A Fine Rant

[Winstonm]

By Steven Pearlstein

Washington Post

(emphasis added)

For most of us, it seems inexplicable that a man as smart and sophisticated as John Thain, having been recruited to Merrill Lynch to clean up tens of billions of dollars in losses, could spend $1.2 million to redecorate his office or demand that the board of directors give him a $30 million bonus at the end of the year. Nor, when escalating losses threatened to scuttle the sale of the firm to Bank of America, did it occur to Thain that he might want to set aside his plans to fly off to the annual celebrity gabfest in Davos, Switzerland, until the Bank of America chairman finally ordered him to do so.

 

This goes beyond mere greed. As with Daschle, it springs from a deeply felt but rarely articulated sense of entitlement that now warps the judgment not just of those on Wall Street -- from top executives to hotshots on the trading desks -- but of those throughout the upper reaches of corporate America. And over time, it has filtered out to law firms and consulting firms, where freshly minted MBAs and legal associates came to expect starting salaries of $150,000 and partners thought it their God-given right to draw $1 million a year.

 

All that is history. It turns out that those inflated pay stubs weren't really a measure of genuine economic worth but manifestations of the mirage that was the bubble economy. Economically, they are no longer sustainable; socially and politically, they are no longer acceptable.

 

http://www.washingtonpost.com/wp-dyn/conte...20303652&s_pos=

 

The American people seem to rapidly be reaching the "I"m mad as hell" point. Crisis creates opportunity - I wonder if we will finally be fed up enough to utilize this crisis-driven opportunity to demand real changes, or will we be satisfied with having simply voted for change rhetoric, but will end up disappointed while watching business as usual transpire.

[Winstonm]

Can someone correct the typo in the headline: How Big is the backlash?

[kenberg]

Can someone correct the typo in the headline: How Big is the backlash?

I just figured that you had a cold.

[kenberg]

This is a very big topic but I believe one very fundamental problem is that in too many instances there are people spending money freely when the money does not in any way whatsoever come from their own pocket.

 

Examples abound.

 

My wife is in the process of retiring. You might ask what sort of process that would be. She teaches at the college level and a year or so ago she went in to see the provost to discuss retirement. The conversation went something like this:

 

Becky: I am thinking of retiring

 

Prov: have you considered terminal leave?

 

Becky: What's that?

 

Prov: You take a one year leave at full pay with no duties. The catch is that you have to agree to leave employment afterward.

 

Becky, pen in hand: I sign where?

 

Now there are reasons for this (there always are). Thanks to rules about age discrimination it is more or less impossible to tell a person that it's time to retire. So there are carrots. As it happens, Becky is 61, in good health, a cooperative colleague, and a sought after instructor. But there are some people who definitely need to retire and the freebie may be the encouragement that they need.

 

Still, if any of the money came out of the pocket of the provost, the outcome might have been different.

 

 

This gets multiplied across the country. I travel some to meetings. Not so much since I retired. In mathematics it usually works like this: If the organizers have the funds they will pay for a shared hotel room. If I bring Becky, which I often do, then I pick up her half of the hotel bill. This seems about right to me. If the math is good, sharing a room at the Day's Inn is fine. But a few years back I was asked to go to a meeting in Santa Fe on a government supported operation. I said no, but eventually I agreed since no one else would go either. They put me up in a room to myself at what appeared to be the finest hotel in Santa Fe, all so that I could attend boring talks on topics I was not interested in. Whoever picked up the tab, it was not with his own money. Santa Fe was nice. So what?

 

This is, or at least was, a very rich country and it is easy to just spend without thinking. This may have to change. However the stimulus plan seems to be based on the idea that it is very desirable to get people to spend money without thinking. Here in Maryland the state government will now be encouraging people to put their money into slot machines. This will help the state become richer, it is said.

 

The 18 billion or whatever for year end bonuses was of course ridiculous. But the by now a cliche line from Pogo still seems relevant: We have met the enemy and he is us. We all need to get our act together.

[PassedOut]

But a few years back I was asked to go to a meeting in Santa Fe on a government supported  operation. I said no, but eventually I agreed since no one else would go either. They put me up in a room to myself at what appeared to be the finest hotel in Santa Fe, all so that I could attend boring talks on topics I was not interested in. Whoever picked up the tab, it was not with his own money.

