The Fed Lets Banks Continue Risky Trades: Too Big To Fail Ensconced

In December 2014, the U.S. Federal Reserve Bank granted banks an extra year past the July 2015 deadline to comply with a major provision of the Volcker Rule requiring the banks to unwind investments in private equity firms, hedge funds, and specialty securities projects.[1] The Fed also announced that it would give the banks yet another year to hold onto their positions. The Fed’s rationale points to an underlying conflict of interest facing the Fed, a banking regulator arguably  too vulnerable to the banks’ lobbying muscle.

Banks pled that dumping holdings quickly would mean having to accept discount prices. “There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” Kevin Petrasic, a partner in a global banking practice, said.[2] At the time, Goldman Sachs had $7 billion invested in private equity that the bank might have had to sell for a loss had the extension not been granted.[3] For Morgan Stanley, $2.5 billion is said to have been vulnerable to being sold at a loss. These figures presumably come from the banks themselves, and reliance on the regulated for information is part of what goes into regulatory capture of an agency by the firms being regulated.

Dennis Kelleher, of Better Markets, claimed the “Street has had years of notice to unwind these investments, and it appears that their self-serving complaints have been accepted fairly uncritically without a real analysis for the basis of the claim.”[4] That is to say, relying on both the information provided by the regulated and their interpretation puts the Fed’s regulatory function at risk—and hence the financial system itself at risk. Interestingly, Kelleher sounds more like a regulator than the Fed in observing, “If you can’t get out of a trade in seven years, it’s probably not the kind of trade you should be doing.”[5] The “regulators” at the Fed seem to have rolled over, taking the “self-serving complaints” at face value—ignoring the obvious problem in doing so. At the very least, regulators at the Fed should have assumed that the information would naturally be skewed; from such a perspective, a critical examination would have been an obvious necessary step prior to any decision to give the banks another year.

In short, the Fed comes off looking rather naïve, though underneath the reality could actually involve the banks having too much control over top Fed officials—the banks having a significant role in the appointing process. As a result, eight years after the financial crisis of 2008, risky proprietary trading was alive and well on a street populated by banks even more so too big to fail. Beyond the question of cozy relationships between the Fed and the banks that it regulates, the lack of any public outcry points to a problematic learning-curve societally in the U.S., with disturbing implications on the ability of a people to self-govern. Yet the alternative would seem to be more cronyism divested of any risk of being made transparent.

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1. Zach Carter, “Fed Delays Volcker Rule, Giving Wall Street Another Holiday Gift,” The Huffington Post, December 18, 2014.

2. Jesse Hamilton, Ian Katz, and Cheyenne Hopkins, “Goldman Needs Volcker Delay to Avoid Private-Equity Losses,” Bloomberg, December 5, 2014.

3. Ibid.

4. Carter, “Fed Delays Volcker Rule.”

5. Ibid.

Police Power Exceeding the Capacity of the Human Brain: Some Countervailing Measures

“Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton’s timeless statement is applicable to legal and illegal power alike, for each is subject to abuse. The victims are those whose wills are bent through either harm or the threat of injury. Put another way, the human brain may lack sufficient cognitive, emotional, and perceptual machinery to check the instinctual plus socialized power-aggrandizing urge. This vulnerability is particularly apparent in viewing video showing a police employee violently over-react in a situation that quite obviously should not have involved violence. Although anger doubtlessly plays a crucial role in the trigger that unleashes the police violence, the more subtle suspension of cognition and warping of perception is also in the mix.

In December 2014, a 23 year-old policeman in Victoria, Texas, pulled over Pete Vasquez, aged 76, because Vasquez’s car did not show an inspection sticker. As Vasquez was trying to explain that his car was exempt—a point that the police chief later confirmed—the policeman grabbed the old man, pushed him to the ground, and used a tazer gun twice. “What the hell are you doing? This gentleman is 76 years old,” a sales manager watching the incident cried.[1] Clearly very angry at Vasquez, the policeman yelled at the onlooker, who seems to have suddenly feared for his own safety.

That the reasonable reaction from a third-party triggered more anger instead of any second-guessing, at least visibly, suggests that the policeman was not in control of his faculties. Crucially, he was not in sufficient control of himself to handle the power that he had been given by law. Psychologically, he evinced a weakness in handling the power in the context of not understanding why the car was exempt from having to show an inspection sticker. An arrogance in not wanting to admit even to himself that he did not understand what he himself had flagged, and a cognitive lapse in assuming that he could not be wrong likely contributed to his need to be in charge and thus his anger at Valsquez for trying to correct him. The anger itself was too much for the policeman, for it eclipsed reason and even perception whose impairment rendered any internal mechanism of self-regulation insufficiently operative.  In short, he used power beyond the capacity of his brain, emotionally, cognitively, and perceptually.

It may be that the authority given to police employees generally is not in keeping with the capacity of the human brain to process and handle power exercisable over other people. Compounding the problem, the police chief talked only about taking “a real hard look at some of the actions that occur within the department,” rather than arresting the aggressor even though the latter action would befit a person who had lost control of his faculties and acted out violently without reason. That the policeman was shifted to an administrative duty is itself an indication that official accountability would come up short within the police department. The implication is that the general public (and city officials) should not rely on departments’ internal-affairs departments to impartially investigate such cases and render sufficient punishment to “their own.” Put another way, the conflict of interest in the very nature of an internal-affairs department is inherently unethical because it can be expected to result in compromised investigations and decisions. To hold a police employee accountable, we must look beyond police departments.   

