“What the hell did we do to deserve this?” - Tony Hayward CEO of BP after the Deepwater Horizon spill.

“Who cares, it’s done, end of story, will probably be fine” - unidentified BP employee in an e-mail before the Deepwater Horizon spill (Economist 19JUN2010 p65.) writing about the use of six centralizers rather than the 21 recommended by the drilling company.

On April 20th Deepwater Horizon burped, blew up, and started spewing oil at what is now estimated to be 60,000 barrels per day. In one hundred twenty days, that’s just short of 2 million barrels of oil. And at $100 / barrel, that amounts to about $200 million in lost product alone. Add to that the cleanup cost which could reach nearly $ 100 billion and the accident begins to look like a rather costly error.

For some brief period of time there was some question about whether this was simply a case of bad fortune. But within days of the accident it became clear that BP systematically cut corners over the whole life of the project. The quotation above suggests that BP employees knew that their work was shoddy; but hoped for the best.

A similar situation held for the piping. Virtually all major oil companies use double walled pipe, but BP chose to use cheaper single walled one, even though the decision violated their own standard

There were problems with the blowout preventer leaking hydraulic fluid and failing tests. Tests of the cement job were unsatisfactory.

It is common practice to circulate drilling mud before removing it in order to remove any gas that it has absorbed precisely to prevent blowouts. BP skipped this step. Similarly, there were serious questions about the quality of the cement job, due in part to the decision not to circulate and degas the drilling mud.

Arguments between the drilling company, Transocean and BP broke out on the rig days before the accident about how to remove the drilling mud. Transocean employees argued that BP’s method took unnecessary and potentially dangerous risks, to which BP’s Mr. Harrell said - referring to the faulty blowout protector - “I guess that’s what we have those pinchers for.” But on the day of the accident, the guy running to push the activation button didn’t get there in time. So we’ll never know whether it would have worked.

The stories about this accident demonstrate a theme. The theme is that BP considered being on time and under budget much more important than it considered safety. And that’s a culture of the company that goes back at least four years. It was in May of 2007 when John Browne resigned after the Prudhoe Bay oil spill and the Texas City refinery explosion that killed 15 employees. One explanation was a pattern of “willful and egregious” (Economist)breaches of safety procedures. Another explanation was that BP had systematically fired its most experienced and most technically savvy employees and had promoted its movers and shakers - the guys who did best at cutting corners. See also, the kind of guy’s who would write “… end of story, will probably be fine.”

Soon after Tony Hayward took the reigns from John Browne he decided to reorient the company. The goal was to improve shareholder value (at least in the short term). He eliminated the alternative energy operations, rendering the newly minted “Beyond Petroleum” slogan to mean nothing, literally. Nothing lay beyond petroleum for BP.

In May 2009, almost a year before the Gulf coast oil spill, Hayward gave a lecture at the Stanford Business school in which he outlined the many problems that he faced when he came to BP. A major issue, he noted, was that “We had too many people that [sic] were working to save the world. We had sort of lost track of the fact that our primary purpose in life is to create value for our shareholders…our primary purpose in life was not to save the world.”

BP’s “Beyond Petroleum” rebranding was, admittedly, the work of Hayward’s predecessor, Lord Browne, and Hayward was focused on developing the company’s core competencies. Then again, with only 6% of BP’s capital expenditure going into renewable energy sources, it’s not as if the company’s radical change ever extended much beyond its PR campaign.

See full article from DailyFinance: http://srph.it/9D107T

The question of how to treat alternative energy is an old one in oil companies: “Are we a primary energy company, or are we just an oil company?” Every oil company has people who believe passionately in one version or the other. One argument is that oil production and refining is a core competency, and that other forms of energy require other technologies and other forms of marketing and are, therefore, distractions. But if you are going to use the argument that you will focus on oil because that is your core competency, you really ought to be good at it.

If Tony Hayward came to Washington and said, “Sorry, we put our best people on alternative energy precisely because we want to end the dependency on oil,” then the appropriate response would be “Well you need to be better at doing oil, don’t you?” And that could be the end of the discussion. But if you have sacked all your best oil engineers because they cost too much, and if you have cut corners in every conceivable measure in the drilling operation - taking exceptions to industry standards and practices at every step, and if you have killed all the alternative energy programs, then it looks like the only concern you have is the bottom line - safety be damned. And after a huge accident such as Deepwater Horizon, it looks like you have been penny wise and dollar foolish.

It’s not behavior that helps the customer. It’s not behavior that helps the public. And ultimately, it’s not behavior that helps the shareholder. BP lost half it’s market capitalization as a result of the accident. And they suspended their dividends - which will make a lot of Brits, Her Majesty included, very upset.

But the failure to behave in a way consistent with generating long term value is not unique to the top levels of BP. It affects other companies.

People at the highest levels of any corporation at times need to abstract the operations of their companies in various ways in order to avoid getting bogged down in details. So operations of all sorts are viewed as black boxes. It’s both necessary and appropriate to do, sometimes.

But one of the great temptations is to view all operations as black boxes that work pretty much regardless of what you do to them, carefully ignoring all the details regarding what is required to make them work. The second half of the problem is to view the profits that operations produce as simply the difference between the cost of inputs and the revenue from sales. If you put these views together without any other information, the only logical step in maximizing profits is to increase sales and to cut costs.

One cuts costs fastest by cutting people. And one cuts the most expensive people first. Sometimes much can be gained by cutting corners in raw materials or processes. Or by cutting out safety redundancies in projects. But in this frame of thinking, because the operation is abstracted at the highest levels and is assumed to work regardless of conditions or constraints, then cutting costs on people or on materials, or on projects, or on quality assurance processes by definition cannot affect the outcome of operations. Operations keep on working, regardless. In this view of the unconditionally functional black box, there can be no straw that breaks the camel’s back.

What happened to BP resembles this in many ways. They kept cutting costs on pipe maintenance until oil leaked at Prudhoe Bay. They kept cutting operating costs at the Texas City refinery until it blew up. They kept cutting costs in drilling until they had produced the most costly oil leak in the history of the US. It demonstrates a serious problem in corporate culture, a problem that goes all the way to the top of the company.

Interestingly, what is happening at BP resembles what has recently been going on at Johnson and Johnson. In a Business Week interview, six or eight years ago soon after he became chairman of the board, Bill Weldon presaged his primary approach to managing the company. The days of 30% per year revenue growth were gone for good, he announced. So the company would have to cut costs.

Wave after wave of hiring freezes and job cuts followed. The first several cuts evidently produced no problems that were serious. But over the last year a significant portion of the products produced by J&J’s consumer pharmaceuticals company within J&J has been removed from the marketplace for quality defects. And the FDA is contemplating filing criminal charges against J&J employees. It’s a black eye for the most visible part of J&J’s business, and it will change for a decade or two how people judge J&J’s commitment to the quality of its products.

In all the details, BP’s Deepwater Horizon accident and J&J’s consumer products recalls are different. But in at least one way they are the same. They arose from a rather profound failure of one or more of the people at the top of the corporation to acknowledge the crucial importance of operations - a failure to acknowledge that cutting costs might start by cutting fat, but it eventually slices away muscle and bone and essential organs until, eventually, the body collapses or bleeds to death.

Treating operations as a black box that always functions, regardless of how it is treated, can produce serious problems. The further the CEO gets from operations, the more likely is the failure. Hubris, and the arts of networking and persuasion are crucial tools for CEOs. Many times CEOs succeed in getting their way because nearly all the constraints they face are political; it is, therefore, tempting for them to believe that the only political constraints exist. And to behave accordingly

But in the end, the real world does constrain our actions. It’s why we have standards and tests and procedures inside companies and in governmental agencies. It’s why companies and governmental agencies hire, train, and retain good people. It’s why CEO’s need to listen carefully and provide the resources for people to do their jobs properly. It’s why sprawling corporations have compliance and process excellence departments that report to the highest levels of the corporation, not to managers of individual business units. And it’s why CEO’s need to be quick to fire people who cut corners in order bolster profits.

Eventually, treating operations as a little black box that just keeps on cranking out profits - no matter what you do to it - will be the beginning of the end for your company.

When Dubya invaded Iraq and the rest of the world declared that the whole thing was a charade, an elaborate grab for oil resources, most Americans were skeptical. But now that we see what has happened since, it seems like a most plausible explanation. The control of oil is, indeed, the most economically salient outcome of the invasion.

Iraq has the second largest proven reserves of oil in the whole world, surpassed only by the stated reserves of Saudi Arabia. And since Saudi Arabia keeps their stated reserves constant regardless how much oil they withdraw, nobody completely believes those statements. Which means that Iraq may hold more oil than any nation in the world. Regardless of rank, there are 112 billion barrels of proven reserves and almost twice that much in speculative reserves. At $100 per barrel, the value of the oil exceeds $10 trillion.

The US has spent in excess of $1 trillion on the war in Iraq. It has spent more than half a billion dollars on building the embassy alone. These acts suggest a seriousness of purpose. More telling are the permanent bases it intends to occupy indefinitely outside of populous areas, and the fact that they are located not far from the oil fields they are designed to protect. There can be no question that one [presumed] outcome of the invasion is the political stabilization of the area and improved access to the oil found there. Even the negotiations with Iraqis over the pricing of oil sought major pricing concessions that would have brought significant excess profits to the oil majors who operated there. So there simply can be no question about whether oil was a major motivating factor. The only question is whether it was the only motivating factor.

(I have never heard it argued before, but I think it is worth arguing that the US was willing to move out of South Vietnam at the point where it was decided that synthetic rubbers could do the job once done by natural latex rubbers and therefore Vietnam was no longer a source of an essential strategic resource. Without any rubber, the US’ major industry at the time - the auto industry - would fail. With rubber it would thrive.)

There never was any question about whether the war in Iraq was about terrorism. The Saddam regime was hostile to al Qaida and to radical Wahibbists in general. It was a regime interested in commerce with the west and with the Orient. And it was strongly motivated by sanctions.

Similarly, there never was much question about whether the war in Iraq was about weapons of mass destruction. Iraq had quite visibly dismantled its WMD programs. And there never was much evidence to the contrary. Furthermore, WMD is never the real reason one nation invades another. At least until the statehood of Israel it was assumed that a nation had the right to defend itself against aggressors with what armaments it could assemble.

What of the role of neocons? Neocons had grabbed the reigns of public opinion in the US and controlled most of the high-powered policy decision-making in Washington. Richly financed by the arms industry who sorely needed real action in order to justify continued lavish defense department expenditures exceeding half a trillion dollars per year, Neocons manufactured rationalizations for the war in Iraq. There can be some doubt, however, whether their arguments were purely mercenary or whether they were calculated to serve the interests of some other group.

They had, after all, advocated a US led occupation of Iraq and Iran some years before 2001, suggesting that war with Iraq and Iran had nothing to do with terrorism, in their minds. The level of preparedness for the invasions and for the bodies of law that followed the putative trigger to the invasion is remarkable, suggesting almost prescience on their part. Or perhaps when one prepares to invade nations to extract their resources, a considerable amount of the right kind of theater makes the job politically possible.

The fact that there exists something in excess of $10 trillion of proven oil reserves in Iraq, the fact that there might be two or three times that quantity there, the fact that political instability threatened access to those reserves, and the fact that an occupying force provides powerful incentive to create political stability within Iraq ought to be sufficient to suggest rather forcefully that the primary motivating force for the invasion was access to oil.

The invasion of Afghanistan has always made a little less sense. Afghanistan was the source of opium valued recently at more than $50 billion per year, and the Taliban had shut down the trade in the year prior to the invasion. After the invasion, the trade bourgeoned. So if one were to imagine, hypothetically, that the parties who benefitted most from this revenue stream also were officials instrumental in making the decision to invade Afghanistan, then the invasion would begin to make sense as a means of restoring the opium trade and the revenue that flowed from it. But it was easy to wonder if that was all. In comparison to the bountiful resources captured in Iraq, Afghanistan hardly seems worthwhile. At least until today.

A story in today’s New York Times sets Afghanistan’s mineral wealth in excess of $1 trillion, pronouncing its bounty huge in comparison even to the rich trade in opiates. Bear in mind that it will take twenty years at least to develop and extract its mineral wealth and $50 billion for 20 years is $1 trillion; therefore, if the mineral resources dwarf the opiate trade we are talking more of three or five or ten trillion dollars worth of resources.

This story begins to bring us closer to understanding the real reason for the invasion. The article suggests that this is new information. It also suggests that the information was known by the Soviets during their occupation of Afghanistan in the 1980’s but was unknown and ignored by the US until some time in the last coupla years. That’s a little hard to believe.

Perhaps it is true that before the survey spoken of in the article, the quantity and quality of Afghanistan’s mineral wealth was less certain; but there can be little question that it was completely unknown. Satellite reconnaissance could have scoured the rocky terrain of the country using special spectrographic techniques that would reveal the concentration of every valuable mineral known to man over almost every square foot of the nation. And this could have been done, probably, in the ‘nineties. So a very good estimate of the mineral wealth there could have been known to high level officials a decade ago, maybe two. The specialists who reported back recently could have merely been doing verification work, not exploration work.

So if we consider the total mineral wealth of Afghanistan and Iraq to be a minimum of $20 trillion and possibly as much as $30 trillion or more, and if we consider that the people who profit most from this mineral wealth will be using other people’s money to secure access to it, then the invasions of both countries would seem like a great deal for them.

The hypothetical question is: if there were to exist a great pot of money that was between $20 trillion and $30 trillion in size; and if that pot of money is known to only to a small group of military-industrialists, and if that group needed a good story to provide political cover to use military force to grab the loot, what do you suppose they might do?

If you stood a chance of getting $10 million for a pivotal part in selling half-truths and outright lies to the American public in support of a goal of access to $10 trillion worth of minerals, what would you do? What do you think your next door neighbor would do?

I mean, after all: those resources are unavailable until the region is politically stable. So the invasion physically improves the lives of all who benefit from the commercial successes of industry and trade as practiced in Europe, North America, and Asia. Doesn’t the end justify the means?

Of course it is impossible to prove just by examining events how people were individually motivated, but there can be no question that the wars in Afghanistan and Iraq gave western nations access to tens of trillions of dollars worth of strategic mineral resources that might have been unavailable otherwise. There can be little question that access to resources figured prominently in the decision to go to war. And that no war could be publicly justified on these terms, so there had to be another reason for public consumption.

The resource wars have begun.

So why are political opponents trying to tar and feather Obama for the Gulf Coast oil spill? Let’s look at some possible reasons:

1) It happened on his watch. In 1883 Krakatoa erupted, sending 21 cubic kilometers of earth into the atmosphere. Chester Arthur was President of the US at the time. Despite this disaster, historians judge Arthur on his achievement in passing the Civil Service Reform Act. Lots of things happen on a President’s watch that are not his fault. Katrina itself was not Dubya’s fault. The disaster itself was not the problem. The lack of response was not even the problem. The problem was a rather wretched and deep denial that there was a problem. It was Dubya’s insistence that everything was under control when, in fact, almost nothing was being done. It was denial of a problem when there was a very real problem and denial of services by a federal agency whose reason for existence was to provide those services.

There is no such agency for oil spills. And there was no denial of the problem.

2) Obama advocated for offshore drilling. According to a book review in a recent issue of the Economist, a recent executive of Royal Dutch Shell argues that the reason for the spill is that US policy has forbidden drilling in easy places offshore; therefore oil companies must drill in difficult places. Had oil drilling along the eastern seaboard been allowed - as Obama advocated days before the disaster - BP would not have been drilling where it did in the Gulf. It’s a self-serving argument. It’s not clear that the depth of the well contributed at all to the problem. In fact, it is possible that a deeper well might have made control of the high pressure gas a little easier. So while agreeing with this executive would help our argument, we find it difficult to agree.

Still, it is one thing to advocate for offshore drilling in a responsible way. It is another to chant “Drill, baby, drill” like some mantra by a crazed sex addict. One is an act of reason; the other an act of mischievous passion.

Curiously, it is the people who yelled loudest “Drill, baby, Drill” who are most shrill in their criticism of Obama on this issue. So if we were to give them credit for possessing a shred of sanity, it is impossible that they would be arguing “We ought to drill offshore, but Obama is insane for advocating it.”

3) Katrina and Oil are both disasters to hit the Louisiana coast. Bush got blamed for Katrina; therefore Obama must get blamed for Oil.
In other words, it’s a habit of the mind. Habits of the mind are frequently quite illogical; and they frequently produce ideas that are completely false. But their effects can be quite persistent. So we need to look at this a little more closely.

Katrina is not Deepwater

What do these two events have in common.
1) They affected the Gulf Coast.
2) People were hurt.
3) The effect was big.
4) Someone was president at the time.
5) Both stories got a lot of attention from a bored press.

What is different about these two events:
1) Katrina was a natural disaster. The oil leak is a man-made one.

2) There were several days’ warning in advance of Katrina, none for the oil disaster. So the federal agency charged with preparing for natural disasters, FEMA, could have been doing something to make sure that it was ready to help if help were needed. No such agency exists for oil spills. Even if we were to assume it might be a good idea to cobble together such an agency (and it’s not) it would take years of political wrangling to get it operational.

3) The problem in New Orleans was the failure of a safety system for which the federal government had direct responsibility. The problem with the oil well was the failure of a company to adhere to the highest standard of safety processes. A Wall Street Journal investigation discussed in The Week clearly establishes nearly half a dozen distinct points at which BP departed from industry best practices, sometimes with stark criticism from their contractors. Even procedures required by the US government permit may have been ignored.

4) It is reasonable to make governmental entities responsible in helping to minimize damage during hurricanes and other natural disasters, it is reasonable to expect the government to be responsive when natural disasters strike. Agencies are charged with the task and their work is funded. It is not reasonable, however, to make governmental entities responsible for minimizing damage caused by man-made disasters, especially when those disasters are caused by profit-maximizing activities of companies that externalize the cost of failures. To do so tempts the most egregious abuses. Both the mortgage system bubble and the blown well in the Gulf are examples. Governments ought to step in not to save the institutions themselves, but to save American taxpayers from ruinous results. Sometimes, as in the case of TARP the one has required the other.

5) Bush attempted to use the Katrina disaster for grandstanding purposes; Obama has attempted to use the oil disaster as an opportunity to tighten up what little control the federal government has over the permitting process.

6) Bush supporters have, since Reagan uttered the incantation “Government is the Problem”, argued that less government oversight is unconditionally better. Such reasoning increased the probability of damage from events such as Katrina. Such reasoning increased the probability of an oil spill disaster such as the one in the Gulf. Such reasoning led to the deregulation of the banking industry that led to the need for the TARP program.

In short, it was the idea that “government is the problem” that underlay the real problem in both cases. That Obama opponents don’t immediately see this and capitulate on this dangerous mythology is testimony to the idea that hubris and deception too often trump reason and interest in the common good in US politics.

7) Katrina and events like it are inevitable. They are conditions of nature that arise regardless of how we behave. The question is in how to deal with them. The Bush Administration dealt with them by not showing up for a while. While we would like to believe that spills from offshore oil wells are avoidable - this is the first one in about forty years - they are likely to occur so long those who drill wells are not held to the highest standards and held accountable when they fail to adhere to those standards. In this respect, Obama has been showing up.

What ought to be baffling to most sane people is the idea that government has no place in regulating the behavior of oil companies; but that it is fully responsible for cleaning up their messes. What kind of a world does that create? A little more care in drilling probably would have averted this particular disaster. And that extra care might have cost a few millions of dollars. But instead, we have a spill that could cost billions in lost product and tens of billions to clean up. Limits on liability externalize that cost, shifting it to taxpayers. If oil companies had to pay more, they would have less incentive to cut corners, and the cost of oil production for them and for us could be a little lower, once the cost of big disasters is properly accounted for as a cost of production.

Oil Must Flow
Americans are totally dependent on oil. It is a dangerous addiction. And it is an addiction impossible to cure before the oil runs out. Until that time, even if we could spill enough oil into the oceans to kill every kind of marine life found there, we will be drilling for oil in the oceans. There is no other choice. To do otherwise means giving up most of the conveniences that we enjoy: things like food and water, good jobs, internet connectivity, and so on. Cheap energy got us all this stuff. And when cheap energy is gone, so will be the stuff. My grandparents lived without the aid of fossil fuel and theirs was a hard life filled with privation. I am not prepared to live it. Neither, I think, is the greenest of the radical greens.

So the oil must flow. What responsibility does Obama have? He has the responsibility to use the event to fix problems inside the federal government’s permitting office. He has a responsibility to use this event to frame America’s oil dependency as a problem. He has the responsibility to push for laws that hold oil companies liable for larger fines when they have some measure of culpability in oil spills.

Moral Hazard
Obama, however, has absolutely no responsibility to protect anyone from the fallout. While it is reasonable to see the government play a role in responses to natural disasters, it is less reasonable that the government should play a role in cleaning up disasters caused by failures of large corporations. TARP, for instance, was not about saving bankers from the consequences of their own bad decisions, it was about saving the American public from those consequences. The American government does not have the expertise to clean up oil spills. Nor is there any reason it should. If oil spills are to be a regular part of American life, then oil companies must be responsible for doing it themselves, or for funding third party efforts to do it.

It might be tempting to say that because no single entity has as many resources to clean up disasters as the federal government, that it ought to be the responsible party. In the case of natural disasters, it makes sense. But in the case of disasters caused by institutions that are acting irresponsibly in order to increase profits as is the case for banks and for oil companies, this line of thinking invites the very kind of excesses that cause disasters.

This is one slippery slope we cannot afford to slide down.

The authors mine a rich vein of financial data, crunching numbers from a number of large and sometimes difficult to access databases. They evaluate this data carefully, employing good statistical tools; and they build a robust and persuasive model for credit-worthiness of soveriegn entities.

The book starts with a careful definition of terms. It defines inflation. It defines default. It produces solid working definitions for the concepts the authors wish to develop. Before long it is easy to see that its primary focus is on the failure of sovereign nations to meet debt obligations, although there is also a chapter dedicated to banking crises.
Early on, the authors divide nations into three groups:

1. Underdeveloped nations into which invested money virtually disappears forever, producing no evident beneficial results and a constant stream of default.
2. Developing nations in which invested money sometimes yields good returns and sometimes creates default situations.
3. Developed nations in which defaults are rare.

They dismiss the nations in the first category as being hopeless in terms of debt. They claim little interest in the third group of nations because, they claim, these nations take access to capital markets seriously. And they behave accordingly. Defaults sometimes occur. But they are rare. And they are almost never serial. By comparison, nations in group 2 default more frequently and serial default is not uncommon. When they do default, the losses are frequently larger. They are interested in producing a model to predict which group 2 nations are actually good credit risks and which are poor ones.

They go on to suggest that group 2 nations - when they become sufficiently stable - tend to “graduate” and become group 3 nations. In light of the recent debt crisis in Greece, it is interesting to note that Greece is among the half dozen or so of the group 2 nations they suggest worthy of graduating to group 3 status.

Among the truly enlightening models they produce is a graph of cumulative percent chance of default for a sovereign nation as a function of its debt service obligations as a portion of its tax revenues. Predictably, as an increasing portion of tax revenue is consumed by debt service, the probability of default increases. This is a graph that every policymaker who votes on a budget should be able to draw from memory; because it tends to make clear that the risks get big quickly. The same graph serves to prove that a nation whose people and institutions hold more debt is more likely to default for the same level of national debt than one where private debt is small. The lesson: debt destabilizes.

Interesting, too, is the fact that short term debt tends to be more destabilizing because it is so cheap; being cheap tempts overleverage. But the real problem is that it has to be rolled over so frequently. A loss of confidence among creditors means that the debt cannot be refinanced. And default is the only option. A loss of confidence that lasts two years could cause a nation that uses only short term instruments to default on a very large portion of its debt, creating a financial trainwreck.

Financial trainwrecks happen from time to time, and few are so potentially devastating as a broad, sytematic bank failure of the sort that prevailed during the Great Depression, otherwise renamed implicitly by this book as the First Contraction. The greatest part of its harm came from widespread bank failures. Similarly, the greatest threat of the banking crisis of 2009 or Second Contraction was the possible effects of widespread bank failure.
In light of the fact that bank failures wreak much more havoc on western economies than sovereign defaults, it is a bit of a mystery why a single chapter of seventeen is dedicated to bank failures. This chapter is primarily dedicated to convincing us that bank failures are relatively common, even in nations that have good credit sense - the type 3 or developed nations. Furthermore, there is not much the authors have to say about their causes or about how to manage them. It is almost as if the authors take the events as givens and the consequences as unavoidable. After all, bank failures are caused by the fluctuation in value of the assets banks hold as collateral for their debts.
The authors miss the opportunity to quote JP Morgan who - when asked what the stock market will do answered presciently “It will fluctuate.” This means one thing to a person or an enterprise with no leverage, especially when there is a quick recovery. In this case, a downturn in asset prices is nothing but a buying opportunity. But fluctuation means something else entirely to people and business entities that are highly leveraged. The authors make the case that it is the business of banks to deal in leverage. The more leverage a bank uses, the more lucrative its business is in good times. Therefore, inevitable fluctuations must inevitably lead to bank failures. And bank failures wreck economies.

Banks tend to amplify the effects of productivity gains by making it easy for saved surplusses to be reinvested to cause further productivity gains. At least that is so when banks invest in enterprises that expand the pool of real wealth. But, the authors point out, the amplification effect of banks works the same way during business contractions, amplifying the pain of the contraction. This is especially true when banks fail. Assets are frozen or lost. Consumers and businesses fail to pay their bills. Institutions are forced to downsize or to reorganize or to go out of business entirely. And even the ones that do not cannot borrow to expand their successful businesses because credit is fozen. The leverage that banks use, then, amplifies the pain of the inevitable economic contraction.

The book was published during the banking crisis of 2009, and its title is suggestive of the thinking that drove the economy into a ditch: “This time is different.” There was, in the early and mid 2000’s a broad consensus among the financial actors that the things that caused asset fluctuations no longer existed. And that, therefore, house prices would go up at a certain minimum rate each year. Therefore, the best way to make money was to borrow and buy derivatives tied to real estatedasset values. That this happened with a decade of the “dotcom” bust - in which precisely the same arguments were being made for businesses the likes of Cisco Systems whose market capitalization was so big and growing so fast that if it kept doing so for another decade or two would surpass the whole GNP of the US - suggests that the level of sheer stupidity within the walls of the financial community can only be exceeded by a kind of blind testosterone-driven hubris.

The title implies that this book will help us understand why someone might have thought that the dotcom and real estate bubbles of the Greenspan/Bernanke era must be different. But it doesn’t. It implies that it will help us understand why exactly these bubbles were the same as other bubbles. But because its primary focus is on the size of debt and its manageability it fails completely to explain the formation and bursting of asset bubbles.

When it comes to helping describe the conditions that set the stage for the Second Contraction, or the 2009 banking crisis, the authors make the compelling case that:

1) the banking regulations that were in place from WWII until 1970 stabilized the global banking system to the point that bank failures were quite rare.

2) deregulation of banking in the 1970s through the 1990s created an environment in which bank failures increased worldwide.

Then, after firmly establishing that banks inevitably fail, that in failing they crash the economies of whole nations and sometimes the whole world, and that the trend of liberalization has led to a trend of increasing instability in the banking system - a mathematically necessary consequence of increasing leverage and lower barriers - they do something very odd. They suggest that re-regulation should not be used to solve the problem of banking failures. But they give no alternative solutions.

How is one to interpret this line of reasoning?

One interpretation is that the authors view the the banking system as an institution whose purpose is to serve the financial needs of bankers. In this light, the whole of the book makes sense. Most of the book is dedicated, then, to helping bankers correctly assess risk in dealing with sovereign entities. Bank failure is simply an inevitable consequence of asset fluctuation and is to be managed by arranging for sovereigns to dump money into the banking system to keep it liquid during downturns. This maximizes the returns of bank because they risk nothing by being overleveraged. The book is of, by, and for bankers. And the way that the title and subtitle appeal to non-bankers is accidental. The book might better be titled “A banker’s guide to minimizing risk in lending to sovereign nations.”

Similarly, the schema of complete deregulation and saving banks during downturns by handing them money is an excellent way to maximize the amount of capital bankers siphon away from more productive activities in the economy; but it may not be such a good way of assuring that they are very good at serving their social function as reliable intermediaries or of assuring that those rich, group 3 nations continue to be good credit risks.

The authors struggle to explain why, precisely, developed nations tend to be good credit risks. In the end, they fail to produce any convincing argument - even one they themselves find compelling. What we come away with is the especially unsatisfying is the argument that it can’t happen because it hasn’t yet. Or not for a long time. That seems to be the argument for why developed nations will not default on debt. Ever.

If we persist in believing it cannot happen because it has not, it’s only a short time before we will find ourselves hearing “This Time is Different.”

Read any official review of the Epson photo printer R1900 and you will find nothing but raves. It prints dots smaller and more accurately than any other. And it produces skin tones like no other. Furthermore, because it is capable of handling rolls of paper, you can print huge pictures at eye-popping resolutions. The only thing better is being there.

As a user of HP all-in one printers for five or seven years, I decided to upgrade about a year ago. I considered competitive printers by Canon and HP and settled on the R1900 because there was general agreement that its photo quality was as close to perfect as is generally available anywhere at any cost.

One or more review articles pointed out that because Epson uses smaller ink nozzles to deliver tinier ink droplets - a feature that allows finer color gradations - the print nozzles would clog. I was willing to set up special photo-printing sessions once or twice per year to accommodate this problem. I knew that this alone would cost about three or four ink cartridges worth of ink - meaning that the first print would always cost $40.

What I did not know, however, was how truly tiny the ink cartridges were. Not until I decided to print this year’s Christmas letter on th Epson Photo R1900. It took about an hour to unclog the print heads. And it took about $40 worth of ink. But fortunately, they all cleared out and I was able to print. I printed a two-page letter, eighty copies of it. When I was all finished, I had used 12 ink cartridges and 8 gloss optimizers. That’s $159 worth of ink and an additional $27 worth of gloss optimizer. The cost of supplies for the job was $186, or just shy of $1.20 per page.

