Bank Bonuses and Dividends After the Financial Crisis: On the Power of Banks in European and American Government and Society

Dividends are typically based on how much a bank (or company, moreover) has profited, less whatever capital is needed from the profit. Similarly, bonuses are based, at least theoretically, on how the managers and the nonsupervisory employees alike perform as well as how the bank performs. In their respective ways of shoring up banks amid the financial crisis of 2008, the E.U. and U.S. differed on how easy it would be for banks to pay dividends and bonuses, as well as to have access to governmental funding. These differences reflect both the relative power of the financial sector in the governmental sector and the cultural attitudes toward business. 

“Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses. . . . Extra capital for European banks should be raised first from the private sector, then from [the state] governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said. Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal.”[1] The bankers much raise additional capital before government coffers could be tapped and dividends and bonuses could be paid.

 
As an aside, the nature of the E.U.'s federal system is also relevant, as state funds would be tapped; only when they are exhausted would a federal fund be used. In the case of the U.S., the states were to be shut out of the solution. This reflects the more general shift from federalism to consolidated power at the federal level. The European federal system was at the time more balanced, and thus more viable.

After Lehman Brothers went under in September 2008, the U.S. Government took “swift action to ensure its banks had a strong cushion of capital.”[2] The banks first (rather than last) resort of capital would come from the Federal Reserve Bank (as created money) and TARP funds enacted by Congress. The bankers did not have to raise additional funds, and they could pay dividends and bonuses even though the government bailout was supposed to be used to expand lending, which largely didn't happen. The banks could take the governmental funds with few if any strings attached. Also, the U.S. Treasury allowed banks to pay back the funds earlier than perhaps advisable because the bankers wanted to be free to pay whatever bonuses they saw fit for themselves.

The difference on whether dividends and bonuses should be allowed at troubled banks reflects a rather basic ideological difference between the E.U. and U.S. concerning whether economic liberty ought to be limited even in cases in which the economic entities are culpable. In short, is a bank (or business) whose management has performed very badly, as in recklessly taking on too much debt, justified in paying out dividends and especially bonuses nonetheless? If traders knowingly sell crap to even their best customers, as traders at Goldman Sachs did in the case of the subprime-mortgage-based financial-derivative bonds, should those traders expect to get bonuses anyway? Competence and ethics are thus both relevant. 

Admittedly, the bonus system on Wall Street had made its way into calculations of standard or basic compensation, such that the bankers had come to expect at least some bonus each year, regardless of performance. However, this expecation (and practice) contorts the very meaning of a bonus; it is not to be expected because it is granted for good or excellent performance, or even ethical conduct. U.S. officials tacitly bought into Wall Street's convenient notion of a bonus, whereas E.U. officials held onto the basic fact that a bonus is an extra, not a given, and, moreover, that raising additional capital as a hedge against systemic risk is more important than bonuses (and dividends). 

I suspect that because the E.U., at the time at least, had major parties on a broader political spectrum than that of the U.S., the financial sector did not have as much power over governmental institutions as in the case of the United States. Put another way, the U.S. political landscape was more tilted in favor of the financial system. Goldman Sachs, for instance, gave $1 million to Barak Obama's 2008 presidential campaign. Furthermore, the U.S. Supreme Court ruled in Citizens United (2010) that corporations could give unlimited amounts of money to political campaigns. Meanwhile, the "hard left" was represented only by "liberal Democrats," whose power has been typically diluted in the Democratic Party. Even the liberal wing of the Democratic Party does not reach the Left parties in Europe in terms of Socialism, for example. 

Therefore, I submit that the interests of corporations, including their stockholders and managements, are distended in American politics. Perhaps not by coincidence, the culture itself is amenable to business. For example, business values have gained a greater footing in how education is conceptualized at many universities in the American States. Since 1980, for example, both universities and students have reduced education to vocation in assessing a major's worth in terms of its potential for resulting in a good-paying job. The criteria for higher education are not so limited, or warped. In terms of teaching, corporate power-point presentations, which were ubiquious in business settings, became more common not only in "teaching by bullet-points," but also in what students would study for exams. 

The cultural value of business in American society, combined with the monied/political power of corporations (including banks) in the halls of government can explain why the American response to the incompetent bankers differed so much from the European response. This is a good case study particularly because it is ludicrous that a no-strings governmental response would follow the bankers' pathetic abuse of the subprime derivative bonds. The sector had even lobbied to keep financial derivatives from being regulated! That bonus were granted attests not only to warped judgment, but to the cultural and political situs of the financial sector in America. I suspect that many Europeans, even E.U. officials, were shaking their heads in disbelief. 

1. Stephen Castle, “Europe Tells Its Banks to Raise New Capital,” The New York Times, October 13, 2011.
2. Ibid.

A Teachable Moment for Americans: Solidarity as a Shared Value in European Identity

Speaking at the Schloss Bellevue palace in Berlin, President Joachim Gauck used a televised speech in February 2013 to make the case for more European integration. At the time, calling for “more Europe” in terms of shifting still more governmental sovereignty from the state governments to that of the Union was not a very popular task. Further limiting the power of his message is the fact that the German presidency is largely ceremonial , unlike the office of governor in an American state. Nevertheless, Gauck was determined to put the contemporary condition of the “European project” in favorable perspective. The most striking—and even effective—aspect of his speech is his repeated references to “European citizens.” Had he used “Germans” instead, he would have subtly undercut his own message. The prime minister of the E.U. state of Britain at the time would never have used the term, "European citizens." Nor would he have agreed with the E.U. value of solidarity and especially the ensuing social policy. The American media tended to follow suit, rather than covering the otherness of the other—the European Union as having a societal political value that has been very recessive in the United States. In this regard, I contend, the American media companies let down the American people, who would have stood to benefit from the wider perspective that would have enriched American political debates from the tyranny of the hegemonic value ensconced in American culture: that of the self-sustaining individual ideally in the state of nature, economically speaking. Reporting on the principle of solidarity would have given Americans the acccurate picture of the E.U. as being more than just a trading "bloc." This point in turn could have resulted in Americans coming to the realization that the E.U. is equivalent to the U.S.—both being empire-scale federal systems wherein governmental sovereignty is split.

