Wasteful Agency-Spending: Employee Bonuses as a Solution

Use it or lose it. I am referring to “the habit of [U.S. Government] agencies spending all surplus funding at the end of the fiscal year in order to avoid budget reductions the following year.”[1] By spending the entire amount allotted for the budgetary year, a federal agency can avoid a lower base-line for the following year’s allotment from Congress. The incentive in this system is to spend every dollar in the budget, whether efficiently or profligately. The challenge is how to replace that incentive with another—one that results in efficient public budgeting. Unfortunately, relying on an incentive presupposes discretion, and one person can never be sure what lies behind another person’s use of it.

In May 2015, a bipartisan group of U.S. Senators proposed to “give agency inspectors general the ability to grant $10,000 bonuses to federal employees who identify surplus or unneeded funding at their agencies.”[2] According to one the senators, “the bill helps combat the perverse incentive to spend leftover money by offering employees a positive incentive to help IGs save money.”[3] That perverse incentive is what made the U.S.S.R. so inefficient economically, as state-owned (i.e., socialist) and controlled (i.e., regulated) enterprises (as well as government agencies) operated likewise. In that political economic system, quotas both in budgets and widgets were the currency by which the system operated. Such bloat, inefficiency and mismanagement that weakened the Soviet Union from within also hampers good government at the federal level in the United States.

The proposed law would amend the 1974 Congressional Budget and Impoundment Control Act, which gave Congress more authority in the budget process. “The Act was inspired by Richard Nixon’s refusal to disburse nearly $12 billion of congressionally-appropriated funds in 1973-74 through the executive power of impoundment.”[4] Nixon cited the impact of the federal budget deficit on inflation as the reason for refusing to spend appropriated funds. The rationale is problematic prime facie because the U.S. president is tasked with enforcing the law rather than selectively enforcing it. Not contradicting the law would have meant going back to Congress with a recommendation that a law be passed withdrawing the surplus funds.

Even though the proposed law in 2015 would place the discretion with civil-service employees rather than politicians, a Democratic U.S. Senate aide said “that the amendment’s language may [allow] federal government administrators to defund key agency functions for ideological or political reasons.”[5] Civil servants are human too, and, besides, they can be subject to pressure from politicians higher up the food chain. In other words, we are back to the same problem—that which is inherent to discretion. Sen. Mike Enzi can have all the faith in the world in “the people holding the shovel who really know how to solve problems”—that “the folks responsible for administering individual programs know where the money is, what is needed and what is being wasted”—but all this does not necessarily mean that the civil servants would flag a budget item as “surplus” because it really would be wasteful to spend the money. Even a bureaucrat holding a shovel could provide an efficiency rationale for cutting one budget-item so as to get out of having to do a boring  ideologically-objectionable task or program. The bonus would be, well, a bonus. That is to say, a perverse incentive.

---

[1] Andy Medici, “New Bill: Point Out Surplus Funds, Get a $10,000 Bonus,” Federal Times, May 21, 2015.

[2] Ibid.

[3] Ibid.

[4] Regional Oral History Office, “1974 Congressional Budget and Impoundment Control Act,” The Bancroft Library, University of California-Berkeley, March 7, 2011 (accessed May 23, 2015).

[5] Daniel Marans, “Rand Paul Amendment Would Increase Executive Branch Power,” The Huffington Post, May 22, 2015.

The U.S. Senate Approves Fast-Track for Pacific Trade Deal: Overstating the General Will

The way the world works is not in itself reason enough to dismiss the possibility of an ideal being more fully realized, and to refuse to take practical steps to its realization. Horse-trading is a staple in politics. The expression “making sausage” is typically used to refer to political horse-trading because people generally do not know—nor do they want to know—how sausage gets made; and it is probably best that way, at least according to the politicians. I propose that we “get under the hood” anyway, because only then can we ask ourselves whether political horse-trading is overused; a better way may be possible and even practical under some conditions.

