Given the eagerness of the powers that be to aim the free money bazooka at anything resembling a failing giant bank, the incentives for those running them aren't to try to limp along through troubled times, but instead to blow themselves up spectacularly.
But remember kids, moral hazard is what happens when a single parent gets $10 more per week in extra food stamp money.
Learned folks, how is he wrong, if he is?
Self-righteousness is incompatible with coalition building.
The complaint isn't about 1 CEO going home with a lot of money. It's the 99% argument: The fact that the top 1% goes home with about 24% of the pie, the highest percentage since WW II, has to mean the other 99% are going home with less. If the company you work for makes more money, you won't be going home with any of it. The top 1% took 95%+ of the economic growth of 2011 home in the USA. Everyone works harder, in tougher times, for their benefits, and their benefits alone.
And it's been pretty clearly shown that Mr. Bigshot (or Mrs. Bigshot) do not create 'value' in the economy proportional to their pay. If CEO's earned 300x the income of people in their company, but then ran out and spent it all like their cleaning staff would have to the situation would be self correcting (you'd create demand which would force people to raise their frontline employees hours and wages) but they don't and so whenever you see these huge paychecks it means the economy missed out on a boost. I mean, it's better than if the company itself had kept it in its coffers (which is the real problem we're having these days) but still not great.
The "large equity stake holder" is presumably the wholly-owned management itself, merely indebted instead. Only now the identity of the lead investor is also the residual claimant from investment.
Institutional investors are a special case, because so many of them subscribe to ISS, which serves as a watchdog on matters like executive comp. I personally disagree with a number of ISS's recommendations, and don't like butting heads with them but they are very influential on companies that have a lot of institutional investors who are known to follow their reccomendations.
I'm not sure that I understand your second point. Could you elaborate?
I'm trying to focus on the incentive alignment problem. Shareholder hiring of management always has the twofold problem of (1) no generally uniform interest (Arrow's theorem), (2) free-rider problems in management quality. Both of these would imply that firms that raise funds via equity would perform best if there is, in practice, one very large stakeholder with all the power and ability to extract most of the return on better management, since there is now one dominant interest and mostly-internalized free-rider externalities. I'm happy to see that you say that this is, indeed the case.
But if so, without effective minority power, minority stakes are de facto just debt that is indexed to the worth of the firm itself. There is no reason why this indexation should be done at all. If the very large stakeholder receives all the marginal return on slightly better management, then their interest in better management should be yet greater. Hence: aligning the residual claimant with the lead investor. But a firm that raised some funds through equity to one very large stakeholder is, more or less, a firm that simply sold itself to a single rich owning entity with capital to throw around. One may as well dispense with the illusion of partial equity interests altogether.
Pursuing this line of thought leads one to the conclusion that the economy would be composed mostly of bank-led conglomerates, which it is worth recalling is, in fact, what Japanese and Korean economies did look like for a very long while; it's not an impossible model. But of course then there start to be more antitrust inefficiencies as each conglomerate gets bigger.
I think part of the surprise (for me, at least) is that these massive golden parachutes don't seem to come with enough strings attached. And perhaps that's simply because the tales told are the juicy ones, where nobody included a "oh, bee tee double you, if you don't work here for at least a year you don't get shit" clause, and then a guy or gal puts in a solid month's work (which may or may not damage or outright cripple the company) and still walks off with more money than the entire forum will probably see in a lifetime.
I can only assume that a bunch of really smart and attentive lawyers DO put such stipulations into a lot of contracts, and some people simply command such clout or have such connections that they can sign up 'without a pre-nup' as it were, and while I'm sure that goes swimmingly a lot of the time (when your years take is seven or eight+ figures, I'm sure even 10-50 million is just padding at that point for many of them), the ones where shit blows up spectacularly and the person responsible still comes out $Texas ahead make for great, incindiary stories.
So having read the last few pages and thought about it more, does anyone have how these possible exceptions stand out against the norm? Do many/most CEOs rock solid gold/platinum parachutes and just ache to be canned for any reason so they can ride off into the sunset on a gold plated private jet, or is it a one in a hundred/thousand/whatever perfect storm of fuckmuppetry that lets people get away with it now and then, but since it makes good news it gets over reported?
I guess what I'm asking is, does it seem to be the status quo (in which case why the shit aren't more companies including "do good works or GTFO" clauses?) or notable exceptions. The 'winning the lottery' of business, as it were.
First they came for the Muslims, and we said NOT TODAY, MOTHERFUCKER!
CEO's spending habits aren't really the problem, its a pay as a function of productivity. At least as the orthodox models assume. High wage inequality could create volatility [as discussed shortly in the labor thread] but there are still enough high wage earners that this is unlikely without some sort of organizing force that correlates the investment decisions of 300,000+ people.
