Managerial risk aversion?

Why are American sports teams so seemingly risk averse in their selection of leaders? This subject has bothered me for some time and it bounced back into my mind last night while watching the Cubs/Cardinals game and enduring the endless dugout shots of the ever pensive Cardinals manager, Tony LaRussa.

Both LaRussa and his counterpart in the other dugout, Lou Piniella, have been fired in previous managerial jobs (a few times in Lou's case). Taking a cursory look around MLB, plenty of current managers come from the same stock of former firees: Leyland, Torre, Cox, Tracy, Garner etc. A survey of the NBA or the NFL produces similar lists of recycled leaders.

Two points that contribute to an explanation of this phenomenon:

1. Being fired as the manager of a professional sports team doesn't send the same signal of incompetence that you might suspect.
2. The risk aversion and short term outlook in the front offices of professional sports franchises makes selecting a "name" leader much more likely, regardless of that leaders previous record.

Point #1 could be true if a manager or coach only impacts the final outcome of a small number of games during a season. If so, then firing such a leader might be seen as a shot across the bow to the folks who do impact the success or failure of a franchise: the players. Additionally, following to point #2, the selection criteria for a new leader may focus on intangibles such as name recognition to send the proper signal of commitment to winning, rather than skills that directly impact on field play. A first time coach may send a low cost approach type signal and could hurt sales of tickets to see the team play.

Assuming that this line of thinking bears some resemblance to reality, are GM's too risk averse in their selections? Could the Triple A manager get the same results as the big name who has bounced around for 10 years, and at half the salary? Have GM's artificially limited their supply of talent? The flip side is the argument that there are a minority of superstar leaders with the ability to inspire the key talent, put fans in seats, and have a larger positive impact on outcomes than the next best leader.

Perhaps of more interest: do these same biases extend to corporate America? How much impact on performance does the CEO actually have and does the same risk aversion lead to a race to the top in terms of executive pay packages (leaving aside the fact that some CEO's basically set their own pay)? No company wants to be known as paying only at the 50th percentile for their leader. Promoting the unknown controller from within may send the wrong signal. For the rest of the team, 50th percentile may be just fine. Following this logic, the hypothesis would be that American companies are needlessly driving up CEO pay and perhaps exhibiting a similar recycling of "name" talent that is seen in professional sports despite the reality that leaders have limited impacts on performance, especially compared to the next best choice.

The rich and public goods

Have we looked past the probability that our new Gilded Age is producing a new generation of Carnegies and Rockefellers, the robber barons who at times were also generous philanthropists? The question of interest to me is whether certain wealthy private individuals are driven to produce public goods and whether this is more efficient or effective than the collective approach of taxation and government sponsored public goods. My guess would be a resounding no on the effectiveness tally but it may be worthy of a more thorough review

Where will the future iterations of the Ford Foundation or the Rockefeller Foundation come from? Bill Gates leaps to mind as a good example but I'm more interested in speculating on what, if any, generosity may emerge from the financial industry types who represent a very high percentage of the new elite. As we shift income towards this highest echelon of society, can we expect a return in the form of public goods? While I'm not sure of the genesis of the Kennedy family fortune, an argument could be made that their wealth has allowed or perhaps even guided its subsequent generations to pursue careers in the public interest. A great responsibility seemed to come with wealth in the past. Is this just coincidence and can any predictions be made about the careers of the wealthiest offspring in decades to come? Would more middle class families produce fewer public leaders than fewer wealthy families? I'd also like to see a fair hearing for how or if private philanthropy or charity is a better mechanism for redistribution than progressive taxation and government services.

Who knows, maybe I'll be amazed at how tuned in billionaires are to the needs of others. Worries about inequality may be unfounded...

Inequality and the military

Has broadening inequality actually been a boon for military recruiting? An article I came across from a few years back discussing the troubles the US Army was having in filling their recruiting pipeline got me thinking about military recruiting all the way back to the Vietnam War. Of course, back then we had the draft so unless your name was George W. Bush or Dick Cheney, you needed a damned good excuse not to serve if your draft number was called.

Since the end of Vietnam, the US military has become an all volunteer force. A concurrent trend that began around the same time is the furthering of income and wealth inequality to levels that resemble Gilded Age America. My question is about the opportunities for the folks in those bottom quintiles of the income distribution: Has this loss in relative, and in many cases absolute purchasing power limited the ability to purchase the human capital levels that would lead to some degree of social mobility? If so, has the military as a career choice gained numbers at a far greater pace than otherwise would have been possible with late 1960's levels of equality?

Buyer beware

I've long been skeptical of the worship of financial superstars among the set of folks whose MBA is their most cherished possession. Eddie Lampert and this latest announcement from Sears Holdings would be exhibit A in the case against such worship.

