Wednesday, December 30, 2015

On the Financial Crisis of 2008: Why Business Ethics Failed

I submit that the academic field of business ethics failed in not being able to anticipate the fraud and exploited conflicts of interest that precipitated the financial crisis of 2008. That is to say, business-ethics scholars, including myself, failed utterly. To the extent that the general public relies on us to shoot off flairs in advance of a high likelihood of icebergs in the water ahead, we failed in our social responsibility, ironically as many of us were admonishing corporate managers to be socially responsible. Many who did so used could use their programs as advertisements or even window-dressing. In this essay, I point to some of the academic reasons why business-ethics scholars failed so miserably.

I think the focus on ethical decision-making is culpable here, as it diverts attention from the institutional level(e.g., inter- and intra-institutional conflicts of interest that are themselves systemic).  Also, the focus assumes that managers want at least to consult the ethical dimension (or worse, that they can become ethical by knowing how ethical decisions are or should be made). The  2015  film, "The Big Short," makes the point that this assumption is faulty at best.

Relatedly, the "managerialization" of the field, as evinced in coming up with procedures by which to make decisions in terms of ethical principles (and, in the field of Business & Society, in CSR2), may mean that business-ethics scholars think too much like managers, so we didn't see the systemic failure coming. We did not have a vantage-point by which we could have seen what the Wall Streeters couldn't (except for a few of them).

I think the hegemony of the individual and firm levels in the field has also contributed to the failure in that business ethicist scholars missed even the obvious ethical problem in how rating agencies are compensated. We also missed the inherent conflict of interest in a bank having its own proprietary holdings apart from those that serve as counter-parties to client trades.

In short, I contend that business ethics is too managerial in perspective (and content) and too micro. My intuition tells me that business ethics scholarship missed (and misses) the forest for a few trees. I would even say, moreover, that scholarship from business schools is not sufficiently distanced from the phenomena being studied. I suspect that many professors of business are caught between identifying themselves as managers and scholars, and this is no doubt reflected in their work because they are actually in neither camp.

The department of business environment and public policy at Pitt, in which I studied as a doctoral student, was an exception in that most of the faculty members had doctorates in disciplines including political science, sociology, and psychology, as well as institutional economics. While the make-up was not managerial culturally--the department was quite obviously the part that was "not like the others" in the school (quoting here from PBS's "Sesame Street";); yet even so, the academic orientation was managerial! I suspect that that department's faculty tried especially hard to be managerially useful because they had come from disciplines in the social sciences. With the subfields being Business & Government, Business & Society, and Business Ethics (though I would argue that it was an exogenous field on account of the lack of ethical theory courses), such a department was in theory almost uniquely (along with Berkeley and Minnesota, at the time) in a position to see the iceberg in the dark (trading) water ahead. Scholars in "Business, Government & Society" were too managerial--too wedded to the system to be really critical--and not academic enough--in the sense of not grasping the real significance in the subject matter--to get the big picture: that the system itself was (and still is) riddled with fraud and self-serving behavior shamelessly at the expense of the whole system. Not seeing the Wall Street culture of greed and opportunism as the proverbial canary in the coal mine, the scholars missed the blatant fraud at Wall Street banks, mortgage servicers such as Countrywide, and the related rating agencies at the expense of investors, clients, and the general public. Scholars at business schools should have had megaphones to warn the American people of the baleful existence of the major institutional conflicts of interests that should be rather obvious to everyone. The silence of the learned enabled the self-satisfied business practitioners to assure the public that the institutional "firewalls" could be trusted to prevent such conflicts from being exploited even as they were!

Meanwhile, I "overshot" while I was in the doctoral program, taking the macro orientation to the point of the business SYSTEM as an entity in relation to other systems in society (e.g., the system of government). Hence I missed the inter-institutional conflicts of interest WITHIN the business system (e.g., the way CPA firms and rating agencies are compensated). I was resisting the gravitational pull of the manager and firm-level managerial orientation of the field of "Business, Government & Society." I had taken a MBA seminar at Indiana on the environment of international business, which studied economic, financial, governmental, and cultural/religious systems, and I patterned my doctoral studies at Pitt on that course (even getting a MA and Ph.D. minor in religious studies and taking substantial coursework in international political economy in political science).

Looking back, I'm astounded that through the coursework in "Business, Government, & Society" at Pitt, the only coverage of conflicts of interest was confined to the "regulatory capture theory," wherein regulators depend on the regulated for information. Even for that conflict of interest, the siphon of information now strikes me as hilariously minimalist. How about the revolving door? How about political pressure on the SEC from government officials who have accepted political donations from Wall Street banks? How about ex-CEOs of those banks serving as high up as Secretary of the Treasury?

