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The Incidence of Corporate Taxation
According to my casebook, it is impossible to demonstrate empirically the extent to which the burden of corporate income taxes ultimately falls on shareholders, capitalists generally, employees, or labor. My gut reaction was that, since we know that increases in corporate rates are vociferously opposed, we can pretty much surmise that it falls on capitalists since workers and consumers would not be able to organize to oppose raises as effectively as they are, in fact, opposed. I've since come up with some counter-arguments on this point, but still think my casebook writers are being somewhat disingenuous.
School Choice and Milton, MA desegregation
Last Friday's Boston Globe featured an article on racial segragagtion in Milton's public schools. The facts have become a little hazy in my mind, but I think that this is roughly right:
As middle-class blacks have moved into the Boston suburb they have become increasingly grouped in one of its several public elementary schools in spite of the fact that they make up over 10% of Milton's population. Similar things have happened in several other Boston suburbs. Massachusetts law says that in a majority white district there can be no school that is majority minority, as this school now is. So, there are proposals for remedying the situation involving bussing and/or lottery allocations of school places. The article more or less explicitly suggested three compossible explanations for the neighborhood demographics. One is that black parents are intentionally moving to a neighborhood where their children will not be a distinct racial minority at school. Another is that black families moving out of a predominantly black neighborhood in Boston are remaining near Blue Hill Ave., a major street that runs through that neighborhood and on to Milton and Randolph Massachusetts. A third is that real estate agencies are steering black families into the the part of Milton that the Tucker school serves. The Massachusetts Commission on Discrimination has made such charges against eight agencies.
If other major U.S. cities are experiencing similar situations as the result of suburb-ward movements on the part of middle class blacks, this raises an interesting issue related to school choice programs. An article in last June's Yale Law Review called "The Political Economy of School Choice" argued that white suburbanites posed the greatest obstacle to broader school choice initiatives because they think it in their interest to preserve their exclusive access to the decent suburban schools that their higher property taxes fund. If the last decade's suburban racial demographic trends continue and accelerate, however, such developmentsmay test whether the issue is really race or class. Lots of school choice advocates present evidence showing majority black support for school choice programs. The question of whether such rates of support are present among suburban black families would be worth investigating. We should also look for (and encourage) school choice activism among suburban blacks who (one hopes) will be achieving more political organization and influence.
The Atlantic this month includes a proposal for a federal universal voucher program that would achieve competition among schools (to please the right) while it equalizes funding accross districts (to please the left). This is a tantalizing idea, but I wonder if these demographic changes would prevent its being supported by black leaders to the degree that they would support municipal inter-district school choice. I have not really thought out this issue yet, so it may not even be one. Of course, one also has to always be a little hesitant to endorse racial coalitions for any policy.
First make me sane, then kill me.
The BBC radio coverage on public radio just read a report about a decision from one of our circuit courts which held, as the BBC characterized it, that it is permissible for the state to give a death row inmate psychoactive drugs in order to make them sane enough to be constitutionally executed. The report was careful enough to say, at one point, that the court merely said that it was permissible to force an inmate to take drugs for the sake of their mental health, not ruling on whether the fact that this made the prisoner elligible for execution raises additional issues. But the "headline" was only slightly less hyperbolic than mine. This raises an interesting issue about news reporting on the holdings of courts which, one must admit, have a reputation for secrecy and unaccountability. Does the respect that lawyers ideally have for scrupulously demarkated holdings run counter to the need to inform the public of the holding's broad, extra-legal implications? Would it compromise my objectivity further, if I wrote that this story reminds me (as someone who's views on society has been much shaped by "1984") of that novel's closing scenes where the protagonist must be "cured" before he can be executed?
Chicken Asset Forfeiture
As if child labor law violations were not enough, Tyson Foods is currently being prosecuted for bringing in truckloads of illegal workers accross the border and into their factories in order to cut labor costs. In the New York Times today (6/3/03) you can read about an attempt on the part of the Justice Department to make the company forfeit the profits made on these transactions, $100 million in an initial prosecutorial estimate (since revised downward). This is the first time something resembling civil asset forfeiture has been contemplated against anyone but lowely drug dealers.
Personally, I can't see what's wrong with bringing willing Mexicans to a Tyson plant, if they'd rather have that job then whatever else they were doing (and were not deceived). But my sympathies for Tyson are much less than for the usual victims of forfeiture, mostly because (as the NYT neglected to mention) forfeiture usually occurs before a drug defendant has even gone to trial. (They get their assets back, if at all, by suing the government.) If, contrary to fact, the U.S. government actually had the wherewithall to appropriate Tyson's profits without a trial, that would surely be something. The interesting question, though, is: Does that seem like such a shocking possibility merely because we tend to assume that a major corporation, unlike a small-time dealer, has the clout to prevent its assets from being expropriated? What's justice got to do with it, one is prompted to ask?
