Author: Michael Zimmer

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Law’s Influence Protecting Wealth Growth

Thomas Piketty in Capital in his path breaking book, Capital the Twenty-First Century, by citing to a vast array of data demonstrates that over the long haul capital grows more rapidly than income or the economy generally – his formula is r>g. Starting from that premise, Shi-Ling Hsu in The Rise and Rise on the One Percent: Getting to Thomas Piketty’s Wealth Dystopia, shows the role law plays in distributing wealth. For Hsu, “Piketty [is] missing a huge piece of the puzzle: the role of law in distributing wealth.” The essence of Hsu’s article is that he shows how, in making and administering law, our legal system has failed to focus on the impact law has on levels of economic inequality. Instead, all too often, the focus of the law and the law making is exclusively on the effect on the private interests that would be directly affected by the legal issue presented. He then demonstrates how, absent a specific and systemic focus on economic inequality, law allows, and frequently promotes, the growth of economic inequality.

Hsu starts with the low hanging fruit of the Great Recession. Preceding it was broad financial deregulation that allowed the huge economic bubble to grow and then, of course, burst when it was no longer sustainable. That deregulation provided the financial industry to gain tremendous short term gain without risk ultimately to itself but that laid to waste the economy of the U.S. and much of the world triggering the Great Recession. In one long paragraph, Hsu summarizes a broad array of corporate and finance laws that were enacted in a very short time to set the stage for the crash. He says there is a now a consensus that “the crisis would not have occurred but for some misguided or feckless legal policy. The financial crisis was, at least in the United States, clearly a product of lawmaking. Lax regulation (or probably more accurately, encouraged) excessive risk taking.” In sum, “a large number of finance professionals took unwise risks that were made possible by one or more legal moves toward deregulation.”

Looking back, these laws were disasters just waiting to happen. We can now ask, what were law makers thinking when they deregulated the financial industry? But at the time of their enactment, there appeared to be close to consensus that these changes would allow economic growth to blossom with minimum risk because the invisible hand of the market would restrain undue risk: The risks would be “rational” because capitalism is all about the allocation of private risk. The Great Recession demonstrated beyond peradventure that the “rational actors,” shielded from the downside of the risks they take, will exercise little or no limit to the risks they will take because that maximizes their upside. That is, of course, how bubbles form, grow and then collapse. For the law to allow this to happen is completely irrational social policy. Even assuming that the risks remain private it is simply wrongheaded to shield actors from the downside consequences of the systemic risk they create while allowing them to capture the upside. Despite the disaster of the Great Recession, the Chicago School macroeconomic paradigm continues to prevail so at best reforms have been muted, if not stifled. For example, banks can still securitize and therefore off load the downside risk that mortgages they issue will not be paid. Piketty with the help of subsequent developments of his work, such as Hsu’s, may help overcome the shortsightedness of prevailing microeconomic economic ideology that has done away with macroeconomic analysis of the economy writ large.

As described by Hsu, the externalities generated by the extreme levels of risky behavior allowed and encouraged by macroeconomic theory were imposed on the American people generally, not on those who created the risk. “In 2008 and 2009, nearly nine million Americans lost jobs. . . . Between 2007 and 2010, nine million Americans slipped into poverty. Even those in the lower ninety-nine percent keeping their jobs, their contractions were more severe than it was for the one percent. For them, housing equity accounts for a much larger fraction of household wealth, and the slow rebound in housing prices has dampened their recovery.” Those externalities included much of the business world beyond the financial sector. When the bubble finally burst, businesses outside the financial sector suffered because the credit necessary to run their operations dried up. To save the financial system, the government, and therefore the American people, assumed the private downside risk from those who created it without imposing any costs on its perpetrators. So, the wealthy suffered less than the people generally and they quickly bounced back from any losses they suffered by snaring almost all the economic since the Great Recession ended. “[F]rom 2009 to 2012, an astonishing ninety-five percent [of total income gains] accrued to the top one percent of earners.”

Hsu identifies the underlying fault with how laws are structured, analyzed and operate: The legislatures do not focus on the broader externalities when considering new laws or amendments to existing laws. “[T]he focus of finance and corporations law is to regulate relations among private parties – investors, directors, managers, and perhaps, under the guise of bankruptcy law, creditors. Securities laws are concerned with protecting the integrity of the market. . . .[T]here is little sense in the law that the finance industry and corporations impose externalities upon a broader society, despite their capacity to redirect the flow of trillions of dollars. . . . [L]awmaking and legal scholarship in the area of finance and corporations law seem to be based predominantly on the notion that the only truly interested parties are private ones.”

A shortcoming of Piketty’s is that he limits his description of capital to things – cash, stock, real and personal property. While it has those physical aspects, capital really is power – social, economic and political power. In terms of law, organized private interests push for and get the legislation they seek. Citing Mancur Olson’s The Rise and Decline of Nations, Hsu describes how, “Over time, special interest groups form, they secure enough above-normal wealth, and what is left over is below-normal wealth for everybody else. Once special interests groups gain a foothold, their influence over policy grows, and their gains at the expense of society cumulate.” Organized wealth gets a seat at the policy-making table but also, in part because of the influence of money in politics, influences who the policy makers are at that table and that determines how policy comes to be defined.

