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No Limits

Written by Al Slivinski on . Posted in Economics, Government, LBOs.

So I open up my morning copy of The London Free Press on Friday, and here is a story headline from one of the inside pages:

LHSC cutting mental health benefits to staff in ‘26

The story also appears in the online version of the paper, with a rather more striking headline:

Staff decry LHSC move to cut unlimited mental health benefits

“It’s really hard to feel like you’re being supported, and we are a No. 1 trauma centre,” an employee said.

As discussed often here, online newspapers are all about click-baiting, so the difference in the two headlines is not surprising. ‘Decrying’, indeed.

The facts of the story are that LHSC, the local provincial hospital corporation, has been paying for an unlimited amount of mental health benefits for its employees, and these will now be limited to a set amount of spending per year. The amount depends on the employee group, ranging from $400/year to (still) unlimited, the last being for those who are in a union that had the foresight to get the ‘unlimited’ benefits into a collective agreement.

Here’s a quote from the email to LHSC staff about this change, which the Freeps said it obtained:

“Since the voluntary introduction of unlimited mental health benefits in 2024, we have seen costs rise exponentially,” the email said, citing expenses exceeding $3.1 million in 2024 and estimated the figure would exceed $5 million in 2025.

And here is a quote from the Freeps article itself:

A non-unionized social worker affected by the cuts, who asked not to be identified, called the decision “a gut-punch.”

“I just can’t wrap my head around that. I just can’t feel comfortable knowing that we had this option and now it’s being taken away, and there’s no other alternatives being proposed,” they said, noting their unlimited mental health benefits as a non-unionized employee will be reduced to $1,500 a year.

Yes, it’s terrible for people to not feel comfortable.

What I actually find most striking about this is the apparent surprise voiced in the email from LHSC. They made something freely available with no limit and ‘we have seen costs rise exponentially’. Goodness, whoddathought that would happen?

Economists are as capable of being full of shit as any social scientists, but there are things people in my former profession say and believe that have unquestionably stood the test of time. One of them is – ‘If you give something valuable away for free, there will be no end to the demand for it’.

And in this case, one must add in the 21st century view that humans are so fragile that it is a wonder anyone can get through their day without a mental health professional helping them out. (I add that social workers like the one quoted above are in the vanguard of that view.)

As it happens the (more serious) The Free Press referenced an article in The Atlantic dated Dec 3 on what is essentially the same phenomenon, and one on which I have written in the past; the granting of special accommodations to university students with ‘disabilities’.

The Atlantic article TFP references is titled Accommodation Nation and is behind a paywall, but for some reason they let me read it for free – an early Christmas gift, perhaps.

Anyway, here is a key quote from the article:

The surge itself is undeniable. Soon, some schools may have more students receiving accommodations than not, a scenario that would have seemed absurd just a decade ago. Already, at one law school, 45 percent of students receive academic accommodations. Paul Graham Fisher, a Stanford professor who served as co-chair of the university’s disability task force, told me, “I have had conversations with people in the Stanford administration. They’ve talked about at what point can we say no? What if it hits 50 or 60 percent? At what point do you just say ‘We can’t do this’?” This year, 38 percent of Stanford undergraduates are registered as having a disability; in the fall quarter, 24 percent of undergraduates were receiving academic or housing accommodations.

I predict they will not be able to say no at any percentage, and the reason I say that is contained in this other quote from the article:

Tarconish sees the growing number of students receiving accommodations as evidence that the system is working. Ella Callow, the assistant vice chancellor of disability rights at Berkeley, had a similar perspective. “I don’t think of it as a downside, no matter how many students with disabilities show up,” she told me. “Disabled people still are deeply underemployed in this country and too often live in poverty. The key to addressing that is in large part through institutions like Berkeley that make it part of our mission to lift people into security.” (One-third of the students registered with Berkeley’s disability office are from low-income families.)

Yes indeed. Only their accommodations are preventing that 38% of Stanford students from ending up underemployed and in poverty.

A monster has been created, and it is feeding an entire bureaucracy of people with titles like ‘assistant vice chancellor of disability rights’, whose livelihood is based on the existence of disabled people. If Stanford or any other U (including my former employer) were to try to pull back on the granting of special accommodations to students, the ‘activists and advocates’ will pour into the streets (and classrooms) and onto social media until the LBOs cry uncle. And they always cry uncle in response to such pressure. This we have seen many times.

