The road to Europe is paved with TARP.
Obama's slip up on the timeline of his phony bonus rage was an AIG banana peel moment ~ and we enjoyed the inadvertent comic relief amidst the Presidential posturing. While the money in the AIG bonuses may be a pittance in bailout dollar terms, the Congressional response exposes the 800 lb. gorilla which was loosed in Washington long before anyone noticed, and which is larger than even those now mumbling about Bills of Attainder yet realize.
Back in February, Donald Luskin was already concerned about one feature of the beast. He pointed out that a soon-to-be-pivotal Title VII in the stimulus bill occupied the very last 12, least likely to be read, pages of a 1,071 page document. There is a larger drama playing out, but Luskin sets a prescient stage:
Here's how Title VII works. Any bank that participates in any way in TARP is subject to the new law. The more TARP money you take, the more people in the company to whom the rules apply. For the biggest banks who took the most money, the rules apply to “senior executives” plus the 20 “most highly compensated” employees.
The rules prohibit any incentive compensation of any kind — bonus, commission, whatever — unless it is paid in restricted stock that doesn't vest until the TARP money is paid back to the government. And the amount of the restricted stock is limited to 50% of your salary. So if you make $200,000 a year, the most you can get in restricted stock is $100,000.
Typically, highly compensated people on Wall Street earn fairly low salaries, but then get large annual bonuses — usually based on performance. Title VII turns that upside down. No more pay for play. It's all about salary now. So if a bank normally pays a superstar trader a nominal salary of $200,000 — and in a home-run year he earns himself a $10 million bonus — the only way to pay him the same total amount is to raise his salary to about $6.6 million. He'd then get that salary even if he did a lousy job in a given year.
And can you imagine the howling from the Congress and the media if we paid huge salaries to these people? There'd really be no choice but to drastically cut back their total compensation.
Card Check for Bankers
Wells Fargo, of course, was effectively compelled to participate in the TARP scheme, despite their better judgment, because putative TARP purposes could not be served if they didn’t. None of the major bankers, however, were present at the birthing of the offer they could not refuse back in October:
Regulators had spent the weekend crashing out their latest strategy to restore confidence to America's battered banking system.... Policy makers wanted to deliver a "confidence shock," one participant said....[They] knew they were taking unprecedented steps. It would take years to disentangle banks from the federal government. Some of these temporary steps would be hard to undo.....A final deal between regulators was hashed out in Mr. Paulson's office Sunday afternoon.... The top bankers were then told to show up for a meeting Monday at 3 p.m., but were given few details.
What followed was "one of the most important gatherings of bankers in American history." What transpired, however, has far wider political and cultural ramifications.
For an hour, the nine executives drank coffee and water and listened to [Paulson and Bernanke] paint a dire portrait of the U.S. economy and the unfolding financial crisis.... Mr. Geithner, whose job as New York Fed chief makes him the central bank's main man on Wall Street, delivered the most sobering news. He described how much preferred stock the government was going to buy from each firm. The government would take $25 billion in Citigroup, $10 billion in Goldman Sachs Group Inc., and so on.
As the meeting neared a close, each banker was handed a term sheet detailing how the government would take stakes valued at a combined $125 billion in their banks, and impose new restrictions on executive pay and dividend policies..... The participants, among the nation's best deal makers, were in a peculiar position. They weren't allowed to negotiate. Mr. Paulson requested that each of them sign. It was for their own good and the good of the country, he said, according to a person in the room.
There's an stunning two-fold precedent here. In the name of saving the banking industry, the Executive Branch simply accorded themselves full purview over all major banks, whether or not they were troubled and whether or not they want to participate in a government controlled solution experiment. You can't "fix" an industry unless you control an industry. Ditto for fixing an economy. Second, not only participation, but compliance with intrusive, government mandated, managerial controls was also essentially coerced.
What is uniquely alarming is that all of the above was accomplished as a matter of regulatory policy not law. It is your shadow government at its most industrious. Four months later, Title VII poured legal cement into the Paulson/Bernanke foundation trench (tranche!) upon which Congress set about building its own New! Improved! regulatory edifice.
This Is Not Your Daddy's Fairness Doctrine
Oddly enough, Claire McCaskill can help us take a more complete measure of the slope we're sliding down. Here she is way back in January:
The White House pledged action against "irresponsible" bonuses for executives at bailed-out Wall Street companies as a Democratic senator unveiled legislation to limit their compensation to $400,000 a year.
Sen. Claire McCaskill proposed a law on Friday that would prevent executives from making more money than the U.S. president until their companies no longer rely on the $700 billion Troubled Asset Relief Program (TARP).
Equitable compensation is the ideological successor to equal pay ~ it sounds similar but it packs a universe changing punch. In the United States. the concept of pay equity is most prominently promoted by the usual suspects, but we're not just talking blue state feminists. We'll let the Coalition of Labor Union Women explain [emphasis Qb]:
Equal pay and pay equity are terms that are used to describe solutions to the dilemma of unequal pay. In 1963, Congress passed the Equal Pay Act, which outlawed the standard business practice of paying women less then men even when they were doing exactly the same work. Its mandate was straightforward: equal pay for equal work.
However, other forms of discrimination, including setting lower wages for "women's jobs," continue to depress wages for women. Pay equity is the term more often used to describe the remedy for wage discrimination against women - or equal pay for work of equal value.
No Wall St. Executive should be making more than the President of the United States! A daycare attendant's service is as valuable to society as a plumber's! Government, of course, is to be the arbiter of such equivalencies, as TARP & stimulus legislation are now confirming. This is a quantum leap from ending identifiable wage discrimination on the basis of sex. It is a portal to "social justice" ~ once more frankly called distributive justice ~ a doctrinal staple of left liberal aspirations.
That agenda is, as yet, being advanced incrementally on the American side of the pond by women in the name of women. Two weeks before her confirmation as Secretary of State, Hillary Clinton introduced the Pay Check Fairness Act. "Finding" that "artificial barriers" to the elimination of sex-based wage discrimination "continue to exist decades after the enactment of the Fair Labor Standards Act of 1938... and the Civil Rights Act of 1964," S.182 asserts that:
Elimination of such barriers would have positive effects, including--
(i) providing a solution to problems in the economy created by unfair pay disparities;
(ii) substantially reducing the number of working women earning unfairly low wages, thereby reducing the dependence on public assistance;
(iii) promoting stable families by enabling all family members to earn a fair rate of pay;
(iv) remedying the effects of past discrimination on the basis of sex and ensuring that in the future workers are afforded equal protection on the basis of sex; and
(v) ensuring equal protection pursuant to Congress’s power to enforce the 5th and 14th amendments.
Equal pay for equal work doesn't even make an appearance on this list. Indeed, benefit #1 makes no mention of women either, but promises instead to fix vague "problems in the economy." Everyone recognizes the value of a crisis! Precisely what kind of economic problems, and what kind of pay disparities are we talking about? Europe has the answers.
Continental Gorillas in Yankee Living Rooms
The most serious economic problem, in the Continental world view is not simply disparity in wages per se, it is disparity in income and by extension, in the distribution of wealth:
The longer the continuum between rich and poor, the more aggravated the assault on European egalitarian principles. We Yanks compound that sin, because such income disparity in the U.S. is perceived as increasing after taxation, instead of the reverse. Socialists Social Democrats may be more frank about the desirability of redistributive fair taxation than our current President, but the playbook is the same. [Oddly enough, Europe figured out long ago that low corporate taxes ultimately mean more money in the redistributive pipeline.]
What is not clear to those who admire Sweden's short stretch on the charts is that the U.S. starts out at a distinct statistical disadvantage. Europeans are working with a completely different definition of poverty.
In the U.S. poverty is traditionally regarded as a function of whether or not someone can afford a defined list of necessities. While that list changes over time ~ and complicates historical charting ~ progress consists of decreasing the number of people who fall below that bar, while the economic conditions of those above the bar are irrelevant.
From the European vantage point, poverty is not actually attached to any specific sufficiency of resources, but is defined by the position you occupy below the national median. In essence, everything below the median is a form of what is emblematically called "income poverty." If you're 20% below the U.S. median, you're as statistically poor as someone who is 20% below the median in Malawi.
Relative poverty rates for different income thresholds, mid-2000s
Relative poverty rates at 40, 50 and 60% of median income thresholds
Source: Computations from OECD income distribution questionnaire.
Note: Poverty rates are defined as the share of individuals with equivalised disposable income less than 40, 50 and 60% of the median for the entire population. Countries are ranked, from left to right, in increasing order of income poverty rates at the 50% median threshold. The income concept used is that of household disposable income adjusted for household size.
*Poverty rates based on a 40% threshold are not available for New Zealand.
The U.S. is always going to be a comparative disadvantage in this universe, because in addition to the wider range of incomes, we also start with a higher median income. In what is partly a function of sheer geographical extent, we also have far wider circumstantial disparities too. The minimum income required for necessities in Montana may be entirely insufficient in Manhattan, but in the European model, a comfortable citizen in Helena and a desperate New Yorker can be equally poor, if they are both X% below the median. To achieve qualitative redistribution, you would, in fact, need to target more money at the New Yorker, who requires a higher income to achieve economic parity with folks in Montana. In terms of quantitative distribution, however, the U.S. and Turkey are nearly indistinguishable.
Many have ironically observed that Obama is moving the U.S. to left at a time when European leadership has shifted right. Qb is reminded of John McCain's opening shot across Obama's general election bow, which garnered more attention for the split-pea soup green backdrop than his speech:
The solution to our problems isn't to reach back to the 1960s and 70s for answers. In just a few years in office, Senator Obama has accumulated the most liberal voting record in the Senate. But the old, tired, big government policies he seeks to dust off and call new won't work in a world that has changed dramatically since they were last tried and failed.
The depth of irony here is more profound than most may realize, because there are far less dusty cautionary tales. The Organisation for Economic Co-operation and Development (OECD) is income equality central. They collect a vast array of statistics, and in the presser for their most recent official review they report that all is not well:
The gap between rich and poor has grown in more than three-quarters of OECD countries over the past two decades, according to a new OECD report.....
In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. Without this spending, the report says, the rise in inequality would have been even more rapid.
But new ways of tackling this issue need to be found, Mr Gurría said. “Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease.”
While we the OECD makes a valiant effort to defend the policies so long a feature of the European order, we appreciate their relatively unsparing look at the results. We only wish that Social Democrats like Obama, and, in this instance, sad to say, Compassionate Conservatives like Bush, had noticed the gorilla's banana peel before they slipped. They have set us on a trajectory whose end seems almost certain, with a speed that makes reversing course look like trying to push federally mandated boulders back up very slippery hills, indeed.