Although the district attorney said the policeman could face charges including official oppression, injury to elderly, aggravated assault and assault, the grand jury stage may be rigged to favor police employees. That is to say, the system itself may enable the propensity of the human brain to over-react with violence when in a position of power over another person without a sufficient internal check. Given the risk of aggrandized uses of power by police employees, candidates for local offices not only in Texas, but in each of the forty-nine other member-states in the U.S., might consider proposing institutionally and personally independent agencies to hold lapsing police employees accountable. Additionally, legislation changing the instructions to grand juries making it less difficult to indict an employee of a police department could be pursued. Especially if scientists find that the human brain is in fact ill-equipped to handle the power typically given to police employees, then either some of that power should be taken away, which may not be practical, or countervailing changes to grand-jury instructions enacted.

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[1] Ed Mazza, “Texas Cop Nathanial Robinson Uses Stun Gun on Elderly Man Over Inspection Sticker,” The Huffington Post, December 15, 2014.

Advise and Consent: Does Politics Have a Limit?

A film that centers on the U.S. Senate’s role in confirming executive nominations made by the president, Advise and Consent (1962) is arguably about whether moral limits pertain to power.  Put another way, should we expect no-hold barred efforts to manipulate others in the political arena? Personal lives and personal pasts being fair game?  Moreover, is the aim power for its own sake, or the manipulation of others for the sake of a public policy and ultimately the good of the country? 

The full essay is at “Advise and Consent.” 

Wall Street Writing Its Own Laws on Risky Derivative Trading

In just four years, Wall Street got away with weakening a part of the Dodd-Frank financial reform law, which became law in 2010 to protect the financial system from the excesses that led to the financial crisis in 2008. Wall Street bankers and their lobbyists accomplished their feat by luring members of Congress into a formidable conflict of interest, which I submit could have been obviated.

The full essay is in Essays on the Financial Crisis, available at Amazon.

Private Interests Over the Public Good: Energy Companies Capture an Attorney General

In Wealth of Nations, Adam Smith argues that the aggregation of the preferences of consumers and producers for a given good is in the public interest for the product or service. Often overlooked is Smith’s Theory of Moral Sentiments, in which the famous economist wraps a moral sentiment around the individual preferences, hence hopefully constraining them, albeit voluntarily. Herein lies the rub, for it is shaky to assume that a preference that seeks to maximize itself will voluntarily restrain itself when it rubs up against an ethical limit that is felt. Such a moral constraint is like a semi-permeable membrane in that the sentiment naturally triggered when a person comes on an unethical situation or person can be ignored or acted on.

To be sure, a sentiment, such as that which a person naturally feels when he or she learns of an innocent person being killed, can be written into law and applied as a new regulation; the individual preferences otherwise triggering the sentiment of disapprobation would thus be constrained involuntarily from doing so. It follows that if a private actor, such as a company’s management, with a preference (which is inherently self-maximizing) can emasculate a restraining regulation without any concern for people’s moral sentiments, then we are back to trusting in voluntary restraint—only now that actor has political power rather than merely being one of many participants in a competitive market. I contend that trusting in the regulated to regulate its regulator is unethical not least because of the underlying conflict of interest.

To illustrate the problem, I discuss the influence of certain energy companies on certain attorneys general in some of the American States. In late 2014, The New York Times reported that Oklahoma Attorney General Scott Pruitt wrote a critical letter to the U.S. Environmental Protection Agency. In particular, he claims that the regulators were grossly overestimating the amount of air pollution caused by companies drilling new natural gas wells in Oklahoma.[1] The public good is salient here because methane, a gas having ten-times the greenhouse effect of carbon, had been shown by independent tests to be leaking from natural gas wells and urban pipe systems.[2]

So the public interest in keeping global warming to within limits palatable to human survival may have been put at risk were Pruitt wrong in his charge. That the letter had actually been written by lawyers for Devon Energy, one of Oklahoma’s biggest oil and gas companies—the attorney general’s staff copied it onto government stationery with only a few word changes and Pruitt signed it as if it was his own—raises serious doubts as to Pruitt’s claim of overstatement.  That is to say, a government  may have been colluding with a private vested interest in a regulation at the expense of the public interest.

An email exchange from October 2011 between attorneys general and large energy producers “offers a hint of the unprecedented, secretive alliance . . . to push back against the Obama regulatory agenda,” according to The New York Times.[3] The newspaper had “reported previously how individual attorneys general have shut down investigations, changed policies or agreed to more corporate-friendly settlement terms after intervention by lobbyists and lawyers, many of whom are also campaign benefactors.”[4] Shutting down investigations is particularly suspect, as it cannot be said that concluding them would run counter to the public good. Moreover, for the regulated to also be campaign benefactors places both the regulated and the regulators and attorneys general in conflicts of interest.

For the energy companies, their roles as the regulated and benefactors conflict because the temptation to obligate regulators and attorneys general to remove a certain regulation goes against being regulated, which implies that government regulation is a viable rather than voluntary constraint. I submit that it is unethical for a society (via its government) merely to allow the regulated to have the other role because of the latent lure of the temptation to obligate government officials to remove unpleasant regulations that are nonetheless in the public interest.

