The Conservative Nanny State : A Book Review Part Three : Myths of Corporations and Truths of the Federal Reserve

Continuing our series of analysis on Dean Baker’s The Conservative Nanny State, we attempt to disrobe the corporation as the nanny state fraud it has become, and demystify the role of the Federal Reserve in profoundly affecting the livelihoods of low income earners.

In the Beginning, God Created the Corporation…

Baker offers quite a thoughtful analysis around the mythology surrounding corporations, a key feature of the conservative nanny state.  The typical argument is that corporations, free and independent, would follow the market harmoniously but for unnecessary, inefficient government interference; this laughable, demonstrably false assertion is an astonishing feat of propaganda, given even a slight historical context.

Helpful in this discussion is a few notes on the definition and history of what is this assumed-to-be essential feature of a market system : in Anglo-American law, a corporation, historically, was an organization created by a state-issued charter to raise capital for advancing some good-will state objective, such as building a bridge or paving roads.  Incorporation was a temporary status, as corporations generally (with a few notably understandable examples, such as in those managing railroads, trade, and shipping) dissolved upon completion of the state’s tasks appearing explicitly in said charter.  Charters of increasingly long duration appeared as the machine of war industry raged feverishly during America’s conflict with Britain in 1812, as discussed more thoroughly in Mansel Blackford’s The Rise of Modern Business in Great Britain, the United States, and Japan.

So if the corporate charter historically traces roots to some set of concrete state goals, why ought investors bother asking the government for articles of incorporation for other business endeavors?  After all, businessmen were free, as they certainly are now, to form partnerships to accomplish whatever financial objectives they chose.  It turns out that articles of incorporation offer something that private partnerships do not : limited liability, or state-conferred immunity for shareholders from both civil and criminal penalties, as well as a guarantee that personal losses cannot exceed the value of one’s investment in said corporation.  That is to say, I can invest, say, $100 in a corporation.  If the corporation commits any and all manner of illegality, I cannot to a large extent suffer any legal charge or punishment, unless I were actually “directly” complicit in the crimes.  More clearly, an investor is not liable for damages rendered with his investment, unless he directed or carried out damages himself.  Further, if my $100 becomes $1000, I get to keep the $900 profit.  But if the company files for bankruptcy with colossal debts say proportionate to thousands or millions with respect to my original investment, I can only lose my $100, and nothing more; lenders to the corporation eat the cost.  Sounds like a fantasy, doesn’t it?

This happens to be an example of what Baker terms takes, or one-sided exchanges offered by the nanny state to individuals.  In data science and statistics, we have another term for this phenomenon : a capped loss function, a loss being a penalty we incur given some random event.  A curious, yet substantial boon for shareholders is that of capped, left-skewed loss function; that is, they take a risk in investing their money, but they can lose no more than that, even if a company, such as Lehman Brothers, defrauds millions with overly risky speculative financial instruments, as in the financial crisis of 2007, or the Enron bankruptcy in 2001, costing thousands their retirements.

It shouldn’t be a surprise that now the government forges charters of indefinite duration.   And the masters of these corporations want more than just the perks listed above : they claim these tyrannies are, in fact, flesh-and-blood persons.  For instance, we can point to the infamous Citizens United decision in the U.S. Supreme Court in 2010 declaring that corporations can contribute vast sums to political causes under the guise of first amendment protection.  More recently, a 2014 decision in Burwell v. Hobby Lobby Stores, Inc. asserted freedom of religion for corporations by exempting them from the mandate to provide contraceptive care under the Affordable Care Act.   Though these decision receive deservedly bad press about being turning points in corporate take-over of our democratic institutions, it’s worth remembering that corporations have enjoyed the rights of personhood for quite a long time.  In 1886, the Supreme Court declared that corporations should receive equal protection under the Fourteenth Amendment of the Constitution in Santa Clara County v. Southern Pacific Railroad Co., despite the intent of the amendment being protection for emancipated slaves.  For more on the history of the corporate personhood dogma, see a report by the Brennan Center for Justice.

So Baker is quite correct in asserting that such a Big Rock Candy Mountain experience wouldn’t be imaginable without a powerful nanny state to guarantee its advantages.  Further, he argues quite pointedly that

...a serious discussion must begin with a
basic truth : the corporation does not
exist in a free market[,]

meaning the free market ideology wouldn’t bear risk of the magnitude corporations routinely undertake.  A familiar theme by now should be that the fantasy begins and ends with government intervention.  Another amenity Baker raises is shareholder anonymity : if I want to invest in a company which participates in child labor exploitation where it’s legal, I can do so without much concern about being discovered.

