Congress Fails to Investigate or Punish War Profiteering

The following post is the text of a radio commentary I (Mike Meeropol) delivered over WAMC radio in early October.


Did you know that the US Congress has rejected efforts to punish, investigate and criminalize war profiteering?

Yes, that’s right. This past February, the House on a mostly party-line vote rejected an effort to forbid expenditures from going to any contractor, “…if the Defense contractor audit agency has determined that more than $100,000.000 of the contractor’s costs involving work in Iraq … were unreasonable.”[1]

Meanwhile, the Senate on an equally party-line vote, rejected an amendment to an appropriation bill “to prohibit profiteering and fraud relating to military action, relief and reconstruction…”[2]

What’s going on here?

The key to understanding this issue is in attempting to define the term “war profiteering.” Can we be precise or must we accept an “I know it when I see it” position as did former Supreme Court Justice Potter Stewart, about pornography?[3]

Whenever a nation goes to war and buys supplies and equipment from private businesses, unless the government forces businesses to sell at a loss, the deal will lead to increased profits. But profiteering and merely profiting are different concepts. Profiteering implies that profits are too high. But how is that possible? How can a price voluntarily arrived at between two parties – one party the US government – be too high?

Well – one way is if the business fails to deliver the product promised. The business gets its money and the government gets little or nothing of what was promised. Anecdotal evidence abounds in any war -- [4]

This is clearly fraud – and should be punished severely.

But what if the product paid for is actually delivered – how do we define war profiteering then? The only economic argument would be that the price charged and the profit earned is much higher than the price and profit that would have been high enough to induce the business to supply the particular product --- In other words, if there were no war, the business would be satisfied to get, say, a 20 % profit – but now they’re getting 40%.[5]

Why does a business gets such a great deal? Because there’s little or no competition – and because the government is very anxious to get production started quickly. Because the stakes in wartime are so high, these extra costs don’t seem to matter at the time – But of course they do.

The House Bill proposed to allow the Pentagon’s own internal audit agency to investigate whether any defense contractor was either padding costs in order to commit fraud or overcharging in other ways. Note that each contractor under that proposed bill would have $99 million in “wiggle room” --- only “unreasonable” charges over $100 million would trigger sanctions.

During the Korean War Congress decided that all businesses were probably going to earn quite high profits and an excess profits tax was imposed. They didn’t even bother to discriminate between unreasonably high profits and just high profits. That made some sense because it is difficult to prove that a specific cost charged is “unreasonable…” Such an allegation would certainly be contested and the time it would take to settle the matter would be time wasted and remember there’s a war on![6]

So there was an excess profits tax during the Korean War. By the way, this very high tax did not interfere with procurement – there is no evidence that Korean War soldiers were short on equipment.

Given the Bush Administration’s unwillingness to support any tax increase, the Korean War solution was never an option during this war. So why weren’t the proposals aimed at punishing and investigating specific acts of war profiteering unanimously approved? -- Why were they defeated in partisan votes?

The answer lies in the difficulty of proving the existence of war profiteering. What Republicans probably feared was that efforts to punish war profiteers would degenerate into a partisan effort to make the President and his big business buddies look bad – with lots of charges and no real resolution of the problem. An effort ostensibly to pursue war profiteers would in the end contribute to reducing the public’s support for Bush’s war.

I would guess that’s why Republicans including NY State Republicans voted against it.[7]


[1] The references is to an amendment to a Defense Appropriations bill. The bill was H.R. 4939. The amendment was H.AMDT.746: The amendment called for inserting the following: \ SEC. __. None of the funds appropriated or otherwise made available by this Act shall be obligated or expended by the Secretary of the Army or his designee to award a contract to any contractor if the Defense Contract Audit Agency has determined that more than $100,000,000 of the contractor's costs for contracts involving work in Iraq under one or more Army contracts were unreasonable.

