Trust is Badly Damaged; Accountability is "In"

This editorial today describes much of what I've been sensing and writing about lately. I've added some emphasis in spots:

In 1995 Francis Fukuyama came out with a book called "Trust," in which he argued that a society's capacity for cooperation underpins its prosperity. The same year, Robert Putnam's famous article, "Bowling Alone," lamented that the United States was depleting its stock of precious social capital. The question of trust -- in government and also in communities -- preoccupied politicians too. "It Takes a Village," Hillary Rodham Clinton urged in the title of her 1996 book, which became a best seller.

You don't hear much about trust these days. Instead, we want accountability.

You see this most viciously in politics. In the mid-term campaigns, nobody has time for trust. The name of the game is to hold opponents accountable by attacking their records -- for failings real or imagined. If the Democrats capture one or both chambers, it will be largely because they promise to hold the president accountable.

This reflects a shift somewhere around 2003 or 2004. In the 1990s, after academics and pundits began talking about trust, the nation did actually become more trusting. The share of Americans saying they trust government "most of the time" or "just about always" rose from 21 percent in 1994 to 56 percent in 2002. Equally, elections became less abrasively focused on accountability. In 2000, according to John Geer of Vanderbilt University, a relatively low 40 percent of the messages in presidential TV spots were negative, down from 47 percent four years earlier.

But some time after the Iraq invasion, these trends reversed. In 2004 the share of Americans saying they trusted government fell to 47 percent, and this month a CBS News-New York Times poll put it at a rock-bottom 28 percent. Meanwhile Geer's measures show that in the 2004 election negative messages jumped to 50 percent of the total, and he guesses that this year's congressional races are the most negative in history.

There's been a similar change in corporate America. In the late 1990s, the new thing for corporate managers was to trust ordinary employees. Company hierarchies were flattened so that people in the middle could demonstrate initiative rather than suffocating under bureaucratic controls. In 1999, the Harvard Business Review reported that 30,000 articles on trusting and empowering middle managers had appeared in the business press over the previous four years.

That paradigm ended in 2002 with Enron, WorldCom and dozens of lesser corporate scandals. Suddenly nobody wanted to trust managers; they wanted to audit them. Instead of the era of management empowerment, we entered the era of mandatory online ethics training. Meanwhile private-equity firms are raising record sums to take over companies on the premise that incumbent managers need to be kicked rather than trusted.

[snip]

But trust, when not abused, is nonetheless an asset. Accountants, lawyers and online training sessions impose costs on businesses; it would be cheaper to trust people if that were possible. Likewise, as Marc Hetherington of Vanderbilt University has demonstrated, government is constrained if nobody trusts it. The Great Society programs were possible because Americans trusted government in the 1960s; the creation of the Medicare prescription drug program arguably reflected the peaking of trust in government in 2003. But Bill Clinton's health care reform was thwarted in the low-trust early 1990s, and nobody now trusts government to modernize entitlements. Meanwhile President Bush had enormous foreign policy momentum in 2002-03 because Americans trusted him. Thanks to the Iraq mess, Americans are now focused on holding Bush accountable, and his options are limited.

There are powerful reasons trust tends to decline and accountability advances. Mobile societies tend to have weak bonds; the Internet makes it easier to hold people accountable and encourages acerbic negativity. And the absence of trust can feed on itself. Leaders function under stifling oversight; this causes them to perform sluggishly, so trust continues to stagnate. But occasionally there is a chance to escape this trap: A shock causes trust to rise, leaders have a chance to lead and there's an opportunity to boost trust still further.

We've recently had a double opportunity. The boom of the 1990s boosted trust in business; the 2001 terrorist attacks boosted trust in government. But CEOs and politicians abused these gifts with scandals and incompetence. Such is the cost of corporate malfeasance and the Iraq war: Precious social capital is destroyed by leaders' avarice and hubris.

How Do You Know When You Staff Needs More To Do?

