Saturday, March 28, 2009

20 times what a teacher made 

While watching Steve Kroft's interview with President Obama on 60 Minutes last weekend, I was interested in this exchange:

KROFT: Do you think that the people on Wall Street and the people in the financial community that you need trust you, believe in you?

OBAMA: Well, I-- you know, I think that there's probably a perception on the part of some on Wall Street and in-- in the financial sector that somehow I can turn off and on people's reactions to something like these bonuses. I think there's a disconnect. I think that maybe they're not spending enough time in some Midwestern town, you know, wandering through Dayton, and hearing stories about how tough things are for people.

And so maybe they're surprised by these reactions, and they expect the President or Congress or others to somehow just quell the frustrations and the angers. And part of my job is to communicate to them, "Look, I believe in the market. I believe in financial innovation. I believe in capital being able to flow to the most productive places in order to spur economic growth. And I believe in success." I want them to do well.

And our financial service sector is one of the hug competitive advantages, comparative advantages, that we have vis-à-vis other countries. But what I also know is that the financial sector was out of balance. You know, you look at how finance used to operate just 20 years ago, or 25 years ago. People, if you went into -- investment banking, you were making 20 times what a teacher made. You weren't making 200 times what a teacher made.

So there was a sense of the financial sector being above the normal rules of the economy. And my attitude is to say, "I want you to succeed. We want to reward wealth. But there's got to be sufficient balance. There's got to be some regulations that actually make the market work better and prevent the kinds of systemic risks that were seeing."

That's not anti-market. That's not anti-Wall Street. I want to protect and preserve what's best about Wall Street. But we're gonna have to get rid of some of the excesses. And that's something that's in their interests, as well in the interests of the American people.

(bolded emphasis mine)

I applaud the president for much of his clear-headed language, not only in this response, but others. Nonetheless, I was struck by his focus on comparative compensation as a means of measuring whether a particular business segment is "out of balance." I agree that the financial sector had and has major problems that will require reform and a restructuring of the regulatory process, so that we have less of a chance of a scenario in which a handful of significant entities take incorrect "bet the ranch" risks that then require government capital to forestall complete economic disaster. But how is compensation the key barometer? Is he saying that compensation levels couldn't have been as high unless something wrong was going on, that therefore there must have been some fundamental disequilibrium?

Let's look at another example -- comparing the compensation of two people in the same business, and not different businesses -- that might be closer to President Obama's heart. In 1997, Barack Obama was married and living in Chicago, and the Chicago Bulls were on another successful run towards an NBA championship, defeating the Portland Trailblazers Utah Jazz four games to two in the Finals. The star player on the Bulls, of course, was Michael Jordan. I am guessing that Barack Obama was a Bulls fan and a Jordan fan (heck, I'm a 76ers fan and also a Jordan fan). Jordan's compensation that season from the Bulls was $30,140,000, and if endorsement compensation is included, his income was likely at least twice that figure. Jud Buechler, also a 6-6 guard, played in 76 games that season for the Bulls, and received $500,000 from the Bulls (neither figure includes extra money received from the league for winning the championship). So, from the standpoint of base compensation, Jordan was 60x Buechler, and that multiple rises if endorsement income is considered. Were the Bulls "out of balance?" They were in enough balance to win. Was the NBA? Well, maybe the NBA was, because eventually it went to a salary cap system -- over the objections of the players, and because the owners (the capitalists, if you will) wanted cost certainty with their labor contracts.

It is certainly irritating to me when I see somebody making a big number, and I perceive that he is mailing it in, or otherwise isn't adding value with his work in a fashion that is commensurate with his compensation. That's easy to see in sports because it's out there on the field or court or rink, and it's usually apparent in business as well. It's also easy to see that Jordan was worth at least 60 times more than Buechler, from the standpoint of the Bulls ownership or average Bulls fan, if the objective was to pack them in the arena and win a championship. It's harder in business to visually see that someone might be worth 60 times another worker, because the action isn't taking place in bite-sized chunks of time right in front of you, but it is entirely likely that such disparate relative contributions occur in many businesses. Maybe the key question is whether relative contributions within the same business, or even across different businesses altogether should result in different compensation levels.

CORRECTION: As commenter Ray points out below, the Utah Jazz lost in the Finals to the Bulls, not the Blazers.


By Blogger D.E. Cloutier, at Sat Mar 28, 02:45:00 PM:

From Rasmussen Reports, 26 Mar 2009:

"While a great deal of public anger is focused at corporate executives these days, Johnny Depp and the Boys of Summer don’t fare much better. Thirty percent (30%) of Americans believe the government should make it illegal to pay movie stars and athletes more than $1 million per year.

"A new Rasmussen Reports national telephone survey found that 59% oppose government pay limits for film stars and jocks.

"There is a more support — but not much more — for capping the pay of corporate executives. Thirty-six percent (36%) say the federal government should make it illegal to pay any executive more than $1 million a year. The majority (54%), however, disagree."


By Anonymous Anonymous, at Sat Mar 28, 03:05:00 PM:

My brother, a Democrat, is a CEO and is very concerned that the government will try to control executive renumeration. He was outraged over the bonus fiasco.

I suspect among top Democrat executives, that he is not alone. This was a losing idea for the Democrats...big time.

a moderate Republican  

By Anonymous Squealer, at Sat Mar 28, 03:08:00 PM:

Well, I think your point is well taken, but the sports comparison seems to suggest American businesses are meritocracies, which everyone learns is false a few years after entering the workforce. Executive compensation, in particular, is suspect in that such compensation is often determined by board members having conflicts of interest up the wazzoo.  

By Blogger Ray Van Dolson, at Sat Mar 28, 03:26:00 PM:

Minor quibble... the Bulls defeated the Jazz in 1997. The Blazers were a victim in the first 3-peat in the early 90's. :-)  

By Blogger Escort81, at Sat Mar 28, 04:15:00 PM:

Right you are, Ray! I was going to use 1992 first, and then decided on 1997.  

By Blogger Elise, at Sat Mar 28, 04:17:00 PM:

I agree some financial corporation employees - and some athletes and definitely some actors - make more than seems reasonable in any rational world. The problem is, I can't think of a cure that wouldn't be worse than the disease. Government limits, confiscatory tax rates, none of that sounds good. The best I can come up with for corporations is better information on the Boards of Directors. Let the shareholders see how they're interlocked and maybe people will get mad enough to complain. Not much to offer, I know.

BTW,the quoted piece of the interview sounds like vintage Obama to me. He’s all, hey, it’s the people in Dayton who are frustrated and angry, nothing to do with me. Oh, really? Well, what about this:

An angry Obama ... said, "...I mean, how do they [AIG] justify this outrage to the taxpayers who are keeping the company afloat?"

And this:

"Here's the problem," Mr. Obama said, "It's almost like they've got -- they've got a bomb strapped to them and they've got their hand on the trigger."

Maybe Obama couldn’t have calmed people down over AIG (and Wall Street in general). But he could have tried. Or at least he could have refrained from adding fuel to the fire.

It’s really kind of funny. This is the sort of thing Obama pulled during the campaign but then he would have used his minions to do the dirty work of stirring up people over AIG while he pretended he knew nothing about it and offered himself as a calm voice of reason and moderation. I don’t know if he’s losing his touch or if that ploy just doesn’t work as well once you’re faced with actually having to govern rather than just talk.  

By Anonymous JT, at Sat Mar 28, 04:34:00 PM:

Probably fairer to use the average salary rather than pick the outlier data point. Jordan pulled huge numbers of fans to games and brought excitement to pro hoops, of which I am not a fan. Similarly, viewership and attendance is considerably higher when Tiger is playing and in the hunt.

I do feel that professional athletes make "too much", as do most entertainers, but that's what value society places on them. Is it 'fair'? well, sure ... if you want to make $30M/year playing sports or acting, then 'all ya gotta do' is become good enough to get one of those jobs.

