Relaxing State Deficit Restrictions: Power-Grab by the European Commission

As the World Bank came out with its revised prediction of 1.1 percent economic growth for the E.U. (“eurozone”) in 2015, down from the earlier estimate of 1.8%,[1] the European Commission announced that it would allow states more leeway in meeting the federal requirement that state budget deficits be no more than 3 percent of their respective economic outputs. Lest this appear as a sign of political impotence, the “strings” demonstrate the opposite.

The full essay is at "Essays on the E.U. Political Economy."

On a Central Federal Policy in Education in the U.S.: Implications for American Federalism

In a speech in January 2015, U.S. Education Secretary Arne Duncan urged a continued central role for the federal government in education policy. He said the president was proposing to increase federal spending on elementary and secondary schools by $2.7 billion; Congress had appropriated $67 billion to the U.S. Department of Education—with $23.3 billion for the Elementary and Secondary Education Act—in the 2015 budget.[1]  Typically, debate on the federal government’s role had focused on the use of standardized tests in holding schools accountable. I submit that a self-governing people has a duty to consider the wider implications, such as the impact of a greater role on the federal system. Otherwise, unintended consequences may show up after it is too late to do anything about them.

Federalism is rarely on the media’s radar screen in the U.S., yet this dimension can be detected in statements made by public officials. For example, in his speech, Duncan said, “If we walk away from responsibility as a country—if we make our national education responsibilities somehow optional—we would turn back the clock on educational progress, 15 years or more.”[2] In positing a responsibility as a country to education, he is claiming that national education responsibilities exist. This implies that the U.S. Government has a legitimate role. This is a contestable claim.

Under the U.S. Constitution, the powers of the federal government are limited, or enumerated, whereas those of the states are both enumerated and residual. Education is not explicitly listed among the federal government’s enumerated powers, but that government can spend money for the general welfare. Education certainly contributes to that. In fact, so many things do that reading “the spending clause” so broadly eviscerates (i.e., wipes out) the enumerating itself because the federal government could get around the list simply by spending money on an additional policy domain. Put logically, a broad reading of the spending clause contradicts the very notion of enumerating powers, so both in original intent and practically, the spending clause must surely apply to the general welfare via any of the enumerated powers. Spending on education is the task of the several states.

Sen. Lamar Alexander (R-TN), chairman of the Education Committee, brought federalism to the surface in his remarks at the time, but without presenting a coherent alternative. Referring to the “No Child Left Behind” law passed while George W. Bush was president, Alexander said, “My goal is to keep the best portions of the original law and restore to states and communities the responsibility for deciding whether teachers and schools are succeeding or failing.”[3] In other words, he wanted to retain the federal government’s role—making it better—even as he wanted to restore to the states and localities their responsibilities. Such cooperative or shared-competency federalism, while common in the E.U., runs up against the enumerated feature of federal power in the American system. Put logically, returning to the states their respective responsibilities would mean taking the federal government out of the education business. Practically speaking, retaining a role for the federal government risks further encroachment on the states.

Generally speaking, the more the enumerated feature of the U.S. Constitution is blurred or distended, the less the states will be able to act as a check against federal encroachment. The check feature of federalism can protect not only the states as viable republics in their own right, but also citizens from abuses of power on the federal level. Likewise, keeping the states from encroaching on the federal enumerated powers can enable the U.S. Government (e.g., the Department of Justice) to protect citizens from abuses of power from state officials. Civil rights during the 1960s is a case in point.

Therefore, the implications of education policy may be more important than the educational issues that pertain more directly to education. Keeping the implications on the system of public governance on the public’s radar screen is thus part of the responsibility of a self-governing people and its elected representatives.

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[1] Caroline Porter and Siobhan Hughes, “Education Secretary Presses Central Federal Policy Role,” The Wall Street Journal, January 13, 2015.

[2] Ibid.

[3] Ibid.

