1) They didn't act according to the convention. 2) More importantly, they aren't signatories to the Geneva Convention. The Convention isn't like the White Ribbon Pledge -- it's a treaty, and applies only to member nations. Which the Taliban, so far as I know, isn't.
THIS REVIEW OF A MANAGEMENT BOOK on the salvation army mentions the incredible work the Salvation Army is doing down here at WTC. Amen. Not showy, like the Red Cross, but effective, omnipresent, and marvelously efficient. The Red Cross came and packed up shop, but the SA's still here, giving the workers a warm place to go and get a snack or -- if they want it -- some warm words from the volunteers. Meanwhile, their CEO makes less than a mid-level accounting manager at most firms.
THERE ARE RUMORS flying that the guys on the Pile are getting sick. A lot of it seems eerily reminiscent of Gulf War Syndrome -- several aneurysms, a guy with spots on his lungs given five years to live, and reports of mysterious green vomit. (My guess: broccoli for lunch.) Not that I doubt that there are noxious things coming out of that hole -- it's just that I think it takes more than 3 months to develop lung cancer. The one thing I can confirm is that my asthma is awful -- I haven't been able to go to the gym in weeks -- and an extraordinary number of previously clear-skinned people seem to be developing acne. I will skip the obligatory jokes about finding a date for the prom.
The retreat of business bureaucracy in the face of the market was brought home to me recently when I joined the advisory board at Enron--a company formed in the '80s by the merger of two pipeline operators. In the old days energy companies tried to be as vertically integrated as possible: to own the hydrocarbons in the ground, the gas pump, and everything in between. And Enron does own gas fields, pipelines, and utilities. But it is not, and does not try to be, vertically integrated: It buys and sells gas both at the wellhead and the destination, leases pipeline (and electrical-transmission) capacity both to and from other companies, buys and sells electricity, and in general acts more like a broker and market maker than a traditional corporation. It's sort of like the difference between your father's bank, which took money from its regular depositors and lent it out to its regular customers, and Goldman Sachs. Sure enough, the company's pride and joy is a room filled with hundreds of casually dressed men and women staring at computer screens and barking into telephones, where cubic feet and megawatts are traded and packaged as if they were financial derivatives. (Instead of CNBC, though, the television screens on the floor show the Weather Channel.) The whole scene looks as if it had been constructed to illustrate the end of the corporation as we knew it.
Personally, I don't think it's a puff piece; it looks like the same kind of idiotic millenial blather that convinced my co-workers, who couldn't read a balance sheet, that they were stock-picking geniuses, and my classmates, who could, that they were better off borrowing money to pay for school than selling any of their precious Webvan stock.
Sullivan's point, however, is well taken: for Krugman to criticize the administration for doing pretty much what it would have done anyway after taking money from Enron is the height of hypocrisy, the more so because Krugman admits straight out that he couldn't figure out any legitimate reason for Enron to give him that $50K.
Why I'm in Favor of Abolishing the Corporate Income Tax
Bloggers note: This is a long explanation about tax policy. You should not attempt to read it if you have some reason that you must stay awake: for example, if you are cooking dinner or operating heavy machinery, or your husband expects you to pick him up at the airport and doesn't have much of a sense of humor about things like spending an extra couple of hours at the arrivals terminal.
How many times have we heard columnists or activists foaming at the mouth about those evil corporations that don't pay their "fair share" of taxes? Well, since I have to wait for the copier repairman to finish up some work, I'm going to take this opportunity to plug one of my pet causes: abolishing the corporate income tax.
Now, I know what you're thinking. If you're a conservative, you're thinking "Right on!" If you're a liberal, you're thinking "typical pro-business yuppie." (You make more money than I do. Trust me. I'm currently the executive copy girl in a construction trailer.) If you're one of those activists, you're thinking "When the revolution comes, she'll be the first one with her back against the wall." Too true, and it will save me a lot of time waiting for common sense to wither away and true Naderism to arrive. And probably I'm not going to convince you. But the rest of you, listen up, because I've got compelling arguments with which to convince you, or your friends, if you're already a believer.
Background: How the Corporate Tax Works Corporations are taxed on their revenue minus their expenses. This is different from the way people are taxed, because the government assumes that the expenses necessary to operate a person are roughly the same from person to person. You may think you need a widescreen TV with picture-in-picture and dolby surround sound in order to support basic life functions, but the government doesn't. Therefore, it taxes you on your revenue -- the money you make for selling your services -- and leaves it to you to figure out the expense part.
The problem with doing likewise with corporations is that they are very different from each other. An aluminum smelter, for example, may have very high revenues, but because there is a lot of competition in the market, it may cost the smelter 99.5 cents to make every dollar it earns. Since the corporate tax rate is 35%, the aluminum smelter would be making an after-tax profit of -34.5 cents for every dollar in revenue. This would quickly put the smelters out of business, and we'd all have to go back to shingling our houses and desperately gulping Mountain Dew out of our hands before it all ran through our fingers.
My old consulting firm, on the other hand, by my rough calculations experienced a 450% return on the cost of my labor and associated overhead (although that figure leaves out the various layabout nephews, current and former mistresses, and assorted friends' children employed by the owner of the company to write reports nobody read. I view those as a personal expense, although the IRS, unfortunately, did not.) 35% of revenue hardly makes a dent in the profits. That is why the government takes into account expenses as well as revenues when calculating taxes.
Argument One: Corporations aren't People As my favorite macroeconomics professor pointed out, it is impossible to tax a corporation because the corporation is just a fictional entity designed to pass profits back to its owners. When you say you're going to "tax a corporation", the corporation doesn't go to the money farm to harvest some more cash to give to the government so we can expand job training for unwed mothers -- some real person is going to pay that tax. When you put a tax on wages, such as social security or the unemployment tax, the employer doesn't say, "oh, well, profits dropped 15% this year; better tell Merrill Lynch to issue a 'sell' rating" -- they pay their employees less, both to lower the tax burden and to recover the lost profits. They hire fewer employees, because each employee is now more expensive. This costs real people money. When you up the corporate tax, either the employees pay, because the firm can't afford as many of them; the customers pay, because the firms have to raise their prices to cover the taxes; or the shareholders pay because dividends are lower and the company is worth less. And before you liberal types start rubbing your hands in glee at the thought of those pained shareholders, keep in mind that the largest shareholders in companies are insurance companies, which invest in stocks in order to make the money they need to pay off when your house burns down; and pension funds, making the money to take picketing US Steelworkers off the streets and put them into good homes. The other big holders are mutual funds, which is what most of us have our 401(k)'s in. So when you say "I want to tax corporate profits", try silently saying to yourself "so that Mom can sell the condo in Florida and move in with me."
