On the Birth of Corporate Social Responsibilty in 1869

Referring to the speculation in gold that was engineered by Jay Gould and others in 1869 to enrich themselves and the Erie Railroad, Henry Adams (1838-1918), a grandson of John Quincy Adams and great grandson of John Adams, wrote at the time:

“For the first time since the creation of these enormous corporate bodies, one of them has shown its power for mischief, and has proved itself able to override and trample on law, custom, decency, and every restraint known to society, without scruple, and as yet without check. The belief is common in America that the day is at hand when corporations far greater than the Erie [Railroad] — swaying power such as has never in the world’s history been trusted in the hands of mere private citizens  . . . — will ultimately succeed in directing government itself. Under the American form of society, there is now no authority capable of effective resistance.” (1)

Gould had wanted the price of gold to rise not only because he had bought some to sell at a higher price, but also because as a stockholder of the Erie, he would benefit from the railroad transporting more wheat from the Midwest to the east coast for export. A higher price in gold meant a lower dollar. Wheat being based in dollars, a lower dollar meant more exports. The strategy was essentially to devalue the dollar, which Gould assured President Grant would be in the national interest economically. As the price of gold rose to $165 in 1869, Grant, fearing a bubble, pulled the plug by having the Treasury sell $4million in gold.  The collapse in the gold market triggered a drop in the stock-market. Even if it might have been in the short term interest of the speculators and railroads, the manufactured bubble was not in the national interest after all. Gould’s bribes of administration officials had been in vain.

Henry Adams saw the imprint of corporate power eviscerating both societal norms and democracy in the scandal.  In other words, the new-found corporate power eventuated in the birth of the need for corporate social responsibility amid capitalism eclipsing democracy. In academic terms, corporate social responsibility and (corporate) business & government, although discrete fields, were both first publicly recognized in 1869.

The corporate power occasioning Adam’s recognition was a novelty at the time, according to Brands, because the large corporation had only come into being as the railroads incorporated in the 1850s. Looking back after the Civil War, Henry Adams observed, "The last ten years had given to the great mechanical energies — coal, iron, steam — a distinct superiority in power over the old industrial elements -- agriculture, handwork, and learning." (2)  The power of steam in particular translated into large, publicly-held, corporations first in the railroad industry.

On account of their size and scope, and the associated equity capital requirements given the risk faced by lenders, the railroads were the first large American corporations to be publicly traded. The diffusion of ownership — a consequence of the large capital demands — led to a separation of ownership from control and to a new ownership interest: that of the short-term-oriented speculator. A short-seller, for example, seeks lower corporate earnings in the future, while a long-term investor hopes for higher dividends, and thus profits. Managers can exploit this difference in order to pursue their interests in the name of the corporation at the expense of societal norms and democratic governance.

Undergirding the managerial basis in skill, the railroads were the first companies to develop the methods of corporate administration. For example, there were supervisors over supervisors—in other words, multilayered organizational charts. Furthermore, dovetailing with the need for safety and efficiency (given the competition), the railroads developed precise management of their operations, including the development of standards for measuring performance. In short, the railroads were the first to develop a cadre of managers specialized in administration in the particular industry. (3)

Regarding the private power based on technique (i.e., managerial power), Henry Adams announced in 1869 that there was no authority, whether in society or government, capable of resisting it. The normative call for corporate social responsibility and the political call for a resurgence of democracy amid the encroaching capitalism were born. In other words, with great power came a recognition of a need for great responsibility. The corporate social responsibility movement began as precisely this recognition even as the modern large corporation was in its second decade.

Punctum Saliens, the large corporate type of commercial organization itself is inherently powerful relative to societal norms and even potential governmental or regulatory restraints. That is to say, the invention of the large corporation may have been inherently problematic, essentially involving systemic risk to the republic itself on account of the private power of the managements. To paraphrase Nietzsche, power cannot be but powerful. To unleash an inherently powerful feeding machine and expect it not to eat the grass is naive, if not patently irresponsible. To expect the managements of extremely wealthy corporations to be willingly socially responsible when their economizing and power-aggrandizing nature is to run through such non-constraints is simply ideological, if not fanciful. Fundamentally, the problem with corporate management is its inherent proclivity to bristle at any external constraint. It is the underlying maximizing egoism that is innately antithetical to the limiting natures of government regulation and corporate social responsibility.

Endnotes:

1. Henry Adams, “The New York Gold Conspiracy,” in Charles F. Adams, Jr. and Henry Adams, Chapters of Erie (Ithaca: Cornell University Press, 1956), pp. 135-36.

2. Henry Adams, The Education of Henry Adams (1907; Boston: Houghton Mifflin, 1961), p. 238.

3. H. W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), pp. 22-23.

On the Aristocracy of Wealth

The rule of a few—aristocracy. The rule of the wealthy—plutocracy. Where the few, being valued above the many, are determined principally on account of wealth, the two forms of government fuse into the aristocracy of the moneyed interest. The cardinal virtue is the fundamental desire for more—otherwise known as greed. Justice is limited to peerage, or amicitia (friendship) based on having wealth. This sort of justice, which can be derived from Cicero, is antithetical to justice as caritas seu benevolentia universalis (love, that is, universal benevolence), which comes from Plato, Augustine, and Leibniz.

