PIGS AT THE TROUGH? Restoring Confidence in Corporate America

Thursday, March 20, 2003

A series of devastating accounting scandals at Enron, WorldCom, and Tyco, to name a few, have shaken the public's trust in the ethics and business practices of America's large corporations. What are the underlying factors behind this recent wave of scandals? Is deregulation the culprit? If so, do we need more regulation or merely better enforcement of existing regulations? Does the confluence of corporate lobbying and campaign contributions encourage corporate malfeasance? If so, what political reforms are necessary?

Recorded on Thursday, March 20, 2003

Peter Robinson: Today on Uncommon Knowledge, the companies we keep.

Announcer: Funding for this program is provided by the John M. Olin Foundation and the Starr Foundation.

[Music]

Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: corporate America--engine of growth, or filthy kleptocracy? Enron, Tyco, WorldCom....these and other enormous scandals have shaken the public's confidence in the ethics and business practices of America's large corporations. Who or what is to blame? Is the free market itself at fault? Do we need more regulations, better enforcement of existing regulations, or perhaps even fewer regulations? And what role does politics play in all this?

Joining us today, three guests. David Brady is a professor of political science and ethics at the Stanford University Graduate School of Business. David Henderson is a fellow at the Hoover Institution and the author of The Joy of Freedom. Arianna Huffington is a nationally syndicated columnist and the author of Pigs at the Trough.

Title: Pigs at the Trough?

Peter Robinson: "To destroy this invisible government, to befoul the unholy alliance between corrupt business and corrupt politics is the first task of the statesmanship of the day." Did you get it, David? That's Theodore Roosevelt and I put it to you that those words that he spoke at the turn of the 20th century are just as valid today at the turn of the 21st. David Henderson?

David Henderson: And I think they're just as mistaken now as they were then.

Peter Robinson: Arianna Huffington?

Arianna Huffington: Much more true now than they were then.

Peter Robinson: And David Brady?

David Brady: Wrong.

Peter Robinson: All right. Arianna, I will quote you--"How can there be talk of a shared destiny in a nation where just over 1% of the population"--you very nicely break this out--"170 billionaires, 25,000 decamillionaires, and 4.8 million millionaires control approximately 50% of the entire country's personal wealth." Arianna, explain yourself. Why should the pattern of the distribution of wealth have anything to do with shared values?

Arianna Huffington: Well, I said shared destiny…

Peter Robinson: Shared destiny.

Arianna Huffington: …but also shared values too because it isn't just the inequalities in wealth that we're talking about, that in the book I describe as the upstairs, downstairs society, it's also that we're living under different rules, laws, and regulations. And let me give you an example. The Attorney General of New York has just concluded a global agreement with Wall Street under which nobody, not a single analyst or bank who have been caught red-handed defrauding the public has had to admit wrongdoing let alone be indicted. Now if you and I go to a supermarket right now and steal $200 worth of groceries, just try telling the policeman that I'm neither going to confirm nor deny what I did. This is a feudal society where you have different rules that apply to different parts of the population.

Peter Robinson: Dave Brady, fundamental unfairness in American society? If you got a lot of money, you get away with things.

David Brady: Well, that's a very complicated question and what it means over time changes, right? Because the question is if you don't have a capitalist system where there are inherent inequalities based on the productive function, then the amount of money you generate, even if you want to redistribute it, is smaller. So the question of are there inequalities now, of course there are, there are always inequalities, the question is what happens to those inequalities over time? And generally in capitalism ,they disappear. This society is more egalitarian now than it was in the 1900s.

Arianna Huffington: But we're not talking about equality of outcome, we're talking about equality of, in terms of the rules that operate. And let me just ask you that question because I asked it of Eliot Spitzer. I said to him, why didn't any of these guys have to admit wrongdoing, why didn't any of the banks have to admit wrongdoing? He said if they did they would go bankrupt or they might go bankrupt. And as my eleven-year-old says, and your point is? I thought it was the invisible hand of the market that would pick winners and losers, not the Attorney General of New York.

Peter Robinson: David?

