The Guardian Unlimited, September 10, 2012
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Erskine Bowles is widely known in Washington policy circles as a co-chair of President Obama’s deficit commission, along with former Senator Alan Simpson. The report that he and Simpson co-authored is widely held up as the basis for a grand bargain on the deficit.
This report has riled many people across the political spectrum in part because of its cuts to Social Security, the most immediate of which is a reduction in the annual cost of living adjustment (COLA) for Social Security. The reduced COLA would amount to a benefit cut of close to 3.0 percent for a typical retired worker. Since the median income for households of people over age 65 is just $31,000, this would be a big hit to a segment of the population that is already struggling.
By contrast, in their quest for every possible source of savings, Bowles and Simpson seem to have never seriously considered a financial speculation tax that would hit the country’s badly bloated financial sector. The United Kingdom has imposed taxes on its financial sector for centuries, and much of the European Union is considering a tax that could go into effect as early as next year. A tax comparable to the one that the UK has on stock trades applied to all financial assets could raise close to $1.5 trillion over the course of a decade.
There is evidence that a bloated financial sector is a serious drag on growth, pulling resources away from productive segments of the economy. In addition, the finance sector is also where many of the highest earners get their income.
This means that a tax on the financial speculation could be a real win/win/win. It could raise money to reduce the deficit, it could make the economy more efficient, and it could reduce inequality. That should place it on top of anyone’s list for deficit reduction.
But apparently it didn’t make it to Bowles and Simpson’s list. While we may never know why, it is worth noting that Erskine Bowles sits on the board of directors of Morgan Stanley, the huge Wall Street investment bank. Mr. Bowles has gotten paid several hundred thousand dollars a year to sit on Morgan Stanley’s board.
Interestingly, Mr. Bowles sits on many corporate boards. He has been paid millions of dollars over the last decade for his service on these boards.
Out of curiosity, CEPR constructed an Erskine Bowles stock index to see how the stock of the companies that had Erskine Bowles on their board performed compared with the overall S&P 500. It turns out that the Erskine Bowles index has not fared very well. Since April of 2003 the Erskine Bowles stock index has lost 33.5 percent of its value. By contrast, the S&P 500 is up by 53.1 percent over this period.
It’s probably not fair to blame Mr. Bowles for the poor performance of the companies he serves as a director. Directors usually just attend a 4-6 meetings a year and rarely play any role in actually running the company.
However, the millions Bowles makes for this work is symptomatic of a larger problem in corporate governance. Directors are essentially paid off to look the other way as CEOs and other top management plunder their companies. In principle directors should be demanding hard work and low pay for CEOs in order to maximize returns for shareholders.
In reality directors generally just take their pay and keep their mouths shut. This allows the top executives of even failing companies to draw pay checks that are an order of magnitude larger than the compensation packages of the most successful companies in Europe and Asia.
The directors perform a valuable service for top management since they act as validators assuring that everything is kosher. The directors are usually people who have high reputations from their work in politics, academia (many university presidents sit on corporate boards), philanthropies, or other businesses.
If a director began to ask whether the company was getting real value for its compensation package, they would likely first be ostracized (the other members of the board just want their paycheck) and then removed at the first opportunity. Directors are in theory elected by shareholders, but the election process is about as democratic as it was in the Soviet Union. Top management gets their candidates approved with almost the same frequency as the Communist party chiefs on the Politburo.
The excessive salaries of top corporate executives are not a just a problem because they pull money away from the corporations they run. They also set a pattern of compensation across the economy. It is now common for heads of universities and even charities to get million dollar compensation packages, pointing out that they would receive much more if they ran a comparably sized company. This is a big part of the upward redistribution of income we have seen over the last three decades.
So Erskine Bowles gives us a real trifecta. He used his position as co-chair of President Obama’s deficit commission to protect Wall Street. He pockets millions as part of a corrupt system of corporate governance that allows CEOs to rip-off the companies they run. And he wants to reduce Social Security benefits for seniors who are already living on the edge. In short, he is a true hero of the Washington establishment.