Abolish The Corporate Income Tax and Tax The Rich

Thursday, October 28, AD 2010

Atlantic columnist Megan McArdle makes the case for why abolishing the corporate income tax (and then taxing capital gains and dividends at the same rate as other income) is a proposal that both liberals and conservatives should be able to agree on:

The incidence of “corporate” taxes is not necessarily progressive. The “employer half” of the payroll tax, for example, is thought by most economists to fall pretty much entirely on the worker; corporations compensate for the extra cost by lowering the wages they offer. Taxes on corporate profits are exactly the same for middle class families who have some shares in a 401(k), and multi-millionaire heiresses.

If we get rid of the corporate income tax, we could eliminate the special treatment for dividends and capital gains.

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28 Responses to Abolish The Corporate Income Tax and Tax The Rich

  • Taxing individuals is messier than taxing corporations and I don’t like using cap gains and dividends as a proxy for high income but I guess it’s better than nothing. I’d still prefer a VAT to replace them all though.

  • My guess is that the U.S.’s corporate tax rate is on the downward slope of the Laffer curve, so you could raise more revenue by decreasing the tax rate.

    The corporate tax is basically a very inefficient disguised VAT, so of course ideally a VAT would be preferable. Politically, though, I don’t see it happening.

  • Only a person who has no understanding of subchapter c would claim that taxing individuals is messier than taxing corporations. The corporate income tax is a set of exceedingly complex rules. McArdle is right that its economic incidence falls on consumers, employees and shareholders in essentially arbitrary but constantly shifting proportions depending of a variety of economic forces. Eliminating the tax does indeed make some economic sense, but the problem is deferral. Unless corporations were required to distribute earnings every year in the form of taxable dividends, then shareholders will expect corporations to defer dividends and therefore defer tax, and corporations will quite sensibly cooperate. The holy grail is called “integration,” whereunder all income would be taxed currently (i.e., as it is earned or realized) one time either at the corporate or shareholder level, but never both levels. Many tax law professors have offered various proposals to do this, but all are fairly complicated — more complicated than subchapter K or S which do something similar with smaller businesses formed as partnerships or s corporations. And anyone who thinks those subchapters are easy to understand is very mistaken.

    In my view, we should impose two types of levies. First, fees designed to pass on concrete social costs to those responsible for creating those costs, such as gas taxes for road maintenance. Corporations should not be immune from such levies. Taxes designed to pay for general governmental services should be imposed only on individuals, and the best approach IMO would be a broad-based consumption tax like that proposed by Harvard’s Wm Andrews and former Senator Sam Nunn. Basically, the idea would be to simply adjust our current income tax to allow for deductions for all additions to savings and tax all subtractions from savings. We essentially do this already with 401(k) plans and IRAs, so it would mainly be a matter of merging and expanding those plans so that there were no limits on contributions or withdrawals. Such a tax would continue to allow for graduated rates. Assuming gifts and bequests are treated as consumption, all lifetime income would be taxed as it is consumed. Economists favor such a tax since it is neutral as between savings and consumption, whereas an income tax favors consumption.
    While one can make the case that our corporate income tax is indeed a very inefficient VAT, a case can also be made that a VAT is a very inefficient broad-based consumption tax.
    Finally, taxing capital gains at ordinary rates may be workable when the top ordinary rate is 28%, as it was immediately after the 1986 Act. But current rates are almost certainly too high to sustain this. Investors will simply refrain from selling investments in order to avoid gain recognition. This so-called “lock-in effect” is well-understood and documented. Aside from the ensuing revenue problem, this behavior causes a misallocation of resources since investors will not move into more appropriate investments because the toll charge is too great. In addition to this practical lock-in problem, there are policy difficulties in that capital gains usually contain a phantom inflation component, which theoretically should not be taxed. The magnitude of this component depends on the magnitude of inflation that exists during the holding period. This risk must be weighed against the fact that capital investments benefit by deferral since it is usually not possible to impose a tax until an investor volunatily decides to sell and thereby cause a recognition event.
    The bottom line is this. This is a healthy discussion to have, and it is good to see a non-conservative such as McArdle try to tackle it intelligently; and it is tricky and complex stuff. People who think that there is some magical easy tax that is simple and fair are naive. But important improvements can be made.

  • Dissent. If a commercial enterprise wishes to have the benefits of limited liability, they can pay for it.

    No one here has suggested that an index be applied to the purchase price of a capital asset in the course of computing tax liability.

  • I find it odd to see a VAT considered favorably here. They may be a somewhat efficient means for the government to fill the coffers by concealing the true cost from the consumer (which is something I oppose), but they are quite regressive (something I oppose even more).

  • RL, the idea that a VAT conceals the true cost from the consumer is simply not true. It only conceals it if you don’t know what it is. That can be remedied simply by requiring that it be printed on all receipts.

    A VAT can be just as regressive or progressive as the current income tax.

  • Mike Petrik, “a VAT is a very inefficient broad-based consumption tax.”

    How so? The difference between a VAT and Nunn’s USA tax is that the latter collects from individuals rather than businesses and it would tax consumption of used goods.

    IMO, the most efficient tax would be a VAT system that gives everyone a tax credit card.

  • restrained,
    How would you make a VAT progressive?

    Limited liability is a privilege afforded by state law, not federal. Consequently, any quid pro could only justify a state level corporate income tax; and most states do impose such taxes. Also, conceptually if limited liability carry substantial social costs, consumers would favor doing business with proprietorships. There is no evidence of this. It must be remembered that the limited liability only extends to investor/shareholders, not the corporation itself or those that act on its behalf such as officers. I have never found the limited liability explanation for the corporate income tax remotely convincing. It is an after-the-fact rationalization, and in my opinion not a good one.

  • VATs are inefficient from an administrability standpoint because administration must occur in each link of every business chain.

    Collecting from individuals is good. Citizens should know what their tax burden is.

    Also, a tax levied on individuals also allows for rate graduation based on ability to pay as measured by consumption level.

    VATs also create fraud opportunities in cross-border transactions.

    Finally, the idea that mechanisms can be established so that individuals are aware of their tax burden may sound good in theory, but it is doubtful that most people really would understand.

  • My preferred method of a progressive VAT would give everyone a tax credit card that’s used at the POS, sort of like a shopper’s card, that instantly discounts the item. Alternatively, we can do as some countries do and give everyone a card but make them pay full price then mail the rebate later. Yet another method is to mail a check to everyone regardless of level of consumption like the FairTax. Finally, we continue income reporting then mail rebates based on income.

    VATs are collected from individuals. They’re just collected by businesses instead of your employer or directly by the IRS.

    Making people aware of the VAT burden would be no more difficult than making people aware of the sales tax burden. Just print it on the receipt. You’ll see it every time you make a purchase.

  • Great Discussion! May I inject a bit of irrationality first, then something of a real problem?

    Restrainedradical: I can just see the more suspicious in our population railing against having to carry and use a government card in order to make a legal purchase. Recall the noise made about a Federal ID card some years ago.

    At least some believe a mandatory card for making purchases would be an equivalent to the “mark of the beast.” While not necessarily a rational stance, it could cause a lot of trouble.

    An unforeseen but real consequence of such a card would be the collection of an individuals purchasing history. The promise of protection of such information, given the private information that is regularly compromised from presumed secure repositories, rings hollow.

    Finally, with regard to the VAT itself: a perceived high tax rate on purchased goods also opens up incentives for black market activity. It is customary in the United States, unlike Europe, to list an item’s price pre-tax, and add the tax at the register. Also, localities, States and the Federal Government have the power to levy tax.

    Assuming that the pricing custom remains, the consumer will see the aggregate of the sales taxes as a single rate and will change behavior accordingly.

  • Death and taxes . . . the power to tax is the power to destroy – that’s why the Federal government cannot tax state, county or municipal governments (e.g., tax-free bond interest).

    The US Internal Revenue Code is about 40,000-plus pages: enough said . . .

    Taxes, nanny-state regulations, and national crushing debt ($13,000,000,000,000.00 and NOTHING to show for it): we the people live and breathe at the government’s discretion.

  • Dissent. If a commercial enterprise wishes to have the benefits of limited liability, they can pay for it.

    They do pay for the benefit of limited liability, just not through taxes. They are required to maintain adequate capital to meet the needs of the business (including lawsuits), and if they fail to do so, the limited liability is discarded.

  • Limited liability corporations pay by not having access to the capital that an unlimited liability business would.

    Dminor, a VAT card would raise privacy concerns. If that’s the route we take, it would have to be voluntary. There would have to be a more onerous alternative like annual reporting of income and savings.

    As for awareness, we can make sellers advertise the full price including tax (unless it’s a multi-jurisdiction ad in which case it would include only the taxes that cover all jurisdictions plus a disclosure like “plus state and local tax”). We can require that receipts print a break down of the taxes. We can mail annual receipts telling every household how much they’ve paid in taxes. Point is, there are lots of ways to get around this problem.

  • “They do pay for the benefit of limited liability, just not through taxes. They are required to maintain adequate capital to meet the needs of the business (including lawsuits), and if they fail to do so, the limited liability is discarded.”

    That is not the case in Illinois. Shell corporations go belly up all the time here and that, by itself, is insufficient under Illinois law to pierce the corporate veil, although it can be a factor in piercing the veil if there are other factors, no observance of corporate formalities, comingling of corporate and private funds, etc, which are also present. Judges have a fair amount of discretion in piercing the veil in Illinois, and in my experience most of them are reluctant to do it, unless the facts of corporate malfeasance are pretty extreme.

  • Limited liability is a privilege afforded by state law, not federal. Consequently, any quid pro could only justify a state level corporate income tax; and most states do impose such taxes.

    I do not see that that follows. They have been granted the status of legal person. I cannot see that the treatment of them as a person needs be confined to the tax collectors of the chartering government.

    I have never found the limited liability explanation for the corporate income tax remotely convincing.

    That is because you are not a proper Poujadiste.

    For a given level of public expenditure, you have to collect the revenue one way or another. Property taxes promote environmental damage and can be subject to caprice in their administration, general sales taxes are regressive, payroll taxes discourage hiring, and taxes on phantom capital gains discourage investment and distort patterns of investment. Given how sclerotic the political system is concerning reform of our wretched tax system, seems you would have other priorities than eliminating corporate taxes.

  • I’m not sure what a Poujadiste is, but I suspect your are right.

    The case for corporate taxation is best made once you decide that you don’t care about horizontal or vertical equity. Few tax scholars are willing to do this (none come to mind). To be sure I don’t view elimination of the corporate income tax as a “priority” at all, but I do think that the policy justifications for the tax are generally pretty weak.

    While sales taxes are generally regressive, a broad based personal expenditure tax as described above would accomodate graduated rates and progressivity. It would also be neutral as between saving and consumption, something universally favored by economists (and how often can one say that!). The key to its success IMO rests in the treatment of testamentary bequests. IMO assets held at death should be regarded as deemed consumed and subject to tax (no need for a separate estate tax). All lifetime income would be subject to tax as it is spent. This is economically desirable and practically feasible.

  • restrained,
    There are, as you say, lots of ways to get around this problem. Pray tell, are there any that aren’t guaranteed beaureaucratic nightmares or invitations to fraud?

  • Mike Petrik writes Thursday, October 28, 2010
    “Finally, the idea that mechanisms can be established so that individuals are aware of their tax burden may sound good in theory, but it is doubtful that most people really would understand”.

    “Most people” = thee, but not me.

    As Richard Feynman said “If you think you understand quantum mechanics, you don’t”.