Having laid out why law helps capital by protecting it and helping it to grow using the example of corporate and financial law, Hsu then goes on to describe several areas of law beyond corporate and financial law that promote capital growth.. Some examples that Hsu pick are surprising. For example, Hsu demonstrates how adding “grandparenting” exceptions when new legal regulations are enacted protects and enhances the capital of the “grandparents.” Antitrust law, one might think, should work against the protection and expansion of incumbent wealth. But Piketty demonstrates how the legal interpretation of antitrust law has come to have the opposite effect. To prove a violation, there must be a demonstration of a negative effect on consumers. So, if consumers are not directly hurt by the challenged activity of the defendants, then the regulated parties are protected from liability even if their activity exacerbates inequality by protecting the growth of private wealth. Another example is electric utility regulation. As the law has evolved, it has come to focus on protecting the return on private capital rather than the need to provide electric services for the entire community. Guaranteeing a return on invested capital, allows it to grow unimpeded. Hus also describes some areas of law where wealth obviously is protected and enabled to grow unimpeded. The specialized tax treatment of the oil and gas industry is a good example of that.

Obviously, Hsu cannot in a single paper describe how law generally tilts to favor capital. What he does give us is a way to analyze law by demonstrating the effect – positive, negative, or neutral – law has on economic inequality. Piketty proposed new, macroeconomic approaches to be developed in a revived data-driven study of political economy. Hus takes us a step further by showing that, in the study of law an important but generally missing element, is the need to study the impact law has on economic inequality.

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The Supremes’ Category Mistake Plus Magical Money Thinking

In Citizens United, the Court made a category mistake: Because money effects speech, money is speech. Last term the Court extended that mistake in Harris v. Quinn: Money is speech even if there is no other speech. This post will see how far this category mistake plus the Court’s magical money thinking goes.

In Harris v. Quinn, the Court struck down the “fair share” agreement provision in the Illinois law providing for union representation of home health care workers as a violation of the First Amendment. The “fair share” provision provides: “When a collective bargaining agreement is entered into with an exclusive representative, it may include in the agreement a provision requiring employees covered by the agreement who are not members of the organization to pay their proportionate share of the costs of the collective-bargaining process, contract administration and pursuing matters affecting wages, hours and conditions of employment.”

Nothing in this provision requires the non-member to do think, say or do anything vis-à-vis the union in terms of membership or participation in the organization. Indeed, the non-member could be engaged in a raucous and potentially effective campaign to get rid of the union and the union would have no basis to take action directly, or indirectly through the employer, to retaliate against someone who was a real pain in the side of the union. There is simply no connection between the non-member and the union other than that the service fee is deducted from the worker’s pay by the employer and forwarded to the union.

Payment for services rendered does not generally trigger free speech or association rights. For example, when I buy my latte at Starbucks I am surely economically supporting the company. But is my purchase a free speech expression for, or association commitment, to Starbucks? I might buy my next latte at Argo Tea. What does that mean in terms of my free speech or association rights other than I paid money because I like lattes? Let’s take the example to a legal context. Suppose I voted for Mitt Romney and now want to claim that my paying my federal income taxes violates my free speech and association rights because that payment is speech in favor of the policies of President Obama: My money going to the federal government is coerced speech. Without regard to tax payer standing, it is absurd to think that my First Amendment objection would be paid any heed at all. Another example, suppose someone who owns a condo or coop apartment loses an election to be on the building’s board of directors. Would anyone give any weight to the claim that being forced to be a member of the building’s association and paying assessments if you own an apartment in the building interferes with the member’s First Amendment rights to speak or associate? Don’t laugh: This is an era in which laughable arguments gain traction if the political winds blow in the right direction, witness the claim that Obamacare was beyond the power of Congress

After Citizens United, it is clear that the Court treats money as speech when it wants to reach a constitutional result that otherwise is improbable. In other words, the Court engages in magical thinking about money and speech. In Harris, the payment of the fee is declared to be speech and a forced association that the state cannot mandate. That is as absurd as me refusing to pay taxes because Obama is the President. But it gets worse when we put Harris together with Shelby County v. Holder, where the Supreme Court struck down a provision of the Voting Rights Act of 1965 because it violated its newly created “equal sovereignty” rights of the states. The essence of the equal sovereignty concept is that Congress is limited in the exercise of its otherwise valid powers if it does not treat all the states equally. Thus, for the present Court, the “fundamental principle of equal sovereignty remains highly pertinent in assessing subsequent disparate treatment of States.” Sure, Alaska’s equal sovereignty rights would have been violated if it was admitted to the Union with only one Senator because the population is so small. But, until Shelby County and is immediate predecessor by the Roberts’ Court, Northwest Austin Municipal Utility District Number One v. Holder that was the very limited scope of this right of equal state sovereignty.

So, how would the magical thinking that money is speech from Harris apply to the equal sovereignty right of the states in Shelby County?  In other words, let’s put the fact that the payment of money is constitutionally protected together with the principle of equal sovereignty.  People in states like Illinois where I live, pay a lot of taxes to the federal government but, in return, get per capita much less money coming back from the federal government than what the federal government pays per capita to some other states, for example, Mississippi or Alabama. Is the fact that the federal government is not paying an equal per capita in benefits to Illinois that it pays to Alabama violate the rights Illinois? Does the State of Illinois have a constitutional claim, just as the States were found to have a valid claim in Shelby County? Why would not the magical thinking that money is speech apply? The politics in these states that are treated so well do bend in the same direction as the politics that appears to drive the Court. So, is this a stronger case than Harris where there was no speech other than the money? Should the claim I just made up, that boggles even my mind, stop Lisa Madigan, Illinois Attorney General from trying it out? Yes, of course, because the magical thinking and category mistakes made by the Court are the result of the winds of politics blowing in one direction.

