Sunday, May 31, 2015

FIFA’s Corporate Sponsors: Reliable Ethical Change-Agents?

In the wake of the U.S. Justice Department’s initial arrests of FIFA officials in May 2015 on corruption charges, could the public reasonably expect FIFA’s corporate sponsors to pressure the international governing body of footfall (soccer in the U.S., where “football” is reserved for “subconcussions being inherent to a sport”)? If so, would the pressure be sufficient to rid the powerful international organization of its squalid officials and practices? I contend that these questions come down to how the power was divided at the time between the sponsors and the organization, rather than to the sponsors’ respective ethical positions or even how strongly the executives feel about ethics in business, including FIFA.

Cobus de Swardt, the managing director of campaigning group Transparency International, said after the arrests of FIFA officials on May 27th in Switzerland that the investigation should act as a "wake-up call" for the sponsors and partners pressure FIFA officials to change the organization’s governing structures and practices.[1] Notably, de Swardt explicitly excluded Sepp Blatter from being among the change-agents, not to mention their presider. "FIFA needs a new start . . . These scandals have taken place under Sepp Blatter's watch."[2] It is one thing to say that the most powerful person in sport should go, and quite another to actually push the deed to fruition.

Undaunted, de Swardt puts forth the following maxim as if it were a universal truth: "If you are putting many, many millions of euros into a business, then you definitely have a right and responsibility to demand that you are not tainted."[3] While FIFA’s sponsors and partners would doubtless have insisted on their right to demand changes in FIFA’s governance structure and officials, assuming a responsibility is not as reliable, particularly if it diminishes profits.
Even the possibility of a tarnished brand-reputation by association with FIFA may not have been enough of a possible negative financially to spur executives into action. "When a business sponsors an event or association such as FIFA, it is effectively tying part of its brand with them," said Peter Walshe at Millward Brown.[4] "There needs to be a fit and when trust issues threaten the organization, the sponsor will need to monitor whether that will have a negative effect on the trust of the brand."[5] This is the theory.

In practice, the major sponsors “get an awful lot of exposure and they'll be wary,” Nigel Curry, a European sponsorship and branding consultant said at the time. “(I)f they pull out, one of their rivals will step in."[6] Walking away from FIFA, or having Blatter unilaterally sever the lucrative relationship, could give rivals an opportunity to gain a strategic competitive advantage through a giant in sports marketing: The World Cup.

Therefore, we have good reason to be skeptical of Curry’s claim that the sponsors were “making more noise than they ever used to,” or at least that something other than chatter was involved.[7] A sponsor could easily let Blatter know that the statements are merely for PR purposes, without any power-play being involved. We can also doubt Curry’s optimistic prediction, "I think we'll see the pressure mounting in coming days” and his underlying assumption that executives at the sponsors would be most motivated by their dislike of uncertainty and scandal.  “(T)hey want to be involved in something clean," Curry insists.[8] Sponsors don’t like losing money either, and they may judge the uncertainty and possible taint from FIFA’s scandals as worth staying the course. What is hot news one day eventually cools, and a long-term contract implies taking a perspective that covers the entire interval rather than risks an advantage by tussling with Blatter.

Currie argued that FIFA’s sponsors and partners could make their respective voices better heard if they could act together to urge a clean-up of FIFA's system. FIFA's partners, which support the FIFA through long-term contracts, included Adidas, Coca-Cola, Visa, Gazprom and Hyundai/KIA Motors. They had “the right to use official FIFA trademarks in their advertising campaigns, exposure in and around stadiums and protection against ambush marketing.”[9] Those advantages are not chicken feed; they could easy dwarf reputational or ethical concerns. Second-tier sponsors included Budweiser and McDonald's at the time. They paid to be involved during and around the World Cup tournaments. Neither of those companies would want to rock the boat either.

As a group, however, these companies had formidable combined force; Visa, McDonalds, Coca-Cola, Budweiser, and McDonalds were major players in their own right, so concerted pressure from a united front would be hard for FIFA’s officials to ignore. If FIFA could not afford to lose its sponsors—meaning that replacing them with their competitors and others would mean less revenue—then ignoring the sponsors’ united stand was not something that FIFA officials could very easily ignore. At the time, the sponsors (and partners) provided almost a third of FIFA's revenues. FIFA had generated $5.7 billion in 2011-2014, which encompassed the Brazil World Cup, with sponsors and commercial partners contributing almost $1.6 billion.[10] Left to their own respective statements castigating the corruption, the sponsors and partners ran the risk of being picked off and replaced by a competitor.

Adidas, FIFA's oldest partner, put out a statement claiming that the company is "fully committed to creating a culture that promotes the highest standards of ethics and compliance, and we expect the same from our partners."[11] The company urged FIFA to "continue to establish and follow transparent compliance standards in everything they do."[12] This hardly rocked the boat over at FIFA, as Sepp Blatter had promised as much at his reelection two days after the arrests.

