Lee Drutman: Blame the system, not a greedy Trent Lott
01:00 AM EST on Monday, December 10, 2007
LEE DRUTMAN
WASHINGTON
SO, TRENT LOTT, the Mississippi senator who had served as the Republican majority leader, has decided he no longer wants to be an elected official. Barely a year into his fourth term, he announced last month he is retiring with no definite plans. But everybody in Washington pretty much knows that he is going to become a lobbyist.
And why not? Instead of the measly $165,200 he earns now to represent the good people of Mississippi, he can earn probably 10 times that by representing the private interests that are capable of paying him some ridiculously high fee, though one that just may actually be worth it, given Mr. Lott’s relationships and skills as a political tactician.
The obvious response is to criticize Senator Lott for his greed (this is certainly the modal response in the news media). But it’s not as though Lott has been some brilliant champion of the people who is suddenly selling out to the almighty dollar. If he is going to serve wealthy special interests (as he often has during his legislative career), he might as well get better compensated for it.
To Senator Lott’s credit, he has spent 34 years in public service, which is a very long career. During this time, he has watched many of his colleagues retire and then go make millions in private lobbying. He is 66, and being a senator is an exhausting job. He has a large family to provide for. Leaving mid-term is actually a pretty rational decision.
What’s truly remarkable is that more congressmen and senators don’t do it. Sure, plenty of former senators and representatives have gone on to become lobbyists upon retiring. According to Public Citizen, since 1998, 43 percent of retiring lawmakers subsequently registered to lobby (and some in quite outrageous ways, such as Louisiana Congressman Billy Tauzin (D), who became head of PhRMA , the drug companies’ lobbying organization, after helping to shepherd the pharmaceutical gift basket better known as the Medicare Prescription Drug Act through Congress). But Lott is the first to resign mid-term to do it (and also the first U.S. senator to resign with no definite announced plans and no major scandal).
So why is the money so good? Maybe because every year, there are more and more companies, universities, foreign governments and other high-paying clients active in Washington. Ten years ago, you could still find some major companies without any real D.C. presence. Now you can’t. And as lobbying becomes more competitive, somebody as savvy and super-connected as a Trent Lott becomes that much more valuable.
Which is a tremendous problem. In an ideal pluralist democracy, lots of groups would petition their government for redress of grievances (as guaranteed by the First Amendment), and in doing so, would ensure that a wide spectrum of interests are represented in the policy-making process. But what if only a handful of those groups can afford to pay for super-connected people like Trent Lott? As the costs of the most connected lobbyists continue to escalate, the representation divide between the haves and have-nots grows worse.
Meanwhile, what’s happening at the lawmaker level is much worse at the staffer level. It is now increasingly common practice in Washington for a young staffer to spend a few years on the Hill, develop some expertise and build some connections, and then go make three times the salary as a lobbyist (and again — why not!? Better money, better hours, and the chance to finally take credit for your own work). But the consequence is that Congress has an increasingly difficult time building its own expertise. As soon as a staffer develops some substantial knowledge about some policy area, he or she is off to make more money in the service of someone with far more parochial use for that knowledge.
The challenge then is two-fold. One is to figure out ways to make public service more of a career in itself and less of the stepping-stone it is increasingly becoming. This may mean such things as better salaries, better benefits and better hours. The other challenge is to find a way that more groups can get adequate representation in Washington, not just those who can afford to hire the megaphone of an über-connected Trent Lott type. This is much harder.
Perhaps it is time to think about regulating the prices that lobbyists can charge for their services (ideally to achieve some rough parity with government). Doing so would not only provide a more level playing field for different outside groups. It would also help to depress the salaries of lobbyists, and thus reduce the lure of lobbying to public servants. This is, of course, a radical solution. But perhaps drastic times call for drastic measures.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.projo.com/opinion/contributors/content/CT_drutlott10_12-10-07_92846D9_v12.2a718ec.html#
Monday, December 10, 2007
Monday, December 03, 2007
A better way to evaluate candidates - Providence Journal
Lee Drutman: A better way to evaluate candidates
WRITING BACK IN 1962, historian Daniel J. Boorstin mused on the ridiculousness of the famous 1960 Kennedy-Nixon TV debates: “A man’s ability, while standing under klieg lights, without notes, to answer in two and a half minutes a question kept secret until that moment, had only the most dubious relevance — if any at all — to his real qualifications to make deliberative presidential decisions on long-standing public questions after being instructed by a corps of advisers.”
It’s amazing how little has changed. For those who have been paying attention to the presidential-primary season, it has been debate after silly debate. The candidates line up under the lights. They try hard to smile, to look relaxed and happy (but presidential). Then Tim Russert (or some other establishment journalist) provides his unhelpful barrage of gotcha-style questions, to which the candidates typically respond with some well-rehearsed talking point that has nothing to do with the original question (“I’m glad you asked, Tim, because I’m in favor of helping make life better for everybody”). Occasionally, they will attack each other’s positions, but this always feels a bit like poking at Jell-O. In the end, everybody races to claim victory, as if such a thing could or should be claimed based on the preceding farce.
What a stupid way to evaluate a presidential candidate. There is nothing in the presidential job description that is at all like the glib pop quizzes of the debates. Being a good president requires the ability to be deliberative, to be thoughtful, to be able to respond to a complicated world that doesn’t conform to the canned nostrums of campaign-speak. It also requires the ability to work with Congress and to navigate the complexities of Washington. If only there were some way to improve this selection process.
How about, just for once, instead of a short-answer debate, we let our candidates take a long-essay test where we get to see the quality of their actual decision-making? The format could work like this: The candidates show up, and they each get an office with a computer, hooked up to the Internet, and a phone. They also get a full scenario. For example, What would they do if radical Islamists staged a coup in Pakistan and began initiating military action in Kashmir? How would they respond if China’s economy went into a tailspin and Asia began following? How would they respond if a particularly virulent flu started showing up in the United States? What would they do if a group claiming to be affiliated with al-Qaida blew up a bus in Chicago?
Then they get an hour to craft a response. They can call whomever they like, do what research they like, and talk to the scenario experts as much as they like. But every move is recorded on video, so we can see how they approach a problem. At the end, they each get 10 minutes in their office to explain how and why they would respond (this way they do not get to hear what other candidates have said).
This would be different. But it would be serious. It would give onlookers a chance to see how the candidates think through a situation, what questions they ask, and how they present a solution, given time to think about it. After all, we want a creative problem-solver in the Oval Office, not a mere regurgitator of rehearsed pabulum.
A second recommendation: Being an effective president also requires being able to work with people in Washington. A president can get very little done without the support of Congress and the executive-branch bureaucracy (witness Jimmy Carter). So why not send out an anonymous survey to all members of Congress and their staffs, plus the top-level career bureaucrats in the executive branch, and ask them what they think of the candidates and how they would feel about working with them? Voters could disregard this information if they like, but if I were choosing a candidate for a job, I’d sure want to know what people who have worked with and will work with that person honestly think.
Choosing the president of the United States is a serious thing. It’s a shame the process that we have emphasizes the trivial — the charades and parades that have no apparent correlation with the ability to lead the executive branch of a naturally fractious government of a nation of 300 million people. Surely, we can do better.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
WRITING BACK IN 1962, historian Daniel J. Boorstin mused on the ridiculousness of the famous 1960 Kennedy-Nixon TV debates: “A man’s ability, while standing under klieg lights, without notes, to answer in two and a half minutes a question kept secret until that moment, had only the most dubious relevance — if any at all — to his real qualifications to make deliberative presidential decisions on long-standing public questions after being instructed by a corps of advisers.”
It’s amazing how little has changed. For those who have been paying attention to the presidential-primary season, it has been debate after silly debate. The candidates line up under the lights. They try hard to smile, to look relaxed and happy (but presidential). Then Tim Russert (or some other establishment journalist) provides his unhelpful barrage of gotcha-style questions, to which the candidates typically respond with some well-rehearsed talking point that has nothing to do with the original question (“I’m glad you asked, Tim, because I’m in favor of helping make life better for everybody”). Occasionally, they will attack each other’s positions, but this always feels a bit like poking at Jell-O. In the end, everybody races to claim victory, as if such a thing could or should be claimed based on the preceding farce.
What a stupid way to evaluate a presidential candidate. There is nothing in the presidential job description that is at all like the glib pop quizzes of the debates. Being a good president requires the ability to be deliberative, to be thoughtful, to be able to respond to a complicated world that doesn’t conform to the canned nostrums of campaign-speak. It also requires the ability to work with Congress and to navigate the complexities of Washington. If only there were some way to improve this selection process.
How about, just for once, instead of a short-answer debate, we let our candidates take a long-essay test where we get to see the quality of their actual decision-making? The format could work like this: The candidates show up, and they each get an office with a computer, hooked up to the Internet, and a phone. They also get a full scenario. For example, What would they do if radical Islamists staged a coup in Pakistan and began initiating military action in Kashmir? How would they respond if China’s economy went into a tailspin and Asia began following? How would they respond if a particularly virulent flu started showing up in the United States? What would they do if a group claiming to be affiliated with al-Qaida blew up a bus in Chicago?
Then they get an hour to craft a response. They can call whomever they like, do what research they like, and talk to the scenario experts as much as they like. But every move is recorded on video, so we can see how they approach a problem. At the end, they each get 10 minutes in their office to explain how and why they would respond (this way they do not get to hear what other candidates have said).
This would be different. But it would be serious. It would give onlookers a chance to see how the candidates think through a situation, what questions they ask, and how they present a solution, given time to think about it. After all, we want a creative problem-solver in the Oval Office, not a mere regurgitator of rehearsed pabulum.
A second recommendation: Being an effective president also requires being able to work with people in Washington. A president can get very little done without the support of Congress and the executive-branch bureaucracy (witness Jimmy Carter). So why not send out an anonymous survey to all members of Congress and their staffs, plus the top-level career bureaucrats in the executive branch, and ask them what they think of the candidates and how they would feel about working with them? Voters could disregard this information if they like, but if I were choosing a candidate for a job, I’d sure want to know what people who have worked with and will work with that person honestly think.
Choosing the president of the United States is a serious thing. It’s a shame the process that we have emphasizes the trivial — the charades and parades that have no apparent correlation with the ability to lead the executive branch of a naturally fractious government of a nation of 300 million people. Surely, we can do better.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
Monday, November 05, 2007
Of market failure and Blackwater - Providence Journal
WASHINGTON
IN THE WEEKS since employees of private security firm Blackwater set off a scandal by killing 17 Iraqi civilians for little apparent reason, there has been much sniping here in Washington about what to do. The conclusions seem to be as follows: The shootings were troubling, and the State Department will implement new policies of oversight so this kind of thing doesn’t happen again. But troubling as the situation may be, it appears that State is in no position to fire Blackwater — we actually really need the services they provide, our military already being so thinly stretched and all.
What a strange situation to be in. The most powerful military force in the world, reliant on a handful of private contractors to handle basic security duty, and then unable (or unwilling) to monitor these contracts to make sure that these hired hands don’t entirely undermine the mission by shooting first and asking questions later.
Who ever thought this was a good idea? And what were they thinking?
Hop into the time machine and set it for 1992, and we can find one Dick Cheney starring as secretary of defense, pushing for a leaner military and promising that much of what the military does could be done more effectively if it were outsourced to private contractors. After all, a report prepared for him by Halliburton subsidiary Brown & Root had promised great cost savings by turning over logistics support to the private sector.
But, easy as it sometimes seems these days to blame all evil on Mr. Cheney, let us remember that the downsizing and the privatization of the military was merely one part of a logic that has been swirling around Washington for the better part of three decades now — that big government (bureaucratic and inefficient) is the problem, and the private sector (nimble and cost-effective) is the solution. Therefore, we should keep cutting government and keep turning key functions over to private companies, who will always do it better. Clinton did this plenty, and George W. Bush has done it even more.
But let’s examine this thinking for a second. Economics 101 tells us that markets work because they are competitive. If you want to, say, hire someone to clean your rugs, you look up local rug-cleaning services, and you’ll find several choices. Because there is competition among sellers and enough buyers to discipline those sellers, the market generally works — people comparison shop, and cleaning services that charge too much or do a bad job go out of business.
But what happens if you are the only rug owner in town, but you own a lot of rugs? Well, anybody who is going to start a rug-cleaning service better be darn sure that you are going to hire them, or else they will soon be out of business. So, they’ll work hard to be your friend, and spend a lot of time cementing that relationship (as opposed to perfecting their cleaning services). But the reality is that with one customer, there won’t be many rug cleaning services around to chose from. (Economists call this troubling single-buyer condition “monopsony.”)
And what if the service does a bad job? Since there’s nobody else to choose from, you’ll have to monitor them closely to make sure they are actually cleaning and not smoking a cigarette. But that requires time and effort, and at that point, well, what’s the point of paying somebody to do it if you have to watch them all the time? You might as well just do it yourself in the first place, since you have all the incentives to do it cheaply and efficiently, while they have every incentive to be slow and costly.
Private contracting in Iraq isn’t rug-cleaning, but the problems are similar to the example. Because this is specialized work, there aren’t many companies that have the expertise and infrastructure to do it. And yet, because the military has intentionally reduced its capabilities over the years, it is now at the mercy of these companies to perform important security functions. Moreover these companies spend a lot of extra time making sure that they have friends in high places to protect them. All of this creates the antithesis of an efficient market (which would be competitive and atomistic), and hence explains the steady stream of cost overruns, no-bid contracts, and now this latest Blackwater brouhaha.
So, now there will be more oversight of contractors. Well . . . good. But remember oversight is an additional cost, and it begs the question: why outsource in the first place, if you have to spend all this time and money making sure the people you hire don’t mess up? The deeper lesson to be learned is not just about accountability, but also about economics. If policymakers want to harness the power of markets, they need to make sure they actually understand the basic theoretical principles behind markets. Failure do so can only result in more stupid policy.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
IN THE WEEKS since employees of private security firm Blackwater set off a scandal by killing 17 Iraqi civilians for little apparent reason, there has been much sniping here in Washington about what to do. The conclusions seem to be as follows: The shootings were troubling, and the State Department will implement new policies of oversight so this kind of thing doesn’t happen again. But troubling as the situation may be, it appears that State is in no position to fire Blackwater — we actually really need the services they provide, our military already being so thinly stretched and all.
What a strange situation to be in. The most powerful military force in the world, reliant on a handful of private contractors to handle basic security duty, and then unable (or unwilling) to monitor these contracts to make sure that these hired hands don’t entirely undermine the mission by shooting first and asking questions later.
Who ever thought this was a good idea? And what were they thinking?
Hop into the time machine and set it for 1992, and we can find one Dick Cheney starring as secretary of defense, pushing for a leaner military and promising that much of what the military does could be done more effectively if it were outsourced to private contractors. After all, a report prepared for him by Halliburton subsidiary Brown & Root had promised great cost savings by turning over logistics support to the private sector.
But, easy as it sometimes seems these days to blame all evil on Mr. Cheney, let us remember that the downsizing and the privatization of the military was merely one part of a logic that has been swirling around Washington for the better part of three decades now — that big government (bureaucratic and inefficient) is the problem, and the private sector (nimble and cost-effective) is the solution. Therefore, we should keep cutting government and keep turning key functions over to private companies, who will always do it better. Clinton did this plenty, and George W. Bush has done it even more.
But let’s examine this thinking for a second. Economics 101 tells us that markets work because they are competitive. If you want to, say, hire someone to clean your rugs, you look up local rug-cleaning services, and you’ll find several choices. Because there is competition among sellers and enough buyers to discipline those sellers, the market generally works — people comparison shop, and cleaning services that charge too much or do a bad job go out of business.
But what happens if you are the only rug owner in town, but you own a lot of rugs? Well, anybody who is going to start a rug-cleaning service better be darn sure that you are going to hire them, or else they will soon be out of business. So, they’ll work hard to be your friend, and spend a lot of time cementing that relationship (as opposed to perfecting their cleaning services). But the reality is that with one customer, there won’t be many rug cleaning services around to chose from. (Economists call this troubling single-buyer condition “monopsony.”)
