NPR’s Planet Money podcast covers a wide range of topical and historical events in American business history. One interesting phenomena they researched was why and when CEO pay exploded within the United States. Before the 1990’s, CEO pay increased at a steady rate as did other pay for the average worker in a company. In the 1992 the average pay exploded. Between 1992 the average pay for a CEO went from $4 million to $19 million in 1996. The main reasons were tax codes being altered and an accounting rule that helped companies maneuver through the tax code.

(Image of Mark Hurd. CEO of Oracle Corporation and a member of the Baylor Board of Regents)

One major cause of the explosion of CEO pay was Business, State, and Society. In 1992 while Bill Clinton was campaigning to become governor he called out the tax system that was rewarding CEO’s for laying off thousands of workers during a recession. He championed the call to change the tax system that did not incentivize expanding CEO pay and moving manufacturing overseas. Within the next few years congress felt the same and changed the tax code that put a limit at $1 million in deductibles for CEO pay. This deductible formerly allowed companies to pay their CEO’s whatever they felt and then deduct that pay from the companies overall earning, thus lowering their taxes. The tax code, however, let companies go around the rule if they clearly showed they payed CEO’s based on performance.

Changing the tax code created both unacknowledged assumptions and unintended consequences. The huge increase in pay may was certainly an unintended consequence. The tax code was trying to prevent CEO’s from being grossly over payed compared to the average worker in the company, but it had the opposite affect. The cause is tied into the unacknowledged assumption. Companies began paying their CEO’s in stock options. Each year their options would increase in their pay package. While this payment method did incentivize CEO’s to actually better the company and not sit back and collect a paycheck, it also hurt the stockholders and the company. Companies did this due to an accounting rule that was not accounted for. The rule allowed companies to not report the options given to CEO’s, so people thought stock options were free. Unfortunately, they did not assume and realize that for every stock created to pay the CEO, the other stocks went down in value and so did the company. Someone ends up paying for it.

In 2000 when the .com bubble burst and shareholders noticed what was happening, companies realized how vastly over payed their CEO’s were being payed. The accounting rule regarding options changed, and CEO pay started to decrease. in 2014 the average pay for a CEO was $12 million. Although still very high, it is much less than what it was before, and it stopped the continuation of the massive increase.

Something that recently caught my eye on my news app on my iPhone was that Viagra had dropping sales in its revenue both domestically and abroad. Curious, I looked into it. In his article “How Viagra Went from a Medical Mistake to a $3-Billion-Dollar-a-Year Industry”, David Kushner covers the same topic by explaining how exactly Viagra was created, reaching back from it’s creation in the 1990s to the expiring patent on its main chemical compound in the present day. This patent, which has already been nonexistent of expired in other parts of the world, will dissolve by 2020 in the US, destroying the monopoly that Pfizer has had on the most viable anti-impotence drug in the world.

One of the four topics covered in this course, unintended consequences and unacknowledged assumption (Idea 4), directly interacts with Viagra as a product itself. Viagra wasn’t originally created as a product for impotence, but as an aid for those with severe chest pain. Viagra was supposed to expand the blood vessels in study patient’s chests to allow better blood flow and reduce pain, but as it turned out, the chest wasn’t the only place affected. Study patients described headaches, muscle aches, and, for some, cured impotence, which had up to this point in time been declared untreatable by the medical society at large. This literal side effect had the metaphorical side effect of creating the multi-billion-dollar industry of Viagra on the medical market and its generic competitors on the black market. 