David Henderson: Well, I think I actually have a better example for you of what you are saying, okay, and that is the drug war. In the drug war, most of the people who go to prison for often very minor offenses are poor people because they can't afford to defend themselves. And if you look, the children of politicians and the children--like Al Gore's kids for example and Richard Shelby's kids from Alabama, his son who was caught smuggling cocaine--they get very light sentences, they don't even get sentences, they just get let off and other people go to prison for the rest of their life when they're twenty years old for doing the same thing. So I absolutely agree that there are just these huge inequalities in the way the rules are applied, but my solution is so different from yours. My solution is to get the government out of most of these things so that these won't be issues. Some person can have marijuana and use marijuana and not get thrown in prison because it's legal.

Arianna Huffington: Well, I agree with you on the drug war. I mean, you and I agree that at the moment the way the drug war operates is incredibly unequal, but when it comes to financial inequalities, when it comes to our tax system for example, that's why we do need the government to step in.

Peter Robinson: Let me try our guests once more on this notion of income inequality.

Title: If I Had an Option, I'd Trade It in the Morning

Peter Robinson: In 1980, the average CEO was making 42 times as much as the average worker. Twenty years later, by 2000, the average CEO was making 570 times much as the average worker. Does that not indicate, in and of itself, a few kinks in the capitalist system? Is that a natural manifestation of...?

David Brady: Do I personally think that CEOs are paid too much? Yes…

Peter Robinson: Okay, good.

David Brady: …but that's different from a solution--then how do I resolve that? Do I want to resolve that by getting a Congress of the United States or a committee of the Congress of the United States to sit around and decide how much CEOs should in fact get? No. The question is, markets are much better, companies that overpay CEOs, in the long-run if you actually have capitalism, those executives will have lower pay because…

Peter Robinson: But there's no evidence of that in the last 20 years at all.

David Henderson: I want to point something out.

Peter Robinson: Why doesn't the market work?

David Henderson: Hold on, the point is that to the extent they are overpaying and I'm a little more agnostic, you might be right I'm not sure, but you might be right. But to the extent they are overpaying, the people who lose are not these low-income poor people Arianna's talking about, they're shareholders. And as you point out in your own book, the vast majority of shares are held by relatively wealthy people. It's a transfer from the somewhat wealthy to the very wealthy.

Peter Robinson: Yeah, but in the last 20 years we now have the American--50% of households now have some money.

David Henderson: Some money.

Peter Robinson: …and a lot of those are retirement funds. You do reach down to ordinary middle class Americans when you're talking about shareholders, right?

David Henderson: Most of the transfer is away from wealthy people towards more wealthy people. That's just a fact.

Arianna Huffington: I think the point is not that we want an act of Congress regulating how much CEOs are making, I would never dream of suggesting that. What I'm saying is that there has been a de-linking between performance and reward and that is very disturbing. I quote in the book a statistic that shows that among the top 23 companies under investigation at the moment by the Justice Department or the Securities and Exchange Commission, their CEOs were making 70% more than the average CEO. So this is really what is very disturbing.

Peter Robinson: In lousy, crooked, badly run companies.

Arianna Huffington: In lousy, crooked, badly run companies, many of them actually being run into the ground. I mean, Ayn Rand would not have approved of that.

Peter Robinson: Does anybody have a good economically based explanation for this explosion in what CEOs are making?

David Henderson: Yes, I do. 1993 tax law, President Clinton introduces a provision saying that a company that pays a CEO more than a million dollars cannot deduct more than that million from its taxable income unless it can give a good reason. Now granted that's a big out and they were able to give good reasons, but the point is, that started companies in the direction of giving stock options as a way around the law and then there was this bubble in the economy so stock options were suddenly worth a huge amount. So this is a dis-equilibrium. We aren't going to see this in two years.

Peter Robinson: Arianna, this is very serious for you because it's the government that messed things up, not the market.

Arianna Huffington: You know, of course, but first of all, let me just say something--this is the unholy alliance that you quoted at the beginning, of course it's the government. The main target of my book is the government.

David Henderson: But you want them to do more, look at the list of things at the end.

Arianna Huffington: First of all I want them to do both more and I want them to do less because right now they're doing an enormous amount because of the huge campaign contributions they are getting.

