Book Review: Dark Age Ahead by Jane Jacobs

dark_age_aheadI judged this book by the arresting title Dark Age Ahead, and decided that – in my current frame of mind – I had to read it.1

Jane Jacobs wrote this is 2004, and the book has a bit of the feel of a time capsule – as her current events examples stem from 2001 to 2002. Jacobs’ strength as a thinker and writer is that she can extrapolate from events in her own life, close observations, and from the newspaper, and illuminate patterns and principles of any age. She’s not academic, and she depends on telling anecdotes. Some may see that as a weakness, although I feel it’s a strength of her work. Her ‘big ideas’ tend to be right, and written in a way that an educated, but non-expert, reader can understand.

The central thesis of this book – and I tend to agree – is that invisible but essential strands of our strong society2are fraying at the edges. Her list of essential strands are not necessarily somebody else’s, but hers seem worthy of consideration, and worry. At the beginning of 2017, when the fraying seems particularly acute, its interesting to note, again, that Jacobs published her book in 2004.

So what is unraveling?

Households

Critiques of the breakdown of the nuclear family are commonly heard from the Right, but Jacobs does not mean exactly the same thing here. A main concern, she develops in the chapter, is the extreme rise in the housing prices, beyond the rise of household incomes. Now that’s interesting, since her book predates the housing crash by four years, although it was obvious to many in the early 2000s that we were on an unsustainable path brought on by low interest rates and easy credit. Her other concern – which will not surprise Jane Jacobs fans – is with the pernicious affects the automobile has had on the development of suburbs and the undermining of public transportation infrastructure.

jane_jacobsCredentials vs. Education

The replacement of a true education in favor of a more “practical” set of market signals through degrees offered by institutes, community colleges and universities. The focus of educational institutions has become to offer a set of letters that indicate preparation for a specific job, rather than passion about learning or knowledge. We can only imagine how justified Jacobs would feel about the $25 million settlement made by the President-elect with respect to his fraudulent “University.”

Science Abandoned

Jacobs has a specific complaint here about the “engineers” who deal with traffic congestion – a particular obsession of hers – but we see plenty of evidence lately of the denigration of science and the scientific method. I can’t tell if the problem has gotten better or worse (probably it’s mixed) but we suffer when society fundamentally doubts scientific conclusions or discounts the need for a scientific approach.

Dumbed Down Taxes 

Jacobs addresses here the problem of tax collection at the Federal level, for example, when certain problems must be solved at the local level. Or vice versa. The result is decision-making with the wrong branch or level of government. In my home state we are plagued by the problem of school funding, which is taxed at the local level, legislated at the state level, but clearly failing standards at the federal level.

Self-Policing Subverted

Specific industries sometimes do best when they self-regulate, recognizing their collective interest to seek best practices and internally police or punish wrong-doers. While acknowledging that truth, Jacobs points out examples – from architecture to police departments to accounting firms – where deeply problematic practices arise from bad self-policing.

Are these the root causes of the rest?

In her introduction, Jacobs asserts but does not prove that these five negative trends listed above over time increase the chance of a major societal breakdown. And she means “Dark Age” literally. Like, post-Roman Empire type reversion-to-chaos.

She also asserts, but does not prove, that these five are not just as consequential as a more typical list of “society-destroying trends” such as racism, environmental destruction, crime, voter apathy/distrust, and the widening gulf between rich and poor, but that they are causal. Meaning, the racism, environmental destruction, stuff etc are actually symptoms of the societal unravelling, rather than the root causes.

I don’t know if she’s right. But there’s good stuff there to chew on.

 
Please see related posts

Book Review of The Death and Life of Great American Cities by Jane Jacobs

Book Review of Cities and The Wealth of Nations by Jane Jacobs

Book Review of Systems of Survival: A Dialogue On The Moral Foundations of Commerce and Politics by Jane Jacobs

Conflict of Interest And Moral Codes

 

 

 

Post read (316) times.

