by hilzoy
The NYT has a long piece on the financial meltdown in two parts: 1, 2. It’s very much worth reading. One point in particular jumped out at me:
“THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.
Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.
This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.”
I think this is what we should have done. As an approach, it has three great strengths. First, it allows us to quickly separate the sound parts of a business from the unsound parts, and send the sound ones back into the private sector unencumbered as soon as possible. Done right, I think this would do a lot to increase confidence in those bits, especially if we used the occasion to try to discover and publish prices on the unsound assets we thereby acquired.
Second, if it led to carving up businesses that were previously “too big to fail”, I think that would be a good thing as well.
Finally, it would do something serious about moral hazard. Moral hazard arises when people think that (e.g.) a company will be protected from some calamity (e.g., failing), and thus either allow it to take risks or, if they work for it, take risks themselves, that they would not take without that belief. This is a serious problem: we do not want financial institutions to take needless risks because they assume that we would bail them out. On the other hand, sometimes the costs of not bailing them out would be very high, so just letting the creative destruction of capitalism proceed unhindered doesn’t look like a very good option either — especially since that destruction is not visited only on those who in some sense deserve it.
I’ve always thought that one way to deal with this would be to find a way of bailing out firms while sacking their managers and wiping out their shareholders. Bankruptcy does this, of course, but when for some reason letting a firm just go bankrupt looks like a bad option, we ought to preserve the basic principle that even if a firm is saved, the individuals — investors and managers alike — who either took or profited from those risks should be slammed.
The point here is not punishment. It’s creating incentives not to do stupid things. You might think of it as a way of turning the divergence of interests between principals and agents to good account. That divergence creates problems when an agent (e.g., a manager) who is supposed to be working for a principal (e.g., a firm) finds it in his interests to do things that damage the firm — for instance, taking risks that produce short-term profits, and thus large bonuses for him, but that place the firm itself at unconscionable risk. But I think it can also be used for good.
In the case at hand, we want a firm (or significant parts of it) to survive, and we think that bankruptcy is, for some reason, not an option. We thereby risk moral hazard. But if we ensure that even though bad things do not happen to the firm, they absolutely do happen to its senior management and its investors, we might be able to create a set of incentives that work against taking unconscionable risks. After all, if managers know that if things go badly wrong, they will abruptly lose their jobs and their bonuses, they will not be nearly as likely to take those risks. And if shareholders know that they will not be made whole, they will be more likely to ask just how much risk a company is taking, and not to accept blithe assurances in place of real evidence.
But we haven’t done this. We have not asked managers to resign. We have not tried to separate sound from unsound banks, or parts of banks. We have not tried to purge our financial system of the parts that got everyone into trouble. Instead, we have tried to prop up everyone, and to inflict as little pain on the financial wizards who created this mess as possible.
I think this is a profound mistake. I hope that Obama will correct it. If he doesn’t — if we respond to this the way we did to the Long Term Capital Management crisis, by fixing the immediate problems without fixing the system that gave rise to them, or learning any lessons for the future — then we have learned nothing, and deserve the future crises that will undoubtedly come our way.
“The NYT has a long piece on the financial meltdown in two parts”
To quibble slightly, these aren’t pieces of New York Times reporting at all. These essays aren’t news reporting, and they’re not by NY Times employees.
They’re Op-Ed opinion pieces by people unconnected to the NY Times: Michael Lewis and David Einhorn.
Not to say they aren’t valuable; I just wouldn’t label them as coming from the New York Times, as opposed to through the NY Times. I’d reserve the phrase “the New York Times has” for news stories, written by staff, myself, making clear that the responsibility for anything in said pieces comes from the entity of The New York Times and their judgment. As opposed to outside Op-Ed pieces, the point of which is present views from other than the staff of the newspaper.
Please forgive me for being fussy about this kind of detail.
Silly hilzoy. That would mean unhappiness for rich people! We can’t have that, it would be *class warfare*. tsk tsk.
*sharpens pitchfork, readies torch*
Your link “2” is broken, by the way; it should go here.
I remain astounded by this part:
Let’s repeat: it’s about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined.
And people say we can’t afford health care for everyone. Or, say, the huge $20 billion dollar NASA budget.
I think they are being a bit disingenuous with this part: “The rest should be liquidated, in calm markets.” It’s my impression that this isn’t what Sweden did at all. Instead of what they was put all the bad assets in a self contained pool that had tons of government money to back it, and then just absorbed the losses. The government lost a lot of money but it was deemed to be less than not taking that action. Someone correct me if I’m wrong.
