PROCÈS-VERBAL

A short post in response to some comments I read recently in a blog series over at New Economic Perspectives. In particular, some of the comments characterizing the workforce, and doing so inaccurately:

Critics of JG/ELR. Critics argue that a job guarantee would be inflationary, using some version of a NAIRU-Phillips Curve approach according to which lower unemployment necessarily means higher inflation. Some argue that JG/ELR would reduce the incentive to work, raising private sector costs because of increased shirking, since workers would no longer fear job loss. Workers would also be emboldened to ask for greater wage increases. Some argue that the program would be so big that it would be impossible to manage it; some fear corruption; others argue that it would be impossible to find useful things for the workers to do. It has been argued that a national job guarantee would be too expensive, causing the budget deficit to grow on an unsustainable path. We will examine some responses to these criticisms in the following sections.

While, in the terms of their discussion, the economic impact of full employment, i.e., inflation and an upward shift of equilibrium (prosperity), has validity, characterizations of employee behavior and incentives in the quote above, are ill-founded, specious and need to be refuted. I come to this from working in a series of small, successful start-ups, and I’ve seen a lot of new hires up close over the last four decades.
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Lately, I’ve been harping a lot on the “rentier economy” of the US, and this is not entirely accurate and by no means comprehensive. But it is very significant and a hard-headed clarification of roles and terms is called for.
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The libertarian bastion Cato Institute is at this moment in court fighting for its life. The attack comes not from the dreaded government, not from the liberal left, but from its libertarian founder, Charles Koch, who apparently believes Cato should abandon the trappings of a think tank in favor of a more directly partisan role in the 2012 election cycle.

Cato was founded in 1974 as the Charles Koch Foundation in Wichita, Kansas. To put this in perspective, this was a period when the groundwork was being laid for a revival of Lochner era jurisprudence, i.e., a reluctance on the part of the courts to uphold any law which infringed upon the machinations of free markets. During this period, Bernard Siegan penned his Economic Liberties and the Constitution, James A. Dorn, his Economic Liberties and the Judiciary, along with Henry Manne, who is described here as an intellectutal entrepreneur, and who was busily on tour giving lectures, holding seminars, and becoming dean of George Mason University Law School.

It was in this period of intellectual ferment that Charles Koch used his wealth to get in the game. The Cato Institute now publishes two peer-reviewed journals, The Cato Journal and Regulation, as well as a variety of newsletters, research papers and more. Apparently, however, this is no longer enough for Koch. As a nonprofit corporation, the Cato Institute has an unusual structure allowed under the laws of Kansas. Funded entirely by donations, Koch enjoys some unusual rights even though the Koch Brothers are no longer the primary donor:

Although they don’t receive dividends like shareholders of a for-profit company, the structure gives the Koch brothers power to appoint half of Cato’s board. In most nonprofits, new directors are elected by the organization’s membership or the current board members.

“We think it’s a really bad structure,” said Robert Levy, Cato’s board chairman. “We’ve repeatedly asked that it be changed.”

So here we are, witnessing an absurd chain of events in which a corporate board of directors battles founders for control of one of the most influential conservative think tanks in America. We are also witnessing the power of the Koch family wealth, as well as the scope one wealthy individual enjoys. One wealthy individual who has no problem varying from the truth:

We seek no ‘takeover,’ and this is not a hostile action.

This is at odds with both the words and deeds of the Koch brothers of late. Last year, they used their shares to place two of their operatives – Kevin Gentry and Nancy Pfotenhauer – on our board against the wishes of every single board member save for David Koch.

We want to ensure that Cato stays true to its fundamental principles of individual liberty, free markets, and peace into the future, and that it not be subject to the personal preferences of individual officers or directors.

Let’s take a look at a few of these new board members of ours. Kevin Gentry is a social conservative activist who’s also vice-chair of the Virginia GOP. Nancy Pfotenauer is a former spokesperson for the McCain campaign who has argued on television in favor of theIraqwar [sic] and the “don’t ask, don’t tell” policy pertaining to gays in the military. Ted Olson is a Republican super-lawyer who’s never identified himself as a libertarian.

