Archive for January, 2012

rejection letters

Tuesday, January 24th, 2012

[S]ometimes a brutal rejection is better. Antony Sher often describes the letter he got from the Royal Academy of Dramatic Art that said: “Not only have you failed the audition and we do not want you to try again, but we seriously recommend that you think about a different profession.” ….

The best rejection letter I ever received contained a reason I will never forget. I had written to a Mr Ivan Sallon, city editor of the Sunday Telegraph, asking for a job. He replied saying that there were no vacancies and went on: “May I offer you a word of advice? When applying for a job, do take care to get names right.” The letter was signed: Ivan Fallon.

Lucy Kellaway, “If you have to reject me, tell it to me to straight“, Financial Times, 23 January 2012.

A reader responds with the following letter:

Sir, Lucy Kellaway is quite right in saying that rejection letters should give reasons …. However, this has to be done tactfully. I will never forget the rejection letter I received from a consulting company that interviewed me right after university. It stated: “In our business, we need spark or depth; sadly, you have neither.” ….

Ms Kellaway’s column also reminded me of two other memorable letters I have received in the past. One, many years ago, came from an American company. After the usual drivel about many high calibre candidates and all that, it ended with an upbeat note stating that it would “contribute your CV and cover letter to the local recycling program”.

The other company simply stated that it had received my application and would keep it on file for a suitable role. At the bottom of the page were the words: “C:\My Documents\rejection.doc”!

Jem Eskenazi, “Rejection has to be done tactfully“, Financial Times 24 January 2012.

a theory of financial crisis

Monday, January 23rd, 2012

A former British academic argues that the current financial crisis happened because psychopaths, who lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people”, took over the financial instructions.

It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame. ….

[Clive] Boddy argues in a recent issue of the Journal of Business Ethics [that] such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”

How do people with such obvious personality flaws make it to the top of seemingly successful corporations? Boddy says psychopaths take advantage of the “relative chaotic nature of the modern corporation,” including “rapid change, constant renewal” and high turnover of “key personnel.” Such circumstances allow them to ascend through a combination of “charm” and “charisma,” which makes “their behaviour invisible” and “makes them appear normal and even to be ideal leaders.”

William D. Cohan, “Did Psychopaths Take Over Wall Street Asylum?“, Bloomberg View, 2 January 2012.

Sounds reasonable to me.

HT: Michael Obersteiner

Vicente Fox on universal pensions in Mexico

Sunday, January 22nd, 2012

Back in 2005, when the Mayor of Mexico City (Andrés Manuel Lopez Obrador) launched his campaign for the presidency, the incumbent President attacked AMLO’s plan to offer provide cash pensions to every resident of Mexico from the age of 70. Fox was a member of the conservative PAN. Its candidate, Vicente Calderón, won a disputed election in which AMLO finished a close second.

President Vicente Fox yesterday criticized the programme of support to the elderly provided by the government of the city of Mexico….

With that we cannot construct schools, universities nor hospitals, the chief executive complained.

…. “To me it seems terribly unjust that some persons, solely because they happen to be elderly, receive money from those who are working”, he explained.

For the head of Government what should be encouraged, in the case of pensions and retirement, is that “during their productive life people do just a little bit of saving, because otherwise a chilling amount of resources will be needed” [from the State].

…. [T]he president announced that he would submit to the Congress an initiative to bring those who work in the informal sector into the tax collection system [i.e., force them to pay taxes].

Apoyar con dinero a ancianos es ‘terriblemente injusto’, expresa Fox“, La Jornada (Mexico, D.F.), 13 March 2005.

Just a few hours after President Fox spoke …, the Mayor of Mexico City, Andrés Manuel Lopez Obrador, emphasized that the universal citizen’s pension constitutes a measure of justice for those who have worked and contributed to the support of the country.

…. During his speech… he [the Mayor] pointed out that “even the World Bank advises other governments to copy the universal citizen’s pension developed in Mexico City. And they (the federal government) now say that it is unjust “.

…. He also said that “technocrats only bring bad examples from abroad, but they should also notice that European countries grant universal pensions from the age of 65 years”.

Bertha Teresa Ramirez, “López Obrador: con austeridad, viable en todo el país la pensión universal“, La Jornada (Mexico, D.F.), 14 March 2005.

