Let Corporate Leadership Handle It....if They Will

April 30, 2014

Some might interpret my recent posts as suggesting a preference for government solutions.

I'm equally happy with private solutions. Corporate pay, especially for CEO's, is a good example. The Board of Directors and the shareholders are certainly the ideal bodies for determining appropriate CEO pay. However, the excesses under current practices have become so egregious that Directors should rightfully fear the government will step in, if they don't do their jobs. There have been referenda in certain countries to limit the pay of CEO's. The US has a higher ratio of CEO pay to median employee pay than almost any other country, and government controls could happen here.

A good example of egregious excess is the pay for Marissa Mayer, CEO of Yahoo.  See Steven Davidoff's analysis of her pay: http://dealbook.nytimes.com/2014/04/29/yahoo-chiefs-pay-tied-to-another-companys-performance/?_php=true&_type=blogs&_r=0

Davidoff reports her base is $1 million. That's OK. Her bonus is a minimum of $2 million, subject to meeting goals. That's OK, too.  So, how is it that her compensation at the end of 2013 is estimated at $214 million? That's not OK. That kind of compensation is way over the top, excessive, unnecessary to motivate or compensate any executive, and it is dilutive to the shareholder equity in the company. It adds to the ire of those concerned with inequality, the advantage of the 1%, and the lost decades to the working class.

Davidoff lays out a mixed record for her two years at Yahoo--revenue was down in 2013 and profits were down in the first quarter of 2014. She has made some promising changes, but it is too early to see how her term at Yahoo will add up.

What's driving the big bucks is stock options. When Compensation Committees of Boards were faced with challenges over corporate pay, they gradually figured that putting the bulk of potential pay on stock performance was an easy way out of criticism: A CEO would only get the $1 million base and the $2 million bonus if the stock value didn't go up, and if it did, the CEO would only get a piece of the increase in market value? Either way, the market determined the final amount, not the Board. Sound fair on the surface? Results can't be blamed on the Board, they figured.

But what if the CEO had little to do with the appreciation in the stock value, as may well be the case with Mayer. She may turn out to be a fabulous CEO, but it's too early to know that, based on mixed results across the two years. Yet, the stock of Yahoo has appreciated dramatically, primarily as a result of the stunning promise of Alibaba, a privately owned internet giant in China in which Yahoo holds a minority interest, and which may go public soon. Mayer did not negotiate that deal and has little, if anything, to do with the performance of Alibaba.

OK, this case is unusual, due to the unique driver of the stock price. But, there could easily have been a way around that, if the Board had done its job. Any there are many other examples of such stock option driven excesses, without an Alibaba in the mix.

I vote (again) for asking the private sector to do its job--for example, the Board should go back to making discretionary decisions on CEO performance and compensation--take the responsibility back that your role requires. Give Mayer $10 million if you think it right, but not $214 million! Don't sidestep your responsibility, and don't complain if you do, when the government or the public step in and compel limits.

Capitalism can work well for our society, but some elements of greed do need to be constrained by the private sector, or the public sector can and will rightfully do that for them.

We Could Use a Bit More Government Help, Please!

April 17, 2014

We Could Use a Bit More Government Help, Please!

I'm not a proponent of Marxism, socialism, or very big government. I acknowledge that our governments (local, state, and federal) are in great need of overhaul. There is waste and inefficiency, and there are many "pork barrel" projects resulting from "earmarks" which have been forced into our excessive budgets due to the inefficiencies of our current political system. We see evidence of waste all around us on a daily basis.

However, that reality does not get solved by simply squeezing down taxes of all sorts further and further, and starving government which has significant entitlements to limit opportunities to cut expenses, resulting in cuts starving critical social needs.

After coming to grips with the growing inequality of our nation across the last 30 years of neoliberal economic domination, I have started to give larger tips to coffee baristas, to parking attendants and others who serve me, realizing more than before, that these helpful members of our community are living with barely enough or not enough, and their wages are not increasing. We should all pitch in whenever we can in that way to ease the burden of these hard working people.

Similarly, I recently learned that there is a box on the tax return which invites us to volunteer extra tax payments which will go directly to pay down the federal debt. I learned that the amounts which have been voluntarily given in recent years have ranged for about $3 million to about $12 million at the peak in 2012, when there was peak noise about the federal debt.

