The short version goes like this:
Once upon a time there was a king. He wanted to get richer. He used charters to divide his lands into provinces run by lords.
The charters allowed the king to retain ownership of his lands, and require the lords make regular payments to the king and protect the king's land.
King's College Charter, 1446
They also granted lords broad administrative rights over their provinces and the inhabitants, allowed them to keep excess provincial profits after paying the king, and protected them with the king's court and army.
The charters worked quite well for the king and his lords; they became wealthier. Other kings followed suit, and they became richer, too. But suffering increased for serfs. Before charters, they only had to make kings rich. Now they were forced to make kings and lords rich.
Serfs complained. They sought help from the courts, but found no justice. The first order of business for “equity courts” was to protect kings’ charters. Common citizen’s concerns were secondary.
After centuries of oppression, people revolted and created democratic governments. Kings’ charters were nullified. In the US, authority over charters was given to each state.
Initially, the states took charters seriously. They specified what corporations were allowed to do, and required corporations to serve the general welfare.
But the states did not create new equity codes to enforce their people-centered charters. Instead, they deferred to British equity code, which was heavily biased in favor of the wealthy few. Consequently, state efforts to regulate corporations were consistently undermined by the courts.
Eventually the states gave up. They allowed corporations to create charters that emphasized shareholders and ignored the interests of common citizens.
After more than a century of growth in corporate power, the US was crippled by the Great Depression. A massive effort to reduce corporate power was launched by FDR. Scores of liberal laws were written. More importantly, they were enforced by FDR’s eight Supreme Court appointees. An era of widespread prosperity was launched, and it lasted for thirty years.
But FDR’s Court appointees were gradually replaced by conservatives. Eisenhower had two appointments, and Nixon added four more. The balance of power on the Court radically shifted in favor of corporations. Since Nixon, the Court has consistently ruled in favor of corporations, culminating in recent decisions such as Citizens United and WalMart.
History teaches us that the road to serfdom is ultimately paved in conservative legal code; code that places the interests of the wealthy few above the interests of the general welfare.
There have been scores of people’s revolutions. They have nullified corporate charters, passed sweeping laws governing corporations, and appointed liberal judges. But such measures were never enough.
The essential ingredient is a liberal equity code that consistently places the interests of the many over the interests of the few. Only then can we reverse centuries of legal precedent favoring the wealthy few, and hope to enjoy centuries of prosperity for we the people.
Italy just passed a law requiring one-third of board seats go to women. A few irreverent questions:
- Will this government regulation ruin Italy's economy?
- Will Italian corporations move to other countries that let them keep their old-boy networks intact?
Whenever someone proposes regulating boards of directors in the US, a chorus of Chicken Little warnings are sounded along the lines of the above questions.
But European countries have been regulating corporate boards for a long time, and their skies never fell.
In the US, only 16% of board seats are held by women. What justifies this? Women just don't have what it takes? They aren't interested in these types of positions?
If the US is ever going to bring corporations in line with our values, then we'll have to start regulating them. It's been amply proven that our highest values don't match theirs.
J.P. Morgan just lost $39 billion. The Senate Banking Committee wants to know why.
Jamie Dimon, Wall Street's darling CEO, presented his defense: plausible deniability. He was advised by his staff to not unwind risky positions, even though they started to show big losses.
Can any financial sector executive claim they fully understand the risks of their complex investments? We all know the answer is no. It's been proven over and over again.
Think about what this means. Bank CEOs who do not eliminate these mysterious, huge risks are not acting responsibly. They have no ethical claim to plausible deniability.
Remember Ronald Reagan and the Iran Contra affair? That was plausible deniability in action. Today's big-time CEOs use it all the time. Our government, especially the judicial branch, has essentially handed out stacks of "Get Out of Jail Free" cards to these executives. It has to stop.
The financial sector is trapped in a game of chicken. Huge CEO egos are involved. They have built fancy, souped-up cars with other people's money. And they are driving by remote control: if the cars crash, they don't get hurt. So nobody backs down.
All four large banks must simultaneously retreat to pre-Gramm-Leach-Bliley risk levels. Since the banks won't self-regulate, we need to re-post the speed limits. Gramm-Leach-Bliley eliminated speed limits, and all but a few of us lost. How long are we going to let this game of chicken last?
