Shareholder reform

Apparently people need a refresher on how corporations work.

Class C shareholders are creditors of the corporation. The original shareholders loaned money to create the company, and later shareholders then purchased that debt. Shareholders are not "betters". They are not gambling on how well the company does. (Option traders, arguably, are "gamblers". But they don't get to vote, and aren't "shareholders" for corporate governance purposes.)

Employees are suppliers of the corporation. They sell their time to the company. If they don't think the terms under which they do so are a *net* positive benefit to them, they should stop working there.
Despite being creditors, class C shareholders are the last people to get paid by the company. It's illegal for corporations to pay anything back to their class C shareholders unless everyone else has been paid. Employees are in the list of "everyone except class C shareholders". It is *illegal* for a corporation to pay its class C shareholders *anything* unless every employee has been paid his or her full salary or other compensation.

In exchange for agreeing to be the last people to get paid, class C shareholders get two benefits. (Otherwise, nobody would agree to be a class C shareholder, because the corporation could just pay its employees - including upper management - so much that nothing is left over.)

1. The class C shareholders get paid *whatever* is left over, whether it's more or less than the amount of the original debt. This is called a dividend. The shareholders own the profits of the company.

1. The class C shareholders get to control how the company is run. Specifically, they get to pick the board members, who in turn hire and fire the CEO, who in turn hires and fires everyone else.

Sometimes, corporations don't make enough to pay everyone who isn't a class C shareholder. If the company is unable to borrow additional money to cover the difference - or believes it is unlikely to make enough to pay its debts in the future - it can restructure. When this happens, the class C shareholders get wiped out, and whoever is next-to-last to get paid loses their debt and become the new class C shareholders.

So shareholders have the most direct interest in making sure that the company either owns enough to pay all its debts, or has a good enough probability of being profitable in the future that it can borrow money against it.

Employees also have an interest in the company being profitable - you can't get paid your salary if the company isn't - but they have a weaker interest than the shareholders do, and unlike the shareholders, *employees can sue* if the company doesn't pay them.

Shareholders cannot sue if the company can't pay them. There are a few exceptions - minority shareholders can sue if the majority is voting to benefit itself at their expense (except in the free republic of Texas), and shareholders can sue on behalf of the corporation if it's being defrauded by its board, management, or subsidiaries. But, in the latter case, any damages awarded go to the corporation, not the shareholder.

Shareholders can also sue - in some cases - when a corporation is wickedly choosing not to issue dividends. But that right is extremely limited; there is no duty of a corporation in general to issue dividends, even if it is profitable, such a duty only arises in special cases.

All lawsuits by shareholders against management are limited by the business judgment rule, which says that, if a court can view an action by management as - potentially - a legitimate part of managing the business, it is not allowed to rule on whether it's a good decision or not.

So one reason shareholders get voting rights is because they have weaker rights against the corporation than anyone else.

Additionally, a good general rule in deciding who should own something is that ownership should be assigned to the person who is, on the margin, most affected by decisions in managing that thing. While employees are affected by management decisions, shareholders are more directly affected, and more affected on the margin. This is the second reason shareholders have voting rights - they have the strongest interest in the company being profitable, since they get all the upside.

Now, that doesn't mean corporate law doesn't need to be reformed in the United States. It does.

The corporate income tax should be abolished. That's not particularly on-point, but corporate income taxes are worst taxes and should always be abolished. The corporate income tax in the US only produces about 2% of GDP, or 11% of total federal tax revenue. It can easily be replaced by a small increase in income taxes (about 1 percentage point). Corporate income taxes are just a way to tax the same income twice, which serves only to distribute and hide the real tax burden represented by our tax laws. They should be abolished.

The capital gains tax rate on sales of stock and the income tax rate on dividends should be set at the same level, by law - whatever we choose that level to be. There should be no tax advantage to corporations retaining earnings rather than distributing them.

That eliminates one distortionary advantage to corporations retaining earnings and growing larger. Another reason corporations retain earnings is empire-building by upper management. This is protected by the business judgment rule, so we need to be careful with it.

But it's worth talking about giving shareholders stronger rights to - at least by majority vote - demand that corporations distribute their earnings.

We should also discuss - even if we decide not to do it - banning the retention of earnings by corporations in order to expand, and requiring businesses to distribute earnings even while issuing new stock to finance expansion.

That way, it's up to each shareholder to decide whether to expand their holdings of that company (by reinvesting dividends) or to use the profits to invest in other businesses (or even for consumption).

Currently, a shareholder who owns stock in a growing company, but wants to invest the profits in other businesses, has to either sell whole shares or demand a stock split in order to sell portions of the shares.

And, of course, the shareholder class as a whole has no way to put the brakes on corporate expansion short of replacing the board of directors, which may or may not work, even when the expanding business is an inferior investment to other firms.

