Any excuse will do

Posted by Marc Hodak on April 21, 2010 under Collectivist instinct, Economics, History, Movie reviews, Politics, Reporting on pay, Stupid laws | Read the First Comment

The IMF is pushing for a bank tax:

[T]o pay for the costs of winding down troubled financial institutions, the IMF proposed what it called a Financial Stability Contribution”—a tax on balance sheets, including “possibly” off-balance sheet items, but excluding capital and insured liabilities. That tax would seek to raise between about 2% to 4% of GDP over time—roughly $1 trillion to $2 trillion if all G-20 countries adopted the tax.

On top of that, the IMF proposed that nations to adopt what it called a Financial Activities Tax, levied on the sum of profits and compensation of financial institutions. That would be paid to a nation’s treasury to help finance the broader costs of a financial crisis…

The IMF said that a nation didn’t need to put in place a specific resolution authority. Instead, the tax money could go to general revenues and used in case of financial crisis. But the IMF warned that the money would be spent by the time a problem arose.

OK, so let’s see how this would work.  Congress levies massive new taxes on every major bank.  Congress would then spend that money on…stuff.  A financial crisis hits, and certain TBTF banks get into trouble.  Congress bails them out, having to borrow gobs of money to do so because the tax revenues that were nominally for “Financial Stability” were in fact spent on…stuff.

So, how is this different from what happened last time?  Hard to see.  Does it do anything to reduce the systemic risks that regulators insist were at the root of the last crisis?  No.  Does it strengthen the banks to make them better able to weather such a crisis?  Not likely when so much money of their capital–enough to raise between 2% to 4% of GDP–is being sucked out of their coffers.  At least if the money were being held in a trust fund instead of dumped into general revenues, it would be there for frenzied politicians to disburse based on the rational workings of the government.  But, of course, the money will not be there.  It will have been spent not to support the financial system, but to support the reelection of incumbent politicians–the most short-term actors on the planet.

Oh.  Yeah.  THAT would be the difference.

So the lesson from all this appears to be:  When it comes to a justify raising taxes, any excuse will do.

Boxing and taxes

Posted by Marc Hodak on April 16, 2010 under History, Unintended consequences | Be the First to Comment

The top marginal tax rate in post-war America on income over $400K was so high that anyone making large, but lumpy income would have a strong incentive to insure that the lumps were spread out across tax years:

The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters.  A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

Of course, tax-driven behavior continues to create unintended consequences.  In a lecture I gave today in Switzerland, I pointed out how the U.S. government’s elimination of tax deductibility of salaries over $1 million created a growing shift in the mix of executive pay from salary toward bonuses and equity.  The mix went from about 70/30 (salary versus bonuses/equity) before the tax law to about 10/90.  This change in the mix of pay contributed significantly to the huge growth in total CEO pay we saw in the ensuing ten years.  And that is how American tax policy intended to reduce CEO pay actually led to its increase.

Something about other people’s high pay just drives congressmen a little nuts.

Hat tip:  Marginal Revolution

The Finish Line for NUMMI

Posted by Marc Hodak on March 16, 2010 under History | Be the First to Comment

California politicians and the UAW are loudly berating Toyota for its decision to close their NUMMI plant in Fremont, California. Most of the media is piling on, with the liberal commentariat pronouncing “treachery” and “ingratitude” for all that California customer’s and workers have given to Toyota over the years, as if there were something other than a commercial exchange between them. The simple reality is that Toyota is making a business decision. It’s Fremont plant is not making money anymore, especially after GM pulled out of its part of it. The commentariat insists it’s never that simple, and is spinning all manner of anti-business narratives out of this decision.

Ok, let’s go with “it’s not that simple.” Only, my narrative won’t assume that Toyota is just there paying workers and suppliers and tax authorities, as if the plant’s existence were a given. My narrative will begin at the beginning, before Toyota moved into Fremont.

