The Tech Industrial Complex

Democracy, Plato and Aristotle both theorized, is a governmental system that is most susceptible to the mob—meaning mob-rule. Accordingly, the Electoral College and the appointments of U.S. Senators by state governments, the latter being the case from the establishment of the U.S. Constitution to a few decades into the twentieth century, were meant to limit any damage from momentary passions of the People to the U.S. House of Representatives. The governments in the United States, like those in the European Union, are republics in which democracy is a part rather than the whole. What neither Plato nor Aristotle could foresee in their agrarian city-states is the threat to democracy by plutocracy—the system of government in which private wealth rules. It is less understandable why the American electorates have ignored repeated warnings of the threat, especially as governmental power has concentrated at the federal level since the war between the CSA and the USA in 1861.

Much like U.S. President Dwight Eisenhower had done “in 1961 when he expressed concerns about the ‘military industrial complex’ in his farewell address,” President Biden said in his address, “’an oligarchy is taking shape in America’ as power and money become more concentrated in the hands of the few.”[1] Biden “criticized the ‘tech industrial complex’ and social media, where ‘the truth is smothered by lies for power and for profit.’”[2] It seemed likely in 2025 that Biden’s warning would not eventuate in any policies oriented to breaking up the concentrations of private wealth, which I submit are inherently incompatible with a democracy. Simply put, seeing billionaires visibly chatting with government officials during President Trump’s second swearing-in presents a picture that may suggest that the influence of private wealth on public policy (and thus government officials) had gained such a foothold that the confluence could be shown brazenly without fear that the American people might vote for candidates campaigning on enforcing anti-trust law and raising the effective tax-rates on billionaires to the point that, with anti-trust, being so rich from an oligarchic business would not be possible going forward.

Tech titans amid the incoming administration: Just the visible tip of an iceberg. (Getty)

Besides Elon Musk, perhaps the richest billionaire in the world at the time, Mark Zuckerberg of Meta (Facebook) as well as the titans of Amazon, Google, Apple, and Microsoft could be seen on television in front of, and amicably chatting with the incoming administration's Cabinet secretaries. Musk was chatting with Trump's proposed secretary of defense in spite of the conflict of interest in Musk owning SpaceX. Zuckerberg could feel comfortable being seen chatting with secretaries and President Trump’s adult sons in spite of his power to minimize political dissent on social media. With 90 days to decide whether to close down or sell Tik Tok, President Trump expressed interest in a news conference in the evening of his second inaugural in letting rich Americans buy into a 50/50 joint venture that would allow China to continue Tik-Tok operations in the United States. Were Zuckerberg or Musk to invest enough that they could exercise control on the company through the American half, the investments could put the two social-media titans closer to achieving monopoly control over social media in the United States. 

The real power evinced in the inaugural ceremony was in the seating area where the Cabinet nominees, the tech titans, and Trump's business-oriented relatives were sitting. At one point prior to the arrival of Trump himself, all of the living former U.S. Presidents, Democrats and Republicans, were looking across the aisle at the cadre of Trump’s nominated cabinet secretaries, the billionaire tech titans, and Trump’s business-family. Those former presidents undoubtedly knew where the real power was, and perhaps they were surprised to see the public-private collusion so brazenly visible. After the ceremony, hidden from the public’s view at the lunch in the Capitol, members of Congress, “Cabinet nominees and business titans within Trump’s inner circle” mingled.[3] The luncheon was an “opportunity that VIPs use to mix and mingle with members of the administration and advance their policy priorities. Apple CEO Tim Cook [was] seated between Donald Trump Jr and [U.S. Senate] Minority Leader Chuck Schumer.”[4] I submit that most such mingling takes place behind closed doors, even and especially in regard to the writing of laws. It is not uncommon for Congressional committee to use language written by the companies to be regulated.  

Lest President Eisenhower’s warning of the dangers to democracy from the military-industrial complex be replaced by Biden’s warning of a tech industrial complex as if the former had gone away on its own,  President Trump promised in his second inaugural address, “Like in 2017, we will again build the strongest military the world has ever seen.” Lest it be forgotten, President Biden has approved weapon-sales to Israel even as it ravaged the residents of Gaza on a scale that openly deified international human-rights law. Rather than assuming that Eisenhower’s problem was only existed in the second half of the twentieth-century, the American people in the twenty-first century would not be wrong in perceiving the tech industrial complex as being on top of the continuing military industrial complex. How many such complexes must there be before a existential threat to democracy itself be recognized and combatted? The sheer power of huge sums of private money, such as the influx of Elon Musk’s millions in Trump’s 2024 presidential campaign, and the magnitude of the discretion that Zuckerberg showed he had in unilaterally firing fact-checkers on his social-media company, can indeed be peeled back to reveal just how much the American voters could be manipulated on whom to vote for and even what issues to focus on. Rarely, if at all, did a candidate for federal office propose applying anti-trust law to the social-media’s big companies in the U.S.—an oligopoly. Nor was there any traction from the few voices in Congress suggesting that maybe the U.S. Government should stand up to military contractors by refusing to buy weapons for Israel and give that country’s government money to buy even more American weapons. The shop was open for business; human rights be damned.

