Goldman's Ethical Conflict of Interest: Obviated or Enabled?

According to U.S. Senator Carl Levin, Goldman Sachs “profited by taking advantage of its clients’ reasonable expection[s] that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve.”[1] Not only was the bank secretly betting against housing-related securities while selling them to clients, in at least one case a client shorting such a security was allowed to have a hand in picking the bonds. What is perhaps most striking, however, is how little Goldman Sachs has had to pay for acting at the expense of some of its clients. One might predict on this basis that the unethical culture at the bank is ongoing.


The full essay is at Institutional Conflicts of Interest, available at Amazon.

1. William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (NY: Doubleday, 2011), p. 19.

Computer Technology Revolutionizing Industries: Books and Films

Crude oil was first drilled in 1859 in northwestern Pennsylvania (not in the desert of the Middle East). It was not long before oil lamps became ubiquitous, lengthening the productive day for millions beyond daylight hours. Just fifty or sixty years later, as electricity was beginning to replace the lamps, Ford’s mass-produced automobile was taking off, providing an alternative use of crude oil. For those of us alive in the early decades of the twenty-first century, electric lighting indoors and cars on paved roads have been around as long as we can remember. As a result, we tend to assume that things will go on pretty much as they “always” have. Other than for computer technology, the end of the first decade of the 21st century looks nearly indistinguishable from the last thirty or forty years of the last century. As the second decade of the 21st century began, applications based on computer technology were reaching a critical mass in terms of triggering shifts in some industries that had seemingly “always” been there.  Books, music and movies were certainly among the fastest moving,  perhaps like the dramatic change in lighting and cars beginning a century and a half before with the discovery of crude oil.

Part I: Publishing and Book-Selling

Borders, a chain of book stores that branched out into DVDs and music CDs, was at ground zero in terms of the major changes beginning to affect industry by 2010. All three of the company’s product areas were in decline due to applications of computer technology being harnessed by new companies more so than the old guard predominantly based in brick and mortar. Indeed, it was precisely the brick and mortar foundation of retail that was undergoing such dramatic transformation. Part I of this essay discusses the book publishing and sales aspect, while part II covers DVDs and CDs.

Even as established institutions such as Lehman Brothers can have tremendous inertia and thus seem nearly immortal, discovery or invention can act with relative haste in transforming industries—though after the vested interests with power have put up their last defense against the all-but-inevitable onslaught of the future piercing into the present. The invention of securitized mortgage-backed bonds brought the world's financial system to its knees in September 2008 after years of posturing in a housing bubble. Lawrence McDonald, who had been a trader at Lehman Brothers, subsequently wrote of his father's bearishness on the housing bubble.

In 1999, the elder McDonald had read a report that claimed that brick and mortar shopping malls were nearly obsolete--that within two years everyone would be doing their shopping on-line. Yet this prediction was too hasty. The prospect of even such far-reaching and transformative invention requires some time. "The retail world will hit back," Larry's dad said. "I guess people like picking up books and holding 'em, checking 'em out. There'll still be bookstores. They've been there for hundreds of years, and they'll still be there in the next century"[1] Yet in going so far beyond the inevitable hitting back, the elder McDonald sounds antiquarian. Even such inertia protected by name, wealth and real estate was bound to succumb after a threshold point at a speed that would take many in the older generation by surprise. For once a threshold point between the status quo defenses and the application of a new technology is reached, it is inevitable that change shall come cascading down like a waterfall over a dam then realized to be mud rather than gold.

In mid-April 2011, the number of e-book sales surpassed paper books in the U.S. for the first time. This could be taken as such a threshold of sorts. The digital book market had reached $1 billion. Amazon.com had the vast majority of the e-book market and e-readers, with Barnes & Noble's Nook reader running second. Borders had waited too late with the Kobe reader, and was thus left depending largely on its declining paper book sales. Launched in November 2007, there were already 7.5 million Kindle readers sold by Amazon by 2011. The company was taking advantage of the revenue from its e-book sales to move its color e-readers closer to ipods by adding applications such as the ability to check email, hence integrating applications and facilitating the shift from paper to digital books.