The "ardent glow of freedom gradually evaporates;—the charms of popular equality . . . insensibly decline; —the pleasures, the advantages derived from the new kind of government grow stale through use. Such declension in all these vigorous springs of actions necessarily produces a supineness. The altar of liberty is no longer watched with such attentive assiduity; —a new train of passions succeeds to the empire of the mind; —different objects of desire take place: —and, if the nation happens to enjoy a series of prosperity, voluptuousness, excessive fondness for riches, and luxury gain admission and establish themselves—these produce venality and corruption of every kind, which open a fatal avenue to bribery. Hence it follows, that in the midst of this general contagion a few men—or one—more powerful than all others, industriously endeavor to obtain all authority; and by means of great wealth—or embezzling the public money, —perhaps totally subvert the government, and erect a system of aristocratical or monarchic tyranny in its room. What ready means for this work of evil are numerous standing armies, and the disposition of the great revenue of the United States! . . . All nations pass this parokism of vice at some period or other; —and if at that dangerous juncture your government is not secure upon a solid foundation, and well guarded against the machinations of evil men, the liberties of this country will be lost—perhaps forever!"[1]

 A society wherein aristocracy is defined in terms of money can be likened to an old industrial city wherein the masses are boorish and the few are refined. The latter spend their spare time at the two or three country clubs in town. On July 4^th, the masses have a motorcycle parade and fireworks downtown while the wealth-aristocrats enjoy golf and swimming followed by dinner in the dining room and then a separate fireworks show on the golf course. It is literally the tale of two cities—only one of which is gated, though some of the many can watch the clubs’ fireworks from outside.

 In an aristocratic plutocracy, business executives and the moneyed of the professional class (e.g., CPAs, physicians and lawyers, but not clerics and professors—the Brahmans who have been uneasily professionalized but not as well compensated) are valued and thus they rule. In other words, the country clubs rule the strip malls. It is not only that money is allowed to buy political power; wealth is valued so much that is presumed to have the right to govern.

 Although wealth is the defining difference in a society wherein aristocracy is a function of money, refinement itself tend to go with the upper classes; and yet for all the lubricating manners, the country club set is limited by its value on wealth. In other words, corruption can coexist with the superficial manners typically found on the putting green. True refinement, it turns out, comes not from wealth, but, rather, from being educated. Hence, the greatest difference in a society, it turns out, exists between the pedestrian mall and the scholar rather than between the poor and the rich. Even so, in a society wherein aristocracy is defined in terms of wealth, the distance between the rich and poor is exaggerated, which in turn is seen as justifying plutocracy. Once a society can be characterized as an aristocratic plutocracy, it may be that only a mass rebellion can bring back the demos in governance; for the propertied will only consolidate their rule, and their property, unless or until they are forced to relent.

1. The Impartial Examiner, Essay (March 5, 1788), 5.14.15, in Herbert J. Storing, ed., The Anti-Federalist (Chicago: University of Chicago Press, 1985), pp. 290-91.

General Electric: Tax Avoidance with Former IRS Employees In-House

The name of the game in all too many corporate tax departments is to minimize the tax due as much as possible. No countervailing notion of “corporate citizenship” or even “fair share” exists in that economic world of single-minded minimization of what is to be paid out. Put another way, responsibility does not compute in the business calculus. Advocates of corporate social responsibility got this wrong for decades by naively assuming that people who work in management roles cannot compartmentalize. Whether due to the strictures of a job description or financial pressures on a company, managers themselves may regret having to compartmentalize in order to keep their respective jobs. Sadly, all too often, a manager faces internal and external pressure to sign off on something that is admittedly unfair or too greedy. That the playing field itself may be slanted in the financial interests of large businesses goes beyond a manager's pay-grade, and even that of a corporation itself. For one to speak out in order to make the tilt explicit in society would deny the operative role of compartmentalization. Managers, even CEO's, may personally want a level playing field wherein corporations cannot yield an undue amount of wealth at the expense of other entities or persons, such a desire is outside of the business calculus. 

One manifestation of the tilted field is the ability of companies to bring IRS agents in-house as employees. In the debate on whether to end the George W. Bush Tax Cuts, the nominal (or statue) tax rates were salient. Much less was said of the effective rates, which are calculated by dividing the actual tax paid by total income (individuals) or net income (corporations). The New York Times reported in 2011: Although “the top corporate tax rate in the United States is 35 percent, one of the highest in the world, companies have been increasingly using a maze of shelters, tax credits and subsidies to pay far less.”[1] Although perfectly legal, the undue advantage means that the U.S. Government has had to look for other sources of revenue to make up for the lost revenue or do without the revenue, using debt to compensate. The "perfectly legal" aspect points back to the tax laws, and, more particularly, at the undue or even improper influence of the business sector in Congress. In fact, lest it be concluded that the business calculus is the reason for the tax avoidance (which is legal, unlike tax evasion), the financial power of business tilts the field not only by having too much influence in the crafting of tax legislation, but also in being able to hire ex-IRS employees to get "the inside scoop" on avoidance tactics. I now turn to the case of General Electric (GE) in 2010. 

