Quote of the Day: Lady Thatcher didn't always get a fair hearing. #QOTD http://t.co/qefQSZScka—
CPS Think Tank (@CPSThinkTank) May 18, 2015
Maggie Thatcher on the 2015 New Zealand budget
08 Jun 2015 Leave a comment
in politics - New Zealand Tags: 2015 Budget, Leftover Left
Deranged conspiracy theories versus the domestic political reality of the Indonesian resumption of executions
05 Jun 2015 Leave a comment
in development economics, economics of crime, law and economics, politics - Australia Tags: Australia, capital punishment, conspiracy theories, crime and punishment, expressive voting, Indonesia, left-wing condescension, Left-wing hypocrisy, Leftover Left, rational ignorance, rational irrationality
The Australian human rights commissioner has put forward a bizarre conspiracy theory linking the recent execution of two drug traffickers in Indonesia to the Australian policy of turning back refugee boats.
Ignorance and condescension of Indonesian domestic politics is prevalent among the left wing elite in Australia.
Indonesia started executions again under the new president after a long hiatus and in particular for death sentences for narcotics drug trafficking. Indonesia had an unofficial moratorium on the death penalty between 2008 and 2012 but resumed executions in 2013. Executions were infrequent.
The new president was recently elected on a platform of being tough on crime and in particular on drug trafficking and the 64 drug traffickers currently on death row:
[The clemency requests] are not on my table yet. But I guarantee that there will be no clemency for convicts who committed narcotics-related crimes
Secondly, making concessions to Australia does not win votes in Indonesia which is a democracy. Thirdly, a range of foreigners are on death row in Indonesia. The best way to have kept those two Australians alive was to say nothing so hopefully they are not moved up in the queue to spite Australia to win domestic political points.
Fourthly, someone of her legal training should be better at spinning conspiratorially yarns than this particularly weak work of imagination.
Does Inequality Reduce Economic Growth: A Sceptical View
30 May 2015 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis, development economics, economic history, entrepreneurship, growth disasters, growth miracles, income redistribution, politics - Australia, politics - New Zealand, politics - USA, Public Choice, public economics, rentseeking Tags: entrepreneurial alertness, Leftover Left, taxes and the labour supply, The inequality and growth, Thomas Piketty, top 1%, Twitter left
Tim Taylor, the editor of the Journal of Economic Perspectives, has written a superb blog post on why we should be sceptical about a strong relationship between inequality and economic growth. Taylor was writing in response to the OECD’s recent report "In It Together: Why Less Inequality Benefits All,".
Taylor’s basic point is economists have enough trouble working out what causes economic growth so trawling within that subset of causes to quantify the effects of rising or falling inequality inequality seems to be torturing the data to confess. The empirical literature is simply inconclusive as Taylor says:
A variety of studies have undertaken to prove a connection from inequality to slower growth, but a full reading of the available evidence is that the evidence on this connection is inconclusive.
Most discussions of the link between inequality and growth are notoriously poor of theories connecting two. There are three credible theories in all listed in the OECD’s report:
The report first points out (pp. 60-61 that as a matter of theory, one can think up arguments why greater inequality might be associated with less growth, or might be associated with more growth. For example, inequality could result less growth if:
1) People become upset about rising inequality and react by demanding regulations and redistributions that slow down the ability of an economy to produce growth;
2) A high degree of persistent inequality will limit the ability and incentives of those in the lower part of the income distribution to obtain more education and job experience; or
3) It may be that development and widespread adoption of new technologies requires demand from a broad middle class, and greater inequality could limit the extent of the middle class.
About the best theoretical link between inequality and economic growth is what Taylor calls the "frustrated people killing the goose that lays the golden eggs." Excessive inequality within a society results in predatory government reactions at the behest of left-wing or right-wing populists.
Taylor refers to killing the goose that laid the golden egg as dysfunctional societal and government responses to inequality. He is right but that is not how responses to inequality based on higher taxes and more regulation are sold. Thomas Piketty is quite open about he wants a top tax rate of 83% and a global wealth tax to put an end to high incomes:
When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much).
It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive…
The left-wing parties don’t say let’s put up taxes and redistribute so that is not something worse and more destructive down the road. Their argument is redistribution will increase growth or at least not harm it. That assumes the Left is addressing this issue of not killing the goose that lays the golden egg at all.
Once you discuss the relationship between inequality and growth in any sensible way you must remember your John Rawls. Incentives encourage people to work, save and invest and channels them into the occupations where they make the most of their talents. Taylor explains:
In the other side, inequality could in theory be associated with faster economic growth if: 1) Higher inequality provides greater incentives for people to get educated, work harder, and take risks, which could lead to innovations that boost growth; 2) Those with high incomes tend to save more, and so an unequal distribution of income will tend to have more high savers, which in turn spurs capital accumulation in the economy.
Taylor also points out that the OECD’s report is seriously incomplete by any standards because it fails to mention that inequality initially increases in any poor country undergoing economic development:
The report doesn’t mention a third hypothesis that seems relevant in a number of developing economies, which is that fast growth may first emerge in certain regions or industries, leading to greater inequality for a time, before the gains from that growth diffuse more widely across the economy.
At a point in its report, the OECD owns up to the inconclusive connection between economic growth and rising inequality as Taylor notes:
The large empirical literature attempting to summarize the direction in which inequality affects growth is summarised in the literature review in Cingano (2014, Annex II).
That survey highlights that there is no consensus on the sign and strength of the relationship; furthermore, few works seek to identify which of the possible theoretical effects is at work. This is partly tradeable to the multiple empirical challenges facing this literature.
The OECD’s report responds to this inclusiveness by setting out an inventory of tools with which you can torture the data to confess to what you want as Taylor notes:
There’s an old saying that "absence of evidence is not evidence of absence," in other words, the fact that the existing evidence doesn’t firmly show a connection from greater inequality to slower growth is not proof that such a connection doesn’t exist.
