Wages and Power

Considering the stagnation in general wages and worker's historically low union power, why have a number of states passed legislation to increase the minimum wage? Where is this pressure coming from?

Secular Stagnation Notes

1. All this buzz about secular stagnation implies the economy was running just fine and now post financial crisis and resulting recession, it is stagnate.

Rob Brenner and others have a different perspective - the capitalist model actually has never worked and stagnation has just been interrupted by weird periods of growth.

2. The Harrod-Domar growth model also sheds light on why there is this stagnation or 'excess capacity' and equally interesting how such a state can persist.

The model assumes for any change in the rate of investment, a change will occur on the demand side and on the supply side. On the demand side the increase in the rate of investment filters through the multiplier and increases the rate of income. On the supply side the increase in the rate of investment causes a change in the rate of potential output. Equilibrium is defined not only as y = potential output but when their rates of change are also equal.

Solving the model we find r must be equal to the given capital ratio times the marginal propensity to save. But if actual growth r is greater than p*s then demand will be greater than capacity and a shortage will ensue causing firms to act in the opposite way of an equilibrating action; they invest more even though they should invest less.

Imposing secular stagnation onto these results we can understand why this stagnation could persist- if the actual rate is smaller than the required rate to utilize all capacity then there will be a capacity surplus and firms will decrease investment when they should invest.

The model demonstrates something we already had intuition about- some investment is needed to correct the deficiency in investment.

Rise of Rentiers and Capital's Never Ending Quest

(Notes and Thoughts from David Deming's talk on Value of Post-Secondary Education)

The situation

The cost of  a college degree has been increasing steadily while state funding of post-secondary education has stayed the same since the 90's and more recently decreased (Deming et. al, 2014). This means students have had to foot more of the bill - which would explain the increase in student debt. The federal government's Title IV financial aid program is supposed to help fill this gap.

However, a good chuck of Title IV money is flowing to for-profit online colleges. For-profit online degree granting institutions have exploded in growth, many relying on Title IV as revenue (Deming et al., 2014).  Not only that, the largest of these institutions are owned publicly traded companies.

Deming and his co-authors investigate the value of a for-profit online degree given their explosive growth and their allocation of government funds. They find that, "applicants with bachelor’s degrees in business from large online for-profit institutions are about 22 percent (2 percentage points) less likely to receive a callback than applicants with similar degrees from non-selective public schools, when the job vacancy requires a bachelor’s degree" (Deming et al., 2014). This finding, coupled with the fact for-profit degrees are more expensive than public and community colleges, suggests investing in a public university or community college degree is the better investment compared to a for-profit online degree.

Implications and Questions

-Why is the cost of a college degree increasing?

- Title IV flowing to online schools which are more expensive and LESS valued in labor market has implications on student debt.  Debt might be higher and would definitely be harder to pay off, thus sucking more consumption out of the future and possibly leading to higher default rates.

-It seems as if financiers have ingeniously found a way to make the government absorb the risk of bad loans while they take in the profits.  The government lends the money to the student, which then gets transferred to the for-profit online college.  The college gets the money regardless of if the student graduates, graduates and finds a bad job, or graduates and finds a good job.  The risk of the student not being able to pay back the loan (which according to Deming's study is higher than a public degree holding student) is shifted to the government.  I might be missing something, but this seems like a great set up if I own stock in a publicly traded corp that has its hand in the for-profit degree business.

Deming et al. Paper

Deming, D.J., Yuchtman, N., Abulafi, A., Goldin, C., & Katz, L. (2014). THE VALUE OF POSTSECONDARY CREDENTIALS IN THE LABOR MARKET:
AN EXPERIMENTAL STUDY. NBER.Working Paper 20528
http://www.nber.org/papers/w20528

Game theory and the walrasian paradigm, game theory and the marxist paradigm

What is the relationship between game theory and the Walrasian paradigm? Between game theory and the Marxian paradigm?

The Walrasian paradigm in some ways can be seen as a subset of game theory.  The Walrasian paradigm works under complete contracts, exogenous preferences, and self-interested actors.  Game theory includes some of these assumptions in its more robust understanding of social interactions. 

Cooperative contracts are complete contracts, contracts that can be enforced by law. Things like having to pay a wage to a worker stipulated in the contract.  Noncooperative contracts are non-binding contracts, things that cannot be enforced by law.  Things like the amount of effort a worker must put in to earn the agreed upon wage.  Game theory captures the Walrasian assumption of complete contracts but also allows space for more than just complete contracts.

Similarily, people can be selfish in their behavior in game theory, but need not be.  Altrustic behavior is also a potential behavior for an individual. 

Game theory's relationship to the Marxian paradigm is the dialectic nature of games and institutions.  Games can be used to model institutions.  For example, you can set rules for a game by based on functions of an institution.  On the other hand, you can model the outcomes of games as institutions.  For example, equal distribution of a firm's final product might be the outcome of a game played.  This back and forth causality can be perceived as dialectic and emphasizes the endogenity of institutions and games.  Institutions cause game outcomes and game outcomes cause institutions. 

It's the questions, boy, it's the questions

Why do we assign businesses the important task of keeping people alive?

Why do businesses invest?

Do we care why they invest if we know their investment is prone to uncertainty?

Are they investing now?

Is the profit rate falling?

What is the role of a business?

Why do we assign businesses the important task of keeping people alive?  

Wages

From "Unlevel Playing Fields" by Randy Albelda, Robert Drago, and Steven Shulman

"if it takes me three hours to make a vest using the current level of techology, and I have what is considered to be the average skill in the industry, then I should be able to trade that vest for a chair that takes the same amount of time to make...Instead, workers offer their time... and in exchange they recieve a wage...Labor time must be worth the amount of time that it takes to "produce" a worker given the current context (i.e. the amount of time needed to support a worker and his or her family as the customary standard of living). The amount of time required to produce a worker is then a social and cultural relation, a matter of conflict over the coustomary standard of living.  If the customary standard of living requires a DVD player and a car, then the wage bill will reflect that."

Macroprudential Policy and Monetary Policy

Jared Bernstein sends us to Stanley Fischer's speech about financial regulation. Unsurprisingly, I agree with Jared's ideas about human behavior in finance.  As Robert Shiller and others have long argued, humans behave weirdly sometimes - falling into traps of euphoria and panic.  A little more broadly, even Keynes noted that some things are just fundamentally uncertain and thus "animal spirits" guide many actions in the economy.

What I am struggling with now is not human behavior in finance but the contradiction between expansive monetary policy and prudential macro policy. Recent expansionary monetary policy leading up to the housing bubble demonstrates how pumping money into the economy can not only cause misallocation of funds, but also increase the fragility of the overall system.

Macroprudential policy could improve the strength of the financial system and help allocate funds to non-bubbles, however when you try to guide a river into specific channels, it might lose some oomph. Likewise, monetary policy will be less stimulative due to restraints such as capital and liquidity requirements.

