The U.S. Senate as Protector of the Interests of the Rich

In the U.S. Constitutional Convention, Governeur Morris said on July 2, 1787, that the “Rich will strive to establish their dominion & enslave the rest. They always did. They always will. The proper security [against] them is to form them into a separate interest.” (Madison, p. 233) By this he meant the U.S. Senate. The democratic principle in the U.S. House and the aristocratic spirit in the U.S. Senate “will then controul each other.” (Madison, p. 233) Having the State Legislatures appoint their U.S. Senators—as was the case until 1913—would defeat the independence of the Senate, and hence its function as a check on the excesses of democracy in the U.S. House.  Such excesses had just been evinced in Shays’ Rebellion in Massachusetts, wherein the legislature there had sided with the former soldiers who had not been paid for their service but were still to make payments on their debts.

In other words, one of the purposes of the U.S. Senate as originally envisioned was to protect property (including creditor interests). The assumption was that the representative democracy of the U.S. House would favor the lower classes.  Although the amounts spent on Senatorial campaigns in after the turn of the twenty-first century practically guarantee that the seats would defend the interests of the rich, that the Senators are elected by citizens rather than appointed by State governments must compromise the U.S. Senate as a check on the democratic excesses in the U.S. House. Even as this check has been enervated, the protection of wealth function endures. 

Indeed, given Shaws’ Rebellion the check on excess democracy is really just the protection of property, which is practially guaranteed anyway by the amounts needed to run for the U.S. Senate.  Not surprisingly, in 2010 the medium wealth of a U.S. Senator was roughly $2.8 million. It is worth quoting from Governeur Morris again—this time from July 19 in Convention. “Wealth tends to corrupt the mind & to nourish its lvoe of power, and to stimulate it to oppression.” (Madison, p. 323)  As the number of electors per member of the U.S. House has increased, even that body could be said to evince a moneyed aristocracy.  The question may thus be raised: Is there a sufficient check against the rich in the national legislature?

Governeur Morris claimed in convention that the U.S. President “should be the guardian of the people, even of the lower classes” on account of the wealth-interest in the U.S. Senate. (Madison, p. 322). However, if the wealth interest has gained a foothold in the U.S. House and even in the presidency itself, that check may well be insufficient and nugatory. A return of domestic functions of government to those of the respective States could perhaps evince a greater weight for what Morris calls “the Mass of the people.” (Madison, p. 323)  At the very least, the lower houses of the State governments are not dominated by the rich. This was precisely what the delegates of the convention wanted to check, and the creation of a general government was their solution. It is no wonder that it has become top-heavy both at the expense of federalism and the poor.

Source:

James Madison, Notes in the Federal Convention of 1787 (New York: Norton, 1987).

The Banking Lobby: Writing Its Own Ticket in Washington

The Huffington Post observed in 2012: “Wall Street's campaign spending and lobbying power is so intimidating that banks have repeatedly stuck the public with the tab for their losses and no one in Washington stops them.” This was a significant change to be sure from President Jackson depriving the Second National Bank of the U.S. of funding in 1832.

For example, as proposed in early 2012, “(m)ortgage lenders would be encouraged to provide greater relief to borrowers who are in less need of help while offering scant assistance to the most troubled homeowners.” These were the terms of “a proposed $25 billion settlement between the nation's five largest banks, attorneys general in nearly every state and the Obama administration.” The banks “would receive greater credit toward satisfying the terms of the deal when they help borrowers who owe less than 175 percent of the value of their homes. Helping borrowers who owe more than 175 percent would qualify for less credit.” It is as if the homeowners most under water were being presumed to be at fault, even in the case of liar’s mortgages foisted by bankers.

The terms of the proposed settlement suggest that the elected representatives were less oriented solving the housing crisis than to collecting campaign contributions from the banks. “To really make a difference in the housing crisis, you have to assist high [loan-to-value] homeowners," said Diane Thompson, an attorney at the National Consumer Law Center. "Otherwise, at some point, they're all going to walk away from their homes.” The banks had long been resisting calls to forgive large portions of loan balances in order to avoid recognizing losses. According to the Huffington Post, the settlement’s terms “appear to satisfy the banks on this point, minimizing the pressure to hand out relief to severely underwater borrowers.” The unfairness can also be seen from the conflict of interest in the stipulation that “states whose residents appear to be victims of illegal foreclosures could take such cases to a committee headed by North Carolina's banking commissioner.” The mechanism reflects the banking lobby effectively heading the settlement between the banks and the government officials. In other words, the banks get to write their own settlement, even though they had been at least partially at fault, as in their liar loans and robo-signing mechanism.