We should not count on practitioners to recognize even monstrous institutional conflicts of interest. When I briefly worked as a staff-auditor (before going back to academia out of sheer boredom and lack of brain-stimulus), I had used a tickmark, "As per comptroller, discrepancy resolved" without even noticing how inherently ethically problematic it is. An independent audit that takes the word of the comptroller. Decades later, I was shocked to hear the man in charge internationally of that CPA firm's internal "firewall" tell me that such a device is effective. I submit that it was not, is not, and in fact cannot be so, and yet the Dodd-Frank financial reform law of 2010 looks the other way. Nice.

That structural conflicts of interest are still in place in public accounting and the rating agencies, as well as at post-Glass-Steagall banks in spite of the financial crisis and even the Dodd-Frank Act suggests to me that the pedestrian "scholars" (aka managerialists) in the field of business ethics still don't get it. The public is still left unprotected.  The American people really needs scholars of business ethics who DO get it and can inform the public honestly even if future consulting gigs take a hit. Sitting in on a doctoral seminar in business while visiting a school before the financial crisis, I was stunned when the professor told his students (who had been bankers) to run their research conclusions from surveys (i.e., empirical research) by the managements of the firms surveyed and change the conclusions as needed so as to keep consulting possibilities open. What if one of those students went on to knowingly publish a flawed risk-analysis metric? As we know from the case of systemic risk in 2008, the financial system could hang in the balance. Perhaps the "regulatory capture" theory should be applied to business schools. Astronomers who study Mars certainly don't live there or try to act like Martians; likewise, business scholars should not conflate themselves with their subject matter. A certain distance between the scholar and the thing being studied is necessary for good scholarship--that is to say, scholarship that gets the big picture concerning the object of study.  

Anyway, all this is to explain my gut reaction at the end of the film: Business ethics failed. It was the sort of immediate intuition that falls with a thud on concrete. My field failed. I failed. How could I have not seen it? How presumptuous of me to think that the financial crisis would be a great case study for me to teach and write about, my past studies, beginning at the masters level, of the environment of business notwithstanding. Relatedly, how presumptuous of the people at the helm in government and business who missed the danger signals to go on to consider themselves vital in saving the financial system and economy. The U.S. Treasury Secretary and the Chairman of the Fed--a scholar whose dissertation is on the Great Depression!--didn't see the iceberg ahead and yet both presumed to be the men of the hour to fix the ship.

Tuesday, September 29, 2015

Business Implications of Power in Mergers: The Case of the New United Airlines

Ideally, a merger combines the best features of one company with those of another company such that the whole is of greater value than the sum of the two parts. Optimal combination as such may imply or at least depend on a rough power-balance between the two adjoining companies, for otherwise distended dominance could translate into the worst of one company (i.e., the dominate one) being foisted onto the merged entity. The opportunity cost, or benefit lost in going with the worst of the dominant company, could be measured by the extent to which the same function in the other company is better than that of the dominant company. Put another way, it would make no sense to go into a merger planning to let each company continue to do what it does worse than the other. Sadly, power can eclipse economic criteria even in a company. The merger of Continental Airlines and United Airlines provides a case in point.

According to The New York Times, “The merger . . . was supposed to combine Continental’s reputation for solid customer service with the broader reach of United’s domestic and international network. Instead, [the merger turned into] an exercise in frustration for [the] fliers, with frequent delays, canceled flights, and lost bags.”[1] Customer unhappiness is a pretty good indication that something went horribly wrong in the formation of the combined company.

One business passenger, a frequent flier, provides us with a synopsis. “Continental was probably the best airline . . . that you could travel on pre-United. I would say United is one of the lowest.”[2] Specifically, he cited poor service, bad wifi connections, and cut-backs on perks and upgrades that evince little appreciation for frequent fliers. “I feel that at 100,000 miles, somebody should care and make me feel like a valued customer. You’re treated as just a commodity, and it’s a race to the bottom. They don’t really appreciate me at all.”[3] He would have quickly switched to another carrier, but the new United held 70 percent of all routes in and out of Newark, his main hub, at the time. Monopoly in a market, and perhaps even oligopoly, may enable sub-optimal merged companies to continue when they otherwise would have gone bankrupt.

United's "Love in the Air" promotion highlighting couples who met in the air. The case of the winning couple pictured here just happens to involve an "upgrade." The love in the air does not refer here to the employees on board or at the gate, even though the impression intended may be that flying United is a loving experience. (United Airlines)

In any case, the poor service of the pre-merger United somehow trumped Continental’s excellent service in the combined airline; the sordid mentality survived the salubrious one. Behind this dynamic lies dominance, or power, disproportional, I submit, from the standpoint of an optimized merged company according to business criteria—that is to say, power over effectiveness. Lest it be presumed that business principles and calculation play a predominate role mergers, the management of the power dynamics should not be left out of the equation.

[1] Jad Mouawad and Martha White, “Despite Shake-Up at Top, United Faces Steep Climb,” The New York Times, September 15, 2015.
[2] Ibid.
[3] Ibid.

