Business Ethics in the Business World: A Glimpse from Goldman Sachs

Goldman Sachs’ ethics code reads in part, “[We] expect our people to maintain high ethical standards in everything they do. . . . From time to time, the firm may waive certain provisions of this Code.”[1] The explicit conditionality is notable and significant. I contend that among other reasons, a negative impact on the bank’s financial position and/or profits is apt to trigger such a waiver not only at Goldman Sachs, but from the business standpoint more generally.


The full essay is in Cases of Unethical Business, available at Amazon.com.

1. William D. Cohan, Money and Power: How Goldman Sachs Came toRule the World (NY: Doubleday, 2011).

A Structural Conflict of Interest in Feinberg's BP-Claims Disbursement Office

A year after the BP oil rig explosion in the Gulf of Mexico, only $4 billion of the $20 billion fund alloted by BP had been paid to claimants. Out of 800,000 claims submitted, two-thirds had been processed.  That is to say, two-thirds of the claims translates into 20% of the available funds. It appears that Ken Feinberg, the lawyer tasked with administering the funds, was being too stingy.

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

Conflicts of Interest for Public Officials: How Broad?

Michael Carrigan, a member of the City Council in Sparks, Nevada, “says he was trying to make sure his vote on a proposed casino, one that his campaign manager helped develop, did not pose an ethics problem.”[1] Carrigan backed the Lazy 8 casino project proposed by Red Hawk Land Co. Carrigan’s friend and campaign manager, Carlos Vasquez, worked as a consultant on the project. The question is whether the elected official’s relationship to his campaign manager who was a consultant on a project to be voted on constitutes a conflict of interest sufficient for the official to have not voted. The Sparks city attorney told Carrigan that he could vote on the project as long as he publicly disclosed his relationship with the project consultant. The attorney was obviously thinking in terms of transparency. Carrigan made the recommended disclosure. The Nevada Ethics Commission, however, claimed after the vote that Carrigan had a conflict of interest and should have abstained even with the transparency. In its reprimand, the commission cited ethics law that says public officials must not vote when their judgment could be affected by a commitment or relationship to someone in their household, a relative, business partner, or a person “substantially similar” to those specified. The commission classifies the campaign manager in the “substantially similar” category because Carrigan’s loyalties to his campaign manager would have affected his judgment. Caren Jenkins, executive director of the Nevada Ethics Commission, explains, “Here was a friend, a buddy, a close confidant. If Mr. Carrigan ever thought it was in his best interest to vote against the project, would he have?”[2] Carrigan sued the commission for its reprimand, claiming it violated his free speech rights. The Nevada Supreme Court sided with Carrigan, who pointed to the fact that he was not in business with his campaign manager. The Nevada Supreme Court said the catch-all category the commission cited failed to “limit the statute’s potential reach (or) guide public officers as to what relationships require recusal.”[3] The state court said the law “thus chilled speech.” In its appeal to the U.S. Supreme Court, the lawyer representing the commission argues, “State and local legislators have no personal ‘free speech’ right to cast votes on particular matters, much less ones in which they have a personal interest.”[4] The Reporters Committee for Freedom of the Press similarly claims that rules such as Nevada’s are important to ensure politicians don’t vote based on personal interests.

The full essay is at "Conflicts of Interest for Public Officials."

---

1 Joan Biskupic, “Nev. Official’s Vote Turns Free-Speech Case,” USA Today, April 18, 2011, p. 6A.
2. Ibid.
3. Ibid.
4. Ibid.

Contending Healthcare Social Contracts: A False Choice?

On March 21, 2010, the U.S. House of Representatives approved “a far-reaching overhaul of the nation’s health system . . . , voting over unanimous Republican opposition to provide medical coverage to tens of millions of uninsured Americans after an epic political battle that,” according to The New York Times, “could define the differences between the parties for years.”[1] The vote was 219 to 212. “This isn’t radical reform,” the U.S. president said, “but it is major reform.”[2] Whether that was real change is an open question. House Speaker Pelosi said, “Today we have the opportunity to complete the great unfinished business of our society and pass health insurance reform for all Americans that is a right and not a privilege.”[3] While Obama was referring to the bill’s reliance on extant private insurance companies, absent even a public option, Pelosi made explicit the change to the American social contract—access to health-care would henceforth be a right for all citizens rather than a benefit to be conferred to those able to pay from their own wherewithal and insurance. The basis of this new right was undoubtedly the human right to life, as in the right to life, liberty and the pursuit of happiness.

