Daily Archives: July 13, 2004

Martha Stewart’s Sentencing

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As readers of this blog know, I believe that the recent prosecution and conviction of Martha Stewart is an injustice.

The result of that injustice is equally disturbing.

As American Enterprise Institute scholar John R. Lott notes in this article, Ms. Stewart’s sentencing reflects a system that is so badly out of whack that it penalizes wealthy people far more than poorer people who commit the same offense:

Before the 1987 [sentencing] guideline, judges could sentence two criminals who’d committed the same crime to vastly different sentences: Ms. Stewart could have been let off with simple probation or given more than 10 years. But judges were rarely that arbitrary. In fact, denying judges discretion has made penalties less, not more, equal.

The reason is simple: the justice system imposes many types of penalties on criminals, but the sentencing guidelines only make sure that the prison sentences are equal. Beyond prison, criminals face financial penalties that largely depend on the criminal’s wealth. In addition to fines and restitution, white-collar criminals face the loss of business or professional licenses and the ability to serve as an executive or director for a publicly traded company.

Using Ms. Stewart’s case as an example, Mr. Lott notes that those extra penalties for the wealthy are substantial, such as Ms. Stewart’s responsibility for the losses that investors in her company suffered as a result of her conviction:

I cannot say it better than Mr. Lott’s conclusion:

It is hardly ever fashionable to defend the wealthy–let alone wealthy criminals. Yet the gap in punishment is so enormous it is impossible to ignore. If fairness means that two people who commit the same crime should expect the same penalty, the current system is not merely unfair, it is unconscionable.

Let’s make CEO negligence criminal

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Enron’s excesses and the unprecedented media firestorm over the company’s collapse have muddled the reasoning of even normally clear thinking business columnists.
The latest to be afflicted is the Wall Street Journal’s ($) Alan Murray, who comes up with this doozy in his column today:

Mr. Lay spent more time schmoozing with politicians and picking fabric swatches for his Gulfstream V corporate jet than studying special-purpose enterprises. As a result, his footprints inside the energy company are shallow, and his fingerprints few. Conviction will be difficult.

In the case of Enron, we already know a giant financial fraud lay at the heart of the enterprise. The convictions of former Chief Financial Officer Andrew Fastow and former Treasurer Ben Glisan established that. At stake in the Lay case isn’t whether fraud was committed but whether the chief executive should be held [criminally] responsible.
For the sake of American capitalism, he should.

Mr. Murray then goes on to base this rather startling expansion of criminal liability on the anecdotal experience of Federal Reserve Chairman, Alan Greenspan:

In unusually clear testimony in July 2002, Chairman Greenspan railed against the “infectious greed” that had invaded American business, arguing that the best antidote was strong and ethical CEOs. “It has been my experience on numerous corporate boards that CEOs who insist that their auditors render objective accounts get them,” Mr. Greenspan said, “and CEOs who discourage corner-cutting by subordinates are rarely exposed to it.”
“Although we may not be able to change the character of corporate officers,” he concluded, “we can change behavior through incentives and penalties.” That is what is at stake in the Lay case.

So, let’s see here. Mr. Murray reasons that, in the “special” case of a business executive, we should treat them like bank robbers in the criminal justice system even though the business executive did not intentionally commit a crime. If the CEO is simply lazy and negligent, then Mr. Murray reasons that she is intentionally neligent and lazy and, therefore, should have the same degree of criminal liability as the bank robber.
As one of my former professors used to say whenever confronted with such muddled reasoning: “Pooh-pah.”
First, using the criminal justice system to remedy the problem that Mr. Murray addresses is akin to using an ax where a scalpel is needed and available. Extending criminal laws that penalize intentional crimes to penalize lazy and negligent businesspeople has the primary effect of confusing and ultimately undermining society’s confidence in the rule of law. Indeed, such application of criminal laws may deter a few folks from becoming CEO’s in the first place (although there is no empirical data supporting such a proposition), but it will not deter laziness or negligence.
However, even more important is the slippery slope. If Mr. Lay should be convicted for being lazy and negligent, then why should Enron’s directors not also be convicted of the same crime? Or should they not be held criminally responsible for their laziness and negligence because they only flew commercial while Mr. Lay flew in the company’s Gulfstream V? Or because their stock options were considerably less than Mr. Lay’s? Or is it because they could not have reasonably known that Mr. Fastow was a crook while Mr. Lay should have?
Similarly, what does the system do with the CEO who is not lazy or negligent, but is truly undermined by crafty underlings who figure out a way to defraud the company despite the CEO’s diligence? Convict the CEO anyway? Or carve out an exception to the crime if the jury finds that the CEO is not lazy or negligent? And if that exception is crafted, can you imagine the procedures and systems that CEO’s would establish so that they would appear not to be lazy and negligent, particularly if they really were lazy and negligent? What webs Mr. Murray would have us weave!
Part of the cost of a free and productive economy is the risk of Enron-type failure. Misapplying criminal law neither will nor should deter such failures, and is much more likely to promote societal cynicism than responsible business practices. As Professor Ribstein notes in his post on Mr. Murray’s column, “we have the tools within our current system. Responding to Ken Lay’s irresponsibility with equivalent excesses in criminal prosecutions is not the answer.”
For a reasoned argument in favor of holding CEO’s responsible as a principal for corporate wrongdoing, see this Professor Bainbridge post, although Brad DeLong is not so sure.

