Tuesday, November 30, 2004

Two From The Bullpen

I'm a bit swamped at work today, so I will pass the baton off to a pair of superior intellects who have been covering two stories that I have been running with over the past couple of months.

The first is the invaluable Juan Cole who provides a cogent knockdown of the usually thoughtful George Will, who has, unfortunately, allowed himself to get swept up in the hype of the liberal academia bugaboo. As I discussed in this post, academic diversity is the latest target of the culture war being concocted in the strategy rooms of right-wing think tanks. Much of the evidence is exaggerated, and the solutions offered are a recipe for disaster on many levels.

Cole continues the effort by punching holes in the methodology used in the studies relied on by Will, arguing as to probable causes for the disparities that actually do exist, pointing to the pernicious results of the proposed solutions, and giving a detailed account of the actual hiring process (which, not surprisingly, does not involve a partisan background check). This piece is well worth the read.

The second pinch hitter I will tap is a writer who I am finding increasingly difficult to do without:
Frank Rich. Rich continues on a theme that I posted about here (also working off a Rich article) relating to the true nature of the values issue in American society, and the role it plays in electoral politics. This time, Rich devotes his considerable comedic, and journalistic, prowess to the recent over-reaction to the infamous Monday Night Football spot featuring a risque appearance by one of the stars of ABC's hit drama, Desperate Housewives. Rich pokes fun at those feigning outrage:
Rush Limbaugh, taking a break from the legal deliberations of his drug rap and third divorce, set the hysterical tone. "I was stunned!" he told his listeners. "I literally could not believe what I had seen. ... At various places on the Net you can see the video of this, and she's buck naked, folks. I mean when they dropped the towel she's naked. You see enough of her back and rear end to know that she was naked. There's no frontal nudity in the thing, but I mean you don't need that. ...I mean, there are some guys with their kids that sit down to watch 'Monday Night Football.'"
He comments on our own peculiar proclivity to replay the supposedly offensive images ad infinitum, as if the medium of video replay shielded the viewer from the more prurient nature of the images. Or not:

Like the Janet Jackson video before it, the new N.F.L. sex tape was now being rebroadcast around the clock so we could revel incessantly in the shock of it all. "People were so outraged they had to see it 10 times," joked Aaron Brown of CNN, which was no slacker in filling that need in the marketplace. And yet when I spoke to an F.C.C. enforcement spokesman after more than two days of such replays, the agency had not yet received a single complaint about the spot's constant recycling on other TV shows, among them the highly rated talk show "The View," where Ms. Sheridan's bare back had been merrily paraded at the child-friendly hour of 11 a.m.
He then provides a refreshing reality check concerning the absurdity of the outrage, considering the content of the underlying broadcast: professional football.

Again as in the Jackson case, we are also asked to believe that pro football is what Pat Buchanan calls "the family entertainment, the family sports show" rather than what it actually is: a Boschian jamboree of bumping-and-grinding cheerleaders, erectile-dysfunction pageantry and, as Don Imus puts it, "wife-beating drug addicts slamming the hell out of each other" on the field.
And also points to the hypocrisy of the moral mavens in "red" America, as well as some numbers that seem to belie their concern for the interests of "the children":

"Desperate Housewives" is hardly a blue-state phenomenon. A hit everywhere, it is even a bigger hit in Oklahoma City than it is in Los Angeles, bigger in Kansas City than it is in New York. All those public moralists who wail about all the kids watching Ms. Sheridan on "Monday Night Football" would probably have apoplexy if they actually watched what Ms. Sheridan was up to in her own series - and then looked closely at its Nielsen numbers. Though children ages 2 to 11 make up a small percentage of the audience of either show, there are actually more in that age group tuning into Mr. Cherry's marital brawls (870,000) than into the N.F.L.'s fisticuffs (540,000). "Desperate Housewives" also ranks No. 5 among all prime-time shows for ages 12-17. ("Monday Night Football" is No. 18.) This may explain in part why its current advertisers include products like Fisher-Price toys, the DVD of "Elf" and the forthcoming Tim Allen holiday vehicle, "Christmas With the Kranks."
The rest of the piece is punctuated with Rich's typical mixture of humor and insight.

Monday, November 29, 2004

The Conflict On Drugs

The cases that have dominated the better part of my legal career over the past two years have dealt largely with the conflicts of interest within the nation's largest financial institutions, and how these conflicts have negatively impacted investors and the markets as a whole.

By way of background, most of the major financial institutions in the US offer both investment banking services as well as research and analyst services. Theoretically, the two are supposed to operate independently, since the missions of each segment are different in nature, and often in conflict. But certain temptations undermined the ability to keep these entities separate during the recent internet boom, as the allure of easy money led to malfeasance and fraud.

The investment banking side of the business began to use their influence to coerce the analysts to offer favorable research reports about certain companies that the analysts knew were weak and destined for failure. In so doing, the investment bankers were rewarded by those subject companies with lucrative underwriting deals for their initial public offerings, and subsequent stock sales. The subject companies, in turn, were able to maintain artificially high stock prices, buoyed by the positive reports emanating from the analysts.

It was a self-sustaining circle. Since both branches, investment banking and research, operated under the same corporate umbrella, it was seen as a win for all involved, and the money from the banking deals fueled big bonuses and jaw dropping salaries for the pseudo-celebrity analysts that frequented the cable networks and pages of the leading financial periodicals.

Unfortunately, many investors who relied on the advice of these high priced and highly touted analysts lost enormous amounts of money when reality caught up to the rosy spin put out in their reports. The public suffered greatly from this conflict of interest, and the markets themselves, which owe much of their success to the concept of transparency and disclosure, lost much of their luster as ordinary Americans and foreign investors found themselves uncertain of what they could know and learn from a system so compromised.

article in today's New York Times echoes many of the familiar plot lines and patterns that have so punctuated my professional life in recent memory including money, influence, conflicts of interest, and injuries suffered by an unsuspecting and trusting public. The only difference is, this story is about our health care system and the role that pharmaceutical companies play in its functioning.

The article discusses a somewhat troubling side effect of the growing influence that pharmaceutical companies have over medical schools and researchers. Recently, when researchers tried to pool data to better determine if anti-depressants prescribed to adolescents and children increased risks of suicide, amid a stir of controversy stemming from some test results that suggested just such a corollary, they discovered that they could not access, share or compare all the data from the studies - even the ones they had helped author. In most cases, the pharmaceutical companies themselves owned the data, and they alone could determine how and when, and if at all, such data would be made public or even available to other physicians researching the problem. This was not an isolated incident, but it is particularly egregious because the drugs in question may have increased the incidents of suicide among their young users. Despite the stakes, these drug companies maintained the confidentiality of the findings out of concern for what dissemanation of such material could do to drug sales and prescription habits among physiscians.

The question presented is why would doctors willingly cede such access to study results to the companies that sponsor them? The answer is, that drug companies are able to secure such beneficial confidentiality clauses in contracts with researchers because of the carrot they dangle in front of medical schools and other research institutions. There is big money in research, and these companies pay handsomely for the services of researchers. In return, the drug companies themselves benefit from the imprimatur of a reputable academic establishment. Each side gets what they need most, much like the triangle of bankers, analysts, and internet companies.
Makers of drugs and medical devices frequently turn to medical schools and academic teaching hospitals to run clinical trials and recruit patients for them. The industry pays many academic institutions millions of dollars annually to run such trials; the involvement of a leading academic researcher in an industry-sponsored test gives it both prestige and credibility. Medical researchers who attract studies reap the benefits of such rainmaking with bigger research budgets and career advancement.
The relationship between medical schools and pharmaceutical companies does not end there. Pharmaceutical companies are also substantial contributors to the endowments of most of the nation's medical schools, and have recently been assuming a more prominent role in funding, designing and influencing many continuing medical education programs (CME) that doctors need to complete in order to maintain certification. According to an article appearing in the Journal of the American Medical Association:

Worse, many medical educational institutions not only allow the industry's encroachments but also welcome and even solicit pharmaceutical company participation in programs that should be the profession's sole responsibility. As a result, CME is now so closely linked with the marketing of pharmaceuticals that its integrity and credibility are being questioned. The problem is not new, but it has recently grown to alarming proportions.
In recent years, private non-academic institutions have shown an increased proclivity to enter the market in pursuit of the largesse drug companies lavish on the providers of studies and trials.

While industry financing of clinical trials has increased, for example, the share of it going to academic institutions has fallen to 35 percent in 2002 from 70 percent in 1991, according to Thompson CenterWatch, a Boston company that covers the testing industry.
This increased competition has further strengthened the hand of the pharmaceutical industry, and augmented their bargaining position.

Specialists like Dr. Korn [an executive of the Association of American Medical Colleges] said that some medical schools, because of their reliance on industry money, might not negotiate aggressively over contract provisions for fear that companies would take test work elsewhere.
One of the concessions medical researchers frequently grant to drug companies is the willingness to bury negative studies and studies that were neutral in their findings. The studies relating to the efficacy of anti-depressants for adolescents and children is a microcosm of the problem, but again, the findings are particularly troublesome because they involve an increased likelihood of death for the children and adolescents who are the patients.

Of the 12 studies, all five of the reports claiming positive results, meaning the drug worked without worrisome side effects, that were submitted for possible regulatory approval were published. The seven other studies were inconclusive or negative, which can mean that the drug failed to work or that the test failed because of its design...

Because many of the antidepressant studies were unpublished, many doctors never heard about the results. Their findings were typically disclosed in limited settings, like talks at meetings of medical specialists or on a poster displayed in a room with dozens of other posters, which is a typical way of disseminating research results at professional conferences.
The influence of the drug companies stretches even further than the researchers themselves. Many of the medical journals and industry publications are also very well attuned to the interests and needs of one of their primary benefactors.

Several researchers who worked on the pediatric antidepressant trials said that in many cases they had little incentive to submit ambiguous or failed trials to medical journals because they thought the papers would be rejected by journal editors.

One of those researchers, Dr. Neal Ryan, a professor of psychiatry at the University of Pittsburgh, said there has typically been little publishing interest in studies with inconclusive findings or those that failed to work because of study design, a type sometimes referred to as a negative study.

"No one gets famous from publishing negative studies," Dr. Ryan said.
While this imbalance of power affects such contractual provisions as ownership of the data, whether the results will be published, the schedule and manner of public disclosure, etc., the more troubling aspect of the relationship is the influence the sponsorship itself could be having on the "results" that are reached. Just as the financial analysts were influenced to embellish their reports by the allure of banking contracts, so too are many researchers incentivised to exaggerate their findings in a manner most favorable to their patrons.

