Saving us from the credit industry

There has been a lot of discussion lately about the need for more regulation of hedge funds and investment banks to prevent another credit crisis from even further damaging the U.S. economy.

But what about another, potentially even darker side of the credit industry–those unscrupulous mortgage, credit card, and other lenders who are slowly drowing the middle class in America in a sea of unpayable debt?  In Making Credit Safer, Elizabeth Warren makes a persuasive case that more regulation is desperately needed in that arena as well.

Warren, a Harvard Law School professor, notes that it is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house.  But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street.

In addition, while it is impossible for the seller to change the price on the toaster once you’ve bought it, your credit-card company can triple the price on the credit card you used to finance your purchase, even if you meet all the credit terms.  Products sold in America are regulated by the Consumer Product Safety Commission, but credit products “are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets,”  Warren writes.

Americans turned over $89 billion in fees, interest payments, added costs on purchases and other charges associated with their credit cards.  As Warren notes, that’s $89 billion that didn’t go to new cars, new shoes, or any other goods and services.  And not all of these costs are measured in dollars.  There is also the anxiety and shame that accompany Americans struggling with debt.

Warren makes the case that foolishness and profligacy on the part of those in debt doesn’t explain the entire problem.  Lenders, she notes, “have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt.”  Credit card interest rates often hover around 30 percent, while so-called Payday loans can have interest rates of nearly 500 percent.

The average credit card contract has become an incomprehensible morass of clauses that culminate, in one case, in the statement by one prominent credit card company that, “We reserve the right to change the terms at any time for any reason.”  Then there are the “yield service premiums” or YSPs that mortgage companies pay to brokers who steer families into high-cost, teaser-rate mortgages.  These YSPs helped drive the wild selling, Warren says, that led to the collapse of the subprime mortgage market.

Congress, under the pressure of the mortgage broker industry has done little so far to curb these abuses.  And the traditional state role in regulating credit card interest rates has been usurped by federal legislation that allows lenders with federal bank charters from locating in states such as Delaware and South Dakota that allow them to export uncapped interest rates.

Warren suggests it’s time to create a Financial Product Safety Commission (FPSC), which would be charged with reviewing new credit products for safety and requiring modification of dangerous products.  It would evaluate mortgages, credit cards, car loans and other forms of credit and review such things as unlimited and unexplained fees, inordinately high interest rates increases, and claims by issuers that they can change the terms after money has been borrowed.

Interestingly, the Federal Reserve and other regulatory agencies have just proposed regulations to limit some of the most egregious credit card practices.  Similar prohibitions against excessive fees and interest rates have been proposed in Congress by Sen. Christopher Dodd, D-CT, and Rep. Carolyn Maloney, D-NY.   Hilariously, the banking industry is fighting the move and saying it will hurt consumers.

All of this sounds like a great start, although I wouldn’t get my hopes up that any of it will make more than a small dent in the credit problem in America.  It’s not clear from Warren’s article, for instance, whether she believes the FPSC would have power to do more than evaluate and make recommendations about unscrupulous and dangerous credit practices.  And as she also points out:

Unfortunately, in a world in which the financial-services industry is routinely one of the top three contributors to national political campaigns, the likelihood of quick action to respond to specific problems and to engage in meaningful oversight is vanishingly slim. 

A selective account of de-Baathification in Iraq

I’ve just read My Year in Iraq, L. Paul Bremer’s account of his management of the first year of the American occupation.  And what stood out about the book for me, other than the deadliness of the accounts of the endless inconclusive meetings, were the omissions and often erroneous details provided about what may have been Bremer’s most momentous and controversial decision: his de-Baathification orders.

Much has already been written about Bremer’s first two orders as head of the Coalition Provisional Authority in Iraq.  CPA Order No. 1 led to a wholesale purge of Saddam Hussein’s Baath Party members from Iraq’s government ministries and industries.  Order No. 2 dissolved the Iraqi military.  Many comentators have rightly pointed to these orders as critical mistakes in the U.S. occupation because they helped start the insurgency, which has caused so much havoc and death and destruction to American troops and Iraqis alike.

Little appears to have been said, though, about the contradictions and apparent mistatements in Bremer’s attempt to defend his de-Baathification policies in his book.

