Corporate Federalism: Did AOL Miss an Opportunity?

Citing twelve past and present AOL employees, The Wall Street Journal characterized AOL in 2011 as a “culture of clashing fiefs and personalities created by a rapid series of acquisitions that haven’t jelled.”[1] Just in managing the likes of Michael Arrington and Arianna Huffington, Tim Armstrong had his hands full as CEO. Both Arrington and Huffington were strong defenders of editorial independence in their respective units. Arrington started a venture capital firm partly financed by AOL to invest in tech firms even as Arrington’s division at AOL, TechCrunch, wrote on technology firms. The problems for AOL went well beyond acquiescing in a structural conflict of interest of TechCrunch writing on particular tech companies while investing in some of them but not others. A person familiar with AOL said that Armstrong “had a macro vision that was right but didn’t have the right plan to implement it.”[2] That is to say, his visionary leadership was good but his strategic management was bad. Strategic leadership demands better. AOL may have been a good candidate for a federal system of governance because the publishing units needed some autonomy even at the cost of foregone corporate cooperation. 

In a federal system adapted to a corporation, each division or acquisition is like a semi-sovereign state with some autonomy from the general government, which includes the board of directors and the CEO. Were the board by analogy the constitutional court rather than part of the federal government, then it would be too easy for conflicts of interest to be exploited at the expense of division autonomy. This arrangement does not compromise the control that comes with property rights, for the shareholders would still be able to vote on major conflicts wherein a division claims that its autonomy is being compromised by a CEO or board.

The federation form—similar to the Japanese conglomerate “family” of businesses centered around a banking division though with each division having some autonomy from headquarter—is perhaps ideally suited to a publishing company in which pressure exists to tailor articles to particular companies favored financially by a division or the publishing company as a whole. In other words, reconciling editorial freedom (and credibility) with the synergy possible from corporate coordination (otherwise why make the acquisitions in the first place?) may be well-suited to the federal form wherein the parts and whole each of some areas of autonomy from the other. The limited autonomy itself must be in the stockholders’ long-term financial interest; this is not difficult, as sacrificing editorial freedom for immediate financial gain is typically detrimental in the long run. 

1. Jessica E. Vascellaro and Emily Steel, “Culture Clashes Tear at AOL,” Wall Street Journal, September 10-11, 2011. 

2. Ibid.

Taxation and Economic Inequality

The top 1% of U.S. taxpayers had 19.4% of the total income in 2007 and paid 28.1% of all federal taxes. In 1987, the top 1% had had 11.2% of the total income and paid 16.2% of all federal taxes. The share of total income going to the wealthy (income over $353,000 in 1987) and the share of federal income taxes they paid increased. That the poverty rate hit 15% in 2011 while the real wages of the middle and lower classes were back to mid-1990s levels suggests that the rich were getting richer as the poor were getting poorer; income and wealth inequalities were increasing. Differential impacts of a taxation regime can have an impact on a growing inequality, and thus on whether a society should adjust its tax structure. 

Although the share of taxes increased between 1987 and 2007, the 15% rate on dividends and capital gains put in place during the second George W. Bush administration meant that at the time, “many wealthy Americans [paid] considerably less because their earnings [were] derived from dividends or capital gains.”[1] 

Also, advantageous itemized deductions are more likely to be useful to a wealthy taxpayer, enabling a lower effective rate lower than that of a middle-class taxpayer. Few if any low-income taxpayers benefit from itemizing deductions. It could be that the standard deduction (and exemptions) are not sufficient to reflect the actual and necessary expenses—especially relative to income. So to claim that the bottom 1% should pay the same share of taxes as the top 1% ignores the fundamental difference between surplus and necessity. The symmetry of a bell-shaped curve does not apply because the incomes at the respective tails are qualitatively (i.e., not just quantitatively) different (e.g., relative to survival).

As for the effective rates, the unjust inversion with the middle class is not universally the case. For example, the top 400 taxpayers saw their effective federal income tax rate drop from 29% in 1993 to 18% in 2008. By comparison, households with income between $50,000 and $75,000 had an effective rate of 15% in 2008. These are averages, so there were doubtless cases of inversion where middle class taxpayers had a higher effective rate than wealthy tax payers. Depending on restoring justice to such cases does not go far enough in deficit reduction. That is to say, as just as it is, making sure millionaires are at least at the effective rate of the middle class may not go far enough, considering the seriousness and magnitudes of the U.S. deficit and accumulated debt. Given the sheer magnitudes, those who can afford to contribute more should be required to do so. It is doubtful that merely correcting for the effective rate injustice on a case by case basis would go far enough.