I think doctors don't make enough, or nurses. I think congresspeople are grossly overpaid. I could go on.  

By Blogger Kinuachdrach, at Sat Mar 28, 06:06:00 PM:

Why not simply let the owners of the business -- the shareholders -- decide what to pay their top executives? Maybe with some backstop -- say, unless holders of 50% of the stock explicitly vote for something higher each year, then the CEO will be paid the same as a Congressman.

What really peeves me (admittedly I am not in Dayton) is the politician who after a decade or so of modestly-paid "public service" is wealthy. But that problem would be better addressed through firing squads.  

By Anonymous Anonymous, at Sun Mar 29, 12:32:00 PM:

From Link:

Winner take all

"The American economy since Reagan has created relatively few winners and left the rest of us behind."

I don't know how true this is ... I expect that compared to the Gilded Age, it doesn't rank in fact. But many people believe it to be true ... I bet if you polled it, it would get a majority.

Unbridled capitalism drives change and progress, but often results in disruption and angry losers ... this can become a political force. A not untypical Obama supporter is someone like my friend -- a smart thoughtful schoolteacher who feels underpaid compared to college classmates who went to Wall Street. There's a perception -- and some truth -- that you have to be connected to succeed in today's America.

Now here's a related point. Our economy has grown a lot since Reagan. If we grow at our historic rate of 3% or more, every generation is much better off than the preceding. Most Americans have grown up with this -- and take it for granted. I was young in the 1970s -- but saw a time when this wasn't true.

There's a big gap between Obama's deficit projections and those of the GPO/CBO -- the latter shows the deficit growing to over $1 trillion ... Obama to "only" $600 billion. Neither of these are sustainable, but the GPO/CBO projection is truly scary. As Obama himself points out, the difference is because Obama assumes 2.6% GDP growth, the other 2.2% ... a trivial difference says Obama.

But what happens if we have no growth?

My spidey sense say we're heading to some combination of Japan's lost decade and our own 1970s-like stagflation. We'll have too many dollars chasing overvalued assets. Government spending will crowd out private investment. Obama's investments won't pay off. It won't be a good environment for real investment. Investment dollars will go after short-term speculative plays. Who'd be stupid enough to start a VC-backed business in Obama's world. The best business opportunities will lie in feeding off the government's tit.

Because of this ... on our current path ... if I had to bet on what our growth rate will be over the next ten years ... today, I'd come in under 2.2%. Don't be fooled if we have an OK 2010 -- we'll have a small natural recovery goosed by Obama's stimulus. As we get past 2012 growth will stall.

This has big implications ... we have much higher expectations of growth baked into government budgets, pension assumptions and so on. My schoolteacher's public pension may not be there when he retires. I could go on. Obama will teach us that we are all in this together .. on the down side.  

By Blogger Elise, at Sun Mar 29, 04:26:00 PM:

Link - I share your pessimism about growth but in my case it's because of debt. It seems like most people, companies, and local and state governments have incurred too much debt over the last however many years. The Federal government's actions simply transfer some of that debt to the national level. I think this means growth has to be very slow.

My gut feeling (no spidey sense, sadly) is that the truly terrible financial crisis will stabilize by the end of the year but growth will be sluggish for five years after that. In other words, I figure we've spent about 5-6 years of money we haven't made yet so as the money we make in the future is already gone.

It will be interesting to check back in a year and see how things are working out.  

By Anonymous Anonymous, at Sun Mar 29, 05:25:00 PM:

Link, again

The tide can turn in 2010. "Wasteful Obama spending" can be made an issue. Doug, my school teacher friend, is a good proxy for middle Americans who bought into Obama. Ask Doug ... as a teacher ... whether he expects to see any benefit from Obama's "investments in education" and he'll say no. Instead, he's already concerned with budget shortfalls and increased classroom sizes. I expect in 2010 he'll be truly disillusioned when he sees where the money is actually going.

Republicans have to figure out how to be a national party ... they need to be an effective opposition ... today they're not even that. They needwin back seats in places like New York to do this.

We all have to rethink what we expect from federal government.  

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