Another large topic covered by this article (and perhaps the most important) was the interaction between business, state, and society (Idea 3). The first subgroup of these interactions encountered by Pfizer was the interaction between business and society. Before the created drug could hit the market, Pfizer first had to determine if there could be a market in the first place. America is a place that is slow to change its perceptions in many areas, and sex was one of them. Many men would be nervous to discuss their impotence with anyone, including their doctors. In order for Viagra to have a good relationship with their consumer base, the Viagra sales team knew that they had to pull all of the stops. They named Viagra the way it is for no other reason than because they needed a name that started with a V, as products that began with Vs were statistically better at getting uncertain customers. Also, due to the social stigma surrounding the word impotence, they renamed the occurrence, dubbing it “Erectile Dysfunction” so that men could see this as something happing to them and not as some kind of personal failure that degraded their masculine self-perception. The phrase caught on so well that ED has now become a mainstream medical term due to its phycological effectiveness on the public at large. However, public relations were not improved by only the corporate level. Every tier of the company from management down received training on marketing techniques to change the social perspective of their prospective customers. This training went down all the way to the sales teams that worked in the trenches: 

With everything ready to go, the team booked a massive launch meeting at the World Center Marriott in Orlando, Florida, to introduce Viagra to Pfizer’s three thousand sales representatives. The average sales rep was a good-looking twenty-five-year-old— “The guy looked like a quarterback, and the girl looked like freaking Candy the cheerleader,” Nelson says—but that didn’t make the challenge any easier. “We needed to make them comfortable with talking about sex,” he says. They did this by getting everyone used to saying all the right words. They went around the room and had everybody say erection five times. “Erection! Erection! Erection! Erection! Erection!” 

The second of the interactions was one between business and state. Now that Pfizer thought that they could rely on a stable market, they needed government approval through the FDA. Some other parts of the government had been relentless in their efforts to block Viagra’s production, distribution, and sale, with lobbying groups taking firm stances as well. Pfizer wasn’t sure that their $100 million investment would pay off, but they were confident enough to put in the last push to finish what they had started. They passed with flying colors, and Viagra was finally ready for the market.

Preston Taylor

It’s is common knowledge that it costs a lot of money to run a successful election campaign.  This enormous tab is often picked up by large corporations, the wealthy elite, and interest groups who are simply looking for a in with the new people in power.  It may not come as a surprise to you then, that while the common man may cast the votes, their voice is lost behind the roar of the investors in the business sector.  In this podcast by Planet Money entitled “The Seattle Experiment,” analysts Sarah Cliff and Kenny Malone investigate a new way to distribute campaign funds that puts power back into the hands of the people.  Ordinarily, campaign funds are given in large sums by corporations who seek an advantage by means of political influence.  They give money to politicians who are aligned with their views, which greatly helps them to get elected.  In the city of Seattle, drastic changes are coming to the way influence is distributed when it comes to elections.  In 2015, Wayne Barnett and the Seattle Ethics and Elections Commission created a system in which individuals were responsible for donating money to candidates of their choice.  They announced its plan in the only way cities seem to know how:  a public service announcement.

“The city of Seattle is giving eligible Seattle residents one-hundred dollar in democracy vouchers that you can use to support participating candidates in the upcoming election…”

By slightly raising property taxes, Burnett and his team were able to ensure that each and every citizen who was eligible to vote had a opportunity to impact their candidate’s chance to win the election.

The voucher program was largely successful in achieving two of its main goals.  It drastically changed who had the ability to run for office and it sent candidates out into the community more than was previously necessary.  Before, most often, the winner of elections was the powerful incumbent due to their strong financial backing.  This most recent election, however, a young, minority, woman won her election the very first time she ran for public office.  The choice was a better reflection of the common man due to her ability to advertise as incumbents do.  Voters were able to choose the candidate who most accurately represented their view as opposed to only hearing about one name on the ballet.  Politicians were also forced to focus more on individual voters.  Candidates actually went door to door, to ask citizens for their democracy vouchers and hear directly from them what they wanted done in their city.