It is impossible to teach constitutional law as an area of traditional law. As Judge Posner says judges in general act as rational actors and they only reach policy questions when the legal rules run out. But the major share of the very limited docket the Supreme Court picks for itself to decide are cases where the rules have run out. Maybe it has always been true, but the Roberts Supreme Court seems to be particularly inept at even keeping up the pretense that it is law, not politics, that they are making. I keep reminding myself, and my students, to respect the institution despite the decisions it makes.

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Piketty’s Capital & the Continuing Pull of Macroeconomic Theory

One of the important points of Thomas Piketty, Capital in the Twenty-First Century is to undermine the use exclusively of the long prevailing macroeconomic theories focusing on national economies called “the Chicago School.” Saul Levmore, in a review of Capital forthcoming in the Michigan Law Review, delivers what should be a devastating blow to macroeconomics as the only way to describe how our society works if, as Piketty shows, that in the long run the return on capital exceeds economic growth, r>g. In a nutshell, Piketty’s microeconomic view shows that macroeconomic theory simply fails to describe reality. Levmore describes how macroeconomic theory would predict that in the long run competition for capital would reduce its rate of return to close to the rate of economic growth: “If the rate of return to capital is high, then there should be more investment in capital. Individual can be expected to save more and to defer consumption. . . . . But as high returns attract capital, opportunities to earn high returns ought eventually to diminish, and decreasing returns should be expected. Moreover, if capital remains expensive, because its suppliers need to be paid high returns, then there is room to substitute labor for capital. This demand for labor ought to increase g. Piketty’s response to this doubt about the long-term claim regarding r>g is essentially to report that it simply had not been so. . . . [D]ata do not lie. . . . At every turn it is useful to remember that this is a thesis driven by data rather than by theory.”

Levemore goes on to describe how macroeconomic theory would predict that the initial very high returns to hedge funds and their managers would, again in the long run, be reduced by competition. But, he says, the continuing “stratospheric compensation of hedge-fund managers is more difficult to rationalize [using Chicago school macroeconomic theory]. It is possible that in the beginning there were some gifted managers who could find extraordinary investments, but with thousands of funds and trillions of dollars in the industry, the reality of efficient market prevails.” The attraction to hedge funds should create competition that reduces the earnings of their managers. But Levemore concedes that Piketty’s microeconomic data shows that it hasn’t and likely won’t absent some enormous disasters like another World War.

After setting forth such a radical critique of macroeconomic theory – that it does not describe reality — Levmore fails to take the next step of asking why marcroeconomic theory does not hold up. Perhaps that simply indicates the continuing hold that Chicago School macroeconomics has over how we all think. That economic ideology is the prevailing paradigm that has a powerful hold on how we think. Through sizable investment by big business and the very wealthy in Milton Friedman’s macroeconomic theory, the prior Keynesian microeconomic paradigm was replaced in the U.S. and also more broadly. While contesting data don’t lie — the prevailing macroeconomic theory fails to describe the real world — it is still hard to see and understand a new paradigm that replaces the existing ideology because it does so much better at describing reality.

In some sense, Piketty may make seeing the new paradigm more difficult. His characterization of capital as things – cash, corporate stock, buildings, etc. – fails to understand its essence. Capital is power. No only economic power, but also social and political power. In The Rise and Decline of Nations, Mancur Olson describes how special interests groups organize to capture power to serve their own interests. Olson’s Logic of Collective Action describes how small, focused groups are more effective than large, more diffused groups in being effective. In the late 1960s and early 1970s, the U.S. Chamber of Commerce directed a campaign for it to become such a group. Future Supreme Court Justice but then Chair of the Chamber’s Commerce Committee called on “business to mobilize politically: Strength lies in organization [and in] the political power available only through united action and national organization.” Chicago School macroeconomic theory triumphed very broadly and the public policy decisions made following the Reagan Revolution continue to reflect that triumph of what Piketty shows is theory over reality.

Certainly a work of such broad scope and in depth presentation of data from 20 countries over almost two hundred years calls for scrutiny and critique. Admitting “data don’t lie,” but then falling to acknowledge how devastating that data is to the prevailing economic paradigm that has helped to bring our world to such a precarious situation, while understandable from a psychological point of view, does not seem to advance very far the project of what to do about the alarming level of growing economic inequality in an economy that is not growing except for those at the very top.

 

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A Response to Piketty’s Capital from a Surprising Corner

Without referring to Thomas Piketty, Capital in the Twenty-First Century, the Harvard Business School, of all institutions, has recently published two studies that ultimately address the increasing economic inequality that plagues the United States and most of the developed world. Michael E. Porter and Jan V. Rivkin published the finding of the survey that the Harvard Business School did of its alumni. In short sum, the study concludes that “large and midsize firms have rallied strongly from the Great Recession, and highly skilled individuals are prospering. But middle and working-class citizens are struggling, as are small business. We argue that such a divergence is unsustainable. . . .” An Economy Doing Half Its Job: Findings of Harvard Business School’s 2013-14 Survey on U.S. Competitiveness (September 2014). Roger Martin, in the October issue of the Harvard Business Review, raises similar alarms: “In a democratic capitalist country, it is not sustainable to leave the members of the largest voting bloc out of the economic equation.” The Rise (and Likely Fall) of the Talent Economy, Harv. Bus. Rev. October 2014, pp. 41, 43.

Martin traces the shift from natural resources being the most valuable assets 100 years ago to the development of talent as the “asset” of greatest value. “By 2013 more than half the top 50 companies were talent based, including three of the four biggest: Apple, Microsoft, and Google.” As talent was becoming the most significant corporate value in the 1970’s, supply-side macroeconomic economists then argued that high income taxes created disincentives so that this talent would not be optimized. Given high tax rates for high incomes, talented people would slack off and not work as hard if so much of the resulting income went for taxes. With the Reagan Revolution, supply-side economics was the basis for the radical reduction in top tax rates. “The top marginal [income tax] rate plummeted from 70% in 1981, to 50% in 1982, to 38.5% in 1987, to 28% in 1988. Thus, in a mere seven years, $1 million earners saw the amount they kept after federal taxes increase from $340,000 to $725,000, while the $3.0 million that $10 million earners had been keeping grew to $7.2 million.” With the emergence of stock-based compensation, top executives focused on “managing the expectations of market participants, not on enhancing the real performance of the company.” The talent that was validated was in the ability short term to manipulate share value and that does not necessarily lead to the growth of the enterprise in the longer run. Thus manipulating the value of corporate stock does not lead to greater economic growth.

In addition to a tax system that creates incentives for top corporate executives to feather their own nests at the expense of the interests of the other stakeholders – shareholders and workers –, the emergence of hedge funds that rake off 2% of the value of the assets and 20% of the profits every year, provides extraordinarily high incomes to their managers. “[T]he top 25 hedge fund managers in 2010 raked in four times the earnings of all the CEOs of the Fortune 500 combined. The hedge fund industry, however, does not produce economic growth. “Essentially, the business of a hedge fund is to trade. . . . But trading doesn’t directly create value for anyone other than the hedge funds. One trader’s gain is simply another trader’s loss.” The tax system subsidizes hedge funds by not treating their earnings as earned income subject to the basic income tax rates but treat much of it as capital gains subject to lower tax rates

Putting together these two phenomena supports the conclusion that the personal gain of a small group of top corporate executives and hedge fund managers is a more important social policy than economic growth overall or even of return on the investment of capital itself. “Across the economy, the return on invested capital . . . peaked in 1979 and has been on a steady decline since the mid-1970s. It is currently below 2% and still dropping, as the minders of that capital, whether corporate executives or investment managers, extract ever more for their services.”

With little actual economic growth and the capture of so much income by top corporate and hedge fund managers, “inequality has rapidly increased, with the top 1% of the income distribution taking in as much as 80% (estimates vary) of the growth in GDP over the past 30 years.” Meanwhile “[r]eal wages for the 62% of the U.S. workforce classified as production and nonsupervisory workers have declined since the mid-1970s.

Martin attributes some job losses to the attempts by top managers to manipulate the price of corporate stock to increase their personal income by eliminating jobs, “the variable they can most easily squeeze in order to signal that they are addressing performance.”

Porter and Rivkin describe structural changes in the economy that pre-date the Great Recession. “Long-run growth rates in private-sector jobs started falling from historical levels about 2000 and remain low. The meager job creation that has occurred has been overwhelmingly in local industries, not those facing international competition. . . . Real hourly wages have stalled even among college-educated Americans; only those with advanced degrees have seen gains.”

When business expands, they do not do so by hiring new employees in the United States. “[B]usiness leaders in America are reluctant to hire full-time workers. When possible, they prefer to invest in technology to perform work, outsource activities to third parties [including off shore], or hire part-time workers.” For example, a story in the New York Times described the structure of Apple: “Apple employs 43,000 people in the United States and 20,000 overseas. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere.” Micro-economists would say that is as it should be because it no doubt is cost effective. From a macroeconomic point of view, aggregating the behavior of many enterprises leads to the hollowing out of our middle class work force and our middle class consumer economy. What is good for the Apples of this world, is not good for America.

Martin, Porter and Rivkin all agree that the present structure of our society, including our economy, is not sustainable. They do not, however, propose remedies. Porter and Rivken ask business to volunteer to be more proactive as to education generally and to educating their workers for the jobs that are allegedly available. While volunteerism is nice and may be of some help, it still seems grossly inadequate when what needs to be done is to redirect the structure and direction of our society and economy that does little for most people or the economy generally but creates tremendous incentives for corporate executives and hedge fund managers to capture almost all of the limited economic growth that results from these policies.

Could it be true that the Harvard Business School is proposing that we counterattack the class warfare the majority have suffered because of the extraordinary power of the small group at the top of the economic ladder? Is the Harvard Business School lining up with Occupy Wall Street?