Bear in mind that these letters are mostly white space. There were two tiny photos and a little spot color. To make matters worse, the gloss optimizer smudged the ink and curled the paper making the whole job look really shoddy. To produce a single print took maybe a minute. Maybe two. It took two maybe three hours to produce the 160 pages of letters. And about a week to beging flattening the curled pages.

Curiously, when each ink cartidge became empty, the printer utility stopped working correctly. Sometimes the utility would not work at all. At other times it would simply show a missing cartridge and fail to identify any of the cartidges by name. This would force the impatient to replace ALL cartridges each time one was empty, multiplying the cost of ink eight-fold! Or one could replace the cartridges one at a time until things worked again, starting with the one that the printer utility said was missing. This usually did the trick. Still, the idea that the print-utility - whose main purpose is to tell you which cartridge to replace - stops working at precisely the point in time it is needed makes using the printer a Kafkaesque experience.

There is no point arguing whether the R1900 can be a good printer for some purposes. If one needs the ultimate in photo reproduction at any cost on very expensive archival paper, this may be a good printer. For printing very subtle skin tone gradations there may be nothing better. But if one is doing anything less demanding this printer is a monumental waste of money. It pays to just go out and buy another printer for each other kind of job. I already bought a laser-jet printer for my occasional black and white jobs. Now I am preparing to buy another ink-jet printer for photo proofing.

In short, the Epson Photo R1900 is in a category by itself. Other photo printers may be described as photo-capable printers, meaning that they do reasonably well in other tasks; but they are especially well suited to printing photos. The R1900 single-handedly defines the large photo ONLY category. One only uses it to make large prints of photos. To use it for any other purpose is simply a waste time of money.

The bankrupcy of GM ought to give us pause. How can a company that was once the world’s largest non-governmental institution be insolvent? If we answer this question well we might learn some very useful things about capitalism, about work, about power, and about anglophone culture. To the extent that we learn useful things and change our practices, we may prevent many more of America’s most powerful institutions from similar failures.

Returns to Scale - And its Limitations

The seeds of GM’s failure were sown early on in its existence. General Motors had grown to be the biggest car company in much the same way that Rockefeller’s Standard Oil had grown - mostly by expanding its economic reach by using profits to buy up competitors and improve margins. It was a practice of using high level economic might that depended very little on other techniques. It required that one acquire competitors by whatever means were effective. Then, one exploited commonality between lines to decrease tooling and production costs. Usually the simple fact of being big enough brought sufficient returns to scale that GM as a firm did not have to be much better than anyone at anything. It did not have to be better at marketing or manufacturing or design or testing. It merely had to be almost as good. Everything else could be done by manipulation of the levers of power.

When Tucker set up a manufacturing line to produce cars in the mid ninteen fifties, GM and other Detroit auto companies used their pull to have him prosecuted for defrauding investors. They claimed he never intended to build cars. The actual cars that he produced were never allowed to be introduced as evidence. He was shut down. He posed a threat to the standard way of doing business. And he was shut down by a manipulation of the legal system.

When the movie was made about his story in the early nineties, a good portion of the dozen or so cars he manufactured, were still roadworthy. Tucker represented the independent, entrepreneurial spirit in America. His ambition was to give Americans the choice of a superior automobile. This represented the peak of Detroit’s power. But five decades of waning power may not have changed Detroit’s way of thinking about the business, much.

In the minds of auto executives, automobiles have just vehicles of exchange. One built them to the lowest possible standard at the lowest possible cost and sold them at the highest possible price. One assumed that the consumer was ingnorant of all he could not see. Beauty in cars was skin deep. And when the paint peeled because of corrosion, that just meant it was time to buy another one. In this view of the business, reliability, performance, and pretty much everything other element of value to a customer were irrelevant if the customer could not sense it at the time of purchase. That meant a kind of race to the bottom.

For decades, Detroit auto companies had their way with the American consumer. Things began to change in 1972. That was when the first oil crisis struck. That was the year the US hit peak oil as predicted by Hubbert in the 1950’s. This would mean that oil production in the US would necessarily decline, and that the US would have to import ever more oil in order to consume the same amount as ever. That was the year OPEC cut oil exports to the US. They did the same in 1977. Oil prices spiked. Jimmy Carter signed a law requiring disclosure of fuel efficiency on each new car. Small cars soon earned a significant market niche.

Detroit exploited that niche by introducing the forgetable Vega and the notorious Pinto. But the Japanese used the event to enter the US market in a different way. An early TV advertisement featured a couple slamming the doors of their Toyota. The implicit message was “It may be a low cost car that sips fuel, but it is still a car of high production value.” The message stuck.

During this decade three Japanese car companies introduced models into the US market: Toyota, Honda, and Nissan. Each of these companies has grown. And, in fact, within the last few years - before the credit crunch - Toyota had already grown to be the world’s largest car company. Toyota has been building cars in the US for two decades using American labor and (some) American parts. And they have been building more reliable cars with less labor input than any other car maker. Honda’s cars are not far behind in terms of reliability. And they generally garner high praise for being fun to drive. Japanese car makers gained ground with American customers by building a reputation for high reliability and high value.

Given that they had serious scale disadvantages at the start, how could Japanese producers have hoped to be successful? There are many answers. The fundamental answer is that they paid less per car for labor and materials and they produced cars that earned for their brands a deserved reputation for reliability and value. And how did they do that?

US businessmen will argue that the labor unions were too strong and that they drew too much capital out of US car companies. This is probably true. But it is probably also true that this is more of an excuse than a reason.

There were two factors that made the labor cost lower for Japanese manufacturers. One is that labor rates were slightly lower. They ran non-union shops and paid wages that were high in local terms but low in comparison to union rates. The other reason was that Japanese had much less labor in their auto assembly processes than the US car companies. The Japanese had evolved a better manufacturing method.

The Stratification Problem

There are several related reasons the Japanese managers were able to get more value from American workers than American managers. One was the idea of KAIZEN. It is the idea of empowering workers to do things that allow them to become more productive. And its’s the idea that workers are invested in their work at every level. They work hard. And this work brings them not just a paycheck, but a meaningful place in society. They engage with all their talents.

Furthermore, position in society - i.e. status - is not a matter of categorical difference but one of function. The world is not split into nobility and “villains;” rather, people higher in the hierarchy have greater responibilities that account for their greater authority. They may have better educations and even better breeding; but they are not somehow categorically different from the people who labor in the factories. These are ideas that are deeply engrained in German and Japanese culture. There is a touch of this same idea in the French notion about work and place in society. It’s much less true in Anglophone countries where the notion of two classes still prevails.

A by-product of the classless workplace idea is that there is a constant dialogue that occurs vertically within an organization. It assumes that decisions are made closest to the groups that will be affected by them. And that competent people with strong training backgrounds, exercising good sense, and motivated by an interest in the success of the organization work out decisions in a way that gains the most advantages and avoids the most pitfals. Management is charged with enabling the virtually continuous flow of incremental improvements by providing financial and engineering support. Management, in this view of the world, derives power from its ability to make good decisions. And to make available the resources to implement.

Even if no practical business decisions were to come out of this dialogue, the dialogue itself creates a kind of shared interest in the business and its operations that knits together people at different levels of the organization. This sense of shared mission allows for give and take in all business arenas including negotiations about pay.

But it also produces good business decisions.

In this model good decisions are both the reason for existence of the power structure, and its product. This vertical dialogue keeps management in the loop about operations. It means that they stay connected with the part of the business that adds the real value.

In Detroit, by contrast, there was a kind of invisible line drawn between workers and management. Management was allowed to set goals and working rules for workers. They were required to make sure the raw materials showed up. And to make sure the finished goods got sold. And to make sure that new products were designed and tooling made. But if there were minor problems that cost time and money on the manufacturing floor, it was the workaround that ruled. The only thing that was to be negotiated between management and workers was compensation.

Similarly, it was assumed that a manufacturing plant, once it was built, was perfect. Nothing could be done to make it work better. Sure, there was an operating budget for keeping things in good repair, but there was no persistent attention paid to the question of how manufacturing processes could be streamlined to make them all better. All decisions were made by people at one level - the highest level with an interest in the outcome. And exempt employees rarely spoke to or saw non-exempt employees except at ceremonial functions.

Reinforcing this separation between workers and management was a culture of entitlement. Whereas in Japan the CEO’s of companies were rarely compensated more than 200 times what workers were; in the US 2000 times or more was not uncommon. Furthermore, the people who ran companies in the US were invariably promoted up through marketing and finance divisions. Anyone who actually knew about and cared about operations was treated as a second-class citizen. A manager might be “rotated through” an operating plant, but he was rarely expected to do much outside of learning what products it made.

Everyone knew that the real money came not from being good at making a product, but by being good at selling it. There may be some truth to that proposition when everyone who is selling cars sells cars that are essentially equivalent in terms of measurable value/cost. But the proposition becomes false when this is not true. Ignore operational excellence long enough and eventually you end up on the wrong side of the value proposition. You lose money. Then you go broke.

Denying the Value Proposition

This is where Detroit has been dangerously wrong for five decades. Early on it embraced designed obsolescence. Then, when Toyota and Honda began delivering cars with greatly enhanced reliability or with measurably superior fuel mileage; when Volkswagon began delivering cars with the road performance and feel that approached that of BMW; and when Volvo and Saab delivered cars with superior safety characteristics, the issue of quality began to plague Detroit. It was clear that one could not simply plead “Rich Corinthian Leather” and sell as many cars as you could ever make. One had to figure out how to deliver value in terms of reliability, drivability, fit and finish.

Improvements in reliability since the early eighties suggest that Detroit understood that it could not afford to be much worse than all its competition in every measurable quality; but it is not clear Detroit ever did get very good at managing the value proposition. When measured against most of their competition, they are both worse than the Japanese in terms of reliability - not just on average but in almost every product line - and worse than the Germans and Scandanavians in terms of performance. Instead of really trying learn how to be better, Ford and GM bought Volvo, Saab, Mazda, and Opel.