Good for those citizens who ticked the box and wrote a bigger check. I did not, and it would appear that perhaps Warren Buffet did not either, as had he done so, his likely contribution would have been a great deal more than the peak annual total of $12 million.

Our total federal government debt is around $17 trillion, so these voluntary contributions are not going to reduce it by even a fraction of 1 percent. Neither will voluntary additional tipping to low wage workers significantly alleviate their financial distress.

There is an understandable reluctance on the part of citizens to try to pitch in to fix things, if others are not joining them in doing so. These are good examples of the value of collectivism, and policies voted in by elected legislatures. Once that is done, most of us feel it's fair. For example, I would be willing to surrender some of my social security benefits, my home mortgage deduction, some of my medicare benefits, if we could only agree that we are all going to join in, in some rational way, so that we can then help to solve some of the problems of our nation. For example, I'd be delighted to do this if we could use half the savings to reduce government debt and the other half to improve the lot of the underprivileged--as with improved access to good schools, training programs, and also infrastructure--which helps everyone.

Without government, with only the market system to deal with these issues, and with no willingness to additionally tax, even for those making more than $1 million per year, the outlook is dismal.

I submit that we need a lot less government in many areas and a bit more in others. Net net, I am convinced we could significantly reduce the cost of governments, but we need to rebalance what they are doing.

The political feasibility of such as this is another thing altogether. Clearly, entitlements such as social security and medicare benefit the older of us, and the older have the time and the money to vote, to make noise, and to be active politically. We need government leadership to show our older population a way to just tighten our belts a little, spread over time, such as to enable our children and grandchildren to have a sustainable future.

CEO Compensation

April 16, 2014

Here are two recent surveys of 2013 CEO compensation. Take your choice. The major difference between the two is that GMI counts as compensation that which is realized by the executive from sale of stock options in the current year, regardless of when those options were granted. Equilar only counts the value of options granted this year--i.e., the difference between the market price of the stock and the grant price at time of option issue.

GMI:  http://www3.gmiratings.com/home/2013/10/gmi-ratings-2013-ceo-pay-survey-reveals-ceo-pay-is-still-on-the-rise/

Equilar:  http://www.equilar.com/nytimes/the-new-york-times-100-highest-paid-ceos

GMI is an independent research providing firm, which does not do consulting for the firms they evaluate. In the 2012 Independent Research in Responsible Investment (IRRI) Survey conducted by Thomson Reuters Extel and SRI-CONNECT.com, GMI Ratings was named “The Best Independent Corporate Governance Research Provider."

Equilar is a privately held company focusing on providing information on executive compensation, frequently cited in Bloomberg, BusinessWeek, The New York Times, Financial Times, the Wall Street Journal, and other business publications.  

I stipulate that both of these analyses are probably correct. The difference is easy to understand, clearly explained in their respective assumptions or methodologies. To illustrate the difference in their respective tallies, take the case of Tim Cook of Apple. Equilar shows Cook's total comp at $4.3 million. This was his salary and bonus, and included only $175,000 of currently issued stock options. Presumably, his 2013 option grants were extended at a price very close to current market--so there is little "equity" at the time issued. Of course, it is hoped that there will be substantial equity in those options as the Apple stock price advances in the future.

GMI Ratings shows Cook's total 2013 compensation as $143.8 million. All of the difference between these two reports is the amount of gain Cook realized in 2013, for options granted in the past.

Personally, I vote for the GMI approach. It seems a more appropriate measure of total comp. Between the end of 2012 and the end of 2013, Cook's wealth (before taxes) increased, due to Apple, not by $4.3 million, but by $143.8 million. If we never count as compensation, year to year as we follow executive comp, that portion of his/her total wealth that is accumulated from the sale of options granted in past years, then we are not really properly evaluating total executive comp. Those gains are part of total comp. In fact, for the majority of CEO's, that is the largest portion of total comp across their term as CEO.

