debating secondary issues so such primary questions are kept off the radar screen of public discourse. Lest it be forgotten, the American media companies are interwoven into corporate America. There may be a vicious self-perpetuating feedback cycle wherein the public is kept from raising a movement that would question the matrix on which the financial elite has thrived. The question may thus be whether this cycle can even be broken.

Wen and Obama: Breaking Up the Banks

Chinese Premier Wen Jiabao told a radio audience on April 3, 2012 “that China’s state-controlled banks are a ‘monopoly’ that must be broken up.” He also urged other businesses to get into the financial sector. “Let me be frank,” he said. “Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly. To break the monopoly, we must allow private capital to flow into the financial sector.” This included raising the total amount foreigners can bring into China under the Qualified Foreign Institutional Investor program to $80 billion.

Besides combined earnings of a bit over 632 billion yuan ($99 billion) in a slowing economy, the largest banks—Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank—were able to raise fees indiscriminately, sparking the popular resentment that Wen was able to tap on the radio. Beyond the unfairness of the windfall profits, the artificially low cost to the banks in borrowing from domestic savings accounts meant that investment has proceeded at the expense of consumption. Given that the current account surplus stood at just 2.7% of GDP in 2011 due to slackening demand in Europe and North America, the imbalance regarding consumption could already be seen as a potential constraint to economic growth.

Therefore, Wen’s strategy in going after the unpopular banking oligopoly was wise both politically and economically. The question at the time was whether anything would come of his remarks. According to The Wall Street Journal, the “major question is whether increasing rhetoric and new initiatives toward economic revisions will lead to broader reform. Prior efforts have faltered amid Beijing’s drive to keep a tight rein on the economy and opposition from interest groups.” That Wen made his remarks as he was preparing to leave office may mean that they should be regarded as akin to President Eisenhower’s “Beware the military-industrial complex” farewell speech. A swan song is not apt to be followed by still another act.

In terms of lessons from a comparative approach, it would be ironic, to say the least, were the Chinese government willing and able to break up the four largest banks while the Dodd Frank Act of 2010 in the U.S. let the banks too big to fail remain intact in spite of the plights of Bear Stearns and Lehman Brothers in 2008. That is to say, if the Chinese government could have taken on its powerful banks, the U.S. government would have looked comparatively weak as against the American banking sector.

Lest it not be forgotten, however, President Andrew Jackson’s defunding of the Second Bank of the United States at around 1830 was daring even bank then when the financial sector was smaller relative to the U.S. economy as a whole. Five or six years later, Congress finally got around to ending the bank’s charter altogether. Jackson’s argument was that having a bank would make Congress, and thus the U.S. Government, too powerful in the American federal system. The dangers to the American republics in having a powerful moneyed interest were also not lost on the nineteenth-century president.

Therefore, we can view the Dodd Frank Financial Reform Act of 2010 through the lenses both of China, assuming something comes of Wen’s remarks, and of American history. President Obama barely broached the subject of breaking up Wall Street banks even though they had been culpable in the derivative mess. Congress would hear nothing of it.  The Chinese government may not be so constrained by the self-serving interests of its banking oligarchy.

Similarly, claims that President Obama’s reliance on private health-insurance companies rather than a state-owned entity in his Affordable Healthcare Act of 2010 was somehow socialism (i.e., ownership by the state of means of production) can also be viewed relative to a Wen’s criticism of the state-owned banks (which favor state-owned enterprises in terms of lending). Obama caved to the private health-insurance company lobby on even a public option, whereas Wen suggests that the Chinese government might break up the four biggest banks. Is the Chinese state stronger than the U.S. Government relative to the interests of private capital?

Relative to the “socialist” leader’s distancing himself from a bias toward state-owned banks (and enterprises in general) in China, President Obama’s support of both the Dodd-Frank and Health-care Affordability laws can be seen in retrospect as anything but advocating U.S. Government ownership of means of production/services. Wen’s remarks show a movement away from socialism, toward Obama’s stance, though perhaps with government rather than banks in the driver’s seat.

Source:

Dinny McMahon, Lingling Wei, and Andrew Galbraith, “Chinese Premier Blasts Banks,” The Wall Street Journal, April 4, 2012.