But even its foreign acquisitions did less good than they might have. There was enough expertise in those enterprises to teach American managers a few things. But it didn’t happen. Enough of the managers came up in Detroit country clubs that if any outsiders from Europe who understood operational excellence landed in the US, they were immediately gelded. Foreign ways were immediately discounted and failure was swift. The game was the only slightly different overseas. There was nothing to be gained by over-investing in foreign operations, especially in Europe. Rather, the slow strangulation of high profile brands served Detroit’s goal of focusing on high mark-up products without delivering high end performance.

What buying those brands could have brought was people who understood how one can cultivate niche markets and serve specific needs very well and competitively. They might also have brought people who understood how to hire and train highly skilled craftsmen, treat them well, and negotiate with them as adults.

But the idea of exploiting niches is one so foreign to GM that its very name denies the possibility. So what if the people who pay a high premium for a Volvo do so because they perceive high value in not being sliced to bits in the event of an accident? So what if they want to know the car has special features that help prevent accidents as well as limit injury?These all add costs. And they cannot be spread out over the entire product line. So why do it? The simple rule that governed their whole business was a kind of interchangeability of all components across all platforms that improved returns to scale. But it also led to a king of lowest common denominator thinking. The only possible place to spend in making a car better was in optional features that were bolted on at the very end of the manufacturing process

Niche markets simply could not exist in the GM framework of thinking. Then, when in the 1990’s more than half of the automobile market was “niche” markets: when Toyota, Honda, Mazda, Volkswagon, BMW, Volvo, Saab, Hyundai, and a few other companies sold most of the cars, Detroit made most of its money on pickup trucks and SUV’s. By denying the very existence of niches, Detroit had backed itself into a place where it sold niche vehicles. But the niche that they were selling into was soon to be a rapidly contracting one. Meanwhile their costs were higher than the competition because they had counted on returns to scale and consumer ignorance to save their bacon.

One question corporate strategists never quite wrestled with was this “Will the SUVs and Pickup Trucks supplant other kinds of autos?” Detroit simply did business as if the answer had to be “Yes.” But that is a daft proposition on the face of it, for it assumes that everyone is either a soccer mom or a farmer/construction worker. And that probably accounts less than 20% of the US population. In an age when fuel prices must rise because of limitations on natural resources, it is insane build a business model on the proposition of building ever larger, more fuel-guzzling vehicles.

By contrast, it is reasonable to argue that one must have at least a meaningful token position in small autos. Because the markups are so small, doing so forces one to hone manufacturing toward operational excellence. One might actually become a far better car company by competing in the economy classes and losing a token amount of money every year at it than by avoiding it and avoiding the whole question of operational excellence.

Furthermore, one knows that eventually fuel must become expensive. So making small cars keeps one in a position of being able to move toward smaller cars the next time fuel prices go up. This is but one strategic error Detroit has made. And it has been making it since the 1970’s.

By the mid 1990’s one might argue that Detroit must have chosen to build trucks and SUV’s out of necessity - the necessity of a set of companies playing a losing hand. Detroit’s niche had always been to make cars that were cheaply wrought or ones that were wasteful of resources. The Japanese had no domestic markets for these vehicles, so Detroit could still have some advantages here. So it focussed on these areas. But even here it was not safe. Toyota brought its skill in making reliable cars to the truck and SUV market. It leveraged it reputation for reliability and scored meaningful hits on Detroit’s home turf with the likes of the Toyota Land Cruiser.

Bad Decisions - Consequence of Culture

We might all disagree about which decisions were GM’s worst. Or which choices doomed Detroit to failure. But the simple fact that it has been losing market share to Toyota and Honda for four decades is a testament to the fact that it is making worse decisions than Toyota and Honda for four decades. Back in the mid 1980’s there was an article in a major business publication that told us Japanese management held US workers in high regard for their skill, knowledge, dedication, and energy; but they viewed US managers with contempt. Perhaps there is something to be learned from the way managers of Japanese and continental European companies manage.

Since that moment, the Japanese had their little problem with banking, suggesting that not all Japanese ideas are uniformly good. But we have had our own little problem with banking. And during the two decades of retrenchment in Japan, the Japanese have continued to invest heavily in their own automated manufacturing lines. The Japanese have more industrial robots per capita than any nation on earth.

Whether this is a good business practice remains to be seen, but there can be no question that the Japanese are serious about being good at manufacturing. Americans, on the other hand, are serious only at being good at investing. It’s good to be good at investing. But it’s a short-sited view. The people who invest capital usually get the short term return; but it is generally where manufacturing operations are profitable that great wealth is generated. When a nation ships its stock of capital offshore, the bulk of the wealth generated from that capital accrues offshore. The Germans and Japanese understand this well. Americans seem completely oblivious.

The idea of investing to improve on-shore productive capacity fits hand-in-glove with the idea of Kaizen. For example, if one finds that one is paying manufacturing workers too much to make a good profit, then the goal must be to improve the productivity of the workers by increasing automation. Or by using some other high impact technique such as building out the product line so that even with marked increases in productivity, there is still a need for each worker. But in every case it requires a kind of joint interest in the long term success of the business. One cannot manage from quarter to quarter or year to year. One must take a long term view of the the business that , in ten years, sets one’s own organization far ahead of where it is today. In the case of the Detroit car company, long term is defined as being roughly the duration of a labor contract - a couple of years, maybe. And every technological change is fought because it increases business risk -especially changes that would bring big improvements in anything.

A great example of this is the Fiero. In the early 1980’s an ambitious manager decided to build a mid-engine two-seater sports car within the Pontiac brand. For reasons that are impossible to understand, he got enough support to start production. The car was ambitious for a number of reasons. One was that it used all plastic (through color) body panels that were virtually immune to denting, rusting, or scratch damage. The car was well received by the press. During its one or two years in production it sold well and it had even garnered its own cult following. What was truly amazing was that it broke every rule in the book. It was well built, reliable, sporty, stylish, and yet it sold for about the cost of a subcompact. When Pontiac stopped production everyone outside Detroit asked “Why?” To many, it seemed like the best answer was because it simply went too far. It appeared that the most compelling reason for its being withdrawn was that it was so good it made everyone else look bad by comparison. And, if the rumor is correct, that was the end of that particular manager’s career at GM: he was fired because he was so damn successful at creating customer value.
Inside American business, the problem of making bad decisions, is not just an issue of choice. It is an issue of identity. The process is lampooned weekly in Scott Adams’ Dilbert cartoon strip and the BBC program The Office. Americans make bad decisions partly because we have embrace bad mental habits in our mental conception the workplace and the various relationships that exist in that context.

The Wrong Work Ethic

One of the issues is that management in many companies in the US operates on a “clubby” mentality: The company is viewed as a club. The offices are its clubhouse. (We are tempted to think of nine-year-olds and treehouses…) Exempt employees are its club members who are elected for their good looks, brains, and athletic prowess. Or maybe because they are well connected. Education at an exclusive, expensive private university is a kind of imprimateur marking suitable club members.

Issues of technical competence are of little or no importance. Showing up at work matters not because it allows one an opportunity to work and produce wealth, but because it is symbolic of commitment to the club. It is possible for institutions to get by on this sort of culture for some time. But when they are pitted against rivals that have more productive ethics, they are doomed to failure.

A friend of mine worked in the IT branch of a major financial company in Manhattan. He joked that people showed up at 9:00. They would drink coffee and hang out in each other’s offices until lunch. Then, to look industrious, they would have sandwiches delivered to their offices. Then they would hang out in each others offices until about 3:00. At about 4:00 everyone would realize that they had a day’s worth of work to do. They would go to their own offices and work until 8:00 or 9:00 pm. Then they would go home. They would return the next day dog-tired and incapable of mounting any meaningful effort. So they would spend most the day going from office to office bragging about what long hours they worked. One’s work status depended most on being present and visible. And maybe on being good looking or witty.

In a business publication some time ago I remember reading of how German workers who came to the US were shocked at the lax culture. They were shocked to see how US workers treated the work place as a place for socialization. In contrast, when in Germany they would go to work, hardly ever talk to their cohorts at work, and then leave promptly at 5:00. Evidently the French do much the same, except they leave earlier. Paris’ afternoon rush hour starts around 2:30. The European conception of the workplace is that it is a place to work. It is not a place to socialize. Europeans work hard, expect results, and go elsewhere to socialize.

Common to the European and Japanese cultures are ideas that value training, competency, focus, and hard work. It assumes specialization and specific spheres of influence based on technical competency. This body of thinking has many consequences. One is that Japanese and European exempt employees can be quite effective during their work days. The French, for example, have the highest GNP per hour worked. Another is that when one views the work place as a place to produce output rather than a place to acquire status, one behaves toward problems differently.

This idea of technical competency allows all decisions to be made at the lowest level possible. It assures that exceptions are handled more quickly and in ways that will typically have the leas possible negative impact on the business.

By contrast, in “clubby” cultures, decisions are management’s reason for existence. And problems are signs of failure. Should ever a problem rear its head in an institution with clubby nature, the management reaction is simply to make the problem go away. The first two or three steps involve a denial of the problem’s existence. In some cases evidence of a problem disappears after it has been denied effectively at high levels. A good chain of management is defined by its ability not to cause problems to be solved, but to cause them to disappear. If nothing else works, one simply silences the person who brought the problem to the attention of others. There are hundreds of techniques to doing this ranging from discrediting the person to firing them. There are firms where such techniques are much more useful in acquiring positions of rank than are demonstrated ability in actually making the reason for the complaint disappear.

In such an atmosphere, the very act of observing a problem tempts disclosing it. And disclosure means punishment and tempts dismissal. This trains the whole organization to be oblivious to problems and to deny problems in the face of any and all evidence of problems. Only management consultants are allowed to see problems. But even here, management consultants must go around to every business of the same kind, see that everyone’s business is in serious danger of collapse because of the same problem, then they must recommend to all their clients some incremental solution that poses no threat either to the entrenched power structure or to the way the company sees itself. In such a culture, it is only a matter of time until the institution collapses.

Specialization and Technical Competency

Not every US company has this sort of a problem. A friend of mine worked at Hewlett Packard in the early nineties. HP had come up as a maker of high-end electronic instrumentation. It had a reputation for no-holds-barred product excellence and high margins. It had just gotten into the laser printer business, and it had brought its culture of excellence into that business. This friend would tell me stories about the way business decisions were made at HP.