The point is seldom made in American public discourse that had the U.S. Government enforced anti-trust law, including stopping tech giants like Facebook and Twitter from peremptorily buying up potential new-entrants in the first two decades of the twenty-first century, a billionaire class would not have been so large, and thus such an implicit threat to democracy. Just in how social-media company financial (and political) interests can be tacitly presented to manipulate internet users in feeds without the voters realizing it, the reason why Biden’s warning was not likely to be heeded at the ballot box can be understood. I submit that the televised images of tech “competitors” sitting together at Trump’s second inaugural points to an inter-related oligopoly instead of a competitive market (wherein new entrants are not bought up). But this is not all that we can take away from having watched the ceremony; we could also see the billionaires amicably chatting with likely high officials in Trump’s second administration, with Musk’s SpaceX having a financial interest in being NASA’s exclusive space-sub-contractor, and with Musk’s “X” and Zuckerberg’s social-media giant having a financial interest in what the Trump administration does about Tik-Toc. 

Extreme personal and corporate wealth literally in front of government officials at the inauguration in democracy's own Capitol Rotunda. 

My point is that, had the inherent threat that having billionaires poses to a viable republic been grasped by the American public, then governmental power would have been used such that the Musk, Zuckerberg, Bezos, and other tech managerial-visionaries would not have been able to become billionaires in the first place. As of 2025, and perhaps even back in 1961 concerning the military contractors, the proverbial horses were almost certainly already out of the barn. Thus, the electoral grass-roots energy going forward from 2025 needed to upset the proverbial apple-cart being steered by individual teckie billionaires to advance the financial interests of their respective companies in the halls of American government would be, realistically speaking, virtually unattainable. One of the most remarkable visuals from President Trump’s second swearing-in ceremony was that of the former presidents all looking over at the billionaires' very visible nicities with the incoming Trump officials and Trump's financially-inclined scions. The former presidents looked like bystanders rather than as pillars of power in themselves even though power had presumably been given to them by the People. I’m just glad that it does not fall to me to get the horses back in the barn. Ultimately, the American People since World War II are to blame for not having minded the proverbial shop as a going concern, for they should have known from the Titanic that most of an iceberg is hidden from view under water. Yes, I think people should know that, even with respect to icebergs in the ocean of political economy. Perhaps, though, I think too highly of popular sovereignty, which, unfortunately, is admittedly quite vulnerable to being manipulated. Both the manipulation itself and the sources are very difficult for the public to detect. Whether through social and/or mass media, even just a few very rich people or a large company, or a network of large corporations with  oligopolistic shared financial interests can frame what is debated, and keep out what is not. It is precisely because detection is so rare that the visuals coming out of Trump's second inaugural are so important, for they give us a rare glimpse of the nature and dynamics of real power in America.

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1. Chris Megerian and Colleen Long, “Five Things To Know about Biden’s Farewell Address that Also Served as a Warning to the Country,” APnews.com, January 15, 2025.
2. Ibid.
3. Michelle Shen, “Trump Attends Congressional Luncheon Where Key Politicians and Business Leaders Mingle,” CNN.com, January 20, 2025.
4. Ibid

On the Role of Agribusiness in Global Warming

Agriculture is a major source of carbon and methane emissions, which in turn are responsible for the general trend of the warming of the planet’s atmosphere and oceans. In fact, agriculture emits more than all of the cars on the roads. 10 percent of the emissions carbon dioxide and methane in the U.S. come from the agricultural sector. Livestock is the biggest source of methane. Cows, for example, emit methane. Methane from a number or sources, including the thawing permafrost, accounted for 30 percent of global warming in 2023. As global population has grown exponentially since the early 1900s, herds of livestock at farms have expanded, at least in the U.S., due to the increasing demand.[1] We are biological animals, and we too must eat. More people means that more food is needed, and the agricultural lobby in the U.S. is not about to let the governments require every resident to become a vegetarian. Indeed, the economic and political power of the large agribusinesses in the U.S. have effectively staved off federal and state regulations regarding emissions. It comes down to population, capitalism, and plutocracy warping democracy.

The full essay is at "On the Role of Agribusiness in Global Warming."

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1. Georgina Gustin, “Climate Change and Agriculture,” Yale University, February 22, 2024.

Stock Market Efficiency: Regulating Speed Trades

A flurry of international activity aimed at putting limitations on computer-based speed-trading was striking during the Fall of 2012 in the U.S. because regulators had been slow to act. Typically, the NYSE has been viewed by the world as the Mecca of efficient investment markets. Paradoxically, however, efficiency may be improved by restricting—meaning regulating—the masses of computer-enabled quick trades that take advantage of momentary microscopic arbitrage opportunities that are too quick for the human hand. The American conventional wisdom seems to be that regulation and market-efficiency are inversely related, rather than complementary. This assumption might be overly simplistic, coming from an inherited ideology. Fortunately, the rest of the world has not been following the SEC.