The reality that executive comp is now structured in most publicly traded companies, such as to put the majority of it in potential stock option gains, is a very troublesome development. It means that the primary motivation of the CEO and his top staff is to do whatever they can to raise the stock price.  The timing of those stock price increases is also important for the CEO who wishes to cash out some of his options--thus motivating results at certain dates, vs. for the long term. Other critical actions important to the long term sustainability of the enterprise often have little impact on stock price, or even a negative impact--such as spending more time and money to achieve diversity in the workforce, raising the pay of the workforce, etc. 

Take a look at the views of Graef Crystal, one of the long time experts on CEO compensation: "It’s a rigged game. When the company’s stock goes up, says Crystal, the chief executive views himself as a hero. And when it goes down, 'it’s Janet Yellen’s or Barack Obama’s fault'" (http://www.nytimes.com/2014/04/15/opinion/ceo-pay-goes-up-up-and-away.html?hp&rref=opinion&_r=0).

For these reasons, I would personally much prefer the previous system. I would prefer the Directors have the authority to make discretionary bonus decisions. These options packages are often of outrageous value and they do dilute the per share value of the company to common shareholders.

But for the most important point about CEO compensation, I don't care which of the two approaches you use--you can ask yourself--is it right that Larry Ellison of Oracle was paid $78.4 million, using the Equilar approach? Or, is it right that Mark Zuckerberg was paid $2.3 billion, using the GMI Ratings approach. It seems doubtful to me that either is right.

In my judgment, both awards are likely well beyond what is necessary to compensate a highly effective CEO for either of those companies. Perhaps both Ellison and Zuckerberg are good leaders. But can anyone really believe that it is necessary to pay these amounts in order to attract and retain excellent leadership? Is there no excellent leader in the whole business world, who would take either of those jobs for $10 million, or maybe even just $5 million in annual compensation?

What other consideration can be appropriate to justify such payments?

Is Philanthropy from the Wealthy Sufficient, or Would a Little More Government Help?

April 12, 2014

Is Philanthropy from the Wealthy Sufficient, or Would a Little More Government Help?

My question for today is whether philanthropy coming from the rapidly increasing wealth of the most wealthy is going to the most critical problems of the underprivileged, and whether the magnitude of it is sufficient to make a difference.  Can increased philanthropy, a by product of increased inequality, be considered a good alternative to programs from the state?

In other words, is increasing inequality, when coupled with the increased philanthropy from some of the ultra-rich, going to make up for what has been cut as the neoliberal economic policies have been increasingly at work across the last 30 years to try to starve the government?

The policies successfully pursued by the Conservative Right since Reagan, have resulted in reducing government expenditures on a variety of critical programs--education, infrastructure, and social welfare are some of those. While medicare and social security have survived, many other social programs benefitting the poor have been reduced.  While this has been happening, our nation has experienced increaseing inequality. Income and wealth have grown dramatically for the wealthy, and wages have been stagnant for the middle class and the poor.  Meanwhile, in some quarters, among the ultra-wealthy, there seems to be a great deal of pride taken in their philanthropy.

This post is not intended to find fault with the generous philanthropy of some of our rich. I am not suggesting they gained their wealth illegally or immorally.  The minority who did that is another subject altogether.

Philanthropy of most all sorts is certainly beneficial--beneficial to someone, be it Stanford University (which recently raised a record $1 billion), the Catholic Church, California Pacific Medical Center (or your favorite hospital), and many others. There seems to be a sense of complacency, however, regarding what is happening comprehensively as the set of neoliberal policies have been playing out across the last 30-40 years.

My guess in preparing to examine this is that (a) little has been done to effectively analyze the question; and (b) there is a growing gap in the difference between public (government) support for the poor and what is directed to the poor from philanthropy.  My guess is that most philanthropy goes to entities like those mentioned in the previous paragraph, and not to the needs of underprivileged--unless one tries to determine how much a church, a major university, or a hospital ends up benefitting the poor.

One source is research sponsored by Google, focused on formal philanthropy, so not including measurement of gifts between individuals. Thanks to Rob Reich of Stanford's Philanthropic Center for directing me to this limited research.

First, the estimate is that total philanthropy has been averaging about 2 percent of GDP since the mid 1990s. Of the 2 percent, Google finds that approximately 1/3 or about .7% of GDP goes to needs associated with the poor. They find that only about 8% of the 2%, or about .2% of GDP is channeled by philanthropy to the basic needs of the poor--food, clothing, housing, etc., and the remainder for things such as literacy and job training.

