Mary Schapiro Will Protect Investors the Same Way Willie Sutton Protected Banks. By Dan Solin
Huffington Post, January 4, 2009 03:24 PM (EST)
We don't have to guess how Mary Schapiro, named by President-elect Obama to head the SEC, will protect investors. As the CEO of the Financial Industry Regulatory Authority (FINRA), she had been a strong advocate of the mandatory arbitration system which requires investors to arbitrate all disputes with their brokers before a panel selected by FINRA and governed by its rules.
How has this worked for investors?
Here is a recent example. It is a true story. You can't make this up.
A 60 year old doctor invested $100,000 he had in an IRA with a FINRA broker.
The broker put the funds into an after-tax account, triggering a $35,000 tax liability.
Over the next 14 months, during which time the S&P 500 increased in value, the portfolio lost a whopping $86,000, reducing its value to $14,000.
This is not surprising given the amount of trading by the broker. His commissions were so huge that the account would have had to earn 31% just to break even! The broker used margin to generate even more trades.
The stocks in the portfolio were 600% more volatile (risky) than the S&P 500.
Before any Judge or jury, the investor would have recovered his losses and most likely would have received a meaningful award of punitive damages.
Not before the FINRA arbitration panel.
They found that the broker had to pay back only the tax liability caused by the transfer of the IRA to a taxable account.
Now for the unbelievable part.
This "impartial" FINRA arbitration panel concluded that the broker did nothing else wrong. No unsuitability. No excessive trading. They gave him a clean bill of health.
Just another day at the office, ripping off investors with impunity. Instead of being drummed out of the industry, he is happily back in his office high fiving his fellow brokers.
So much for FINRA "self-regulation."
This shameful process is "supervised" by the SEC, the very agency Ms. Schapiro will head if she is confirmed.
"Real change" would be to put an investor advocate, and not an industry shill, in charge of the SEC.
"Real change" would be to abolish the FINRA mandatory arbitration system and expose it for the farce it is.
"Real change" would be give investors their constitutional right to a trial by jury.
Do you think Mary Schapiro will represent "real change" at the SEC?
Do you think Willie Sutton protected banks?
Bipartisan Alliance, a Society for the Study of the US Constitution, and of Human Nature, where Republicans and Democrats meet.
Sunday, January 4, 2009
James Hansen's open letter to Michelle and Barack Obama
Thanks to the people on my e-mail list for all the suggestions (more than 100!) about my draft
“Tell Barack Obama the Truth – the Whole Truth”. Most frequent criticism: the need for an
executive summary. Two people suggested: put a summary in the form of a letter to Michelle
and Barack Obama. I like that idea. They are equally smart lawyers, and if we can get either
of them to really focus on the actions that are needed, the planet has a chance.
The letter turned out to be four pages. Sorry. But I wrote a note to John Holdren, which can
serve as an executive summary. John has promised to deliver the letter, but cannot do so
prior to the inauguration. That delay is a problem for one of the three recommendations: tax
and dividend. Thus I am making the letter available at
http://www.columbia.edu/~jeh1/mailings/20081229_DearMichelleAndBarack.pdf
and the revised “Tell Barack Obama the Truth” at
http://www.columbia.edu/~jeh1/mailings/20081229_Obama_revised.pdf
in hopes of getting the information to people who continue to push for “goals” and “caps”.
“Goals” for percentage CO2 emission reductions and “cap & trade & dividend” are a threat to
the planet, weak tea, not commensurate with the task of getting CO2 back to 350 ppm and
less. Note:
(1) There must be a tax at the mine or port of entry, the first sale of oil, gas and coal, so every direct and indirect use of the fuel is affected. Anything less means that the reduction of demand for the fuel will make it cheaper for some uses; e.g., people will start burning coal in their stoves. Peter Barnes’ idea to push the cap upstream to the extent possible is not adequate nor is a ‘gas tax’ suggested by NY Times and others. A comprehensive approach is needed.