Winds of Change: Business and the US Political Season

The housing market numbers show significant cooling, as I and many others have been observing for some time, but the Fed seems to feel hopeful that inflation will not be much of a threat. Bulls point to the stock market's recent gains and describe scenarios involving that delicate, rare unicorn named "Soft Landing." Bears point out the current stock market highs still represent low annualized rates of growth over the first six years of this century, based on historical standards, and fret that consumers by and large have not benefited from recent stock market gains. Poll numbers seem to validate the notion that economic gains are not felt to be widespread at all.

All of this is fueling a furious political season in the US, as we head in to Congressional elections in less than two weeks. Republicans, ever the friends of our big business lobbyists here in DC, are poised for a bad, bad year, struggling to sustain control of at least one house in the US Congress. Pent up frustration among Democrats could lead to a lot of investigative ugliness for Republicans over issues like war profiteering on the Iraq war and other fronts. The Democrats will not likely have the power throughout congress to get new legislation passed and signed by the president, but they will probably promote highly popular working and middle class issues like a minimum wage increase, college student loan assistance and some form of universalized health care. In truth, many businesses are ready to take health care expenses off their income statements while having the country as a whole benefit from cost reductions through economies of scale, though specific industries will remain in opposition to any such changes.

What this election will probably bring with it a new phase of economic populism, whereby the middle class in America begins to see its interests more in line with the interests of working people and less in line with CEO's and big business. The benefits of economic growth are not being widely felt, and the Republican Party has been badly hurt by it international failures and misguided fantasies through the Iraq occupation. The public seems in no mood to sustain such international adventurism.

These political probabilities will have economic impacts. In the short term, the markets will likely be fretful in the face of rising Democratic power, and lobbying firms here in DC are rushing to find connected Democrats to hire after years of keeping Democrats in exile. But in the longer term, the Democrats have been the more fiscally responsible party (judging by the last 20 years), as surprising as that may seem to many, and better US debt management will, as ever, soothe the markets. One thing I hear from Democrats, Republicans, big business types, grass roots populists, basically everyone, is this: the status quo cannot hold and the current direction of US society will change.

But which way will things turn? That's anybody's guess, but the trends I discuss in this earlier article will, for my money, bring about more destabilization of the status quo, rather than less. Unless the telecoms and their allies in congress succeed in regulating the Internet against net neutrality, a new age of savvy information elites from anywhere in the world will continue to make news, disseminate video, set the agenda, change politics and change the ways that businesses operate. Google has become a highly accessible social memory and historical record, and this makes for much more populist accountability to those who traditionally hold and wield power. YouTube, recently sold to Google, allows anyone to create highly accessible video content. Anyone who's viewed videos on this website has seen YouTube video.

But What About Inflation?

Here's what I just got in my inbox from the Wall Street Journal's online alert system:

NEWS ALERT
from The Wall Street Journal


Oct. 18, 2006

U.S. consumer prices tumbled last month on the back of a steep slide in energy prices, but the underlying inflation rate accelerated to its highest annual rate in over a decade, which should keep Federal Reserve officials on edge about inflation risks in the economy. The overall consumer price index decreased 0.5% in September, the biggest drop since November 2005, the Labor Department said. Excluding food and energy, the CPI advanced 0.2%.

This threatens the perfect economic storm scenario I've been fretting and writing about for a few months now: a recession triggered by the housing market collapse with the return of higher inflation. "Stagflation" is a word I remember well from my youth. Energy prices won't stay relatively low as they are at the moment, either. Low gas prices may very well represent a temporary artifact of the U. S. political cycle, with elections in early November: a bit of a gift from the international oil industry to help keep a very friendly U. S. administration in power. Do I sound cynical? I live in the DC metro area.

Economy Watch: Housing Market Still Falling

As I've discussed before, the residential real estate boom has been responsible, directly and through indirect effects (related industry services and growth, consumer confidence and wealth effects) for almost half of the U. S. post-2000 stock market correction growth. In that context, two new news items suggest the correction in the housing market is not yet done: a continuing, disturbing bit of news for the economy.

