Wednesday, August 31, 2016

The E.U.’s Federal System: Thwarting a Trade Deal with Canada

Dwarfed by the arduous trade negotiations between the E.U. and U.S., the E.U. and Canada actually completed negotiations on a free-trade deal in February, 2016. Ratification had to be pushed back from the fall. The drag from the “deep suspicion over the benefits of unrestricted trade” that was increasing globally was ostensibly the reason.[1] I contend that the true obstacle was the amount of sovereignty that the E.U. states still retained in the Union. Americans can think back to the Articles of Confederation as having the same major drawback. In the E.U.’s case, however, the Union had evolved past being a confederation, given the governmental sovereignty already at the federal level. The veto-power of a state government was thus out of place, and thus an obstacle for the E.U. even in fulfilling its existing responsibilities at the federal level.

The complete essay is at Essays on Two Federal Empires.

[1] Paul Vieira, “Antitrade Sentiment Thwarts Talks,” The Wall Street Journal, August 30, 2016.

Monday, August 29, 2016

California Passes Stricter Pollution Targets: Bringing Business Around

California’s legislature approved a bill (SB 32) in August, 2016 that extends the climate targets from reducing greenhouse-gas emissions from 1990 levels by 2020 (the former target) to just 40 percent of 1990 levels by 2030.[1] A second law, which includes increased legislative oversight of California regulators and targets refineries in poor areas, passed as well. Diane Regas of the Environmental Defense Fund pointed to California’s climate leadership. “As major economies work under the Paris Agreement to strengthen their plans to cut pollution and boost clean energy, California, once again, is setting a new standard for climate leadership worldwide.”[2] At first glance, it would seem that the legislature had freed itself from big business to pass the bills, but the sector itself was split. I submit the anticipation of a refreshed “cap and trade” program as an alternative (or mitigating factor) to stricter regulations played a role. Simply put, using the market mechanism in government regulation makes the stricter targets more palatable to market-based enterprises.
To be sure, oil companies and some manufacturers fought the bills hard. Of the higher costs and out-of-control regulators supposed or at least advertised by big oil, Governor Brown labeled the lobbying campaign a “brazen deception.”[3] Given the companies’ vested commercial interests, that lobbying effort could have been flagged as a conflict-of-interest situation. Accordingly, that campaign’s credibility should have been hard won, with Californians applying strict scrutiny to the “information.” Sadly, it is not uncommon for regulators to cast aside such a conflict because they are fine with relying on information provided by the very companies being regulated. 
That big oil did not dominate the debate may be due in part to Governor Brown’s use of the market mechanism to appeal to business in spite of the higher target in the legislation. Specifically, the legislation increased the government’s leverage in getting wayward polluting companies to participate in the cap and trade program, which requires companies to buy permits in order to release greenhouse gas emissions. According to Governor Brown, the passage of SB32 would increase the leverage that the government has to “reach an elusive deal with businesses that would prefer a flexible program like cap and trade instead of more stringent requirements to slash pollution.”[4] Business managers prefer flexible programs, and bringing in the market mechanism provides a sense of familiar ground.
Therefore, it is possible that the anticipation of a renewed, fuller utilization of the market-based method increased support for the bills from the business sector, or at least mitigated possible opposition, such that big oil and the climate-denying stalwarts in manufacturing could not dominate the lobbying. Put another way, incorporating the market mechanism either directly or indirectly as an alternative to tougher regulations applied across the board is a political strategy that can split the business vote such that the sector itself does not dominate lobbying campaigns in one direction and thus thwart the voters’ judgments, which should consider the arguments of both sides of a proposal.  

[1] Chris Megerian, “’A Real Commitment Backed Up by Real Power’: Gov. Jerry Brown to Sign Sweeping New Climate legislation,” Los Angeles Times, August 25, 2016.
[4] Megerian, “A Real Commitment.”

