Finally, An Explanation for Corporate Compensation

Anyone who reads this blog regularly won’t be surprised to find out that once again, it is government meddling that has created what many see as a problem. However, this one, like the price of oil, is being blamed on companies and few are discussing the real issue.
Tech Central Station has the first article I have come across that actually explains why corporate compensation is so high to begin with. Big corporations are using the heavy hand of government to prevent take-overs. And use of this government intervention (something we could make illegal and let the free market respond to prices as we used to) is what allows compensation to increase seemingly without limit.
“As a result of the takeover boom of the early 1980s the managements of some of the larger corporations started to look for permission, from both courts and politicians, to protect themselves with poison pill defenses in order to thwart takeover bids. These take a number of forms but the essential outcome is much the same: it makes the hostile takeover of a company by a corporate raider more expensive.”
How does preventing takeover allow CEO compensation to skyrocket?
“…back in the 1950s and 60s, when there was a fairly unregulated market for corporate control, managers could not pay themselves huge sums in this manner because someone could and would come along and buy the company and throw the bums out. Now that those poison pills form the corporate defenses they can’t, or at least only at vastly greater cost.”
So, if another corporation can’t come along and buy the company and toss out those who are leeching profits, companies – stockholders and workers – are left with little choice but to pay whatever the market rate is, and the market rate is as high as it is because nobody can buy these companies up and throw out the expensive and wasteful CEOs.
Once again, market rigidity is the cause of the non-competitive pricing.

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Freedom as an Incentive

If you caught Paul’s appearance on The Line last night, the discussion on government incentives to attract businesses to the state was especially useful. When a business is looking to locate in the Southwest, New Mexico is in competition with its neighbors. Two chief strategies come into play in this competition. States can either 1) create a business-friendly environment through low taxes, unobtrusive regulations, and protection of private property, or 2) use high taxes and an active government to bribe favored companies.
According to an index developed by the Pacific Research Institute, New Mexico ranks 37th in the nation for economic freedom, based on a number of indicators in the fiscal, regulatory, and judicial policy sectors as well as government size and state welfare spending. A color map is available, but New Mexico’s situation stands out most clearly in black and white:

That big dark blip in the middle of the Southwest, that’s us. Here’s how New Mexico compares to its immediate neighbors.

Rank State
2 Colorado
5 Utah
6 Oklahoma
11 Arizona
17 Texas
37 New Mexico

While its neighbors have generally proceeded with the first strategy, fostering economic development through economic freedom, New Mexico has stood out in its zeal for the tax-and-bribe approach.
Has this been a successful strategy for New Mexico? As Harry pointed out last week, New Mexico lags behind its neighbors in private sector generated income. Indeed, most economic comparisons with neighboring states are unfavorable.
With taxes from the oil and gas industry filling the state coffers, New Mexico is in a good position to create a climate more friendly to all business in the state, not just to a handful of bureaucratic favorites. Give home-grown businesses a better chance, and the entire state will be more attractive to outside investors and entrepreneurs.
In case you missed it, KNME will rebroadcast The Line Sunday at 6:30 am.

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Per Capita Income in New Mexico 2005 — More Bad News

When the Bureau of Economic Analysis released its per capita income data for 2005 it looked at first like there might be some good news. The release emphasizes changes in per capita income from 2004 to 2005. And, while New Mexico continues to be near the bottom of the income rankings, its growth was in the top 25 percent (12th out of 50). That seems like a good reason for celebration, right? Wrong!
The reason we should not celebrate is income growth was disproportionately for state and local government and welfare payments. In fact, New Mexico had the highest yearly growth of income for state and local government in the nation! Here is how NM government growth compares to states in the region:
For yearly growth rate of welfare NM was 7th in the nation, and it would have been higher had we not been muscled out by the hurricane ravaged states. Here is how NM compares to states in the region:
Netting our the disproportionate effect of government and welfare growth on per capita personal income from 2004 to 2005, we see that New Mexico is lagging behind other states in the growth of private sector generated income:
So there you have it. Prosperity is generated by private sector growth and not by reliance on government — just the opposite of what the trend is in NM compared to other states.

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Wrong Reason for Veto of Stem Cell Funding

My view is that stem cell research has the potential to improve our lives significantly. Yet I hope the president follows through on his veto threat. My reason:

By its very nature, government politicizes everything it touches. Science is no exception. Stem cell research needs neither government money nor politics. It is better is to get the government out and let the private sector continue its good work. Those people calling for increased funding could take out their checkbooks and support it. Those who oppose embryonic stem cell research would not be forced to pay for it.
Michael Tanner

Of course the same thing could be said for just about everything the government forces you (the taxpayer) to fund. By the way, if popular support of stem cell research is mirrors congressional support for it then we should see a lot of voluntary contributions to it. My guess is that most stem cell research already qualifies for some government sponsorship because of tax deductibility to those private organizations conducting it.

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Eminent Domain Curbed in Missouri

Governor Matt Blunt (R) in Missouri has signed legislation restricting use of eminent domain. His bill is particularly good in that it bars the taking of private property solely to increase taxes or create jobs; It explicitly rejects the Supreme Court decision Kelo v. New London; and it increases the compensation for seized homes from market value to a premium level (since clearly the owners did not want to sell and value their homes above the market clearing level). It also provides additional tools for homeowners to fight with in court and a “Property Owner’s Bill of Rights” to educate those faced with a possible eminent domain seizure.
Good for Missouri. Now lets demand the same in New Mexico!

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