Wednesday, December 30, 2015

On the Financial Crisis of 2008: Why Business Ethics Failed

I submit that the academic field of business ethics failed in not being able to anticipate the fraud and exploited conflicts of interest that precipitated the financial crisis of 2008. That is to say, business-ethics scholars, including myself, failed utterly. To the extent that the general public relies on us to shoot off flairs in advance of a high likelihood of icebergs in the water ahead, we failed in our social responsibility, ironically as many of us were admonishing corporate managers to be socially responsible. Many who did so used could use their programs as advertisements or even window-dressing. In this essay, I point to some of the academic reasons why business-ethics scholars failed so miserably.

The full essay is at Business Ethics Failed.

Tuesday, September 29, 2015

Business Implications of Power in Mergers: The Case of the New United Airlines

Ideally, a merger combines the best features of one company with those of another company such that the whole is of greater value than the sum of the two parts. Optimal combination as such may imply or at least depend on a rough power-balance between the two adjoining companies, for otherwise distended dominance could translate into the worst of one company (i.e., the dominate one) being foisted onto the merged entity. The opportunity cost, or benefit lost in going with the worst of the dominant company, could be measured by the extent to which the same function in the other company is better than that of the dominant company. Put another way, it would make no sense to go into a merger planning to let each company continue to do what it does worse than the other. Sadly, power can eclipse economic criteria even in a company. The merger of Continental Airlines and United Airlines provides a case in point.

According to The New York Times, “The merger . . . was supposed to combine Continental’s reputation for solid customer service with the broader reach of United’s domestic and international network. Instead, [the merger turned into] an exercise in frustration for [the] fliers, with frequent delays, canceled flights, and lost bags.”[1] Customer unhappiness is a pretty good indication that something went horribly wrong in the formation of the combined company.

One business passenger, a frequent flier, provides us with a synopsis. “Continental was probably the best airline . . . that you could travel on pre-United. I would say United is one of the lowest.”[2] Specifically, he cited poor service, bad wifi connections, and cut-backs on perks and upgrades that evince little appreciation for frequent fliers. “I feel that at 100,000 miles, somebody should care and make me feel like a valued customer. You’re treated as just a commodity, and it’s a race to the bottom. They don’t really appreciate me at all.”[3] He would have quickly switched to another carrier, but the new United held 70 percent of all routes in and out of Newark, his main hub, at the time. Monopoly in a market, and perhaps even oligopoly, may enable sub-optimal merged companies to continue when they otherwise would have gone bankrupt.

United's "Love in the Air" promotion highlighting couples who met in the air. The case of the winning couple pictured here just happens to involve an "upgrade." The love in the air does not refer here to the employees on board or at the gate, even though the impression intended may be that flying United is a loving experience. (United Airlines)

In any case, the poor service of the pre-merger United somehow trumped Continental’s excellent service in the combined airline; the sordid mentality survived the salubrious one. Behind this dynamic lies dominance, or power, disproportional, I submit, from the standpoint of an optimized merged company according to business criteria—that is to say, power over effectiveness. Lest it be presumed that business principles and calculation play a predominate role mergers, the management of the power dynamics should not be left out of the equation.

[1] Jad Mouawad and Martha White, “Despite Shake-Up at Top, United Faces Steep Climb,” The New York Times, September 15, 2015.
[2] Ibid.
[3] Ibid.

Sunday, September 27, 2015

Great Lakes Water in the U.S.: Treating a Union as a State

Squabbling amongst states in a federal system may be an inherent feature of federalism. How much the jealousies and petty interests manifest in terms of policies may depend on the balance of power between the federation itself and its member-states. In the case of the E.U., the spat at the state level over how to allocate the tens of thousands of refugees from the Middle East and Northern Africa effectively stymied federal action that could have assuaged the angst. It is no accident that the state governments hold most of the governmental sovereignty in the E.U. federal system. By contrast, the case of the U.S. demonstrates that nearly consolidated power at a federal level can obviate, or stifle, strife between state governments. This alternative is not optimal either, for interstate differences tend to be ignored, resulting in increasing pressure on the federal system itself. How to handle municipal requests for drinking water from Lake Michigan is a case in point.

The complete essay is at Essays on Two Federal Empires.

The basins of the five Great Lakes. Wisconsin is to the left of Lake Michigan (the lake to the southwest in the picture). (wikipedia)

Tuesday, September 22, 2015

A Subtle Conflict of Interest in Obama’s Nominee for FDA Commissioner

Robert Califf, U.S. President Barak Obama’s nominee in 2015 to head the federal Food and Drug Administration (FDA), had received consulting fees of roughly $205,000 between 2009 and early 2015 from drug companies and a medical-device maker.[1] He donated the money he had made since around 2005 to nonprofit groups, and he had ceased all such work before he became the FDA deputy commissioner for medical products and tobacco. The question is whether he would have a conflict of interest in taking the helm at the regulatory agency that puts the public’s interest above those of the regulated companies. I contend that such a conflict is indeed entailed, though not on account of the money he received or any relationships he had developed with people at the companies.

As a clinical-trial researcher at Duke before joining the FDA, Robert Califf was a founder of the Duke Clinical Research Center Institute, which helped pharmaceutical companies run clinical studies. Such facilitation is oriented to helping companies, and, if ethically done, ultimately to helping the public too. In other words, he was not oriented to an area in which the respective interests of a drug company and the public are apt to be at odds. He could thus safely assume a mentality favorable to the companies. Such a mentality is at odds with that of a regulator of companies. Government regulation itself presupposes a tension between the interests of the regulated and the wider public. The mentality fitting the regulator’s role puts the public interest above the interests of the companies possibly to be regulated or already being regulated. A regulator, or an entire agency, captured by one or more of the companies being regulated, regulates sub-optimally because the public interest is valued less than a private interest (including the regulator’s own personal interests).