Originally posted in 2005, when TdJ was distributed only as group email. Translated freely from the Spanish by Larry Willmore. The links above are to the full articles. If you are able to read Spanish, you will enjoy them. I have translated only short segments of each article.

This, in Spanish, is a key statement that President Fox made in his radio address to the nation:

A mí me parece terriblemente injusto que a otros, simple y sencillamente por estar como adultos mayores, se les cubra con el dinero precisamente de quienes trabajan.

And this is my translation:

To me it seems terribly unjust that some persons, solely because they happen to be elderly, receive money from those who are working.

In Mexico it had been traditional for incumbent Presidents to remain aloof from politics, but Fox did not respect this tradition. He seized every opportunity to attack AMLO and support the PAN candidate.

Incidentally, AMLO is once again running for President, promising a universal age pension that reaches all Mexicans. The recent initiative of Calderón – extending 70+ pensions to urban areas – takes the wind out of AMLO’s sails. The timing could not be worse (for AMLO).

non-contributory pensions in Mexico

Sunday, January 22nd, 2012

It is difficult to keep up with events in Mexico. The pension scene changes almost daily.

The extension of the rural 70+ scheme to urban areas is now official, and was communicated to the nation last Tuesday (17 January) by President Felipe Calderón, speaking in Naucalpan, a city located just northwest of Mexico City in adjoining State of Mexico which – in sharp contrast to Mexico City – offers no pensions to its elderly citizens. Anyone who receives an earnings-related pension from the social security system (IMSS) or from the civil service (ISSSTE) is not eligible for an urban 70+ pension. Urban pension benefits are identical to those of rural pensions – $500 pesos (US$37) a month – but urban beneficiaries will receive bi-monthly credits on a debit card, whereas rural beneficiaries receive benefits in cash or direct deposits.

Will rural pensions now be pension-tested as well? This is not clear. The government’s 70+ webpage continues to list only three requirements for eligibility:

a) Be at least 70 years old
b) Reside in a community with 30,000 inhabitants or less
c) Agree to suspend any benefit the applicant might receive from the [federal] Human Development Programme Oportunidades

The webpage offers no information for applicants who reside in communities larger than 30,000 inhabitants. For a government that prides itself on transparency, this lack of information is troubling.

I fear the worse. The conservative PAN (National Action Party) that controls the executive branch of the federal government has opposed non-contributory pensions in general, and universal pensions in particular. The former Mayor of Mexico City, Andrés Manuel López Obrador (born 1953), initiated universal pensions in 2001, then ran for President of Mexico in the federal elections of 2006. He lost by one percentage point to the PAN candidate, Felipe Calderón (born 1962), in a contested vote. AMLO promised, if elected, to extend Mexico City’s universal pension to all Mexico. Calderón, backed by the then incumbent President Vicente Fox (also from the PAN), repeatedly and strongly voiced his disagreement with AMLO’s pension manifesto. It was AMLO’s political allies in Congress who initiated – with no support from President Calderón – legislation for the rural 70+ pension scheme. Have the views of Felipe Calderón and his party changed so radically? I sincerely hope so. But I doubt it. This might well be strategic behaviour in an election year. This is why I fear the worse. (Mexican presidential elections take place every six years, and the incumbent is not allowed to run for re-election.)

At a minimum, I have no doubt that the government will eventually subject pensions in rural areas to the same tests as pensions in urban communities, although they may wait until after the 2012 elections to do this. It defies logic to think that rural applicants will escape a pensions test to which urban residents are subjected.

What will happen to state programmes when the federal 70+ programme commences in urban areas? Will pensioners in states with generous benefits be forced to shift to the federal scheme, with reduced benefits? This question is especially important for Mexico City, where universal pension benefits are $897 pesos a month, almost double the $500 pesos of the 70+ scheme. Moreover, the age of eligibility in Mexico City fell in 2009 from 70 to 68 years, and benefits are indexed to consumer prices. In the case of 70+, both benefits and the age of eligibility have been frozen since 2007. This is not a prediction, but one possibility is that the federal government might allow state governments to top up the federal benefit, and/or provide full benefits to seniors younger than 70 years.

A universal minimum pension for all Mexicans, with allowance for state top-ups and early pensions, would introduce only modest complexity into the 70+ scheme, with a simple pension test that does not stigmatise beneficiaries.

