And stay out of my damn yard!

Now I remember why I started this blog: To push back against public policy ideologies that are flatly contradicted by real world facts and/or which proponents will not quantify, test against alternatives, or accept accountability for results. Hence the subtitle to this blog: "The trouble with people is not that they don't know but that they know so much that ain't so."  So far, I haven't changed the world—or the proprietors of Environmental Economics. Here's a good example of what pragmatic, problem-solvers are up against.

Yesterday, Environmental Economics posted The case for cap-and-trade (or a carbon tax) in 2009. I posted the following comment, starting by quoting the only reference in the post to policies not involving attempts to achieve policy goals by manipulating price signals.

"[F]orcing electric utilities and other entities that buy energy to purchase a mix of energy without appropriate price signals is not a good idea."

Why not? We've done a lot of this in the last 35 years or so, including the requirement that utilities buy electricity from co-generation projects at "avoided cost." The amazing achievements of the Clean Air Act and State analogs all resulted from command and control regulations with nary a price signal. Surely, you're not proposing to replace tried and true methods with an untested method without at least a comparative discussion. Or are you?

One of the proprietors, John Whitehead, responded this morning.

Roger,

The forced demand will increase the price of renewable energy. The decreased demand for dirty nonrenewable energy will decrease its price. The prices are moving in the opposite direction of where they need to go to provide the appropriate signals to energy consumers about the full social costs of the energy sources. Consumers will want to buy less green energy and more dirty energy. I don't know how all that would play out since it is not exactly textbook theory but there are some definite inefficiencies in that scenario.

And a sarcastic answer to your question: Yes, i'm suggesting we have no discussion. I'm that sort of dick.

And that's why we started a blog (with open comments). To limit discussion!

"To limit discussion." And yet in the sidebar is this invitation, which I now assume is meant only to offer talking points to those who already agree with their ideology, not to engage skeptics.

The Answer Desk

GOT A QUESTION?

Got a question about environmental economics? Why do economists like benefit-cost analysis? Tradeable permits? Ask an environmental economist at the Answer Desk.

On the substance of Whitehead's response (in which he quotes himself in italics) I continue to find it astonishing that educated people will propose big changes in government policy affecting us all while admitting they "don't know how all that would play out" and that there are some "definite inefficiencies" in their proposals.

In contrast, when I engaged Robert Rapier on The Oil Drum on why his proposed gasoline tax of $2.00 per gallon was essential and sufficient to address the problems of too much petroleum consumption in the US, there was considerable responsive back and forth. I was not persuaded by the answers, but the willingness to engage is important. My public policy proposal (and yours) should be tested in a process that completely and accurately describes the problem to be addressed, considers all possible solutions (especially those that have been tested in the real world), identifies all significant costs, benefits, and collateral effects, and commits to quantified predictions for which we should be held accountable. But you may disagree with that.

Social Security ain’t broke and don’t need fixin’.

This week Obama said entitlement programs will be "a central part" of his Administration's effort to control federal spending. (Interestingly, these remarks at a press conference are not in prepared statements on the Obama transition website.) Clearly, Medicare and Medicaid are underfunded, but Social Security needs, at most, a minor tweak and is probably just fine for the long term with no changes in funding or benefit formulas, according to Bruce Webb and Barkley Rosser. So why did he say it?

Update on Monday, January 12, 2009 at 10:38PM by Skeptic

Not to worry.  Obama's a fixer, not a transformer.  Bruce Webb explains it all at Angry Bear.

Renewable power needs at least 1 deus ex machina.

Wind farms are often idled when there is plenty of wind because they are much easier and quicker to turn off and on than fossil fuel and nuclear power plants, according to Jennifer Dillon. Add to that the fact, as this sailor well knows, that winds may suddenly shut off and it's quite understandable that power dealers prefer coal and nuclear for base load requirements. Dillon says the answer is a "smart grid," and she provides a link to DOE work on designing a smart grid.