Public Citizen, a nonpartisan public-health group, urged the U.S. Senate to reject the nomination because “it would accelerate a trend of FDA decision-making that is more aligned with industry than with patients.”[2] Interestingly, the group did not highlight the fact that Robert Califf had received money from drug companies for consulting work, such as participating at an AstraZeneca employee-education session about cardiovascular disease. Rather, the complaint is oriented to the impact of a mentality aligned with the drug companies.

In the language of conflicts of interest, a regulator acting in line with his or her mentality assumes one role. Acting in line with the public interest above that of company interests to the contrary, can be considered another role. Both roles pertain to the regulator’s exercise of his office—for our purposes, the FDA Commissioner. The roles conflict. Robert Califf could reasonably be expected to be tempted to make decisions in line with his mentality (i.e., a private benefit to himself, and a broader private benefit to the companies involved) at the expense of his office’s duty to put the public interest above the two private interests (which include that of his mentality, or orientation). Herein lies the personal conflict of interest—personal in that he could be expected to be tempted on an ongoing basis to put his personal mentality (i.e., a personal benefit, psychologically) above the duty of his office to put the public’s welfare first.

To be sure, we cannot assume that Robert Califf would give into the temptation as Commissioner of the regulatory agency. Sanjay Kaul, a cardiologist, asserted that Califf had demonstrated his ability to act with independence. “Even though I have not always agreed with him on many issues, I respect him for his intellect and integrity. There is no doubt in my mind that he will leverage his inside knowledge of how the industry works to promote innovation without compromising public safety.”[3] Although I suspect that Kaul overstates the congruence of the respective interests of the industry and the public, we cannot assume that a predisposition to help drug companies necessarily wins out.

Even so, I contend that to have a person with a mentality or at least habit of helping companies in the regulated industry as a regulator necessarily involves an ongoing tension for the person, and furthermore that submitting said person to such a tension (or temptation) is itself unethical because of the subtle harm done on him or her. More simplistically, a regulator ought to have a mentality or bias that is aligned with putting the public interest above the interests of the regulated.

Even a subtle bias gained from substantial work-experience, which itself points to an underlying orientation and may even extenuate it, can be reckoned as a personal role. That role can be in tension with another role to be performed—a role oriented to a wider-held benefit (e.g., that going to the public). A personal conflict of interest can therefore exist even without any hint of personal financial benefits (e.g., bribery, extortion, etc.) being likely in a person’s position/office. Even as we tend to limit our recognition of personal conflicts of interest to the superficial level of money—such conflicts being much more extensive—the good news is that more of those conflicts are avoidable than we surmise. Merely in matching a mentality or predilection of a potential office-holder to the role having a wider rather than narrow distribution of benefits (i.e., acting for the public welfare), we can reduce the incidences of such conflicts.

[1] Drug companies spent an additional $21,000 reimbursing the cardiologist for travel, meals, and other expenses. Joseph Walker, “FDA Nominee Received Industry Fees,” The Wall Street Journal, September 19-20, 2015.
[2] Ibid.
[3] Ibid.

Saturday, September 19, 2015

Bank of America Board Ignores a Binding Resolution: Fiduciaries Seizing Power from Shareholders

Corporate board directors have a fiduciary duty to act in the shareholders’ financial interest. What if a board’s directors think they know better that the stockholders as to their interest? In such a case, the directors would be acting like elected representatives who vote contrary to the wishes of their constituents for their own good. While valid from the standpoint of representative democracy, I’m not sure the principle has legitimacy in the corporate context, wherein property-rights are being represented. Simply put, an owner gets to decide how his or her wealth is used, within legal parameters of course. The case of Bank of America’s board may suggest that directors essentially work for their managements while being shamelessly dismissive of even binding directives from the stockholders as a group.

“At the bank’s 2009 annual meeting, shareholders passed a bylaw requiring that the board be overseen by an independent “chairman.” The bylaw passed by a whisker, but it was nonetheless binding.” In the fall of 2014, however, “the board abruptly overturned the bylaw” by electing Brian Moynihan, the bank’s CEO, as chairman of the board.[1] In other words, the directors shamelessly dismissed a binding shareholder directive. The directors claimed that the bank’s governance structure—that is, whether to have the same person occupy both the CEO and chair positions or not—should be allowed to vary “depending on the strategy and environment in which [the bank] operates.”[2] I’m not convinced, however, that this is a valid point.

Firstly, the duality of the chair and CEO (i.e., having the two positions held by two people) is not oriented to particular business strategies or environments; rather, the governance device is intended to prevent a CEO, whose supervisor is the board, from dominating it and thus impairing its overseeing role. Such a situation is like an employee coming to dominate his boss. It doesn’t matter what the business is, the structure itself is problematically both ethically and in terms of the performance of the board and its management. That the board brazenly contradicted the stockholders’ binding bylaw in appointing the sitting CEO as chairman of the board may suggest that the CEO already had too much power over the board responsible for holding him accountable.