Acknowledging the fiscal and structural imbalances that gave rise to the debt crisis in several E.U. states  and the problems entailed in “patching up” the problems by emergency measures, Gauck nonetheless pointed to non-economic elements of the European project that were also in crisis. “It is also a crisis of confidence in Europe as a political project. This is not just a struggle for our currency; we are struggling with an internal quandary too.”[1] This problem was predicated on the point that the strengthening of a European identity comes out of a recognition of shared values, rather than in differentiation from other cultures outside of Europe.

Too often, Europeans have artificially restricted their values to their particular state. Typically, Europeans would preface a self-referential remark with, “In my country,” only to describe a custom or value that is by no means limited to, distinctive in, one particular E.U. state. Even in saying “more Europe means a European Germany,” Gauck risked falling into this trap, at least in terms of keeping Europe as secondary. More in line with his thesis would have been the expression, more Europe means more European. More European in turn means more of a consciousness of values that European citizens (and residents) share, whether or not people in Africa, Asia, or America happen to esteem those values too. So the question facing European citizens is this: What values do you share?

From an American perspective, the salience of the value of solidarity held by Europeans would be so obvious, were it made transparent by the American media, because solidarity has been such a recessive value in the United States. Ironically, World War II was perhaps the last time solidarity in terms of “we’re all in it together” was explicitly pushed and acknowledged in America. Even then, the value was more in terms of sacrificing for a common purpose rather than seeing to it that the most vulnerable among us do not fall through the cracks in terms of sustenance. In Europe, solidarity has more of a social welfare quality.

Moreover, whereas Americans have tended to apply human rights only to the harm caused by tyrants abroad, Europeans have tended naturally to extend to the value to covering the basic sustenance rights of one’s own fellow citizens as well. The shift needed for a stronger European identity has included becoming aware of the duty to apply the value domestically to other Europeans rather than merely to people in one’s own state, or “country.” By implication, “European Germans” would feel solidarity with starving “European Greeks.” This element twas largely missing from the austerity response of E.U. finance ministers to the debt crisis from 2010 to 2012. So even in the E.U., the principle can succumb to greed and interstate clashes of economic interests. I submit, therefore, that “more Europe” involves not only a stronger value-fueled-identity, but also more fiscal redistribution at the federal, or E.U., level. Put another way, Europeans surely have more shared values than that of austerity. It is a pity that the American media failed to capture this point in reporting on Greek austerity, which more closely resonates with the values dominant in the U.S.

1. Ian Johnson, “German President Joachim Gauck Uses Major Speech to Call For “More Europe,” DW, February 22, 2013.

Presidential Authority and Bureaucracy: Regulatory Agencies

Circulating in Congress in the fall of 2012 was a bill that would have allowed "the White House to second-guess major rules and mandate that agencies carefully study the economic effects of new regulation. The change could, in effect, delay a number of rules for the financial industry. Those who support preserving the status quo where Wall Street regulates itself will find much to like in this legislation," said Amit Narang, a regulatory policy advocate at Public Citizen, a nonprofit government watchdog group.[1] President Obama had received $1 million from Goldman Sachs as a campaign contribution in 2008. Yet of how much value to Wall Street is a mere delay in regulation? Some, surely, but not enough to make this the decisive issue here. Rather, I submit that the president's control as chief executive of the regulatory agencies and the added bureaucracy are more salient in this case study. 

In terms of Wall Street’s interest, the proposed bill would have permitted the White House only to delay proposed regulations until further explanation is provided; the president would not be able to veto them. The issue from this case can thus be said to be whether the U.S. president as the chief executive in the U.S. Government must have control over even independent agencies such as the SEC. To be tasked with the enforcement of U.S. law and yet not to have the right even to be consulted by agencies as varied as the FCC, the FDIC, the SEC and the CFTC puts the chief executive in a bind—that of constitutional responsibility without the requisite authority. 
At a much less significant level, the added bureaucracy could have been a problem, given how much bureaucracy was in the agencies themselves: “at the minimum a 13-point test for rule-making. That includes finding ‘available alternatives to direct regulation,’ evaluating the ‘costs and the benefits,’ drafting ‘each rule to be simple and easy to understand’ and periodically reviewing existing rules to make agencies ‘more effective or less burdensome.’”[2]

1. Ben Protess, “Lawmakers Push to Increase WhiteHouse Oversight of Financial Regulators,” The New York Times, September 10, 2012. 
2. Ibid.

Second-Term Inaugural Addresses of American Presidents: Of Transformational or Static Leadership?