I don't see how a smart grid shortens the start-up or shut-down time for coal-fired or nuclear power plants. What would potentially make wind power reliable enough for base loading is a way to store and quickly withdraw wind-generated electricity, e.g., in the form of hydrogen. Maybe "renewable portfolio standards" could force more use of renewables despite their cost and inconvenience to power dealers. It seems weaning ourselves from coal is going to be a lot more complicated than building wind (and solar) farms, a lot more expensive than generating facility project costs, and may depend on storage and other technologies that don't exist yet. Imposing a charge on CO2 emissions doesn't solve any of those problems either. Who's got answers?

Major Push Is Needed to Save Afghanistan, General Says

That's the headline above this LATimes article, but the story makes clear that General Petraeus is advising a major push cannot save Afghanistan. The only solution is diplomatic, and agreements with Pakistan and Iran are indispensible.

General Petraeus also cautioned that security in Afghanistan would not improve if the only initiative was the deployment of more American troops; he said that Afghanistan required a diplomatic and economic commitment as well.

"There has been nothing easy about Afghanistan," General Petraeus said. Although "the natural tendency will be to look to the way progress was achieved in Iraq for possible answers," he added, it is clear that Afghanistan is different from Iraq.

Afghanistan has a higher illiteracy rate, more difficult terrain and fewer developed resources than Iraq does, he said.

More about the differences between Iraq and Afghanistan here. A fundamental problem in both Iraq and Afghanistan is that there are no examples in history where a nation has successfully accomplished what we say we want to accomplish in Iraq or Afghanistan. There is no model for us to plug in and follow. We are not only trying to do something that is obviously extremely difficult to do, but we have to invent the way to do it. There is no reason to believe it's possible, let alone feasible.

Greenspan confirms foreign competition depressed US wages.

"Too Much Fed" quotes from a Wall Street Journal review of Alan Greenspan's new book in this Mark Thoma post:

Many economists say the Fed, by cutting short-term interest rates to 1% in mid-2003 and keeping them there for a year, helped foster a housing bubble that is now bursting. In his book, which was largely written before much of the recent turmoil in credit markets, Mr. Greenspan defends the policy. "We wanted to shut down the possibility of corrosive deflation," he writes. "We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address....It was a decision done right."

He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates.

Notice how he seems to like low wages and low prices and does NOT like stagnation in stocks, bonds, and housing prices. He does seem to like (asset) bubbles though.

Greenspan oddly credits the end of communism for a global labor glut when he should have credited globalization. Communism only ended in the Soviet Union and affected a relatively small number of workers in nations with minimal trade relations with the West. At its peak, just before dissolution in 1991, the Soviet Union had a population of 293 million, whereas Mexico, China, and India had a combined population more than 10 times that size. Alan, don't try to lay off on the commies the competitive pressures on US wages; you and the free trade coalition were responsible for our declining middle class.

Update on Thursday, January 8, 2009 at 08:48AM by Skeptic

Other prominent economists have lately said that globalization has contributed to the decline of the American middle class, and even the New York Times editorial board has admitted it.  If we want the results to change, we have to change our policies.

Update on Friday, June 26, 2009 at 08:55AM by Skeptic

The National Bureau of Economic Research has published a study confirming that the offshoring activities of US multinational companies to low wage nations and import competition depress US wages. The Abstract:

In this paper, we link industry-level data on offshoring activities of U.S. multinational firms, import penetration, and export shares with individual level worker data from the Current Population Surveys. We examine whether increasing globalization through offshoring or trade has led to reallocation of labor, both within and out of manufacturing, and measure its impact on the wages of domestic workers. We also control for the “routineness” of individual occupations. Our results suggest that (1) offshoring to high wage countries is positively correlated with U.S. manufacturing employment (2) offshoring to low wage countries is associated with U.S. employment declines (3) wages for workers who remain in manufacturing are generally positively affected by offshoring; in particular, we find that wages are positively associated with an increase in U.S. multinational employment in high income locations (4) much of the negative effects of globalization operate through downward pressure on wages of workers who leave manufacturing to take jobs in agriculture or services and (5) the downward pressure on aggregate U.S. wages operating through import competition has been quite important for some occupations. This effect has been overlooked because it operates across, not within, industries.

Update on Monday, August 31, 2009 at 09:48AM by Skeptic

Berkeley professor Ann Harrison summarizes the work of herself and colleagues on International trade, offshoring, and US wages.

Did the negative effects of international trade and offshoring activities on US wages increase in the 1990s relative to earlier decades? We find that they did, and that the negative impact of offshoring to low-wage countries on both US wages and employment only became important in the 1990s. The wages of older workers appear to have been disproportionately hurt by offshoring activities.

Interestingly, they found that offshoring to high-wage countries actually increased US wages in the same industries. 

Update on Thursday, October 8, 2009 at 03:31PM by Skeptic

Larry Summers said 3 years ago that the middle class in high-wage nations was being left out of global economic growth.  The beneficiaries have been the owners of capital and workers in low-wage nations.

Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration’s foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth – and that its share of the pie may even be shrinking.

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

. . . .

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.

Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers – whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe – are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.

. . . .

The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.

Mr. Summers clearly regards this as a political problem but offered no solution. I wonder if he's got one now that he's chairman of the National Economic Council. 

Nuclear power is just too damn expensive.

The sensational version is here, estimating that the levelized capital cost of electricity from a new nuke is 17-22 cents per kW-hr and the all-in cost (including operations, maintenance and fuel) is 25-30 cents per kW-hr. This compares with current retail costs prices in the neighborhood of 10 cents per kW-hr.

A less dramatic (but not necessarily more accurate) all-in estimate by Lazard is here, 9.7-12.8 cents per kW-hr. The Lazard report has the virtue of comparing costs of nuclear power with all the other generation technologies in use now or expected to be commercial in the near future. According to Lazard, electricity from coal fired power plants with carbon capture and sequestration would be even more costly, about 13.5 cents. That makes renewables look pretty good cost-wise—except that some of the technologies (wind and solar, e.g.) are unsuitable for base load.

Update on Friday, May 29, 2009 at 09:38AM by Skeptic

The French company Areva is building a 1,600 megawatt nuclear plant in Finland.  It was budgeted at $4 billion, but is behind schedule and now expected to cost $8 billion, according to this NYT report.  The original budgeted capital cost of $2.50 per peak watt and the currently expected cost of $5.00 per peak watt may be compared with approximately $0.50 per peak watt as the capital cost of new combined cycle power plants running on natural gas.

Update on Wednesday, July 15, 2009 at 02:20PM by Skeptic

Ontario has shelved plans to build two 1,200 MW nukes because capital cost bids were 3-4 times the budget amount, according to this Toronto Star report.  On a peak watt basis, the only "compliant bid" was CAN$10.80 (US$9.50) from Atomic Energy of Canada, Ltd.  A lower submission of CAN$7.375 per peak watt from Areva NP was non-compliant apparently because it was not a fixed price bid.  Ontario had budgeted CAN$2.90 per peak watt.

Joe the Plumber has a great opportunity

. . . as described by Ezra Klein here.

How many pinheads can dance on a virtual Austrian?

The sky may be falling on the real economy, but academic economists still have time to debate precisely what Austrian School or Chicago School economists believe—or should believe if they are orthodox. Mark Thoma posted here an excerpt from a textbook on economic history and got over 100 comments, making it one of his most provocative posts. It was a clash about religious beliefs, not about provable facts or which of the ideas might have the most utility for solving diverse economic problems. Still, I got some new-to-me insights about how this fits into "Conservative" economic philosophy and links to sources I may read. After summarizing a few salient points below, I propose a warning label all these folks ought to use on their utterances.

The excerpt said the differences between the Austrian School (based on the work of Carl Menger, Ludwig von Mises, and Friedrich Hayek) and the Chicago School (led by Milton Friedman) were insignificant and proceeded to summarize the essential beliefs and then criticize them. It turns out that Austrians and Chicagoans are as offended at being lumped together as were Catholics and Protestants in Martin Luther's time.

There were bitter and arcane arguments over doctrinal differences and whether certain precepts were orthodox or apostasy or simply expressed inaccurately. (I expected arguments about whether precepts were sound or unsound, and there was some of that, but the dominant discussion was about who is entitled to be called a Chicagoan or an Austrian.) A few self-avowed Austrians weighed in, including the author of the official write-up of Austrian economics on the Library of Economics and Liberty website, and others referred us to www.mises.org for even more official information.

