Teeth for the Watchdogs

I’ve been a fan of Inspectors General for decades – even though I was once the subject of an IG report. The 30 most senior Federal Inspectors General are appointed by the President and confirmed by the Senate, and can only be fired by the President. They report both to the Senate and to the head of their department or agency. Their job is to find and bring to light mismanagement and (the iconic) “fraud, waste, and abuse.” Interestingly, the US Air Force Inspector General also runs a Complaints Program.

 You don’t have to be a fan of Stafford Beer or grok his Viable System Model and “System Three” to grasp the value of an individual or office whose mission is taking problems directly to the head of a large organization. It does help, though, to have spent time in the innards of a large organization wondering whether the bosses really understand what’s happening down below. Information doesn’t flow upwards very easily “through channels.”

Of course, if your IG reports to the folks who fund your agency, it’s not difficult for him to get your attention: “If you have them by the budget, their hearts and minds will follow.” But what if an office is supposed to bring problems to light but can’t get anyone’s attention?

A recent WaPo story, Subway Safety Panel Foiled by Constraints, highlights this problem. The Tri-State Oversight Committee is responsible for safety on the DC area’s subway system (Metro), but has “no employees of its own and no dedicated office, phone or Web site. It borrows space for its monthly meetings, which officials said no member of the public has ever attended.”

In June, 2009 a subway accident killed nine and injured 80. The previous April the TSOC (“Tea-Sock”) sent Metro a nice letter describing a similar incident and asked for a report, but the Post article continues that “The committee has no power to demand a response and, to date, the committee says Metro has made no formal report to it on the incident.”

Hold your breath and turn blue, Tea-Sock!

Driven by the publicity surrounding the fatalities, the Congress is now considering shifting safety regulation to the Federal Transit Administration, which funds American subway systems. That should do the trick. But it is “a day late and a dollar short.”

According to the Post, “Some state-level regulators have far more authority. For instance, the subway system in San Francisco, which is subject to muscular oversight by state regulators, discovered problems with flickering circuits and was directed to install a collision-avoidance backup system decades ago.” Decades ago…

A recent Bloomberg News story, Pequot Trading in Google, Cox, Premcor Sparked Warnings to SEC, highlights a different watchdog problem. Rather than being a toothless watchdog like Tea-Sock, the Securities and Exchange Commission was (charitably) “distracted.” The SEC received at least 44 reports of possible insider trading by a hedge fund, Pequot Capital Management Inc. These reports weren’t from disgruntled individuals: “The spreadsheet shows that the SEC received alerts from the New York Stock Exchange, the American Stock Exchange, the Chicago Board Options Exchange and the NASD, the brokerage regulator now known as the Financial Industry Regulatory Authority, or Finra.” That’s some list of watchpuppies.

“Systems problems” abound here, but there’s also a technology problem or two. According to the article, the market surveillance analysts use computer software to spot suspicious trades. Their reports, however, average 123 days to prepare and forward to the SEC. Since I learned years ago that only 5% of “report languishing time” involves actual work, the watchpuppies need to learn to move their work from desk to desk a bit faster – possibly electronically?

There is also an apparent technology imbalance. According to a National Public Radio story, the trading firms are using supercomputers and “flash trading” to place orders in split seconds. Split seconds vs 123 days: it’s hard to see how the watchpuppies can keep up!

The same Bloomberg story says that in 2006 the SEC received 514 surveillance tips but brought only 29 cases forward. A 2007 report by the General Accountability Office faulted SEC for its oversight of referrals. There is also widespread concern that the SEC has been too cozy with its regulated industry; a former SEC attorney has claimed that his supervisors blocked him from investigating Pequod. Does the name Bernie Madoff ring a bell?

Since the SEC is certainly subject to corruption (where do the SEC’s staff go after working there?), and the SEC doesn’t report to anyone who funds the stock exchanges, we need a better feedback mechanism to control insider trading.

I’d like to suggest the following:

(1) The referrals from the watchpuppies shall be made public.

(2) If a lawsuit is brought alleging an instance of insider trading, a published relevant referral shall be a rebuttable presumption of guilt.

That shifts the burden of proof to the companies doing the trading. Given their profits, I think they can handle it.

F’rinstance: In December, Bank of America okayed paying Merrill Lynch executives $5.83 billion in bonuses after they’d driven Merrill into the ditch. That’s almost twice what it would cost to pay off $200,000 in loans for each of America’s graduating medical students last year.

