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 I discovered that the situation is even worse than I thought: the Rule Against Perpetuities has been completely repealed in 20 states, opening the door for "dynastic trusts", private family trusts that can accumulate principal, avoid taxes, preserve family control over assets,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.

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.

Atkinson on Inequality

I recently finished reading Anthony B. Atkinson’s recent book Inequality: What Can Be Done?  It doesn’t duplicate what Piketty did in Capital in the Twenty-First Century, but in some ways I like it better. Atkinson’s examination of the determinants of income distribution focuses more on product and labor markets, and on the social context in which markets operate. Atkinson does not believe that we are condemned to increasing inequality because r is greater than g. He points to other times and places where inequality has been reduced even though growth rates were low.

Atkinson points out that government policy had a lot to do with decreasing inequality in the past, and he proposes a long menu of options to consider at this point. In this he differs from Piketty, whose policy proposals are mostly limited to a global wealth tax. His fifteen proposals include comprehensive redesign of the income tax, to make it more progressive and to introduce an “earned income discount”, rather than the present discount for capital gains. He proposes a progressive lifetime capital receipts tax in place of the estate tax. He believes that all young people should receive a capital endowment when they reach adulthood, and that there should be a taxable “participation income” and a substantial child credit.

Many of these ideas would not get a lot of support in the U.S. today, or even in the U.K., Atkinson’s home. But they are cleverly designed to deliver help to those in need while preserving incentives and garnering strong political support. Everyone is eligible, but benefits are taxable at progressive rates. They borrow their best features from the design of successful programs like Social Security. Political action may be long coming, but planting these ideas in the public imagination now is important.

George Will and FDR

Ken Burns uses the conservative columnist George Will as one of the commentators in his monumental documentary miniseries on the Roosevelts. I suppose he felt he had to include such a conservative commentator lest he be accused of not being "balanced." PBS makes a point of being balanced in this way.

At one point, Will says that Americans had always believed that they had the right to the pursuit of happiness, and that government should protect that right, as it says in the Declaration of Independence. But, says Will, FDR goes beyond that to try to give the people happiness itself, that is, money. He is referring to the New Deal social insurance programs, like Social Security, Unemployment Insurance, Aid to Dependent Children, and so on. Will clearly believes that this goes beyond the Constitution, which he says both Roosevelt presidents treated as just a nuisance.

Will's fundamental error is one commonly made by professional economists. It is the identification of money and happiness. FDR and other liberals do not and did not support social insurance because they think it will make people happy. Most of the involuntarily unemployed, single mothers, ill and disabled people, and others receiving money from the government are not particularly happy about their circumstances. They would rather not qualify for that government check, thank you very much. The point of social insurance is not to make people happy, but to enable people who would otherwise be impoverished to live a life of dignity. It is to enable people to have access to the institutions and services that might help them improve their condition. It is to help pay the rent, put food on the table, pay for the bus fare to get to a job, or to a doctor's office, or to the church.

So happiness is not what this is about. Money doesn't buy happiness. Seeking money in order to be happy is a vain quest. Giving money to the poor thinking you are making them happy is silly. Only economists and children believe these things. Social insurance is there to "promote the general welfare", an object endorsed in the Preamble to the Constitution.

All-American Burger King

I'm getting really tired of the lazy coverage, even in the business-news media, of the Burger King--Tim Horton's proposed merger. "All-American" Burger King?  Burger King was owned by a British conglomerate from 1989 until 2002, and since 2010 has been controlled by a Brazilian private-equity firm (though it has publicly traded stock). Yes, it is talking about a tax inversion, but that seems to be a relatively small part of the story, unlike the Walgreen's situation. Do your homework, people!

Why can't the banking industry solve its ethics problem?

This is the question asked yesterday in an article in the New York Times. They offer two possible answers. One is that the highly competitive conditions in the industry attract bankers who are extremely motivated by money and are very risk-tolerant, meaning the risk of being caught, I guess. The other is that the industry does not have sufficient financial incentives in place (clawing back bonuses when there are violations, for example) that encourage ethical behavior.

