McCain talks about school choice, mainly charter schools. But he doesn’t take on the unions, which is at the root of much of what has gone wrong with schools over the last 40 years. His answer isn’t different enough from Obama’s to make this a winning issue.
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Part of the problem is that Obama has never had a real job himself and has essentially no businessmen in his cabinet or circle of advisers. And then there’s the fact that his primary spokesman knows nothing about business and on the rare occasions when he is asked an important question, such as what about the moral hazard in the mortgage rescue plan, counters with an attack on the business expert who was brave enough to point out the moral hazard in the first place? Who was just doing his job?
Think maybe the Emperor has no clothes? And the child innocent enough to point this out is vilified.
These people don’t exactly inspire confidence.
During the campaign Obama told us that we can’t eat all we want, drive SUV’s, and heat our homes if we want the rest of the world to like us. He also promised to get the rest of the world to like us. Connect the dots, anyone? You can’t say he isn’t giving us what he promised.
Look on the bright side, maybe they are intentionally being idiots to drive the economy as low as it can possibly go so they can take credit for the inevitable bounce back. This is what we get for electing a cipher.
“Look on the bright side, maybe they are intentionally being idiots to drive the economy as low as it can possibly go so they can take credit for the inevitable bounce back. This is what we get for electing a cipher.”
nokarmahere, that’s something that only the sneaky Jews can pull off. There are not enough Jews in the Obama administration to pull off such a stunt. I think we might be looking at incompetence rather.
I am by nature an optimist. I was always confident that we would top the USSR in the Cold War. In previous recessions I had no doubt that we would pull through just fine. It barely crossed my mind that 9/11 would do irreparable damage to the economy as some had feared.
Now I’m not so optimistic.
A monstrous spending package that goes against what my instincts say is the right thing, increasing govt (permanent??) in our economy that’s sending us in the direction of sclerotic Europe, a very liberal President who is barely more qualified than I am to be President (experience-wise). And to top it all off, he’s giving the impression that he has virtually no idea what he’s doing. To paraphrase a quote from the movie U-571 – “The Captain is always right, whether he’s right or not. The words ‘I don’t know’ will sink a ship faster than a depth charge.”
If one wants to say that this is Bush’s mess, I find that mostly disingenuous (as if Clinton, Frank, Dodd, etc.. had nothing to do with it). However, Bush did start this spending with TARP. Fine. However, Bush is gone and Obama is tripling down on what I think is a losing hand.
At this point in time, I’m hoping that there’s a huge backlash at the polls in 2010 and 2012 and we elect people who abhor reckless spending and govt intrusion as much as I do. Basically a repudiation of what’s going on now. And hopefully that will steer this country away from following the European path and back towards the path that made our economy great in the first place.
Whereas the Bush Administration was staffed by a Ship of Fools according to the left the new administration would be staffed by a hyper-competent board of experts. So far, looks like an even bigger Ship of Fools from my vantage point. We need to have Fitzmas early this year.
Speaking of “Fitz,” where are we in the Patrick Fitzgerald investigation of Blago? While Blago himself has been in the news, I haven’t heard anything lately on the investigation and the tapes. Is the process going along normally and a prosecution/acquittal will come eventually? Or is this thing being put on the back burner (or squashed) due to possible embarrassing revelations?
Jennifer, if indeed this thing is being swept under the carpet in one way or another, I recommend you shed some light on it for us.
Unleash President Summers! Let Larry be Larry!
The goal here is nationalization of
Banking,
Manufacturing,
Health Care and
Whatever else he can grab.
Nothing less is acceptable.
I would like to pose a (possibly heretical) question for the Contentions readers who have far more expertise than I do in economics and business. The question arises from the Madoff and Stanford scandals, from stories of executives like Angelo Mozilo who make tens or hundreds of millions of dollars even as their companies go down in flames, and the fact that the distance between CEO salary and average salary in companies has vastly increased in recent decades. It’s also related to what Alan Greenspan noted, that we had always assumed that self-interest would guide banks not to over-extend themselves, in order to protect their stockholders–but we were wrong in this case. It even reaches back to Enron and WorldCom and so on, most of whose executives went on to live in luxury even though they destroyed the retirements of thousands.
So here it is: Has something changed in American business culture? And more specifically: have we severed the connection between the success of the CEO and the success of the company as a whole? Have we drifted into a situation where executives can gather extreme wealth so quickly that they no longer have a major incentive to steer their companies for long-term profitability? Perhaps the banks and mortgage lenders overextended themselves because of irrational exuberance, and perhaps because of government pressure; probably both. But perhaps they overextended themselves, at least in part, because executives like James Johnson and Franklin Raines could make tens or hundreds of millions in the short term even as they exposed their companies and stockholders to extraordinary long-term risk.
I have always been conservative through and through, but I’ve also felt as though capitalism flourishes best in a culture of honesty, hard work and personal responsibility, and American capitalism has been especially successful because of its Jewish-Christian ethic. Perhaps we have lost some of that culture, not only on the executive level (where it guided (most) executives to consider the interests of everyone, including ordinary workers and stockholders) but also on the worker level (where the loss of the work ethic has effect).
Is there anything to this? Have we disconnected a necessary bond between the success and compensation of the executive and the success and profitability of the company?
Ahithophel, You ask a good question here. I don’t know the answer, but it’s something that should be discussed and if necessary, rectified.
I work in the world of trusts (trusts, estates, etc..). One of the trusts we have has invested in Madoff Investments almost exclusively. This trust was inherited in a $980,000 share (split between 2 people). Madoff has a $1M minimum so another $20,000 had to be plunged into it. Every year Madoff wired $50,000 twice to the trust as dividend type payments. A chunk of that bi-annual $50,000 had to go to pay the firm that audited Madoff (tragicomedy). As of now, that $1M investment is worth $1.3M on paper. That’s on paper. No one knows the real value at the moment, if any. My friend who’s the administrator of the trust suggests that the best thing to do is to get the Madoff certificate in physical form and sell that physical certificate on Ebay!! Sadly, that might be only way to get more than $0. Anyway, there’s a semi-interesting story I though I’d impart when the Madoff name brought it to mind. He seems to be a good example of someone who enriched himself while ruining his investors.
I assume that what Pethokoukis meant was “Obama’s economic plans cannot work without the cooperation of the markets.”
(I hope my html works this time. There doesn’t seem to be a previewer anywhere about.)
Madoff, who seems to be some sort of sociopath, is not a good example to illustrate Ahithophel’s point. One must rather consider the executives who are normal in terms of their corporate culture, and whose personal interests may have become disengaged from the success of their companies.
This seems hugely important. I greatly admire what capitalism has accomplished, but one has to ask whether this is the kind of contradiction within capitalism that Marx envisaged. I personally can’t carry the discussion much further, since I am second to none in my ignorance of economics.
Peter Shalen — Pethokoukis probably meant to word it as you indicate, but that revised wording still doesn’t convey the underlying truth of the situation. Obama’s economic plans cannot work BECAUSE the markets cannot cooperate with them. (Hate typing html code. Won’t do it.)
Ultimately, investment in the market maps back to an evaluation — key word there — of underlying value, in the securities offered for trade. I’m well aware that a lot of trading, especially now in our IT age, is marginal speculation that is not based on a substantive evaluation of the business soundness/prospects that back the securities. But margin speculation is only possible because of the basic investment principle of predicting company strength and security value.
The market CANNOT evaluate securities as having more value by fiat — which is what Obama & Co are asking it to do. Government intervention is not an endower of value. At the absolute best, it means that any profits there are will be limited by some political formula. At the worst, it means the company in question has no value at all.
Only if government controls everything does one government-managed enterprise look more promising than another.
I note that a number of us predicted before Obama even took office what he would do, and what effect it would have. There is no surprise here.
Obama’s fear mongering and pessimism is a feature not a bug. The idea is precisely to spook the markets and drive down the economy. Then his solution will be more nationalizations, massive expansion of the government, and communities organized to be be fully dependent on Washington. Sometimes you have to destroy a village to save it.
Thanks for your thoughts, RIchie and Peter. I may at some point attach this question to a more recent post, to see if we can get some more responses. I am curious what people think.
Ahithophel — one factor I think we must consider in the corporate culture today is how much government intervenes in the business sector now. This intervention has growin exponentially just in my lifetime. A lot of people don’t really understand what a priority it has to be today, for corporations to solicit the favor of the US government.