 A trader on the floor of the NYSE.   Getty Images

The broadest and fastest changes to unfettered speed-trading as of September 2012 were in Canada, where regulators had began increasing the fees charged to firms that flood the market with orders back in the spring of that year. According to the research and trading firm ITG, the change made trading more rather than less efficient because the crush of data burdening the market’s computer systems was reduced. Too much information coming all at once can be distinguished from perfect information, and can even overwhelm a market’s very infrastructure, eviscerating any possible gain from the additional information. For computer science folks, all this can be pretty sexy language; for the rest of us, the mundane fact of the matter is that more information does not always make a market more efficient. Exploiting small increments of arbitrage at a high volume so as to make a quick fortune may not actually improve a stock market’s efficiency because the market itself might crash. Regardless, any increase in the micro efficiency of the stock prices may not be significant, which is perhaps why such volume must be thrown at the problem to make enough money at the macro level.

Nevertheless, the SEC was proposing nothing to hamper the unfettered wild-west of computer trading. Meanwhile, Canadian trading desks were preparing for rules coming into effect on October 15, 2012 that would curtail the growth of the sophisticated trading venues known as dark pools, which the U.S. Government had allowed them to proliferate in the United States. To be sure, the Canadian rules had been hotly debated, but many Canadian bankers and investors determined that they did not want to go any further down the road that has taken the United States from having one major exchange in 2002 to having 13 official exchanges and dozens of dark pools in 2012. In the interim, trading firms and investors on Wall Street were hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August 2012 by Knight Capital that cost it $440 million in just hours.

What is striking about Canada is not so much that it was not following the SEC; rather, even the rules going into effect in mid-October were seen by some banks there as insufficient. “We don’t want to look like the U.S., but we have to do it better than we are now,” said Greg Mills, the head of stock trading at Canada’s largest bank, Royal Bank of Canada.[1] Major market participants urging the state to better protect the viability of the market itself through more regulation is a case of statesmanship, or a sort of enlightened self-interest that fuels principled leadership over opportunism in the short-run. To be sure, legislators and regulators should not depend on such “industry self-regulation,” but it is quite beneficial as a supplement. That is to say, the cart should not lead the horse, but it is nice when the cart voluntarily lessens the load.

In the “theory of regulation” literature, market participants urging more regulation are typically presumed to be invoking the comparative advantage of regulation. A bank that would benefit over its rivals if computer-trades were not allowed in such time-volume as they were in the U.S. as of 2012 is typically assumed to be the only player willing to advocate for more government. Admittedly, the strategic use of regulation is not lost on businesses invested in the profit-motive. Nevertheless, this motivation does not exclude the possibility that market participants may urge more regulation out of a realization that if the market freezes up or collapses even for a time, every participant suffers financially.

Perhaps business practitioners in the U.S. are missing not only the forest for the trees, but also the trees for the branches, and the legislators and regulators are following in suit—in part due to the shared perspective (as it is so subtle being everywhere) and in part due to the corporate campaign contributions and intense lobbying. That is to say, the limiting nature of a perspective, unknown to the holders, is as it were a common denominator that tacitly supports a corrosive plutocratic (i.e., rule by wealth) symbiotic relationship between business and government that undermines the system itself. That there are other systems, such as Canada, that are founded on a different set of assumptions can mean that the basic form of the American perspective, which would otherwise be invisible or taken as a given, can be seen, or at least finally glimpsed. From this transparency, the assumptions taken for granted can be put as a problem to be solved. 

1. Nathaniel Popper, “Beyond Wall St., Curbs on High Speed Trades Proceed,” The New York Times, September 28, 2012. 

A Weak Economy as a Competitive Advantage to the Largest Corporations

Size matters, at least in the business world. Richard Fuld, the last CEO and Chairman of Lehman Brothers, overextended "his" bank with risky real-estate and financial derivatives in part so Lehman Brothers would be as big as Goldman Sachs. 

Empire-building (and ego) aside, the largest corporations can indeed perform differently than smaller firms in an economy. In April 2013, it was clear that the biggest companies were outpacing smaller ones. Analysts estimated profits for the 100 largest companies in the Standard & Poor’s 500 stock-index to rise 6.6% in the second quarter, while earnings for the bottom 100 were expected to fall by 1.6 percent. Of all the profits earned by the companies in the S&P 500, 22% would be coming from the 10 largest companies, enabling them relatively more wherewithal with which to gain still more market share. Put another way, beyond a certain point, organizational size can protect or buffer a company in the midst of a languid economy. It is not only the market mechanism that accounts for this phenomenon.
One benefit enjoyed by the big corporations is being able to profit from other markets around the world and thus make up for a slow market at home. Smaller firms, with little or no access globally, are more constrained in the sense of being limited to the conditions of the domestic economy. Additionally, large companies enjoy easier access to credit. A bad economy need not keep the biggies from making investments in expanding operations still more, hence building on their existing size-advantage. There appears to be a certain threshold in organizational size beyond which the size of a company's operations can act as a buffer mitigating the negative effects of a slowing economy. It may even be that the market mechanism itself rewards size, and in so doing facilitates the shift from competition to oligopoly or even monopoly in a given market. This does not necessarily result in greater efficiency in business or benefits for the consumer.

Once an organization reaches a certain size, diseconomies of scale kick in. Further increases in size bring disproportionate increases in costs, which counter the earlier economies of scale. As argued by Thompson in Organizations in Action (1967), as organizational size increases, the cost of integrating the various divisions and departments increases more than proportionately. In fact, coordination and integration can become virtually impossible once an organization has reached a certain size. For example, banks like JPMorgan and Bank of America may be so large that they cannot be effectively managed, not to mention in a cost-efficient way.

In addition to the impact from the market mechanism and business, federal legislation can benefit the largest corporations disproportionately or even exclusively, thereby widening the gap between the "haves" and "have nots." For example, federal budget-cutting tends to hurt small business more than large corporations. Also, large corporations like G.E. can afford to lure tax experts away from the IRS in order to minimize the corporate income tax liability. In fact, G.E. got away with zero tax in 2010, despite having earned billions of dollars in the U.S. that year. 
Furthermore, large corporations have considerably more lobbying power than do small companies. With some strategically-placed political campaign contributions, a large company can get its particular situation explicitly exempted in proposed tax legislation. In some cases, the companies or their lobbying group have even given the tax-writing Congressional staff the legislative language--saving the staff some work.

A large corporation can even create a sustainable competitive advantage for itself by getting Congress to increase the tax burden on smaller firms! Applied to the formulation of regulations by regulatory agencies, a large company with exclusive access to domestic and even international market data can "give" it to the regulators, who depend on such data in crafting regulations that will be effective in the market. Of course, the company can use its informational asset as leverage with which to sway regulators to soften the regulations in a way that benefits the company over its competitors. Even the prospect of future, well-compensated employment can influence a regulator to see to it that the future employer will not face regulations that are too costly. Otherwise, the eventual salary of the regulator-turned-regulatee could be lower amid the lower profits from costly regulations. This use of assets to sway regulators to go easy on the company (but not its competitors!) is known as the strategic use of regulation. I submit that organizational size facilitates such use because the assets that can be used as leverage are more valuable to regulators.

The power of large corporations over public policy and regulations is not the market mechanism at work; rather, it is a manifestation of plutocracy at the expense of representative democracy and the public interest. In a plutocracy, the good of the part trumps the good of the whole. This is sub-optimal for the whole because the interest of a part is not necessarily in line with the interest of the whole. Accordingly, public policy can be justified in countering the “artificial” advantages of organizational size in the political arena. Furthermore, even the size bias of the market mechanism and business itself could be reduced or even countered as per the public interest in more competitive markets in place of oligopolies and monopolies. This would take thinking systemically from the perspective of the public interest.

Source:

Nelson Schwartz, “As Wall St. Soars in Tough Era, Company Size Is a Big Factor,” The New York Times, April 15, 2013.

CEOs in 2012: Avoid the “Fiscal Cliff”!

Reporting in November 2012 in anticipation of the across-the-board budget cuts and end of the Bush tax cuts, together expected to amount to around $500 million for 2013 alone, the Wall Street Journal observed that some large American corporations were “making plans to slow investments, lay off workers and pay less-generous dividends if Congress and the Obama administration don’t find a way to avert the so-called fiscal cliff.” Such plans could represent a self-fulfilling prophesy wherein a hit of just over a half trillion dollars in an economy of over $16 trillion is nonetheless depicted by the media as a cliff. In actuality, it could be more like taking a step down the stairs rather than falling off a cliff. Even if the federal budget cuts and end of the Bush tax breaks in 2013 would not in themselves drive the U.S. economy off the cliff into an economic abyss, the assumption of economic Armageddon could build-up downward momentum to something even far worse than a return to recession. The culprits are those in business, government and the media who were engaging in a series of steadily loud exaggerations. It could justifiably be asked, what’s the difference?

The difference is that a downturn from exaggerated rhetoric on the public airwaves would not inevitable, even were sequestration to occur. Even the sequestration alone was not in itself inevitable as 2012 was coming to an end, as Congress and the president had ample opportunity go beyond posturing to avert the $500 million hit by reaching a deal on budget-cuts and revenue increases. Making matters perhaps worse, the corporate executives who were discussing their plans publically in November 2012 may have been depicting their intentions overly pessimistically in order to manipulate the contours of an eventual deal between Congress and the White House, or just to press the federal officials to get to a deal—anything. In other words, as laudable as it is to pressure elected representatives to work together for the good of the entire economy, advertising exaggerated corporate plans to do it could play into the self-fulfilling prophesy.

Bank of America CEO Brian Moynihan said at an investor conference in New York in November that uncertainty about U.S. tax and spending policies had already prevented many clients from investing in 2012. At a meeting of CEOs hosted by the Wall Street Journal, Mark Bertonini of the health insurance company, Aetna, said, “The American people are going to suffer, because we’ll lay them off.” Besides the fact that stoking fears as a means to manipulate public opinion and federal lawmakers is ethically problematic, the CEO’s claim might be exaggerated, or at least overly simplistic even as it is in line with the financial interest of an insurance company that would be negatively affected by the budget cuts to hospitals.

The Journal itself provides a reality-check in making the following observation: “To be sure, there is a difference between CEOs issuing warnings to influence a policy debate and actually making cuts. Companies juggle a range of factors when deciding whether to hire, fire or invest, and many say privately they are more influenced by broader shifts in technology and demand than the fiscal cliff.” Merely in using the term cliff, however, the Journal is unwittingly complicit in the game. About a week later, the Journal would blatantly state that for investors, the stakes   were high.