First of all, as Rajiv Chandrasekaran points out in Imperial Life in the Emerald City: Inside Iraq’s Green Zone, his book about how we screwed up the post-war reconstruction effort in Iraq:

While the [Baath] party did have plenty of thugs, many of Iraq’s most capable scientists, engineers, and other professionals also belonged. To gain admission to the best colleges and graduate schools, to get a coveted government job, to get a promotion, you had to be a member. If you excelled at your job, you might be promoted into the party’s upper ranks, even if that was not something you sought. Turning down a promotion could get you fired or sent to jail.

In his book, Bremer seems to aknowledge this reality, saying that the CPA “had no gripe with” people who had joined the Baath Party to get a job or because they had been coerced into doing so.  He notes:

Our concern was only the top four levels of the party membership, which the [de-Baathification] order officially excluded from public life. These were the Baathist loyalists who, by virtue of their positions of power in the regime, had been active instruments of Saddam’s repression.

What Bremer never explains is why CPA Order No. 1 actually went beyond those four levels of party membership to prohibit rank and file Baath Party members from holding positions in the top three layers of management in every national government ministry, affiliated corporations and other government institutions.

Bremer, by the way, doesn’t even discuss in his book the history of the dispute between the State and Defense departments over how deep the purge should go or the more lenient NSC-brokered compromise that President Bush reportedly agreed to.

Bremer says he explained to his staff that the White House, DOD, and State had all signed off on CPA Order No. 1.  But Chandrasekaran’s book says that neither Rice nor Powell were ever shown a copy of the order. Moreover, Bremer doesn’t mention that both Jay Garner, whom Bremer succeeded in managing the occupation, and Stephen Browning, an engineer in the U.S. Army Corps of Engineers who was tapped to head four ministries, had come to him to personally object to the order as too harsh.

Chandrasekaran describes Garner as as saying to Bremer: “You’re going to drive 50,000 Baathists underground before nightfall.  Don’t do this.”  Browining objected that Baathists were “the brains of the government…,” without whom the CPA would have “a major problem” running most ministries.  According to Chandrasekaran’s book, Bremer responded tersely that the subject was not open for discussion.  Apparently, none of this was open for discussion in Bremer’s book either.

Bremer further doesn’t note that the CPA began to receive reports that 10,000 to 15,000 teachers had been fired as a result of Order No. 1. They were level-four party members who had joined because they were told to do so by the Ministry of Education, according to Chandrasekaran.  Entire schools were left with just one or two teachers in some Sunni-dominated areas.

Bremer later lays the blame in his book for the teacher firings on the Iraq Governing Council’s implementation of his policy. “This went well beyond the intent of our initial policy. Iraqi children were paying the price…,” he writes.  Maybe, but the order certainly set a tone for the Council.

Finally, Bremer appears to completely misjudge the impact of his de-Baathification decrees, saying of Order No. 1:

On the plus side, the reaction of the Iraqi people to the de-Baathification decree was overwhelmingly favorable. Literally hundreds of times over the next fourteen months I would hear that Order No. 1 was the single most important step I had taken as administrator…”

Somehow Bremer doesn’t appear to realize that “with the scrawl of his signature,” as Chandrasekarn put it specifically in describing Order No. 2, “he (Bremer) created legions of new enemies.”

We’re halfway through the credit crisis

We’re about halfway through the current mortgage credit crisis, and it will take a combination of self-discipline from the financial markets and government intervention and regulation get us the rest of the way through it.

That’s the message I took from Robert R. Glauber, a former chairman and CEO of the National Association of Securities dealers, who discussed the origins of the crisis and  what needs to be done to end it, in a seminar at the Harvard Kennedy School last week.  Glauber described the credit crunch as “an accident waiting to happen.”

He noted that housing prices have dropped 10 percent in the past year and are projected to drop another 10 percent until possibly well into 2009.  Mortgage delinquencies will continue.  Projected losses due to defaults in the subprime mortgage market could reach $300 billion.  But Glauber doesn’t think it will end there.  Another $200 billion in defaults on commercial real estate loans are likely among other losses.

