The American Media Went “Nuclear” on the U.S. Senate's Filibuster: A Case of Hyperactive Marketing?

Is ending the filibuster on appointments to executive-branch offices as well as judicial appointments below the U.S. Supreme Court really “the nuclear option”? Is this expression simply rhetoric gone horribly over the top? Journalists would undoubtedly demur, at least publically, yet without feeling an ounce of shame.
On November 22, 2013, a leading story on the front page of USA Today immediately snagged my fleeting attention with the headline, “’Nuclear’ volleys across aisle signal a Cold War in Congress.”[1] The 52-48 vote in the U.S. Senate on the previous day was neither a “nuclear volley” nor the beginning of a “cold war.” Rather, the reform was yet another legislative device having to do with reducing the gridlock within the chamber and perhaps for a party to gain more control therein. The political tussles between the two major parties had already been going on, so the latest reform could not have been the start of a war, cold or hot.
To be sure, editors look for headlines to be attention-grabbers, and thus sensationalistic—yet even if the claim is false or even misleading? Signaling a cold war flies in the face of the prior existence of such a “war,” as during the U.S. Government’s partial shutdown when raising the government’s debt-ceiling was in jeopardy. Moreover, the reporter continues the sensationalism within the article.
For example, the reporter invokes “the superpower theory of Mutually Assured Destruction—that is, if you use the most powerful weapon against your enemy, your enemy will use it against you—neither side had ever deployed it.”[2] Does not this “theory” apply more to shutting down the government or refusing to raise the debt-limit? The fact that Americans waked up on November 22^nd with a functional federal government belies the journalist’s application of the theory to whether the U.S. Senate would confirm more appellate and district judges. Nevertheless, the reporter “reports” that “Democrats voted for detonation.”[3]  I didn’t hear any sort of blast, or for that matter, see any damage the next day.
As for any realistic (i.e., still incremental rather than radical) consequences, the reporter provides merely a quote at the end of the article. Sen. Chuck Grassley (R-IA) said, “The silver lining is that there will come a day when the roles are reversed. When that happens, our side will likely nominate and confirm lower court and Supreme Court nominees with 51 votes.”[4] As if as an afterthought, the reporter tacked on this quote, which says basically that the Senate would continue to delimit the filibuster’s domain. Crucially, incrementalism is not radicalism. Hence, the war rhetoric is misleading at best, and it displaces reportage on the real significance of the vote.

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1. Susan Page, ““’Nuclear’ volleys across aisle signal a Cold War in Congress,” USA Today, November 22, 2013.

2. Ibid.

3. Ibid.

4. Ibid., emphasis added.

Unnecessary Systemic Risk: Banks' Price-Fixing and Racketeering in Side Businesses

A lawsuit filed in a Florida district-court in 2013 alleged that JPMorgan, Goldman Sachs, and the London Metal Exchange (LME) artificially inflated aluminum prices.  The plaintiffs accused the companies of anti-trust practices and racketeering, including the “manipulation of the aluminum market through supply price fixing.”[1] This sounds like what had led to the forced break-up of Rockefeller’s Standard Oil Company, though in that case exactly a century before, the restraint of trade had to do with the company’s main line of business (i.e., oil). In the case of the banks, however, owning commodity assets such as storage facilities and trading in raw materials do not constitute banking. This point triggers a larger question involving the repeal of the Glass-Steagal Act.

Should we allow banks to expand even beyond these functions to owning commodities and related real-estate? What does this do to the banks' systemic risk?    Image Source: salisburyareafoundation.org. 

Under Glass-Steagal, commercial banks were not permitted to engage in investment-banking activities, such as proprietary trading and market-making. The law’s repeal in the late 1990's is ironic, for in just a decade the notion of systemic risk would flash into the public’s consciousness under the label of banks being “too big to fail.”
Rather than confront systemic risk directly, U.S. lawmakers and regulators have consistently preferred focusing on incremental change in particular areas. For example, when the lawsuit was filed in Florida, regulators were “scrutinizing ownership of commodity storage facilities by major U.S. banks.”[2] Unfortunately, the scrutiny was limited to price-fixing and racketeering, and those regulators probably were not talking to regulators at the SEC who were still promulgating regulations as part of the Dodd-Frank Act of 2010, which was ostensibly geared to reducing systemic risk through providing for the “orderly liquidation” of banks and other financial institutions too big to fail.
Were the various government regulators to compare notes, they might ask each other whether branching off into trading commodities and owning storage facilities increase the banks’ systemic risk. By taking on market risk (i.e., of commodity and commercial real-estate markets) that is higher than the risks in commercial banking, the banks increase their systemic risk. Factor in the legal and reputational liabilities associated with price-fixing and racketeering and the systemic risk increases even more.
Therefore, beyond the question of collusion and restraint of trade in a side business, it can and should be asked whether banks should go into side businesses at all, given the matter of systemic risk. Focusing narrowly on whether lines formed at warehouses, and, moreover, debating secondary issues more generally, are at the very least distractions from the fundamental matter of systemic risk. To the extent that Dodd-Frank fails to curb such risk, we as a society put the economy and financial system at a higher risk of collapsing if we follow the government and the media in focusing too narrowly on just the possible wrong-doing of the bankers. Ironically, sustaining such a focus may be in the banks’ own financial interest.

