Tilting at Windmills

May/ June 2013 In praise of better government … Welfare for the Rockefellers … Whatever happened to truth in labeling?

By Charles Peters

Large and in charge

Attorney General Eric Holder recently told the Senate Judiciary Committee that some banks have become “so large” that it’s “difficult for us to prosecute them.” Wait a minute—I thought the Obama administration said that the big banks are not a problem. It certainly made no effort to break them up. But if their size means they can get away with committing any financial crime they want, doesn’t that indicate that there’s at least a slight problem?

How much does candor cost again?

“[O]ne quality in perennially short supply” in applications to business schools, reports Melissa Korn of the Wall Street Journal, is “candor, as would-be MBAs deliver ‘right’ answers instead of the real ones.” In an attempt to solve this problem, the University of Pennsylvania’s Wharton School of Business has begun inviting its applicants to participate in a six-person roundtable discussion, during which it urges them to “relax, be genuine.”

Almost immediately, applicants began seeking out other applicants with whom they could rehearse for these discussions. And of course the consultants were sure to come along. Already, two firms are offering practice group discussions.

Who needs enemies, when you’ve got friends on Facebook?

The axiom that has long governed local TV news that “if it bleeds it leads” does not apply to social networks. On Facebook, it’s the good news that leads. Indeed, the news is often a little too good to be true.

According to a study by Dr. Jonah Berger, an assistant professor of marketing at the University of Pennsylvania’s Wharton School of Business, the news that people share about themselves on Facebook is strongly slanted toward making their own image. “In most oral conversations,” we tend to say the first thing that comes to mind, according to Dr. Berger, “but when you write something, you have the time to construct and refine what you say, so it involves more self-presentation.” The result, writes John Tierney of the New York Times, whose report I’m relying on for this item, “helps explain the relentlessly perfect vacations that keep showing up on Facebook.”

Another study found that “the longer people spend on Facebook, the more they think that life is unfair and that they’re less happy than their ‘friends.’ ” And yet another study found “a ‘rampant nature of envy’ and other ‘invidious emotions’ among heavy users of Facebook.”

In praise of better government

The unfortunate thing about the recent sequester debate is that by pitting antigovernment Republicans against pro-government Democrats, it left no room for those who believe both in the importance of government and in the need to trim the fat from government agencies and to make them more effective in performing their missions.

As to the fat, here’s just one example. In 1940, there were more than five million farmers in the United States. In 2012, that number had fallen to fewer than a million. Yet the Department of Agriculture has 5,000 more employees than it did in 1940, when there were more than five times as many farmers.

As to agency effectiveness, in the past few months, we have had one story after another about foul-ups at the Department of Veterans Affairs—of disability applications taking more than a year to process and other similar outrages. In 1946, I was among the ten million or so World War II veterans discharged from the military, most of us seeking one or more benefits including college tuition, disability pensions, housing loans, or unemployment compensation. My tuition was paid promptly and my pension came through in a matter of months. I do not remember any of my friends complaining about longer delays. Today, the number of people being discharged from the services each year does not approach one, much less ten, million. Yet it takes 236,000 VA employees now to screw up what 169,000 handled with reasonable efficiency back then.

During a speech at the National Defense University in April, Secretary of Defense Chuck Hagel pointed out another way bureaucracy grows as its mission shrinks. “Today the operational forces of the military—measured in battalions, ships and aircraft wings—have shrunk dramatically since the Cold War, yet the three- and four-star command and support structures sitting atop these smaller fighting forces have stayed intact.” And “in some cases,” he added, as with the Department of Agriculture and Veterans Affairs, “they are actually increasing.”

Old Funny Bags

Bill Maher is usually funny and fairly far left politically, so I was struck to hear him declare in March on his show on HBO that the rich “actually do pay the freight in this country.” Especially in California, he said, “it’s outrageous what we’re paying—over 50 percent. I’m willing to pay my share, but yeah, it’s ridiculous.” This fortifies the impression that I’ve had for some time that the higher a media figure’s income, the less liberal they become on the subject of income taxation. Remember during the 2008 campaign, when ABC’s Charles Gibson successfully pushed Obama to raise the level of income that would be subjected to higher taxes, from $100,000 to $250,000? And how many protests did you hear when Obama raised that $250,000 to $400,000 as part of the December 2012 budget deal?

Whatever happened to truth in labeling?

Eric Holder’s faintness of heart with regard to the big banks seems to extend to the tobacco companies. Two years ago, you will recall that the Food and Drug Administration announced that tobacco companies would have to display on cigarette packages pictures of the harm done by tobacco, including images of diseased lungs and of a man inhaling smoke through a tracheotomy tube. At the time, I thought, Boy, that’s great, that will really make smokers think about the damage they’re doing to themselves. But, of course, the tobacco companies took the FDA to court. They obtained a ruling from the right-wing intellectual pygmies of the D.C. Circuit Court of Appeals that the requirement violated tobacco companies’ First Amendment rights. If you can see even a shred of merit in that argument, you’re an even worse lawyer than I thought you were. But you have the comfort of knowing that the attorney general of the United States agrees with you: Holder has decided not to take the case to the Supreme Court.