(2) “Cap & trade & dividend” creates Wall Street millionaires and complex bureaucracy. The public is fed up with that – rightly so. A single carbon tax rate can be adjusted upward affecting all activities appropriately. With 100% dividend the public will allow a carbon price adequate to the job, i.e., helping us move to the postfossil-fuel world.
(3) Supply ‘caps’ cannot yield a really big reduction because of the weapon: ‘shortages’. All a utility has to say is ‘blackout coming’ and politicians and public have to cave in – we are not going to have the lights turned out. Will the public allow a high enough tax rate? Yes, dividends will exceed tax for most people concerned about their bills.
(4) A tax is not sufficient. All other measures, such as building codes, are needed. But with millions of buildings, all construction codes and operations cannot be enforced. A rising carbon price provides effective enforcement.
(5) Wouldn’t it be cheaper to let people burn the dirtiest fuel? No. The clean future that we aim for, including more efficient energy use, is not more expensive. For example, you may have read about passively heated homes that require little energy and increase construction costs only several percent. Such possibilities remain the oddball (with high price tag), not the standard construction, unless the government adopts policies that make things happen.
Some of you suggested that I should only explain the urgency of the climate crisis, the need
to get back to 350 ppm CO2 and less. Politicians are happy if scientists provide information
and then go away and shut up. But science and policy cannot be divorced. What I learned in
the past few years is that politicians often adopt convenient policies that can be shown to be
inconsistent with long-term success, given readily available scientific data and empirical
information on policy impacts.
Jim Hansen
“Tell Barack Obama the Truth – the Whole Truth”. Most frequent criticism: the need for an
executive summary. Two people suggested: put a summary in the form of a letter to Michelle
and Barack Obama. I like that idea. They are equally smart lawyers, and if we can get either
of them to really focus on the actions that are needed, the planet has a chance.
The letter turned out to be four pages. Sorry. But I wrote a note to John Holdren, which can
serve as an executive summary. John has promised to deliver the letter, but cannot do so
prior to the inauguration. That delay is a problem for one of the three recommendations: tax
and dividend. Thus I am making the letter available at
http://www.columbia.edu/~jeh1/mailings/20081229_DearMichelleAndBarack.pdf
and the revised “Tell Barack Obama the Truth” at
http://www.columbia.edu/~jeh1/mailings/20081229_Obama_revised.pdf
in hopes of getting the information to people who continue to push for “goals” and “caps”.
“Goals” for percentage CO2 emission reductions and “cap & trade & dividend” are a threat to
the planet, weak tea, not commensurate with the task of getting CO2 back to 350 ppm and
less. Note:
(1) There must be a tax at the mine or port of entry, the first sale of oil, gas and coal, so every direct and indirect use of the fuel is affected. Anything less means that the reduction of demand for the fuel will make it cheaper for some uses; e.g., people will start burning coal in their stoves. Peter Barnes’ idea to push the cap upstream to the extent possible is not adequate nor is a ‘gas tax’ suggested by NY Times and others. A comprehensive approach is needed.
(2) “Cap & trade & dividend” creates Wall Street millionaires and complex bureaucracy. The public is fed up with that – rightly so. A single carbon tax rate can be adjusted upward affecting all activities appropriately. With 100% dividend the public will allow a carbon price adequate to the job, i.e., helping us move to the postfossil-fuel world.
(3) Supply ‘caps’ cannot yield a really big reduction because of the weapon: ‘shortages’. All a utility has to say is ‘blackout coming’ and politicians and public have to cave in – we are not going to have the lights turned out. Will the public allow a high enough tax rate? Yes, dividends will exceed tax for most people concerned about their bills.
(4) A tax is not sufficient. All other measures, such as building codes, are needed. But with millions of buildings, all construction codes and operations cannot be enforced. A rising carbon price provides effective enforcement.