Ashby’s Law and “Phase Four Souvlaki”

When I lived on Capitol Hill forty years ago, another odd-ball from the Marine Corps Reserve, Larry Feldman, and I frequented a certain Greek restaurant for souvlaki. Sometimes we had other things, but the souvlaki was great.

During the Nixon Administration, inflation got out of hand, and the President imposed Wage and Price Controls (always capitalized!). A 90 day freeze somehow became a thousand days of monkeying with wages and prices, known as Phases One through Four. Wikipedia will tell you more than you want to know, including: “The controls helped Nixon to re-election, but afterwards were seen to be a total failure; meat disappeared from grocery store shelves and Americans protested wage controls that didn’t match up to inflation.” And, “In these phases, the controls were applied almost entirely to the biggest corporations and labor unions, which were seen as having price-setting power. However, 93% of requested price increases were granted and seen as necessary to meet costs.”

My friend Larry and I had a phrase that captured the absurdity of Wage and Price Controls, at least as imposed by Nixon. We talked about “Phase Four Souvlaki,” which had gotten smaller and smaller. It will come as no surprise to you to learn that as prices for meat and sour cream went up, the size of the souvlaki serving went down, since its price was “frozen” by the wage and price controls. Duh!

I learned later that this is not only a lesson in feedback loops at the wholesale and retail levels, but also a great example of Ashby’s Law of Requisite Variety!
The government simply had no chance of enforcing its wage and price controls! How many inspectors do you think it would have taken to weigh portions at all the restaurants across America each day? You can’t get there from here.

Wage and Price Controls haven’t been tried across the United States since then, but I’ve no idea whether they’ve been forgotten or whether someone somewhere learned about Ashby’s Law.

Even though Ross Ashby was still in school when Prohibition in the United States ended, some observers of Prohibition (always capitalized) have observed the “Ashby’s Law” problem.

As noted in Wikipedia, “A total of 1,520 Federal Prohibition agents (police) were given the task of enforcing the law.” And also, “Many of Chicago’s most notorious gangsters, including Al Capone and his enemy Bugs Moran, made millions of dollars through illegal alcohol sales. By the end of the decade Capone controlled all 10,000 speakeasies in Chicago and ruled the bootlegging business from Canada to Florida.”

Fifteen hundred agents? Ten thousand speakeasies in Chicago alone? Gimme a break!

Oh, and did I mention “unintended consequences?” As John D. Rockefeller, Jr., said, “When Prohibition was introduced, I hoped that it would be widely supported by public opinion and the day would soon come when the evil effects of alcohol would be recognized. I have slowly and reluctantly come to believe that this has not been the result. Instead, drinking has generally increased; the speakeasy has replaced the saloon; a vast army of lawbreakers has appeared; many of our best citizens have openly ignored Prohibition; respect for the law has been greatly lessened; and crime has increased to a level never seen before.”

Are there lessons here for those that decide how governments tackle problems? That is, the designers of government?

WAPO: “Rain Forces Open to Shut Down Early”

This is a headline on the front page of a section of today’s Washington Post. Can you guess which section?

Reading this I thought of Paul Pangaro’s wonderfully insightful “Notes on the Role of Leadership and Language  in Regenerating Organizations,” what Paul calls his “Little Grey Book.”

Paul says that every organization creates its own language. This language facilitates common understanding within the organization, but it also creates barriers inhibiting understanding of the world outside, as well as understanding by the world outside.

Needless to say, the future is outside the organization. If your organization can’t “see” (understand) the road to the future, “you can’t get there from here.” Does General Motors ring a bell?

And the larger the organization, the less opportunity each individual has to interact with anyone outside the organization. Imagine marbles on a saucer vs marbles on a platter: what percent of the marbles touch the edge? And government has some of the biggest platters in the business!

When I worked in the Pentagon, we used to joke that the reason we used so many acronyms in conversation was that without them the workday would have been ten hours long, not eight. (Actually we said ten days not twelve; that’s another Pentagon joke: working a half-day meant only twelve hours!)

This insight of Pangaro’s is only one of a great many; you (or I!) could profitably spend many hours reading his work at www.pangaro.com. We met around the meetings of the American Society for Cybernetics. At the annual conferences, one asked each friend, “What has become obvious to you since last we met?”

Paul Pangaro always had the best answers. He still does.

(BTW, the headline was from the sports section. “Open” is a golf tournament.)

Unintended Consequences (and Jay Forrester)

Today’s Washington Post reports that General Motors is likely to be building more cars overseas after it’s restructured (see www.washingtonpost.com/wp-dyn/content/article/2009/05/07/AR2009050704336.html).