  • While running a small corporation, I thought about such expenses as rent, electricity, and wondered why taxes were not levies on the same basis. The landlord, the utility companies are not our partners; why should the government be? Why not a Gross Receipts tax? This way we would know the cost.
    My accountant complained: “Are you trying to put me out of business?”.

  • I’m not sure what a Poujadiste is, but I suspect your are right.

    Well, you gotta get with the program.


  • Gabriel,
    The State of Washington does have a gross receipts tax. It applies whether or not you have a profit (that is what “gross” means), and is almost universally despised by the business community. It is also not simple. The only simple tax would be a head tax. All other taxes are compromises between competing objectives — administrability, understandability, revenue objectives, and fairness. And the fly in the ointment is fairness. Fairness is the enemy of simple even if lay folks think otherwise. Most people know no more about taxes than they do about quantum physics, but they seldom let that impair strong opinions.

  • Thanks, Art. I’m afraid that is yet another program that I’ll have to avoid.

  • Fairness is the enemy of simple even if lay folks think otherwise

    Non ci credo. You are beginning to sound like Barber Conable.

  • I would rather expect that, and thank you my friend.

  • It’d never work.
    Firstly, it would greatly increase the taxation of the rich, which is suicide in every developed economy. An exodus of wealthy people giving away the passport would be the consequence, foreign investments in the US would be greatly discouraged.

    Secondly, the lobbying effort would then be directed to lowering the income tax, and rightly so. It is not that corporations owners would accept paying more taxes just because there’s “income tax” written over it.

    The way is reduction of public spending and state invasiveness and reduction of taxation, not increased taxation.

    The rich are those who provide the jobs and create a country’s wealth. Punish them, and you’ll kill the goose that lays the golden eggs. Encourage them to risk and invest and the whole country will prosper.

    (not rich, in case you ask).

Obama To Announce New Business Tax Cuts

Monday, September 6, AD 2010

President Obama will propose several new tax cuts and incentives for businesses on Wednesday, September 8th, including one which is billed as having a decidedly right-leaning flavor:

President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.

The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama’s 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.

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4 Responses to Obama To Announce New Business Tax Cuts

  • It would encourage businesses to invest more than they otherwise would have. The big problem with Cash for Clunker was that most of the money went to people who were going to buy cars anyway. Likewise, most of the business tax break will go to businesses that will have made those investments anyway.

  • The answer to your last questions strikes me as dependent on whether companies have been putting off replacement of critical equipment en masse or not.

    The long timetable is helpful because it makes it possible for companies to decide now to replace in six months or a year. In this respect it is different from the idiocy of the “Cash for Clunkers.” It may also be different in that manufacturers with an ongoing relationship to their equipment suppliers are in a better place to avoid the price gouging of the car program. (E.g. I was interested in a truck at a dealership up the street and was watching it for a couple of months. Come Cash for Clunkers, the price went up more than $3,000. I have heard the same from other people – that the incentive was eaten up by price increases.)

    In general, I am a whole lot more supportive of this idea than its companion bill – $50 billion in new investments. I am more supportive of that – because there is at least an offer of value (infrastructure) for money rather than just tossing money into the wind like the President’s past plans.

    Perhaps the President is coming to his senses on economic policy.

  • I am not so sure I would support this idea. Is this a carrot to conservatives to support other programs in the bill they would otherwise reject? Or, is this a favor to a select voting group?

    Additions to plant and equipment require planning. Would this actually encourage the purchase? Businesses would still need to fund the cost of the purchase.

    Without the accelerated depreciation of 100% in the first year, the business would deduct the cost over several years. So, the deduction is not exactly lost without President Obama’s proposal.

    Finally, it is similar to Cash for Clunkers. Businesses would receive a tax savings up front and pay more in taxes later with the lost depreciation. (The amount they would pay later could be at a higher tax rate per the expiration of Bush’s tax cuts for partnerships, S-Corps, and sole proprietorships.) They do receive a benefit from the time-use of money. However, without permanent business tax breaks, this will result in a slow down once the benefit expires.

    Is this a carrot or is it a political tool to make this administration look good due to a spurt of growth that is set to expire? Congress should look at a more permanent solution.

  • I found this comment from Veronique de Rugy the other day to be interesting. This ‘graph in particular struck me:

    “He rightly assumes that lowering the cost of employment helps firms keep their current employees or hire new ones. He wrongly assumes, however, that tax credits are a good way to reduce these costs. I asked a small business owner during a recent radio show to explain to me why the tax credit wouldn’t work, and he confirmed my intuition. This tax credit is useful only if you have a tax liability, which you likely don’t have when business is slow.”

Privacy or Anonymity

Wednesday, August 4, AD 2010

The Wall Street Journal has been running a series on the business of online “spying” for marketing information about web browsers. From today’s installment:

You may not know a company called [x+1] Inc., but it may well know a lot about you.

From a single click on a web site, [x+1] correctly identified Carrie Isaac as a young Colorado Springs parent who lives on about $50,000 a year, shops at Wal-Mart and rents kids’ videos. The company deduced that Paul Boulifard, a Nashville architect, is childless, likes to travel and buys used cars. And [x+1] determined that Thomas Burney, a Colorado building contractor, is a skier with a college degree and looks like he has good credit.

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2 Responses to Privacy or Anonymity

  • I don’t get to worked up about this as a privacy issue, but I do think it’s instructive to note the nature of “browsing the web” as opposed to brick and mortar window-shopping. The fact is that you could almost consider it public information that Mr. Brown goes to the mall every Saturday and buys a paper, drinks a Starbuck’s coffee while he reads it and then goes into Borders, GAP and Radio Shack, etc. All you need is someone in a kiosk to observe it and then try to sell him a product based on his habits. This is all legal, yet it would require a too much effort to record this kind of thing and then sell the info to big companies.

    But information may be collected on the web much more easily. It’s as if each user would send a letter to every major company saying “Here’s what I did for the last year since I’ve been at this IP address. Use this information however you may wish.” Buyer beware has taken on a new meaning. “They” know who you are.

  • People will have to make their own choices as to what they are willing to reveal by their non-private habits. But I am not entirely confident that the technology will remain essentially benign as opposed to a politburo “Big Brother” approach. In this world the liberals are intent on not only getting their way in what the law allows, but in making sure that everyone MUST THINK LIKE THEM. It will, eventually, occur to educators and others paid by government that they can determine who doesn’t THINK LIKE THEM by using these resources. At that point, there will be people who argue that they would be failing to fulfill their obligations if they DON’T use (x+1) to greatest effect.

Progressives Are Not Cynical Enough About Business

Friday, July 16, AD 2010

One thing my study of economics has taught me is that businesses will tend to act in whatever way they think will bring them the most profit. There may be rare exceptions, and of course businessmen often have mixed motives. But the overall tendency in this direction is very strong.

My guess is that if you surveyed people, many more self-described progressives would say that they agreed with the statement than self-described conservatives. Indeed, progressives often criticize conservatives and libertarians for being insufficiently attuned to the rapacious self-interest motivating businessmen.

Yet oddly enough, it seems to me that one of the main problems with progressive thought is that they don’t take the idea that businesses act to maximize profit seriously enough. For a group that claims to have a low opinion of businessmen, progressives have a strange habit of advocating policies that will only work on the supposition that businesses won’t act to maximize profit, and then react with shock when they proceed to do so.

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0 Responses to Progressives Are Not Cynical Enough About Business

  • ” If progressives would only be more consistent in their cynicism, their policy prescriptions might improve.”

    Progressives who become more consistent in their cynicism become Marxists.

  • It is not a question of progressive’s being cynical enough, more like being clueless enough of how economic life actually works. Government always trumps private, Federal vs. local. They are extremely ideologically consistent in this. The law of unintended consequences is automatically ignored in staying true to this worldview.

  • Progressives who become more consistent in their cynicism become Marxists.

    A more consistent cynicism might lead progressives to become Marxists, or it might make them into libertarians.

  • Whether it leads to marxism or libertarianism is unimportant. The Progressive movement is utopian, denies original sin, and Jesus Christ. It was condemned prior to Vatican II and Catholics can not be Progressives. Thought you’d like to know.

  • @Tim McCarthy
    What you’re saying isn’t completely right. The Vatican always argues for a “balance” between pure capitalism and socialistic capitalism. I think, for instance, that they would’ve agreed with the raise of the minimum wage; even though some companies are now apperently cutting working hours, a large share of companies simply can’t so their poorest employees are earning more.
    Sure, the idea that we can create a utopia with socialism is obviously not realistic and not in line with Catholic teachings, but I certaintly believe that a Catholic or christian government or business must protect their poorest employees or citizens. We can obviously not stop sin but caring for our brothers and sister is most definitely effective. Again I’m not saying people should adopt socialism, just that there should be some social elements in capitalism.
    See for instance Rerum Novarum and the social teachings of the church.
    Maybe you know all this and I just understood you wrong, I don’t mean to be patronizing (or socialist BTW), but at least others should know this.

  • Richard, you’re right on track. And we can all thank you for reminding us here of what the Church actually has to say about the matter as opposed to letting people like Glenn Beck define our terms for us. Actually, I don’t feel any strong desire to rehabilitate the term Progressive. I do want to point out, though, that when liberals or progressives or Democrats or whatever you want to call them decry the abuses of big business, it is actually an opportunity for conservative enablers of big business (through irresponsible deregulation) to wake up from THEIR doey eyed naivete.

  • Mark,

    Here’s a list of the irresponsible (bank) deregulation since 1864.

    1. National Bank Act of 1864 (Chapter 106, 13 STAT. 99). Established a national banking system and the chartering of national banks.
    2. Federal Reserve Act of 1913 (P.L. 63-43, 38 STAT. 251, 12 USC 221). Established the Federal Reserve System as the central banking system of the U.S.
    3. To Amend the National Banking Laws and the Federal Reserve Act (P.L. 69-639, 44 STAT. 1224). The McFadden Act of 1927. Prohibited interstate banking.
    4. Banking Act of 1933 (P.L. 73-66, 48 STAT. 162).
    Glass-Steagall Act. Established the FDIC as a temporary agency. Separated commercial banking from investment banking.
    5. Banking Act of 1935 (P.L. 74-305, 49 STAT. 684).
    Established the FDIC as a permanent agency of the government.
    6. Federal Deposit Insurance Act of 1950 (P.L. 81-797, 64 STAT. 873). Revised and consolidated earlier FDIC legislation into one Act.
    7. Bank Holding Company Act of 1956 (P.L. 84-511, 70 STAT. 133). Required Federal Reserve Board approval for the establishment of a bank holding company.
    8. International Banking Act of 1978 (P.L. 95-369, 92 STAT. 607). Foreign banks in the federal regulatory framework. Deposit insurance for branches of foreign banks engaged in retail deposit taking in the U.S.
    9. Financial Institutions Regulatory and Interest Rate Control Act of 1978 (P.L. 95-630, 92 STAT. 3641). FIRIRCA. Created the Federal Financial Institutions Examination Council. Established limits and reporting requirements for bank insider transactions. Electronic fund transfers.
    10. Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221, 94 STAT. 132). Established “NOW Accounts.” Began the phase-out of interest rate ceilings on deposits. Granted new powers to thrift institutions. Raised the deposit insurance ceiling to $100,000.
    11. Depository Institutions Act of 1982 (P.L. 97-320, 96 STAT. 1469). Garn-St Germain. Expanded FDIC powers to assist troubled banks. Net Worth Certificate program. Expanded the powers of thrift institutions.
    12. Competitive Equality Banking Act of 1987 (P.L. 100-86, 101 STAT. 552). CEBA. Expedited funds availability. Recapitalized the Federal Savings & Loan Insurance Company (FSLIC). Expanded FDIC authority for open bank assistance transactions, including bridge banks.
    13. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (P.L. 101-73, 103 STAT. 183). FIRREA – restore public confidence in the savings and loan industry. Abolished the Federal Savings & Loan Insurance Corporation (FSLIC), and the FDIC was given the responsibility of insuring the deposits of thrift institutions in its place. FDIC insurance fund created to cover thrifts was named the Savings Association Insurance Fund (SAIF), while the fund covering banks was called the Bank Insurance Fund (BIF). Abolished the Federal Home Loan Bank Board. Two new agencies, the Federal Housing Finance Board (FHFB) and the Office of Thrift Supervision (OTS), were created to replace it. FIRREA created RTC as a temporary agency of the government. The RTC was given the responsibility of managing and disposing of the assets of failed institutions.
    14. Crime Control Act of 1990 (P.L. 101-647, 104 STAT. 4789). Title XXV of the Crime Control Act, known as the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, greatly expanded the authority of Federal regulators to combat financial fraud.
    15. Federal Deposit Insurance Corporation Improvement Act of 1991 (P.L. 102-242, 105 STAT. 2236). FDICIA greatly increased the powers and authority of the FDIC. Major provisions recapitalized the Bank Insurance Fund and allowed the FDIC to strengthen the fund by borrowing from the Treasury. The act mandated a least-cost resolution method and prompt resolution approach to problem and failing banks and ordered the creation of a risk-based deposit insurance assessment scheme. Brokered deposits were restricted, as were the non-bank activities of insured state banks. FDICIA created new supervisory and regulatory examination standards and put forth new capital requirements for banks.
    16. Housing and Community Development Act of 1992 (P.L. 102-550, 106 STAT. 3672). Established regulatory structure for government-sponsored enterprises (GSEs), combated money laundering, and provided regulatory relief to financial institutions.
    17. RTC Completion Act (P.L. 103-204, 107 STAT. 2369.
    18. Riegle Community Development and Regulatory Improvement Act of 1994 (P.L. 103-325, 108 STAT. 2160). Established a Community Development Financial Institutions Fund, a wholly owned government corporation that would provide financial and technical assistance to CDFIs.
    19. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (P.L. 103-328, 108 STAT. 2338). Permits adequately capitalized and managed bank holding companies to acquire banks in any.
    20. Economic Growth and Regulatory Paperwork Reduction Act of 1996 (P.L. 104-208, 110 STAT. 3009
    21. Gramm-Leach-Bliley Act of 1999 (P.L. 106-102, 113 STAT 1338) Repeals the Glass Steagall Act of 1933. Allows national banks to underwrite municipal bonds. .
    22. International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001* (P.L. 107-56) The law requires financial institutions to establish anti-money laundering programs and imposes various standards on money-transmitting businesses.
    23. Sarbanes-Oxley Act of 2002 (P.L. 107-204) Sarbanes-Oxley establishes the Public Company Oversight Board to regulate public accounting firms that audit publicly traded companies. It prohibits such firms from providing other services to such companies along with the audit. It requires that CEOs and CFOs certify the annual and quarterly reports of publicly traded companies. The Act authorizes, and in some cases requires, that the Securities and Exchange Commission (SEC) issue rules governing audits.
    24. Fair and Accurate Credit Transactions Act of 2003* (P.L. 108-159)
    25. Dodd/Frank – In 2,300 pages the culmination of all that preceeded.

  • My opinion of liberals/progressives tells they think businesses and Republicans will to act in whatever manner necessary to make Obama look bad.

    For example, today the racists are selling off the NYSE just to cause people to think that Obama’s socialist agenda is not salutary. The villains!

  • I think you ought to read the documents. It still stands that Progressivism is utopian and as such denies original sin and by extension Jesus Christ. Their was never any teaching allowing socialistic capitalism. What is that ? Socialism and Communism and Progressivism are condemned. Subsidiarity is what is approved. The means of production owned by working men is approved. Re-distribution of wealth is condemned. Moreover what is socialistic capitalism ? Do you mean Distributism written about by Chesterton and Belloc ? Glenn Beck has nothing to do with me, I was taught by the Church prior to Vatican II in the 1950’s. The Church can not change it is until the end of this age, and no lib modernist influence has any place in the Church.

  • Humanistic ideal: “Man is the measure of all things and that our job is to make life worth living.”

    “But it is not necessary here to argue whether the other-worldly or the humanistic ideal is ‘higher.’ The point is that they are incompatible. One must choose between God and Man, and all ‘radicals’ and ‘progressives’ from the mildest liberal . . . have in effect chosen Man.”

    Orwell: “Reflections on Gandhi”

  • @Tim McCarthy Doesn’t subsidiarity imply a kind of involvement of the government in for instance health care? Helping society organise systems like that?

  • The most important goal of business is survival. If a business does not survive it can do no good or anything. The main goal of a progressive politician is to get elected; just like his or her conservative counterpart. Ergo, he or she will do or say whatever it takes to stay in office. Why state the obvious. Everybody knows that business people or politicians or bureaucrats driven by fear or lust for power or greed make poor choices that harm themselves and many others and then try to cover their tracks. On the other hand great leaders driven by Faith, Hope and Love make inspired choices that enrich themselves and the world at large. Let’s quit bemoaning human weakness and spread the One True Faith that will once again make a positive difference.

  • @ Richard. No it doesn’t. It means the decision should be taken as close to the action as possible. No Federal nothing unless it can not be resolved at the lowest level. For example parents decide what their children are taught not the Federal Government. But to the contrary the Federal Government should maintain interstate roads. They should regulate interstate trade, getting rid of obstacles for the free flow of commerce. There is no reason not that by applying subsidiarity and free market principles we couldn’t have better cheaper health insurance than what is currently going on. I’m not for turning back the clock, but if we took a look at how the laws were back then and adapted them to now we would be better off. On the one hand we have the party of death, and on the other the zionist neo-cons, and to paraphrase Fr. Malachi Martin when asked who he’d vote for Kerry or Bush he said he intended to be in St. Pats in NYC praying God would deliver us from both of those evils. Progressives are the enemies of the Church.

  • Without the assistance of government, business is shackled by the consumer. If the consumer is vicious, the business will be vicious. If the consumer is virtuous, the business will be virtuous.

    Government has a role; however, a vicious electorate will elect a vicious government and business will secure its authority through the power of the gun. Then there is no check on evil.

    Progressives, especially well-intentioned progressives are dangerous and destructive.

    Capitalists, as capitalism has come to be practiced are corporatists. They secure profits and eliminate competition with the power of the guns of government.

    To think that modern capitalists and progressives are different is simply foolish – they are exactly the same. Big Business and State Socialism are very much alike, especially Big Business – Chesterton.

    A government of virtuous men will curtail our disordered appetites and leave the natural free market to serve. No one goes into business, in a genuinely free market, unless they think they have a way to serve others and their profit is the measure of the degree of success they achieve in serving others.

    In a progressive corporatist capitalist construct only those with the lust for power will go into business and should anyone else manage to get in, they will be crushed by the corporate government.

    Debating capitalism, socialism, progressivism, etc. in the current paradigm is a fools errand. The terms we are using are incorrect, the intentions are masked and the idea of Christian justice doesn’t enter into the equation.

    Progressive aren’t cynical about business. Progressives are very much in favor of business provided they control consumer choices – no happy meals with toys, plenty of prescription drugs with deadly side effect, no guns in the hands of the common man, the right to murder a human being simply because of their current location – inside the womb or in the nursing home. They also want to control the businesses – no free market in insurance, managed pools of mandatory insurance instead, no parochial schools, plenty of government indoctrination centers.

    This is the stuff of a ‘scientific dictatorship’, one in which the slaves enjoy their servitude. It is a technological feudal system – we are the serfs and the progressives are the lords. The first thing our lords must do is eliminate the only Lord we should have – His Name is Jesus Christ.

    No King but Jesus Christ for me.

  • Psalm 146:3, “Put not your faith in princes . . . “

  • Someone help me out here – is there a reason the author of the article is not posted with the article – I have never seen a blog that doesn’t list the author. It is EXTREMELY annoying an unprofessional.

  • Jim, the author shows at the bottom of each post on the main page. The individual pages don’t for some reason (and I agree it’s unfortunate, but it’s not that big of a deal once you know where to look). Blackadder was the author of this post.

  • “It is EXTREMELY annoying an unprofessional.”

    Professional? Jim, we are just a rag-tag bunch of unpaid volunteers! 🙂

    As RL said you can see the authors on the main page for each post before clicking on the post. Alternatively, on the main page clicking on a contributor’s name will bring up all the posts of the contributor clicked on.

  • That businesses optimize is a useful assumption in constructing ideal types. I think you will find in practice that businesses satisfice rather than optimize.

    In the case of wage and hour laws, rules on the terms on consumer credit, and the regime in health care finance, public policy imposed costs. Parties to economic transactions make adjustments which distribute the costs between workers, proprietors, and customers. Some of the politicos who imposed those costs did so with the assumption that proprietors would eat all the new costs.

    It may be that these pols are insufficiently cynical. It may also be that they are ignorant or have not come to the realization that other people have their own agendas and their own fish to fry and are not merely characters in Henry Waxman’s doll house. I come from Upstate New York. We have twelve members of Congress. Perhaps four have some familiarity with business or economics from the occupations they have followed or from academic study. Ignorant would seem likely. The extent of narcissism would be harder to determine.

  • After reading this discussion I’m baffled by the republican party. They seem to get the vote of most serious christians (and rightly so, as they are against abortion), but they often seem very unchristian. Seen from Europe I get the impression that they are often a little xenophobic and very warlike. Also the ties politicians in the United States often have with the business world seems very unhealthy for a democracy.
    Are these impressions just wrong? BTW the presidential candidates are obviously the most visible in Europe, so that’s most of all where I’m basing these conclusions on.

  • “Are these impressions just wrong?”


  • ““Are these impressions just wrong?”



  • American Knight’s analysis is spot on. The question is how do we affect real Catholic change. The right are corporatists or zionist trotskyites ( Krystal and Strauss founders of neo con were trotskyites first)
    The Dems are the party of death and it matters little which modifier you use; liberal, socialist, or progressive. My latest suggestion is to keep throwing the incumbents out until they listen to us.
    We are to bring forth the Social Kingship of Christ, not play patty cake with evangelicals that think they are bringing the latter day rain.

  • I find it difficult to understand what this blog post has to do with Catholicism. Following the author’s logic, we should abolish minimum wage, indeed, all regulation of business, because it will affect prices. And it is of course not true that “progressives” are surprised by the reactions of (certain) businesses. If I may quote from your own comments’ policy:
    “I will not exaggerate others’ beliefs nor make unfounded prejudicial assumptions based on labels, categories, or stereotypes. I will always extend the benefit of the doubt. (Ephesians 4:29)”

  • Perhaps a better title for this post would have been “Progressives Are Not Skeptical Enough Of Business.” You see, there’s a big difference between being skeptical and being cynical.

    It’s OK to have a healthy skepticism of business, government, or even (up to a point) the Church. Ronald Reagan’s “trust, but verify” rule encapsulates that quite well. Blind and unquestioning faith in the fallen human beings who comprise any institution usually leads to trouble. Being prepared for the POSSIBILITY that one might be decieved, or that the other party has ulterior motives, doesn’t hurt.

    However, that is not the same as cynicism — the attitude that automatically ASSUMES people or institutions to be stupid, evil, or corrupt until (or even if) proven otherwise, and never expects any better from them. Cynicism, like flippancy (an attitude that automatically treats everything as a joke) dulls the intellect instead of sharpening it, and if unchecked turns into a cancerous contempt for others that is extremely toxic to one’s spirtual life.

