On the Role of Socialism in American Political Polarization

In a stunning upset in the 2012 Republican U.S. Senate primary in Indiana, Indiana's Treasurer, Richard Mourdock, beat incumbant veteran Richard Lugar by 22 percent (61-39%). Even though Lugar's 36 years of experience in the Senate had seasoned him into a statesman in foreign policy, the Tea-Party-backed Mourdock was able to portray the aged senator as out of touch and too willing to compromise with Democrats. Mourdock had no intention of extending any hand across the aisle. Is such polarization worth the loss of experience in international relations? Moreover, what is the role of socialism in the political polarization? 

"While Lugar advised in his concession speech . . . that Mourdock would need to work together with lawmakers in the Senate, the new nominee stuck to the belligerent tone he [had] maintained in the campaign, warning that Democrats and socialists were destroying the nation."[1]  Even if Democrats were for government ownership of the means of production (i.e., companies), which is socialism, it does not follow that those Democrats were also attempting to sabatage the U.S. in its foreign relations. Especially given Lugar's expertise in that area, working across the iasle would only make sense. Nevertheless, Mourdock saw a link. 
"Today," he said, "we see the Obama White House and we see a Senate chaired by Harry Reid that's doing everything it can -- though perhaps not intentionally -- to turn our dreams, to turn our great national hope and our dream into the nightmare of ever-growing government, to make us that … western European-style nation,’ Mourdock said. ‘Just yesterday, France elected a socialist,’ he continued. ‘There are those I'm sure in the administration and in the left side of the Democratic Party that were cheering for that. But we're not going to stand for that in Indiana because the supporters of Barack Obama are not going to win!”[2] In other words, Mourdock expected the Democrats to cheer on and perhaps even aid "socialist" governments around the world, the spread of which could isolate the U.S. and the related interests of private property. In 2019, for example, the World Trade Court ruled against the E.U. for having unduly (i.e., unfairly, in terms of free trade) subsidized Airbus. The government ownership of a company goes beyond such subsidization of a corporation like Airbus, which, as of 2019, was owned by EADS, which in turn was owned by a mix of private companies and a few E.U. states. 

What about those supposed socialist countries? To be sure, Francois Hollande ran under the Socialist Party banner. However, the “socialist” policies that he had campaigned on were redistributionist. He did not advocate that the state own more of the means of production. Hollande was redistributionist in that he suggested that la dette (government debt) that Sarkozy had doubled should not be cut only by austerity (i.e., budget-cuts), which hurt the poor disproportionately; rather, the rich should be taxed what they had been taxed before the top tax rate was lowered. 
In fact, Hollande was in a position fresh from his victory to push for federal (i.e., E.U.) economic stimulus spending to complement the federal austerity programs in debt-ridden states, including Greece, Spain, Portugal and Ireland. Using tax increases and budget cuts to reduce government debt is hardly socialism. 
So, Mourdock's lack of knowledge on socialism as an economic system as well as on European governments, combined with his refusal to reach across the aisle, were misplaced, and thus not worth the loss of Lugar's expertise in foreign policy. 

1, Michael McAuliff, “Dick LugarLoses to Tea Party’s Richard Mourdock in Indiana Republican Senate Primary,” The Huffington Post, May 9, 2012. 
2. Ibid.

A Strong State vs.The Market Mechanism in China

Under Marxist ideology, the Chinese economy was a command-and-control economy eschewing the market mechanism. Mao's collective farms provide us with a good example. The economy of the U.S.S.R., also Marxist, was based on production quotas and fixed prices. They changed by fiat rather than by changes in demand. State owned, or socialist, productive enterprises were given quotas based on the prior year's production (plus more). This push replaced that of producing more to sell more. Any hint of a market brought with it the stench of Capitalism. So one would suppose that China marked a significant departure when the government announced in 2013 that it would expand the range in which the yuan currency would float. Yet in 2019 in the midst of a trade tussle with the United States, the Chinese state demonstrated just how dominant the state still was relative to any market system.  

The reforms incorporating the market mechanism had begun under Deng Xiaoping. Although publicly-owned and state-owned-enterprises still dominated, they were set within a market economy. The mix of government-owned (i.e., socialist) businesses and a market mechanism has been uneasy in practice. Private or partially-privately owned enterprises could find it difficult to compete with competitors subsidized by the state. Widen the circle to international trade and foreign private enterprises could be found having the same complaint. Of course, the domestic and foreign consumers stood to benefit by the subsidized lower prices, so assessing the existence of state-owned enterprises is more complex than first meets the eye. In part, this is so because governments tend to emphasize the interests of business rather than consumers.  

