Wednesday, November 8, 2017

The Saudi Crackdown: A Cause for Market Confidence

The Saudi government sought to confiscate cash and other assets worth as much as $800 billion in ostensibly cracking down on corruption in late 2017. More than 60 princes, officials, and business practitioners were initially detained. Both the figure and the number of arrests reflect merely “the initial stages” of asset seizures and arrests, according to a Saudi spokesman.[1] It was not long before 500 had been detained.[2] I submit that both the swiftness and scope left international investors and foreign businesses in Saudi Arabia unnecessarily rattled. Doubtless uncertainty as to the real reason for the crackdown unnerved the business elite. Corruption was endemic in the Saudi political economy, so the sudden need to crack down on it understandably left people to wonder as to the real reason, which, as it turns out, was nothing for business to fear.
The first point to make regards the spuriousness of the prime facie anti-corruption motive. At the time, Saudi laws “included little or no regulation of the sprawling royal family and its closest clients.”[3] For example, a major Saudi investment firm founded by one of King Salmon’s sons and then chaired by another owned “a significant stake in a conglomerate” that did “extensive government business.”[4] Indeed, princes “were known for borrowing money and simply never paying it back, which nearly led to the collapse of the National Commercial Bank.”[5] Prince Alwaleed bin Talal, curiously one of the detainees, told the American ambassador in 1996 that a handful of senior princes controlled billions of dollars in off-budget programs.”[6] Bringing about accountability in princely self-aggrandizement at the expense of the government can only be an oxymoron when said government belongs to the royal family. To apply democratic accountability would only be to demonstrate a foreigner’s base ignorance of the Saudi political economy.
The New York Times observed at the time that “if corruption is defined as private profit at the public expense, the practice is so pervasive that any measures short of revolutionary change may appear to be selective prosecution.”[7] Such change was clearly not in the cards. Doubtless the Crown Prince, who headed the anti-corruption force, shielded his allies and supporters and took advantage of the opportunity to take some detractors out of play, but his motive likely went beyond merely consolidating power, given the precariousness of the economy’s oil-dependency in the twenty-first century amid global calls for lower use of fossil fuels. Indeed, being dependent on any industry is not sound economic practice for any government or ruling family.
Crown Prince Mohammed bin Salman said that going after corruption at the highest level would be necessary to moving the Saudi economy off its dependence on oil, but the pervasiveness of “unlawful gain”—as if the law touched the royal family—undermines the claim. Were the Crown Prince determined to rid the political economy of corruption, an entirely new system would be needed; such a prospect would indeed legitimately raise caution-flags among investors and businesses, but they needn’t have worried as corruption itself was still safe in Saudi Arabia given the continuance of the royal family as the economic and political sovereign.
The riddle as to the actual motive is solved once it is realized that the assets seized would go to the state, and thus be available for investment to diversify the economy. The prolonged period of low oil prices had “forced the government to borrow money on the international bond market and to draw extensively from foreign reserves, which dropped from $730 billion at their peak in 2014 to $487.6 billion in August” 2017.[8] Eurasia Group, a political risk advisory firm, claimed that the crown prince needed “cash to fund the government’s investment plans.”[9] Like other countries in the Middle East, Saudi Arabia was facing time pressure to diversity economically while oil-money could still make it possible. The low oil prices simply meant that more than on-going oil revenue would be needed. So rather than being spooked by the uncertainty unleashed in the dramatic crackdown, investors and business practitioners having an interest in the Saudi economy should have felt more secure, for a diversified economy enhances stability for the long term.



[1]Margherita Stancati, “Saudis Target Up to $800 Billion in Assets,” The Wall Street Journal, November 8, 2017.
[2] Nicholas Kulish and David Kirkpatrick, “Arrests Reveal Blending of Kin and Kingdom,” The New York Times, November 8, 2017.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8]Margherita Stancati, “Saudis Target Up to $800 Billion in Assets,” The Wall Street Journal, November 8, 2017.
[9] Ibid.

On the Centenary of the Russian Revolution: Government as Artificial


On November 7, 2017, Russian soldiers marched in a military parade in Red Square in Moscow to honor the soldiers who had marched in a military parade on November 7, 1941 before going to the front to defend the city from invading Nazi troops. Commemoration of the centenary of the Russian Revolution was relegated to side streets “in a pale shadow of grand Soviet demonstrations on Red Square.”[1] Even though Russian communists and likeminded activists from around the world marched through central Moscow, the mood was subdued in spite of the milestone.
In Soviet times, November 7th was a major holiday in the USSR, with demonstrations held in every major city and Red Square filled with tanks and missile launchers, yet just decades after the collapse of the Soviet Union November 7th was just another day. In 2005, President Vladimir Putin cancelled the holiday and created a Unity Day instead to be on November 4th. What for generations of Soviets had been a major holiday was suddenly just another day, with even the centenary of the revolution being just a side-show. Societal fixtures, even if trumpeted by governments, may seem permanent, yet the artificiality in government-sanctioned holidays becomes readily apparent once a regime-change has occurred.
It could even be said that governments are themselves artificial rather than natural, given the innate instinct for self-determination and freedom of movement evinced in our species. Governmental social realities can be viewed as artificial, especially given the tendency of humans in positions of authority to expand their control and that of their respective institutions. The Soviet Union definitely suffered from such artificial control; even the Russian participants marking the centenary of the Russian Revolution preferred being able to attend by free choice instead of being ordered to do so. As the French case confirms, even a well-intended revolution can go dreadfully wrong; such is the nature of government, yet without it human society would be a mess. Like governmental holidays, government itself can nonetheless be viewed as artificial, and particular regimes as inherently temporary.



