Dec 13 2010

Inside Job Part 3: Regulation

The previous two posts have been abstracted from the actual content of the film and have instead focused on its impact on me and its methods. But wait! I also had thoughts on the actual content of the film!

Many aspects of The Inside Job were compelling, especially to the layperson such as myself who has only a cursory knowledge of the events precipitating the recent worldwide financial troubles. Beyond its interest as a history lesson however, the film sharply advocates for greater regulation of the financial services industry (in a variety of capacities (kinds of derivatives allowed, conflict of interests, executive pay, etc.)).

It’s also a topic that is moderately interesting to me as I often find myself thinking about regulation prompted by the near constant stream of examples of businesses’ inability to self regulate.

On some level it’s difficult for me to understand what people are envisioning when they advocate for complete deregulation. Without wanting to pose a straw man, I think the basic argument is that the market can sort out any troubles (or questionable practices) that may arise in industry.

There are many things that aren’t clear to me about this position. I just don’t see how in a completely deregulated system we would avoid monopolies, worker exploitation, and environmental exploitation to name just a few things that we all agree are negative. If the answer on how these are avoided is that ‘consumers of the end-good will decide to buy something different,’ I think that the laissez-faire viewpoint is extremely naive about the modern consumer world.

In order for this kind of choice to occur there are several important prerequisites:

  1. Consumers must be informed. Especially as the production chain lengthens, it seems like it’s increasingly difficult for consumers to know what companies (and business practices) have gone into the making of a particular product. When I look at labels of pre-packaged food I’m often even unsure what all the ‘ingredients’ are, since I don’t have extensive knowledge of the chemistry that goes into modern food production and preservation. (Although, I’m extremely happy that thanks to regulation I can count on there being a list of ingredients and that they have been tested for negative health impacts on humans.) So if I don’t understand even for one package of teriyaki tofu, what all is going into it, I’m not sure how the free market camp expects that I will know enough about the tens of thousands of parts that go into a computer to make an informed decision. Especially if the manufacturer is not required to tell me what the parts are, where they came from, who made them and under what circumstances (thanks again Regulation!). In order for consumers to determine the kinds of things that we tend to regulate, using only their purchase decision, consumers would need to have access to the necessary information, which in my experience manufacturers are reticent to provide unless legally compelled.

    (On a small tangent, it seems like using the purchasing decision as the mechanism to approve or disapprove of company practices is a very blunt tool.

    Ok, so this person bought our competitor’s product instead of ours, what was it that they didn’t like about our product? Was it the size? Shape? Cost? Aspects of our worker compensation plan? Did they not like our environmental practices?

    This is similar to the line I investigated in my post on Winner Take All Politics a few weeks ago. Broadly taken, I believe that for preferences, a yes/no method of communication will rarely yield very accurate representation of the preference.)

  2. Commensurate options must exist for purchase. If the consumer choices are to be the only thing that drives company policy, that presupposes that there will be a variety of companies (with varying internal policies) who all produce a similar product. As a consumer, I can then purchase the item from the company I most support (theoretically communicating to competitors that they should change their policies if they want me to buy their option in the future). This does not match with the world that I observe currently. Maybe I’m a hapless casualty of ‘product differentiation,’ but when I’m in a store, I think that I rarely see two exactly equal products. Undoubtedly the world would look very different under a completely free market system, but I can’t imagine even in an idealized market that for every product there would be a bunch of vendors with the same basic item who I could then select between based on my moral compass. (I’m asserting here that regulation generally represents a society’s collective moral will (eg, “we don’t want child laborers,” “we do want a minimum wage for all workers,” “we don’t want toxic chemicals spewed into our public spaces for private gain,” etc.)) That also makes me wonder about what the truly free market advocate has to say about intellectual property rights at all. Isn’t copyright enforcement by the government a form of regulation on an industry?

I’m sure there are many other prerequisites to a perfectly functioning free market that are lacking in our current society, but those are the two that jump out at me most immediately.

