As Economic Inequality Grows: the "NBA Star" rationalization.

== Are super-compensated CEOs “mutant-NBA level” worth it? ==

Nobel Prize willing economist Joseph Stiglits makes a point in cogent and clear terms that I have been trying to get across for a decade - that members of our CEO-golf-buddy caste are utter hypocrites for claiming that their skyrocketing bonuses and compensation packages are immune to the laws of supply and demand: 

"Competitive forces should limit outsize profits, but if governments do not ensure that markets are competitive, there can be large monopoly profits. Competitive forces should also limit disproportionate executive compensation, but in modern corporations, the CEO has enormous power—including the power to set his own compensation, subject, of course, to his board—but in many corporations, he even has considerable power to appoint the board, and with a stacked board, there is little check. Shareholders have minimal say. Some countries have better “corporate governance laws,” the laws that circumscribe the power of the CEO, for instance, by insisting that there be independent members in the board or that shareholders have a say in pay. If the country does not have good corporate governance laws that are effectively enforced, CEOs can pay themselves outsize bonuses."   

Let me make this absurd situation plain to you. In any rational labor market, skyrocketing pay levels would have the natural market effect of attracting geniuses from other fields of human endeavor, drawing competitors and new talent until the supply of talent met demand and compensation packages settled back down to more historically normal levels. That isn't capitalism 101.  It is Capitalism 1.

Yet, members of the steadily narrowing and increasingly incestuous CEO Caste have strenuously avoided discussion of this simple fact of economics, while shouting their fealty to market forces in every other way. (Hence the hypocrisy.) 

On those rare occasions when they do address this issue, they use what I call the Mutant Basketballer argument… that they are like the very top athletes on championship ball teams, so mutant-good that they are beyond any thought of replacement and worth any salary they demand. (See my earlier posting: The Syndrome of the Essential Man.)

Of course, there is an inconvenient flaw to that incantation. NBA stars are subject to fiercely rigorous statistical and scientific appraisal of their objective performance, more closely tracked and scrutinized - in fact - than any other professional clade on Earth. (I've made this same point more extensively before.)

Moreover, those sports stars do not appoint buddies to the committees that evaluate them. NBA athletes compete with each other, instead of participating in an oligarchic circle-jerk.

Stiglitz (author of The Price of Inequality: How Today's Divided Society Endangers Our Future) makes this point amid a larger context, describing how Adam Smith himself prescribed government actions to compensate for inevitable aristocratic cheating. Indeed, the doyen of right wing economics, Friedrich Hayek, also maintained that governments should act to maximize the number of skilled and confident citizen-consumer-producers who are well-equipped to compete with one another in flat-open-fair markets.

Continueth Stiglitz:

"Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity. This should not come as a surprise: we have a political system that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large “gifts.” Economists have a name for these activities: they call them rent seeking, getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort. Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation."

To be clear, many of our current crop of billionaires have made their wealth the way Smith and Hayek and all believers in flat-fair-creative market systems know is best, by fostering teams of bright engineers to create new and better good and services. This is the type of entrepreneurs that Supply Side economics was supposedly designed to encourage! 

Only then comes the irony — that Supply Side never helped any of these "productive" billionaires. Indeed, nearly all of them today are democrats (with some deep libertarians) who despise the blatant crony raid and rent-seeking subsidy called Supply Side.

Read this article by one of the smartest economists of our era.

== Economics ==

A fascinating political-economic piece on the Evonomics site has a terrible title: Stop Crying About the Size of Government; Start Caring About Who Controls It. It is worth a look... as are a majority of things appearing on that bold new site, whose contribution is to prove that creative-productive market enterprise is not the same thing as plutocratic oligarchy.  They are, in fact, opposites.

The White House's common sense idea to protect retirement accounts. Regarding brokers and managers of the millions of IRAs and other retirement saving accounts that have mostly taken over from old-style corporate pension plans, , the administration wants to impose a legally enforceable duty to act in the “best interest” of clients, similar to the fiduciary duty lawyers and other professionals already owe. Now what could be controversial about that?  Well, these brokers currently are allowed to churn those accounts to maximize their own commissions and the GOP led Congress has stalled for 7 years doing anything about it. Yep, on the side of the little guy. 

A  fascinating piece on why it has been so hard to establish the “rule of law” in most crony-corrupt developing states.  

== The threat of North Korea ==

Internationally, headline-grabbing North Korea claimed to have set off a Hydrogen Bomb, a technological feat that most western experts view with suspicion and doubt. But I'll not opine on that, except to say there is one and only one potential solution to this ongoing canker sore on humanity’s lip.

That solution is North Korea’s lifetime partner and subsidizing neighbor to the north and west.  Sure, many have tried to get that neighbor to apply pressure – which they could easily do, getting Kim Jong Un’s regime to settle down and stop chewing the carpet. 

So far, all normal means of persuasion have failed, because that giant neighbor likes pointing at North Korea as an object lesson. Moreover it does not want to see a united, prosperous Korea next door. Also, to be fair, a collapse of the NK regime could send millions of refugees crossing the Yalu River. None of which excuses this refusal to act.

