On Executive Compensation

As noted in the Wall Street Journal, “The U.S. Treasury and the Federal Reserve unveiled Thursday a set of curbs and rules for executive compensation at banks, marking a watershed moment for government intervention in the private sector.” As one might expect, the right is spinning the pay curbs as an assault on free markets and capitalism, and the left as a long overdue step to end the looting of corporate America by CEO’s in collusion with the Boards of Directors who decide their compensation.

Wikipedia has a pretty good summary of how the system currently works, and a more detailed, albeit somewhat dated, scholarly paper on the subject may be found here. I tend to lean to the left on this one, and am more or less in agreement with Mark Green’s take at Huffpo. In short, I suspect the claim that CEO compensation decisions are comparable to those for other highly paid individuals such as the top tier in major league sports, movie stars, pop singers, etc., is poppycock. I have little faith in the integrity of the system, and suspect that, in effect; CEO’s are not only cutting the cake, but are deciding who will get the first piece. I do not agree that such legitimized thievery is an essential aspect of free market capitalism.

According to the arguments on the right, summarized, for example, here and here, the Administration’s attempt to regulate executive pay won’t work. We are told that the services of these highly talented individuals are in great demand, and, if we refuse to cross their palms with silver, they’ll simply jump ship and move to more lucrative posts, or, according to a rather more fanciful argument, will start successful new private businesses of their own. To all this I can only say, I doubt it. I suspect people are standing in line to take these jobs, and that many of those in the line are not only more capable than the current incumbents, but are also willing to work for a much more reasonable level of compensation. Who is right? We are in the process of conducting an experiment to find out.

The right has made some very specific predictions about what will happen if the Administration follows through on its policies. I propose that we carefully monitor the future careers of the executives affected by the cuts. If they actually do “go Galt,” and no comparable talents can be found to replace them, I will cheerfully eat crow. If, on the other hand, it turns out that the services of these individuals were not really as critical or as indispensible as advertised, and the dire degradations in the performance of management at the affected firms predicted by the right fail to materialize, then perhaps they might consider adjusting their paradigm of what constitutes “free market capitalism” accordingly.

Germany to Reverse Course on Atomic Energy?

As a result of their dismal showing in the elections to the Bundestag on September 27, Germany’s left of center Social Democrats (SPD) have been replaced in the former “grand coalition” government with the more conservative Christian Democrats (CDU) by the market oriented Free Democratic Party (FDP). One salutary result has been an apparent reversal of course on the irrational but ideologically fashionable decision to shut down Germany’s nuclear generating capacity. According to Der Spiegel,

The Union (CDU) and FDP will accommodate the nuclear industry – but under stern conditions. The operational lifetime of German nuclear power plants can be extended on condition that high safety standards are met. According to a paper by the new coalition’s working group on the environment made available to Spiegel Online, “Nuclear energy will be necessary as a transitional and bridge technology until climate friendly and more economical alternative means of producing sufficient electricity are available capable of meeting baseload electric generation requirements. Therefore, the operational lifetime of German nuclear power plants will be extended to 32 years.

Solar Power and German Ideologues

Der Spiegel has provided us with another edifying example of the difference between sound public policy and ideological grandstanding. It turns out that the outgoing Social Democratic (SPD) “Minister of the Environment,” Sigmar Gabriel, has saddled the German people with a gift that will keep on giving in the form of a debt of at least 27 billion Euros. It comes in the form of a clause in Germany’s “Renewable Energy Law” that grants a subsidy of 43 Cents per kilowatt-hour to producers of solar power – five times higher than the cost of conventional power. But wait, it gets better; the subsidy will remain in effect for at least the next 20 years. And, by the way, that’s just for the facilities that were built between 2000 and 2008. Meanwhile, new facilities are being built hand over fist. About 2000 additional megawatts are expected to come on line in 2009, providing German consumers with another heaping helping of debt to the tune of 9 or 10 billion Euros. This remarkable example of ideological dilettantism has, at least, resulted in the creation of many new jobs – in China. Following a predictable pattern, German solar cell producers have been ramping down production at home and transferring it to Asia. Meanwhile, as Der Spiegel points out, the subsidies have had such “environmentally friendly” effects as

…keeping the world price of solar panels artificially high. The result: international producers are flooding the German market with solar modules – and very little is left for other countries, in spite of the fact that a solar facility in Africa could produce substantially more electricity than in rainy Germany.

All this comes at a time when the actual cost of solar modules has been in free fall. Spiegel cites an article in the German trade magazine “Photon,” according to which, “Solar power can now be produced much more cheaply than the high subsidies would lead one to believe.”

Judging by the quantitative results, we must assume that wind has been less afflicted by ideological meddling than solar in Germany. Wind facilities currently provide six percent of her power, as opposed to solar’s contribution of less than one percent.

There are Boycotts, and then there are Boycotts

As Tom Blumer points out:

It becomes more obvious with each passing month that General/Government Motors and Chrysler have permanently lost a large percentage of consumers who won’t buy a vehicle from a bailed-out and/or state-run company. Recent proof: Neither maker had an entry in the top 10 list of the most purchased vehicles under the cash-for-clunkers program (Toyota and Honda had three each, while Ford had two). GM’s share of sales from clunker trade-ins was only 17.6%, well below its already declining market share.

The press probably won’t recognize the informal GM-Chrysler boycott unless and until the doors shut for the final time at these companies, if even then. They’re too busy promoting usually ineffective boycotts with which they agree.

Wonder which boycott will be more effective in the long run? Here’s some anecdotal evidence for you: I will go out of my way to shop at Whole Foods. The chances that I will ever buy another GM product are vanishingly small.

My Beautiful ICE Bubble is Popped

That dour realist, Robert J. Samuelson, lost no time in exploding my lovely fantasy of speeding German ICE liners flashing over the rails between our cities. Well, I can always hope the folks at Siemens and Deutsche Bahn know something he doesn’t know.

Hard Times in Russia

In her nightmarish account of life in Stalin’s Gulag, Eugenia Ginzburg, in a dark cell in solitary confinement herself at the time, describes a young prison warden’s reaction to the screams of a tortured Italian prisoner:

But it continued – a penetrating, scarcely human cry which seemed to come from the victim’s very entrails, to be viscous and tangible as it reverbedrated in the narrow space. Compared with it, the cries of a woman in labor were sweet music… So I only whispered: “What’s the matter with her? It’s terrible to hear.” He shrugged and said: “They haven’t got the guts, these foreigners, they just can’t take it. She’s only just come in, and yet she makes all that fuss. The Russians are different, they don’t kick up a row. Look at you for instance, you’ve got five days (in solitary) and you’re still not crying…”

It’s a good thing Russians can take it. Whether in politics, economics, or war, history has not been kind to them, unless, perhaps, one can construe the sacrifice of 25 million lives to, as Churchill put it, “tear the guts” out of Hitler’s armies and achieve victory in World War II “fortunate.” Now, as France, Germany, and Japan seem to be seeing light at the end of the tunnel, Russia appears to be mired in the recession as deeply as ever. However, one of her citizens has come up with a new twist on an old way of doing business that the rest of the world might do well to take notice of.

Obama and the Stock Market

According to Bloomberg back on March 6,

The Dow Jones Industrial Average fell 20 percent since Inauguration Day through yesterday, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

Obamas enemies duly fastened the Dow Jones millstone around his neck, for example, here,

Well guess what, folks…as ANY economist will tell you, capital markets are forward-looking. The Dow Jones Industrial Average usually rises and falls based on expectations of what will happen, not based on what’s happening right now. In other words, if stocks fall, it is because investors believe the future is looking bleak, not because the present state of the economy is bad. Note that the stock market collapsed in 2001 in anticipation of the recession that followed. The stock market is collapsing now in anticipation of the fact that Obama’s plan will be ineffectual.

and here,

To those critics who claim that Obama can’t possibly “own” the decline in the stock market sincehis election, recall that these indices are a kind of futures market, with investors buying in (or selling as the case may be) based on how they believe the economy will do.

Let’s see, the stock market stood at 7949.09 at the close on Inauguration Day. Today it closed at 9361.61. Is there an economist in the house? Do these arguments work both ways, or are we dealing with what scientists call an irreversable process? Seems like it’s risky to play the stock market, both economically and politically.

On the Wisdom of Committing Suicide to Avoid Population Decline

A lot of people seem to have trouble putting two and two together. They’re concerned about the demographic problem so many developed countries are facing on the one hand, and on the other they’re worried about global warming and environmental degradation. Perhaps it’s a good thing that one of the nations most threatened by both these problems is Japan. As Mark Steyn points out, her population peaked at 127.8 million in 2004, and will drop to 89.9 million by 2055 if current trends continue. She will, therefore, be among the first nations that will be forced to solve the problem one way or another. Her people are conservative and aren’t good at assimilating foreigners. Even if they were, Japan isn’t an easy place for potential immigrants to reach, illegal or otherwise. It may be that’s a good thing, both for Japan and the rest of us. It will be good for Japan because she will likely be forced to solve the problem without inundating her islands with immigrants whose language and/or culture is alien to her own. It will be good for the rest of us because it will demonstrate that, for better or for worse, the problem can be solved without risking cultural, political and environmental suicide.

Clearly, we cannot put off the demographic problem forever. We and Canada can import the entire populations of Central and South America, and Europe can import the entire populations of North Africa and the Near and Middle East, but, eventually, the problem will just come back. No nation can support an infinite population. The problem must be faced, and, if it must be faced, it is better to do so with a population that is not wracked by ethnic tensions and that is not so large that the available environmental resources can no longer safely support it.

