Is There A Good Way To Stop Corporate Inversions?

The increase in corporate inversions has triggered debate in Washington.  Some argue that cutting the corporate tax rate is the solution, and others are considering changes in laws that make it more difficult for corporations to reincorporate in lower tax nations.  There is a good description of the issues on both sides of the debate in this article.

 

Why Are Customers and Employees Rallying In Support Of A Fired CEO

One of the most successful grocery chains in America is on strike.  Customers and employees are protesting the firing of its CEO.  There are not many firms in America where that would happen today.  This article on the Market Basket protests in New England has made it into the national press because it is unique.  It flies in the face of the dominant business ethic in America which holds that maximizing shareholder value is the mission of the corporation.  The deposed CEO has operated the successful firm based upon a strikingly different view of the corporate mission.  He claims that the key to the firm's success has been building a link between its employees and its customers.  While other firms, which often claim that "employees are their greatest asset", cut employee benefits and downsize in order to maximize shareholder value, Market Basket has demonstrated that the old fashioned ideas held by Market Basket's CEO can be a key to success in business.  The owners of Market Basket have prospered under this form of management. A community of shared interest has been established between the employees and its customers. 

The firing of the CEO at Market Basket has little to do with the firm's performance.  There has been a long history of disputes between the members of the family which own Market Basket.  One wing of the family gained control over the board and fired the leader of the other family wing.  This kind of thing often happens in family held firms.  The fired CEO is currently engaged in discussions with the other wing of the family about the price of a payout that is in the $1.5 billion range.  Some members of the controlling family would like to take the money and run. They have little interest in running a business.

Details On 4% Growth Rate In Spring Quarter

The good news is the 4% growth rate was higher than most forecasts.  The details in this article indicate that the economy is still puttering along.  Inventories increased 1.66% and accounted for much of the gain in GDP.  Its better when the gains come from final sales rather than inventory.  The average real annual growth rate excluding inventories has been around 2.4% since the end of the official recession.  During a typical business cycle recovery the growth rate is usually much faster.  We have not made much progress in reducing the output gap.  The economy not growing fast enough to reduce the gap between potential GDP and actual GDP.  It also means that output could expand without creating price inflation.

Is There A Real Debate Among Economists About The Obama Stimulus?

This survey of top economists about the effect of the Obama stimulus indicates that there is less debate about the impact of the stimulus within the profession than there is among the general public. Much of the general public believes that stimulus did not reduce unemployment, and they also believe that the resulting budget deficit has led to unsustainable government debt.  Few believe that the stimulus might have been too small, or that less of the stimulus should have been devoted to tax cuts.  Economists are more likely to debate the size and content of the stimulus rather than its efficacy.

The lack of consensus about the Obama stimulus among the general public is not the result of disagreement within the economics profession. There is wide agreement about its immediate impact, and some uncertainty about longer term effects.  The public depends upon the media for its information.  The right wing media constantly attacked the stimulus and government deficits for several years.  The mainstream media play a different game.  It gives equal time to both sides of the debate.  Given the consensus within the profession, this is like giving equal time to those who argue that the earth is flat.

St Louis Fed Study Shows That Chasing Stock Returns Is Poor Strategy

Many investors chase returns in the equity market.  They increase investments in mutual funds when stock prices have increase and they sell when performance deteriorates. That is a losing strategy. Investors who buy and hold mutual funds earn a 5% annual return during 7 year periods.  That implies a 40% return over the period.  This study confirms the views of investors like Warren Buffet who does not try to time the market.  He buys stocks that represent a good value,  and he holds them as long as the firm maintains its strategic position in an industry.  I doubt that Buffet watches CNBC.

West Agrees To Widen Sanctions Against Russia

Recent events in Ukraine has encouraged Europe to join with the US to widen sanctions against economic interests in Russia.  Europe has been more connected to Russia economically and it has been more difficult for them to agree on sanctions.  Germany has the strongest economic relationships with Russia but recent events have motivated it to agree to strong sanctions.  The UK has banking relationships with Russia and France sells military equipment to Russia.  They resisted sanctions until the downing of the Malaysian airline in Ukraine.

Why Not A Maximum Wage To Reverse Income Inequality?

Many are comfortable with a minimum wage because it provides a floor which enables some to earn a subsistence wage.  If a minimum wage makes sense, why not use a maximum wage to reverse the inequality trend that is particularly acute in the US and the UK?  It is pretty clear that there is a market failure in the US and the UK because there is no reason to believe that these executives are more productive than those in other western nations.  Some of the issues that arise from this discussion are interesting.

One issue is whether there is really a market that determines CEO wage levels.  There may be no market failure if there is no real market in which corporate boards compete for the most productive CEO's on price.  The market for wages in most corporations is internal.  The share of wages going to top management is determined internally by corporate boards.  They justify their decisions by using compensation consultants who provide comparative data on CEO compensation in their industry.  Few corporate boards conclude that their CEO is not in the top quartile for their industry.

Some argue that shareholders should be more aggressive in limiting CEO compensation.  There are several problems with that suggestion.  CEO's receive most of their compensation in the form of stock option grants.  That was done in order to link CEO compensation to increases in shareholder value.  Moreover, Wall Street likes this arrangement.  The reports of their analysts have an important effect on the direction of a firm's stock price.  The criteria that they use to evaluate corporate performance provide Wall Street with a measure of control over corporate decision making.  For example, during the dotcom boom Wall Street analysts provided World Com with positive reviews because the CEO was serial acquirer of other firms. They earned huge fees from his business.  World Com failed and the CEO ended up in jail.  The Wall Street analyst did not go to jail.  The criteria used by Wall Street analysts today may have changed but CEO's are very sensitive to the short term performance goals that are in favor today. 

Since corporate governance is not likely to change, and the influence of Wall Street and the shareholder value ethic is very powerful, we cannot expect changes in CEO compensation to be modified by internal forces,  any changes will have to come from external forces.  The changes in CEO compensation may have been triggered by tax policies in the US.  A reduction in the top marginal tax rate may have encouraged CEO's to pursue higher wages, and the reduction in taxes on dividends, and on capital gains from stock sales, has also encouraged CEO's to promote their financial interests.  Some argue that more progressive tax policies might be the best way to reduce income inequality.  That may be accurate but it will be very difficult in our current environment.  The first problem is that corporate executives can direct campaign contributions to favored candidates.  The second problem is that nation states compete with each other on tax policy.  Corporate executives can, and do find ways to limit the ability of nation states to determine tax policies.