General Electric reported global profits that year of $14.2 billion, $5.1 billion of which came from operations in the United States. Rather than owing any federal income tax on the $5.1 billion, however, the company claimed a tax benefit of $3.2 billion. Behind the “fierce lobbying for tax breaks and innovative accounting that enable[d] [the company] to concentrate its profits offshore,” the company’s tax department was led at the time by a former U.S. Treasury official, John Samuels.[2] Moreover, the department included “formal officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.”[3] G.E. had essentially brought the tax-writing and enforcement skill of the U.S. Government “in house.” As paid employees of G.E., the former government expertise was put under the aims of the private company, an organizational machine solely oriented to maximizing profit, whether short term or long.

Generally speaking, companies of such enormous financial wherewithal that annual profits are in billions of dollars can appropriate and harness governmental machinery for the sake of private gain. The issue here is not simply the existence of too much tax avoidance, hence at the expense of fairness; rather, the underlying problem is whether the existence of such large and powerful private enterprises is compatible with a democratic form of government. It is certainly not in the interest of the business sector that this question be interjected into public discourse. So the vested powerful interests, working through political stand-ins and the media, which itself is largely corporate, preoccupied with secondary issues, such as nominal individual tax rates, off-shore factories, and NAFTA. NBC, for instance, was owned by G.E. before being bought by Comcast. 

To be sure, the mantra well-known to many Americans in the 1950s, What is good for GM (or GE) is good for America, was supported by the notion that economic prosperity benefits everyone and a profitable company hires more employees than does an unprofitable company. What if the societal absorption of the value of this ideology made it possible for the business sector to have so much influence in Congress that the corporate taxpayers have practically been able to write their own tax laws? What if a pro-business society is too vulnerable to the rule by wealth (i.e., a plutocracy) that this underbelly can even keep itself hidden from view? Flaws exist in the assumption that what is good for GM or GE is good for America. Abstractly speaking, the good of a part is not necessarily the good of the whole. Private gain is more limited than is public gain. So if some of the parts come to dominate the whole and even define it in their own terms or image, the other parts and even the whole can be taken advantage of on the tilted board.

1. David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether,” The New York Times, March 24, 2011.
2. Bonnie Kavoussi, “General Electric Avoids Taxes By Keeping $108 Billion Overseas,” The Huffington Post, March 11, 2013.
3. David Kocieniewski, “G.E.’s Strategies Let It Avoid Taxes Altogether.”

Executive Compensation (Part II): Paying Failure

In late September 2011, Léo Apotheker was fired after 11 months as CEO at Hewlett-Packard. As a reward, he walked with $13.2 million in cash and stock, in addition to a sign-on package worth about $10 million, according to the New York Times. A month earlier, Robert P. Kelly received severance worth $17.2 in cash and stock when he was fired as CEO of Bank of New York Mellon. Even his clashing with board members and senior managers did not obstruct his nice severance package. A few days later, Carol Bartz was let go as CEO of Yahoo with nearly $10 million in spite of the company’s poor performance. Back in April 2011, John Chidsey, the CEO of Burger King, had departed with a severance package worth almost $20 million in the fact that McDonalds had been outcompeting Burger King. Baxter Phillips, the CEO of Massey Energy, got a package worth over $34 million in spite of “presiding over a company barraged with accusations of reckless conduct and with legal claims stemming from one of the deadliest mining disasters in memory,” according to the New York Times. Unfortunately, the list goes on and on. Is this a system of pay-for-failure? Moreover, do chief executives, who seem to outward appearances to be almost exclusively motivated by what they can get in additional compensation, have too much leverage over boards, and thus over even the owners as well? If so, is corporate governance itself severely broken? I answer in the affirmative.

“We repeatedly see companies’ assets go out the door to reward failure,” Scott Zdrazil, the director of corporate governance at a major bank’s investment fund that sought to tighten the restrictions on severance packages at three oil companies in 2010. He claims that investors are frustrated that boards of directors have not prevented such windfalls. Even the Dodd-Frank financial reform law has its mandated “say on pay” stockholder votes on a non-binding basis. It is as though stockholders have given up their property rights in favor of the “rights” having been taken or assumed by their agents—the directors and upper echelon managers. It is as though the business judgment rule trumps property rights even where the compensation of executives who typically control their boards is at issue. The conflict of interest here is extraordinary even as it is assumed to be obviated by the fiction of board independence from management. To be sure, a board of directors is supposed to hold management accountable.