The United States, for example, has protested against the Chinese government devaluing its currency. A low currency means that exports are less expensive in exported markets.  The complaint has been that "a weak yuan gives Chinese exporters an unfair price edge in foreign markets and helps swell the massive U.S. trade deficit with China."[1] In the face of the trade dispute with the U.S. in 2019, China promised in August "to avoid 'competitive devaluation' to hold down export prices in the face of of Trump's tariff hikes."[2] However, the yuan's low point of 7.0927 on August 23, 2019 was the currency's weakest rate since January 2008.[3] The heavy hand of the central bank could easily dominant market forces because the bank set the exchange rate every morning and let the yuan fluctuate only 2% against the dollar during the day. 

Interestingly, the Chinese government had announced in 2013, "The exchange rate is going to be more market-oriented" [4] People's Bank of China Vice Governor Yi Gang made this statement on a panel at the International Monetary Fund’s 2013 spring meeting in Washington. In other words, “China's central bank plans to widen the yuan's trading band in the near future," he said.[5] This meant that China's leaders would "press ahead with change despite the surprise slowing of the economy."[6] On the surface, this shows that the "Communists" were really serious about moving closer to a market economy. At a deeper level, this shows just how much power the government still had over its economy--power that could be used to restrict the market in service to state objectives. In the literature of international political economy, the Chinese government would be classified as a strong state because it could resist external pressure. By contrast, six years later, the U.S. Federal Reserve would lower a key interest rate due to political pressure from the White House, where concerns of a possible recession in 2020 were intensifying. The weak state classification could also explain the accumulating federal public debt (i.e., the failure to resist pressures to tax less and spend more). 

From a big-picture perspective, balance or equilibrium in the global economy is in everyone’s financial interest. Keeping a currency artificially low is like a dam keeping waters from reaching a balance. The pressure from the held-up water can be expected to destabilize the global economy. China’s policy to gradually let the yuan’s value be market-determined was thus taken to be a prudent step. However, American frustrations on state subsidies and a low yuan in 2019 suggest that the Chinese government rather than the market mechanism was still very much in control of the Chinese economy. 

1. Joe McDonald, "China Let Its Currency Sink to an 11-Year Low After Trump's Trade Threats," Time Magazine, August 26, 2019. 

2. Ibid.

3. Ibid.

4. Natasha Brereton-Fukui and Bob Davis, “China Vows Wider Yuan Movement,” The Wall Street Journal, April 17, 2013.

5. Ibid.

6. Ibid.

On the Political Power of Capitalism in American Society

In his confidential memorandum, “Attack on American Free Enterprise System,” Lewis Powell, later to be a justice on the U.S. Supreme Court, wrote in 1971 that the “leftists” were launching a frontal assault on the “free enterprise system,” “capitalism,” or the “profit system.” Powell saw this as an attack on, rather than a defending of the “American political system of democracy under the rule of law.” That the corporate profit-interest might be a threat to “one person, one vote” apparently did not occur to the future Justice. Rather, what is good for GM he presumed must be good for American democracy. Moreover, both, he presumed, are consistent with, or perhaps even foundational for American values.

Powell goes on to write, “A visiting professor from England at Rockford College gave a series of lectures entitled ‘The Ideological War Against Western Society,’ in which he documents the extent to which members of the intellectual community are waging ideological warfare against the enterprise system and the values of western society.” Powell notes in his report that almost half of the students on twelve representative college campuses favored socialization of basic U.S. industries. He cites Stewart Alsop, who had written that “Yale, like every other major college, is graduating scores of bright young men who are practitioners of ‘the politics of despair.’ These young men despise the American political and economic system.” It is strange, therefore, that, forty years later, the American political and economic system would be so well-undisturbed—having been so un-molested by the minions of educated young voters who had gone on to become leaders in that system. Yale, after all, contains in its mission the intent to educate the future leaders of America (and perhaps the world as well). There must have been a giant collective change-of-mind among the myriads of socialists before the Reagan landslide of 1980.

Powell goes on to suggest that business managers (including executives) “have not been trained or equipped to conduct guerrilla warfare with those who propagandize against the [business] system. . . . The traditional role of business executives has been to manage, to produce, to sell, to create jobs, to make profits, to improve the standard of living, to be community leaders, to serve on charitable and educational boards, and generally to be good citizens.” The practitioners here are the citizens; Powell is not pointing to what would come to be called “corporate citizenship,” a marketing slogan designed to get customers to feel better about buying more widgets. Nor is Powell pointing to the related notion of “corporate social responsibility,” which was invented by businessmen (rather than by “socialists” adding to corporate obligations) in the late 1950s.