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[1] Melanie Burton, “Glencore, JPMorgan Sued Over Warehouse Aluminium Prices,” Reuters, August 7, 2013.

[2] Ibid.

Handouts in Averting the Fiscal Cliff: The Price of Politics?

What is that nebulous thing called politics? Might it be that the practice is essentially exploiting or creating what are known as principal-agent costs? That is, might politics boil down to a skill in the agent (elected representative) in putting his political or economic interests ahead of doing the bidding of his principal(s) (i.e., his constituent body).  
In the U.S. Senate bill in early 2013 to obviate the “fiscal cliff,” for example, the Democrats may have agreed to benefits for the Republican lawmakers’ campaign backers in exchange for going along with a more progressive federal income tax system. Among the added provisions were special expensing rules for certain film and television productions—no doubt those made by particular campaign contributors. The provision for tax-exempt financing for the New York Liberty Zone around the former World Trade Center may also have been a favor to a particular someone. Lest it is wondered what an extension of the American Samoa economic development credit was doing in an expedited measure to obviate the “fiscal cliff,” the answer may have had to do with a particular Republican lawmaker’s relationship with someone having an interest in American Samoa. I can only speculate here, as I was not privy to the actual relationships and negotiations. However, the sheer strangeness of such provisions in such a bill suggests that the particular political or economic interests of particular Republican lawmakers may have been the culprit.

 Is money the language of politics?    citizen.org

Such interests need not stem from particular relationships. To get the Republicans to “move on principle” regarding progressive taxation, the Democrat negotiators may have agreed to give on particulars on another law—in this case, Obamacare. The bill also contained a provision to remove the Community Living Assistance Services and Support program, or CLASS, which was proposed to enable millions of elderly and disabled people to stay in their homes rather than be placed in institutional care.

Generally speaking, the pattern involves essentially “buying off” particular lawmakers so they will “shift over” on a larger principle—in this case, progressive taxation. Give a bit on Obamacare and include a provision financially beneficial to a particular Republican lawmaker or one of his or her financial contributors or patrons—anything satisfying a particular interest of a particular lawmaker—so he or she will move from the preference of his or her constituents. The agency cost is the difference that a lawmaker (agent) skirts for his own political or economic interest from doing the bidding of his or her official constituents (principals).

If the skill called politics involves a politician’s particular interests at the expense of one of his or her principles or official duties (i.e., to constituents), then negotiation cannot be expected to be confined to compromising on the merits of the bill itself. Rather than merely going back and forth on numbers for the upper income subject to the Bush tax cuts, a Republican negotiator might propose an unrelated provision benefiting one of his or her friends, business associates, or campaign contributors. Granted the provision, the negotiator would then give on the numbers. One might ask whether the inclusion of particular exogenous interests is necessary to negotiation on a given policy. Wouldn’t the final product in terms of the policy be better were the unrelated benefits kept out of the mix? That is to say, is their incorporation a decadent or inferior form of politics, or an essential element that cannot be removed? Perhaps the answer lies in whether negotiation on a given policy, such as deficit reduction, can be done without the negotiators bringing up their particular interests (as a means of shirking their principles or duty). Perhaps ethical leadership in politics involves refusing to enable (or exploit) another’s “agency costs” by incorporating the unrelated provisions, in which case politics itself could find higher ground and the resulting policy would more closely match the preference of the body politic.  

Source:

Reuters, “Fiscal Cliff Bill Proposed By Senate Packed With Mix of Handouts, Takebacks,” Huffington Post, January 1, 2013.

“Fiscal Cliff” in U.S.: Real or Hyped?

