Democracy and Fallen Evil Dictators

Kaddafi’s killing raised again the question of how revolutionaries aspiring to democracy should treat evil dictators. Brutal dictators are often paranoid and usually commit their crimes in three different contexts: 1) by committing war crimes in savage wars against other countries; 2) by using extreme violence in civil wars among their own people; and 3) through the brutal persecution and starvation of his own citizens.

Ranking dictators in terms of brutality is usually done by counting the number of dead outside the battlefield. For instance, the atrocities committed in Portugal by Napoleon’s armies, although enormous in terms of body counting were much less than the number of those killed in the battlefield. On the contrary, the number of those killed by the Red Army during the Chinese civil war was less than those killed through famine and persecution by Mao Tse Tung during the so-called “great leap forward” and “cultural revolution”. So, not surprisingly, Mao often tops the list of the bloodiest dictators, among the likes of Hitler, Stalin and Pol Pot.

Obviously, not all dictators end up killed like Kaddafi. Some manage to die in bed and remain venerated by their followers or descendents, as in the case of Mao, Pol Pot and Kim il-sung. Others commit suicide before being arrested, as Hitler did. Some fled or were sent into exile (like Napoleon or Idi Amin). A small minority end up being judged by a domestic or an international tribunal. Of these some are condemned to capital punishment (like Saddam Hussein) and others to long imprisonment terms.

Long term imprisonment should be the normal outcome in democracies that abhor the death penalty. It would prove the superiority of democratic justice and provide a deterrent and educational role. Yet there are very few dictators that ended up this way.

The fact that victors prefer the elimination of the defeated is the result of either revenge or fear of a comeback. None are democratic virtues.

If Kaddafi had been delivered to the ICC, his trial could provide important revelations on how he corrupted many regimes throughout the world. For the sake of transparency, it is important that NATO and the new Libyan authorities conduct honest investigations on why he was not kept alive and brought to justice.

Is Finance Theory Responsible for the Rise in CEO-kleptocracy?

The unprecedented rise in the compensation of CEOs and other top executives in US listed companies began in the early 1980s. As documented in several studies, including that of Frydman and Saks (2007) from which we reproduce the following two charts. In the 1980s the average total compensation of the top three executives suddenly jumped from an historical multiple below 40 times the average worker compensation to a median multiple that is now close to a 120.

This trebling in relative compensation was achieved mostly by linking compensation to the stock performance during the strong bull market of the 1980s and 1990s. As shown in the next figure its contribution to total compensation now accounts for more than 50% of basic compensation (salary + performance bonus).

Since managers have little or no influence in the valuation of their companies, was their pay just a fortunate coincidence due to the exuberant valuations of the stock market during those two decades? Or, did finance theory legitimize in the eyes of the shareholders their hands in the till behavior? We can dismiss the first hypothesis by the fact that throughout the last seventy years managerial stock holdings remained always below 1% and by looking at Shiller's chart of the S&P Composite Real Price-Earnings Ratio.

Although the nine-fold rise in real valuations between 1980 and 2000 was unprecedented by historical standards we must notice that during the other two major bull periods ended in the crashes of 1929 and 1973 the median compensation multiple never exceeded 40 (despite a seven-fold valuation rise before 1929 and a four-fold rise before 1966).

Moreover, when valuations returned to their normal values after the stock market crash of 2001, executive compensation continued to rise instead of correcting downwards. For instance, in the period 2000-2005 the real value of total compensation of the three highest-paid officers in the 50th percentile almost doubled to 5.2 mllion while that of those in the 90th percentile more than doubled to 21.6 million dollars in today’s values.

So what led shareholders and the taxman to become so generous in overlooking this hands on the till behavior?

Until the 1950s the number of top executives holding share options was basically negligible. However, from 1965 to 1980 the fraction of those granted share options rose from less than 20% to more than 60% and by 2000 it had reached 100%.

Despite being traditionally indifferent to management issues, finance theory was seized by executives to demand and legitimize their new found wealth. The following is a short-list of the key developments in finance theory that played some role in this process:
1) The Modigliani and Miller theory on the neutrality of capital structures resuscitated the entity theory of the firm and provided the basis for a widespread belief that paying dividends was an inefficient way of making distributions (a view reinforced by the predatory tax regimes of the time);
2) It also created a tolerant attitude towards excessive leverage which was later used to drive buy-out strategies and risk arbitrage driven M&A transactions;
3) Modern portfolio theory, with its emphasis on diversification, promoted the wide dissemination o capital among minority institutional investors. This, in practice, left companies in the hands of their managers and investment bankers colluding on irresponsible corporate governance approaches sanctioned by ever obliging compensation consultants;
4) Financial innovation in the use of derivative instruments and the Black-Scholes formula to price stock options facilitated and ignited the recourse to dubious short-term market manipulations through earnings management and outright accounting fraud.

