Russian Private Property: Based on Fairness or Legality?

n a move to shore up popular support before the presidential election in 2012, Vladimir Putin called for a windfall levy on the dishonest privatisations of the 1990s. “We need to close the problems of the 1990s, of what, speaking honestly, was dishonest privatisation,” he told tycoons meeting at a congress of Russia’s big business lobby. He went on to say, “We need to establish the social legitimacy of private property itself and social confidence in business.”[1] The implication is that just acquisition is requisite to private property being recognized as legitimate, societally.

Directly contradicting Putin’s assumption, Mikhail Prokhorov, the Russian billionaire who was running at the time against Putin for the presidency, said, “To review the [privatisation] results now would destroy the legitimacy of all property rights in the country. The problem is fundamental—everything that was done then was legal even if it wasn’t just.”[2] In other words, the acquisition need not be just for the property to be legitimate. In fact, it is the taking of private property that was acquired legally that undercuts the legitimacy of private property. If this is because such a taking is unfair, then why wouldn’t the unfairness in the privatisations in the 1990's also negate the legitimacy of the private property?

1. Catherine Belton, “Putin Calls ForWindfall Levy on “Dishonest” Privatisations,” Financial Times, February 10, 2012. 
2. Ibid.

Distinguishing Entitlements from the Safety Net

In 2012, Congress lost sight of the fundamental purpose of a safety net, extending it beyond the difference between life and death. By zeroing in on the purpose of a safety net, Congress can both save money and better provide for the survival of those who are not providing it for themselves. Of such people, where survival itself is at stake, questions of being deserving pale in comparison to society’s obligation to fend off starvation, sickness and homelessness. Ironically, by extending the safety net beyond survival, Congress has undercut its role in providing for its citizens’ survival.

The “government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, . . . declined from 54 percent in 1979 to 36 percent in 2007,” according to a Congressional Budget Office analysis published in 2011.[1] Making the secondary mission primary undercuts the primary mission by putting it at risk.

Objections to the secondary mission as unnecessary can spill over as criticism of the primary mission as if it too were not necessary. “Many people say they are angry because the government is wasting money and giving money to people who do not deserve it. But more than that, they say they want to reduce the role of government in their own lives. They are frustrated that they need help, feel guilty for taking it and resent the government for providing it.”[2] A wealthy retired person drawing social security insurance ought to feel guilty; the insurance program is not a savings account. Criticism of this category mistake can impact politically the funding of social security for those who need it. For example, even as wealthy retirees draw on social security, the social security disability program is work-based, meaning that a minimum number of quarters of work are necessary even for one to apply for benefits. Making a safety net dependent on a work history cuts off the long-term ill from the safety net. Moreover, the requirement implies that a person who has a disability does not deserve to survive independently of work. For a safety-net program to be dependent on anything means that the program is not part of the safety net, as safety nets are by definition not conditional. Yet where a society so values work as a source of a person’s value (e.g., “I am a plummer”), a program can easily be assumed to be part of the safety net without actually being part of it.

Related to the political cost of criticism of superfluous programs (i.e., beyond survival) is the refusal to fund true safety-net programs sufficiently. Congress has “expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt. In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue.” One “benefit” of tax cuts is that they “starve” entitlements, which are all grouped together and presumed to be unnecessary rather than serving a true safety-net function.

The result of the prejudice and related starvation is that over the next 25 years from 2012, “as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.”[3] In other words, safety-net programs are fair game on the chopping block without respect to whether people die without them or are merely inconvenienced. The failure to distinguish between these two is dangerous to the abject poor. Were the distinction made, corporate welfare and even middle-class welfare could be cut by more, I submit, than the additional funds needed to provide the least well-off with sustenance. In other words, we as a society can have a solid survival-oriented (and limited) safety net that is not conditional while actually saving money as benefits are narrowed to people who really need them.

The key is focus in place of upward drift. As just one example, money saved from a means test for social security retirement insurance could be spent in expanding social security disability such that its benefits are not conditional on the long-term ill somehow having worked thirty or forty quarters in the last ten years. How exactly is a retarded adult supposed to find and hold a job for that many quarters?  Making the benefits unconditional with respect to work history is crucial, as the social security supplemental income program is insufficient to meet sustenance needs. It is unconscionable to expect the long-term disabled to have worked in order to receive enough to live on while the middle class receives entitlements classified as “safety net.” The key to making survival a human right is recognizing the need both to expand programs at that level and severely restrict programs aimed at higher levels. Whereas middle- and high-income beneficiaries of government largess can justifiably be blamed, it is sheer cruelty to blame those who are not able to meet even their own basic needs from work for receiving subsidies.