As it turns out, this is increasingly unavoidable with creation of multinationals, or conglomerates of varied businesses who deal across continents where legal protections for citizens vary.  It might not come as a surprise that these multinationals tend to farm out factory and dangerous work to countries where they need not observe ethical labor practices; Amnesty International has long documented such practices in Indonesia, including slave and child labor on palm oil plantations.  Other examples include Apple’s use of child labor through the manufacturing giant Foxconn and Walmart profiting from prison labor, though we can point to countless other examples of labor abuse, human trafficking, and complicity in organized crime, documented in various media reports and by the International Consortium of Investigative Journalists.

And as it turns out, the story gets worse : what should be a state tool designed to improve the general welfare has enjoyed ever-diminishing oversight while a narrowing of focus : in 1919 the Supreme Court ruled that profits are the lone objective of incorporated companies in the decision Dodge v. Ford.  That is, not only are they a shield from prosecution for shareholders and a safety net against personal financial liability, they must pursue profits, placing any other priorities as secondary.  Everything else is public relations, something to which we’ll return later.  Sounds rather destructive, doesn’t it?

 We can actually point to a much more comprehensive list of corporate atrocities in the name of profit-seeking, such as

  • vicious atrocities in Central America (described somewhat in earlier posts) perpetrated by the United Fruit Company, as described in Big Fruit,
  • business decisions to intentionally continue production of the ill-fated Ford Pinto, discussed in Mother Jonesdespite critiques of the hype of the article, the central thesis remains : Ford executives decided killing customers was the right business decision,
  • the deliberate contamination of Hinkley groundwater by Pacific Gas and Electric, the subject of the film Erin Brokovich,
  • the deliberate cover-up and falsification of research linking sugar consumption to heart disease and obesity by the Great Western Sugar Company, carefully documented in the film Sugar Coated,
  • the falsification of research by tobacco firms, documented in the thriller The Insider,
  • the burying of significant scientific research on climate change for forty years by Exxon Mobile, documented by Exxon Knew,

and so on.  In each of the cases, shareholders could lose no more than the value of their investment, despite their money financing criminal actions.  This is an extremely important point, worth belaboring.  If I personally hired someone to poison my community’s water supply, I could face capital murder.  But if I pay a corporation to do it as a shareholder, I’m in the clear.  Certainly we can argue about fine legal points such as intent, but the metaphor is apt with respect to outcomes.  So Baker suggests conservatives and market ideologues whining about the minimal government oversight of these tyrannies remember that they can always go into business together through private contracts, surrendering this limited liability.  In any case, they don’t want markets nor personal responsibility, often repeated ideals of the conservative nanny state; rather, they want a welfare safety net for themselves.

Baker nicely summarizes with the following :

[i]t takes a conservative nanny
state to create an institution...
that allows investors to cause
harm and not be held accountable.

Baker continues with more highly elucidating discussion on corporate perks, all worth reading, but I’ll move on after addressing one point I find rather important which will come up again later : the corporate income tax.  Donald Trump’s incessant shrieking that the corporate income tax being too high echoes repeated mantras from conservative pundits and think tanks (like U.S Chamber of Commerce and the ultra-conservative Heritage Foundation), complaining of crushing of entrepreneurial initiative and unfair “double taxation.”  And yet these purveyors of the nanny state fail to mention that many of the largest corporations for whom they serve as mouthpieces never pay a penny through this tax, as documented by the Institute on Taxation and Economic Policy.  Further, even if we suspend belief to partake of the melodrama, this is a very, very small price to pay for the aforementioned incredible legal protection.  So Baker correctly points out that this is a voluntary tax, meaning individuals need not incorporate to do business; the tax is a fee for the overwhelming advantage of limited liability, among other amenities conferred by government-issued charters.  If entrepreneurs don’t want to pay the fee, they can assume the risk.

So what is a reasonable, market-based alternative?  As discussed earlier, Western European countries offer some interesting possibilities.  Further, worker-owned corporations (documented earlier by the National Center for Employment Ownership), limits on charter issuance, and requirements within the charters for leadership to be liable to stakeholders rather than just shareholders would be a good start.  If all else fails, traditional contracts and partnerships are perfectly suitable approaches.

Even beyond charter issuance, most large corporations owe their beginnings to extreme government investment and intervention, something Baker calls takes, to which we’ll return later.  In that vein, how about a return-on-investment for taxpayers?  Walmart wouldn’t have been possible without the Interstate Highway System; Amazon wouldn’t be possible without the internet; where’s the taxpayer’s return?