Don’t look to public policy to shore up the property rights of stockholders any time soon. Eric Dash of the New York Times avers that the Obama administration “seemed to lose its bully pulpit for compensation reform after most of the nation’s biggest financial companies repaid their government loans.” Never mind that the administration allowed at least four of the mega-banks to repay early based on the bankers’ desire to avoid limitations on their own compensation.

The bottom line is that CEOs are not really all that interested in serving the owners of the companies; the top executives are primarily interested in their own gain, be it in terms of position/power or compensation. Structuring the latter in stock options with vesting periods and looking to outside directors for accountability are not sufficient checks on the single-minded pursuit of CEOs of their narrow self-interest. Even when a bank is in dire circumstances, such as Merrill Lynch was on September 15, 2008, a CEO can be obsessed with “letters”—statements on his or her compensation (as well as that of other top execs) being honored by the acquiring company.

As negotiations dragged on into the wee hours of Monday morning, Ken Lewis of Bank of America was utterly disgusted with John Thain’s fixation on what he and others at Merrill would get as bonuses (for a year of losses, by the way), even as Merrill and its stockholders held in the balance after midnight (when Lehman filed for bankruptcy). Lewis could only look over at Thain and think to himself, The only thing these Wall Street guys are concerned about is themselves. Even in the midst of a financial system collapse, Thain was focused on getting what he thought he deserved in spite of the huge losses. In fact, he had put off even talking to Lewis at Bank of America—repeatedly rebuffing his president’s (Fleming) lobbying—because the CEO did not like the idea of having to work for Lewis! Do you suppose the Merrill stockholders wanted to risk their entire investment in the bank because Thain didn’t want to end up working for someone else? The board of directors left the contingency plans up to him, so he didn’t have to worry about any pressure to start merger talks. Merrill’s stockholders were at best an afterthought to him, and yet the directors, who had been elected by the owners, had hired him. The eventual $29 per share price, by the way, was a result of Fleming’s negotiating for the stockholders; Thain was still looking for a line of credit from Goldman—risking an entire loss to stockholders so he could retain control of Merrill rather than turn it over to Lewis.

Even after Merrill Lynch had announced a $5.1 billion loss ($5.56 per diluted share) for the third quarter of 2008, Thain was insisting on a cash bonus of $40 million. Fleming and McCann were to get $25 million, while two other senior managers would get $15 million a piece. Thain subsequently admitted that a $20 million cash bonus for himself would be more "realistic." Given Merrill's losses in 2008 and the fact that the bank had to be sold, it is crazy that any cash bonuses would be paid for any senior manager. Thain's suggestion to the board's compensation committee that the bonuses be viewed as "success fees" for the top managers' efforts in putting together the sale of Merrill to Bank of America is nothing less than bizarre, if not comical. Failure as successs? What planet was Thain from? That a man like him ever got to be the CEO of a major bank (one too big to fail!) suggests that major flaws exist in how business practitioners view and value leadership and in how corporate governance is designed and operates.

When times were good, the finance crowd had lauded Thain as a “superman” for modernizing the NYSE. The business world tends to invent “superheroes”--even calling them rockstars!--while ignoring the more ignoble underbellies of its idols. In other words, leadership is worshipped without any clear grasp of the leaders' real contributions, while failure at the top is generally underplayed or ignored, at least financially speaking. This lack of proportion and balance is not by accident, as it is fully in the financial interests of the so-called "leaders." As for the followers and bystanders, these incredulous groupies--retarded court jesters wearing grizzled suits--happily allow themselves to get played as fools. They are dominated, not led, for the weak can dominate but not lead the herd animals.

Besides pointing to the utter bankruptcy and banality of business leadership, the case of Thain demonstrates that the system of corporate governance in the U.S. is broken even as it continues on as the status quo. Sadly, stockholders as a group are severely over-exposed to risk as a result. As long as top executives get what they believe they are worth, they will see to it, in a “by the way” fashion, that stockholders do not lose everything, but is this enough? Must stockholders (and society itself) settle for this? Are they even aware of the risk to their wealth as CEOs risk all to make sure they are taken care of? In academic terms, the system of corporate governance is incurring huge agency costs, yet I suspect we (and stockholders) are blind to their magnitude. As a society, Americans have a bad habit of taking the word of vested interests, who get away with making excuses or simply opining that there is no problem, after all. We assume that executive compensation is set by the invisible hand of the marketplace because it is in the executives’ financial interest that we take this bait and swim along with it in our gullible mouths. We are like fish that do not even realize that there are hooks in our mouths!

It does not occur to us, or to stockholders, that competent managers are out there who would gladly take top management positions for much, much less. Corporate executives have engineered a coup of sorts, having separated ownership from control at the expense of stockholders and even systemic risk in the financial system. The suits have even captured the government, such that stockholder votes on compensation are legally non-binding. This is not the invisible hand connecting demand and supply in the labor market; rather, it is a result of a rich velvet coup under the subterfuge of capitalism and democracy—with the electorate completely beguiled. Let’s not pretend this is the free market doing this, or that the governments in the U.S. are oriented to protecting the interests of stockholders and the public at the expense of the corporate managerial class.