So in my mind, regulation seems to a necessary aspect of modern commerce. We cannot expect that every consumer will be informed about the morally-relevant aspects of every company, nor can we assume that without regulation there will always exist an option for each product that concurs with our collective ethic.

I do think that in modern day America, there are plenty of bad regulations. Ones that serve to protect a special interest at the expense of the general tax payer, or regulations that are simply outdated/obsolete. But for me, these are cases to have better regulation, not remove all of it.

As I alluded to above, I conceive of contemporary commerce as being immensely complex; a delicate balance of hundreds of companies in dozens of countries with thousands of workers conspiring to bring a computer to my local store. This complexity creates increased opportunities for people (and institutions) to skirt regulations (and thus defy our collective moral will) and also leads to a so-called “revolving door” between regulators and industry members. This phenomena in the financial services sector is highlighted throughout the film and is sickening to watch. (Who better to regulate the banks than one of their biggest CEO’s?)

After the film, I started to think about a broader definition of “conflict of interest” where it’s not individuals that benefit, but targeted groups more broadly. I have a sketch of what I’m thinking about, but it’s not fully fleshed out yet.

Class-conflict of interest
Imagine a society where a small minority has a belief (ala Ayn Rand) that the best thing for everyone is for them (as a group, not necessarily as individuals) to have all of the society’s wealth. Now imagine that for historical reasons, Group A is actually the minority that is in charge of that society’s public policies.* This seems like a conflict of interest to me. Even though a particular individual policy maker may not be enriched directly by a decision that s/he participates in, by virtue of her philosophy and her membership in the group that she believes should be enriched it seems that this would be an unideal situation for a just society.

The situation described above is basically the picture that is painted in the film of top-level economists and economic advisers (even in academia). Where suggestions are made and policies are advocated for that serve to continue the Reaganomics idea of trickle down wealth (make the wealthy as absolutely rich as possible, and (the theory goes), the worst off will have their income raised as well). Maybe trickle-down economics works, and maybe it doesn’t, but regardless, do we really want to have a cadre of the wealthy as the principle advisers on the issue? As the category of people who will benefit most directly from the decision, it seems like we should be more suspect of their advice to adopt policies that will enrich them disproportionately but are described as being “for the good of society.”

Well, that’s probably enough for now on regulation, though I’m sure I’ll return to it in the future. These were originally designed as a trifecta of posts regarding The Inside Job with decreasingly removed levels of connection to the content. So now I’m done with that. Next on to something else!

*There an interesting series called The Trap (link is to the first of three parts) by filmmaker Adam Curtis, which has an intriguing thread about the shift in government attitude in the UK under Margaret Thatcher when civil servants started to be characterized as evil/selfish actors who were (and should be) only out for their own self-interest. The response is then to limit the extent of government, completely ignoring the idea that civil servants may actually have been altruistic from the beginning. I’m vastly oversimplifying even this one small aspect of Curtis’ film, but it’s worth the one hour investment if you’re interested…

Dec 6 2010

Inside Job Part 2: Short term journalism gains vs. long term societal gains

The first thoughts I had after leaving The Inside Job were about the style of journalism that it was and the implications for public knowledge about our policy decision makers. The film has elements of Michael Moore-style aggressive interviews (although the interviewer was not on camera and not an identified presence in the film), where the interviewee would be interrupted, contradicted, and often made to look uninformed.

At one point Glen Hubbard (currently Dean of the Columbia Business School, formerly Chief Economic Advisor to the George W. Bush administration) specifically tells the interviewer that it was foolish of him to have agreed to be interviewed and that he will only speak for another three minutes. It’s apparent that several other subjects mirror Glen Hubbard’s sentiments and at least one interviewee tells the crew to turn the camera off prematurely.

In watching these interactions, there’s a part of me that thinks it’s sweet justice (however small) for these former “public servants” who made disastrous choices while serving “our best interests” to be made uncomfortable and to be called out for the impact of their decisions. Concurrently though, I was thinking “wow, that person will probably never agree to be interviewed about this again.”

