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Finance’s Failures: Lack of Accountability

This week I’ll be highlighting some excellent, recent articles on problems in the US financial sector.  First up is Jennifer Taub’s Reforming the Banks for Good.  On the way to introducing six valuable reforms, Taub notes the following:

 In 2013 JPMorgan Chase (the bank that bought WaMu) agreed to pay $13 billion to the U.S. government related in part to the sale of bad mortgages to government-sponsored housing enterprises Fannie Mae and Freddie Mac. The settlement was heralded by the government as the largest ever with a single institution in U.S. history. But the board of directors at JPMorgan Chase awarded CEO Jamie Dimon a 74 percent pay increase (to $20 million) that same year. Dennis Kelleher, president of Better Markets, called this move “as shocking as it is indefensible,” noting, “It’s a real slap in the face to the [Department of Justice] and financial regulators who think that the actions that they’ve taken in the last year have been appropriate to punish and deter JPMorgan Chase.” It is hard not to conclude that those who helped create a global financial calamity have not and will not suffer personal consequences.

I’m looking forward to reading Brandon Garrett’s Too Big to Jail this fall to explore some systemic responses to the problem. If it’s not solved, fines simply become a cost of doing business. And for too big to fail banks, no mere fine can deter bad conduct. If any particular penalty really endangered a bank, it would just be funneled back to the bank in the form of a bailout.

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Abe Fortas and the Chief Justiceship

120px-Abe_fortas_hand_in_airI’ve posted previously about how the attempted retirement of Chief Justice Warren in 1968 and the failed nomination of Justice Fortas as his replacement caused a significant change in how people think about what the appropriate relationship is between the Justices and politics.  After Fortas went to the Court in 1965, he helped draft the President’s 1966 State of the Union Address, sat in on White House meetings about Vietnam, and gave his input on a host of other topics that we would now consider completely improper.

My favorite anecdote is that when Warren announced his retirement, LBJ called Clark Clifford and Fortas to the White House to discuss who his successor should be.  In other words, Fortas was in the meeting to decide that Fortas should be nominated!  (Needless to say, Fortas was for picking Fortas.)

Social Science in an Era of Corporate Big Data

IsaacWorkingIn my last post, I explored the characteristics of Facebook’s model (i.e., exemplary) users. Today, I want to discuss the model users in the company–i.e., the data scientists who try to build stylized versions of reality (models) based on certain data points and theories. The Facebook emotion experiment is part of a much larger reshaping of social science. To what extent will academics study data driven firms like Facebook, and to what extent will they try to join forces with its own researchers to study others?

Present incentives are clear: collaborate with (rather than develop a critical theory of) big data firms.  As Zeynep Tufekci puts it, “the most valuable datasets have become corporate and proprietary [and] top journals love publishing from them.”  “Big data” has an aura of scientific validity simply because of the velocity, volume, and variety of the phenomena it encompasses. Psychologists certainly must have learned *something* from looking at over 600,000 accounts’ activity, right?

The problem, though is that the corporate “science” of manipulation is a far cry from academic science’s ethics of openness and reproducibility.* That’s already led to some embarrassments in the crossover from corporate to academic modeling (such as Google’s flu trends failures). Researchers within Facebook worried about multiple experiments being performed at once on individual users, which might compromise the results of any one study. Standardized review could have prevented that. But, true to the Silicon Valley ethic of “move fast and break things,” speed was paramount: “There’s no review process. Anyone…could run a test…trying to alter peoples’ behavior,” said one former Facebook data scientist.

Grant Getters and Committee Men

Why are journals so interested in this form of research? Why are academics jumping on board? Fortunately, social science has matured to the point that we now have a robust, insightful literature about the nature of social science itself. I know, this probably sounds awfully meta–exactly the type of navel-gazing Senator Coburn would excommunicate from the church of science. But it actually provides a much-needed historical perspective on how power and money shape knowledge. Consider, for instance, the opening of Joel Isaac’s article Tangled Loops, on Cold War social science:

During the first two decades of the Cold War, a new kind of academic figure became prominent in American public life: the credentialed social scientist or expert in the sciences of administration who was also, to use the parlance of the time, a “man of affairs.” Some were academic high-fliers conscripted into government roles in which their intellectual and organizational talents could be exploited. McGeorge Bundy, Walt Rostow, and Robert McNamara are the archetypes of such persons. An overlapping group of scholars became policymakers and political advisers on issues ranging from social welfare provision to nation-building in emerging postcolonial states.