Sunday, September 27, 2015

Great Lakes Water in the U.S.: Treating a Union as a State

Squabbling amongst states in a federal system may be an inherent feature of federalism. How much the jealousies and petty interests manifest in terms of policies may depend on the balance of power between the federation itself and its member-states. In the case of the E.U., the spat at the state level over how to allocate the tens of thousands of refugees from the Middle East and Northern Africa effectively stymied federal action that could have assuaged the angst. It is no accident that the state governments hold most of the governmental sovereignty in the E.U. federal system. By contrast, the case of the U.S. demonstrates that nearly consolidated power at a federal level can obviate, or stifle, strife between state governments. This alternative is not optimal either, for interstate differences tend to be ignored, resulting in increasing pressure on the federal system itself. How to handle municipal requests for drinking water from Lake Michigan is a case in point.

City officials in Waukesha, Wisconsin—with a population of about 70,000—sought in 2015 to address an increasing contamination problem in the aquifer by drawing on Lake Michigan, located 17 miles away. The Great Lakes altogether hold one-fifth of the Earth’s fresh surface-water; even so, the request for just a drop in the bucket “stirred up a colossal struggle” between the states bordering the lakes.[1]

Waukesha’s city officials ran straight into the Great Lakes Agreement—a compact of the same type as the Shengen Agreement (on open interstate borders) in the E.U.(i.e., an agreement between some of the state governments rather than a federal law, regulation, or directive). In 2008, the eight member states bordering the Great Lakes agreed to prohibit “large amounts of water from the five Great Lakes from being pumped, trucked, shipped or otherwise moved beyond the system’s natural basin.”[2] Any of the heads of government could veto a proposal to make an exception. As Waukesha lies just outside of the natural basin of Lake Michigan, the request was at the mercy of any squabble or jealousy between the states that might be triggered. 

The basins of the five Great Lakes. Wisconsin is to the left of Lake Michigan (the lake to the southwest in the picture). (wikipedia)

The extended reach of the federal interstate-commerce clause had done much to remove potential conflicts between states from arising. In the E.U. as well, the corresponding basic law had resolved and even forestall conflicts between the states. Germany, for instance, could not block out-of-state beer simply because an ingredient was different. The German Constitutional Court bowed to the federal European Court of Justice, demonstrating that some governmental sovereignty had indeed been transferred to the federal level from the states. In the case of Waukesha, Wisconsin’s head of government would have to deal with his counterparts in the seven other states. This is very unusual in the American federal system; the typical dynamic consisted of a state government appealing to a federal-level institution. That habit also comes with at least one downside.

Specifically, appealing to an empire-level institution—one whose coverage literally spans a continent and beyond—can lead to the mistaken assumption that that level is essentially that of a state, and that of a state is in turn tantamount to being regional or local. Unlike most E.U. states, most U.S. member states do not have governments at the regional level. So treating the U.S. as if it were the state of France with a large back yard and the American states as if each were a few localities or even just a locality can result in faulty policy prescriptions.

For example, the historic drought in California at the time—the snowpack in the Sierra Nevada mountains (source of 30 percent of California’s water) being at a 500-year low (ouch!)—made the heads of government subject to the Great Lakes Agreement “more protective than ever of their increasingly valuable resource.”[3] The head of state and chief executive of the government of Michigan, Rick Synder, said, “Obviously I have concerns about the usage of the Great Lakes in any capacity.”[4] He characterized the lakes as “one of the world’s most precious assets.”[5] This could well be true, with the rising sea-level contaminating drinking water in the limestone beneath Miami in Florida, for example, and the drought in California.

On the other hand, with Lake Michigan being 1,740 miles (2800 km) from Los Angeles, and 1,192 miles (1919 km) technically from Miami, we are not talking about Berlin borrowing water from Munich or London from Edinburgh. Put another way, at least eight other towns and cities just outside the lakes’ basins yet in the states bordering the Great Lakes wanted lake water at the time. Is it not absurd to assume that water needs thousands of miles away might justifiably shut out those localities? That’s what many residents in Waukesha thought—“worries that dry Western states might one day try to pipe into Great Lakes water [being] absurd.”[6] According to Nancy Vogel, a spokeswoman for the California Natural Resources Agency, government leaders there were “already pressing regions of [California] to rely less on imported water. Besides, she said, “there are extreme legal, environmental and financial hurdles.”[7]

To be sure, a California company proposed a North American Water and Power Alliance in the 1960s to “divert water from numerous sources—the Great Lakes were to be a connecting channel—to feed the West. Another plan would have redirected water into the Canadian prairies and the Southwestern United States.”[8] Such plans on a continental scale, tellingly unrealized, a qualitatively as well as quantitatively different from requests such as Waukesha in Wisconsin. For one thing, continental plans would have to involve the federal institutions of the U.S., which take into account huge cultural and political differences between the member states as a matter of course (unlike the case of a state government), and over a thousand miles (two to three thousand kms) are far from clustering with Waukesha’s 14 miles.

