As the chairman of Bill Clinton's Council of Economic Advisers, and subsequently as the chief economist of the World Bank during the East Asian financial crisis, Joseph Sitglitz was deeply involved in many of the economic-policy debates of the past ten years. What did this experience tell him? That much of what we think we know about the prosperity of the 1990s is wrong. Here is a revised history of the decade, by the winner of the 2001 Nobel Prize in Economics.
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"In 1993 and 1994 the FASB [Financial Accounting Standards Board] proposed changing the treatment of executive stock options. But the companies that use options were happy with the status quo. They fully realized what it would mean if their shareholders better understood how such options decreased the value of their shares: stock prices would fall, and so would executive compensation. Executives didn't want this to happen--at least not until they had cashed in. Wall Street and Silicon Valley, among others, had a mutual interest in making the FASB back down. So they turned for help to both Congress and the Administration. They got support from the Treasury and Commerce Departments. But we at the Council of Economic Advisers thought it wrong that powerful political forces should interfere with the decisions of the FASB. The board was supposed to be independent precisely to avoid such meddling. We noted that although it was difficult to put a value on options (the reason companies gave for wanting not to give them a value at all), it was also difficult to measure many other items in the accounting framework. Providing an accurate estimate of depreciation, for instance, is far more difficult than accurately estimating the value of an option. Clearly, a value of zero was wrong, and we could and should do better. But as is often the case, politics won over principle: the Treasury and Commerce Departments sent a letter to the FASB, arguing against accounting for options. Other pressures were brought to bear, and the FASB finally gave in. As the events of the past few months illustrate, this was a mistake."
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/ dave /