Pay More And Get (Much) More

The latest Congressional lawmakers caught in ethical and financial wrongdoing are Democratic Senator Bob Menendez and Republican (now ex) Rep. Aaron Schock. And sure, I feel anger and disgust. Only most of it is directed at the simpleminded public and an imbecilic media influencing it to keep our elected leaders ill paid and vulnerable to petty temptations.

Americans by and large accept our capitalist system where CEOs and other top officers of large companies are paid millions or tens of millions of dollars in salary. In the same way our annual federal budget of over $3.5 trillion is collectively controlled by a 100 Senators and 435 Representatives, or over $6 billion apiece. That's above the revenue threshold of $5 billion for a Fortune 500 company. Yet they're paid only $174,000 each with no raises since 2009.

This does not even count the millions of dollars they have to raise to fight elections - every 2 years for Representatives and 6 years for Senators. Unless they are very wealthy and prepared to use their own money they have to fund their campaigns by turning to deep pocketed donors who rarely give anything for free. And once lawmakers of modest means are taking help in cash or kind for their campaigns it's a small extra step accepting this for personal gain or pleasure.

Sen. Menendez' lengthy list of alleged transgressions sound relatively minor to me. He has a rich ophthalmologist friend of 20 years named Dr. Salomon Melgen who contributed over the years a total of $750,000 to various campaign funds helping Mr. Menendez. The Senator also used perks like private jet travel, hotel and villa stays paid for by Dr. Melgen. Mr. Menendez for his part pushed for favorable treatment of Dr. Melgen's cases involving billing disputes with CMS (Medicare), grant of visas to foreign girlfriends of Dr. Melgen on three occasions, and trying to further Dr. Melgen's financial interests by dissuading donations of monitoring equipment to ports by the Customs and Border Patrol.

Political leaders and officials frequently try to help or further the interests of their constituents, friends and relatives. My colleagues and I regularly fielded such calls when I was in the Indian government. Some matters were purely discretionary, i.e., the decision could have gone either way on merits. It is for the concerned agencies to decide whether to accommodate such requests or refuse because they clearly violate some rules or principles. Grant of a U.S. visa for example (as I know from the experiences of hundreds of Indians) often hinges on the whims of the consular officer who happens to be interviewing the applicant. So a Senator weighing in on behalf of a close friend's girlfriend(s) isn't a big deal.

Rep. Schock's excesses are more trivial still, though his donors claim they were swindled by his "campaign full of corruption and lies about his integrity." He splurged taxpayer or campaign funds on doing up his office like in Downton Abbey, some duty free shopping, a couple of non-official trips by private jet, and taking his staff / interns for a New York trip and a Katy Perry concert. The cumulative excess tab was well under $200,000, and there was no "bribe multiplier." By that I mean that taxpayer or donor loss is no higher than Mr. Schock's benefit, unlike in bribes where the loss to government (or briber's gain) is far higher than the payoff to the public official. (That's the whole point of paying a bribe - getting back much more than your "investment.")

These lapses by the two lawmakers are microscopic as compared to failure of all in Congress on the truly big issues. Take healthcare expenses, which nationally run to $3 trillion annually with almost half in public funds. This is about $9,000 per capita, over twice as much as in peer developed countries, and yet Americans on average get less care and suffer worse outcomes.  We can bring down our prices to West Europe levels without compromising quality through straightforward steps I outlined back in March 2011. We don't because lawmakers instead heed and protect the health insurer, provider and affiliated lobbies. This costs us $1.5 trillion extra, or a sellout of nearly $3 billion annually per Congress member. Another example: low tax rates for hedge fund managers (who overall don't produce anything useful, and typically through their seldom detected shenanigans like insider trading, hurt ordinary investors.)

I see three takeaways. First, let us mainly judge our lawmakers and leaders on how they promote and protect our national interests on which we spend billions and trillions of dollars, and cut them some slack on travel and office expenses. Second, let us be enlightened enough to pay them salaries and allowances commensurate with their responsibilities that have at least partial parity with those in the private sector. This will make them less vulnerable to petty corruption and not so easily bought out for small favors. (That's why you rarely see CEOs of S&P 500 companies engage in petty corruption, not because of their superior morality.) And third, let us have true campaign finance reform and publicly funded elections so that our lawmakers need to depend less on special interests.

About the last it is heartening that Hillary Clinton after announcing her 2016 Presidential bid spelled out campaign finance reform as one of the four main tenets of her campaign. It will be great if President Obama (who as outgoing President will be seen as having no axe to grind) strongly pitches for much higher salaries for Congress members, federal and state heads, as they're all underpaid. Even Republican lawmakers and Governors who oppose Mr. Obama will appreciate this as their espousing this themselves is seen and derided in the shallow media as being self-serving. And I'd certainly like to see the new President champion this, perhaps as an adjunct to campaign finance reform.

So how much is a fair salary? I'd point to "clean" Singapore's example where top officials and administrators are paid in the seven figures, and their prime minister is the highest paid worldwide. Illustratively, a large and rich country like U.S.A. can pay its President $5 million annually, Congress members $2 million, about the same for state governors, adjusted for state size, and significant raises for most states' legislators. They should also be paid very decent pensions, while being barred from holding future "influence" jobs such as of lobbyists where they interact with former colleagues and staffers. All this may cost an extra $4 billion or so annually but think of how it will improve the stewardship of our $4 trillion federal budget, and similarly of state funds.

Myopic thinking fanned by an asinine media that is behind the poor pay of our public leaders is not just a problem in U.S.A.  Back in an Aug. 2007 post I had reacted to chain emails sent by otherwise educated and intelligent friends about how overpaid Indian Members of Parliament are swallowing up our national resources. Then in May 2009 I wrote on the misplaced outrage at some pathetically small expenses by British Members of Parliament.

So no, we're not alone in our thinking. But I just hope Americans can like Singapore be more progressive and enlightened in paying our public representatives better, and reaping the rewards in the form of much better and cleaner governance.

We're All Fair And Balanced In Our Own Eyes

Non-Republicans laugh at the Fox News Channel's describing itself as "Fair & Balanced" and this slogan is the butt of endless Jon Stewart digs on The Daily Show.  But its hardcore audience laps up  the Fox News fare as gospel truth (an appropriately applicable term for this viewer demographic) and sees no irony.

Most of the world including many Muslims regard the Al-Qaeda and the Taliban as destructive and fanatical operatives that are a blight to civilized society.  Yet these militants think of themselves as soldier-saints of Allah setting out to right society. 

Israeli rightwing nationalists feel it's entirely justified and reasonable for them to expand Jewish settlements in occupied Palestinian territory.  And Iranian hardliners feel the same way about denying Israel's right to exist.

We all tend to see our own viewpoint as being right and those deviating from it - even if it's an overwhelming majority - as being wrong.  In her 2008 "Buried Prejudice: the Bigot in Your Brain" in Scientific American, Siri Carpenter describes how reported facts are filtered by our biases that are often shored up by self-interest.  "We are pre-disposed to ascribe superior characteristics to the groups to which we belong, and to exaggerate differences between our own groups and outsiders."  She goes on to quote studies showing that "many of our implicit associations about social groups form before we are old enough to consider them rationally... full fledged implicit racial bias emerges by age six - and never retreats."  This may also apply to religious bias.

This brings me again to my ongoing discussions about Muslims, with relatives and friends in India who are highly intelligent, fair minded and decent, even if we've different perspectives.  Some exchanges have been triggered by blog posts and popular forwarded emails I get from them.  They talk about secular politicians pandering to Indian Muslims, the destructive role of Islam and its meager contributions to humanity (measured by Nobel Prizes awarded to Muslims), etc.  Some others in my circle have been privately reacting to my June 27 post "Treating Our Indian Muslims Right".  Three examples below illustrate my disagreements with them:

a) An email doing the rounds glorifies Nathuram Godse, the Hindu assassin of Mahatma Gandhi, reproducing his supposed speech at his trial where he talks of Gandhi working against Hindus and favoring Muslims.  Those who forward it generally preface it with a disclaimer like "I don't agree with what Godse did or all he says, but he does have a point."  I personally am repelled at the killer of Gandhi, a disgrace to their Hindu community, sought to be partially rehabilitated through half rationalizations in this manner.  You'll find this Godse speech and reenactments all over on Google and on YouTube.  In viewer comments, Hindu zealots hailing Godse's murder of Gandhi outnumber those who deplore this by ten to one or worse.  At least this shows that bigotry abounds in all religions, and "pacifist" and "all-embracing" Hinduism isn't different in this aspect.

b) Some of my friends and relatives proclaim that "secular" in India means being "pro-Muslim" and reverse discriminating against Hindus in order to garner Muslim votes en bloc. A friend in his blog uses the phrase "secular fundamentalists" to describe secular politicians. He says that "secular" in their dictionary means being contemptuous of their own (Hindu) religion and being obsessed with that of another minority, the Muslims.  I pointed out that the Muslim vote bank (14.5% of the population) is much smaller than the Hindu vote bank (80% of population) that would be put off by such a bias.  The friend countered that Hindus are too fragmented and turn out in smaller percentages, so wooing Muslims this way still makes sense to these politicians. 

