Thursday, September 29, 2016

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

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

The full essay is at "Essays on the Financial Crisis."

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

Thursday, September 22, 2016

Russian Electoral Fraud: A Threat to Constitutional Governance

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

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

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

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

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

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

Wednesday, September 21, 2016

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

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

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

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

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

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

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

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

Thursday, September 15, 2016

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

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

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

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

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

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

Wednesday, September 14, 2016

Corporate Money in Politics: Undue Influence and Conflicts of Interest

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

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Monday, September 12, 2016

Exposing Bottom-Feeder Management: Business Schools to the Rescue?

I submit that the management being taught at American business schools does not take into account just how bad some managements actually are. Although I suspect that most of them are at the lower-levels of management, bottom-feeders can achieve some height, organizationally speaking. I don’t believe business-school faculties know just how bad “bottom-feeder” management actually is, or at the very least such management is tolerated rather than triggering a wholesale renovation of the managerial skills being taught. My aim here is to spark efforts to extend managerial science to proffer tactics oriented to correcting even the worst cases. In short, managerial science needs to reach a certain sordid managerial mentality in order to expunge it from even those businesses.
A telling indication of the problematic mentality is an overstepping, such as in using words beyond their regular usages. This can include conflating analogies with direct signification. Unfortunately, once a management creates such an instance, it tends to spread to other managements eager to take liberties.
One example of such a contagion is using the word guest for customer. Target was an early bird, applying the word used by hotels, and by 2015 grocery stores and other retailers were already primped with their very own “Guest Service” signs. What those presumptuous managements did was to ignore the difference between a guest and a customer. For one thing, guests don’t pay, whereas customers do. To ignore such a common-sense difference is to presume a certain entitlement to use the language incorrectly as if doing so were correct. Put another way, there is something phony about a management that directs its store managers to refer to customers as guests. The underlying mentality is similar to that of a person who bends the law because doing so is convenient. Unfortunately, the mentality does not stop at issuing misnomers as if they were no such thing; the entitlement is also to correct customers who tell store managers or employees, “I’m not a guest here; I’m a customer.” The insightful customer will recognize that she is face to face with ignorance that can’t be wrong. Like arrogance on stilts during a flood, the “guest” advocates should be under water apologetically rather than pronouncing the new meaning of the word as a fait accompli. Management science needs procedures or tactics that the offending managements can use to clear out the practice and its underlying mentality. Considering how fast the contagion has spread, we may conclude that business-school faculties are coming up short.
Another example of bottom-feeder management can be observed in dealing with customer-service departments. In this case, the pathogen resides at low-levels of management and the subordinate non-supervisory employees. Simply put, too many employees in call-centers are brazenly rude to customers, or at the very least too rigid, for management science to have reached them. The employees’ supervisors are culpable too, both in hiring such employees and not getting rid of them. I suspect the hiring process is too artificial in that it does not uncover the interviewee’s normal attitude, whereas the process regarding upper- and middle-management positions is more involved. The potential bottom-level employees are doubtless on their best behavior during an interview, and managerial science has not been applied at that level with techniques that can viably uncover how those employees would actually be on the job attitudinally. To be sure, unions may protect even such employees, but I suspect that it is more convenient for the supervisors to retain even problematic employees than having to undergo the process to fire them and hire replacements. Being oriented to their own comfort—following the most convenient route, many supervisors may not typically follow up on customer complaints, which includes listening to the relevant recorded calls.
Additionally, low-level supervisors erroneously tend to presume that the solution to a bad attitude is more training. That training, as a managerial technique, is presumed to be sufficient to change underlying attitudes demonstrates that the existing managerial science itself is not up to par. That the lapses are usually at the lowest level of management in a company may account for the fact that the science is faulty in extending the reach of training too far—to reach attitude rather than just conduct. Even a changed conduct with the same attitude is not good, as customers can see through the superficiality and fakeness.
In some cases, employees are so confident that they can get away with treating a customer rudely that they actually refuse customer requests to speak with the supervisor. Some such employees refuse to identify themselves. For such presumption to exist is itself a good indication that something basic is lacking in the application of management science to the lowest level of management in companies. I submit that the management taught in business schools is culpable too in that it is oriented to upper- and middle-level management, and management down on the front lines differs in significant ways from the management practiced at higher levels.
The management taught at business schools should give students ways to deal with the unique or extenuating aspects of low-level management in companies. Too often, customers and even employees must deal with low-class management. This includes supervisors who extend the management hierarchy too far, needlessly causing difficult power-relations by making one non-supervisory employee the supervisor of two or three other such employees.
For example, a consulting firm sent groups of two to four part-time employees out to register people to vote in a battle-ground state in 2016. Those employees had been hired to work with each other in small groups—none of the employees in the groups were to supervise; the manager/supervisor selected high-volume employees to coordinate the respective groups in terms of keeping track of where the other employees are. Some of those coordinators took it upon themselves supervise their peers in the groups and the real manager/supervisor did not enforce his position that no one in a group would supervise the others. In that atmosphere, employees designated merely to coordinate locations developed obnoxious power-trips. Within a group of two to four people, it goes too far to designate or allow a difference (i.e. hierarchy) in power. This takes the boss-subordinate relation too far because the small groups functioned better when the employees worked together.
Therefore, to apply management science oriented to upper- and middle-levels to the lowest level, among a few employees takes the science too far. The science should be extended alright, but only if it is tailored to the level rather than simply being applied unchanged. Being bereft of suitable, good management, the front-lines of companies tend to operate a world away from the quiet halls of upper- and middle-level managers. Hence, accountability is difficult, as many customers know. I suspect that middle-level managers assume they would be stretched too thin were they actually charged with intervening at the lower levels. However, the work assigned to such managers may be too upward-oriented, so their bosses may be to blame too. It is as if there were a dividing wall separating the bottom-level managers and employees from the middle-level managers. Such a wall is part of the problem, and it demonstrates that lower-level management is different and thus needs management skills that do not yet exist because management science has been devoted to one side of the wall.