Bertonini’s claim of eventual layoffs could have very little to do with Aetna’s actual contingency plans—the claim being primarily to manipulate rather than inform. Even defense contractors and hospitals, which would be directly impacted by the sequestration (but also by a Congressional agreement, albeit less so), had probably already factored the possibility into their operations in 2012 so any further downturns in 2013 from the sequestration would probably be more muted than the cliff rhetoric would suggest.

Already in 2012, the eurozone’s quarterly GDP numbers, including the third-quarter “slump” of -0.2 percent, was “weighing on” executives at American companies in terms of their cautiousness in investing and hiring at a time when consumer demand in the U.S. was running at its highest level since mid-2007. That is to say, world events prior to the anticipated “fiscal cliff”were also playing a role in the business outlook in America.

Warren Buffett, the founder of Berkshire Hathaway, said the U.S. has a "very resilient economy" and so going over the so-called cliff would not be permanently crippling. To be sure, the senior statesman of business could have been trying to manipulate Democratic leaders to push for higher tax revenue from the rich. However, Seifi Ghasemi, CEO of Rockwood Holdings, a specialty chemical manufacturer, said in late 2012 that preventing another war in the Middle East and bolstering Europe’s economy were bigger concerns” at the time than avoiding the sequestration of across-the-board budget cuts. With the exception of Newt Gingrich saying on ABC This Week that the U.S. economy was big enough to handle a $500 million hit, Buffett and Ghasemi were lone wolves in the wilderness in downplaying the "cliff" theatrics that the sky would fall should the budget ax fall early in 2013. At the conference of CEO’s hosted by the Wall Street Journal in November 2012, 73 percent of the executives said they were more concerned about sequestration than even the E.U.’s debt crisis—this in spite of the fact that the Economist had just come out with a major piece on the uncompetitiveness of France representing a new danger to the euro.

The involvement of CEOs in the chorus of “the sky is falling” rhetoric in order to manipulate public policy for financial gain should strike us as nothing new. It is crucial to note, however, that the topic here was systemic in nature, meaning that the U.S. economy as a whole and the fiscal viability of the U.S. Government itself were presumably at issue. The stakes are perhaps too large where the risk is systemic for CEO’s to “hyper-drive” the public discussion into hysteria just so profit won’t be as negatively affected by government cuts.

Whereas corporate public affairs offices are typically oriented to getting favorable regulations (i.e., strategic use of regulation) or deregulation oriented to a particular industry, the “fiscal cliff” would impact the entire economy—the question being how much. Using the sequestration “debate” to eke out more financial gain or avoid a loss for one’s company can be dangerous for the system as a whole if the manipulation distorts the problem. In my view, fiscal cliff is inherently distortive, and thus any public manipulation based on it is also problematic. To “join in”for financial gain is not exactly being socially responsible.

Whether in public or “behind closed doors,” corporate involvement in the public policy process has more legitimacy ethically speaking when the effort is to “save the ship” where the “ship” is the system as a whole, and thus far from narrower benefits, such as to the companies themselves. To be sure, companies have a financial interest in the general condition of the macro economy, but the more systemic the suggestion, the less immediate the financial benefit to a particular firm. The more immediate the benefit is to a company, the less credible are its managers’ efforts to manipulate public opinion and officials.

Rather than “fear mongering,” the CEOs at the meeting hosted by the Wall Street Journal in November 2012 could have suggested possible ways that sequestration could be obviated by an agreement by Republicans and Democrats leaders in the U.S. Government. Specifically, the executives could have oriented their comments to suggesting new ways that Congress could raise revenue and cut the federal budget in ways that are wiser than simply across the board. Optimally, the suggestions would be oriented to the problem at the systemic level and thus reflect such a perspective.

Implying that a corporation’s particular financial interest is never completely overcome by a societal perspective, the Wall Street Journal reported in November 2012, “Different business sectors are split over what policy makers should do. Some have called for Congress to extend all expiring tax cuts for at least another year. Others have said Congress should raise taxes as part of a broader deficit-reduction plan that cuts spending on Medicare and Social Security. . . . (S)ome say fears of the fiscal cliff are overblown.” The split by sector suggests that the prescriptions even at the macro, or societal level at the very least take into account an industry’s own financial interest. It is as if what is good for the part is presumed to be good for the whole. To be so inclined does not make a CEO or company look good in the public discourse.

A suggestion with even an indirect financial benefit to one’s firm can easily be discounted by public officials and even the general public as lacking sufficient credibility to be trusted. An executive’s venture into the public square can easily be for naught under such circumstances. It would be better to remain quiet than suffer the loss in reputational capital. The alternative to either one is for the CEO or public affairs director to limit the company’s particular benefit from a systemic-oriented suggestion to public relations, which is itself a valuable long-term intangible asset. That is to say, time and energy spent coming up with the most respectable (i.e., clever) suggestion can do much more for one’s own company than trying to profit more directly from manipulating public discourse in a self-interested way. The numbers will take care of themselves. Ever notice that when people recognize a clever suggestion made by someone, they don’t accuse the person of trying to manipulate things, but, rather, praise him or her for the insight? CEO’s wanting a share of the leadership podium at the societal level might keep this observation in mind.