  1. My current frame of mind also has me reading Plutarch’s Fall of the Roman Republic and seeking out any signs that the center will hold, and that things will not fall apart.
  2. Jacobs is a Canadian who lived a significant portion of her adult life in the United States, so her “strong society” comments could be considered aimed at both countries.

The Link Between Health and Wealth

hans_roling_dataMy wife (a doctor) likes health, and I like money. In that sense, our marriage represents the intersection of two things everybody wants more of.

The biggest predictor of good health and a long life is how wealthy you are. This is often true – with plenty of variation of course – at the individual level. The correlation is even stronger at the societal level. Conversely, poverty in society correlates highly with illness and death.

To see the link between money and health most memorably, you really should look up – on your favorite video playback device like your iWatch (do those still exist?) – the YouTube videos of Hans Rosling.

Rosling, a Swedish data scientist, animates massive time series of national data sets that show the change in the life expectancy of people, as incomes rise, over time. In one short 4-minute video you can see where we humans were – grouped by country – in the year 1800. There’s a big clustering of national populations with an average lifespan of around 40 years in 1800. The year 1800 was only 150 years past Thomas Hobbes’ description in Leviathan of the life of man as “poor, nasty, brutish and short.”

Rosling then rolls the animation forward in time, and we see that as incomes rose over the past two centuries so did lifespans. First Europe and North America move upward in lifespan as incomes rise, but then eventually in the second half of the Twentieth Century huge populations in Asia and Africa rise in both average income and expected longevity.

It’s really much cooler to watch than it sounds. (Or maybe I need better hobbies? You tell me.)

The video is also a great reminder that no matter how much we may despair about the direction of the world on a day-to-day and week-to-week basis, on at least a decade-by-decade scale, we’ve made extraordinary strides as a species.

Most countries in the world – especially the rich ones – soar to above 75 years life expectancy by 2010. The wealthier we get, the longer we live. This is an extremely strong reason for optimism about the future. We have pulled ourselves up from the Hobbesian morass.

hans_roling
Hans Roling

For academic types and data nerds I’ll briefly acknowledge that the causal relationship between income and life expectancy is considered poorly understand by scholars. It’s a classic chicken and egg question – do you need wealth to become healthy or health to become wealthy? The relationship over time is so clear, however, that we can say this: We will live longer, if we can all figure out how to get richer.

Ok, that’s the happy story, and I think is a long-run optimistic thought.

Health and Wealth at Home

The glass is also only half full, however.

The link between wealth and health – or if you prefer that half-empty glass, the link between poverty and death – not only correlates over time, but also in specific locations.

In August of this year, my home city of San Antonio released its own powerful data visualization map showing the relationship between health and money for specific places at a moment in time.

The map shows color-coded average life expectancy in San Antonio zip codes, for which we also have average income data.

In zip codes directly East and West of my house, to examine some specifically poor neighborhoods, people have a life expectancy 15 years lower than people who live in the wealthiest zip codes of my city. 15 years on average! How big is that gap?

The 15 years on average difference between San Antonio zip codes is bigger than the difference between the average life expectancy in The United States (79.3 years) and Ethiopia (64.8 years), according to the World Health Organization. The health differences between neighborhoods in my city seem to me nasty and brutish. The disparity is an indictment of how wealthy – in the truest sense of the word – we really are today.

And while San Antonio just happens to be the most unequal city in the country by zipcode comparison, according to a report by the think tank Economic Innovation Group, this kind of health and wealth disparity is found all over. Fort Worth, TX ranks third in the nation in zipcode disparity. Houston’s Tarrant County ranks 12th among counties nationwide for zip code inequality.

