Why do CEO’s make so much money? The question seems to obsess us, probably more than it should. Discussions of income inequality often turn to the topic of outsized CEO pay packages, even though massive payouts to a handful of people cannot possibly account for the trends we have seen in the nation’s income statistics—there simply aren’t enough CEOs of large companies to produce the change, even if every one of them received outsized compensation, which isn’t the case. Similarly, CEO pay is often brought up in the context of stagnating median wages, even though the pay of most CEOs, distributed across thousands of workers, would boost their paychecks by only a small amount.
Nonetheless, inside most of us retain the village instinct that anyone who is paid so much must be getting away with something. In the fourth chapter of his new book, the Logic of Life, Tim Harford suggests that we’re right. Sort of. But not necessarily in the way that you probably think.
A lot of the invective against CEO pay is simply argument from incredulity: how could Michael Eisner possibly be worth $800 million in total compensation to his shareholders? Coming, as this almost always does, from someone who has spent little time watching CEOs work, this has always seemed slightly silly: how could you possibly have any idea whether he’s worth $800 million or not?
But Harford ably outlines an even more intriguing possibility: Michael Eisner might be worth $800 million even if he does nothing at all—indeed, perhaps he’d be worth even more if he did nothing but play video games all day.
That’s because many economists believe that CEO pay is structured as it is not to spur the CEO to ever greater heights of achievement, but rather pour encourager les autres. Michael Eisner might work just as hard for $1 million a year . . . but the gigantic payoff to becoming CEO spurs those beneath him to ever-greater heights of achievement. Basically, Michael Eisner has won the employment lottery. And because the prize is so big, all of his subordinates are dutifully beavering away, vying for a chance at the gravy train.
This does a pretty good job of explaining the structure of corporation pay, but not necessarily the magnitude—one imagines that Michael Eisner’s subordinates would work pretty hard to get a shot at even a mere $400 million in total compensation. This is where the explanation that I have previously favored comes in: captive boards doling out favors to CEOs. As Mr. Harford explains, each shareholder’s contribution to even a truly outlandish CEO pricetag is too small for them to take much interest in holding it down. The games that companies were recently revealed to be playing with their stock options show just how lamentable a state shareholder supervision of boards is—and I wish someone had a better answer to the question of why large institutional investors aren’t more active in corporate governance.
The other thing tournament theory doesn’t explain very well is why CEO salaries have changed. I wish this chapter had contained more on the shift, which started in the 1980s but really got going in the 1990s, towards ever larger CEO paychecks. This is not a criticism—as every writer knows, there’s always too much good material to slide by your editor’s miserly word counts—but still, I wish. There are a lot of plausible candidates out there: changes in financial theory, the stock market boom, deregulation, dilution of shareholder interest by changes in the capital markets, even a cultural shift—and I would like Mr. Harford to help me sort through them.
Comparison of today’s American companies with the companies of the 1980s, or their current European counterparts, would seem to reveal that the tournament is an effective, if perhaps a little distasteful, structure. Americans are widely known for working harder than Europeans. Moreover, current American companies are not only far more productive than they used to be, but also enjoy significant productivity advantages over their foreign counterparts in critical but harder-to-measure areas like logistics and IT. When American companies take over companies abroad, suddenly their IT operation seems to improve dramatically. These differences may go a long way towards explaining the growth differentials between the two regions.
I wish this chapter had contained more on the shift, which started in the 1980s but really got going in the 1990s, towards ever larger CEO paychecks
This corresponds roughly with the time when liberalrob entered the workforce.
My theory is they've just been stealing it all from him since then.
Read Warren Buffett's latest letter to Berkshire shareholders where he opines about CEO compensation (starts at the bottom of p.18 of this PDF).
Buffett sets the compensation of 40+ CEOs of Berkshire operating companies, and he also sits on a number of outside corporate boards (though he's usually not picked for the compensation committees, for reasons that will be clear after reading his letter).
The surprising thing to me is that despite being willing to spend enormous amounts of money, they don't seem to be able to hire particularly talented people. For example, if I had a large amount of stock in GM (and I didn't take the easier route of just unloading it) why wouldn't I beat the bushes to find someone, anyone who was interested in doing something more than look dignified as the ship sinks?