And what if the service does a bad job? Since there’s nobody else to choose from, you’ll have to monitor them closely to make sure they are actually cleaning and not smoking a cigarette. But that requires time and effort, and at that point, well, what’s the point of paying somebody to do it if you have to watch them all the time? You might as well just do it yourself in the first place, since you have all the incentives to do it cheaply and efficiently, while they have every incentive to be slow and costly.
Private contracting in Iraq isn’t rug-cleaning, but the problems are similar to the example. Because this is specialized work, there aren’t many companies that have the expertise and infrastructure to do it. And yet, because the military has intentionally reduced its capabilities over the years, it is now at the mercy of these companies to perform important security functions. Moreover these companies spend a lot of extra time making sure that they have friends in high places to protect them. All of this creates the antithesis of an efficient market (which would be competitive and atomistic), and hence explains the steady stream of cost overruns, no-bid contracts, and now this latest Blackwater brouhaha.
So, now there will be more oversight of contractors. Well . . . good. But remember oversight is an additional cost, and it begs the question: why outsource in the first place, if you have to spend all this time and money making sure the people you hire don’t mess up? The deeper lesson to be learned is not just about accountability, but also about economics. If policymakers want to harness the power of markets, they need to make sure they actually understand the basic theoretical principles behind markets. Failure do so can only result in more stupid policy.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
Thursday, October 04, 2007
Our disastrous national traffic jam -- Providence Journal
Lee Drutman: Our disastrous national traffic jam
09:09 AM EDT on Thursday, October 4, 2007
LEE DRUTMAN
WASHINGTON
ONE OF THESE DAYS (and it will surely be soon), a major American metropolitan city will come to a screeching halt during rush hour. There will simply be too many cars, trying to get too many places, all at once, and too little pavement to accommodate all this automotive ambition. Such is the logical conclusion of all the trends.
Recently, the Texas Transportation Institute (TTI) released its annual Urban Mobility Report. The short of it is this: Congestion just keeps getting worse. More people are spending more time in traffic than ever before, across more cities. In the 437 United States urban areas, the average individual traveler loses 38 hours a year to congestion, and 26 gallons of gasoline. Nationwide, that is 4.2 billion hours, and 2.9 billion gallons of fuel, and $78 billion dollars. Which is about three times worse than it was in 1982, when the TTI first started putting out these reports. (Providence commuters lose a combined 19.5 million hours a year and waste 11.6 million gallons of gas in traffic, ranking Providence 37th and 38th in the nation, respectively; Boston commuters lose 93.4 million hours and 62.5 million gallons of gas, ranking Boston 12th and 13th in the nation, respectively).
But that’s just the hard numbers. How do you measure the emotional strain of sitting there, helplessly pounding the steering wheel, watching your life waste away in a bizarre pile of steel and exhaust, with nothing even worth listening to on the radio (just commercial after commercial telling us about all the great sales events we need to drive to). Then add in the time lost to recovering from the excruciating commute, all the anger and hostility that now needs to be defused (or taken out on somebody), and, of course, the heart attacks (according to the New England Journal of Medicine, being stuck in a traffic jam more than doubles the risk of a heart attack in the ensuing hour), and you begin to wonder: So this is what all our prosperity has brought us, then? More three-car pile-ups? Choking on our own affluence, are we?
In many ways, our modern traffic dilemma is a perfect triumph of individual rationality over collective rationality. Sure, many of us in urban areas could take public transportation to work, but the bus doesn’t come that often, and it takes longer, and worse, you are then stuck sitting with the great unwashed masses. To relinquish the car is to relinquish control, freedom, and all those other cherished values that made this country great. Of course, if everybody took the bus, the buses would run more often, and be nicer, and get there faster (because there would be less car traffic). But who goes first?
And what of the other solutions? Carpooling? Four out of five commuters now go it alone, up from three out of four just a few years ago. Who can spare the time it takes to pick up an extra person? And besides, who wants to give up that valuable alone time. Telecommuting? Never became acceptable. Living closer to work? Great if you can afford to live somewhere nice downtown, but what about the schools, and the peace and quiet? And what if your spouse works somewhere else? Shopping locally? But can you really get everything you’ve come to expect, and all the best deals?
And so it goes. We know what we should be doing, but pity the local politician who tells people how to live their lives, and punishes them with heavy fines if they don’t comply. After all, what could be worse than sitting in traffic? Why, having the mayor suddenly tell you that if you want to drive into the city by yourself during peak traffic time, well, that will be $100, please.
And yet, how else will this traffic problem solve itself without some courage on behalf of our public leaders? The incentives are all misaligned. Even if the traffic is bad, the other options are still worse for most people. So slap on some congestion pricing, as Michael Bloomberg is proposing to do in New York City. And use that money to improve public transportation, and to subsidize urban redevelopment so more people can afford to live closer to work. But pity the politician.
This does not happen overnight. But the situation we are in did not happen overnight either. Sixty years ago, federal lending policies encouraged mass suburbanization by basically making financing a home in an urban area untenable. General Motors bought out trolley lines in almost 50 cities so it could rip them up and then sell more cars and buses. And all that wonderful propaganda about the American dream on half-acre lots. . . .
So, here are the consequences: suburban snarl. And what comes of global competitiveness, when we can’t even get to work without getting an ulcer anymore? Maybe we ought to try this for global competitiveness: maybe someday soon, Los Angeles can compete with Lagos for the most congested city in the world.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
09:09 AM EDT on Thursday, October 4, 2007
LEE DRUTMAN
WASHINGTON
ONE OF THESE DAYS (and it will surely be soon), a major American metropolitan city will come to a screeching halt during rush hour. There will simply be too many cars, trying to get too many places, all at once, and too little pavement to accommodate all this automotive ambition. Such is the logical conclusion of all the trends.
Recently, the Texas Transportation Institute (TTI) released its annual Urban Mobility Report. The short of it is this: Congestion just keeps getting worse. More people are spending more time in traffic than ever before, across more cities. In the 437 United States urban areas, the average individual traveler loses 38 hours a year to congestion, and 26 gallons of gasoline. Nationwide, that is 4.2 billion hours, and 2.9 billion gallons of fuel, and $78 billion dollars. Which is about three times worse than it was in 1982, when the TTI first started putting out these reports. (Providence commuters lose a combined 19.5 million hours a year and waste 11.6 million gallons of gas in traffic, ranking Providence 37th and 38th in the nation, respectively; Boston commuters lose 93.4 million hours and 62.5 million gallons of gas, ranking Boston 12th and 13th in the nation, respectively).
But that’s just the hard numbers. How do you measure the emotional strain of sitting there, helplessly pounding the steering wheel, watching your life waste away in a bizarre pile of steel and exhaust, with nothing even worth listening to on the radio (just commercial after commercial telling us about all the great sales events we need to drive to). Then add in the time lost to recovering from the excruciating commute, all the anger and hostility that now needs to be defused (or taken out on somebody), and, of course, the heart attacks (according to the New England Journal of Medicine, being stuck in a traffic jam more than doubles the risk of a heart attack in the ensuing hour), and you begin to wonder: So this is what all our prosperity has brought us, then? More three-car pile-ups? Choking on our own affluence, are we?
In many ways, our modern traffic dilemma is a perfect triumph of individual rationality over collective rationality. Sure, many of us in urban areas could take public transportation to work, but the bus doesn’t come that often, and it takes longer, and worse, you are then stuck sitting with the great unwashed masses. To relinquish the car is to relinquish control, freedom, and all those other cherished values that made this country great. Of course, if everybody took the bus, the buses would run more often, and be nicer, and get there faster (because there would be less car traffic). But who goes first?
And what of the other solutions? Carpooling? Four out of five commuters now go it alone, up from three out of four just a few years ago. Who can spare the time it takes to pick up an extra person? And besides, who wants to give up that valuable alone time. Telecommuting? Never became acceptable. Living closer to work? Great if you can afford to live somewhere nice downtown, but what about the schools, and the peace and quiet? And what if your spouse works somewhere else? Shopping locally? But can you really get everything you’ve come to expect, and all the best deals?
And so it goes. We know what we should be doing, but pity the local politician who tells people how to live their lives, and punishes them with heavy fines if they don’t comply. After all, what could be worse than sitting in traffic? Why, having the mayor suddenly tell you that if you want to drive into the city by yourself during peak traffic time, well, that will be $100, please.
And yet, how else will this traffic problem solve itself without some courage on behalf of our public leaders? The incentives are all misaligned. Even if the traffic is bad, the other options are still worse for most people. So slap on some congestion pricing, as Michael Bloomberg is proposing to do in New York City. And use that money to improve public transportation, and to subsidize urban redevelopment so more people can afford to live closer to work. But pity the politician.
This does not happen overnight. But the situation we are in did not happen overnight either. Sixty years ago, federal lending policies encouraged mass suburbanization by basically making financing a home in an urban area untenable. General Motors bought out trolley lines in almost 50 cities so it could rip them up and then sell more cars and buses. And all that wonderful propaganda about the American dream on half-acre lots. . . .
So, here are the consequences: suburban snarl. And what comes of global competitiveness, when we can’t even get to work without getting an ulcer anymore? Maybe we ought to try this for global competitiveness: maybe someday soon, Los Angeles can compete with Lagos for the most congested city in the world.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
Thursday, September 20, 2007
Corrupt lobbyists remain triumphant -- Providence Journal
http://www.projo.com/opinion/contributors/content/CT_drut20_09-20-07_JB75ES1.1f8ebf7.html
LEE DRUTMAN
WASHINGTON
SO, AT LONG LAST, and with the begrudging signature of the president of the United States, the so-called lobbying- and ethics-reform bill is now law. Well, hip, hip, hooray.
“A great day it is indeed,” House Speaker Nancy Pelosi (D.-Calif.) said at a press conference. “Democrats in Washington are draining the swamp to make this the most honest Congress in history.” Take that, culture of corruption!
Oh, if only the world of Washington influence-peddling were so simple that a little bit of new fundraising disclosure here, a well-meaning ban on junkets there, and a sprinkling of earmark disclosure all around, and bam, presto, shazam! The most honest Congress in history! In history!
Lest we get too cynical, though, there is some good here. Disclosure, for example, is a helpful, knowledge being power and all that. Now, thanks to this new bill, we the public will know more about what lobbyists are giving to whom, and how they are bundling contributions. We will know more about “earmarks.” And soon, we will be treated to a steady stream of reports from the good-natured numbers crunchers at various public-interest watchdogs around town, each nourishing our sense of outrage at how much money is sloshing around. Each full of sound and fury, signifying . . .
But then, come election time, our beloved member of Congress will arrive at the local pancake breakfast, cheerfully telling us how he got this federal funding for a regional biotechnology center that is creating jobs (an earmark), this federal grant for a new cancer ward at the city hospital (an earmark), and that federal grant to keep a cherished museum afloat (an earmark). Then he will offer the usual nostrums about the awful corruption in Washington that he (tirelessly, and mostly on his own) is working to fix, and we will think: What a great guy. I’m voting for him!
As for the ban on meals and free corporate travel and other tasteless gifts to lawmakers, it only means that lobbyists will just have to spend even more time at $1,000-a-plate fundraisers, which members of Congress, in their infinite wisdom, never considered banning lobbyists from attending. But the lobbyists will be okay. More regulations mean more specialized and valuable expertise to navigate the process. Sure, they have might more paperwork now, but they are getting well paid for their time.
The big question, of course, is what is lobby and ethics reform trying to change? Is it the “culture of corruption,” the supposed mechanistic quid-quo-pro graft and bribery that Jack Abramoff came to symbolize? If so, there’s no need for new laws. Just enforce the existing ones, as the Justice Department ultimately did. Remember, Jack Abramoff is in jail now. The need is for better people. But that has been the need since Day One.
Still, you have to be pretty cynical about politicians to think that they are such ciphers that their unconditional support can be secured for a prime rib or a prime seat at a Nationals game. Sure, there are bad apples, and instances of what we know as corruption. But from a perspective of representative democracy, the problem is not that it is a venal swamp in need of draining, but simply that a minority of interests with the majority of financial resources hire the majority of the lobbyists, who in turn convince the majority of the elected representatives what the “right thing” to do is. And they are darn persuasive about it. For example, why would a pharmaceutical company risk bribing a congressman when it can just bring in sick patient after sick patient to beg politely for continued full Medicare drug reimbursements? The media like to focus on the scandals. But most lobbying happens above board. What really matters is the quantity of it.
So, what is to be done? Well, for one, pay congressional staffers better so they’ll stick around longer, developing independent expertise on issues instead of going off to work as lobbyists as soon as they turn 26 or 27. Give Congress more independent sources of information so they don’t have to depend on lobbyists so much to know what’s going on with an issue. And enact public financing of federal elections so lawmakers don’t feel any extra pressure to keep those with the most money the most happy. But, most importantly, let’s have a real conversation about the ways in which the current lobbying system does or does not represent the public at large instead of overblowing a few instances of corruption that were punishable under existing laws.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
LEE DRUTMAN
WASHINGTON
SO, AT LONG LAST, and with the begrudging signature of the president of the United States, the so-called lobbying- and ethics-reform bill is now law. Well, hip, hip, hooray.
“A great day it is indeed,” House Speaker Nancy Pelosi (D.-Calif.) said at a press conference. “Democrats in Washington are draining the swamp to make this the most honest Congress in history.” Take that, culture of corruption!
Oh, if only the world of Washington influence-peddling were so simple that a little bit of new fundraising disclosure here, a well-meaning ban on junkets there, and a sprinkling of earmark disclosure all around, and bam, presto, shazam! The most honest Congress in history! In history!
Lest we get too cynical, though, there is some good here. Disclosure, for example, is a helpful, knowledge being power and all that. Now, thanks to this new bill, we the public will know more about what lobbyists are giving to whom, and how they are bundling contributions. We will know more about “earmarks.” And soon, we will be treated to a steady stream of reports from the good-natured numbers crunchers at various public-interest watchdogs around town, each nourishing our sense of outrage at how much money is sloshing around. Each full of sound and fury, signifying . . .
But then, come election time, our beloved member of Congress will arrive at the local pancake breakfast, cheerfully telling us how he got this federal funding for a regional biotechnology center that is creating jobs (an earmark), this federal grant for a new cancer ward at the city hospital (an earmark), and that federal grant to keep a cherished museum afloat (an earmark). Then he will offer the usual nostrums about the awful corruption in Washington that he (tirelessly, and mostly on his own) is working to fix, and we will think: What a great guy. I’m voting for him!
As for the ban on meals and free corporate travel and other tasteless gifts to lawmakers, it only means that lobbyists will just have to spend even more time at $1,000-a-plate fundraisers, which members of Congress, in their infinite wisdom, never considered banning lobbyists from attending. But the lobbyists will be okay. More regulations mean more specialized and valuable expertise to navigate the process. Sure, they have might more paperwork now, but they are getting well paid for their time.
The big question, of course, is what is lobby and ethics reform trying to change? Is it the “culture of corruption,” the supposed mechanistic quid-quo-pro graft and bribery that Jack Abramoff came to symbolize? If so, there’s no need for new laws. Just enforce the existing ones, as the Justice Department ultimately did. Remember, Jack Abramoff is in jail now. The need is for better people. But that has been the need since Day One.
Still, you have to be pretty cynical about politicians to think that they are such ciphers that their unconditional support can be secured for a prime rib or a prime seat at a Nationals game. Sure, there are bad apples, and instances of what we know as corruption. But from a perspective of representative democracy, the problem is not that it is a venal swamp in need of draining, but simply that a minority of interests with the majority of financial resources hire the majority of the lobbyists, who in turn convince the majority of the elected representatives what the “right thing” to do is. And they are darn persuasive about it. For example, why would a pharmaceutical company risk bribing a congressman when it can just bring in sick patient after sick patient to beg politely for continued full Medicare drug reimbursements? The media like to focus on the scandals. But most lobbying happens above board. What really matters is the quantity of it.
