Archive for May, 2018

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Austin O’Brien is a J.D. Candidate (Class of 2019) at the Fordham University School of Law and a former student of mine at the University of Notre Dame. He sent the following response to my recent piece on “utopia and markets,” which I am pleased to publish here as a guest post.

Dear Professor Ruccio,

I have been enjoying your recent blog posts on various dimensions of utopia. The one about “utopia and markets” struck a particular chord with me as I had my Corporations exam last Tuesday. Throughout the course, I noticed that corporate law itself has certain utopian elements. The very notion of a fiduciary duty to the corporation and shareholders (and creditors, when the business is on the brink of insolvency or is insolvent) enshrines the notion that an officer or director should maximize shareholder value, that is, the surplus to which they have access through their holdings and dividends. But, what I find to be most interesting is the flipside of this: it is not only the case that officers/directors should maximize value, but also that they are obliged to do so and, when a shareholder prevails in demonstrating that this duty has been breached, the breaching party must be punished. I think this counters the notion that profit-maximizing behavior is “natural.” The utopia that these duties try to build is one where officer/directors maximize (surplus) value at the behest of those who have claims on the surplus. So, the maintenance of capitalism takes extraordinary (legal) efforts just to compel officers/directors to act in the manner prescribed (as opposed to merely discovered or described) by neoclassical theory. Thus, the hegemonic economic utopian project is an active project that makes legal recourse an option when officer/directors take actions that do not allow investors to benefit from the exploitation that is at the heart of the firm’s consumption of labor power.

Let me try to explain what I mean. Corporate law is premised on the notion that it governs voluntary exchanges among sophisticated parties who seek to maximize profits.  Those individuals subject to corporate law are none other than the economic actors that fit neoclassical economists’ understanding of human nature: rational decision-makers who maximize utility or profits under conditions of scarcity. Well, that is at least the set of individuals corporate law deems itself to oversee. Perhaps it is more likely that this type of actor is the type of actor that corporate law intends to create. This rational actor is the dream of corporate law. Indeed, perhaps this homo economicus is proscribed by corporate law. In fact, if corporate law is largely in place to assist in profit-maximization, then this is the type of actor it must demand so that its project may succeed

The very heart of corporate governance lays bare corporate law’s project. At least with regard to the enforcement of particular norms among corporate officers and directors, the notion of a fiduciary duty is central to corporate law. Fiduciary duties arise in many contexts. In corporate law specifically, a fiduciary duty typically refers to the duty owed by a corporate officer or director to the corporation’s shareholders. The duty of care (i.e., the duty to make informed business decisions) and duty of loyalty (i.e., the duty to not use their position as officer or director to further their private interests) are hallmark examples of such a fiduciary duty. Now, the idea of these fiduciary duties is that they protect a corporation’s shareholders by ensuring that a corporation’s officers and directors are actually acting for the benefit of the shareholders and, more generally, the corporation itself. And what is the benefit of being a shareholder of a corporation? In short: a share of the profits. Shareholders benefit from a corporation’s increasing (rate of) profit(s), especially when profits are used to issue dividends.

This seems fairly innocuous at first glance. It is this mass of shareholders, after all, who vote for and elect the directors. And, it is this group of directors who select the corporation’s officers. But the tension is hidden in plain sight. If corporate law (and neoclassical economics) takes as given the idea that firms maximize profit and that such behavior is natural, then why the need to ensure that profit-maximization occurs? While corporate law is premised upon the notion that it oversees the activities of sophisticated rational individuals interested in profits, the ultimate scandal is when an officer or director is this very individual who behaves accordingly but to the detriment of the class that has claims on a corporation’s profits. See, the problem for corporate law is the possibility that a rogue officer or director might maximize their own gains to the detriment of the shareholders.