Source: Google; http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/30/only-a-third-of-charitable-contributions-go-the-poor/

In recent times, our national budget has been about 1/4 of the nation's GDP--$4 Trillion vs. $16 Trillion. So, a very rough adjustment is to say that philanthropy is equivalent to about 8 percent of the national budget, and that the portion dedicated to the poor is equivalent to about 3% of the national budget.

Perhaps the lack of attention to the question is already answered by simply seeing the magnitude of philanthropy.  By comparison, the 2013 US federal budget proposed 20 percent for social security, 19 percent for defense, 16 percent for unemployment, welfare and other mandatory spending, and 21 percent for medicare, medicaid and related programs. So, by comparison to any of these, regardless of whether they have been cut, 2 percent of GDP or 8 percent of the national budget pales by comparison, not to mention 1/3 of this amount, the portion going to the poor.

So, it appears that philanthropy cannot possibly make up for any significant changes in social support programs.

But a few questions remain, just to close the subject:

What has been happening as wealth has been increasing so dramatically for the ultra-rich? Has philanthropy been increasing dramatically?

Source: National Philanthropic Trust: http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/

The answer appears to be yes, indeed, a nice increase of 100% or so since 1972! But, hold on, GDP in 1972 was 1/3 of what it is today, also in inflation-adjusted dollars--so, the growth in philanthropy has not kept pace with GDP growth.

Given that wealth to the top 10 percent has grown faster than GDP across these years, this suggests that the ultra-wealthy have not increased their giving in concert with the growth in their wealth. Take a look at the comparison done by Piketty and Saez, two of the foremost scholars on the subject of inequality.  For 30 years between 1950 and 1980, the incomes of the lower classes (the 0-90 percent group in the left most column) advanced nicely, even more than the percentage increases among some of the wealthiest. Note that the wealthy did not suffer, however, they just yielded a little equality to those of lower incomes.  However, for the 28 years since, the trend is reversed. The incomes of the 0-90 percent increased only 1 percent, while those in the top 1 percent increased their incomes between 81 percent and 403 percent.

Source: Piketty and Saez in http://www.wweek.com/portland/article-17350-9_things_the_rich_dont_want_you_to_know_about_taxes.html

I acknowledge that this comparison needs more work than I have put into it. These numbers are far too aggregated, and the analysis would benefit from more segmented data and comparison. For example, it would be ideal to have the philanthropy of the top 10 percent, 5 percent and 1 percent, to be able to compare that to the advances in incomes displayed above. I also want to point out that the Google analysis appears to focus only on what is going out from donors--thus not including what may be coming into large wealthy endowed foundations for distribution in future years. To be complete, this kind of analysis needs to consider that, as well.

Nevertheless, it seems that the basic question is answered: The amount of annual giving philanthropy in the US has not increased in parallel to the increase in wealth to the ultra-rich, and the amount of philanthropy, particularly considering the small proportion of it targeted to the underprivileged, cannot possibly fill any meaningful gap in shortage of support to the underprivileged in the US.

My conclusion: Much to the disappointment of neoliberals, here is another example where the private market, left uncontrolled, will fail the needs of the state--unless, of course, you hold the view that we need not spend anything much to help the underprivileged. I argue some engagement from the state is necessary.

Note that the Scandinavian democratic socialist countries such as Sweden have managed rather well in terms of prosperity, growth, and happiness of their citizens for a considerable period of time. England has a national health system, and the costs of that system are below our private insurance market based system, and it works as well or better than our system in many ways.

I'm not promoting socialism for the US, just noting that our fears of government are not justified by comparison to other countries.

However, we must press forward on all fronts and be practical. Until/unless some improved government solutions can be effected, we must work with the wealthy to continue to grow their contributions and help them to meet both their personal charitable preferences and also collaborate with government and other philanthropists to better address the needs of the underprivileged. According to Thomas Piketty and many others, we appear to be in a long term trend toward increasing wealth at the top.