So, what is to be done? Well, for one, pay congressional staffers better so they’ll stick around longer, developing independent expertise on issues instead of going off to work as lobbyists as soon as they turn 26 or 27. Give Congress more independent sources of information so they don’t have to depend on lobbyists so much to know what’s going on with an issue. And enact public financing of federal elections so lawmakers don’t feel any extra pressure to keep those with the most money the most happy. But, most importantly, let’s have a real conversation about the ways in which the current lobbying system does or does not represent the public at large instead of overblowing a few instances of corruption that were punishable under existing laws.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
Wednesday, September 05, 2007
The challenge of the narcissistic CEO -- Providence Journal
WHY DOES THE PAY of American chief executive officers surge year after year, no matter how well their companies are doing? Maybe it’s just plain old narcissism — pathologically self-important executives who can never get enough external validation, and so they have to keep paying themselves more and more as a salve for their wobbly egos. Of course, they do this with the acceptance of the boards of directors they so assiduously cultivate.
If so, do companies that keep indulging their CEOs in their Sisyphean pay-raise chases only make their narcissism worse? And if they do, what are the consequences? Don’t narcissists become more psychologically unstable over time, taking more ever more extreme and ill-advised actions in pursuit of some elusive psychological self-justification? And can that really be a good thing for the economy?
In psychiatric parlance, one is said to have “narcissistic personality disorder” (NPD) when he/she makes exaggerated claims about talents and abilities, needs constant admiration from others and has a hard time feeling empathy for others.
Not surprisingly, those who score high on the Narcissistic Personality Inventory (NPI) test do things we generally frown on as a society. They cheat, they take more than their share and hoard it, they value material goods excessively, and they spend way too much time looking at themselves in the mirror. They also tend to gravitate to high-profile, high-paying positions of leadership — such as corporate executive.
In upcoming issue of Administrative Science Quarterly, two professors from Pennsylvania State University’s Smeal College of business, Arijit Chatterjee and Donald Hambrick, examine the impacts of CEO narcissism on company performance. Their study, intriguingly titled “It’s All About Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance,” suggests that the more narcissistic the CEO, the more the company tends to pursue big, high-risk strategies. More acquisitions, more frequent big changes in direction, more fluctuations in just about everything. But “although narcissists tend to generate more extreme and volatile performance than non-narcissists, they do not generate systematically better or worse performance.” (The study is based on 111 CEOs in the computer and software industry; the researchers measured narcissism by seeing how much the CEOs got paid relative to others in the company, how much they spoke about their company in the first-person singular, and how prominently they were featured in company materials.)
Other research, however, does suggest that overly narcissistic leaders are actually quite destructive in the long-term. For example, Roy Lubit’s work (“The Long-Term Organizational Impact of Destructively Narcissistic Managers”) makes a convincing case that, over time, narcissism leads to recklessness, and eventually, big trouble. It also alienates and drives away the most talented people in the company. Or, as management guru Peter Drucker once wrote, “The leaders who work most effectively, it seems to me, never say ‘I.’ And that’s not because they have trained themselves not to say ‘I.’ They don’t think ‘I.’ They think ‘we’; they think ‘team.’”
Psychologists have no real cure for narcissism, though it can be dampened through humbling life experience. Conversely, the more one is allowed to indulge in narcissism, the worse all the symptoms generally get — the never-ceasing quest for self-importance and approval that leads to more outrageous and unreasonable attempts to reach the slippery heights of feeling okay with yourself. So maybe paying CEOs more and more with each passing year is only fueling their narcissism, which leads them to pursue grander but more outrageous moves, until one day — Wham! Bam! Crash!
Sure money motivates. And sure a little bit of narcissism is probably a condition for the risk-taking that our economy thrives on. But eventually, the money itself becomes meaningless. It is merely status, and there will always be somebody with more. Likewise, beyond a certain level, risk-taking just becomes idiotic thrill-seeking for its own sake. And worse, it’s reckless thrill-seeking with thousands of employees and investors along for the ride.
It’s hard to say exactly where healthy incentive turns into harmful addiction, where productive drive turns into damaging disorder. But with each passing year, as CEO pay reaches ever higher stratospheres while average worker pay stagnates (the ratio is now on the order of 400-to-1 — truly remarkable since all other industrialized nations have kept the ratio around 20-to-1), it seems more and more like a line is being crossed. And as a general rule, it’s probably not good policy to indulge and encourage the potentially destructive psychological disorders of those who have the power. It can only lead to no good eventually.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy ( ldrutman@gmail.com).
If so, do companies that keep indulging their CEOs in their Sisyphean pay-raise chases only make their narcissism worse? And if they do, what are the consequences? Don’t narcissists become more psychologically unstable over time, taking more ever more extreme and ill-advised actions in pursuit of some elusive psychological self-justification? And can that really be a good thing for the economy?
In psychiatric parlance, one is said to have “narcissistic personality disorder” (NPD) when he/she makes exaggerated claims about talents and abilities, needs constant admiration from others and has a hard time feeling empathy for others.
Not surprisingly, those who score high on the Narcissistic Personality Inventory (NPI) test do things we generally frown on as a society. They cheat, they take more than their share and hoard it, they value material goods excessively, and they spend way too much time looking at themselves in the mirror. They also tend to gravitate to high-profile, high-paying positions of leadership — such as corporate executive.
In upcoming issue of Administrative Science Quarterly, two professors from Pennsylvania State University’s Smeal College of business, Arijit Chatterjee and Donald Hambrick, examine the impacts of CEO narcissism on company performance. Their study, intriguingly titled “It’s All About Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance,” suggests that the more narcissistic the CEO, the more the company tends to pursue big, high-risk strategies. More acquisitions, more frequent big changes in direction, more fluctuations in just about everything. But “although narcissists tend to generate more extreme and volatile performance than non-narcissists, they do not generate systematically better or worse performance.” (The study is based on 111 CEOs in the computer and software industry; the researchers measured narcissism by seeing how much the CEOs got paid relative to others in the company, how much they spoke about their company in the first-person singular, and how prominently they were featured in company materials.)
Other research, however, does suggest that overly narcissistic leaders are actually quite destructive in the long-term. For example, Roy Lubit’s work (“The Long-Term Organizational Impact of Destructively Narcissistic Managers”) makes a convincing case that, over time, narcissism leads to recklessness, and eventually, big trouble. It also alienates and drives away the most talented people in the company. Or, as management guru Peter Drucker once wrote, “The leaders who work most effectively, it seems to me, never say ‘I.’ And that’s not because they have trained themselves not to say ‘I.’ They don’t think ‘I.’ They think ‘we’; they think ‘team.’”
Psychologists have no real cure for narcissism, though it can be dampened through humbling life experience. Conversely, the more one is allowed to indulge in narcissism, the worse all the symptoms generally get — the never-ceasing quest for self-importance and approval that leads to more outrageous and unreasonable attempts to reach the slippery heights of feeling okay with yourself. So maybe paying CEOs more and more with each passing year is only fueling their narcissism, which leads them to pursue grander but more outrageous moves, until one day — Wham! Bam! Crash!
Sure money motivates. And sure a little bit of narcissism is probably a condition for the risk-taking that our economy thrives on. But eventually, the money itself becomes meaningless. It is merely status, and there will always be somebody with more. Likewise, beyond a certain level, risk-taking just becomes idiotic thrill-seeking for its own sake. And worse, it’s reckless thrill-seeking with thousands of employees and investors along for the ride.
It’s hard to say exactly where healthy incentive turns into harmful addiction, where productive drive turns into damaging disorder. But with each passing year, as CEO pay reaches ever higher stratospheres while average worker pay stagnates (the ratio is now on the order of 400-to-1 — truly remarkable since all other industrialized nations have kept the ratio around 20-to-1), it seems more and more like a line is being crossed. And as a general rule, it’s probably not good policy to indulge and encourage the potentially destructive psychological disorders of those who have the power. It can only lead to no good eventually.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy ( ldrutman@gmail.com).
Monday, July 09, 2007
The Long-Term Value Moment
The Long-Term Value Moment
Corporate America is realizing that there is more to life than quarterly earnings. Now is the time for progressives to help businesses figure out what taking the long view actually means.
Lee Drutman | July 9, 2007 | web only
Has corporate America had finally had it with short-termism? In late June, the Committee for Economic Development issued the latest in a series of reports by business think tanks illustrating a growing change in the way American business is thinking about value. "Built to Last: Focusing Corporations on Long-Term Performance," lays out a strong case against a destructive short-term focus that has infected American capitalism in recent years. It calls on companies to stop issuing quarterly earnings guidance and instead take the long view: "Decision making based primarily on short-term considerations damages the ability of public companies -- and, therefore, of the U.S. economy -- to sustain superior long-term performance."
This is not an isolated development. Just the week before the release of the "Built to Last" report, the Aspen Institute's Corporate Values Strategy Group (another prominent consortium of business leaders) came to essentially the same conclusion. The group released its Aspen Principles -- "dedicated to re-asserting long-term orientation in business decision-making and investing" --- with all the same sturm and drang about how the focus on quarterly earnings is undermining the American economy ("short-termism constrains the ability of business to do what it does best -- create valuable goods and services, invest in innovation, take risks, and develop human capital").
Other major business policy stalwarts, The Conference Board ("Revisiting Stock Market Short-Termism"), the Business Roundtable ("Breaking the Short-Term Cycle") and the Chamber of Commerce ("Enhancing America's Long-Term Competitiveness: Ending Wall Street's Quarterly Earnings Game") have also recently sermonized on the pathologies of short-term thinking.
Add it up, and it's starting to feel like maybe American business is doing a little collective soul-searching. Surely, business leaders seem to be saying, there must be more to life than devoting everything to Wall Street earnings expectations every three months? As Chamber of Commerce President Thomas Donohue put it: "I can tell you that CEO frustration with earnings expectations is widespread and growing rapidly."
Maybe, just maybe, American business leaders are yearning for something more meaningful, something they can feel good about in a larger sense. And maybe, just maybe, progressives have a real opportunity to help these executives think about how to expand their purpose. Looking through these reports, one gets the sense that business leaders are not sure how to think about and measure long-term value. This is new territory, and there are competing views. Now is the time for progressives to pipe up about what taking the long view could and should mean for American business.
Of course, advocates of socially responsible business have for years been stressing that if you take the long view, being socially responsible is not just its own reward -- it's good business, too. Sure, energy efficiency is a big up-front cost, but it saves money over the long term. Sure, providing your employees training and benefits can be expensive, but over time, happier, skilled employees contribute more. Sure, cutting corners on product safety and quality is a great way to meet those quarterly goals, but safe, high-quality products build lasting relationships with consumers. Sure, investing in local schools and community institutions is an extra cost, community goodwill and support are crucial (though intangible) assets.
The problem is that in a world of instant earnings gratification, it gets real hard to justify things that will eventually be profitable. In such a world, business's only responsibility is to make money for its shareholders -- now! This puts executives in a tough position: ship jobs overseas, pollute, and generally cut corners to meet the numbers today, or see your company's stock price go for a serious tumble tomorrow, taking your stock options with it.
But why now? After all, it's not like you need a Stanford MBA to realize that sacrificing everything at the altar of quarterly reporting just can't be the smartest strategy for continued success. (Remember the parable of the goose that lays golden eggs? Keep the goose happy, and you get a steady stream of golden eggs for the foreseeable future. Cut it open to get all the golden eggs now, and sure, you get an extra egg or two today. But good luck finding a new golden-egg laying goose .) Is America's business elite really just figuring this out now?
Well, probably not. But what has happened is that three recent trends -- the growth of hedge funds, the rise of private equity, and new accounting and financial reporting rules -- have transformed quarterly earnings from something that corporate executives could easily control and exploit into something that has become increasingly burdensome, and something that may even undermine their managerial control.
First, consider the rise of hedge funds. There is now an estimated $1.4 trillion in 9,400 hedge funds, up from about $150 billion in 2,000 hedge funds in 1997. These funds tend to be rather aggressive in their investing strategies, often making very big bets. (Between 1997 and 2006, the annual volume of trading on the NYSE more that quadrupled, from 133 billion to 588 billion shares traded, a development that tracks the rise in hedge funds.) Aggressive traders like quarterly earnings guidance because they provide ready benchmarks for big gambles. But big gambles mean big volatility. And big volatility means that companies can get beaten up pretty bad for one rough quarter.
Now, add in the rise of private equity. In 2006, $440 billion of private equity went into buying companies, as compared to $100 billion in 2003. There is a lot more money out there now just waiting to gobble up a company whose stock is temporarily undervalued. And with all these hedge funds adding to market volatility, one bad quarter and boom -- your company could suddenly be a target for a hostile takeover if the market cascades in the wrong way. But take away the focus on short-term metrics, and aggressive investors have fewer clear benchmarks to bet on, which means less volatility. Hence fewer undervalued companies to take over, and more management autonomy.
Finally, there are the post-Enron changes in accounting and reporting regulations, which further erode executives' ability to control the market. Under the old system of loose rules and looser enforcement, corporate managers discovered remarkable freedoms in managing the quarterly numbers. This was what many of the big accounting scandals were about -- corporate executives with massive stock option grants learned how to manipulate "earnings" through various devious accounting tricks (some of which were actually remarkably straightforward), and Wall Street played right along. The investment banks were generally in on the secret, getting rich themselves from lucrative underwriting. This helped send stock prices higher and higher. Executives then cashed in at the highs. And those not in the know were left holding the bag when the house of cards crumbled, and the ineluctable nosedive finally came.
Now, however, CEOs can't get away with those same old tricks. New regulations mandate clearer accounting, more straightforward financial reporting, and hence more transparent markets. But all this information does give hedge funds and private equity more power vis-à-vis corporate executives, knowledge being power and all.
The cynical view, then, is that all this mumbo-jumbo about "long-term value" is just a ploy by corporate managers to make sure they continue to enjoy the kind of autonomy and freedom they have grown accustomed to. Give outside investors too much information (the current trend), and pretty soon, they might start using that information to make life difficult. But replace the easily interpretable quarterly earnings figures with more amorphous metrics of "long-term value," and corporate executives soon regain their ability to control the spin and in doing so, retain their freedoms (such as the cherished freedom to pay themselves whatever the heck they want to be paid).
Look closely at the arguments by Chamber of Commerce's Donohue, and you begin to wonder whether the shift to a long term focus isn't just an excuse to do away with unwelcome financial reporting regulations. According to Donohue,
The rules have now been changed to favor a culture of immediate financial gratification without regard to long-term costs… Washington and Wall Street felt obligated to buy into the view that accounting should be made into a precise science. GAAP [Generally Accepted Accounting Principles] is being treated like 2+2 arithmetic instead of broad guidelines requiring judgment.
Translation: we don't like being told how to do our accounting. (Notice how Donohoue elides Wall Street and Washington as co-conspirators in a push towards short-term thinking, even though the shift to short-termism preceded accounting regulation by almost a decade.)
Still, regardless of the rationale behind it, the move away from quarterly earnings focus is genuine. In 2002, only a few intrepid companies were refusing to play the Wall Street quarterly earnings game. Now roughly half of publicly-traded companies are. Probably within a few years, almost all will be.
On the whole, this is good news. The quarterly earnings obsession is not particularly healthy for progressive business principles that value environmental sustainability, investing in workers, making safe, quality products, and building strong community relationships (all long-term projects).
But if quarterly earnings reports disappear as the primary metric of evaluating business, what replaces them? Well, some measure of long-term value. But what? It's not clear yet -- that's what these reports are all trying to hash out. The accepted metrics of long-term value are still up for grabs, at least for a little while. And therein lies the great challenge and the potential battle.