Read more of this article »

The Green is gone

Posted by Marc Hodak on December 14, 2009 under Executive compensation, History | Be the First to Comment

This story about the demise of Tavern on the Green is a story of failure by a young heiress to keep alive her father’s fabulously successful restaurant.  Tavern was a New York institution for 30 years run by Jennifer LeRoy’s father.  When her father passed away, giving his 22 year old daughter control of the business, the first thing she did was scrap his incentive plan:

“Tavern made an incredible profit,” says Mr. Coyle, adding that top managers “earned hundreds of thousands of dollars in bonuses,” and that his bonus allowed him to purchase a Porsche.

The bonuses were based on a generous profit-sharing plan implemented by Mr. LeRoy, who was known for his excesses. Ms. LeRoy can be credited with a more fiscally conservative approach to running the business. Shortly after she took over, the bonus program was restructured. Managers were given a guaranteed amount based on their salary, not on the restaurant’s profits. It would be the first of several major moves as Ms. LeRoy put her stamp on the restaurant and grew into her role.

While there are many possible reasons that a business that had survived everything from New York’s near-brush with bankruptcy, a Central Park that could not be risked entering after dark, and everything else since, the end of the story is that she got what she paid for.

Obama on rewards without performance

Posted by Marc Hodak on October 12, 2009 under History | Be the First to Comment

President Obama has spoken eloquently, more or less, on the perils of pay without performance.  I wonder what he would say about this:

For this:

Imagine a CEO receiving a $1.4 million bonus (among his other compensation) for promising to implement a grand strategy before it has even had the chance to fail.

What George Washington missed

Posted by Marc Hodak on September 8, 2009 under History, Unintended consequences | Read the First Comment

First first lady was nobody's fool

Our first First Lady was nobody's fool

The Father of our country, for all his wisdom and brilliance, may have unintentionally put his wife’s life at risk.

President Washington was mindful of his place in the history of the young nation he did so much to bring about.  But he was also deeply bothered by slavery, and aware that his slave ownership would be a stain on his reputation.  He decided to limit that black mark as best as he legally could, promising to free his slaves in his will.  But not wishing to leave his wife in the lurch economically, President Washington willed that his slaves would be freed after her death.

Well, Martha Washington was no fool.  Abigail Adams, on a visit to Mount Vernon, wrote in 1800:

In the state in which they were left by the General, to be free at her death, she did not feel as tho her Life was safe in their Hands, many of whom would be told that it was [in] their interest to get rid of her–She therefore was advised to set them all free at the close of the year.

Smart lady.  Martha died of natural causes two years later.

Two conversations about compensation

Posted by Marc Hodak on under Collectivist instinct, History, Reporting on pay | Read the First Comment

People reading the news may be forgiven for thinking that we are having a kind of national conversation about executive compensation.  In fact, we are having two conversations.  One of them is about corporate governance.  The other is about wealth redistribution by non-market means.  Both of them sound like they’re about compensation because the word is used often in the story, but they are different.

Take this item headlined:  Warning: Pay Gap Between CEOs and Workers Will Keep Growing

This is nominally about compensation.  It has the words “CEO” and “pay” in it.  In fact, this is a story about a study released by the Institute of Policy Studies, which is a progressive organization dedicated to revamping society along socialistic lines.  They simply hate the idea that some people make a lot more than others.  Governance is simply a side show for them:

Governance problems do need to be resolved,” notes IPS Director John Cavanagh. “But unless we also address more fundamental questions – about the overall size of executive pay, about the gap between the rewards that executives and workers are receiving – the executive pay bubble will most likely continue to inflate.

But.  It’s about the size of pay.  A colleague of Cavanagh wrote:

Shareholders have no reason to begrudge executives like these their fortunes. But the rest of us do.

For IPS, it’s not about the shareholders.  It’s about social justice, which is code for democratizing pay.  I get to vote on how much you make, and you get to vote on how much I make, regardless of how we “vote” in our revealed preferences via the market place.

What annoys me about this is not the nominal aims of the progressives.  I too would prefer a world with less extreme distributions of income.  What annoys me is that this sentiment is not really about income–it’s about state power versus market power–it’s simply reported as if it’s about income.

