In the words of lobbyist Lauren Maddox, “The policy process is an extension of the market battlefield.”

The answer is not necessarily found in broader or stricter “ethics rules” barring specific gifts to politicians. Such rules may have little effect and will not, on their own, restore public trust. Instead, we need to consider how to prevent high-stakes market competition from intruding on political decision-making, to create what might be considered “safe zones” where the market has no influence.

I don’t have a problem with the changes Reich wants to make — public financing, slowing down the revolving door between public service jobs and corporate jobs, etc. But wishing for “safe zones” makes about as much sense as wishing for unicorns (or safe zones patrolled by unicorns).

Take the last healthcare fight. Reich writes:

Doctors squabbled over whether primary-care physicians would get a Medicaid payment boost or a somewhat smaller boost would go to all doctors. Insurers that specialize in higher — cost plans mainly going to unionized companies squared off against those specializing in plans that cater to lower-wage workers on whether taxes should be raised on high-cost plans and at what level the tax would kick in. Middle — sized companies fought against small employers over the size of businesses that will be exempt from the requirement of insuring their employees. And on and on.

Many of these battles continue but have moved into the regulatory process, where different companies, sectors, and industries are seeking rules that advantage them and disadvantage their competitors.

As opposed to when? The only reason we had any chance of a real debate this time is that the Godzilla of the medical world, the AMA, had its monopoly of power broken by the insurance companies a few decades ago. Case in point: from the New York Times in 1965.

The American Medical Association said today that it was placing an advertisement in 100 newspapers to make its position clear on its opposition to health care reform. The advertisement calls health care reform ‘the beginning of socialized medicine.’

What was the AMA trying to nuke? Medicare.

Healthcare is a particularly good case because even if, for example, somehow you magically created a public debate “safe zone,” Big Pharma would still have plenty of indirect influence over it. Remember this charming story from the New York Times last year?

A growing body of evidence suggests that doctors at some of the nation’s top medical schools have been attaching their names and lending their reputations to scientific papers that were drafted by ghostwriters working for drug companies — articles that were carefully calibrated to help the manufacturers sell more products.

I’m not arguing we couldn’t rein in some of the insanity. But it’s ridiculous to that we can treat market power like it’s a stain on public discourse.

In fact, I think this denial makes the problem worse. By pretending that power isn’t an inextricable part of the economy, we undermine building support for the real solution — insuring everyone has a real say by creating Checks and Balances .

The really inconvenient truth: We’re toast. Fried. Steamed. Poached. More so than even many hand-wringing carbonistas admit. According to the National Oceanic and Atmospheric Administration, C02 that’s already in the air or in the pipeline will stoke “irreversible” warming for the next 1,000 years. Any scheme cobbled together in Copenhagen for slowing—forget reversing—the growth of greenhouse gases will be way too little, way too late. In the apt jargon of industry, a hotter planet is already “baked in.”

But fear not — technology will save us!

Coastal communities, for example, will survive not because the world will somehow unite to stop sea levels from rising (it won’t). They’ll survive because they’ll learn to adapt—much as the Dutch have done since the Middle Ages.

I’ve got one word for you, Spencer: Katrina.

I don’t know how anyone could see how our country abandoned our poor brothers and sisters during & after Katrina and think technology will save us. Maybe it’s the “us” where Spencer is having trouble opening his imagination; guys like him don’t worry that our government would abandon them.

But it wasn’t just poor folks of color our country abandoned. Here’s how well we’ve “adapted” to Katrina’s lessons:

Three days before the 4th anniversary of Hurricane Katrina (August 29), a coalition of 17 advocacy groups today urged the U.S. Army Corps of Engineers to honor President Obama’s priority in his budget and campaign “to restore nature’s barriers – the wetlands, marshes and barrier islands that can take the first blows and protect the people of the Gulf Coast.”…

The severity of Katrina’s damage in Louisiana was caused, in part, by the fact that the state has lost 1/3 of its original wetlands – about 2,000 square miles — an area larger than Delaware.