Even giving bankruptcy judges “the legal authority to modify principal balances on mortgages in a way that is fair to both parties,” which “would have allowed more than a million ordinary Americans to keep their homes,” was too much for the banking lobby. It got the U.S. Senate to vote down the amendment in 2009 even as banks were foreclosing on millions of Americans. David Kittle, chairman of the Mortgage Bankers Association, gleefully said, “We led the way on this, and we are clearly responsible for defeating this for the third time in the last year.” Meanwhile, Sen. Dick Durbin (D-Ill.) told a radio host, “And the banks—hard to believe in a time when we're facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.” This was a striking admission, as was the banks’ dominance a year after the financial crisis—a near-meltdown in which the banks played a significant role.

“The finance, insurance and real estate (FIRE) sector combined to spend $6.8 billion on federal lobbying and campaign contributions . . . from 1998 through 2011. . . . That's $1 billion more than any other sector spent on Washington.” Lawmakers are under such pressure to amass campaign cash that the contributions buy the contributors access, and thus influence. The American Banker’s Association, the U.S. Chamber of Commerce, and the Business Roundtable multiply the bank’s influence even more. Additionally, the lobby can utilize the influence of community banks and credit unions, which goes far beyond their role in the economy. The fear voiced in the constitutional convention in 1787 that Congress would become an aristocracy based on wealth—being disproportionately oriented the moneyed interest—had come to pass well before the financial crisis of 2008.

So it should be no surprise that in May 2010, Sen. Tom Harkin (D-Iowa) sought to cap ATM fees--noting that “ATM fees average $2.50 and can run as high as $5 . . . while the real cost of processing a transaction is about 35 cents,” the banks “opposed the idea, arguing that capping fees would just lead to fewer cash machines, including those owned by banks.” As a result, there wasn’t even a floor vote. His own floor leader, Harry Reid, denied it because Republicans had not agreed to it. In short, banks get their way on both sides of the aisle. The republic itself serves the banks even when they have acted badly or unfairly. Even if this means that democracy is a sham in the U.S., even such a recognition would not be likely to make a difference—the electorate so dispersed and disoriented, even subtly manipulated against its own interest in democracy. 

Sources:

Loren Berlin and D. Levine, “Robo-Signing Settlement Might Not Provide Homeowners With Needed Help,” The Huffington Post, February 2, 2012. 

Dan Froomkin and Paul Blumenthal, “Auction 2012: How the Bank Lobby Owns Washington,” Huffington Post, January 30, 2012. 

When the Cameras Are Off: Who Are the Politicians?

In Game Change, a journalist account of the 2008 U.S. Presidential race, the two political reporters conducted hundreds of interviews and had unusually close access to the campaigns. As a result, the reporters present some pretty interesting political morsels. For example, Hillary Clinton considered Bill’s administration to have been “a tactical and operational disaster” (p. 43). ouch! She would never have said such a thing in front of a microphone. This raises the question: do we, the voters, know candidates as well as we think we do? I contend that we do not, and, moreover, that this partially explains why we are so surprised when our elected representatives behave less than with maturity while in office.

The book’s overall theme calls attention to the magnitude of the difference between the actual candidates of president and vice president and the images of them that they efficaciously portrayed through an unwittingly complying media. In reading about what the candidates are like in person, I was particularly struck by their foul mouths and what their associated judgments intimate about their characters (or lack thereof). That we, the voters, are not privy to the candidates’ real personalities, characters and values is of great importance because we base our decisions at least in part on the fabricated images, or brands. We are situated too far removed from the actual candidates to be able to discover the people behind the curtain.

