Capitalism = pay for performance...right?

A recent article about how CEO compensation works is eye opening.  I wish I had my pay set the same way.  I would basically get together in a room with a bunch of friends, we would look at how much my peers were making, and then set my pay more than 75% of them.  Then we'd all go out for drinks and laps in my Ferrari.  Then the next month, one of my peers would initiate the same process, using my (now higher) compensation as a benchmark upon which to jack up his pay.  Thus, the incomes spiral upwards, with only profound negligence being punished.  Sounds nice, huh?

The fact is that the higher you go up the "food chain" in most company's management structure, the harder it is for anyone to pin failure on you.  You can always deflect and say it was bad call made by one of your subordinates, or just poor macroeconomic conditions, or the acquisition you made didn't work out because the company lied to you during due diligence.  Even if your company is under performing, often times the board of directors will increase your pay just to keep you around and maintain continuity in the business.

Why should any of us care?  You know all that economic growth that the country experienced over the past few decades?  Most of the benefits have gone to the wealthiest people in the country, and CEO's make up very large proportion of that population.  Maybe if we can change the way that pay is determined for this group, it could do something to right the imbalances that are driving the Occupy Wall Street movement.

Liquidity Trap Thinking

I was thinking about where to put what little money I have the other day, and I realized that my thinking was textbook "liquidity trap" thinking.

My money is sitting in a savings account making 1% APR.  There's no risk to it, and it's available at practically a moments notice.

I think: Maybe I should invest it in some high dividend companies.  They give dividends every quarter that are greater than 1% that I'm getting in my bank account.  I could minimize transactions fees by buying an ETF.

But...the stock prices on these do vary with the market.  What if the economy gets worse (can you imagine?) and I'm on the streets looking for a new job.  My money that I would rely on to pay for groceries and the mortgage is now worth less than when I put it in because the stock's value has declined.  Same goes for investment grade bonds - could have a higher return, but the value on the secondary market can vary based on the day-to-day investment community concerns.

Nope, better keep it in that savings account.

Now, imagine the millions of people like me having that same conversation with themselves, and that is a liquidity trap.  The federal reserve has lowered interest rates down to the floor, they are, in fact negative in real terms.  The goal is to get people to take that money out of their savings account and go do something with it: start a business, invest in a company, or buy something!  But uncertainty about the future kills our motivation, and the fact that everyone is in debt up to their eyeballs means our perceived risk is high.

Historically the only cure for this is for either the government to fill the gap with public works projects, or for the central bank to aggressively pursue inflationary practices.

The reasoning behind the inflationary bit is to make me think "if I just leave this money in my 1% savings account, and I believe that will be at 5%, I'm losing that purchasing power fast.  I might as well go blow it on Camaro ZL1 and enjoy my ride into bankruptcy."  Then everyone goes out and spends their money and jump starts the economy.  Of course, we could just convert it to Gold or Euros, or Swiss Franc's, thus undermining the Fed's strategy, but that's a discussion for another day.

Ron Paul's Budget Proposal

Ron Paul published his budget proposal.  From what I understand, he's not polling in a way that makes him a viable candidate for the Republican nomination, but his budget proposal is a template for what Libertarians like to see.  It raises some interesting questions to discuss.

The high level on his budget plan: Deregulate, shrink government, lower taxes, cut the power of the federal reserve.  I think there are a lot of people who see this plan, and think "what's not to like?"

Do you like Salmon?  Do like hiking in the woods occasionally?  Have you ever visited a National Park?  How about that tax break for installing new windows, or high efficiency appliances?  Do you invest in stocks in your 401(k) or IRA?  All of these would be at risk.

RP would eliminate the department of the interior, department of energy, department of commerce, department of education, and the department of housing and urban development.  The EPA is another favorite target of conservatives.  These departments are responsible for our national parks service, fisheries and hatcheries, regulation of logging practices, publishing of economic statistics, energy policies, mining regulations, the list goes on and on.

Also RP would repeal pretty much all financial regulations.  Every regulation of corporate and financial controls that has been put in place since the collapse of Enron and WorldCom, not to mention the collapse that occurred in 2008/2009 would be taken off the books.  This would encourage unethical behavior at US corporations, and after a lot of people have their money stolen, there would probably be a large scale contraction of the public market for US corporate equity.  People will look for greater returns in other countries whose governments do have significant regulation of financial controls and reporting, which would put the US at a disadvantage.  The cost of capital for US corporations would be higher than in other countries, and RP's 15% corporate tax rate probably wouldn't be low enough to compensate.

He also joins the movement of people who want to continue paying social security to seniors while allowing young people to opt out of paying into social security.  The only way he manages to do this is by cutting out every federal protection for the environment, the poor, food and drug quality, center for disease control, etc.  Yay, what a win!  Now Grandpa has the resources to walk down the crumbling sidewalk to buy his food laced with unregulated industrial toxins that is devoid of all informational labeling.  It'll be just like the good old days when 5 year old children worked in factories for 80 hours a week.