Political horse-trading occurs when one elected representative (Mr. X) agrees to go along with another representative’s (Mr. Y) piece of legislation, which isn’t very important to X’s constituents but is to Y’s, in exchange for Y’s vote on another bill, which isn’t important to Y’s constituents but is to X’s folks back home. With enough support and horse-trading both bills stand a good chance of becoming law, whereas without the practice perhaps neither bill would pass. Although the legislative output of the legislative chamber is increased, that the support for each bill is overstated—the votes in favor being more than the number of representatives who support the legislation itself. A minority of representatives in the chamber may be for drilling for oil in natural parks, for example, but a bill whose express purpose is to permit such activity by oil companies could pass anyway due to horse-trading. The general will as per the representatives as a whole would not be in line with the legislation passed, meaning theoretically at least that the will of the people would not be in favor of drilling; so is more legislative output necessarily a good thing in a representative democracy? Rousseau would point to the general will as having been thwarted by ambitious politicians looking out narrowly for the particular will of their respective constituencies or even just themselves. Out of an original social contract comes “a moral and collective body made up of as many members as the assembly has voices, and which receives by this same act its unity, its common self, its life and its will.”[1] This will is the general will. If particular interests make out well at the expense of the good of the whole, then the general will is thwarted or compromised. Hence, horse-trading may not be justified by its facilitative impact in terms of legislative output.

In May 2015, the U.S. Senate rebuffed the U.S. President’s request to have the proposed Pacific trade treaty (PTT) voted “up or down” without amendments (i.e., “fast-track” authority). The U.S. House of Representatives had already approved the fast-track authority. In spite of Democratic senators claiming that workers would not be adequately protected as the trade deal had been negotiated, enough of those senators turned around and voted a week or so later to end the debate. Sixty-two senators voted for cloture, enabling the fast-track authority to go through. The U.S. president and the Senate’s majority leader had enough power to do the necessary horse-trading.

The vote nearly failed—being a few votes shy of the 60 needed to end debate. “It only succeeded after about a dozen senators engaged in a tense discussion in the middle of the Senate floor, well after the time for the vote had expired.”[2] The bending of the Senate’s rules on the duration of the vote is itself suspect; it could be the smoke over cloaked horse-trading. According to several U.S. senators, "the key was Senate Majority Leader Mitch McConnell (R-Ky.) promising Sen. Maria Cantwell (D-Wash.) to have a vote on reauthorizing the Export-Import Bank, which backs loans in places where there might not otherwise be sufficient funding to purchase products from the United States. A key beneficiary is Boeing, in Cantwell's state."[3] Does this constitute horse-trading, or would the reauthorization of the Export-Import Bank make the Pacific trade deal better for U.S. workers?

As an instance of corporate welfare, the Bank would primarily benefit American businesses that export to the impoverished countries getting the loans. The companies’ shareholders and to some degree the workers would also benefit from the additional business. Even so, reauthorizing the Bank would not mean that workers in countries that are party to the TPP would be protected or that the free-trade deal would not result in American workers being laid off. The A.F.L.-C.I.O. contended at the time that 700,000 jobs in the U.S. had been lost or displaced due to NAFTA.[4] Presumably the figure would not have been higher without the corporate welfare that the Export-Import Bank was dolling out. We can conclude, therefore, that Cantwell’s horse-trade with McConnell did nothing to remove Cantwell’s concerns about worker-protections under the TPP—assuming she really had concerns!

Moreover, we can conclude that the support for fast-tracking the TPP deal was less than 62 senators who voted in favor of ending debate, since the horse-trading made the difference in the cloture vote. In effect, McConnell broadened the scope of the vote by making a promise regarding another issue. In doing so, he blurred the general will and thus compromised the democratic principle wherein the people’s representatives vote on the merits of the same thing—rather than some of the representatives essentially voting on one thing and other representatives voting on something else. The legislative output is greater, but so is the risk that bad legislation will go into effect.