This is the part of giving things away that economists have missed. In the 21st century governments giving things away generally creates a class of people (those advocates and activists – and bureaucrats) who have a vested interest in said things remaining free. This, coupled with that ‘gut-punch’ feeling of people who were getting the free stuff, makes stopping the give-away a political grenade.

As a parting shot, the Atlantic article also points out that it is the already-privileged who benefit from this disability industry. Another quote:

As more elite students get accommodations, the system worsens the problem it was designed to solve. The ADA was supposed to make college more equitable. Instead, accommodations have become another way for the most privileged students to press their advantage.

(You can also be sure that ‘assistant vice-chancellor for disability rights’ is making well into six figures, btw.) Along those same lines, people who work for LHSC are also mostly well up in the salary distribution. No one there is working for minimum wage, you can be sure, and few employees of any organization get unlimited anything. Indeed, I betcha London’s cops and firefighters don’t get unlimited mental health benefits.

One more (impending) example of this general phenomenon came across my desk the same week. The headline at the very top of the first page of my (on paper) London Freeps Friday morning was this:

Micro-shelter plan takes shape

Our brilliant city leaders have hatched a plan to ‘bring 60 micro-shelters for London’s homeless to a southeast farm field’.

I here predict that this will go one of two ways.

One, it will turn out, to our city leaders’ surprise, that no homeless person will go willingly to live waaay down in south London, miles from everything. Then the city will be faced with either writing off the whole thing as a bad idea, or forcing people to live there in order to receive other things. (The advocates and activists will hate that second option. Count on a human rights case.)

Or, two, if they do find people willing to live in them, it will turn out that no matter how many of these the city builds, no matter where they build them, and no matter how much they spend on providing free accommodation to homeless people, it will not be enough. The activists and advocates will be explaining in the Free Press forever that the City ‘needs to do more’.

[I’m betting on option one. A photo of the site for these shelters, taken from the Freeps, is below. It’s just off Cheese Factory Road. Really.]

Now, one might say in this instance – ‘But Al, clearly this does not benefit the well-off, this spending is clearly of benefit to the truly desperate among us’.

I will cite another quote from the Freeps article:

It was also revealed Wednesday that the site will be operated by Xpera, a national emergency management and security firm, which has a office in London.

In an interview with The Free Press, [London Mayor] Morgan cited the firm’s experience in crisis response, logistics, security, first aid and de-escalation training.

“So, a well trained professional firm which has a lot of experience doing this, a lot of experience with site management, site security, and they are the successful proponent and will be operating the site,” he said.

The article does not mention how or how much Xpera will be paid, or how many employees of theirs will be involved. It does say this:

The early estimate to set up and operate the site until April 2027 is $7 million, funded from a city reserve fund. The latest report outlines the shelters cost $1.2 million before HST, and the city will enlist J-AAR excavating firm to construct the site at a cost of around $725,000.

I got $100 in my pocket that says that ‘early estimate’ comes up waaaay low. Anyone want to take the other side of that bet?

 

Why, Indeed?

Written by Al Slivinski on . Posted in Economics, LBOs.

‘It’s all about the Benjamins, man.’

That’s a line from a pretty old movie, I think, but damned if I can remember which one.

Anyway –

This morning’s WSJ had an opinion piece in it titled ‘Why CEOs Get Paid So Much’, with the sub-headline – ‘Doug McMillon’s success at Walmart shows the value of corporate leadership’.

It’s not a long piece, and the gist of it is easy to lay out. McMillon took over as CEO of Walmart in 2014, and is about to step down and retire. In that time, according to the article:

“Walmart’s annual revenue has grown on his watch from nearly $486 billion to $681 billion in its latest fiscal year. Walmart’s shares have risen some 310% in his tenure, while the company has increased wages and benefits for Walmart’s 2.1 million employees.”

Now, as a number of the WSJ readers who commented on this piece point out, the fact that one CEO of one company did well (assuming that those numbers indeed imply ‘doing well’, as no comparisons with other retailers are offered) does not constitute an answer to the question that is implicit in the article’s title.