To me, fiscal stimulus is an obvious answer but in the present political arena, I'm not sure we can count on it. Therefore, we need to think of how monetary policy interacts with prudential regulation.

Pay without Performance: Long, Long Summary

At the heart of the corporate governance structure lies an agency problem.  Shareholders (owners) cannot constantly supervise the managers  (controllers).  Some mechanism to force managers to keep shareholder interests in mind has to be in place, otherwise executives would always act in their own best interest.  Enter the board of directors.  The board of directors was created to champion shareholder interests and vested with the power to run the company.  This trifecta of managers, directors, and shareholders allegedly operates under the arm’s length bargaining model which states the executive “comes seeking the best possible deal for themselves  and board comes seeking the best possible deal for the shareholders” (2).  

However the authors argue arm’s length bargaining has hardly been the case. After thoroughly inspecting executive compensation Bebchuk and Fried find that directors stand to gain much by supporting executives and suffer little cost of neglecting shareholders. Furthermore, the “checks” of shareholder action and the market do not provide the constraints financial economists believe.

It is assumed directors have shareholders interests in mind because they are mandated to do so, but upon further examination the authors find strong incentives for directors to please executives and weak incentives to look out for shareholders. 

Incentives to favor executives, small costs to ignoring shareholders, lack of market or shareholder limitations

Being a director comes with good pay, perks from the company, networking, low workloads, and extra business.  A seat on a company board is no doubt desirable.  Keeping the board seat is also attractive. A director obtains a seat by first being nominated by the current board’s nominating committee.  Nominating committees historically have not been independent .  In the past, having CEOs on nominating committees was not uncommon.  Recently, under new requirements, nominating committees have had to include more independent directors.  However, CEOs still maintain influence over nominations through independent directors desire to maintain good terms with the CEO. The work to get on good terms with the CEO and thus the slate for nomination is validated because once on the slate, being reelected to the board is almost a given.  For example a study looking at the years 1996-2002 found that “electoral challenges to board’s slate was practically nonexistent” (25). 

Once on the board, the financial and nonfinancial incentives to remain in good standing with the executive strengthen.  Financially, high CEO pay has been linked to higher board pay (30).  CEOs have power to give directors business, engage in pet projects, or contribute to director-favored charities (28).  This type of “back scratching” is inherent throughout board-executive relations and is exemplified by “interlocking” in which one executive sits on a director’s board and vice versa.  Non-financially, social and psychological factors also influence directors to favor executives over shareholders.  Besides becoming friends with executives and the desire to avoid conflict, some directors may experience cognitive dissonance where directors were previously or are currently executives and thus a lot higher CEO pay.  The magnitude of cognitive dissonance is by no means a small percentage. For example, in 2002, “41% of the directors on compensation committee were active executives” (33).  

Directors hold infinitesimal amounts of shares (34), allowing them to make choices that could decrease shareholder value yet benefit an executive. 

Assuming directors do have shareholder interests in mind, they are still constrained by time and lack of information, a study completed in 2001 finds that directors only worked about 100 hours a year (37). Thus the widespread use of compensation consultants should come to no surprise.  Compensation consultants are justified as impartial, a resource with an objective perspective that has access to other private company information, which many courts defer to in litigation.  However, compensation consultants also have strong incentives to please managers and no incentives for shareholder loyalty. Consultants seek future business and give the executive the news they want to hear.  Compensation consultants can boost CEO pay regardless of performance, “when a firm did well, consultants pushed for high compensation…when a firm did poorly, the consultant looked not to performance but rather to peer group pay norms” (39). 

Proponents of arm’s length bargaining claim shareholder action and market constraints will limit any deviations from the arm’s length model.  Bebchuk and Fried demonstrate the multiple barriers shareholders face in challenging the board.  A major obstacle facing shareholders that wish to challenge the board via litigation is the history of court action; courts don’t have the competency to judge compensation packages and thus have almost never overturned board decisions (46).  Courts defer to board decisions if minimum requirements are met (independence of comp committee), throw out cases due to formalities like the demand requirement (bringing a demand to the board before entering any legal cases), and the last route options like “waste” have been described as rare as the Lock Ness monster (46). In other words, the “check” of shareholder action on executive compensation has no teeth.

Because CEOs and other executives are at the top of the corporate latter, normal market forces don’t constrain their compensation.  They can’t move up, are unlikely to be picked up by different firm, and rare cases of dismissal is most certainly not due to compensation requests.  

Directors recognize pleasing executives can yield substantial benefits and the cost directors incur for neglecting shareholders is negligible.  Furthermore, constraints provided via shareholder action and the market are ineffectual.  

Managerial power existence and how it is used to extract rents and decouple pay from performance

It is clear the arm’s length bargaining model is not equipped to explain current executive compensation agreements; incentives influence the board to favor executives and not shareholders while there are no effective constraints to combat this effect. The authors develop and offer a managerial power approach that better explains executive compensation and the relationships between the board, managers, and shareholders. 

Under this approach, managers can extract rents  by camouflaging compensation under the outrage constraint.  The outrage constraint reflects the fact executives cannot receive infinite amounts of compensation without protest by shareholders and other community members. An example of the outrage constraint is CalPERS strategy of publicly shaming companies/CEOs that were performing poorly which lead to increased CEO turnover (69).  Managers also use their power to decouple their pay from their performance.  Executives are compensated for activities that do not reflect increased shareholder value. By camouflaging their pay, managers can extract rent, receive pay not related to their performance, and provoke little outrage. For example, compensation consultants can assist in camouflage by expanding and/or changing definitions to boost CEO pay (71).

The ratcheting effect of managers all wanting to be above average – leading to higher and higher pay reflects managerial power. For instance, instead of having to substitute cash compensation for equity based pay, executives received equity payments on top of already existing cash components. As seen later, the shift to equity payments could have been performance based but managers choose to pursue and maintain equity arrangements that were not strongly linked to performance.  

Certain environments can confer more power onto managers: larger boards, no large outside shareholders, no institutional shareholders, and protection from takeovers. Executives can utilize this power to garner not only more pay but pay that is less predicated on performance. 

CEO pay tends to be higher and less performance sensitive when the board is larger, directors serve on more than one board, and when directors are “attached” to CEOs either through interlocking or being appointed by CEO.  Psychological factors allow directors to be more generous when they can’t be the only one blamed or when they know the executive personally.

Both large outside shareholders and the presence of institutional investors place downward pressure on executive pay. A 2002 study found “a shareholder with a stake larger than the CEO’s ownership interest reduces CEO compensation by 5%” (82). Furthermore, studies show CEOs of companies with large external shareholders  are less likely to be rewarded for luck (83).

