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).

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • On the Marc Faber Controversy
      Il n'y a rien à défendre - by Vidocq   Dr. Marc Faber, author of the Gloom, Boom and Doom Report Photo credit: Michael Wildi / RDB     Il n'y a rien à défendre - There is nothing to defend Personne n'a lu ce qui a été écrit. - Nobody read what was written. Personne n'a pensé avant d'agir, comme la plupart des gens de nos jours. - No one thought before acting, like most people nowadays. L'homme que tu pends est l'homme que tu as fait, pas l'homme que...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • Tales From a Late Stage Bull Market
      Pro-Growth Occurrences An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.   This happens almost every time Bigfoot is in front of a camera. [PT] Cartoon by Gary Larson   Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com