Erskine Bowles is widely known in Washington policy circles as a co-chair of President Obama's deficit commission, along with former Senator Alan Simpson. The report that he and Simpson co-authored is held up as the basis for a grand bargain on the deficit.
This report has riled many people across the political spectrum, in part because of its cuts to social security, the most immediate of which is a reduction in the annual cost of living adjustment (Cola). Reduced Cola would amount to a benefit cut of close to 3% for a typical retired worker. Since the median income for households of people over age 65 is just $31,000, this would be a big hit to a segment of the population that is already struggling.
By contrast, in their quest for every possible source of savings, Bowles and Simpson seem never seriously to have considered a financial speculation tax that would target the country's bloated financial sector. The United Kingdom has imposed taxes on its financial sector for centuries, and much of the European Union is considering a tax that could go into effect as early as next year. A tax comparable to the one the UK has on stock trades, but applied to all financial assets, could raise close to $1.5tn over the course of a decade.
There is evidence that our overgrown financial sector is a serious drag on growth, pulling resources away from productive segments of the economy. In addition, the financial sector is also where many of the highest earners get their income. This means that a tax on financial speculation could be a real win-win-win: it could raise money to reduce the deficit; make the economy more efficient; and reduce inequality. That should place it on top of anyone's list for deficit reduction.
But the tax apparently didn't make it to the Simpson-Bowles list. While we may never know why, it is worth noting that Erskine Bowles sits on the board of directors at the huge Wall Street investment bank Morgan Stanley, where he is paid several hundred thousand dollars a year. Interestingly, Bowles also sits on many other corporate boards, also being paid millions for his services over the last decade.
Out of curiosity, CEPR constructed an Erskine Bowles stock index to measure how well stocks at the companies where he has been sitting on the board performed, compared to the overall S&P500. It turns out that the Erskine Bowles index has not fared very well. Since April of 2003, the Erskine Bowles stock index has lost 33.5% of its value. By contrast, the S&P500 is up by 53.1% over this period.
It's probably not fair to blame Erskine Bowles himself for the poor performance of the companies with which he serves as a director. Directors usually only attend four to six meetings a year and rarely play any role in actually running the company. However, the millions Bowles makes for this kind of work is symptomatic of a larger problem incorporate governance. Directors are essentially paid-off to look the other way, as CEOs and other top management plunder their companies.
In principle, directors should be demanding hard work and low pay for CEOs in order to maximize returns for shareholders. In reality, directors generally just take their pay and keep their mouths shut. This allows top executives even at failing companies to draw paychecks that are an order of magnitude larger than the compensation packages of their counterparts at the most successful firms in Europe and Asia.
The directors perform a valuable service for top management since they act as validators, assuring shareholders, regulators and the public that everything is kosher. The directors are usually people who have high reputations from their work in politics, academia (many university presidents sit on corporate boards), philanthropy and other businesses.
If a director were to begin to ask whether the company was getting real value for its senior executives' compensation packages, he or she would likely be ostracized (the other members of the board just want their paycheck) and then removed at the first opportunity. Directors are, in theory, elected by shareholders, but the election process is about as democratic as the Soviet Union's was: top management gets their candidates approved with almost the same frequency as the Communist party chiefs on the Politburo.
The excessive salaries of top corporate executives are not only a problem because they pull money away from the corporations they run, but because they also set a pattern of compensation across the economy. It is now common for heads of universities, and even charities, to get million-dollar packages, pointing out that they would receive much more if they ran a comparably-sized company. This is a big part of the upward redistribution of income we have seen over the last three decades.
So Erskine Bowles gives us a real trifecta. He used his position as co-chair of President Obama's deficit commission to protect Wall Street. He pockets millions as part of a flawed system of corporate governance that allows CEOs to rip off the companies they run. And he wants to reduce social security benefits for seniors who are already living on the edge.
In short, Erskine Bowles is a true hero of the Washington establishment.