Adam Smith Probably Didn't See This Coming

One of the hallmarks of modern stock markets is that the power of management has eclipsed the ability of investors to control them. CEO's make mind numbingly large salaries, even at companies whose performance is decidedly mediocre.  

The reason seems to be because stock markets have become so liquid that investors have no commitment to a particular company.  Boards of Directors are filled with folks from management of other companies who benefit from the general inflation in management salaries, so the notion of board oversight on salary has proved to be a fantasy.  Capital Gains tax rates are so low it is not worth challenging management, you just aim to buy stock cheap and sell it when you have a gain and move on to some other stock.  

A side effect of the current situation that is more of a problem for society is that companies do less planning and investment for the long term, hire fewer people, and generally focus all their attention on doing whatever is necessary to keep their stock price as high as possible, right now.   Layoff's that reduce overhead are often the quickest and easiest way to keep your bottom line looking good.

How do we bring investor control back into the equation?  How do we motivate companies to take a more long term view?  To focus on making the company more valuable in the long term?  What if you had to hold a stock for 10 years to get truly low Capital Gains tax rates?  Would that bring investor control back?

Or do we care if capital doesn't control companies very well?  What if we just go back to the punitively high taxes that applied to the very wealthy from 1950 through 1980 and use the tax revenue generated to make sure everyone can afford a good education that won't cripple them with debt?  
If management pays themselves exorbitant salaries, a big chunk will go the Uncle Sam to be used for scholarships, or a more generous GI Bill. So at least we will maintain a society based on achievement rather than continuing the gradual slide we are currently in toward a class based society, where rich kids always have opportunity and only the very best of the rest will be able to rise to the level of achievement they aspire to.

Syria & Ukraine - Thoughts on Tribalism

Tribalism is in our nature.  Our default emotional inclination is to distrust that with which we are unfamiliar.   When humanity was living in isolated small groups, with no technology, subject to the whims of the environment, that inclination was necessary for survival.  When your tribe is barely surviving a stranger is a threat on many levels.  They may deprive your tribe of the resources you need to survive, or just outright kill you.  So whatever tribe recognizes the threat first and eliminates the strangers survives.

As humanity evolved that instinct evolved into forms of institutionalized discrimination against those who are different from us.  

Beginning a couple hundred years ago our ability to manipulate our environment began to make, for more and more people, the notion of scrimping for survival a thing of the past.  Here in 2013 we have the technology to feed everyone, to house everyone, to cloth everyone.

But our thinking lags behind our technology.  Even in the United States, where Tribalism was not well entrenched to begin with, and has been continually weakened by the influx of immigrants seeking to put that all behind them, we are only now finally getting to the point where Government, in word and deed, does not discriminate against people based on broad categorizations of personal characteristics.  Although our founding principal was that we are all created equal and entitled to equal treatment under the law, we had to fight a Civil War in which millions of citizens died and then amend the Constitution to clarify that the principal actually applied to all persons.  WW I and WW II both exploded out of tribalism, the sincere belief by some that other ethnic or religious groups were subhuman in some way.

To this day, 150 years after the Civil War, we in the US are still trying to clarify that "all" means "all".  Most of the world is moving, slowly, the same direction as the United States, particularly in Democratic states.  The exception is the Middle East.  The crossroads of the world has such a long history of conflict between competing groups that many folks there evidently have not yet even begun to realize we all do better through respect and cooperation.

Syria is the bleeding wound in Middle East that is exacerbating regional tribalism.  In some sense, like our Civil War, it may be a necessary and painful process that we cannot insulate the people of the region from.  But in our Civil War, we were largely left to sort it our ourselves.  In Syria that is not the case.  Russia and Iran, two purported democracies where powerful groups "who know best" have a monopoly on the democratic process, have been supporting the Syrian Government, whose power is based in Tribalism and patronage, for decades and continue to protect and support the regime.  Various other regional power brokers support one or another group of dissidents hoping to influence the outcome.

Now Russia is moving in the same direction in Ukraine.

So the stark choice for the US is whether we try to counter the influence of external power brokers to level the playing field so the people of Syria make the choice they will live with, and learn from, in the future, at the risk of sparking wider conflict?  Or do we stand by and let the folks with a tribal agenda prevent the people of Syria and Ukraine from living and learning from their mistakes.

On Chosing Your Own Doctor

The notion of choosing your own Doctor has become a big controversy since Obamacare was passed.  Everyone is for it, the controversy is all about accusing others of not allowing people to choose their own doctor, implying (usually) that if you don't get to choose your own doctor you will end up dead.  It is silly.

Over the years I have from time to time been hired to do research that relates to he competence of doctors.   Here are some basic truths I have learned.  

1.  The competence of Doctors is controlled by Doctors (in California by the Medical Board) 

2.  Medical Science is full of gray areas, competing ideas, different views of treatment.

3.  In our privacy obsessed society it is very difficult to get information about the competency of a particular doctor, particularly doctors operating in a small or solo practice.

Put these three facts together and you have created the situation we have - where Doctors who are supposed to monitor doctors are extremely unwilling to judge another doctor to be incompetent.  Even when a patient dies at the doctors hands, other doctors are inclined to bend over backwards to give the doctor the benefit of the doubt.

As a result horribly incompetent doctors, doctors who have committed major mal-practice multiple times, including killing people with their mistakes, sometimes continue being doctors for many years, continue having patients and getting referrals.   

Who goes to these Doctors?  Who sends them referrals?  People (including other doctors) like you and me who judge them as we judge other people we meet.  Are they likable.  Well-spoken.  Friendly.  Do they sound like they know what they are talking about.

There is no way for a lay person to know if their Doctor is bad, mediocre or good.  Given the gray areas in the medical field, even fellow doctors who work with the doctor may have a hard time distinguishing good from mediocre.

As far as I can see there is only one way to make sure you don't get a really bad Doctor.  Use a big corporate entity for your medical care, who pays the malpractice insurance for all it's doctors.  We all know no corporation is going to tolerate an employee who costs them lots of money.

Nattering Nabob's of Negativism

Those immortal words rolled off the tongue of then Vice President Spiro T. Agnew in the early 1970's.  Richard Nixon picked Agnew to appeal to Conservative voters.  Although later convicted of tax fraud and forced to resign as VP, Mr. Agnew's wonderfully alliterative phrase has stayed in my mind these intervening 40 years or so, and actually bring a smile to my face when I recall them.  My memories of Mr. Agnew were of a smiling, happy man who loved to play golf and didn't spend much time working (so was the perfect VP).  Although he could be very denigrating and condescending in what he actually said, he was always upbeat and positive in how he said it.  His "Nabobs of Negativism" barb was directed at the press that dared to question Republican notions of how to run the country.  

In some respects Spiro seems have have been the archetype of what is now the quintessential Republican.  He was a man so sure his instincts were always right and so sure he had special understanding that he was disdainful of research, facts or other opinions, except to the extent some single fact might be cited to support what his gut told him to do. 

Not to say only Republicans can have those characteristics.  Here in California two democratic members of the legislature are gone as a result of indictments relating to their hubris.  But democrats are wildly individualistic, they are sort of like cats, independent and impervious to what others think.  Republicans are more like dogs, they have to fit into the mores of the pack.  So the most dominant can lead the whole pack astray.  

It tickles my sense of irony that Agnew's words so perfectly describe the modern Republican party.  Certainly blaming the other guy is a basic political gambit, but the Republican party has taken it to ludicrous levels.  They started ripping Obama the day he was sworn in and have spent the last 5 to 6 years trying to villify him,  They were pretty up front about the fact everything they did the first four years was what they deemed would allow them to beat Obama out of a second term.

Examples are legion.  When Obama continued and expanded the bail-outs George Bush started, instead of dealing with the reality we needed to hold our noses and accept the medicine the country needed because of their silly policies during the 10 years they ran Congress, they saw it as an opportunity to rip him up one side and down the other.  They acted like frat boys who had a decade long wild party and ended up setting the house on fire and now were complaining the firemen are using too much water to put the fire out.

Since Obama was reelected their new strategy is to do nothing and hope to get Republican majorities in Congress in 2016.  They have turned Congress into the most expensive and unproductive debating society the world has ever see, blocking even something as obviously non-partisan as allocating money to take care of the Veterans of the wars Republicans so confidently led us into a decade ago.  It would cost too much money they say.  Makes perfect sense if your world view is about your needs, while you are oblivious to your obligations. The wars are winding down so we don't need them anymore, no point in spending money on Veterans. 

I once was was a Republican.  Many of the high minded principles they traditionally have espoused need effective representation so they can be a consistent influence on government policy.  There are Republicans, I am sure, who are serious about doing good things for the country.  But the reality is the discipline the current party enforces, stemming from the basic incompatibility of the coalition they have thrived on, has made them irrelevant, drifting away from the views of the majority of the American people, and left them on the verge of a lifetime achievement award for being the ultimate nabobs of negativism.

Banker's bonuses

Entertaining but at the same time disheartening tidbit in the Economist Business overview (3.1.14)

The British Government bailed out the Royal Bank of Scotland during the crash of 2008-09 and the British Government is still the majority shareholder.  Since the bailout the Bank consistently posted big losses.  For 2013 the bank lost around 13 billion dollars.  Yet the bank still doled out bonuses to executives that amounted to about $800,000,000.

What can you conclude?  Only thing that occurs to me is the interchangable club that runs both banks and government treasury's has a different measure of success than the rest of us.

Thoughts on Achieving Stability and Prosperity in our economy

The discipline of Economics is a wild and woolly place were anyone with a notion can probably find data to support it.   But when you cross-check economics against history, the outlines of what tax policies a government should pursue to maximize stability and prosperity are pretty clear.  Here are a couple of basics that recent history has highlighted.

I.  Don't view Corporations as cash cows to fund all your government activities.  Corporations are fictional entities we create to encourage risk. As fictional entities they are both highly mobile and highly adaptable, so taxing corporations is rather like trying to catch a greased pig.

The way to deal with corporations is:

A.  Surcharge the products they sell as an access to markets tax.  The more they sell to us the more they pay.  Thus if they are a domestic corporation that sells mostly overseas, they pay little tax, encouraging them to stay here even if our labor costs are higher.  Domestic corporations and foreign corporations get treated equally so it is difficult for other countries to lure away our corporations by offerring lower tax rates.  

B.  Have some sort of retained earnings tax so Corporations can't stockpile huge amounts of cash.  Any cash they have been sitting on for more than two years has to be either kicked out to shareholders as dividends, paid to employee's, or they are taxed.  The longer the corporation holds funds, the higher the tax.  As we have seen since the crash a few years ago, Corporations have not been investing in new enterprises that create jobs, they have been stockpiling cash or buying back their own shares (which is really a way of paying income to the people who own their shares, or share options, without their having to pay taxes).  The lack of enthusiasm among corporations for investing in new ventures that creat jobs has been a big contributing factor to our languishing economic recovery.

C.  Stock options as a compensation for Corporate employee's should be taxed just like any other ordinary income at the value of the stock at the point it vests.  Stock options began because people thought it would motivate management to care about the long term success of the Corporation.  But it is pretty clear that generally corporate management no longer pays much attention to long term planning, everything they do is about pumping up the Corporate share price in the short term to make their options as valuable as possible because that is what is best for them personally.  

However, we should also create a mechanism where stock options could be treated beneficially under the tax law if the options go into a trust that provides the employee can't touch the principal until 7 years after the employee leaves the company.  This would make stock options a more viable tool to motivate managers to plan for the long term health of the Corporation.

