Browsing the blog archives for November, 2013.

Capping CEO Pay in Switzerland-UPDATED


On November 24 the Swiss will vote to add a CEO pay restriction to the nation’s constitution. If 50% of the voters affirm, then CEO pay will be capped at 12 times that of the lowest paid worker in a company. The logic has simple emotional appeal–no individual should earn more in a month than another individual earns in a year. But the measure is devoid of logic.

First, notice the ease by which the Swiss constitution can be changed. The purpose of a constitution is to create principled and grounded law that is not subject to the whims of the masses. Changing a constitution should take some time and contemplation. If not, it offers no clear, lasting protection to anyone.

Second, notice the month-to-year comparison. Why is 12:1 the correct ratio? Why not 52:1 for a week-to-year comparison or 4:1 for a quarter-to-year comparison? Like most leftist economic policies, the numbers are merely arbitrary, designed to trigger an emotional response.

Third, notice the stated purpose of the “1:12 Initiative for Fair Pay.” As with similar measures in the US, its proponents say they want to address a “growing wealth gap” in Switzerland. Of course, their remedy is to trim the top, not raise the bottom.

Finally, notice the disregard for economic ramifications. The CEOs of 3 Swiss companies–Roche, Nestle, and ABB–earn 261, 238 and 225 times the salary of their lowest paid employee. These executives earn market salaries for their contributions. Some might think they make “too much,” but if this measure passes Swiss firms will either relocate their headquarters elsewhere or be stuck with less competitive executive talent. Neither outcome does anything for the lowest wage earners and both would have a negative impact on government tax revenues.

This vote reminds me of the time when candidate Obama was asked if he’d favor an increase in the capital gains tax even if the evidence was clear that doing so would reduce tax revenues. He answered in the affirmative, arguing that it’s just a matter of “fairness. It’s a clear red flag when legislators are openly willing to adopt policies that hurt their constituents in the name of “fairness.” The real issue in such instances is not fairness, but envy.



Taxis in Paris


Hailing a cab in Paris has become quite difficult in recent years, thanks to the alliance between the union and central planners. Paris caps the number of taxi licenses it awards and charges 230,000 Euros for each one. As a result, they are expensive and in short supply. Their drivers also have a reputation for poor service, which shouldn’t come as a surprise given the monopoly they enjoy.

Companies like SnapCar and VTC have moved into offer an alternative, Tourist Vehicles with Chauffeurs (VTCs in French). Unlike taxis, VTCs offer transportation by prior arrangement. Rather than wait for a taxi, patrons can use their smartphones to contact a VTC. They typically get a response in just a few minutes, which can beat the long wait for a taxi.

But unionized taxi drivers in Paris did not appreciate the competition. Rather than try to outperform the VTCs, they’ve lobbied for a mandated 2-hour delay before VTCs can respond to any requests. The French government “compromised” and agreed to a 15-minute delay. This means that VTCs must lower their service levels to the level of mediocrity offered by the taxis. Consumers have no choice in the matter.

This is French cronyism at its finest. Unions and government have colluded to restrict choices and deliver poor service to the public, all in the so-called national interest. Perhaps you are convinced that this type of thing doesn’t go on in the US. Think again.

Although cronyism in the US is often more subtle, examples are not difficult to find if you look for them. Public schools are funded by tax dollars, forcing Americans to pay dearly for a “free” education, and then pay again if they choose to send their kids to a private school. The federal government spent billions to prop up General Motors after consumers were not willing to purchase enough GM vehicles on their own. The City of Orlando just committed $30 million of tax dollars for a new soccer stadium to “boost the economy.”

In each of these examples, politicians committed tax revenues—future tax revenues in the case of the federal government—to pursue what liberals call the public good. In each instance, however, they distort markets by redistributing private wealth in ways individuals would not otherwise do on their own. If soccer fans in Orlando really wanted a new stadium, the city wouldn’t need to subsidize ticket prices by picking up part of the construction tab. If they don’t want it bad enough to pay the entire cost, then everyone else shouldn’t be required to pick up the tab.