What if legislative votes were like straw polls wherein each representative would be asked what he or she thinks of a proposal, such as drilling in national parks. The matter requires judgment as well as information. Looking into an issue and making a judgment on it is what elected lawmakers are presumably supposed to do. Political horse-trading impedes or compromises the judgment and perhaps even the information-gathering. To be sure, judgment is involved in deciding which bills to trade; however, this sort of judgment is not the same as judgment on a particular issue, with a vote ensuring from it. Theoretically at least, being satisfied as a country with legislative output reflecting legislative judgments on the respective bills, rather than informally grouping them so they all get through, has the benefit of better public policy unless the lawmakers’ judgment capacity is bad (i.e., voters making bad choices in who they vote for). Put another way, if enough senators (technically, states) judged that the PTT negotiated by the Obama administration would be a bad treaty, then the fast-track status should not have been approved; the check-and-balance in the Senate’s power to ratify treaties would be of value.

Practically speaking, Obama and McConnell could not be expected to hold back on using their power to reach 60 votes. To assume otherwise would be tantamount to expecting a stream to run uphill. Horse-trading could be made illegal, but enforcement would be a bitch given the nature of the beast. Making use of referendums at the policy level, such as whether the U.S. Government funds should cover abortion, or whether pot should be legalized, would preempt legislative horse-trading, though voters could of course use their vote in a referendum for another purpose rather than to signify their judgment on the issue at hand. Even so, considering the prevalence of horse-trading in legislative chambers, the general will stands a better shot at being reflected if referenda are included on ballots. Voting only for a candidate—theoretically in part because of the candidate’s good judgment—implies that he or she would use it on issues rather than merely to horse-trade well. The prevalence of legislative horse-trading means that the electorate should not rely so much on voting to fill offices; some direct democracy should also be in the mix. Perhaps then legislative rules (with teeth) clamping down on horse-trading would be enough to pick up the slack. Even more idealistically, perhaps voters might vote for candidates who find contributing to the general will rather than obfuscating it to be fulfilling and of value. Of course, if the electorate deems (i.e., the general will) that good legislation is the aggregation of bills satisfying various parts (i.e., constituencies) of the whole, then the voters will favor candidates who value horse-trading. To the extent that such candidates get elected (and reelected) even though the majority of the voters believe that their representative should use his or her judgment on each issue rather than horse-trade, then at least part of the problem lies with representative democracy itself.

---

1. Jean-Jacque Rousseau, The Social Contract, in The Social Contract and Other Political Writings, Victor Gourevitch, ed. and trans. (Cambridge: Cambridge University Press, 2004), p. 50.

2. Michael McAuliff, “Senate Advances Fast-Track for Obama Trade Deals,” The Huffington Post, May 21, 2015.

3. Ibid.

4. Kevin Granville, “The Trans-Pacific Partnership Trade Deal: What It Would Mean,” The New York Times, May 11, 2015.

Banks Guilty of Colluding to Set Euro-Dollar Exchange-Rate Basis: Toward a Competitive Market

In May 2015, Citicorp, JPMorgan Chase, Barclays, and the Royal Bank of Scotland both acknowledged colluding to set the “fix” rate in foreign exchange markets, and agreed both to change their internal cultures and pay criminal fines of over $2.5 billion.[1] The U.S. Attorney General, Loretta Lynch, stated that her department would “vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American customers.”[2] I submit that this does not go far enough, given the size and power of the banks and the condition of the sector.

Private gain at the expense of the public good is an old story. Corporations give to Congressional campaigns at least in part in hopes of being able to bend federal lawmakers to insert and approve a loophole that would keep the good of the whole from constraining quite so much the particular private interests. To be viable in the long term, a republic—even a republic of republics—must privilege the public good over potentially overweening private interests; otherwise, the implicit message can only be that anything goes—provided a company’s head knows where to send the dollars.