See Essays on the Financial Crisis.

Sources:

Eric Dash, “The Lucrative Fall from Grace,” New York Times, September 30, 2011. 

Gred Farrell, Crash of the Titans (New York: Crown Business, 2010). On Thain's bonus, see chapter 16.

The Basis of American Aristocracy: Wealth & Property

In the constitutional convention of the United States in 1787, the property-interests were well-represented. Even so, a fear of a plutocracy was voiced by those property-protectors as well. While one might conclude at first glance that the wealthy delegates were duplicitous, their position is not self-contradictory, even if the bias toward wealth is discomforting for those of us who value representative democracy.

Governeur Morris, on July 5, asserted that property is “the main object of Society.” (1) Rutlidge, on July 5, concurred, maintaining, “Property was certainly the principal object of Society.” (2) Hamilton, on June 26, argued that the “inequality of property constituted the great & fundamental distinction in Society.” (3) King, on July 6 averred that “property was the primary object of Society.” (4) In Morris’ view, property is thus “the main object of [Government].” (5) Hamilton articulated this view in the Federalist by writing that the adoption of the Constitution will afford additional security “to the preservation of [republican] government, to liberty and to property.” (6) “I am convinced,” he writes, “that this is the safest course for your liberty, your dignity and your happiness.” (7) So his statement that “the vigour of government is essential to the security of liberty” can be read as a plea for a General Government primarily to protect property interests. (8) Butler, on July 11, claimed likewise that government is “instituted principally for the protection of property.” (9) At the very least, these remarks evince a reductionism wherein society and government were viewed in terms of wealth. Shouldering a minority view on this point, Wilson, on July 13 in the convention, “could not agree that property was the sole or the primary object of [Government] & society. The cultivation & improvement of the human mind was the most noble object.” (10) This object, he suggested, is a personal right. (11) As much as this object is laudatory, it is not the object of government, which I contend is to provide and ensure order, which goes beyond the protection of property. If there is a higher purpose, government can express and operationalize societal ideals, which can thus orient whatever order government provides.

The primary result of the delegates’ property-centric view was the formation of a General Government of the U. States to counter the risk that State legislatures would act democractically at odds with the interests of the wealthy. Just a year before the convention, the Massachusetts legislature had attempted to act in the interest of debtors (i.e., unpaid soldiers who were still expected to pay on their farm debts; the representatives sought to stop this injustice at the expense of the creditors). Shays’ Rebellion was the unhappy result. Govereur Morris, on July 2, alluded to this affront on property interests in stating, “Every man of observation had seen in the democratic branches of the State Legislatures, precipitation—in Congress changeableness, in every department excesses [against] personal liberty [,] private property & personal safety.” (12) However, what if private property is acquired unjustly at the expense of another’s liberty? In other words, liberty may run counter to the interests of the rich.

Madison, on June 26 in the convention, remarked that “we had not among us those hereditary distinctions, … nor those extremes of wealth or poverty which characterize [the modern States in Europe]… . An increase of population will of necessity increase the proportion of those who will labour under all the hardships of life, & secretly sigh for a more equal distribution of its blessings… . a leveling spirit… the future danger.” (13) Leveling would actually be in line with liberty if wealth has been acquired unjustly, as for example, under duress. Moreover, too great an inequality of wealth can threaten the viability of a republic. For example, in 1985, the top five percent in the U.S. held $8 trillion in wealth. By 2007, they had $40 trillion. Besides being in part from the dot.com and housing bubbles wherein asset values were overvalued, the concentration of wealth cannot but undermine representative democracy wherein each person has one vote. Interestingly, even as they sought to protect their wealth from being leveled via representative democracy, the delegates also feared that the U. States would end up as a plutocracy (i.e., ruled by the wealthy who would be our aristocracy). Governeur Morris, on July 2, expressed the following. “Let the rich mix with the poor and in a Commercial Country, they will establish an oligarchy. Take away commerce, and the democracy will triumph. Thus it has been all the world over. So it will be among us.” (14) Madison reports that Morris feared “the influence of the rich.” (15) That the U.S. was even then an extended republic on the scale of an empire was thought, at least by Morris, to strength the ability of the rich to rule.  “The schemes of the Rich,” he maintained, “will be favored by the extent of the Country. The people in such distant parts can not communicate & act in concert. They will be the dupes of those who have more knowledge & intercourse.” (16) Govereur Morris, on July 2, maintained that “The Rich will take advantage of their passions & make these the instruments for oppressing them. The Result of the Contest will be a violent aristocracy, or a more violent despotism.” (17)

Madison reports that Morris’ “creed was that there never was, nor ever will be a civilized Society without an aristocracy. His endeavor was to keep it as much as possible from doing mischief.” (18) To contain such mischief (and to protect property-rights), the delegates wanted the proposed U.S. Senate to represent the interests of the wealthy (as well as wisdom and the state governments—a combination they problematically assumed would play well together in the Senate). Govereur Morris, on July 2, claimed that “The Rich will strive to establish their dominion & enslave the rest. They always did. They always will. The proper security [against] them is to form them into a separate interest.” (19) Accordingly, Davy, on July 6, urged that “wealth or property ought to be represented in the [second] branch.” (20)

The Senate was to be a conservative institution, wherein the vested property interests must sign off on any reform.  This could partially explain why passing health-insurance reform in 2010 was so arduous (and why extant health-insurance companies were able to kill off a competing public option). It could also explain why the wealthy could insist that their tax cuts be extended even as the U.S. Government was facing another deficit over $1 trillion also in 2010.