[2] Even more significantly, a proposal by Senator Byron Dorgan of North Dakota to establish a system for investigating fraud and abuse has never even made it out of committee. (S. 2361)

[3] One can find the quote at the BrainyQuote web site:
The actual full quote is “I shall not today attempt to define this kind of material but I know it when I see it.”
For a full background discussion see Movie Day at the Supreme Court or "I Know It When I See It": A History of the Definition of Obscenity by Judith Silver at http://library.findlaw.com/2003/May/15/132747.html#Scene_1
[4] During World War II, a Senator from Missouri, Harry S. Truman made a name for himself by driving, “…thousands of miles around the country going from one defense plant to another documenting waste and fraud. [Truman] then headed the Senate Special Committee to Investigate the National Defense Program -- the Truman committee, for short. The process saved American taxpayers $15 billion (in 1940s dollars). And by uncovering faulty military equipment, he prevented the deaths of hundreds if not thousands of U.S. soldiers.” The quote is from an OP-ED piece in the St. Louis Post-Dispatch entitled Fighting War Profiteering, Truman Style by Sarah Williams posted on the AlterNet web site on March 6, 2006March 6, 2006http://www.alternet.org/story/33131/ Unfortunately, there is much evidence that a lot of the same is happening in Ira q. The article goes on to mention a few examples. For more details, there is a new documentary by Robert Greenwald called IRAQ FOR SALE. At their web site, iraqforsale.org there are a number of links and a number of references to books that specifically relate to war profiteering in the current war.

[5]Economists call this return “rent.” For economists rent is not what you pay the landlord. Instead it is a payment over and above the payment that would induce you to sell a product or provide a service. Imagine you own a house on a small (1/2 acre) piece of land overlooking the ocean and you want to sell it. You bought it ten years ago for $200,000 and if you had invested the $200,000 in the stock market you would have averaged a rate of return of, say, 10% a year. That would have doubled the value of your $200,000 investment. One might say that any payment above $400,000 (let’s fix on $420,000) for that piece of land would be sufficiently high enough to induce you to sell. However, this year, there are 3 or 4 millionaires anxious to buy that house. You know if because a house right next door to you sold for $1 million. So you get them bidding against each other and you end up getting $1.2 million. The difference between the $420,000 you would have been willing to sell for and the $1.2 million you received is called “rent.” It is a pure return to scarcity and does not reflect what economists call the opportunity cost of the land and house. In the case of military contracting – the company would make a fine profit at a much lower price but the government is in a hurry and does not carefully scrutinize the details of the bid and does not put enough fine print in their to control the behavior of the military contractor and the result is that the government pays much more than it had to pay and the company makes more than the product is actually worth in terms of real costs.

[6] The Korean War began in the summer of 1950. During the fiscal year 1951, individual income tax revenues rose from 15.8 to 21.6 billion dollars while corporation income tax revenues rose from 10.4 to 14.1 billion. Total federal receipts rose from 14.4 percent of GDP in fiscla 1950 to 16.1 percent in fiscal 1951 to 19.0 percent in fiscal 1952. In fiscal 1953 which was the year of prolonged negotiations till the armistice was signed that summer, receipts fell to 18.7 percent of GDP. The tax increases were so significant that in fiscal 1951, even though defense expenditures rose from 5 to 7.4% of GDP the budget went from a small deficit (-1.1% of GDP) to a small surplus (1.9% of GDP). [See Economic Report of the President (any year) Tables B-79 and B-80.]

[7]You can inspect the votes of Representatives at the following site: http://home.ourfuture.org/straighttalklive/war-profiteers_house.html
A quick check shows one NY State Republican, Representative John Sweeney as not voting. The New Hampshire Republicans split with Jeb Bradley voting yes and Charles Bass voting no. New Jersey members of Congress split perfectly along party lines while Rob Simmons was the only Connecticut Republican to vote yes.

Angry response to Kerry Healey's exploitation of racism in her attack ads on Deval Patrick

Dear Readers -- the following is an email message I sent to all fellow faculty at Western New England College where I teach. I am including it here based on an invitation I received to share it with all readers of this Blog. I am reproducing it here without editing.