Furthermore, Amazon’s Kindle Direct Publishing was fundamentally changing the self-publishing business, with major implications for publishers, established writers, and bookstores. With self-published writers selling their books for $1 on Kindle, downward price pressure was being felt even by bestsellers, who found that they had to compete on Kindle at $10 a book, rather than merely sell for higher amounts at the brick and mortar bookstores. In The Wall Street Journal, Jeffrey Trachtenberg quotes a senior publishing executive who observed that Amazon was “training their customers away from brand name authors . . . instead creating visibility for self-published titles. Trachtenberg explains that the low cost of digital publishing, plus the ability to use twitter, facebook and a blog to market a self-published book “enabled previously unknown writers to make a splash.”[2] The rise of digital and self-publishing was prompting more people to question their next trip to the bookstore.  Indeed, the book itself was being fundamentally changed with the readers like Kindle and Nook.  Such changes naturally take some time for particularly older people to adjust to, but the young, having been raised with computers, slipped right into the new way of buying and reading books (and newspapers, for that matter).

Even the traditional brick-and-mortar library was being forced to adjust. In April 2011, Woo and Trachtenberg reported that Amazon had announced that it would add a public-library feature to its e-reader, Kindle.[3] For Amazon, library borrowing mean more Kindle readers sold and e-book sales. Barnes & Noble's Nook reader had begun with a library-reader ability, so Amazon was making the feature universal. Rather than being able to save to a hard-drive, library-card holders can temporarily download a digital book they have checked out, typically for 14 or 21 days. Publishers that sell digital books to libraries realized that such books do not wear out, so the arrangements typically require a re-purchase after so many check-outs. HarperCollins, for instance, requires repurchase after twenty-six.

Not surprisingly, libraries tend to question the need to repurchase a product that they have already purchased. It might be that traditional publishers were still not “getting it.” That is to say, they had not yet understood the impact of the new technology—the repurchase requirements being essentially a manifestation of insecurity. The traditional publishers may have been sensing that they were suddenly on borrowed time, and were instinctively grasping at whatever was closest to them in the water.

At the time, I found myself grappling with e-books and readers. At the same time, I would find myself in Borders sometimes thinking all this will be gone and yet no one here—even the staff!—seems to realize it. It was as though the world of brick and mortar bookstores I had known would “always” be had already gone; it was like seeing something as already a ghost even as other people were still taking it as real. It is perhaps like looking back on one’s childhood home as distant and already gone even while it still exists and one is in it. That is to say, it is to sense the present as already historical because one can see that it too shall pass. From such a perspective, the present takes on the appearance of being its own world because one is no longer completely in it; rather, a part of one’s perspective is like a time-traveller already stepping back in time to that world.

As a writer, I was grappling with making the leap to digital and self-publishing even as I was frustrated with the traditional route, as having published an academic book had not made it any easier to broaden out into novels and screenplays. I can understand why digital and self-publishing has taken off at the expense of the traditional publishers. Whereas formerly new writers had to find a literary agent and a New York publisher, the changing technology has brought with it new decisions, suck as whether to go with Kindle or put one’s first book on one’s blog for free downloading in hopes of viral marketing albeit without revenue on the project. In other words, the technology opening has pushed writers more into the publishing business.  Future writers might feel they need an MBA—perhaps taken on-line (university education being impacted by the new technology as well).

Part II: Movie Theaters, On Demand, and DVDs

The effects of computer technology on the sales of movies and on film-making itself were notable as the second decade of the twenty-first century was getting underway. Stopping inside a Blockbuster store to rent a DVD, which itself was short-lived in the process of technological development, was going by the wayside; even buying a DVD at a Borders or Barnes & Noble was fading. As dramatic as these changes seem, the impact on film-making and, moreover, in what a film is hinted at even greater transformation.

In early 2011, Borders closed 200 stores in the United States. Although e-books sold by Amazon.com were giving Borders a run for its money, the chain was also being pummelled by the increasing file-sharing of music and movies as well as DVD rentals by mail and online movie-streaming sold by Netflix, which was rushing to ride the wave from DVD to on-line streaming.

In April 2011, Netflix posted an 86% jump in quarterly profits as its online movie streaming service clicked with consumers. According to The Wall Street Journal, “In the letter to shareholders, signed by Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells, … the two executives said in the letter that its DVD offerings will be a ‘fading differentiator’ for the service, which last year began letting people subscribe to a streaming only service for $7.99. Already the company has begun to discourage people from choosing rental plans that offer consumers the option of also renting DVDs. In its letter to shareholders, the company said the sign-up page on its website for non-members is now ‘all about streaming’.”[4] The executives wanted to see the postal costs associated with the company’s DVD rental service drop with the decreasing volume as customers switch over to online streaming to make room for the rising costs of licensing content. In other words, the company was riding the technological wave from DVDs to online viewing, leaving brick-and-mortar based DVD companies such as Borders in the dirt.