Postwar leaders of the social and administrative sciences such as Talcott Parsons and Herbert Simon were skilled scientific brokers of just this sort: good “committee men,” grant-getters, proponents of interdisciplinary inquiry, and institution-builders. This hard-nosed, suit-wearing, business-like persona was connected to new, technologically refined forms of social science. . . . Antediluvian “social science” was eschewed in favour of mathematical, behavioural, and systems-based approaches to “human relations” such as operations research, behavioral science, game theory, systems theory, and cognitive science.

One of Isaac’s major contributions in that piece is to interpret the social science coming out of the academy (and entities like RAND) as a cultural practice: “Insofar as theories involve certain forms of practice, they are caught up in worldly, quotidian matters: performances, comportments, training regimes, and so on.” Government leveraged funding to mobilize research to specific ends. To maintain university patronage systems and research centers, leaders had to be on good terms with the grantors. The common goal of strengthening the US economy (and defeating the communist threat) cemented an ideological alliance.

Government still exerts influence in American social and behavioral sciences. But private industry controls critical data sets for the most glamorous, data-driven research. In the Cold War era, “grant getting” may have been the key to economic security, and to securing one’s voice in the university. Today, “exit” options are more important than voice, and what better place to exit to than an internet platform? Thus academic/corporate “flexians” shuttle between the two worlds. Their research cannot be too venal, lest the academy disdain it. But neither can it indulge in, say, critical theory (what would nonprofit social networks look like), just as Cold War social scientists were ill-advised to, say, develop Myrdal’s or Leontief’s theories. There was a lot more money available for the Friedmanite direction economics would, eventually, take.

Intensifying academic precarity also makes the blandishments of corporate data science an “offer one can’t refuse.” Tenured jobs are growing scarcer. As MOOCmongers aspire to deskill and commoditize the academy, industry’s benefits and flexibility grow ever more alluring. Academic IRBs can impose a heavy bureaucratic burden; the corporate world is far more flexible. (Consider all the defenses of the Facebook authored last week which emphasized how little review corporate research has to go through: satisfy the boss, and you’re basically done, no matter how troubling your aims or methods may be in a purely academic context.)

Creating Kinds

So why does all this matter, other than to the quantitatively gifted individuals at the cutting edge of data science? It matters because, in Isaac’s words:

Theories and classifications in the human sciences do not “discover” an independently existing reality; they help, in part, to create it. Much of this comes down to the publicity of knowledge. Insofar as scientific descriptions of people are made available to the public, they may “change how we can think of ourselves, [and] change our sense of self-worth, even how we remember our own past.

It is very hard to develop categories and kinds for internet firms, because they are so secretive about most of their operations. (And make no mistake about the current PR kerfuffle for Facebook: it will lead the company to become ever more secretive about its data science, just as Target started camouflaging its pregnancy-related ads and not talking to reporters after people appeared creeped out by the uncanny accuracy of its natal predictions.) But the data collection of the firms is creating whole new kinds of people—for marketers, for the NSA, and for anyone with the money or connections to access the information.

More likely than not, encoded in Facebook’s database is some new, milder DSM, with categories like the slightly stingy (who need to be induced to buy more); the profligate, who need frugality prompts; the creepy, who need to be hidden in newsfeeds lest they bum out the cool. Our new “Science Mart” creates these new human kinds, but also alters them, as “new sorting and theorizing induces changes in self-conception and in behavior of the people classified.” Perhaps in the future, upon being classified as “slightly depressed” by Facebook, users will see more happy posts. Perhaps the hypomanic will be brought down a bit. Or, perhaps if their state is better for business, it will be cultivated and promoted.

You may think that last possibility unfair, or a mischaracterization of the power of Facebook. But shouldn’t children have been excluded from its emotion experiment? Shouldn’t those whom it suspects may be clinically depressed? Shouldn’t some independent reviewer have asked about those possibilities? Journalists try to reassure us that Facebook is better now than it was 2 years ago. But the power imbalances in social science remain as funding cuts threaten researchers’ autonomy. Until research in general is properly valued, we can expect more psychologists, anthropologists, and data scientists to attune themselves to corporate research agendas, rather than questioning why data about users is so much more available than data about company practices.

Image Note: I’ve inserted a picture of Isaac’s book, which I highly recommend to readers interested in the history of social science.

*I suggested this was a problem in 2010.

Facebook’s Model Users

DontAnthropomorphizePeopleFacebook’s recent pscyhology experiment has raised difficult questions about the ethical standards of data-driven companies, and the universities that collaborate with them. We are still learning exactly who did what before publication. Some are wisely calling for a “People’s Terms of Service” agreement to curb further abuses. Others are more focused on the responsibility to protect research subjects. As Jack Balkin has suggested, we need these massive internet platforms to act as fiduciaries.