Several studies of academic research have also found that investigators may overstate, unwittingly or not, test findings to please a study's sponsor or a medical journal editor. And university researchers, [prominent medical school] researcher Dr. [Karen Dineen] Wagner among them, are also sometimes paid significant amounts of money by a drug's manufacturer for work directly related to their study of that medication, creating a potential conflict of interest...

Academic researchers routinely receive speaking and consulting fees from drug companies whose products they test. But some schools put restrictions on such payments.
Other studies have contrasted the typical findings for government sponsored studies versus those financed by private industry.

Studies of the issue suggest more bias in industry-sponsored studies. One survey of such studies, published last year in BMJ, a British medical journal, found that reports sponsored by drug makers and published in medical journals were more likely to find drugs safe and effective than studies financed by the government and other sources.
To summarize, the pharmaceutical industry is exerting an ever larger measure of control and influence over the process of clinical research concerning the drugs that they are sponsoring. Through an advantageous bargaining position, the industry is able to dictate the terms of the studies, including which findings will be published and which will not, no matter what the interest of the public is, or what interest the medical profession has in having access to such information when making health care decisions. The professions' own trade papers seem so preoccupied with the interests of the drug companies that they display an institutional reluctance to publish negative results. Further, their patronage alone is creating a conflict of interest by which researchers are touching up their findings in order to present the results in a light most favorable to their sponsors despite actual scientific data. Rounding out the list, the pharmaceutical industry has taken an increased role in determining the curriculum at medical schools and in continuing medical education courses.

While that may seem like a comprehensive approach by the pharmaceutical industry to dominate the medical profession, or at least manipulate it in order to yield results that comport with its own goals and objectives, the drug companies have left no stone unturned in their effort to cement their position of hegemony. Drug companies have also been spreading their tentacles into the world of federal regulation, which in itself is fast becoming a thinly veiled tool for the very industries its various offices are charged with regulating. No recent case better exemplifies this phenomenon than that of Vioxx, the prescription painkiller put out by pharmaceutical giant Merck.

An article appearing in
The Lancet (subscription required), sums up the scope of the Vioxx story:

The Vioxx story is one of blindly aggressive marketing by Merck mixed with repeated episodes of complacency by drug regulators. We need clear statements from all parties in this sorry tale about the lessons to be learned. Without more vigilant drug regulation in the future, doctors will continue to be misled and patients' lives will continue to be endangered.
The drug itself, Vioxx, was supposed to be something of a wonder drug in that it provided pain relief for people suffering from chronic conditions such as arthritis, while at the same time caused fewer of the gastrointestinal side effects, such as ulcers, than other pain medication such as aspirin, when taken on a daily or regular basis.

The problem is, studies showed that Vioxx had other more pernicious side effects - namely that it increased the risk of major cardiovascular events such as heart attacks or strokes. Given the fact that the drug was targeted for the elderly, as frequent sufferers of arthritis who are thus in need of everyday painkillers, the increased risks of heart attack and stroke were that much more pertinent. When faced with the results of these studies,
Merck chose to bury them, downplay them and come up with new study parameters that would conceal the results (for example: subsequent studies selected younger participants less likely to be as susceptible to cardiovascular disease, but also not representative of Vioxx's likely market). Merck was unwilling to abandon its prized project even though it meant that it would be subjecting the drug's takers to life-threatening risks. The investment in Vioxx was too large, and the payoff too tempting.

Internal Merck & Co. e-mails and marketing materials show the drugmaker fought forcefully for years to keep safety concerns from destroying the sales of big-selling painkiller Vioxx, according to a published report.

The Wall Street Journal reported...that the e-mails seen by the paper show that Merck executives were worried in the mid-to-late 1990's that Vioxx would show greater heart risk than cheaper painkillers that were harsh on the stomach but were believed to reduce the risk of heart attacks...

The paper said that several company officials discussed in e-mails how to design a study that would minimize the finding that Vioxx had a higher heart attack risk than the cheaper drugs, even though some of those writing the e-mails believed that damaging comparisons would be difficult to conceal.
In furtherance of its efforts at obfuscation, Vioxx found a willing accomplice in the FDA. Merck let profits cloud its judgment, but that is precisely why we have government regulation in place. It is not prudent, in every scenario, to leave the welfare of the public to people who are overly influenced by corporate edicts. Federal regulators are supposed to be there to mitigate the conflict of interest. But, as I stated earlier, federal regulators have been coopted by the industries they are tasked with overseeing, spreading the conflict of interest like a virus to all gate keepers.

"The FDA didn't do anything," says Eric Topol, chief of cardiovascular medicine at the Cleveland Clinic. "They were passive here."

Sen. Chuck Grassley, R-Iowa, says the FDA was worse than passive.

Investigators for the Senate Finance Committee, which Grassley chairs, met Thursday with FDA researcher David Graham, lead scientist on a study presented in August at a medical meeting in France.

Graham told the finance committee investigators that the FDA was trying to block publication of his findings, Grassley said in a statement. "Dr. Graham described an environment where he was 'ostracized,' 'subjected to veiled threats' and 'intimidation,'" Grassley said. Graham gave Grassley copies of e-mail that appear to support his claims that his superiors suggested watering down his conclusions.

Rep. Tom Davis, R-Va., chair of the House Government Reform Committee, last week wrote acting FDA commissioner Lester Crawford to ask what the agency knew about Vioxx and when. Davis also asked whether the FDA plans to collect more data on related drugs.

"In light of Merck's withdrawal of Vioxx...and other recent news stories examining FDA's review of the safety and efficacy of antidepressant drug use by children, I am concerned whether FDA has been sufficiently aggressive in monitoring drug safety," Davis wrote.
Within this context I want to revisit the subject of tort reform that I first addressed in an earlier post. The right wing has derisively labeled the plaintiff's bar as "trial lawyers" and ascribed to them every societal wrong, from a slumping job market to a shortage of flu vaccines. In actuality, these attorneys represent the last line of defense for ordinary citizens who are injured through negligent, reckless and malicious corporate practices. When the system of regulation fails, as it has been prone to do in recent years, these public protection lawyers are the sole recourse for the injured party. In addition, they are, in many instances, the only group capable of providing a financial incentive for corporations, such as Merck, to revise their negligent and reckless practices, and to bring their policies in line with the greater public good.

It is no secret that President Bush has made what he calls "tort reform" a major plank in his second term agenda. But his version of tort reform is actually an attempt to strip away this safety net for citizens injured by big corporate entities. It is an attempt to remove any semblance of corporate restraint by reducing payouts to injured parties, a system that would encourage more corporate abuses - making the cost of litigation more acceptable and thus providing incentive to partake in unsafe practices if otherwise profitable.

In light of the ugly calculus used by Merck in the Vioxx case, and the fact that the FDA was complicit, consider the fact that the Bush administration actually wants to make FDA approval itself a form of immunity for drug companies. According to the Bush administration's take, if the FDA approves a drug, no citizen could hold that company liable for any level of abuse in producing, testing, marketing or distributing the drug. It is the ultimate get out of jail free card.

The Bush administration has been going to court to block lawsuits by consumers who say they have been injured by prescription drugs and medical devices.

The administration contends that consumers cannot recover damages for such injuries if the products have been approved by the Food and Drug Administration. In court papers, the Justice Department acknowledges that this position reflects a "change in governmental policy," and it has persuaded some judges to accept its arguments, most recently scoring a victory in the federal appeals court in Philadelphia.
I do not mean to demonize the pharmaceutical industry. They are merely seeking to maximize their influence, profits and power. In the process, they have spearheaded many important scientific breakthroughs that have saved lives, and greatly benefited society as a whole. But at times, the industry will be seduced by the same siren's song that big business inevitably falls prey to: profits over public welfare. Since this is an inextricable conflict of interest, it is necessary to rein in such unchecked power. Greater regulation of the industry is needed in order to insure that its beneficial qualities are maximized, and any conflicts of interest are minimized and taken out of the decision making process - whether it be legislation mandating that all test results of drugs are released to doctors and consumers, or reinvigorating the FDA with a sense of purpose for performing its oversight duties.

If the Bush administration has its way, however, companies like Merck could release drugs like Vioxx with impunity. They would be able to manipulate studies, hide negative results, influence the FDA, and would not have to fear the economic repercussions of lawsuits. This power and lack of responsibility would have the effect of giving the maximization of profits carte blanche in its decision making process. Considering how disfunctional and coopted the FDA has shown itself to be, it would be foolish to make FDA approval alone the bestower of immunity from any and all wrongdoing.

The public needs protection from conflicts of interest, whether it be in the realm of financial markets or prescription drugs. Our society is made healthier by such regulations, as markets gain the trust of investors, and well informed physicians and health care professionals are able to best serve patients in a way that improves health and well being. Unchecked power leads to corruption. This is the very basis of our Constitution. The administrative state, an outgrowth of the government for the people, must not shirk its responsibilities to guarantee the public's interest. But if federal regulators are not up to the task, then we must maintain the ability of public protection lawyers to perform their valuable service to society as a last ditch avenue for justice.

Wednesday, November 24, 2004

Happy Thanksgiving

I am not sure that I will be blogging much over the holiday weekend, but I may churn something out in between the helpings of food and football games. Either way, I wanted to wish all of my readers a Happy Thanksgiving.

I also wanted to call your attention to two items related to our troops currently serving overseas who, along with their families and loved ones, are feeling a particular sting this time of year. Their sacrifice deserves special attention and consideration.

In furtherance of this, I recommend a gift of books, DVDs and/or magazines to the young men and women stationed in Iraq and Afghanistan, and to those recovering in VA hospitals. Although they are temporarily on hold until after the holidays (due to overwhelming mail traffic), sites like
Books For Soldiers (linked in my blog roll under "Help Our Troops") are an excellent place to go in order to send donations to soldiers in need of a little support. While they will not be able to process donations until after Christmas, that shouldn't prevent any of us from setting aside a care package as we contemplate our own bounty of blessings. The link will be there after Christmas, and indefinitely, if you care to utilize it.

Until then, there are
sites you can visit in order to donate money for phone cards and long distance minutes for our less affluent soldiers who cannot afford to call home from their VA hospitals as they convalesce over the holiday season. That fact alone is a travesty.

Or you can always go the direct route and send phone cards of any amount to:

Medical Family Assistance Center
Walter Reed Medical Center
6900 Georgia Avenue, NW
Washington, DC 20307-5001

The second item is
a story from a truly remarkable blog called A View From A Broad. This article, the featured item in the blogger zine Blog Tower, is written by Ginmar, a young woman currently serving in Iraq. Her observations are stunning in their beauty, subtlety and honesty. Less pretentious than a journalist, but more insightful than a casual observer, her voice is more like literature in real time - at least when she feels like it. In this article, she is clearly in the mood, and the result is something of more worth than the vast majority of the rants and ravings careening through the blogosphere.

Tuesday, November 23, 2004

The Great Wal-Mart Of China, Part II

In Part I of this series, I discussed the shift in the balance of power within the American economic framework - in favor of retailers to the detriment of manufacturers and suppliers. At the forefront of this revolution is retailing juggernaut Wal-Mart. Through innovation, aggressive business practices, and the implementation of a radical new employer/employee business model, Wal-Mart has been blazing a trail that is having widespread ramifications throughout the US economy. In the wake of this hard charging corporate superstar lies the ruins of countless thousands of once coveted manufacturing jobs, and with it, the whole concept of high valued employment for life. Following Wal-Mart's lead, other retailers - as evidenced by the recent merger of Kmart and Sears Roebuck & Company - have begun to pattern their business practices accordingly: lowering costs by reducing salaries and benefits, putting increased pressure on US manufacturers by using the clout of their far reaching buying power, and encouraging outsourcing.

It is the last part of that tripartite approach, encouraging outsourcing, that I will focus on in Part II. In particular, Wal-Mart's increased intertwining of interests with the restive giant that is China.

To The East

Wal-Mart maintains its high profit margins, which it needs to continue expansion as well as reward shareholders and Wall Street, by streamlining its processes to reduce costs. This is accomplished through technological advancement, a low wage/low benefit employment mode, and demanding ever lower prices from the manufacturers that produce the products Wal-Mart sells. This model has created a good deal of tension between Wal-Mart and US manufacturing firms because the latter's profits have been consistently reduced, diminished and eliminated by the relentless demands of Wal-Mart. There is only so far the manufacturing firms can go while still paying workers a living wage and comporting with US labor laws.

Perceiving these limitations, Wal-Mart began soliciting cheap imports as far back as the 1970s. At that time, however, Wal-Mart was already lagging behind its competitors like Sears, Montgomery Ward, JCPenney and Kmart in the quest for imports from abroad.

In addition, Wal-Mart seemed conflicted between its desire for ever cheaper products, and its instincts to support US industries. Founder Sam Walton initiated a famous "Buy American" campaign during the 1980s and early 1990s. Walton even went as far as to bail out some U.S. companies, in a few highly publicized cases, by purchasing their wares when imports were threatening to put them out of business.

But the allure of cheap merchandise has steadily eroded Wal-Mart's more noble sentiments. Throughout the same period that Walton was touting "Buy American," Wal-Mart was increasing its percentages of imports from Asia and elsewhere. As Wal-Mart increased its competitive advantage through its computerized supply chains, it soon overtook its rivals and became the biggest global importer, with a list of suppliers stretching into the tens of thousands and representing many different nationalities and localities.

The change in philosophy for a company that once urged domestic purchasing is evident in the rhetoric of the company's management. For example, when CEO Lee Scott and CFO Tom Schoewe talk with Wall Street analysts, they are boastful in their emphasis on global sourcing as vital to maintaining and increasing Wal-Mart's bottom-line profits.

Over time, Wal-Mart began to narrow its importing partners, increasingly focusing on one giant resource: China. According to

Wal-Mart inherited a massive list of global suppliers, now winnowed down to 6,000
global suppliers, 80 percent in China...

Today, it is a massive conveyor belt to the U.S. consumer of $15 to $30 billion a year in products from China. By the estimate of Retail Forward, Wal-Mart now imports more than half of its non-food products. [emphasis added]
But Wal-Mart has taken the process of global sourcing several steps farther than mere bargain hunting by forming a multifaceted partnership with China. The migration to the East was exemplified by Wal-Mart's establishment of its primary global procurement center in Shenzhen, the "miracle city" and hub of South China's export industries. This new locus for Wal-Mart's corporate activities is just the culmination of years of pro-active efforts to shift production and manufacturing facilities to China.

In fact, both academics and business executives report, American retailers have actively driven outsourcing -- teaching East Asians how to design and manufacture products for American consumers, creating their own house brands in league with Chinese and Asian producers, and then bluntly warning beleaguered U.S. manufacturers that they'd better move their American plants to China and Asia if they want to survive...

Chinese entrepreneurs describe how Wal-Mart presses them to integrate their operations into Wal-Mart's business plans and supply chain. Frank Ng, a partner in Force Electronics, which makes radio-controlled toys and other high-tech gadgets for Japanese toy firms to sell to Wal-Mart, told me Wal-Mart requires his firm to send managers for training to Wal-Mart's center in Shenzhen, makes the firm use Wal-Mart's computer software, and then monitors its production...

Collaboration with its firms now extends to joint efforts at creating, designing, and producing products for the American market. "Wal-Mart gives Chinese suppliers the specifications for Wal-Mart products," says Professor Gereffi. "And they teach those suppliers how to meet those specifications. They have to do with price. They have to do with quality. They have to do with delivery schedule. So, in a sense, Chinese suppliers learn how to export to the U.S. market through large retailers like Wal-Mart."
China's economy is expanding at rates that have given some economists cause for concern for its own health, and to such a degree that it is rapidly becoming an economic superpower - a potential rival for even our own economic interests especially throughout the rest of Asia. And the whole time, their transformation into capitalist titan has been aided and abetted by an unlikely midwife: Wal-Mart. Wal-Mart has been spending time, effort and resources in helping Chinese firms to outcompete American ones. But they are not even content with their own migration to China. They are encouraging - even coercing - US manufacturers to relocate to China or face extinction.

Case in point: Bill Nichol, CEO of Kentucky Derby Hosiery, a sock manufacturer that has supplied Wal-Mart for 40 years. He credits Wal-Mart with forcing his company to be more disciplined and efficient, but he adds: "Their message to us, surprisingly, is, 'There's a broad market out there. If you want to focus on the lowest-cost part of the market, it's obvious that you can't do that in the United States'." So half of Nichol's 1,500 U.S. employees will soon be out of work and he'll have to open plants in China and other low-cost countries to hang onto his Wal-Mart account.

We heard that story again and again from American manufacturers in sectors as diverse as electronics, apparel, bicycles, furniture, and textiles. They expressed private dismay at the relentless pressure from the likes of Wal-Mart and Target to cut costs to the bone in America and then, when that did not satisfy the mass retailers, more pressure to move production to China or elsewhere offshore. But most did not dare to go on camera and tell their story publicly for fear of jeopardizing their remaining sales to Wal-Mart.

Privately, they report that Wal-Mart house brands, made in China, are undercutting their American-made products. Some add that Wal-Mart buyers "advise" and push them to move a certain share of their production abroad, up to 30 percent, and then periodically check to see whether American firms are meeting Wal-Mart's quota for overseas production.
Wal-Mart's representative seemed to acknowledge this part of their corporate strategy in an interview given to Frontline. He certainly didn't deny it:

When I asked Wal-Mart's Ray Bracy about the complaints of U.S. suppliers that they were being pressured to shift production overseas, he said he could not confirm that happened but added, "I suspect that this is a legitimate occurrence that you're citing and, and there may be some validity to that."
Thus Wal-Mart and China have formed a type of joint venture. Not only does Wal-Mart purchase enormous quantities of its products from China, it has also moved its global procurement operations there, trained and tutored aspiring Chinese workers in the business of exporting to America, pressured other US firms to migrate to China, and even went as far as to begin developing branded products with Chinese manufacturers.

Wal-Mart and China are a joint venture," Gereffi replied. "And both are determined to dominate the U.S. economy as much as they can in a wide range of industries." This hand-in-glove partnership increases the squeeze on U.S.-based manufacturers to outsource or shut down. Privately, they report that Wal-Mart house brands, made in China, are undercutting their American-made products.
Crouching Tiger

Despite the bitter political division in Washington during the late 1990s, there was a growing consensus on one big issue. Most Republicans and Democrats agreed that trade with China would be a boon for America. I, for one, was strongly in favor of the moves to increase economic ties with China because I believe that engagement, cooperation, and interaction can act as a catalyst for democratic reform in countries that have a tradition of despotism and totalitarianism. In many ways, these economic ties have borne such fruit as China continues to move, albeit incrementally, toward the adoption of democratic reforms.

But economics, not foreign policy concerns, were the primary impetus giving rise to the bipartisan support for expanded trade with China.

President Clinton summed up the mainstream consensus in Washington with a message to Congress in the spring of 2000. In a letter circulated to House members, he wrote, "China with more than a billion people is home to the largest potential market in the world...if Congress makes the right decision, our companies will be able to sell and distribute products in China made by American workers on American soil, without being forced to relocate manufacturing to China...We will be able to export products without exporting jobs."
The mood was optimistic, the size of the market proved too tantalizing an inducement to ignore. But despite the grandiose expectations, the record has been a mixed one - especially regarding claims of job losses.

The benefits of trade with China largely depends on what business sector you are in. Expanded trade with China has paid dividends for large U.S. multinationals like Boeing, Caterpillar, and Cargill, but the results have been underwhelming for small and mid-sized firms.

China is the world's fastest growing market for commercial aviation, and needs billions of dollars worth of airplanes from Boeing. Its growing infrastructure has been a boon for companies like Caterpillar, which produces tractors and other heavy equipment. And it is importing billions of dollars worth of farm products, a boon to companies like Cargill...

But China has been a tougher market to crack for smaller and mid-sized American companies, like those selling bicycles, vacuum cleaners, and lawn mowers, who face stiff price competition from Chinese manufacturers of these products. And they also face discriminatory rules, burdensome red tape, language difficulties, and a population that earns only a fraction of what U.S. consumers make, and therefore lacks the purchasing power to buy consumer goods made in America.
Not only have these smaller and medium sized companies been unable to ply their wares in China's marketplace, they have increasingly found themselves crowded out of domestic and other international markets by China's burgeoning manufacturing sector - aided, of course, by Wal-Mart. So in this sense, not only has trade with China not delivered any tangible benefit, it has actually hurt these businesses greatly - for many even fatally.