Well, UP is India's most populous state where the Muzaffarnagar Hindu-Muslim riots recently occurred. I see from UP 2012 election results that the winning Samajwadi Party got 34% of the votes, and secular BSP and Congress got 24% and 12% respectively.  In other words the secular parties combined had about 70% of the vote, and given that Muslims comprise 18% of UP's population, the other 52% of their supporters have to be primarily Hindus. You'd hardly expect such support from Hindus for a party that discriminated against them. In any case it's much easier to cast lots with a dominant majority and stronger side.  While corruption, inefficiency and infighting may justifiably sink them, we should at least credit secular parties with  fair-mindedness and courage for trying to level the field for minorities.

c) An otherwise saintly elder relative in India echoed a sentiment in our circle when he said, "If you see Muslims on TV they are so aggressive (while seeking rights and denouncing oppression).  Can Hindus raise their voice in Pakistan and other Muslim countries?"  I on the contrary expect Muslims to freely express their justified indignation at being targeted in riots on account of their religion.  Moreover, I'd hate to see Muslims in India treated the way less tolerant countries treat their minorities, including Hindus.  That's what makes India's secularism and inclusiveness so much better than the ethos in those other countries.

Of course, being "truly" fair and balanced should be just one of the major factors for voters everywhere, including Indians.  Given the widespread corruption, stifling bureaucracy and ineptness that permeates the present Congress government in India, I'd agree with its detractors that it should be replaced.  The clear frontrunner to lead a new Indian government is Narendra Modi of the BJP, the Hindu-centric opposition party.  Modi has developed a solid record and reputation as an able and incorruptible administrator as Chief Minister of Gujarat State which has made remarkable progress in his 12 year tenure. Widespread accusations of his involvement in the deadly 2002 anti-Muslim riots have never been proved and he has protested his innocence and made numerous overtures and reassurances to Muslims recently.  So I'd give him the benefit of the doubt and cautiously favor his election, especially if other alternatives like the well regarded Nitish Kumar of Bihar are not nationally viable. But unlike Modi's BJP supporters, my choice would be based purely on economic and administrative grounds, and in spite of, not because of his RSS / Hindutva roots.








 

Playing Rajat Gupta

 I've followed developments and written earlier about Rajat Gupta in March 2011,  in May 2012, and in July 2012.  The essence of my views has been:
a) Rajat's alleged insider tip-offs are out of character with the person I had come to know.
b) His heavy contributions to society and humanity far outweigh his alleged transgressions.
c) His insider leaks if true also pale in comparison to the misdeeds of typical hedge fund managers and other Wall Street players who are never caught or whose dishonest acts aren't technically crimes.
d) Even if he revealed secrets they could have been pried or deduced through wily questions by Rajaratnam.  Our Indian culture and ethos can make it seem impolite and difficult to completely clam up when a friend asks a direct question about a confidential matter.

 More light has been shed on the last point in a May 17 article in the New York Times that has pieced together the story of how he was manipulated by hedge fund titan (and crook) Rajaratnam.  This piece is well researched and dispassionate, providing insights into how Rajat could have landed in the mess that he's in.
Even the trial Judge Rakoff at the time of sentencing acknowledged that Rajat is "undoubtedly a good man".  In an interview (Fortune, Jan 24, '13) he stated without going into the specifics that he takes a defendants good deeds into account in his judgements.

[An aside: Though I think highly of judge Rakoff a point where I'd take issue with him as a financial purist is in his characterizing Rajat's tip-offs as “the functional equivalent of stabbing Goldman in the back.”  Actually, insider "buy" trades do not damage the firm whose shares are traded.  They instead discriminate against outside prospective buyers who are preceded by the inside trader and lose some of the fair chance to be "lucky" before share prices rise.  Of course that still makes insider trading wrong and it is rightly outlawed as it affects the integrity of the markets.]

Rajat continues to maintain he's not guilty as he appeals his conviction and sentencing, and  I continue to root for him.  Back to the Times article it speculates that an unfortunate Rajat was played by a "boorish" Rajaratnam and it reads somewhat like a Shakespearean tragedy.  As the future unfolds I'd like Rajat to have a happier ending.

Voter, Blame (Or Pat) Thyself

Cynicism pays.  Mitt Romney doesn't seem to be hurting from switching positions in the blink of an eye to whatever his audience of the moment wants to hear.  All his "then and now" video excerpts  played by Jon Stewart in the Daily Show and by other media haven't stopped his upward momentum in popularity.  With two weeks to go before elections he's pulled even with (or even slightly surpassed) Obama in national polls.  Pundits on average have Romney's chances of winning the election improving from less than one in four a month ago to almost even now (though NerdWallet still has him only at 29% today.)

And then we have India where corruption, the role of money in politics, inefficiency and populism has severely affected economic growth. Prime Minister Manmohan Singh with a clean image is called an underachiever by Time in its July 16 issue for failing to check corruption around him, and to stick his neck out for reforms.  With a few notable exceptions it looks like elected leaders of whatever party or political platform are on the take.

Looking at India and the US as examples, are the virtues of democracy as great as they're cracked up to be?

"Even the worst democracy is better than the best of dictatorship." Thus said then Prime Minister Yousuf Gilani of Pakistan in Feb. 2010 and I've heard this sagely intoned in our polite circles in India for decades. 

Really? Will average Chinese citizens trade places with their Indian counterparts, including the growth rates over the past quarter century that have made the Chinese thrice as rich?  A June 21, 2011 article in Business Insider lists the most economically successful dictators of the past century, and generally left their people a lot better off than before.  England's golden age was in the 16th century when Queen Elizabeth I reigned (1558-1603) wielding absolute power, seeding the idea of benevolent despotism. 

Still, the odds favor democracies.

Corruption and misuse of power can flourish in any political system, but democratic checks and balances like a free press and independent judiciary can better restrict the most egregious behavior.  An Oct. 26, 2012, NY Times story describes $2.7 billion of wealth amassed by the once humble family of Chinese Prime Minister Wen Jiabao.  Compare this to Robert Vadra, Sonia Gandhi's son-in-law and Priyanka's husband whose wealth grew in 3 years from $100,000 to "just" $60 million.  And consider that Robert Vadra's alleged misdeeds are being widely reported and criticized by Indian media, while a tight lid is kept in China on any adverse news about its leaders.

Democracy has another thing going for it - people choose their leaders and hence are responsible for their own plight.  Chance still plays a role, of course.  Two prime ministers, Narasimha Rao who started economic reforms and his successor from the opposing party A.B. Vajpayee, were better than expected, and India thrived.  Mr. Manmohan Singh isn't terrible but he fell short of his high promise.  In US recent history Presidents Bill Clinton and George W. Bush probably represent the opposite ends of the performance spectrum.  

Still, in past presidencies and the coming general elections of Nov. 6, US citizens decide on their leaders, for better or for worse.  There's no one else to blame or congratulate for that choice, whether it's made with eyes wide open, or out of ignorance.  Does there have to be a lot of the latter for the Republicans to win?  After all Republican stances on important issues like taxes, health care coverage and the social safety net are less favorable to the middle class (and the poor of course) than Democratic ones.  In the NY Times on Oct. 24 Nicholas Kristof describes how Obama's economic policies trump Romney's.  Instead of USA's steady if modest recovery under Obama, Europe style austerity measures favored by Romney and Republicans would have led to Europe style economic crisis.  Yet Republicans can only clinch elections with substantial middle class backing.