The experiment fiasco is just the latest in a long history of ethically troubling decisions at that firm, and several others like it. And the time is long past for serious, international action to impose some basic ethical limits on the business practices these behemoths pursue.

Unfortunately, many in Silicon Valley still barely get what the fuss is about. For them, A/B testing is simply a way of life. Using it to make people feel better or worse is a far cry from, say, manipulating video poker machines to squeeze a few extra dollars out of desperate consumers. “Casino owners do that all the time!”, one can almost hear them rejoin.

Yet there are some revealing similarities between casinos and major internet platforms. Consider this analogy from Rob Horning:

Social media platforms are engineered to be sticky — that is, addictive, as Alexis Madrigal details in [a] post about the “machine zone.” . . . Like video slots, which incite extended periods of “time-on-machine” to assure “continuous gaming productivity” (i.e. money extraction from players), social-media sites are designed to maximize time-on-site, to make their users more valuable to advertisers (Instagram, incidentally, is adding advertising) and to ratchet up user productivity in the form of data sharing and processing that social-media sites reserve the rights to.
 

That’s one reason we get headlines like “Teens Can’t Stop Using Facebook Even Though They Hate It.” There are sociobiological routes to conditioning action. The platforms are constantly shaping us, based on sophisticated psychological profiles.

For Facebook to continue to meet Wall Street’s demands for growth, its user base must grow and/or individual users must become more “productive.” Predictive analytics demands standardization: forecastable estimates of revenue-per-user. The more a person clicks on ads and buys products, the better. Secondarily, the more a person draws other potential ad-clickers in–via clicked-on content, catalyzing discussions, crying for help, whatever–the more valuable they become to the platform. The “model users” gain visibility, subtly instructing by example how to act on the network. They’ll probably never attain the notoriety of a Lei Feng, but the Republic of Facebookistan gladly pays them the currency of attention, as long as the investment pays off for top managers and shareholders.

As more people understand the implications of enjoying Facebook “for free“–i.e., that they are the product of the service–they also see that its real paying customers are advertisers. As Katherine Hayles has stated, the critical question here is: “will ubiquitous computing be coopted as a stalking horse for predatory capitalism, or can we seize the opportunity” to deploy more emancipatory uses of it?  I have expressed faith in the latter possibility, but Facebook continually validates Julie Cohen’s critique of a surveillance-innovation complex.

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Happy 4th to The Persons of the Divided States of America

shredded flag“Person means a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated business association, joint venture, governmental entity, or other organization.”

That is from the definitions section of a commercial agreement I happened to be reading today for a consulting assignment.  That type of definition appears in millions of commercial contracts–purchase agreements, merger agreements, loan agreements, leases, licenses, you name it.

In the commercial world, among business lawyers and clients, it is commonly assumed that whenever we reference persons we mean to include every form of organization people have created.   That familiar usage might make the holdings in cases such as Holly Hobby or Citizens United seem natural, with corporations having many of the same rights and duties as people have.

On the other hand, we use the term this way in the business context where the issues being addressed concern commercial obligations and powers, liabilities and indemnities and purchases and sales–not free speech or free exercise of religion.  Moreover, the presence of such definitions in these agreements, despite ubiquity, underscores that it is more natural for persons to be seen only as natural persons, not organizations.

Hard liners on both sides of debates about corporate rights and duties show stupidity, arrogance, or mendacity when declaring either, on the right, “of course corporations are persons” or, on the left, “of course corporations are not persons.” In fact, organizations are not natural persons.  But for some purposes, they should be treated as natural persons are and for others they should not.  (See here for some additional thoughts on Hobby Lobby drawing on the example of Berkshire Hathaway.)

Context is key and hard liners tend to forget context.  In the talk these days about these two SCOTUS cases, it looks as if the Divided States of America is increasingly peopled by hard liners. Alas, that’s not something to celebrate this Fourth of July.

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Originalism in Noel Canning, Part I

One striking aspect of Noel Canning is the unexpected role that original meaning plays. The majority emphasizes historical practice and the policies embedded in the relevant constitutional provisions; the concurrence urges a sharp focus on original meaning. Yet the majority opinion comes very close to reflecting what we know about the original meaning of the Recess Appointments Clause, while the concurrence has little basis in the evidence on original meaning.

Let’s start with the “recess” issue. In a forthcoming article, I demonstrate that the evidence cuts overwhelmingly against the notion that the original meaning of “recess” (or “the recess”) was limited to “inter-session” breaks. The majority fails to cite some useful evidence on this point, but its analysis is sound. It recognizes that ratification-era dictionaries do not distinguish between intra- and inter-session recesses and that the word “recess” was used broadly to refer to all types of legislative breaks. Also, historical practice has long reflected an understanding that “recess” applies to both intra-session and inter-session breaks.