First, an item about new home sales from the relatively more stable Washington DC area housing market. Notice that, in the example cited, it's not just the middle or lower bands of the housing market, which had been the most affected in the DC metro area this year, but a defaulted purchase in the upper range of the market:

House Sales In Region Increasingly Called Off
More New-Home Buyers Are Canceling Contracts

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, October 18, 2006; A01

NVR Inc., the region's largest home builder, said yesterday that four out of 10 of its new-home sales in the Washington area were canceled last quarter, making it the latest builder to report that more buyers are backing out of deals.

Around the Washington market, cancellation rates have tripled in the past year, to 17 percent, according to researchers at Hanley Wood Market Intelligence. In August alone, that meant about 250 cancellations. In its most recent earnings report, builder Toll Brothers Inc. said cancellations in the quarter that ended in July had more than doubled, to 18 percent nationally, while numerous builders said in interviews that their cancellations locally had increased.

Developers and builders say buyers are abandoning five-figure deposits on their future homes because they cannot sell their existing homes or did not sell them for nearly as much as they had counted on.

In an effort to reverse the trend, builders are helping buyers sell their old houses, delaying closing dates or offering favorable loan terms -- or even cash, beyond the free decks and plasma televisions they have been using to try to lure customers since the housing market began cooling a year ago.

For instance, both Pulte Homes Inc. and Toll Brothers here are offering "home staging" services -- that is, help for buyers who want to polish their existing homes to sell them. Pulte will give its customers up to $2,000 toward such services. Toll Brothers is also covering up to six months in mortgage payments for the new homes if buyers take out the loan through the company. The idea is to give buyers room to sell their old homes, a company representative said.

It is difficult to put a price tag on how much in incentives builders are giving to buyers with existing contracts because they tend to be worked out on a case-by-case basis. But both cancellations and builders' efforts to stop them have generally been more prevalent in markets where prices increased rapidly during the housing boom, including Washington.

With little success in selling their home and a settlement date rapidly approaching on a new $900,000 house in Clinton, Irica and James Cheeks last month decided to walk away from that dream house and their $60,000 deposit.

Second, there's this speech from San Francisco Reserve Board President Janet Yellen. For those of you who need a translation, "behind the curve" means the statistics we have don't yet reflect how bad it is out there:

Of course, housing is a particularly interest-sensitive sector, and, as we know, it already has shown clear signs of cooling. Frankly, the pace of it has been a little surprising. Nationally, housing permits are down noticeably—by more than 20 percent—from a year ago. In addition, inventories of unsold houses are up significantly, sales of new and existing homes are off their peaks, and surveys of homebuyers and builders are showing much more pessimistic attitudes.

The national data on residential investment reflect all of these developments and enter directly into the calculation of real GDP growth. After adjusting for inflation, (real) residential investment dropped at an 11 percent annual rate in the second quarter following two small declines in the prior two quarters.

The California data, not surprisingly, show even more softening in the housing market. For the first half of this year, quarterly average home sales in California are down nearly four times as much as they are nationwide, and new housing activity also has slowed more dramatically in the state and in the Bay Area. The local exception is the San Jose-Santa Clara area, where the decline in new single-family housing permits this year has been more moderate, presumably because of the relative strength of the Silicon Valley's tech firms.

According to some of our contacts elsewhere in this Federal Reserve District, data like these are actually "behind the curve," and they're willing to bet that things will get worse before they get better. For example, a major home builder has told me that the share of unsold homes has topped 80 percent in some of the new subdivisions around Phoenix and Las Vegas, which he labeled the new "ghost towns" of the West. Though the situation isn't that bad everywhere, a significant buildup of home inventory implies that permits and starts may continue to fall and the market may not recover for several years. While builders remain hesitant to cut prices so far, and instead offer sales incentives, price cuts at some point in the future seem almost inevitable.