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New Takes on the Sad Shape We Are In

For some time, I have been interested in the increasingly sad plight of our polity: ever increasing economic equality, the implosion of the government in response to crises and the general decay of our political and civic life. Recently, Jeffrey D. Sachs, noted economist and now director of the Earth Institute at Columbia University, published, “The Price of civilization: Reawakening American Virtue and Prosperity,” and Larry Lessig, noted professor of law and director of the Edmond J. Safra Foundation Center for Ethics at Harvard, published, “Republic, Lost: How Money Corrupts Congress –and a Plan to Stop It.”  Both look to our current plight and both start from the same place: The extreme negative effect extreme wealth has on our political system. Sachs characterizes political power as actually being held by a “duopoly:” “[T]he only difference between the Republicans and Democrats is that Big Oil owns the Republicans while Wall Street owns the Democrats.” For Lessig, government policy to advance the interests of the people is consistently thwarted: “Change on the Left gets stopped because strong, powerful private interests use their leverage to block changes in the  status quo. Change on the Right gets stopped . . . because Congress works to block any change that would weaken the fund-raising machine.” Sachs juxtaposes what the government does with the following widely shared values of the American people:  1. “equality of opportunity, 2. “individuals should make the maximum efforts to help themselves,” 3. tthe government should help those in need as long as they are trying to help themselves,” and 4. “the rich should pay more in taxes.”

Lessig differentiates among the rich. His focus is on the rich “whose power comes not from hard work, creativity, innovation, or the creation of wealth [but] who instead secure their wealth through the manipulation of government and politicians.”  In Lessig’s view the influence of money in campaign financing and lobbying from the wealthiest interests is corrupting even if it is not illegal. Democracy has become “a show or ruse” that has resulted in the loss of faith and trust in our system of government. For one example, Lessig quotes studies showing that “from 1998 to 2008, the financial sector spent $1.7 billion on campaign contributions and $3.4 billion on lobbying expenses.” He finds it “impossible to believe that our government would have been this stupid [in allowing the financial services industry to run the economy off the rails] had congressmen from both sides of the aisle not been so desperate” for campaign contributions  and the money spent lobbying. The American people overwhelmingly think that the government is corrupt and in the hands of the rich and powerful. Presently, only 11% of the people have confidence in Congress.

Sachs traces the beginning of the collapse of American virtue to the Reagan Revolution that created “a new antipathy to the role of government, a new disdain for the poor . . . and a new invitation to the rich to shed their moral responsibilities to the rest of society.” The “extreme libertarianism” that followed has “unleash[ed] greed.” He analyzes the consequences of the Civil Rights Movement and the backlash it produced, the rise in the Hispanic population and the rise of the Sunbelt and of suburbanization. Sachs pinpoints the main impact of economic globalization to be that it has cause a “a tremendous and rapidly expanding range of sophisticated economic activities that once were carried out only the United States, Europe, and Japan can now be carried out even more profitably in China, India, Brazil and elsewhere.” Not only does globalization impact national economies, it has an impact within them as well. “High-skilled (and therefore high-income) workers are likely to benefit. . . while low-skilled (and therefore low-income) workers are likely to feel the pressure of tougher competition from abroad.”  With the resulting increase in the wealth of those at top while they have turned their backs on the rest of society has produced our present politics that is so disassociated from the needs,  interests and values of the vast majority of Americans.

To regain prosperity and a vibrant society, Sachs says we need to set some specific short term goals: 5% unemployment by 2015, 50% of those between age 25 and 29 to have college degrees by 2020,  with academic performance established using global benchmarks, by 2015, every child should be enrolled in comprehensive early childhood development programs, ensuring nutritional monitoring, safe day care, and quality preschool.  He calculates the cost of these short term as well as longer term goals concerning the deficit, the environment and other issues that need to be addressed in the longer term. Sachs further demonstrates that these goals cannot be achieved by budget cutting alone. So for him it is “time for the rich to pay their due” and that would produce enough revenue to meet our goals without creating any sort of hardship on wealthy taxpayers.

To end the grip that the “corporatocracy” has on government, Sachs proposes public campaign financing, free media time for elections, banning campaign contributions from lobbying firms, stopping the “revolving door” and taking away the government “trough” for corporate interests. The problem is, of course, how to get from here to there.

Lessig suggests a number of possible strategies to reduce the impact of money on politics: First, There should be primary election challenges to incumbents by “citizen politicians” who do not want the job but will stay in the race until the other candidates commit exclusively to public financing. Second, a presidential candidate could pledges that, if elected, “she will (1) hold the government hostage until Congress enacts a program to remove the fundamental corruption that is our government, and (2) once that program is enacted, she will resign.” Given the slight chance these two strategies have of being adopted, Lessig proposes a Constitutional Convention to force reform onto our system. Even if this final step is taken, it is not clear whether money could be taken out of politics.

The emergence of these extreme critiques of the present plight of the United States by people at elite institutions reflects a groundswell that real change is necessary if we are to stop our decline. Sachs and Lessig show how deeply entrenched the defects are that are destroying the nation. Their proposed solutions also demonstrate how difficult real change will be to end the corruption of our government resulting from the hold that big money has on it. Holding a constitutional convention in face of some of the proposals being bandied about by groups such as the Tea Party would be extremely risky but our situation may be so tenuous that the risk must be taken.