(5) Wouldn’t it be cheaper to let people burn the dirtiest fuel? No. The clean future that we aim for, including more efficient energy use, is not more expensive. For example, you may have read about passively heated homes that require little energy and increase construction costs only several percent. Such possibilities remain the oddball (with high price tag), not the standard construction, unless the government adopts policies that make things happen.
Some of you suggested that I should only explain the urgency of the climate crisis, the need
to get back to 350 ppm CO2 and less. Politicians are happy if scientists provide information
and then go away and shut up. But science and policy cannot be divorced. What I learned in
the past few years is that politicians often adopt convenient policies that can be shown to be
inconsistent with long-term success, given readily available scientific data and empirical
information on policy impacts.
Jim Hansen
In TNYT: Should Congress Put a Cap on Executive Pay?
Should Congress Put a Cap on Executive Pay? By Robert H. Frank
TNYT, January 4, 2009, BU5
It's no wonder that voters’ outrage over exorbitant executive pay is mounting. After all, the government just had to bail out financial firms that paid big bonuses last year to many of the same executives who helped precipitate the current financial crisis.
Nor is it any wonder that Congress is considering measures to limit executive pay — not just in the financial industry, but economywide. So far, the only formal legislative proposal is “say on pay,” which would require a nonbinding shareholder vote on executive pay proposals. But critics complain that this would have little impact and are hungry for stronger measures.
One popular proposal would cap the chief executive’s pay at each company at 20 times its average worker’s salary. But while Congress may well have compelling reasons to limit executive pay in companies seeking bailout money, voter anger is not a good reason to extend pay caps more generally.
To be sure, executive pay in the United States is vastly higher than necessary. Executives in other countries, whose pay is often less than one-fifth that of their American counterparts, seem to work just as hard and perform just as well. The same was true of American executives in the 1980s.
So why not limit executive pay? The problem is that although every company wants a talented chief executive, there are only so many to go around. Relative salaries guide job choices. If salaries were capped at, say, $2 million annually, the most talented candidates would have less reason to seek the positions that make best use of their talents.
More troubling, if C.E.O. pay were capped and pay for other jobs was not, the most talented potential managers would be more likely to become lawyers or hedge fund operators. Can anyone think that would be a good thing?
In large companies, even small differences in managerial talent can make an enormous difference. Consider a company with $10 billion in annual earnings that has narrowed its C.E.O. search to two finalists. If one would make just a handful of better decisions each year than the other, the company’s annual earnings might easily be 3 percent — or $30 million — higher under the better candidate’s leadership. That same candidate couldn’t possibly make as much difference at a company with only $10 million in earnings.
That’s why companies where executive decisions have the greatest impact tend to outbid others in hiring the ablest managers.
Critics complain that executive labor markets are not really competitive — that chief executives appoint friends to their boards who approve unjustifiably large pay packages. But C.E.O.’s have always appointed friends, so that can’t explain recent trends.
One reason for these trends is that companies themselves have become bigger. As the New York University economists Xavier Gabaix and Augustin Landier argue in a 2006 paper, C.E.O. pay in a competitive market should vary in direct proportion to the market capitalization of the company. They found that C.E.O. compensation at large companies grew sixfold between 1980 and 2003, the same as the market-cap growth of these businesses.
Beyond growth in company size, executive mobility has also increased. In past decades, about the only way to become a C.E.O. was to have spent one’s entire career with the company. With only a handful of plausible internal candidates, pay was essentially a matter of bilateral negotiation between the board and the chosen. Increasingly, however, hiring committees believe that a talented executive from one industry can also deliver top performance in another.
A celebrated case in point was Louis V. Gerstner Jr. Having produced record earnings at RJR Nabisco, he was hired by I.B.M., where he led the computer giant, then struggling, to a dramatic turnaround in the 1990s.
This new spot market for talent has affected executive salaries in much the same way that free agency affected the salaries of professional athletes.