Argument Two: The Corporate Income Tax Costs the Economy More than it Earns The Corporate Income Tax brought in $204.9 billion in 1998. My tax professor (a Democrat) estimated the cost of corporate compliance in that year to be $300 billion. That's just the direct cost -- what corporations paid tax lawyers and accountants.
This labor is unproductive. It adds no new wealth to the economy; we are paying people simply to transfer money from one place to another, a net economic loss. Particularly so because the money isn't being transferred into any sort of wealth producing investment, such as a store or manufacturing plant. This doesn't mean that we shouldn't have any government or regulations -- the police add no new wealth to the economy, but I still want them around. It just means that we have to weigh the cost of the regulations against the benefit we get out of them. In this case, we make $204.9 billion off the corporations, but at the expense of taking $300 billion worth of resources out of the economy which could have been building widgets or thinking up a new recipe for fat-free muffins.
Nor is $300 billion the only cost. Remember, those corporations won't stump up on their own: you need IRS agents to check on them. And congressional staffers to write laws closing "loopholes". And courts to take corporations you think aren't complying. And reporters to write foamy-mouthed editorials about how corporations aren't paying their "fair share". More importantly, there is a hugely distortionary effect on the economy, because corporations spend an enormous amount of time and money trying to structure transactions to get around taxes. All of this activity is economic dross, and its so widespread I've given it its own section.
Argument 3: The Corporate Income Tax is Extremely Distortionary I've talked elsewhere about the lengths that companies go to in order to avoid, among other things, taxes. One of the most egregious of these is the way that taxes favor debt. Now, corporations prefer debt to equity anyway, for the same reason that you'd rather take a loan from your parents than sell them part of your house. What makes this preferance so compelling, however, is that while corporations have to pay dividends or repurchase shares out of their after-tax profits, they can deduct any interest on debt. Suppose I have a project that is projected to return 8% -- every dollar I invest yields me $1.08 at the beginning of the year. We'll posit 0 inflation and a risk-free environment so that we don't have to get into tiresome concepts like the time value of money. Now assume that I don't have the cash to make the investment, but I can borrow money at 9%. In a tax-free world, this would give mea return of -1%, and I would pass up the opportunity to own my very own fur-bearing trout ranch. However, if I am a corporation, I can deduct that 9% -- call it $9 annual interest on a $100 loan. Since the corporate tax rate is 35%, I have just lowered my tax bill by a little over $3. Add that $3 to the $8 I'm getting off the trout, and suddenly it's an attractive business opportunity. The trout are no more fruitful, their pelts no more soft and lustrous -- the tax status makes all the difference.
So why is this bad? Partly because it encourages companies to make investments that have a negative economic return -- the actual economic return of 8%, with an actual economic cost of lending the money of 9%. (Yes, this is simplistic. Work with me.) But mostly because it allows companies to take on more risk than they otherwise would. As I said in the above-referenced post, debt makes the company riskier in ways that equity does not, because corporations, not being people, can't borrow money from their parents and therefore get into real trouble when they can't meet their interest payments. The tax exemption, added to the innate preference for debt, means that companies will leverage themselves right up to the point where Moody's threatens to drop their rating to "run for the hills!". People are always over-optimistic about the outcomes of the projects they are pursuing, as you know if you've ever attended a budget meeting or a bridal shower. Add in a little shoddy accounting and you get Enron.
There are numerous other ways in which companies engage in distortionary behavior; entire firms exist for the sole purpose of arranging asset swaps between firms or entities that can't deduct the assets, and firms or entities that can -- every major investment bank has several groups pretty much solely devoted to this purpose. This makes money for the corporation, but it doesn't create new wealth; it merely transfers money from the government's pocket to its own. Meanwhile, all those people and resources that could be utilized to actually produce something are paid instead to engineer the transfer.
The standard activist response is to close the "loopholes." This is discussed in our next section:
Argument 4: It is Impossible to Close the Loopholes I am all for closing loopholes that are special breaks generated by friendly legislators. Most loopholes, however, do not fall under that category. Most loopholes have to do with items that are legitimately treated as expenses for some purpose. For example, if you eliminated the debt deduction, you would get rid of a lot of fur-bearing trout ranches -- but there are companies that require a high level of capital investment in order to operate, such as automakers. They finance their physical plant with debt, partly for the tax break, but also partly so that they can match the financing cost of the equipment to the life of the equipment. During a bad year, with those debt payments coming in, it wouldn't be a good idea to slap them with an enormous tax bill too -- not unless we've decided as a nation that we'd rather drive Yugos. Many of the "loopholes" decried by Nader and his ilk fall into this category -- corporations engaged in clearly distortionary, but legal behavior, in order to minimize their taxes.
So why can't we eliminate this? There are several reasons. The first is the same reason that it's impossible to entirely eliminate computer hacking, or burglary -- they've only got to find one way in, while you have to close all the doors. As fast as you write the new laws, an army investment bankers, accountants, and tax attorneys will get busy seeking a way around it. I'm sure Nader would like to outlaw this as well, but since this would amount to a law against thinking, it would be impossible -- although he may not realize this, given how successful he's been at implementing such a plan among his own followers.
The second reason is that there's a fine line between necessary and unnecessary transactions, and picking where that line falls will remain more of an art than a science. The harder we try to crack down, the more time and money we waste arguing whether the trout pelts really need to be stored at the dry cleaners before they're sold.
And the third goes back to those costs we talked about in Argument 2. The more laws we write to try to close loopholes, the more congressional staffers we need to write them, judges to interpret them, IRS staffers to enforce them, tax lawyers to brief companies on them, etc. And the effect is geometric, not arithmetic -- the more tiny, specific laws we write, the more impossible the tax code becomes to comply with, as complexities generate ever more conflicts and gray areas, and the code itself passes beyond the comprehension of a single person, thereby making it impossible to completely tell whether or not you're in compliance. This unpredictability adds risk, raising the cost of capital and reducing the willingness of companies to invest. This latter cost is impossible to quantify, but we could quantify most of those direct compliance costs -- and I would be willing to bet that they far exceed any revenue generated by "closing the loophole".
Argument 5: Eliminating the Corporate Income Tax Makes Corporate Welfare Harder At last, an argument even a Naderite could love. Much of that corporate welfare consists of tax deductions, credits, or what have you, that the public perceives as "free" because we're not handing them a fistful of cash. Eliminating the corporate income tax will force voters to ask themselves whether we actually like Chiquita bananas enough to hand them a wad of our hard earned cash every April 15. When we think about all of the unproductive activity we'd be eliminating by eliminating the corporate tax, lets not forget all those high-priced lawyers eating tax deductible dinners with your congressman in order to convince him that his latest client desperately needs a tax break for the Good of the Nation.
Summary The corporate income tax costs the economy much more than it produces in revenue. Eliminate it and watch a flood of economic activity be unleashed as all those unemployed accountants, tax lawyers, and IRS agents get to work inventing the next Furby. Recoup any lost revenue by eliminating the capital gains tax and treating capital gains as ordinary income in order to equalize the tax treatment of debt and equity, and it will be a long time before we see another Enron.
Summary for Those Who Started to Nod off in the Third Paragraph and Skipped to the Bottom The corporate income tax is very bad. You should be against it. Email this link to any of your friends who question this.
THE WALL STREET JOURNAL says roundabouts (traffic circles, for Americans) are a no-go in the United States. I don't see why -- I love roundabouts. They keep the traffic moving, reduce accidents, and prevent frazzled ENTJ types like my ex-boyfriend from tapping maniacally on the steering wheel at intersections. Yet the journal reportst that in America they caused more accidents than they solved because people couldn't figure out how to use them. Is the nation that gave the world the first man on the moon now so stupid that they can't figure out "inside lane to drive, outside lane to exit"?
SEEMS THE SAUDIS WANT US to get the hell out, militarily speaking. I'm bemused, befuddled, and otherwise bewildered. While I hesitate to suggest the US strongarming lands legitimately owned by another country (well, as legitimately as can be said of anything conferred by a drunk Winston Churchill), I wonder how long the Saudis think that they will last if they stop being our allies. While I suspect that they are trying to maintain their legitimacy by hurting our ability to war on Iraq, I see this as ineffective for two reasons:
1) Turkey, which likes us, borders Iraq. It may be harder to stage an attack from Turkey, but I doubt that it's impossible.
2) If Saudi stops being a vital military base, we are free to notice the profligacy with which the royal family sponsors terrorism. Now, I know that toppling the house of Saud is what Osama wants (or wanted); however, I doubt that what he wanted was for the oil fields to be seized and operated in a trust for the whole Arab people to buy things like schools that teach math and science and economics instead of The Protocols of the Elders of Zion. While I realize that there are so many political and diplomatic obstacles to this that it would probably never happen, I don't think its entirely improbable; countries like France and Japan, after all, just want access to the oil, regardless, and most Arab nations would be happy to get a cut of Saudi oil wealth. As a bonus, we could simply tell nations that if we find terrorist connections, you're off the list for oil revenues for five years. No appeal, nothing -- just cancel that order for the solid gold toilet.
Big argument in my family as to whether we could hold the fields. I say we could and here's why: no rebellion that I am aware of has ever succeeded without outside financing. Exhibit 1: Ireland. Tons of rebellions that went absolutely nowhere until the 1870's, when Irish-Americans started making enough money to finance Sinn Fein. Heartwarming movies about Michael Collins to the contrary, the Irish fought the English with American-financed guns, not peat and pitchforks. Exhibit 2: The French. The French Resistance was more valuable as a source of information to the nations with the big guns than as a Force Saboteur. Exhibit 3: The Quagmires. Russia foundered in Afghanistan because we were arming the hell out of the other side, not because its impossible to hold, just as, myths to the contrary, I am reliably assured that we would have had little trouble holding Vietnam if they had not been funded by the Russians and Chinese. Notice that the Polish, who hate Russians with a rare passion, did not manage to free themselves until the giant faltered -- they didn't even manage to make a good show, because the Russians had all the guns and stuff.
The other great danger of holding territory -- that its more expensive than its worth -- is a non-issue, because its self-financing merely through eliminating OPEC. Plus the alternative, terrorism, is very expensive. If we cut off the oil money, Arab terrorists would be back to fighting with rocks. Rocks are not very effective against an army with tanks and F-14's. Also, teenaged boys don't look nearly as cool toting around a sack of gravel as they do lightly caressing the stock of an AK-47.
I am not necessarily advocating that we do this. I don't like the idea of the United States walking in and taking over someone else's land, no matter how badly they have behaved. Nonetheless, I think it behooves the Saudis, who provided the funding for the gaping pit in the ground across the street from me, to think very carefully before they decide that they are no longer our friends. But then at least Sgt. Stryker won't have to worry about going to Saudi Arabia.
WILLIAM SAFIRE on the birth of patriotic schmaltz. He explains elegantly why those commercials on the History Channel make me choke up even though, like sausage, I know exactly what goes into making them.
Mickey Kaus reports that Lieberman also has ties to Enron, via an ex-staff member who lobbied him on Enron's behalf. Says Mickey: "Lewan's revolving-door mendacity sharply limits Lieberman's ability to unctuously condemn the Bushies' Enron 'ties.' " Democrats may be learning the lessons Republicans got -- fast -- during the Lewinsky scandals: if you want to crticize that mote in thy neighbor's eye, be prepared for some careful scrutiny of the beam in thine own. The question is, will the Democrats follow the Republicans' lead in having the integrity to boot but good anyone found to be breaking the rules they're howling about?
The market's tanking and my classmates are sending out emails advertising sublets in NYC, SF, and other high-end meccas. It's hard to cry for MBAs, of course, but it does not bode well for recovery.
Redistributionist balderdash from the Washington Post in the form of an article on why poor children do worse in school. The cause, according to the article: summer vacation.