My fear is that the federal government will not stop with a pensions-test, but will instead move on either to geographic targeting or to more stringent means-tests. Geographic targeting is very crude. Some districts of urban Mexico contain both mansions and shacks, so there will be inevitable errors of inclusion and exclusion. Individualised means tests have even more problems, not least of which is more opportunity for corruption, for payment of ‘mordidas’ (bribes) to officials so that they will certify an applicant as poor.

The information so far is mixed, so it is difficult to know whether tests of eligibility will go beyond age, residence and income from other pensions. Officials from the federal ministry of social development (SEDESOL) in Chihuahua and Guanajuato told journalists that the their goal is to ensure that all residents aged 70 years and older, regardless of socioeconomic status, have a pension. The position of SEDESOL officials in Chiapas and Yucatan, in contrast, is that the 70+ programme will be targeted to those living in poverty in urban areas, but they never define what they mean by “poverty”. The news report from Yucatan is especially detailed. The representative of SEDESOL in Yucatan explained that applicants with no other pension income, who meet age and residence requirements, will be invited to provide the information required for a socioeconomic information card (Cédula Única de Información Socioeconómica). This procedure takes about 35 minutes. Those whose applications are approved can expect the bi-monthly pension to commence in May/June of this year.

The mixed information and lack of guidelines for this initiative is worrisome. So much for the transparency and clear rules promised by President Calderón!


bank profits and employee bonuses

Saturday, January 21st, 2012

From the United Kingdom, more evidence that it is better to work for a bank than to own shares in one.

In an attempt to avoid another display of bankers being rewarded for failure, the Financial Services Authority is demanding that institutions take account of the multibillion-pound compensation bill for [mis-selling] payment protection insurance when they calculate pay-outs [of bonus awards] for 2011. ….

Last year the UK’s five biggest lenders took charges totalling almost £6bn for their longstanding practice of providing loan insurance to people who did not need or want protection. PPI was frequently sold alongside loans to cover repayments when borrowers fell ill or lost their jobs. ….

Some banks are expected to resist the pressure, arguing that most staff responsible for PPI mis-selling have since left. ….

David Cameron, the prime minister, came under renewed pressure this week after it emerged that Royal Bank of Scotland, which is 83 per cent state-owned, was preparing to award its chief executive a bonus of at least £1m for 2011, a year in which the bank’s share price fell 43 per cent.

Sharlene Goff and Megan Murphy, “UK banks targeted on mis-selling scandal“, Financial Times, 21 January 2012.

the poverty of means tests

Saturday, January 21st, 2012

UVic economist Christopher Willmore is blogging again! His latest post is an essay on universality versus targeting. This is his conclusion:

“Stay poor, and we’ll help out – if you manage to make it through all the bureaucratic hurdles. Try to get out of poverty, and we’ll pull the rug out from under you.” That’s the basic message of means-testing. Targeting benefits to the poorest makes work very expensive. If benefits are universal, we don’t see this disincentive to participating in the job market. If flipping burgers at McDonald’s doesn’t cost you your child grant, and you’re able to keep all or most of what you make, you’re more likely to take that fast food job, and maybe use it as a springboard for a more valuable career later on.

Means testing is one of those obvious notions that is actually a pretty crummy idea when you look at it closely. Unfortunately, its common sense appeal makes it very popular. Nearly every government in the world uses it as a linchpin of its social welfare program, and in the current global recession many nations are looking to tighten their welfare requirements. Instead, they should be loosening them.

Christopher Willmore, “To help the poor, help everyone“, Stray Silvers, 20 January 2012.

Christopher runs through each of “the top five reasons why means testing is often a bad idea”. Be sure to click on the links to articles that illustrate his points.

profitable banks

Friday, January 20th, 2012

Banks are very profitable …. for their employees, not for the owners.

The investment adage that you’re better off working for a bank than owning shares in one is mostly true. Indices of global banks, including sexy developing-world lenders, have gone exactly nowhere over the past decade. Ditto the stock price of the mighty Goldman Sachs, which released full-year results on Wednesday. Over shorter periods, bank returns are uglier still.

Yet Goldman, for example, has paid its employees $125bn during the past 10 years (doubling along the way), twice what it made in net profits. Hence, some hope that a possible route to boosting low bank returns on equity is a structural cut to industry compensation ratios. ….