If the market for executive talent is competitive, critics ask, why are C.E.O.’s in an industry paid about the same, regardless of performance? That’s because no one knows with certainty how a particular executive will perform. But most hiring decisions are based on well-researched predictions, and always with hope for success. Executives whose record predicts good performance command a high rate. Their leash, however, has grown shorter.
In the past, a C.E.O. could often stay in the job for many years despite lackluster performance. Today, a C.E.O. who fails to deliver is often dismissed after a year or two.
In short, evidence suggests that the link between pay and performance is tighter than proponents of pay caps seem to think. Since the fall of the former Soviet Union, no one has seriously challenged the wisdom of relegating a high proportion of society’s most important tasks to private markets. And the market-determined salary of a job generally offers the best — if imperfect — measure of its importance.
The financial industry, however, may be an exception. A money manager’s pay depends primarily on the amount of money managed, which in turn depends on the fund’s rate of return relative to other funds. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns. But as recent events have shown, these complex assets also expose the rest of us to considerable systemic risk.
On balance, then, the high pay that lures talent to the financial industry may actually cause harm. So if Congress wants to cap executive pay in financial institutions receiving bailout money, well and good.
Elsewhere, however, the more prudent response to runaway salaries at the top is to raise marginal tax rates on the highest earners, irrespective of occupation. Again, relative salaries drive job choices. The jobs with the highest pretax salaries will still offer the highest post-tax salaries, just as before, so this step will not compromise the price signals that steer talented performers to the most important jobs.
In answering voter outrage about executive pay, Congress should recall the words of Marcus Aurelius: “How much more grievous are the consequences of anger than the causes of it.”
Robert H. Frank, an economist at Cornell, is a visiting faculty member at the Stern School of Business at New York University.
TNYT, January 4, 2009, BU5
It's no wonder that voters’ outrage over exorbitant executive pay is mounting. After all, the government just had to bail out financial firms that paid big bonuses last year to many of the same executives who helped precipitate the current financial crisis.
Nor is it any wonder that Congress is considering measures to limit executive pay — not just in the financial industry, but economywide. So far, the only formal legislative proposal is “say on pay,” which would require a nonbinding shareholder vote on executive pay proposals. But critics complain that this would have little impact and are hungry for stronger measures.
One popular proposal would cap the chief executive’s pay at each company at 20 times its average worker’s salary. But while Congress may well have compelling reasons to limit executive pay in companies seeking bailout money, voter anger is not a good reason to extend pay caps more generally.
To be sure, executive pay in the United States is vastly higher than necessary. Executives in other countries, whose pay is often less than one-fifth that of their American counterparts, seem to work just as hard and perform just as well. The same was true of American executives in the 1980s.
So why not limit executive pay? The problem is that although every company wants a talented chief executive, there are only so many to go around. Relative salaries guide job choices. If salaries were capped at, say, $2 million annually, the most talented candidates would have less reason to seek the positions that make best use of their talents.
More troubling, if C.E.O. pay were capped and pay for other jobs was not, the most talented potential managers would be more likely to become lawyers or hedge fund operators. Can anyone think that would be a good thing?
In large companies, even small differences in managerial talent can make an enormous difference. Consider a company with $10 billion in annual earnings that has narrowed its C.E.O. search to two finalists. If one would make just a handful of better decisions each year than the other, the company’s annual earnings might easily be 3 percent — or $30 million — higher under the better candidate’s leadership. That same candidate couldn’t possibly make as much difference at a company with only $10 million in earnings.
That’s why companies where executive decisions have the greatest impact tend to outbid others in hiring the ablest managers.
Critics complain that executive labor markets are not really competitive — that chief executives appoint friends to their boards who approve unjustifiably large pay packages. But C.E.O.’s have always appointed friends, so that can’t explain recent trends.