VISA put out a statement indicating disappointment with FIFA in light of the arrests. "As a sponsor, we expect FIFA to take swift and immediate steps to address these issues within its organization," the statement reads. "This starts with rebuilding a culture with strong ethical practices in order to restore the reputation of the games for fans everywhere."[13] Rebuilding a cultural is notably mute on who should do it. Indeed, this statement too is consistent with Blatter’s re-election promise to assume the responsible to change the organizational culture.

McDonald’s statement is more revealing. Matters of ethics and corruption were being taken very seriously. Interestingly, the statement revealed “contact with FIFA on this matter.”[14] Whether collusion or pressure was involved behind the scenes, and, if the latter, which party had the upper hand, would say a lot about the value of Curry’s suggestion of a united front. Of course, as marketing directors were among those arrested, staying with the statements of general ethical principles could protect the companies’ respective reputational capital in more ways than one, while not risking a very lucrative marketing venue.

1. Pan Pylas, “FIFA’s Commercial Partners Urged to Make their Voices Heard,” The Associated Press, May 27, 2015.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.
8. Ibid.
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Ibid.

Friday, May 29, 2015

On the Nature of Entrenched Power: FIFA’s President Ensconced in Corruption

In May 2015, U.S. Attorney General Loretta Lynch was “shocking FIFA like an earthquake,” according to the European newspaper, Das Bild.[1] She was leading “an American-led takedown of corruption in FIFA,” the Federation Internationale de Football Association, which oversees the sport of football, or soccer as it is known in the U.S., globally.[2] With great power comes resounding responsibility, even if the sound is ignored. When the head of an organization goes after the corruption-fighters rather than admitting to error at the very least in having presided over allegedly corrupt officials near the top—and in fact repeatedly dismisses calls to resign and not stand for re-election (but then is implicated and resigns just days after he was astonishingly reelected!)—the question becomes one of the intractability of squalid power, as if it were defying gravity—at least that of the ethical variety. 
A U.S. Justice Department investigation made public on May 27, 2015 “accused 14 international soccer officials or sports marketing executives of bribery, racketeering, fraud and money-laundering over two decades in connection with marketing rights worth hundreds of millions of dollars awarded for tournaments in North and South America.”[3] The Justice Department could document more than $150 million in bribes.[4] Seven officials, including two FIFA vice presidents and members of its finance committee were arrested in Zurich. Jeffrey Webb, president of the North and Central American and Caribbean regional body known as CONCACAF, was among those arrested. Sepp Blatter, FIFA’s president, was not implicated in the indictment. In addition, Swiss officials were investigating the FIFA votes that assigned World Cup tournament to Russia in 2018 and to Qatar in 2022. “Both decisions were marred by allegations of wrongdoing,” according to Politico.[5]

FIFA's Sepp Blatter, as if holding in all the bad news.

In making the investigation and arrests public, Lynch castigated the allegedly corrupt FIFA officials. “They were expected to uphold the rules that keep soccer honest and to protect the integrity of the game. Instead, they corrupted the business of worldwide soccer to serve their interests and to enrich themselves.”[6] The bribe-taking began in 1991 and never let up, she added. “They did this over and over, year after year, tournament after tournament,” she said. “These individuals through these organizations engaged in bribery to decide who would televise games, where the games would be held and who would run the organization overseeing organized soccer worldwide — one of the most popular sports around the globe.”[7] The putrid odor of corruption was ensconced in the very fabric of FIFA’s governance.

By 2011, the organization overseeing the sport worldwide “repeatedly faced charges of corruption while operating with a lack of transparency and little oversight.”[8] FIFA’s ethics committee seemed only to put up a few tokens to project the veneer of accountability. Specifically, Mohamed bin Hammam and another FIFA official, Jack Warner of Trinidad and Tobago, were suspended on May 29, 2011 by a FIFA ethics committee. Bin Hammam was accused “of offering cash payments of $40,000 apiece to about two dozen officials from Caribbean nations, with the understanding that they would vote for Bin Hammam over [the then-current president, Sepp] Blatter.”[9] Blatter, too, was accused of corruption, but he miraculously managed to evade the net of the association’s ethics committee. In fact, because bin Hammam withdrew his candidacy for the presidency, Blatter was able to run unopposed for a fourth term.