Under the arm’s length approach, shareholders should not have any obligations to outgoing executives, so it is puzzling why they receive so much compensation.  Using a managerial power lens, it is clear executives leverage their power to secure excess compensation on the way out.  Gratuitous payments are payments not stipulated in the CEOs contract.  CEOs that warrant firing should not receive compensation upon leaving, however Bebchuk and Fried describe several examples of fired executives receiving millions of dollars of gratuitous compensation (88).  An explanation for the excess payments to CEOs points to repaying old favors than with performance (93). 

Acquired companies executives also receive bonus payments from their boards. Since acquired companies usually benefit in some way, this bonus might not reflect managerial manipulation.  On the other hand, executives also get bonuses from the acquiring firm board, which can lead to lower acquisition premiums for shareholders (92). In this case, CEOs benefit at the expense of shareholders.

Gratuitous payments and bonuses from acquiring firms have little to nothing to do with performance and exemplify extracting rent. Retirement benefits demonstrate how managerial power influences firms to camouflage executive pay to lower outrage costs and how these benefits do not increase shareholder value. 

The then recent corporate scandals such as Enron prompted legislation such as the Sarbanes-Oxley act and tighter disclosure requirements.  Retirement benefits offer various ways to circumvent disclosure requirements and again separate compensation from performance.  Additionally, retirement benefits extended to executives do not contain favorable tax treatments for the firm and thus can only be the result of managerial power.

Regular or “qualified” pensions are considered efficient because they offer tax subsidies to the firm. Because these qualified plans can only pay out $100,000 annually (97), CEOs usually are covered by supplemental executive retirement plans or SERPs. SERPs, unlike regular pensions, “shift some of the executive’s tax burden to the firm” (97). SERPs also shift the risk of bad investment yields to the firm from the manager.  Since regular pensions are defined contribution, firms put in a defined amount but the benefit amount depends on investment yields.  SERPs alternatively are defined benefit meaning even if the investments have poor yields, the firm has to make up the difference.  Furthermore, SERP payments “are usually based on years of service and preretirement cash” (99) meaning performance is not linked to pay. It allows firms to hide build up of executive payments and past executive payouts. Why are executives different then regular employees?  The authors point out that executives more than regular employees would be better equipped to handle the risk of bad investment yields. The fact that in 2002 70% of firms supplied SERPs to their executives (98) may be an effect of managerial power.

Like qualified pensions, regular employees have 401(k)s but executives are allowed to defer compensation. And like SERPs, under deferred compensation managers receive substantial gains at the expense of the firm and shareholders.  The deferred compensation “builds according to a formula devised by the firm” (102).  Interestingly enough, usually the yield from this formula is above market returns.  If executives invested money themselves they would be subject to a 15% capital gains tax. Deferred compensation is subject to 35 percent corporate tax, thus it is again puzzling that “over 90 percent of firms offer deferred compensation” (105).

Retirement perks including “access to apartments, planes, cars, home-security devices, and financial planning” (107) highlight the desire to hide compensation. It would yield more utility if the executives received cash equivalent compensation and could decide for themselves what they’d like to do with the money.  However, perks camouflage the true value of extra compensation given to managers. Consulting contracts further exemplify camouflage and the decoupling of pay from performance. For example one executive received 1 million dollars for being available 5 days a month for one year (109).

Golden goodbyes and retirement perks do not make sense under an arm’s length bargaining model but can be understood via the  managerial power approach.  Executives utilize their power to not only extract excess compensation but to decouple their pay from their performance.  The next section examines CEO compensation and continues to document examples of this process.

Historically non-equity pay has not been correlated with performance and thus regulators instituted a rule that says firms cannot deduct more than 1 million dollars of CEO compensation unless that compensation is performance based.  However, CEOs have received salary and bonus beyond 1 million (122). In other words executives receive cash compensation at a disadvantage to firms and shareholders. Even further, CEO cash compensation is highly correlated to events not necessarily related to executive decisions like market-wide or sector-wide stock price increases. Allowing CEOs to reap benefits of results they did not help produce.

Unlike salary, bonuses have to meet objective and subjective criteria to be awarded. Objective criteria appear impartial and perhaps reasonable guidelines to allocate bonuses.  Upon closer inspection, it seems most objective requirements have little or nothing to do with increasing shareholder value.  Examples of such objectives include meeting a budget or having current profits exceed the previous year. Meeting a budget does not display any improvement to shareholder value while aiming at higher profits than the previous year can distort incentives for long-term success. A company could rank at the bottom of peer firms yet have higher numbers than last year. Moreover, the objective creates an incentive to make earnings look higher than they really are, “For example, companies have based bonuses on accounting earnings that include the appreciation of pension fund investments, which generally depend on stock market performance and not on the efforts of the companies’ executives” (125).  According to the authors, in 2001 Verizon awarded bonuses based on the net income for the year, which included about 2 billion dollars of pension appreciation income from investments (125). If the company did not include the appreciation, net income would have been negative. 

Executives also receive bonuses for making acquisitions that do not necessarily increase shareholder value, “A 2002 BusinessWeek study examining large acquisitions made in the spring of 1998 concluded that 61% of the buyers ‘destroyed their own shareholders’ wealth’ in the process by overpaying for their targets” (128).  Executives have monetary and non-monetary incentives to acquire firms, via bonuses or empire building respectively. Yet, there are no incentives to downsize.  Acquisitions therefore appear to be just another reason to hand out cash to CEOs.

Golden hellos such as signing bonuses represent pay that relates in no way to performance. Golden goodbyes even in the face of terrible tenure represent pay decoupled from performance, “Currently, most compensation contracts ensure that executives receive generous treatment even in cases of spectacular failure” (133). For example, Jill Barad received 50 million after overseeing a two-year stock decline of 50% (134).

Again, cash compensation has been historically weakly correlated with performance.  As fact became more apparent to shareholders they began to demand some type of performance-based pay.  Reflecting common feelings, the federal tax code in 1994 stipulated publicly traded companies cannot deduct pay in excess of 1 million annually per executive unless pay was based on performance or pay was granted via options.

  

Interestingly, the shareholder pressure led to an increase in option based plans while performance based plans were largely ignored.  Perhaps due to managerial power, when shareholders and institutional investors won their campaign for option plans, they were ADDED ON TOP of current cash compensation and not substituted out.  Inflated CEO pay produced little outrage largely because of the booming market of the 90’s.

Options (call) are promises that one can buy a company’s stock for a specific price, called the exercise or strike price.  The idea behind options based compensation packages is that the more stock an executive has, the more aligned the interests of the executive and shareholders will be.  

To test whether option plans really carried out their intended effect, shareholders use the share price to determine executive performance.  Share price seems like a good gauge of performance since increasing the share price is good for all shareholders, including the CEO, but without significant adjustments it isn’t. Many things can lift a share price without any intervention by a manager- for example,  a study found “only 30% of share price movement reflects corporate performance, the remaining 70% is driven by general market conditions” (139). Additionally, falling interest rates and the general upward trend of the stock market can produce windfalls for executives.

