Clintonomics

Hillary Clinton Campigns In Iowa, Meeting With Small Business OwnersAre you a corporate employee who wishes that your income were tied more closely to your employer’s profits?

I have good news for you: There’s an easy way to make that happen. Take 10% (or 5% or 20%) of your wages, and use them to buy corporate stock.

Are you a corporate employee who *doesn’t* wish that your income were tied more closely to your employer’s profits?

I have good news for you, too. You don’t have to buy additional stock if you don’t want to.

Hilary Clinton, however, wants to change all that. She wants to force you into a profit sharing arrangement that is, for all practical purposes, equivalent to forcibly converting part of your salary into corporate stock. If you were planning to do that anyway, this will make no difference to you. If you weren’t planning to do it anyway — if, for example, you preferred to diversify your risks by investing your wages in some other industry — then, of course, this will make you worse off.

(I trust that none of my regular readers is silly enough to respond that Clinton’s plan is much better than buying stock, because you get the profit-sharing in addition to your existing salary. But for the benefit of the occasional drive-by reader, this is not possible. Market pressures insure that your total compensation is equal to the value of what you produce for the company, and if one facet of that compensation goes up, then another must go down.)

I have the impression that Clinton supporters like to tout her credentials as a true policy wonk. But the first rule of wonkism is that before you start dictating changes in voluntary chosen arrangements, you’ve got to identify a market failure that you’re trying to alleviate. In this case, what is that market failure? As far as I’ve been able to determine, Clinton has not even attempted to address that question. This is not policy analysis; it is a declaration or contempt even for the possibility of a thoughtful analysis. Don’t we already have enough of that on the other side?

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37 Responses to “Clintonomics”


  1. 1 1 Sub Specie Æternitatis

    But isn’t Clinton’s proposal going to be without effect even for those employees who don’t wish to hold (the equivalent of) employer stock? Such an employee can readily offset the mandatory position by a short position in their discretionary account. (Unless of course there is an insider trading or other legal bar.)

  2. 2 2 Steve Landsburg

    Sub Specie: Fair enough. But I think it’s not unreasonable to suppose that most people can figure out how to buy stock in the companies they work for, whereas it takes a certain level of sophistication to figure out how to short sell.

  3. 3 3 Mike H

    You’ve ignored a couple of points:

    * Generally, only employees of publicly listed companies can buy shares in their employer.

    * Clinton’s plan doesn’t force anyone to do anything. Instead, she proposed reducing the corporate tax for companies that share profits. Aren’t tax breaks for business a good thing?

  4. 4 4 Advo

    First of all, what Hilary proposes is not at all the same as forcing people to buy company stock.

    When buying a stock, the stockholder gains a participation right in ALL future profits of the company. This participation right increases in value as the future profit growth prospects of a company increase.
    With Hilary’s proposal, you only a gain a participation right in profits as long as you are at the company, and you can’t sell that participation right as you depart the company. This is very different from holding a stock.

    Secondly, if you hold company stock, you are exposed to fluctuations in the share price, which (at least over a term of several years) is only very vaguely tied to the development of a company’s profits and much more to the overall stock market/stock market sector.

    THAT SAID, I am not sure Hilary’s given rationale makes any sense. The arguments given on her website are tortured, to say the least. Perhaps her proposal is good politics.

    I could imagine two possible (non-political) benefits. The first involves involves information problems and the second a multiplicator effect.

    1. Perhaps profit sharing is beneficial for employee morale/motivation. Companies appear to think that it is, at least to some degree, as they have profit-participation schemes of various shapes and sizes, though these tend to be limited to the upper classes of employees (why?).
    Since the effects of employee morale and motivation are notoriously hard to measure, and management tends to pay much more attention to hard, measurable factors (i.e. expenditures and profits) than to fuzzy factors like “morale” and “motivation” (even if those factors are of critical importance), it’s reasonable to assume that companies are on average using profit-sharing schemes less than would be optimal.
    Government subsidizing profit-sharing might encourage companies to do something that would make sense even without the subsidy but that companies aren’t doing because they systematically undervalue their benefits.

    2. Let’s say that profit-sharing causes employees to become more productive but that this productivity increase is insufficient to justify the cost. I.e. the company pays $5000 but gets only $4250 in increased productivity. Hilary’s tax credit of $750 makes the profit-sharing cost-neutral for the company.
    So now the net result is that through $750 cost to the public purse, Hilary has boosted the employee’s income by $5000 at no cost to the company.

