Posted by Marc Hodak on July 22, 2009 under Invisible trade-offs, Politics | 
Liberal blogger Ezra Klein is dubious about Obama’s pleas to progressives: that whatever happens in each house of Congress, he will fight in conference to uphold his “bottom lines,” which consist of affirmative answers to these questions:
Does this bill cover all Americans? Does it drive down costs both in the public sector and the private sector over the long-term. Does it improve quality? Does it emphasize prevention and wellness? Does it have a serious package of insurance reforms so people aren’t losing health care over a preexisting condition? Does it have a serious public option in place?
Never mind that he’s claiming with a straight face that a central planning system, which is what a “serious public option” will inevitably devolve into, is likely to produce a combination of widespread availability, decreasing costs, and improving quality–something that no government-run system has ever produced whether it be shoes or schools. And after all this, Professor Bainbridge feels Obama has left some things out:
- Nothing about Americans being able to keep the doctor they have now
- Nothing about Americans who are satisfied with their health care insurance being able to keep their existing policy
- Nothing in it about preserving opt-outs so that those who don’t want socialized medicine can keep private plans that fund procedures and drugs the government is unwilling to cover
- Nothing about how to pay for it without raising taxes to global highs
And then there is that thing that Obama, the progressives, and nearly every one else has left out in their “bottom line,” i.e., the prospect of finding cures for nasty things that don’t happen to have yet been cured. Innovation continues to be the ignored trade-off.
Posted by Marc Hodak on under Executive compensation, Invisible trade-offs |
The Sucker Proxy
While Congress presses ahead on “Say on Pay,” some institutional investors are beginning to rethink their position. The Say on Pay bill would require an up or down vote by investors each year for every public company. Even a small pension fund has investments in thousands of companies. How are they supposed to wade through the SEC-mandated morass that is executive compensation disclosure for every one of those companies sufficient to form an opinion on its adequacy and render a vote?
My firm plows through hundreds of proxies each year in order to determine the relative quality of compensation plans for our research purposes. We employ a team in India to get the data, and a couple of analysts in New York to plow through the data for a couple of months in order to reach opinions about specific firms. We’re down to doing this every other year because the effort is so costly, and the quality of plans don’t really change that much from year to year for any given firm.
Activist investors have sipped this tonic, and have come to a conclusion of their own:
Some shareholders say they have already gotten a taste of say on pay voting and find it unwieldy and time-consuming. The United Brotherhood of Carpenters, whose pension funds have about $40 billion in assets, says it cast more than 200 say-on-pay votes this year at companies participating in the government’s Troubled Asset Relief Program. These companies needed to get their pay plans ratified by shareholders…
“We think less is more,” said Edward Durkin, the union’s corporate affairs director. “Fewer votes and less often would allow us to put more resources toward intelligent analysis.”
Unfortunately, they’re making this case to congressmen who don’t even read the laws that they pass.
Posted by Marc Hodak on July 18, 2009 under Futurama, Invisible trade-offs |
to be able to see a great-great-great grandchild.
I don’t know that even the best health care system will get that for me, but I firmly believe that at the current pace of treatment innovation–which is by no means guaranteed–the first immortals are now among us, being pushed around in their strollers.
Posted by Marc Hodak on July 14, 2009 under Invisible trade-offs, Reporting on pay |
One of the more persistent fallacies about health care costs is that they make our businesses less competitive. The reasoning goes that our companies must bear health care costs directly, while their European counterparts don’t. If the government took over those health care costs by providing universal coverage, the costs to business would drop correspondingly and, presto, they become more competitive.
As any good economist knows, this reasoning is incomplete. To the extent that health care costs drop for companies, taxes to cover those health care costs now borne by the government will go up. Since those taxes will be paid by workers–mostly the same workers now getting coverage from their companies–the costs of health care will have simply shifted from the companies to the workers. But this would not represent the likely equilibrium.
Companies would have to compensate their workers the same regardless of whether health care coverage was part of the compensation package or not. (This may not be obvious on first blush, but it’s true–trust me.) And since workers are bearing a higher personal cost via their taxes, they would require higher compensation to cover those costs, which they could demand in a competitive market for talent (again, what companies don’t provide in one kind of benefit, they will need to replace with another or with cash). Of course, the people forced to exchange cash for company health care coverage aren’t exactly the same people getting their taxes raised in exchange for government health care coverage, which would create a new kind of equilibrium–this all gets sorted out by the market in its own, unpredictable way.
