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.

Americans on How Political Campaigns Are Funded: A Black Hole in the Center of the Political System

Considering the widening cultural and political divides in American society that were on full display in Congress during the first half of the 2010s, uncovering a general will stretching across partisan lines as well as across a the continent and beyond would proffer a rare opportunity for significant legislative output. Furthermore, such a case would enable us to assess whether the elected representatives of the People were indeed representing, and, if so, whom. That is to say, the political distance between the People and their political class could be measured. I contend as respecting the stance of the People on money in politics and public governance, much unity and, unfortunately, much distance can be discerned, at least as of the end of May 2015 when a New York Times/CBS News telephone-poll was taken.

Evincing a unity striking not only in its singularity, but also given the partisanship on the topic then in the Congress, more than four in five Americans said that “money plays too great a role in political campaigns,” and two-thirds said “that the wealthy have more of a chance to influence the elections process than other Americans.”[1] By a significant margin, Americans said “they reject the argument . . . that political money is a form of speech protected by the First Amendment.” That even self-identified Republicans were evenly split suggests that The New York Times does not overstep in generalizing to characterize Americans, rather than the poor or Democrats, for instance, as rejecting the money-as-speech judicial doctrine. In fact, 75 percent of self-identified Republicans said they support more disclosure by outside groups, and Republicans were almost as likely as Democrats to favor further restrictions on campaign donations.

Nevertheless, Republican Congressional leaders had “blocked legislation” to require more disclosure by political nonprofit groups that were not required to reveal their respective donors. Furthermore, “some prominent Republicans” in Congress were calling “for legislation to eliminate existing caps on contributions.” As startling as the amount of daylight visible between the political class and the rank and file in the Republican Party itself is, the distance between the governed and their governors is even more grave, considering that the people doing the legislating happened to be elected.

A"Rockefeller Republican" turned populist? He stands alone in the rain outside the White House. (Getty Images)

It should come as no surprise, therefore, that The New York Times observes from the poll that “Americans appear to be as inured to the role of money in campaigns as they are disillusioned by it, expressing a deep cynicism about the willingness of elected officials to fight the system they inhabit or to change the rules they have already mastered.” A majority of Americans were pessimistic that campaign rules would be improved. The conflict of interest that Americans believed that their elected representatives were actively exploiting dovetails with the role of money in politics at the time because the representatives and their “paymasters” had written the rules! At the very least, both parties knew how to “work the rules” in their respective, and, mostly joint, interests.

In business theory, “agency costs” are incurred by someone (i.e., the principal) who has hired another person (i.e., the agent) to the extent that the latter does not do the will of the former. The principal not only loses out because the job isn’t getting done, but also must spend additional time and energy to get the agent to get the job assigned done. Perhaps the agent finishes the job, but skews it to be more in the agent’s own benefit. If the principal’s benefit is less as a result, this loss is also an agency cost. This theory can be applied to politics.

When a supermajority of an electorate want a law passed but those voters’ own elected representatives (i.e., agents) refuse, the principals incur agency costs. Moreover, when a People want one system of governance and the political class ensconced in another one—the current one in which that class benefits (and therefore has a conflict of interest in)—the People suffers agency costs. In terms of democratic theory, the governmental sovereignty is suspect rather than legitimate from the standpoint of popular sovereignty (i.e., the general will of the People as a people).

I contend that the political class’s continued exploitation of the conflict of interest is a significant factor in the distance that had widened between the governed and the elected governors. “Candidates for political office are not in it just to serve the people; they also want the prestige and the perks,” said one respondent in the poll. The New York Times reports that in follow-up interviews, respondents “described political leaders as a kind of class apart.” Mixing “public life and personal enrichment,” elected officials were in the habit of taking “frequent flights on the private planes of billionaires” and going on “junkets paid for by corporate lobbyists and foreign governments,” all while ostensibly doing the people’s business.

Moreover—and this is where it gets really important—some of those polled “expressed a profound alienation from their own government. They said they did not expect elected officials to listen to them. They described politics as a province of the wealthy.” Incredibly, “they said they sometimes did not feel informed enough to come to an opinion about the candidates.” In spite of “being inundated with political advertising,” they said they were repulsed by the billions of dollars” behind it. In short, a significant part at least of the electorate had tuned out, given up, and lost hope. It would appear that popular sovereignty can commit suicide, rather than continue to endure a sordid political class—humiliatingly the People’s agents—and the related self-aggrandizing deep pockets who shamelessly put their private interest above the public weal. Abstractly stated, popular sovereignty can simply choose to give up, rather than even recognize the bill that would be required to pay in order to take back the wayward governmental sovereignty. I suppose the latter can be like a black hole, sucking in power and money even as the universe itself becomes unhinged from its outer walls and begins to collapse into itself. So narrow-minded, so greedy with its ruddy, fat hands, can a black hole be that it consumes the very conditions of its existence.