Mike Meeropol (econ Prof, Western New England College, Springfield, MA)

I am writing this e-mail because I am thoroughly disgusted with the effort to “Willie Horton” the candidacy of Deval Patrick for Governor of Massachusetts. I hope some of you inclined not to read this will force yourself to do so … Even people who were not inclined to support Mr. Patrick for Governor should respond to the vicious advertising campaign.

First some background. In 1988, when Michael Dukakis was running for President, his opponents made a big deal out of the fact that a prisoner on furlough while serving a sentence in Massachusetts raped someone. The fact that this prisoner was on furlough from a Massachusetts prison was evidence that Michael Dukakis was “soft on crime.” Oh, I forgot to mention that Horton was black and the public knew it.

That campaign worked – Dukakis never recovered from being carefully, successfully painted as a “liberal” who would let the criminals out of jail.

Fast forward to 2006. Deval Patrick had a commanding lead over Kerry Healey after his impressive primary victory. Let’s go to the tried and true method of demonizing someone as a dangerous “liberal” who will let the criminals out of jail. This time, the criminals don’t have to be black because the candidate himself is black.

The Healey campaign has created two vicious advertisements which if carried to their logical conclusion want people to believe that Deval Patrick is a friend of cop-killers and rapists. Let’s start with the cop killer. The following is shamelessly cribbed from a Newsweek article:

Carl Ray Songer: Songer was convicted of murdering a Florida state trooper in 1973. Patrick handled the 1985 appeal as a lawyer with the NAACP’s Legal Defense and Educational Fund Inc. (He argued that, in the penalty phase of the trial, the jury didn’t hear crucial arguments before it issued a death sentence.) The appeal was successful; Songer is serving a life term. This seems to be a clear-cut case of Patrick doing his job—and doing it well. Still, an ad for Healey confuses. Its tag line is: “While lawyers have a right to defend admitted cop killers, do we really want one as governor?” Grammarians will note the ambiguity of “one,” which makes it unclear whether the lawyer or the cop-killer is running for governor.

End of quote.

I hope you won’t mind my didactic pedantic addition to this discussion. The point is not that LAWYERS have a right to defend cop-killers. All accused AND convicted individuals have a RIGHT to an attorney – and thus lawyers have a DUTY to defend people – even convicted cop-killers. Does any sane person in the commonwealth or anywhere else think that because Deval Patrick (when he was working as an attorney for an organization) helped get a convicted murderer’s sentence reduced from the Death Penalty to life imprisonment he is a FRIEND of murderers?

Let’s move on to the newest Healey ad where Deval Patrick is seen on television complimenting a man who (at the time) he believed to be innocent of the rape charge for which he was convicted. The ad ends with a statement, “Has a woman ever complimented her rapist?” Again, we turn to Newsweek:

Benjamin LaGuer: LaGuer was a young, black man of Hispanic origin convicted in 1984 of raping a 59-year-old woman for more than eight hours. In calls and letters to prominent civic leaders and journalists, he said he was a victim of mistaken identity. Nobel Peace Prize winner Elie Wiesel rallied to the cause, as did John Silber, then president of Boston University. Patrick wound up writing letters on LaGuer’s behalf to the Massachusetts Parole Board. And he wrote a check to help secure a DNA test for LaGuer (which confirmed his guilt). But when reporters asked about it, Patrick’s memory became hazy and he recalled writing only a single letter. A TV ad asks: “What kind of person defends a brutal rapist?” Patrick told reporters the attack was a “cheap shot”—but apologized at a campaign appearance “to anyone who feels we didn’t come forward with all the facts” about his efforts on LaGeur’s behalf.