1

Ok, You Asked For It: A Bit More About Wal-Mart v Dukes

I have been asked why I am so fearful that the Supreme Court’s decision in Wal-Mart v. Dukes foreshadows the demise of systemic theories challenging patterns or practices of discrimination. After all, the case is about class actions. My fear is that, has it done in other areas, the lower courts and the Supreme Court itself will look back and declare that systemic antidiscriminaiton law is as it was described in Wal-Mart. My fear is based on articles by Barry Friedman in the Georgetown Law Review, The Wages of Stealth Overruling (With Particular Attention to Miranda v. Arizona), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1647745, and Margaret Moses’ article, Beyond Judicial Activism: When the Supreme Court is No Longer a Court, 14 U. Penn. J. of Const. L. 161, http://papers.ssrn.com/sol3/papers.cfm?abstract _1781243. Friedman analyzes recoent decisions by the Robert Court that do not expressly overrule precedent but interpet so that nothing but hollow shells are left. Moses shows how the Robert Court reaches out to decide issues to impose the majority’s public policy predilections, thereby underminng precedent, even where the parties did not bring those issues to the Court or where those issues were never decided by lower courts or sometimes even briefed by the parties.

Wal-Mart itself is an exmple of the Court looking back to precedent but in doing so radically distorting it. General Telephone Co. v. Falcon was an earlier class action case in which the Court rejected the “across the board” theory of class actions. The “across the board” theory had approved class actions where a plaintiff, claiming one type of discrimination, could being a class action challenging every kind of discrimination of the employer. Falcon claimed he was a victim of defendant’s hiring discrimination but he tried to bring a class action challenging the employer’s promotion discrimination. After deciding such “across the board” class actions could not generally be brought under Rule 23, the Falcon Court, in a footnote, described two exceptions where a plaintiff could still bring a class action claiming more than one type of discrimination: 1. If the employer used a common test in more than one context, for example if in Falcon General Telephone used the same employment test for both hiring and promotion decisions and 2. if the employer had a “general policy” of discrimination.

The plaintiffs in Wal-Mart did not try to bring an “across the board” class action challenging all the ways that Wal-Mart discriminated. Instead, their action focused on Wal-Mart’s discriminatory pay and promotion practices at its stores. Since the level of pay was significantly influenced by whether an employee had been promoted or not, pay and promotion were closely interwined, unlike the hiring and promotion claims in Falcon. Falcon was inapposite Wal-Mart, yet the Court relied on it to reject plaintiffs class action. The Court turned the two exceptions from Falcon which would allow a plaintiff to bring a class action that reached more than one type of employer discriminaiton into a limit on the scope of class actions involving a single type of discriminatioin. Thus, it now appears that class actions challenging a single type of employer discrimination will be denied unless the employer uses either an employment test or has a general policy of discrimination. Since the Wal-Mart majority was unable to conceptualize the operation of Wal-Mart’s policy granting unchecked discretion to store managers on pay and promotions as a pattern or practice of discriminaiton, my fear is that lower courts and the Supreme Court itself will decide that systemic disparate treatment claims are limited to situations challenging the employer’s use of an employment test or where the employer has a formal, i.e., general, policy of discrimination. That would mean that Teamsters, Hazelwood and Bazemore, which interpreted Title VII to prohibit systemic patterns or practices of discriminaiton, are victim of stealth overruling.

Because the Wal-Mart majority hollowed out class action precedent to truncate class actions, that misuse of precedent forewhadows the use of the language in Wal-Mart to truncate the substance of the systemic theories of discrimination.

4

Our Fractured Age

The disconnect between what seem to the common interests and needs of most of us – now the 99% of us – and how we think about ourselves collectively has fascinated and troubled me for quite some time. Daniel T. Rodgers, Henry Charles Lea Professor of History at Princeton, has recently published a very interesting book entitled, “Age of Fracture,” that explores the intellectual basis for that disconnect. Looking at a broad set of social, economic, philosophical and political intellectual traditions, Rodgers explains how the intellectual underpinnings of our thought processes have shifted from the idea of collective identity to one of individualized freedom, but freedom from reality.  Reviewing the intellectual history of the late twentieth century until now, his analysis crosses the left-right divide to show how all of these different disciplines can by synthesized because they all vector in the same direction, this idealized sense of individual freedom.

Rodgers starts by describing the political rhetoric Presidents have used in their speeches. Presidential speechwriters rely on tropes that resonate because that rhetoric helps bolster Presidential leadership: The better the rhetoric connects to the prevailing mindsets of the people, the more effective the “bully pulpit.” Presidential rhetoric has interested me ever since I read Gary Wills’ Pulitzer Prize winning book, “Lincoln at Gettysburg: The Words That Remade America.” In essence, Wills analyzed President Lincoln’s use of rhetoric to show that it both reflected but helped reify a change in the concept of the nature of our country: Our  concept of American changed from, “The United States are . . .” to, “The United States is.” Rather than going back that far, Rodgers begins with the rhetoric of our Cold War era Presidents – for example, Kennedy’s “Ask not what this country can do for you; ask what you can do for this country” – calling us to gird our loins and stand united to advance our collective national interest in order to better confront the menace we faced by the menace of Communis and the Soviet Union. With the ending of the Cold War, President Reagan’s rhetoric moved away from that sense of collective identity and obligation toward an idealized, almost dream-like, sense of individual “freedom,” including freedom from the actual conditions of our lives as well as our from much sense of collective obligation. That predominant mindset allows us to escape hard choices and to assume a perfected life will be easy to achieve. It is not as if a Reagan’s rhetoric by itself caused the shift. Rather, presidential rhetoric both reflects but also amplifies the ideas that are already settling into our unexamined background mindset.

