Monday, February 23, 2009

The Politics of Stimulus

So now we have a 780+ billion dollar plan to stimulate the economy. Tax cuts, safety net supports, and infrastructure investments. Stimulate consumer buying to re-stimulate economic growth while promoting new strategic priorities. Two major questions arise from this bill’s passage: 1) will it accomplish its stated goals for our economy? 2) What can we expect to see in the future based upon this legislative experience?

I do not know if the stimulus will accomplish its goals or not. Most state and local governments are behind it for their constituencies, minus 3 Republican governors thus far who are refusing funds because they think strings will be attached to the dollars. Well, damn right there had better be! Isn’t that our complaint now – that $350B was given to banks by George W. Bush with no strings or accountability attached, never to be seen again?

I am certainly not a professional economist. Yet my instinct is that this package will help with our overall financial mess IF spent wisely on the investment part. The other two parts are no-brainers to help people have more to spend. But I am in the school that worries that this package is not big enough proportionately to the size of the problem. In this instance, underfunding is a bigger problem than overfunding. If we are over, we can always opt to scale back partway through the effort. But if we are underfunded, people will not see the real jolt needed to stop the downward slide, and consumer confidence in the economy (which is the ultimate key to our solution) will not move up; the stimulus will not have succeeded and it will be hard to get more money to see it through.

I also think that the stimulus will not be enough by itself without: a) a smart mortgage relief plan to stop the original housing slide that precipitated this crisis; b) some banking deadheads lending out the federal money they have already been given and may be given in the future; and c) a long-term budget that begins to get our federal spending back into a normal annual budget planning framework. Specificity about all three of these additional components is supposedly forthcoming over the next few weeks. We will have to wait and see what these will look like.

On the political side, what can we expect for a future decision process from Washington politicians? Certainly there were missteps from all governmental parties. Many White House errors looked like rookie jitters on Opening Day all agog finding themselves in the big stadium – nervousness, inattention to detail, execution plans not fully thought through. Necessary homework was not done and political vetting of what was being inserted into the bill was entrusted to untrustworthy legislators, so the bill’s sponsors were left vulnerably on the defensive arguing over Mickey Mouse stuff. Staffers did not touch enough bases in advance with key players in order to smooth the way. It all smacked of too big a bite too soon on the job before people had a chance to settle into their chairs and figure out how to even use their out-of-date desktop computers; but urgency is calling.

House Democrats got greedy and slipped traditional pet projects into what was a tough-enough fight already, thereby sidetracking people’s energies. Pelosi played hardball with House Republicans sooner than necessary because she knew she ultimately had the votes needed at the end. This allowed the freeze-out to become the temporary headline instead of economic stimulation. Some dissenting votes from House Democrats were actually good to see for overall balance.

The sorry spectacle was with the Senate Republicans. One would prefer not to kick someone when they are already down, but when they beg to be kicked again one feels almost obligated to do so. The hypocritical calls for non-partisanship inclusion while acting completely partisan and stuck in a past history of their own making was shameful. After 12 years of controlling the game and completely freezing out the minority Democrats, winning at all costs with no quarter given, their complaints about “not being included” rang pretty hollow. Especially when efforts were made to include them, particularly from President Obama. But to these Senate Republicans, , non-partisanship apparently means the same old “do it my partisan way or no way at all.” In Congresses of old, it was understood that nonpartisanship meant everyone bending a bit in order to find reasonable compromises where everyone takes away something worthwhile while the country gets forward movement for the overall good. With the thankful exception of Republican Senators Collins, Snow and Specter – who came, negotiated in good faith, found such compromises while others stood around whining at being left out, and thereby became critically included players in shaping the final bill’s outcome – it seems to have been a lesson lost on this Congress. Inclusion requires getting constructively involved.

The truth is that roughly 35% of this stimulus bill is in tax cuts, seemingly the Republicans’ only answer to any problem that comes along. That is a pretty good percentage of worthwhile compromise. Conversely, grand arguments about mortgaging our grandchildren’s future did not seem to be important for 8 years when we turned budget surpluses into 1 trillion dollars of annual debt. Hollering about deficit spending didn’t seem to stop these same Republicans from spending $600B for an unfunded war in Iraq, financially irresponsible regardless of whether the war itself was a right or wrong thing to do. Protesting against spending as a tool to financial downturns denies economic history. The reality is that no economic downturn, including the 1930s depression or the major 1980s recession, was ever solved by cutting spending or making tax cuts. They all required deficit spending to bring us out. Including by the Republican’s patron saint Ronald Reagan, who grew the budget deficit each year in office through deficit spending as well as in actuality growing the size of government! So much for tax cuts and smaller government. Despite his wonderful rhetoric, even he could not prove the smaller government theory, and “trickle down economics” was just the “voodoo economics” George H.W. Bush accurately predicted in 1980 that it would be.

