Corporations United

The absurdity of the republican primary has set me to thinking about the catastrophic Citizens United decision by the Supreme Court. How anyone in their right mind could think that what this county needs is more corporate money in politics is totally beyond me.

(photo: seth_schneider)

In the dissenting opinion in the Supreme Court's Citizens United ruling, Justice John Paul Stevens wrote:

“A democracy cannot function effectively when its constituent members believe laws are being bought and sold.”

According to Senator Bernie Sanders (I-VT) , “Americans are profoundly disgusted by the Citizens United decision and what it means for our democracy.”

That's why Sanders is trying to build momentum for an amendment to overturn Citizens United. The Saving American Democracy Amendment states that:

• Corporations are not persons with constitutional rights equal to real people.
• Corporations are subject to regulation by the people.
• Corporations may not make campaign contributions or any election expenditures.
• Congress and states have the power to regulate campaign finances.

The New Mexico state legislature passed a measure calling on congress to overturn Citizens United. You can read about this almost nowhere in mainstream news. Several other states and local governments have introduced similar measures to similar lack of fanfare. Among them, Hawaii and California, and towns in Massachusetts and Vermont.

Organized opposition to Citizens United

• Amend2012 a project of Common Cause
• Free Speech For People (FSFP) is a national, non-partisan campaign seeking to restore democracy to the people and to ensure that people, not corporations, govern in America. FSFP is dedicated to overturning, through a 28th Amendment to the US Constitution, the US Supreme Court’s January 2010 ruling in Citizens United v. FEC and a corporate rights doctrine, which threatens our elections and our self-government.
• Corporations Are Not People
• Move To Amend End corporate rule. Legitimize democracy.

More News

• Mass. activists: Overturn Citizens United ruling
• The National Conference of State Legislatures on Citizens United and the States
• How Do We Overturn Citizens United? The occupy movement opposes Citizens United.
• Voters Can Fix the Court's Citizens United Mistake
• California Moves Towards Overturning Citizens United: The California state Assembly endorsed a constitutional amendment to repeal Citizens United. The amendment passed by a 48-22 vote.
• This is How Overturning Citizens’ United Starts
• New York Assembly Committee Approves Resolution Calling For A Constitutional Amendment To Overturn Citizens United
• Montana wins states' backing over Citizens United fight

Our kind of truth

Populist demagogues in politics and the mass media are doing everything they can to discredit the quality press as propaganda organs for left-wing elites who sneer at the views of ordinary Americans. Santorum pretends to speak for these people – that is, for a minority of Americans who are mostly white, provincial, highly religious, deeply conservative on cultural and social issues, and convinced that Obama and all Europeans are dangerous godless socialists.

The point is not whether Santorum is right or wrong factually. What he says “feels” right to his followers, because it conforms to their prejudices. And the Internet, having swamped the quality press, feeds and reinforces those prejudices, making it more difficult to distinguish the truth from lies.

The public is increasingly segmented into groups of likeminded people who see their views echoed back to them in blogs, comments, and tweets. There is no need to be exposed to different opinions, which are, in any case, considered to be propaganda.

Our Kind of Truth, by Ian Buruma on Project Syndicate

The Rise of Private Power

David Rothkopf spoke yesterday at Seattle Town Hall on the rise of private power on a cold rainy night.

Rothkopf served as deputy under secretary of commerce for international trade policy in the Clinton Administration. Rothkopf was managing director of Kissinger Associates, an international consulting firm, founded and run by Henry Kissinger and Brent Scowcroft and went on to start two international advisory firms of his own. He is now a visiting scholar at the Carnegie Endowment as well as CEO and editor at large of Foreign Policy magazine.

Rothkopf is the author of three books, most recently, Power, Inc.: The Epic Rivalry Between Big Business and Government and the Reckoning that Lies Ahead.

Power, Inc.

Rothkopf begins with the origins of corporations in the Europe of the middle ages where church and state competed for power. Since that time, the world has moved to an era in which the axis of political tension is beween corporations and the state.

Governments midwived the birth of corporations, creating early state sponsored companies like the Dutch and British East India companies, an event soon followed by the South Sea Island Bubble. Church, state and the corporation are different approaches for controlling and allocating wealth, status and authority in society. In western countries, the church was largely tamed. But, in the modern day, laissez-faire capitalism has enabled the corporation to become a serious rival of state power.

There are several means of deploying power available to nations - control of borders, printing money, passing laws, military force. Multinational companies can circumvent many of these by changing domicile to the most favorable legal environment. Most financial instruments are created by private entities. Some big corporations have larger cash flow than most countries.

