The Recipe for Recovery Is Revealed

4 February 2009 at 11:11 am 21 comments

| Mike Sykuta |

The Obama administration has apparently revealed its recipe for economic recovery. Based on the rhetoric and policy proposals fronted thus far, the recipe appears as follows:

  1. Do everything possible to discourage potential high-value executives from working in troubled industries by capping executive pay in struggling industries.
  2. Eliminate high-powered market-based incentives for mid-level employees to perform their jobs well.
  3. Encourage distressed companies to renege on long-term contracts that populist politicians find offensive (or consider easy to target so as to appear they are being responsible with taxpayers’ money).
  4. Dole out a trillion dollars of taxpayer funds to pet projects and interest groups in the name of “economic stimulus” (enabled by the perception of “responsibility” created by their railing against the targets of #1-3).
  5. Ignore the economic consequences of the incentives created (or destroyed) in #1-3 as well as the fact that someone at some point will have to pay that trillion dollar bill.
  6. Half-bake under the heat of political pressure and serve to the masses who are starved for quick-fix solutions that only impose costs on “that other guy” or “the rich fat-cats of corporate America.”

I don’t know about you, but I think it will be interesting to see how quickly the soufflé crashes . . . though I’m not looking forward to it being force-fed.

Entry filed under: Bailout / Financial Crisis, Corporate Governance, Former Guest Bloggers, Public Policy / Political Economy.

The Gig Economy “We Are All Monetarists Now”

21 Comments Add your own

  • 1. Craig Pirrong A/K/A Streetwise Professor  |  4 February 2009 at 11:38 am

    Mike–

    You’re forgetting one–strengthening unions.

  • 2. Mike Sykuta  |  4 February 2009 at 11:47 am

    Ah yes…I figured that falls under No. 4…one of those interaction of ingredient things.

  • 3. geoff  |  4 February 2009 at 12:39 pm

    this is great! (I mean this is scary).

  • 4. Peter Klein  |  4 February 2009 at 2:09 pm

    According to today’s announcement the government will cap executive compensation even for firms that don’t receive any bailout funds! So obviously this has nothing to do with reforming insolvent institutions per se.

  • 5. whittaker  |  4 February 2009 at 8:55 pm

    “Do everything possible to discourage potential high-value executives from working in troubled industries by capping executive pay in struggling industries.”

    This is absolutely ridiculous. Pick a person at random from the phone book. The odds are better than 99% that this person will both:

    a) be glad to serve as a major corporate exec for $500K/yr; and

    b) do a VASTLY better job than the current management.

    The primary reason for (b) is that the person will not be under the CONCEIT that they can understand, let alone add value to, a multi-billion $ organization. So they will make common sense decisions and refrain from micro-managing.

  • 6. whittaker  |  4 February 2009 at 9:03 pm

    “Eliminate high-powered market-based incentives for mid-level employees to perform their jobs well.”

    Equally preposterous. I personally dozens of highly talented people who work 80-100 hour weeks and will never make anything close to $500K. If that’s what they want, they’d have a better chance buying lottery tickets.

  • 7. Andre Sammartino  |  4 February 2009 at 9:12 pm

    Now the pleas have begun for similar meals down udner:

    http://business.theage.com.au/business/putting-the-cap-on-capitalism-20090205-7yes.html

  • 8. bee  |  4 February 2009 at 10:20 pm

    The chances that the average joe will outperform a high powered exec are the same as them out swimming Phelps. Not likely!

    Obama and the political class are playing upon the fears of the electorate. They know this is a terrible course but see political gain.

  • 9. Peter Klein  |  5 February 2009 at 12:42 am

    Whittaker, yes, that is why the best-run companies in every industry are headed by people picked randomly off the street, people who, fortunately, don’t suffer from the conceit that they actually know anything about their companies or industries.

    By the way, what color is the sky on your planet?

  • 10. David Hoopes  |  6 February 2009 at 12:02 am

    It is easy to make gross generalizations about executives and “Wall Street” as the source of all economic problems. Mostly as bee points out this is just politicians populist posturing. What simpler way is there to create a name for yourself than by being a demagogue.

    From Merriam-Webster
    Demagogue
    1 : a leader who makes use of popular prejudices and false claims and promises in order to gain power

  • 11. whittaker  |  7 February 2009 at 10:26 am

    “The chances that the average joe will outperform a high powered exec are the same as them out swimming Phelps. Not likely!”

    Analogies with professional athletes and entertainers are completely useless. You don’t see thousands of people packing stadiums and paying $100 a seat to hear the president of GM give a speech.

    Furthermore, it would be very easy to set up a statistical test, with a series of races, to determine whether Mark Phelps is a significantly better swimmer than the average Joe. No one would doubt the outcome of such a test. But how do you propose to prove that Rick Wagoner is a better CEO than I would be?

  • 12. whittaker  |  7 February 2009 at 10:34 am

    “Whittaker, yes, that is why the best-run companies in every industry are headed by people picked randomly off the street, people who, fortunately, don’t suffer from the conceit that they actually know anything about their companies or industries.”

    Your argument is circular. You decide that GM (for example) is one of the best-run companies, therefore they must have picked the best qualified exec to run it, therefore it is being optimally run.

    Large company executives are first and foremost POLITICAL INSIDERS who perpetuate and defend corporate statism in return for the enormous rewards they reap. A large corporation is 90% about politics and 10% about business.