Unfortunately determining the productivity of a CEO is problematic due to [iirc] some things we have discussed in the thread already. This however, is unrelated to the Atrios quote and deals more with macroeconomic stability rather than microeconomic incentive compatability
Re: The Atrios quote.
Its kinda right and kinda wrong. The free money bazooka isn't really pointed at the banks because we think they don't want to limp along, but because their ability to limp along is beholden to their creditors willingness to keep money in the system. If people keep their money in the system they generally do fine and limp along. If people see the bank limping along and withdraw their money the banks fails. One of the reasons we point the free money bazooka is to say "don't worry that a limping along bank will fail". Even though we may ideally want the banks to fail if they do fail; if we, at the end of the day, don't fire that bazooka, we aren't credible in the future threat to fire the bazooka to ensure people don't withdraw their money... and so they will withdraw their money more often and so banks that are attempting to limp along will fail more.
There is a problem of moral hazard in that if you give someone too much money, or ensure that they have access to money if things go poorly, that you cannot stop them from behaving poorly. I.E. since you're insuring against their risk you're shifting their optimal behavior to be more risky, and/or you're inducing laziness (which is essentially the same thing mathematically). But this is probably less an issue with banks and the free money bazooka because it seems to be a lot easier to structure loan conditions to align with the interest of equity* than it is structure executive compensation to align with the interests of equity.
*That is, the free money bazooka tends to insure the creditors and screw equity and since we can either require collateral or a requisite portion of own capital investment we can more easily ensure good behavior on the part of equity. In addition we can say "well you get the free money bazooka, but we own the company now" which removes the moral hazard problem of getting the free money with respect to equity. But management has even more limited liability, tends to invest none of its own capital into the project, and puts up no collateral, and no the opportunity cost of the time they spend working at the company does not count.
Ronya, i will get back to our discussion in a bit. But i need to respect my self appointed schedule if i want to pass my cores(and the above discussions actually fit into my studying a bit more).
Atrios would say that the bazooka is aimed at the bankers and that a better idea would be to aim it at the people who owe the bank money, which should have the same effect as far as keeping the bank afloat goes and wouldn't you know, keep everyone fucked.
Self-righteousness is incompatible with coalition building.
Atrios would say that the bazooka is aimed at the bankers and that a better idea would be to aim it at the people who owe the bank money, which should have the same effect as far as keeping the bank afloat goes and wouldn't you know, keep everyone fucked.
Aiming the bazooka at the bank is the same as aiming it as the creditors. In general, the bazooka comes with wiping the equity of the shareholders out and new equity arrangements. Sometimes it comes with restructuring requirements [but this can be expensive when there are preexisting contracts with management] for management.
If the bank has enough money to pay its creditors and they demand they money it has to comply. The question is does the possibility of the bazooka change the bankers incentives to behave and the answer is, as far as i can tell, "only so much as the bankers have perverse incentives compared to equity". If the bazooka is preserving the correct incentives for equity then the problem isn't the bazooka.
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Tiger BurningDig if you will, the pictureRegistered User, SolidSaints Tuberegular
He was suggesting giving the money to the banks' debtors. Presumably homeowners, I guess.
Yeah, sorry that wasn't clear. Atrios' point is, and has been for a while, that the bailouts are bailing out the people who fucked us while making sure that the people they fucked remain utterly fucked.
Self-righteousness is incompatible with coalition building.
I think part of the surprise (for me, at least) is that these massive golden parachutes don't seem to come with enough strings attached. And perhaps that's simply because the tales told are the juicy ones, where nobody included a "oh, bee tee double you, if you don't work here for at least a year you don't get shit" clause, and then a guy or gal puts in a solid month's work (which may or may not damage or outright cripple the company) and still walks off with more money than the entire forum will probably see in a lifetime.
I can only assume that a bunch of really smart and attentive lawyers DO put such stipulations into a lot of contracts, and some people simply command such clout or have such connections that they can sign up 'without a pre-nup' as it were, and while I'm sure that goes swimmingly a lot of the time (when your years take is seven or eight+ figures, I'm sure even 10-50 million is just padding at that point for many of them), the ones where shit blows up spectacularly and the person responsible still comes out $Texas ahead make for great, incindiary stories.
So having read the last few pages and thought about it more, does anyone have how these possible exceptions stand out against the norm? Do many/most CEOs rock solid gold/platinum parachutes and just ache to be canned for any reason so they can ride off into the sunset on a gold plated private jet, or is it a one in a hundred/thousand/whatever perfect storm of fuckmuppetry that lets people get away with it now and then, but since it makes good news it gets over reported?
I guess what I'm asking is, does it seem to be the status quo (in which case why the shit aren't more companies including "do good works or GTFO" clauses?) or notable exceptions. The 'winning the lottery' of business, as it were.
