Monday, May 15, 2006
America is Restricted (Not Addicted) to Oil
When President Bush first declared that “America is addicted to oil” it sounded about right to me. But after months of repetition, the once clever analogy now strikes me as the wrong diagnosis. We aren’t addicted to oil. We’re restricted to oil.
There is a significant difference between the two conditions. Addiction is a compulsive need for a habit-forming, harmful substance. Our need for energy is neither compulsive nor harmful to us. We require energy to heat our homes, to cook our food, to power the industries that employ us and to move us between home and work. These activities are habit-forming only in the sense that we are in the habit of staying alive and making a living. It’s true that we could and should be more efficient in our use of energy, but energy consumption is not an addiction, it’s a necessity.
It might seem like meaningless word-parsing to point out that we are not technically addicted to oil. But we can’t get beyond this recurring crisis until we clearly understand how we got into this mess in the first place. In retrospect, it’s obviously shortsighted that any country would allow itself to become so dependent on one source of energy. And it’s downright suicidal to rely on foreign governments who are openly hostile to American interests for our primary source of energy. Year after year, we willingly transfer a significant portion of our national wealth to dictators and otherwise corrupt governments who in turn use our money to enrich themselves, perpetuate their corruption and oppose our interests at every opportunity. If that isn’t the official definition of stupid it should be.
Our strategy of letting free market forces determine the most cost effective sources of energy is seriously flawed. The oil market is not a free market. It’s dominated by cartels that manipulate supply. They cleverly raise and lower supply to ensure maximum profits while at the same time taking care that the price of gasoline doesn’t go so high that alternative energy sources would be an attractive investment for private enterprise.
Though we are not addicted to oil, there are two underlying national addictions that perpetuate the energy crisis. One is our addiction to living for today at the expense of economic health and security tomorrow. The other is an addiction to pandering that afflicts our elected officials. We are short-sighted pocketbook junkies and our leaders keep passing us the needle loaded with another feel-good dose of flawed energy policy.
The President and Congress need to stop pandering and start leading. This is an opportunity made-to-order for a President who wants to be remembered for taking on the big problems. Mr. President, it’s time to stop bunting the runners along and start swinging for the fences — and the only fence within our homerun range is ethanol. So let’s get on with it. Ford and General Motors already manufacture automobiles that run on either gas or ethanol. We should require this flex-fuel capability in every new car sold in America, including imports. If we need to provide subsidies for domestic automobile manufacturers, ethanol producers and fuel distributors to make the ethanol alternative cost effective, do it. As the price of gas decreases in response to declining demand created by the ethanol alternative, increase taxes on gasoline to keep it from undercutting ethanol sales. The new gas tax revenue would easily pay for the initial investment required to force ethanol into the energy marketplace.
Most of us wish that government intervention in the marketplace could be avoided. But it’s time we face up to the fact that there are times when it’s necessary. And this is surely one of them. Let’s hope our pandering leaders find the backbone needed to end America’s restriction to oil.
Monday, May 01, 2006
CEO Compensation: A Shameful Conspiracy of Greed
The trial of former Enron executives Ken Lay and Jeffrey Skilling is the latest reminder that government oversight of unscrupulous executive behavior is unfortunately necessary. But only a relative handful of executives participate in illegal behavior. We should be more concerned with the legal pillaging of corporate coffers by CEOs and other corporate officers that occurs every day. Illegally cooking the corporate books is a rarity. Excessive executive compensation is anything but rare.
From the annual Forbes CEO compensation report we learn that Terry Semel of Yahoo landed the top spot in 2005, earning $230.6 million. John Hammergren of McKesson is Semel’s bookend in the top 100, with compensation of $13.4 million.
A simple list of very large numbers can numb the mind and obscure the enormity of the problem. To illustrate how grossly excessive CEO compensation is, I’m going to pick on Richard Fairbank, CEO of Capital One Financial, and number ten on the Forbes list. You’ve probably heard Capital One’s commercial slogan, “What’s in your wallet?” Well, I don’t know what’s in your wallet, but thanks to Forbes I do know what’s in Mr. Fairbank’s. And I’m sure you’ve never owned a wallet like his. His compensation in 2005 was $56.7 million and over the past five years it totaled $226.3 million.
If we assume that Fairbank paid his fair share of taxes, his disposable income last year was around $31.2 million, and over the past five years it totaled $124.5 million. Contrast that with a median U. S. household income of approximately $45,000. If the discrepancy doesn’t immediately offend you, perhaps a little real world perspective will.
Every American household has three primary expenses: food, shelter and transportation. At $45,000 per year the average American has income sufficient to purchase food, but must acquire shelter and transportation on credit. For most Americans it will take 30 years to purchase a home and five years to purchase a car.
Contrast that with the purchasing power of our representative CEO. How many homes or cars could Mr. Fairbank purchase with the $31.2 million he “earned” last year? If we assume the average home price is around $200 thousand, even if we reserve an excessive amount for food, Fairbank can purchase 155 average homes. If Fairbank prefers to spend his money on transportation, assuming the average automobile costs around $20,000, he could buy 1550 automobiles. That’s purchase. Free and clear. No mortgage and no car payments.
And that’s only one year of compensation. It’s even more shocking when you consider that the $124.5 million he accepted over the past five years translates into 620 homes or 6200 automobiles.
Such greed is not only shocking, it’s disgusting. Nobody needs that kind of wealth and certainly no public company can justify the transfer of corporate assets of this value to one individual. Every dollar that goes into a CEO’s wallet is money that could have gone to employees, shareholders or investment in the business.
How is this legal pillaging of corporate assets accomplished? It’s simple. The fox is guarding the henhouse. Boards of directors determine CEO compensation and boards are mostly composed of CEOs or former CEOs of other businesses. Every time a board votes to increase a CEO’s compensation, the compensation bar is raised for every CEO. Board members return to their day jobs as CEOs and wait for their own boards to recognize it’s time for another raise for their CEO. This self-serving escalation of executive compensation is nothing less than a shameful conspiracy of greed.
The recent Securities and Exchange Commission proposal to require additional disclosure of executive compensation in annual reports will do nothing to curb the pillaging. The only people who actually read the fine print in such documents are wealthy investors who are quite willing to go along with this conspiracy. I’m not sure what ought to be done about it, but it might be a good start to require that every CEO hold an annual company meeting of all employees. The only topic of discussion would be executive compensation. The CEO and each member of the board would stand up and state how many average homes or cars could be purchased with his or her compensation of the past year. Maybe a little bit of shame could go a long way toward curbing this shameful conspiracy of greed.