This view of total company costs being a wash regardless of whether companies or the government are providing the coverage is well accepted by economists of every stripe, from Bush’s former CEA Chairman Gregory Mankiw to Obama’s current CEA Chairwoman Christine Romer (who called this argument “schlocky”).
Yet, the Wall Street Journal publishes an entire article based on this fallacy.
At some businesses, in fact, health care is the highest expense after salaries—with devastating consequences. Owners must skimp on vital investments like marketing and research. Some can’t hire the people they want because top candidates demand premium coverage. Or they end up understaffed because of the high cost of insurance—and lose potential clients as a result.
Clearly this Wall Street Journal writer doesn’t read the Wall Street Journal.
Posted by Marc Hodak on July 3, 2009 under Economics, Invisible trade-offs |
And does a great job of it. He leads with a great punch:
– “The American people overwhelmingly favor reform.”
If you ask whether people would be happier if somebody else paid their medical bills, they generally say yes. But surveys on consumers’ satisfaction with their quality of care show overwhelming support for the continuation of the present arrangement. The best proof of this is the belated recognition by the proponents of health-care reform that they need to promise people that they can keep what they have now.
My own summary: I’m amazed at the number of otherwise intelligent people who favor reform on the theory that we can’t individually afford the skyrocketing costs of health care, but that we can afford it collectively, and that by increasing the degree to which I’m paying for your health care and you’re paying for mine, we’ll bring those overall costs under control.
Posted by Marc Hodak on June 19, 2009 under Invisible trade-offs, Politics |
I picked up today’s Wall Street Journal this morning and saw a picture of two old Latvians literally at each others’ throats. The story behind that pic is that Latvia has promised pensions and public sector jobs to many, many people. Now that it can’t fund that promise (which was likely predictable at the time the promises were made), and is proposing to cut back 10 percent on pensions and 20 percent on public sector wages. My guess is that one of the people in the picture is a pensioner, and the other is a public sector employee, or spouse of one. My certainty is that they are frustrated by the perceived betrayal of their government, the reality that the losses are not going to hit everyone evenly, the reality that political influence will determine who gets what, and that they don’t have any. So they do what people often do in that situation–they turn on each other. Whenever the government must choose among the recipients of its largess, especially as it withdraws it, it is bound to create social strife.
You also see an echo of that in the headline story “Corporate Lenders Get Hit,” which describes how proposed rules for lending won’t hit all lenders evenly, and may even drive certain types of lenders out of the market. In this case, the disfavored lenders are figuratively hitting back via their lobbyists.
If one takes political debates on economic issues at face value, one can be forgiven for thinking that trade-offs are never necessary. Each side argues from an “all we need…” advocacy. When they admit of any conflicts their scheme may create, they invariably assert that sensible bureaucrats can make sensible trade-offs against fair standards, never admitting that fairness is impossible when the standards are arbitrary, and that nearly every standard creates, at its contentious, man-made boundary, winners and losers, often in the millions.
But when tough choices need to be made, as they always will be with the imposition of man-made rules, we are also apparently amused by pictures of people at each other’s throats, as long as it’s not us in those pictures.
Posted by Marc Hodak on June 15, 2009 under Executive compensation, Invisible trade-offs, Politics, Unintended consequences |
The government, purveyor and practitioner of the most perverse incentives on the planet, is coming down the road with a cart of new remedies for incentive compensation:
“This financial crisis had many significant causes, but executive compensation practices were a contributing factor,” Geithner said in his statement on Wednesday. “Incentives for short-term gains overwhelmed the checks and balances meant to mitigate against the risk of excess leverage.”
It is, indeed difficult to pinpoint all the potential causes of the financial crisis, and it’s certainly plausible to point the finger at bank compensation. The politicians and media would have us believe that:
A consensus has grown in Washington that compensation incentives based on short-term profit encouraged excessive risk taking at banks and played a major role in creating the financial crisis.
But the manner and degree to which bank compensation is at fault is, in fact, quite speculative. Read more of this article »
Posted by Marc Hodak on June 9, 2009 under Executive compensation, Invisible trade-offs, Reporting on pay |
So, you’ve played the populist card on executive compensation, Mr. President. You used it to provide cover for the mammoth, Democratic-payback-mondo-porkfest called the “Stimulus Package.” You used $500K to buy $787B. Well played, sir. But now that card is on the table. You can’t just pick it up again.