Election propaganda and voter ignorance of course play a role, but more complex factors may matter more.  Man does not live on bread alone, and factors beyond material and physical benefits may turn the scales to explain why many in the middle class identify with Republicans. 

Are Romney supporters oblivious of his duplicity, especially the 95% who lose out in Republican intent to "broaden the tax base" while lowering taxes for the richest? Some are, though many more may simply overlook it because his party's platform is closer to their disposition on social values, religious zeal, immigration and racial issues, etc. 

In a few days we'll know who and what wins out.  And with the US being a great democracy our voters will get to live with their choices.

We Are Gullible And Easily Manipulated

The title of this post is my understanding in plain words of the essence of behavioral economics, particularly as applied to politics and public discourse.  A series of studies have validated this view that people often don't realize what's (fairly obviously) in their best interest and hence undermine it.

It explains for example, why more Americans disapprove rather than approve of the 2009 health reforms (inadequate and marred by compromise as they were) that overall better their lot.  Or how so many Americans fall for Tea Party tax ideals that basically favor the top 1% at the expense of the 95% (even if not all the 99%.)

Now The Economist in its March 24, 2012 article "Nudge, Nudge, Think, Think" describes how forces for public good can use behavioral economics to manipulate people back to collectively bettering their lot. The article informs how the two authors of "Nudge" are helping governments and socio-political campaigns. Cass Sunstein, has been recruited by Barack Obama to the White House. Richard Thaler has been advising policymakers in several countries including Denmark, France and, above all, Britain, where David Cameron has established a Behavioural Insights Team, nicknamed the Nudge Unit.

Prof. Richard Thaler has since my University of Chicago days in the 1990s been engaged in a vigorous and running though largely good-natured debate with his "efficient markets" colleagues.  The latter who dominated our University's financial ideas say that investors as a whole make completely rational decisions based on their self-interest. Can there be irrational investors who pay more or sell securities for less than what they're worth according to publicly available information?  Sure.  But according to efficient markets theory there are enough rational counter parties to benefit from their stupidity to drive the prices back to the "correct" level.

The University to its credit brought in Thaler and others to enrich its diversity of economic ideas instead of stacking its faculty ranks with just its renowned efficient market theorists.  Thaler's thinking has increasingly gained traction in academic, financial, social and political circles.

Behavioral economics is of course a double edged sword and special interests have been using it to dupe people into supporting their causes even at the expense of the general populace.  Now genuine reformers in politics and government can harness the concepts to swing the pendulum back towards gaining popular approval for the best public interests.

Obama: Centrist or Weakling?

President Obama made most of the concessions to Republicans and Tea Party hardliners that have led to the debt ceiling deal that averted a US default. He gave way to most demands of the Tea Party faction of the Republicans - deep spending cuts and no revenue increases by raising taxes or closing tax loopholes for the rich. The Democrats had little choice but to go along or else crash the US economy.

But they are not happy.  In his Aug. 1 NYTimes column "The President Surrenders" Paul Krugman scathingly explains why Obama's capitulation is a catastrophe in both economic and political terms.  Joe Nocera in his companion "The Tea Party's War on America" talks of this group and the Republicans taking the country hostage and being rewarded with near-complete capitulation by Obama.  Even William McGurn in the right wing WSJ today calls the accord a "conservative victory" and a "striking achievement." 

There is a difference between a Bill Clinton type centrist who compromises and someone who is reluctant to take a stand, and when forced to do so repeatedly backs away to become the appeaser in chief. Emboldened by their successful brinksmanship Republicans are likely to take Obama's (abject) pliability for granted in future negotiations on key issues.  That said, I've a couple of additional observations:

•  The US government may not be "of the people" or "for the people" in the sense that the Administration and Congress are adequately acting in the interests of the populace, rather than key special interests. That's why approval rates for Obama are at 45% and of Congress at an all time low of 14% according to the latest CNN/ORC poll. But the US government is still "by the people."  Voters put Obama in office in 2008 (particularly those supporting him against Hillary in the primary) and elected many Tea Partiers in 2010.  So at least Americans are fully responsible for the state of their national economy and polity, unlike people living in countries with repressive regimes.

• As a corollary to the above the US won't get political accountability if the voters remain befuddled about who's responsible for their plight.  Despite the Tea Party and Republicans plunging the nation into a contrived debt crisis an ABC poll today shows Americans lashing out at both parties.  68% and 67% of them disapprove of Republicans and Democrats respectively.  Paul Krugman partly ascribes this to the media, deriding its false sense of balance in his July 28 NYTimes column for tending to blame both sides equally no matter who's actually at fault.  Still, there's enough information out there for Americans to judge their leaders and vote in their own best interest, but many don't. Take the Tea Party that vehemently opposes tax increases even for households making over $250,000 a year.  It should logically attract only the 2% of Americans who are above this threshold, yet over 20% belong to this group.

• Obama's actions may have weakened Democrats and given away too much of the store for average Americans, but they haven't affected his own re-election chances.  To Democrats and a majority of independents he'll likely be the lesser of two evils when faced with a Republican nominee elected by an increasingly radicalized GOP.  There's also no viable Democratic primary challenger or a third candidate (like NY mayor Michael Bloomberg) on the horizon yet.  So to the GOP rhetoric about making Obama a one term President and the above ABC poll showing him at par nationally and behind Mitt Romney in the key state of Pennsylvania, time will tell. But I'd place my odds on seeing him in office, with or without a spine, till 2016.

Right Wing Judges Have Their Uses

I've generally taken a dim view of the conservative majority of the US Supreme Court, especially since their partisan 2000 ruling against Al Gore that stopped the Florida vote recount and made GWB President.  There's been the (so far unrealized) fear that they'd overturn Roe v. Wade to give abortion foes an upper hand. In January 2010 they aided special interests and electoral corruption by removing restrictions on corporations from spending freely on supporting or opposing candidates.  Going forward when it ultimately comes to them they may undo the 2010 health care reforms by (among other things) striking down the vital mandate for everyone to get insurance coverage.

But this same conservative wing also plays a key role in curbing class action lawsuits, expanding interpretation of anti-discrimination laws, and left wing activism that unfairly burdens our businesses and the economy.

On June 20 the Supreme Court threw out the largest class action sex discrimination lawsuit against Wal-Mart with the conservative wing also making it difficult to file such class actions in the future.  This is welcome as such cases are generally a boon for trial lawyers while imposing huge costs on businesses that are hard put to defend against a wide variety of claims, many of them frivolous.  Businesses pass on such costs to Americans in the form of higher prices, and this also makes the US a less desirable place to hire workers or operate in.  So in this way the conservative judges have helped not just businesses but also the economy and American consumers by reducing unnecessary litigation. 

In this same case the conservative majority did businesses another favor by indirectly rejecting "proof by quota" as I call it.  This is an argument by trial lawyers and bodies like the EEOC that the simple fact of lower average pay or under-representation of ethnic groups or gender is proof of discrimination.  For example, if women in Wal-Mart on average earn less than men, or their proportion in management positions is much below 50% then this alone proves Wal-Mart's discriminatory conduct.  It ignores (or shifts the burden to defendants to prove) other possible reasons like women working less hard or for fewer hours due to their family commitments, or interrupting careers to raise children.  Or having fewer applicants with the required skills or willingness to work long, non-standard hours.  The conservative judges required proof of some employer conduct or instructions that's common to all discrimination claims to allow them to be clubbed and litigated.

