We just passed the 20th Anniversary of The Simpson Murders. This has resulted in a spike of media interest in the "Trial of the Century". It wasn't but it is definitely one of the most important trials in the twentieth century. I am going to spend most of this post talking about the trial. But, in the interests of completeness and in an effort to reduce confusion let me briefly present some background.
OJ (technically Orenthal Julius) Simpson became famous as a College football player. He went on to have a distinguished carrier as a professional. His tenure as a pro was of intermediate duration. He was extremely talented. But at that time professional football made no attempt to protect franchise players from injury. Since he was the heart of the offense defensive players focused on him and punished him with excessively viscous hits. It was considered part of the game to "injury out" players on the opposite team. So his carrier was not as long as it should have been because a series of injuries reduced his performance.
Simpson was one of the first black professional athletes to try and parlay sports fame into success in other endeavors. He became the spokesman for the Hertz rent-a-car company. He did a number of well received commercials featuring him jumping over things like luggage in airports. (This was a simpler time and on one saw this sort of thing as a security problem.) He also had parts in a number of movies, most notably the "Naked Gun" movies. He became one of the regulars on "Monday Night Football" in the era when this was a very highly rated show that was carried on ABC rather than a sports cable channel.
In all these endeavors he had considerable success. But in all these endeavors he was one of the first blacks to do this. There were few black actors. There were few blacks starring in commercials. There were few blacks in the announcer booth on sport shows. And he was never accorded appropriate respect. I think he would be the first to admit that he was not a great actor. But he never represented himself as such. He pretty much played himself. His Hertz commercials were a big success. They drove a lot of traffic the company's way. And he was just trying to provide "color" and a little insight on "Monday Night Football". He might not have been the most brilliant but he was not an embarrassment either. In my opinion he was never in any of these endeavors accorded the respect he would have gotten had he been white.
At the time of the events we are going to be involved in his star had waned. He was past his peak in all the endeavors I have mentioned above. But he had been well paid for them so he was in excellent financial shape. And along the way he married a beautiful blond white woman named Nicole Brown. Then Nicole Brown Simpson, as she came to be known, and her boyfriend Ron Goldman were found brutally murdered on June 13, 1994. The police quickly focused their attention on OJ. On June 17 the famous "Bronco Chase" occurred. OJ was supposed to turn himself in to the police on that day. Instead he was found to be cruising the LA freeway system in a white Ford Bronco that was being driven by Al Cowlings, a friend. All the LA TV stations had news helicopters equipped to transmit video. By the time it was done the "chase" took 4 1/2 hours, plenty of time to get the 'copters airborne and on the air. As it was going on it became a national story being covered wall to wall, even by the networks. This event marked a major the transition of what passes for journalism on TV toward trash TV.
The "story" of the chase was significant enough to justify coverage by local cable news channels in LA. It was not significant enough to justify coverage on national cable news channels and certainly it did not deserve to have the networks break into regular programming and broadcast a Bronco driving sedately down the freeway followed by a bunch of cop cars with all lights flashing. But it was ratings gold. And that's all that counts. So you could literally not find anything else on TV while it was going on. And it went on for hour after hour after hour. The Bronco finally pulled into the driveway of Simpson's house. Negotiations ensued and Simpson was taken into custody without further incident. This all set the stage for "The Trial of the Century".
It was not. But it was one of the most important trials of the twentieth century. It was potentially precedent setting but in the end no precedents were set. It could have broken new legal ground but in the end no new legal ground was broken. But, although legally insignificant, the trial was of major importance from a cultural perspective.
The trial ran from November 1994 to June 1995 and featured live TV cameras in the courtroom. OJ ended up being acquitted and no one has ever been convicted in a criminal court of perpetrating the crimes. So as a crime it is still officially unsolved. The heirs and relatives later sued Simpson in civil court and won. And, in a ridiculous coda, OJ is now in the slam as the result of being convicted in a case involving OJ sports memorabilia. And that's part of what I want to talk about.
There are those who think the original jury got it right. There are those who think the trial was ultimately a massive miscarriage of justice, I fall into neither of those camps. Oh, I think OJ did it. But I would characterize the trial as a routine, middle of the road, miscarriage of justice. To see why, let's first delve into the cast of characters. On the prosecution side we had Marcia Clark aided by Christopher Darden. These were two competent but not superstar advocates. The only thing of note here is that Darden is black.
On the defense side we have superstars. The most obvious of these initially was F. Lee Bailey. He was a high profile defense attorney in the style of the fictitious Perry Mason. What the trial showed was that he was long past his "sell by" date. As the trial progressed he was shoved aside by Johnny Cochran. The Simpson case made Cochran's reputation, and justifiably so. He demonstrated that he was the black F. Lee Baily. Cochran came up with the most memorable line to emerge from the whole trial: "if it doesn't fit, you must acquit". His work was as good or better than anything Bailey had done in his prime. Unfortunately, Cochran died less than ten years later and was very ill for the last part of his life. So he could not completely capitalize on his newfound fame. But that's not the end of the list.
Another member of the defense team was Alan Dershowitz. Dershowitz had become famous ten years earlier in connection with the Claus von Bulow case. Von Bulow was accused of murdering his wife. She was bedridden and died in suspicious circumstances. Dershowitz used a scorched earth tactic of attacking every piece of the prosecution case large or small, important or unimportant. He succeeded in throwing enough "reasonable doubt" up to get von Bulow off. With few exceptions (see below) the Dershowitz model was followed in the Simpson case.
There were a number of other superstar lawyers on the defense team (including Robert Kardashian of reality TV family fame) but the only other one I want to point out is Barry Scheck. He has specialized in the use of DNA in criminal cases and has been active in "The Innocence Project" a group that has been able to get over two hundred convictions reversed by using DNA to prove that identifications, especially "eye witness" identifications, were wrong. The OJ trial was the first high profile trial to involve DNA evidence.
Now let me move on to another critical courtroom player, the presiding judge Lance Ito. I credit Ito with being one of the people most responsible for OJ's acquittal. What was his contribution? He was a big fan of Johnny Cochran. One of the big problems the prosecution had was they had a complicated case to present. Part of their job was to help the jury keep everything straight. But Cochran kept popping up with trivial objections. This would interrupt the flow of the point the prosecutions was trying to make. This made it nearly impossible for the prosecution to manage the roadmap jurors needed to keep straight in their minds in order to understand the prosecution's case.
The defense had a much simpler problem. All they had to do was punch one big hole in the prosecution's case. They didn't need a roadmap so a strategy of lots of prosecution objections would not have disrupted them. Ito should have contained Cochran and given the prosecution a fair chance to put their case on. But he didn't. It turns out that the famous "if it doesn't fit, you must acquit" is actually not true. But the explanation is complicated. And, as I will cover below, the jury wanted to acquit OJ. They just needed a reason.
Finally, let me introduce one more player Mark Furman. He was the lead cop on the investigation. The OJ defense team was able over the course of the trial to hang him out to dry. The LA police have run a very effective PR operation for many decades. The Jack Web "Dragnet" shows and others have portrayed the LAPD as square jawed honest upholders of the law who are interested in "just the facts, mam" and don't indulge in hanky panky. The evidence is overwhelming that the reputation is not justified. Any number of 'noir Hollywood movies from several decades have done a much better job of showcasing the bad behavior of the LAPD than I could. And Mark Furman is a poster child for this sort of thing. The trial highlighted a number of instances of Furman taking shortcuts, violating procedures, and otherwise engaging in bad policing. The defense took advantage of this and there was again nothing the prosecution could do about it. The OJ case was high profile from the start. You would think the LAPD brass would have put their top people on it. But they didn't. Besides the Furman antics there was sloppy lab work and other examples of shortcomings on the part of the police.
And this brings me to a larger point. OJ is black. Most of the jury was black. The black community in LA has been the victim of bad and frankly racist policing for decades. If you could get honest answers out of them I am sure it would have turned out that jurors had a very poor opinion of the LAPD. True or not, and I'm inclined to the opinion that there were many cases of "true", the black community felt that the LAPD had railroaded innocent black people into jail and let guilty white people who had committed heinous crimes against black people off the hook. So "if it doesn't fit, you must acquit" was good enough for them. I think they were wrong but they weren't that wrong.
And there is another similar point. OJ was rich. And even if he hadn't been the case had such a high profile that it would attract top tier talent to the defense team. This is not true of most cases. Usually the defendant is poor and the case is not that interesting. This means that the defense does not have the resources to put on a Perry Mason quality (or F. Lee Bailey quality or a Johnny Cochran quality) defense. One reason for Mark Ferman's behavior was that he was used to getting away with it because the defense did not have the resources to catch him out. This is also true of the lab work. I don't think the lab got anything wrong but their procedures, documentation, etc., were shaky enough to give the defense something to talk about. This is again a case where most defendants do not have the resources to uncover this sort of thing and exploit it. This sort of thing usually cuts in favor of white defendants, especially rich ones (i.e. Claus von Bulow and everyone Perry Mason ever defended) but in this case it cut in favor of a black defendant.
I have tremendous sympathy for the Brown and the Goldman families. As far as I can tell the victims were both nice and good people. The did not deserve to be brutally murdered. And if they must be murdered then the guilty party should have been found, convicted, and put away for a long time. But many many many black people who were nice and good people have been murdered in Los Angeles. And, as a result of bad policing the crime was not prevented and the guilty party or parties were not arrested, convicted, and put away for a long time. The best thing would be for the LAPD to do its job well. Lacking that, OJ getting off is not the worst thing that could happen.
This next point will sound harsh. As I have pointed out the victims did not deserve to die and OJ got away with it. But, as I have also pointed out above, he did not really get away with it. He ended up in the slam in the end. And what about all those black men that would take OJ as a model and start killing white women wholesale? I was never worried about that outcome. And let me point out that, in fact, the opposite did and does happen. White men have killed black men and women with impunity in far too large numbers. And a significant number of them have gotten off. And this actually did encourage other white men to kill black men and women on the theory that they could get away with it. Again the best situation would be for killers, black or white, to get caught and appropriately dealt with whether their victims were black or white. But we still have not gotten to that point. Absent that then the OJ case can be said to balance the scales. It is a bad outcome but not the worst outcome.
I pointed out above that the defense adopted a scorched earth approach to most of the prosecution case. As an example there was a pair of gloves. They had OJ try them on late in the case. They did not fit even though they were OJ's because they had shrunk in the mean time. (That's the hole in the Cochran argument.) But the visual of OJ struggling to get the gloves on was compelling. They attacked the lab work and other physical evidence. But one thing they did not touch was the DNA evidence. As I said above, DNA was not as well understood then. This was the first time it was being used in a high profile trial. At the time everyone was wrestling with what the proper procedures for collecting and analyzing DNA. They were also wrestling with the proper interpretation of a DNA result. So thee was plenty of room for mischief on the part of the defense.
At the time Barry Scheck was the most experienced lawyer on the subject of the proper use of DNA in the courtroom. So the defense had the capability to put on a show and cast doubt here too. But ultimately they didn't. I was relieved. As a "science guy" I felt at the time that DNA held out a lot of promise. But I was concerned that it's reputation would be sullied as a side effect of this case before it had a chance to establish a solid reputation. Since the defense chose to not challenge the DNA evidence no one puts "DNA evidence" and "The OJ Trial" together. Today, due to procedures and techniques developed after the OJ trial, DNA evidence is now the accepted "gold" standard. It is even more golden than the old standard, fingerprints. So my biggest worry (seriously) about potential negative effects to the broader society caused by the OJ trial, namely calling DNA evidence into question, did not materialize.
It would be nice to be able to say that the LAPD learned its lessons. It should have improved its investigatory procedures and moved on to a more color blind approach to policing. I think the LAPD has made progress on both fronts but it still has a long way to go.
The trial was covered "wall to wall" on a cable channel called Court TV. Court TV got massive ratings. It tried to repeat its success with other trials but never quite could. And Court TV has since morphed into something called "tru TV". But the trial has left its mark on the cultural landscape. Cable TV routinely covers sensational trials, sometimes for months on end. Sometimes there is a TV feed from the courtroom as there was in the OJ trial. If not then they get creative and find ways to fill hour after hour after hour without it. Judge Ito has been broadly criticized for how he ran the trial. He's still on the bench but his reputation, generally good before the trial, was in tatters by the end. No judge wants to suffer the same fate. So they are much more careful in how they handle lawyers in these situations. I'm sure that attorneys on both sides have absorbed lessons. But since neither side in the OJ trial really did a bad job the lessons are much more small bore. And it is still easy to get a good argument going as to whether the verdict was right or wrong even though its 20 years later. There are very few trials for which that is true and that's why it is such an important trial.
Finally, I have some sympathy for OJ. He was a brilliant athlete. Most of the time he seems to have comported himself well and seems to have generally come off as a nice guy. He tried hard (both creatively and just in terms of effort) to leverage his sports stardom into a more durable carrier off the football field. That's commendable. But he did not get the success and especially the respect his skill and efforts deserved. He had a temper. Under the circumstances that is understandable. He should not have (presumably in a fit of temper) killed two people. That is not forgivable but it is understandable.
Monday, June 16, 2014
Wednesday, June 4, 2014
The Stupidity of Corporate Management
The recent news that the pay (actually total compensation, a difference without a distinction that its meaningful in this context) of Fortune 500 CEOs has just topped $10 million seems an obvious justification for this post. But it actually stems from a conversation I had with an out of town cousin who was visiting recently. But, in case you missed the CEO compensation news, here's a link to one of many stories about it: http://www.npr.org/blogs/thetwo-way/2014/05/27/316336449/median-ceo-pay-tops-10-million-for-the-first-time. I am going to use The Boeing Company as a poster child for what I want to talk about. Why them? Because they are "the local boy" so I have followed them more closely than other companies. But I consider them typical rather than unique. The details may differ from company to company or executive to executive but the story line remains the same.
My academic credentials are nearly nonexistent on this subject. I took a single one semester class on Business Law in High School. I took some American Institute of Banking classes decades ago when I worked for a Bank. What you are getting is a worm's eye view of the situation, what things looked like from the other end of the organization chart. Like many, I have repeatedly asked myself "why did they do that?" when some particularly spectacular piece of management stupidity surfaced either at work or in the news. The same kinds of things kept happening over and over so there had to be some underlying method to the apparent madness. It took me a long time to extract the method as the "usual suspects" were of no use. None of what I am about to reveal is to be found in any MBA curriculum, academic publication, or in the prodigious output of the "business press" (Forbes, CNBC, etc.). But these are iron clad principles that have the force of law in actual business practice.
But first, how could this be one of my posts without a digression? So let me digress, but only for a very short time, and ask "how do CEOs justify their large compensation packages"? Their answer is that "they work hard and they are smart". And by "smart" they really mean something more along the lines of skillful. They have to be very smart to understand the complex problems they wrestle with on a day to day basis. But they also have to apply the very best judgment to solving these problems. So more than just raw "smarts" are required. So, in their eyes, they really are very special. Let me first address the "hard work" issue as it can be easily dispensed with.
