[davelj]

[quote=squat250]davelj, i wouldve considered children luxury goods prior to having them.

Now that i have them, it’s clear to me they are absolutely necessary. It was unseeable to me that i wasn’t who I really am without them.

So, no, not a luxury.

I’d rather have them and have a complete crap lifestyle.

They often ask me, pa, how much would you sell one of us for?
When i explain that i honestly would not take a million, or even to their shocka nd chagrin, ONE BILLION DOLLARS, they cannot understand it. Hell, they might even sell me for a billion dollars.

Do other kids ask their parents weird questions like that?

how much would you take for me? Assume I’ll be well taken care of, pa, so you don’t have to worry about it. but you never get to see me again. How much?

Dude, I would not sell you.

Sure you would. think of all the money, Pa! Think of it! Wealthy beyond your dreams!

The money would mean nothing, little dude.[/quote]

Once they’re out of the womb children certainly look more like necessities… it’s interesting, however, that a majority of the world’s parents (mostly in developing countries) would gladly part with one of their children for an amount that we here in the industrialized world would find insulting. Where you stand depends upon where you sit.

How do you feel about folks having children that they clearly cannot support? Does it bother you that your tax dollars go toward supporting something that only came about as a result of a poor choice by another human being?

My point is that children should be *viewed* as a luxury good prior to their arrival. As long as I don’t have to support them, then fine. And as long as the folks that have them don’t bitch and moan about how difficult their life is because they have them, then fine. But when I hear folks talk about how expensive it is to live, and they have children, I just think, “you made your bed… time to lie in it.”

[davelj]

[quote=bearishgurl]

I think there are a lot of these families in financial distress only because they were unrealistic about the cost of real life and what could happen to them and NOT due to buying or taking out equity at the peak.[/quote]

I think a lot of families dramatically underestimate the cost of providing for children. Most folks shouldn’t have children – realistically, they can’t afford to provide for them in the manner they view in their mind’s eye; rather, they discover this uncomfortable truth after the fact. Children should be viewed as luxury goods – they’re expensive and completely unnecessary.

[davelj]

[quote=harvey]What makes you think that CEO/board shenanigans don’t occur in private companies also?

Investment in private companies has plenty of its own risks.

Take a moment and think about why there are “public” companies in the first place.[/quote]

CEO/board shenanigans do occur at private companies… it’s just considerably more unusual. Most private companies have concentrated ownerships, and these owners tend to be pretty vigilant on matters of corporate governance because they don’t have the luxury of liquidity that public companies provide.

Public companies exist largely because owners want to cash out in part or in whole – or have a liquid holding that they can sell more easily in the future. That’s the *real* reason *most* public companies exist (that is, go public via IPO). The *purported* reason – contradicted by the empirical evidence – is that these companies need access to the public markets for less expensive capital. This latter reason is certainly valid in certain cases – no doubt about it – but it’s not the *primary* reason that most companies are public. Take the average public company and see how many times over a five year period they need to access the public markets for long-term debt or equity that they would have paid considerably more for if they were private. In percentage terms the number is not that large. And in this day and age, many small companies, if they are successful and have proper governance, can access the public debt markets (and even equity markets in many cases) on the same terms as their public brethren.

So, public companies exist *primarily* because owners want to cash out (in the early stages) and managers want to loot (after the company’s mature)… and there are plenty of new owners who will enable them in this process. Other more “legitimate” reasons exist as well (as discussed above)… but these tend to be secondary.

[davelj]

[quote=harvey]
What percentage of a typical large company’s profits go to CEO compensation? In other words, even if the “value” of a CEO was “zero” and we took all of their compensation away to reflect that, how much difference would it make to the bottom line of the company?

To use some rough numbers:

I found that the average CEO pay at the S&P500 is about 10 million, which means that CEO compensation costs the S&P500 about $5 billion per year.

The total income annual income for the S&P500 is about a trillion dollars.

So, in the aggregate, CEO compensation accounts for about half-a-percent of the total income of these corporations.

These data I’m using is pretty rough, but even if the numbers were off by quite a bit, the point is still made. CEO compensation just doesn’t impact investment returns much at all (their performance does, or course, but that’s a different issue.)

If we want to claim something is an economic problem, then we have to have some objective way to measure the magnitude of the problem. CEO pay rates very high on the “distasteful” scale, but the actual economic impact of their compensation – even if it were 100% “waste” – is insignificant.[/quote]

harvey, c’mon… this is a massive straw man argument. Of course you’re right here but the point of this thread is wealth/income inequality, which is why CEO, and to a larger extent senior management, compensation in general, is an issue. This graph just covers CEO compensation but you’d see the same trend lines with slightly lower ratios if the graph was labeled “Ratio of Senior Management Compensation to Average Worker Compensation.”