The Supreme Court can restrict "proof by quota" even more explicitly, particularly by public agencies like the EEOC whose actions can hobble businesses even if their orders are eventually overturned on appeal.  I like the role of our right leaning judges in at least three other areas:

• Curbing pro-union partisanship and bias.  On April 22 I've talked of excesses by unions and the undesirable NLRB steps to try forcing Boeing to shift its 787 plane assembly from South Carolina to expensive, heavily unionized Washington.  Employers should be free to factor in labor relations and costs as well as labor disruptions to assess profits and viability, without the NLRB calling their resultant plant location an anti-union retaliation.  Even if it ultimately loses in a conservative Supreme Court (assuming the case goes that far) the NLRB's litigation is creating enough headaches for Boeing in the intervening period.  It would be a lot worse if a liberal Supreme Court actually sided with the NLRB.
• Countering the excesses of anti-discrimination laws.  As mentioned above, affirmative action can easily slip into quota based appointments and promotions that undermine a meritocracy and cause reverse discrimination.  Back on April 8, 2009 I mentioned the offshoot of anti-age discrimination leading to barring employers (with a few exceptions) from having a mandatory retirement age, no matter how high.  I've already talked about why I consider these developments unfortunate from an economic and jobs viewpoint, and would like to see conservative judges bring the balance back even if our politicians won't.  Liberal judges through their judicial activism on the other hand may perpetuate or even extend such misplaced anti-discrimination measures. 
• Being tough on crime.  Crime shouldn't pay, and "justice" should imply proportional consequences for major offenders.  On Sep. 3, 2009 I had espoused justice for violent and serious criminals to be weighted more towards deterrence, restitution and even retribution, instead of rehabilitation and reform.  When public resources are severely strained we see some courts forcing authorities to ease overcrowding, provide proper health care, spend more on inmates, or else to release them.  Conditions within prisons seem to be better than those for many outside of it.  Conservative judges are more in tune with the majority of Americans who prefer "true" justice to a coddling of criminals.

So there's at least a silver lining to these "right-minded" gentlemen of the court.

Union Bashing - Good Or Bad?

How do I perceive unions, particularly public employee unions?

My childhood memories are of the already slow and congested life in Calcutta (now Kolkata) coming to a halt during general strikes called "bandhs" that occurred all too often.  On the good days workers would take time off after their lunch break to stage demonstrations in support of "worker rights" that meant more pay, less work, and more additions to already bloated payrolls.

We then moved to the scenic hill station of Darjeeling (of tea fame) with little union activity where I spent my middle and high school years.  But union activity and strikes were much in fashion when I entered college at the University of Delhi.  Most colleges in our 110,000 strong University used to be closed for a couple of weeks a year due to strikes by students and non-teaching staff (called "karamcharies".)

The University karamcharies earned about 50% more than their counterparts in the private sector.  Our college education was publicly funded and nearly free and few of us were aware of what exactly were the demands of the striking students.  To most it seemed a way to avoid classes and inject a little excitement by clashing with authorities.  Our own St. Stephen's College with 1000+ students was one of the very few (of the nearly 100 colleges and departments comprising the University) that refused to take part in any strikes.  So police would be posted outside our gates to guard against trouble by outside strikers who resented our non-involvement.

Years later after joining the IAS I was on the other side, with my fair share of handling public union negotiations, agitations and strikes.  One of my later stints was as Municipal Commissioner (city manager) of Shimla city that had one of the most militant public unions.  They would strike or disrupt services about twice a year in spite of the Essential Services Maintenance Act (ESMA) that made these jail-able offenses.  That's because ESMA was never invoked, or action under it was rapidly withdrawn as a precondition for any settlement.  Of our 1100 employees, we had over 600 sanitation workers as part of previous concessions to the union though we needed no more than 400.  Their pay and benefits were double of those in the private sector.

Early in my Shimla MC tenure the union went on strike and their staff threw buckets of human feces in my office in appreciation of my engaging temporary replacements to keep the city going.  It took me and my team almost a year to draw up contingency plans and train home guards to distribute water and run other facilities in case of future stoppages.  In a subsequent strike, I used these preparations to maintain services, deployed armed police to guard our strategic installations against sabotage and invoked ESMA to penalize strikers and restore normalcy. It was the first time this had happened in the (then) 120 year history of Shimla, and put a stop to labor troubles for the next three years.

 By then I had come to the "capitalist" US and expected things to be very different here, but there are commonalities.  Political leaders here also tend to make deals with public unions to smooth their own tenure even while giving away long term benefits that devastate budgets down the road.  Then there are the illegal strikes disrupting essential services that are barred by US laws (also all too often failed to be invoked by the authorities).  For example the New York transit strike of 2005 disrupted life for millions and violated the Taylor Law (similar to ESMA) but the violators received a mere slap on the wrist.  Then there are the airline pilots unions who get around strike bans by staging mass sick-outs.  Employees avoiding duty by falsely claiming to be sick can be fired, and the management can easily require medical testing by an independent board in such circumstances, yet this abuse is taken in stride.

Even in the broader philosophical context one can question the value and social contributions of unions.  Collective bargaining had a big and useful role to play in the old days when a few large and powerful employers could collude to keep wages and benefits artificially low.  Or when a race to the bottom (in costs) could cause unsafe conditions or extreme hardship in the absence of public safety laws.

But most or all of this is now inapplicable since mechanisms are in place for protecting workers through anti-trust laws, OSHA, the Minimum Wage Act and the like.  It is these laws that ensured a five day work week, stopped child labor and promoted worker safety much more than the unions, contrary to claims by film maker Michael Moore on Stephen Colbert on his March 29 show, or by union leader Richard Trumka in a WSJ Op-Ed on March 4.

Almost by definition so long as there is no employer collusion or monopoly, union activity is an attempt to secure wages and benefits over and above the free market level.  In the latter the workers are free to go (or be wooed away) to where they get the best compensation for their services, according to their perceived worth.  Instead, collective bargaining can look a lot like collective blackmail, as when workers at the GM plant making engine transmissions threaten or go on strike bringing most production to a halt.  No wonder US manufacturers want to diversify production globally to make them less vulnerable, and it's not just to go to where labor costs are lowest. 

So yes, I'm not a fan of unions nor view them as net contributors to public welfare, as their raising of US labor costs has contributed at least partially to the current level of unemployment.  There are some pro-union laws and practices that beg for change.  For example, see how the National Labor Relations Board (NLRB) is trying to force Boeing to locate its Dreamliner assembly plant in heavily unionized Washington State, instead of in South Carolina.  In 2008 Boeing workers in Washington went on a 58 day strike that cost Boeing $1.8 billion.  So Boeing management understandably wanted to instal new plants in less unionized and more business friendly locations.  The NLRB interpreted this as illegal retaliation against union activity.  The WSJ in its April 21 Opinion pages rightly deplores NLRB's sandbagging of Boeing and calls for a change in such a system.

And what of Republican efforts to restrict bargaining by public unions on matters other than their salaries, or do away with compulsory contributions by workers to their union funds?  In principle I find little wrong with that.  We already know that politicians are not mindful of future liabilities that their concessions to unions can impose on future administrations.  That's a big reason why our states and local governments are in budgetary crises.  As far as union contributions go, why should workers be forced to contribute if they don't want to?  That's the situation in the "right to work" states in the South that employers find more attractive, and such forced contributions did not commonly exist even in more socialist countries like India.

On the other hand I'm perfectly fine with the unions launching concerted drives to mobilize public opinion against Republican union busters, and trying to recall elected representatives as they are doing in Wisconsin.  Besides, Governor Scott Walker and his fellow Republicans in Wisconsin have been quite weaselly in their actions.  For instance, they have specifically exempted police and firefighter unions from the new restrictions, apparently because these union members traditionally lean Republican.  These uniformed personnel that are vital to maintaining security and safety should be specifically barred from union activity, as they are, even in India, let alone favored with special exemptions.

Indiana and Ohio states under Republican leadership have also moved to curb the scope of collective bargaining by public employees.  But they have sought a more uniform implementation without picking any favorites, so their actions are fairer and a better blueprint for change than those of Walker & Co. in Wisconsin.

Landmark Half-Measures

This is just the latest of the Obama (and Congress) half-measures that have been widely labeled as "historic", "unprecedented" and "landmark".  I'm referring to the Financial Reforms Bill signed into law on July 21st.

It started with the $800B economic stimulus package of Feb. '09 that Paul Krugman warned even at the negotiation stage as being very inadequate,and reiterating these concerns after Congressional agreement. His fears of a stalled recovery have been realized.  Next we had the Afghanistan surge of troops, but with delays and declaration of a withdrawal starting in July 2011 - signaling intentions to embolden the enemy though leaving some leeway.  Then of course there's the health care overhaul of Mar. '10 but without even the public option, leave alone the far more appealing and cost effective "Medicare for all" (aka "single payer") push.