In my rather ignorant, presumptous hometown, an unemployment rate of around 20% went with the recession of 1980 as the machine tool industry went to Europe. The city had the highest unemployment rate in the state in the post-September 2008 recession, and yet the first vote the re-elected U.S. House representative made in 2010 was to cut off unemployment compensation. His claim was that people should get off the dole and work for a living. It was apparently beside the point that there were no jobs; the unemployed were supposed to have them anyway. This is like telling people that the empty space on a table is to be imagined as spaghetti and then getting mad at them for not eating it—as if they should be expected to eat air. Such warped, illogical thinking as the Congressman evinced in 2010 in the rustbelt of America can be linked to reducing a true safety net to a society of entitlements. To hold the poorest of the poor to such warped thinking is utterly cruel as well as ignorant. I hope American society has not come to such a selfish and short-sighted end. The society is only as good as we treat the least among us, for such treatment reveals our true colors.

1. Binyamin Appelbaum and Robert Gebeloff, “Even Critics of Safety Net Increasingly Depend on It,” The New York Times, February 12, 2012. 
2. Ibid.
3. Ibid.

Obama’s Educational Waivers: Toward the Political Consolidation of an Empire

A decade after the No Child Left Behind federal law was enacted, “President Obama freed 10 states from some of its crucial provisions.”[1] The states’ freedom from a deadline for bringing all students to proficiency in reading and math by 2014 came with strings—accepting Obama’s own educational agenda, which focuses on accountability and teacher effectiveness and includes higher standards than the ones set in NCLB. Many state education officials have criticized the 2014 deadline as “an impossibly high bar” that “did not take into account the needs of some of the most disadvantaged children.”[2] In announcing the waivers from the deadline, Obama said that the goals of NCLB should be met “in a way that doesn’t force teachers to teach to the test, or encourage schools to lower their standards to avoid being labeled as failures.”[3] However, if the standards are to be even higher, might even fewer schools wind up passing—even if the deadline is extended?

In assuming that the setting education policy is one of the enumerated powers of the Federal Government, Obama was applying a “one size fits all” approach over what is essentially an empire of differing republics. Furthermore, having so much power over the states on education policy, the Obama administration was compromising the check and balance feature of federalism wherein the states are to act as a check on federal encroachment just as the federal government is to act as a check on states violating the rights of, or not providing for, their respective citizens. In other words, the significance of NCLB and the Obama administration’s own attempt to standardize education policy in the states through the spending clause of the U.S. Constitution (which alone is a stretch) goes well beyond education policy. The viability of the system of government in the United States can be seen to be severely compromised just in the president’s attitude toward the states—as if they were children and he was daddy.

Ken Wheare argues in his text, Federal Government, that state governments need be autonomous of federal authority in only one area for modern federalism to work. Wheare also extolls the mutual check and balance feature of federalism (as distinguished from a confederal alliance). The point I would like to make is that if the states of a federal system are “free” only in one domain, they do not have a sufficient basis of power on which to act  as a viable check against the encroachment of federal power over that of the states.

Where the federation is on the empire scale, such as the E.U., Russia, and the U.S., the consolidation that comes with federal encroachment means that inherent differences across the lands within the federation are stifled or ignored. Built-up pressure is not good for ongoing political stability. Policy itself tends to be of compromise that no one would independently want, rather than tailored to the particular political societies within the federation. As of at least the beginning of 2012, Europe has seemed more aware of the need of particular states to legislate for their respective polities  than has America.

As Justice Sandra Day O’Conner once said, “Congress is acting like a state legislature.”[3] Such a significant category mistake cannot be good for the viable of a republic of republics—what Montesquieu referred to as wheels within a wheel. If all of the wheels within the wheel of the whole cannot operate at least partially independently, then any problem in the mechanism can quickly bring the entire mechanism to a quick stop. Like genetic diversity with respect to health, semi-sovereign diversity is necessary for political stability where the federation is on the empire-scale (i.e., inherently heterogeneous). We focus only on the substance of education policy at the expense of the impact of  the “how” on our system of public governance at our own peril. As long as it has interlarded itself into the classroom, perhaps the Federal Government should mandate that federalism be taught in Civics. It is more than a little disconcerting that the White House staff and their boss might need to attend such a class before being able to grasp the importance of the topic.