I do hope that the promised transparency is implemented. If government expenditures can be seen online, some citizens will pore over them obsessively. Discussion threads will start about every line item, and links to the outrages will appear in countless emails.

 

:P

[kenberg]

Do I have it right that CEOs will have to limit their pay to $500,000 if they accept government help for their companies?

 

I am imaging the breadwinning CEO coming home to his faithful wife and dog:

Dear, I have a really tough situation at work. I can take my forty million dollar bonus and let the company go under, or I can limit my pay to half a million and save the company. What do you think I should do, dear?

 

This plan may need a bit of fine tuning.

[Lobowolf]

Hopefully turning down bazillions of dollars in free money is one of those decisions that would have to be made, or at least ratified, by the Boards of Directors.

[PassedOut]

Hopefully turning down bazillions of dollars in free money is one of those decisions that would have to be made, or at least ratified, by the Boards of Directors.

For sure.

[Winstonm]

I am a little surprised no one has hit upon this line:

 

It turns out that those inflated pay stubs weren't really a measure of genuine economic worth but manifestations of the mirage that was the bubble economy. Economically, they are no longer sustainable;

 

We converted our production economy into a FIRE (Finance, Insurance, Real Estate) economy. On top of this self-delusion, we then managed to suppress wages and direct the benefits of productivity gains to the corporations and wealthy.

 

In a healthy economy, Supply (productivity) = Demand (real wages). What happened in the Reagan/Greenspan/Bush I, Clinton/Bush II era was that productivity increases were not passed on to real wages, leaving Supply>Demand.

 

How to balance the equation? New debt. Supply=Demand + New Debt. Trouble is this cannot last forever - and when insolvency occurs, you are back at Supply>Demand, which can only be truly solved by falling prices or higher real wages.

[kenberg]

A few quick morning thoughts.

 

1. I am not an economist but since the economists mostly seem good at explaining things after they happen instead of anticipating them, I don't thin k that we owe them too much deference.

 

2. I seriously doubt that massive debt is the solution to anything. There may be solutions to problems that temporarily require massive debt, but this debt should be regarded asa a real problem and there should be serious discussion of how that will be addressed. More than "Oh when the economy gets better we will take care of it".

 

3. A country cannot maintain its wealth through credit defaul swaps, whatever they might be. Fundamentally, we have to produce something that someone else wants to buy.

 

And a prediction: The $500,000 cap will not survive. The problem is not that the CEOs are paid too much, the problem is that when it comes to running their companies they have their heads up their asses.

[Winstonm]

2. I seriously doubt that massive debt is the solution to anything. There may be solutions to problems that temporarily require massive debt, but this debt should be regarded asa a real problem and there should be serious discussion of how that will be addressed. More than "Oh when the economy gets better we will take care of it".

 

Blame the politicos for bastardizing Keynes.

[jdonn]

2. I seriously doubt that massive debt is the solution to anything. There may be solutions to problems that temporarily require massive debt, but this debt should be regarded asa a real problem and there should be serious discussion of how that will be addressed. More than "Oh when the economy gets better we will take care of it".

Of course debt is not the answer, but debt may be a sympton of the answer (I believe it is.)

 

You make a very good point that there should be clarity in how money spent now will get paid later. I think the trick is spending on infrastructure improvements that will clearly pay dividends later in terms of savings and increasing wealth. The following are my ideas of the types of projects that could do this.

 

I am strongly in favor of computerizing health care records, which is a huge time and money saver. It would also improve the quality of health care by reducing human error, which in turn would reduce health care costs for everyone since people would be in less need of the entire system.

 

Another big one to me that I'm surprised doesn't get mentioned more often is switching to a GPS system for air traffic control. It's quite expensive (I have heard 35 billion?) but would pay huge dividends in the long run. Flights could get sent on much more direct paths which not only would save lots of time but literally save millions of gallons of fuel a year [edit: turns out it saves billions of gallons of fuel a year, not millions], and would be a huge step in reducing oil consumption. I understand many airlines are against it because they would have to be involved in a huge initial investment, but the fuel savings alone might keep them in business in the future and it's clearly for the good of the country as well.

 

I also believe there should be a serious investment in education, much more serious than there currently is. The obvious long-term benefits for the wealth of a nation that would come from that don't even need to be mentioned, and many people consider it a moral issue as well.