Which brings me back to the financial reforms law.  It is huge and complex, yet leaves almost all the important safeguards against a meltdown to be put in place through subsequent regulations by government agencies.  That's great for bankers and their lobbyists who can get all the loop holes and escape clauses inserted while working with regulators.  If they can win over hundreds of lawmakers, why not a few dozen regulators behind closed doors?  Krugman points to further timidity by the Obama team - they are even dithering over nominating an obviously great fit like Elizabeth Warren to head the new consumer financial protection agency.

But that's not all.  Regulations can be changed by successive administrations, without further legislative oversight.  That means that even if the present crop of  regulators do their job well and insert the right checks and balances, all this can be undone by a future Bush clone who assumes the Presidency.  Knowing this, even the Republicans beholden to bankers and supporting them may not be quite so upset with the new law.  And as seen in the current crisis, it can take many years for the negative consequences of lax oversight to surface, while banks can start to profit almost immediately.

This means that a future regime that loosens regulations that unfairly helps banks can benefit from their patronage.  Yet such an administration can quite possibly escape (or at least get the benefit of the doubt for) the blame for planting the time bomb that causes a financial disaster on a successor's watch.  

Other instances of the Obama and the Congressional Democrats collectively lacking courage are in enacting effective energy legislation, and perhaps immigration reform.  In energy we couldn't even have the weak cap and trade system passed, leave alone a stiff gasoline tax that can fund alternative fuel development as espoused by Thomas Friedman for years.

My take even on Obama "victories" is generally of his doing a lot when cornered into having to act, yet without doing enough.  It's almost like trying to save half the patient.  And it's not a question of being a centrist, but being ineffective.  I believe his taking the lead and acting more vigorously and decisively on contentious issues would help rather than hurt the Democrats in the 2010 mid-term elections.  It would not only rally his disheartened Democratic base, but also win the respect of more independents. 

But some initiatives did work well.  The response to the H1N1 "swine" flu epidemic was good overall, and overestimating the demand for the swine flu shots and the resultant oversupply was much better than if they'd underestimated it.  On the gulf oil spill the Obama team could have acted faster and forced more skimmers to be mobilized, including those from other oil companies.  But it did force BP to pay into a $20 billion fund despite Republican condemnation and appointed Kenneth Feinberg to administer compensation (with luck speedily and impartially) from it.   

Hopefully they can build more upon these types of successes in the time to come.

Some Perceptions on Travel Outside the US

A friend recently emailed me asking about booking travel from the US to India, and experiences with airlines. I offered my personal (and very limited) perspectives to her two questions, and thought I'd share them here. This is about personal travel by coach with a close eye on the budget. Anything you'd like to add is welcome.

Q: I'm planning a trip to India. Do you know and use any good travel agents, or do you just book online?
 

A: I do know of good travel agents (and supplied that information to our friend.)

However, the online options have improved a lot over recent years and I've found very good deals on http://www.kayak.com/ and http://www.orbitz.com/ in that order. The fares fluctuate and the best ones may be available for just an hour or so before they are snapped up. So if you've time it is best to check multiple times every 4 - 5 hours, and/or at odd times like early morning or late night.

The other thing is that for international travel their systems don't work well in real time. So just like Travelocity has problems even in domestic flights, these sites often display low fares that they later say are no longer available when you proceed to book your travel. You do sometimes get those lower fares when you try subsequently. 

Frequent flier miles sometimes come in very handy.  Daughter Sheena got a business / first class ticket for her forthcoming trip from Austin, TX, to Lima, Peru on American Airlines for relatively few (60K) AAdvantage miles.  This is on dates when paid fares even in coach are very high.

Q: Which airline have you mostly been flying? Are you happy with it? Have you ever taken the Air India nonstop? (i.e., the direct flight from New York or Chicago to Delhi or Mumbai.) I'm curious about it, and also about its quality aspects.

A: Some of my recent trips to India have been on Delta non-stop from JFK (since discontinued), American-Swiss combos via Zurich, Air France via Paris, and Thai Airways. The US airlines typically have the skimpiest service, especially American, while the European (and Thai) airlines have better food and cheerier attendants. Continental is better among the US carriers, though. They took great care of us in Frankfurt when we were stranded for 3 days due to bad snowstorms in the US.
 

In contrast, when we flew American Airlines and missed a connection in Zurich due to a late incoming flight, they wrongly blamed this on the weather and we stayed a day at our own expense without any help from them. They ultimately paid up months later, but that's a long story.

There are mixed reviews about Air India but my experience on all 6-7 trips on it has been very good. A couple of times passengers tended to be unruly or unsophisticated - a Sardarji swaying drunkenly after several free drinks, and some passengers getting up from their seats on landing while the plane was still taxiing on the runway. But those were sources of amusement rather than inconvenience for me / us.
 

To us personally the Air India crew has been very attentive, polite and gracious, emblematic of typical Indian hospitality. On one occasion after we were airborne a flight attendant noticed I had long legs and of her own re-seated me (and Anita) in a more spacious section. At other times the flight attendants have plied me with multiple alcoholic drinks when I requested for one (may be I look like a boozer.)

And those traveling non-stop from the US to on Air India have generally liked it a lot even in coach - plenty of leg room, good food, unlimited drinks, polite crew, etc. Jet Airways invariably receives rave reviews though I've not used it for international travel myself, and they don't offer non-stops to India. In general it's better, faster and less uncertain (due to delays and missed connections at intermediate airports, volcanic ash in Europe, etc.) to travel non-stop from US to India. So I'd recommend it, on Air India or whatever.

Moreover, the crews are individuals so experiences can vary - I've often seen great attendants and got service to match even on my lowest ranked airline, American Airlines.

Guarding Your Tail

Imagine you are running a $100B company. Your personal salary is 2% of the excess earnings (over and above the safe treasury rate) of your company. You secretly bet your company's fortune so you get an extra 1% of return on investment with 98% probability, but your company can lose everything with a 2% probability.

Any bookie can see these are terrible odds for the company since the "expectation" is (0.98 X 1) - (0.02 X 100) = -$1.02B. In other words your actions will cause your firm to lose $1.02B a year on average over a long period of time.

But if you are mainly concerned about about your own earnings during your 5 year tenure at the top, then making this bet makes perfect sense. There is an over 90% chance that your company gets that 1% for all five years, netting you $20M every year. If they are unaware of the chances you've taken, then your investors will attribute your "success" to your superior managerial capability. And if that calamity does occur wiping out your investors, you personally get to walk away paying nothing. You even keep your past earnings, go yachting and getting your life back, as BP's CEO Tony Hayward would say.

That in essence is why people can have strong incentives to take on tail risks defined as very unlikely but catastrophic events. Instances of such tail risk taking include:
a) The aforementioned BP spill, where cutting corners and ignoring safety imperatives can save oil companies hundreds of millions of dollars a year. While the other oil chiefs solemnly swear to the complete safety of their practices, they know the chance of any such false claims being exposed on their watch is very low. Just as it was for Tony Hayward who was unlucky enough to have lost the reverse lottery. But the the risk of something terrible happening is very high, when aggregated over all the operating companies and the tens of thousands of wells operating under loose regulations.
b) The financial meltdown led by the collapse of the sub prime mortgage loans market. The easy money architects like Alan Greenspan thought the risk was very low. Many lenders, traders and money managers (backed by their rocket scientist quant analysts) knew that a drop in real estate prices could be catastrophic to the derivatives market. They just figured that the bubble wouldn't burst in their short term trading horizon, and someone else down the line would take the fall. Or if they were too big to fail, that they could collect on the upside while a lot of the downside would be borne by taxpayers. They were right on many counts. Even Goldman Sachs which famously dodged the bullet would have done badly if the housing price collapse had started a year earlier, before they unwound their positions.
c) Hurricane Katrina and the damage to New Orleans. Generations of politicians and lawmakers avoided raising and strengthening New Orleans' barriers. These would have guarded against the very unlikely possibility (in their watch) of a Category 5 hurricane directly hitting the city. They instead could divert such resources for popular "pandering" projects that would win them accololades and political support, with no one the wiser about the risk that did not materialize. But a city's life should be measured in centuries (think of the Netherlands' dikes) and over that horizon the risk was very high.
d) Other as yet unrealized disasters like nuclear accidents (assuming Three Mile Island wasn't bad enough and a while back) or earthquakes where safety codes are not strong or enforced enough.