In short, the unique aspects of federal institutions comprising an empire-scale “extended republic,” and the related sheer vastness in territory of such a Union as the U.S. (and E.U.) are much different than the governance and territory of the comprising states. Montesquieu referred to them as wheels within a wheel. Treating hypothetical demands from California as of equal force (and legitimacy) as that of Waukesha in Wisconsin, causing the actual request to arduously swim upstream against a driving current of concern, is just one problem with treating an empire-scale (and political type of) federal Union as if it were akin to one of its member polities/republics. Put another way, if the U.S. has forgotten what it is, then it is bound to err. Likewise, to the extent that the E.U. is subject to denial on the part of its citizens, that Union too is compromised from within.

[1] Monica Davey, “Request for Pipeline Tests a Multistate Compact,” The New York Times, August 26, 2015.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.

Tuesday, September 22, 2015

A Subtle Conflict of Interest in Obama’s Nominee for FDA Commissioner

Robert Califf, U.S. President Barak Obama’s nominee in 2015 to head the federal Food and Drug Administration (FDA), had received consulting fees of roughly $205,000 between 2009 and early 2015 from drug companies and a medical-device maker.[1] He donated the money he had made since around 2005 to nonprofit groups, and he had ceased all such work before he became the FDA deputy commissioner for medical products and tobacco. The question is whether he would have a conflict of interest in taking the helm at the regulatory agency that puts the public’s interest above those of the regulated companies. I contend that such a conflict is indeed entailed, though not on account of the money he received or any relationships he had developed with people at the companies.

As a clinical-trial researcher at Duke before joining the FDA, Robert Califf was a founder of the Duke Clinical Research Center Institute, which helped pharmaceutical companies run clinical studies. Such facilitation is oriented to helping companies, and, if ethically done, ultimately to helping the public too. In other words, he was not oriented to an area in which the respective interests of a drug company and the public are apt to be at odds. He could thus safely assume a mentality favorable to the companies. Such a mentality is at odds with that of a regulator of companies. Government regulation itself presupposes a tension between the interests of the regulated and the wider public. The mentality fitting the regulator’s role puts the public interest above the interests of the companies possibly to be regulated or already being regulated. A regulator, or an entire agency, captured by one or more of the companies being regulated, regulates sub-optimally because the public interest is valued less than a private interest (including the regulator’s own personal interests).

Public Citizen, a nonpartisan public-health group, urged the U.S. Senate to reject the nomination because “it would accelerate a trend of FDA decision-making that is more aligned with industry than with patients.”[2] Interestingly, the group did not highlight the fact that Robert Califf had received money from drug companies for consulting work, such as participating at an AstraZeneca employee-education session about cardiovascular disease. Rather, the complaint is oriented to the impact of a mentality aligned with the drug companies.

In the language of conflicts of interest, a regulator acting in line with his or her mentality assumes one role. Acting in line with the public interest above that of company interests to the contrary, can be considered another role. Both roles pertain to the regulator’s exercise of his office—for our purposes, the FDA Commissioner. The roles conflict. Robert Califf could reasonably be expected to be tempted to make decisions in line with his mentality (i.e., a private benefit to himself, and a broader private benefit to the companies involved) at the expense of his office’s duty to put the public interest above the two private interests (which include that of his mentality, or orientation). Herein lies the personal conflict of interest—personal in that he could be expected to be tempted on an ongoing basis to put his personal mentality (i.e., a personal benefit, psychologically) above the duty of his office to put the public’s welfare first.

To be sure, we cannot assume that Robert Califf would give into the temptation as Commissioner of the regulatory agency. Sanjay Kaul, a cardiologist, asserted that Califf had demonstrated his ability to act with independence. “Even though I have not always agreed with him on many issues, I respect him for his intellect and integrity. There is no doubt in my mind that he will leverage his inside knowledge of how the industry works to promote innovation without compromising public safety.”[3] Although I suspect that Kaul overstates the congruence of the respective interests of the industry and the public, we cannot assume that a predisposition to help drug companies necessarily wins out.

Even so, I contend that to have a person with a mentality or at least habit of helping companies in the regulated industry as a regulator necessarily involves an ongoing tension for the person, and furthermore that submitting said person to such a tension (or temptation) is itself unethical because of the subtle harm done on him or her. More simplistically, a regulator ought to have a mentality or bias that is aligned with putting the public interest above the interests of the regulated.

Even a subtle bias gained from substantial work-experience, which itself points to an underlying orientation and may even extenuate it, can be reckoned as a personal role. That role can be in tension with another role to be performed—a role oriented to a wider-held benefit (e.g., that going to the public). A personal conflict of interest can therefore exist even without any hint of personal financial benefits (e.g., bribery, extortion, etc.) being likely in a person’s position/office. Even as we tend to limit our recognition of personal conflicts of interest to the superficial level of money—such conflicts being much more extensive—the good news is that more of those conflicts are avoidable than we surmise. Merely in matching a mentality or predilection of a potential office-holder to the role having a wider rather than narrow distribution of benefits (i.e., acting for the public welfare), we can reduce the incidences of such conflicts.