In fact, aside from the bigger companies like Boeing, Caterpillar and Cargill, there is a bizarre inversion of the general rule governing trade relationships between developing nations and industrialized states. In the current dynamic, the United States is playing the role of developing nation, exporting raw materials, and China is acting every bit the part of the industrialized state, sending back finished products manufactured from those same raw materials.
"We export cotton, we import clothing," [Yvonne Smith, the communications director at the Port of Long Beach] reports. "We export hides, we bring in shoes. We export scrap metal. We bring back machinery. We're exporting waste paper, we bring back cardboard boxes with products inside them."
Alan Tonelson of the U.S. Business and Industry Council argues that the majority consensus on the benefits of trade with China underlying the various free trade agreements was wrong because of the relative strengths and weaknesses of the respective economies.
"China had too much production power and too little consumption power to be digested into the world trading system all at once," he says. To Tonelson, this is why the U.S. is hemorrhaging jobs to China.
But its not just jobs. Overall, the U.S. trade deficit with China reached a record $124 billion dollars in 2003 and the figure is headed even higher this year. Today, U.S. imports from China outpace U.S. exports to China by more than five to one, and the deficit shows no signs of abating.
These deficits are much larger than the trade deficits that the United States experienced in the 1980s and 1990s with Asian trading partners such as Japan. Put in historical perspective, America's current trade deficit with China is roughly double what it was at its height with Japan in the mid-1980s, when trade frictions between the U.S. and Japan led Sen. Lloyd Bentsen (D-Texas) to famously declare on the floor of the U.S. Senate: "We're in a trade war, and we're losing it."
These unprecedented trade deficits have raised the eyebrows of many economists of all political persuasions, including Alan Greenspan, who warned of the deleterious effects such deficits could have on our currency valuation last week at a conference of European economists.
Conservative economist Paul Craig Roberts, who served in the Reagan administration, predicts the trade deficit will cause a crash of the U.S. dollar before long, and warns that the U.S. will wind up having a third-world economy, supplying raw-materials to other countries, who then ship back finished goods to the U.S. Economist Larry Mishel, president of the liberal Economic Policy Institute, contends that the trade deficit with China has cost the United States more than a million jobs over the past decade...

"We have a trade deficit now that's running around 5 percent of GDP," says Mishel. "This is very large by historical standards, and you run the risk of foreign investors losing confidence in the United States, pulling back from the dollar, the exchange rate falling, and interest rates rising, and all that could cause a major recession in the United States."
The problems seem worse when you consider that there is no end in sight. China's industrial strength lies in the sheer size of its massive population. Its workforce is far larger than the combined populations of Japan, Korea and the other so-called "Asian Tigers," and even then, China has not fully tapped its full potential as large segments of the working age population remain uneducated and agrarian. As education and affluence reach more of China's population, China's workforce will increase in size, expertise and ability. That is why China is taking a lead role not just in the realm of factory production of such products as footwear, clothing, furniture and toys, but also such technologically advanced items as computers, big-screen television sets, lasers, space components and huge port cranes.
Analysts concerned with long-term U.S. economic security see China's seemingly inexhaustible supply of cheap labor, coupled with the Chinese government's commitment to a rapid development strategy and the movement of Chinese industries into high-tech sectors, as posing a long-term threat to American producers across the board.
That is what sets China apart from other markets opened by free trade agreements, such as Mexico and Africa. China's labor force is vastly larger and more able than any other market previously introduced to the world's economic system in such a manner. In addition, the infrastructure is infinitely larger and more capable than any comparable new entry. In many ways, these factors have provided a shock of severe proportions. Tom Hopson, the president and CEO of Five Rivers Electronics Innovations, which assembles televisions for companies like Philips, Samsung and RCA in the US had this to say about China's potential:
I think the biggest thing that we've recognized is the infrastructure China has. They can build every television that's needed, that's going to be sold in the United States this year. They have the infrastructure in place to do that. And they're not shipping all those today, but they have production facilities sitting with capacities to satisfy the U.S. market today, which to me is pretty amazing that they continued to invest in the infrastructure.
Hidden Dragon

In the rush to tap the enormous potential of China's markets, we have tolerated much in terms of inequity and economic manipulation on the part of the Chinese government. Eager to commence trading, we have allowed China to dictate the terms of its entry into the world's economic system, and they have been meticulous in securing every advantage and benefit - safe in the knowledge that the size of their market would assuage all fears. In Wal-Mart, they have found a complicit partner to lobby on their behalf.

As a testament to the comingling of interests, consider the reaction to the practice of dumping that China has notoriously engaged in. Dumping is the process by which Chinese producers export and sell products in the U.S. below the price in China, or below what it costs to manufacture and ship abroad. This has the effect of bankrupting competition who could not possibly offer their products at such rates, and then, once the competition is eliminated, the dumper would then restore higher prices, free from the downward pressures of competition.

When Tom Hopson's company, Five Rivers Electronics Innovations, filed suit with the International Trade Commission accusing Chinese firms of dumping television sets on US markets, Wal-Mart spent a considerable amount of time testifying and supporting one side of the litigation - the Chinese side. They defended the Chinese firm's practices in the face of a valid complaint from an American manufacturer. Despite Wal-Mart's efforts, Five Rivers prevailed on the merits. Wal-Mart remained unapologetic.

Wal-Mart has also been increasingly active in Washington, ramping up its lobbying efforts and increasing its campaign contributions as many sensitive issues of trade loom on the horizon. One such issue, involving China, has to do with currency valuation.
China's currency, which is pegged to the U.S. dollar, is a major point of contention with many U.S. manufacturers and trade groups. Skip Hartquist, an attorney at Collier Shannon Scott, a Washington law firm that specializes in international trade matters, estimates that Chinese manufacturers get an unfair advantage because the Chinese currency is undervalued by about 40 percent, making Chinese products much cheaper for Americans to import. Many American manufacturers share this view.
But Wal-Mart vigorously opposes all efforts to force China to play by the rules and allow the value of their currency to be determined by the market. In this regard, Wal-Mart is simultaneously for free trade, and against it. The disturbing trend, however, is that Wal-Mart is consistently siding with China and their interests when they conflict with those of the United States and its companies.

Dragon Slayers

The peculiar dilemma presented by the ascendancy of giant retailers like Wal-Mart, and their close relationship with China, is a cautionary tale about the limits of the efficacy of two economic cults: free trade and efficiency.

Free Trade

Despite the proclamations by die-hard free traders that all free trade is an unequivocal good no matter what the context, the truth is that there are limitations and drawbacks.
Free-traders like Brink Lindsey of the Cato Institute take issue with that assessment. "Trade policy, or trade flows, one way or another don't have an effect on overall employment numbers," says Lindsey. "They affect the kinds of jobs we have. And so some number of jobs have definitely been eliminated because of Chinese competition. Elsewhere in the economy, other jobs have been created because of Chinese competition. Because American consumers have saved at Wal-Mart buying Chinese goods, they've got more money in their pocket to buy something else, which creates business opportunities for those other business, which means they hire workers they would not have hired, otherwise. The net effect, most economists think, is a wash."
But I think Lindsey's contentions are not supported by the evidence. Job numbers are down as an overall tally. Furthermore, wages are down, which seems to indicate that Americans losing manufacturing jobs are replacing them with lower paying alternatives. So, in the end, we should not only look at the number of jobs in total, which are down regardless, but also at the type and quality of jobs and whether those new jobs will support a middle class lifestyle that has been the cornerstone of American society for the past century.

Some of these changes in job types are inevitable as, to some degree, these jobs would be lost eventually anyway. But that doesn't mean that any mechanism that causes the outsourcing of jobs is acceptable. There are ways to ease the economy into transitions that will not cause as drastic a crisis for so many Americans who suddenly find themselves out of work and without the necessary skills to find gainful employment in a rapidly evolving economy. Despite President Bush's claims during the debate, No Child Left Behind won't help these workers - and there are tens of thousands of them. The introduction of so unique a market and labor force as China's has caused upheaval in our economy in a very short time period. That is not always a net positive.
Others, such as Alan Tonelson...argue that the U.S. needs to change course and raise trade barriers. "We have to recognize that our trade and manufacturing crisis has become so grave that we have no choice but to start thinking seriously about restricting trade in various ways," Tonelson asserts.
While I believe that protectionism can be counterproductive if taken too far, and it often is, in the present situation a measured and targeted dose could be useful. Our relationship with China is not a healthy one. The staggering trade deficits have no historical precedent, and their effects on the valuation of the dollar are beginning to be felt, though the full parameters of the potential damage are an unsettling unknown lurking in the distance. We must figure out a mechanism to bring those deficits under control - despite the objections of Wal-Mart, and what will surely be a new Chinese ally, Kmart/Sears.

At the very least, we should be vigilant about some of China's more unsavory practices such as dumping, currency manipulation and their own protectionist tendencies. The free traders tend to turn a blind eye to China's protectionist policies, remaining steadfast in their refusal to countenance retaliatory measures. I think that a bit of quid pro quo is in order.


I think Americans suffer from the widespread misconception that "efficiency" has an inherent normative quality - that it is a good thing in all contexts. That is not necessarily true. Efficient methods are morally neutral, and should only be judged, normatively, by the outcome. For an example in the extreme, labor laws such as the mandatory work week, child labor prohibitions, safe workplace rules, environmental regulations, minimum wage mandates, etc. probably detract from the efficiency of a given business, at least in the short term. Businesses could be more productive and efficient if workers were compelled to toil 80-hour work weeks for paltry salaries, in factories that are not as safe or clean, with no regard for the environment, etc. Yet, we as a society have decided that certain "efficiencies" are morally repugnant, and thus we have opted for more humane alternatives.

So we should not be misled by the siren's song into thinking that efficiency justifies itself. Yes efficiency often leads to desirable outcomes, but not always. Wal-Mart is the quintessential example.
The Wal-Mart model is a double-edged sword. On the one hand, Wal-Mart is probably the most efficient company in the history of American business. It's pushed a low-cost, global-sourcing model to the nth degree. It's created suppliers that produce goods cheaper than they ever could before.

The flip side of that model is that this has come at the cost of U.S. jobs that are actually moving offshore, and even Wal-Mart's own suppliers are concerned that by pushing costs down so low, companies can no longer be profitable. So in a sense, it's like we have two models in the world economy. We have the efficiency model, which is based on low cost and global sourcing, and Wal-Mart is the best company of its kind in promoting efficiency, low-cost sourcing. But we also have an innovation model based on higher wages, new products, good benefits for U.S. workers.

And those two models are in conflict to some degree. I think Wal-Mart has actually been producing global efficiency, but it's as though the efficiency model doesn't have a floor.
Thus we see that extreme efficiency on the part of one party in an economic model does not necessarily lead to an outcome that we as society must accept. If efficiency ultimately leads to lower wages, fewer benefits, and the loss of jobs, then what good is this efficiency? When hard working Americans can't practice their trade, or are forced to toil for a breadth above minimum wage with minimum benefits, why is that desirable? I'll take the American dream over low prices at Wal-Mart any day.

Monday, November 22, 2004

Blog Tower

Mick Arran, he of infinite blogger hats, has recently dedicated his considerable talents to something that I consider a very worthy effort. The project is entitled Blog Tower, and it aspires to be something of a periodical for bloggers. The editors scour the internet for talented writers and meaningful posts, and compile them for publishing under a single cover.