Yet we learned from Brady Dennis of the Washington Post that “dozens of countries already require graphic warning labels similar to those proposed by the FDA, and a survey by the World Health Organization found that they were more effective than text-only labels in deterring smoking.”

So a lawyer walks into a bar. Is he billing his hours?

“Churn that bill, baby.” This is a quote from an email from one lawyer to another at DLA Piper, the world’s largest law firm. The email is the latest, and one of the more delicious, examples of how major law firms run up the bill on their clients, whose fee is usually based on something called “billable hours.” These are the hours worked mainly by the firm’s young associates and billed at four or five times the rate paid the associate. The associate is therefore under pressure to either work fifty hours or more a week in order to report forty actual billable hours, or count part of his billable hours as time spent, say, chatting with pals on Twitter. If these tactics fail to pad the bill enough, unnecessary work will be performed. And this was the subject of the DLA Piper memo that was recently unearthed by Peter Lattman of the New York Times: “Now Vince has random people working full time on random research projects in standard ‘churn that bill, baby!’ mode. That bill shall know no limits.” In another email, another of the firm’s lawyers wrote, “I hear we are already 200k over our estimate—that’s Team DLA Piper!”

A survey of lawyers reported by Lattman found that “more than half acknowledged that the prospect of billing extra time influenced their decision to perform pointless assignments, such as doing excessive legal research or extraneous document review.”

Supersized

A couple of bulletins from the world of the wealthy: the Wall Street Journal, to meet the needs of its readers, now has a special sixteen-page section in its Friday editions, “Mansions,” filled with ads for luxury property. Care for a mansion in Santa Monica, California, for only $34.9 million? Or perhaps you’d prefer one of the Manhattan apartments listed by the real estate agency Brown Harris Stevens, a “park front classic nine on CPW” for only $10.5 million (the translation: that’s nine rooms on Central Park West) or, if that’s simply not enough space for you, “a full floor penthouse UWS” (Upper West Side) at
$19.5 million.

Excuse me, sir? May I trouble you for a mariachi band?

We also have the Journal to thank for news of another goodie for the well-to-do. This from the Boston Collegiate Consulting Service, offering concierge services to the more affluent students in the area. “College used to be a great equalizer,” observes the Journal’s Melissa Korn. “No matter their parents’ social status, students who came to campus tended to deal with basic life skills on their own—from frying up grilled cheese sandwiches to unclogging toilets and folding laundry.” But that was before companies like BCCS made it possible for them to “summon butlers, drivers and gofers with a click or a call,” with demands for everything from an “authentic mariachi band” to “300 bottles of a Merle Norman perfume,” which, by the way, were to be bought and shipped to the student’s mother in Saudi Arabia.

Keeping up with the Joneses in the third millennium

Of course, most of us can’t afford mansions or concierges. But the spending of the rich has, nonetheless, had an impact on us, according to research by the University of Chicago’s Marianne Bertrand and Adair Morse, reported by the Washington Post’s Brad Plumer. They call the effect “trickle-down consumption.”

As the very rich spend more, the slightly less rich spend more to keep up, and then each of the rungs below tend to do the same. It doesn’t take long for the spending to reach the average man, who since 1980 has not been making more income. “In areas where incomes of the top 10 percent are growing,” writes Plumer, “the supply of businesses and services that cater to the well-off also increase. Swankier bars replace cheaper bars. Expensive restaurants replace cheap restaurants. Whole Foods nudges out the local grocery store. And less-well-off residents end up spending more at these places.”

Meanwhile, as the rich bought their mansions and penthouses, those below bought larger homes. Another study by Cornell University’s Robert H. Frank, confirming the Bertrand and Morse finding, reports that the median size of homes grew 50 percent between 1970 and today.

If you’re spending more on everything from your home to your local grocery store, and earning less, bankruptcy and foreclosures are either just around the corner or have already arrived. Yet another study, unearthed by Plumer, reports that higher divorce rates and longer commutes came along with the bankruptcies.

Class, not race

Here’s what I hope the Supreme Court decides in the affirmative action case it’s now considering: affirmative action should be based on economic status, instead of race. It doesn’t make sense for an upper-middle-class black student from an educated family to get a 310-point increase in his SAT score that elite colleges now give on the basis of race, according to a study by Princeton sociologist Thomas J. Espenshade, while a lower-middle-class white student gains no such preference.

One realistic basis for my hope that I learned from David Leonhardt of the New York Times is that Justice Anthony Kennedy, who probably will cast the deciding vote in the current case, wrote a separate opinion in Grutter vs. Bollinger, the case that endorsed affirmative action for blacks, in which he said that race should be one factor “among many others” in college admissions.

Welfare for the Rockefellers?