For government officials, taking the campaign contributions from companies whose regulations the officials can relax or expunge creates a conflict of interest between acting on a private interest’s behalf at the expense of the public interest and protecting the public good through non-voluntary constraints on private interests. According to The New York Times, attorney generals “in at least a dozen are working with energy companies and other corporate interests, which in turn are providing them with record amounts of money for their political campaigns, including at least $16 million” in 2014.[5] Also in that year, the U.S. president, Barak Obama, admitted publicly that the federal elected-representatives must take the huge contributions in order to compete in elections “and that obligates us.”[6] We can fill out the president’s point by adding that the large contributions, such as the $1 million from Goldman Sachs to Obama ’08, obligates elected representatives to put particular private interests over the public interest even though being a law-maker or enforcer-of-law carries with it the duty to protect the public interest from otherwise maximizing private interests.

If enough parts of a ship are allowed to go their own way at the expense of the ship itself, steering a steady course and maintaining speed are impeded. Similarly, if powerful private interests in a republic are allowed to obviate measures that restrict them so the republic may remain viable over the long term, then the whole will weaken as if leaking energy. Put another way, prick enough tiny holes in a flat balloon and inflating it will not last very long. Even though a particular pin-prick does not deflate the whole over time, a system enabling such hole-making enables enough tiny holes that a slow deflation becomes a mathematical certainty.

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[1] Eric Lipton, “Energy and Regulators on One Team,” The New York Times, December 7, 2014.

[2] The E.P.A. had taken the industry’s own “estimate” of 1 percent as the leakage rate, whereas independent tests showed leak rates up to 18 percent. Cities tested include Washington, D.C., Denver, and Los Angeles.

[3] Lipton, “Energy and Regulators.”

[4] Ibid.

[5] Ibid.

[6] Barak Obama at a news conference in late 2014.

Wales Compromising Scotland: Should Britain Keep Its Promise?

A few months after residents in the Scottish region of the E.U. state of Britain voted not to secede from the state by a margin of 55 to 45 percent, a state commission announced proposals for the regional assembly to have more authority. David Cameron had promised on behalf of the state government that the Scottish region would be given more power provided the residents reject secession. To be sure, replying on such a promise in political matters is hazardous at best, as changing political winds can easily erode such sand castles. At the very least, political players with their own agendas can succeed in obfuscating the understood validity of such a promise.

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

Political Theater Undermining American Democracy

To be viable, a representative democracy needs a virtuous and educated citizenry. Thomas Jefferson and John Adams agreed on this point in their exchange of letters in retirement. Their assumption was that an electorate would be able to apply judgment informed by virtue and a broad knowledge to not only matters of public policy, but also the candidates and incumbent office-holders themselves. To the extent that the people in power use it to present a false image, the judgment by the popular sovereign is unavoidably marred. The democratic system itself falters even if it is being portrayed as strong by those at its helm. I contend that the extent of political theater being orchestrated by U.S. office-holders compromises the democratic legitimacy of public power at the federal level.

In 2010, U.S. Sen. Carl Levin’s Investigations subcommittee questioned Goldman Sachs managers on the mortgage-based securities sold the even the bank’s best clients without mentioning that the subprime-mortgage-based bonds were “crap.” Lloyd Blankfein, Goldman’s CEO at the time, calmly told Levin that the bankers were under no obligation to share their view of their product on account of the risk-return tradeoff. In other words, a client might want a lot of risk, and such bonds may be of value in that case. However, it could also be argued that crap is crap, regardless of risk. Furthermore, simply in putting their derivative securities up for sale, Goldman Sachs was saying, implicitly, that they have value. In short, it is reasonable to have expected the U.S. Justice Department to make use of the evidence that Levin’s subcommittee amassed to charge Goldman Sachs with fraud. Yet no such action emerged after the dramatic hearing; it was sheer political theater. After all, the bank had contributed $1 million to Barak Obama’s 2008 presidential campaign—its largest single contribution. No wonder Blankfein was so calm; he undoubtedly knew that in spite of the political theater, he had nothing to fear from the feds.

In 2014, Chuck Hegel resigned as U.S. Defense Secretary. In announcing Hegel’s departure, Barak Obama said he was sorry to see the man go. Throughout the prepared remarks of both men, nothing suggested that the secretary had been shown the door. Meanwhile, the media was claiming that sources in the administration had disclosed that Hegel had been pushed out. In an article the next day, The New York Times refers to Hegel’s ouster, quoting David Rothkopf, an expert on the National Security Council, as referring to “the Hegel ouster.”[1] Tension between Hegel and the White House had begun with differences on the administration’s policy on Syria, according to the Times. If the president even just gave Hegel a hint that the secretary should resign, then the scripted announcement was sheer political theater—that is to say, a lie.

If it is so easy for government officials to lie on such a scale, then how can an electorate possibly make informed judgments when voting on candidates? Put another way, if politicians’ respective brands are marketed for effect rather than being based on facts on the ground, then voters actually vote for or against something that does not exist. Were the elaborately orchestrated lies exposed as such beyond a shadow of a doubt, perhaps voters would vote against the offenders simply for having lied so egregiously. Such lying befits a squalid character—certainly not one that can be trusted in positions of power.

Moreover, the basis of representative democracy in the popular sovereign—the People—is severely compromised if much of what is presented through the media is an act designed to manipulate rather than inform the general public. In The Federalist Papers, the idea emerges that the larger the electoral district—meaning more constituents per representative and more distance involved—the less familiar the voters tend to be with candidates and office-holders. This argument bolstered the point that most of the domestic power should remain with the States rather than be transferred to the proposed General (i.e., Federal) Government. Back in 1787, the entire U.S. population was about 7 million. By 2014, that population had grown to over 310 million, with twelve States having more than 7 million. Logic alone would seem to dictate that each of those States should be federal systems. California, for example, could devolve some of its sovereignty to States covering the central valley, the north, the Bay area, and southern California. The particular preferences in these regions would be better reflected in public policy—instead of a one-size-fits-all approach that tends to go to the lowest common denominator.

