Beat the Press

Dean Baker's commentary on economic reporting


New York Times Exposes CEO Pay Scam

Eric Dash at the New York Times had a very good piece this morning on a backdoor $500,000 bonus that Denny’s gave to its CEO, Nelson Marchioli, by allowing him to buy stock at below the market price. Of course Denny’s is free to pay Mr. Marchioli whatever it feels is appropriate, but by making the payment in the form of stock options priced at below market values, it was able to conceal this payment from all but the most vigilant analysts. As the article points out, Denny’s is not the only company making such surreptitious payments to its top executives.

There are two important points here. First, this sort of surreptitious pay deal demonstrates a continuing problem in corporate governance. Companies are not supposed to be run for the well-being of their CEOs. If the pay could not be disclosed openly, then it is not proper, end of story. It would be reasonable for the laws to mandate that all compensation packages for top executives have to be subject to shareholder approval at regular intervals. This is not government intervention, this is the government setting workable rules for corporate governance, just as it sets rules that ensure equitable treatment for minority shareholders.

The second point is that the corruption that allows exorbitant pay for CEOs has ramifications far beyond the money pilfered from corporate coffers. The multi-million dollar pay packages for corporate CEOs set standards that affect pay scales throughout the economy. As a result, we see inflated salaries for high level executives not only in business, but also in government, universities, and even charities.

For this reason it is important to redress the imbalance in corporate governance that allows CEOs to get such outsized payments. This topic is addressed at more length in my new book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (coming soon to a website near you).

(Angry Bear has corrected me [and the article] on the valuation of the stock options given to Mr. Marchioli. Using the Black-Scholes valuation method, the value of the options is close to $1 million.)


No Correction on Mexican Growth at the Washington Post

To those following the issue, the Washington Post still has not corrected the error in its reporting on Mexico’s post NAFTA growth rate (“Mexican Deportee’s U.S. Sojourn Illuminates Roots of Current Crisis,” 4-17-06:A1). My April 18th post noted that the growth data reported in this article implied that Mexico had enjoyed an average GDP growth rate of 17.5 percent a year in the post-NAFTA era, which would be a world record. The IMF data show Mexico’s growth rate at a weak 2.9 percent.

While the Post has taken a strong pro-NAFTA position on its editorial page, I wrote and continue to believe that this error was an honest mistake. The failure to correct this error after it has been called to their attention is harder to explain. (I also noted a similar error on growth in the Post’s Sunday Outlook section, but we can give opinion writers more leeway.)

Since the Post will make an effort to correct misspelled names in wedding announcements, it is difficult to understand its refusal to correct a major error in a front page news article.


Arctic Oil Nonsense

Proponents of drilling in the Arctic National Wildlife Refuge are happy to make whatever outlandish claims are convenient to advance their cause. A few years ago, they were pushing the line that drilling in the Refuge would generate 500,000-750,000 jobs, citing a study by WEFA, one of the country’s leading economic forecasting firms. We did a short analysis showing the faults of this study. When WEFA refused to stand behind its study, this outlandish job claim quickly disappeared from the debate.

But the nonsense continues. President Bush claimed today that the country would be producing another million barrels of oil a day if President Clinton had allowed drilling in the refuge. He presumably meant this claim to impress his audience, implying President Clinton’s opposition to drilling in the refuge is a major factor behind today’s high oil prices.

A few simple facts indicate otherwise. First, there is a world market for oil. What matters in determining the price of oil is how much oil is supplied in the world, not how much is supplied in the United States. If we were getting an additional 1 million barrels of oil a day, then its impact would be the same on prices in the United States whether the oil comes from Alaska or anywhere else. One million barrels is less than 1.2 percent of world oil supply. That is not trivial, but it will not hugely affect the world price of oil.

The second point follows directly from the first. Iraq’s average oil output is approximately 1 million barrels a day less than it was before the war. In other words, the Iraq war has reduced world oil supplies by approximately the same amount that drilling in the refuge might have increased it.

The third point is that the oil in the Refuge is a temporary fix. According to the Energy Information Agency, it would take approximately 10 years to reach the peak production of 1 million barrels a day. This peak production would continue for approximately 10 years, and then it would trail back down to zero over roughly 10 years. This means that if we had begun drilling in the Refuge the day Clinton took office in 1993, then we would have hit peak production just over three years ago, and we would begin to see a decline in output beginning in 2013. This is not exactly long-term energy security.