At a news conference on May 30, 2015 in Zurich, Blatter promised “zero tolerance” of illicit behavior in the future. However, “he remained defiant, remarking that “FIFA was experiencing ‘difficulties’ but not a crisis.”[10] He “dismissed calls” by people including Hugh Robertson, a sports minister in the E.U., that the election should be postponed because the results lacked credibility. The day before, Blatter had asserted, “I am the president of FIFA; you cannot question me.”[11] This statement speaks volumes; it reminds me of former U.S. President Richard Nixon’s statement, “If the president does it, that means it’s not illegal.”[12]

Again in May 2015, the day before FIFA’s annual Congress in Switzerland, Blatter refused to heed calls for his resignation in the wake of a scandal; in fact, he hoped he would be re-elected the next day! "We have the opportunity to begin on what will be a long and difficult road to rebuilding trust,” he said before he was re-elected. “We have lost their trust, at least a part of it, and we must now earn it back."[13] The “we” includes “I.” Just after his re-election to a fifth term, he explicitly stated that he would “bring back FIFA.”[14] “I will give this FIFA to my successor in a very, very strong, strong position . . . and a good FIFA,” he insisted.[15] Can a good FIFA come from a bad person, however, ethically speaking?
That the man in charge when the trust was lost would imply that he should be included—remaining at the helm no less—defies the nature of trust and smells of deceit, as if he had been oblivious to the widespread bribery. Ignoring the fact that two FIFA vice presidents and members of its finance committee had been arrested just a day earlier, he defiantly retorted, “We cannot watch everyone all the time. We have 1.6 billion people directly or indirectly touched by our game.”[16] Besides looking disingenuous, his statement seeks to belittle the corruption critics by implying that their criticism is ridiculous.
No critic was saying that FIFA’s president should have been keeping an eye on 1.6 billion people; rather the accusations were directed in large part at his inner circle. FIFA places a large amount of discretion in a comparatively small number of individuals. “Unlike the International Olympic Committee, whose 100-plus delegates vote on important matters like the awarding of the Winter and Summer Games, FIFA’s power is concentrated in a 24-member executive committee.”[17] This power-structure alone is conducive to bribery because relatively few people need be bought off.
To dissimulate and insult reasonable anti-corruption efforts undermines Blatter’s claim he is the man to head efforts at FIFA to rebuild the flattened trust. The U.S., and the Obama administration more particular, accepted some risk in leading the effort to clean up the corruption in FIFA.  “This Department of Justice is determined to end these practices, to root out corruption and to bring wrongdoers to justice,” Lynch said in announcing the arrests on May 27, 2015.[18] Such determination is particularly laudable when it is directed to the rich and powerful, since they have the wherewithal to fight back—even going on offense!
In the case of FIFA, its executive committee had the power at the time to “decertify any country’s soccer federation if it perceives interference from a national government. Critics [said] this leaves politicians reluctant to intervene, fearful of facing public wrath if a country’s soccer team is suddenly declared ineligible to compete.”[19] That Europe joined America in calling for Blatter to resign rather than put himself up for re-election is therefore extremely important, for FIFA could hardly expunge both the E.U. and U.S.
Therefore, Blatter went with contorting—even subtly ridiculing—an anti-corruption effort that involved considerable risk. He even hinted that the true objective behind the investigation was to keep the World Cup from being played in Russia and Qatar. “If two other countries had emerged from the envelope I don’t think we would have these problems today,” he told the members of FIFA’s Congress.[20] In actuality, the investigation came out of a income-tax-evasion investigation in 2011 of Chuck Blazer, who was involved in international football/soccer, and a separate investigation of a Russian organized-crime case in late 2010.[21] “I don’t think there was ever a decision or a declaration that we would go after soccer,” said Richard Weber, the chief of the I.R.S. unit in charge of criminal investigations. “We were going after corruption,” he added.[22] Blatter was likely getting his talking point from Vladimir Putin, president of Russia, who had much incentive to see the investigation discredited so nothing would stop Russia from hosting an upcoming World Cup that was part of the bribery investigation.
Blatter’s choices in how he would react publicly to the arrests were telling as to the man’s unethical character. I submit he was thus likely susceptible to, or at least likely an enabler of the widespread bribery that had been going on under his watch. That he appealed “to unity and team spirit so we can move forward together” as he addressed FIFA’s Congress on the day of the vote—just two days after the arrests—is to promise, in effect, even more decay rather than a real clean-up.[23] Even though he would resign less than a week after his reelection, that he was so defiant for so long, even as his secretary general became publicly linked to a $10 million deposit linked to bribery, reflects very badly on just how entrenched power can be at the top of our societal institutions. That is to say, the institutional devices we rely on to remove powerful, corrupt people from their lofty perches in organizations—and even governments—must be woefully inadequate.