In trying to address this tension, corporate law, by way of imposing and enforcing fiduciary duties, unwittingly brings in class through the back door. One of the many problems with capitalism is, of course, rooted in the fantastical belief that self-interested individuals acting selfishly somehow bring about, in the aggregate, the best possible social results. Well then, why the need to punish these self-interested officers and directors? Shouldn’t it be the case that, by the invisible hand, capitalists benefit in the aggregate when capitalists act selfishly? The answer is, simply, no because capitalism is a class system that must be vigorously maintained to reproduce itself across time. In this case, it is maintained not only by proscribing (as opposed to merely discovering) how corporate officers and directors behave, and not only obliging them to act to the benefit of a specific class of capitalists, but also legally punishing such officers and directors when they do not act to the benefit of corporate shareholders. For the maintenance of capitalism, this is a necessary fix. It is a needed measure to build the neoclassical utopia by ingraining specifically neoclassical values into the decision-making of corporate officers and directors. So, when corporate officers and directors do act for the benefit of the corporate shareholders, they are not doing so because of some innate nature, but rather according to a specifically proscribed set of values that are enforced by the specter of shareholders seeking legal recourse for a breach of a fiduciary duty.

It becomes increasingly clear that corporate law itself is an active project shaping the way corporate actors behave as economic agents. In the end, if corporate shareholders are not able to successfully lay claim to a share of the profits arising out of the private and productive consumption of labor power, then what good is it to be a capitalist? For capitalism to (re-)produce itself across time and space while maintaining legitimacy within the capitalist class itself, capitalists must be able to do as capitalists do: extract surplus-value from the production process through the consumption of labor power.

Thus, celebrating when ill-behaved corporate directors are caught and punished as if such a victory is yet one more blow to the legitimacy of capitalism misses the point: punishing such actors maintains, indeed even reinforces and reinvigorates, the capitalist organization of society. Shareholders taking legal actions for a director’s or officer’s breach of a fiduciary duty is part and parcel of furthering the utopia envisioned by neoclassical economists. The ideal corporate officer or director, according to the neoclassical utopian vision, is a quasi-religious one that directly contradicts the neoclassical view of human nature: an officer or director who acts selflessly to the benefit of the shareholders. Of course, such directors and officers are far and few between. It should then come as no surprise that corporate directors regularly bestow lavish compensation packages upon corporate officers to ensure that these officers take actions to maximize (surplus) value for shareholders. And, if a director or officer does breach their duties, they are a bad capitalist who are nearly certain to be replaced by a good capitalist, that is, one who maximizes corporate profits. So, a bad corporate actor, at least in the terms of corporate law, is really an actor who fails to uphold specifically neoclassical values that sustain the capitalist system of relations. And one should not forget that, in light of the Marxian critique of these capitalist social relations, this fight over profits is a fight over the surplus-value extracted from workers.

Perhaps one can readily imagine a different set of values and an alternative alignment of duties. Imagine a scenario in which workers are the shareholders and elect the boards of directors. This would be remarkably different. Rather than being incentivized to further extract value in the consumption of labor power, directors (and their corporations’ duly appointed officers) would have an incentive to reward workers with the value created by the workers’ very labor. But this is antithetical to capitalism and corporate law as they stand today. This set of values would turn the system on its head. And turning this system on its head means first pointing out corporate law’s blind spots, tensions, contradictions, and values that it takes for granted yet furthers in its quest to build a very particular vision of society. This task of criticism is rooted in the recognition that corporate law actively maintains capitalism all the while providing active measures to bring legal actions to those with claims on the surplus against those officers and directors who stand in the way of shareholders enjoying the fruits of others’ labor.

mike3june

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The majority of government expenditures in the United States go towards social insurance and means-tested transfers.* And the good news is, they work.

According to recent report by Bruce D. Meyer and Derek Wu, Social Security cuts the poverty rate by a third—more than twice the combined effect of the five means-tested transfers. Among those transfers, the Earned-Income Tax Credit and food stamps (officially, the Supplemental Food Assistance Program) are most effective. All programs except for the tax credit sharply reduce deep poverty (below 50 percent of the poverty line), while the impact of the tax credit is more pronounced at 150 percent of the poverty line. For the elderly, Social Security single-handedly slashes poverty by 75 percent, more than 20 times the combined effect of the means-tested transfers.** Supplemental Security Income, Public Assistance, and housing assistance have the highest share of benefits going to the pre-transfer poor, while the tax credit has the lowest.***

And the bad news?

