We need to update that old joke: “People warned me that if I voted for McCain, we’d get another four years of Bush policies. They were right!”
Glenn Greenwald explains:
[W]hen it comes to uprooting (“changing”) the Bush/Cheney approach to Terrorism and civil liberties…the Obama administration has proven rather conclusively that tiny and cosmetic adjustments are the most it is willing to do. They love announcing new policies that cast the appearance of change but which have no effect whatsoever on presidential powers. With great fanfare, they announced the closing of CIA black sites — at a time when none was operating. They trumpeted the President’s order that no interrogation tactics outside of the Army Field Manual could be used — at a time when approval for such tactics had been withdrawn. They repudiated the most extreme elements of the Bush/Addington/Yoo “inherent power” theories — while maintaining alternative justifications to enable the same exact policies to proceed exactly as is. They flamboyantly touted the closing of Guantanamo — while aggressively defending the right to abduct people from around the world and then imprison them with no due process at Bagram. Their “changes” exist solely in theory — which isn’t to say that they are all irrelevant, but it is to say that they change nothing in practice: i.e., in reality.
How to Predict the Coming Bank Compensation Regulations
By Robert P. Murphy
In an article that convinced half my readers I was a genius, and half that I was completely insane, I argued that the way to predict the coming moves in currencies and other major financial events was to put yourself in the shoes of the extremely powerful elites who are running the show behind the scenes. Let’s apply that general approach to the specific question of the promised “reform” of compensation at financial institutions. There are more recent articles, but this WSJ story from last week has some great quotes to illustrate my points.
First of all, we need to drop Ayn Rand’s view that big businesses are a persecuted group. Yes, it’s true that governments keep the best legitimate businesspeople from achieving the success that they would on a free market. But what that means is that the potential big businesses are persecuted. Precisely because of onerous government regulations, there is prima facie suspicion that huge businesses right now are using the government to enrich themselves and/or hobble their competitors.
One of the most eye-opening moments in my undergrad education occurred in a Public Choice lecture by Gary Wolfram. Gary (I worked with him later on, so I can call him by his first name now) explained to us that the federal regulations banning cigarette advertisements in many outlets (notice you don’t see Marlboro ads during football games?) were supported by the big tobacco companies. Isn’t that counterintuitive? Fresh from reading Atlas Shrugged, wouldn’t you have guessed that the tobacco executives were throwing darts at pictures of bureaucrats when the new regulations went into effect?
Gary’s explanation was that the tobacco companies had found in their research that advertising didn’t bring in many new smokers, but mostly stole market share from other brands. So if all the tobacco companies could agree to cut back on their advertising, they would all make more money. But of course, that kind of cartel would be hard to police in a free market, especially since a new upstart brand could come in with a big advertising campaign. But the plan could work if the government punished any cheats with big fines. Hence the big tobacco companies benefited from these particular rules, while smaller tobacco companies–especially ones that had a better (in the relevant sense) product–were stifled.
Let’s switch topics now to financial institutions. Let’s suppose the CEOs [UPDATE: It makes more sense to say the major shareholders, not CEOs, have the below conversation, but I'll leave the dialogue in the original form.] of Goldman Sachs, JP Morgan, and a handful of the other big boys are sitting in a smoke-filled backroom talking shop. The conversation might go like this:
CEO A: “Boy, wouldn’t it be great if we could cut the salaries we pay to our employees across the board? Man, that would be great. It’s not like our top people would go into hotel management or start driving a cab. They’d stick with our firms.”
CEO B: “Yeah, but we could never all agree on the rules and enforce them. Besides, if the public caught wind of it, we’d be toast. Remember the fiasco with the chartered jets?”
CEO C: “Well, what if we got the feds to impose the rules? We could spin it so that it was designed to protect the public from risky positions.”
CEO B: “Give me a break, the public wouldn’t go for that. What if the government proposed cutting teachers’ salaries by 10% across the board in order to raise graduation rates? It’s absurd. We need a better angle.”
CEO D: “Nah nah, he’s onto something there. We could make this work.”
CEO B: “OK fine, let’s assume for the sake of argument that the public buys it. Still, we’d lose our best talent overseas. The SEC and the Fed can’t tell Deutsche Bank how much they can pay their top execs, at least not ones based outside the US.”