Given the expertise and societal position, at least potentially, of CEO’s, contributing toward solving system-wide problems in the political economy can even be regarded as a part of corporate social responsibility, as long as the financial benefit implied by a given suggestion is not too direct or exclusive to the executive or his/her company. Financial self-interest exculpates the ethical merit that is inherent in the very notions of responsibility and duty that are salient in ethics. In public discourse, it is better to be oriented to mapping the general course of the ship (i.e., the political system and/or financial system as a whole) around icebergs rather than trying to reserve a deck chair with a better view. We expect people to wrangle for position, whereas we take notice when individuals take a stand in spite of themselves for the greater good of the system.

 J.P. Morgan led banks in bailing out Wall Street in 1907.  Source: Upsidetrader.com

Consider, for example, J.P. Morgan’s decision in 1907 to take the weight of the banking crisis on his own shoulders by leading banks to save Wall Street by infusing the needed capital into the system. Contrast this vaulting of business leadership to the societal level with the vaunted self-protective orientation of Wall Street bank CEOs in September 2008. Business leadership raised to the societal level is rare indeed, and thus particularly valuable—and yet countless CEO’s settle for strategic leadership of significantly less value.

It is not as though opportunities are rare. In November 2012, President Obama presented CEOs with just such a platform at the White House just as he was entering into negotiations with Congressional leaders on a possible deal that would avert the “sky from falling.”To have optimal credibility with the president, the CEOs would have had to treat the meeting as falling under “corporate social responsibility” in that they would have had to take the perspective of the U.S. as a whole, and thus be on the same page as the president, to be credible. Put another way, the president would hardly have been expecting this, so a CEO achieving such a height would have stood out above the crowd and thus have had the president’s ear.

As an example of a perspective oriented to the political system and at the same time justifying business leadership on the societal level, David Crane, CEO of NRG Energy, said in referring to members of Congress and the president,“I think everyone just has this fear that they just do as they’ve done the last four years and just lob grenades at each other. CEO’s, whether they’re Republicans or Democrats, they’re deeply pragmatic people and you just don’t play with craziness like our government is playing with right now.” This statement is more oriented to a systemic flaw—that of gridlock in the federal government—than to getting something for NRG. Furthermore, the pragmatism, and one could add experience, of CEO’s could come into play should executives feel like doing some “pro-bono” work for the American people.

In conclusion, distorting public discourse in order to gain financially can contribute toward the general sense that a cliff is just ahead. Such participation is not constructive. In contrast, being oriented to coming up with a clever suggestion geared to a societal problem even (and especially!) though one’s company would only rise or fall along with all the other boats (i.e., the benefit of which being systemic in nature), can raise a CEO from strategic leadership to societal leadership. Only at this level can duty be reconciled with benefit in terms of credibility and the related reputational capital. CEOs following JP Morgan’s example in 1907 in willing the leap to societal leadership wherein the focus is on saving the system could make all the difference on whether the U.S. survives its own accumulated icebergs. Regarding the question of survival and the related implicit call to CEOs to “step up to the plate” for the good of the “team” (or ballpark), the U.S. Government’s gigantic accumulated-debt of over $16 trillion and deficits of over $1 trillion stood out even in 2012 as huge red flags much more dire than any $500 million so-called “fiscal cliff.”

Sources:

Kate Linebaugh and Stobhan Hughes, “Companies Warn About Cutbacks,” The Wall Street Journal, November 14, 2012.

Damian Paletta and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” The Wall Street Journal, November 14, 2012.

Brian Blankstone and William Horobin, “Euro-Zone Economy Shrinks Again,” The Wall Street Journal, November 16, 2012.

Maureen Farrell, "Buffett Not Worried About Fiscal Cliff," CNNMoney, November 16, 2012.

Jonathan Cheng, “Investors Show Optimism That Cliff Will Be Avoided,” The Wall Street Journal, November 20, 2012.

ICE Bought NYSE: Profiting from the Rules?

Tell me what the rules are, and I’ll make money with them.” This statement, made by Jeffrey Sprecher of Intercontinental Exchange, captures well the attitude that business practitioners should have toward government regulation in a republic. That is to say, businesses should be regulation-takers rather than makers. For the regulatees to make regulation to which they themselves would be subject is an oxymoron, or contradiction in terms. At the very least, it involves a conflict of interest. At the macro level, business as “regulation-maker” effectively turns a democracy into a plutocracy. Accordingly, the strategic use of regulation should pertain to the use side, rather than the regulating side. Crafting regulations—essentially dictating them to legislators or regulators—in order to make money from them takes the strategic use of regulation too far.

 Jeffrey Sprecher of ICE.  Making money playing by the rules.  (nypost)

Sprecher began by working at electric companies. He picked up on the need of those companies to hedge energy contracts so he bought a small exchange and built it up around derivative trading. Eventually, he did away with the exchange’s trading floor—preferring 24 hour computer trading. In 2010, the passage of the Dodd-Frank Act of financial reform requires that derivative trading be done through a clearinghouse. Sprecher’s company stood in a position to take advantage of the new rule. In fact, the intent of the new regulation being that regulators could have a better idea of the volume of derivatives “out there,” Sprecher created a derivatives database in his company. In other words, he anticipated in a way that meant more profits, and he did so without trying to manipulate legislators or regulators with a huge lobbying effort. Rather, he anticipated weaknesses in the market and devised company-based solutions that would be profitable. It is no surprise that the Dodd-Frank Act essentially adopted his business model regarding derivatives—effectively forcing it on the industry as a whole.

