It’s Only Fair

Astonishingly, organizations can violate their own mission statement without any manager or non-supervisory employee being aware of the violation. This can happen even when the people in an organization really do take their mission seriously. At Goodwill, the mission is to end poverty, a laudable goal. It follows explicitly (i.e., according to a sign in the stores) that “every customer has an equal opportunity to purchase any item for sale.” Although the sign bases this point on the fact that the goods “come from public donation,” I submit that ending poverty by giving the poor access to relatively low-priced merchandise is hampered if some customers are permitted to fill their carts with on-sale (i.e., color of week) items when the doors open. Certainly allowing those resale-minded customers to deprive other customers of a selection of items on sale (especially clothing, which even homeless people need) is not fair.

According to the sign, possible violations include any employee or volunteer of a store being able to purchase items in the store whether for themselves or others. “Nor may merchandise be reserved or set aside for anyone.” To be sure, recognition is also given to the possibility that a customer might think that the organization is not being fair. When I interviewed a store manager about whether allowing customers who resell items on sale in “garage sales” conveniently misconstrued as businesses to buy in such bulk that effectively deprives other customers, whose use for the clothing is for personal use, she dodged the question itself but took my point implicitly by admitted that she knew of no way in which the practice could be thwarted. I told her I had a few ideas, but she was not interested in them. I topld her I am a business ethicist and would be writing on this case. Patronizingly, she quipped, “Have fun writing your paper!” In retrospect, I wish I had replied, “Have fun managing!” How interested would the organization’s management be? I wondered at the time.

Goodwill could indeed have stepped in to prevent the obviously unfair practice of certain customers, who actually compete with each other in going around—as part of their re-selling businesses—to different Goodwill stores to swoop up as many shirts or pants on sale. 

A "garage sale" of a reseller open for business at her personal residence. Beyond the cars is the Goodwill store at which I had observed the opening of a major, half-off, sale on shoes and clothing (and misc) just a week earlier. Some of the athletic shoes, which sold for $7 without any negotiation (a sign that a reseller is hosting the "garage sale"), I had seen in a cart full of such shoes at the beginning of the sale at the Goodwill store. 

The personal-use customers can have little chance, or practical opportunity, to get an item on sale because Goodwill allows customers even at the opening of a sale to fill their carts entire of one kind of item (e.g., athletic shoes). Even if a wife/mother is buying athletic shoes for her husband and teenage kids, a whole cartful is suspicious. I witnessed a woman head immediately to the shoe section when the doors open and quickly throw as many athletic shoes in her card as she could before other customers had a chance to take advantage of the sale. Clearly, the monopolistic character of the woman’s behavior and that her commercial interests could eclipse the personal-use interest of other customers who would do without as a result not only reek of unfairness, but also violate the “equal opportunity to purchase any item in the store.”

A reseller had her cart full just seven minutes after the Goodwill store opened with a sale that would practically guarantee that the reselling would be lucrative. The number of men's shorts alone in this cart points to something beyond personal use. The resellers do not pay taxes on their profits because the sales, primped as "garage sales," are easy not to report. Legally, the income from genuine garage sales is taxable.

Meanwhile, Goodwill looks the other way undoubtedly because more revenue and less risk of having items unable to be sold are obtained when the re-sellers buy in bulk. In other words, the lack of recognition of the tilted status quo and of ideas on how to restore balance may not be accidents. A false premise that the status quo must be balanced, or that the status quo does not justify effort to achieve balance may also be in the mix. A policy could be put into effect that limits the number of same-classification items on sale that can be purchased by each customer.

Already I can think of ways in which the commercial customers could get around this limitation, for profit-seekers hate limits, whether internal or external. They could bring along family and friends to divide up the quickly stashed merchandise. They could fill their respective carts when the doors open and carefully stash their carts so to be able to make multiple trips to different cashiers.

At some point, however, store employees and even managers can be relied on to help enforce the policy by being on the lookout for such tricks. A customer’s claim that she needs a cartful of sneakers in order to try them on to find one that fits can be easily rebuffed. Only six items are allowed in the fitting rooms anyway. Such games and how to deconstruct them could be incorporated into training. It is not difficult, for example, to see people quickly filling their respective carts with one or two item-classifications shortly after the doors open. The store manager with whom I spoke had no problem in identifying the re-sellers who buy in bulk. Her hands’ off, laissez faire attitude was problematic as it did not fit with the organization’s mission to reduce poverty in a fair way, which in turn requires equal access to the merchandise. Hiding behind the relatively effortless status quo, as if it were intractable or even as fair as possible, evinces a willingness to live with an unfairness that could otherwise be reduced even if it cannot be eliminated. Not having any ideas when imperfect measures could make a dent evinces an unwillingness to think too far from the status quo (i.e., outside the box).

See "A Lack of Good Will at Goodwill."

See also Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon. 

Increasing Income Inequality in the U.S.: Deregulation to Blame?