Peter Robinson: Next topic, the effects of corporate money on politics.

Title: Hey, Big Spender

Peter Robinson: 1997 to 1999, listen to the three biggest corporate spenders on lobbying--I take this from Arianna's book. That's in case there are any factual challenges, direct them to her please.

Arianna Huffington: There haven't been yet.

Peter Robinson: Philip Morris spent more than $50 million--I quote Arianna, "any industry that kills 400,000 Americans a year, Philip Morris' big tobacco, is bound to have a bit of a public relations problem." Two, Bell Atlantic, now Verizon, spends more than $40 million on lobbying. Arianna suggests it's to retain monopoly pricing, in which they succeeded. Exxon Mobile spends more than $34 million on lobbying. Arianna, I quote her again, "Exxon Mobile has battled to keep America dependent on dirty, scarce fossil fuels." So I put it to you that this is evidence on the very face of it, tens of millions of dollars a year gushing into Washington from big corporations and the system is corrupt.

David Brady: The actual question is, there's not very much money in politics at all. A recent study, by Ansolabehere and Snyder at MIT shows that over the 20th century, if you actually take the amount of money spent on campaign finance as a percent of GDP, it hasn't risen at all. It's flat, it's flat.

Arianna Huffington: That is what is amazing, how cheap politicians are. You can buy them for not a lot of money.

David Brady: The second point is, you don't buy them very well because the next point is, there are $134 billion in the 2000 budget given in defense contracts. How much money did defense contractors spend to buy that? $33.3 million. Now I tell you, if there's an investment you could make where you put $33 million and it turns to $134 billion, there's two things that are absolutely clear. One, why aren't there more people in the market because that's cheap, and second, we don't find more people in the market. So, that explanation of monies buying something just doesn't wash.

David Henderson: I want to point something out sir, and that is, notice that the three companies you gave example of are all companies where there are huge issues of regulation. The government is trying to regulate and they're trying to fight off the regulation. In some cases companies are trying to get their competitors regulated, like Bell Atlantic, but the point is, when you make it a political issue, the money will follow. So the way to go…

Peter Robinson: The government has forced them to engage in a game in order to continue operating their business.

Arianna Huffington: First of all, Dave made a very good point, which is that politicians are very cheap to buy. It is the best rate of return on investment, it really is, because you give a few hundred thousand, maybe a few million, and you get back billions. Let's look at the contracts that have been doled out about the rebuilding of Iraq.

David Henderson: You missed half of the point though.

Arianna Huffington: No, the four consortia that were competing for the contracts have given a total of $2.8 million in campaign contributions. They're getting a billion and a half in government contracts to rebuild Iraq. This is just a small example of the rate of return. And also the lobbyists. Let me just mention one more thing. Let's not forget the lobbyists. How many of them are former public officials, how many of them are either married to senators or they're children of senators? I mean Linda Daschle, what is Linda Daschle doing being a lobbyist, the wife of Tom Daschle?

Peter Robinson: Linda Daschle is the wife of Senate Minority Leader Tom Daschle.

Arianna Huffington: Yes, what is she doing being the powerful lobbyist for American Airlines and Northwest Airlines, instrumental in a huge, I hope we would all agree, terrible bailout of the airline industry that's cost tax payers $15 billion without any protections for layoffs.

Peter Robinson: So all the money in politics is "A" irrelevant, "B" distasteful but harmless, or "C" actually buying a national policy?

David Henderson: I think to some extent it's buying national policy. Those aren't all--you know, I don't want to go exclusive on one of those, but the point is, here's what's left out--I mean, first of all, let me just reiterate my point that if you want less of this, the thing to do is not regulate more, it's regulate less and then it won't be an issue. That's why liquor companies have hardly any presence in Washington. Liquor is a state issue, so you'll see them in Sacramento, Albany, and so on, but not in Washington. But here's the point and this is the point that Dave was making that was more subtle and I just want to put more on the table and that is, that it looks like this huge rate of return cause you spend $30 million and you get, you know, X number of billion. But the point is, $X billion is the revenue that the government spends on their contracts, it's not the profit. The rate of return is much lower than that.