Thursday, August 25, 2016

Global Markets and London Overreact to the British Vote to Secede from the E.U.: Missing the Bright Spots

The world’s financial sector may be excessively sensitive to increasing uncertainty associated with major changes—that is, changes that impact how large institutions, including governments, relate to each other. In such cases, so much is at stake that forces (i.e., the major powers) tend to manage the large-scale change with a minimum of disturbance. In short, the status quo has too much at stake for the market’s feared uncertainty to actualize. The British referendum on whether the E.U. state should secede is a case in point.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Big Soda Campaigning against a Proposed Tax in San Francisco: A Vested Interest Thwarting Democracy?

With a proposed 1-cent per ounce tax on sweetened beverages such as soda-pop on the 2016 ballot in Oakland and San Francisco, the effected industry reserved about $9.5 million in television-ad time.[1] As of August 10th, the American Beverage Association had already spent $747,267 on campaign consultants and advertisements against the proposed tax in Oakland, whereas supporters of the proposal had spent only $23,297.[2] The imbalance itself could mean that business was subverting democracy by overwhelming voters. If big-soda’s ads were unethical as the pro-tax camp contended, the subversion would be especially harmful.
We’re “up against a campaign that’s willing to lie,” Campbell Washington, an Oakland Councilmember said.[3] As if the industry’s massive ad blitz were not enough of a problem for people like her, the industry was claiming that the tax would increase the prices of eggs, bread, and milk. “It’s an incredibly painful and unethical lie,” said Oakland Councilwoman Rebecca Kaplan. “People worry about having to pay for their groceries. To threaten that their groceries are going to be taxed when it’s not true is a totally despicable tactic from the soda industry.”[4] Hoe Arellano, a spokesman for groups opposing taxes, retorted that grocers “have shown repeatedly that they will pass on those costs to their consumers.”[5] He was assuming that the grocers would not up the price of sugary drinks, but would do so on other foodstuffs.
With the proposed tax being only 1-cent per ounce, Arellano’s assumption that consumers would see a significant increase in the prices of other foods and drinks seems a stretch. The industry’s strategy does seem to include scare tactics, which are unethical. The question of whether grocers would up the prices of soda to fully capture the tax increase is more difficult to answer. The evidence from Berkeley’s tax from 2014 shows that consumption of soda, energy drinks, and other taxed items fell by 21 percent in some neighborhoods after the tax took effect.[6] So People would likely cut down on their purchases of soda. It is possible, therefore, that grocers would not try to capture all of the tax with price increases on the drinks. Even so, the grocers’ profits could take a hit instead of prices of other foods and drinks being affected. I must conclude, therefore, that the industry’s advertising campaign contained untruthful fear-mongering and hence was unethical.
The broader question is whether the huge imbalance in advertising spending was getting in the way of the will of the people being found by democratic means. That is, aside from the fear-mongering, does a large imbalance of campaign spending cause voters to lean too far in one direction when they would otherwise weigh both sides as each having a point. Put another way, such an imbalance can keep a side from getting its message out. To be sure, the pro-tax camp was relying on a grass-roots approach, but that has its limitations in reaching the mass-electorate which has been saturated with ads from the opposing side.
It may be that business has a social responsibility, being within a democratic system, not to overwhelm it with spending on political ads. When an industry has a vested interest in the vote, it may be best for the industry to limit itself to providing facts to the public discourse. To be sure, election results do not always favor the party that spent most; money isn’t everything. Even so, it seems unethical for business to dominate society simply because the bottom line is affected. Free speech is of course a right, but the U.S. Supreme Court’s ruling that spending is speech can be regarded as problematic. If so, the use of public policy to reinforce good social responsibility would be possible and perhaps even advised in the interest of protecting the democratic process from being overwhelmed.

