Friday Reads

Good Morning!

There are so many confusing things out there at the moment about our national policies in so many areas that it gets overwhelming at times.  One topic that I really think should be getting obvious at this point but isn’t really taking root as a source of discussion because of the huge amount of corporate money in elections is the absolute failure of the private sector in providing all kinds of traditionally public goods.  I’ve been following the Snowden episode from a weird angle.  It is probably an occupational hazard, but what if James Bond weren’t in her majesty’s secret service but Halliburton’s?   What does it mean to outsource the public’s safety, welfare, and security?

Federal investigators have told lawmakers they have evidence that USIS, the contractor that screened Edward Snowden for his top-secret clearance, repeatedly misled the government about the thoroughness of its background checks, according to people familiar with the matter.

The alleged transgressions are so serious that a federal watchdog indicated he plans to recommend that the Office of Personnel Management, which oversees most background checks, end ties with USIS unless it can show it is performing responsibly, the people said.

Cutting off USIS could present a major logistical quagmire for the nation’s already-jammed security clearance process. The federal government relies heavily on contractors to approve workers for some of its most sensitive jobs in defense and intelligence. Falls Church-based USIS is the largest single private provider for government background checks.

The inspector general of OPM, working with the Justice Department, is examining whether USIS failed to meet a contractual obligation that it would conduct reviews of all background checks the company performed on behalf of government agencies, the people familiar with the matter said, speaking on the condition of anonymity because the investigation has not yet been resolved.

After conducting an initial background check of a candidate for employment, USIS was required to perform a second review to make sure no important details had been missed. From 2008 through 2011, USIS allegedly skipped this second review in up to 50 percent of the cases. But it conveyed to federal officials that these reviews had, in fact, been performed.

Ah, the profit motive as the root of all evil.  Isn’t it similar to the love of money when you basically cut costs at all corners just to provide increasing bits of the pie to your voracious, nonmanagerial owners who only care about ROE?

Republicans continue to push ideological hype over reality in the fight to give any public interest institution to their friends.  Sneaking into a congress near you is the possible end of Fannie and Freddie despite the fact they are currently returning goods sums of money to the Treasury.  It’s all based on the false hype that they were the reason the mortgage market failed instead of private mortgage factories.

It has now been nearly five years since Fannie and Freddie were put into conservatorship by the Treasury Department. Since then, we have been through the financial crisis, the housing crisis and the foreclosure crisis. Although the housing market has come a long way back, the market for private mortgage-backed securities — that is, bundles of mortgages sold to investors without a government guarantee — remains moribund. Believe it or not, the much-maligned Fannie and Freddie have kept the housing market alive by taking on the credit risk for most plain-vanilla mortgages, especially that most sacred of sacred cows, the 30-year, fixed-rate mortgage.

Indeed, ever since the creation of mortgage-backed securities in the 1970s, this has been a critical role of Fannie and Freddie; their “wrap” helped give investors the confidence to buy securities stuffed with thousands of mortgages they were never going to inspect individually. Currently, an incredible 77 percent of the mortgages being made in America are guaranteed by Fannie and Freddie.

Yet this can’t last forever. Conservatorship was supposed to be temporary. Although Fannie and Freddie are now making a gaggle of money, for complicated reasons having to do with the way the Treasury Department originally set up the conservatorship, that money is not reducing the government’s $180 billion bailout of the two companies.

Meanwhile, many Republicans have been screaming that the financing of housing should be left to the private market and that Fannie and Freddie must be put out of business. (They believe, wrongly, that Fannie and Freddie caused the financial crisis.) And the Obama White House — shocker! — has punted.

Thus we have Corker-Warner. (The bill has six other co-sponsors, three from each party.) The first thing to note about it is that, by god, it actually would eliminate Fannie and Freddie; the two companies are supposed to be wound down within five years.

But does that mean the private market will take over? Not a chance. Warner told me that although the bill would insist that private capital absorb the first 10 percent of any losses, the federal role remains critical. A new federal agency would be established to explicitly guarantee losses beyond that. And the bill would create programs to help make homeownership possible for low-income Americans, just like Fannie and Freddie once did. Those ads Fannie and Freddie used to run showing diverse Americans smiling in front of their home-sweet-homes could easily be replayed by supporters of Corker-Warner.

Yes.  You read that right.  The big change is that the profits don’t stay in these quasi agencies and they won’t remain low.  The duties shift to the same kinds of contractors that have been bilking the defense department for years with a crippled over sight agency and no guarantee they will make a market.

