Thursday, January 29, 2015

Universities and Hospitals: Time for American States to Tax Nonprofits?

The 2015 budget that Gov. Paul LePage proposed to the Maine legislature takes aim at the “sacred cow” of property-tax exemption for nonprofit organizations. Colleges and hospitals, for example, would be levied a property tax, with places of worship and government-owned entities remaining exempt. The rationale is that of fairness to home-owners, who must bear a disproportionate weight particularly in New England, where colleges and hospitals in particular are ubiquitous. However, I submit that a second justification exists—one based squarely on the colleges and hospitals themselves.

Not to be left undefended, non-profits in Maine claimed that their “special status is needed because they provide vital programs that governments often don’t.”[1] Universities, for example, provide knowledge and training, while hospitals provide health-care. The latter is arguably more vital than the former; a person can do without a higher education but one’s life is essential to oneself. This distinction can be the leading edge of a slippery slope stretching across the corporate world. Apple, for example, provides computers, which facilitate a person’s higher education. GE provides equipment that is used in hospitals to diagnose patients. In short, nonprofits can be viewed as part of a larger spectrum that is characterized by the provision of goods and services, rather than as separate and sacrosanct.

Indeed, corporate charters are the means by which governments essentially delegate important tasks to private companies. To say that only nonprofits perform functions needed by governments for society ignores the fact that governments charter companies. Which functions are vital seems too subjective for us to be able to rest on the conviction that only what nonprofit organizations provide is crucial in a society. In general, providing a product or service that is valued by consumers in a society is to perform a societally-worthy task; to claim that only nonprofit organizations provide vital products and services is dogmatic in the sense of being artificial or contrived.

As for profitability, executives at universities and hospitals are not unconcerned with maximizing revenue. As Gov. Jerry Brown was preparing his 2015 budget proposal, the University of California was demanding an increase of $100 million. Just because university administrations are bad at cutting spending does not mean that they are oblivious to capturing as much surplus as possible. To justify upcoming tuition hikes to students, the head of UC-Davis sent out an email insisting that the tuition increases would be necessary to keep education accessible and affordable. Maybe the Aggie cows have an opportunity, careerwise, in the university's administration (I'm afraid grass wouldn't cut it to cover tuition though).

The same underlying breed of greed can be said to characterize hospital administrations, though competition forces them to be more assertive in keeping spending in line. Were hospital administrators truly most interested in providing a vital service, they would not lie to the uninsured and turn them away. My point is that a realistic look inside nonprofits undoubtedly reveals an orientation chiefly to money (i.e., profit). Universities and hospitals are more like corporations than property-tax law in the States might suggest.

[1] Jennifer Levitz, “Maine Proposal Would Tax Property of Big Nonprofits,” The Wall Street Journal, January 24-25, 2015.

Wednesday, January 28, 2015

Syriza Party Governing in Greece: Austerity and the E.U.

Clarion calls of confrontation roiled through the E.U. after the state election in Greece on January 25, 2015. Would the E.U., heavily dominated by its largest state, and the European Central Bank (ECB) accept a larger public deficit (i.e., more government spending to alleviate the austerity) and continue the cheap loans, or would Alexis Tsipras, the new Greek prime minister, have to choose between continued austerity and default? 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Saturday, January 24, 2015

Standard & Poors: Internal Controls Enabling a Conflict of Interest

After the financial crisis of 2008, rating agencies reassured the public that additional “internal safeguards” would prevent the sort of over-stated ratings that had contributed to the crisis. Congress did not deconstruct the structural conflict of interest wherein a rating agency is tempted to overstate the rating on financial security such as a corporate bond because the agency’s revenue would be higher if more of the bonds are sold. I contend that reliance on a company’s internal “fire walls” is naïve, given the strong, sustained temptation that exists as long as an institutional or structural conflict of interest is in place. To obviate the problem, the conflict itself must be deconstructed.

The full essay is at "Standard & Poors."

Wednesday, January 21, 2015

Police Snatching Property: A Conflict of Interest While American Federalism Sleeps

The U.S. Justice Department halted its adopted-forfeitures program in early 2015 out of a sense that state and local law-enforcement agencies had been using the federal program to retain a greater portion of seized property, including cash, than state laws permit. Asset forfeiture had grown since the 1980s largely as a strategy in combatting drug traffickers, yet the agencies themselves benefited in being able to spend the cash. Besides this conflict of interest, the federal-state dynamic here demonstrates federalism in action, though perhaps not as strongly as the system of government allows.

As police departments collected more and more in involuntarily forfeited property, an increasing number of people complained that their property had been seized without there being any evidence that they had committed any crime. In other words, the police were getting away with dismissing the “innocent until proven guilty” mantra of American justice. The ACLU, for instance, issued a statement saying the forfeitures violate the due process clause in the U.S. Constitution.[1] If so, then the Justice Department could have gone further than merely refusing to allow police departments to collect property at levels permitted only by federal law. Specifically, the federal agency could have sued police departments to contest even the state laws as unconstitutional. Presumably taking the property of anyone charged but not convicted of a crime, even of drug-dealing, violates constitutional rights. In a viable federal system, moreover, the federal government is obliged to act as a check against state and local abuses of power. That the Justice Department fell short of this function suggests that American federalism had already been compromised rather than fully functional.

Were the Federal Government acting as a viable check on the state (and local) governments in the U.S., surely going after governmental conflicts of interest would be on the federal radar screen. That the departments could spend the money from the forfeited property (whether under state or federal law!) points to a conflict of interest wherein a department’s own financial interests trumps or eclipses the wider protection inherent in the doctrine of presumed innocence.  Put another way, police could get away with exploiting a public benefit for private gain (that of the police). Of course, no police administrator would admit to it.

Ron Brooks, for example, headed the National Narcotic Officers’ Associations Coalition at one point. “While the money is helpful to us, that’s not the reason forfeiture occurs,” he explains. “It occurs because it removes the most critical component of these criminal organizations: the capital to operate.”[2] He claims that the helpful money is not even a temptation even though it is entirely reasonable to assume it is; he is dismissing the motive out of hand when it is anything but reasonable to do so. Typically, such an attempt to hide a conflict of interest is a subterfuge—meaning that one does in fact exist and it is being exploited. Put another way, if police administrators really were indifferent to the helpful money, why not admit that it could be a temptation?

Therefore, we can conclude that the departments’ discretion in forfeiture cases is problematic, given the active temptation to exploit the conflict of interest. Were the U.S. Government to have been acting as a check on the states, the Justice Department lawyers would have gone after that discretion, at the very least. Of course, going after the relevant state laws permitting the forfeiture practice would go even further in deconstructing the institutional conflict of interest, and thus evince a stronger federal system wherein the two systems of government—federal and state—act as checks against abuses in the other at the expense of the People.

[1] Devlin Barrett and Zusha Elinson, “Holder Moves to Curb Asset Seizures,” The Wall Street Journal, January 17-18, 2015.
[2] Ibid.

Sunday, January 18, 2015

Behind the Lower 2014 U.S. Federal Budget Deficit: A New Default

The U.S. Government’s fiscal deficit of $483 billion for fiscal-year 2014 is the lowest since 2007.[1] At a preliminary 3% of GDP, that deficit is much better than the 2010 deficit, which came in at 10% of the GDP. To be sure, the American economy was larger in 2014. Also, the federal government’s overall fiscal improvement masks changes “behind the curtain” that may not be so palatable.

In 2014, the federal government’s revenues first crossed the $3 trillion level.[2] Had the spending level of 2007 been that of 2014, the government would have run a budget surplus for the year. To be sure, going back to pre-recession spending-levels would ignore the gradual upward slope of spending since at least 2000; based on this slope, and assuming the actual revenue, the deficit for 2014 would have been appreciably more than $483 billion.

So, is the spending side to be lauded or criticized? In large part, this depends on the person’s political ideology. The same goes for the revenue side. What I find interesting about the spending is that a steeper upward slope (from that from 2000-2007) in from the fourth quarter of 2008 (the credit freeze having occurred that September) to mid-2009 is followed by flat-lined spending through 2014.[3] Put another way, spending departed from the gradual upward-sloped pattern to reach a new plateau. That it held from 2009 to 2014 explains why the spending level in 2014 is lower than it would have been had the gradual upward-sloped pattern continued unabated. Sequestration worked.

