Andre de Cavaignac : Politics

On Social Democracy, GDP/Capita and Disposable Income

mrdecav — Mon, 11 Jan 2010 12:51:00 GMT

I'm sitting here on a short trip to Munich, and just read Greg Mankiw's latest post regarding today's New York Times article by Paul Krugman regarding European Social Democracy and the pending US healthcare reform. Paul Krugman essentially argues that economic advance can come hand-in-hand with social democracy. From what I can tell, Mankiw is politely dissenting.

While it is indeed interesting [and perhaps somewhat telling] that the GDP/capita is so much higher in the US than elsewhere, it is difficult to associate this to actual quality of life. While Germans may make less than us annually, they make about equal to us per hour (see my napkin math below).

I suppose the question really becomes whether Europeans work less because the incentive structure is setup such that more work isn't worth it past a certain level (much like any gradated tax rate does), or if they actually value their time not working higher than the extra salary.

But it could also be because of this: GDP/Capita accounts for both employed and unemployed people in the country. While this is important overall, it is not as vital to an individual worker. What an individual worker cares most about is how much he is making in an hour for himself.

	GDP/Capita (PPP)	Avg. Hours Worked (Annual)	Average GDP/Hour (Productivity)	Disposable Salary	PPP Ratio	Disposable Salary (PPP)	Avg Disposable Salary/Hour (Real productivity?)
US	47440	1777	26.7	31410	1	31410	17.7
UK	36358	1652	22.0	26312	1.09	28680	17.4
Germany	35539	1362	26.1	25146	1.29	32438	23.8
France	34205	1346	25.4	26416	1.35	35662	26.5

One notable and surprising ratio shown in this is the productivity of actual employed workers (the ones that calculate using "disposable salary"). These numbers should mitigate the influence of unemployed on the productivity numbers by taking disposable salary of employed workers and applying the PPP ratios, then finding productivity using that. When these figures are used, employed individuals in both Germany and France take home more per hour than their US and UK counterparts. Also, the disposable salary of Germans and French are marginally higher than their employed American counterparts after PPP is accounted for.

Sources:

GDP/Capita (PPP): http://gregmankiw.blogspot.com/2010/01/learning-from-europe.html

Average Hours Worked: OECD - http://en.wikipedia.org/wiki/Working_time

Disposable Salary: http://www.worldsalaries.org/

PPP: OECD - http://www.oecd.org/dataoecd/48/18/18598721.pdf

On Compensation in Finance

mrdecav — Thu, 05 Feb 2009 17:55:00 GMT

This post is part of a series of essays on things unrelated to software development. You can find all the essays here.

The compensation structures on Wall Street have long been criticized as excessive, lavish and unnecessary. Banks have consistently justified such salaries, noting the executives being compensated brought in big earnings for the bank. When the bank balance sheets were positive, there was little incentive to attempt to correct the salaries, however with most banks now in dire straits, many have begun to take a more firm tone with banks.

This concern was underlined this week by Obama’s new government enforced incentive cap of $500k per year for top executives in banks receiving federal aid. While Obama has found a significant problem in banks, their compensation structure, his cap is not only horribly low, but may also have a significantly negative effect on banks. Without that ability to recruit top talent into executive positions, banks will have more trouble hiring than the offices of Mr. Madoff.

Free markets tend to assume that people will do what they consider in their best interest. Consider a classic example of a big, blue lake, full of fish with multiple fishermen. If the lake is a public entity, it is in the interest of each fisherman to collect as many fish as possible, without regard for environmental impacts or long-term sustainability. If they do not, the other fishermen will fish the entire bounty from the lake, draining it of their resource, and they’ll be left with nothing. If each fisherman owns their own portion of the lake, however, they will want to sustain their portion of the lake for future years, to ensure long-term prosperity.

The banks have begun to look much like the overfished lakes of Wall Street. With huge annual bounties, and little incentive to maintain the overall value of the organization, traders, bankers and executives alike have taken large risky bets at expense of the the organization, in effect hollowing out their balance sheets. Large bonuses rewarded short-term harvests, and threatened long-term prosperity. Even with some compensation supplied in stock options, the incentive to make a few large cash bonuses and move on was so great, that it simply eclipsed the interest in ensuring a banks long-term viability.

Compensation structures should provide incentive for employees to ensure long run profitability over short-term profits. The most obvious way to accomplish this is to lower annual cash bonuses and increase the use of instruments that mature over time, such as stock options. Employees who receive bonus compensation based on the performance of the company in five years are more likely to ensure that the organization maintains long term profitability, and is less likely to take risky bets that undermine the banks sustainability and performance.

Obama is right to point out the broken compensation structures on Wall Street, but the amount of the compensation on Wall Street is not the cause of current economic woes. It is the form of compensation and how that from makes people act. Obama should not be looking at limiting overall executive pay, but rather rewarding success in solidifying a firm over the long run. If a salary cap is necessary to push a bill through congress in the short term, a bonus structure should be provided for any executive who has been instrumental in restoring confidence and a positive cash flow to a bank. Change in the way banks provide incentive to their employees is necessary, but populist politics should not get in the way of proper reform.

Hybrid Vehicles: Environmentally Evil?

mrdecav — Thu, 04 Jan 2007 03:08:00 GMT

I was drawn into a debate the other day with one of my brothers my long standing argument that hybrid cars (such as the Prius) are not as environmentally friendly as both the car companies, hippies and media claim. I argued that although the burning of fossil-fuel is greatly reduced while the vehicle is operating, the overally environmental impact of the toxic batteries and the electric motor (both in manufacturing and disposal) has the potential to greatly outweigh the green operation of the vehicle.

Needless to say, this argument did not go over well. Without facts in hand, my brother rightly told me my argument had no merit. Today I went searching about buying a hybrid car for a future road trip, and accidentally came accross a dust-to-dust automotive energy study that details the energy cost of different vehicles from creation to disposal. Sure enough, the hybrid sector of the market appears to be above the average energy cost for a vehicle, at $3.180 per mile.

In fact, even entry level SUV's had a significantly lower energy cost, at $1.336 per mile. Cars similar in size (or larger) to the hybrids, listed as "Lower-Mid-Range" in the study show an average of $2.064/mile. Only the Luxury Car segment beats the price per mile of a hybrid.

According to this study, a Prius not only consumes 150% of the energy of a comparable size car, but also contains parts (such a Nickel Metal Hydride [NiMH] batteries) that will do harm years after the car is disposed of. This "eco-friendly" picture that has been painted onto the hybrid cars scream marketing scam to me. Surely one study does not completely prove the fact that the car is worse for the environment, but I would love to see more people (eg. newspapers) were to look into this and open up some level of debate.