In short, the delegates to the constitutional convention were concerned that a “leveling danger” not be allowed to redistribute wealth even as they feared the advent of a plutocracy as essentially aristocratic governance. Government should protect wealth but not be run by it. In modern terms, this position might seem familiar as: CEO’s like Lloyd Blankfein of Goldman Sachs should not run the government, but the latter should not be used by those without to take from the wealthy. Yet as the CEOs’ agents in government essentially operate in the interest of the corporations and the wealthy, does not the government’s orientation to property already evince a plutocracy by a moneyed aristocracy? If so, Jefferson and Adams, who were for a natural aristocracy of talent and virtue rather than money (the latter being an “artificial aristocracy,” which the two founders believed was taking hold in the U. States even in the early 1800's), would doubtless demur. It is telling for us that government protecting wealth is virtually taken for granted among the American people even as the fear of an impending plutocracy and moneyed aristocracy is nearly absent. Any balance from the delegates’ two fears has dissolved in favor of property. The bias is so ingrained in American society and government that it has become invisible.

1. James Madison, Notes in the Federal Convention of 1787. New York: Norton, 1987, p. 244

2. Ibid., pp. 245

3. Ibid., p. 196

4. Ibid., pp. 247

5. Ibid., p. 244

6. Alexander Hamilton, Federalist #1, in Jacob E. Cooke, The Federalist, Hanover, N.H.: Wesleyan University Press, 1961, p. 7

7. Ibid., p. 6

8. Ibid., p. 5

9. James Madison, Notes, p. 268

10. Ibid., p. 287

11. Ibid., p. 287
12. Ibid., pp. 233

13. Ibid., p. 194

14. Ibid., pp. 233-34

15. Ibid., pp. 235

16. Ibid., pp. 235

17. Ibid., p. 235

18. Ibid., p. 251

19. Ibid., p. 233

20. Ibid., pp. 248

Societal Enabling of Economic Inequality

According to one study of people around the world, people of different cultures, incomes, religions, and other differences show “a universal desire for smaller gaps in pay between the rich and poor” than was the actual case at the time of the survey in 2014.[1] Interestingly, the respondents didn’t have a clue how much of a gap actually existed in their respective economies. The difficulty in estimation means that the public discourse on economic inequality has been rife with erroneous assumptions. Where the error lies in the direction of minimizing the gap, we can postulate that public policy allows for greater economic inequality than would otherwise be the case.

The full essay is at "CEO/worker Pay."

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1. Gretchen Gavett, “CEOs Get Paid Too Much, According to Pretty Much Everyone in the World,” The Huffington Post, September 24, 2014.

World Cup Soccer Frenzy in the U.S.: A Threat to the NFL?

First, 19 out of 20 brains of former NFL football-players showed lethal brain damage in autopsies. Then, it was 45 out of 46 brains.[1] Missed at first from the initial assumption that concussions from the occasional hard-hits—which make good television—have been the cause of the dementia-causing protein in the damaged brains, was the impact of the more subtle mini-concussions from regular play. A 21 year-old with dementia (CTE) had not had a concussion from a major hit.  Nor had a high-school senior football player with chronic (CTE) brain damage in the front lobe, and thus severe short-term memory loss, difficulty thinking, personality changes, and fits of rage. Suicides are not uncommon, not to mention an abbreviated life-span.[2] Meanwhile, the violence of the sport ironically continued to be the main draw to an American audience, with cheers at the most jarring clashes. What is going on here, and is there light at the end of this tunnel?

The NFL is a wealthy organization, shielded from tax by its non-profit status. From taking in $10 billion a year as of 2014, and that figure expected to go to $25 billion by 2027, a lot is on the line in maintaining the status quo in terms of American culture and sport.[3] The NFL continued for a long time to deny any link between the CTE dementia and football even though the wealthy non-profit organization’s own sponsored study had already admitted to a link—the league kept the result secret for years.

Blinded by the astonishingly high pay, the players too have been complicit, even self-destructive, as they have ignored the incoming scientific evidence culled from the dead brains of former colleagues. The illusion of immortality that typically runs out of steam by age 40 is alive and well in many young athletes. Together with the monetary high, the illusion can feed the denial.