Most Americans have no idea how unequal wealth as well as income is in the United States. This is the thesis of Les Leopold, who wrote How to Make a Million Dollars an Hour. In an essay, he points out that the economic inequality increased through the twentieth century. His explanation hinges on financial deregulation. I submit that reducing the answer to deregulation does not work, for it does not go far enough.
In 1928, the top one percent of Americans earned more than 23% of all income. By the 1970’s the share had fallen to less than 9 percent. Leopold attributes this enabling of a middle class to the financial regulation erected as part of the New Deal in the context of the Great Depression. In 1970 the top 100 CEOs made $40 for every dollar earned by the average worker. By 2006, the CEOs were receiving $1,723 for every worker dollar. In the meantime was a period of deregulation beginning with Carter’s deregulation of the airline industry in the late 1970s and Reagan’s more widespread deregulation. Even Clinton got into the act, agreeing to shelve the Glass-Steagall Act, which since 1933 had kept commercial banking from the excesses of investment banking. The upshot of Leopold’s argument is that financial regulation strengthens the middle class and reduces inequality by tempering the wealth and income of those “on the top.” Deregulation has the reverse effect.

The increasing role of the financial sector in the second half of the 1900s means that finance itself could claim an increasing share of compensation.  

Leopold misses the increasing proportion of the financial sector in GDP from the end of World War II to 2002. The ending of the Glass-Steagall act in 1998 does not translate into more output on Wall Street relative to other sectors. Indeed, the trajectory of the increasing role of finance in the U.S. economy is independent of even the deregulatory period. Leopold’s explanation can be turned aside, moreover, by merely recognizing that the “young Turks” on Wall Street have generally been able to walk circles around the products of their regulators. Even though financial deregulation can open the floodgates to excessive risk-taking, such as in selling and trading sub-prime-mortgage-based derivatives and the related insurance swaps, I suspect that the rising compensation on Wall Street has had more to do with the increasing role of the financial sector in the American economy.
The larger question, which Leopold misses in his essay, is whether the “output” of Wall Street is as “real” as that of the manufacturing and retail sectors, for example. Is there any added value to brokering financial transactions, which in turn are means to investments in such things as plants and equipment used to “make real things”? Surely there is value to the function of intermediaries, but as that function takes on an increasing share of GDP, it is fair to ask whether the overall value of “production” is inferior.

Given the steady increase of the financial sector as a percent of GDP, one would expect a more steady divergence of these two lines. Reagan's deregulation fits the divergence pictured, though one would expect a further increase in divergence after the repeal of the Glass-Steagall Act in 1998.  Source: Les Leopold

As for the rising income and wealth of Wall Streeters, increasing risk, which is admittedly encouraged by deregulation, is likely only part of the story. If the financial products are premium goods as distinct from the goods sold at Walmart, for instance, then as the instruments are increasingly complex one would expect the compensation to increase as well.
Leopold is on firmest ground in his observation that Americans are largely oblivious to the extent of economic inequality in the United States. Few Americans have a sense of how much more economic inequality there is in the U.S. than in the E.U., where the ratio of CEO to average worker compensation is much lower. One question worth asking centers on what in American society, such as in what is valued in it, allows or even perpetuates such inequality, both in absolute and relative terms. The relative terms suggest that part of the explanation lies in cultural values having relative salience in American society. Possible candidates include property rights and the related notion of economic liberty, the value placed on wealth itself as a good thing, and the illusion of upward mobility that allows for sympathy for the rich from those “below.”
In short, beyond actual regulations, particular values esteemed in American society and the increasing role of the financial sector in the American GDP may provide us with a fuller explanation of why economic inequality increased so during the last quarter of the twentieth century and showed no signs of stopping during the first decade of the next century. Americans by in large were wholly unaware of the role of their values in facilitating the growing inequality, and even of the sheer extent of the inequality itself. In a culture where political equality has been so mythologized, the acceptance of so much economic inequality is perplexing. At the very least, the co-existence of the two seems like a highly unstable mixture from the standpoint of the viability of the American republics “for which we stand.” Yet absent a re-calibration of societal values, the mixture may be an enduring paradox of American society even if the democratic element succumbs.

Source:

Les Leopold, “Inequality Is Much Worse Than You Think,” The Huffington Post, February 7, 2013.

CEO Compensation: How Much Is Too Much?