I have frequented several sandwich shops over the years. The ones I frequent (and here I am specifically talking about the non-chain shops, e.g. Subway) have been run in many cases by Korean women of a certain age. I have no idea how many hours they put in but its a lot. They are there from dawn till dusk. In one shop I now frequent all the pastries are baked on site every day. So the proprietor is there from before sunup until the shop closes late in the day. These ladies put in an unbelievable number of hours. And this applies to many small businesses. I have frequented establishments run by both sexes and all ethnicities. Many small businesses depend heavily on the proprietor. And they depend on that person putting in long hours every day and having the flexibility and skill to perform multiple duties. I would stack up the range of skills and the work ethic of these proprietors against any "ten million dollar man" (and they are nearly all men) helming one of these corporate behemoths.
The rest of this post will address the intelligence and judgment components.
General Ledger
Ok. I was not altogether honest. Because I need another digression. The term or art for the corporate books is General Ledger. Some of you may be familiar with Quick Books, an inexpensive software package designed for use by small businesses. And a thorough discussion of General Ledger systems would span several weighty volumes. But there are only a few things you need to understand. And those things can be covered quickly.
General Ledger systems have what's called a "chart of accounts". This is a list of buckets (e.g. accounts) into which items of income or expense are placed. There is a separate chart of accounts for each department. Each account for a department is "rolled up" to create a division total. These totals are rolled up through larger and larger portions of the corporation until you finally get to the top. Then all the top accounts are rolled together to figure out how the corporation as a whole is doing.
General Ledger systems fulfill several roles. So it is useful to have lots of separate accounts. In a store there can be an account in the "shoe" department for "men's shoes" and another for "women's shoes" and one for "socks" and so on. So each time a pair of men's shoes is sold the amount is added into the correct account. In a similar manner the sale of a pair of women's shoes goes into its account. And so on. And we can have an account for "sales tax" and other accounts for other things. So in order to find out how the department is doing you can add all these accounts together. But you can also add the accounts for "men's shoes" together from all the shoe departments in all the stores to see how "men's shoes" are doing over all. This should give you the flavor of how General Ledger works and why most General Ledger systems have lots of separate accounts.
And so far, I have talked about income accounts. There are also expense accounts. The shoe department might have a "salary" account. But, in the same way it was useful to have lots of income accounts, it might be useful to have an "overtime" account and a "bonus" account (shoe sales people might get an extra "bonus" for selling a particularly large amount of shoes). And there might be a "lighting" account and an "advertising" account and so on.
So that gives you a flavor of how General Ledger works at its most basic level. And I demonstrated how it might be useful to add the accounts up in different ways. Corporations of any size add the accounts up in at least three different ways. (1) They add them up one way to calculate their Income Tax bill. (2) They add them up a second way to produce the "Annual Statement" for stock holders. And (3) they add them up a third way to assist management in running the company. Why do they do this? Because each "way" serves a different purpose. In the first case the idea is so show the least profit so the Income Tax bill will be as low as possible. In the second case the idea is to show the most profit so the stock holders will be happy. In the third the idea is to shed light on what parts of the business are doing well or badly and which managers are doing a good or a bad job.
As an example of this, Boeing is one of several companies that is not profitable, at least when the accounts are added up in the proper way. How do we know? Because they have not paid any Income Tax in years. However, if we add things up in the "Annual Statement" way, Boeing is very profitable. So it is only fair that their senior executives should be paid millions. And, as far as I can tell, Boeing does a terrible job properly adding things up in the third way, the way that allows them to make good management decisions. Because they have made a lot of really boneheaded decisions over the past couple of decades. With that digression complete let me get back to the main line of analysis. My first issue of management stupidity is:
General Ledger Visibility
What do I mean? Well, a few years ago Boeing was going through hard times. This resulted in a laser focus on expenses. This in turn resulted in an edict from the top echelons of the company to trim the use of office supplies and to cut travel expenses. What? Boeing is a multibillion dollar company. In this environment accountants have a term for things like office supplies and travel expenses. It is "not material", as in "this will not have a material effect on the financial situation". So why did Boeing management highlight these two tiny expense categories even though completely zeroing out all expenses in these specific categories would not have affected Boeing's profitability in a noticeable way? It is because small though they are they are "visible" in General Ledger. Each department has a General Ledger account for each. If the amount of expense in either or both of these accounts goes down the reduction will directly increase profit. But, you say, what about doing something that would make a big difference like say making Boeing engineers more efficient?
There are lots of engineers. They have relatively high salaries (not senior management salaries but definitely not janitor salaries either). If you were to say increase the efficiency of engineers by 1% wouldn't that save lots more money than you would by dinging the office supply and travel accounts? It turns out surprisingly the answer is no? The thinking goes that Engineers are on salary. If you increase their efficiency by 1% their payroll cost does not change at all. They just end up sitting on their hands for a few minutes over the course of a week. So no number in General Ledger changes so there is no savings. Is this right? It doesn't matter. Management thinks it is right. So since, to management's way of thinking, reducing office supply costs and travel costs changes the numbers in General Ledger, albeit by a small amount, it is better to do that than to try to increase the efficiency of Engineers because the latter change will not show up in the General Ledger numbers.
This General Ledger Visibility problem raises its ugly head in even more perverse ways. One way to restate the problem is "General Ledger is more real than reality". In the early days of the space program there was a process called "ground truthing". NASA people would look at satellite pictures or other measurements. Then they would go out and actually look at what was on the ground, the ground truth. They wanted to understand how much of what the satellite said was really real. Then they could figure out how far to trust the satellite data. In many cases the satellite data gave a better picture of what was going on than you could get from the ground. In other cases there were various fixes and adjustments that were necessary to get the satellite data to align with reality. And in still other cases the satellite data was misleading and could not be trusted.
General Ledger systems are like satellite data. Sometimes they tell you what is going on better than any other method. Other times they can be trusted after the appropriate adjustments and fixes have been applied. And other times they just plain mislead you. Many executives, however, are true believers when it comes to the numbers General Ledger systems spit out.
Manageable versus Unmanageable Costs
Let me be clear what I am talking about here. If an executive believes that actions he takes can affect a cost then that cost is manageable. Otherwise, it is unmanageable. Let me give you an example, in this case an example that has nothing to do with Boeing. A company I worked for used a lot of natural gas. Now this cost was visible in General Ledger. It had its own little line in the chart of accounts in a particular department. And the amount was large, millions of dollars per year. So that was not the problem. The problem was that the company had almost no control over the cost of natural gas. So to a great extent the cost was unmanageable. Now they did what they could. They put a great deal of effort into using the gas efficiently so they used as little as possible. They also tried to be smart about how they bought gas. If the thought the price trend was up they would sign up for a long term contract at a fixed price. If they thought the price trend was down they would avoid long term contracts and buy on the "spot" market.
Now the above example is a set of specific circumstances. So I'm going to move on to a more general situation. (I don't know if it applies to Boeing but likely it does.) Companies occupy buildings. In some cases they own the buildings but the trend is toward leasing. These buildings involve operating costs, specifically power for heating, lighting, air conditioning and other machinery, etc. The prime consideration that goes into how most buildings are built is construction cost. They are typically built as cheaply as possible and no thought is given to whether this will result in high operating costs. So typically these buildings are very inefficient to operate. In the last decade or so a lot of effort has gone into studying this. And it turns out that a lot of ways have been identified to reduce operating costs, particularly costs associated with energy use. And some of these ways turn out to have very good cost/benefit ratios. I have a brother who has studied this area thoroughly. He says that a lot of these "retrofits" pay for themselves by reducing operating costs dramatically. A typical payoff period is 18 months. That is a fantastically quick return on investment.
But in spite of this it is very rare to see buildings retrofitted. Why? Well, let me trot out a very lame excuse first. Many building leases are "all in". The price of the lease requires the landlord to pay operating costs like energy bills. So if the building is retrofitted it will be disruptive to the company using the building and, since the rent is fixed, there will be no cost savings. This is lame. If the retrofit is done and the rent is reduced but by less than the savings both sides benefit. The land lord has more money left over after his operating costs have been deducted from the rent check and the tenant sees cost savings because the rent is now lower. So why doesn't this happen? Because management sees rent as an unmanageable cost. It doesn't matter how high it is. It's unmanageable so efforts are turned to reducing costs in other areas. Is management correct? No!
Red money, Green money, and Blue money
If you think at all about the color of money you probably think it's all green. A nickname for U.S. currency is "greenback" because that's the predominant color of our currency. I used to also believe that all money was the same color too. This led to a lot of frustration.
In a previous job (not at Boeing) I was responsible for selecting and procuring computer equipment. This was back in the old days when a nice computer ran several million dollars. So we are talking decisions that involved very high levels of management because the equipment was very costly. (The company was far smaller than Boeing so a million dollars was a very big deal.) I am going to skip over all the "do we really need to do this" part of the discussion. Let's assume that everyone has agreed that the investment needed to be made and we were just trying to figure out how the acquisition should be structured.
What I mean by "structured" is "buy, rent, or lease" and "new or used". The idea was to pick among the various possibilities. Now naïve old me, I cranked up the spread sheet and starting calculating the cost of the various options. My assumption was "all things being equal" (and I wrangled all the technical issues to make sure that all things in fact were equal) we just wanted to structure the deal to result in the lowest overall cost. This is where I learned the hard way about red money, green money, and blue money. What do I mean?
Well part of that whole General Ledger thing is what is called a budget. Before the year starts all the income and expenses for the next year are estimated. Then the idea is not necessarily to make income go up and expense go down. It is to hit your budget numbers. (I must say that if you missed your income numbers on the high side and your expense numbers on the low side people would be pretty happy even though technically you missed your numbers.) But part of the process of creating the budget was to guess what would happen, money-wise. So the budget might include money for our piece of computer equipment. And an assumption would be made as to whether it would be bought, rented, or leased. Needless to say, there were separate "buy" "lease", and "rent" General Ledger accounts. So typically one of these budget accounts would have money in it and the others would be empty.
Silly me. I knew that there were separate accounts. But I had heard of money being "reprogrammed" in the federal budget to cover some unexpected event. And I'm a computer guy. I know that all this budget stuff is just numbers in a computer file. It's not that hard to move the numbers around. So I do my analysis. And I figure all I have to say is "if we do it this way we can save a lot of money so we just reprogram the money and everyone's happy". That's when I learned about red money (capital), green money (lease/rent), and blue money (maintenance and other operating costs). Apparently there is no philosopher's stone to turn one color of money into another color.
Now there some good reasons for not changing the color of money. There's fraud. You don't want people just changing things around willy nilly. But it is not hard to put procedures in place so you make sure the changes serve a legitimate purpose (saving money) and not just providing a cover for hanky panky. And there is the issue of "ratios". Most companies operate on borrowed money. And the banks are supposed to make sure that the company can pay the borrowed money back. So they might require a company to maintain a certain "capital ratio". The details don't matter but the result is that a company might not want to make a capital expenditure (buy some expensive piece of equipment) because it will cause the capital ratio to go out of whack. Contrarily, it might be necessary to buy something rather than rent it to keep some other ratio in line. But in my case none of these considerations came into play. Changing the color of money was perfectly feasible. It was just not done.
The Myth of Rationality
The model business people hold up of themselves to the world is that of rationality. They are not swayed by sentiment. "It's just business, mam." They want you to believe that the decisions they make are based on careful analysis and are driven solely by the profit motive. But its not so.
After many years, Boeing seems to have finally gotten the 787 program on track. They are able to build and deliver the planes on schedule and the airlines are able to put the planes in service and keep them there. But a lot of pain, suffering, and money, have been poured down numerous rat holes to get to where we are now. If you listen to management propaganda, then each of the major decisions made at the start of the program was the result of cold rationality applied to careful analysis. Here is a list of the most important and consequential decisions management made:
Taken separately any of these decisions might make sense. But taken together they represented a recipe for disaster. In my opinion, when these decisions were made Boeing management was in poor shape. What is common to all these decisions is that each decision separately would require more and better effort from Boeing management than the alternative "do it the old way" option. This is particularly true of decision #4.
The 787 program has been a fiasco for most of the lifetime of the plane. I thought at the time that Boeing really needed to do #1. But this would be hard to do. So I thought they should focus on it and avoid change elsewhere in the program. Obviously they didn't. The result was chaos everywhere. And chaos is very expensive in the plane building business
There were a number of engineering problems. This delayed things. Then parts came in incompletely or incorrectly assembled. Then the pieces did not fit together very well. And various subcontractors had trouble coming up to speed. In particular, problems in South Carolina were so great that Boeing decided they had to buy the subsidiary responsible for work there so that they could fix management there. Given that early on South Carolina had been a major problem area would you recommend minimizing their responsibilities or doubling down? Boeing decided to double down. In fact, they decided to quadruple down. Not only did they increase the volume of work of the kind originally planned but they also ended up adding in more work. They went so far as to build a full assembly line so they could play South Carolina off against the northwest. And there have been major quality problems with work out of South Carolina as late as as earlier this year. (The current official story is that "everything is good there now".)
There has been similar problems with components made in Italy and other places in the world. And, as a side effect of moving so much expertise and responsibility off shore, we have in effect taught a lot of people around the world a lot about how to build technologically advanced airplanes. This has major impacts from both a civilian perspective (China is in the process of getting a commercial airplane manufacturing capability off the ground, as are a number of other countries) and governmental perspective (the dual use nature of this technology makes it militarily important both for offensive (building better military planes) and a defensive (getting better at shooting down our military planes) perspective). People get wound up about Edward Snowden and not at Boeing. That's because Boeing has a lot of political clout and a good PR operation and Snowden doesn't. But Boeing has done a better job of providing aid and comfort to potential adversaries than Snowden has.
Anyhow, this overload caused by management overreach has resulted in a lot of problems for the 787 program. It seems back on track after many years of delays. A number of analysts think the program will never make back its costs. I think it eventually will, perhaps a decade from now.
The Boeing 787 program is a classic example of the maxim "if they want to do it they will find a way and if they don't want to do it they will find an excuse". I have seen innumerable projects that penciled out just fine. But management didn't want to do them (e.g. retrofit buildings) so they didn't. I have seen innumerable projects that did not pencil out (e.g Boeing moving their headquarters to Chicago) but management found a way. If you ask management they will say that in each case "it was simply a cold hard business decision" but you will be hard pressed to find a business case laid out in detail and that that actually pencils out.
Across the board cuts
Boeing, and lots of other companies have announced (and implemented) "across the board" budget cuts on a number of occasions. This is where you cut the budget of each part of the business by the same percentage. Turn the issue inside out and see what it looks like. If the answer is "across the board cuts" what does the result of the "hard nosed business analysis" have to be to justify this action? It has to be that all parts of the business are exactly as efficient/inefficient or important/unimportant? What are the chances that is actually true? "A snowball's chance in hell" overestimates the likelihood.
What across the board cuts tells you is that management does not understand the business they are supposed to be experts in managing. There should be strong parts of the business and weak ones. There should be parts that are more important and other parts that have less importance. And it is the primary job of management to know exactly which parts those are. Then you cut more heavily in the weak areas and more heavily in the less important areas. It even makes sense to not cut a weak area if it is critical. But you should have been shoring that important but weak area area up long before the need to cut arose. Why weren't you?