  5. 5 5 acarraro

    If it’s a tax credit, it seems like a stealth corporate rate tax cut to me. Corporate tax rates are too high and she cannot support an outright cut for political reason. This would have a similar effect no?
    I grant you that corporate taxation reform would be better and less distorting, but maybe this is a second best?

  6. 6 6 eric

    @subspecie

    Having worked for a company that gave occasional bonuses in company stock, peer pressure could easily have prevented short selling even if someone were savvy enough to know how to do it and pay the transaction costs. Even selling the stock immediately would have raised eyebrows. “What, you don’t believe in our company?!?!?” Fortunately, I worked in an financially savvy department where I could at least say out loud the argument that shorting stock is a better option than receiving it, since a company downturn would lead to a layoff and a portfolio loss at the same time. Still wouldn’t have done it, though.

  7. 7 7 Sub Specie Æternitatis

    @eric I hear you and I can certainly imagine peer pressure preventing people from doing the reasonable thing.

    Also, you are absolutely right that most employees ought to be short their company for the reason you state. The only exception to that rule would be a handful of top managers who ought to be required (by the board as a condition of employment, not the law!) to hold a large fraction of their net worth in company stock.

  8. 8 8 Harold

    “Expanding profit-sharing – by offering incentives to help businesses cover the initial costs of setting up a plan and overcome the inertia of a “business as usual” mentality – would be a win-win for America’s workers and businesses.”

    Surely this provides at least a partial answer to the market failure. Barriers to entry or costs of transaction.

    If profit sharing reduces inequality in society in general, and inequality is a bad thing, then we have an externality. Another market failure. Maybe debatable, but certainly a reasonble possibility.

    People have time inconsistent preferences. This could result in market failure on long term choices such as wage rates.

    Profit sharing is one answer to the market failure of principle-agent problem. From wiki “Various mechanisms may be used to align the interests of the agent with those of the principal. In employment, employers (principal) may use piece rates/commissions, profit sharing…”

    These may not be secifically spelled out, but that’s politics.

  9. 9 9 Sub Specie Æternitatis

    @Harold

    Yes, incentives can and should be used to address the principal(!)-agent problem. But for large organizations, giving every employee a de facto stake in the value of the whole organization is a terrible way to go about this, because for most employees their impact on the value of the organization as a whole is so tiny.

    Let’s be concrete. Imagine you are a line employee of Exxon Mobil (market cap ~$380b). As part of a profit-sharing plan, you are given the equivalent of a one millionth ownership of Exxon. That is a huge incentive share, both from your point of view (being the equivalent of an asset worth $380,000) and from the point of view of Exxon Mobil (giving such shares to tens or hundreds of thousands of workers corresponds to giving away a substantial fraction of the entire value of the corporation). So you could hardly ask for an even bigger share of Exxon Mobil being given to every worker.

    But how much does this huge incentive do to align your interest with that of the company? Trivially little.

    Imagine you could make an unobserved decision to make a choice that results in a cost to you but a benefit to the corporation (e.g., being extra careful in unloading some crates, even if that means your being late for dinner with your family).

    If your incentives and the company’s were perfectly aligned, you’d make that choice purely on the basis of whether the costs exceed the benefits, regardless of who pays/receives them. If the incentives are completely non-aligned, you act purely on the costs/benefits you personally pay/receive.

    So how far does the profit-sharing plan move your incentives from completely unaligned to completely aligned? By one-millionth! The profit-sharing plan will only induce you to value the benefit to your employer higher than the cost to you, if the former is 1,000,000 larger than the latter.

    Situations in which you, at a cost of $1, can save your employer $1 million are somewhere between exceedingly rare to non-existent. And, in any case, choosing $1 in your pocket, even if costs an associate $1 million, is probably a sign of psychopathy.

    Hence, profit-sharing for line workers in large organization is not an answer to the principal-agent problem. The sole exception are a handful top executives who (a) can be given the equivalent of a no-trivial share of the whole corporation and (b) with some frequency make unobservable decisions which materially affect the value of the entire organization.

  10. 10 10 Ken B

    Mike H makes a common logical error.
    “Clinton’s plan doesn’t force anyone to do anything. Instead, she proposed reducing the corporate tax for companies that share profits. Aren’t tax breaks for business a good thing?”

    They are, but that doesn’t mean selective ones are. You can see that easily in countless examples.