Pitney Bowes battles America’s broken health care finance system

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This Wall Street Journal ($) article provides an excellent analysis of what Pitney Bowes — the mailing service and equipment company — learned regarding the question of why health costs keep rising relentlessly in America: A dysfunctional market creates few incentives for any of its participants to deliver efficient care. In fact, competition among insurers, health-care providers and producers of drugs and equipment often led to higher, rather than lower, prices.
Although the Bush Administration continues to ignore the problem, the struggle by American businesses to rein in health-care costs is nearing crisis levels. American employers still pay the majority of health-care costs for more than 130 million Americans and have borne the brunt of double-digit annual increases in benefit costs. Companies as large as General Motors Corp. reports that it spends “significantly” more on health care than steel, and recent data suggests that health care costs to employers could rise as much as 10% next year. Even a big company with an entire team dedicated to rooting out the source of rising health-care costs has little power to change these dynamics.
Pitney-Bowes has an internal team that aggressively pursues ways to contain ballooning health costs. But such a solution is easier wished for then achieved:

Last year, [the Pitney-Bowes team] scored a small victory. Employees who went to a hospital in 2003 stayed for an average of 3.7 days, unchanged from a year earlier. The overall number of admissions didn’t rise, either.
So Pitney Bowes was startled to nonetheless discover that the average cost of each hospital visit jumped 9% to $10,600. The average cost per day jumped 17%. One of the biggest culprits? Increasingly powerful hospital groups in California, whose price increases pushed the company’s average cost of a hospital admission in that state to $20,500, twice what it paid elsewhere.
By combing through claims data from its 46,000 U.S. employees and their dependents, Pitney Bowes can pinpoint some of the big contributors to the nation’s surging health-care bill: Local hospital mergers; entrepreneurial doctors prescribing costly MRIs and CT-scans at their own private clinics; marketing for expensive drugs such as the heartburn medicine Nexium, which became Pitney Bowes’s third-highest drug expenditure last year after an advertising blitz by maker AstraZeneca PLC.

Indeed, despite the Pitney-Bowes team’s efforts, health care costs at the company continue to skyrocket:

. . . the total cost of claims Pitney Bowes paid directly — covering about 80% of its employees — rose 11.5%, more than it expected. About 20% of Pitney Bowes’s employees are covered by health-maintenance organizations, for which the company pays a simple premium. That brings the average increase in prices for the entire company down to 7.5%. Pitney Bowes also managed to reduce its overall costs by increasing employee contributions and winning discounts on certain drugs and services.
The Pitney Bowes team . . . has helped moderate the expansion in Pitney Bowes’s $135 million health-care budget. But despite its most vigilant efforts, Pitney Bowes’s health-care costs continue to climb faster than the rate of inflation and faster than increases in most other business expenses.

Read the entire article because it provides an excellent overview of the economic pressures that will continue to drive health care prices higher in America’s health care finance system that is predominated by private third party payors. As noted on this blog before, unless or until the payment of health costs are placed back in the hands of the consumer, these market anamolies that continually drive up costs and limit competition in certain sectors of health care administration will continue to proliferate. The failure of the Bush Adminstration and the Republican-controlled Congress to address this key issue in a meaningful fashion remains a glaring weakness that the Democrats can exploit in the upcoming Presidential election.

Another Baylor doctor defects to Methodist

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Deep divisions in the Texas Medical Center resulted from the decision of Baylor College of Medicine to terminate its 50 year relationship with the Methodist Hospital earlier this year. One by-product of the split is that Baylor and Methodist began to compete with each other for medical talent (earlier posts here) that previously served both institutions.
This Chronicle story reports on Dr. Michael Lieberman‘s resignation yesterday as chairman of Baylor’s pathology department to become director of Methodist’s new research instititue. This move follows the earlier resignation of Methodist’s chief of surgery to remain with Baylor.
Dr. Lieberman is the first key defection from Baylor to Methodist in the battle between Methodist and Baylor to retain staff members. Before the Baylor-Methodist breakup, 19 of Methodist’s division chiefs were Baylor department chairs; now that number is down to 17 and almost certain to reduce further.
Dr. Lieberman was one of the doctors who co-signed a letter to Baylor trustees in April opposing the breakup because it could cause “a crisis of major proportions” and predicting that many faculty would “undoubtedly” stay at Methodist.
Expect more defections between these two fine institutions as the dust settles after this unfortunate divorce in a long-standing Medical Center relationship.