During the school year, the students in all three status categories gained the same amount on the tests. The difference between the three groups is what happened during summer vacation. When the kids came back in the fall, the tests showed that over the summer months the poor kids lost ground in reading the first two summers, then held their own, but sank in math. The middle-class kids gained in reading and held their own in math. The rich kids gained in both reading and math, but a lot more in reading
Fair enough -- seems methodologically sound, and it sounds like a new insight. Quick as a flash I thought, "well, let's make the school year longer." But the authors have anticipated this, and are quick to caution against such simplistic solutions:
The researchers, Karl Alexander, Doris Entwisle and Linda Olson of the Johns Hopkins University, are quick to point out that what poor kids need is not necessarily more school: "We found that better off children in the [study] more often went to city and state parks, fairs, or carnivals and took day or overnight trips. They also took swimming, dance, and music lessons; visited local parks, museums, science centers and zoos; and more often went to the library in summer." They also were more likely to participate in organized sports and in more types of sports.
Computation drills and work sheets in August are probably not the answer.
No, more school isn't the answer for poor kids -- they need to be sent to camp.
Notice that there is absolutely no correlation offered between any of the activities cited and reading or math skills, which are the metrics we are supposed to be discussing. No, these are just a grab bag of activities that high-culture types consider "enriching" and therefore force on their children. Not that I am against any of these things, mind you, but I am hard-pressed to identify in what way swimming improves your math skills, or taking overnight trips helps you to read. (All the children in my family spent those overnight trips reading like mad, but since we were also known for reading while walking down the street, that's not very good evidence.) Its possible that trips to the zoo, etc. have a measurable effect in stirring interests in children that they then develop reading and math skills in order to pursue -- but I want to see some data, please, not a blanket assertion. As someone who was dragged to every activity on that list on a regular basis, I have a feeling that the books piled on every flat surface in our house and the relentless math and spelling bees to which my father subjected us had more to do with our academic prowess (such as it is) than our junkets to the Planetarium.
ONE EXAMPLE OF my assertion yesterday that all presidents make decisions that benefit their friends comes from The Weekly Standard (subscription required):
ON JULY 5, 1995, Enron Corporation donated $100,000 to the Democratic National Committee. Six days later, Enron executives were on a trade mission with Commerce Secretary Mickey Kantor to Bosnia and Croatia. With Kantor's support, Enron signed a $100 million contract to build a 150-megawatt power plant.
Enron, then a growing giant in energy trading, practically had a reserved seat on Clinton administration trade junkets. . . and Enron benefited from its government contacts during the Clinton years. After Lay's trip to India with Ron Brown, Enron received nearly $400 million in U.S. government assistance so that it could build a power plant south of Bombay. According to reports in the Houston Chronicle at the time, the Export-Import Bank kicked in $298 million, while another federal agency, the Overseas Private Investment Corporation, put up $100 million. . . Clinton himself was involved in starting the India effort for Enron. According to Michael Weisskopf of Time, Clinton scrawled a note to McLarty telling him to help with the project . . . All told, Enron received over $4 billion from OPIC and the Export-Import Bank for projects in Turkey, Bolivia, China, the Philippines, and elsewhere.
Under Clinton, the Commerce Department was proud that it was finally using the might of the U.S. government to assist favored firms. But the enterprise was plagued by constant criticism that somehow it always seemed to be big political donors that got most of the help.
This train wreck has been 65 years in the making, since 1937, when pharmaceutical maker McKesson & Robbins went belly up and congressional investigators were flummoxed to learn that the SEC laws they passed didn't mean accountants were supposed to be in the business of detecting fraud.
Let's not pretend to know more about Andersen's destroyed documents than we do. But still: When auditors have reservations about a large and successful company's books, they don't blab to the press or shout an announcement from the rooftops, blowing a hole in a stock owned by thousands of investors. No one would ever hire them again. The missing emails may well contain a record of Andersen wringing its hands hopelessly over this dilemma, as accounting firms have done since time immemorial.
This is an impossible bind, made more so because accountants have been prepared to live with cognitive dissonance rather than give up a federal meal ticket. . .
The profession's drippy rhetoric would have you believe accountants work for the public good or the Gods of Absolute Accounting Purity (GAAP), but this is silly. They make a living selling a service to involuntary customers who are going through the motions to satisfy a federal mandate. The annual audit is a service truly valued by no one: It doesn't catch crooks and it doesn't benefit honest companies either, because it provides no proof or assurance to investors about the accuracy and completeness of a company's books. Had it been otherwise, Enron might have been more inclined to listen to Andersen's advice, in which case Enron would still be around.
JAMES CRAMER, founder of TheStreet, has an excellent article excoriating the regulatory environment that allowed Enron to happen. I may not agree with his implicit prescriptions for regulation, but I certainly agree that the peculiar, quasi-populist way that the Clinton Administration structured the regulations (not allowing firms to profit from good research by distributing it to preferred clients, then weakening enforcement on accounting fraud) was a key factor in the disaster that Enron became. I also, of course, agree with his primary solution:
Nobody's too worried about [accounting fraud] because nobody goes down for it. Particularly the accountants! I can't find an instance where a major accounting firm's partners lost personal property or spent time in jail for abetting or simply looking the other way when there was fraud. Enron should change all that. . . The government could send a message once and for all that if you hide transactions, if you dissemble to directors, if you cheat on your books to move up your stock price, as I think we will find happened with Enron, you are going to jail. More important, since Enron is now bankrupt, your accountants, who checked off on the deceit, will get prosecuted as well and get held for the damages. They still have money! . . .
The focus in Washington needn't be on endless hearings . . . the focus should be on getting scalps and making those scalps pay. The goal should be that everyone else is too scared to launch another scheme to boost stock prices through bogus accounting and hidden, off-balance-sheet investments
PatrickRuffini takes apart Josh Marshall much more thoroughly than I did for his attempt to blame the deficit on the Bush tax cut -- Ruffini has numbers and everything. He also points out that the tax cut we've given out so far ended up being twice what Bush asked for because the Democrats padded them in pursuit of the sort of wrong-headed fiscal stimulus I talked about earlier -- and that Josh Marshall wanted the Democrats to take credit for the tax cuts a little while ago.
TNR describes the social chaos in Argentina. It all boils down to this one delicious quote (from a taxi driver, of course; P.J. O'Rourke says that all third world taxi drivers are under contract to UPI to provide memorable quotes): "Here we have two parties: the thieves and the incompetents. . . they are devouring Argentina." The writer points out that while in Asia, there was broad consensus about what should be done (the consensus centered around doing the wrong thing, but at least it prevented utter chaos), in Argentina the rich and poor have very different visions of how to go about things. The poor seem to be wrong about the economic fix, but right in believing that any fixes implemented by the non-Peronists will be directed first at making sure that well-to-do sons, brothers, and layabout brothers-in-law maintain their sinecures, and only then to making sure that the poor have enough to eat.