This podcast was pretty obviously discussing the effects of campaign donations as it relates to business, state, and society.  Now a days, it isn’t uncommon for businesses to spend millions of dollars in lobbying for political gain.  The benefits of such expenditures can be immeasurable, and corporations often overshadow the other members of society that would stand to gain from political influence were they given the chance.  This article by the Notre Dame School of Law entitled “What is this ‘Lobbying’ That We are All so Worried About?,” economists analyze the impacts of powerful lobbyists on politicians and their agendas and further explains how influential they can be.Modern politics is such a web between business donations, politicians, and citizens seeking a voice, that is often difficult to distinguish between the three.  In Seattle, the ties between business and state have begun to lessen, while those between the voter and the representative grow stronger.

When the US paid off the entire national debt.

Thomas Klinger

In recent America history citizens are so used to a massive national debt that we no longer even think about the possibility of paying it off or even slowing down its growth and we worry about the effect this massive debt will have on future generations who must service it. In this episode of NPR’s Planet Money podcast the hosts examine several interesting episodes in the history of US national debt such as when we had none at all and why we have such a such a massive debt now. American national debt began when after its revolution the government made a conscious choice to assume the debts accrued fighting the war, largely due to the urging of Alexander Hamilton. Hamilton wished to take on the debts of the individual states in order that the new national government would have a large debt, in order to create trust in the issuance of future US debt. If the debt from the US was trusted by the world at large to be serviced trade and industry would benefit from the spending the US could make off of the borrowed money. This policy largely worked for the first decades of American government, trade and industry flourished as US debt became one of the safest investments in the world. However this would all change with the of Andrew Jackson. Jackson had a personal dislike of debt, having had a bad experience when he held an investment in debt, and wanted to see the national debt paid completely off. The national debt went through cycles where in bad times it increased and in good times it was paid down, but it had never been paid completely off before. Indeed when America paid off its national debt completely it was the first country up until then to do so. The debt at the time of Andrew Jackson’s presidency was 58 million dollars but he benefited from a land bubble at the time in paying it off. Using the inflated land values the government sold off property in the West and used the proceeds to pay off the debt, Jackson also ruthlessly vetoed government spending. Together these land sales and fiscal prudence eventually paid off the debt completely. However there then came the problem of what to do with all the surplus money the government now was making, the government had never had a surplus before and did not know what to do with the money. There was no mechanism at this time to give it directly to the citizens so Jackson instead gave it to individual states proportionally off of their population. The situation was good for about a year but the state’s banks went crazy printing paper money out of their surplus and then the land bubble popped leading to the longest depression up to that time. This is a great example of unintended consequences and unacknowledged assumptions as paying off the national debt would seem to make some sense and having a government surplus should be great. As shown by Jackson paying off the debt the assumption that paying off the national debt would be a benefit was not true and the unintended consequences with the government surplus created disruptions in the economy. After this experiment in being debt free the US benefited from having a national debt which helped pay for the Civil War and cushioned various economic downturns. The podcast continues the story of our national debt by explaining one of the reasons we have such a massive debt currently. Up till World War One Congress approved individually every item of debt and the details of that debt down to detailed discussions for purchasing horseshoes for a government department. In World War One the debt needed to finance the war became too complex for Congress who wanted to concentrate on thoughtful big policy discussions, so Congress gave the Treasury Department the job of determining what debt and how much was needed for government spending. However Congress did not give the Executive branch a blank check, instead handing them a debt ceiling which they were not supposed to go over. This debt ceiling is not actually a legal limit on debt as it would be unconstitutional to limit the money spent by Congress and so this debt ceiling has not contained the growth of our national debt. The debt since 50 years ago now no longer follows a cycle of growing during bad times and being paid down in good times but has grown and grown during bad or good economic times. This is another good example of unintended consequences as well as complexity, the legislative branch gave up one of its biggest powers because of how complex the task was becoming and even though it has helped with streamlining and making cheaper acquiring new debt it has also allowed our national debt to break free from a normal cycle where we could pay it down. The podcast speaks well to a host of our unacknowledged assumptions about the national debt as well as the complexity of how the national debt affects the economy and government but perhaps because of this complexity and unacknowledged assumptions leaves unanswered what the consequences might be from our massive current debt.Early in the podcast the hosts played a clip paraphrasing Hamilton’s arguments as “The bigger the debt the better” and from Jackson it would seem that to have no debt is indeed not a good thing and perhaps having a large debt should not cause as much worry as it does but we do seem to have entered uncharted waters with the rate at which our debt has been increasing and when we might reach a point where a bigger debt will end up hurting the American economy.