Fiscal Responsibility in Alaska: On the Challenge of Falling Oil-Tax Revenue

With West Texas Intermediate (WTI), the U.S. benchmark oil price, at $46.07 on January 12, 2015, lawmakers in Alaska were getting nervous because the government was relying on oil-industry taxes to cover 89% of the government’s operating revenue.[1] At the time, the government had a $3.5 billion deficit in the $6.1 billion budget.  How the governor, Bill Walker, planned to deal with the shortfall can give us a glimpse of what fiscal responsibility might look like in government.

In spite of the huge deficit relative to the total budget, Walker was asking government agencies to reduce their respective budgets by only 5% to 8% for the coming fiscal year. To cover the rest, the governor planned to “dip heavily” into Alaska’s $14 billion in reserves.[2] Merely having reserves is itself fiscally responsible. In California, Gov. Jerry Brown had contributions to a “rainy day” fund as part of his budget even as the University of California clamored for $100 million more in funding—a request the governor rejected as exorbitant.

The fiscal responsibility goes even further in Alaska. The government was diverting only $300 million of the $6.76 billion in oil-tax revenues it expected to collect over the two-year period ending June 30, 2015 toward operating costs—the rest of the revenue going to trust funds, capital projects, and local governments.[3] The continued contributions to the trust funds strike me as particularly responsible, given the political temptation to skimp on them in order to obviate budget cuts of even 5 percent.

In short, Alaskan fiscal responsibility can be characterized as balanced, with budget cuts going along with tapping reserves and continued contributions to trust funds. A return to higher oil prices would signal attention to making up for the reserves’ depletions and adding still more to increase the reserves. In the long term, the reserves could reach a level at which the operating budget is funded entirely by the reserves’ investment revenue. With enough self-discipline to forge ahead with a sustained fiscal responsible policy, governing officials can make taxes obsolete.

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[1] Ana Campoy, Mark Peters, and Erica Phillips, “Energy-Heavy States Get a Crude Awakening,” The Wall Street Journal, January 13, 2015.

[2] Ibid.

[3] Ibid.

Stockholder Activism at DuPont: A Conflict of Interest for Management

In American corporate governance law, the business judgment rule gives management expertise the benefit of the doubt over stockholder proposals. Compared with executive skill, they look rather populist and thus potentially irrational in nature. Nevertheless, with the rule chaffing up against the property-rights foundation of corporate capitalism, the managerial prerogative can be said to be dubious. Indeed, a strict private-property basis justifies displacing the default profit-maximization mission for a given corporation. Alternatively, stockholders may want to use their concentrated, collective wealth for other purposes, such as to alleviate hunger. Once enough profit has been made for the business to be sustained for another year or two, any additional surplus would be spent on food pantries, for example, rather than going out as dividends or being retained by the corporation. Because managerial skill is premised on the profit-maximization goal and its associated strategies, corporate executives intrinsically resist alternatives proposed by stockholders. The managers face a conflict of interest in providing their recommendation for stockholders. Even when the proposal assumes profit-maximization but differs from a current strategy (i.e., adopted by management), a conflict of interest exists should the management seek to provide a recommendation for the stockholders.


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

Is Dark Trading Ethical?

Dark trading” has a subterranean connotation, as if it were done by slithering snakes in the river Styx. In actuality, the term refers to trading in stocks that is done on computers that are less public than the exchanges. That is to say, the bid-and-ask quotations on a given computer network are known only to participants on it, and not to the traders on the public exchanges. Ethically, the public-private dichotomy is relevant. I submit that it reflects a wider trend in American society.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

The Fed Lets Banks Continue Risky Trades: Too Big To Fail Ensconced

In December 2014, the U.S. Federal Reserve Bank granted banks an extra year past the July 2015 deadline to comply with a major provision of the Volcker Rule requiring the banks to unwind investments in private equity firms, hedge funds, and specialty securities projects.[1] The Fed also announced that it would give the banks yet another year to hold onto their positions. The Fed’s rationale points to an underlying conflict of interest facing the Fed, a banking regulator arguably  too vulnerable to the banks’ lobbying muscle.