Human beings can survive without national health care programs. They can even survive with reduced social security benefits. They will have somewhat more difficulty surviving on the planet if we degrade the environment to the point of collapse. Our environment is already threatened by excessive population. When will it be seriously threatened? Depending on your point of view, it may be now, it may be at some distant date in the future, or it may already have been decades ago. It doesn’t matter. The question is one of risk. How much longer will it behoove us to risk the environment of the planet by forcing the growth of our populations to support government entitlement programs? I suspect we should have abandoned this dubious method of “solving” our problems a long time ago.

Why? Our environmental problems are obvious enough. The environmental impact of increasing the population in developed countries is substantially greater than similar increases in less developed countries. As for the wisdom of tolerating unlimited immigration by culturally alien foreigners, you might want to ask the Serbs how that worked out for them in Kosovo. For that matter, we have legions of subject matter experts right here in the United States who are quite capable of analyzing the potential outcome of the complexities of population dynamics in such cases. You will find them on any Indian reservation.

It would be wise for the developed nations to severely curtail immigration, accept the natural declines in their populations, and reduce entitlement benefits to sustainable levels. If they don’t now, they will eventually be forced to under much less favorable conditions, and that in the not too distant future. So much seems obvious to me. However, I realize that, at least in the United States, there are powerful blocs of opinion on both the right and the left that, whether they worry about possible declines in our economic and military power, or are concerned their “progressive” social programs will be threatened, are prepared to deny the obvious indefinitely as we stumble into an uncertain future. As a result, for the time being, rational action along the lines I’m suggesting is probably out of the question. One can only hope that Japan, fortuitously protected from the worst of these threats in spite of herself by miles of ocean and cultural taboos, will serve as a role model for the rest of us in the way she solves her demographic problem. Perhaps her solution will be sufficiently elegant to convince the rest of us to follow her example rather than continuing to risk cultural and environmental suicide.

GM and Profitability in the Emerald City

I suspect GM will need to do something more drastic than change its logo to return to profitability. They might start by seeking to recover the lost art of making head gaskets and intake manifold gaskets that don’t leak. My Mom just had to fork over $700 to fix a leaky gasket on the lemon they sold her. The mileage, you ask? 30,000!

All the evidence I can gather on this issue seems to indicate that the ancients actually found a solution to this problem, but the knowledge was lost during the ensuing decades. I recommend an archeological expedition to recover it. New generations of highly sensitive metal detectors could be used to find ancient dump sites. If an intact fossil of a Model T could be found, the key to the gasket riddle might be rediscovered via reverse engineering. GM would truly have taken a giant step back on the road to economic recovery.

Going Bust Today and Yesterday: Recurring Anecdotes

On the Panic of 1837, from the “Democratic Review,” 1840, when England called the tune:

“Give (our merchants) credit at home, they take the money and make still greater purchases on credit in England. And this credit is renewed and maintained at the pleasure or the fortune of the creditor people; and it may be arrested or contracted by their fears, their caprice, or their disasters. And a contraction of this credit there is followed, as we have lately seen, by panic, convulsion, prostration, paralysis of credit, commerce, property and labor here.”

On the Depression of 1893 in Kansas by the great American journalist William Allen White in his Autobiography:

“Money was easy. The farmers were borrowing up to their ears. The mortgage companies and trust companies had money to lend. No one cared what interest he paid – or promised to pay. Kansas was plastered with farm mortgages. Crops were good, and prices reasonable; times on the boom, and no one watched how the wheels of plutocracy were whirring and grinding, generating the power that ran the land. I was a part of it and never remotely dreamed its significance… Through 1893 and 1894 the depression held its blighting hand over the country and especially over the Missouri Valley. Railroads were going through bankruptcy, the big ones swallowing the little ones. Financial institutions were reorganizing after failure, or to avoid it. The whole structure of American business and finance was being recast before our eyes.”

On the Great Depression by sociologist Frederick Lewis Allen as set forth in 1952 in his book, “The Big Change:”

“What was destined to halt the forward progress of business was the fact that the businessmen of America had become bemused with paper values – with the piling up of speculative or artificially generated wealth which had little relation to the production of goods… there developed a speculative mania which benefited immediately only those who could lay their hands on capital; and in addition, there were invented or improved a series of devices for distributing the fruits of prosperity – or what looked like them – into the pockets of the few.

“These devices included company mergers at inflated prices which gave insiders a chance to line their own pockets; the piling of holding companies one upon another until… they were sometimes five or six or seven deep, with the result that the heaviest cream of the profits of the concerns at the base of such a pyramid could be drawn off by the owners of the concern at the top; the formation by banks of “security affiliates” which in effect used the depositors’ funds to make investments, in securities and in real estate, such as wsere denied to the banks themselves by law; the frequent practice of inflating corporate profits by selling properties back and forth among a group of companies at rising prices; and the formation of stock-market pools in which the officers of a company would join with brokers and well-heeled speculators to push up the price of the company’s stock – and then unload the stock on a new lot of buyers, thus making making money at the expense of those officers’ own stockholders.”

Sounds familiar, doesn’t it?