The closeness of the House vote suggests that the people were divided on whether the new right ought to be conferred (and/or whether it should be conferred by the U.S. Government rather than decided on a State by State basis). Sure enough, the pendulum did indeed shift.  On January 19, 2011, the U.S. House voted 245-189 to repeal the health-care law. Then, on April 15^th, the House voted 235 to 193 for a budget  that “would significantly scale back federal domestic programs and cut $5.8 trillion over the next decade."[4] Medicaid would be a set amount sent as a block grant to the States for them to use for their poor (the States or the poor having to make up for any shortfall), while Medicare would be subsidies sent to the elderly for use in their health insurance premiums. Neither the poor nor the elderly would be guaranteed access to health care. "A Congressional Budget Office review of the Ryan proposal predicted that retirees would pay more for their health care under it than they would under traditional Medicare. The agency also said the Ryan plan to convert federal Medicaid spending into block grants for states would most likely end up reducing benefits for those enrolled in the program."[5] The bill would also reduce the top tax rates for individuals and corporations. Democrats “accused Republicans of promoting a morally skewed vision of America by taking savings out of medical care for older Americans and the poor while supporting tax breaks for corporate America and the affluent.”[6] 

In effect, the Republicans in the House were rejecting the change to the American social contract passed the previous year with respect to there being a right to health-care.  Furthermore, the House Republicans were redoing the social contract with respect to the Great Society programs even before the passage of the health-care right because Medicaid and Medicare would be a fixed amount and transferred to the States (in all but funding), and limited to a fixed subsidy, respectively, rather than being open-ended commitments of the U.S. Government. The poor and retirees would have to pay more than what had been the case even without "Obamacare." In other words, the Republicans were pushing to change the social contract in the other direction with respect to the extent of the federal government's obligation, rather than merely undoing the creation of the right that occurred in 2010.

In short, two visions for a social contract pushing the House in opposite directions more or less simultaneously. Even more significant than the electoral pendulum swing in November of 2010, the existence of two different visions for a social contract contending at the same time was evident.  All of the House Republicans had opposed the health-care law in 2010 while all of the Democrats opposed the Ryan budget in 2011. Two distinct social contracts were in a tug-of-war. The assumption was that only one could be enacted, or a compromise that could only result in a third that neither vision wanted. I contend that this is a false choice--that we are making the problem harder than it need be, given our governmental system of federalism. 

The two social contract visions differ not only with respect to redistribution and the extent to which government should secure the survival of its citizens, but as to whether federalism is at all relevant.  Whereas the Democrats wanted the general government of the union to be the governmental agent in the contract, Republicans sought either a mixture of federal and state involvement or, perhaps ideally, a state by state basis on the government side of the social contract. 

Having some federal involvement would allow for a minimal governmental obligation as part of a social contract spanning the union, while involvement by the state governments would enable various social contracts such that both visions could be realized with respect to rights and obligations.  Lest “minimal” actually be “maximal,” a one-size-fits-all social contract would stymie the two mutually exclusive visions. At the same time, leaving the entire matter of social contract to the states would deny a floor of human rights for all Americans. Social contract itself is complex in the United States, as per the nature of a union of states wherein governmental sovereignty is divided between two systems of government (state and federal).  

That the debate had been allowed to funnel into a “one social contract” only scenario at the federal level essentially truncated the union into a consolidated system, as if Congress were only a national legislature, or a state legislature. In his book, Gov. Rick Perry of Texas writes that the federal system of government, "if respected, allows people of varying beliefs to live together united as Americans."[7] He notes that "we can tailor solutions to our own values and perspectives rather than trying to create national one-size-fits-all policies" while agreeing "that there are certain things we must do together."[8]  While Perry views activities of union as only those that the republics in the union cannot accomplish, union could also involve a floor of governmental obligations in keeping with what each generation determines as due Americans simply in being Americans. Yet such a criterion is vulnerable to a slippery slope so the floor feature must be safeguarded by governmental or federal design.

In conclusion, there need not be one choice between the Republican and Democratic proffered social contracts wherein only one of them exists in the United States; the Republican variant could be the law of the land in Texas, for example, while the Democratic alternative could be the social contract in Massachusetts. The only thing to be compromised would be a minimum “floor” of rights for all Americans by virtue of what it means to be an American. Such a matter of compromise would enable us to get past the false dichotomy that presumes a one-size-fits-all decision must be made. In other words, both the Democrats and the Republicans can have what they want--just not U.S.-wide.  To have their respective visions enacted somewhere in the United States means giving up the objective of seeing all of the United States in their own image. 