Regulation Can Work--Capital is Responsible for its Ills

April 10, 2014

Anyone reading my recent posts will predict that I want regulation, because deregulating is one of the key precepts of the neoliberal economic philosophy, and from earlier posts, it is clear that I am among those who feel the broad set of neoliberal principles has served us poorly in recent decades, and needs to be re-balanced.

Indeed, I recognize a need for regulation in a number of areas in this increasingly complex world, regulations assuring food and chemical safety, medicine, architecture and construction in seismic zones, the environment, and banking certainly need regulation, as well as other areas.

However, I am in many respects a critic of regulation. Regulation has extended in many areas to a highly burdensome level, with little gained. People in many fields report that a very significant amount of their time is now dedicated to filling out reports, and that it is not evident from many of them that there is any significant improvement in safety. Some of this comes from fear resulting from an incident (overcorrection), some comes from lack of experience in the field (such as banking) by those constructing the solutions, and some may come from other motivations such as I describe below in the banking example.

Let's take banking, a field I understand better than some others, having spent a career in it. If anyone reading this has taken out a mortgage in recent times, you know there now are numerous documents you are required to address. There are others the bank must provide and submit behind the scenes. And, there are regulations that slow the process and likely often prohibit many banks from making creditworthy loans they used to make, and most certainly make the banks very slow in meeting customer needs.

We could live without a number of those burdensome documents and rules.

How?

For example, let's consider just a few rules which would provide far greater protection than the burdensome and time consuming reports and rules:

1.  Let's separate even more clearly the fundamental banking process serving consumers and businesses from the trading and other speculative activities some of the larger banks participate in. If the latter activities are spun off entirely into separately owned entities, shareholders and depositors in the fundamental bank will be far less at risk.

2.  There is no good reason for banks to be allowed to speculate in commodities, such as food products, or in minerals and chemicals. This activity can be left to entities which do not accept deposits.  For customers who want to participate in such speculative activities, they should have a minimal net worth and acknowledge the risk they are taking. There should be no bailouts for failures of such entities.  Some of these protections are included in Dodd-Frank, but with far less clarity than I recommend.

3.  Capital requirements of banks have been raised. They can be raised further.

4.  For deposit taking institutions, a minimum down payment on mortgage loans is appropriate--at least 15 or 20%.  Private entities not allowed to take deposits can offer more aggressive mortgages, and we should not bail them out, if they fail.

5.  Simple rules requiring retention of a significant portion of every loan made--e.g., 25%, will do wonders to better assure the underwriting is carefully done. Sometimes it's just too easy to sell a weak loan to others, and with only 10% retained on the books of the originating bank, that bank can afford to lose a few of those. But, 25% retained is sufficient to assure that the pain of a loss will be anticipated and will hurt.

This list of five is not intended to be a comprehensive proposal for regulating banking, to replace the Dodd-Frank legislation, the regulatory version of which is now approaching 20,000 pages. However a few dozen rules like this can provide far greater protection to depositors and the financial system of the US, and can save billions of dollars being wasted on burgeoning compliance departments of banks, expanding bank regulatory agencies, and hordes of accountants, lawyers, and consultants, as well as improving and simplifying the lives of all of us being regulated or on the other end of that process. These kinds of rule require very little paperwork and compliance personnel--either in the banks or in the regulatory agencies.  They don't require lawyers to interpret them.

The irony of the conservatives complaining about regulation is two-fold in my opinion:

First, the economic disaster which precipitated the latest round of banking regulation was initiated in both Democratic (Clinton) and in Republican (Bush) administrations. It exploded under Bush. Had we not experienced that huge economic disaster, we likely would not have had the 20,000 pages.

According to economists, the neoliberal policies expounded mostly by Republicans or Neoliberals do indeed tend to result in periodic booms and busts--more so than the policies of Democrats or Keynesians.

Second and even more interesting is this--faced with the political demand from such crises that the system be better secured, financial capital is motivated to work through lobbyists to avoid the simple kinds of solutions described above, in favor of the complex solutions of such bills as Dodd-Frank. Of course, they'd like to avoid all additional regulation, but faced with the political certainty of more, they scramble to minimize the profit or return on equity expense of it.

The likely reason is that the actions described above are perceived by financial capital to have a more significant impact on profits and return on equity than the burdensome regulation.