Arianna Huffington: But that's not the point. I'm sorry David, but you are completely missing my point. My point is that if you buy bad public policy and that's really my point.

David Henderson: And you buy good public policy. GM bought good public policy by going after Kyoto for example.

Arianna Huffington: But look at GM, look at GM and Ford and Chrysler, they paid a combined $37 million just in lobbying alone last year. What did they buy? They bought…

Peter Robinson: They bought declining market share. You're talking about three companies that are on the ropes.

Arianna Huffington: That's because instead of improving their product, they're buying politicians to maintain tax credits for particularly large SUVs. I mean, isn't that insane public policy?

Peter Robinson: Arianna blames our problems on the economic deregulation that began under Ronald Reagan, is she right?

Title: Free Your Market and Your Mind Will Follow

Peter Robinson: I'm going to quote you once again Arianna--"Over the last 20 years Americans have been doused with regular sermons on the supposed,"--supposed, I mentioned that to the two of you because I'm hoping that you'll both find it offensive--"supposed correlation between unregulated markets and higher standards of living." How did the free market ideology of the Reagan revolution come to be the political consensus of our times? Would either of you like to answer that question?

David Henderson: Geez, I don't think it is the consensus of our times, in other words, that we should have deregulation. I think we're experiencing a massive move towards regulation. Airport security has been nationalized in the last year, we've got a corporate bailout of airlines, people are--there's this huge new wave of corporate regulation under Oxley-Sarbanes, and so on. So, I don't see--I think it was the dominant view throughout the Eightiess, through the early, maybe even mid-Nineties.

Peter Robinson: Through the Clinton years?

David Henderson: Through most of the Clinton years, but I think there's been a swing away.

David Brady: I only know environmental data on this and basically starting in 1990, the amount of environmental regulations went up under Bush.

Arianna Huffington: Well, if you look at the deregulation that went on in the Nineties, including the so-called Financial Modernization Act that basically ended a lot of the checks and balances…

Peter Robinson: Can you give us a year on that or at least an administration?

Arianna Huffington: 1990, during the Clinton years--1998--that basically ended a lot of the checks and balances that had been imposed during the New Deal. This is what happened during the Nineties, this constant, gradual dismantling of regulations and also Bush becomes president and nominates Harvey Pitt to be head of the Securities and Exchange Commission--a man who actually said that he wanted a kinder, gentler SEC. So the message is communicated across corporate American and Wall Street that nobody's really minding the store and they can get away with anything and they did try to get away with everything.

Peter Robinson: Okay, Arianna has produced a best selling book; she is onto something. People feel something when they see a Tyco outrage or they see Enron collapse. My suggestion is that I want the two of you to tell me what she's on to and how to understand the bubble and the corruption of recent years in a proper economic framework and then we'll let Arianna attack Ronald Reagan.

David Brady: Well the question is, she did have an unprecedented period of growth. Now I'm not going to get into the question of whether it was Reagan or whether it was Silicon--I tend to put it more on private enterprise than on politicians, but the question is there was…

Peter Robinson: The point of Ronald Reagan, he peeled back government so that private enterprise could operate.

David Brady: I understand, but--there are people who believe that, I'm just saying as a social scientist, I'm sure…

Peter Robinson: You have to be blind to certain truths.

David Brady: I have to be blind to certain truths. I have to be careful. Thank you. So at any rate, whatever the cause, the bubble caused an unprecedented period of prosperity, it made CEOs heroes as they were multi millionaires created everyday in this valley, and the result of all such booms in economic history are that there are excesses and there are in fact during those time periods people who cheat on the margin. Now the question is, what is the way in which that gets resolved? The answer as far as I'm concerned is markets resolve that because CEOs and companies that do that ultimately fail, not government regulations.

Arianna Huffington: Let me very quickly respond and then you we can come back to you. I'm not talking about excesses, that would not be worth writing a book around excesses--there's always excesses and there's always greed, I'm talking about systemic failures that we need to address and I'm talking about the need to establish watchdogs that have teeth and that we recognize that these were not victimless crimes that billions of dollars have been lost in 401(k)s, in savings, in people's ability to send their kids to college. We're not just talking about money loss, we are talking about lives destroyed.

