Service industry deregulation: corporate crime and tougher disciplines on the poor

Steve Suppan
Institute for Agriculture and Trade Policy

Although criminal activity within the private service industries has been an important factor in the current recession, the service industry continues to form the basis for the U.S. negotiating position on the General Agreement on Trade in Services. These industries continue to target public service assets for takeover and to globalize their practices, even as new details of scandal emerge daily. President Bush’s plan for assisting the poorest in the U.S. imposes a range of tough new regulations that require welfare assistance beneficiaries to work more in exchange for fewer benefits.

Corporatederegulation and crime

Sincethe last Social Watch report, there have been almost daily reports in the U.S.press about the criminal indictment of, or civil penalties or administrative lawrulings against one or more of the corporate advisors to GATS. The market share captured by lawbreakers and rule violators in financialservices, energy services, telecommunications, etc, is huge. Even larger weretheir “mis-stated” profits during the 1990s, brought to light by thecollapse of Enron and other firms.

“Overthe past six years, Business Weekreports, investors have lost USD 200 billion as a result of 783 audit failuresat firms that overstated profits, and such incidents doubled from 1997 to2000.”[1]The guilty pleas, alleged crimes, the bankruptcies and federal rule violationsrun such a wide gamut that no less a services liberalization proponent than theBrookings Institution has tried to calculate the cost to stock market wealth ofthe crisis in corporate governance. Still to be calculated are the costs toemployees, customers, taxpayers, retirees, governments and those who have losttheir jobs in the United States due to corporate malfeasance. And this is to saynothing of the transnational impacts of misreporting the alleged benefits ofcorporate deregulation in fueling World Bank privatizations in the 1990s.

Nogovernance crisis here

Despitethe dubious provenance of much corporate advice to U.S. trade negotiators onGATS, there has been no public discussion about the “trade policy governancecrisis”  among those who promoteservice liberalization and corporate self-regulation. The summary of the U.S.proposal for GATS still advocates global “commercial presence” that restricts government regulation with “least burdensome” to tradecriteria.Many of the majorfirms advocating such disciplines have had service creation and deliverypractices which, abetted by government deregulation, did much to bring about thecurrent U.S. economic recession. For example, of the financial service industry,William Greider has written, “[t]he merger of commercial banks and Wall Streetinvestment houses, ratified by Congress in 1999 and legalizing the new financialconglomerates like Citigroup and J.P. Morgan Chase, has already produced thevery scandals of self-dealing and swindled investors that lead to the legalseparation of these two realms seventy years ago in the Glass-Steagall Act.”[2]

Yetthere are no legislative proposals that would prevent the kind of businesspractices certified by banks, accounting firms and lawyers in their dealingswith Enron, Global Crossing, WorldCom and others as “legal” and“normal.” Beyond supporting new laws and initiating investigations toprosecute the crime that is most difficult to prove—fraud—the BushAdministration has not yet been able to overcome its antipathy to enforcinggovernment regulation on corporations. The U.S. administration even attempted toweaken non-binding language on corporate accountability in the PoliticalDeclaration of the World Summit on Sustainable Development. Resistance to reformis particularly fierce in the financial services industry, where non-compliancewith federal conflict-of-interest rules has been facilitated by chronicunder-funding by Congress of the Securities and Exchange Commission (SEC) andother regulatory authorities, in response to industry pressure. Firms aredesperately seeking to strike deals with the SEC to avoid a fundamentalrestructuring of the financial services industry.

Insteadof reforming services liberalization disciplines and objectives, tradenegotiators are seeking to “lock in” advantages for their services industryclients. At the same time, they are ignoring the negotiators’ equivalent ofcorporate due diligence, contained in the GATS requirement in Article XIX.3, foran “assessment of trade in services in overall terms and on a sectoralbasis.”[3] Apparently, the negotiating strategy is to “lock in” new GATSdisciplines irreversibly before the extent and causes of the financial rotbecomes a matter of public record in lawsuit filings.

Inflexibilitytowards the poor

Notall service industry deregulation, of course, has had criminal consequences.Indeed, proponents of government deregulation continue to see regulation as athreat to prosperity: “The only significant current threat to continuedderegulation is a consequence of the Enron collapse—the threat of increasingregulation of accounting, corporate governance, and securities.”[4]This ideology maintains a strong grip on the U.S. government. This is not initself criminal, but it has deepened the economic hardship facing millions ofAmericans. For example, Federal Reserve Chairman Alan Greenspan’s refusal todiscipline stock market volatility and speculation by toughening investorborrowing requirements, was deeply harmful to the economy.