From the previous year, the medium value of salaries, bonuses and long-term-incentive awards for the CEOs of 350 major American companies increased by 11% in 2010 to $9.3 million, according to the Hay Group.  Corporate net income increased by a medium of 17% and shareholders medium returns, including dividends, increased by 18 percent. Share prices also increased more than the CEO compensation. However, bonuses increased 19.7%, which is just barely more than the percentage increases in corporate profit and shareholder returns.
Of course, comparing percentages can be misleading because the base amounts can differ markedly. Ten percent of 100, for example, is less than ten percent of 1000. The issue regarding CEO compensation may have less to do with comparisons to corporate net income and stockholder returns, as these are different categories, than to the absolute amount of the compensation.
One might compare, for example, the amounts earned by a typical CEO and a typical worker. In 2000, on average, CEOs at 365 of the largest publicly traded U.S. companies earned $13.1 million, or 531 times what the typical hourly employee earned. The corresponding ratio in 1990 was 85 and in 1980 it was only 42, according to Finfacts. It is unlikely that the contributions, and thus value, of CEOs to corporate bottom lines were increasing accordingly--both in absolute terms and relative to the sweat of hourly employees. In fact, Sarah Anderson points out that many of the executives responsible for the financial crisis of 2008 used it as a springboard financially. Specifically, at ten of the financial firms that received bailout money, executives were awarded stock options when the market was at bottom. After the taxpayer funds helped lift the price of the stocks, "the executives who brought the global economy to the brink of disaster" saw their portfolios increase in value by $90 million. This surely violates the maxim of justice as fairness, especially as theorized by John Rawls.
Furthermore, it is doubtful that American CEOs are more talented than those in Europe and Asia. According to Finfact, income inequality in the U.S. was, as of 2003, greater than anywhere else in the industrialized world. One could be excused for asking whether the highest CEO figures are beyond even what one person could reasonably spend (without giving tens of millions away at a time without a thought) even in a very comfortable life of luxury.
Viacom CEO Philippe Dauman, for example, topped the list at $84.3 million, more than double his 2009 pay. Even if a significant portion of this figure are stock options that cannot be sold for several years, the total amount is so far beyond what a person can use even for luxuries that one might wonder what impact it could have on the CEO. Moreover, the amount dwarfs by many times the salaries even of middle level managers, not to mention workers. The amount itself is sufficient to raise some questions.
For example, can the worth of a particular CEO to a corporation really be worth $84 million?  Is that amount necessary to motivate or sufficiently reward a manager who happens to be the CEO? Is the potential CEO labor market really so limited? Is corporate governance itself at issue? Given the influence that CEOs can have over the boards tasked with overseeing them as well as setting executive compensation, the obscene numbers may be indicative of the conflict of interest.  Where a CEO is chairman of the board too (i.e., duality), the conflict of interest is structural and bears on corporate governance itself. That American CEOs get paid more on average than European CEOs suggests that the American compensation amounts may be due to arrangements pertaining to American corporate governance rather than occurring naturally from a competitive labor market.
From a governmental standpoint in a republic, the high CEO compensation signifies concentrated private power. Such power may be an inherent threat to representative democracy wherein each citizen able to vote has one vote. In other words, the pay may incur systemic risk to the republic itself as a representative democracy. Such concerns can and should constrain even private contracts, for individual transations should not be allowed to put the whole at risk.Yet if concentrated wealth already has bought the mainstream candidates and government officials such that they are in its grip, the high compensation amounts are effectively protected and the republic can be expected to run without contradicting this particular powerful vested interest. The only way out of this negative feedback group is for the people to recognize the manipulation and corruption in the halls of their government and vote accordingly. The problem is that such action is apt to be decentralized unless candidates outside the vested interests can raise above the din of the party lines.

Sources:

Joann Slublin, “CEO Pay in 2010 Jumped 11%” The Wall Street Journal, May 9, 2011, p. B1.

Michael Hennigan, "Executive Pay and Inequality in the Winner-Take-All Society," Finfacts, August 7, 2005.

Sarah Anderson, "Can Europe Pop the U.S. CEO Pay Bubble?" CommonDreams.org, September 2, 2009.

See related essay: "Wall Street Bonuses and TARP: A Tale of Two Cities"

Inequality in Corporate Capitalism: Beyond Redistribution

I contend that a concern that too much income or wealth is concentrated “at the top” in the U.S. does not necessarily translate into a demand for redistribution; rather, the inequality itself may be thought dangerous to the viability of a representative democracy (i.e., a republic form of government) and inherently unfair. Even though redistribution may be entailed as large banks and business corporations are dismembered, ridding the system of the concentrations of wealth does not in itself mean that those “at the bottom” should or would necessarily become richer. For example, to say that CEOs should not be allowed to make millions of dollars, especially when their companies or banks lose money, does not imply redistribution because there is no claim that the compensation be directed to others for their benefit. The point is that the compensation itself is unfair. Indeed, saying that corporate capitalism is itself unfair because some people benefit beyond what they deserve is not to say that their benefits should be redistributed; rather, the point is simply that such benefits should not be allowed.

The Occupy Wall Street protesters should have started out by demanding that corporate capitalism be extirpated or expunged from the American society and polities without demanding redistribution. Neither corporate downsizing nor selling off businesses or divisions would necessarily entail redistribution to the lower and middle classes. I suspect the beneficiaries of the transition would be stockholders (while upper echelon executives see less almost immediately in cash and stock income). Even though lower and middle income people could gain, the real driver behind the decrease in the economic inequality would be that the super-rich are not so rich. This is not to say that economic equality would be the goal; talent and effort justify more compensation. The problem is when the system is tilted so the inequality in compensation is allowed to far beyond its legitimate basis. To the extent that the system of corporate capitalism was itself in the protesters’ crosshairs, then simply redistributing wealth to momentarily mitigate the amount of economic inequality would fall short.