The U.S. itself is essentially an empire made up of fifty republics (i.e., representative democracies) and one federal republic. Regarding the latter, regulating interstate commerce and providing a common defense have traditionally been imperial-level governmental functions. With the political consolidation at the imperial level has come greater distance, both interpersonal and geographical, between the power and the people. A person in Kentucky, for instance, is more likely to know his or her representatives in Kentucky’s legislature than in Congress. What percentage of Americans have spoken with Barak Obama? The vast majority ely on the managed image through the media, and it is natural to assume veracity without evidence to the contrary. In short, the imbalance in the federal system, along with the growth in population, creates a climate in which egregious lies can thrive at the expense of representative democracy in America.

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1. Mark Landler “White House Shake-Up That May Have Stopped at Just One Departure,” The New York Times, November 25, 2014.

Banks Too Big To Jail: A Systemic Conflict of Interest

When a blatant conflict of interest is ensconced in a regulatory system, the public can expect to be insufficiently protected from being harmed. Such a people is probably too tolerant of such conflicts, or else too weak to effectively counter the concentrated power of the vested interests benefitting from the sordid design. I submit that the relationship between U.S. banks and the Federal Reserve is plagued by a clear conflict of interest, and furthermore that the refusal of the Fed and the U.S. Justice Department to go after fraud committed at the big banks is a direct result.

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

Wall Street Banks in Commodities Businesses: An Inherently Unethical Conflict of Interest

Writing to the bank’s board of directors, an executive at Goldman Sachs wrote that the bank’s commodities division would achieve higher value “if the business was able to grow physical activities, unconstrained by regulation and integrated with the financial activities.”[1] According to Sen. Carl Levin, Goldman’s goal here is “to profit in its financial activities using the information it gains in the physical commodities business.”[2] The integration could be achieved in part by using the bank’s access to nonpublic information from the banking or trading operations to manipulate the price of a commodity by artificially restricting or adding to supplies through ownership at the production or storage stages. This structure contains a conflict of interest. Because resisting the temptation to exploit the conflict would put the Goldman bankers at odds with the bank’s financial interest, I contend that reliance by the public on intra-bank firewalls (i.e., policies) separating the commodity businesses from the bank’s trading operations is too weak to protect the public, including buyers of the commodity.

The full essay is at "Wall Street Banks in Commodities"

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1. Sen. Carl Levin, “Opening Statement,” Wall Street Bank Involvement in Physical Commodities Hearing, Permanent Subcommittee on Investigations, U.S. Senate, November 20, 2014 (accessed November 21, 2014)

2. Ibid.

3. Ibid.

Missing Out in Reducing the Carbon Footprint: Human Reason Lapsing on Opportunities

Wind farms and solar panels—these alternatives to coal and natural gas could play a larger role in reducing the human impact on climate change were it not for missed opportunities. That any would be passed by when the species itself may hang in the balance points to a certain recklessness in the reasoning process akin to ill-afforded complacency.

In 2012, 13 gigawatts worth of wind-powered electricity generation capacity was installed in the United States, enough to meet the needs of roughly three million homes. This represents 40 percent of all the capacity added to the nation's power grid that year. Seven gigawatts had been added in 2011, and a bit more than five in 2010. In 2013, with Congress allowing the federal tax credit to lapse, only one gigawatt of wind power capacity was installed. Bioenergy, geothermal, and offshore wind were lagging too. Worldwide, investment in renewable energy sources was slowing as well, down to $211 billion in 2013, 22 percent less than the amount in 2011.[1]  Meanwhile, carbon emissions were at a record level globally in 2013 and the world’s oceans were already easing back in the additional amount of carbon that they could absorb. It would seem that the homo sapiens species has a self-destructive bent hard-wired in the brain.

At the very least, we are walking past opportunities as we head toward a global climate possibly outside of the realm of human habitation. According to the U.S. Energy Information Administration in 2014, the levelized cost of onshore wind energy for plants going into operation in 2019 could be as little as $71 per megawatt-hour (in 2012 dollars) without subsidies. Similarly, projections for the levelized cost of photovoltaic solar-cell energy were down 40 percent.[2]  Adding solar and wind plants to gas-powered generators and utilizing advanced load-management technologies could leverage the cost-savings, as the cost projections of energy from coal and natural gas were not showing similar drops.

Looking further out on the horizon, technology could perhaps be developed that would extract carbon from the oceans and the atmosphere. This unknown could end up making much of the difference in whether humanity keeps the global temperature increase within the 2C degree limit for sustainability.

In conclusion, the test may be whether we as a species use reason to resist the ever-present urge of instant-gratification. We know that a tax credit can be efficacious, and we see the cost projections coming down, yet on the other hand we find it hard to resist the convenience of driving more as gas prices drop, and we drive right by opportunities to reduce our collective imprint on the climate while we still can. It is as if we were a very overweight person at an unlimited buffet. In spite of having a goal of losing weight, we just can’t help ourselves while we are at the buffet because the food is there and we figure we can always eat less tomorrow. At the buffet, we figure in a warped sort of way that as long as we are there, it won’t be all that much worse if we go back for another dessert. It is just this sort of flawed reasoning that I suspect lies behind the arrows going in the wrong way in our handling of the climate crisis.

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[1] Eduardo Porter, “A Carbon Tax Could Bolster Green Energy,” The New York Times, November 19, 2014.

[2] Ibid.

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

The full essay is at "Homelessness in the U.S."

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1. David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

Adieu to Florida’s Gold Coast: Beyond Money and Politics

In October 2014, the City of South Florida passed a resolution in favor of South Florida seceding from Florida and becoming the 51^st State of the United States. Vice Mayor Walter Harris, the resolution’s sponsor, told the city’s commission that the government of Florida had not been addressing adequately the issue of the sea-level rising. Already, Miami was subject to regular flooding at high tide. This reason for secession has a serious downside, however; a better rationale may ironically come from the perspective of Floridians in North Florida.

The proposed State of South Florida would include the counties in orange. (Orlando Sentinel)

Harris was obviously frustrated. “We have to be able to deal directly with this environmental concern and we can’t really get it done in Tallahassee.”[1] However, even though a government of South Florida might indeed be more willing to legislate to save much of South Florida from the inevitable, that State would be more vulnerable to sea-water disasters. A hurricane could cut out a good part of tourism dollars along the “Gold Coast” (i.e., West Palm Beach to Miami), and still Tallahassee could count of unhampered tax revenue from the northern regions of Florida to fund clean-up and restoration projects. A government of South Florida would not have this spread-out diversity, so a major storm could effectively cripple that government’s wherewithal to respond.

So Harris’s rationale is a double-edged sword, meaning it cuts both ways. More pliability but more risk. Mayor Philip Stoddard’s rationale is more solid, and yet more effusive and thus easy to overlook or dismiss. “It’s very apparent that the attitude of the northern part of the state is that they would just love to saw the state in half and just let us float off into the Caribbean. They’ve made that abundantly clear every possible opportunity and I would love to give them the opportunity to do that.”[2] I submit that Northern motive here does not stem from fiscal or even political self-interest; rather, people living in South Florida have a bit of a bad reputation, attitudewise.

After four months living in Miami, I came away wishing that the U.S.  might someday kick South Florida out of the Union for not being civil enough to warrant inclusion in American society. On a daily basis, I found not only irate, impatient drivers honking incessantly, but also extremely rude retail employees dominating the service industry—such rudeness easily passing as passive and even active aggression toward customers. More generally, I found a mix of self-absorption and fastidiousness to be so common that it characterizes the dominant culture.  Obviously, not everyone living in the stretch of urbanization from West Palm Beach to South Miami had this mentality; in fact, I ran into some nice people who admitted to me that the real problem with South Florida is the people. How damning an assessment this is!

In short, enough residents of South Florida do not play well with others that the sordid attitude and its ensuing behaviors can enjoy the validity that comes with being the established norm. Transferring to a local bus at a light-rail station in Dade County (i.e., Miami), for example, I was literally thrown out of kilter mentally when a black 25 year-old fat guy body-slammed me into the side of the opened front-door because he thought I should have let all the Blacks on first rather than wait in line as I did. Adding insult to injury, the black bus driver refused to call the police when I asked him while I was still body-pressed by Fat Albert. “You shouldn’t have gotten on then,” the middle-aged driver said.  I submitted a complaint to the transit company, but never received a reply. At the very least, I concluded, a corrupt institutional culture enables the interpersonal aggression there.

While in Miami Beach on a bus, I was perplexed to find a driver ignoring two local black men shouting at each other in the bus. At the very least, the black woman driving the bus was not concerned about what impression the tourists standing in the aisle would have of the vacation spot. The situation quickly turned surreal when one of the black men lurched down the steps from the back third of the bus to hit the other man standing in the aisle near the back door. From my seat, I caught a glimpse of tourists falling over like dominos in the aisle toward the front of the bus. As they stood up, several of them demanded that the driver stop and call the police. Incredibly, she just kept driving. Eventually, when we stopped to let off some passengers, the driver did call the police, but only to ask if the man who was hit wanted to press charges. He did not, so the driver told the police they did not have to come. Eventually, the troubled man got off the bus of his own accord.

On nearly a daily basis, I encountered aggressively rude people in Fort Lauderdale and Miami of every race. At a Starbucks in a nice suburb of Miami, I was stunned when a woman of about 60 decided even before I had put away my things that I was leaving; she sat down at my small table while I was still drinking coffee.  “You’re leaving,” she said as if she could not be wrong. “No, I’m still here,” I replied, but this made no difference to her sense of entitlement. The employees I encountered at more than one Starbucks store were—how shall I put it—a piece of work. I called the company’s customer service on one occasion to report that a veteran (i.e., not new) employee didn’t know what a pull-over is.  Adding insult to injury, she refused to ask her manager. “No, we don’t have those,” the employee said, scolding me with her tone merely for ordering a French-roast pour-over because none was brewed.  It is Starbucks policy that if a roast is not brewed at the time, it is to be made by the pour-over method. The customer-service representative in Seattle said after I relayed the account, “You’re right; that really is beyond the pale—she doesn’t know what a pour-over is and she is not in training? Yeah, that is bad.” I agreed, adding, “That’s how it is here in Miami.” At another Starbucks, a manager explained that South Florida is challenged in the service industry. In other words, so many people are rude it is difficult to find nice people to hire. Several people living in the metro area told me that employees in the service sector there are notoriously rude, so I concluded that the culture must be really bad.

Doubtless the sordid reputation had reached many ears in North Florida by the time of Stoddard’s resolution in South Miami. He was conveniently ignoring this point when he sought to have South Florida play the victim role. They would just love to float us off into the Caribbean. Northern Floridians might want to send the commissioners there a thank you note, and not because much of the problems stemming from the rising sea-level would be obviated; rather, it may be more a question of culture—a decadent, pathological culture wanting out and neighbors to the immediate north willing to help them along to make their wish come true. In other words, the resolution might be a case of “be careful what you wish for; you might get it.”

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[1] Adrienne Cutway, “Officials Want South Florida to Break Off into Its Own State,” The Orlando Sentinel, October 21, 2014.

[2] Ibid.

China’s Increasing International Role: A Historical Departure

Historically, China was isolationist. The Opium Wars in the mid-19^th century is a good illustration of why. From this context, China’s announcements of a series of international trade and finance initiatives by which China would assume a larger leadership role internationally are stunning. Doubtless the enhanced role is in line with China’s geopolitical and economic interests. After all, political realism is hardly a dead theory in the 21^st century. Even so, the impact of the reversal on the culture is significant, and thus worthy of study. Specifically, the traditional mistrust of foreigners is likely to diminish. As it does, the Chinese will be more likely to consider and even advocate for economic and political principles, such as liberty and rights, that are valued elsewhere in the world but not so much in China. The result could be increased political instability. In short, the initiatives timed to coincide with the Asia-Pacific Economic Cooperation (APEC) meeting in November 2014 could eventually weaken the Chinese government’s grip on power.

The full essay is at “China’s Increasing International Role”

Sen. Mitch McConnell Re-elected: A Washington Insider Sustained by the Establishment

The human brain is likely hard-wired to assume that tomorrow will be like today. This coping mechanism effectively narrows the window of our cognitive and perspectival range. The status quo not only endures; it is dominant, whereas reform must push hard to see the light of day. In politics, establishment interests, made wealthy in the status quo, bet their contributions on the political insiders—the establishment politicians who embrace the status quo. As a result, an electorate is manipulated and mislead by branding ads to the extent that it cannot be said that the real will of the people is done. The ensuing public policy is also not of that will; rather, legislation protects the vested interests in return for their contributions. A republic in the grip of this self-sustaining cycle can be said to suffer from a kind of hardening of the arteries. As times change, such a ship of state becomes increasingly unmoored from its people. Eventually, the ship sinks, after the pressure of incongruity has reached an unsustainable level. I contend that the 2014 U.S. Senate election in Kentucky between the Senate’s minority leader, Mitch McConnell, and his Democratic challenger, Alison Grimes, illustrates this political illness in action.

In a Louisville Courier-Journal poll conducted January 30 through February 4, 2014, only 27 percent of registered Kentucky voters viewed Mitch McConnell favorably, while fifty percent had an unfavorable opinion of the minority leader.[1]  President Obama’s approval rating came in 2 percentage points above that of McConnell’s.  With a 3 percent margin of error, the poll gave McConnell 42 percent to Grimes’ 46 percent—meaning that were the election held then and the actual turnout was not skewed, Grimes would be the next U.S. Senator from Kentucky.

With the U.S. House and the president deadlocked through the midterm election in November, legislative achievement cannot explain how McConnell’s 27 percent turned into the 56.2 percent who voted for him. Similarly, Pat Roberts of Kansas had had low favorability ratings only to come up with 53.3 percent of the vote. Both senators were Washington insiders who had strayed from their respective home states. Yet in the end, this is what saved them.

According to the New York Times, McConnell’s campaign benefitted from $23 million in spending from independent groups including the National Rifle Association, the National Association of Realtors, and the National Federation of Independent Business. The Kentucky Opportunity Coalition, registered as a social welfare organization, spent $7.6 million on attack ads against Grimes.[2] That organization ran more political ads in Kentucky than any other outside group, which means that Grimes could not counter the critical ads sufficiently. In short, McConnell’s strategy was at least in part to bring in out-of-state money to get a chunk of Grimes’ favorable rating.  Although positive correlation is not causation, the widening spread between the two candidates through the summer and fall, with McConnell on top, coincided with the onslaught of outside-group spending on attack ads against Grimes. 

It is possible that the people of Kentucky sent their incumbent senator back to Washington in spite his low favorability rating. In other words, Kentucky’s electorate may have been manipulated and mislead, deprived in effect of making the choice.

The implications in terms of public policy are just as bad. Contributors to the “social welfare” organization are not publically listed, so they have cover should anyone accuse the incoming majority leader of paying them back with favors. Whereas Grimes as a freshman senator would have much less power with which to make the favors happen, McConnell’s position as majority leader attracted the contributions like a tall beacon on a clear night. The establishment money, in other words, backed up the Washington insider, effectively protecting the status quo and thwarting real reform.

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[1] James Hohmann, “2014 Election Poll: Mitch McConnell Trails Alison Lundergan Grimes by 4,” Politico, February 6, 2014.

[2] The Editorial Board, “Dark Money Helped Win the Senate,” The New York Times, November 9, 2014.

Narrowing Public Debate: Political Narrative as Fact

For ordering his men at Gettysburg to keep firing at over 10,000 Virginian infantrymen in what is now known as Pickett’s Charge, Alonzo Cushing—who died in the battle—was awarded the Congressional Medal of Honor by President Barack Obama on November 6, 2014. As a result of that charge, Pickett lost his entire division. In the 1984 film, Gettysburg, General Lee tells Pickett after the battle to look after his division. “General Lee,” Pickett declares, “I have no division.” Suddenly Lee is confronted with the true magnitude of his military blunders at Gettysburg. 

From this point of view, Cushing’s military honor looks rather different than from Obama’s point of view. As conveyed by the media, that vantage point enjoyed a virtual monopoly, and thus the interpretation could easily be taken as true rather than relative. I submit that much from the political discourse as sourced or conveyed by the media is projected as truth when it is highly subjective and thus subject to question and debate.

At the ceremony, President Obama said, “I’m mindful that I might not be standing here today as president, had it not been for the ultimate sacrifices of those courageous Americans.”[1] Hardly a partisan comment, the statement is nonetheless partial even if it seems indisputably true. Firstly, whereas Lincoln referred to all of the fallen when he spoke at Gettysburg to commemorate the national cemetery, Obama was likely referring only to the Union troops. What of the courageous men under Pickett who walked more than a mile over open field as canon-fire came from the hills on the sides and from directly ahead where the Union’s artillery fired shots from behind a stone wall? Considering that the entire division was slaughtered during that “charge,” is it even ethical to honor a man who ordered his troops to keep shooting? My point is that what we take as a given may be anything but.

Even the Union’s battle cry during the CSA-USA war that the USA would cease to exist should it lose the war is faulty. The CSA never put a claim on the states that remained with the Union, or the Union itself; rather, the Confederate states formed their own federal system. So it is erroneous to claim that the U.S. would not exist in the twenty-first century had the Union army not beaten the CSA in 1865. So it is odd that Barack Obama thought he would not be president. If he was referring to his multi-racial makeup, the U.S. without the “Southern” states would hardly be more racist in the twenty-first century.

I realize that the winner of a war gets to write the history, but that account should at least be coherent. Even such an account would be partial, but it would be conveyed as tantamount to fact by the source as well as the media. I submit that both elected officials and journalists have an ethical responsibility to represent partial or ideological statements as such. For example, the media could add alternative takes in the reportage, hence widening the window of interpretations held to be viable. In short, I contend that the American political discourse tends to be very narrow, especially when possible policy prescriptions are being debated. Having a duopoly of two major parties contributes to this tunnel vision, but so too does the confounding of partial and full accounts by candidates, elected officials, and the media.

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[1] Gregory Korte, “Union Soldier Honored for Gallantry at Gettysburg,” USA Today, November 7-9, 2014.

Reforming U.S. Corporate Taxation: On the Virtue of Simplification

As the Republican Party assumed control of the U.S. Senate, and thus of Congress itself, since they would continue in the majority in the U.S. House, Republican Congressional  leaders and President Obama all emphasized policy areas where common ground could be found. Suddenly, the day after the midterm election of 2014, talk of bipartisanship was in the air. In this essay, I discuss the domain of corporate taxation in order to suggest that the common ground can be deeper than typically thought.

With the stars aligned, previously untouched proposals were poised to see the light of day. According to The New York Times, “The Treasury Department under Mr. Obama . . .  [had] proposed a detailed plan to broadly overhaul the corporate tax code and bring down the corporate income tax rate to 28 percent from 35 percent. Mr. Obama [also] proposed a novel deal to Republicans: simplify the corporate tax code and allow multinational corporations a one-time low tax rate to bring home billions of dollars in profits parked overseas, but use the windfall from that ‘tax holiday’ for infrastructure spending.”[1] To be sure, a lower tax rate does not translate into a lower tax bill if loopholes are removed in the simplification. Furthermore, a one-time low tax rate could be seen as a gimmick—to insignificant in itself to move corporations back to the U.S. that have fled for tax purposes. That the new president of the European Commission, Jean Claude Juncker, had been the prime minister of the tax-haven Luxembourg suggests that corporations would still have enticing alternatives.

For their parts, the newly re-elected House Speaker and the presumptive majority leader in the U.S. Senate, Mitch McConnell, wrote at the time of “the insanely complex tax code that is driving American jobs overseas.”[2] Of course, the complexity also translates into loopholes that cadres of corporate lawyers have been able to use to minimize the U.S. taxes that corporations actually pay. Would a simpler tax code bring them back if it meant higher taxes (i.e., fewer loopholes)—especially if the tax rate changes by only 7 percent? 

Moreover—and my point is precisely moreover—would incremental tax reform be worth all the legislative fuss? In other words, would minor adjustments trigger major corporate moves that would make a dent in the structural unemployment, keep capital in the U.S., and significantly contribute to lowering the U.S. Government's deficits? The incremental approach itself is vulnerable to the onslaught of corporate lobbyists, each of whom can slip in a very specific provision as the legislation is tweaked as a myriad of clauses are adjusted. That many points of access exist in the Congressional system of lawmaking makes this all the more likely.  To be solid, tax reform must be bold enough to have a positive impact above and beyond the inevitable imprint of the vested interests that offer huge sums to lawmakers in exchange for favors, which one by one undermine the point of the reform.

For example, rather than dropping the corporate tax rate 7 percent and only moderately simplifying the tax code, members of Congress could write legislation putting the rate at, say, 10 percent and allowing only basic expenses as deductions. Better yet, re-frame the tax as one based on revenue and forget about deductions. The same approach could be applied to individuals’ income tax. Any income could be taxed at, say 10 percent, without deductions and thus tax returns. I submit that in both cases, the U.S. Treasury would collect more tax revenue.

As a starker example to make my point, the U.S. Government could do away with corporate taxation altogether. Corporate earnings that are paid to stockholders as dividends would of course be taxed as personal income. Taxing such funds as corporate income would be to tax them twice. Corporate income that is reinvested rather than distributed can be viewed as merely one part of a seamless cycle of capital investment; selecting a point at which to tax would be rather artificial in this sense. Furthermore, at no point in the cycle do human beings use the funds for consumption and thus pleasure. In short, corporate income taxation can be viewed as arbitrary and artificial in nature. Companies would have a disincentive to go off-shore, and foreign companies would be inclined to invest in the States.[3] My point is that the paradigm of the status quo need not be the limit to the common ground between the Democratic and Republican parties; such ground goes deeper than superficial incrementalism.