Banks pled that dumping holdings quickly would mean having to accept discount prices. “There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” Kevin Petrasic, a partner in a global banking practice, said.[2] At the time, Goldman Sachs had $7 billion invested in private equity that the bank might have had to sell for a loss had the extension not been granted.[3] For Morgan Stanley, $2.5 billion is said to have been vulnerable to being sold at a loss. These figures presumably come from the banks themselves, and reliance on the regulated for information is part of what goes into regulatory capture of an agency by the firms being regulated.

Dennis Kelleher, of Better Markets, claimed the “Street has had years of notice to unwind these investments, and it appears that their self-serving complaints have been accepted fairly uncritically without a real analysis for the basis of the claim.”[4] That is to say, relying on both the information provided by the regulated and their interpretation puts the Fed’s regulatory function at risk—and hence the financial system itself at risk. Interestingly, Kelleher sounds more like a regulator than the Fed in observing, “If you can’t get out of a trade in seven years, it’s probably not the kind of trade you should be doing.”[5] The “regulators” at the Fed seem to have rolled over, taking the “self-serving complaints” at face value—ignoring the obvious problem in doing so. At the very least, regulators at the Fed should have assumed that the information would naturally be skewed; from such a perspective, a critical examination would have been an obvious necessary step prior to any decision to give the banks another year.

In short, the Fed comes off looking rather naïve, though underneath the reality could actually involve the banks having too much control over top Fed officials—the banks having a significant role in the appointing process. As a result, eight years after the financial crisis of 2008, risky proprietary trading was alive and well on a street populated by banks even more so too big to fail. Beyond the question of cozy relationships between the Fed and the banks that it regulates, the lack of any public outcry points to a problematic learning-curve societally in the U.S., with disturbing implications on the ability of a people to self-govern. Yet the alternative would seem to be more cronyism divested of any risk of being made transparent.

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1. Zach Carter, “Fed Delays Volcker Rule, Giving Wall Street Another Holiday Gift,” The Huffington Post, December 18, 2014.

2. Jesse Hamilton, Ian Katz, and Cheyenne Hopkins, “Goldman Needs Volcker Delay to Avoid Private-Equity Losses,” Bloomberg, December 5, 2014.

3. Ibid.

4. Carter, “Fed Delays Volcker Rule.”

5. Ibid.

Police Power Exceeding the Capacity of the Human Brain: Some Countervailing Measures

“Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton’s timeless statement is applicable to legal and illegal power alike, for each is subject to abuse. The victims are those whose wills are bent through either harm or the threat of injury. Put another way, the human brain may lack sufficient cognitive, emotional, and perceptual machinery to check the instinctual plus socialized power-aggrandizing urge. This vulnerability is particularly apparent in viewing video showing a police employee violently over-react in a situation that quite obviously should not have involved violence. Although anger doubtlessly plays a crucial role in the trigger that unleashes the police violence, the more subtle suspension of cognition and warping of perception is also in the mix.

In December 2014, a 23 year-old policeman in Victoria, Texas, pulled over Pete Vasquez, aged 76, because Vasquez’s car did not show an inspection sticker. As Vasquez was trying to explain that his car was exempt—a point that the police chief later confirmed—the policeman grabbed the old man, pushed him to the ground, and used a tazer gun twice. “What the hell are you doing? This gentleman is 76 years old,” a sales manager watching the incident cried.[1] Clearly very angry at Vasquez, the policeman yelled at the onlooker, who seems to have suddenly feared for his own safety.

That the reasonable reaction from a third-party triggered more anger instead of any second-guessing, at least visibly, suggests that the policeman was not in control of his faculties. Crucially, he was not in sufficient control of himself to handle the power that he had been given by law. Psychologically, he evinced a weakness in handling the power in the context of not understanding why the car was exempt from having to show an inspection sticker. An arrogance in not wanting to admit even to himself that he did not understand what he himself had flagged, and a cognitive lapse in assuming that he could not be wrong likely contributed to his need to be in charge and thus his anger at Valsquez for trying to correct him. The anger itself was too much for the policeman, for it eclipsed reason and even perception whose impairment rendered any internal mechanism of self-regulation insufficiently operative.  In short, he used power beyond the capacity of his brain, emotionally, cognitively, and perceptually.

