Lots of fences

For whatever reason, today I was reminded of the poem Mending Wall by Robert Frost.

The narrator in the poem writes about his interactions with his neighbor:

My apple trees will never get across
And eat the cones under his pines, I tell him.
He only says, “Good fences make good neighbours.”
Spring is the mischief in me, and I wonder
If I could put a notion in his head:
“Why do they make good neighbours? Isn’t it
Where there are cows? But here there are no cows.
Before I built a wall I’d ask to know
What I was walling in or walling out,
And to whom I was like to give offence.

I don’t know much about Robert Frost, but this poem was published in 1914, and it strikes me that Frost was alive through much of the Gilded Age, that period of time where the rich and powerful few controlled American politics, and inequality was reaching its dramatic local maximum in the 1920s, even as incremental progress had been made under Roosevelt and Wilson. He was not writing about any of those things in this poem. But I think of his poem because of how we collectively interact with each other, and how this matters in a discussion about inequality that is sometimes missed.

Paul Krugman writes in The Conscience of a Liberal (2007):

[H]igh levels of inequality strain the bonds that hold us together as a society. There has been a long-term downward trend in the extent to which Americans trust either the government or one another. In the sixties, most Americans agreed with the proposition that ‘most people can be trusted’; today most disagree.

In 2012, this number was just 32.4%, as compared to 46% in 1972.

He also notes a bizarrely wrong op-ed by Irving Kristol in 1997 defending high levels of inequality: “in all of our major cities, there is not a single restaurant where a CEO can lunch or dine with the absolute assurance that he will not run into his secretary.”

This was a strange argument to make in 1997: it’s even stranger in 2016.

A recent New York Times investigation by Nelson D. Schwartz looked at the world of the rich and the companies that cater to them. The lede says it all: “Companies are becoming adept at identifying wealthy customers and marketing to them, creating a money-based caste system.”

The world it describes is one we all know exists: the rich are being catered to, and importantly, separated from the rest of us because they can pay to do so. In some ways it is also to the detriment of everyone else. Disturbingly, it seems that the big data that is collected on every single one of us (thanks to modern technologies) is used so that companies can just target those who matter (the rich) with greater accuracy than ever before.

Along with the rich being able to purchase and isolate themselves from everyone else, there is a set of drawbacks for everyone else. In an exchange with a reader, Schwartz writes:

If 20 percent of people end up going to the front of the line – and there’s only one or two lines at the airport or to board the ship, for example – the rest of us have to wait longer. Similarly, seats in coach are getting squeezed ever closer together to make more space in the front of the plane for first, business class and premium economy.

My point here is not that inequalities in income are leading to inequalities in services that did not previously exist, although that is certainly happening. My point is more that we are increasingly being separated from each other on the basis of class even outside of where we work and where we live (which had already increasingly become the case over the last several decades). A benefit of having a relatively compressed income distribution in the 1950s is that people of different economic classes were not separated from interacting from each other in the same way (ignoring the major issue of racial segregation). Unions and moral outrage ensured that workers, blue-collar or white-collar, made incomes that were not exorbitantly different, and further more individuals also occupied similar spaces in the world outside of work. Luxury items existed, of course, but fundamentally, whether someone drove a Chevy or Cadillac did not hinder or stop people from interacting with each other and understanding each others’ concerns. How can we trust or empathize with anyone as we pay money to separate ourselves from each other? How can the very rich, who separate themselves from the rest of society while having a disproportionate voice in the political process, possibly understand the problems of most people?

I think that the the modern conservative response, without irony, might simply be: “Good fences make good neighbors.”


Trump, the GOP and liberal complacency

There is a storyline right now about how slim Donald Trump’s chances are in the general election, and how the GOP may soon have to perform another famed “autopsy.” Much of it is based on sound analyses of the political environment by writers I respect. In some circles you hear that Hillary Clinton must be absolutely overjoyed at having Donald Trump as her competition. And the Republican Party is having a panic attack as it faces the possibility of fracturing from within, as an epic Clinton victory would have significant down-ballot implications on the Senate, House, and state governments. Or so, that’s the way the story goes.

But I am not so sure.

PredictWise shows a 70% chance of a Clinton victory: this is not large by any means. General election polls show an average 6-7 percentage point lead for Clinton: but this can and will dissipate to some degree as Trump turns his attention to the general election battle.