According to a piece in the National Review, “George Washington might have had the right idea. Second inaugural addresses should be short and to the point. Of course, speaking only 135 words as Washington did in 1793 might be a little severe.”[1] Consider how short, and (yet?) so momentous Lincoln's Gettysburg Address was. The challenge for second-term-presidents, whether Barack Obama or the sixteen two-term presidents before him, is “how to make a second inaugural address sound fresh, meaningful and forward-looking." Almost all of Obama’s predecessors failed at this. Only Abraham Lincoln and Franklin D. Roosevelt made history with their addresses. One stirred a nation riven by civil war; the other inspired a country roiled by a deep depression. All but forgotten are the 14 other addresses, their words having been unable to survive the test of time. Even those presidents famed for their past oratory fell short.”[2] This is a particularly interesting observation: surviving the test of time being the decisive criterion. Even a president whose silver tongue mesmerizes a people of his or her time may not deliver ideas that survive beyond being a cultural artifact of the president’s own time. What of an address that is quite meaningful in its immediate time yet does not pass the test of time so as to be recognized as a classic? 

The full essay is at "Inaugural Addresses: Of Leaders?"

1. George E. Condon, Jr., “The Second-Term Inaugural Jinx,” National Journal, January 20, 2013.

2. Ibid.

Increasing Income Inequality in the U.S.: Deregulation to Blame?

Most Americans have no idea how unequal wealth as well as income is in the United States. This is the thesis of Les Leopold, who wrote How to Make a Million Dollars an Hour. In an essay, he points out that the economic inequality increased through the twentieth century. His explanation hinges on financial deregulation. I submit that reducing the answer to deregulation does not work, for it does not go far enough.
In 1928, the top one percent of Americans earned more than 23% of all income. By the 1970’s the share had fallen to less than 9 percent. Leopold attributes this enabling of a middle class to the financial regulation erected as part of the New Deal in the context of the Great Depression. In 1970 the top 100 CEOs made $40 for every dollar earned by the average worker. By 2006, the CEOs were receiving $1,723 for every worker dollar. In the meantime was a period of deregulation beginning with Carter’s deregulation of the airline industry in the late 1970s and Reagan’s more widespread deregulation. Even Clinton got into the act, agreeing to shelve the Glass-Steagall Act, which since 1933 had kept commercial banking from the excesses of investment banking. The upshot of Leopold’s argument is that financial regulation strengthens the middle class and reduces inequality by tempering the wealth and income of those “on the top.” Deregulation has the reverse effect.

The increasing role of the financial sector in the second half of the 1900s means that finance itself could claim an increasing share of compensation.  

Leopold misses the increasing proportion of the financial sector in GDP from the end of World War II to 2002. The ending of the Glass-Steagall act in 1998 does not translate into more output on Wall Street relative to other sectors. Indeed, the trajectory of the increasing role of finance in the U.S. economy is independent of even the deregulatory period. Leopold’s explanation can be turned aside, moreover, by merely recognizing that the “young Turks” on Wall Street have generally been able to walk circles around the products of their regulators. Even though financial deregulation can open the floodgates to excessive risk-taking, such as in selling and trading sub-prime-mortgage-based derivatives and the related insurance swaps, I suspect that the rising compensation on Wall Street has had more to do with the increasing role of the financial sector in the American economy.
The larger question, which Leopold misses in his essay, is whether the “output” of Wall Street is as “real” as that of the manufacturing and retail sectors, for example. Is there any added value to brokering financial transactions, which in turn are means to investments in such things as plants and equipment used to “make real things”? Surely there is value to the function of intermediaries, but as that function takes on an increasing share of GDP, it is fair to ask whether the overall value of “production” is inferior.

Given the steady increase of the financial sector as a percent of GDP, one would expect a more steady divergence of these two lines. Reagan's deregulation fits the divergence pictured, though one would expect a further increase in divergence after the repeal of the Glass-Steagall Act in 1998.  Source: Les Leopold

As for the rising income and wealth of Wall Streeters, increasing risk, which is admittedly encouraged by deregulation, is likely only part of the story. If the financial products are premium goods as distinct from the goods sold at Walmart, for instance, then as the instruments are increasingly complex one would expect the compensation to increase as well.
Leopold is on firmest ground in his observation that Americans are largely oblivious to the extent of economic inequality in the United States. Few Americans have a sense of how much more economic inequality there is in the U.S. than in the E.U., where the ratio of CEO to average worker compensation is much lower. One question worth asking centers on what in American society, such as in what is valued in it, allows or even perpetuates such inequality, both in absolute and relative terms. The relative terms suggest that part of the explanation lies in cultural values having relative salience in American society. Possible candidates include property rights and the related notion of economic liberty, the value placed on wealth itself as a good thing, and the illusion of upward mobility that allows for sympathy for the rich from those “below.”
In short, beyond actual regulations, particular values esteemed in American society and the increasing role of the financial sector in the American GDP may provide us with a fuller explanation of why economic inequality increased so during the last quarter of the twentieth century and showed no signs of stopping during the first decade of the next century. Americans by in large were wholly unaware of the role of their values in facilitating the growing inequality, and even of the sheer extent of the inequality itself. In a culture where political equality has been so mythologized, the acceptance of so much economic inequality is perplexing. At the very least, the co-existence of the two seems like a highly unstable mixture from the standpoint of the viability of the American republics “for which we stand.” Yet absent a re-calibration of societal values, the mixture may be an enduring paradox of American society even if the democratic element succumbs.