[1] Ivan Nechpurenko, “Communists Mark Russian Revolution’s Centenary in Moscow,” The New York Times, November 7, 2017.

Federalizing the Criminal Code: Racial Opportunity Costs

On December 13, 2011, a bipartisan group of legal experts told a panel of lawmakers in the U.S. House of Representatives that the federal criminal code had grown so large that U.S. citizens could not possibly keep up with it. “We ought to get rid of the old myth that you’re presumed to know the law,” Rep. John Conyers (D-Mich.) said. About 4,500 criminal statutes exist, according to Ed Meese, a former U.S. Attorney General under President Reagan. “This is in addition to over 300,000 other regulations that don’t appear in the federal code but nevertheless carry essentially criminal penalties including prison,” he said. “So the vast array of traps for the unwary that lurks out there in federal criminal law is more extensive than most people realize.” The Administrative Office of the U.S. Courts figures some 80,000 defendants are sentenced in federal court each year.
Back in the 1990s, Sandra Day O’Connor, then a justice of the U.S. Supreme Court, said at a small gathering, “Congress is acting like a state legislature.” She went on to point to all the crimes being federalized. I asked her why the Rehnquist Court had not applied the brakes to this breach of federalism. “Because it takes five,” she replied. In other words, not even the Rehnquist conservative majority, which had been responsible for the Morrison and Lopez rulings, was sufficient to arrest the ongoing political consolidation via the federalizing of criminal law.
In late 2011, Rep. F. James Sensenbrenner, chairman of the U.S. House Judiciary Committee’s panel on crime, introduced a bill that would reduce the federal criminal code by a third and define the level of criminal intent that is necessary to break the law. Laying aside the matter of Congress over-criminalizing society at the expense of liberty, and the related matter of the “micro-managing” mentality that is implied in a ceaseless desire to “mold” or control others by threatening penalties, federalism itself ought to be brought to bear on Sensenbrenner’s proposal.
Specifically, in addition to reducing the quantity of federal criminal statutes and regulations to that which the citizenry can reasonably be expected to digest, each statute and regulation should be either retained or thrown out on the basis of whether it falls within one of the enumerated powers of Congress. By “falls within,” I do not mean indirectly or by extension, as in the specious argument that an Iowa farmer’s home-grown wheat used solely by the farmer (and his family) is subject to the reach of the interstate commerce clause because if enough farmers grew wheat for their own consumption, the price of wheat transported between states would be impacted. The term expressly need not be used in the U.S. Constitution for it to be understood that the enumerated powers do not distend through sheer reasoning to preempt those powers reserved to the American republics or their residual powers. Wheat that never leaves Iowa cannot, by definition, be considered to be part of interstate commerce. I suspect that the same logic is being broken in Congressional efforts to federalize criminal law.
The U.S. Constitution clearly states that the police power resides with the states. Considering the abuses associated by state officials in implementing (or abusing) that power (e.g., California police pepper-spraying students to manipulate them off the sidewalk on a public university campus), the U.S. Government could shift from undercutting federalism by “federalizing” criminal law outside the enumerated powers to strengthening federalism by acting on a check against abusive state officials. In other words, federal criminal law could be primarily directed to the states (i.e., their officers), and to citizens secondarily and only within the powers enumerated for Congress. This approach is consistent with the confederal element that is retained in the broader notion of modern federalism (e.g., as applied in the U.S. and E.U.), while acknowledging that the general government also reaches to the citizenry directly (“direct effect”).
One example of the federal government attempting to check a systematic abuse of power by police in a state’s county is the three-year investigation by the civil rights division of the U.S. Department of Justice of the Maricopa County sheriff’s office in Arizona. The ensuing report found “a pervasive culture of discriminatory bias against Latinos” reaching Sheriff Joe Arpaio himself. Deputies are said to “target Latino drivers on the roadways and detain innocent Latinos in the community in their searches for illegal immigrants,” according to the New York Times. Such practices, according to the report, are in violation of the Fourth Amendment’s prohibition on unreasonable seizures. The report adds that Latinos have been systematically mistreated in the county jail. Besides the report, a separate federal grand jury investigation was underway as well, focusing on accusations of abuse of power by the sheriff department’s public corruption squad.
For its part, the Justice Department was urging the sheriff to cooperate with the federal government in turning his department around, or risk a lawsuit and the loss of millions of dollars in federal money. Even so, Arpaio “brushed off the criticism in a news conference as politically motivated,” according to the New York Times. He was particularly upset that the homeland security secretary, Janet Napolitano, a former Arizona governor, had announced that the federal government would no longer allow the sheriff’s deputies to check the immigration status of inmates in their custody. In reaction, the sheriff remarked, “This is a sad day for America as a whole.”
Besides the inherent impoussance of the Justice Department’s plan “to do cultural change” in a sheriff department that is headed by intransigence, the sheer time during which the alleged abuses had been allowed to continue (e.g., the report taking three years) bespeaks a woefully inadequate priority in the federal government to act as a real check on the states. To be sure, Arizona is a sovereign state with regard to its police power, and the federal government is obliged to respect that sovereignty. However, neither a government of a state nor of the union is free to violate the U.S. Constitution, which is the source of all of the governmental sovereignty that is in the federal system (characterized by dual sovereignty—split between two systems of government, that of the states and that of the union). So Arisona is not free to violate the Fourth Amendment, and the general government can legitimately provide a check, as judged by the judiciary. Therefore, rather than usurping state criminal law by federalizing criminal statues, Congress should go to work to give the federal government better tools with which to act as a check on sheriffs such as Arpaio. Generally speaking, there is more than enough for the Congress to do within its federal role without encroaching on federalism itself paradoxically by “federalizing” powers assigned to the several states. The latter activity involves an opportunity cost that I dare say the Latinos in Maricopa County doubtless do not appreciate.