Bankers, of course, talk about the war for talent and the potentially devastating effect on morale and top-line growth if compensation and/or headcount are slashed. It is true that most bankers have next to no loyalty ….

[But there is no evidence of a shortage of talented employees for the industry.] Goldman reduced its compensation bill by a fifth in 2012, and global headcount by 2,300. Yet those remaining are hardly queueing for the exits, nor will the thousands of graduates who apply every year think twice.

Lex, “Goldman Sachs: paying through the nose“, Financial Times, 19 January 2012.

Sachs on greed and social restraint

Thursday, January 19th, 2012

Columbia University economist Jeffrey Sachs has written an eloquent column for the FT series “Capitalism in Crisis”.

[S]uccessful capitalism has never rested on a moral base of self-interest, but rather on the practice of self-interest embedded in a larger set of values. Max Weber explained that Europe’s original modern capitalists, the Calvinists, pursued profits in the search for proof of salvation. They saved ascetically to accumulate wealth to prove God’s grace, not to sate their consumer appetites.

Keynes noted the same regarding the mechanisms underpinning Pax Britannica at the end of the 19th Century. As he put it, the economic machine held together because those who ostensibly owned the cake only pretended to consume it. American capitalism, more secular and less patriotic, created its own vintage of social restraint. The greatest capitalist of the second half of the 19th century, Andrew Carnegie developed his Gospel of Wealth, according to which the great wealth of the entrepreneur was not personal property but a trust for society.

Our 21st century predicament is that these moral strictures have mostly vanished.

Jeffrey Sachs, “Self-interest, without morals, leads to capitalism’s self-destruction“, Financial Times, 19 January 2012.

The problem is stated clearly, but what is the solution?. Greed has always been with us. How do we restore social restraint? Professor Sachs’ appeal to “regain our moral bearings” is not helpful unless interpreted as a call for political action. And this begs the question, What type of political action? More practical is John Kay’s emphasis yesterday on rules and institutions to direct greed “towards the creation of new wealth rather than the appropriation of wealth already created by other people”. I would add – and I think Mr Kay would agree – that rules and institutions are needed also to distribute some portion of growing incomes to those less fortunate.

universal pensions in urban Mexico

Thursday, January 19th, 2012

This post examines possible stigma attached to universal pensions in Mexico City, and discusses briefly a proposed extension of the universal 70+ pension scheme to urban communities in Mexico. (Currently only residents of rural areas are eligible for a 70+ pension.)

I always suspected that there might be some self-targeting of the ostensibly universal age pensions in Mexico City, because it is undignified for a wealthy resident to accept benefits that – for him or her – are tiny. The cash pension is small, less than a minimum wage. The other benefits (social events, free health care and free public transportation) are of little interest to Mexicans of means. The wealthy in Mexico have their own social clubs, never travel in buses or the modern but crowded metro, and they invariably use private, not public, clinics and hospitals.

A Mexican researcher, Marco A. López Silva, confirms my suspicions. His excellent article is available only in Spanish,  so I have translated large parts of it into English. For those able to read Spanish, I recommend that you read the full essay, which contains much more of interest than I include here. Also, Mr López’s words read much better in the original than they do in my quick translation.

Mr López finds evidence of considerable self-targeting in 2001, the first year of Mexico City’s universal pension, but only modest self-targeting ten years later. This is what I would have predicted. Municipal officials in the beginning deliberately promoted the scheme in low-income areas. Mr López, who seems to have access to inside information, claims that the government of Mexico City, when they launched universal pensions, had a budget for only 250 thousand pensioners, and they knew that 328 thousand were old enough to claim an age pension. I would expect the “stigma” effect to be important only for the wealthiest three to five percent of the population.

[W]hen [Mexico City's] universal pension scheme was launched [in 2001], some of its proponents … argued that the pension scheme was self-targeted. …. The reasoning was more or less the following: applications to join the program had to be presented in government-run health clinics, and since wealthy seniors never use these clinics (and probably do not even know where they are located), they would not go there to seek benefits. At the time I heard other arguments: it was said, for example, that the program took advantage of the “stigma” effect. This effect is those who are well-off are “ashamed” to be seen receiving help intended for or needed by those who are poor. It was also said that wealthy seniors would not want to waste time in a queue to ask for benefits – a rather weak argument, because retirees’ [time] is likely to have a low opportunity cost.