Recall that prior to the first presidential debate between Obama and Romney in 2012, 538 estimated Obama’s chances of winning on October 3 were 86.1%. Following the debate, it fell to 61.1% on October 12, in the span of less than 10 days, a dramatic turn of events. Yes, things reverted after better subsequent debate performances, and Obama managed to resurrect most of his 2008 coalition amidst an expanding economy, but for a period of time, you remembered that there was no guarantee of an expected outcome. Likelihood of events is not the same as certainty of events. Crucially, in a year where conventional wisdom has been upended time and time again, a humbled observer would think twice about confusing the two.

A lot can change in the world between now and November, and we have seen these things in the past. Jimmy Carter had at one point a commanding lead over Ronald Reagan, but the world refused to stay static. The Iran Hostage Crisis shook confidence in Carter as an energy crisis and recession were unfolding. Right or wrong, the blame often goes to the incumbent party, and suddenly voters who had thought Ronald Reagan too conservative were willing to give those ideas a shot after all.

A strange assumption has then taken hold: that the world will continue to look the same in 6 months. In some ways, this is the best single prediction one could give and most likely outcome, given everything we know about the political landscape and the current economic environment. I am not arguing otherwise. But predictions are validated in large samples: based on data today, if we could run the Clinton-Trump race 100 times, we would expect Clinton to win about 70% of the time. Instead, we observe and care about a finite sample of exactly one in November. We have our best guess today, but this is because we cannot predict what strange events will happen in the intermediate period, or the timing of the next recession, or the next ISIS attack. But something will happen, and the calculus of the election could be significantly changed (or not).

In many liberals, there is a smugness about the demographic changes in the country, and how these changes will automatically guide them to victory for the foreseeable future, as it did in 2008 and 2012. In this complacency is quite a lot of missing data points: despite winning the White House since 2008, progressive causes have been stymied since 2010. Republicans have commanded the House of Representatives since then and they are now firmly in control of the Senate. Republicans have taken state legislatures and governorships (31 to Democrats’ 18), and they enacted “severely” conservative policies in the process. In particular, when the federal government is divided, all of the meaningful change essentially occurs at the state and local level. And the GOP, for all the talk of its death, has cleaned up and enacted their preferred policies.

David Frum, following the passage of Obamacare in March 2010, said:

Conservatives may cheer themselves that they’ll compensate for today’s expected vote with a big win in the November 2010 elections. But [. . .] So what? Legislative majorities come and go. This healthcare bill is forever. A win in November is very poor compensation for this debacle now.

It seems Democrats have forgotten that policy happens at all levels of government. Yet their imagination, by and large, is captured entirely by the White House in election years. It involves the big picture ideas along with great television and significant coverage in all forms of media. No need to get involved with the murky and mundane details of governance at the local or state level. And I am as guilty of this as anyone: how many times have I tried to go to city council meetings (zero)? How many times have I paid close attention to state legislatures when there wasn’t a bathroom bill making national headlines (close to zero)?

Of course, this is broad-brushing of others on my part, and there are many passionate people working at all levels to fight for a progressive agenda. But their numbers pale in comparison on election day to the opposing side.

So the same people who seem unaware of the devastating losses at the state level are now declaring that Republicans will be destroyed after this election due to demography and a loudmouth reality TV star who can’t be taken seriously. Complacency and certainty are terrible traits to have when so much is at stake.


Pay for no performance

How can CEOs, management and boards of directors have their interests aligned with the long-term health of the companies they run? How can their interests be aligned with the interests of their employees?

I’m grappling these questions as I look to a few glaring cases of capitalism gone wrong, and I am wondering why boards of directors ultimately do what they do. In my mind, a board should provide diverse expertise and guidance for a company, choose its CEO, and stay vigilant in making sure the chosen CEO has taken an appropriate course. Part of choosing the CEO also requires setting contract terms and compensation. And on this, I have a hard time understanding how boards in America can agree to such large compensation terms with so little downside risk for the executives involved.

It has recently come to light that in the event of a merger, Marissa Mayer, CEO of Yahoo, would receive $55 million in severance if she were ousted. Just as ridiculous is her compensation across 5 years: at minimum, it was projected to be worth $117 million across 5 years. It will likely end up being closer to $365 million, depending on the share price. Not only are these amounts ridiculous, but they are in part determined based on share price, an imperfect indicator of company health. If you happen to enter as CEO during a recession, and you stay on just as the economy and the technology sector expand, then you see the gains flow to your pay. All you had to do was nothing. This is almost precisely what happened with Yahoo: their share price increased entirely due to a large stake in Ali Baba (an investment made prior to Mayer’s tenure), which had its IPO in 2014 and currently has a market cap of nearly $200 bn.