[1] Drug companies spent an additional $21,000 reimbursing the cardiologist for travel, meals, and other expenses. Joseph Walker, “FDA Nominee Received Industry Fees,” The Wall Street Journal, September 19-20, 2015.
[2] Ibid.
[3] Ibid.

Saturday, September 19, 2015

Bank of America Board Ignores a Binding Resolution: Fiduciaries Seizing Power from Shareholders

Corporate board directors have a fiduciary duty to act in the shareholders’ financial interest. What if a board’s directors think they know better that the stockholders as to their interest? In such a case, the directors would be acting like elected representatives who vote contrary to the wishes of their constituents for their own good. While valid from the standpoint of representative democracy, I’m not sure the principle has legitimacy in the corporate context, wherein property-rights are being represented. Simply put, an owner gets to decide how his or her wealth is used, within legal parameters of course. The case of Bank of America’s board may suggest that directors essentially work for their managements while being shamelessly dismissive of even binding directives from the stockholders as a group.

“At the bank’s 2009 annual meeting, shareholders passed a bylaw requiring that the board be overseen by an independent “chairman.” The bylaw passed by a whisker, but it was nonetheless binding.” In the fall of 2014, however, “the board abruptly overturned the bylaw” by electing Brian Moynihan, the bank’s CEO, as chairman of the board.[1] In other words, the directors shamelessly dismissed a binding shareholder directive. The directors claimed that the bank’s governance structure—that is, whether to have the same person occupy both the CEO and chair positions or not—should be allowed to vary “depending on the strategy and environment in which [the bank] operates.”[2] I’m not convinced, however, that this is a valid point.

Firstly, the duality of the chair and CEO (i.e., having the two positions held by two people) is not oriented to particular business strategies or environments; rather, the governance device is intended to prevent a CEO, whose supervisor is the board, from dominating it and thus impairing its overseeing role. Such a situation is like an employee coming to dominate his boss. It doesn’t matter what the business is, the structure itself is problematically both ethically and in terms of the performance of the board and its management. That the board brazenly contradicted the stockholders’ binding bylaw in appointing the sitting CEO as chairman of the board may suggest that the CEO already had too much power over the board responsible for holding him accountable.

The man of the hour. Brian Moynihan, Chair and CEO of Bank of America as of 2015. His power exceeded even that of the stockholders, whose concentrated wealth he managed. Lest it be maintained that a CEO with such power optimizes corporate earnings, consider that his predecessor, Ken Lewis, had the bank purchase Countrywide, whose fraudulent mortgages played a vital role in bringing about the financial crisis of 2008. Perhaps CEO/chair duality is of value simply in reducing a corporation's systemic risk. Hence, Congress may legitimately intervene.(Simon Dawson/Getty Images)

Were governance structure to be so malleable as to change according to strategy and environment, corporate governance would be more like a policy than something worthy of a corporate charter. By analogy, the argument that a corporation’s governance structure should depend on strategy and the business environment treats a constitutional clause as if it were a mere statute alterable by a legislature rather than a constitutional amendment. The structure, in other words, is too easily changed, and thus subject to the power-agenda a CEO or chair.

Lest it be objected that corporations are merely economic entities and thus subject only to the criteria of efficiency and effectiveness, I submit that power was alive and well among the directors, the CEO, and even the stockholders as the matter of the binding bylaw came to a head in 2015. “Power is the only issue here, Bob Monks, a governance expert at ValueEdge Advisors, a shareholder-activist firm. The board’s appointment of the CEO as chair “is simply saying power is with the C.E.O. and any structural arrangement that purports to dilute his power will be driven out.”[3] The question is whether the stockholders as a group would have and be able to exercise enough power to hold the board and CEO accountable.

[1] Gretchen Morgenson, “At Bank of America, a Vote to Give Shareholders Due Respect,” The New York Times, September 18, 2015.
[2] Ibid.
[3] Ibid.

Wednesday, September 16, 2015

Gay Marriage: God’s Law, Legal Reasoning, and Ideology

Mixing religion, jurisprudence, and ideology together is one potent drink. Ingestion can cause palpable heart-burn as well as migraine headaches. In the case of gay marriage in the U.S., sorting out and evaluating the three elements can be rife with controversy and thus confusion. In this essay, I discuss the county clerk in Kentucky who refused to grant marriage licenses to gay couples because doing so would violate God’s law and thus betray Jesus. Her religious rationale makes for interesting legal reasoning. I then look at the U.S. Supreme Court’s gay-marriage decision. I contend that a natural-right (and thus human right) basis clashes with ideological anger. Human nature itself is on display throughout, particularly as it wades into religion, legal reasoning, and ideology.

