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Real World Economics: Dangerous incentives for Cabinet appointees are fact of life

Joe Biden’s Treasury secretary nominee Janet Yellen earned $7 million for speeches, mostly to financial corporations, since leaving the Federal Reserve two years ago. Should citizens be concerned about her impartiality while heading one of the four foundational Cabinet positions specified in the U.S. Constitution?

Edward Lotterman

It troubles me. And I do think receiving that much from the banking system should bar anyone from heading the Fed, which directly regulates that sector. However, our history is full of Treasury secretaries who had earned great wealth from companies and sectors that they then oversaw. $7 million is a lot of money, but, adjusted for inflation, paltry compared with past examples.

So, “What is the ‘economics’ in this?” a friend asked when I voiced this concern as a possible column subject. Well, economics studies how people respond to incentives.

Clearly, if an official is offered a bribe to make a public policy decision, there is a financial incentive to do wrong. If swayed, they violate oaths of office and commit crimes. But, what if past pay for nominal services like speeches after fancy lunches in luxurious skyscraper offices merely give public decisionmakers more favorable views of the companies in question? Some compare such speaking honoraria several times above normal to food samples at supermarkets. Food makers offer these so shoppers buy products, even if the payoff is months down the road.

Such anticipation of future bounty is an old problem in defense procurement. A high-level civil servant may scrupulously administer the purchase of a new jet fighter or destroyer. But, if they know that after their government retirement, they might be offered a job by Boeing or General Dynamics paying four times their current salary, is there an incentive be more “flexible” in analyzing and enforcing the contract? This is especially salient if, over the years, they have seen one colleague after another cash in like this.

So yes, there are concerns about incentives if a Cabinet appointee has earned more over two years giving standard speeches than most people earn in a lifetime.

On the other hand, the nation needs Treasury secretaries with deep understanding of the general economy and of banking and finance. This should include practical experience, not just academic research. It is near impossible to find such people without past or prospective ties to private corporations.

In fact, naming high-level executives from banking or investment firms to head Treasury is common. The incumbent, Steven Mnuchin, is a case in point. He came to the Trump administration as a hedge fund manager after a legacy executive stint at Goldman Sachs. Donald Regan, Treasury secretary for Ronald Reagan, had headed Merrill Lynch for a decade and owned tens of millions in stock. C. Douglas Dillon, who served in the Kennedy and Johnson administrations, was in the family that owned Dillon, Read & Co., an important investment bank now part of UBS. That ownership also was worth tens of millions. Andrew Mellon, serving 11 years under Harding, Coolidge and Hoover, owned Pittsburgh-based Mellon Bank and much of of Alcoa Aluminum, which he had helped found. Dillon and Mellon’s ownership stakes continued while in office and they returned to run their companies later.

In comparison to this level of private-sector wealth, Yellen’s speaking honoraria are piffling. Ditto for those of Lawrence Summers, who was criticized by Harvard faculty for accepting $135,000 for a talk to Goldman Sachs while president of the university and then taking a retainer from the bank for thousands of dollars a month.

One must understand that people like Yellen, or unnamed procurement contract managers in the Pentagon, are human beings. Russian Bolshevik revolutionary Leon Trotsky had a good insight in observing: “When it starts to rain rubles from heaven, even the most diligent commissar will make sure his bowl is turned right side up.” Regardless of politics or temperament, most people take advantage of legal opportunities for money when offered.

Yellen taught college economics at Harvard and Berkeley for years. A distinguished scholar, she earned well, but only a fraction of what 30-year-old Wall Street traders did. And since Fed governors are subject to the same pay limits as generals and members of Congress, she probably took a pay cut when Bill Clinton named her to the Fed Board in 1994. That continued when she headed his Council of Economic Advisors from 1997-1999.

After a few years back at UC-Berkeley, she became president of the San Francisco Fed. Since Fed district banks are private corporations, there are no federal salary caps. Their presidents earn substantially more than anyone at the Board of Governors. But in 2010, she was back at the Board earning about $180,000 as Vice-Chair and $203,000 as Chair. Beaucoup bucks to most Americans, but someone with her experience and contacts could have gotten 10 times that at a bank or investment firm.

So, after stepping down at age 71, with a first-term president who repeatedly had excoriated her (and her successor) and thus was probably not likely to be offered another administration job, and retired from decades in academia, why not accept money offered for what she had done as part of moderately paid jobs for years?

She is not culpable in any way. Yet one can also sympathize with the average citizen who saw Wall Street firms treated with kid gloves in the aftermath of the financial debacle a decade ago, saw hundreds of thousands of ordinary families foreclosed upon, and therefore, justifiably, concludes the system is not fair.

Ditto when hearing about ex-civil servants or lieutenant colonels who triple their salaries at Boeing. They probably never favored the corporation in any way and were hired for great expertise in the minutia of selling hardware to the Pentagon. Yet incentives for malfeasance, great or small, do exist.

Yes, there are measures, like two-year bans on bureaucrats accepting jobs with companies with which they dealt directly. But these are mere palliatives and, in practical terms, impossible to implement at the Cabinet level. It’s a problem we must live with.

St. Paul economist and writer Edward Lotterman can be reached at


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