In Search of Capitalism: Copenhagen

Denmark has long dominated world happiness rankings. Last fall The Earth Institute ranked Denmark first in happiness based upon surveys and  a United Nations commission ranked them first this spring based upon a statistical analysis of life expectancy, GDP per capita and freedom with respect to life choices.  I have previously blogged about various aspects of the Danish economy, here, with a particular focus on its high standard of living, high taxes and low inequality. As noted in that post, Denmark sports the highest taxes in the world as well as very high economic performance.

Since I have long believed that an economic system is only as good as the well-being of its people, I visited Copenhagen this month to see first hand what life in Copenhagen is like and to learn more about the law and economics of Denmark. I learned some amazing things.

For example, Denmark boasts excellent transportation infrastructure. I took a high speed train (112 mph) from my hotel to the airport in minutes. The ride was easy, cheap, fast, safe, clean and even fun. No taxi was needed at all. The airport also has a subway connection but my hotel was too far for that even less costly option. Copenhagen  Airport itself was one of the most convenient and modern airports I have ever seen. It is currently the 17th ranked airport in the world. We cleared security in less than 3 minutes.

I also traveled across one of the coolest bridges in the world into Sweden. Oresund Bridge won the Outstanding Structure award in 2002. The bridge exemplifies the outstanding economic infrastructure Denmark enjoys, ranking 13th in the world according to this recent survey.

Copenhagen also is a bicycle paradise. An astounding 52 percent of the population commutes by bicycle. I spent several days biking around Copenhagen and the paths are so safe (separate lanes for bikes separated by curbs and with independent bike traffic signals) that few even need helmets. I am convinced that if I lived in Copenhagen I would live longer and happier based upon their bicycle infrastructure alone. In short, massive investment in infrastructure greatly improves life for everyone in Copenhagen.

Denmark also excels in investing in its people. I met a young college student working at a brewpub. According to him Denmark offers free college education to all its citizens and even pays students to attend through a generous living stipend. We in the US know that such a program pays economically as studies show that the original GI Bill paid between 5 to 12.5 dollars in growth and for each dollar the government spent educating our World War II veterans. In Denmark free higher education is viewed both as an economic imperative as well as part of a well-functioning democracy. Educated citizens are less susceptible to calls by growth-retarding elites for excessive tax cuts and macro-economically pernicious deregulation.

The rich and powerful live quite well in Denmark too. I saw more Benzs here than in Beverly Hills and more Porsches than on Chicago's Gold Coast. Further, Copenhagen boasts the best restaurant in the world and  many other world class restaurants. So the very wealthy can enjoy a dynamic and competitive economy and need not view competitive capitalism based upon broad empowerment of all citizens with fear and loathing as they clearly do in the US.

Finally, Copenhagen passed my beer test with flying colors. One measure of a vibrant capitalist system is a rich delivery of consumer goods and services. In November of 1989, I visited East Berlin. The beer was awful. I literally could not finish a German dunkle--or any East German beer. Ever since I have used beer quality as a proxy for consumer choice and quality of consumer offerings. In Copenhagen, I visited many microbreweries (such as Brewpub Kobenhavn) and consulted with many experts about the best. They are world class brewers and easily can compete with the best in the US. Copenhagen has outstanding beer! 

So, I really think the US should take some lessons in capitalism on board from Denmark. First, high taxes are fully consistent with high growth and general happiness. Denmark certainly proves this point. Second, we should return to massive funding for higher education. Denmark proves that a GI Bill for everyone is affordable and even pays in all sorts of economic and political ways. Third, we should go back to our roots as a nation of powerful public investment (the GI Bill, the Interstate Highway System, the space program and the creation of the internet by DARPA) and search out ways to invest in green transportation that both pay for themselves and lead to better lives for all. Finally, we should understand that high inequality leads to under-funding of the public sector and massive transfers from the middle class to the very rich as recently seen in the US.

Corporate America Takes A Commendable Stand Against NBA L.A. Clippers Franchise Owner Donald Sterling

Donald Sterling, 1989

At this point, unless you've been hiding under a rock for the past week, we all have been exposed to L.A. Clippers owner Donald Sterling's racist rant to his mistress.  Sterling's vitriol racist tirade showed his ignorance and narrow-mindedness.  New NBA Commissioner Adam Silver was commendably decisive and swift in meting out his punishment to Sterling-a $2.5 million fine and lifetime ban from virtually all NBA-related activities. 