A candidate’s public image can differ radically from the actual person. When Hillary Clinton was a U.S. senator from New York, she portrayed herself as bipartisan and self-effacing in the Senate when in fact she was anything but—at least according to Game Change. On the evening of her win in New Hampshire, Hillary remarked privately, “I get really tough when people fuck with me” (p. 190). Referring to Barak Obama to her aides after one of the debates, she remarked, “What an asshole” (p. 145). We the People would never guess at such a remark from how chummy she would be with him in serving as his Secretary of State. Images can be deceiving.

As still another example, consider John Edwards, who said to Brumberger, one of his aides: “Why didn’t you come to me like a fucking man and tell me to stop fucking her?” (p. 134). On the republican side, McCain was “still prone to outbursts of profanity,” which have never been caught on tape during an interview (p. 274). On his first visit to his campaign headquarters, for instance, McCain blurted out, “What the fuck are all these people doing here? . . .  I am not fucking authorizing these fucking hires. Who are these fucking Bush people? Where is the fucking money?” (p. 278). In public, the candidate said, “I’m very happy with the campaign” (p. 285). It is no wonder we have so little actual basis on which to know what our representatives will actually do when in office.

Evidently, the candidates hire like-minded staff, which may mean that the political culture in Washington is saturated with a baseness that we, the People, never see. Harold Ickes of Hillary’s campaign, for example, said of Barak Obama after the Rev. Wright fiasco, “This guy has been sitting in the church for twenty fucking years. If you really want to take him down, let’s take him fucking down” (p. 238). This is not quite the separation of Church and state that we are used to. Ickes’ association of church and “fucking” is itself revealing. It is no wonder the real personalities are intentionally masked. How many candidates could win if they were simply themselves?

There are implications for how our system of government is structured and for its electoral processes. Even though we can’t be blamed for the fake images being fed to us if nothing else is available to us, we are to blame for acquiescing in the elongation of the election season—the 2012 presidential campaign “season,” for instance, began shortly after the 2010 midterm election. Such an elongation simply extends the run of the fake images, rather than making it more likely that we might glimpse the real persons behind the curtain. Furthermore, our ancestors are to blame for expanding popular election into larger and larger electoral districts in which there is more distance between the average voter and the candidates. On the number of electors per candidate, the delegates in the Constitutional Convention warned that in very large electoral districts the people would not be able to get to know their candidates. Contrary to American history from the USA-CSA war to today, we could demand more of our intra-state representatives and less of the elected officials in the U.S. Government. Members of Congress and candidates for president are too good at playing the image game . . . too fucking good . . . and the huge districts enable them to get away with it.

Source:

John Heilemann and Mark Halperin, Game Change: Obama and the Clintons, McCain and Palin, and the Race of a Lifetime (New York: Harper Collins, 2010).

Vertical and Horizontal M&A: A Bias in Antitrust Policy?

The Obama Justice Department developed a track record in challenging horizontal mergers and acquisitions—those in which a company buys a direct competitor—in industries that are already highly concentrated. In deals that are not between direct rivals, such as those that occur in vertical integration, the Obama Administration approved the deals, albeit with the imposition of legally binding restrictions on the acquirer’s ability to use its “in house” supplier to engage in unfair competition.
As one example of unfair competition through the use of a purchased distributor, Standard Oil under John D. Rockefeller bought a company that owned and operated pipelines through which oil was transported. Besides using the company to obtain competitive information, he made sure that higher rates were charged to competitors—even though who had no other means of transport available. Where practicable, going by pipeline was preferable to barges and railroads from a cost standpoint—although Rockefeller obtained substantial rebates from the railroads (from his volume or market power—this point is subject to debate). In addition, the railroads granted Standard Oil drawbacks—a cut from the railroad’s business in servicing other customers, including competitors of Standard. Given Standard’s sheer volume, the rationale went, trains being used to haul others’ product were not available for Standard and thus represented a cost in terms of foregone volume transported. Even so, from the ethical standpoint of fairness, both the rebates and especially the drawbacks were subject to substantial critique—especially that of Ida Tarbell, whose text (History of the Standard Oil Company, 1904) on Rockefeller’s helmship of Standard was scathing.
More than a century later, the Obama Justice Department allowed Comcast to take control of NBC Universal and Google to buy travel software maker ITA Software. The government’s rationale is that companies can save money from synergies and thus lower prices for consumers (or increase salaries, retained earnings or dividends). Even in a competitive market, however, the “lower prices” scenario seems to have doubtful validity, given tacit collusion on price, non-price means of competing, and executive managers’ interests in increasing their compensation and keeping investors happy.  Similarly, by the way, reducing companies to being “job creators” is not only reductionistic; it also demonstrates an ignorance of what businesses are designed to do (i.e., earn profit by selling widgets—jobs being merely a means).
Moreover, the assumption that “legally binding restrictions on the acquirer’s ability to use its prize to unfairly harm competitors” are a sufficient means of checking or thwarting baleful consequences from what is an institutional or structural conflict of interest seems to be highly tenuous, in my opinion. Just as water in a stream “seeks” ways to go downstream even when temporarily blocked (and a cat obstructed from food laid out continuously seeks ways to get around the obstacles), the managers of company A that owns company B, which acts as a supplier or distributor for competitors of company A, will doubtlessly (and inevitably) seek ways around the restrictions. In the parlance of trade, such ways are known as “non-tariff barriers.” They are notoriously difficult to stop (think: stop the cat).

