By William K. Black
May 14, 2016 Bloomington, MN
This is the second column in my series on the “Mankiw’s myths and Mankiw morality.” In the first column I showed that N. Gregory Mankiw’s own unprincipled principles of economics predicted that the financial system would be rigged by and for the financial CEOs. In his New York Times column Mankiw purported to be writing to dispel myths, but actually did the opposite, asserting that the financial system could not be rigged. I explained in the first column how Mankiw famously decreed that it would be “irrational” (rather than ethical) for a CEO not to “loot” a firm that he controlled. I term this view that being ethical is irrational for a CEO “Mankiw morality.” Under Mankiw morality, financial CEOs would have the incentive and the ability to rig the system and would do so repeatedly.
My second column responds to some of Mankiw’s myths about the “trade deals.” I again apply Mankiw morality and theory to refute Mankiw’s myths about “trade deals” being good for America. Mankiw morality predicts that CEOs, whenever they can personally get away with it, will rig the system to create a “sure thing” allowing the CEO to become wealthy through fraud and other abuses. The CEOs see regulators and prosecutors as the paramount risks to their ability to get away with rigging the system. They look for every opportunity to discredit and render ineffective regulation, to make it difficult to prosecute elite white-collar criminals, and to ensure that agency heads and attorney generals will be appointed who are unwilling to effectively regulate and prosecute corporate elites.
The “free trade deals” are pretexts for emasculating regulation and prosecution of corporate elites. They have virtually nothing to do with “trade” much less the oxymoronic abuse of the term “free trade.” Consider first why the deals are always crafted in an indefensible manner. The CEOs get to participate in making the deals. Consumers, workers, and investors are excluded under official secret laws. All of economic theory, particularly under Mankiw morality (it would be “irrational” for CEOs not to defraud), predicts that the CEOs would use their unique ability to rig the deals in their favor. They deliberately crafted the deal making system to give them the means and opportunity to rig the deals – they already had the motive.
The conventional economic claim for the (purported) paradox of greed is that it leads merchants to act as if they cared about the customer. If the customer can observe that the system is rigged against him – because he gets sick promptly after eating meat from the Butcher A – and if Butcher A has a competitor then Butcher A cannot sell customers bad meat and stay in business. None of these self-protective mechanisms work reliably in vast swaths of business. We cannot know whether a financial firm’s assets are massively overvalued. We know from UK experience with payment protection insurance (PPI) and U.S. experience with the yield spread premium (YSP) that “consumer choice” is a cynical cover for massive rip-offs of customers. None of us can know whether our airbags, pollution control systems, and ignition systems were manufactured by companies that have engaged in knowingly defective designs – and covered up the defects through fraud for over a decade.
The international deals are not remotely “fair,” but at least on tariffs there is some countervailing corporate and sovereign power. If a U.S. firm’s lobbyists induce our trade deal negotiators to demand a tariff that is wonderful for the U.S. firm’s CEO and terrible for a German firm’s CEO then the German CEO has the incentive to hire his own army of lobbyists to push back against the deal and the German government has a reason to go to bat for the elite German CEO.
But no such countervailing power exists with regard to the regulations and laws that are most essential to the health and safety of our people and the effectiveness and stability of our financial system. Elite CEOs typically share a community of interest in opposing these effective regulations. They share a near identity of interests in preventing effective prosecutions and enforcement actions against CEOs. These points explain why President Obama’s rhetoric about the deals – they mean that the U.S. rather than China makes the rules – is knowing propaganda on his part. Whether U.S. CEOs or Chinese CEOs dictate the terms of the deal is irrelevant. They all want to achieve and maintain the ability to rig the system with impunity.
In Mankiw’s unprincipled “ten principles” of economics (which consists of ten myths) he preaches that trade is wonderful because it allows “each person to specialize in the activities he or she does best.” The CEOs that led the three epidemics of accounting control fraud that caused the crisis did what they do best – they rigged the system to make themselves even wealthier by causing catastrophic harm to their fellow citizens and their nations. When frauds and cheat are able to specialize in what they do best with impunity the result is disastrous, not desirable. The international deals are designed to rig the system to allow the elite fraudsters to specialize in what they do best – acting as parasites and predators against the public.
