Monday, December 22, 2008

A quick note to, hopefully, make things more grey

In the light of a number of corporate bailouts, much ado has been made about CEO pay and bonuses.

I have heard many pundits and journalists express outrage that companies that are receiving federal money would put it toward such a finite investment as a bonus for the CEO. However, I would think that the CEO of a failing company would be thinking, nearly every day, of jumping ship. The decision made by a board of directors to give the CEO more money does provide the value of keeping the existing leader in the time of crisis.

One might also make the argument that the existing leadership of a failing company deserves to be removed from their posts. This might definitely be true. However, the cost of attracting a new CEO to the post might be even more than merely retaining the existing CEO. Place yourself in the shoes of a business executive, and ask yourself what salary you'd require to be the head of AIG right now.

I don't necessarily think all this justifies the expense. But I do like viewing most things as a tricky grey area.

Perhaps our outrage should be toward the fact that CEOs of major companies have such an astronomical baseline salary to begin with, rather than that the failing companies have to keep those salaries high to compete.

Tuesday, December 16, 2008

More on the unsustainability of full employment

The concluding point of this recent post was that perhaps an economy based on full or nearly-full employment is unsustainable, or at least in conflict with what is healthiest for individuals as consumers, as well as for residents of a finite planet. Robert Reich concurs, but he does so by explaining why a Keynesian solution to the current economic crisis may prove insufficient.

The false assumptions, according to the Keynesian model, are that "American consumers will eventually regain the purchasing power needed to keep the economy going full tilt," and "even if Americans had the money to keep spending as before, they could do so forever."

His explanation of the error of those assumptions illustrates the dilemma of full employment:

This would be a problem if most of what we consumed during our big-spending years were bare necessities. But much was just stuff. And surely there are limits to how many furnishings and appliances can be crammed into a home, how many hours can be filled manipulating digital devices, and how much happiness can be wrung out of commercial entertainment.

The current recession is a nightmare for people who have lost their jobs, homes, and savings; and it’s part of a continuing nightmare for the poor. That’s why we have to do all we can to get the economy back on track. But most other Americans are now discovering they can exist surprisingly well buying fewer of the things they never really needed to begin with.

What we most lack, or are in danger of losing, are the things we use in common – clean air, clean water, public parks, good schools, and public transportation, as well as social safety nets to catch those of us who fall. Common goods like these don’t necessarily use up scarce resources; often, they conserve and protect them.

He identifies the problem perfectly and lucidly, but his solution doesn't nearly address it. His solution is the standard liberal model of social programs supported by income taxes. Though the social programs he proposes are good and often absolutely necessary, income taxes won't be sufficient if we're facing the dilemma of chronic underemployment.

Whatever solution we concoct must address the fact that: a) individuals might not be able survive on purely employment income alone, and b) taxing employment income might not get you as far as it once did. A potential solution that fits the bill could be extensive natural resource taxation, levied on all income that people earn from selling land, airwaves, oil, et cetera. These are all things that came with the earth, and anyone who profits from them did little to earn the profit, other than get there first. Each of those industries are among the most profitable on the planet, since most of the income is taken from control of common resources, rather than productivity. And if those things are common resources, the existing system of control and profit is theft, and justice requires their taxation.

The government should step in, yes. Though instead of as a buyer where consumers no longer can, they should as a supplier where corporations should not. The few necessary social programs that Reich defines as common may still be necessary, but they in no way match the revenue that is available from natural resources. The remaining surplus can be returned to each citizen as a share of the commons, thus addressing dilemma (a).

And we have, reported Friday, an appointee for Secretary of Energy who might be amenable to such a solution (at least in part). The Nobel Laureate Steven Chu has advocated the increasing of gas taxes. Though unclear from this article whether his proposal would be the case, most often the gas tax is proposed with an income tax decrease to offset it. This is the direction we would like to head.

Wednesday, December 3, 2008

Consumerism, or Consumer "Confidence?"

"According to Keynes, the root cause of economic downturns is insufficient aggregate demand," quoth Mankiw in the NYT.

In plain English, people are buying less stuff. Very simply, this can be for two reasons, either: a) they want to, or b) they have to.

The latter cause is easily understood: if you've lost your job, took a pay cut, or merely haven't seen your income increase with the cost of living, you tend to put spending on hold.

The former is peculiar, and is treated as such by the press. In the famous incident in which Phil Gramm told reporters that the nation's recession was "mental" it is very likely he was thinking of this group, people who curb their spending not because they are forced to by losing their job, but because they fear that they could become part of the latter category for any of the named reasons. It didn't help that he (Gramm) added that we were a nation of whiners.

When an economy is in trouble, it can most readily be saved by people -- those who still have the power to spend -- doing so. This is why some of the less-charismatic economists can show disdain for this group of folks who fear what may happen: They see this group as those who hold the solution, who are holding back out of fear and self-interest. And when those who can spend hold back, the government steps in to spend in their stead, which is anathema to the free-market orthodoxy (as well as, potentially, common sense).

But what is this group really thinking? It's usually not so conscious a thought as "I might lose my job, so I'd better hoard up cash in case I do," it's usually something more along the lines of "Maybe I don't need this thing after all." It's as if television media reporting on corporate and economic troubles (with the (conscious or subconscious) message of "don't spend more than you have to") is currently counteracting television advertising (with the (conscious or subconscious) message of "buy this thing, you need it") such that people are actually deciding what they need and what they can do without.

And the effect is what economists and reporters call "low consumer confidence" (which has the same horrible ring that Phil Gramm's comments did, i.e.: "Why don't you grow a pair, you thifty sissies?"), when what it actually is is just lower consumerism. People are deciding they're happy with what they have and they don't need more stuff. As long as people don't lose their minds navigating the conflicting messages coming from their colorful living room appliances, this is actually a very good thing for individuals.

It's bad, however, for an economy that is dependent upon full, or nearly-full employment.