Steven Pearlstein

Washington Post columnist Steven Pearlstein was online Wednesday, June 4 at 11:00 a.m. ET to discuss how competitive markets can sometimes degenerate into self-destructive "arms races" that produce no winners and leave everyone worse off. These "races to the bottom" explain why smart people made stupid mortgage loans, why unsuccessful CEOs are overpaid and even why Scott McClellan lied as White House spokesman.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.

A transcript follows.

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Danvers, Mass.: Is the only solution a revolt of the voters? Shouldn't we prefer an institutional mechanism that forces the collaboration you mention? At bottom, do we rely on getting lucky that our leaders may turn out to be rational, dispassionate, public spirited people?

Steven Pearlstein: I think it is cultural and political. You can't pass a law saying no spin. What you can do, however, is make it socially unacceptable and politically dangerous for top government officials to spin, manipulate, shade the truth. In other words, just like likeability in the U.S. is an important trait that candidates have to have to succeed in politics, candor and truthfulness has to assume the same importance. And those qualities need to be defined broadly: it means not only not lying in a technical sense, but much more than that. It means putting things in the right perspective and not making small points into big ones or minimizing the importance of big issues and factors and problems. It means talking frankly about tradeoffs and the cost and benefits of doing things. It means not playing budgetary games. It means not personalizing policy differences. It means giving accurate assessments of where things stand, the good and the bad, the disappointments as well as the successes. It means sharing with the public some of the nuances of things rather than making everything seem black and while. It means distinguishing the things we know to be true with things on which experts disagree. Anyway, you get the idea.

The press here can play a big role, it seems to me. We need to legitimize politicians who practice this kind of politics and governance, and protect them, while either criticizing and ignoring those who practice the politics of manipulation and obfuscation and lies. That's a very legitimate role for us, and it should be applied evenhandedly to people at all points of the political spectrum.

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McLean: Didn't the U.S. win the Cold War in large part because the arms race bankrupted the Soviets? Don't sports teams win championships all the time after spending tens (or hundreds) of millions on superstarts? Hasn't Best Buy done very well for itself by reducing the margin on its flat screen TVs, and making up for that diminution on volume?

If you're already the strongest player in a given field, then perhaps the arms race suits you just fine.

Steven Pearlstein: That's a very interesting point. And that has been the strategy followed by many of the strong players in lots of markets. But you have to be careful about saying its socially useful in all cases.

Let's take the example of the flat screen TVs. Right now, that looks like it is a great outcome for consumers, which is really the most important test. But if Best Buy winds up driving every other retailer out of business and gains a legal monopoly in the market for electronic equipment, then that wouldn't be optimal for consumers in the long run, would it?

And in the case of the salary arms races in sports, if the results are ever higher ticket costs and need for public subsidies for stadiums and increasing gaps between what the superstars make and everyone else, then it is not clear that there is a good outcome. Just as it is not clear there has been a good outcome in the arms race in political deception and manipulation.

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Arlington, Va.: Good Column, Steven. I think the Saudis are heeding your advice and refusing to get into a competative race to the bottom over their one and only source of national income. Did you see this article?

http://www.business24-7.ae/Articles/2008/6/Pages/06042008_9c3b2fe49a4a41b6b505463693ecd67a.aspx

Here is a quote:

"Saudi Arabia's Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices, Saudi media reported."

"He will tell the Council that keeping sufficient oil quantities underground is a good investment for the future as oil prices will then be higher he will argue that this will be better than producing more oil and generating financial surpluses on the grounds these surpluses are causing inflation."

Steven Pearlstein: Obviously, there can be a real danger when competitors collaborate, as in price fixing cartels, which is what OPEC is. And that's not the kind of collaboration I'm talking about. Competition mostly works for everyone's benefit. But there are limited number of instances when it doesn't, and when competition generates a less than socially-optimal outcome. Those are what I was pointing out today.

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Manotick, Ontario: Sorry Stephen, but your column reeks of "stupidomics". Wasting time discussing competition in an economy where at least 80 percent of the transactions are simply faux competition reeks of the flat earth society.

Thank you.

Steven Pearlstein: What planet are you living on? 80%? Trust me, I lived in Ontario for a couple of years, and that's not anywhere near correct.

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Silver Spring, Md.: Very insightful article as usual Mr. Pearlstein. However I would note that Mr. McClellan's "culture of deception" is not a Washington phenomenon but a Republican creation. In its modern form it begin with Ronald Reagan and Supply Side economics, tax cuts creating record deficits, and especially that the "deficits don't matter." During the Clinton years it was Whitewater, Monica Lewinsky, and impeachment, three non events spun by Republicans.

With the Bush administration the list of lies (excuse my use of the "L" word) is endless, highlighted by the war on Iraq and the Reagan rerun of tax cuts creating record deficits which don't matter. Can you think of a single, comparable lie (opps, that "L" word again") from the Democrats?