The man of the hour. Brian Moynihan, Chair and CEO of Bank of America as of 2015. His power exceeded even that of the stockholders, whose concentrated wealth he managed. Lest it be maintained that a CEO with such power optimizes corporate earnings, consider that his predecessor, Ken Lewis, had the bank purchase Countrywide, whose fraudulent mortgages played a vital role in bringing about the financial crisis of 2008. Perhaps CEO/chair duality is of value simply in reducing a corporation's systemic risk. Hence, Congress may legitimately intervene.(Simon Dawson/Getty Images)

Were governance structure to be so malleable as to change according to strategy and environment, corporate governance would be more like a policy than something worthy of a corporate charter. By analogy, the argument that a corporation’s governance structure should depend on strategy and the business environment treats a constitutional clause as if it were a mere statute alterable by a legislature rather than a constitutional amendment. The structure, in other words, is too easily changed, and thus subject to the power-agenda a CEO or chair.

Lest it be objected that corporations are merely economic entities and thus subject only to the criteria of efficiency and effectiveness, I submit that power was alive and well among the directors, the CEO, and even the stockholders as the matter of the binding bylaw came to a head in 2015. “Power is the only issue here, Bob Monks, a governance expert at ValueEdge Advisors, a shareholder-activist firm. The board’s appointment of the CEO as chair “is simply saying power is with the C.E.O. and any structural arrangement that purports to dilute his power will be driven out.”[3] The question is whether the stockholders as a group would have and be able to exercise enough power to hold the board and CEO accountable.

[1] Gretchen Morgenson, “At Bank of America, a Vote to Give Shareholders Due Respect,” The New York Times, September 18, 2015.
[2] Ibid.
[3] Ibid.

Wednesday, September 16, 2015

Gay Marriage: God’s Law, Legal Reasoning, and Ideology

Mixing religion, jurisprudence, and ideology together is one potent drink. Ingestion can cause palpable heart-burn as well as migraine headaches. In the case of gay marriage in the U.S., sorting out and evaluating the three elements can be rife with controversy and thus confusion. In this essay, I discuss the county clerk in Kentucky who refused to grant marriage licenses to gay couples because doing so would violate God’s law and thus betray Jesus. Her religious rationale makes for interesting legal reasoning. I then look at the U.S. Supreme Court’s gay-marriage decision. I contend that a natural-right (and thus human right) basis clashes with ideological anger. Human nature itself is on display throughout, particularly as it wades into religion, legal reasoning, and ideology.

Monday, September 14, 2015

Why the E.U. is Compromised in Handling the Refugee Crisis

At least four E.U. states, including Hungary, the Czech Republic, Slovakia, and Poland, rejected a federal plan on September 11, 2015 that would have imposed refugee quotas on the states. The failure to come up with a fair allocation of migrants by state threatened to undo the borderless travel within the E.U. The tremendous influx of mostly Syrian refugees exacerbated differences between the states; given their power even at the federal level of the E.U., the infighting was a risk to the viability of the E.U. itself. I contend that structural flaws in the E.U. itself unnecessarily compromised the Union from quashing the risk to itself by solving the refugee problem. The state governments were clearly not in unison in dealing with the problem themselves.

The complete essay is at Essays on Two Federal Empires.

Refugees held up in Hungary because the state's government was overwhelmed. Why didn't the E.U. step in to help? (Mauricio Limo/NYT).

Saturday, September 12, 2015

Corbyn as Labour Party Leader in Britain: Are Increased Deficits Implied or Avoidable?

The notion that a political party oriented to redressing the widening economic inequality during the years following the financial crisis of 2008 and the subsequent debt-crisis in the E.U. necessarily must increase government deficits to do so is, I submit, faulty. That is to say, being especially oriented to the plight of the poor, with the goal being the elimination of extreme poverty, can be consistent with fiscal responsibility. The election of a socialist as leader of Britain’s Labour party presents us with an interesting case of assumed fiscal irresponsibility.

Jeremy Corbyn upon being elected as leader of the British Labour Party (Jeff Mitchell/Getty)

Jeremy Corbyn was elected leader of Britain's opposition Labour party in September 2015. He won 59.5 percent of the ballots cast, or 251,417 votes, in the leadership, winning in the first round. He vowed to work toward justice for the poor. "I say thank you in advance to us all working together to achieve great victories, not just electorally for Labour, but emotionally for the whole of our society to show we don't have to be unequal, it doesn't have to be unfair, poverty isn't inevitable," he said.[1] He a impressed many Labour party members by repudiating the pro-business consensus of former leader Tony Blair—going instead with wealth taxes, nuclear disarmament and ambiguity about EU membership." Additionally, he promised to increase government investment though money-printing and renationalising vast swathes of the state’s economy. The Tories have used the economic crisis of 2008 to impose terrible burden on the poorest people in this country," he said. All this would not come without a cost.

For his part, Prime Minister David Cameron assumed that Corybn’s platform would mean larger government budget deficits—a problem the E.U. has struggled to address by levying penalties on wayward state governments. Cameron said—and this is crucial—"It's arguing at the extremes of the debate, simply wedded to more and more spending, more and more borrowing and more and more taxes. And in that regard they pose a clear threat to the financial security of every family in Britain." He is using rhetoric in characterizing Corbyn’s platform as extreme. In any case, Corybn said nothing about borrowing more and thus increasing the state’s public debt, yet Cameron assumed that it goes along with such a platform. To be sure, Cameron has a political incentive to make the inference, at least publically. According to Reuters, “The likely abandonment of the political center ground, particularly on the subject of balancing Britain's books, is seen by many as a gift for the Conservative Party that could herald a prolonged spell in power for the center-right party.” For the media to take the Prime Minister’s inference at face value, as if Corybn himself had said it, is hardly fair not only to him, but also to the residents of Britain.