Policy implication

The opening move of the Trump administration and the next Congress “on Day 1” will be the repeal of the Affordable Care Act (aka Obamacare.) This is just a current example of one policy issue at the intersection of health and wealth.

affordable_care_actPlease believe me when I say I’m agnostic overall about whether that’s a good or bad move, in the long run. Its repeal and/or replacement might lead to something better. I know more or less what ACA supporters intended, which was an attempt to blunt the effects of poverty on health outcomes. I know many intended beneficiaries found the rollout clumsy, coercive, and surprisingly expensive. I know many opponents feel socialized medicine like this makes us poorer.

The bigger question

That unhappiness with the ACA notwithstanding, the biggest question is not necessarily the ideal form of government-subsidized healthcare. That’s kind of a distraction, actually.

In my mind the central issue is whether poverty, and the faster death that comes with it, are ok.

Are we ok with this? Are we ok in the short run with a life-expectancy difference comparable to the gulf between the United States and Ethiopia? That gap exists between me and my neighbors just down the street.

I know what the long-term solution is at the intersection of health and wealth, and I’m really happy about that. It’s the short and medium term that we haven’t solved.

 

A version of this post ran in the San Antonio Express News and Houston Chronicle

 

Please see related posts:

The Map: Inequality in America – From the Washington Post

Kooky and Good Idea To Address Inequality

Book Review: Plutocrats by Chrystia Freeland

Video: Wealth Inequality in America

 

 

Post read (1264) times.

Book Review: Between The World And Me

Ta-Nahesi Coates wrote Between The World And Me as a personal intellectual and political history, and guide for his son, for thinking about race in the United States. The book also might seem to serve as an updated guide for the rest of us to make sense of the mess of race relations in the United States.

We need the help. Along with rising inequality and rising oceans, rising racial tension is a defining Top-3 issue of our time.

We each understand the race issue in this country differently. The latest fault lines run between those who believe #BlackLivesMatter and those who respond that #AllLivesMatter. Some see an undeclared war on unarmed black men, while others see equal and compelling evidence for the disrespect and endangerment of uniformed police officers. It sometimes feels like the misunderstanding between these sides must be the worst ever. A little bit of history shows that, no, things may be bad now but they were actually even worse before.

Coates has a stark, powerful, way of describing race relations.

Right now it’s about – and always has been about – control over black bodies. Coates’ long thesis statement below:

“Here is what I would like for you to know: In America, it is traditional to destroy the black body – it is heritage. Enslavement was not merely the antiseptic borrowing of labor – it is not so easy to get a human being to commit their body against its own elemental interest. And so enslavement must be casual wrath and random manglings, the gashing of heads and brains blown out over the river as the body seeks to escape. It must be rape so regular as to be industrial. There is no uplifting way to say this. I have no praise anthems, nor old Negro spirituals…

For the men who needed to believe themselves white, the bodies were the key to a social club, and the right to break the bodies was a mark of civilization. ‘The two great divisions of society are not the rich and poor, but white and black,’ said the great South Carolina senator John C. Calhoun. ‘And all the former, the poor as well as the rich, belong to the upper class, and are respected and treated as equals.’ And there it is – the right to break the black body as the meaning of their sacred equality. And that right has always given them meaning, has always meant that there was someone down in the valley because a mountain is not a mountain if there is nothing below.

You and I, my son, are that ‘below.’ That was true in 1776. It is true today. There is no them without you, and without the right to break you they must necessarily fall from the mountain, lose their divinity, and tumble out of the Dream. And then they would have to determine how to build their suburbs on something other than human bones, how to angle their jails toward something other than a human stockyard, how to erect a democracy independent of cannibalism. But because they believe themselves to be white, they would rather countenance a man choked to death on film under their laws. And they would rather subscribe to the myth of Trayvon Martin, slight teenager, hands full of candy and soft drinks, transforming into a murderous juggernaut.”

So, Coates isn’t going to sugarcoat this for us.

