by the Sandwichman
The phrase, cited by Michael, "traitors to the cause of economics as a whole" has a farcical ring to it -- like "traitors to the cause of the phone company billing department" or "traitors to the noble cause of bureaucracy". No doubt the note of laconic derision was intentional on Card's part. But it captures the peculiarly regimental loyalty and zeal that clings to the latter-day proponents of price doctrine.
If the contemporary exorcism of labor from economics seems tragic, it needs to be remembered that it isn't the first time. Setting aside Marx as beyond-the-neoclassical-pale, there is the case of William Thomas Thornton's On Labour: it's wrongful claims and rightful dues its actual present and possible future. Thornton's critique of price doctrine hinged on the phenomenon of 'higgling' or what we might today call negotiation. As Michael V. White explained in "'That God-forgotten Thornton', Exorcising Higgling after On Labour." "With equilibrium thus assumed rather than explained, Thornton's critique was dissolved by exorcising higgling from the domain of the 'science of political economy'." (page 151)
Depending on one's theological vantage point (or cynicism), the liquidation of Thornton's critique looms as either the Original Sin or the Immaculate Conception of marginalist thought.
Friday, August 15, 2008
Thursday, August 14, 2008
The Exclusion of Labor, cont.
Here is the last paragraph of what I posted earlier, plus some text that goes into more detail about the subject. Any suggestions would be appreciated.
Most economists are dismissive of any theory not built on what they consider to be solid micro-foundations -- economists' jargon for this patently unrealistic model. Mainstream economists feel threatened by the suggestion that work, workers, or working conditions could be a legitimate subject of economic inquiry. As a result, any challenges to their theoretical position get treated to a hostile reception.
In one famous case, in 1944 Richard Lester published an article questioning whether labor markets actually operated in the manner that mainstream economics suggested. Lester had extensive experience in industry after having recently served as chair of the Southern Textile Commission of the National War Labor Board. Using government data, as well as surveys of industry leaders, Lester found evidence at odds with the assumptions of mainstream economic theory (Lester 1944). For example, his results suggested that an increase in the minimum wage would have little or no effect on employment, a conclusion that infuriated major defenders of the faith, led by George Stigler, later a leader of the Chicago school of economics and a Nobel laureate (see Prasch 2007).
Exactly a half century later, using an entirely different approach, Alan Krueger of Princeton and David Card of the University of California, Berkeley walked back into the same hornet's nest (Card and Krueger 1994). As might be expected, they too met with hostile criticism from fellow economists, some sponsored by the fast food industry. Card and Krueger were both distinguished economists. In fact, Card had won the John Bates Clark award from the American Economic Association given to the outstanding economist under the age of 40. In the face of the controversy, Card eventually dropped this line of research because of the personal costs of challenging the discipline. He explained:
I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole. [Clement 2006]
Lester and Card did not fail to convince their fellow economists because of errors in their work. Economists either ignored their results or, worse yet, rejected them out of hand because they conflicted with economists cherished beliefs. As Stigler's colleague, Milton Friedman, once wrote: "Nothing is harder than for men to face facts that threaten to undermine strongly held beliefs, to change views arrived at over a long period. And there are no such things as unambiguous facts" (Friedman 1968, p. 14; cited in Diesing 1985, p. 61).
Yet, Chicago economics is famous for rejecting empirical evidence. Dierdre McCloskey, a former Chicago faculty member, recounts how people who used data that called the theory into question would "be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point" (McCloskey 1985, p. 140).
Melvin Reder, another Chicago faculty member, offered further insight in the way that Chicago refuses to give ground in the face of evidence that calls the micro-foundations into question:
Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research be consistent with the implications of standard price theory .... The major objective is to convert non economists to their way of thinking .... However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training. [Reder 1982, pp. 13, 18, and 19]
Economists regard this stubborn resistance to be good science. Predictably, the troubling questions raised by Lester and Card had no effect. Economists' beloved micro-foundations and their faith in market efficiency remained invulnerable -- so much so that economists today rarely even bother to publish research about the core of economic theory. In this environment, economists can continue to use their transaction-based theory without the inconvenience of dealing with work, workers, or working conditions. But by removing work, workers, and working conditions from their theory, economists blind themselves to the kind of inefficiencies that this book shows, especially in Chapter 9.
Most economists are dismissive of any theory not built on what they consider to be solid micro-foundations -- economists' jargon for this patently unrealistic model. Mainstream economists feel threatened by the suggestion that work, workers, or working conditions could be a legitimate subject of economic inquiry. As a result, any challenges to their theoretical position get treated to a hostile reception.
In one famous case, in 1944 Richard Lester published an article questioning whether labor markets actually operated in the manner that mainstream economics suggested. Lester had extensive experience in industry after having recently served as chair of the Southern Textile Commission of the National War Labor Board. Using government data, as well as surveys of industry leaders, Lester found evidence at odds with the assumptions of mainstream economic theory (Lester 1944). For example, his results suggested that an increase in the minimum wage would have little or no effect on employment, a conclusion that infuriated major defenders of the faith, led by George Stigler, later a leader of the Chicago school of economics and a Nobel laureate (see Prasch 2007).
Exactly a half century later, using an entirely different approach, Alan Krueger of Princeton and David Card of the University of California, Berkeley walked back into the same hornet's nest (Card and Krueger 1994). As might be expected, they too met with hostile criticism from fellow economists, some sponsored by the fast food industry. Card and Krueger were both distinguished economists. In fact, Card had won the John Bates Clark award from the American Economic Association given to the outstanding economist under the age of 40. In the face of the controversy, Card eventually dropped this line of research because of the personal costs of challenging the discipline. He explained:
I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole. [Clement 2006]
Lester and Card did not fail to convince their fellow economists because of errors in their work. Economists either ignored their results or, worse yet, rejected them out of hand because they conflicted with economists cherished beliefs. As Stigler's colleague, Milton Friedman, once wrote: "Nothing is harder than for men to face facts that threaten to undermine strongly held beliefs, to change views arrived at over a long period. And there are no such things as unambiguous facts" (Friedman 1968, p. 14; cited in Diesing 1985, p. 61).
Yet, Chicago economics is famous for rejecting empirical evidence. Dierdre McCloskey, a former Chicago faculty member, recounts how people who used data that called the theory into question would "be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point" (McCloskey 1985, p. 140).
Melvin Reder, another Chicago faculty member, offered further insight in the way that Chicago refuses to give ground in the face of evidence that calls the micro-foundations into question:
Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research be consistent with the implications of standard price theory .... The major objective is to convert non economists to their way of thinking .... However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training. [Reder 1982, pp. 13, 18, and 19]
Economists regard this stubborn resistance to be good science. Predictably, the troubling questions raised by Lester and Card had no effect. Economists' beloved micro-foundations and their faith in market efficiency remained invulnerable -- so much so that economists today rarely even bother to publish research about the core of economic theory. In this environment, economists can continue to use their transaction-based theory without the inconvenience of dealing with work, workers, or working conditions. But by removing work, workers, and working conditions from their theory, economists blind themselves to the kind of inefficiencies that this book shows, especially in Chapter 9.
