May that independence long continue.
Sent to Boston Globe
Tuesday, January 27, 2009
Cullen on Libya
It was good to see the Editorial and Columnist independence of the Globe from its big sister the New York Times. The very day that Kevin Cullen (Not buying Libya's ruse, Boston Globe, January 22, 2009: B1) was excoriating the lack of courage and common sense of the Globe Op-Ed page for carrying an article by Libyan leader, Khadafy, the New York Times carried a column by the same dictator (Muammar Quaddafi, The One-State Solution, New York Times, January 22, 2009: A31) urging a one state solution for the Israelis and Palestinians.
May that independence long continue.
Sent to Boston Globe
May that independence long continue.
Sent to Boston Globe
Geithner's Grilling
I searched in vain in your report on the confirmation hearings for Timothy Geithner for some questioning about the appropriateness of the use Shared Appreciation Mortgages (SAMs) as a solution to the ongoing financial crisis (Obama convenes financial team minus his chief economic spokesman, New York Times, January 22, 2009: A22).
SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed hoemowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.
There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.
Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made? Perhaps it is just too late!
Sent to New York Times
SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed hoemowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.
There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.
Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made? Perhaps it is just too late!
Sent to New York Times
Saturday, January 24, 2009
The Patriotic Bank of America
I was very taken with the remark by Mr. Kenneth D. Lewis (CEO of The Bank of America) that his company was being patriotic in closing its bid for Merill Lynch despite the latter firm's staggering losses (New York Times, January 17, 2008: B1, B8.)
I wonder how else a patriotic firm might act and how government might encourage patriotism -- though of course it should not need to do so.
First, a patriotic company would not lay off employees. Rather it would achieve cost cutting through the reduction of pay and hours for all employees in the company from CEO to the assembly line or office worker.
Second, a patriotic company would use slack time to give employees further training: training to do their own jobs more effectively, or cross training to help them learn other existing jobs, or learning in preparation for the jobs that will be needed if the firm takes a new strategic direction when the crisis is past.
Third, a patriotic company would work with, talk and listen to its employees to develop new products and new processes that would contribute to the long term effectiveness of the firm.
The role of government in the current crisis is to extend the availability of short-time unemployment benefits. This allows the worker on reduced hours to pick up an unemployment insurance payment for those lost hours.
Sent to New York Times
I wonder how else a patriotic firm might act and how government might encourage patriotism -- though of course it should not need to do so.
First, a patriotic company would not lay off employees. Rather it would achieve cost cutting through the reduction of pay and hours for all employees in the company from CEO to the assembly line or office worker.
Second, a patriotic company would use slack time to give employees further training: training to do their own jobs more effectively, or cross training to help them learn other existing jobs, or learning in preparation for the jobs that will be needed if the firm takes a new strategic direction when the crisis is past.
Third, a patriotic company would work with, talk and listen to its employees to develop new products and new processes that would contribute to the long term effectiveness of the firm.
The role of government in the current crisis is to extend the availability of short-time unemployment benefits. This allows the worker on reduced hours to pick up an unemployment insurance payment for those lost hours.
Sent to New York Times
Monday, January 19, 2009
India has a Soft Spot for Bush
India may indeed feel friendly toward the Bush Administration (India has a Soft Spot for Bush, New York Times Week in Review, January 11, 2009: 4)
But that approbation has been bought at a terrible price: the Nuclear Treaty between the USA and India. This horrendous treaty gives India a pass on the requirements of the nuclear non-proliferation treaty. They will receive nuclear assistance from the United States without having to comply. Back in September you recognized its problems (A Bad India Deal, September 30, 2008: A30) and correctly editorialized that passage of the treaty "would make it even harder to rein in Iran's (and other's) nuclear ambitions."
Your correspondent in Sunday's paper did your readers a disservice by failing to point out that with this treaty, the United States is contributing to the fragility of the nuclear world order.
Sent to New York Times
But that approbation has been bought at a terrible price: the Nuclear Treaty between the USA and India. This horrendous treaty gives India a pass on the requirements of the nuclear non-proliferation treaty. They will receive nuclear assistance from the United States without having to comply. Back in September you recognized its problems (A Bad India Deal, September 30, 2008: A30) and correctly editorialized that passage of the treaty "would make it even harder to rein in Iran's (and other's) nuclear ambitions."
Your correspondent in Sunday's paper did your readers a disservice by failing to point out that with this treaty, the United States is contributing to the fragility of the nuclear world order.
