Sunday, January 27, 2019

Elizabeth Warren’s Surreptitious Socialism

By Richard A. Epstein

Senator Elizabeth Warren has long been openly contemptuous of American business.  She proved it yet again l by publishing a dangerous and uninformed screed in the Wall Street Journal outlining a proposal that, if implemented, will shake markets to their roots. Like many proposals for radical reform, her Accountable Capitalism Act would destroy the institution she says she wants to save. The bill’s central provision tells the whole story: all corporations whose annual revenues exceed $1 billion dollars would be required to receive a federal corporate charter to remain in business. Those charters will come with conditions attached, to force corporations to pay due attention not just to their shareholders, but to their employees, suppliers, and their local communities.

Warren believes the federal government can attach whatever conditions it wants to the charters it issues, and she further claims that it should act to reverse the purportedly dangerous trend of top corporate officials making cash distributions to their shareholders instead of plowing those proceeds back into their own businesses. Her intellectual nemesis, no surprise, is Milton Friedman, who in a seminal 1970 article argued that “the social responsibility of business is to increase its profits.”

The most obvious problem with Warren’s proposal is that it would likely lead to the largest flight of capital from the United States in history. Foreign investors will see little reason to put their wealth at the mercy of some crusading federal board that can override a company’s board of directors. Current covered American corporations would have powerful incentives to dump assets or relocate overseas. Make no mistake about it, her proposal calls for the outright confiscation of wealth through the nationalization of corporate boards that would be forever beholden to political figures. Surreptitious socialism turns out to be her way of saving capitalism. And for the worst of all reasons.

Start with first her point. It is for good reason that corporate officers and directors of public companies owe fiduciary duties only to their shareholders. If someone extends similar duties simultaneously to employees, suppliers, customers, bondholders and community members, then directors and officers would be obligated to decide what to do when these interests clash. Bedlam would result. Family corporations often have complex capital structures because family members share ownership and job responsibilities overlap in complex ways. Hence no one can sell shares to outsiders unless the business as a whole is sold. In contrast, large public corporations need very simple capital structures, in which each share of stock is fungible with any other now that management and ownership are largely separate. That simple structure puts all shareholders in the same boat, and thus reduces the risk that any general corporate transaction, at least in the absence of self-dealing, will favor one group of shareholders over another. Fungibility also creates an active market for the sale of shares so that shareholders who are uneasy about the direction of any given corporation can sell their shares, perhaps at a loss, to others who are more comfortable with the corporation’s future.

This arrangement does not take into account the preferences and needs of so-called stakeholders who have not invested a dime in the business. Firms face competition in markets for capital, labor, products, and consumers. These groups will all deal with the firm on an arm’s-length basis, often led by agents who owe them exclusive fiduciary duties. Competitive forces tend to produce win-win deals in all cases. Labor markets are a source of particular sensitivity and confusion. Warren laments that “average wages haven’t budged over the past year,” but there is good evidence today that wages are now outpacing inflation. Indeed, that understates the overall improvement, because unemployment rates among key groups—minority workers, ex-criminals and teenagers—are down to their lowest levels in over 50 years, another point she doesn’t mention. These new workers will depress average wages because they usually command lower wages than their more established peers. It is therefore even more impressive that overall wage levels are moving up when these new entrants drag down the pool statistics. In any event, why condemn the CEO who helps create new low wage jobs because he necessarily earns a larger multiple of his employees’ average wages than before? Warren ignores the simple point that the boom in jobs and stock market prices works to everyone’s advantage.

Read the rest here.

1 comment:

  1. "Stakeholders". One of my least favorite words. In other words, those without Taleb's "skin in the game". NGO's and other busybodies.
    Unfortunately, I know otherwise bright women who would vote for this dimwit because "It's OUR turn!"