In fact, the protesters would have been more credible (and successful) were they to have distanced themselves from the topic of redistribution because they would quite obviously stand to gain from it. In refusing to police the “redistribution” signs opened the protesters up to a conflict of interest wherein their own private interests could be seen to bias their claim to acting for the good of the whole.

Sadly, the protests were enervated from within by a lack of resolve to focus on a few key points; the movement’s own failure to delimit itself in terms of demands allows for such competing agendas as redistribution to emerge and gain a footing. The Wall Street Journal dispatched reporters in five cities to interview over 100 protesters. “The picture that emerged is a motley conglomeration of people with widely varying goals—and some with no clear-cut goals at all other than to denounce greed.” There is “a tolerance—and, sometimes, sympathy—for causes well outside of the mainstream.” Inside the demonstrations, “there is broad acceptance of a wide range of opinions and agendas—even those that occasionally border on the absurd.” This atmosphere provided the context in which redistributive agendas could encroach on the more fundamental point that corporate capitalism itself should be replaced with something perhaps more akin to Adam Smith’s version (i.e., not necessarily with socialism).

Douglas Schoen, a former strategist for Bill Clinton, surveyed 198 protesters in New York City. Schoen reports his results as the following: “The demonstrators believe in redistribution of wealth, government-provided health care and education no matter what it costs, increased regulation and protectionist trade legislation.” Schoen concluded the protesters were well to the left of the independents needed by the Democrats to win the White House in 2012, so his summary may be biased to show the movement in a less than favorable light. For instance, he missed the objectives voiced by some of the protesters to eliminate the “legal person” status of a corporation—and, indeed, corporate capitalism itself. Even so, his survey shows that it redistributive goals were among the protesters’ agendas. The same thing can be seen in a report in the Huffington Post.

According to the Post “The gap separating the richest 1 percent of Americans from the rest of the country has emerged as arguably the single most prominent rallying cry of the Occupy Wall Street movement. . . . The Occupy protesters identify themselves as "the 99 percent" —referring to the majority of the population that has had to contend with limited economic and social opportunities while money continues to accrue to the very wealthiest citizens.” The “limited economic and social opportunities” intimate a desire for redistribution from “the very wealthiest citizens.”

To be sure, if the economic/political power of “the very wealthiest citizens” is a threat to the republics (and unfairly gotten), a tax on them would be justified and this implies redistribution through government spending. Even so, that spending can be for the good of the whole rather than funneled to the poor exclusively means that the redistribution can be to the whole rather than from X to Y within the whole. Furthermore, the redistribution itself would not be the point, and as such would only be a temporary byproduct as the concentrations of excessive private wealth that constitute an inherent threat to the viability of representative democracy are rendered innocuous to the body politic (and the economy). 

While not without merit, the ancillary “redistributionist” demands brought with them a certain opportunity cost in foregone focus. In fact, I would not be surprised to find that pro-business groups funded “redistribute” signs amid the protests; it was undeniably in the business interest to discredit the demand that the modern corporate form itself (including the “legal person” doctrine) be made illegal beyond a certain cut-off in assets and/or revenues. This demand is particularly toxic to American business because both corporate capitalism and its sordid impact on the American system of representative democracy are front and center, and thus at risk in themselves. It is not about limiting a CEO’s bonus or taxing corporations more for entitlement programs; rather, the mega-corporation itself—as an economic template—is the target. In short, the protesters missed a great opportunity to make the focused claim that extreme economic inequality itself is inherently unfair (i.e., without adding into the mix the virtues in redistribution) and that modern corporate capitalism itself causes it and leverages it in corrupting the halls of government with still greater inequality as a result.

It is the inherent unfairness of extreme economic inequality, rather than any of the benefits from redistribution, that lies at the root of the rise again to populism and is the basis of the complaint; the system of modern corporate capitalism is culpable too as the structure or conduit through which the inequality is magnified. The extent of the inequality can be seen in the following comparisons: the total income of the top 1% is the same as the total income of the bottom 60 percent, and the total wealth of the top 1% is the same as the total wealth of the bottom 90 percent. That is, one percent of the population has as much wealth as ninty percent have.The wealth of the one percent is thus extremely concentrated. 

On October 26, 2011, the Huffington Post reported some statistics on the degree of economic inequality in the U.S. at the time. The report is worth quoting at length:   

“Income for the wealthiest Americans has nearly tripled since 1979, while remaining relatively stable for the rest of the country, according to figures released this week by the Congressional Budget Office. The numbers offer a striking illustration—the latest one in a long series—of how wide the gap has grown between America's richest citizens and everyone else. For the richest 1 percent of Americans, income rose a full 275 percent between 1979 and 2007, —accounting for inflation—according to the CBO. For the poorest 20 percent of Americans, meanwhile, income rose just 18 percent in the same time period. For the middle 60 percent of earners—that is, the 21st through 80th percentile—income grew by just under 40 percent. And for the 80th through 99th percentile, income grew by 65 percent. That's a rapid climb, but the top 1 percent experienced a rate of growth more than four times as fast.”