In using “a private electronic chatroom to manipulate the spot market’s exchange rate between euros and dollars using coded language to conceal their collusion,” the banks, or “The Cartel” as they referred to their group, “acted as partners—rather than competitors—in an effort to push the exchange rate in directions favorable to their banks but detrimental to many others.”[3] In other words, the banks acted as price-makers rather than price-takers; the market could not, therefore, be considered competitive. I submit that Lynch did not go far enough in settling for an acknowledgement of wrong-doing, promised change of internal cultures, and a fine; they do necessarily result in a competitive marketplace. Lynch said that the “penalty all these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct” as well as “the pervasive harm done.”[4] Perhaps this so in terms of the size of the fine, but in giving the public confidence that the market would from then on be competitive. If firms in an industry are large enough that four of them colluding can set a price or rate, then the industry is oligarchic. To move it to a competitive basis, governmental action breaking up the largest firms (including in terms of ownership) is necessary. The justification lies in the value of the public good when economic liberty and property rights threaten to compromise the good of the whole.

To be sure, the U.S. Government would only be able to break up Citicorp and JPMorgan. Lest it be claimed that the resulting smaller firms would have less wherewithal to compete with Barclays and the Royal Bank of Scotland (as well as other banks), shedding less profitable divisions and focusing on developing a specialty-area can result in higher profits (i.e., from the sale of premium goods). Had lawmakers and President Obama given the U.S. Government the authority to break up financial institutions that have an unacceptable level of system risk (i.e, that a bank’s collapse could paralyze the entire financial system given the impact of high volatility on the market mechanism adjusting for risk), breaking up the largest American banks would not only make the sector more competitive, but also reduce the banks’ respective systemic risks. Were a crisis and ensuing short-sellers’ run on the banks occur, holding more dollars in reserves might not buy a bank much more time. It did not take long for Lehman Brothers to run through its cash once the short-sellers set in.

In short, the U.S. Attorney General could have taken a more systemic view and a related pro-active approach oriented beyond holding the banks accountable by including measures that would have provided the public with more confidence that the sector would be more competitive in the future.

---

1. Loretta Lynch, “Attorney General Lynch Delivers Remarks at a Press Conference on Foreign Exchange Spot Market Manipulation,” The U.S. Department of Justice, May 20-, 2015.

2. Ibid.

3 Ibid.

4. Ibid. Lynch said that the banks’ concerted actions “inflated the banks’ profits while harming countless consumers, investors and institutions around the globe—from pension funds to major corporations, and including the banks’ own customers—who placed their faith in the market and relied on it to produce a competitive exchange rate.” Ibid.

President Obama Overreaching on Trade

Throughout the twentieth century, the U.S. Government grabbed more and more power from the governments of the member-states. Even within the U.S. Government, presidents have tended to over-reach. Specifically, they have put their role in proposing legislation and treaties above their role as that government’s chief executive in enforcing existing laws. In May 2015, Sen. Elizabeth Warren issued a report whose thesis is that presidents of both parties had failed to enforce the labor-provisions in the existing trade treaties. That the current president, Barak Obama, was in the midst of negotiating yet another trade treaty said to have labor provisions included opens him up to the charge of over-reaching. That is to say, rather than focusing first on enforcing existing trade arrangements to which the U.S. was then a party, he was going beyond—that is, over-reaching—to negotiate yet another deal. Such over-reaching is akin to going beyond the negative legislative power in vetoing legislation to spend a lot of time proposing legislation at the expense of devoting time to running the executive branch as its chief executive and conferring with members of Congress on ways to improve the administration of existing law. In this essay, I use Warren’s report as a means into answering why the overreaching habit has become so ubiquitous among American presidents that the electorate barely recognizes it as such.

Citing analyses from the Government Accountability Office, the State Department, and the Department of Labor, Warren’s report claims that the U.S. Government “does not enforce the labor protections in its trade agreements.”[1] Eleven countries in which the U.S. had trade treaties with had “documented reliance on child labor, forced labor or other human rights abuses related to labor.”[2] After the Obama administration finalized a labor action-plan with Colombia in 2011—a deal Obama called a “win-win for workers”—105 union activist were murdered as of May 2015.[3] Given the opportunity cost of the foregone benefits of alternatives not pursued in taking a course of action such as negotiating another trade deal, Barak Obama’s decision to pursue a Pacific trade treaty put him on a course that did not make enforcement of existing trade treaties a priority. This is a bit like going out shopping to get more stuff rather than spending Sunday cleaning out the messy garage. That is to say, the mentality is the same; and yet, how often is it applied to a U.S. president? Moreover, what is behind it?