 (The Wall Street Journal)

The eclipse of DVD sales by on-line streaming effected not only companies like Borders and Blockbuster that had remained primarily Brick-and-mortar enterprises; the change was also putting more pressure on studios to get their films On Demand sooner—at the notable and rather vocal expense of movie theaters.

According to The Wall Street Journal, technology was putting pressure on the old “windowing” system, which “staggers a movie’s release through avenues like theaters, DVD and television, to maximize the profitability of each.”[5] Theaters were concerned about DirecTV’s plan to add movies sixty days after they hit theaters to premium video on demand—cutting the time in half. The studios pointed out that most films earned the bulk of their profits within the first few weeks of release. Filmmakers, including James Cameron of “Titanic” and “Avatar,” wrote that theaters are “the optimum, and most profitable, exhibition area” of the art form.

To be sure, films such as “Titanic” and “Avatar” are particularly striking on the big screen. By the time “Titanic” got to TBS on television, the relatively tiny screen was encumbered by the network’s programming graphics even during the film. Imagine, if you will, a cartoon figure dancing around the bottom left of the screen while “TBS” is shown on the bottom right as the hero and heroine “fly” at the front of the ship in a beautiful sunset.  The “windowing” process can be viewed as a trajectory of increasing decadence as well as inferiority in terms of picture.

However, even with the decadence of commercial television cannibalizing even its own programing, the size of the screen makes less difference for some films than others. Furthermore, to claim that earlier availability on television (or computer) reduces the incentive to see a film in a theater is to manipulate customers rather than trust in us to choose the means of delivery. Todd Phillips, director of “Hangover,” argued that the new science would dissuade would-be movie goers from going to the theaters because the sense of urgency would be removed.  If that sense is constructed rather than real, DirecTV may have been doing the customers a favor.

Were directors such as James Cameron truly concerned to protect the optimality of their art form, the fact that films do not benefit equally from being on a big screen relative to a television wide-screen would suggest that customers could benefit from a system in which films are ranked in terms of the importance of the big screen. Directors could issue a recommended score, say from 1 to 10, and film critics could proffer their own recommendations.  This would systematize the tendency of critics to urge “see it at home” versus “go to the theater.” Of course, in viewing previews advertised on a computer or on television, consumers make their own decisions, rather than feeling an artificial urgency that is in the interest of the theater owners.

As salient as computer technology is to changing how (and where) movies are being watched, the impact of such technology on filmmaking itself and how films may be viewed in the future is perhaps even more dramatic. Cameron’s “Avatar,” for example, involved new digital motion-detection technology in 3-D. More significant still would be a merger of virtual reality and movies (perhaps via video game technology), such that one day a viewer may be in a scene rather than looking in on a narrow range of one on a rectangular screen. Such a development would probably reverse the tendency of scenes to get shorter and shorter (in line with decreasing attention-spans?) because the viewer would be more invested in a given scene.  “Shots” would not make sense; rather, the question for the director would be whether to control the viewer’s vantage point, and if so, how often to change it in a given scene. Furthermore, an editor would have to make the scene changes such that the viewer would not disoriented—“jumping” from one “world” suddenly into another.

Of course, movie theaters would not exist were virtual reality the predominant means, unless the traditional showing would also be sought, and even then, the economics might not support the brick and mortar venues.  In fact, if Cameron and the theater owners were correct, the theaters might not survive DirecTV and the internet.

Like the brick-and-mortar bookstore and library, the movie theater might not be as permanent as their history in the twentieth century might suggest. Indeed, what we take for a book and a movie may be on the brink of fundamental change not only in delivery, but also in terms of content. In both cases, novices with a passion are able to try their hand (or camera) and gain some market share from the “professionals.” Even the latter are being forced to adapt or become antiquated.  As the second decade proceeds, these industries are on the cusp of changes perhaps on the order of those that occurred in lighting and transportation from the 1850s to the advent of commercial air travel. It is difficult to compare the two periods in terms of their respective transformations because the industries differ and the same people were not alive for both. Even so, I suspect that the hope and optimism that came with electricity and the automobile are in the air concerning what is possible as computer technology continues to develop and be applied.

1. Lawrence McDonald, A Colossal Failure of Common Sense (New York: Crown Business, 2009), p. 63.

2. Jeffrey A. Tracktenberg, “Cheapist E-Books Upend the Charts,” The Wall Street Journal, April 21, 2011, B1, B4.

3. Stu Woo and Jeffrey A. Trachtenberg, “Amazon’s Kindle Will Offer E-Books from Libraries,” The Wall Street Journal, April 21, 2011, B4.

