Washington Push on Executive Pay Has Unintended Consequences

Regulators at the SEC and politicians on Capitol Hill seem to have short memories when it comes to executive compensation.  When the SEC years ago decided to make the compensation of top executives public information, it had the all too predictable result of actually increasing average compensation levels.  Once a top CEO knew what other CEOs were making, he could argue for a pay hike based upon being “underpaid”.  Of course regulators were “shocked” by the resulting “race to the top.” 

Similarly Congress was shocked when after deciding to heavily tax salaries over $1 million, that companies shifted away from direct cash pay and toward options and increased bonuses in the form of shares. 

And soon Washington will also pretend to be shocked and outraged that the current anger over Wall Street bonuses is leading firms to reduce bonuses, but increase base pay.  As illustrated in today’s Wall Street Journal, companies like Morgan Stanley have increased their base pay from $300,000 to $400,000.  Even Citibank, essentially a ward of the US government, is increasing its base pay to $300,000 for employees that were previously eligible for bonuses.

The real harm in this is not that Wall Street employees are getting paid more in cash, but that less of their compensation will be tied to their performance, and the performance of their firm.  A flat salary, regardless of how hard you work, will encourage shirking. Perhaps even worse, is that more upfront cash, and less long-term stock options, will shift Wall Street’s focus even more toward today, rather than tomorrow.  So much for Washington fixing the short term focus of Wall Street, but then one shouldn’t be too surprised given the even more short term focus of Washington.

Too Big to Fail

One of the most pernicious public policies aggravating the financial crisis is that of “too big to fail.” The doctrine states that some banks (now financial institutions generally) are so large that their failure would incur “systemic risk” for the financial system. That sounds terrible and it is intended to. Financial services regulators and Treasury secretaries use it to frighten small children and congressmen. How can an elected official vote to incur systemic risk? He must vote to approve the bank bailout of the day. In fact, people who use the term cannot even agree among themselves as to what it means, much less what causes it and, therefore, what the appropriate response would be. I suggest the reader substitute the phrase “too politically connected to fail” whenever he sees “too big to fail.” What follows will then be rendered intelligible.

Whiskey Tango Foxtrot Moment in Afghanistan

In yesterday’s Washington Post, veteran newsman Bob Woodward recounts a recent meeting between National Security Advisor James Jones and a few dozen Marine officers in Afghanistan’s Helmand province under the command of Marine Brig. Gen. Lawrence D. Nicholson. 

The subject on everyone’s mind: force levels. Saying that he was “a little light,” Nicholson hinted that he could use more forces, probably thousands more. “We don’t have enough force to go everywhere,” Nicholson said.

Of course he doesn’t. One senior military commander confided, in Woodward’s telling, ”that there would need to be more than 100,000 troops to execute the counterinsurgency strategy of holding areas and towns after clearing out the Taliban insurgents. That is at least 32,000 more than the 68,000 currently authorized.”

So, Nicholson and other commanders were asking: Can we expect to receive additional troops in Afghanistan any time soon?

Jones’s answer: don’t bet on it.

The retired Marine Corps general reminded his audience in Helmand that Obama has approved two increases already. Going beyond merely an endorsement of the outgoing Bush admiministration’s decision to more than double the force in Afghanistan, Obama accepted the recommendation of his advisers to send an additional 17,000, and then shortly thereafter another 4,000.

Well, Jones went on, after all those additional troops,…if there were new requests for force now, the president would quite likely have “a Whiskey Tango Foxtrot moment.” Everyone in the room caught the phonetic reference to WTF – which in the military and elsewhere means “What the [expletive]?”

Nicholson and his colonels – all or nearly all veterans of Iraq – seemed to blanch at the unambiguous message that this might be all the troops they were going to get.

Nicholson and his Marines should be concerned. But so should all Americans. The men and women in our military have been given a mission that is highly dependent upon a very large number of troops, and they don’t have a very large number of troops. The clear, hold and build strategy is dangerous and difficult – even when you have the troop levels that the military’s doctrine recommends: 20 troops per 1,000 indigenous population. In a country the size of Afghanistan (with an estimated population of 33 million), that wouldn’t be 100,000 troops, that would be 660,000 troops.

Pacifying all of Afghanistan would be nearly impossible with one half that number of troops. It is foolhardy to even attempt such a mission with less than a sixth that many.

So, what gives? (Or, as the military folks might say, “Whiskey, Tango, Foxtrot?”)

It is doubtful that anyone in the White House, the Pentagon, or on Capitol Hill honestly believes that 70,000 U.S. troops can turn Afghanistan into a central Asian version of Alabama – or even Algeria, for that matter. They might reasonably object that they aren’t trying to pacify the whole country, but rather the most restive provinces in the south and east. Perhaps barely 10 million people live there (which my calculator says would require a force of 200,000). Besides, they might go on, the 20 per 1,000 figure is just a guideline, just a rule-of-thumb. Some missions have succeeded with fewer than that ratio of troops, just as other missions have failed with troop ratios in excess of 20 : 1,000.