In fact, observing the heightened scrutiny of swap contracts under Dodd-Frank, Sprecher decided to convert them to futures contracts. Here again, profit was also in the mix. “The reality is that there are incentives to convert swaps into futures, where there’s less competition,” according to Richard McVey of MarketAxess. “There’s no requirement for [Sprecher’s company] to open [its] futures clearinghouse to other exchanges.” This restriction of competition to increase profit is ironic for ICE because in late 2012 came the announcement that the company would purchase the New York Stock Exchange, which had capitalized on monopolizing the trades of its members. Ironically, Sprecher’s actions had undercut this monopolization and here he was exacting his own version in turning “insurance” swaps into garden-variety futures contracts. Business skill can be regarded as the art of knowing when to ride a wave—and which wave to ride.

It should be noted that both the computer-trading and derivative-trading trends furthered by Sprecher’s very company enabled it to buy the vaunted New York Stock Exchange for $8.2 billion rather than something much higher. According to the New York Times in late 2012, the “transformation of the New York Stock Exchange from its position at the apex of the world financial system to an asset to be bought and sold like any other—and one that is not deemed to be worth as much as it would be if it traded more modern derivative securities rather than old-fashioned stocks—has been going on for decades, but has accelerated in recent years.” Essentially, Sprecher took advantage of this trend by making the purchase, and he would capitalize on owning the “temple of commerce” through intra-company synergies even while committing to keep the NYSE floor up and running.

In short, business acumen has no need of being sidetracked into manipulating lawmakers and regulators into formulating rules favorable to one’s particular company. The strategic use of regulation is most profitably accomplished over the long run on the use side. Take the rules as given and make money with them. This is entirely consistent with business in a viable republic. An implication of this thesis is that it’s the bad—both in terms of business intuition and moral disapprobation concerning manipulating public policy for private gain—manager who represents the plutocric threat to a republic.  The business practitioners knocking on Congressional doors are not the brightest guys in the room as regards innate business skill, and they are not the most forthright concerning getting what they want, whether by money or even information. Unfortunately, turning opportunities into profit is instinctive only for some practitioners, while it is forced or contrived in many others, who therefore feel compelled to circumnavigate business by pressuring public officials. It is significant—and telling—that ICE did not have a substantial lobbying presence in Washington, as Sprecher and his subordinates undoubtedly “kept to the knitting,” being good at it, and thus they did well in profiting from gaps in the market and the related regulatory changes.

Sources:

Ben Protess and Nathaniel Popper, “Exchange Sale Reflects New Realities of Trading,” The New York Times, December 21, 2012.

Floyd Norris, “A Temple of Commerce that Failedto Keep Up with Change,” The New York Times, December 21, 2012.

Michael J.de la Merced, “At the Big Board, Seeking Rejuvenation in Consolidation,” The New York Times, December 21, 2012.

Constricting Debate in the Public Square: The Case of Gun Control

The managements of large corporations attempt and, I submit, often succeed at keeping the most financially threatening alternatives in public policy off the public’s radar by pressuring media and using public relations campaigns. As U.S. president Obama’s health-insurance proposal was being debated in Congress, health insurance companies deftly either kept the single-payer proposal off the media’s discussion or relegated the policy as radical. This term, if stuck to a proposed policy, is the kiss of death in a society of incremental change. Such change, if the only game in town, can unfortunately come to be viewed as constituting major change. The gun-control debate in February, 2018 after the shooting of 17 people at a high school in Parkland, Florida is a case in point.

In step with the National Rifle Association, U.S. president Trump supported “efforts to strengthen the  federal background-check system for firearms.”[1] He also supported a ban on “bump stocks,” which enable a gun to shoot hundreds of rounds  per minute. Congress had considered such a ban, but could not in the end resist pressure from the NRA. So in terms of political viability, going beyond tightening background checks and banning bump stocks to ban the assault weapons themselves could easily be perceived as radical and thus a waste of time to include in the debate. Yet such a course ignores the possibility that the debate could render the infeasible, feasible. Moreover, restricting debate to the politically feasible gives the impression that at least some of the alternatives being considered are major rather than tertiary in nature. Banning bump stocks and tightening checks could seem like solutions rather than things that should have been done long before the shooting in Florida.

Putting the alternatives being considered as part of the debate in the media into perspective can be accomplished by including the stance of Al Hoffman, a prominent Republican donor. In the wake of  the  shooting, he had had enough. He demanded that the Republican Party, which at the time controlled the governments of Florida and the U.S., “pass legislation to restrict access to guns.” He “vowed not to contribute to any candidates or electioneering groups that did not support a ban on the sale of military-style firearms to civilians. ”[2] He was saying that his monetary support would go behind a ban on assault weapons.

With the debate restricted to background checks and bump stocks, Hoffman could be perceived as advocating something radical and politically infeasible. The artificially restricted debate ensured the continuance of such infeasibility as well as the perception of the ban being radical in nature rather than reasonable. It is no accident that the NRA’s management declared that a ban on assault weapons was not debatable. For the organization to have been able to keep such an option off the table and perceived societally as radical and infeasible suggests that the news media was not operating in the public interest. So too, I submit, does the media restrict or contort reporting and discussing matters of public policy relevant to corporations. Like the NRA, large companies can effectively steer public discourse on to less threatening alternatives as if they are central  rather than secondary in importance.