Absent from Powell’s description of the businessman is the role of corporations even in 1971 in lobbying Congress for favorable legislation and/or regulation that would translate into higher profits. Powell would be hard-pressed to account for the role of the banking lobby in getting the U.S. Senate to vote down Senator Durbin’s amendment that would have given bankruptcy judges the authority to modify mortgages in foreclosure. This is how the “free enterprise system” has fought back “attacks” from “socialists.” After the Citizens United decision of the U.S. Supreme Court (2010), corporate money in unlimited amounts could go toward political advertising—including for or against a candidate—anonymously through “social welfare” non-profits. This is how corporate America has gone after its “attackers.”

Generally speaking, corporate American knows very well how to shut down its opposition in the halls of Congress. Powell’s memo pushes beyond the need for “public relations” and “governmental affairs” to urge a “scale of financing available only through joint effort” and related “political power” through the U.S. Chamber of Commerce. Business must learn the lesson “that political power is necessary…it must be used aggressively and with determination.” The corporation—created by the government—must, one might say—become the government, necessarily from within—through the system—rather than via revolution.

This sally into the political arena includes funding a highly competent staff of lawyers at the U.S. Chamber to argue before the courts in line with corporate interests. In the 2011 term, the Chamber’s ensuing legal defense department batted 100% on U.S. Supreme Court decisions. Powell could well have added that business’s lobbying and campaign dollars could be directed to not only defeating threatening legislation and regulations, but also influencing the nomination and confirmation of justices to federal (and state) courts. The astonishingly high success rate was therefore no accident.

In short, the threat to American democracy and even to the American principle of market competition may come not from “socialists” in academia and the media, but rather from the supposition that political power oriented to the corporate good rather than the public good is itself a good. That is to say, Powell’s memo may have the story turned around. His antagonists may have been oriented to saving the American system, whereas his proponents would actually subvert it in line with their narrow self-interest.

Source:

Lewis Powell, “Attack on American Free Enterprise System.” Memorandum, 1971. See pdf download at page-bottom of: http://billmoyers.com/content/the-powell-memo-a-call-to-arms-for-corporations/2/

Pruning Back an Ideological "Re-Definition" of Socialism

Should language lose its integrity for ideological purposes? On Fox News in the wake of the passage of Obamacare, Brit Hume and Newt Gingrich, a former Speaker of the U.S. House of Representatives, both (re)defined socialism as “government control of private property.” Their rendering falls short, however. According to the Random House Dictionary (via Dictionary.com), socialism is “a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole” (italics added). Whereas government regulation of privately-owned means of production and distribution involves some of the control being in the hands of the community as a whole through its government, socialism includes the vesting of both ownership and control with the government. 
Hume and Gingrich doubtless believed that words can be redefined to suit ideological objectives. Public discourse is difficult enough in a democracy. The dialogue "across the aisle" becomes more difficult when one or both sides decide that language can (and even should!) be subordinated to ideology to the extent that dictionary definitions (and common usages) are presumed to be changeable simply by applying a new meaning to the words on the public airwaves or speeches. Ideologically akin people will doubtlessly follow along, and soon the word has a meaning that contradicts the dictionary definition.  
Going further, to intentionally scare people by redefining a word in such a way that the word appears worse than it actually is nothing short of misleading manipulation. Even in such a case, not even the opposing partisans alert the people through the media or speeches that X means Y rather than Z according to dictionary definitions. No one stands up for language, so ideology can have its way and prey on words.
If government control via regulation is not convenient to the business sector and its advocates, what about government ownership without control! As per the definition of socialism, government ownership without formal control does not constitute socialist enterprise. Ownership and control can indeed be separated. Bearle and Means, in their classic treatise, The Modern Corporation and Private Property, point to the separation in modern large corporations, wherein stockholders as a group are the owners and control is maintained by managers. Theoretically, a government could own a company that is controlled by its management. Perhaps public policy would be served by the ownership alone, or the managers could have taken de facto control away from the government officials.
Therefore, the definition of socialism is more delimited than typically thought. To be sure, the meaning of words can change naturally, but such shifts are gradual as per changing times and thus uses, rather than sudden, as from being artificially interlarded for short-term political use. In the case of socialism, the term has historically applied to an entire economic system, such as those of the U.S.S. R. and China before capitalism made such inroads. A person would not say that healthcare is socialism, or even that taxes are socialistic. In Arizona, the dominant ideology has viewed taxes as theft.
With the fall of the command-and-control economic systems of the U.S.S.R. and China, socialism has come to be increasingly applied to governments owning and controlling particular enterprises rather than every means of production and distribution. Hence a capitalist economic system can contain socialist enterprises. For example, the Green Bay Packers’ football team in Wisconsin has been socialist because the citizens of the Green Bay together have owned the team. The community need not transfer ownership formally to a government for an enterprise to be socialistic. So too has the China National Tobacco Corp. 
In short, socialism can be distinguished from government regulation of privately-owned economic enterprise. Conflating the two by effectively redefining the word, socialism, muddies the public discourse and sows confusion, neither of which is helpful to viable republic. Furthermore, socialism can be applied to particular enterprises as well as to an entire economy whose means of production and distribution are owned and controlled by the community as a whole (often through its government). The application to particular enterprises does not reduce socialism to control alone. 