He compared the “credit bubble” to the “dot-com” bubble of the late 1990s.  In both cases, Wall Street had “manufactured” companies as investment opportunities.  In the current crisis, hedge funds invested in mortgage securities.  Regulators allowed investment banks to create highly leveraged, off-balance-sheet investment mechanisms that were built on subprime mortgages.  It was a natural thing to do because there was a trillion-and-a-half dollar supply of those mortgages around.  This created a housing bubble, which started to collapse at the beginning of 2007.

How will it all end?  Two things have to happen, Glauber says: One, the markets, aided by government, have to stop the downward spiral of contracting capital markets.  The feds have started this to some extent by lending to investment banks.   Glauber termed it a “major step” in easing fears among banks and investors.

Secondly, investment banks have to write down their assets and raise new capital.  The problem is that the banks are reluctant to take that second step.  They’ve gone about halfway, but they are waiting for the cost of capital to bottom out.  

Meanwhile, the U.S. Treasury has proposed a “Blueprint” for tighter regulation of Wall Street, including standards for mortgage participants and the first ever regulation of hedge funds and private equity funds.

Thus far, Glauber said, the markets haven’t done a very good job in policing themselves.  The question is how much additional regulation will be needed to supplement market discipline.  That regulation can range from information gathering to systemic controls on investment banks and other mortgage institutions.  Glauber suggested that the line should be drawn between institutions that are federally insured (they should have more regulation) and those that aren’t (not as much regulation needed).

Glauber also acknowledged that part of the reason for the mortgage crisis involves a conflict of interest on the part of ratings agencies such as Standard & Poors, Moody’s, and Fitch, which investors relied on to rate mortage-backed securities.  Those ratings agencies are paid by the issuers of the securities to rate them.  But the conflict may not explain the whole thing.  The argument can be made that the magnitude of the mortgage defaults have turned out to be so massive and unprecedented that the ratings agencies could never have predicted it.  Even if the ratings agencies had considered the the most dire data they had on the securities they were rating, they would have missed the crisis by a factor of three, he said.

 

Why can’t we get the cost of building our infrastructure right?

Is it just everyone’s imagination, or does just about every large public construction project ever undertaken end up costing signficantly more than expected?

A number of researchers say we’re not imagining things.  In fact, says one, project promoters consistently lie about what their proposed projects are likely to end up costing.

In a 2002 paper in the Journal of the American Planning Association titled  “Underestimating Costs in Public Works Projects: Error or Lie,” Bent Flybvjerg, M.S. Holm, and S. Buhl, reported on the results of a review of 258 public transportation infrastructure projects around the world worth $90 billion.  They found that costs had been underestimated prior to completion in 9 out of 10 of those projects, and that actual costs were 28 percent higher on average than estimated costs.

They also found that no learning appears to have occurred over the 70-year period of the projects they examined.  Cost underestimation has continued in the same order of magnitude over that time.  “Project promoters routinely ignore, hide, or otherwise leave out important project costs in order to make total costs appear low,” they wrote.

In a followup paper in 2005, “Policy and Planning for Large Infrastructure Projects: Problems, Causes, Cures,” Flyvbjerg maintained that these cost understimation problems apply to a wide range of other project types including power plants, dams, water projects, concert halls, museums, sports arenas, convention centers, IT systems, oil and gas extraction projects, aerospace projects, and weapons systems.

The policy implications are clear, Flyvbjerg argued: Lawmakers, investors, and the public can’t trust information about costs, benefits, and risks of large infrastructure projects produced by promoters and planners of those projects. The current way of planning large infrastructure projects is ineffective and leads to bad investments. And there is a strong need for reform in policy and planning for large infrastructure projects.

Among the projects Flyvbjerg cited as having large cost underestimation and overestimations of benefits were Boston‘s Big Dig, in which costs rose from $2.8 billion to $14.6 billion in constant dollars; Denver‘s $5 billion International Airport, in which costs were close to 200 percent higher than estimated; the cost overrun on the San Francisco-Oakland Bay Bridge retrofit of $2.5 billion, or more than 100 percent, even before construction started; the Channel tunnel between the UK and France, which came in 80 percent over budget for construction and 140 percent over for financing; the $4 billion cost overrun for a Pentagon spy satellite program and the over $5 billion overrun on the
International Space Station. He cited many others as well.

