Tuesday, October 11, 2011

Occupy Wall Street

The ever delightful Chris Wallace on breakfastpolitics today gave the title In which I underestimate Occupy Wall Street to Sophie Mirabella's column in The Punch which was really title Protestors occupied with glib, childish, pointless fantasy.

I think Chris is more on the money.

Mirabella is absolutely right that the movement that is "Occupy Wall Street" is just a lot of un-happy campers. It isn't a movement driven by a specific agenda for reform. Mirabella writes;

Protest against a policy, protest against a corrupt Government if you want – but protesting against democracy and capitalism just seems so… well… laughable, pointless and politically adolescent.

In that she shows she is missing the point. These aren't people protesting about democracy or about capitalism - but about the way democracy and capitalism are practised today. She is right they don't know what they want - but they do know they don't want "more of the same." No amount of Mirabella ranting about the current Government not being a "good government" in Australia rebuts the revulsion the public is now displaying for the way politics is conducted.

As my first criticism I'll choose the much vaunted claim that an opposition doesn't need to reveal its policies until an election. That is inconsistent with the idea that it is a representative democracy - I want to know how the candidates will react to the unknown events in the future, not what their manifesto of things to be delivered is. Whitlam failed (in part) by not adjusting the manifesto to the economic circumstance; Howard learnt early the idea of "core" and "non-core" promises.

It is by the party and candidates core beliefs that I would like to judges them as my representatives.

The USA has it far far worse with a Congress determined to spend its life in posturing rather than action. There was a great episode of the West Wing in which Josh stated that he didn't want success in social welfare reform because it was too useful as a campaign tool.

More reasoned commentators note that "Historians like to collect things, to study them later, because to be a historian is to know that no one can understand the present until it’s past." They note with Mirabella that there is no agenda, but they reflect that earlier movements started the same way.

Nineteenth-century grass-roots populism made twentieth-century progressivism possible. Then, the rhetoric of revolution created energy for reform. Whether that will happen here remains to be seen. So far, no one is proposing a set of reforms; there’s nothing akin to the early-twentieth-century reformers who were part of the good-government movement.

A more detailed chronology of the protest concludes;

And not posting clear demands, while essentially a failing, has unintended virtue. Anyone who is at all frustrated with the economy--perhaps even 99% of Americans--can feel that this protest is their own.

That's actually a really good way to plan change - spend the time to understand the problem before leaping to solutions.

To understand the public frustration, understand the failings of the sector that are the centre of the protest - the finance sector. That's why the movement started at Wall Street.

In a recent Washington Post column titled There are no rogue traders, only rogue banks Barry Ritholtz noted;

Banks are supposed to have expertise in preserving capital and managing risk. If they cannot discharge those simple duties, then perhaps they should not be in the business of finance. Most of all, they should not be engaging in behavior that puts taxpayer money at risk.

And therein lies the nub of the issue - no one has confidence any longer than the financial system actually works. And fiddling with Basel III regulation is only part of the issue. At the heart of this lies the very culture of capitalism.

And that is nowhere better represented than in the obscenity that is CEO and senior executive compensation. Writing in the SMH today Michael West challenges the "labour market" view of executive salaries and wonders why when company performance declines executive salary stays high. Actually, the problem is the way the market is structured. The executives are all effectively in higher demand when life is tough - it is harder to manage a firm in bad times than good.

The real issue is how firms have dealt with the conundrum identified by Berle and Means that senior executives manage companies for their benefit, not the shareholders. CEOs like growth because it makes their job bigger, even if the capital being reinvested in the company could get better returns for shareholders if distributed as dividends.

The "solution" to the conundrum, to align the CEO incentive to the investors, fails because of the erroneous assumptions of efficient market theory. As discussed here yesterday there are problems with using market prices of assets as real measures.

But the biggest issue of all is that the bulk of money invested in equities comes from investors seeking long term, not short term, returns. The solution to that is to structure truly long-term bonuses - that is the bonus payments are only calculated and paid five years after the relevant period - including after termination, resignation or retirement. They should be calculated on the basis of total return (dividends + capital growth) over the period relative to either the overall market or a sectoral market.

Government can influence this outcome through the taxation system, by dramatically increasing tax on income paid as salary and reducing it on income paid as long term bonus.

An interestingly different view of the relationship between pay and performance was advanced in On Line Opinion today on politicians salaries. Under the heading "pay peanuts get monkeys" the author states that;

When the ceiling of your earnings is in the mid 300′s (notwithstanding the perks) the appeal of going into public office for this calibre of person is reduced, considering their earning potential in the private sector. Particularly when you consider the impact on their personal life: politicians are away from their family for significant periods of time, missing birthdays, anniversaries and pet funerals in the backyard.

I tend to think the issue is more the overpayment elsewhere rather than the under-payment here. But I also think we erred in the Latham inspired decision to change superannuation entitlements. I certainly didn't like well superannuated pollies going out to make second careers as consultants, but what we need is more a scheme that reduces that tendency. There is nothing more obscene than the current model that sees a political career as merely the pathway to the "higher" career of consultant. Just more salary doesn't solve this - a good superannuation scheme that is diminished by post political earnings is better.

To return to my first target. Sophie Mirabella needs to realise that the protesters are justifiably angry at both the way capitalism is conducted and the operation of our democracy.

It is inadequate of her to respond like Marie Anionette of being informed the peasants had no bread to eat and saying they should eat cake.

Novae Meridianae Demetae Dexter delenda est


Vic N said...

Paul Krugman at the NYT is arguing the same point




you're in good company!!

David Havyatt said...

Thanks Vic

Love this comment by Krugman

"The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is."


"There’s something happening here. What it is ain’t exactly clear, but we may, at long last, be seeing the rise of a popular movement that, unlike the Tea Party, is angry at the right people. "