Leonhardt rebuts Sorkin on AIG Pay

As an addendum to my previous post, the day after Andrew Sorkin's New York Times column defending executive bonuses ("The Case for Bonuses"), the much more astute and sensible NYT economics columnist, David Leonhardt, published a piece entitled "Paying Workers More To Fix Their Own Mess." While Leonhardt did not specifically mention Sorkin's column, he did quote from it, and it is clearly a response and counterpoint to Sorkin's nonsensical defense of big bonuses for incompetent executives. As I have suggested before, Leonhardt is one of the few economics writers who seems to understand the depth and breadth of the current economic crisis.

The "Brainiacs" and "Talent" at AIG

Washington is finally catching on to why people are so upset with these million dollar bonuses for executives who drove their companies into the ground and swindled American taxpayers. But Wall Street apparently still doesn't quite understand the fuss, and the folks there continue to make the argument that these bonuses are necessary to "attract and retain talent." This "talent" are the greedy, immoral,short-sighted scoundrels who bankrupt their own companies, stole the retirement funds of million of Americans and drove the global economy to the brink of depression. Some talent.

The most stupefying assertion of this ridiculous argument about talent comes in the form of a New York Times column by Andrew Ross Sorkin, entitled "The Case for Bonuses at A.I.G."

Sorkin writes that "as unpalatable as it seems, taxpayers need to keep some of these braniacs in their seats" so they can help fix the mess they made and "to prevent them from turning against the company."

Braniacs at A.I.G.?????? These "braniacs" are colossal blunderers and incompetents, just like most of the CEOs at the other companies that went bankrupt based on hugely risky and irresponsibly stupid investment decisions.

Edward M. Liddy, the new (supposedly improved) CEO of A.I.G., perpetuates this shibboleth:

"We cannot attract and retain the best and brightest talent to lead and staff" the company "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

This argument about attracting and retaining talent has two major problems. First, it is clear by now that such a strategy did not work. Big money didn't attract talent, but greed. And selfish greed doesn't benefit much of anybody except those few who practice it.

Second, if multimillion dollar payouts are necessary to attract "talent," then how do you explain the influx of very talented, dedicated, public-spirited people into the federal government, especially with the new Obama administration? Washington is inundated by people, young and not-so-young, wanting to hitch their stars to a noble vision and public service. How many of them are being offered million dollar salaries? None.

So let THEM take over administration of these discredited and disgraced financial institutions.

Obama Defends Domestic Surveillance

Caleb Hamman
chamman@butler.edu

As described in chapter five of The End of the American Century, undemocratic trends in the U.S. political system are having immense effect in furthering American decline.

The Bush II administration deserves substantial culpability. Decider & Co. scissored the democratic fabric as they exacerbated economic inequality, infringed upon the rights of American citizens, and ruled by fiat decrees issued from a hierarchical decision-making structure.

Conversely, the Obama administration has brought about some welcome developments. A grassroots presidential campaign, an end to torture, and a more transparent governing style are some recent democratizing measures that bode well for the U.S. political system.

Still, other actions have been less than reassuring. Among the most ominous has been Obama’s refusal to depart from the Bush status quo on the issue of domestic surveillance.

Since January, the Obama Justice Department (DOJ) has taken action to ensure the legality of Bush’s domestic spying policies will go unquestioned, the details of the program will remain unknown, and surveillance practices will remain institutionalized for possible use by future administrations.

Supporting evidence is provided in abundance by the DOJ’s record in the ongoing Al-Haramain court case.

Wendell Belew and Asim Ghafoor, former lawyers for the now defunct Al-Haramain Islamic Foundation, sued the Bush administration after they accidentally received documentation from the Treasury Department revealing that they had been subject to warrantless surveillance in 2004.

To review, Bush’s domestic surveillance program, operating without the use of warrants, was in direct violation of the Foreign Intelligence Surveillance Act of 1978 (FISA) which permitted domestic surveillance only in the case of a court order. Bush’s spying policies were unquestionably illegal. His own DOJ refused to certify them and his attorney general, John Ashcroft, threatened to resign if they were continued (1).

To date, Bush’s spying program has withstood attacks against its legality by employing a clever bit of sophistry. The defenders of surveillance essentially argue:

1. No one can bring suit against the program who does not have standing.
2. No one can claim they have standing (because no one knows they have been spied on).
3. No one can be told they were spied on because the information is a “state secret.”