One reason for these trends is that companies themselves have become bigger. As the New York University economists Xavier Gabaix and Augustin Landier argue in a 2006 paper, C.E.O. pay in a competitive market should vary in direct proportion to the market capitalization of the company. They found that C.E.O. compensation at large companies grew sixfold between 1980 and 2003, the same as the market-cap growth of these businesses.
Beyond growth in company size, executive mobility has also increased. In past decades, about the only way to become a C.E.O. was to have spent one’s entire career with the company. With only a handful of plausible internal candidates, pay was essentially a matter of bilateral negotiation between the board and the chosen. Increasingly, however, hiring committees believe that a talented executive from one industry can also deliver top performance in another.
A celebrated case in point was Louis V. Gerstner Jr. Having produced record earnings at RJR Nabisco, he was hired by I.B.M., where he led the computer giant, then struggling, to a dramatic turnaround in the 1990s.
This new spot market for talent has affected executive salaries in much the same way that free agency affected the salaries of professional athletes.
If the market for executive talent is competitive, critics ask, why are C.E.O.’s in an industry paid about the same, regardless of performance? That’s because no one knows with certainty how a particular executive will perform. But most hiring decisions are based on well-researched predictions, and always with hope for success. Executives whose record predicts good performance command a high rate. Their leash, however, has grown shorter.
In the past, a C.E.O. could often stay in the job for many years despite lackluster performance. Today, a C.E.O. who fails to deliver is often dismissed after a year or two.
In short, evidence suggests that the link between pay and performance is tighter than proponents of pay caps seem to think. Since the fall of the former Soviet Union, no one has seriously challenged the wisdom of relegating a high proportion of society’s most important tasks to private markets. And the market-determined salary of a job generally offers the best — if imperfect — measure of its importance.
The financial industry, however, may be an exception. A money manager’s pay depends primarily on the amount of money managed, which in turn depends on the fund’s rate of return relative to other funds. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns. But as recent events have shown, these complex assets also expose the rest of us to considerable systemic risk.
On balance, then, the high pay that lures talent to the financial industry may actually cause harm. So if Congress wants to cap executive pay in financial institutions receiving bailout money, well and good.
Elsewhere, however, the more prudent response to runaway salaries at the top is to raise marginal tax rates on the highest earners, irrespective of occupation. Again, relative salaries drive job choices. The jobs with the highest pretax salaries will still offer the highest post-tax salaries, just as before, so this step will not compromise the price signals that steer talented performers to the most important jobs.
In answering voter outrage about executive pay, Congress should recall the words of Marcus Aurelius: “How much more grievous are the consequences of anger than the causes of it.”
Robert H. Frank, an economist at Cornell, is a visiting faculty member at the Stern School of Business at New York University.
A Century of Chlorination
Perspective on a Century of Chlorination
Jan 04, 2009
Article originally from American Chemistry magazine.
For an industry expert’s perspective on the 100th anniversary of the chlorinationof U.S. drinking water, the American Chemistry Council (ACC) interviewed Dr. James P. Brennan, Technology Manager with Arch Chemicals in Smyrna, Ga., who has worked extensively with water chlorination chemistry for more than 30 years.
“The chlorination process has long been the conventional method of disinfection for municipal water and wastewater, due to its low chemical cost and consistent performance,” he says.
Beyond drinking water, chlorine disinfection is an important component to healthyswimming pools, schools, daycare centers, and restaurants. As Brennan puts it, chlorine and the chlorination process are used for everything from preventing the transmission of disease to reducing spoilage in freshly harvested fruits and vegetables.
“Chlorine had a marvelous effect on public health during the first 50 years of use,” hesays. “Through the chlorination process, the average lifespan went from 49 to 70 years.”
During that time, he adds, the basic principle of cleaning and sanitizing had already begun; and because of the concepts of good hygiene, the population as a whole benefited.