Management-oriented groups like the Chamber of Commerce and the Business Roundtable are going to want to fudge the definition so they can maximize executive autonomy and control. (They don't have a history of caring too much about workers or the environment.)
But the fact that the Aspen Principles were drafted with the help of unions and pension funds is a good sign. More progressive voices need to get into the conservation and think about ways to define long-term corporate value so it includes social and environmental concerns. A window is opening in the debate over what could and should go into a long-term measure. But progressives need to act quickly. It may not be open long.
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.prospect.org/cs/articles?article=the_longterm_value_moment
Corporate America is realizing that there is more to life than quarterly earnings. Now is the time for progressives to help businesses figure out what taking the long view actually means.
Lee Drutman | July 9, 2007 | web only
Has corporate America had finally had it with short-termism? In late June, the Committee for Economic Development issued the latest in a series of reports by business think tanks illustrating a growing change in the way American business is thinking about value. "Built to Last: Focusing Corporations on Long-Term Performance," lays out a strong case against a destructive short-term focus that has infected American capitalism in recent years. It calls on companies to stop issuing quarterly earnings guidance and instead take the long view: "Decision making based primarily on short-term considerations damages the ability of public companies -- and, therefore, of the U.S. economy -- to sustain superior long-term performance."
This is not an isolated development. Just the week before the release of the "Built to Last" report, the Aspen Institute's Corporate Values Strategy Group (another prominent consortium of business leaders) came to essentially the same conclusion. The group released its Aspen Principles -- "dedicated to re-asserting long-term orientation in business decision-making and investing" --- with all the same sturm and drang about how the focus on quarterly earnings is undermining the American economy ("short-termism constrains the ability of business to do what it does best -- create valuable goods and services, invest in innovation, take risks, and develop human capital").
Other major business policy stalwarts, The Conference Board ("Revisiting Stock Market Short-Termism"), the Business Roundtable ("Breaking the Short-Term Cycle") and the Chamber of Commerce ("Enhancing America's Long-Term Competitiveness: Ending Wall Street's Quarterly Earnings Game") have also recently sermonized on the pathologies of short-term thinking.
Add it up, and it's starting to feel like maybe American business is doing a little collective soul-searching. Surely, business leaders seem to be saying, there must be more to life than devoting everything to Wall Street earnings expectations every three months? As Chamber of Commerce President Thomas Donohue put it: "I can tell you that CEO frustration with earnings expectations is widespread and growing rapidly."
Maybe, just maybe, American business leaders are yearning for something more meaningful, something they can feel good about in a larger sense. And maybe, just maybe, progressives have a real opportunity to help these executives think about how to expand their purpose. Looking through these reports, one gets the sense that business leaders are not sure how to think about and measure long-term value. This is new territory, and there are competing views. Now is the time for progressives to pipe up about what taking the long view could and should mean for American business.
Of course, advocates of socially responsible business have for years been stressing that if you take the long view, being socially responsible is not just its own reward -- it's good business, too. Sure, energy efficiency is a big up-front cost, but it saves money over the long term. Sure, providing your employees training and benefits can be expensive, but over time, happier, skilled employees contribute more. Sure, cutting corners on product safety and quality is a great way to meet those quarterly goals, but safe, high-quality products build lasting relationships with consumers. Sure, investing in local schools and community institutions is an extra cost, community goodwill and support are crucial (though intangible) assets.
The problem is that in a world of instant earnings gratification, it gets real hard to justify things that will eventually be profitable. In such a world, business's only responsibility is to make money for its shareholders -- now! This puts executives in a tough position: ship jobs overseas, pollute, and generally cut corners to meet the numbers today, or see your company's stock price go for a serious tumble tomorrow, taking your stock options with it.
But why now? After all, it's not like you need a Stanford MBA to realize that sacrificing everything at the altar of quarterly reporting just can't be the smartest strategy for continued success. (Remember the parable of the goose that lays golden eggs? Keep the goose happy, and you get a steady stream of golden eggs for the foreseeable future. Cut it open to get all the golden eggs now, and sure, you get an extra egg or two today. But good luck finding a new golden-egg laying goose .) Is America's business elite really just figuring this out now?
Well, probably not. But what has happened is that three recent trends -- the growth of hedge funds, the rise of private equity, and new accounting and financial reporting rules -- have transformed quarterly earnings from something that corporate executives could easily control and exploit into something that has become increasingly burdensome, and something that may even undermine their managerial control.
First, consider the rise of hedge funds. There is now an estimated $1.4 trillion in 9,400 hedge funds, up from about $150 billion in 2,000 hedge funds in 1997. These funds tend to be rather aggressive in their investing strategies, often making very big bets. (Between 1997 and 2006, the annual volume of trading on the NYSE more that quadrupled, from 133 billion to 588 billion shares traded, a development that tracks the rise in hedge funds.) Aggressive traders like quarterly earnings guidance because they provide ready benchmarks for big gambles. But big gambles mean big volatility. And big volatility means that companies can get beaten up pretty bad for one rough quarter.
Now, add in the rise of private equity. In 2006, $440 billion of private equity went into buying companies, as compared to $100 billion in 2003. There is a lot more money out there now just waiting to gobble up a company whose stock is temporarily undervalued. And with all these hedge funds adding to market volatility, one bad quarter and boom -- your company could suddenly be a target for a hostile takeover if the market cascades in the wrong way. But take away the focus on short-term metrics, and aggressive investors have fewer clear benchmarks to bet on, which means less volatility. Hence fewer undervalued companies to take over, and more management autonomy.
Finally, there are the post-Enron changes in accounting and reporting regulations, which further erode executives' ability to control the market. Under the old system of loose rules and looser enforcement, corporate managers discovered remarkable freedoms in managing the quarterly numbers. This was what many of the big accounting scandals were about -- corporate executives with massive stock option grants learned how to manipulate "earnings" through various devious accounting tricks (some of which were actually remarkably straightforward), and Wall Street played right along. The investment banks were generally in on the secret, getting rich themselves from lucrative underwriting. This helped send stock prices higher and higher. Executives then cashed in at the highs. And those not in the know were left holding the bag when the house of cards crumbled, and the ineluctable nosedive finally came.
Now, however, CEOs can't get away with those same old tricks. New regulations mandate clearer accounting, more straightforward financial reporting, and hence more transparent markets. But all this information does give hedge funds and private equity more power vis-à-vis corporate executives, knowledge being power and all.
The cynical view, then, is that all this mumbo-jumbo about "long-term value" is just a ploy by corporate managers to make sure they continue to enjoy the kind of autonomy and freedom they have grown accustomed to. Give outside investors too much information (the current trend), and pretty soon, they might start using that information to make life difficult. But replace the easily interpretable quarterly earnings figures with more amorphous metrics of "long-term value," and corporate executives soon regain their ability to control the spin and in doing so, retain their freedoms (such as the cherished freedom to pay themselves whatever the heck they want to be paid).
Look closely at the arguments by Chamber of Commerce's Donohue, and you begin to wonder whether the shift to a long term focus isn't just an excuse to do away with unwelcome financial reporting regulations. According to Donohue,
The rules have now been changed to favor a culture of immediate financial gratification without regard to long-term costs… Washington and Wall Street felt obligated to buy into the view that accounting should be made into a precise science. GAAP [Generally Accepted Accounting Principles] is being treated like 2+2 arithmetic instead of broad guidelines requiring judgment.
Translation: we don't like being told how to do our accounting. (Notice how Donohoue elides Wall Street and Washington as co-conspirators in a push towards short-term thinking, even though the shift to short-termism preceded accounting regulation by almost a decade.)
Still, regardless of the rationale behind it, the move away from quarterly earnings focus is genuine. In 2002, only a few intrepid companies were refusing to play the Wall Street quarterly earnings game. Now roughly half of publicly-traded companies are. Probably within a few years, almost all will be.
On the whole, this is good news. The quarterly earnings obsession is not particularly healthy for progressive business principles that value environmental sustainability, investing in workers, making safe, quality products, and building strong community relationships (all long-term projects).
But if quarterly earnings reports disappear as the primary metric of evaluating business, what replaces them? Well, some measure of long-term value. But what? It's not clear yet -- that's what these reports are all trying to hash out. The accepted metrics of long-term value are still up for grabs, at least for a little while. And therein lies the great challenge and the potential battle.
Management-oriented groups like the Chamber of Commerce and the Business Roundtable are going to want to fudge the definition so they can maximize executive autonomy and control. (They don't have a history of caring too much about workers or the environment.)
But the fact that the Aspen Principles were drafted with the help of unions and pension funds is a good sign. More progressive voices need to get into the conservation and think about ways to define long-term corporate value so it includes social and environmental concerns. A window is opening in the debate over what could and should go into a long-term measure. But progressives need to act quickly. It may not be open long.
Lee Drutman is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.prospect.org/cs/articles?article=the_longterm_value_moment
Friday, June 22, 2007
Postal rates and democracy -- Providence Journal
Lee Drutman: Postal rates and democracy
07:19 AM EDT on Friday, June 22, 2007
BERKELEY, Calif. Consider junk mail — about 100 billion pieces a year in America, or 5.8 million tons. It’s almost half of all mail delivered today, and about half of which just goes straight into the trash (a truly idiotic waste of paper). One wonders: Might that daily deluge of glitzy credit-card pre-approvals diminish if the U.S. Postal Service started, say, charging direct marketers a little more for bulk mail? (Though without all that external approval, where would we all then turn for validation?)
Of course, there’s politics in this. The credit-card companies and other direct marketers like things the way they are. And in an era when old-fashioned letters aren’t what they used to be, the U.S. Postal Service, an “independent establishment of the executive branch of the Government of the United States,” which is expected somehow to break even despite being an inherently losing proposition, needs whatever business it can get. This year, it is projecting a $5.2 billion loss. Which takes us to rate hikes.
Last month, the cost of a first-class stamp went from 39 cents to 41 cents. Postcards now cost 26 cents. Parcel post, $4.50. Gotta make up the difference somehow, blah, blah, blah. But don’t let your the eyes glaze over yet. Because something troubling is brewing in the minutiae of postal- rate hike policy — something that threatens the viability of small, independent magazines of ideas and politics and literature, the kinds of publications that tend to have a hard time staying solvent as it is, but that are essential for a democracy where thoughtful and reasoned deliberation of politics and values continues to flourish and even occasionally inspire. (The blogosphere is fine, but its click-through ephemera are not an adequate substitute for thought-through essays on paper; The Daily Kos is not the New York Review of Books.)
Thus we get to the substantial magazine-rate hike, a troublingly unequal one in its effects. The large, big-subscription glossy magazines, chockablock with disposable gossip and teeming with Technicolor advertising (which makes them cheaper to subscribe to), will make out fine. They can absorb a 10 percent rate hike. But the small, independent magazines, with narrower audiences and much less advertising, are looking at rate hikes as high as 40 percent (No bulk discount rates for them, apparently).
The rate plan appears to have been largely drafted under the radar by the likes of media conglomerate Time Warner, which spent $4.5 million lobbying the federal government last year.
Fortunately, media activists are leading a charge to get the Postal Service to rethink the hike before it takes effect on July 15. They have a Web site — www. stoppostalratehikes.com — with an online petition. Let’s hope it’s not too late.
Like most public policies, postal-rate hikes are ultimately a competition between competing values. On the one hand, we could view the U.S. Postal Service as something that should be run like a business (the current view, it seems). As such, it makes sense to offer customers bulk discounts, because such bulk discounts tend to increase sales. Think about your last trip to Costco. The consequence, of course, is that the mail then essentially becomes a conduit for advertising, which is both a waste of resources (think of the trees) and a waste of time (think about the hours you spend each year throwing out half your mail).
The other possibility is to think of the Postal Service as a public service (the original conception), and a public service that is even worth subsidizing a little, especially considering how many private corporations the U.S. government directly and indirectly subsidizes through a massive corporate welfare state. In such a view we would care much more about the social consequences of postal rates than whether the Post Office makes or loses money.
We would like, for example, to have low rates for small independent journals of ideas, because we know that a vibrant free press is essential to democracy. (Remember the thinking behind the First Amendment? Anyone?) But we would not care so much if the Postal Service was losing money because higher rates pushed direct marketers to be more selective in assaulting us with unsolicited credit-card offers.
Hopefully, the U.S. Postal Service will realize the consequences of what it is about to do and not force even more small, independent magazines into extinction. But more broadly, we all ought to realize that postal- rate hikes —dull as they may seem — actually have some important consequences for our everyday lives and the quality of democratic discourse, and they are actually worth fighting over sometimes.
07:19 AM EDT on Friday, June 22, 2007
BERKELEY, Calif. Consider junk mail — about 100 billion pieces a year in America, or 5.8 million tons. It’s almost half of all mail delivered today, and about half of which just goes straight into the trash (a truly idiotic waste of paper). One wonders: Might that daily deluge of glitzy credit-card pre-approvals diminish if the U.S. Postal Service started, say, charging direct marketers a little more for bulk mail? (Though without all that external approval, where would we all then turn for validation?)
Of course, there’s politics in this. The credit-card companies and other direct marketers like things the way they are. And in an era when old-fashioned letters aren’t what they used to be, the U.S. Postal Service, an “independent establishment of the executive branch of the Government of the United States,” which is expected somehow to break even despite being an inherently losing proposition, needs whatever business it can get. This year, it is projecting a $5.2 billion loss. Which takes us to rate hikes.
Last month, the cost of a first-class stamp went from 39 cents to 41 cents. Postcards now cost 26 cents. Parcel post, $4.50. Gotta make up the difference somehow, blah, blah, blah. But don’t let your the eyes glaze over yet. Because something troubling is brewing in the minutiae of postal- rate hike policy — something that threatens the viability of small, independent magazines of ideas and politics and literature, the kinds of publications that tend to have a hard time staying solvent as it is, but that are essential for a democracy where thoughtful and reasoned deliberation of politics and values continues to flourish and even occasionally inspire. (The blogosphere is fine, but its click-through ephemera are not an adequate substitute for thought-through essays on paper; The Daily Kos is not the New York Review of Books.)
Thus we get to the substantial magazine-rate hike, a troublingly unequal one in its effects. The large, big-subscription glossy magazines, chockablock with disposable gossip and teeming with Technicolor advertising (which makes them cheaper to subscribe to), will make out fine. They can absorb a 10 percent rate hike. But the small, independent magazines, with narrower audiences and much less advertising, are looking at rate hikes as high as 40 percent (No bulk discount rates for them, apparently).
The rate plan appears to have been largely drafted under the radar by the likes of media conglomerate Time Warner, which spent $4.5 million lobbying the federal government last year.
Fortunately, media activists are leading a charge to get the Postal Service to rethink the hike before it takes effect on July 15. They have a Web site — www. stoppostalratehikes.com — with an online petition. Let’s hope it’s not too late.
Like most public policies, postal-rate hikes are ultimately a competition between competing values. On the one hand, we could view the U.S. Postal Service as something that should be run like a business (the current view, it seems). As such, it makes sense to offer customers bulk discounts, because such bulk discounts tend to increase sales. Think about your last trip to Costco. The consequence, of course, is that the mail then essentially becomes a conduit for advertising, which is both a waste of resources (think of the trees) and a waste of time (think about the hours you spend each year throwing out half your mail).
The other possibility is to think of the Postal Service as a public service (the original conception), and a public service that is even worth subsidizing a little, especially considering how many private corporations the U.S. government directly and indirectly subsidizes through a massive corporate welfare state. In such a view we would care much more about the social consequences of postal rates than whether the Post Office makes or loses money.
We would like, for example, to have low rates for small independent journals of ideas, because we know that a vibrant free press is essential to democracy. (Remember the thinking behind the First Amendment? Anyone?) But we would not care so much if the Postal Service was losing money because higher rates pushed direct marketers to be more selective in assaulting us with unsolicited credit-card offers.
Hopefully, the U.S. Postal Service will realize the consequences of what it is about to do and not force even more small, independent magazines into extinction. But more broadly, we all ought to realize that postal- rate hikes —dull as they may seem — actually have some important consequences for our everyday lives and the quality of democratic discourse, and they are actually worth fighting over sometimes.