This is only partly because the biggest corporations seek “power,” although there are some cases in which they do. The much larger piece of this puzzle is the fact that government regulates business to the nth degree today. The place of government-tending in corporate business costs now is one I liken to that of cosmetic procedures in the upkeep budget of “ageless” entertainment stars, and socialites: just good personal hygiene.
Business doesn’t engage in crusades. The bigger it gets, the more it can lose by resisting the hand of government. So it cultivates government — primarily Congress and senior agency leadership. The largest businesses almost never resist increased regulation, because the costs of it will put their smaller competitors out of business — and their customers will pay the freight anyway. You and I pay, through our consumer purchases, for every single regulation imposed by our governments at each level (which accounts for the difference between inflation adjustment and the total delta of consumer prices in 1969 versus 2009. Somewhere around 25-30% of the increase in the prices of goods and services over the last 40 years has come from the cost of added regulation. This increase has been mitigated by technological efficiencies and changed consumption patterns; otherwise it would be higher).
Demanding that government regulate business — whether the issue is trade practices, finance, the environment, or worker benefits — opens new doors to business seeking to cultivate government, and individual members of government profiting from that dynamic. Anyone who knows the history of community activism and the Community Reinvestment Act will recognize the truth of what I’m saying, as it relates to our Congressmen, the senior leadership of Fannie/Freddie and the SEC, the big-name lenders, ACORN, and some well-placed law firms.
Government-tending is a big part of doing business in the major corporations now, whether we’re talking the carmakers, finance, oil and gas, drug companies, health care, or telecommunications. Our federal government is into everything now; its regulations and demands are as important as those of stockholders, but have a very different character. Government oversight and regulation are overhead costs, and they are approached on the opposite of good business principles. Consider that the carmakers in Detroit have been government-tending for decades — making government happy about their labor relations, the fuel economy of their fleets, the safety features of their vehicles — and shedding actual customers throughout that period.
I am not saying government regulation caused Madoff. Madoff is Madoff. There are always going to be spectacular (and by definition temporary) Ponzi-scheme successes, but they are few and far between. We CAN note that government regulation, of which there was and is a lot, didn’t prevent Madoff.
Fundamentally, I think a large part of the problem, where there is uninspiring corporate leadership, is the complacency that develops in big organizations when the newness wears off. Some of this is just a human pattern that need not have its origins in anything nefarious, although it can inhibit good business performance — which must always avoid complacency. But here again, we have to look at how government both regulates business, and by that very regulation, makes it harder and harder for healthy competition to act as a cattle prod on complacent management.
Think again about the auto industry. I would bet money there is a market niche for a low-cost maker of vehicles that offer less than government requires of an automobile purchased legally in the USA. I predict they’d be lining up in the streets overnight, to buy a new car for $4-5K rather than the $9-10K break-in point we have today. But the federal government won’t let that cheaper car be sold in America. Of course, we have good reasons for commissioning our government to regulate vehicle features. Pollution, safety, fuel economy. But with each regulation, government ensures that there will be less competition for the makers of more expensive vehicles. Toyota and Honda benefit from that big-time, just as GM and Ford do — but it also eliminates one of the healthy cattle prods of competition.
Too much of doing business in the US now is a matter of government-tending rather than innovatiion, efficiency, sound basic practices, and customer service. Consider, again, the lending industry. Through regulation and lawsuit, the federal government basically declared borrowing money to be a human right between the 1970s and the 1990s. It also implied a a guarantee of the main capital sump that backed the “right to borrow” — outstanding mortgages — with Fannie and Freddie. Not all businesses responded to these government-created conditions with less-careful lending, and playing the mortgage-backed securities game. But a number of them did. They KNEW they were engaged in a fundamentally unsound business practice, but it looked cheaper than endless ACORN lawsuits to them (Countrywide’s travails on that head were a cautionary tale), and as long as they were assiduous in government-tending, Congress decreed that Fannie and Freddie — the implicit guarantee — could go right out with them on that unsound limb.
If government had let lenders retain the practices that prevailed well into the 1980s, of vetting borrowers carefully and turning many of them down, none of this would ever have happened. Indeed, if government had not sought to mitigate the inconvenience of personal bankruptcy in the ’80s and ’90s, more borrowers would have thought twice about what they were doing. Government took all semblance of a reliance on personal integrity out of the lending process, and we should not be surprised that that had an impact at all levels, from the customer to the banker to the political representative and the agency head.