Source:

Les Leopold, “Inequality Is Much Worse Than You Think,” The Huffington Post, February 7, 2013.

Faster, Higher, Bigger: A Rationale for Regulation

The death of a Georgian luge athlete on the opening day of the 2010 Winter Olympics occurred amid concerns about the speed of the record-setting track at the Whistler Sliding Center. “There were some questions asked by other athletes even before this tragic accident,” said Nikolas Rurua, Georgia’s deputy minister for culture and sports. He added that there had been several crashes in the same area of the track. This is like looking back in a financial crisis to point out that several had preceded that one. It does seem like financial crises may be part of a larger pattern that is based in human nature. I contend that just such an innate propensity to recklessness at the expense of the public good (and one's own!) serves as a rationale for regulation in any country.

The luge is often called the “fastest sport on ice.” Sliders use their legs and shoulders to steer small fiberglass sleds down an icy track, at times approaching or surpassing speeds of 90 m.p.h., according to the Vancouver 2010 Winter Olympics Website. One headline read, “This Winter Games could be the first time the sport sees a competitor hit 100 mph.” Sports Illustrated’s David Epstein, who covered the Olympics, claimed the Whistler course was at the time the fastest in the world, “and not by a little.” He explained that while most luge courses “flatten out” around the 11th turn, the Whistler track “just keeps on dropping, so there’s really kind of no break from gathering speed toward the end.” Epstein reported that some athletes had been complaining about the speed of the course and speculating that the 2010 Winter Games could be the first time a competitor hit 100 mph. “That’s 15 to 20 mph faster than any course in the rest of the world.” Is being faster the overriding point?
Whether we are talking about luge tracks, sky-scrapers, corporations, or passenger jets, the human psyche seems to have an innate proclivity to extend a threshold further—regardless even of how far the extension is from our natural limits. This can be reckless, for we are perhaps by nature inclined to ignore the recklessness involved in going faster or getting bigger.

Not only do we like faster, higher, and bigger; we, like Dick Fuld, the last CEO of Lehman Brothers, are not content until we have hit biggest, for he put the investment bank through so much risk in part so his bank would surpass Goldman Sachs. He wanted to be higher, in the rarified Wall Street club that has included JPMorgan Chase, Citigroup, Solomon Brothers, Bank of America, and Goldman Sachs. If the human susceptibility is as I describe here, a strong rationale for regulation of business exists in any country. We should not limit recklessness to that which occurred from the late 1990's through at least the Financial Crisis of 2008 as large American investment banks bundled sub-prime (i.e., risky) mortgages into bonds, a third of which Moodys rated AAA, and sold even the lower-rated bonds as if even they were safe (while confidentially admitted to themselves that they were "crap"). The human brain simply doesn't function well when in the grip of greed. Interestingly, a group of the large bankers meeting with U.S. Secretary of the Treasury, Henry Paulson, amid the fear in the financial crisis admitted that they had been wracked with greed--so why hadn't the federal government protected them from themselves with financial regulation? The answer is of course the bankers' own lobbying and political campaign contributions. You cannot both corrupt government into functioning as a plutocracy and yet expect that same government to be politically strong enough to act as a constraint on even severe cases of greed.

Airlander 10, the largest aircraft in the world, crashed on its second test-flight on August 24, 2016. 

In 1912, the Titanic ocean-liner was the largest thing built by human beings. In spite of the risk in being the largest, the ship was presumed to be unsinkable. Speaking about the ships a century later, Helen Kearns, a spokesperson for Siim Kallas, who was the E.U. Transportation Commissioner at the time, said, “There are legitimate questions as these vessels have substantially evolved in recent years.” I wonder if “evolved” is the right word. “The boats have gotten a lot bigger, as it’s economically advantageous to have more passengers,” Kearns added, but “the way these vessels have grown in size does mean finding the right balance to make sure regulations are stringent enough to ensure there are procedures like safe evacuations.” She was presuming here that cost-efficiency is a given, and, furthermore, that regulations can make up for any increased risk that comes with size.

Kearns was responding to reports that a cruise ship had hit a rock off Tuscany and partially sank several yards from an island off the coast. In the case of the partial-sinking of the Costa Concordia about twenty feet from an island just off the Tuscany coastline on Friday the 13th in January 2012, there was still confusion regarding how many of the 4,200 souls on board were still missing. That total figure of people who had been on board is about double that of the ill-fated Titanic, which went down in the North Atlantic on April 15, 1912—almost exactly a century earlier. In that case, the White Star Lines pressured the captain to light the fourth boiler to reach New York City early and "make the papers!" It did not occur to anyone that the ship's rudder was made for smaller ships, and thus it could not turn quickly enough to avoid the giant pop-cycle ahead in the cold water.
To put the two accidents in perspective, being twenty feet from an island would undoubtedly have been treated like a godsend to those people on the Titanic who perished in the icy waters of the north Atlantic. Had cruise ships become so large (and complex) that being twenty feet away was deemed to be too far? Or had cruise lines become too bureaucratic, mirroring the tendency in modern corporations generally, as per Max Weber's studies.
We forget that in James Cameron's film, Titanic, the Titanic’s designer says to the White Star Line executive who has just claimed that the Titanic—the biggest ship in the world—cannot sink,  “I assure you, good sir, it is made of iron. The Titanic will sink. It is a mathematical certainty.” A century later, it was taken for granted that Costa could not fall over in the water, yet it did—making it difficult if not impossible to deploy the emergency boats.
Regulation can be thought of as the structural walls separating sections of a ship. In oil tankers, those walls keep the oil from all going to the front or back and capsizing the ship. In the case of ships like the Titanic, the walls were designed to keep water leaking into one section from filling more sections--five were filled in the case of the Titanic because of the way the iceberg tapped along the side of the ship. Regulation does not stop at how ships are designed internally, but includes how big they are. Ideally, regulation realizes that speed, height, and size are themselves subject to regulation because the faster you go, the higher you build, and the bigger your boat or corporation, the faster you'll fall. An instinctual human urge, I submit, discounts or dismisses such risk (a.k.a. recklessness) out of a single-mindedness that narrows cognitive perspective into a fixation. Doubtless a product of eons of natural selection, this instinct is not bound to change anytime soon, so we can take regulation as a given rather than pretend that it is optional. Before the financial crisis, U.S. Federal Reserve Chair, Alan Greenspan, said he was ideologically opposed to regulating the financial sector; he thought a laissez-faire market could control its own volatility and risk. During the crisis, he briefly admitted that he had been wrong. He soon "repented" for his "heresy" and went back to the free-market line even though even competition requires game-rules, especially if the players keep getting bigger. 