The way in which U.S. presidents are selected—by which I mean the process—may give us a clue. At the nominating stage, the emphasis is on campaigning by proposing and selling policies. “If elected, I will create an X,” for example. “If elected, I will push Congress to enact Y.” While such an approach is consistent with leadership, the emphasis comes at the expense of administration. Rarely do presidential candidates say, for example, “If elected, I will enforce Z.” That’s boring to an electorate used to getting flashy new things. Additionally, the nominating contests prize political games rather than administrative experience. For example, a candidate who has an innate ability to use media to sell himself and trash the other candidates is not necessarily the candidate who would be good at enforcing law by administrative means.

This is not to say that U.S. presidents should have a M.B.A. as a prerequisite. George W. Bush had one from Harvard, and yet he essentially delegated the office’s administrative functions to the cabinet secretaries. Rather, the selection process itself could be designed differently such that people oriented to the chief-executive role more so than proposing new legislation (i.e., a legislative role) would tend to come out on top. Rather than being driven by a desire to put his or her ideological stamp on society through new legislation—this being the cause of the overreach—the ideal candidate would be oriented to protecting the viability of the system of public governance itself should it suffer from a systemic fault-line or extant threat—and otherwise be most interested in administering the government machinery—seeing that the existing laws and treaties are enforced. It would not be as if this task could be done by next Tuesday after which there would be plenty of time to join Congress in its legislative role. Indeed, for the separation-of-powers to work in the U.S. Government, a president’s legislative role should be limited to the negative one exercised by the presidential veto.

In short, just as the federal government itself has encroached on the constitutional prerogatives of the governments of the member-states, U.S. presidents have encroached on the Congress’s legislative role by going beyond their negative legislative role. Even within the bundle of presidential powers, spending time negotiating more trade deals before making sure that the existing treaties are fully enforced evinces an overreaching. The greed of power lies behind the over-reaching itself. Behind the greed is a malignant narcissism that seeks to reimage the world in the ego’s own image. As an alternative mentality, imagine a person who gets more excited about getting a system—in this case, the federal executive branch—to work properly, which includes not only working well, but also producing a lot of output. Applied to the executive branch, this would mean an orientation to (and satisfaction from) overseeing the government agencies and pushing them to enforce existing laws, including the treaties on trade. For such a mentality to “gets its due,” the selection process, the office itself, and even the values of the electorate would need to change. By the latter, I don’t mean that the electorate itself would have to value administrative functions; rather, enough Americans would have to agree to buffer the presidency from their own desire to be titillated and amused by “presidential contests” and snazzy presidential proposals. This is in part why the delegates at the Constitutional Convention invented the severely-flawed Electoral College; there was to be a check—the limited electors at the state level—on the passions of the citizenry in the selection of the U.S. president.  

---

[1] Zach Carter, “Elizabeth Warren Details Obama’s Broken Trade Promises,” The Huffington Post, May 18, 2015.

[2] Ibid.

[3] Ibid.

Beyond Facebook’s Impact on Political Polarization in the U.S.

Any time “scientists” at a company purport to have done a study involving said company in any way, the public has good reason to be suspicious of the reported conclusions. Were the folks running the company really intent on providing credible information, they would use independent scholars (i.e., not being compensated by the company). Such a management would want to obviate even the appearance of a conflict of interest—their desire to provide the public with an answer being so strong. So the management at Facebook may not have been very invested in providing the public an answer to the question: how much influence do users actually have over the content in their feeds? In May 2015, three “Facebook data scientists” published a peer-reviewed study in Science Magazine on how often Facebook users had been “exposed to political views different from their own.”[1] The “scientists” concluded that if users “mostly see news and updates from friends who support their own political ideology, it’s primarily because of their own choices—not the company’s algorithm.”[2] Academic scholars criticized the study’s methodology and cautioned that the risk of polarized “echo chambers” on Facebook was nonetheless significant.[3] I was in academia long enough to know that methodological criticism by more than one scholar is enough to put an empirical study’s findings in doubt. Nowadays, I am more oriented to the broader implications of the “echo-chamber” criticism.