The author of the quoted textbook was branded a Marxist by some, as was Mark Thoma for publishing the excerpt. It turns out that the Austrian School (which either is or is not the foundation for the Chicago School) developed in large part as a reaction to the theories of Karl Marx. One comment (by Dan Zale) provides this quotation from von Mises:

The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the non-progressive majority of people. ... The market process provides the common man with the opportunity to enjoy the fruits of other peoples' achievements. It forces the three progressive classes to serve the non-progressive majority in the best possible way.

Everybody is free to join the ranks of the three progressive classes of a capitalist society. These classes are not closed castes. ... What is needed to become a capitalist, an entrepreneur, or a deviser of new technological methods is brains and will power.

Source: "The Anti-capitalistic Mentality" (1956) p. 40.

Of course, this stands in stark contrast to—and was meant to be in stark contrast to—Marx's idea (which was also Adam Smith's idea) that the value of everything consists entirely of its labor content. In the Mises view, all value comes from capital, innovation, and entrepreneurship, which values may then be shared (or not) with the non-productive masses.  Sound familiar?

One comment (by Michael Cain) quoted from Hayek to show that modern Chicagoans and Austrians are quite capable of ignoring the words of the original theoreticians when those words contradict the extreme individualism philosophy of those claiming the mantle today.

Hayek, at least, recognized a moral argument that there should be constraints imposed on outcomes, and that government redistribution was probably the only way to impose those constraints (from the condensed version of Road to Serfdom):

There is no reason why, in a society which has reached the general level of wealth ours has, (the certainty of a given minimum of sustenance) should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.

The difference between that and modern conservatism seems to be that the contemporary group believes that everyone could make "adequate provision" for those risks, if only the government would get out of the way.

(I have noted that some of these abusers of Hayek similarly misrepresent Adam Smith.)

The whole dialog reinforced the insight I got while reading this earlier Mark Thoma post and comments: For many economists, economics is a virtual world they prefer to the real one, and I suggested they and other social scientists preface everything they say or write with a disclaimer along these lines.

WARNING! The following is a discussion of a virtual world that differs in very material ways from the real, physical world in which we live. Although I take this stuff very seriously and am trying to improve my skills—like players of Grand Theft Auto or Dungeons and Dragons—many of the things I say (I won't tell you which ones) are not meant to describe or make predictions in the real world. Therefore, nothing I say should be construed as advice for surviving and prospering in the real world or for establishing norms for the ordering of the real world. Basically, if you're not a gamer like me, you should just ignore me.

Update on Thursday, January 8, 2009 at 02:55PM by Skeptic

Not only can you be a full-time gamer, there are at least 5 other advantages to being an economist, as Joe Romm points out here.

Update on Friday, January 9, 2009 at 10:03AM by Skeptic

Koen, commenting on Joe Romm's cartoon, reposted an extract from the Financial Times of a blog post by prominent European economist Willem Buiter:

Economic policy is based on a collection of half-truths. The nature of these half-truths changes occasionally. Economics as a scholarly discipline consists in the periodic rediscovery and refinement of old half-truths. Little progress has been made in the past century or so towards understanding how economic policy, rules, legislation and regulation influence economic fluctuations, financial stability, growth, poverty or inequality. We know that a few extreme approaches that have been tried yield lousy results - central planning, self-regulating financial markets - but we don’t know much that is constructive beyond that.

The main uses of economics as a scholarly discipline are therefore negative or destructive - pointing out that certain things don’t make sense and won’t deliver the promised results.

I agree economics and economists are not useless.  Just saying that physicians and lawyers who give advice as recklessly as many economists tend to lose their licenses to practice.

BTW, the subject of the Buiter post is the difficulty Obama will have getting us out of the ditch with Keynesian stimulus policies because our underlying economic fundamentals, especially the role of the US economy in the world economy, have become so bad and the stimulus only makes them worse.  Worth reading.

Update on Friday, January 9, 2009 at 03:42PM by Skeptic

Princeton economist Uwe Reinhardt gives his take here on what ails modern neoclassical economics and its practitioners. Some of the comments on his post are insightful also.