One of the questions that people frequently asked in business discussions was “Are you technical or non-technical?” The assumption behind this question was that two kinds of issues bear on a business decision. One is technical issues. These are ones that require a deep understanding of the way things actually are. You cannot convince a broken glass that it is not broken. You either have to repair it or get a new glass. Technical people are good at understanding this sort of thing - much better than non-technical people, usually. The other type of issus is non-technical issues which deal much more with the way things are perceived, the way people are influenced, the way power and resources flow within an institution. Technical people are sometimes much less good at understanding these sorts of things. So when a person makes an assertion in a business meeting, it is helpful to know whether that assertion is backed by the authority of expertise.

No good business plan of action could go forward unless the technical people understood how to overcome the technical obstacles. No business plan could go forward unless the non-technical people understood how to overcome other kinds of business obstacles. The question implicitly gives credence to this idea. ( We note in passing that the question could persist long after the practice of managing in the way we just mentioned has ceased. For instance, it could be used to disqualify people from voicing legitimate concerns. And in such cases it would serve a purpose opposite to the one we attributed to it..)

The question itself betrays a number of bits of brilliance that might help explain HP’s early success. It suggests that business decisions take into consideration technical and non-technical ideas. It suggests that competence and good judgment in one’s field of expertise ( technical or non-technical) are highly valued. It demonstrates an implicit assumption that people are expected to come to the table with core competencies, and that decisions rely on the competencies and good judgements of all specialists. This is a sign of a workplace where work is defined in terms of delivering value to customers more than it is in terms of gaining personal status.

Decisions are not imposed from the top down. They percolate up from the operating groups of the company. It is suggestive of the idea that people at all levels are expected to voice objections and suggest problems before decisions are made.

This is an idea completely consistent with the Japanese idea of kaizen. It is an idea consistent with the continental European idea of highly trained crafts-people. It is an idea NOT consistent with the idea of business place as club. It is not consistent with the Adam Smith idea that a person in a craft or trade can learn all that there is to know about it with three weeks of on the job training.

Canary in a Coal Mine

The failure of GM is not a result of the financial crisis. My wife, who spent twenty some years as an executive in a health-care company predicted six years ago that GM would collapse if it did not get its health care related expense problems fixed. And, in fact, a huge part of GM’s financial collapse owes to financial obligations it owes in support of health care costs. Had the UAW been served by the Japanese health care system, those costs would already be something like half of what they are today and GM might not yet be entering bankrupcy. So GM’s failure ought to tell us something about the cost of not fixing health care in the US.

But Rick Waggoner, until recently the chairman of GM, insisted right up until the day he was thrown out that GM would never seek bankrupcy protection. Either he was completely delusional, or he was unwilling to publicly admit a serious problem. What is scary is that within the clubby atmosphere of the Detroit business world it is precisely this aspect of his behavior that was the most likely to get him the chairmanship. And it was the most likely to keep him there while that mentality was responsible for filling the chairman position.

The clubby practice of denying problems has kept Detroit from being as good as its competition at design, manufacturing, or reliability for something like five decades. It has imperilled American Motors, Chrysler, Ford, and GM. AMC went out of business long ago, though its Jeep brand - still plagued with reliability problems ( ironically ) staggers on as part of an ailing Chrysler.

It is inevitable that a few brands will disappear over the next decade. It will not be long before the category “commuter car” becomes a special category. And, in fact, it will not be a great surprise if some cities begin to try to create special incentives to drivers to use smaller, cheaper electric powered commuter cars.

But the bigger question is how far will the Anglophone world need to fall behind the rest of the world in order to discover that:

1) Operational excellence and technical competence counts. The notion of continuous improvement implicitly acknowledges the idea that problems exist and need to be solved. It implicitly depends on technical competence and good judgement.

2) Decisions must be made on the basis of information not just on the basis of preserving power. When considerations of power usurp the decision making process, bad decisions are made. And the consequence is a more serious erosion of power. Power is a natural consequence of good decisions.

3) The workplace is a temple for the sacred purpose of generating wealth, and power is a natural consequencs of being good at this. If one thinks of the workplace as being a place to gain status or power first, then one risks trading business assets and advantages for personal gain. That’s a morally reprehensible point of view.

4) Entitlements don’t create wealth; they create fiefdoms, slave plantations. What creates wealth is an efficient means of production or distribution. And what creates excess wealth is an incrementally more efficient means of production or distribution. Once everyone else has learned your tricks, you need to create new ones; so you must cultivate expertise and set it to work within a culture that is very good at defining and implementing low risk incremental change.

GM’s failure ought to teach us these lessons. If we learn them well, we might yet forestall a general economic disaster. Apart from the sheer monumental good fortune of its accidental discovery five centuries ago, America’s good fortune as a nation stems from healthy institutions of all sorts. It depends completely on a low level of institutional corruption and on a high level of sanity, wisdom, expertise, and business intelligence. It depends on hard work at all levels. It depends on productivity at all levels. It depends on management that is actively engaged in identifying problems and fixing them. It depends on capital and on a continuous re-investment of profits in the efforts that improve effectiveness at all levels. It depends on a high level of trust and trustworthiness among all interested parties in an institution.

All of these attributes were compromised by the clubby atmosphere that smothered Detroit. GM is bankrupt. So are the practices that got it there.

What is one to think of this? On the one hand, we note that with the expansion of America’s middle classes, with their growing ability to save and invest, has come a dramatic increase in the amount of capital seeking good management. Even in the ninteen fifties and sixties, investment in the capital markets was seen as an endeavor of rich people. But by the end of the 1980’s everyone with a good job was salting money away in the capital markets. Assuming some modest returns to scale and inprovements in productivity due to improving IT systems, it seems reasonable to assume that pay in the sector would increase. It would be in everyone’s best interest for it to do so, so long as the financial system grew more efficient at allocating a growing pool of resources.

A second factor in assessing the rise in financial sector pay is the argument that the financial sector works by allocating resources to the most efficient means of production. A healthy financial sector does this better than an ailing one. And it is definitely worth a lot of money to get this allocation system working efficiently. This is a reasonable and supportable argument. And to the extent that rising pay in the finiancial sector has led to more efficient means of production - in excess of the premiums to pay within financial sector itself - we are all better off for it.

We are not prepared to argue whether these conditions are strictly satisfied. The market is not always completely efficient. That, however, is the topic of another discussion.

Moving beyond that issue we see two monumental problems that attach to the situation of stratospheric pay levels within the financial industry: Transparency and Opportunity Cost.

There is a lot of talk about transparency. Not coincidentally, the same WSJ page features and article about regulations pertaining to derivatives and other esoteric financial instruments.

There ought to be discussions about this, because when wealth is transferrred to the financial system in excess of the value added by that system, we all become impoverished. Lack of transparency is the magic that makes such a transfer possible. Madoff’s whole scheme worked because of lack of transparency. He claimed to have magical powers. And people believed him.

Lack of transparency leads to chicanery: It is what makes that transfer seem desirable when it is actually not so. There are a thousand highly paid political operatives working on resoring transparency. And if capitalism is to function correctly, they damn well better take a good crack at it. In light of this work ther is a glimmer of hope that it will be fixed by good legislation. ( In Journal-Talk, Regulation)

When all the processes in the financial market are open, frank, truthful, unbiased, unpuffed, unwrapped, and in plain view of all interested parties, there is some small hope that the market can approach efficiency. The size of the distortions tends to be limited, at least. When it is otherwise - when the distortions become a huge part of the system, the financial industry will swallow up great gobs of capital, pay it to its operatives, and weath-making enterprises - companies that manufacture and distribute goods and services that add real value to peoples’ lives - will quickly starve for lack of capital. That is the fast-track to serfdom.

The second problem with stratospheric pay in finance is opportunity cost. Every economic activity requires an input of talent. When all talent flees any activity it is usually not long before the activity stands on shaky ground. It is not long before it begins to crumble. When I was leaving college, for instance, steel producing companies were losing money on US operations. There were lots of reasons. Part of it was that factory floor pay in the US was an order of magnitude higher than it was in the far east. And unskilled labor in the far east was more productive. So it made sense to invest there rather than here. In any case, steel companies, when they offered jobs to degreed engineering graduates, paid the worst. So on average, they probably also got the worst. This drove them into a kind of inevitable downward spiral. There still exist a few specialty steel makers. But most of the industry is located offshore.

Every manufacturing industry in the US competes for talent with the financial industry. It does so for engineering, business, and finance professionals. If the financial industry is paying more than any manufacturing industry, where will people with the best talent go?

There is absolutely no question that finance needs good people to allocate resources among businesses. But what if all businesses are handicapped by their inability to hire the best talent? The process of efficient allocation no longer produces the best economic result. I am told by my wife who graduated from Columbia Business School in the late 1980’s that almost all the best people specialized in finance. They planned to work on Wall Street because that’s where they could make the most money. At that point in time the ratio between finance and other non-farm pay was 1.2. In other words, that level of pay proved no hinderence to the financial system in terms of attracting talent. The additional fifty cents on the dollar amounts to excess profit drained from the capital pool that could be used to rebuild manufacturing in the US or rebuild a crumbling infrastructure.

The readers of WSJ tend to be more closely connected with the financial system than readers of any othe publication, so it is not unexpected that WSJ should advocate for their interests. The readers of the WSJ will likely be people who view with suspicion and animosity any regulation that threatens to derail the gravy train. Maybe, though, that is precisely what needs to happen.

Take, for example, the question of education. On one hand education provides shared experiences, shared values, shared culture that allows the possibility of a civil dialogue on issues. It also, properly executed, would give us the tools to look at questions from different points of view and to better assess arguments on the basis of the merits of the evidence. It would allow us to reach informed decisions rather than simply aligning with our group. On the other hand, education must make us productive and effective in the economic sphere. Otherwise our society becomes weak and servile in an economic sense. If we build a society that is especially weak in a liberal sense, then we all become slaves of a wicked, corrupt, but highly effective central authority.