Well, I know exactly how much of MY wealth has been incinerated and I have to say that so far the Obama presidency pretty much sucks.
Thank you for that very informative post, Commander Dyer. I was hoping you would drop by and share your sense of things. I certainly learned something, and I agree entirely that the extension of government further and further into the market has created a pernicious situation where companies have to cultivate government relations, politicians have enormous power (and power to profit) from their influence over the market, and consumers end up footing the bill for all of that compliance and cultivation.
I’d still be interested to know whether you think there is a problem where CEO compensation has become so detached from the long-term performance of the business that executives are less incentivized to manage their companies responsibly. Madoff was a bad example. But I could cite Richard Fuld, Robert Prince, James Cayne, and Angelo Mozilo, all of whom made collectively hundreds of millions of dollars in the years before Bear, Lehman, and Countrywide went bust, and Citigroup’s stock fell from $50 to $3. And we all heard the stories of major executives walking away with retirement packages in the tens or hundreds of millions even when their companies are tanking. When the managers walk away with hundreds of millions even as they wipe out hundreds of billions in market value, it seems as though the incentive system is out of whack.
I understand there are incentives other than compensation (reputation, pride, etc.), and I’m not interested in revenge. If someone deserves hundreds of millions of dollars, good for him. Also, my instincts as a conservative are to defend businesses, because they are the engines of our economy, they create jobs and generate wealth for workers and shareholders. Most of the executives I’ve known are not only sharp, they’re also excellent people. But it *is* striking how the CEO-to-worker pay ratio has risen. In 1965 CEO’s in major companies earned 24 times more than the average worker. In 1978 it was 35 and in 1989 it was 71. Depending on how you count, it reached somewhere between 300-1 and 500-1 as the market performed well in 2000, 2004, 2005. I’m just concerned that CEO compensation has become so high, and so detached from long-term performance. If I can over-leverage a company and make $200M in three years, why should I care if the company goes bankrupt in year 4?
So there are two issues here, the culture question (not addressed in this post) and the executive incentives question.
“I have always been conservative through and through, but I’ve also felt as though capitalism flourishes best in a culture of honesty, hard work and personal responsibility, and American capitalism has been especially successful because of its Jewish-Christian ethic. Perhaps we have lost some of that culture, not only on the executive level (where it guided (most) executives to consider the interests of everyone, including ordinary workers and stockholders) but also on the worker level (where the loss of the work ethic has effect).”
Bingo. The dominant ethic is essentially pagan-with-better-technology.
Ahithophel, part of the problem is the general confusion (note the word general and not specific, as in specific to you) in the relationship between market value as in market capitalization and the real or intrinsic value of a public company. Once an IPO has been subscribed by investors the value of those shares no longer have anything to do with the issuing firm’s intrinsic or real value. One only has to point to the tulip speculation that went on in Holland in the sixteenth (I think) century to come to an appreciation of the madness of crowds as it plays out in markets. And anyone who tells you markets are rational is lying. Markets are made up of individuals, who run the gamut from shrewd to out-and-out nuts. True, the nuts don’t usually reproduce with any fecundity, but they are with us nonetheless.
Still, just as investors can bid up stock prices as in the dot com bubble of recent history; they can bring prices crashing down as in today’s market. The problem is that sometimes Investors are right in their estimation of a company’s future and sometimes they are not. The underlying fundamentals of a company teetering on the edge of bankruptcy are certain to influence investors dumping stock, but they are as likely to be as influential as are rumours of bankruptcy. In either case there is a flight of capital out of the company’s stock and a corresponding price reduction in that stock. But what is important to recognize is that none of this has even the slightest effect on a company’s treasury. The only exception would be if the company so deserted by investors was in the throes of either refinancing or, say, issuing new stock. In which case the market value of their stock would have a marked impact on the negotiations involved.
Barring a catastrophic collapse in stock value management is thus insulated from the vagaries of the stock market as a performance measure. It goes without saying that should management be compensated with stocks and options to buy same a low market price is punishing in and of itself. Having said that, your allusion to an executive leveraging assets, collecting big-time, and subsequently taking a powder is not something savvy market players miss, though it is possible especially when the bulls are running hot.