  11. 11 11 Steve Landsburg

    Harold: I endorse Sub Specie’s excellent response to your comment. Just one more thing. You wrote:

    If profit sharing reduces inequality in society in general, and inequality is a bad thing, then we have an externality.

    How could profit sharing possibly reduce inequality? We go from a system where all workers performing the same job earn $100 a week to a system where workers performing that job at one company make $75 while workers performing that same job at another company make $125. That looks like more inequality to me.

  12. 12 12 Steve Landsburg

    Ken B:

    They are, but that doesn’t mean selective ones are.

    This really shouldn’t need to be said, but I’m still glad you said it.

  13. 13 13 dave smith

    The research that backs this up (I’ll admit I have not read it) almost has to be subject to selection bias and from the fallacy of composition. Companies that would most benefit from profit sharing are already doing it and those that would not benefit are not doing it. Furthermore, if EVERYONE did it, then it might cease to be a good idea.

  14. 14 14 Joel

    Playing devil’s advicate: everyone is better off with profit sharing, and those who don’t choose to participate by buying stock simply don’t know what’s best for them, so need government to intercede on their behalf. Liberals reject the rational choice assumption.

  15. 15 15 Advo

    @Sub Specie
    You assume perfect rationality, but human beings aren’t perfectly rational. Nowhere close.
    If human beings acted perfectly rationally – and without scruples – large companies couldn’t exist. Given the sprawling nature of such organisations and the massive internal information problems they involve, if everyone (or even the majority) of employees in them was only out strictly for themselves and didn’t care what happened to the whole, such companies would be extremely inefficient.

  16. 16 16 Sub Specie Æternitatis

    @Advo You are right. When I do economic analysis, the basis will be that the actors will act rationally to advance their own interests. I do so not because this assumption is self-evidently true, but because it is only way to reason about how people will respond to changed circumstances; the irrational may do anything–”Interest rates up? Then I shall eat more bananas!”–and are therefore hard to predict and impossible to predict confidently.

    However, this assumption–as you note–is certainly not self-consciously true. Most people in their own minds certainly don’t make decisions by calculating and maximizing the expected value of their utility function. They claim to be, and in many instances actually are, swayed by reasons and instincts that are hard to describe as self-interested without defining utility functions so arbitrarily as to render them useless for analysis. (“Why did the chicken cross the road? Well, its utility function must have a positive factor for being on the other side.”).

    So why bother doing rational analysis or economics at all? In some cases, because these particular actors really are self-consciously acting like homo economicus (think of hedge fund traders who really are just trying maximize their expected portfolio value). But more generally, because of the strongly-supported empirical fact that most people on average in the long run by means of a complex and not-fully-understood social and cultural process tend to act as if they were homo economicus on matters which directly affect them, even if they are entirely unaware of them. In time, people find and sincerely embrace rationalizations for acting as if they rationally responded to economic incentives, even as they will heatedly deny doing so.

    For example, do teenage thugs considering whether to rob the local liquor store collect extensive statistics on odds of success, average cash takes, odds of apprehension, odds of conviction, average imposed prison sentences, and the long-term effect on earnings potential of incarceration? Of course not! Yet, almost as if by magic, the aggregate incidence of liquor stores robberies responds to these factors as if teenage thugs made exactly such a calculation.

    A classic paper, some of the ideas of which I have doubtlessly butchered above, is https://www.researchgate.net/profile/Tony_Lawson2/publication/227390811_What_Has_Realism_Got_To_Do_With_It/links/02e7e52fa60c0732f8000000.pdf#page=154

  17. 17 17 Sub Specie Æternitatis

    @Advo

    And let me add to your specific point: Yes, large organizations really are massively inefficient for the very reason you state: individual’s incentives are not aligned with the organization’s and so will often act in inefficient ways. This is so, even despite the substantial (and costly) investment into aligning incentives (supervision, performance evaluation, bonuses, etc.).

    So why do large organization still exist? Because totally atomized individual transactions involve substantial transaction costs which may outweigh even the large inefficiencies of large organizations. Note that as transaction costs are declining in many markets due to technological advances (cf, e.g., Uber, AirBNB), we observe a shift towards smaller organizations and even individual dealing, just as this theory would predict.

    The classic paper on this subject is of course: http://www3.nccu.edu.tw/~jsfeng/CPEC11.pdf

  18. 18 18 Harold

    Sub Specie. From wiki “In the US, small businesses (fewer than five hundred employees) account for more than half the non-farm, private GDP and around half the private sector employment.” The likes of Exxon do not employ most people.