4. Nick Wingfield, “Netflix Faces Rising Costs,” The Wall Street Journal, April 26, 2011.

5. Michelle Kung and Ethan Smith, “Filmmakers Pan DirecTV Plan,” The Wall Street Journal, April 21, 2011, B2.

Business Ethics in the Business World: A Glimpse from Goldman Sachs

Goldman Sachs’ ethics code reads in part, “[We] expect our people to maintain high ethical standards in everything they do. . . . From time to time, the firm may waive certain provisions of this Code.”[1] The explicit conditionality is notable and significant. I contend that among other reasons, a negative impact on the bank’s financial position and/or profits is apt to trigger such a waiver not only at Goldman Sachs, but from the business standpoint more generally.


The full essay is in Cases of Unethical Business, available at Amazon.com.

1. William D. Cohan, Money and Power: How Goldman Sachs Came toRule the World (NY: Doubleday, 2011).

A Structural Conflict of Interest in Feinberg's BP-Claims Disbursement Office

A year after the BP oil rig explosion in the Gulf of Mexico, only $4 billion of the $20 billion fund alloted by BP had been paid to claimants. Out of 800,000 claims submitted, two-thirds had been processed.  That is to say, two-thirds of the claims translates into 20% of the available funds. It appears that Ken Feinberg, the lawyer tasked with administering the funds, was being too stingy.

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

Conflicts of Interest for Public Officials: How Broad?

Michael Carrigan, a member of the City Council in Sparks, Nevada, “says he was trying to make sure his vote on a proposed casino, one that his campaign manager helped develop, did not pose an ethics problem.”[1] Carrigan backed the Lazy 8 casino project proposed by Red Hawk Land Co. Carrigan’s friend and campaign manager, Carlos Vasquez, worked as a consultant on the project. The question is whether the elected official’s relationship to his campaign manager who was a consultant on a project to be voted on constitutes a conflict of interest sufficient for the official to have not voted. The Sparks city attorney told Carrigan that he could vote on the project as long as he publicly disclosed his relationship with the project consultant. The attorney was obviously thinking in terms of transparency. Carrigan made the recommended disclosure. The Nevada Ethics Commission, however, claimed after the vote that Carrigan had a conflict of interest and should have abstained even with the transparency. In its reprimand, the commission cited ethics law that says public officials must not vote when their judgment could be affected by a commitment or relationship to someone in their household, a relative, business partner, or a person “substantially similar” to those specified. The commission classifies the campaign manager in the “substantially similar” category because Carrigan’s loyalties to his campaign manager would have affected his judgment. Caren Jenkins, executive director of the Nevada Ethics Commission, explains, “Here was a friend, a buddy, a close confidant. If Mr. Carrigan ever thought it was in his best interest to vote against the project, would he have?”[2] Carrigan sued the commission for its reprimand, claiming it violated his free speech rights. The Nevada Supreme Court sided with Carrigan, who pointed to the fact that he was not in business with his campaign manager. The Nevada Supreme Court said the catch-all category the commission cited failed to “limit the statute’s potential reach (or) guide public officers as to what relationships require recusal.”[3] The state court said the law “thus chilled speech.” In its appeal to the U.S. Supreme Court, the lawyer representing the commission argues, “State and local legislators have no personal ‘free speech’ right to cast votes on particular matters, much less ones in which they have a personal interest.”[4] The Reporters Committee for Freedom of the Press similarly claims that rules such as Nevada’s are important to ensure politicians don’t vote based on personal interests.

The full essay is at "Conflicts of Interest for Public Officials."

---

1 Joan Biskupic, “Nev. Official’s Vote Turns Free-Speech Case,” USA Today, April 18, 2011, p. 6A.
2. Ibid.
3. Ibid.
4. Ibid.

Contending Healthcare Social Contracts: A False Choice?

On March 21, 2010, the U.S. House of Representatives approved “a far-reaching overhaul of the nation’s health system . . . , voting over unanimous Republican opposition to provide medical coverage to tens of millions of uninsured Americans after an epic political battle that,” according to The New York Times, “could define the differences between the parties for years.”[1] The vote was 219 to 212. “This isn’t radical reform,” the U.S. president said, “but it is major reform.”[2] Whether that was real change is an open question. House Speaker Pelosi said, “Today we have the opportunity to complete the great unfinished business of our society and pass health insurance reform for all Americans that is a right and not a privilege.”[3] While Obama was referring to the bill’s reliance on extant private insurance companies, absent even a public option, Pelosi made explicit the change to the American social contract—access to health-care would henceforth be a right for all citizens rather than a benefit to be conferred to those able to pay from their own wherewithal and insurance. The basis of this new right was undoubtedly the human right to life, as in the right to life, liberty and the pursuit of happiness.