“Scientists agree that these lost wetlands could have helped reduce Katrina’s storm surge,” said Charles Allen, assistant director of the Center for Bioenvironmental Research at Tulane and Xavier Universities and co-director of the Lower 9th Ward Center for Sustainable Engagement and Development. “Wetlands are ‘horizontal levees’ that in many cases are more economical and effective at damage prevention than man-made vertical levees because they absorb storm energy, slow incoming waves, wind, and surge waters. It is widely recognized that we urgently need to restore these wetlands and coastal forests to prevent similar or worse storm damage in the future.”

Despite these facts, four years after Katrina, Congress has been unable to fund major coastal restoration projects it authorized in the 2007 Water Resources Development Act because the U.S. Army Corps of Engineers has not completed the projects’ design and engineering.

In the face of these facts, how can Spencer write:

Ditto the other supposed horsemen of the climate apocalypse. Drought? Check out Perth, on the edge of the Great Australian Desert, where more than a million people keep hydrated with seawater that’s been desalinated by wind power.

Who does he think is going to pay for building a system like this for Africa?

Spencer isn’t completely clueless. At one point he hints at the bigger issue:

But won’t the transition to a warmer world be painful? The honest answer is that we don’t know. It depends on the resources we can bring to bear, technological and otherwise.

But that’s about it.

Look, I love Wired as much as the next geek. But it’s stunning that after decades of political deadlock over stopping global warming, Wired assumes politics will disappear when we try to cope with global warming’s aftermath.

Spencer’s article appeared in the same issue as Wired’s holiday gift guide; here’s my recommendation for Spencer.

Take the bailout of AIG. In a scathing report, Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, recently charged that the Fed “refused to use its considerable leverage” and instead paid 100 cents on the dollar to AIG’s trading partners. It was in stark contrast to how Obama’s crew handled the banks during the Chrysler bailout (WSJ via Epicurious Dealmaker):

President Barack Obama’s auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.

“And not a penny less,” said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.

The next day, Mr. Obama called the banker’s bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.

A few hours later, Mr. Lee called Mr. Rattner back. “We need to talk,” he said.

The banker’s about-face was a vivid example of the government’s tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country’s biggest banks.

Could we have done the same with AIG? Economics of Content says no — leverage doesn’t mean squat if you aren’t willing to use it.

This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which [a Bloomberg article] portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument — how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn’t willing to let AIG file for Chapter 11.

It’s an argument a lot of folks — including Geithner — have used to defend the Fed’s depending-on-the-kindness-of-strangers negotiating strategy.

But if threatening to let AIG fail wasn’t credible, the Fed had plenty of other leverage at its disposal. With Chrysler’s lenders, says investment banker & blogger Epicurious Dealmaker, the government

simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn’t like it.

What if they’d done the same with AIG? They could’ve brought all the parties to the table and said:

I have also been authorized to inform you that we are fully aware of the legal rights and fiduciary duties which constrain each of you to do what you think is best for your firms and your stakeholders. Under normal circumstances, we would be entirely supportive of these obligations. However, these are not normal times. Furthermore, and because these are not normal times, I would like to inform you that the government of the United States of America will take an extremely dim view of any individual or institution which chooses to pursue simply its own interest and its own duties without regard for the consequences to the broad economy, this country, and indeed the entire world. This government has a fiduciary duty too, gentlemen, and I am afraid that it trumps yours….

Counterparties: [Angry murmurs, outbursts, shock and outrage, etc.]

TED: Gentlemen, gentlemen, please. Let me continue. I am not finished….

And before we get to brass tacks, gentlemen, allow me to make a personal observation. I have known and admired many of you for many years, and I personally respect the power and dignity of each of your individual institutions.

But I am not your friend today. I am not your fucking friend. As far as you are concerned, you should view me as the Angel of Fucking Death. Because the time has come for each of you to do what is right for the greater good. It is time to think about survival, gentlemen—your own and that of your institutions—both now and in the future. For let me assure you that the decisions you make in this room today will be remembered. They will be remembered, gentlemen, as long as there is a United States of America. And if, God willing, we all come through this terrible crisis to a safer and more stable world, those people who helped us get there will be remembered. And, perhaps more importantly, those people and institutions in this room which did not help us, which put their own narrow personal and corporate interests before the interests of this nation and its people, will be remembered as well.

