Category: Law and Inequality

Compensation Caps and Relative Deprivation

Former Fed Vice Chair Alan S. Blinder’s column “Crazy Compensation and the Crisis” offers a sensible perspective on some origins of the current economic crisis:

Take a typical trader at a bank, investment bank, hedge fund or whatever. . . .[W]hen they place financial bets [they face the following odds]: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM [other people’s money] will absorb almost all of the losses anyway.

[Now] let’s consider the incentives facing the CEO and other top executives of a large bank or investment bank (but, as I’ll explain, not a hedge fund). For them, it’s often: Heads, you become richer than Croesus ever imagined; tails, you receive a golden parachute that still leaves you richer than Croesus. So they want to flip those big coins, too.

After this flash of insight, Blinder retreats into quietism, counseling that “fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees.” I don’t know why he doesn’t consider the power of an income tax system that’s much more progressive at the very top income levels. As David Leonhardt observes,

Today . . . the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change [from the past] is especially striking, because there is so much more income at the top of the distribution now than there was in the past.

Of course, we may need to be sensitive to the rising costs of living for the wealthy.
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Online Symposium: Citron’s Cyber Civil Rights

From tomorrow through Thursday, Concurring Opinions will be hosting a number of scholars invited to discuss Danielle Citron’s work Cyber Civil Rights. Responding to controversies over online attacks, Citron argues the following:

Social networking sites and blogs have increasingly become breeding grounds for anonymous online groups that attack women, people of color, and members of other traditionally disadvantaged groups. These destructive groups target individuals with defamation, threats of violence, and technology-based attacks that silence victims and concomitantly destroy their privacy. Victims go offline or assume pseudonyms to prevent future attacks, impoverishing online dialogue and depriving victims of the social and economic opportunities associated with a vibrant online presence. Attackers manipulate search engines to reproduce their lies and threats for employers and clients to see, creating digital “scarlet letters” that ruin reputations. . . .

Web 2.0 technologies accelerate mob behavior. With little reason to expect self-correction of this intimidation of vulnerable individuals, the law must respond. General criminal statutes and tort law proscribe much of the mobs’ destructive behavior, but the harm they inflict also ought to be understood and addressed as civil rights violations. Civil rights suits reach the societal harm that would otherwise go unaddressed and would play a crucial expressive role. Acting against these attacks does not offend First Amendment principles when they consist of defamation, true threats, intentional infliction of emotional distress, technological sabotage, and bias-motivated abuse aimed to interfere with a victim’s employment opportunities. To the contrary, it helps preserve vibrant online dialogue and promote a culture of political, social, and economic equality.

As I’ve noted before, I think this piece breaks new ground in applying venerable laws to the online environment. In this cyber-symposium, we propose to discuss the following issues:

What can the law do to respond to these threats?

How we deter harassment while promoting legitimate speech?

How do we balance the privacy rights of speakers and those they speak about in the new communicative landscape created by sites like AutoAdmit, Juicy Campus, Facebook, and anonymous message boards?

A list of scholars invited to discuss these issues appears below:

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Healing the Damage: Truth & Repudiation in the Agencies

I have tried to keep track of executive failures over the past eight years in financial, health, and safety regulation. But I have been overwhelmed. As James Galbraith argues in The Predator State, the past administration appointed the most extreme anti-regulatory voices it could find, across the board. Now the Center for Public Integrity has released a report on the results: the “eight-year tenure of the Bush administration was marked by more than 125 systematic failures across the breadth of the federal government.” As they note,

[T}he failures are rooted in recurring themes: agency appointees selected primarily for ideology and loyalty, rather than competence; agency heads who overruled staff experts and suppressed reports that did not coincide with administration philosophy; agency-industry collusion; a bedrock belief in the wisdom of deregulation; extensive private outsourcing of public functions; a general failure to exercise government’s oversight responsibilities; and severely slashed budgets at understaffed agencies that often left them unable to execute basic administrative functions.

The question now is, what to do about it? Responding to the administration’s torture policies and other human rights violations, Jack Balkin and Bruce Ackerman have suggested two approaches. Both of them are worth looking into with respect to some Bush-era holdovers who will be on independent agency boards for years to come.

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Individualizing v. Generalizing

Thanks to Dan for inviting me to blog this month. I’m looking forward to it.

I’ll start with two pieces in the NY Times Sunday Magazine this week that raise interesting questions about individualization versus generalization and the struggle for equality for women and people with disabilities.