One commenter on the piece also made the very astute observation that McMillon’s actual compensation is never stated in the article. Sources tell me it was $US27million last year.

So, the implicit claim the article is making is that, given how well Walmart did during his term, McMillon’s pay package was perfectly reasonable. In a phrase, he was worth it. Again, hardly a proof that CEO pay is reasonable in general; I do expect better arguments from the WSJ.

However, I write mostly to say that this whole discussion goes against the way (most) economists think about pay. The only answer economics can give to the question ‘What is that employee worth?’ is the same as they give to the question ‘What is my house worth?’. It is worth whatever someone is willing to pay for it.

That is not a normative, or ethical, claim. Rather, it follows from the belief that there simply does not exist any notion of objective, intrinsic value for, well, anything. ‘One man’s trash is another man’s treasure.’ I am well aware that this attitude flies in the face of much common sense and/or talk about such things, including often my own. I, too, wonder how Vlad Guerrero Jr’s prowess in baseball (much as I love watching him play) can possibly be ‘worth’ paying him a half billion (big US) dollars over the life of his contract.

A friend of mine pointed out during the World Series that, based on the claimed average price the Jays were getting per seat during the WS, they were raking in close to $100million per game, thus going a long way toward paying for Vlad. But of course, Vlad did not get them to the WS on his own, and there are all the other costs the Jays had to pay and…..

To an economist, that is all beside the point. The Jays org agreed to that contract, therefore he is worth it – to them – and they are the ones paying him.

This attitude also runs against any number of progressive slogans about workplace justice, like, ‘Equal pay for work of equal value’.

The economist’s objection to that slogan is ‘how does one assess what work is of ‘equal value’. Well, lots of bureaucracies do try to do that, and one way it often shakes out is to insist that people with the same job title must be paid the same. Anyone who has spent more than five minutes in the world of work knows that not all people with the same job title (first baseman, assistant professor, millwright, on and on) are providing ‘equal value’ to their employer – or to their fellow employees.

On top of that, there is no way to assess what ‘value’ any particular employee has to his employer, as economists insist that it is all ‘team production’ and quite impossible to separate out the contributions of the different team members. That holds for CEO McMillon, too. However well or badly Walmart did over his term, there is no way to determine how much of that is due to him and how much to other team members, not to mention everything that happened outside the company over which he had zero control.

All of the above could be taken to imply that no matter what or how anyone is paid, in any company, there is no way to improve the situation. It should not. In particular, there are aspects of how CEOs (and others) are selected and paid that do bear scrutiny, imho.

First, there are some incentive structures that are often built into CEOs’ (and others’) pay that seem to me to be clearly counterproductive.

Economists think incentives matter, although they do not believe that only financial incentives matter. Consider the occupation of restaurant server. It is typical that they are tipped by the customers. (I know there are those who think tipping is an awful practice, but I am much in favour of it, a topic for another post). The idea is that if the server does a better job the tip gets bigger; that is certainly how I approach tipping. However, a restaurant is still a team operation, so the server can only do a good job if the bar staff and kitchen do their job well, too. So, in recognition of this, many restaurants require servers to turn over some proportion of their tips to be divided between the bar, kitchen and busboy staff. This isn’t perfect, but it is a recognition of the fact that it is a team effort, and that still, incentives matter.

[Aside on the non-financial incentives in the workplace. One of my university-era summer jobs was as a short-order cook on the breakfast and lunch shift in a diner along I-75. The servers did not tip out to me in those days, but they sure let me know if I was doing my bit to help them keep customers happy, both when I did well and when I did not. Those incentives matter too, the question is whether the employer can augment them in some way.]

Not all incentive structures seem productive to me, however. In Ontario labour law, if an employee is terminated by an employer whose payroll is greater than a stated minimum, they are entitled to severance pay, unless they ‘are guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and was not condoned by the employer’.

Fair enough. However, it seems that many CEOs hired by large companies (like Walmart, etc) have negotiated into their contract some kind of ‘golden parachute’ that pays them a large sum in the event the Board of Directors fires them. Now, if a Board fires a CEO, it is invariably because they are not happy about the company’s performance. So, why should said CEO then get paid some amount that dwarfs any statutory severance pay when they have just been fired?

