The CEO Pay Ratio
You may have seen this chart:

Politifact looked into the chart, and its source is a student paper from 2005, which contained no source or citation for the 475:1 ratio.  So, unless you’re the type of person to rely on the unchecked accuracy of students, it’s not a reliable source of information.

The far-left Institute for Policy Studies (IPS), in 2010, did, however, claim that the average CEO pay ratio was 325:1 (see page 2, above the cartoon).  There are few issues with the ratio:

1. CEO Pay is inflated:  IPS says the average CEO pay they use is $10.8 million.
1. Included in that number is the value of stock options and restricted stock, valued at grant, along with bonuses and other compensation.  In the trade, this is known as “proxy comp,” the (often over-estimated) amount of compensation a publicly traded company is required to disclose by the SEC in its annual proxy statement to shareholders.
2. This is an overstatement because, at the time of grant, the shares are not vested (the executive may or may not actually receive them), and if the stock price goes down, they may be worthless (or worth a lot less).
3. This is also unfair, because well run companies will intentionally tie CEO pay to stock price.  The criteria on which public company’s CEO are (rightfully) measured, is improvement in stock price, earnings and profit margin.  This translates into equity and bonus-heavy compensation.  In other words, if the board wants to keep the CEO focused on what is good for the company, they will pay less in salary (less guaranteed), and more in stock grants and year-end bonus (more incentive-based).  More on this in part 2.
4. It is unclear whether it is included in the $10.8 million number, but proxy comp must, under SEC regulations, include fringe benefits, like retirement plans, healthcare benefits, etc.  You can argue about whether or not this is compensation, but it is not cash handed over for pay.
2. Worker Pay is understated: The IPS paper cites “average worker pay” of $33,121.
   1. Unlike with CEO pay, the “average workers pay” does not include benefits, like stock options, 401(k) contributions, medical, dental and vision insurance premiums paid by the employer, or even bonuses.  Any other compensation received by the employee is excluded.  As noted in the IPS paper (page 37, endnote 3), “worker pay” is simply an average hourly rate for “production workers” ($19 per hour) multiplied by 33.4 hours over 52 weeks.  Why 33.4 hours?  I suppose the proletariat get 90 minutes a day for lunch, and the evil cleptocrats don’t pay them for it.
   2. In contrast, according to the federal government, the average wage index (most recent year available is 2009) was $40,711.62.  That would yield a ratio of  265:1, not 325:1. Again, even this larger number does not include bonuses, retirement contributions, medical, dental or other benefits paid by the company.
3. The CEO compensation study only looked at S&P 500 companies. There are thousands of very sizable US companies not on that list.  The S&P 500 only represents about $325 billion in earnings ($10.16T/31.3), globally (about 0.6% of global GDP) and only employs a total of 25.6 million people–globally.  (In contrast, there are over 130 million total people employed by all employers in the US alone–5 times what the S&P 500 employs globally.)  These are the largest and most powerful international public companies in the world–not a place to look for modestly compensated executives.
4. Finally, “production workers,” the basis for the low-ball $33,121 number, are not the sort of workers employed by most S&P 500 companies.  Companies like Google, Apple, Microsoft, GE, McDonalds (the franchisor company, not the burger restaurants–there’s a difference), Visa, MasterCard, Pepsi (again, franchisor, not bottler), etc., do not employ a lot of production-line workers, much less workers paid hourly.  Most of these companies employ salaried workers in the fields of finance, sales, legal, engineering, computer technology–most are college entry level companies.  So most of these “overpaid” CEOs are not leading companies full of “production workers.”

To give a concrete example of proxy comp versus reality, the 2010 proxy statement for Google shows that, in 2009 their CFO received a (relatively modest) salary of $450,000 (see summary compensation table at page 59).  This would put him in the 10:1 range for (relatively well compensated) Google employees.  (The CEO received only $1 in direct compensation).  When you include his bonus, stock and option awards (awards that may never vest, and may be worthless when they do), he received $24.7M.  Now, no one should feel sorry for Mr. Pichette–he took home over $3 million in cash, which even after taxes, is a nice living wage.  But his “proxy comp” is inflated 12 times larger than what he actually took home.  Similarly, the evil Goldman Sachs CEO, Lloyd Blankfein had a salary of $600,000 in 2010, but his proxy comp number was over $14 million (page 29), the bulk of which is in stock awards.

In sum, the oft-cited ratio is based on false premises and comparing narrowly selected groups to inflate and understate, respectively, both sides of the equation.  It is like comparing apples to apple pies.

You’ll no doubt recall that Senator Durbin’s misplaced arrogance led to price fixing on debit card transaction, a move that costs banks and consumers dearly, but will benefit the bottom line of his big box retail donors. Dick believes it is inappropriate for the GOP to pressure the Fed on monetary policy.  Of course, he should know, this is the exact same thing he did seven months ago.  Dick, who’s never had a real job outside of politics, also believes he knows how to allocate risk in an insanely complex system that safely processes over $1.3 trillion a year better than people who have done it for decades.  So maybe we should take the crazy things he believes with a grain of salt.

Liberals love to throw money at things, especially when it’s someone else’s money.

There is no reason why the GOP, or anyone, cannot send a letter, an email, a video, a dead fish or a horses head (subject to local law, some exclusions apply), to the Fed.  The Fed is an independent central bank, and is designed to shrug off political criticism.  If Ben Bernanke cannot handle a few angry politicians, he is not the right man for the job.

To the substantive point of the criticism, though, discouraging the Fed from printing more money is not sabotage, or even evidence of some Vast, Right Wing Conspiracy™ to bring down President Obama.  Governing is choosing, and there is a clear choice here:

1. Do we print more money (a THIRD try at quantitative easing) and hope against experience that this time, the banks begin to lend to companies and investors that don’t want to borrow and people begin to spend on things they don’t need; or
2. Do we reform our tax and regulatory process and encourage people to invest and spend the money they already have.

Liberals love to throw money at things, especially when it’s someone else’s money.  But there are real consequences to quantitative easing (a fancy phrase for printing more money to throw at stuff).  When you print more money, each dollar becomes less valuable.  This is great if you’re a debtor, because it’s cheaper to pay off $14 trillion when the dollar is not worth as much as when you borrowed it.

They see capitalism as an incomprehensible dark art involving incantations read from the Wall Street Journal over mahogany altars.

But if you already have money, inflation is a silent thief.  Warren Buffett, Obama’s best buddy, has said for years that inflation is more confiscatory than any tax increase.  And if we show a willingness to pay off our enormous debt by devaluing the dollar, we may find that the dollar is no longer the world’s reserve currency (see artists renderings).

More importantly, the purpose of printing money is to make it cheaper for people to borrow.  Interest rates are already ridiculously low.  No matter how low they go, no one can force unwilling capital to invest.  Obama has made it clear that he is no friend of capitalism, and his regulatory promiscuity and demagoguery is impairing expansion and investment.  The CEO of Euro Pacific Capital testified today that he was fined for hiring too many people, and had to spend half a million dollars to fight off regulators.  Regulators have run amok, and the uncertainty is undermining expansion.

They beat on the fuselage of the gleaming, silver jet of capitalism and grunt “make fly now!”

It’s not just hiring and expansion, either.  Investor confidence is almost as low today as it was right after the Lehman collapse.  Ask yourself, if you came into money tomorrow, would you buy a second home, or would you hold on to the money until the housing market hits bottom?  Would you invest in the stock market, or wait until the ups start outnumbering the downs on a more regular basis?  Would you invest in a business, hire new workers and expand, or would uncertainty–not just in your product–but in the regulatory and economic landscape make you guard your nest egg?

Unless an investor believes prices are more likely to go up than down, investing is a fool’s errand.  And a fool and his money are soon invested in Solyndra.   People are spooked, and until the world starts to make sense again, they will keep their money under their mattress–no matter how cheap Bernanke makes it to borrow more.

Liberals may understand this, or they may not.  It is tempting to believe that our liberal friends see capitalism as black magic voodoo; an incomprehensible dark art involving incantations read from the Wall Street Journal over mahogany altars..  Like an anachronistic caveman, they beat on the fuselage of the gleaming, silver jet of capitalism and grunt “make fly now!”  All the while, damaging the sensitive avionics with their thorny, regulatory clubs.  Occasionally, Warren Buffett shouts “beat harder!”

We have to decide if we’re going to make life easier for ourselves now and harder for our children later, or vice versa.  It’s a choice, and it has consequences.  So the next time someone you are part of the “let him die” party, or want to subsidize corporate jets at the expense of children’s safety, or that you’re trying to balance the budget on the backs of seniors, children and the middle class, ask them if they’d rather deficit spend and print money on the backs of their unborn grandchildren.

*Fair disclosure: I work in the credit card industry, though not for a bank.  I know these issues well, but I also have a (very indirect and slight) financial stake in the outcome.

Smiley tries to re-define the word “lie” as giving information that turns out to be incorrect, whether or not you knew it to be at the time.  Logically, then Tavis Smiley must think Obama lied about the stimulus plan’s impact on unemployment.  Obama said that the stimulus would keep unemployment under 8%.  It’s been over 9% for almost his entire presidency.  By Tavis Smiley’s definition, Obama lied to the American people.  He wanted a Kenseyian solution, and he sold the stimulus bill to the American people.  The fact that Obama honestly believed the stimulus would work is, according to Smiley, irrelevant.

By Tavis Smiley’s confused attempt at logic, Merle Hodge lied when he said the Rams would beat the Eagles this week; and the entire sports world lied when they said the Patriots would beat my beloved Giants in Superbowl XLII.  It’s an idiotic stance to take, and if liberals at PBS think NPR was right for firing Juan Williams, PBS should take a long look at Tavis Smiley’s contract.

There seem to be two main objections to Perry’s comments: first, “but we like Social Security!” and second, it’s not a criminal enterprise.   The first point is a non sequitur.  Maddoff’s clients loved their returns too, until they scheme collapsed.  The second point is also unhelpful.   This is like saying it’s not fair to call a Russian mobster a mafioso because he’s not Italian.

So let’s have an honest look at the claim, and give it’s critics (Social Security’s defenders) the benefit of the doubt.  Let’s deconstruct the definition of a Ponzi Scheme:

1. It is a fraud–the “investors” are unaware of the truth.
2. Early investors are paid by the later ones.
3. To create the illusion of profitability.

Point 1: A Fraud.  To the first point, it is hard to say whether, today, Americans are unaware of the truth of Social Security.  When it was passed in1935, Congress made clear that current retirees would be paid from existing workers.  In fact, one of the main objections to Social Security was that it’s burden on current employees and employers would cause more hardship and unemployment.  It would be hard to argue that Americans are not (or should not be able to easily figure out) that current employees pay for current retirees.

But on another aspect, Governor Perry has a point.  If you are paying into Social Security today, you are not very likely to receive benefits in the future–certainly not at the level at which you are promised.  The latest government report estimates that the Social Security program will be unable to meet its obligations, starting in 2036–100 years after its inception .  So, under current law, those who were born in or after 1969 (i.e., who will turn 67 in 2036 or after) are being lied to.

Point 2: Existing Investors Paid from New Investors.  This is manifestly the case with Social Security.  The major difference is that investment is involuntary (in fact, compulsory), and the only way to avoid the scheme is to not work–not quite a viable option.  In addition, withdrawal from Social Security is not voluntary and only occurs at age .  Unlike a traditional Ponzi scheme, retirees cannot create a run on the manager–though the baby boomers are the closest thing to that.

It is worth noting that the reason most Ponzi schemes collapse is not that the fraud is uncovered, but that people begin to demand their money back in larger amounts than new investors invest.  The two events are, of course, connected, but if mass hallucination allowed people to ignore the inevitable, the scheme could last indefinitely–until withdrawals outpaced investments.  It could even last for 100 years.  Withdrawals outpacing deposits is an exact parallel with the baby boomer crisis: in 1950, there were 16 workers supporting each retiree.  Today, there are about 3.

Point 3: The Illusion of Profitability.  Here, again, the point should be conceded.  The government has spent the better part of a century siphoning off the excess funds collected as workers vastly outnumbered retirees.  In lieu of investment or even holding those funds in a static account, the government used it for its own purposes, and is now finding itself nearly empty handed when the largest bills are coming due.

So yes, Social Security is a Ponzi scheme, but it is also legal.  But it is only legal because the government runs it.  Ask yourself this: if your employer came out with a new pension plan that promised guaranteed benefits for every worker, and used today’s employee wages to pay for current retirees, how fast would the FBI and Department of Labor raid his offices?

Krugman points out that Rick Perry recently said that evolution is “just a theory,” and it has “got some gaps in it.”  Flabbergasted, Krugman claims that a “vast majority of biologists” would disagree.  Really?  Perry was talking about one particular area of evolution, the theory that man evolved from apes.  There are other theories.  Creationism is one.  Douglas Adams’s theory that we descended from an alien race of telephone cleaners is my favorite.  Maybe Krugman’s, too.  Like any theory, human evolutionary theory has its gaps.

I have a BS in Physics and an MS in Atmospheric Physics, so I’m not a biologist, but I’m certainly closer to one than an economist is.  I’m not going to defend creationism, nor do I think evolution is wrong–I believe it to be true.  But it is only a theory.  And there are major gaps.  In fact, almost four years ago, Krugman’s own paper did a story about the missing fossil evidence of the “dark age” of evolution.  Oops.  Maybe the Times actual science reporters are closet Republicans.  Krugman dismisses these missing pieces of information because, apparently, being a Times columnist means never have to check your facts.

Anthropogenic Global Warming should barely qualify as a theory.  It is a hoax.  It’s not a super secret decoder ring, dark cloaks, blood oath conspiracy.  Not is it run by a cabal that meets in secret.  It is just the predictable product of rational people operating independently under an irrational system.

In the late 1990′s, liberal politicians began to embrace anthropogenic global warming as club with which to beat businesses and individuals over the head.  If carbon fuels–the cheapest and simplest form of fuel we have–were really killing the planet, businesses and individuals would have to submit to regulation.  Carbon fuels and other “greenhouse gases” touch everything.  Power generation, leisure and business travel, soaps, beef, rice–everything that moves, breaths or farts produces carbon emissions.

If you can get people to agree to carbon regulation, a central planned economy would be inevitable.  So liberals, starting with Al Gore, began a quest to promote a silly, inane little theory into gospel. That meant that any science funding that tied to or tended to prove AGW was given priority.  That’s not science, it’s propaganda.  And it leads otherwise well meaning scientists into compromising positions, where their scientific integrity is pitted against their ability to make a living.  Guess which side wins?

Krugman’s assertion that there is a code of silence over global warming is more laughable than his assertion that evolution is somehow a proven fact.  There is a petition, signed by over 31,000 scientists stating that global warming is not proven, and that Kyoto is a really, really bad idea.  31,000.  You would think the Times would cover something like that.  Unless, of course, it disagrees with their agenda.

As a scientific theory, Global Warming is childish.  It holds that the absorption spectrum of CO2, which disproportionately traps infrared radiation emitted from the Earth as it is warmed by the sun, traps heat like a greenhouse.  The theory has been around since the 1880′s, but like many childish theories of the Left, it ignores reality to reach a preferred conclusion.  The climate models used to predict global warming effects have to ignore realistic cloud formation, macro-weather effects, volcanic activity and scores of other real world events in order to get fractions of a degree of warming.  In fact, just this weekend, CERN physicists announced new discoveries in cloud nucleation, which will require massive rewrites of climatology models.  This may be in the weeds for Krugman, but that’s where real science is done.

There’s a tremendous amount of hubris involved in thinking that a simple numerical model that ignores whole swaths of reality can accurately predict a fraction of a degree change in tempereature over 100 years.  Especially when the same type of numerical models cannot accurately predict the difference between a Category 3 hurricane and a tropical storm over the span of less than a week.

As a trained scientist, and a Republican, I don’t fear facts or science.  I am not afraid that new information might change my perception of the world–if my perception was wrong, I welcome it.  It is Messrs. Gore and Krugman who fear the free competition of ideas.  Their ad hominem tantrums underscore their fear of being proven wrong.  But no amount of fist banging, name calling, bullying or childishness will turn a wish into a fact.  Anthropogenic global warming is not a fact; it is the pipe dream of anti-business, pro regulation liberals like Paul Krugman.  Republicans don’t hate science, we hate the politicization of science.