In Creature Comforts, Rebecca Skloot reports on the difficulty faced by people with disabilities seeking to use a variety of animals to assist them in day-to-day public life. In doing so, she identifies the inevitable tension between the individualized inquiry required by the ADA and the urge (and sometimes need) to generalize. The people maintaining public spaces, including those who use those spaces, want bright lines about which animals are permissible service animals, while the ADA requires that they accommodate individuals with disabilities and their individualized needs.

Similarly, in The Senator Track, Lisa Belkin comments on the difficulty that women (including Caroline Kennedy) face when they seek jobs after taking what she calls a “mom sabbatical.” Belkin claims that we need to redefine “experience” so that “what you do, and think, and produce, and change all count—even if none of your activities take place in an office, where you enjoy a title and a salary.” This call for individualized inquiry, however, butts up against the simplicity and utility of generalization; in short, working in an office with a particular title serves as a general proxy for a group of skills that Belkin would have employers examining on an individual basis (e.g., ability to run meetings, to arrive on time, to manage accounts, etc.).

The fight for individualization over generalization is a worthy one. In setting up the equality struggle in this way, however, both pieces miss an important component of the battle: longstanding and entrenched biases. In the disability context, our perceptions and judgments about the suitability of certain animals for public accommodation are undoubtedly intertwined with our biases regarding difference (and our definitions of “normalcy”). It will be much easier, I expect, to get people to accept, for example, horses as service animals for the blind than it will be to get people to accept a parrot as a service animal for a man prone to psychotic episodes. Similarly, the difficulty faced by women who take time out of the traditional work force to provide care for family members is as much one of stereotypes as it is of a more neutral inclination to generalize. I’m reminded here of research by sociologist Shelley Correll and colleagues at Cornell on the motherhood penalty (for a recent review of the research the work in this area, see Stephen Benard et al., Cognitive Bias and the Motherhood Penalty, 59 Hastings Law Journal 1359 (2008)). This research suggests that a woman seeking to reenter the traditional work market will have to overcome stereotypes that her male counterpart will not. Imagine a mother and a father who each picks up a child from your neighborhood school, Monday through Friday at 1:30 pm. You bump into each one and engage in conversation; which one do you expect will have an easier time convincing you (through subtle signals or otherwise) that he/she is engaged in workforce-related activities between 9:00 and 1:00?

IBG: Foundation of American Finance Capitalism?

Thomas Friedman delivers today with a column that makes me proud he’s a fellow Marshall Scholar. My favorite paragraphs:

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

[T]his legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated. . . . The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense.

Thank you, Mr. Friedman. Finally, respectable opinion is coming around to a view that the “man on the street” has intuited for some time: the recklessness of contemporary finance capitalism is systemic, not merely the product of a few bad apples. A passion for deregulation and budget cuts left an administration unable to detect even the grossest frauds. In that culture, virtually anything went. And as the Bush years come to a close, I expect many inspector generals across the administrative state will be detecting ever more wrongdoing.

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Who Hid All the Poor People?

Former Reagan speechwriter Peggy Noonan recently commented on a strange incongruity in the current economic downturn–everyone she sees seems to be doing all right:

One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. . . . And yet when you free yourself from media and go outside for a walk, everything looks . . . the same. . . . [For example,] [e]veryone’s still overweight.

Charlie Gibson of ABC may have the same problem. Perhaps we are just a “nation of whiners,” as Phil Gramm claimed. But Wonkette dissents:

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Payday Lenders’ Creative Electoral Tactics

Who’d guess that my worries about the political power of the financial sector and Jaya’s concerns about misleading ballot initiative wording would converge? Easha Anard reports on the trend:

Payday lenders are spending millions of dollars to back ballot initiatives that challenge state restrictions on their cash-advance practices. . . . [In Arizona], Yes on 200 is financed by the local affiliate of the Community Financial Services Association, a national payday-lending group. . . . . [T]he wording of the ballot initiative suggests it would impose further regulation on payday lenders; in fact, it would roll back much tougher rules. Yes on 200 is promoting the initiative with a counterintuitive strategy: spending money on ads that depict payday lenders as unscrupulous. One ad says, “Arizonans agree: Payday lenders who rip off hard-working Americans need to be stopped,” and asks voters to support the ballot initiative.

Now those are people you can trust! No regulation needed for them.

I wonder if Bryan Caplan would consider those who want to regulate payday lending financial illiterates–and approve this “noble lie” as a way of promoting better policy?