How could the economics profession have slept so soundly right into the middle of the economic mayhem all around us? Robert J. Shiller of Yale University, one of the sage prophets, addressed that question in an earlier commentary in this paper. Professor Shiller finds an explanation in groupthink, a term popularized by the social psychologist Irving L. Janis. In his book “Groupthink” (1972), the latter had theorized that most people, even professionals whose careers ostensibly thrive on originality, hesitate to deviate too much from the conventional wisdom, lest they be marginalized or even ostracized.

If groupthink is the cause, it most likely is anchored in what my former Yale economics professor Richard Nelson (now at Columbia University) has called a ”vested interest in an analytic structure,” the prism through which economists behold the world.

This analytic structure, formally called “neoclassical economics,” depends crucially on certain unquestioned axioms and basic assumptions about the behavior of markets and the human decisions that drive them. After years of arduous study to master the paradigm, these axioms and assumptions simply become part of a professional credo. Indeed, a good part of the scholarly work of modern economists reminds one of the medieval scholastics who followed St. Anselm’s dictum “credo ut intellegam”: “I believe, in order that I may understand.”

The financial theory king is dead. Now what?

Edward Hadas calls for a paradigm shift here and in Fortune. Maybe the whole belief system of free market fundamentalism hasn't collapsed, but the part relating to finance irrefutably has and must be abandoned.

When the financial system crashed, a whole intellectual edifice fell down with it. New economic ideas are desperately wanted.

Hadas doesn't think the answer is to just exhume John Maynard Keynes, which is what everybody else seems to be doing. He calls for new ideas and proposes 3 of his own.

His comments on the passing of the old regime:

It was the belief that largely free financial markets – in old fashioned banking, newfangled investments and international trade – could deliver steady and rapid growth.

. . . .

The hands-off approach to bankers and traders spawned disastrous financial innovations such as negative amortization mortgages and collateralized debt obligations. It also encouraged regulators to ignore fast-rising mountains of leverage and central bankers to watch from the sidelines as asset price bubbles grew and grew.

The confidence in cross-border financial freedom proved at least as misguided.

Update on Tuesday, January 6, 2009 at 10:33AM by Skeptic

In another post, Hadas insists central bankers have to pay attention to asset prices and take "firm countermeasures" to prevent bubbles and imprudent leverage.

Why are tax cuts such a large part of the emerging Obama stimulus plan?

In the public discussions of the stimulus plan, there seems to be near consensus on the Left that tax rebates (and especially rate cuts that don't affect household incomes immediately) are relatively ineffective at stimulating demand. Studies of the Bush tax rebates indicated that about half of the give-backs were saved or used to pay down debt instead of stimulating aggregate demand by being promptly spent. The leading "Democrat ideas" have been investment in infrastructure and green energy projects, subventions to State and local governments so they would not reducing spending, and of course extension of unemployment insurance. But over the weekend it was reported that the Obama stimulus plan will include a very large component that is just tax reductions, which is the only stimulus that Republicans approve. What's going on? Has Obama changed parties? Does he lack the nerve for a fight?

Tyler Cowan may have the answer here. The Obama team may not have been able to identify enough "shovel ready" projects to absorb all the infrastructure spending they may have wished. Rather than authorize money that would not be spent soon enough, or spend money on undeserving projects (like digging holes and filling them in), Obama has decided to bring forward the middle-class tax cut he promised and call it part of the stimulus plan. My assessment:  If Obama proposes permanent tax cuts for the middle class only and front loads it with some kind of rebate, then he gets a twofer--stimulus and delivery on a campaign promise.  If he proposes only temporary tax cuts/rebates, he's caving in to the GOP.

Update on Saturday, January 10, 2009 at 06:26AM by Skeptic

The Obama administration in waiting has released a paper by Christina Romer and Jared Bernstein with estimates of the jobs effects of the stimulus plan. These key findings are on page 2, with the second bullet being most relevant to the above post:

A package in the range that the President-Elect has discussed is expected to create between three and four million jobs by the end of 2010.

Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases. However, because there is a limit on how much government investment can be carried out efficiently in a short timeframe, and because tax cuts and state relief can be implemented quickly, they are crucial elements of any package aimed at easing economic distress quickly.