  • “Seen from Europe I get the impression that (the Republican party) are often xenophobic and very warlike… Are these impressions just wrong?”

    What you are seeing, Richard, is a focus on the most extreme elements of the conservative movement/Republican Party. Every movement or political faction has its “fringe” elements, which don’t represent the majority of people involved, but which unfortunately tend to attract most of the media attention. I’m sure the same thing happens in your country.

    In fact, we in America probably get an equally simplistic, stereotyped or distorted view from OUR media of what’s happening in Europe and elsewhere in the world. It’s just the nature of the news media to do that. I hope that answers your question.

  • America is large and not Europe, though our politicos wish it were and work to change it into it. Look at the stats when this country was strong and wealthy after the last war we did not export but 5% of GDP. We made all kinds of things and now we do not. This is key to prosperity we make things to create wealth we do not take in other’s laundry that’s called service. It is parasitic. This is part of the reason for this crisis we have more parasites than are healthy for a political organism. We must rid the
    body of these parasitic diseases and promote healthy activities like small businesses, while getting rid of the terminal diseases like the Federal Reserve and fractional banking, the IRS, reduce the Federal Government to about 10% of it’s current size. Well you get the idea. We need to stop supporting Europe and pull all of our Nato troops and war machines out. Let the Russians take over. The EU has put obstacles in the way of American free trade in Europe so have a nice day, we are out of there. We can do it alone just like we did in the past and be the wealthiest country on the globe. The US is fighting a proxy war for the EU, or the Mohammedans would have taken over the Continent due to their physical superiority to the fighting forces in the EU. Remember France it was on TV and the French police looked like little skinny girls and could not control the Mohammedans. Fortress America with Catholic Ghettos are what we need again.

  • Tim,

    I agree on many of your points especially the Fed and fractional-reserve banking (usury); however, I would not call service oriented businesses parasitic. All businesses serve, some provide and intangible benefit, some provide manufactured goods, some facilitate (service). All are legitimate; however, we do need to get back to having a manufacturing base, not because there is something wrong with service, but because wealth is created by mixing man’s labor (with the intent on sanctification) with God’s creation for His glory.

    In truth the USA barely needs to import anything and we should be exporting our massive surplus to help the world and enculturate the world to freedom.

    As for letting the Russians take over – I am not cool with that at all. I do think we need to stop our imperial military and have the biggest baddest military around, but not send them anywhere without a firm purpose for defeating an enemy – utterly defeating an enemy. Our military should not be the policeman of the EU, we should not be nation-building and we should most certainly not be using our soldiers within the borders of the USA (on the borders – I am all for that). That being said, we cannot create a vacuum because the Russians, the Muslims and the Chinese will fill it – we can’t have that.

  • We have no surplus to export. We don’t make anything any more. Agri-business has killed vegetable farming we export corn syrup, soy oil, corn oil, etc. We need to import everything, we need food, we need clothes, we need tv’s nothing is made here any more.
    The service industries like accounting are now counted as part of the GNP thanks to Billy Clinton. Accountants do not make anything they count what has been done. This is perverse. It adds no wealth. Service business are a cost of manufacturing which produces wealth. They do not create wealth they suck it out of the economy, but they are clean jobs for college educated clerks.
    The most important thing is this the Chastisement which Our Lady explained at Fatima has not been fulfilled and Russia has not been consecrated. This chastisement which is coming will be worse than the Deluge.

    We have protected Europe it is time they grew up. If they can protect themselves Russia will not take over but I’m betting on Russia, because EU is effeminate

  • @tim mccarthy Russian is Orthodox now, and the EU atheist, so, it’d be an improvement.

  • Tim,

    Most accountants are progressives because they earn their livelihood as a result of burdensome government regulation and graduated income tax scheme. However, their are some services that are useful. Retail is one of those. Most people purchase the goods we used to manufacture through service retailers. Financial services professionals are usually progressives too because they tend to favor the evil Fed and corporatism. Some actually help people make smart decision about the stewardship of their wealth, sadly those are few and far between.

    Not having a manufacturing base is part of the globalization plan to erode the sovereignty of the United States of America. The intent is to kill the shining city on the mountain and it eventually will happen, but it does not have to be now.

    The kings of the earth who had intercourse with her in their wantonness will weep and mourn over her when they see the smoke of her pyre.
    They will keep their distance for fear of the torment inflicted on her, and they will say: “Alas, alas, great city, Babylon, mighty city. In one hour your judgment has come.”
    The merchants of the earth will weep and mourn for her, because there will be no more markets 5 for their cargo:
    their cargo of gold, silver, precious stones, and pearls; fine linen, purple silk, and scarlet cloth; fragrant wood of every kind, all articles of ivory and all articles of the most expensive wood, bronze, iron, and marble;
    cinnamon, spice, 6 incense, myrrh, and frankincense; wine, olive oil, fine flour, and wheat; cattle and sheep, horses and chariots, and slaves, that is, human beings.
    “The fruit you craved has left you. All your luxury and splendor are gone, never again will one find them.”
    The merchants who deal in these goods, who grew rich from her, will keep their distance for fear of the torment inflicted on her. Weeping and mourning,
    they cry out: “Alas, alas, great city, wearing fine linen, purple and scarlet, adorned (in) gold, precious stones, and pearls.
    In one hour this great wealth has been ruined.” Every captain of a ship, every traveler at sea, sailors, and seafaring merchants stood at a distance
    and cried out when they saw the smoke of her pyre, “What city could compare with the great city?”
    They threw dust on their heads and cried out, weeping and mourning: “Alas, alas, great city, in which all who had ships at sea grew rich from her wealth. In one hour she has been ruined.
    Rejoice over her, heaven, you holy ones, apostles, and prophets. For God has judged your case against her.” – Apoc 18:10-20

  • The lunacy on this blog is beyond belief. Certainly beyond catholic belief.

  • Why thank you for your kind remark Professor Simons. I am sure you are used to an ideological spectrum at Dartmouth that goes from far left to lunatic left, so I can understand your distress at being exposed to uncongenial currents of thought.

  • I understand the importance of having a strong manufacturing, and for that matter an agricultural, base to the economy — i.e. making, selling, and buying stuff — but since when are service jobs now classified as being bad and unnecessary? Doesn’t this imply that the ONLY “real” economic wealth or value lies in material goods? Aren’t knowledge, independence, skill, and just plain enjoyment of life economic goods as well?

    Service jobs are simply doing for others what they do not have the time, ability, or inclination to do for themselves — thereby freeing them to devote their time to do the things they CAN do, or want to do. When this comes about as a result of genuine demand — and isn’t artificially forced on people through excessive government regulation or other causes — how is that bad? And finally, isn’t the notion that real wealth only lies in “things” and not in serving others basically un-Christian?

  • Spot on Elaine. Although material wealth is measured only by the things produced, so in that sense service isn’t wealth; however, some services enhance wealth. Education and apprenticeship for example, without those how will most people have any idea how to create material wealth?

    As for the true wealth – we know that can’t be measured.

    Look where your treasure is, for there your heart will be also.

  • Simons,

    Care to elaborate? Levying an attack like that without any substance, hmm? When did that stop being beyond Catholic belief?

    You may have a little something in your eye.

  • We have no surplus to export. We don’t make anything any more.

    This is a myth, albeit a widespread one. America’s manufacturing output is actually much much higher now than in previous decades.

    What trips people up is that while the U.S. is making more stuff than ever before, we’ve gotten so efficient at doing it that it takes fewer people than before, so manufacturing employment has declined even as output has risen (the same is true, btw, for agriculture).

  • Bravo BA! That is a simple fact, but one that seems to elude most people.

  • I was a Manufacturing Engineer for thirty five years. I worked start-ups and turnarounds I am the wrong guy to try to bamboozle. This idea that we make as much now as then is another Progressive piece of bent truth. The dollars as a number have remained the same but our share of the industry as a percentage has diminished. I saw it, I fought against it. A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100. These companies were forced out of business by the progressive force of ISO conformance to the EU. The regs were intended to put America out of business. Nafta sent the rest of the jobs to China and India. It is all about how little they pay them, it has nothing to do with anything but that.
    What you really need to do is stop getting you info from the liberal news, watch fox news, but not the talking heads like Hannity etc, they are apostate Catholics which endorse contraception.

  • This idea that we make as much now as then is another Progressive piece of bent truth. The dollars as a number have remained the same but our share of the industry as a percentage has diminished. I saw it, I fought against it. A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100.

    I’m not saying that the U.S. makes as much now as in the past. It makes more. That’s just a fact, as the chart I linked to illustrates.

    It’s true that as a percentage of the world total, U.S. manufacturing output has declined in recent decades. But it doesn’t follow from this that U.S. manufacturing output has declined. Suppose, for example, that total manufacturing output worldwide doubles while America’s share of output falls from 20% to 15%. Our share of industry as a percentage would diminish, but we would still be making more stuff and before. This is basically what has happened (though the numbers are just for purposes of the example).

    Likewise, as I noted previously, a decline in manufacturing employment doesn’t imply a decline in manufacturing output. Indeed, one of the reasons manufacturing employment has fallen is that the manufacturing sector has become so productive that they can produce lots more stuff with fewer people.

  • Today’s Sunday I’m taking a day of rest.

  • A single aside in the Chicago Metro Area when I started we had 1200 job shops there. We now have less than 100. These companies were forced out of business by the progressive force of ISO conformance to the EU.

    In addition to Blackadder’s point, which is undeniable, it’s worth noting that the upper midwest does not the entire US make (although in regards to manufacturing they’re used to thinking so.) The amount of manufacturing employment in the South and in Texas has increased over the last couple decades, even as the Great Lakes states have seen decreases in manufacturing employment (though not necessarily output.)

It's Not Subversion, It's The System

Monday, February 22, AD 2010

I ran across this Boston Globe article about a Boston College professor who believes she has successfully identified a new form of civil disobedience, or as she terms it “economic disobedience.”

The interview changed the way Dodson talked with other supervisors and managers of low-income workers, and she began to find that many of them felt the same discomfort as the grocery store manager. And many went a step further, finding ways to undermine the system and slip their workers extra money, food, or time needed to care for sick children. She was surprised how widespread these acts were. In her new book, “The Moral Underground: How Ordinary Americans Subvert an Unfair Economy,” she called such behavior “economic disobedience.”

I’m perplexed as to why Prof. Dodson is so surprised by this.

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4 Responses to It's Not Subversion, It's The System

  • The only system I can think that it subverts is the legal system type hoops put in the way– I know I’ve heard of a lot of places getting attacked for giving away beyond-sell-date food, and there can be taxes on any recompense that an employer offers an employee…. Ditto with the flipside of workers willing doing an extra ten minutes after they’ve clocked out so the work is done right.

    (My sister did that once– and was informed that she’d be fired if she did it again, because the risk of legal action against her workplace was way, way too high. Not out of fear of risk, but because she was willingly doing something extra without being paid.)

    It doesn’t seem the lady drew the same sort of conclusion I would’ve, but the phenomena seems to be in the same vein as the various Catholic services that have had to shut their doors because the law says X can’t happen, and there’s no way for them to sneak.

  • Dodson’s perspective is so screwed up. Her implicit starting point is that the system is evil and soul-crushing, and anyone who acts humanely is undermining it. And the fact that she’s surprised by human charity! Is she stunned when someone holds a door open for her? Does she see that few-second pause as an undermining of efficiency? or maybe an attempt to overthrow “the man”?

    Foxfier is right that in an absolutely legalistic society, there’s always the possibility of complaint. What we forget is that such obsessive interpretation of the law is a relatively new thing. There’ve always been decent people doing a little extra.

  • This type of understanding is often produced by academics, for whom work can only be understood as an abstraction. When you trade in ideas, it’s easy to forget that the idea you have in your mind may not have any correspondence to reality, especially when it’s an abstraction like “the capitalist system,” which is almost meaningless. Philosophers, political “scientists”, psychologists and social scientists are most susceptible to this. It seems this professor has been “mugged by reality”.

    I actually like the understanding of charity as subversive, but not subversive of “the system”. Charity is subversive of evil!

  • Oooh, Charity as subversion of the fallen nature of man, maybe? I like it….

On Certification Instead of Regulation

Thursday, January 7, AD 2010

What started as a “Ha, do you libertarians endorse this?” dare by Mike of Rortybomb has turned into a somewhat interesting discussion between him and Megan McArdle about to what extent it’s possible to protect people who are not good at understanding complex financial products (the elderly, or people who just aren’t good at understanding complicated service agreements) from being victimized by banks without in the process hurting the people you’re trying to help. This as the new credit card legislation is going into effect, trying to crack down on banks which raise interest rates quickly if you’re late paying, have hidden fees, or move due dates around (theoretically in an attempt to keep people from paying on time.)

Mike suggests that banks should be required to offer a “plain vanilla option” of products such as credit cards or checking accounts.

And that solution would be mandating financial services to provide Vanilla Option financial products. Boring, low-reward trap-fee products you’d probably have to pay a yearly fee for.

So much of our financial services are predicated on tricks and traps but also have a lot of benefits. You get free checking, but if you overdraft you lose more than you gained. Now with a vanilla option, you could pay more upfront to not take the risk of losing later. This is banking how it used to be, boring. And this is exactly the kind of product that people with weak cognition would want to have available. Someone approaching older age, but before getting there, could opt for the “extra boring” financial services package. People buy renter’s insurance; some might view a yearly-fee on their checking account or credit card as a “trap insurance.”

Megan doesn’t think the idea would be very successful:

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One Response to On Certification Instead of Regulation

  • The Thaler and Sunstein book Nudge made some similar recommendations regarding what you might call “plain vanilla” options for things like credit cards, mortgages, etc. In general they think that you could get around the problems noted by Ms. McArdle by making the plain vanilla the “default option” rather than just one option among many. The idea is that most people tend to stick with a default option whatever it is, and the few who don’t tend to be the ones who are more knowledgeable and capable of comparing the pros and cons of other options. I’m not sure how that would translate into things like health care, but it’s an interesting idea.

8 Responses to Best Candidates for Employee Owned Companies

  • Fun stuff, fun stuff.

    Ok, here are my comments.

    1) As you say, the first points against EOCCs are uncontroversial. Again, following J.S. Mill, or more recently, Robert Dahl and other advocates of economic democracy, it is widely acknowledged that there must be a period of worker-investor partnership. The shares alloted to workers are necessarily smaller, so that investors can profit. The idea is that a successful business will be able to gradually change the ratio of worker to investor ownership in favor of the workers.

    As Mill wrote, “it is even likely that when such arrangements become common, many of these concerns would at some period or another, on the death or retirement of the chiefs, pass, by arrangement, into the state of purely co-operative associations.” Others have suggested other means the same ends might be achieved.

    2) Regarding democracy, you write,

    “The success of such companies rely heavily on the creativity of the management team, and so they’re naturally going to be strongly top-down organizations. Democracy is much better at inertia than creativity, and thus the top down structure.”

    I think perhaps the fallacy here is the assumption that all decisions must be subject to a democratic vote. I would not propose that rank-and-file workers be granted creative control over new projects, or even a democratic veto. Of course the management team, if it so desires, can seek such input.

    But there are many, many operations besides the development of creative ideas that must take place in a company, no matter what they do. Administration, distribution, accounting, etc. There are day to day operations which have nothing to do at all with the creative process – there is no reason why the by-laws governing these non-creative processes cannot be democratically decided or influenced by those who must carry them out.

    The rank-and-file worker does not necessarily need a direct say in every decision made, in other words, in order for there to be democracy. The idea is to extend as much control and provide as much accountability possible within those areas that most directly affect the workers.

    3) Further on the topic of democracy, you write of large firms that

    “an individual worker’s vote is not going to count for much with so many employees.”

    I must object once again. I’ll leave aside whatever parallels might be drawn with political democracy and the implications that might have.

    Rather, I would suggest that, again, the concept of democracy need not be so narrowly applied. It need not be limited to a guaranteed vote on every matter. It may be as simple as having a say in the by-laws that govern a particular worker’s area of a particular firm, and a mechanism by which management can be held accountable. Or it could be more expansive. It depends upon what workers, managers, and investors are willing to agree upon.

    4)Here are what I think are serious problems: Ultimately a degree of good will must play a role, since I imagine that to many investors, it appears that a firm that keeps its workers in line autocratically or oligarchically will be more focused on the bottom line than one in which, yes, operations might be potentially held up by deliberations. This is one area where arguments against unions and arguments against economic democracy overlap; rising and falling stock values sometimes follow the victories and defeats of management versus labor.

    Superficial calculus might declare that more shares for the workers means less shares for the investor, but if worker ownership and democracy lead to greater productivity – and I think they can, do, and will continue to – then everyone wins.

    What we need are socially conscious investors who strive to do with their money what Christian morality demands of them, or their secular social conscience, or call it what you will. This is not to say that people should make BAD investments as an act of charity, but perhaps that they should forgo super-profits overnight for more modest returns over a period of time.

    For, in the end, if the model works, it works. There may be situations where slavery or some other hideous form of exploitation would yield even greater profits than the typical capitalist firm, but we avoid those and outlaw those because they are morally reprehensible. We let, in other words, a moral consideration, a view of the human person, draw a limit for our economic behavior.

    There is no reason this cannot also be a positive sentiment – instead of abstaining from a bad form of investment for moral reasons, engaging in a good form of investment for other moral reasons.

  • I would not propose that rank-and-file workers be granted creative control over new projects, or even a democratic veto.

    In what sense, then, would the company be “employee owned”?

  • In the sense that workers own shares and earn dividends from them…?

    I suppose I should say, it isn’t necessary that every worker have control over every process in EOCC. It is sufficient that they have control over their immediate area of work, have the ability to hold all management accountable for their leadership and performance, and own shares in the company.

    I mean, do investors typically insist on control over the creative work of the management team? No. They own the company but, to use an example Darwin might be thinking of, they don’t sit in at every meeting to design the next video game, they don’t hover over the shoulder of the screen writer or the producer of the next movie.

  • Here is the guy who blazed the train here in the US

    Learn how Jack Stack and his fellow employees transformed a failing division of International Harvester into one of the most successful and competitive companies in America using the principles of Open-Book Management.

  • Your typical investor isn’t going to be sitting in on board meetings, at least not at a large company. But if they don’t like the way the company is being run they can sell their shares, or vote against management at the next election. Because of this management is going to be very concerned about keeping shareholders happy, and would be unlikely to do anything that would upset the shareholders.

    In the case of a typical public company, keeping the shareholders happy isn’t inconsistent with a great deal of creativity and growth within a company. Where the shareholders are employees, however, the situation is somewhat different. Unlike a typical shareholder, who has invested only a small portion of this income in a given company, an employee shareholder will have almost his entire livelihood dependent on how the one company does, which is going to make him less willing to abide high risk/high return strategies. In addition, if an employee’s shares are going to be diluted whenever a new employee is hired, that is going to make employee shareholders less willing to expand, as doing so could lessen the value of their own shares even if it makes the company as a whole more successful.

    Mind you, all of that is premised on the idea that shareholders have some indirect control over management stemming from their ability to sell their shares freely and/or exercise voting rights. Presumably, though, you don’t think that employees should be able to sell their shares freely, as if they could the “employee owned” company would quickly become a regular investor-owned company. And based on your recent comments, it doesn’t seem like you think employee shareholders should have voting rights either (I kind of doubt that this is your view, but that’s what it sounds like from your recent statements). In that case I’m not clear on how you think employees are supposed to “hold all management accountable.”

  • “Your typical investor isn’t going to be sitting in on board meetings, at least not at a large company.”

    No kidding. And they aren’t going to sit in on “should Gandolf’s robe be dark grey or light grey in the Lord of the Rings video game” session either. The point here was simply that creative decisions are not going to be subject to democratic vote – but those coming up with the ideas will be held accountable for their performance.

    “Unlike a typical shareholder, who has invested only a small portion of this income in a given company, an employee shareholder will have almost his entire livelihood dependent on how the one company does”

    Understood. That still doesn’t mean that everyone has to have a vote on everything. This is a very simple point I am responding to. It isn’t an absolute requirement for economic democracy or worker ownership. It’s simple. There’s no need to nitpick the point. Either you agree or don’t. Either people have to be able to vote on everything for there to be democracy, or they don’t.

    Now, onto the other points…

    “which is going to make him less willing to abide high risk/high return strategies”

    Isn’t this assuming that the employee isn’t also earning a salary – like every executive is today? What is the difference between the executive with extensive stock options, whose “entire livelihood” is tied up with the company he works for, and the worker’s who stake is probably smaller? Wouldn’t it be less of a dependency on share value and more of a willingness to risk?

    On the other hand what makes a CEO and a well invested board of directors want to take major gambles with everything they have? Why is there a difference?

    “In addition, if an employee’s shares are going to be diluted whenever a new employee is hired, that is going to make employee shareholders less willing to expand, as doing so could lessen the value of their own shares even if it makes the company as a whole more successful.”

    It could do that, yes. Presumably, everyone will understand that possibility when they sign up. But even if the value of their shares decline, they would still be earning more than their counterparts in the industry who don’t own anything. Moreover, I see no reason to assume that this is a likely thing to happen. As the National Center for Employee Ownership reports,

    “Just as important, however, are potential productivity gains. Studies consistently show that when broad employee ownership is combined with a highly participative management style, companies perform much better than they otherwise would be expected to do. Neither ownership nor participation accomplishes these significant gains on its own. Companies want employees to “think and act like owners.” What better way to do that than to make them owners?”

    They do much better – meaning, as they company performs better, bringing on new workers will only make it better, and not necessarily cause a dividing up of the shares to result in a loss of income to the shareholders.

    As for the final paragraph….

    While I don’t think it needs to be a contract for life, I do think there has to be a contract of some kind, yes – for the reason you state.

    But the contract also includes voting rights, and I have absolutely no idea what “statements” you are talking about that suggest I don’t think employee shareholders should have voting rights. I do think they should have voting rights, I just don’t think they need to have a vote over everything.

    Let me try, try, to put it more clearly: some decisions depend upon objective knowledge, experience, skill, things that cannot be decided democratically. Those are the sort of things Darwin was referring to, companies that rely on the creativity of a small team to make big profits. I don’t think that creative process itself requires democratic oversight. But I do think that if it is manifest that the ideas aren’t selling, the workers can vote them out, like investors do with any poorly-performing executive officer.

  • Joe,
    CEOs, entrepeneurs, and creative talent gamble on risky, potentially high reward strategies because the payoff for success is so much bigger, and because they don’t usually risk everything – their chances of rebounding from a loss are higher. Investors who choose such companies also have a higher appetite for risk than your average company man.

    And Blackadder’s point about workers being hesitent to dilute their share of the profits by allowing more employees rings true to me – look at how unionized industries (services in Italy, for example) and professional occupations (doctors, teachers) both tend to resist allowing more workers (through deregulation and licensing reform).

    That said, I find your idea for transitioning from venture capital to employee ownership as an industry matures an interesting one – perhaps through a pre-established dividend amount/share buyback (e.g. 3 times the investment, adjusted for inflation?).

  • Sometimes its true about the unwillingness to dilute shares, but the situations you’re talking about aren’t the same ones I’m talking about. I think that if it is clear that adding more workers is going to make the company more successful, worker-owners are going to have better reasons to bring on more worker-owners than union workers or professional associations are.

    A wage worker’s wages, even in a union, are determined more by supply and demand on the labor market than the profitability of the firm they work for. With worker-owners it is the other way around.

    As for the transition, yes, something along those lines.

12 Responses to John Mackey on Capitalism and Running a Business

  • I think the problem here is in the word “value” which is inherently subjective. Notice that MacKay never uses it. The noble purpose he aspires to is much more objective: healthy food, socially responsible trade, biodiversity, etc.

    I am sure walmart sells many good that people “value” but do they aspire to a noble purpose in the selling of those goods? They might say so because they are offering rock bottom prices which do help the family budget. But is there a trade-off?

  • Other than the fact that they have become China-Mart, Wal-Mart is a very helpful company. They are very, very beneficial to the poor. They hire people with low skills and also sell necessary goods at prices the poor can afford. Is that their mission? I don’t know. Does it really matter? In the temporal sense, no – they provide the benefit anyway, wether for virtue or greed.

    The problem with modern American quasi-corpratist capitalism is that it is not truly free-market capitalism, which is the only naturally occuring economic system. Management is usually made up of bean-counters who have no closeness to the business’ purpose just the bottom-line and shareholders are more often investment companies that have the same bottom-line orientation. If individuals own shares they are often treating the market of stocks as a gambler’s paradise rather than a place where one can easily transfer titles of ownership in a business they care about.

    Along with the easy money and manipulation of the Fed with its control of the banks and the money supply we do not have a free economic system that truly rewards entrepreneurs with a vision. We need to get back to that. Will the market always reward people with vision? No and it shouldn’t.

    The market, free from government intervention, is ultimately responsible to the end consumer. Consumer’s appetites dictate who succeeds and who fails. If people are thrifty, financially literate and moral the market will reward business that meets those standards. Unfortunately, those examples are dwindling in the modern controlled American and global economy.

    I never really liked Mackey’s stores becuase they are full of crunchy, granola eating people and tend to epitomize the neo-hippie trends; however, in light of his philosophy I think I may frequent the stores more, although they are quite expensive.

    Odd how the same people shop at Whole Foods and Starbucks, yet one company is pro-free market and truly responsible, the other is anti-capitalist, hypocritical and full of self-absorbed and condesending green (watermellon) ‘charity’.

  • AK,

    “The problem with modern American quasi-corpratist capitalism is that it is not truly free-market capitalism, which is the only naturally occuring economic system.”

    Markets evolved over time. The first societies were in fact communal. I’m not saying that this means we must be communal, but that different stages of technological development give rise to different economic systems. For most of human history the vast majority of the people did not participate in markets at all. They produced what they needed to live. For most of civilized history participation in markets was secondary to production for immediate consumption. Only in the last 400 years or so has production specifically for exchange become the predominant economic system.

    “If people are thrifty, financially literate and moral the market will reward business that meets those standards.”

    The problem with this is that it is almost as utopian as socialism. Any system can work if people are moral; the problem is that many people choose not to be, and ruin any system that they participate in.

    The Church has always recognized the right and duty of the state and the people to regulate the economy to serve the common good. The state is not perfectible, and markets are not perfectible, because man as such is not perfectible; as the teaching of the Church makes clear, however, ALL of these institutions are required to serve the common good.

    That means that leftists are wrong to categorically dismiss the market and rail against it as inherently immoral; and it also means that rightists are wrong when they categorically reject a meaningful role for the state and the public sector in meeting people’s needs. History has indeed shown that both are necessary, and that one without the other has the potential to lead to great injustice and civil disorder.

  • JH,

    “Markets evolved over time. The first societies were in fact communal. I’m not saying that this means we must be communal, but that different stages of technological development give rise to different economic systems.”

    Joe, I agree with your assessment, we were originally communal because we were in survival mode. I was referring to civilization. Men living in civilized society and not in communal tribes. In stating that free-market capitalism is the only NATURAL economic system I am making a statement of what freely acting men will do: engage in mutually beneficial voluntary exchange. The only technology needed for that is money, a medium of exchange. Even if production is nothing more than growing crops or raising cattle and even if the medium of exchange is trading crops for cattle. That is the essence of free market capitalism. Without interference of any sort, that is what rational humans will do.

    “For most of human history the vast majority of the people did not participate in markets at all. They produced what they needed to live. For most of civilized history participation in markets was secondary to production for immediate consumption. Only in the last 400 years or so has production specifically for exchange become the predominant economic system.”

    People did exchange in markets. The market has been the center of the city and the principle reason for travel for all of human history. In the last several hundred years we have simply applied better transportation, advanced productive capacity and more fluid money. The basic exchanges are still the same. Crops for cattle or gold for ploughs or dollars for computers – it is all basically the same.

    “The problem with this is that it is almost as utopian as socialism. Any system can work if people are moral; the problem is that many people choose not to be, and ruin any system that they participate in.”

    Not really, by moral I was referring to the aggregate and not necessarily the individual actors. If the principles, traditions and customs of a society are basically moral then the institutions will be basically moral despite the large quantity of sinners and the smaller quantity of deliberate sinners. In any event, a free market liberates human creativity and innovation and allows methods and means for checking and punishing the immoral actors. All government methods for checking bad behavior developed in a free market first, meaning the creativity of some individual devised the method which is used by government. Governments are inherently administrative and not creative.

    “The Church has always recognized the right and duty of the state and the people to regulate the economy to serve the common good. The state is not perfectible, and markets are not perfectible, because man as such is not perfectible; as the teaching of the Church makes clear, however, ALL of these institutions are required to serve the common good.”

    I hope I did not give the impression that I am against this sentiment. When individuals actors who assign certain duties to government and leave most to the natural market the most social benefit is realized. None are perfectible, only utopians believe that, yet we are to seek something MORE PERFECT. We are to journey as individuals and in the aggregate toward perfection knowing it is like the horizon. We can see it, we can move toward it, but we will never reach it.

    “That means that leftists are wrong to categorically dismiss the market and rail against it as inherently immoral; and it also means that rightists are wrong when they categorically reject a meaningful role for the state and the public sector in meeting people’s needs.

    Those are difficult words. What is a leftist? What is a rightist? As I understand it we have assigned the LEFT to those who advocate for absolutism and the RIGHT to those who advocate anarchy. If that is correct, then you are correct, neither option works with fallen man. I don’t subscribe to either idea, no rational person can. As with everything save for Love of Christ, balance is what is required.

    “History has indeed shown that both are necessary, and that one without the other has the potential to lead to great injustice and civil disorder.”

    I don’t think we are disputing if both are necessary, I think we are disputing the point of balance. In fact it isn’t a duality, it is inherently trinitarian.

    We need to devise an order that assigns proper roles and the balanced amount of power to three spheres:

    Free Man (the market)

    Church first because the moral order belongs to the moral authority. For us that would be The Church, for others, well, they’re confused. Nevertheless, there are some basic commonalities that are true no matter what ‘denomination’ one may belong too, even pagans, atheists and followers of false religions. The historic commonality is Christian morality. Heretical Christians, non-Christians and Catholic Christians all benefit from Christian morality as taught by Mother Church. This country was founded on these principles, despite the fact that the Protestants refused to attribute the teachings to the Catholic Church.

    I think it was Patrick Henry who stated, “It cannot be emphasized too clearly and too often that this nation was founded, not by religionists, but by Christians; not on religion but on the Gospel of Jesus Christ.”

    State is second in the sense that men in the aggregate have given consent and certain duties from their own sovereignty to government. Limited duties, with a specific and narrow scope. Primarily to protect LIFE, LIBERTY, PROPERTY and FREEDOM OF WORSHIP. If government is limited to the protection of the aforementioned, not the regulation, not the promotion, not the management but simply PROTECTING, then that government is legitimate, licit and as moral as humanly possible. Prosecuting murder, especially of the pre-born and waging just war are designed to protect life. Liberty and property are protected by ensuring that the market is not coerced by anyone. Freedom of religion is obvious.

    If government is limited to those activities and respects subsidiarity (federalism) then men are free to act within the confines of good, informed conscience. Those who do not, face punishment by both the market and the government.

    All three orders are necessary, integrated and need to be balanced and coordinated appropriately. That will never happen, but it is not for us to make it happen. Our duty is to seek the more perfect integration, coordination and balance of Church, State and Free Man. The efficacy is the work of God.

  • AK,

    I agree with a lot of what you say, but I reject the strict limitations you think ought to be imposed on government.

    When I talk about not rejecting the state or markets, I am talking about the economy as well as everything else. Let me be more clear: the Church has not only supported, but insisted on, state intervention in the market when it becomes apparent that the latter cannot meet the needs of people, provide them with that which is their right as human beings with with dignity, to preserve social order, etc.

    In a modern technologically advanced society, what we cannot have is unaccountable, concentrated economic power, whether it is an outcome of markets or government decrees.

  • Joe,

    I think we agree on most things and I know we agree in the macro-cosmic sense. I think we are finding babelized disagreement in the micro-comsic sense.

    The reason for strict limitiations on the government is NOT becuase government is BAD. Authority is a good. Governmnet must be restricted because it is SANCTIONED FORCE. That is a devasting power. Used morally it is a benefit; however, if that power is used immorally, even for ‘good’ intentions, it is calamity. Governments, all kinds, are run by sinful, fallen humans. Without restraint the monopoly of power will typically attract the greedy, ambitious and worse. That means the sanctioned force of government can be in the hands of humans cooperating, willfully or negligently, with Satan. Checking government is not an indictment on government, it is an indictment on man.

    Furthermore, the Church is NOT infallible in economic matters. I respect and agree with Church teaching on the moral intent of man’s economic activity. The problem is that what the Church has insisted needs regulation is NOT the market of freely acting humans it is the very intervention of humans acting with force of government. We have to keep in mind that our sins are ever present wheter we are a businessman or a government regulator, neither is infallible and neither is exepmpt from corruption. The difference is the businessman has to operate with numerous other actors some as corrupt as he and others far less so. The government regulator has COERCIVE POWER and there is no check on his corruption becuase the government is a monopoly.

    The only market of government exists internationally and one can argue that in the last hundred years or so, we have established a global government monopoly apparatus so government monopoly has no competition. That is the problem.

    All that power concentrated in a few hands WILL invariably lead to that power being in the hands of corrput and evil men. Even a good king cannot be sure that his offspring will have a good rule. Usually for monarchs and inheritors of wealth, by the third generation it is all squandered.

    Limiting and checking the power of government is what keeps evil men in check and allows the vurtuous to benefit the most in need.

    Markets cannot create conentrated power. Only FORCE can do that. Governments role is to keep force OUT of the market so that the power is always with the lowest commong denomentator: The end user, the consumer.

  • I believe we could have a clearer discussion of the problems were we to give up believing that the U.S. of A. is basically a moral country. I have, for example, just finished reading George Archibald’s JOURNALISM IS WAR. He recounts his various investigations into the vile shenanigans in the cesspool of Washington in the past two decades.

    It is distressing to realize that all our suspicions of politicians and union leaders and CEOs and the Catholic clergy are not without foundation. We are forever hoping that somehow our politicians will not infected by the poisonous miasma that is Washington [sad that George’s glorious name should stand for base corruption].

    Two classic examples were the town hall meetings in which one Representative said that he would listen only to people from his district and was told that the participants were people from his district.
    In another the Representative proclaimed that it was his town hall meeting and he would set the rules.

    The sadness arises from the fact that these people have been blinded by the Washington miasma. They come from relatively simple backgrounds. They have not discovered the vaccine against the halls of power.

  • Gabriel,

    “I believe we could have a clearer discussion of the problems were we to give up believing that the U.S. of A. is basically a moral country.”

    Words are tricky things. They are inadequate for communicating, but the best we have available.

    The US of A IS a moral country in the sense that the principles she was founded upon are moral. She is also moral in the sense that within the context of her history, with all her blemishes and horrors, she is the most consistently moral country.

    The bulk of her people seek virtue, imperfectly, and in comparison to the peoples of Christendom, with less efficacy. Perhaps we are struggling for virtue in a world with Satan on the loose.

    Our culture is certainly NOT moral and we do have to take responsibility for that but loss of our culture does not make all of us immoral. Was anyone moral in Sodom and Gomorrah? Moral people, or at least people seeking to be moral, may be immersed in a culture that is immoral. Jesus dined with sinners and publicans. Perhaps we are here to reclaim the USA for her King.

    Our political class is overwhelmingly immoral. Thieves, usurers, liars, perverts openly displaying their homosexual proclivities, adulterers, megalomaniacs, etc. are in more abundance than moral men. This is the reason government is supposed to be BOUND with the chains of the Constitution.

    Our biggest problem is our institutional desire to evict God from public intercourse and governance. We CANNOT remain moral if we demand that he leave us alone. Without Him we are certainly immoral. The work of the enemy seems to be succeeding becuase we keep diminishing God’s role in our public lives, but this need not be so. The first amendment secures our given right to worship the God of Christ freely. We need to make a courageous, respectful and civil PROTEST against the removal of God from our public lives and our governments.

    For the LORD did not give us a Spirit of timidity.

    We need to stop being timid, cowed by political correctness and deference for the sensibilities of men. We need to walk boldly into the fire proclaiming our King. Otherwise we are just spectators to the demise of a once great nation. Silence is consent.

    Pray the Rosary with your brothers and sisters on the corner of your street, in front of the city hall, in the centers of commerce. Proclaim the King and see how many moral people will join you. Then tell us if this is still a moral country. I think she is. I beleive she is. I hope she is. The USA is consecrated to our Blessed Mother. Respect your mother and ask her for the graces to set this moral country back on the path to Heaven and away from the abyss.

    I’ll join you.

  • American Knight:
    What you write seems to me to be wish-filled thinking. Our culture, thus our country, is not moral. It has no defenses against immoral positions. For example, it may well be that a majority of Americans do not hold with abortion “except except except…”.
    Abortion is not illegal in this country.
    It appears that many [most?] couplings are not done with the marriage lines. [What society has ever survived without a clear understanding of marriage and the family?].
    What of the next stage the education of children? The school system is hostage to unions which protect mediocrity in its members and in students.
    Consider the history of the country. It took a while to slaughter enough Indians that they became no longer a problem, except that they are forced to live in reservations where education is abominable and drunkenness rife.
    Need I dwell on slavery which continued to the 1960s?
    The War on Poverty seems to have impoverished many more. Roe v. Wade was quite clearly an effort to decrease unwanted populations.
    And so on and so on and so on.

    The much praised liberty has become a liberty to do whatever you could get away with. And to avoid as much responsibility as possible – personal and public. And to call in the lawyers to protect yourself, teste the ACORN business.

    We are not on this earth to build America as the City on the Hill.

  • Gabriel,

    What you may perceive as wish-filled thinking is Hope.

    I know our culture is immoral, but as I stated in my previous post that doesn’t make the country immoral. In principle the United States of America is founded on Christian morality by sinners.

    To assume that it is an immoral country is to concede the fight. We live in an immoral country we have institutionalized evil so we are all going to Hell. I reject that.

    We live in a moral country and most of us do it immorally and we have insitutionalized evil so those of us with eyes to see and ears to hear MUST be good Christian witnesses, fight for the re-establishment of our moral principles and re-consecrate our country and our selves to the Blessed Virgin and through her immaculate hands and heart to her Son, our Lord.

    I think we are here precisely to build America as the City on a Hill and our own state, town, home and body too!

    The efficacy of that work is not for us to decide, but it is our duty to do the work with that end in mind.

    “Thy Kingdom come” That means into our hearts, but it also means into our familiies, our towns, our country and the world.

  • American Knight writes Friday, October 9, 2009 A.D.
    “I think we are here precisely to build America as the City on a Hill and our own state, town, home and body too!
    “The efficacy of that work is not for us to decide, but it is our duty to do the work with that end in mind.

    “Thy Kingdom come” That means into our hearts, but it also means into our families, our towns, our country and the world”.

    My attempt is to point out that being American is no guarantee of goodness. We have relaxed too much into the comfort of the wealth of natural resources and take it as a right.

    The Founders were political creatures [and mostly ignorantly anti-Catholic]. They had fallen for the “Enlightened” nonsense of automatic progress, a word interpreted as improvement. Yet they were not shocked by being slavers.

    You must put together for me a list of accomplishments of the U.S.A. to balance the various horrors committed in the name of Liberty and Manifest Destiny.

  • Gabriel,

    I totally agree: Being American is no guarantee of goodness. Neither is being ‘Catholic’. Far too often we Catholics are tempted (God knows I fall for it often) to lean toward conceit when it comes to our faith. I am not condemning you, I am just using a handy exapmple. You stated, “The Founders were political creatures [and mostly ignorantly anti-Catholic]. They had fallen for the “Enlightened” nonsense of automatic progress, a word interpreted as improvement. Yet they were not shocked by being slavers.”

    Your statement is correct; however, Catholics have also owned slaves and advocated for slavery. Many Catholics were involved in racist and biggotted practices as recent as the last century. So we cannot cast stones at our poor misguided Protestant brethren simply because our Church, is The one established by Christ and only we have Apostolic succession. This is true for the Church, it is not necessarily true for each Catholic.

    I suspect this is the same for Protestants, in fact it may be more excuseable for them becuase they do NOT have infallible teaching, just the pale shadows left over from when their heretical founders were Catholic.

    Since the Church is perfect and we know that Catholics are not can you draw the conclusion that the Church is imperfect or that Catholics are perfect? Of course not, The Church is the Church and we are sinners. The same analogy can be applied to our country, although less ‘perfectly’. America is good and moral, Americans may or may not be. Until all of our mores, institutions, conventions, customs, etc. are corrupted (sadly that may not be far off) then we have something good to hold on to and revert to, while correcting the mistakes of the past, which include slavery and something much worse – abortion.

    The accomplishments of the USA that balance horrors do not exist. America is not a church and she has no spiritual soul, just a spirit of principle. Theie is no balance. The slaughter of Christians at Nagasaki with atomic weapons is unexcuseable we need to transcend it, not excuse it. Nevertheless, America has done more good for the world than harm, in her time but that doesn’t mean a balance has been achieved. Keep in mind she’s a country not a person. Most of our errors are propogated by evil forces and evil men working with them. We have a struggle ahead and the outcome will determine the fate of billions. In any event, this is not the thread to truly debate this issue.

    Suffice it to say that Mackey highlights his ‘conversion’ from nice sounding anti-capitalist platitudes to the honesty of the fact that free-markets allow the morally inclined to thrive and provide for their customers, their employees and themselves for the benefit of all. In fact a free-market even allows one to glorify God in their free market activity if they so choose. Thank God for that becuase without these wealthy Catholics who thrive in the free market, we’d have even less parishes than we do. I heard that one good man underwrote the public prayer of the Holy Rosary in Kansas City for almost 200,000 of the faithful. It required a $200,000+ check – thank God for free-markets!

Unreasonable Compensation

Thursday, April 23, AD 2009

With people focused on the economic downturn, many have found it a good time to give a little extra thought to whether other people are making more than they ought to. The president has spoken out several times against “excessive compensation” of executives, and a number of people have floated the idea of adjusting the top marginal income tax rate to effectively cap total compensation at ten million dollars a year. MZ tackled the question somewhat humorously here.

Beyond question, $10 million is a lot of money. Most of us will never see anything like that much money, and so it seems entirely reasonable to demand: Why should anyone be paid so much? What’s so special about CEOs and actors and baseball players that they deserve tens of millions of dollars? Aren’t they running off with the money that we should be getting instead?

I certainly wouldn’t claim that executives are not often paid more than they are worth. A board of directors is still a group of people with emotional commitments (including wanting to assure themselves that they made the right pick in choosing the current CEO) and they will certainly not always do what is in their own best interest. Though we may be comforted that in a free economy the incentives are in place to automatically punish them for not doing so.

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22 Responses to Unreasonable Compensation

  • supply and demand, it’s just that simple.

  • Concerns over executive compensations always seem overblown to me; a way for politicians to express faux moral outrage over what is almost entirely a matter of symbolism. In its worst form it exploits a crude populist instinct based on the haunting fear (and resentment) that someone, somewhere might be overpaid. Notice, even if confiscatory taxes were imposed on income over $10 million, the tax would generate very little revenue because the contracts would just be restructured. I suppose there may be some symbolic value in preventing people from being paid large salaries, but it seems to be a very minimal and cheap sort of value.

  • Indeed it is a distraction away from the far more vast and destructive sums being either created or spent by the government.

    While there is something to the argument that top executive are over paid, its really an irrelevant question. They should be paid whatever the market is willing to pay them. If the agreement on compensation is consensual then morally there isn’t much to argue against. If its a stupid move of the part of the employer, that will be revealed in due course as the company’s fortunes decline.

  • One of the odd things about executive compensation is that the people who actually have to pay the compensation tend to be the ones who are least concerned about it.

    As for whether it can be justifiable to pay someone $48,000 for an hour’s work, I think that the Wilt Chamberlain example shows pretty clearly that it can.

  • I’ll point out that to some of the workers on the lower end, $105 extra a year is a big deal (probably an extra week’s groceries).

  • There is a problem with executive compensation. Not that it’s too high, but that it’s unresponsive to the needs of the stakeholders – principally the shareholders of the company. This occurs because of imbalances in corporate governance. I think there are reasonable adjustments that the SEC could make to level the playing field so that shareholders can better control the selection of directors and ensure their interests are better served. This would result in a better correlation between compensation and benefits to the company.

  • I am opposed to high executive pay not because I think it needs to be re-distributed in a futile attempt at equality (real equality will be established through Distributist principles), but because that much money in the hands of a single individual easily translates into disproportionate political and social power.

    The disproportionate wealth stems from ownership, not work. More evenly balanced ownership, i.e. on the cooperative model, will address the problem. We will see that, after all, it is possible to compete and succeed without paying someone 34 million dollars to make all the big decisions. What a waste of resources.

  • I also want to add, whenever I’ve looked up CEO compensation, I see a break down that shows, like I said, that almost all the compensation comes from ownership: stock options, etc.

    The actual salary, for instance, of the CEO of Wal-Mart a few years ago was only 1.1 million, but he took home over 20 million in compensation.

    So, I don’t care about 1 million. I don’t think that gives a person a disproportionate political presence, though, if he is a Christian, he doesn’t need that much money and should give a lot of it away. But that’s his decision.

    I do care about the 20 million. Because it places too much power in the hands of one person.

  • My understanding is that it became a lot less advantageous for companies to give executives stock after the Sarbanes/Oxley round of accounting rules revisions.

    It looks like in this case, the CEO for 1.4M in salary, 5.3M in bonus, 7.9M in stock options and 18.6M in “non equity incentive plan compensation”. So about 1/4 stock, if I’m reading that right.