The closeness of the House vote suggests that the people were divided on whether the new right ought to be conferred (and/or whether it should be conferred by the U.S. Government rather than decided on a State by State basis). Sure enough, the pendulum did indeed shift.  On January 19, 2011, the U.S. House voted 245-189 to repeal the health-care law. Then, on April 15^th, the House voted 235 to 193 for a budget  that “would significantly scale back federal domestic programs and cut $5.8 trillion over the next decade."[4] Medicaid would be a set amount sent as a block grant to the States for them to use for their poor (the States or the poor having to make up for any shortfall), while Medicare would be subsidies sent to the elderly for use in their health insurance premiums. Neither the poor nor the elderly would be guaranteed access to health care. "A Congressional Budget Office review of the Ryan proposal predicted that retirees would pay more for their health care under it than they would under traditional Medicare. The agency also said the Ryan plan to convert federal Medicaid spending into block grants for states would most likely end up reducing benefits for those enrolled in the program."[5] The bill would also reduce the top tax rates for individuals and corporations. Democrats “accused Republicans of promoting a morally skewed vision of America by taking savings out of medical care for older Americans and the poor while supporting tax breaks for corporate America and the affluent.”[6] 

In effect, the Republicans in the House were rejecting the change to the American social contract passed the previous year with respect to there being a right to health-care.  Furthermore, the House Republicans were redoing the social contract with respect to the Great Society programs even before the passage of the health-care right because Medicaid and Medicare would be a fixed amount and transferred to the States (in all but funding), and limited to a fixed subsidy, respectively, rather than being open-ended commitments of the U.S. Government. The poor and retirees would have to pay more than what had been the case even without "Obamacare." In other words, the Republicans were pushing to change the social contract in the other direction with respect to the extent of the federal government's obligation, rather than merely undoing the creation of the right that occurred in 2010.

In short, two visions for a social contract pushing the House in opposite directions more or less simultaneously. Even more significant than the electoral pendulum swing in November of 2010, the existence of two different visions for a social contract contending at the same time was evident.  All of the House Republicans had opposed the health-care law in 2010 while all of the Democrats opposed the Ryan budget in 2011. Two distinct social contracts were in a tug-of-war. The assumption was that only one could be enacted, or a compromise that could only result in a third that neither vision wanted. I contend that this is a false choice--that we are making the problem harder than it need be, given our governmental system of federalism. 

The two social contract visions differ not only with respect to redistribution and the extent to which government should secure the survival of its citizens, but as to whether federalism is at all relevant.  Whereas the Democrats wanted the general government of the union to be the governmental agent in the contract, Republicans sought either a mixture of federal and state involvement or, perhaps ideally, a state by state basis on the government side of the social contract. 

Having some federal involvement would allow for a minimal governmental obligation as part of a social contract spanning the union, while involvement by the state governments would enable various social contracts such that both visions could be realized with respect to rights and obligations.  Lest “minimal” actually be “maximal,” a one-size-fits-all social contract would stymie the two mutually exclusive visions. At the same time, leaving the entire matter of social contract to the states would deny a floor of human rights for all Americans. Social contract itself is complex in the United States, as per the nature of a union of states wherein governmental sovereignty is divided between two systems of government (state and federal).  

That the debate had been allowed to funnel into a “one social contract” only scenario at the federal level essentially truncated the union into a consolidated system, as if Congress were only a national legislature, or a state legislature. In his book, Gov. Rick Perry of Texas writes that the federal system of government, "if respected, allows people of varying beliefs to live together united as Americans."[7] He notes that "we can tailor solutions to our own values and perspectives rather than trying to create national one-size-fits-all policies" while agreeing "that there are certain things we must do together."[8]  While Perry views activities of union as only those that the republics in the union cannot accomplish, union could also involve a floor of governmental obligations in keeping with what each generation determines as due Americans simply in being Americans. Yet such a criterion is vulnerable to a slippery slope so the floor feature must be safeguarded by governmental or federal design.

In conclusion, there need not be one choice between the Republican and Democratic proffered social contracts wherein only one of them exists in the United States; the Republican variant could be the law of the land in Texas, for example, while the Democratic alternative could be the social contract in Massachusetts. The only thing to be compromised would be a minimum “floor” of rights for all Americans by virtue of what it means to be an American. Such a matter of compromise would enable us to get past the false dichotomy that presumes a one-size-fits-all decision must be made. In other words, both the Democrats and the Republicans can have what they want--just not U.S.-wide.  To have their respective visions enacted somewhere in the United States means giving up the objective of seeing all of the United States in their own image. 