Sent to New York Times
Dawn Johnsen as head of OLC
The liberal blogosphere and the New York Times is delighted with the appointment of Professor Dawn Johnsen as the head of the Justice Department's Office of Legal Counsel.
They quote with approval her attacks on the legal reasoning (weak) to be found in the Torture Memoranda. They expect that she will act on these to investigate wrongdoing in the higher echelons of the administration.
I fear that this will not be the case. In February of last year, the Boston Globe quoted Professor Johnsen as saying "People who rely on [sic] good faith on an Office of Legal Council opinion should not be prosecuted even if it turns out that the opinion was wrong" (AG won't probe CIA on torture laws, Boston Globe, February 8, 2008: A 2).
It seems to me that her position is dangerously close to the Nuremberg Defense that "I was just obeying orders." On the face of it, her statement implies that she will not be taking steps to weed out the "bad apples" that proliferated in the top echelon of the Bush administration.
I do hope that I am wrong.
Sent to New York Times
They quote with approval her attacks on the legal reasoning (weak) to be found in the Torture Memoranda. They expect that she will act on these to investigate wrongdoing in the higher echelons of the administration.
I fear that this will not be the case. In February of last year, the Boston Globe quoted Professor Johnsen as saying "People who rely on [sic] good faith on an Office of Legal Council opinion should not be prosecuted even if it turns out that the opinion was wrong" (AG won't probe CIA on torture laws, Boston Globe, February 8, 2008: A 2).
It seems to me that her position is dangerously close to the Nuremberg Defense that "I was just obeying orders." On the face of it, her statement implies that she will not be taking steps to weed out the "bad apples" that proliferated in the top echelon of the Bush administration.
I do hope that I am wrong.
Sent to New York Times
Thursday, January 15, 2009
Wednesday, January 14, 2009
Monday, January 12, 2009
Thursday, January 8, 2009
Op-Ed: A better way to deal with CEO Compensation
Op-Ed: CEO Compensation
Cambridge Chronicle
It is no longer on the Chronicle's web page. Here it is:
860 words
Compensation in Organizations: A Modest Proposal
I think it is fair to say that we are approaching a crisis in capitalism similar to that at the end of the nineteenth century. At that time, major corporations were clearly being run for the benefit of their top managers (who were also usually their owners). The unparalleled greed by these beneficiaries led, in the near term to the trust-busting legislation of the first Roosevelt and in the longer term to the countervailing power of the Unions aided by the New Deal legislation of the second Roosevelt.
Since the 1970's, we have seen the repeal or non-enforcement of anti-trust legislation and we have seen the collapse of the labor movement as a viable countervailing force. As a consequence, the compensation of the executive echelon (and especially the CEO) has risen from 40 times that of the average employee in the 1970's to over 400 times that of the average employee today.
This change arises from two different trends: the inability of workers to capture much of the gains in productivity for themselves (this reduces the denominator in the CEO/employee pay ratio), and the practice of paying large bonuses (almost unrelated to performance; for example in the year that ATT lost $2.6 billion, the top management team gained $2.2 million in bonuses in addition to their regular salaries; and over five years Home Depot’s stock price declined over 7% while the departing CEO walked away with a staggering $210 million in bonus) to managers in order to attract or keep them in the firm. The collapse of union power has resulted in a Federal minimum wage that covers about 60% of poverty level wages for a family of four (a much lower percent in large, expensive urban centers such as Boston). The downsizing and outsourcing of the past decade has reduced the bargaining power of professional workers in the labor market. On the other hand, the labor market for CEO’s has stayed rather strong – this, as pointed out by David Levine (UC, Berkeley), is because it is a rigged market. Prices are set, not by free market forces, but by a firm’s compensation committee which is often made up of other senior executives with an “arms length” relationship with the focal firm. They may be arms length in terms of the firm’s competitors, but they are anything but arms length in the CEO market. They too are players in that game, so higher compensation for one means higher compensation for all! There is a second way in which the market has been rigged over the past five years: fraud. All those phantom profits in Enron, Qwest, and so on had as a consequence not-so-phantom bonuses to their executives. To “compete” in this rigged market for executives, other firms had to raise their compensation levels at the CEO and executive level. Even after the bursting of the economic bubble, we see little decline in the compensation of executives (in the past three years, the total cash compensation of the CEO of ATT has doubled from $2.2 million to $4.8 million; while the stock price almost halved).