The lead paragraph: “The U.S. government is pouring billions into General Motors in hopes of reviving the domestic economy, but when the automaker completes its restructuring plan, many of the company’s new jobs will be filled by workers overseas.”

And later, “Essentially in control of the company, the president’s autos task force faces an awkward choice: It can either require General Motors to keep more jobs at home, potentially raising labor costs at a company already beset with financial woes, or it can risk political fury by allowing the automaker to expand operations at lower-cost manufacturing locations.”

This will likely happen when Fiat takes over much of Chrysler, leaving the United Auto Workers with a large stake in a company who’s “salvation” lies in eliminating the jobs of their members.  How fun.

This is viewed by the media as “ironic,” but in truth it’s an excellent example of what Jay Forrester of MIT explains in a memorable chapter of Urban Dynamics (1969) – unintended consequences resulting from intervening in the workings of complex systems. If you “push” on a complex system, it is quite likely to react in EXACTLY the opposite direction than you intended.

A city is a complex system. An industry is a complex system. Economies are complex systems. Countries are complex systems.

The Amazon.com listing of Urban Dynamics is a good place to explore – it lists 100 books that refer to it.

Another is Forrester’s wikipedia page.

It starts: Forrester was born in 1918 on a cattle ranch near Anselmo, Nebraska, in the middle of the United States. His early interest in electricity was spurred, perhaps, by the fact that the ranch had none. While in high school, he built a wind-driven, 12-volt electrical system using old car parts — it gave the ranch its first electric power.[1] After finishing high school, he had received a scholarship to go to the Agricultural College. Three weeks before enrolling, he realized a future of herding cattle in Nebraska winter blizzards had never appealed to him. So instead in 1936 he enrolled in the Engineering College at the University of Nebraska to study Electrical engineering. As it turns out this study was about the only academic field with a solid, central core of theoretical dynamics.[2].

After finishing the University in 1939 he went to the Massachusetts Institute of Technology, to become a research assistant and eventually spend his entire career. In his first year at MIT he was commandeered by Gordon S. Brown who was the pioneer in “feedback control systems” at MIT. During World War II his work with Gordon Brown was in developing servomechanisms for the control of radar antennas and gun mounts. This work was research toward an extremely practical end that ran from mathematical theory to the operating field. Experimental units were installed on the USS Lexington, and, when they stopped working, he volunteered to go to Pearl Harbor in 1942. He fixed the problem when the ship sailed off-shore during the invasion of Tarawa.[2]

That’s an intro that makes the entry hard to close! Last I knew, Forrester is still alive – more about that later.

The point here is that if you hope to design a governmental intervention that will have its desired effect, you’re in deep and dark waters – there are a lot of unintended consequences waiting for you! Like growing old, designing government is not for sissies!

As one f’rinstance, would YOU like to be in charge of redesigning how government(s) regulate the finance industry?

Have you noticed that since we discovered that some financial institutions are “too big to fail” many of them have gotten bigger, by swallowing their smaller, weaker cousins?

Does that result make the financial system more stable? Stay ‘chuned…

Now is the time for all good cyberneticians to come to the aid of the country…

Now is the time for all good cyberneticians to come to the aid of the country…

First, in a recent article in the New York Review of Books (December 4, 2008), George Soros (GEORGE SOROS!!!) invents a new term, “reflexivity,” for “the two-way circular connection between market prices and the underlying reality.”

Evidently George Soros has never heard of “positive feedback.”

Second, the Economist of November 22, 2008, has a “leader,” or editorial, entitled “No time to waste,” that talks about “automatic stabilizers.”

Evidently the Economist has never heard of “negative feedback.”

Sadly, if you either Google “automatic stabilizer” or look it up in Wikipedia, you find a lot of references, and a quick look uncovered NONE of them that mention “negative feedback” or cybernetics, or anything that looks like a scientific reference beyond economics, he said dismally.

I even found an OECD paper on automatic stabilizers (“The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond”, by Paul van den Noord, OECD Working Paper No 230, 2000). A quick review disclosed formulae, but no references to feedback, cybernetics, etc. Sigh.

This is not news!

“Contemporary cybernetics began as an interdisciplinary study connecting the fields of control systems, electrical network theory, mechanical engineering, logic modeling, evolutionary biology, neuroscience, anthropology, and psychology in the 1940s, often attributed to the Macy Conferences.”

WHAT have cyberneticians been doing these past sixty years? Flying together in tight (feedback) loops, I guess.

I don’t know whether to cry or to strangle someone.