1. Robert Pear and David M. Herszenhorn, “Obama Hails Vote on Health Care as Answering ‘the Call of History,” The New York Times, March 22, 2010, p. A1.

2. Ibid.

3. Ibid.

4.Carl Hulse, “House Approves Republican Plan to Cut Trillions,” The New York Times, April 16, 2011, pp. A1, A12.

5. Ibid.

6. Ibid.

7. Rick Perry, Fed Up! Our Fight to Save America from Washington (New York: Little Brown, 2010), p. 26. See Skip Worden, American and European Federalism: A Critique of Rick Perry's 'Fed Up!'." 

8. Ibid.

Goldman's Ethical Conflict of Interest: Obviated or Enabled?

According to U.S. Senator Carl Levin, Goldman Sachs “profited by taking advantage of its clients’ reasonable expection[s] that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve.”[1] Not only was the bank secretly betting against housing-related securities while selling them to clients, in at least one case a client shorting such a security was allowed to have a hand in picking the bonds. What is perhaps most striking, however, is how little Goldman Sachs has had to pay for acting at the expense of some of its clients. One might predict on this basis that the unethical culture at the bank is ongoing.


The full essay is at Institutional Conflicts of Interest, available at Amazon.

1. William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (NY: Doubleday, 2011), p. 19.

Achieving Balance in American Federalism: On the Crusade of Texas’ Rick Perry

As the governor, or head of state, of Texas, Rick Perry has been on a crusade to reinvigorate American federalism. Referring to the efforts of officials in the U.S. Government to secure the Mexican border, Perry said, “It is part of that frustrating paradox where Washington neglects their responsibility for areas clearly within their purview, while interfering in other areas in which they’re neither welcome nor authorized.”  The chief executive was pointing to a little-noticed point concerning the expansion of the domains in which the federal government is active.

The complete essay is at Essays on Two Federal Empires.

See Rick Perry, Fed Up! and the critique of Perry's book, Skip Worden, American and European Federalism: A Critique of Rick Perry's 'Fed Up!

Tax Avoidance at GE: On Corporate Income Taxation

In spite of $14.2 billion in global operating profit ($5.1 billion on U.S. operations) in 2010, GE paid no corporate income tax to the U.S. Treasury that year thanks to offsetting prior losses by GE Capital (i.e., bad loans).  In spite of that unit having received TARP funds from U.S. taxpayers, the corporation was able to avoid paying any income tax. This seems like Rousseau's social contract run amuck: corporate welfere in exchange for nada.  Such a modus operendi is in line with the corporate mission: to economize in the sense of maximizing (or satisficing) what is taken in while minimizing what must go out.  In other words, a corporation aims to turn itself from a productive, lean throughput to a concentration of capital in its own right.

In terms of U.S. corporate income taxation, the extent of resources that corporations devote to minimizing what they owe the U.S. Treasury is money that could be better spent, or invested, in productive enterprise. For example, G.E. files returns in 250 jurisdictions and has a staff of 975 working in the corporation's tax department. Even if those people pay for themselves and more by reducing the company's tax liability, the company could eliminate that entire department and orient its global operations in terms of efficiency rather than taxation were income tax applied only to individuals.  The legal person "doctrine" aside, corporations are not citizens; rather, they are groups of citizens. 

Robert Samuelson suggests that the top corporate income tax rate be reduced from 35%, which is one of the highest in the world. He argues that the 15% rate in individual income taxation on dividends and capital gains should be increased.[1] The effect would be regressive, for the top one percent receive two-thirds of all the capital gains and dividends. At the very least, the 15% is relatively low in the individual income tax system and most of the taxpayers subject to the tax could afford a higher rate.

Samuelson does not go far enough, for even with a lower top corporate rate companies would retain their tax departments and steer profit into countries with low tax rates (for there would still be differentials between countries). Theoretically, it does not make sense to tax both corporate income and dividends.  Furthermore, corporate income taxation treats companies as end-points rather than as throughputs. The implications of taxing individuals rather than corporations are staggering not only for more efficient productive investment, but also for attracting foreign direct investment to the U.S. In addition, public accounting firms could eliminate their tax departments and focus all of their attention on auditing--an endeavor made all the more important on account of the misleading financials on Wall Street leading up to the financial crisis of 2008.  Rather than getting headaches over the intracacies of tax rules, public accountants could devote more attention to whether it is enough to follow GAAP in giving an unqualified opinion.