These seem to be nothing more than thin rationalizations. They reflect the fact that the American public would not support an open-ended mission in Afghanistan that would occupy essentially all of our Marine and Army personnel for many years. The “70,000 troops for who knows how long” is a political statement. They are pursuing a strategy shaped by focus groups and polls, rather than by doctrine and common sense.

No, that is not an argument for more troops. It is not an argument for ignoring public sentiment. It is an argument for a different mission.

The public’s growing ambivalence about the war in Afghanistan reflects a well-placed broader skepticism about population-centric counterinsurgency that are heavily dependent upon very large concentrations of troops staying in country for a very long period of time. Americans don’t support such missions, because the benefits don’t outweigh the costs. And they likely never will. They are equally skeptical of COIN’s intellectual cousin, ambitious nation-building projects.

And if I’m right, and if no one actually believes that killing suspected Taliban, destroying fields of poppies, building roads and bridges,  establishing judicial standards and training Afghan police is actually going to work, then, well,….

Whiskey Tango Foxtrot?

The mission in Afghanistan, especially the troop increases, appear more and more as face-saving gestures. A show of wanting to do something, even if policymakers doubt that it will actually succeed. It is a delaying action, a postponing of the inevitable, a kicking the can down the road.

I hope I’m wrong. I hope that a miracle happens. I hope that the Taliban disappears. That Osama bin Laden, Ayman al-Zawahiri, Mullah Mohammed Omar, Jalaluddin Haqqani, Gulbuddin Hekmatyar, and every other bad guy I can name winds up dead on an Afghan battlefield. Tomorrow, preferably. I hope that all Afghans (girls and boys) get an education and earn a decent living. I hope that Hamid Karzai learns how to govern, Afghan judges learn how to judge, and that the Afghan National Army and Afghan National Police quickly learn how to defend their own country.

In short, I hope that the people who are crafting our Afghan strategy know something that I don’t.

I fear, however, that the deaths and grievous injuries endured by our military personnel during this interim period, which may run for years or even decades, as we seek “peace with honor” or “a decent interval” (or pick your own favorite Vietnam cliche), will weigh heavily on the consciences of policy makers if, in the end, they have merely burdened these men and women with an impossible task.

Ask Robert McNamara how that feels.

The Failure of Do-Nothing Policies

A news story from today in a slightly alternate universe:

Jobless Rate at 26-Year High

Employers kept slashing jobs at a furious pace in June as the unemployment rate edged ever closer to double-digit levels, undermining signs of progress in the economy, and making clear that the job market remains in terrible shape.

The number of jobs on employers’ payrolls fell by 467,000, the Labor Department said. That is many more jobs than were shed in May and far worse than the 350,000 job losses that economists were forecasting.

Job losses peaked in January and had declined every month until June. The steep losses show that even as there are signs that total economic activity may level off or begin growing later this year, the nation’s employers are still pulling back.

White House press secretary Robert Gibbs said, “President Obama proposed a $787 billion stimulus program to get this country moving again. He tried to save the jobs at GM and Chrysler. But the do-nothing Republicans filibustered and blocked that progressive legislation, and these are the results.”

House Speaker Nancy Pelosi said at a press conference, “We begged President Bush to save Fannie Mae, Merrill Lynch, Bank of America, AIG, the rest of Wall Street, the banks, and the automobile industry. We begged him to spend $700 billion of taxpayers’ money to bail out America’s great companies. We begged him to ignore the deficit and spend more money we don’t have. But did he listen? No, he just sat there wearing his Adam Smith tie and refused to spend even a single trillion to save jobs. And now unemployment is at 9.5 percent. I hope he’s happy.”

Democrats on Capitol Hill agreed that the “do-nothing” response to the financial crisis had led to rising unemployment and a sluggish economy. If the Bush and Obama administrations had been willing to invest in American companies, run the deficit up to $1.8 trillion, and talk about all sorts of new taxes, regulations, and spending programs, then certainly the economy would be recovering by now, they said.

Congress Just Raised Our Credit Card Fees

Technically, it was the companies which raised their fees.  But they did so to anticipate new legislative restrictions on fees taking effect.  Congress wanted to cut costs for consumers, but ended up costing them instead.

Reports the Washington Post:

Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.

Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.

“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta – lower limits, higher rates, higher minimum payments.”

It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.

The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.

One hates to think of what additional “help” Congress plans on providing for us in the future.

Obama Adopts the Mikulski Principle

Economists have advanced many theories of taxation. But as usual, the one that seems to explain the policies of the Obama administration best is what I call the Mikulski Principle, the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

Let’s go and get it from those who’ve got it.

Just take a look at the myriad taxes proposed or publicly floated by President Obama and his aides and allies:

As the links will indicate, not all of these taxes have been formally proposed, and some have already run into sufficient criticism to have become unlikely. But together they illustrate the mindset of an administration and a Congress determined to extract as much money as they can from Americans rather than cut back on expenditures, which have doubled in about eight-and-a-half years.

Indeed, the administration’s programs remind us that today is July 2, the 233rd anniversary of the day on which the Continental Congress voted for American independence, issuing a document that declared, among other things,

He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.