I’ve read expected losses are anywhere from $2-$3 trillion, which sounded insane only a few months ago and part of the reason why they didn’t do this. Of course it turns out that it would have been a lot better to have done it. Well, we’re only about 25% of the way through so perhaps I shouldn’t be talking in the past tense.
Pitchforks! This subject continues to be both enraging and depressing. We got a peek behind the curtain of what the “top 0.1%” are up to, unfiltered, and how grotesque! Their attitude brings to mind Poe’s “Masque of the Red Death”. They think they are safe.
I’d like to pick out one point, and suggest that it should be made in vastly greater scope:
How about Congress passes a law that no one in any governmental position, be it executive or Congressional or judicial, be allowed to work in a field related to their governmental work for a subsequent period of, say, ten years?
This would, I’d hope, go some ways to restoring both the literal civil service, and equally importantly, the Plum Book political employees, as well as those in Congress, and their employees, to people with far fewer essential corrupt and self-serving motivations.
I’ve made this suggestion before, to be sure, but I’m happy to seize on another opportunity to repeat it. I don’t think the idea should be remotely limited just to financial regulators.
And, no, I don’t believe this would mean we couldn’t get highly competent people to go into governmental service, though obviously that’s something of a matter of opinion.
There’s a great New Yorker cover, the Oct. 20, 2008, issue, “Red Death on Wall Street”.
In that same issue, “the Omen” is a tale of a trader, Jérôme Kerviel. It is an eerie forshadowing of the current economic turmoil.
[can’t spell worth a d**n!]
I think the best solution to moral hazard (at least for publicly traded corporations) is to legislate that all compensation beyond some salary limit (say $5 million per yea)for the top C-level executives must be in the form of stock shares that cannot be sold for 5 years. There could be some clawback provisions for misfeasance or malfeasance, but the main point would be to align the interest of the executives with the shareholders.
Long term results would then be very material to the people most in a position to influence them.
EdSez: yes — or at least in some form that ensures that executives’ time horizon is longer than the next quarter.
So … hilzoy supported the bailout, and accused those who opposed it of being committed to the destruction of America, but now that the dust has settled she’s got a better idea to offer. Seems like a fun line of work.
Median household income in the US is very close to $50K. Thus, the $2-3 trillion dollars mikkel cites is the annual income of 40-60 million households. There are around 100 million households in the US. So, the Masters of the Universe have pulled off a trick that amounts to having mislaid (if not literally stolen) the paychecks of the middle half of American households for an entire year. I am puzzled as to why we’re not seeing middle-aged, middle-class mobs rioting in the steets right now.
To EdSez I say: $5 million a year is enough compensation for anybody. If we’re too squeamish to outlaw higher salaries, we should tax them at a 90% marginal rate. Companies would still be free to pay their C-level execs $10 or $20 or $50 million a year, if they really thought that’s what it takes to outbid their competitors for such valuable talent. To be absolutely clear, I’m talking about taxing the executives’ personal income at 90%, kicking in at $5 mil a year. If a corporation really, really wanted its CEO to take home $10M/yr, it would need to pay him something like $55M/yr; if $20M, then $155M, and so on. If the corporation could not afford that, its competitors probably couldn’t either. Would a lot of C-level people simply withdraw their labor from the market rather than work for slave wages like $5M/yr? Probably. And, given their recent track record, good!
–TP
Tony P:
You calculation does put things in perspective about how big this is, but it’s a bit hard to compare it like that because a lot of the salaries and such are just based on cash flow. Another way to put it is that M2 captures what we think of as “money” since it’s savings + checking accounts and CDs. That’s $8 trillion. That means that somewhere between 25 and 50% (I’m going even higher because that $2-$3 trillion was Roubini about 6 months ago, I’d like to see what he said now) of all the “money” has been “lost.” OK if you want to be technical, what’s actually happening is that that is how much debt has gone bad, which is making the money supply much less leveraged and harder to extend credit…but still, in order to pump back up the leveraged money supply they’ll have to replace the losses with actual money and cause the potential for huge inflation.
However way you slice it, they’ve messed up so much that they’ve lost decades worth of generated wealth.
Silly Hilzoy indeed! Not sixteen months ago, Larry Summers took time out from raking in fees among his financial firm buddies to assure us that moral hazard is not something for us to worry our pretty little heads about:
excerpt from Summers’ FT opinion piece of Sept 23, 2007, with link to original
I supported Obama’s campaign and have high hopes for his presidency. But his appointments of Summers and Geithner signal that the game of highly-compensated academic/political enablers continuing to lend cover to obscenely-compensated moral hazardees is regrettably likely to continue, even after the Republican looters are cleared out of their offices.
