November 15, 2003

Loss of Transparency

I was just reading the comments from a post over at Asymmetrical Information about bonuses to non-exempt employees at Ralphs in California. Basically, it seems that a court has decided that Ralphs' bonus plan, which pays low-income workers a bonus based on net income, is illegal under California law because it, in effect, reduces their pay for prohibited expenses. These prohibited expenses include shrinkage expense (i.e. losses from shoplifting), worker's compensation, and cash shortages.

This law obviously exists to make sure that a sales clerk cannot have his or her pay docked because a worker gets hurt or someone steals something from the store, which seems fair — although you can argue whether the state or the market should decide these things. In my mind, it's difficult to see that this should extend to bonuses, but that's not the point of my post.

As one of the commenters to the above post said, instead of having a clear, well-publicized bonus plan that is tied to profitability, the board of directors of Kroger (which owns Ralphs) could simply change to a system where the compensation committee consults on a yearly basis and, taking into consideration the financial health of the business, including profitabilty, arbitrarily determines the bonus amount. It would seem that this would be perfectly legal. But what have we lost here?

It ended up reminding me of the Grutter and Gratz decisions about affirmative action at the University of Michigan. The outcome of those two cases seemed to be that diversity is a compelling state interest (Grutter) but a clear, formulaic system is not allowed (Gratz). Many universities will surely scrap their point systems in favor for arbitrary processes decided by admission boards behind closed doors.

In both cases, the fear is that through good intentions, legislation and litigation we've pushed the actors towards more opaque systems. Is the price paid worth it? Is this even something that can be controlled, or is it an inevitable offshoot of regulation? What are the effects on a democracy (or a market economy) when the incentives are to obscure decision-making processes?

Can anyone think of other examples of this phenomenon?

Posted by richard at November 15, 2003 07:53 PM
Comments

I'll bite — not necessarily with examples, but with theory. The Economist's recent "survey of America" describes a duality of openness and opacity: America is the most open and democratic place on Earth, and yet there seem always to be fears about what the government is hiding: Roswell, CIA activity in other countries, military/industrial conspiracies.

It seems to me that our government, because "We don't have to tell you anything" is generally recognized as an inadequate answer, tends to offer one of two justifications for the lack of transparency in a given policy or function: "I could tell you, but I'd have to kill you," or "You can't handle the truth." (There is a third explanation for opacity, that the government is doing something evil and sneaky, but that is not a justification.) The first justification appeals to national security concerns, where the government does not come clean with the people because there are some people it does not want to know what is going on. This is a generally more accepted rationale for a lack of transparency: the trouble is that you have to trust that the government isn't lying (or itself deluded) when it decides that "national security" is the basis for secrecy. That's what we're dealing with now.

The second justification seems to be the one that applies in the affirmative action context: the Supreme Court seems to have decided that a government's mystical, unanalyzable use of race behind closed doors does less harm than a come-clean quantifiable use of race that everyone can pin down. Because one recognized constitutional "harm" caused by the use of race is the stigma that attaches to a given race when government attends to it, this approach makes some legal sense. The act of race-preferencing is beneficial; knowledge that it goes on is harmful. As one acquires more specific knowledge of the preferencing, the harm is greater, outbalancing, at a certain point, the benefit that has accrued.

Still, I think the grander theory of the Grutter and Gratz decisions is that affirmative action is controversial, the government should be able to engage in it in some limited way, provided that it does so on tiptoe, so as not arouse controversy, lawsuits, and political discussion.

And though I wrote that cynically, there is something to this. The American people have not proven able to discourse reasonably about race, either as an historical matter or on a "what's next?" basis. So what is to be gained by cluing in litigants — er, citizens, I mean — to the nuances of Michigan's "point system." It arouses less controversy to say that race is "something to consider" than to say that race is "worth 14 points." And if the Supreme Court's job is to settle controversies, maybe these rulings describe the best way to do that.

For my part, I would never invoke the "you can't handle the truth" justification. I think it understates the maturity of the American people. Then again, I'm half the time clamoring for media and government to stop treating me like an idiot, and the rest of the time calling everybody else idiots. So what do I know?

The problem I always had with The X-Files is that I didn't understand why the government would bother to conceal an alien landing. Maybe it's explained once or twice in the body of episodes, but I don't see how either of my rationales for secrecy would fit. I don't know how transparency would threaten national security, i.e., I don't know what "wrong" people could find out about it. And I don't see why the American people would not be able to "handle the truth." In fact, I don't see even how the third "evil and sneaky" explanation would apply, unless, I don't know, NORAD was stealing alien technology to build Illudium Q-36 Explosive Space Modulators. Anyway, all this is a side point.

But you asked for examples: how about the wholly opaque "Camp X-Ray," apparently named by Orwell himself (though who would know?)?

Posted by: Brad A. at November 24, 2003 10:25 AM

Here's one for "national security" — the FBI will soon be able to subpoena materials from businesses, libraries, etc. without first obtaining a court's approval. And what's more, the subpoenaed institution has to keep quiet about it.

http://www.wired.com/news/politics/0,1283,61341,00.html?tw=wn_tophead_1

Posted by: Brad A. at November 24, 2003 10:24 PM