For me, this is an excellent resource for discovering blogs, writers and articles that otherwise slip through the cracks. The best part is, the editors have put in the effort locating the pieces, so all you have to do is enjoy the fruits of their labor. Of course you could leave a small donation to aid the cause, but that is left to your discretion.

(In the interest of full disclosure, I should note that one of my pieces is featured in Volume 1 - hence my effusive praise).

Here is the editor's note:

From the Editor:

A lot of the best writing in America, maybe in the world, can be found on blogs and hardly anybody knows it. Blog Tower aims to change all that by rounding up the best we've run across, ganking them straight out from underneath the authors and reprinting them here all in one place, probably without their knowledge, certainly without their permission. Blog Tower has only one priority: sharp, clean, interesting writing, and we'll steal it wherever we find it.

From political essays to pungent satire, from social commentary to humorous anecdotes, we promise you some of the best blog-writing around, and all collected in the same place. If you're new to blogs, you'll find a ton of interesting sites you'll want to visit again and again, and if you're an old pro, well, we think there will be some surprises for you, too.

So settle back and give your browser a well-earned rest. You've both earned it.

- Mick

The Great Wal-Mart Of China, Part I

The recent acquisition of Sears, Roebuck & Company by fellow retailing giant Kmart may be a cause of some concern for our economy. While this aspect of the story did not receive much attention, I think that China was secretly delighted with the turn of events - for reasons that I will explain in the rest of this series. The newly formed retailing behemoth will still only be 3rd on the retail totem poll, trailing #2 Home Depot, and the overall leader Wal-Mart - the company that Kmart/Sears is trying to compete with by joining forces. The move by Kmart/Sears is indicative of the evolving landscape of the retail industry in America, and the impetus that the corporate practices of Wal-Mart and others have given to the mission of other retailers to galvanize, coordinate and expand. The New York Times described the prevailing conventional wisdom:

In the world of retailing, there is no such thing as "too big to fail," as investors have often learned to their sorrow.
The New Bosses

The basic premise of the merger, and the underlying economic imperative, is that large retail chains are the power brokers in today's global economy, and as such they have had a direct impact on the decline of manufacturing in America and the rise of manufacturing in other developing nations - primarily China.

A recent edition of
Frontline, the PBS new program, which dealt with the Wal-Mart phenomenon, drew on opinions from both sides of the debate over the significance of the emergence of the new paradigm of the "buyer-driven" global economy. Despite the many differences, there was agreement as to the tectonic shift in power.

Nelson Lichtenstein, an economic historian at the University of California, Santa Barbara, draws a colorful analogy to medieval times: "The power of Wal-Mart is such, it's reversed a hundred-year history in which the manufacturer was powerful and the retailer was sort of the vassal," he says. "It's changed that. It turned that around entirely. Now the retailer, the mass global retailer, is the center, the power, and the manufacturer becomes the serf, the vassal, the underling, who has to do the bidding of the retailer. That's a new thing."

Brink Lindsey, an economist at the Cato Institute, a libertarian Washington think tank, agrees. "We've definitely seen a shift in the balance of bargaining power between manufacturers and retailers," Lindsey says. "Back in the old days, manufacturing was a high-productivity endeavor; retailing and distribution was fairly low-productivity. And manufacturing was big and consolidated; retailing was small-scale and decentralized. And so manufacturers called the shots.

"Now, things are very different. You have large-scale retailing that's very high-productivity, that has a lot of bargaining power. And they can go to smaller manufacturers and call the shots and say, 'If you want to be on our shelves, you have to do it our way'...Wal-Mart -- they're very demanding, and they've got a lot of bargaining clout to back up their demands."
To understand just how persuasive Wal-Mart can be, you have to look at the magnitude of their influence. As of today, although the numbers seem to be growing by the minute, many manufacturers sell "20-30 percent of their output to just one big box retailer -- Wal-Mart, which represents the consolidated buying power of 100 million customers who shop in its 3,500 stores every week."

But it's not just one group of manufacturers or producers who are finding their list of customers dwindle as Wal-Mart assumes an ever prominent role. UCLA Sociology Professor Edna Bonacich described Wal-Mart's status as a "monopsony" a condition in which a single buyer controls substantial portions, if not dominant positions, in many different markets. For example:

They don't control 100 percent of the market, but they may control 38 percent of the market for [several] goods. They are the largest toy seller. They are the largest grocer. So there are large products that they control. And then the manufacturers are basically stuck having to sell to them. If they don't sell to [Wal-Mart], then they're in deep trouble. So there's a big volume effect.
According to Gary Gereffi, a Duke University professor who studies global supply chains:

Wal-Mart has life-or-death decision over [almost] all the consumer goods industries that exist in the United States, because it is the number one supplier-retailer of most of our consumer goods -- not just clothes, shoes, toys, but home appliances, electronic products, sporting goods, bicycles, groceries, food.
And Wal-Mart has used this leverage to enormous, some would say, ruthless advantage. Part of the success is owed to a technological innovation. Wal-Mart led the charge for the retail trade to adopt the universal barcode, as opposed to other less centralized labeling. Wal-Mart then designed a computer system and remote scanners that it could use to tap into the vast information bonanza contained within the lines and numbers of the bar code. Now, Wal-Mart had a way of maintaining real time sales data on all of the products it offered.

Former Wal-Mart store manager Jon Lehman described the minor revolution thusly:

It really took it from sort of an archaic or old-build way of just maybe communicating with a vendor every 52 weeks out of the year to communicating every day, every hour, every minute," he says. According to Professor Bonacich, this created a power shift from the manufacturer to the retailer, because Wal-Mart "knows what is being sold...[and] what prices are popular, so they are able to say, 'We want to sell this at a certain price. You make it at a certain price, or we're not going to work with you.'"
And that is exactly what Wal-Mart began to do. Armed with reams of data, Wal-Mart representatives went about aggressively pushing the manufacturers to lower their costs in order to comport with consumer habits. But they did not rely on this data alone. They took the additional step of prying into the business models of the manufacturers themselves. According to Lehman, buyers for Wal-Mart:

...visit these factories; they visit the manufacturers. They want to look in their books; they want to look at the cost of manufacturing, the cost of packaging, the cost of shipping, the cost of production. All of those things are factored in, and Wal-Mart wants to see all that. ...

Wal-Mart puts the pressure on these manufacturers to: "Come in here and sell me the same merchandise you sold me last year, but sell it at a reduced cost. And we know you can sell it to us at a reduced cost, because we've been to your factory. We've seen your books. We've seen your cost of product, cost of shipping," so on and so forth, "your wage cost." They look at all that, and they call it "partnership."
The manufacturers are thrust out in the open, naked in a sense, with all information known by Wal-Mart before the bargaining process begins. There is no back and forth, just a unilateral dictation of terms. Take it or leave it. For many, it was the death knell of their operations. An offer they had to refuse, but couldn't at the same time.

New Model

Aside from the aggressive intrusion into the supply chain that Wal-Mart has embarked on, there is a basic business model that informs its labor policies. I think they are best summed up by this quote from founder Sam Walton:

I pay low wages. I can take advantage of that. We're going to be successful, but the basis is a very low-wage, low-benefit model of employment.
In this respect, Wal-Mart caught their competitors by surprise. Companies like Sears, Woolworth's, Kmart and Costco were operating under the premise that it would be too costly and inefficient to maintain a minimum wage workforce, which has a 50 or 75 percent turnover. The costs of re-training, they thought, would outweigh the upside of lower salaries and benefits.

Nelson Lichtenstein describes the Wal-Mart revelation:

But Wal-Mart, I think, showed that they could do that. And partly you can have a workforce which rapidly turns over if you have the technology there, which means you can just slot one person into the job with no training and no sort of background. And that's what's happened. Wal-Mart has to hire something on the order of half a million workers every year just to maintain its current workforce. And they understood that. And that's been true, not just at Wal-Mart, of course, [but in] the whole fast-food world, the whole world of contingent workers. I mean, this is sort of a new American model for labor, for workforce, and Wal-Mart has been right there at the forefront of that, partly forging the way, partly being a vanguard firm, but partly just taking advantage of that.
It didn't take long for Wal-Mart's competitors to catch on. Kmart/Sears has been paying close attention, and will follow Wal-Mart's lead in ushering in a new era of low wage disposable workers.

But clearly Wal-Mart, the largest and, according to Fortune, the most emulated and respected firm in the nation today, is setting a new standard that other firms have to follow if they hope to compete. And more than just other firms, it's setting standards for the nation as a whole. It's almost legislating social policy, not in terms of votes and lobbying, but when it does something, it's so large, it's so influential, others follow it. ....

We can see that right now in terms of Wal-Mart's employment policy, which is the de facto employment policy of vast ranges of people in America ... who don't work for the firm, but their employer sets their wage standards, their benefits standards according to the standard that Wal-Mart has put in place.
Gone is the old "GM model" that was based on establishing employee loyalty during the course of lifetime employment. The skilled worker who is valued for his or her knowledge and ability is being phased out, in favor of workers with less training, that also represent less investment by the employer, and are thus easier to undervalue. In addition, Wal-Mart's aggressive anti-union measures have insured that their workforce has remained unorganized, and as such, without any bargaining power to demand an increase in any of these areas.

Edna Bonacich discusses the dilemma:

On the one hand, you can say that poor people need cheaper goods, and this is a tremendous service for the United States. But on the other hand, that is ignoring that people are not just consumers, but they also are workers, and they are citizens, and they have other interests besides being a consumer. But the United States can focus entirely on the consumer role and ignore, to a large extent, the worker role. And Wal-Mart, in its promise to lower consumer costs, is ignoring the fact that at the same time it's participating in the lowering of worker standards; that the very people who buy their goods are, in fact, being pushed into a lower earnings [category].

There's a kind of cyclical process of poorer workers needing cheaper goods, needing poorer workers to produce those goods, in a kind of ratcheting down of standards. What happens is that inequality is increasing in the United States. The middle class is kind of being hollowed out, and there are more and more workers who find that it's hard to earn a living wage. They don't make enough in order to live. The distinction between the earnings of workers and the earnings of management, that division has grown huge. It used to be something like 60-1, [what] the highest executives made versus their workers. Now it's something like 600-1.
There is no doubt that Wal-Mart's revolutionary product tracking system has helped efficiency by streamlining the supply chain from the warehouse to the store's shelves, which in turn creates savings for the company. Certain aspects of this method are praiseworthy, and deserving of imitation. Other sides of this story are slightly more controversial. While prices have been lowered for consumers, many of the manufacturers targeted in the process have been priced out of business, which in turn has led to the loss of thousands of jobs. When Wal-Mart forces competitive bidding down to cost, some consumers benefit in incremental ways, but for others, who lose manufacturing jobs that they have built their entire lives around, the results are catastrophic. Furthermore, Wal-Mart's own labor policies have nudged the market, in terms of salary and benefits for employees, downward even further, dragging along competitors and non-related industries. On the one hand, their practices are leading to unemployment, and on a second front, they are driving the very nature of "employment" down by their own dedication to the low wage model.