Even so, the jump in spending in 2008/2009 pushed it to a new, higher plateau. Even though spending might have been higher, fixing spending around roughly $35 billion represents a higher mark for revenue to reach, even during recessions. In short, the fiscal “new normal” after the 2008 financial crisis and the ensuing recession involves higher spending and more revenue in absolute terms. An alternative might have been to spike spending during the recession then peg the spending after 2009 to the level it would have been consistent with the previous gradually-ascending slope. That amount would have been roughly $30 billion (rather than $35 billion), and the U.S. Government would have shown a slight surplus for 2014.

[1] Josh Zumbrun, “Budget Deficit Reaches a Seven-Year Low,” The Wall Street Journal, January 14, 2015. The budget deficit for the calendar year came in at $488 billion.
[2] Ibid.
[3] Ibid.

Relaxing State Deficit Restrictions: Power-Grab by the European Commission

As the World Bank came out with its revised prediction of 1.1 percent economic growth for the E.U. (“eurozone”) in 2015, down from the earlier estimate of 1.8%,[1] the European Commission announced that it would allow states more leeway in meeting the federal requirement that state budget deficits be no more than 3 percent of their respective economic outputs. Lest this appear as a sign of political impotence, the “strings” demonstrate the opposite.

The full essay is at "Essays on the E.U. Political Economy."

Thursday, January 15, 2015

On a Central Federal Policy in Education in the U.S.: Implications for American Federalism

In a speech in January 2015, U.S. Education Secretary Arne Duncan urged a continued central role for the federal government in education policy. He said the president was proposing to increase federal spending on elementary and secondary schools by $2.7 billion; Congress had appropriated $67 billion to the U.S. Department of Education—with $23.3 billion for the Elementary and Secondary Education Act—in the 2015 budget.[1]  Typically, debate on the federal government’s role had focused on the use of standardized tests in holding schools accountable. I submit that a self-governing people has a duty to consider the wider implications, such as the impact of a greater role on the federal system. Otherwise, unintended consequences may show up after it is too late to do anything about them.

Federalism is rarely on the media’s radar screen in the U.S., yet this dimension can be detected in statements made by public officials. For example, in his speech, Duncan said, “If we walk away from responsibility as a country—if we make our national education responsibilities somehow optional—we would turn back the clock on educational progress, 15 years or more.”[2] In positing a responsibility as a country to education, he is claiming that national education responsibilities exist. This implies that the U.S. Government has a legitimate role. This is a contestable claim.

Under the U.S. Constitution, the powers of the federal government are limited, or enumerated, whereas those of the states are both enumerated and residual. Education is not explicitly listed among the federal government’s enumerated powers, but that government can spend money for the general welfare. Education certainly contributes to that. In fact, so many things do that reading “the spending clause” so broadly eviscerates (i.e., wipes out) the enumerating itself because the federal government could get around the list simply by spending money on an additional policy domain. Put logically, a broad reading of the spending clause contradicts the very notion of enumerating powers, so both in original intent and practically, the spending clause must surely apply to the general welfare via any of the enumerated powers. Spending on education is the task of the several states.

Sen. Lamar Alexander (R-TN), chairman of the Education Committee, brought federalism to the surface in his remarks at the time, but without presenting a coherent alternative. Referring to the “No Child Left Behind” law passed while George W. Bush was president, Alexander said, “My goal is to keep the best portions of the original law and restore to states and communities the responsibility for deciding whether teachers and schools are succeeding or failing.”[3] In other words, he wanted to retain the federal government’s role—making it better—even as he wanted to restore to the states and localities their responsibilities. Such cooperative or shared-competency federalism, while common in the E.U., runs up against the enumerated feature of federal power in the American system. Put logically, returning to the states their respective responsibilities would mean taking the federal government out of the education business. Practically speaking, retaining a role for the federal government risks further encroachment on the states.

Generally speaking, the more the enumerated feature of the U.S. Constitution is blurred or distended, the less the states will be able to act as a check against federal encroachment. The check feature of federalism can protect not only the states as viable republics in their own right, but also citizens from abuses of power on the federal level. Likewise, keeping the states from encroaching on the federal enumerated powers can enable the U.S. Government (e.g., the Department of Justice) to protect citizens from abuses of power from state officials. Civil rights during the 1960s is a case in point.