Making up for lost revenues
The Wall Street Journal ran two articles on Tuesday, February 4th about government responses to declining tax revenues in the face of the ongoing recession. One was about states cutting services, about half of which falls under health and human services. Why do I find it tough to get all worked up about the cutting of items with names like "Juvinile Justice Program" or in respose to stories about people in the Boston area going without needed articifical limbs because of budget cuts? I guess its because I have never really needed these things, because I certainly would not have had the means to provide them for myself if I had. In the former case, I can well imagine that the civil servants getting the axe are more perturbed by the cuts than the beneficiaries, but this may well be because those served lack effective voice.
The other article had to do with administrative agencies introducing "user fees" to fund themselves. For example, the FTC is planning to help fund itself through assessing fees on telemarketers who call people on the proposed "national no call list". While one might question whether the fee amount that brings in the wanted revenue is going to be the same fee amount that optimially deters telemarketing, I am totally in sympathy with the idea of sticking it to companies using telemarketing. (Last term somebody in one of my classes was defending telemarketing as providing information needed to improve the efficiency of the free market. I was impressed with myself for viscerally finding that argument utterly contemptable.)
Other proposed fees include making drug manufacturers pay for FDA approval and making TV broadcasters pay for holding onto licences. The former seems likely to further slow down the process of drug approval and further increase the costs of drugs since companies seem to be in a position to pass on whatever costs they want to consumers because of the intricacies involving doctors and insureres. The latter might seem to increase the susceptability of the FCC to capture by media companies carrying forward the strange process of "monopolization through deregulation". On the other hand, maybe making bribes obligatory will actually increase agency autonomy. That is probably wishful thinking, sadly.
Is this a reason not to cut taxes? I think not. But we should consider whether ending the double taxation of dividends is really going to be achieved and, if so, whether it would really have the promised effect of improving the honestly and efficiencly of capital markets. I'm starting to think that Gephardt actually is on the right track with his plan to reduce the tax rate of a large majority of Americans to about 10% by removing policy motivated deductions and exclusions that largely favor the wealthy (and tax lawyers). He says that he would give 75% of Americans that low rate.
The State of Africa or Numbers Games
One of the more interesting facets of what I am sure was an effective State of the Union address was Bush's selective reference to the numerical costs and benefits of his various proposals. I could not help but be heartened by his claims about how much tax relief would be provided to families of four making $40,000/year though his faster introduction of the child tax credit, although I wonder if he told the whole story. The promise of $450 million dollars for tutoring for 1 million disadvantaged children sounds great too. Though it may have seemed out of place in the address, you have to be touched by his proposal for $15 billion to treat 2 million AIDS victims in Africa.
But lets talk about the dollar figures that went unmentioned, most conspicuously the price tag for a war with Iraq. At the lowest CBO estimates, deployment of troops plus one month of war with Iraq will cost $15 billion. The total costs including the cost of occupation are sure to come to much more than that. Some people have estimated at $200 billion total price tag. So, lets do some math. There are 30 million Africans with AIDS. $15 billion treats 2 million of them. (That money is proposed to go to lots of other uses as well so even the marginal costs of treating victims rises, as it conceivably might given differing local conditions in Africa, the following estimates are still conservative.) At that rate, we could treat everyone in Africa with AIDS for $225 billion. The Iraq war could easily cost that much. Does anyone seriously think that it will do more good to regime change Iraq than to treat 30 million people with AIDS. Granted, the long-term consequences of both policies are impossible to forsee, but intuitively one would think that the benefits of the latter are much more secure than those of the former, no?
Can the fact that it is potentially in our "national interest" to oust Saddam really make up for this kind of prioritization? But if its not in our national interest to help dying Africans, then what is that proposal doing in the State of the Union address? Is Bush appealing to the supposed racialist sentiments of African-Americans, who may see him as plotting against them on the affirmative action issue?
Incidentally, today's (29/1/03) Wall Street Journal has an article reporting substantial corporate support for the type of affirmative action threatened by the University of Michigan case.
From the Makers of the Exoatmosphereic Kill Vehicle...
February's issue of Business 20 tells the touching rags to riches story of Raytheon. Known to Alvin Warren's tax students as a case standing for the proposition that damage payments may be considered recovered capital if the plaintiff proves the extent of related capital loss, the company also manufactures cruise missles, air-to-air missles, and (in the future) missle defense systems. According to the article, "Raytheon has forged the defense-industry equivalent of Intel's lucrative market position--making the vital organs inside many other company's products." That they also make the Stinger missles that will probably blow the vital organs out of a few American pilots in Iraq in the coming months was handled delicately.