Because of its unlooked for gift from the Treasury Department, the Al-Haramain case appeared to be the first with substantial promise to penetrate this circular reasoning—at least until the Bush administration declared the document a “state secret” and Al-Haramain was forced to return it to the Treasury Department by court order (2).

For three years, the Bush administration continued to assert the state secrets privilege and thus prevent Al-Haramain from proving the standing necessary to question the legality of the surveillance program.

Recently things began to take a different turn. Last July, U.S. District Judge Vaughn Walker ruled that the state secrets privilege didn’t apply to the Al-Haramain case. Then, on Jan. 5, Walker ruled that, with some minor qualifications, Al-Haramain’s lawyers should be given access to the controversial document in order to establish standing.

Enter the Obama administration. Writing last week in Salon, Al-Haramain’s lawyer Jon Eisenberg described how Obama’s election had given the plaintiffs “hope” that they would see some “change we can believe in” in “the Justice Department’s handling of the case under Attorney General Eric Holder” (3).

Perhaps Al-Haramain’s lawyers had taken heart from Obama’s campaign Web site. Herein, “The Plan to Change Washington” describes one aspect of “The Problem” as being “Secrecy Dominates Government Actions” (4).

Specifically, “The Bush administration has ignored public disclosure rules and has invoked a tool known as the "state secrets" privilege more than any other previous administration to get cases thrown out of civil court.”

Despite its rhetoric, Eisenberg testifies that Obama’s Justice Department “has continued to assert the state secrets privilege in the Al-Haramain case, even though Judge Walker ruled last July that the privilege does not apply.”

Also writing in Salon, constitutional and civil rights lawyer Glen Greenwald describes how “the Obama DOJ” is “not merely trying desperately to keep the Bush administration’s spying activities secret, and not merely devoting itself with full force to preventing disclosure of relevant documents concerning this illegal program, but far worse, doing everything in its power to prevent any judicial adjudication as to whether the Bush administration broke the law by spying on Americans without warrants” (5).

Greenwald details how “Obama lawyers have been running around for weeks attempting one desperate, extreme measure after the next to prevent this case from proceeding—emergency appeals, requests for stays, and every time they lose, threats of still further appeals.”

The process reached a climax late last month. On Feb. 27th, the Ninth Circuit Court of Appeals rejected an emergency request by Obama’s DOJ to halt further proceedings before Judge Walker. This ruling effectively ensured that Al-Haramain’s lawyers would have access to the top-secret document necessary to prove standing.

At this point, Obama’s lawyers took unprecedented action. According to Eisenberg, “they informed Judge Walker in a public court filing that if he intends to give us access to the secret filings in the case, the government will ‘withdraw that information from submission to the court’.”

As Eisenberg describes, this statement implies that “executive branch authorities (who? the FBI? the army?) will attempt to seize the documents from Judge Walker”—something that would be “a violation of the constitutional separation of powers, unprecedented in this nation’s history.”

From its actions in the Al-Haramain case, it seems quite clear that the Obama administration has chosen to defend the Bush status quo on domestic surveillance. Legal arguments aside, it’s a rather disturbing decision—one preventing the achievement of justice for past crimes and effectively guaranteeing that domestic surveillance practices will be available to future administrations.

It’s less than clear why the Obama administration has elected this position. It’s not as if they’ve merely invoked "state secrets" in order to protect a few pieces of sensitive information; rather, in exactly the same fashion as Bush, they’ve employed the privilege to have undesirable cases thrown out in their entirety, ensuring that the legality of domestic surveillance will never meet serious challenge.

At best, Obama’s surveillance policy is simply representative of a hesitancy to investigate past crimes. At worst, it’s an attempt to retain expanded, illegal powers for the executive branch and a tacit approval of establishing an above-the-law presidency effectively immune from judicial restraint.

Unfortunately, the context of past actions seems to rule out the least of all evils. Obama voted for the 2008 FISA amendments—bestowing legitimacy on surveillance practices and described by Yale Law School Professor Jack Balkin as “byzantine” and giving “new powers” to the presidency that are “either sketchy or opaque” and “will have to be worked out” by “the executive branch” (6).

Welcome Caleb Hamman to the team

Caleb Hamman, a former student of mine, will be joining this blog as a guest contributor. Caleb is double-majoring in Political Science and Philosophy at Butler University, and is the opinion editor and columnist for The Butler Collegian. HIs first blog will appear here shortly.

Is the Global Economy a Ponzi Scheme?