The unified statements of current and former NBA players helped galvanize Commissioner Silver's decision to act on the matter with dispatch.  I also think that economic pressure from corporate sponsors, who started to pull or suspend their corporate sponsorship of the Clippers, was instrumental in forcing the league and other owners to see the need to harshly punish Sterling for his behavior, and preserve the economic integrity and viability of the NBA.  In the past, on this particular blog, I've tended to come down hard on corporations for failure to demonstrate a measure of corporate social responsibility.  This time around, I must say, I'm very proud of the corporations that early on, without hesitation or blinking, pulled or suspended their sponsorship of the L.A. Clippers.  Corporate condemnation, coupled with current and former NBA player's statements and protest actions, have helped push forward the change needed in this situation-Sterling's exposure as a bigot and thankfully his eventual exist as an NBA franchise owner. 

My hat goes off to the following corporations who responded to Donald Sterling's bigotry, by pulling or suspending their L.A. Clippers sponsorships:

• State Farm
• Red Bull
• CarMax
• Kia
• Amtrak
• Virgin America
• Sprint
• Mercedes Benz  

Thank you to the corporations listed above that did the right thing!  What are your thoughts?


*photo courtesy of cliffwildes/wikimedia commons

Say-on-Pay and Corporate Social Responsibility, By: Jennifer Roeske

     In the business section of today's New York Times, there is an article about the G.M. exhibits at this past weekend's New York International Auto Show and the fact that consumers who attended seemed unshaken by the company's decision to delay the recall of millions of potentially defective cars. Even if consumers are still confident, I expect that shareholders are not.  Today's Times printed another story reporting that the recent G.M. recalls will impact the company's bottom line and that profits are expected to decline sharply. Perhaps shareholders, understanding the connection between companies that deal responsibly with consumers and profitability, will communicate with the company about socially responsible behavior.

     Recently, a St. John's law student, Jennifer Roeske, wrote a short piece about shareholder involvement in corporate governance matters and the impact that involvement may have on pay decisions.  I am including her piece in this post.

          "Corporate social responsibility is controversial. While some believe it is necessary to help the communities that corporations affect and see it as a way to gain an altruistic public image, ultimately it affects shareholders’ bottom line. Some shareholders may want a greater return on their investment, and therefore disapprove of corporations deviating from a focus on the “bottom-line.” This is especially true for short term investors, or investors who depend on dividends to support themselves or their loved ones.

            Say-on-Pay is an internal mechanism that shareholders can use to let the corporation know whether or not they approve of its practices. It allows shareholders an “advisory vote” on the compensation of the top five executives of a corporation. In the U.S., experience has shown that the majority of corporations receiving a failing vote work strenuously to correct any deficiencies and to determine what issues shareholders had with the proposed executive pay package. Say-on-Pay opens the lines of communication between shareholders and the corporation, specifically the executives and the board. It gives shareholders a voice in corporate policy. This can include a corporation’s stance on corporate social responsibility. If shareholders are dissatisfied with the conduct of a corporation, they can vote down executive pay packages to show their dissatisfaction.

            The effectiveness of Say-on-Pay is a topic of hot debate. However, thus far in the U.S. companies have reacted to failed Say-on-Pay votes by fixing deficiencies and communicating with shareholders, eventually receiving a passing vote in the subsequent year. Last week, the financial post featured an article regarding the rise of theSay-on-Pay movement in Canada. While currently Canada does not require this type of vote, many companies have adopted them on their own. Additionally, the article discusses the weight these votes are carrying with boards; they are not ignored. Boards are increasingly aware of the risk of reputational damage if it ignores a shareholder vote. While the approval rating of packages on the whole is high, looking at the failed votes shows that shareholder opinion is taken seriously by corporations. Therefore, Say-on-Pay can be used by shareholders as a way of letting the corporation know their stance on corporate social responsibility."  

The Virtues of Private Securities Litigation: An Historic and Macroeconomic Perspective

Financial market crashes of historic proportions and swindles and frauds of historic proportions go hand in hand. Two giants in the field of economics made essentially this point long ago: Harvard economist John Kenneth Galbraith in The Great Crash 1929 and MIT economist Charles P. Kindleberger in Manias, Panics and Crashes. Each of these books notes that fraud temptations expand during euphoric economic times (for the fraudfeasor as well as the victim) and that the revelation of market chicanery after the inevitable crash deals further blows to investor confidence causing rapid contraction in capital flows. Economic devastation follows. These books are classics and should be read by every business student and economic policymaker.

Recent evidence from the world of finance and economics demonstrates the wisdom of these works. Thus, a recent paper in The Review of Financial Studies found that firms engaged in fraud pretend to be legitimate and invest and hire excessively during the period of ill-gotten gains and then shed employees and investment when the inevitable crash follows, exacerbating the boom and the bust. MIT finance professor, Andrew Lo, states that booms induce "cocaine addict" responses where profits lead many to underestimate risks (including lawmakers and regulators). Another study found that the Private Securities Litigation Reform Act (which made securities fraud difficult to impossible to prove) led to more accounting chicanery, like that seen during the Enron and WorldCom era of massive securities fraud.

This is all consistent with the massive frauds underlying the subprime lending frenzy. In the largest settlement in history, JPMorgan Chase paid the US Government $13 billion for admitted material misrepresentations in connection with mortgages peddled to Fannie Mae and Freddie Mac as well as other investors. (Better Markets filed a challenge to this deal.). BOA paid $9 billion to settle similar claims just last month. The Wall Street Journal estimates that total bank exposure for bogus mortgage backed securities totals $85 billion. Other massive frauds committed by subprime lenders, including the megabanks, have consistently been noted on this blog. It is beyond cavil that much of the capital flowing into the subprime mortgage business came from duped investors, victims of Wall Street fraud.

The simple truth is that our lawmakers and the judiciary diluted enforcement of the federal securities laws pursuant to the PSLRA as well as a series of draconian cases and thereby gave the green light to more securities fraud. More securities fraud means more financial instability with all its consequent macroeconomic devastation.

We must restore private rights of action under the securities laws.

All of this sums up a law review article entitled The Virtues of Private Securities Litigation that I just posted on SSRN (available here for free download) that applies all of this evidence to the subprime debacle and concludes that there is an overwhelming case that PSLRA materially contributed to the crisis and that restrictions on private securities litigation should be lifted.

Here is the abstract:

In the wake of the Great Depression, the federal securities laws operated to mandate disclosure of material facts to investors and extend broad private remedies to victims of securities fraudfeasors. The revelation of massive securities fraud underlying the Great Depression animated the federal securities laws as investment plunged after 1929 and failed to recover for years. For over sixty years after the enactment of the federal securities laws, no episode of massive securities fraud with significant macroeconomic harm occurred. The federal securities laws thereby operated to facilitate financial stability and prosperity, in addition to a superior allocation of capital. Unfortunately, as memories faded and inequality soared, corporate and financial elites (with the active aid of lawmakers) launched a sustained attack upon private enforcement of the securities laws. Soon thereafter the horrors of the Great Depression returned and massive securities fraud triggered the Great Recession of 2008 as economists would predict. This Article argues for a rollback of the war on private securities litigation to at least the 1980s based upon history and economic science. This would at least restore sensible pleading standards, impose liability on all participants in securities frauds (including aiders and abettors) and allow the states to impose more demanding standards of liability on wrongdoers in financial markets.

How Home Ownership Keeps Blacks Poorer Than Whites

Vice Provost Dorothy Brown

In an important article penned in late 2012 by Emory Law Professor and Vice Provost Dorothy Brown, she argues that home ownership continues to be a wealth building tool for white homeowners but does not benefit African American homeowners in the same way.  Her article continues to resonate in 2014 as real estate markets have seemingly rebounded in many communities across the nation, but not significantly for African American communities.  Writing for Forbes magazine, Brown posits:

"Home ownership has been an important vehicle in creating a solid white middle class, but it has not done the same for most black homeowners, because blacks and whites buy homes in very different neighborhoods. Research shows that homes in majority black neighborhoods do not appreciate as much as homes in overwhelmingly white neighborhoods. This appreciation gap begins whenever a neighborhood is more than 10% black, and it increases right along with the percentage of black homeowners. Yet most blacks decide to live in majority minority neighborhoods, while most whites live in overwhelmingly white neighborhoods."