Chlorine can be applied to water as a gas (elemental chlorine), a liquid solution (sodiumhypochlorite), or in several dry forms. A granular form of dry chlorine (calcium hypochlorite), introduced 80 years ago, was stronger and had a longer shelf life. This product also evolved and is now easier to handle and store than ever.
“One success begets another, and chlorine evolved in its uses and its forms,” says Brennan.
More recently, he says, this product has become available in consistent tablet forms with delivery systems designed to provide dosage control and convenience, resulting in higher-quality treated water.
Calcium hypochlorite is also used in municipal water treatment plants and for sanitizing pools and spas. Private owners of pools and spas can conveniently transport and store it, and plant operators can easily apply it directly to the source, which is imperative for stopping the transmission of diseases.
Over the past 30 years, Brennan’s career has taken him from the laboratory bench to field locations throughout the U.S. and, more recently, around the globe. Most interesting and rewarding to him has been the opportunity to educate others about the chlorination process, particularly in underdeveloped areas in Asia and South America, where he has traveled in efforts to improve public health by emphasizing the importance of safe drinking water and how to treat it efficiently and reliably.
"We are teaching sustainable methods to treat water,” he says. “We want to keep the process simple and teach people how to use the products and protect their water sources.”
Looking ahead, Brennan says he believes improvements to the chlorination process are always evolving, especially in ways to make it more available and reliable.
And for the enormous effect chlorine has had on everything from public health to ensuring safe drinking water, he says, “Job well done.”
Jan 04, 2009
Article originally from American Chemistry magazine.
For an industry expert’s perspective on the 100th anniversary of the chlorinationof U.S. drinking water, the American Chemistry Council (ACC) interviewed Dr. James P. Brennan, Technology Manager with Arch Chemicals in Smyrna, Ga., who has worked extensively with water chlorination chemistry for more than 30 years.
“The chlorination process has long been the conventional method of disinfection for municipal water and wastewater, due to its low chemical cost and consistent performance,” he says.
Beyond drinking water, chlorine disinfection is an important component to healthyswimming pools, schools, daycare centers, and restaurants. As Brennan puts it, chlorine and the chlorination process are used for everything from preventing the transmission of disease to reducing spoilage in freshly harvested fruits and vegetables.
“Chlorine had a marvelous effect on public health during the first 50 years of use,” hesays. “Through the chlorination process, the average lifespan went from 49 to 70 years.”
During that time, he adds, the basic principle of cleaning and sanitizing had already begun; and because of the concepts of good hygiene, the population as a whole benefited.
Chlorine can be applied to water as a gas (elemental chlorine), a liquid solution (sodiumhypochlorite), or in several dry forms. A granular form of dry chlorine (calcium hypochlorite), introduced 80 years ago, was stronger and had a longer shelf life. This product also evolved and is now easier to handle and store than ever.
“One success begets another, and chlorine evolved in its uses and its forms,” says Brennan.
More recently, he says, this product has become available in consistent tablet forms with delivery systems designed to provide dosage control and convenience, resulting in higher-quality treated water.
Calcium hypochlorite is also used in municipal water treatment plants and for sanitizing pools and spas. Private owners of pools and spas can conveniently transport and store it, and plant operators can easily apply it directly to the source, which is imperative for stopping the transmission of diseases.
Over the past 30 years, Brennan’s career has taken him from the laboratory bench to field locations throughout the U.S. and, more recently, around the globe. Most interesting and rewarding to him has been the opportunity to educate others about the chlorination process, particularly in underdeveloped areas in Asia and South America, where he has traveled in efforts to improve public health by emphasizing the importance of safe drinking water and how to treat it efficiently and reliably.
"We are teaching sustainable methods to treat water,” he says. “We want to keep the process simple and teach people how to use the products and protect their water sources.”
Looking ahead, Brennan says he believes improvements to the chlorination process are always evolving, especially in ways to make it more available and reliable.
And for the enormous effect chlorine has had on everything from public health to ensuring safe drinking water, he says, “Job well done.”