Raytheon is after all a wholesome company, as the photo showing a multi-ethnic work force smiling over warheads adequately conveys. They earn every cent of what are described as the defense industry's highest profit margins. And Raytheon could have easily been on the short end of the Darwinian stick had they not played it so brilliantly. Business 20 describes the so-called "Last Supper" of 1993: "With the Cold War over and a peace dividend in the offing, then-Deputy Defense Secretary William Perry summoned the top brass from the 20 biggest defense contractors to dinner in Washington and essentially ordered the industry to consolidate."
Well, its good to be on the right side of the boot-sole! I propose a celebratory limerick (from Thomas Pynchon):
There once was a rocket called V-2,
To pilot which one did not need to.
One push of the button,
and it would leave nothin'
but stiffs and big holes and debris too!
Tax Shopping
Two summers ago a friend of mine from the British Conservative Party recommended the European Foundation Intelligence Digest to me. You can subscribe to if at this address: euro.foundation@e-f.org.uk. The Digest summerizes interesting stories from the European press, including the following blurb:
Germany has lowest taxes in Europe
The German Finance Ministry has calculated that Germany has the lowest taxes in Europe. When pension contributions, health and unemployment payments are included, the total tax burden in Germany is 36.4%, as against 37.4% in Britain, 41.8% in Italy and 45.4% in France. The rate in the USA is 29.6% and 27.1% in Japan. Portugal, Switzerland and Ireland have total tax burdens which are even lower than the German figure. But if you calculate the tax burden alone, i.e. excluding social security and pension contributions, the German tax rate is 21.7%, the lowest in Europe, while Japan is at 17.2% and the USA at 22.7%. [Handelsblatt, 20th January 2003]
Those interested in tobacco company litigation might find this piece of interest as well:
European commission presses on with lawsuit against US cigarette manufacturers
The European Court of Justice has ruled that the European Commission is the competent body for pursuing three American cigarette manufacturer, Phillip Morris, Japan tobacco and R J Reynolds, in the American courts for complicity in cigarette smuggling and money laundering. The defendants in the case had argued that the Commission had no right to bring it; the case is being heard in New York. The Commission, which is supported by 10 member states, accuses the cigarette companies of using their smuggled cigarettes for money laundering, and of thus depriving European countries of over 2 billion euros per year in tax revenue. There are various different legal suits which revolve around this issue, the most recent having been lodged on 31st October 2002 specifically against R J Reynolds. It claims that Reynolds allowed its cigarettes to be used for money-laundering and arms-buying operations in Russia, Italy and Colombia. [Le Monde, 15th January 2003]
Ganging Up On U.S.?
The night before last, a local public radio station's BBC coverage featured a story on the Franco-German agreement to oppose war in Iraq. The BBC painted the U.K. as the odd-man-out, which was more or less the same line taken by a German Social-Democratic MEP who emphasized that almost every now or future E.U. state was urging restraint. (He did not mention Turkey, but their position is being discussed on NPR this morning.)
The contrasting view came not from the New York Times London correspondent, but from an American journalist who said basically what I heard on CNN the day before: France and Germany are not really of one mind about the U.N resolution or the Bush Administration's plan. The not-so-subtext is "There's still no need to worry about a Common Foreign Policy in Europe." But isn't this a red herring? If the U.N. itself does not have the credibility to make the U.S. suffer from flouting supposed international norms on warfare, what different will it make whether European countries are united on whether its standards are appropriate. And if the issue is Realpolitik, then is the E.U. really more of a player than its constituents alone?
Note:The positions of other European governments on an Iraq war seems quite controversial. I recently heard a report claiming that most central/east European states support the U.S. Another report pointed out that Spain, Italy, and (perhaps) Denmark do to, but insisted that these (and cenral/east European governments) were succombing to U.S. pressure to fall in line. (1/26/03)
Polycentric Regulation?
In a recent article Insight suggests that the Enron debacle may be somewhat attributable to willful blindness and favoritism on the part of Clinton SEC. It also accuses the current SEC of covering up. Lastly, it mentions the following interesting proposal:
The failure of the SEC to protect investors from fraud and its simultaneous "success" at putting up barriers to innovative, legitimate, small companies has prompted one scholar, Yale Law School professor Roberta Romano, to propose a system of "competitive federalism" for securities regulation. Under Romano's system, which she details in a new book published by the American Enterprise Institute, public companies could choose whether they wanted to be regulated by the SEC, a state or a foreign country, and investors could decide which jurisdiction best would protect them.
