How does bloated CEO pay maximize shareholder value? One of the great mysteries of the world

June 12, 2021 Leave a comment

from Dean Baker

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

If history follows the path Thomas Piketty noted, it will . . .

June 11, 2021 1 comment

from Ikonoclast  (originally a comment)

If history follows the path Thomas PIketty noted, it will take a major war or revolution to change matters. Each time profit rises faster than the overall rate of growth we get a war, like WW1 or WW2 or a great depression like most of the 1930s. Sometimes we get the depression, then the war. Piketty noted that under capitalism’s axioms:

If R (rate of return on capital) is Greater Than G (growth in inflation adjusted dollars) then inequality increases.

There are real limits to the increase in inequality. People reach the point where they will not tolerate greater inequality. They will rebel against the system and elites enforcing the inequality or be diverted by elite misdirection into attacking others.

Piketty’s “Conditional Law of Approach to an Asymptote” (my clumsy title for it) is fully compatible with Capital as Power theory. There is no need to assume that R and G are measuring real wealth. They are simply the ratios of nominal capital being assigned to each variable by the calculations and operations of the capitalist financial system. Since money does not measure value but rather implements creorder power, then the relative power of the owners of capital axiomatically increases and the relative power of the rest of society axiomatically decreases. However, the decrease in the relative power of the bulk of the people has a lower real limit (more a band than a precise point) this being the physiological or psychological limits beyond which people find life intolerable or impossible. The rise in real inequality will be found to have real limits. Read more…

On the limits of ‘mediation analysis’ and ‘statistical causality’

June 11, 2021 Leave a comment

from Lars Syll

mediator“Mediation analysis” is this thing where you have a treatment and an outcome and you’re trying to model how the treatment works: how much does it directly affect the outcome, and how much is the effect “mediated” through intermediate variables …

In the real world, it’s my impression that almost all the mediation analyses that people actually fit in the social and medical sciences are misguided: lots of examples where the assumptions aren’t clear and where, in any case, coefficient estimates are hopelessly noisy and where confused people will over-interpret statistical significance …

More and more I’ve been coming to the conclusion that the standard causal inference paradigm is broken … So how to do it? I don’t think traditional path analysis or other multivariate methods of the throw-all-the-data-in-the-blender-and-let-God-sort-em-out variety will do the job. Instead we need some structure and some prior information.

Andrew Gelman

Causality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. Read more…

The quant case for open-access COVID vaccines

June 10, 2021 5 comments

from Blair Fix

Around the world, rich countries are celebrating as their COVID numbers fall. Their success is no mystery — it’s because of a massive rollout of COVID vaccines. While we should celebrate the development of these vaccines, their deployment highlights the tyrannies of capitalism.

Most of the basic research for COVID vaccines was funded by the public. Yet their manufacture is controlled by Big Pharma. The predictable result is that vaccines flow to the highest bidder and Big Pharma reaps the profit. Thus, the world is now ‘blessed’ with 9 new pharma billionaires.

Since we’re stuck with COVID for the long haul, we need to end the privatized vaccine model. The alternative is surprisingly simple. Let governments continue to fund basic science. And let private companies continue to manufacture vaccines. Just don’t let these companies have a monopoly on property rights. Instead, put vaccines in the Creative Commons. The result will be cheap vaccines, available to all.

To make the case for open-access vaccines, it helps to run the numbers. To date, the vast majority of COVID vaccines have gone to rich nations. It’s plutocratic healthcare in action: more money = more vaccines.

Let the data speak.

The global distribution of COVID cases

We’ll start by looking at how the global distribution of COVID cases has played out since the beginning of the pandemic. Figure 1 shows the global share of cases by continent since February 2020. Read more…

Power shifts, or not?

June 9, 2021 4 comments

from Peter Radford

“Even someone as smart as Larry Summers.”  

Power can flummox even the best economist.  A typical explanation of events in an economy makes scant reference to the way in which power distorts the wondrous smooth motions that so obsess the discipline.  It’s almost as if human relationships don’t exist in those wonderful models they are all so proud of.  For the rest of us, power is central.  It takes little time to realize that establishing an imbalance can have all sorts of advantages.  They most notable being that it defeats or undermines the consequences of the classic impersonal marketplace.  Fair is out.  Asymmetry is in.