Over the past few years there have been attempts by stockholders to bring an end to excessive compensation, but this has been limited thus far in its success. What is needed is a change in climate, a change in the culture of best practice in organization compensation. The current culture since the downsizings of the late 1980's and early 1990's has been a view that top managers of a firm matter and that everyone else in the firm is dispensable. This attitude is exemplified by the enormous bonuses (in the range of 100%+ of salary) given to executives compared to the modest bonuses of 8% of salary given to employees (if they get any bonus at all).
In an organization, everyone makes a contribution to the success of the organization. That contribution is of course greater for the CEO than for the janitor, or even for the research scientist at her bench. These differences in contribution can and should be reflected in different salaries: a living wage for the janitor and a good differential for the research scientist, and a large differential for the CEO. But when it comes to the bonus awarded for the firm’s performance, let equity reign. Let every member of the firm get the same percent bonus. Let everyone get 100% of salary or let everyone get 8% of salary. Reward differential contributions with different salary levels, but let the bonuses be an equal percentage. If this were adopted as best practice by the best firms and by the powerful institutional shareholders, I believe that the excesses we see today would be banished. This is a stronger set of best practices than a simple goal to restrict CEO compensation as it provides clear links between CEO bonuses and employee bonuses. The adoption of such a best practice will not solve all of our problems with compensation excess. But it is a start that will, in turn, lead the looming crisis in capitalism to recede.
Cambridge Chronicle
It is no longer on the Chronicle's web page. Here it is:
860 words
Compensation in Organizations: A Modest Proposal
I think it is fair to say that we are approaching a crisis in capitalism similar to that at the end of the nineteenth century. At that time, major corporations were clearly being run for the benefit of their top managers (who were also usually their owners). The unparalleled greed by these beneficiaries led, in the near term to the trust-busting legislation of the first Roosevelt and in the longer term to the countervailing power of the Unions aided by the New Deal legislation of the second Roosevelt.
Since the 1970's, we have seen the repeal or non-enforcement of anti-trust legislation and we have seen the collapse of the labor movement as a viable countervailing force. As a consequence, the compensation of the executive echelon (and especially the CEO) has risen from 40 times that of the average employee in the 1970's to over 400 times that of the average employee today.
This change arises from two different trends: the inability of workers to capture much of the gains in productivity for themselves (this reduces the denominator in the CEO/employee pay ratio), and the practice of paying large bonuses (almost unrelated to performance; for example in the year that ATT lost $2.6 billion, the top management team gained $2.2 million in bonuses in addition to their regular salaries; and over five years Home Depot’s stock price declined over 7% while the departing CEO walked away with a staggering $210 million in bonus) to managers in order to attract or keep them in the firm. The collapse of union power has resulted in a Federal minimum wage that covers about 60% of poverty level wages for a family of four (a much lower percent in large, expensive urban centers such as Boston). The downsizing and outsourcing of the past decade has reduced the bargaining power of professional workers in the labor market. On the other hand, the labor market for CEO’s has stayed rather strong – this, as pointed out by David Levine (UC, Berkeley), is because it is a rigged market. Prices are set, not by free market forces, but by a firm’s compensation committee which is often made up of other senior executives with an “arms length” relationship with the focal firm. They may be arms length in terms of the firm’s competitors, but they are anything but arms length in the CEO market. They too are players in that game, so higher compensation for one means higher compensation for all! There is a second way in which the market has been rigged over the past five years: fraud. All those phantom profits in Enron, Qwest, and so on had as a consequence not-so-phantom bonuses to their executives. To “compete” in this rigged market for executives, other firms had to raise their compensation levels at the CEO and executive level. Even after the bursting of the economic bubble, we see little decline in the compensation of executives (in the past three years, the total cash compensation of the CEO of ATT has doubled from $2.2 million to $4.8 million; while the stock price almost halved).
Over the past few years there have been attempts by stockholders to bring an end to excessive compensation, but this has been limited thus far in its success. What is needed is a change in climate, a change in the culture of best practice in organization compensation. The current culture since the downsizings of the late 1980's and early 1990's has been a view that top managers of a firm matter and that everyone else in the firm is dispensable. This attitude is exemplified by the enormous bonuses (in the range of 100%+ of salary) given to executives compared to the modest bonuses of 8% of salary given to employees (if they get any bonus at all).