1. Robert Pear and David M. Herszenhorn, “Obama Hails Vote on Health Care as Answering ‘the Call of History,” The New York Times, March 22, 2010, p. A1.

2. Ibid.

3. Ibid.

4.Carl Hulse, “House Approves Republican Plan to Cut Trillions,” The New York Times, April 16, 2011, pp. A1, A12.

5. Ibid.

6. Ibid.

7. Rick Perry, Fed Up! Our Fight to Save America from Washington (New York: Little Brown, 2010), p. 26. See Skip Worden, American and European Federalism: A Critique of Rick Perry's 'Fed Up!'." 

8. Ibid.

Goldman's Ethical Conflict of Interest: Obviated or Enabled?

According to U.S. Senator Carl Levin, Goldman Sachs “profited by taking advantage of its clients’ reasonable expection[s] that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve.”[1] Not only was the bank secretly betting against housing-related securities while selling them to clients, in at least one case a client shorting such a security was allowed to have a hand in picking the bonds. What is perhaps most striking, however, is how little Goldman Sachs has had to pay for acting at the expense of some of its clients. One might predict on this basis that the unethical culture at the bank is ongoing.


The full essay is at Institutional Conflicts of Interest, available at Amazon.

1. William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (NY: Doubleday, 2011), p. 19.

Achieving Balance in American Federalism: On the Crusade of Texas’ Rick Perry

As the governor, or head of state, of Texas, Rick Perry has been on a crusade to reinvigorate American federalism. Referring to the efforts of officials in the U.S. Government to secure the Mexican border, Perry said, “It is part of that frustrating paradox where Washington neglects their responsibility for areas clearly within their purview, while interfering in other areas in which they’re neither welcome nor authorized.”  The chief executive was pointing to a little-noticed point concerning the expansion of the domains in which the federal government is active.

The complete essay is at Essays on Two Federal Empires.

See Rick Perry, Fed Up! and the critique of Perry's book, Skip Worden, American and European Federalism: A Critique of Rick Perry's 'Fed Up!

Tax Avoidance at GE: On Corporate Income Taxation

In spite of $14.2 billion in global operating profit ($5.1 billion on U.S. operations) in 2010, GE paid no corporate income tax to the U.S. Treasury that year thanks to offsetting prior losses by GE Capital (i.e., bad loans).  In spite of that unit having received TARP funds from U.S. taxpayers, the corporation was able to avoid paying any income tax. This seems like Rousseau's social contract run amuck: corporate welfere in exchange for nada.  Such a modus operendi is in line with the corporate mission: to economize in the sense of maximizing (or satisficing) what is taken in while minimizing what must go out.  In other words, a corporation aims to turn itself from a productive, lean throughput to a concentration of capital in its own right.

In terms of U.S. corporate income taxation, the extent of resources that corporations devote to minimizing what they owe the U.S. Treasury is money that could be better spent, or invested, in productive enterprise. For example, G.E. files returns in 250 jurisdictions and has a staff of 975 working in the corporation's tax department. Even if those people pay for themselves and more by reducing the company's tax liability, the company could eliminate that entire department and orient its global operations in terms of efficiency rather than taxation were income tax applied only to individuals.  The legal person "doctrine" aside, corporations are not citizens; rather, they are groups of citizens. 

Robert Samuelson suggests that the top corporate income tax rate be reduced from 35%, which is one of the highest in the world. He argues that the 15% rate in individual income taxation on dividends and capital gains should be increased.[1] The effect would be regressive, for the top one percent receive two-thirds of all the capital gains and dividends. At the very least, the 15% is relatively low in the individual income tax system and most of the taxpayers subject to the tax could afford a higher rate.

Samuelson does not go far enough, for even with a lower top corporate rate companies would retain their tax departments and steer profit into countries with low tax rates (for there would still be differentials between countries). Theoretically, it does not make sense to tax both corporate income and dividends.  Furthermore, corporate income taxation treats companies as end-points rather than as throughputs. The implications of taxing individuals rather than corporations are staggering not only for more efficient productive investment, but also for attracting foreign direct investment to the U.S. In addition, public accounting firms could eliminate their tax departments and focus all of their attention on auditing--an endeavor made all the more important on account of the misleading financials on Wall Street leading up to the financial crisis of 2008.  Rather than getting headaches over the intracacies of tax rules, public accountants could devote more attention to whether it is enough to follow GAAP in giving an unqualified opinion.