The financial crisis was a shocking demonstration of corporate power. When the shit hit the fan, who did we help? Homeowners? Nope, Wall Street. Next came the Citizens United decision, a milestone in the increasing political rights of corporations.

Thomas Jefferson, William Brandis and Adam Smith all mistrusted corporations and feared their influence on politics. Alexander Hamilton was their early cheerleader in American history and architect of the framework in which corporations helped America rise to power.

Adolf Fassbender, The White Night, 1932

American Capitalism

The financial crisis left the reputation of Anglo-American Capitalism in taters and the disfunction of American politics isn't helping America's influence in the world. Rothkopf took a big swipe at the premature triumphalism of the 1990's exemplified by Francis Fukuyama's The End of History which asserted that the Washington Consensus represented "the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government."

Ideologicalization of American politics has rendered constructive debate impossible. (Ideology sucks! See the tag-line above.) The great opportunity presented by the crisis for financial reform was wasted. The watered down reform that was enacted remains underfunded and mostly unimplemented.

As traditional forms of state power are increasingly ineffective, the US government has put all it's chips on military power, developing its comparative advantage at projecting force. This is the "leviathan" doctrine articulated in Thomas Barnett's 2004 book The Pentagon's New Map, which set out a grand strategy for an American foreign policy specializing in policing the globalized world economy.

Different capitalisms

What is taking the place of the Washington Consensus, both between and within countries, is a competition among several different varieties of capitalism: state capitalism, entrepreneurial capitalism, small business capitalism, chaotic capitalism.

Can corporations be made to serve societies? Rothkopf believes so. But, we need to intelligently discus the alternatives, and be willing to cede authority upward to transnational bodies. Viewed in this light, the EU as an experimental attempt to regain lost sovereignty. Rothkopf also cited public/private partnerships such as those that created the transport system in the US and the internet.

The Scandinavian countries, Rothkopf pointed out, are near the top of the rankings, including quality of life, education, and per-capita GDP. It's amusing to note that socialist Sweden let Saab go under at the same time the nominally capitalist US was bailing out GM. The reason? A generous safety net in Sweden made bankruptcy possible.

Rothkopf, perhaps understandably considering his background in publishing, sees a comparative advantage in protection of intellectual property. I see problems with that. At least in its current form, IP law overwhelmingly favors big companies, holding back innovation. Patents and copyrights are a blatant example of corporate manipulation of the legal environment. Erecting barriers to the creative remixing of ideas will merely succeed only in exporting the vibrant technology sector and with it another of the crown jewels of the American economy.

Rothkopf's intelligence and scholarship were evident throughout his thought-provoking talk. The same could not be said of the questioners in the Q&A session. The city that brought the world the Battle of Seattle couldn't muster many rhetorical molotov cocktails. Step it up, Seattle.

More

• The Carnegie Endowment page on Power Inc. has a video and a point-by-point summary.
• Inside Power, Inc. in Foreign Policy Magazine
• NY Times commentator Thomas Friedman's comments on Power, Inc. Capitalism, Version 2012
• Have Corporations Become Too Powerful? on Yahoo's business program, The Daily Ticker

Leveraging moral hazard

The Economist, hypothesizing an unattainable federalized Euro-Fed, says, "If you were sitting down with a blank sheet of paper, you would advise the euro zone to complement its one-size-fits-all monetary policy by pooling sovereignty and creating new institutions, [...among other things...] a bail-out fund could ensure that large European banks were not at the mercy of their vulnerable sovereign borrowers."

That's a touching show of sympathy for the creditors. And, looking at how the US fared with its massive intervention and how scary things were looking in Europe for a while there, you might conclude that bail-outs are the lesser evil. We'll have to wait and see how this looks in 5 or 10 years.

Greece asks Angela Merkel and Nicolas Sarkozy for a hundred billion Euros as concerned and inexplicably naked investment bankers look on.

Some say the big mistake the US made was letting Lehman Brothers go under. Some say the mistake was in the inconsistency of how Bear Stearns was handled compared to Lehman.

Whether an investment bank or a small sunny country with lots of islands, "too big to fail" applies either way. Maybe Greece isn't, but Spain might be and Italy even more so. While Greece and Spain both have long histories of default on debt (according to my dedicated research staff), Italy does not.

What's needed is a mechanism, an orderly well-defined processes, to handle failure of large systemically connected entities, whether they are corporations or governments.

Defaults happen. It's only common sense that we should have a means for resolving default, while minimizing damage and preventing problems from spreading to weaker neighboring nodes in the densely connected social network of finance.

