The Abuse of Presidential Power-Becker

"Power tends to corrupt, and absolute power corrupts absolutely”. This famous dictum of Lord Acton is as relevant today as it was when stated in 1887. It applies to the private sector, such as private monopolies, as well as the public sector, but this insight has become much more important in the public sector since he wrote because of the large expansion of governmental powers during the past 70 years.

I would only add to Acton’s dictum that discretionary power is even more corrupting than the power embodied in regulations. The most dangerous trend in presidential power has been the growth in presidential willingness to take many discretionary actions that not only have little basis in law, but also frequently cause great harm to the economy and the society at large. The harm consists of both the direct damages from the actions, and the often large but indirect cost from the increased uncertainty and fear about the political environment faced by business, unions, and other groups.

Consider two examples mentioned by Posner. In 1962 President Kennedy used various threats to pressure steel companies to rescind a price increase in response to a very generous wage settlement that the industry made with the United Steelworkers union. Even many economists then believed that steel prices and steel output had a huge effect on the economy because it was claimed that steel was an important raw material in automobile production and many other goods. Yet the value added by the steel industry-the most important measure of its importance-was less than a few percent of US GDP.

Moreover, forcing the steel industry to suppress the price increase slowed down the substitution of aluminum and plastics for steel in the production of cars and other products. Prices provide important signals to an economy of the relative costs of producing different goods, which lead businesses and consumers to respond by substituting away from inputs and goods rising in price relative to other inputs and goods. The replacement of steel by other materials would have been faster if President Kennedy had stayed out of the negotiations, so that the disciplining of the United Steelworkers union and the companies could have occurred earlier.

As it was, it took only another decade for the steel industry to be turning to Washington for help through higher tariffs on steel imports, and direct subsidies. If the steel workers union and steel companies had been allowed to bargain without government interference and help, the adjustment by the industry to growing competition from other materials and steel from other countries would have been faster and more efficient. Probably too, the survival of the industry without a government lifeline would have become easier.

A more recent example is the BP oil spill in the Gulf of Mexico that is still not fully contained.  Whatever the degree of carelessness by BP, they will be fined billions of dollars as various cases brought by injured parties make their way through the courts. Such tort-based liability is justified, but there was no good economic reason for President Obama to interfere by requiring BP to create a $20 billion escrow account, and to defer its dividend payments. These were simply politically motivated acts to offset the public impression (not obviously correct) that he was too slow to act once the spill was discovered. The British have been claiming that his acts reflect a protectionist attitude of the US that is anti-foreign business.  In any case BP is strong enough to repay sizable damages without any presidential interference since its shares still have a market value of over $100 billion, even after a large decline in their value following the spill and the president’s threats.

It is still too early to evaluate the long-term harm from the president’s use of excessive authority against BP. However, the general anti-business tone of the current Congress and presidency that is reflected not only in various discretionary acts by the president, but also in proposed and actual legislation, such as the health care law, controls over executive pay, and the Dodd-Frank bill, are already slowing down the recovery from the financial crisis and recession. I have argued elsewhere (see, for example, the article by Steven Davis, Kevin Murphy, and myself in the January 4^th issue of the Wall Street Journal) that the anti-business legislation, and the uncertainty about subsequent legislation, has contributed to the slowness of this recovery compared to recoveries from prior severe recessions. Unemployment has remained sluggishly high in part because both small and large companies have been reluctant to take on additional employees in an uncertain and threatening environment. Perhaps that is good politics, but the use of presidential and congressional powers against business is surely not good economics.

Comments

[Jason Buberel]

As a small business owner, I am not at all concerned with the uncertainty resulting from the use (abuse?) of presidential authority. While the president may overstep traditional bounds in specific cases, the targets of those actions are typically very specific - BP, GM, United Steel - and do not have industry-wide effects.