The traditional Libertarian response is that if people care enough, then they will be willing to pay for these things, and private business will fill the void.  I just don't think this is realistic.  The health of our environmental and the existence of a variety of animal species is a public good.  The perception that when you buy a share of stock in GE or Apple, that their financial statements are accurate and comparable to other companies has a public goods component as well.  The market will NOT step in to provide those things, and individual citizens or groups of citizens are powerless to force these things, except, perhaps, by electing representatives who will.

Cain's 9-9-9 tax plan

I watched a couple episodes of the show Mad Men a while back.  I like the bits about coming up with advertising ideas, and the "newness" of advertising with images that drove the business in the '60s, but didn't like the interpersonal dramas.

The results of modern marketing is in display in politics in a big way, and it is clear that the pitch/soundbite is perceived as more important than the content.  Herman Cain's "9-9-9" tax plan is exactly that.

It's no surprise.  The guy is the former CEO of Godfathers Pizza, so he knows a thing or two about marketing. "9-9-9" just rolls off the tongue, and it sounds really appealing because nine seems like a really low number compared to the top rates in our progressive income tax code.

The reality, is that this tax plan would be a big benefit to the wealthy, and would screw the bottom, say, 95% of earners in the US.

Let's say you are a typical family of four, with pre-tax household income of about $60,000.  Under Herman Cain's tax plan, your payroll taxes would be 9%, but you would lose deductions for mortgage interest, child tax credits, standard deductions, etc.  Chances are your effective income tax level then would be the same or higher than it is today.

Secondly his plan eliminates the tax deduction for health insurance premiums, including the part your employer pays.  So your employer is likely to pass more health insurance costs onto you.  You can say goodbye to the inappropriately named "Flexible Spending Account" that you may use today to use pre-tax dollars on out-of-pocket medical expenses.

Then Herman Cain adds a 9% sales tax.  So now you take the money you earned and already paid 9% on, and you pay another 9% on everything you buy.  So now that family of 4 takes their $54,600 of income and likely spends all of it in a given year.  (Maybe in some lower cost areas of the country you can manage to save some proportion of that).  This would be on top of any local sales taxes, which in my area are at 9%, excluding groceries and professional services.  So the two 9% federal taxes are essentially combined for a 18% federal tax plus your local tax rates.

For someone who makes $1,000,000 a year, this is great, because they only get the 9% payroll tax.  And if they derive any considerable portion of their income from capital gains on stock, then the effective income tax rate is even less, because Herman Cain wants to eliminate that.  Then, this millionaire could choose to only spend 10% or less of that total yearly income, thus only paying maybe $9,000 in the national sales tax.  This person with $1,000,000 income per year could only pay 3.5% of their total income towards federal taxes under the first two "9's" in this plan.

The third bit of the plan, the last 9, is a 9% business tax, and this is where it gets even better.  The 9% is not a corporate income tax, I believe it is a tax on total sales.  If a business has earnings before taxes of 15%, that today are taxed at ~35%, your tax burden is 5.25% of sales (.15 X .35).  Now business have a 9% tax (a considerable increase) that will be passed onto consumers in terms of higher prices.

Ezra Klein sums it up nicely:

Which gets to perhaps the main way in which there is no 9-9-9 plan: This plan wouldn’t work. Not as policy and, as I expect Cain will soon find out, not as politics. Moving to an 18 percent consumption tax is, among other things, very bad for older voters, who make up a substantial portion of the Tea Party base. Jacking up taxes on the poor and the middle class even as you sharply reduce them on the rich and completely eliminate them on overseas income for corporations isn’t popular among anyone in the political system who isn’t specifically paid by the Club for Growth. The 9-9-9 plan is a great slogan. But the more seriously Cain gets taken, the more seriously the plan is going to get taken. And as that happens, it will soon become clear that it’s very poor policy.

Occupy Wall Street Declaration

Have traditional news outlets given this any attention?  I think it is a convenient narrative to claim these people don't have a direction or a purpose, but it seems to me that they do, it just doesn't translate well to 5 second sound bites.  Just a sampling from their declaration:

We come to you at a time when corporations, which place profit over people, self-interest over justice, and oppression over equality, run our governments. We have peaceably assembled here, as is our right, to let these facts be known.

They have taken our houses through an illegal foreclosure process, despite not having the original mortgage.
They have taken bailouts from taxpayers with impunity, and continue to give Executives exorbitant bonuses.
They have perpetuated inequality and discrimination in the workplace based on age, the color of one’s skin, sex, gender identity and sexual orientation.
They have poisoned the food supply through negligence, and undermined the farming system through monopolization.
They have profited off of the torture, confinement, and cruel treatment of countless animals, and actively hide these practices.

The 99% includes those in the top quintile - surprise!

I think one thread that earlier seemed to be missing from the We Are the 99 Percent Tumblr, was any messages from those in the top 20%, but now I am seeing some.

My family is in the top 20% of income distribution.  We're doing OK, and are able to save a little.  But the only reason why we are in good shape has a lot to do with luck and timing.

Occupy Everywhere

It seems that the favorite tact for traditional media voices to take when covering the Occupy (insert city name here) movement is to comment on how the protesters can't agree on a platform, that they tend to be shabby and young, and that it is not going to amount to anything.  I don't really think this is the case.