[1] Josh Gerstein, “For Loretta Lynch, A Stunning Debut on the World Stage,” Politico, May 28, 2015.
[2] Ibid.
[3] Ibid.
[4] Matt Apuzzo, “U.S. Tax Investigation Snowballed to Stun the Soccer World,” The New York Times, May 29, 2015.
[5] Gerstein, “Loretta Lynch.”
[6] Ibid.
[7] Ibid.
[8] Jeré Longman, “Accusations Are Replaced by Anger at FIFA,” The New York Times, May 30, 2011.
[9] Ibid.
[10] Longman, “Accusations.”
[11] Ibid.
[12] The Frost-Nixon Interviews.
[13] Associated Press, “Sepp Blatter.”
[14] Lucy McCalmont, “Sepp Blatter Re-Elected as FIFA President for Fifth Term,” The Huffington Post, May 29, 2015.
[15] Ibid.
[16] Mike Collett and Brian Homewood, “Sepp Blatter Is Up for Re-election on Friday and Probably Going to Win,” The Huffington Post, May 29, 2015.
[17] Longman, ‘Accusations.”
[18] Gernstein, “Loretta Lynch.”
[19] Longman, “Accusations.”
[20] Mike Collett and Brian Homewood, “Sepp Blatter.”
[21] Apuzzo, “U.S. Tax Investigation.”
[22] Ibid.
[23] Mike Collett and Brian Homewood, “Sepp Blatter.”

Tuesday, May 26, 2015

Wasteful Agency-Spending: Employee Bonuses as a Solution

Use it or lose it. I am referring to “the habit of [U.S. Government] agencies spending all surplus funding at the end of the fiscal year in order to avoid budget reductions the following year.”[1] By spending the entire amount allotted for the budgetary year, a federal agency can avoid a lower base-line for the following year’s allotment from Congress. The incentive in this system is to spend every dollar in the budget, whether efficiently or profligately. The challenge is how to replace that incentive with another—one that results in efficient public budgeting. Unfortunately, relying on an incentive presupposes discretion, and one person can never be sure what lies behind another person’s use of it.

In May 2015, a bipartisan group of U.S. Senators proposed to “give agency inspectors general the ability to grant $10,000 bonuses to federal employees who identify surplus or unneeded funding at their agencies.”[2] According to one the senators, “the bill helps combat the perverse incentive to spend leftover money by offering employees a positive incentive to help IGs save money.”[3] That perverse incentive is what made the U.S.S.R. so inefficient economically, as state-owned (i.e., socialist) and controlled (i.e., regulated) enterprises (as well as government agencies) operated likewise. In that political economic system, quotas both in budgets and widgets were the currency by which the system operated. Such bloat, inefficiency and mismanagement that weakened the Soviet Union from within also hampers good government at the federal level in the United States.

The proposed law would amend the 1974 Congressional Budget and Impoundment Control Act, which gave Congress more authority in the budget process. “The Act was inspired by Richard Nixon’s refusal to disburse nearly $12 billion of congressionally-appropriated funds in 1973-74 through the executive power of impoundment.”[4] Nixon cited the impact of the federal budget deficit on inflation as the reason for refusing to spend appropriated funds. The rationale is problematic prime facie because the U.S. president is tasked with enforcing the law rather than selectively enforcing it. Not contradicting the law would have meant going back to Congress with a recommendation that a law be passed withdrawing the surplus funds.

Even though the proposed law in 2015 would place the discretion with civil-service employees rather than politicians, a Democratic U.S. Senate aide said “that the amendment’s language may [allow] federal government administrators to defund key agency functions for ideological or political reasons.”[5] Civil servants are human too, and, besides, they can be subject to pressure from politicians higher up the food chain. In other words, we are back to the same problem—that which is inherent to discretion. Sen. Mike Enzi can have all the faith in the world in “the people holding the shovel who really know how to solve problems”—that “the folks responsible for administering individual programs know where the money is, what is needed and what is being wasted”—but all this does not necessarily mean that the civil servants would flag a budget item as “surplus” because it really would be wasteful to spend the money. Even a bureaucrat holding a shovel could provide an efficiency rationale for cutting one budget-item so as to get out of having to do a boring  ideologically-objectionable task or program. The bonus would be, well, a bonus. That is to say, a perverse incentive.

[1] Andy Medici, “New Bill: Point Out Surplus Funds, Get a $10,000 Bonus,” Federal Times, May 21, 2015.
[2] Ibid.
[3] Ibid.
[4] Regional Oral History Office, “1974 Congressional Budget and Impoundment Control Act,” The Bancroft Library, University of California-Berkeley, March 7, 2011 (accessed May 23, 2015).
[5] Daniel Marans, “Rand Paul Amendment Would Increase Executive Branch Power,” The Huffington Post, May 22, 2015.

Friday, May 22, 2015

The U.S. Senate Approves Fast-Track for Pacific Trade Deal: Overstating the General Will

The way the world works is not in itself reason enough to dismiss the possibility of an ideal being more fully realized, and to refuse to take practical steps to its realization. Horse-trading is a staple in politics. The expression “making sausage” is typically used to refer to political horse-trading because people generally do not know—nor do they want to know—how sausage gets made; and it is probably best that way, at least according to the politicians. I propose that we “get under the hood” anyway, because only then can we ask ourselves whether political horse-trading is overused; a better way may be possible and even practical under some conditions.