Championing across the board cuts is prima fascia evidence of incompetence. Whoever champions this should be fired immediately for cause. The only defense is if the executive in question can prove that he was literally forced to adopt equal cuts by outside forces. And if he received only moderate pressure he should be fired for not finding a way to effectively counter the pressure.
But across the board cuts are common. As are other less obvious signs of incompetence. Every time I see a management decision I ask myself the simple question "does this decision and its rationale demonstrate a deep and honest understanding of the organization"? Frequently it doesn't. As another example, various large financial institutions almost completely crashed the economy of the entire world a few years ago. Executive after executive said "I didn't know my subordinates were engaged in dangerous/unethical/risky practices" or "I had no idea that these procedures could crash the economy (or. perhaps more importantly, destroy my company)". At a minimum these statements demonstrate an ignorance of critical aspects of the business these people are charged with managing (and paid outrageous sums to manage effectively). They should have all been fired for cause for incompetence, I don't care which. I believe that many of them knew that bad behavior was rampant on their watch. But that same bad behavior resulted in them being paid massive amounts of money.
Management Responsibility
In this last example (Wall Street a few years ago) we see a question of where management's responsibility lies. I would like to turn the problem around. I often found myself with a situation where I thought that management should take some action. Frequently they didn't. It took me a long time to figure out what the real problem was. Management certainly does not want subordinates making decisions that management feels are properly in their domain. And they are diligent about asserting themselves in these situations. But what about the situation where assuming responsibility is, shall we say, inconvenient? I have found that management is equally diligent at dodging these "opportunities", usually by inaction. I came up with the following formulation years ago: "it's not a problem if it is not causing management problems".
We see this everywhere. There is a certain amount of work to do. Management doesn't want to pay for all of it to be done. The obvious solution is "off the clock" work by subordinates. If everything gets done and we stay within budget then, viewed from the management perspective, there is no problem. If there is no problem then there is no need for management to do anything. So we see a lot of creativity deployed to create situations where subordinates, for one reason or another, end up doing a lot of work that is uncompensated or undercompensated. You can root around in pretty much any newspaper during pretty much any week and you will find one or more examples of employees doing work that benefits the company but is not fully reflected in those employee's paycheck's. The company and the techniques and the justifications vary from case to case but the result is always the same. That's bad. There is worse.
Boeing was in a dog fight a few years ago over the "military tanker" contract. About fifty years ago Boeing built a bunch of airplanes that were used for in-air refueling. Needless to say, it was long past time to replace these planes with newer ones. But tankers are unsexy. So there was always some other sexier place to spend DOD money. So Boeing was having a hard time getting the government to sign on the dotted line for new planes. To be fair, Boeing tried all the legitimate techniques for getting the business first. But year after year passed by and no signed contract materialized. What's a Boeing manager to do? Well, there's always the illegitimate techniques? But they are at best a public relations problem and at worst are flat out illegal. This is a case where no manager wants their fingerprints visible on anything. What does the actual management playbook (as opposed to the one they teach from in school) say to do in these circumstances? You glower at your subordinate(s) and say "I don't care how this gets done, just do it.". If anyone asks later, you say "well, of course everyone knew that I expected them to behave in a legal and ethical manner at all times. That goes without saying.".
I don't want to re-litigate the whole tanker incident. Frankly, it was a few years ago and I remember only some of the details. And it represents an extreme example. The details ended up in the public domain. And important people were fired. Other important people went to jail. But "I don't care how, just do it" is a common strategy for providing management with plausible deniability.
Usually, what's involved is pretty mundane. My ex-boss used to work a horrific number of hours because management provided inadequate resources and he felt a responsibility to get the job done and done well. My cousin was talking about her company being too cheap to buy her a color printer. She had to jump through a bunch of unnecessary hoops to get what should have been a simple job done. Besides the "just do it" component the other point of commonality in all these cases is this. The job got done. It got done in a way that was invisible to General Ledger. The fact that it got done and that there were no visible negative consequences meant that from management's perspective there was no problem,
I spent years trying to bring my now ex-boss around to my point of view on this. He finally saw the light a couple of years after I retired. He no longer works horrible hours. And the company seems to get along ok now that his efforts are no longer heroic. Once management sees something that affects them negatively then they have a reason to take action. But the other thing I told my manager is that this sort of thing is dangerous. If you can turn your problem into management's problem without leaving any of your fingerprints visible then you're fine. But it is often impossible to do that. So the manager knows (or should know) what's going on. At that point he may decide you are not a "team player" or you are a "troublemaker". In other words, he can work things so in effect his problem becomes your problem. But the thing to remember is he could have done that anyhow.
Conclusion
You have no doubt correctly concluded that I think senior management of large companies is wildly overpaid. So let me conclude with a quick note about how this came to be. How would like it if your friends and family and softball buddies set your pay? And, oh by the way. you are the one who gets to pick the specific set of friends, family and buddies that serve on your "compensation committee". That's how it works in these large companies. Senior executives and members of the board of your company decide how much you as CEO get paid. You have come up through the ranks with the senior executives so you probably like and respect each other. As CEO you have more say than anyone else as to who serves on the Board of Directors of your company. So who do you pick as board members? Friends, possibly some members of your executive team, and CEOs (or senior executives) of other companies that you are friendly with. Everyone knows it's a "you scratch my back - I scratch yours" situation. If everybody decide that these positions should pay extremely well then everybody (or at least everybody we care about) does extremely well. But wait, there's more.
The possibility exists that this might look bad. Luckily someone came up with a great way to deal with this a few decades ago. Companies that specialized in determining "appropriate" compensation for senior executives were invented. Officially they are expert in impartially determining what a "fair" compensation package looks like. So they provide complete cover. "We hired this highly respected company to figure all this out then we did exactly what they recommended." Problem solved. It's just another one of those "hard nosed business" situations. But guess who picks out which "compensation specialist" company gets the job? The CEO. And no one has to tell anyone anything for these companies to figure out that their job is twofold. First, they come up with an astronomical number, the more astronomical the better. Second, they come up with a bunch of really high quality BS to justify the number. This second part is where they really earn their money.
And any "compensation specialist" company that does a really superior job deserves to be paid accordingly, right. It's only fair, after all. So, once a company is able to develop a bit of a reputation, it does really well. In the real world, the group made up of your friends, family, etc. would do a poor job compared to the job these companies do. Your friends would not come up with a figure that was nearly high enough. And the fact that these "compensation specialist" companies are so expert at coming up with an astronomical number and then papering the whole thing over with truly awesome BS is why they get paid the big bucks, baby.
My academic credentials are nearly nonexistent on this subject. I took a single one semester class on Business Law in High School. I took some American Institute of Banking classes decades ago when I worked for a Bank. What you are getting is a worm's eye view of the situation, what things looked like from the other end of the organization chart. Like many, I have repeatedly asked myself "why did they do that?" when some particularly spectacular piece of management stupidity surfaced either at work or in the news. The same kinds of things kept happening over and over so there had to be some underlying method to the apparent madness. It took me a long time to extract the method as the "usual suspects" were of no use. None of what I am about to reveal is to be found in any MBA curriculum, academic publication, or in the prodigious output of the "business press" (Forbes, CNBC, etc.). But these are iron clad principles that have the force of law in actual business practice.
But first, how could this be one of my posts without a digression? So let me digress, but only for a very short time, and ask "how do CEOs justify their large compensation packages"? Their answer is that "they work hard and they are smart". And by "smart" they really mean something more along the lines of skillful. They have to be very smart to understand the complex problems they wrestle with on a day to day basis. But they also have to apply the very best judgment to solving these problems. So more than just raw "smarts" are required. So, in their eyes, they really are very special. Let me first address the "hard work" issue as it can be easily dispensed with.
I have frequented several sandwich shops over the years. The ones I frequent (and here I am specifically talking about the non-chain shops, e.g. Subway) have been run in many cases by Korean women of a certain age. I have no idea how many hours they put in but its a lot. They are there from dawn till dusk. In one shop I now frequent all the pastries are baked on site every day. So the proprietor is there from before sunup until the shop closes late in the day. These ladies put in an unbelievable number of hours. And this applies to many small businesses. I have frequented establishments run by both sexes and all ethnicities. Many small businesses depend heavily on the proprietor. And they depend on that person putting in long hours every day and having the flexibility and skill to perform multiple duties. I would stack up the range of skills and the work ethic of these proprietors against any "ten million dollar man" (and they are nearly all men) helming one of these corporate behemoths.
The rest of this post will address the intelligence and judgment components.
General Ledger
Ok. I was not altogether honest. Because I need another digression. The term or art for the corporate books is General Ledger. Some of you may be familiar with Quick Books, an inexpensive software package designed for use by small businesses. And a thorough discussion of General Ledger systems would span several weighty volumes. But there are only a few things you need to understand. And those things can be covered quickly.
General Ledger systems have what's called a "chart of accounts". This is a list of buckets (e.g. accounts) into which items of income or expense are placed. There is a separate chart of accounts for each department. Each account for a department is "rolled up" to create a division total. These totals are rolled up through larger and larger portions of the corporation until you finally get to the top. Then all the top accounts are rolled together to figure out how the corporation as a whole is doing.
General Ledger systems fulfill several roles. So it is useful to have lots of separate accounts. In a store there can be an account in the "shoe" department for "men's shoes" and another for "women's shoes" and one for "socks" and so on. So each time a pair of men's shoes is sold the amount is added into the correct account. In a similar manner the sale of a pair of women's shoes goes into its account. And so on. And we can have an account for "sales tax" and other accounts for other things. So in order to find out how the department is doing you can add all these accounts together. But you can also add the accounts for "men's shoes" together from all the shoe departments in all the stores to see how "men's shoes" are doing over all. This should give you the flavor of how General Ledger works and why most General Ledger systems have lots of separate accounts.
And so far, I have talked about income accounts. There are also expense accounts. The shoe department might have a "salary" account. But, in the same way it was useful to have lots of income accounts, it might be useful to have an "overtime" account and a "bonus" account (shoe sales people might get an extra "bonus" for selling a particularly large amount of shoes). And there might be a "lighting" account and an "advertising" account and so on.
So that gives you a flavor of how General Ledger works at its most basic level. And I demonstrated how it might be useful to add the accounts up in different ways. Corporations of any size add the accounts up in at least three different ways. (1) They add them up one way to calculate their Income Tax bill. (2) They add them up a second way to produce the "Annual Statement" for stock holders. And (3) they add them up a third way to assist management in running the company. Why do they do this? Because each "way" serves a different purpose. In the first case the idea is so show the least profit so the Income Tax bill will be as low as possible. In the second case the idea is to show the most profit so the stock holders will be happy. In the third the idea is to shed light on what parts of the business are doing well or badly and which managers are doing a good or a bad job.
As an example of this, Boeing is one of several companies that is not profitable, at least when the accounts are added up in the proper way. How do we know? Because they have not paid any Income Tax in years. However, if we add things up in the "Annual Statement" way, Boeing is very profitable. So it is only fair that their senior executives should be paid millions. And, as far as I can tell, Boeing does a terrible job properly adding things up in the third way, the way that allows them to make good management decisions. Because they have made a lot of really boneheaded decisions over the past couple of decades. With that digression complete let me get back to the main line of analysis. My first issue of management stupidity is:
General Ledger Visibility
What do I mean? Well, a few years ago Boeing was going through hard times. This resulted in a laser focus on expenses. This in turn resulted in an edict from the top echelons of the company to trim the use of office supplies and to cut travel expenses. What? Boeing is a multibillion dollar company. In this environment accountants have a term for things like office supplies and travel expenses. It is "not material", as in "this will not have a material effect on the financial situation". So why did Boeing management highlight these two tiny expense categories even though completely zeroing out all expenses in these specific categories would not have affected Boeing's profitability in a noticeable way? It is because small though they are they are "visible" in General Ledger. Each department has a General Ledger account for each. If the amount of expense in either or both of these accounts goes down the reduction will directly increase profit. But, you say, what about doing something that would make a big difference like say making Boeing engineers more efficient?
There are lots of engineers. They have relatively high salaries (not senior management salaries but definitely not janitor salaries either). If you were to say increase the efficiency of engineers by 1% wouldn't that save lots more money than you would by dinging the office supply and travel accounts? It turns out surprisingly the answer is no? The thinking goes that Engineers are on salary. If you increase their efficiency by 1% their payroll cost does not change at all. They just end up sitting on their hands for a few minutes over the course of a week. So no number in General Ledger changes so there is no savings. Is this right? It doesn't matter. Management thinks it is right. So since, to management's way of thinking, reducing office supply costs and travel costs changes the numbers in General Ledger, albeit by a small amount, it is better to do that than to try to increase the efficiency of Engineers because the latter change will not show up in the General Ledger numbers.
This General Ledger Visibility problem raises its ugly head in even more perverse ways. One way to restate the problem is "General Ledger is more real than reality". In the early days of the space program there was a process called "ground truthing". NASA people would look at satellite pictures or other measurements. Then they would go out and actually look at what was on the ground, the ground truth. They wanted to understand how much of what the satellite said was really real. Then they could figure out how far to trust the satellite data. In many cases the satellite data gave a better picture of what was going on than you could get from the ground. In other cases there were various fixes and adjustments that were necessary to get the satellite data to align with reality. And in still other cases the satellite data was misleading and could not be trusted.
General Ledger systems are like satellite data. Sometimes they tell you what is going on better than any other method. Other times they can be trusted after the appropriate adjustments and fixes have been applied. And other times they just plain mislead you. Many executives, however, are true believers when it comes to the numbers General Ledger systems spit out.
Manageable versus Unmanageable Costs
Let me be clear what I am talking about here. If an executive believes that actions he takes can affect a cost then that cost is manageable. Otherwise, it is unmanageable. Let me give you an example, in this case an example that has nothing to do with Boeing. A company I worked for used a lot of natural gas. Now this cost was visible in General Ledger. It had its own little line in the chart of accounts in a particular department. And the amount was large, millions of dollars per year. So that was not the problem. The problem was that the company had almost no control over the cost of natural gas. So to a great extent the cost was unmanageable. Now they did what they could. They put a great deal of effort into using the gas efficiently so they used as little as possible. They also tried to be smart about how they bought gas. If the thought the price trend was up they would sign up for a long term contract at a fixed price. If they thought the price trend was down they would avoid long term contracts and buy on the "spot" market.
Now the above example is a set of specific circumstances. So I'm going to move on to a more general situation. (I don't know if it applies to Boeing but likely it does.) Companies occupy buildings. In some cases they own the buildings but the trend is toward leasing. These buildings involve operating costs, specifically power for heating, lighting, air conditioning and other machinery, etc. The prime consideration that goes into how most buildings are built is construction cost. They are typically built as cheaply as possible and no thought is given to whether this will result in high operating costs. So typically these buildings are very inefficient to operate. In the last decade or so a lot of effort has gone into studying this. And it turns out that a lot of ways have been identified to reduce operating costs, particularly costs associated with energy use. And some of these ways turn out to have very good cost/benefit ratios. I have a brother who has studied this area thoroughly. He says that a lot of these "retrofits" pay for themselves by reducing operating costs dramatically. A typical payoff period is 18 months. That is a fantastically quick return on investment.