Sources:
Gary Fields and John Emshwiller, “Criminal Code Is Overgrown, Legal Experts Tell PanelWall Street Journal, December 14, 2011. 
Marc Lacey, “U.S. Says Arizona Sheriff Shows Pervasive Bias Against Latinos,” The New York Times, December 16, 2011. 

Monday, November 6, 2017

A Dysfunctional Trajectory of U.S. Presidential Debates: The Case of 2012

Just weeks before the 2012 elections in the U.S., the New York Times observed, “In 1960, John F. Kennedy was trailing Richard Nixon as they stepped into the crucible of the first nationally televised debate. While Kennedy soared, Nixon stumbled and never recovered. Network television played a definitive role, but those were very different times. There were three networks, not 500 channels, and the consumer Internet was still very much on the drawing board of the future. Half a century later, televised debates remain relevant, but the ritual is up against an always-on informational stream that surges with political messages.”
Indeed, $2.5 billion was being spent on the U.S. presidential election alone. It could even be said that the political conventions and the debates themselves had become pre-arranged “political messages” and thus part of the advertising.
In the second presidential debate of 2012, for example,  the candidates were primarily oriented to covering all their memorized talking points rather than answering questions posed by the voters invited for that very purpose as part of the "town hall" format. As it happened, the candidates talked so much that very few of the people's questions were asked. All that talk might have been justified had there been a focused and sustained back-and-forth limited to contending counter-arguments to specific points.
I was stunned at how rarely "debating" was even attempted. The candidates even dismissed the moderator when she tried to focus the "debate" by returning the particular candidate to the question that had been asked by the audience. The candidates' lack of respect for the moderator and the people asking the questions was displayed by the ease and quickness with which the candidates deviated in favor of their own talking points. It was as though the "debate" was a series of control battles between a candidate and the moderator. This indicates that insufficient direction was enforced by the moderator.
I was also stunned at the extent to which both candidates presumed that their role in the debate  included being able to overrule the moderate and run it as if they were not subject to the rules. Making matters worse, at a few points the moderator actually moved on to a new question and topic when the candidates had begun to focus on specific points and counter-points in a real back and forth. Even the moderator did not understand fundamentally what a debate is.
To take one example of the dysfunction in the debate, a voter asked Obama what he had accomplished in office that impacts the voter's ability to afford ordinary things needed in life, like food. Obama mentioned killing Bin Laden even though no economic link is salient between that killing and the price of bread. It was instead an opportunity for Obama to get out all of his talking points on a more general topic. Romney replied to particular points made by Obama on his accomplishments in office, but here too the focus on the economic aspect of the voter's question was insufficient. Then Obama deviated even from discussing his own record to criticize Romney's, which was not within the scope of the question. I believe the moderator went to a new question rather than enforce compliance with the original question and direct Obama to reply to one of Romney's specific counter-points on Obama's economic accomplishments in office. From my vantage-point, it was like looking at an arrangement severely out of balance and yet seemingly incapable of self-correction.
Particularly troubling to me was the lack of respect shown by the candidates for the invited voters with respect to their questions, and for the moderator with respect to her authority. When a voter asked who in the State Department had decided to reduce security in the U.S. embassy in Libya prior to the attack that killed the ambassador, neither Obama nor Romney came close to providing an answer. Instead, the candidates sparred over Obama's statements after the attack. This example also illustrates another way in which the moderator fell short.
Questions about why Obama thought at first that the attack was due to protests over a video produced in California are not as important as questions concerning Obama's policies on Iran and Syria, for example. Looking back at the presidential debates in the 2000 race would probably show too much attention on controversies that are only of the time; had there been more substantive debate in foreign policy, voters might have been better able to anticipate Bush's eventual invasion of Iraq. That is to say, a cost of the moderator selecting rather limited controversies because they are hot at the time of the debate is that the voters are deprived of being able to anticipate future policies of the candidates.
My thesis is that the presidential "debate" format and operation are deeply flawed from the standpoint of what it is to debate. Even to deem one candidate as "the winner" is an absurdity if the "debate" does not pass muster in terms of what a debate is. That the media runs with this absurdity anyway indicates just how out of touch we are on what constitutes debate. Just because insiders do not fix the problem does not mean that it cannot be fixed.  
As a possible reform bearing on the operation, the moderator could receive training from debate experts on how to run a debate (with some allowances for the fact that the candidates do not bring in folders of supporting evidence, though maybe doing so would help them to focus). At the very least, the moderator should be able to turn off the microphone of a candidate once he has swerved off  the question on the table or from the last "on point" contention made by the other candidate. The moderator should certainly have that ability when as in the second debate a candidate talks over the moderator in order to ignore the moderator's decision. "But I just need to respond to . . ." should trigger the moderator into "mic-cut" mode.
In short, a debate is characterized by a true back and forth that is focused and sustained (i.e., contained) on particular points oriented to a question. A debate is not “all over the map," where the candidates bounce around even within a given topic, like two hyperactive boys unable to concentrate (and with a moderator as though heavily sedated or impotent). It is therefore worth asking whether the presidential (and VP) debates at least as of 2012 were debates at all, as distinct from two people simply getting their respective messages out in pre-established talking points. Under the circumstances, it is astonishing that the media self-servingly promotes the "debates" as crucial to the outcome of the election.
It is of course in the economic interest of the media and its paid “commentators” or “experts” to populate the airwaves with “the next debate is crucial!” before the next debate. The media could get away with the manipulation were it not for the lack of any self-restraint in the claims. For example, the media claimed in the run-up to the VP debate that that debate would be crucial—perhaps even a game-changer—because Obama had lost the first presidential debate of the general campaign (i.e., after the primary season, or year). That political scientists had reported time and again that voters do not vote for president on the basis of the vice-presidential candidates was apparently missed by the media in its unquenchable thirst for still more viewers.