In 2009, for instance, 238,000 households filed returns with adjusted gross incomes of at least $1 million. Twenty-five percent of them paid an effective federal income tax rate of less than 15 percent, and 1,470 paid no federal income tax at all. Although the money involved dwarfs the number of taxpayers concerned, focusing on this “effective rate” injustice need not blind us to the fact that the increase to the treasury would fall well short of what is necessary to eliminate a deficit of over $1 trillion (not to mention paying down a debt roughly equal to the annual GNP of the U.S.). A macro justice matter concerns the role of the wealthy in reducing the deficits and debt—beyond the question of effective rates to address the inconvenience to the wealthy versus the pain from cuts to the poor.

To claim that the effective tax rate on the top 1% or even 5% of all taxpayers should be higher than the rates on lower incomes is not “class warfare.” Neither is the claim that those who can afford to contribute more money to reduce the deficit (and debt). The notion that those who can afford to contribute more follows from the principle that those who have means, rather than those who do not, should be relied on disproportionately, given the qualitative difference between surplus and sustenance. To suggest that everyone except those who are able should sacrifice to reduce a deficit is antipodal to the ethical principle of fairness. In other words, it is unfair to try to squeeze blood from a turnip while leaving the watermelons alone.

As easy as it may be to get bogged down on the percentages and dollar amounts, charts and graphs, pros and cons, the debate about taxation, spending cuts, and deficit reduction comes down to values. This is why the debate can get so heated, only we don’t take the cue and cut to the chase. We are perhaps too instrumental and utility-oriented; we miss the broader question of what we as a society value—who we are—things that are even if we don’t make it explicit. I submit, therefore, that the final paragraph below is much more significant than any of the figures and analysis above. Statistics can be manipulated to support virtually any point, whereas values go to the core in defining a society and its members.

A society that cuts its way to eliminating a deficit is saying something quite different regarding itself than a society that includes a solidarity tax on the wealthy. Solidarity itself can mean different things to different people, particularly when self-interest is consulted. How do we weigh society as dog-eat-dog relative to society as solidarity? In other words, is solidarity something more than society as an aggregation? Is it ethical to exempt the rich from paying more while making cuts to the sustenance of the poor? 

1.  David Kocieniewski, “A Tax Others Embrace, U.S. Opposes,” The New York Times, September 21, 2011. 

Bank One: Adding to Systemic Risk after the Financial Crisis of 2008

The financial crisis in September 2008 was indeed a crisis, and yet it is stunning how soon the American financial sector sought to undermine governmental efforts to guard against another such crisis. Exactly three years after the crisis, Republicans in Congress  repeatedly invoked the Dodd-Frank Act’s 848-page length and rules on trading derivatives and swaps as examples of government overreach at the expense of much-needed jobs. “Dodd-Frank is adding safety margins to the banking system,” according to Douglas Elliott at the Brookings Institution. “That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer.”[1] To scrap the new law in order to save few jobs would thus be short-sighted even with regard to jobs. Wall Street's concern, however, was not jobs, but, rather, the loss of profit off high-risk trading. 

The banks had grown used to the higher risk and were not about to do without it in spite of its risk to the economy. The Dodd-Frank law “aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff.”[2] The banks themselves could not be relied on to forestall such “cliff-diving” because it could be so profitable. Nor could the banks be expected to look out for the financial system as a whole in the face of such profitability as the financial derivative instruments were making.

For example, at the Federal Reserve hearing on September 20, 2011 on Capital One’s proposed takeover of ING, John Finneran, Capital One’s general counsel, said the “acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system.”[3] The combination would have around $200 billion in deposits (moving the bank from No. 8 to No. 5 in the U.S.),  however, which raised “questions about the deal’s impact on customers and the broader economy.”[4] John Finneran’s claim of lower risk thus required further support. To be sure, he did argue that the deal would “not lessen competition or result in any undue concentration of resources.”[5] He was thinking in terms of restraint of trade more so than systemic risk. Regarding the latter, John Taylor of the National Community Reinvestment Coalition, pointed to the risky subprime loans in the bank’s credit card portfolio. Before the hearing, he had asked, “We already have four too-big-to-fail banks. Why make a fifth?”[6]

That the proposal to carve up the four $1 trillion plus banks was summarily dismissed as Dodd-Frank was being written (with the help of the banking lobby, which Sen. Durbin said still owned Congress) was apparently not enough; preventing an increase in the number of mega-banks too big to fail would still go too far, at least from the vantage point of the banks and, presumably, the Republican party as well. This view was expressed by Dan Tarullo, a Federal Reserve governor. “While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks.”[7] I contend that Tartullo’s stance is wrongheaded and even dangerous.