In short, taxation ought not to have so much gravity in orienting corporate America.  Instead, business would do much better in focusing more on building better mousetraps. Individuals who benefit financially from the productive enterprise would be taxed, perhaps even without all the deductions that enable them to avoid being taxed. Imagine a tax-returnless system of individual income taxation involving a fixed low rate applied like a fee on any income taken in, whether from wages, salary, dividends or capital gains. Ironically, by simplifying taxation, more of it could be collected even as businesses are left to do business.

1. Robert Samuelson, "The Real GE Scandal," Newsweek, April 11, 2011, p. 21.

President Obama's Role in Budget Negotiations: Undercutting His Role in Presiding

On April 5, 2011, President Obama observed, “We’re going to have some very tough negotiations. And there are going to be, I think, very sharply contrasting visions in terms of where we should move the country. That’s a legitimate debate to have.” (1) He sounded very presidential in making the statement because he was taking the perspective of the nation as a whole. Furthermore, he used that vantage-point to try to keep negotiations from falling off the track. “If they can’t sort it out,” he said, “then I want them back here tomorrow.” (2) In short, he was presiding, rather than being partisan in taking a side, as he framed the situation facing the union. 

                                             Doug Mills, The New York Times                 

However, even as the president was referring to the two sides sorting the budget out as “they,” he himself was on one of the sides. That is, even though he “sought to position himself above the nitty-gritty haggling going on in Congress, which . . . limited his influence on the process” yet distanced him from any blame, his taking a side in the dispute subtly worked against his attempt to preside to hold the process as a whole together. (3) 

The full essay is at The Essence of Leadership, which is available at Amazon in print and as an ebook.

1.   Gregory Korte, “Meeting Fails to End Impasse on Federal Budget,” USA Today, April 6, 2011, 2A.

2.  Naftali Bendavid, Jonathan Weisman, and Carol E. Lee, "Budget Talks Head to Brink,” Wall Street Journal, April 6, 2011, pp. A6.

3. Ibid.

Political Ideology in a U.S. Federal Healthcare Budget: Disentangling Redistribution, Government and Federalism

A shift in power from the U.S. Governments to those of the states is distinct from a redution in the size of government. These are distinct, albeit not disparate, unrelated, goals. Shifting power does not in itself imply or mandate a reduction in the size of government. For example, in shifting public health-care policy, an expansion of government could result if enough states develop programs further-reaching than what Congress had enacted.  Of course, as per the nature of federalism, particularly in an empire-scale instance, the resulting health-care programs would differ from republic to republic, given the innate heterogeneity that exists at such a scale.

There is a saying in politics: Elections have consequences. In 2011, the impact of the 2010 election was particularly obvious in that the Republicans had gained control of the legislatures of Wisconsin and Ohio as well as the U.S. House of Representatives.  While the governments of Wisconsin and Ohio were going after public-sector unions (or restricting them to reduce government deficits), the House Republicans had their eyes on health-care.  Rep. Paul Ryan, an up and coming Republican from Janesville Wisconsin—a town with high unemployment after the auto plant there closed—was producing a budget that he claimed would cut $5 trillion over 10 years. His proposal reflected, or conflated, two salient traditional Republican aims: to shift power from the U.S. Governments to those of the states and to reduce the size of government.

Because restoring a balance of power to a federal system is distinct from decreasing (or increasing, for that matter) the size of government, it is important to distinguish them in Rep. Ryan’s proposal. The New York Times points to the two aims in observing that “while saving large sums for the federal government, the proposals on Medicaid and Medicare could shift some costs to beneficiaries and to the states.”[1] Shifting costs to the beneficiaries involves or implies a reduction in the size of government, while shifting costs to the states impacts the balance of power in the federal system. It is in the public interest for such items to be distinguished in debate and legislative votes because the people could want one without the other.

Under Ryan’s proposal, according to the paper, “Medicaid would be transformed into a block grant, with a lump sum of federal money given to the states to care for low-income people. States would be given more discretion over use of the money than they have under the current federal-state partnership.”[2] Even though increased discretion adds to the power of state governments relative to the federal, or general, government, block grants maintain state dependence. In fact, if health-care is not among the enumerated powers of the U.S. Government, it could be argued that lump sum payments to the states for health-care are unconstitutional; otherwise, spending for the general welfare would eviscerate even having enumerated powers at all.

Regarding the “size of government,” The New York Times reports that “(f)or future Medicare beneficiaries — people now under 55 — Mr. Ryan’s proposal calls for the federal government to contribute a specified amount of money toward the premium for private health coverage. Under the traditional Medicare program, the government reimburses doctors and hospitals directly.”[3] The “specified amount” element is “less government” than is an open-ended entitlement.

