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Category: Law and Inequality

Reverse Robin Hood: The $30 Billion Question

Remember the controversies over the State Children’s Health Insurance Program (SCHIP) last fall? The Bush Administration was very concerned that spending an additional $30 billion over the next five years to cover more children would put the country on the road to “socialized medicine.” Even if economic reports indicated that only one in five families in the coverage expansion would drop private insurance to purchase government sponsored insurance, that was seen as far too high a cost to pay to allow even a bit more publicly-financed insurance to “pollute” children’s health care.

Yet the administration has recently endorsed the Fed’s $30 billion guarantee for JP Morgan as it purchases Bear Sterns. I’ll let the accountants figure out exactly how much of that money will end up being provided by taxpayers, but I think it’s safe to assume that more guarantees like this are coming, and that the market itself priced it in in response to the toxic subprime securities Bear still counts as “assets.”

So what are the practical consequences when a country allows millions of kids to go uninsured, but structures financial regulation so that leaders of banking firms face nearly no downside, and high upside, on extraordinarily risky investment strategies? It appears that we only worry about moral hazard in the health care arena (where it has been largely discredited), and not in the financial world (where it has been amply confirmed). Internationally, the US is looking less like a leader in financial innovation and more like a haven for crony capitalism. The New York Times describes the situation as “socialized compensation” for the connected:

Bankers operate under a system that provides stellar rewards when the investment strategies do well yet puts a floor on their losses when they go bad. They might have to forgo a bonus if investments turn sour. They might even be fired. Their equity might become worthless — or not, if the Fed feels it must step in. But as a rule, they won’t have to return the money they made in the good days when they were making all the crazy bets that eventually took their banks down.

The costs of such a lopsided system of incentives are by now clear. Better regulation of mortgage markets would help avoid repeating current excesses. But more fundamental correctives are needed to curb financiers’ appetite for walking a tightrope. Some economists have suggested making their remuneration contingent on the performance of their investments over several years — releasing their compensation gradually.

In a recent hearing questioning the extraordinary gains at top financial firms (for pioneering strategies that now may lead to massive government bailouts), Henry Waxman suggested that current policies may lead to a crisis of faith in the market system:

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“Poorism”

What happens when global inequality becomes extreme enough to be exotic? One result is “poorism,” which brings residents of the developed world to visit slums, favelas, and shantytowns as tourists. Eric Weiner explores the ethical dilemmas:

From the favelas of Rio de Janeiro to the townships of Johannesburg to the garbage dumps of Mexico, tourists are forsaking, at least for a while, beaches and museums for crowded, dirty — and in many ways surprising — slums.

David Fennell, a professor of tourism and environment at Brock University in Ontario [says it] is just another example of tourism’s finding a new niche to exploit. The real purpose, he believes, is to make Westerners feel better about their station in life. “It affirms in my mind how lucky I am — or how unlucky they are,” he said.

Not so fast, proponents of slum tourism say. Ignoring poverty won’t make it go away. “Tourism is one of the few ways that you or I are ever going to understand what poverty means,” said Harold Goodwin, director of the International Center for Responsible Tourism in Leeds, England. “To just kind of turn a blind eye and pretend the poverty doesn’t exist seems to me a very denial of our humanity.”

While the feel-good side of tourism is usefully satirized in Richard Flanagan’s Gould’s Book of Fish, I’m in favor of this type of travel in general. Spending 10 weeks in Lima, Peru the summer after my first year of law school fundamentally changed my view of the world. It’s very difficult to have a sense of what living on a dollar a day is like unless one has actually seen a shantytown in person. It certainly helps one understand why “contributing to widening divide between rich and poor” is one of the social sins recently highlighted by the Vatican.

Misery Loves Inequality

InequalityGraph.pngEconomist Robert H. Frank notes that Congress is finally considering alternatives to GDP as measurements of economic well-being:

This week, Senator Byron Dorgan . . . will hold a hearing exploring whether traditional economic measures like per-capita income accurately capture people’s sense of well-being.

[S]urvey findings [show] that when everyone’s income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income.

In the three decades after World War II, the relationship between well-being and income distribution was not a big issue, because incomes were growing at about the same rate for all income groups. Since the mid-1970s, however, income growth has been confined almost entirely to top earners. Changes in per-capita G.D.P., which track only changes in average income, are completely silent about the effects of this shift.

The chart above, from Lane Kenworthy’s blog Consider the Evidence, shows the trend graphically.

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The Home Finance Arms Race

A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:

The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.

Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.

If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:

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Are Debtors’ Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now “Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.” And the “payday loan” industry has found a lucrative new niche–”volume has climbed to about $48 billion a year from about $13.8 billion in 1999.”

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they’d find predatory “Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements,” and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn’t know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the “fugitive disentitlement” doctrine might leave hard-liners unmoved by Ms. Rumph’s plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing “consumption gap” between rich and poor is actually based on.

Recommendation Inflation

clarence.jpgThough many law schools have become vigilant about stopping grade inflation, what about “recommendation inflation?” Recommendations can become difficult to write well if one is unaware of the prevalence of superlatives in others’ assessments. Consider this observation from an English professor: “The level of praise is so high that any assessment short of ‘brilliant’ can look tepid. That means that any consideration of a candidate’s weakness is probably a kiss of death.”

The inflation here is particularly pernicious because simple observations like that can become self-fulfilling prophecies. Though the confidentiality of recommendations is supposed to ensure candor, privacy laws also make it highly unlikely that anyone can ever fully compare what one recommender has written on behalf of a range of applicants.

Lior Strahilevitz has argued that there is “often an essential conflict between information privacy protections and antidiscrimination principles,” because “the government can publish previously private information about individuals so as to discourage decisionmakers’ reliance on problematic proxies.” Reflecting on that proposal, I thought that one solution to recommendation inflation would be to establish a norm among recommendation writers to disclose how many times they called someone “the best student I have taught,” “in the top 1% of students,” etc.

But I sense that the impulse to quantify & disclose here is probably misplaced. To return to the Chron article I cited at the beginning, perhaps there are some more creative ways out of the problem. Though this style of recommending is directed to humanities graduate students, it could be translated to other fields:

One of our sources made a great comparison between the challenge of writing a letter of reference and the task facing Clarence, the angel in It’s a Wonderful Life: “Clarence elucidates the importance of George Bailey’s life by showing George what it would have been like if George had never been born. A great letter explains what a field or discipline would have been like if the candidate had never contributed to it, and thereby establishes the candidate’s contribution.”

Ah, the wisdom of Frank Capra. Perhaps narratives have as much a place as numbers in the assessment of excellence.

Photo Credit: It’s a Wonderful Life (George and Clarence).

How Much Should a Person Consume?

In the book “Stuffed and Starved,” Raj Patel notes the startling incongruity evident in the “simultaneous existence of nearly 1 billion who are malnourished and nearly 1 billion who are overweight.” The two groups’ disparate ecological footprint explains a lot of this paradox of excess and deprivation. Jared Diamond summarizes the data provocatively:

A real problem for the world is that each of us 300 million Americans consumes as much as 32 Kenyans. With 10 times the population, the United States consumes 320 times more resources than Kenya does. . . .The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.

Diamond believes that we can avoid resource shortfalls if basic conservation measures are put in place. He argues that “Much American consumption is wasteful and contributes little or nothing to quality of life[;] [f]or example, per capita oil consumption in Western Europe is about half of ours.” However, a Cato Institute blogger (Randal O’Toole) appears to resist even basic steps to curb American energy consumption. He says “A better prescription would be to let markets work: If we really run short of anything, the price will go up, and people will consume less.”

O’Toole neglects to note exactly who will be consuming less, but the answer is sadly familiar. As biofuels become common, an American Hummer’s gas guzzling may well be raising prices for staple foods in the poorest parts of the world:

The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter. . . Rising prices for cooking oil are forcing residents of Asia’s largest slum, in Mumbai, India, to ration every drop. Just in the last week, protests have erupted in Pakistan over wheat shortages, and in Indonesia over soybean shortages.

Though food prices have been rising in the United States, basic staples are becoming truly scarce for some of the world’s poorest. As the fungibility of food and fuel advances, the buying power externality strikes again.

Of course, it’s not merely “free markets’” fault here; the US needs to get out of the business of subsidizing ethanol and to revisit various conservation and public transportation strategies. Sadly, I doubt people like O’Toole would endorse the publicly financed political campaigns that could help end the former, or the planning efforts and taxes necessary to fund the latter. We can all have some hope that high prices will drive technological development. But, as Bruce Wilder puts it, “stories of ‘limitless possibilities’” do not constitute an argument.

Status Anxiety in the Professions

The most emailed NYT story at the moment is a litany of complaints from doctors and lawyers:

[S]omething is missing, say many doctors, lawyers and career experts: the old sense of purpose, of respect, of living at the center of American society and embodying its definition of “success.”