It may be that the authority given to police employees generally is not in keeping with the capacity of the human brain to process and handle power exercisable over other people. Compounding the problem, the police chief talked only about taking “a real hard look at some of the actions that occur within the department,” rather than arresting the aggressor even though the latter action would befit a person who had lost control of his faculties and acted out violently without reason. That the policeman was shifted to an administrative duty is itself an indication that official accountability would come up short within the police department. The implication is that the general public (and city officials) should not rely on departments’ internal-affairs departments to impartially investigate such cases and render sufficient punishment to “their own.” Put another way, the conflict of interest in the very nature of an internal-affairs department is inherently unethical because it can be expected to result in compromised investigations and decisions. To hold a police employee accountable, we must look beyond police departments.   

Although the district attorney said the policeman could face charges including official oppression, injury to elderly, aggravated assault and assault, the grand jury stage may be rigged to favor police employees. That is to say, the system itself may enable the propensity of the human brain to over-react with violence when in a position of power over another person without a sufficient internal check. Given the risk of aggrandized uses of power by police employees, candidates for local offices not only in Texas, but in each of the forty-nine other member-states in the U.S., might consider proposing institutionally and personally independent agencies to hold lapsing police employees accountable. Additionally, legislation changing the instructions to grand juries making it less difficult to indict an employee of a police department could be pursued. Especially if scientists find that the human brain is in fact ill-equipped to handle the power typically given to police employees, then either some of that power should be taken away, which may not be practical, or countervailing changes to grand-jury instructions enacted.

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[1] Ed Mazza, “Texas Cop Nathanial Robinson Uses Stun Gun on Elderly Man Over Inspection Sticker,” The Huffington Post, December 15, 2014.

Advise and Consent: Does Politics Have a Limit?

A film that centers on the U.S. Senate’s role in confirming executive nominations made by the president, Advise and Consent (1962) is arguably about whether moral limits pertain to power.  Put another way, should we expect no-hold barred efforts to manipulate others in the political arena? Personal lives and personal pasts being fair game?  Moreover, is the aim power for its own sake, or the manipulation of others for the sake of a public policy and ultimately the good of the country? 

The full essay is at “Advise and Consent.” 

Wall Street Writing Its Own Laws on Risky Derivative Trading

In just four years, Wall Street got away with weakening a part of the Dodd-Frank financial reform law, which became law in 2010 to protect the financial system from the excesses that led to the financial crisis in 2008. Wall Street bankers and their lobbyists accomplished their feat by luring members of Congress into a formidable conflict of interest, which I submit could have been obviated.

The full essay is in Essays on the Financial Crisis, available at Amazon.

Private Interests Over the Public Good: Energy Companies Capture an Attorney General

In Wealth of Nations, Adam Smith argues that the aggregation of the preferences of consumers and producers for a given good is in the public interest for the product or service. Often overlooked is Smith’s Theory of Moral Sentiments, in which the famous economist wraps a moral sentiment around the individual preferences, hence hopefully constraining them, albeit voluntarily. Herein lies the rub, for it is shaky to assume that a preference that seeks to maximize itself will voluntarily restrain itself when it rubs up against an ethical limit that is felt. Such a moral constraint is like a semi-permeable membrane in that the sentiment naturally triggered when a person comes on an unethical situation or person can be ignored or acted on.

To be sure, a sentiment, such as that which a person naturally feels when he or she learns of an innocent person being killed, can be written into law and applied as a new regulation; the individual preferences otherwise triggering the sentiment of disapprobation would thus be constrained involuntarily from doing so. It follows that if a private actor, such as a company’s management, with a preference (which is inherently self-maximizing) can emasculate a restraining regulation without any concern for people’s moral sentiments, then we are back to trusting in voluntary restraint—only now that actor has political power rather than merely being one of many participants in a competitive market. I contend that trusting in the regulated to regulate its regulator is unethical not least because of the underlying conflict of interest.