Thursday, September 8, 2016

Going to the Extreme for Economic Growth: Low Interest-Rates as Unfair and Unwise

Is moderate monetary policy better than going to the extremes? The same can be asked of fiscal policy. Moreover, is a hypertrophic urge to prompt economic growth as if it were an end in itself better than seeking an economic equilibrium? Generally speaking, systems in equilibrium are more stable than those that include a schizogenic, or limitlessly maximizing, variable. An example of the latter is the population growth of our species relative to the equilibria otherwise established by the ecosystems in which we live. A desire for economic growth is a maximizing variable in a political economy. So too is the related practice of taking monetary (and fiscal) policy to an extreme. If the desire is great enough and the related policies extreme enough, the equilibrium of a political economy can be punctured with systemic risk increasing as does the instability of the system. I contend, therefore, that moderate government and central bank policies are preferable to going to the extremes. Here, I address monetary policy.

As Raghuram Rajan stepped down on September 4, 2016 as India’s central banker, he warned the world—and especially the U.S. and E.U.— against keeping interest rates low as a way to encourage growth. He claimed that low interest rates globally could distort markets and are difficult to raise. Central bankers setting interest rates low to stimulate economic growth can become “trapped” out of fear that raising the rates would slow economic growth.[1] This is ultimately a defect of democracy itself—the inflicting of necessary “pain” on the electorate being very difficult politically. Hence, for example, the U.S. Federal Reserve Bank at the time was caught in its “long-running dilemma about whether the labor market [could] easily withstand another interest-rate increase” even though many policy makers believed that the economy was nearing full employment.[2] That the market nonetheless expected that the Fed would “push off a rate increase until December” demonstrates just how politically difficult raising rates can be even when they are extremely low and the economy is near full-employment.