Observations on Jena, former East Germany
So, last week I gave some lectures at the Max Planck Institute for Economics in Jena, a city in the Lander of Thuringia in the former East Germany. This city was touted in the latest Economist Country Survey of Germany as doing as well as any in this former nation. Its university is also very renowned. Founded in 1558, it had Goethe as an administrator and faculty that included Shiller, Hegel, Fichte, Herder, Haeckel, and Frege, with both Robert Schumann and Karl Marx as students. The major business in town (it is only about 90,000 population) is the Carl Zeiss Optical Works, which dates to the 19th century, and was one of the most successful of enterprises even during the period of socialist rule, and is doing well now, part of why The Economist could tout the place. Its unemployment rate is about the same as the German average, which is much better than most of the former East Germany, where some parts still have such rates exceeding 20%.
The city is a more extreme than usual example of mixing the old and the replacing bomb-damaged-new in Germany. The old Market Square, with its Rathaus dating to the 14th century survived bombing that hit the Eichplatz next to it. That area was rebuilt during the socialist period, partly with an open square, and partly with a tall and round skyscraper. This structure represented the "Kombinate" approach of the former East Germans, which involved lots of horizontal and vertical integration of activities, with, in this case. everything in Jena coming under a single administrative entity. This skyscraper effectively represented this approach, with much of the university on several of its floors in that era.
On the one hand life seems not too bad. Buildings look OK, and people do not look poor. Students seem to have adapted to the new regime, although they were completely unacquainted with Post Keynesian economics, which I lectured on in one of my talks. However, in talking to some of them, they do not see prospects as good there. Most plan to look for jobs in "the old states" (of the West) or even outside of Germany, these being economics grad students. I also observed very little construction going on, with some of what is going on still being fixups of WW II bomb damage.
A curious point is that while hard science faculty survived mostly the transition, all the social science faculties were purged at the time. The current economics profs are all from the West. None of them live in Jena permanently, having apartments there, but going back home to the West on the weekends, if not more frequently. One of them told me that he did move his family in the late 1990s to Weimar near Jena, but they moved back west after three years, there being too much hostility from the locals. However, the students say this is gradually dying out.
The city is a more extreme than usual example of mixing the old and the replacing bomb-damaged-new in Germany. The old Market Square, with its Rathaus dating to the 14th century survived bombing that hit the Eichplatz next to it. That area was rebuilt during the socialist period, partly with an open square, and partly with a tall and round skyscraper. This structure represented the "Kombinate" approach of the former East Germans, which involved lots of horizontal and vertical integration of activities, with, in this case. everything in Jena coming under a single administrative entity. This skyscraper effectively represented this approach, with much of the university on several of its floors in that era.
On the one hand life seems not too bad. Buildings look OK, and people do not look poor. Students seem to have adapted to the new regime, although they were completely unacquainted with Post Keynesian economics, which I lectured on in one of my talks. However, in talking to some of them, they do not see prospects as good there. Most plan to look for jobs in "the old states" (of the West) or even outside of Germany, these being economics grad students. I also observed very little construction going on, with some of what is going on still being fixups of WW II bomb damage.
A curious point is that while hard science faculty survived mostly the transition, all the social science faculties were purged at the time. The current economics profs are all from the West. None of them live in Jena permanently, having apartments there, but going back home to the West on the weekends, if not more frequently. One of them told me that he did move his family in the late 1990s to Weimar near Jena, but they moved back west after three years, there being too much hostility from the locals. However, the students say this is gradually dying out.
Wednesday, August 13, 2008
The US and the Former USSR Compared
In 1959 C Wright Mills wrote of the basic trend then apparent that was making the US and USSR increasingly alike. He mentioned quite a long list of observations to support his claim:
-- "each had amalgamated on a continental domain great varieties of peoples and cultures";
-- "both had expanded their territory and power significantly;"
-- the political order is enlarged and centralised (becoming less political and more bureuacratic). In neither are there any "nationally responsible parties" that "debate openly and clearly the issues which the world now so rigidly confronts. The two-party state is without programmatic focus and without organisational basis for it." Neither nation has a civil service independent of corporate interest (US) or party dictation (USSR). "The classic conditions of democracy and democratic institutions do not flourish" in their power structures. "History-making decisions and lack of decisions are virtually monopolised by elites."
-- the power of both depended on technological developments that had ben made into a "cultural and social fetish";
-- the organisation of all life is increasingly adapted to industrial technologies. (As it turns out life hasn't adapted that well after all!)
-- work is alienated from people and consumption is culturally exploitative;
-- education and religion tends to be shaped by major economic, military and political forces. "They do not originate. They adapt." Mass eduction has evolved to "educated illiteracy".
-- the media is one of mass distraction. "they do not often communicate; they do not connect public issues with private troubles...they trivialise issues.."
-- the goal of the "self-cultivating" person has declined. "It is the specialist who is ascendant in both Russia and America."
The list goes on. Perhaps the most telling line in Mill's essay is when he asks "to what extent [is] the continuation of freedom [in the US] due to the fact that it is not being exercised?"
I think that was answered about 10 years later when peaceful civil protest resulted in students being shot dead, the US Army began (and probably continues to) spy on its citizens, news reporters began to be jailed for failing to reveal their sources and numerous assassinations occurred against civilian leaders.
Not that things are (or were) that much different in Australia.
'The Decline of the Left'. Lecture on the British Broadcasting Company. 1959. From 'Power, Politics and People - the collected essays of C Wright Mills'. Edited by Irving Louis Horowitz. Oxford University Press. 1963.
-- "each had amalgamated on a continental domain great varieties of peoples and cultures";
-- "both had expanded their territory and power significantly;"
-- the political order is enlarged and centralised (becoming less political and more bureuacratic). In neither are there any "nationally responsible parties" that "debate openly and clearly the issues which the world now so rigidly confronts. The two-party state is without programmatic focus and without organisational basis for it." Neither nation has a civil service independent of corporate interest (US) or party dictation (USSR). "The classic conditions of democracy and democratic institutions do not flourish" in their power structures. "History-making decisions and lack of decisions are virtually monopolised by elites."
-- the power of both depended on technological developments that had ben made into a "cultural and social fetish";
-- the organisation of all life is increasingly adapted to industrial technologies. (As it turns out life hasn't adapted that well after all!)
-- work is alienated from people and consumption is culturally exploitative;
-- education and religion tends to be shaped by major economic, military and political forces. "They do not originate. They adapt." Mass eduction has evolved to "educated illiteracy".
-- the media is one of mass distraction. "they do not often communicate; they do not connect public issues with private troubles...they trivialise issues.."
-- the goal of the "self-cultivating" person has declined. "It is the specialist who is ascendant in both Russia and America."
The list goes on. Perhaps the most telling line in Mill's essay is when he asks "to what extent [is] the continuation of freedom [in the US] due to the fact that it is not being exercised?"
I think that was answered about 10 years later when peaceful civil protest resulted in students being shot dead, the US Army began (and probably continues to) spy on its citizens, news reporters began to be jailed for failing to reveal their sources and numerous assassinations occurred against civilian leaders.
Not that things are (or were) that much different in Australia.
'The Decline of the Left'. Lecture on the British Broadcasting Company. 1959. From 'Power, Politics and People - the collected essays of C Wright Mills'. Edited by Irving Louis Horowitz. Oxford University Press. 1963.