“Above all else, the CBO's figures suggest that the richer you are, the richer you'll get over time. But this is far from the first report to reach that conclusion: Numerous studies have shown that America's very highest earners have been steadily pulling away from the rest of the population for a generation. Even as income for the richest 1 percent has nearly tripled since 1979, wages for the lower and middle classes have hardly moved. . . . Today, the 400 richest people in the country control more wealth than the bottom 50 percent of households, and the U.S. ranks roughly alongside countries like Uganda, Cameroon, Ecuador and Rwanda  in terms of the gap between its poorest and wealthiest citizens.”

It is highly probable that the extent of the inequality in wealth had arguably surpassed that which could be justified in terms of fairness (i.e., from more compensation for greater effort and talent). Behind the figures lay a system of corporate capitalism that had furtively rendered the republican form of government into a plutocracy (i.e., ruled by and in the interest of wealth). This is the point—not that more income should be redistributed within the existing system.

In conclusion, redistribution short-circuits the more fundamental demand that the political economy itself be re-configured—rid of the mega-corporations and the billionaires—because the system itself has become inherently unfair as evinced by the extreme inequality in income and wealth. Besides being unfair in terms even of Adam Smith’s moral sentiment, mega-corporate (rather than small and medium business) capitalism engenders or facilitates concentrations of wealth even after they have become dangerous to both the economy and democracy. The systemic risk to which the market is vulnerable is that the system itself is geared predominately to further increase those concentrations at the expense of economic justice and political democracy. In other words, corporate capitalism knows no limits within itself concerning concentrations of capital. Regarding externally-imposed limitations, the large corporation inherently seeks to enervate any extrinsic obstacle, including legislatures and regulatory agencies. The mega-machines will continue to amass capital unless the large corporation itself becomes the target and is found by a threshold of people in a society to be irreconcilable with fairness and accountability. Efforts to merely refine the existing system will surely founder. In other words, the point is not increased redistribution, even if that is a byproduct in the transition.

See related essays: "Occupying Wall Street: A Self-Regulated Protest?" and "Protest Movements 101"

Sources:

Alexander Eichler, “One Percenters’ Income Nearly Tripled In Last Three Decades: CBO,” The Huffington Post, October 26, 2011. http://www.huffingtonpost.com/2011/10/26/income-inequality_n_1032632.html

Douglas Belkin, Tamara Audi, and Danny Yadron, “Protests Put Democrats in Bind,” The Wall Street Journal, October 25, 2011. http://online.wsj.com/article/SB10001424052970203911804576651410222669534.html

A U.S. Visa Fast-Track For Rich Investors

The New York Times reported in December 2011 that affluent foreigners had been rushing to take advantage of a U.S. immigration program. The foreign applicants must invest at least $500,000 in construction projects within the United States. The number of applicants had nearly doubled since the end of 2008 to more than 3,800 in the 2011 fiscal year. The intent of the program is to spur economic development at a time of high unemployment. Yet the program has also been characterized as a cash-for-visas scheme. Besides the question of whether the program’s rules have been stretched in New York City to qualify projects in prosperous areas for special concessions, an ethical question can be raised concerning who should get a visa.
Obviously, the program’s designers must have known that only wealthy people could qualify. A public-interest ethical argument could be made that they deserve a green card because they contribute to economic development out of which jobs for Americans can ensue. Indeed, to the extent that the additional investment results in more economic activity, the visitors making the investment in 2011 could have been helping to forestall a double-dip recession. This was a distinct possibility at the time, given the E.U. debt crisis.
The ethical issue is in the exclusion of people who are not wealthy. The principle of fairness would seem to mandate that just as many non-rich foreigners be granted green cards above the ordinary limit. However, this would seem to be rather artificial—a sort of tit for tat—as in “we’ll accept your tax cut if you accept ours.” Moreover, in the context of high unemployment, any such increase in visas should not add to the supply of labor.
John Rawls suggested that in designing such a system as applying for a green card, a veil of ignorance as to whether one will be rich or poor should be utilized. Rawls’ thinking was that if the designers cannot know whether they or their friends will be rich or poor, then the proposed system design will be fair (i.e., there would be the chance that one’s friends are poor foreigners unable to get a green card). While fair in itself, this ethical device may not adequately take into account the public interest that could be satisfied by only one segment (e.g., the rich). Should the U.S. renounce the possibility of more economic development, particularly at a time of high unemployment, just because poor and middle-class foreigners cannot participate?
Related to the matter of income and wealth, it can be asked from both the public interest and ethical standpoints whether capital investment is more valuable economically than highly skilled and educated foreigners. To be sure, the latter ought not crowd out citizens and existing residents who have comparable skills and knowledge, and it is presumably possible to further train and educate existing citizens and residents.
For example, the very same issue of the New York Times containing the story of the green cards for foreign investors reported that M.I.T. was announcing an expanded program that would still allow anyone anywhere to take M.I.T. courses online free of charge, but would add online labs, self-assessments and student-to-student discussion. Also, for a small charge, a certificate can be obtained. At the time, the university’s free OpenCourseWare included nearly 2,100 courses and had been used by more than 100 million people. Rafael Reif, the provost, gave the following as the operating assumption: “There are many people who would love to augment their education by having access to M.I.T. content, people who are very capable to earn a certificate from M.I.T.” To be sure, a certificate would not be a degree, but in terms of non-professional jobs the former may be sufficient. “The most important thing is that it’ll be a certificate that will clearly state that a body sanctioned by M.I.T. says you have gained mastery,” Reif added. The notion that cost (and debt) ought not be an obstacle to a natural drive to learn more, whether in terms of skills or knowledge, is foreign in the United States (and increasingly in Europe as well).
Yet from the standpoint of economic development as well as jobs, viewing education as an investment rather than as a purchased product would likely pay substantial dividends. Where such an approach to vocational training and higher education falls short for citizens and residents, welcoming the best and the brightest from abroad—even training and educating them at online programs such as M.I.T’s—may be an investment policy even more beneficial than that of attracting additional capital investment in construction projects.