You think public elections are distorted by the Supreme Court's Citizens United decision? Well, corporate law is worse. It's so loosey-goosey that boards of directors can ignore "no" votes.
That's right. Corporate law allows plurality voting, which means top vote-getters win regardless of how many people vote against them. For example, just last month shareholders voted 2-to-1 against a Sirius XM director candidate, but plurality rules let him win anyway.
The chancellor and vice chancellors of Delaware's Court of Chancery
Making matters worse, corporate law does not give shareholders the right to nominate candidates, or call for votes on critical issues. But, it explicitly gives this right to boards of directors. So most of the time, shareholders only vote on candidates listed by the board, or on proposals presented by the board. Lacking legal pressure to do otherwise, board members usually nominate their buddies, and they almost always make proposals they strongly favor. Candidates who might shake things up on the board rarely see the light of day, and the same goes for proposals that might cut CEO pay, increase rank-and-file wages, or help restore the environment.How did it get this bad? It's called the "race to the bottom." Early in the 1900's Delaware started competing for corporate revenue by creating a very biased legal code, called Title 8. It grants generous liability protection to shareholders and
directors, and does not tax out-of-state sales. As frosting on the cake, it totally ignors the rights of employees, local communities, or the environment. Corporations flocked to Delaware, which is now corporate home to almost a million corporations and almost two-thirds of the Fortune 500. Isn't it ironic, that the second smallest state in the Union is number one in corporate law? (For details, see Deep Economics Part 2
, Beware of Delaware.)The real secret to Delaware's success has been favoring directors over shareholders. Why? Because directors make the decision about where to incorporate. If Delaware does not keep them happy, they just leave for a more director-friendly state.
Delaware relies on corporate revenue more than any other state, so director satisfaction is more important in Delaware than any other state. Since corporate law tilts in favor of executives, is it any wonder their pay is so high?
Since corporate law ignores employees, is it any surprise that executives send jobs overseas, or pay non-viable wages? Since corporate law ignores the environment, is it any surprise that corporations do so much environmental damage?The solution starts with federalizing corporate
law. Now conservatives would have you believe this is tantamount to declaring war on freedom and America itself. But in truth, the only risk is that executive pay might decline, and boards might become more accountable to the people. Sounds like a risk worth taking to me.
For an entertaining puppet show on Delaware's Court of Chancery, watch the video below:
I just watched a Niall Ferguson presentation on the "The Six Killer Apps of Prosperity" (TEDTalks, on Netflix). These factors explain "The Great Divergence," or how the West came to dominate the East in terms of wealth, and how the East has now erased the West's advantage by adopting the killer apps themselves.
For context, it is useful to know that Ferguson endorsed Romney for President a year ago. His rationale: we need "a private-equity guy in the White House." Simultaneously, he dismissed the Occupy movement as "Occupopulists." If nothing else, this conservative has a dry wit.
Back to his thesis. Ferguson, and a vast number of conservatives like him, assume it is OK to sum the wealth of everyone living in a country, divide it by the total number of people in the country, and use the resulting average to compare nations, continents, or civilizations with one another. To make things exciting, conservatives then compete with one another to invent stories, called "theories," for why average wealth went up or down over time.
For all his brilliance, Ferguson's work is flawed by an egregious statistical error: you can't use averages to describe skewed numbers! This tenet is taught in every introductory statistics class; it is a very basic principle.
As we all know, wealth is highly concentrated –– or skewed. For example, in 2007 the top 10% owned an incredible 83% of all non-home wealth! (See Part 2
, Disparity for more details.)
Averages would allow Ferguson to proudly proclaim that average wealth has been rising in the US, when, in fact, wealth has been declining for most people. Since wealth has increased dramatically at the top, the average is inflated, and the important story impacting the greatest number of people is concealed.
Numbers can reveal the truth, or they can disguise it. It depends on your values. If you value compassion and the general welfare, then you studiously avoid averages in economics. But if you value greed or winning at any cost, then averages are a great tool for hiding the carnage.