After all, if minimum capital must be increased, the leverage of banking decreases, and it is the leverage of banking which enables the huge profits. Return on equity will decline as equity is increased, of course.

Similarly, if a bank is required to keep 25% of a loan they originate, sell off no more than 75% to other banks, preferring to sell 90% of it, they forego the profits on the additional 15% they would like to sell. Selling loans to others has two benefits to banks--there is often a "spread" or a fee financial advantage.  My loan at Prime + 1% can be sold to other banks at P + 1/2 and possibly a fee to me (after all, I did all the work to originate it). Thus, my gross yield on the 10% retained may climb from P+1% to P+5%. Another benefit is that selling off portions of loans I make helps to diversify my risk--I end up with smaller exposures, so that if something unexpected goes wrong with the borrower, I only have to suffer only a small portion of the loss.

However, when the portion retained is very small, the motivation to be careful and underwrite to avoid loss, is somewhat reduced.  Financial capital would argue that there is no significant diminution in underwriting and that the additional profits from selling off most of the loan are appropriate and deserved by the underwriting bank. But, if not at the loan officer level, then perhaps at the CFO or CEO level where the aggregates are calculated and where underwriting direction emanates, such structural exposures matter.

In these ways, I argue that financial capital (the equity interests and the top management of banks), lobbies heavily to avoid such simple forms of regulation, in favor of regulation which is costly and burdensome--the net result being more profits to bank shareholders and most likely more remuneration to bank CEOs.

So, when bank CEO's and bank investors complain about the cost of regulation, bear in mind that there are indeed far less burdensome alternatives, alternatives far less expensive in terms of staff and consultancies and lawyers and accountants, much better for customers--but, perhaps a bit more expensive in terms of a little reduction in return on equity and perhaps top management compensation.

By the way, this is one of the ways we can enjoy a gradual redistribution of income and wealth in a nation approaching the highest levels of inequality in the world.  A little less for capital improves the balance.

I argue that the system would be much better off with a little less return on equity, a little less compensation to bank CEOs, and a substantially less burdensome regulatory structure.

10 Myths Propagated by Neoliberals

April 9, 2014

Neoliberalism is a political philosophy which is to the right of the economic spectrum. It originated in the 1930s and 1940s with such scholars as Friedrich Hayek, who proclaimed an approach in opposition to the dominant economic and political philosophy of the time--Keynesianism.  While the term is specific for economic historians, this philosophy has evolved to best identify today with the key precepts of the political Right. From my list below, it will be easily seen that this political philosophy is largely characteristic of that of the Republican party.

I do not consider myself a Marxist or a socialist. I think capitalism is the best economic system known.  However, that doesn't mean it is perfect in the sense of universally serving all needs, especially when unrestrained or relied upon as the only tool for sustainable growth--but that is generally the position of neoliberals. I believe there is a role for government--to meet the needs which private investors are not prepared to meet (without substantial government subsidies), and to govern and manage the free market such as to do our best to avoid or correct for abuses of the free market.

A few of the most crucial myths which neoliberals have sold to much of the American public:

1.  That the uncontrolled market is best for everyone--we should reduce or eliminate the influence of government except in very limited areas.

The uncontrolled market brought us the global recession of 2008 to the present. Culprits included complex mortgage securitization instruments. Major financial institutions failed and citizens lost critical amounts of savings and were left with very low fixed income returns for years thereafter. While the wealthy also lost in the first stage of the recession, those at the top end of income and wealth gained dramatically during the recovery, while the middle class did not, and many are still unemployed.

2.  Reducing taxes is always beneficial to the economy and to citizenry.

Neoliberals have lured the middle class and the poor with the siren song of reducing taxes, which behind the scenes is called "starve the beast." The beast of government, when starved, is forced to cut whatever is discretionary, which usually includes public schools, infrastructure, and any social support programs.  So, the lesser privileged end up voting in the small tax savings (big tax savings for high earners), with the unexpected end result that their critical services are lost.

3.  Reducing taxes always results in savings which go into investment and creates job--that's the "trickle down."

There hasn't been any substantiation in recent years to the arguments made by Art Laffer and others. In fact, it appears that much of the savings increasingly going to the wealthy through tax reductions is going into liquid investments, expensive multiple homes, art, and the like, and relatively little into investments creating jobs for the underprivileged.