1. Winnie Hu, “10 States Are Given Waivers from Education Law,” The New York Times, February 10, 2012. 
2. Ibid.
3. Personal Correspondance. 

Conflicts of Interest and Paradigm-Shifts: The Case of Financial Regulation

It is perhaps all too easy to perceive a sea-change in perception when the reality of societal change is much more gradual. There is something to the argument that John D. Rockefeller’s reputation was salvaged in the 1930s not because the old man was passing out dimes, but, rather, simply because he had outlived his critics. Similarly, Thomas Kuhn, in his text on paradigm changes in scientific revolutions, bemoans that the advocates of a default theory must finally die off before their darling can finally be replaced by a new one. In other words, any given person is not apt to shift paradigms. The culprit, I suspect, is pride, which Augustine suggests in his writings is inherently self-idolatrous. I believe the human brain is capable of accepting inter-paradigmatic change, just as a person can be humble. That this is not the norm does not mean that we ought not raise our expectations to it.

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

Windfall Oil Profits

Conoco Phillips reported a 66% increase in earnings for the fourth quarter of 2011, “attributed to high crude prices and asset sales.”[1] With the prices of most crudes above $100 a barrel, the company gained a windfall that vastly made up for a drop of nearly 3% in its refining and marketing business. Chevron, on the other hand, reported a 3.2% decline in fourth-quarter earnings due to “poor refining results” that “overwhelmed higher revenue from oil sales.”[2]

Meanwhile, Exxon Mobil reported net income of $9.4 billion for the fourth quarter, up from $9.25 billion the year before. The company’s revenue of $121.6 billion was up 16 percent. The improved earnings reflected the $100 plus prices for many benchmark crudes, which resulted from “continuing unrest in the Middle East and North Africa and strong demand from China and other developing countries.”[3] To be sure, the company’s purchase of XTO Energy for $25 billion in 2010 meant that the plummet in natural gas prices also had a significant impact on the company. Even so, a company making nearly $38 billion on an annual basis raises questions on the sheer size alone, and whether any market can be competitive with such a giant.

Furthermore, the legitimacy of the windfall profits coming from political instability rather than any merit on the company’s part should also be questioned, as well as why Congress balked on a windfall profits tax for the industry in 2011. In other words, the market power is not the only kind of power we should be concerned about in looking at Exxon Mobil. Such a concern could extend to why George W. Bush decided to invade Iraq, given that that that country’s ruler had kicked American oil companies out in 1993 after the U.S. intervened to move the Iraqi army out of Kuwait. We could even ask whether the oil companies, or their agents in government, have had anything to do with the inciting some of the political stability behind the astronomical crude prices.

To be sure, Chevron shows us that even a big oil company can manage not to benefit from a $100-plus crude-price windfall. Moreover, oil executives could argue that windfalls are “necessary” as “cushions” against the prospect of a glut in natural gas, for example, or the need to do major work on aging refineries. Even with the inevitable vicissitudes that come with dealing with raw material markets, however, that the prices of crudes have gone so much higher than the costs of getting oil out of the ground suggests that the market mechanism has not been functioning as Adam Smith would have predicted—meaning an oligopoly has replaced a competitive marketplace.

John D. Rockefeller, whose effort to coordinate the refining industry in the U.S. via a huge monopoly called Standard Oil (of which Exxon Mobil is a descendant), could point to all the bankruptcies amid the “excessive competition” in the 1860s as justifying even a monopoly in place of any competition at all. He used means that would be considered very unethical today to get competitors to “agree” to be bought out by the combination so there would be no “destructive competition.” Even if it was necessary in the early years of the oil industry, we ought not assume that huge oil companies are necessarily the legacy we must pass on to the next generation.

1. Clifford Krauss, “Higher Oil PricesRaise Earnings at Exxon Mobil,” The New York Times, February 1, 2012. 
2. Ibid.
3. Ibid.