Some megaprojects become so large in relation to national economies, he noted, that cost overruns and benefit shortfalls from even a single project may destabilize the finances of a whole country or region.  Flyvberg pointed out that technical, psychological, and political reasons have been advanced to explain the cost underestimation problem.  The psychological explanation is sometimes referred to as “optimism bias,” a form of self deception.  The political explanation is that project planners purposefully underestimate project costs in order to get approval for their projects—in other words they lie about the costs.

Flyvbjerg contended that the explanation that planners purposefully lie is the best explanation for the data.  Optimism bias would disappear, he argues, after people estimating costs and benefits became experienced and began drawing on the knowledge and skills of more experienced colleagues.

But Flyvbjerg seems to discount the possibility that many of these people don’t have the opportunity or inclination to draw on the knowledge and skills of others.  If those people with knowledge and skills were consistently hired for these projects, then what Flyvbjerg is saying would certainly be true.  But it may well be the case that projects are often begun with inexperienced analysts and managers.  It’s not that they necessarily are lying about costs and benefits.  It’s just that there is no opportunity or inclination to learn from others and that idealism and ideology take over.

Why is it that presidents continue to make unsupported presumptions about the projects and situations they face that lead them into trouble without seeming to learn from the experience of those who came before them?  Those presidents may not always be purposely deceiving others in underestimating the risks of political events and undertakings. They may truly be deceiving themselves because they often don’t ask key historical questions and learn from past events.

Flyvbjerg maintained that the profession of forecasters would indeed have to be an optimistic–and non-professional–group to keep their optimism bias throughout the 70-year period his study covered for costs and not learn that they were deceiving themselves and others by underestimating costs and overestimating benefits.  It’s not a credible explanation, he concluded.  I’m not so sure.  I think this may be exactly what often happens.

 

 

The patient loses: a whistleblower’s experience

[Guest post by Mike Gordon jgordon30@msn.com]

I have been a Respiratory Therapist for 19 years. I have seen hospitals try to increase productivity to unsafe levels, even though there is a Medicare mandate to have adequate staff.

I was the only therapist on at night at one hospital. Things were not right.   I entered into the Kansas Human Rights mediation process and cannot discuss the case further.  I can tell you that if you say something is not right and leave notes, those notes can be used against you. I am living proof.  Retaliation is very real in healthcare.

Mediation was the only way for me to get to work in another state.  But the state medical boards would not give me a license until this mediation was resolved, which meant if I didn’t go along with the mediation, I couldn’t work at the only job I have done for 20 years.

You want medical retaliation. Try this: The Joint Commission will not investigate, state medical boards will not investigate, which means there is no one to complain to.  The hospital really can say anything they want and you have no defense.  When I heard the airline whistleblowers on CSPAN, I heard what happened to me.

Management must use the same playbook. The Kansas Human Rights Commission is “not favorable to employees” is what I was told.  So I got what I could and will try to move on.

Want a really nice Catch 22?   I’m terminated for bringing up wrong things, and the Medical Board, Joint Commission, and CMS all refuse to investigate.  I try to go to another state to work.  A second hospital hires me, lets me work 90 days, and fires me for not getting a full license.  The Oklahoma Board stops me from working further. (Their reasons keep changing.)  I am told they said something different to this Board.

To those who try to use mediation, don’t think the charges against the employer will be the only items used in mediation.  Don’t expect to be believed.  I had convincing proof, but it wasn’t enough.  If all state human rights commissions are operated like the one I used, then they need to be shut down. I thought I was going to get help.

Don’t expect real reforms in the way treatment loads are handled and in interaction between the sexes.  Not to mention how different disciplines interact.  When the physicians, nurses, and therapists all have their own agendas, the patient has been left out and that’s one way that bad things happen to good patients.  As long as physicians see the hospital experience as one of “write orders and call me in the morning,” the patient loses.

As long as nursing only cares for their part–”call Respiratory because they don’t want to deal with the patient” –or they enjoy calling Respiratory to lord over them (some hospitals will fire you if don’t play a nurse tech role), or they are too incompetent to know when a patient is going bad, or they misuse the physician order to call for every little thing, then the patient loses.