Brown continues by arguing that this divide and the wealth gap between black and whites is not as much about class as it is about race:

"If you think this is class and not race, you are wrong. A 2001 Brookings Institution study showed that 'wealthy minority neighborhoods had less home value per dollar of income than wealthy white neighborhoods.' The same study concluded that 'poor white neighborhoods had more home value per income than poor minority neighborhoods.' The Brookings study was based on a comparison of home values to homeowner incomes in the nation’s 100 largest metropolitan areas, and it found that even when homeowners had similar incomes, black-owned homes were valued at 18% less than white-owned homes. The 100 metropolitan areas were home to 58% of all whites and 63% of all blacks in the country."

Finally, Brown describes that these studies are supported by significant research and that at bottom, the real estate market penalizes integration:

"Those conclusions are supported by a large body of research. Put simply, the market penalizes integration: The higher the percentage of blacks in the neighborhood, the less the home is worth, even when researchers control for age, social class, household structure, and geography." 


For those that argue that we live in a post-racial society, and that the election of President Obama has finally cleansed our nation of the lingering effects of slavery, Jim Crow, "separate but equal" and the discriminatory prison industrial complex, well, they have some explaining to do.

Midwestern People of Color Legal Scholarship Annual Meeting

The Indiana Tech Law School is honored to host the 2104 Annual Meeting of the Midwestern People of Color Legal Scholarship Conference on April 3-5, 2014, in Fort Wayne, IN. 

The conference theme is "Rethinking Legal Scholarship Amid Cultural and Professional Transformations" and will feature keynote speakers Professor Bryan Stevenson, Judge Tanya Walton Pratt, and President-Elect Paulette Brown. 

The annual meeting features a robust series of works-in-progress, presented by legal academic on cutting edge issues of importance. 

The conference program features exciting panels and topics including a Deans of Color panel discussing current challenges to legal education and a Hot Topics panel discussing Michael Sam and his future in the NFL and a critical examination of corporate law pedagogy in American law schools.

The Economist on our Crony Capitalist System

The Economist is a centerist, pro-business, pro-capitalism publication from London. As such it is the perfect voice for echoing the essential thesis of my book Lawless Capitalism: high inequality has led to a rigged legal system that has displaced capitalism with crony capitalism.

Or, in the words of The Economist:

Class warriors and free-market devotees alike are worrying about rent-seeking. American libertarians fear an elite has rigged their country’s economy; plenty of ordinary Joes reckon the government and Federal Reserve care more about Wall Street than Main Street.

My main difference with The Economist is their outlook on this crucial issue and their so-called "Crony Capitalism Index." In an apparent effort to take the spot light off inequality, they gerrymandered an index that they admit is "crude" and subject to severe limitations. This allows a level of optimism I do not share.

My focus is instead on the relationship of inequality to the durability of the rule of law in the economic sphere. I contend that when more money is concentrated in fewer hands the costs of collective action plunge and the subversion of law follows. Lawless Capitalism catalogs this process law by law and regulation by regulation in all areas where big money would most seek to bend the law to their interest and against true meritocratic competition.

My view is tightly bound to empirical economic science (such as here, here, and here) which emphasizes the relationship between inequality and legal subversion--but without my focus on specific legal and regulatory frameworks. Economists Daron Acemoglu and James Robinson state the case well:

economic inequality will lead to greater political inequality, and those who are further empowered politically will use this to gain a greater economic advantage by stacking the cards in their favor and increasing economic inequality yet further -- a quintessential vicious circle. And we may be in the midst of it. The U.S. tide has lately not lifted all boats; over the last 40 years, while the richest Americans have seen a sharp increase in their incomes, the income of the median household has hardly budged. Predictably, this has gone hand-in-hand with political inequality.

If the appropriate focus is on the relationship between law, inequality and crony capitalism, then optimism is unjustified. Here is a snapshot of the most recent data compiled by the nation's leading economist on inequality, Emmanuel Saez:

 

Basically, inequality measured by the income at the very top (the only thing that matters under my thesis because that is where the power to bend law resides) rivals the historic pre-crisis high and matches the very high levels seen during the period of financial liberalization and other legal indulgences for the very rich and powerful. Too many resources concentrated at the top necessarily means too much disempowerment for others and lower growth for all as privilege displaces meritocratic competition.