Certain industries, such as construction and manufacturing, are likely to experience particularly strong job growth under a recovery package that includes an emphasis on infrastructure, energy, and school repair. But, the more general stimulative measures, such as a middle class tax cut and fiscal relief to the states, as well as the feedback effects of greater employment in key industries, mean that jobs are likely to be created in all sectors of the economy.

More than 90 percent of the jobs created are likely to be in the private sector. Many of the government jobs are likely to be professionals whose jobs are saved from state and local budget cuts by state fiscal relief.

A package is likely to create jobs paying a range of wages. It is also likely to move many workers from part-time to full-time work.

It's interesting that Bernstein, who made his reputation as a labor economist and is officially Chief Economic Advisor to the Vice President-elect, is a co-author with Romer, who is designated to be Chair of the Council of Economic Advisors.

Update on Saturday, January 10, 2009 at 11:58AM by Skeptic

Brad DeLong makes the case (mostly through a re-post from Howard Gleckman) that 2 of the 3 business tax reduction proposals leaked by the Obama team have been previously scorned as ineffective stimulus by some of Obama's economic advisors. Their apparent purpose is to buy GOP votes, but DeLong makes the point that the the proposed individual tax cuts would at least slow down rising income inequality, which is a traditional Democrat concern.

If the Democrats enact a big stimulus package that seems to save America from a second Great Depression, what would that do to the Republican Party?

Dean Baker suggests the GOP fears being out of power for a generation if the Democrats are seen to have that success. So how can the GOP deprive the Dems of that aura? By getting involved, voting for the bill, and sharing credit for success? By blocking the bill and hoping we won't have a deep, unforgettable recession or worse? Generally speaking, what other choices does it have?

Unreasonable executive pay is a symptom, not a cause, of our broken system.

Mark Thoma raised the question here whether outlandish executive pay should be capped or perhaps subject to higher tax rates on the outlandish part. As I read the post, the comments, and a NYT op ed piece by Lewis and Einhorn (linked below), the executive pay question came into better focus for me.

My first reaction was that I was being asked to choose between solutions when the problem hadn't been defined yet. I posted this:

What exactly is the problem that requires any government intervention? Is it that top executives are taking advantage of shareholders? Is it that what should be a marketplace for executive talent has been captured and is not working properly, leading to misallocation of resources and economic "inefficiency"? Is it envy? Something else perhaps? Maybe not really a problem at all?

One or two commenters suggested it was a cosmetic problem deserving of attention and that there are income distribution effects. I was underwhelmed and posted this.

I agree corporate governance in big US companies is not the best way to do it. But all of the points raised above, and others, have been the focus of attention since at least the 1970s, and some efforts have been made to improve the system. IRC Sec. 162(m) limits the deductibility of executive pay in excess of $1 million unless "performance based." Improved disclosure of executive compensation. Shareholders have slightly improved ability to get votes on dissident proposals. (To the contrary and unfortunately, the rule that forfeited to the company "insider trading" gains from exercising employee stock options and selling within 6 months of each other was abrogated some time in the 1980s.)

I've not done a study, but my impression is that the worst executive pay abuses (I agree they are abuses) are in finance and industries in which financial transactions (such as roll-ups, refinancings, and generally "creating shareholder value" by balance sheet transactions rather than through operations) dominate the business plan. I attribute that (again without study) to the different traditions of compensation that grew up in investment banking from those in manufacturing and retail. The former, a deal-making tradition, was fee driven--taking a percentage of the value changing hands. The latter was driven by operations targets, like earnings, in businesses that took a longer view of things and prized "management skills."

Still, I see the struggle as being primarily between the shareholder class and the executive class without substantial implications for middle class incomes. And, again without research, my impression is that although CEO compensation can be far larger than is warranted, it's not in normal times many cents per share, which is I assume why shareholders grumble but still hold shares.

If y'all can make a persuasive link between changes in corporate governance and/or executive compensation, on the one hand, and getting the middle class moving again, on the other hand, I'll join the mob and bring my own torch and pitchfork. A shareholder rights movement would not have the same visceral appeal to me.

