Talking Top Salaries in Finance and the Gas Price Spike with Kudlow and Co.

February 21st, 2013 at 12:38 pm

Had great fun co-hosting the Larry Kudlow show last night—yes, it was fun and interesting (though way, way too much of the Republican talking point: it’s Obama’s sequester!  That part was pure nonsense).  Anyway, check out this segment on the pay of finance CEO’s.  There you learn that as penance for his lack of oversight during the London Whale incident, Jamie Dimon of JPM lost half his take home pay last year, taking him down to…wait for it…$11.5 million.

If that’s penance, please punish me.  And like I said, if that’s what’s going on at the tippy top of the job market at a time when the economy has remained weak, I don’t think $9 an hour at the other end of the market is going to crash the show.

Anyway, the conversation that ensued was about whether these folks are overpaid.  It’s a great topic and one worthy of more time than we were able to give it, but note Larry’s surprising position, which intimated that their inflated (my word) salaries do send distortionary signals.

Also, check out this segment with John Kilduff, energy expert from Again Capital, on the recent gas price spike.  His theme was that following some permanent shut downs along the east coast, we’re in danger of simply having too few refineries to produce the gas we need.  The conversation, inevitably, went to the regulatory place, but there’s been no ratcheting up of production regulations over this period, and John notes.

So what gives?  From what John said, it sounds like refining oil to gas is still highly profitable, yet such market signals don’t seem to be getting through.  There’s more to this, I’m sure, and I’m going to look into it.  We may need to start thinking about refineries more the way we think of public/private utilities.

BTW, in reading this piece from today’s NYT I was reminded of another argument we had on the show—the impact of the sequester on the economy.  I don’t understand how my fellow hosts were pro-growth and pro-austerity, but whatever.  The point that occurred to me on reading the Times piece (which noted, as I did on the Kudlow show, that the sequester is predicted to shave 0.5% off of 2013 GDP), and reflecting on the gas price segment is that this recent price spike is another drag on the 2013 economy, one that’s of a similar magnitude to the outlay losses associated with the sequester ($44 billion).

So, pressures on this year’s economy include: a $0.45+/gallon gas spike (with the rule of thumb that a penny aggregates up to $1 billion higher spending on gas*), an $85 billion sequester with $44 billion in lower outlays this year (with the rest coming later), and the loss of over $100 billion in the expiration of the payroll tax cut.  As the NYT article notes just re the policy changes (not the fuel costs), that’s the different between below trend and well-above trend growth…which is to say, between stagnant and falling unemployment.

*Pushing the other way is the miles-driven chart I link to here.

 

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4 comments in reply to "Talking Top Salaries in Finance and the Gas Price Spike with Kudlow and Co."

  1. Th says:

    On gas prices (from memory – a risky proposition): 1. prices slowly rose to $4 in spring and summer of 2008 before the melt-down so that may be the new normal.
    2. Because the existing pipelines from the oil sands area and plains area move oil mainly to inland refineries (Illinois, Indiana, Oklahoma, etc.) there is a big discount on this oil (glutted captive market) which makes them more competitive than east coast refineries buying from foreign sources. Check out recent investments in Indiana refineries to convert to processing oil sands.
    3. Keystone already has pipelines bringing oil to those refineries listed above and the proposed pipeline is an end-run around this glutted market to ships bobbing off-shore in the Gulf. I believe the Keystone XL terminus is at a free trade zone. Pipelines are also being built to carry this oil to B.C. for Asian export and Embark (?) bought a pipeline from Oklahoma to the Gulf to move some of the over-supply in Oklahoma to the Gulf. I’m guessing the results will be than the price advantage of the inland refineries will be short-lived. The result of the Keystone XL may well be higher prices for the US.


  2. Tom in MN says:

    I think for CEO salaries, just like those of top athletes, you have to let the market decide what to pay. Are they worth it? I see no sign of that, but that’s a different and unrelated question.

    The point you make with Dimon’s pay cut is the real problem. People claim CEO’s deserve their pay because they take the risks. Yet I see no sign of any risks to them. Mess up and they get a smaller bonus, still more than most people make in their life. Tank the company and they walk away with a severance package that would be all most people would ever need. And your company gets caught breaking the law and there are not even charges brought let alone anyone going to jail. In the rest of finance, big gains come with big risks and CEO’s should be no different. At this point all the risk seems to be to those making the low wages and that is the real problem, especially when there is also talk about reducing the safety net.

    On gas: high prices are better in the long run. The government should not be trying to lower them. Add enough taxes so a $.45 increase does not seem that much and give people incentive to buy more efficient cars, which will also make it so they notice these types of spikes less. But build refineries? Why make us take the risk (it will come on line just as prices fall to new lows I expect) when all the profits go to the oil companies?


  3. Smith says:

    There are three problems regarding pay of finance CEOs
    1) Size of financial services sector in U.S. economy
    2) Salaries in financial services
    2) CEO pay in general

    First size of financial services sector, evidence of terrible cost:

    Slide 2 shows 4% before 1980 to 8% now
    http://pages.stern.nyu.edu/~tphilipp/papers/slides_finsize.pdf
    $280 billion dollars per year for non-productive trades
    http://www.newyorkfed.org/research/conference/2011/NYAMP/Fed_Philippon_v1.pdf
    It’s probably worse
    http://www.motherjones.com/kevin-drum/2011/12/our-bloated-financial-industry
    The trend is for greater takeover of our economy by financial services
    http://www.huffingtonpost.com/2011/12/15/financial-sector-economy_n_1151058.html

    See also
    http://www.nybooks.com/articles/archives/2011/jul/14/busts-keep-getting-bigger-why/

    Second: Salaries are larger in financial services because they’re an oligopoly, huge cost of entry, 1980 DIDRA law greatly aided consolidation and profits, also their product is money. If you work in good restaurant, chances are you eat better.

    Third: CEO salaries are obscene and defy common sense. It’s partly about unneeded size (monopoly vs. economy of scale), tax law (lack of disincentive), weak labor movement, and return to normal rule of aristocracy.

    Depression and WWII created aberration which endured in Europe due to calamitous defeat of the right and continued threat of Marxism.

    You can’t have both $10 million compensation packages and fair wages for labor!


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