Sources:
"Olympic Luger Dies on Track Where Speed Caused Concern," CNN.com, Febuary 13, 2011.
Steven Erlanger, “Oversight of Cruise Lines at Issue After Disaster,” The New York Times, January 17, 2012.

Having It Both Ways: American Culture or Merely Congress?

Under the terms of the debt-ceiling budget agreement enacted during the summer in 2011, members of a joint Congressional committee, evenly divided between the parties as well as between the two chambers, had until Nov. 23 of that year to recommend ways to reduce budget deficits by at least $1.2 trillion over 10 years. Both houses had to vote on the package by Dec. 23, 2011. If no legislation is enacted, the government would automatically cut almost $500 billion from military spending, with an equal amount from nonmilitary programs, between 2013 and 2021.

As negotiations in the “super committee” were becoming mired in November, some Democrats were becoming “increasingly concerned” that some Republicans on the committee, in declaring that they would not be able to accept new revenues toward deficit reduction, were calculating that they would be able to reverse the triggered cuts. Not just any cuts—only those from military spending were loathed by the Republicans. Even as the joint committee was still meeting, Republicans on the House and Senate Armed Services Committees were “readying legislation that would undo the automatic across-the-board cuts totaling nearly $500 billion for military programs, or exchange them for cuts in other areas.”

“Republicans should not count on taking the easy way out if they continue to resist a balanced deficit deal that includes revenue increases,” warned Senator Charles E. Schumer, Democrat of New York. Representative Chris Van Hollen, Democrat of Maryland and a member of the joint committee, said the attempt to undo the triggers “reflects a total lack of seriousness.” Adding that such efforts would not be successful, he said they were “the result of people trying to escape the fundamental choices before us, and one of those choices is whether or not we are willing to end special interest tax breaks to pay for defense.” Interestingly because he is a Republican, the House speaker, John A. Boehner of Ohio, said he wanted the joint committee to succeed, but that he would not tamper with the mechanism for automatic cuts. “I would feel bound by it,” he said. “It was part of the agreement. The sequester is ugly. Why? Because we don’t want anybody to go there.” That’s just the point; the default of automatic cuts was put into the agreement as an incentive for the joint committee to reach an agreement. Consisting of both parties equally, both sides would have to give. I contend that the Republicans were much less used to giving, so they were less tolerant to the hard choice that the default they had voted for foisted on them.

The porous path of least resistance is often easy to spot. Republicans being forced to choose between agreeing to tax increases and defense cuts found themselves between a rock and a hard place—that is, between anti-tax lobbyists such as Grover Norquist and defense contractors such as Lockheed Martin. “There is more fear this time,” Representative Mo Brooks, Republican of Alabama, said about the anxiety being expressed by military contractors in his district. Simply put, the Republicans were used to being able to satisfy both Norquist and Lockheed, so the lawmakers went after what they perceived as a false choice. The Speaker was being a statesman in refusing to support such efforts.

When all of a sudden getting things all one’s way is no longer possible, perception itself can be affected—such as in viewing the defense cuts as unfair or disproportionate even though they were equal to the non-defense cuts that the Democrats would have to swallow in the absence of an agreement in the joint committee. In other words, that the Democrats were not trying to change the mix of sequestration cuts even though half of those cuts were politically noxious. This suggests that the Republicans may have felt more entitled to getting things all their way than did the Democrats. Tolerance for being in a tight spot is easier if one is not used getting one’s way and thus does not necessary expect it. In other words, respect for even one’s own rules tends not to hold up to a mentality that privileges getting 100% of one’s position.

That more Americans are conservative than liberal may have been providing the Republicans in Congress with a “playing field” leaning in their favor. Hence, they could typically avoid being the side to blink. For example, during the summer of 2011, they successfully kept raising taxes off the table. When suddenly faced with pressure to give even a bit on this point, the ongoing mentality seeks to deconstruct the default giving rise to the pressure rather than to respect the hard choice and the structure undergirding it.

Beyond partisan politics, it is legitimate to ask whether the American cultures (and there are several, as in Europe) unduly support or even value the mentality wherein a person demand his own way. “My way or the highway” is a common expression in the U.S. I contend that it is particularly salient in American business. Perhaps Republicans coming from or representing that sector of society are so used the self-serving rigidity of “corporate policy” that they won’t even sit down to discuss a deal unless it fits with their “ground rules.”  I suspect that the instinct to deconstruct anything that pressures a choice that involves not getting everything one’s own way is engrained in American managerialism and corporate culture.