Parasitism, Inc.: A Deficient Markets Hypothesis

elgrecomoney.jpgAccoring to an article by Jonathan Ford of Prospect, the finance sector gobbled up nearly 35% of total corporate profits in the US and Britain in 2005. As financier-turned-academic Paul Woolley observes in the piece, “There is no economic merit in a sector that makes exceptional profits and devours capital and labour, and then justifies it on the grounds that you can get some ‘cash back.'”

Woolley’s analysis animates the article and should wake up anyone still complacent about the validity of the “efficient markets hypothesis.” Ford points out a cozy revolving door relationship between academics, regulators, and tycoons in high finance. All were complicit in a parasitic reallocation of money from the real economy to speculative games designed to enhance cream-skimming at the top:

While the efficient market idea held sway, academics viewed the expansion of finance with equanimity. . . . Financial instruments always existed for a purpose—such as to pass on risk cheaply and efficiently to the investor best placed or most willing to bear it. If that were not the case these products simply would not exist. More trading was beneficial because it enhanced liquidity, and liquidity lowers costs and promotes efficient pricing.

But, according to Woolley, the scale of derivatives trading should be seen as symptomatic of distorted markets. . . . [M]omentum causes mispricing which in turn creates an insatiable demand for active management. This then spills into the derivatives markets in various ways. For instance, the investor responds to the volatility of the equity market by hedging his risk and buying a put option (giving the right to sell shares at a pre-determined price). The seller of the put protects his own exposure by selling equities. The investor has thus brought about, at a cost, the very event he was seeking to insure against.

Both Ford and Woolley still endorse “market solutions” to the crisis, such as “lengthening the period over which performance is assessed,” so that bonuses depend less on quarterly and annual results. Dilip Abreu has proposed similar realignment of incentives for ratings agencies. But I’d like to see more public involvement in investment decisions generally–a move featured in the stimulus plan Timothy Canova has suggested.

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Evolutionary Pressures on Minds and Bodies

Corpus 2.0, a recent design project on potential human bodily evolution, has been spreading around the web. One model with a shoulder bump finds it much easier to keep her handbag steady. Other forms of “progress” include a “ridge in the nose developed for wearing glasses, ears moulded to accommodate earphones, a thumb with an extra joint for sending SMS messages more efficiently and a foot adapted to create the same posture as wearing high heels.” This work struck me as a less critical version of the “future farms” and other body modifications both proposed and ridiculed at the “Design and the Elastic Mind” show at MOMA earlier this year.

While many find these particular modifications to bodily form grotesque, opposition to unfortunate evolutionary pressures on attitudes and mental habits strikes me as much less developed. That’s one reason I cautioned against runaway “cognitive enhancements” in an article last year. The founder of Better Living Through Chemistry predicts that we should be happy to choose “average hedonic set point[s] of our children. . . . [so that] allelic combinations . . . .that leave their bearers predisposed to unpleasant states of consciousness . . . will be weeded out of the gene pool. . . [leading to] some form of paradise-engineering.” Following Walker Percy, I think such people are actually quite useful to a world too prone to “irrational exuberance”–even if introversion is maladaptive for the introvert himself.

Rankings Abroad: Watch out for the Sin Bin

This piece in the CHE covered the increasing importance of international rankings systems to universities around the world (including the US).

Shanghai Jiao Tong University’s “Academic Ranking of World Universities,” assigns scores to institutions on the basis of four factors: quality of education, quality of faculty, research output, and per capita performance. . . .Quality of faculty counts the number of staff members who have won . . . awards as well as the number of “highly cited researchers” in 21 fields. . . . The “Times Higher Education-Quacquarelli Symonds World University Rankings” is more heavily focused on reviews by academics, which account for 40 percent of an institution’s score. A survey of employers contributes 10 percent. The rankings also consider the faculty-student ratio, the proportion of international faculty members and international students, and the number of citations per faculty member.

Germany reached a recent decision on dividing nearly two billion euros among designated universities largely on the basis of how strong they were in research. In France, a central goal of a new law intended to shake up the higher-education system is increased collaboration among institutions involved in scientific research.

Meanwhile, rankings appear to be shaping secondary schools abroad as well; Neal Lawson reports that in Britain, “private companies will run ‘sin bin’ schools for excluded pupils and . . . more parents are using lawyers to secure school places.” Lawson worries that rankings-mania will make education “a positional good – one that is valued only because it gives one child a better education than another.”