Sadly, America has a second rate education system that is worse at preparing Americans for all academic pursuits than are most European systems. And we have a system that is worse at preparing Americans for all vocational/technical pursuits than certainly the German educational system. By no measure is it first rate.

There are many reasons for the decline, many of which have to do with adult’s attitudes about education. But some of the reason lies in the Reagan era decision to dumb down education to make Americans good only at the three R’s Restin’, Recitation, and Revival Meetin’s. There’s no thinkin’ involved. Because that threatens the powers that be. And, evidently the same people imagined that vocational training just makes workers more expensive, not more productive. ( It’s thinking as old as anglophone economics: it’s one of the great fallacies of Adam Smith’s Wealth of Nations. )

The problem arises because conservatives do not have a position on education that drives us to be more productive as people. Conservatives do not argue that we need to be better in vocational training. And they argue against the utility of science. This is strictly medieval thinking. And it threatens to eliminate the middle classes. The problem of inferior education also arises because liberals tend to undervalue the social, political, and cultural values and tools of thought that are rightly taught in liberal arts colleges, in high schools, and in elementary schools.

Getting the educational system to work is more than getting public policy straightened out. But that step is necessary.

Turn next to the issue of individual liberty. America has very nearly come off the rails entirely. One of the great problems of modern conservatism since about 1880 is that conserving individual liberty has been at odds with conserving capital. Large institutions find convenience and profit in trampling the property rights, the environmental rights, the privacy rights and personal liberties of individuals. In matters of labor and commerce the Democratic party has tended to represent the interests of individuals against corporations.

But conservatives have represented themselves as the party of personal liberty - freedom from government intrusion - even as they attempted to eliminate all checks on abitrary executive power agianst individuals. There was precious little space for liberals to defend personal liberty. Fortunately this is a category that has had some constitutional protection. But no attribute of political life can be preserved in the absence of deep support both in individuals and in institutions.

These two examples raise the question of how well all of the interests of a democratic society can be represented by a two party system. For it is inevitable that conflicts of logical consistency will arise from time to time within a party’s framework making it impossible for a party to effectively advocate for issues that are rightly in its scope of interest.

I set out in an attempt to describe a kind of canonical policy framework (in its form now, far from complete) that would frame issues in a way that would lead to productive policy debate and good decisions on public policy. It still seems like a good exercise. But it might prove that no two party system is capable of managing all policies over the whole univers of political discourse in a way that is both consistent and productive of good results.

This is just a very quick sketch of the idea. My hope is to expand upon this in the future, both by adding items to the chart and by explaining the entries. The main goal is to provide principled positions on big-issue sorts of policy that allow productive policy debate. We note in passing that we have tried to frame positions on both sides of the aisle in positive terms because the public “goods” that each side is defending are worthy of defense.

Perhaps this exercise will lead to a strong argument that a two party system is incapable of reaching a good decision a large portion of the time because of the logical limitations on internal consistency and lack of independence between category areas.

As much as I love to go there, as much as I agree with Sara, as much as I buy her arguments, as much as I see the same events, hear the same words, interpret them in parallel ways, I also have a sense of unease about the project.

One of the arguments Sara makes is that the far right has been dividing the country up into “us and them” for a long time. And that this divisive technique is inherent to the authoritarion point of view. Fair enough. I agree. But one of the curious side-effects of the work is that by focusing on groups that possess the characteristics she abhors, she, coincidentally does the same thing. The language is gentler. The focus is on their bad behavior and their unfortunate psychological makeups (Wingnuts are authoritarians. And that makes them psychos. This is the subtext.) And the question that keeps coming up is “What are we to do with people like this?”

The problem with this is that we are aping a behavior in “wingnuts” that we rightly deplore. Rather, what we need to ask is “How do we create a dialogue that changes the equation?”

…

It is a property of people who were in their teens and twenties during the 1960’s to view political power in a particular way. During the 1960’s one did whatever it took to get attention for one’s cause. One created a political group to protect that cause. One pushed that cause as far as one could, to hell with the consequences on society. It’s a kind of Bolshevik “take no prisoners” approach to political power. It achieved political ends that most people less than fifty years old will agree were laudible.

The great problem with this frame of mind is that it enforces the mental practice of aligning with a group over the mental practice of evaluating ideas on their own merit. What happens next is that ideas cease to be the currency of political discourse. Rather, all of political discourse is about allocation of power. And the symbols that belong to that task. Political discourse is targeted at bringing people into the group and making them loyal members. And about closing the door to the influence of outsiders. Political parties and groups of all sorts become more insular. And before long the whole political process freezes up because of a kind of brittleness that pervades every individual, every institution, every component in the political process.

Fueled by bone-deep racism, an unnatural terror of liberal government, frustration over the economic downturn, and fears about America’s loss of world standing, they said, the militant right wing is indeed rising again. Their numbers are up, their talk is turning ugly, and it’s not unthinkable that we could be in for a wave of domestic terrorism unseen since the mid-90s.

In fact, I live in a place with deep right wing roots. And I heard two remodelling contractors whispering in my hallway that they were pretty sure the President would not last out his first term, but would end the same way Kennedy did. This is not the kind of thing we heard even in the 1990’s. We are in a worse place.

Thing is, these are not inherently bad people. They are people who have a psychological make-up that embraces a particular point of view. And they have been fed on a public rhetoric of nationalism, jingoism, hatred and lies preached by the rabid right for thirty years.

There is a very important question about how to make sure that they do little real damage in the short term. But the real question is how to restore their correct relationship with society. Part of that task involves changing the voices they hear in public, the tone and the tenor of the people they listen to on radio and television. Part of the task involves figuring out how to bring the bottom thirty percent of the nation back into society. How do we provide good jobs? How do we provide health care? How do we provide social services? How do we make them feel safe and secure? For it is ultimately a great sense of insecurity and anger at perceived injustice that fuels their rage.

That rage was cultivated by the reactionaries who followed Reagan. Reagan mirrored the methods of sixties radicals by simply choosing a different set of political propositions, selling them by appealing to greed and hatred, and using the political capital to demolish opponents. His own success at this transformed the Republican party from a group of men who acted like Eisenhower - who built the interstate highway system and warned Americans of the dangers of the military-industrial complex - to men like Gingrich, and Dubya whose whole agenda appears to be oriented to sustaining a highly abstract form of pillage of every fungible asset held by the US.

Not only did the backlash to the sixties-style Bolshevism create them, but it kept them in power for sixteen of the last twenty-four years. And it kept liberal politicians cowed and frustrated. The results have been so ugly that people under the age of fifty have resoundingly repudiated not just the Republicans in question, but the whole Bolshevik approach to the political process. Obama’s ascendency represents a repudiation of the notion that who has the power has his way with the system. It represents to people under fifty a hope that political discourse can become both civil and productive of good public policy.

I am encouraged by Obama’s lead. He has attempted to make dialogue a centerpiece of his political modus operandi. It’s a refreshing change from the authoritarian styles of the Bushes and Reagans. But Obama’s administration has its own share of left-leaning Bolsheviks. And the Republicans have circled the wagons and taken a totally obstructionist role. So the hope that Obama created of a new age of dialogue remains more of a hope than a reality.

The impression from outside the beltway, at least, is that there are two groups with mutually incompatible views of the world running Washington. They have grown incapable of talking to each other. And the question is not so much how to adopt policies that create the most good for American people and institutions, but rather “Who is in control?” Outside the Oval office, it is still the adolescent activists and the counter-activists of the same era who are in control.

Despite inroads made by Obama and the under fifty crowd, the dream of bringing Americans together in a dialogue, every day, seems more and more difficult. The fracturing of the media has meant more views find expression, which is very helpful. But it also has meant a kind of breakdown.

Before the fragmentation process started in the 1980’s there was an effort throughout the media to present information without filtering it through a partisan filter. But with the rise of the Murdock empire, even institutions as large and influencial as the Walls Street Journal have seen ideology filter news. For example, WSJ made no mention of the election of Barack Obama on the day after the election. As if the President didn’t count because he had the wrong sort of political views. And the photo of Arlen Specter that accompanied his change of party announcement made him look completely looney. Even if it were true that six decades of association with Republicans has made him so, it is truly not a sign of unbiased reporting to make him look gratuitously bad.

So, how do we bring even-handed reporting and productive dialogue back into the political arena? Here are some ideas:

• Speak more about common interests and shared ideals and less about fractious issues.
• Speak more about problems, solutions, ideas, policies, and programs and less about people and processes.
• Focus discussions on finding common ground in interests and principles.
• Speak less severely about the psychological deficiencies of opponents and more about ways to persuade and encourage constructive engagement. Exchew name-calling, ad-hominem attacks, calling into question a person’s intelligence, mental stability, or sanity. We have different physiologies and different life experiences. And unless we are willing to systematically eliminate those who are not like our own ideal selves, we will all be happier if we can live together peacefully, with civility, and with respect.
• Attempt to be truthful and balanced.
• Focus less on the horrific and scandalous and more on the possible and necessary.
• Make political discussions less strident and more thoughtful.
• Introduce ideas and points of view that are not compliant with partisan points of view - any of them - but ones that still make sense to reasonable, apolitical people.
• View arguments to be less about winning and losing (which makes debate a zero-sum game) and more about being an organized and systematic search for valid propositions - things that reasonable people will agree with. (which makes debate a means of increasing knowledge)

It may be that we have gone so far with polarization that the only purgative to the poison is a terrifying and destructive social upheaval. I hope that is not so. But it is clear that fact has played an ever-diminishing role in all of political discourse and political power considerations have played an ever-increasing role. It is almost to the point at which if a person is not strongly aligned with a political organization, he has no voice. And people of one partisan persuasion have become deaf to all the noises made by people of the opposing party persuasion.

A failure of the body politic to recognize and come to grips with the most fundamental and obvious facts is the inevitable result. One is reminded of the story of the emperor’s clothes. Only a naive child is willing to state the obvious, that the fine suit of clothing the king is wearing is not simply diaphanous - it is non-existent. In the fable, the whole world fell silent and blushed at the recognition of the gap between truth and accepted political dogma. But in our political climate instead of such a statement creating a great stir, it goes completely unnoticed amidst the cacauphony of political gamesmanship.

