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What We Read Today 06 August 2017

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Topics today include:

  • A Skeptical View of Financialized Corporate Governance

  • Maximizing shareholder value: The goal that changed corporate America

  • CEO Pay Has Grown 90 Times Faster than Typical Worker Pay Since 1978

  • Who Should Set CEO Pay? The Press? Congress? Shareholders?

  • Is the US Public Corporation in Trouble?

  • Mueller investigation enters new phase

  • New Chief of Staff Reins in White House Aides—and Trump's Tweets

  • Five tough decisions for the GOP on healthcare

  • Newly Unearthed CIA Memo: Media Are the “Principal Villains”

  • Rosenstein: Trump did not direct feds to investigate Clinton

  • The Coming War between Trump & The Fed

  • Wage Growth at the Bottom

  • Job Growth at the Bottom

  • May's Brexit Plan Starts to Take Shape

  • Explaining Brexit’s Costs and Whether Britain Will Pay Up

  • Trump administration ‘not playing around’ on North Korea

  • Mobile Internet in China

  • And More

Articles about events, conflicts and disease around the world

U.S.

  • Mueller investigation enters new phase (The Hill)  Special counsel Robert Mueller’s investigation of potential coordination between President Trump’s campaign and Russia has moved into a new phase with the impaneling of a grand jury.  By taking the step, legal experts say, Mueller is indicating that he has found evidence of criminal activity and that the investigation will extend beyond Trump’s ousted national security adviser Michael Flynn. Stephen Vladeck, a professor at the University of Texas Law School said : 

“We don’t know exactly what these developments portend, other than that there’s actually some significant criminal charges being considered.  It is a more serious phase, because it suggests that the special counsel has reached a point where he is up to presenting evidence to a grand jury.”

  • New Chief of Staff Reins in White House Aides—and Trump's Tweets (Bloomberg)  On his fifth day on the job as Donald Trump’s new chief of staff, John Kelly gathered about 200 White House aides for a meeting where he spelled out in blunt terms the way things are going to work in the West Wing he now oversees.  The retired Marine Corps four-star general said he didn’t care whether they had been part of the Trump campaign or had joined the administration from Capitol Hill or another corner of the political world, according to people who attended the meeting. They all work for the president now, he told them, and they had to act as one team.

Perhaps even more important, Kelly is testing his authority to tame Trump’s sometimes reckless tweeting habits. While Kelly isn’t vetting every presidential tweet, Trump has shown a willingness to consult with his chief of staff before hitting “send” on certain missives that might cause an international uproar or lead to unwelcome distractions, according to three people familiar with the interactions. Kelly has been “offering a different way to say the same thing,” the person said.

  • Five tough decisions for the GOP on healthcare (The Hill)  Republicans have left Washington for the August recess with healthcare decisions hanging overhead, many of which must be addressed by the end of September.  Here are five decisions looming for the GOP:

  1. Should there be one more effort at ObamaCare repeal?

  2. Should we work with Democrats?

  3. Should we back legislation to make key payments to insurers?

  4. What's to be done with CHIP?

  5. What's to be done with 'bare' counties?

The most startling sections from the CIA memos – all marked “SECRET” – reveal how CIA views the first amendment and journalistic freedoms:

“Absolute power corrupts absolutely, and the power of the media to publish in this country is nearly absolute.”

Below are among the most significant sections from the 1984 formerly Secret report.

“Absolute power corrupts absolutely”: Ironically enough these are actual words coming out of the CIA applied not to itself – a secretive spy agency which frequently operates above and outside of the law (Iran-Contra, COINTELPRO, Operation Mockingbird, Church Committee findings… to name a few examples) – but these are words applied to the media. The CIA further likens investigative journalism with enemy foreign espionage:

“we can cite precise parallels in methods and results, if not in motivations, between the media’s attempts to penetrate us and our opposition’s attempts to do the same.”

  • Rosenstein: Trump did not direct feds to investigate Clinton (The Hill)  Deputy Attorney General Rod Rosenstein in a Sunday interview said President Trump has not directed the Justice Department to “investigate particular people”.  During an interview on “Fox News Sunday”, host Chris Wallace asked Rosenstein if he viewed Trump’s recent comment that prosecutors should be probing Hillary Clinton’s deleted emails as an order.  Trump tweeted about the need for more investigation last Saturday, directing his comments toward Attorney General Jeff Sessions and special counsel Robert Mueller.  Rosenstein responded:

"No, Chris. I view what the president says publicly as something he said publicly.  If the president wants to give orders to us in the department, he gives that to us privately. And then if we have any feedback, we provide it to him," he continued.

wage.growth.by.wage.level.2017.aug

job.growth.by.wage.level.2017.aug

UK

North Korea

  • Trump administration ‘not playing around’ on North Korea (The Hill)  U.S Ambassador to the United Nations Nikki Haley praised new sanctions against North Korea as a sign that the international community is seriously addressing the threat of Pyongyang's nuclear weapons program.  "It is time for North Korea to realize, we are not playing anymore," Haley said on Fox News' "Sunday Morning Futures with Maria Bartiromo."  The sanctions largely target North Korea's major exports such as coal, iron and seafood, Haley said.