I contend that the inference is invalid—that is to say, fiscal irresponsibility is not necessarily part of the mix in going with policies oriented to relieving poverty and even socialist policies—socialism being having the government own the means of production (regulation being government control over private property).  Corybn mentioned wealth taxes; he could also have pledged to reduce or end corporate tax-subsidies and even increase other taxes, including on business. He could also have vowed to decrease government spending in areas that do not affect the poor. Obviously, a downside goes with each of these measures, but this is not my point here. Rather, I submit that increasing government revenues and even decreasing government spending overall is consistent with having policies oriented to relieving and even eliminating the scourge of poverty, which dehumanizes people and limits them in so many ways, including in productiveness. Accordingly, Corybn could have said that he would work on behalf of human rights within Britain.

Regarding nationalizing economic sectors by printing money, government debt would not increase; rather, the means is inflationary. Were Corybn to change his position on using monetary policy for a large-scale fiscal purpose, we would be wrong in assuming that he must increase the state’s deficits to do so. Alternatively, he could prioritize the sectors to be nationalized and do so gradually. If even this approach would strain government finances, he could float government bonds specific to the government investments and use the revenue from them to pay off the bonds. This use of debt is acceptable in the business world, and thus qualitatively different than simply adding to the state’s deficit without a tie to future revenue. For anti-debt purists, the nationalization policy could be subordinated to the anti-poverty spending such that nationalizations occur only when the government can afford to pay for them—say from running a surplus, which I contend is consistent with an emphasis on anti-poverty measures.

[1] William James and Michael Holden, “Socialist Elected UK Opposition Labour Leader,” Reuters, September 12, 2015. Source of all quotes in this essay.

Wednesday, September 9, 2015

Fewer Blue-Collar Lawmakers in Maine’s Legislature: Public Financing Cut by the U.S. Supreme Court on Free Speech Grounds

In 1996, Maine became the first American state to enact a public financing system for statewide elections. Voters passed a referendum by which the government provides money to candidates who meet a threshold of fundraising in $5 increments from voters in their districts. Before 2011, candidates got matching funds from the government if an opponent was funding his or her campaign with their own money, or if an outside group was spending money on the race over a certain amount.[1] The reason for the discontinuance of the matching funds and the subsequent impact on the number of blue-collar people running for office and being in the legislature demonstrate that the public financing of political campaigns can have a huge impact on both political campaigns and representation in a legislative chamber.

By 2008, 85 percent of lawmakers in the Maine legislature were running with public funds. Passage of the referendum allowed waitresses, teachers, firefighters, convenience store clerks and others to run for office and win. Women benefited especially, running in greater numbers than had been possible before. Thanks to public funding, Maine soon had the most blue-collar legislature in the U.S. The gap between Maine’s citizens and their representatives was effectively narrowed.

Historically, the American Founding Fathers knew that the legislatures of the member-states were closer to the people—and not just geographically—than the U.S. House of Representatives. Hence, some delegates at the Constitutional Convention decried the aristocratic nature of the proposed U.S. House. For one thing, the legislative districts of a state representative are smaller. Partly for this reason, citizen-legislators would be more likely. By design, the total number of legislators at the state level dwarfs the number of representatives in the U.S. House. The Founders thus understood that the vast repository of self-governance in the “extended republic” and the republics within would be mostly in the state legislatures. Hence, most authority over domestic matters was constitutionally assigned to the states, with the governmental institutions at the federal level enjoying only limited, or enumerated, powers. The impact of Maine’s referendum suggests that representative democracy has greater potential at the state level than at the federal level. To be sure, Madison’s theory that political minorities are less protected in smaller republics represents a downside to state government relative to federal. However, the greater presence of blue-collar people in Maine’s legislature may mean that Madison’s theory need not apply, at least concerning economic minorities. Unfortunately, the Maine experiment was rather severely clipped in 2011.

Specifically, the U.S. Supreme Court decided that providing public funds to match outside groups and self-funding candidates was a limit on their free-speech rights. Participation in Maine's public funding system dropped to 51 percent by the 2014 election. How increasing the money-as-speech of one person limits the free-speech of others is utterly perplexing to me, unless the context is of two people in close proximity using loudspeakers. At the very least, the American doctrine of free-speech had traversed a few curves—the 2010 Citizens United case being a major case in point.

Moreover, the court’s decision may point to a basic bias in the American political elite in favor of great wealth. Corporate donors would quite naturally want to squash the influx of blue-collar lawmakers—preferring instead “professional” politicians intent on being re-elected. My basic point is that public financing can have a huge impact not only on campaigns, but also on the composition of legislatures. That is to say, Americans need not assume that “deep pockets” entrenched in the status quo necessarily enjoy the overwhelming advantage in representative democracy.

[1] Paul Blumenthal, “Maine Voters Hope to Restore Their Revolutionary Election System,” The Huffington Post, September 4, 2015.

Tuesday, August 25, 2015

Migrants Overwhelming Europe: Unfairness Impeding the E.U.

More than 100,000 migrants, many of them refugees from conflicts in the Middle East and Africa, entered Hungary from January to August 2015, the vast majority en route to the more affluent northwestern E.U. states. A record 50,000, many of them Syrians, reached Greece by boat from Turkey in July alone. Meanwhile, Hungary was building a fence along the state’s border with Serbia, where 8,000 migrants were staying in parks, to keep more migrants from entering.[1] 

I contend that the disproportionate power of the state governments relative to that of the federal government accounts in part for the difficulty that the E.U. has faced in coming to grips with the tremendous influx. This case suggests why redressing the imbalance in the federal system has been plagued with difficulty.

