issue: Economy

The Right Way to Curb Executive Pay

Posted on by The Progressive Policy Institute

Yesterday, word was leaked that after telling Bank of America head honcho Ken Lewis to expect a goose-egg in salary for 2009, the Obama administration pay czar Ken Feinberg was going to give pay cuts to chief executives at four other financial firms, including Citigroup and AIG, and the automakers GM and Chrysler. While no one to the left of Steve Forbes can really defend multimillion dollar payouts to executives for driving companies and the economy into the ground (and don’t be fooled — despite getting $0 in salary, Lewis will take home $53 million in “other compensation” this year), this plan isn’t the way to rein in payouts. It might feel good in the short term, but it doesn’t solve anything and could cause problems in the future.

First, cutting pay for financial executives in 2009 is a bit like slamming the barn door after the horse has bolted. These problems were festering for many years, and most of the chief executives who are running these companies weren’t in charge when errors were made — the beleaguered Lewis excepted, and he’s stepping down at the end of the year. So they’re getting blamed for their predecessors’ decisions.

It also doesn’t affect the main culprits who got us into this mess. The notorious Joe Cassano from AIG FP in London — who almost single-handedly drove the insurer into the ground — is untouched by the decision.

And, despite what the administration might hope, the rest of Wall Street is not going to rein in salary practices either in sympathy with their comrades or fear of rebuke. The companies affected are the ones that still have significant stakes owned by the government. Those that have returned their TARP money — Goldman and JP Morgan — are unaffected.

Given the incentive to work for a company with pay limited by the government or one where pay isn’t limited, people will jump ship for the latter. This has the potential to make the already weak companies — Bank of America and Citi, for example — even weaker. Which means that we might have a bigger problem on our hands if either of the two largest banks in the country drift with no one at the wheel (Lewis’ decision to resign without a replacement means we might see this at Bank of America anyway).

Finally, there is the concern that this will be the only chance we have to move on keeping salaries in the financial industry in line with a level that benefits the country, not bankers. When taking a hard look at pay in the future, bankers can use this as political cover, claiming that the administration has already “dealt with the issue.”

A better solution to the pay issue is to look not at short-term, feel-good measures, but to implement longer-term solutions. Line up incentives for bankers with those of shareholders and the American people. Eliminate “guaranteed” bonuses. Replace cash payouts and options with restricted stock grants, vesting over time, keeping executives interested in the long-term health of companies.

Rep. Barney Frank (MA) has pushed the Corporate and Financial Institution Compensation Fairness Act of 2009 through the House with a “Say on Pay” measure, giving shareholders a non-binding say on management salaries at the annual meeting, an idea that has merit. But its non-binding nature and the fact that most shareholder votes are made by institutional investors (more often than not either current or former I-bank employees) as proxies for their clients limit the measure’s effectiveness. A more effective part of the same bill also requires bonuses to be in line with risk-taking.

Even better is the fact that incentives will be disclosed. A little known secret on Wall Street is that traders can make more than the CEOs, and the trader’s payouts are normally undisclosed. If such incentive structures were spelled out to investors, they might not be so sanguine in signing off.

“Performance Parking” in DC’s Backyard

Posted on by The Progressive Policy Institute

Variable pricing — charging different prices at different times — usually gets referenced in public policy debates as congestion pricing or cordon pricing: a fee to drive in a certain area during rush hour. As is often the case in urban planning, Singapore has been on the cutting edge of this, first trying it out in 1975. But the highest profile example has been the London City (downtown financial district) congestion pricing system, running since 2003.

While variable pricing is most often thought of as a way to provide incentives for cars driving, it can also be used for cars that are parked, too. Like lunch, there’s no such thing as “free parking.” Curbside parking that we don’t pay for costs us in other ways, whether from increased congestion from losing a lane on the street, to the time wasted circling looking for a spot in a downtown area. Performance pricing on parking meters is one way to make sure that parking availability on crowded city streets is subject to market demand. This can increase budget revenues for municipalities while keeping you from circling the block for hours looking for a spot.

In my hometown of Arlington, VA, the county is giving “performance parking” a shot, with the idea of aiming to keep parking spots on streets 85% full (PDF). Parking meters and parking ticket machines will be programmed to respond to observed parking rates so that it costs more to park in an area when it’s busier. The immediate thought is that this would benefit only those looking to park in the Wilson Boulevard business corridor during the week. But I can’t help but think that it’ll help with parking in the Clarendon area as well, where weekend nights find cars slowly rolling around looking for spots. People are stuck in their cars looking for a spot to open up, rather than in one of the nearby clubs that local bands play. Performance parking is a way to solve that problem.

Variable pricing is aimed at reducing congestion and increasing local revenues, but a better chance to hear rock and roll in Northern Virginia might be the upshot.