Wednesday, May 23, 2007
Bush taps fox for consumer henhouse - Providence Journal
Lee Drutman: Bush taps fox for consumer henhouse
07:29 AM EDT on Wednesday, May 23, 2007
LEE DRUTMAN
BERKELEY, Calif. -- YOU ALMOST have to admire the pure, unadulterated chutzpah. Of all the people out there to head the Consumer Product Safety Commission (CPSC), the Bush administration went ahead and chose Michael Baroody, the executive vice president of the National Association of Manfacturers (NAM) — a man whose job for the last 13 years has been to characterize almost all CPSC regulations as needless meddling by cantankerous, fear-mongering bureaucrats.
Even at this late hour in the Bush administration, in the wake of a major electoral rebuke that put Congress back in Democratic hands, President Bush is sticking to his guns. What this administration needs is another corporate toady in a regulatory role, gosh darn it!
The magic of the marketplace has clearly worked for Baroody (the NAM pays him $344,607 a year to demonize regulation). So why not leave everything up to the simple laws of supply and demand? All government does is interfere with the ability of hard-working Americans to make money, right? And if the people really wanted safe products, why, they’d buy them, already! (Never mind that as lobbyist for the NAM, Baroody supported weakening guidelines to require companies report about product hazards so that consumers could make informed choices.) And if product users get hurt (like all those silly babies who keep getting injured in defective baby walkers), well, it’s probably because they’re stupid (unlike manufacturers, who never make a mistake).
What makes the whole thing even stranger is that Baroody has revealed that he would receive a $150,000 good-bye gift from the NAM. Since this counts as an “extraordinary payment” under federal ethics rules, it means that he will now have to recuse himself from agency matters regarding the NAM for two years. Given that the NAM is, after all, one of the most active business lobbying groups in Washington ($13.2 million in expenditures in 2006), Baroody is probably going to have to be doing a lot of recusing. Makes you wonder what kind of agency head he can be (“Nope, sorry, can’t say anything about that one”).
But maybe that’s the point. Though, apparently, he can be involved in decisions involving NAM member companies and associations (hardly re-assuring). Add that current acting chairman and fellow commissioner Nancy A. Nord was formerly director of consumer affairs for the U.S. Chamber of Commerce — the grand-daddy of all business lobbying groups, with $72.7 million on lobbying expenditures in 2006 — and that’s one heck of an agency you’re running there, Baroody.
Consumer groups are understandably in an uproar about this whole Baroody business (children’s safety! The fox in the henhouse!), and Sen. Bill Nelson (D.-Fla.) has put a “hold” on the nomination, meaning that the Senate leaders cannot schedule a confirmation vote, though hearings on Baroody are scheduled for tomorrow. Though reports indicate that Bush might instead just wait until the Senate breaks and then make one of those recess appointments, like the one he gave John Bolton when the Senate refused to confirm him to be U.N. Ambassador.
Like John Bolton, Baroody is somebody who is basically hostile to the very operating philosophy of the agency he is appointed to be part of. But Bolton was merely appointed to be ambassador to the U.N. Baroody has been appointed to head the whole agency. (Imagine Bolton as U.N. secretary general.) This is more than just the old saw about the fox in the henhouse. This is the fox who doesn’t even think there should be a house, and in fact has been trying to tear it down, plank by plank, for the last 13 years — let the hens survive on their own in the marketplace! Houses are a waste of taxpayer money! Too bad the same vaunted market principles of popular demand and collective wisdom are in short supply these days at another house, one that happens to be painted white.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy. ( ldrutman@gmail.com)
07:29 AM EDT on Wednesday, May 23, 2007
LEE DRUTMAN
BERKELEY, Calif. -- YOU ALMOST have to admire the pure, unadulterated chutzpah. Of all the people out there to head the Consumer Product Safety Commission (CPSC), the Bush administration went ahead and chose Michael Baroody, the executive vice president of the National Association of Manfacturers (NAM) — a man whose job for the last 13 years has been to characterize almost all CPSC regulations as needless meddling by cantankerous, fear-mongering bureaucrats.
Even at this late hour in the Bush administration, in the wake of a major electoral rebuke that put Congress back in Democratic hands, President Bush is sticking to his guns. What this administration needs is another corporate toady in a regulatory role, gosh darn it!
The magic of the marketplace has clearly worked for Baroody (the NAM pays him $344,607 a year to demonize regulation). So why not leave everything up to the simple laws of supply and demand? All government does is interfere with the ability of hard-working Americans to make money, right? And if the people really wanted safe products, why, they’d buy them, already! (Never mind that as lobbyist for the NAM, Baroody supported weakening guidelines to require companies report about product hazards so that consumers could make informed choices.) And if product users get hurt (like all those silly babies who keep getting injured in defective baby walkers), well, it’s probably because they’re stupid (unlike manufacturers, who never make a mistake).
What makes the whole thing even stranger is that Baroody has revealed that he would receive a $150,000 good-bye gift from the NAM. Since this counts as an “extraordinary payment” under federal ethics rules, it means that he will now have to recuse himself from agency matters regarding the NAM for two years. Given that the NAM is, after all, one of the most active business lobbying groups in Washington ($13.2 million in expenditures in 2006), Baroody is probably going to have to be doing a lot of recusing. Makes you wonder what kind of agency head he can be (“Nope, sorry, can’t say anything about that one”).
But maybe that’s the point. Though, apparently, he can be involved in decisions involving NAM member companies and associations (hardly re-assuring). Add that current acting chairman and fellow commissioner Nancy A. Nord was formerly director of consumer affairs for the U.S. Chamber of Commerce — the grand-daddy of all business lobbying groups, with $72.7 million on lobbying expenditures in 2006 — and that’s one heck of an agency you’re running there, Baroody.
Consumer groups are understandably in an uproar about this whole Baroody business (children’s safety! The fox in the henhouse!), and Sen. Bill Nelson (D.-Fla.) has put a “hold” on the nomination, meaning that the Senate leaders cannot schedule a confirmation vote, though hearings on Baroody are scheduled for tomorrow. Though reports indicate that Bush might instead just wait until the Senate breaks and then make one of those recess appointments, like the one he gave John Bolton when the Senate refused to confirm him to be U.N. Ambassador.
Like John Bolton, Baroody is somebody who is basically hostile to the very operating philosophy of the agency he is appointed to be part of. But Bolton was merely appointed to be ambassador to the U.N. Baroody has been appointed to head the whole agency. (Imagine Bolton as U.N. secretary general.) This is more than just the old saw about the fox in the henhouse. This is the fox who doesn’t even think there should be a house, and in fact has been trying to tear it down, plank by plank, for the last 13 years — let the hens survive on their own in the marketplace! Houses are a waste of taxpayer money! Too bad the same vaunted market principles of popular demand and collective wisdom are in short supply these days at another house, one that happens to be painted white.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy. ( ldrutman@gmail.com)
Sunday, April 22, 2007
To see the facts clearly, put on your political goggles -- San Francisco Chronicle
REVIEW
To see the facts clearly, put on your political goggles
Lee Drutman
Monday, April 16, 2007
Full Disclosure
The Perils and Promise
of Transparency
By Archon Fung, Mary Graham and David Weil
CAMBRIDGE UNIVERSITY PRESS; 282 Pages; $28
Maybe Louis Brandeis only had it partially right. Sure, sunlight can be the best disinfectant. But it depends. Is it direct sunlight? Or is it filtered? If so, by what? And what are we trying to disinfect, anyway? As it turns out, things get complicated quickly when you start questioning this bit of conventional wisdom. According to Archon Fung, Mary Graham and David Weil, sunlight has its dark side, and "simply placing information in the public domain does not guarantee that it will be used or used wisely."
The authors (a political scientist, a lawyer and an economist, all based at the Kennedy School's Taubman Center for State and Local Government at Harvard University) got interested in what they call "targeted" transparency policies about five years ago, when they noticed these kinds of policies popping up all over the place (by "targeted," they mean focused on a particular area, such as automobile defects or hazardous materials exposure, with specific, previously agreed-on metrics as opposed to more general, "right-to-know" disclosure).
The political appeal was easy to get: Respond to a crisis quickly without getting mixed up in thorny regulation. Harness the power of technology and the market at a time when people don't trust their government anyway. But there seemed to be less understanding of whether the faddish approach actually worked to produce "significant, long-term behavior changes by users and disclosers in the direction intended by policymakers." True, there were some successes. But there were also some costly failures. And many policies didn't seem to be making much of a meaningful difference. The authors wanted to know why.
In one sense, "Full Disclosure" is aguide for policymakers, complete with the requisite "10 principles for an effective transparency policy" guide. Their basic advice is that for transparency policy to be effective, the information must be both easy to understand and easy to act upon. Users must be able to register their choices clearly, and disclosers must have the ability and incentive to respond meaningfully. As an example of a relatively successful policy, the authors offer up Los Angeles restaurant hygiene. Every restaurant in that city must post a health inspection score (A, B or C) in its window: easy to interpret, easy to act upon and every restaurant owner knows what happens when the score drops from A to B.
Problem is, such effective policies are hard to come by. That's because they are, after all, a product of politics, and politics is a nasty business. Targeted groups fight tooth and nail to make sure that disclosures are weak and confusing, and, therefore, largely ineffectual: What, exactly, will be disclosed? How will it be measured? How often will it be disclosed? And who has to disclose it? It all depends on who is at the political table. "Targeted transparency policies are often born in crisis," the authors write, "usually as political compromises reflecting the relative power of organized representatives of potential disclosers and weak coalitions of potential users."
A disclosure policy written to favor the disclosers tends to result in atrophy. Only when users (or as is more often the case, groups working on behalf of users) gain some political power can disclosure become sustainable and effective. Good transparency policies can do this, essentially changing the "political terrain." Good policies empower users. They also ultimately make it so disclosers have no incentive to undermine transparency.
Consider financial disclosures for publicly traded companies. First introduced in the early 1930s in response to the stock market crash of 1929, financial disclosure has generally worked well (though, there have been some recent, err, hiccups). That's because investors as a class have been politically powerful. But it's also because they've made use of financial information to send signals to corporations that they value disclosure. Equally important, companies came to value transparency because it made raising capital easier (investors are less skittish when they have faith in the numbers). In short, incentives were well aligned all around; everybody was better off with a system of transparency. But, "significant incentives for disclosers to support transparency do not materialize until a viable system is in place or seems inevitable."
At best, "Full Disclosure" ought to make citizens wise to the tricks that commonly turn transparency policies into little more than symbolism. At worst, the book is just one more piece of information, interesting but difficult to act on, because though there is plenty of sunlight shining into our political process, there's little the average reader (or even the average policymaker) can do when powerful interests dig in their heels. If James Madison once warned that "a popular government without popular information or the means of acquiring it, is but a Prologue to Farce or a Tragedy or perhaps both," then Fung, Graham and Weil seem to be warning that even with popular information and the means of acquiring it, farce and tragedy remain acute dangers absent a meaningful way to act on that information.
Lee Drutman is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/16/DDGR5P8IOH1.DTL
To see the facts clearly, put on your political goggles
Lee Drutman
Monday, April 16, 2007
Full Disclosure
The Perils and Promise
of Transparency
By Archon Fung, Mary Graham and David Weil
CAMBRIDGE UNIVERSITY PRESS; 282 Pages; $28
Maybe Louis Brandeis only had it partially right. Sure, sunlight can be the best disinfectant. But it depends. Is it direct sunlight? Or is it filtered? If so, by what? And what are we trying to disinfect, anyway? As it turns out, things get complicated quickly when you start questioning this bit of conventional wisdom. According to Archon Fung, Mary Graham and David Weil, sunlight has its dark side, and "simply placing information in the public domain does not guarantee that it will be used or used wisely."
The authors (a political scientist, a lawyer and an economist, all based at the Kennedy School's Taubman Center for State and Local Government at Harvard University) got interested in what they call "targeted" transparency policies about five years ago, when they noticed these kinds of policies popping up all over the place (by "targeted," they mean focused on a particular area, such as automobile defects or hazardous materials exposure, with specific, previously agreed-on metrics as opposed to more general, "right-to-know" disclosure).
The political appeal was easy to get: Respond to a crisis quickly without getting mixed up in thorny regulation. Harness the power of technology and the market at a time when people don't trust their government anyway. But there seemed to be less understanding of whether the faddish approach actually worked to produce "significant, long-term behavior changes by users and disclosers in the direction intended by policymakers." True, there were some successes. But there were also some costly failures. And many policies didn't seem to be making much of a meaningful difference. The authors wanted to know why.
In one sense, "Full Disclosure" is aguide for policymakers, complete with the requisite "10 principles for an effective transparency policy" guide. Their basic advice is that for transparency policy to be effective, the information must be both easy to understand and easy to act upon. Users must be able to register their choices clearly, and disclosers must have the ability and incentive to respond meaningfully. As an example of a relatively successful policy, the authors offer up Los Angeles restaurant hygiene. Every restaurant in that city must post a health inspection score (A, B or C) in its window: easy to interpret, easy to act upon and every restaurant owner knows what happens when the score drops from A to B.
Problem is, such effective policies are hard to come by. That's because they are, after all, a product of politics, and politics is a nasty business. Targeted groups fight tooth and nail to make sure that disclosures are weak and confusing, and, therefore, largely ineffectual: What, exactly, will be disclosed? How will it be measured? How often will it be disclosed? And who has to disclose it? It all depends on who is at the political table. "Targeted transparency policies are often born in crisis," the authors write, "usually as political compromises reflecting the relative power of organized representatives of potential disclosers and weak coalitions of potential users."
A disclosure policy written to favor the disclosers tends to result in atrophy. Only when users (or as is more often the case, groups working on behalf of users) gain some political power can disclosure become sustainable and effective. Good transparency policies can do this, essentially changing the "political terrain." Good policies empower users. They also ultimately make it so disclosers have no incentive to undermine transparency.
Consider financial disclosures for publicly traded companies. First introduced in the early 1930s in response to the stock market crash of 1929, financial disclosure has generally worked well (though, there have been some recent, err, hiccups). That's because investors as a class have been politically powerful. But it's also because they've made use of financial information to send signals to corporations that they value disclosure. Equally important, companies came to value transparency because it made raising capital easier (investors are less skittish when they have faith in the numbers). In short, incentives were well aligned all around; everybody was better off with a system of transparency. But, "significant incentives for disclosers to support transparency do not materialize until a viable system is in place or seems inevitable."
At best, "Full Disclosure" ought to make citizens wise to the tricks that commonly turn transparency policies into little more than symbolism. At worst, the book is just one more piece of information, interesting but difficult to act on, because though there is plenty of sunlight shining into our political process, there's little the average reader (or even the average policymaker) can do when powerful interests dig in their heels. If James Madison once warned that "a popular government without popular information or the means of acquiring it, is but a Prologue to Farce or a Tragedy or perhaps both," then Fung, Graham and Weil seem to be warning that even with popular information and the means of acquiring it, farce and tragedy remain acute dangers absent a meaningful way to act on that information.
Lee Drutman is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/16/DDGR5P8IOH1.DTL
Sunday, April 08, 2007
Whither corporate accountability? - Providence Journal
Whither corporate accountability?
01:00 AM EDT on Monday, April 9, 2007
Lee drutman
BERKELEY, Calif.
LATE LAST MONTH, as the U.S. Supreme Court heard oral arguments in a pair of cases regarding the rights of investors to hold corporations and banks accountable for fraud, I was once again reminded of the puzzling (though, sadly, not shocking) fact that the very groups that benefit most from our current capital-formation system still don’t seem to understand that accountability matters. A lot.
In one case, Credit Suisse First Boston Ltd. v. Billing, 16 Wall Street banks (joined by the solicitor general of the United States, which filed an amicus brief) argued that they are immune from antitrust lawsuits when it comes to initial public offerings (IPOs). They claim that they are already capably regulated by the Securities and Exchange Commission (SEC), and to allow an investor antitrust suit to go forward would illegally undermine the SEC.