I suspect that people reading this essay who have visited the U.S. and are from other regions may be nodding in agreement, Yes, that’s how the rest of us see you guys, but you don’t see it. Americans are perhaps so used to the entitlement of my way or the highway and so used to evading rather than respecting even self-imposed hard choices the mentality within is hardly even recognized, much less expunged in any meaningful way. I see my fellow Americans so used to the rigidity and selfishness of employees (and managers) in retail sectors of American business that it can scarcely be imagined that customer (or, falsely, “guest”) relations in the states might be severely dysfunctional in terms of social psychology.

If I am correct here, then the way the chronic deficits are dealt with may be as problematic as the fiscal imbalances themselves, for both evince a jejune mentality that refuses to grow up and face adult decisions.

Source:

Jennifer Steinhauer and Robert Pear, “Lawmakers Aim to Stop Defense Cuts if Debt Panel Fails,” The New York Times, November 5, 2011. 

On the Allure of Popular Suffrage

In the European singing contest/show in which Susan Boyle competed, she lost the top spot to a teenage rap group. The method of selection made all the difference. Rather than having a three-judge panel of experts on singing determine the winner, the general public could “text” via cell phone or other device to vote. That one of the judges explicitly advocated for Boyle after her final performance (just before the voting) was no never mind to the general public that submitted a majority of the votes. To be sure, there were certainly non-music reasons to vote against her. Most notably, the suggestive comments she made on stage just before her first performance, including, “I’m 48, and that’s not my other half” (as she was swinging her hips as if she were sexy), were downright emetic, if not utterly bizarre. So it is possible that the voters put her personality defect above her excellent singing. It is also possible that the “texters” responsible for a majority of the votes simply preferred rap music. I do not like rap “songs” that include shouting and swearing; I do not even regard such “songs” as music. Otherwise, I could sing a song simply by yelling at you. From what I saw, the rap group in the competition was not swearing, but the “singing” did sound at times like shouting to me. Moreover, the group members seemed more oriented to dancing than singing. It is possible that the votes for that group went for any of the fads being represented rather than to singing per se.

A tension, or even an outright contradiction, can exist between meritocracy and direct democracy, or popular sovereignty. Plato and Aristotle both claim that there is a dark side to each system. Meritocracy can slide into aristocracy and democracy into mob rule: government by a selfish and uninformed mob swayed by the passions of the moment over even the people’s own best interests. What struck me about the results of the singing contest was that the rap singing wasn’t good singing whereas Susan Boyle sang very well, yet even so, the group won. It can be safely assumed that most of the voters probably were not experts on good singing. They were not trained to separate their own tastes from a critical perspective focusing on the singers’ voices. The judges presumably could have done this, but they were relegated to proffering their views before the voting—views that the voters could ignore without any imprecation. Indeed, the selection method itself—popular sovereignty—tacitly "disvalues" expertise. In one person, one vote, no one is assumed to be any better qualified to render a decision than anyone else. Differences in effort and talent among the electors are irrelevant unless particular voters care to take them into account.

Lest it be assumed that people in Western democracies necessarily privilege popular sovereignty or the will of the people refracted through elected representatives, it should be noted that power-elites are tacitly permitted to run our political, commercial and non-profit sectors. When Greece’s prime minister, George Papandreou, proposed a referendum in which the Greek people would decide whether to accept the latest debt-deal negotiated at a meeting of the European Council (consisting of heads of the E.U.’s state governments), leaders of France and Germany as well as E.U. appointed officials bore down on the prime minister, perhaps even undercutting his influence with members of his own party in the Greek legislature. Although defending the euro currency from a collapse assumed likely without the implementation of the latest debt deal, the E.U. leaders (including Merkel and Sarkozy) sent the message that direct democracy, ironically in Greece, could not be tolerated given the severity of the economic challenges involved. Experts at the E.U. level, such as the head of the European Central Bank, were included as the E.U. leaders met with Papandreou to pressure him to drop his proposal or change the question to being on the euro zone (rather than on whether to accept the latest E.U. debt deal). Disrespect for direct democracy, or popular sovereignty, was very much implied in the stance being taken at the impromptu E.U. meeting before the G-20 meeting. Yet strangely, the “gang” got away with it. Europeans did not stand up for the voice of the Greek people to be heard directly. Not even the Greek parliament resisted the E.U. “gang” by sufficiently backing the prime minister’s proposal. Instead, leaders of some of the E.U.’s big states and maybe even some E.U. appointed officials may even have pressured members of Papandreou’s own party to bring him down lest he not relent and do what was being deemed necessary to save the euro and the E.U. itself.  Indeed, even Papandreou, when he was caving on the referendum, betrayed his earlier appeal to popular sovereignty by stating that the referendum had value only as long as the opposition was opposing the debt-deal.

