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Outlandish CEO Pay Is a Matter Between Friends Print
Saturday, 26 April 2014 07:51

Joe Nocera documents what many of us already knew, the multi-million dollar pay packages of corporate CEOs are a matter between friends, not a market relationship. The specific context is the pay of the CEO and other top executives at Coca Cola.

The company has recently been in the news since an activist investor calculated it had set aside $24 billion for management bonuses over a two-year period. An amount that came to $2 million for each person in the pool. Nocera focused on the reaction of Warren Buffett to this news. As a result of his control over Berkshire Hathaway, Buffet is effectively one of the company's largest shareholders. Buffett has repeatedly complained publicly about outlandish CEO pay packages.

For this reason it seemed reasonable to expect that Buffett would use his shares to vote no when the pay package for Coke's top executive was put to a vote. However Nocera reports that he chose to abstain. Buffett's rationale, as relayed through third parties, is that it would have been too confrontational to vote down the package. Essentially Buffett said that he thought the pay was too high, but that he didn't want to make waves. He also acknowledged supporting other pay packages as a director that he felt were too high in order not to make waves.

This beautifully illustrates the dynamics of CEO pay. This is not a market relationship, it is a deal between friends.

When it comes to the pay of ordinary workers, whether clerks in a Walmart or factory workers in the auto industry, the question is always whether the company can get away with paying less. If lower pay means lobbying against minimum wage hikes or shipping work overseas, it will be done in a second, no apologies made. The story is that the goal is to maximize profits.

Yet, the same corporate board members who tell us about representing shareholders' when it comes to the pay of ordinary workers, somehow get all touchy feely when it comes to the pay of CEOs and other top management. This was the reason that CEPR started Director Watch and worked with Huffington Post on its Pay Pals site.

The corporate directors are the ones who most immediately need to be harassed. These are mostly prominent public figures (our list of directors profiled to date includes Erskine Bowles, Richard M. Daley, Elaine Chou, and Judith Rodin). They are paid six figure salaries to go to a small number of meetings a year. Their main responsibility is to ensure that management is acting on behalf of the shareholders.

When directors approve exorbitant pay packages even for mediocre CEOs, they cannot claim they are doing their jobs. They are essentially getting paid off to look the other way.  

 

Note: Typos corrected.  

 
Paul Krugman and the Economics Fringe Print
Saturday, 26 April 2014 07:34

Paul Krugman has devoted two recent blogposts to address complaints from heterodox economists over Thomas Piketty’s new book. I have written several pieces on the book and made my own view quite clear. I think it is a great book and I am happy to see it bring so much attention to the growth in inequality over the last few decades, even if Piketty gives short shrift to policies that could reverse this rise in inequality.

Rather than dealing directly with the dispute over Piketty, I will take some issue with Krugman’s account of the mainstream and the crisis. Krugman writes:

“It is true that economists failed to predict the 2008 crisis (and so did almost everyone). But this wasn’t because economics lacked the tools to understand such things — we’ve long had a pretty good understanding of the logic of banking crises. What happened instead was a failure of real-world observation — failure to notice the rising importance of shadow banking. Economists looked at conventional banks, saw that they were protected by deposit insurance, and failed to realize that more than half the de facto banking system didn’t look like that anymore. This was a case of myopia — but it wasn’t a deep conceptual failure. And as soon as people did recognize the importance of shadow banking, the whole thing instantly fell into place: we were looking at a classic financial crisis.”

To my mind this seriously mischaracterizes the nature of the downturn we have experienced since 2008, with important real world consequences. I have long argued that the crisis is really the story of the housing bubble and its collapse. However entertaining it might have been, the financial crisis was secondary.

Read more...

 

 
College Doesn't Pay for Everyone Print
Friday, 25 April 2014 05:09

In her Washington Post column Catherine Rampell correctly pointed out that the median return in higher wages for those with college degrees more than covers the tuition and opportunity cost associated with attending college. She notes however that college enrollment has edged downward in recent years.