People who defend CEO compensation in America try to draw comparisons with everyday workers and their own motivation to show up and do a good job based on the pay they receive. Money rewards good work, so their fable goes. But there is no parallel here. When most people do a poor job, they can be let go. Most don’t receive severance, and most immediately worry about how they will make ends meet, or get another job. The psychological and financial impact is often severe.

There is no similar downside for Marissa Mayer. She never has to worry about money, and she gets paid tens of millions of dollars even if she screws up and leaves. And so, I wonder: what are boards of directors thinking? This kind of thing doesn’t even seem to align with shareholder interests.

Yahoo recently laid off 1,600 people. Make the rosy assumption that Yahoo did not lose any revenue from cutting all of these workers, and that the move only cut costs. Suppose Marissa Mayer gets her severance this year of $55 million: assuming (conservatively) that employees receive a total of $200,000 in compensation on average (including health insurance and other benefits), $55 million would pay 275 workers for a year. If we consider her $365 million potential pay across 5 years, that money would pay for 365 workers for 5 years. In reality, Yahoo arguably lost some revenue from laying off these workers.

The same would not be said for the CEO. Is it at all possible to make the argument that she, or some other CEO, would have done a worse job with just $36.5 million instead of $365 million? This discussion leads easily to questions of taxing the rich. Many arguments against raising rates on the very rich seem nonsensical when put in this perspective.

There are other examples of  boards of directors making poor decisions: Men’s Warehouse tried a disastrous acquisition of Joseph A. Bank and ousted its famous founder George Zimmer in the process. In this case, the board went against the CEO, and gave him no severance. Why? Men’s Warehouse’s largest shareholder was the hedgefund Eminence, which also owned a stake in Joseph A. Bank. They had pushed for a merger of sorts (and overpaid, to their simultaneous detriment and benefit). Among the members of the board of directors was Deepak Chopra, bullshit artist and new age spiritualist. What expertise could he have brought to Men’s Warehouse’s business dealings? Zimmer deserves some of the blame, as he handpicked many of the directors.

Mr. Zimmer, who lives in the Bay Area, says he feels bad for Men’s Wearhouse employees, but not for Eminence. “I don’t have a high regard for hedge funds,” he said. “Nothing personal — I’ve never met the Eminence people — but I love the idea they might lose a fortune. Hedge funds may force companies to be more efficient, but that’s not always the best thing for every stakeholder group, like employees. It’s curious we’ve allowed capitalism to become all about shareholders.”

At least in this case, you could argue that the decision was based on large stakeholder in the company. But it sucks that the employees will ultimately pay the price. Should boards be prescient rather than short-sighted? Shouldn’t they be actual experts on business matters, representing both shareholders and the many employees that work for the company? Was Deepak Chopra qualified to be a part of that decision?

Freeport is another example where a board of directors failed to do its job properly, sitting idly by (and getting rich) while letting an overcompensated CEO take the company down. The mining company decided to get into oil at the height of the commodity boom by taking on massive amounts of debt to the tune of $20 billion. The chairman, James Moffett, argued for the purchase of two companies: Plains Exploration and Production and McMoRan Exploration, where he was also the CEO. The conflicts of interest are staggering, as he stood to get rich from buying a company he had a large stake in. Where was the board to voice these concerns?

Freeport’s chief executive, Richard Adkerson, was McMoRan’s co-chairman. Nine Freeport directors owned stock in McMoRan totaling about 6 percent of the shares. Freeport agreed to buy McMoRan for $2.1 billion — a 74 percent premium over its market price before the deal was struck. Mr. Moffett himself was paid $73 million.

Moreover, Plains owned 31 percent of McMoRan, enough to block any deal. Freeport eliminated that possibility when it bought Plains. And James Flores, Plains’s chief executive, who now runs Freeport’s oil and gas operations, was also a director of McMoRan. He made $200 million on the deal.

In addition to the $73 million, after Moffett was “let go”, he received another $79.4 million in severance. The company’s market capitalization had fallen to as low as $4bn and is now $13.08B, far below its debt obligations.

Not all companies face such dramatic ends. But the questions remain: how can boards of directors do a better job for the company and the employees, and how can CEO compensation be drastically changed?

 


Financial regulation has been in the news recently, in big and small ways.

As part of the Dodd-Frank financial regulation act from 2010, a Financial Stability Oversight Council (FSOC) was established. A key responsibility was to designate institutions as “systemically important financial institutions” (SIFI), resulting in stricter regulations and higher capital requirements. This is a simple way to make the financial system safer. More capital means being able to weather a storm, when it comes (not if). Having financial assets over a certain amount automatically designates institutions as SIFI, but there is a class of other institutions that FSOC may decide qualifies as well.