And let me tell you something, gentlemen, banker to banker: you do not want to be on that list. That list will be a world of pain.

Normally you don’t want the government to use its power in such a brazen way — it’s too dangerous. But when we’re saving Wall Street from a meltdown that they’d helped create by fighting for & then taking advantage of rules that let them rake in insanely large profits while driving the economy over the cliff? In that case, different rules apply. Think of it as tough love.

Because the alternative is not just that we get screwed today. If Wall Street walks away fat and happy, we will get screwed far, far worse next time. The lesson they’ll rightly take away is that they can do whatever they want and we will always bail them out.

Gretchen Morgenson, one of the smartest business writers around, asks what we’re going to do about the financial regulators who completely failed us.

Even though calamitous lending practices laid waste to the nation’s economy, surprisingly little has changed about how the financial arena operates and is supervised…. Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or are jockeying for increased responsibilities. The Federal Reserve Board, for example, wants to become the financial system’s uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max….

Yet those in the public sector ask us to believe that regulators who snoozed during the credit bubble will be alert to emerging problems on their beats when the next mania begins.

Her solution: a proposal by Prof. Edward J. Kane.

To bring accountability to regulatory performance, Mr. Kane suggests that financial supervisors take an oath of office in which they agree to perform four duties. First is the duty of vision, under which they would promise to adapt their surveillance practices to respond to the creative ways financial institutions hide their dubious practices. Regulators must also promise to take prompt corrective action, and to perform their work efficiently. Finally, there is what Mr. Kane calls the duty of “conscientious representation,” whereby regulators swear to put the interests of the community ahead of their own….

To ensure that regulators live up to the promises they make, Mr. Kane suggests that inspectors general at each agency be charged with regularly auditing the performance of financial overseers. A crucial component of those reviews would be exploring attempts by regulated entities to influence the officials who oversee them.

In doing so, we could strive for “perfectly virtuous” financial regulators:

“If real world supervisors were perfectly virtuous, they would make themselves politically and financially accountable for the ways in which they exercise their discretion,” he writes. “Perfectly virtuous supervisors would fearlessly bond themselves to disclose enough information about their decision making to allow the community or interested outsiders to determine whether and how badly they neglect, abuse, or mishandle their responsibilities.”

Maybe we could also get the regulators to wear togas?

Oaths and inspector generals vs. Wall Street is like me vs. Mike Tyson — not even a crack addict would have trouble figuring out who’s gonna win.

If you’re going to ratchet down Wall Street’s power to influence regulators, there are only 2 ways to do it: chop way back the size of Wall Street, or create checks and balances. The fact that someone as thoughtful and knowledgeable as Morgenson can’t see that — that she’d write a column about oaths and inspector generals — shows just how big the power blind spot is the conventional economic model.

It wouldn’t be an ideal health plan or the best bill you can imagine. But it’s no exaggeration to say that it would be the greatest progressive legislative accomplishment in four decades, and that’s nothing to sneer at.

In the middle of a fight where the other side is screaming that Obama wants to create death panels, it’s a little weird to argue liberals shouldn’t go ballistic over hints Obama is going to drop the public option. As Matt Taibbi said, “time to consider what good stuff might be in a public-option-less bill is after you’ve lost that battle, not before.”

But Yglesias’ argument also highlights a problem with traditional economic models. Yglesias says the current bills have a lot to offer:

most notably a set of consumer protections that would cap out-of-pocket health costs, guarantee access to preventive care, and prevent insurers from treating people well as long as they’re healthy only to start monkeying around when they get sick.. [The bills] force insurers to offer a defined set of benefits to all comers at a fixed price—no discrimination based on gender, health status, whatever. ..those of us who do have insurance would be spared the insurance-related anxiety that’s endemic in contemporary American life.

Let’s assume that such a bill gets passed and that insurance companies don’t manage to bury within the 1000 page bill loopholes that neuter the bill. The day after the bill passes, the insurance companies, will start working nonstop to create as many innovative ways around it as possible. They’d be fools not to — tweak the rules back in their favor and they win serious $$$.