    Steve: the inequality we are concerned with is not between the different workers but between the workers and employers and owners. If we take some money from the owners and employers and give it to the workers we reduce inequality, even if we inadvertantly make eveyone worse off.

    Even if these are struck out we still have the other other market failures I mention.

  19. 19 19 Josh

    Most certainly Clinton has some silly positions on several issues like perhaps on equal pay and probably the issue you just raised. But the alternative right now is Trump. And he is much more scary economically than Clinton. He wants to build a wall on the Mexican border for goddsake and repeats this over and over. He hates immigration (otherwise he’d talk of making immigration laws less complex/onerous, instead he simply says legal is ok illegal bad) and hates free trade. He has made THE cornerstone of his campaign. I hope to god Clinton is the next president if nobody else decides to run.

  20. 20 20 Advo

    <<<>>>

    The fact that you have to make incorrect assumptions because otherwise you can’t use models isn’t exactly a good argument for making incorrect assumptions, is it.

    Didn’t we just recently conclude on this blog that by rights, nobody should be voting? There’s absolutely no way that is a rational use of an individual’s resources. If people do something as stupid and wasteful as voting, how can we conclude that they won’t alter their behavior in response to profit sharing?

    <<<<But more generally, because of the strongly-supported empirical fact that most people on average in the long run<<<<

    That may be true, sort of, but for a great many purposes this observation is no more useful than the observation that, on average, the Rocky Mountains are flat.
    In my experience economists are, on average, not so good at identifying where their incorrect assumptions produce useless conclusions.

  21. 21 21 Sub Specie Æternitatis

    <>

    Who said that voting was stupid and wasteful?

    If you enjoy the process–or perhaps more generally, get a warm fuzzy feeling from having participated–voting is no more stupid than going to church or attending a football game.

    The only thing that is stupid would be to vote because you believe that your vote influences the outcome.

  22. 22 22 Harold

    Sub Specie. The Coase is of course a classic. The Lawson I am not familiar with. You don’t have a link to the full text? Or a good introduction to Critical Realism?

    Wiki says “Tony Lawson argues that economics ought to embrace a “social ontology” to include the underlying causes of economic phenomena.” That sounds reasonable.

    Geofrey Hodgson quotes Lawson: “Substantive explanations, then, even when serving illustrative purposes, ought not be tagged ‘critical realist’. Nor, incidentally, should they be interpreted as constituting evidence by which the critical realist explanatory framework is itself to be assessed. . . . In short, the examples and
    discussion which follow merely provide. . .an indication that explanatory endeavours consistent with critical realism are feasible in the social realm.”
    Which seems well short of “proof”. Hodgson goes on to criticise Lawson’s claims for the philosophical approach, particularly his claim that the decline of British manufacturing illustrates the approach.
    http://www.geoffrey-hodgson.info/user/image/critrealecon.pdf
    You say “Yet, almost as if by magic, the aggregate incidence of liquor stores robberies responds to these factors as if teenage thugs made exactly such a calculation.”
    Yet there is world of difference between teenagers responding to incentives by for example by slightly reducing offending in the face of tougher sentences and these incentives being the only or indeed major explanation of the behaviour. Simply compare crime incidence across different cultures. You could respond with the catch all caveat that incentives differ in different cultures, but you then seem to be back to the chicken crossing the road problem. I don’t think this illustration gets us anywhere close to the claim that individuals act as though they were rationally reacting to economic incentives in the main. Yes, there is some apparent response, but that could be a very small part of the explanation.

    To summarise, I think you are far short of refuting Advo’s arguments.

  23. 23 23 Ken B

    @21
    Next you’ll tell me my attendance doesn’t affect the football score.

  24. 24 24 Harold

    On voting. The rational analysis that voting is pointless because your vote will not make any difference is difficult to argue against. However, it seems to miss something very important that undermines the entire economic approach. Democracy depends on something approaching a representative cohort voting. It seems a bad idea that all rational people do not vote, leaving it entirely up to the irrational to select the government.

    Compare this with the Australian system of compulsory voting. There is a relatively small penalty for not voting but most people respond to this incentive and vote rather than pay the penalty. You are free to spoil your vote if you want as long as you turn up. All rational people now vote. Who is going to end up with the best government? The country where only irrational people vote or the one where everyone votes?

    If we do an analysis based on the individual as the unit, we cannot justify compulsory voting. Yet it is seems clear that the country with compulsory voting will end up with a better government. I am not sure how to square this circle, but it seems clear to me that this illustrates that analysis based on individuals is missing something.

  25. 25 25 Sub Specie Æternitatis

    Drat! Harold just brought it to my attention that the link I posted above directs to an anthology when clicked on directly, rather than the essay starting at page 154: Milton Friedman’s The Methodology of Positive Economics (which is a classic, regardless of the status of the anthology as a whole).

    My apologies for the confusion.

  26. 26 26 Sub Specie Æternitatis

    @KenB @21 Bite your tongue! My team always wins if I cheer loudly enough while wearing my lucky shoes.

    @Harold @24

    You may be right that democracy would fail even more dramatically if everybody was aware of the arguments demonstrating the irrationality of voting in hopes of affecting the outcome.

    You’d also be right to say that lottery systems would fail if everybody was aware of the arguments demonstrating that they are more likely to be hit by a truck on the way to the lottery place than to purchase the jackpot ticket there.

    In both cases, I would consider that to be far more telling against the underlying systems, democracy or lotteries, against than the critical arguments.

  27. 27 27 Harold

    Sub Specie. I think that the lottery could disappear with little effect. It would not need replacing. If democracy disappears we need an alternative way to select government.

  28. 28 28 Dave

    I think first you should apologize for making a straw-man argument. You know perfectly well the difference between a tax credit and mandatory profit sharing, yet you posed the argument as if it was mandatory.

    This is what is known as “lying”. Not just in blogging, but everywhere.

    If what you really meant to do was make an argument against the government subsidy of profit sharing, you didn’t.

  29. 29 29 iceman

    Harold — on compulsory voting I would say an uninformed vote is clearly worse than not voting at all, would play well to the worst forms of populism. On the irrationality of voting, I recall reading that a famous mathematician (Laplace?) said he didn’t vote because the probability of his vote mattering was negligible. To the response “but if everyone thought that way…” he replied the probability of that was negligible as well.

    To me the whole issue of rationally ignorant voting is really a strong argument in favor of keeping as many matters as possible as local as possible.

  30. 30 30 Harold

    iceman- Laplace seems to be saying that his level of rationality is only going to be attained by vanishingly few members of the population, so is not a threat to democracy. However, Laplace was not aware of the persuasive talents of Landsburg, nor the mass communication methods of the internet. Thus his defence no longer applies. It is quite possible that the risk of rationalism undermining democracy is no longer negligible.

  31. 31 31 Harold

    Sub specie, Is this the article?
    http://www.sfu.ca/~dandolfa/friedman-1966.pdf

  32. 32 32 Sub Specie Æternitatis

    @Harold, it is. It can also be found at the original link I posted, it just requires a few more clicks to get to page 154 of the anthology.

  33. 33 33 Khodge

    I agree with Clinton 120%. Everyone knows that politicians with nearly zero real business experience can make a company more profitable by legislating best practices. This fact has been proven in the argument for a $15 minimum wage.

  34. 34 34 Scott H.

    I have a profit sharing plan in my company tied to my 401k account. It really has nothing at all to do with the company stock. Each year profit sharing (in dollars deposited to my 401k) is a company option. I get paid in profit sharing (more tax advantageous) or through a direct bonus payment — if any profits or bonuses are going to be paid.

    The decision on how much bonus goes to direct pay and how much goes to profit sharing depends on a combination of what is best for the existing stockholders, and the most tax advantaged way to compensate employees.

  35. 35 35 Khodge

    I’m not sure of the law but companies do not offer their stock precisely because it is a bad idea. If, for example, you were employed for 20 years, your 401k would be large and well diversified, assuming reasonable investment and saving practices. If all of your money goes to your company’s stock, when the company collapses due to mismanagement or market forces, you’re training for a new career rather than retiring.

  36. 36 36 Ken B

    @iceman 29
    To my shame I had never thought of that last point.
    I think that a compelling argument in jurisdictions where I live, but less compelling in those where Harold lives.

  37. 37 37 Harold

    Sub specie. Friedman seems to be basically saying what Box said. All models are wrong, but some are useful.

    There is a wealth of difference between incomplete models, such as not including trader’s hair color, and proving the basic assumptions wrong. If we know the basic assumptions re wrong we know the model has failings. It may still be useful

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