Forty-two years ago, this magazine ran the first of many articles and Tilting items urging that Social Security be means tested. In 1985, Robert Kuttner and I debated this issue—I was for, he was against—in Mother Jones and at Harvard’s Institute of Politics. I had to concede that in terms of persuading people, he won, so over the years I argued the case less and less because it seemed so futile. The only reforms came in 1983, when Congress began to include the proceeds of Social Security in the total income subject to taxation, and in 1993, when the tax was increased under Bill Clinton. And even those successes were diminished as the tax code became less progressive.

Now there seems to be at last a ray of hope, as others are seeing the need for means testing. In the Washington Post, Harry J. Holzer and Isabel Sawhill ask, “Why won’t liberals back reform? Growing entitlements are hurting programs for the poor.” It just doesn’t make sense to waste Social Security and Medicare on the Rockefellers.

Some liberals argue that a reform of Social Security is not needed for deficit reduction. But even if it isn’t, means testing could make money available to lower the payroll tax for working people, or to raise payments for those who are struggling to make do solely on what they get from Social Security.

Hit the road, Jack (the severance alone makes it worth it!)

Jack Lew’s employment record between his time in the Clinton administration and his return to Obama’s illustrates a couple of problems. His $700,000-to-$800,000-a-year salary at New York University and his $685,000 severance, paid when he left to go to CitiGroup, provides an example of the excessive compensation for academic administrators that’s contributing to inflated tuition bills. At CitiGroup, Lew received yet another generous severance bonus, this one payable on the condition that his departure was for a “high level position with the United States government or regulatory agency.” In other words, he would get the bonus if he could be nice to CitiGroup in his next job.

Money-go-round

Unfortunately, most of the stories about the revolving door, like the one about Jack Lew, get buried in the business section or other inside pages, so the New York Times deserves congratulations for putting two on its front page recently. “K Street is literally littered with former Baucus staffers,” a trade association executive recently told Eric Lipton, the author of the first Times article. Lipton discovered that at least twenty-eight people who had worked as aides to Senator Max Baucus since he became chairman of the Senate Finance Committee in 2001 “have subsequently lobbied on tax issues.” And their efforts have not been without effect. They have already “saved their clients millions—in some cases billions—of dollars after Mr. Baucus backed their requests to extend certain corporate tax perks.”

In return, the former aides contribute to Baucus’s campaign fund. Jeffrey Forbes, former staff director of the finance committee, has given at least $25,000 to the fund, and hundreds of thousands of dollars have come from his clients, including Verizon and Altria.

The senior Republican on the Finance Committee, Senator Chuck Grassley, has sixteen staff alumni who are now registered as tax lobbyists.

One more time around

The second revolving-door story to make the front page of the Times concerns the Promontory Financial Group and its founder, Eugene A. Ludwig, the former head of the Office of the Comptroller of the Currency. The OCC has long been known as one of the more indulgent of the bank regulators—and I can assure you that the competition for that distinction has often been keen.

“Nearly two-thirds of [Promontory’s] roughly 170 senior executives worked at agencies that oversee the finance industry,” report the articles’ authors, Ben Protess and Jessica Silver-Greenberg. A recent addition to the 170 is Mary Schapiro, the former chairman of the Securities and Exchange Commission. One new hire who did not add to the total is Julie Williams, the former chief counsel of the OCC, because she was replaced by Amy Friend, who is leaving Promontory to take—what else?—Williams’s still-warm seat as chief counsel of the OCC.

The most amazing thing about Promontory is that it makes money on giving advice not only to financial firms like Morgan Stanley, but also to the government agencies that regulate them. “Behind the scenes,” reports the Times, “the firm acts as an advocate for banks, helping draft letters that challenge crucial rules and discussing reforms with regulators.”

Because of its connections, the firm is able to charge its clients as much as $1,500 an hour, making DLA Piper look like a discount store. Such fees have enabled Ludwig to earn more than $30 million annually and “live on an $11.5 million estate, replete with a tennis court and a modern art collection,” where he entertains regulators and the regulated. He travels by private jet and, when in New York, he is a regular at the Four Seasons restaurant, “where he is known by name and salad order.”

Rethinking capitalism

I’m hearing more and more people talk about the need to rethink capitalism. How can they help having such thoughts when they read in a recent New York Times article that United Technologies, “even though its profits and revenues have never been higher” and the price of its stock has “soared past $90 dollars to a record high” in February, “confirmed it would eliminate an additional 3,000 workers this year on top of 4,000 let go in 2012”? Or when they saw in a recent Sunday Times business section a gallery of photographs of executives with excessive salaries, exactly twenty of whom were each making more than $20 million per year?

Capitalism doesn’t have to be this way. Our values have to change so that the ablest people want to get rich but not filthy rich, and, instead of flocking to Wall Street, want to start businesses that make useful products and create jobs paying decent wages.

This can happen because I saw it happen. American capitalism was far from perfect in the 1950s, but it did involve much more modest executive compensation in relation to the wages and benefits paid employees. Profits did not always have to be maximized, and it was a rare company that boasted of eliminating the jobs of its workers.

Charles Peters is the founding editor of the Washington Monthly and the author of a new book on Lyndon B. Johnson published by Times Books.