As to the trickle down, evidence such as this picture of income growth for the wealthy since about 1970 clearly shows that there has been no trickle down--it's all been flowing up.

Source:  INCOME INEQUALITY IN THE UNITED STATES, 1913-2002*

THOMAS PIKETTY, EHESS, Paris EMMANUEL SAEZ, UC Berkeley and NBER 2004, Fig. 11.

4.  Government is almost always poorly managed vs the private market, which is usually well managed.  Government leaders are "bureaucrats" who will simply do what is in their personal best interest.

History is replete with exceptionally competent government leaders in many nations.  Business is also replete with many leaders who have had less than admirable character or competence. While government generally doesn't have the competitive pressure that sometimes motivates efficiency in private enterprise, not everything can be accomplished by competitive forces. We can't have two airports built in competition or two parallel highways built in competition. Furthermore, who can argue that it is entirely appropriate that the top 10 CEO's last year earned more the $100 million each?  Can this really be argued to be "efficient," in the best interest of shareholders and the public?

5.  Incentives in the form of bonuses, stock options, and the like are necessary to motivate good management, and even to motivate people to work hard or do the right thing.

I worked in the trenches for years before those kinds of rewards were available to me. I don't remember lacking any motivation then, or gaining more motivation when I did have access to those. There is something in most of us which wants to do the right thing, advance and improve the area of responsibility we have.  This is not to argue against incentives, although some of those have reached outrageous proportions, such that we are left to wonder just how much more effort and focus was provided for the difference between perhaps $10 million and $100 million in compensation for those top CEO's last year. This is to simply ask recognition that financial incentives are not the only motivation for good work--and/or that those incentives have advanced to well beyond what is necessary to keep leaders hustling.

6.  Liberty is the ultimate positive to be achieved, meaning that any form of collectivism is to be avoided because it means I have to accept some limits on my freedom, just in order to achieve the betterment of someone else in society.

There are times when my total freedom means less freedom or opportunity for someone else.  Along with freedom to worship as we please and freedom of speech, neoliberals have added freedom from taxes, freedom to have and carry a gun, and freedom to treat employees as commodities.

7.  Open borders are always better than any form of protectionism.

It is disingenuous for the US to continue to promote this key element of neoliberal economic philosophy, considering that in the early decades of our own industrial development, we used protectionism heavily to enable the nurturing of our infant industry. So did Japan, Korea, Taiwan, England, and most other developed countries. Furthermore, even at our now advanced industrial state, we continue to protect our industry, even to the extreme of providing subsidies to well-to-do US farmers who cannot otherwise compete with foreign agricultural products, as just one example. Yet, we continue to ask other nations to take down their border controls. Global trade is a good thing, but it needs to be managed, sometimes uniquely by each nation, weighing all consequences.  The US should also yield power in IGO's to a better representation of the developed and developing world--the WTO is a good example.

8.  Private markets can handle most all the needs and ills of society, and do so far better than government.

A good example might be the evolution of housing policy for those without homes. Across the last 30 years in both England and the US, there has been a massive move toward moving housing for the poor to the private sector, using tax benefits and reduced regulation as the carrots.  This has not had the intended effect--we have seen no improvement overall in the quality or accessibility of housing for the poor.

Consider schools and infrastructure. Are these also all going to be best handled by private capital and/or by philanthropy? The ultra wealthy can use helicopters to avoid traffic and poor roads, private airports and private jets to avoid tired airports, and private schools to avoid the malais of our public schools.

It does not seem evident that private markets can do it all.

9.  Inequality is really a good thing--because it means we have maximized the incentive motivation, which is at the heart of capitalism.

To a degree, inequality IS a good thing, but inequality in the US has risen to among the highest in the world, a dramatic increase since the 60s and 70s when we were relatively egalitarian. Across this period, income and wealth have flowed to the wealthy while wages have stagnated for the middle class and the poor. I do not argue to eliminate incentives, just that the pendulum has swung too far. See the work of Emmanuel Saez of UC Berkeley in regard to taxation. There is little evidence that a higher tax rate on the wealthiest would result in significantly diminished incentive, investment, or economic growth.

