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.

Wal-Mart: Political Contributions as Bribery

In September 2005, “a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country. . . . Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: ‘There is reasonable suspicion to believe that Mexican and USA laws have been violated.’”[1]

Critics protesting a new Wal-Mart store after the bribery scandal    John Moore/Getty

The full essay is in The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.com.

1. David Barstow, “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle,” The New York Times, April 21, 2012.

Hollywood Bribes China

The Foreign Corrupt Practices Act, known as F.C.P.A., “forbids American companies from making illegal payments to government officials or others to ease the way for operations in foreign countries.”[1] The practical difficulty facing American companies doing business around the world is that in some cultures bribes are so ubiquitous they are simply a part of doing business.  For American companies to refuse to participate in what is generally expected can be a competitive disadvantage, particularly if substitutes exist and the practice is widespread.

The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

1. Edward Wyatt, Michael Cieply, and Brooks Barnes, “S.E.C. Asks if Hollywood Paid Bribes in China,” The New York Times, April 25, 2012.

Credit-Card Companies in a Conflict of Interest

On April 12, 2012, Hawaii sued Bank of America, Chase, Citi, Barclays, Capital One, Discover, HSBC, and their subsidiaries, “claiming that the banks ‘slammed’ Hawaii credit card customers, charging them for products customers didn't need and that the companies never provided.”[1] The Hawaiian government alleges that the banks used “‘predatory tactics to sign up customers for services they either don’t want or don't qualify for,’ and the companies charged their customers ‘without their knowledge or consent,’ according to a press release issued by the Hawaii attorney general's office.”[2] According to the Attorney General, David Louie, “You don't know that you're enrolling, but they say, 'Oh you just enrolled,' okay, and now they've put a charge on your credit card.”[3]  The banks’ telemarketing departments may have charged customers an average of $150 in the form of small charges.

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

1. Bonnie Kavoussi, “Hawaii Sues Bank of America, Chase, Citi, Others For DeceptiveCredit Card Marketing,” The Huffington Post, April 13, 2012.

2. Ibid.

3. Ibid.

Using Corporate Position to Torture Whistle-Blowers

Jack B. Palmer made a quiet complaint through internal channels at Infosys, an outsourcing company based in India. He suspected some managers were committing visa fraud. His complaint leaked. As a result, investigators from the U.S. Government looked into “whether the company used workers from India for certain kinds of jobs here that were not allowed under their temporary visas, known as B-1.”[1]

The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

1. Julia Preston, “Whistle-BlowerClaiming Visa Fraud Keeps His Job, but Not His Work,” The New York Times, April 13, 2012. 

Justice as Fairness: Greece’s Bond-Holder Holdouts

In the wake of the agreement whereby private holders of Greek debt would swap the bonds and take a 75% loss, two or three percent of the private holders—namely, well-financed hedge funds including Aurelius Capital and Elliott Associates—were thought to be mulling over holding out for full pay-outs instead of agreeing to take the loss. Greece’s dilemma would have been to pay them in full in order to avoid a default and face the ire of the holders who took the losses, or risk default by invoking a collective bargaining law to force the holdouts to swap their bonds.

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

Tyco’s Kozlowski: Isolation or Work-Release?

L. Dennis Kozlowski, a former CEO of Tyco, was denied parole “due to concern for the public safety and welfare,” according to the New York Department of Corrections.[1] A parole board ruled that releasing him in 2012 would have the effect of minimizing his corporate crimes and affect public safety. The board concluded that early release would “not be compatible with the welfare of society at large, and would tend to deprecate the seriousness” of his offenses.[2] He was convicted in 2005 of looting nearly $600 million in bonuses and other payments from Tyco in the 1990s.

As much of a sentence of 8 to 25 years in prison may seem to befit such a case of greed and abuse of corporate position, that Kozlowski was transferred three months before the denial of parole to a minimum-security facility in Manhattan and approved in a work-release program suggests that the seriousness of his crimes did not translate into the punishment after all.

Although white-collar convicts should not be conflated with murderers and rapists, prison should not be conflated with a dorm for the corporate criminals. Put another way, the punishment ought to fit the crime (rather than another, or none). If the sentence includes prison, then prison it should be.

It is worth asking, however, whether prison is suitable for white-collar crime. Put another way, would the public safety really have been compromised had Kozlowski been released early? Does stealing $600 from a corporation without any threat of violence put anyone’s safety at risk? If not, then only enough security to keep the criminals in the prison facility should be necessary, as they are not dangerous. This does not mean an open door policy or giving the inmates permission to go out of the facility to work.

Having to confront oneself for hours without distraction in a cell for a sustained period of time—as if a kid sent to his or her room for hours as a punishment—may well be fitting to the white-collar crime. Furthermore, taking the criminal’s wealth and property and requiring work to repay any losses to others also seems fitting. These two elements ought to be applied successively rather than concurrently so each can have its full effect.

1. Chris Dolmetsch, “Former Tyco Chief Kozlowski Is Denied Parole in New York,” Bloomberg, April 5, 2012; Kevin McCoy, “Former Tyco Chief Told No on Parole,” USA Today, April 6, 2012.

2. Ibid.