But in spite of this it is very rare to see buildings retrofitted. Why? Well, let me trot out a very lame excuse first. Many building leases are "all in". The price of the lease requires the landlord to pay operating costs like energy bills. So if the building is retrofitted it will be disruptive to the company using the building and, since the rent is fixed, there will be no cost savings. This is lame. If the retrofit is done and the rent is reduced but by less than the savings both sides benefit. The land lord has more money left over after his operating costs have been deducted from the rent check and the tenant sees cost savings because the rent is now lower. So why doesn't this happen? Because management sees rent as an unmanageable cost. It doesn't matter how high it is. It's unmanageable so efforts are turned to reducing costs in other areas. Is management correct? No!
Red money, Green money, and Blue money
If you think at all about the color of money you probably think it's all green. A nickname for U.S. currency is "greenback" because that's the predominant color of our currency. I used to also believe that all money was the same color too. This led to a lot of frustration.
In a previous job (not at Boeing) I was responsible for selecting and procuring computer equipment. This was back in the old days when a nice computer ran several million dollars. So we are talking decisions that involved very high levels of management because the equipment was very costly. (The company was far smaller than Boeing so a million dollars was a very big deal.) I am going to skip over all the "do we really need to do this" part of the discussion. Let's assume that everyone has agreed that the investment needed to be made and we were just trying to figure out how the acquisition should be structured.
What I mean by "structured" is "buy, rent, or lease" and "new or used". The idea was to pick among the various possibilities. Now naïve old me, I cranked up the spread sheet and starting calculating the cost of the various options. My assumption was "all things being equal" (and I wrangled all the technical issues to make sure that all things in fact were equal) we just wanted to structure the deal to result in the lowest overall cost. This is where I learned the hard way about red money, green money, and blue money. What do I mean?
Well part of that whole General Ledger thing is what is called a budget. Before the year starts all the income and expenses for the next year are estimated. Then the idea is not necessarily to make income go up and expense go down. It is to hit your budget numbers. (I must say that if you missed your income numbers on the high side and your expense numbers on the low side people would be pretty happy even though technically you missed your numbers.) But part of the process of creating the budget was to guess what would happen, money-wise. So the budget might include money for our piece of computer equipment. And an assumption would be made as to whether it would be bought, rented, or leased. Needless to say, there were separate "buy" "lease", and "rent" General Ledger accounts. So typically one of these budget accounts would have money in it and the others would be empty.
Silly me. I knew that there were separate accounts. But I had heard of money being "reprogrammed" in the federal budget to cover some unexpected event. And I'm a computer guy. I know that all this budget stuff is just numbers in a computer file. It's not that hard to move the numbers around. So I do my analysis. And I figure all I have to say is "if we do it this way we can save a lot of money so we just reprogram the money and everyone's happy". That's when I learned about red money (capital), green money (lease/rent), and blue money (maintenance and other operating costs). Apparently there is no philosopher's stone to turn one color of money into another color.
Now there some good reasons for not changing the color of money. There's fraud. You don't want people just changing things around willy nilly. But it is not hard to put procedures in place so you make sure the changes serve a legitimate purpose (saving money) and not just providing a cover for hanky panky. And there is the issue of "ratios". Most companies operate on borrowed money. And the banks are supposed to make sure that the company can pay the borrowed money back. So they might require a company to maintain a certain "capital ratio". The details don't matter but the result is that a company might not want to make a capital expenditure (buy some expensive piece of equipment) because it will cause the capital ratio to go out of whack. Contrarily, it might be necessary to buy something rather than rent it to keep some other ratio in line. But in my case none of these considerations came into play. Changing the color of money was perfectly feasible. It was just not done.
The Myth of Rationality
The model business people hold up of themselves to the world is that of rationality. They are not swayed by sentiment. "It's just business, mam." They want you to believe that the decisions they make are based on careful analysis and are driven solely by the profit motive. But its not so.
After many years, Boeing seems to have finally gotten the 787 program on track. They are able to build and deliver the planes on schedule and the airlines are able to put the planes in service and keep them there. But a lot of pain, suffering, and money, have been poured down numerous rat holes to get to where we are now. If you listen to management propaganda, then each of the major decisions made at the start of the program was the result of cold rationality applied to careful analysis. Here is a list of the most important and consequential decisions management made:
- They would move from a plane made primarily out of aluminum to one made in large part out of carbon fiber.
- They would transition from a "send a lot of small parts from subcontractors to a Boeing plant for final assembly" to a "send large pre-assembled pieces of the plane to a Boeing plant where they will be snapped together" construction method.
- Instead of Boeing doing all the design and "integration" (making sure all the parts fit together) work a lot of the design and integration work will be done by contractors with Boeing supervising.
- Instead of almost all of the plane being built in the U.S. large parts of the plane would be farmed out to foreign countries.
Taken separately any of these decisions might make sense. But taken together they represented a recipe for disaster. In my opinion, when these decisions were made Boeing management was in poor shape. What is common to all these decisions is that each decision separately would require more and better effort from Boeing management than the alternative "do it the old way" option. This is particularly true of decision #4.
The 787 program has been a fiasco for most of the lifetime of the plane. I thought at the time that Boeing really needed to do #1. But this would be hard to do. So I thought they should focus on it and avoid change elsewhere in the program. Obviously they didn't. The result was chaos everywhere. And chaos is very expensive in the plane building business
There were a number of engineering problems. This delayed things. Then parts came in incompletely or incorrectly assembled. Then the pieces did not fit together very well. And various subcontractors had trouble coming up to speed. In particular, problems in South Carolina were so great that Boeing decided they had to buy the subsidiary responsible for work there so that they could fix management there. Given that early on South Carolina had been a major problem area would you recommend minimizing their responsibilities or doubling down? Boeing decided to double down. In fact, they decided to quadruple down. Not only did they increase the volume of work of the kind originally planned but they also ended up adding in more work. They went so far as to build a full assembly line so they could play South Carolina off against the northwest. And there have been major quality problems with work out of South Carolina as late as as earlier this year. (The current official story is that "everything is good there now".)
There has been similar problems with components made in Italy and other places in the world. And, as a side effect of moving so much expertise and responsibility off shore, we have in effect taught a lot of people around the world a lot about how to build technologically advanced airplanes. This has major impacts from both a civilian perspective (China is in the process of getting a commercial airplane manufacturing capability off the ground, as are a number of other countries) and governmental perspective (the dual use nature of this technology makes it militarily important both for offensive (building better military planes) and a defensive (getting better at shooting down our military planes) perspective). People get wound up about Edward Snowden and not at Boeing. That's because Boeing has a lot of political clout and a good PR operation and Snowden doesn't. But Boeing has done a better job of providing aid and comfort to potential adversaries than Snowden has.
Anyhow, this overload caused by management overreach has resulted in a lot of problems for the 787 program. It seems back on track after many years of delays. A number of analysts think the program will never make back its costs. I think it eventually will, perhaps a decade from now.
The Boeing 787 program is a classic example of the maxim "if they want to do it they will find a way and if they don't want to do it they will find an excuse". I have seen innumerable projects that penciled out just fine. But management didn't want to do them (e.g. retrofit buildings) so they didn't. I have seen innumerable projects that did not pencil out (e.g Boeing moving their headquarters to Chicago) but management found a way. If you ask management they will say that in each case "it was simply a cold hard business decision" but you will be hard pressed to find a business case laid out in detail and that that actually pencils out.
Across the board cuts
Boeing, and lots of other companies have announced (and implemented) "across the board" budget cuts on a number of occasions. This is where you cut the budget of each part of the business by the same percentage. Turn the issue inside out and see what it looks like. If the answer is "across the board cuts" what does the result of the "hard nosed business analysis" have to be to justify this action? It has to be that all parts of the business are exactly as efficient/inefficient or important/unimportant? What are the chances that is actually true? "A snowball's chance in hell" overestimates the likelihood.
What across the board cuts tells you is that management does not understand the business they are supposed to be experts in managing. There should be strong parts of the business and weak ones. There should be parts that are more important and other parts that have less importance. And it is the primary job of management to know exactly which parts those are. Then you cut more heavily in the weak areas and more heavily in the less important areas. It even makes sense to not cut a weak area if it is critical. But you should have been shoring that important but weak area area up long before the need to cut arose. Why weren't you?
Championing across the board cuts is prima fascia evidence of incompetence. Whoever champions this should be fired immediately for cause. The only defense is if the executive in question can prove that he was literally forced to adopt equal cuts by outside forces. And if he received only moderate pressure he should be fired for not finding a way to effectively counter the pressure.
But across the board cuts are common. As are other less obvious signs of incompetence. Every time I see a management decision I ask myself the simple question "does this decision and its rationale demonstrate a deep and honest understanding of the organization"? Frequently it doesn't. As another example, various large financial institutions almost completely crashed the economy of the entire world a few years ago. Executive after executive said "I didn't know my subordinates were engaged in dangerous/unethical/risky practices" or "I had no idea that these procedures could crash the economy (or. perhaps more importantly, destroy my company)". At a minimum these statements demonstrate an ignorance of critical aspects of the business these people are charged with managing (and paid outrageous sums to manage effectively). They should have all been fired for cause for incompetence, I don't care which. I believe that many of them knew that bad behavior was rampant on their watch. But that same bad behavior resulted in them being paid massive amounts of money.
Management Responsibility
In this last example (Wall Street a few years ago) we see a question of where management's responsibility lies. I would like to turn the problem around. I often found myself with a situation where I thought that management should take some action. Frequently they didn't. It took me a long time to figure out what the real problem was. Management certainly does not want subordinates making decisions that management feels are properly in their domain. And they are diligent about asserting themselves in these situations. But what about the situation where assuming responsibility is, shall we say, inconvenient? I have found that management is equally diligent at dodging these "opportunities", usually by inaction. I came up with the following formulation years ago: "it's not a problem if it is not causing management problems".
We see this everywhere. There is a certain amount of work to do. Management doesn't want to pay for all of it to be done. The obvious solution is "off the clock" work by subordinates. If everything gets done and we stay within budget then, viewed from the management perspective, there is no problem. If there is no problem then there is no need for management to do anything. So we see a lot of creativity deployed to create situations where subordinates, for one reason or another, end up doing a lot of work that is uncompensated or undercompensated. You can root around in pretty much any newspaper during pretty much any week and you will find one or more examples of employees doing work that benefits the company but is not fully reflected in those employee's paycheck's. The company and the techniques and the justifications vary from case to case but the result is always the same. That's bad. There is worse.
Boeing was in a dog fight a few years ago over the "military tanker" contract. About fifty years ago Boeing built a bunch of airplanes that were used for in-air refueling. Needless to say, it was long past time to replace these planes with newer ones. But tankers are unsexy. So there was always some other sexier place to spend DOD money. So Boeing was having a hard time getting the government to sign on the dotted line for new planes. To be fair, Boeing tried all the legitimate techniques for getting the business first. But year after year passed by and no signed contract materialized. What's a Boeing manager to do? Well, there's always the illegitimate techniques? But they are at best a public relations problem and at worst are flat out illegal. This is a case where no manager wants their fingerprints visible on anything. What does the actual management playbook (as opposed to the one they teach from in school) say to do in these circumstances? You glower at your subordinate(s) and say "I don't care how this gets done, just do it.". If anyone asks later, you say "well, of course everyone knew that I expected them to behave in a legal and ethical manner at all times. That goes without saying.".
I don't want to re-litigate the whole tanker incident. Frankly, it was a few years ago and I remember only some of the details. And it represents an extreme example. The details ended up in the public domain. And important people were fired. Other important people went to jail. But "I don't care how, just do it" is a common strategy for providing management with plausible deniability.
Usually, what's involved is pretty mundane. My ex-boss used to work a horrific number of hours because management provided inadequate resources and he felt a responsibility to get the job done and done well. My cousin was talking about her company being too cheap to buy her a color printer. She had to jump through a bunch of unnecessary hoops to get what should have been a simple job done. Besides the "just do it" component the other point of commonality in all these cases is this. The job got done. It got done in a way that was invisible to General Ledger. The fact that it got done and that there were no visible negative consequences meant that from management's perspective there was no problem,
I spent years trying to bring my now ex-boss around to my point of view on this. He finally saw the light a couple of years after I retired. He no longer works horrible hours. And the company seems to get along ok now that his efforts are no longer heroic. Once management sees something that affects them negatively then they have a reason to take action. But the other thing I told my manager is that this sort of thing is dangerous. If you can turn your problem into management's problem without leaving any of your fingerprints visible then you're fine. But it is often impossible to do that. So the manager knows (or should know) what's going on. At that point he may decide you are not a "team player" or you are a "troublemaker". In other words, he can work things so in effect his problem becomes your problem. But the thing to remember is he could have done that anyhow.
Conclusion
You have no doubt correctly concluded that I think senior management of large companies is wildly overpaid. So let me conclude with a quick note about how this came to be. How would like it if your friends and family and softball buddies set your pay? And, oh by the way. you are the one who gets to pick the specific set of friends, family and buddies that serve on your "compensation committee". That's how it works in these large companies. Senior executives and members of the board of your company decide how much you as CEO get paid. You have come up through the ranks with the senior executives so you probably like and respect each other. As CEO you have more say than anyone else as to who serves on the Board of Directors of your company. So who do you pick as board members? Friends, possibly some members of your executive team, and CEOs (or senior executives) of other companies that you are friendly with. Everyone knows it's a "you scratch my back - I scratch yours" situation. If everybody decide that these positions should pay extremely well then everybody (or at least everybody we care about) does extremely well. But wait, there's more.
The possibility exists that this might look bad. Luckily someone came up with a great way to deal with this a few decades ago. Companies that specialized in determining "appropriate" compensation for senior executives were invented. Officially they are expert in impartially determining what a "fair" compensation package looks like. So they provide complete cover. "We hired this highly respected company to figure all this out then we did exactly what they recommended." Problem solved. It's just another one of those "hard nosed business" situations. But guess who picks out which "compensation specialist" company gets the job? The CEO. And no one has to tell anyone anything for these companies to figure out that their job is twofold. First, they come up with an astronomical number, the more astronomical the better. Second, they come up with a bunch of really high quality BS to justify the number. This second part is where they really earn their money.
And any "compensation specialist" company that does a really superior job deserves to be paid accordingly, right. It's only fair, after all. So, once a company is able to develop a bit of a reputation, it does really well. In the real world, the group made up of your friends, family, etc. would do a poor job compared to the job these companies do. Your friends would not come up with a figure that was nearly high enough. And the fact that these "compensation specialist" companies are so expert at coming up with an astronomical number and then papering the whole thing over with truly awesome BS is why they get paid the big bucks, baby.
Tuesday, May 20, 2014
Monica Lewinski and the failure of Journalism
The word "hook" is a term of art. It is something that is included in order to attract attention. "Monica Lewinski" in the title is the hook for this piece. I will talk about her but this piece is primarily about other things. She is able to serve as my hook because she has been in the news recently. Andy Warhol coined the phrase "15 minutes of fame" to describe people who come under intense scrutiny for a short period of time. As I write this it appears that interest in Ms. Lewinski is already waning. It lasted more than 15 minutes. But an older phrase, "three day wonder", appears to be a reasonably accurate description for her recent time in the spotlight. The action that occasions her current round of attention is piece she wrote for Vanity Fair. It's in the June issue, the one with Jon Hamm (Vanity Fair's hook) on the cover.