Sources:

Tamar Lewin, “M.I.T. Plans to Expand Its Free Online Courses,” The New York Times, December 19, 2011.

Patrick McGeehan and Kirk Semple, “Rules Stretched as Green Cards Go to Investors,” The New York Times, December 19, 2011. 

Judicial Ethics: Friendship and Philanthropy

Harlan Crow was a Dallas real estate magnate and a major contributor to conservative causes. He did many favors for his friend, Clarence Thomas, “helping finance a Savannah library project dedicated to Justice Thomas, presenting him with a Bible that belonged to Frederick Douglass and reportedly providing $500,000 for [Virginia] Thomas to start a Tea Party-related group.” The two friends spent time together at “gatherings of prominent Republicans and businesspeople at Crow’s Adirondacks estate and his camp in East Texas.” Crow also “stepped in at Thomas’ urging” to finance the multimillion-dollar purchase and restoration of the cannery that had employed the justice’s mother. Crow’s restoration “featured a museum about the culture and history of Pin Point that has become a pet project of Justice Thomas’s. . . . While the nonprofit Pin Point museum is not intended to honor Justice Thomas, people involved in the project said his role in the community’s history would inevitably be part of it, and he participated in a documentary film that is to accompany the exhibits.”

News “of Mr. Crow’s largess provoked controversy and questions, adding fuel to a rising debate about Supreme Court ethics. But Mr. Crow’s financing of the museum, his largest such act of generosity, previously unreported, raises the sharpest questions yet — both about Justice Thomas’s extrajudicial activities and about the extent to which the justices should remain exempt from the code of conduct for federal judges. Although the Supreme Court is not bound by the code, justices have said they adhere to it. Legal ethicists differed on whether Justice Thomas’s dealings with Mr. Crow pose a problem under the code.”

The code says judges “should not personally participate” in raising money for charitable endeavors, out of concern that donors might feel pressured to give or entitled to favorable treatment from the judge. In addition, judges are not even supposed to know who donates to projects honoring them. . . . (T)he restriction on fund-raising is primarily meant to deter judges from using their position to pressure donors, as opposed to relying on ‘a rich friend’ like Mr. Crow, said Ronald D. Rotunda, who teaches legal ethics at Chapman University in California.” On the other side of the argument, Deborah L. Rhode, a Stanford University law instructor who has called for stricter ethics rules for Supreme Court justices, said Justice Thomas “should not be directly involved in fund-raising activities, no matter how worthy they are or whether he’s being centrally honored by the museum.”

Ethical Analysis:

Ethical analysis is hardly an objective science. Nietzsche’s view that a philosopher’s philosophy is merely a reflection of his or her most dominant instinct expressed via cognition seems particularly relevant. In other words, out of the tussle of one’s instincts one remains and it can be expressed as one’s thought. For instance, the thought that first came to my mind in reading the Times article was that exempting U.S. Supreme Court justices from the judicial ethics code violates the ethical principle of fairness. This “first find” ethically-speaking seems to me to be the most indubitable conclusion of the case, ethically-speaking. However, my perception as well as “the salience” of the principle of fairness may have more to do with which of my instincts is most dominant in my psyche than any objective determination of ethical outcome.

The principle-instinct of fairness could be so dominant for me because it was conditioned as such through my early years. Specifically, I have a brother who is 1.5 years younger than me, and the closeness in age meant that the principle of fairness was seldom far removed when we were kids. For instance, awhile after we moved to a house my parents had had built, they made split our large, shared bedroom into two. The question not far from the surface all around was “is the space equal?”—as if square feet would matter to two boys (we eye-balled it and concluded the rooms were “fair enough”).

What instinct and supporting personal experience lies behind the lawyer’s thou shalt not claim that justices should not be involved in fundraising PERIOD? Is there an ethical principle in that asseveration? Considering that the lawyer at Stanford does not have a graduate degree in ethics (or law, for that matter), her declaration is highly likely based on a dominant instinct that has an urge to express itself in the garb of ethical language.

The lawyer at Chapman is more discerning, pointing to the purpose in the ethical prohibition on fundraising: the point is to keep justices from using their influence to get rich people to donate. In the case of Justice Thomas, it appears that Harlan Crow has wanted to make his donations. This, unlike had Thomas used his influence to secure the gifts, is not ethically problematic. The ethical problem would arise should a matter of concern to Crow come before Thomas’ court; the justice would be ethically obliged to recuse himself to obviate his personal conflict of interest. Announcing such a conflict would not be sufficient, as the underlying temptation to lean in favor of the benefactor would still exist; it would simply be apt to be better camouflaged by legalese. Of course, should a justice choose not to know the sources of beneficial donations, recusals to avoid such conflicts of interest would be less likely.

Therefore, one way to play it ethically is to allow the particular justice to decide how much he or she wants to avoid having to recuse based on knowing the identity of a benefactor. Hardly objective, this ethical strategy is one of several that are possible. It reflects empowering individual justices to determine the extent to which they want to subject themselves to the possibility of having to recuse to avoid a conflict-of-interest. The principle of boyhood fairness insists that the strategy be applicable for any federal judge, without exception. 

Last but not least, the field of judicial ethics would be better served if American law schools would follow their European counterparts in hiring legal scholars (i.e., holders of the doctorate in law, the J.S.D.). Also, a scholar of judicial ethics should have at least one degree in philosophy (ethical theory)—preferably a masters or a joint Ph.D./J.S.D.

Source:

Mike McIntire, “Friendship of Justice and Magnate Puts Focus on Ethics,” The New York Times, June 18, 2011.

The Banking Lobby: Writing Its Own Ticket in Washington

The Huffington Post observed in 2012: “Wall Street's campaign spending and lobbying power is so intimidating that banks have repeatedly stuck the public with the tab for their losses and no one in Washington stops them.” This was a significant change to be sure from President Jackson depriving the Second National Bank of the U.S. of funding in 1832.

For example, as proposed in early 2012, “(m)ortgage lenders would be encouraged to provide greater relief to borrowers who are in less need of help while offering scant assistance to the most troubled homeowners.” These were the terms of “a proposed $25 billion settlement between the nation's five largest banks, attorneys general in nearly every state and the Obama administration.” The banks “would receive greater credit toward satisfying the terms of the deal when they help borrowers who owe less than 175 percent of the value of their homes. Helping borrowers who owe more than 175 percent would qualify for less credit.” It is as if the homeowners most under water were being presumed to be at fault, even in the case of liar’s mortgages foisted by bankers.

The terms of the proposed settlement suggest that the elected representatives were less oriented solving the housing crisis than to collecting campaign contributions from the banks. “To really make a difference in the housing crisis, you have to assist high [loan-to-value] homeowners," said Diane Thompson, an attorney at the National Consumer Law Center. "Otherwise, at some point, they're all going to walk away from their homes.” The banks had long been resisting calls to forgive large portions of loan balances in order to avoid recognizing losses. According to the Huffington Post, the settlement’s terms “appear to satisfy the banks on this point, minimizing the pressure to hand out relief to severely underwater borrowers.” The unfairness can also be seen from the conflict of interest in the stipulation that “states whose residents appear to be victims of illegal foreclosures could take such cases to a committee headed by North Carolina's banking commissioner.” The mechanism reflects the banking lobby effectively heading the settlement between the banks and the government officials. In other words, the banks get to write their own settlement, even though they had been at least partially at fault, as in their liar loans and robo-signing mechanism.

Even giving bankruptcy judges “the legal authority to modify principal balances on mortgages in a way that is fair to both parties,” which “would have allowed more than a million ordinary Americans to keep their homes,” was too much for the banking lobby. It got the U.S. Senate to vote down the amendment in 2009 even as banks were foreclosing on millions of Americans. David Kittle, chairman of the Mortgage Bankers Association, gleefully said, “We led the way on this, and we are clearly responsible for defeating this for the third time in the last year.” Meanwhile, Sen. Dick Durbin (D-Ill.) told a radio host, “And the banks—hard to believe in a time when we're facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.” This was a striking admission, as was the banks’ dominance a year after the financial crisis—a near-meltdown in which the banks played a significant role.

“The finance, insurance and real estate (FIRE) sector combined to spend $6.8 billion on federal lobbying and campaign contributions . . . from 1998 through 2011. . . . That's $1 billion more than any other sector spent on Washington.” Lawmakers are under such pressure to amass campaign cash that the contributions buy the contributors access, and thus influence. The American Banker’s Association, the U.S. Chamber of Commerce, and the Business Roundtable multiply the bank’s influence even more. Additionally, the lobby can utilize the influence of community banks and credit unions, which goes far beyond their role in the economy. The fear voiced in the constitutional convention in 1787 that Congress would become an aristocracy based on wealth—being disproportionately oriented the moneyed interest—had come to pass well before the financial crisis of 2008.

So it should be no surprise that in May 2010, Sen. Tom Harkin (D-Iowa) sought to cap ATM fees--noting that “ATM fees average $2.50 and can run as high as $5 . . . while the real cost of processing a transaction is about 35 cents,” the banks “opposed the idea, arguing that capping fees would just lead to fewer cash machines, including those owned by banks.” As a result, there wasn’t even a floor vote. His own floor leader, Harry Reid, denied it because Republicans had not agreed to it. In short, banks get their way on both sides of the aisle. The republic itself serves the banks even when they have acted badly or unfairly. Even if this means that democracy is a sham in the U.S., even such a recognition would not be likely to make a difference—the electorate so dispersed and disoriented, even subtly manipulated against its own interest in democracy. 

