Legislative Action to Alleviate the Principal-Agent Problem

This WSJ article outlines a new bill being pushed through Congress requiring that shareholders have "Say on Pay". It introduces a number of measures meant to bolster the power of shareholders in determining executive pay. Is this a roundabout way of "capping" executive pay or merely a move by Congress to help shareholders?

Watering Lawns and Negative Externalities

With spring coming into full swing in recent weeks in the Northeast, I have begun to deal with commonalities of season, including sprinklers. On my property, there are electronic sprinklers designed to go on at midnight to minimize the chance that someone would get wet, and are also placed to minimize water reaching the sidewalk.

However, most people don't have such an effective system, and have sprinklers that consistently launch water at innocent pedestrians. Recently it occurred to me that people should be fined for such egregious "sprinkling" of water to account for the negative externalities that include someone getting wet, and the forced movement into the street, which may increase the chance that one could be hit by a car. While the second may seem a tad absurd, the first is a clear showing of how "other people" must take the cost of people watering their lawns. 

My Initial Venture into Capitalism and Freedom

The great Milton Friedman treatise defending 20th Century right wing politics is simply one of the greatest books discussing the relationship between economic and political freedom. As America was conceived as a state of all sorts of freedoms, Friedman makes it clear within the first few pages of his book that with an increasing shift toward being a general welfare state that people are giving up their freedom, regardless of whether they believe so or not. 

While I'm into the book a mere 1o pages, I am thoroughly enjoying what he has to say

Keynesiansim Prevailing In China

As China seeks to shift it's GDP growth from exports to consumption through its stimulus package exceeding 500 billion dollars, the country seems to be showing signs of recovery as demand for raw materials has increased, and the usually thrifty consumers of China's populace have spent more due to the stimulus packages efforts. 

The article also goes on to say that the passage of the package has raised the spirits of the people, and that a psychological effect has helped in improving China's economy. 

Jobs is still Working: The Announcement AAPL Needed

After reports of Jobs leave of absence from Apple Inc. was announced, the stock price went tumbling as investors worried about times ahead without Steve at the helm of the revolutionary firm. This article successfully assuages investors fears that Apple has been without the inspiration of the company's revered founder.

Such a release by Apple was a great decision, and will help my net worth recover.

(I'm a shareholder :))

Socialism...

Basically how it works...

The Motive to Work

With the current administration having greater interest in raising taxes on the rich and achieving greater "income equality," I have begun to think about incentives and their strong force upon economic systems. It is quite evident that people do respond to incentives, especially monetary ones.  Higher taxes unequivocally lower the incentive to work, and executive pay caps do so to an even greater extent. Some populists might ask why society should care about those at the top and whether they are able to reap the great pecuniary benefits of being a CEO or another top executive. 

Let's forget about the big men for a second, and let's focus on the youngest of adults, teenagers. Think about that senior high school quarterback who dreams daily of getting a Division 1A football scholarship, and having a shot to be drafted and play in the NFL, making millions of dollars. He works exceedingly hard to get to that point, yet only a miniscule amount of high school football players ever make it to the NFL. This is even translated to crack dealers, as seen in Freakanomics, where they discuss why youths in the projects turn to running crack, when there is a 1 in four chance of being killed (most dangerous job in the nation after lumberjacking, where there is a 1 in 200 chance), and a great risk of facing criminal charges among other consequences. One may ask themselves, why would they do that? It's to get to the top. As shown in the book, these drug cartels have a hierarchy, where they have a quasi board of directors, each of whom receives a six figure salary. Surprisingly enough, some of those guys are actually Ivy League educated. The kids in the projects see those at the top and dream to get there, therefore they start running drugs hoping to eventually get to the top. 

How is this relevant to executive pay caps? Well, why would people work so hard, so arduously to increase their paychecks and move up the proverbial "ladder" without the "pot of gold" at the end of the rainbow? The answer is that people wouldn't be motivated, if they knew that the top didn't exist, or that they would eventually have exorbitant amounts taken from them due to heavy taxation and have their pay capped, eradicating any motive to work harder for an end of year bonus. 

The moral of the story is this: the many at the bottom are cognizant of the top, and aspire to get there. With a marketplace that limits pay and reduces incentives to next to nothing. Adequate incentives to work must be present at all times, especially at the top, or else productivity will decline, since the motivation to work will decline as a result of poor economic policy.