The Backstory : Aggressive Accounting

These days I've also been reading The Great Unraveling by Paul Krugman. It is his NYT columns from 2000-2002 mostly about how bad George W. Bush is. Today I was reading his columns about aggressive accounting and corporate governance. There are two things of note.

In 1995, Congress overrode a veto by Bill Clinton to pass the Private Securities Litigation Reform Act, which made lawsuits against companies and auditors "that engaged in sharp accounting practices."

In 1997-2000, after-tax profits stalled, but the S&P 500, the profits reported to investors grew 46%. Krugman attributes this to the changes in management theory and the advent of "principal-agent" theory. What's sad is that it is a well-meaning idea where managers' pay depends strongly on stock prices so that they have more accountability. I can see how before it may have seemed like managers were inefficient, maybe sometimes too generous to employees, and maybe out of touch with the needs of the company since they did not have as much invested in their own companies. Unfortunately, tying their compensation to stock prices gives them a big incentive to artificially boost those prices regardless of actual performance. The problem is that the real performance of a company will always be somewhat qualitative. It will always be some kind of combination of factors. Any quantitative measure can always be manipulated. That is something Deming said, too.

We are still trying to deal with the effects of these issues today. Back in 2001 I was still in high school and I had no idea who Paul Krugman was. All these things were happening, but I didn't really know. I just knew that Reaganomics and tax cuts are irresponsible. It is kind of weird to get the back-story now, especially knowing that I was there, too. It is a different sensation from reading about things that happened longer ago or in different countries. I am glad that I think I will have a better understanding of things happening going forward, but it's also a little strange knowing that millions of other people will continue to be unaware and just minding their own business as I was.

Financial Meltdowns Just Happen Sometimes

Krugman's take on bankers

Some highlights.

The official Financial Crisis Inquiry Commission — the group that aims to hold a modern version of the Pecora hearings of the 1930s, whose investigations set the stage for New Deal bank regulation — began taking testimony on Wednesday. In its first panel, the commission grilled four major financial-industry honchos.

There were two moments in Wednesday’s hearing that stood out. One was when Jamie Dimon of JPMorgan Chase declared that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.” In short, stuff happens, and that’s just part of life.

Still, Mr. Dimon’s cluelessness paled beside that of Goldman Sachs’s Lloyd Blankfein, who compared the financial crisis to a hurricane nobody could have predicted. Phil Angelides, the commission’s chairman, was not amused: The financial crisis, he declared, wasn’t an act of God; it resulted from “acts of men and women.”

But there was nothing accidental about the crisis. From the late 1970s on, the American financial system, freed by deregulation and a political climate in which greed was presumed to be good, spun ever further out of control. There were ever-greater rewards — bonuses beyond the dreams of avarice — for bankers who could generate big short-term profits. And the way to raise those profits was to pile up ever more debt, both by pushing loans on the public and by taking on ever-higher leverage within the financial industry.

On the other hand, according to the Economic Long Wave Theory, these large crashes do happen every so often as a part of a cycle.

Krugman is a Traditional Democrat

Lately Paul Krugman seems to be obsessed with criticizing Obama, and he did another hit piece today.

He is mad at Obama for saying that he agrees with Republicans that regulation does not need to be "top down command and control." Krugman says that that's not what Republicans said, and that Democrats came up with that etc. He says that what Obama said is worse than Hillary supporting the gas tax holiday because Obama is using Republican talking points.

Krugman doesn't know two shits about politics. He has the view of many traditional Democrats, which is that we have to sell the liberal view and liberal ideas in terms of being in opposition with Republicans. We have to talk about how the liberals are always right, the liberals did the most successful programs, and the liberals are morally superior. However, I think this kind of thinking blinds Democrats to their own faults. They are unable to think critically about why Republicans have been so successful in politics for the past 30 years.

While some of Krugman's specific points are correct, and of course Reagan's policies toward regulation were really bad, he's missing the big picture. The bigger picture is that Democrats do often frame regulation as being anti-business, and that American people are concerned about how regulation and programs will affect the economy. Democrats need to stop thinking about regulation as being in opposition to the big bad companies, and think of it as supporting businesses that are good for Americans.

And anyway, even though Reagan and Bush II are really bad, my policy professor says that Bush I did more for the environment than Clinton.

Furthermore, in terms of negotiations, it is a good idea to give ideological ground this way. In a sense, it is agreeing with the concerns that people have while pushing for solutions more aggressively. Yes, Democrats need to admit they are not anti-business, and they are pro smart regulation. Krugman has an outdated view of politics.