On Griggs v. Duke Power: Implications for College Credentialing
The Toll of a Rights 'Victory', by George F. Will
Washington Post, Sunday, January 4, 2009; B07
Like pebbles tossed into ponds, important Supreme Court rulings radiate ripples of consequences. Consider a 1971 Supreme Court decision that supposedly applied but actually altered the 1964 Civil Rights Act.
During debate on the legislation, prescient critics worried that it might be construed to forbid giving prospective employees tests that might produce what was later called, in the 1971 case, a "disparate impact" on certain preferred minorities. To assuage these critics, the final act stipulated that employers could use "professionally developed ability tests" that were not "designed, intended or used to discriminate."
Furthermore, two Senate sponsors of the act insisted that it did not require "that employers abandon bona fide qualification tests where, because of differences in background and educations, members of some groups are able to perform better on these tests than members of other groups." What subsequently happened is recounted in "Griggs v. Duke Power: Implications for College Credentialing," a paper written by Bryan O'Keefe, a law student, and Richard Vedder, a professor of economics at Ohio University.
In 1964, there were more than 2,000 personnel tests available to employers. But already an Illinois state official had ruled that a standard ability test used by Motorola was illegal because it was unfair to "disadvantaged groups."
Before 1964, Duke Power had discriminated against blacks in hiring and promotion. After the 1964 act, the company changed its policies, establishing a high school equivalence requirement for all workers and allowing them to meet that requirement by achieving minimum scores on two widely used aptitude tests, including one used today by almost every NFL team to measure players' learning potential.
Plaintiffs in the Griggs case argued that the high school and testing requirements discriminated against blacks. A unanimous Supreme Court, disregarding the relevant legislative history, held that Congress intended the 1964 act to proscribe not only overt discrimination but also "practices that are fair in form, but discriminatory in operation." The court added:
Thus a heavy burden of proof was placed on employers, including that of proving that any test that produced a "disparate impact" detrimental to certain minorities was a "business necessity" for various particular jobs. In 1972, Congress codified the Griggs misinterpretation of what Congress had done in 1964. And after a 1989 Supreme Court ruling partially undid Griggs, Congress in 1991 repudiated that 1989 ruling and essentially reimposed the burden of proof on employers.
Small wonder, then, that many employers, fearing endless litigation about multiple uncertainties, threw up their hands and, to avoid legal liability, threw out intelligence and aptitude tests for potential employees. Instead, they began requiring college degrees as indices of applicants' satisfactory intelligence and diligence.
This is, of course, just one reason college attendance increased from 5.8 million in 1970 to 17.5 million in 2005. But it probably had a, well, disparate impact by making employment more difficult for minorities. O'Keefe and Vedder write:
"Qualified minorities who performed well on an intelligence or aptitude test and would have been offered a job directly 30 or 40 years ago are now compelled to attend a college or university for four years and incur significant costs. For some young people from poorer families, those costs are out of reach."
Indeed, by turning college degrees into indispensable credentials for many of society's better jobs, this series of events increased demand for degrees and, O'Keefe and Vedder say, contributed to "an environment of aggressive tuition increases." Furthermore they reasonably wonder whether this supposed civil rights victory, which erected barriers between high school graduates and high-paying jobs, has exacerbated the widening income disparities between high school and college graduates.
Griggs and its consequences are timely reminders of the Law of Unintended Consequences, which is increasingly pertinent as America's regulatory state becomes increasingly determined to fine-tune our complex society. That law holds that the consequences of government actions often are different than, and even contrary to, the intended consequences.
Soon the Obama administration will arrive, bristling like a very progressive porcupine with sharp plans -- plans for restoring economic health by "demand management," for altering the distribution of income by using tax changes and supporting more muscular labor unions, for cooling the planet by such measures as burning more food as fuel, and for many additional improvements. At least, those will be the administration's intended consequences.