Tuesday, August 12, 2008
Is There a Middle Way Economic System: Janos Kornai Speaks
Among the things I did while out of town for the last two weeks was to interview the 80-year old, Janos Kornai, for a forthcoming book. For those who do not know who he is, he is probably the best known economist in Eastern Europe, and in my opinion deserves the Nobel Prize in economics, if for nothing else, for his development of the concept of the "soft budget constraint," originally to analyze the problems of market socialist economies, but which is clearly relevant to many economies, as the current problems of financial institutions and their relationships with governments in many countries during the past year indicate. Kornai has had a fascinating personal life as well as career, having barely survived the Nazi occupation of Hungary, then at least partly in reaction to that becoming a supporter of Stalinist socialism, which he turned against after Stalin's death as he learned of human rights abuses, then his involvement in the 1956 revolution and later turning to mathematical economics and linear programming, to become a critic of neoclassical economics in his book, Anti-Equilibrium from 1971, and then on to forecast the fall of socialism in Hungary with his later work and his broader analysis of the nature and history of the socialist economies. For those not wishing to wait for our interview to be published, his fascinating memoirs are available from MIT Press.
In any case, I wish to note an unresolved issue in our discussion. In the late 1980s Kornai argued that ultimately "there is no third way" between command socialism and market capitalism, that the soft budget constraint and related political issues would force every country either to go to a hard line command socialist position like North Korea's or move towards some form of market capitalism as did most of Eastern Europe eventually. During our discussion he brought up in a favorable way the late West German economist, Walter Eucken, who has been little translated into English. He was the inventor of the concept of the "social market economy," (sozialmarktwirtschaften), which has been the official ideology, more or less, of the Bundes Republik of Germany since the late 1940s, and which I think the social democracies of the Nordic countries are more or less examples of as well. Now it can be argued, and Kornai does, that these countries are all just special cases, if involving some "hybrid" elements, of market capitalism. And it is certainly true that they all have mostly private ownership of the means of production with little central planning. However, Sweden in particular has long advertised itself as representing a Middle Way, with its advanced welfare state and high environmental and other public goods concerns. I, for one, think that Kornai should be a bit more willing to grant such status to such economies.
In any case, I wish to note an unresolved issue in our discussion. In the late 1980s Kornai argued that ultimately "there is no third way" between command socialism and market capitalism, that the soft budget constraint and related political issues would force every country either to go to a hard line command socialist position like North Korea's or move towards some form of market capitalism as did most of Eastern Europe eventually. During our discussion he brought up in a favorable way the late West German economist, Walter Eucken, who has been little translated into English. He was the inventor of the concept of the "social market economy," (sozialmarktwirtschaften), which has been the official ideology, more or less, of the Bundes Republik of Germany since the late 1940s, and which I think the social democracies of the Nordic countries are more or less examples of as well. Now it can be argued, and Kornai does, that these countries are all just special cases, if involving some "hybrid" elements, of market capitalism. And it is certainly true that they all have mostly private ownership of the means of production with little central planning. However, Sweden in particular has long advertised itself as representing a Middle Way, with its advanced welfare state and high environmental and other public goods concerns. I, for one, think that Kornai should be a bit more willing to grant such status to such economies.
Monday, August 11, 2008
Speaking of Child Labor
If you want to hear what I have to say about child labor, here’s a link to Against the Grain, a KPFA (Berkeley) radio show that interviewed me today. CS, the show’s host, really does his homework; he’s great at cutting through the distractions and getting to the point. In another life I used to do what he does now (for WORT in Madison) and can appreciate what it takes to do it well.
Who Are the Ossetians?
The current war between Russia and Georgia is over South Ossetia, an autonomous region of Georgia that won de facto independence on the ground back in 1993, with some assistance from the Russians, who have had peacekeeper troops there since. There are some odd ironies to this war, including that one of the places most ferociously bombed in Georgia in the current campaign has been Gori, birthplace of Josef Dzhugashvilii, better known to the world as "Stalin." While he is usually thought of as being Georgian, and certainly mostly was, there has long been a rumor that he had Ossetian ancestry, even though during his rule, Osip Mandelstam was accused of "anti-Soviet slander" for mentioning this rumor (apparently initially spread by anti-Stalin Georgian nationalist emigres). The basis of it is that a paternal great grandfather apparently did come originally from a thoroughly Ossetian village, Geri. Of course it was Stalin who initially split Ossetia into two halves, making the northern part an autonomous region in the Republic of Russia and the southern one an autonomous region in the Republic of Georgia, within the broader Union of Soviet Socialist Republics.
Another matter of some controversy involves the origin and identify of the Ossetians, who would like to have their own country (and while Russia helps them in the south, there is now way that help will extend to the north). Their language is clearly of the Iranian branch of Indo-European, related to Farsi/Persian, as well as such languages as Kurdish, Peshto, and Tajik, among others. They are also clearly descended from the Alans, who ran a medieval kingdom in the region for several centuries, only coming to an end with the Mongol invasions of Chingiz Khan. The bigger controversy has to do with the origins of the Alans, with the official Soviet view being (and the most widely held one now) that they were either descended from or closely related to the ancient Scythians of the golden grave mounds. While this view became widely accepted after the beginning of the 19th century, it overturned a competing view that has had some recent advocates pushing for it that the Scythians were of Turkish origin. That view was originally expressed by Herodotus.
Another matter of some controversy involves the origin and identify of the Ossetians, who would like to have their own country (and while Russia helps them in the south, there is now way that help will extend to the north). Their language is clearly of the Iranian branch of Indo-European, related to Farsi/Persian, as well as such languages as Kurdish, Peshto, and Tajik, among others. They are also clearly descended from the Alans, who ran a medieval kingdom in the region for several centuries, only coming to an end with the Mongol invasions of Chingiz Khan. The bigger controversy has to do with the origins of the Alans, with the official Soviet view being (and the most widely held one now) that they were either descended from or closely related to the ancient Scythians of the golden grave mounds. While this view became widely accepted after the beginning of the 19th century, it overturned a competing view that has had some recent advocates pushing for it that the Scythians were of Turkish origin. That view was originally expressed by Herodotus.
Putin Shows Who is Boss in Russia
The Georgians made a bad mistake attempting to invade South Ossetia, given the clear interest of the Russians in it and especially on the eve of the Olympic games, a period traditionally when nations attempt to avoid fighting wars, or at least starting fresh ones. I can only hope that the US did not give them a "green light" given that we are not willing to support them, to busy trying to get Russia to help us out with Iran, although one never knows with this administration.
However, I must agree with the many who are upset with the over-the-top reaction by the Russians, continuing to bomb deep into Georgia proper even after the Georgians had retreated from South Ossetia. Although clearly there are various motives going on here, including consolidating in Abkhazia, scaring the Ukrainians, and messing with the Georgian oil pipeline, another would seem to be strictly an internal Russian political one. The Russian constitution currently says the Commander in Chief is the president, now Dmitri Medvedev. Stories have been coming out of Russia in recent weeks about Russian bureaucrats now knowing whose picture to hang on their office walls, with a trend to putting up ones that show both Putin and Medvedev side by side. So, Putin goes from Beijing, where he hugged with Bush, to Vladikavkaz, the capital of North Ossetia on the frontline (note: "Vladikavkaz" means "Victory in the Caucusus" in Russian), where he undoubtedly put into play this very strong reaction. I think the bottom line in Russia is that those pictures with both guys are going to come off the walls and the old ones with just Putin will be back in their places (and this means that Russia will now also be like Germany, Italy, and Israel with having a strong premier and a figurehead president).