The concurrence claims there is “strikingly little support” for the assertion that “the recess” was used to refer to intra-session breaks. But by my count, nine ratification-era constitutions use the term without limiting it to inter-session breaks, as do many state legislative enactments. There are executive-branch examples as well, such as when the Governor of New Jersey sent a message to the legislature in 1754 referring to a coming intra-session break as “the Recess.” Thomas Jefferson’s 1801 Manual of Parliamentary Practice and Blackstone’s Commentaries also use “recess” in a broad sense. In fact, there is virtually no evidence that “recess” or “the recess” was restricted to inter-session recess. The usage examples put forward to support that position usually refer to particular recesses that happen to have been inter-session. Of course, the fact that inter-session recesses were called “the recess” does not mean that other recesses weren’t also called “the recess.” As we have seen, they were.

Beyond the usage examples, a bit of analysis carries the point further. In the ratification era, New Jersey enumerated its sessions annually. During an annual session, the legislature might hold multiple work periods, which it called “sittings.” Sittings were separated by recesses that modern observers would call “intra-session” breaks. This practice looks a lot like the contemporary Senate’s, except that the New Jersey legislature had an official name for its intra-session work periods—sittings—and the modern Senate does not (colloquially, senators call them “work periods”). By contrast, Massachusetts called each sitting a new “session” and often had multiple sessions in a single year. As a result, in modern parlance an identical break would be “intra-session” in New Jersey and “inter-session” in Massachusetts. Given this variation in state practice, it seems unlikely that the Constitution adopts any particular definition of “recess” or “session.” How could we know whether it adopted that of New Jersey or Massachusetts? Wouldn’t the ratifiers in each state have viewed the Clause differently?

The concurrence ignores virtually all of this evidence. It dismisses New Jersey’s usage in a footnote without any clear explanation.

The next question regarding “recess” is how to cabin the term so that it doesn’t extend to, say, lunch breaks. There are a few possible responses. One is to take the Constitution at face value and hold that because it doesn’t set a limit, the courts needn’t worry about generating one. It is not obvious that the courts must limit recesses rather than permit the political branches to negotiate the term, constrained by the political process and the ballot box.

A similar response is to recognize that the Senate controls the “Rules of its Proceedings” and therefore can define its recesses, within reason, to protect itself from executive encroachment.

A final response is to identify features of breaks that make them constitutionally significant “recesses.” Both the majority and the concurrence take this route in Noel Canning. The concurrence decides that inter-session breaks count and intra-session breaks do not, despite scant textual or historical support for that position. The majority decides that three days is too short, borrowing arbitrarily from the Adjournments Clause, and nine days is presumptively too short, noting that in practice recess appointments have rarely been made during shorter breaks.

In my view, a better and likely more faithful position is that recesses are breaks between Senate work periods—times when senators take a break from the ordinary course business for a week or more. Here, I rely less on evidence of original meaning—we simply don’t have enough evidence to be confident that any particular meaning was correct—and more on reasoning about what information the Framers had before them and what fits with their purposes. Oddly, people tend to miss that the Framers could not have predicted future Senate practice and therefore could not have written the Recess Appointments Clause with an expectation of annual sessions. In fact, there were divergent views on what the Senate would do. Some thought it would rarely meet; others thought it would remain in session almost continually. We also lack a record of what anyone thought the Senate would call its work periods or how it might enumerate them. What the Framers surely knew, though, was the practice of state legislatures. The “work period” concept accommodates both the Massachusetts session and the New Jersey sitting. It is also the most obvious, know-it-when-you-see-it candidate for what constitutes a recess of significance as opposed to a mere lunch break or weekend. In fact, unlike those insignificant breaks, senators have long referred to the times between work periods as “recesses,” often with more specific names like the “August Recess” and the “Easter Recess.” Most important, breaks between work periods are times when senators might not be readily available.

The majority’s nine-day presumptive minimum comes close to this “work period” view, although it arrives there by relying on historical practice. The convergence may not be coincidental. A break between work periods is essentially a week or more off, which means a minimum of nine days. Perhaps, then, historical practice reflects the work period view in action—and perhaps original meaning and historical practice have been in harmony, not conflict.

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President Pro Tempore

As a follow-up to a prior post, I want to point out a constitutional oddity.  Article I states that the House of Representatives “shall choose their Speaker and other Officers” and that the Senate “shall choose their other officers, and also a President pro tempore.”  For much of our history, the Speaker of the House has been a strong political figure.  The President pro tempore of the Senate, by contrast, has never been important in the Senate.  Why did the office remain impotent, I wonder?