Well, since most businesses are small businesses, I'm guessing that most CEOs don't have ridiculous golden parachutes simply because most of those businesses couldn't afford it even if they wanted to provide them. And for small businesses the equity and management tend to be a lot closer together (often being self, friends, or family), at least in the cases where it isn't being too heavily funded by venture capital. Contrast this with large publicly traded companies, where sometimes you have large shareholders running the show (like with your Microsofts), and sometimes not.
I don't know how prevalent excessive compensation is in the subsection of large companies, but there have been plenty of headscratching examples that come out regularly suggesting that it happens a lot more than it should. And the companies involved tend to be big enough and provide huge enough compensation in both good and bad situations that it is easier to take notice. So even if this problem only shows up in a numerically small portion of the population of CEOs, the cases where it does show up are often large enough that it's a nontrivial issue.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I think part of the surprise (for me, at least) is that these massive golden parachutes don't seem to come with enough strings attached. And perhaps that's simply because the tales told are the juicy ones, where nobody included a "oh, bee tee double you, if you don't work here for at least a year you don't get shit" clause, and then a guy or gal puts in a solid month's work (which may or may not damage or outright cripple the company) and still walks off with more money than the entire forum will probably see in a lifetime.
I can only assume that a bunch of really smart and attentive lawyers DO put such stipulations into a lot of contracts, and some people simply command such clout or have such connections that they can sign up 'without a pre-nup' as it were, and while I'm sure that goes swimmingly a lot of the time (when your years take is seven or eight+ figures, I'm sure even 10-50 million is just padding at that point for many of them), the ones where shit blows up spectacularly and the person responsible still comes out $Texas ahead make for great, incindiary stories.
So having read the last few pages and thought about it more, does anyone have how these possible exceptions stand out against the norm? Do many/most CEOs rock solid gold/platinum parachutes and just ache to be canned for any reason so they can ride off into the sunset on a gold plated private jet, or is it a one in a hundred/thousand/whatever perfect storm of fuckmuppetry that lets people get away with it now and then, but since it makes good news it gets over reported?
I guess what I'm asking is, does it seem to be the status quo (in which case why the shit aren't more companies including "do good works or GTFO" clauses?) or notable exceptions. The 'winning the lottery' of business, as it were.
Your typical "golden parachute" severance package is referred to as a double trigger, because it requires the two triggers of (1) a change in control of the company and (2) that the executive be fired without cause or quit for good reason (basically under circumstances where the company is forcing you out, like changing your title, not paying you, or making you move away from your home). If both occur, then you get some amount (usually a multiple of salary and/or bonus). Most of the huge golden parachutes you hear about are the result of options and other equity awards vesting immediately. The idea behind a golden parachute is to ensure that you won't be fired right after you help to get your company bought by someone else. The other type of payments you hear about as "golden parachutes" (although they aren't technically parachutes) are really big ordinary severance provisions. Again, the numbers usually only get so big because of accelerated vesting of equity. Keep in mind that the equity would have been earned if they continued employment, so most of the parachute is really just getting money you otherwise would have gotten on a faster timeframe.
Not directly related, but I actually wrote the largest retention bonus plan in world history. It was in the mid 9 figures, payable to a single person, over 5 years, with the full amount accelerating if the executive was terminated before the end. The guy is a really really good businessman, but noone is that good. . .
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
A question came up in the elections thread, which I think is more appropriate here. @ronya@goumindong
I generally think food stamps are a good program, except in areas where they get so concerned with fraud prevention that they raise the cost of administration significantly.
That said, there are a lot of very smart and savvy people (including a number of tax professors at NYU law) who do not like the program at all, especially as compared to other welfare programs, such as the EITC.
I understand that putting money that can only be used to buy food in people's hands is efficient in that all of it gets immediately spent, pumping money into the food production and sales sectors. I also understand that food stamps allow people to spend their other money on items other than food, and that removing the element of desperation that imminent starvation creates allows for more rational decision making about how to spend one's money and what jobs to take. All of that said, it seems to me that most of the revenue effect could be replicated through any number of transfer programs that put money directly into the economy, including my somewhat silly example of buying food to burn, but also increased military spending (to purchase manufactured goods). Please explain why the revenue effect of food stamps would be so high, especially in a world where we literally pay farmers to grow less food.
I am not arguing against food stamps, just that any position attempting to justify food stamps from a purely economic viewpoint, instead of one which values making sure people are fed, leaves me skeptical. I'm happy to be shown why I am wrong.
To be clear, the question is why is putting money in the hands of people who will spend it better than just putting the money directly in the economy at the lowest level (i.e., retail)? Is it better to pay someone to dig and fill in holes so we have an excuse to give him a check (or to just hand him money with no work done) vs giving that money directly to the stores he would have shopped in, in exchange for goods which the government can then use (or even destroy)? If so, why?
FWIW, Robert Barro would also like to know
Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.
Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.
Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.
The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
Quick note: Barro is being at least a little cheeky on the precision point. Macroeconomics never comes with error bars, because its numbers are based on other numbers. There is no imprecision in "what is the average price?" as compared to "what is the average temperature?", because prices are things that are already discrete numbers at their point of measurement.
Also, the shuttling to and fro between "evidence is hard" and "evidence is unreliable" and "but here's evidence pointing in the direction I want" is ... um.
A large part of the economic multiplier is what the poor will do with the money they would've spent on food otherwise, which is to pay off bills and debt. Debt collection is expensive, roughly 20%-50% of the total bill, so avoiding the need for debt collection is a bigger impact than just the value of the money spent. Buying $100 in military supplies is great for military suppliers, they get $100, doesn't do squat for anyone else. Buying $100 in food for the poor is great, not just for the food supplier who gets $100, but also for the phone company who gets the $100 debt owed them that would've been defaulted on otherwise plus saves $20 in collection costs.
Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.
Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.
Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.
The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
I think something else that happens when you give the people at the very bottom money that can only be spent on necessities is that it doesn't distort the market nearly as much as just giving money directly to a specific business would. That is, the decisions on what to do with the money you are now not spending on food are more natural decisions based upon actual demand (for the most part, there are always going to be ridiculous outliers like people on welfare purchasing luxury goods before they meet their basic needs and the like). If you just gave the money to grocery stores and told them to destroy an equivalent amount of product, it would create artificial demand that should raise prices for everybody else, while also opening up new avenues for cheating the system (if you don't tell them what items to destroy you open it up to them choosing whichever ones have the lowest profit margin for example).
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
I think this topic may have been beaten to death in the election thread, and I think a lot of the arguments that have been put forth do make sense, but I would still love to know how they arrive at such a high multiplier.
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
There is more to it, with foodstamps poor people get to eat and have the ability spend money on other things which create more demand in the market.
And frankly, "people get to eat" should be good enough.
If it isn't you may want to get your empathy chip looked at the next time you go in for your service check.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.
Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.
Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.
The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
Robert Barro has discovered that economics is not real science. OK then.
It is as much a science as weather forecasting or psychology; that is to say, we don't understand it completely and weird things happen that we can't explain afterwards with certainty.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
It also keeps a lot of money local; not much of it is piling up in the pockets of (generally) wealthy construction companies and construction supply companies. Just think about the suppliers of groceries (some local, some national) compared to construction supply (most big companies supplying big companies).
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
There is more to it, with foodstamps poor people get to eat and have the ability spend money on other things which create more demand in the market.
And frankly, "people get to eat" should be good enough.
If it isn't you may want to get your empathy chip looked at the next time you go in for your service check.
AMFE - I have said multiple times I think feeding people is important, and support food stamps for that reason, but the exercise is determining if food stamps really are good even if you don't care about feeding people.
I think your answer doesn't work, because the poor can just buy food and the government can buy other goods to destroy or use.
So far, I think the answer is probably related to lower emergency healthcare costs and crime rates, along with making people market participants. I would love to know the answer on how they game our so high though.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Given the eagerness of the powers that be to aim the free money bazooka at anything resembling a failing giant bank, the incentives for those running them aren't to try to limp along through troubled times, but instead to blow themselves up spectacularly.
But remember kids, moral hazard is what happens when a single parent gets $10 more per week in extra food stamp money.
Learned folks, how is he wrong, if he is?
There is still incentive not to blow up your bank and be seen as a failed leader and poor banker/businessperson.
At the same time, extra food stamp money is good stuff and would be a big positive. I honestly don't care if I get hit with $10/week extra tax (although I'd certainly feel it) if I knew it was going to the impoverished.
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I don't understand why you would even want to buy and then destroy food. Is it a thought exercise meant to demonstrate something, or what?
It was a thought exercise about the impact of spending federal $$$$ on either food stamps or infrastructure (which both sides agree is a worthy cause) that some people got emotional about (which was kind of the opposite of the point, no one was seriously proposing it, just comparing the economic impact of burning food to giving foodstamps).
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From a strict "dollars go here" sense, it doesn't matter who spends the money really, in the macro sense I'm not sure there's much of a difference if you increase G instead of C
Feeding people has extra effects which were previously stated (lower crime, lower heath costs, fed workers are better workers), though I'm not sure if those effects are included in the numbers. For just the basic multiplier though, compared to infrastructure spending the poor will spend more, vs doing infrastructure where 1) not all of the money goes directly to people who will spend it and 2) they are likely to have a higher average standard of living and so their propensity to save is higher, and margins on food are, I would imagine, lower than construction too, so that would cause the numbers to end up higher
AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
He's trying to understand how food stamps are good or something I think.
I mean, burning food, feeding people.
There's an inherent good in one of those things so I'm not sure of his point.