However, I must agree with the many who are upset with the over-the-top reaction by the Russians, continuing to bomb deep into Georgia proper even after the Georgians had retreated from South Ossetia. Although clearly there are various motives going on here, including consolidating in Abkhazia, scaring the Ukrainians, and messing with the Georgian oil pipeline, another would seem to be strictly an internal Russian political one. The Russian constitution currently says the Commander in Chief is the president, now Dmitri Medvedev. Stories have been coming out of Russia in recent weeks about Russian bureaucrats now knowing whose picture to hang on their office walls, with a trend to putting up ones that show both Putin and Medvedev side by side. So, Putin goes from Beijing, where he hugged with Bush, to Vladikavkaz, the capital of North Ossetia on the frontline (note: "Vladikavkaz" means "Victory in the Caucusus" in Russian), where he undoubtedly put into play this very strong reaction. I think the bottom line in Russia is that those pictures with both guys are going to come off the walls and the old ones with just Putin will be back in their places (and this means that Russia will now also be like Germany, Italy, and Israel with having a strong premier and a figurehead president).
Sunday, August 10, 2008
NPR on Fighting Fair
I was listening in to NPR, hearing about what the powerful Russian airforce is doing to defenseless citizens in Georgia. What I did not hear was how similar Russian explanations for their actions and their tactics sound identical to those of the US military -- including taking out defense and communications facilities.
The Irrelevance of Workers In Economic Theory
Many of you know that I am finishing up a book manuscript regarding the exclusion of work, workers and working conditions from economic theory. This part jumps into the middle of a section. The meat of the post is really in the third and fourth paragraphs, where I do a JSTOR survey of the almost total exclusion from economics. Fans of Martin Feldstein may appreciate his contribution.
In short, the exclusion of work, workers, and working conditions was not simply an accidental oversight. First, it served an important purpose in defending the capitalism from the accusation of exploitation. Second, any analysis based on labor would call out for both impossible quantification and more difficult mathematics. Utility, however, seemed to permit economists to avoid the need for quantification, while seeming to simplify mathematical complexities. Finally, utility seemed to be capable of fitting in with the type of models that economists were using in their quest to emulate physics with its mathematics of maximization.
As Phil Mirowski noted, "Production, as conventionally understood, does not "fit" in neoclassical value theory" (Mirowski 1989, p. 284). In short, ideology, mathematical convenience, and scientific ambitions all combined to sweep work, workers, and working conditions under the rug.
The radical shift from labor to extreme subjectivity in which consumer's unmeasurable preferences became the center of economic analysis sealed labor's marginalization in the theoretical world of economic theory. Other fields, such as sociology, industrial relations, or psychology seriously explore questions of work, workers or working conditions, but economics does not.
An August 8, 2008 search of 73 economics journals collected electronically in the JSTOR database revealed how marginal work, workers, and working conditions has become in economic literature. Of the articles published since January 2004, the term "working conditions" appeared in only 12, not counting four more substantial articles in the Review of African Political Economy, a journal rarely cited by mainstream economists. Of the remaining articles, three concerned the problem of retention of teachers. Another had a footnote that observed that people can learn about working conditions from websites. One article noted that faculty members in colleges and universities join unions to improve working conditions. A book review considered whether globalization could improve working conditions. Two articles mentioned legislation that took working conditions into account. One article disputed that child labor abroad experienced hideous working conditions. Another cited a mid-nineteenth century British economist who said that factory working conditions were good.
My favorite entry was from Martin Feldstein, whose contempt for spiteful egalitarian was discussed earlier. This article was one of his many attacks on Social Security that proposed that good working conditions should be treated as taxable income (Feldstein 2005, p. 36). None of the articles offered any evidence of serious engagement with work, workers, or working conditions. In contrast, a search for sociologists' articles with the term "working conditions" that covered ten fewer journals, returned 107 articles.
At the same time as questions of labor were disappearing, economics began to elevate the status of investors' financial claims, insisting that owners of this form of property had rights equal to those of owners of real goods, such as land or factories. Even something as ephemeral as "good will" became recognized as property.
In short, the exclusion of work, workers, and working conditions was not simply an accidental oversight. First, it served an important purpose in defending the capitalism from the accusation of exploitation. Second, any analysis based on labor would call out for both impossible quantification and more difficult mathematics. Utility, however, seemed to permit economists to avoid the need for quantification, while seeming to simplify mathematical complexities. Finally, utility seemed to be capable of fitting in with the type of models that economists were using in their quest to emulate physics with its mathematics of maximization.
As Phil Mirowski noted, "Production, as conventionally understood, does not "fit" in neoclassical value theory" (Mirowski 1989, p. 284). In short, ideology, mathematical convenience, and scientific ambitions all combined to sweep work, workers, and working conditions under the rug.
The radical shift from labor to extreme subjectivity in which consumer's unmeasurable preferences became the center of economic analysis sealed labor's marginalization in the theoretical world of economic theory. Other fields, such as sociology, industrial relations, or psychology seriously explore questions of work, workers or working conditions, but economics does not.
An August 8, 2008 search of 73 economics journals collected electronically in the JSTOR database revealed how marginal work, workers, and working conditions has become in economic literature. Of the articles published since January 2004, the term "working conditions" appeared in only 12, not counting four more substantial articles in the Review of African Political Economy, a journal rarely cited by mainstream economists. Of the remaining articles, three concerned the problem of retention of teachers. Another had a footnote that observed that people can learn about working conditions from websites. One article noted that faculty members in colleges and universities join unions to improve working conditions. A book review considered whether globalization could improve working conditions. Two articles mentioned legislation that took working conditions into account. One article disputed that child labor abroad experienced hideous working conditions. Another cited a mid-nineteenth century British economist who said that factory working conditions were good.
My favorite entry was from Martin Feldstein, whose contempt for spiteful egalitarian was discussed earlier. This article was one of his many attacks on Social Security that proposed that good working conditions should be treated as taxable income (Feldstein 2005, p. 36). None of the articles offered any evidence of serious engagement with work, workers, or working conditions. In contrast, a search for sociologists' articles with the term "working conditions" that covered ten fewer journals, returned 107 articles.
At the same time as questions of labor were disappearing, economics began to elevate the status of investors' financial claims, insisting that owners of this form of property had rights equal to those of owners of real goods, such as land or factories. Even something as ephemeral as "good will" became recognized as property.
Friday, August 8, 2008
The Petro-Euro. Exchange Rate Warfare (continued)
I have been unable to post replies to blogs lately. I don't know why. So I continue the discussion on exchange rate warfare here.
YouNoSneaky has queried the very existence of an over-valued US dollar.
Discounting very recent declines, the US dollar has been over-valued for a long period of time. Probably (at least) since the early 1960s. That has got to do with the petro-dollar (1973) and global reserve currency (1948) arrangements.
"...At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions such as the IMF. This confers on the US a major economic advantage: the ability to run a trade deficit year after year. It can do this because foreign countries need dollars to repay their debts to the IMF, to conduct international trade and to build up their currency reserves. The US provides the world with these dollars by buying goods and services produced by foreign countries, but since it does not have a corresponding need for foreign currency, it sells far fewer goods and services in return...." [1]
'Reason' correctly points out that Germany does not have a trade deficit. However Germany is the core of the Eurozone.
