Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't by John Jr. (books that read to you TXT) 📕

that that occurs is if a particular candidate is a member.” Similarly, Jim Tobin, the director of the National Association of Life Underwriters PAC, testifies that instances of double-giving by his PAC are “extremely rare,” occurring “no more than 1 percent, maybe 2 percent of the time.” This happens when “one of our members may be running for Congress and, even though he may not stand a chance, we feel obligated to give him some money so as to encourage other members to run in the future.”

I interviewed representatives from many of the biggest PACs about this topic.61 Most of them have rules forbidding double-giving; in the exceptional cases where they do double-give, it is almost always because one of their own members is a candidate. This held true whether the group was a trade, corporate, ideological, or labor PAC.

So where does this myth of widespread double-giving originate? Mostly, it comes from sloppiness in using the data, such as attributing corporate donations to the companies themselves rather than to their employees, as previously discussed. Additionally, double-giving is sometimes alleged when PACs simultaneously donate to both Democratic and Republican primaries. But this is not actually a case of double-giving, and there is nothing cynical about it; PACs simply seek to support candidates in both parties whose positions are closest to their own. And even in such instances, if the candidates supported by a PAC win both parties’ primaries, PACs almost always limit their donations to one candidate in the general election. Unfortunately, this kind of sloppy reporting helps breed a general animus toward the entire political system and generates demands for new campaign finance laws, which in turn create far more problems than they solve.

Individual Reputations and Crime

A state judge on Monday sentenced former Tyco International Ltd. executives L. Dennis Kozlowski and Mark H. Swartz to 8 1/3 to 25 years in prison for looting the company of hundreds of millions of dollars to pay for lavish parties, luxurious homes, and extravagances such as a $6,000 shower curtain.

In a case that came to symbolize corporate greed, state Supreme Court Judge Michael J. Obus also ordered Kozlowski and Swartz to pay nearly $240 million in fines and restitution. Kozlowski and Swartz were immediately taken into custody and led from a packed courtroom in handcuffs as family members of both men sobbed. The men are likely to serve at least part of their sentences in one of New York’s 16 maximum-security state prisons.

—Washington Post62

A commonly heard complaint about our criminal justice system is that it favors the rich over the poor. With their ability to hire high-priced attorneys, wealthy defendants can allegedly “buy” a favorable verdict or at least secure a minimal sentence if found guilty. Very few people would disagree that a rich defendant has an overwhelming advantage over a poor one. But when we analyze the overall consequences a criminal faces after conviction, we find a surprising result: rich criminals face disproportionately high penalties.63

When people think about how criminals get punished, they tend to focus on prison terms. Perhaps financial penalties also come to mind such as fines, restitution, and legal fees. But for many convicted criminals, the most significant penalty is something else—their lost reputation. And it is through the loss of reputation that the wealthy really pay for their crimes.

Let’s look at a statistical composite of two hypothetical people—in 1984, Jim made $17,000 per year working as a bank teller, while Brandon made $82,000 per year as a manager at the same bank. Aside from their jobs and income, both men are statistically identical—they are unmarried, forty-year-old, white male Californians with no criminal history. Let’s say they were both convicted of committing the same crime—embezzling over $350,000 from the bank, the average amount stolen in these crimes.

According to statistics, their prison sentences would be very similar, with Jim spending around five weeks in jail, while the better-off Brandon would be locked up for five days less.

But the slightly shorter prison term is the only advantage that Brandon would receive from his wealth. On the downside, Brandon would face financial penalties far in excess of those applied to Jim. But the larger fine extracted from Brandon—$4,000 compared to $1,700 for Jim—is just the beginning. Brandon’s main punishment comes in the lost earnings after he returns to work. While Jim can expect his income to fall from $17,000 before his conviction to just over $10,000 afterward, Brandon’s income will plunge from $82,000 to a mere $4,700. Amazingly, after controlling for a variety of social and demographic factors, wealthier ex-convicts on average earn a lower salary after their conviction than poorer ex-convicts.

This crushing drop in income is especially evident with the richest ex-convicts. The average person convicted of insider trading in 1984 and 1985 made $365,000 a year prior to conviction versus $14,000 in the last year of probation or parole. If the legal costs and fines weren’t enough to bankrupt them, around two-thirds of white-collar criminals get divorced, with their spouses getting 90 percent or more of their assets. (The normal property division rules don’t apply when one spouse becomes a convicted felon.)64

Why would the conviction of a rich corporate executive depress his later income so dramatically? To begin with, after his conviction, he is highly unlikely to regain enough trust to be rehired to a job at his previous level. Although shareholders oversee the activities of a firm’s top officers, it is impossible for them to monitor all of their executives’ decisions. They must have some degree of trust in their officers’ honesty. Although shareholders will probably learn of corrupt activities eventually, by then it may be too late to correct the problem. A CEO could embezzle huge amounts of money or do other irreversible damage to a company before his dishonesty is discovered.

For this reason, companies place a premium on their executives’ honesty.

They, like most Americans, see the terrible price paid by companies like Enron, Adelphia, Tyco, Imclone, and WorldCom due to