What are the odds that liberals & progressives will be able to mobilize again and again to stop them?

Well, look at what happened with Wall Street. First they gutted the rules restraining their behavior while our side wasn’t really paying attention (some folks on our side saw it was happening but we didn’t do much about it). Eventually the new freedom they gained blew up the system and we had to bail them out, which really pissed off a lot of taxpayers. Despite this public anger, they’ve managed to skate virtually scot free. Why? Because there are no institutions that either act as a political check on them or help to mobilize resistance.

In contrast, look at Medicare. Sure, health care lobbyists have gotten all kinds of goodies for themselves into it (e.g., banning Medicare from negotiating lower drug prices). But when it comes to coverage? It’s so untouchable we’ve got right-wing folks at town hall meetings saying, ” Keep your government hands off my Medicare.”

That’s why the public option matters. It isn’t simply that it’ll create competition. Once created, it’ll act as a foci for organizing. Every time insurance companies try to mess with it – and they will, over and over – they’ll face a much, much tougher battle than they would otherwise have.

Traditional economic theories don’t handle these kind of economy-politics interactions very well. It’s one more reason we need a new way of thinking and talking about the economy.

Actually, according to BusinessWeek, Europe just showed us we’ve got a lot more power than you think. Europe’s in the middle of passing a bunch of new rules around Finance — and they won’t just affect folks in the Old Country.

U.S. firms will have to play by the new rules—or find a way around them. Otherwise, they risk losing a large pool of buyers, including European pension funds, insurers, and other big investors.

If anything, globalization gives us the power to set global rules if companies anywhere in the world want access to our markets. Take the case of mortgage-backed securities.

In May the European Parliament passed a plan that likely will force banks and others to maintain a 5% stake in the asset-backed securities they create, rather than selling them off completely. Lawmakers reason that firms with more skin in the game will adhere to strict underwriting standards; lax practices fueled many of the blowups in the bust. “European regulators want to make sure regulated institutions aren’t being used to offload risky securities,” says Rick Watson, managing director of the European Securitisation Forum, a London-based trade group.

The U.S. is mulling a similar law. Whether or not federal lawmakers pass it, U.S. firms may decide to keep a chunk of the investments anyway. If they don’t, their securities won’t sell in Europe, where investors owned more than $500 billion of U.S. asset-backed securities at the peak.

So yes, companies can threaten they’ll leave if we pass new rules. But if they want to sell to us? They can run but they can’t hide.

But in an article entitled “The Dubious Promise of Digital Medicine,” Business Week pours a big bucket of cold water on this enthusiasm. To understand why computerizing healthcare records is running into trouble, we’ll take a look at the problem using the three assumptions about the economy I explored in the last few posts.

People Aren’t Calculators

In theory, Healthcare IT should be able to radically reduce the number of medical errors. For example, with computerized records nobody has to decipher a doctor’s handwriting. In practice, the track record is mixed.

The Joint Commission, a nonprofit group that inspects and accredits 15,000 health-care organizations, … issued a warning in December about problems with complex health-tech systems. It cited one U.S. pharmaceutical database that found 43,372 medication mistakes, or about 25% of the total reported in 2006, involved computer technology. The problems included flaws in data entry, inadequate software, and confusing screens.

As I’m sure you know from painful personal experience, a lot of software is built by geeks who don’t pay attention to how people actually think, let alone what it’s like to use the software in a hectic place like a hospital. And if software doesn’t work the way people think, it can actually increase errors.

Take the experience of Dr. Mark Del Beccaro, chief medical information officer Seattle Children’s Hospital.

Del Beccaro soon became troubled by incidents of children suffering medication overdoses despite alerts from the Cerner software. He asked the doctors involved whether they had seen the alerts onscreen. “They told me, ‘I get so many alerts, I click through [them],’ ” Del Beccaro says. “They do become mind-numbing.”