There is less doubt that the named banks successfully conspired to artificially drive up the price of about 900 IPOs during the 1990s technology bubble, engaging in a practice called “laddering” — essentially requiring that certain customers purchase the shares at steadily escalating prices to create the trompe l’oeil of a seductively rising stock. Banks also awarded hot IPO offerings to select clients in exchange for underwriting business. While the banks and their favored clients all made out quite well in all this, the resultant market bubble had real consequences. In expanding, it misallocated capital into firms that probably should have never been taken public in the first place. In bursting, it left less in-the-loop investors (i.e. you and me) holding the bag at a cost of billions of dollars (to us!). Wonder where that capable SEC was . . .
Now the banks and their attendant cheerleaders assert that to let investors hold banks accountable under antitrust law would undermine capital formation by increasing its costs. Funny, for all their great love of free markets, they don’t actually trust leaving IPO prices up to an open market. No, better to let investment banks conspire to self-servingly cheerlead investment dollars into worthless technology companies. After all, think of the lucrative underwriting business to be gained!
The second case, Tellabs Inc. v. Makor Issues & Rights Ltd., is about the proper threshold for investors to bring class-action lawsuits when a CEO makes false statements about company finances, as optical networking and broadband equipment firm Tellabs’s chief executive allegedly did in 2001. Tellabs (with supporting briefs from both the Securities and Exchange Commission and the U.S. Department of Justice) argues that under the proper interpretation of a 1995 law regarding such suits (The Private Securities Litigation Reform Act) it should be very difficult indeed for investors to bring such suits — that investors need to show that there was, in fact, a “high likelihood” that the executive was intending to deceive investors. But investors (with support from 32 states) argue that such a threshold is unnecessarily high. After all, how can investors ever gather enough evidence to show intention to deceive if they can’t even undertake legal discovery?
Again, the issue of accountability. One common explanation for the recent wave of corporate frauds was the 1995 law in question, which significantly limited the ability of investors to file suit when companies committed fraud. In doing so, it emboldened executives to be less than forthright about their company’s finances. Arguing for the strictest interpretation of the law is in essence an invitation for more fraud, telling companies: Go ahead, make it up as you go — ain’t nobody gonna be able to touch you on that one.
In all likelihood, the Supreme Court will resolve these legal ambiguities on behalf of the corporations, banks, and fellow travelers in the current administration who, ever since Sarbanes-Oxley, have been complaining loudly that all this accountability stuff does nothing but gum up the market by making everything more expensive.
They ought to be careful what they wish for. Free markets not only require rules, but also confidence that those rules will be followed and that those who don’t follow them will be punished. This confidence is the main reason that the U.S. has been the world’s preeminent stock market. And yet, piece by piece, the very groups that seem to benefit most from this system seem to stubbornly insist on undermining it. If this is what they mean by lowering the costs of capital formation, it’s worth remembering the old adage that you get what you pay for.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.projo.com/opinion/contributors/content/CT_drut9_04-09-07_GD52JQQ.1d61b2e.html
01:00 AM EDT on Monday, April 9, 2007
Lee drutman
BERKELEY, Calif.
LATE LAST MONTH, as the U.S. Supreme Court heard oral arguments in a pair of cases regarding the rights of investors to hold corporations and banks accountable for fraud, I was once again reminded of the puzzling (though, sadly, not shocking) fact that the very groups that benefit most from our current capital-formation system still don’t seem to understand that accountability matters. A lot.
In one case, Credit Suisse First Boston Ltd. v. Billing, 16 Wall Street banks (joined by the solicitor general of the United States, which filed an amicus brief) argued that they are immune from antitrust lawsuits when it comes to initial public offerings (IPOs). They claim that they are already capably regulated by the Securities and Exchange Commission (SEC), and to allow an investor antitrust suit to go forward would illegally undermine the SEC.
There is less doubt that the named banks successfully conspired to artificially drive up the price of about 900 IPOs during the 1990s technology bubble, engaging in a practice called “laddering” — essentially requiring that certain customers purchase the shares at steadily escalating prices to create the trompe l’oeil of a seductively rising stock. Banks also awarded hot IPO offerings to select clients in exchange for underwriting business. While the banks and their favored clients all made out quite well in all this, the resultant market bubble had real consequences. In expanding, it misallocated capital into firms that probably should have never been taken public in the first place. In bursting, it left less in-the-loop investors (i.e. you and me) holding the bag at a cost of billions of dollars (to us!). Wonder where that capable SEC was . . .
Now the banks and their attendant cheerleaders assert that to let investors hold banks accountable under antitrust law would undermine capital formation by increasing its costs. Funny, for all their great love of free markets, they don’t actually trust leaving IPO prices up to an open market. No, better to let investment banks conspire to self-servingly cheerlead investment dollars into worthless technology companies. After all, think of the lucrative underwriting business to be gained!
The second case, Tellabs Inc. v. Makor Issues & Rights Ltd., is about the proper threshold for investors to bring class-action lawsuits when a CEO makes false statements about company finances, as optical networking and broadband equipment firm Tellabs’s chief executive allegedly did in 2001. Tellabs (with supporting briefs from both the Securities and Exchange Commission and the U.S. Department of Justice) argues that under the proper interpretation of a 1995 law regarding such suits (The Private Securities Litigation Reform Act) it should be very difficult indeed for investors to bring such suits — that investors need to show that there was, in fact, a “high likelihood” that the executive was intending to deceive investors. But investors (with support from 32 states) argue that such a threshold is unnecessarily high. After all, how can investors ever gather enough evidence to show intention to deceive if they can’t even undertake legal discovery?
Again, the issue of accountability. One common explanation for the recent wave of corporate frauds was the 1995 law in question, which significantly limited the ability of investors to file suit when companies committed fraud. In doing so, it emboldened executives to be less than forthright about their company’s finances. Arguing for the strictest interpretation of the law is in essence an invitation for more fraud, telling companies: Go ahead, make it up as you go — ain’t nobody gonna be able to touch you on that one.
In all likelihood, the Supreme Court will resolve these legal ambiguities on behalf of the corporations, banks, and fellow travelers in the current administration who, ever since Sarbanes-Oxley, have been complaining loudly that all this accountability stuff does nothing but gum up the market by making everything more expensive.
They ought to be careful what they wish for. Free markets not only require rules, but also confidence that those rules will be followed and that those who don’t follow them will be punished. This confidence is the main reason that the U.S. has been the world’s preeminent stock market. And yet, piece by piece, the very groups that seem to benefit most from this system seem to stubbornly insist on undermining it. If this is what they mean by lowering the costs of capital formation, it’s worth remembering the old adage that you get what you pay for.
Lee Drutman, a frequent contributor, is the co-author of The People’s Business: Controlling Corporations and Restoring Democracy.
http://www.projo.com/opinion/contributors/content/CT_drut9_04-09-07_GD52JQQ.1d61b2e.html
Monday, March 19, 2007
Just stop egging her on, please! - The Providence Journal
Lee Drutman: Just stop egging her on, please!
07:19 AM EDT on Wednesday, March 14, 2007
LEE DRUTMAN
BERKELEY, Calif. -- SO WHY, again, is Ann Coulter news? Right, right. She’s a fire-breathing blond bombshell who says outrageous things that no reasonably self-respecting person would ever say, and then defends her latest faux pas with relish that would make even an all-beef hot dog blush (none of that gay, French apologizing for her!). And in this 24-hour news cycle era, the bow-tied blowhard pundit Tucker Carlson perhaps put it best when he recently said, “[W]e’re always happy to have her on . . . She’s great TV.”
But by great TV, Mr. Carlson means exactly what? An immature, predictable little-miss-princess, pushing every button she can get her eager little fingers on, screaming out for ever-more attention (“Look at me! I just called John Edwards a ‘faggot’! And I’m pretty, and I don’t regret it one bit!”)? This is not exactly Edward R. Murrow here.
Coulter, to her credit, is smart enough to know that if she goes to the Conservative Political Action Conference, as she did March 2, and says “I was going to have a few comments on the other Democratic presidential candidate, John Edwards, but it turns out that you have to go into rehab if you use the word ‘faggot,’ so I’m — so, kind of at an impasse, can’t really talk about Edwards, so I think I’ll just conclude here and take your questions.” Well, of course, people will get upset, and, of course, the newspapers and the cable talk shows will cover it, lavishing her with the positive reinforcement that every child in that acting-out phase craves so desperately (and giving her yet another opportunity to flog her latest book). Besides, it’s what we’ve come to expect of her by now anyway. Did anybody really think she’d pass up an opportunity to say something provocative like that? The only question is: what will she do next?
“C’mon, it was a joke,” she tells The New York Times, tongue firmly in cheek. “I would never insult gays by suggesting that they are like John Edwards. That would be mean.” On her Web site, she responds to a statement by Edwards campaign manager David Bonior (a former congressman) by writing: “It’s always good to divert Bonior from his principal pastime, which is fronting for Arab terrorists.” Oh, Ann, there you go again, titillating us with your blithe disrespect for appropriate civic discourse (or anything resembling a fact). Maybe we’ll get lucky and you’ll make another fun remark referring to certain exotic sexual practices.
She’s right, of course. It is a joke. But the joke is on the media, and on civic discourse. When Fox News’s Sean Hannity announces, “We’ll just put it on the calendar, every other Tuesday, Ann will be here to defend it,” Coulter must be laughing all the way to the bank. All she has to do is say something else offensive and outrageous and insulting and . . . she gets another round of media appearances! And the public (joy of joys!) gets treated to yet another exciting, insightful and thought-provoking session on ad-hominem attacks.
Praise be, then, to the daily Lancaster (Pa.) New Era, for its announcement on March 6 that it had “halted publication of Ann Coulter’s syndicated column following her crude characterization of presidential candidate John Edwards as a homosexual at a public appearance on Friday. Coulter’s use of name-calling, sarcasm and overstatement in her columns too often detracts from the arguments she seeks to make.”
Maybe if every newspaper pulls her column, if every cable-news show stops inviting her to fill the airwaves with her nonsense, if no publisher agrees to promote her book, maybe she will finally just go away, like the little child who finally realizes that nobody is going to listen no matter how loud she screams and so just gives up and lets everybody have some peace and quiet at last.
But no, everybody responds and just encourages her. John Edwards eagerly places a video of her remarks on his Web site to help him raise money, even as he decries her comments as “un-American and indefensible.” Coulter’s critics jump all over her and call for Republicans to also denounce her comments. But that’s exactly what she wants: More attention.
And as long as the media and critics keep giving it to her, she will keep acting out.
So, reporters and editors everywhere, please: Ann Coulter is not news! She has been doing the same thing for years; there is nothing “new” about it. She has no pretensions to anything serious (as her awful, inaccurate and problematically attributed writing clearly shows). She is nothing more than a third-rate stand-up comic whose idea of wit is to insult people with crude jokes about their alleged sexual perversities. Or, at least, she would be, if the media were to finally take away her platform and report instead on something of actual consequence.
http://www.projo.com/opinion/contributors/content/CT_drut14_03-14-07_PI4OBQG.21fda79.html
07:19 AM EDT on Wednesday, March 14, 2007
LEE DRUTMAN
BERKELEY, Calif. -- SO WHY, again, is Ann Coulter news? Right, right. She’s a fire-breathing blond bombshell who says outrageous things that no reasonably self-respecting person would ever say, and then defends her latest faux pas with relish that would make even an all-beef hot dog blush (none of that gay, French apologizing for her!). And in this 24-hour news cycle era, the bow-tied blowhard pundit Tucker Carlson perhaps put it best when he recently said, “[W]e’re always happy to have her on . . . She’s great TV.”
But by great TV, Mr. Carlson means exactly what? An immature, predictable little-miss-princess, pushing every button she can get her eager little fingers on, screaming out for ever-more attention (“Look at me! I just called John Edwards a ‘faggot’! And I’m pretty, and I don’t regret it one bit!”)? This is not exactly Edward R. Murrow here.
Coulter, to her credit, is smart enough to know that if she goes to the Conservative Political Action Conference, as she did March 2, and says “I was going to have a few comments on the other Democratic presidential candidate, John Edwards, but it turns out that you have to go into rehab if you use the word ‘faggot,’ so I’m — so, kind of at an impasse, can’t really talk about Edwards, so I think I’ll just conclude here and take your questions.” Well, of course, people will get upset, and, of course, the newspapers and the cable talk shows will cover it, lavishing her with the positive reinforcement that every child in that acting-out phase craves so desperately (and giving her yet another opportunity to flog her latest book). Besides, it’s what we’ve come to expect of her by now anyway. Did anybody really think she’d pass up an opportunity to say something provocative like that? The only question is: what will she do next?
“C’mon, it was a joke,” she tells The New York Times, tongue firmly in cheek. “I would never insult gays by suggesting that they are like John Edwards. That would be mean.” On her Web site, she responds to a statement by Edwards campaign manager David Bonior (a former congressman) by writing: “It’s always good to divert Bonior from his principal pastime, which is fronting for Arab terrorists.” Oh, Ann, there you go again, titillating us with your blithe disrespect for appropriate civic discourse (or anything resembling a fact). Maybe we’ll get lucky and you’ll make another fun remark referring to certain exotic sexual practices.
She’s right, of course. It is a joke. But the joke is on the media, and on civic discourse. When Fox News’s Sean Hannity announces, “We’ll just put it on the calendar, every other Tuesday, Ann will be here to defend it,” Coulter must be laughing all the way to the bank. All she has to do is say something else offensive and outrageous and insulting and . . . she gets another round of media appearances! And the public (joy of joys!) gets treated to yet another exciting, insightful and thought-provoking session on ad-hominem attacks.
Praise be, then, to the daily Lancaster (Pa.) New Era, for its announcement on March 6 that it had “halted publication of Ann Coulter’s syndicated column following her crude characterization of presidential candidate John Edwards as a homosexual at a public appearance on Friday. Coulter’s use of name-calling, sarcasm and overstatement in her columns too often detracts from the arguments she seeks to make.”
Maybe if every newspaper pulls her column, if every cable-news show stops inviting her to fill the airwaves with her nonsense, if no publisher agrees to promote her book, maybe she will finally just go away, like the little child who finally realizes that nobody is going to listen no matter how loud she screams and so just gives up and lets everybody have some peace and quiet at last.
But no, everybody responds and just encourages her. John Edwards eagerly places a video of her remarks on his Web site to help him raise money, even as he decries her comments as “un-American and indefensible.” Coulter’s critics jump all over her and call for Republicans to also denounce her comments. But that’s exactly what she wants: More attention.
And as long as the media and critics keep giving it to her, she will keep acting out.
So, reporters and editors everywhere, please: Ann Coulter is not news! She has been doing the same thing for years; there is nothing “new” about it. She has no pretensions to anything serious (as her awful, inaccurate and problematically attributed writing clearly shows). She is nothing more than a third-rate stand-up comic whose idea of wit is to insult people with crude jokes about their alleged sexual perversities. Or, at least, she would be, if the media were to finally take away her platform and report instead on something of actual consequence.
http://www.projo.com/opinion/contributors/content/CT_drut14_03-14-07_PI4OBQG.21fda79.html
Wednesday, February 28, 2007
Perennial Lobbying Scandal -- TomPaine.com
Perennial Lobbying Scandal
Lee Drutman
February 28, 2007
Lee Drutman is the co-author of The People's Business: Controlling Corporations and Restoring Democracy .
Last week it was reported that the U.S. Chamber of Commerce had spent $72.7 million on lobbying in 2006, setting a new American record, previously held by ... the U.S. Chamber of Commerce: $53.4 million in 2004. It is a remarkable amount of money, and so it's worth asking: How exactly does a group manage to spend so much money on the political process? And should we care?