It's unclear why anyone should be impressed by a man who is systematically hollowing out formerly viable companies to enrich himself and a tiny subset of remaining shareholders. The level of re-investment in Sears (and Kmart) stores is anemic. If you've set foot in a Sears lately you'll know whereof I speak. Meanwhile, billions are being spent in buying back stock to further pump the share price over the short term. Of course, that's the point, he never has any interest in running companies successfully. The whole exercise is based on the assumption that the parts show more value as they are dismantled. A group of vultures apparently have faith in Lampert's skills in this regard as the five year stock appreciation in Sears Holdings illustrates. As soon as there is nothing left to squeeze, Lampert will sell off and head to his next slaughter. Perhaps the treads on this deteriorating jalopy are showing a bit sooner than Lampert anticipated, however. It will be interesting to see what tricks he still has left in his playbook. I'm willing to bet the word restructuring is part of it.

Lampert's own little Sears Holdings bubble will burst eventually, the only question is who will be left holding the last shares? Perhaps this is why corporations that wish to continue actually producing something and employing people construct poison pills to prevent this type of action. It's not efficient use of capital, it's simply plundering by those with the means to carry it out.

Hedge fund welfare

Daniel Gross brings up a point that isn't discussed much in polite company, namely that bailouts only occur for holders of capital. Sounds to me like something other than the market is deciding winners and losers in the Bear Stearns case. The truth is that these conglomerates meddle and disrupt market outcomes all the time in myriad ways and none of the usual free marketeers seem troubled by it.

The individuals caught up in the housing bubble and facing foreclosure would seem to have a better case for bailout than the hedge fund types who will get a nice tax break on any losses they take. The overall point is not to be bamboozled by anyone who simply shouts "free market" at the top of their lungs to dispute a policy choice. In reality, no such animal exists and ironically, Wall Street is many times purported as the closest to a true free exchange that we get. Perhaps not.

Fair for whom?

I'm beginning to wonder if Professor Mankiw moonlights as an editorial page writer for the Wall Street Journal. In this piece from Sunday's NYTimes, Mankiw may as well be screaming "Lucky Duckies" about the group of Americans paying only 4.5% of their income in federal taxes.

Mankiw asserts that economists should leave normative debates out of economic analyses, then cites the Rawls vs. Nozick philosophical debate to imply that there just isn't any answer about what is or isn't fair from the economic realm. It's obvious, however, that Mankiw falls clearly on the Nozick side of the fence and that is really the point: you can't hide your bias behind a set of tools. The bias informs the tools used, the use of the tools, and the questions that get asked and answered by the tools. As long as economics remains a social science, the normative side is vital and economists need not shy away from those arguments.

Specific to the analysis of federal tax rates, a side by side comparison of the changes in pre-tax income in addition to effective tax rates over time for the same groups of taxpayers would be a bare minimum starting point for a balanced look. Excluding notoriously regressive state taxes is a bit suspect as well. Adding those elements would clearly show that incomes have diverged wildly over the last 30 years and the tax code has only made it worse. This should be ground zero for a discussion over tax rates, not Mankiw's singular snapshot. Even at this ground zero we should acknowledge that collecting taxes is simply the mechanism by which we pay for civilization. The discussion then follows with what we've already committed to funding and how best to achieve this funding target. Since Mankiw is biased toward a more limited role for government, we should at least force him to spell out what he wants to cut if he thinks taxes are too high (especially since we have a deficit that will force taxes higher than they presently are).

Carried interest

Seems almost ridiculous to have to point out the nonsensical arguments emanating from the hedge fund managers fighting by idiot proxy to keep their tax loophole, but the level of disinformation has reached a fever pitch. It must be that obscure names like hedge fund and all the zeroes involved make folks believe that this is complicated.

It's not.

Carried interest is simply the part of the hedge fund managers income at risk, much as the tips a waitress at a nice restaurant might receive. If the hedge fund manager or waitress improves the investment, be it dinner or dollars invested in emerging markets, then a bonus could be in order. Hedge fund managers have it in writing, tied to fancy metrics that usually go up regardless of their meddling. If the waitress could capture the extra benefit provided due to great service, and could contract a defined fee for that service before the meal, would the Senate be demanding that these tips be taxed at the 15% capital gains rate? Yeah, doubtful.

And my already taxed income dollars go to pay those tips, so the double taxation bit won't fly either.

Still economics?

An example of how far the field of economics stretches itself. A much more compelling and transnational argument than Leavitt's abortion argument for the drop in crime.

And pictures too...

This is primarily a test of my ability to post a picture to this blog -- the photo itself is from a vacation down in Ft. Lauderdale last year. Ah, the good old days when we had nothing but free time and disposable income. Now we'll have disposable diapers instead.

A blog before son arrives

Given that I'll be starting grad school in a few weeks and have a baby on the way, I figure why not start a blog as well. I keep hearing horror stories about how I'll never sleep again so maybe this will keep me occupied in the wee hours. Perhaps I'll get the hang of posting baby pics as well. With a bit more luck and time, I'll be able to post about other topics that pique my interest, primarily economics and politics, possibly areas of potential research. I'm sure to bore everyone silly after a few months of heavy neoclassical theory has been hammered into my skull. I aim to keep a heterodox eye open and at least some semblance of a sense of humor. The baby can't help but be of assistance there. Should be interesting.