At the time, Jean-Claude Juncker, president of the E.U. Commission—the federal executive branch—criticized state officials for “finger pointing” instead of coming up with viable public policies. He deputy, Frans Timmermans, said in an interview, “Europe has failed. Europe has to get moving. . . . So far, many member states have thought they can go it alone. That doesn’t work. We have to do it together.”[2] In other words, leaving the problem to the states was not working, yet something was impeding united action. I submit that the want of sufficient competencies (i.e., enumerated powers) at the federal level was the main obstacle.

Police disperse migrants at a registration place in Kos, Greece. Should the E.U. leave it to the state governments to handle the crisis? (Yorgos Karahalis/AP)

To be sure, for the E.U.’s general government to warrant additional competencies, it’s governmental machinery must be viewed as fair—that is to say, impartial regarding the various states. In taking sides in favor of creditor states as Greeks were heading to the polls to vote on a referendum in July on whether to accept additional austerity as part of a proposed debt “bailout,” E.U. officials compromised the legitimacy of their respective institutions, and thus of the federal government itself.

The unfairness may have manifested as well in the case of border protection funds. Hungary’s prime minister, Vikto Orban, claimed, “The European Union distributes border protection funds in a humiliating way.”[3] More power states to the west had been able to take the money from the eastern states. He went on to say that the E.U. institutions had failed to offer a coherent solution. I submit that the perception of unfairness and the failure to come up with a viable solution are linked, for granting institutions thought to be unfair additional authority is understandably difficult for the state governments on the “outside.” In other words, to the extent that E.U. institutions are pliable enough to be manipulated by the wealthiest, most powerful states, efforts to move toward a state-federal balance-of-power will face resistance.

[1] Reuters, “As Migrants Head North, Hungary Decries ‘Humiliating’ EU Policy,” The World Post, August 25, 2015.
[2] Ibid.
[3] Ibid.

Sunday, August 23, 2015

American Consumers Using Gas-Savings to Reduce Debt: Frugality or Responsibility?

The steep drop in the price of oil in July 2015 was a concern for traders. Drillers and other energy companies comprise a significant portion of the S&P 500 index. “The upside to falling oil is that all the money that drivers are saving at the gas pump should mean more spending by them at stores — and a faster-growing U.S. economy. But Americans are choosing to pay off debt instead of going shopping.”[1] Is this a bad thing? In reckoning it as such, Wall Street analysts are missing the big picture, even financially.

Gasoline at a station in January 2015. (ABC News)

To go on a shopping spree when in significant consumer debt is, I submit, foolish and perhaps even reckless. The mentality erroneously treats debt as permanent rather than something to be paid back. In this respect, the U.S. Government has been a terrible role model, as Bill Clinton dedicated only half of the surpluses in the late 1990s to paying down the debt. After his presidency, the wars and occupations in Iraq and Afghanistan added more than $4 trillion to the government’s debt.

To urge consumers in debt to spend what they save on gas implies the same mentality. Tim Courtney at Exencial Wealth Advisors, for example, says "Household finances are growing more healthy ... but you want to see a pick-up in spending, too."[2] I submit that such additional spending at the expense of reducing debt is detrimental to a person’s financial position. Not only is the debt not reduced, but also the habit of spending while ignoring the debt is reinforced. Consumers regaining their pre-debt position is good for Wall Street, moreover, because the financially solid position puts the consumers in a better position to spend beyond the short term.

Even so, using discretionary income to reduce household debt is said to be frugality. The following passage from The Associated Press is a case in point, and even makes explicit the interests behind the perspective. “The new frugality helps explain why the biggest long-term driver of stock prices — corporate earnings — have been so disappointing lately. In the second quarter [of 2015], companies in the S&P 500 grew earnings per share just 0.07 percent from a year ago, according to research firm S&P Capital IQ.”[3] That which is behind disappointment can be expected to be treated harshly rhetorically. Hence, responsible efforts to reduce debt is “frugality,” which has the negative connotation of cheapness.

I submit that debtless consumers are worth more societally than are continuously increasing corporate earnings (and consumer debt). The Associated Press could have reported that consumers were being responsible while over-reaching corporate expectations were taking a hit. How the media decide to report a story does indeed have an impact not only on consumers and company managers, but also the society as a whole—even in how it votes. In the case of the U.S., especially relative to the E.U., business interests can be said to have a disproportionate influence societally.

[1] Bernard Condon and Ken Sweet, “Why Stocks Are Tumbling 6 Years into the Bull Market,” The Associated Press, August 23, 2015.
[2] Ibid.
[3] Ibid.

Wednesday, August 19, 2015

On the Pretentiousness of Senior Water Rights in California

California water regulators proposed a record $1.5 million fine on July 21, 2015 against the Byron Bethany Irrigation District (BBID) in the Sacramento-San Joaquin River Delta. The agency claimed that the district had defied cutbacks that the California Water Resources Control Board had ordered by diverting water from June 13 through June 25. The complaint said that Byron Bethany had consumed an estimated 2,056 acre-feet of water[1] in spite of the fact that the agency had imposed a 25 percent mandatory cutback in urban water use and cuts to major agricultural interests.[2] I contend not only that the district’s board put the interest of a part ahead of the good of the whole (i.e., the common good), but also that the board did so out of a sense of entitlement based on the sheer longevity of the water rights in the district.

The district’s diversion of water up-stream was at the expense of the farmers down-stream. Due to difficulties overall in obtaining water, farmers in California fallowed an estimated 542,000 acres (220,000 hectares) of land in 2015.[3] Almond growers planted new trees nonetheless; almonds are a premium cash-crop there. Even so, both those growers and the siphoning water-district put their own private interests above competing private interests (i.e., other farmers) as well as the good of the whole. 