Political horse-trading occurs when one elected representative (Mr. X) agrees to go along with another representative’s (Mr. Y) piece of legislation, which isn’t very important to X’s constituents but is to Y’s, in exchange for Y’s vote on another bill, which isn’t important to Y’s constituents but is to X’s folks back home. With enough support and horse-trading both bills stand a good chance of becoming law, whereas without the practice perhaps neither bill would pass. Although the legislative output of the legislative chamber is increased, that the support for each bill is overstated—the votes in favor being more than the number of representatives who support the legislation itself. A minority of representatives in the chamber may be for drilling for oil in natural parks, for example, but a bill whose express purpose is to permit such activity by oil companies could pass anyway due to horse-trading. The general will as per the representatives as a whole would not be in line with the legislation passed, meaning theoretically at least that the will of the people would not be in favor of drilling; so is more legislative output necessarily a good thing in a representative democracy? Rousseau would point to the general will as having been thwarted by ambitious politicians looking out narrowly for the particular will of their respective constituencies or even just themselves. Out of an original social contract comes “a moral and collective body made up of as many members as the assembly has voices, and which receives by this same act its unity, its common self, its life and its will.”[1] This will is the general will. If particular interests make out well at the expense of the good of the whole, then the general will is thwarted or compromised. Hence, horse-trading may not be justified by its facilitative impact in terms of legislative output.

In May 2015, the U.S. Senate rebuffed the U.S. President’s request to have the proposed Pacific trade treaty (PTT) voted “up or down” without amendments (i.e., “fast-track” authority). The U.S. House of Representatives had already approved the fast-track authority. In spite of Democratic senators claiming that workers would not be adequately protected as the trade deal had been negotiated, enough of those senators turned around and voted a week or so later to end the debate. Sixty-two senators voted for cloture, enabling the fast-track authority to go through. The U.S. president and the Senate’s majority leader had enough power to do the necessary horse-trading.

The vote nearly failed—being a few votes shy of the 60 needed to end debate. “It only succeeded after about a dozen senators engaged in a tense discussion in the middle of the Senate floor, well after the time for the vote had expired.”[2] The bending of the Senate’s rules on the duration of the vote is itself suspect; it could be the smoke over cloaked horse-trading. According to several U.S. senators, "the key was Senate Majority Leader Mitch McConnell (R-Ky.) promising Sen. Maria Cantwell (D-Wash.) to have a vote on reauthorizing the Export-Import Bank, which backs loans in places where there might not otherwise be sufficient funding to purchase products from the United States. A key beneficiary is Boeing, in Cantwell's state."[3] Does this constitute horse-trading, or would the reauthorization of the Export-Import Bank make the Pacific trade deal better for U.S. workers?

As an instance of corporate welfare, the Bank would primarily benefit American businesses that export to the impoverished countries getting the loans. The companies’ shareholders and to some degree the workers would also benefit from the additional business. Even so, reauthorizing the Bank would not mean that workers in countries that are party to the TPP would be protected or that the free-trade deal would not result in American workers being laid off. The A.F.L.-C.I.O. contended at the time that 700,000 jobs in the U.S. had been lost or displaced due to NAFTA.[4] Presumably the figure would not have been higher without the corporate welfare that the Export-Import Bank was dolling out. We can conclude, therefore, that Cantwell’s horse-trade with McConnell did nothing to remove Cantwell’s concerns about worker-protections under the TPP—assuming she really had concerns!

Moreover, we can conclude that the support for fast-tracking the TPP deal was less than 62 senators who voted in favor of ending debate, since the horse-trading made the difference in the cloture vote. In effect, McConnell broadened the scope of the vote by making a promise regarding another issue. In doing so, he blurred the general will and thus compromised the democratic principle wherein the people’s representatives vote on the merits of the same thing—rather than some of the representatives essentially voting on one thing and other representatives voting on something else. The legislative output is greater, but so is the risk that bad legislation will go into effect.

What if legislative votes were like straw polls wherein each representative would be asked what he or she thinks of a proposal, such as drilling in national parks. The matter requires judgment as well as information. Looking into an issue and making a judgment on it is what elected lawmakers are presumably supposed to do. Political horse-trading impedes or compromises the judgment and perhaps even the information-gathering. To be sure, judgment is involved in deciding which bills to trade; however, this sort of judgment is not the same as judgment on a particular issue, with a vote ensuring from it. Theoretically at least, being satisfied as a country with legislative output reflecting legislative judgments on the respective bills, rather than informally grouping them so they all get through, has the benefit of better public policy unless the lawmakers’ judgment capacity is bad (i.e., voters making bad choices in who they vote for). Put another way, if enough senators (technically, states) judged that the PTT negotiated by the Obama administration would be a bad treaty, then the fast-track status should not have been approved; the check-and-balance in the Senate’s power to ratify treaties would be of value.