For a Respiratory Therapist, you are really caught in the middle. You are given the maximum amount of work to do, expected to find time for all the emergencies that occur during the shift, and try to survive for another day. The patient loses in so many ways.  You can’t fix a patient when three other nurses are calling you and the ER calls.

You can only do so much.  The hospitals use consultants to cut staff.  The hospitals are becoming a production line and the patient is the product. There is no quality control inspection process like there is for the airlines. The patient loses.

Why have a doctor order something I don’t have time to give?  Then the nurse orders therapy.  Most of time, the patient doesn’t need what is ordered and then I have to try and get the proper order.  What does that patient need? Do I have time to give that therapy?

Into this mix is a management that only wants productivity, not patient care.  It is very complex and you feel good when things go well, but this is happening less and less.

Have we ruined Iraq’s economy yet?

The Bush administration has transformed failed nation building into an artform.  

Here are some of the nation-building principles that the administration has used: 

First, you rush in to the situation with a pre-set ideology—e.g., free-trade policies and privatization are the answers to the country’s problems—that blinds you to all alternative options and objectives.  You do not listen to pleas for caution or reason, especially when it comes from people with knowledge and experience.  For that very reason, you are careful not to employ anyone with knowledge or experience.  Better to have people around you who share your ideology and your political party affiliation.

You do not make any effort to understand the history of the country you are rebuilding or the political, societal, or economic aspirations of its people.  Remember, not knowing anything about them allows you to know what’s best for them.  Moreover, you do not do advance planning for your nation-building project, and if there are any plans kicking around, you must do your best to keep everyone in the dark about them.

Other important principles include:  Do not give contracts to companies indigenous to the country you are rebuilding or to any firms with knowledge or experience in the areas in which you are seeking their help.  Give out contracts to politically connected friends and political contributors to the president.  Make sure those contracts are cost-plus, and do not attempt to monitor the companies’ performance or audit their use of the funding they get.

The results have been predictable.  As Naomi Klein has pointed out in her book, The Shock Doctrine: The Rise of Disaster Capitalism:

(L. Paul) Bremer was sent to Iraq to build a corporate utopia; instead, Iraq became a goulish dystopia where going to a simple business meeting could get you lynched, burned alive or beheaded.

A clear step-by-step account of how the U.S. has implemented these principles of failed nation building can be found in the book, Imperial Life in the Emerald City: Inside Iraq’s Green Zone, by Rajiv Chandrasekaran.

The key ideological assumption that Bremmer and his staff had regarding Iraq was that there was an imperative to impose free-market reforms and privatization in the country and to do it quickly. 

There were those who understood that there were problems with that approach.  One was Timothy Carney, who had been recruited to advise the Ministry of Industry.  Carney agreed it made no sense for the Iraqi government over the long run to own all the factories.  But “Carney figured the decision of what to sell, when to well, and for how much rested with the Iraqis.”

Glenn Corliss, a member of Carney’s team, was another who advocated caution.  He had worked for Fidelity and JPMorgan and had specialized in restructuring businesses.  As Chandrasekaran notes, Corliss worried that the sale of factories to private investors would result in layoffs.

That view wasn’t shared by the neocons in the Bush administration, including Bremer, who wanted fundamental economic restructuring of Iraqi society.   Had Bremmer, the neocons, their consultants etc. been aware of Iraqi history and its current society, they would have realized that unemployment was indeed a key concern throughout Iraq, even among those who were glad that Saddam had been toppled. 

Before Saddam fell, government jobs in Iraq had been plentiful and guaranteed people a salary for life.  While salaries were low, the cost of most goods and services was subsidized by the government.  Every family received monthly food rations from the state.  Education, even college, was free, and so was health care. 

Most Iraqis were particularly concerned about unemployment in the days after Saddam’s government was toppled.  They were also wary of foreign ownership of domestic businesess and privatization of the oil industry, in particular.  But Bremmer et al. didn’t heed those viewpoints either.  One of Bremmer’s key aides, Peter McPherson,  told Chandrasekaran: “We need to shrink government employment, not increase it.”