Malcolm vs. Martin

I can’t remember if Coates actually ever mentions Martin Luther King by name in his book (I actually kind of doubt it) but one of the unspoken messages of Between The World And Me is a clear rejection of the King line of thought.

between_the_world_and_meI know it’s too simple to set up Malcolm X and MLK as the two competing branches of black thought in the twentieth Century, but if you’ll grant me that simplification, Coates roots himself deeply in Malcolm’s camp. First, by crediting him as the initial spur for Coates intellectual journey. Next, in naming his alma mater Howard University “The Mecca,” he references the need and centrality of a gathering point for blacks other than in the Judeo-Christian world. Finally, the enemy Coates identifies most strongly throughout his book, is “The Dream.”

The Dream of course is what all us are living – an imagined world of increasing prosperity, justice, keeping our head down, following the rules. For so-called whites1 in America, the Dream can be achieved through going to the right schools and living in the safe suburbs.

Coates recalls being taught in school about the King-inspired Freedom Marches and watching images of a seemingly endless series of beating, clubbings, water-cannoning, and dog-attacks on a compliant, non-resistant, group of blacks.

“The black people in these films seemed to love the worst things in life – love the dogs that rent their children apart, the tear gas that clawed at their lungs, the firehoses that tore off their clothes and tumbled them into the streets. They seemed to love the men who raped them, the women who cursed them, love the children who spat on them, the terrorists who bombed them. Why are they showing this to us? Why were only our heroes nonviolent?”

Maybe, as Coates believes, the message from teaching about the Freedom Marches is a disempowering one. The Dream, in Coates’ telling, is both a comfortable White illusion, and a Black prison of self-imposed subservience. It’s what allows white America to control black bodies. To embrace the Dream therefore – a word that we’ve made short-hand for MLK, the man who had The Dream – is to be complicit in the well-known deaths of Trayvon Martin, Michael Brown, Eric Garner, Freddy Gray, and Sandra Bland, in addition to of course the historical murders of Emmett Till, Medgar Evars, and the children inside the 1963 Baptist Church.

Ta_Nahesi_coates

It’s a strong indictment of King’s legacy, even if Coates never mentions the man’s name.

My problem with the book

Coates has forgotten more about writing than I will ever learn, nevermind obviously his specialization in black intellectual history. His writing is amazing. He wins prizes for his stuff in The Atlantic more often than I visit the dentist. So I criticize this book at my peril. However…

Something I selfishly wanted from reading Between The World And Me was the feeling of walking around afterwards vibrating with my new knowledge as the most “Woke” white guy around. I’d read this book and then see race relations with a fresh perspective, offering cool insights and radical sympathy. It’s unfair, but I wanted transformation and I didn’t have that moment. Maybe I was so “Woke” already that I couldn’t improve upon myself? No, obviously not. Maybe I can’t feel the radical sympathy because the cognitive dissonance with my own whiteness would be too far a stretch? I don’t know. But that selfish desire and consequent disappointment affected my view of the book. Which is to say a main problem with this book was my high expectations.

I was more blown away by Narrative of the Life of Frederick Douglass and Taylor Branch’s trilogy on the MLK years than I was by Between The World And Me. Maybe those are unfair comparisons, between absolute all-time classics and a book that just came out last year. But Coates is our best contemporary writer on black America, and a MacArthur winner, so it’s not totally unfair either. I didn’t find myself transformed or breathless or wanting to tell everyone I know to go out and read it. I do think every US Citizen needs to read Taylor Branch’s trilogy in order to vote or to qualify to collect social security. I don’t have that same feeling about Between The World And Me.

Not The audience?

Now, maybe I wasn’t supposed to get that inspired feeling because I’m not the intended audience for Coates’ book. Coates uses the 2nd person voice throughout to address his son specifically, and in that sense this could be seen as a more personal book, or at least a book more directed at Coates’ inner circle than, say, me. His project may not be, in the end, to make so-called white, ex-finance guys, “woke.”

But I do actually think I’m one of his main audiences. He’s in the Style section of the New York Times this month, and I am the Atlantic-reading demographic.2 But what is he doing there if not trying to capture the likes of me?