The common factor in all these instances is that the people taking the risks on average derive a huge benefit from doing so, even if this is severely detrimental to the affected populace. That's why leaving the regulation and policing to the private industry can be so harmful. These special interests can lobby fiercely, or use a portion of their expected benefits to bribe or buy support and intimidate opposition that wants tighter controls.

At "my" University of Chicago the majority academic view leaned heavily towards private enterprise and self regulating markets. It went way beyond the concept of "efficient markets" relating to stock, etc. prices that makes intuitive sense. Many of the arguments and reasoning I heard in support of this more extreme "private and unregulated is generally the best" view was not convincing to me. It generally cited historical correlations between free enterprise and economic prosperity. Many of these no longer hold as even Andy Grove pointed out on July 1 in BusinessWeek in a different context of job creation and the rise of China and other controlled economies.

Still, to its credit the University of Chicago does tolerate dissent and fosters diversity of opinion. Paul Krugman in his April 9, 2009 NYT column, pointed to Raghuram Rajan of this school presciently warning back in 2005 of the risk of a financial meltdown, absent adequate controls. Now we just need to have lawmakers and politicians step up to the plate and have the right government safeguards to watch our collective back - and tail.

More J&J Shenanigans

As I suspected my Listerine experience mentioned in the last post was not just a one-off by J&J. It looks to be part of a pattern created by the top management placing quick growth and profits over ethics and long term reputation and performance.

Here are other recent instances:

• The Justice Department in January accused J&J of bribing nursing home drug procurer Omnicare with tens of millions of dollars to buy and promote its drugs. The kickbacks allegedly increased J&J's sales through Omnicare from $100 million annually to $280 million. The inappropriately administered drugs like Risperdal increased the risk of death for many patients with dementia.
• A subsequent March 11 BusinessWeek article (March 22-29 issue) reports an "explosion of litigation" by states against J&J over illegally marketing Risperdal for unapproved uses. The practices included getting paid doctors to plant questions from the audience so they could talk about off-label uses. J&J may end up paying billions to settle this.
  
• Last week J&J recalled 40 of its pain and allergy drugs for children including children's Tylenol. These drugs were contaminated or had the wrong strength of ingredients, and J&J's may be guilty of criminal (not just civil) misconduct. It's ironical that the government is advising consumers for their children's safety to switch from branded J&J products to their generic equivalents.
• BusinessWeek on April 29 reported J&J will pay over $81 million to settle criminal and civil cases over improper promotion of its drug Topamax.

J&J of course is not alone in cutting corners and acting improperly. It's just no better now than the rest, and the loss of its reputation is likely to cost it much after its current management and CEO have departed. To consumers that means being wary of it, and regret its exit from the small pool of iconic brands that we over the decades had learned to trust.

Another Uniquely American Feature

Last month I picked up my parents returning from India at New York JFK airport. That's when I learned that the luggage cart rental has been increased there from $3 to $5. This apparently happened in February 2009 at both NYC airports.

Welcome to the US. Most fellow passengers of my parents were quite upset, and many avoided using the carts and struggled with their bags. Back in the late '80s and early '90s this charge was $1 to $1.25. I suspect Smarte Carte, the private company that operates and rents these carts, has a pretty cozy relationship with the airport authorities. This company's website as well as JFK's official one studiously omit disclosing these rates.

The parallel between these cart charges and non-universal US health care (at least as it existed till today) is obvious. It also points up the inefficiencies of this private, fee for service arrangement that makes everyone except this private company worse off. While passengers are being ripped off we also may be nearing a high cost death spiral as also explained by Krugman in a health care context. That means the exorbitant cart rates will decrease demand for them so much that the overhead costs will be spread over fewer carts, creating a push for even higher rates.

In all airports outside of the US luggage carts are "free", meaning these are included in normal airport charges that should work out to a few cents per passenger. So almost everyone uses carts and the per unit cost is a small fraction of that here. It's high time the airports (like health care authorities) learned from such better practices outside the US.

How Did He Get It So (Largely) Right?

Paul Krugman's article last week in the Times "How Did Economists Get It So Wrong" was remarkable in two ways.

First, it neatly captured the essence of how two schools of economists (which includes finance academics) differ in their approach to markets. Krugman presented this so skillfully that it can be grasped by readers without a background in economics. At the same time it was immensely useful and interesting as a recap and to put issues in perspective even for practitioners in the field.

Second, the article is fully eight pages long - much longer than his Op-Eds, and I thought it would be too "heavy" for most readers. Yet to my surprise it was the most popular and emailed article for a couple of days. That's as much of a tribute to the caliber of the Times' readership as to Krugman's writing. I strongly recommend this piece to anyone who wants to get an insightful overview (admittedly from Krugman's eyes) of the rival schools of thought and of the issues separating them.

Though I studied at Chicago, I find myself agreeing with much of what Krugman says. This is particularly so in regard to the Keynesian belief in helping the economy through temporary stimulus spending, and events showing markets can be grossly inefficient for long periods of time. In fact, in my post back on Feb. 10 I had voiced strong misgivings about the statements of some prominent Chicago professors who opposed the fiscal stimulus plans.

However, Krugman is still a little unfair to the Chicago school by painting them as largely unified against Keynesian beliefs, firmly believing in efficient markets, and lumping them all as "freshwater" economists. Krugman did acknowledge that the danger of a financial market meltdown was first pointed out by another Chicago economist, Raghuram Rajan. But Krugman didn't mention that a leading academic of the theory of "behavioral economics" (rival to efficient markets theory) also belongs to the Chicago school. That professor is Richard Thaler who is at least as well known as the other proponent of behavioral economics, Robert Shiller, whom Krugman repeatedly mentioned.

In fact, during my time there I had found it great about Chicago that rival theories could be freely and vigorously debated in the weekly finance workshops and other academic forums. I remember how Eugene Fama (dubbed "the father of the efficient market theory") in his highly popular fnance class had included Thaler's papers as required reading. And though a lot of friendly riffs about opposing beliefs were exchanged, Thaler used to be invited to Chicago's finance workshops to discuss his papers even when he taught at MIT or Cornell. Then about 10 years ago he was welcomed into Chicago as a tenured professor.

But apart from setting the record straight about Chicago and other other schools (about their not having monolithic, misplaced beliefs) I really like and commend Krugman's article.

Changing Our Criminal Justice System

I am unhappy with several aspects of our US criminal justice. But I'm on the left or the right depending on the practice in question. Broadly speaking, I'm with the left when it comes to presumption of innocence and treating those not yet convicted of crimes with dignity. And I'm with the right for more powers for investigating crimes, treatment of convicted offenders and lowering the taxpayer tab on prison inmates.

This is where I'd want a more liberal shift:

• Avoid handcuffing non-violent suspects before they obtain bail. Why did Martha Stewart, Michael Jackson, or the two Bear Stearns fund managers have to be handcuffed and confined before appearing in court when (a) they seem highly unlikely to pose physical danger to the arresting officers, and (b) had ample advance notice of impending charges, so they could be allowed to do something about it? Being handcuffed would be very humiliating and an affront to our dignity for most of us - something that can't be undone even if we're subsequently cleared. Since 1980 the Indian Supreme Court has barred handcuffing of suspects who are not likely to be violent or dangerous. There is also a clear provision for anyone to approach the court and seek anticipatory bail to avoid needless humiliation and inconvenience. If a developing country like India can have these safeguards, why not the US?
• Have much stricter gun control. What age are we living in? The 2nd Amendment giving the right to bear arms is an anachronism, though this will be hard to repeal because of entrenched beliefs. It's almost inconceivable for someone coming from India (and I'm sure most developed countries) to see how easily any punk in the US can acquire a firearm. Even assault weapons can be bought, with the NRA and the loony gun-toting fringe vigorously defending this right in the name of self-protection. And there should be strict background checks and stringent penalties for disqualified applicants possessing illegal firearms. Thanks to guns the US has a much higher homicide rate than other first world countries. With shootings at Columbine, Virginia Tech, Washington Beltway sniping, "going postal" and other workplace violence, perhaps the average American is now ready for more Europe style arms restrictions.
• Freely let DNA evidence and new techniques be used to revisit old cases of conviction to reassess guilt. Some of these convictions have been successfully challenged, DNA tests allowed and convictions reversed. But we know how jury verdicts can be so flawed and arbitrary - why assign a false sanctity to such verdicts and not allow DNA tests in all such cases?
• Decriminalize victimless crimes like acts between consenting adults, or using (as opposed to dealing with) drugs. What former NY Gov. Elliott Spitzer did in hiring a call girl may be bad for his family life, but shouldn't have been a crime.

