Author: John Quiggin

Pay without Performance

John Quiggin7 Comments

I’ve been reading


“Pay without Performance : The Unfulfilled Promise of Executive Compensation” by Bebchuk and Fried)

For anyone who still believes that executive pay is based on rewarding performance, and encouraging risk-taking, this book should disabuse them. There are loads of studies pointing out, not surprisingly to anyone who reads the papers, that top executives and boards look after each other in a way that rewards failure.

The most telling detail for me is the observation p98, that every single CEO in the S&P Execucomp Database has a defined benefit pension plan. This, while bosses everywhere have been shifting their employees onto defined contribution plans, where they, and not the company, bear all the risk, and while the Republicans in the US are trying to do the same with Social Security.

One thing I would have liked more of is quantitative information about the aggregate magnitude of payments to executive pay, considered in relation to corporate profits. There’s only a little of this in the book, though the authors say here

Aggregate top-five compensation was equal to 10 percent of aggregate corporate earnings in 1998-2002, up from 6 percent of aggregate corporate earnings during 1993-1997.

Given that this excludes various kinds of hidden transfers[1], that non-executive board members extract substantial rents (mostly through favorable corporate decisions rather than in cash) and considering senior managers, rather than merely top-5 executives, as a class, it’s apparent that the total rents income flowing to this group could easily be between 25 and 50 per cent of aggregate corporate profits. If this is correct, it ought to have profound implications for the way in which we model corporations, and the way in which we think about the class structure of modern capitalism.

fn1. It’s not clear whether retirement benefits are counted, for example, and these are as large, in present value terms, as direct compensation. Then there is the observation that executive insiders do remarkably well in trading the shares of their own companies.

Weekend reflections

John Quiggin9 Comments

A bit late but weekend reflections is back.

It’s your chance to make comments on any topic of your choosing, to be written and read at the leisurely pace of the weekend. I welcome pieces a little longer than the usual comments, but not full-length essays. If you want to draw attention to something longer, try an extract or summary with a link. As usual, civilised discussion and no coarse language. After some nasty recent experiences, I will be more vigorous than ever in policing this rule.

As is usual when I cover certain topics, a couple of posts have produced flame wars, and I have closed comments (meanwhile, the R-word thread has veered off into the 11-th dimension, and I’ve let it run). Anyway, if you have substantial comments you wanted to make on topics where comments are closed, here’s your chance.

Incompleteness and the precautionary principle

John Quiggin18 Comments

As commenters and my last post, and others, have pointed out, there’s a logical gap in my argument that, given imperfect knowledge and the recognition that we tend to overestimate our own capabilities, we should adopt a rule-based version of consequentialism which would include rules against pre-emptive or preventive wars[1]. The problem of imperfect knowledge also applies to the consequences of deciding not to start a pre-emptive war. As I’ll argue though, the symmetry is only apparent and the case for caution is strong.
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Consequentialism for beginners

John Quiggin32 Comments

Now that, thanks to Kieran Healy and the Medium Lobster, we’ve all had our fun with Richard Posner’s case for pre-emptive war, complete with toy numerical example, it’s time for me to play straight man.

Posner’s starting assumption is consequentialism: that we should evaluate an action based on whether its probable consequences are, on balance, good or bad. I broadly agree with this, so I’ll try to explain why it shouldn’t lead to conclusions like those derived by Posner.

I’ll ignore a range of more complex objections and come straight to the first distinction learned by beginning students of the subject. Should we evaluate the consequences of general rules such as “don’t engage in pre-emptive wars” (rule-consequentialism) or should we evaluate each action on a case by case basis (act-consequentialism)

For perfectly rational decision makers, following the rules of Bayesian decision theory, the answer is easy and, in fact, trivial. It’s best to make the optimal decision on a case by case basis, and an optimal set of rules would be so detailed and precise as to yield the optimal decision in every case. Posner routinely assumes this kind of perfect rationality, which is why he doesn’t see any big problems with toy examples, or with claiming that this kind of reasoning can usefully be applied to improbable catastrophes with incalculable consequences.

There are two objections that can be made here

* Human beings are not perfectly rational and do not follow the rules of Bayesian decision theory

* Since war is a negative sum game, rational decision makers do not fight wars
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Multinationals, chains and coffee

John Quiggin39 Comments

My views about multinationals and chains are generally pretty nuanced, except when it comes to coffee. So I’m happy enough to go to Borders in a (successful) search for “The Nutmeg of Consolation” (Patrick O’Brian) especially since, as I recall, there’s quite nice little independent coffee shop in a corner of the store. I get the book and order my coffee. I’m vaguely aware that something is wrong, but, given my decaffeinated state, it’s not until I look around and see everyone drinking out of paper cups that I realise the awful truth – the place had turned into a Gloria Jean’s. I drank the coffee anyway, and it wasn’t as bad as my previous experience several years ago, but I certainly won’t be going back.

Then I come home to write this post on multinationals, flick to the SMH, and discover that GJ is about to become an Australian multinational. I don’t have any particular thoughts on this, other than to say that the idea that there might be 240 000 people willing to pay to drink this stuff every day is alarming.

Kyoto: the empire strikes back

John Quiggin52 Comments

One of the nice things about being the resident opposition at the Financial Review is that, as well as lots of letters, my articles often attract full-length replies. Mostly these are from right-wing thinktanks, but on several occasions they’ve been from government ministers I’ve managed to prod into a response. This kind of thing tells me I’m doing my job (of course, I also welcome support in the form of letters to the Fin or directly to me).

Today’s Fin (Subscription required) has a piece from Ian Campbell, the new minister for the environment, responding to my piece on Kyoto, which I’ve placed over the fold. I’ve heard that my piece, which I thought was pretty mild, upset the government, and that the original draft was considerably hotter than the published version. I’m pleased to say that I agree with a substantial part (though not all) of Campbell’s intro which reads

Without intervention projected changes in global temperatures are expected to cause major environmental and economic impacts on agricultural industries, on human health, on businesses and through a greater number of extreme weather events such as heatwaves, drought, bushfires, storms and flooding.

Contrary to John Quiggin’s assessment (AFR, December 2), it’s precisely because Australia understands that climate change will not go away that we are working to meet our Kyoto target. However, we do not believe the protocol is an effective response to climate change.

At least on the science, this is a clear-cut rejection of the wishful thinking that still seems to have plenty of supporters.
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Bremer’s last gift

John Quiggin12 Comments

As the American ruler of Iraq, Paul Bremer had the amazing knack of being able to pick the worst possible decision on every occasion[1]. From the dissolution of the Iraqi army to his refusal to hold elections in 2003, when there was some chance they could have worked, he did everything wrong he possibly could. Now he’s gone, and most of his policies have been abandoned, but he’s left one last gift, which may turn out to be the most poisonous of the lot.

When Bremer set up the electoral system for the elections that are supposed to be held in January, he went for a single nationwide electorate, rather than having representatives of provinces or individual constituencies[2].

In any case, what this means is that, to the extent that fighting depresses the turnout in Sunni areas, Sunnis get less seats. Being a minority, they’re bound to lose most of the power they’ve traditionally held in any case, but under Bremer’s rules, they could be excluded almost completely. By contrast, under a constituency system, provided some sort of ballot could be held, Sunni candidates would be elected from Sunni areas.

To address this problem, Juan Cole is suggesting an emergency intervention, setting aside 25 per cent of the seats for Sunni candidates. It’s probably about the best that can be done in the circumstances, but the outlook is not that good.

Meanwhile, the onset of civil war has been announced, not by leftist opponents of the war, but by arch-hawk Charles Krauthammer who complains (haven’t we heard this before) about the unreliability of our native allies

People keep warning about the danger of civil war. This is absurd. There already is a civil war. It is raging before our eyes. Problem is, only one side is fighting it. The other side, the Shiites and the Kurds, are largely watching as their part of the fight is borne primarily by the United States.

I don’t recall Krauthammer mentioning civil war as part of the plan in 2003. But maybe this is one of those four-war things.

fn1. I don’t think this was simple stupidity. His orders were, as far as I can see, to establish a secular free-market democracy that would be a reliable ally of the US and Israel. Any halfway realistic policy would have required him to abandon these objectives, and settle for a moderately theocratic, semi-socialist and imperfectly democratic state, on the “Iran-lite” model, because that’s what a majority of Iraqis want. Instead, he followed the dream.

fn2. My guess is that his motive was to allow votes for Iraqi exiles who could be presumed to be more favorable to the occupation than the people who were actually experiencing it.

Blogs meet the Harvard system

John Quiggin17 Comments

Martin Pike at Northcote Knob:

I just got back a masters essay in which I used a reference to a post on John Quiggin’s blog. I got a distinction, and despite there being a rather large swathe of pedantic comments scrawled on the pages the blogref got through unscathed.

For nerds; I was using Harvard system (eg Pike, 2004) but added a footnote disclosing that it was a blog, and who Quiggin is (or claims to be!).

Anyone heard of this being done, or am I breaking ground here?