Coates will remain a top voice on these issues in the decades ahead, so a lot is riding on whether he rises to the occasion. Like I said, we certainly need the help.

 

Post read (192) times.

  1. Coates makes the interesting point every time he mentions “whites” that this “so-called” racial designation is as invented as any other. Today’s “Whites” used to be called the Irish, or Jews, or Norweigans, or Italians, or Scots, any number of whom would resist common cause with any other now-designated “white” group. It just became convenient and powerful more recently to unite “whites” under a single designation, for the purposes, Coates posits, of control of black bodies. This seems, unconsciously, true.
  2. He’s also the latest comic-book author for The Black Panther, which obviously also makes him cooler than me in every way.

School Finance FrightMare in Houston

choice_between_two_evilsVoters living within the Houston ISD catchment area on November 8th face a “Scylla and Charybdis” vote – and it’s not Clinton vs. Trump – but rather equally terrible public school funding choices.

What’s happening in Houston gives Texans everywhere an insight into a complex problem with no easy solutions, as Glen Read the general manager of budgeting and financial planning for HISD explained to me in a conversation recently.

A “yes” vote on the ballot question in Houston will authorize “the board of trustees of Houston Independent School District to purchase attendance credits from the state with local tax revenues,” which means sending an estimated $162 million from the state’s largest school district to a state education fund, known as the Foundation School Program (FSP). It also means future payments from HISD in increasing amounts in future years, as Houston’s property values increase.

A “no” vote – barring legislative intervention this Spring – triggers something that has never yet happened in Texas, which is to separate commercial properties from HISD’s tax rolls and assign them to other school districts. Like I said, neither of these choices feels good.

houston_isdIt’s also an opportunity – albeit a painful one – for Texans to learn more about a financing system which the Texas Supreme court in their May 2016 ruling named “Daedelean,” “Byzantine,” “Augean,” and an “ossified regime ill-suited for 21st Century Texas,” while simultaneously declining to over-rule previous legislative decisions.

These upcoming payments from HISD have been mislabeled “Robin Hood” and “recapture.” But “Robin Hood” is a terrible nickname for this upcoming process, for two reasons, having to do with the definition of “wealthy” and for the specific meaning of “recapture.”

First, labeling HISD a “wealthy” district is odd. The “wealthy” designation that triggers HISD’s payment comes from a math formula – specifically the ratio of total real estate property values to student population, with a few adjustments to the population number for attendance rates plus specific student designations. The “wealthy” label does not take into sufficient account a measure that seems more important to me, like the fact that 76 percent of HISD kids are designated “economically disadvantaged.” Robin Hood – the mythical man in tights – did not after all make a habit of stealing from the poor.

augean

Second, also unlike our mythical Robin Hood that “recaptured” money does not necessarily get redistributed to poorer school districts. Now, this is the point where Texans everywhere should sit up and pay special attention. Right here. Ready?

HISD’s “recaptured” money goes into the state’s primary education fund – the FSP – but that money is not doled out subsequently to poorer districts. This is the key point. The math ratio of property value to student population determines which districts pay money in to the FSP and which districts take money out of FSP, but none of that determines whether the state, as a whole, allocates sufficient money to the FSP. In fact, as property values rise locally – and you, the taxpayer, pay more – you’re not really funding your local district, or even the poorer districts. You are relieving the state of the obligation to pay more for education. More money into the FSP from higher property values means less the state has to pay. That’s the finance trick you need to know.

And that’s really nice if you’re trying to save money at the state level, but not exactly Robin Hood-style redistribution, nor a great plan for funding great public education.

For these reasons, The Houston Chronicle editorial page has twice urged a “No” vote, and which would trigger either the never-before-enacted property-tax-separation method or daring the state legislature to try something different before July 2017 – when property rolls would shifted. To be clear, a “No” vote is a sort of game of financial chicken between the voters of Houston and the state, with unknown consequences.