Americans in "The Federal City" watching a debate in 2012. Civic togetherness?  NYT

Indeed, as the New York Times suggests, even the electoral significance of the presidential debates was being overplayed. The Huffington Post reported that even after his “loss” in the first debate, President Obama continued to show an edge in battleground states. That is to say, the media’s claim in the wake of that debate that once again Romney was in play (vindicating the media’s view that the debates matter!) had been a momentary over-reaction. At the very least, the media was missing the forest for the trees (or branches).
Two contending forces could be pointed to as decisive. The "debates" are not salient in either account. On the one hand, pro-Obama supporters could point to the following as game changers: 1.) Bill Clinton’s speech at the Democratic Convention answering the Republican criticisms of Obama from the Republican Convention, and 2.) Romney’s leaded closed-door comment that it would not be his job as president to worry about the 47% of Americans who did not owe income taxes in 2011 and thus refuse to take responsibility for their lives (preferring to be dependent on the government) were the game-changing events in the election of 2012. On the other hand, a Romney supporter could point to the following forces: 1.) a general sense among Americans that Obama had caved into Wall Street or been generally weak as president, and 2.) the "pocket-book" (i.e., lack of an economic recovery). Neither of these possible scenerios has the debates playing a prominent role in the the voters' decisions of who to vote for.
The media’s hype on the debates was just that—self-interested manipulation akin to “pay attention to me!” With most of the American electorate having made up their minds before the debates, the post-debate polls showing significant shifts should have been read very skeptically, especially given the limitations of polling (e.g., by state vs. aggregated, “likely voters,” cell phones, no call lists, etc.) and the margins of error, which the media constantly ignore because definitive headlines sell.  
Indeed, the report a week after the vice presidential debate that Obama still held an edge in battleground states was itself an invalid claim, given the margin of error. The Huffington Post used the headline even while stating in the article itself that the finding is within the margin of error and thus spurious! The electorate is nearly blind to the errors and uncertainty in polling, especially in relation to the financial-interest of the media in misusing poll “data.”
Unfortunately, the presumption of truth tends to go with having a microphone and television camera. Reason takes a back seat behind the lights on the stage of a “debate.” The media keeps the electorate on the edge of their chairs for months on end, as if each bend in the road were on a political cliff. You better watch! There might be a crash! It is American Gladiator on steroids, and the masses are content to be spectators to a spectacle. I suspect that the subtle shifts throughout an electorate that constitute the will of the people on election day do not hinge on a series of orchestrated talking-points whether in a convention or “debate.”
Furthermore, the historical trajectory of the presidential debates over fifty years was toward “talking points” even without regard to the moderator’s question, in lieu of a sustained back and forth on a specific point to be debated and only then to be followed after some time by another point of contention in a debate that is moderated. In other words, after fifty years of presidential debates the viewers had no idea how far the spectacle had drifted out to sea. That something is called a debate does not mean that it is a debate. Moreover, just because the media characterizes a given social reality as true or actual does not necessarily mean that it is, particularly when the media’s interest is in play. Truth itself manifested as social reality should be viewed as a problem rather than as a given.
Stepping back finally, my thesis can be read as an indictment of the shift away from the emphasis on electing independent electors to the Electoral College by state, which was intended to serve as a check on excessive democracy. Election campaigns in extended republics (i.e., empire-scale) have so much distance between the candidates and the electorate, given the size of the latter and the extended geography of multiple republics, that democracy can be subject to media manipulation and demagoguery (enabled by the lack of sustained back and forth on specific points of contention in the debates). This is why the delegates in the U.S. Constitutional Convention in 1787 opted for smaller electorates (i.e., in the states) to elect their own electors, who in turn could meet with the candidates and cast more informed ballots without being beholden by their respective electorates to vote for a certain candidate.
Put another way, hundreds of millions of people are necessarily reliant on the media for information on the candidates for empire-wide office. The candidates in turn can essentially market themselves as a brand that can be quite contrived or artificial (e.g., the McCain campaign’s efforts to give us a certain view of Sarah Palin even as the campaign knew she was not qualified to be president).
My analysis in this essay is essentially geared to pointing to the expected decadence in electing an empire-level office directly. Jose Barroso, president of the E.U. Commission, was at the time proposing that his office be popularly elected by citizens of the E.U., and thus he was unwittingly subjecting the E.U. to the same sort of flaw. At root, Barroso was misconstruing the nature of the E.U. as a federal empire-level/scale union in applying that which is well-suited to the level of the E.U.'s republics.
As an alternative to the media spectacle that is the U.S. presidential election, Americans might consider reforms that would emphasize and protect the electors in the Electoral College, or replacing it with a combination of state officials and members of Congress (who are themselves elected and thus based in democracy!) to meet in order to choose the president. Both means are consistent with historical federal theory, whereas the direct election route is not. In other words, the reductionism to polls and talking points is to be expected; it confirms the judgment of the majority of the delegates who were at the federal convention in 1787. In short, they understood what the United States were much better than the modern electorate and officials do today. This is the basic problem facing the American polity, in my view.
If I am correct, we as a people have lost touch with what a federal, empire-level/scale union is, and so we do not even realize when we have gone far off course. For instance, we do not understand the particular risk that goes with consolidation at the federal level. We do not understand that what works electorally at the state level may not work in the context of a combination of such republics; a step-wise leap is involved, with qualitative as well as  quantitative differences. It is as though we were on a ship without a rudder, and yet we presume we must be on course so we keep going ahead. We continue with the status quo, happily going through the electoral-season rituals as though we were a dead beetle still moving along—the legs still twitching. It is indeed a horrible spectacle in the light of day, even if everything seems just dandy to the vast majority of the electorate that is to select the next president. Sadly yet tellingly, none of this is subject to debate.
Sources:

David Carr, “TV Debates That Sell More Than Just Drama,” The New York Times, October 15, 2012.