Not that the existence of asymmetry ought surprise anyone.  The real world is an awfully lumpy place.  Resources, information, people, and everything else exist in clumps.  Without those clumps there would be no exchange.  There would be no trade.  There would be no markets.  But the world is lumpy, hence all of the above.  This paradox, that economists study idealized worlds whose features eliminate the very phenomena that are the supposed object of study, is one of the more endearing aspects of economics.  Building theories about made up worlds is a whole lot more fun and easier than inventing them to explain the real world.  But, hey, let’s be fair: as long as we all know that we are theorizing about our fantasies in order to extract useful nuggets about the real world, we should go for it.  Unfortunately, and I think this is fair criticism, the way in which economics is taught often elides this. Read more…

Pharmaceuticals: Beating the hell out of the average

June 9, 2021 7 comments

from Shimshon Bichler and Jonathan Nitzan

A lot has been written on the imminent decline of pharmaceuticals: their falling production, reduced R&D, declining innovation, the opioid crisis, patent cliffs, biting competition from generic drugs, growing opposition to IPR. The list goes on.

Top Guns

Judging by the yardsticks that matter the most, though – namely, the companies’ relative profit and relative capitalization – pharmaceuticals are doing just fine. In fact, based on these yardsticks, they remain the most powerful corporate sector of all.

In their 2020 study, ‘Profitability of Large Pharmaceutical Companies Compared With Other Large Public Companies‘ (JAMA 323, 9, March 3, pp. 834-843), Ledley et al. show that, during the period 2000-2018, the top 35 listed pharmaceutical firms outperformed every other corporate group in the S&P 500 (with the possible neck and neck exception of technology companies).

They had higher than average: (1) gross profit margins (76.5% vs 37.4% for the remaining S&P 500); (2) EBITDA margins (29.4% vs 19%) [2];  and (3) net profit margins (13.8% vs 7.7%). They also did better on all three margins than every other corporate subsector in the S&P 500, including non-pharmaceutical health-care firms.

Figure 1, taken from Ledley et al., visualizes this systematic out-performance. Read more…

And we are still doing nothing substantive to stop this

June 8, 2021 15 comments

from Ikonoclast  (originally a comment)

. . . what really counts is the amount of coal, oil and gas we are burning and thus how much CO2 we are releasing into the atmosphere. The benign Holocene is ending. Scientists have declared we have already entered a new era, the Anthropocene. The climate, and thus weather patterns, of the benign (for humans at least) Holocene were a resource for human civilization.

It is common mistake, and one I long made, to pay attention only to primary input resources. Thus we were obsessed about peak oil, peak coal and peak gas, imagining that the supply of these primary input resources would be the constraint for our global civilization, civilization being so energy dependent. However, it turns out that the major constraint on civilization involves not our inputs but our wastes. Our wastes wreck ecological, biosphere and geosphere systems.

Climate change is the best case in point of the above (though not the only case). Climate change melts ice caps and glaciers, raises sea levels, raises temperatures and exacerbates both floods and droughts, generating wilder swings between the two and periods where regional climate remains stuck longer in one phase. It changes growing seasons affecting food production.

It is extremely troubling that coal, oil and gas still contribute so much to our energy mix. To save the world from catastrophic climate change we should have already reduced our use to the point that we could reach zero use by 2030. We have already used up almost all of our carbon budget. Read more…

Global energy consumption 1900 to 2017

June 8, 2021 10 comments

Patent monopolies and inequality: When we give rich people money, why does inequality surprise us?

June 7, 2021 7 comments

from Dean Baker

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine. Read more…

Are mindless zombies a projection of what we fear we have really become?

June 6, 2021 10 comments

from Ikonoclast (originally a comment)

It’s strange in a time of gross over-population that dystopian fiction so often focuses on hypothesized fertility crises. We see this in The Handmaid’s Tale and Children of Men, for example. This is when the real problem is of course the diametric opposite. The earth has a vast over-population crisis of humans and an accelerating decline of all other forms of life (the sixth mass extinction).