Washington Post, Sunday, January 4, 2009; B07
Like pebbles tossed into ponds, important Supreme Court rulings radiate ripples of consequences. Consider a 1971 Supreme Court decision that supposedly applied but actually altered the 1964 Civil Rights Act.
During debate on the legislation, prescient critics worried that it might be construed to forbid giving prospective employees tests that might produce what was later called, in the 1971 case, a "disparate impact" on certain preferred minorities. To assuage these critics, the final act stipulated that employers could use "professionally developed ability tests" that were not "designed, intended or used to discriminate."
Furthermore, two Senate sponsors of the act insisted that it did not require "that employers abandon bona fide qualification tests where, because of differences in background and educations, members of some groups are able to perform better on these tests than members of other groups." What subsequently happened is recounted in "Griggs v. Duke Power: Implications for College Credentialing," a paper written by Bryan O'Keefe, a law student, and Richard Vedder, a professor of economics at Ohio University.
In 1964, there were more than 2,000 personnel tests available to employers. But already an Illinois state official had ruled that a standard ability test used by Motorola was illegal because it was unfair to "disadvantaged groups."
Before 1964, Duke Power had discriminated against blacks in hiring and promotion. After the 1964 act, the company changed its policies, establishing a high school equivalence requirement for all workers and allowing them to meet that requirement by achieving minimum scores on two widely used aptitude tests, including one used today by almost every NFL team to measure players' learning potential.
Plaintiffs in the Griggs case argued that the high school and testing requirements discriminated against blacks. A unanimous Supreme Court, disregarding the relevant legislative history, held that Congress intended the 1964 act to proscribe not only overt discrimination but also "practices that are fair in form, but discriminatory in operation." The court added:
"The touchstone is business necessity. If an employment practice which operates to exclude Negroes cannot be shown to be related to job performance, the practice is prohibited."
Thus a heavy burden of proof was placed on employers, including that of proving that any test that produced a "disparate impact" detrimental to certain minorities was a "business necessity" for various particular jobs. In 1972, Congress codified the Griggs misinterpretation of what Congress had done in 1964. And after a 1989 Supreme Court ruling partially undid Griggs, Congress in 1991 repudiated that 1989 ruling and essentially reimposed the burden of proof on employers.
Small wonder, then, that many employers, fearing endless litigation about multiple uncertainties, threw up their hands and, to avoid legal liability, threw out intelligence and aptitude tests for potential employees. Instead, they began requiring college degrees as indices of applicants' satisfactory intelligence and diligence.
This is, of course, just one reason college attendance increased from 5.8 million in 1970 to 17.5 million in 2005. But it probably had a, well, disparate impact by making employment more difficult for minorities. O'Keefe and Vedder write:
"Qualified minorities who performed well on an intelligence or aptitude test and would have been offered a job directly 30 or 40 years ago are now compelled to attend a college or university for four years and incur significant costs. For some young people from poorer families, those costs are out of reach."
Indeed, by turning college degrees into indispensable credentials for many of society's better jobs, this series of events increased demand for degrees and, O'Keefe and Vedder say, contributed to "an environment of aggressive tuition increases." Furthermore they reasonably wonder whether this supposed civil rights victory, which erected barriers between high school graduates and high-paying jobs, has exacerbated the widening income disparities between high school and college graduates.
Griggs and its consequences are timely reminders of the Law of Unintended Consequences, which is increasingly pertinent as America's regulatory state becomes increasingly determined to fine-tune our complex society. That law holds that the consequences of government actions often are different than, and even contrary to, the intended consequences.
Soon the Obama administration will arrive, bristling like a very progressive porcupine with sharp plans -- plans for restoring economic health by "demand management," for altering the distribution of income by using tax changes and supporting more muscular labor unions, for cooling the planet by such measures as burning more food as fuel, and for many additional improvements. At least, those will be the administration's intended consequences.