But anyone who has looked at economic studies on the determinants of economic growth knows that the problem of finding out what influences growth is very difficult, and the solutions aren’t always obvious.
The chosen theory of the OECD about the connection between inequality and economic growth is inequality leads to less investment in human capital at the bottom part of the income distribution.
[Inequality] tends to drag down GDP growth, due to the rising distance of the lower 40% from the rest of society. Lower income people have been prevented from realising their human capital potential, which is bad for the economy as a whole
I found this choice of explanation curious. So did Taylor as the problem already seems to have been solved:
There are a few common patterns in economic growth. All high-income countries have near-universal K-12 public education to build up human capital, along with encouragement of higher education. All high-income countries have economies where most jobs are interrelated with private and public capital investment, thus leading to higher productivity and wages.
All high-income economies are relatively open to foreign trade. In addition, high-growth economies are societies that are willing to allow and even encourage a reasonable amount of disruption to existing patterns of jobs, consumption, and ownership. After all, economic growth means change.
In New Zealand, interest free student loans are available to invest in higher education as well as living allowances for those with parents on a low income. There are countries in Europe with low levels of investment in higher education but that’s because of high income taxes not because of inequality.
The OECD’s report is fundamentally flawed which is disappointing because most research from the OECD is to a good standard.
via CONVERSABLE ECONOMIST: Does Inequality Reduce Economic Growth: A Skeptical View.
How to show the emergence of a working super rich while attempting to argue they are a rentier class
28 May 2015 Leave a comment
in financial economics, industrial organisation, managerial economics, organisational economics, survivor principle, theory of the firm Tags: CEO pay, Leftover Left, leveraged buyouts, market for corporate control, mergers and takeovers, superstar wages, superstars, Twitter left
The Washington Centre for Equitable Growth in a review of Thomas Piketty accidentally contradicted their own arguments about the emergence of the top 0.1%. They quote Piketty:
on page 302 of his book that the rise in labour income “primarily reflects the advent of ‘supermanagers,’ that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labour.”
according to the Washington Centre for Equitable Growth:
these supermanagers were being vastly overly compensated given their questionable contributions to productivity.
The Washington Centre for Equitable Growth then goes on the argue that in 1979, most of the top managers worked for large, publicly traded firms but by 2005 more were working in closely held firms.
Who are today’s supermanagers and why are they so wealthy? equitablegrowth.org/research/today… http://t.co/Ts2OkOUk5g—
Equitable Growth (@equitablegrowth) December 03, 2014
I wish to explore this point about the biggest gains in both percentage terms and magnitude were among privately held business professionals and they are vastly overcompensated relative to their productivity. The key to the argument as explained in a link to a Robert Solow article by the Washington Centre for Equitable Growth is:
Piketty is of course aware that executive pay at the very top is usually determined in a cosy way by boards of directors and compensation committees made up of people very like the executives they are paying.
Piketty is equally direct about the ability of top managers to set their own pay:
It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously or at the least to be rather optimistic in gauging their marginal productivity.
Emmanuel Saez is less coy:
…while standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation committees.
When arguing that the optimal top income tax rate is 83%, Piketty, Saez, and Stantcheva push for that high top tax rate in part because top executives are more likely to bargain for higher pay when tax rates are lower and receive funds that might go elsewhere within the firm.
Emmanuel Saez and Gabriel Zucman explore the new wealth divide in the U.S. equitablegrowth.org/research/explo… http://t.co/WKJKAigAPN—
Equitable Growth (@equitablegrowth) October 24, 2014
The only comment I could find on the increasing number of privately held companies that pay top executives so well is frustration by the Washington Centre for Equitable Growth that it complicates statistical collection. No other analysis is undertaken.
Xavier Gabaix and Augustin Landier found back in 2008 that what a major company’s CEO earns is directly proportional to the size of the firm that they are responsible for running. Executive compensation closely track the evolution of average firm value. During 2007 – 2009, firm value decreased by 17%, and CEO pay by 28%. During 2009-2011, firm value increased by 19% and CEO pay by 22%. Xavier Gabaix and Augustin Landier also found that compensation for executives has risen with the market capitalization. From 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional six-fold matching increase.
What intrigued me about this casual reference to the great number of super managers employed by privately held firms is the argument that they have a cosy relationship with their board of directors immediately collapses. That argument about executive pay is usually in the context of the separation of ownership from control. In large publicly held companies the executives are subject to less scrutiny by shareholders as few of them have a large enough individual stake in the company to gain from the extra effort of monitoring their pay packages.
When the pay packages of top executives is questioned, it is always pointed out that there is an easy way to test for whether top executives cheat shareholders by overpaying themselves.
This simple test is comparing the pay of large private companies and public companies with a large or a few share holders with public companies with diffuse share holdings. Private equity typically also pay its top executives very well, even though the capacity to dupe public shareholders are not a factor.
Privately owned companies and public companies with a few large shareholders can easily keep track of the pay packages of the executives and the board of directors hired to monitor them. Private equity ownership have high pay-for-performance but also significant CEO co-investment.
The standard argument for excessive compensation for CEOs is free rider problems prevent shareholders from doing sufficient monitoring of executive compensation practices, and that the problems have been getting worse over time. For example, in a classic paper, Bebchuk and Fried (2004) argued that executive compensation is set by CEOs themselves rather than boards of directors on behalf of shareholders,
This argument does not apply to private companies with a few shareholders but they still offer large pay packages to their top executives. Companies, be they public or private that pay any employee more than they contribute risks takeover and loss of market share and failure through higher costs.