CEO A: “Well, what if we got all the major governments on board? Our overseas friends would benefit from the arrangement just as much as we would. The only important thing, would be to install a system that keeps us all honest.”
CEO B: “You guys are crazy. Look, part of our advantage is that we can recruit the best talent. If there is an industry-wide cap, some of our best people might switch to our competitors. How are you going to get people to move to Manhattan, if you can only pay as much as a bank based in Charlotte?”
CEO C: “I got it! We’ll make the new compensation rules favor the big banks. So there will still be overall caps, but the biggest banks will still be able to offer the most lucrative compensation packages, relative to their smaller competitors.”
Is the above a paranoid delusion? You tell me. Here are some choice excerpts from the WSJ piece of September 18:
Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.
The Fed’s plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives.
The U.S.’s largest banks, about 25 in number, would get especially close scrutiny. The central bank intends to compare these banks as a group to see if any practices stand out as unusually dangerous to their firms.
The proposal will likely push banks to use “clawbacks” — provisions to reclaim the pay of staffers who take risks that hurt their firms — in certain pay packages, among other tools, to punish employees for taking excessive risks with their firms’ money.
The Fed’s planning comes amid an intensifying global debate about the way bank employees are paid ahead of the Group of 20 meeting of world leaders in Pittsburgh next week. U.S. and foreign officials worry that if they don’t coordinate their rules, some countries could draw talent away from others.
On Thursday, European Union governments issued a communiqué urging the G-20 to adopt strict rules to restrict bonus payments. Speaking after the meeting of EU leaders in Brussels, French President Nicolas Sarkozy said he would support the idea of linking the size of bonuses at each bank to their level of capital.
My tip: If you want to anticipate how these new rules will shake out, just suppose that they are actually being designed by the world’s richest bankers. Because they are.
Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.
Dan Simmons alerted me to this WSJ article by Harvard’s Robert Stavins. Now I respect Stavins, because he blasted the absurd economic analysis that the California Air Resources Board put out on its statewide cap-and-trade plan. So even though he is a proponent of carbon legislation, I think he’s intellectually honest.
However, in this recent WSJ piece, he’s got two different arguments that seem wrong on the face of them. First let’s look at the iffy one:
Critics argue that we can afford to wait because the world of tomorrow will be wealthier and better able to absorb the costs. But acting sooner, such as by adopting the emission caps proposed in the U.S. House legislation, will lower the ultimate costs of achieving the target, because there will be more time allowed for gradual transition—which is what keeps costs down.
OK on the face of it, this is a bit weird. You keep costs down by giving firms more time to comply. But, I think we all get what Stavins is saying. He’s got in mind a scenario where firms don’t have to do anything for the next twenty years, and they don’t anticipate they will ever have caps imposed in the future, and then Glenn Beck’s coastal house gets flooded and everyone realizes Al Gore was right. So then the government imposes draconian cutbacks in emissions, and everyone slaps his head and realizes the government should have made the hard choices sooner. OK fair enough, but like I said, you need to assume the part about firms being surprised by the caps, or else it doesn’t work.
But now this next one I’m really not sure I follow:
As for how much [the Waxman-Markey cap-and-trade] will cost, the best economic analyses—including studies from the U.S. Congressional Budget Office and the U.S. Energy Information Administration—say such a policy in the U.S. would cost considerably less than 1% of gross domestic product per year in the long term, or up to $175 per household in 2020. (That’s the cost of one postage stamp per household per day.)
If you read it quickly, it sounds like the cost of Waxman-Markey will be a postage stamp a day. But wait a minute, he said (no more than) 1% of GDP per year. Surely the economy (especially “in the long run”) will crank out more than 100 postage stamps per household per day. (In 2007 median household income was over $50,000. Note that $50,000 > $17,500.) So Stavins is giving two different answers here, saying (no more than) 1% of GDP in the long run, OR in the short run, the cost will be up to a postage stamp per day. I don’t think it’s a coincidence that he didn’t actually spell out a concrete number, so that the reader could realize just what “1% of GDP” meant.