I contend that in the E.U., as well as in the U.S., all too often lip-service is given to popular sovereignty and representative democracy, when in fact people still look up to expertise. The Oscars, whose awards are decided by members of the film academy who have expertise in the various fields of filmmaking, is more esteemed than are the People’s Choice Awards. The Oscars are more likely to recognize Maryl Streep’s acting ability than is the People’s Choice.  I would argue that the results of the Oscars are more credible because expertise is not chucked for a flavor of the month. For instance, in the 2010 Oscars, Hurt Locker beat Avatar for Best Director and Best Picture. Hurt Locker was largely an Indie (i.e., on the fringes) film, whereas Avatar broke box office records and was no doubt much more popular with the general public. The Academy members were able to weight improved 3D effects, story and direction without allowing the technical dazzle to overshadow. Indeed, Avatar did receive the Oscar for its development and use of new 3-D technology, even as the members of the academy recognized that the most technologically-advanced film is not necessarily the best.

Of course, Oscar voting is not perfect. The 5000 plus membership may be sufficiently small that cronyism or, its opposite, grudges, may play a role. Avatar’s David Cameron, for example, was apparently not the best-liked man in Hollywood at the time, and his ex-wife just happened to be the director of Hurt Locker. I saw a television clip a few months before the 2010 Oscars showing Cameron being very rude to a fan who simply wanted an autograph at LAX, so I was rooting for his ex-wife and her movie even though Avatar was one of my favorite movies at the time. The lesson is perhaps that no selection process, or person for that matter, is perfect.

My point is that the case of Susan Boyle and the Oscars both point to there being drawbacks to popular suffrage. The E.U. suggests that efforts to bracket direct and even representative democracy are tolerated by the general populous even in democracies. Maybe we are not as much the democrats as we think we are. Maybe there is good reason to leave some things to experts. Even so, at least with respect to political judgment, there may be good reason not to cut off the will of the people. Hence, the U.S. has its Electoral College and the European Council appoints its president, while the U.S. House of Representatives and the E.U. Parliament have elected representatives of the people. In binding the Electoral College to popular vote, the U.S. has moved to the democratic pole, even while tolerating the influence of “big money” in politics. In looking the other way while E.U. leaders undercut state government vetoes and referendums, the E.U. have moved subtly away from the rule of law as well as democracy, even while the salience of state-level elected officials at the EU level (via the European Council) emphasizes “first order” representative democracy (over “second order” selected by the first order). Ideally, neither expertise nor the will of the people are eclipsed, with the rule of law protecting both. The E.U. and U.S. could both take a lesson.

Sources:

 Richard Corliss, “Oscar Wrap-Up: Why Avatar Lost,” Time, March 8, 2010. 

Marcus Walker and Alkman Granitsas, “Greece Blinks on Euro Threat,” The Wall Street Journal, November 4, 2011. 

CEO Pay: American and European Values

To what extent do inequalities in wealth accrue based on structural elements, such as tax deductions that only wealthy people can use, as distinct from factors pertaining to individuals, such as talent, sacrifice, and effort? The two clusters can build on each other, as people who have become rich primarily by exercising a talent and working hard use some of their accrued power to “reform” the system to their advantage at the expense of the poor and middle class. Such structural reforms in turn can make it easier for wealthy people to become even richer. In the context of a society in progress, structural and idiosyncratic factors doubtlessly interact—the trend being of an increasing chasm between the rich and poor. 

 

 

For example, as the graph above indicates, CEO compensation in the U.S. increased at a higher percentage rate than did corporate profits and factory worker pay every year from 1990 to 2005. In 2010, CEO compensation increased 27% while workers saw their compensation increase just 2.1 percent. Meanwhile, the poverty rate increased from 12% to 14%. CEOs in the E.U. were making comparably less. Foreign Policy in Focus reports that in 2006, for example, “the 20 highest-paid European managers made an average of $12.5 million, only one third as much as the 20 highest-earning U.S. executives. The Europeans earned less, despite leading larger firms.” I suspect that societal values have a lot to do with the difference, though changes in the make-up of American executive compensation should not be ignored.

Specifically, the ratio of pay between an American CEO and factory worker has been increasing in part to the growing proportion of executive compensation in the form of stock options. However, it is also true that Americans are relatively accepting of very high incomes (and inequality). A European is more likely to say, Enough is enough once a CEO has made far more than he or she could ever use. Politically, this is reflected in the fact that the Green Party and the Party of the Left are more powerful (and represented) in Europe than in America. Although the American two-party system acts to cut off the “extremes,” I suspect that the proportion of Americans who would agree with a European far-left party is less than in the E.U.

According to Foreign Policy in Focus, “In the United States, only 32 percent of the public [in 2007 supported] an outright pay cap on executive earnings. But average Americans [appeared] to be every bit as outraged over CEO pay excess as average Europeans. Indeed, 77 percent of Americans [said that] corporate executives "earn too much.” This disconnect, which I submit does not exist in Europe, reflects the American value on economic freedom and the association of freedom with putting up with someone else’s objectionable views or conduct.

In Europe, during and after the recession of 2008, “the idea of raising taxes on high-income earners” gained currency. New E.U. and state taxes were proposed, including a tax on financial transactions (E.U.) and a one-time levy on high-income individuals. In the state of Britain, the tax rate on the highest segment was increased from 40% to 50%, and in the state of Italy the government was considering in 2011 an additional 5% tax on annual incomes above 90,000 euros and a 10% on incomes over 150,000 euros. Considering the increasing fiscal demands being put on the E.U. Government and the pressing debt situations in many states, the recessionary risk of increasing tax on the rich may well be worthwhile. Indeed, Liliane Bettencourt and fifteen other billionaires made an open plea for a special tax on the European rich. Recognizing that they had benefitted financially from the European “structure,” they wanted to help preserve it.