I will get back to Ms. Lewinski and what she had to say at the end of this piece. And she does tie in to my main thesis. And that thesis is encapsulated in the boring (or at least less hook-ish) part of my title. And before continuing let me confess to a bit of hyperbole. I am not going to talk about all of journalism. I am going to focus on what passes for journalism inside the "beltway", the circular highway that surrounds our nation's capital, Washington DC. I believe my thesis applies to a broad swath of journalism but I am not going to attempt to prove that. I am not even going to talk about it. I will leave the question of how broadly my thesis applies across all areas of journalism in the hands of you, dear reader.
If I am going to talk about journalism failure I need to start by talking about journalism success. And to do that it is important to understand what journalism is about. Libraries are divided into two broad sections, fiction and non-fiction. Journalism resides in the broad category of non-fiction. Journalism is about what is true not what is false. It is about what is not what might be or how we wish things to be. Journalism is also bound up in the news, or more broadly, current events. Good journalism tells us what is going on in the world. It also tells us what is NOT going on in the world. There is an old saw to the effect that "people watch the news on TV to find out what disasters did not happen today".
Bound up in the news is the concept of "breaking news". Journalists value speed. They treasure the "scoop", getting a story out before anyone else does. And speed is sometimes the enemy of accuracy. The quick version of some event may be incomplete or inaccurate. I am going to deal with that problem by ignoring it. I am going to examine how three big stories were covered, not by any specific journalist but broadly. And each of these stories unfolded over a period of years. So with respect to the stories I am going to discuss there was plenty of time to fill in any gaps or correct any inaccuracies that were the result of the need for speed. And, depressingly, the time period over which these stories occurred is many decades. Given the amount of time involved the problem is systemic. It is not limited to a particular story or journalist or news organization. The dominant news medium was print for the first story and TV for the last. So maybe the Internet will finally fix the problem. Only time will tell.
The first story I am going to talk about is frequently referred to at the "McCarthy Era" or "McCarthyism". Senator Joe McCarthy was a Republican back bencher from Wisconsin who was first elected in 1946. He became famous starting with a speech he made in 1950 and remained famous until his death in 1957. To explain what the fuss was about will require a little background.
The US got dragged into World War II on the side of the British and in opposition to the Nazis. On the theory that "the enemy of my enemy is my friend" the US ended up allied with what was then called the U.S.S.R. but which I will refer to as Russia for convenience. This was a good thing because the longest campaigns and the largest battles were fought between the Germans and the Russians. But the Russians were never very popular either before or during the war. And after the war the Russians took political and economic control of a group of countries generally referred to as "Eastern Europe". This made the Russians very unpopular by the late '40s. So there was an opportunity to make political hay. The Democrats had been in control before the war and during it. So blaming the Democrats for various bad behavior (e.g. cozying up to the commies) was a fun and profitable game for the Republicans.
Added to this was a long history of aggressive spying by the Russians. The Russians maintained an active program of spying and undercover political shenanigans in the '30s and during and after WWII. Their activities seemed unimportant to the US in the '30s. We turned a blind eye during the war in order to keep the Russians in the fight. The single biggest coup for Russian intelligence was stealing the US design for the Atomic Bomb. So by the late '40s the Russians were "dirty commies" who were spies and saboteurs. In the middle of this was the US State Department. During the war their job was to keep the Russians in the fight no matter what. This meant that various State Department officials spent a lot of time with Russians and said nice things about them on a regular basis. This left many State Department officials wide open to unscrupulous attacks. At the same time a number of Russian spies were identified by authorities. Enter Joe McCarthy.
McCarthy was happy to launch unscrupulous attacks. He was especially happy to launch them against the State Department. He was famous for waving a piece of paper around where it could be photographed but not read. According to McCarthy it contained a specific number of names (51 or 87 or some other specific number) of spies or traitors in the State Department or in some other part of the government. We now know that none of these papers contained any names at all. There were various investigations and committee hearings. And some spies were exposed. But the information to expose them was developed by the FBI or other government agency. J. Edgar Hoover (then head of the FBI) found McCarthy useful so he occasionally fed McCarthy tips. So did a few other government officials. We now know that McCarthy and his operatives developed no "actionable intelligence" on their own during this period.
In other words, McCarthy was a fraud (and a well known drunk). And it quickly became apparent he was a fraud to those in the know including many journalists. But he was useful. He advanced an agenda that benefitted people like J Edgar Hoover. Eisenhower, an honest and able man found him useful as he was damaging Democrats and Eisenhower was running for President as a Republican in '52. His theory was he could rein him in after the election. "Journalists" found him useful because he was good copy. So a circle of powerful people, many of them journalists, ran interference for him. The result was that McCarthy was able to ruin the lives of many good and patriotic people.
There is a journalist who is famous for openly opposing McCarthy. His name is Edward R. Murrow. Many books have been written about this subject. But a quick introduction to the Murrow/McCarthy battle can be found in a very good movie called "Good Night and Good Luck" starring George Clooney. But Murrow was an outlier. Almost no other "journalists" openly opposed McCarthy. Most of them jumped on the gravy train that McCarthy represented and enjoyed the ride.
McCarthy was eventually brought down and his era slowly ground to a halt. Was it great (or even adequate) journalism that did it? Sadly, no. It was TV. ABC was the new network on the block at the time and did not have a full schedule of daytime TV programs. McCarthy launched a Senate investigation that came to be known as the "Army/McCarthy hearings" because they were ostensibly about treason in the army. ABC decided to televise them. They went on for weeks and McCarthy was front and center as master of ceremonies. Average Americans got to see McCarthy as he actually was not as the news media portrayed him. And they did not like what they saw. The hearings effectively ended when the attorney representing the army said to McCarthy "Have you no sense of decency, sir, at long last? Have you no sense of decency?" The audience in the room and at home were nearly unanimous in their opinion that the answer was "no".
The next story I am going to cover is the granddaddy of all "gate"s, Watergate. Richard Nixon, who had come to prominence as part of the crew that hung on to Joe McCarthy's coat tails, was elected narrowly to the Presidency in 1968. So when 1972 rolled around he was of a mind to take no chances. But for a number of reasons he was way ahead. This was a situation he had no experience with. Not quite believing his good fortune and sitting on a large well funded organization (called CRP by the Nixon people and CREEP, technically the "Committee to Re-Elect the President", by everyone else) he decided to leave no stone unturned. A secret group called the "plumbers" (we find and fix leaks) was formed. They decided to break into the headquarters of the Democratic National Committee. The DNC happened to be then housed in a building complex near the Lincoln Memorial called the "Watergate Complex". The name of the building eventually became the nickname for the scandal.
On their second burglary job the plumbers were caught. Events surrounding Watergate spawned the aphorism "it's not the crime that gets you, it's the cover up" because that is how Watergate went. If the Nixon people had owned up early on they probably would have received a slap on the wrist and Nixon would have still been re-elected. Instead the burglars were initially characterized as a "rogue operation" that no senior officials knew anything about. But then payoffs were arranged and various cover up contingency plans were hatched and implemented. And things kept spiraling out in more and more baroque ways. Eventually the whole thing broke wide open and Nixon was forced to resign.
There is a Murrow-like character in Watergate. Except it is two people operating as a team that came to be known by the nickname Woodstein. The two members were Bob Woodward and Carl Bernstein. They were junior reporters for the Washington Post. As with McCarthyism before, most of the news media (including most of the senior reporters at the Washington Post) either provided cover for the Nixon people or stood on the sideline. Another hero in uncovering the scandal was a Federal Judge named John Sirica. He was the judge that officiated at the original burglary case. He refused to accept a plea deal the Nixon Justice Department had put together as part of the cover up effort. As a result of his probing facts came out that pointed to a larger conspiracy. This was one of several key points where the Nixon people came very close to successfully hushing things up. There is a book by Woodstein and a movie starring Dustin Hoffman and Robert Redford called "All the President's Men" that covers some of the Watergate events. But the whole story has enough twists and turns (and players) to fill an entire season of "Game of Thrones".
From start to finish Watergate took about 3 years. The burglars were caught in June of 1972. The US Senate convened a "Watergate Hearing" committee in May of 1973. The critical time was during this first 18 months. The election took place in November of 1972 (Nixon won big). The Sirica hearings that led to additional information coming out also happened during this period. Woodstein were most active during this period. The revelation before the Senate committee (and the public) in August of 1973 of the existence of the Nixon Tapes put an end to any serious possibility of the cover up succeeding.
And, unlike the Army/McCarthy hearing, the Watergate Hearing was well conducted. It was covered on TV but this time the public gave the participating Senators high marks for how they comported themselves. It would be nice to report that DC journalists as a group also comported themselves well during the critical early period. But they didn't. They divided themselves for the most part into the "Nixon apologists" group and the "there's no story here" group. Once the existence of the Nixon Tapes was revealed it quickly became apparent that there was a big story here. At that point the DC news media came piling in. There were lots more twists and turns. But Nixon resigned in August of 1974 and was pardoned about a month later by President Ford.
I was too young for the McCarthy era. I heard stories about it and the last embers of McCarthyism were just dying down when I started getting interested in the world around me. But I was front and center for Watergate. And Watergate whetted my appetite to learn more about the McCarthy era. But by then (and still to some extent all the way to the present) the McCarthy period is not much spoken of. Very few people covered themselves in glory during this period. And there are a lot of people who engaged in shameful behavior during that period. They are happy to let sleeping dogs lie.
In any case, after Watergate wound up I spent some time trying to figure out what lessons could be learned. (I did the same thing at about the same time with respect to Vietnam. See http://sigma5.blogspot.com/2014/04/vietnam-lessons-learned.html for more on what I learned from Vietnam). My basic question with the Watergate affair was how to evaluate whether the media was doing a good job with respect to a potential scandal. I came up with two questions: (1) Is the media doing a thorough investigation? (2) Is the media afraid of the powers that be (the people being investigated)? The two questions are related. If the media is afraid of (or beholden to) the powers that be they are more likely to do a poor (or nonexistent) investigation. And the people who need to talk in order for the story to come out are less likely to spill the beans if they are afraid. With Watergate a large segment of the media had effectively been bought off by the Nixon Administration. This is not done using bags of cash. It is done by "access" (giving selected members of the press access - either off the record or on - to key administration figures) and "leaks" (dribbling out "not for attribution" juicy ("newsworthy") tidbits).
The Nixon Administration had a segment of the media in their pocket using some combination of access and leaks. This is not necessarily a bad thing. Everybody does it. But good journalists weigh the costs against the benefits. Are they being given correct information? Are they being required to slant their coverage in order to stay in the good graces of the administration? Good journalists should never tolerate being given bad information. And a certain amount of "slant" is probably unavoidable. But the slant should be kept to saying nice things about the administration (how much and for how long is a judgment call) but it should never extend to suppressing facts or shutting out the other side's ability to get their story out. So in the early stages of Watergate the Nixon Administration did not lack for cheerleaders.
Then there was the "thorough investigation" issue. Most of the media coverage between June and November of '72 was election coverage. With respect to Watergate it was definitely "there's no story there". How much of this was laziness or narrow mindedness versus being bought off by access and leaks versus fear of the Nixon Administration is hard to tell. The Nixon people kept a formal "enemies" list. People on this list were to be sabotaged at every opportunity. Given the number of "journalists" working in DC, the list was remarkably short. And with that let me move on to the third story, the one that involved Ms. Lewinski.
Actually this story is multiple stories. The first one goes by the name of "Whitewater". It broke during the 1992 campaign when Bill Clinton was running for President. At heart it was an influence peddling scandal. Someone does a favor for Bill and Bill does a favor for this person in return. Whitewater was a real estate development. The Clintons (before Bill was running for President) were given an opportunity to get in on the ground floor of a deal that was supposed to be highly profitable. The problem with this scheme is that the Clintons ended up losing a bundle of money on the deal. After that the Clintons were unlikely to come through with the "pro quo" to go with the "quid". So even if the plan was to peddle influence, it didn't happen in this case.
Clinton won the election. In spite of this the "investigation" of Whitewater continued. But no one has ever shown that the Clintons made money on the deal. Various investigations have come up with various figures for their loss. But the figure was in the tens of thousands of dollars. (For contrast, Bill was earning $26,500 a year at the time of the deal.) Mostly what these investigations turned up was that the other party to the deal, a banker named Jim MacDougal, was a real sleezeball. But Whitewater turned out to be only the first of the Clinton "scandals". And, in an homage to Watergate, a "gate" nickname was usually attached to each.
The next one was "travel-gate". The Clintons kicked the current occupants of the White House travel office out and installed their own people. I never could understand what the big deal was. (And George W Bush did the same thing 10 years later and no one let out a peep.) Travel-gate somehow managed to garner vast quantities of publicity anyhow.
Shortly thereafter, we were treated to "Vince Foster-gate". Vince Foster was a Whitehouse aid who committed suicide. Somehow, in spite of the fact that the death was thoroughly investigated there was supposed to be some deep mysterious conspiracy behind the death. "It wasn't a suicide. It was a hit job ordered by Bill Clinton." It never made any sense. But the media obsessed about it for month after month anyhow.
There were others. It is now hard to keep them all straight. But before moving on to the one that involved Ms. Lewinski let me cover one more. Hillary was employed for many years by the Rose law firm. It was one of those political law firms that are ubiquitous in DC but Rose was in Little Rock, the state capital of Arkansas. While she was there she decided to invest in cattle futures. There is no evidence she ever had any interest in or knowledge of cattle futures except in the case of this one transaction. And the transaction turned a nice profit. Now, if you know how to game the system, it's pretty easy to make sure that a single transaction for a single individual makes money. There is no firm evidence that this happened in this case. But a single very profitable transaction is suggestive. So here we have a classic influence peddling scenario. But this whole thing never got any real traction. We heard ad infinitum about Whitewater, at best a failed effort at influence peddling, and we heard almost nothing about cattle futures, a classic influence peddling scenario. To this day I can make no sense of this.
Before he was elected there were a lot of rumors that Bill Clinton was a skirt chaser. No one was able to come up with definitive proof but there was a lot of speculation. Four years before Clinton ran another Democrat named Gary Hart ran for President. And he too was surrounded by similar rumors. One day he dared the media to come up with definitive proof. Shortly thereafter proof appeared that Hart had dallied with a lady named Donna Rice on a boat called "Monkey Business". Whether he was informed by the Hart experience or he was just a more careful politician, Clinton never made that mistake. In fact, in a famous "60 Minutes" interview early in the campaign he owned up to being a sinner and to having committed unspecified sins. He also did not take a "holier than thou" attitude and chastise others who had been caught out. So the implied pact was that his past dalliances would be let pass but that he would mend his ways while in the White House.
