Scandalous Reflections

The news is dominated by two scandals, one each in the public and private sectors. While "sobering" (one of the president-elect's apt descriptors), they are hardly surprising.

Bernie Madoff's asset management business is but the latest Ponzi scheme to fall apart, with the distinction that his fraud operated for at least a decade - a remarkably long duration - and sucked in A-list investors. Financial markets put a premium on cash right now, and undoubtedly the dramatic ebb tide of cash flow over the last three months made Madoff realize the inevitable end was at hand.

The Madoff scandal illustrates the limits of both public and private checks and balances. There are news reports of Madoff being reported to the SEC repeatedly, and yet nothing was done. Sophisticated investors were supposed to do their homework, yet nothing was done by the victims or their advisors. Reportedly some advisors kept their clients away from Madoff, who refused to discuss investment strategy or disclose true financial records. Transparency and accountability would have shortened the fraud's duration, but sometimes enforcing these essential principles requires backbone, forcefulness and fearlessness of being unpopular. And how many humans posess such strengths, either in government or the private sector? Democracy and capitalism are limited in their speed of self-correction by the frequency of human fallibility.

One common sense aphorism I've often used is "if it sounds too good to be true, it probably is." Homeowners and investors alike were lulled into an uncritical stupor by perennially rising asset appreciation. The good times were too good to be true, and now many are paying the price (me included - and I've used the phrase "don't confuse brains with a bull market" many times in the past).

Meanwhile, the Blagojevich scandal is another reminder that greed motivates both public and private leaders. Surprising? Not really. But the next time you hear a gratuitous screed against corporate greed, just reply "What about Blagojevich?" There are no genetic differences between those in the public and private sectors, so we shouldn't be surprised when financial incentives drive behavior, scandalous or otherwise, of public and private leaders.

Democracy and capitalism are designed to have multiple layer of checks and balances driven by financial and other incentives. Sometimes the incentives are mis-aligned (think mortgage meltdown), but sometimes it's just bad actors who bully their way through the levees of checks and balances upheld by mere mortals. No law can entirely overcome human weakness. It is the Sysiphean imperative for all of us to keep our eyes open.

A Good IDEA

My degree is in economics, not political science. Not wanting to re-invent the wheel, I'm educating myself about such things as voting systems. I knew there were lots of options used in the world's democracies - and I just learned about a small organization dedicated to helping democracies choose the right "rules of the game" for themselves. 

The International Institute for Democracy and Electoral Assistance (International IDEA) is an intergovernmental organization that supports sustainable democracy worldwide. Its objective is to strengthen democratic institutions and processes.

International IDEA acts as a catalyst for democracy building by providing knowledge resources, expertise and a platform for debate on democracy issues. It works together with policy makers, donor governments, UN organizations and agencies, regional organizations and others engaged in democracy building.

The US is not a member of this young organization. I hope some day we will be!

Executive Clawbacks

To The Editor, Wall Street Journal:
Carly Fiorina ("Corporate Leadership and the Crisis") recommended clawback provisions for CEOs, which are the right solution to the debate over executive compensation. Successful CEOs should be richly rewarded for great work, but if they've built a house of cards that collapses, they need to give it back. Well-designed clawbacks would not only satisfy the public's need for fairness, they would focus CEOs – and other corporate officers, and boards of directors – on long term performance rather than annual goals tied to compensation.

The devil is always in the details, so I'd like to encourage those focused on corporate governance to develop a "standard American clawback." My two cents: all compensation above what is earned by the President of the United States is subject to a two-year clawback – for example, bankruptcy in September 2008 would mean executives return all "excess compensation" from September 2006 on. Triggering events would include precipitous stock drops, significant layoffs, executive indictments, bankruptcy, and government bailouts. Mitigating circumstances might include popped stock bubbles, CEOs hired for turnarounds, whistleblowers and force majeure events.  All corporate officers and board members would be subject to the clawbacks, including those who have left the company. Clawback proceeds would go to the company in the case of bankruptcy, bailouts or indictments. Terminated employees would share clawback proceeds after major layoffs, and shareholders would receive a special dividend in the case of stock swoons. In no instance would the government share in the proceeds.

If this "standard American clawback" had been in place during 2008, hundreds of corporate executives and board members would be disgorging hundreds of millions of dollars, at times going into personal bankruptcy as a result. And that's exactly the point – we want our corporate leaders keenly focused to make sure this mess never happens again.