As valuable as closing budget-gaps by revenue and spending reforms at the state and E.U. levels is, the matter of addressing a cycle of increasing economic inequality remains unanswered. If a given societal structure acts as a multiplier effect on a given inequality—exacerbating it, in effect—then something more than a new tax may be needed. In other words, any bias in the system that increases the inequality can be neutralized by the addition of a countervailing structure. For example, placing a strict limit, such as $1 million, on what an individual can inherit—with the rest going back to society via the state—would act to counter the “snowball effect” of “old wealth.” At least as of 2011, a person can live comfortably on $1 million; the surplus, being essentially surfeit with respect to what  person is apt to consume, would be better used as a corrective of the tendency of wealth to further accumulate among the rich. In other words, just as banks with assets over $1 trillion are too big to fail, a billionaire getting richer may not be worth the “cost” to society in terms of the increased inequality—to say nothing of the probable compromise to a republic form of government (which can often be too easily bought).

In short, income and even accumulated wealth can reasonably be considered as applying generally to one’s life (and those of one’s kids and grandchildren) and more particularly to being used (i.e., spent). If one’s wealth vastly exceeds what can be spent on things one can consume, this might be an indication that the concentration has gotten out of hand, at the expense of society itself. In other words, if you have a bank account with a balance of $15 billion, do you really need $5 billion more?  Will you ever use it? There is an opportunity cost—part of which being contributing back to society and reducing the economic inequality. Even so, this way of thinking reflects a value on solidarity that is much more European than American, at least in terms of being valued. In other words, the typical American would be more likely to object to any limitation on economic freedom, even if the playing field is tilted in the direction of the wealthy being able to take disproportionate advantage of that freedom, irrespective of whether the additional wealth is usable.  

Sources:

David Gauthier-Villars, “Wealthy French Push for Extra Tax,” Wall Street Journal, August 24, 2011. 

Matt Krantz and Barbara Hansen, “CEO Pay Sours While Workers’ Pay Stalls,” USA Today, April 4, 2011. 

Sarah Anderson, “Executive Pay Debate Raging in Europe and the United States,” Foreign Policy in Focus, August 28, 2007. 

Anti-trust Enforcement in the E.U. and U.S.: Business, Government and Society

In 2014, the E.U. depended on Gazprom, a state-controlled Russian gas company, for one-third of the natural gas used in Europe. Meanwhile, Russia depended on the company for export-earnings. Moreover, both the E.U. and Russia view Gazprom from not only commercial vantage-points, but geopolitical ones as well. Both dimensions were in the mix as the European Commission weighed bringing anti-trust charges against the company in April 2015. At the time, the E.U.’s executive branch was already formally pursuing Google on anti-trust grounds. Relative to anti-trust enforcement in the U.S., the E.U.’s own represents a formidable attempt to open up competitive markets. We can generalize, in fact, to posit a more balanced “check and balance” between business and government in Europe.

Regarding the salience of geopolitics, the E.U.’s action could force Gazprom to “drop conditions with European utilities that restrict those utilities’ ability to share the gas with other countries.”[1] We need only recall Russia’s use of Gazprom to cut off natural gas to Ukraine in the midwinter “gas wars” in 2006 and 2009 to grasp the geopolitical weight on the Russian side of the “commercial transactions.” Even though an anti-trust action would also involve going after Gazprom for the more exclusively commercial practices of “thwarting its European customers’ efforts to diversity sources of supply, and . . . imposing unfairly high charges by linking gas prices to those of oil, rather than basing prices on global natural gas market rates,” the Commission’s decision-making process included the geopolitical element of Russia’s military involvement in Ukraine at the time. That is to say, going after even egregious commercial practices could have dire political consequences. Government regulation of business is not merely about market efficiency and effectiveness. In fact, Gazprom demonstrates just how salient geopolitics can be in the management of a company. 

In fact, government regulation is itself nestled in a broader social contract, even if implicit, between business and society. The greater a people’s ingestion of business values, the less likely is a government to pursue powerful companies on anti-trust grounds. Those companies may even have disproportionate influence politically. From this standpoint, the E.U.’s executive branch may seem biased.

For her part, Margrethe Vestager, the E.U.’s competition commissioner at the time, answered such criticism just prior to her visit to the U.S. In her view, going after Google for skewing search results in favor of its own shopping service is simply a matter of enforcing the law. “As enforcers, we build our cases on evidence and on interpretation of facts because the European Union as well as the United States is built on the rule of law.”[2] Although the definition of a market is different in the U.S., the relative dearth of anti-trust enforcement in the U.S. may have been her real message here. Rather than defending Google, Americans might see to it that their elected representatives represent constituents by pushing for more competitive and less oligarchic markets. 

To be sure, it is one thing for one government to go after a foreign company, and quite another for another government to go after a domestically-based company. It is also true, however, that a domestic company could have too much political leverage over its home government, especially if the societal values align with those in the business world. In the U.S., the relative value put on economic liberty and business values such as efficiency may ironically make anti-trust action in favor of more competitive (i.e., efficient) markets less likely; a pro-business society may actually be less favorable to the long-term best interests of a commercial system (while being more favorable to the more narrow interests of powerful companies).

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[1] James Kanter, “Europe Is Expected to Charge Gazprom in Antitrust Case,” The New York Times, April 20, 2015.

[2] Jessica Guynn, “EU Enforcer Means Business,” USA Today, April 20, 2015.