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[1] July Bykowicz and Srobhan Hughes, “Trump Open to Tighter Gun Checks,” The Wall Street Journal, February 20, 2018.

[2] Alexander Burns, “”GOP Donor’s Ultimatum: Guns or Money,” The New York Times, February 18, 2018.

On the Strategic Use of Regulation: Financial Reform at the Bequest of Wall Street

According to The New York Times, Wall Street bankers were busy working on how to weaken the regulations or otherwise profit from them before the ink was dry on the financial reform law of 2010 . First, regarding trying to profit from the new regulations, BOA, Wells Fargo and other big banks that were faced with new limits on fees associated with debit cards were imposing fees on checking accounts. Compelled to trade derivatives in the daylight of closely regulated clearinghouses rather than in murky over-the-counter markets, titans like J.P. Morgan Investment Bank and Goldman Sachs were building up their derivatives brokerage operations. Their goal was to make up any lost profits — and perhaps make even more money than before — by becoming matchmakers in the vast market for these instruments. That critics were pointing to them as a principal cause of the financial crisis made no difference to those bankers. Even when it comes to what is perhaps the biggest new rule — barring banks from making bets with their own money — banks found what they thought was a solution: allowing some traders to continue making those wagers as long as they also work with clients.

Lest one conclude from the banks’ stretegic responses that the new law passed in the wake of the financial crisis of 2008 goes strongly against their interests, it is important to remember that the reform is more geared to giving government officials adequate power to mop up a future mess than to enabling them to prevent one in the first place by clamping down on the banks. The devil is in the details. This in itself can be an opportunity for banking lobbyists to work over regulators who depend on information from the industry and can be swayed by legislators who have received campaign contributions and fund-raisers from the bankers. Regulators are tasked under the new law with writing the specific rules of the road governing limits on risk-taking by financial firms and previously unregulated trading. By leaving so much to the discretion of existing regulators, the new law is “a boon to Wall Street lobbyists, who will now be working behind the scenes to influence the regulators,” according to John Taylor, president & CEO of the National Community Reinvestment Coalition. Furthermore, in enforcement, there is evidence that regulators are apt to look the other way. The wave of predatory lending that sank the housing market, for example, could have been largely prevented if the Federal Reserve had enforced existing rules on mortgage lending, according to Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.

Under the financial reform law of 2010, banks and other financial institutions are overseen by a council of  regulators. That group is charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008. But there’s little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head. “If a bank went to the regulators and said, ‘We’ve got a good idea: we’re going to put our lending officers in charge of risk management,’ that bank would be put out of its misery immediately,” said Isaac. “That’s what the government just did. It put the regulators in charge of assessing their own performance. It’s a very bad system.” While the law creates a separate agency with a single consumer mandate, even it remains beholden to those regulators, who retain the power to veto its regulations and enforcement actions. That setup, said Taylor, could seriously hamper the board’s effectiveness. “That club of regulators is very insular, and usually in agreement,” he said. “They can kill serious reform, and the financial lobby remains much more influential with regulators than consumer advocates.”

The problem can be broadened by considering that President Obama brought to head his economic team people like Larry Summers, who while in the Clinton Administration lobbied against regulating derivatives, and Tim Geithner, who had been appointed as President of the New York Federal Reserve at the urging of Citigroup and its major stockholder. In other words, it is not just a matter of relying on the same regulators; the construction of the law involved the same advisors.  Indeed, that members of Congress listened to the banking lobby at all even as the banks were complicit in the financial crisis of 2008 can be viewed as going back to the same. At a fundamental level, the banking industry may have too much leverage over top government offiicals, whether legislators or regulators.

Sadly, according to Newsweek, “the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.” This might be because it is in the big bankers’ interest that the government come in and clean up, but not restrict them in the meantime.  In the 1980s, the financial sector’s share of total corporate profits ranged from about 10 to 20 percent. By 2004, it was about 35 percent. According to Newsweek, “What you get for that money is favors. The last financial crisis fades from memory and the public begins to focus on other things. Then the finance guys begin nudging. They hold some fundraisers for politicians, make some friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations come undone.”

In the wake of the financial crisis, the American people had a chance to brake up the banks too big for our republics, but even then the bankers were able to quietly get this option off the airwaves. I contend that the too big to fail systemic risk is actually greater with respect to the viability of the US than to the financial system. That is to say, the ability of Wall Street to dodge the bullet even when it was culpable for a near melt-down of the financial markets may mean that we are living in a plutocracy rather than a democracy—the latter being mere window-dressing. Even when Wall Street is “bad,” it owns Congress, according to Sen. Dick Durbin of Illinois.  This ought to tell us that the game is over, yet with regard to the regulators I suspect the games will go on for some time.

Sources:

http://www.msnbc.msn.com/id/38266914/ns/business-eye_on_the_economy/ 

http://www.newsweek.com/2010/07/15/five-problems-financial-reform-doesn-t-fix.html  http://www.cnbc.com/id/38272518

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.