In short, taxation ought not to have so much gravity in orienting corporate America.  Instead, business would do much better in focusing more on building better mousetraps. Individuals who benefit financially from the productive enterprise would be taxed, perhaps even without all the deductions that enable them to avoid being taxed. Imagine a tax-returnless system of individual income taxation involving a fixed low rate applied like a fee on any income taken in, whether from wages, salary, dividends or capital gains. Ironically, by simplifying taxation, more of it could be collected even as businesses are left to do business.

1. Robert Samuelson, "The Real GE Scandal," Newsweek, April 11, 2011, p. 21.

President Obama's Role in Budget Negotiations: Undercutting His Role in Presiding

On April 5, 2011, President Obama observed, “We’re going to have some very tough negotiations. And there are going to be, I think, very sharply contrasting visions in terms of where we should move the country. That’s a legitimate debate to have.” (1) He sounded very presidential in making the statement because he was taking the perspective of the nation as a whole. Furthermore, he used that vantage-point to try to keep negotiations from falling off the track. “If they can’t sort it out,” he said, “then I want them back here tomorrow.” (2) In short, he was presiding, rather than being partisan in taking a side, as he framed the situation facing the union. 

                                             Doug Mills, The New York Times                 

However, even as the president was referring to the two sides sorting the budget out as “they,” he himself was on one of the sides. That is, even though he “sought to position himself above the nitty-gritty haggling going on in Congress, which . . . limited his influence on the process” yet distanced him from any blame, his taking a side in the dispute subtly worked against his attempt to preside to hold the process as a whole together. (3) 

The full essay is at The Essence of Leadership, which is available at Amazon in print and as an ebook.

1.   Gregory Korte, “Meeting Fails to End Impasse on Federal Budget,” USA Today, April 6, 2011, 2A.

2.  Naftali Bendavid, Jonathan Weisman, and Carol E. Lee, "Budget Talks Head to Brink,” Wall Street Journal, April 6, 2011, pp. A6.

3. Ibid.

Political Ideology in a U.S. Federal Healthcare Budget: Disentangling Redistribution, Government and Federalism

A shift in power from the U.S. Governments to those of the states is distinct from a redution in the size of government. These are distinct, albeit not disparate, unrelated, goals. Shifting power does not in itself imply or mandate a reduction in the size of government. For example, in shifting public health-care policy, an expansion of government could result if enough states develop programs further-reaching than what Congress had enacted.  Of course, as per the nature of federalism, particularly in an empire-scale instance, the resulting health-care programs would differ from republic to republic, given the innate heterogeneity that exists at such a scale.

There is a saying in politics: Elections have consequences. In 2011, the impact of the 2010 election was particularly obvious in that the Republicans had gained control of the legislatures of Wisconsin and Ohio as well as the U.S. House of Representatives.  While the governments of Wisconsin and Ohio were going after public-sector unions (or restricting them to reduce government deficits), the House Republicans had their eyes on health-care.  Rep. Paul Ryan, an up and coming Republican from Janesville Wisconsin—a town with high unemployment after the auto plant there closed—was producing a budget that he claimed would cut $5 trillion over 10 years. His proposal reflected, or conflated, two salient traditional Republican aims: to shift power from the U.S. Governments to those of the states and to reduce the size of government.

Because restoring a balance of power to a federal system is distinct from decreasing (or increasing, for that matter) the size of government, it is important to distinguish them in Rep. Ryan’s proposal. The New York Times points to the two aims in observing that “while saving large sums for the federal government, the proposals on Medicaid and Medicare could shift some costs to beneficiaries and to the states.”[1] Shifting costs to the beneficiaries involves or implies a reduction in the size of government, while shifting costs to the states impacts the balance of power in the federal system. It is in the public interest for such items to be distinguished in debate and legislative votes because the people could want one without the other.

Under Ryan’s proposal, according to the paper, “Medicaid would be transformed into a block grant, with a lump sum of federal money given to the states to care for low-income people. States would be given more discretion over use of the money than they have under the current federal-state partnership.”[2] Even though increased discretion adds to the power of state governments relative to the federal, or general, government, block grants maintain state dependence. In fact, if health-care is not among the enumerated powers of the U.S. Government, it could be argued that lump sum payments to the states for health-care are unconstitutional; otherwise, spending for the general welfare would eviscerate even having enumerated powers at all.

Regarding the “size of government,” The New York Times reports that “(f)or future Medicare beneficiaries — people now under 55 — Mr. Ryan’s proposal calls for the federal government to contribute a specified amount of money toward the premium for private health coverage. Under the traditional Medicare program, the government reimburses doctors and hospitals directly.”[3] The “specified amount” element is “less government” than is an open-ended entitlement.