Of course, there is plenty that Clinton can be blamed for regarding energy policy. For example, if he had introduced mileage standards that increased average mileage by just 10 percent, this would save the country 1 million barrels a day of oil consumption, which would have the same effect on oil prices as increasing production by the same amount.

But, we can’t talk about these issues seriously unless reporters do more than just mindlessly report what politicians say.

The Housing Bubble: Why Did the Media Miss It?

As the housing bubble starts to unwind people will be looking for villains in this economic disaster. There are many, with the list including Alan Greenspan, the bulk of the economics profession, and of course, the reporters covering the housing market.

As was the case with the stock bubble, there was very little attention paid to the underlying fundamentals in the market. Anyone who bothered to look at the data could have quickly recognized that the run-up in home prices in the years after 1997 had no historical precedent. From the early 1950s until 1997 (the years for which we have good data), house prices largely followed the overall rate of inflation. In the years since 1997, house prices have increased by 50 percent after adjusting for inflation.

If housing prices have tracked the overall price level for 50 years, and then suddenly take-off relative to other prices, this is a fundamental change in a key sector of the economy. Fundamental changes in the economy are not impossible, but they don’t happen very often. Unless there is very good evidence, it is reasonable to assume that there has been no fundamental change. In this case, that means assuming that the run-up in house prices is a bubble and will be reversed.

I have debated most of the key actors in this debate and none have given an explanation for the run-up in house prices that passes the laugh test. They would say things like people value the security of homeownership, that homeownership is the American Dream.

Did this first become true in 1997?

There is a limited supply of land and many of the areas with the most rapidly growing housing prices are uniquely attractive places to live.

Did New York, Boston, San Diego, Washington, and San Francisco first become nice places to live in the late 1990s?

Environmental restrictions have limited the supply of new housing.

Did environmental restrictions become stricter after the Republican takeover of Congress and many state houses in 1994? If they did, why has homebuilding been going on at a near record pace over the last 4 years?

Immigrants are pushing up the demand for housing.

How many recent immigrants are buying $450,000 homes (the median home price in places like San Francisco and Boston)? More importantly, didn’t we just have a national debate over Social Security, the main premise of which was that population and labor force is growing slowly?

Finally, I had my key check on the state of the fundamentals in the housing market: rents. If the run-up in house prices reflected fundamental conditions of supply and demand, then there should have been a comparable run-up in rents. There wasn’t. Rents rose somewhat more rapidly than the overall rate of inflation in the last 90s and the beginning of the current decade, but had nowhere near the run-up as home sale prices. More recently rents have trailed the rate of inflation. No economist has been able to give an explanation for how fundamentals could lead to a run-up in house sale prices, while having no noticeably effect on rents.

Good reporting would have prominently noted the evidence that the run-up in house prices would not be sustained, that it was a bubble. In fairness, the media paid considerably more attention to the possibility of a bubble in the housing market than they did to the stock bubble in the late 1990s, which managed to almost completely escape the notice of economic reporters. Still, most of the reporting had the same cheerleading attitude to house prices that reporters routinely apply to stock prices. Unfortunately, when the cheering stops, it is the homeowners, not the reporters, who feel the pain.


More Fact Checking Problems at the Washington Post

Last Tuesday, I pointed out that a front page Washington Post article had overstated Mexico’s growth in the post-NAFTA era by a factor of five (Mexican Deportee’s U.S. Sojourn Illuminates Roots of Current Crisis, 4-17-06:A1). It appears that the Post’s problems with arithmetic are continuing.

The front page of the Sunday Outlook section had an article that refers to the rise to power of Hugo Chavez in Venezuela and Evo Morales in Bolivia (Old States, New Threats, 4-23-06;E1). The article comments that “social tensions have exploded as a result of the unleashing of market economies that create rapid but uneven growth.”

Growth in Venezuela and Bolivia may have been uneven, but it certainly was not rapid. According to data from the Penn World Tables and the World Bank, per capita GDP in Venezuela was more than 10 percent lower when Hugo Chavez took office in 1998 than it had been in 1980. In Bolivia, per capita GDP had fallen by almost 15 percent between 1980 and 2005 (see also “Bolivia’s Challenges”).

The Post is a serious newspaper. It should be able to at least get basic facts like economic growth rates right.