Although the study’s primary question concerned how much what users see on their feeds is due to the company’s algorithm, the question of whether Facebook was a contributing factor in the increasing political polarization in the U.S. was at issue. “What we do show, very definitively,” Eytan Bakshy, who worked on the study, said, “is that individuals do have diverse social networks. . . . The majority of people do have more friends from the other side than many have speculated. We’re putting facts behind this.”[4] Facebook users who self-report a liberal or conservative orientation had, on average, 23% of their friends with an opposing political ideology; and 28.5% of the hard news that such users encountered on the News Feed cut across ideological lines, on average.[5] We know from neuroscience that the human brain privileges people who are similar, so these low percentages do not necessarily mean that Facebook’s algorithm has a contributing impact. That it could be is perhaps of more significance.

According to the 2014 Political Polarization in the American Public study by the Pew Research Center, political polarization increased from 1994 to 2014; the emptying out of a “middle” is especially pronounced among the politically engaged.[6] The proliferation of news networks specializing on particular political market-segments and the ability of social-network users to pick what they encounter are arguably contributing factors, and subtle leanings from a giant company’s algorithm could play a significant role too on an aggregated scale.

The potential in terms of political influence on a mass scale with a usership as large as Facebook’s warrants consideration, however. At the time of the study, Mark Zuckerberg, founder and CEO of Facebook, had the wherewithal to subtly push a political point by carefully amending the company’s algorithm (as well as by using his public platform). Imagine Starbucks' Howard Schultz, who had felt free to use his company (and its employees) to further political issues (and positions) he values, in Zuckerberg's position at Facebook. Would users appreciate being manipulated, subtly or not, into discussions on race that tilt to Schultz's position?[7] The impact on public policy could be astounding simply on account of the proportion of Americans who actively use Facebook. The mining of user-data would give such a CEO even more power not only over particular users, but also on a societal level.[8] The problem, in other words, is that of an unelected person having such massive political power in a viable representative democracy. Similar to the rationale of anti-trust laws, limits on the size of social-media companies in terms of usership could therefore be justified with some degree of precedent.

See also "Taking the Face Off Facebook."

---

1. Alexander B. Howard, “Facebook Study Says Users Control What They See, But Critics Disagree,” The Huffington Post, May 12, 2015.

2. Ibid. I put the quotes around “scientists” to make the point that the conflict of interest renders the label itself controversial in being applied to the study’s investigators.

3. See, for example, Christian Sandvig, “The Facebook ‘It’s Not Our Fault’ Study,” Multicast, Harvard Law School Blogs, May 7, 2015.

4. Howard, “Facebook Study.” See Eytan Bakshy, Solomon Messing, and Lada Adamic, “Exposure to Diverse Information on Facebook,” Facebook Blog, May 7, 2015.

5. Ibid.

6. Ibid. See “Political Polarization in the American Public,” U.S. Politics & Policy, Pew Research Center, June 12, 2104.

7. Skip Worden, Starbucks: A Shaky Management Wading into Social Issues (Amazon, 2015).

8. Skip Worden, Taking the Face Off Facebook: Strategic and Ethical issues (Amazon, 2015).

On the Southwest American Drought: Looking to China

Lake Mead, a reservoir outside Las Vegas serving 40 million people in Nevada, Arizona, Southern California, and Northern Mexico, was at its lowest level (i.e., below 1,080 feet) in April 2015 since it was formed with the Hoover Dam.[1] Particularly for California, whose snow-melt would again be minimal, the continued drought was quickly turning dire. With a surplus of rain-water coming down on western Washington and Oregon, the U.S. Government could have dusted off FDR’s Civilian Conservation Corps (CCC) to activate the long-term unemployed (and the imprisoned) to assist the Army’s Corps of Engineers in constructing aqueducts and digging canals that would hook up with the extant canals running from the delta area north of Sacramento to southern California. It is not as though the Oregonians and Washingtonians would miss the water, and the Californian farmers could see to it that their best produce finds itself up north. Yet as easy as such a large-scale governmental project seems, the devil is in the details, which can actually be rather huge in themselves. China provides a useful case study that the Americans could, conceivably at least, benefit from—should they endeavor on a truly large-scale governmental project.