In an organization, everyone makes a contribution to the success of the organization. That contribution is of course greater for the CEO than for the janitor, or even for the research scientist at her bench. These differences in contribution can and should be reflected in different salaries: a living wage for the janitor and a good differential for the research scientist, and a large differential for the CEO. But when it comes to the bonus awarded for the firm’s performance, let equity reign. Let every member of the firm get the same percent bonus. Let everyone get 100% of salary or let everyone get 8% of salary. Reward differential contributions with different salary levels, but let the bonuses be an equal percentage. If this were adopted as best practice by the best firms and by the powerful institutional shareholders, I believe that the excesses we see today would be banished. This is a stronger set of best practices than a simple goal to restrict CEO compensation as it provides clear links between CEO bonuses and employee bonuses. The adoption of such a best practice will not solve all of our problems with compensation excess. But it is a start that will, in turn, lead the looming crisis in capitalism to recede.
Restore the Senate's Treaty Power
It is tempting to simply comment on the rich irony that two of the architects of the Bush administration’s extra-constitutional activities are to be found in your pages defending the constitutional process of treaty ratification (John R. Bolton and John Yoo, Restore the Senate’s Treaty Power, New York Times, Monday, January 5, 2009: A19).
More important however is their attempt to wrap ideological preferences into a constitutional requirement. Each of the treaties to which they object involve international constraints that may be to the disadvantage of corporate America. They do not mention treaties like NAFTA and the South American free trade deals that have been avidly sought by corporate America
The fact is that we live in a world much different from that of the founding fathers – a world that is much more reciprocally interdependent than was 18th. Century America, In that world American exceptionalism and independence affected few other countries. Today as we have seen, America needs to work collaboratively with the whole world.
The last eight years have shown how much America would have gained had it been part of the International Criminal Court. In such a world, John Yoo would not have dared pen the infamous torture memoranda; America would not have lost its reputation for justice and integrity. Furthermore, if we had adhered to the Kyoto accords, America would not be eight years behind in adopting fuel efficient cars (and Detroit's consequent collapse) and in the development of new technologies to help prevent global warming (which might have been Detroit's lifeline).
In the present world, the treaties disdained by Bolton and Yoo are the foundation upon which we must build new relationships with the rest of the world.
Sent to the New York Times
More important however is their attempt to wrap ideological preferences into a constitutional requirement. Each of the treaties to which they object involve international constraints that may be to the disadvantage of corporate America. They do not mention treaties like NAFTA and the South American free trade deals that have been avidly sought by corporate America
The fact is that we live in a world much different from that of the founding fathers – a world that is much more reciprocally interdependent than was 18th. Century America, In that world American exceptionalism and independence affected few other countries. Today as we have seen, America needs to work collaboratively with the whole world.
The last eight years have shown how much America would have gained had it been part of the International Criminal Court. In such a world, John Yoo would not have dared pen the infamous torture memoranda; America would not have lost its reputation for justice and integrity. Furthermore, if we had adhered to the Kyoto accords, America would not be eight years behind in adopting fuel efficient cars (and Detroit's consequent collapse) and in the development of new technologies to help prevent global warming (which might have been Detroit's lifeline).
In the present world, the treaties disdained by Bolton and Yoo are the foundation upon which we must build new relationships with the rest of the world.
Sent to the New York Times
Friday, January 2, 2009
Budget Crises
Where is the Congress when we need it (In Budget crises, California
and other states reluctantly halt road projects, New York Times,
December 23, 2008: A16)?
Everyone agrees that the coming stimulus package will involve money
for the States for infrastructure investment. Why isn't it already on
the way? Delaying projects involves extra expenses in winding them
down and restarting them.
States also have other expenses: aid to towns and cities, human
services, education and policing. These are all in jeopardy.
Congress should reconvene immediately and pass a bill that gives each
State about 20% of its fiscal 2007 budget. That will get the
stimulus package off to a good start.
Sent to the New York Times
and other states reluctantly halt road projects, New York Times,
December 23, 2008: A16)?
Everyone agrees that the coming stimulus package will involve money
for the States for infrastructure investment. Why isn't it already on
the way? Delaying projects involves extra expenses in winding them
down and restarting them.
States also have other expenses: aid to towns and cities, human
services, education and policing. These are all in jeopardy.
Congress should reconvene immediately and pass a bill that gives each
State about 20% of its fiscal 2007 budget. That will get the
stimulus package off to a good start.
Sent to the New York Times
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