Maybe finding a reason to try to sway fiscal conservatives on the SNAP program? Is that where this started, @Spacekungfuman? I've been in and out all day so I'm at a loss for the impetus.
Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two.
Gathering evidence is challenging. In the data, transfers are higher than normal during recessions but mainly because of the automatic increases in welfare programs, such as food stamps and unemployment benefits. To figure out the economic effects of transfers one needs "experiments" in which the government changes transfers in an unusual way—while other factors stay the same—but these events are rare.
Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.
The administration found the evidence it wanted—multipliers around two—by consulting some large-scale macro-econometric models, which substitute assumptions for identification. These models were undoubtedly the source of Mr. Vilsack's claim that a dollar more of food stamps led to an extra $1.84 of GDP. This multiplier is nonsense, but one has to admire the precision in the number.
Robert Barro has discovered that economics is not real science. OK then.
It is as much a science as weather forecasting or psychology; that is to say, we don't understand it completely and weird things happen that we can't explain afterwards with certainty.
Maybe it shares some issues with weather or psych but honestly, economics is completely dominated by politics because there's nothing to force any intellectual rigor. You ask an economist a question and after throwing a few charts with sloping lines at you, you get whatever answer is most politically convenient. Barro's on the right track saying that we need a hundred more Great Recessions to figure out what's actually going on, but immediately sits back and declares the multiplier nonsense because he finds it politically inconvenient to admit that food stamps may be beneficial.
If you want a more general example, over the past few years I'm starting to get the impression that a $2T spending stimulus and 5% NGDP targeting would have made a huge difference in unemployment, because it makes sense to me after reading Krugman and Yglesias and whoever else. Unfortunately, "makes sense to me" is not science, and the Austerians have just as good a case that it "makes sense" that something something belt-tightening is the solution, and furthermore there really isn't any ability to run an experiment that would settle the issue the way we did with evolution or relativity. (This is, of course, discounting the possibility that there really is a good way to tell and it's just buried under the bullshit, like we're playing Mafia with the mob controlling the vote on Day 1.)
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
There is more to it, with foodstamps poor people get to eat and have the ability spend money on other things which create more demand in the market.
And frankly, "people get to eat" should be good enough.
If it isn't you may want to get your empathy chip looked at the next time you go in for your service check.
AMFE - I have said multiple times I think feeding people is important, and support food stamps for that reason, but the exercise is determining if food stamps really are good even if you don't care about feeding people.
I think your answer doesn't work, because the poor can just buy food and the government can buy other goods to destroy or use.
So far, I think the answer is probably related to lower emergency healthcare costs and crime rates, along with making people market participants. I would love to know the answer on how they game our so high though.
I think that misses the point that if you give the poor foodstamps, they're going to still spend their other money on other essentials/near essentials compared to just buying/burning those other essentials/near essentials which also impacts all the costs you mentioned plus things like improving education (maybe the family can get one more person through college with the extra money + extra work, where it was just out of reach before), improving their earnings potential (maybe they can afford a cheap car so their job opportunities open up, generating more money), etc.
It's sad, but money does solve a lot of problems.
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There's no difference between eating food and burning it.
Except, of course, one leads to people being fed, which leads them to being able to do other shit or other shit better or to spending their money on something else.
The current economic crisis has us swimming in experiments.
And the experiments turn out differently depending on how salty your local water is. You have ten variables and two equations, the answer is whatever you want it to be.
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sportzboytjwsqueeeeeezzeeeesome more tax breaks outRegistered Userregular
The current economic crisis has us swimming in experiments.
There is also weather data out there. Weather is a science. It is understood (for the most part). There are still things that cannot be predicted or always explained with certainty. We just can't be that precise (yet).
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
There's no difference between eating food and burning it.
Except, of course, one leads to people being fed, which leads them to being able to do other shit or other shit better or to spending their money on something else.
The current economic crisis has us swimming in experiments.
And the experiments turn out differently depending on how salty your local water is. You have ten variables and two equations, the answer is whatever you want it to be.
How do they turn out differently? Which ones are you talking about here?
There is also weather data out there. Weather is a science. It is understood (for the most part). There are still things that cannot be predicted or always explained with certainty. We just can't be that precise (yet).
Actually weather is incredibly hard to understand and the largest issue with weather is it's too dependant on small factors that can't be measured. And even then, weather prediction is pretty damn good as long as it's short-term. Long term the numerical methods used to do predictions start to breakdown as assumptions stop holding.
If you want to get right down to it, the main issue with weather is there ISN'T enough information out there.
The current economic crisis has us swimming in experiments.
And the experiments turn out differently depending on how salty your local water is. You have ten variables and two equations, the answer is whatever you want it to be.
How do they turn out differently? Which ones are you talking about here?
He's trying to understand how food stamps are good or something I think.
I mean, burning food, feeding people.