The comment above about supporting the bailout (John at 1:08am) may also hit home (I don’t remember Hilzoy’s exact position on the bailout, but she has a conscience and knows if it’s a fair reproach or not; in any case there was a ton of that going around at the time, and many who trusted that the mediation of e.g. Barney Frank was going to make a second blank check to the Bush Administration a better idea than the first one was, have plenty to reproach themselves for). Back to Summers as a proxy for what we may have to expect from the Obama administration, Yves Smith called Summers’ support of the bailout “a bit of advocacy masquerading as economics” (here), and I’ll believe that won’t continue to be par for the course when I see it.
” I am puzzled as to why we’re not seeing middle-aged, middle-class mobs rioting in the steets right now.”
Middle-aged, middle-class people understand that rioting in the streets, with the usual burning down of your own neighborhood, doesn’t actually solve anything. So we don’t do it. Understanding stuff like that is part of why we’re middle classed, not poor.
Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive.
A random Google walk for “citigroup” and “executive compensation” is instructive.
Is Sanford Weill still running the place?
How about Congress passes a law that no one in any governmental position, be it executive or Congressional or judicial, be allowed to work in a field related to their governmental work for a subsequent period of, say, ten years?
This seems beyond reasonable to me.
Middle-aged, middle-class people understand that rioting in the streets, with the usual burning down of your own neighborhood, doesn’t actually solve anything.
Well then we had damned well better make sure we retain our middle class, hadn’t we?
Pitchforks are cheap. Any poor slob can afford one.
Thanks –
John: “So … hilzoy supported the bailout, and accused those who opposed it of being committed to the destruction of America, but now that the dust has settled she’s got a better idea to offer. Seems like a fun line of work.”
I did support the bailout bill as opposed to voting against it without a clear alternative. I also, at the time, supported the Swedish option. If you can point me to anywhere where I accused the opponents of the bailout of being committed to the destruction of the country, it would be news to me.
So I’m a little surprised that no one on this comment thread has asked the obvious question: is this strategy viable for the auto companies?
It makes sense for far-flung horizontals like financial firms. You can chop up most investment banks into a dozen or so smaller and fairly independent businesses. Sure, you could chop up GM into its brands, but I’m guessing that GM’s brands are feeling pain across the board: it wouldn’t really be an act of separating the good businesses from the bad. 3M? Cisco? Microsoft? You can divide them up. They are basically lots of small interoperating businesses.
As usual in my life, wish I had data rather than hunches.
I was thinking at least of this post, Hilzoy.
Okay, so I’m obviously dumber than Larry Summers. But I really don’t understand this point:
So what I don’t understand about this analogy is this: Moral hazard fundamentalists aren’t cheery about the prospects that the externalities of a failure are somehow good for the marketplace. That is, what we don’t think is that spillover costs — pain you feel caused by actions you did not take — are just great for everyone. That’s what the fire department is for: the fire department mitigates contagion, spillover costs, externalities (pick your favorite word). What the fire department *doesn’t* do is reimburse you for your loss. It just puts the fire out. A fire department isn’t any kind of insurance, since you likely suffer a catastrophic loss whether or not there is a fire department in your area. (Fire departments don’t prevent fires, but they prevent them from spreading, let’s say). So the agent smoking in the bedroom has suffered his or her loss, and there is no moral hazard.
What we want in the case of firms too big to fail is the exact same thing. We want the agents to suffer the loss and yet we want to mitigate spillover costs. And what we fear we are getting in the case of these bailouts is fire-departments-as-free-insurance: we are not only putting out the fire but are also mitigating the loss to management and shareholders.
I take it some people will read this passage and reason like this: “The prospect that people may smoke in bed is not usually taken as an argument against the existence of fire departments. Since obviously I believe there should be fire departments, then I should also believe in financial bailouts and that moral hazard isn’t an issue.” And this kind of reasoning, which is suggested by the passage, seems a little misleading to me.
Ara,
The analogy doesn’t disturb me all that much because of his reference to the fire spreading. Personally, I would have changed the analogy a bit to suggest of having someone smoke while standing next to 20,000 lbs of dynamite. The kind of losses we have seen were not contained to the people that were making bets. They GREATLY increased systemic risk in a way that wasn’t obvious to most people until it far too late.
To minimize moral hazard, a regulatory structure that seeks to minimize contributions to systemic risk made by private actors has to be implemented so that failures of companies produce a more non-systemic and relatively contained event. Using the fire department example, perhaps the house is lost but the entire neighborhood is threatened.
As someone with strong libertarian/free markets views and a view on human nature that finds the idea of “self regulation” completely and utterly absurd, I don’t necessarily see how such an approach is a bad thing.
High levels of uncertainty can cripple a market in that most (although not all) investors with capital to invest/lend, etc. will move to the sidelines (this is the experience in my business). To the extent that can be reduced to a level that investors can understand it and can price off of it, investors will be more willing to transact.
John: in that post, I didn’t say anything about opponents of the bailout generally. I said that these particular people — “According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout” — were callous.
There are lots of people who opposed the bailout because they thought that the markets weren’t about to crash, or that they’d crash even with the bailout, or that the bailout would not help nearly enough, etc. But it takes callousness to believe that you have a choice between the markets crashing and the bailout — and then decide you’d rather go with the crash.
d’d’dave: “Unfortunately, many readers of this blog consider Criminal and Businessperson to be synonyms.”
Gary Farber, January 04, 2009 at 09:05 PM: “That’s interesting; I’d never noticed. Please give cites to such comments from people here, if you’d be so kind. Since there are “many” such readers here, this should be very easy. Thanks!””
d’d’d’dave: Okay. How about this? It’s not far off:
Gary Farber, January 04, 2009 at 11:26 PM “How about Congress passes a law that no one in any governmental position, be it executive or Congressional or judicial, be allowed to work in a field related to their governmental work for a subsequent period of, say, ten years? This would, I’d hope, go some ways…[toward government employing]… people with far fewer essential corrupt and self-serving motivations.”
d’d’d’dave: Okay. How about this? It’s not far off:
I can’t read minds, so I don’t know precisely what Gary intended, but I read his comment as being directed more at public sector employees (elected or not) than private.
His suggestion, if I understand it correctly, is meant to remove an incentive for folks in the public sector to abuse their position.
Thanks –
Russell:
Gary seems to be saying the private sector has a higher concentration of corrupt people.
A civil servant could be corrupt and profit from it without ever working in the private sector. All he would need is an accomplice in the private sector. A person who moves from civil service to the private sector will likewise need an accomplice to reward him. There is no difference. Since there is no difference , and since we know Gary is very accomplished with language and logic, we are left with the inevitable conclusion that Gary believes there is an inherently higher concentration of corrupt people in the private sector.
And what is a corrupt person if not a criminal who hasn’t been caught?
d’d’d: Gary can, and probably will, speak for himself, but I would have thought that the idea was to prevent public servants from having the option of selling out the public good in exchange for a lucrative job later. Obviously, you’re right that it’s possible to benefit from selling out the public good by other means. But it’s harder, and making it harder is, I think, a good thing.
Well to be fair, based on d’d’d’ logic there probably is a higher concentration of corrupt people in the private sector. After all, it’s a lot easier to steal legally (either through undue risk taking or working the system) and also the rewards are much greater.
Of course that’s a far cry from considering “Criminal and Businessperson to be synonyms.” It certainly doesn’t take very many corrupt people to greatly damage the country whether they are in government or the private sector.
Quite frankly, it should be people like you that are most pissed about the status quo. After all, it is undeniable that there is immense favoritism in handing out contracts and it has little to do with competence. Look at all the “government outsourcing” for instance. I’d say it’s not that whether the private/public sector is worse, but that there is a small but powerful complex between corrupt areas of both that work together and squeeze out the majority of their colleagues on both sides.
Russell:
I just don’t buy the premise that people in the public sector have better characters on average than people in the private sector.
I also don’t buy the premise that it is easier to steal in the private sector.
Where are your cites? Have there been studies done?
Hilzoy,
I think good things can happen when a person experienced in a given industry can apply that experience in public service. To require that a civil servant can not be involved in the industry is guaranteeing that they’ll have little relevent experience. How useful is that?
Gary seems to be saying the private sector has a higher concentration of corrupt people.
I don’t really see that in his comments.
Your algebra of corruption upthread assumes that bad behavior on the part of a government official requires corresponding bad behavior on the part of someone in the private sector.
I don’t think that’s true.
Thanks –
I just don’t buy the premise that people in the public sector have better characters on average than people in the private sector.
I also don’t buy the premise that it is easier to steal in the private sector.
Me either. I don’t see anyone saying either of these things.
What Gary suggested is that people responsible for overseeing the operation of an industry not be allowed to work in that industry for a period of ten years when their public career ends.
The point of this is to remove one very obvious, and in real life very commonly exercised, incentive to favor the folks they are supposed to be overseeing at the expense of the public interest.
This kind of favoritism *might* also involve bad behavior on the part of the private parties, but absolutely does not *require* it.
Thanks –
“d’d’d’dave: Okay. How about this? It’s not far off:”
Yeah, it’s very far off from saying that I “consider Criminal and Businessperson to be synonyms.”
Because I don’t, remotely, consider any such thing.
I suggest that people be giving a disincentive from either joining governmental service with a specific eye towards tilting their governmental service towards a future private industry profession, or from developing such a desire during their governmental service. If that suggests anything, it suggests that I believe that people are motivated by incentives.
“Gary seems to be saying the private sector has a higher concentration of corrupt people.”
I didn’t speak to the question at all, although a casual reading of my suggestion would point in the opposite direction. (Though that would be a misreading, as well.)
I have no idea where you’re getting these “seems to” and “close enough”s from, but I suggest recalibrating… something.
“A civil servant could be corrupt and profit from it without ever working in the private sector. All he would need is an accomplice in the private sector. A person who moves from civil service to the private sector will likewise need an accomplice to reward him. There is no difference.”
But back on planet earth, or at least in the U.S., there’s a huge difference: one is illegal bribery and malfeasance of office, and the other is, right now, perfectly legal and a customary tradition of job trajectories.
“…we are left with the inevitable conclusion….”
FAIL.
That’s without even getting back to the point that I said not a word about how many business people I consider criminal, and while I wouldn’t pull an imagined number out of my rear end and suggest it’s accurate, I’m quite sure the considerable, likely vast, majority of people in private enterprise are not criminals.
(And I’d say that a high proportion of the minority who are, in some way, corrupt — which is not the same, unfortunately, as criminal — are often so because of systemic incentives, rather than particularly worse morals from the start. The Michael Lewis and David Einhorn pieces Hilzoy linked touch on some of these incentives towards what are at least destructive behaviors, if not necessarily exactly corruption.)
Perhaps you might try asking people whose opinion differs from yours what they think, rather than mindreading them so very very very badly.
Another suggestion I offer is sticking to naming whom you’re thinking of, rather than going with broad mindreading claims such as “many readers of this blog consider….”
To require that a civil servant can not be involved in the industry is guaranteeing that they’ll have little relevent experience. How useful is that?
That isn’t what’s being suggested.
Moving from private –> public: no objection.
Moving from public with responsibility for oversight –> private in the same industry: not until a waiting period of ten (or pick your number) years has passed.
That’s the suggestion on the table.
Thanks –
I don’t know who suggested these premises, since it certainly wasn’t me. I certainly don’t believe either such thing, and I’m pretty sure I’d know if I did.
And d’d’d’derailer racks up another digression.
How about Congress passes a law that no one in any governmental position, be it executive or Congressional or judicial, be allowed to work in a field related to their governmental work for a subsequent period of, say, ten years?
Well, I think that is problematic. How are you going to define “a field related to their governmental work”? I mean, if I work at the IRS for a few yaers, am I not allowed to work for anyone who pays taxes? Or suppose I work at the SEC, am I not allowed to work for any publicly traded companies?
I can see a more workable rule being that if you worked for a gov’t agency you’re not allowed to lobby that agency for a period of X years after leaving (I guess we would have to define “lobby” then).
How about Congress passes a law that no one in any governmental position, be it executive or Congressional or judicial, be allowed to work in a field related to their governmental work for a subsequent period of, say, ten years?
OK. But how are those people supposed to earn a living? Most of the people affected are not going to be independently wealthy. Do you propose having the government continue to pay them their salary for the continuing ten years? Although I think such a measure might well pass a cost-benefit analysis by reducing corruption, I don’t think it would be politically viable. Do you?
You can get around this problem by narrowly tailoring the definition of “a field related to their governmental work”, but if you do, then you introduce a loop hole a mile wide.
This might be easier to understand with concrete examples. Consider a midlevel SEC investigator. Her education and career have been entirely focused on untangling complex financial schemes hatched by the financial services industry. When she leaves government service, how does she eat? She can’t work for any finance company because that would introduce the possibility of a quid pro quo. She can’t work for any non-finance company because her skills are useless to companies that aren’t involved in finance. So how does she eat for a decade?
“But how are those people supposed to earn a living?”
People switch career tracks all the time. Or they can make a career in government.
It’s almost certain in most cases they won’t make as much money this way, it’s true, but I strongly doubt many folks would wind up in the poor house after a successful career in government.
I read all the time about executives who move from companies that do one sort of thing to a company that does another sort of thing. It seems perfectly common.
“…I don’t think it would be politically viable.”
I don’t think it would be easy, but under the right circumstances it could be done. the Pendleton Act took Garfield’s assassination to pass, but current circumstances of national disaster might allow for something along the lines I suggest. Particularly if the financial crisis continues to deepen, and more comes out about Bush-era governmental corruption.
People switch career tracks all the time.
Subject matter experts who have spent a lifetime learning about an area do not “switch career tracks” terribly often.
Or they can make a career in government.
This is absurd. Rational people will have great difficulty committing not just to taking one job in government (which is tough enough) but also committing to a lifetime of government service. What happens when your mother in New York gets into a serious accident and you want to move from DC to NYC in order to spend more time with her? Must you accept the fact that you cannot work at any job that pays above minimum wage? More to the point, do you really think that professionals with options are going to assume that such eventualities NEVER happen and that taking a government job is perfectly fine?
It’s almost certain in most cases they won’t make as much money this way, it’s true, but I strongly doubt many folks would wind up in the poor house after a successful career in government.
This issue isn’t that they would make less money than before, it is that they would make much less money than their government salary. I’m not worried about professionals going to the poorhouse, I’m worried about professionals refusing to enter government service, thus lowering the quality of those who do enter it.
I read all the time about executives who move from companies that do one sort of thing to a company that does another sort of thing. It seems perfectly common.
Yes, this is true for high level executives, but it is not generally true for other people. So this suggests that a tiny fraction of the people affected by your proposal would be fine. I guess everyone who’s not equipped to be a CEO for a big company will be screwed.
Seriously, the phrase “perfectly common” covers up a multitude of sins. For starters, most people in the government are not executives. In addition, this is only true for high level executives. It is much less true for middle managers, let alone non-executive positions.
I don’t think it would be easy, but under the right circumstances it could be done.
It seems a little bit silly to propose plans that are not politically viable. I mean, some bizarre set of circumstances could make any proposal, no matter how crazy, politically viable, but that doesn’t change the fact that in the real world your proposal probably can’t be enacted.
I can’t decide whether you’ve just really failed to think through the ramifications of this policy or whether you are just completely incapable of empathizing with a middle class middle aged professional who has a family. When you have mortgage payments and kids going to college, “switching career tracks” and decimating your earning power isn’t really an option.
“People switch career tracks all the time. Or they can make a career in government.
It’s almost certain in most cases they won’t make as much money this way, it’s true, but I strongly doubt many folks would wind up in the poor house after a successful career in government. ”
Zoinks!?!? Gary you are normally pretty level-headed but this seems crazy. People sometimes switch career tracks, but after 10 or so years they rarely switch careers entirely and when they do it is often as a semi-retirement move. Most job switching involves drawing on your contacts and skills built up over time to turn that into something useful for your next employer. That useful thing might be somewhat different from your previous job, but it rarely involves cutting yourself off from the skills and practices of your old job entirely.
“I strongly doubt many folks would wind up in the poor house after a successful career in government.”
Well *now* they don’t, because there are some transferable skills. You seem to want to cut the transferable skills down to a sliver of their previous work experience. Which would be a rather different situation. Mid-level IRS worker is a classic example. Would you forbid them from working in tax at all? Or worse still, forbid them from working in any finance department that has tax implications? What do you see them doing?
I can see a more workable rule being that if you worked for a gov’t agency you’re not allowed to lobby that agency for a period of X years after leaving
That’s actually a pretty good rule, crisp, easy to understand and enforce fairly.
Would there be loopholes? Yes. But my normal operating assumption is that keeping corruption out of government is more or less a game of whack-a-mole, so that doesn’t really surprise or bother me.
Whack as many moles as you can on any given day, tallest moles first. Lather, rinse, and repeat.
But how are those people supposed to earn a living?
If you take Ugh’s more limited definition of the rule, I think there is a pretty wide field left to play in.
Even with a broader construction of “can’t work in the same industry”, competent, professional people generally have a lot of options.
There are people who will look at a rule like this and decide they don’t want to work in government. Maybe a lot of them would have been good public servants. That would, in fact, be a shame.
You pay a price either way. Take your pick.
I don’t think it would be politically viable. Do you?
Yes, I do.
Look, there are already a pretty wide variety of things people are and aren’t allowed to do because they hold public office. Quite a number of them make potential money-making opportunities off limits.
This is one more.
The list of people who act favorably toward particular private industries while in public office, and then retire into 7 and 8 figure private positions is as long as my proverbial arm.
Perhaps the name Phil Gramm rings a bell?
It’s extremely harmful, and it should stop.
My guess is that a practical version of Gary’s suggestion is quite feasible, would be very valuable, and would be an easy sell politically.
Thanks –
Look, there are already a pretty wide variety of things people are and aren’t allowed to do because they hold public office. Quite a number of them make potential money-making opportunities off limits.
The thing whose political viability I questioned was the notion of paying people who had left government service their government salary for the 10 year embargo period if we structure the rules so that they can’t effectively work after they leave. If you pay them, then I think the system will do a great job to reduce corruption, but I don’t think you’ll ever get the votes for that.
If you don’t pay them and you go with the strong version of the policy (forbid people from working anywhere in the field), then I think you’ll keep many many experts out of government service. If you go for Ugh’s weaker version, you’ll avoid that problem, but you’ll fail to kill a major form of corruption: people doing favors for a company while working for the government and then going to work for that company after they retire where they get paid a great deal even without doing anything since the payment is essentially a post-dated bribe.
Maybe what’s needed is mandatory public disclosure of income and assets for ten years after you leave government service?
“What happens when your mother in New York gets into a serious accident and you want to move from DC to NYC in order to spend more time with her?”
Most federal jobs are transferrable, and not based in DC.
“I’m worried about professionals refusing to enter government service, thus lowering the quality of those who do enter it.”
Yes, I knew people would have such worries, but given the numbers of good people out there interested in taking not huge-paying governmental jobs, I’d have to see real evidence that not enough good people would apply before I’d start being convinced that’s inevitable.
In any case, my plan is unlikely to be taken up any time soon, so I wouldn’t hyperventilate too much yet.
“I mean, some bizarre set of circumstances could make any proposal, no matter how crazy, politically viable, but that doesn’t change the fact that in the real world your proposal probably can’t be enacted.”
Call it a thought experiment, if you like.
“When you have mortgage payments and kids going to college, ‘switching career tracks’ and decimating your earning power isn’t really an option.”
An awful lot of people go into governmental jobs as a career, whether as postal delivery people, FBI, clerks, mid-level managers, or below. I’m not all that worried about people who feel a need to make over $100k, say, not being able to do so in government, since most people in the U.S. don’t make that much.
Mostly I’m happy if most folks regard governmental service as a lifelong career; I wouldn’t make it mandatory, but I’m not inclined to discourage it.
In any case, if any variant of my notion were to be picked up by someone in Congress, rest assured that it would be modified into something “practical.”
“People sometimes switch career tracks, but after 10 or so years they rarely switch careers entirely and when they do it is often as a semi-retirement move.”
Perhaps you are unfamiliar with the Senior Executive Service.
And they make:
Call me a socialist for thinking people should be able to get by on this, along with the excellent benefits and sure retirement benefits.
“If you don’t pay them and you go with the strong version of the policy (forbid people from working anywhere in the field), then I think you’ll keep many many experts out of government service.”
Probably somewhat less absolute forms than the absolute form I proposed can be worked out, so that incentives to make decisions while in government to benefit particular industries and companies can be largely eliminated, while still leaving openings for skills to be applied in some ways in private industry.
Certainly I wasn’t intending to be so broad as to suggest that, say, a government accountant can never work in accounting again; that’s not the sort of thing that leads to bad effects, and it’s not what I was suggesting. On the other hand, setting policy over, say, forestry, might lead to a banning from working for a timber company, or lobbying on timber interests, for a decade. I’m talking about policy-influencing positions, or those in decision-making positions that can benfit private interests in major ways being limited from working directly for the same industries; I’m not suggesting a general ban on never doing the same kind of work again for all governmental employees.
As the details of this would be too small to fit the margins of this comment box, I leave them to other, lesser, minds to work out. I’m a big picture guy.
😉
Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street.
To be called Moneygall?
“Most federal jobs are transferrable, and not based in DC.”
Not easily transferable, and not if you have only one city in mind. It is difficult even for members of government in such large agencies as the post office, heaven forbid something smaller.
I have no idea why you think the SES is relevant to what you quote from me. An explanation would be helpful.
Again: let us be specific. Could a former IRS worker be allowed to work in the tax department of a corporation?
In the non-tax finanace department?
In payroll?
In the non-tax legal department working on the tax implications of contracts?
On the other hand, setting policy over, say, forestry, might lead to a banning from working for a timber company, or lobbying on timber interests, for a decade.
So, would that prevent someone from starting a small consulting company and having a forestry company pay them a large retainer? If it doesn’t, then you’re not doing much to stop corruption since starting a tiny company is dirt cheap. If it does, then it seems like the law has to be very broad indeed, broad enough to lock professionals out of their field of expertise.
I’m talking about policy-influencing positions, or those in decision-making positions that can benfit private interests in major ways being limited from working directly for the same industries; I’m not suggesting a general ban on never doing the same kind of work again for all governmental employees.
Really? Did I misread your comment where you wrote “no one in any governmental position, be it executive or Congressional or judicial”? Because that sounds a great deal broader than only “decision-making positions that can benefit private interests in major ways”. So which is it? Do you mean to cover everyone in the government or only a small fraction? Or do you think your original phrasing (“no one in any government position”) actually means only a small fraction of the federal workforce?
Most federal jobs are transferrable, and not based in DC.
Regarding transferability, cite please?
Federal jobs are distributed all over the country (I never claimed they were all based in DC), but within any specialty, they do cluster geographically. Thus if you’re an air pollution specialist working for EPA, there are very few places in the federal government where you can work with that skill set. That’s just based on conversations I’ve had with people who were, you know, air pollution specialists working for the EPA.
I don’t think “most federal jobs” is necessarily the criterion we should be looking at. A new regulation that made it impossible for the federal government to hire physicians would be a huge problem even though “most federal jobs” do not require an MD, right? Most federal jobs are going to be, on average, relatively low paying non-professional jobs, just like most soldiers are long ranking enlisted folk. But the government’s ability to perform many complex tasks depends on the quality of its professional staff. Those jobs are a small fraction of the federal workforce, but systematic efforts to reduce their quality can have an outsized influence on the government’s efficacy as a whole. Haven’t we had enough examples of the glorious effects of systematic incompetence in government lately?
Yes, I knew people would have such worries, but given the numbers of good people out there interested in taking not huge-paying governmental jobs, I’d have to see real evidence that not enough good people would apply before I’d start being convinced that’s inevitable.
I don’t think you understand the objection. Right now, we have government jobs that pay professionals somewhat less than they’d make in industry, but still a reasonable amount. Under your proposal, we’d keep the slightly lower salaries and augment them with the effective requirement that most professionals would have to either continue in their government job until retirement or forego professional work for a decade. People who can do basic math recognize that unless they’re willing and able to stick to one job for the rest of their career, they face a high probability of losing a decade’s worth of income. Speaking as a professional, that scares the living daylights out of me. And I don’t have a mortgage. I don’t have lots of debt that needs to be paid down. I don’t have kids going to college. Most professionals do.
If the idea is that all people “in any governmental position, be it executive or Congressional or judicial” should have their career prospects restricted in this way, then that would include elected and appointed officials as well as what are usually described as “career” government workers. I’m not a fan of romanticizing the “citizen congressmember”, which is one reason I hate term limits, but that goes too far for me.
Presidents could only appoint people to the cabinet who were willing to give up the prospects of nongovernment employment in their area of expertise for 10 years following the end of their service? Don’t the large pay cuts people already take to enter the cabinet provide enough disincentive for qualified people?
Can we all agree that public office holders who are responsible for oversight or regulation of particular private industries should be prevented from trading favorable treatment for compensation, of whatever form, including future employment?
If that’s agreeable to all, I’m happy to concede on a pretty broad range of details.
The point here is that the regulatory function of government has been compromised in a lot of really significant industries. It would be really freaking good if that were to change.
I’m sure that if we all put on our thinking caps we could come up something that would be better than what we have now.
As an aside, I note that someone who normally posts under a pseudonym is posting under an actual name. Don’t know if that’s a matter of concern, just thought I’d mention it in case it was.
Thanks –
And the idea that you should be locked in for your entire life based on a decision made in your 20s seems rather crazy too. Ever had a boss you can’t stand? How much more would it suck if you were required by law to abandon your profession entirely for 10 years if you got fed up enough that you had to leave.
Yikes.
Turbulence, Sebastian, if you don’t like my last comment, fine, but consider it my last comment for now on the topic; I’m not interested in being drawn back into an argument I’ve already explained that I’m not going further into the weeds of.
When Congress starts a debate on such a notion, it’d be interesting to discuss the details of their proposal. I’m not interested in simply arguing for the sake of argument.
I worked at a company once that had a clause in its contract prohibiting employees from getting a job at a competing company for a year after leaving, where “competing” was defined extremely broadly. We referred to it as the McDonald’s Clause, since we figured that would be where we’d end up working next if it were actually enforced.