Energy Efficiency Spurs Economic Growth

Posted on by The Progressive Policy Institute

A new study from Environment Northeast (ENE), an environmental research organization, offers a rebuke to the notion that energy efficiency can only be achieved at the expense of economic growth. Studying the macroeconomic impact of efficiency policies in the Northeast, ENE finds that efficiency provides not just savings for consumers and a decrease in emissions — the usual benefits of energy efficiency — but a significant economic boost as well.

The study used a forecasting model to project the effect of efficiency programs on the economies of six New England states: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. It found that efficiency programs led to gains of more than $180 billion in gross state products over 15 years, more than justifying the efficiency investments made by the states.

How exactly does energy efficiency get translated into economic growth? Saving on energy bills, consumers could then redirect that money to the wider economy. Moreover, lower energy costs give regional businesses a boost by strengthening global competitiveness and promoting further growth. So much for the false choice between the environment and the economy that skeptics would have us make.

To read the ENE report, click here.

Building a Clean Economy on an Old Tobacco Plant

Posted on by The Progressive Policy Institute

It’s hard to imagine many new uses for a shuttered tobacco factory. Thirty-foot tall cranes designed for moving bales, a paper factory, heavy equipment including backhoes, fork-lifts and tractors, and old cement floors stained by tobacco juice made sense for tobacco. But the odds that this plant, situated on 140 acres of land and given up by tobacco company Brown and Williamson in 2006 after its merger with R.J. Reynolds, would find a second life seemed pretty low.

Welcome to the world of sustainability and green entrepreneurs. An enormous tobacco factory in Chester, Virginia, about 20 minutes southeast of Richmond, has become the unlikely but inspiring location for an interdisciplinary group of green companies to work together and create a sustainable—and profitable—economy.

The Sustainability Park was launched in 2006 by Brenda Robinson, a Richmond-area biomass entrepreneur. She founded the Sustainability Park to create a community of businesses sharing a common vision of sustainability and renewable energy advancement.

“The Park is still creating jobs and did throughout the economic downturn,” said Robinson, the Park’s founder. “We are continuing to expand with new manufacturing facilities and equipment.”

The Sustainability Park currently has thirteen tenants, whose services include biomass production; industrial composting for landscapers and gardeners; recycling of massive amounts of debris that would otherwise go to landfills; and even a baseball training facility for Richmond-area youth that uses all-recycled equipment. Tenants in the Park also provide the important new business of LEED¬—Leadership in Environmental Energy and Design—Certification. This important program, created and monitored by the U.S. Green Building Council, provides strict standards for certifying construction as sustainable according to a variety of criteria, including the percentage of post-consumer material used and the impact on the local environment.

The Park and other projects like it across the country, belie the notion that green or sustainable projects are somehow antithetical to the free market or to capitalism; on the contrary. The Park itself is a for-profit company and the tenants are all for-profits. There is a raging market for the services the tenants provide. One company, Ace Recycling, sorts large quantities of construction debris, recovering tons of metal, biomass and other materials, for later post-consumer use, whether as wood pellets or as road surfacing—and at prices often lower than landfills.

Robinson explained that small businesses, like those at the Sustainability Park, are currently constrained by the lack of growth capital and government programs are not structured to aid these types of projects.

“We have been resourceful without government assistance,” said Robinson, “but infusion of government shovel-ready funding would have created many more sustainable jobs and additional tax revenue while helping the environment, promoting creative entrepreneurship and clean energy solutions.”

These businesses do need help from government, whether with improved access to stimulus funds; reducing the red tape often required at the federal or state level to apply for and receive grants; and increased investment in research and development. Recently, the Park considered applying for a federal grant to help increase efficiency of their own energy use, which could have saved $250,000 a year. They stopped the application process when they discovered that the regulations in place—including the requirement to purchase a $30,000 energy audit and a limit of 25% on the company’s savings—would have dramatically reduced their economic impact.

Yet, the profitability and early success of the Park’s tenants reveals the tremendous promise of clean technology as a business model and investment for society. Robinson noted the co-location of such varied “green” businesses has triggered tremendous cooperation, brainstorming, and even business deals within the Park. A recycler, for instance, sold material to another tenant to build a road.

The innovation and entrepreneurial spirit at the Park shows that America can indeed grow its way out of the current economy and into a new clean economy, where we will begin leading the world again. Our policymakers need to open the door and where helpful, provide incentives and ease regulatory burdens. The new generation of green entrepreneurs will do the rest.

For evidence, just see the facts. Less than three years later, $20 million has been invested in the Park, which has created 80 local jobs—including rescuing many employees who lost their jobs when the tobacco factory closed.