The most popular way to reduce windfall options is to index the exercise price to market average or average of a basket of peer firms.  This way, any market or sectoral swings won’t reward the executive; only good performance would reward managers. Another way to reduce windfalls for managers is to tie vesting to performance.  In other words, CEOs could not exercise their options unless certain goals were met.  

Some defend conventional options by stating reduced windfall options would change the accounting treatment regular options can garner.  If the exercise price is fixed, the firm does not have to take a charge against earnings.  Meaning under conventional options, earnings are inflated. Higher earnings could mean higher shareholder value. (148).  Taking a charge against earnings is known as expensing and it is the main reason firms put forward for avoiding reduced windfall options. However, as the authors note, expensing all options will most likely be required after 2004 by all firms, leaving no excuse to move towards reduced windfall options. The non-existent presence of reduced windfall plans even in the face of calls from institutional investors (Institutional Shareholder Services, Council of Institutional Investors) reflect managerial power “In 2002 only 8.5 percent of large public firms issuing options to executives conditioned even a portion of the grant on performance” (143).

Three more activities represent managerial power and how it has been used to decouple pay from performance: at-the-money options, backdoor repricing, reload options.

In-the-money options are not considered performance based because they have a strike price below the current market price.  The executive could buy at a low price and sell at a high price and the difference the executive made would have nothing to do with their performance.  At-the-money options have a strike price equal to the current market price.  This seems fair.  However, recalling the market’s general trend upward, at-the-money options soon become in-the-money and again can have nothing to do with performance.  Out-of-the money options have a strike price higher than the current market price, so for options to be profitable, the share price would have to be higher than the current market price.  This option out of the three has the most incentive for executive to raise the share price, even though the share price could rise on its own.  Under the managerial power model, it is not surprising then that less than 5% of companies use out-of-the-money options (160).

In 1992 95% of options were at-the-money (160).  This represents executives maximizing their gains under the outrage constraint. Of course managers would like in-the-money options but those cause outrage because there is no shareholder benefit.  Managers strongly oppose out-of-the money so the “compromise” is at-the-money. Even then managers “camouflage in-the-money as at-the-money” (164). Siebel systems “issued 600k options at-the-money with a share price of $33. The next day the company disclosed large increase in profits, driving the stock up to $46 per share. This increased executive options by 8 million” (163) and immediately turning at-the-money options into in-the-money. If Siebel had waited to grant the options at the time of the news release, no extra value would have been conferred to the options. 

Related is an activity known as repricing or backdoor repricing. This allows the exercise price in option plans that have gone out-of-the money to be lowered, in effect rewarding the manager for a decreased share price.  Repricing exemplifies managerial power, and their objective of structurally decomposing pay and performance.

A better way to organize option plans is to allow “the strike price to increase over time at predetermined rate” (161).  Since the stock market tends to rise over time, managers couldn’t be rewarded for something they had no influence over. Conventional options reward general market increases, but when the general market happens to decrease the options are repriced. This environment produces “heads I win, tails I don’t lose” (167) odds.  

Reloads are a particular mind-boggling type of compensation considering the purpose of options based pay.  Options allow executives to become shareholders, hopefully aligning their interests.  However, once options vest, CEOs own the options and most likely can exercise them the same day.  While it is not required CEOs sell the shares, evidence shows most do, “For every 1000 new options awarded, an executive sells 684 shares of stock” (174). Reload options allow executives who have sold stock to be “reloaded” with more options in order to replace the incentive to have shareholder interests in mind. 

A type of in-the-money option although not called it by name is restricted stock.  Restricted stock has a strike price well below the grant-date price – zero.  The justification for restricted stock is that it will provide some sort of long term-value, however restricted stock appears to behave identically to conventional options.  The selling of restricted stock is even worse than conventional options; in 1997 a study found for every 1000 new restricted stock awarded, an executive sells 940 shares of stock (174).

This pattern of “unwinding” erases the incentive options create. If executives can exercise options as soon as they vest and sell them, shareholders will either have less incentive for CEO to act in their interest or the same incentive at the price of granting more options.  

Not only are there no meaningful restrictions on unwinding but also managers stand to make additional gains by timing the selling of shares (179). There are countless examples of executives selling shares before bankruptcy or share price declines (181).  One striking example documents “Qwest insiders sold 2 billion while they were overstating revenues.  Shortly after, Qwest stock feel more than 95%” (182). For this reason, it is recommended that executives disclose in advance their desire to sell shares.  

The solution of equity based compensation shareholders fought so hard for has not been effective.  Instead of aligning shareholder and executive interest as previously thought, executives have been able to use their power to extract pay that is unrelated to their performance.  Much of this pay has been obscured and camouflaged to lower outrage and secure the maximum amount of managerial compensation under those constraints.  

The solutions the authors suggest are two-fold: treating the symptoms of the underlying problem and to treat the underlying problem.  Inflated executive compensation is largely a result of corporate governance malfunction.  To improve executive compensation, firms can link pay to performance, improve transparency, and require shareholder approval.

As discussed both non-equity pay and equity compensation are weakly linked to CEO performance.  To strengthen this link, companies can embrace policies like reduced windfall options – options that do not reward general market or sector-specific rises.  Revise the ways in which managers receive bonuses by deleting discretionary criteria and rewards for acquiring other businesses.  Restrict the sale of shares and require sales to be announced in advance.  Do not reward executives for failures.  Inspect the size and scope of retirement perks.

Transparency can be improved by expensing options.  This would not only reflect more accurate earnings numbers but also remove a key barrier to utilizing reduced windfall options. Firms can reduce camouflage by providing accurate monetary values on all forms of CEO compensation. 

Requiring shareholder approval could give teeth to intervention opportunities shareholders already have.  Voting on specific compensation components could give shareholders the chance to reject executive actions like unwinding incentives, excessive severance benefits, conventional options, and repricing.

To treat the cause of excess executive pay, corporate governance must be addressed.  More specifically, boards must be made more dependent on shareholders for reelection. Currently, several barriers exist for shareholders to remove a board member and replacing them with shareholder approved candidates. Significant time and money must be contributed as well as meeting a list of criteria such as ownership requirements.  

Placing new shareholder candidates shouldn’t require a vote or a year long wait.  In addition “short slates” should be replaced with “long slates” in order to have the majority of the board shareholder approved.  Providing challengers with some financial resources would remove advantages existing board members have. 

Removing these barriers would greatly improve the legitimacy of board decisions.  Most importantly, it would produce strong incentives for the board to make decisions with the shareholders best interests in mind.

Pay without Performance: Review

Bebchuk and Fried present a tight, persuasive argument demonstrating how managers utilize their power to extract rents and decouple pay from performance.  The structure of the book strengthens their message as it cover a broad range of topics yet transitions smoothly from point to point.  They begin by highlighting what arm’s length bargaining is supposed to portray, then describe what actual bargaining resembles, and demonstrate how their theory actually fits reality. The heart of the book documents how pay is decoupled from performance on account of managerial power. They finish by tying everything together through recommendations for ways to move forward.

Pay without Performance is an excellent resource for anyone who wants to learn more about executive compensation and/or corporate governance relationships between executives, boards, and shareholders.  The authors utilize minimal jargon and provide examples of concepts that might be hard to understand for readers with little financial background. The book might be out of range for the non-financial reader but if supplemented with other sources, the message is digestible.  A beginner and certainly an intermediate finance student would benefit from the amount of detail presented. Although the book lacks visuals and author calculated statistics, the authors have completed a thorough literature review, compiling study after study to support their claims.  It is the wealth of empirical research that makes the book so persuasive. 

This book has the potential to appeal to heterodox and orthodox schools, as Bebchuk and Fried draw from both perspectives.  On the orthodox side, the authors give incentives the primary role in executive and board decisions.  At times, they employ the concept of utility to discuss why one pay package might trump another. Throughout the book, they heavily rely on the concept of efficiency to explain company actions. 

The discussion of power is not something usually found in orthodox financial economics.  Bebchuk and Fried not only acknowledge executives hold power, but also actively use it to extract rents and insulate themselves against their own poor performance.  Once garnered by managers, power can be used to accumulate more power and thus further protect themselves from changes or reforms not in their best interest.  Psychological effects have a substantial role to play in the relationship between directors and CEOs.  The authors pull from behavioral finance by offering social and psychological reasons for the board’s loyalty to the executives and not shareholders. 

Bebchuk and Fried approach executive compensation holistically and extensively.  By not exclusively invoking orthodox or heterodox perspectives, they paint a robust picture of executive compensation.  Incentives and efficiency are just as important as power and psychology.

That said, they inspect and challenge executive compensation only in the interest of fair process.  The authors separate their argument from the moral argument at the very beginning and openly consent to higher CEO pay as long as the bargaining carried out follows the arm’s length model.  By separating themselves from moral concerns, their argument gains objectivity at the cost of leaving other stakeholders like regular employees and the community out of the picture.

The authors repeat the scope of their book and challenging the level CEO pay or the distribution of earnings is not within it. They do no discuss how CEO compensation for good performance is untangled from the rest of the employee’s contributions. Nor is there a conversation about how communities are better off when CEOs engage in arm’s length bargaining.  Although narrowing the scope of their book has allowed Bebchuk and Fried to completely and robustly dissect executive compensation on a micro-level, it has in effect excluded how executive compensation fits into the big picture.  What they call for is fair process and once it is obtained, in their eyes, the battle is over.

Future research could widen the authors’ message to include more of a general dialogue about CEO pay and statistics. Further research could also connect this literature to the growing radical literature on maximizing shareholder value – how stock buybacks are increasing shareholder wealth and how that impacts executive compensation. 

This book is a thorough introduction to executive compensation involving analytical tools from both heterodox and orthodox schools.  The authors utilize a fascinating array of studies to demonstrate how executives use their power to extract rents and receive pay that does not relate to their performance.  Even though the scope of the book does not provide space to challenge the level of CEO pay, question how much company success is because of CEO decisions, or how executive compensation affects social welfare, it is a conservative place to start in critiquing executive compensation and well worth a read.

Pay without Performance- Review thus far

Executive - "You scratch my back"

Board Directors - "And we'll scratch yours!"

Itchy workers -

"

"

(From David Ruccio's Blog)

Note on Marx's theory of financial crises

Marx argues the C-M-C cycle has the possibility to be destabilizing because of hoarding and adding credit into the mix not only increases the possibility of a crisis, but perhaps makes a crisis inevitable due to changes in the real economy.

Gary Dymski highlights the strategic shift in banking; banks used to know their borrowers and held loans on their own books but now the lending process is disseminated across multiple institutions, "Loan making once involved assessing risk, lending funds, and holding those funds until loans were retired.  This process became disarticulated: the assessment of risk, the lending of funds, the servicing of loans, and the holding of loans all are done by different financial market players" (2013).

The more "innovative" finance becomes, the more fragile and interdependent the cycle becomes.  For Marx, merely adding one contract into the cycle led to increased fragility- think of what the cycle would look like now. 

Dissertation Idea: Monetary Policy Doesn't Work

-Liquidity trap

-Endogenous money supply theory

-Decoupling of fed funds rate and long term interest rates (Comert)

-banks hoarding reserves

-companies borrowing not to invest but to increase shareholder value (Mason)

-household consumption not on the rise (Cynamon and Fazzari)


Most of these ideas address the narrowing of the channels through which interest rates affect growth via consumption and investment. 

Mainstream Stories about Wages

On a personal note, I tend to enjoy Jared Bernstein's blog quite a bit.  He writes in an accessible manner, often embedding nerdy whomp-whomp jokes into his posts- something I aspire to.

I also enjoy his posts because they validate the fact that I am not actually a crazy person.  For example, I understand how the marginal product of labor story explains wages but could never understand how it fit in with how wages are actually determined.  In the real world.

Bernstein's post from a week or so ago makes me feel not so crazy. Apparently the MP story doesn't have much applicational usefulness for him either, "In fact, one problem with the MP assumption is that there is no distributional outcome with which it is inconsistent" (Bernstein, 2014).

I love this observation.  It just so happens that textbook way economics explains wages can correlate to any income distribution! In other words, if the top 1% has everything and the bottom 99% has nothing it must be because the bottom 99% contributes no marginal product and the wage distribution is accurate.

Another related mainstream story is the human capital theory of wages.  A worker's education, experience, sex, race, skills, etc. all contribute to their wage.

This is another theory that I believe justifies any income distribution and/or extremely high salaries.

Why are some people's salaries over a million dollars a year? Because they have better education, more experience, and superb skills.

So if white males happen to be the majority of workers earning over a million dollars a year, it has nothing to do with race, sex, or privilege it has to do with their human capital investments.

What seems to make more sense in terms of wage determination is Marx's theory.  The reserve army of the unemployed keeps wages low and extraction of surplus value high no matter if productivity or education improves. 

Changing Landscape of Jobs

(From David Ruccio)

The above figures give another reason to not be so optimistic about the official unemployment rate declining to about 6.3%.  The type of jobs being created are primarily low wage jobs and presumably jobs with no benefits. 

This can be seen clearly in academia where tenure track positions are being replaced by part-time adjuncts (i.e. UMKC). 

Other than not supplying decent, livable wages for workers, on a macro scale this is a huge drain on aggregate demand.

Macro Implications for Student Debt

(From Naked Capitalism Blog)

My brain translates: Me poor student- no buy house ever





Student debt is becoming a larger and larger component of household debt as can be seen here and here and here.  Although household debt (relative to GDP) is decreasing (more on the declining effect of monetary policy later), it is useful to think about how accelerating student debt is transforming household debt and the implications. 

Mortgages are by far the largest component of household debt but as can be seen from the first graph and from the above links, mortgages are not driving borrowing anymore, student debt accounts for most of the growth in household debt.