"A third of their trade exports have been hit, and we basically gave them a kick in the gut with a billion dollars of sanctions that they are going to begin to feel right away."

China

mobile.internet.china

Other Scientific, Health, Political, Economics, and Business Items of Note - plus Miscellanea

  • A Skeptical View of Financialized Corporate Governance (Anat R. Admati, Journal of Economic Perspectives)  Hat tip to Timothy Taylor.  This paper is an ascerbic critique of the failure of the philosophy of "maximizing shareholder value" (MSV).  (Econintersect:  Perhaps this is too much an over-simplification but we would summarize the message  thusly:  The result of financialization and MSV has been much increase in "extraction of wealth"  by executives at the expense of shareholders, customers, and society in general.)  From the abstract:

The legal separation between corporations and their stakeholders, including shareholders, has been important to the success of the corporate form in organizing long-term, large-scale production, while limited liability and the tradability of shares help corporations acquire funds from a broad set of investors.

However, this legal separation exacerbates conflicts of interest between those who control corporations and others, including shareholders, creditors, employees, suppliers, customers, public authorities, and the general public. In large corporations, stakeholders vary enormously in the information and degree of control they have on corporate actions. Contracts and markets do not generally create efficient outcomes if markets are not competitive, contracts are incomplete or costly to enforce, or if corporate actions create negative externalities for those with little information or control. Laws and regulations can help alleviate these frictions, but their design and enforcement are also costly and subject to information and control frictions.

In recent decades, much emphasis has been placed on aligning the interests of managers and shareholders. Managerial compensation typically relies on financial yardsticks such as profits, stock prices, and return on equity to achieve such alignment. This development has been part of a broader trend referred to as “financialization,” whereby the financial sector and financial activities grow in prominence within the economy, and financial markets and measures increasingly guide economic activity.

Financialized governance may not actually work well for most shareholders. Even when financialized governance benefits shareholders, significant tradeoffs and inefficiencies can arise from the conflict between maximizing financialized measures and society’s broader interests. For example, financialized governance provides incentives for slanted presentations of accounting data and even in some cases outright accounting fraud. Misconduct, law evasion, or fraud directed at other stakeholders such as customers and governments may benefit shareholders, but they may ultimately have to bear legal expenses, large fines, and loss of reputation. Financialized incentives can also lead to misallocation through “short-termism” or mismanagement of risk, with the upside benefiting those controlling corporations and the downside harming others, including shareholders and the broader economy

  • Maximizing shareholder value: The goal that changed corporate America (The Washington Post)  This article uses IBM as a case study of how "maximizing shareholder value" (MSV) provided a shift from investment in human capital to managing the short-term financial performance of a corporation.  This is a considerably different emphasis than the preceding paper but still, buried behind the story is the concommitant increase in executive compensation in proportion to that of the average employee.  See next article. 

Click for large image.
ibm.stock.1980.2013

  • CEO Pay Has Grown 90 Times Faster than Typical Worker Pay Since 1978 (Economic Policy Institute)  Over the last several decades, inflation-adjusted CEO compensation increased from $1.5 million in 1978 to $16.3 million in 2014, or 997%, a rise almost double stock market growth. Over the same time period, a typical worker’s wages grew very little: the annual compensation, adjusted for inflation, of the average private-sector production and nonsupervisory worker (comprising 82% of total payroll employment) rose from $48,000 in 1978 to just $53,200 in 2014, an increase of only 10.9%.  Due to this unequal growth, average top CEOs now (in 2014) make over 300 times what typical workers earn.  And that has continues to grow.  See the 2016 report:  CEOs Make 335 Times What Workers Earn (CNN Money)

  • Who Should Set CEO Pay? The Press? Congress? Shareholders? (Harvard Business Review)  This 1992 article discusses whether CEOs are overpaid.  At that time the average CEO was paid 130x the average employee in their company.

  • Is the US Public Corporation in Trouble? (Kathleen M. Kahle and René M. Stulz, Journal of Economic Perspectives)  Hat tip to Timothy Taylor.  The argument that public corporations are intrinisically less efficient than private firms is explored.  Their conclusion is somewhat ambiguous but contains factors that bear on the discussion in the preceding articles today about executive extraction from corporations increasing over the last 3-4 decades.  One startling graphic shows that capital investment peaked just about the advent of widespread acceptance of "maximizing shareholder value" (MSV).  Since capital investment is largely related to longer-term strategies for a firm, one is tempted to posit that MSV produced an increase in "short-termism".  Econintersect:  We also note that the total for ratios to assets of capital expenditures plus R&D also peaked in 1980 at 0.17.  It declined slowly to less than 0.12 in 1991; then increased to more than 0.17 in 2000; and finally fell sharply to about 0.10 in 2002, remaining between 0.09 and a little more than 0.14 (in 2015) since then.  Thus total investment since the early 2000s has averaged approximately 60% of what it was in the early 1980s.  Does this justify the assertion of growing "short-termism" and "extraction of wealth"  by executives?  Well, perhaps one could argue the relationships are circumstantial (ie, correlation does not prove causation) but the what we see is alarming.  Smoking gun, and all that.

capital.investment.r.and.d.1975.2015


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