Mark Blumenthal, “2012 Polls Continue to Show Close Race Nationwide, Obama Edge in Battleground States,” The Huffington Post, October 15, 2012.

Russia's Putin and Big Tobacco

In political economy theory, democracy is said to have the drawback of excessive consumption of public revenues at the expense of investment, such as in infrastructure relevant to foreign direct investment. Latin American countries were contrasted negatively with the Asian newly industrialized economies, whose relatively strong states could buffer popular calls for more in entitlements so that more could be invested in infrastructure attractive to foreign multinational companies. The implication is that a trade-off exists between democracy and economic development.
Apart from the economic aspects, the question may be whether a representative government can resist popular calls for more money to be spent by the government on popular consumption. In the U.S. case, it can be asked whether the fiscal stresses on Social Security and Medicare are due more to demographic factors (i.e., an aging population) or democracy itself. The ability of representative democracy to maintain a viable economy and republic in the long term is at issue.
Accordingly, Putin’s less than democratic approach to ruling Russia may have a bright side. Even though nearly 40% of the population smoked in 2012 and the world’s four big tobacco companies controlled 90% of the Russian market, the Kremlin was pushing strong anti-smoking legislation through the legislature. Besides the question of whether such legislation should be at that level in an empire-level federal system (there had been legislation at the republic level), the fact that the government was standing up to big business and 40 percent of its population (60% of Russian men) can be attributed to a strong state resisting popular pressure literally for consumption. This is not necessarily bad, as people do not always know what is best for them.


Even in democracies, checks exist against “excessive democracy.” The Electoral College and the U.S. Senate are two such institutional checks at the federal level in the United States. The electors in the College were to check popular pressure to elect someone who is not in the best interest of the people. In the wake of an attack, for instance, the people might want a president who will invade the offending country (or another). The electors may say, “hold on, that’s not in your own best interest so we are going to elect someone else—someone who will resist that momentary urge.”
Popular passion can also have considerable sway in the U.S. House of Representatives because each member is up for re-election in two-year intervals. It was to be annual, but in the eighteenth century travel time made that unrealistic at the empire level (whereas annual elections suffered no such obstacle for state legislatures). The six-year term in the U.S. Senate was meant to check the influence of the passions of the moment that can sway the House. So, too, the appointment of U.S. Senators by the state governments rather than directly elected by the people was so designed. The subsequent popular election of the senators has thus weakened this check.
In short, if it seems that elected representatives, including the American president, cannot say no to additional entitlement programs or to Wall Street, the relatively-undemocratic federal government of Russia might be found to have a few pluses even though putting down the democratic impulse of protest is hardly laudable. Perhaps the ideal is a government that is democratic yet of a strong enough state to withstand or at least check the passions of the people to consume more. Smoking is indeed a case of consumption that is not in a person’s or society’s best interest. Putin can indeed be credited if history will show that his government did indeed stand up to big tobacco and the large minority of smokers in Russia.

Source:

Lukas Alpert, “Kremlin Cracks Down on Big Tobacco,” The Wall Street Journal, October 16, 2012.

Should Citi Be Broken Up or “Prodded”?