One of the meaningful differences between mortgage debt and student debt is that loans for houses leave the borrower with an asset- a house- that could be taken away if payments are not made.  Student loans however, leave the borrower (hopefully) with a degree that (hopefully) translates into a job with (hopefully) higher wages.

The delinquency rate on student loans has an alarming upward trend (second and third link) that I think will only get worse due to the growing portion of low-wage jobs (more later).

Macro Implication Possibility #1: Securitized Student Loans act like Securitized Mortgages

If student loans are similar to the way mortgages functioned in the financial crisis, there is a great risk for a similar crisis as student debt becomes a larger and larger portion of household debt.

However, federal student loans are a different class of debt because they are guaranteed by the federal government.  Therefore if a wave of defaults occurred, it wouldn't produce a credit crunch in money market funds like the defaults on mortgages did. 

But even if most student debt is backstopped by the government and can't infect credit elsewhere, if the percentage of private student debt loans (which do not have this backstop) is growing, then we still have to watch out for this problem.   It does seem likely the private loan percentage of student debt will grow as federal loans shrink and tuition costs increase:

 (From Equitablog)

Macro Implication Possibility #2: Consumption Suck

Secondly, even if there is no reason to worry about private student loans growing to a worrisome level, delinquencies suck consumption out of the economy.  Since student debt is so hard to get rid of (bankruptcy won't help, you don't have an actual asset- like a house that can be taken away) they debit your (presumably already low) income through garnished wages, taking tax refunds, etc.

(This isn't meant to represent causation, just a brainstorm of how these variables might relate to one other): Increasing tuition costs contribute to increased student debt.  Increased student debt decreases consumption by contributing to less types of other debt like home and car loans.  A low wage economy decreases consumption and increases the likelihood of default.  Defaults lead to even less consumption by taking way even more income.  These simple student debt relationships could contribute to the "new normal" slow growth forecast for the economy. 

Systemic!

From David Ruccio's blog:

Money Multiplier Theory, Endogenous Money, and Monetary Policy

Two popular narratives explain how the monetary base, the money supply, banks, reserves, the interest rate, and depositor's behavior relate to one another.  The first is the money multiplier theory that beginning economics students learn.  The second is the endogenous money theory.

The money multiplier theory says the central bank adjusts the money supply via the monetary base to target the federal funds rate.  The central bank decides the quantity of the monetary base (currency and reserves) through open market operations or discount loans, and depending on the size of the money multiplier (currency-deposit ratio, reserve-deposit ratio i.e. behavior of depositors and banks) the money supply quantity is reached that will be (or be close to) the target federal funds rate.  It is important to note in this story (Larry Ball's version at least) banks create money but their function is hidden within the money multiplier, specifically the reserve-deposit ratio.

The endogenous money theory says the traditional notion of banks taking deposits and turning them into loans is backwards; banks make loans and those loans create deposits.

This paper by the Bank of England (BoE) endorses the second theory while (intentionally or not) highlighting bank's constraints that stem from the first theory.  A few thoughts:

How can "the" interest rate be targeted if the authors reject the effectiveness of open market operations (i.e. adjusting the quantity of reserves)? It initially seems like the authors accept the fact that the central bank sets (not targets) "the" interest rate but there is no channel described that demonstrates how they do this...until you get to page 8.

Ball's story has the Fed targeting the federal funds rate through open market operations and the discount window, while the BoE authors have the central bank setting the interest rate on reserves as the policy rate. By controlling the interest rate on reserves, they can mold the options banks have in regard to lending and borrowing. 

So what are the differences in the two narratives?

The money multiplier theory is consistent with the stories in the news; The Fed plans to taper bond buying program and end QE**.  Peruse the Fed's website and this is the same story they give in their "plain English" breakdown of monetary policy.

Both theories acknowledge bank's role in money creation and identify lender and borrowing behavior as limits to money creation.

Do these differences matter?

Paul Krugman suggests  the endogenous money theory isn't anything to get riled up about since banks are still constrained in money creation and still do not lie outside of economic rules. 

From a pure theoretical standpoint, I think the BoE endogenous money theory is something to get riled up about.  The majority of intro economics textbooks and the Fed's current targeting would be depicting monetary policy backwards.

From a practical standpoint, I think we'd have to consider the mandates of our central bank: full employment and price stability. 

In the US excess reserves are through the roof. These reserves could be lent out and stimulate economic activity. A simple observation suggests the Fed's current bond buying program is pumping excess reserves into banks that are going nowhere. Perhaps borrowers and businesses are too leveraged already and that's why there's nowhere for the excess to go. Perhaps the banks are content with receiving a safe return from interest on reserves. Or perhaps banks are charging too high an interest rate to borrow.

Both Ball and the Bank of England state the federal funds rate (or the interest rate on reserves for the Bank of England) determine several other interest rates related to borrowing and lending.  I'm inclined to believe that but seeing the excess reserves in US depository institutions, I'm beginning to wonder if banks charge too much risk and liquidity premiums above the safe rate. Perhaps this is why the Fed's expansionary monetary policy is just sending excess reserves to extraordinary heights instead of being lent out and providing stimulus.

Is the bank of England fairing better in this regard? I'd love to hunt down data on reserves of depository institutions for the BoE.  If they have less excess reserves in portion to the US, then I'd say they are doing a better job at utilizing monetary policy to achieve gains in the real economy (assuming of course these are respectable loans and not throwing money at anyone who walks in the door).

________________________________________________________________________________

*I specify "BoE" endogenous money theory vs. endogenous money theory because I've heard  this argument before and can't claim that the BoE's version of endogenous money theory is the same as other writers such as Randy Wray, Gerald Epstein, etc.

**I didn't comment too much on QE here because the logic of QE by the Fed and by the BoE seems to be in line whereas expansionary monetary policy seems to take different approaches.

Ball, L. Money and Banking.

McLeay, M., Radia, A., & Thomas, R. 2014. Money creation in the modern economy. Bank of England.

Paddy needs a drink: finance video series

No clue what ideological perspective this guy comes from but I'm learning a lot from his video series.  The clips are also generally entertaining:

https://www.youtube.com/watch?v=KjTCqqI0zR8

The purpose of finance

I'm currently watching this video on regulating shadow banking. It is very interesting if you are into finance or acronyms. 

One of the panelists has a simple point yet it had never crossed my mind.  He argues the regulatory process begins in favor of the financiers; in order to regulate an innovation or instrument, the regulators must prove why it warrants regulation (think derivative markets).  He advocates for a reconceptualization of regulation where any innovation or instrument is proven to be socially beneficial before it is even allowed to exist.

Also: Jerry Epstein and Jim Crotty explore the social benefits of finance here.

FRED Blog

Interesting Data!

http://fredblog.stlouisfed.org/

When banks don't behave like banks

One of my classmates remarked she works for a small community bank and capital requirements pose a tougher constraint on her bank than the big ones.

