Justice System

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10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

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1
Mar 10

Labor and Employment Laws: The Hidden Job Killer

When we ignore government sleight of hand, the real number of unemployed Americans is a staggering 26.9 million.  In For 15 Million Unemployed any Job is a Good Job; Questions for Pollyannas; Wishes Aren’t Fishes, Michael Shedlock (“Mish”) continues his excellent analysis of the unemployment situation.  Contrary to Bernanke and Obama Administration rosy projections, Mish predicts that official unemployment will remain greater than 9 % through 2015.  In a quote from Allen Sinai, chief global economist for Decision Economics, Mish describes corporate hiring behavior:

American business is about maximizing shareholder value…You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.

Workers are expensive. Federal, state and local employment laws make them more so.

New Deal Labor Legislation

In the late 19th and early 20th century, rapid industrialization resulted in powerful owner/capitalists, virtually powerless workers, and deplorable working conditions.   Upton Sinclair’s The Jungle dramatized the deplorable state of affairs in the meatpacking industry.  In reaction, in 1935, Congress passed the Wagner Act to permit union organizing. Then it enacted the Fair Labor Standards Act to establish minimum pay, limitations on hours and pay for overtime work.  Perhaps labor legislation should have stopped at that point.

Nothing Succeeds Like Excess

New Deal labor legislation was just a springboard for greater federal control over the workplace.   Since 1964, there has been a flood of labor and employment legislation and Executive Orders.

  • The Civil Rights Act prohibits race, color, religion, sex or national origin and pregnancy discrimination.
  • The Age Discrimination in Employment Act prohibits age discrimination.
  • One Executive Order prohibits all forms of discrimination and requires affirmative action.  This includes training and outreach programs and other positive steps which must be incorporated in written personnel policies and a plan which must be updated annually.
  • The Equal Pay Act requires that men and women in the same workplace be given equal pay for equal work.
  • The Americans with Disabilities Act prohibits disability discrimination. The Rehabilitation Act requires most federal contractors and subcontractors to take extra measures to hire and promote qualified disabled individuals.
  • The Occupational Safety and Health Act requires employers to meet legal health and safety standards.
  • The Employment Retirement and Income Security Act (“ERISA”) sets uniform minimum standards to assure that employee benefit plans are established and maintained in a fair and financially sound manner.
  • The Workers Adjustment and Retraining Notification Act requires that covered employers provide notification sixty days before a plant closing or a mass layoff.
  • The Family and Medical Leave Act provides covered employees with entitlement to up to 12 weeks of job-protected, unpaid leave during any 12 months for the following reasons:

-Birth and care of the employee’s newborn or adoption or foster care of a child

-Care of an immediate family member (spouse, child, parent) who has a serious health condition

- The employee’s own serious health condition

These are the major pieces of federal labor and employment legislation, but there are additional enactments regulating the employment relationship.

Since we live in a federal system, state and even municipalities impose additional employment, benefit and labor obligations.  Moreover, the courts have intervened to create doctrines such as wrongful discharge to limit an employer’s right to dismiss an employee at will.

Real World Consequences

Much of the above legislation is grounded in noble sentiment: workplace fairness and employee protection.  But there are real world consequences: a loose definition of “serious health condition” allows employees to take large unpredictable amounts of time off, harming production schedules.  Affirmative action programs require lots of staff and recordkeeping, extra recruitment and training, and slower hiring.  ERISA imposes fiduciary liability on plan sponsors. With virtually every workplace sector protected, firing an employee is difficult, with the ever present danger of a discrimination or retaliation charge. And so the American workplace is now one of the most regulated areas of our economy.

Laws are often a hidden tax. See Ask Your Congressional Representative to Do Nothing.   Allen Sinai has reached the correct conclusion: why hire expensive workers who have a host of protections and entitlements when you can substitute cheaper capital (automated machinery, robots, computers, etc)?  In a globalized economy where a highly motivated, well-trained Chinese worker makes about $1 per hour, the over protected American worker may have priced himself out.

If the Obama Administration is serious about reducing the unemployment rate, it should be thinking about shelving expensive health care initiatives and the Employee Free Choice Act.  More employer cost will equal less American employment.

