THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Wednesday, April 4, 2018

“The Worst Law in America”?

In its “Review & Outlook” section on Monday of last week, March 26, 2018, the Wall Street Journal ran a piece entitled, “The Worst Law in America.”  Without getting into an argument as to whether the referenced “Martin Act” in New York state really is the worst law in the entire United States — a claim that could no doubt engender some very lively discussion — we do have to admit that the Martin Act is pretty bad.  As described by the editorial staff,

Passed in 1921 to stop “boiler-room” stock-sale operations, the Martin Act lets prosecutors call almost anything fraud, and there’s no requirement to prove evil intent in civil cases.  Yet proving scienter, or the intent or knowledge of wrongdoing, has been a staple requirement of British and American law for centuries lest innocent mistakes be prosecuted as intentional frauds.  The Martin Act thus gives prosecutors a huge advantage against defendants.
What happens when you're guilty until proven innocent.
Now, this is pretty bad.  It puts the accused in the position of having to prove innocence rather than that being the burden of the accuser.  Being “guilty until proven innocent” of course means that a conviction is a foregone conclusion, to say nothing of forcing the accused to prove a negative, which is logically impossible — you cannot prove the existence of non-existence.  (E.g., the accused should not have to prove that he or she did not do something.  That cannot be done.  The accuser must prove that the accused did do something, and let the accused have the chance to refute the evidence.)
Now, the Wall Street Journal is absolutely correct that the sort of thing allowed by the Martin Act is intolerable.  It must be corrected.
The problem is that the recommended solution, legislation introduced by Representative Tom MacArthur, a Republican from New Jersey, attempts to correct a flaw in internal control with additional external controls.  This, as any CPA or engineer can tell you, is a serious mistake.  When the system itself is flawed, no amount of change outside the system can fix it.  If the outside change is comprehensive enough to fix the problem, it does not fix the system, it replaces it . . . usually with a system that has new and different flaws that must be corrected in turn.
"Just one of those things"? Or bad design and construction?
Take, for example, a badly build bridge.  When cracks start appearing that render it unsafe, the “internal control” solution would be to rebuild the bridge the right way.  The “external control” solution is to start patching and replacing individual parts, adding buttresses and supports that counter the problems there, but not the ones developing, and that often interfere with the reason for having a bridge there in the first place, causing it to become unusable or even impassable due to the mass of jury rigged repairs and structural supports that could end up costing more than a new bridge built the right way.  The underlying problem is in the bridge itself — the system — and no amount of patching or hole-plugging is going to fix it.
So, what is the solution to the dangers of stock brokers misleading the public?  Number one, get more people interested in keeping stock brokers honest — and that means more people ready, willing, and able to purchase shares in corporations, especially corporations for which they work or have some other stake in.  The more people keeping an eye on things, the more transparency they demand, and the easier and more effective enforcement becomes.  Why?  Because the system itself supports it!
Judge Peter S. Grosscup
This was, in part, the thinking of Judge Peter S. Grosscup in the early twentieth century.  Grosscup, one of Theodore Roosevelt’s “Trust Busters,” thought there was a twofold solution to securities fraud, corporate corruption, and what he perceived as weaknesses in the Sherman Antitrust Act of 1890.
One, have a uniform federal corporation law.  Two, have America’s corporations broadly owned by as many people as possible.  In articles like “Who Shall Own America?” (American Illustrated Magazine, December 1905) Grosscup argued that a strong and just America could only be built on a solid foundation of broad-based capital ownership.
What Grosscup left out was how to finance widespread capital ownership, a problem Louis O. Kelso and Mortimer J. Adler solved in their two collaborations, The Capitalist Manifesto (1958) and The New Capitalists (1961).  As the subtitle of the latter has it, “A Proposal to Free Economic Growth from the Slavery of Savings.”
The idea, embodied in the Employee Stock Ownership Plan (ESOP) Kelso invented, was for ordinary people to purchase full dividend payout corporate shares newly issued to finance growth, permit corporations to deduct dividends from taxable income, and for shareholders to pay for the shares with the future stream of dividends on a tax-deferred basis.
Abraham Lincoln
Despite whatever weaknesses or flaws ESOPs might have, the fact that today millions of workers in thousands of companies across America own shares that they otherwise would not own argues for the soundness of the idea.  It also suggests that the way to “Make America Great Again” is to forgo manipulating the monetary and tax systems, and let people get back to doing something productive with their own labor and capital by extending the ESOP idea to every child, woman, and man in the United States, a “capital homestead” as the modern equivalent of Abraham Lincoln’s 1862 land homestead.
Of course, saying it is easier than doing it.  Fortunately, there is a proposal that would bring about a society in which (as Pope Leo XIII put it) the great mass of people not only prefer to own, they do own because they have both the opportunity and access to the means to become capital owners.
It is called “the Capital Homestead Act” — not an actual piece of legislation, of course, but a set of specifications for what enabling legislation should include.  As described on the CESJ website, a Capital Homestead Act would be a national economic policy based on the binary growth model.
“Binary growth” is the concept that economies grow steadily larger as private capital acquisition is distributed more broadly among the population on market principles. This concept also focuses on the importance of unleashing the unutilized or underutilized capacity of all economic systems to produce in greater abundance.
Overall, the Capital Homestead Act is designed to lift barriers in the present financial and economic system in order to universalize access to the means of acquiring and possessing capital assets.  This would allow every child, woman, and man to accumulate in a tax-sheltered Capital Homestead Account, a target level of assets sufficient to generate an adequate and secure income for that person without requiring the use of existing pools of savings or reductions in current levels of consumption.
Grosscup had a lot more articles that are well worth reading, two of which can be found on the CESJ website: