Club Troppo

From the NBER Reporter.

One example of compensation data enabling much broader research is my research on “Superstar CEOs” with Tate.³ The title refers to the fact that, in terms of compensation, but also in terms of status and press coverage, managers in the United States follow a highly skewed distribution: a small number of superstars enjoy the bulk of the rewards. We explore the ramifications of a “CEO superstar culture” for managers and shareholders. Specifically, we ask whether the popular notion of prominent achievers subsequently underperforming, which is widely-held in many contexts (from “Sports Illustrated Jinx” to “Nobel Prize Disease”), applies to top executives. The empirical basis for this study is a unique, hand-collected dataset on CEOs who won high-profile awards from the business press or other prominent organizations between 1975 and 2002, merged with ExecuComp data. Our challenge is to identify the correct counterfactual – how would a superstar CEO have performed had he not won the award and attracted all the media attention? How do we avoid measuring mere mean reversion?

Using a two-stage matching procedure and nearest-neighbor matching estimators, we identify CEOs who, based on observables, were likely to win the award at a specific point in time but did not. We find that actual award winners significantly underperform the matched sample of not-award-winning CEOs, by 12-20 percent over three years. At the same time, the average compensation of award winners increases from about $13m to over $18m, far more than that of “hypothetical” winners. Moreover, winners spend significantly more time on outside activities (public speeches, writing memoirs, board meetings of other companies, on the golf course). The silver lining is that these findings are concentrated in badly governed firms, for example, firms with weak shareholder rights. Good governance can prevent the extractions and distractions of superstars, without lowering the firm’s performance, as far as we can infer from the awards data.

In one episode of Yes Minister Hacker says something like “It seems the civil service just prevents governments from implementing the sovereign promises the government has made to the people” to which Bernard says “Well somebody has to”.

I’m a bit of a promises guy – I think if a politician promises something they should deliver it. And it’s bad if they welsh on the promise.  So I begin unsympathetic to Julia’s broken promise. After all she said that she wasn’t introducing a carbon tax.  Now she is.

Anyway I read a bit of the transcript with Neil Mitchell and have to admit that I’m kind of convinced by her case. Firstly circumstances are different in a hung parliament, but I don’t think that’s very firm ground on which to base a rearrangement. Circumstances always change.

And when Julia said “Get out every statement from the election campaign … all of the ones where I talked about the need to price carbon” I wasn’t particularly convinced either.  But then she said this.

The Australian people voted for me knowing I believed climate change is real and that I was determined to act on it, and that the Labor way of acting on it was to price carbon. People were going to say ‘Well isn’t that going to work effectively like a tax’, and we were going to have one of those silly debates about whether or not I would say the word tax. So I just clarified yesterday that the first few years with the fixed price do work effectively like a tax. This is the right thing to do to price carbon.

Well I’m not sure it’s all that clearly expressed, but at that stage I kind of ‘got it’.  Julia went to the election saying she was going to put a price on carbon. Not denying that prices would rise, thinking she’d do it using permits she ruled out a tax. If John Howard was in her shoes right now he’d be arguing that it’s not really a tax, it’s a fixed price permit system. Which it is.

Anyway, it all seems pretty OK to me.  Then again I’m not particularly enamoured of the Abbot led Coalition, so that’s no doubt influencing my judgement.

What do others think?

Postscript: Having written the above piece I listened to Julia on Alan Jones’ program (mp3). I was pretty amazed at her hamfistedness in explaining what seems (at least to me – and others disagree as we have seen) a reasonable position. Fred Argy explains why below.  All her predecessors from Hawkie on would have explained their position, and have done a good job of persuading the audience – though of course even the best persuader can only turn around a few people. Howard makes an interesting contrast – as he was a shifty fellow and ultimately got a reputation for it, but of all our past PMs he was the most unfailingly polite – which I suspect is a very worthwhile political trait. I was amazed at the combination of aggression and blind recitation of all the same talking points she’d been using from the press conference to the House to all the interviews. She might have listened to Jones and her other accusers and then, having done so crafted her explanation, her persuasion, her case in as commonsensical way as possible to what they had said.  Had I been writing the post now, I might have titled it “To price but not to tax: to defend but not to explain: to assert but not to persuade”. I can’t imagine anyone in Jones’ audience thinking the better of the PM for the interview other than those who were already admirers.

In this week’s Missing Link Friday: Why Ross Gittins doesn’t want to hear you complaining about the high cost of living. Is there a connection between free trade and disability? Just how deluded are Americans about inequality? Who’s to blame for American ignorance about climate change? And the truth about exaggerated reports about the death of blogging.

Gittins: Stop complaining about the cost of living

Is the high cost of living getting you down? Don’t expect any sympathy from Ross Gittins:

My theory is that if people are reduced to whingeing about the cost of living, it’s a sign they don’t have any more pressing problems to complain about. The cost of living is always rising, so there’s always something to complain about if you’re that way inclined.

Prices might rise but so do incomes. And even if some prices rise faster than incomes, we might still be better off. In the US, Matt Yglesias shrugs off the rising cost of health care writing: "discussion of health care costs sometimes ignore the fact that something has to go up as a share of GDP." He posts two graphs to make his point.

The graphs are Mark Perry’s and were originally posted on his blog Carpe Diem. Perry also posts international data on the share of household spending on food.

Free trade and the rising cost of disability

There are costs to trade liberalisation, writes R.A. at Free Exchange, and they often fall on a small number of people who lose their jobs or see their wages fall. R.A. links to a recent paper by US economists David Autor, David Dorn, and Gordon Hanson. They argue that:

Growing import exposure spurs a substantial increase in transfer payments to individuals and households in the form of unemployment insurance benefits, disability benefits, income support payments, and in-kind medical benefits.

(Continued)

I admire SA independent senator Nick Xenophon hugely. He’s a rare combination of brains, enterprise and principle. I knew him at Adelaide University; he had all those qualities then, and he seems to have kept them intact over the quarter-century since.

But I have wondered for weeks why he is so keen to have the states insure against natural disasters.

Today I may have found the answer to my puzzle. Xenophon is being advised by former insurance industry executive John Tsouroutis. When Malcolm Farr profiled Tsouroutis in a recent article for The Punch, the picture emerged of a bloke who thinks outside private insurance is always good.

This seems to me exactly wrong. At a government level, outside private insurance is almost always bad.

Before we go any further, it pays to remember that insurance only spreads risk rather than eliminating it. Remember also that private insurers need to make profits.  (I make these obvious points here only because they seem to have disappeared in the debate over state insurance.) Insurance is likely to cost you more than not being insured.  You don’t insure to save money. You insure to avoid unlikely episodes that would cause you too much stress to fund yourself when they happened. For instance, you insure your family against the chances of its principal breadwinner being killed or disabled, because your savings won’t cover the costs of this sort of unlikely but potentially devastating blow.

So I was startled to hear that many state governments currently take out natural disaster insurance. As a general principle, governments should not insure against Bad Things, be they floods, bushfires or earthquakes – or, for that matter, recessions. Not only should Queensland not take out such insurance, but the other states should stop doing so.

And here’s why: (Continued)

Veteran econoblogger John Quiggin is the blogosphere’s pitbull terrier. Once he gets his teeth into an issue he just won’t let go. One of JQ’s current worthy obsessions is the utter untrustworthiness of Murdoch’s flagship newspaper The Australian (see here, here and here):

As can be expected with the Oz, the headline is the exact opposite of the truth. In fact, if it weren’t for the fact that it often runs relatively accurate AP and Reuters material, and weather forecasts from the Bureau of Meteorology (while denouncing the Bureau in its opinion pages), the Oz would be a reliable paper – we could just assume the opposite of whatever it reports.

I thought I’d draw JQ’s attention to another and equally egregious Oz misinformation campaign, namely to mischaracterise the report of the recent ALP review team of Wise Old Owls Carr, Bracks and Faulkner as recommending entrenching and enhancing trade union power. It’s a theme running through several recent Oz stories, including this one by Ben Packham and James Massola:

TRADE unions would have their role in the ALP bolstered under a blueprint to reform the party, receiving a guaranteed role in party preselections for the first time.

In fact trade unions have long had a guaranteed role in party preselections at both state and federal level by virtue of the provisions of every single State and Territory branch constitution. Each constitution differs significantly, but typically they give affiliated trade unions 50% of the votes for the State administrative committee or state executive i.e. about 50% of members of state executives are trade union representatives, and the state executive in turn typically gets half the votes on all preselection committees/electoral colleges. Thus typically the unions get about 25% of the votes on all preselections, and this is “entrenched” because it is provided in the respective State branch constitutions. In some States it’s more than that e.g. in South Australia the unions effectively get 50% of the votes on preselections while in Western Australia it’s 30%.

(Continued)

Here’s a cut and pasted Amazon review of The Macrodynamics of Capitalism: Elements for a Synthesis of Marx, Keynes and Schumpeter. It’s a bit heavy and I’ve ignored the maths so can’t vouch for it.

I’m basically slapping it up here for my own future reference, but Troppodillians might be interested to have a squiz. Without endorsing it wholeheartedly it’s of interest to questions about the methodology of economics and social sciences. I’ve never waded through Keynes’ Theory of Probability but have always been aware that there’s a lot of unity between it and his whole approach to social science (in his case economics).  And there isn’t much that Keynes wrote that I don’t find myself in sympathetic agreement with. I can’t say the same for anyone in the neoclassical camp, though of course there’s lots of things to be learned from them.

This is an interesting book that overlooks the connections between the approach to decision making and expectations formation presented by Keynes in his A Treatise on Probability (TP) in 1921 ( the same material is also in the 1908 Cambridge Fellowship Thesis version) and Keynes’s integration of this approach into the mathematical elasticity analysis of chapters 20 and 21 of the GT (1936) using an aggregated version of the theory of purely competitive firms based on a micro foundation that assumed one fixed input ,capital goods ,such as plants,factories,machinery,or equipment ,and one variable input ,labor.

The author states the following:

“In sum,the aim of this chapter is… to isolate as precisely as possible the basic logical flaw in the Classical system and to go on then to show the limitations of current seemingly consistent reformulations of this approach”.(2008,p.27)
The author then starts his search in chapters 2 and 3 of the GT.He never gets to the core of Keynes’s theory presented in chapters 20 and 21.

The problem is that there is no basic logical flaw in the Classical model.It is a logically consistent system that is a special case of a much more general case that Keynes had aready analyzed in general decision theoretic terms in the TP.The basic classical case comes from the work of Jeremy Bentham.James Mill,David Ricardo,Nassau Senior,J B Say,etc.,were his students.Bentham’s approach is diametrically opposed the the approach of Adam Smith.Smith’s approach is an updated and improved version of the political and economic thought of the Old and New Testament,Plato,Aristotle,Augustine,Aquinas,and Albert the Great,the teacher of Aquinas.It can be summed up in the term virtue ethics.Bentham sought to completely replace this approach with his Benthamite Utilitarianism.Benthamite Utilitarianism assumes a rational economic man who can calculate the odds(risks) of different alternative courses of action.This rational economic calculator will then seek to maximize his utility over time.Bentham claimed that all humans can make such calculations and are able to choose the best or optimal course of action over time.The fundamental foundation of Bentham is that each individual decision maker can obtain an optimal information set that allows him to know all of the relevant odds and outcomes before he makes a decison by choosing one of the many different courses of action that he is confronted by.Classical and neoclassical economics is merely the mathematical representation of Bentham’s Benthamite Utilitarianism.Keynes realized that there was no fundamental difference on this basic,crucial point between the classical economics of Bentham’s students ,such as Mill,Ricardo,Say,and Senior and neoclassical economics.

(Continued)

I was reading an article the other day that I can’t now find, by a pollster whose name I can’t remember (increasing age is like that). It dealt with Coalition strategist Mark Textor’s highly successful four part 2010 campaign theme for Tony Abbott: stop the boats, no big new taxes, end the deficit, stop the waste.

I’ve already said more than enough about the boats. But the success of Textor’s tax/deficit theme was quite remarkable given that Australia had (and still has) the lowest deficit of any western nation by a very long way, and is the lowest taxing western nation bar the US (and will still likely have that status even if the Gillard government succeeds in introducing a carbon tax and minerals resource rent tax as promised). Abbott’s success with those slogans was as much due to the ineffectiveness of Labor’s campaign as to Textor’s skills in reading and exploiting the zeitgeist.

However the waste issue is in another category. There really was significant waste, at least in the pink batts scheme, green loans and the Building the Education Revolution program (at least in NSW; it was pretty efficient and delivered value for money in the other States according to the Orgill Report), and it was an entirely legitimate election issue.

However, there were two aspects of these waste items worth highlighting:

(Continued)

Brad Delong and other worthies occasionally hoist some conspicuously worthwhile comment from comments threads to make their own post.  And who says such comments have to come from one’s own blog. Well this was the nearest thing to it. The comment is from Steve Randy Waldman’s blog Interfluidity and is a comment on a very recent post of Steve’s that was the inspiration for a post of mine last night. Anyway it’s a great comment. It’s about our ignorance and what to do about it.

Indy writes:

In a little follow-up to my comment on the problems of non-evaluable industries, I thought I’d share some insights from my own extremely bipolar (in terms of valuation) industry – the military.

At the lowest tactical level – good or bad decisions have immediate and stark life and death results, and there are causal connections between inputs and outputs that are obvious even to laypersons. Following training exercises we conduct post-mortems, “after action reviews”, and even the most junior enlisted soldier can often explain what went right and wrong because of the closeness-in-time and clear connection between cause and effect. In fact, American-style intense military training would be futile and impossible if they couldn’t understand these things. Thankfully, most can, something that is ensured through the testing that is part of the initial entry selection process.

On the other hand, at the highest strategic levels where decisions about the allocation of significant present-day resources are being made about managing international relationships and developing innovative capabilities that may or may bear fruit decades hence in terms of competitive-edge superiority, almost no one, not even the experts, can actually tell what constitutes a good decision.

You often hear about all the horrible waste and “dead-end projects” in the military, but the truth is, there’s almost no other effective way to deal with this long-term “non-evaluable” problem except through the shot-gun approach, which is to (most likely) over-allocate, and throw as much as you can afford of everything you can against the wall to see what sticks. What sticks is the seed for a new round of randomized variation in a process that resembles natural selection or genetic programming. Just like with biological life, evolution through mass waste, pain, and failure is, tragically, the only effective survival strategy in an overwhelmingly complex, hostile, and competitive environment of scarce resources. Ask your local investment banker.

It’s not much different from the world of long-term innovation researching corporations – the capacity of different nations (or companies) to afford the largest number of projects, and absorb the losses of the inevitable large numbers of dead-ends, can often determine who wins in the long run. Smaller players usually have to just sit this state-of-the-art game out, and free-ride in terms of catch-up development when their intelligence services eventually discover our new successful systems. Our edge costs one thousand times more than their copying, and usually only lasts a few years, but there’s no way around that.

But now let me get back to that concept of “actionable intelligence” because it’s just so fundamental to this discussion. Commanders have a certain freedom of maneuver and various possible courses of actions from which they must choose. The Intelligence collectors and analysts often have insanely gigantic amounts of the wrong information and never quite enough of the right information – the kind that makes it clear what to do right now. Think “Federal Reserve”. (Continued)