In principle, alerts are a very good idea. If someone’s tired or distracted, an alert could save someone from, say, ordering a very dangerous drug combination. But people only have so much room in their brains to handle alerts. If the people designing the software don’t take this into account, constant reminders could actually increase errors.

Organizations Aren’t Calculators

Why doesn’t the market take care of this? Healthcare IT vendors who do a better job of adapting to users’ real needs should beat the ones that don’t. In the real world this isn’t happening. Why? Organizations aren’t calculators — or at least not simple ones.

Hospitals are very complex organizations, often with their own organizational culture and ways of operating. That means that a healthcare IT system has to be flexible enough to fit how each hospital works. As BusinessWeek says, this creates “a fundamental tension”:

Info tech companies want to sell mass-produced software. But officials at large hospitals say such systems, once installed, require time-consuming and costly customization.

BusinessWeek cites a 2005 Pediatrics article on what can happen when the organizational needs of healthcare IT vendors and hospitals clash.

Digital technology slowed treatment in several ways, the researchers concluded. One example: Doctors and nurses in the intensive-care unit were accustomed to ordering medications and tests while a sick child was en route to the hospital. The Cerner system required that orders be submitted only when the patient arrived, costing crucial time.

Even “one of health technology’s best-known advocates,” Dr. James M. Walker isn’t happy with how this tension is playing out:

Vendors such as Epic, Walker says, sell relatively rudimentary electronic tools and expect hospitals and doctors to assure accuracy and safety. “This can be very tricky,” Walker adds. “A lot of us are trying to say: ‘Look, let’s slow down.’ ”

Why don’t healthcare IT vendors build systems that are more flexible? Here’s my guess: it’s harder to build than an inflexible system. If you’re going to build a flexible system, you can’t just take a look at the needs of one hospital (i.e., the first client you get). You have to study what goes on in a bunch of hospitals – and you can’t leave the details up to geeks, you’ve got to bring in folks with squishier, people-centered skills that many IT shops don’t value. You also need a smarter design to build a flexible system; you can’t just bang it out.

Then there’s the dirty little secret that if a system is too flexible, the vendor is leaving money on the table. A flexible, well-designed system may cost a lot less to install and customize – good for the hospital, not so good for the IT vendor.

And if an IT vendor’s system isn’t flexible, it can actually help the vendor gain more business – if you buy an inflexible package, you may have a hard time getting it to play nicely with another vendor’s software. Take what happened at Dr. Walker’s hospital. After spending $35 million buying and installing Epic Systems, they ran into a serious problem during a pilot project.

[Errors] began appearing at a rate of several a week in the hospital’s psychiatric unit. “The pharmacy would interpret an order as one drug at one dosage, and the patients were ordered the wrong medications at different dosages,” recalls Jean Adams, a nurse in charge of the IT team. Fortunately, astute staffers discovered the problem after a few weeks and began verifying the computer drug orders using the phone. Full implementation of the Epic system was put on hold. Adams says Geisinger traced the trouble to incompatibility between a common pharmacy database and Epic’s system.

Epic CEO Judith Faulkner says the episode at Geisinger, and similar incidents at other hospitals, taught her company that physician orders and pharmacy records cannot use distinct technologies. “It doesn’t work when you mix and match vendors,” Faulkner says. “It has to be one system, or it can be dangerous for patients.”

In theory, the costs of not locking out other vendors and the hard work of creating a flexible system could be outweighed by winning more contracts — after all, they’d be a better deal for most hospitals. But good luck making that argument in a healthcare IT company. Companies aren’t rational calculators, and selling that kind of gamble to the Top Brass is going to be tricky. And if all your competitors are facing the same issues, everybody may implicitly decide they’re better off not deciding to compete based on flexibility.

Politics Are an Inherent Part of the Market

Given these challenges – and the fact that Health IT can cost big bucks – it’s not too surprising that the feds are pushing hard to reshape the healthcare ecosystem to support Healthcare IT. Obama’s stimulus plan tried to solve the financial challenges by giving hospitals big incentives to computerize their records.

There’s also a stick: The federal government will cut Medicare reimbursement for hospitals and medical practices that don’t go electronic by 2015.

