Thursday, March 19, 2009

Talentless talent: Let's Outsource Financial Executives

Perhaps the most amazing thing about the AIG bonus scandal is the claim that it takes big bucks to retain top talent. Talent!? They ran a perfectly good insurance company into bailout-ville! With that kind of talent, who would be considered a talentless hack?

I suggest that we (the taxpayers and now the majority owners of AIG) outsource AIG's executive positions to India and China. If some poor schlub makes $20/hr. and produces goods worth $30/hr., he'll be let go if someone else (in a foreign land or perhaps Buffalo) can produce $20/hr. worth for compensation of $9/hr. After all, $20-$9 = $11 which is clearly > $30-$20 = $10.

Shouldn't the same reasoning hold for financial executives? Now here me out. If executives lose, say $100 billion, and get paid, say, $1 billion, shouldn't we be happy to outsource the position and pay maybe $100 million for somebody who will only lose $50 billion?

Let's take this a step further. It is probably pretty hard to make a profit because of competition and all that. But it should be pretty easy to break even. Not much "talent" at all in that. I bet that at $500k or a million a year (if Obama's tax on the rich goes through) there would be an ample supply of people talented enough to break even, a far superior outcome compared to the present.

In fact, I wish I were authorized to start taking applications or even drawing randomly from a qualified pool ... I would *love* to test this out in practice. I wouldn't want to take any random person -- we could end up with a Jerry Spring guest or Paris Hilton for goodness sake -- but say any random MBA from a top 25 business school. I would bet good money that s/he could outperform the current crop of top financial executives on a salary-adjusted basis. And that is all that matters, right?

Tuesday, March 10, 2009

Double Dip Recession

I know, I know it is a little early to call the end of the recession, much less the next one. But hear me out. The government's massive monetary and fiscal stimulus must raise output, at least the way the government calculates it. With the appropriate lag, the economy will grow again. The recovery will be a weak one, however, without robust job growth. Then a bout of inflation and the Obama administration's tinkering with taxes, health care, etc. will cause uncertainty that will put the economy back into a tailspin. The only question is whether this will play out before the mid-term elections or not and how voters will respond.

For history buffs out there, I'm using the Great Depression as a model here. We may someday speak of the "Obama Recession" in the same way we mention the "Roosevelt Recession" of 1937-38 today. As most people don't remember the Roosevelt Recession, which gets lumped with the downturn of 1929-1933 and blamed on Herbert Hoover, the stock market crash, investment banks, etc., the Obama administration may not see this as a big risk. He is already setting us up for this by his repeated insistence that he "inherited this mess." It's nice to have a shrewd thinker in office for a change!

Saturday, March 07, 2009

Review of Hamilton's Curse by Thomas J. DiLorenzo

The subtitle of Hamilton's Curse by Thomas J. DiLorenzo (TJD) is ominous: "How Jefferson's Archenemy Betrayed the American Revolution -- and What It Means for Americans Today." According to TJD, Hamilton wanted a big, powerful government and a massive perpetual national debt and Jefferson wanted a small, limited one that would quickly eradicate the debt it took on during the Revolution. Jefferson was a free trader too, and knew that laissez-faire policies were "the surest route to peace and prosperity" (3). Hamilton, by contrast, believed "that government is best which governs most" (3). Unfortunately, from TJD's hyper-libertarian point of view, Hamilton won so today we live in Hamilton's world while we pay lip service to Jefferson.

I'm sorry, but this is a load of baloney. TJD would know that if he had bothered to read any of my work, including Hamilton Unbound, The First Wall Street, Financial Founding Fathers, or One Nation Under Debt, all available at Amazon. Instead, he bashes Chernow's well-written but economically un-astute recent biography of Hamilton, my review of which can be read here. TJD dismisses the claims of Hamilton scholars (but, tellingly, not me or Richard Sylla) that Hamilton created U.S. capitalism as "absurd" without actually rebutting them (5). And instead of trying to understand what Hamilton was trying to accomplish, he leans on the hoary caricatures of Hamilton as a protectionist (high tariff) and interventionist that have led in recent years to the lamentable use of Hamilton's name by the Brookings Institution (a leading liberal think tank), William Kristol (neocon editor), and Pat Buchanan (a so-called paleocon)!