Ultimately, like the tulip bulbs alluded to above, there is a market for executive talent, and the price paid for that talent is usually a reflection of the assets being supervised and the expected returns those assets are anticipated to furnish. I’m not sure this sheds anymore light on your good question, but it might, I hope, give you something more to think about.
Ahithophel — OK, you can ignore my prompt over at Gordon Chang’s post.
Cas Balicki has raised an excellent point about executive compensation, and I don’t see a need to develop it further. I would make this point about the criteria for executive hiring today: they are more about an executive’s connections, as opposed to his record of accomplishment, than they used to be. Particularly in the finance industry, the major companies have been likely to favor guys who have good connections in Washington.
Another issue is simply that we have seen expansion, especially of finance and lending activities of various kinds, for such a long time that I think many boards who selected CEOs in the late 1990s and early 2000s might have lost the perspective of business people who know what it is to deal with hard times. Until 2008, it had been a while since the industry paid a big price for being overleveraged or poorly run. Everyone was making money.
We also — again — can’t ignore the impact of government. It has been firmly embedded in the fiduciary integrity of financial institutions for eight decades (and more, in some ways). Think about it: do we see the superior management of our bankers as the ultimate guarantee of our deposits, or do we see the FDIC as performing that role? When the savings and loans went belly up in the late 1980s, who stepped in to sort them out? The federal government.
It’s a subtle thing, but if you’re the board of a major financial institution, and you survey the fortunes of the finance industry for the last 30 years, what do you want in your CEO? Government connections have to be high on the list.
Compensation is competition. If one major corporation doesn’t pay the millions to the guy with the list of credentials that rolls out the door and down the side of the skyscraper and all the way to Central Park, plus has twelve senators and all the agency heads on speed-dial — another one will.
But remember this: a person on Social Security disability has an entitlement to his $900 a month, or whatever. The government will point a gun at his neighbor to collect it on his behalf. The corporate CEO, on the other hand, is ENTITLED to NOTHING. What any board decides to pay him is voluntary on the part of the board, and there is nowhere the CEO can go to “demand” that amount — or more, or even less. The fact that some CEOs have been able to collect big paychecks and bonuses while not performing very well is more a reflection of how colossally, unbelievably rich America is, than of anything else. We cushion failure in every walk of life.
I really think the cushioning of failure in the finance industry starts with government guarantees. Customers today don’t have to be very selective in their choice of bank or lender, because the government guarantees we won’t lose money, even if the institution is run badly. The accountability mechanism is weakened, when the focus migrates from whether the institution’s managers are maintaining assets soundly and operating at a profit, to whether they are complying with government regulations and mandates, and whether the Congress is smiling upon them today.
It takes an uninterrupted record of expansion and success to maintain an industry in this state of tenuous or wishy-washy accountability. A big interruption has just occurred, to upset the sweetness and light. Quite frankly, I think the best thing for everyone would be for the US government to let the most improperly-leveraged institutions fail, and let bankruptcies and buy-outs sort out the assets and obligations. Bankruptcy administration would almost certainly provide a better deal for shareholders, employees, and clients than the current situation. But as long as the government won’t let its OWN policies produce the failure they naturally do, the link of accountability won’t be usefully restored in the finance industry.
Very interesting discussion of Achitophel’s question. I just want to raise another consideration abotu executive compensation. A lot of it is given in stock options and other “future” assets, which can gain values surprising even to those who granted them. This is done in great part to shield the company from granting huge initial salaries, and to shield the recipients from taxes, and is labeled as “incentive.” It si pat of the regime J.E.Dyer points out as having to do with compying with regulations and currying favor with government; straightforward compensation would draw fire where (it is hoped) incentive compensation won’t. For the reasons she mentions, the incentives are not very much tied to actual business innovation, economy and competititive success.
But when a nonentity bank CEO can draw big scores, CEO’s in the sectors of the economy that still demand some insight and courage can ask for still more. The result is a higher overall level of compensation than we would see without the current income tax and corporate tax laws and the heavy government regulation of many kinds of corporations.
Many thanks to Cas Belicki, J. E. Dyer and Margot. I am really very grateful that you’ve taken the time to respond. It’s been an interesting conversation. Since this original post is well past its date, I may repost this question at some point to gather some other perspectives, but we’ve had a lot of excellent responses already. Thanks again!