Practically speaking, Obama and McConnell could not be expected to hold back on using their power to reach 60 votes. To assume otherwise would be tantamount to expecting a stream to run uphill. Horse-trading could be made illegal, but enforcement would be a bitch given the nature of the beast. Making use of referendums at the policy level, such as whether the U.S. Government funds should cover abortion, or whether pot should be legalized, would preempt legislative horse-trading, though voters could of course use their vote in a referendum for another purpose rather than to signify their judgment on the issue at hand. Even so, considering the prevalence of horse-trading in legislative chambers, the general will stands a better shot at being reflected if referenda are included on ballots. Voting only for a candidate—theoretically in part because of the candidate’s good judgment—implies that he or she would use it on issues rather than merely to horse-trade well. The prevalence of legislative horse-trading means that the electorate should not rely so much on voting to fill offices; some direct democracy should also be in the mix. Perhaps then legislative rules (with teeth) clamping down on horse-trading would be enough to pick up the slack. Even more idealistically, perhaps voters might vote for candidates who find contributing to the general will rather than obfuscating it to be fulfilling and of value. Of course, if the electorate deems (i.e., the general will) that good legislation is the aggregation of bills satisfying various parts (i.e., constituencies) of the whole, then the voters will favor candidates who value horse-trading. To the extent that such candidates get elected (and reelected) even though the majority of the voters believe that their representative should use his or her judgment on each issue rather than horse-trade, then at least part of the problem lies with representative democracy itself.

1. Jean-Jacque Rousseau, The Social Contract, in The Social Contract and Other Political Writings, Victor Gourevitch, ed. and trans. (Cambridge: Cambridge University Press, 2004), p. 50.
2. Michael McAuliff, “Senate Advances Fast-Track for Obama Trade Deals,” The Huffington Post, May 21, 2015.
3. Ibid.
4. Kevin Granville, “The Trans-Pacific Partnership Trade Deal: What It Would Mean,” The New York Times, May 11, 2015.

Wednesday, May 20, 2015

Banks Guilty of Colluding to Set Euro-Dollar Exchange-Rate Basis: Toward a Competitive Market

In May 2015, Citicorp, JPMorgan Chase, Barclays, and the Royal Bank of Scotland both acknowledged colluding to set the “fix” rate in foreign exchange markets, and agreed both to change their internal cultures and pay criminal fines of over $2.5 billion.[1] The U.S. Attorney General, Loretta Lynch, stated that her department would “vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American customers.”[2] I submit that this does not go far enough, given the size and power of the banks and the condition of the sector.

Private gain at the expense of the public good is an old story. Corporations give to Congressional campaigns at least in part in hopes of being able to bend federal lawmakers to insert and approve a loophole that would keep the good of the whole from constraining quite so much the particular private interests. To be viable in the long term, a republic—even a republic of republics—must privilege the public good over potentially overweening private interests; otherwise, the implicit message can only be that anything goes—provided a company’s head knows where to send the dollars.

In using “a private electronic chatroom to manipulate the spot market’s exchange rate between euros and dollars using coded language to conceal their collusion,” the banks, or “The Cartel” as they referred to their group, “acted as partners—rather than competitors—in an effort to push the exchange rate in directions favorable to their banks but detrimental to many others.”[3] In other words, the banks acted as price-makers rather than price-takers; the market could not, therefore, be considered competitive. I submit that Lynch did not go far enough in settling for an acknowledgement of wrong-doing, promised change of internal cultures, and a fine; they do necessarily result in a competitive marketplace. Lynch said that the “penalty all these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct” as well as “the pervasive harm done.”[4] Perhaps this so in terms of the size of the fine, but in giving the public confidence that the market would from then on be competitive. If firms in an industry are large enough that four of them colluding can set a price or rate, then the industry is oligarchic. To move it to a competitive basis, governmental action breaking up the largest firms (including in terms of ownership) is necessary. The justification lies in the value of the public good when economic liberty and property rights threaten to compromise the good of the whole.

To be sure, the U.S. Government would only be able to break up Citicorp and JPMorgan. Lest it be claimed that the resulting smaller firms would have less wherewithal to compete with Barclays and the Royal Bank of Scotland (as well as other banks), shedding less profitable divisions and focusing on developing a specialty-area can result in higher profits (i.e., from the sale of premium goods). Had lawmakers and President Obama given the U.S. Government the authority to break up financial institutions that have an unacceptable level of system risk (i.e, that a bank’s collapse could paralyze the entire financial system given the impact of high volatility on the market mechanism adjusting for risk), breaking up the largest American banks would not only make the sector more competitive, but also reduce the banks’ respective systemic risks. Were a crisis and ensuing short-sellers’ run on the banks occur, holding more dollars in reserves might not buy a bank much more time. It did not take long for Lehman Brothers to run through its cash once the short-sellers set in.