So, now we all have a bunch of silly-assed compensation rules that anyone could have predicted would create retention risk at American public banks. Sure, most people were saying, “Screw ’em. Where else could they go?” but we knew otherwise, didn’t we BO? We knew that any bank under TARP would chafe at the pay restrictions, in part because it put them at a competitive disadvantage. We knew that once you set some of the banks free, they would poach the others into submission, those big wounded banks still trapped under TARP, with all that taxpayer investment. Poof.
So here we are, on the eve of a TARP repayment by some banks that you have done everything to slow. But that part of the game is finally up. Now, what do you do?
Of course. You try to maintain some uniformity on the pay restrictions across all the banks, in and out of TARP. So, you’re forced to loosen up some of the restrictions on the remaining TARP banks while imposing new ones on the soon-to-be non-TARP banks. I know where you’re coming from, Mr. President.
Don’t worry, your secret appears safe, for now. The media has not a clue about your strategy or its motivation. Most of them are still at the “where else can they go?” stage. And the regular readers of this blog are plenty smart enough, but there’s only a few dozen of them–not enough to really alert the media. So, don’t worry. Do what you have to do. It’s all you can do, isn’t it Mr. President, as political choices lead to economic consequences that prompt more political choices…
Posted by Marc Hodak on May 20, 2009 under Invisible trade-offs, Politics |
One of the best encapsulations I have ever read on the subject. Sample:
Politicians need headlines. And this means they have a deep need to do something (“Sen. Snoot Moves on Widget Crisis!”), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn’t produce favorable headlines and, indeed, often produces the opposite (“Sen. Snoot Fails to Move on Widget Crisis!”).
Awesome stuff. This article should be required reading in every school purporting to teach introductory social science.
FD: I’ve done my part in introducing the author, John Steele Gordon, into a curriculum; he has guest lectured in my “History of Scandal” course at NYU.
Posted by Marc Hodak on May 17, 2009 under Invisible trade-offs |
Assistant Professor of Finance Linus Wilson has done a valuation of the warrants bought by Old National Bancorp from the U.S. Treasury to satisfy repayment of the Capital Purchase Program, the investment that healthy banks everywhere are dying to pay back. Prof. Wilson has estimated that Treasury accepted a discount of up to 80 percent. Tyler Durden comments:
While these days, when $9 trillion misplaced here or there by the Federal Reserve is taken as almost a given, the amounts in question are nominal, it merely underlines the continuing trend of short shrifting taxpayers at the cost of established banking interests. One can be sure that what is valid for ONB, is more than valid for Goldman Sachs, Citi and BofA.
Wilson summarizes it best:
U.S. taxpayers do not appear to be receiving fair market value for the risky securities that they purchased. Policy makers should be troubled because Wilson estimates that the CPP warrants could be worth between $5 billion and $24 billion based on May 1, 2009 closing prices. It could mean billions of dollars in lost revenue if the U.S. Treasury continually negotiates deals at the low-end of or below fair market value. Further, if the U.S. Treasury agress to sell the CPP warrants below fair market value, then the estimates of the subsidies involved in the CPP investments by the Congressional Budget Office (2009) and the Congressional Oversight Panel (2009) may be significantly underestimated.And here comes the kicker:
Many readers will not be surprised by this results. U.S. Treasury officials’ incentives are not as well aligned with the interests of taxpayers as bank managers’ incentives are aligned with the interests of their shareholders. For this reason, we should probably continue to expect the U.S. Treasury to negotiate a price that is below or on the low-end of the fair market value of the CPP warrants. Without a major change in the structure of compensation in the federal bureaucracy, which seems nearly impossible, the best hope for taxpayers is to sell the warrants to third party investors.
Of course, Treasury may have particular reasons for giving Old Bancorp a great deal on their warrants, besides simply not caring about a few measly millions. Taxpayers are oblivious to the amounts or the reasons. If the press gave them the information, which would require more financial literacy than possessed by their average readers, they would have no idea what to make of it. And, because this theft is invisible to the taxpayers, it means absolutely nothing to the bureaucrats managing their money.
But to hear it from our legislators, our country needs a massive dose of help in making its public corporations more accountable to their shareholders. Meanwhile, the largest accountability gap on earth continues unabated under the very noses of Congress, while their putative oversight focuses on pointy-headed academic dissertations about what Treasury ought to be doing.
HT: Zero Hedge