The answer is almost always said to be that the company could not have hired said CEO in the first place without including such a parachute in their contract. In other words, the market standard is that such clauses are always offered to new CEOs, so the only thing to negotiate over is its size.

Sorry. It seems to me a winning strategy here is to say to a potential CEO ‘If you are confident of your ability to run this company, such a clause won’t matter to you, because we are going to build into your contract all kinds of good things that you will get if the company does well’. A CEO candidate who turns that down is maybe not the person you want to run your company.

I admit that this has come to mind in no small part because of my awareness that this golden parachute infection is spreading.

Two cases in point.

a) Our local city council recently entertained a resolution that city councillors who lost their re-election bids should be paid some amount (I forget how much) of severance pay. Jeezus, Mary and Yosef. As if not being re-elected is not the ultimate dismissal with cause. In the end the Council voted itself a 30% raise in salary (J,M & Y again!), but did not approve severance for themselves.

b) NCAA football coaches with big-time multi-hundred-million-dollar programs now routinely have such clauses in their contracts.

You can read the whole sorry story here, I will give you just the last three lines of it:

“This season, LSU leads the way with a $53 million buyout for firing Brian Kelly, followed by Penn State’s $49.7 million buyout of James Franklin. The largest buyout ever remains the $77 million Texas A&M agreed to pay Jimbo Fisher in 2023.”

Yes, those are the payouts given to those three fired football coaches by those three (try not to laugh) non-profit, state-supported institutions.

By the way, Texas A&M’s football team this year, two years after firing the coach who they could not possibly have hired without that $77M clause, has a 10-0 record and is ranked 3rd in the country. Wonder what the new coach’s buyout clause looks like?

Ok, I’m being a smart-ass here, but I have a real point: such clauses seem to me like an incentive to fail. CEOs and football coaches get a big payment if things go badly enough that the Board/Athletic Director fire them. I get why you would want such a clause if you are the CEO or coach, but not why it is agreed to by the other side(s).

My second concern is not about an incentive problem per se, but rather about something that has crept into hiring all kinds of high-level people.

To illustrate, here is another quote from the WSJ opinion piece regarding Mr. McMillon:

“He’s spent more than 40 years at the company, rising from a part-timer in a Bentonville, Ark., Walmart garden center to the C-suite.”

That, my friends is a rare thing, so far as I can tell. Very few CEOs of major companies these days actually worked at that company at all before becoming CEO, let alone for 40 years. They are mostly ‘headhunted’ by professionals who are paid by the hiring company to find and vet potential hires.

So, here’s an idea the WSJ article never considers: maybe the reason for Walmart’s success is that they had as CEO someone who knew the firm from the ground up over a career of 40 years.

Suppose you are such a CEO, and the Board decides you are not doing the job, the company is not thriving, so they fire you. Having worked there for many years, and being paid very handsomely as CEO, you would quite naturally be entitled to a considerable severance package in that case. Seems sane and fair to me.

Another observation based on my own career. It has become common practice to do the very same thing at universities in both Canada and the US, in the following sense.

The two highest level positions at a university are that of President and Provost. The former is the CEO, the guy at the top, and the latter is the person in charge of academics, which is, of course, what a U is supposed to be about. Both positions are always held by people who started out as professors, doing what I did for 42 years.

My former employer did not have a President who had risen from its own professorial ranks for the entire time I worked there. And, during my career, we had, so far as I can tell, exactly two Provosts who were appointed to that position from the institution’s own professoriate.

Early in my career, when I had been around long enough to be known outside of UWO, I would occasionally get correspondence from colleagues at other institutions saying they were looking for a new Chair/Dean/Whatever and asking me if there was anyone I knew who might be a suitable candidate. In later years, when I got such emails they were always from a headhunter firm.

So, we have universities that are run by people who neither know nor give a shit about the institution’s history, strengths and weaknesses. They are all on the ‘administrative career ladder’, not having done a regular professor’s job in perhaps twenty years. All the head-hunted Provosts are hoping to be appointed President somewhere else one day, and the Presidents are all hoping to be appointed President at some more prestigious university. They are all looking ahead, and not to the university’s future, but to their own.