It leads me to wonder if genuine fears are deflected by an invocation of the opposite in story-telling. Dystopian and horror fiction give us a delicious thrill of vicarious fear when we actually feel fully secure that “that could never happen”. What people enjoy about disaster storytelling is feeling proof against the specific disaster depicted. It could only happen to others or so we think. We are not so foolish and purblind as the people in the story so that could never happen to us. Actually, we are as foolish and purblind but in a afferent way. The laws of nature would never recoil against us and seriously threaten us with zombies. Actually the laws of nature do recoil against us and are about to do so in a catastrophic manner, though probably not by generating zombies. Although, it must be said that humans infected by capitalist ideology are pretty much like mindless zombies in the way they consume today without thought for a sustainable tomorrow. Are mindless zombies a projection of what we fear we have really become? Are we truly afraid of ourselves, of our inner mindlessness, as we indeed should be? Read more…

How statistics can be misleading

June 5, 2021 2 comments

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from Lars Syll

From a theoretical perspective, Simpson’s paradox importantly shows that causality can never be reduced to a question of statistics or probabilities.

To understand causality we always have to relate it to a specific causal structure. Statistical correlations are never enough. No structure, no causality. Read more…

How U.S. capitalism lifts all boats

June 4, 2021 20 comments

from Jonathan Nitzan and Shimshon Bichler

Nitzan june 4

Liberals insist that capitalism lifts all boats. It doesn’t, certainly not in the U.S. Since 1880, ‘real’ total returns on the S&P 500 rose, on an annual average, 4.6% faster than U.S. ‘real’ wages. The total returns/wage ratio today is 1,166 greater than in 1880.

Causal inference from observational data

June 4, 2021 2 comments

from Lars Syll

nisbettResearchers often determine the individual’s contemporary IQ or IQ earlier in life, socioeconomic status of the family of origin, living circumstances when the individual was a child, number of siblings, whether the family had a library card, educational attainment of the individual, and other variables, and put all of them into a multiple-regression equation predicting adult socioeconomic status or income or social pathology or whatever. Researchers then report the magnitude of the contribution of each of the variables in the regression equation, net of all the others (that is, holding constant all the others). It always turns out that IQ, net of all the other variables, is important to outcomes. But … the independent variables pose a tangle of causality – with some causing others in goodness-knows-what ways and some being caused by unknown variables that have not even been measured. Higher socioeconomic status of parents is related to educational attainment of the child, but higher-socioeconomic-status parents have higher IQs, and this affects both the genes that the child has and the emphasis that the parents are likely to place on education and the quality of the parenting with respect to encouragement of intellectual skills and so on. So statements such as “IQ accounts for X percent of the variation in occupational attainment” are built on the shakiest of statistical foundations. What nature hath joined together, multiple regressions cannot put asunder.

Now, I think this is right as far as it goes, although it would certainly have strengthened Nisbett’s argumentation if he had elaborated more on the methodological question around causality, or at least had given some mathematical-statistical-econometric references. Unfortunately, his alternative approach is not more convincing than regression analysis. Read more…

China’s demographic crisis

June 3, 2021 1 comment

from Dean Baker

Both the Post and NYT had pieces today on how China is encouraging families to have more babies in order to counter an alleged demographic crisis. The basic story, which has been repeated many times in the U.S., is that China will be seeing a decline in the ratio of workers to retirees since families have had relatively few children over the last four decades. This is supposed to be really bad news, in fact, a crisis.

In response, China’s government is apparently taking steps to encourage families to have more children. This follows several decades in which it had the opposite policy in place, encouraging families to have just one child.

The crisis story is a bit hard to understand for those of us familiar with arithmetic. Every wealthy country has seen a sharp reduction in the ratio of working-age people to retirees. That is something that happens when better living standards and improved health care allow people to live longer. Also, when countries have gotten wealthier, people have chosen to have fewer children.

This rise in the ratio of retirees to the working-age population has not prevented both working-age people and retirees from enjoying higher living standards. This isn’t magic, productivity rises through time as technology improves and workers become better educated. This means that each worker can produce more output in the hours they work.

