Economists


Sometimes it is hard to put a quantitative measure to qualitative concepts like Stinking, Filthy and Dirty rich. As a useful approximation perhaps this story from AP will help bring some more rigour to these rather fuzzy concepts. And don’t bother placing a comment that reads: “they worked hard for it. ” Working hard ain’t got nothing to do with it. Indeed you will need a class anlysis to crack this chestnut.

Morgan Stanley CEO gets $40M 2006 bonus By JOE BEL
BRUNO, AP Business Writer
Fri Dec 15, 9:21 PM ET

NEW YORK – Morgan Stanley Inc., the second-largest
U.S. investment house, gave chief executive John Mack
$40 million in stock and options for 2006, reflecting
the largest bonus awarded to a Wall Street CEO.

Mack, 62, was awarded 461,821 stock units valued at
$36.2 million on December 12, according to a filing
with the Securities and Exchange Commission
late Thursday. He was also awarded 178,945 options to
buy Morgan Stanley shares, valued at about $4 million.

Morgan Stanley is expected to report its best year
ever on Tuesday, buoyed by a record run in the stock
market and an unprecedented level of takeover
activity. Goldman Sachs Group Inc., Bear Stearns Cos.
and Lehman Brothers Holdings Inc. turned in record
profit reports this week.

The record bonus comes 18 months since he rejoined
Morgan Stanley after an internal struggle over the
company’s lackluster performance caused the ouster of
CEO Philip Purcell. At the time, Mack pledged to
investors that he would turn around the company’s
sagging stock price and bolster profits.

He appears to be holding up his end of the bargain.
Since joining Morgan Stanley in June 2005, shares in
the company have risen about 62 percent – with some 40
percent of that coming in 2006.

Analysts project the company will report earnings of
$6.77 per share on $33.73 billion of revenue,
according to Thomson Financial. Most on Wall Street
expect Morgan Stanley will easily surpass these
projections.

Mack’s compensation eclipses the $38.3 million former
Goldman Sachs CEO Henry Paulson received in 2005.
Earlier this week, Lehman Brothers disclosed that CEO
Richard Fuld received $10.9 million in stock for 2006.

Bear Stearns, Goldman Sachs, and Merrill Lynch & Co.
have yet to file regulatory reports detailing bonus
packages for their top executives. However, on
average, 2006 will go down as some of the highest
overall compensation numbers in Wall Street’s history.

Goldman Sachs said in its full-year earnings report
that overall compensation this year was about $16.4
billion, or an average of about $622,000 per employee.
Lehman said it would pay its employees an average of
$335,441 this year – paying 25,936 workers a total of
$7.7 billion in salary, bonuses and other benefits. At
Bear Stearns, staff would receive an average of
$321,740 in compensation.

Morgan Stanley also reported stock bonuses for seven
of its other top executive officers, according to
regulatory filings.

Among them was co-presidents’ Zoe Cruz, who received
$17 million in stock and $1.92 million in options, and
Robert Scully, was awarded $11.4 million in stock and
$1.28 million in options. Chief Financial Officer
David Sidwell was paid $7.98 million in stock and
$890,291 in options.

Shares of the company slipped 34 cents to close at
$79.26.

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We have decided to sell off Canadian Observer.  We are willing to take raw cash or a paragraph about why you are the individual or individual’s to take over the blog.   The blog is well established and has good potential for growth.

Interested parties can reach us in the comments section.

Poor old uncle Milty dies in the shadow of his discredited doctrines on both money and government spending. No worries he will receive posthumous six gun salute from nearly every central banker that matters. We will no doubt hear endless references to his faux Nobel prize (all the so-called Nobel prizes are actually prizes awarded by the Swedish central bank in honor of Alfred Nobel). Not since J.B. Say has liberal economics been graced by such a theoretician of obscurantism. RIP SOB.

In case you all missed this one the FT is reporting that MPs in England are questioning why it is that prince Charles is exempt from paying corporate or personal income tax on his main sources of income. In related news economists came out with a study which showed that taxes on Royalty cause a mis-allocation of hereditary titles and would create a non-Pareto optimal allocation of resources.

By Goodwin Ginger

The head of the Bank of Canada David Dodge sent our bullshit detector into the red when he uttered this rather unintelligible defense of Income Trusts:

“The work we have done in terms of capital markets, per se, is that probably, on balance, income trusts make capital markets somewhat more complete and somewhat more efficient.”