Much that is wrong with today’s PSE institutions can be laid at the feet of that simple fact, and I cannot see that it is any different for profit-making companies. To deny it is to deny that knowledge of the institution you are running is important for running it well.

Whither Goest The Middle Class?

Written by Al Slivinski on . Posted in Economics.

One can write only so much about a 34-year-old with zero experience, even if they are a mayor-elect, so let’s turn to something a bit more hard-nosed, some income statistics. The graph below is from the blog Marginal Revolution, written by economist Alex Tabarrok, but credit where due, I first came across it in an article from The Free Press.

Now, let’s be clear about what this shows. It is based on data from the US Census Bureau’s CPS, which has been about as reliable as large data sets get for a very long time. It shows the change in the proportion of families in the US that are in three different annual income ranges: below $50k, above $150k and in between those two annual incomes. Thus, note that all families have to be in one of these three ranges.

The key point here is that the percentage of families in the bottom two groups have decreased between 1967 and 2024, while the percentage in the top group has increased. Very importantly, this is all measured in constant 2024 dollars, so this is not the result of inflation, which has of course been considerable over that period.

Thus, we have the caption – American families have been moving up.

There are other questions to ask about this surprising (to me) graph, however. For example, since this is household (i.e., ‘family’) income, is all this just a reflection of the fact that more and more households have come to have two earners in them over this time frame?

Well, Tabarrok considers this, and his answer is ‘yes, but only partly’. He provides a link to another economist’s blog, where you can find the graph below:

 

What this shows is that the percentage of married couples with two income earners did rise from 1967 to the late 90s, but after that it actually dropped a bit. So, the increase in household income shown in the first graph can reasonably be the result of more two-earner households up to the 90s, but after that it is simply because earners, whether one or two, are earning more in real terms.

So, the bottom line seems to be, for the US, if the middle class is truly disappearing (meaning those families in the middle income group), it is because they are moving into the higher income group. And, of course, the lower income group is shrinking in proportion too, as those folks earn more.

This is a surprise to me, but I suppose only because we all read so often in the media how everyone is suffering these days. Also, I wonder very much whether anything like this is true in Canada. As always, data of this quality is much harder to find for Canada, but I will keep looking and report back if I find anything. For now, let’s just say that reports of the relative impoverishment of families in the US middle class seem to have been rather exaggerated….unless I am missing something here.

Before closing this off, I will mention one more thing. Below is another graphic covering almost the exact time period as those above. It comes from the US Fed, and it depicts the Gini coefficient for income in the US over this period. The Gini is a long-used index of how unequally is income distributed in any population. A higher Gini index indicates a more unequal distribution. This graph is a bit odd in that the Gini is typically given as a decimal number between 0 and 1, and here it is a whole number. If you just put a decimal point in front of the numbers on the vertical axis you get the usual thing.

So, it is clear that income is distributed more unequally today in the US than it was in the 60s, and that the big increase in this measure occurred between 1980 and 2005. Since then it has bounced around. However, note that the actual change has not been a lot over that period – it went from 0.36 to almost 0.42. Secondly, given what we saw in the first graphic, one could ask whether this trend is even worrying. That is, if almost everyone is seeing their income increase in real terms, does it matter that income is distributed somewhat more unequally? What I suspect is going on here is that for the group with incomes above $150k, incomes have been growing more than for those in the two lower income groups. That would increase the Gini as we have seen, but still be consistent with more families moving into that group.

A final point, about which I have little to say, so far. The first graph above is about gross incomes, that is, before tax, and I think the Gini numbers are, also. Now, the US is a low tax country by any standard. The Tax Policy Centre notes that “In 2021, taxes at all levels of US government represented 27 percent of gross domestic product (GDP), compared with a weighted average of 34 percent for the other 37 member countries of the Organisation for Economic Co-operation and Development (OECD).”

However, it may be that over the period covered in the graphs above, that tax percentage went up, in which case the disposable incomes of US households may not have increased as much as did their gross incomes. This is harder to track, but I did find data from the same Tax Policy Centre indicating that US federal income tax rates have not changed much since the 1980s, and that the rate paid by those in the lowest income quntile has actually dropped noticeably. This of course only considers federal income taxes, not taxes levied by other levels of government or sales and other commodity taxes.