"...Getting a share of this economic free lunch has been one of the motivations, and perhaps the main motivation, behind setting up the euro2 . Were the euro to become a reserve currency equal to, or perhaps even instead of, the dollar, countries would reduce their dollar holdings while building up their euro savings. Another way of putting this would be to say that Eurozone countries would be able to reduce their subsidy to American consumption and would find that other countries were now subsidising Eurozone consumption instead...."[2]
The Eurozone does has a trade deficit.
World trade in today's context is dominated by (i) European and US multinational corporations (ii) these same multinationals enjoying monopoly market positions within nations and (ii) trading occuring within the same corporations (or networks of) across national boundaries. Given this, the question of global exchange rate wars between these two powerful camps - the Eurozone and the US - needs to be explored further.
Stefan Karlsson also points out that a net outflow of Foreign Direct Investment (FDI) from the US combined with a large inflow of foreign capital into the US is a very good deal for America [BR: or is it really for US multinatinals??], since this means that Americans can get money very cheaply from the Asian central banks and invest them in high-yielding investments in Asia. [This is] the mechanism behind the fact that America, despite the build-up of net foreign liabilities ..has had a surplus in net investment income of roughly $30 billion during 2004. The fact that foreigners have $11 trillion in U.S. assets versus U.S. holdings of only $8 trillion of assets outside America is thus more than compensated by the fact that U.S. investments offshore have a much higher average yield than foreign investments in America. It is not America who loses when the Asians lend money at low rates to Americans who can then invest it in high-yielding investments in Asia.”[3]
[1] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm
[2] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm
[3] What Are We to Make of the Trade Deficit?
Daily Article by Stefan Karlsson | Posted on 3/21/2005
http://mises.org/story/1762
YouNoSneaky has queried the very existence of an over-valued US dollar.
Discounting very recent declines, the US dollar has been over-valued for a long period of time. Probably (at least) since the early 1960s. That has got to do with the petro-dollar (1973) and global reserve currency (1948) arrangements.
"...At present, approximately two thirds of world trade is conducted in dollars and two thirds of central banks' currency reserves are held in the American currency which remains the sole currency used by international institutions such as the IMF. This confers on the US a major economic advantage: the ability to run a trade deficit year after year. It can do this because foreign countries need dollars to repay their debts to the IMF, to conduct international trade and to build up their currency reserves. The US provides the world with these dollars by buying goods and services produced by foreign countries, but since it does not have a corresponding need for foreign currency, it sells far fewer goods and services in return...." [1]
'Reason' correctly points out that Germany does not have a trade deficit. However Germany is the core of the Eurozone.
"...Getting a share of this economic free lunch has been one of the motivations, and perhaps the main motivation, behind setting up the euro2 . Were the euro to become a reserve currency equal to, or perhaps even instead of, the dollar, countries would reduce their dollar holdings while building up their euro savings. Another way of putting this would be to say that Eurozone countries would be able to reduce their subsidy to American consumption and would find that other countries were now subsidising Eurozone consumption instead...."[2]
The Eurozone does has a trade deficit.
World trade in today's context is dominated by (i) European and US multinational corporations (ii) these same multinationals enjoying monopoly market positions within nations and (ii) trading occuring within the same corporations (or networks of) across national boundaries. Given this, the question of global exchange rate wars between these two powerful camps - the Eurozone and the US - needs to be explored further.
Stefan Karlsson also points out that a net outflow of Foreign Direct Investment (FDI) from the US combined with a large inflow of foreign capital into the US is a very good deal for America [BR: or is it really for US multinatinals??], since this means that Americans can get money very cheaply from the Asian central banks and invest them in high-yielding investments in Asia. [This is] the mechanism behind the fact that America, despite the build-up of net foreign liabilities ..has had a surplus in net investment income of roughly $30 billion during 2004. The fact that foreigners have $11 trillion in U.S. assets versus U.S. holdings of only $8 trillion of assets outside America is thus more than compensated by the fact that U.S. investments offshore have a much higher average yield than foreign investments in America. It is not America who loses when the Asians lend money at low rates to Americans who can then invest it in high-yielding investments in Asia.”[3]
[1] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm
[2] 'Petrodollar or Petroeuro? A new source of global conflict.' By Cóilín Nunan. Accessed on 8th August 2008. http://www.feasta.org/documents/review2/nunan.htm
[3] What Are We to Make of the Trade Deficit?
Daily Article by Stefan Karlsson | Posted on 3/21/2005
http://mises.org/story/1762
Kvetching
I don't usually use the Internet to kvetch, but after 6 weeks of smoke that had me wearing a mask, I now am reduced to dialup. We lost on electricity on Tue. night because of the strongest thunderstorm I have ever witnessed. The walls on the house shook. Rapid lightening strikes eventually took out a transformer around the corner. I talked to some of the repairmen sitting in a truck. They could not do anything until someone came to tell them which transformer is out.
I told them that I could show it to them. It goes out frequently. 15 minutes later, they drove way. Finally, after continual promises that a fix was coming in 2 hours, we finally got electricity back on Wed. night, only to find out that our DSL was kaput.
AT&T has been giving us the same runaround as PG&E. One call promised that a technician would come by 8 tonight, but another said that we have our "appointment" between 8 am and 8 pm on Wed.
I told them that I could show it to them. It goes out frequently. 15 minutes later, they drove way. Finally, after continual promises that a fix was coming in 2 hours, we finally got electricity back on Wed. night, only to find out that our DSL was kaput.
AT&T has been giving us the same runaround as PG&E. One call promised that a technician would come by 8 tonight, but another said that we have our "appointment" between 8 am and 8 pm on Wed.
Exchange Rate Warfare
Perhaps readers may be able to help clarify the state of play for multinationals over the last few decades? I'm trying to piece together the jigsaw of international manoevres by the world's largest corporations.
It's interesting to observe that the nations with the largest deficits - the US, UK and Germany - are also the homes of the largest transnational corporations. Have their respective governments and reserve banks been:
(i) floating a lot of debt to these businesses at low interest rates;
(ii) maintaining artificially high exchange rates in order for their large MNCs to
(iii) accumulate assets relatively cheaply overseas and in order to facilitate
(iv) their cheap repayment of debt??
Now that these same corporations are caught in a recession with high levels of debt are we now seeing a taxpayer-funded bailout of these same MNCs?
It's interesting to observe that the nations with the largest deficits - the US, UK and Germany - are also the homes of the largest transnational corporations. Have their respective governments and reserve banks been:
(i) floating a lot of debt to these businesses at low interest rates;
(ii) maintaining artificially high exchange rates in order for their large MNCs to
(iii) accumulate assets relatively cheaply overseas and in order to facilitate
(iv) their cheap repayment of debt??
Now that these same corporations are caught in a recession with high levels of debt are we now seeing a taxpayer-funded bailout of these same MNCs?