David Henderson: Well two things, if they're crimes then you're saying there are laws in the book. So you're saying the laws didn't work, why trust more laws. I actually think some of the more crimes clear-cut and, by the way people are in trouble for those crimes, some of them weren't…

Arianna Huffington: Not nearly enough.

David Henderson: …well, let me finish, I didn't interrupt you--second, the idea that you're going to regulate to solve this--here's my solution okay? Take Oxley-Sarbanes, which was a major increase in regulation passed in the last congress--the claim is that the stockholders are being ripped off.

Peter Robinson: Tell us what Oxley-Sarbanes is. Just set that up.

David Henderson: It puts lots of regulations on corporations, on the kinds of accountability there now is for CEOs to make…

Peter Robinson: It's an attempt to do exactly what Arianna wants right?

David Henderson: Well, I don't know exactly...

Arianna Huffington: It's incredibly lame and it's being undermined every day at the SEC.

David Henderson: I knew it wouldn't be exactly what you wanted, okay, but anyway, it's a movement towards more regulation. There's a very simple default option that should have been in that law. If the purpose is to save the assets of shareholders, if shareholders are to benefit, why not have that law as the default law, but let the shareholders vote by a majority of shareholders to get out of it? Then there's nothing lost, the shareholders are voting not to have these protections. And here's my prediction--80% of the companies, just rough measure, but 80% would be out of it, they wouldn't like this because this is going to hurt.

Peter Robinson: Last topic, Arianna's reforms to reduce corporate malfeasance.

Title: Too Many Cooks in the Books

Peter Robinson: Arianna will now list her top three reforms and the two of you will say what you think of them.

Arianna Huffington: First of all, there have to be lobbying reforms. I mean just to mention a very simple one, it should be illegal, if you're married to a senator or you are the son of a senator, to be a lobbyist. There are millions…

Peter Robinson: To the 6th degree of sanguinity.

Arianna Huffington: …there are millions of other jobs available.

David Henderson: Restrictions on who you can marry, okay. Free society.

Arianna Huffington: Tom Daschle could give up his job, that's perfectly okay. One of them can keep the job. Then on the financial front, we finally need to end these conflicts of interest that have been at the root of so many of these scandals, like auditing and consulting. Accounting firms doing auditing should not also be consulting. People are not still agreeing with that.

Peter Robinson: Straightforward, right?

David Henderson: Let that be a market-driven standard. If you have that rule, have that be the default rule but allow the stockholders to vote out of it. And I predict that many stockholders will vote out of it and then…

Peter Robinson: Why?

Arianna Huffington: Let me just mention…

David Henderson: Why? Because often in the process of consulting, you'll learn things about the firm that help you with the auditing. Now granted, it goes the other way often, but the point is, if I'm wrong, then companies aren't going to vote for it. What do you lose by giving my option?

Arianna Huffington: But you see right now…

Peter Robinson: In a perfect world, would the SEC even exist?

David Henderson: No.

Peter Robinson: In yours?

David Brady: In a world of perfect markets, it wouldn't have to, but we don't live in a perfect world.

David Henderson: My perfect world, meaning the world I want.

David Brady: Yeah, the world he wants.

Arianna Huffington: But you see here's the problem…perfect markets do not exist. We've seen that again and again. But average investors and the CEOs who are not getting the same…

Peter Robinson: Even those analysts on Wall Street.

Arianna Huffington: You know even you had Bernie Ebbers getting preferential IPOs and the right advice about where the stocks were and then you got stocks being touted.

Peter Robinson: So Arianna is not talking about, I don't think, a massive new regulatory regime, she is talking about--who was it, was it--some marvelous New Dealer talked about the disinfectant of sunlight. She wants information pushed reliably, believably, credibly, into the public realm, is that about…

Arianna Huffington: Absolutely, that' absolutely true and also…

Peter Robinson: …and you'll both go for that right?

David Henderson: I don't know what she's talking about.