Then I read the morning fish wrap and realized that outlandish executive compensation is a symptom, not a cause, of an out-of-control financial industry and posted this:

The governance failures of government dwarf the governance failures within companies. Contrast this discussion about executive pay with The End of the Financial World As We Know It by Lewis and Einhorn in today's NYT Opinion.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O'Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup's chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said "this business is irresponsible and we are not going to participate in it" — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he'd be replaced by someone willing to make money from the credit bubble.

The online version is preceded by focusing on definition of the problem to be solved: "We have a brief chance to cure ourselves. But first we need to ask: of what." I see outlandish executive pay as a symptom, not a root cause. Dean Baker is on the right track here. Echoing Grover Norquist, he just wants to shrink it [the financial industry] down to an appropriate size.

Update on Sunday, January 18, 2009 at 11:26AM by Skeptic

I've moved the penultimate hyperlink to The End of the Financial World as We Know It from the misleading place I initially put it.  The "contrast" in the discussion is not between two NYT pieces but between the NYT piece and the discussion in Thoma's blog. 

The quotation in the last paragraph I said introduced the online version of the NYT piece isn't there anymore, but it is and was at the end of the third paragraph of the piece.

Update on Tuesday, April 28, 2009 at 09:34AM by Skeptic

This post says "obscene Wall Street salaries are proof of market failure."

New look

Realitybase has a new look for 2009.  The former template is no longer supported by our host.  So I had to switch to keep up with the times.  Your comments are welcome--especially if there is anything that doesn't work right or if it's hard to read.  Post a comment or find my email address at the end of the About Me page. 

Thank you for your attention in 2008, when our Google PageRank advanced from 0/10 to 1/10 to 3/10, which I think means I am no longer dead to Google.

The rise and fall of the credit default swap business and AIG

The story is well told in a three-part series in the Los Angeles Times ending today. Part 1: Bold innovators led AIG's stunning rise. Part 2: Complex deals veiled risk for AIG. Part 3: Credit rating downgrade, real estate collapse crippled AIG. Just as a credit rating agency did not consider the possibility of a nationwide decline in housing prices, the geniuses at AIG did not consider the possibility that AIG's credit rating could slip from AAA to AA. When that happened, AIG had to respond to demands for more collateral and could not.

The elephant in the global warming room

One predicted effect of global warming is rising sea level. Predictions are of course predictions, and people may choose to be unpersuaded. But here's an observable fact they cannot deny—the sea level has risen 8 inches in the last 100 years, according to this Los Angeles Times article, which describes the inexorable effects in Malibu. This NASA report confirms that and reviews sea level rise events over the last 20,000 years, based on geological evidence. NASA reports an acceleration in the rise starting a century or century and a half ago.

Twentieth century sea level trends, however, are substantially higher that those of the last few thousand years. The current phase of accelerated sea level rise appears to have begun in the mid/late 19th century to early 20th century, based on coastal sediments from a number of localities. Twentieth century global sea level, as determined from tide gauges in coastal harbors, has been increasing by 1.7-1.8 mm/yr, apparently related to the recent climatic warming trend. Most of this rise comes from warming of the world's oceans and melting of mountain glaciers, which have receded dramatically in many places especially during the last few decades. Since 1993, an even higher sea level trend of about 2.8 mm/yr has been measured from the TOPEX/POSEIDON satellite altimeter. Analysis of longer tide-gauge records (1870-2004) also suggests a possible late 20th century acceleration in global sea level.

Bush has inadvertently(?) given the auto unions a powerful weapon in the Detroit bailout plan.

Treasury's bailout of GM and Chrysler will not be funded unless union workers agree to reduced compensation and other conditions to make them "competitive" with the US workforces of Nissan, Honda, and Toyota. But there is no requirement that executive pay, or compensation of thousands of non-union employees, be reduced to these "competitive" levels.

Clearly, this was a union-busting move by the Bush Administration, Congressional Republicans, and the Detroit auto companies, but it could backfire. The unions might condition their acceptance of these give-backs on the Companies' agreements (i) to reduce compensation by at least the same percentage for every non-union employee and (ii) not to use buyouts or post-termination benefit extensions to reduce the non-union workforce. The unions might also demand veto power over executive compensation in excess of a certain amount. How could the union-busters argue effectively that taxpayer money should be used to save Companies whose executives and non-union employees are unwilling to compete?