My professor responded that all bankers complain about capital requirements.

I'm sure my classmate's point had some validity, but it was my professor's response that made me wonder why bankers complain about capital requirements. 

Although capital requirements are not the same thing as reserve requirements, both seem to force banks to "save for a rainy day" i.e. force banks to anchor themselves when irrational exuberance sets in. 

I can't speak to capital requirements at the moment, but reserve requirements appear to be obsolete:

Pollin (2012) and Mason (2011) among others have pointed out financial institutions (and corporations) are sitting on hoards of cash.  The trend for excess reserves is clearly increasing (see graph above).  This means the banks are holding money instead of loaning it out. In other words, banks have stopped behaving like banks, they have reduced their intermediation between the financial and real economy. Obviously loaning money out to circulate could increase spending and create jobs, so why aren't the banks making these loans?

One reason could be that they still deem it too risky.  Another reason (which seems more likely to me) is the opportunity cost to loaning it out is too great.  Banks have a great incentive to keep hoarding excess reserves:

The interest they receive on their excess reserves (IOR) has been .25% consistently since about 2009.  The spike at the beginning of the graph reflected the logic that banks needed an incentive to strengthen their balance sheets, stop making loans, to reduce the risk of insolvency (You can see from the first graph banks did not hold excess reserves prior to the crash).  Now the IOR banks receive is higher than the interest banks must pay on loans they take out:

 

 

In other words, they can make profits with no risk by borrowing at .08% and receiving interest of .25%.  The incentive structure is causing banks to stop behaving like banks. With a "new normal" of a low fed funds rate, there doesn't seem to be any force that would alter this trend. If this argument is correct, it has relevance to increasing income inequality and supports the secular stagnation hypothesis. 

 







 

Non-Accelerating Inflation Rate of Unemployment

The NAIRU is defined as the rate of unemployment where inflation does not accelerate, or in other words, where additional demand will not increase employment it will only increase inflation. 

Historical Evidence

Drawing on Milton Friedman's articulation of the concept of a natural rate of unemployment, Volcker used the idea of a tradeoff between inflation and unemployment to battle high inflation in the 80's (Ball, 2009). In the mid-1990's economists believed the NAIRU to be around 6% (Baker & Bernstein, 2013) however, when Greenspan kept interest rate low, the unemployment rate drop to a low of about 4% in 2000.  In 2000 there was a slight increase in inflation but the cause for the increase may have been other shocks in the economy, not higher wages (Baker & Bernstein, 2013).
 
Econometric evidence suggests that the NAIRU exists but fluctuates (Ball, 2009). Two major shifts in the NAIRU occurred in the 1960's and 1990's, a time when workers held lots of bargaining power and a time when workers held little bargaining power respectively.

WS-PS Model (Blanchard, 2005)

Wage Setting

W/P = z - bu

where W/P is real wages
b is the sensitivity of real wages to the unemployment rate
u is the unemployment rate (measure of bargaining power)
z stands for all other variables affecting wage setting


Price Setting

P = (1+m)W

P is price
m is the mark up determined by degree of monopoly
W is nominal wage


Solving for u:

u* = (1/b)([(z-(1/(1+markup)])

which means the natural rate of unemployment (u*) depends on the degree of monopoly and bargaining power of the workers. 

The idea of the NAIRU/Wage-Price Spiral rests on the assumption that businesses will pass on the added cost of higher wages to the consumers via the mark-up.  Higher wages means higher prices which means real wages won't increase which means workers will expect higher inflation and bargain for even higher nominal wages (and they can because the labor market is tight) which leads to increased prices, and so on. 

Even if the degree of monopoly power were zero, the goods market was purely competitive, and the mark-up was zero, there could still be a wage-price spiral if the labor market was tight.  The price of the good would just be the cost of making it, which would mean any increase in nominal wages would result in an increase in the price, which would leave real wages unchanged:

Old Price + change in wages = Old Nom Wage + change in wages

In the purely competitive market, there wouldn't be any profit but the WP spiral could still occur.  If there were differing degrees of monopoly, different companies would reap different profits due to the magnitude of their mark up which depends on their market share.  However, it seems no matter what the value of the mark-up is, firms will strive to keep it constant, prices will always rise to maintain the mark-up meaning profits will remain constant. 

NAIRU and the Distribution of National Income

Pollin brings up an interesting thought, what if firms didn't pass on the higher wage costs to consumers, and just took lower profits (Pollin, 1998).  

profits  = revenue - costs

If a firm faces increased costs, it can raise revenue (prices) to keep profits constant, or it can take the loss in profits.  This would distribute more of the national income to labor (which at the moment sounds like something labor could use).

One way to distribute more of the national income to labor is to reduce the mark up.  This is a non-obvious reason why full employment is good for workers.  Abba Lerner offers a cycle of how full employment can result in reduced degrees of monopoly:

↑employment→ ↑business confidence→ operating at high level of capacity ↓markup (is possible) → ↑competition (actually decreases mark-up) → reduced degree of monopoly --> more national income going to labor.

Of course, then again businesses might not mind mild unemployment. Marx, Robinson, Stiglitz, and Krugman among countless others have observed unemployment (up to a point) is great for businesses because it functions as a worker discipline device.  Workers fear getting sacked so they don't ask for higher wages, better conditions, say no to more responsibilities, etc. 


NAIRU Today

The on-going discussion of income inequality is surely a good reason to explore the mechanisms of income distribution.

Apparently there is some talk of monetary tightening on the grounds that we are reaching the NAIRU.  I think we should consider history and the quote below, before making such bold claims.

"We understand that as the unemployment rate falls to lower levels, the risk of accelerating inflation increases. But if the rate of inflation is not accelerating, there is the risk that people are being needlessly denied the chance to work and wages for those at the bottom are being held down by bad government policy " (Baker & Bernstein, 2013).


 .................................................................................................................................................................


Baker, D. & Bernstein, J. (2013). Getting Back to Full Employment

Ball, L. (2009). Hysteresis in Unemployment: Old and New Evidence.

Blanchard, O. (2005). Macroeconomics.

Pollin, R. (1998).  The Reserve Army of Labor and the Natural Rate of Unemployment: Can Marx, Kalecki, Friedman, and Wall Street all be wrong?

Disincentives to Work or No Work?

Three major on-going political and economic debates are centered around income inequality, the minimum wage, and the welfare state. Highly interrelated, these debates contain the same theoretical underpinnings. 

• One narrative for income inequality (Mankiw-esque):

People who earn higher incomes deserve it for various reasons; ambition, hard work, ingenuity.  The return they get for being skilled, talented, or educated is fair. We need income inequality to make people work hard. 

• One narrative for abolishing or not raising the minimum wage:

People working minimum wage jobs can better themselves if they got an education.  It isn't a choice to work those jobs, no one is stuck there. 

• One narrative for a smaller welfare state:

People abuse the system and don't want to work.  If they had no other choice but to work, they'd find a job.  If people sincerely can't get a job, we retrain them and they'll be able to get one then.