By April 2015, the Chinese central government had spent 308 billion yuan ($50 billion) on the South-North Water Transfer Project.[2] It’s sheer size is not for the faint-at-heart. The project “takes water from the Yangtze River and channels it across a half-dozen provinces and more than 1,700 culverts, aqueducts and other man-made structures.”[3] More than 400,000 people had been relocated. In spite of all of this effort, many towns in need of the water were continuing to pump up ground-water—causing the ground to sink even more. The shortage of water in Northern China had prompted cities to over-rely on their respective wells. Unfortunately, getting water that way was cheaper for the cities than from the transferred water via the project’s massive canals. Adding still more incentive to stay with the status quo, the cities in need of water had to build related infrastructure, including pumping stations and processing plants, in order to have access to the water from the project. Leaving this last bit to the city governments was not the smartest move by the project’s planners.

The lapse is particularly sad, given all the credit the Chinese government is due for having thought of and embarked on such a large-scale project capable of solving such a potentially devastating problem. At the time, Californians would have been aware of just how dire a water-shortage can be, yet the government of California was merely constructing more reserve-basins and ordering municipal water utilities to cut water-use by 25 percent. With all the surplus rain-water along the coast and western mountain-range in Oregon and Washington, why the U.S. Government had not stepped in to construct a massive Northwest system of massive canals taking the surfeit runoff to California is baffling to me.

The academic literature of international political economy may provide an answer. To explain why the Asian countries like Taiwan and South Korean have developed economically whereas Latin-American countries such as Panama have not, the literature distinguishes between strong- and weak-state countries. A strong state, or government, is able to resist pressure from society to consume governmental revenue. A strong state, for example, can say no to corporate welfare, for example—not just to spending more tax revenue on food-stamps!—whereas a weak state succumbs to corporate and other lobbying. The U.S. Government is a weak state because of the influence that defense-contractors, Wall Street, and corporate America have on members of Congress and the president. Put another way, after having spent roughly $4 trillion on the U.S. military in Afghanistan and Iraq, and trillions more in fiscal and monetary policy in the wake of the financial crisis of 2008, spending tens of billions more on a water-transport system linking the northwest with the southwest (including Arizona) was not even on the radar screen.

The difference here between China and the United States is not merely one of priorities; the Chinese government is stronger with respect to fending off powerful interests in China who want money from the government. The difference, in other words, is not between democracy and dictatorship; rather, plutocracy is a weak-state form of government (e.g., the U.S.). To be sure, dictatorship brings with it a myriad of problems, but that of being a weak-state incapable of large-scale infrastructure projects is not one of them. In the literature, democracy is associated with weak-states in Latin America—the electorate being able to vote for candidates promising more consumption of government resources at the expense of the sort of investment in infrastructure that could bring in foreign-direct-investment (i.e., multinational corporations). Similarly, we can add plutocracy to the weak-state side of the ledger. Whereas plutocracy is inherently weak from the standpoint of a government being able to resist pressure from private wealth, democracy is not so, as a citizenry can vote in candidates who campaign on resisting corporate welfare, whether to Wall Street or Lockheed Martin.

In short, for all the credit that the Chinese central government deserves in having gotten the huge canals built—and why were not the governments of California, Oregon, Washington, and the U.S. talking in similar terms?—a mammoth project must be designed beforehand with everything covered—from the intake of the water to the flow into municipal pipes. Otherwise, the entire project can falter. “Water, water all around, but not a drop to drink” could otherwise apply. Were the U.S. Government to contemplate such a massive project to solve the water-shortage in the Southwest, the planning should include an analysis of the financial incentives and disincentives that every actor along the process, including at the end-point, would have. Water flows downhill, and the incentives must likewise. Otherwise, a dam could pop up that keeps any of the water from reaching the end-users.

---

[1] Reuters, “Lake Mead on Track for Record Low Water Level Amid Drought,” The Huffington Post, April 24, 2015.