Competition is always a nice suggestion, but only if we can believe that investors are going to be informed and interested enough to put the pressure on companies to chose the right regulator. Who would make such a decision in reality? Probably not investors, even powerful institutional ones. The decision would probably be made by management and the underwriters of a company's IPO.
I am inclined to believe that the case of regulation is rather like the case of accounting standards. Some people think that the FASB should disband and let companies use whatever accounting standards are appropriate for them. What we need on the contrary is one system to which all parties are, in fact, consistently adhering. Similarly, we don't need more regulators. We just need one that is not being bought out.
Noisily Withdrawing Up the Ladder
The National Law Journal portrays the SEC's proposed requirements for reporting corporate misconduct, as dividing professors, who largely favor them, from practitioners, who are opposed. The weak requirement would require attornies to report a clients misconduct "up the ladder", perhaps as far as the corporate board of directors. The stronger one, would require them to report misconduct to the government and, thus, to effect a "noisy withdrawl" from the case. This strong requirement would only apply if the company had not set up its own special compliance committee to report violations to the SEC.
It seems questionable whether inside reporting alone is going to do any good. We all know how dismissively directors respond to shareholder suit proposals when they contradict their own interests. It hardly improves matters when such decisions are made by litigation subcommittees appointed by interested directors. This might seem to indicate that "noisy withdrawls" (exciting as they sound) are not likely to happen. Nonetheless, lawyers seem worried. The article describes one attorney (from Dechert) whose diligent search through the legislative history of Sarbanes-Oxley turned up a Senator's statement that "There is no obligation to report anything outside the... corporation."
Charitable Damages
The Ohio Supreme Court recently became America's first to demand that punitive damages go to start up a new charitable foundation. Robert Dardinger collected $21.5 million from Anthem Blue Cross/Blue Shield for breach of contract in a case involving the death of his wife Esther, whose previously approved chemotherapy regime was discontinued after several treatments while it's appropriateness was reviewed by an appeals panel. The court additionally ordered payment of $30 million in punitive damages (reduced from the $49 million jury award) to go to a new cancer research fund. Plaintiff's council said that this is what Dardinger would have done with the money had he been awarded it.
Supposing that the award was just big enough to deter such industry behavior in the future, but too big for compensation to plaintiff, maybe giving the award to charity is not such a bad idea. But do we really want judges deciding how its spent?
The REAL state of my mental health
This month's Atlantic features some facinating articles on "The Real State of the Union" from policy analysts at the New America Foundation. But the cover also advertises three articles about sex. Does it reflect badly on me that I would rather read about pension reform than "Sex Week at Yale"??
For Gabe My good buddy Gabe just contributed to getting a guy off of death row. So, here's to him!
This is mindblowing! In the Wall Street Journal Marketplace section today (Monday, January 13), Leslie Chang discusses the use of imagery from the Cultural Revolution in new commercials on a Chinese regional TV channel owned by News Corp. Read the article. Draw your own conclusions.
The Cultural Revolution was a project of the Chinese government from 1966-76 that moved professionals and students from cities to rural farming collectives. Countless people died as a result of this and other simultaneous policies. (Something similar was done on a smaller scale by the communist government in Poland which, I am reliably told, relocated Krakow's intellectuals to an industrial suburb called Nova Huta in order to crush opposition.)
Comment on the Opinion Journal article of the week
Here's the article. Here's my response: The two-working-parents necessity, not women's desire to work, is a main cause of familial decline. Most of the women who really want to work are middle/upper class socially as well as educationally and, therefore, can find men who could support them with their income alone. However, as wealth inequality grows, men are increasingly blamed if they cannot help the family keep up with the (wealthiest) Joneses. This pushes the "necessity" income up further and leads, at least, to one parent's overworking. If we want families to stay together one of the main things we need to do is get tax relief and/or income support to working families. Reducing the length of the work week would create more jobs and increase leisure.
Best of Both Worlds?
I am pursuaded by arguments that we should stop taxing dividends, e.g. by the arguments of Radley Balko and Adam White. But that disproportionally helps the rich, so we should also increase personal income taxes on people who make more than a certain (high) amount per year. Of course, the people with high incomes are not necessarily the ones who would get lots of dividends. Many of the dividends do/would go to corporations that hold stock in other corporations as well. So we'd need to adjust corporate taxes too. But there is no reason why we can't get the informational efficiency gains from eliminating the dividend tax, without the undesireable wealth effects.