Monday, September 14, 2015

Why the E.U. is Compromised in Handling the Refugee Crisis

At least four E.U. states, including Hungary, the Czech Republic, Slovakia, and Poland, rejected a federal plan on September 11, 2015 that would have imposed refugee quotas on the states. The failure to come up with a fair allocation of migrants by state threatened to undo the borderless travel within the E.U. The tremendous influx of mostly Syrian refugees exacerbated differences between the states; given their power even at the federal level of the E.U., the infighting was a risk to the viability of the E.U. itself. I contend that structural flaws in the E.U. itself unnecessarily compromised the Union from quashing the risk to itself by solving the refugee problem. The state governments were clearly not in unison in dealing with the problem themselves.

Refugees held up in Hungary because the state's government was overwhelmed. Why didn't the E.U. step in to help? (Mauricio Limo/NYT).

“The cold reception migrants received in Budapest was a contrast to the welcome in Munich.”[1] The refugees faced a patchwork of policies at the state level within the E.U., which at the federal level was “ill equipped to deal with the surge.”[2] Janos Lazar, the chief of staff of Hungary’s governor, accused the E.U. of failing to properly police its territory and manage the refugee situation overall. The problem “is the E.U. itself,” he said.[3] Left on their own, Hungarian officials had work begun on a fence along the E.U. border facing Serbia, held up trains and vehicles entering through Serbia bound for Austria and Germany, and cracked down on migrants entering without going through the designated check-points.[4] The E.U. requires migrants to register with the first state they enter, which put a strain on Hungary.

The difficulty in arriving at federal policies on screening, allocating, and paying for the migrants goes to “the heart of the viability of the European Union’s borderless interior,” which states on the border were at the time required to police and protect.”[5] Some of those states—notably Greece, Italy and Hungary—were so economically stressed that they were admitting migrants with little or no processing. This in turn prompted Austria at one point to search vehicles and trains entering the state from Hungary, formally to check for smuggled migrants and make sure that the trains would pass through the state on the way to Germany. Borderless interstate travel, which came into being in the Schengen Agreement,  was becoming undone. Angela Merkel of Germany warned that the agreement among many of the E.U.’s states would “be on the agenda of many” if refugees were not distributed fairly between the states.[6] The following week, with some states still shirking their fair share of refugees, Germany, Austria, Slovakia, and the Netherlands announced that they would reinstate temporary border controls. German officials claimed they were overwhelmed with the influx.[7] The controls would increase the pressure on other states, such as Britain and Poland, to take in more migrants and prevent non-refugee migrants from entering unlawfully. The complete loss of the free interstate transport of goods and people from state to state would increase the prospect of the E.U.’s eventual dissolution because the cohesion would be weakened considerably. The unfettered movement of goods and people played a crucial role in the E.U.’s cohesion, given the amount of sovereignty still at the state level.

The want of more governmental sovereignty at the federal level, and thus the inordinate amount retained by the state governments, gets us closer to the underlying weakness compromising the E.U. in responding to the strife between the states. A principle reason for the Union in the first place had been to prevent wars between the states. This purpose had also been salient in the founding of the U.S. and—after 1865—transferring more state sovereignty to the federal level. Even with the eventual imbalance of federal-state power in the U.S., the federal level would have trouble policing the border—putting more pressure on border states such as the Republic of Texas to pick up the slack.

As a manifestation of the state-centric orientation of the E.U., the governors of the states—that is to say, the people governing the states—were the central actors even at the federal level. At the time, the press quoted state officials, even in regard to what the federal role should be. This puts those officials in a conflict of interest, given the obvious temptation they had to propose and advocate for federal policies in their own state’s interest rather than that of the Union. With a parliament, council, and executive branch—each one having a federal official presiding—the federal level should have had its own voice so as to protect the Union’s own interests.

I suspect the underlying culprit at the time was the dominant states’ rights ideology, wherein even the term “state” is resisted—the implication being that the E.U. is somehow an international organization of still sovereign countries rather than a modern federation having its own federal government with a share of sovereignty and including a legislative body whose representatives are elected by E.U. citizens, another body representing the states, an executive branch, and a supreme court, the European Court of Justice. The denial thwarts the E.U. in the seemingly inexorable refusal to shift enough additional governmental sovereignty to the federal level that its institutions, which include a place for the state governments to have their say (as is the case in the U.S. Senate), could have provided a federal measure to address the migrant crisis before the state governors got into a tussle that in turn stood to compromise the E.U. itself.  

[1] Anemona Hartocollis and Dan Bilefsky, “Train Station in Budapest Cuts Off Service to Migrants,” The New York Times, September 2, 2015.
[2] Ibid.
[3] Ibid.
[4] Alana Horowitz, “Hungary Ramps Up Crackdown On Refugees,” The World Post, September 14, 2015.
[5] Alison Smale and Melissa Eddy, “Migrant Crisis Tests Core European Value: Open Borders,” The New York Times, September 1, 2015. (Online version is dated August 31, 2015; accessed September 13, 2015).
[6] Ibid.
[7] Willa Frej and Lydia O’Connor, “More European Countries Are Bringing Back Border Controls,” The World Post, September 14, 2105.