Practical definition: Confiscatory taxation

Posted by Marc Hodak on August 24, 2009 under Collectivist instinct, History, Invisible trade-offs, Revealed preference | Read the First Comment

Confiscatory taxation:  What is going on in Great Britain.

Contrast this with

Socialism:  Using state power to penalize success and reward failure.

Using the threat of violence to take an extra $50,000 from someone making $1 million is not considered a crime if implemented by authorities elected by the people who are, for the most part, not being taxed at that level.  In fact, these people call their confiscation the patriotic or moral thing to do.  They will claim that most of the people being taxed are actually OK with it; but they don’t dare let the class of people paying it vote on whether they should all do so.  They will claim that those who do not wish to pay it lose their claim to their money by virtue of their selfish desire to keep it; but they don’t see the irony of their preferences forcibly imposed on others as a baser form of selfishness, abetted as it is by coercion.

But the victims of this self-justified view of theft-disguised-as-patriotism-or-morality won’t sit still for the grasping hypocrisy.  They will leave.  They take their money and, more important, their wealth-creating talents, to friendlier climes.

A parody of seigniorage

Posted by Marc Hodak on June 2, 2009 under History, Irrationality | 2 Comments to Read

On a recent trip to D.C., I got some change from a vending machine, and thought, “Damn, someone managed to get a fake coin into the change box.”  It looked like a casino token.  I was pissed.  When I looked more closely, I got confused.  It’s markings said United States of America and indicated a value of $1.  I shrugged and put it in my pocket.  Shortly afterward, I saw a sign on the wall that read:

I read that one line twice:  “They Save the Nation Money.”

Once upon a time, the currencies of choice were gold or silver.  These precious metals had many properties that made them especially useful as currency– they were scarce, portable, and divisible into any useful denomination of coin.  People using such coins in exchange could be reasonably certain that the next person in the chain of commerce would accept it at an equivalent value for which they received it.  The only problem was that these metals had to be weighed for each transaction.

Monarchs exploited the opportunity to create greater trust in commerce by minting uniform denominations with the seal of the sovereign stamped on the coin.  The stamp assured its value.  To enhance the credibility of that stamp and protect the value of the coin, the sovereign threatened penalties to anyone representing a debased version of the coin as the real thing.

Eliminating the need for scales in every transaction was a huge advance in commerce, equivalent to the replacement of cash and checks with credit cards.  The monarch capitalized on the value of his stamp by selling officially minted coins to banks for slightly more than they were nominally worth in bullion, which banks were willing to pay because the demand for the coins was high.  This profit was called seigniorage.

Alas, monarchs didn’t enforce anti-counterfeiting laws against themselves.  When they began to debase their coins, their currency suffered from inflation, and their people began reverting to other trusted coins, or to bullion and scales.  To enforce their debasement, governments began forcing their people to use the debased currency via legal tender laws.  The history of how seigniorage transformed from a game of narrow spreads into a large-scale, legal counterfeiting operation is long and sordid, but it has finally, apparently come to this:

The U.S. government now advertises that the coins it wishes the public to circulate have minimal intrinsic value.

I understand that the government is promoting this as a savings versus paper bills, which cost less per dollar to produce, but must be replaced more frequently, making their overall cost higher than the equivalent currency in coin.  Still, I’m astounded that minimizing the intrinsic value of what is in circulation is being sold as a public benefit.  I’m not yet sure how it’s being bought, but I can see a whole bunch of otherwise thoughtful people nodding, “That makes sense.”

A brief history of money in the U.S.

Posted by Marc Hodak on May 26, 2009 under Economics, History | Be the First to Comment

The world is far too complicated for me to figure out beyond my little niche in corporate governance.  So, I’m always looking for high quality material to inform me on the larger issues.  Gold, Money, and the U.S. Constitution by Eugene Holloway is such material.

It’s easy to bemoan the actions of private or political officials out of context, or to argue polemical abstractions.  By weaving the history into the law, Holloway provides a richer understanding of why things evolved the way they have, and a sense (warning, really) of where things are likely to go from here.  An excellent read.

Note:  I have linked to the last of four parts, but additional links to the prior three parts are right on that page.