Various "bimbo alerts" surfaced after he entered the White House having to do with events that had occurred before he became President. But no hard proof was found. That is until Paula Jones emerged. She alleged an affair with Clinton. But hard proof was scarce. Eventually a lawsuit ensued and depositions were taken, including one by Bill Clinton. Meanwhile it turned out that Clinton had become involved with a White House intern named Monica Lewinski. The most salacious aspect of this involvement can best be characterized as mutual jerk off sessions. No actual sex (in the biblical sense) was involved. But that turned out to be enough. Lewinski had been confiding in a friend named Linda Tripp. Tripp in turn had consulted Lucianne Goldberg. Goldberg was very active in Republican circles. She advised Tripp to secretly tape her conversations with Lewinski. When it came out that Lewinski had a dress with semen stains on it (the "blue dress") Goldberg counseled Tripp to counsel Lewinski to keep the dress as insurance. . Tripp did what Goldberg counseled and Lewinski did what Tripp recommended.
The Republicans had engineered an "independent council" investigation of the various Clinton "scandals". They then engineered the replacement of original head with a hard charging conservative named Ken Starr. Starr was made aware of the existence of the tapes and the dress. He went to town. The investigation was supposed to be handled in secret but the Starr operation leaked like a sieve. And, in spite of running down every whisper, Starr concluded there was no serious wrongdoing involved. But after pressure was applied he dumped the whole thing in the lap of the US House of Representatives. The body was controlled by Republicans at the time so they promptly moved bills of impeachment. This results in a trial with the Senate in the role of the jury. The Senate (controlled by Democrats) did not vote to convict. The public generally concurred with the opinion of the Senate and Republicans did badly in the next election. With his feet cut out from under him, Clinton eventually settled with Paula Jones for $850,000 and no admission of guilt.
As a side note, the Tripp tapes were illegally recorded. The reason I mention this is a couple of years later another tape surfaced. This one featured Newt Gingrich, then Speaker of the House, and documented him engaging in flagrantly unethical behavior. Not a peep about illegality was heard from Republicans when the Tripp tapes surfaced. But a huge uproar went up about the "illegality" of the tape in the Gingrich case. The tape was leaked to the New York Times by Democratic Representative Jim McDermott. Republicans (including now Speaker John Boehner, who was heard on the tape) sued McDermott. The case dragged out for years and McDermott eventually lost. The result was millions of dollars of penalties, court costs, and legal fees. I will say in defense of the media that they did actively support the McDermott side of the case.
I applied my two Watergate tests to the various Clinton "scandals". In the Watergate case the answers were "no" (the media did not thoroughly investigate, at least in the critical early period when it mattered) and "yes" (many media figures were afraid of the Nixon Administration. Many low level employees also frankly admitted to Woodstein that they were afraid to talk.) In the Whitewater case, I quickly concluded the opposite. The answers were "yes" (a whole crop of journalists who had grown up on Watergate were eager to crack their own "gate") and "no" (no one in Little Rock seemed to be the least bit afraid of the Clintons nor reluctant to talk). If there was any substance to Whitewater I expected it to emerge quickly. It didn't. (The basic facts of Whitewater were all in the original story.) It became quickly apparent that the same was true of "travel-gate", "Vince Foster-gate" and other Clinton "scandals". The exceptions were "cattle futures", which the media quickly lost interest in, and the Lewinski affair.
Given this pattern at some point the story should have changed from "allegations by anonymous sources have surfaced suggesting Clinton involvement in fill-in-the-blank-gate" to "the GOP scandal machine has surfaced a new and likely false charge against the Clintons in a crass effort to damage them politically" but it never did. Instead the media ignores their earlier bad behavior and relies heavily on the Lewinski affair when the subject is raised because they can argue with at least marginal credibility that they behaved appropriately in that case. And the beltway media has yet to own up to their sins in any of these stories. I note without comment that in all the stories I have recounted the beltway media acted to promote Republican causes and damage Democratic ones. I am perfectly willing to believe that examples going the opposite way exist. Conservatives have suggested a number of possibilities. But so far I have found their analysis unconvincing.
Finally, let me recommend Ms. Lewinski's piece. It is well written and she has some interesting things to say. She does herself justice in that she gives us a much more well rounded picture of herself than the media has at any time, then or now. She titles her piece in part "The Culture of Humiliation". She styles herself an expert on that particular subject and I am convinced by her logic. Her involvement in a "gate" has effectively forestalled many carrier options. She has suggested that she can provide assistance to others who have also been the target of public humiliation. Again I am convinced. I wish her all the luck and much success in her endeavor.
I will get back to Ms. Lewinski and what she had to say at the end of this piece. And she does tie in to my main thesis. And that thesis is encapsulated in the boring (or at least less hook-ish) part of my title. And before continuing let me confess to a bit of hyperbole. I am not going to talk about all of journalism. I am going to focus on what passes for journalism inside the "beltway", the circular highway that surrounds our nation's capital, Washington DC. I believe my thesis applies to a broad swath of journalism but I am not going to attempt to prove that. I am not even going to talk about it. I will leave the question of how broadly my thesis applies across all areas of journalism in the hands of you, dear reader.
If I am going to talk about journalism failure I need to start by talking about journalism success. And to do that it is important to understand what journalism is about. Libraries are divided into two broad sections, fiction and non-fiction. Journalism resides in the broad category of non-fiction. Journalism is about what is true not what is false. It is about what is not what might be or how we wish things to be. Journalism is also bound up in the news, or more broadly, current events. Good journalism tells us what is going on in the world. It also tells us what is NOT going on in the world. There is an old saw to the effect that "people watch the news on TV to find out what disasters did not happen today".
Bound up in the news is the concept of "breaking news". Journalists value speed. They treasure the "scoop", getting a story out before anyone else does. And speed is sometimes the enemy of accuracy. The quick version of some event may be incomplete or inaccurate. I am going to deal with that problem by ignoring it. I am going to examine how three big stories were covered, not by any specific journalist but broadly. And each of these stories unfolded over a period of years. So with respect to the stories I am going to discuss there was plenty of time to fill in any gaps or correct any inaccuracies that were the result of the need for speed. And, depressingly, the time period over which these stories occurred is many decades. Given the amount of time involved the problem is systemic. It is not limited to a particular story or journalist or news organization. The dominant news medium was print for the first story and TV for the last. So maybe the Internet will finally fix the problem. Only time will tell.
The first story I am going to talk about is frequently referred to at the "McCarthy Era" or "McCarthyism". Senator Joe McCarthy was a Republican back bencher from Wisconsin who was first elected in 1946. He became famous starting with a speech he made in 1950 and remained famous until his death in 1957. To explain what the fuss was about will require a little background.
The US got dragged into World War II on the side of the British and in opposition to the Nazis. On the theory that "the enemy of my enemy is my friend" the US ended up allied with what was then called the U.S.S.R. but which I will refer to as Russia for convenience. This was a good thing because the longest campaigns and the largest battles were fought between the Germans and the Russians. But the Russians were never very popular either before or during the war. And after the war the Russians took political and economic control of a group of countries generally referred to as "Eastern Europe". This made the Russians very unpopular by the late '40s. So there was an opportunity to make political hay. The Democrats had been in control before the war and during it. So blaming the Democrats for various bad behavior (e.g. cozying up to the commies) was a fun and profitable game for the Republicans.
Added to this was a long history of aggressive spying by the Russians. The Russians maintained an active program of spying and undercover political shenanigans in the '30s and during and after WWII. Their activities seemed unimportant to the US in the '30s. We turned a blind eye during the war in order to keep the Russians in the fight. The single biggest coup for Russian intelligence was stealing the US design for the Atomic Bomb. So by the late '40s the Russians were "dirty commies" who were spies and saboteurs. In the middle of this was the US State Department. During the war their job was to keep the Russians in the fight no matter what. This meant that various State Department officials spent a lot of time with Russians and said nice things about them on a regular basis. This left many State Department officials wide open to unscrupulous attacks. At the same time a number of Russian spies were identified by authorities. Enter Joe McCarthy.
McCarthy was happy to launch unscrupulous attacks. He was especially happy to launch them against the State Department. He was famous for waving a piece of paper around where it could be photographed but not read. According to McCarthy it contained a specific number of names (51 or 87 or some other specific number) of spies or traitors in the State Department or in some other part of the government. We now know that none of these papers contained any names at all. There were various investigations and committee hearings. And some spies were exposed. But the information to expose them was developed by the FBI or other government agency. J. Edgar Hoover (then head of the FBI) found McCarthy useful so he occasionally fed McCarthy tips. So did a few other government officials. We now know that McCarthy and his operatives developed no "actionable intelligence" on their own during this period.
In other words, McCarthy was a fraud (and a well known drunk). And it quickly became apparent he was a fraud to those in the know including many journalists. But he was useful. He advanced an agenda that benefitted people like J Edgar Hoover. Eisenhower, an honest and able man found him useful as he was damaging Democrats and Eisenhower was running for President as a Republican in '52. His theory was he could rein him in after the election. "Journalists" found him useful because he was good copy. So a circle of powerful people, many of them journalists, ran interference for him. The result was that McCarthy was able to ruin the lives of many good and patriotic people.
There is a journalist who is famous for openly opposing McCarthy. His name is Edward R. Murrow. Many books have been written about this subject. But a quick introduction to the Murrow/McCarthy battle can be found in a very good movie called "Good Night and Good Luck" starring George Clooney. But Murrow was an outlier. Almost no other "journalists" openly opposed McCarthy. Most of them jumped on the gravy train that McCarthy represented and enjoyed the ride.
McCarthy was eventually brought down and his era slowly ground to a halt. Was it great (or even adequate) journalism that did it? Sadly, no. It was TV. ABC was the new network on the block at the time and did not have a full schedule of daytime TV programs. McCarthy launched a Senate investigation that came to be known as the "Army/McCarthy hearings" because they were ostensibly about treason in the army. ABC decided to televise them. They went on for weeks and McCarthy was front and center as master of ceremonies. Average Americans got to see McCarthy as he actually was not as the news media portrayed him. And they did not like what they saw. The hearings effectively ended when the attorney representing the army said to McCarthy "Have you no sense of decency, sir, at long last? Have you no sense of decency?" The audience in the room and at home were nearly unanimous in their opinion that the answer was "no".
The next story I am going to cover is the granddaddy of all "gate"s, Watergate. Richard Nixon, who had come to prominence as part of the crew that hung on to Joe McCarthy's coat tails, was elected narrowly to the Presidency in 1968. So when 1972 rolled around he was of a mind to take no chances. But for a number of reasons he was way ahead. This was a situation he had no experience with. Not quite believing his good fortune and sitting on a large well funded organization (called CRP by the Nixon people and CREEP, technically the "Committee to Re-Elect the President", by everyone else) he decided to leave no stone unturned. A secret group called the "plumbers" (we find and fix leaks) was formed. They decided to break into the headquarters of the Democratic National Committee. The DNC happened to be then housed in a building complex near the Lincoln Memorial called the "Watergate Complex". The name of the building eventually became the nickname for the scandal.
On their second burglary job the plumbers were caught. Events surrounding Watergate spawned the aphorism "it's not the crime that gets you, it's the cover up" because that is how Watergate went. If the Nixon people had owned up early on they probably would have received a slap on the wrist and Nixon would have still been re-elected. Instead the burglars were initially characterized as a "rogue operation" that no senior officials knew anything about. But then payoffs were arranged and various cover up contingency plans were hatched and implemented. And things kept spiraling out in more and more baroque ways. Eventually the whole thing broke wide open and Nixon was forced to resign.
There is a Murrow-like character in Watergate. Except it is two people operating as a team that came to be known by the nickname Woodstein. The two members were Bob Woodward and Carl Bernstein. They were junior reporters for the Washington Post. As with McCarthyism before, most of the news media (including most of the senior reporters at the Washington Post) either provided cover for the Nixon people or stood on the sideline. Another hero in uncovering the scandal was a Federal Judge named John Sirica. He was the judge that officiated at the original burglary case. He refused to accept a plea deal the Nixon Justice Department had put together as part of the cover up effort. As a result of his probing facts came out that pointed to a larger conspiracy. This was one of several key points where the Nixon people came very close to successfully hushing things up. There is a book by Woodstein and a movie starring Dustin Hoffman and Robert Redford called "All the President's Men" that covers some of the Watergate events. But the whole story has enough twists and turns (and players) to fill an entire season of "Game of Thrones".
From start to finish Watergate took about 3 years. The burglars were caught in June of 1972. The US Senate convened a "Watergate Hearing" committee in May of 1973. The critical time was during this first 18 months. The election took place in November of 1972 (Nixon won big). The Sirica hearings that led to additional information coming out also happened during this period. Woodstein were most active during this period. The revelation before the Senate committee (and the public) in August of 1973 of the existence of the Nixon Tapes put an end to any serious possibility of the cover up succeeding.
And, unlike the Army/McCarthy hearing, the Watergate Hearing was well conducted. It was covered on TV but this time the public gave the participating Senators high marks for how they comported themselves. It would be nice to report that DC journalists as a group also comported themselves well during the critical early period. But they didn't. They divided themselves for the most part into the "Nixon apologists" group and the "there's no story here" group. Once the existence of the Nixon Tapes was revealed it quickly became apparent that there was a big story here. At that point the DC news media came piling in. There were lots more twists and turns. But Nixon resigned in August of 1974 and was pardoned about a month later by President Ford.
I was too young for the McCarthy era. I heard stories about it and the last embers of McCarthyism were just dying down when I started getting interested in the world around me. But I was front and center for Watergate. And Watergate whetted my appetite to learn more about the McCarthy era. But by then (and still to some extent all the way to the present) the McCarthy period is not much spoken of. Very few people covered themselves in glory during this period. And there are a lot of people who engaged in shameful behavior during that period. They are happy to let sleeping dogs lie.
In any case, after Watergate wound up I spent some time trying to figure out what lessons could be learned. (I did the same thing at about the same time with respect to Vietnam. See http://sigma5.blogspot.com/2014/04/vietnam-lessons-learned.html for more on what I learned from Vietnam). My basic question with the Watergate affair was how to evaluate whether the media was doing a good job with respect to a potential scandal. I came up with two questions: (1) Is the media doing a thorough investigation? (2) Is the media afraid of the powers that be (the people being investigated)? The two questions are related. If the media is afraid of (or beholden to) the powers that be they are more likely to do a poor (or nonexistent) investigation. And the people who need to talk in order for the story to come out are less likely to spill the beans if they are afraid. With Watergate a large segment of the media had effectively been bought off by the Nixon Administration. This is not done using bags of cash. It is done by "access" (giving selected members of the press access - either off the record or on - to key administration figures) and "leaks" (dribbling out "not for attribution" juicy ("newsworthy") tidbits).
The Nixon Administration had a segment of the media in their pocket using some combination of access and leaks. This is not necessarily a bad thing. Everybody does it. But good journalists weigh the costs against the benefits. Are they being given correct information? Are they being required to slant their coverage in order to stay in the good graces of the administration? Good journalists should never tolerate being given bad information. And a certain amount of "slant" is probably unavoidable. But the slant should be kept to saying nice things about the administration (how much and for how long is a judgment call) but it should never extend to suppressing facts or shutting out the other side's ability to get their story out. So in the early stages of Watergate the Nixon Administration did not lack for cheerleaders.