In 2011, the office of the special inspector general for the Troubled Asset Relief Program published a report on the aid provided to Citigroup by the U.S. Government during the financial crisis of 2008. “Unless and until an institution such as Citigroup is either broken up,” the report concludes, “so that it is no longer a threat to the financial system, or a structure is put in place to assure that it will be left to suffer the full consequences of its own folly, the prospect of more bailouts will potentially fuel more bad behavior with potentially disastrous results.” The Dodd-Frank Act of 2010 was an attempt to provide such a structure, with the federal government’s role being oriented to upping reserve requirements for the biggest banks and ordering the liquidation of big banks in bankruptcy, rather than to break up the banks too big to fail. That is to say, rather than add systemic risk to the restraint-of-trade criterion of anti-trust law, Congress and the U.S. president decided in 2010 to allow the banks with $1 to $2 trillion in assets to decide whether to downsize of their own volition or continue to face the raised reserve requirements.
Philosophically, the American body-politic in very general terms tends to view the proper role of government as tinkering with the contours of markets to affect business incentives rather than intervening directly in a company, as in breaking those up that have grown too big (and powerful) for the public good. Making it more costly for a big bank to retain all its lines of business (i.e., its size) instead of breaking it up is believed on a rather subtle level by the society at large give due regard to property rights (i.e., economic liberty). The public tends to view such an approach as balancing property rights with the public good. More nefariously, the approach can also be viewed as a manifestation of the political power of corporations on K Street in Washington, D.C. over Congress and the White House. Actually, adjusting market incentives via regulation can be said to prioritize property rights and private wealth over the public good where the threat to the market mechanism itself and the financial system (not to mention the republic!) is particularly grave. The American orientation to the market mechanism in preference to "big government" tends to disregard this scenerio wherein an improbable systemic collapse is part of the equation.
The fear that the fall of Lehman Brothers would trigger the collapse of the American financial system “by Monday” led Congress to put hundreds of millions of TARP money up for a vote on a “fast-track” that is astonishing by Congressional standards, not to mention democracy itself. The American "approach" itself had to be temporarily put on hold, and by a Republican administration! Not to be outdone, the free market orientation held on in the form of no-strings on the bailout money.
It can be argued that TARP itself was not only insufficient, but also that it actually enabled the marginally-run banks that were too big to fail to endure and thus continue to inflect the system with systemic risk. In terms of the ensuing reform law on financial regulation in 2010, it can be argued that to enable a mammoth bank that is regarded as too big to manage to continue to exist by rejecting the break-up approach (or reinstating the Glass-Steagal Act) in favor of relying only on setting up differential reserve requirements (i.e., regulatory costs) based on total assets and otherwise helping to order the liquidation process of an already-defunct bank may be too detrimental to the public interest. In other words, the tremendous size of the banks and the associated systemic risk may make the market-oriented American approach too property-rights oriented for the public good. 
 In terms of unmanageable banks, I have in mind Citigroup in particular, which I will turn to below, though Bank of America could easily be added to this list, given Ken Lewis's "empire-building" moves to acquire Countrywide and Merrill Lynch. He might as well have hung a sign outside of headquarters in Charlotte, "Dump Your Crap With Us! We'll Buy It!" Being the biggest bank, as though a Walmart in the financial world, is not necessarily a good thing both on the firm level and in terms of systemic risk in the economy.
Referring to Citi, Gary H. Stern, former president of the Federal Reserve Bank of Minneapolis, said, “I ask myself, ‘Could I manage one of these places with lots of capable senior officers?’ and I think the answer is no.” That is to say, the bank had become too large to manage. Like blindfolding a car driver or putting a confused drunk driver behind the wheel, having a heavy piece of machinery running not fully under control can be to invite an accident. It is very risky, even self-destructive, merely to allow such a thing to go on. Relying on the CEO to “pull over” and by analogy reduce obstructions by reducing the vehicle’s size (maybe unhooking a trailer) can be viewed as a luxury that the public interest cannot afford.
Gretchen Morgenson of the New York Times writes that “(g)iven Citi’s close ties to Washington, we can only hope that the change of command [of CEO] also reflects a regulatory prodding to overhaul the company. And if that involves cutting this behemoth down to a manageable size, then taxpayers should definitely cheer.” Regulatory “prodding” can be viewed as woefully insufficient if we are to rely on an empire-building CEO to voluntarily bring his “behemoth down to a manageable size.” That is, the fact that Pandit had felt perfectly fine with Citi being beyond a manageable size does not bode well for taxpayers cheering any time soon on hopes that Mike Corbat might suddenly see the light as he entered the corner office on his first day as CEO. He was more likely to see the power of his new office over such an expansive empire than to reflect on how he could have less under him. The motivation of a CEO is crucial to the question of whether the American market-oriented approach is sufficient to deal with something on the order of systemic risk.
The “regulatory prodding” approach that tends to sway the American electorate as a whole, even if subtly, may be fatally flawed in that economic efficiency and even profit-seeking itself are presumed in the approach to be the exclusive or primary motivators of CEOs and even boards. In actuality, the empire-building motive of power may eclipse even greater profitability, and therefore be oblivious to the prodding of additional reserve requirements. That is to say, the "market-prodding" approach may fall short by treating non-financial motives as extrinsic to the business calculus. Such motives may ignore or even trump "new and improved" regulations designed to channel financial motives in business. A bank's CEO might say, "I'll put up the additional reserves! I don't want to cut off product-lines that otherwise tie into my overall strategy synergistically."  Translation: I want to expand my empire even if it costs more proportionately because I like the pleasure that comes from the additional sense of power. Nietzsche could hardly have put it better.
For our purposes, the following axiom can be set forth for business as a phenomenon as well as at the managerial level:

Business is not only economic or financial in nature; it is also political in the sense that power is in the mix.

Managers are motivated not just by financial considerations such as efficiency, cost-containment, and revenue maximization, but also by the desire to control, which is an application of power.

The market-oriented approach to regulation may not sufficiently take into account this axiom. Structuring the market mechanism itself may need to be supplemented by a more direct intervention in private companies so systemic risk is lowered to a level that does not present taxpayers with a "high risk, low probability" collapse of the financial system itself. The sheer continued existence of Citibank (and even Bank of America) may point to the inadequacy of the Dodd-Frank Act as “reform” adequate to the purpose, given what we learned, or should have learned, from living through the financial crisis in September 2008.


Source:



Gretchen Morgenson, “Citi’s Torch Has Passed. Now Find a Knife,” The New York Times, October 20, 2012.

Russia's Putin Embraced BP

The Russian state-owned company, Rosneft, reached separate agreements in October 2012 to buy TNK-BP from BP and a group of Russian billionaires. According to the Wall Street Journal, the deal represents “an acquisition that promises to reshape the Russian oil industry in favor of the state-owned company.” The Russian federal government was set to own or control nearly 50% of the Russian oil industry. Lest it be supposed that the legacy of inefficient state enterprise might compromise that industry in Russia, the state would have the benefit of literally sitting on the same board with representatives of the experienced oil producer from the private sector. By implication, the traditional dichotomy between public and private could be further blurred, such that the easy labels of “socialism” and “capitalism” may become less and less relevant or useful (except in the rhetoric of American presidential contests). Rosneft itself is a case in point of privateness and publicness coming together with a shared vocabulary or at least financial aim. Before addressing this point, I present the basics of the deal itself.