D.   All of these are reasonable steps to require from Corporations in return for the huge benefit society confers by granting limited liability. Limited Corporate liability imposes major costs on society, we should be compensated for those costs and we should design tax law to shape corporate compensation schemes to guide their behavior towards conduct that benefits society, not just the owners of the Corporation.

II.  Go back to steeply graduated income tax rates.   Basic Government funding should come mostly from people.  Government should be to serve the people, the people should therefore support the government to the extent they benefit.

A simple fact is that the more assets you have the more benefits you get from government.  On top of that allowing wealth to concentrate in a few hands undermines the purchasing power that drives a healthy economy.  Concentrated wealth makes the rich relatively richer but in reality they are poorer than if the wealth is more dispersed because there is less money circulating in productive parts of the economy.

So income tax rates should meet the following criteria:

1.  Be based on computations of the mean income of a full time worker in this country.  People up to that mean pay a modest tax.  Above the mean rates should increase until they become very high on people who make a lot of money.  The wealth of the wealthy is protected by Government, they should pay the lions share of costs of the institutions that provide that protection.

2.  The mean should be adjusted every two years to reflect the most recent data, and the graduated rates should be percentages of the mean, so that both growth and inflation is computed into the system to avoid stealth taxation or stealth tax avoidance.

How the 1995 Changes in Capital Gains Tax on Homes Plays out in Berkeley

I live in a neighborhood in North Berkeley where a lot of people bought their house 30 or 40 years ago when they were young.  They bought the houses at various times of course but generally the ones that have lived here the longest paid under $100,000.  The houses now sell for around a million dollars.

Their houses were relatively expensive when they bought 30 or 40 years ago, compared to housing in other parts of the state or country, and they are still relatively expensive compared to other parts of the state or country.  Relatively the value of the house hasn't changed, the big dollar increase is mostly simply inflation.  They haven't really gained much over all those years.

Before 1995 the homeowners in our neighborhood could have sold the house and as long as they rolled the money over into buying a replacement residence they would face no capital gains.  They could downsize to a smaller house and stay in the neighborhood where they have lived there whole life and where all there friends reside.  But Congress in 1995 threw out the old rollover rule that had been the law for at least 50 years.  Instead now when you sell your house you get a flat Capital Gains exemption of either $250,000 or $500,000, depending on whether you are married or single.  

That $250,000 / $500,000 exemption probably still works pretty good for folks in parts of the country where house prices have always been lower.  But it is crippling in the markets where housing is more expensive.  Older people who want to sell are staggared by the size of the potential capital gains tax, and the tax would effectively leave them without enough money to buy a new place in their neigborhood.  To move or downsize they would have to pay a big tax and then have to move somewhere cheaper to afford housing.   So they stay.   As a result almost no houses are for sale in our part of town, which means that when a house comes on the market, very wealthy folks sweep in and snatch it up.  A house a little further up the hill came on the market last year.  It was not in very good shape, so was offered at $600,000.  Almost immediately a developer stepped in, offered $950,000.  The developer prettied the house up and sold it a few months later for somewhere around $1,300,000.  

One of our elderly neighbors had to move into a residential care facility. Her children, who live out of town, couldn't sell the house to pay for the care because the tax obligation would have been so crippling.  So they are left renting the house, unable to sell the house until their mother dies, at which point they get a stepped up basis (so in the eyes of the tax man they don't have any gain) and the tax obligation goes away.

Berkeley, and I am sure a lot of other neighborhoods in this country, are tangled up in a classic catch 22.  Inflation, and the real estate bubble that the capital gains tax changes contributed to, has driven the price of the houses up to the point where many people can't afford to move.  So they don't, and the lack of inventory drives the prices up even higher, making moving impossible for even more people.  Young people can't afford to buy, older people can't afford to move.  

Thanks, Congress.