To be sure, the powerful interests are wealthy as things are, and so the gravity of the status quo would have to be countered as we drill. Tax reform can be painted with a broad brush, however, without intricacies that can be exploited by lobbyists together with the members of Congress who are already thinking ahead to their next election.  “We are all dirty,” Barak Obama admitted to the press a month or so before the 2014 midterm election. Campaigns cost so much that "we have to take the money," and “that obligates us,” he said. Hence, in spite of being unpopular in Kentucky, Sen. Mitch McConnell (who stood to assume the powerful position of majority leader and thus "repay" contributors) handily defeated his opponent. This is a tough nut to crack.

However, Congress (i.e., collective action within each chamber) can effectively make a policy domain difficult for favors. Reform as incremental change is like thick grass to the python snakes in Florida’s Everglades. If the tall grass is cut incredibly short to begin with, those sneaky, slithering snakes would be seen and perhaps captured, so they would naturally avoid that area. Similarly, even the corporations that have “bought” members of Congress or the president would be hard pressed to ask for a favored tax exemption or deduction if there is no corporate income tax! Even a tax rate of 10 percent with no deductions would have little shade wherein the snakes could lay their eggs. 

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[1] Jonathan Weisman, “As Power Shifts in Washington, Some See Chance for Tax and Fiscal Deals,” The New York Times, November 6, 2014.

[2] John Boehner and Mitch McConnell, “Now We Can Get Congress Going,” The Wall Street Journal, November 5, 2014.
[3] I am assuming that foreign companies would not be allowed to simply have a scant presence in the U.S. in order to avoid taxes in their respective home countries. The U.S. would not have many allies otherwise.

An Ebola Vaccine: A Lesson for Obamacare

With the Ebola virus confined to impoverished states in Africa until 2014, drug companies had little financial incentive to develop a vaccine. “A profit-driven industry does not invest in products for markets that cannot pay,” Margaret Chan, the director general of the World Health Organization, said in late 2014.[1] At the time, at least 13,567 people were known to have contracted the virus in the outbreak, with nearly 5,000 people dead. It cannot be said that the profit-motive in a market economy is efficient in this case.

As a few cases made their way to the U.S. and E.U. in the Fall of 2014, elected officials quickly felt the fear among their respective constituents. As a result, the U.S. sent troops to West Africa to help contain the illness. In short, money began entering the equation in significant amounts as soon as the people in developed countries perceived themselves as being at risk. Doubtless public funds went to drug companies for expedited research toward a viable vaccine. The arrow here goes from governments to private companies in the marketplace, rather than coming out of the “efficient market hypothesis.” In other words, relying on private companies and the market mechanism, moreover, may be suboptimal in the field of medicine.

The implication for the Affordable Care Act, or “Obamacare,” is that the president erred in caving into the health-insurers lobbyist on including a public option. Relying on private insurance companies may be suboptimal, though admittedly they are not drug companies. Even so, if the market mechanism itself is deficient in the case of a vaccine, then perhaps the healthcare industry, including health insurance, ought to rely chiefly on government rather than the private sector.

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1.Rick Gladstone, “Ebola Cure Delayed by Drug Industry’s Drive for Profit, W.H.O. Leader Says,” The New York Times, November 3, 2014.

The Bank of Japan’s Quantitative Easing: An Unnatural Imbalance

On October 31, 2014, the Bank of Japan made public its policy of buying larger amounts of government debt—80 trillion yen ($734 billion) a year—so as to stimulate the economy.[1] The Nikkei 225-stock index average rose almost 5 percent that day, while the yen fell to its lowest level against the dollar since the preceding month. In effect, investors and analysts were factoring in the likely stimulatory impact on the economy and the inflationary implication of more yen relative even to the expanded output, respectively. Put another way, the lower yen suggests that any strengthening of the currency from higher economic output would be more than countered by the weakening impact of inflation. Interestingly, not even the likely boost to exports from the cheaper yen was expected by the market participants to give the stimulus the edge in pushing the currency higher rather than lower.

 

I submit that the central bank’s strategy is suboptimal in terms of the mission to stabilize the currency on account of the risk of an inflationary spiral. The imprudence, or imbalance in favor of stimulus, stems from another imbalance wherein exaggerated fears of deflation are allowed to eclipse the common-sense notion that periods of deflation naturally go alone with there being periods of inflation. The problematic mentality, I contend, can be understood in terms of a wave function wherein only the half of each wave above the base line are permitted. Such a policy goes against the nature of a wave function to spend as much time below the line as above it. In monetary terms, price stability is thwarted in favor of an inflationary bias.

 

I suspect the root of the problem involves a failure to distinguish between moderate, or cyclical deflation and the severe, ruinous kind. The lack of balance involved in resolutely shutting off even low deflation after years of inflation can resonate into an economy being out of balance. That is to say, the imbalance can expand like a ripple in a pond—a ripple being of course a natural wave function of ups and downs rather than only ups. Perhaps applying principles of natural science to macroeconomics might help central bankers in their task to maintain price stability.

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[1] Jonathan Soble, “Japan’s Central Bank Unexpectedly Moves to Stimulate Economy,” The New York Times, October 31, 2014.