Metlife, the insurance company, had received this designation. They appealed, and a judge agreed with them. That a judge could undermine a key regulatory capacity of Dodd-Frank is a little frightening. The Treasury Department is appealing the decision.

The New York Times notes:

It is unclear how the ruling may affect the other three nonbank companies that regulators have designated as “systemically important”: the American International Group, Prudential Financial and General Electric’s financing arm.

This could have ripple effects and water down Dodd-Frank’s effectiveness. The systemically important tag was a primary reason GE decided to become an industrial company again and sell off GE Capital, rather than be weighed by considerable financial risk moving forward. This is the downside of having a law that empowers regulators and committees to make rules, rather than have the rules enshrined in the law itself.

As the Treasury Department prepares their appeal, they have been busy in other ways as well.

Coming off Pfizer’s $160 bn attempt to relocate its headquarters overseas by merging with Allergan, the U.S. Treasury Department announced rules to further stop “inversions”. The details are difficult to understand, and could be reversed, absent legislation, in the next presidential administration. But the effect was immediate, with Pfizer calling off the merger, resulting in a $400 mn penalty.

Finally, I couldn’t talk about tax avoidance without talking about The Panama Papers, leaked documents from a Panama law firm specializing in individual tax avoidance. The fallout has been significant. Among other things, the rulers of China who had wanted to spearhead a crackdown on corruption turned out to have family members named in the papers, and censors have blocked many western media outlets.

One step back, two steps forward.


Remembering that People are People

It is sometimes too easy to be jaded and cynical, and to write people off as merely a product of their affiliations and past lives. This especially applies to public figures and how we think about them. When I say easy, I mean cognitively easy: we think of a person and what they stand for in a way that challenges our world view the least and fits neatly into a narrative we had already started writing. Rewriting, or adding digressions and nuance to the story, is too time-consuming. I am as guilty of this as anyone. In many cases, the judgement is actually correct, and more often than not it is borne out by an abundance of evidence.

But every so often, I need to be reminded that people are people, and that they can be complex and difficult to label. Their motives are not so simple, and not so impure as we might have first thought. This realization doesn’t automatically render individuals great, nor does it wipe the slate clean. But it is an antidote to thinking of the world as a static and stark chess board, where everyone plays a single role for a single side, never changing.

The first example is Neel Kashkari, the Goldman Sachs banker picked by Treasury secretary Hank Paulson (and former Goldman Sachs banker himself) to “administer” the Troubled Asset Relief Program (more commonly known as TARP). It was never clear to me what his job was precisely, or whether he was particularly good or bad at it: but members of Congress were not happy with it or the turn TARP had taken after being passed under the spectre of a harsh financial collapse. Recall the famous hearings, where Kashkari was asked by Rep. Cummings: “Is Kashkari a chump?”


After going back to the world of finance and working for Pimco, he then ran for governor against Jerry Brown in California (we know the outcome there). His ads made him sound like any other ostensibly fiscally conservative Republican. Low taxes, less government, etc. Nothing remarkable, interesting, or particularly thoughtful.

Then, surprisingly, he was picked as the next head of the Federal Reserve Bank of Minneapolis. I don’t think he was qualified or should have been picked for that position, in which he will occasionally be asked to vote on monetary policy that impacts the entire economy, but I’ll leave that for others: Brad DeLong and others summarize the issues and his views well.

But then, in February, he gave his first major speech. It was all about ending Too Big To Fail (TBTF). Here are his policy prescriptions:

  • Breaking up large banks into smaller, less connected, less important entities.
  • Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
  • Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

Sounds like the Bernie Sanders plan. It’s not clear that breaking up large banks into smaller banks is a good solution (nor do I understand how one enforces them to be less connected than if they were part of a big entity with a large capital base). Nor do I think TBTF is something you can regulate away. The tax on leverage is probably a good idea (a financial transaction tax), and large banks have been forced, thanks to Basel III and Dodd-Frank, to hold significantly more capital. Stress tests carried out by the Treasury have also pushed towards this.

But all of this is a long way of saying I was surprised by the speech. Probably it went into territory that’s not really standard (and maybe not appropriate) of a newly-appointed Federal Reserve Bank president, at a time when there’s unprecedented scrutiny by outsiders to politicize the Fed. And the usual caveats apply, especially when dealing with an aspiring politician: this could simply be an attempt to change his public perception rather than a sincere belief in the kind of financial regulation he talks about. Only time will tell. But it certainly did not sound like a Wall Street banker.