Instead, the regulatory uncertainty that stems from the undefined application and enforcement of the recent Health Care Reform and Financial Industry reform is of much greater concern. Many of the implementation details of those bills were left to the regulatory agencies. Because of the lack of specificity in the legislation, it will take years of litigation before the boundaries of those laws become clearly defined.

[SV]

I hope you guys read your comments because I have a simple thing to convey. The idea that legislative uncertainty is a large contributing factor to the fact that rapid recovery has not occurred yet is more a political narrative than an objective analysis. Obama could be hailed as business's best friend, repeal the health reform and financial laws, and replace the corporate tax rate with a consumption tax and the economy would STILL be ravaged.

Perhaps I am relaying a narrative myself (and I would be happy to have you correct me in a subsequent post, email, or comment), but I believe the prolonged recession is relatively easy to explain if difficult to solve. Bad loans fueled by legislation were securitized by loophole mining investment banks who then gamed the ratings agencies by packaging loans that were bound to default with solid loans and then receiving AAA ratings for them. All kinds of funds and banks that should never have touched these instruments (pension funds for instance) bought them and then when they were worth nothing, banks had a balance sheet crisis. This led to bailouts to prop up the credit mechanism and forestall a run on our currency. Fiscal efforts in the stimulus while perhaps disproportionate to their cost, held up the economy until the past few quarters as spending dried up. Excess capacity leads to cash hoarding leads to restricted lending in general and low spending/investment by the private sector. Nowhere in the story I just told does government uncertainty play a PROMINENT role. I do not deny that it probably plays a role of some sort. My position is, however, that this is a Republican narrative being taken seriously by too many people who ought to know better.

[IntuitiveEconomics]

One can intuitively understand why uncertainty is bad for business and economic growth, however, in my view, it is only one of the factors responsible for the slow recovery.

The recovery is slow because it is taking place against the new politico-economic backdrop of an America that has transitioned to permanent, European style, slow, long-term economic growth. In a nutshell, this new, permanent, weak, long-term economic growth can be summarized as decreased personal incentives to produce.

In other words, the slow recovery is due to the generalized feeling that the correlation between what one personally produces and his standard of living is getting weaker and weaker by the day, and will get even more so in the future, as poverty will be further subsidized while high productivity will be further penalized by increasing direct and indirect taxes. So, simply stated, in such an environment, why work? Or, at least, why work as hard or as smart as before? Especially in difficult, mentally challenging, high value added endeavors?

With low raw productivity at the micro-economic level, there is little that macro-economists can do to retain America’s economic prosperity. In the end, economists only have the raw productivity of a people to work with. They can try to make the best use out of a low raw productivity, but they will never be able to preserve America’s leading position in economic prosperity, something Americans seem to have become accustomed to taking for granted. Low individual raw productivity acts as an ultimate (low) ceiling to prosperity.

[Pete]

There are several narratives proposed to explain the most recent Great Recession. Yes, the housing bubble bursting certainly hurt, but that bubble has burst, so the economy should be on the rebound by now, right? Unfortunately, the market has not been allowed to fully correct. Interest rates are kept artificially low by the Fed, and Fannie and Freddie (and FHA) keep buying up mortgage debt. So many marginal players in the housing and finance (and auto) industries are kept afloat by government largesse.

I think the abuse of Presidential power is just one small part of the Obama administration's overall attitude toward business. They hate business and business knows this, creating the freeze in the face of uncertainty. This also happened in the 1930s with FDR - FDR actively harassed business until he needed them on his side for WWII.

[Quentin]

The underlying problem here is that people seem to actually want the president to have more power than was given by the constitution. The vast majority of examples of abuses of presidential power that have been given were popular with the public and the president in question would likely have been hurt politically for not acting. When a corporation makes a huge and expensive mess at the bottom of an ocean and is not able to deal with it quickly on its own, there seems to be an expectation that the president is the one who should fix the problem (and not take a vacation until it's fixed). The president is expected to fix all of our most challenging problems and gets credit for success or blame for failure regardless of whether there is any actual connection between the president's powers or actions and the outcome of the crisis du jour. In short, the people view the presidency as an elected dictator, but they only consciously think about it in those terms when the office is held by the opposing party.

