But this old-fashioned form of porkbarrel spending (roughly $20 billion each in the House and Senate Bills), as much as it needs to be controlled, is now being dwarfed by the new Bush version of patronage: outsourcing. As an article in this month’s Vanity Fair describes, this new form of patronage is not just tens of billions but hundreds of billions. This makes it’s scale totally different from ordinary porkbarrel projects:

To get some idea of the scale: contractors absorb the taxes paid by everyone in America with incomes under $100,000. In other words, more than 90 percent of all taxpayers might as well remit everything they owe directly to SAIC or some other contractor rather than to the IRS.

You undoubtedly have heard of Halliburton which, according to Congressman Waxman’s committee, has received contracts valued at an estimated $25.7 billion for its work in Iraq - and which is now moving its headquarters from Houston to Dubai. But have you heard of SAIC (Science Applications International Corporation) which has a workforce of 44,000, has been awarded more individual federal government contracts than any other private company in America (currently 9000), and has more than a hundred contracts worth more than 10 million apiece? Prior to the war, SAIC was awarded seven contracts, together worth more than $100 million, without competitive bidding.

But the issue is not simply the waste of money. There is also the danger that the federal government has allowed internal government experience to waste away in the process. As described in an editorical in today’s Wall Street Journal, “the number of private federal contractors has soared to 7.5 million, four times bigger than the federal civilian work force itself . . .” As anyone who has hired a consultant knows, even when consultants are honest and knowledgeable, they cannot make up for a lack of in-house expertise.

In the past few decades, however, the public has become increasingly impatient with partisan politics - for good reason. While politicians have been attacking each other, fighting highly emotional battles over symbolic issues of little real substance, undermining or reversing whatever progress had been achieved by the other party, they have been doing little to address a mounting list of serious long-term problems that face this nation. These problems - which include declining economic competitiveness, an educational system that is failing our youth, a mounting national debt, exploding health care costs, a trade deficit, a growing technology deficit, and global warming - remain ignored or inadequately addressed because such problems require political agreement and long-term cooperation, two things that our current system of politics cannot provide.

A New Economic Environment That this is happening now is no accident. It follows from the fact that we have just passed through one economic era (based on mass production) and entered another (driven by innovation and rapid technological change). Under mass production, companies used high volume production of standardized products to compete based on price within national economies. During this period, the public was focused primarily on material goals and advancing the nation’s standard of living while the primary role of government was to regulate the economy and settle disputes between interest groups over material resources. Within this role political conflict was not particularly harmful - in fact, it was used as a means of sorting out who should get resources. Those individuals, interest groups or political parties that pushed the hardest for their interests were rewarded with economic resources in the form of government programs, legislation and/or tax breaks.

Under the new economics, however, all this has changed. Instead of using mass production to compete nationally based on price, companies now use innovation to leapfrog their global competitors with new or essentially new products. This means government has a much different role to play. First, conflict among interest groups is no longer focused on material resources so much as issues perceived as justice, rights, and morality: civil rights, environmental protection, pro-life, welfare, gay rights, abortion. This means our traditional means of settling disputes - letting the groups fight it out and distributing resources and programs to those that shout the loudest - no longer works. Instead it simply leads to endless shouting matches between interests and ideologies. Second, the need for government is shifting from regulation of the national economy to a strategic role of coping with global competition and rapid technological and environmental change. In this role, government must respond much as companies have had to respond: by anticipating future needs, agreeing upon strategies to deal with them and cooperatively working to build the capabilities and systems needed to implement those strategies.

Learning From Business To better understand what is required to fulfill this role, it is useful to review how this new economic era arose. One major piece of this evolved out of the quality movement in Japan just after the war. This story is familiar to most business people: how “made in Japan” went from being synonymous with poor quality to excellent quality; how American quality expert W. Edwards Deming taught Japanese engineers the principles of statistical process control (SPC); how Japanese executives as well as engineers embraced quality with an enthusiasm that had been lacking in the United States; how Deming emphasized the need for top management to establish “constancy of purpose” and Dr. Joseph M. Juran called for top management to establish quality processes and systems throughout the organization; and how the Japanese went on to teach the world how to build quality into manufactured products like automobiles. Out of this emerged the first element of the new competition: by introducing what were essentially new products (products with higher quality, new features and lower prices) ahead of their competitors, the Japanese had changed the nature of competition.

Meanwhile, within U.S. companies, accelerating product innovation was changing their method of competing in a similar way. Emerging initially from the invention of the transistor in the late 1940s, by the mid-1960s, the semiconductor revolution was well underway. Not only had the huge and costly computers given way to the mini-computer by that time, but Gordon E. Moore was prompted to write his famous article describing what later became known as “Moore’s Law,” namely that the number of transistors on integrated circuits was doubling every two years and could be expected to continue. Again, most of us are familiar with the history. Today, computers, cell phones, flat screen TVs, and all electronics continue to get smaller, faster and more powerful.

Although we tend to see process innovation and product innovation as very different things, the effect they have had on competition is essentially the same: they both allow companies compete, not merely by undercutting competitors prices, but by racing them to market with new or essentially new products. Whether it is Toyota, using product and process innovation to repeatedly introduce new model automobiles, or Intel, doing the same with computer chips, this method of competition is very different from that used under mass production.

So what important lessons can be learned from this that applies to the new politics? There are a number of principles and tools now used by business that need to be applied to government and politics: constancy of purpose, systems thinking, a systematic method for defining goals and measuring results, and open systems planning. I expect to touch on all of these eventually. But the one I want to emphasize first is what Deming called “constancy of purpose.” The logic of this comes out of statistical process control in that a process cannot be improved until it is first brought under “statistical control,” meaning that it is subject only to common-cause rather than special-cause variation. More than anything else, this is the reason we need a new kind of politics. If we expect government to ever become reliable - and it has to become reliable if we are to survive the 21st Century - we have to replace decision-by-conflict politics with a new kind of politics that allows us to agree on what long term challenges we face, develop a strategy for dealing with them, and work together on implementation of that strategy.

Stay tuned for Why We Need a Third Party: to give politics constancy of purpose.

© 2007 by Centrarian.com

In theory, using a price-based mechanism like a carbon tax would be better 1) nationally because incentives could be set at an affordable level and the market used to find cost-effective solutions and 2) internationally because having every country control to same marginal cost would be a good basis for equity. But politically the carbon tax is impossible and any politically acceptable tax would be insufficient to have much impact.

It is to resolve this impasse that a feebate makes perfect sense: it uses prices to drive reductions in greenhouse gas emissions but it does so without collecting any net revenue.

The idea of a feebate is to combine a fee and a rebate in such a way that the incentive effect remains even though the tax effect is neutralized by the rebate. The most well-known feebate is a vehicle feebate, which puts a fee on gas-guzzling vehicles and uses the funds to provide rebates for hybrid cars. But there have been other less publicized feebates that can be used to reduce pollution from industrial sources such as power plants. Such a feebate was developed for controlling SOx in Phila in 1980s (but not implemented) and a version of it implemented in Sweden to control NOx in 1990s.

In the Swedish version companies are simultaneously charged a fee for each ton of pollution and paid a rebate for the amount of energy generated. Companies that have high emissions-to-energy output ratios pay net fees and companies with low ratios collect net rebates. Although this version has worked well - producing a 40% reduction in NOx in its first year - it would probably be politically impossible in this country because the same coal-burning power plants that would have to pay high fees are also ones with significant political clout.

In the Philadelphia version of the feebate, each company is assigned a breakeven emission level (BEL) - which could be based on previous emission levels or by some other formula (as long as the total BELs add up to the initial total of emissions). A feebate “rate” in dollars per ton of CO2 is established for all companies. To make fees equal rebates, the BELs are adjusted each year by the average overall reduction among all companies (if total emissions are down by 10%, then each company’s BEL is reduced by 10%). Those companies whose emissions are above their adjusted BEL pay the feebate rate for each ton over that level and those whose emissions are below the adjusted BEL collect the feebate rate for each ton below that level. Over a period of time - say ten years - the BELs could be based on the average emission-to-power-output ratio for all companies (BEL = avg ratio x power output of the given plant).

The resulting feebate has a number of advantages. As with a carbon tax, incentives can be set at an affordable level and then the market allowed to find the best solution. In contrast to the cap-and-trade which does not provide continuing incentives to reduce once the cap has been achieved, the feebate does. If lower cost ways of achieving reductions emerge, companies have the incentive to take advantage of them up until the new marginal cost equals the feebate rate. In contrast to both the carbon tax and the cap-and-trade which provide little flexibility in determining the distribution of costs among companies, the feebate, with BELs that are independent of the control level, allows vertually any distribution.

Although the feebate is not applicable to all situations and is hardly a silver bullet, it does need to be added to the list of possible mechanisms - and in the case of reducing greenhouse gas emissions from power plants - may be the optimal choice.

© 2007 by Centrarian.com

Although Rawls in A Theory of Justice developed a complex and elegant argument to show that if self-interested, rational people were engaged in a bargaining game to establish a society they would agree on limiting inequalities to those that benefit the least advantaged group, there are a number of reasons why this argument is not convincing. For one thing, we are not in the position of establishing a society so it is not very relevant (we might very well be willing to accept such a society if we were born into it but that is not the same as being willing to change from our current system to that one). Also Nozick’s counter-argument in Anarchy, State, and Utopia is, I believe, devastating: that such a “patterned” system would require redistribution after virtually every transaction (because it would likely undo the previously acceptable distribution) and would be unjust because it would conflict with any kind of property right or “entitlement.”

Where does this leave us? The predominant view is that this is just one of many examples of our inability to find common ground for values and we simply have no choice but to accept this state of affairs. Others, such as Alasdair MacIntyre (see After Virtue) argue that this is the result of the failure of the “enlightenment project” which, in destroying the traditional religious and Aristotelian context for morality and failing to establish a new one, left modernity with fragments of what was once morality without providing a common ground for values. As a result, our debates about values ultimately rest on personal feelings or opinion and take the form of “my goal is better than your goal.”

You can get a sense of how subjective and unanswerable the issue of inequality is in reading Brad DeLong’s post - What Kinds of Inequality Should We Worry About?

How much should we worry about inequality–on the global level, on the societal level, on the personal level? Answering that question requires that we first answer another question: “Compared to what?” . . . On the personal level, it is also hard for me at least to make the argument that a great deal of political-economic worry should be spent on the problem that some people are richer than others. Some have worked harder; some have applied their intelligence more skillfully; some have been better people; some have been worse people; many more have just been lucky enough to be in the right place at the right time. But are there alternative political-economic arrangements that could make individuals’ relative wealth closely correspond to their relative moral or other merit? I don’t see what they might be.

Now suppose the gap between the Nozick (entitlement) side of the argument and the Rawls (equality) side of the argument could be narrowed or closed by showing that property rights as they now prevail cannot be justified on the basis of entitlement? And what if, in changing these rights to fit what could be grounded in entitlement, it was apparent to all that such a system would be much more equal? Hopefully that would make it possible for left and right to spend less effort in conflict and more working together for the common aim of creating a more equal entitlement system.

That, to me, is what is promising about left-libertarianism. By exposing the faulty arguments underlying current private property arrangements, this school has initiated a much needed debate about property. This debate focuses primarily on the validity of Locke’s assertion, whether the original homesteader of a piece of land becomes its full owner by “mixing his labor” with that land, and whether this justifies current ownership by the homesteader’s decendents. Instead left-libertarians argue, since this land was commonly owned prior to it being homesteaded, there is no reason to think that an individual should gain full ownership simply by mixing his or her labor with it. While practical necessity may dictate that individuals rather than governments control land and other natural resources, that does not mean that individual owner should have exclusive rights or that the government should not collect rent as an agent for others who have been excluded from using this scarce resource.

In the words of C. B. MacPherson (from Property): “The essential principle of property being to assure to all persons what they have produced by their labour and accumulated by their abstinence, this principle cannot apply to what is not the produce of labour, the raw material of the earth. If the land derived its productive power wholly from nature, and not at all from industry, or if there were any means of discriminating what is derived from each source, it not only could not be necessary, but it would be the height of injustice, to let the gift of nature be engrossed by individuals.”

The debate is just beginning. Why now? I will come back to that later.

© 2007 by Centrarian.com

Gretchen says that efforts by shareholders to make directors more accountable to owners seem to be working. The proof is that Martin Lipton, the country’s premier takeover lawyer and inventor of the poison pill, is complaining that many board of director candidates are declining to serve. He claims that the activists are “destroying the role, focus and collegiality of the board of directors” and that it is “time to recognize the threat to our economy and reverse the trend.” Morgenson argues that if this were really a problem, the costs of directors’ and officers’ liability insurance would be skyrocketing. But instead, these costs have plummeted by almost 40% in 2005 and another 10% last year. She ends by saying “Mr. Lipton’s fear-mongering . . . won’t stop the train.”

I hope she is right, that the worm is turning, that publicizing the undeserved rewards given to executives even though they have clearly screwed up will curb the behavior. I also hope that board members are forced to take their responsibilities more seriously.

But anyone who has been a CEO, worked alongside one and/or been married to one knows how difficult, lonely and all-consuming these jobs can be. While there certainly are CEOs that take the money and run, or coast along comfortably, those that actually succeed - especially those that successfully transform mediocre organizations into high-performing ones deserve to be rewarded handsomely for that success.

This is the other side of the story: transforming an organization from mediocrity to excellence requires top-down control by a CEO who knows what excellence involves and demands excellence from everyone. This cannot be a democratic process. Until the organization is fully transformed, in fact, democracy and equality are the enemy of excellence. Not only are there individuals who will actively fight this process before they are won over, but there will be many who will have to leave because they are just not capable of contributing to excellence. That can make the job of the CEO particularly arduous, lonely and all-consuming. Anyone who has been a CEO, worked alongside one and/or been married to one knows this very well.

Let’s not let this movement to curb undeserved rewards turn into anti-executive populism. If we do, mediocrity will drive out excellence.

Mostly people describe how money has corrupted the process and call for election reform to fix it. Take, for example, Public Funding of Elections. While this certainly needs to be done, it also needs to be made clear that this is not enough. Otherwise, people are disappointed and become discouraged when they finally get reform and it doesn’t really solve the whole problem.

Worse still is when reform bills get passed and they don’t even achieve their intended result. Take the recent attempt by Democrats to curb the influence of lobbyists: Congress Finds Ways to Avoid Lobbyist Limits.

More unusual are articles like You Want to See Broken Politics: Just Look at the Casinos which spell out the problems with the political decision-making process itself. Here we get detailed analysis of what was wrong - 1. Last minute, haphazard decision-making . . . Unfortunately, there are just not enough articles like these that really try to define the problem. How can we expect to fix a problem if we don’t even know specifically what the problem is?

I read an article recently - Kaizen, That Continuous Improvement Strategy, Finds Its Ideal Environment - describing how high tech companies like Apple and Google are using Kaizen to rapidly and repeatedly improve their product. Kaizen “refers to a disciplined process of systematic exploration, controlled experimentation and then painstaking adoption of the new procedures. In the original formulation, kaizen was applied to manufacturing, where experimentation could determine whether a new process resulted in quality improvements or cost savings in a matter of months. It is much more difficult to apply kaizen to product design, since it can easily take years to design and market a new product.”

It made me ask, why can’t government take a problem, actually provide a solution for its customers and then actually begin a process of improving that solution?

The conventional answer, of course, is that government isn’t designed to work that way. But that is precisely what we need to do - to consider how it can be redesigned to work that way.

Obviously, this involves more than just reform - how to reduce corruption and influence so that the people have more say in public decision-making. Reform cannot make politicians accountable for actual results rather than rhetoric. Reform cannot assure us that solutions will be found - in fact, more democracy may actually be counter-productive. Many of our most flagrant failures are the direct result of voters insisting on conventional solutions that have persistently failed in the past (think “being tough on crime” or “the war on drugs”). Reform cannot assure us that once solutions are found they become permanent and automatic, or that these solutions are built upon and continuously improved.

What is needed is much more than mere reform.

So how should we fix the problem? A later article - The C.E.O.’s Parachute Cost What? - suggests that just publicizing the issue may be enough. It seems that the whole reason all of this is coming to light in the first place is that new regulations forcing greater disclosure of executive pay - especially exit pay received by executives in pension plans and buyouts - are making them public. The problem may already be well on the way to being solved just because directors are suddenly having to justify these packages.

So maybe instead of making things worse, Congress ought to wait and see if disclosure solves the problem. On the other hand, if pressure is brought to end the disclosure requirements they need to stick to their guns.

I emphasize undeserved. Recently it was reported that Robert L. Nardelli - Nardelli article - is expected to exit from Home Depot with a package worth more than $210 million (added to his more than $10 million per year while he was there) even though the company’s stock has fallen by roughly 20% during his tenure.

A month before that it was reported that Hank McKinnell, previously head of Pfizer, recieved a $200 million exit package (see McKinnell article). This package included a pension of $6.65 million a year for as long as he lives (worth $82.3 million), $78 million in deferred compensation, and an estimated $18.3 million in “performance-based shares.” As Gretchen Morgenson, author of the article points out, “perhaps it would be more accurate if these were identified as failure-based shares”, given the fact that Pfizer shares dropped from $46 to $26 a share under his tenure.

Unfortunately, there are lots more examples. Mostly because “incentive” compensation plans pay off no matter what - even if stockholder value has been destroyed.

What to do about it? Will Congress fix it or make it worse? I will certainly come back to that.

• Attempting to ascertain public or collective needs is inherently more difficult than determining private or individual needs.
• It is easy for taxpayers to feel victimized by government, even when they are not, because the free rider problem often makes it necessary to charge everyone for non-excludable good or services, even those who don’t want the service.
• Representative democracy is inherently problematic and direct democracy, even today, is only practical in a limited way.