With K-Mart/Sears primed to enter the market as a newly formed mega-retailer, I expect them to pattern their business model on that of Wal-Mart's. This will further impact domestic manufacturers and suppliers, sending ripples through an already troubled sector of our economy. On the bright side, K-Mart/Sears might also be hiring new workers at lower wages with fewer benefits.

Profits and Savings

The argument in favor of Wal-Mart's practices in regard to manufacturers, employees, and otherwise, is that in the end, the consumer wins out as savings are passed on to the shopper (as was pointed out above, however, this can be an illusory benefit when the full impact of Wal-Mart's corporate practices are factored in). More than just savings, some argue, Wal-Mart is successful because of its other innovations like technological advancements, and the concept of the superstore itself. To some degree this is true, as their is no doubt that Wal-Mart has contributed to the advancement in technology industry wide. In addition, the comprehensive nature of the offerings is truly staggering. Wal-Mart offers everything from food and clothing to appliances and video games. It is the location for one-stop shopping - a convenience oriented society's happy hunting grounds, and a clever strategy.

But it all goes back to the low prices. Although convenience is a factor, consumer loyalty is built around the affordability of the products, and that has been the engine by which Wal-Mart has charged to the forefront of the US retail market. It was the message behind the ubiquitous Wal-Mart slogan, "Always the low price." But in the world of discount items, all that glitters is not even cubic zirconia.

According to insiders and industry watchdogs, Wal-Mart is actually engaged in an elaborate form of a bait and switch campaign designed to ensnare unwitting shoppers. They lure in consumers with highly advertised, and prominently displayed, low priced items relying on the fact that once in the store consumers will opt for higher priced products from the rest of the store's offerings. The corporate policy is built around the concept of the "opening price point" as explained by Jon Lehman:

OK, it's lawn-and-garden time. Your grass is getting high. Your lawn mower is broken from last year, or you need a new lawn mower. You're going to go to Wal-Mart. So you go to Wal-Mart, and you're looking for a lawn mower, and to your delight, you walk in, and you see this $99 lawn mower. You may not want a cheap, basic lawn mower, but you see that price point on an end cap or a big display stack base, and you say, "Wow, what a great price." And it draws you in. It lures you into the department, and you form the perception immediately that "Hey, Wal-Mart's got the lowest prices in town. Look at this item right here. How could they sell it for $99?"...

But as you walk into the department and look for that $269 power-drive lawn mower that you really are after, they're not losing money on that item. And it may not be the lowest price in town. Wal-Mart used to advertise "Always the low price." They don't do that anymore.
As Lehman recalled, Wal-Mart was actually sued for false advertising by several competitors after industry studies revealed the truth that Wal-Mart is quite frequently not the lowest price in town. But this was a strategy conceived of in the days when Wal-Mart was little more than founder Sam Walton's start-up company, and despite the lack of that exact language in advertising slogans, the opening price point method is still a crucial aspect of Wal-Mart's pricing strategy. Informed by their repository of sales data on all things from last year's sales and customer requests, to this year's hot new items and emerging trends, Wal-Mart carefully selects opening price point products to attract consumers, and sell them on the higher priced items that surround them in the stores. Lehman recounts Walton's influence on the practice:

That was his idea, yeah: Let's get the hottest item that we can find within a category, the item that customers, they're going to look at that, and they're going to equate that to the lowest price in town. They're going to see that, and they're going to say, "Wow," and they'll form an opinion that this is the best place to shop. And Wal-Mart doesn't run too many sales, as you probably know, but "I can come here every day and find the items that I want at the lowest price in town." But they're duped.
In addition, it is important to point out, that the savings from "efficient" business practices are not always passed on to the consumer for other more or less obvious business reasons. First, Wal-Mart is very well attuned to profits, and as such, is keen on keeping margins high, which means that lower costs don't always correlate to lower prices - just more profits. Second, Wal-Mart is in the business of expansion. What started out as a small cluster of stores in mostly rural areas has transformed into a retailing empire that has a presence in all corners of the globe, and a foothold in every region of this country. There is a reason Wal-Mart is number one in a competitive industry. Such growth requires reinvestment of capital and, as such, lower costs don't necessarily translate into cheaper prices.

Gazing Eastward

While Wal-Mart has been tirelessly paring away at costs and overhead by dragging manufacturers down to bare subsistence levels, capitalizing on their dominant position in the supply chain, and remaining faithful to a corporate policy of low wages, they have been running out of room to make progress on the domestic front. There is only so far that US manufacturers and laborers can go, constrained by the mandates of labor law - such as the minimum wage, mandatory work week and overtime rules. So, in pursuit of ever greener pastures, Wal-Mart has been moving Eastward, seduced by the receptive shores of the emerging manufacturing Mecca that is China. In Part II of this series, I will explore the intricacies of the unique symbiotic relationship that Wal-Mart and China have formed over the past decade, and examine how this strange marriage may impact our economic stability and strength in the future.

Friday, November 19, 2004

Who'll Stop The Rain?

There is frequently a delay between the time that you see lightning and you hear the accompanying thunder as a storm front approaches your location. The gap in sensory perception is a result of the difference between the respective speeds of light and sound. By counting the seconds in between the illumination and the peal of thunder, you can determine how many miles away the storm itself is - but I forgot the exact metrics.

No matter. I speak of this phenomenon as a way of drawing an analogy to the current warning signs appearing regarding our economy and such programs as Social Security, and the eventual storm that will descend upon us. The question is, will people pay attention to the lightning flashing before our eyes, or will we act surprised when the thunder and the rain comes?

Zeus himself, better known as Alan Greenspan, was busy hurling lightning bolts from high atop Mount Olympus
today, casting warnings about trade deficits, budget deficits and profligate spending:

This is not the first time Mr. Greenspan has warned about the risks of a spiraling current-account deficit. In testimony before Congress last February, he said "foreign investors, both private and official, may become less willing to absorb ever-growing claims on U.S. residents."

As he did last winter, Mr. Greenspan said today that his preferred remedy would be for the Bush administration to bring down both the current-account and budget deficits. That would encourage household savings in the United States, which are also at extraordinarily low levels.
But in typical Greenspan fashion, he rejected any notion that even a portion of Bush's reckless, revenue draining tax cuts be sacrificed at the altar of fiscal sanity and Social Security solvency:

But analysts did not interpret Mr. Greenspan's remarks as a rebuke of the White House, which has indicated it will seek to make the deep tax cuts of its first term permanent. If anything, they said, his speech had a laissez-faire tone - leaving events in the hands of the market.
Once again, he is advising that we reduce benefits for retirees, and push back the retirement age in order to accommodate the requirements of Social Security - the whole time preserving every facet of Bush's tax cut regime. But now he offered this kernel of wisdom that only someone so well-versed in economics could elucidate: Our deficits pose risks for the valuation of the dollar, not just the future viability of entitlement programs. Thanks Mr. Greenspan. I had no idea.

Brad Delong weighs in on the subject, citing evidence from currency markets abroad over recent weeks:

The dollar is weaker than ever, and could start dropping like a stone if America doesn't get its fiscal acts together. Of course, that must mean it's time for another tax cut, right? Let's expand our deficits, and play chicken with the global economy. This could all get ugly, and all too soon.
Brad also offers this citation for those that desire a more in depth technical analysis (warning: highly wonkish):

The U.S. now borrows from abroad to allow the government to run a large fiscal deficit without crowding out private investment, even as growing consumption (and necessarily, very low private savings) reduce the United States' ability to finance the fiscal deficit and private investment domestically.

This relatively positive state of affairs, however, is likely to change. The limited cost of the existing U.S. debt reflects unusually low U.S. interest rates, and external investors' willingness to continue to finance large U.S. current account deficits at these low rates.
The layman's translation, if I may venture an attempt, is that we are borrowing so much abroad, to fund our out of control deficits, that foreign investors are beginning to get skittish about the value of our debt which we need them to invest in. Furthermore, if Greenspan doesn't raise interest rates, they might be less inclined to invest in our debt but if he does, it could negatively affect many Americans with floating rate mortgages and other personal debt. If the market bottoms out on our debt, the dollar goes into a free-fall, and then it's time to don the khaki pants because it's third world banana republic time.

What will happen when the perfect storm arrives? What "tough choices" will our selfless leaders ask us to make as the dollar sinks, interest rates climb and the deficits become an untenable albatross? The thunder will be the sound of Thor's hammer (aka Tom Delay) crashing down on
Social Security and Medicare leaving them, and the rest of the administrative state, in shambles. Its just about counting the seconds in between the sights and the sounds.

Thursday, November 18, 2004

The Perils Of Unipolarity And Permission Slips, Part III

In Part I of this series, I discussed the recent, and relatively sudden, realization of American unipolarity, as well as the impact this dynamic has had on the perceived "legitimacy" of our actions given the prior era's framework for such determinations. In Part II, I examined the rhetorical and practical means by which the Bush administration has been charting a course that has deviated from accepted norms and precedents in foreign policy, and how this new course has impacted on legitimacy and our prospects for success in foreign policy endeavors in the present and future. In this segment, I will discuss the proper means and methods to adopt for confronting the threats unique to this period in time, as well as a prescription for managing our unipolar role.

Recovering From Iraq

I have stated before that I opposed the invasion of Iraq. I opposed it on several grounds. First of all, I thought that the inspectors should have been given more time to conduct their job. Ascertaining the true nature of the threat posed by Saddam's arsenal was crucial in determining the necessity of action. Relatedly, the United States could have used the extra time afforded the inspectors to further lobby world leaders and the court of world opinion regarding the need for regime change, and to fully develop a well informed and comprehensive plan for winning the peace. Despite the claims of many Bush supporters that the administration never said Saddam was an "imminent threat," their actions and haste in the run-up to the invasion suggested otherwise. If the threat was not believed to be imminent, then it only makes this lack of patience that much more inexcusable.

I also believed that invading Iraq would strike a blow against moderate forces and centrists in the Muslim world, and cut in favor of extremists and fundamentalists like Bin Laden. I tended to agree with Michael Scheuer who called the invasion a "Christmas gift" for Bin Laden. Furthermore, I think that the conduct of the war, and more specifically the reconstruction, has been a flawed exercise plagued by the pathology of putting ideological concerns ahead of empirical evidence and the input and advice of disinterested experts.