There's an inherent good in one of those things so I'm not sure of his point.
Maybe finding a reason to try to sway fiscal conservatives on the SNAP program? Is that where this started, @Spacekungfuman? I've been in and out all day so I'm at a loss for the impetus.
Yes. It started as a response to someone saying that food stamps can be justified on economics alone. I want to know if that is true (in which case, it is a great argument to use against conservatives) or if the economics are the same as any direct spending or transfer program.
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AManFromEarthLet's get to twerk!The King in the SwampRegistered Userregular
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Learned folks, how is he wrong, if he is?
And it's been pretty clearly shown that Mr. Bigshot (or Mrs. Bigshot) do not create 'value' in the economy proportional to their pay. If CEO's earned 300x the income of people in their company, but then ran out and spent it all like their cleaning staff would have to the situation would be self correcting (you'd create demand which would force people to raise their frontline employees hours and wages) but they don't and so whenever you see these huge paychecks it means the economy missed out on a boost. I mean, it's better than if the company itself had kept it in its coffers (which is the real problem we're having these days) but still not great.
I'm trying to focus on the incentive alignment problem. Shareholder hiring of management always has the twofold problem of (1) no generally uniform interest (Arrow's theorem), (2) free-rider problems in management quality. Both of these would imply that firms that raise funds via equity would perform best if there is, in practice, one very large stakeholder with all the power and ability to extract most of the return on better management, since there is now one dominant interest and mostly-internalized free-rider externalities. I'm happy to see that you say that this is, indeed the case.
But if so, without effective minority power, minority stakes are de facto just debt that is indexed to the worth of the firm itself. There is no reason why this indexation should be done at all. If the very large stakeholder receives all the marginal return on slightly better management, then their interest in better management should be yet greater. Hence: aligning the residual claimant with the lead investor. But a firm that raised some funds through equity to one very large stakeholder is, more or less, a firm that simply sold itself to a single rich owning entity with capital to throw around. One may as well dispense with the illusion of partial equity interests altogether.
Pursuing this line of thought leads one to the conclusion that the economy would be composed mostly of bank-led conglomerates, which it is worth recalling is, in fact, what Japanese and Korean economies did look like for a very long while; it's not an impossible model. But of course then there start to be more antitrust inefficiencies as each conglomerate gets bigger.
I can only assume that a bunch of really smart and attentive lawyers DO put such stipulations into a lot of contracts, and some people simply command such clout or have such connections that they can sign up 'without a pre-nup' as it were, and while I'm sure that goes swimmingly a lot of the time (when your years take is seven or eight+ figures, I'm sure even 10-50 million is just padding at that point for many of them), the ones where shit blows up spectacularly and the person responsible still comes out $Texas ahead make for great, incindiary stories.
So having read the last few pages and thought about it more, does anyone have how these possible exceptions stand out against the norm? Do many/most CEOs rock solid gold/platinum parachutes and just ache to be canned for any reason so they can ride off into the sunset on a gold plated private jet, or is it a one in a hundred/thousand/whatever perfect storm of fuckmuppetry that lets people get away with it now and then, but since it makes good news it gets over reported?
I guess what I'm asking is, does it seem to be the status quo (in which case why the shit aren't more companies including "do good works or GTFO" clauses?) or notable exceptions. The 'winning the lottery' of business, as it were.
CEO's spending habits aren't really the problem, its a pay as a function of productivity. At least as the orthodox models assume. High wage inequality could create volatility [as discussed shortly in the labor thread] but there are still enough high wage earners that this is unlikely without some sort of organizing force that correlates the investment decisions of 300,000+ people.
Unfortunately determining the productivity of a CEO is problematic due to [iirc] some things we have discussed in the thread already. This however, is unrelated to the Atrios quote and deals more with macroeconomic stability rather than microeconomic incentive compatability
Re: The Atrios quote.
Its kinda right and kinda wrong. The free money bazooka isn't really pointed at the banks because we think they don't want to limp along, but because their ability to limp along is beholden to their creditors willingness to keep money in the system. If people keep their money in the system they generally do fine and limp along. If people see the bank limping along and withdraw their money the banks fails. One of the reasons we point the free money bazooka is to say "don't worry that a limping along bank will fail". Even though we may ideally want the banks to fail if they do fail; if we, at the end of the day, don't fire that bazooka, we aren't credible in the future threat to fire the bazooka to ensure people don't withdraw their money... and so they will withdraw their money more often and so banks that are attempting to limp along will fail more.
There is a problem of moral hazard in that if you give someone too much money, or ensure that they have access to money if things go poorly, that you cannot stop them from behaving poorly. I.E. since you're insuring against their risk you're shifting their optimal behavior to be more risky, and/or you're inducing laziness (which is essentially the same thing mathematically). But this is probably less an issue with banks and the free money bazooka because it seems to be a lot easier to structure loan conditions to align with the interest of equity* than it is structure executive compensation to align with the interests of equity.