[1] Michael McLaughlin, “Big Soda Spends Millions on ‘Unethical’ San Francisco Area Ads Fighting Drink Taxes,” The Huffington Post, August 24, 2016.
[2] Darwin Graham, “Big Soda Is Spending Big Money Against Oakland Surary Beverage Tax Proposal,” East Bay Express, August 10, 2016.
[3] Ibid.
[4] McLaughlin, “Big Soda.”
[5] Ibid.

Wednesday, August 24, 2016

Apollo Global Flew Too Close to the Sun: Personal and Institutional Conflicts of Interest

I submit that people tend to get more upset over the exploitation of personal conflicts of interest than the institutional sort. That is to say, our blood boils when we learn of another person contravening a duty in order to gain financially, yet we don’t mind when a CPA firm falsely gives a qualified opinion on an audit so the company being audited will continue with that audit firm the following year. Logically, as the money involved is more in the case of the CPA firm and individuals within the firm stand to benefit personally as the firm is enriched by the continued business, yet even so, we cannot stand direct personal enrichment resulting from a conflict of interest. In August, 2016, Apollo Global, a large private equity firm, settled with the SEC. Both personal and institutional conflicts of interest brought on the $53 million fine. Hence, this case is useful in comparing the two sorts of conflicts of interest.
The S.E.C. accused the private equity firm of misleading investors and failing to supervise a senior executive who was twice caught “improperly charging personal items and services” to Apollo’s funds (and, by extension, to the investors).[1] Misleading investors here is an institutional conflict of interest because the activity is 1) systemic in an organization rather than being done by a person and 2) premised on the institutional relationship between the investor class and the firm. A person improperly charging personal items constitutes a personal conflict of interest because the individual’s personal gain is put before the person’s obligation to the company. In both cases, a narrower gain supplants a wider benefit, which in turn is usually associated with a duty.
The misleading of investors involves the private equity firm’s failure to inform its investors of “so-called monitoring fees.”[2] Apollo had been charging the fees to some of the companies it owned as compensation for the consulting and advice it had provided to them. The Apollo executives were essentially breaking out the supervisory aspect of owning a company and charging the latter for it. In short, Apollo was charging some of its companies for being owned. The private equity firm was even accelerating the monitoring fees when one of its companies was about to be sold or gone public. Specifically, “Apollo would accelerate the remaining years of monitoring fees into lump-sum payments.”[3] According to the S.E.C., these payments effectively reduced the “amounts available for distribution to fund investors.”[4] Apollo, and therefore its management, stood to gain. This represents a narrowing of the beneficiary group (from the companies and the fund’s investors to Apollo itself) by exploiting the fund’s duty to inform its investors. This is known as an exploitation of a conflict of interest.
Regarding the personal conflict of interest, one of Apollo’s senior executives submitted “fabricated information to Apollo in an effort to conceal his conduct” from 2010 to mid-2013.[5] The SEC charged Apollo’s management with knowing of the manager’s misconduct yet failing to do anything about it. In charging the fund for personal items, the manager gained personally, while the fund paid the price. Hence, here again the narrowing of a benefit is involved. The manager exploited his duty to report only work-related expenses in order to gain personally.
Which conflict of interest here aggravates you more? Another person enriching himself—stealing, in effect—or the fund’s charging its companies for functions that are part of ownership and misleading investors about it? I contend that most people would say the former, even though the misleading of fund investors has been a recurring problem. “A common theme in our recent enforcement actions against private equity firms is their failure to properly disclose fees and conflicts of interest to fund investors,” said Andrew Ceresney, the S.E.C.’s head of enforcement.[vi] Ceresney could cite the Blackstone Group and Kohlberg Kravis Roberts & Company as just two such cases.
I submit the following explanation. We humans are more easily resentful of other people enriching themselves unethically than of organized groups of people doing the same thing institutionally. A person found stealing raises our ire more than a company found misleading investors so to profit more at their expense. Something about groups and institutionalization mitigates our reactions. As a result, better legislation and improved regulatory enforcement oriented to breaking up institutional conflicts of interest (even before they are exploited!) find insufficient political will. The Dodd-Frank financial reform law of 2010, coming on the heels of a major financial crisis, thus leaves the CPA and rating company conflicts of interest in tact. We can expect, likewise, that private equity firms will continue to be tempted to exploit their conflicts of interest even as individual managers found to be stealing from the company "trough" will face prosecution. I contend that American society, including its business sector, could do worse than regard institutional conflicts of interest as more rather than less harmful than the personal variety.