Thereturn of stock indexes to 1998 price levels seriously eroded many retirementsavings, and has contributed to an increase in unemployment, estimated in August2002 at 5.7% of the work force. This understates the extent of the problem,however, because government unemployment data are based primarily on those whofile with the government for unemployment benefits. Due to cutbacks inunemployment insurance, the number of workers who exhaust their benefits beforethey can find work has doubled in the last two years.[5]The increase in unemployment and consequent decrease in consumption has hadsevere consequences for state governments that responded to corporate lobbyistsby cutting taxes by USD 35 billion from 1993-1999. The 50 U.S. state governmentsnow find themselves without sufficient reserves to supply basic public servicesduring a recession.

Notsince the tax cuts of the Reagan Administration have state governments been insuch bad financial shape. “State fiscal conditions, already in decline priorto the September 11 attacks, are rapidly approaching a state of crisis.According to the National Conference of State Legislatures, revenues in 43states are below estimates and 36 states have already planned or implementedcuts in public services.”[6]Yet these programs—providing food, cash, health care and child care programsto low-income people—are among the most efficient means to ensure consumption,to foster state economic activity and to reduce economic volatility. On theother hand, “trickle down” approaches, such as cutting taxes to high-incomepeople and corporations, are very inefficient at generating economic activity,especially among low-income people.

Thestates’ budget crisis will be exacerbated by the massive Bush Administrationtax cut, passed in June 2001 legislation, that will start to cut federal revenuedistributions to states this year and accelerate thereafter—unless repealed.Successful service industry lobbying against taxes on most services has alsohurt state revenue, since the average state depends on sales taxes for about 40%of their revenue.

On26 February 2002, the Bush Administration revealed its plans for reauthorizingthe 1996 Personal Responsibility and Work Opportunity Reconciliation Act. The1996 welfare law required parents to work in order to receive welfare benefitsfrom state programs, but the reduction in state welfare caseloads decreased thenumber of beneficiaries under “workfare” programs to 6.5% of total welfarerecipients. The Bush plan will require 70% of state beneficiaries, largelysingle mothers with children, to work 40 hours a week for wages that areunlikely to cover the increased cost of childcare. The Bush plan will continueto enforce tough welfare compliance rules, cutting off benefits to families if aparent misses an appointment with a welfare caseload worker. While the BushAdministration demands “flexibility” in corporate regulation and the abilityof government managers to hire and fire, it is quite inflexible when dealingwith the poorest U.S. citizens, residents and immigrants.

The“tough love” approach to poverty in the 1996 welfare law dropped the overallwelfare caseload by 50% between 1996 and March 2001.[7]However, a government report submitted to Congress on 3 June 2002 showed thatonly a third of the drop was due to families earning enough to rise above the(very low) federal poverty thresholds.[8]Other reasons for the caseload decrease included the disqualification ofrecipients because of rule violations and caseworkers failing to inform the poorof available benefits. According to a 1999 study, a further 20% of the caseloadhad simply “disappeared.”[9]For those who remained on welfare programs, by January 2000, cash and foodassistance benefits “for a typical family of three [i.e. a mother and twochildren] had fallen to less than half the poverty guideline in all but sixstates.”[10]These benefits are likely to fall further as a result of state budget crises andthe tighter Bush Administration restrictions on benefits.

Ahuman rights budgetary perspective

Asthe official number of poor increases, states have been given greaterresponsibility, but fewer resources to supply basic services to the poor.Attempts to privatize public services targeted to help the poor have beenlimited by lack of interest from the private sector: the services are notlucrative enough. The last two decades have seen an erosion of public sectoremployment as federal, state and municipal governments grant private contractorsthe more profitable service investment opportunities, such as transportation toand from wealthy suburbs, while leaving less lucrative markets to be serviced bythe public sector. Even firms with multiple federal rule violations, poorperformance records and criminal convictions are allowed to bid to take overpublic assets!