Left-Center-Right Sub-species

Wikipedia tells me that the modern American left includes New Deal liberals, Rawlsian liberals, social democrats and civil libertarians.

Conservative classifications include fiscal conservatives, social conservatives, libertarians (who sometimes argue they are neither conservative nor liberal), and the much-maligned neoconservatives. I'm not quite sure yet where the Edmund Burke/Kirk Russell followers would fit.

It would follow, then, that Centrists will include sub-species as well. Utterly speculating here, there might be Pragmatists, Realists, Fiscally Conservative Social Moderates, Poll Reading Straddlers (a brand of politicians, not voters), Moderate Republicans and Conservative Democrats. 

I'm a Fiscally Conservative Social Moderate.  I believe I have lots of company, but I'll need some hard data to back that up. Hopefully some enterprising political scientists have conducted polls that break out these nuances.

Liberal Principles - John Rawls

Wikipedia continues to amaze and enlighten.

I read the entry on Left-Right Politics - it's worth spending some time on to get an historical perspective. It's good to be reminded that our concepts of Left and Right have changed rather dramatically over time, as well as across geographies.

I hyperlinked to the entry on John Rawls after reading this sentence:

The contemporary left in the United States is usually understood as a category including New Deal liberals, Rawlsian liberals, social democrats, and civil libertarians, and is generally identified with the Democratic Party.

Rawls was an important developer of Liberal principles. His primary values appear to be fairness and justice - his principle of Justice as Fairness articulates principels that justify government intervention on behalf of the disadvantaged. 

First, each person is to have an equal right to the most extensive basic liberty compatible with similar liberty for others. 

Second, "Social and economic inequalities are to satisfy two conditions: (a) They are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and (b), they are to be to the greatest benefit of the least advantaged members of society."  

The first of these two principles is known as the liberty principle, while the second half, reflecting the idea that inequality is only justified if it is to the advantage of those who are less well-off, is known as the difference principle.

I'll need to read the primary text before I can adequately respond to these. However, my initial reaction is that it highlights two value trade-offs: fairness versus individual liberty, and fairness versus effectiveness. The Wikipedia entry noted that Rawls was worried about moral hazard in applying these principles to nations versus individuals - that is, unproductive nations would expect to be bailed out by productive nations. The entry is silent on whether worried about moral hazard for individuals, which was a driving principle for the centrist welfare reform of the 1990s. 

Pragmatism

Obama's "pragmatic centrist" appointments, as characterized in the mainstream media, show the typical association of pragmatic the adjective with being a centrist. I didn't realize until I was preparing this post that Pragmatism originated as an American philosophy in the late 1800s by Charles Pierce.

I doubt that most centrists subscribe to a Pragmatist philosophy - or could even understand it for that matter. My brother-in-law has a Ph.D. in philosophy from Yale, and the vernacular used by his brethren quickly makes eyes glaze over. Here's an online definition that is more in line with common usage:

a practical approach to problems and affairs - tried to strike a balance between principles and pragmatism

I'm intrigued that the example given is just what I'm trying to describe for centrists - stiking a balance between principles and pragmatism, which by being shown in this example as being a contrast to principles, thus falls outside the realm of centrist principles per se.

Lawyers, Mediators and Centrists

My younger daughter Mary finishes the Semester Intensive program at Kripalu Institute this week, and last night we talked at some length about similarities between centrism and yoga (Kripalu is "Yoga University" in North America).

One of her insights is that American politicians are mostly lawyers, who are trained in advocating one side or another in adversarial circumstances. This may account for politicians' propensity to argue for the extremes and go for the win rather than searching for middle ground, as mediators often do. While some lawyers are trained to be mediators, we both guessed that most lawyers are not.

I've thought in the past that mediation training would benefit all of our newly-elected officials. As I don't know the specifics of what that really means - how are mediators trained? - I'll put that idea on the back burner for further research. However, a quick look at the Wikipedia discussion of mediation makes me think that the "muscular middle" I'm trying to define is different from mediation - which is "a neutral third party who has no enforcing powers." I'll speculate that mediators' communication skills would help build balanced centrist policies, but effective centrist leaders need to wield power advocating specific (not neutral) points of view.