 

I also like the idea of fixing up lots of roads, bridges, and levees right now. I understand that is a big idea right now just because of instant job creation, but it should be done even regardless of that. Road improvements could have gigantic time and fuel savings, even if they just reduce average trip time by 1%. Similarly with bridges, and that would also address serious safety issues. And needless to say fixing and improving levees now would save a ton of expense by preventing cities from flooding later.

 

I don't consider these increasing the size of government. Every person who is kept more wealthy, more healthy, and more educated is a person who is much less likely to need programs like Medicare and Food Stamps and Medicaid, much less likely to need saving from the National Guard and housing from FEMA, and much more likely to be in a higher tax bracket and help pay back the debt in that way as well.

 

Investments such as those would have massive up front costs, but such obvious long term benefits in terms of increasing wealth (not to mention national security and convenience) that I think they would easily pay for themselves in the long run. That's why, although I disagree with Republicans in general on tax cuts to stimulate the economy, I completely agree with them that tons of the spending in the current bill is completely misplaced. Who cares if these programs are good, the point of this bill is to create jobs and make sound long-term investments that will pay dividends over time, not to pass as much of a party's agenda as possible. I'm all in favor of programs to help people quit smoking and have safe sex, but those should not be in an economic stimulus package. I am very much in favor of the current stimulus bill created by Democrats AFTER the group of senators meeting to "scrub" it are finished knocking off as many of those programs as possible.

[kenberg]

I pretty much agree on the wish list for projects. I would add, and I doubt you would disagree, that there are some people who are really in deep ***** because of the downturn and they need help pronto. Moreover, they will spend the money. Give me a stimulus and I will be stimulated to put it in the bank. Give someone with a couple of kids and no job a check and it will get spent.

 

On computerizing health records: I was in for a physical the other day and the doc was paging through sheets and sheets, trying to find the records of this test or that. The medical community should be embarrassed. I once had a doc ask if I could remember the results of a test because the records seemed to be missing. Sure, I always carry my various numbers from my blood tests around in my head. Not. We can transfer cash, even very large sums (if I had very large sums), on line. Student records are on line. We play bridge online. Medical records are a stack of paper. It's crazy.

 

One more word on this salary cap for CEOs. Of course the salaries and bonuses are ridiculous. But American Idol is ridiculous. It doesn't threaten the nation though. The problem is ot how much money a CEO at GM makes, the problem is that I, and many others, drive a Honda. If a new CEO could deal effectively with that issue, forty mil would be a bargain.

[bid_em_up]

And a prediction: The $500,000 cap will not survive. The problem is not that the CEOs are paid too much, the problem is that when it comes to running their companies they have their heads up their asses.

The cap itself will probably survive.

 

They will just figure out a different way to compensate them.

[jdonn]

I would add, and I doubt you would disagree, that there are some people who are really in deep ***** because of the downturn and they need help pronto. Moreover, they will spend the money. Give me a stimulus and I will be stimulated to put it in the bank. Give someone with a couple of kids and no job a check and it will get spent.

Sure, by all means lower taxes now on a temporary basis for people making under some certain amount of money (2 years for <$250,000?). I don't think it's a good long term strategy to get done the things we need to get done, but you have to give people help when they need it. All that would be doing anyway is borrowing from our future selves when we (presumably) have money to loan it to our current selves who don't have money.

 

All the current appointees with unpaid-tax problems also make me think there should be a major initiative to force people to pay the taxes they owe, catch more people evading taxes, audit more people and corperations, etc. Just giving the government the taxes it is actually owed from everyone would probably end up being more for them than raising taxes anyway.

[PassedOut]

I agree on the spending for infrastructure and medical records, etc. It's also right to pump money into the economy to help those unemployed, etc.

 

I completely disagree with the idea of any type of permanent tax cuts, including those promised by Obama during the presidential campaign. Until the debt is paid off, any permanent tax cuts are worse than useless because they are so difficult to reverse.

[jdonn]

I completely disagree with the idea of any type of permanent tax cuts, including those promised by Obama during the presidential campaign. Until the debt is paid off, any permanent tax cuts are worse than useless because they are so difficult to reverse.

As my last post shows I agree with you on this, but I think we can also agree it's 100% impossible to be elected president without promising a lot of people permanent tax cuts.

[DrTodd13]

What drives me nuts is if the gov gives a company 10 million dollars then people go out and find 10 million dollars worth of what they consider ridiculous expenditures and then say "Look at what they spent our money on!" To be fair, if the company spent 1 billion that year, 10 million dollars of which was from the gov then only 1/100th of any ridiculous expensive could be said to have been paid by the gov.