[P]rofessional status is now inextricably linked to ideas of flexibility and creativity, concepts alien to seemingly everyone but art students even a generation ago. “Now we have people trying to start a Facebook or a MySpace. You might be working like a maniac, but it’s going to pay off in status. You’re going to be famous, providing something people are going to know and use all over the world” [says one career guidance professional].

In a culture that prizes risk and outsize reward — where professional heroes are college dropouts with billion-dollar Web sites — some doctors and lawyers feel they have slipped a notch in social status[.]

Perhaps a brief swim in the TechCrunch DeadPool could bring these folks out of their quarterlife-style quagmire. For every glittering Mt. Zuckerberg, there’s an iceberg of “wanna-be-preneurs” with little more than a business plan and a prayer. Seriously, there are reasons for doctors and lawyers to be glum, but I think they have little to do with the fantasies of early retirement or nonstop creativity the article adumbrates.

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What’s Wrong With A Company Paying for a CEO’s Family to Fly?

120px-Bombardier.learjet60.vp-crb.arp.jpgMichelle Leder, of Footnoted, was on NPR’s Marketplace yesterday. The story: the worst examples of agency-costs in footnotes in SEC filings in 2007. (She doesn’t sell it that way, but that’s what it is.)

Bloggers have highlighted a few of Michelle’s “best” finds, including Edward Mueller’s agreement, as CEO of Quest, to permit his family members to use the company plane to travel back and forth to California (where his family was based) to Denver (where Qwest is headquartered.) Although the story was hyped as permitting Mueller’s daughter to commute daily to school — something of a modern-day Leonard v. Pepsico, there is no evidence that the family plans to fly back and forth in this way.

But who cares anyway? Increasing numbers of high-level executives work far away from home, commuting to headquarters for parts of the week. (The consultants’ four day week, but permanently.) Encouraging them to do so maximizes shareholder wealth because it (presumably) allows recruitment of talent that wants to live elsewhere. Now the problem with these schemes is that it is taxing for the executive and her/his home life to be separated from the family. As Professor Joan Heminway explains here, personal turmoil in a CEO’s life can have materially adverse consequences for shareholder value, and well-run companies probably ought to do everything they can to make executives personally happy.

So why not pay for a family to commute back to California, to enable a family member to finish her last year of high school surrounded by friends, while coming “home” to Denver when possible? If that makes Mueller happy, and reduces the chance that he would live in California and commute to Denver, Qwest’s shareholders win. If the argument is simply that the CEO should pay for this travel out of his own pocket, the flight costs will be imputed as income to him under the agreement, so the economics are basically the same. Given disclosure, these kinds of perks should be seen simply as salary-substitutes, at worst, and as ways to reduce the chance of disruption by increasing the CEO’s chance of having a normal family life.

Dailykos (which originally brought the story to my attention) had this to say:

And as this president likes to remind us, this is the ownership society, so don’t be surprised to learn that some of your retirement funds are going to fuel up that jet so an execu-kid can zip off to the prom.

But this is plainly silly. Would we prefer that Qwest simply paid Mueller more money? Or not disclosed the behavior?

The Heroism of Susan Pace Hamill

It is now sadly all too common to see public intellectuals pointedly ignoring–or even cheering on–growing inequality. Bloodless statistical accounts tend to miss the consequences that flow for poor families when taxes on the wealthiest are cut and social programs are gutted accordingly.

Professor Susan Pace Hamill has done an extraordinary job in turning public attention to this problem. According to the NYT’s David Cay Johnston, “her latest effort is a book, As Certain as Death (Carolina Academic Press, 2007), that seeks to document how the 50 states, in contravention of her view of biblical injunctions, do more to burden the poor and relieve the rich than vice versa.” Some statistics are really striking:

The poorest fifth of Alabama families, with incomes under $13,000, pay state and local taxes that take almost 11 cents out of each dollar. The richest 1 percent, who make $229,000 or more, pay less than 4 cents out of each dollar they earn, according to Citizens for Tax Justice, an advocacy group whose numbers are generally considered trustworthy even by many of its opponents.

As a cursory Google search shows, Professor Pace Hamill has honed her message with extraordinary clarity and skill in a variety of forums–law review articles, books, interviews, and even sermons. Prof. Pace Hamill’s engaged scholarship and contributions as a public intellectual provide a great model for those who seek to develop religiously inspired legal theory.

Hat Tip: TaxProfBlog; Mirror of Justice.