Category: Law and Inequality

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.

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Thoughts on Giving (and a book recommendation)

Mountain Beyond Mountains.jpg

So it’s Christmas Eve and for many C is for charity and C is for consumerism too. As Frank points out giving can be difficult in part because so many charities have become huge operations and one may wonder whether the money is going to the programs or to the administrative overhead. CNNMoney has a recent article about how to evaluate a charity. It suggests that 75% of the budget should go to its mission (what I call program) leaving 25% for administrative and fundraising costs (yes it costs money to ask for money). The article recommends Give.org and CharityNavigator.org as sites to see how a group uses funds.

Forbes has a survey of the top 200 charities by assets and efficiency. (TIP: use the sort by feature, not the article links. The links go to a useless slideshow. The sort by takes on to the charts.) Here is the efficiency list. Now it may be that some charities are not that efficient but still pretty good. Forbes suggests that 90% is quite possible and that under 70% is suspect. Remember it takes money to attract talent and raise money. Looking for charities with high efficiency is great but some programs require more in staffing to achieve goals. So another way to look at a charity is whether they offer some sort of metrics. Unlike private enterprise the return will not be as easily quantified. Still by setting goals, evaluating them, and seeing where program may need to change, many charities are better able to raise money. For it is easier to give money if one has a sense that someone is at the helm and making sure that the program is working. It may not succeed on each goal but it is focused on understanding why. In addition the idea of social entrepreneurship (see also The New Heroes) which focuses on a problem and tries to find solutions on a large scale uses some of this approach.

Now for a little consumerism. Someone I consider a friend of Concurring Opinions, Patrick S. O’Donnell, often shares excellent insights and further reading suggestions. In one such comment

Patrick mentioned several items for those interested in inequality and development. One of the mentioned authors is Paul Farmer. Although reading Farmer’s work is worth the time, one may desire something a little different from policy this time of year. As such I recommend Mountains Beyond Mountains by Tracy Kidder. It details how Dr. Farmer began and continues his impressive work in changing public health systems. So if you want to spend a little holiday money on yourself and want to read a great story that also reveals the problems and some solutions for a major social issue, get the book. I will warn that a friend told me about it, and I hated him for a bit, because I could not put it down and tend to other tasks until I finished.

Ed. Note: Ah yes Frank notes in the comments that one can give to Farmer’s cause at this link. Or I find this link easier for giving directly to Partners in Health.

Police on Steroids, Profs on Ritalin

cyborgflower.jpgThere has been some excellent blawgospheric comment on the Mitchell Report, a Black Sox scandal for our age (see, e.g., Jeff Lipshaw, Howard Wasserman, Michael Dimino and Alfred Yen). My question is: what will be the cultural impact? I think two recent stories on performance enhancement in other fields provide some clues, and suggest the wisdom of the PCBE’s worries.

First, the Village Voice has a long story on some possibly inappropriate steroid/HGH use in the NYPD. I say “possibly” for two reasons: 1) the slippery “therapy/enhancement” distinction here and 2) the threat posed by bulked up criminals. The Voice reports that “the Brooklyn District Attorney’s Office knows of 29 cops and at least 10 NYPD civilian employees—all well under the age of 60—who have received prescriptions for [steroids for] hypogonadism.” Doctors quoted in the story find it implausible that so many officers would have this disorder–but there are probably other physicians who have a much broader concept of disease. And if suspects are bulking up on illegal substances, who can blame the cops for trying to catch up?

The other story is on concentration-enhancing drugs increasingly used not only by students (an old problem), but now by professors. Andrew Sullivan asks, “So if a prof wants to do a little Provigil, it’s no worry for me. Why should it be a worry for anyone but the prof himself?” I think there are several reasons, not least the potential for medicalized competition to invade spheres of life we now deem constitutive of our identity. But for now let me just focus on how the police and profs examples intersect.

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Understanding Resistance to Redistribution

Over at Balkinization, Professor Brian Tamanaha worries that the “fabled American Dream, the supposed glue that holds our society together across its many fault lines, is a delusion for many.” He points to “new research [that] suggests the United States’ much-ballyhooed upward mobility is a myth, and one that’s slipping further from reality with each new generation.” (Even The Economist has recognized the problem!) Tamanaha wonders why the issue has so little visibility in national political debates, and gives several good reasons. I’d like to focus on one of them: the sense that increasing inequality “feels irresistible, the product of structural factors beyond our control.”

First, though this sense may be widespread, it is highly contestable empirically, and doesn’t really “ring true” at an intuitive level. Let’s not even talk about the justice or appropriateness of an executive making hundreds of times more than line workers–what about people who almost got to the top spot? As Eduardo Porter reports, “widening disparities in business, which show up in a variety of other ways, reflect a dynamic that is taking hold across the economy: the growing concentration of wealth and income among a select group at the pinnacle of success, leaving many others with similar talents and experience well behind.”

A form of “legitimation theodicy” has become important for some at the top, who reach for sports metaphors:

[Some] very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter’s “unique talent” for baseball, as Leo J. Hindery Jr. put it. “I think there are people, including myself at certain times in my career,” Mr. Hindery said, “who because of their uniqueness warrant whatever the market will bear.”

The flip side of this is a well-cultivated sense among the “losers” in the new economic order that their fates are their own fault. This is one reason why the SCHIP battle is so hard-fought right now: it is very important for those pursuing an inequality-enhancing agenda to insist that some people do not deserve health insurance. . . . and that that sin is so egregious as to be visited even upon their children.

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