This little factoid was not major news. Sadly, there is little “new” about business groups spending ridiculous amounts of money to try to influence public policy. When the Center for Responsive Politics totaled up all lobbying expenditures from 1998 to 2004, of the top 100 groups (all of whom spent at least $19 million), 60 were corporations and 32 were business trade groups (like the Chamber of Commerce). That means 92 percent of the most active groups were businesses or business trade groups. The Chamber topped the list at $204 million, followed by Altria at $101 million and General Electric at $94 million.
The Chamber’s record-breaking expenditures are also not news because there is nothing outwardly scandalous about them, in the way that, say, Jack Abramoff’s delightful dealings were outwardly scandalous. I suspect that most of the Chamber's lobbying is decidedly uninteresting and above-board—lots of meetings, mostly in the greater Capitol Hill area, full of long-winded arguments about why proposed or existing regulations are bad for economic growth.
But this dull fact doesn't neatly fit the picture of that “culture of corruption” that the Democrats keep promising to end. One looks in vain for the outlandishly inappropriate gifts and meals and tickets and trips that are said to buy influence. Though I don’t know for sure, I strongly suspect that large organizations like the Chamber of Commerce (or General Electric, or Boeing, or the Edison Electric Institute or any of the other business groups that spend tens of millions a year on professional lobbying) are not basing their lobbying strategy primarily on steak dinners and choice seats at a Wizards game. (If this were all it took, the Chamber would certainly have to spend a lot less).
Which is not to say that there aren’t plenty of such lavish lawmaker-lobbyist goings-on around the greater District of Columbia area, each with its own distinct whiff of impropriety. But the relentless focus on highlighting these goings—on (pick up a copy of The Washington Post or listen to a Democratic speech on the subject) offers a very misleading picture of lobbying.
If only it were that glamorous, the actual lobbyist must think! Lobbying is a shoe-leather business and it involves more than just the luxury box. To be effective, it takes relentless focus on the arduous and complex process by which a bill becomes a law (drafting it, attending hearing after hearing, then the subcommittee vote, the committee vote, the floor vote, the conference committee and so on). And then after all that, the endless attention to the process by which a law becomes an agency rule (public comment after public comment) and then to a never-ending litigation strategy once the rule is in place. And so on and so on, over and over again. Start participating at every level (and shaping public opinion, where necessary) and the lobbying expenditures do start to add up.
Only those with millions to spend can fight full strength at every stage of the process. Or even better, credibly threaten to fight full strength at every stage, in order not to actually have to.
Consider the prescription drug reform the Democrats promised during campaign season. By mid-January, when the bill was ready, Democratic leaders had backtracked. They had left intact the ban on Canadian drug imports, the ban on price caps and the requirement that private insurance plans remain small and numerous (and hence handicapped in their ability to negotiate bulk discounts).
Did pharmaceutical companies make their case with meals and tickets and trips? Or did they use more “appropriate,” though more costly, means, like hiring hordes of former Democratic staffers to make convincing arguments on why all those reforms would, in fact, be counterproductive, and by just generally being annoyingly persistent? They were successful, at least in part, because pharmaceutical lobbyists could promise to fight the Democrats every step of the way—a credible threat, given their resources. The pharmaceutical and health products industry spent $612 million to lobby between 1998 and 2004, more than any other industry. While such reforms might be popular generally, there was no organized group to push Democrats with nearly as many resources.
The fact that the Chamber of Commerce could and did spend $72.7 million on lobbying last year ought to give us far more pause than any of these periodic scandals of improper trips or exploited loopholes that keep popping up in our newspapers. Yes, these scandals are outrageous, and obviously worth noting and exposing. But the real outrage is the broad range of progressive policies that are simply off the agenda because to go against all that money is widely viewed as political suicide. In addition, a broad range of business-friendly policies are on the agenda because all that business money has worked tirelessly to place them there.
Sure, Congress could and should put all the limits it wants on gifts and travel (though by all indications, loopholes abound in all the latest plans and probably always will). Sure, more disclosure about lobbying is great (though not particularly useful, given that citizens don’t really get meaningful choices between candidates who listen to a lot of lobbyists and those who don’t). But it’s also time to look at the fundamental imbalances in the world of lobbying, and at who can afford to spend $72.7 million to influence public policy and who can’t. And why that matters far, far more than a single golf outing to Scotland.
http://www.tompaine.com/articles/2007/02/28/perennial_lobbying_scandal.php
Lee Drutman
February 28, 2007
Lee Drutman is the co-author of The People's Business: Controlling Corporations and Restoring Democracy .
Last week it was reported that the U.S. Chamber of Commerce had spent $72.7 million on lobbying in 2006, setting a new American record, previously held by ... the U.S. Chamber of Commerce: $53.4 million in 2004. It is a remarkable amount of money, and so it's worth asking: How exactly does a group manage to spend so much money on the political process? And should we care?
This little factoid was not major news. Sadly, there is little “new” about business groups spending ridiculous amounts of money to try to influence public policy. When the Center for Responsive Politics totaled up all lobbying expenditures from 1998 to 2004, of the top 100 groups (all of whom spent at least $19 million), 60 were corporations and 32 were business trade groups (like the Chamber of Commerce). That means 92 percent of the most active groups were businesses or business trade groups. The Chamber topped the list at $204 million, followed by Altria at $101 million and General Electric at $94 million.
The Chamber’s record-breaking expenditures are also not news because there is nothing outwardly scandalous about them, in the way that, say, Jack Abramoff’s delightful dealings were outwardly scandalous. I suspect that most of the Chamber's lobbying is decidedly uninteresting and above-board—lots of meetings, mostly in the greater Capitol Hill area, full of long-winded arguments about why proposed or existing regulations are bad for economic growth.
But this dull fact doesn't neatly fit the picture of that “culture of corruption” that the Democrats keep promising to end. One looks in vain for the outlandishly inappropriate gifts and meals and tickets and trips that are said to buy influence. Though I don’t know for sure, I strongly suspect that large organizations like the Chamber of Commerce (or General Electric, or Boeing, or the Edison Electric Institute or any of the other business groups that spend tens of millions a year on professional lobbying) are not basing their lobbying strategy primarily on steak dinners and choice seats at a Wizards game. (If this were all it took, the Chamber would certainly have to spend a lot less).
Which is not to say that there aren’t plenty of such lavish lawmaker-lobbyist goings-on around the greater District of Columbia area, each with its own distinct whiff of impropriety. But the relentless focus on highlighting these goings—on (pick up a copy of The Washington Post or listen to a Democratic speech on the subject) offers a very misleading picture of lobbying.
If only it were that glamorous, the actual lobbyist must think! Lobbying is a shoe-leather business and it involves more than just the luxury box. To be effective, it takes relentless focus on the arduous and complex process by which a bill becomes a law (drafting it, attending hearing after hearing, then the subcommittee vote, the committee vote, the floor vote, the conference committee and so on). And then after all that, the endless attention to the process by which a law becomes an agency rule (public comment after public comment) and then to a never-ending litigation strategy once the rule is in place. And so on and so on, over and over again. Start participating at every level (and shaping public opinion, where necessary) and the lobbying expenditures do start to add up.
Only those with millions to spend can fight full strength at every stage of the process. Or even better, credibly threaten to fight full strength at every stage, in order not to actually have to.
Consider the prescription drug reform the Democrats promised during campaign season. By mid-January, when the bill was ready, Democratic leaders had backtracked. They had left intact the ban on Canadian drug imports, the ban on price caps and the requirement that private insurance plans remain small and numerous (and hence handicapped in their ability to negotiate bulk discounts).
Did pharmaceutical companies make their case with meals and tickets and trips? Or did they use more “appropriate,” though more costly, means, like hiring hordes of former Democratic staffers to make convincing arguments on why all those reforms would, in fact, be counterproductive, and by just generally being annoyingly persistent? They were successful, at least in part, because pharmaceutical lobbyists could promise to fight the Democrats every step of the way—a credible threat, given their resources. The pharmaceutical and health products industry spent $612 million to lobby between 1998 and 2004, more than any other industry. While such reforms might be popular generally, there was no organized group to push Democrats with nearly as many resources.
The fact that the Chamber of Commerce could and did spend $72.7 million on lobbying last year ought to give us far more pause than any of these periodic scandals of improper trips or exploited loopholes that keep popping up in our newspapers. Yes, these scandals are outrageous, and obviously worth noting and exposing. But the real outrage is the broad range of progressive policies that are simply off the agenda because to go against all that money is widely viewed as political suicide. In addition, a broad range of business-friendly policies are on the agenda because all that business money has worked tirelessly to place them there.
Sure, Congress could and should put all the limits it wants on gifts and travel (though by all indications, loopholes abound in all the latest plans and probably always will). Sure, more disclosure about lobbying is great (though not particularly useful, given that citizens don’t really get meaningful choices between candidates who listen to a lot of lobbyists and those who don’t). But it’s also time to look at the fundamental imbalances in the world of lobbying, and at who can afford to spend $72.7 million to influence public policy and who can’t. And why that matters far, far more than a single golf outing to Scotland.
http://www.tompaine.com/articles/2007/02/28/perennial_lobbying_scandal.php
Friday, January 19, 2007
Adam Smith -- yuks included, LA Times Book Review
http://www.calendarlive.com/books/reviews/cl-et-book19jan19,0,7457278.story?coll=cl-books-reviews
BOOK REVIEW
Adam Smith -- yuks included
On the Wealth of Nations Books That Changed the World P.J. O'Rourke Atlantic Monthly Press: 256 pp., $21.95
By Lee Drutman
Special to The Times
January 19, 2007
ADAM SMITH is an Enlightenment-era moral philosopher best known for writing "The Wealth of Nations," a founding text of modern economics that checks in at more than 900 dense pages — enough to discourage many a would-be reader.
P.J. O'Rourke is an impudent political satirist with a penchant for quippy one-liners, best known for such books as "Parliament of Whores" and "Give War a Chance." He is also the choice of the editors at Atlantic Monthly Press to be Smith's explicator for a mass audience as part of the publisher's "Books That Changed the World" series. (The jacket headline: "P.J. O'Rourke reads Adam Smith so you don't have to.")
It's not the best of matches. For one, O'Rourke is overly fond of Smith ("Even when he was wrong he was smarter than other people."), which makes him a satirist with nothing really to satirize. Hence there are fewer snappy one-liners than usual, and his jokes often feel forced: "Then there is the matter of those goods and services — Adam Smith's gross domestic product. I am as grossly domestic as anyone. Where's the product?" Hah, hah, hah.
The bigger problem is that O'Rourke is at best an amateur economist — a point he is surprisingly happy to make several times (ah, self-deprecating wit). But he is a Mencken research fellow at the über-libertarian Cato Institute, where he appears to have imbibed a very particular, morality-play view (markets = good; politicians = bad) of Smith's much more complicated and nuanced magnum opus. "Free markets lead to thinking," O'Rourke writes, "that eternal enemy of politicians."
Unfortunately for those hoping to acquire a reasonable understanding of Smith, O'Rourke is either unwilling or unable to probe "The Wealth of Nations" for anything more than a series of Cato-approved talking points to the effect that unfettered commerce rules, governments drool.
Nowhere, for example, does O'Rourke really probe the workings of crucial Smith concepts such as comparative advantage, the division of labor or the nature of competition. Nor does he explore Smith's controversial characterization of human nature as innately predisposed to "truck, barter, and exchange." And though he touches on Smith's conclusions about man being much disposed to sympathy for his fellow man, he does not explore how Smith's praise of self-interest is fundamentally circumscribed by this assumption — that the market is perfectly self-regulating only if you believe that people won't cheat each other if they have the chance. Also missing: Smith's disregard for joint-stock corporations, which he criticized for their greed, irresponsibility and generally anti-competitive nature.
Instead, O'Rourke's approach is to plod through the five books of "The Wealth of Nations" in order, telling us that Smith said this, Smith said that, furnishing direct quote after direct quote, cherry-picking his way to a series of pro-market policy prescriptions that today's leaders ignore at their own peril. "[M]aybe they'll all buy my book and give it to [World Bank President] Paul Wolfowitz for Christmas," he writes hopefully.
O'Rourke misses no opportunity to lob predictable barbs at politicians (who, by some remarkable stroke of chance, all happen to be bumptious and venal, while all private commerce-loving citizens are honest and virtuous). For example, in his very limited discussion of the division of labor, O'Rourke quips that "the specialization of politics at least keeps politicians from running businesses where their stupidity and ignorance could do even greater harm to economic growth."
But something strange happens when O'Rourke gets to Book 5, where Smith wrestles with the proper functions of government and recommends the kind of mildly progressive state that makes free-market devotees like O'Rourke break out in hives. O'Rourke decides that in applying his "lofty intellect to mundane political issues, [Smith] yielded to the temptation to slide down Olympus." Here, the "truly sagacious" Smith of Book 2 is suddenly spouting "mixed-up pronouncements."
And when the Scottish political economist suggests that landowners should be taxed on the rent they collect, O'Rourke can only conclude, "Smith must have been completely out of his head." Then again, "thinking about taxes leads to bad thinking," O'Rourke explains. Except, of course, when Smith opposes inheritance taxes and value-added taxes, as he also does in Book 5, which makes him OK.
If O'Rourke weren't a Cato Institute fellow, a reader might wonder whether the satirist had in fact produced a brilliant satire of the righteous black-and-white sermonizing to which free-market devotees are often prone. At some points, he is so over-the-top, so unwilling to engage in anything resembling nuance, it feels like it must be a parody. At one point, he even writes: "[N]o people are as rapacious and grabby as those who work for the public good. They don't want mere millions or billions of dollars to satisfy personal avarice," he explains. "They seek trillions of dollars necessary to make life on earth better for everyone." Imagine the horror! True evil revealed at last! Parody or not, anyone who wants to understand what Adam Smith was up to would be well-advised to decline O'Rourke's offer and instead read the darn books for themselves (preferably in annotated and abridged form).
Lee Drutman is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
If you want other stories on this topic, search the Archives at latimes.com/archives.
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Copyright 2007 Los Angeles Times
BOOK REVIEW
Adam Smith -- yuks included
On the Wealth of Nations Books That Changed the World P.J. O'Rourke Atlantic Monthly Press: 256 pp., $21.95
By Lee Drutman
Special to The Times
January 19, 2007
ADAM SMITH is an Enlightenment-era moral philosopher best known for writing "The Wealth of Nations," a founding text of modern economics that checks in at more than 900 dense pages — enough to discourage many a would-be reader.
P.J. O'Rourke is an impudent political satirist with a penchant for quippy one-liners, best known for such books as "Parliament of Whores" and "Give War a Chance." He is also the choice of the editors at Atlantic Monthly Press to be Smith's explicator for a mass audience as part of the publisher's "Books That Changed the World" series. (The jacket headline: "P.J. O'Rourke reads Adam Smith so you don't have to.")
It's not the best of matches. For one, O'Rourke is overly fond of Smith ("Even when he was wrong he was smarter than other people."), which makes him a satirist with nothing really to satirize. Hence there are fewer snappy one-liners than usual, and his jokes often feel forced: "Then there is the matter of those goods and services — Adam Smith's gross domestic product. I am as grossly domestic as anyone. Where's the product?" Hah, hah, hah.
The bigger problem is that O'Rourke is at best an amateur economist — a point he is surprisingly happy to make several times (ah, self-deprecating wit). But he is a Mencken research fellow at the über-libertarian Cato Institute, where he appears to have imbibed a very particular, morality-play view (markets = good; politicians = bad) of Smith's much more complicated and nuanced magnum opus. "Free markets lead to thinking," O'Rourke writes, "that eternal enemy of politicians."
Unfortunately for those hoping to acquire a reasonable understanding of Smith, O'Rourke is either unwilling or unable to probe "The Wealth of Nations" for anything more than a series of Cato-approved talking points to the effect that unfettered commerce rules, governments drool.