The Michigan auto worker who is at her best in producing automobiles does not get to specialize in those activities. She is told to give up doing what she does best – or move to a state or Nation that pays its auto workers considerably less.
International wage differences mean that the international deals will tend to (net) reduce U.S. employment. But wage differences tend to be visible and often disguise the paramount reason that production costs are lower in foreign firms than U.S. firms. The larger cause of international production cost differentials in nations such as China, India, and Bangladesh is that enormous societal costs of production are not borne by the firm due to the failure to enforce effective safety and health regulations essential to protect workers, consumers, and the general public. When a Bangladeshi garment factory “saves money” by building a shoddy building illegally on marshy land it transfers the true costs of production to the workers – who were killed by the hundreds when the building collapsed. When an Indian or Chinese chemical firm “saves money” by dumping toxic waste illegally and that renders the rivers and lakes toxic it transfers the true costs of production to the general public. When a UK company sells disinfectants in Korea that kill and sicken hundreds of consumers it transfers the true costs of production to its customers. When Chinese and Indian firms “save money” by burning coal they transfer the true costs of production to the public – globally.
In each of these cases the CEO wins at the expense of people who cannot effectively protect themselves from his depredations. In each of these cases the production under the deals moves out of the United States not because of “specialization” or efficiency but due to a regulatory race to the bottom. The extent of environmental damage in China is so extraordinary that for a wide range of goods the true costs of production to the public are much higher in China than the United States. It is typically vastly cheaper to reduce toxic emissions before they occur rather than to try to remediate them after they have polluted our world. Under Mankiw mortality, CEOs optimize their interests, not the interests of the firm, and certainly not the interests of the people.
In economic jargon, I have been describing negative externalities. The deals are secretly crafted with unique advantages given to the CEOs in order to minimize the ability of groups that would try to protect the public to organize and try to counter the CEOs.
The deals are designed to maximize the regulatory race to the bottom. They are designed as a ratchet that provides rewards only in one direction – for weakening regulation and the ability to prosecute corporate elites. There is no incentive to strengthen vital health and safety regulations even though they have been repeatedly shown to be already too weak. A nation that joins the deals must, for example, conduct cost-benefit analyses to adopt any new rule – but it can deregulate without any such analysis. Anyone who has followed the practice of pro-business U.S. jurists using their personal hostility to regulation and their personal views as to “benefits” and “costs” to overturn rules can predict exactly how these deals will be used to intensify the regulatory race to the bottom that has caused catastrophic harm to China, India, and as climate change intensifies, the world.
Greenpeace’s leak of the draft Transatlantic Trade and Investment Partnership (TTIP) confirmed that American and European heads of state favoring the deal have been dishonest about its contents. The Obama administration claims that TTIP requires other nations to “implement strong labor and environment provisions.” The draft deal does not require other nations to adopt and enforce “strong labor and environment provisions.” The deal is unremittingly hostile to regulation and while there are many hortatory provisions designed to provide political cover, any competent lawyer can see that the CEOs have gotten their way in the key substantive provisions that will provide the excuses for the kangaroo tribunals to assault effective regulation. Effective prosecution of corporate elites is impossible absent effective regulation, as the financial crisis just taught anyone who cares to observe.
The Indefensible Kangaroo Tribunals
CEOs love the deals not simply because they intensify the race to the bottom and make it ever harder to effectively regulate and prosecute elite corporate crimes and scandals. CEOs exhibit such chutzpah that they have created a “tribunal” that will not only effectively require the repeal of even inadequate regulation but also create the ability for the CEO to profit enormously when he forces nations to provide a public subsidy to firms that commit the worst harm to the public. Better yet, they have rigged the tribunals to make them kangaroo non-courts that effectively end national sovereignty in favor of CEO sovereignty.
The only problem is the CEOs have won so big on the tribunals that the EU public overwhelmingly opposes their triumph. The EU public is so enraged, now that it understands the tribunals’ indefensible destruction of the rule of law and sovereignty, that the official position of the EU is that the tribunals are unacceptable in TTIP.