Saturday, September 12, 2015

Corbyn as Labour Party Leader in Britain: Are Increased Deficits Implied or Avoidable?

The notion that a political party oriented to redressing the widening economic inequality during the years following the financial crisis of 2008 and the subsequent debt-crisis in the E.U. necessarily must increase government deficits to do so is, I submit, faulty. That is to say, being especially oriented to the plight of the poor, with the goal being the elimination of extreme poverty, can be consistent with fiscal responsibility. The election of a socialist as leader of Britain’s Labour party presents us with an interesting case of assumed fiscal irresponsibility.

Jeremy Corbyn upon being elected as leader of the British Labour Party (Jeff Mitchell/Getty)

Jeremy Corbyn was elected leader of Britain's opposition Labour party in September 2015. He won 59.5 percent of the ballots cast, or 251,417 votes, in the leadership, winning in the first round. He vowed to work toward justice for the poor. "I say thank you in advance to us all working together to achieve great victories, not just electorally for Labour, but emotionally for the whole of our society to show we don't have to be unequal, it doesn't have to be unfair, poverty isn't inevitable," he said.[1] He a impressed many Labour party members by repudiating the pro-business consensus of former leader Tony Blair—going instead with wealth taxes, nuclear disarmament and ambiguity about EU membership." Additionally, he promised to increase government investment though money-printing and renationalising vast swathes of the state’s economy. The Tories have used the economic crisis of 2008 to impose terrible burden on the poorest people in this country," he said. All this would not come without a cost.

For his part, Prime Minister David Cameron assumed that Corybn’s platform would mean larger government budget deficits—a problem the E.U. has struggled to address by levying penalties on wayward state governments. Cameron said—and this is crucial—"It's arguing at the extremes of the debate, simply wedded to more and more spending, more and more borrowing and more and more taxes. And in that regard they pose a clear threat to the financial security of every family in Britain." He is using rhetoric in characterizing Corbyn’s platform as extreme. In any case, Corybn said nothing about borrowing more and thus increasing the state’s public debt, yet Cameron assumed that it goes along with such a platform. To be sure, Cameron has a political incentive to make the inference, at least publically. According to Reuters, “The likely abandonment of the political center ground, particularly on the subject of balancing Britain's books, is seen by many as a gift for the Conservative Party that could herald a prolonged spell in power for the center-right party.” For the media to take the Prime Minister’s inference at face value, as if Corybn himself had said it, is hardly fair not only to him, but also to the residents of Britain.

I contend that the inference is invalid—that is to say, fiscal irresponsibility is not necessarily part of the mix in going with policies oriented to relieving poverty and even socialist policies—socialism being having the government own the means of production (regulation being government control over private property).  Corybn mentioned wealth taxes; he could also have pledged to reduce or end corporate tax-subsidies and even increase other taxes, including on business. He could also have vowed to decrease government spending in areas that do not affect the poor. Obviously, a downside goes with each of these measures, but this is not my point here. Rather, I submit that increasing government revenues and even decreasing government spending overall is consistent with having policies oriented to relieving and even eliminating the scourge of poverty, which dehumanizes people and limits them in so many ways, including in productiveness. Accordingly, Corybn could have said that he would work on behalf of human rights within Britain.

Regarding nationalizing economic sectors by printing money, government debt would not increase; rather, the means is inflationary. Were Corybn to change his position on using monetary policy for a large-scale fiscal purpose, we would be wrong in assuming that he must increase the state’s deficits to do so. Alternatively, he could prioritize the sectors to be nationalized and do so gradually. If even this approach would strain government finances, he could float government bonds specific to the government investments and use the revenue from them to pay off the bonds. This use of debt is acceptable in the business world, and thus qualitatively different than simply adding to the state’s deficit without a tie to future revenue. For anti-debt purists, the nationalization policy could be subordinated to the anti-poverty spending such that nationalizations occur only when the government can afford to pay for them—say from running a surplus, which I contend is consistent with an emphasis on anti-poverty measures.

[1] William James and Michael Holden, “Socialist Elected UK Opposition Labour Leader,” Reuters, September 12, 2015. Source of all quotes in this essay.

Wednesday, September 9, 2015

Fewer Blue-Collar Lawmakers in Maine’s Legislature: Public Financing Cut by the U.S. Supreme Court on Free Speech Grounds

In 1996, Maine became the first American state to enact a public financing system for statewide elections. Voters passed a referendum by which the government provides money to candidates who meet a threshold of fundraising in $5 increments from voters in their districts. Before 2011, candidates got matching funds from the government if an opponent was funding his or her campaign with their own money, or if an outside group was spending money on the race over a certain amount.[1] The reason for the discontinuance of the matching funds and the subsequent impact on the number of blue-collar people running for office and being in the legislature demonstrate that the public financing of political campaigns can have a huge impact on both political campaigns and representation in a legislative chamber.