THE WALL STREET JOURNAL REPORTS that prosecutors are requesting life in prison, rather than death, for Johnny Walker. While I am very much against the death penalty, I worry that this sends a bad message about how seriously we take high treason.
Paul Krugman sounds more than a little desperate today. As far as I can tell, not even Krugman thinks Bush has really done anything -- he's just hoping that if he repeats "Bush" and "Enron" together enough times, we'll throw the bum out.
This latest, though, is a disappointing turn for Paul Krugman. He goes beyond silently allowing readers to think that he knows more than he does; now he is actively distorting what he is an expert on.
Wealthy businessmen in Asia didn't bother to tell investors the truth about their assets, their liabilities or their profits; the aura of invincibility that came from their political connections was enough. Only when a financial crisis came along did people take a hard look at their businesses, which promptly collapsed.
Yes, this is very similar to the Asian crisis, in the same way that taxicabs are very similar to bananas because they are both usually yellow. The crisis in Asia was not that a single company committed criminal acts; the crisis was caused by the fact that in Indonesia they weren't criminal acts. If you wanted to do business in Indonesia, you made sweetheart deals with the worthless relatives of politicians, invested massive sums in the idiotic schemes of whichever bureaucrat happened to be in charge of your industry, and followed the same accounting standards as my college roommate, who stuffed her unopened bills in a drawer until it was too full to open, then bought a new desk. The very fact that Enron is going to jail indicates that we are not practicing "crony capitalism" -- although I'm sure we will be if Ralph Nader has anything to say about it. Paul Krugman knows this -- his specialty is international monetary and trade economics -- which makes this criminal academic negligence. I'm extremely disappointed, because although we are on different ends of the political spectrum, I've always thought of Krugman as not only smart, but also middlin' honest.
Not any more, though. The Op-Ed is a series of irrelevancies. Here's my favorite: "Why did George W. Bush make the absurd claim that Enron's C.E.O., Kenneth Lay, opposed him in his first run for governor, and that the two men got to know each other only after that race?" Why can't Krugman come up with anything more damning than the possibility that Enron supported him in his first, as well as his second, bid to get his hands on the vital financial regulatory apparatus of Texas?
Read the article. All of the allegations run along these lines -- vague accusations of dishonesty notable only for their total triviality. They not only have no taint of unethical behavior, but also have nothing to do with crony capitalism, which is the alleged subject of the Op-Ed. But these are not the meat of the piece. The meat of the piece is vague accusations of impropriety based on the following:
1. Bush recently made two decisions that were "worth billions to companies with very strong connections to Mr. Bush." Its too bad we don't have some Democrats in office, whose decisions would presumably be worth billions only to the ACLU and Friends of the Earth. 2. Bush the Elder is on the payroll of some company that buys distressed defense contractors, then turns them around by getting them government contracts. We should certainly get rid of Presidents whose family members have unseemly connections. For example, if his father was involved in a large scale criminal enterprise like the mob, or his brother were so closely involved with drug dealers that he asked Bush to pardon. . . oh, sorry, I'm having flashbacks again.
But I shouldn't be getting Bush off the hook by invoking Clinton or the Kennedys -- I certainly think we should hold Bush to a higher standard than that. I should be getting Bush off the hook by pointing out that the two closest things to actual allegations are that the administration made decisions that happened to help their friends. No proof. Of course its possible that this was illegal or unethical, but if so, Krugman had better have more than the simple fact that the decision helped those friends -- as an economics PhD of all people should know, the fact that an action has a given effect does not mean that producing that effect was the sole reason, or even part of the reason, that the action was taken -- otherwise we'd only eat chocolate ice cream when we wanted to get our faces messy and gain three pounds. Our government is 30% of our GDP -- even if Jesus Christ himself were making the decisions, statistically, some of them would turn out to disproportionately benefit the 12 Disciples. Krugman knows all this, which is what is so disturbing. If one of Krugman's undergrads had turned in a paper based on this evidence, he'd have to flunk him. Which is why I don't understand why he would not only write this thing, but publish it.
EXCELLENT ARTICLE from NRO explaining the mechanics of Enron's collapse. It points the figure to a common pattern in the development of new financial instruments: high profits for the inventor, then declining profits as competition enters the market. When the firm that enjoyed those windfall profits tries to protect them by leveraging up to expand the scale of their operations, they become exposed to the possibility -- nay, the probability -- of disaster.
THE INCOMPARABLE Rand Simberg takes me to task for using the "have your cake and eat it to" cliche. Now, normally I spring to the defense of my cliches -- cliches may not be original, but they are often useful shorthand. However, in this case, Simberg is pointing out that the cliche stinks because it's incomprehensible. Which it is, as evidenced by the fact that I, who am of normal intelligence, didn't figure out what it meant until I was a junior in college. So I hereby retract "have their cake and eat it too" and replace it with "eat their cake and have it too".
BOB HERBERT'S A LITTLE DESPERATE SOUNDING on this Enron thing. His op-ed today tries to pin it on the Bush Administration, but succeeds only in confirming that the Enron execs were a bunch of jerks. This is Herbert's brilliant attempt to make the fact that the Bush Administration didn't act sound criminal:
Bush administration officials are making a big deal out of the fact that calls from Mr. Lay did not result in a bailout or, presumably, any other assistance to Enron. The truth is that Enron had already gotten just about everything it wanted from the federal government. It walked right into the heart of the Bush administration and helped shape its national energy policy, even as consumer representatives and environmental advocates were largely frozen out.
I see. Enron didn't make that call in a desperate attempt to stave off bankruptcy -- it was only to thank the administration for a job well done. Which is why Enron investors and employees are enjoying what we may properly term uncharacteristic returns on their stock today.
Peter Jay pegs the current situation as step two of a waltz motif: economic success creates envy and draws predators. In the next step, either a compromise is reached whereby most of the wealthy party's money is protected with enough going to the rest of society to smooth things over or the whole enterprise breaks down. He worries that in this new, well-connected world, "the South" —that is, the poor nations mostly of Africa, South America, parts of Asia and Eastern Europe—might follow the lead of the Seattle/Genoa anarchists and gang up on "the North"—the wealthy nations—cramming a version of global governance down the North's throat that effectively shuts down a process that began with the industrial revolution: "a truly Malthusian denouement." Lest we doubt that could happen, Jay reminds us that "even in the United States primitive superstitions and ethical blindness can afflict broad swaths of an immensely affluent and educated society, not least constraining the nation's lawmakers to adopt barbaric postures.