Far from being "the champion of the Leviathan State" (9), Hamilton was a libertarian mugged by reality. He learned from hard experience that a limp-wristed state was just as big a threat to liberty as an autocracy. He therefore sought to create a vigorous government that could protect life, liberty, and property. But that is where he drew the line, and that is the right place to draw it. He wanted privately owned and operated banks, insurers, factories, even roads and bridges. He did not espouse the creation of a social safety net, income taxes, or free floating government fiat paper money.

As I argue in One Nation Under Debt, Hamilton wanted a government that was big only compared to what Jefferson wanted. Compared to today's behemoth, he wanted a tiny government, Jefferson a teensy one. Both would be with Ron Paul today. This is why TJD has to claim that it took "the relentless efforts of generations of his political heirs to install Hamiltonianism for good in this country" (7). Hamilton, by this definition, was no Hamiltonian! Again, TJD confuses what Hamilton really wanted with the use that others later made of his name. If TJD would have taken the time to read the original sources, or at least the relevant secondary literature (see above), he would have seen this and found a more appropriate scapegoat for his well justified abhorrence of the status quo.

In order to scapegoat Hamilton, TJD distorts the historical record severely. He calls this poor orphaned bastard (literally meant) from the West Indies "an aristocratic New Yorker," denies solid evidence of his abolitionist sentiments, and tosses around character aspersions like hand grenades. Worst of all, in my view, TJD grossly misunderstands Hamilton's view of the national debt. Hamilton did not champion "the creation of a large national debt" (p. 40), a large national debt was thrust upon him as Treasury Secretary. Where he differed with Jefferson was in how quickly to pay it off. Jefferson wanted to do so very quickly, even if it damaged the economy with high taxes. Hamilton wanted to do so over several decades, to keep taxes at more reasonable levels, to help jump start the modernization of the financial system, and to keep the young nation united. TJD, like many writers, completely misses the amortization feature that Hamilton built into government bonds and the fact that he gave public creditors a significant "haircut" or interest rate reduction by paying only part of the sum owed in 6 percent bonds and the rest in 3 percent bonds and zeros that converted into 6 percent bonds a decade later!

In short, this book is more diatribe than history, more fiction than fact. Our government is too big, waaaaaay too big, and our current national debt is getting out of control. But it isn't Hamilton's fault any more than Jefferson's.

Tuesday, March 03, 2009

Does Anyone Pay Their Taxes?

Our nation's debt is now almost $11 t ... t ... ttt ... tttrillion dollars yet it is clear that many people in high places don't pay their full due in taxes. A fourth Obama pick has now been nailed for tax "avoision."

This suggests two things to me:

1) Maybe the Senate should swap places with the IRS. It seems to be awfully good at sniffing out tax problems. Or maybe Obama should nominate everyone who makes more than $200-250k per year for something that would require a Senate looky loo. At the rate the Senate finds problems, it could pay down a good chunk of the debt. (Po' folks probably also have tax issues but it just wouldn't be cost effective to find $50 here, $500 there. Plus, there are so many of us, especially now.)

2) Maybe, just maybe, our tax code is too complex? Maybe people, even highly trained CPAs, do make honest mistakes because the code is so ... well, like a huge ever changing inconsistent blob?

Too bad the Flat Taxers of the 1990s messed up by seeming to argue for regressive income taxation instead of massive tax simplification. Cutting out deductions (especially that horrible mortgage interest deduction ... on new mortgages anyway) would allow Obama to slash nominal rates while increasing the total tax haul. Not to mention freeing up millions of man (and woman) hours currently wasted on figuring out how much one's season basketball tickets can be deducted.