This lead me to start thinking about the much heralded decline of professional journalism and the sustainability of what is replacing it. I’m not an expert on this by any means, but my understanding is that historically there were journalists who spent their lifetimes developing personal and professional relationships with the important decision and policy makers in the public sector. These journalists could then call on these relationships and also on the general history of what they’d published, or maybe on the credibility of their editors to give politicians and other public servants confidence that they would be treated fairly if interviewed. Under this system journalists are incentivized to be judicious in their treatment of decision makers because they may compromise their ability to interview them in the future.

As full-time professional journalists decline, it seems like more and more of the one-off sensational bloggers, book authors and documentarians are jockeying to take their place.* Many of these media-creators are not fully paid professionals who are limited to any one particular area of coverage. This means that in many ways they have less need for continued access than their predecessors. I was thinking about this as a slash and burn model of interviewing. It’s not a big deal to Michael Moore (and I presume Charles Ferguson) if their interview goes so negatively that the subject (eg Charleton Heston) will never speak to them again, because they’ve already extracted what they wanted (which is often the emotional reaction that their tactics create). To clarify, I do think there are cases where these methods may be in society’s best interest. If a scandal is being exposed, if it’s possible to illicit a confession, or other important discovery during the course of the interview, then it seems better to have done so than not, even if it means the subject will never grant another interview.

What does this mean for society? Well sadly, as this film demonstrates I think that it means that future interviewers will enjoy far less access to public policy and decision makers. (The recurrence of those officials who had declined to be interviewed for the film featured prominently and they also maintain this extensive list on their website).

It may also mean that politicians and public figures will increasingly grant access only to those entities that they believe will portray them positively, such as Sarah Palin’s refusal to appear on any major news network other than the highly conservative Fox News.

In my ideal world part of being a public servant would be that you would need to be available to the public both during and after your tenure, for those decisions that you made which shaped public policy. I’m not sure exactly what form this would take, because I understand that as an official (or afterwards) one has more to do that just answer questions from journalists all the time. But if there’s one message that comes through most clearly in the film, it’s that when you allow people to make decisions that benefit them (or others) in the short term and remove the possibility (or likelihood) that they will be held accountable if the long term effects of those decisions are bad, then you will end up with a system that incentivizes people to take short term risks. This is not what we want our public servants to be doing (or our business leaders if they are receiving or controlling public funds).

Although I agree that exposés and uncomfortable interviews can be entertaining to watch, I worry that the proliferation of this form of reporting will serve in the long run to make public officials less open to the public and this is a result that hurts us all.

*Another unfortunate aspect of the decline of print journalism is the assault on the value of content and most specifically the well researched and documented journalism that’s most important for public understanding of the complex legislation and policies that impact them. I’ve been reading Jaron Lanier’s interesting manifesto You Are Not a Gadget that discusses this more in depth (kind of).

Dec 5 2010

Inside Job Part 1: Meta post on media consumption

This afternoon I saw Charles Ferguson’s new film Inside Job and I wanted to post my thoughts on it. As I was gearing up to do so, I realized that my last several posts have all been about reactions to some kind of media (book, film, etc) and I thought I should talk about that for a minute.

In our modern society I think it’s all too easy to be a passive consumer of media and to have media creators (largely big corporate media conglomerates) heavily influence (to the point of near determination) the content of our thoughts. It’s not as though someone crawls into our head and forces our views to go down one path as opposed to another, it’s subtler than that (and less explicitly nefarious). Rather, I think that there’s a tremendous and under-emphasized importance on impacting the subject (but maybe not the content) of our thoughts.