Incremental change, or “reform,” is not the way to correct such a dysfunctional system as a political class at odds with its principals (as well as principles) in a democracy; the class’s paymasters would only subvert the “reforms” in all but name. The Dodd-Frank Financial Reform Act of 2010, for example, merely tweaked with the problem of systemic risk by raising reserve requirements on the largest banks; the proposal to break up the five largest banks predictably got nowhere. The People were led to believe that holding more in reserves would make a difference in an inter-bank credit freeze an amid short-selling. Meanwhile, Wall Street would continue to fund the Congressional re-election campaigns of the law’s “writers” and supporters.

The superiority of the popular sovereign (i.e., the People) over the entrenched governmental sovereign (i.e., the political class) is evinced in the poll in that 39% said fundamental changes are needed in the way political campaigns are funded in the United States, and a whopping 46% said the system should be completely rebuilt. That, my friends, is an astonishing find in American politics. Almost half of the popular sovereign believed that the way its agents are selected had to be completely rebuilt. Beyond mere statute, such a “big picture” standpoint is constitutional in nature. Unfortunately, the political class would almost inevitably have its say, even a veto, on any proposed constitutional amendments—even any in which elected officials have a conflict of interest. The wish to completely rebuild the way campaigns for elected office are run may be like hoping that a universe take back its power from the black hole at ground zero already dominating even space and time.

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[1] Nicholas Confessore and Megan Thee-Brenan, “Poll Shows Americans Favor Overhaul of Campaign Financing,” The New York Times, June 2, 2015. All of the quotes in this essay are from this source.

Spanked by Stockholders: Citigroup

In April 2012, Citigroup’s shareholders voted against the bank’s proposed $15 million compensation for the CEO, Vikram Pandit. This was the first time a majority on a stockholder vote—in this case, 55 percent—united in opposition to what was considered “outsized compensation at a financial giant.”[1] Shortly thereafter, a major stockholder sued Citigroup for breach of fiduciary duty (owed to the stockholders) for excessive executive compensation. Nevertheless, the prognosis is not so bad for the “top brass” on Wall Street; they need not worry unless the votes were to become binding and managements were barred from voting proxies.

For one thing, the vote, taken as required by the Dodd Frank Financial Reform Act of 2010, was non-binding. “After the vote, Richard D. Parsons, who is retiring as Citigroup chairman, said that he takes the vote seriously and Citi's board will carefully consider it.”[2] It is odd, to say the least, that the agents of the owners would just “carefully consider” a majority vote of stockholders. Anything less than binding contradicts principal-agent theory. Lest it be argued that the business judgment rule ought to trump property rights, the question of the total compensation for the “top five” positions at the bank does not hinge on technical expertise in management. Moreover, it could be argued that in a economic system based on private property, that the property rights trump even the expertise of hired managers.

Secondly, the problem for stockholders voting no may have had more to do with the relationship to performance than that the pay level itself was too high. “The company has been flatlining,” said Mike McCauley, a senior officer at the Florida State Board of Administration, which voted its 6.4 million shares against the plan. “The plan put forth reveals a disconnect between pay and performance,” he continued. Calpers, the California state pension fund, also voted against the plan. The issue for Calpers “was whether pay was linked to performance and whether those targets were spelled out and sustainable over the long term,” said Anne Simpson, director of corporate governance for Calpers, which owns 9.7 million Citigroup shares. “Citi was found wanting on both,” she said. “If you reward them for focusing on high-risk, short-term profits, that's what you get, and that's how the financial crisis caught fire.”[3] In other words, the issue was not necessarily excessive pay on Wall Street; rather, the perceived culprit was a reckless design of compensation incentives resulting in excessive risk.

Therefore, I do not relate the negative vote at Citigroup to the wealth-inequality protests in the Occupy Wall Street movement. That American CEOs continued to make far more proportionately than workers than was the case in Europe was besides the point. The majority of Citigroup’s shareholders were trying to make sure that Citigroup would not go the way of Bear Stearns and Lehman Brothers.

1. Jessica Greenberg and Nelson Schwartz, “Shareholders in Citigroup Reject Executive Pay Plan,” The New York Times, April 18, 2012.

2. Ibid.

3. Ibid.