[2] Te-Ping Chen, “China Water Project Leaves Some Cities Dry,” The New York Times, April 24, 2015.

[3] Ibid.

Democracy as an Anti-Trust Criterion: The Comcast Time-Warner Merger

As the U.S. Department of Justice and the SEC were reviewing the proposed merger between Comcast and Time Warner in April 2015, six U.S. senators signed a joint letter opposing the $45 billion deal. Comcast would control about 30 percent of the pay-television subscribers in the U.S. and an estimated 35 to 50 percent of the American broadband internet service.[1] That more senators had not signed on is telling with respect to how business-oriented American society had become.

At the time, the Justice Department was investigating whether the takeover would harm competition, while the Federal Communications Commission was evaluating whether the combined company would be in the public interest. For their part, the senators wrote that the combined company’s “unmatched power” would reduce competition and hamper innovation, as well as lead to higher prices, fewer choices, and worse service.[2] Opponents more generally “portrayed Comcast’s effort as a land grab that would give the company too much leverage in the industry.”[3] In short, one company would have too much power over the future of television and broadband. What about over Congress? The silence alone on this question is telling.

Beyond the industry-level impacts, which would admittedly be quite significant, the plutocric ramifications are also striking. That is, the giant company would have so much financial muscle that its forays into campaign finance would likely have an anti-democratic impact. Members of Congress, for example, would be subject to greater temptations to do Comcast’s bidding at the expense of their respective constituents (and states). As recipients of political-campaign donations, elected representatives have an incentive to look the other way as a large corporation gets even bigger.

In 2008, for example, the largest single contributor to Barak Obama’s presidential campaign was Goldman Sachs. The $1 million contribution helped insure that the White House under Obama would not come down too hard on the bank (or Wall Street). Interestingly, the Dodd-Frank Financial Reform Act of 2010 does not give the federal government the authority to break up banks that are too big to fail. Similarly, a “super Comcast” would insulate itself in Congress against populist attempts to break up the company in order to bring more competition to the television and internet industries. I submit that anti-trust law ought to be strengthened to include the protection of representative democracy from encroachments from large concentrations of privately-held capital (i.e., large corporations).

---

[1] Emily Steel, “6 Senators Urge Rejection of Comcast-Time Warner Cable Deal,” The New York Times, April 21, 2015.

[2] Ibid.

[3] Emily Steel et al., “Comcast Is Said to Abandon Bid for Major Rival,” The New York Times, April 24, 2015.

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).

---

[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.

BuzzFeed’s Internal Firewalls Fall to a Conflict of Interest

In spite of the fact that public-accounting firms rely on their respective audit clients’ decisions to be retained to perform the next year’s audit, society deems an unqualified audit-opinion to be independent. The assumption is that the audit firms can police themselves, keeping their financial pressures from influencing the audit opinions. The ongoing temptation is of course to produce a clean opinion so as to be retained as the client’s public accountants. Unfortunately, someone at a given CPA firm must have authority requiring attention both to audit opinions and the firm’s own financial performance; internal policies separating pressure from the latter from reaching the former can thus be easily overcome from the vantage point of that authority. This vulnerability was on display in 2015 in the “dot-com” industry in BuzzFeed.


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

Electric Utilities Thwart Solar Applications: A Conflict of Interest Rewarding the Status Quo

Considering the contribution of coal-burning power-plants to atmospheric carbon-emissions and thus global warming, governments around the world should be encouraging rather than discouraging home-owners to install solar panels. That is to say, we ought not privilege the status quo when it has contributed so much already to an uncomfortable or even uninhabitable Earth for mankind. So it is unfortunate that energy officials in Hawaii’s government had to step in to pressure—no, order—the Hawaiian Electric Company to approve its “lengthy backlog” of solar applications.[1] I submit that the officials should have gone further in correcting for the conflict of interest in the utility. Put in the vernacular, electric companies tended at the time to screw customers who could sell back “home-grown” solar power. The root problem here is in the utilities’s dual roles of seller and consumer of power.


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