Direct and Representative Democracy: Colorado on the Hot Seat

In ancient Athens as well as Renaissance Florence, direct and representative democracy co-existed. The representatives elected or chosen by lot were viewed (and viewed themselves!) as standing in for the people assembled. From a practical standpoint, it is difficult even to legislate by town hall meeting or by a series of referendums on election day. Accordingly, power in democracies has been delegated to representatives and even appointees. In February 2012, this principle, and direct democracy itself, were set to be challenged in a federal lawsuit against Colorado. In my view, the principle is valid whereas the suit is not. Direct democracy outranks representative democracy—the latter having been created not to save a people from themselves but out of sheer practicality.

Colorado's Capitol (seat of government)       Matthew Staver/NYT

The object of the lawsuit is Colorado’s 20-year-old taxpayer-controlled budgeting process known as Tabor, which requires that tax increases (and presumably spending increases) be passed by referendum rather than legislative vote. The 33 plaintiffs argue that Colorado’s Taxpayer Bill of Rights “blocks the ability and jurisdiction of the . . . Legislature to properly do its job.”[1] The rationale is that subjecting tax increases and budget figures to popular referendum usurps Colorado’s legislature’s prerogative. In the early U.S., James Madison had “pushed strongly for a barrier between the passions of the popular will and sober governance . . . through a legislative branch.”[2] Representative governance, in other words, has the benefit of acting as a check on popular passions in the best interest of the people. This objection could be obviated by requiring a revote in a year or two to make the referendum’s results final.

I submit, however, that Madison’s concern is trumped by a more basic relationship that undergirds the relationship between direct and representative democracy: that between the popular sovereign and government. Arguing on the basis of a benefit such as checking passions, for example, is not to furnish a rationale for prerogative. In other words, that the popular sovereign may not always be wise or prudent does not mean that its agents therefore trump their principals—the people. Even if an agent has expertise that his or her principal does not have, this does not, as in the business judgment rule, necessarily mean that the agent becomes the principal (and the principal, the agent). In the case of corporations, maximizing profit is merely the default—something the owners should be able to deviate from and their hired hands (e.g., executives) would be obliged to devise strategy in line with the new mission.

If, as the plaintiffs claim, Colorado’s legislature is “unable to raise and appropriate funds” and thus “cannot meet its primary constitutional obligations” under the “guarantee” clause of the U.S. constitution, it is because the principal has taken that constitutional role back, through fully constitutional means, which the popular sovereign, as the principal, has the right to do. Remember, the people as a group have delegated authority to representatives.

In other words, popular and governmental sovereignty are not incompatible. Constitutions are ratified not by the member governments, but, rather, by the people, precisely because the authority of the people goes beyond that of their agents. The popular sovereign does not have to continue even with its constitutions. Indeed, that sovereign could change any American constitution in any way that sovereign desires, as per the Constitutional Convention of 1787. We could even hold a convention proposing a totally new constitution and with its ratification the current one would instantly be dust. Remember that the Constitutional Convention of 1787 tossed out the guidelines set by the Continental Congress limiting the convention to amending the Articles of Confederation. The convention started over and invented modern federalism in the process. I raise this point only to show that a popular sovereign trumps its government—really by definition. Yet it seems that the legislators in Colorado have their arrows crossed concerning this relationship—most likely a case of good old-fashioned arrogance.

Rather than the Colorado legislature being hamstrung, it is the obligation of the dutiful agents to furnish their master, the popular sovereign, with options that do not privilege the agents themselves or their body over the principal. General tax policy and overall budget numbers decided by the popular sovereign are more legitimate than had they been decided by legislative means even if the people are stupid and willful. This difference in legitimacy exists because the popular sovereign is politically superior to its agents. It is not really a question even of getting the best policy—“best” at this level involves judgment rather than the expertise of a legislator, professional or scholar, anyway.

Instead of being usurped by agents who take themselves as principals and thus somehow illegitimate in a democracy, direct citizen lawmaking is an ideal toward which we should strive to the extent that it is practicable. The agents have too often succeeded in limiting the actual sovereign to speaking once every two or four years, and then only on the vague decisions of filling offices, leaving policy decision to themselves. All too often, this means nothing gets decided, which I submit reflects the tenuous authority of the agents to be definitive for the people. One reason why the Congressional vote on health-care did not settle the matter is because the people themselves did not have a direct say on such an important, life or death, matter. Similarly, the ongoing controversy on abortion partially reflects the “limbo” status from how it was decided (i.e., not by us, as in direct democracy).

Policies like declaring war (in a non-emergency), abortion, whether to extend a tax cut, overall deficit spending, overall drug policy (e.g., legalization), and especially constitutional amendments bearing on government should be up to the people, with the judiciary stepping in when needed to protect individual rights against either legislative or popular encroachment via majority rule. Should abortion be decided by the states? Should the Bush tax cuts be extended for all or excluding the rich? Should the U.S. get out of Afghanistan?  (Should the U.S. have invaded Iraq?)  Should pot be legalized?  Should financial regulation be strengthened or is deregulation the general principle we want to follow? Considering health-insurance, should it be by a public single-payer, a public option with private options, or exclusively by existing private insurers? Should everyone be covered or just those who can pay? The questions would have to be very basic and oriented to basic judgment calls, rather than requiring expertise; our legislators could see that it is incorporated under the rubric of the general principles decided by us.

Along this line, constitutional questions bearing on our system of government are particularly legitimate for direct decision—such as on the role of the states and whether we should have more of a federal or consolidated system. Should corporations be considered as persons, politically? Should money be deemed as “speech” politically? A degree in law is not required to make a judgment on such basic governmental questions. Even the Greek slave Meno knew geometry without being taught, according to Socrates. In fact, experts, like legislators, are properly agents of the popular sovereign, rather than being an alternative wiped out by direct democracy but somehow integral to the legislative process. Federal constitutional amendments in the U.S. could be ratified by referendums (as is already the case in some of the E.U. states in ratifying amendments to E.U. basic law). Amendments could even be sourced in referendums. As it stands, the American people have no direct say on changes to the U.S. Constitution—either in proposing or ratifying amendments. Nor do we have the opportunity to have a say on the existing planks—something Jefferson thought every generation has as a right. Would it be so traumatic were sections of the U.S. constitution forced to compete with a few alternatives, taking say one Article every four years? This is just one of many ways the American people could decide on what binds us.

Admittedly, such changes expanding direct democracy would indeed alter the nature of legislative business; it would more closely resemble what one would expect to find from agents (e.g., technical working out of broad policies already decided and working on submissions for further “instructions”). As a people, we have allowed ourselves to be hoodwinked into viewing our agents as our principals, and this is reflected in the power they have with respect to a near-monopoly on decisions. It is no wonder that the Colorado legislators feel threatened by something that is decided by others. Those legislators suffer from a rather basic category mistake: conflating themselves with their principals. Out of this error has come the representatives’ assumed false entitlement to the near-monopoly that they have enjoyed while the rest of us have been asleep. I can’t even add “at the wheel,” for we have ceded that to our driver without even supposing that we have the right—as the owner of the car—to tell him where to go. We are Ms. Daisy sleeping off a hang-over in the back seat while Morgan Freeman decides where we’ll go. We even expect him to decide, as if it were his job. We are indeed quite asleep. Perhaps we don’t deserve direct democracy?

1. Kirk Johnson, “Colorado Lawsuit Challenges Wisdom of the Ballot Box,” The New York Times, January 31, 2012. 
2. Ibid.

State Fiscal Governance in the E.U.: Toward Balanced Union

At the end of January 2012, 25 of the 27 E.U. states (all but Britain and the Czech Republic) indicated at a meeting of the European Council that they would accept in principle (i.e., subject to ratification) a new limit of 0.5% of gross economic output over a complete economic cycle for the states’ “structural budget deficits” and strengthen the E.U.’s enforcement mechanism on states that breach that limit on deficits and 60% of gross output for accumulated state debt. The Wall Street Journal reported at the time that the “0.5% deficit limit would, if obeyed, mark a revolution in [the states’] fiscal policies, ending more than 30 years of steadily rising [state] debt.” This statement is immediately undercut, however, as the Journal describes the extent of the loopholes in the amendment.  The reader is left wondering whether the E.U. will use the proposed enforcement mechanisms, such as the ECJ imposing fines on states already hard up for cash, as well as whether fining a state government would make any difference.

Sarkozy, Merkel and Monti at the European Council Meeting          

Philippe Wojazer/Reuters

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

1. Marcus Walker, “BudgetTreaty: Neither Panacea Nor Poison,” The Wall Street Journal, January 31, 2012. 

A Future of Regulators at Fault?