California’s government was managing water overall in the fourth year of a severe drought. The task was difficult even without self-aggrandizing water-users, and the actions of the latter made it even more difficult, and thus detracted from the public good. Accordingly, the government’s decision that the fine could be as high as $5.1 million if the case goes to a hearing is justified even though the threat is manipulatory in nature.

The mandated water-cuts pertained even to farmers with water rights going back nearly a century. The Byron Bethany district fell into that category.[4] This point played a significant role in the district board’s decision to keep the spigots open for a week. Russell Kagehiro of the BBID reacted to the proposed fine by stating, “The state board is choosing to make an arbitrary example out of B.B.I.D. at the expense of our customers and the communities their hard work supports.”[5] Significantly, he added that the district “will vigorously defend its right to water and due process. The landowners and others that rely upon B.B.I.D.’s senior water rights deserve no less.”[6] That he emphasizes the district’s rights to water—indeed, senior water-rights—says quite a bit about his rationale in taking the water. In short, the underlying mentality is that of presumed superiority over not only other districts, but also the republic of California.

That California is a semi-sovereign republic in the U.S. means that the member-state has the authority to manage the water within its borders unless the U.S. Government claims preemption. Whether or not the California Government can legally override long-held water-rights is a matter for a court to decide. If that government granted the rights, then it could retract them unless doing so would violate the California or U.S. constitution. Absent such a violation, a right is a function of government or else natural. In this case, the rights are presumably contractual and thus rest on a governmental rather than a natural basis. It is in virtue of sovereignty that a government can unilaterally cancel even a contracted right, for sovereignty itself means that no higher authority exists. In modern federalism, governmental sovereignty depends on the domain in question.

Because California’s government was dealing with a drought-crisis, a strong state-interest is satisfied in overriding even long-standing water-rights within California. Moreover, given the water-crisis, the cuts had a rational basis. According to this analysis, the California Government was on solid—indeed, parched—ground in fining the district. Complementing this conclusion is the more damning observation that the district’s unilateral diverting-action based on senior water-rights reflects not only a sordid selfishness, but also a related lack of concern for the welfare of others and even for the public good. Put another way, from the severity of the water-shortage as the context, a presumptuous mentality can be derived.

By analogy, had the first-class passengers on the Titanic insisted on extra room on the limited number of small boats at the expense of the men without such senior rights (i.e., passengers not in first class), the captain would have been well-justified in stepping in to order that the boats be filled to capacity for the good of the whole. That the sense of entitlement of some might actually sabotage not only the livelihoods of others, but also the good of the whole is a testament to just how squalid the mentality is.

[1] An acre-foot is the amount of water that would cover a square acre up to a foot high.
[2] Adam Nagourney, “California Farm District Accused of Diverting Water,” The New York Times, July 21, 2015.
[3] Reuters, "California's Drought Will Cost the State $2.74 Billion This Year, Report Finds," The Huffington Post, August 18, 2015.
[4] Nagourney, "California Farm District."
[5] Ibid.
[6] Ibid.

Sunday, August 9, 2015

Analysis of Inferences and Assumptions: A Homework Assignment for “We the People”

Thomas Jefferson and John Adams both strongly believed that the continued viability of a republic depends on an educated and virtuous citizenry. Public education and even the practice of some of the professional schools (e.g., medicine and law) since at least the early twentieth century to require a degree in another school (e.g. Liberal Arts and Sciences) before being admitted to the undergraduate program (i.e., the M.D. and J.D. or LLB, respectively). This lateral move is unique to the U.S.; entering medical and law students in the E.U. need not already have a college degree. I submit that the Founding Fathers’ firm political belief in the importance of an educated electorate concerns the value of not only having a broad array of knowledge, but also reason being able to assess its own inferences, or assumptions; for inferences, or leaps of reason, go into political judgments. Ultimately, voters make judgements, whether concerning the worthiness of candidates on a ballot, their policies, or proposals on a referendum. To the extent that subjecting assumptions to the “stress test” of reasoning is not a salient part of secondary education, an electorate is likely to make sub-optimal judgements, resulting in suboptimal elected officials, public policies, and laws.

Government ultimately by “We the People” can be risky business, especially if any plank of a constitution can be changed by amendment. Were a super-majority of Americans intent on bringing back slavery, the constitutional-amendment process would enable the people through their elected representatives to repeal the 12th Amendment to the U.S. Constitution. The constitutional amendment prohibiting the sale, production, importation, and transportation of alcoholic beverages was repealed in 1933 after thirteen years. Clearly, the assumptions that had gone into the passage of the Eighteenth Amendment turned out to be faulty. Had the American electorate have subjected those assumptions to better critical-analysis  when that amendment was being debated in the first place, perhaps organized crime would not have prospered and grown as much as it did. My assumption here is in need of critical analysis, however, as I know very little about the history of Prohibition. Yet I just made the assumption nevertheless. I contend that such a making of assumptions—out of very, very imperfect information yet made nonetheless—is a huge problem that remains largely invisible in representative democracy as a form of government. My aim here is to improve it by making one of its fault-lines transparent, and thus potentially treatable.