At the time of Rep. Ryan’s proposal, Medicaid and Medicare were open-ended entitlements. Anyone who met the eligibility criteria was entitled to benefits. Under a fixed lump sum, Republicans say the federal government could better predict and control its costs under Medicaid and Medicare, which as of the beginning of 2011 insured more than 100 million people and accounted for more than one-fifth of the federal budget. Unless the states would pick up the added costs (which would shift the taxing and spending federal balance), beneficiaries of these programs would be at risk for more of the costs if health-care costs rise.

Rep. Jan Schakowsky, a Democrat and a former executive director of the Illinois State Council of Senior Citizens, said “Mr. Ryan and the Republicans are declaring war on entitlements — and war on the elderly and the poor. . . . Beneficiaries will end up paying more.” The New York Times also reports that as of 2011, “(a)bout half of Medicaid recipients are children. Nearly two-thirds of the money spent on Medicaid benefits is [sic] for low-income people who are 65 and older or disabled.”[4] For his part, Rep. Ryan said “he was not cutting Medicaid and Medicare, but rather slowing their growth rate. Furthermore, he insisted that if health costs for a group of patients exceeded the federal payment in a given year, the insurer would have to absorb the cost.”[5] Finally, Rep. Ryan “claimed his proposal is equitable because Medicare would pay less on behalf of higher-income beneficiaries, and they would pay more of the cost of their health coverage.”[6]

Whether the beneficiaries or insurance companies pick up the slack, the fact that public funds would not be used means that government would be reduced from what it otherwise would be. Yet if the states pick up the slack, the balance of federalism rather than the size of government would be changed. Moreover, in addition to the size of government (and federalism) elements, the matter of redistributive justice is involved. It is no wonder that these elements are conflated in the public sphere.

I contend that legislative representatives have an obligation to more clearly distinguish the elements of federalism, the size of government, and redistribution in public policy proposals. A desire to shift power to the states can be better distinguished from the questions of redistributive justice and the related matter of the size of government (and latter two can be better distinguished, since, for example, government could be expanded in a way that helps or hurts the poor, for example). Democracy itself would be improved were the people, either directly via a referendum or indirectly through representatives, able to decide on the three elements one by one. In fact, a decision for greater federalism would mean that questions of the size of government and redistribution would be decided on both the state and the federal level.

1.Robert Pear, "G.O.P. Blueprint Would Remake Health Policy," The New York Times, April 4, 2011. 

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.

Government Employees and Manufacturing Jobs: Takers and Makers?

I contend that we need to expand our notion of “making” in the twenty-first century global economy. We also need to reduce our conception of “taking” when it comes to what government employees do and even in what the government does. Otherwise, even Steven Moore might be left with the unavoidable conclusion that the American corporations, even more so than the “welfare mothers,” are the “takers.”

In 2011, according to Stephen Moore, “there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government. . . . More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers.”[1] “Collecting a paycheck from the government” implies that people who work in government are somehow receiving an entitlement rather than compensation for their labor. Treating government employees, and, moreover, the receivers of government services, as “takers” reduces all the functions of government to welfare programs. Are the corporations in the private sector that receive defense contracts “takers” akin to the lazy “takers” that Stephen Moore has in mind in his opinion piece?  Is G.E. a “taker” in not having any tax due on 2010 earnings in the billions?  Presumably, the defense contractors and tax-minimizing companies benefitted from government-sponsored infrastructure, such as police protection and roads?  Furthermore, are citizens who benefit from security and transportation to be regarded as “takers”?  Are flyers “takers” when they rely on the FAA to keep flight control agents in control towers on the up and up?

Furthermore, Moore is ignoring non-governmental reasons for the reduction in factory jobs in the U.S. “Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. . . . Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things.”[2] However, even though government payrolls have expanded as we have asked for more from our governments, such as in regulating banks too big to fail, the proliferation of capitalism in the world, such as via more foreign direct investment in developing countries (with the notable exception of Africa), has brought with it a spreading-out of manufacturing around the world.

Even so, the U.S. still has the most manufacturing jobs of any economy, but this does not mean we need not expand our skilled labor force in new fields such as computer technology. In focusing on manufacturing, Moore seems to reduce “making” to manufacturing.  Does not a CPA “make” something of value when investors and creditors rely on the certified financial statements of a company?  

1. Stephen Moore, "We've Become a Nation of Takers, Not Makers," The Wall Street Journal, April 1, 2011. 

2. Ibid.