That shouldn't mean protecting creditors or borrowers from the consequences of poor decisions.

The so-called "voluntary" hair cuts for holders of greek bonds, an attempt to avoid triggering credit default swaps, appear to have failed. But, what if they hadn't? Or pressure from some country whose investment banks had underwritten CDS's had influenced the terms of a bailout? Some speculate that was back story behind Timothy Geithner's trip to Europe in December.

In that context, credit default swaps are a device for leveraging moral hazard.

Credit-default swaps on Greece cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps payout of $5.2 billion on Lehman Brothers Holdings Inc. in 2008. The actual payout on Greece will be “much smaller” than the net amount reported by DTCC, Pickel said. A gross $68.9 billion of contracts were outstanding as of March 2 before accounting for offsetting trades.

Amazingly, after the AIG debacle, there's still no disclosure requirements for CDS exposure, so it's hard to know the extent to which US banks have sold CDS on European Debt and net exposure is even harder to guess. It looks like some of that exposure got unwound in to past few months. You can bet, a lot of it ended up in the laps of taxpayers, just like last go 'round.

• Who’s selling Greek CDS (June 2011)
• Sizing up the Greek risk to U.S. banks (June 2011)
• Who's The AIG In This Financial Greek Tragedy? (June 2011)
• Eliot Spitzer explains How Wall Street is gaming the Greek bailout
• Next Time, Greece May Need New Tactics

The legal code

Laws are the source code a country runs on. Institutions are components.

Alex Tabarrok - Launching the Innovation Renaissance

I'm something of a junky for the EconTalk podcast. On a recent episode, Alex Tabarrok and host Russ Roberts both of George Mason University had a conversation about Tabarrok's book Launching the Innovation Renaissance. Tabarrok argues that innovation in the United States is being held back by patent law, the educational system, and immigration policies.

Tabarrok's recommendations to increase innovation and productivity:

• prune back the patent system
• pay teachers better and in return demand better more accountable teachers - a more competitive, flexible, and open educational system
• focus education more on the STEM (science, technology, engineering, math) fields
• enable high-skilled immigration
• cut back on regulation
• invest in research and infrastructure - productive assets rather than welfare and warfare.

On intellectual property, he nails the problem head on:

Where you are building on previous ideas, standing on the shoulders of giants, then what you have to recognize is that previous intellectual property has veto power on new intellectual property. Intellectual property has two sides. Yes, it's an incentive to innovate. But it's also a cost. When you are building on previous intellectual property, it's a cost of innovation. Patents can be a cost of innovation as well as an incentive.

Tabarrok suggests a graduated system with 3-year, 15-year and 20-year patents and a narrowing of scope of the patents that are granted with the specific aim of allowing for cumulative innovation.

On education, Tabarrok worries that universities have become a status good - a consumption good, rather than a productive investment, especially for fields outside of the STEM fields, science, technology, engineering, math.

Computers are exploding, the Internet is exploding. And yet we graduated more students in computer science 25 years ago than we do today. [...] the same thing is true in mathematics and statistics, in chemical engineering.

How you fix that, I'm not sure. Subsidize those fields more and fluffier fields less? An engineering student pays 3k in tuition, but it costs 20k to study English Literature? That seems a little crass. On the other hand, I studied in a building paid for with Microsoft money. So, even if governments find it difficult to play favorites, industry can certainly sponsor fields selectively.

The one place where I might part ways with both Tabarrok and Roberts is the belief in deregulation.

One of the big influences on my thinking has been Mancur Olson's Rise and Decline of Nations. What Mancur Olson talks about is this accretion of interest groups over time. Everyone is trying to divide that pie up more and more in their favor, and it slows down decision-making.

It's not that I doubt the accretion of special interests. It's all around us. But, is deregulation the cure to that? Maybe they're right; regulation can certainly be a tool of rent-seekers.

Could we even build the Hoover Dam today? Technologically, yes. But politically could we have the will to do it? There would be so many environmental groups, so many lawyers, so many state and local governments, so many veto players.

But, deregulation can work out for worse, too. Take away Glass-Stegal, you get too-big-to-fail. Too much deregulation is an invitation to criminality and incompetence. Think of liar loans or the BP gulf oil spill. My own suspicion is that tilted rules are no good, no rules are no good, and sensible, well thought out, fairly and firmly enforced rules are really difficult and prone to failure, but are still the only serious option.