End of Newsweek quote…

I actually find this a bit refreshing. Patrick didn’t try to stonewall on the fact that when first questioned about his work on behalf of this prisoner he stated he only wrote one letter when in fact he had written more. The most important point is, what was the substance of Patrick’s involvement in the case? He thought the man might have been a victim of mistaken identity. There are a number of tragic examples of rape victims absolutely certain that they have made accurate identifications and the charged individual is convicted. In the end, often years later, DNA tests have exonerated the convicted individual to the everlasting chagrin of the victim who knows two things – her mistake cost an innocent person years of his life and the real rapist went free perhaps to rape again. These things have happened and with the advent of DNA testing, we hope they will not happen again. [Please note – I am not talking about false accusations – I’m talking about good faith identifications by true victims.] So Patrick joined with others in advocating a DNA test for this convicted individual – and the test proved him guilty. Patrick ceased his involvement in this case immediately.

Let’s ask ourselves something. Didn’t Patrick provide a public service. Yes he initially thought this guy might be innocent. But he made money available to prove it one way or the other. Now we know for sure the guy is guilty and the possibility of nagging doubt hanging over the case – perhaps disturbing the victim and her family – can be finally put to rest. Kerry Healey’s ad is garbled. Does she want us to believe that Patrick thinks rapists are nice people in general? Does any sane person believe that Patrick will open the prisons and pardon every convicted rapist?

Third and final installment of the “Willie Horton, Mark II” campaign. Again, Newsweek

Bernard Sigh: The Boston Herald reported last Friday [Friday the 13^th] that in 1993 Patrick’s brother-in-law, Sigh, was convicted of raping his wife, Patrick’s sister, and was now an unregistered sex offender living in Massachusetts. The story is true: Sigh served a short prison sentence, reconciled with his wife and moved to Massachusetts. Patrick told reporters the couple are now deacons in their church and counsel other couples. Most distressingly for the family, Patrick said, their two young children were unaware of their parents’ history. The Healey campaign denies having any hand in the story.

End of Newsweek quote.

You know what? I believe that neither Kerry Healey nor any official in her campaign planted the story. But someone who wants Kerry Healey to win planted that story. And it’s disgusting politics.

I am sorry to have bored you with this nonsense. As a pedantic economist I would be much happier arguing about the merits of income taxation vs. property taxation, charter schools vs. public schools, etc. etc. However, I think it is essential that the residents of Massachusetts send a very clear message that such campaign tactics will not work. I not only am going to vote for Deval Patrick (I did in the primary) but I’m going to work at persuading others to do it (which I wasn’t planning to do) because I am so angry and disgusted at the effort to pander to the ignorance and racism that infects and frightens too many of our fellow citizens.

I particularly want to urge independents and Republicans who might be reading this (and I urge Democrats who share these arguments with acquaintances and family members who are independents or Republicans) to call the Healey campaign and tell them you are turned off by their disgusting campaign. That would be a great public service.

[Even if in the end you want to vote for Healey because you support her policies it would a good thing to call and complain about the campaign – though I personally think the best way to punish her campaign is to vote against her – vote for one of the other candidates if you still don’t want Patrick…]

Thanks for reading – again my apologies for the length of this post

Mike

The Unbearable Lightness of YouTubing

Google buys YouTube. This was an opportunity for Adam Hanft over at Marketplace to think about the question: just why are these open-posting video sites so popular? For viewers they're popular because (if) there are enough interesting videos to watch to make it worth a waste of some time. But what's in it for the people uploading the videos? Adam's answer is interesting.

In a curious inversion of Marxism, the millions of people who upload videos to YouTube haven't thrown off their chains, they've embraced them.

People are positively jubilant about spending time and effort to create videos or discover them, and then post them for free.

But why? There's no economic benefit to them. And that defies classic economic theory that says we are all rational beings and act only in our own self-interest.

YouTubers do what they do because it's a form of uncensored self-expression. They circulate elements of themselves, put those personal fragments out into the world, and that exhibitionism becomes a signifier of their very being.

In short, YouTube-ing serves a powerful need.

Putting up a video of their cat swimming is clearly not in the economic self-interest of the person who does it. But it's clearly in their emotional self-interest.