    As for not knowing anything about the company or industry, what I mean is that being CEO doesn’t require any knowledge that the average Joe couldn’t pick up in 6 months to a year, tops. That’s assuming it’s even possible to do a good job running these monstrosities.

  • 13. whittaker  |  7 February 2009 at 10:51 am

    “What simpler way is there to create a name for yourself than by being a demagogue”

    I believe it is reasonable, in light of the explosive growth in executive compensation over the past few decades, to ask for OBJECTIVE PROOF that these individuals are better than average at their jobs.

    By that I mean, not just that the board of directors or some other CEO says you’re doing a good job. I’m asking for metrics that you can show to a broad cross-section of people and convince them that you’re doing superior work. Not circular arguments that say that if you make this much, you must be great.

    And all I’m getting back is hot air and false comparisons to athletes. I’m not the one demagoguing and posturing here.

  • 14. Peter Klein  |  7 February 2009 at 1:34 pm

    Whitaker, have you read any of the empirical literature on executive compensation? There are literally hundreds of empirical studies. Try the Kaplan survey in the 2008 Academy of Management Perspectives, or any introductory corporate finance or managerial economics text, for an overview. Then we can have an intelligent conversation.

    BTW, I haven’t seen anyone here defend Rick Waggoner — far from it, his leadership at GM has been a disaster, as far as I can tell. And, actually, the Phelps analogy is instructive. Athletes. entertainers, popular speakers, etc. earn substantial incomes when people are willing to pay to see them perform or hear them speak, and don’t otherwise. Similarly, executive pay (on average) tends to reflect the willingness of consumers to buy the goods and services produced by the executive’s company. In both cases consumers are “voting” with their dollars.

  • 15. whittaker  |  7 February 2009 at 7:06 pm

    “Try the Kaplan survey in the 2008 Academy of Management Perspectives”

    I assume you mean this:

    http://goliath.ecnext.com/coms2/gi_0198-490914/Are-U-S-CEOs-overpaid.html

    This is a subscription site. So I have to pay to find out why CEOs are paid so much? Incredible. No thanks.

    “executive pay (on average) tends to reflect the willingness of consumers to buy the goods and services produced by the executive’s company. In both cases consumers are “voting” with their dollars.”

    People buy the COMPANY’s product. Few people who buy a GM car know or care who Rick Waggoner is, but almost everyone who goes to watch an Olympic swim meet knows who Mark Phelps is.

  • 16. whittaker  |  7 February 2009 at 7:11 pm

    Make that Rick Wagoner, with one g. I accidentally picked up your misspelling. But it kind of proves the point doesn’t it? He is deservedly obscure.

  • 17. whittaker  |  7 February 2009 at 7:13 pm

    And it should be Michael Phelps.I don’t follow swimming that much either.

  • 18. Peter Klein  |  7 February 2009 at 11:18 pm

    Dude, it’s called a derived demand curve. Please Google “marginal revenue product” and then come back.

  • 19. Mike Sykuta  |  8 February 2009 at 5:10 pm

    While Michael Phelps is undeniably a great swimmer, that isn’t (directly) the reason he was making lots of money in endorsements prior to his recent publicity problem. For instance, he didn’t do anything to make AT&T’s wireless network any better–he didn’t design it, he didn’t install anything, he didn’t do anything to improve customer service. He just appeared in a few commercials and received a LOT of money for it.

    The reason he received lots of money is because corporate executives thought they would sell more to consumers by having their products affiliated with or recommended by Phelps.

    Now is that because the corporate executives are overpaid idiots themselves? Or is it the same principle that people are paid based on how much extra revenue (or better, net revenue) comes into the firm as a result of their “effort”–regardless of what the nature of that effort is.

    There is a wealth of evidence looking at pay-performance sensitivities for executives and it systematically points to pretty high correlations–not perfect, but not unrelated either.

    And it may be true that some average Joe could run a company just as well and they just haven’t been given a chance, just like there may be some average Joe who is just as good as the best pro sports player, but whose life never afforded them the opportunity to be discovered. However, scouts get paid a lot of money to be out there looking talent–even in unusual places.

    There are scouts in the executive job search industry too out there looking for good talent. I suspect that if there were a multitude of prospects to lead Fortune 500 companies, we’d see a lot more turnover and a longer list of new names and much lower prices for executives. The fact that we don’t suggests would-be execs are not in abundance.

  • 20. David Hoopes  |  9 February 2009 at 4:59 pm

    I’m not sure Whittiker is worth arguing with. He/she just seems to be railing at something he/she doesn’t understand and doesn’t want to understand. I guess it’s something that he/she gets the market bit with athletes. It’s so nice to reduce our problems to the plotting of evil people. We get rid of them and everything is hunky dory. Again, I’m not saying I think paying people hundreds of millions for poorly managing is a good thing. But, experience shows that further centralization of decision making (i.e. having a little committee in politicians setting pay scales) will be much of an improvement. Again, no one is complaining about all the money the Fannie Mae and Freddie Mac execs walked off with.

  • 21. Now, Everyone, Gasp In Surprise « Truth on the Market  |  15 September 2010 at 2:52 pm

    […] least by the expectations of reasonable economic thinkers. For example, see the posts here and here from my pre-TOTM days.  But as to his conclusion that government needs to get out of the way? […]

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