We have a lot of hard legislative and personal work still in front of all of us. Hopefully lessons will be learned by all. But this kind of rhetorical grandstanding and negativism that we saw will not be helpful to these efforts. By the polls, the Republican nay-saying is only registering positive with the less-than-25% of the population that are already committed Republicans; the only folks they are winning are the same folks they have already won, which November 2008 demonstrated is not enough to win elections. So is this the face and the soul of the to-be-reinvented new Republican Party that we can expect to see? One that looks remarkably like the same old one that spent us into oblivion and threw out all Congressional oversight of the Executive Branch and Wall Street? If so, it is a embarrassing face with a voice that few care to hear anymore.

Tuesday, February 10, 2009

Limiting Executive Pay

President Obama recently announced the imposition of a $500K cap on the base pay for executives at financial institutions receiving substantial US taxpayer funds. Additional compensation in the form of stock options continues to be allowed, but with longer time restrictions before such stock can be cashed in. Regulations regarding large bonus payments in companies with a net operating loss are probably also forthcoming.

As expected, a cry of protest went up from different quarters about the unfairness or supposed ineffectiveness of the new regulation, though perhaps more muted than I might have expected. Conversely, the decision was greeted enthusiastically by the general public, still reeling from a strong belief that they are underwriting the business failures of rich CEOs. My guess is that not too many CEOs have wanted to appear in public to argue for their current compensation levels, opting instead for backdoor grousing.

Most of the stated objections centered around:
- the federal government should not be micromanaging businesses;
- these failed companies and CEOs are simply victims of the overall meltdown of the economy, and should be given an opportunity to bring their companies around;
- this announcement was just a public relations bone tossed to the public by the President, without substantive impact;
- $500K is not competitive pay, and will not keep or attract the quality of executives needed by these companies.
Each of these arguments is pretty easily refuted, though they miss the larger point we should be focusing on.

Yes, the federal government should normally not be dictating executive compensation pay scales. At least for successful businesses. But these are not successful businesses. These are companies that would be bankrupt today if not for the infusion of US tax dollars to prop them up. And when you are bankrupt, one of the many things you give up is the ability to control your own destiny; your creditors are now in the driver’s seat. The rule is, if you want to operate on your own, earn a profit. If you want a bailout, the bailers are understandably going to dictate the terms. And for better or worse, the federal government is now the bailer.

Victims? No. Banks and financial institutions got into their mess (and now our mess) by not minding the store. They chose to ignore long-standing rules of risk management, quality credit expectations in loan-making, and oversight of the financial products being created and the line people making these products. All using other people’s money. Their attention was on the quantity of sale numbers, not the quality of those numbers. The result is no different than irresponsible Chinese milk product manufacturers or peanut producers in Georgia. No pleas of victimhood allowed. (Note: they executed the milk producers in China.)

A good public relations move by the President? Absolutely. It was easy to do because it was right to do. And the American people know it is right. Given that virtually NO CEO has stepped forward and acknowledged, “I blew it” and taken responsibility for his/her mismanagement, then someone has to try to force that acknowledgement onto the desks of executives. That there is responsibility to be taken for your actions, and consequences for the failure of that responsibility. It is a message seemingly lost on a significant number of executives and Boards of major corporations. American common sense knows better.

Is $500K an appropriate salary for an executive of a $50B+ corporation? No, assuming that company is making a profit from that $50B! But there are two larger issues that this limitation really brings forth:

1) Executive pay has been and should be the province of the company’s Board of directors. But this principle has been effectively undermined because Boards’ pay decisions and their ultimate financial impact are typically hidden from the public and the stockholders. And many Board members all come from the same pool, members of the same big club who all think the same and look out for each other. I support you here if you support me there. Where are all the stockholders in all this voting who might rightly say that $5-10 million is a pretty adequate style of living; salary above that is eating into my stock dividend, thank you. Any greater compensation should be based on long-term company success, not short-term accounting games played while the CEO is in charge.

2) That $500K hopefully will in fact drive out a bunch of people who did not do their jobs, who did not perform to expectations. Apparently too many Boards do not seem capable of exercising this most basic responsibility: holding leaders accountable for performance.

Not all CEOs are created equal. There are different CEO skills needed for different companies at different points in a company’s existence. The startup CEO is a very different animal and skill set from the “steady state” CEO from the visionary “next plateau” CEO. What is needed now in these companies is a turnaround CEO. One who knows how to take a company that is on a downward spiral and reverse and reprioritize itself strategically, focus its efforts on prime activities, and shift its connections to a new sustaining market. This is a specialized skill. $500K and a significant bonus for success will fine with this brand of CEO because it will be the challenge that will be the prime appeal, not the dollars. These people are around. But these are clearly not the people currently running the automobile and financial companies. We need to get this old guard out, those whose time has come and gone, and get the right people in the right job at the right moment.

If a $500K salary cap helps to make that happen, then I am all for it. These are the new guys who will truly deserve the big bucks if they are successful.