In short, the U.S. Attorney General could have taken a more systemic view and a related pro-active approach oriented beyond holding the banks accountable by including measures that would have provided the public with more confidence that the sector would be more competitive in the future.

1. Loretta Lynch, “Attorney General Lynch Delivers Remarks at a Press Conference on Foreign Exchange Spot Market Manipulation,” The U.S. Department of Justice, May 20-, 2015.
2. Ibid.
3 Ibid.
4. Ibid. Lynch said that the banks’ concerted actions “inflated the banks’ profits while harming countless consumers, investors and institutions around the globe—from pension funds to major corporations, and including the banks’ own customers—who placed their faith in the market and relied on it to produce a competitive exchange rate.” Ibid.

Monday, May 18, 2015

President Obama Overreaching on Trade

Throughout the twentieth century, the U.S. Government grabbed more and more power from the governments of the member-states. Even within the U.S. Government, presidents have tended to over-reach. Specifically, they have put their role in proposing legislation and treaties above their role as that government’s chief executive in enforcing existing laws. In May 2015, Sen. Elizabeth Warren issued a report whose thesis is that presidents of both parties had failed to enforce the labor-provisions in the existing trade treaties. That the current president, Barak Obama, was in the midst of negotiating yet another trade treaty said to have labor provisions included opens him up to the charge of over-reaching. That is to say, rather than focusing first on enforcing existing trade arrangements to which the U.S. was then a party, he was going beyond—that is, over-reaching—to negotiate yet another deal. Such over-reaching is akin to going beyond the negative legislative power in vetoing legislation to spend a lot of time proposing legislation at the expense of devoting time to running the executive branch as its chief executive and conferring with members of Congress on ways to improve the administration of existing law. In this essay, I use Warren’s report as a means into answering why the overreaching habit has become so ubiquitous among American presidents that the electorate barely recognizes it as such.

Citing analyses from the Government Accountability Office, the State Department, and the Department of Labor, Warren’s report claims that the U.S. Government “does not enforce the labor protections in its trade agreements.”[1] Eleven countries in which the U.S. had trade treaties with had “documented reliance on child labor, forced labor or other human rights abuses related to labor.”[2] After the Obama administration finalized a labor action-plan with Colombia in 2011—a deal Obama called a “win-win for workers”—105 union activist were murdered as of May 2015.[3] Given the opportunity cost of the foregone benefits of alternatives not pursued in taking a course of action such as negotiating another trade deal, Barak Obama’s decision to pursue a Pacific trade treaty put him on a course that did not make enforcement of existing trade treaties a priority. This is a bit like going out shopping to get more stuff rather than spending Sunday cleaning out the messy garage. That is to say, the mentality is the same; and yet, how often is it applied to a U.S. president? Moreover, what is behind it?

The way in which U.S. presidents are selected—by which I mean the process—may give us a clue. At the nominating stage, the emphasis is on campaigning by proposing and selling policies. “If elected, I will create an X,” for example. “If elected, I will push Congress to enact Y.” While such an approach is consistent with leadership, the emphasis comes at the expense of administration. Rarely do presidential candidates say, for example, “If elected, I will enforce Z.” That’s boring to an electorate used to getting flashy new things. Additionally, the nominating contests prize political games rather than administrative experience. For example, a candidate who has an innate ability to use media to sell himself and trash the other candidates is not necessarily the candidate who would be good at enforcing law by administrative means.

This is not to say that U.S. presidents should have a M.B.A. as a prerequisite. George W. Bush had one from Harvard, and yet he essentially delegated the office’s administrative functions to the cabinet secretaries. Rather, the selection process itself could be designed differently such that people oriented to the chief-executive role more so than proposing new legislation (i.e., a legislative role) would tend to come out on top. Rather than being driven by a desire to put his or her ideological stamp on society through new legislation—this being the cause of the overreach—the ideal candidate would be oriented to protecting the viability of the system of public governance itself should it suffer from a systemic fault-line or extant threat—and otherwise be most interested in administering the government machinery—seeing that the existing laws and treaties are enforced. It would not be as if this task could be done by next Tuesday after which there would be plenty of time to join Congress in its legislative role. Indeed, for the separation-of-powers to work in the U.S. Government, a president’s legislative role should be limited to the negative one exercised by the presidential veto.

In short, just as the federal government itself has encroached on the constitutional prerogatives of the governments of the member-states, U.S. presidents have encroached on the Congress’s legislative role by going beyond their negative legislative role. Even within the bundle of presidential powers, spending time negotiating more trade deals before making sure that the existing treaties are fully enforced evinces an overreaching. The greed of power lies behind the over-reaching itself. Behind the greed is a malignant narcissism that seeks to reimage the world in the ego’s own image. As an alternative mentality, imagine a person who gets more excited about getting a system—in this case, the federal executive branch—to work properly, which includes not only working well, but also producing a lot of output. Applied to the executive branch, this would mean an orientation to (and satisfaction from) overseeing the government agencies and pushing them to enforce existing laws, including the treaties on trade. For such a mentality to “gets its due,” the selection process, the office itself, and even the values of the electorate would need to change. By the latter, I don’t mean that the electorate itself would have to value administrative functions; rather, enough Americans would have to agree to buffer the presidency from their own desire to be titillated and amused by “presidential contests” and snazzy presidential proposals. This is in part why the delegates at the Constitutional Convention invented the severely-flawed Electoral College; there was to be a check—the limited electors at the state level—on the passions of the citizenry in the selection of the U.S. president.  