Speaking recently with a construction worker—a man of about 30 years old—I was impressed with his knowledge of how to put windows on buildings. “If you use a finger to smooth out the caulking around a window, you are getting chemicals such as the oil on your finger on the caulk, and this could diminish the sealing ability.” I was stunned that something I would admittedly do without a thought would be in his eyes an elementary error. “Even some of the guys who do residential windows don’t know this,” he said. He worked on office buildings. He went on to complain that the company, with his union’s consent, takes as much out if his paycheck for health-insurance as from the paychecks of workers who have families insured. “It’s just me,” he lamented, “so I’m subsidizing my union brothers whose health insurance covers their wives and kids.” I agreed with him that the arrangement seemed unfair.

Then, unfortunately, he turned to politics. It was as though he was suddenly on drugs. “I’m for Hillary,” he asserted. “Bill Clinton was one of the best presidents, and if Hillary were president, the two of them would talk in bed about stuff. Bill would be president again. Hillary had influence when Bill was president.” I asked why Bill Clinton was such a good president, to which my interlocutor replied, “Unemployment was low, the economy was humming, and the [federal] government had a [budget] surplus.” Exhausted just from contemplating the guy’s leaps in reasoning alone, I did not comment.

I could have added that Bill Clinton had signed off on legislation repealing the 1933 Glass-Steagal Act forbidding commercial banks to do investment-bank work and vice versa. The risk taken on by many of the largest banks in the U.S. would play a significant role in freezing up of the commercial paper (i.e., overnight inter-bank lending) market in September 2008. Additionally, Clinton’s Treasury Secretary, Robert Rubin, played a significant role in lobbying Congress to keep financial derivative securities, such as the bonds that are based on risky home-mortgages, unregulated. With Larry Summers, also in the Clinton Administration, and Alan Greenspan, chairman of the Fed, Rubin lobbied members of Congress to ignore the pleas of Brooksley Born, chair of the Commodity Futures Trading Commission, to give her agency oversight of the off-exchange markets for derivatives.[1] She resigned in 1999, just after Congress passed legislation prohibiting the CFTC from regulating derivatives.[2] As a result, Treasury Secretary Henry Paulson and Fed chair Ben Bernanke had no idea how many subprime-mortgage-based bonds existed when so many of them defaulted in 2008. In that financial crisis, the U.S. Government was flying purblind, as if the Titanic in the North Atlantic at night.

Viable assessments of Bill Clinton’s presidency would have to include the above, whereas the impact of his administration on unemployment and GNP-growth is more questionable. That the bubble collapsed in 2000 may suggest that any impact Clinton may have had on the U.S. economy was not necessarily good in the long-run. Even so, my interlocutor simply assumed that Bill Clinton was largely responsible for the economic boom.

Even to assume that Clinton should get the credit for the federal government’s budget surpluses ignores the vital role that the Speaker of the U.S. House of Representatives, Newt Gingrich, played. Furthermore, to the extent that a president does not have an appreciable impact on the U.S. economy as a whole, any surplus due to increased tax revenues from the economic boom could also not be credited to Bill Clinton. In fact, that he decided to spend half of the surpluses rather than use all of the extra money to reduce the government’s accumulated debt—perhaps under the assumption that the boom would continue for decadescan be said to be problematic, or at least short-sighted.

In terms of Bill and Hillary’s relationship, I must confess complete and utter ignorance. In the movie Dave, the fictional U.S. president and his wife hate each other and thus perpetuate the illusion that they are sleeping in the same bed. The assumption itself of any knowledge of the Clinton’s relationship, and more specifically even who would “be president” were Hillary elected in 2016, is a red flag. In other words, that the construction worker presumed so much on a matter so private, and so very distant, told me just how carried away people can get in making assumptions and yet be wholly unaware of how deeply problematic the sheer making of the assumptions is. In other words, I saw no evidence of an internal feed-back corrective in the man’s mind, such that he might beg off his declaratory asseverations. 

Moreover, I realized that his faulty chain of inferences would play a key role in the construction worker’s eventual vote for U.S. President in 2016. I contend that he is by no means alone. In fact, bad assumptions may play a very significant role the American—and indeed any—electorate’s votes.

Consider, for example, how many Americans have declared that Barak Obama is a Muslim. The very ideational act of presuming to know the faith of a person so distant is itself a red-flag. If the assumption played a role in how some of the electorate voted in 2008 and 2012, and if the assumption is wrong, then the phenomenon of unchecked assumptions really does play a significant role in how an electorate—the popular sovereign—does as the “We the People” of a representative democracy. In other words, popular sovereignty itself, to which governmental sovereignty (i.e., governments) is, theoretically at least, an agent, has a rather basic downside, or vulnerability.

If I am correct, then public education in any representative democracy should include assumptional analysis, wherein students are taught how to assess their assumptions and any “supporting” inferences. As a result, the future electors should be able to get a better grip on how far they go in making inferences based on no or scant information. I contend that representative democracy would be a much better form of government were the human, all too human, assumptional “brain sickness” made transparent and treated.

[1] Peter S. Goodman, “The Reckoning: Taking a Hard New Look at a Greenspan Legacy,” The New York Times, October 9, 2008.
[2] Michael Hirsh, Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street (New York: John Wiley and Sons, 2010).

Tuesday, August 4, 2015

Coal Industry Challenges Lower Carbon-Emission Targets: Human Nature on Full Display

With heat-waves underway and glaciers melting, climate-change was undeniable in the summer of 2015. Human nature itself was on full display. It was almost as if the human race could not summon itself into action even as the hardships of a warming world were a foregone conclusion.