I think he's pretty much right, so far. Like he says, there's no rational economic (what he really means is "monetary") benefit to posting a video of yourself picking your nose, but people must get some kind of kick out of it or they'd be unlikely to bother doing it. But then he goes on to wax philosophic about the sociology of the situation, and here I think he reaches too far.

Those who argued that the Internet is an isolating phenomenon completely misread the latent powers of connection it represents.

You see, those who upload videos are offering a part of themselves to the world. And they're "selling" their self-identity by doing so.... So the genius of YouTube was that it recognized the hunger to be visible, the stem-cell of all this user-generated content.

He seems to think that all those lonely people are solving their anomie, their post-modern, post-industrial, post-nuclear family, end-of-history existential loneliness by connecting with strangers near and far through the videonet. If people see you picking your nose, and you see videos of them eating a Twix, then somehow you are a little more connected to the world, a little less lonely.

Yeah... I don't think so. The thrill of it all, the newness of it all probably works for some people, but there's no way that being an exhibitionist is going to solve problems of loneliness for very many folks. (It's worth noting that probably most of those posting videos to YouTube are not doing it out of some sort of unconscious loneliness thing.)

First of all, this idea suggests something pretty sad about our culture, if Hanft if right. It means that the only way people can feel like they matter, like they exist, is if they are known by millions of strangers. Having family and friends and neighbors isn't enough; it's either be a movie star or disappear. That's pretty stark. I sure hope he's wrong about that. But even if he's right, there's no way that posting your little videos to YouTube will give you the existence you might be craving. It might seem so for a while, as long as the newness factor hasn't worn off. But pretty soon it'll be old hat. Your uncle will have posted videos, your mom, your math teacher--everyone who is and isn't cool. And on top of that, you'll start realizing that, well, even after they've seen your movie, none of those strangers staring at their screens knows anything meaningful about you. They're not your friends and they won't be there to say, "you matter," when you are feeling down in the dumps. If people have a problem with social connections, if they're having an existential crisis, YouTube and it's clones ain't gonna do them no good. Frankly, when it comes to existential crises, I think I'm with the luddites. Them and Victor Frankl.

Econ-Atrocity: Why the Euro is wrong for Europe, and America

Why the Euro is wrong for Europe, and America
By Gerald Friedman, CPE Staff Economist
October 6, 2006

I still have some old French Francs floating around my desk drawers, but their only value these days is as souvenirs, an English word of French origin meaning a “token of remembrance,” a “momento,” “of sentimental value.” Instead of national currencies like the Franc, since January 2002 a new currency has circulated in 12 European countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain). (Three EU members, Denmark, Sweden, and the United Kingdom, remain outside the Eurozone; the 10 new members admitted in May 2004 are all scheduled to adopt the Euro in the next few years.)

Since the end of February 2002, the old national currencies have been demonetized. But I am not alone in holding onto old Francs. Many of my friends and neighbors in Paris this summer admitted holding onto Francs, and people still give prices in Francs. I suspect that much of the affection for the old currency reflects deep disappointment with the Euro; and I fear that this is spreading into disenchantment with the entire European project. There are many small problems with the Euro: unattractive bills, a general shortage of small denomination coins (‘monnaie’), and a widespread perception that when prices were converted from national currencies to the Euro the conversion rate was rounded up to give a boost to profit margins. But the real problem is that the Euro was sold to Europeans under false pretenses. It was presented to the European public as a painless way to raise productivity, reduce unemployment and promote growth. But it has done none of these; on the contrary monetary integration has come with slow growth and persistently high unemployment. Today, it appears that the Euro’s promises were never serious; instead, from the beginning, the Euro was a weapon in an ongoing attack on the European welfare state.

Proponents promised that replacing national currencies with the Euro would raise productivity by reducing the costs of changing money and allowing businesses to market their goods more efficiently in foreign countries. No one should be surprised that these specious promises have not been realized. Money changing remains a large business in European tourist destinations, with stands changing dollars, yen, and other currencies into Euros instead of into Francs. The money-changing business is declining, but this is due more to the ATM and the use of credit cards than to the Euro. As for the trouble businesses have with multiple currencies, the invention of the pocket calculator and computer spreadsheet, not to mention the nearly universal use of the United States dollar, has virtually eliminated the cost of calculating foreign exchange rates as a business consideration.