The Romanian Supplement
I just heard on public radio, but so far have found no equally reliable confirmation that a Romanian soccer team is going to build a moat around its field and fill it with crocodiles in order to keep fans from storming the field. Hopefully Alina is going to provide the extensive coverage this developing story deserves.
Can You Read the Signs?
This commentary was sort-of inspired by Johnathan Scrmetti's post about a class on Terrorism at Harvard Law School. It's on Federalist Society blog called Ex Parte. I guess that the people in that class will no more about Al Quaeda than 99.9% of Americans.
I finally saw Signs the night before last. What a great movie! It's a cliche that horror movies tap into our real-world fears (e.g. "Invasion of the Body Snatchers" or "The Thing" playing on fear of communism.). Shyamalan knows he's doing this and practically invites us to watch how. But Signs goes way beyond self-reference. It is a meditation on our psychological tendency to conflate the various things (events, people, stories) that scare and anguish us, as well as to seek the comfort of explanations anywhere we can. And what a panopoly of human explanatory techniques it observes: religion, conspiracy theory, information seeking!
Signs even satisfies my personal taste for a didactic aspect in movies. Allowing the viewer to see countours of Father Hess' issues more clearly than he can, it suggests that we must come to terms with the big, out-of-our-hands, problems (conquest by aliens, whether God exists, spousal death) at the same time as we come to terms with the smaller decisions (whether and where to hide, whether to pray, what she would have wanted).
Earlier I wrote that I had a hard time not thinking of reactions to September 11th as I watched, which is true except that I really wasn't trying not to think about them. But, at the same time I guess, I was also reminded of a piece of music by Pat Methany called As Falls Wichita, So Falls Wichita Falls. For a while, while I was watching, I started to think about a philosophical conversation I had once about whether pieces of music can have meaning (really about whether anything non-linguistic can). I felt like saying that the music's meaning was like the movie's, without really knowing what I meant. But I was watching it by myself, so there wasn't really anyone to say that too.
Anyway, I love movies like this.
Marxed Out?
All this Federalist Society blogging is making me want to write something radical. But instead...
Yesterday Alina had the guts to write on Ex Parte (Harvard's Federalist Society blog) that conservatives should know The Communist Manifesto inside-out. My reaction was that the Marx essay that people(maybe Muslims especially) should be reading is rather "On the Jewish Question." It's not that I don't think religious freedom is important, but it seems to me that the current "Clash of Civilizations" mentality needs to be countered by the observation that any real clash that exists today is fundamentally about inequalities of wealth (and status/respect) not religion. (Aside, that is, from the obvious clash with radical terrorists, which is about them being insane.)
There is a lot of crap in Marx's essay, of course, but luckily Robert Tucker has compiled a nicely edited version in his book. I heard that Duncan Kenndey was assigning it to Harvard LLM's, but if you don't happen to be in his class pick it up.
Bush Tax Plan Comments Part1: Stakeholder Democracy: Positive or Normative?
Bush’s stimulus package is apparently going to be pretty heavily tilted toward the top incomes, with the exception of some of the deductions that it is phasing in faster. A main component are elimination of taxes on stock dividends and the reduction of the top marginal rate. Lately, I’ve been thinking that the rich (at least the super rich and corporations) should probably be paying even more of the tax burden then they currently are. (Rather, I guess my main thought is the middle-class individuals, for whom the marginal utility of income is higher, should be paying even less.) I am no longer too worried about hurting economic growth, because I basically think that the economy “deserves a break today.” What I mean is that there is still plenty of wealth out there to redistribute to the (now and future) unemployed and that we all could all do with less consumption and more leisure, education, and job-rotation. But I am concerned by two arguments against this proposal: (1) Further increasing the tax burden of the super-rich and corporations will, in fact, add to their political influence. (2) If middle-class people don’t pay taxes then they won’t have any reason to care about politics. Okay so (2) is a totally stupid argument that I don’t find the least bit persuasive (mostly because middle class people work to hard to get involved in politics anyway). But I AM worried about (1).
Does increased tax burden cause increased political influence or is it merely correlative because of the x-factor, increased wealth. We must acknowledge (a) that tax policy is influenced by private interests seeking special breaks and (b) that all lobbying is most easily accomplished by holders of great wealth. But, seemingly, the causation only runs from wealth to both influence and taxpaying (and capacity for tax avoidance, whether through ex post advising or ex ante lobbying). There is no causal link between the actual amount of taxes paid (e.g. in audits) and political influence, because the people in the tax administration don’t have any political pull in other policy agendas, notwithstanding the fact that the IRS is part of the Department of the Treasury.