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27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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1
Dec 09

Uncomfortable Questions

By nature Americans are optimistic people.  But, optimism should not be an excuse to suspend critical thinking.  There are uncomfortable questions which should be asked:

To Congress:

  1. Is this financial crisis different from past recessions?
  2. If this crisis is different why are we continuing to employ the same failed policies of the past?
  3. Ben Bernanke and Tim Geithner were in positions of responsibility at the inception of the financial crisis. Why should they continue in their positions?
  4. If easy monetary policies have gotten us into past financial trouble, why will easier monetary policies not cause further financial trouble?
  5. How is a jobless recovery a genuine recovery?
  6. After passing the TARP and a stimulus program, have Americans received value for money spent?

To the Federal Reserve Chairman:

  1. You have been a student of the Great Depression; explain how and why current circumstances differ from the 1929 Depression?
  2. Your zero interest rate policy created the housing bubble and much of the current financial crisis.  Why continue this zero interest rate policy and cause further financial damage?
  3. Under what authority did the Federal Reserve have the right to purchase mortgages, equity stakes in private entities?
  4. If you believe a recovery is in progress, why are you not removing government guarantees and selling the mortgage backed securities the Federal Reserve purchased?
  5. Isn’t a zero interest rate policy antithetical to a strong dollar?  And might not a weak dollar actually hurt the US economic recovery?
  6. Won’t a zero interest rate policy lead to dangerous speculative excess and misallocation of capital?
  7. Given the scope and nature of guarantees and expansion in the Fed balance sheet with securities of dubious quality, what is the chance of a US default on its debt?
  8. Did the Federal Reserve buy private mortgage backed securities at face value? If so, why?
  9. Why are you afraid of an audit of the Fed’s balance sheet?

To the Executive Branch and Treasury Secretary:

  1. Given the massive amount of public and private debt (almost 400% of GDP) should government policy be encouraging businesses and individuals to go further into debt to spur a recovery?
  2. Why are record bonuses being paid to Wall Street executives when these entities caused the financial crisis and needed public support to avoid bankruptcy?
  3. Has China directly threatened the Administration with boycotting the purchase of US debt?
  4. With meager internal savings and the potential for a threatened foreign boycott of US debt purchases, how does the Administration intend to fund the rapidly growing federal deficit?
  5. How many banks are actually insolvent?
  6. Why have we not promptly closed problem banks?
  7. Is the FDIC insolvent?
  8. How much more public money will be required to continue to fund the losses at Fannie and Freddie?
  9. Is massive federal assistance to select private companies like GE, American Express or AIG constitutional?
  10. With ever growing deficits, why is the Administration proposing costly health care proposals and expanded troop levels in Afghanistan?
  11. Is the government secretly intervening in the public debt and equity markets?  If so, why?
  12. You have current regulatory power to reform the financial system. Why are you not:

a. Forbidding the creation and trading of private, customized credit derivatives?

b.Imposing windfall profit taxes on Wall Street that received any form of federal assistance?

c. Breaking up the “too big to fail banks?”

    General Questions for Economists:

    1. How is the constant tampering with interest rates and providing taxpayer supported financial guarantees consistent with capitalism?
    2. How does a zero interest rate policy affect pension funds and the elderly population living on a fixed income?
    3. Why is the market incapable of determining an appropriate level of interest rates?
    4. Does our level of national income support our current projected debt levels?
    5. Does FDIC insurance lead to reckless lending?
    6. What is the long-term effect of government meddling in supposedly free capital markets?
    7. Many of you did not predict the last financial crisis. What did you learn which would help you predict the next crisis?

    To the Judiciary:

    1. Has the US Constitution been violated in favoring select private entities with public support, backdoor “make whole” schemes at the expense of competitors and at the expense of taxpayers?
    2. What theory of preemption permitted the Treasury and the Federal Reserve to effectively take over AIG when insurance companies are state regulated enterprises?

    Conclusion

    We are in uncharted waters.  When a real estate enterprise in Dubai dominates the financial headlines and shakes the world financial markets we are far from putting the financial crisis behind us.  Right now, I think we are in the “extend and pretend” phase of the crisis, wherein markets and government collectively believe that ignoring current problems will permit the economy to heal over time.  That is Plan A.

    The real question looms in front of us:  What is Plan B, if all government efforts fail?