[1] Zach Carter, “Elizabeth Warren Details Obama’s Broken Trade Promises,” The Huffington Post, May 18, 2015.
[2] Ibid.
[3] Ibid.

Wednesday, May 13, 2015

Beyond Facebook’s Impact on Political Polarization in the U.S.

Any time “scientists” at a company purport to have done a study involving said company in any way, the public has good reason to be suspicious of the reported conclusions. Were the folks running the company really intent on providing credible information, they would use independent scholars (i.e., not being compensated by the company). Such a management would want to obviate even the appearance of a conflict of interest—their desire to provide the public with an answer being so strong. So the management at Facebook may not have been very invested in providing the public an answer to the question: how much influence do users actually have over the content in their feeds? In May 2015, three “Facebook data scientists” published a peer-reviewed study in Science Magazine on how often Facebook users had been “exposed to political views different from their own.”[1] The “scientists” concluded that if users “mostly see news and updates from friends who support their own political ideology, it’s primarily because of their own choices—not the company’s algorithm.”[2] Academic scholars criticized the study’s methodology and cautioned that the risk of polarized “echo chambers” on Facebook was nonetheless significant.[3] I was in academia long enough to know that methodological criticism by more than one scholar is enough to put an empirical study’s findings in doubt. Nowadays, I am more oriented to the broader implications of the “echo-chamber” criticism.

Although the study’s primary question concerned how much what users see on their feeds is due to the company’s algorithm, the question of whether Facebook was a contributing factor in the increasing political polarization in the U.S. was at issue. “What we do show, very definitively,” Eytan Bakshy, who worked on the study, said, “is that individuals do have diverse social networks. . . . The majority of people do have more friends from the other side than many have speculated. We’re putting facts behind this.”[4] Facebook users who self-report a liberal or conservative orientation had, on average, 23% of their friends with an opposing political ideology; and 28.5% of the hard news that such users encountered on the News Feed cut across ideological lines, on average.[5] We know from neuroscience that the human brain privileges people who are similar, so these low percentages do not necessarily mean that Facebook’s algorithm has a contributing impact. That it could be is perhaps of more significance.

According to the 2014 Political Polarization in the American Public study by the Pew Research Center, political polarization increased from 1994 to 2014; the emptying out of a “middle” is especially pronounced among the politically engaged.[6] The proliferation of news networks specializing on particular political market-segments and the ability of social-network users to pick what they encounter are arguably contributing factors, and subtle leanings from a giant company’s algorithm could play a significant role too on an aggregated scale.

The potential in terms of political influence on a mass scale with a usership as large as Facebook’s warrants consideration, however. At the time of the study, Mark Zuckerberg, founder and CEO of Facebook, had the wherewithal to subtly push a political point by carefully amending the company’s algorithm (as well as by using his public platform). Imagine Starbucks' Howard Schultz, who had felt free to use his company (and its employees) to further political issues (and positions) he values, in Zuckerberg's position at Facebook. Would users appreciate being manipulated, subtly or not, into discussions on race that tilt to Schultz's position?[7] The impact on public policy could be astounding simply on account of the proportion of Americans who actively use Facebook. The mining of user-data would give such a CEO even more power not only over particular users, but also on a societal level.[8] The problem, in other words, is that of an unelected person having such massive political power in a viable representative democracy. Similar to the rationale of anti-trust laws, limits on the size of social-media companies in terms of usership could therefore be justified with some degree of precedent.

See also "Taking the Face Off Facebook."

1. Alexander B. Howard, “Facebook Study Says Users Control What They See, But Critics Disagree,” The Huffington Post, May 12, 2015.
2. Ibid. I put the quotes around “scientists” to make the point that the conflict of interest renders the label itself controversial in being applied to the study’s investigators.
3. See, for example, Christian Sandvig, “The Facebook ‘It’s Not Our Fault’ Study,” Multicast, Harvard Law School Blogs, May 7, 2015.
4. Howard, “Facebook Study.” See Eytan Bakshy, Solomon Messing, and Lada Adamic, “Exposure to Diverse Information on Facebook,” Facebook Blog, May 7, 2015.
5. Ibid.
6. Ibid. See “Political Polarization in the American Public,” U.S. Politics & Policy, Pew Research Center, June 12, 2104.