Here's where I favor a marked shift to the right:

• Much stiffer penalties for criminals. True to our sense of fair play, justice should be retributive, not just reformative or a deterrent as liberals maintain. There's no reason to take capital punishment off the table for egregious murders so long as guilt is established beyond all lingering doubt (say with 99.99% certainty), not just reasonable doubt. There also shouldn't be a blanket minimum age or intelligence threshold for capital punishment. After all, a juvenile showing extreme cruelty or sadism while knowingly committing crimes is more, not less, likely to become an even bigger monster as he grows older.
• A tougher and lower cost jail environment. There's something wrong about criminals (especially hardened ones) sentenced to punishment spending their time watching TV, pumping iron, eating well and enjoying better medical care than many people outside the prison. Criminals should repay their debt to society through work and depending on the gravity of their offenses (think Dahmer, Bundy, the Beltway snipers, or the killers of my childhood friend Aasha) as a resource for medical testing and organ donation against payment to the state. These measures will at least lower the taxpayer burden, and if they act as some kind of a deterrent against crime, that's a bonus. (The Chinese till recently were harvesting and selling organs of executed prisoners. That disturbed many of us because we weren't sure if (a) those people had actually committed crimes deserving of the death penalty, and (b) if the profit from organ sales was itself an incentive for executing prisoners.)
• Close monitoring of inmates and strict punishments for offenses committed in jails. I've don't understand how prison rapes and inmate on inmate violence can still go undetected given our advances in technology. We can cheaply video monitor (and record) every cell, every square foot of prison space, and every movement by every inmate. Any offenses can be easily proved by playing back the recordings and inmates severely punished, preferably in a revenue positive fashion (see point above.) Guards who fail to act can also be identified and disciplined. This will also crimp in-prison gang activity and prevent the worst and most dangerous inmates from victimizing weaker ones.
• Further limiting or completely eliminating trials by jury. The US is one of the few countries where jury trials, which are highly wasteful with often arbitrary verdicts, are still widely prevalent. Other countries use just judges, whose verdicts can be appealed to superior judges and panels of judges. Given our multicultural society with ethnic divides and loyalties, jury trials are even more vulnerable to unfair outcomes, especially when the alleged crimes cross racial boundaries. Remember how O.J. Simpson was let off for double murder by a mostly black jury in 1994, and lost in the subsequent civil case decided by a mainly white jury (though this case admittedly required a lower burden of proof.)
• Requiring every US resident to submit a DNA sample and to carry a national ID card. Objections by the ACLU to maintain privacy have little merit, since safeguards can be imposed to ensure the information is used only to detect or prevent major crimes. Besides, consider the huge upside of such measures. Any DNA on a crime scene can be matched against a national database of the entire populace to solve crimes. Terrorism can be severely limited with a national ID, possibly combined with biometrics. The system can be carefully designed of course to protect most privacy, but this exercise to guard against "Big Brother" excesses should be very feasible.

There may be nuances, but a majority of Americans likely agree with my thinking. 

Another Look At Howard Dean

I was underwhelmed by Howard Dean's Democratic Presidential bid in 2004. Even before the Iowa primary and his much publicised "scream" (a total non-factor for me) Dean was my fourth preference, behind Wesley Clark, John Edwards and John Kerry, in that order.

I had paid inadequate attention to what Dean had to say and thought he leaned too far left on some issues at that time. But as 2008 rolled along I was impressed by his articulation of Democratic values and even-keeled stance as DNC chairman during the Hillary - Obama primary slug fest. And now he's been making direct, succinct and insightful comments in TV news shows on health reforms, including on the issue of the public option that he strongly supports.

In the Morning Joe program on MSNBC he offered this very interesting perspective on death panels and why Obama seemed to be backing away from the public option ahead of a Senate vote. He said this was a way to get a bill past the Senate with 60 votes when Democrat senators like Ben Nelson and Kent Conrad are sabotaging the public option provision. This provision can then be re-introduced through a "reconciliation process" with the House of Representatives bill that then needs only 50 votes to pass. If that's truly what Obama has in mind then I won't be so hasty in judging him.

Others have also noticed how Dean is such an effective voice for health reforms and for batting down misinformation by opponents. Here is a YouTube clip by a group called The Young Turks showing how Dean counters three arguments against key reform provisions. The commentator wonders why Dean isn't the Health and Human Services Secretary. Now that he's done being DNC chairman I hope he gets to assume another high public office. And yes, if I could revisit 2004 he'd be my top choice among those presidential candidates.

Rubina a Graphics Editor - What's That?

For the couple of years after graduating from the Columbia School of Journalism our daughter Rubina has worked as a graphics editor, the last 18 months with the Wall Street Journal (WSJ).

What does she do as a graphics editor? She obtains the data and material and then uses it to create charts, tables, inset summaries and other visuals (except pure photographs) that accompany news stories. For her and her colleagues it can be a charged - some will say stressful - environment with tight deadlines. But she has a passion for it.

For the most part she and her colleagues walk into work in the morning, learn about developing stories and then conceive of the graphics in consultation with reporters, columnists and editors. Then it's data and materials search, verification, creation, iterations and all to be completed before "press time" by late evening.

They each do anything from two to five graphics on a typical day, depending on the complexity and the workload. To maintain an efficient and collaborative environment without worries about who gets credit the graphics folks generally do not put their names on their creations. We don't know about her precise handiwork till she tells us, though we can make some guesses.

Want to see a sample of Rubina's work? Unfortunately, most of the online versions are not the same as the ones in print, and need a subscription to view. If you have one, here's one from May 12 that she did on the US federal highest bracket tax rates going back all the way to 1913. The print version was better. It is overlaid with the terms and pictures of US Presidents. Rubina had to work with some IRS folks to get a major part of the information. When the story came out the IRS called to compliment the WSJ on the graphic.

Addendum on July 22: Today, Rubina had a graphic on childhood obesity so I thought I'll add it. Here's what she had to say:
I have a U.S. map on today's Currents page on child obesity rates by state. Rather than color-coding the states like we usually do, we decided to make the heights of the states correspond to their obesity rates. This was done using a program called Cinema 3-D, which I used for the first time on Monday. You can see the print version on page A11 or online here by clicking on the small map: http://online.wsj.com/article/SB124821547930269995.html

Misplaced Outrage - The UK Scandal That Isn't

So what do you think about the UK's MP expenses scandal that has forced the resignation of Speaker Michael Martin and several Ministers and MPs? The media reports talk of public outrage about these excesses and one poll shows the effect on UK voters. 63% have not been swayed by all this coverage and it won't change their voting preference, but a whopping 27% say that it has.

I think this whole controversy is deplorable, and a commentary on the quality of our media coverage. In an August 2007 post I disagreed with criticism of what we pay our lawmakers. I am strongly of the view that we should pay our apex lawmakers well, considering the enormous responsibilities and the public trust we place upon them.

That's not only fair but also expedient, as it will insulate them somewhat from the petty blandishments (like sports event tickets, rides on private jets, or stays in vacation homes of people seeking favors.) This won't prevent misdeeds by the heavily corrupt, but at least give the fundamentally decent lawmakers (hopefully the majority) the financial cushion to better follow their conscience. I'd also like to reduce the dependence of candidates to Congress (or Parliament in the case of UK or India) on special interests for raising funds for elections. This can be achieved, for example, by providing them public funding to contest elections, with the amount depending on their poll performance.

So how much should we pay them? I'd say $1 - $2 million a year to US members of Congress, and about 1 million GBP annually to UK MPs. For UK's 646 MPs it will work out to about 1 billion GBP including associate expenses, a drop in the bucket as compared to the UK central budget of 600 billion GBP. In the current MP scandal the total amount claimed by all MPs put together was 92 million GBP, not all of it improper. Given UK's population of 61M, that's less than 2 pounds per capita.

So yes, I consider this whole scandal to be a storm in a tea cup. And I know of no opinion leader or journalist of standing who has had the sense - or the courage - to pronounce it as such.