We can do what we usually do about this type of thing, which is to shut off our brains in order to take comfortable refuge behind pre-existing ideological prejudices, and take potshots at the other side’s idiocy. But if you are under the impression that you could start a conversation about school finance with “All we need to do is…” then you are mistaken. This subject does not admit of easy solutions.

 

Hacking our way intelligently through the overgrown jungle of public school finance, we have to hold a number of contradictory thoughts in our head simultaneously. For what its worth, my process goes like this:

  1. The socioeconomic background of an individual student appears to affect student outcomes far more than funding-levels-per-student at a school or district. As a result, poor performance at poor schools and higher performance at wealthier schools can persist indefinitely, despite roughly equal funding-levels per student. “Social reproduction” – or a society with little economic mobility – can’t be undone easily by throwing more money at the problem.
  2. And yet, just giving up on the idea of economic mobility – our hope that poorer kids have a chance to get ahead in life through a combination of hard work and a good education seems – I don’t know, what’s the word? Maybe: Un-American?
  3. When we talk about public school finance in Texas, really what we’re talking about is educating poorer kids: 59 percent of kids in Texas public schools overall are classified “economically disadvantaged.” The school districts subject to ballot questions that I’m writing about this week and next week, in the Houston and San Antonio ISDs, educate 76 and 92 percent economically disadvantaged kids, respectively.
  4. To which I conclude that we can’t fix this quickly with more money, or by simply equalizing scarce resources, but at the same time, to not try to improve it some how, some way, some day is to resign ourselves to a bleak future of haves and have-nots with no end in sight.

I have no sodaedalean_mazelutions. I’m just trying to educate myself on one of the most complex finance problems out there.

I can see that the HISD ballot question is a terrible choice to make.

 

A version of this ran in the San Antonio Express-News and Houston Chronicle

 

Please see related post

The San Antonio ISD ballot question (upcoming)

 

Post read (116) times.

Why Wealth Inequality Matters – Plus CEO Pay Again

inequalityLast week I wrote about the sharp rise in super-manager pay throughout the 1990s, and specifically a funny (to me) quirk of stock option awards and bad math by corporate boards. The good news is I have a bunch more thoughts on the rise of super-manager pay and – but wait – Wait — WAIT! Listen. You Guys! Before you turn the page. This is important.

The rise of CEO pay is part of a larger topic.

You might have read last week’s post and thought, on the one hand, who cares what top executives get paid, that’s their business. And, on the other hand, it doesn’t apply to you.

I somewhat agree. I wish the rise of CEO pay applied to you and me, obviously, but jealousy can only get us so far.

Wealth Inequality

We – I don’t mean you as readers of a blog and me – but rather we as a society, need to have a serious discussion about “wealth inequality.”

I know I can’t make you think it’s important. Personally, I see rising wealth inequality as one of the top three most important political, moral, and economic issues of our time.

Believe me, I understand, even putting those two words – wealth inequality – together feels political. It feels ‘socialist.’ Also, it bears repeating that I consider myself a pretty hard-core capitalist. But I feel like – just as democracy depends on outspoken critics to make it stronger – capitalism too needs its critics in order to make it stronger.

Wealth inequality in this country seems like such a taboo topic – somewhere on the scale between sex and the surprising likeability of songs by the band Nickelback – that I feel the need to make the case for even talking about it.

Nickelback_is_good
Shhh…nobody mention that they actually LIKE Nickelback

So I say the sharp rise in CEO pay matters, specifically, right now, because wealth inequality matters.

Political insurgencies

Do you know what these bizarrely contentious Presidential elections of 2016 are actually about? I think I do. It’s about anger from people who resent the concentration of wealth and power in the hands of elites.

The surprising insurgency successes of the Presidential campaigns of Bernie Sanders, Ted Cruz, and Donald Trump each in their own way are “anti-Establishment.” A year ago, few would have given any of those three a serious shot at making it so far into primary season.