McPherson, on leave of absence as president of Michigan State University, also advocated a “clean-slate” approach to debts and assets held by Iraqi companies.  Partly because those companies had largely all been looted and their financial records were either missing or un-auditable,  McPherson reasoned that all debts and assets of those companies should be nullified.  Corliss, however, knew this approach would simply penalize the stronger, more valuable companies, and benefit “the dogs that you got to take out back and shoot.” 

McPherson also had another interesting theory that as inefficient state companies shrank or went out of business, imports and new private firms would flourish.  He termed the theory “shrinkage,” and he went so far as to suggest that looting was a much-needed form of shrinkage because the theft of government property promoted private enterprise.  McPherson persuaded Bremer to eliminate import duties and slashed Iraq’s top tax rate for individuals and businesses from 45 percent to a flat 15 percent rate.

But as Chandrasekaran noted, the predicted foreign investment in Iraq has never materialized. 

Do companies do well by doing good?

Three academic researchers have produced the most comprehensive review to date of 35 years of studies on a question that seems to have become more timely and pressing than ever—do efforts by corporations to benefit society also benefit their bottom lines?

A draft version of their paper, “Does it Pay to be Good?”, by Joshua Margolis, Hillary Anger Elfenbein, and James Walsh, can be found on The Economist website and has been discussed in The New York Times.  Margolis said the authors are continuing to revise the paper.  Last year, Margolis asked me to hold off in posting a blog entry about the paper, but yesterday he extended permission to cite the paper and post this blog entry.  He said he hopes to have an updated version of the paper by May.

The authors have so far produced an analysis of 167 studies, and concluded that, in general, these studies found there was a mildly positive relationship between corporate social and financial performance.

So, what does that really mean?  The attention to that question is the real strength of this analysis.

First of all, the authors note the stakes involved in the three decades of research they reviewed:

If only doing good could be connected to doing well, then companies might be persuaded to act more conscientiously, whether in cleaning up their own questionable conduct or in redressing societal ills….A positive link between social and financial performance…would license companies to pursue the good…

In 1970, they note that Milton Friedman laid down the gauntlet by criticizing any firm that made so-called socially responsible investments, arguing that such activities amounted to theft from the shareholders.  As a result, at least 167 studies have been conducted since 1972 to study the effect of corporate social performance on corporate financial performance, and there have been 16 reviews of this research.   Margolis et al. are the first to offer a comprehensive appraisal of all these studies, and to suggest an entirely new path for future research.

They found that most of the 167 studies did not find statistically significant relationships between corporate social and financial performance.  Yet, certain conclusions can be drawn from the studies, among them that companies do not appear to suffer financial harm due to socially responsible investments.  Only 2 percent of the studies reported a significant negative effect on financial performance in undertaking socially responsible activities.   This appears to negate Friedman’s warnings that companies that undertake these activities will destroy shareholder value in the process.

As the authors put it:

Companies can do good and do well, even if companies do not always do well by doing good.

And, on the negative side, companies that act irresponsibly and are caught, often suffer costly consequences.

Yet, the authors also note that the studies have shown that the next marginal dollar spent on a socially responsible investment is not necessarily going to provide as great a financial return as other types of investments.  Therefore, there should be reasons other than just the potential financial benefits for pursuing corporate social performance.  Those conclusions would seem to jibe with those of David Vogel, author of “The Market for Virtue,” who has argued that Corporate Social Responsibility initiatives are an “insurance premium” for businesses rather than a consideration at the core of a business’s processes.

In fact, Margolis et al. suggest that the studies they reviewed show corporate social performance is a legitmate activity that may not produce hugh financial returns; and yet, companies ignore it at their own peril.  The authors cite the case of Wal-Mart, which found its investment plans disrupted because its corporate and marketing policies generated so much opposition.

The authors further conclude that one of the most under-explored effects of corporate social performance is whether those policies actually result in measurable benefits to society as a whole.  And they suggest that it may now be time for researchers to stop trying to find a causal link between corporate social performance and corporate financial performance, and turn their attention to three possible questions for future research:  1) why do firms pursue corporate social performance?  2) how do they go about it? and 3) how can they pursue both corporate social performance and corporate financial performance at the same time?

In other words, the question shouldn’t be: do firms do well by doing good, but rather, how can firms do good and do well at the same time?