Having launched this project through the lens of presidential rhetoric, Rodgers then looks at developments across a wide swath of our intellectual life. He starts with economic theory and describes how the earlier macroeconomic Keynesian theory was supplanted – he quotes economist Robert Lucas, “The term ‘macroeconomics’ will simply disappear from use” — by microeconomic theory, the idealized world of individual rational actors motivated solely to maximize their profits. While he shows how disconnected this was from reality, Rodgers fits microeconomic theory within the broader conceptual view of the world of the individualized but unreal “freedom” reflected in President Reagan’s speeches. Rodger’s next chapter moves to politics and political theory. He traces the shift from Galbraith’s earlier view that the overwhelming  economic power of megacorporations gave them extraordinary political power to the microeconomic view that disconnects economic from political power by its focus on individual economic actors focused solely on their own economic agendas. In an interesting take, Rodgers shows how political theory moved toward rational choice analysis with its exclusive focus on the “power-seeking saturated world of politics” means that the problems of our powerless subordinated groups slip “out of the categories of analysis.” In a tour de force, he then describes how the divergent views of Gramsci, Genovese, Geertz and Foucault, nevertheless when taken together, conceptualize power as dispersed extremely broadly in “spheres of culture, ideas, everyday practices [and] science.” In sum, if microeconomic theory is all about individual economic gain disconnected from politics, political gain is all about special interest “rent seeking” divorce from collective needs and power is defined so broadly that it is so diffused as to exists everywhere, Rodgers asks whether power is in fact “nothing at all.” If power is nothing at all for us, that leaves most of us collectively powerless. Read More

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Duking It Out With Wal-Mart

Thanks for inviting me back to Concurring Opinions. Last visit, I spent much of my month ranting about Ricci v. DeStefano – the New Haven firefighters case. This year I will try to avoid doing the same about Wal-Mart v. Dukes but I do want to say something. The decision is a major procedural decision limiting the availability of class actions for employment discrimination claims but also for class actions generally. To reach its decision, the Court indicated that it had to address the underlying substantive law which involved claims of systemic disparate treatment and disparate impact. The discussion of substance was in the context of deciding whether there were common questions of law and fact needed to satisfy Rule 23(a) and that is certainly not the same as discussing the substantive law directly. Nevertheless, I think the way the substantive law was discussed may well be a foreshadowing, a grim foreshadowing, of how the lower courts and the Supreme Court will treat the two systemic theories of discrimination in the future. The hope is that Wal-Mart will be treated “only” as a procedural class action case.

The plaintiffs’ claim was that Wal-Mart had a policy of granting unfettered discretion to its store managers to make pay and promotion decisions and it operated as a pattern of pay and promotion discrimination . The discretion policy is in sharp contrast to the general way in which Wal-Mart operates. Wal- art has been heralded as having developed the most sophisticated systems yet for collecting, analyzing and acting upon data flowing to its Bentonville headquarters in real time in all aspects and all locations of its business. If, for example, a freezer unit in a Wal-Mart location in Shanghai starts drawing electricity beyond established parameters, that information is transmitted to Bentonville, analyzed and the local facility is notified and ordered to deal with whatever problems that heightened power usage reveals. Like the rest of the data generated in the operation of the business generally, the pay and promotion data is collected in the Bentonville. The difference is that nothing is done about what were concededly dramaticshortfalls in pay and promotion of women working at Wal-Mart stores.

The evidence, which was unchallenged, showed that women filled 70% of the hourly jobs but only 33% of management jobs, with most promotions coming from the pool of hourly workers. Further, it took women longer than men to rise into the management ranks and the higher in the management hierarchy the fewer the women. Finally, women were paid less than men in every region and that salary gap widened over time, even for men and women hired into the same jobs at thesame time. Based on that basic statistical evidence, plaintiffs claimed that this system of making pay and promotions was a pattern of systemic disparate treatment discrimination and the discretion policy operated as an employment practice that resulted in disparate impact to women. This post will deal with one aspect of the systemic disparate treatment claim – the failure of the Court to confront the statistical evidence of discrimination that plaintiffs presented.  Read More

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Democratic Deficit or an Oligarchy?

“It has been said that democracy is the worst form of government

except all the others that have been tried.”

Winston Churchill

I suppose the retort is that, if we have a democracy, these other forms must be really, really terrible. The U.S. seems mired, incapable of even starting to come to grips with our problems. After a 50 year struggle to get a rational health care system, we are closer but still not there. And, we may yet not get there. Waiting in the wings are issues such as reforms in financial regulation, climate change, and important civil rights issues. At the glacial pace of health care reform, these issues may not be reached, much less decided, before the next election cycle starts in full swing.

Some will say that we are doing just fine because inaction is the point of our governmental system. As Thomas Paine put it, “That government is best which governs least.” Whether or not that might still be true in some philosophical sense, the reason for our governmental inaction is not policy but is the result of a tremendous and growing democratic deficit in the way our government is structured and operates. And, of course, our government is not really that small, it is just ineffective.

A number people, particularly Sandy Levinson, have called out our democratic failings. Commonly reported causes of that deficit include federalism, a national government of limited powers, a President not elected by the people, separation of powers between the Congress and the President that diffuses responsibility, the disproportionate power of seniority in both Houses of Congress, each State getting two seats in the Senate no matter how miniscule or large its population and the filibuster rule of the Senate requiring supermajorities to get anything done.