Of course, the money that is saved in taxes can be spent on lobbying for other policies, strengthening the wealth/influence correlation. Nevertheless, I think that much political influence is currently effected by the relatively non-wealthy through the use of PACs and tools of special interest aggregation. Consequently, I think that the argument that increasing tax burden increases influence is basically hot air.
The Question of Campaign Finance:
Another issue: Assuming that we reject, as a normative view, the proposition that greater wealth should provide greater control, the political potency of PACs raises an interesting conflict between the principals (1) that the less well-off should be able to get equal influence on policy and (2) that public choice theory is right when it warns us of the inefficiencies caused by lobbying for policies with low-but-concentrated benefits and high-but-diffuse costs. This is why it is hard to know whether or not to support the part of McCain-Feingold discussed by Prof. Fried in the New York Times the other day. On the one hand, it seems unfair that rich people should be able to buy ads in major newspapers supporting a certain candidate, while advocacy groups cannot. On the other hand, the benefits to the advocacy groups often come at far greater expense to the public at large. To oversimplify vastly, if you support McCain-Feingold you’re asking to cut the non-rich out of political advocacy. But if you oppose it, you’re asking for more wasteful policies that hurt the public at large to benefit a few. However, since the issue here is not campaign contributions but rather political ads, maybe it’s a moot issue. Anyway, Fried was discussing it in constitutional terms. Still, applied to campaign finance reform generally, the problem is salient.
Posting Bond
Comparing the troubles in bond rating agencies (like Moody's and S&P) to those in investment firms would be an interesting exercise for someone who knows more about these things... like for example the Wall Street Journal who did it today (1/6) in the "Money and Investing" section.
Apparently, the SEC regulates entry into the bond rating business very heavily, making it much more difficult to enter. Consequently, companies, in the words of Columbia Prof. Macey, "have more incentive to cut costs than to do a good job."
What's more, the agencies, as Joe Lieberman said, "wield immense power over companies, capital markets, and our entire economy." This is because, as a starting company, it is very hard to sell your bonds (i.e. borrow money) if you can't get one of these licenced agencies to rate their safety as investments.
As with stock research analysts, rating agencies have recently proved highly unreliable. For example, the three main firms kept Enron's debt well-rated (as "investment-grade") until a week before it filed for bankrupcy. So, in response, the SEC is going to decide by the end of January whether to allow more competitors to enter the frey.
But this may not solve the problem. Like stock analysts, who kept "buy" ratings on dog-stocks in order to avoid losing investment banking business, bond raters earn their keep in fees paid by the companies who's debt they rate. However, unlike the stock analysts, individual bond raters are not allowed to invest in the companies whose ratings they provide. Their pay is also not proportionate to company revenues from rating.
So, it seems to my untutored mind that this comparison could potentially tell us something about whether the incentives of individual employees or those of whole firms are what need to be controlled in order to keep the system honest. If the defenders of the bond agencies are right that employee incentives are neutral, then the problem with the Enron-ratings must have been on a firm wide level, e.g. managers telling individual raters not to down-grade Enron. This would jive with some reports from the stock case, which said that Sandy Weill, head of the investment firm SSB, insisted that research analyst Jack Grubman keep the buy ratings on. In this case, the argument about the relatively bad incentives for stock research analysts would be beside the point.
My torts professor last year suggested that the most efficient way to control the risky bahavior of subordinates in a hierarchical authority structure is often to put the responsibility on their superiors. Sounds like this advice should be applied in investment firms and rating agencies. Not that eliminating barriers to entry would be a bad idea either.
Empire Building
I was intrigued by my collegue's notes on this article by Michael Ignatieff from the New York Times Magazine.
Imagine if Bill O'Reilly were talking about the "U.S. Empire" on T.V. every night. Hell, imagine if Connie Chung was! (Did Romans talk about their empire?) How would such terminology change the tone of public debate in what is probably world history's most democratic (and certainly its least bellicose and expansionist) empire? Would it make us more conscious of the world's holding us accountable for "our" policies. Would it make us more interested in whether people elsewhere think that "we" are doing what "we" think we are doing? Or would it just make us thump our chests harder? I know so many people who believe that going imperial has been the right move for the U.S., that I should, perhaps, have been a little surprised that they did not appropriate the term. Maybe if our occupation of Iraq goes well we will pick up the gauntlet. Or maybe we'll just wait for the next phase of "Operation Enduring Pretext".
Ignatieff worries that in becoming an empire, we may lose our soul as a republic. I want to know what that means and to what extent we really have the choice to be a republic. I do wonder though whether, as Ignatieff puts it, "Bush's proclamation of a war without end against terrorists and tyrants may only increase its vulnerability while endangering its liberties and its economic health at home."