Thursday, August 7, 2008
Feldstein on the Tax Rebate – Life-cycle Model Vindicated
When President Bush and some in Congress thought that their one-time tax rebate was just the right fiscal remedy for an economy about to enter a Keynesian slowdown, some of us wonder if Albert Ando and Franco Modigliani’s old life cycle model of consumption had it right – that people would save much of this one-time tax rebate. Martin Feldstein argues that they were correct:
That’s right – very little bang for the buck. Feldstein takes this evidence and then turns on one of Obama’s proposals:
If Obama’s proposal was solely to boost consumption demand – it is even worse than this as it is a transfer of income from one household to another with the likely effect on aggregate consumption being zero if the households had similar marginal propensities to consume. But a lack of consumption is not what ails the US economy. Furthermore, Obama’s proposal is more designed to address income inequality and less about Keynesian demand stimulus. The fiscal stimulus part of the Obama plan would be from accelerating certain forms of public investment.
Feldstein closes on what I consider heresy:
Feldstein is well aware that we have a long-term fiscal imbalance with the current level of taxes being far below the current and projected level of government spending. Ricardian Equivalence types would mock at the idea that recognizing those deferred taxes into current taxes might curb aggregate demand. And even if one rejects Ricardian Equivalence, how can any economists with a supply-side orientation dismiss fiscal responsibility. After all, Keynesian maladies tend to be short-run affairs but the crowding-out of investment is something that lowers long-term growth. Feldstein knows this and usually preaches this. What on earth got him to close his WSJ oped with such heresy?
Update: Mark Thoma is linking to several comments about this Feldstein oped including how Free Exchange has caught Feldstein criticizing something he once endorsed:
Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the paydown of debt.
That’s right – very little bang for the buck. Feldstein takes this evidence and then turns on one of Obama’s proposals:
These conclusions are significant for evaluating the likely impact of Barack Obama's recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be … All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1% of GDP.
If Obama’s proposal was solely to boost consumption demand – it is even worse than this as it is a transfer of income from one household to another with the likely effect on aggregate consumption being zero if the households had similar marginal propensities to consume. But a lack of consumption is not what ails the US economy. Furthermore, Obama’s proposal is more designed to address income inequality and less about Keynesian demand stimulus. The fiscal stimulus part of the Obama plan would be from accelerating certain forms of public investment.
Feldstein closes on what I consider heresy:
The distinction between one-time tax rebates and permanent changes in net income is also important for the debate about Mr. Obama's proposal to raise income and payroll taxes. Because those tax increases would be permanent, they would cause a substantial reduction in consumer spending and aggregate demand.
Feldstein is well aware that we have a long-term fiscal imbalance with the current level of taxes being far below the current and projected level of government spending. Ricardian Equivalence types would mock at the idea that recognizing those deferred taxes into current taxes might curb aggregate demand. And even if one rejects Ricardian Equivalence, how can any economists with a supply-side orientation dismiss fiscal responsibility. After all, Keynesian maladies tend to be short-run affairs but the crowding-out of investment is something that lowers long-term growth. Feldstein knows this and usually preaches this. What on earth got him to close his WSJ oped with such heresy?
Update: Mark Thoma is linking to several comments about this Feldstein oped including how Free Exchange has caught Feldstein criticizing something he once endorsed:
MARTIN FELDSTEIN wrote back in December of 2007 that a fiscal stimulus was needed, and that a good way to design said stimulus was in the form of uniform tax rebates. For once, Congress did just what an economist wanted it to do, introducing a tax rebate stimulus plan that sent cheques to millions of households in the second quarter of this year. Naturally Mr Feldstein is appreciative, no? No. In today's Wall Street Journal, Mr Feldstein writes that of course the stimulus didn't work, and what's more, any old fool should have known it wouldn't. I believe this is what is known as a flip-flop.
Tuesday, August 5, 2008
More Pension Ripoffs: Ellen Schultz Deserves an Award
Ellen Schulz deserves some sort of award for keeping on top of the pension ripoffs that the corporations pull off. Here she also discusses my old employer, Consolidated Freightways.
Basically, the companies, even when they are cutting benefits for ordinary workers, they get shift lush executive pensions into the tax-free pension fund, increasing profits and managerial benefits at the same time.
Here is the article. Read it and weep.
Wall Street Journal - August 4, 2008
Companies Tap Pension Plans
To Fund Executive Benefits
Little-Known Move
Uses Tax Break Meant
For Rank and File
By ELLEN E. SCHULTZ and THEO FRANCIS
At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.
In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.
The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.
How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.
The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.
But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.
The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.
Now, when the executives get ready to collect their deferred salaries, Intel won't have to pay them out of cash; the pension plan will pay them.
Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel's contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel's executive compensation.
Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.
Fred Thiele, Intel's global retirement manager, said the benefit was probably somewhat lower, because if Intel hadn't contributed this $187 million to the pension plan, it would have invested the cash or used it in some other productive way.
The company said the move aided shareholders and didn't hurt lower-paid employees because most don't benefit from Intel's pension plan. Instead, they receive their retirement benefits mainly from a profit-sharing plan, with the pension plan serving as a backup in case profit-sharing falls short.
The result, though, is that a majority of the tax-advantaged assets in Intel's pension plan are dedicated not to providing pensions for the rank and file but to paying deferred compensation of the company's most highly paid employees, roughly 4% of the work force.
On the Hook
And taxpayers are on the hook in other ways. When deferred executive salaries and bonuses are part of a pension plan, they can be rolled over into an Individual Retirement Account -- another tax-advantaged vehicle.
Intel believes that its practices "feel consistent" with both the spirit and letter of the law that gives tax benefits for providing pensions.
Intel may be a model for what's to come. Many companies are phasing out their pension plans, typically by "freezing" them, i.e., ending workers' buildup of new benefits. This leaves more pension assets available to cover executives' compensation and supplemental benefits. A number of companies have shifted executive benefits into frozen pension plans.
Technically, a company makes this move by increasing an executive's benefit in the regular pension plan by X dollars and canceling X dollars of the executive's deferred comp or supplemental pension.
CenturyTel, for instance, in 2005 moved its IOU for the supplemental pensions of 18 top employees into its regular pension plan. Chief Executive Glen Post's benefits in the regular pension plan jumped to $110,000 a year from $12,000. A spokesman for the Monroe, La., company, which made more such transfers in 2006, was frank about its motive: to take advantage of tax breaks by paying executive benefits out of a tax-advantaged pension plan.
How They Do It
So how can companies boost regular pension benefits for select executives while still passing the IRS's nondiscrimination tests? Benefits consultants help them figure out how.
To prove they don't discriminate, companies are supposed to compare what low-paid and high-paid employees receive from the pension plan. They don't have to compare actual individuals; they can compare ratios of the benefits received by groups of highly paid vs. groups of lower-paid employees.
Such a measure creates the potential for gerrymandering -- carefully moving employees about, in various theoretical groupings, to achieve a desired outcome.
Another technique: Count Social Security as part of the pension. This effectively raises low-paid employees' overall retirement benefits by a greater percentage than it raises those of the highly paid -- enabling companies to then increase the pensions of higher-paid people.
Indeed, "it is actually these discrimination tests that give rise to Qserp in the first place!" said materials from one consulting firm, Watson Wyatt Worldwide. "Qserp" means "qualified supplemental executive retirement plan" -- an industry term for a supplemental executive pension that "qualifies" for tax breaks.
