That’s the convenient consensus of political leaders, anyway. Convenient because then they don’t have to deal with the possibility that government manipulation of the cost of capital might have had a meaningful impact on the capital markets. They can pretend that government guarantee of mortgage loans didn’t materially goose the mortgage market. They can blithely conclude that 70,000 pages of new financial services regulation since 2000 was just not enough. Nope. It was the compensation of managers and traders. Yeah, that’s it.
What, a scientist might ask, was different about banking compensation in recent years that would have caused this particular crisis in 2008 instead of, say, any time in the last couple of decades that bankers were being paid obscene bonuses under supposedly perverse incentives? The best answer to that question would be…stepped up government manipulation of the capital and mortgage markets.
The government changed the game with artificially low rates, and artificially high mortgage profits, and artificial capital market complexity born of mind-numbing red tape. The bettors were always at the table. The game was changed on them.
So, if you’re a government official, all this of course means that we have to change the way people bet so we can keep the silly game we created. We can keep absurdly low interest rates that are divorced from the reality of our underlying cost of capital. We can keep Fannie and Freddie, and now the Fed, propping up housing markets because high food costs, high energy costs, or high costs of anything else are bad, but high housing costs are good. Then we can expand regulation of the financial sector because an extra 10,000 pages is sure to achieve the Nirvana that the prior 70,000 pages could not.
But certain people–rich people–will be making less money. Now, wouldn’t that make it all better?
The current debate over how bankers should be paid is actually two conversations conflated into one.
The nominal conversation is about elevated concepts, such as corporate governance and systemic risk. The Fed proposal is about regulating “compensation policies deemed to pose a potential threat to a financial institution’s soundness.” In fact, the discussion of governance and risk is simply a front for the real conversation driving public policy—envy, i.e., a less elevated concern about how much other people make and who gets to decide.
Governance, as a distinct topic, is too boring for the media to write about. On the other hand, how much other people make is quite interesting. But raw dollars is too crude a topic for our media elite to claim as an explicit journalistic interest. So the MSM satisfies this interest implicitly by conflating the governance and envy conversations in a kind of bait and switch. The bait is code words like “millions” and “outrage” in the headline or lead. Then, for the next fourteen paragraphs, they will discuss governance and risk, as if those considerations were actually driving policy makers and government leaders to the point where compensation overwhelms the agenda of the upcoming G20 talks. Finally, in the fifteenth paragraph, they will return to the crux of what’s driving the debate:
In the U.S., the Fed’s plan will further inflame the debate between those who feel it bank pay too high [sic] and those who resent Washington’s reach into the private sector.
“Pay too high” is a concern about envy, not governance, but even here the narrative is used to disguise envy by obliquely citing ‘those who feel.’
What do these people have in common? According to Bryan Caplan:
Check whether the marginal human is, over his entire lifetime, self-supporting in present value terms. A small fraction of people – such as violent criminals, long-term welfare recipients, the chronically sick, and politicians – probably don’t pass this test. But even people who earn minimum wage probably do.
Unfortunately, “present value” is a term that is alien to most people, which makes them more likely to fall for the value-destroying programs of the politicians.
I don’t know who the couple dozen folks were who kept coming back to check my site for each of the last four days when they would get nothing more than a bare 404 notice, but thank you for your persistence. Hodak Value updated its main web site, and it temporarily screwed up this blog site. That is now resolved, and we push forward without further interruption, for which management is truly sorry and, as usual, the owner is even sorrier.
The U.S. Senate voted to charge $10 to visitors to the U.S. to promote…U.S. tourism. Really.
Lawmakers said many international governments aggressively help tourism in their countries by subsidizing promotional programs, but the United States leaves that work to the private sector and to state and local governments.
One might read this to say that the U.S. is looking to close the gap in freedom between us and the rest of the world by funneling more spending through Washington. But this tax would land on tourists, not Americans.
Which is why the EU is threatening retaliatory taxes on American tourists going there.
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.
Politicians and the media, working together to politicize the language, have grabbed onto a new phrase: the bonus culture. It’s a suitably nebulous phrase that conjures up bankers immersed in a world of money–our money–flowing through their homes and dinners and art, regardless of what happens to “working men and women,” of which they are not a part.
The definition of ‘bonus culture’ should be simple: an area of society where incentives are transparent.
Instead, we have this alienated view of money, and those who work with it, arising from the cargo cult mentality that endows money with a sense of magic, as if it flows toward certain people based on some dark art. It hearkens back to the medieval view of traders and moneychangers who grow wealthy without producing anything tangible as the inherent objects of suspicion, while the looters who walked around with swords or muskets and forcibly took money from their subjects were treated with a sort of reverence for their power.
You’d think that in this day and age, we’d have a healthier view of money as a medium of exchange and a store of value. You’d think that in a society where the vast bulk of involuntary transactions are tax collections, that those dealing without the threat of force would be regarded with a less conspiratorial view than those who rely on that threat. But it remains exactly the opposite: politicians are viewed with less suspicion than bankers. And the reason is that bankers live in a “culture of bonuses” while the financial incentives of politicians are far better disguised.
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.
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.
SEC Chairman Mary Schpiro sees Wall Street’s aggressive pursuit of top brokers, and sees red:
“Certain forms of potential compensation may carry with them enhanced risks to customers,” Schapiro wrote. “For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors’ interest.”
This sounds good…to people unfamiliar with the way the average owner balances incentives and controls. If all we had to worry about were incentive effects, then the average restaurant owner who allowed their waitresses to keep their tips would risk their waitresses nudging their customers toward the more expensive fares like the unpriced specials. The average law firm billing their lawyers by the hour would risk their associates padding their hours to the detriment of their clients. The average district attorney’s office whose DA’s election chances are increased by headlines might pursue headlines at the expense of justice in the case of politically unpopular individuals.
These things all happen, of course, but that’s not the point. The point is that it is impossible to disentangle the sensible from the perverse aspect of common incentives. Allowing a waitress to keep her tips encourages better service. Allowing lawyers to bill by the hour encourages them to go the extra mile to dig up the materials that will help their clients win their cases. Requiring DAs to go up for election provides a measure of accountability to the public the DA is supposed to serve. Similarly, giving brokers an interest in the commissions they generate can encourage them to seek out new customers and recommend suitable investment products that they are selling to a largely skeptical public.
What’s missing from Shapiro’s analysis is the fact that incentives aren’t implemented in a vacuum. They are implemented alongside controls. The waitress who somehow snookers her customers, even if they don’t know they’ve been snookered, is liable to be chastised by her boss if he cares about the reputation of his business. The partners are supposed to monitor the reputation of their firm. The governor and the press are supposed to monitor the DA. Are there monitoring failures? Of course. But that’s not an indictment of the incentives, either.
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