CEOs distance themselves from the average worker

The problem is not one of its impact on corporate profits. The problem is a social one – you have a group of senior executives at the vast majority of public companies who are dramatically overpaid relative to their contribution to the company, which engenders greater income inequality… which is bad for society. Yes, capitalism is going to lead to some degree of income inequality – that’s inevitable – and not an altogether bad thing. But when “crony capitalism” leads to the *dramatic* level of inequality that we see today… that’s bad policy for everyone, in my view, because the masses get restless, with all that implies.

In hindsight, although they weren’t capitalists, I’m sure the Romanovs wished they had been a little more generous with their own ill-gotten lucre. Personally, I’d rather pay higher taxes and have a civil society than spend my time looking over my shoulder.

[davelj]

[quote=harvey]Economists have answered the question long ago: The market determines value.

Although there is good reason for regulation that helps markets work better (e.g. by improving transparency and eliminating textbook market failures), there is never a good reason to believe that government should be the sole judge of economic value.[/quote]

I’m a big fan of markets – I used to be a small-l libertarian and I still have a great fondness for markets. But they don’t work ALL the time and it goes beyond just the textbook cases of market failure (e.g., pollution).

One big market failure is executive compensation at public companies. Public companies are fantastic vehicles for looting. Ownership tends to be fragmented and most large institutional shareholders place greater value on the information that management provides them than they do on proper governance. And the trading is such that there are very few “owners” and lots of “renters,” which is perfect for management. Consequently, it’s very unusual – although not unheard of – for investors to stage a coup (there almost has to be gross negligence involved). The boards are typically hand-picked by management and championed to the nominating committee. And of course the board fees are so lucrative relative to the time commitment that most decisions, including compensation, are rubber stamped. It’s really a complete joke. Once in a blue moon someone like Icahn will come along and shake things up but that’s the dramatic exception to the rule. So, I’d say executive compensation within public companies is a pretty big market failure as a result of internal control fraud. The shepherds (mutual funds, hedge funds, etc.) render the ultimate owners (the investors in those funds) impotent… and management runs roughshod over the lot of them. Which is why, in my view, public companies are to be generally avoided if at all possible.

So while I certainly prefer situations in which a pure market determines value… there are a lot of situations in which folks manage to do their damndest to make certain that doesn’t happen. Executive compensation is a good example, which fits in with the theme of this thread.

[davelj]

[quote=harvey]

Who decides what has value?

Just you?[/quote]

Clearly one of the toughest parts of this debate… who decides? And, further, what is the metric used?

For example, in aggregate, most of the mutual fund industry (and you could extend this to most of the entire asset management industry) doesn’t add much in the way of value other than providing liquidity (which certainly has value, although not as much as we collectively pay for it). That amounts to billions of dollars per year in fees where it “appears” that not much value is created. But that’s just dollars and cents… arguably the mere fact that someone is managing folks’ money (even if it’s not optimally managed) makes them “feel” better – it gives them a sense of hope and peace of mind. What is this worth? I really don’t know how much “psychic income” this provides… but it’s certainly worth something.

[davelj]

[quote=no_such_reality][quote=CA renter]
By all means, people should go out there and create, innovate, and improve upon things. That’s valuable to society, no doubt. But “investors” who don’t create, don’t expand productive capacity, etc.? That’s zero-sum, and requires other to suffer in order for the “winners” to gain.[/quote]

You really need to go see a few more places where people don’t invest capital.[/quote]

Yeah, that’s actually empirically incorrect. Investing is a “market-sum” game where the participants share in the total market return pie (or “economic return” pie, if you like). Without the capital there’s essentially no market return to share. (Recall that the market return will ultimately be a function of economic growth… which requires that capital.) And the capital doesn’t just magically appear.

NSR is right – places that are unfriendly to capital tend not to grow much, which basically leaves everyone in the crapper.

Now, are the “financiers” (“investors” in your parlance) overpaid for the value they provide? Certainly. But there’s a pretty big gulf between the proposition they add no value versus the notion they are simply overpaid for the value they provide.

[davelj]

[quote=sdrealtor]Irony is I just googled Taleb and found out he appears to be a never married 51 year old. Sounds like a brilliant guy too. Just one who probably spends a lot of time wondering if I am so smart how come I don’t have everything I deserve.

The rock stars in this world benefit from some level of luck but they are truly different and able to do things with that luck that others can’t. They don’t just wake up and find a pot of gold sitting in front of them. They make it happen on the playing field.[/quote]

Actually, not that it matters or should matter, but Taleb’s married (or was when he wrote “The Black Swan”). And even if he wasn’t, I’m betting that a smart, outspoken guy worth tens of $millions isn’t going to have much trouble rounding up companionship if he wants it. So, I’m not sure what his relationship status has to do with this discussion.

Your “rock stars” are only truly different from the other “lesser rock stars” in that they were, on average, luckier. Again – I want to be clear – I’m not saying that your “rock stars” wouldn’t be successful without luck – I’m saying that the DEGREE of their success, among other successful folks, would be different.

Let me give you a specific example: There’s a guy that runs a boutique investment bank in NYC that’s been incredibly successful – worth well over $100 million. In an interview he recently said (and I’m paraphrasing), “I was a very average investment banker in the ’70s but I was in the right place at the right time in the right sector with the right group of partners. There was nothing that really distinguished us but we got lucky on a few deals and it was off to the races. I seriously doubt I could replicate what I’ve done if I were starting out today – it’s a different world.”

There are a lot of smart, creative, hard-working financiers out there. But what separates the guys that are worth $10 million from those worth $100 million+ isn’t *generally* that the latter were smarter, more creative or harder working (although certainly sometimes that’s the case)… it’s a few small turns of good fortune that steered the latter in the “more fortunate” direction and the former in the “less fortunate” direction. Now, both are still extremely successful. But the degree of DIFFERENCE among this small group is largely a result of randomness.

As Taleb (and behavioral psychologists) likes to point out, humans are very poor at processing and accepting randomness because it’s our desire to believe that we have more control over our lives and various outcomes than we really do. It’s simply human nature to deceive ourselves about randomness.

[davelj]

[quote=AN]
What you fail to understand is guys like Zuckerberg, Page, Brin, Gates, Jobs, etc. are all the same. They’re just born in different generation. When Gates and Jobs started Apple and Microsoft, there were no internet. Yet, they still made their millions. The reason why I say they all are the same is because they all are problem solvers. [/quote]

What’s ironic is that Bill Gates and his father are interviewed extensively in the book “The Self-Made Myth”… and they both disagree with you. They find it existentially absurd the wealth that Bill Gates has been able to amass through Microsoft and see “collective fingerprints” and pure “good luck” everywhere in his success.

To be clear, I agree that all of your so-called “problem solvers” would be very successful in most different times and places… the issue is the absolute and relative DEGREE of their success. There are MANY hard-working, indefatigable, brilliant problem solvers out there… only a teeny tiny fraction of them become billionaires. What’s the difference between them? Randomness.

[davelj]

[quote=Hobie]100% tax? Really? Would you go to work of all your efforts allowed you ‘0’ take home? Doubt it.

Time for a real world check.[/quote]

Umm… I’m agreeing with you… that’s why I said the tax ISN’T 100%. Thus your post is a non-sequitor.

[davelj]

[quote=Hobie][quote=davelj]Because it’s the government’s enforcement of laws, property rights, etc. that allowed you to accumulate the wealth in the first place?[/quote]

That simply protected what the private party created. Which is a benefit of the tax collected.

Again, why is govt better qualified to distribute earnings? So if they made the road, they didn’t invent the new concept.[/quote]

That’s why the tax isn’t 100%… we all recognize the “individual” played a very important role… but let’s not deceive ourselves into believing that the individual did this on his/her own… it’s preposterous.

[davelj]

[quote=AN][quote=davelj]One wistfully wonders where Mark Zuckerberg and most of the other internet billionaires would be if the government – and our tax dollars – hadn’t developed the internet…][/quote]
They’ll probably be right about where they are. These are truly brilliant guys and if there’s no internet, they’ll just invent something else. After all, Bill Gates got his Billions from Windows, not MSN/Bing.[/quote]

I disagree completely. (And Nassim Taleb is with me here, for what it’s worth.) What I see is a thin layer of very smart, hard working folks – none not particularly different from the others. The only real difference between them is “luck” and the degree of said luck. For example, take the top 25% of the graduating class of Wharton, Harvard Business School, or Pick a Class (the name and major is not important). All of these folks are very smart, motivated and hard working… the dramatic difference in outcomes is largely the result of luck. Some went into the right field, others didn’t; some met the right people, others didn’t, etc. But the great disparity in outcomes between them is not something inherent or the result of “harder work” or “more intelligence,” it’s … luck (or as Taleb would put it, “randomness”).

Even the “winners” will attest to this – they all have stories of many folks who were smarter and harder working then themselves who didn’t end up in the same place.

[davelj]

[quote=Hobie]How can you have a discussion with such a warped way of thinking?

Any why is the govt better qualified to distribute the after tax savings that I earn?[/quote]

Because it’s the government’s enforcement of laws, property rights, etc. that allowed you to accumulate the wealth in the first place?

[To be clear, I don’t think many folks are in favor of high taxes on estates of a few million dollars, but… once you start getting above $10 million – and particularly the really large fortunes – personally I think pretty high tax rates are in order. In the vast majority of cases, after all, you’ll find the government’s fingerprints, in one form or another, all over the accumulation of those fortunes. One wistfully wonders where Mark Zuckerberg and most of the other internet billionaires would be if the government – and our tax dollars – hadn’t developed the internet…]

[davelj]

1.084%

[davelj]

Capital begets capital; wealth begets wealth.

One of my favorite quotes of all time:

“Turning $100 into $110 is work; turning $100 million into $110 million is inevitable.” – Edgar Bronfman Jr.

Where inequality is concerned, nothing moves the dial in the absence of steeply progressive tax rates at the very top of the wealth pyramid, as well as treating capital gains and dividends more like earned income.

[Author]

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