Regulating Smoking in China: A Socialist Conflict of Interest

Government ownership and control of a means of production is the standard definition of socialism even if some linguistic revisionists want to redefine the term as merely the control of a business or industry. In short, a government must own the economic enterprises to meet the definition of Socialism rather than merely government regulation of private businesses. Socialism, I contend, involves a structural conflict of interest that a government that both owns an controls an enterprise, industry or even an entire economy may be tempted to exploit for its own ends rather than the public good. The key here is the regulating of that which is owned. Specifically, where a government as owner enjoys the benefit of profit or surplus, that government has a financial interest that can be against the restriction of the produced product. Such a monopolistic restriction could admittedly be warranted by public health or safety, but the gain could also be private in the sense that it is limited to the government and even the personal financial interests of government officials. In other words, the public good can be distinct from a government’s own financial (and related political) interest even as that government is charged with acting in the public interest in part by owning and regulating state enterprises. It is the pivot between the public and private interest that sets up the conflict of interest because the human urge is to go with a narrower, private interest at the expense of the public good. In other words, the very possibility, even likelihood given human nature, that a government would exploit the wider distribution of benefits for the narrower one (i.e., to the government itself) is the basis of a conflict of interest. I argue elsewhere that even the mere possibility renders even an as-yet unexploited conflict of interest inherently unethical. Here, I examine the matter of public health in China as a case of a socialist (in part) government that has had a conflict of interest. 

Three hundred million Chinese were smokers in 2010. This number is roughly equivalent to the entire U.S. population in 2000. In 2010, the addiction killed an estimated 3,000 people a day in China; this translates into 1.2 million tobacco-related deaths for the year. One out of three cigarettes smoked worldwide was smoked in China. It was estimated that smoking would kill about a third of Chinese men under 30. On May 1, 2011, the Chinese government banned smoking in indoor public places. However, the law contained no penalties. According to Time magazine, the law was not likely to have any effect.[1]

The reason for the lenient regulation may have had something to do with the powerful China National Tobacco corporation, a state-owned and controlled enterprise. In 2010, taxes and profits from the monopoly were roughly 7% of the government’s revenue.[2] That gave government officials an incentive to protect the enterprise's revenue and a disincentive to issue regulations that could be expected to reduce the consumption of cigarettes in China even if a reduction were in the public interest. This combination of incentive and disincentive is an earmark of a conflict of interest, the basis of which is the human instinctual urges behind the combination. 

This may be why more incentive typically exists to protect and increase revenue coming in than to minimizing costs even if they exceed the revenue. Even if the government’s expense in covering health-care costs for the 3,000 Chinese a day who died of smoking in 2010 exceeded 7% of the government’s total revenue, even a partial loss of revenue would likely be resisted by government officials.  Attention to revenue can dwarf that to costs especially where no market competition exists because extracting more revenue is relatively easy whereas cost-containment is still difficult.
Ethically, the government officials otherwise tasked with regulating so as to protect the public health in China and thus preventing deaths from smoking suffered from the personal (if kickbacks were involved) and institutional conflict of interest wherein the government’s financial interest and public-health goals were in conflict. That is to say, the officials not only had their own ethical dilemmas to resolve; there was also a larger institutional problem akin to a house being designed to be at odds with itself. The part of the government oriented to protecting and even increasing the revenue may have had disproportionate influence beyond that of the public-health department because the narrower the benefits are, the greater the incentive. Seven percent of the state's revenue doubtless got more attention from the state itself than its broader public-health measures, including those that made it more difficult for people to smoke in public. 

See related essay: Socialism Where You Might Least Expect It.

See related book: Institutional Conflicts of Interest:Business & Public Policy.

1. “A Smoking Ban without Teeth,” Time, May 20, 2011.
2. Ibid.