Privatizationhas been sold to government managers as a way to reduce costs associated withbetter wages, health benefits and pensions for public sector workers,particularly for those without college degrees, when compared to private sectorworkers in the same categories. One study has shown that “for women withoutcollege degrees, occupations ‘at risk’ for privatization constitute 63.9% oftheir public sector jobs, such as health care and child care workers, foodservice employees, and clerical and administrative staff.”[11]Privatizing these modestly paid public sector jobs and withdrawing their healthand pension benefits might save money short term in service delivery, but pushworkers closer to the poverty line in private sector jobs without benefits.According to 1998 government figures, about 69% of public sector jobs had healthinsurance, compared to 47% in the private sector.[12]Just one health emergency could push such newly privatized workers into poverty.The U.S. Census Bureau reported on 30 September 2002 that “an estimated 14.6%of Americans—41.2 million—went [health] uninsured in 2001, up from anupwardly revised 14.2% or 39.8 million in 2000.”

Incontrast to the twenty-year old drive to privatize the delivery of potentiallylucrative public services, there is a new and small movement to analyze thedelivery of public services from a human rights perspective. In an August 2002 report, the United Nations High Commissioner for HumanRights warned that the liberalization of trade in services proposed in GATScould make it impossible for governments to fulfill their human rightsobligations in the delivery of public services. High Commissioner Mary Robinson urged the WTO Secretariat and members tohonor the GATS commitment in Article XIX.3 for an assessment of liberalizationimpacts in services and to “allow the maximum flexibility to developingcountries to withdraw liberalization commitments.”[13]

Thereis no indication that major WTO trading powers intend to honor the GATS rule forassessment prior to demanding commitments. However, there are other human rights initiatives on public servicedelivery that may have better prospects of success, at least at the state andmunicipal level of government. One approach has been to analyze governmentbudgets in terms of the governments’ obligations to comply with human rightscommitments. The advocates of bringing a human rights framework to budgetformulation and analysis are well aware of opposition to their project,particularly that of “U.S. exceptionalism,” i.e. the doctrine that lawsapplying to all other governments do not apply to the United States.Nonetheless, it is hoped that if a human rights framework can be adopted inbudgets of those countries that have ratified the United Nations Covenant onEconomic, Social and Cultural Rights, such adoption might have a civilizingeffect on the U.S. government.

Notes:

[1] David Moberg, “Enronomics 101: Business as Usual in the Disinformation Economy,” In These Times, 4 March 2002, p. 15.

[2] William Greider, “The Enron Nine: Wall Street’s Most Prestigious Firms May Have Been Involved in a Ponzi Scheme,” The Nation, 13 May 2002.

[3] Chakravarthi Raghavan, “GATS talks without mandatory assessment?” Third World Economics, No. 282; 1-15 June 2002, p. 2-4.

[4] William Niskanen, “Regulatory Change over the past Quarter Century,” Regulation (Summer 2002), Cato Institute at http://www.cato.org/pubs/regulation/regv25n2/regv25n2.html#features

[5] Wendel Primus and Jessica Goldberg, “The August Unemployment Rate Masks The Severity of the Downturn and the Problems of Those Exhausting Their Unemployment Benefits.” Center on Budget Policy Priorities, 16 September 2002 at http://www.cbppp.org/9-13-02ui.htm

[6] Kevin Carey and Iris J. Lay, “States Are Cutting Low-Income Programs in Response to Fiscal Crisis: Less Counter-Productive Options Are Available,” Center on Budget Policy and Priorities, 17 January 2002 at http://www.cbppp.org

[7] “Welfare Reform: After Five Years, Is It Working?” National Organization of Women Legal Defense and Education Fund, 2002 at http://www.nowldef.org/html/issues/wel/welfareworking.shtml

[8] “Government Data Show Welfare Reform Failure,” National Organization of Women Legal Defense and Education Fund, 17 July 2002 at http://www.nowldef.org/html/news/pr07-17-02.shtml. Poverty thresholds, which define poverty assistance benefits, were established by a 1964 poverty formula that Congress has refused to revise to reflect current costs of living.  Concerning U.S. poverty calculation methodology, see Steve Suppan, “United States,” Social Watch, No. 3, 1999, p. 204-207.

[9] “Welfare Reform: After Five Years, Is It Working?” Op. cit.

[10] Ibid.

[11] Annette Bernhardt and Laura Dresser, “Why Privatizing Government Services Would Hurt Women Workers,” Institute for Women’s Policy Research, 2002, at http://www.iwpr.org

[12] Ibid.

[13] Cited in Charkravarthi Raghavan, “GATS liberalization may conflict with human rights obligations,” Third World Economics, 16-31 August 2002, p. 2.

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