For those who, like me, think that globalisation is on the balance extremely good for the world, this bears thinking about.
As readers know, I think that predictions of political fallout from Enron are grossly exaggerated, largely because I think that journalists understand political processes very well, but economic processes barely at all, because English and Communications majors tend to fall asleep if you even mention numbers. For this reason, I also think that most journalists are missing the possible legal and regulatory fallout in the financial sector, especially as regards banks and audit firms. Professor Reynolds points to an excellent site containing some articles on the potential implications of the disaster for accounting firms. They indicate pretty clearly that Arthur Anderson's client relationships were excessively close, in part because they now sell so many services besides audit. Meanwhile, the Wall Street Journal exposes the extent to which the bulge bracket investment banks aided and abetted Enron's collapse:
"The upshot: Some of the world's leading banks and brokerage firms provided Enron with crucial help in creating the intricate -- and, in crucial ways, misleading -- financial structure that fueled the energy trader's impressive rise but ultimately led to its spectacular downfall"
I think the banks are going to take a big hit on this one, and here's why: a large part of their most lucrative business comes from selling new "structures". Some of these, like convertible debt and even, yes, junk bonds, are innovative ways for firms with unique or highly variable risk to get affordable financing. But many of these structures are simply innovative ways to get around taxes, regulations, or previously entered contracts.
But Megan, I hear you cry, didn't you just yell at Ralph Nader for saying pretty much the same thing? The answer is no. What Ralph is talking about is a firm retaining cash at the wishes of shareholders in order to avoid taxes. I don't like tax avoidance, which results in stupid transactions that destroy net economic wealth; this is why I am in favor of abolishing the corporate income tax. (More on this another time -- I've convinced even some dyed-in-the-wool liberals on this one.) On the scale of economic sins, however, its the equivalent of the 35-minute "shotgun rosary" perfected by longtime friend Tommy Meehan (that time includes all three Sorrowful Mysteries!).
Many of the structures the banks are selling, on the other hand, are aimed at one of two things: keeping liabilities off their financial statements in order to fool current and potential stockholders; or creating financial instruments that are legally equity (stocks, for non-MBA types) while behaving like debt (more on why corporations prefer debt to equity another time) so that they will not violate their debt covenants. Debt covenants are legal riders attached to bonds that prevent the issuer of the bonds from borrowing more money. This is done because the more debt a company has, the riskier each piece of that debt is. The riskier a company is, the higher the interest rate lenders (in this case, the purchasers of the bonds) demand in order to compensate for the greater risk of default. Since interest rates on bonds are fixed, a company could conceivably borrow money from company A at a low interest rate, and as soon as the check cleared, borrow MORE money from lender B. This makes the company much riskier than it was when lender A gave them the money. This effectively forces lender A to assume junk-bond level risk in exchange for AAA level (much lower) returns on their investment -- a sucker game. Debt covenants are written in order to prevent borrowers from doing this. Clear?
So investment banks are now getting a large part of their income by forcing those lenders to assume more risk, while staying within the letter of the law by calling the new financing equity. Another big part comes from innovative ways to hide liabilities from shareholders. The latter is what got Enron into trouble. The former. . . well, witness a conversation I had with a friend, unnamed, who works at a top-tier bank. We were talking about his projects, and he sketched out -- in very broad detail -- the financial structure he was pitching. It was -- surprise! -- a way to issue preferred stock without violating debt covenants. I had an epiphany.
"So you're basically stealing," said I, thoughtfully. "No!" he said, stung. "You're forcing current debtholders to assume more risk, in spite of a supposedly binding contract that you wouldn't." I pointed out. "All the downside goes to them, and all the upside goes to the stockholders." (In the interests of full disclosure, I should point out that I'd had half a bottle of wine and was nowhere near this lucid or concise. But you get the gist.) "Well, it's legal," he said, a mite defensively. "Legally, it may be in the clear," I conceded. "Ethically, its stealing." "Well, I wouldn't point that out in any interviews," he said.
I think that we will be taking a very hard look at both these sorts of practices in the near future. If we look hard enough, a la Glass-Steagall (the law generated by the Crash of 1929 that created the SEC and otherwise radically transformed the financial industry), most of my friends will be out of work and the great investment banking boom of the 80's and 90's will be at an end. At the very least, I think that some types of banking jobs are going to be severely affected by all this.
A MOST CHARMING intro to the blog on Benjamin Kepple's blog, to which I have linked at left not because he is laudatory, but because the site is interesting and concise, much more than can be said for my own rambling style. (I'm working on it, I'm working on it -- us Creative Writing majors aren't supposed to be able to say it all in 500 words). He's especially good -- and concise -- on Enron.
He makes reference to the Janegalt name, so let me make it clear now: I am not now, nor have I ever been, an objectivist. I have read most of what Ayn Rand wrote, and I agree with some of what she said. But the name is less a tribute to her than a mildly interesting username that's almost never taken, plus it annoys the hell out of a lot of people who annoy the hell out of me.
OK, I'M PICKING ON JOSHUA MARSHALL, but I couldn't let this one go unnoticed. Marshall is attempting to walk the fine -- nay, invisible -- line between Bush's stupid economic pronouncements and Daschle's idiotic fiscal maundering.
". . . Hill Democrats are suffering from a crying deficiency of good strategy. It's not that Daschle's argument was bad on the merits. What it lacked was coherence. And in political battles coherence is king.
"Daschle says the tax cut was bad. But he doesn't want to raise taxes. But that means we may have dip into Social Security revenues, or maybe raise taxes, or go into deficit spending. And all of those are bad. And so on and so forth."
The Democrats want to have their cake and eat it too. That's not an argument, that's a fantasy.
Now, personally, I am in favor of balanced budgets during peacetime. I am in favor of them because deficits allow the government to spend money to please constituents now at the expense of their children who will inherit the debt -- it is another tired variation on robbing Peter to pay Paul. Balanced budgets force taxpaying citizens to choose between getting goodies from the government and keeping the money and buying goodies themselves. In this way, we hope that the government provides only the goodies which the government can provide more efficiently than the private sector. These are good reasons to be in favor of balanced budgets.
These are not the reason that Democrats are in favor of balanced budgets.
The stupid reason that Democrats are in favor of balanced budgets is that they painted themselves into a corner trying to give Clinton the credit for every good thing that happened during his years in the White House. Now, given that businesses, even a lot of high-tech businesses, felt about Clinton the way they would have felt about having all their teeth removed sans anaesthesia, it was hard to argue that Clinton was an economic leader. They might have said good things about NAFTA -- except that their labor constituency would shred them into little pieces and used them to line their bird cages. The wisdom to appoint Alan Greenspan to a second term is hardly the kind of thing to hang a legacy on. So the explanation that they settled on was the marvelous effect of the balanced budget. (Never mind that it was the Republicans who conceived and executed the balanced budget; we will not talk about the decline in initial revenues from the Clinton tax hikes. We are not talking about who should get credit; only about the balanced budget.)
Now, any reputable economist (even, I'd imagine, Paul Krugman in his lucid moments) will tell you that the balanced budgets were the effect, rather than the cause of the boom. But the Democrats chant the mantra, because without it, Clinton's a third-rate political hack who charmed his way into the White House on an off year and stayed because he presided over an enormous economic boom, and his scandals didn't catch up with him quite in time. And the Democrats revert to being the Party of Jimmy Carter. But it is the only weapon the Democrats have against tax cuts, which is what this is really all about -- Bush gave all that lovely money that could have been spent on lovely, lovely new programs, back to taxpayers who'll just blow it on a stereo and some Milk Duds.
Note that Tom Daschle did not volunteer to cut the boondoggle agricultural bill, the stupid stimulus bill his party proposed, or any of the other soon-to-be-ex-wife-with-the-charge-cards-at-Neimann-Marcus type spending the Democrats were gleefully doing. Nor did Mr. Daschle have the courage to step up against the tax cuts, probably because it's hard to get a place in air-conditioning repair school these days. Memo to Daschle: you can't come out against something without wanting to get rid of that thing. The voters know this, which is why you should try to get that place in repair school while you still have some pull.
Marshall wants the Democrats to sit back and let the Republicans struggle:
"The key here is that Democrats are letting themselves get baited into the trap of solving the problems created by Republican policies, which is a category strategic error.
"The president and his party promised X would happen and Y happened. They said that deficits wouldn't return and they did return. They had the power and authority to do it their way and now they have to take responsibility for what's happened.
It's not for the Democrats to figure out how to clean up Bush's mess or solve his problem for him. This is about taking responsibility. Something the Republicans seem quite unwilling to do. They blame the return of structural deficits on the war on terrorism and the downturn in the economy, each of which play a smaller role than the results of their own policy"
How is this wrong? Let me count the ways:
1) Multiple Democrats voted for the tax cut. Going to campaign against them next fall? 2) Most voters blame the deficit on the War on Terrorism and the Economy. In order to convince them otherwise, Daschle will have to go around flogging his line about how bad the tax cuts were. And there's a waiting list for air-conditioner repair school, at least the good ones. 3) Voters respond to politicians who say "well, he messed it up -- let him fix it!" the same way your mother did when you tried that it out after your little brother drank Drano and barfed all over the two-inch plush in the livingroom. Not that I wouldn't enjoy seeing the voters chasing Daschle with a yardstick, mind you, but I don't think it's Good for The Nation. 4) He's flat wrong about that last. The tax cut already distributed, if memory serves, added up to somewhere around $40 billion. We've spent way more than that on the War on Terrorism already. Plus the effect of the recession which -- oops! -- began under Clinton -- has cut revenues significantly. How significantly we'll only know after April 15. You can get Joshua Marshall type numbers only by acting as if all the tax cuts were already in effect, instead of phased in over the next 10 years.
I think that Daschle is having a hard time learning to lead the majority. His style is smile-while-he-sticks-the-knife-in, but still oppositional, which works brilliantly for a minority leader -- but as a majority leader, he's expected to produce results, not retorts. He has as of yet come up with no clear agenda of his own -- only an incoherent attempt to blame everything from budget deficits to boll weevils on the Bush administration, which is not doing him much good because the public likes the Bush administration.
So try this excercise. Quick: name one prominent Republican Senator under FDR. Daschle, in my very, very humble opinion, risks backing himself into the same irrelevance the Republicans enjoyed during that wartime presidency. Pointing fingers and saying "It's his fault! Make him clean it up!" will not burnish the reputation for leadership he covets.
Josh Marshall thinks that Enron has the potential to take down the Republican Party. I distrust this prediction for several reasons, the foremost being that Josh Marshall badly wants the scandal to take down the Republicans. As with Whitewater, desire leads to bad punditry. This is why Eleanor Clift hasn't made a meaningul prediction since, oh, Nixon.
More importantly, I just can't see where the scandal will come from. Bad campaign finance? The Clintons knowingly took money from foreign nationals whose contributions were illegal; the Torch pretty obviously handed out some quid for his pro quo. Bush, on the other hand, took perfectly legal money and didn't quash investigation, stall publicity, or any of the rest of it. The fact that the administration isn't stonewalling or even stalling indicates to me that there's nothing they're worried about. So far the only evidence I've seen in the Enron debacle points to the rich fantasy lives led by Democratic strategists and liberal media types.
Josh Marshall's post does nothing to make my Republican side worry. His scandal scenario:
"But those pooh-poohing the notion that this could be a major scandal of any sort overlook the less than likely, but yet real, possibility that this could develop into a meta-scandal - a cascade of revelations which gain traction not because of specific or discrete criminality but because the sheer magnitude of the event delegitimizes the whole framework of interaction between government and corporations at the highest levels."
Pooh-pooh. (Say it out loud -- it's fun!). A cascade of revelations about what? That corporations give a lot of money to politicians? That Ken Lay had the ability to call the Secretary of the Treasury? The man ran an enormous freaking energy corporation during a major energy crisis -- even if they hadn't given a dime, the Secretary of the Treasury would probably have taken his call.
Repeat after me. The actions taken by the Enron corporation and their auditors were illegal. The criminal coverup is why noone but Enron and their auditors knew anything was wrong. If you can find some evidence, for example, that the Bush administration pressured the SEC -- or that the Bush-appointed SEC head exerted some sort of pressure -- to quash an investigation, or give Enron a pass on illegal behavior -- then Josh Marshall is absolutely right: this will bring down the administration. But I will bet a million dollars (well, if I had a million dollars I would -- I'll bet a million Argentinian pesos, which I don't have now, but should be able to purchase in a few weeks out of my lunch money) that no such evidence will be found, because nothing of the sort happened. For those who believe that the administration is slimy enough to do that sort of thing, I will posit that they still wouldn't because it would be suicidal.
And to what end? Let's go all the way with the anti-Bush crowd and posit that in May Ken Lay told Bush exactly what was wrong, and (as the Enron execs seem to have figured out about that time) that there was no exit. Why in hell would that slimy, no good Bush administration help Enron? It's not as if they could expect more campaign cash from Enron -- or its executives, as any two-bit country lawyer could figure out that by the time the lawsuits have all settled, the executives would likely be in jail and stripped of all but their most inaccessible assets. If Ken Lay told Bush everything, there is no upside for Bush in doing anything except telling the SEC to get an investigation underway at once. Which he didn't. So most reasonable people can logically assume that the administration knew little or nothing about the scope of the problem. Unless you are so dedicated to the Anti-Bush Leagues (ha ha ha -- puns are atrocious) that you think Bush would have allowed the collapse just for the sheer joy of watching those starving, hollow-eyed workers line up at the welfare office. In which case, there's nothing much I can do to convince you other than lobbying the staff to up your meds.
Clearly Josh Marshall knows that they aren't going to get the administration on the evidence; instead, he hopes that that "sheer magnitude of the event delegitimizes the whole framework of interaction between government and corporations at the highest levels". This sounds impressive, but what does it mean? Does he mean that there is going to be a populist revolution in political affairs? I doubt it -- the populist candidates of left and right polled considerably under 10% of the vote, and that includes people like me, who could vote for whoever the hell they wanted to for president because my polling district, and state, would have gone for Gore if Buddha himself had walked across the Hudson and announced that Bush was his ordained successor. (Note: I didn't vote for Nader or Buchanan -- but I could have, and it would have made no difference in the outcome.) Is he suggesting broad new regulatory powers? To do what? The auditors lied. If the sheriff is stealing, can the city council stop it by passing stricter sentencing laws? I suppose you could federalize the auditors -- in which case expect more Enrons, as you aren't getting a high quality audit out of civil servants who make 30K a year.
In fact, I do think that we will be taking a long look at our auditing system, but I don't think we'll federalize it -- I think we'll make sure some Arthur Anderson partners do time. As we should. The Enron executives and their conniving auditors destroyed the lives of countless investors and employees, and they should pay -- and not in any country club either. Put them in with the murderers, the rapists, and the rest of the scum who took advantage of society's civility, and are now denied its pleasures. They should have their assets stripped, and their passports taken so that they cannot get to their hidden assets. Their financial lives, and those of their spouses and children, should be scrutinized until the day they die to ensure that not one penny of the proceeds from bankrupting Enron ever gets spent for their personal enjoyment. They should be a resounding example to executives, and especially to auditors, that society no longer makes any distinction between poor and rich criminals.
But they won't take down the Republicans, because the Bushies, unlike some presidents I could name, are too smart to get caught helping criminals get away with it.
I'm currently helping one of the office workers, a very nice engineering student, with a project that involves, among other things, entering dates in military time. This engineer (who shall remain nameless, genderless, and otherwise unidentified) just walked in to show me the key he/she had made for converting regular time to military. I can think of no greater indictment of our educational system than that it produces engineering students who require visual aids in order to add 12 to single-digit numbers.
LOTS OF PEOPLE HAVE WRITTEN up Victor Hanson's article in the new City Journal but few have commented on this gem by James Q. Wilson on the state of marriage in modern society, which can be summarized in this elegant quote:
"Marriage was once a sacrament, then it became a contract, and now it is an arrangement."
As always, Wilson stands on rock-solid methodological ground, yet brings clarity and insight to a murky topic, rather than merely regurgitating arithmetical proofs of points already obvious to anyone with common sense, a practice which Patrick Ruffini has skewered. Wilson evaluates the social costs, as well as benefits, to the Enlightenment approach to social benefits, and suggests that some social disorder may be the inevitable by-product of the same forces that created our economic and political gains.
It may be that our differences with the Middle East are irreconcileable: we may stand on opposite sides of a vast divide, and as determined as we are to stand on the side of economic, scientific, and political liberty, they may be equally determined to stand on the side of social order. This thesis was just developed recently, so feel free to disagree on the grounds that families/fathers aren't really as important as we think they are, or there is no such gulf, or any other reason. But I think I may be onto something.
Accenture has pushed back the start dates for its New York MBA's yet again, this time to some fuzzy time in the fall, provided that the stars line up and the gods of Mammon do not further punish the service economy. A classmate who had been waitressing to pass the time until her start date (previously pushed back twice, from September '01 to May '02, and now to Don't Let the Doorknob Hit You on the Ass on Your Way Out), tells me that the recruiters she went to told her that she'd be better off looking in strategy consulting than in Investment Banking (her former trade). Since I can tell you from personal experience that the strategy consulting biz is in approximately the same shape now as the buggy whip industry was in 1910, this is Extremely Bad News both for yours truly, and for the economy. Why? Because if strategy consultants are in the toilet, the restructuring pain that usually accompanies recessions has not yet begun, and firms are still more focused on staving off bankruptcy than building new markets. I can also tell you that the Investment Bankers I know are not doing deals -- they're pitching like hell, but nothing's going live. Which means that the pain of bankruptcy sell-offs and distress mergers that usually accompany a recession haven't yet begun, and people are more focused on avoiding risk than building new businesses.
Lesson: we ain't going back to the 90's any time soon. Stock valuations, IMHO, are totally insane, because people are still thinking, in the backs of their minds, that 90's valuation levels represent some sort of a baseline. I have said it before, and I will say it again: corporate earnings cannot possibly support current valuations, even at very low levels of inflation. That means that a significant portion of current stock prices represents the buyers belief that it will experience capital appreciation independant of any future earnings.
So Joe Investor, perhaps in his twenties or thirties -- perhaps older -- sees the current prices as a temporary aberration from normally high valuations, rather than seeing the high valuations as an aberration from normal PE ratios between 10-20. That investor is still expecting those valuations to come back. Perhaps wishing will make it so. But there is no historical precedent that I can think of for a permanently overvalued asset, except maybe insurance.