Ferguson's failure to abide by the fundamental rules of statistics means his work is fundamentally flawed. It also means that every economist who uses averages is very likely making the same mistake. And, since there are lots of economists using averages, then ... well, I think I've made my point. The leading killer app in economics is averages.
Women need a 65% pay increase to reach men. In 2009, average personal income was $25,370 for women and $41,750 for men.
$25,370 is a very low income. It's barely over the poverty line for a family of four.
It would cost $2 trillion per year to fix this problem. That's a lot of money. For example, we spent $4.8 trillion in four years on the financial sector bailout.
The simplest explanation for why women are paid less than men is that it would cost a lot of money to pay them the same.
From the US Census Bureau, Table 705, 2009
In classic economic terms, where markets are all-wise, the huge pay disparity between men and women can only mean one thing: women are worth far less than men. And, since the markets are never wrong, there must be a good, logical explanation for why women are worth less. Such as: women prefer lower paying jobs, or women don't perform as well as men.
But, if we make the far more rational assumption that women are just as capable as men and they want to earn as much as men, then we must conclude that the markets are not wise, and something else is going on. Indeed, all the evidence tells us the markets are anything but perfect, and that the cause of male/female pay disparity has nothing to do with capabilities or preferences, and everything to do with our values.
Take the Supreme Court's recent Wal-Mart decision. The following facts were uncontested: women fill 70% of the lower-paying hourly jobs, but only 33% of the higher-paying management jobs. If the Court valued fair pay, it would have ruled that Wal-Mart was obviously discriminating against women. But ever since Eisenhower's two and Nixon's four conservative appointments, the Supreme Court took a decisive turn in favor of corporate interests, and has rarely looked back.
We must ask ourselves: Do institutions like the Supreme Court and corporations value the same things we do? Certainly this can't be true. Otherwise, what kind of society are we –– one that values women less than men? And, if these institutions are not in alignment with our values, what are we going to do about it?
One month ago Amendment 1 passed, making North Carolina the last Southern state to constitutionally ban gay marriage.
Where is the payoff from bashing gay rights? Perhaps history has a clue. The South's last unanimous campaign against civil rights targeted the black race. Even though most Southern whites had nothing to gain economically, they fought and died to protect slavery. Why?
Perhaps no one gave a better answer than Supreme Court Justice Roger B. Taney in the Dred Scott decision. His words resonated deeply in the South: "[people of the black race are]
beings of an inferior order, and altogether unfit
to associate with the white race,
either in social or
political relations, and
so far unfit
that they had no rights
which the white man
was bound to respect." (For more details, see Part 1
of Deep Economics)
Taney's words succinctly captured Southern hatred of blacks. Southern gentry used it to their advantage: you poor white boys better fight and fight well, otherwise the North will force you to live cheek-to-cheek with those blacks. It was a powerful battle cry. Confederates were three times more effective than Yankees at killing the enemy. Fighting against feared personal degradation was far more motivating than fighting for somebody else's freedom.
And now Southern hatred rises again, but this time against gays. Posters like "God Hates Fags" present the essence of the message sent by Christian fundamentalists across the South. And it worked: 61% of voters supported Amendment 1 in North Carolina, which in politics is a tremendous margin of success. Liberals, fighting for somebody else's rights, were far less effective and took a terrible beating at the polls.
Conservative wealth needs voter support to maintain dominion. It wins that support by aligning with hate campaigns. War is a longstanding favorite. Hate is rallied to rationalize war, which in turn feeds the mammoth arms industry.
Another hate campaign is being tested today in Wisconsin. The campaign is presented by conservative wealth as a cure for our financial woes. But it's just another hate campaign, this time against public workers and their right to a decent wage, pension, and to be unionized. Conservative wealth hopes to win voter support, and thereby protect its dominion.
Hate campaigns restrict our vision, especially when polished by massive infusions of money. Well-financed hate campaigns make it hard to see what is really going on. They delude us into thinking hate brings deliverance. But God will not smile on Southern churches for bashing gay rights. Wisconsin's economy will not heal by cutting public spending and restricting unions. Yet hate campaigns supported by egregious wealth consistently make silk purses out of sow’s ears.