I respect Neiwert and Robinson for their great integrity, for their formidable insight, for their persistence, for the power of their prose, and for the depth and commitment of their readers and commentators. As I said, I find Orcinus a source of encouragement and sometimes inspiration. But I earnestly look forward to the day when their work is irrelevant. I wish I knew how we might get there.

Or is it?

One question the case raises is this: What right does the United States have to try citizens of other nations - who have no official connection with he US - for acts they take in their own nations? In trying and sentencing Noorzai, the US is implicitly asserting a right to try, convict, and sentence people who live in other lands and are subject to other laws, and whosee behavior is not governed by US law.

A noteworthy early and very public example of this behavior was the capture and prosecution of Panama’s President Manuel Noriega by the Bush Administration in 1989. It was a matter of fact that Noriega was entwined with the CIA and that he was also deeply involved in drug trafficking and illegal arms trafficking.

In a syndicated column in 1984 Drugs, Drugs Everywhere and no Solution in Sight William F. Buckley states

Fifty, perhaps sixty percent of all crime is drug related. Ninety percent of illgal drugs reaching the country come in through organized crime. … There are now 4 million frequent cocaine users, 10 million occasional users. The cost of heroin and coke, three years after President Reagan’s big anti-drug campaign was launched are half what they were, which tells us that drugs are more ubiquitous than ever.

Maybe that was the point of the program. And maybe Noriega was making it difficult for the concession to make money. So he was nabbed and thrown in prison on charges that were close enough to the truth that they might stick.

Whatever might have been the motivations to invade, kidnap Noriega, and try him for breaking laws that would not apply to him as a citizen and leader of a sovereign nation, it seems to be a clear violation of the tenet of sovereignty upon which international law is based. It’s hard to understand how one might argue that the US actually has a right to incarcerate citizens of other nations for acts they have committed in their own lands. Other nations, in fact, view the Noriega capture as an act of war, not of law enforcement: and view his incarceration in light of being a prisoner of war, not a common criminal. If one is viewing it in terms of international law, it’s very difficult to believe in national sovereignty and see it any other way.

Between World War II and that day in 1989 when Noriega was captured, it is impossible to find another example of the US removing a citizen of a foreign nation forcefully from his homeland and trying him under US law for acts committed in his own nation. But the treatment of Noriega set the precedent by which Dubya would kidnap and detain purported al Qaeda operatives.

Ironically, as the Bush family was pressing for the right to capture people in other lands and imprison them outside the bounds of any legal doctrine that would allow it, they were simultaneously denying all protections of law under either the US Constitution or the Geneva Convention. The second Bush administration perpetually defended its rights to treat people held at Guantanamo Bay arbirtrarily, beyond the reach of the protections of law. That is not how one treats criminals or war criminals. Not if one cares about learning and making public the nature of their crimes.

The practice of swooping into a country, scooping up people, and throwing them into jail is unprecedented among civilized nations. Civilized nations consider the capture of their citizens by another nation an act of war or of kidnapping. Or both. To behave otherwise is to deny the idea that nations have soveriegn control over their citizens and the resources within their borders. That, in turn invites all sorts of nasty behavior. In fact, it invites chaos.

The practical problem with trying citizens of other nations in US courts for actions they have taken in the sovereign nations of which they are citizens is that it sets up a dangerous precedent. It implicitly invites other nations to do the same to citizens of the US. For example:

Imagine an American, a female divorcee travelling in a nation that follows Sharia law, say the fictitious nation of Irajistan. She refuses advances of a minor government official. By some means not relevant to the story, he finds out she is a divorcee. And that she was not faithful to her previous husband. This means that she has broken Sharia law. The official charges her with infidelity, has her tried; and she is stoned to death. This is precisely the kind of world we are creating if we kidnap people from other nations, try them (or not) in US courts for breaking US law in other sovereign lands, and incarcerate them.

Noorzai travelled to the US of his own accord to “meet with government officials, lured.. by two goverment contractors who said the Americans wanted to talk with him about terrorism financing and promised him safe passage home. Instead, after 11 days of talks with federal agents, he was arrested.” One can make the argument that luring a person into the US is different from kidnapping them. But the issue of reciprocity is the same; the woman in the fiction above was in Irajistan of her own accord. It is impossible to argue that (from a western point of view) she deserved to be stoned to death.

The second question raised by the Noorzai story concerns certain relationships in commerce and political power. The headline and a sentence in the second paragraph hint at Noorzai’s connection with Muhammed Omar. It’s as if the editorial board want us to see the story as one more link between the Taliban and drug smuggling.

The tribal leader Haji Bashir Noorzai, whose case drew wide attention because of his prominent role in the drug trade and his ties to Mullah Mohammed Omar, the fugitive leader of the Taliban, was found guilty last fall of taking part in a conspiracy that sent tens of millions of dollars worth of heroin around the world, including to the United States.

At first glance, the casual juxtaposition of Mullah Mohammed Omar and language about drug trafficking causes us to link the two facts mentally. But in actual fact, the sentence barely asserts any link, and the article never shows any sort of relationship between Noorzai and Mullah Omar. After parsing the quoted sentence carefully one realizes that one might just as well say “Noorzai, a petty drug smuggler and tribal leader lived in Afghanistan when it was ruled by Mullah Omar.”

The fact is, the Taliban, when they had complete control of Afghanistan eliminated opiate production altogether. If Noorzai held with the Taliban and enforced their position on opium production and distribution, he would be innocent of the drug charges. Alternatively, if Noorzai had been a major drug trafficker, he would have been part of a coalition to oppose Omar in order to restore the trade.

Noorzai claimed he did help the US invasion, so maybe he hoped to be a drug smuggler. But the charges against him suggest he was, at best, a bit player in the drug supply chain. Recall that Afghanistan, since the US invasion, has seen opiate production climb from nil to about $50 billion per year in street value. Even if Noorzai managed to distribute one hundred million of dollars’ worth of opiates in the course of the eight years, this amounts to about 0.25% of the Afghan production. Noorzai was not a big fish. He was neither a major Taliban operative nor a major drug smuggler. Perhaps he deserves to be in jail, but the case has no material effect on the business of the cartel.
How does one account for the turn of events? Perhaps he was prosecuted for working outside an officially sanctioned cartel. Or perhaps he was prosecuted just so that there would be another story equating Taliban with drugs. In neither case is the truth about Afghanistan being accurately reflected in the press - at least not in the headlines and ledes.
Interestingly, the story reminds us of the recurring nexus of arms and drugs and CIA operatives. Noorzai “once led a force of mujahedeen fighters in the war between Afghanistan and the Soviet Union” and “had helped the US recover stinger missiles that the CIA had provided to Afghan rebels.” During the invasion of Afghanistan, Noorzai’s tribe “collected and gave the American authorities thousands of Taliban weapons” - a service for which he was not directly paid. So why did he render it? Noorzai has close and trusting ties with CIA contractors. The article suggests as much, else whe would not have come to the US. What was he hoping to gain? A concession, perhaps.

It’s another of many stories suggesting the possibility that contractors working for the CIA and/or for certain arms of the military were involved in drug smuggling enterprises in Afghanistan. With $50 billion/year at stake, it is inevitable that some sort of de facto trade of arms for drugs would occur.

It is helpful to start the story with the Soviet involvement in Afghanistan starting in 1979. Mujahedeen resisted, using arms surreptitiously supplied by the US. That required CIA “contractors” who would deal with the likes of Osama bin Laden. Sometimes they provided arms. Sometimes training or logistical support. But in any case they cultivated a close working relationship. From the Afghan/Mujahedeen point of view, the arms were the most valuable thing they could get from the relationship. But it is impossible to view all Mujahedeen as being interchangeable. And CIA contractors had to choose which groups would get what and how much. How were they to choose? Part of that choice must have been a quid pro quo. The Mujahedeen had something to trade that was extremely easy to transport, and extremely valuable.

That was opium. So the mujahedeen traded opium for arms. CIA contractors might have gotten some or all of the weapons gratis from the DOD. But they certainly would not distribute them for free if they stood to make tens or hundreds of billions of dollars for the same effort, trading in opiates.

Assuming this happened on any scale - and it is naive to imagine that it did not - the second worst thing that could happen to the business was the Soviet withdrawal from Afghanistan in the late 1980’s; for it made US arms less valuable, opening up the possibility of alternative distribution networks.
Who was poised to capitalize on this? Al Qaeda. They had connections with the producers. All they would have had to do to reap much greater profits was to establish direct contacts with foreign distributors and cut out the US middlemen. Suggestive of the fact that they were in the process of doing this is the fact that al Qaeda was deep into the blood diamond business in the mid 1990’s. Especially when peace has broken out, that’s the currency the drugs/arms business.
Curiously, this line of reasoning  might give al Qaeda a motive for wanting the Taliban removed. Assuming the eradication of opium was not their own idea to weaken the existing distribution system so as to allow them to rebuild it from scratch, eliminating the Taliban would be the only way they might continue building their drug-smuggling empire. But it seems unlikely that they would have hoped for a US invasion which would risk setting the very operatives who sold them arms in direct contact with the Afghan suppliers.
There is no question that al Qaeda was a criminal operation, that it did smuggle arms, that it did trade opiates for arms, and that it did attempt to grab tens of millions of diamond to use as currency in its smuggling operations. It is more of a leap of logic to assert that al Qaeda somehow threatened the cartel.
If, however, we suspend disbelief and assume that al Qaeda operatives were jailed in Guantanamo for approximately the same reason Noriega was jailed in Miami - threatening the family business - then all the language about “national security” and all the efforts to detain without public oversight begin to make sense.

It’s the timing that tells the story, though. The worst thing that could happen to the business was the Taliban’s complete eradication of opiate production; for Afghanistan supplies roughly 90% of the world’s heroin. It threatened the collapse of the whole distribution network which had to operate on stored inventory while the Taliban was being overthrown. Furthermore, the Taliban had created stability in the region for the first time in decades, obviating the need for arms. It was a terrible blow to many interests.

Cast in this light, one might reasonably wonder to what extent the US recent actions against al Qaeda and the Taliban echo those against Manuel Noriega long ago. Do both represent defenses of commercial turf?