The second example is Tom Wheeler, FCC chairman since 2013. Ars Technica had an in-depth interview entitled “How a former lobbyist became the broadband industry’s worst nightmare.” Tom Wheeler had served as a chief lobbyist for the cable and telecommunications industries prior to his appointment. Few had expected him to be anything but a friend to those industries, and progressive were unhappy with his nomination.

Fast forward to 2016, and he has largely acted as an opponent to the telecommunications and cable industries in their ambitions to consolidate and monopolize. Famously, he led the charge to destroy the proposed merger between Time Warner and Comcast. Most recently, he has pushed for rules requiring cable companies to conform to a single standard in cable boxes, thus allowing customers to purchase rather than lease the boxes at extraordinary rates (to the tune of $20 billion annually, or $231 for the average customer). The entire interview is worth reading. There is even a reference to The Master Switch by Tim Wu, a definitive text on monopolies in the information industries of past and present from the man who coined the term net neutrality.

Wheeler’s tenure has been consequential. But looking at his resume, you might have thought he would reach different decisions on a number of important issues. Sometimes people can surprise you. It’s worth remembering that.


Rethinking Trump

I wrote just a few days ago that Trump was a lot like the rest of the Republican party, and more moderate if anything on certain policy issues, and that we should be cognizant of this rather than solely emphasize his choice of rhetoric. I said this because I worried this focus on rhetoric would make his party competitors seem less crazy when they held equally destructive policy beliefs.

However, over the last few days, my thinking has changed based on recent events. The other presidential candidates in his party, like other leaders in the party from the past, are largely responsible for the terrible turn of events. By claiming repeatedly that their country was being taken in apocalyptic terms; by portraying every election as a matter of spiritual life or death; by claiming Obama was purposefully trying to ruin the country; and by using racism subtly and not so subtly, they have created this current monster and his followers. But at this point, the only candidate who has advocated for violence is Trump, and that has me rethinking my classification of him as the least bad option from the party.

Policy choices are meaningful, and they can ultimately impact real lives in small and large ways. But someone who incites and advocates violence and who aspires to hold the highest office in the country, leading the executive branch and all its limbs, would be decidedly destructive and dangerous in ways I have trouble thinking about. So I was wrong about Trump: rhetoric does matter.

I guess this started at a Trump rally when John McGraw, a 78 year-old man, punched a protester as he was being escorted out. The protester was held back and wrestled to the ground by police officers. Afterwards, when video came to light, McGraw was arrested. In an interview, McGraw stated:

Number one, we don’t know if he’s ISIS. We don’t know who he is, but we know he’s not acting like an American, cussing me… If he wants it laid out, I laid it out. [. . .] Yes, he deserved it. The next time we see him, we might have to kill him. We don’t know who he is. He might be with a terrorist organization.

I hesitate to associate a single man with Trump. But throughout the campaign, Trump has expressed support for exactly this kind of thing:

“If you see somebody getting ready to throw a tomato, knock the crap out of them, would you?” Trump said, drawing cheers and laughter. “Seriously, OK? Just knock the hell — I promise you, I will pay for the legal fees. I promise. I promise. They won’t be so much, because the courts agree with us too — what’s going on in this country.”

I thought it was a dumb thing, more talk to whip up support among his followers, but nothing to be taken very seriously. Just Trump being Trump.  I was wrong.

On NBC’s “Meet the Press” on Sunday, Trump was asked whether he would pay McGraw’s legal fees, as he once offered to do for supporters who rough up protesters.

“I’ve actually instructed my people to look into it, yes,” Trump responded.

There’s really nothing more to say. What I worry about is the other Republicans. They have stated that they don’t like what’s being done, but that they would support the nominee, whoever he is. They have to change their minds fast if they care even the slightest about, I don’t know, democracy and civic discourse. But maybe that’s not likely. Josh Barro writes about Rubio powerfully:

[Republicans] have spent seven years running around the country, accusing the president of being a fifth columnist hell bent on destroying our country. If Obama’s America were as bad as people like Rubio say it is, the civil unrest fomented by Trump would be justified.

Now the Republicans who fed this narrative are watching in apparent horror as they see voters have taken them all too seriously.

Rubio says the idea of supporting Trump as the nominee is “getting harder every day.” [. . .] “I think we all need to take a step back and ask whether we’re contributing to this,” Rubio said Saturday about the unrest. He should start with himself.


Links: 2016/03/10

To get into the habit of posting regularly, I’ll try to occasionally post articles and podcasts I’ve found interesting in some way: