In 1985, an unnamed Reagan staffer defined the administration’s fiscal and political strategy as “starve the beast”. Grover Norquist was even more explicit about Republican strategy when he declared in 2001, in what has become the typically violent rhetoric of the modern GOP, “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub”. The theory of shrinking the size of government not only provided a rationale for tax cuts but also limited the effectiveness of government oversight of the private sector. This has led to rampant inequality as the nation’s wealth continually gets transferred from the poor and the middle class to uber-wealthy plutocrats. And, as two recent stories clearly illustrate, the designed ineffectiveness of the federal government is hurting us all in distinctly corrupt and deadly ways.
The tragic crash of an Ethiopian Airlines Boeing 737 MAX 8 aircraft, which apparently had “clear similarities” to a Lion Air crash of the same type of Boeing aircraft last October, is being attributed to issues associated with the airplane’s new flight control system, according to the initial investigations. It has also brought the focus on to how the new flight control system on the aircraft was certified as safe for flight by the FAA.
In 2015, Boeing, under enormous competitive pressure from Airbus, was in a hurry to get the 737 MAX 8 out the door. The redesigned 737 included an entirely new feature that was a radical departure from all prior Boeing tradition. Instead of allowing the pilot to have complete control, the new plane had an automated flight control system that would activate when a sensor indicated the plane was in danger of a high speed stall. In addition to taking control of the aircraft away from the pilot, the system also had another feature that was also unique to this airplane. The new flight control system, designed to kick in a “hazardous failure” situation that normally required multiple sensors, relied on just a single sensor, with no backup. It is currently believed that the failure of this sensor caused the automated flight control system to kick in, overriding polite control even after the pilot had reset the system and stabilized the plane on multiple occasions, forcing the nose down in a mistaken effort to regain speed, and causing the two deadly crashes.
The FAA is responsible for certifying that all new planes are safe for flight. As in any regulatory environment these days, this requires a degree of cooperation between the regulator and the business being regulated. As usual, the FAA certification team selected certain, critical technical assessments that the agency would test for themselves and delegated other elements of the process back to Boeing.
According to the report in the Seattle Times, “The FAA, citing lack of funding and resources, has over the years delegated increasing authority to Boeing to take on more of the work of certifying the safety of its own airplanes…But several FAA technical experts said in interviews that as certification proceeded, managers prodded them to speed the process…A former FAA safety engineer who was directly involved in certifying the MAX said that halfway through the certification process, ‘we were asked by management to re-evaluate what would be delegated. Management thought we had retained too much at the FAA. There was constant pressure to re-evaluate our initial decisions. And even after we had reassessed it…there was continued discussion by management about delegating even more items down to the Boeing Company’. Even the work that was retained, such as reviewing technical documents provided by Boeing, was sometimes curtailed…When time was too short for FAA technical staff to complete a review, sometimes managers either signed off on the documents themselves or delegated their review back to Boeing”.
In addition, Boeing decided, apparently without input from the FAA, that pilots who were familiar with the current version of the 737 needed minimal additional training on the 737 MAX. Because the new automated flight control system was designed to only activate in extreme situations, pilots were not even informed that control of the aircraft could be taken away from them. The new flight control system was not even included in the plane’s flight manual.
Worse, after the Lion Air crash last October and based on the initial reports from investigators, Boeing promised to deliver a software update to the automated flight control system by January. However, that update was apparently delayed for weeks due to haggling between Boeing and the FAA as well as the 35 day-long government shutdown. According to the Wall Street Journal, “A software fix to the MCAS flight-control feature by the FAA and Boeing had been expected early in January, but discussions between regulators and the plane maker dragged on, partly over differences of opinion about technical and engineering issues, according to people familiar with the details. Officials from various parts of Boeing and the FAA had differing views about how extensive the fix should be. U.S. officials have said the federal government’s recent shutdown also halted work on the fix for five weeks”.
The situation with Boeing illustrates the two sides of regulatory capture. As we can see from the pressure from senior FAA administrators to push the certification process along as quickly as possible in response to Boeing’s competitive pressure from Airbus as well as the FAA’s reluctance to ground the airplane after the crashes and the direct appeal to Trump from the head of Boeing, regulatory capture is facilitated when an administration is willing to cater to business interests. But the flip side of regulatory capture is regulatory starvation, where the agency is so strapped for funds that it can not do the job it is legally required to do and must rely on the business being regulated to help the agency do that job. Regulatory starvation invites regulatory capture.
A similar, less obvious story is hidden in the corruption of the college admissions process where William Singer was bribing college coaches and forging SAT tests to get rich, unqualified students admitted to prestigious universities. As part of the scheme, Singer funneled the bribes to coaches and SAT proctors through his charity, Key Worldwide Foundation (KWF). KWF claimed its goal was “to provide education that would normally be unattainable to underprivileged students, not only attainable but realistic”. If you drop the prefix “under”, it did exactly that.
Even a cursory glance at the foundation’s tax records raised enormous red flags. Despite taking in $7 million in four years, the supposed charity had no employees, no directors, and just three officers, two of whom did not work on the foundation at all and one, William Singer, who claimed only eight hours a week in foundation work and took no compensation. The fact that there were no independent directors indicated the Singer, as the lone active officer, probably had a massive conflict of interest. Despite that bizarrely low physical overhead, KWF reported in 2016 that it had over $2 million in “total functional expenses” despite paying less that $1,000 for “management and general expenses”, something that should of raised serious questions about how the charity’s money was being spent.
KWF donated tens of thousands to an organization that had the same address as the charity itself. It donated $100,000 to an organization that was not a charity but an entity controlled by the UCLA men’s soccer coach. It paid $1.5 million in consulting fees to the former Georgetown tennis coach over a three year period. Many of the partners that the charity listed had never heard of KWF. All in all, the foundation’s tax returns screamed for even a cursory audit.
As AccountingToday notes, “Efforts by the IRS to root out and prosecute tax fraud have declined in recent years amid steep cuts in staffing and budgets. In 2017, a tax-exempt organization stood a less than 1 percent chance of being selected for an audit, according to IRS data. The agency had about 840 fewer tax examiners in 2017 than it did four years ago. According to one legal scholar who focuses on charities and non-profits, “No one at the IRS probably even looked at the returns until the FBI called”.
According to a former high-ranking IRS enforcement officer, “Due to budget cuts, attrition and a shift in focus, there’s been a collapse in the commitment to take on tax fraud. I believe there are thousands of individuals who have U.S. tax obligations and are not complying with U.S. tax laws”. It is estimated that business owners cheat our government out of about $125 billion per year through tax evasion. In the last decade, budget cuts have force the IRS to cut audits by 42%. Criminal referrals are even rarer, dropping by 25%. The IRS audits only about 0.5% of all tax returns, nearly a third less than 2008. The number of enforcement agents has dropped by a similar amount. This has all occurred as the US became a premier haven for foreign tax evasion and money laundering.
I have already written about the fraudulent use of foundations to engage in self-dealing as well as to evade taxes and campaign finance laws. But the IRS shied away from investigating foundations after Republicans created the faux scandal about the agency targeting conservative charities in 2013. Hopefully, the crimes committed by the Trump Foundation and KWF’s role in the college admissions scandal will bring a renewed effort to ensuring that charitable foundations are doing actual charity.
At the IRS, regulatory starvation is allowing the wealthy of this country to engage in criminal schemes and massive tax avoidance. Paul Manafort, Rick Gates, and Michael Cohen are all illustrative of that abuse. Regulatory starvation and capture at the FAA has, in the end, cost hundred of innocent civilians their lives. Grover Norquist’s “drowning the government” has led to death in the skies.
Originally published at thesoundings.com on March 19, 2019.