I remember I used to shop at grocery stores that always had celebrity gossip magazines right at the checkout line, you know the ones that I’m talking about, with Brad Pitt and Tom Cruise on the covers with oversized headlines about who is cheating on who and what diet some female celebrity is on (or off). I have never in my life purchased, perused, or probably even touched one of these magazines and yet for a few minutes every time I was at the store, I would be sucked into the celebrity gossip world while I waited for the cashier to ring up my groceries. My thoughts of celebrity improprieties would generally bleed out into my day for a few minutes after I left the store and maybe even longer depending on what the headline was (it’s pretty hard to forget something like the Lorena Bobbitt case that was plastered on every cover for months). On days that I wasn’t getting groceries I rarely, if ever, thought about celebrities, their personal lives, or the other kinds of things on those magazine covers. So in that way, even though the magazines couldn’t force me to like/dislike a particular celebrity, they could force me to at least think about celebrities for those few minutes a day.

Similarly, if I watch the news and all the discussion is about some trivial thing like the effectiveness of a diet pill on the market, then I spend a few minutes of my day thinking about some aspect of diet pills and not something more substantive (which I don’t realize that the news isn’t covering in order to instead bring me this important update on weight loss).

All of that is to demonstrate my own discomfort with starting sentences off with “I read this article lately that…” or “I saw this movie and…” because I wonder if I’ve changed the subject matter, but not the process by which thoughts enter my brain.

Not to say that there’s anything wrong with consuming media, I just want to make sure that some significant portion of my thoughts are arrived at through reflection, inspiration, discussion, comparison, or experience and not just because someone else thought a subject was important enough that they should create media about it.

In general I think that I, and many of the people that I interact with, have the right basic approach to media which is to take it as a substrate, a possible ingredient to thoughts which will then generate reflection, conversation, and new thoughts (maybe even the creation of response-media). In this way, the cultural dialogue continues…

Nonetheless, I think I will also make a concentrated effort in the near future to post on some thoughts that don’t relate directly to something I’ve read/seen/taken-in lately.

Dec 1 2010

Winner take all politics

Tonight I attended an Alliance for Democracy sponsored talk by Paul Pierson on his new book Winner-Take-All Politics: How Washington Made the Richer Richer- And Turned Its Back on the Middle Class. The talk was pretty interesting. It began with a brief synopsis of the book and then was mainly a discussion about wealth inequality and politics.

Over the last 30 years the share of income devoted to the top .1% has more than quadrupled. In the vernacular of current political science books, we have gone from Broadistan (1900-1970s) to Richistan (post 1970s) with an unprecedented amount of wealth concentrated amongst the absolute richest members of our society. Among economists conventional wisdom states that this is because of technology and globalization. As the world has become increasingly technological, high tech skills become more in demand which necessitates both expensive equipment and also expensive education, which means that those with means begin to separate themselves at an increasing rate. Dr. Pierson argued against this conventional description on several fronts. He pointed out that globalization has been a factor in all nations (and in many moreso than the US, because we have lower trade levels than many developed nations), but that none have seen the same level in inequality that we’ve witnessed here. Also, education alone can’t account for the change, since the vast majority of our most educated Americans do not fall into the top 1% of earners. Rather Pierson believes that the American government since the 1970s has been succumbing to increasing pressure from special (moneyed) interests and has been creating new legislation in some cases, and failing to create legislation in other cases that would have served to curb the increase in wealth inequality.

Part of the problem has been the rampant rise in lobbying over the last few decades. Pierson pointed out that corporations spend far more money on lobbying than they do on elections and that the corporate rule of thumb is that ‘influencing whoever is elected is much more important than electing your favored candidate.’ Lobbyists are able to have tremendous impact because they are extremely organized, persistent, have access to officials and are well funded. Leaving out the funding part (because Pierson didn’t talk much about it), Pierson advised that groups wishing to combat the influence of corporations in politics will need to focus on being organized (think clear, consistent message) and also persistent (exerting pressure consistently, not just during election years, or on specific measures) to be effective.

Pierson attempted to present his position as hopeful, because he does believe that our elected officials can influence wealth inequality and thus improve it in the future (unlike former Treasury Secretary Henry Paulson who believed that “[wealth inequality] is simply an economic reality, and it is neither fair nor useful to blame any political party”). At the end of our discussion however, I didn’t think the audience seemed very hopeful. The status quo seems so entrenched and enriched, it’s hard to imagine the circumstances that would allow for a radical shift.

