Tag Archives: Graft

Federal Unaccountability Beyond My Wildest Dreams

06 Friday Apr 2018

Posted by in Big Government, Federal Budget

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In December, Laurence Kotlikoff wrote in Forbes about large chunks of federal spending over many years that have not been reconciled with known accounting transactions. (The link is to a cached version of Kotlikoff’s article because Forbes blocks its site to those using adblockers). I first learned of these massive discrepancies at The Solari Report, which covered the issue in February. At first, I was so dumbfounded by the numbers that I thought it might have been a joke, or worse: fake news on Solari? But the story is real and it is shocking: $21 TRILLION of spending that cannot be explained, spanning the years 1998-2015! That’s more than five times the level of federal spending in 2017. It’s also shocking that the gap has gone almost unnoticed by the news media, though a few specifics have garnered attention at different stages of the disgorgement, as demonstrated by the various links provided in the Solari article.

The discrepancies are concentrated mainly in two departments of the federal government: Defense (DOD) and Housing and Urban Development (HUD). Kotlikoff quotes a description of the “accounting adjustments” from the Comptroller General of the General Accounting Office (GAO). These adjustments are akin to the entries people make in their checkbook registers when the balance can’t be reconciled to their bank statement:

“‘Journal vouchers are summary-level accounting adjustments made when balances between systems cannot be reconciled. Often these journal vouchers are unsupported, meaning they lack supporting documentation to justify the adjustment or are not tied to specific accounting transactions…. For an auditor, journal vouchers are a red flag for transactions not being captured, reported, or summarized correctly.'”

The article at Solari makes the following observations:

“There appear to be at least five possibilities: 1-The missing money was spent appropriately, but existing accounting infrastructure is incapable of tracking it. 2-The money was “wasted,” i.e. spent unwisely. 3-The money was directed into black projects and Special Access Programs in massive amounts outside the Constitutional appropriations process, and therefore without the knowledge of Congress and the citizenry, for purposes unknown. 4-The money was used to manipulate markets to maintain the reserve status of the dollar. 5-The money is being stolen by fraud and collusion between government and private interests. Or perhaps a combination of all of these.“

All five explanations represent a form of failure of governance or government administration. Some are more nefarious than others. While #1 might seem fairly innocuous, it nevertheless would demonstrate a slovenly approach to record-keeping and accountability as well as a ripe temptation to anyone seeking opportunities for graft. Furthermore, one cannot trust that #1 is the full explanation. The amounts are so massive that they far exceed the waste in government that even I thought possible. And no one in the federal agencies seems to have an explanation. Mark Skidmore, a Michigan State University economist who has studied the issue and made inquiries with these agencies, describes what sounds like a runaround. In December, however, the DOD announced a positive step: it’s first-ever department-wide independent audit. The Office of the Inspector General (OIG), the Congressional Budget Office, and the General Accounting Office are certainly aware of the discrepancies. Links to supporting documentation at the OIG and DOD web sites appear in both the Solari and Kotlikoff articles.

If these funds have been wasted or misused, taxpayers are the victims, of course. There are a few well-known examples of private and even public companies that have victimized investors to perhaps a similar (proportionate) extent over the years. Bernie Madoff and Exxon come to mind. But in general, public companies cannot escape demands that their books be in order and that they produce value over time. The federal government, however, has received a pass for this fecklessness over many years. Perhaps it’s because the public has such low expectations for the government’s effective use of tax dollars. Federal agencies such as HUD and DOD seem almost as budgetary “black holes” into which tax dollars are sucked, with an apparent lack of scrutiny.

Kotlikoff closes by urging a thorough investigation into the government’s cockeyed accounts:

“Taken together these reports point to a failure to comply with basic Constitutional and legislative requirements for spending and disclosure. We urge the House and Senate Budget Committee to initiate immediate investigations of unaccounted federal expenditures as well as the source of their payment.”

The Solari piece is no less emphatic in demanding a full probe of the causes of the budgetary discrepancies:

“We must recognize the possibility that massive fraud is being perpetrated against the American people. If that is not the case, it would take relatively little effort and expense to put that concern to rest. On the other hand, what malfeasance might investigation reveal, and who might be responsible?