While she sees this decline largely as the result of young people failing to recognize the benefits of college, it can be more readily explained by a growing divergence in the income of college grads. Work by my colleague John Schmitt and Heather Boushey shows that a substantial proportion of college grads, especially male college grads, earn less than the average high school grad. They found that the lowest earning quintile of recent college grads (ages 25-34) earned less than the average high school grad. The implication is that many young people may be reasonably assessing their risks of not being a winner among college grads and therefore opting not to get additional education. To get more young people to attend college it is important that most can predictably benefit from the additional education, not just that the average pay of college grads rises. (of course the story would be worse for those who start college and do not finish.)

Note: typos were corrected and the comparison was clarified.

 
One Million More People Are Eligible for the Exchanges Every Month Print
Friday, 25 April 2014 04:58

The New York Times ran a piece reporting that more Democrats running for election this year are openly campaigning on the Affordable Care Act. The piece noted that eight million people had signed up for the exchanges by the end of the open enrollment period. While this is a large base of people who may perceive themselves as benefiting from the law, it is worth noting that this number is likely to increase substantially in the months leading up to the election.

Under the law, people who face a "life event" become eligible for insurance in the exchange. Life events include job loss, divorce, death in the family, and the birth of a new child. Every month roughly four million people leave their jobs. If just one in five of these people go from a job with insurance to either being unemployed or a job without insurance, it would mean another 800,000 people are becoming eligible for the exchanges every month for this reason alone.

This means that the number of people who will have had the opportunity to buy insurance through the exchanges by election will be far higher than the number currently enrolled. Since many of these people will have found themselves unexpectedly without insurance, they are likely to especially value the opportunity to buy insurance on the exchanges. 

 
How and Why Housing Is Holding Back the Recovery Print
Thursday, 24 April 2014 16:08

Neil Irwin has an interesting piece in the NYT's Upshot section about how housing is holding back the recovery. There are two points worth adding.

First, the vacancy rate continues to be well above historic averages. In the fourth quarter of 2013, the most recent period for which data are available, the vacancy rate was still over 10.0 percent. This compares to a vacancy rate that averaged less than 8.5 percent in the pre-bubble years. This translates into a large number of empty units that will discourage new construction for some time to come.

The other point is that looking at the historic average share of residential construction in GDP may be somewhat misleading. If we go back to the 1980s, the share of medical care in GDP has risen by more than 6.0 percentage points. This increase must come from other categories of consumption. If we say non-health care consumption is roughly 60 percent of GDP, then a 6 percentage point rise in the share of health care in GDP would imply a reduction of 10 percent in non-health care consumption, if the consumption share of GDP stayed constant.

In fact consumption has risen as a share of GDP, but if we assume the consumption share will not rise indefinitely, it means that a rising share of consumption going to health care means a smaller share going to everything else. The implication is that we might expect housing to comprise a smaller share of GDP going forward than in the past. In that story we should still expect housing to recover further, but perhaps not to its average share for 1970s, 1980s, and 1990s.

 
Washington Post Discovers Worksharing Print
Thursday, 24 April 2014 05:25

It's a bit late, but who said the Washington Post can't learn? It ran a nice piece on worksharing, pointing out the impact that reducing work hours can have in preventing unemployment. Those of us who have been working on worksharing for the last five years might be a bit frustrated with the delay, but if even the Washington Post can learn, there is hope for America.

 
NYT Reports Food Industry Claims People Would Not Buy Genetically Modified Foods If Given a Choice Print
Thursday, 24 April 2014 05:01

According to a NYT piece, the food industry claims that people would not buy food if they knew it contained genetically modified organisms. The piece discussed a law passed by Vermont's legislature that would require foods that contained genetically modified organisms to be labeled. It told readers:

"Big food manufacturers and the biotech industry that produces the seeds for genetically engineered crops contend that mandatory labeling of products containing ingredients derived from those crops — also known as genetically modified organisms, or G.M.O.s — will be tantamount to putting a skull-and-crossbones on them."

Its striking that the industry apparently believes that it has to conceal information from the public in order to sell its products. Economists usually favor making information available to consumers so that they can make better choices.