The shareholder agreement ensures that donor intent will be honored.

Sometimes I hear that this is less about donor intent than it is about founder intent. Well, if we define “founders” as those initially given shares in Cato, only three of the five original shareholders remain alive and thus can have an informed opinion about these goings-on; Charles, Ed, and George Pearson. Two of those three are appalled by what is going on and want the shareholder agreement dissolved.

This is simply about the rule of law.

Regardless, as you well note, this bid by the Kochs to take over Cato – if successful – can only lead to the destruction of the most prominent and influential libertarian think tank in the world.

The shareholder agreement has worked well thus far and so it should continue to be respected.

Shareholder control has been dormant for decades. The shareholders have not met – in person or on the telephone – from 1981 through 2008. No shareholder had asked for a meeting over that time despite a requirement of annual meetings.

—Jonathan H. Adler, The Volokh Conspiracy, Koch V. Cato — A View from Cato. Accessed 4 March, 2012.

In attempting to pack Cato’s board with GOP political operatives (and dispensing with the pretense that the Cato Institute was ever anything but politically driven), the Koch brothers are attempting to get all their ducks in a row for the 2012 election cycle, uniting Cato with Americans for Prosperity, if not it’s poorer sibling, FreedomWorks, both Koch organizations as well. This is how American politics works. A few wealthy people can cobble together a coalition of voters and activists spanning class and regional differences: Cato for the thinking conservative. Americans for Prosperity for the businessmen who do, and FreedomWorks for the culture warriors. Both FreedoWorks and AFP provided substantial support for the Tea Party movement as well. Is this the secret of GOP unity, or merely an affect? I don’t know. However, having major, well-funded, and diverse organizations under such tight control is certainly a fact of American political life which cannot be ignored in either case. Certainly, it is a wonderful illustration how just two people with enough money can build such enormous political reach.

I cannot say that I’m not enjoying watching these libertarians revolt against being given their marching orders from the “private sector,” or that I have not escaped feeling rather smug while watching my intellectual and political opponents make my point that, at the very least, being driven by government fiat is no worse than being driven by the whim of a wealthy individual or a corporate group.

So while I sit back and enjoy the show, it should be noted, once again, that irony should be avoided at all cost.

There are many instances of what could be called a state of the union address already written. One which comes to mind immediately is Nicholas Kristof’s excellent op-ed, America’s Primal Scream published last October:

IT’S fascinating that many Americans intuitively understood the outrage and frustration that drove Egyptians to protest at Tahrir Square, but don’t comprehend similar resentments that drive disgruntled fellow citizens to “occupy Wall Street.”

I am certain most Americans have seen other examples. Suffice it to say that most Americans, even if they disagree on certain fundamental issues, such as the role of government in society, agree on the reality of inequality in America. It is well and reliably documented.
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If you’re interested, parts one through five of my #occupywallstreet #occupyboston series:

• Part 1 – Premises
• Part 2 – Race to the Bottom
• Part 3 – The Beginnings of a “Demand”
• Part 4 – A Work in Progress or Mission Accomplished?
• Part 5 – 150,000 New Reasons To #occupywallstreet

“President Obama is the only candidate for president who shares our vision of America as a land of opportunity for everyone. We need a leader willing to fight for the needs of the 99 percent, and stand with hard working families to say that the world’s wealthiest corporations must pay their fair share”

      —SEIU President Mary Kay Henry’s endorsement release

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“Speaking For Myself . . .”

In an earlier post, I expressed my feeling that the story of wealth inequality playing out across America was merely the tip of the iceberg. It is, in fact, little more than a soundbite. In various and subtle ways, the structural weaknesses and injustices (negative externalities) generated by free financial markets impose costs many of which remain off balance sheets but are, nonetheless, imposed on all either through market prices or through taxes. Simply leveling the playing field through measures like the financial transaction tax and Tobin tax, which I think are vital, does nothing to address other underlying problems which unregulated finance has inflicted upon us all. Today’s absentee landlords are known as shareholders, and include a huge proportion of working Americans, who know very little of where their money is being invested and nothing at all about who is managing their money or how they are managing it.