The Twenty Fifth Amendment also makes the President pro tempore (along with the Speaker) the officers who must receive communications regarding presidential disability. Now it is easy to see why you wouldn’t want the Vice-President to a responsible person (conflict-of-interest), but why not the Majority Leader?  By the 1960s, which is when the XXV Amendment was ratified, it was perfectly clear that the Majority Leader was the true leader of the Senate.  Worse still, the Majority Leader is still not in the line of presidential succession–the President Pro Tempore is.  It’s a weird setup.

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What Berkshire Hathaway Teaches About Hobby Lobby

Eleven years ago tomorrow, the abortion issue led Berkshire Hathaway, the huge conglomerate Warren Buffett built and now owned by one million different shareholders, to end its shareholder-directed charitable contribution program. Under the program, Berkshire’s board earmarked an amount for charitable giving and then let the company’s class A shareholders designate the charities to which their share went. In twenty-two years, the program distributed $197 million to thousands of different charities.

Berkshire terminated the program on July 3, 2003 because activists boycotted products of one of its subsidiaries to protest giving to organizations they opposed on religious grounds: some designated Planned Parenthood, which facilitates a woman’s choice to abort an unwanted pregnancy, while others gave to Catholic Social Services, which opposes abortions.

Berkshire stood for neither position, of course, because it is a business organization whose mission is to increase its intrinsic economic value, which has nothing to do with religion. Berkshire’s board chose to terminate the program because the boycotts hurt Berkshire’s business and its personnel while offering shareholders only a slight convenience and tax advantage.

The scenario speaks to the debate that erupted this week between foes in the abortion debate thanks to the Supreme Court’s decision in the Hobby Lobby case. The issue in that case, narrower and more technical than accompanying rhetoric suggests, was whether the word persons in a federal statute about religious freedom includes corporations owned by a small number of people with a specific set of religious beliefs. If so, then regulations implementing Obamacare cannot require them to fund birth control devices in conflcit with their religious beliefs.

A majority of the Court concluded that closely-held corporations are persons for the purpose of the statute because they are readily seen as merely a convenient legal form through which individuals do business. The dissent complained that only individuals can have religious beliefs and therefore corporations, whether closely held or otherwise, aren’t persons for purposes of the federal law.

The Berkshire example is instructive on both opinions. Buffett has always boasted that Berkshire, though using the corporate form, adopts a partnership attitude. The shareholder charitable contribution program epitomized this attitude. It gave the decision to the owners, as is done in partnerships and closely held corporations, not the board, the practice in public corporations. Those owners, moreover, were the class A shareholders, a subset of Berkshire’s shareholder body made up of people with larger and older stakes—including hundreds who really were Buffett’s original partners.

Berkshire shareholders, class A and class B, readily agree on a wide variety of business and ownership topics. For example, in a vote earlier this year on the company’s dividend policy, 98 percent ratified the existing—and unusual—no-dividend practice. But put a question about hot-button religious or political  issues of the day such as abortion and expect deep divisions.

Berkshire’s shareholders may be able to act like partners or closely-held shareholders on business issues while the charitable giving program proved they were unable to do so on others. For the Court in Holly Lobby, this perspective supports the majority’s holding about the nature of close corporations while validating the dissent’s appetite for a sharp boundary between them and the typical business organization.

Lawrence A. Cunningham is the author of the upcoming Berkshire Beyond Buffett: The Enduring Value of Values and editor of The Essays of Warren Buffett: Lessons for Corporate America. He teaches business-related courses at George Washington University Law School.

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President Fred Vinson

93px-Fred_m_vinsonFred Vinson is one of the more obscure Chief Justices and is widely seen as a mediocre member of the Court.  He was appointed by President Truman in 1946 (the last Chief Justice from the Democratic Party) and served until he died in 1953.  As Carlton Larson pointed out in this terrific piece a few years ago, Vinson would be viewed very differently if he had written Brown, which he almost surely would have he had not died when he did.  Vinson penned the opinions in Shelley v. Kramer, Swett v. Painter, and McLaurin v. Oklahoma striking down racial segregation, and there is no reason to think that he could not have in Brown (though whether it would have been unanimous is another question).

What I didn’t know until recently is that Truman really wanted Vinson (a former Congressman and Treasury Secretary) to succeed him as President.  He tried to talk Vinson into running in 1952, and with Truman’s backing Vinson would have been a formidable candidate for the Democratic nomination.  Vinson declined, though, partly for health reasons and partly because he felt that a Chief Justice should not reenter politics.