While the Euro has done little, or nothing, to raise productivity, it has had great economic significance. By preventing countries from balancing their international accounts through changing currency values, the Euro forces all of Europe to adopt a uniform economic policy regardless of different national needs. Worse, the rules and treaties behind the Euro give this uniform policy a strong deflationary bias, tying the hands of European governments and preventing labor and socialist administrations from taking effective action against rising unemployment and stagnant real wages. With different currencies, countries could maintain different growth rates while devaluing their currency to balance any differences in national inflation rates. But countries with a common currency are driven to a uniform growth rate because faster growth and a higher rate of inflation will lead to an exodus of business and jobs to a country’s slower growing trading partners. Logically, uniformity could come with all countries growing faster and driving down their unemployment rates even at the risk of somewhat more inflation. But the rules of the common currency were written to prevent this. The 1992 Maastricht Treaty that established the European Monetary Union leading to the Euro, established stringent conditions for countries entering the monetary union including limits on the use of fiscal stimulus to reduce unemployment and an explicit requirement that monetary convergence be on the basis of lowering inflation to a common, low level. Furthermore, authority over monetary policy was given to an appointed and undemocratic Frankfurt-based European Central Bank charged with holding down inflation but with no official responsibility for reducing unemployment or maintaining high growth rates. And, through practice and design, the dominant role in Europe’s new uniform monetary policy went to the Continent’s strongest economy, Germany, a country that entered the Euro with an undervalued currency. Now, Germany has a $200 billion trade surplus and its strong export industries are pulling up the value of the Euro which has risen by 60% against the dollar since 1998. Germany’s bankers and wealthy cash holders applaud the rising value of the Euro; but by lowering the cost of imports and driving up the price paid for Europe’s exports, the rising Euro value has been a dead weight around the neck of European industries, contributing to high unemployment throughout the Eurozone.

In the Euro we see the designs of a new economic order intended to undo a century’s social progress. Democratic politics has brought into place welfare states that redistribute income from rich to poor, from lucky to less fortunate. By cushioning citizens and workers from economic misfortune, by limiting the burden of unemployment, welfare policies have promoted democracy by limiting the power of wealth and control over access to the means of production. From the beginning, by promoting free trade ahead of political union, the European Common Market was founded on a contrary principle to free market exchanges from the ‘burden’ of state regulation. Now, the Euro brings recession, unemployment and slow growth to a continent without effective democratic political institutions able to regulate continent-wide markets and monetary institutions. As a result, instead of national or super-national Keynesian growth policies, Euro-zone politicians can only try to alleviate unemployment by driving down wages and reducing taxes in a beggar-thy-neighbor attempt to attract the favor of bond markets and footloose capital.

The petty problems of the Euro will be fixed. More coins will be minted and I suspect that artists, scientists, and humanitarians will find their way onto the bills. Maybe they will even replace the silly bridges pictured on the bills with examples of Europe’s great architecture. But the real problems will be harder to fix because they require changing the very direction of European integration and the Community’s vision of freedom. So far, integration has been an economic affair; in practice, it has been concerned with freeing capital from local and state regulation rather than freeing citizens by giving them the opportunity to regulate capital through democratic action. On its current path, the Community has become a battering ram, breaking down democratic regulation, and the dream of European integration has been hijacked to become a weapon in the class struggle against labor and the welfare state. Meaningful change will require restoring democracy to Europe.

Sources:
* Bernard Moss, Monetary Union in Crisis: The European Union as a Neo-Liberal Construction (London, 2005).
* Joerq Bibow, “How the Maastricht Regime Fosters Divergence as Well as Fragility,” Levy Economics Institute of Bard College, Working Paper 460 (July 2006).

© 2006 Center for Popular Economics