Indeed, we have already seen that the pace of house-price appreciation has clearly moderated, and there are signs that it may continue. For example, one indicator we have been following is the Case-Shiller house price index, which is based on house price data in ten large urban markets—three of which are in California, by the way. Beginning in May of this year, futures contracts on this price index began trading, and they show house prices falling at about a 6 percent annual rate by the end of this year. Though this is still a very new and pretty thin market, the results are interesting and suggestive.

Significant movements in house prices can be an issue for economic activity. Just as the run-up in house prices provided some support for consumer spending, slower increases, and especially outright decreases, could weaken that support. For example, back when house prices were rising so fast, people saw that more and more equity was being built up in their houses, and they might well have felt that they could afford to spend pretty freely. In economic terms, this is called the "wealth effect." In addition, with instruments like home equity loans, refinancing, and so on, households have found it much easier to pull money out of their rising house values to support their spending. Now, with the pace of house-price appreciation slowing, of course, their equity is not rising so fast anymore, which may weaken the growth in consumer spending. In California, the impact of a vanishing wealth effect might be quite significant because over the past year the state has seen a more rapid deceleration in housing prices than the nation. In fact, two northern California metropolitan areas, San Mateo and Sacramento even reported declines in house prices over the past year.

There are those who believe business investment will make up for these downnward trends in the economy. I have yet to comprehend the argument, hear from my clients or ever witness in practice a cycle when businesses significantly increase capacity in a down market. Who's going to buy the new stuff?

Quotes of Note

"What is man but his passion?" -- Robert Penn Warren

"A purpose of human life, no matter who is controlling it, is to love whoever is around to be loved." -- Kurt Vonnegut, Jr.

"To go against the dominant thinking of your friends, of most of the people you see every day, is perhaps the most difficult act of heroism you can have." -- Theodore H. White

Moving to China

Two articles from today's New York Times highlight deals from Western companies to access markets in China. The first comes from Wal-Mart:

Wal-Mart Said to Be Acquiring Chain in China
By DAVID BARBOZA and MICHAEL BARBARO

SHANGHAI, Tuesday, Oct. 17 — Wal-Mart Stores, the largest retailer in the United States, is laying the groundwork to become the biggest foreign chain in China with the $1 billion purchase of a major retailer here, according to people briefed on the deal.

The move represents a large step for Wal-Mart’s strategy in China, allowing the American retailer to more than double its presence in a country that, despite its size and growing middle class, remains largely untapped by foreign retailers.

Though the size of the acquisition — of a Taiwanese-owned supermarket chain called Trust-Mart — may be modest for Wal-Mart, it is a critical one because the Chinese market is becoming much more pivotal in the retailer’s overall international strategy. For Wal-Mart, China represents an opportunity to tap a vast and fast-growing market abroad at a time when the company’s sales are lagging elsewhere and it has run into obstacles to expansion at home.

“China is the only country in the world that offers Wal-Mart the chance to replicate what they have accomplished in the U.S.,” said Bill Dreher, an analyst at Deutsche Bank Securities.

The second involves Viacom:

Viacom to Provide Content to Leading Chinese Web Site
By DAVID BARBOZA

SHANGHAI, Oct. 17 -- Viacom, one of the world’s biggest media companies, said today that it had struck a deal to provide television and music video content to Baidu, one of China’s biggest and fastest-growing internet companies.

The alliance between Viacom’s MTV Networks and Baidu.com, one of the world’s most trafficked web sites, is the biggest effort so far to introduce American television and entertainment programming into China.

The deal comes just two months after MTV Networks -- which produces the MTV music video channel as well as Nickelodeon and popular cartoon programs like Sponge Bob Square Pants -- formed a similar alliance with Google to distribute ad supported clips over the internet.