Hence, the U.S. government has decided to take a tougher line: “In a striking public rebuke of China, Secretary of State John Kerry warned Beijing on Thursday that its effort to rein in North Korea had been a failure and that something had to change in its handling of the isolated country it has supported for the past six decades.” 

Among the discussed options, getting from the UN a partial ban on permitting North Korean ships to enter ports around the world – including Chinese ports - an effort to cut off more of the country’s trade. But China has vetoed such resolutions in the past. 

Well, well. There is one thing the West and others have not tried… tort law.  

Tort law? Yes, simple assignment of liability. Before leaving office, President Obama should declare that - if the North Korea ever does anything truly nasty, the victims of that nastiness - yes even in war - will have recourse to courts everywhere, seeking compensation from the deep-pocketed power who neglected to do much, across 60 years, to prevent the harm. 


Watch how that gets a reaction! Why? Because Rule-of-Law is a concept that both boggles and awes powerful men, when they see it actually functioning. They know, deep-down, that it is the sole source of actual legitimacy. And they have found it incomprehensible, yet transfixing, how an increasingly independent world judiciary has the power to impose accountability outside of the international (and easily bullied) political caste. The notion that individual citizens of Seoul might - after say an NK artillery barrage, or far worse - file suit against much deeper pockets... that could raise a chill up certain spines.

And I have said enough about that.

THE SYNDROME OF THE “ESSENTIAL MAN”

How likely is it that any human is well-qualified to judge his own status as an “essential man”?

It is true that history shows some examples of fellows who resisted all external pressures to step down, knowing with brilliant sureness that they had a vital and historic mission. Almost certainly Abraham Lincoln was right, when he took this stance. Arguably, FDR. And yet, knowing humans as we do – especially their most dismal habit of self-serving delusion, should we not have the reflex of holding this kind of self-appraisal in… well… suspicion?

Should not one of the traits of an honest and mature man be to recognize this delusional habit, and worry about it? The way that George Washington did, when he resigned paramount power – several times – and set the Great Example?

Sure, a certain bullheaded determination is essential in politics. But there are ways to compensate. To ensure accountability. To (above all) provide that your institution and constituents get the benefit of the doubt, and not you. The nation and not the leader. When overwhelming evidence suggests that maybe a guy should go… shouldn’t he go?

You see the same classic syndrome across the entire CEO caste, driving up compensation/pay/stock-option rates toward the moon, as chummy fellow members of the caste vote each other outrageous pay scales, justified on what basis?

Why, it seems always to be a variant on (surprise!) the old Essential Man thing!

So let’s veer aside for a moment and ponder this version of the syndrome. The CEO variation.

Start with basics. These guys believe in capitalism, right?

All right, then. The core assumption of capitalism – and I believe this too - is that high rates of return will normally attract new talent to a field! Right? Imbalances and shortages should be self-correcting.

Specifically, if a shortage of good managerial talent stimulates high market prices for managerial talent, then, within short order, new managerial talent should commence to train itself, ramp-up, then compete (presumably fairly) and innovate until there is so much of it around that the shortage is eased. Whereupon, anomalously high premiums will no longer have to be paid.

In other words, the predicted curve is that a brief period of elevated CEO pay should soon give way to a talent migration that causes a surfeit, even a glut of skilled executives, easing the shortage and causing pay rates to drop.

Isn’t that the fundamental premise? Isn’t that the absolutely basic article of capitalistic-freemarket faith?

But it is not what we’ve observed. Not at all. Instead, the pattern across the last two decades has almost perfectly matched what you see when insatiable demand meets an absolutely limited supply. Like the limited supply of Da Vinci paintings, or Stradivarius violins. Or seven foot centers who can both rebound and pass accurately from mid-court.

Members of the CEO caste seem to be saying “we are actually mutants, like pro basketball players. No matter how much we are paid, the pool of skilled corporate administrators will remain fixed and small.  Market incentives – even astronomical ones - will never augment supply. All companies can do is bid up CEO pay in order to hire the few mutant managers away from each other, just like sports teams!”

Well? Is that not EXACTLY the logic implicit in the CEO compensation spiral, as we see it endlessly accelerating skyward? The justification for taking billions away from research, from reinvestment, from worker benefits and from dividends for smalltime stockholders? So that top managers can move around like football free agents, playing rapid musical chairs and games of golden parachute?

Hm. Interesting proposition. Mutants. Like Sports stars. (In which case, are we best served coming up with some kind of league-wide reserve clause, hm? Don’t some of these same guys own sports teams and cry for caps? For cost controls? Oh, but then let’s also leave off the whole youth factor. They seem also to be saying that in this field, unlike any other across all of human endeavor, youthful brilliance is entirely irrelevant. Hm. And double hm.)