At the very least, we should be asking the secretaries of DOD, HUD, and the Treasury, the chairman of the Federal Reserve, and the President of the NY Fed what they know, and we need independent audits of all those entities plus the Exchange Stabilization Fund. Anything less will be to acquiesce in an ongoing financial coup d’état.“

Clinton Foundation Domain of Darkness

23 Saturday Jul 2016

Posted by in Privilege, rent seeking

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Clinton-Foundation-600-LA

Hillary and Bill Clinton provide a fascinating case study in the art of graft, and the Clinton Foundation provides them with brilliant cover. The foundation masquerades as a legitimate charity, avoids taxes, and provides a vehicle for what’s known as “pay-to-play” influence-buying. It appears that Bill Clinton made a lucrative career of this while his wife was serving in public office. It was a sensitive issue when Hillary was Secretary of State, given the potential for compromising national objectives. It is still sensitive in view of the many gifts to the Clinton Foundation provided by foreign entities, not to mention the handsome speaking fees paid by foreign entities directly to the Clintons.

Here, I discuss some of the suspicious activities of the Clinton Foundation. This post is the last in a three-part series on Hillary’s most recent scandals. The first in the series covered Hillary’s Benghazi disaster; the second post dealt with her negligent email practices and handling of classified information, as well as her prevarication in responding to investigative efforts.

Last year, the New York Times published a report on the Clinton Foundation’s (CF) connections to a series of deals that ultimately gave a Russian company control of a large share of worldwide uranium supplies:

“At the heart of the tale are several men, leaders of the Canadian mining industry, who have been major donors to the charitable endeavors of former President Bill Clinton and his family. Members of that group built, financed and eventually sold off to the Russians a company that would become known as Uranium One. … the sale gave the Russians control of one-fifth of all uranium production capacity in the United States. … Among the agencies that eventually signed off was the State Department, then headed by Mr. Clinton’s wife, Hillary Rodham Clinton.

As the Russians gradually assumed control of Uranium One in three separate transactions from 2009 to 2013, Canadian records show, a flow of cash made its way to the Clinton Foundation. Uranium One’s chairman used his family foundation to make four donations totaling $2.35 million. Those contributions were not publicly disclosed by the Clintons, despite an agreement Mrs. Clinton had struck with the Obama White House to publicly identify all donors. Other people with ties to the company made donations as well.“

The amounts involved are far greater than the figures in the quote suggest. One individual with intimate connections to the deals gave in excess of $31 million to the CF. The Times report gives details on the shifty ways in which some donor money found its way into CF coffers, often not attributed to the donors themselves in official records. These practices look an awful lot like a sophisticated way of laundering money for influence buying:

“A person with knowledge of the Clinton Foundation’s fund-raising operation, who requested anonymity to speak candidly about it, said that for many people, the hope is that money will in fact buy influence: ‘Why do you think they are doing it — because they love them?’“

There are many other suspicious links between the CF and rent-seeking individuals and institutions. Jonathan Turley has detailed the unsavory nature of the Clinton’s connection to Laureate International Universities, an online college that encompasses Walden University Online, known in some circles as an operator of scams far-exceeding the allegations against Trump University. The chairman of Laureate, Douglas Becker, has been a major donor to the Clintons and their foundation. As it happens, Laureate received $55 million in funds from State Department Grants. Bill Clinton was paid $16 million to serve as Laureate’s “Honorary Chancellor”. Here is one interesting comment from Turley:

“Laureate has come up in the Clinton email scandal. In her first year as Secretary of State, Clinton is quoted as directly asking that Laureate be included in a high-profile policy dinner — just months before the lucrative contract was given to Bill Clinton. Hillary Clinton later references ‘Laureate Universities, started by Doug Becker who Bill likes a lot.’“

There might not be anything to top the cronyism inherent in the activities of the CF in pretending to rebuild Haiti after a massive earthquake struck the island in 2010. The article at the last link offers descriptions of a number of projects, ostensibly funded for the benefit of Haiti, that involve double-dealing by the Clintons and CF:

“The Haitian protesters noticed an interesting pattern involving the Clintons and the designation of how aid funds were used. They observed that a number of companies that received contracts in Haiti happened to be entities that made large donations to the Clinton Foundation. The Haitian contracts appeared less tailored to the needs of Haiti than to the needs of the companies that were performing the services. In sum, Haitian deals appeared to be a quid pro quo for filling the coffers of the Clintons.“

Foreign governments gave to the CF while Hillary Clinton was serving as Secretary of State and have continued to do so even after her presidential candidacy was made clear. This was reported more recently, and includes gifts from “friends” of foreign governments and other foreign interests including Mexico, Turkey, Japan, Saudi Arabia, the UAE, and of course Russia. Many contributions are “bundled” by third-party entities, an apparent but ineffective effort to obscure the true sources of gifts:

“A number of Hillary Clinton’s top lobbyist bundlers, who have raised millions for her presidential campaign, either directly represent foreign entities or work at firms that represent foreign entities, according to documents from the Justice Department’s Foreign Agents Registration Unit.“

Here is a New York Times review of “Clinton Cash: The Untold Story of How and Why Foreign Governments and Businesses Helped Make Bill and Hillary Rich”, by Peter Schweitzer. Rep. Marsha Blackburn (R – TN) is urging the FBI, the IRS and the FTC to investigate the activities of the Clinton Foundation.

The CF is guilty of ignoring widely accepted charitable best practices, according to this report. Its small board of directors is insular and lacking a sufficient degree of independence. Its record-keeping is suspicious, such as a $12.6 million expense for Bill Clinton’s 60th birthday expensed as “fund raising costs”. Inappropriate gifts to the Clintons from directors have raised eyebrows, and apparent “payoffs” for retiring directors, in the form of appointments to powerful positions, have made the CF into a veritable revolving door for Clinton insiders.

I include this last bit because it amuses me: according to Dr. Ben Carson, Hillary Clinton is Lucifer in the flesh. The explanation is that Hillary liked Saul Alinsky in college (and maybe still does), and Alinsky acknowledged Lucifer as the “first radical”. That probably leaves a few degrees of separation between the two. Economist Tyler Cowan does not agree with Carson, but he toys with the notion in a short analysis on Marginal Revolution. Here are a few of his bullets on the topic:

“This topic seems to have entered the news cycle. I am not sure how, so I thought I would add a few observations in the interests of clarity: 

1. Under the most plausible ‘yes’ scenario, Lucifer inhabits the corpus of us all, not just the Clinton family, grandchildren included. 

2. The correct answer is still ‘probably not.’ 

3. Is there a greater chance that Hillary Clinton is in fact Lucifer himself, rather than merely being possessed by him? (Would that not also be a new kind of transgender relation?) No, more likely she would have a Satanic familiar. In most equilibria, the number of familiars is greater than the number of Satans. Far greater.“

A better argument for Hillary’s connection to the Prince of Darkness would rely on the self-serving nature of the “charitable” Clinton Foundation while disguised as a charity. It is both a repository for future policy influence and a pool for enrichment of the Clintons themselves and their cronies. The CF represents a grotesque distortion of the charitable motive. Let’s hope James Comey, Director of the FBI, can direct a competent investigation into the CF’s activities. More importantly, let’s hope that come November, the better judgement of American voters will deny Hillary the presidency.

Postscript: The FBI’s original investigation of Hillary’s emails, presided over by former Director James Comey, was an apparent effort to exonerate her. An investigation of the CF is underway, and the investigation of Hillary’s email shenanigans has been renewed.

Seeding the Grapes of Graft

23 Saturday Apr 2016

Posted by in Big Government, rent seeking

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Government-Bounty-Hunter

Are you investing in graft and rent-seeking activity without knowing it? Is a significant share of your saving channeled into sectors that profit from political influence over politicians, regulators and government planners? Maybe it’s no surprise, and you knew all along that your capital backs firms who manipulate the political system to extract resources beyond what they can earn through honest production. You have an interest in the success of the rent seekers, and you might well get a tax benefit to go along with it!

All this is almost certainly true if your savings are in a 401k, an IRA, a public or private pension fund, or in publicly-traded stocks. These sources of investor funding are dominated by firms that rent seek…. an indication of just how far the cancer of corporatism has gone toward completely subverting free market capitalism. It can be turned back only by ending the symbiosis between industry and government and encouraging real competition in markets.

This question of investing in rent seekers is raised by Guy Rolnik at Pro-Market (the blog of the Stigler Center at the University of Chicago Booth School of Business):

“Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers?“

Rolnik’s emphasis is primarily on mergers and acquisitions, industrial concentration, diminished competition, and monopoly profits extracted by the surviving entities. As Alex Tabarrok at Marginal Revolution notes, “The Number of Publicy Traded Firms Has Halved” in the past 20 years. At the same time, the trend in business startups has been decidedly negative. While I strongly believe in the benefits of a healthy market for corporate control, these trends are a sign that the rent seekers and their enablers in government are gaining an upper hand.

Monopoly must be condoned if there are natural barriers to entry in a market, but such monopolists are generally subject to regulation of price and service levels (complex issues in their own right). If there are other legitimate economic barriers to entry such as differentiated products and strong brand reputations, there is no reason for concern, as those are signs of value creation. And given the private freedom to innovate and compete, there is little reason to suspect that above-normal profits can persist in the long run, as new risk-takers are ultimately drawn into the mix. That is how a healthy economy works and how prices direct resources to the highest-valued uses.

Rent seekers, on the other hand, always have one of the following objectives:

Government Protection: Increased concentration in an industry is a concern if there are artificial barriers to entry. One sure way to protect a market is to enlist the government’s help in locking it down. This happens in a variety of ways: tariffs and other restrictions on foreign goods, patent protection, restrictions on entry into geographic markets, implicit government guarantees against risk (too big to fail), union labor laws, and complex regulatory rules and compliance costs that small competitors can’t afford. The upshot is that if we want more competition in markets, we must reduce the size of the administrative state.

Subsidies: Another aspect of rent seeking is the quest for taxpayer subsidies. These are often channeled into politically-favored activities that can’t be sustained otherwise, and the recipients are always politically-favored firms with friends in high places. This is privilege! Look no further than the renewable energy industry to see that politically-favored, subsidized, and uneconomic activities tend to be dominated by firms with political connections. Naturally, good rent-seekers have an affinity for central planning and its plentiful opportunities for graft. With big-government control of resources you get big-time rent seeking.

Contracts: Government largess also means that big contracts are there to be won across a range of industries: construction, defense, transportation equipment, office supplies, computing, accounting and legal services and almost anything else. Because these purchases are made by an entity that uses other people’s money, incentives for efficiency are weak. And while private firms may compete for these contracts, there is no question that political connections play an important role. As government assumes control of more resources, more favorable rent-seeking opportunities always appear.

Influencing public policy is a game that is much easier for large firms to play. Moreover, the revolving door between government and industry is most active among strong players. This is not to say that large corporations don’t engage in many productive activities. They often excel in their areas of specialization and therefore earn profits that are economically legitimate. However, when government is involved as a buyer, subsidizer or regulator, the rewards are not as strongly related to productive effort. These rewards include above-normal profits, a more dominant market position, a long-term pipeline of taxpayer funding, the prestige of running a large operation with armies of highly-skilled employees engaged in compliance activities, and prestigious appointments for officers. Some of these gains from graft are shared by investors… and that’s probably you.

For society, the implications of channeling saving into rent-seeking activities are unambiguously negative. To say it differently, the private return to rent seeking exceeds the social return, and the latter is negative. Successful rent seekers artificially boost their equity returns and may simultaneously undermine returns to smaller competitors. The outcomes entail restraint of trade and misallocation of resources on a massive scale. The public-sector largess that makes it all possible gives us high rates of taxation, which retard incentives to work, save and invest. If taxes aren’t enough to cover the bloat, our central bank (the Fed) is not shy about monetizing government debt, which distorts interest rates, inflates asset prices and  inflates the prices of goods. In the aggregate, these things warp the usual tradeoff between risk and return and worsen society’s provision for the future.

How should you feel about all this? And your portfolio? As an investor, you might not have much choice. It’s not your fault, so take your private returns where you can find them. Some firms swear off rent seeking of any kind, like Koch Industries, but it is not publicly traded. You could invest in a business of your own, but know that you might compete at a disadvantage to rent seekers in the same industry. Most of all, you should vote for lower subsidies, less regulation and less government!