But ending or reforming shareholder control of businesses makes no logical sense.

David Ricardo on money

Strictly speaking, there can be no permanent measure of value. A measure of value should itself be invariable; but this is not the case with either gold or silver, they being subject to fluctuations as well as other commodities. Experience has indeed taught us, that though the variations in the value of gold or silver may be considerable, on a comparison of distant periods, yet for short spaces of time their value is tolerably fixed. It is this property, among their other excellencies, which fits them better than any other commodity for the uses of money. Either gold or silver may therefore, in the point of view in which we are considering them, be called a measure of value.

-- David Ricardo, The High Price of Bullion: A Proof of the Depreciation of Bank Notes, 1810, pg. 13 (footnote)

Bill Woolsey explains monetary policy

The reason I support GDP targeting is that I believe the slow, steady growth in money expenditure provides the least bad macroeconomic environment for microeconomic coordination. Letting everything else--interest rates, the price level and inflation, the unemployment rate, and real output--adjust according to market forces is desirable. Having technocrats use "monetary stimulus" to manipulate unemployment and inflation to maximize a "social welfare" function is wrongheaded.

Monetary Freedom: The Economist on Targeting Unemployment

The same goes for having the Fed set inflation and letting NGDP adjust.

The same goes double for having the Fed set the price of a single commodity (especially gold) and letting inflation and NGDP adjust.

The same goes triple for having the Fed set the price of a commodity like oil (or refined gasoline) and letting inflation and NGDP adjust. The current recession was caused by the Fed's decision to target the price of oil in 2008, and the 'double-dip', which is really just the prolongation of the same recession, is most likely caused by the Fed's attempt to bring down the price of oil in the summer immediately past.

Why interest rates don't matter when determining the status of monetary policy

Interest rates are an unreliable indicator of the stance of monetary policy. To quote Milton Friedman, "Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy." It is true that short-term interest rates can fall immediately after monetary easing occurs. (They always then rise, and if monetary policy stays loose nominal interest rates will rise to above where they were before the monetary easing occurred.) When interest rates do fall due to monetary easing, real interest rates always fall further than nominal interest rates do (since inflation expectations are rising); but from Jul 2008 - Nov 2008, real interest rates (as measured by TIPS yields) actually rose. TIPS spreads fell to negative levels in late 2008, forecasting substantial deflation (which has been borne out by changes in the overall price level over the last three years).

Furthermore, even when interest rates do fall in response to monetary easing (long-term rates rose on expectations of QE II), that effect only means interest rates fall relative to what they would be without the monetary easing. Interest rates still respond to the market factors that determine the supply of and demand for Treasuries. In the summer of 2008, the market interest rate, assuming a constant stance of monetary policy, on short-term Treasuries was falling, due to the financial crisis driving up demand for safe assets. The Fed kept that fall in interest rates from happening until October, which meant holding interest rates above where they would have been assuming constant monetary policy. That was an effective tightening of monetary policy.

Milton Friedman's Comments on 1929-1933 sound like comments on today

There is one sense---and, so far as we can see, only one---in which a case can be made for the proposition that monetary decline [1930-1933] was a consequence of the economic decline. . . . The [Federal Reserve] System was operating in a climate of opinion that in the main regarded recessions and depressions as curative episodes, necessary in order to purge the body economic of the aftereffects of its earlier excesses. The prevailing opinion also confused money and credit; ... regarded it as desirable that the stock of money should respond to the "needs of trade," rising in expansions and falling in contractions; and attached much greater importance to the maintenance of the gold standard and the stability of exchanges than to the maintenance of internal stability. . . . Given that milieu, it can be argued that . . . [the Fed] could not have been expected to prevent the appreciable decline in the stock of money during 1930, because it and others as well regarded the decline as a desirable offset to earlier speculative excess; and that its failure to react vigorously . . . reflected the attitude that it was desirable to liquidate "bad" banks, to let "nature take its course" rather than to support the financial system "artificially".

A Monetary History of the United States, 1867-1960, Friedman & Schwartz, pp. 691-692.

New computer. Well, sold as a phone. But hey, $50 computer with free built-in phone!

I got my new Android phone today. I love it love it love it love it. It charges from my laptop, which the Blackberry didn't do. It mounts on my laptop just fine, and takes music no problem --- I have Rhythmbox doing the work and it just works. I think photos will work the same way, so I sort of have a digital camera now. Love it love it love it. The only problem is that it has 2GB of storage and I have 5GB of music. So now I'm in the market for an SD card.

My thoughts on the AF game

This game was over when OU got the ball back for the final time. Seriously, AF burned 3:41 on a scoring drive, then kicked the ball away with 3:39 left on the clock? They should have tried an onside kick; without getting the ball back immediately, they had basically no chance of scoring again.