Perhaps even more astonishing, given the huge amount of money on the line for the NFL as well as that league’s players (and the team owners) is the propensity of masses of people to continue right ahead as if nothing had changed, even with the new knowledge. During the 2013-2014 season, two years after PBS’s Frontline exposition of the scientific evidence of “brown matter” in the brains of ex-pro-football players not yet elderly and Frontline’s investigation of the NFL’s cover-up and subsequent damage-control, I discerned no shift away from the huge interest in NFL games among the American public. Sunday afternoons still turned residential neighborhoods into temporary ghost-towns.

Do we not understand the concept of a sport in which head-bashing is a staple as being inherently dangerous? I think we do. Cognitive dissidence, the holding of contradictory beliefs simultaneously, is in all likelihood enabling the denial. This lapse so happens to be in line with the moneyed status quo and popular culture writ large. Change in the sport’s popularity is likely to be long in coming, and so the dollars are likely to keep coming to the NFL, the team owners, and the players. Powerful interests being highly invested in perpetuating the status quo while seeming to adequately address destabilizing news is nothing new.

American fans at the World Cup 2014 in Brazil, cheering on their team. Could the leap in numbers and enthusiasm be a game changer in terms of American sports? If so, will the most dangerous game bear the brunt of the squeeze? (Image Source: Frederic Brown via Getty Images)

The axis of change can come from unexpected places, however, with an earthquake far away setting in motion a sea-change of change eventually from the subtle shifts of subterranean tectonic plates under the sea. The frenzy intensifying at huge viewing parties in major American cities as team USA made its way through the World Cup in 2014, and the increased American viewership up 44 percent over the previous Cup in 2010 may evince such an earthquake, with any subsequent gradual shift under American sports being much less visible.[4]

  

In the 2014 tournament, a record-breaking 18.2 million viewers in the U.S.—a record American viewership at that point for a soccer game—saw the U.S. game with the E.U. state of Portugal.[5] For the game between the U.S. and the E.U. state of Germany, 1.7 million concurrent viewers were logged on to ESPN—more than the number that had signed in to watch Super Bowl less than five months earlier.[6] For the final, the record broke again, with 26.5 million people in the U.S. watching, according to the Nielson company, with over 750,000 more people watching the game online at any given minute.[7] Generally speaking, the average viewership in the U.S. for all of the 2014 World Cup matches was up nearly 40 percent over the previous Cup in 2010.[8]

Such a leap in popularity raises the possibility that soccer, which is known more accurately to the rest of the world as football, could act as a sort of pressure-release value on the inherently dangerous sport of head-clashes and body collisions. Even though the two sports are played in different seasons, the people over at the danger-plagued NFL must have noticed the dramatically increased popularity of soccer in the summer of 2014.

To be sure, soccer still had a distance to go before triumphing over American football’s major feast-day. After all, American football is, well, American, while taking up soccer means getting in bed with the rest of the world--something anathema to American isolationists and the "City on a Hill" pilgrims. Additionally, as some pundits observed, a low-scoring soccer game can be pretty boring (like baseball?). That's actually a fair point, which is why I advocate the heresy of making the goals wider. Lest too much scoring occur, the economic law of declining marginal returns suggests that the width be brought in a bit, though still wider than was the case for all those low-scoring World Cup games in 2010. Lest the statistics-obsessed traditionalist lose it over this suggestion, those little factoids are merely means, rather then ends in themselves.

Whether or not soccer is spruced up, the huge bump in both fan enthusiasm and numbers of Americans watching the World Cup games may point to a opening void in American sports, festering just under the surface since the bad news for American football Fans from that sport may one day be up for grabs, with the healthier, more athletic sport hopefully scoring more and reaping the benefits.

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[1] Frontline, “League of Denial,” PBS, 2012.

[2] Ibid.

[3] Brent Schotenboer, “NFL Takes Aim at $25 Billion, But at What Price?” USA Today, February 5, 2014.

[4] Kim Bellware, “USA vs. Belgium World Cup Match Breaks Another Ratings Record,” The Huffington Post, July 2, 2014.
[5] Kim Bellware, “It’s Official: The United States As a Nation Has Gone World Cup Crazy,” The Huffington Post, June 27, 2014.

[6] Ibid.
[7]David Bauder, "The World Cup Final Was the Most Watched Soccer Game in U.S. History," Associated Press, July 14, 2014.
[8] Ibid.

Who Won the Kentucky Derby?

This might seem like a simple question. California Chrome won the race in 2014. That is to say, the horse by that name won. As the Derby is a race, a jockey would have played a decisive part in the win. The aptitude may well be in the horse, but the racing skill lies with the person perched on the animal. So the jockey, Victor Espinoza, won the race. If his role was essentially that of coaching or directing the horse, which unlike a racing car is a living creature with a brain to boot, then could the argument be made that the horse’s trainer—in this case Art Sherman—also won? Although Sherman quipped during a post-race interview that he had felt like he was on the horse for the last 75 years, surely a distinction can be drawn between a player and a coach. After all, Babe Ruth hit all those homeruns—not his coach. To win a race, the winner must presumably be in the race—and not vicariously. Least of all can it be said that the “horse’s owner”—an expression like “slave owner” in that a living being is “owned”—won the race. Otherwise, a person could simply wave money around in lieu of actually running to qualify for an Olympic context in track and field. To give wealth such power—coming at the expense of reason itself—would surely point to a rather distorted set of societal values. I contend that both NBC Sports’ post-race coverage and the Derby’s trophy ceremony reflect and in fact affirm the hegemony of business values in American society.