There are instances where the public sector outperforms the private sector.  Mass privatization of everything from schools to jails to spying due to ideological or rent-seeking corporations is a really bad idea.  More thought should be put into these privatization schemes.  There is a new book out that discusses this and uses BP as a good example of a cautionary tale.

The London civil servants of the 1960s and ’70s who all but ignored profitability as they issued directives across British Petroleum’s bloated corporate network were replaced by highly motivated managers who were rewarded for cutting costs, reducing risk and making money. The company’s more incongruous businesses — food production and uranium mines, for instance — were sold. Payroll was cut by more than half. Oil reserves jumped. The time it took to drill a deepwater well plummeted. Profits soared.

But then, in 2005, a BP refinery in Texas City blew up, killing 15 and injuring around 170. In 2006, a leak in a BP pipeline spilled hundreds of thousands of gallons of oil in Prudhoe Bay, Alaska. And in 2010, an explosion on the Deepwater Horizon oil rig killed 11 and resulted in the biggest offshore oil spill in the history of the United States. These days, BP’s stock trades about 25 percent below where it was before the disaster off the coast of Louisiana, about the same place it was a decade ago.

BP’s bumpy ride is recorded in “The Org: The Underlying Logic of the Office,” a compelling new book by Ray Fisman, a professor at Columbia Business School, and Tim Sullivan, the editorial director of Harvard Business Review Press. “The Org” aims to explain why organizations — be they private companies or government agencies — work the way they do.

The book offers telling insight on a topic that has ebbed and flowed across the world over the last 30 years, as governments of all stripes have set out to privatize state-owned enterprises and outsource services — what does the private sector do better than government, and what does it do worse? Long dormant in the United States, the debate has acquired new urgency as governments from Washington to statehouses and city halls around the country consider privatizing everything from Medicare to the management of state parks as a possible solution to their budget woes. One of the authors’ chief insights is that every organization faces trade-offs — inherent conflicts between competing objectives. The challenge is to manage them. This is way more difficult than it sounds.

While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman said.

The success or failure of an organization often depends on whether it can clearly identify its goals and align the interests of managers and employees to serve them. Yet whatever reward structure an organization picks can skew incentives in an undesirable way.

No where is this most noticeable than in the fight to help Public Education survive state privatization schemes.

The 2012-2013 school year saw the fight over public education reach a new pitch, ending with mass layoffs in Philadelphia, and other large school districts, and a cadre of parents and workers who began a hunger strike in protest. This final incident marks the end of a 10-month stretch that has seen an increasingly diverse chorus of voices speaking against American education policy’s relentless focus on high-stakes testing, massive expansions of charter schools and mass teacher and staff layoffs. But there have also been some serious advancements in that agenda, especially in large urban districts.

The Philadelphia School District decision to lay off 3,800 teachers and staff (about one-fifth of the workforce), includes 1,202 safety staff among the casualties. Only 12 will remain next school year to watch over the district’s 149,535 students while they are not in class, in the hallways and cafeteria where violence is most likely.

“I just can’t [see] school district of Philadelphia…without student safety staff. It will be a disaster,” says Patricia Norris, a cafeteria worker at Cayuga Elementary in North Philadelphia.

On Monday June 17, Norris, two parents and another school district employee began a hunger strike to protest the layoffs and the general deterioration of public education in Philadelphia. When interviewed that afternoon, she’d been drinking nothing but water all day. She was red-eyed and exhausted, but spoke animatedly from the tent on Broad Street where she was camped outside Corbett’s Philadelphia offices.  “I just want the governor and people in Harrisburg to put their children in our children’s shoes. All I know is I’m fighting. And fasting.” She paused and sunk back in her metal chair. “I just want someone to listen.”

Similar layoffs are being seen in Chicago, where 50 public schools will be shuttered next year, one of the largest number of closures in America history (Philadelphia will be closing 23 public schools next year). These austerity measures put a grim cap on the 2012-2013 school year.

“The mantra of the Republicans was always choice, competition, testing and accountability, says Diane Ravitch, who served as a Assistant Secretary of Education for the first President George Bush. “Now that’s the mantra of the Democratic Party… All over the country, in most states, there is legislation to roll back any kind of rights for teachers, any tenure, any academic freedom, cut their pensions, cut their benefits, make it easier to fire them. Everywhere there is a fight going on for the survival of public education. The country is filled with ground zeroes.”

So much of the actual effectiveness of these efforts or ability to provide same service are lost in the shrillness of ideology, the quite search for political funding by providing more pork to corporations, and the corporate media who is yet another example of the public trust put up for auction.  It is time to look around at many of these functions and say enough!  There are a whole lot of things that die when subjected to the siphoning of profits and the idea of cost slashing as an end itself.

What is on your reading and blogging list today?