Given such political sensitivity, Rajan urged central bankers and government officials not to use low interest rates as a substitute for “other instruments of policy” and ‘various kinds of reforms” that are needed to encourage growth; it is simply too difficult politically to increase such “good” rates.[3] Relying too much on one policy lever, moreover, is not wise because doing so could introduce a maximizing variable that could compromise the equilibrium of a political economy.

As one example of why going to extremes on monetary policy is not a good idea, Japan was issuing negative interest-rate bonds at the time, which some investors were actually buying. Such bonds do not pay interest, and the principal returned is less than that which the investor paid for the bond. Willing investors were betting that their purchases would stimulate other investors to buy, so the price of the bonds would go up (the original investors would then sell for a profit).

Yet another instance concerns companies in the E.U. that were issuing bonds with negative interest-rates. Investors were “paying for the privilege of lending their money to companies.”[4] This is clearly dysfunctional from a financial standpoint. Edward Farley, head of European corporate bonds at PGIM Fixed Income, said, “It seems pretty bizarre to ask a corporate to look after your money and give you back less in two or three years’ time.”[5] To be sure, the E.U.’s central bank had expanded its bond-buying to corporate debt over the previous summer, hence “creating more demand for bonds and pushing down their yields.”[6] This does not explain the investors’ bizarre behavior in buying bonds with negative interest-rates. Something else was behind the oddity; something was wrong, financially speaking. The Wall Street Journal makes the source of the problem explicit, noting at the time that the negative interest-rates were a “sign of how aggressive central-bank policy is upending conventional patterns in finance.”[7] We can substitute “extreme” for aggressive, and we have an explicit link between upending conventional behavior in finance and a central bank going to extreme measures.

Another example of a warping of finance concerns savings accounts. When the price of money reaches an extreme low, people have less incentive to put money into a savings account. Consumption is artificially stimulated while saving is discouraged. This imbalance can through off the equilibrium of a stable economy. Furthermore, it is not fair to penalize one sector of a financial system (i.e., savers) while making it easier for another sector (mortgage holders). Put another way, the efforts to stimulate economic growth should not be borne on one group in the economy while another group benefits.

In general, going to an extreme in monetary policy, such as when a government relies exclusively on low interest rates to spur economic growth, is not wise because setting a variable in the economy at an extreme can cause the economy to become distorted. This in turn can rip a tear in the economy’s equilibrium. The solution is not just to balance the use of monetary and fiscal policy; resisting the temptation to go to extremes in demanding economic growth may also be needed.

At that more fundamental level, achieving and sustaining an equilibrium at the macro level (i.e., the economy or political economy) should be valued more when monetary or fiscal policy is being pushed to extremes. At that level, societal values, rather than merely political platforms and central-bank policies, must be changed; otherwise, electorates will continue to pressure politicians and central bankers to do what they have to in order to get more economic growth. To be sure, voters want more jobs, and thus a growing economy, so the societal values that support the demand beyond that which is in keeping with maintaining equilibrium are not easily changed. I submit that the existing societal values in advanced economies lapse in failing to recognize that equilibrium is elastic within limits. So to a certain extent growth vs. equilibrium, or increase vs. balance is a false dichotomy.

To be sure, the economic growth that is in keeping with growing the existing equilibrium rather than piercing through it is not necessarily enough for full employment to be achieved. As per the U.S. Full Employment Act of 1946, governments may need to step in to fill the gap such that everyone who wants a job can have one, even if the government is the employer. Franklin Roosevelt understood this in the Great Depression of the 1930’s, so he instituted the CCC and other programs in his New Deal. With governments stepping up to the plate, voters might not insist that their elected representatives and their appointees in turn set monetary or fiscal policy to an extreme level in order to pump up an economy beyond an undistorted equilibrium. Like someone who tries too hard, pushing monetary or fiscal policy to an extreme may ultimately be worse economically than had the devices been used moderately.