At the time of Rep. Ryan’s proposal, Medicaid and Medicare were open-ended entitlements. Anyone who met the eligibility criteria was entitled to benefits. Under a fixed lump sum, Republicans say the federal government could better predict and control its costs under Medicaid and Medicare, which as of the beginning of 2011 insured more than 100 million people and accounted for more than one-fifth of the federal budget. Unless the states would pick up the added costs (which would shift the taxing and spending federal balance), beneficiaries of these programs would be at risk for more of the costs if health-care costs rise.

Rep. Jan Schakowsky, a Democrat and a former executive director of the Illinois State Council of Senior Citizens, said “Mr. Ryan and the Republicans are declaring war on entitlements — and war on the elderly and the poor. . . . Beneficiaries will end up paying more.” The New York Times also reports that as of 2011, “(a)bout half of Medicaid recipients are children. Nearly two-thirds of the money spent on Medicaid benefits is [sic] for low-income people who are 65 and older or disabled.”[4] For his part, Rep. Ryan said “he was not cutting Medicaid and Medicare, but rather slowing their growth rate. Furthermore, he insisted that if health costs for a group of patients exceeded the federal payment in a given year, the insurer would have to absorb the cost.”[5] Finally, Rep. Ryan “claimed his proposal is equitable because Medicare would pay less on behalf of higher-income beneficiaries, and they would pay more of the cost of their health coverage.”[6]

Whether the beneficiaries or insurance companies pick up the slack, the fact that public funds would not be used means that government would be reduced from what it otherwise would be. Yet if the states pick up the slack, the balance of federalism rather than the size of government would be changed. Moreover, in addition to the size of government (and federalism) elements, the matter of redistributive justice is involved. It is no wonder that these elements are conflated in the public sphere.

I contend that legislative representatives have an obligation to more clearly distinguish the elements of federalism, the size of government, and redistribution in public policy proposals. A desire to shift power to the states can be better distinguished from the questions of redistributive justice and the related matter of the size of government (and latter two can be better distinguished, since, for example, government could be expanded in a way that helps or hurts the poor, for example). Democracy itself would be improved were the people, either directly via a referendum or indirectly through representatives, able to decide on the three elements one by one. In fact, a decision for greater federalism would mean that questions of the size of government and redistribution would be decided on both the state and the federal level.

1.Robert Pear, "G.O.P. Blueprint Would Remake Health Policy," The New York Times, April 4, 2011. 

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.

Government Employees and Manufacturing Jobs: Takers and Makers?

I contend that we need to expand our notion of “making” in the twenty-first century global economy. We also need to reduce our conception of “taking” when it comes to what government employees do and even in what the government does. Otherwise, even Steven Moore might be left with the unavoidable conclusion that the American corporations, even more so than the “welfare mothers,” are the “takers.”

In 2011, according to Stephen Moore, “there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government. . . . More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers.”[1] “Collecting a paycheck from the government” implies that people who work in government are somehow receiving an entitlement rather than compensation for their labor. Treating government employees, and, moreover, the receivers of government services, as “takers” reduces all the functions of government to welfare programs. Are the corporations in the private sector that receive defense contracts “takers” akin to the lazy “takers” that Stephen Moore has in mind in his opinion piece?  Is G.E. a “taker” in not having any tax due on 2010 earnings in the billions?  Presumably, the defense contractors and tax-minimizing companies benefitted from government-sponsored infrastructure, such as police protection and roads?  Furthermore, are citizens who benefit from security and transportation to be regarded as “takers”?  Are flyers “takers” when they rely on the FAA to keep flight control agents in control towers on the up and up?

Furthermore, Moore is ignoring non-governmental reasons for the reduction in factory jobs in the U.S. “Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods. . . . Even Michigan, at one time the auto capital of the world, and Pennsylvania, once the steel capital, have more government bureaucrats than people making things.”[2] However, even though government payrolls have expanded as we have asked for more from our governments, such as in regulating banks too big to fail, the proliferation of capitalism in the world, such as via more foreign direct investment in developing countries (with the notable exception of Africa), has brought with it a spreading-out of manufacturing around the world.

Even so, the U.S. still has the most manufacturing jobs of any economy, but this does not mean we need not expand our skilled labor force in new fields such as computer technology. In focusing on manufacturing, Moore seems to reduce “making” to manufacturing.  Does not a CPA “make” something of value when investors and creditors rely on the certified financial statements of a company?  

1. Stephen Moore, "We've Become a Nation of Takers, Not Makers," The Wall Street Journal, April 1, 2011. 

2. Ibid.