Nevertheless, there are real threats in this world, and threats that may require the use of hard power and military assets depending on the nature of the threat and the context, and Iraq is now, in some ways, a moot point. The real difficulty lies in processing the lessons from the Iraq campaign, while at the same time not over-reacting to the mistakes made.

For one, I am not willing to rule out pre-emptive war should an exigent situation present itself. I am also not willing to subject American foreign policy decisions to the sole discretion of any international body or alliance, be it the United Nations, NATO, the EU, or any other. Because future scenarios are unknowable, and their dimensions impossible to discern, I will not say a priori that I am categorically opposed to unilateralism. In this respect, I turn to the words of
Francis Fukuyama, a neoconservative thinker who has become a strange bedfellow of mine, but until he starts hoarding the blankets, we shall remain on amiable terms:
Certainly, it would be utterly wrong to conclude that the [Iraqi] war teaches us that the United States should never stick its neck out and lead the broader Western world to actions that our allies oppose or are reluctant to undertake. Nor should we conclude that pre-emption and unilateralism will never be necessary.
With that as a starting point, I will attempt to establish a framework from which we should operate in a manner that would make tactics such as pre-emptive invasion and unilateral action less likely to be necessary, and even then, more acceptable to those who dissent. Because there is no doubt that such policies are costly, risky and occasionally counterproductive to the stated goals.

Legitimacy Matters

The spark of this discussion was
the article by Robert W. Tucker and David C. Hendrickson which appears in the most recent edition of Foreign Affairs. In it, the authors argue that, historically, there are four pillars from which the United States derives legitimacy in the arena of foreign policy:

Washington's long-held commitment to international law, its acceptance of consensual decision-making, its reputation for moderation, and its identification with the preservation of peace.
Whether Tucker and Hendrickson are right as to the actual sources of legitimacy, I find it hard to argue that legitimacy is irrelevant. Quite simply, it makes life much easier, and increases the prospects for success in almost any endeavor - but especially when undertaking such a grandiose project as nation building in the Middle East. While some neoconservatives such as Charles Krauthammer are quick to deride the cult of legitimacy, others like Fukuyama have pointed out the importance thereof. Krauthammer argues:

Liberal internationalists...appeal to legitimacy--on the grounds that multilateral action has a higher moral standing.
Krauthammer does acknowledge that having more allies is better, but he downplays the importance, argues in favor of acting without multilateral forces when some in the coalition might dissent from certain policies, and questions the motives of some of our traditional allies. His argument about "morality" is more or less irrelevant - except in so far as it induces the world to support us or not. I do not believe that multilateral actions necessarily have a higher moral standing, but the support of other nations is our target, not moral satisfaction. That support is vital to the success of nation building efforts and protracted military campaigns. While our military is capable of handling most tasks alone, the aftermath is better suited for a more inclusive effort. Beyond actual logistical support, legitimacy gives the United States the perception of moral standing, which, again, is more important than the ultimate disposition of actual morality. Legitimacy is an invaluable asset if we are really trying to win over the hearts and minds of vast swathes of the world's population, and usher in a pax democratia. I return to Fukuyama:
The final area of weakness in Krauthammer's argument lies in his treatment of legitimacy, and how the United States relates to the rest of the world. Failure to appreciate America's own current legitimacy deficit hurts both the realist part of our agenda, by diminishing our actual power, and the idealist portion of it, by undercutting our appeal as the embodiment of certain ideas and values.

Legitimacy is important to us not simply because we want to feel good about ourselves, but because it is useful. Other people will follow the American lead if they believe that it is legitimate; if they do not, they will resist, complain, obstruct or actively oppose what we do. In this respect, it matters not what we believe to be legitimate, but rather what other people believe is legitimate. If the Indian government says that it will not participate in a peacekeeping force in Iraq unless it has a UN Security Council mandate to do so, it does not matter in the slightest that we believe the Security Council to be an illegitimate institution: the Indians simply will not help us out.
So, if we accept as a base point that legitimacy matters, and it provides a set of conditions conducive to the realization of our foreign policy goals (be they realist, isolationist, neoconservative, liberal internationalist, etc.), then we must examine how do to best go about achieving such status.

Recapturing Legitimacy

Fukuyama, Tucker, Hendrickson and Ikenberry all argued two premises: first, legitimacy is in the eye of the beholder; second, legitimacy is a worthy objective of our foreign policy. Despite enunciating the four pillar model, Tucker and Hendrickson both acknowledge that the United States has not strictly adhered to those precepts in the past. Deviation is not unheard of, but there is a different context today that changes the nature of, and perceptions of, American unilateralism and circumvention of international law.

For one, we are in an era of unipolarity and have been since the Soviet bloc fell. Although China looms on the horizon as a future rival almost certain to attain super power status in both economics and military might, for now, and for the past decade, America stands alone relatively unchallenged. This tends to make other nations a bit more uneasy about our exercise of power, as I explained in Parts I and II.

In addition, the removal of the Soviet threat has taken away the incentive to grant the United States the benefit of the doubt in the sphere of foreign policy, so we have been forced by a newly skeptical international body to come up with other means to justify our actions.

Finally, the United States is currently under leadership that itself has expressed disdain for international law, treaties, and organizations. Whereas leaders of decades past have pushed the importance of these institutions, the current administration is composed of actors whose ideologies are almost opposed to their very existence.

Given those concerns, we must redefine our policies in a way to capture legitimacy, while not abdicating our ability to act absent the blessing of the world in all matters - a version of carte blanche that existed during the Cold War.

Rhetoric Matters

Before I continue with the second part of this essay, I want to focus on the importance of rhetoric. Whatever path to legitimacy is eventually taken, one thing is obvious: the Bush administration must alter the rhetoric emanating from the policymakers that are running the show. Rhetoric matters when you are trying to win over the people of the world, especially in a unipolar, post-Cold War world.

If you approach the United Nations, NATO and European allies with a sincere concern for their opinions, and regard for their institutional mandates, they will be more receptive to your entreaties. Those organizations and nations might not always agree, and they might not always endorse your actions just because you enter negotiations with a respectful demeanor, but it is prudent to minimize their opposition and leave open the channels for rapprochement in the future.

Threatening the United Nations with "irrelevance" if they do not accede to your demands is not going to foster cooperation. Considering dissolving NATO because the members were not unanimous in their support for your policies is not productive and not likely to pave a road for future cooperation. Grousing about "Old Europe" and obsolete alliances is not going to induce the targets of your barbs to contribute to your efforts. Closing off reconstruction contracts in Iraq to companies from non-coalition countries is just one manifestation of these punitive, exclusionary tendencies.

Perhaps most importantly though, if your ideological brain trust is churning out opinion after opinion concerning why these alliances, institutions, and organizations are bankrupt, corrupt, and hostile, and then you act accordingly, those same groups will likely treat you with contempt when you ask for their assistance in the future - which we almost definitely will.

I think Fukuyama is right when he chides fellow neoconservatives for their focus on the motives of allies and importance of the role of international law in the matter of Iraq:
But if [Krauthammer] had listened carefully to what many Europeans were actually saying (something that Americans are not very good at doing these days), he would have discovered that much of their objection to the war was not a normative one having to do with procedural issues and the UN, but rather a prudential one having to do with the overall wisdom of attacking Iraq. Europeans tended not to be persuaded that Iraq was as dangerous as the Bush Administration claimed. They argued that Ba'athi Iraq had little to do with Al-Qaeda, and that attacking Iraq would be a distraction from the War on Terror. Many Europeans, moreover, did not particularly trust the United States to handle the postwar situation well, much less the more ambitious agenda of democratizing the Middle East. They believed that the ongoing Palestinian-Israeli conflict was a more dangerous source of instability and terrorism than Iraq and that the Bush Administration was undercutting its own credibility by appearing to side so strongly with the policies of Ariel Sharon...
Modified Pillars

Pillars One and Two

I have a few problems with first two parts of the Tucker/Hendrickson thesis which are: 1) Washington's long-held commitment to international law; 2) Its acceptance of consensual decision-making. The major problem is the way the authors resolve the apparent tension between strict adherence to these precepts on the one hand, and utter disregard for them on the other. The Bush administration shows the latter tendency, but perhaps rigid obedience is not a wise course either. Here is where I think Tucker and Hendrickson overstate their case, in the context of counseling for deferring to the United Nations in regard to pre-emptive war:

[Return to international law] would be imprudent, say the critics, because the principles of the UN Charter that allow for force only in circumstances of self-and collective defense cannot meet the dangers of a world in which terrorists and "rogue states" may acquire WMD...

Such illegal uses of force are in fact unnecessary for U.S. security and actually imperil it. The Iraq war clearly illustrates both points: not only did containment and deterrence offer a perfectly workable method of dealing with Saddam's Iraq, but the consequences of the U.S. occupation have also made Americans much more insecure. Those consequences include daily attacks on American soldiers, the inflammation of opinion in the Muslim world (encouraging new recruits for al Qaeda), and the possibility of further wars arising from the potential disintegration of the Iraqi state.

The baleful results of the Iraq war are also relevant to the dangers posed by the acquisition of nuclear weapons by North Korea or Iran, two instances in which preventive war is often urged. As with Iraq, "preventive" attacks would be remedies worse than the disease and could mean catastrophic war in both regions. U.S. threats of "regime change" also undermine the more reasonable policy of dissuading either state from acquiring such weapons through measures short of war-that is, through a mixture of negative sanctions and positive inducements. The prospects of a grand bargain with either Pyongyang or Tehran would be enhanced were Washington to abandon its not-so-secret wish to bring about the downfall of these regimes.
While I agree with the authors concerning the results of the invasion of Iraq, and agree that any non-sanctioned pre-emptive military action against North Korea and Iran could be disastrous (even UN sanctioned ones could be), I am still not willing to categorically rule out "illegal" actions such as pre-emptive war in all settings. Just because Iraq turned out poorly, and perhaps had paradoxical effects, does not mean that every such exercise of power will end up similarly - especially if you factor in the layers of incompetence displayed by the Bush team which might not be repeated by other administrations.

For example, what if the United States approached the UNSC before 9/11 with a plan for a limited invasion of Afghanistan to topple the Taliban and disrupt al-Qaeda. It is more than possible that the UN would have declined the request for endorsement. Unless the United Nations accepted our argument of self defense, the action would have been deemed illegal under international law. But such an action would have been proper despite its illegality in my opinion, though I must acknowledge the benefit of hindsight.