[1] Geeta Anand, “A Departing Central Banker’s Warning,” The New York Times, September 5, 2016.
[2] Eric Morath, “Jobs Data Cool Odds on Rate Rise,” The Wall Street Journal, September 3-4, 2016.
[3] Anand, “A Departing Central Banker’s Warning.”
[4] Christopher Whittall, “European Firms Borrow at Subzero Rates,” The Wall Street Journal, September 7, 2016.
[5] Ibid.
[6] Ibid.
[7] Ibid.

Tuesday, September 6, 2016

Brazil’s Rousseff Impeached and Removed from Office: A Case of Partisan Politics?

Dilma Rousseff was impeached and removed from office at the end of August, 2016. The state’s senate voted 61-20 to convict her on charges that she used illegal bookkeeping maneuvers to hid a growing budget deficit.[1] Her defense that she did not enrich herself through public office—that she did not steal public money for her own account—can be regarded as an attempt to deflect the legislators from the existing charges.[2] Only 56 legislators were necessary for a two-thirds majority. Given the problems of hyperinflation and fiscal mismanagement, including a growing public debt, her offenses were “deemed an impeachable crime.”[3] Although Brazil was hardly the only country where the chief executive has sought under political pressure to make a budget deficit look smaller than it actually was, enforcing deterring consequences even just in this case is laudable—while other, partisan motives, detracted from the vote’s legitimacy.

In a representative democracy, the popular sovereign—the People—have a right and interest in getting accurate deficit figures from their government. Put another way, accounting gimmicks have no place in a republic. Rousseff’s impeachment and removal from office would be inappropriate, however, to the extent that the legislators were motivated by partisanship or even displeasure as to the government’s economic performance. The point of having terms of office is to insulate office holders so they can enact painful measures that are nonetheless needed, such as efforts to reduce the debt. Not even something less than success with deficits warrants removal of office, for elections serve that purpose without compromising the institution of a term of office.

In Brazil, Rousseff’s administration “had come under pressure over a brutal recession.”[4] According to the Wall Street Journal, many people believed that “Rousseff’s fall had less to do with the official charges than her mishandling of South America’s largest economy, which moved from 7.6% GDO growth in 2010, when she was first elected, to the worst downturn since the Great Depression in her second term.”[5]  The economy contracted by 3.8% in 2015 and was expected to shrink another 3.2% in 2016.[6] Pressure to remove her out of attribution of the economic decline to her policies should not have been a factor in the impeachment vote because bad policies, or even becoming unpopular, is not criminal in nature. Sen. Cristovam Buarque of the Popular Socialist Party was wrong, therefore, when he declared, “Impeachment isn’t only about a crime. There is also a government without support in [the legislature] and without a path for the economy.”[7] At the very least, his vote to impeach the president was misguided and thus stained.

Being implicated in the “massive corruption scandal at the state oil company,” however, could justify impeachment.[8] Rousseff was indeed damaged by the scandal, as she had headed Petrobra’s board of directors when much of the illegal activity occurred. Petrobras wrote off nearly $30 billion in 2014 and 2015—much of it due to bribes and inflated contracts.[9] Yet did she know of these at the time? A subsequent investigation found no evidence that she personally benefitted from the big-rigging and bribery scandal in which politicians and contractors colluded to loot billions from the giant oil company.[10] Of course, this does not mean that she did not go along with the schemes. Given the magnitude of money involved, it is hard to believe that the chair of the board would be oblivious and thus guilt-free.

Regardless of the question of her tacit approval of the corruption, that the scandal “splintered her political base and devastated her popular support” should not have fed into the vote against her.[11] That such a political loss during a term of office would make it easier for legislators to vote against her is something they should resist, for otherwise the vote becomes merely a partisan opportunity to change the parties in power.

Her removal did indeed end 13 years in which her Workers’ Party was in power. Such a political feat as removing such a longstanding party means a partisan motive could indeed have contributed to the 61-20 result. Before the vote, her “political enemies hailed her looming removal “as a rebuke to the leftist tide that swept across many South American countries in the early 2000s.”[12] The use of an impeachment vote to make such a rebuke is not appropriate because the impeachment device is supposed to deal with criminal activity such as deliberately misstating budget-deficit numbers. That Sen. Ronaldo Caiado of the Democrats Party said the “ouster was a repudiation [of] the Workers’ Party” suggests that the impeachment mechanism was used inappropriately. In short, Caiado was confusing an election with an impeachment.