[Brian Davis, Austin, TX]

BP will survive, work, produce, and market itself out of the hellacious mess it made in the Gulf of Mexico. No one can compare this global behemoth to a local dry cleaner that has to close its store because it flunked the perc inspector's interpretation of EPA's rule on parts per million into the city wastewater system. What else was the federal government to do except try to cut through some of the clutter that regularly clogs the pipeline between establishment or acceptance of an actor's economic liability and collection of compensation in negotiable form. It's not like BP is a deadbeat apartment tenant who can be evicted on a few days' notice from the JP court. The Coast Guard has skimmers and boomers working the oil spill 24/7. BP gets a $ Multi-Million bill from the U.S. government every couple of weeks. Homeland Security (Admiral (Ret.) Allen is looking over BP's shoulder at every move. The Navy has some fine carriers, destroyers, and subs but they wouldn't be much help in this exercise. Lest we forget, the doors to any courthouse in America remain open to BP in the event its brass were to decide the company is being kicked around without due process. This isn't the steel mills seizure during wartime for which the Supreme Court ever-so-gingerly rapped Harry Truman's fingers with a yardstick.

[mark zdeblick]

THere is one uncertainty created in the last 18 months that will live long past its creator, and that is the primacy of the creditor in a bankruptcy setting. Obama's conversion of GM to Government Motors overturned hundred's of year's of legal and common law precedent without creating any new legal standard. When will the government next declare $500M of creditor loans worthless compared to a Union's claim on assets? This is not a "Republican" spin on things... what creditor would loan a single dime to any Unionized company? People may wonder why low interest rates have not led to an increase in economic activity or inflation and there are many reasons why creditors would not now increase the number of loans they make. But Obama's unilateral, unchecked action against GM's former creditors will permanently change the way many creditors treat US-based debtors in the future. Since the credit markets are vastly larger than equity markets, Obama's random use of power created a permanent dampening of economic activity.

[H. Stewart]

Many of the Super Class (transnational CEOs of the World's largest Corporations such as BP, and all other variety of Venture Capitals) enjoy transnational status, while being subjected to the national laws everywhere, they are often allowed significant power on the governments whose law define them. An example that is real: is Haliburton who derives significant revenue from the U.S. Government and its US operations, but when the US economy weakened and public opinion turned against the practices and demanded investigations, fines, etc., it moved its headquarters to the Persian Gulf. These Super Class oligarchs will move from one government to another, if they aren't obliged their power and influence. Today many large trans national corporations are moving towards the Persian Gulf (due to ability to exert their power). Until we learn to become less dependent on oil and more efficient with solar, wind, geothermal, etc.; we in this nation are held hostage to these transnational oligarchs. The abuse is the grip these transnationals have on our nation (using the White Houses vulnerabilities in politics and the needs within the nation).

[Ted]

Before we start coming up with theories of "business uncertainty" maybe we should look at standard theories, namely that monetary policy is way, way too tight. Is it surprising that when the Fed allows inflation expectations to plummet that a recovery is "slow"? You don't need to appeal to uncertainty. Talk to me when the Fed actually runs expansionary policy and see if the recovery is still slow.

[Brian Davis, Austin, TX]

Mark, if it's any consolation, in the Chrysler BK case, which cast the die for judicial erasure of the absolute priority rule, the Supreme Court issued an order vacating the Second Circuit's affirmance of the lower courts' rejection of the creditors' objections to the "sale" and reordering the allocation of the "proceeds." That's a technical way of saying SCOTUS didn't want to leave that fait accompli standing as precedent. At the end of the day, GM and Chrysler weren't as much bankruptcy cases as renegade exercises of federal eminent domain.

[Joe Smith, Houston, TX]

I am in complete agreement with Becker and Posner on this topic. I just wish their points would receive more acceptance and publicity.