*That is, the free money bazooka tends to insure the creditors and screw equity and since we can either require collateral or a requisite portion of own capital investment we can more easily ensure good behavior on the part of equity. In addition we can say "well you get the free money bazooka, but we own the company now" which removes the moral hazard problem of getting the free money with respect to equity. But management has even more limited liability, tends to invest none of its own capital into the project, and puts up no collateral, and no the opportunity cost of the time they spend working at the company does not count.
Ronya, i will get back to our discussion in a bit. But i need to respect my self appointed schedule if i want to pass my cores(and the above discussions actually fit into my studying a bit more).
Aiming the bazooka at the bank is the same as aiming it as the creditors. In general, the bazooka comes with wiping the equity of the shareholders out and new equity arrangements. Sometimes it comes with restructuring requirements [but this can be expensive when there are preexisting contracts with management] for management.
If the bank has enough money to pay its creditors and they demand they money it has to comply. The question is does the possibility of the bazooka change the bankers incentives to behave and the answer is, as far as i can tell, "only so much as the bankers have perverse incentives compared to equity". If the bazooka is preserving the correct incentives for equity then the problem isn't the bazooka.
Well, since most businesses are small businesses, I'm guessing that most CEOs don't have ridiculous golden parachutes simply because most of those businesses couldn't afford it even if they wanted to provide them. And for small businesses the equity and management tend to be a lot closer together (often being self, friends, or family), at least in the cases where it isn't being too heavily funded by venture capital. Contrast this with large publicly traded companies, where sometimes you have large shareholders running the show (like with your Microsofts), and sometimes not.
I don't know how prevalent excessive compensation is in the subsection of large companies, but there have been plenty of headscratching examples that come out regularly suggesting that it happens a lot more than it should. And the companies involved tend to be big enough and provide huge enough compensation in both good and bad situations that it is easier to take notice. So even if this problem only shows up in a numerically small portion of the population of CEOs, the cases where it does show up are often large enough that it's a nontrivial issue.
Your typical "golden parachute" severance package is referred to as a double trigger, because it requires the two triggers of (1) a change in control of the company and (2) that the executive be fired without cause or quit for good reason (basically under circumstances where the company is forcing you out, like changing your title, not paying you, or making you move away from your home). If both occur, then you get some amount (usually a multiple of salary and/or bonus). Most of the huge golden parachutes you hear about are the result of options and other equity awards vesting immediately. The idea behind a golden parachute is to ensure that you won't be fired right after you help to get your company bought by someone else. The other type of payments you hear about as "golden parachutes" (although they aren't technically parachutes) are really big ordinary severance provisions. Again, the numbers usually only get so big because of accelerated vesting of equity. Keep in mind that the equity would have been earned if they continued employment, so most of the parachute is really just getting money you otherwise would have gotten on a faster timeframe.
Not directly related, but I actually wrote the largest retention bonus plan in world history. It was in the mid 9 figures, payable to a single person, over 5 years, with the full amount accelerating if the executive was terminated before the end. The guy is a really really good businessman, but noone is that good. . .
I generally think food stamps are a good program, except in areas where they get so concerned with fraud prevention that they raise the cost of administration significantly.
That said, there are a lot of very smart and savvy people (including a number of tax professors at NYU law) who do not like the program at all, especially as compared to other welfare programs, such as the EITC.
I understand that putting money that can only be used to buy food in people's hands is efficient in that all of it gets immediately spent, pumping money into the food production and sales sectors. I also understand that food stamps allow people to spend their other money on items other than food, and that removing the element of desperation that imminent starvation creates allows for more rational decision making about how to spend one's money and what jobs to take. All of that said, it seems to me that most of the revenue effect could be replicated through any number of transfer programs that put money directly into the economy, including my somewhat silly example of buying food to burn, but also increased military spending (to purchase manufactured goods). Please explain why the revenue effect of food stamps would be so high, especially in a world where we literally pay farmers to grow less food.
I am not arguing against food stamps, just that any position attempting to justify food stamps from a purely economic viewpoint, instead of one which values making sure people are fed, leaves me skeptical. I'm happy to be shown why I am wrong.
To be clear, the question is why is putting money in the hands of people who will spend it better than just putting the money directly in the economy at the lowest level (i.e., retail)? Is it better to pay someone to dig and fill in holes so we have an excuse to give him a check (or to just hand him money with no work done) vs giving that money directly to the stores he would have shopped in, in exchange for goods which the government can then use (or even destroy)? If so, why?
FWIW, Robert Barro would also like to know
Also, the shuttling to and fro between "evidence is hard" and "evidence is unreliable" and "but here's evidence pointing in the direction I want" is ... um.
Robert Barro has discovered that economics is not real science. OK then.