Hardly convincing. Dodge must have had to dig deep way back to his school boy days at Princeton to come up with this half hearted defense of income trusts. Just re-read that sentence: per se …on balance…somewhat more complete and somewhat more efficient.”

Lets take this from a probabilistic point of view. As completeness is really a property of efficiency we can rewrite the sentence to read: ‘The limited work we have done on capital markets is that probably on a balance (.51) trusts make capital markets somewhat (.50) more complete and therefore somewhat more efficient.’ The probability that Dodge thinks that income trusts make the capital markets more efficient can be calculated by multiplying the values (.51) X (.50) = (.2550). So even if we just disregard the fact that this finding is based on limited research and as such means that the conclusions are not robust (i.e., you cannot generalize from them) there is still only a one and four chance that Dodge believes income trusts will improve the efficiency of capital markets. Not much of a commitment from Dodge.

How the Globe and Mail managed to translate this into the headline “Dodge touts trusts’ benefits: Bank Governor says they make markets more efficient,” we do not know. Maybe they already have trust in trusts as an efficient mechanism for the intergenerational preservation privilege. Not usually a measure of market efficiency but hey if stretched you could fit it in to the definition.

Indeed if the Bank of Canada has been doing any research on how income trusts increase capital market efficiency you could have fooled us. At their website they list all their Working Papers going back to 1996 way before Dodge ever got the top job. There is exactly one paper which deals with income trusts and the question of the efficiency of capital markets is not raised let alone assessed in one of those prevaricating models so beloved by academic economists and so detested by the real world. It gets even worse. In the past 48 issues of the Bank of Canada Review (dating back to 1994) there has been only one article (not issue but article) on capital market efficiency and income trusts do not even make a salutary appearance. So if the Bank of Canada has been doing any research on the implication of income trusts on capital market efficiency it is the best kept secret since the days when they were targeting inflation without telling us what the target was.

How do you know when an orthodox economist is prevaricating? When he or she speaks like a politician. Per se, on balance that is somewhat our position.

And they say marxist economists are slaves to the dead ideas of an old dead man.

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Tim Duy

By Goodwin Ginger
A couple of days back we weighed in on the BCE trust tax boondoggle. The point of our intervention was to cast doubt on the certainty of the law like connection that is drawn between decreased taxes and increased investment and thereby productivity gains. The Pencils got in an uproar: “read an introductory microecon text” the school boys pronounced. To which we replied “we have read that book” (they are all interchangeable; if ever there was a scam it is the new edition of this years micro/macro textbook racket/market). The problem is that in the real world capitalists make strategic decisions in an attempt to further different goals over different time horizons only a few of which are given by the neoclassical theory of the firm. Moreover, as prices and environments change, the initial calculations upon which the most rational of plans are drawn up shifts, sometimes in the right direction, but sometimes much further than any theory could have anticipated in the wrong direction. It should be noted that the law of Large Numbers does not ensure that the two sides of the ledger net out. For the Pencils out there that is what Keynes meant by uncertainty (you can read about it in a fourth year seminar).

The story of how capitalism works gets even worse when one tries to tell a macroeconomic narrative via the aggregation of the neoclassical firm. Moroever, bad public policy will also arise whenever the stylized representative firm is the basis upon which public policy is constructed. This is necessarily the case because in reality firms have bastardized utility functions owing to the fact that they are created over a shifting time horizon and a shifting environment in the context of uncertainty.  Public policy based on the representative firm is simply too daft to capture this essential aspect of reality.

The same can be said about the theory of comparative advantage built as it is on a stylized representative nation. Brad Delong, one of the leading neoliberals of our time (an honest man too; in so far as he really truly did /does believe in those fairy tales he retails from his lectern), seems to be having a crisis of faith. Why does Mexico not follow the developmental trajectory that neoliberal theory predicted it would have? Brad poses his intellectual conundrum thus:

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.

[…]

We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

The last sentence is painstakingly telling: not even Brad believes his pitiful counter factual that perhaps ‘Mexico would have been even worse off today had it not been for NAFTA.’

To figure out why it has not gone according to plan Brad has two options. On the one hand, he could take the preferred path of neoconservatives: “The best laid plans of mice and men and all that jazz.” Or, on the other hand, he could do the honest thing and think like a political economist and ask: Where did the money go? Answering the most basic question “who won and who lost” will take one much closer answering the “why” question than hand wringing over a doomed ontology of capitalism. Here is to keeping your stick on the ice.

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