Robert Dudley, CEO of BP, talking with Vladimir Putin at the Kremlin.   Source: Telegraph

According to the Wall Street Journal, “(u)nder the terms of the transaction, BP will receive $17.1 billion in cash for its 50% stake plus shares representing 12.84% of Rosneft, worth $9.7 billion on the bid date. It will then use $4.8 billion of that cash to purchase an additional 5.66% of shares Rosneft from the Russian government, taking its total holding up to 19.75%, BP said in a statement. . . . BP will get two seats on Rosneft's nine-person board as part of the deal and expects to be able to account for its share of Rosneft's earnings, production and reserves on an equity basis.” Rosneft would acquire the other half of TNK-BP for $28 billion from the AAR consortium of Russian oligarchs. “Rosneft will finance the transactions, which have a total cash value of $45.1 billion, from a combination of existing cash resources and new borrowings.”  In short, we’re talking about a lot of money—a lot at stake. In other words, the implications of the deal deserve a lot of attention and analysis.
Expanding on the traditional notion of interlocking directorates, BP would be sitting on the board alongside officials or representatives of the Russian government. The latter would be able to nurture and develop contacts in the corporate world and BP would have access in Russia far beyond Arctic exploration rights.  That is to say, collusion could become worse, and this could undercut the public interest in the interest of private gain—private here applying both to corporate retained earnings and government coffers. That is to say, government itself could become more “private” and less “public,” leaving the public interest without a proper guardian or advocate.
The deal gives the Russian state an interest in the well-being of a foreign private company. This in turn would give the company some leverage in terms of Russian regulations. In other words, BP could use its alliance with the state to essentially “capture” Russian regulatory agencies. "This is a good, big deal, not only for the Russian energy sector, but also for the Russian economy," said Russian President Vladimir Putin, after a meeting at which he approved Rosneft's acquisition of TNK-BP in a meeting with the company's Chief Executive, Igor Sechin. The Russian president would thus have an interest in protecting BP as well as the joint venture. That is to say, from the standpoint of the bipolar dichotomy of “socialism vs. capitalism,” the cosy relationship proposed in Russia puts government and private ownership literally in the same room and having the same financial purpose. Mutual back-scratching would be almost inevitable, not only concerning the interests of the Russian state and BP, but also particular government officials and company executives.
Lest it be thought that privatizing the nearly 50% of the Russian Oil industry that would be controlled by the Russian state would be preferable—this option being more in line with the traditional “public vs. private” paradigm—it can be asked whether Russian oligarchs are preferable to Putin’s state. The tradeoff might come down to one of whether the state is really distinct from organized crime in Russia. There might not be much of a difference, with the exception that state-corruption is slightly more transparent. Even if the distinction is meaningless practically speaking, it can also be asked whether the oligarchs deserve their wealth and profits, especially if they came out of cheap post-Soviet sell-offs based on connections. For that matter, the anti-democratic response of Putin can cause one to ask whether his government deserves the added revenue. The Wall Street Journal reports, “A Rosneft takeover of TNK-BP would bring the Russian state's control over oil production to nearly 50% and mark a major milestone in Mr. Putin's reassertion of Kremlin control over the strategic oil sector, much of which was sold off in the privatizations of the 1990s to well-connected tycoons like AAR's owners. Since Mr. Putin came to power in 2000, the tide has turned the other way in an industry the Kremlin depends on both as a source of international influence and more than half of all tax revenues.” One might ask whether Putin deserves this even as he represses political opposition—even arresting a major figure following a “documentary” on television produced by the state. Faced with the abuses that more wealth and BP-connections might give the Russian president,  a reasonable person might be left with the conclusion that neither Putin’s pals nor his government is worthy of owning vast wealth; the world envisioned by Adam Smith as against the concentration of great wealth might come out the winner, even if only in the world of thought.
In addition to the downside, which may admittedly be so abstract and contrary to the status quo to be of any practical effect,  it is also worth pointing out that putting government officials and business managers in the same room could enhance both the efficacy of government regulation and corporate public affairs departments.  That is to say, knowing the otherness of the other could improve how one relates to the other “above board.”
Being on the same board, government officials or their representatives in Russia would no doubt see up close how private business executives “think” (i.e., the logic of business), while executives in the private sector (at BP) would gain a better understanding of the political calculus of government officials. That is to say, business and government would take one step closer together from that of “arm’s length” transactions and the regulatee-regulator relationship. Understanding how the other thinks is indeed a good thing where two parties must interact (e.g., regulation). At the very least, the efficacy of government regulation could in principle be enhanced as it could be put in sync with how managers think.
Understanding how business managers use regulation strategically—even preferring more regulation because it is easier for one’s own company than one’s competitors to comply—can enhance a regulator’s ability to craft regulations that achieve the desired public-policy outcome.  In other words, being able to anticipate the policies that business managers would enact in reaction to a proposed regulation can give the regulator a sense of the outcome up front. The regulation can thus be tailored with the anticipated reaction in mind such that the outcome sought would stand a better chance of resulting. A regulator could anticipate, for example, how managers would attempt to circumvent the proposed regulation, and the latter could be adjusted to close off that possibility.  A Russian official who has seen BP executives in action on Rosneft’s board could say to a regulator of another industry, “No, that won’t work; they would only do X to get around it. I know how they think.”
In terms of corporate public affairs departments (and corporate lobbyists in general), feedback from a company executive who knows how government officials think could advise on how to appeal to them on their own terms. A BP executive with experience with Russian government officials on Rosneft’s board could say to the director of BP’s government affair’s department in Russia and even another country, “If you really want the legislator to pay attention, bring up X because X is likely to be on his or her mind.” That is to say, fit the company’s strategic objective within the political calculus. Knowing the otherness of the other is necessary both to regulators in crafting more effective regulations that are not undercut by the other and to corporate public affairs directors who want to influence legislators and regulators.  As discussed above, however, there is also a downside, and it should not be disregarded either.
In summary, the modern world of extensive territorial empires and great concentrations of private wealth in the form of corporations can leave the individual business practitioner and the small investor in the dust along with the public at large. There is indeed value to public policy and government regulation in government officials deepening their understanding of how business executives think. Similarly, corporate public affairs departments could use more insight on how government officials tick. At the same time, the financial stakes and related cosy relationships as evinced in the proposed deal in Russia increase the risk of collusion at even personal financial benefit at the expense of the common wealth and general welfare of the people and even society at large. Putin might conclude, for example, that what is good for BP is good for Russia. This represents a very dangerous step (similar to “What is good for GM is good for the U.S.”) away from democracy in the direction of plutocracy. The question is perhaps less on whether the old “public vs. private” world is antiquated than whether government is really still government—governing the whole in the interests of the whole rather than certain parts—and whether large corporations are still private. On the latter point, it is worth remembering that Clive of the East India Company had a private army in Bengal at his disposal and the title of governor from the state. Indeed, the notion that the CEO of a private company would also be the governor of a territory might give us pause in reflecting on the governmental power that a large public-private partnership might have in Russia.