Viacom officials say they are moving aggressively to digitize their entertainment content and funnel it onto the internet, mobile phones and other devices, putting its entertainment at the fingertips of people in every part of the globe.

“This is an extraordinary milestone for us,” said Bill Roedy, the head of MTV Networks International. “This gives us an amazing opportunity to tap into a new market. This is a direct link to the No. 1 portal in China.”

I have no idea how good these deals are on the merits, based on their business models and terms. Time will tell. But as I emphasize with my negotiation students, deals operate on two simultaneous levels: 1) the structural and strategic merits and exigencies of the situation, and 2) the human, cognitive and emotional realities of the player(s) involved.

From a cross-cultural relations perspective, I'll be interested to see how well these very different cultures are able to work together through the operational complications of strategic alliances. In the West, we are not as good at building and sustaining business ties through relationships as they are in China, and we rely more on contracts and the law to encourage compliance and commitment. Once the negotiators are done, and the operations people must make this work in order to derive sustainable value from these joint enterprises, mistakes and miscomminications are more likely to occur.

As I say, time will tell.

Steve Martin (The Jerk): "And that's all I need!"

Decades later, this still really cracks me up. Someday, I may deconstruct some of the real smarts in this movie, but let's just say for now, I've seen rags to riches to bust cycles, for large groups and for individuals, and Martin's sendup of wounded, grandiose, even narcissistic pride is pure genius. Of course, his child-like comedic character is likable, and not everyone I've seen come through such time is, shall we say, likable. But a lot of people who go through it are good folks, even if they do get to like the taste of their own koolaid too much:

Negotiations Case: Whither North Korea?

The case of North Korea and its nascent nuclear program presents the rest of the world with few immediate options, and no good confrontational options. This is, at its current equilbrium, like a crisis negotiation:

by Bruce A. Wind 10/95
[Officer Wind is a member of the Seattle, WA, Police Dept. Hostage
Negotiations Team.]

Incidents involving barricaded subjects, hostage takers, or persons threatening suicide represent especially trying and stressful moments for law enforcement personnel who respond to them. Officers first responding to the scene must quickly assess the totality of the situation, secure the area, gauge the threat to hostages or bystanders, and request additional units as appropriate. Crisis negotiators must establish contact with subjects, identify their demands, and work to resolve tense and often volatile standoffs without loss of life. Special Weapons and Tactics (SWAT) teams must prepare to neutralize subjects through swift tactical means. Field commanders assume ultimate responsibility for every aspect of the police response.

North Korea is a desperately poor, totalitarian country whose leader is not an irrational actor. He's a power made despot, but he's not irrational. The US signalled to its "Axis of Evil" enemies that it will invade and depose a regime if that regime cannot defend itself with a nuke. The US is bogged down in an occupation of Iraq with no good end in sight, is threatening Iran (Axis of Evil member number 2) and has left North Korea (member number 3) alone precisely because it was not so weak a target as Saddam's Iraq. It is rational, therefore, for Iran and North Korea to pursue nuclear weapons development for self-defense. This is not rocket science.

So, now North Korea is in a fearful frenzy and is trying to leverage its nuclear development to get dialogue with the West on more favorable terms, including more economic support and an end to sanctions. Waving around a nuke is like holding the rest of the planet hostage. The only responsible course, from a pure power analysis, is to engage with North Korea through a policy of negotiation, dialogue, reassurances and international cooperation aimed at containment. I come at this not through any partisan political analysis, but purely as an expert in negotiations and my understanding of how to de-escalate crisis scenarios.

Freedom, Privacy and Social Instability in the Information Age

It's no secret the Internet Age brings with it tremendous destabilization, along with great potential for losses of privacy. In the West, we're constantly now struggling, on all fronts, to sort out what principles of privacy and freedom we need to translate and update for the Information Age. The U. S. Government struggles to gain access to information for security purposes, but the Consitituion includes civil protections that require court review and warrants prior to searches. Historically, lack of strict protections for citizens leads to totalitarian abuse of power by governments. "Trust us" is not a sufficient guarantee of a free society. Unchecked, unaccountable power leads to unmitigated abuse, always and everywhere throughout history.