Watson Wyatt senior consultant Alan Glickstein said the firm's calculations tell employers exactly how much disparity they can achieve between the pensions of highly paid people and others. "At the end, when the game is over, when the computer is cooling off, you know whether you passed [the IRS nondiscrimination tests] or not," he said. At that point, companies can retrofit the benefits of select executives, feeding some into the pension plan.
They can do this even if they freeze the pension plan, because executives' supplemental benefits and deferred comp aren't based on the frozen pension formula.
Keeping Quiet
Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to "minimize this problem" of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it "only to employees who are eligible."
The IRS was also a concern for Mr. Schmidt. He advised employers that in "dealing with the IRS," they should ask it for an approval letter, because if the agency later cracks down, its restrictions probably won't be retroactive.
"At some point in the future, the IRS may well take the position" that supplemental executive pensions moved into a regular pension plan "violate the 'spirit' of the nondiscrimination rules," Mr. Schmidt wrote. In an interview, he confirmed his written comments.
Companies don't explicitly tell the IRS that an amendment is intended to shift supplements executive benefits obligations into the regular pension plan. "They hide it," a Treasury official said. "They include the amendment with other amendments, and don't make it obvious."
With too little staffing to check the dozens of pages of actuaries' calculations, the IRS generally accepts the companies' assurances that their pension plans pass the discrimination tests, the official said.
"Under existing rules, there's little we can do anyway. If Congress doesn't like it, it can change the rules." To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests.
A spokesman for the IRS said it has no idea how many such pension amendments it has approved or how much money is involved.
A Way to Pass
Sometimes, the only tipoff that a firm is moving executive benefits into the regular pension is that it provides small increases to some lower-paid groups in the plan, in order to pass the nondiscrimination tests.
Royal & SunAlliance, an insurer, sold a division and laid off its 228 employees in 1999. Just before doing so, it amended the division's pension plan to award larger benefits to eight departing officers and directors. One human-resources executive got an additional $5,270 a month for life.
But to do this and still pass the IRS's nondiscrimination tests, the company needed to give tiny pension increases to 100 lower-level workers, said the company's benefits consultant, PricewaterhouseCoopers. One got an increase of $1.92 a month.
Joseph Gromala, a middle manager who stood to get $8.87 more a month at age 65, wrote to the company seeking details about higher sums other people were receiving. A lawyer wrote back saying the company didn't have to show him the relevant pension-plan amendment.
Mr. Gromala then sued in federal court, claiming that administrators of the pension plan were breaching their duty to operate it in participants' best interests. The company replied that its move was a business decision, not a pension decision, so the fiduciary issue was moot. The Sixth U.S. Circuit Court of Appeals agreed.
PricewaterhouseCoopers declined to comment. A spokesman for Royal & SunAlliance's former U.S. operation, now called Arrowpoint Capital, said the pension plan "wasn't discriminatory." Royal & SunAlliance recently changed its name to RSA Insurance Group.
Pension-plan amendments like the documents Mr. Gromala sought must be filed with the IRS, but the agency normally won't disclose specifics such as who benefits. The IRS says it can't release details of the amendments because they reflect individuals' benefits.
Not So Safe
Employers sometimes tell executives that moving their supplemental pensions or deferred comp into the company pension plan will make them more secure. Normally, supplemental pensions or deferred comp are just unsecured promises; companies don't set aside cash for supplemental executive pensions and deferred comp because there's no tax break for doing so. But the promises will be backed by assets if the company can squeeze them into a tax-advantaged pension plan.
This supposed security can prove illusory, as executives at Consolidated Freightways found out.
The trucking firm moved most of its retirement IOUs for eight top officers into its pension plan in late 2001. It said this would protect most or all of their promised benefits, which ranged up to $139,000 a year.
This came as relief to Tom Paulsen, then chief operating officer, who says he knew the Vancouver, Wash., trucking company was on "thin ice."
But the pension plan was underfunded. And Consolidated didn't add more assets to it when the company gave the plan new obligations. Adding the executive IOUs thus made the plan weaker. It went from having about 96% of the assets needed to pay promised benefits to having just 79%.
Losing Benefits
Consolidated later filed for bankruptcy and handed its pension plan over to a government insurer, the Pension Benefit Guaranty Corp. The PBGC commits to paying pensions only up to certain limits. Mr. Paulsen said he and other executives have been told they won't get their supplemental pensions.
Some lower-level people will lose benefits, too. Chester Madison, a middle manager who retired in 2002 after 33 years, saw his pension fall to $20,400 a year from $49,200. Mr. Madison, 62, has taken a job selling flooring in Sacramento, Calif.
He faults those who made the pension decisions. "I look at it as greed and taking care of the top echelons," he says.
It's impossible to know how much the addition of executive pensions to the pension plan contributed to the plan's failure. But in this as in similar companies where a plan saddled with executive benefits failed -- such as at kitchenware maker Oneida Ltd. in upstate New York -- it's clear the move weakened the plans by adding liabilities but no assets.
A trustee for Consolidated's bankruptcy liquidation declined to discuss details of the company's pension plan.
Mr. Madison and five other ex-employees sued Towers Perrin, a consulting firm that had advised Consolidated on structuring its benefits. The suit, alleging professional negligence over this and other issues, was dismissed in late 2006 by a federal court in the Northern District of California. Towers Perrin declined to comment.
Some companies, after moving executives' supplemental benefits into a pension plan, now take steps to protect them. When Hartmarx Corp. added executive obligations to its pension plan last year, it set up a trust that automatically would be funded if the plan failed.
Glenn Morgan, the clothier's chief financial officer, said the trust benefits nine or 10 people. "The purpose is to pay them the benefit they've earned," he said.
Basically, the companies, even when they are cutting benefits for ordinary workers, they get shift lush executive pensions into the tax-free pension fund, increasing profits and managerial benefits at the same time.
Here is the article. Read it and weep.
Wall Street Journal - August 4, 2008
Companies Tap Pension Plans
To Fund Executive Benefits
Little-Known Move
Uses Tax Break Meant
For Rank and File
By ELLEN E. SCHULTZ and THEO FRANCIS
At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.
In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.
The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.
How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.
The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.
But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.
The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.
Now, when the executives get ready to collect their deferred salaries, Intel won't have to pay them out of cash; the pension plan will pay them.
Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel's contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel's executive compensation.
Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.
Fred Thiele, Intel's global retirement manager, said the benefit was probably somewhat lower, because if Intel hadn't contributed this $187 million to the pension plan, it would have invested the cash or used it in some other productive way.
The company said the move aided shareholders and didn't hurt lower-paid employees because most don't benefit from Intel's pension plan. Instead, they receive their retirement benefits mainly from a profit-sharing plan, with the pension plan serving as a backup in case profit-sharing falls short.
The result, though, is that a majority of the tax-advantaged assets in Intel's pension plan are dedicated not to providing pensions for the rank and file but to paying deferred compensation of the company's most highly paid employees, roughly 4% of the work force.
On the Hook
And taxpayers are on the hook in other ways. When deferred executive salaries and bonuses are part of a pension plan, they can be rolled over into an Individual Retirement Account -- another tax-advantaged vehicle.
Intel believes that its practices "feel consistent" with both the spirit and letter of the law that gives tax benefits for providing pensions.
Intel may be a model for what's to come. Many companies are phasing out their pension plans, typically by "freezing" them, i.e., ending workers' buildup of new benefits. This leaves more pension assets available to cover executives' compensation and supplemental benefits. A number of companies have shifted executive benefits into frozen pension plans.