Among the objections to the aforementioned, corporatists like to claim that “stakeholders” are customers, and that they vote with their dollars, leading to a perverse propaganda that corporations actually aren’t tyrannies.  Even if we are to believe such a preposterous framework, one must have a dollar to vote under said theory, marginalizing the poor and the disinterested customers immediately.  More still, this framework is even more preposterous when we consider externalities, or effects of transactions not taken into account.  For instance, Walmart may decide to build a supercenter near me, multiplying traffic by a factor of twenty and causing awful pollution, yet, they don’t simply vanish just because I don’t patronize their stores.  Further, even high school students learn about oligopolies and the aforementioned U.S. Chamber of Commerce, examples of special interest collectivism designed to diminish the well-known destructive effect of markets on profits; with a twist of irony, they also hate collectivism when leveraged by working people (code-named unions), to which we’ll return later.  In any case, these purveyors of the nanny state may decry these possible reforms as “government meddling in the economy”, but the corporation is  by definition precisely that.  Another objection is that progress slows without the risk protection conferred by the nanny state, as investors won’t want to take chances with their savings.  Considering that we’re decimating the ecology around us, perhaps some forms of “progress” ought to slow down.  In any case, requiring these corporatists to accept personal responsibility in making careful, conservative, thoughtful investments is better aligned with the demands they make of poor people everyday.

In summary, conservative nanny state mythology demands we accept as a law of nature that corporations are an essential feature of the most optimal economic strategy, a proposition easily debunked with elementary analysis.  Again, corporations would not survive in a true market-based system.  Alternatives are appearing throughout the economic landscape, as we’ve mentioned earlier.

What is the Federal Reserve?

Baker continues his discussion of the nanny state by unveiling the purpose of the Federal Reserve; its chairperson, a position previously held by appallingly lauded Alan Greenspan, wields perhaps the greatest power over the economy of any individual.  By shifting the so-called federal funds rate, or the short-term rate for lending between banks, this chairperson can adjust the speed of the economy; cutting rates increases lending, borrowing, and job production, while hiking them has the opposite effect.

Perhaps the dirtiest secret of this process is a preplanned unemployment rate, meaning that in order to ensure downward pressure on wages in large segments of the economy, a steady, large supply of unemployed workers must remain available.  Ironic as it seems, this heavy-handed intervention in the economy seems perfectly natural to free market ideologues, as they generally are among the beneficiaries of such policies.  Baker discusses the Beige Book, a report published by the Federal Reserve eight times a year; during periods of low unemployment, particularly 1997 to 2000, employers lamented the increased benefits and wages necessary to entice employees from other companies, even in trades traditionally plagued with low income in the neoliberal period.  As vicious and malevolent as this form of social planning might seem, elites claim it is necessary to ensure inflation remains stable.  The human cost seems less important, as employers enjoy more access to the Federal Reserve board members, and competing on the open market for employees is something they’d prefer not to do.  Baker further discusses how Greenspan disproved conventional thinking by economists of the day that low unemployment would accelerate inflation in the late nineties, undercutting the very rationale for retaining a buffer of unemployment.  Likely, precluding inflation is a convenient cover for pressing a large swathe of the population into stagnation.  Baker describes a bit of the makeup of the agency itself, referring the reader to the official website for more detailed explanations.

Suffice it to say, the governing bankers and economists vary greatly in policy design regarding inflation and unemployment, and Baker very correctly points out that a one or two percent rise in unemployment matters significantly less to well-compensated bankers than to autoworkers or other tradespersons of mid-to-low income.  Conversely, said bankers likely will balk at even meager increases in inflation, considering this undercuts the value of existing loans.  Baker’s point is that the very people running the Federal Reserve carry a heavy bias toward policy hostile to most of the working class, something rather obvious when one considers the matter seriously.  He further remarks that the most recent three chairmen, Paul Volcker, Alan Greenspan, and Benjamin Bernanke enjoy fanciful reputations as “inflation fighters,” generally with little-to-no acknowledgement of the overwhelming sacrifices demanded of working class people who lose their jobs when these fighters hike interest rates to stem inflation. In fact, Baker, Andrew Glyn, David Howell, and John Schmitt discuss remarkable alternatives to controlling inflation with unemployment in Unemployment and Labor Market Institutions: The Failure of the Empirical Case for Deregulation; they discuss substantive case studies in collective labor bargaining with employers in Sweden, Ireland, and other western democracies, finding that when workers’ associations assess wage change on the economy at large, both inflation and unemployment remain lower than those in the United States.  Unfortunately, the vicious assault on collective bargaining here in the states has shriveled union participation to less than ten percent of workers; by contrast, a large majority of working class people in the aforementioned democracies are card-carrying union members.  And it benefits them greatly.

Next time, we’ll discuss unions more thoroughly, along with special nanny state provisions which contravene markets.