The point I want to add to the discussion is the role of our system of political parties, the lack of much party discipline, and the role of campaign contributions.  We tend to talk about the Republican Party and the Democratic Party as if they were monolithic institutions that play significant roles in governance. That assumes some discipline within each party that is lacking. Each elected national official – President, Senators and Representatives – has his or her own, individualized political party as do their opponents trying to replace them. Yes, individuals who call themselves Democrats or Republicans sometimes work together under the umbrella of one party name or the other. Yes, the so-called national parties have some money to contribute to the campaign war chests of some candidates. Presidential elections come as close as we get to national parties because in each election there is a national Democratic Presidential Election Party and a Republican one as well.  But, these parties are really creatures of the candidates, not the other way around. Read More

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Comparative Constitutional Law, “Exceptionalism,” and “Originalism”

Last summer I was fortunate to share with Anne Massie the chance to teach Comparative Constitutional Law in the Loyola Chicago program at its Rome campus. Part of what made it enjoyable was the participation of Justice Ruth Ginsburg, along with her law professor husband, Marty Ginsburg. Justice Ginsburg gave three lectures – one on the inner workings of the Court, a second on her experiences litigating women’s rights cases in the 1970s, and the third on dissents. Her lectures revealed to enthralled students how passionate she is about what she is doing and how personal the relationship is among most of the Justices. Marty gave a wonderful lecture entitled “Imperfections.” It was about how things that happen that might seem not so desirable at the time can, nevertheless, lead to even better outcomes. He started with wondering what would have happened if big law firms would have hired women lawyers when Sandra Day O’Connor and Ruth Bader Ginsburg graduated from law school. That would have been good, but, had that been the case, both of them would now be rich, retired partners of major law firms. As things turned out, much better things happened because one path had been closed. His warmth and humor made the ambiance so relaxed that a student was so bold to ask how he and Justice Ginsburg had met, which they took turns answering.

What I want to comment on, however, is an insight that teaching comparative constitutional law allowed me to have and has been useful in my thinking about American constitutional law. It ties together our supposed “exceptionalism,” our doctrine of judicial review, and “originalism.”

I have always been proud that the US Constitution has been the inspiration for the development of written constitutions and of constitutional democracy, including individual constitutional rights, in many countries around the world. Judicial review, as originally articulated in Marbury v. Madison, has taken hold around the world in part because of our experience with it, particularly in its role in developing individual constitutional rights to expand the concept of what a democracy entails.

In recent times, however, our Constitution and the decisions of our Supreme Court are not cited that often by the courts making constitutional decisions in these other countries. Given the strident rejection of any citation to foreign legal developments by some in the US, including some member of our Supreme Court, one explanation is simply that turnabout is fair play: If the constitutional law of other countries is to be avoided at all costs in US courts because of our supposed “exceptionalism,” why should the courts in other countries cite US decisions?

There may be some of that.  However, I think more is at stake. The demand for isolationist “exceptionalism” may have something to do with our turn toward “originalist” interpretative approaches that has come to so dominate the discourse about constitutional law in this country.  “Originalism” creep is even expanding across the ideological spectrum of US constitutionalists. “Originalism” in any of its many versions is simply a non-starter for the courts of most other countries deciding constitutional questions.

The absence of “originalist” talk outside the US may be because most of the countries that now have constitutional judicial review have written it into their constitutions. Some have even created specialized constitutional courts with jurisdiction limited to decisions of constitutional questions. Our written constitution lacks such an explicit provision, though the structure of our constitution, with the horizontal separation of powers into three branches for the national government and a vertical power distribution between the national and supposedly sovereign states, seems to me to ache for judicial review to resolve the inevitable disputes that emerge in such a complicated power sharing system. In countries with express judicial review provisions, there is no question of the legitimacy of judicial review, though, of course, there are intense disputes over any particular exercise of that power.

So what is the link between “originalism” and an explicit judicial review power? Given security over the legitimacy of judicial review in those countries where it is explicitly established in the written constitution, it struck me that one way of looking at our obsession with “originialism” is that it reflects our collective insecurity about the legitimacy of judicial review. The strident cry of US “exceptionalism,” as virtuous and not to be contaminated by the introduction of foreign influences, is a way of shielding our constitutional discourse about judicial review from any recognition of its calm acceptance in so many other countries. What is exceptional is not judicial review but our insecurity over its legitimacy.

Some years back, Cass Sunstein proffered a straightforward political explanation for US judicial “exceptionalism:” The national political turn away from Warren Court activism with the coming of Nixonian Republicanism. One of its goals was to stop the momentum the Warren Court had been developing for the expansion of individual constitutional rights from negative ones to include positive rights. Shutting out the experiences of other countries that had been developing broader individual constitutional rights helped stem the tide toward recognition of positive rights here.

If that is true, that raises a question of which way causation runs: Has our collective insecurity about the validity of judicial review caused the cry for US “exceptionalism” and our soul-searching “originialism”? Or, has that insecurity been used instrumentally with politically motivated calls of “exceptionalism” and “originalism” made to retard the development of individual constitutional rights?

I wish I knew the answer to that. At any rate, teaching comparative constitutional law sure put the debates over how to interpret our Constitution into a new context. I hope I will be able to expand the discussion in my US constitutional law course this coming semester.