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    14
    Sep 09

    Why are We Investigating CIA Officers Instead of Bankers?

    There are times when the American populace needs to be put through a values clarification exercise. An example: when a charity solicits us for a contribution, we often respond that we cannot afford to give.  What we really mean is that we would rather spend money on a movie, new clothes or a couple of beers. On a macro, social policy basis we also have trouble clarifying our values.  We rail against excessive health care costs, but we do not ban cigarettes or alcohol, or mandate that overweight people all attend Weight Watchers. We have technology to prevent a drunken driver from starting an automobile while inebriated, but after a DWI conviction do we consider mandating that safeguard?

    This brings us to the main point: why are we investigating CIA officers instead of bankers?  On Monday August 24th, the New York Times had a front page article heralding that Attorney General Eric Holder was naming a veteran prosecutor to investigate CIA interrogation techniques during the Bush Administration. The purpose of the investigation is to decide whether or not to bring criminal prosecutions. Here is the obligatory disclaimer so human rights advocates can move on and finish reading this piece.  If there are bona fide legal abuses of prisoners’ civil rights, then by all means the Department of Justice, the military or other governmental bodies should thoroughly investigate such abuses and bring criminal cases, if warranted.

    The actions of CIA officers should be examined in context.  Post-9-11, the government adopted a philosophical stance on terrorism and the threat to the US homeland.  The stance was that the United States was in mortal danger from jihadists and other terror organizations and, unchecked, these terrorists had the capability of inflicting untold harm on the American public.  Thus, as always, the CIA mandate was to protect the country. Post 9-11, these were extraordinary times and the danger was real and imminent.  Possibly extreme measures were needed to obtain information and protect Americans.

    Every intelligence gathering or law enforcement agency probably has a small minority of unbalanced individuals who go overboard in exercising authority. My guess is that 99.99% of CIA, FBI and other agents are professional, disciplined, well-trained patriots acting in good faith and with the highest motives and integrity. These are professionals who give up time with their families on a GS pay scale to protect us. How do we repay them?  Post-hoc, we investigate them.  The average citizen has no idea what this means.  These officials being investigated may have to hire their own attorneys, pay for their defense out of pocket and hope to be reimbursed for these expenditures if exonerated.  This does not take into account the psychological strain on the individual, the public humiliation, opprobrium of friends and neighbors and the strain on families.   Moreover, there is a chilling, trickle down, effect on others in the agency.  No risks will be taken and the best and brightest in the agency will avoid being involved in interrogations. DOJ investigations take a long time and that is one large cloud to be under.

    Contrast the treatment of CIA officials with the treatment of the principals in the financial industry who caused the 2008 market meltdown:

    • Rating agencies received a fee from the institutions that were being rated and essentially conspired to inflate ratings to the detriment of investors;
    • Stock brokers did not disclose the riskiness of investment products being sold to investors;
    • Real estate brokers pushed clients into houses they could not afford and conspired with mortgage brokers, banks and clients to obtain bogus financing;
    • Purchasers knowingly falsified their applications as to income and assets to obtain a larger mortgage or any mortgage;
    • Investment bankers took the suspect paper, packaged the paper into collateralized debt obligations and sold them to pension funds;
    • Pension fund managers had a fiduciary duty to investigate what they were buying, but instead chose to reach for a few extra basis points of yield to earn a bigger annual bonus;
    • Lawyers willing created CDOs and derivatives on the CDOs.  They counseled clients to provide the skimpiest of disclosures and misled investors.

    The mortgage and housing arena is but one part of the financial meltdown and there are more principals in the financial industry worthy of investigation. But the reality is that few individuals and companies are being investigated. The standard apology for this lapse is that investigations would disrupt the economy.  Who could have really understood the magnitude of these problems? This did not occur during my administration!  Let’s let bygones be bygones.

    That approach is too facile and disingenuous for my tastes.  For the average working man the catastrophic result has been lost homes, depleted retirement accounts, broken families and lost dreams.

    Who is more deserving of prosecution, members of the financial industry or members of the CIA?  Patriots versus Scoundrels.   People who tried to save lives versus people who destroyed lives. People earning a GS pay scale versus Goldman Sachs executives scheduled to share in $11.4 billion in bonuses for the first six months of 2009.  A values clarification moment –you decide!

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