Technically, a company makes this move by increasing an executive's benefit in the regular pension plan by X dollars and canceling X dollars of the executive's deferred comp or supplemental pension.
CenturyTel, for instance, in 2005 moved its IOU for the supplemental pensions of 18 top employees into its regular pension plan. Chief Executive Glen Post's benefits in the regular pension plan jumped to $110,000 a year from $12,000. A spokesman for the Monroe, La., company, which made more such transfers in 2006, was frank about its motive: to take advantage of tax breaks by paying executive benefits out of a tax-advantaged pension plan.
How They Do It
So how can companies boost regular pension benefits for select executives while still passing the IRS's nondiscrimination tests? Benefits consultants help them figure out how.
To prove they don't discriminate, companies are supposed to compare what low-paid and high-paid employees receive from the pension plan. They don't have to compare actual individuals; they can compare ratios of the benefits received by groups of highly paid vs. groups of lower-paid employees.
Such a measure creates the potential for gerrymandering -- carefully moving employees about, in various theoretical groupings, to achieve a desired outcome.
Another technique: Count Social Security as part of the pension. This effectively raises low-paid employees' overall retirement benefits by a greater percentage than it raises those of the highly paid -- enabling companies to then increase the pensions of higher-paid people.
Indeed, "it is actually these discrimination tests that give rise to Qserp in the first place!" said materials from one consulting firm, Watson Wyatt Worldwide. "Qserp" means "qualified supplemental executive retirement plan" -- an industry term for a supplemental executive pension that "qualifies" for tax breaks.
Watson Wyatt senior consultant Alan Glickstein said the firm's calculations tell employers exactly how much disparity they can achieve between the pensions of highly paid people and others. "At the end, when the game is over, when the computer is cooling off, you know whether you passed [the IRS nondiscrimination tests] or not," he said. At that point, companies can retrofit the benefits of select executives, feeding some into the pension plan.
They can do this even if they freeze the pension plan, because executives' supplemental benefits and deferred comp aren't based on the frozen pension formula.
Keeping Quiet
Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to "minimize this problem" of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it "only to employees who are eligible."
The IRS was also a concern for Mr. Schmidt. He advised employers that in "dealing with the IRS," they should ask it for an approval letter, because if the agency later cracks down, its restrictions probably won't be retroactive.
"At some point in the future, the IRS may well take the position" that supplemental executive pensions moved into a regular pension plan "violate the 'spirit' of the nondiscrimination rules," Mr. Schmidt wrote. In an interview, he confirmed his written comments.
Companies don't explicitly tell the IRS that an amendment is intended to shift supplements executive benefits obligations into the regular pension plan. "They hide it," a Treasury official said. "They include the amendment with other amendments, and don't make it obvious."
With too little staffing to check the dozens of pages of actuaries' calculations, the IRS generally accepts the companies' assurances that their pension plans pass the discrimination tests, the official said.
"Under existing rules, there's little we can do anyway. If Congress doesn't like it, it can change the rules." To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests.
A spokesman for the IRS said it has no idea how many such pension amendments it has approved or how much money is involved.
A Way to Pass
Sometimes, the only tipoff that a firm is moving executive benefits into the regular pension is that it provides small increases to some lower-paid groups in the plan, in order to pass the nondiscrimination tests.
Royal & SunAlliance, an insurer, sold a division and laid off its 228 employees in 1999. Just before doing so, it amended the division's pension plan to award larger benefits to eight departing officers and directors. One human-resources executive got an additional $5,270 a month for life.
But to do this and still pass the IRS's nondiscrimination tests, the company needed to give tiny pension increases to 100 lower-level workers, said the company's benefits consultant, PricewaterhouseCoopers. One got an increase of $1.92 a month.
Joseph Gromala, a middle manager who stood to get $8.87 more a month at age 65, wrote to the company seeking details about higher sums other people were receiving. A lawyer wrote back saying the company didn't have to show him the relevant pension-plan amendment.
Mr. Gromala then sued in federal court, claiming that administrators of the pension plan were breaching their duty to operate it in participants' best interests. The company replied that its move was a business decision, not a pension decision, so the fiduciary issue was moot. The Sixth U.S. Circuit Court of Appeals agreed.
PricewaterhouseCoopers declined to comment. A spokesman for Royal & SunAlliance's former U.S. operation, now called Arrowpoint Capital, said the pension plan "wasn't discriminatory." Royal & SunAlliance recently changed its name to RSA Insurance Group.
Pension-plan amendments like the documents Mr. Gromala sought must be filed with the IRS, but the agency normally won't disclose specifics such as who benefits. The IRS says it can't release details of the amendments because they reflect individuals' benefits.
Not So Safe
Employers sometimes tell executives that moving their supplemental pensions or deferred comp into the company pension plan will make them more secure. Normally, supplemental pensions or deferred comp are just unsecured promises; companies don't set aside cash for supplemental executive pensions and deferred comp because there's no tax break for doing so. But the promises will be backed by assets if the company can squeeze them into a tax-advantaged pension plan.
This supposed security can prove illusory, as executives at Consolidated Freightways found out.
The trucking firm moved most of its retirement IOUs for eight top officers into its pension plan in late 2001. It said this would protect most or all of their promised benefits, which ranged up to $139,000 a year.
This came as relief to Tom Paulsen, then chief operating officer, who says he knew the Vancouver, Wash., trucking company was on "thin ice."
But the pension plan was underfunded. And Consolidated didn't add more assets to it when the company gave the plan new obligations. Adding the executive IOUs thus made the plan weaker. It went from having about 96% of the assets needed to pay promised benefits to having just 79%.
Losing Benefits
Consolidated later filed for bankruptcy and handed its pension plan over to a government insurer, the Pension Benefit Guaranty Corp. The PBGC commits to paying pensions only up to certain limits. Mr. Paulsen said he and other executives have been told they won't get their supplemental pensions.
Some lower-level people will lose benefits, too. Chester Madison, a middle manager who retired in 2002 after 33 years, saw his pension fall to $20,400 a year from $49,200. Mr. Madison, 62, has taken a job selling flooring in Sacramento, Calif.
He faults those who made the pension decisions. "I look at it as greed and taking care of the top echelons," he says.
It's impossible to know how much the addition of executive pensions to the pension plan contributed to the plan's failure. But in this as in similar companies where a plan saddled with executive benefits failed -- such as at kitchenware maker Oneida Ltd. in upstate New York -- it's clear the move weakened the plans by adding liabilities but no assets.
A trustee for Consolidated's bankruptcy liquidation declined to discuss details of the company's pension plan.
Mr. Madison and five other ex-employees sued Towers Perrin, a consulting firm that had advised Consolidated on structuring its benefits. The suit, alleging professional negligence over this and other issues, was dismissed in late 2006 by a federal court in the Northern District of California. Towers Perrin declined to comment.
Some companies, after moving executives' supplemental benefits into a pension plan, now take steps to protect them. When Hartmarx Corp. added executive obligations to its pension plan last year, it set up a trust that automatically would be funded if the plan failed.
Glenn Morgan, the clothier's chief financial officer, said the trust benefits nine or 10 people. "The purpose is to pay them the benefit they've earned," he said.
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