However, although finance theories were the facilitators of the process, what really ignited it was the replacement of previous values based on fairness and justice by the greed and no-taxes cultures promoted by the Reagan and Thatcher right wing revolutions. These were compounded by the subsequent corruptible nature of the regulated and regulatory industries brought in by subsequent left wing governments.

So, halting and reversing the hands on the till process will now require a change in political attitudes as well as a denouncement of the misuse of academic finance theories.

Arguments Against the Death Penalty

Based on liberal principles, we argued before that individuals should not have the right to voluntarily terminate their lives. We shall consider now whether the State should have the right to capital punishment.

Most countries have renounced that right, but about 60% of humankind still lives under regimes with death penalty. Some of those regimes are dictatorships, like China, Iran or Saudi Arabia, but others are democracies, such as Taiwan, Japan and the United States.

Leaving aside the case of dictatorships and countries at war where human rights are ignored, we shall focus on the use of death penalty to punish non-political crimes in democratic countries such as the United States.

The case for using the death penalty to punish horrible crimes (e.g. homicide) is usually based on the principles of reciprocity, proportionality and deterrence. All these arguments are flawed.

The principle of reciprocity has its roots in the Hammurabi Code that introduced the law of an eye for an eye. However, it is now clear that you cannot correct a wrong by repeating it. Moreover, vengeance is not certainly among the enlightened virtues.

The principle of imposing penalties proportional to the seriousness of the offense is obviously just, but must be kept with reasonable boundaries. For instance, the assumption that death is the ultimate punishment is false. Torture, forced labor or isolation can be used as the harshest forms of punishment. However, societies need to balance redemption and punishment on the basis of its costs and benefits to society as whole; as well as the risk of committing irreparable mistakes in the administration of justice.

It is certainly true that lenient punishments or unrealistic beliefs in the recuperation of criminals can encourage crime. This can be easily observed in countries like Portugal which, after introducing a maximum effective prison sentence of 15 years and various forms of soft prison regimes and house arrests, experienced one of the highest rises in crime in the world.

Nevertheless, the statistics for the United States, where not all states have death penalty, also show that capital punishment does not work as a deterrent of violent crime. First, some homicides are not premeditated (e.g. passion crimes). Second, crimes are mostly the result of widespread possession of lethal weapons that often turn what would be simple fights into murders. Finally, and not least important, the perpetrators of premeditated crimes believe that the odds of being caught and executed are small and worth taking.

To sum up, none of the three arguments in favor of death penalty is strong enough to waive the liberal principle about the inviolability of the right to life. Only fallacious reasoning or prejudice can justify this barbarous historical relic.

Judged by the media or the mob: will the IMF Director have a fair trial?

To be fair justice must be blind but balanced. The treatment given to Dominique Strauss-Kahn charged with the sexual assault of a hotel maid in New York seems to lack both.

Let me begin by stating that I dislike the man, not only for being a socialist, but also for his past behavior in relation to women. I am also inclined to believe that he is probably guilty of sexual harassment in relation to the maid in question. Whether he was set up by his political adversaries, a possibility given the rare speed with which the police intervened and the fact that the security of the French hotel where he was staying did not cover up the occurrence as it would normally do is not relevant for the point I want to make.

The point is that trying to make him an escape goat or symbol of an American tough justice system for Public figures is as absurd as was the decision to deny him bail.

The fact that an act of aggressive (violent?) sexual advances between a 62-year old man and a 32-year old woman can be treated as a crime without bail and punishable with as much as 20 years in jail is proof of how far the media and political correctness have gone to make a mockery of justice.

In a country where the violent killer of his wife (OJS) goes free due to media pressure, where same-sex relations are recognized by law, where one night-stand sex is common and the divorce rate is rampant the fact that ‘forced’ sex between older and younger people is treated as a crime comparable to murder reveals double standards.

So, the real issue here is how America ended up developing such an unbalanced notion of justice? Public figures should not be singled out for special treatment (punishment or escape) just because the media or the mob asks for that. That is the real meaning of justice.