Friday, September 18, 2015

Creeping Feudalism

A couple of years ago I published an essay in Perspectives on the threat that creeping feudalism poses to the U.S. economy. Over the last 15 years or so there have been changes in policies, proposals, public attitudes, and even laws that have increased the ability of the rich to keep their estates intact over many generations. This raises the specter of our current extreme inequality resulting in the establishment of a hereditary aristocracy in our country, with control over politics, the economy, and culture.

This activity has been kept very quiet, so doing the research on this topic was difficult. Even with the internet as a tool, it was not easy to find out what was happening, especially in the legal sphere. I have now discovered two recent books on this topic by prominent law professors that deserve wider attention.

Lawrence M. Friedman of Stanford Law School has written Dead Hands: A Social History of Wills, Trusts, and Inheritance Law (Stanford Law Books, 2009). The strongest characteristic of this book is its clear and complete explanations of the current state of the relevant law, especially the laws concerning wills and trusts. I discovered that the situation is even worse than I thought: the Rule Against Perpetuities has been completely repealed in 20 states, opening the door for "dynastic trusts", private family trusts that can accumulate principal, avoid taxes, preserve family control over assets, and never have to be dissolved.

The social history part of Friedman's book is noticeably weaker. He detects something of a movement in contemporary mores towards giving the dead more control over what happens to their estates, and the institutions of government less. This is based on casual observation as much as anything else, and there is no attempt to connect it to other social movements or changes in culture.

Nor does Friedman see much danger in this. He does not think that accumulating dynastic trusts will grow to dominate the allocation of capital, or that wastrel, ignorant children of the upper class will ruin the crown jewels of the society. But he doesn't express much confidence in his conclusions. It has the air of classroom speculation.

The other book is Immortality and the Law: The Rising Power of the American Dead by Ray D. Madoff, of Boston College Law School (Yale University Press, 2010). Though not as detailed in its description of the law, it covers a wider variety of topics, including the treatment of dead bodies, posthumous publicity rights, and copyrights. However, it does not include much consideration of the effects of estate taxes.

Madoff does not venture into social history, or speculate on changes in social attitudes. However, she does offer normative conclusions about the recent direction of public policy. As her subtitle suggests, she believes the dead are becoming more powerful, a conclusion that is hard to avoid. She does not believe this is a good thing, and would like to see the direction reversed by, for example, strengthening the Rule Against Perpetuities and putting shorter time limits on copyrights.

Neither of these books draws out the implications of these new developments for the operation of our economic system. This is where I believe the greatest dangers lie, but then, I'm an economist, not a lawyer. Democratic capitalism (as Michael Novak calls it) is a fine economic system. The crypto-feudalism that we are evolving toward does not promise to work nearly as well.

Friday, September 4, 2015

In an article in the September issue of The Banner, three members of Calvin's business department (Tom Betts, Bob Eames, and Jill Risner) ask why business (as a social sector) has an image problem, and why we should care about this. In the online discussion questions, they repeat the question about why the public in polls rate the honesty and ethical standards of business so low.

I don't think this should be a mystery. Let's consider the evidence, starting in the 1980s:

  • The savings and loan crisis (Lincoln S&L, the Keating Five, Neal Bush, Whitewater, etc.)
  • The collapse of Long Term Capital Management, and the near failure of several money-center banks that were major creditors of the hedge fund
  • Enron (and WorldComm, Global Crossing, Adelphia, SBC, and a bunch more)
  • The Spitzer investigations, bringing to light widespread Wall Street corruption and cronyism
  • The collapse of Barings Bank due to unauthorized currency speculation
  • A series of insider trading cases including Raj Rajuratnam
  • The financial crisis of 2008 (Countrywide, WaMu, AIG, Bear Stearns, Lehman, Madoff, and more)
  • Continuing fines levied on major banks for breaking rules on market manipulation, proprietary trading, and fiduciary responsibilities
Add to this the growing inequality of the income distribution, including the decline of median wages and the hollowing out of the middle class, and the unyielding opposition of the business sector to the interests of working people in seeing their wages increase along with productivity.

Later in the article, the authors do acknowledge (citing Jeff Van Duzer) that "the dominant business paradigm needs to be turned on its head: instead of customers and employees being the means of serving shareholders, shareholders and their capital should serve customers and employees." It cites some bright spots, such as the commitments of companies like Patagonia and Chipotle, and the "B Corporation" movement.

But the article seems to be designed to convince ordinary Christians (and perhaps their pastors) that business is OK, and that these exceptional companies that they highlight are typical. Well, Enron was not typical either, but it turned out to be much closer to representing the current culture of American business than Patagonia can claim.

The article makes many excellent recommendations for how businesses should be run, and the attitudes that businesses should take to the responsibilities they have to various constituencies, including not only customers and employees, but the general public. What the authors do not do is give us an understanding of how the culture of American business can be changed. Having Christians read a few books, such as Van Duzer's, is a good thing. But what we need is a campaign to evangelize the business community, and that's not going to be easy.