Laws Gone Wild - Banning Old Age

To me this is another of the flawed anti-discrimination laws leading to absurd consequences. I'm talking of the Age Discrimination in Employment Act (ADEA) of 1967 and its subsequent amendments.

We hear much more about countering discrimination against minorities and women, and resultant affirmative action. Despite vigorous denials from its liberal advocates this often becomes a drive to fill quotas. Barack Obama last month quoted some gender disparities in pay and top executive positions to imply unequal treatment of women. Now if there is any real bias or violation of the principle of "equal pay for equal work" I'm all for vigorous corrective action. But just the numbers being thrown around do not establish this, and there are more benign explanations.

The fact that many working women opt for a better balance between work and family, and take some years off to raise children can explain their making 78 cents for every dollar that men make. Similarly, there may be very few women who are prepared to put in 14 hour workdays to have a shot at the corner office. That, rather than a glass ceiling, may largely be why only 3% of Fortune 500 CEOs are women. To use these statistics to equate salaries or senior executive elevations among the genders may very well be reverse discrimination against men.

Other countries like India have quota-based intake of disadvantaged groups (like caste-based reservations) into government or public sector jobs, or into many educational institutions. So similar US practices do not surprise me as much as the "protections" against age discrimination. In India I never questioned the logic of having a mandatory retirement age. It used to be 58 years for most government jobs, and was subsequently raised to 60 years. For a few, mainly high positions, it extends to 62 or 65 years. After that, retirees who are willing and able to work can seek employment as contractors or consultants, or even be re-employed in the public sector as special cases. Private companies are free to have or not have mandatory retirement policies.

These practices make a lot of sense. Employees are recognized for their years of useful service while accepting the effects of age, and are given a cordial send-off after reaching a threshold. They leave with their memories and morale intact, making way for younger, more vigorous successors. Employers are free to retain exceptional workers past that point. But the rank and file know and accept the retirement age as a natural conclusion of this stage of their careers. If they want to work more they'll see no shame or a blow to their self-image to seek lighter or different, less paying work that may be more suited to their present stage of life. Even usually more liberal Europe recognizes the right to set an age for forced retirement.

This was pretty much the case in the US as well, till the ADEA of 1967 was amended in a series of steps from 1978 till 1993 to bar mandatory retirement in most sectors. Remarkably, the biggest blow was struck in the sweeping restrictions of the 1986 amendment when a Republican (Ronald Reagan) was President. Ideology notwithstanding it's hard to resist signing legislation favoring a key voting bloc like seniors ahead of the next Presidential election (that was won by Bush Sr.)

Adverse consequences of the US ban on mandatory retirement (many of which I've seen at first hand) include:

• Older employees drawing the highest salaries have reason to stick it out as long as they can. Employers have to push them out for bad performance after documenting negative evaluations. Not only do the departing seniors feel humiliated at this ignominous end to their long career, but this can also hurt employees morale all around.
• Managers in these situations have to give negative evaluations and terminate employees which subjects them to needless stress. Incidents of workplace violence and other fears of retaliatory action make the managers' job even harder.
• Reducing "natural" turnover adversely affects the career prospects of promising younger employees, which can create friction among employees and again affect morale.
• Older employees who manage to coast or "get by" are not replaced for many years by better, cheaper and more energetic younger employees. This makes for suboptimal company performance that aggregates to a drag on the economy, making it less competitive.

Bad, populist laws like these are politically hard to resist and block. Worse, once they are passed they're almost impossible to undo. Anyone attempting to do so despite the merits is likely to be painted as "anti-senior " and risks political suicide. So despite the pressures it is still much better to stop such laws before they are enacted.

I hope lawmakers (particularly Democrats) draw this lesson while considering the proposed Employee Free Choice Act ("Card Check Law.") This awful law being pushed by unions and liberals would allow unions to be formed without needing workers to vote their preferences by secret ballot. But that's another story.

Change They Don't (Want Us To) Believe In

I was surprised to see these two articles by reputed and brilliant professors in "my" University of Chicago Booth School of Business. One argues against capping CEO / executive pay in taxpayer bailed out companies, and the other against the government spending as part of the Obama fiscal stimulus plan.

The first by Steven Kaplan appearing in a Feb. 17 Op-Ed in The Chicago Tribune warns that "Restricting bank executives' pay would stall recovery." He acknowledges that high and flawed financial incentives were at the root of high risk-taking and illusory profits that brought down these banks, and that the massive taxpayer bailout justifies "some" government say in executive compensation. But he then asserts, "Even though $500,000 is a lot of money, banking executives have a different salary market. They would find the compensation low, and that is likely to create four problems:

• Banks would avoid accepting government assistance unless the situation is grave. Only the worst firms would accept government help.
• Many executives would leave the "bailed-out" banks for jobs that pay more, and the best employees would leave the troubled firms at exactly the wrong time.
• It would be difficult to hire new executives because the best ones would choose other opportunities.
• Stronger firms that have accepted federal money would give it back to avoid the restrictions.

All these factors would slow the recovery of the financial system."

I find these arguments to be deeply flawed. To his first and fourth points, most banks seeking and continuing to receive government help, even the so-called stronger ones, have little discretion in the matter. They know full well that their failure to do so will expose them to a ruinous bank run or its equivalent with depositors. Their leeway can be further curtailed by imposing regulatory capital requirements that forces them to seek timely government help. Further, the push towards better governance and heightened awareness of potential conflicts of interest will make vigilant bank boards compel their management to do the right thing.

Mr. Kaplan's second and third points are anchored on a "greed is best" premise that the most suitable executives for bank turnaround are lured by outsized financial awards alone. But it is this brand of managers and the existing compensation structure that substantially contributed to the crises in the first place. They stood to make enormous fortunes by fudging numbers, taking massive gambles with other people's money and limiting themselves to short-term "on my watch" perspectives. Instead, we need managers who want to establish their legacy of building or rescuing great institutions. A lack of outsized compensation structure is more likely to attract these types of managers, encourage sounder decisions and reduce their temptation to gamble. Just compare the CEO salaries and the fortunes of Japanese and US automakers. Or consider if hiking the annual pay to a billion dollars will really get us a much better US President.

So I largely disagree with Mr. Kaplan though there is ambiguity in the stimulus amendment limiting top executive pay as reported in a Feb. 14 CNN story. That can lead to some loopholes and confusion even if the measure is directionally correct.

The other article is a Jan. 21 Op-Ed in the Wall Street Journal by Alberto Alesina of Harvard and Luigi Zingales of Chicago Booth. They repeat the Republican refrain of stimulating the economy by cutting taxes, homing in on the complete elimination of capital gain taxes in 2009, and to the exclusion of government spending. Here's a quick counter to their main contentions:

a) Regardless of it starting as a financial / credit crisis, the US economy obviously now fits their description of a "bad equilibrium." That's where layoffs and job loss fears lower consumer demand that makes firms cut back that causes more layoffs that... They concede government spending can change this "bad" equilibrium into a "good" one, yet they still oppose it.

b) Their proposed solution of tax cuts (eliminating all capital gains for investments "begun" during 2009, etc.) is an extension of the Bush efforts for the past eight years. Where did that get us? Plus they want to make all capital expenditures and R&D investments tax deductible. Wouldn't that mean losing a lot of government revenue on the bulk of such expenditures that the companies would have incurred anyway, incentive or no incentive?

They see their role here "... to courageously propose the right economic policy, even when it is unpopular." I wouldn't call it particularly courageous for business academics to write in support of the finance industry and business interests that directly or indirectly sustain them. My friend RS wryly alluded to this equation as one hand washing the other.

To be fair RS thinks highly of Luigi Zingales and his writings in general, and considers this particular WSJ Op-Ed by him to be an anomaly.

Other writings by the Chicago business professors are more insightful and objective, including those relating to the current state of the economy. For example here's a good commentary in the Feb. 12 New York Times by Doug Diamond, Anil Kashyap and Raghuram Rajan on the Geithner Plan. They express reservations about elements of the plan, in particular the public-private partnership to buy up toxic assets, though they don't come up with an alternative. That's why I find Paul Krugman (alas, not of Chicago) to be better. In his Feb. 22 Op-Ed in the New York Times (among other writings) he makes a clear and cogent case for the temporary nationalization of banks. I'd like anyone opposing his proposals including the Chicago crowd to address his arguments head on.