 

I don't know the exact text of this $500,000 limitation but if it says "salary" then the execs will just claim that bonuses relating to profit or revenue are not salary. The gov tried something like this ten years ago. They heavily taxed base salaries over 1 million. The result is that companies paid their execs a million in base salary but laid on the stock options. Then greed kicked in and execs did every manipulation possible to jack up the stock price so that they could cash in. Then their folly was realized and the dot com bubble burst. More unintended consequences of government action.

 

Other than that, a lot of this disdain is simply covetousness which no one seems to think is a bad thing anymore.

 

Finally, Obama is demagoging the hell out of this issue. Pass the stimulus now or the world will end! If you believe Keynes then what they are proposing is too small. If you believe the austrian school then like Hoover's and FDR's massive increase in spending this could lead to another depression. Don't say nobody ever predicted this because the austrian school has yet to be proven wrong. Ignore them at your own peril.

[Winstonm]

I mentioned Keynes not because I agree but because he gets blamed for what were not his concepts.

 

The Austrian school has been on top of this crisis, but even more so I see it as a Minsky Moment, and I do not believe Minsky was of the Austrian school though I could be wrong there.

 

Minsky's revolutionary concept was that capitalism has a built-in flaw, that stability ultimately leads to instability as the false lure of seeming stability causes higher and higher risk-taking.

 

Actually, if you simply followed the progress from the end of the Great Depression until now you would find a progression of Minsky's risk-taking/stability ideas.

[Winstonm]

Finally, Obama is demagoging the hell out of this issue. Pass the stimulus now or the world will end!

 

Don't make this Obama's issue - this was Exactly the same claims made by Bush, Paulson, and Bernanke in getting the first TARP shoved through Congress.

[PassedOut]

Regarding taxes, I just read a piece by Reed Hastings, president of Netflix: Please Raise My Taxes

 

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

 

Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50 percent on all income above $1 million per year. Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.

Quite sensible. I believe Warren Buffet recommends something similar.

[Winstonm]

What no one is admitting is that when mark-to-market accounting is used our banks are insolvent. We keep chipping away at icebergs with a pair of ice cube tongs. We overpay with taxpayer money and get virtually nothing in return, while keeping the same management in place who created the problems in the first place.

 

It's a game - protect the investors and to hell with the taxpayer.

 

The best solution is to nationalize the banks, toss out the incompetent magagement, and eradicate the shareholders values. Then we can recapitalize and start fresh.

[DrTodd13]

Finally, Obama is demagoging the hell out of this issue. Pass the stimulus now or the world will end!

 

Don't make this Obama's issue - this was Exactly the same claims made by Bush, Paulson, and Bernanke in getting the first TARP shoved through Congress.

Given that he is the one currently doing it, it is an Obama issue. Bush and the rest of them were just as wrong for what they did.

[kenberg]

Regarding taxes, I just read a piece by Reed Hastings, president of Netflix: Please Raise My Taxes

 

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

 

Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50 percent on all income above $1 million per year. Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.

Quite sensible. I believe Warren Buffet recommends something similar.

For the youngsters who never had the pleasure:

 

 

Here in Maryland we pay a state tax and a piggyback county tax and when added to a 50% federal tax it could become a disincentive. Still, I live in Maryland rather than some tax free place like Las Vegas because (a.) my kids and grandkids are here and (b.) I can't stand Las Vegas. So we don't make all of our decisions on the basis of profit/loss.

[mike777]

Regarding taxes, I just read a piece by Reed Hastings, president of Netflix: Please Raise My Taxes

 

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

 

Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50 percent on all income above $1 million per year. Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.

Quite sensible. I believe Warren Buffet recommends something similar.

It would be nice to tax Buffet's gifts at 70%.

 

I have no problem with lowering income tax rates.

Between 35% fed tax....state tax...Corporate tax which really customers pay(no customers....no tax to pay)....some city, county tax, property tax, sales tax, gas tax, social security tax,..add in license and usage fees.........that seems like a good start on taxes....

 

 

I say let people earn alot more and tax them less on what the earn.....just tax them when they spend or gift it.....

 

btw if the goal is to get the consumer to spend more, alot more, tax them less when they spend....you can always tax it when they try to gift something....to someone or something.....

 

tax labor or making money less and gifting money much more.