Money Is Indeed Speech
I am not sure if I disagree with Prof. Fried about this editorial condemning as unconstitutional the part of McCain-Feingold that limits spending by advocacy groups on ads mentioning candidates. However, it seems worth mentioning that the main thing constraining the average American's ability to express his preferences in the Washington Post is not going to be that law.
...and no get-out-of-jail-free cards
As Prof. Babchuk of Harvard Law School pointed out in the New York Times, even the $1.4 billion settlement against the investment firms who's fraudulent research discredited U.S. capital markets is not nearly enough to deter such behavior in the future. Will the structural changes foised on Wall Street by Sarbanes-Oxley and new regs from industry SROs do better? Doubtful. In the future, we may need to send the responsible parties to prison.
Purchasing Power Envy
Is it rational for people in poorer countries to envy the greater purchasing power of labor in wealthier countries? Does the difference lead to (justified) resentment? Here's a related story:
When I was in Prague a few years ago, I knew this Slovak guy, Michael, who was studying to be a doctor and, in the meantime, working in a youth hostel. He always said that he thought Czech Republic should be called Czech Republic of Foreigners.
A surprisingly large number of people you meet backpacking around Europe fall into the seemingly obscure class of Australians-who-are-working-at-pubs-in-London-in-order-to-fund-intermittant-trips-to-various-countries. Australians are allowed to work in the U.K. because (roughly) of some historic connection having to do with being or having been part of the Commonwealth. Sterling has weakened somewhat against the dollar since my first trip, but remains strong against most world currancies. So, for example, an Aussie working at a London pub for a few months can easily save up enough money to liesurly wind their way from Prague through central and south-east Europe and, say, down to the Dalmatian Coast... at trip lasting at least a month an a half.
Compare this to Michael: I suspect that it would be next to impossible for him to save enough in two years working at the Czech hostel for him to take one and a half months' vacation in London.
Does this phenomenon, on a wider scale, generate envy of the U.S.? A middle class person who invests 5% of their earnings in the stock market (in reasonably good times) gets enough return over 20 years, I imagine, to have purchasing power in a less developed country significantly greater than what a 5%/20 year investment by, say, an Indonesian worker could buy in America. Do people in other parts of the world think in these terms? If they do does it piss them off?
A Pizza Hut pizza that would cost $14 here cost, in 1997, $5 in Budapest. Is the Pizza Hut pizza worth that much more there? How many hours of janitorial work does it take to earn a Pizza Hut pizza in Budapest as compared with here? No idea.
Cry Me a Jury Verdict
Last year my friend Andy wrote me an indignant email asking how a California judge could overturn a mega-verdict against some corp or other. I answered him in Federal Rules of Civ Pro terms. When the following $290 million verdict against Ford Romo v. Ford Motor Co.survived judicial scrutiny last year I should have made a point to mention it as a counterexample to the judges protect corporations from juries thesis. Of course there are many such counterexamples, some of which are discussed in the December 25 National Law Journal.
An interesting quote in the article has a plaintiffs attorney saying that jurors would rather put corporate tortfeasors in jail, but turn to punitive damages awards as a second best option. Of course the idea of criminal liability for corporate torts flies in the face of most deterrence theory. But it is worth asking why we use criminal penalties (now increased under Sarbanes-Oxley) to deal with insider trading and perhaps managerial self-dealing (if that is what Fastow faces jail for) but not for products liability. Perhaps the reason is that in products liability cases we are trying to deter corporations from taking undue risk vis a vis consumers, while in insider trading and interested party cases we are trying to protect shareholders from exploitation by individual managers or directors. Another interesting question is insurance. We let corporations insure their directors and managers against shareholder suits regarding poor exercise of business judgment. Do we let corporations insure against tort suits? Would doing so retard the tort deterrence effects?
We have to ask ourselves whether or not there is any reason to believe that jury verdicts provide optimal deterrence for corporate torts. Some scholars have set out to prove that juries do not consider the deterrence effects of their judgments. While it would be hard to distinguish jurors with deterrence objectives from jurors with retribution objectives, some recent judgments seem too large to be attempts at compensation. In any case, jurors' motives are largely irrelevant to the question of whether the (threat) of damage awards deters optimally. A much more pertainant question is how well companies can predict jury verdicts and whether judges will sustain them.
My Old Haunt
Here is where I used to ruminate about social norms, the autonomy of law, dogmas of libertarianism, and (most enticingly) the misdiagnosed decline of Harvard Law School. Maybe I'll continue to keep the more abstruse stuff there. Who knows?