Then there was the "thorough investigation" issue. Most of the media coverage between June and November of '72 was election coverage. With respect to Watergate it was definitely "there's no story there". How much of this was laziness or narrow mindedness versus being bought off by access and leaks versus fear of the Nixon Administration is hard to tell. The Nixon people kept a formal "enemies" list. People on this list were to be sabotaged at every opportunity. Given the number of "journalists" working in DC, the list was remarkably short. And with that let me move on to the third story, the one that involved Ms. Lewinski.
Actually this story is multiple stories. The first one goes by the name of "Whitewater". It broke during the 1992 campaign when Bill Clinton was running for President. At heart it was an influence peddling scandal. Someone does a favor for Bill and Bill does a favor for this person in return. Whitewater was a real estate development. The Clintons (before Bill was running for President) were given an opportunity to get in on the ground floor of a deal that was supposed to be highly profitable. The problem with this scheme is that the Clintons ended up losing a bundle of money on the deal. After that the Clintons were unlikely to come through with the "pro quo" to go with the "quid". So even if the plan was to peddle influence, it didn't happen in this case.
Clinton won the election. In spite of this the "investigation" of Whitewater continued. But no one has ever shown that the Clintons made money on the deal. Various investigations have come up with various figures for their loss. But the figure was in the tens of thousands of dollars. (For contrast, Bill was earning $26,500 a year at the time of the deal.) Mostly what these investigations turned up was that the other party to the deal, a banker named Jim MacDougal, was a real sleezeball. But Whitewater turned out to be only the first of the Clinton "scandals". And, in an homage to Watergate, a "gate" nickname was usually attached to each.
The next one was "travel-gate". The Clintons kicked the current occupants of the White House travel office out and installed their own people. I never could understand what the big deal was. (And George W Bush did the same thing 10 years later and no one let out a peep.) Travel-gate somehow managed to garner vast quantities of publicity anyhow.
Shortly thereafter, we were treated to "Vince Foster-gate". Vince Foster was a Whitehouse aid who committed suicide. Somehow, in spite of the fact that the death was thoroughly investigated there was supposed to be some deep mysterious conspiracy behind the death. "It wasn't a suicide. It was a hit job ordered by Bill Clinton." It never made any sense. But the media obsessed about it for month after month anyhow.
There were others. It is now hard to keep them all straight. But before moving on to the one that involved Ms. Lewinski let me cover one more. Hillary was employed for many years by the Rose law firm. It was one of those political law firms that are ubiquitous in DC but Rose was in Little Rock, the state capital of Arkansas. While she was there she decided to invest in cattle futures. There is no evidence she ever had any interest in or knowledge of cattle futures except in the case of this one transaction. And the transaction turned a nice profit. Now, if you know how to game the system, it's pretty easy to make sure that a single transaction for a single individual makes money. There is no firm evidence that this happened in this case. But a single very profitable transaction is suggestive. So here we have a classic influence peddling scenario. But this whole thing never got any real traction. We heard ad infinitum about Whitewater, at best a failed effort at influence peddling, and we heard almost nothing about cattle futures, a classic influence peddling scenario. To this day I can make no sense of this.
Before he was elected there were a lot of rumors that Bill Clinton was a skirt chaser. No one was able to come up with definitive proof but there was a lot of speculation. Four years before Clinton ran another Democrat named Gary Hart ran for President. And he too was surrounded by similar rumors. One day he dared the media to come up with definitive proof. Shortly thereafter proof appeared that Hart had dallied with a lady named Donna Rice on a boat called "Monkey Business". Whether he was informed by the Hart experience or he was just a more careful politician, Clinton never made that mistake. In fact, in a famous "60 Minutes" interview early in the campaign he owned up to being a sinner and to having committed unspecified sins. He also did not take a "holier than thou" attitude and chastise others who had been caught out. So the implied pact was that his past dalliances would be let pass but that he would mend his ways while in the White House.
Various "bimbo alerts" surfaced after he entered the White House having to do with events that had occurred before he became President. But no hard proof was found. That is until Paula Jones emerged. She alleged an affair with Clinton. But hard proof was scarce. Eventually a lawsuit ensued and depositions were taken, including one by Bill Clinton. Meanwhile it turned out that Clinton had become involved with a White House intern named Monica Lewinski. The most salacious aspect of this involvement can best be characterized as mutual jerk off sessions. No actual sex (in the biblical sense) was involved. But that turned out to be enough. Lewinski had been confiding in a friend named Linda Tripp. Tripp in turn had consulted Lucianne Goldberg. Goldberg was very active in Republican circles. She advised Tripp to secretly tape her conversations with Lewinski. When it came out that Lewinski had a dress with semen stains on it (the "blue dress") Goldberg counseled Tripp to counsel Lewinski to keep the dress as insurance. . Tripp did what Goldberg counseled and Lewinski did what Tripp recommended.
The Republicans had engineered an "independent council" investigation of the various Clinton "scandals". They then engineered the replacement of original head with a hard charging conservative named Ken Starr. Starr was made aware of the existence of the tapes and the dress. He went to town. The investigation was supposed to be handled in secret but the Starr operation leaked like a sieve. And, in spite of running down every whisper, Starr concluded there was no serious wrongdoing involved. But after pressure was applied he dumped the whole thing in the lap of the US House of Representatives. The body was controlled by Republicans at the time so they promptly moved bills of impeachment. This results in a trial with the Senate in the role of the jury. The Senate (controlled by Democrats) did not vote to convict. The public generally concurred with the opinion of the Senate and Republicans did badly in the next election. With his feet cut out from under him, Clinton eventually settled with Paula Jones for $850,000 and no admission of guilt.
As a side note, the Tripp tapes were illegally recorded. The reason I mention this is a couple of years later another tape surfaced. This one featured Newt Gingrich, then Speaker of the House, and documented him engaging in flagrantly unethical behavior. Not a peep about illegality was heard from Republicans when the Tripp tapes surfaced. But a huge uproar went up about the "illegality" of the tape in the Gingrich case. The tape was leaked to the New York Times by Democratic Representative Jim McDermott. Republicans (including now Speaker John Boehner, who was heard on the tape) sued McDermott. The case dragged out for years and McDermott eventually lost. The result was millions of dollars of penalties, court costs, and legal fees. I will say in defense of the media that they did actively support the McDermott side of the case.
I applied my two Watergate tests to the various Clinton "scandals". In the Watergate case the answers were "no" (the media did not thoroughly investigate, at least in the critical early period when it mattered) and "yes" (many media figures were afraid of the Nixon Administration. Many low level employees also frankly admitted to Woodstein that they were afraid to talk.) In the Whitewater case, I quickly concluded the opposite. The answers were "yes" (a whole crop of journalists who had grown up on Watergate were eager to crack their own "gate") and "no" (no one in Little Rock seemed to be the least bit afraid of the Clintons nor reluctant to talk). If there was any substance to Whitewater I expected it to emerge quickly. It didn't. (The basic facts of Whitewater were all in the original story.) It became quickly apparent that the same was true of "travel-gate", "Vince Foster-gate" and other Clinton "scandals". The exceptions were "cattle futures", which the media quickly lost interest in, and the Lewinski affair.
Given this pattern at some point the story should have changed from "allegations by anonymous sources have surfaced suggesting Clinton involvement in fill-in-the-blank-gate" to "the GOP scandal machine has surfaced a new and likely false charge against the Clintons in a crass effort to damage them politically" but it never did. Instead the media ignores their earlier bad behavior and relies heavily on the Lewinski affair when the subject is raised because they can argue with at least marginal credibility that they behaved appropriately in that case. And the beltway media has yet to own up to their sins in any of these stories. I note without comment that in all the stories I have recounted the beltway media acted to promote Republican causes and damage Democratic ones. I am perfectly willing to believe that examples going the opposite way exist. Conservatives have suggested a number of possibilities. But so far I have found their analysis unconvincing.
Finally, let me recommend Ms. Lewinski's piece. It is well written and she has some interesting things to say. She does herself justice in that she gives us a much more well rounded picture of herself than the media has at any time, then or now. She titles her piece in part "The Culture of Humiliation". She styles herself an expert on that particular subject and I am convinced by her logic. Her involvement in a "gate" has effectively forestalled many carrier options. She has suggested that she can provide assistance to others who have also been the target of public humiliation. Again I am convinced. I wish her all the luck and much success in her endeavor.
Friday, May 16, 2014
Regulations
The Republicans have been on a rant about regulations for some time now. The media in good lapdog fashion dutifully reports their blather on this subject (and every other subject) in their usual uncritical manner. The short and sweet version is "all regulations are evil". This is followed by the usual nonsense, "it is bad for the economy", "it is some kind of plot to take away our liberty", etc., etc., etc. Since all issues have two sides it goes without saying that Democrats (the un-Republicans) have never met a regulation they didn't like so all regulations are some kind of malevolent plot on the part of the Democrats to destroy the economy, take away our liberty, etc., etc., etc.
This "controversy" of course is all nonsense. And, since Democrats don't at all believe what the Republicans say they believe, but the idiot media lets the Republicans frame the discussion, only a complete idiot would show up for the "debate" so what we usually see is the equivalent of a Republican debating an empty chair while the media pretends that news is happening.
The Republicans keep trotting this nonsense out for the reasons outlined above but it bears absolutely no resemblance to reality. The truth is that Republicans love regulations, if you pick the right regulations, and Democrats hate regulations, if you pick the right regulations. The devil is in the details. There are good regulations. There are bad regulations. There are parts of society that are over-regulated. There are parts of society that are under-regulated. This leads to an obvious path forward. Get rid of the bad regulations. Keep good regulations. Reduce regulations where things are over-regulated. Increase regulations where things are under-regulated.
Of course, there is a sensible debate to be had about which are the "good" and which are the "bad" regulations. There is another sensible debate about where society is under-regulated and where it is over-regulated. But all I have to do is use the word "sensible" and you know that such a discussion is not going to happen in D.C. The current popular colloquial description for an activity like this is "going out into the weeds". Doing so is bad for ratings so everyone agrees (i.e. both the politicians and the news media) that it is a good idea to just not go there. So they don't. Instead we have the idiot "discussion" I have outlined above.
There is a life cycle for regulations. We start out with a situation where there is a problem. Over time this problem becomes apparent enough so that something resembling a consensus develops that something needs to be done. If the government is involved (see below for a discussion on private sector regulation) then laws are passed. This enables government departments to write regulations so they do. Then conditions change. But now there is a problem. The regulations have become part of the landscape and groups have come to depend on their existence and their general form. Any significant change is seen as detrimental to one or more of these groups. Depending as they do on the status quo, these groups organize to resist changes (e.g. updated regulations). On the other hand those who might benefit from the regulatory change see the benefit as strictly hypothetical so they make little or no investment in opposing the forces of stasis. The regulations become more and more detrimental as conditions continue to evolve away from the initial situation for which the regulations were designed. And we end up with a situation where the consensus now is that the regulations in a certain area are bad. And we all sit around wondering why they don't get fixed.
Let me give you a specific example of the life cycle of a specific set of regulations from what is now ancient history. Commercial airlines date back to roughly the '30s. Flying in the early days was dangerous and expensive. This made founding and operating an airline a very risky business. So the federal government stepped in. They provided various subsidies (i.e. airmail, R&D subsidies to airplane manufacturers, easy financing for airports, etc.). This was because there was a general consensus that having airlines was a good idea. Another thing they did was to put in regulations that made it hard to start an airline. They also put in a lot of restrictions about where a particular airline could fly and how much they could charge for a ticket. These regulations were designed to reduce the financial risk by reducing competition and making it easy for airlines to fly routes profitably (i.e. by setting ticket prices high). It worked. By the '50s we had a robust and very profitable airline industry. It was now possible to fly quickly (compared to alternate modes of transportation) between pretty much any major city in the country. These kinds of regulations extended to international flights so you could also fly to most major cities around the world. In short, the subsidies (still present but at much lower levels) and the regulations resuled in the achievement of the initial goal.
But things had changed. The regulations resulted in a monopolistic market where prices were unnaturally high. And subsidies were no longer necessary to guarantee that planes would be designed and built and airports would be built or upgraded. The market was now big enough and stable enough to do this without government help. So the benefits of the regulations were pretty much a thing of the past. But the established airlines liked things as they were. They could make a nice profit without having to work very hard. And the manufactures liked their subsidies even though they no longer needed them. The people who built and upgraded airports liked the free money too. So they all organized to keep things just the same.
They succeeded right up to the late '70s. Government control of pricing was finally ended. Regulations that made it hard to start a new airline were scaled way back. (The various subsidies were also scaled back considerably over a long period of time but they are still around to some extent.) The result is just what you would expect. Fares plunged. New "low cost" airlines entered the industry and old airlines jumped into the markets where they thought their competitor's prices were too high. This has been very good for passengers in terms of price. Service has plunged but the market has decided that cheap is what matters. The old line airlines have had a lot of trouble. Several of them have gone out of business completely. The others have merged and restructured to the point that they are unrecognizable. And, most importantly, the job of being the CEO of an airline has gone from being a cushy, prestigious, fun, and pretty easy job to a permanent throbbing nightmare. From their perspective they were right to resist deregulation with every fiber of their being.
We have seen this same scenario play out over and over in all segments of the economy. Businesses come to depend on a certain kind of "regulatory framework". And it doesn't matter if the proposed change looks like a good one or a bad one. Any change looks risky. And, if the truth be told, regulations are the friend of big businesses. And the more complicated the better. The established business has figured out how to be successful in the current regulatory framework. New competitors are at a disadvantage while they figure out how to do business. A change to the regulatory framework can represent an opportunity for a newcomer to get a jump (competitive advantage) on the old guys. This is what happened in the airline business. Southwest pioneered a new business model. It resulted in a lot of early success for Southwest. It also required the old line airlines to change how they did business so they could catch up. It took them a long time to make the transition. Today, all airlines are clones of Southwest to a great extent. If you were part of an old line airline all this change was not fun.
Then there is the captive regulator. If businesses can work it properly they can get the regulator to work for them rather than the other way around. This is what has happened in banking and finance. A change to the law permitted financial institutions to literally shop around between three agencies and chose which one they would be regulated by. If a regulator loses too many "customers" this is bad for whoever is running the agency. So the agencies were forced to chase customers (the financial institutions they were supposed to be regulating). This resulted in a race to the bottom. What these institutions wanted was loose regulation. "I'm the loosest regulator. No I am." After a few years of this none of the regulatory agencies were doing their job properly. The regulatory agencies each knew that if they did their job properly then all the institutions would flee to one of the other regulatory agencies. We all know how that turned out. The situation has improved somewhat since. But none of the regulatory agencies is back to where they need to be.