Of course it's possible the Bush Administration understands this full well and has deliberately planted this time bomb to go off in the first two months of the Obama Administration.

Key provisions of the GM and Chrysler Term Sheets (which are identical except for the Appendices) are summarized below.

Terms applicable to union employees

The Company and its subsidiaries must modify by December 31, 2009 the "total amount of compensation, including wages and benefits" paid (per-hour and per-person as certified by the Secretary of Labor) and "work rules" to be "competitive" with the US workforces of Nissan, Honda, and Toyota. In addition, at least half of future contributions to existing union-managed benefit plans must be in the form of Company stock instead of cash, and the Company may not use buyouts or post-severance benefit continuations to reduce head count.

Despite the fact that these changes are described as restructuring "targets" and the fact that the Company's obligation to achieve them is qualified by "best efforts," if term sheets agreeing to these modifications have not been signed by leaders of all the major unions and benefit plan representatives by February 17, 2009, that would be an "Event of Default." Also, failure to have these changes approved by union members, and regulatory applications for approval of the benefit plan changes pending by March 31, 2009, would be Events of Default. If there is an Event of Default, Treasury may declare the entire loan due and immediately payable. (Some of these provisions could apply to non-union employees also, but not doing so would not be an Event of Default.)

The "Restructuring Plan" that must be submitted by February 17, 2009 must include "specific actions" to result in "rationalization of costs, capitalization, and capacity with respect to the 'manufacturing workforce'," but there is no requirement for the elimination of any other jobs.

Terms applicable to non-union employees

The Company is not required to make any changes in the compensation, benefits, tenure, or working conditions of any employees who are not union members or among the 25 most highly compensated employees in the Company ("Senior Employees"), except for two provisions.

The Company and its top 3 executives will be subject to the same limits Section 111(b) of the Emergency Economic Stabilization Act of 2008 imposes on compensation of the top 3 executives of financial companies receiving money from the "TARP." According to this Treasury Notice, the main effect is to prohibit payment of golden parachutes. Any bonuses or incentive compensation for Senior Employees is subject to the approval of the Car Czar. It is a Condition of Closing (on December 29, 2008) that the Company and Senior Employees present written waivers of all claims against each other and Treasury arising out of any modifications required to implement these requirements.

The Return of Depression Economics and the Crisis of 2008

This new book by Paul Krugman is being discussed all week at TPMCafe by a number of well-known economists including Krugman. Some very fundamental issues are being debated, and I expect Obama's economic policy team is following it.

After the emergency economic packages, then what?

Robert Reich correctly points out that we dare not think temporary government stimulus packages can restore long term economic health to the middle class and working class. They were in a decades-long and accelerating decline before the subprime mortgage crisis and current recession started.

Not long ago I was talking to someone who once had been a deficit hawk but the current recession had turned into a full-blooded Keynesian. He wanted a stimulus package in the range of $500 to $700 billion. "Consumers are dead in the water," he said, fervently, "so government has to step in." I agreed. But I didn't tell him his traditional Keynesianism is based on two highly-questionable assumptions in today's world, and the underlying logic of Keyenes leads us toward something bigger and more permanent than he has in mind.

The first assumption is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren't much higher than they were in the 1970s. Middle-class families continued to spend at a healthy clip over the last thirty years despite this because women went into paid work, everyone started working longer hours, and then, when these tactics gave out, went deeper and deeper into debt. This indebtedness, in turn, depended on rising home values, which generated hundreds of billions of dollars in home equity loans and refinanced mortgages. But now that the housing bubble has burst, the spending has ended. Families cannot work more hours than they did before, and won't be able to borrow as much, either.

Click here to read the rest of Reich's post.

Update on Friday, December 19, 2008 at 09:14PM by Skeptic

Obama said today in a press conference that he's concerned about the aftermath of the recovery--dealing with the public debt and deficit and structuring an economy that produces rising incomes for the middle class.  The New Yorker observes that he and Robert Reich are not the first men in history to worry about what comes after a crisis. 

How to stimulate the economy out of recession

Mark Thoma's blog has a thoughtful and diverse discussion going here about whether government spending, tax cuts, or something else, or nothing can stimulate an economic recovery.

This means you, Governor.