The typical case in the U.S. is that the industry being regulated resists being regulated, while the regulators insist on enforcing the regulations. To be sure, particularly strong firms in an industry may propose incremental regulations for strategic advantage—knowing that smaller or less profitable firms in the industry would have more trouble complying financially. The strategic use of regulation is an under-appreciated phenomenon in the de-regulation movement. Perhaps even more bizarre is the case of an industry complaining about lax enforcement of existing regulations and demanding even more. What industry might fit this bill? As a hint, look for a major scandal that did reputational harm to an industry.

In the industry, the firms’ calls for a crackdown must contend with a legacy of a light regulatory touch.” People in the industry question whether regulators have been “too gentle” on the firms. If a firm “runs afoul of the rules, regulators largely rely on the firms to report their own wrongdoing.”[1] It sounds like Andy Taylor’s jail in Mayberry—the keys are hanging on the wall, help yourself Otis (he was the drunk). From 1996-2011, regulators penalized only ten firms, letting scores of others off the hook “because [the] regulators deemed their violations accidental.”[2] The sounds like the work of Andy’s deputy, Barney—find the loot only to lose the criminal.

I am describing the futures industry, whose firms, “ordinarily loath to accept regulation,” decided in the wake of MF Global’s collapse and loss of $1.2 billion of customer money to spearhead efforts for “new oversight as they try to heal the black eye.”[3] The existing regulations are nearly non-existent. For example, “firms need not inform customers of the whereabouts of their money.”[4] It is no wonder that prospective customers would be hesitant to enter that arena—hence the firms’ financial interest in additional regulations. The question is perhaps why the regulators had not recommended any to Congress.

Without the usual vested interests thwarting prospective regulations bearing on themselves while Congress stands by and takes the contributions, any additional regulations “spearheaded” by the industry can be expected to be enacted. The question, I suppose, is whether the regulators will feel like enforcing them. With no headwind from the industry, lax enforcement would be an interesting nut to crack. Could it be that regulators exist who don’t believe regulations are very important? Such a mentality would be the opposite of public service—something like agnosticism in religion, only as held by clerics. Such a thing simply is not expected, hence it is worth investigating.

The most likely explanation is that the regulatory agency was “captured” by its industry, and ultimately it was in the interest of the industry itself to come up with something stronger. If so, might it be that once the new regulations are up and running, particular firms or the industry as a whole might want to capture the agency again? Even in following the industry’s “spearheading,” the agency is essentially “captured.” Is it the case in the American system more generally, that agencies are captured by their regulatees whether in increasing or decreasing enforcement? In other words, might the business and financial sectors be too powerful over government for their own good—like children telling their parents when to discipline them and when to let them get away with something?  The sectors—and in particular their largest firms—may be too powerful for a viable republic: TBTG, meaning too big to govern. TBTF might not be the biggest elephant in the living room after all.

1. Ben Protess and Azam Ahmed, “Insiders Call For Oversight of Futures,” The New York Times, January 26, 2012.

2. Ibid.

3. Ibid.

4. Ibid. 

Reining in Corporate Pay: Europe as a Model of Fairness for America

Corporate compensation—executive pay in particular—represents a “clear market failure,” so said Vince Cable, the business secretary in the E.U. state of Britain.[1] While suspected, the sheer explicitness, or blatant manner, of this verdict is itself noteworthy. Moreover, it stands as an opportunity for the E.U. to surpass the U.S. on economic fairness, which is a type of justice (see John Rawls). That is to say, Europe had an opportunity at the time of Cable’s statement to set the E.U. on a trajectory that would make the unfairness in the American system more transparent.

The business secretary, a Liberal Democrat in a coalition government with the Conservative Party, told the British House of Commons in January 2012 that business and investors “recognize that there is a disconnect between top pay and company performance and that something must be done.”[2] In New York at the time, the disconnect was generally taken as a fact of life, given the power of the managerial elite in corporate capitalism (as well as American legislatures). As if attempting to pop this stygian balloon filled with the noxious air of denial, Vince Cable continued, “We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind . . . (a)nd we can’t accept top pay rising at five times the rate of average workers’ pay as it did [in 2010].”[3] The unfairness, in other words, is at the expense of not just the corporation’s owners, but also the (other) employees—executives being employees too.