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.

Wen and Obama: Breaking Up the Banks

Chinese Premier Wen Jiabao told a radio audience on April 3, 2012 “that China’s state-controlled banks are a ‘monopoly’ that must be broken up.”[1] He also urged other businesses to get into the financial sector. “Let me be frank,” he said. “Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly. To break the monopoly, we must allow private capital to flow into the financial sector.”[2] This included raising the total amount foreigners can bring into China under the Qualified Foreign Institutional Investor program to $80 billion.

Besides combined earnings of a bit over 632 billion yuan ($99 billion) in a slowing economy, the largest banks—Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank—were able to raise fees indiscriminately, sparking the popular resentment that Wen was able to tap on the radio. Beyond the unfairness of the windfall profits, the artificially low cost to the banks in borrowing from domestic savings accounts meant that investment has proceeded at the expense of consumption. Given that the current account surplus stood at just 2.7% of GDP in 2011 due to slackening demand in Europe and North America, the imbalance regarding consumption could already be seen as a potential constraint to economic growth.

Therefore, Wen’s strategy in going after the unpopular banking oligopoly was wise both politically and economically. The question at the time was whether anything would come of his remarks. “The major question is whether increasing rhetoric and new initiatives toward economic revisions will lead to broader reform. Prior efforts have faltered amid Beijing’s drive to keep a tight rein on the economy and opposition from interest groups.”[3] That Wen made his remarks as he was preparing to leave office may mean that they should be regarded as akin to President Eisenhower’s “Beware the military-industrial complex” farewell speech. A swan song is not apt to be followed by still another act.

In terms of lessons from a comparative approach, it would be ironic, to say the least, were the Chinese government willing and able to break up the four largest banks while the Dodd Frank Act of 2010 in the U.S. let the banks too big to fail remain intact in spite of the plights of Bear Stearns and Lehman Brothers in 2008. That is to say, if the Chinese government could have taken on its powerful banks, the U.S. government would have looked comparatively weak as against the American banking sector.

Lest it not be forgotten, however, President Andrew Jackson’s defunding of the Second Bank of the United States at around 1830 was daring even bank then when the financial sector was smaller relative to the U.S. economy as a whole. Five or six years later, Congress finally got around to ending the bank’s charter altogether. Jackson’s argument was that having a bank would make Congress, and thus the U.S. Government, too powerful in the American federal system. The dangers to the American republics in having a powerful moneyed interest were also not lost on the nineteenth-century president.

Therefore, we can view the Dodd Frank Financial Reform Act of 2010 through the lenses both of China, assuming something comes of Wen’s remarks, and of American history. President Obama barely broached the subject of breaking up Wall Street banks even though they had been culpable in the derivative mess. Congress would hear nothing of it.  The Chinese government may not be so constrained by the self-serving interests of its banking oligarchy.

Similarly, claims that President Obama’s reliance on private health-insurance companies rather than a state-owned entity in his Affordable Healthcare Act of 2010 was somehow socialism (i.e., ownership by the state of means of production) can also be viewed relative to a Wen’s criticism of the state-owned banks (which favor state-owned enterprises in terms of lending). Obama caved to the private health-insurance company lobby on even a public option, whereas Wen suggests that the Chinese government might break up the four biggest banks. Is the Chinese state stronger than the U.S. Government relative to the interests of private capital?

Relative to the “socialist” leader’s distancing himself from a bias toward state-owned banks (and enterprises in general) in China, President Obama’s support of both the Dodd-Frank and Health-care Affordability laws can be seen in retrospect as anything but advocating U.S. Government ownership of means of production/services. Wen’s remarks show a movement away from socialism, toward Obama’s stance, though perhaps with government rather than banks in the driver’s seat.

1. Dinny McMahon, Lingling Wei, and Andrew Galbraith, “Chinese Premier Blasts Banks,” The Wall Street Journal, April 4, 2012.

2. Ibid.

3. Ibid.

Amtrak’s Conflict of Interest

On June 15, 2011, U.S. House Republicans called for the breakup of Amtrak’s de facto monopoly of intercity and interstate passenger-rail transport in the United States. Specifically, Republican lawmakers proposed that the lucrative northeast routes be opened to private providers. For example, Richard Branson’s Virgin Trains had been seeking to provide service between Boston and Washington. Of course, letting one of the providers build and own the tracks even as other providers use the tracks would put that owner-provider in a conflict of interest in charging the other providers for their use of the track, so it would be preferable to have the U.S. Government supply the tracks and charge all of the private providers of train service.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.