Many Americans fail to see the link between the French taxi fiasco and incessant government activity in the US. Those who do make the connection seem unwilling to oppose this cronyism lest they be labeled as opponents of education, American cars, or economic development. The rest of us have grown tired of politicians who insist on raising taxes and hiking the debt to fund these types of projects. We are looking for new leadership.


You never could keep your plan


There has been a collective shock recently over the realization that many Americans simply won’t be able to keep their current health insurance plans, at least not as they were. Defenders of the President are attempting to reinterpret his multiple and infamous “if you like your plan you can keep it” appeals. Had Obama conceded this point while attempting to garner support for his version of reform, it’s unlikely that the bill would have passed. Those surprised that Obamacare is not expanding choices and coverage while reducing premiums have denied reality from the beginning. An elementary look at Obamacare reveals that this was never possible in the first place.

While everyone has a bone to pick with the healthcare system, you could divide Americans into 4 general categories before Obamacare passed: (1) The majority of Americans who had insurance and were generally satisfied with their plans, (2) a minority of Americans who had insurance and were not satisfied (i.e., wanted more coverage and/or lower premiums), (3) Americans who wanted insurance but either could not or would not purchase it, and (4) Americans who did not want insurance. Groups 1 and 4 together were too large in number to defeat, so the President had to ensure those in the first camp that Obamacare would leave them alone. Those of us who challenged his “keep your own plan” claims at the time were branded as naysayers, defenders of the big insurance companies, or even racists. Never mind the fact that we were right and the issue was never that complicated. Here’s a quick review.

Obamacare proponents claimed that it would deliver more coverage to more Americans at lower rates. All three of these claims could be true only if the system was incredibly inefficient, and an added layer of government bureaucracy could force greedy physicians, pharmaceutical firms and insurance companies to finally give people their money’s worth. While there are inefficiencies in the system, most politicians knew that “getting rid of the fat in the system” would not come close to raising the revenue required. In fact, few politicians actually made such an argument. Most inferred it, hoping that the masses wouldn’t dig deep enough to see the obvious flaw. They were right.

The problem is simple. You can’t add millions of non-payers and partial-payers to the health care rolls without getting someone else to pay more. Put another way, if you’re going to mandate that those in groups 2 and 3 get more but pay less, then those in group 4 must be forced to purchase coverage they don’t want or need, and those in group 1 must pay more for their coverage. It doesn’t add up any other way.

The “keep your own plan” scam is the best example of voodoo economics I’ve seen in a long time. Of course, acknowledging this obvious flaw begs an answer to another question. If the President and his central planners knew from the beginning that keeping your own plan would not be possible for many Americans–and sooner or later everyone would find out–then why did they make the claim? I believe they knew deception was required to take such a huge step toward a government health care system. I see no other rational explanation.


Reviving the Auto Industry


Mainstream media reports have been touting increases in auto sales as evidence that the economy is gaining steam. Indeed, consumer demand for new cars and trucks is widely viewed as a measure of broad confidence in the economy. A major AP story even added, “The government shutdown dampened — but didn’t stall — Americans’ demand for new cars and trucks.” Did they really expect the temporary partial government shutdown to halt all private economic activity? And how do they really know what effect—if any—the shutdown had on auto sales?

They’re not telling the entire story. While auto sales increased last quarter, this should not come as a surprise. Sales have been soft since the recession began, but the age of the average car on the road today has risen to 11 years. Pent up demand, low interest rates and model year clearances converged to lift sales. It was bound to happen sooner or later.

But there’s another factor at work here. People are stretching out their car loans more than ever. According to Experian, long term loans (73-84 months) increased to 25% of the total, while short term loans (25-36 months) decreased to 25% of the total. Put another way, many Americans saddled with older vehicles are starting to trade them in, but they are stretching out their payments over a longer period of time.

This trend also creates a potential problem down the road. With longer term loans, Americans will be building less equity in their vehicles and won’t be as likely to replace them in the near future. This doesn’t bode well for auto sales over the next decade. Less equity also puts buyers at risk of delinquency and repossession.

While economic activity is always welcome, this is hardly a sign of a reviving economy. It’s merely part of the predictable ebbs and flows of the auto business. We will be making progress when employers begin hiring more full time workers. Unfortunately, this just isn’t happening now.