                                                                                WSJ

In conclusion, the Obama administration’s differential treatments of vertical and horizontal mergers and acquisitions evinced a bias caused by understating the strength of a structural conflict of interest that is inherent in one company buying a distributor or supplier that services competitors of said company. Perhaps the underlying culprit lied in understating of the more sordid aspects of human nature combined with an overstating of the efficacy of government regulation. If highly concentrated, massive stocks of capital, such as are evinced in banks or companies that are too big to fail, represent a risk both to competitive markets and to representative democracy, then not only should both vertical and horizontal mergers and acquisitions be subject to higher hurdles, but also existing companies that are too big to fail should be broken up, as the U.S. Supreme Court broke up Standard Oil in 1913.

Sources:

Thomas Catan and Brent Kendall, “After AT&T: The New Antitrust Era,” The Wall Street Journal, December 21, 2011. 

Skip Worden, God's Gold, available in print and as an ebook at Amazon.  (Source for material on Rockefeller)

On structural conflicts of interest, see Institutional Conflicts of Interest, available in print and as an ebook at Amazon. 

Cases of Unethical Business: A Malignant Mentality of Mendacity

The book, Cases of Unethical Business: A Malignant Mentality of Mendacity, presents a number of cases of unethical conduct at American companies in several industries, along with some cases from other regions of the world for comparative perspective. A variety of industries are represented so to evince a common denominator lurking beneath specific instances of unethical conduct in business. The emphasis here is not on ethical decision-making, for it does not go deep enough. Rather, the underlying mentality out of which the decisions come is to be unearthed to be examined in the light of day. The mentality can be characterized as a mendacious narcissism having little or no regard for other people or institutions; yet even this characterization is incomplete, for a certain presumptuousness or even arrogance is can also be discerned in the cases. The mentality can be deemed to be inherently unethical in itself, regardless of whether any ensuing sordid conduct ensues.

The book, Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

Unethical Business at Volkswagen: Loans Cut off

As R&D was at a premium in car companies reorienting to electric and even driverless cars, Volkswagen could ill-afford the suspension of the European Investment Bank’s low-cost financing in 2017. The company “was barred from receiving European Union research funding over allegations it misused a previous loan to cheat on emissions” by programming “11 million cars to fool regulators.”[1] At issue were the company’s “use of so-called defect devices, software that caused pollution controls in diesel motors to work properly only when the engine computer detected that an official emissions test was underway.”[2] Accordingly, the European Anti-Fraud Office concluded that the company had misled authorities about how €400 million ($472 million) was used ostensibly to develop engines to be more fuel efficient and thus pollute less. I contend that the company’s reply was worse than none.
In spite of the fact that the company had pleaded guilty to having installed defect devices in cars in the U.S., the company’s management in the E.U. issued the following statement: “All funds received by Volkswagen from the European Union were used for the designated purposes”[3] Such boiler-plate language that leans on perfection as if it were a daily phenomenon actually makes a culprit look more guilty (and oblivious). Why is it that managers can be so utterly tone-deaf in replying in a defensive way to an accusation against their respective companies? I suspect that going on the advice of PR people is not the best plan, for such people are oriented to making someone or something look good. Meanwhile, a corporate legal department is also narrowly concerned; in this case, the concern is to minimize or obviate entirely any legal liability. The result is a company that doesn’t look very good because efforts to evade taking responsibility for oneself never do. Better not to issue a statement than to go down the road most travelled. The challenge for managers in formulating a company statement is to take responsibility and demonstrate contrition as in accepting the consequences, such as the suspension of low-cost loans in Volkswagen’s case, while not admitting to legal liability that the company genuinely disputes. A statement thus may not be available in short order, but even a delayed response is better than boiler-plate obviating for a company’s reputation.