The continued existence of banks with assets of over $1 trillion allows for enough systemic risk to tank the system. Increasing such risk by permitting Bank One to continue “amassing a big national banking franchise” ignored the risk of there being too much systemic risk in the system already. It is highly unlikely that merely increasing capital requirements for the biggest banks and providing for their possible liquidations reduced the systemic risk in the system to a tolerable level. Therefore, adding more systemic risk to the system should have been forbidden.  

1. Edward Wyatt, “Dodd-Frank Act a Favorite Target for Republicans Laying Blame,” New York Times, September 21, 2011. 
2. Ibid.
3. Ben Protess, “Capital One Denies ING Takeover Would Make It ‘Too Big to Fail’,” New York Times, September 21, 2011. 
4. Ibid.
5. Ibid.
6. Ibid.
7. Wyatt, "Dodd Frank."

American Federalism Eclipsed by an Ideal of Democracy: Education Over Immigration as a Constitutional Problem

The U.S. Constitution includes immigration as one of the listed (i.e., enumerated) powers of the federal government. Education is not such a power; hence it resides with the States. Historically, the accumulation of power by the federal government has involved taking areas from the States even though those areas are not listed as federal powers. As a result, American federalism has shifted increasingly toward a consolidation of power at the federal level. Among other means, Congresses and U.S. presidents have used the power of the purse to gain control from the States. Education is a case in point, whether elementary, secondary, or higher education. That the U.S. Government has had trouble controlling the country's southern border with Mexico suggests that maybe adding education has come at the expense of the added attention and effort that could have been put on immigration. In business terms, an opportunity cost (i.e., the cost of foregone benefits) comes with each additional federalized area. U.S. President Obama on education presents us with a case in point. 

“Our country used to have the world’s largest proportion of young people with a college degree,” the president said in 2011. “We now rank 16th. I don’t like being 16th; I like being No. 1.”[1]  Liking being at the highest rank is only natural. Wanting a more educated people is laudable, especially because an more educated citizenry is more likely to be able to maintain a republic instead of falling prey to "fake news" and a deceitful demagogue. 

By 2020, the influx of educated suburbanites from other States was changing Arizona politics, for example. A candidate for sheriff of Phoenix's county who had campaigned on standing up "to the mobs," with peaceful protests being included as if they were inherently dangerous rather than a constitutional right worthy of protection, lost. In truth, the mobs consisted of all of the uneducated residents--a large group, and thus with the numbers to vote in office-holders, given Arizona's rank of 49th out of the 50 States on elementary and secondary education in 2019. By 2020, the influx of new, more educated blood in Phoenix and some of its suburbs (not Glendale or Mesa) was beginning to compensate for the power of the uneducated in the State.

As laudable as more education is especially in the backward States, the ability of the U.S. Government to intervene comes with a cost in terms of federalism sliding into consolidated governance of a empire-scale country, which is inherently heterogenous (i.e., has differences within). One size does not always fit all in cases such as the U.S. and E.U. because the states are different culturally. My point is that to forestall consolidation in order to protect the checks and balances made possible only in a federal system. 

Education is problematic precisely because allowing the federal government in to shore up States such as Arizona puts one more nail in the coffin of American federalism, yet such States would otherwise continue to suffer from the uneducated being able to determine who holds public office. It is a paradox actually, in that the poorer, uneducated citizens are less able or inclined to hold their elected officials accountable between elections. In Arizona, for instance, people complain about "the police state" of nightly surveillance by police helicopters especially in the middle- and lower-class areas of the Phoenix metropolitan area, yet without defending their right to peaceable enjoyment. Yet those same voters vote into office the "law and order" authoritarian type of person who is inclined to take liberties with innocent people, being ignorant of the fact that even innocent people do not like being intimidated as if that were are necessary deterrent. 

In 2011, President Obama's visit to a city's school sent a good message wherein education should be valued, but it is also significant that the president overlooked the fact that education is not among the areas granted to the U.S. Government by the U.S. Constitution. He could have resolved this tension by urging that Americans urge their respective state officials to improve their education systems. Yet there would still be States like Arizona in which too many people believe that taxing constitutes stealing.

It is not as though the president of the United States had a lack of things needing his attention within the enumerated powers of the U.S. Government. In fact, state officials of some border States were stepping in to adequately enforce immigration law because federal officials were too ineffectual. That the federal government fought such assistance while continuing to encroach on State domains such as education evinces a desire to have it all; that is, a desire at the federal level to consolidate power rather than respect federal constitutional boundaries (as well as international boundaries such as borders). It was as if the person in charge of an association’s club house were resisting cleaning help by some of the members while going into their houses to try to clean them. Somehow the common sense advice to get one's own house in order before trying to order other houses, which is so needed to restore American federalism, has been missed at the federal level. 