But when it comes to overcoming the nonfinancial challenges of Healthcare IT, the government hasn’t stepped in yet. For example:

When health technology fails for one medical provider, there is no central mechanism for reporting problems to others who use it. The federal government collects and disseminates this kind of information on drugs and medical devices. But tech contracts routinely bar medical providers from disclosing systemic flaws.

The U.S. Food & Drug Administration has been considering whether to regulate health technology in the manner it oversees medication and implants. That decision now falls to the Obama Administration, which faces opposition from industry groups arguing that additional red tape would impede adoption of helpful technology.

Instead, Healthcare IT vendors have been pushing for leaving oversight with a nonprofit called Certification Commission for Healthcare Information Technology, which has a heavy vendor presence and is chaired by a former CEO of a healthcare IT vendor. How tough are its standards?

Sharona Hoffman, a professor of law and bioethics at Case Western Reserve University in Cleveland, says CCHIT’s product testing, typically completed in a single day, isn’t rigorous enough. In an article last December in the Harvard Journal of Law & Technology, she and a co-author faulted the group for telling vendors the testing scenarios in advance and for not conducting ongoing monitoring

Got that? When the commission tests these aircraft carrier-sized systems that cost $35 million a pop, they usually test them for just one day.

Healthcare IT vendors might have a shot at convincing DC to back off. Why?

… red flags raised by doctors and researchers haven’t gotten much attention in Washington, in part because the health-tech industry has forged strong ties to the President, his top medical advisers, and Republican heavyweights such as Gingrich.

Take the new White House healthcare reform czar,Nancy-Ann DeParle.

[She] recently stepped down after eight years as a member of [healthcare IT vendor] Cerner’s board of directors. A former administrator of Medicare and Medicaid during the Clinton Administration, DeParle worked from 2006 through 2008 as a managing director at CCMP Capital Advisors, a private equity firm that invests in health-care businesses.

Similarly, healthcare IT vendor CEO Glenn Tullman, who used to work out with Obama, served on Obama’s campaign finance committee and is also tight with Gingrich:

Shortly after the stimulus became law two months ago, Tullman and Gingrich hosted a Webcast for thousands of hospital officials and doctors promoting the financial incentives. Since then, Tullman has worked with a client, the University of South Florida Health system in Tampa, to seek $15 million in stimulus money to hire 130 e-health “ambassadors” who would pass out free samples of Allscripts’ prescribing software to physicians. If the funding comes through, the $50,000-a-year representatives would receive a two-week training course from Allscripts, though the marketers otherwise are supposed to be independent of the company.

Conclusion

Sometimes Healthcare IT works really well – and when it does, it can be a godsend. The VA, for example, has saved millions of dollars through health IT. And my new doctors all work in practices that have been recently computerized where not only can they easily pull up my info but they can also electronically send my prescriptions to my pharmacist, which means that by the time I get to the pharmacist, the drugs are ready.

But making healthcare IT work well enough to drive down medical errors and health care costs overall won’t be easy. I’ll leave the last word to somebody stuck in the middle of this mess:

“Most big health IT projects have been clear disasters,” says Dr. David Kibbe, senior technology adviser to the American Academy of Family Physicians. “This [digital push] is a microcosm for health-care reform….Will the narrow special interests win out over the public good?”

We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed. If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been — and as stupid as they’ve been.

This quote’s been getting a lot of traction in the blogosphere and the media. That’s because it’s from Charles Munger, Vice Chairman of Warren Buffett’s Berkshire Hathaway investment firm — a company that according to Bloomberg News “is the largest private shareholder in Goldman Sachs Group Inc. and Wells Fargo & Co.”

Munger says it’s going to be really hard to change the rules to bar these grotesque practices.

This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without. It will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization.

But if Munger’s firm is the biggest private shareholder in some of the biggest financial players, why’s he only talking about having Uncle Sam reigning in these players? Why isn’t he also fighting so shareholders like Berkshire Hathaway could nix this influence? For example,

Munger said the financial companies spent $500 million on political contributions and lobbying efforts over the last decade. They have a “vested interest” in protecting the system as it exists because of the high levels of pay they were earning, he said. The five biggest U.S. securities firms, only two of which still exist as independent companies, paid their employees about $39 billion in bonuses in 2007.