To illustrate the problem, I discuss the influence of certain energy companies on certain attorneys general in some of the American States. In late 2014, The New York Times reported that Oklahoma Attorney General Scott Pruitt wrote a critical letter to the U.S. Environmental Protection Agency. In particular, he claims that the regulators were grossly overestimating the amount of air pollution caused by companies drilling new natural gas wells in Oklahoma.[1] The public good is salient here because methane, a gas having ten-times the greenhouse effect of carbon, had been shown by independent tests to be leaking from natural gas wells and urban pipe systems.[2]

So the public interest in keeping global warming to within limits palatable to human survival may have been put at risk were Pruitt wrong in his charge. That the letter had actually been written by lawyers for Devon Energy, one of Oklahoma’s biggest oil and gas companies—the attorney general’s staff copied it onto government stationery with only a few word changes and Pruitt signed it as if it was his own—raises serious doubts as to Pruitt’s claim of overstatement.  That is to say, a government  may have been colluding with a private vested interest in a regulation at the expense of the public interest.

An email exchange from October 2011 between attorneys general and large energy producers “offers a hint of the unprecedented, secretive alliance . . . to push back against the Obama regulatory agenda,” according to The New York Times.[3] The newspaper had “reported previously how individual attorneys general have shut down investigations, changed policies or agreed to more corporate-friendly settlement terms after intervention by lobbyists and lawyers, many of whom are also campaign benefactors.”[4] Shutting down investigations is particularly suspect, as it cannot be said that concluding them would run counter to the public good. Moreover, for the regulated to also be campaign benefactors places both the regulated and the regulators and attorneys general in conflicts of interest.

For the energy companies, their roles as the regulated and benefactors conflict because the temptation to obligate regulators and attorneys general to remove a certain regulation goes against being regulated, which implies that government regulation is a viable rather than voluntary constraint. I submit that it is unethical for a society (via its government) merely to allow the regulated to have the other role because of the latent lure of the temptation to obligate government officials to remove unpleasant regulations that are nonetheless in the public interest.

For government officials, taking the campaign contributions from companies whose regulations the officials can relax or expunge creates a conflict of interest between acting on a private interest’s behalf at the expense of the public interest and protecting the public good through non-voluntary constraints on private interests. According to The New York Times, attorney generals “in at least a dozen are working with energy companies and other corporate interests, which in turn are providing them with record amounts of money for their political campaigns, including at least $16 million” in 2014.[5] Also in that year, the U.S. president, Barak Obama, admitted publicly that the federal elected-representatives must take the huge contributions in order to compete in elections “and that obligates us.”[6] We can fill out the president’s point by adding that the large contributions, such as the $1 million from Goldman Sachs to Obama ’08, obligates elected representatives to put particular private interests over the public interest even though being a law-maker or enforcer-of-law carries with it the duty to protect the public interest from otherwise maximizing private interests.

If enough parts of a ship are allowed to go their own way at the expense of the ship itself, steering a steady course and maintaining speed are impeded. Similarly, if powerful private interests in a republic are allowed to obviate measures that restrict them so the republic may remain viable over the long term, then the whole will weaken as if leaking energy. Put another way, prick enough tiny holes in a flat balloon and inflating it will not last very long. Even though a particular pin-prick does not deflate the whole over time, a system enabling such hole-making enables enough tiny holes that a slow deflation becomes a mathematical certainty.

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[1] Eric Lipton, “Energy and Regulators on One Team,” The New York Times, December 7, 2014.

[2] The E.P.A. had taken the industry’s own “estimate” of 1 percent as the leakage rate, whereas independent tests showed leak rates up to 18 percent. Cities tested include Washington, D.C., Denver, and Los Angeles.

[3] Lipton, “Energy and Regulators.”

[4] Ibid.

[5] Ibid.

[6] Barak Obama at a news conference in late 2014.