The burst of takeovers and leverage buyouts in the 1980s were partly driven by opportunities to profit from reducing corporate slack and downsizing flabby corporate headquarters of large publicly listed companies. Cleaning out the overpaid executives and overstaffing in the headquarters of large corporations was an express purpose of these takeovers and leveraged buyouts.
The response of the Left over Left of the day was support regulation to stop these mergers and takeovers rather than applauding them as giving lazy, overpaid top executives a kick up the backside and from the boot out the door. This regulation to make hostile takeovers more difficult undermined the market the corporate control rather than strengthened it as Michael Jensen explains:
This political activity is another example of special interests using the democratic political system to change the rules of the game to benefit themselves at the expense of society as a whole.
In this case, the special interests are top-level corporate managers and other groups who stand to lose from competition in the market for corporate control. The result will be a significant weakening of the corporation as an organizational form and a reduction in efficiency.
Central to the hypothesis of the Twitter Left of CEOs overpaying themselves is there is free cash within the business they pocket in pay rises, fringe benefits and lavished corporate headquarters rather than pay out in dividends or invest in profitable investments.
CEOs with high pay packages are now much more likely than 20 or 30 years ago to be employed in private companies where the shareholders have far greater opportunities to ensure they get value for money.
All modern theories of the focus in part or in full on reducing opportunistic behaviour, cheating and fraud in employment and commercial relationships. The market for corporate control, and mergers and takeovers realise large benefits from displacing underperforming manager teams. Premiums in hostile takeover offers historically exceed 30% on average. Acquiring-firm shareholders on average earn about 4% in hostile takeovers and roughly zero in mergers.
Another reason for high CEO pay in both public and private companies is CEOs tend to be more risk adverse than their shareholders. The shareholders in any one company has a diversified portfolio and protected by limited liability if the company fails because of a risky venture. Moreover, shareholders receive nothing in dividends if the company breaks even so they would prefer that managers pursue business ventures likely to do more than break even.
The agent principal conflict ears as long as the company breaks even, the CEO gets paid. Out of career concerns, a CEO does not want to be at the head of a company that fails because his re-employment prospects are quite grim. High-risk/high-reward ventures are less attractive to top executives because if they fail, their human capital that is specific to the failed company is worthless elsewhere.
To encourage CEOs to take risks, paying them were share options makes them more interested in risky ventures because their pay goes up in line with the risks they take which they would otherwise not take but for option being paid in options. Privately owned companies are well aware of this risk aversion among their chief executives which is why they pay them so well and often in share options and bonuses for taking risks.
The Washington Centre for Equitable Growth simply did not address the reasons for privately owned companies paying the top executives so well.
The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% is very sensitive to stock market fluctuations. This volatility in the pay of CEOs is inconsistent with the notion that their pay is linked to their ability to form cosy relationships with the boards of directors rather than with their performance.
These top 0.1% CEOs are working super rich whose fortunes rise and fall with the businesses they direct. Top CEOs are paid so much more because they direct the fortunes of large enterprises. In such cases, a small amount of extra talent is worth because the benefits of that small amount of extra talent are spread over such a large firm.
The Rise and Rise of the Super Working Rich
15 May 2015 1 Comment
in economic history, entrepreneurship, financial economics, human capital, industrial organisation, labour economics, occupational choice, property rights, survivor principle, theory of the firm Tags: entrepreneurial alertness, Eugene Fama, Leftover Left, separation of ownership and control, super-rich, superstar wages, superstars, top 1%, Twitter left, working rich
The rise of the rentiers is nothing new. What is new is the degree of financial globalization and liberalization that has supercharged the fortunes of the super-wealthy even beyond robber baron levels. But it’s no mystery how to reverse this. It’s a matter of setting better rules for markets and taxing earners at the top a bit more.
In the course of a deranged rant against the entrepreneurs in society, the Atlantic collected an excellent set of information suggesting that the working rich have replaced rentiers as the super-rich. Rentiers are the idle rich. A rentier is a person or entity receiving income derived from patents, copyrights, interest, etc.
In The Evolution of Top Incomes: A Historical and International Perspective (NBER Working Paper No. 11955), Thomas Piketty and Emmanuel Saez concluded that:
While top income shares have remained fairly stable in Continental European countries or Japan over the past three decades, they have increased enormously in the United States and other English speaking countries.
This rise in top income shares is not due to the revival of top capital incomes, but rather to the very large increases in top wages (especially top executive compensation). As a consequence, top executives (the “working rich”) have replaced top capital owners at the top of the income hierarchy over the course of the twentieth century…
The Twitter Left claim that the surge in top compensation in the United States is attributable to an increased ability of top executives to set their own pay and to extract rents at the expense of shareholders. Obviously, from the chart below the pay the top 0.1% goes up and down with the share market. Top wages do not seem to have any independent power to dupe shareholders into overpaying them in bad times.
Xavier Gabaix and Augustin Landier found back in 2008 that what a major company’s CEO earns is directly proportional to the size of the firm that they are responsible for running. Executive compensation closely track the evolution of average firm value. During 2007 – 2009, firm value decreased by 17%, and CEO pay by 28%. During 2009-2011, firm value increased by 19% and CEO pay by 22%.
Xavier Gabaix and Augustin Landier also found that compensation for executives has risen with the market capitalization. From 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional six-fold matching increase.
Better executive decisions create more economic value. If the number of big companies is greater than the number of good chief executives, competitive bidding will push up executive pay to reflect the value of the talent that is available.
What happens to share prices when there is a surprise CEO resignation? Up or down? Apple went up and down in billions on news of Steve Jobs’ health.
When Hewlett Packard’s CEO Mark Hurd resigned unexpectedly, the value of HP stock dropped by about $10 billion! This makes his $30 million in annual compensation a bargain for shareholders. The fall in share price represents the difference between what the market expected from Hurd as Hewlett Packard’s CEO and what the market expects from his successor. Was Hurd under-paid?