[1] Paulo Trevisani and Reed Johnson, “Brazilian President Rousseff Ousted,” The Wall Street Journal, September 1, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

Saturday, September 3, 2016

Apple Owes Back-Taxes in the E.U.: Blame Ireland or Apple?

The European Commission issued a formal decision on August 30, 2016 that the state of Ireland “recoup roughly €13 billion ($14.5 billion) of unpaid taxes accumulated over more than a decade by Apple, Inc.”[1] The decision “shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes.”[2] E.U. law “forbid companies from gaining advantages over competitors because of government help.”[3] This applies both the federal government and the state governments, so the law could be better stated as, “No state government shall help companies gain advantages over their competitors.” Presumably Ireland’s government made the offer of help, rather than Apple getting that government to comply with the company’s wishes. If so, the state government rather than the company should be held responsible. Put another way, if Apple’s board and management considered the Irish offer to be legitimate at the time, Apple should not be held to pay the back taxes; rather, the state government should pay a penalty to the Commission.
In the wake of the decision, Tim Cook, CEO of Apple, wrote, “Apple follows the law and we pay all the taxes we owe.”[4] In other words, the company took the Irish offer as legal and thus paid only the taxes owed as per Ireland’s position. To be sure, the arrangement was sweet for the company. According to the Commission, Ireland offered Apple tax arrangements in 1991 and 2007 allowing the company “to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.”[5] Ireland allowed the company to allocate profit at an Irish-registered unit called Apple Sales International, which purchased Apple goods from its outside manufacturers and sold them at a markup outside North and South America. In 2011, the unit brought in €16 billion in profit, and allocated under €50 million of it to Ireland where it was subject to taxation. The rest was allocated to a “head office” registered in Ireland and thus outside of U.S. jurisdiction.[6] The tax benefit is clearly unfair prime facie, to the U.S., and to other foreign companies doing business in the E.U. It should be noted, however, that the U.S. tax system encouraged “companies to find as low a foreign tax rate as they can, book as much profit as possible outside the U.S. and leave the money overseas.”[7] This is precisely what Apple did.
The principal question before us here is not whether the arrangement was fair, but, rather, whether the state government or the company was to blame, and thus deemed culpable to be fined or taxed. It is significant that the E.U.’s antitrust commissioner, Margrethe Vestager, noted that the commission’s investigation “concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.”[8] The state government is thus the culprit here in that it granted the illegal benefits. Doubtless Apple’s management and board had no reason to suspect that an offer from a government would be illegal. When a U.S. state government makes an offer to a company so it will build a factory in the state, the company’s management does not have reason to suspect that the offer is against U.S. law.
Hence, a spokeswoman for the U.S. federal treasury observed that “retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules” of the E.U. state governments.[9] Apple’s benefits may be quite unfair, yet so too are retroactive tax assessments when the company had no reason to call into question Ireland’s tax rules. I suspect that the unfairness in the former biased E.U. federal officials against viewing the state government rather than the company as culpable. If the issue is that of a state government violating federal law, then the federal executive should hold the state government to account, and thus fine it rather than the company.

[1] Natalia Drozdiak and Sam Schechner, “$14.5 Billion Irish Tax Bill,” The Wall Street Journal, August 31, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Richard Rubin, “EU Decision Upsets Treasury, Congress,” The Wall Street Journal, August 31, 2016.
“Companies based in the U.S. owe the full 35% corporate tax rate on their global profits. They get tax credits for payments to foreign governments, and they don't pay the residual U.S. tax until they bring the money home.”
[8] Drozdiak and Schechner, “$14.5 Billion Irish Tax Bill,”, italics added.
[9] Ibid.