Mixed Messages
Someone sufficiently credulous, who both read the Wall Street Journal on Wednesday and watched the Fiesta Bowl last night, might be a bit confused about the state of foreign investment in the U.S. stock market. Wednesday's Journal featured an article on the Dollar's recent decline against the Yen and Euro, speculating that the drop might be due to foreign money's being pulled out of the stock market in the wake of U.S. accounting scandals and the perceived heavy-handedness of the Sarbanes-Oxley response. On the other hand, between the drama of OSU football's win over Miami, viewers saw commercials (from NYSE) explaining the virtues of the New York Stock Exchange which are claimed to be "why now, more than ever, the world puts its stock in us."
Is it appropriate for me to respond, as I did, with indignation that the Exchange would engage in such blatant false advertising? Why does it strike me as worse than the false advertising engaged in day in and day out by the companies traded on the Exchange? Is it that I cannot conceive of any justification for such gratuitous duping of innocent football viewers, some significant fraction of whom are probably in the much-cited "50% of U.S. taxpayers with money in the stock market". Or is it that such institutional duplicity seems more serious than run-of-the-mill product pushing?
During another commercial I picked up a recent issue of Forbes magazine the cover of which featured the "Company of the Year": Northrop Grumman (a defense contracter, I think) with the caption (I kid you not) "Gearing Up for Iraq". Read an interview with the CEO here
Winter Term Class: Comparative Tax Administration
This class is also known as: How to get the only people in the developing world who have any money or resources to hand them over to people in the developed world so that our bureaucrats can use it to (supposedly) straighten out their countries. Luckily the professor, Richard Bird who has worked for the tax arms of the IMF (about 50 people) and World Bank (2 people), seems likely to present a somewhat more balanced view of things than would I. For example, he said that we must acknowledge that the IMF is controlled by the countries that set it up (initially, until 1949, only to reconstruct Europe). On the other hand, when one student pulled out the evil-IMF-wants-to-take-away-all-the-money-from-social-programs-for-the-world's-poorest line, he responded indignantly and intelligibly: The fiscal division of the IMF was created in 1964 only to deal with international balance of payments problems of poor countries which had caused inflation and a corresponding increase in government spending on food subsistence programs for the urban poor. In the absence of tax cuts the only way to remedy these budget deficits was to decrease spending, so when the IMF was asked "How?" it pointed to the social programs. According to Bird, the IMF never insists that countries take any particular measures.
This is all well and good, but why was reducing government deficits the (only?) way to solve the balance of payments problems instead of, say, promoting exports like the Asian tigers did (and demanding that U.S. and Europe reduce protective tarrifs and export subsidies). Also, why did these Latin American countries have to deal with balance of payments problems at all, when certain other countries, most notably the U.S., could run up the trade deficit to end all trade deficits. The answer, though perhaps not the justificaction, is that the dollar continued to be valued as a world reserve currancy. But it still seems to me that people elsewhere can justly question whether they benefit at all (much less fairly) from the disproportionate ability of the U.S. to run trade deficits. I know that economists pooh-pooh this line of argument, but it is people like my Scottish friend Graham to whom I have to answer. So if any economist out there can tell me why the poor in a country who introduced fiscal austerity measures should not be pissed off that they had to do so, please let me know. And please do not send any answer that does not include the words "welfare enhancing".
A Law Student's New Years' Resolution
How could I have neglected for so long the facinating National Law Journal? In the December 16 issue, for example, I read about internet sites that claim it to be illegal entrapment under a 1995 law for police to visit them in the line of duty. The cheeky thing, though, is that such a law does not exist. Now, that is truly net democracy! We can make up our own laws and the police will follow them until someone tells them better. Of course this is not really such a new phenomenon: The NLJ article also debunks the "urban legend" that undercover cops must give themselves away if the prostitute they are soliciting pops the question.
Check your FCC
Just heard on public radio that an upcoming FCC meeting in Richmond, VA will involve discussion of increasing media industry concentration. Check out this site which does not appear to be run by NBC, CBS, Fox, AOL/Time Warner, or Viacom:
www.democraticmedia.org.
According to the radio report, the next FCC meeting will entertain such questions as whether CBS could (hypothetically) buy NBC. I cannot see how allowing such an acquisition could possibly increase the quality of programing, but also wonder question whether the FCC can meaningfully promote diverse programming (or, even more dubiously, democracy) by countering tendancies toward monopoly. Another key question: Does the availability of web-based programing make up for the fact that other content is so closely controlled? In other words, should Clearchannel not bother me, just because I can get live365?
A word from our non-sponsors.
For my first entry, I link you to The Onion.
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