There is an easy way to test for whether top executives cheat public shareholders. Compare the pay of large private companies, and public companies with a large or a few share holders, with public companies with diffuse share holdings. Private equity typically also pay its top executives very well, even though the capacity to dupe public shareholders are not a factor.
The burst of takeovers and leverage buyouts in the 1980s were very much driven by opportunities to profit from reducing corporate slack and downsizing flabby corporate headquarters of large publicly listed companies.
The response of the Left over Left of the day was support regulation to stop these mergers and takeovers rather than applauding them as giving lazy capitalists their comeuppance. This regulation undermined the market the corporate control rather than strengthened it as Michael Jensen explains:
This political activity is another example of special interests using the democratic political system to change the rules of the game to benefit themselves at the expense of society as a whole.
In this case, the special interests are top-level corporate managers and other groups who stand to lose from competition in the market for corporate control. The result will be a significant weakening of the corporation as an organizational form and a reduction in efficiency.
Central to the hypothesis of the Twitter Left of CEOs overpaying themselves is there is free cash within the business they pocket in pay rises, fringe benefits and lavished corporate headquarters rather than pay out in dividends or invest in profitable investments.
The interests and incentives of managers and shareholders frequently conflict over the optimal size of the firm and the payment of free cash to shareholders. What to pay the top executives is a minor manifestation of this common entrepreneurial difference of opinion the future of the business.
These conflicts in entrepreneurial judgements are severe in firms with large free cash flows–more cash than profitable investment opportunities. Jensen defines free cash flow as follows:
Free cash flow is cash flow in excess of that required to fund all of a firm’s projects that have positive net present values when discounted at the relevant cost of capital. Such free cash flow must be paid out to shareholders if the firm is to be efficient and to maximize value for shareholders.
Payment of cash to shareholders reduces the resources under managers’ control, thereby reducing managers’ power and potentially subjecting them to the monitoring by the capital markets that occurs when a firm must obtain new capital. Financing projects internally avoids this monitoring and the possibility that funds will be unavailable or available only at high explicit prices.
Michael Jensen developed a theory of mergers and takeovers based on free cash flows that explains:
- the benefits of debt in reducing agency costs of free cash flows,
- how debt can substitute for dividends,
- why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidation-motivated takeovers,
- why bidders and some targets tend to perform abnormally well prior to takeover.
Michael Jensen noted that free cash flows allowed firms’ managers to finance projects earning low returns which, therefore, might not be funded by the equity or bond markets. Examining the US oil industry, which had earned substantial free cash flows in the 1970s and the early 1980s, he wrote that:
[the] 1984 cash flows of the ten largest oil companies were $48.5 billion, 28 percent of the total cash flows of the top 200 firms in Dun’s Business Month survey.
Consistent with the agency costs of free cash flow, management did not pay out the excess resources to shareholders. Instead, the industry continued to spend heavily on [exploration and development] activity even though average returns were below the cost of capital.
Jensen also noted a negative correlation between exploration announcements and the market valuation of these firms—the opposite effect to research announcements in other industries. Not surprisingly, after a successful corporate takeover, there is major changes to realise the untapped benefits they saw in the company that the incumbent management were not seizing capturing:
Corporate control transactions and the restructurings that often accompany them can be wrenching events in the lives of those linked to the involved organizations: the managers, employees, suppliers, customers and residents of surrounding communities.
Restructurings usually involve major organizational change (such as shifts in corporate strategy) to meet new competition or market conditions, increased use of debt, and a flurry of recontracting with managers, employees, suppliers and customers.
All modern theories of the focus in part or in full on reducing opportunistic behaviour, cheating and fraud in employment and commercial relationships. The market the corporate control, and mergers and takeovers realise large benefits from displacing underperforming manager teams. Premiums in hostile takeover offers historically exceed 30 percent on average. Acquiring-firm shareholders on average earn about 4 percent in hostile takeovers and roughly zero in mergers.
In terms of corporate control, Eugene Fama divides firms into two types: the managerial firm, and the entrepreneurial firm.
The entrepreneurial firms are owned and managed by the same people (Fama and Jensen 1983b). Mediocre personnel policies and sub-standard staff retention practices within entrepreneurial firms are disciplined by these errors in judgement by owner-managers feeding straight back into the returns on the capital that these owner-managers themselves invested. Owner-managers can learn quickly and can act faster in response the discovery of errors in judgement. The drawback of entrepreneurial firms is not every investor wants to be hands-on even if they had the skills and nor do they want to risk being undiversified.
The owners of a managerial firm advance, withdraw, and redeploy capital, carry the residual investment risks of ownership and have the ultimate decision making rights over the fate of the firm (Klein 1999; Foss and Lien 2010; Fama 1980; Fama and Jensen 1983a, 1983b; Jensen and Meckling 1976).
Owners of a managerial firm, by definition, will delegate control to expert managerial employees appointed by boards of directors elected by the shareholders (Fama and Jensen 1983a, 1983b). The owners of a managerial firm will incur costs in observing with considerable imprecision the actual efforts, due diligence, true motives and entrepreneurial shrewdness of the managers and directors they hired (Jensen and Meckling 1976; Fama and Jensen 1983b).
Owners need to uncover whether a substandard performance is due to mismanagement, high costs, paying the employees too much or paying too little, excessive staff turnover, inferior products, or random factors beyond the control of their managers (Jensen and Meckling 1976; Fama and Jensen 1983b, 1985).
Many of the shareholders in managerial firms have too small a stake to gain from monitoring managerial effort, employee performance, capital budgets, the control of costs and the stinginess or generosity of wage and employment policies (Manne 1965; Fama 1980; Fama and Jensen 1983a, 1983b; Williamson 1985; Jensen and Meckling 1976). This lack of interest by small and diversified investors does not undo the status of the firm as a competitive investment nor introduce slack in the monitoring of payments to top executives.
Large firms are run by managers hired by diversified owners because this outcome is the most profitable form of organisation to raise capital and then find the managerial talent to put this pool of capital to its most profitable uses (Fama and Jensen 1983a, 1983b, 1985; Demsetz and Lehn 1985; Alchian and Woodward 1987, 1988).
More active investors will hesitate to invest in large managerial firms whose governance structures tolerate excessive corporate waste and do not address managerial slack and and overpaid executives. Financial entrepreneurs will win risk-free profits from being alert and being first to buy or sell shares in the better or worse governed firms that come to their notice.
The risks to dividends and capital because of manifestations of corporate waste, reduced employee effort, and managerial slack and aggrandisement in large managerial firms are risks that are well known to investors (Jensen and Meckling 1976; Fama and Jenson 1983b). Corporate waste and managerial slack also increase the chances of a decline in sales and even business failure because of product market competition (Fama 1980; Fama and Jensen 1983b).
Investors will expect an offsetting risk premium before they buy shares in more ill-governed managerial firms. This is because without this top-up on dividends, they can invest in plenty of other options that foretell a higher risk-adjusted rate of return. The discovery of monitoring or incentive systems that induce managers to act in the best interest of shareholders are entrepreneurial opportunities for pure profit (Fama and Jensen 1983b, 1985; Alchian and Woodward 1987, 1988; Demsetz 1983, 1986; Demsetz and Lehn 1985; Demsetz and Villalonga 2001).
Investors will not entrust their funds to who are virtual strangers unless they expect to profit from a specialisation and a division of labour between asset management and managerial talent and in capital supply and residual risk bearing (Fama 1980; Fama and Jensen 1983a, 1983b; Demsetz and Lehn 1985). There are other investment formats that offer more predictable, more certain rate of returns.
Competition from other firms will force the evolution of devices within the firms that survive for the efficient monitoring the performance of the entire team of employees and of individual members of those teams as well as managers (Fama 1980, Fama and Jensen 1983a, 1983b; Demsetz and Lehn 1985). These management controls must proxy as cost-effectively as they can having an owner-manager on the spot to balance the risks and rewards of innovating.
The reward for forming a well-disciplined managerial firm despite the drawbacks of diffuse ownership is the ability to raise large amounts in equity capital from investors seeking diversification and limited liability (Demsetz 1967; Jensen and Meckling 1976; Fama 1980; Fama and Jensen 1983b; Demsetz and Lehn 1985). Portfolio investors may know little about each other and only so much about the firm because diversification and limited liability makes this knowledge less important (Demsetz 1967; Jensen and Meckling 1976; Alchian and Woodward 1987, 1988).
It is unwise to suppose that portfolio investors will keep relinquishing control over part of their capital to virtual strangers who do not manage the resources entrusted to them in the best interests of the shareholders (Demsetz 1967; Williamson 1985; Fama 1980, 1983b; Alchian and Woodward 1987, 1988).
Managerial firms who are not alert enough to develop cost effective solutions to incentive conflicts and misalignments will not grow to displace rival forms of corporate organisation and methods of raising equity capital and loans, allocating legal liability, diversifying risk, organising production, replacing less able management teams, and monitoring and rewarding employees (Fama and Jensen 1983a, 1983b; Fama 1980; Alchian 1950).
Entrepreneurs will win profits from creating corporate governance structures that can credibly assure current and future investors that their interests are protected and their shares are likely to prosper (Fama 1980; Fama and Jensen 1983a, 1983b, 1985; Demsetz 1986; Demsetz and Lehn 1985). Corporate governance is the set of control devices that are developed in response to conflicts of interest in a firm (Fama and Jensen 1983b).
At bottom, the private sector is highly successful designing forms of organisation that allow large sums of money, billions of dollars to be raised in the capital market and entrusted to management teams.
via The Rise and Rise of the Super-Rich – The Atlantic and How the Richest 400 People in America Got So Rich – The Atlantic.
Working-class Tories are not just turkeys voting for Christmas
14 May 2015 Leave a comment
in liberalism, Public Choice Tags: British general election, Leftover Left, working-class Tories
Suzanne Moore has written the best essay yet on the British general election. A die hard Lefty from her youth raised in a working class Tory household who argued politics with her mum to the day she died. They both gave as good as they got:
We always thought each other wrong and moved on to more pressing subjects. Years of screaming at her over the turkey that she herself was a turkey voting for Christmas did not change her voting habits. She just went out for a fag and moaned to the neighbours that I was “still against everything”.
She did herself proud by being aware of her own arrogance in retrospect:
Of course, I had diagnosed her with that everyday ailment “false consciousness”. This is still how most of the left operates. We have the truth, we know what is best and we will enlighten you, awaken you from your slumbers and you will be grateful.
Suzanne Moore is also very insightful about how shy Tories think:
If anyone wants to listen to the so-called “shy Tories”, what you will often hear is not talk of aspiration but a desire to be left alone by the state – even a deep suspicion of it.
Moore also couldn’t summarise better why her mother, who was part of a mixed-race couple, and so many others in the working-class voted for the Tory party
She believed that the Tories would enable her to do things and that Labour would stop her doing them.
Further evidence that street politics is counter-productive
14 May 2015 Leave a comment
in constitutional political economy, politics - Australia, politics - New Zealand, politics - USA, Public Choice Tags: activists, civil disobedience, Leftover Left, protesters, street politics
Public disorder and rioting by a large leads to a law and order response among the public and a hardening of social attitudes against whatever the desired social reform might be when it is tainted by civil disorder.
The Left, the Green Left and the watermelons in particular want to believe that street protests change things. They have to validate their youthful offences against public order.
Sadly, no; sadly for them but not for the law-abiding rest of us who resolve our differences by trying to persuade each other and elections.
The law-abiding rest of us believe in democratic equality. Your vote counts as much as mine in a democracy with free speech. The only way you can change my vote is by free speech, not by public disorder, threats and intimidation and taking the law into your own hands.
Labour lost the working-class vote a long time ago
13 May 2015 Leave a comment
in economic history, politics - Australia, politics - New Zealand, politics - USA, Public Choice Tags: British Labour Party, Labour Party, Leftover Left, Twitter left, UK politics, withering away the of proletariat
Is Marxism hate speech? Is it safe to be allowed on campus?
13 May 2015 Leave a comment
in constitutional political economy, economic history, laws of war, liberalism, Marxist economics, Public Choice, rentseeking, war and peace Tags: campus speech codes, hate speech, Leftover Left, Marxism, trigger warnings
What’s left of the welfare state after dastardly neoliberalism still lifts most out of poverty
12 May 2015 Leave a comment
in labour economics, labour supply, politics - USA, poverty and inequality Tags: child poverty, family poverty, Leftover Left, neoliberalism, welfare reform, welfare state
How government reduces child poverty (SPM-measured) in the U.S. bit.ly/1D7eXjZ From: @aecfkidscount http://t.co/80m2jjXxvY—
Richard V. Reeves (@RichardvReeves) April 16, 2015
To tackle poverty, the Left says welfare, the Right says work. Guess what? They're both right: brook.gs/1zSabJI http://t.co/E4AZR05CQJ—
Richard V. Reeves (@RichardvReeves) February 13, 2015
The magic of (increasing) redistribution in one @EugeneSteuerle graph blog.metrotrends.org/2015/02/addres… http://t.co/lbtlM3zT5L—
Richard V. Reeves (@RichardvReeves) February 18, 2015
Nick Cohen gets to the nub of Labour’s vote winning problem
10 May 2015 Leave a comment
Brilliant paragraph by @NickCohen4 on how the Left hate the English. theguardian.com/commentisfree/… http://t.co/NIoQJUhUA0—
Guy Walters (@guywalters) May 10, 2015
Senator Warren made a good case against Investor-State Dispute Settlement in the TPP
09 May 2015 Leave a comment
in economic history, economics of regulation, entrepreneurship, industrial organisation, international economic law, international economics, law and economics, politics - Australia, politics - New Zealand, politics - USA, property rights Tags: Australian productivity commission, free trade agreements, investor state disputes settlement, Leftover Left, preferential trade agreements, Senator Elizabeth Warren, Twitter left
In the Washington Post a few months ago, Senator Elizabeth Warren made a balanced case against investor state dispute settlement, not only in the Trans-Pacific Partnership. But in any trade agreement.
Apart from a few rushes of blood in rhetoric to appeal to her base, she made reasoned arguments, good use of history, and put up constructive alternatives to what she was criticising. Furthermore, she put forward arguments that appealed to every point in the political spectrum. The Left over Left critics of investor state disputes settlement clauses in trade agreements in New Zealand never do that.
She echoed arguments I have made the at investor state disputes settlement clauses have no place in trade agreements between liberal democracies.
Liberal democracies have independent courts and honest politics where everyone gets a fair go. That means sometimes you’re on the losing side of politics, but you as free to persuade the majority that they are mistaken. That is democracy in action: sometimes you win, sometimes you lose and there is an election in a few years where you can get another go.
New Zealand has a Closer Economic Relations Agreement with Australia. One provision is a requirement that in most cases New Zealanders are treated the same as Australians under Australian law.
To explain this, some years ago, a New Zealand television production company successfully sued the Australian television regulator to have New Zealand made television shows recognised as Australian content under the 50% Australian content regulations for free-to-air television in Australia.
Note the New Zealand business sued in the Federal Court of Australia and won. They had their day in court.
Senator Warren makes the point that if a business in the USA is unhappy with a regulation, they can challenge by normal democratic and legal means, which investor state disputes settlement undermines:
If a foreign company that makes the toxic chemical opposes the law, it would normally have to challenge it in a U.S. court. But with ISDS, the company could skip the U.S. courts and go before an international panel of arbitrators. If the company won, the ruling couldn’t be challenged in U.S. courts, and the arbitration panel could require American taxpayers to cough up millions — and even billions — of dollars in damages.
Senator Warren also provides a good history of the emergence of investor state disputes settlement and the relevance of that history to contemporary developments:
But after World War II, some investors worried about plunking down their money in developing countries, where the legal systems were not as dependable. They were concerned that a corporation might build a plant one day only to watch a dictator confiscate it the next. To encourage foreign investment in countries with weak legal systems, the United States and other nations began to include ISDS in trade agreements.
Investor state disputes settlement were indeed created to protect businesses that did not have robust democracies and legal systems. Would be international investors in one of these countries were promised international redress if there was a coup, a takeover of their investments or some other unforeseen negative impact because sovereign risk.
She then asked why are these provisions in trade agreements with liberal democracies where they have no relevance:
Those justifications don’t make sense anymore, if they ever did. Countries in the TPP are hardly emerging economies with weak legal systems. Australia and Japan have well-developed, well-respected legal systems, and multinational corporations navigate those systems every day, but ISDS would pre-empt their courts too.
Senator Warren also makes a good point that investor state disputes settlement undermines competition between legal jurisdictions and the rewards for having a sound legal system:
…to the extent there are countries that are riskier politically, market competition can solve the problem. Countries that respect property rights and the rule of law — such as the United States — should be more competitive, and if a company wants to invest in a country with a weak legal system, then it should buy political-risk insurance.