Arianna Huffington: We need more transparency when it comes to company statements. I mean right now basically, a lot of financial instruments have been created which are simply an invitation to fraud. Let me just give you an example--Goldman Sachs created something cute called MIPS, Monthly Income Preferred Share, which is equity on the balance sheet and debt on the IRS return. Wouldn't you love to have one of those? And it's these shenanigans that have been going on for years undetected that really have to come to the front. I mean even…

David Brady: It's a regulatory shenanigan, not a market shenanigan.

Arianna Huffington: I don't care what it is, I mean, I'm not an ideologue.

David Henderson: As long as you have all these regulations you're going to have people figuring out things like this.

Arianna Huffington: Incidentally, this is not a Republican, Democrat issue, I mean Senator Corzine, this great populist, was head of Goldman Sachs when that instrument was created and he's still defending it. This is just about the fundamental corruption of the…

Peter Robinson: Okay so sum up--you want greater government intervention in the economy or simply a modest but stricter regulatory regime?

Arianna Huffington: I want first of all certain obvious common sense things to be illegal, like, let me just give you one…

David Henderson: Illegal or legal?

Arianna Huffington: No, illegal. Let me give you one very simple example--tax haven subsidiaries. Why are we allowing companies to reincorporate in Bermuda, defrauding the taxpayer of $70 billion a year?

Peter Robinson: I promised you that we'd get back to you on taxes.

David Henderson: They're not defrauding themselves.

Arianna Huffington: No they're defrauding us, they're not paying taxes.

David Henderson: How is that defrauding you? Do you think the government is going to cut your taxes because they pay more?

Arianna Huffington: You know what, I would like very much to move my column to Bermuda.

David Henderson: I would like that too.

Arianna Huffington: Wouldn't you like that?

David Henderson: And I think we all should be allowed--we should extend this thing, we should allow us to do the same thing.

Arianna Huffington: I want it to be illegal for corporations…

Peter Robinson: David, answer that one specifically--should we shut down the ability of--businesses that do a substantial portion of their business in the United States to incorporate in tax havens like Bermuda?

David Brady: I know it's really hard to believe on your show, but I actually don't know enough about what the facts are to determine that.

Peter Robinson: You're not allowed to say that on television! Any answer but "I don't know."

David Brady: And something else, I don't think anybody else knows the answer--there are reasons for its happening, whether those reasons in general, increase aggregate welfare, I don't know and I don't think anybody else does.

Arianna Huffington: I'm going to give you my book at the end of the show, there's an entire section on it that explains how a lot of these companies were able basically to continue their fraudulent shenanigans because of these tax haven subsidiaries. Enron had 88 of them just to give you an example. Halliburton under Cheney had 44of them and they ended up getting tax rebates instead of paying taxes.

Peter Robinson: David, you answer this then we've got to go to our final questions. Go ahead.

David Henderson: The point is that I think anyone who wants to should be able to incorporate anywhere they want to and there's no great thing about paying a lot of taxes. And if Stanley or whoever wants to incorporate somewhere and pay lower taxes, then that doesn't raise your tax bill because the government takes everything it can from everybody.

Peter Robinson: But alas you can't, but the two of you can do some sort of marvelous web exchange, but on television the window is closed. Last couple of questions, five years from now, will American corporations be spending more or less on politics? David?

David Brady: About the same.

Peter Robinson: David?

David Henderson: Roughly the same, inflation adjusted.

Peter Robinson: Arianna? Inflation adjusted, you show-off.

Arianna Huffington: If the reforms I propose are enacted, less.

Peter Robinson: But that's what I want to know, do you think you have a serious chance?

Arianna Huffington: Yes, I do.

Peter Robinson: All right, last question then, five years from now, will American corporations be more or less heavily regulated than at present? Dave?

David Brady: Slightly more.

David Henderson: More.

Peter Robinson: Much more?

David Henderson: On a scale of 1 to 10, if it's a 4 now, it will be a 5.

Peter Robinson: Arianna?

Arianna Huffington: Definitely more if there is a God.

Peter Robinson: We'll reconvene in five years to consider that question. Arianna Huffington, David Henderson, and David Brady, thank you very much. I'm Peter Robinson, for Uncommon Knowledge, thanks for joining us.