Steven Pearlstein: I disagree. Both parties have been moving in this direction for some time (need I mention Lyndon Johnson and the Vietnam War, Richard Nixon, Reagan and Iran Contra). But what's new is that since the Reagan and Clinton administrations, it has been part of the everyday strategy of governing in all areas, and it has been very corrosive. We know this because people say they no longer believe what they hear from government or government officials, which wasn't always the case. Mike Mansfield didn't lie or spin Hugh Scott didn't lie or spin. Tip O'Neill didn't lie or spin. Jimmy Carter didn't lie or spin. Frankly, I don't think George Bush Sr. lied or spun. Bill Clinton himself in his first term was a pretty straight shooter, although in time the people around him became master spinners.

This isn't a black and white thing, by the way. Obviously, people in politics and government, like in every arena, will try to put the best face on what they are doing and the worst face on the arguments against them. But there need to be hashmarks and limits to that, with big penalties for rank manipulation and lying and misleading. To say all tax increases are bad for economic growth is a LIE. To say the entire middle class is suffering economically and about to fall into poverty is a LIE. To say going to war in Iraq was necessary to fight al-Qaeda was LIE. And politicians who lie ought to be shunned.

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Arlington, Va.: I think you misunderstand the Saudi action in (potentially) limiting production. This is not a cartel move, it would be a single entity (Saudi) forgoing near term profits in order to husband a resource that they believe will be in even greater demand and price at a later date. It is a risk they take that "something" doesn't come along and replace the need for their resource (like cold fusion).

Steven Pearlstein: If they want to make that move unilaterally -- unilateral withholding of supply -- that may be very rational on their part. But they might not choose to do that without knowing that there is a cartel at work in the background, particularly a cartel over which they have undue influence.

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Troy, N.Y.: Hi Steven. I liked relating the Bush administration to the boneheads on Wall Street. Everything was great until it fell apart. I'm tempted to think that not changing until we are forced to is just how humans are 'predictabily irrational', to borrow from Dan Ariely's book. Changing thousands of years of behavior is going to be a tough road to hoe.

Steven Pearlstein: Yes, but history is full of examples where we have come up with institutions and rules to restrain competitive dynamics that are socially damaging.

Let me give you a very fundamental one. In primitive societies, a couple of the strong guys get all the women. That's what happens in a fully competitive market. But societies that restrained that in some way, and went toward monogamy, wound up being more successful societies. But to do that, societies had to adopt rules and norms of behaviors and institutions to support that restraint on unfettered competition. Those are all forms of collaboration.

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Seattle: One of my long-standing fascinations with the business world has been their perception that many of its leaders believe that is it better to be weak yet appear strong rather than be strong yet appear weak. I don't know where this attitude came from but I remember when reading up about Orvitz's time at Disney that the Disney Board of Directors would rather pay Orvitz well over 100 million unearned dollars than admit they made a mistake in hiring him. How much of a reason behind Wall Street's "rush to the bottom" is caused by this self-decieving vanity?

Steven Pearlstein: Not much, I think.

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Seattle: Good column, but didn't Akerloff already win a Nobel Prize for showing how this works in terms of used cars?

Steven Pearlstein: I'm no expert on George's work, but he certainly identified an instance in which imperfect information, and asymetric information (sellers know more than buyers) led to less than optimal and efficient results in a competitive market situation. And then he suggested institutions that might help correct for those naturally occuring problems so that the market could be more efficient. And some of those fixes involved collaboration. NOt sure it is the same as an arms race or a race to the bottom, however.

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Alexandria, Va.: Mr. Pearlstein,

Congrats on your Pulitzer. Your column a few weeks ago on Friedman, Billings, Ramsey was illuminating but did not contain the whole story on how FBR's executives were awarded large bonuses and raises despite the company's dismal performance last year ("FBR's Awful Truth"). In addition to the year-end bonuses, stock grants and retention awards that you noted in your column (awarded, by the way, just days after FBR laid off more than 10% of the employees, without bonuses), FBR's proxy statement indicates that the executives also received mid-year cash and stock bonuses for 2007. What's more, CEO Eric Billings and at least one other executive recently got substantial base salary raises by taking a second salary from FBR Capital Markets, the investment banking sub which went public in 2007. This "double dip" gave Billings an 83% raise from $960,000 to $1,760,000 annually. FBR is giving Radio One stiff competition as the local poster child for overreaching management compensation. And despite the rolling of heads on Wall St. in recent months, not one senior executive at FBR has been held accountable for FBR's woes. Maybe the board of directors will hear an earful from the shareholders at FBR's annual meeting tomorrow.

washingtonpost.com: FBR's Awful Truth (Post, March 14, 2008)

Steven Pearlstein: Thank you for sharing that. Might be worth a second look on my part if what you say is true.

