Blind to Crony Socialism

Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed” bit).

 

People are usually struck by the seeming injustice of CEOs running companies into the ground and then getting paid obscene amounts in the form of “golden parachute” type good-bye presents. Often there is no other way to get rid of a bad CEO though –  if his or her employment contract guarantees a large termination benefit, the company may have little choice in the matter. As a rule, private shareholders are bearing the cost of such transactions, and they are in this position voluntarily (after all, they could sell their shares or vote against generous CEO payment packages at shareholder meetings). We realize of course that in the age of crony socialism, one usually has to judge such things carefully on a case by case basis. Still, it is a far cry from the misuse of taxpayer funds, which are appropriated by coercion and offer those bearing the costs no opportunity to “opt out”.

 

So where’s the liberal outrage with a story like the pension swindle in El Monte, California?  This is about a dying town, with a per capita income of $10,316 and a quarter of its population below the poverty line, that is paying a pension to one of its retired (at the age of 58) city managers of more than $250,000 per year.  Adjusted for inflation.  With medical for him and his wife.  And survivorship benefits.  And to which he contributed nothing.

Or another retired city manager who collects $216,000 per year, allowing him to “take some things off his bucket list” such as golfing at the Old Course at St Andrews.  And it looks like the public is paying for more than just green fees.  His retirement came shortly after he was swept up in an anti-prostitution sting operation.

More broadly, with Trump’s cabinet nominations and his presidency, there is currently an enormous amount of discussion about conflicts of interest in the public sector.  All of these discussions completely ignore the most flagrant example.

 

Squeezed by cronyism

 

Public Sector Union Thugs

Many politicians, especially Democrats, get elected with huge support from public sector unions.  When it comes to negotiating the compensation of public employees, the unionists sit, in essence, on both sides of the table.  The politicians buy the support of the unions with public money.

The favorite coinage for this corrupt bargain is pension and other retirement benefits since the real cost of the bribery is easily obscured with bogus assumptions, especially about expected investment returns.[1]  The end result is public pension plans that are underfunded by trillions and the occasional bankruptcy in a place like Detroit.

 

The costs of surreptitious vote buying via the detour of public sector unions supporting politicians, who then provide enormous taxpayer-funded benefits to union members have become increasingly obvious to the tax cows in recent years. Ever since the bubble era has begun to be frequently shaken by financial crises, many pension funds had to abandon their fictitious return assumptions. Suddenly it became clear that maintaining the generous benefits and pensions of a great many “civil servants” would require vast sacrifices. Alas, those asked to do the sacrificing can only dream of receiving even remotely similar benefits.

 

This is such a glaring conflict that I have tried to find if there are any laws against it.  So far, I have found nothing.  I have, however, found an Atlantic article by a clearly left-wing journalist who started off very sympathetic to public unions but who had a Damascene moment when he was a reporter in a small California town:

 

“Over the next couple years, I nevertheless came to see the several downsides of the union’s influence. Contract negotiations were held in private, with the City Council representing Rancho Cucamonga residents and union reps representing the firefighters. This posed a structural problem, for the interests of elected officials weren’t particularly aligned with the public, whereas the union negotiators had a personal stake in whatever compensation package was adopted.

“To be more specific, if a City Council member behaved in a fiscally irresponsible manner, it wouldn’t matter for at least a few years, by which time ambitious pols would have moved on to a county post or the state legislature. And lavish compensation packages could easily be obscured by combining what appeared to be a reasonable salary, the only number the public was likely to hear, with exorbitant pay for overtime or over the top fringe benefits.

“But if a City Council member crossed the fire union? The consequences were immediate. As soon as the next election rolled around, they’d face a well-financed challenger. On his campaign mailers, he’d be photographed flanked by handsome firefighters. On weekends, friendly guys in fire-coats would go door to door on behalf of their would be champion.  “We’re very concerned that Councilman X is endangering public safety by refusing to do Y,” they might say. Or else, “Challenger Z is a crucial ally in our effort to make this city safer.” The incentives were clear.”