On my way home, I couldn’t stop thinking about Dr. Pierson’s dismissal of campaign finance reform as a top action item for those of us who are looking for ways that we can help improve our society so I wrote him the following email:

Hello Dr. Pierson-

I was fortunate enough to to attend your talk this evening in Portland and had a follow up thought.

My thought deals with the question I asked you about the asymmetry between lobbyists being able to exert immediate and tangible punishments or rewards to elected officials (eg “We will cease contributing to you if you vote the wrong way on this”) whereas regular citizens can only threaten (or offer) vague and time-delayed indications of votes. You agreed that this discrepancy is a problem, but that with better organization and communication through technology it might be possible to better influence elected officials (through more credible delivery of votes? through more calls/emails to their office?).

I’m writing because as I was biking home from the event I thought I should advocate to you that campaign finance reform should be higher on your list of action items.

I think when that woman asked about campaign finance reform (CFR) you said that it wasn’t at the top of your list because (1) it’s unlikely to happen, and (2) most of the money spent to influence politicians is spent on lobbying and not campaign contributions (correct me if I’m wrong here, I was taking notes and trying to follow the conversation at the same time). I’ll deal with both criticisms, and I’ll try to keep it succinct; I do value your (and my) time.

You’re probably right that significant campaign finance reform is unlikely to happen imminently but as you repeatedly called attention to this evening, it’s an uphill battle for almost any changes to occur in the current climate. I think that CFR is more likely than most issues to be tackled because it has such broad appeal. From the Tea Party to the Green Party, even a significant portion of congress supports reform. We recently had Lawrence Lessig speak (in the same venue a few weeks ago) about his new project Fix Congress First ( and he had some staggering statistics about how many people believe that the fundamental problem with congress is that it’s corrupted by money. There was also the study done with congresspeople which found that their (self-reported) percentage of time spent fundraising was 30-70% and that the majority would like for it to be less. So I think that this could be an issue with legs if there was coordinated effort to bring attention to it. If you were thinking it was unlikely because of the Roberts Court, then I think that there’s still some legislative room for improvement. Although justices have perversely decided that it is unconstitutional to limit the ability of corporations to spend in an election, they have repeatedly indicated that there is a legislative option for publicly financed elections, which in some cases would serve a similar effect. (Tragically, our voter owned election system that we’ve enjoyed for the last 5 years in Portland was voted out in our recent election.)

As for your other point regarding CFR, I wanted to draw attention back to my question about the difference between a lobbyist and a concerned citizen. I think there are some organized grassroots groups that attempt to speak with elected representatives on a variety of issues and convince them to vote a certain way. In my mind, the primary difference is not that a lobbyist is better organized or more persistent (although I’ll concede that in many cases they are both), but is instead that lobbyists are able to reward or punish using large sums of money. Being able to offer a check that will reduce the fundraising burden of a representative is a big deal, and the bigger the check, the bigger the deal. Under the current system, even a highly organized and persistent group who lacks funding will be unable to influence (or possibly even access) an elected official who needs to be generating funds (constantly) for their reelection. If some kind of CFR was enacted that served to magnify the donation power of individual citizens (of limited means) then the challenges of organization, persistence, and education about dry legislative issues would be surmountable. Without CFR, I can’t see how even a group of highly organized and persistent non-professional lobbyists could hope to counteract the moneyed interests.

Thank you for agreeing to come and speak to us. I purchased your book and look forward to reviewing the full-treatment of your argument.

Best wishes
James Ofsink

So we’ll see if he responds (not that I really ask him to). It’s true that I’m looking forward to reading through his book.

In writing this post, I also found this interesting graphic of the real vs: perceived income inequality in America.
Real vs. Imagined US Wealth Distribution

There’s more info on the chart here.