Source:

Selina Williams and James Marson, “Rosneft to Buy Entirety of TNK-BP,” The Wall Street Journal, October 22, 2012.

Morsi as Partisan in Constitution-Building: Lessons from Washington

Appealing for unity after the controversial ratification of a draft constitution in December 2012, President Morsi of Egypt pledged in a televised address to respect the one-third of the electorate that had voted against the proposed constitution. He claimed that “active patriotic opposition” should not annoy the president or the people in a democracy. I contend that the office of president should not be of the sort that would have partisan opposition, ideally at least. That is to say, presiding means safeguarding the process itself, as well as the good of the whole, rather than pushing a partisan agenda. That Morsi was on record in support of the partisan-drafted proposal undercut his role as presider in chief. Given the innate instability of a nascent democracy, the role for a presider “above the fray” was particularly valuable in Egypt at the time. Morsi fell short in this regard, and thus put the fragile democracy at risk.
President Morsi speaking behind the seal of Egypt, suggesting a "good of the whole" orientation.     source: csmonitor
In his address, Morsi said, “We don’t want to go back to the era of the one opinion and fabricated fake majorities.” Such an era is the extreme of a partisan president. The presiding president, in contrast, transcends opinions and even majorities, being oriented to the long-term interest of the republic itself. Literally, to preside means to “stand before,” as exemplified by George Washington’s officiating role at the constitutional convention in the United States in 1787. He resisted the urge to “trade on his stature” to advance one or another proposal until the last day, when he suggested that a U.S. House district of 40,000 rather than 30,000 would be insufficiently representative.  Had Morsi followed Washington’s example as the draft Egyptian constitution was being proposed and ratified, Egypt might have had a more credible person to hold up the fragile democracy so it would take root rather than succumb to partisan strife.
While pursuing a partisan path is undoubtedly tempting for a president, the costs are often ignored or hardly transparent. In Morsi’s case, his invitation for the opposition to join a dialogue was met by Husseain Abdel Ghani’s comment that the invitation was merely Morsi’s “dialogue with himself.” Only by standing above the proposed draft could the president have had enough credibility to effect a reconciliation. It was not enough for him to move to the political center after the ratification had been secured.
Instead of being invested in the draft, Morsi could have focused on “the big picture” in terms of how much consensus is necessary for a constitution to be something more than a partisan-approved document. Put another way, Morsi could have been oriented to the process by which the partisan-dominated draft could have been further modified such that at least part of “the opposition” would have been on board. Unlike a law, a constitution should have more than a majority faction’s stamp on it. Because most of a society should be behind a convention, it should not be dominated either in its formulation or ratification by the majority faction, or else follow-up work is warranted. Here is where a presiding president can come into the picture, being oriented to the society as a whole—to which a constitution rightly corresponds.
In short, Morsi may have approached the draft constitution as though it were a law rather than a constitution. Advancing the document that was dominated by his party in being formulated, he missed the opportunity to seek a wider massaging of the document into a final form. A similar mistake occurred in the American case as the convention there refused to consider proposed amendments from the countries’ ratifying conventions—some of which had sizable anti-federalist representation. Had this minority been assuaged, perhaps the resulting document might have had more safeguards against political consolidation at the expense of the governments of the member states.
Washington, himself a federalist, missed the opportunity to suggest on the last day of the convention that it would be in the long-term interest of the United States for the states to send new delegates to another convention for the purpose of considering amendments proposed by the ratifying conventions because a viable constitution should be something more than reflecting one perspective—as any one perspective contains blind spots. Moreover, incorporating a minority’s concerns could provide a check against the tyranny of the cultural artifacts of the age. A resulting document would be more likely to stand the test of time.
Similarly, by the way, an academic treatise can only be determined to be a classic after the scholar’s age has passed because only then—in another culture, in effect—can the artifacts of the author’s own be fully transparent. Like a good scholar being oriented at least in part to readers not yet born, a presiding president is oriented to a process most likely to render a constitution into a classic. Of course, it would be impossible for such a presider to ever know if he (or she) has been successful. The best such a president can do is to take pains that the process not succumb to expediency. Having such a perspective, such a president should be indifferent toward the various partisan agendas, even that of his (or her) own party. From the standpoint of such a presidential viewpoint, partisan agendas are merely the fleeting vanities of vanities.

Source:

David Kirkpartick, “Morsi Admits ‘Mistakes’ in Drafting Egypt’s Constitution,” The New York Times, December 27, 2012.