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Even after all those expenditures, more than one tenth of Americans are still struggling to survive at or below the poverty line—12.7 percent according to the official poverty measure, 14 percent according to the Supplemental Poverty Measure.****

U.S. capitalism leaves such a large portion of the population in destitute circumstances that even massive public spending has not been able to solve the problem. In other words, anti-poverty programs work—but the mountain of poverty created by the American economy is simply too large to overcome.

But wait, it gets worse.

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Every year, the federal government doles out billions in “tax expenditures” to corporations (especially those that allow multinational companies to delay paying U.S. taxes on their foreign profits and “accelerated depreciation,” effectively a tax subsidy for spending on machinery and equipment) and individuals (through deductions for retirement savings, employer-sponsored health plans, mortgage-interest payments and, sweetest of all, income from watching the value of your home, stock portfolio, and private-equity partnerships grow). According to the Center on Budget and Policy Priorities, the total of all federal income tax expenditures in 2017 was higher than Social Security, the combined cost of Medicare and Medicaid, or the combined cost of defense and non-defense discretionary spending.

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The bulk of each year’s spending on individual tax expenditures is delivered in the form of deductions, exemptions, or exclusions.  The value of these tax breaks increases as household income rises: the higher one’s tax bracket, the greater the tax benefit for each dollar that is deducted, exempted, or excluded. As a result, these tax expenditures provide their largest subsidies to high-income people (27.5 percent to the top 1 percent in 2015), even though they are the individuals least likely to need financial incentives to engage in the activities that tax expenditures are generally designed to promote, such as buying a home, sending a child to college, or saving for retirement.  Meanwhile, moderate- and low-income families receive considerably smaller tax-expenditure benefits for engaging in these activities (only 22.3 percent for the bottom 60 percent of American taxpayers).

Eliminating those welfare programs for the rich would go a long way toward improving and expanding the anti-poverty programs for the nation’s poor.

Alternatively, the American economy could be reorganized so that it doesn’t generate such obscene levels of poverty in the first place, thereby eliminating the need for the endless debates about the size and nature of government programs to help the poor.

 

*Social insurance programs are available to all individuals who have experienced unfortunate circumstances or are aged. These programs include Social Security retirement and disability insurance, unemployment insurance, and Medicare. Means-tested transfers provide cash or in-kind assistance to only those with the lowest incomes. These programs include the Supplementary Nutrition Assistance Program (formerly, food stamps), Supplemental Security Income, and Public Assistance, as well as certain tax credits, housing assistance, and Medicaid. All told, according to my calculations (based on the historical tables from the White House Office on Management and Budget), these programs constituted 60 percent of all federal outlays in 2015, in addition to a large share of state and local spending.

**Another consequence of Social Security, as noted by Christina Gibson-Davis and Christine Percheski, is that the net wealth across the range of elderly households grew from 1989 to 2013 since “With stable income, fewer older people dipped into savings to pay their bills, and they had more money to invest”—in contrast to households with children most of whose wealth declined during that same period.

***The Supplemental Security Income program is a federal cash-assistance program specifically targeting individuals with low incomes and who are also aged (65 or over), blind, or disabled. Public Assistance broadly refers to benefits (often in the form of cash welfare) offered by state and local governments to needy families and individuals. An especially prominent program is the Temporary Assistance for Needy Families program, which is federally funded but run by states and targeted to low-income families with children. The Earned-Income Tax Credit is given to individuals and couples with positive earnings, especially those with qualifying children. Federal agencies as well as states and localities offer a wide variety of housing assistance programs, including rental houses or apartments that are managed by local housing agencies and funded by the Department of Housing and Urban Development and vouchers to tenants who are free to choose any housing that meets minimum health and safety standards.

****The supplemental measure extends the official poverty measure by taking account of many of the government programs designed to assist low-income families and individuals that are not included in the official poverty measure.