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
There is more to it, with foodstamps poor people get to eat and have the ability spend money on other things which create more demand in the market.
And frankly, "people get to eat" should be good enough.
If it isn't you may want to get your empathy chip looked at the next time you go in for your service check.
It is as much a science as weather forecasting or psychology; that is to say, we don't understand it completely and weird things happen that we can't explain afterwards with certainty.
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AMFE - I have said multiple times I think feeding people is important, and support food stamps for that reason, but the exercise is determining if food stamps really are good even if you don't care about feeding people.
I think your answer doesn't work, because the poor can just buy food and the government can buy other goods to destroy or use.
So far, I think the answer is probably related to lower emergency healthcare costs and crime rates, along with making people market participants. I would love to know the answer on how they game our so high though.
There is still incentive not to blow up your bank and be seen as a failed leader and poor banker/businessperson.
At the same time, extra food stamp money is good stuff and would be a big positive. I honestly don't care if I get hit with $10/week extra tax (although I'd certainly feel it) if I knew it was going to the impoverished.
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It was a thought exercise about the impact of spending federal $$$$ on either food stamps or infrastructure (which both sides agree is a worthy cause) that some people got emotional about (which was kind of the opposite of the point, no one was seriously proposing it, just comparing the economic impact of burning food to giving foodstamps).
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Feeding people has extra effects which were previously stated (lower crime, lower heath costs, fed workers are better workers), though I'm not sure if those effects are included in the numbers. For just the basic multiplier though, compared to infrastructure spending the poor will spend more, vs doing infrastructure where 1) not all of the money goes directly to people who will spend it and 2) they are likely to have a higher average standard of living and so their propensity to save is higher, and margins on food are, I would imagine, lower than construction too, so that would cause the numbers to end up higher
I mean, burning food, feeding people.
There's an inherent good in one of those things so I'm not sure of his point.
Maybe finding a reason to try to sway fiscal conservatives on the SNAP program? Is that where this started, @Spacekungfuman? I've been in and out all day so I'm at a loss for the impetus.
Maybe it shares some issues with weather or psych but honestly, economics is completely dominated by politics because there's nothing to force any intellectual rigor. You ask an economist a question and after throwing a few charts with sloping lines at you, you get whatever answer is most politically convenient. Barro's on the right track saying that we need a hundred more Great Recessions to figure out what's actually going on, but immediately sits back and declares the multiplier nonsense because he finds it politically inconvenient to admit that food stamps may be beneficial.
If you want a more general example, over the past few years I'm starting to get the impression that a $2T spending stimulus and 5% NGDP targeting would have made a huge difference in unemployment, because it makes sense to me after reading Krugman and Yglesias and whoever else. Unfortunately, "makes sense to me" is not science, and the Austerians have just as good a case that it "makes sense" that something something belt-tightening is the solution, and furthermore there really isn't any ability to run an experiment that would settle the issue the way we did with evolution or relativity. (This is, of course, discounting the possibility that there really is a good way to tell and it's just buried under the bullshit, like we're playing Mafia with the mob controlling the vote on Day 1.)
I think that misses the point that if you give the poor foodstamps, they're going to still spend their other money on other essentials/near essentials compared to just buying/burning those other essentials/near essentials which also impacts all the costs you mentioned plus things like improving education (maybe the family can get one more person through college with the extra money + extra work, where it was just out of reach before), improving their earnings potential (maybe they can afford a cheap car so their job opportunities open up, generating more money), etc.
It's sad, but money does solve a lot of problems.
TylerJ on League of Legends (it's free and fun!)
The current economic crisis has us swimming in experiments.
There's no difference between eating food and burning it.
Except, of course, one leads to people being fed, which leads them to being able to do other shit or other shit better or to spending their money on something else.
And the experiments turn out differently depending on how salty your local water is. You have ten variables and two equations, the answer is whatever you want it to be.
There is also weather data out there. Weather is a science. It is understood (for the most part). There are still things that cannot be predicted or always explained with certainty. We just can't be that precise (yet).
TylerJ on League of Legends (it's free and fun!)
Thank you.
How do they turn out differently? Which ones are you talking about here?
Actually weather is incredibly hard to understand and the largest issue with weather is it's too dependant on small factors that can't be measured. And even then, weather prediction is pretty damn good as long as it's short-term. Long term the numerical methods used to do predictions start to breakdown as assumptions stop holding.
If you want to get right down to it, the main issue with weather is there ISN'T enough information out there.
http://krugman.blogs.nytimes.com/2012/07/20/hated-in-estonia/?r=1
Estonia: Austerity success story, overblown, or victim of confounding variables?
Yes. It started as a response to someone saying that food stamps can be justified on economics alone. I want to know if that is true (in which case, it is a great argument to use against conservatives) or if the economics are the same as any direct spending or transfer program.