That would seem to be a problem, but the CEOs’ answer to the problem that the public detests their kangaroo tribunals is President Obama – who idolizes the kangaroo nature of the tribunals. Obama appointed Michael Froman as his pro-CEO hatchet man on these cynical deals. Froman is a former Citigroup executive. Froman, with Obama’s consistent backing, has made these indefensible investor-state dispute settlement (ISDS) tribunals an overriding goal of any deal the U.S. makes.
What makes Froman so duplicitous is his introduction to ISDS, in which he pictures the kangaroo tribunals as a means to “ensure that the United States and partner countries are able to regulate in the public interest as they see fit” and that the kangaroo tribunals make real “our core values” by “promoting the rule of law.” The kangaroo tribunals and the CEO fraud immunity deals do the opposite. Absent the deals the U.S. and other countries have right to “regulate in the public interest as they see fit.” The thing that emasculates that right – central to the concept of sovereignty and democracy – is deals like TTIP and the Trans-Pacific Partnership (TPP). What Froman is claiming is the exact opposite of reality.
Similarly, the kangaroo tribunals are expressly crafted by CEOs to destroy the rule of law and make it exceptionally dangerous to “regulate in the public interest.” ISDS is being used, for example to threaten to bankrupt nations that sought to discourage cigarettes via regulation. The kanagaroo tribunals are not subject to the rule of law precisely because CEOs drafted the key language in the deals to accomplish that goal in order to rig the system. The tribunal members are not judges. They do not have to follow any rule of law. Their decisions are not subject to any meaningful ability to appeal. They can order unlimited damages that can bankrupt any nation. They do not have to respect the law or the decisions of the judiciary of any nation. The tribunal members are notorious for their conflicts of interest.
Virtually every phrase written in this key Obama administration document about the kangaroo tribunals is an obvious lie or crafted to deceive the reader. I’ll use one sentence to illustrate the point.
ISDS creates a fair and transparent process, grounded in established legal principles, for resolving individual investment disputes between investors and states.
ISDS is designed by CEOs to be rigged, not “fair.” The deals’ clauses creating the kangaroo tribunals are invariably made as opaque as possible to the public so that they cannot be effectively criticized. Even when members of Congress finally get to have a copy of the documents – years after the CEOs get access – the “fast track” procedure CEOs insist on effectively prevents Congress from rejecting even indefensible provisions like the kangaroo tribunals.
The tribunals are not “grounded in established legal principles” – they are expressly drafted by the CEOs’ lobbyists to remove the public’s normal rights to “due process.” The kangaroo panels are not limited to “investment disputes between investors and states.” As I noted, a nation can be bankrupted by a kangaroo panel because it adopts a rule to keep its citizens alive by discouraging smoking. Unless one is murdering the English language as well as the cigarette customer, such a health regulation is not an “investment dispute.” Every prior cynical deal with an ISDS provision has led the kangaroo tribunals to treat the adoption of clearly bona fide health and safety rules as an “investment dispute” subject to their review. Indeed, the nation is helpless because of its surrender of its sovereignty when it signs these deals to go to its courts and have them declare that adopting health and safety rules does not create an “investment dispute.”
The Obama administration apologia for the kangaroo tribunals claims they are only designed to provide compensation to protect against expropriation or discriminatory trade rules. That claim is false. CEOs have expressly drafted these kangaroo tribunal rules for the paramount purpose of preventing effective regulation to protect public health and safety. CEOs foreign lobbyists routinely threaten to bankrupt nations should they dare to adopt effective regulation that cracks down on corporate crimes and abuses.
The kangaroo tribunals should be eliminated, not “reformed,” but here are two reforms that would smoke out the Obama administration’s propaganda about these deals.
- Will you agree to revise ISDS to expressly eliminate the ability of business to bring an action to seek damages based on the adoption or enforcement of regulations and laws related to health and safety and the environment, including finance?
- Will you agree to revise ISDS to expressly provide that a Nation can bring an action in an international, governmental judicial system to declare such an action against such a rule or law unlawful, declare that it is dismissed, and award damages to the Nation that was sued?
We all know that the CEOs will not allow the Obama administration to make either change. The same two questions, therefore, should be addressed to each candidate for the presidency and the U.S. House and Senate who supports TPP or TTIP.