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Revisiting Richard Grasso


Tags BiographiesFinancial MarketsLegal SystemPhilosophy and Methodology

06/17/2008Christopher Westley
Richard Grasso, the former head of the New York Stock Exchange, is in the news again. Back in 2003, he was the pariah du jour, the newest emblem of corporate greed for the new decade. I wrote about him here.

At the time, I defended his right to be paid the $188 million promised to him by his former employer. The sum was based on years of deferred compensation, agreed to freely and honestly by the labor demander (the NYSE) and the labor supplier (Grasso). An ethic of liberty requires that such agreements be upheld. But I also noted that the NYSE has benefited from near monopoly status thanks to decades of regulatory intervention, and that this also contributed to the salary structure made available to people like Grasso. Those decrying the compensation were often part of the very system that made it possible.

Since the Grasso story seemingly vanished from the news by the end of 2003, many thought the episode was over, but today I learned that his case is close to going to court. Over the years, it appears that Grasso has maintained a low profile, rejected settlements, and adhered to the principle that a contract is a contract, and that unless the NYSE is bankrupt, it must honor his and pay him the full $188 million. Good for him.

But it's not good to the New York Times, which explained in an article more suited for the editorial page, why Grasso's long ordeal is likely to end in his favor. The author, Landon Thomas, wrote,

[W]hile Mr. Spitzer and Mr. Cayne face years in exile, the indefatigable Mr. Grasso brings his case to New York's highest appeals court on Tuesday, with a growing chance that he may keep the vast portion of his payout.

Last year the Appellate Division of State Supreme Court reversed parts of an earlier ruling against Mr. Grasso. Now, in a future trial, New York State would have to prove not only that Mr. Grasso's pay was unreasonable, but that he knew it was so and that he took steps to keep the matter from his board. The ruling was a blow to the state's case, now being overseen by Attorney General Andrew M. Cuomo, imposing a higher legal burden on Mr. Cuomo's lawyers to prove that Mr. Grasso had used devious means to secure his pay.

One may wonder why New York, or any state, is competent to decide whether one's pay is reasonable. But then one wouldn't be writing for the New York Times. The Gray Lady is simply tapping into the public envy that arises when stories such as Grasso's come up — an envy that drives people to seek, through the state, to reduce the envy-causing inequalities.

To me, this impulse is a great waste of time. We know that inequality is and has always been the sine qua non of human existence. Disliking it is like disliking oxygen. And yet many seem to find satisfaction in programs and policies meant to eliminate or reduce envy in society.

Mises recognized this preference as a driving force explaining the embrace of increased state welfare in postwar Europe. He knew that many individuals valued the alleviation of envy more than the loss in productivity and wealth that the alleviation required. So introducing the threat of violence to force wealth transfers from the productive to the unproductive — or even to those simply possessing fewer skills valued by a market geared toward the satisfaction of consumer demands — can justify interventionism that, on the whole, reduces wealth and liberty.

But Mises, the market optimist, also argued that the benefits of liberalism were so great that such policies would not be supported in the long run. Was he right? After all, many recent positive economic reforms in places like Russia, China, India, South Korea, and even New Zealand occurred out of the desire for the fruits of the relatively less interventionist West. But many have criticized Mises's optimism, including Murray Rothbard in a chapter in his classic book The Ethics of Liberty. And envy-based policies seem to persist, whether in the form of progressive taxation or in assumptions that a state like New York can decide something as subjective as the reasonableness of salary contracts freely agreed upon.

Nonetheless, the Grasso case shows that there are limits to the interventions that the public is willing to tolerate. It is no accident that when the public is set on limiting government, wealth and freedom expand. We saw this happen as a result of the tax and regulatory reform movements in the United States and Great Britain in the 1970s. It explained the economic growth that resulted when the Cold War ended and individuals were allowed to keep wealth that would otherwise have been diverted to the public sector. There's no question such outcomes terrify government bureaucrats. They always result in more resources being devoted to satisfying the social good.

Grasso's case may be one of many events reflecting Mises's optimistic assumption of how interventionism would be limited. To be sure, they demonstrate the effectiveness of economists underscoring for the public the benefits of the right to contract, as well as the cost of intervention. But what's troubling about the Grasso episode also reflects the core of Rothbard's criticism of Mises on this point. Some basic rights — such as those to private property, to be left alone, to self-defense, to contract, and to free association, among others — should never be subject to the whims of the masses acting through the state. Wasn't this the purpose of the Bill of Rights in the first place?

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