The graph below Read more…

The ritual of capitalization

June 2, 2021 10 comments

from Blair Fix

. . . the clergy aren’t priests … they’re economists.

There’s something mysterious about finance. The symbols are arcane. The math is complex. The practitioners are impressively educated. And the stakes are high. All of this gives finance the veneer of higher truth — as if quants are uncovering a reality not accessible to the rest of us. In a sense they are. But the ‘reality’ is not what you think.

When you look at stock-market numbers, they do point to a truth about the world. But it is a truth not about natural law or of human nature. It is a truth about human ideology. The reality is that finance is a quantitative belief system. At its center is a universal ritual — the ritual of capitalization. It is this ritual that underlies all stock-market numbers.

In this post, we’ll look at the regularities that stem from the ritual of capitalization. They are astonishing in scope — a breathtaking consistency to human behavior. They beg the mind to look for some material basis for their existence. But that is a mistake. The reality is that the regularities of capitalization are an artifact of ideas — a manifestation of capitalist ideology itself. A regularity from ritual.

Giving property a number

The ritual of capitalization starts with the institutional act of exclusion — namely property.1 Property, of course, has a deep history that long predates capitalism. I won’t wade into this history here. Instead, I’ll defer to Jean-Jacques Rousseau’s succinct (but apocryphal) telling of property’s emergence. Property arose when

[t]he first person who, having enclosed a plot of land, took it into his head to say ‘this is mine’ and found people simple enough to believe him …

Putting a fence around something and calling it ‘property’ is step 1 of capitalization. But property alone is not enough. Romans had property. So did most feudal kingdoms. But these societies did not have capitalization. To capitalize property, there is a second step. You must mix property with finance. Read more…

Racial wealth gap in the U.S.

June 2, 2021 Leave a comment

Is causality only in the mind?

June 2, 2021 2 comments

from Lars Syll

James HeckmanI make two main points that are firmly anchored in the econometric tradition. The first is that causality is a property of a model of hypotheticals. A fully articulated model of the phenomena being studied precisely defines hypothetical or counterfactual states. A definition of causality drops out of a fully articulated model as an automatic by-product. A model is a set of possible counterfactual worlds constructed under some rules. The rules may be the laws of physics, the consequences of utility maximization, or the rules governing social interactions, to take only three of many possible examples. A model is in the mind. As a consequence, causality is in the mind.

James Heckman

So, according to this ‘Nobel prize’ winning econometrician, “causality is in the mind.” But is that a tenable view? Yours truly thinks not. If one as an economist or social scientist would subscribe to that view there would be pretty little reason to be interested in questions of causality at all.  And it sure doesn’t suffice just to say that all science is predicated on assumptions. To most of us, models are seen as ‘vehicles’ or ‘instruments’ by which we represent causal processes and structures that exist and operate in the real world. As we all know, models often do not succeed in representing or explaining these processes and structures, but if we didn’t consider them as anything but figments of our minds, well then maybe we ought to reconsider why we should be in the science business at all … Read more…

Two kinds of inflation chart

June 1, 2021 3 comments

This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.

“This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.”

source: https://www.forbes.com/sites/vineerbhansali/2021/02/23/why-paying-attention-to-asset-price-inflation-is-important-for-investors/?sh=4f1909944399

Economists need to rethink the foundations of their discipline

June 1, 2021 8 comments

from Ken Zimmerman (originally a comment)

Economists are fixated on a framework developed for relationships that are fixed and predictable. Relationships involving humans are neither fixed nor predictable. So the problem infecting economics is a simple one — it’s using the wrong framework. Which means of course economists can never reveal anything of importance or useful in understanding economic relationships. Economists need to rethink the foundations of their discipline.

If, as I believe economics is a social science, here are some things economists need to consider in doing the make over of their discipline.

The social sciences are about how society works. Social scientists examine institutions like the government, the economy, and family; they also study how individuals and groups interact with one another and the roots of human behavior.

Some examples of social sciences include the following: Read more…

World population graph: past, present, and future

May 31, 2021 3 comments