Just before interviewing the jockey, a NBC Sports journalist prefaced, “We interviewed the owner, then the trainer, and now the jockey.” Lest it be pointed out that the jockey had been busy, the trophy ceremony followed the same pattern. Kentucky’s head of state handed to trophy to Steve Coburn, who with the other owner, Perry Martin, were all too pleased to speak on their win. In fact, the governor made it quite explicit by announcing, “To the Martins, to the Coburns, our victor.” The horse and jockey were not even in the camera shot. Wealth had won the race without breaking a sweat. Next came the trainer’s turn, and then, last and apparently least, the jockey.

Imagine running a race, and winning it only to watch the metal being given to your sponsor. “To Coke, our victor.” In enabling a runner, horse, or jockey to train, a sponsor is not the winner (for otherwise the sponsor would be enabling itself). While it is understandable that wealth is highly esteemed in the business sector, the imposing of this “top dog” in society itself distorts non-business activities into the prism of commerce. In the context of managerial capitalism, particularly where managers style themselves as “coaches,” it is no accident that coaches and trainers in sports come to be treated  as ends rather than means—as the winners rather than as facilitators on the sideline. It is important to remember that Art Sherman was not on the horse that won the Derby in 2014.  

In short, the priorities evinced by NBC Sports and the Derby reflect those in the business world at the expense of the world of sports; overreach can thus be seen rather clearly. Put another way, the horse race provides us with a snapshot of just how much American society has formed around the ideological crucible of Wall Street. At least from the jockey’s standpoint, the over-reach both in terms of ownership and managerialism violates the ethical principle of fairness (i.e., the trophy should have gone to the jockey, as he is the person who actually raced). Sadly, the exaggeration or over-reach was already so engrained in American society even before the race that I bet few if any Americans even noticed how very odd the trophy sequence is.   

Wealth: Benefitting and Distorting Society

“One of the great political and economic challenges of our time is figuring out the balance between wealth that benefits society and wealth that distorts.”[1] In terms of benefitting society, invested (as distinct from donated) wealth can benefit consumers by enabling better and cheaper products. Economists estimate that for every dollar invested in productive enterprise, there is $5 of benefit to consumers.  Interestingly, this does not apply to money that is donated (rather than invested) to feed the poor (i.e., consumption rather than production).

In terms of distorting society, the study of “rent seeking” describes how “people or companies get rich because of their power, not because of their ideas.”[2] That is, “wealthy individuals and corporations are able to influence politicians and regulators to make seemingly insignificant changes to regulations that benefit themselves. In other words, to rig the game.”[3] Wealth can have a distorting effect not only on society, but also on the political and economic systems.  Contributing to the financial crisis, for example, “some of the [U.S.’s] largest banks actively manipulated customers and regulators and, sometimes, their own stockholders to profit from dangerous risk.” Moreover, for “many economists, rising inequality can create exactly the wrong outcomes for society over all. Rather than simply serving as an invitation for everybody to engage in potentially beneficial risk-taking, inequality can allow those with wealth to crush new ideas.”[4]

It is said that there will always be the rich and always be the poor. To some extent, economic inequality simply reflects the decisions people make—choices that reflect character, will-power, talent and aptitude. To reduce all of these to a uniformity would take a rather astonishing re-working of the human genome. Even so, it is also the case that the rich are able to exchange or use their economic power for political power and thus “rig the system” in their own favor—such that they can become even richer.

It seems to me that a society must recognize some economic inequality, given human nature and free-will. To take a simple example, some students will force themselves to study more while others will make the easier choice of going out for a beer. Most people would agree that the students who studied and got A’s should be wealthier. The economic inequality is justified by their greater sacrifice. Furthermore, if wealthy people are necessary for investment in productive enterprise to be possible or sufficient, then some economic inequality is justified because it serves society by benefitting consumers as well as the wealthy.

At the same time, society also has an interest in protecting the viability of itself, including its political and economic systems, from being distorted by the rich into serving them disproportionately. An upper limit on wealth is thus justified. The difficulty lies in determining where to draw the line. Just because there is no mathematical equation that will give “the” answer does not justify refusing to draw the line—treating economic liberty as having no upper limit. I suspect that this lapse is a salient part of American culture.

1.Adam Davidson, “The Purpose ofSpectacular Wealth, According to a Spectacularly Wealthy Guy,” The New York Times, May 1, 2012. 
2. Ibid.
3. Ibid.
4. Ibid.