Other institutional holders of concentrated power - large corporations - also struggle in the new playing field to determine how to use information, and the power information access confers, appropriately, as in the HP scandal story quoted below.

The Internet does enable small groups of people to organize in ways they could not do easily in the past. It also makes citizen publishing of content, news, news analysis, video and so forth far more possible, without having to sell content to an establishment media filter reliant on advertising and establishment goodwill for survival.

For example, American politicians have been rocked and lost power due in no small measure to citizen based Internet activism. In my home state, incumbent Senator George Allen's reelection campaign has gone into a nosedive following the Internet publication of a home made video of him calling a an American born twenty-something of Indian descent a racial epithet. The masses are using the tools of the Information age to shift the balance of power against established institutions, and it's no surprise the institutions are fighting back. I've previously written about the net neutrality issue, and that's political fight represents a major front on this social fault line in the Information Age.

Privacy. Information. Power. And here we come to today's HP story (emphasis added):

Five to Face Charges in HP Scandal

By Ellen Nakashima
Washington Post Staff Writer
Wednesday, October 4, 2006; 1:58 PM

California's attorney general is preparing to file criminal complaints today against ousted Hewlett-Packard Co. chairman Patricia C. Dunn and four others for their roles in the Hewlett-Packard Co. spying operation that surfaced last month, according to sources close to the case.

The criminal complaints are expected to be filed in Santa Clara County Superior Court in California against Dunn; former HP ethics director and senior legal counsel Kevin Hunsaker; and three HP outsiders, including Boston security contractor Ronald R. DeLia and two private investigators, Bryan Wagner, of Littleton, Colo., and Matthew DePante, whose firm is in Melbourne, Fla.

All five will be charged with four felony offenses under California statutes. The offenses include obtaining phone records under false pretenses; unauthorized access to and use of computer data, identity theft; and conspiracy to commit the crimes. They carry penalties of $10,000 and/or imprisonment for up to three years.

Attorney General Bill Lockyer has been investigating the case for weeks.

The charges stem from an extensive HP spying operation that involved impersonating people to obtain their phone records. The two-phase operation began in 2005 and ended in spring 2006, under Dunn's direction, and was designed to identify who inside HP or on its board was leaking confidential company information to reporters.

The charges will come just days after Dunn, Hunsaker and HP Chief Executive Mark V. Hurd appeared before a congressional investigative subcommittee to answer questions about the methods the company used to find out who was leaking information to the news media. Those methods included lying to get phone records; following or watching board directors, journalists and their family members at home and at conferences; and conducting a "sting" operation on a reporter. In one instance, investigators placed tracer software in an e-mail to a reporter to try to track who she communicated with.

The criminal charges will be the first lodged in the case, which is also being investigated by the FBI.

Dunn, 53, resigned at the request of the board last month. A breast cancer survivor, she is battling stage 4 ovarian cancer and was due to begin chemotherapy today.

Dunn told the House subcommittee last week that she had been assured the phone records used to help identify who was leaking HP information to the media were obtained illegally.

Documents HP submitted to the House Energy and Commerce oversight and investigative committee, however, show that Dunn was told in June 2005 by HP's Boston security contractor, DeLia, that he was securing personal phone records of directors and journalists by means of "pretext."

Pretexting involves impersonating someone to obtain their phone records. In addition to violating California laws, it is a violation of federal wire fraud statutes, according to former federal prosecutors.

Security, privacy, liberty, free societies, fair markets, concentrated social power versus populist power. The issues are the same for every generation, and we're in new global, social territory together. The HP story is pretty crazy, but I can guarantee you this is not unique stuff. HP has not been the only big player doing this, because there are a number of boutique corporate security firms competing in precisely this kind of market.