By 2008, 85 percent of lawmakers in the Maine legislature were running with public funds. Passage of the referendum allowed waitresses, teachers, firefighters, convenience store clerks and others to run for office and win. Women benefited especially, running in greater numbers than had been possible before. Thanks to public funding, Maine soon had the most blue-collar legislature in the U.S. The gap between Maine’s citizens and their representatives was effectively narrowed.

Historically, the American Founding Fathers knew that the legislatures of the member-states were closer to the people—and not just geographically—than the U.S. House of Representatives. Hence, some delegates at the Constitutional Convention decried the aristocratic nature of the proposed U.S. House. For one thing, the legislative districts of a state representative are smaller. Partly for this reason, citizen-legislators would be more likely. By design, the total number of legislators at the state level dwarfs the number of representatives in the U.S. House. The Founders thus understood that the vast repository of self-governance in the “extended republic” and the republics within would be mostly in the state legislatures. Hence, most authority over domestic matters was constitutionally assigned to the states, with the governmental institutions at the federal level enjoying only limited, or enumerated, powers. The impact of Maine’s referendum suggests that representative democracy has greater potential at the state level than at the federal level. To be sure, Madison’s theory that political minorities are less protected in smaller republics represents a downside to state government relative to federal. However, the greater presence of blue-collar people in Maine’s legislature may mean that Madison’s theory need not apply, at least concerning economic minorities. Unfortunately, the Maine experiment was rather severely clipped in 2011.

Specifically, the U.S. Supreme Court decided that providing public funds to match outside groups and self-funding candidates was a limit on their free-speech rights. Participation in Maine's public funding system dropped to 51 percent by the 2014 election. How increasing the money-as-speech of one person limits the free-speech of others is utterly perplexing to me, unless the context is of two people in close proximity using loudspeakers. At the very least, the American doctrine of free-speech had traversed a few curves—the 2010 Citizens United case being a major case in point.

Moreover, the court’s decision may point to a basic bias in the American political elite in favor of great wealth. Corporate donors would quite naturally want to squash the influx of blue-collar lawmakers—preferring instead “professional” politicians intent on being re-elected. My basic point is that public financing can have a huge impact not only on campaigns, but also on the composition of legislatures. That is to say, Americans need not assume that “deep pockets” entrenched in the status quo necessarily enjoy the overwhelming advantage in representative democracy.

[1] Paul Blumenthal, “Maine Voters Hope to Restore Their Revolutionary Election System,” The Huffington Post, September 4, 2015.

Tuesday, August 25, 2015

Migrants Overwhelming Europe: Unfairness Impeding the E.U.

More than 100,000 migrants, many of them refugees from conflicts in the Middle East and Africa, entered Hungary from January to August 2015, the vast majority en route to the more affluent northwestern E.U. states. A record 50,000, many of them Syrians, reached Greece by boat from Turkey in July alone. Meanwhile, Hungary was building a fence along the state’s border with Serbia, where 8,000 migrants were staying in parks, to keep more migrants from entering.[1] 

I contend that the disproportionate power of the state governments relative to that of the federal government accounts in part for the difficulty that the E.U. has faced in coming to grips with the tremendous influx. This case suggests why redressing the imbalance in the federal system has been plagued with difficulty.

At the time, Jean-Claude Juncker, president of the E.U. Commission—the federal executive branch—criticized state officials for “finger pointing” instead of coming up with viable public policies. He deputy, Frans Timmermans, said in an interview, “Europe has failed. Europe has to get moving. . . . So far, many member states have thought they can go it alone. That doesn’t work. We have to do it together.”[2] In other words, leaving the problem to the states was not working, yet something was impeding united action. I submit that the want of sufficient competencies (i.e., enumerated powers) at the federal level was the main obstacle.

Police disperse migrants at a registration place in Kos, Greece. Should the E.U. leave it to the state governments to handle the crisis? (Yorgos Karahalis/AP)

To be sure, for the E.U.’s general government to warrant additional competencies, it’s governmental machinery must be viewed as fair—that is to say, impartial regarding the various states. In taking sides in favor of creditor states as Greeks were heading to the polls to vote on a referendum in July on whether to accept additional austerity as part of a proposed debt “bailout,” E.U. officials compromised the legitimacy of their respective institutions, and thus of the federal government itself.

The unfairness may have manifested as well in the case of border protection funds. Hungary’s prime minister, Vikto Orban, claimed, “The European Union distributes border protection funds in a humiliating way.”[3] More power states to the west had been able to take the money from the eastern states. He went on to say that the E.U. institutions had failed to offer a coherent solution. I submit that the perception of unfairness and the failure to come up with a viable solution are linked, for granting institutions thought to be unfair additional authority is understandably difficult for the state governments on the “outside.” In other words, to the extent that E.U. institutions are pliable enough to be manipulated by the wealthiest, most powerful states, efforts to move toward a state-federal balance-of-power will face resistance.

[1] Reuters, “As Migrants Head North, Hungary Decries ‘Humiliating’ EU Policy,” The World Post, August 25, 2015.
[2] Ibid.
[3] Ibid.