Political risk is is an entrepreneurial opportunity for the insurance market. The World Bank’s Multilateral Investment Guarantee Agency provides insurance to those investing in developing countries against expropriation (including indirect expropriation), as well as acts of war and terrorism. Export Finance schemes of many governments offer political risk Insurance. Anyone who travels in the less safe countries of the world routinely buys travel insurance.
The World Bank puts out an annual index on ease of doing business in every country of the world so foreign investors can’t say they won’t warned of the risks they were taking for the profits they sought.
Investor state disputes that were indeed referred to international arbitration used to be rare. Now they are more common as Senator Warren explains:
From 1959 to 2002, there were fewer than 100 ISDS claims worldwide. But in 2012 alone, there were 58 cases.
Recent cases include a French company that sued Egypt because Egypt raised its minimum wage, a Swedish company that sued Germany because Germany decided to phase out nuclear power after Japan’s Fukushima disaster, and a Dutch company that sued the Czech Republic because the Czechs didn’t bail out a bank that the company partially owned. U.S. corporations have also gotten in on the action: Philip Morris is trying to use ISDS to stop Uruguay from implementing new tobacco regulations intended to cut smoking rates.
In a response to Senator Warren’s op-ed, Gary Clyde Hufbauer said:
…only 13 ISDS cases have been brought to judgment against the United States. The United States has not lost a single case.
Why? Because the United States does not expropriate private property without compensation, and the United States does not enact arbitrary or discriminatory laws against foreign firms. Contrary to what the Senator implies, American taxpayers have not had to cough up millions and even billions of dollars in damages. They have not had to cough up anything.
The best part of Senator Warren’s op-ed is when she appeals to all points of the political spectrum based on arguments that do indeed appealed to them:
Conservatives who believe in U.S. sovereignty should be outraged that ISDS would shift power from American courts, whose authority is derived from our Constitution, to unaccountable international tribunals. Libertarians should be offended that ISDS effectively would offer a free taxpayer subsidy to countries with weak legal systems. And progressives should oppose ISDS because it would allow big multinationals to weaken labour and environmental rules.
Senator Warren did make a good case against investor state disputes settlement, particularly between liberal democracies. Foreign investors should take their chances in domestic politics and the courts like the rest of us. They’ve invested in a liberal democracy with independent courts, honest politicians and a commitment to a market economy.
Investor state disputes settlement clauses in trade agreements allow foreign investors to sue the host country for laws, policies, or court decisions they find objectionable. This gives foreign investors more rights than local investors; more influence than local citizens. That is contrary to equality before the law, which is the essence of liberalism.
The point that the Twitter Left rarely makes against investor state disputes settlement, and Senator Warren goes a way towards making is the shield offered by investor state disputes settlement clauses against predatory, corrupt governments in underdeveloped countries, many of which were socialist kleptocracies, has become a sword against regulations that arise in any liberal democracy that were sought and obtained through normal democratic means.
The Australian Productivity Commission held a public inquiry into regional and bilateral trade agreements in 2010. The commission specifically addressed investor state disputes settlement in its subsequent report:
1. There does not appear to be an underlying economic problem that necessitates the inclusion of ISDS provisions within agreements. Available evidence does not suggest that ISDS provisions have a significant impact on investment flows.
2. Experience in other countries demonstrates that there are considerable policy and financial risks arising from ISDS provisions.
The Productivity Commission concluded that investor state dispute settlement provisions are just not worth bargaining coin:
Nor, in the Commission’s assessment, is it advisable in trade negotiations for Australia to expend bargaining coin to seek such rights over foreign governments, as a means of managing investment risks inherent in investing in foreign countries. Other options are available to investors.
The Australian Productivity Commission was quite right to question the advantages of setting up a preferential legal system for anyone:
…a bilateral arrangement with Australia to provide a ‘preferential legal system’ for Australian investors is unlikely to generate the same benefits for that country than if its legal system was developed on a domestic non-preferential basis.
To the extent that secure legal systems facilitate investment in a similar way that customs and port procedures facilitate goods trade, there may be a role for developed nations to assist through legal capacity building to develop stable and transparent legal and judicial frameworks.
When the Left over Left usually argues against investor state disputes settlement provisions they get so carried away with the conspiratorial rhetoric that they overlook a much better argument.
Investor state disputes settlement provisions are bad deal from liberal democracies. Liberal democracies with the rule of law, a market economy and private property rights offer ample protections to any foreign investor.
In trade agreements with less democratic countries, the need for reciprocal promises may not be worth the price when there are other options for investment protection, such as political risk insurance.
The question must be asked as to who lobbies for these agreements considering how much is opposition they provoke, and how useful they are as a mobilisation tool for the Twitter Left in their relentless campaign against lower prices and higher living standards.
The shy Tory voter versus the shy Labour voter (waiting for those hard left policies) – updated
09 May 2015 1 Comment
in constitutional political economy, politics - Australia, politics - New Zealand, politics - USA, Public Choice Tags: British general election, British Labour Party, expressive voting, Leftover Left, New Zealand general election, New Zealand Labour Party, opinion polls, rational ignorance, rational irrationality, UK politics, voter demographics
The go left young man, go left strategy is a view of many in the Labour Party in New Zealand, Australia and the UK is if they present hard left policies to the electorate, they will mobilise many more votes from people who are currently don’t vote or who are mysteriously parking their vote with the Tory party or other centre parties.
Michael Foot’s attempt at to get out shy Labour voters with a hard left campaign in the 1983 British general election, which lead to his manifesto earning the title the longest suicide note in history.
The eight foot high stone monolith Ed Miliband planned to erect in the garden of number 10 Downing Street, if he could get planning permission, was dubbed the heaviest suicide note in history.
The heaviest suicide note in history http://t.co/1xDQlnnWU7—
Phil Rodgers (@PhilRodgers) May 03, 2015
The New Zealand Labour Party went left at the 2014 general election and for its troubles earned its lowest party vote since the party was founded in 1919.