Well, it turns out that data thrown up during the first phase of implementation lend support to these arguments. In the graph below, the districts of Mexico City are ordered according to their level of Human Development (X axis) and the pension program’s coverage of old people living in each district. To contrast this graph I used data published by the United Nations Development Program (for 2004), official information published by the Government of the Federal District on the number of old people receiving pensions in each district, and population data from the 2010 census. As you can see, in 2001 the “wealthier” districts (such as Benito Juarez and Miguel Hidalgo) had much lower coverage ratios than the “poorer” districts (such as Milpa Alta or Tláhuac). The difference is enormous: more than 100 percentage points in the extreme cases. In fact, the graph reveals an almost linear correlation between the two variables: the greater the development in a district, the lower the coverage ratio.

Graph: Pension Coverage vs HDI, 2001
Y-axis: Coverage (Beneficiaries/Population >70 years)
X-axis: Human Development Index, 2004

[....]   As the program expanded, the apparent effect of self-targeting became blurred. The graph below is like the previous one, except that the [coverage] data are for 2011. As you can see, the difference in coverage between the poorest delegations (eg Milpa Alta, with 106.4%) and richest (Benito Juarez, 95.5%) is now quite small.

So what happened to the stigma effect? If it did exist, it became weaker as more people obtained benefits (if my neighbour is not poor and has enrolled in the program, it is less shameful for me to ask for the same benefits; the more people participate, the weaker the “stigma”).  [....]

[The federal 70+ pension scheme is limited to rural areas, and is based on Mexico City's universal pension.] It began to operate in 2007, … providing universal coverage to those who were at least 70 years old and were living in communities no larger than 2,500 people. In 2008 … coverage was extended to communities up to 20,000 inhabitants. In 2009 coverage increased again to include communities of up to 30 000 inhabitants. At that level of geographic coverage, 55% of the elderly are poor, and the rest are not. If the proposal of the President [Felipe Calderón, to extend the 70+ pension scheme in 2012 to the entire country] is accepted, the percentage of non-poor beneficiaries is likely to increase to 60%. But is that really important? If Mexico today spends $170 billion [pesos] annually on gasoline (petrol) subsidies, is it not possible to spend $27 billion [pesos] a year to guarantee a pension, very small, for all Mexicans who helped make this country what it is?

The worst thing is that, in the coming weeks, ideological arguments will be used to mask specific interests of the political class. The PAN, which for years opposed universal programs (how can we forget that statement of [President Vicente] Fox, “to me it seems terribly unfair that some persons, simply because of their age, are showered with tax money taken from those who work”?) has decided to convert to universalism … and it suits them to expand the [70+] program in an election year. The PRD [a party of the left] will also support the proposal …. And the PRI [the traditional party, now in opposition] will oppose it, because they prefer to provide more resources to their governors, especially in an election year.

We’ll see who wins. Hopefully the old folks …

Marco A. López Silva, “Despilfarradores versus cuentachiles“, La cuadratura del círculo, 27 October 2011.

The proposed urban 70+ scheme differs from the rural scheme – and Mexico City’s scheme – in that it will be pension-tested so, in effect, a universal minimum pension rather than a universal pension.

greed and the market economy

Wednesday, January 18th, 2012

FT columnist John Kay has written another superb essay, comparing greed in market economies with greed in command economies.

North Korea is hardly free of the profit motive. The Kim dynasty and the cliques around it may profess disdain for capitalism, but they understand the goal of personal enrichment as well as any Wall Street Master of the Universe. The difference between North Korea and the US is not that one society offers more scope for greed than the other. In both countries, as in many others, there are greedy people and many who are not, and those who are greedy are disproportionately represented in the controlling elite. The difference lies in the channels of greed – the degree to which the quest for profit is directed towards the creation of new wealth rather than the appropriation of wealth already created by other people.

A successful market economy emphasises the former and restricts the latter through rules and institutions, in a structure that has evolved slowly and requires constant defence against those who would use economic and political power to subvert it. Success or failure in that endeavour is the central explanation for why some societies are rich and others poor. Crony capitalism is very different from the market economy.

John Kay, “A real market economy ensures that greed is good“, Financial Times, 18 January 2012,

That is an ungated link. The gated column is available here.