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Cameron, N.C.: Steve, Throwing lots of money at a problem just does not work all the time. To use a sports analogy Red Sox have a large payroll spent wisely and have had success lately, Yankees have not and are not as successful lately. Other teams with much smaller payrolls have a better ratio of success. To expand this to government, some expensive programs may be successful but not all. Some less expensive programs may have a better ratio of success but are not as flashy and thus discounted. We need people in government who are willing to go for "small ball" and not the "three run homer" all the time.

Steven Pearlstein: That's certainly true.

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Rockville, Md.:"But if Best Buy winds up driving every other retailer out of business and gains a legal monopoly in the market for electronic equipment, then that wouldn't be optimal for consumers in the long run, would it? "

But the barriers to entry and low (if exist at all) for selling electronic equipment. If Best Buy starts charging more or offering limited quantity, it is very easy for somebody to see the market opportunity and open up shop. The price now charged is the market price - absent any artificial ceilings due to price war.

Steven Pearlstein: Barriers to entry are not low if there is a dominant firm willing to engage in predatory pricing for a time to keep out a new entrant.

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Arlington, Va: Steven, there may be a cartel, but there is also oil in the United States. We used to produce 10 million barrels a day and now only about 5. If the Saudis withhold their oil then we can just ramp our production back up and take their market share. I'm sure you agree with that !

Steven Pearlstein: Yes, and we should ramp up production, particularly by opening up the Gulf and the west coast for drilling for natural gas. We also ought to allow more oil and gas drilling in Alaska, including ANWAR, and get that gas pipeline built from up there. Too bad we don't have a Democratic candidate who's willing to stand up to the environmental community on this one, and willing to trade big new subsidies for renewable energy for a simultaneous push on nuclear and lower-risk offshore drilling.

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McLean: But I guess it all depends on how broadly you look at it. The sports team that wins a championship after overspending on free agents -- yeah, maybe it costs too much to go to their games, but people are still lining up to do it. Meanwhile, that team has fulfilled its mission of putting a winning team on the field/court/ice, and has increased its marketing revenue several times over. Overspending on the right free agent made sense for the team, even if it has priced out a few fans and may lead to an economically questionable stadium deal for the city.

Likewise, the overreliance on spin may have won elections several times in the last 16 years. So in a narrower view, it was probably worthwhile for the parties in power (at least until they screwed things up so much that they couldn't effectively spin it anymore). I guess the rest of the electorate is the equivalent of the people paying for the new stadium, writ large.

Steven Pearlstein: That's one way to look at it.

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Re: Ontario: I think Ontario over-stated and mangled the point, but had a seed of truth. How much competition is there really in some industries, like credit cards? Visa and Mastercard at one point shared the same building. The problem is that under current anti-trust law and rhetoric, the theory and potential for competition are more highly regarded than actual competition. How do we acknowledge and guard against such problems?

Steven Pearlstein: I think there's still a lot of competition out there in many markets. As any reader of my column knows, I'm a big antitrust guy. But even without very vigorous antitrust enforcement in recent years, we still have a highly competitive economy here in the US.

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Re: Saudi Arabia's actions: Saudi Arabia is doing the classic cartel maneuver of "leading and following" by signaling a consideration in the reduction of production. Watch other OPEC nations respond by "following" the Saudi's "lead" and similiarly cutting production, or they can reject the offer and not. In the latter case, Saudia Arabia's parliament will reject the call to reduce output. Standard and classic anti-competitive tactics.

Steven Pearlstein: Thank you.

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Denver: An example of that is the extant "ENRON LOOPHOLE" that is causing the run up in energy prices. "TRUCKER" on Daily Kos has the sad details. ONLY USA TODAY AND MONEY TRADE JOURNALS have published the story in MSM and that was a year ago when the ceo of the bankrupt Amaranth hedge fund testified before a congressional committee. What's up with that?

Steven Pearlstein: Gee, I mentioned the Enron loophole just a few weeks back, in a column about the speculative bubble in commodities.

washingtonpost.com: Clinton's Best Oil Idea: Get Tough on OPEC

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Silver Spring, Md.: My concern is the culture of deception lies largely with my party, the Republicans. While I agree that Lyndon Johnson did deceive on the Viet Nam War which is an exception. I also agree that George H W Bush largely did not, and was not well liked in his own party as a result. I would separate Nixon as a common place liar to protect himself. In contrast deception, marketing, or lying, call it what you will, is the single strategy for today's Republicans.

Steven Pearlstein: I'm not sure I'd let the Democrats off the hook that easily.

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Alexandria, Va.: Steve, I think it is important to tell you how much all of out here in "readerland" appreciate your columns. we hope that as you write your columns that you think of us as your audience, friends and neighbors and not that you are writing to fulfill your requirements. By your writings you both educated and teach. Thanks you!

Steven Pearlstein: What a nice way to end today's chat. Thank you. "See" you all next week.

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