 

Conclusion

The left goes nuts when a private company is contractually obliged to use its own money to pay off a failed CEO.  Or the leftists dust off their little-used copies of the Constitution and start quoting the Emoluments Clause when there is the prospect of a foreign visitor to the presidential inauguration taking a bag of peanuts from the minibar in a Trump hotel.

But when left-wing politicians collude with their public union supporters to rack up unpayable pension bills in the trillions, we get… crickets.

So I ask…where’s the outrage?

 

Well – at least someone is outraged. Sorry, “boss” – but you actually have no say in the matter.

 

Image captions by PT

Footnote:

1] Probably even accurate accounting would not be sufficient for voters to apply effective control. Voters only really pay attention when something hits their wallets through taxes. Therefore, they are unlikely to control future promises even with accurate information. What is required is 100% pre-funding of these liabilities on a completely arm’s-length basis, in cash and when they are granted. Or, as the private sector is increasingly doing, the conversion of defined benefit to defined contribution pension plans.

 

Roger Barris is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).

 

 
 

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3 Responses to “Where’s the Outrage?”

  • wmbean:

    The irony of the private corporation board of directors is that the individuals elected to the board tend to be other CEOs, bank executives, and the like. How are the bad employment contracts conceived? The same way their own employment contracts were conceived. Do you really believe that a board of directors member who is an executive of another corporation will really hold his the current or new CEO’s feet to the fire? Not bloody likely. This is the problem with one; size of the corporation, and two; very limited liability. Think for a minute that if corporations and limited liability organizations were outlawed what would happen? Whether one is the sole owner or a partner one owns the liabilities as well as the assets. No performance, no wealth or income.

    Of course that does not do much for government service and public service unions. If the public service unions had to pay into social security instead of being allowed to be excluded then pensions would be limited and the union members would need to contribute to their own 401ks. One way to avert the pending pension disaster is to convert all public service employee unions to social security and merge their pension assets into the social security funds. I think maximum social security benefit is $26, 200 this year. And let them have medicare. Do this for all levels of public service and seen what happens.

  • Bam_Man:

    This is nothing more than an obvious symptom of “Late Stage Crony Capitalism”. They don’t even pretend to hide their outrageous looting schemes anymore. As George Carlin astutely pointed out many years ago, “It’s a big club and you and I ain’t in it.”

  • woodsbp:

    “Where’s the outrage?” The ‘Kosh Korous’ is where. Lets see how the Three Houses sing along in harmony.

    “Often there is no other way to get rid of a bad CEO though – if his or her employment contract guarantees a large termination benefit, the company may have little choice in the matter.”

    This appears to be a frank admission that some corporate selection and compensation committees are staffed by irresponsible idiots. And that the larger the corporation the greater the level of idiocy that can be expected – except for financial corporations where illegality trumps incompetence.

    There is a well-known and very effective, but little used procedure, for ensuring that a board can easily rid itself of an inconvenient CEO – though it has to be asked; how in God’s Holy Name did the selection committee appoint such a person in the first place? Its written into their contract of employment: “You shall be paid a basic salary only and you shall be dismissed without notice and without additional compensation of any sort – at the whim of the board”. There are lots of folk who would be more than willing to accept this offer. 50% of something being economically superior to 100% of zero.

    The classical Neo-liberal economic theory underpinning the above is that the board of the corporation shall appoint the person who possesses the minimum levels of qualification and experiential competence necessary for the position: no more, no less. Or to put it in a more folksy mode: a standard burger between two halves of a bare bun – no ketsup or mayo or trimmings or side-orders. Think Minimum Wage. Not Maximum Waste.

    And Roger. Try not to denigrate labour unions too much. Believe it or not they are an economic complement to productive Capitalism! Without effective labour unions to act for them, labour is eventually enrolled by Farage-like demagogues. That is not part of the Capitalist song sheet.

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