Even if we can somehow manage to change the rules, millions more will be spent to gut the rules. That’s how we got into this crisis in the first place. Shareholders can’t do anything about it today because although they “own” the company via shares, they don’t have the power that real owners do. Why not fight so shareholders can keep financial companies from spending millions to change the rules in ways that screw everybody else over? And fight so that folks like the rest of us, whose money is in 401(k)s and pension funds, can vote as to how 401(k) and pension managers use the “ownership” we have in financial companies to make sure they advocate for what we think is good for us. In short, create some checks and balances.

I can guess why somebody running an investment firm might not wanna go there. But the next time someone does another lovefest interview with somebody from Hathaway, maybe they ought to ask.

As [Kimberly-Clark] CEO Thomas Falk began a speech to an executive-education program at his alma mater, the Wisconsin School of Business, two Greenpeace activists switched his PowerPoint for theirs. Instead of a primer on Kimberly-Clark’s success, the audience saw photos of the Canadian boreal forests that supply the company’s wood, with before (lush trees) and after (a clear-cut moonscape) shots followed by a smiling Falk declaring, “It’s all business as usual.” After panicked organizers ordered everyone out (”There are activists in the building!”), the attendees trooped into a cafeteria where Greenpeace had placed menus for such delicacies as “songbird stir-fry,” noting that half the songbird species in North America migrate to the boreal forests that supply Kimberly-Clark.
…

The Greenpeace the public doesn’t know operates somewhat differently. A decade ago it formed a partnership with a German company to manufacture refrigerators that don’t use chemicals called HFCs as their coolant (HFCs are greenhouse gases, now responsible for 17 percent of man-made global warming but on track to contribute as much as carbon dioxide). Greenpeace first got China’s largest refrigerator-maker to produce Greenfreeze fridges, then one in Japan, then major Western manufacturers such as Whirlpool and Miele, with the result that 300 million Greenfreeze fridges are in homes worldwide. No sit-ins, no banners, no PowerPoint sabotage was required; just business deals. “If Greenpeace is going to ring the siren saying there is an [environmental] emergency,” says Amy Larkin, who directs the group’s Solutions campaign of working with businesses, “we better bring the ambulance. I’m proud of my colleagues who are climbing companies’ smokestacks to unfurl banners, but we need every kind of action.”

Greenpeace can’t say for sure that the possibility of smokestack climbing (and worse) makes companies more willing to cave to the group’s demands, but “what we hear over and over again, especially after a few drinks, is company people telling us, ‘We wouldn’t be talking to you if we weren’t scared of you’,” says Greenpeace research director Kert Davies. Even if the threat is merely implicit, pairing hard-core activism with opportunistic cooperation may be exactly what the environmental community needs right now. The world has been backsliding on climate change for decades, and even a global recession has made hardly a dent in emissions: atmospheric concentrations of carbon dioxide, the chief man-made greenhouse gas, rose 2.1 parts per million in 2008, the National Oceanic and Atmospheric Administration reported last week, essentially unchanged from the 2.2ppm in booming 2007. And, yes, the Environmental Protection Agency just took the first steps toward regulating carbon dioxide, but if you believe that’s going to cut emissions in time and be enough to avert expensive climate change, I have a nice bridge you might be interested in.
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The good-cop, bad-cop strategy has paid off. Coca-Cola, Pepsi and Unilever have all developed Greenfreeze technology for their vending machines and coolers; Unilever, maker of Ben & Jerry’s ice cream, alone has deployed 2 million ice-cream coolers worldwide, including 2,000 in Boston and Washington on a test basis. (The EPA has to rule that the technology is safe and effective—that the fridges keep food cold and don’t blow up, for instance—before Greenfreeze coolers can be rolled out commercially.) This year Wal-Mart began using a non-HFC refrigeration system in one of its Canadian stores, and is moving toward implementing the technology in the U.S., where its coolers are responsible for more greenhouse gases than its trucks. Greenpeace also got guitar makers, including Gibson and Fender, to press their suppliers to stop using 250-year-old Sitka spruces from Alaska’s Tongass National Forest for the instruments’ sound boards. As for Kimberly-Clark, Greenpeace has persuaded 20 colleges and 700 small businesses, such as mom-and-pop grocery stores, not to carry its products, and the company just introduced Scott Naturals, with some recycled fiber rather than just fiber from ancient trees. Score another for the bad cop.

But if a lioness was a business, she’d have another option. She could try to get a law passed discouraging gazelles from running so much — say, grass credits for sedentary gazelles. She could fund the Don’t Break a Leg Coalition, dedicating to promoting lioness-funded research that shows running is dangerous for gazelles — especially running very fast. She could meet with the editorial board of the Gazelle Gazette and convince its editors to write an op-ed, “Change Gazelles Can Believe in,” arguing that lionesses have become less violent — and that the differences between gazelles and lionesses was exaggerated to begin with. In short, she could increase her odds of succeeding by changing the rules.

Most economists try their best to ignore this reality. Sure, they’ll denounce tariffs pushed by the sugar industry. But they act as if the rules of the game “distort” the market. In doing so, they willfully avert their eyes from what we can see on the front page every day: politics are an integral part of markets, because politics set a large portion of the market’s rules.

And as soon as we say we want the market to be governed by real rules — we want courts and cops to enforce legal contracts, we don’t want our kids drinking toxic-laced milk, we don’t want our banking system to meltdown — it’s a whole new game. Because now every business has two moves they can make: play by the rules, or try to change the rules.

When we pretend that isn’t so, we get the “deregulation” that drove our financial meltdown. The financial “deregulation” movement was Wall Street’s version of the Don’t Break a Leg Coalition. Republican and Democratic politicians and Wall Street players like Robert Rubin said, let’s unleash the power of the market by getting rid of those pesky regulations. But getting rid of the regulations that create an implicit safety net for banks that are too big to fail? No way. The result: the same thing you get if you told a teenager they can do whatever they want and you’ll bail them out if they get into trouble.

If politics are intimately intertwined with the market, what can we do to stop the lionesses from changing the rules so they win and everybody else loses? Take a page from the Founding Fathers — use checks and balances. Shape the economy so there are economic actors with the power needed to keep the lionesses in check.

In future posts I’ll give some examples of how checks and balances might work in the economy, particularly in Finance. For now, I’m going to answer two questions this Principle might raise for you.

First, instead of using checks and balances, can’t we count on good rules and smart regulators to protect us? No, because the politicians who write the rules and the regulators who enforce them aren’t independent economic actors. They are completely dependent on others for the resources they need to survive, and that means they can be easily threatened or blackmailed. If you don’t believe me, just look at the supposedly “independent” Federal Reserve. As the meltdown demonstrated, Wall Street’s had their ear; the Fed sees Wall Street as customers to take care of, not potentially dangerous creatures to keep in check. The only way to keep the lionesses in check is to have actors who have their own resources that the lionesses can’t easily take away.

Second, am I saying we need checks and balances because corporations are evil? I don’t think that’s a useful way of looking at the economy. Sure, there are CEOs who are sociopaths. But that’s not the real problem we are facing. The problem isn’t that Wall Street is run by evil, greedy bastards, it’s that given the way the economy inherently works, it’s in their self-interest to try to bend the rules in their favor. Wall Street players are no more evil than lionesses; both are just creatures of an ecosystem. And believe me, if lionesses could influence the rules of their ecosystem like Wall Street can, they would (I’ve asked).

It isn’t just bankers whose power we need to keep in check. Would you really want to live in an economy where Live-Simply, Tread-Lightly-on-the-Earth middle-class Greens were the only ones with the power to shape which products are produced and the lives we live? Not me (although at least the reeducation camp I’d be sent to would be LEED-certified).

Political power is an inherent, inextricable part of an economy. We can hide from this truth and suffer the consequences. Or we can acknowledge this truth and strive to ensure, as Montesquieu said, that “power ought to serve as a check to power.”