Central to the strategy of the New Zealand Labour Party in the 2014 general election was mobilising non-voters in their working-class electorates.
The median voter theorem be dammed! The New Zealand Labour Party in the 2014 general election honestly believed that hard left policies would induce these non-voters to vote.
These non-voters are called the missing million by the New Zealand left . Almost one million people did not vote in 2014; 250,683 were not enrolled, while 694,120 were enrolled but did not turn out to vote. Many of these voters were thought to be just parking their vote pending the arrival of true believers to lead the Labour Party if the Left over Left is to be believed! Many of these non-voters are younger voters who generally are more likely to vote left.
The Internet – Mana party also spent an immense amount of the $4 million donated by Kim.com in trying to turn out to the youth voter as well.
Chris Trotter was wise and prophetic on go left young man, go left and the shy Labour voters will come:
[T]he Left has been given an extraordinary opportunity to prove that it still has something to offer New Zealand …..
If Cunliffe and McCarten are allowed to fail, the Right of the Labour Party and their fellow travellers in the broader labour movement (all the people who worked so hard to prevent Cunliffe rising to the leadership) will say:
“Well, you got your wish. You elected a leader pledged to take Labour to the Left. And just look what happened. Middle New Zealand ran screaming into the arms of John Key and Labour ended up with a [pitiful] Party Vote …
So don’t you dare try peddling that ‘If we build a left-wing Labour Party they will come’ line ever again! You did – and they didn’t.”
Be in no doubt that this will happen – just as it did in the years after the British Labour Party’s crushing defeat in the general election of 1983. The Labour Right called Labour’s socialist manifesto “the longest suicide note in history” and the long-march towards Blairism … began.
The most obvious flaw in the missing million and non-voter argument where they are waiting for true believers to offer hard left policies is a countries with much higher rates of voter turnouts and compulsory voting are not more likely to have left-wing governments.
There is much more evidence of shy Tory voters rather than shy Labour voters.
Shy Tory voters is a name invented by British opinion polling companies in the 1990s. The share of the vote won by the Tories in elections was substantially higher than the proportion of people in opinion polls who said they would vote for the party.
The final opinion polls gave the Tories between 38% and 39% of the vote – 1% behind the Labour Party. In the final results, the Conservatives had a lead of 7.6% over Labour and won their fourth successive general election.
Because of this turnout of shy Tory voters, the Tories won 3 million more votes than the Labour Party. This 14 million votes was more votes than they or any other British political party is ever won in a British general election, breaking the record set by Labour in 1951.
In a subsequent marketing research port, it was found a significant number of Tory party supporters refusing to disclose their voting intentions both the opinion poll companies, and exit polls.
This shy Tory factor is so large that opinion poll companies attempt to account for it in the weights they assign in their opinion polls surveys.
One of the explanations behind the turnout of the shy Tory vote in the 2015 British general election was a fear that a Labour Party minority government would be be holding to the hard left Scottish nationalists.
A number of British media commentators talked about running into many ordinary people expressing that very fear and they were undecided voters. About 20% of British voters were undecided on the eve the election, which is an unusually high amount.
Ironically, Neil Kinnock, the British Labour Party leader in the 1992 election, warned of a shy Tory factor a few days before the current British general election.
Tony Blair was much blunter a few months before the British general election about the relevance of the median voter theorem to British politics and the future of the British Labour Party. The most electorally successful politician in Labour history said that May’s general election risks becomes one in which a
traditional left-wing party competes with a traditional right-wing party, with the traditional result.
Asked by the Economist magazine if he meant that the Conservatives would win the general election in those circumstances, Mr Blair replied: “Yes, that is what happens.”
The post-mortem by the New Statesman called “10 delusions about the Labour defeat to watch out for” equally blunt about the role of Tony Blair in rescuing British labour from permanent oblivion:
Many of your drinks will be prompted by variations on this perennial theme. Labour accepted the austerity narrative. Labour weren’t green enough. Labour weren’t radical (which has somehow come to be used as a synonym for left-wing).
Given that the last time Labour won an election without Tony Blair was 1974 it’s hard to believe people still think the answer is to move left. But people still do. I sort of love these people for their stubbornness. But I don’t want them picking the next leader.
The shy Tory vote stirred by the fears of a hard left government happened in the 2014 New Zealand general election. On the Monday night for the election that Saturday, the Internet – Mana party board had an hour of television for their Moment of Truth. This included Edward Snowden beamed in from Moscow put forward a whole range of bizarre conspiratorial theories about NASA surveillance of New Zealand and analysis by base in Auckland.
David Farrar reported that in Tuesday night opinion polling, the National party’s party vote rose from 44% to 47%. In the subsequent general election that Saturday, the national party led all night for the first time. It won as many votes as it did in the previous election when it was expected to lose votes because the national party government was going into its third term.
One reason for shy Tory voters is expressive voting. People obtain more sense of identity by proclaiming themselves to be a left-wing voter than they do from saying that they are a right-wing voter.
The expressive aspect of voting is “action that is undertaken for its own sake rather than to bring about particular consequences” (Brennan and Lomasky 1993, 25). There is almost never a causal connection between an individual’s vote and the associated electoral outcome. Hence, a vote is not disciplined by opportunity cost.
With no opportunity cost of how you vote in terms of deciding the outcome, people vote expressively to affirm their identity. Voting is about who and what you boo and cheer for and how you present yourself to the world.
Through the fatal conceit and the pretence to knowledge, a left-wing vote allows people to identify with doing good and changing the world for the better. No point in voting that way if you don’t go around thumping your chest proclaiming yourself as doing good for others by voting Left including telling the truth to polling companies.
Utopia, you are standing in it! 
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