Iraq and the Bay of Pigs

Looking back on this five-year anniversary of our occupation of Iraq and its catastrophic cost in American and Iraqi blood and treasure, one can only hope that our future leaders draw some lessons from it.

But will they?

Whoever among the three remaining candidates is elected president in November, he or she might start by reading a book that I’m pretty sure George W. Bush never read.

That book, Thinking in Time: The Uses of History for Decision Makers, by Richard E. Neustadt and Ernest R. May, was published in 1986.  Its recommendations remain timely and common sensical, particularly the central recommendation that presidents should carefully examine the historical and political presumptions on which they base their decisions. 

Had Bush, Cheney, and Rumsfeld read Thinking in Time after 9/11 and taken its recommendations about presumptions seriously, it seems to me we wouldn’t be in the mess we’re in today in Iraq.  They might, first of all, have come to realize that some of their presumptions about Iraq resembled presumptions in the Kennedy administration that led to the disastrous Bay of Pigs invasion in Cuba in 1961.

Neustadt and May conclude that the Bay of Pigs was perhaps the classic case of unexamined presumptions by American presidents.  One of those presumptions that Kennedy and his advisers held was that there would be prompt uprisings against Castro throughout Cuba once the Cuban exiles who were recruited for the invasion landed on the beach there and proclaimed a rebel government.

There were high-level officials within the CIA who would have scoffed at the notion that the Cuban population would have welcomed the American-sponsored invasion.  But Neustadt and May note that Kennedy wasn’t even aware that the organizers of the invasion had walled themselves off from colleagues who might have challenged their presumptions.  They add that most of those whose comment or advice Kennedy asked were too inhibited to question his underlying presumptions or to spell out theirs.

The Kennedy administration’s presumption that the Cuban people were waiting for deliverance from Castro in the form of American-style democracy may have been more far-fetched than the the presumption of the Bush administration 40 years later that the Iraqi people were waiting for the Americans to deliver them from Saddam Hussein.  Hussein was a far more despotic ruler than Castro.  But the Bush administration was equally wrong in assuming that American-style democracy would be welcomed with open arms in Iraq.

As Rajiv Chandrasekaran notes in his own 2006 book, Imperial Life in the Emerald City: Inside Iraq’s Green Zone, Bush and his advisors, and some top officials in the Pentagon, also wrongly presumed that the Iraqis would “quickly undertake responsibility for running their country and rebuilding their infrastructure.”

Chandrasekaran further points out that there was little coordination in pre-war planning between the State Department and the CIA or even with post reconstruction experts within the Pentagon, and there was “an aversion to dwelling on worst-case scenarios that might diminish support for the invasion.”

Neustadt and May contend that presidents facing difficult decisions should:

…pause to define their concerns.  They should take precautions to avoid being misled by analogies of one stripe or another.  Then to the extent possible, they should try to see their concerns in historical context…

The invasion at the Bay of Pigs was clearly not directly analogous to the invasion of Iraq.  There were many significant differences between the two events.  But it seems that had Bush, Cheney et al. stopped to “see their concerns in historical context” before acting, they might have realized they were basing their projections about the aftermath of the Iraq invasion on some very faulty presumptions.

Vogel: The business case for corporate responsibility will always be about to be proven

In 2005, David Vogel, a professor at the University of California, Berkeley, wrote a book called The Market for Virtue, which concluded that the corporate social responsibility movement had only a limited potential to bring about significant change in the way companies do business.

In a seminar last week at the Kennedy School of Government, Vogel didn’t change his message much.

Corporate social responsibility (CSR) is alive and well by every possible dimension, he conceded.  There has been an expansion in private codes of ethics; and private, voluntary regulation—so-called soft regulation—has expanded significantly.  It’s all very encouraging, but what does it mean?  Are companies behaving more responsibly?  It’s very difficult to say because the boundaries of what constitutes CSR keep shifting and companies are multifaceted, Vogel maintained.

British Petroleum, for example, has been applauded for addressing climate change issues in its business policies, but has been criticized for oil spills in Alaska, he noted.  Merck has been praised for providing drugs to cure river blindness disease in Africa, yet criticized for marketing Vioxx.  Exxon has an exemplary health and safety compliance record regarding its own employees, but hasn’t been good on global climate issues.

In the financial sector, the subprime loan mess has eclipsed much of the progress made along corporate responsibility indexes.  The fact is that while the risks and opportunities of CSR have become more important to managers in recent years, their importance relative to other business processes have not increased, Vogel argued.  CSR is an “insurance premium” for businesses, rather than a consideration at the core of a business’s processes. 

Yet, Vogel acknowledges, there remains an irresistable attractiveness in the concept of CSR and the belief “that you can make money and make the world a better place.”  The problem, he maintained, is that “the business case for CSR will always be about to be proven, but will never be proven.”

One thing that has changed about CSR is the relative importance advocates place on public policy and government regulation.  In the recent past, there was a view that government had become irrelevant as an actor in the sphere of social responsibility, but that view is now seen as naive and there is an awareness that there are limits to CSR.  Global climate change is an example.  Without government regulation and support, companies are not going to make the investments needed to begin to address that problem, he maintained.

Vogel disagreed with a comment from a member of the audience that CSR initiatives continue to be hampered by the “command and control” nature of government regulation.  “I like command and control,” he said, pointing out that advances since the 1960s in clean air, civil rights, and consumer product safety in this country have been the result of command-and-control government intervention and regulation.

Yet, Vogel was sanguine about the potential for government to resume its former pre-eminent role as a regulator of the corporate sector, arguing that government’s role in that regard constantly fluctuates.   I’m not sure I agree with him there.  It seems that since the Reagan years, there has been a long and steady slide in the political willingness in this country to use government in that command-and-control function.  The trends seem largely to have been downwards, and I’m not sure there’s a clear consensus for a reversal in the foreseeable future.

Private militias and their accountability

Michael Walzer, a contributing editor to The New Republic, writes in the current issue of the magazine about the use of private militias and mercenaries in Iraq and elsewhere, and concludes it’s “mostly a bad idea.”

Walzer points to Max Weber’s definition of a state as holding a monopoly on the legitimate use of physical force within a society or territory.  And he adds that:

It is a very dangerous business to loosen the state’s grip on the use of violence, to allow war to become anything other than a public responsibility.

But that is exactly what has happened in Iraq.  To be fair, the current Bush administration didn’t pioneer the use of privately run militias for security and other jobs that the administration wasn’t willing or able to order its own troops to do.  Walzer notes that during the wars over the former Yugoslavia, then President Clinton permitted a private U.S. firm to train Croat soldiers in fighting the Serbs.  But might it have been better, he asked, if Clinton had gone to Congress and laid out the argument to use American troops to help the Croats?  Using private soldiers “makes policy invisible,” he notes.

Well, maybe not so invisible when those private soldiers start killing civilians, as Blackwater USA guards did when they fired into a crowd last September in Baghdad.

As Walzer points out, soldiers get out of hand at times as well, sometimes for similar reasons, including a lack of adequate training, equipment, and support.  But that, he says, “is the result of political decisions, not market processes.  And, for such decisions, we know whom to hold accountable.”

And it’s not just politicians who are held accountable when soldiers get out of hand, it’s the soldiers themselves.  As Walzer notes, solders are trained to fight in accordance with a code of conduct enforced by military courts, which in turn are overseen by civilian courts.  By contrast, security companies in Iraq operate under a voluntary, and unenforceable code of conduct.  Moreover, in an administrative law imposed by Paul Bremmer in 2004, guards are immune from prosectuion in Iraqi courts.

It remains, unclear, Walzer says, whether contractors can be tried by military courts.  They can theoretically be brought back to the U.S. for trial in federal courts.  But while there are some 100,000 American contractors in Iraq, not one has been prosecuted for an act of violence.

Violence by private militias is only one of the accountability issues raised by the government’s increasing use of private contractors in Iraq.  The government is simply unable or unwilling to adequately monitor a wide range of activities of private contractors, from reconstruction efforts to interrogations of suspected insurgents.   The result is not only unplanned violence, but general mismanagement, shoddy construction, and poor delivery of services. 

But there’s no doubt as why the use of private contractors holds such appeal to so many administrators in government.  As Gilmour and Jensen have pointed out:

…if private actors are not subject to the rules set for government action, delegating authority to private parties may allow the government to do through them what it cannot do itself.