The theory that lies beneath all the rhetoric is human capital.  Wages are no long subsistence wages, as early economists theorized, but they are a return to our skills, talents, and hard work.  This theory along with the assumption that jobs are always available is what makes these narratives believable. 


It is the assumption that jobs are always available I'd like to explore.  There are many measures of unemployment, but there are two in particular that could help shed light on this question: the Beveridge ratio* and the inverse of the Beveridge ratio.  The Beveridge ratio is the ratio of job openings to number of unemployed people.  The inverse is well, the inverse. 

A good Beveridge ratio (for the worker) would be 1 or higher since a number higher than one would mean there is more than one job opening for every unemployed person.

A good inverse Beveridge ratio would be less than 1, meaning for every 1 unemployed person, there's more than one job opening

Using FRED and JOLT series:

Civilian Labor Force (CLF16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Civilian Employment (CE16OV), Thousands of Persons, Monthly, Seasonally Adjusted
Job Openings: Total Nonfarm (JTSJOL), Level in Thousands, Monthly, Seasonally Adjusted

I first calculated the unemployment level by subtracting the employed level from the labor force.  Then constructed the ratio and the inverse for the years 2000-12 to 2013-12.  Unfortunately the JOLTS job opening series doesn't go back further than 2000-12.

As you can see, the Beveridge ratio (for this times series) never even reaches one and the inverse then obviously can never drop below one. 

These measure are conservative because they do no include marginally attached or part-time workers who would like full-time jobs. 

The point here is that we assume jobs are just floating around unfilled because people are too lazy to work, too unmotivated, or too discouraged by the welfare they receive.  Why don't we check our assumptions?  Because if I have calculated everything right (which I may not have so I encourage you to check) it seems that there aren't enough jobs to go around.  Hence, the narratives to get a job or get skills or an education fall apart. 


*The Beveridge ratio is a term my past professor at Roosevelt used and I think I remember him saying, no one else really calls it by that name.

The Economist

How to be a true progressive

"He wants to invest more in the poor, but has shown no appetite to overhaul America's welfare state, many elements of which- from disability insurance that discourages work to ineffective training schemes do nothing to boost economic opportunity, and often undermine it"

Why is the disincentive to work always framed as the welfare state being too strong? The way I look at it, the disincentive to work is wages being too low. 


A memo to Obama

"taxing the rich more- is a blunt edged response to inequality"

Agreed.  The systemic issues should be addressed but in the meantime...

"Mobility and opportunity, on the other hand get their hearts pounding"

Yes because without the idea of upward mobility and opportunity their story wouldn't make sense.

"Any negative effects of the minimum wage can be counteracted through the EITC"

Let real wages stagnate longer, take away transfers since people will be working their $7.25/hr jobs (if they exist) and everything will work out because they are working and will get a tax credit. 

"offered intensive counseling and training to the long-term unemployed"

So they can be skilled cyclically unemployed people.

"Since people who end up on DI seldom leave, the key is to persuade them not to apply"

...

We should minimize transfers because if people are willing to do what it takes (accept lower wages, enroll in job training) they can get hired again.  The minimum wage is fine at $7.25 because you are able to move up if you do what it takes. 

Am I missing something?  It sounds like mobility and opportunity are assumptions for these proposals, not arguments to improve them. 


Inequality v growth (enough said?)

"Some inequality is needed to propel growth, economist reckon.  Without the carrot of large financial rewards, risky entrepreneurship and innovation would grind to a halt."

Without the carrot in your mouth, risky offshoring and tax dodging would grind to a halt.


Plucking the goose

"At a time when the rich world is struggling to generate economic growth, you might imagine that its politicians would be competing to attract good companies and stimulate them to create jobs, innovative products and revenue"

This sounds a lot like developing countries competing for capital inflows which often inflate bubbles, misallocate resources, and fly out at the first whiff of paranoia. 

"data protection officer to safeguard customers' details.  The cost would be monumental. "

This kind of statement might explain why businesses aren't looked upon so brightly today by some.  Cost of providing quality service is just too much?

6 millionaire myths debunked, debunked- Keys to Success or Mirage of Opportunity

6 millionaire myths debunked

1.

People might read the article above and think, "Well gee, what's the big fuss about income  inequality?". 

The article is particularly misleading in the context of the income inequality discussion because the article is discussing a stock variable- accumulated savings, assets. Whereas income is a flow- it has units of time attached to it.

Clearly it is easier to amass a million dollars than to earn a million every year.  Knowing that you'd think wealth inequality might be better than income inequality, but it is actually worse.

2.

"their first million in dozens of different ways, from starting their own businesses to investing in the stock market or real estate. And those aren’t the only paths to becoming a millionaire, either: Others hit the mark by simply living below their means and saving portions of each paycheck. "

This assumes people start life with collateral or savings.  What happens when you are living at the means floor? Cheapest apartment, ramen budget... How do you save?

3/4.

"In most cases, millionaires have gotten to where they are precisely because they've practiced excellent savings habits and live frugally. They learn to make smart choices...without letting excuses get in their way. They, too, have to deal with unexpected expenses — plumbing leaks, health insurance increases, car trouble. They just keep moving forward despite the inevitable obstacles they have to overcome"

While in school,  Jim takes out loans to cover his tuition, he works a part-time job to pay for rent, food, and transportation. Of course his pay is minimum wage, which he hates (that's why he's in school) so he has to be frugal and eat ramen everyday (which has the effect of makes him unhealthy).  Say his car (which apparently fell from the sky) breaks down and now he needs to take the bus everywhere and save up for a new used car.  He feels like the bus and all his hard work is going nowhere.  Nonetheless he's absolutely sure when he graduates there will be a job available for him that pays enough to pay for the box he lives in (apt), beater (cheapest car he could find-hopefully it won't breakdown again), student loans ($500/month) and still save something.  He made all the correct smart choices so naturally he'll be validated.

5.

"Not so: Pure luck is not a factor in achieving success. Rather, truly successful people make their own luck. After all, a million-dollar idea is worth nothing without execution...Casey would say it was hard work, not luck, that got him over the million-dollar threshold. After getting an “in” at that first store, he worked 12-hour shifts — sometimes several in a row, at various stores, without stopping to sleep in between —"

Robinson Crusoe- making rational choices with limited resources.  No human relationships to constrain him! No society to speak of. 

6.

"Another common myth is that millionaires were born into money or inherited it. But that's not often the case. In a recent survey, Fidelity Investments found 86 percent of millionaires are self-made"

Again, it is much easier (I'm not saying it is easy by any mean, just easier) to amass one million than to receive one million per year.  And just out of curiosity, what exactly does "self-made" mean? Apparently it means using the participant's perception of what "wealthy" means as the "objective", scientific variable. 


Tardy, J. (2014) 6 millionaire myths debunked. Yahoo Finance.