Also, there’s the little problem that the CBO report that came out last week said Waxman-Markey would cost the economy anywhere from 1.1% to 3.4% of GDP, by the year 2050. (See Table 1 on page 13 of this pdf.)So I’m not sure how that range translates to “considerably less than 1% of gross domestic product per year in the long run.”
From the poor man’s Brad DeLong, Matt Yglesias, who writes:
And in economic terms, there’s really very little difference between spending down a reserve of accumulated cash and in taking advantage of an opportunity to borrow at an extremely low interest rate.
I think by “economic terms,” Yglesias means, “If you stop thinking about it the way a household or company would.”
I warn you, as patently false as you think that statement is, standing alone, if you click on the context you’ll see it’s much worse.
The problem here is that Yglesias thinks the one bad effect of deficit spending is a hike in interest rates. He completely ignores the growth in the federal debt. And what’s worse, he “zings” someone (Michael Boldrin) who wasn’t talking about crowding out, but instead was referring to people trying to save for the future and then having their actions offset by federal profligacy. So even if the government literally borrowed all its money at zero percent, that wouldn’t affect Boldrin’s argument against deficit spending as a means to “stimulate” the economy.
As Free Advice readers know, I have taken the Krugman/DeLong side in their debate with the Chicago School. In a nutshell, people like Cochrane and Fama are saying that in principle the government can’t boost nominal spending in the present, as if it’s a matter of accounting. That’s just wrong, especially if you allow for the Fed. (E.g., saying “deficits just rearrange resources” could just as well “prove” that printing money couldn’t possibly provide an artificial boom. The only way to make the argument work is to incorporate “idleness” as part of the legitimate market use of resources–which I do here–but that’s not what Cochrane et al. seem to have in mind.)
“I don’t know why Obama said all economists agree on [the need for a stimulus bill]. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science…” and “the period of the ’20s was one of healthy growth, until Hoover’s anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted, brought this expansion to an end, and created a great depression…”
Then DeLong supposedly corrects this historical caricature by saying: “Herbert Hoover was on the right wing of the American political spectrum and tried as best he could to follow pro-market, pro-globalization, pro-competition economic policies…”
In case you’re wondering, not a word in there about how this pro-globalization guy signed off on the Smoot-Hawley tariff, which has a reputation as being anti-globalization. Less famous, Hoover also was proud of the massive turnaround in immigration during the early 1930s. (I don’t remember if he enacted policies to promote this trend, or if it was purely due to the relative deterioration of US job prospects.)
If DeLong wants to challenge Prescott’s statement, I think the onus is on him (DeLong). Oh, and jacking up the top income tax rate from 25% to 63% in one year is also not something that shouts “pro-market” to me. (Look at the rates in 1931 and 1932.) But again, you won’t find any explanation from DeLong on why this is evidence of a hardcore right-winger.
Today Rush Limbaugh was going nuts over President Obama’s “surrender to the UN” when the rest of the world “didn’t fire a shot.” He said something like, “You know who should really be worried, folks, are our traditional allies. The Brits [and I forget the other countries he listed--RPM]. The people who depend on this country for their security and economic assistance, they oughta be alarmed that Obama just threw them under the bus.”
And here I thought Rush was against people being dependent on Uncle Sam?
Before, the pundits had merely been asserting that there was little threat of price inflation because of high unemployment. But now Matt Yglesias has upped the ante (HT2 Bob Roddis):
Germany business and policymaking elites seem pretty uniformly convinced that the government has been preventing an unemployment explosion through unsustainable measures…and that in winter 2009-2010 unemployment is going to explode. They think that recent growth is a minor rebound from a very low level, and that future growth will be sluggish or possibly even feature a “double dip.” Nevertheless, they think we need to be very worried about inflation!. The one person who bothered to face up to this contradiction at all said that in his opinion there’d been a reduction in Europe’s growth potential, comparable to what happened during the oil shocks of the seventies.
Wow. So now it’s an actual contradiction to worry about price inflation at a time of high unemployment.
Yglesias goes on to give a history lesson and explain that Hitler’s rise to power had nothing to do with the German hyperinflation, which had ended five years beforehand. I’m not sure what Yglesias’ explanation is for the 1970s stagflation in the US, or the hyperdepression in 2008 in Zimbabwe, but I’m sure deregulation has something to do with it.