All three – Cruz, Trump and Sanders – tap into anger at how elites (regardless of whether you label them “Washington Insiders” as Cruz does or “Wall Street Fat Cats” as Sanders does, or “Sad-Pathetic-Loser-Fraud-Establishment” as I imagine Trump might) seem to have benefitted disproportionally at the expense of ‘regular people’ over the last thirty years.

What the anti-establishment insurgencies indicate to me is that old labels of “Left” and “Right” matter less right now than whether you identify as an “Insider” or an “Outsider,” or simply part of the “Powerful” or the “Vulnerable.” We know many people in the New Hampshire primary were torn between voting for Trump or Sanders.

The collective id senses some unfair proportion of wealth and power has concentrated at the top, at the expense of the bottom.

Meanwhile, folks at the top are surprised at this resentment. Folks at the top have embraced a narrative of meritocratic success. “We earned it. We worked hard. These rewards came to us through highly moral means, such as education, savings, delayed gratification, professional advancement, and investment. What are these Cruz/Sanders/Trump supporters even complaining about?”

In that context of inequality and resentment, properly explaining executive compensation matters tremendously. Depending on your explanation, you would favor a whole series of different political choices.

Back to CEO pay

So that’s why explaining the rise of super managers in my lifetime matters, at least to me. (Also, why the heck am I not a super manager?)

The market

One logical thing to say is that in a market system, supply and demand sets compensation to the “correct” market level. Executives get paid so much because their skills are in high demand and top managerial talent is in short supply, hence the ‘price’ of executive talent rises to a market-clearing level. If that happens to be over $10 million dollars per year, so be it, that’s just the labor market for top executives.

This tautology – the market pays $10 million because that’s where supply meets demand and where the market clears – has some elegance.

sanders_anti_market
Sanders sets his jaw against the problems of the market

And if that’s the explanation, and you don’t like inequality, then you might see ‘the market’ as something worth fighting, as I think Sanders and his supporters tend to do.

Increased corporate scale

The global scale at which corporations now operate creates tremendous efficiencies. Our organizations are profitable through combining technology with the cheapest global talent, both in the country (via immigrants) and out of the country (via offshoring). But if you believe CEOs are paid the big bucks on the backs of cheap labor, and domestic workers feel their wages undercut, then Trump’s plan to build a wall against that cheap labor starts to sound less insane than it really is, right?

trump_wall

Interlocking board members

Anybody who watches public companies knows that while corporate boards theoretically represent shareholders, in practice they represent the insider interests of corporate management and themselves. Board members – themselves often highly paid executives typically invited to join the board by the CEO – would not be so gauche as to limit top executive pay. It’s like a private club, and when you’re on the inside, you get paid quite well.

ted_cruz_not_likeable
Why is he always left out of the club?

I see this “club” explanation as the sort of “us vs. them” mentality which seems to fuel Cruz’ fire. The guy never gets invited to the club, like, ever. As his Senate colleague Lindsey Graham noted, “If you killed Ted Cruz on the floor of the Senate, and the trial was in the Senate, nobody would convict you.”

Lower taxes

Personally I think taxes explain everything in life. So, outside of the math errors of corporate compensation committee boards I described earlier, I believe the drop in marginal income tax rates leads directly to wealth inequality.

And I request of our leaders: please don’t raise taxes until after I’ve gotten paid for a few years like a super manager.

 

Please see related posts:

CEO Pay and the Options Math Error

Inequality in America – Video and Graphic

Inequality in America – The WSJ Video

Inequality in America – The Interactive Map

Yahoo Executive Compensation – It’s all about the stock awards

Executive Pay with Equity Awards – It takes a Buffett to push this agenda

 

 

Post read (1231) times.

CEO Pay-Rise: A Silly Math Mistake

ceo_options_payAn economics paper published last month in the National Bureau of Economic Research really fascinates me. Maybe that’s because I’m a fundamentally boring person? No, that’s not the main point.

Economists Kelly Shue and Richard Townsend set out to explain the sharp rise of executive pay in the ten-year period 1992 to 2001.