It could be argued that the 13% annual increases in executive pay are a function of an increasing proportion of company stock options in the compensation. If the profits are languishing, the theory goes, the value of the options should be zero (i.e., unexecuted). However, what if the next group of executives, or even the economy over all, “performs” such that the options held by the previous executives then become valuable? Moreover, what do options cost non-management stockholders in terms of dilution? I suspect that options are “an easy way out” relative to cash compensation. The question is thus whether the practice can be reined in.

Under Vincent Cable’s proposals, shareholder votes on executive pay would be binding. Seventy-five percent, rather than a mere majority, would be needed for approval. I have never understood why the American states limit such votes to “non-binding,” as if the business judgment rule trumps property rights on compensation. Given that CEOs typically control their boards, whose job it is to oversee the executives for the stockholders, treating the property owners of the corporate wealth as if they were a focus group or a meaningless straw poll in Iowa seems misguided at best—and supportive of an institutional conflict of interest centered on the executives. To be sure, the suggestion made by Chuka Umunna, Vincent Cable’s counterpart in the Labour Party, to have employees as part of executive compensation committees also incurs a conflict of interest—one centered on the employees who have an interest in wanting “payback” for the decades of unfair compensation.[4] Conflicts of interest can work both ways—inflating and deflating deserved compensation.

My main point is the following: Were Europe to strengthen investors’ property rights—including disallowing proxies held by managements for such votes on account of the conflict of interest—the fault running through American political economies and civil societies would become more transparent (i.e., more obvious). “We have  been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance,” John Criby of the Confederation of British Industry—a business lobby group—said. “Millions [of pounds] for mediocrity does a disservice to the reputations of hard-working businesses.”[5] Indeed, it does a disservice to the society as a whole—particularly in terms of what it stands for. Can you imagine the U.S. Chamber of Commerce coming up with such a statement? It is a pity, particularly in terms of systemic risk, that a lack of enlightened self-interest in the vested interests on such a “clear market failure” exists in America. For this reason, “Europe as a Model” is not such a bad thing, certain rhetoric (of the usual suspects) to the contrary.

In Vermont and Wisconsin at the time of Vincent Cable’s speech in Britain, movements were underway to amend the respective constitutions (as well as that of the U.S.) to make it clear that corporations are not “legal persons.” I believe it would follow that money is not speech, though the amendments ought to make this explicit, given the tendency of justices to invent legal doctrines and the sway of money in legislative halls. Polls at the time showed 71% of the people across the United States were opposed to the Citizens United (unlimited corporate political contributions) decision of the U.S. Supreme Court two years before (almost to the day). Lest those movements get cocky, their leaders should be aware that huge corporate “war chests” used to buy politicians, commentators, and air time may mean that even such a supermajority’s popular will may not be sufficient. If so, it is unlikely that anything like Vincent Cable’s proposals would see the light of day in America. Accordingly, I have pointed out here the value in merely having an alternative displayed in Europe, even if the benefit is limited to wakening Americans up to the grip of corporate capitalism in American societies.

1, Julia Werdigier, “British Government Works to Rein in Corporate Pay,” The New York Times, January 23, 2012. 

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

dit Downgrades in the E.U.: Blaming the Messenger?

On January 13, 2012, “S&P stripped France and Austria of their prized triple-A credit ratings and reduced the ratings of seven other [states in the euro-zone], including Italy, Spain and Portugal. Germany, Finland, the Netherlands and Luxembourg were spared, along with Belgium, Estonia and Ireland.”[1] Italy was downgraded from single-A to triple-B-plus. "We think there are elements missing in their analysis … when it comes to the growth strategy … there is no space for maneuver for fiscal impetus but we believe that a growth strategy will have to rely mainly on structural reforms," Olivier Bailly, an E.U. Government spokesman, told reporters.[2] “Bailly also called the timing of the S&P decisions ‘very odd’ citing fiscal policies adopted to weather the crisis in the downgraded countries as well as the two successful debt auctions in Spain and Italy last week. ‘We think that there is a strange timing in this announcement considering the signals from the markets,’ Mr. Bailly said.”[3] The “very odd” and “strange timing” reference a tacit political motive behind S&P, which the European officials point out is an American company.

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

1. Christopher Emsden, Matina Stevis, and Bernd Radowitz, “E.U. Leaders Focuson ‘Progress’,” The Wall Street Journal, January 16, 2012.

2. Ibid.

3. Ibid.