Venture capital comes up, briefly, in the context of it being stifled by Sarbanes-Oxley. I would pay a lot of attention to that system. Big companies are doing less basic research. In the pharmaceuticals industry, for instance, a big chunk of the early stage R&D has been outsourced from big-pharma to venture funded biotech. You might say, venture capital is the silver lining on this gilded age we're in. VC and corporate research budgets skew largely toward product development rather than basic research. Even so, we'd better keep the venture system healthy or we'll have a lot less privately funded research of any kind going on.

It might be the case that the dilema the US finds itself in regarding innovation is a counterpart to what gets called the middle-income trap. In the high-income trap, the pie is so big that there's an enormous temptation to try to get a slightly bigger slice for ones-self. The relative effort of that is less then trying to grow an already huge pie bigger and the potential rents are juicy. Once that kind of thinking sets in, the social contract erodes and people loose faith.

I hope people in high places read Tabarrok's book. I hope they don't pay too much attention to the deregulation bit, and instead take seriously the challenging job of designing rules that make true innovation more rewarding than gaming the system.

More

• John Cook sparked a discussion

Stop SOPA

In a matter of days, it looks likely that congress will pass SOPA (the Stop Online Piracy Act), another gift to special interest groups from motion picture and recording industry.

The bill targets sites like Sweden's The Pirate Bay, Hong Kong based MegaUpload or the Dutch site TorrentFreak requiring search engines, discussion forums, blogs and DNS providers to censor access to these types of sites prompting comparisons to China's great firewall.

The technical cluelessness on display in the congressional hearings is embarrassing, but, really, who expects anything different? Leading engineers have petitioned in opposition on the grounds that this legislation imposes serious burdens on infrastructure providers and probably won't even work.

How big a problem is this?

Technical issues aside, we should recognize that bootlegging movies or music is a fairly low-cost crime as far as society is concerned. Comparing it with illegal drugs, as The Economist does, is a joke when you think about lives wrecked by meth or crack or the ongoing drug war in Mexico. Piracy seems pretty benign next to the consequences of financial malfeasance in recent years, but now we're talking radical crazy talk.

The biggest consequence of piracy is that an artificial monopoly is less lucrative than it would otherwise be. Legal monopolies have a long history of abuse. They're a great way for politicians to give out favors and ask favors in return. In a textbook specimen of double-speak, any recognition of this economic and political reality is called sympathetic to piracy, something like being called a pinko in the McCarthy era.

A couple definitions

Rivalry is an economic concept describing whether the use of a good by one party precludes its use by another. The distinction being made here means that a million people could listen to Lady Gaga's latest tune at the same time. A million people could not ride in my car or live in my house. My house and car are rival goods. Songs are non-rival.

For every copyrighted work not pirated, how many would be purchased? My guess is that this ratio is low. I'm pretty sure nobody has convincingly shown otherwise. For the items not purchased, the utility of consuming them is lost, with no corresponding gain to the monopolist. This is called a dead weight loss, meaning some people could be made better off without making anyone else worse off, but we fail to do it. This loss is the music/movies/etc that wouldn't be enjoyed if they weren't pirated.

Willful ignorance of these simple but important ideas bugs me a lot more than bozo-grade technical knowledge.

Which is worse, the problem or the solution?

Now, it's important that creators of valuable intellectual property make a decent living. Few question that. What we're talking about is whether publishers should put up toll booths on the road between the consumer and the producer, and whether the government should enforce the use of these toll roads, when technology has made such choke points obsolete. Since distribution is now practically free, is it a good idea to create costly and ultimately ineffective legal barriers to replace the physical barrier that no longer exists?

Let's total up the costs. There's dead weight loss. There's a loss to innovation and culture which suffer when the interchange of ideas is impeded. There's the technical costs of implementing measures like SOPA, (and DRM and copy-protection before it), which tend to fall on paying customers.

To be fair, a partially market based means of valuing intellectual property and rewarding its creation is not to be dismissed lightly. Blocking access to download sites will result in some revenue trickling down to deserving artists. Too bad, no one speaks about the issue in terms of balancing benefits against costs.

The real problem

[The nightmarish SOPA hearings By Alexandra Petri, Washington Post]

It's shameful that congress is so eager to shill for corporations and their lobbyists rather than protect the interests of the people they are elected to serve.

Update:SOPA and it's sister PIPA (the PROTECT IP Act) have been temporarily shelved, thanks to an enormous public outcry and the opposition of Oregon Senator Ron Wyden. Clay Shirky sums it up, like so:

We should delight in the stand we’ve taken in favor of things like, say, notifications, and trials, and proof before censoring someone, but we should get ready to do it again next year, and the year after that. The risk now is not that SOPA will pass. The risk is that we’ll think we’ve won. We haven’t; they’ll be back. Get ready to have this fight again.