1. Ben Protess, “Apollo Global Settles Securities Case as S.E.C. Issues $53 Million Fine,” The New York Times, August 23, 2016.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.

Monday, August 22, 2016

Homeless “Campers” Starting Wildfires: Outside the Social Contract

Nederland, Colorado. A town in Boulder County that had embraced marijuana dispensaries for profit, found itself just outside a wildfire that burned 600 acres in July, 2016. Two homeless men were charged with fourth-degree arson for failing to put out their camp fire. The townsfolk reacted in anger, pointing to the increasing number of homeless people in the nearby national forest. Officials had been forced to deal with “more emergency calls, drug overdoses, illegal fires and trash piles deep in the woods.”[1] Some residents urged the U.S. Forest Service to crack down on the homeless by imposing tighter rules on camping, or banning it altogether in certain parts of the woods most popular with the homeless. An analysis drawing on the political philosophy of Thomas Hobbes, a seventeenth-century English philosopher can be employed to reveal a broader perspective on the problem.
In his masterpiece, Leviathan, Hobbes theorizes that people in the state of nature once made a social contract wherein they ceded their political freedom to a sovereign, who could forestall civil strife and war. Self-preservation is the dominate motive here. In agreeing to give up some freedom to a system of laws and police, agreeing to be bound by them, people believe themselves more likely to survive.
Social-contract theory more generally is not limited to the political dimension. In living in society, people agree to give up some of their economic self-sufficiency that comes from living off the land. Economic interdependence comes from specialization of labor, trade, and even the use of money. In an economy, people are interrelating parts rather than being wholly self-sufficient. As recessions and the loss of particular industries demonstrate, being a part in an economy is not necessarily best for a person’s self-preservation.
Therefore, it is hardly surprising that people for whom the socio-economy—a system of interdependence—does not make self-preservation more assured would head to a forest to live off the land. The homeless in the national forest near Nederland can hardly be blamed for doing what is necessary to survive. Hobbes maintained that people have the right (of self-preservation) to fight off execution even though the punishment is issued by a sovereign who rightly holds all political (and theological) power.
To be sure, a state of nature in a forest located next to a modern society may be inherently problematic. That one homeless man camping long-term in the national forest outside of Nederland asked a forest official when the trash would be picked up points to the problems entailed—problems that would not exist were we all in the state of nature. If modern society can no longer tolerate people living in the state of nature, then places must be found for the extricated humans within the socio-political economy consistent with their self-preservation.
In the E.U., the operative principle is solidarity. Social policy is the typical means by which governments implement the principle wherein self-preservation is taken to be a human right that a society is obligated to protect. In the U.S., the principle is scant—eclipsed perhaps by that of economic liberty within interdependence. Hence, the safety net within American society has gaps. It is only natural for people falling through them—for whatever reason—to seek self-preservation outside of society. It is also natural for people accustomed to the safety in society to fear the human landscape outside of society, where liberties given up in society are taken back up. These liberties are feared by the people in society as they have given them up in exchange for safety. Therefore, we can see, using Hobbes’ theory, that it is in the interest of the residents of Nederland to petition the government of Colorado to accommodate the forest people back in society rather than continue to fight their nearby presence by pushing them further away from society.

1. Jack Healy, “As Homeless Find Refuge in Forests, ‘Anger is Palpable’ in Nearby Towns,” The New York Times, August 21, 2016.