10. Any form of redistribution is harmful because it diminishes the equal opportunity that everyone has in this country to succeed.

There are many forms of redistribution, and the choices need not take what has been gathered to date by the wealthy, but simply adjust some of the future incentives (e.g., capital gains taxes, wealth transfer taxes, carried income taxes, certain deductions, taxes on the earnings above a very high level) that uniquely benefit those of high income and wealth. A little less flowing to the highest incomes can be directed to better enable equal opportunity for everyone else.  There are a number of economists who also argue that economic growth is slowed at very high levels of inequality. Plus, there are non economic (moral, societal) reasons of improving the lot of the lower classes.  And, we potentially forestall a revolution, such as we have seen in a number of other countries.

There are more than 10 myths, and there are more arguments to show the weaknesses of the comprehensive neoliberal philosophy which has evolved across the last thirty years.  This post is simply intended to provoke some thought from all of us regarding a few of the examples of failure.

The pendulum has swung too far to the Right!

CEO Pay

April 1, 2014

In the New York Times on March 29, 2014, Deborah Hargreaves comments on the growing pay gap between CEOs and the median compensation of their employees (http://opinionator.blogs.nytimes.com/2014/03/29/can-we-close-the-pay-gap/?smid=fb-share).

She reports that in 2012, the pay of S&P 500 CEO's was 354 times that of their rank and file! Last year, the 10 highest paid CEOs took home more than $100 million each. In the early days of the 20th century, JP Morgan thought the ratio of CEO pay to median worker pay should be no more than 20:1. In the 1970s, Peter Drucker thought that was still a good limit. Yet, since the 70s, we have only sharply advanced that ratio.

Arguments from the right are that we should not tinker with the market. Let the invisible hand do its work. Limiting CEO pay, they argue, will only drive the best CEOs out of the US to other jurisdictions.

Hargreaves reports that a survey of actual practices finds little support for that notion. There is just not that much international movement of CEO's.

Hargreaves finishes without a strong policy recommendation. I do the same. It is not yet clear to me that a regulatory limit is the right solution to this clear inequity.

However, it is a valuable step for us to all recognize the magnitude of the problem. Wealth and income gains for the top 10 percent have grown significantly, while the real wages of middle class and poor have advanced very little across the last thirty years.

Two suggestions Hargreaves reports deserve consideration: Full disclosure of CEO/median pay by all public companies; and, a German practice of installing a company board made up 50 percent of workers, with the authority to establish CEO compensation.

Anyone who has worked in the business sector and has had access to the variety of major elements of compensation (salary, bonus, and stock options) certainly knows that attempts to structure compensation to clearly and directly reward or punish success and failure, is fraught with assumptions and guesses, and often fails to achieve the objective, as the real world twists and turns after such commitments are made. Often, it turns out that the chosen measures of success yield more to the economic and competitive environment than to the talent of the CEO. Likewise, it is also true that CEOs do sometimes lose their jobs when such uncontrollable factors are the cause of failure--i.e., no one could have done much better.

Often rewards are tied to short term performance, and/or to stock price performance. No one could have won on stock price in 2008, and no one could have failed in 2013. It's not quite that simple, but almost.

Why would it be problematic to report in great detail to shareholders, just how CEO and other top officer pay compares to the median wage of the company? What could be wrong with including all forms of compensation, including bonus, stock options, use of the corporate jet, and any other forms of compensation (executive pensions, golden handcuffs, etc.)? What could be wrong with that?

I'm sure some on the Right will argue that shareholders simply won't understand it, and it will only incite concern, rancorous shareholder meetings, and controls that do not reflect market condition in an increasingly globalized world.

In my opinion, we need some rancorous shareholder meetings, and it's not in the spirit of competitive markets to deny the owners of the business (shareholders) all the information they need and the opportunity to decide the corporate pay at the top levels.

On my way around town this morning, thinking on this and related issues addressed in this blog, I was motivated to leave larger tips for the baristas and others who serve me--considering how poorly we have protected the opportunity of our citizens at those pay levels.

Regrettably, individual tipping and philanthropy will not be sufficient to enable the rebalancing we need to secure the sustainable future of our nation.