    It’s really interesting to me (in the sense that it highlights our differences) that you find the stock issues more troubling than the salary. I tend to be very much in favor of paying executives mostly in stock rather than in cash (especially if it’s restricted stock they can’t sell for a certain number of years) in that I think it incents them to look longer term.

    Now for instance, at the company I work for I own about 500 shares total, and my bonus is based on how profitable we are (so it was a lot smaller this year 🙁 ). By comparison, the CEO owns a much, much larger percentage of the company. But I generally consider that positive because I hope it means he’s incented to make good long term decisions for the company. The same actions that will make his billion dollar stake in the company be worth 1.5 billion would make my $5,000 stake worth $7,500, and assure me a safe job and good bonuses in the meantime.

    Which basically makes me realize that while I support a democratic (or more properly: representative democracy) ideal when it comes to political structures, I’m basically a monarchist or oligarch when it comes to the corporate world — though I want to see the castes be porous in a meritocratic kind of way.

  • “I do care about the 20 million.”

    Yeah, right.

    Is that only when his stock options are worth that much?

    Would you actually express the same disgust and resentment when his shares are significantly worth less?

    I can’t believe that folks here have the gall to think they can dictate such seemingly draconian terms on companies across America without actually paying any heed whatsoever on the kind of negative repercussions that might likely occur as a result.

    A talented individual such as a Steve Jobs might as well earn a mere dollar/year for his salary, but God forbid that he should happen to be compensated in stock options which value for the most part ultimately depends on his management of the company.

    Should his skillful management of the company be appropriately reflected in the value of those stock options, crucify the bastard!

    Should the value of said stocks fall below a buck, all the better!

  • “while I support a democratic (or more properly: representative democracy) ideal when it comes to political structures, I’m basically a monarchist or oligarch when it comes to the corporate world”

    And so here’s where we’ll have our disagreements 🙂

    I don’t see how a political democracy can be supported by an economic oligarchy indefinitely. We may call it a political democracy but if real power is distributed differently, it’s just a name.

    What is it people really want in life? I think we agree that no one needs millions of dollars to live a dignified and comfortable life; I should hope we would also agree that any man who says ‘only 30 million can make me happy’ doesn’t have a natural right to it.

    I see no reason why a man can’t be happy with a salary that provides a dignified, comfortable life. I don’t see why progress or economic decision making has to be conditioned on such large compensation. I have a very hard time respecting a person who insists on that much money. What would happen if they didn’t get it? Would they die? What would happen if they just lived at a middle class level, maybe a little higher? It would prevent them from wanting to do a good job?

    I guess I don’t understand how that works. I have many flaws and faults, many sins of which I am guilty, but the need for that much money is something I can say I’ve never had. In fact, give me a computer with an internet connection and I’ll live in a tool shed or a van if I have to 🙂

  • “Would you actually express the same disgust and resentment when his shares are significantly worth less?”

    Disgust and resentment? You’re projecting your own feelings on to me, E.

    I’m for the stock being more evenly distributed to all of the people whose labor create the wealth that the CEO has been hired to manage. Production is a partnership.

  • e,

    Don’t be unhinged. No one said what you’re suggesting.

    Joe did say that he finds it easier to approve of cash compensation than stock compensation — which I find myself at variance to — but no one is talking about crucifying anyone.

    (BTW, I don’t think Steve Jobs even gets stock options. He still owned a major chunk of Apple from when he founded it and figured increasing the value of that was enough. As someone who bought Apple stock in 1996, I agree.)

  • There is a lot to chew on here. I think we are in agreement that the compensation is mostly tied to the performance of the firm rather than the actual work product. My greater concern is not necessarily the gross dollar amounts as much as they act as a first dividend and our lax bankruptcy laws induce companies to undercapitalize thereby resulting in the socialization of risk and the privitization of profit. Similarily companies that carry too much cash on the books place themselves at risk for leveraged buy outs. LBOs wouldn’t be near as advantageous without the bankruptcy protection. Why own company stock if your bonus is equivalent of the dividend of x% of the float? Why worry about the long term health of the company, if you can be paid first and now for risk you aren’t really assuming?

  • The biggest problem I have with large executive bonuses at failing companies is the fact that the top people who are driving companies into the ground are being rewarded while the people at the bottom who are doing the front-line work, no matter how well they do it, get screwed.

    Take the Chicago Tribune, which is handing out $18 million in bonuses to its top executives while firing about 50 reporters, editors, and photographers. The people who actually make the paper worth reading (or used to, before Sam Zell got ahold of it) get nothing while the people who come up with one harebrained marketing idea after another get rewarded, on the grounds that they are sooo talented that the Trib Company simply must provide them with incentive to stay.

    An insistence on high levels of profit for the benefit of stockholders and executives is a big part of what is destroying the newspaper industry, to which I devoted 20 years of my life. It led to Gatehouse Media — a mega-corporation owned by some mysterious hedge fund in New York — buying up nearly every significant newspaper in downstate Illinois, running up massive amounts of debt, then having to slash and burn the staff at nearly every newspaper it owned.

    Now there’s nothing wrong with making a profit, of course; there’s nothing wrong with making big profits if they are the result of genuine innovation and high demand for your product. If Steve Jobs makes gazillions of bucks because Apple computers are great products and everyone wants one (including me, I love them), I don’t have a problem with that. It’s the idea that you can increase profits SOLELY by making risky investments and cutting costs (which usually translate into massive layoffs) that I have a problem with.

  • Elaine,

    While it’s a spectrum rather than a duality, it strikes me you basically have high growth business models and sustaining business models. A sustaining business model has the capacity to keep employing everyone well, and if it has investors to provide them with a small return each year. But the business itself is not going to be worth much more in five or ten years than it is now. A great many small family businesses fall in this category. On the other hend, you have high growth business models where you expect the worth of the business in five or ten years to be anywhere from 2-100x what it is now. These are the sorts of businesses which can return a lot to people via stock, etc.

    It strikes me that a number of the problems we have with “corporate raiding” have to do with people who take what is fundamentally a sustaining business model and try to turn it into a high growth business model for a while in order to turn a quick profit. It’s bad for the business, and indeed basically everyone involved except those who cash out early and run.

  • It’s bad for the business, and indeed basically everyone involved except those who cash out early and run.

    The difficulty, though, is that ‘corporate raiding’ is one of the most effective checks we have on agency costs like empire-building (AOL-Timewarner anyone?) and excessive perquisite consumption. Moreover, such ‘raids’ generally benefit shareholders, while the people doing the raiding are assuming much of the risk. LBO’s provide management with a very strong incentive to eliminate inefficiency and produce stable cash returns. I’ll admit that bankruptcy perhaps eliminates too much of the downside risk (as M.Z. suggested), and that some features of these deals are problematic, but here as elsewhere the benefits need to be considered in addition to the drawbacks. And I think LBO’s play an important role in reducing agency costs.

  • “I’ll point out that to some of the workers on the lower end, $105 extra a year is a big deal (probably an extra week’s groceries).”

    Indeed. But if I read the post correctly, hiring the cheaper guy could end up in revenue loss for workers.

    When you’re one of the guys on the factory floor who gets laid off because the company’s not being run well, it’s a big deal, all right.

  • Joe,

    I guess I’d need to think a little more deeply on the topic, but a few thoughts:

    – I’d see democracy as more necessary for a state than for a company because with a state (especially a large, modern state) the potential dangers involved in failure or overthrow much outweigh the greater efficiency one might find in a monarchy or oligarchy. Businesses on the other hand, present fewer problems when they fail. And leaving a badly run company is generally far, far easier than leaving a badly run country.

    – This is kind of an assumption of the above: It seems to me that individual decision making is almost invariably more efficient than collective decision making. Our form of government (representative democracy) recognizes this, in that rather than having everyone vote on everything, we elect people who then make decisions either individually or collectively. While a company of any size is large enough that one person can’t know enough to make all decisions, I do strongly support business models in which each person is the decions maker in regards to his set of responsibilities, with managers making decisions where necessary rather than doing everything by consensus. It’s not as simple as straight top-down management, but like with a well-run army the executives should give the next level of management a clear set of orders and objectives, those managers formulate order and objectives to accomplish those, and so on down the line. Each person down to the individual worker is a creative part of the whole, but each takes direction from above. Given my experiences in various companies I don’t find the idea of true bottom up management very attractive. I guess I should read up on how this works out in reality in organizations like Mondragon.

    – That said, I do strongly believe in profit sharing and employee ownership stakes. I don’t necessarily see why we should require everyone owning the company equally (if the CEO and CFO were the joint founders of the company twenty years before, it makes total sense to me that they’d own far more of it than the 1000th worker hired who’s only been on staff a year) but I do think that everyone should have a real stake in the company they work for. At the same time, my experience is that often the upper levels of management not only make decisions that have wide ranging effects, but they frankly put in more time than most workers would want do. As I’ve started to have to deal with VPs and Directors more, I find myself getting called into meetings that start as early as 7am or run as late as 7pm, and all the executives I know are answering emails and making phone calls in the evenings and through the weekend. 70+ hour weeks seem standard for them — and I’ve got to say that one of the things I’m enjoying about not being in business for myself anymore is not feeling like I need to put in 80 hour weeks.

  • John Henry,

    Agreed. LBOs are certainly not always a bad thing. Sometimes they turn a failing company into a successful one again. (And as you point out, the leveragers are the ones taking on the risk — since they are “leveraged” as in borrowing the money to fund buying the company on the assumption they can make it work.)

    But at times there do seem to be examples of people taking overweight old companies and trying to turn them into growth monsters when they’re simply in industries where there’s not that much room for growth. (Obviously, the people who try to do this must disagree about whether there’s room for growth.)

    I’d tend to put the fad of buying up regional newspapers around the country over the last ten years in that category. It doesn’t seem to me that there’s much growth potential in regional newspapers these days — at best you can keep them at a sustaining level. Though there are very interesting exceptions. The WSJ has turned itself into a broader national newspaper over the last five years and as a result is growing quite nicely.

  • The problem with this issue (like with many others) is it is multi-faceted and people choose to only address the area that fits the point they want to make or demagogue. Class warfare plays well with the masses so politicians make hay about CEO XYZ getting $$$$$$$ in compensation. It is an easy target to shoot at just like complaining about overpaid ballplayers. Truth is salaries at the top have skyrocketed over the last couple decades. However, that truth doesn’t automatically equal all being overpaid or mean that government intervention is necessary or proper to fix the perceived problem. We often hear that a company needed to pay X amount in order to attract top talent. Problem with that argument is it isn’t always top talent (or top results) being rewarded.

    This situation is similar to the problem caused by “free” health care. Whenever the end user is not responsible for the cost of something you can be sure the cost will escalate unchecked. In this case because of the dilution of the strength of the individual stock holder no one is able to speak up about the corporate waste or mismanagement of assets. If a company is owned by one or a few people they tend to be more careful about out of control spending including spending on management. However, a massive corporation has billions of share holders who have little or no say in the level of compensation, perquisites, or golden parachutes offered to management. I am strongly opposed to government interference, but I see it coming because most boards of directors are too cozy with management and are failing to provide proper oversight.

  • Well said. While some may think $10M or $40M is a lot of money for a CEO there are workers in Africa or China that think making $10 per hour is a lot of money. The goal should not to be to drag down those doing well but to lift up those that are not. You’re free to quit your company if you think the CEO makes too much money. You’re also free to better yourself with FREE books at the library so you can move up the ladder. Besides, the free market will reward and/or punish companies that do stupid things with their money much better than two corrupt politicians being wined and dined by some lobbyist that “help” them decide who gets paid what and who gets taxed and how much.