As the U.S. economy slogged through a recession following the credit crisis in 2008 and the E.U. was weighed down by the ballast of austerity in the most indebted states, developing economies, including those of China and India, kept the world economy afloat. As a group, those economies grew 7.4% in 2010, 6.2% in 2011, and 5.5% in 2012. In keeping with this trend, the Global Economic Outlook of the Conference Board predicted 4.7% for 2013. Fortunately, the Board also predicted a pick-up in consumer demand in the U.S. to pick up the slack. “The only really short-term positive impact that we can have is that we can see a faster return of demand, particularly in the U.S.,” the Board’s chief economist said. As of 2012, such a return was not necessarily “in the cards.” The pessimism can be seen in the projected world economic growth of 3 percent, which is lower than the 3.2% expected in 2012 and the 3.8% achieved in 2011. That the projected growth rate of only 1.8% for the U.S. in 2013 is less than the projected 2.1% for 2012 indicates that increased demand in the U.S. was not expected to fully pick up the slack for the slowing-down of the developing economies. Here I want to point to a major factor in the U.S.: the possibly impending “fiscal cliff” of cuts in the federal budget and the end of the Bush tax breaks  that were scheduled to begin on January 1, 2013 unless Congress and the White House could come to a legislative agreement beforehand on an alternative way of holding down the deficits. Presumably that way would have a less recessionary effect.

In doing political risk analysis, one might be tempted to weigh in on predictions of a grand deal. I submit that predicting whether one comes together, as well as its differential economic impact would be, is not merely difficult, but also nearly impossible—unless one has “inside information” from the key players in Washington. Political risk analysis is not a sort of crystal-ball operation. Predicting the future is notoriously difficult for us mere mortals. However, we can assess how the prospect of a possible event, such as the “fiscal cliff,” is being played out in real-time. In other words, it is possible to determine whether the “fear-mongers” are exaggerating the probably economic impact (and why!). Assessing the severity of the worst-case scenario can thus be recalibrated, with implications for strategic planning.

Should the automatic cuts in the U.S. federal budget and end of the Bush tax cuts begin on January 1, 2013—a combined hit of over $500 million in that year alone—a “recessionary toll” was generally held to be the result. That is to say, the domestic demand made possible by increasing discretionary spending would be reduced as government spending decreases and federal income taxes increase. The Global Economic Outlook pointed to the prospect of Congressional and White House negotiations potentially obviating the sequestration as bearing on the global economic growth. Even though Congressional leaders could be counted on to rise to the occasion in delivering on sufficient dramatics at the last minute, the general public could not be sure that the denouement would involve a quick swerve away from “fiscal cliff” as though in some 1940s film noir.

Just by the numbers—around $500 million in 2013—the Conference Board may have been overstating the recessionary impact of the sequestration in an economy whose GDP was over $16 trillion. For one thing, the momentum in 2012 was in the direction of increasing demand. Also, corporate planning may have already “hedged their bets” so “going over the cliff” would not actually involve much change, at least initially, on their part.

I must add here the caveat that I not an economist. Hence, I do not have the quantitative expertise necessary to "run the numbers" on how much GNP would decline from the sequestration. However, I have run economic regressions, so I have some sense that the actual variables in a political economy are not as formulaic as those in a regression equation. The inherrent uncertainty in the political dimension in particular renders suspect the “empirical social science” approach of modern economics as determinative in political economy. Put another way, the political-risk-analysis dimension of an economic growth projection introduces considerable uncertainty in an otherwise quantitative economic numbers game, which might itself be overly deterministic or "exact." Even if we could untangle the myriad political factors going into political negotiations beforehand, we would still have to accept the uncertainty that is inherent in predicting the future, especially where human decisions are in the mix. That is to say, the future cannot be known for certain, given the respective natures of time and human beings.

I suspect the differential economic impact between a possible deal and sequestration was being exaggerated, particularly by the media but also by officials in government and CEOs—all of whom had subterranean reasons for doing so.  The media’s “fiscal cliff” label alone illustrates the proclivity to exaggerate. It is not as though a deal would have absolutely no drag on the economy, even if significantly less than that of sequestration. However, in distinguishing between “some” and “more” in terms of a drag on consumer demand in the U.S., the impact on the overall global economic output may be less than the “fiscal cliff” rhetoric implies because the world is much more than the American union. In other words, if the “differential” in terms of economic impact between a deal to cut the deficit and sequestration turns out to be less than portrayed in 2012, the resulting impact on the larger global economy would also be less.

In terms of a prognosis for 2013 from the vantage-point of late 2012, my best guess was that it would be largely similar to 2012 globally—the U.S. and E.U. continuing to climb out of deep recessions while struggling to inflict austerity on themselves for their own good, and the developing economies continuing to cooling their heels from growth rates that were probably unsustainable anyway. In terms of international business prospects, “continued languid” rather than “fiscal cliff” would be my headline. 

Source:

Matthew Walter, “U.S. Seen Propelling Growth of Global Economy in 2013,” The Wall Street Journal, November 13, 2012.