In his Sunday New York Times column, Thomas Friedman quotes a climate expert, Joe Romm, who nicely captures a problem that I discuss in my book, and in several blogs posted here(especially "The US Economy Will Shrink A Lot, and It Should.").

"We created a way of raising standards of living that we can't possibly pass on to our children. . .We have been getting rich by depleting all of our natural stocks--water, hydrocarbons, forests, rivers, fish and arable land--and not by generating renewable flows."

This led me to Joe Romm's blog, climateprogress.org, where he has a thoughtful and thought-provoking entry entitled "Is the Global Economy a Ponzi Scheme?" The essay, and that site, are worth a look, and I have added a link to it in my blogroll.

The End of the American Century Published in China

The End of the American Century will appear this month in China, published by the Shanghai Lexicographical Publishing House, and translated by Professor Ni Lexiong and Sun Yunfeng of the Shanghai University of Political Science and Law.

The US Economy Will Shrink (A Lot), and It Should

The U.S. economic stimulus plan passed by Congress aims to regenerate economic growth, spending and consumption. But it is almost certainly bound to fail, and not for the reasons given by partisans on both sides of the Congressional aisle. In spite of the stimulus, the economy will continue to contract. This is inevitable; it is necessary; and it is even desirable. The main task of the government should be protecting those who are displaced and impoverished during this contraction and retrenchment.

The U.S. economy must contract because it is way too large, in numerous respects. It is too large given the U.S. levels of production and exports. It is built largely on consumption and debt, not output. And it is too large for the rest of the world, even given the size and wealth of the country.

The U.S. economy is big—about 28% of global GDP. But the U.S. accounts for only about 8% of global exports; 16% of manufacturing value-added output, and 5% of the world’s population.

The main contributor to the outsized US GDP is consumption, where the U.S. is indeed the world’s leader. Consumption accounts for about 72% of US GDP, which is a record for any large economy in modern history. As we are now learning, this consumption has been built on a mountain of consumer and household debt, which now totals some $13 trillion—approximately the size of the entire U.S. economy. This is unsustainable.

Furthermore, much of U.S. debt is owed to other countries. About half of the federal debt and a quarter of corporate bond debt is held by foreigners. As former Senator Hillary Clinton pointed out in 2007, "16% of our entire economy is being loaned to us by the Central Banks of other nations."

These huge levels of consumption are a drain on the planet, its resources and its people. The U.S. has only 1 in 20 of the globe’s people, but we consume a quarter of the world’s fossil fuels; 29% of “materials” (including minerals, metals and synthetics); 19% of forestry products; and 14% of its water. The U.S. is also the world’s biggest contributor to environmental pollution, greenhouse gas emissions (a quarter of the world’s total) and global warming. At 5% of the globe, we leave a huge carbon footprint.

In the 1970s Yale historian Paul Kennedy, writing in The Rise and Fall of the Great Powers, suggested that eventually the U.S. would have to decline to its “natural” share of the world’s wealth and power, which he estimated should be in the 16-18% range, rather than the 30-40% held by the U.S. at that time. This would indicate a cutting of the U.S. economy by half.. But so would many of the economic indicators I mention above. Consumption, debt, and borrowing all need to be reduced by about that amount, as should petroleum and energy use.

Given the hugely bloated size of the U.S. economy, and of U.S. consumption, and of consumer and government debt, it is hard to see how the economic stimulus package will make much of a dent in things. The economy is bound to decline, and needs to.

This contraction has already begun. The country’s GDP shrunk last quarter at an annualized rate of 3.8 %. If this continues, it will be the largest yearly decline in the US economy since 1946. But a much larger decline will be necessary to bring the economy back to a more natural, balanced and sustainable level. The contraction of GDP is likely to continue for several years, at the very least. This would be unprecedented for the postwar period, when only once (1974-75) did the economy contract two years in a row.

Such a decline could be on a scale of that of the 1930s. The main problem then, as now, will be the reduction in employment, and the consequent growth in poverty. It is hopeless throwing good money after bad in an effort to revive growth, consumption and debt. Instead, the federal and state governments should focus on alleviating the suffering that this contraction will entail, by increasing funds for unemployment compensation, Medicaid, welfare, job retraining and education.

Many people will suffer in this transition, and they should be helped. For most people, though, this economic retrenchment will simply mean belt-tightening. Our standard of living will decline, in ways most of us have not experienced before. But we are still a highly developed wealthy country, and will remain so. Once the U.S. economy has stabilized at a more natural size, it will grow again. And this time, it can happen in a way that is not so destructive of the planet, other peoples, and our souls.