Think of super-manager CEOs like Robert Iger, Chairman and CEO of Walt Disney & Co., who received $76.8 million in total compensation last year, according to data compiled by Bloomberg. Or Marissa Mayer of Yahoo, who received $59.1 million in 2015.

The first thing to know is that this level of ‘super-manager’ pay – a term I’m borrowing from Thomas Piketty – is a relatively new phenomenon. Before thirty years ago, managers who didn’t found their companies didn’t get paid like that. Between 1992 and 2001 for example, median CEO pay in the US rose more than three times (inflation-adjusted!) from $2.9 million to $9.3 million. And super-managers still don’t get paid like that outside of the US and the UK.

So what explains the relatively recent rise, as well as geographic anomaly of ‘super manager’ pay?

The punch line explanation from the Shue and Townsend paper on the rise in CEO pay: corporate boards are bad at math.

If you’ve been thinking about the sharp rise of CEO pay recently – as I have – you might have the impression that efficient markets, or the increasingly global scale of companies, or lower marginal tax rates, or even crony-insider-oriented capitalism explain it. Each of these may also be true, and I want to explore them later. Maybe next week.

But Shue and Townsend present the case that half the reason for the rise in pay is just weak math skills on the part of corporate boards. Which I have to admit, as an explanation, I kind of love.

Fixed numerical options awards

So what did they study?

Shue and Townsend noticed that CEOs usually got awarded a fixed number of company options as part of their pay packages each year. Options give executives the chance to earn part of their pay as a result of increased share prices in their companies. The point of the options awards is to align pay with share price performance. This idea has some theoretical merit.

But they also noticed that as the value of company stocks rose, compensation committees didn’t reset the number of new options awarded the next year. Rather, committees typically just awarded the same number of options as the prior year.

So why is this bad math? The same number of options awarded on a higher price stock are worth far more. It’s an unintentional pay raise, due to the way options work.

Maybe a specific example helps explain why. If the CEO gets 100 options on a company’s stock, and the price goes up 50% in the year, from $10 to $15, the executive reaps $500 as a result. A repeated 100 options award in the next year, if the price goes up another 50%, from $15 to $22.50, will be worth $750. Which is in effect a 50% pay raise for the executives. I’ve used small numbers in this example to keep the math simple, but the effect on CEO pay in that period was anything but small.[1]

Awarding the same number of options led to dramatic raises for CEOs, even though it appears the compensation committees did not intend to give raises, as salaries and bonuses did not increase much during the 1992 to 2001 period.

How else do we know that corporate board compensation committees didn’t intend to give these pay raises? Regulatory changes in the early 2000s required firms to calculate the value of options awards, and to disclose them publically. Once they did that, Shue and Townsend noticed that firms awarded options less often or became more likely to change the option awards from year to year.

The economists also argue, persuasively, that their data show that a lack of sophistication about the value of options grants among board compensation committees partly explains the rise in CEO pay.

Forced to do a little bit of math and disclose it, fixed-number of options awards went away.

If this all seems a bit confusing and obscure, here’s a pro tip: The next time you negotiate your CEO comp package, try to insist on a pre-set number of options grants. Just trust me on this.

Also, if you’re looking for a non-partisan solution to the rise of inequality in America? Try teaching more math.

 

A version of this post ran in the San Antonio Express News.

Please see related posts:

Yahoo Executive Compensation – It’s all about the stock awards

Executive Pay with Equity Awards – It takes a Buffett to push this agenda

 

 

[1] For economists who study this type of thing, the fixed-number of options award fall under the category of irrational human behavior known as ‘number rigidity.’ ‘Number rigidity’ is a little bit like that annoying Facebook video in which the guy predicts you will say ‘7’ when asked to think of any number between 5 and 12. And he’s right every time, darnit! It doesn’t make rational sense, except if you know that our brains are wired for inertia, consistency, and pattern recognition.

 

Post read (198) times.