Alas, there is a problem. In sports, there are explicit performance metrics that can be applied, in order to determine who are the top fifty or so mutant-level -- and thus irreplaceable -- athletes in a given sport. But in business, tremendous effort is made to obscure and obfuscate every performance metric. Correlations with stockholder return or rates of innovation or long term company health are vague, at best. The one correlation that seems always to affect pay is how well you manage to pack the Board with your pals. And that is a dead giveaway. Because truly superior men would be ashamed of having to use tricks like those. They would refuse.

Here’s an example offered by financial expert John Mauldin: “John Walter joined AT&T, but after nine short months he was out of a job. The complaint was that Walter "lacked intellectual leadership." Walter got $26 million for that little stint in a severance package. That's what you call really beating time. Of course, a few of us might have another word for it -- and for AT&T.”

And yet, let’s reiterate the irony -- these same guys sing the praises of capitalism as a perfect mechanism for swiftly correcting imbalances of supply and demand! It always works, they say. Well, except where you just gotta have mutants. Amazing.

Just for the record, I most definitely believe in competitive markets and have said so countless times. Indeed, my aim during this aside is to point out a hypocritical betrayal of markets by those who most vocally claim to be defending them. In fact, there is a business correlate with the kind of price curve that we have seen in the area of CEO compensation. You’ll see a similar curve in a market for a commodity has been cornered so that production is controlled by a small, collusive group, in order to create artificial scarcity. Think diamonds.

And no better example is served (as we return full circle to the earlier topic) than the situation we observe with Defense Secretary Donald Rumsfeld.

The man who oversaw our humiliation in not one, but two catastrophic Asian land wars, who supported Saddam for decades, till the maniac slipped his leash, who participated in the incredible Blunder of 1991, who later perceived Saddam bulging with hair-trigger WMDs, who suppressed military counsel about troop levels, who confidently predicted we would be greeted by the Iraqi people with “kisses and flowers,” who sanctioned torture, who declared “mission accomplished” while predicting a short happy transition to peace and democracy in Iraq, who oversaw the worst decline in our state of readiness in generations and has alienated most of the Officer Corps and most of our allies…

…now appears to be claiming (without offering a scintilla of evidence) that he is such a superior manager of our nation’s defense that there are no possible replacements. None at all. Not even from the pool of experienced and well-respected conservatives. (e.g. some retired general?) (Er, some other retired general?)

Look, there are many ways to look at these things, but I always try to ask… ”what are you REALLY SAYING?”

And what this “essential man” seems to be saying is “you must continue to put up with all my failures, arrogance, bullying and unending chain of mistakes. Because my political faction cannot find anyone else to bring forward. Nobody else who might – while lacking my heavy burden of liabilities – actually do a better job.”

It’s all the same dreary rationalization – and hearkens to the pattern that really destroyed markets in most cultures, for 4,000 years.

A market for a commodity has been cornered and production controlled, in order to create artificial scarcity. But this market – for managerial talent – must be opened and freed, if our civilization is to prosper.

See also: The Contradiction of Capital Markets

              and Deep Cheating and the CEO Cartel

 ==The Generals' Revolt==

Some of you have commented upon Donald Rumsfeld’s response to the Generals’ Revolt, in which he firmly dismissed any possibility of resigning the office of Secretary of Defense. He admits that there have been problems and miscalculations and failures – many – worthy of deep criticism. Yet, he insists that his leadership remains badly needed.

Instead of joining the back-and-forth hatefest at its superficial (and least interesting) level, let’s dig a bit. Inherent in everything that Rumsefled is saying appears to be one core assumption -- that there aren’t any other qualified conservatives – untarnished by scandal and failure – who are capable of doing his job.

In other words, despite taking responsibility for AbuGhraib and failed intelligence and mangled war planning and losing the confidence of the Officer Corps, he remains the “essential man.” Impossible to replace, even by another, similar conservative.

Notice how I expressed it. Of course, many of us would like to see neocon leadership replaced at the top of our republic. This movement has acted as if they had a “mandate” to utterly transform America, despite having “won” disputed and at-best profoundly narrow electoral victories. A troglodytic and roughshod era of rationalization and contemptuous dismissal of all dissenting thought.

See: The Real Culture War: Defining the Background


and NeoConservatism, Islam and Ideology: The Real Culture War

But I am not going there right now. Instead, let us perform another of our patented thought experiments.

Let us assume, for a moment, that DR and his movement do have a “mandate.” A blank check from the American people to pursue a general line of policy called “neoconservatism” – including all of the adventurism and romantic Platonism that comes part and parcel with the Straussian worldview.

Even if his movement had such a mandate, that is irrelevant to the issue of whether or not Rumsfeld should resign. For what he is actually claiming is that he – himself – is not replaceable even by some other neocon who has a top defense background and is politically compatible!

In other words, his own movement has such a paucity of talent that it cannot step in with another highly qualified person who can pursue conservative policies WHILE soothing the trainwreck of morale within the Pentagon and across America at large.

Let’s take a moment to delve into the implications of this dogged stand. Whether we call it “stalwart and determined” or “obstinately power-grubbing,” there are even deeper levels that merit exploration.