Erskine Bowles: An Object Lesson in Wall Street
Influence on Washington
No wonder the deficit commission's report ignored calls
for a Tobin tax when its co-author is a corporate
finance insider
Dean Baker	
The Guardian
10 September 2012 
http://www.guardian.co.uk/commentisfree/2012/sep/10/erskine-bowles-wall-street-influence-washington
        
Erskine Bowles is widely known in Washington policy
circles as a co-chair of President Obama's deficit
commission, along with former Senator Alan Simpson. The
report that he and Simpson co-authored is held up as the
basis for a grand bargain on the deficit.

This report has riled many people across the political
spectrum, in part because of its cuts to social
security, the most immediate of which is a reduction in
the annual cost of living adjustment (Cola). Reduced
Cola would amount to a benefit cut of close to 3% for a
typical retired worker. Since the median income for
households of people over age 65 is just $31,000, this
would be a big hit to a segment of the population that
is already struggling.

By contrast, in their quest for every possible source of
savings, Bowles and Simpson seem never seriously to have
considered a financial speculation tax that would target
the country's bloated financial sector. The United
Kingdom has imposed taxes on its financial sector for
centuries, and much of the European Union is considering
a tax that could go into effect as early as next year. A
tax comparable to the one the UK has on stock trades,
but applied to all financial assets, could raise close
to $1.5tn over the course of a decade.

There is evidence that our overgrown financial sector is
a serious drag on growth, pulling resources away from
productive segments of the economy. In addition, the
financial sector is also where many of the highest
earners get their income. This means that a tax on
financial speculation could be a real win-win-win: it
could raise money to reduce the deficit; make the
economy more efficient; and reduce inequality. That
should place it on top of anyone's list for deficit
reduction.

But the tax apparently didn't make it to the Simpson-
Bowles list. While we may never know why, it is worth
noting that Erskine Bowles sits on the board of
directors at the huge Wall Street investment bank Morgan
Stanley, where he is paid several hundred thousand
dollars a year. Interestingly, Bowles also sits on many
other corporate boards, also being paid millions for his
services over the last decade.

Out of curiosity, CEPR constructed an Erskine Bowles
stock index to measure how well stocks at the companies
where he has been sitting on the board performed,
compared to the overall S&P500. It turns out that the
Erskine Bowles index has not fared very well. Since
April of 2003, the Erskine Bowles stock index has lost
33.5% of its value. By contrast, the S&P500 is up by
53.1% over this period.

It's probably not fair to blame Erskine Bowles himself
for the poor performance of the companies with which he
serves as a director. Directors usually only attend four
to six meetings a year and rarely play any role in
actually running the company. However, the millions
Bowles makes for this kind of work is symptomatic of a
larger problem in corporate governance. Directors are
essentially paid-off to look the other way, as CEOs and
other top management plunder their companies.

In principle, directors should be demanding hard work
and low pay for CEOs in order to maximize returns for
shareholders. In reality, directors generally just take
their pay and keep their mouths shut. This allows top
executives even at failing companies to draw paychecks
that are an order of magnitude larger than the
compensation packages of their counterparts at the most
successful firms in Europe and Asia.

The directors perform a valuable service for top
management since they act as validators, assuring
shareholders, regulators and the public that everything
is kosher. The directors are usually people who have
high reputations from their work in politics, academia
(many university presidents sit on corporate boards),
philanthropy and other businesses.

If a director were to begin to ask whether the company
was getting real value for its senior executives'
compensation packages, he or she would likely be
ostracized (the other members of the board just want
their paycheck) and then removed at the first
opportunity. Directors are, in theory, elected by
shareholders, but the election process is about as
democratic as the Soviet Union's was: top management
gets their candidates approved with almost the same
frequency as the Communist party chiefs on the
Politburo.

The excessive salaries of top corporate executives are
not only a problem because they pull money away from the
corporations they run, but because they also set a
pattern of compensation across the economy. It is now
common for heads of universities, and even charities, to
get million-dollar packages, pointing out that they
would receive much more if they ran a comparably-sized
company. This is a big part of the upward redistribution
of income we have seen over the last three decades.

So Erskine Bowles gives us a real trifecta. He used his
position as co-chair of President Obama's deficit
commission to protect Wall Street. He pockets millions
as part of a flawed system of corporate governance that
allows CEOs to rip off the companies they run. And he
wants to reduce social security benefits for seniors who
are already living on the edge.

In short, Erskine Bowles is a true hero of the
Washington establishment.

___________________________________________

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