While I do not agree with most of the administration’s recent actions, many citizens seem to want a more active federal government. For some reason, they seem to think the federal government can do a better job at micro tasks than smaller more focused and specialized governments, organizations, or companies. I am not one of these. I do believe the federal government has important roles in marco areas like national security, economic viability, and similar functions. Its very structure makes it ill suited to be competent let alone effective in micro tasks such as education or health care or home mortgages and housing. Perhaps the citizens have forgotten the differences between the micro and macro tasks for their governments? Or perhaps governments have decided that doing the micro is easier than the macro even if the results are not that effective?

How did we get to this sorry state of affairs? Whom do we blame? Yes, we do need to blame someone and hold someone accountable. The tax dollars of citizens can no longer be consumed by any federal program or legislation rife with procedural and structural dysfunctions. The same goes for state and local governments. We got here slowly step by step until the last election when things really accelerated. The expansion of presidential powers as evidenced by all of the recent actions by President Obama and his administration is a problem, but to be fair, it is not a recent problem. I have seen it exercised more than once during my 67 years by presidents of both parties and Congresses controlled by both parties.

I blame the American people, who has sat back and quietly and willingly let this happen to them. They have only themselves to blame for the erosion of their basic freedoms and rights by allowing governments, especially the federal government to assume responsibilities that belong to them or to their state or local governments.

I also blame the corporate sector--business schools, corporate management and boards of most American corporations and other similar organizations-- for failing to promote and educate the American public and our political leaders on the role of and importance of the free enterprise system and capitalism and to fight back when the need was there to do so. I wish I had done more when I was still working. Just give the American public the facts and they will figure it out.

It is not too late to do so. It just takes effort and resolve and the belief that it is worth it. For one, I believe it is worth it.

[Jason Scorse]

Dr. Becker- as a Ph.D. in Econ from UC Berkeley I have long respected your work- you are a brilliant economist.

So why have you stooped so low with this garbage that you are now peddling? You know as well as I do that we suffered a tremendous recession that will take a long time to recover from and that business uncertainty is just a code word for the fact that you don't like Obama's progressive policies.

There is zero evidence that uncertainty is in any way a major source of continued sluggish employment growth- as you marshal exactly zero evidence to make your claims. Of course businesses are going to complain, but as an economist you know what they want- less taxes and less regulation because they are greedy- no mystery there. They are acting in their self-interest.

You know better than to peddle this garbage. If you don't like Obama's policies fine, but don't make up stories about his economic performance that make no sense. You should be applauding him for bringing this economy back from the brink- as should the business leaders- don't let your biases distort your better judgment. Please. You're better than this.

[OnePlusOne]

The Western nations face a great competition challenge from the emerging economies.

So, we, Westerners, either reestablish supply side individual production incentives that return us to a minimum 4% annual growth, or we fade away in a world that is growing by 4% on average.

It’s just as simple as that!

[DeVries]

Indeed "OnePlusOne", but people often misinterpret this challenge as an implied endorsement of Chinese style central planning.

The issue is not whether China, India and the other emerging economies will match US per capita productivity (they cannot, unless they make their economies much freer), but rather, whether the modest supply side liberalizations they have already introduced are enough to get them to a level of even just half of US per capita income. A China and India alone that have reached just ½ of US per capita income, will be economies larger than the US and Europe combined.

So, to paraphrase what you said:

The West either retakes the lead in supply side liberalization of their economies (i.e. incentives to produce) or it fades away into worldwide economic oblivion.

It is indeed as simple as that!

[fdsgfg]

The Western nations face a great competition challenge from the emerging economies.

So, we, Westerners, either reestablish supply side individual production incentives that return us to a minimum 4% annual growth, or we fade away in a world that is growing by 4% on average.

It’s just as simple as that!

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In any case BP is strong enough to repay sizable damages without any presidential interference since its shares still have a market value of over $100 billion, even after a large decline in their value following the spill and the president’s threats.

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[Acne Care]

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