Nowhere, for example, does O'Rourke really probe the workings of crucial Smith concepts such as comparative advantage, the division of labor or the nature of competition. Nor does he explore Smith's controversial characterization of human nature as innately predisposed to "truck, barter, and exchange." And though he touches on Smith's conclusions about man being much disposed to sympathy for his fellow man, he does not explore how Smith's praise of self-interest is fundamentally circumscribed by this assumption — that the market is perfectly self-regulating only if you believe that people won't cheat each other if they have the chance. Also missing: Smith's disregard for joint-stock corporations, which he criticized for their greed, irresponsibility and generally anti-competitive nature.
Instead, O'Rourke's approach is to plod through the five books of "The Wealth of Nations" in order, telling us that Smith said this, Smith said that, furnishing direct quote after direct quote, cherry-picking his way to a series of pro-market policy prescriptions that today's leaders ignore at their own peril. "[M]aybe they'll all buy my book and give it to [World Bank President] Paul Wolfowitz for Christmas," he writes hopefully.
O'Rourke misses no opportunity to lob predictable barbs at politicians (who, by some remarkable stroke of chance, all happen to be bumptious and venal, while all private commerce-loving citizens are honest and virtuous). For example, in his very limited discussion of the division of labor, O'Rourke quips that "the specialization of politics at least keeps politicians from running businesses where their stupidity and ignorance could do even greater harm to economic growth."
But something strange happens when O'Rourke gets to Book 5, where Smith wrestles with the proper functions of government and recommends the kind of mildly progressive state that makes free-market devotees like O'Rourke break out in hives. O'Rourke decides that in applying his "lofty intellect to mundane political issues, [Smith] yielded to the temptation to slide down Olympus." Here, the "truly sagacious" Smith of Book 2 is suddenly spouting "mixed-up pronouncements."
And when the Scottish political economist suggests that landowners should be taxed on the rent they collect, O'Rourke can only conclude, "Smith must have been completely out of his head." Then again, "thinking about taxes leads to bad thinking," O'Rourke explains. Except, of course, when Smith opposes inheritance taxes and value-added taxes, as he also does in Book 5, which makes him OK.
If O'Rourke weren't a Cato Institute fellow, a reader might wonder whether the satirist had in fact produced a brilliant satire of the righteous black-and-white sermonizing to which free-market devotees are often prone. At some points, he is so over-the-top, so unwilling to engage in anything resembling nuance, it feels like it must be a parody. At one point, he even writes: "[N]o people are as rapacious and grabby as those who work for the public good. They don't want mere millions or billions of dollars to satisfy personal avarice," he explains. "They seek trillions of dollars necessary to make life on earth better for everyone." Imagine the horror! True evil revealed at last! Parody or not, anyone who wants to understand what Adam Smith was up to would be well-advised to decline O'Rourke's offer and instead read the darn books for themselves (preferably in annotated and abridged form).
Lee Drutman is the co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
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Copyright 2007 Los Angeles Times
Thursday, January 11, 2007
CEOs gone wild, cont'd
Lee Drutman: CEOs gone wild, cont’d
Providence Journal
07:23 AM EST on Thursday, January 11, 2007
BERKELEY, Calif.
And so the saga continues. For the latest installment of “greedy CEOs gone wild,” we bring you outgoing Home Depot Chief Executive Officer Robert Nardelli, who managed to somehow finagle a $210 million severance package after a troubled six-year period during which the company’s stock fell 7.9 percent and competitor Lowe’s gained significant market share.
Then again, constructing opulent compensation packages on sand is nothing new to the good folks at Home Depot. Not only was company co-founder Kenneth Langone on the New York Stock Exchange board of directors that awarded Richard Grasso $188 million, but Langone was also Grasso’s staunchest defender. “Dick’s pay is fair and reasonable,” Langone was quoted as saying once Grasso’s fortune became public. Grasso had served as a member of Home Depot’s board of directors.
Though Nardelli still falls short of former Exxon CEO Lee Raymond, who got a record $357 million retirement package in 2005, this latest round of outrage comes at an opportune time for reform. The Democrats are now in control of Congress, and Massachusetts Democrat Barney Frank, a long-time critic of extreme executive compensation, is now chairman of the House Financial Services Committee and seems to be spoiling for a fight.
Last November, he introduced the Protection Against Executive Compensation Abuse Act, to give shareholders the right to review and approve CEO pay plans. He continues to talk tough.
The Nardelli debacle also comes close on the heels of a puzzling pay disclosure about-face at the Securities and Exchange Commission that is further fueling outrage.
Just three days before Christmas, the SEC bowed to corporate pressure and reversed course by allowing companies to delay disclosing stock-option grants, so they can report smaller executive-compensation totals. SEC Chairman Christopher Cox called it “a relative technicality,” but investor advocates knew better. They were up in arms. And Frank seized on the moment, issuing a statement making the case for legislation: “Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self-restraint of top executives.”
Of course, to call it self-restraint is a euphemism if there ever was one. Between 1993 and 2003, the percentage of company profits going to the top five executives more than doubled, growing from 4.8 percent to 10.3 percent. In 2004, the median Fortune 500 CEO received compensation worth $15 million. At last count, the average CEO was earning more than 400 times the average of worker pay, and more than 800 times the minimum wage.
One wonders: How much longer can this go on? CEOs taking 10 percent off the top off all corporate profits, making 400 times more than the average worker (a truly remarkable figure, when you consider the fact that in all other advanced industrial countries, the ratio is about 20 to 1).
Congressman Frank’s approach — give the mass of shareholders, the actual owners of the company, some say — makes perfect sense and would probably do a good amount to curb extravagant pay packages. It should hardly be controversial. If a common-sense reform like this, tackling an issue so universally agreed to be a problem, cannot gain traction in a Democratic Congress, then this is more than a case of just CEOs gone wild. It’s a case of narrow corporate interests gone wild in our political system.
http://www.projo.com/opinion/columnists/content/CT_drut11_01-11-07_053NPM1.1f57712.html#
Providence Journal
07:23 AM EST on Thursday, January 11, 2007
BERKELEY, Calif.
And so the saga continues. For the latest installment of “greedy CEOs gone wild,” we bring you outgoing Home Depot Chief Executive Officer Robert Nardelli, who managed to somehow finagle a $210 million severance package after a troubled six-year period during which the company’s stock fell 7.9 percent and competitor Lowe’s gained significant market share.
Then again, constructing opulent compensation packages on sand is nothing new to the good folks at Home Depot. Not only was company co-founder Kenneth Langone on the New York Stock Exchange board of directors that awarded Richard Grasso $188 million, but Langone was also Grasso’s staunchest defender. “Dick’s pay is fair and reasonable,” Langone was quoted as saying once Grasso’s fortune became public. Grasso had served as a member of Home Depot’s board of directors.
Though Nardelli still falls short of former Exxon CEO Lee Raymond, who got a record $357 million retirement package in 2005, this latest round of outrage comes at an opportune time for reform. The Democrats are now in control of Congress, and Massachusetts Democrat Barney Frank, a long-time critic of extreme executive compensation, is now chairman of the House Financial Services Committee and seems to be spoiling for a fight.
Last November, he introduced the Protection Against Executive Compensation Abuse Act, to give shareholders the right to review and approve CEO pay plans. He continues to talk tough.
The Nardelli debacle also comes close on the heels of a puzzling pay disclosure about-face at the Securities and Exchange Commission that is further fueling outrage.
Just three days before Christmas, the SEC bowed to corporate pressure and reversed course by allowing companies to delay disclosing stock-option grants, so they can report smaller executive-compensation totals. SEC Chairman Christopher Cox called it “a relative technicality,” but investor advocates knew better. They were up in arms. And Frank seized on the moment, issuing a statement making the case for legislation: “Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self-restraint of top executives.”
Of course, to call it self-restraint is a euphemism if there ever was one. Between 1993 and 2003, the percentage of company profits going to the top five executives more than doubled, growing from 4.8 percent to 10.3 percent. In 2004, the median Fortune 500 CEO received compensation worth $15 million. At last count, the average CEO was earning more than 400 times the average of worker pay, and more than 800 times the minimum wage.
One wonders: How much longer can this go on? CEOs taking 10 percent off the top off all corporate profits, making 400 times more than the average worker (a truly remarkable figure, when you consider the fact that in all other advanced industrial countries, the ratio is about 20 to 1).
Congressman Frank’s approach — give the mass of shareholders, the actual owners of the company, some say — makes perfect sense and would probably do a good amount to curb extravagant pay packages. It should hardly be controversial. If a common-sense reform like this, tackling an issue so universally agreed to be a problem, cannot gain traction in a Democratic Congress, then this is more than a case of just CEOs gone wild. It’s a case of narrow corporate interests gone wild in our political system.
http://www.projo.com/opinion/columnists/content/CT_drut11_01-11-07_053NPM1.1f57712.html#
Friday, January 05, 2007
Reinventing Capitalism - Los Angeles Times
http://www.calendarlive.com/books/reviews/cl-et-book5jan05,0,4914102.story?coll=cl-books-reviews
BOOK REVIEW
Reinventing capitalism
Capitalism 3.0 A Guide to Reclaiming the Commons Peter Barnes Berrett-Koehler: 198 pp., $22.95
By Lee Drutman
Special to The Times
January 5, 2007
PETER BARNES is a businessman in a quandary. He's a firm believer in free markets, but he's also convinced that our current version of resource-depleting, pollution-spewing capitalism is pushing nature ever closer to collapse — and generating a gaping divide between rich and poor that increasingly defies all conceptions of fairness.
Yet Barnes is no fan of government either. It's too susceptible to corporate pressure to be effective, he argues, and besides, do we really want politicians setting prices?
The co-founder and former president of Working Assets Long Distance, a telephone service that donates to nonprofit organizations, thinks he has a better idea: Establish an independent "common wealth" sector to protect shared assets like air and water, and maybe even cultures and communities. Secure these assets in a trust that belongs to everyone, he writes in "Capitalism 3.0," and profit-making corporations couldn't wantonly gobble them up. Plus, everybody would benefit equally from their use. If it sounds farfetched, maybe that's the point: "We ignore common wealth because it lacks price tags and property rights," warns Barnes, who already has incorporated a nonprofit organization called the Sky Trust to protect the atmosphere.
Barnes' tale of capitalism gone mad begins with the Industrial Revolution, when the primary social problem was a scarcity of goods and the primary economic problem was coordinating limited investment capital. Land and natural resources, by contrast, appeared endless. Hence, what he calls Capitalism 1.0 developed with rules and practices that privileged capital above all else, particularly the joint-stock corporation.
By 1950, scarcity was no longer a problem. But the great engines of capitalism, already programmed to maximize production and profitability, were incapable of slowing down. Instead, they entered a new phase Barnes calls Capitalism 2.0. Instead of filling human and social needs, he writes, they began creating what Dr. Seuss' villain in "The Lorax" calls "thneeds," things we didn't know we needed. Worse, corporations continue to impose their "illth," British critic and author John Ruskin's word for goods produced by an economy that don't contribute to human welfare, on a natural environment whose capacity for absorbing is far less boundless that previously thought.
Barnes is at his best in diagnosing the structural maladies in today's iteration of capitalism, which has created a "world is awash with capital, most of it devoted to speculation" but "healthy ecosystems are increasingly scarce." The main problem, as he sees it, has to do with the three algorithms that drive market behavior: Maximize return to capital; distribute property income on a per-share basis, and the value, or price, put on nature is zero. And, he notes, 5% of the world's people control half the property shares.
The obvious moral of "The Lorax" parable, in which the evil Once-ler cuts down all the truffula trees to make thneeds, Barnes says, is that "trees need property rights too." If the trees belonged to everyone, held in trust, their price would not be zero — the Once-ler would have to pay (and the trust would be responsible for protecting the trees from extinction). Such a set-up, the author argues, would not only protect nature, but also allow everyone (not just the wealthy) to benefit equally from its occasional use. If such a plan were implemented properly, this would be what Barnes calls "Capitalism 3.0," in which "[w]e'll have more things we truly need — healthier ecosystems, communities, culture — and fewer thneeds."
Barnes' new and improved capitalism is more an exploration than a detailed plan. Even if the details prove unworkable (and they may very well), he deserves plaudits for offering a way past the stale debates of statism versus privatization. Instead of chiding greedy capitalists and venal politicians, perhaps we ought to look more closely at the rules and incentives to which they are duly bound to respond. And perhaps in doing so we will discover something new right under our noses.
Lee Drutman is co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
BOOK REVIEW
Reinventing capitalism
Capitalism 3.0 A Guide to Reclaiming the Commons Peter Barnes Berrett-Koehler: 198 pp., $22.95
By Lee Drutman
Special to The Times
January 5, 2007
PETER BARNES is a businessman in a quandary. He's a firm believer in free markets, but he's also convinced that our current version of resource-depleting, pollution-spewing capitalism is pushing nature ever closer to collapse — and generating a gaping divide between rich and poor that increasingly defies all conceptions of fairness.
Yet Barnes is no fan of government either. It's too susceptible to corporate pressure to be effective, he argues, and besides, do we really want politicians setting prices?
The co-founder and former president of Working Assets Long Distance, a telephone service that donates to nonprofit organizations, thinks he has a better idea: Establish an independent "common wealth" sector to protect shared assets like air and water, and maybe even cultures and communities. Secure these assets in a trust that belongs to everyone, he writes in "Capitalism 3.0," and profit-making corporations couldn't wantonly gobble them up. Plus, everybody would benefit equally from their use. If it sounds farfetched, maybe that's the point: "We ignore common wealth because it lacks price tags and property rights," warns Barnes, who already has incorporated a nonprofit organization called the Sky Trust to protect the atmosphere.
Barnes' tale of capitalism gone mad begins with the Industrial Revolution, when the primary social problem was a scarcity of goods and the primary economic problem was coordinating limited investment capital. Land and natural resources, by contrast, appeared endless. Hence, what he calls Capitalism 1.0 developed with rules and practices that privileged capital above all else, particularly the joint-stock corporation.
By 1950, scarcity was no longer a problem. But the great engines of capitalism, already programmed to maximize production and profitability, were incapable of slowing down. Instead, they entered a new phase Barnes calls Capitalism 2.0. Instead of filling human and social needs, he writes, they began creating what Dr. Seuss' villain in "The Lorax" calls "thneeds," things we didn't know we needed. Worse, corporations continue to impose their "illth," British critic and author John Ruskin's word for goods produced by an economy that don't contribute to human welfare, on a natural environment whose capacity for absorbing is far less boundless that previously thought.
Barnes is at his best in diagnosing the structural maladies in today's iteration of capitalism, which has created a "world is awash with capital, most of it devoted to speculation" but "healthy ecosystems are increasingly scarce." The main problem, as he sees it, has to do with the three algorithms that drive market behavior: Maximize return to capital; distribute property income on a per-share basis, and the value, or price, put on nature is zero. And, he notes, 5% of the world's people control half the property shares.
The obvious moral of "The Lorax" parable, in which the evil Once-ler cuts down all the truffula trees to make thneeds, Barnes says, is that "trees need property rights too." If the trees belonged to everyone, held in trust, their price would not be zero — the Once-ler would have to pay (and the trust would be responsible for protecting the trees from extinction). Such a set-up, the author argues, would not only protect nature, but also allow everyone (not just the wealthy) to benefit equally from its occasional use. If such a plan were implemented properly, this would be what Barnes calls "Capitalism 3.0," in which "[w]e'll have more things we truly need — healthier ecosystems, communities, culture — and fewer thneeds."
Barnes' new and improved capitalism is more an exploration than a detailed plan. Even if the details prove unworkable (and they may very well), he deserves plaudits for offering a way past the stale debates of statism versus privatization. Instead of chiding greedy capitalists and venal politicians, perhaps we ought to look more closely at the rules and incentives to which they are duly bound to respond. And perhaps in doing so we will discover something new right under our noses.
Lee Drutman is co-author of "The People's Business: Controlling Corporations and Restoring Democracy."
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