Worst. Tariffs. Ever

Thomas Klinger

In the Planet Money podcast titled Worst. Tariffs. Ever the show starts off with the news of Trump’s new tariffs on steel and aluminum before discussing an important historical event in the history of tariffs in America, the Smoot-Hawley Tariff Act. Though the podcast says this might be boring for some, mentioning the amusing scene from Ferris Bueller’s Day Off of the boring teacher using the Smoot-Hawley Tariff in his lesson, it is also a great lesson in unintended consequences. The impetus for Smoot-Hawley came in the late 1920s at a time of great economic growth for America with new industries creating new jobs, however the farming sector was being left behind in this growth. In an otherwise good economic climate politicians looking for an issue to campaign on seized on the idea of protecting American farmers from foreign competition. In the 1928 election Hoover and the Republicans won and went about enacting their promises to protect farmers by raising tariffs and the two representatives in charge of tariff policy lent their names to the bill, Smoot and Hawley. The bill was originally only meant to protect the two industries most threatened by foreign competition which were sugar and wool. However since the bill was being passed through Congress other representatives in a process known as log-rolling refuses to vote for the bill until other industries important to their state or district also got their own tariffs. This process got out of hand with thousands of industries getting their own tariffs put into the bill even industries which probably did not even need them such as goldfish farms.

Tariffs have always had unintended consequences associated with them such as the downstream effect by which tariffs enacted to protect one industry hurt other industries and consumers related to the initial industry being protected and with the Smoot-Hawley Tariff these unintended consequences were as large and far reaching as the bill itself. An example of these unintended consequences is found in the example of the American egg industry which also got a protective tariff raise on foreign eggs from eight to ten cents, in response Canada raised their tariff on American eggs from 3 cent to ten cents to match it. This was disastrous for the American egg industry which had been making a lot of money off of its exports and the amount exported to Canada fell from a million dozen to 13 thousand dozens after the new tariff rates. Other countries also enacted counter-tariffs specifically targeted against America to punish it and even formed trading blocs to better organize their actions against America. The legislators of Smoot-Hawley had not even considered that this would happen regarding Smoot-Hawley to be mere domestic legislation which would not have international consequences even though they had been warned by a thousand economists in a public letter about the potential downfalls of tariffs. During this time the world was also going through the Great Depression which while Smoot-Hawley did not cause the Great Depression it certainly did not help. After World War Two America spent decades undoing the effects caused by the Act having to negotiate to lower tariffs and resulting counter-tariffs and the Act itself had become a cautionary tale against politicians who argued against free trade such as Ross Perot debating Al Gore over NAFTA. However finally winding back to the start of the story and how Trump can raise these tariffs without the approval of Congress ties back into the unintended consequences from Smoot-Hawley. Congress having seen the bad effects from Smoot-Hawley and how their log-rolling contributed to it decided to give up their tariff powers to the executive branch to stop this from happening in future. Economists however still hold the view that even relatively narrow tariffs will still hurt downstream industries and invite counter-tariffs which will hurt trade.

One of the Big Ideas from the course that comes into play is that of unintended consequences and unacknowledged assumptions. The politicians who voted for Smoot-Hawley assumed that the bill was simply an internal political decisions which would pass by unnoticed by the world at large. With the bill however many former trading partners started to punish American trade hurting the industries the Act meant to protect and when in reaction to these negatives effects Congress gave up its powers to the executive branch they might have unintentionally given power for a new Smoot-Hawley type trade war being started by the move which sought to prevent another one.