Both of these approaches suggest that there is only one sort of motivation, namely financial, and the only questions concern how strong the motivation is (people who are not very motivated might be ethical just out of laziness or risk-aversion), or what sorts of behavior are rewarded financially. Neither views ethics as a intrinsic, a desire to do the right thing, to be honest with other people, or even to have a good reputation, that might act as a constraint on gain-seeking behavior.

The theory of economic regulation provides a context for this discussion. To explain the conundrum of industries and firms that seek or support their own regulation, economists have offered a variety of hypotheses. The conservative, Chicago School version is that they want government to set up and enforce a kind of cartel, preventing entry and keeping prices high. A more liberal approach suggests that businesses understand that without public trust and confidence, they will lose their markets. Once trust is lost, the best way to reestablish it is to have some outside agency provide accountability. Government has usually been a good choice, since government has usually been trusted more than the press or private non-profits.

The conclusion I come to about today's bankers is that they do not think public trust is important to their business. The public does not have a choice: they have to use banks, and all of them are tainted. If the public's money is stolen or wasted or lost, the government will make it good, so no worries. Therefore there is no need for regulation, nor is there any need for the industry to change its culture or reform itself.

So we do not see what I have been hoping to see: some prominent bankers standing up and saying, "There is something wrong with our industry, and we need to change." Until that happens, the crisis of corruption that began in the 1980s with the savings and loans will just keep getting worse.

Businesses and charities

Stephen L. Carter has an opinion piece for Bloomberg (reprinted recently in the GR Press) in which he claims that people's problem with Hobby Lobby and other businesses that claim religious rights is that they make profits, and profits are evil. He is completely wrong about this.

Yes, businesses make profits and charities don't. Charities must follow the non-distribution rule, that their members (contributors) must not receive any surplus funds generated by the charities' activities. Those funds must be used for the charitable purposes for which the organization was established. But that doesn't mean that a business can't earn profits, or that profits are wrong.

There are other differences between the two kinds of corporations that are more important. Businesses make our economy run. They provide goods and services that people are willing and able to buy, and they expect to make a profit in the process. As key economic institutions, we need them to be open to all, serving people without regard to race, nationality, gender, religious belief, or any other irrelevant personal characteristics. The only way we can have an open, competitive economy with opportunity for all is if businesses are required to serve all equally in accordance with universal moral principles.

Indeed, this principle of the openness of business is not only part of American national ideology, but is a basic part of Calvinist Protestant social thought. John Calvin's argument that the Biblical prohibition of usury should not apply to New Testament Christians was based on the idea that since there was no longer an exclusive "chosen nation," Christians should treat all others according to universal moral principles, especially the Golden Rule.

The anger that Carter detects about profits in today's America may be due to a violation of others of Calvin's basic principles. He held that the benefits of specialization and exchange should be equally shared between buyer and seller, and that the public benefit should take precedence over private gain. The growth of profits as a share of national income at the expense of wages suggests that this balance in the distribution of the economy's benefits has been disrupted in our economy.

Charities are established to provide educational, cultural, scientific, artistic, and religious services that often are not profitable, but which serve the public good, and which as a society we wish to promote. Businesses will not do enough of these things, or will not do them at all, and government often does not have the creativity, diversity, and sensitivity to do them well. So we make it possible for groups of like-minded people to contribute before-tax money to enable these activities. By their nature they include some but not others. This is especially the case for religious organizations. People with no affinity to a charity's aims, purposes, or beliefs can not demand service from in the way that they can demand service from a business. Businesses are not giving anything away, but charities are.

The same is true for employment relationships. Sympathy for a charity's purposes and belief in its principles is essential for employees of the organization. Charities have a well-recognized legal right to place religious demands on their employees that are not permissible for businesses. They could hardly operate in any other way. But businesses are chartered to generate economic activity, and their criteria are restricted to who can do the job well. Hobby Lobby can not insist that its employees endorse its religious beliefs, unless it wants to become a charity, collect donations, and start giving away flower pots.