Therefore, the implications of education policy may be more important than the educational issues that pertain more directly to education. Keeping the implications on the system of public governance on the public’s radar screen is thus part of the responsibility of a self-governing people and its elected representatives.

[1] Caroline Porter and Siobhan Hughes, “Education Secretary Presses Central Federal Policy Role,” The Wall Street Journal, January 13, 2015.
[2] Ibid.
[3] Ibid.

Fiscal Responsibility in Alaska: On the Challenge of Falling Oil-Tax Revenue

With West Texas Intermediate (WTI), the U.S. benchmark oil price, at $46.07 on January 12, 2015, lawmakers in Alaska were getting nervous because the government was relying on oil-industry taxes to cover 89% of the government’s operating revenue.[1] At the time, the government had a $3.5 billion deficit in the $6.1 billion budget.  How the governor, Bill Walker, planned to deal with the shortfall can give us a glimpse of what fiscal responsibility might look like in government.

In spite of the huge deficit relative to the total budget, Walker was asking government agencies to reduce their respective budgets by only 5% to 8% for the coming fiscal year. To cover the rest, the governor planned to “dip heavily” into Alaska’s $14 billion in reserves.[2] Merely having reserves is itself fiscally responsible. In California, Gov. Jerry Brown had contributions to a “rainy day” fund as part of his budget even as the University of California clamored for $100 million more in funding—a request the governor rejected as exorbitant.

The fiscal responsibility goes even further in Alaska. The government was diverting only $300 million of the $6.76 billion in oil-tax revenues it expected to collect over the two-year period ending June 30, 2015 toward operating costs—the rest of the revenue going to trust funds, capital projects, and local governments.[3] The continued contributions to the trust funds strike me as particularly responsible, given the political temptation to skimp on them in order to obviate budget cuts of even 5 percent.

In short, Alaskan fiscal responsibility can be characterized as balanced, with budget cuts going along with tapping reserves and continued contributions to trust funds. A return to higher oil prices would signal attention to making up for the reserves’ depletions and adding still more to increase the reserves. In the long term, the reserves could reach a level at which the operating budget is funded entirely by the reserves’ investment revenue. With enough self-discipline to forge ahead with a sustained fiscal responsible policy, governing officials can make taxes obsolete.

[1] Ana Campoy, Mark Peters, and Erica Phillips, “Energy-Heavy States Get a Crude Awakening,” The Wall Street Journal, January 13, 2015.
[2] Ibid.
[3] Ibid.

Monday, January 12, 2015

Stockholder Activism at DuPont: A Conflict of Interest for Management

In American corporate governance law, the business judgment rule gives management expertise the benefit of the doubt over stockholder proposals. Compared with executive skill, they look rather populist and thus potentially irrational in nature. Nevertheless, with the rule chaffing up against the property-rights foundation of corporate capitalism, the managerial prerogative can be said to be dubious. Indeed, a strict private-property basis justifies displacing the default profit-maximization mission for a given corporation. Alternatively, stockholders may want to use their concentrated, collective wealth for other purposes, such as to alleviate hunger. Once enough profit has been made for the business to be sustained for another year or two, any additional surplus would be spent on food pantries, for example, rather than going out as dividends or being retained by the corporation. Because managerial skill is premised on the profit-maximization goal and its associated strategies, corporate executives intrinsically resist alternatives proposed by stockholders. The managers face a conflict of interest in providing their recommendation for stockholders. Even when the proposal assumes profit-maximization but differs from a current strategy (i.e., adopted by management), a conflict of interest exists should the management seek to provide a recommendation for the stockholders.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Is Dark Trading Ethical?

Dark trading” has a subterranean connotation, as if it were done by slithering snakes in the river Styx. In actuality, the term refers to trading in stocks that is done on computers that are less public than the exchanges. That is to say, the bid-and-ask quotations on a given computer network are known only to participants on it, and not to the traders on the public exchanges. Ethically, the public-private dichotomy is relevant. I submit that it reflects a wider trend in American society.

The full essay is in Cases of Unethical Business, available in print and as an ebook at