A related book:  Cases of Unethical Business, can be obtained in print or as an ebook at Amazon.com.

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[1] Jack Ewing, “European Bank Cuts Funds to VW Because of Emissions Fraud,” The New York Times, August 1, 2017.

[2] Ibid.

[3] Ibid.

On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management

Nietzsche is perhaps most stunning in his eviscerating critiques of modern morality and, relatedly, Christianity. His pessimistic attitude toward modern management is less flashy, but no less radical, for the business world would look very different were it populated by Nietzschean strength rather than so much weakness that in spite of which—and because of which, seeks to dominate even and especially people who are stronger. Accordingly, this book provides formidably severe critiques of both business ethics and management and sketches Nietzsche’s notion of strength as an alternative basis for both. Nietzsche’s notion of the ascetic priest as a bird of prey with an overwhelming urge to dominate eerily similar to both the business manager and the ethicist. Therefore, the last two chapters are on Nietzsche’s unique take on Christianity, and John D. Rockefeller, a devout Baptist ostensibly compatible even with being an acidic monopolist. 

On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management is available in print and as an ebook at Amazon. 

Institutional Conflicts of Interest: Business and Public Policy

Typically people react emotionally much more severely to an exploited conflict of interest when a person gains a personal benefit such as through a bribe. If company, or even an office or department thereof, stands to benefit inordinately, American society typically looks the other way on the institutional conflict of interest rather than taking it apart. This may just be human nature. However, the troubling institutional arrangements within an organization or between them may be tolerated because of the erroneous assumption that conflicts of interest are unethical only when they are exploited. Accordingly, the book provides a solid grasp of the structure and essence of the conflict of interest in order to make the case that it is inherently unethical. Examples of institutional conflicts of interest readily come from business, with particular attention to corporate governance and the financial sector, as well as from how business and government relate, such as through regulation The reader should come away with a sense of just how pervasive and ethically problematic institutional conflict of interests are. 

The book, Institutional Conflicts of Interest: Business and Public Policy, is available in print and as an ebook at Amazon.com

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

Although the credit-based building boom was doubtlessly not sustainable and fraught with risk, the ensuing budget austerity mandated at the federal level inhibited the state’s government from spending more money “on infrastructure projects to generate jobs.”[3] Contracting government spending exacerbates rather than ameliorates an economic downturn, even if deficits go up. The federal law on state deficits being at or below 3.5% of a state’s GDP did not have enough flexibility for the Spanish government to be able to minimize the period of the downturn. 

Hence, The New York Times concluded at the time of the recovery, “Spain’s resurgence is less cause for celebration than a grim reminder of how long it took.”[4] That is to say, the steep unemployment level, which had reached 25 percent, need not have endured as long as it did. Even in 2017, the unemployment rate remained above 18 percent (near 39 percent for the state’s youth).[5] 

It is difficult, therefore, to see even a return to the size of the economy before the debt-crisis as a recovery. To be sure, exports had grown “to close to one-third from about one-fourth of the economy,” and such an economic engine is clearly more stable than an over-leveraged construction-led economy.[6] An economy fueled by consumption-buying from within would be more stable still, however, and the stubbornly high unemployment rate attests to why such a solid foundation had not yet materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion) of new machinery into the operations, relying on one company for the surge in exports is not as solid as a diversified export-base.

To be sure, the increasing tax revenue in the state, albeit very modestly, enabled more money to flow back into the economy. Work on the long-planned expansion of the Barcelona subway system, a €6.8 billion project, had resumed. Yet such an infusion was needed especially during the crisis and in the ensuing years of extremely high unemployment.  The inflexible federal strictures of budget discipline did not allow for such counter-cyclical measures even in a rather extreme cyclical downturn.

Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.

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[1] Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.