To be sure, it is not as though the Obama administration was so consumed with visiting local schools that it would not have time or resources with which to better enforce immigration law. It is rather the accumulation of areas that are not included in the enumerated federal powers that has left the U.S. Government vulnerable to not doing enough in its own areas. 

Interestingly, while the president was acting as parent-in-chief at a local (rather than federal) school, his administration lost a case in federal court against Alabama’s immigration law enforcing the federal law. Among other things, the Alabama law “nullifies any contracts entered into by an illegal immigrant.”[2] Another section “forbids any transaction between an illegal immigrant and any division of the state,” and still another section “requires elementary and secondary schools to determine the immigration status of incoming students.”[3] Nothing here violates or nullifies federal law; in fact, Alabama was helping the U.S. Government with its task. In the E.U., where most power still resides at the State level, it is common for the state governments to be required to implement E.U. directives. In the U.S., where the federal level has accumulated so much to do, it makes even more sense that state governments would be required to do more of the legislating. "Congress is behaving like a state legislature," Justice Sandra O'Conner once told me when I asked her about the role of the federal government in eclipsing federalism by instituting a system of consolidated power.[4]

1.  Mark Landler, “Obama Urges Students to Set Their Sights on College,” New York Times, September 29, 2011. 

2. Campbell Robertson, “Alabama Wins in Ruling On Its Immigration Law,” New York Times, September 29, 2011. 

3. Ibid. 

4. Sandra J. O'Connor, Personal Conversation, Yale University. 

The Right of Political Protest in the U.S.: Nullified in the Outback by Intimidation

The First Amendment of the U.S. Constitution states in part, “Congress shall make no law respecting . . . the right of the people peaceably to assemble, and to petition the Government for a redress of Grievances.” Peaceable protest, even to protest a government or an official thereof, has come to be regarded as a staple of American democracy. In practice, however, the right can be eviscerated such that peaceful protesting is simply not worth the trouble. Such trouble can be orchestrated by a police force or even a government within the United States.
Implicit in the right to protest is the value put on tolerating the expression of contrary opinions. Conservative and progressive views, even those of racists and anarchists, respectively, are generally accorded the right to peaceably protest in a public way. If a State is sufficiently one-sided, however, public officials, including governors, majors, and police chiefs, can reflect the dominant attitude of residents that protests on behalf certain political, economic, or social ideologies should not be allowed. If they must be allowed, then massive shows of police force can—it is assumed--legitimately be used to intimidate the protesters.

The placement of the three posters illustrates pictorially that business and authoritarian political interests can co-exist comfortably in a broader political coalition. In Nazi Germany, for instance, the industrialists were part of Hitler's authoritarian political coalition. Besides receiving purchase orders from a state that is able to resist popular calls for government spending, business likes the political stability that a "law and order" police-state can provide. 

In Arizona, for example, prior to the 2020 election, a conservative candidate for sheriff of Maricopa County, which includes the Phoenix metropolitan area, displayed signs containing the imperative, “Stand Up to the Mobs!” Just above that line was another imperative—that the laws be enforced. Presumably the unenforced laws on car-emission limits and mask requirements on public transportation were not on the candidate’s mind. Presumably he was not planning on holding the transit authority accountable for allowing passengers without masks to ride the buses and light rail. A supervisor at Metro Valley told me by phone at the time that the county law (and ordinances of the cities) that face masks must be worn on public transportation does not have “legal force” because it is just a requirement. Stunned, I did not point out that her company was in violation of the requirement because even bus drivers did not have to wear masks; I had already investigated the strange messages coming out of that company, such as, “Masks are required and we will allow passengers to board without wearing them.”
The candidate for sheriff was likely referring back to the protests against police brutality (otherwise known as abuses of power). That he did not use the word, “Rioters,” instead of “Mobs” implies that he was including peaceable protests too. Given the bad connotation of the word, “Mobs,” as “a large and disorderly crowd of people” according to the Merriam-Webster dictionary, a negative attitude toward at least certain peaceful protests can be inferred. I had heard enough Arizona residents conflate “liberal” peaceful protests with riots to know what the candidate meant by mobs. “They are all violent,” one conservative resident insisted to me as I thought of the state’s pre-college education rating of 49^th out of the 50 States.
A few years after the 2016 presidential election, some students of Arizona State University told me that protests against Donald Trump had not really been allowed on campus. One student even observed that Arizona does not tolerate “liberal” protests. Besides the errant assumption that any mob of people is bound to become violent (which in turn rests on an extremely negative view of human nature rivaling that of John Calvin), anger against “liberals,” which was clearly evident locally, was likely behind the excessive police force designed to intimidate even peaceful protests.
With ASU police regularly staked out in jeeps parked on sidewalks and even academic courtyards, an excessive show of force has been the authoritarians’ tactic of choice to intimidate protesters even if they happened to be 20 students in the Global Politics of Human Rights class whose final project was a class protest on campus on April 13, 2017. The students protested against Trump’s policies on immigration, LGBT rights, women’s rights, Black Lives Matter, and even the prison system. 

The class was fluid in its movements, rather than being intent on blocking a sidewalk. (Source: Connor Bolget of The Republic)

As vaguely reported by a local newspaper, “At one point, Arizona State University personnel asked the group to relocate in order to stop blocking the sidewalk. Protesters then stood in a staggered line, with about a foot between each person, instead of standing shoulder to shoulder. Campus police then were called to the scene, as the protesters changed from holding signs to linking arms, walking back and fourth [sic] in front of the grassy area of Hayden Lawn.”[1] The word lawn is important, as the area is a large square of grass with sidewalks on the periphery.
Who were the opaquely labeled university personnel? In addition to the routine police presence on the campus, students working essentially as police aides typically have the campus covered (even sidewalk intersection to intersection). I have seen those security students keeping a particular eye on outdoor “political” tables near the student union building. It is possible that those student-security personnel notified the campus police of the class’s final project as a protest, which the police would have understood as such rather than as an academic project.

The walkie-talkie-clad "eyes and ears" for the campus police are ubiquitous on the main ASU campus--sometimes at every sidewalk-intersection even as observant police jeeps are stationed during the day on sidewalks and even academic courtyards. 

Did the university personnel and police over-react? The local newspaper reported, “Passers-by had some difficulties finding their way around the linked demonstrators, so ASU’s campus police stepped in to give a second warning, this time directly” to the professor.”[2]  That the protesters were few (20 with some add-ons) and were generally fluid (i.e., mobile) suggests that both the university personnel and the caller over-reacted. It would not be a crisis for by-passers (especially students) to walk on the grass, especially at that square. The police stepped in to give a second warning, so who gave the first? The student security workers? Given that students ordinarily walked on the grass and the small group was mobile, were two warnings really necessary? Should a university police force be able to interfere with a class project without permission from an upper-level academic administer? I suspect that the police took it upon themselves to threaten the professor as if she deserved to be arrested because students had to make a slight detour on grassy square. I also suspect that the police viewed the event as a political protest rather than as an academic project. That it was the latter means that the police should not have intervened without the permission of an academic administrator. Instead, the incident reflected the local culture wherein mobs protest and protests can be expected to turn violent. With such a negative view of protests even as a class project, it is easy to understand why threats and intimidation would be used with impunity.
Hence even the people in the peaceful protests against abuse-of-power by the police in Phoenix during the summer of 2020 (as distinct from the riots, which rightly have no constitutional protections) had to contend with massive police shows of force. Even a small protest on behalf of Ryan Whitaker had to put up with a police helicopter circling overhead as if twenty people might suddenly lose control of themselves and go on a rampage. A resident who lived near a park where protests against police violence took place told me that even peaceful protests walking to the park had to contend with an overwhelming police presence. I was talking to the other Midwesterner after a police car hit a parking lot curb as the police employee quickly swerved closely by me as I was walking from the main library, which was closed. No one was in the nearby park or even in the library’s parking lot that early afternoon during a weekday. Even though protests were taking place nightly, I contend that the police were over-reacting to one person walking through the parking lot. The aggressive driving was totally uncalled for, and yet the police employee likely, given the culture there, regarded it as measured rather than hyperactive. The underlying assumption, which I had heard from both local police and residents, is that any grouping of citizens in public is likely to turn violent without intimidation from an exaggerated show of force. That very assumption is what puts Arizona at odds with the First Amendment of the U.S. Constitution.
During that summer, the city’s mayor was bragging about how minimal the protests were there compared with those in other big cities in other States. If that differential was the result of intimidating peaceful protesters under the subterfuge that they would inevitably become violent because mobs are unruly, then the “success” came by trampling on the right of the people to assemble peaceably, which means without feeling intimidated. I would not call that success.

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1. Conner Borgelt, “ASU Class Holds Protest as Part of Its Final Assignment,” The Republic (azcentral.com), April 14, 2017.
2. Ibid.