Fortunately for me, we have yet another example of Wall Street mismanagement: 150,000 is the number of investors, some of whom will have to wait for years before they see their money, directly affected by the MF Global collapse. I know these people, or people very much like them, and in the larger sense, almost all of us are these people. If you have a 401k or an IRA. If you have or are thinking of investing in financial markets, you are one of these people. You are those who largely accept the tenets of capitalism (I do, but with caveats): that if you work hard enough, you get a little lucky, and you get to reap the rewards of your efforts. If you are one of those who believes in the integrity and good faith of those you entrust to handle your money, do your accounting, and those who run the firms you invest in, you are one of those people. I believe markets are the most efficient means to determine value/price, though not always-witness the housing bubble. There is a very good case for wondering if this has been warped as well – take a good, cold hard look at securities markets today and ask yourself the degree to which greater fool theory determines value, because really, who is a value investor anymore? What else does technical analysis actually describe? Underlying value? Please. We treat the hard-work-yields-success paradigm as if it were a cause-and-effect dynamic, but the truth is, more than a little luck is needed. And to those who wish to throw the maxim that people make their own luck (through diligence and intelligence) at me, I’d have to say that luck plays a far greater part than you might think. One can fail through lack of effort at a crucial point or the flaw intellect has failed to detect, but neither hard work nor smarts will guarantee success either, because strength has limit, knowledge is not perfect and the state of the marketplace itself is dynamic. The markets at all levels, like life, really are a gamble.

We assume that the managers act with integrity (but we don’t know), and that the regulators are on the case making sure that forms are followed (which is hardly ever true).

So I admire the small business entrepreneurs, whether they make it or not. They makes the attempt knowing that they don’t know everything they need to know, and hope that flexibility, determination and thought will suffice to make up the shortfall; and they hope that the vagaries of pure chance and hazard pass them by.

About a year ago, a customer came up to me with a few books on how to start your own business. Her teen-aged daughter stood next to her. Dressed as a professional, she looked bright enough, and I took a deep breath then asked her if she was thinking of starting her own business. She said she was. I glanced over at her daughter, then looked her straight in the eye and told her that if she decided to go ahead with this, she should have the backing of her family beforehand, because she wasn’t going to be available for them for several years, and that was the case if all went well. She smiled and thanked me.

I saw her again a few weeks ago. I didn’t recognize her, but she knew me. She told me I was right. She said that her business was doing great and she had even been offered a publishing deal in the event she wanted to write a book. (If not a secondary profit generator, it is at least fabulous marketing opportunity.) She told me that she thought that she could control the business, rather than the reverse, but that plainly, business demands had trumped all other concerns.

Running a business is more absorbing, more demanding, than having a family. I know. I’ve been through the startup adventure five times.

For the record, about 66% of all startups fail within 36 months. Yet another reason to admire their grit, and the truth is that their hard work is rewarded with failure rather than success by a whopping margin.
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I don’t know how it began. I’ve seen AdBusters magazine but I admit I’ve never opened one up. I’m really hazy on when it began too. I’m a johnny-come-lately to the #Occupy movement, and if I hadn’t spent the past three to four years playing catch-up in economics and political economy, I’d probably be pissed off when a “Breaking News” segment about events taking place at an #Occupy site (which probably would only have been the result of a police raid) interrupted the ballgame or movie I was watching just like everyone else. As it turned out, targeting Wall Street was perfectly tailored to my concerns because in a quiet way, I’ve been examining some of the basic assumptions underlying our corporate economy for years myself.

So I don’t think buzz over #Occupy Wall Street and wealth inequality goes far enough, but that’s for another post. It is, nonetheless, a good place to start.