 
Problems of Patent Financed Drug Research #43,783, Ignoring Non-Patentable Treatments Print
Wednesday, 23 April 2014 15:16

In principle we might think that researchers should be examining the most promising options for treating disease. But the patent system only provides incentives to pursue treatments that are expected to lead to a patentable drug. Therefore we may see many potentially effective treatments ignored, as appears to be the case with the cancer treatment featured in this Pro Publica piece.

 
The American Middle Class Is Doing Much Worse Than the NYT Says Print
Wednesday, 23 April 2014 13:10

The NYT had a very interesting piece in its Upshot section that showed the trends in after-tax per capita income at each decile cutoff in the United States, alongside the trends in several other wealthy countries. It showed that the United States was at or near the top at every decile cutoff in 1980. However, it had fallen back sharply in the bottom five deciles. It ranked first in per capita income for the top five deciles with the gap between the United States and other countries growing further up the income ladder. In short, the rich are getting much richer in the United States and they are doing so in a way that is out of line with the patterns in other wealthy countries.

While this is not a pretty picture to those who would like to see everyone benefiting from growth, the actual story is even worse than shown in the NYT piece. Most of the countries in the analysis have seen a sharp reduction in the length of the average work year since 1980, the United States has not. For example, in France the length of the average work year was shortened by 17.6 percent between 1980 and 2012, the most recent year for which data is available. In Canada the reduction in the length of the average work year was 6.4 percent over this period, in the Netherlands it was 9.6 percent, and in Finland 11.1 percent. By comparison, the average work year shrank by just 1.3 percent in the United States.

This shrinking of the average work year corresponds to the increase in vacation time in other countries, with workers in many countries now enjoying 5-6 weeks a year of paid vacation. Workers in other wealthy countries can also count on paid sick days and paid family leave when they have children or a sick family member in need of care.

These guarantees and additional leisure translate into real improvements in living standards in which workers in the United States largely did not share. In 1980 workers in the United States worked somewhat less than the average for OECD countries. In 2012, they worked somewhat more. 

The NYT piece emphasized that low and moderate income workers in other countries now typically have more after-tax income than their counterparts in the United States. However they also have an institutional structure that allow them to better manage the demands of work and family. And, they enjoy more leisure.

 
Phantom Bubbles at FiveThirtyEight Print
Wednesday, 23 April 2014 04:38

FiveThirtyEight looks at the bubble horizon and concludes stocks and housing are safe, but we should be worried about bonds. The analysis here is seriously misguided.

First as a sidebar, contrary to what you read at FiveThirtyEight, real house prices are somewhat above, not below, their long-term trend levels. That doesn't mean we have a housing bubble, but anyone anticipating a future rise in nationwide house prices in excess of inflation is likely to be disappointed.

But the more important point is that the concern about a bubble in bonds is largely illusory. The piece constructs a case for a bond bubble that just is not there.

First, I was surprised to read that the size of the U.S. bond market is almost $40 trillion, which the piece rightly points out is considerably larger than the $28 trillion stock market or the $20 trillion housing market. When I checked the source for this number I discovered that the figure referred to the total size of the debt market, not just longer term debt that we would typically refer to as "bonds." The FiveThirtyEight figure includes 90-day T-notes and money market funds.

This is not just a question of semantics. Longer term debt (with a duration of five years or more) has large fluctuations in value in response to a change in interest rates. The price of shorter debt will also vary, but the size of the changes is trivial by comparison. This means that if we are worried about a bubble inflating bond prices, we should really only be looking at longer term debt. The size of this market would be roughly half as large, or less than $20 trillion. That's still big, but a considerably smaller basis for concern than the piece implies.

More importantly, the room for losses in this market is not nearly as large as it was in the case of the stock or housing bubbles. The stock market lost more than half of its value from its 2000 peak to its 2002 trough. House prices lost more than one third of their real value from the 2006 peak to the 2011 trough. By contrast, it is difficult to envision a scenario where the bond market loses even 10 percent of its value.

Read more...

 

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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