Perverse Incentives Are Endemic (TM)
Posted by Marc Hodak on May 5, 2009 under Politics, Revealed preference | 
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Asked by the mom of a child in a voucher program that BHO is agreeing to kill:
The answer, left out of this video, can be found here.
Posted by Marc Hodak on under Economics, Reporting on pay | Be the First to Comment
Good bankers have an incentive to go to the places that offer them the most. That’s simple.
Banks, like all companies have a powerful incentive to keep their best producers. Right now, American banks with little prospect of soon repaying TARP are losing talent to hedge funds, foreign banks, and other non-government owned entities in droves.
The government has the incentive to avoid embarrassment about how much bankers get paid in times when banks are in trouble. Officials have necessarily focused on large institutions, especially TBTF firms, and have crafted all sorts of brain-damaged rules to try to contain the pay of bankers at those firms. However, those rules don’t distinguish good bankers from poor ones within these large institutions. That’s because compensation regulation is driven by headlines, while compensation is more complicated than headlines can capture. Which gets us to another incentive.
The media has an incentive to provide blaring headlines, which is how they sell stories. One way to do that is to tap into the deep vein of envy that exists among the masses. Most readers love to hate the “rich,” especially if they feel they can blame the rich for themselves being worse off.
This brings us full circle in the ecology of incentives. Headline-driven media does not allow fine distinctions between good and bad bankers. The compensation constraints intended to punish whole firms or industries invariably punish those that deserved their pay. These deserving ones feel the same outrage at being punished for their success that the envious masses feel about the underserving ones getting paid anything at all. In a bad environment, the best ones leave first.
Alas, there is a tension between economic news, which is sold with headlines, and economics, which is inherently nuanced. That is why readers and presidents prefer one-handed economists. Which is why only hacks do well in the media and in any administration. The good ones do their best under the constraints of politics, pick up some real world experience, and go back to the cocoon of their ivory towers.
Posted by Marc Hodak on May 4, 2009 under Politics | Be the First to Comment
Fritz Henderson is nominally in control of GM. He’s, you know, the CEO. In theory, that means he also has a fiduciary duty to his investors. So, when he gets a proposal from certain of his creditors that they will not accept getting flucked sideways by accepting 10% for their $27 billion in debt while other, more Democrat-like creditors would be getting 39% for giving up $10 billion in junior claims, why, he’s supposed to consider their arguments against some standard, preferably a reasonable one.
Henderson’s response: Sorry, I can’t give more than 10 percent to the bondholders.
“It’s outside of what the Treasury has told us they would support,” Henderson said. “It’s about as factual as I can be.”
Translation: The politicians are in control. And we all know who controls them.
Posted by Marc Hodak on May 3, 2009 under Politics, Practical definitions | Be the First to Comment
President Obama said he was looking for someone who has “empathy for ordinary Americans” in a Supreme Court justice. I was taught that the role of judges in our system of checks and balances was to interpret the law. The legislature makes law. Empathy is a good thing in lawmakers. Laws affect everyone, and one should appreciate their effect on others when creating them. The executive implements and enforces the law. There are lots of ways to apply rules, and we’d like to think that they are being implemented in the most humane and reasonable way possible. Judges interpret the law. What does empathy mean in the context of interpretation? Here’s what he meant:
Judicial empathy: Ignoring the law to achieve an outcome the judge desires.
You will note that is more or less the same as the definition of judicial activism.
Senator Specter (R then D-PA) might be instructive on this point, explaining why a blatantly discriminatory approach to selecting judges would work best:
We have a very diverse country. We need more people to express a woman’s point of view or a minority point of view, Hispanic or African-American, so that somebody who has done something more than wear a black robe for most of their lives.
I would like to know what the woman’s point of view is with respect to: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.” Is there a Hispanic or African-American way to read: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause?”
Specter is a liar. Given a choice between Janice Rogers Brown and any of a passel of liberal white males, the sharecropper’s daughter doesn’t have a chance with the Democrats on the Senate Judiciary committee, and he knows it. Neither would a conservative Hispanic against a liberal white male.
Senator Leahy proposes an even more disingenuous standard. He’s looking for “somebody who can reflect the feelings of real Americans.”
As opposed to the Americans on the other side of the political debate, no doubt.