I have, on quite a few occasions, told tweeps that the #Occupy movement would trade the tents and sleeping bags in a heartbeat for CNBC, WSJ, Bloomberg’s cable channel and BusinessWeek, CNN Money, Barrons, and all the news slots devoted to the daily market news. A huge media behemoth devoted to, as the ads during the 70′s when individual investing began to take hold used to say, “making your money work for you.”  (As opposed to actually going out and earning a wage and surviving on that alone. In America, more than anything else, it matters where your income comes from.) All of which was concerned with “Your Money,” the insane antics of Washington and the European debt crisis, or whatever market moving news of the day turned out to be, along with business friendly commentary from the likes of Larry (“Lawrence of America”) Kudlow, who had at one point two prime time slots on CNBC. #Occupy has tents, and the intention of staying until . . . something happens.
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Speaking For Myself . . .

It’s not that I never intended to reach this point, because all this has been simmering within for years. The timing, however, is prompted by an short exchange on Twitter with @cspenn in response to his post on #occupyboston, noting (yet again) that the movement seems to lack focus:

• @cspenn: #the5: 3 takeaways I learned yesterday visiting #OccupyBoston: bit.ly/uN7RdP

• Me: @cspenn A closer look at all the items in your list tells me there’s more focus than you give the people you spoke with credit for. . . Many of those items are manifestations of crony-capitalism, for instance. Or just plain corruption . . . Note the comparative lack of cultural issues brought up, for instance. In this context, another effect of cronyism.

• @cspenn: @papicek I totally agree there are commonalities, but saying “end corporate greed and corrupt politics” isn’t quite a solution or focus.

• Me: @cspenn For my part, the solution is already out there: level the playing field through taxation & enforcement . . . Some effort needs to be given on the topic of legal doubt, which tax cheats depend on.

• @cspenn: @papicek That presumes the governing authority behind taxation/enforcement is not corrupt, however.

• Me: @cspenn See what happens? You introduced another topic which dissolves focus! It’s moot, however . . . Because once the taxes are in place, the desired effect is in process.

• @cspenn: @papicek the better question is: what is the linchpin, the shatterpoint, that holds much of the corrupt system in place? Break THAT.

• Me: @cspenn A systems view. You’re looking for a leverage point. But the problems permeate our society, from the Absentee landlordism of NYSE . . . to a quite demonstrable racial inequality in America. A single leverage point won’t suffice.

Poor guy. I hit him with a barrage of tweets (this recreation is pulled together to simulate the exchange as I saw it, and contains minor edits), replying to his in a somewhat random fashion. He must have thought I was as lacking in focus as he feels #Occupy Wall Street appears to him. Because his points are pertinent and well taken, I decided that now is an good time to pull together the earlier posts in this series and synthesize a program going forward.

A program, not a demand, please note.
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“Our soundness standards should be no more or no less stringent than those the market place would impose. If banks were unregulated, they would take on any amount of risk they wished, and the market would price their capital and debt accordingly. Ideally, banks should also face regulatory responses to their portfolio risks that simulate market signals. And these signals should be just as tough, but no tougher than market signals in an unregulated world. Perfection would occur if bankers had a genuinely difficult choice deciding if they really wanted their institutions to remain insured or become unregulated.”
— Alan Greenspan Banking in the Global Marketplace

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“The Class [A] through Class [C] Notes will be governed by, and construed in accordance with, the law of the State of New York. The Class [D] Notes will be governed by, and construed in accordance with, the laws of the Cayman Islands.”
— Goldman Sachs, ABACUS 2007 AC1, Indicative Terms, Page 20.

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@papicek you say borrowed, I say stole… The govt is way too big. It’s a beast that we should starve. Riddled with cancer.”
— @BrocktonDave

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“I’m down here to figure out what I think.”
— Governor Deval Patrick at #occupyboston, 15 October 2011

The events of the last six weeks have been exhilarating to follow on the ground and on Twitter. At last the grassroots have found a voice, and in targeting Wall Street, their aim is true.

What follows might be read by some as an attack on free markets, open markets and the freedom of contract, and to some extent this is true, yet this is not entirely so. Early on, the question, “why do you occupy?” was asked and for me, the short answer is: I know too much not to sympathize and support the Occupy movement. So what follows is essentially some of that longer answer, which only touches on the myriad reasons to demand real change in American society. What follows is a mixture of personal and reported experience with a macro view of what this means to everyone.
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