Furthermore, there are more ways to garner multilateral support outside of the United Nations, and its edicts of international law. The UN is saddled with its own corruption and bureaucratic ineptitude but there are other venues to court, and other avenues to travel. Fukuyama again:

Krauthammer and others have dismissed the importance of legitimacy by associating it entirely with the United Nations-and then shooting at that very easy target. Of course, the UN has deep problems with legitimacy. Since membership is not based on a substantive principle of legitimacy, but rather formal sovereignty, it has been populated from the beginning by a range of dictatorial and human-rights abusing regimes. Our European allies themselves do not believe in the necessity of legitimization through the Security Council. When they found they could not get its support for the intervention in Kosovo because of the Russian veto, they were perfectly willing to bypass the UN and switch the venue to NATO instead. But our legitimacy problem in Iraq went much deeper. Even if we had switched the venue to NATO-an alliance of democracies committed to the same underlying set of values-we could not have mustered a majority in support of our position, not to speak of the consensus required for collective action in that organization. The Bush Administration likes to boast of the size of the "coalition of the willing" that the United States was eventually able to pull together. One can take comfort in this only by abstracting from the quality of the support we received. Besides Britain and Australia, no one was willing to put boots on the ground during the active phase of combat, and now that post-conflict peacekeeping looks more like real warfare once again, Spain, Honduras and other members of the coalition are pulling out. Those countries that did support the United States did so on the basis of an elite calculation of national interest-in almost all cases against the wishes of large majorities of their own populations. This is true alike for Tony Blair, our staunchest ally, and for Poland, the most pro-American country in eastern Europe. While the behavior of Germany's Gerhard Schroeder in actively opposing the war was deeply disappointing, I would still much rather have Germany on my side than a feckless and corrupt Ukraine.

It is clear, in other words, that a very large part of the world, including many people who are normally inclined to be our friends, did not believe in the legitimacy of our behavior towards Iraq. This is not because the Security Council failed to endorse the war, but because many of our friends did not trust us, that is, the Bush Administration, to use our huge margin of power wisely and in the interests of the world as a whole. This should matter to us, not just for realist reasons of state (our ability to attract allies to share the burden), but for idealist ones as well (our ability to lead and inspire based on the attractiveness of who we are).
Fukuyama makes some important observations. First, in regards to Iraq, even if we went to smaller, more amiable bodies like NATO, we could not find the support we needed. Second, most of the nations that did eventually sign on were not enthusiastic in their support, and were mostly acting out of national interest that has revealed a lack of resolve on the part of the withdrawing members.

Thus there is something of a new test forming. On the one hand, appeal to international law and the United Nations, and, importantly, do so from a vantage point of respect for the institutions and an ideological position of appreciation for the importance of such multilateral organizations. Do not proceed with brash and inflammatory rhetoric which is prone to create distrust and entrenched opposition.

If those efforts are not met with success, continue to lobby, while at the same time consulting with traditional allies and smaller organizations such as NATO. If all three corners are counseling against our actions, then it would be wise to reconsider, or at the very least, agree to delay the decision. In the case of Iraq, this might have led to a better outcome than the tangled knot we are dealing with now.

While there could be exceptions to these modified pillars in the potential case of extreme and imminent threats that somehow fail to alarm our allies, I think these fundamentals provide a strong overarching principle to guide us going forward. They better guard our own interests than a strict obedience to international law would, but at the same time defer more to our allies and international bodies, and give weight to their counsel, so as to foster trust, support, and an air of legitimacy which are all so vital for our current mission.

At the very least, this approach will show the world that the United States is committed to acting within a set of principles other than "might makes right," and the related claim that since we are the mightiest, we can act with disregard and impunity. Such positions will hinder our efforts in the future, and diminish our standing. There is no way to maintain legitimacy while disregarding alliances and international norms, so we must be willing to give as well as take.

Pillars Three and Four

There are two other pillars that need consideration within the broad strategy of insuring support and legitimacy for our actions vis-a-vis the many pressing foreign policy dilemmas we now face, such as a nuclear North Korea and Iran. They are: 3) Our reputation for moderation; 4) Our identification with the preservation of peace.

The current problem we are facing with the loss of our reputation for moderation was a predictable outcome given the manner in which the Bush administration went about the intervention in Iraq. While the battle fields in Afghanistan were still smoldering from the effects of US munitions, the country rushed to war in Iraq, despite pleas for delay from almost all sectors of the international community.

Further, the rhetoric being used by Bush administration officials seemed to indicate a new era of American power: an acknowledgement of unipolarity coupled with the "crusade" for democratic regime change. To a world grown accustomed to the relative stability of the NATO/Warsaw stalemate, colored by strong American traditions of isolationism, this new paradigm marked a dramatic shift away from moderation and the preservation of peace, and toward radicalism and a promise of perpetual war.

I began discussing the problems, and inherent contradictions, with the Hobbesian conceptualization of "America as Leviathan" and democratic crusader in Part II of this series. Here is Fukuyama's take:

The problem of judgment gets to the heart of what is wrong with the vision of a unipolar world that Krauthammer lays out. In his words, the United States "has been designated custodian of the international system" by virtue of its enormous margin of military superiority. If we had in fact been designated global custodian, we would have no legitimacy problem, but we have unfortunately designated ourselves. We have in effect said to the rest of the world, "look, trust us, we will look out for your interests. You can do this safely because we not just any run-of-the-mill hyperpower. We are, after all, the United States." While we would not trust Russia, China, India, France or even Britain with a similar kind of power, we believe that the rest of the world should trust us. This is because the United States is different from other countries, a democracy espousing universal values and therefore not subject the same calculations of self-interest as other would-be hegemons.

There is actually something to this argument. But it is also not very difficult to see why it does not gain much traction outside the United States, and not just among those endemically hostile to America. Krauthammer-the-realist, after all, argues for a narrow definition of national interest, which does not suggest we will be a very reliable partner to a struggling friend when we do not have important interests at stake. And even if we were willing to bear other people's burdens, what about our judgment?
Fukuyama, like Ikenberry, touches on the fundamental stumbling block with this theory: unless the rest of the world accepts us in such a role, it will be untenable. But the rest of the world will not accept this reality, and provide the tactical and logistical support that it requires, unless the actions of the United States are seen as legitimate. Part of this is through deference to international institutions and alliances, another is to reassure the world of our commitment to moderation and peace.

I have argued before that the United States has been too ready to resort to military force on many occasions in our past. In this sense, I echoed Tucker and Hendrickson's critique:

The United States has gone down a road in which the use of force has become a chronic feature of U.S. foreign policy, and the country's security has been weakened rather than bolstered as a consequence. It is true, of course, that the American public does not like the idea of deferring to others, but it may come to see the advantages of doing so once it appreciates that enterprises undertaken on a unilateral basis must be paid for on a unilateral basis. Ultimately, however, the importance of legitimacy goes beyond its unquestionable utility. Certainly the leaders who earned the United States' reputation for legitimacy in the post-World War II era believed it to be a good in itself. For its own sake, and for the sake of a peaceful international order, the nation must find its way back to that conviction again.
We must be perceived as pursuing war as a last resort, not as a predetermined policy that we keep on the backburner until we reluctantly go through the motions in international bodies - as was the case with Iraq, and only then, at the urging of people like Colin Powell and Tony Blair. We must realize that in certain contexts, non-military solutions are more effective. A decision to commit troops and military assets is not always strong just because it is violent. Sometimes strength is in negotiation and creative solutions - such as Reagan's summits with Gorbachev.

In Iraq, sanctions and inspections were, in essence, a success. While Saddam was able to exploit them for his own personal enrichment, to the tune of several billion dollars, they were still effective in denying him access to weapons of mass destruction. While he was scheming to usurp the sanctions/inspections regime in the future, such goals were not in danger of being realized in the imminent future, and should have been anticipated anyway.

And to the degree that they were, that is where the United States should have directed its efforts. By rooting out corruption (including the graft of American corporations), and compelling the United Nations and its member states to uphold the sanctions and inspections in perpetuity, the United States could have kept Saddam defanged and contained within his box. Of course, "smartening" the sanctions in order to lessen the burden on the Iraqi people would have been a wise course as well. Granted such a task would have been difficult, and required determined diplomatic wrangling, I urge you to consider all the difficulties, expenditures and ramifications that are attendant our militaristic solutions - and the loss of credibility and trust that have accompanied them.

Furthermore, if we went through those pains, and the UN was as recalcitrant as some would claim, then our invasion would have been better received by the people of the world, and their leaders - seen as a last resort, not an inevitability. I am not suggesting that we would have enjoyed widespread support, but certainly more than we are seeing now, given our posture pre-invasion.

So too, should we approach Iran from the vantage point of appealing to international institutions such as NATO and the United Nations. We should seek to establish an effective and comprehensive multilateral regime of sanctions and inspections, building on the successes, and correcting the failures, of the Iraqi model. That would go a long way to restoring our image of moderation and preference for peace which are so crucial to our recapturing legitimacy. Always we must appear to be working as a cooperative power within the rules and norms of the international community - at least until we are required to deviate from them because we have truly exhausted all other means and the threat is imminent. We must consult our allies, accept their input, tone down our rhetoric, and be willing to consider other options than war.

Another important reality to consider is that the era of American unipolarity will not last forever, and it is important that we set a precedent in the world for establishing acceptable expressions of power. As I mentioned above, China will soon balance out our power, both militarily and economically, and the European Union is rapidly emerging as a force to be reckoned with on the economic front (though not militarily in the foreseeable future). If we do not modify our behavior, we will in fact provide powerful incentive to other regions and nations to try to enhance their power and stature in order to challenge our unipolarity. Once attained, they will be able to point to our actions as justifications of their own unilateral campaigns. The less cautious and circumspect we are in our role as superpower, the less likely it is that we will hold on to our singular status, and the less our credibility will be in the future if we object to unilateralism on the part of another nation.

I will leave the closing thoughts to John Ikenberry:
A unipolar order without a set of rules and bargains with other countries leads to a system of coercive unipolar American empire - and as such it is unsustainable at home and unacceptable abroad. As the Iraq episode shows, under these circumstances other countries will tend to "undersupply" co-operation. They will do so either because they decide to free-ride on the American provision of security, or because they reject the US use of force that is untied to mutually agreed-upon rules and institutions - or both. So the US will find itself - as it does now - acting more or less alone and incurring the opposition and resistance of other states. This is the point when the conservative unipolar vision becomes unsustainable inside the US. Americans will not want to pay the price for protecting the world while other countries free-ride and resist. This appears to be true in the case of Iraq: a majority of Americans now believe that the Iraq war was not worth it, after sustaining barely more than 1,000 military deaths. The US is 5 per cent of the world's population but generates nearly 50 per cent of total world military spending. Is this sustainable in a world where other countries are in open revolt against an American imperium?

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