Candidates run from, are ignorant about, and mostly just ignore the national debt

There have been few signs that the three remaining presidential candidates seeking to capture the nation’s commanding heights are willing to confront the subject of America’s public debt, which has grown to over $19 trillion, more than the gross domestic product. It is estimated that by 2023, entitlement payments, military spending and interest on the debt will consume 100 percent of tax revenues.

All three have behaved like they know less than zilch about the subject. Assuming the final match-up is Hillary Clinton versus Donald Trump, you get to choose from two disliked candidates who give egomaniacs a bad name. All in all, this match-up is not a battle of good against evil. It is a choice between bad and less bad.

When it comes to the debt, all three remaining candidates have behaved like Scarlett O’Hara in “Gone with the Wind” who reacted to every adverse circumstance with the statement: “I can’t think about that right now. If l do, I’ll go crazy. I’ll think about that tomorrow.”

Donald Trump, the presumptive Republican nominee, did wade into the subject several weeks ago. There are a thousand things you can say about Trump, some of which you can even print in newspapers. But we have come to know one thing above all else: He’s going to say what is on his mind.

Several weeks ago, Trump made the stunning suggestion that maybe Uncle Sam can save a few shekels by renegotiating the public debt and paying back holders of United States bonds less than 100 cents on the dollar. Such action would be tantamount to a default. His proposal overshadows everything he has said about the economy. It was greeted as lunacy and created quite a kerfuffle in global financial markets, which found his suggestion as enticing as exploratory surgery.

Despite concerns about the United States putting its fiscal house in order, Treasury securities are seen as among the world’s safest, if not the safest, debt because they are backed by the full faith and credit of the United States government. No other investment carries as strong a guarantee that interest and principle will be paid in full and on time.

Responding to the tsunami of ridicule that greeted this absurd suggestion, Trump walked back his comments the following day, saying he never meant to suggest he wanted the United States to default on its debt.

Some perspective is in order here regarding who owns our nation’s debt. American stakeholders own nearly $13 trillion of the more than $19 trillion. More than $5 trillion is held by trust funds such as Social Security and the Highway Trust Fund; $5.1 trillion is held by individuals, pension funds and state and local governments; and the balance of$2.5 trillion is held by the Federal Reserve.

Of the remaining $6.2 trillion, China holds $1.3 trillion, followed by Japan with $1.1 trillion, and the $3.8 trillion that’s left is held by other countries such as Saudi Arabia, with $117 billion.

Foreign governments don’t own us; we owe us.

While nobody knows for certain what would happen, failing to pay creditors anything less than the full amount owed undermines the very notion of the full faith and credit guarantee of United States government sovereign debt. Americans whose savings and retirement accounts include treasury bonds would be hurt. International investors would panic and raise future borrowing costs for the United States government by demanding higher interest rates since the debt would be seen as a less safe investment. This would prompt interest rates around the globe, which are often tied to U.S. treasuries, to spike. After all, U.S. treasuries are the pillar of the global financial system.

Sadly, it’s time to toss in the towel, the tablecloth and the rest of the accoutrements and admit it: We got these candidates to this point; they are what the American public deserves.

Originally published: May 28, 2016

Stock options for executives carry unintended consequences

If you are Rip Van Winkle awakening from a 20-year slumber, you might not know about America’s outrageous compensation for chief executive officers. But almost everyone else does. The flow of most income and wealth gains to the few highest earners comes at the expense of everyone else.

Let’s not forget that Americans’ real median incomes have been stagnant. Annual U.S. household income reached $57,263 this past March but is still below the $57,342 median in January 2000, according to Sentier Research. Any wonder why Americans are angry?

In contrast, a recent AFL-CIO study found that heads of the Standard & Poor’s 500 companies are paid about 330 times as much, on average, as production and non-supervisory employees.

CEO compensation took off in the 1990s because activist shareholders, board members and academics, all mating like alley cats, pushed to better align management’s interests with those of shareholders. So corporations began to award stock options to senior managers

Executive stock options have been a controversial topic for some time because of the fortunes executives have made under these programs. Stock options come in several forms. In the most common, executives granted stock options have the right but not the obligation to purchase shares of their company’s stock at a favorable set price within a specified time period.

Stock options are often used in lieu of signing bonuses as a tool to attract talented executives. In theory, they also align shareholder and management interests. The idea is that granting stock options gives executives skin in the game and creates incentives for them to make decisions that lead to higher stock prices. Vesting periods for options give current managers incentives to remain with the firm.

While beneficial in some ways, this formulation has its downsides. It tempts executives to focus on the short term at the expense of long-term shareholder value. Let the next guy worry about the Ohio factory whose leaky roof should have been replaced years ago while management focuses on managing quarterly earnings figures to meet investor expectations and lift stock prices. Management may decide not to invest in research and development on projects whose payoff is down the road.

Recent revelations about Valeant Pharmaceuticals International offer a treasure trove of teachable moments. Conventional pharmaceutical companies spend about 20 percent of sales on R&D for new drugs. Valeant executives devoted only 3 percent to R&D. The firm also had to restate its 2014 and 2015 earnings because millions in sales had been recognized during the wrong period and an array of costs excluded to allow it to report fantasy earnings of $2.74 a share when each Valeant share earned 14 cents.

But wait, there’s more. While CEO Michael Pearson received a base salary of $2 million, his executive pay was tied to Valeant’ s stock price. He owned stock and options worth more than $3 billion, putting him on the Forbes billionaire list before the recent scandal crushed the stock.

Today’s business world is a playground for feckless conduct that pats you on the back for behaving badly. Maybe it is time to put an end to that by prohibiting hired gun managers from buying and selling stock in their companies, just like we bar professional athletes from betting on their own games. In lieu of stock options, give them big cash salaries plus generous bonuses linked to how profitable their companies are over several years as an incentive for them to manage for the long term.

When future historians look whether stock options are an effective way to align the interests of managers and shareholders, they will ask some basic questions: Do they motivate executives to act in the best interest of shareholders? What costs do stock options impose on the company and its shareholders?

The answer is that they may indeed accomplish those things, but with a lot of unintended consequences.

Originally published: May 14, 2016