You may be willing to grant the specific examples I have cited but you may still be skeptical of the general proposition that businesses actually like regulation. So let me move on to private regulation. And this goes back a long time. Back in colonial times a new way to heat buildings was developed. The traditional way was to use a lot of fire places. These were later replaced by (eventually) very sophisticated stoves. The "Franklin" stove was quite the modern marvel when it was introduced by Ben Franklin. (Yes, that Ben Franklin.) The next wave of cutting edge technology was to use a boiler to heat water. This hot water was circulated around the building to "radiators". It was a giant improvement. But occasionally the boiler would blow up and burn the building down. So people started buying fire insurance. And the fire insurance companies decided that it was in their interest to reduce the incidence of fires and explosions. So they set up regulations for the construction and maintenance of these boiler systems. If you didn't have a conforming system you couldn't buy fire insurance. All of a sudden nonconforming boilers were as scarce as hens teeth.
I picked that example because it was the first example (at least in the U.S.) of private regulation. But I am talking about a niche market. How about something more general? Well, in 1894 an organization called Underwriter's Laboratories was formed. Pretty much every type of electrical gadget found in the home used to have a green "UL" sticker on it. The idea was the same. If something bad happened and whatever was involved did not have a UL sticker on it then someone was likely to have to cough up a lot of dough in court. If the device had a UL sticker the device maker could at least argue that "It's not my fault. My device was tested by UL and conformed to all appropriate safety standards". The argument might not work all the time but it worked enough of the time to make the sticker quite valuable to device manufacturers. And, since stores became reluctant to sell non "UL approved" devices, it kept a lot of shoddy devices off the market. UL is still around. It's just not as prominent as it used to be. There are other standards laboratories and other government and non-governmental standards organizations out there that give it a run for its money.
Before wrapping things up here, let me make one purely political observation. The airline industry was deregulated under a Democratic President, Jimmy Carter. Carter also deregulated the trucking industry. Moving vans and long haul truckers used to have their rates set by a department of the federal government. The same department also had barriers to entry set up to protect the old line moving companies and trucking companies. That's all gone. President Clinton put together a task force chaired by Vice President Gore to review and eliminate obsolete government regulations. They got rid of thousands of pages of them. The Republican presidents that followed Carter (Reagan then "H W" Bush) did nothing on the regulatory front. Nor did the Republican president that followed Clinton ("W" Bush). There were periods under these Republicans when their party controlled both houses of congress in addition to the White House. Yet we saw no activity on the deregulation front from either the White House or the Congress. And the "deregulate everything" Republicans that are now so vocal were conspicuous by their silence in those days.
President Obama represents a special case. It is obvious that he inherited horrific problems that demanded a regulatory response. And he has stepped up to the plate in these areas. But he has also been amenable to working to reduce unnecessary regulation in other areas.
Congratulations! You have now arrived at the wrap up. Regulatory reform is a thankless task. For the reasons I have outlined above you have to fight entrenched interests to make any progress and you get no credit from those who benefit if you do your job well. But it is nevertheless the job of our elected officials. And it is obvious that they don't do it. Part of the problem is certainly the fact that it is one of those "long on grief and short on glory" jobs. But I want to note another factor. There are two major political parties. And the media does a thorough job of keeping us informed of who is in which party. But I want to categorize politicians differently. I want to put them in one of two categories but the categories won't be their political affiliation or even where the fit on the "liberal" / "conservative" political spectrum.
The categories I am interested in are "show horse" and "work horse". I try to pay a lot of attention to this sort of thing. But, even so, I am not very good at it. I used to be a fan of Anthony Weiner. I liked what I saw of him. I thought the first Weinergate scandal reflected poorly on his judgment and so I thought it was appropriate that he resigned. But my opinion of him, while much diminished, was still positive. Then Weinergate II happened. Here things went from "poorly" to totally idiotic. But what's relevent for this discussion is a minor side effect of Weinergate II. It came out that Weiner was all show horse and no work horse. He was an attention hog who worked hard at avoiding anything that resembled actual work. Why didn't I notice this? Because I am not on the inside of the U.S. House of Representatives.
I have some idea of what is going on with my own delegation. But the only way I can form an opinion of anyone else in congress is by following the media. The media is happy to cover "show horse" activities. So I know who the show horses are. But that doesn't tell you much about anything else. Senator Ted Kennedy got his share and more of media attention. But he also was known as a hard worker. He spent prodigious amounts of time crafting legislation and working to get it passed. So he is a classic example of someone who is both a show horse and a work horse. Another example is Senator John McCain. He spends too much time on show horse activities (e.g. Sunday talk shows). But he also has a distinguished work horse record. People who are work horses but don's spend much time being show horses are effectively invisible. As are people who are neither show horses nor work horses.
It would be nice if there was ready access to accurate information on who the actual work horses are. But that sort of thing doesn't attract eyeballs. And attracting eyeballs is the real job of most of the beltway press. That, and being seen as a power player. Sigh!
This "controversy" of course is all nonsense. And, since Democrats don't at all believe what the Republicans say they believe, but the idiot media lets the Republicans frame the discussion, only a complete idiot would show up for the "debate" so what we usually see is the equivalent of a Republican debating an empty chair while the media pretends that news is happening.
The Republicans keep trotting this nonsense out for the reasons outlined above but it bears absolutely no resemblance to reality. The truth is that Republicans love regulations, if you pick the right regulations, and Democrats hate regulations, if you pick the right regulations. The devil is in the details. There are good regulations. There are bad regulations. There are parts of society that are over-regulated. There are parts of society that are under-regulated. This leads to an obvious path forward. Get rid of the bad regulations. Keep good regulations. Reduce regulations where things are over-regulated. Increase regulations where things are under-regulated.
Of course, there is a sensible debate to be had about which are the "good" and which are the "bad" regulations. There is another sensible debate about where society is under-regulated and where it is over-regulated. But all I have to do is use the word "sensible" and you know that such a discussion is not going to happen in D.C. The current popular colloquial description for an activity like this is "going out into the weeds". Doing so is bad for ratings so everyone agrees (i.e. both the politicians and the news media) that it is a good idea to just not go there. So they don't. Instead we have the idiot "discussion" I have outlined above.
There is a life cycle for regulations. We start out with a situation where there is a problem. Over time this problem becomes apparent enough so that something resembling a consensus develops that something needs to be done. If the government is involved (see below for a discussion on private sector regulation) then laws are passed. This enables government departments to write regulations so they do. Then conditions change. But now there is a problem. The regulations have become part of the landscape and groups have come to depend on their existence and their general form. Any significant change is seen as detrimental to one or more of these groups. Depending as they do on the status quo, these groups organize to resist changes (e.g. updated regulations). On the other hand those who might benefit from the regulatory change see the benefit as strictly hypothetical so they make little or no investment in opposing the forces of stasis. The regulations become more and more detrimental as conditions continue to evolve away from the initial situation for which the regulations were designed. And we end up with a situation where the consensus now is that the regulations in a certain area are bad. And we all sit around wondering why they don't get fixed.
Let me give you a specific example of the life cycle of a specific set of regulations from what is now ancient history. Commercial airlines date back to roughly the '30s. Flying in the early days was dangerous and expensive. This made founding and operating an airline a very risky business. So the federal government stepped in. They provided various subsidies (i.e. airmail, R&D subsidies to airplane manufacturers, easy financing for airports, etc.). This was because there was a general consensus that having airlines was a good idea. Another thing they did was to put in regulations that made it hard to start an airline. They also put in a lot of restrictions about where a particular airline could fly and how much they could charge for a ticket. These regulations were designed to reduce the financial risk by reducing competition and making it easy for airlines to fly routes profitably (i.e. by setting ticket prices high). It worked. By the '50s we had a robust and very profitable airline industry. It was now possible to fly quickly (compared to alternate modes of transportation) between pretty much any major city in the country. These kinds of regulations extended to international flights so you could also fly to most major cities around the world. In short, the subsidies (still present but at much lower levels) and the regulations resuled in the achievement of the initial goal.
But things had changed. The regulations resulted in a monopolistic market where prices were unnaturally high. And subsidies were no longer necessary to guarantee that planes would be designed and built and airports would be built or upgraded. The market was now big enough and stable enough to do this without government help. So the benefits of the regulations were pretty much a thing of the past. But the established airlines liked things as they were. They could make a nice profit without having to work very hard. And the manufactures liked their subsidies even though they no longer needed them. The people who built and upgraded airports liked the free money too. So they all organized to keep things just the same.
They succeeded right up to the late '70s. Government control of pricing was finally ended. Regulations that made it hard to start a new airline were scaled way back. (The various subsidies were also scaled back considerably over a long period of time but they are still around to some extent.) The result is just what you would expect. Fares plunged. New "low cost" airlines entered the industry and old airlines jumped into the markets where they thought their competitor's prices were too high. This has been very good for passengers in terms of price. Service has plunged but the market has decided that cheap is what matters. The old line airlines have had a lot of trouble. Several of them have gone out of business completely. The others have merged and restructured to the point that they are unrecognizable. And, most importantly, the job of being the CEO of an airline has gone from being a cushy, prestigious, fun, and pretty easy job to a permanent throbbing nightmare. From their perspective they were right to resist deregulation with every fiber of their being.
We have seen this same scenario play out over and over in all segments of the economy. Businesses come to depend on a certain kind of "regulatory framework". And it doesn't matter if the proposed change looks like a good one or a bad one. Any change looks risky. And, if the truth be told, regulations are the friend of big businesses. And the more complicated the better. The established business has figured out how to be successful in the current regulatory framework. New competitors are at a disadvantage while they figure out how to do business. A change to the regulatory framework can represent an opportunity for a newcomer to get a jump (competitive advantage) on the old guys. This is what happened in the airline business. Southwest pioneered a new business model. It resulted in a lot of early success for Southwest. It also required the old line airlines to change how they did business so they could catch up. It took them a long time to make the transition. Today, all airlines are clones of Southwest to a great extent. If you were part of an old line airline all this change was not fun.
Then there is the captive regulator. If businesses can work it properly they can get the regulator to work for them rather than the other way around. This is what has happened in banking and finance. A change to the law permitted financial institutions to literally shop around between three agencies and chose which one they would be regulated by. If a regulator loses too many "customers" this is bad for whoever is running the agency. So the agencies were forced to chase customers (the financial institutions they were supposed to be regulating). This resulted in a race to the bottom. What these institutions wanted was loose regulation. "I'm the loosest regulator. No I am." After a few years of this none of the regulatory agencies were doing their job properly. The regulatory agencies each knew that if they did their job properly then all the institutions would flee to one of the other regulatory agencies. We all know how that turned out. The situation has improved somewhat since. But none of the regulatory agencies is back to where they need to be.
You may be willing to grant the specific examples I have cited but you may still be skeptical of the general proposition that businesses actually like regulation. So let me move on to private regulation. And this goes back a long time. Back in colonial times a new way to heat buildings was developed. The traditional way was to use a lot of fire places. These were later replaced by (eventually) very sophisticated stoves. The "Franklin" stove was quite the modern marvel when it was introduced by Ben Franklin. (Yes, that Ben Franklin.) The next wave of cutting edge technology was to use a boiler to heat water. This hot water was circulated around the building to "radiators". It was a giant improvement. But occasionally the boiler would blow up and burn the building down. So people started buying fire insurance. And the fire insurance companies decided that it was in their interest to reduce the incidence of fires and explosions. So they set up regulations for the construction and maintenance of these boiler systems. If you didn't have a conforming system you couldn't buy fire insurance. All of a sudden nonconforming boilers were as scarce as hens teeth.
I picked that example because it was the first example (at least in the U.S.) of private regulation. But I am talking about a niche market. How about something more general? Well, in 1894 an organization called Underwriter's Laboratories was formed. Pretty much every type of electrical gadget found in the home used to have a green "UL" sticker on it. The idea was the same. If something bad happened and whatever was involved did not have a UL sticker on it then someone was likely to have to cough up a lot of dough in court. If the device had a UL sticker the device maker could at least argue that "It's not my fault. My device was tested by UL and conformed to all appropriate safety standards". The argument might not work all the time but it worked enough of the time to make the sticker quite valuable to device manufacturers. And, since stores became reluctant to sell non "UL approved" devices, it kept a lot of shoddy devices off the market. UL is still around. It's just not as prominent as it used to be. There are other standards laboratories and other government and non-governmental standards organizations out there that give it a run for its money.
Before wrapping things up here, let me make one purely political observation. The airline industry was deregulated under a Democratic President, Jimmy Carter. Carter also deregulated the trucking industry. Moving vans and long haul truckers used to have their rates set by a department of the federal government. The same department also had barriers to entry set up to protect the old line moving companies and trucking companies. That's all gone. President Clinton put together a task force chaired by Vice President Gore to review and eliminate obsolete government regulations. They got rid of thousands of pages of them. The Republican presidents that followed Carter (Reagan then "H W" Bush) did nothing on the regulatory front. Nor did the Republican president that followed Clinton ("W" Bush). There were periods under these Republicans when their party controlled both houses of congress in addition to the White House. Yet we saw no activity on the deregulation front from either the White House or the Congress. And the "deregulate everything" Republicans that are now so vocal were conspicuous by their silence in those days.
President Obama represents a special case. It is obvious that he inherited horrific problems that demanded a regulatory response. And he has stepped up to the plate in these areas. But he has also been amenable to working to reduce unnecessary regulation in other areas.
Congratulations! You have now arrived at the wrap up. Regulatory reform is a thankless task. For the reasons I have outlined above you have to fight entrenched interests to make any progress and you get no credit from those who benefit if you do your job well. But it is nevertheless the job of our elected officials. And it is obvious that they don't do it. Part of the problem is certainly the fact that it is one of those "long on grief and short on glory" jobs. But I want to note another factor. There are two major political parties. And the media does a thorough job of keeping us informed of who is in which party. But I want to categorize politicians differently. I want to put them in one of two categories but the categories won't be their political affiliation or even where the fit on the "liberal" / "conservative" political spectrum.
The categories I am interested in are "show horse" and "work horse". I try to pay a lot of attention to this sort of thing. But, even so, I am not very good at it. I used to be a fan of Anthony Weiner. I liked what I saw of him. I thought the first Weinergate scandal reflected poorly on his judgment and so I thought it was appropriate that he resigned. But my opinion of him, while much diminished, was still positive. Then Weinergate II happened. Here things went from "poorly" to totally idiotic. But what's relevent for this discussion is a minor side effect of Weinergate II. It came out that Weiner was all show horse and no work horse. He was an attention hog who worked hard at avoiding anything that resembled actual work. Why didn't I notice this? Because I am not on the inside of the U.S. House of Representatives.
I have some idea of what is going on with my own delegation. But the only way I can form an opinion of anyone else in congress is by following the media. The media is happy to cover "show horse" activities. So I know who the show horses are. But that doesn't tell you much about anything else. Senator Ted Kennedy got his share and more of media attention. But he also was known as a hard worker. He spent prodigious amounts of time crafting legislation and working to get it passed. So he is a classic example of someone who is both a show horse and a work horse. Another example is Senator John McCain. He spends too much time on show horse activities (e.g. Sunday talk shows). But he also has a distinguished work horse record. People who are work horses but don's spend much time being show horses are effectively invisible. As are people who are neither show horses nor work horses.
It would be nice if there was ready access to accurate information on who the actual work horses are. But that sort of thing doesn't attract eyeballs. And attracting eyeballs is the real job of most of the beltway press. That, and being seen as a power player. Sigh!
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