"We're the first generation to feel the effects of climate change and the last generation that can do something about it," said Obama on August 3rd when he announced a new set of regulations for U.S. power plants that call for a 32 percent reduction in greenhouse gas emissions, from 2005 levels, by 2030. The EPA also issued final rules for new power plants that call for phasing out new coal-fired units unless there is technology in place that can capture and store carbon emissions. Obama said the rules would reduce carbon dioxide pollution by 870 million tons, the equivalent of what is produced by 108 million homes or 166 million cars.[1] He acknowledged a battle lurked ahead, as industry groups were already gearing up to fight the rules in court.

                            Penguins face receding ice and rising waters. (Natacha Pisarenko of AP)

On the same day, the World Glacier Monitoring Service released a study providing new evidence that the world’s glaciers had melted to the lowest levels since the late nineteenth century, and the ice-melt in 2015 would likely be twice the rate in the 1990s and three times the rate the decade before that. "Globally, we lose about three times the ice volume stored in the entirety of the European Alps every year," Michael Zemp, director of the WGMS and lead author of the study said.[2]  On July 20th, “James Hansen, the former NASA climateologist who brought climate change to the public’s attention in the summer of 1998, [had] issued a bombshell: He and a team of climate scientists had identified a newly important feedback mechanism off the coast of Antarctica that suggests mean sea levels could rise 10 times faster than previously predicted: 10 feet by 2065.”[3] Coastal Florida, including its vast commercial and residential real-estate, hang in the balance. Meanwhile, Californians, in the fourth year of the worst drought there in a millennium, witnessed a 50-acre brush fire swell seventyfold in just a few hours, with many other fires raging too.[4]

In spite of the clear indications that the Earth’s atmosphere was warming at an uncharacteristically high rate, the National Mining Association of coal-mining companies requested a stay in court on the EPA’s new rules while the courts have the opportunity to determine the lawfulness of the agency’s attempt to commandeer the nation’s electric grid."[5] Doubtless the focus on the EPA's power-grab did not include the fact that that July was the hottest globally since record-keeping began in 1880. The first seven months of the year were the hottest January-to-July span on record. In fact, from ice-cores scientists determined that the planet was its warmest in at least 4,000 years.[6]

Because coal-fueled power plants made up about 40 percent of the carbon emissions in the U.S. at the time, the companies were playing with fire in that their legal opposition to the rules could make an appreciable difference in how much climate change results from emissions. Put another way, a point of law could conceivably decide whether the lives of future generations of people are just uncomfortable or impossible.

"[T]he Rule . . .  aims at nothing less than the comprehensive 'transformation' of the American electric power grid," wrote Hal Quinn, the NMA's president and chief executive officer, in a letter to Environmental Protection Agency head Gina McCarthy. "Congress, however, did not give EPA the power to restructure how the nation produces and consumes electricity."[7] Even if reducing carbon emissions by a third from power plants constitutes a restructuring of the power grid, Obama’s point about his generation then in power being the first to perceive the impacts from global warming and the last to realistically keep the world’s ecosystem from getting away from us dwarfs the matter of a regulatory agency overreaching.

Of course, the matter may be as simple as that of a narrow private interest being indifferent to the general welfare. Implementing the rule, Quinn wrote, "will irreparably injure the coal mining industry, coal mining workers, and coal mining communities" and "has no purpose other than to reduce the use of coal for electric generation as a means of reducing power sector [carbon dioxide] emissions."[8] The harm to the coal-mining industry in terms of lost revenue was Quinn’s real concern. That the human race could stand in the balance in just a few generations makes the sordid nature of the industry’s self-interest transparent. In fact, the increased demand for electricity for air-conditioning could mean that the mining industry had a financial stake in global warming even though in just a few generations demand for electricity decreases due to more climate-related deaths. 

James Jansen and his colleagues warned that if carbon emissions were not cut soon, the social disruption and dire economic consequences of the sea-level rise along could be devastating. “It is not difficult to imagine,” the scientists wrote, “that conflicts arising from forced migrations and economic collapse might make the planet ungovernable, threatening the fabric of civilization.”[9] That such a prospect was rendered realistic given the clear signs of global warming already extant makes the narrow focus of the coal executives even more astonishing. To be sure, business and societal norms and perspectives can be expected to differ, and even clash, for business is but one component of society. For a part to seek to maximize its own gain at the expense of the continued viability of the whole in the foreseeable future renders the strategy highly unethical, not to mention problematic from the standpoint of society. The latter arguably has an ethical right—obligation even—to constrain the maximizing tendency of the hypertrophic part.

Beyond business and society, human nature itself, particularly in its preoccupation with instant gratification even at the risk of self-preservation in the long term, can explain why such a genetically-successful species could also be that species that alters its ecosystems to the extent that the species itself goes extinct. The force of reason pales in comparison with selfishness. On August 3, 2015, the generation that could grasp the actuality of climate change was both doing something about it and putting up obstacles. Human nature was on full display. The question is whether such nature is compatible with its own survival.

[1] Kate Sheppard, “Obama On Climate Rules: ‘This Is Our Moment To Get This Right’,” The Huffington Post, August 3, 2015.
[2] Nick Visser, “World’s Glaciers Melting At Fastest Rate Since Record-Keeping Began,” The Worden Report, August 3, 2015.
[3] Eric Holthaus, “The Point of No Return: Climate Change Nightmares Are Already Here,” Rolling Stones, August 5, 2015.
[4] Ibid.
[5] Kate Sheppard, “Coal Interests Prepare To Challenge Obama’s Power Plant Rules,” The Worde Report, August 3, 2015.
[6] Nick Visser, "It's Official, July Was Earth's Hottest Month on Record," The Huffington Post, August 20, 2015.
[7] Sheppard, "Coal Interests."
[8] Ibid.
[9] Holthaus, “The Point of No Return.”