Sources:

Loren Berlin and D. Levine, “Robo-Signing Settlement Might Not Provide Homeowners With Needed Help,” The Huffington Post, February 2, 2012. 

Dan Froomkin and Paul Blumenthal, “Auction 2012: How the Bank Lobby Owns Washington,” Huffington Post, January 30, 2012. 

Analysis of Italy’s 2016 Referendum: Beyond the Euro and the E.U.

The predominate axis of analysis in the wake of the Italian referendum in early December, 2016 centered on the euro, the federal currency of the European Union. 

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

Fraud in Selling Sub-Prime Mortgage-Based Bonds: Beyond Accountability

“In December 2011, the S.E.C. publicized its civil securities fraud charges against top executives from Fannie Mae and Freddie Mac for understating their exposure to subprime mortgages, which resulted in the government taking them over.”[1] Robert Khuzami, then the head of the S.E.C.’s enforcement division, said at the time that “all individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”[2] Pursuing even senior ranks has the air of fairness economically as well as in terms of the dictum, no one is above the law. So much for words; how about the accompanying deeds?

The full essay is at "Essays on the Financial Crisis."

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[1] Peter Henning, “Prosecution of Financial Crisis Fraud Ends With a Whimper,” The New York Times, August 29, 2016.

[2] Ibid.

[

Apple Owes Back-Taxes in the E.U.: Blame Ireland or Apple?

The European Commission issued a formal decision on August 30, 2016 that the state of Ireland “recoup roughly €13 billion ($14.5 billion) of unpaid taxes accumulated over more than a decade by Apple, Inc.”[1] The decision “shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes.”[2] E.U. law “forbid companies from gaining advantages over competitors because of government help.”[3] This applies both the federal government and the state governments, so the law could be better stated as, “No state government shall help companies gain advantages over their competitors.” Presumably Ireland’s government made the offer of help, rather than Apple getting that government to comply with the company’s wishes. If so, the state government rather than the company should be held responsible. Put another way, if Apple’s board and management considered the Irish offer to be legitimate at the time, Apple should not be held to pay the back taxes; rather, the state government should pay a penalty to the Commission.

In the wake of the decision, Tim Cook, CEO of Apple, wrote, “Apple follows the law and we pay all the taxes we owe.”[4] In other words, the company took the Irish offer as legal and thus paid only the taxes owed as per Ireland’s position. To be sure, the arrangement was sweet for the company. According to the Commission, Ireland offered Apple tax arrangements in 1991 and 2007 allowing the company “to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.”[5] Ireland allowed the company to allocate profit at an Irish-registered unit called Apple Sales International, which purchased Apple goods from its outside manufacturers and sold them at a markup outside North and South America. In 2011, the unit brought in €16 billion in profit, and allocated under €50 million of it to Ireland where it was subject to taxation. The rest was allocated to a “head office” registered in Ireland and thus outside of U.S. jurisdiction.[6] The tax benefit is clearly unfair prime facie, to the U.S., and to other foreign companies doing business in the E.U. It should be noted, however, that the U.S. tax system encouraged “companies to find as low a foreign tax rate as they can, book as much profit as possible outside the U.S. and leave the money overseas.”[7] This is precisely what Apple did.

The principal question before us here is not whether the arrangement was fair, but, rather, whether the state government or the company was to blame, and thus deemed culpable to be fined or taxed. It is significant that the E.U.’s antitrust commissioner, Margrethe Vestager, noted that the commission’s investigation “concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.”[8] The state government is thus the culprit here in that it granted the illegal benefits. Doubtless Apple’s management and board had no reason to suspect that an offer from a government would be illegal. When a U.S. state government makes an offer to a company so it will build a factory in the state, the company’s management does not have reason to suspect that the offer is against U.S. law.

Hence, a spokeswoman for the U.S. federal treasury observed that “retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules” of the E.U. state governments.[9] Apple’s benefits may be quite unfair, yet so too are retroactive tax assessments when the company had no reason to call into question Ireland’s tax rules. I suspect that the unfairness in the former biased E.U. federal officials against viewing the state government rather than the company as culpable. If the issue is that of a state government violating federal law, then the federal executive should hold the state government to account, and thus fine it rather than the company.

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[1] Natalia Drozdiak and Sam Schechner, “$14.5 Billion Irish Tax Bill,” The Wall Street Journal, August 31, 2016.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Richard Rubin, “EU Decision Upsets Treasury, Congress,” The Wall Street Journal, August 31, 2016.

“Companies based in the U.S. owe the full 35% corporate tax rate on their global profits. They get tax credits for payments to foreign governments, and they don't pay the residual U.S. tax until they bring the money home.”

[8] Drozdiak and Schechner, “$14.5 Billion Irish Tax Bill,”, italics added.

[9] Ibid.