Lessons From American History: Politicians Have Self-Interests. Part II

In 13 History on 2012/08/31 at 11:09 AM

2. Politicians Have Self-Interest Too

In 1992, New York State found itself $200 million short of having a balanced budget, which the state constitution requires. The total state budget was about $40 billion, so it could have been balanced by cutting one half of one percent—the equivalent of a family with an after-tax income of $100,000 finding ways to save less than 50 dollars a month.

So did New York cut its budget? Don’t be silly. Instead, it had a state agency issue $200 million in bonds and use the money to buy Attica State Prison from the state. The state took the $200 million its own agency had borrowed, called it income, and declared the budget balanced. New York now rents the prison from its own agency at a price sufficient to service the bonds.

Had any private company sold, say, its corporate headquarters to a wholly-owned subsidiary and called the money received income, its management would be in Club Fed. So why wasn’t Governor Mario Cuomo or the state comptroller thrown in jail for what was a patent act of accounting fraud? Because government, unlike corporations, can keep their books as they please. And why must corporations obey accounting rules? In a beautiful example of Adam Smith’s invisible hand at work, it was the self-interest of Wall Street bankers and brokers that produced one of the great ideas in American economic history.

In the 1880s the great Wall Street banks that were emerging at that time, such as J. P. Morgan & Co. and Kuhn Loeb, as well as the New York Stock Exchange, began demanding two new ways of doing business: First, listed firms, and those hoping to raise capital through the banks, were required to keep their books according to what became known as Generally Accepted Accounting Principles. There are many ways to keep honest books—and, of course, an infinite number of ways to keep dishonest ones—so it’s important that all companies keep them the same way, so that they can be compared and a company’s true financial picture seen. Second, these firms were required to have their books certified as honest and complete by independent accountants. It was at this time that accountancy became an independent, self-governing profession, like law and medicine.

But while J. P. Morgan was probably the most powerful banker who has ever lived, not even he had the power to force governments to adhere to Generally Accepted Accounting Principles and submit their books to independent certification. And because it is in the self-interest of politicians to cook the books—just as corporate managers did until Wall Street forced them to change their ways—they continue to commit accounting fraud on a massive scale. This is no small part of the reason that the federal government and many state governments are in financial crisis today.

In 1976 New York City went broke, thanks to spending borrowed money and hiding the fact by means of fraudulent accounting. The state refused to help until the city agreed to do two things: adhere to Generally Accepted Accounting Principles and have its books certified by independent accountants. What a concept! Needless to say, the state imposed no such discipline on itself. So here we are, 36 years later, and the city is in pretty good financial shape while the State of New York is a financial basket case, almost as badly off as California. Maybe New York City should offer to help the state—once, of course, it agrees to keep honest books.

3. Immigration is a Good Thing

Everyone living today in the United States either has ancestors who said goodbye to everyone and everything they had ever known, traveling to a strange land in search of a better life, or did so himself. That takes a lot of guts and a lot of gumption. Both are inheritable qualities.

The French and Spanish governments, far more authoritarian than the British, were very careful about who they permitted to emigrate to their colonies. They wanted no troublemakers, no dissidents, and especially no religious heretics. The British government, on the other hand, couldn’t have cared less who went to its colonies. The result was a remarkably feisty mix of people. Many just marched to the beat of a distant drummer. More than a few arrived one jump ahead of the sheriff—and others one jump behind him, having been transported as criminals. But the bulk came of their own free will, and have been coming ever since, in hopes of finding a better and richer life. Even those who arrived as slaves, and thus had no choice about it, survived an ordeal that is utterly beyond modern imagination and passed that incredible strength down to their descendants.

But while immigration made this country, there has been a long history of anti-immigration in America, beginning as early as the 1840s when the Irish, fleeing the famine, began to pour into our burgeoning eastern cities. Western states later pressured the federal government to limit and even exclude immigration from China and Japan. In the 1920s we limited all immigration, trying to make the ethnic mix that was then in place permanent.

To be sure, we need to secure our borders. All sovereign governments have a right and a duty to decide who gets to come in. But it is entirely in our interest to allow in those who want to work hard and succeed, for that makes us all richer. And in a time when by far the most precious economic asset is human capital (a phrase not coined until the mid-18th century), turning away those who possess it makes no sense. In particular, current regulations regarding H-1B visas and visas issued to foreign postgraduate students at American universities often force the holders to return to their native countries after they finish their studies or the particular job for which they were admitted. Many of these highly educated and highly skilled people wish to stay. Instead of letting them, we send them back to work in economies that compete with us. That’s nuts.


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