There are talented people who clearly earn whatever they get (such as for example Steve Jobs or possibly the few CEOs in the financial industry who bet against the housing boom going on forever) but these people are not especially valued over the drones.
I would say that for many companies, motivating the troops is the least of their worries....and really, how far down does that motivation go. There can't be many people at one of these places that realistically thinks that they have a chance to make it to the top.
Fred:
Funny you mention Warren. What is even funnier is that I bet Megan would have loved his father.
On why institutional investors haven't gotten more active about CEO pay:
1. Too many institions are passive (Index funds vote ISS reccomendations and they own the plurality share of most S&P 500 sized firms).
2. It's still a relatively small cost per institution. CalPERS and NY's Pension system each only have a few hundred billion, so I'd be surprised if their largest holding was more than a billion, so they're contributing a few million to any given CEO (and their holdings are spread across many different funds).
3. Most of the pay comes in the form of options which were granted years ago but excercised today, and most people are terrible at valuing options, watch deal or no deal and guess what the banker is going to offer for an example. Also, options are a pretty cheap form of compensation, since most firms effectively issue new stock to employees to cover them, so it gooses cash flows and the dilution is much slower to be noticed/or are offset by larger share repurchases.
Other than Warrent Buffet (who doesn't pay with options much) who actually thinks about what portion of the company they own? That's where the cost of option payments hit shareholders.
Fred:
I forgot to mention one thing. Buffet is a rare breed. He is the type that drives the WSJ crowd crazy. He makes perfect sense so they do their best to try and marginalize him(though it is hard because of Buffet's wealth).
The reason professional investors don't say much about CEO pay is that they are the ones that originally pushed for the pay for performance and/or options that caused CEO pay to soar over the last 20 years or so.
In the late 1970s-early 1980 before the great bull market took off the investment community came up with the idea that the reason stock had done so poorly over the prior 20 years is that CEOs did not have the same interest as shareholders. Of
course this completely ignored the impact of high inflation and high interest rate on stock valuation in the 1970s -- but don't let a little thing like the facts interfere with a great theory. So the professional investor community pushed the idea of providing the bulk of CEO compensation in stock options and other forms of stock so as to aline CEO incentives with stockholder interest.
So when the shift in the approach to CEO pay was followed by the great bull market of the 1980s and 1990s of course both the CEOs and the professional investors were all to happy to claim that their theory worked and was responsible for the great stock returns of he 1980s and 1990s.
Let's see. A useless CEO gets obscene pay package because it motivates a few underlings who are just as incompetent.
The folks in the trenches, who actually do the real work, read about the obscene CEO pay, check their own paltry pay stub, get wickedly pissed, and do their best to sabotage the jerks at the top.
Yuppers.
Sure makes sense. NOT!!!!
What ivory tower academic wrote this book?
Continuum-
Tim Hartford wrote the book. He is not an academic. Maybe you should suspend your anti-academic bias and practice doing research.
Continuum - so that I can avoid falling into the trap you describe, can you please tell me at what threshold of income and/or reponsibility would I move from "folks in the trenches" to incompetent underling?
Rickm is correct- Harford is not an ivory tower academic.
You can agree or not with Harford's thesis, but I see no reason to insult him that way.
"The folks in the trenches, who actually do the real work..."
Sounds like you subscribe to the Labor Theory of Value.
Mike,
I don't know for sure the answer to your question, but when I was a child, I told everyone I wanted to live the life of an incompetent underling.
With no data to back me up, I'll propose 3 synergistic explanations for the increase in CEO pay since 1980.
1) Change to individual tax structure.
The decreasing change in marginal rates at the high end meant that tournament-structured compensation made more sense. I think that the ratio of CEO pay to direct-report-of-CEO pay increased substantially; no difference in marginal rates between the two would at least partly explain that phenomenon.
2) Change to expected inflation
Moving to an environment where capital gains are favored over dividends, due to lower inflation (inflation increases the tax rate on real capitla gains), means it is economically reasonable for companies to retain more earnings. That means a bigger pool of money per CEO (but fewer CEOs).
3) Investing as hobby.
More relatively uninformed buyers means a CEO's reputation is more important. Thus, more CEO's are "professional managers", and fewer are company veterans. This restricts the pool of plausible CEOs.
Michael Eisner was an outlier, and not typical of CEO's in general. Very few got the kind of compensation he got. As a CEO he had enormous success in his early years, but much less later on. When he was running the company poorly, he was clearly overpaid.
It amazes me, though, that so much attention is paid to CEO compensation when Hedge Fund managers, athletes and movie stars often make much more than the typical CEO.
The crucial test of whether CEO's of public companies are overpaid is to see what pay they get at private companies. If I recall correctly, ceteris paribus they actually get more money at privately held concerns than they do at publicly held ones. That's something I read a while ago. If someone asks for a citation to prove it, I'll try to find one, but I can't promise it.
Maybe part of the factor in CEO pay scales is the mind-boggling size that some modern large corporations have achieved. One person may live at the top of a hierarchy that sets the course of events for an organization of 150,000 people around the world and $100B in global market capitalization, while variously negotiating operational inputs and outputs with other businesses totaling perhaps another 1-5 million people and $2-5T in global market value.
What is the person who can steer that ship really worth?
Everyone seems to have a well-defined sense that the value is "less than what they make now", frequently asserted in reference to their own wealth and/or income scale, but useful ideas for objectively evaluating that value are in short supply.
There are a lot of plausible candidates out there: changes in financial theory, the stock market boom, deregulation, dilution of shareholder interest by changes in the capital markets, even a cultural shift—and I would like Mr. Harford to help me sort through them.
Changes in market capitalization of the largest companies is another possibility, with some strong data backing it.
Quoting from the paper:
In other words, it appears that a large part of the increase in salary for CEO A of company X comes from buying company Y and taking what used to be CEO B's salary as well. It's not clear how relevant that is to income inequality. Is the problem of the top .5% running away from the rest of the top 1% necessarily the biggest problem?
Here is an article that notes the same trend I had read about before--that private companies are offering more lucrative pay packages now than public ones. That seems to me pretty conslusive proof that the typical CEO of a public company is not overpaid.
I wish someone had a better answer to the question of why large institutional investors aren’t more active in corporate governance.
And what legal/policy changes could encourage them to be more active.
The above theorizing on the various statistical/economic reasons for the lop-sided executive compensation is nothing short of wonderful.
It truly calls to mind the late night dinner conversations of the French nobility just before the peasants stormed Versailles.
Now, to mix metaphors a tad. Let's get out all our fiddles while the middle class burns.
Thacker's and anony's explanations sound plausible.
What then, does that say about increasing growth in industrialized countries? It looks like while we've seen enormous growth, its going entirely to the top, and on a worldwide scale, the bottom.
It truly calls to mind the late night dinner conversations of the French nobility just before the peasants stormed Versailles.
And the fact that you recall these conversations would appear to be strong proof that the French medical system gives superior outcomes to the American one, at least in longevity.
I always figured there was a large component of the "agency problem". That is, you pay them enough that they have no incentive to put their interests above your own. I guess that doesn't address your point about $400 mil being enough, but still...
Let's get out all our fiddles while the middle class burns.
Rather an enjoyable burn, I do tell you. Or, do you call the minimum wage earners "middle class"?
Continuum:
I work at a Fortune 50 company with a highly paid CEO.
In 2006 he got $18.6 million in total compensation. Of this, $6.4 million was due to stock and options grants, $2 million was increases in his pension plan, and about $8.3 million was cash (salary, bonus based on current year performance, long term incentive based on 3 year rolling average performance). The rest was "other", a grab bag of memberships, tax planning, car lease, etc.
The company did right at $40 billion in sales and $4 billion pretax profit. There are 140,000 employees. So if we cut his compensation by $14 million, we'd each get a bonus of $100. This would be nice, but it wouldn't change my life much - I've got an upper middle class salary.
I can remember when the company stock was trading at $8/share. It's now over $100, so he and his predecessor did pretty good job for the stockholders (and my ESOP).
ech,
$18.6 million for a CEO is chump change. That's not what people are complaining about.
Joel Klein's Conscience:
Buffett makes a lot of sense when he talks about corporate governance, but not so much when he attempts to foment class warfare about taxes. For example, his recent lamentations that he doesn't pay enough in taxes. Two problems with that story:
1) Buffett owns a huge chunk of Berkshire Hathaway. BRK pays a whole lot in taxes.
2) If Buffett wanted to pay more in taxes, he wouldn't deliberately avoid the capital gains tax by donating his shares of BRK to the Gates Foundation. Instead, he'd sell his shares of BRK, pay the capital gains on them, and then donate the net proceeds to the Gates Foundation.
These two paragraphs from the Berkshire letter are worth posting here:
Most egregious is the executive comp at the "Government Sponsored Entities" (e.g., Fannie Mae).
Sounds similar to the pay structure and incentive schemes of the drug dealers in Freakonomics.
Um. Fred. When Buffett said that he should pay more in taxes, he wasn't' saying that 'Warren Buffett' should pay more in taxes, he was saying that rich people like himself should allllllll be mandated to pay more in taxes.
RICKM,
Nothing is stopping Buffett from paying more. As they say, lead by example.
"Why do CEO’s make so much money?" Because they are judges in their own cause.
"Why do CEO’s make so much money?" Because they are judges in their own cause.
Continuum wrote: It truly calls to mind the late night dinner conversations of the French nobility just before the peasants stormed Versailles.
95% of my ancestrage is French peasantry, and I can safely say that we got bored with storming Vesailles a long time ago. If complex hierarchies threaten and confuse you, the modern world offers a better solution: work at a small, privately-owned firm.
dm wrote: $18.6 million for a CEO is chump change. That's not what people are complaining about.
Only because there's someone making more than $18.6 million who currently captivates their attention. I'm fairly certain a goodly many people would be carping about those "ridiculous eight-figure salaries" if a small quantity of nine-figure salaries weren't available as front-row flame bait.
The main problem I have with current CEO compensation is that it ignores exogenous factors. GE trades for less than in did 10 years ago. If Jeff Immelt was CEO from 1988-1998 and Jack Welch from 1998-2008, would the stock price be materially different? The CEO of Exxon received a huge retirement package because oil traded at $70 a barrel.
The CEO should have targets to hit, such as increased shareholder equity (within debt limits) and options should kick in for each target. That way, if they earn a lot, I can accept that it is justified. Too many times it does appear like a lottery system, one that they sometimes lose (Nardelli at Home Depot).
Forgot the /sarcasm tag.
In an attempt to render some kind of mathematical-statistical legitimacy to executive compensation, I find the above arguments tantamount to counting the number of angels dancing on the head of a pin.
Most (but not all) of the above comments (save Fred's) seem to ignore the elephant dancing on that same pin's head in the corner. (Feel free to insert pun here.) Namely, that in general, most Board of Directors' Executive Compensation Committees exhibit the same independence, fidelity and integrity as that of Enron's audit committee.
The answer to outrageous executive compensation is the same as that to "why does a dog lick his privates".
Because he can.
Spare me the "pay for performance" nonsense where a CEO's compensation is tied to stock options. The recent revelations of retroactively adjusting strike points to lower costs in order to bring executive stock options into the money, puts that dog to rest.
(Although not quite old enough to remember the Bastille, my university economic training has been much tempered by years of human nature experience.)
Economic analysis is almost 100% accurate in predicting previous events. But, as for current and future, well, maybe not so much.
Shorter anony-mouse:
Anyone who complains about the increasing disparity between CEO pay and regular pay isn't really complaining about the increasing disparity between CEO pay and regular pay. They are just whiney and resentful.
The really obscene pay packages all involved stock options. Until a couple of years ago, stock options were not expensed when issued. Therefore they didn't show up in GAAP earnings.
This was really a huge deal. It is hard to believe that GAAP could drive corporate behavior, but they are extensively used in stock screens and high level quantitative analysis. There was extensive political pressure to allow this unrealistic accounting treatment, including legislation.
I don't have any problem with CEO's making salaries similar to star baseball players. Especially if their salaries are tied to the companies economic performance vs. a meaningful benchmark.
I do have a problem with income derived from options that weren't expensed and total compensation similar to the dictator of a developing nation.
Fred, I'm a great admirer of Warren as a businessman and investor, but he is badly mistaken about taxes. The high tax rates that prevail in many European countries explain the lower labor supply and much of the lower growth there.
Moreover, he has been misleading people about tax rates, arguing that he pays a higher tax rate than his secretary and implying that the US income tax is regressive. He's just plain wrong about that and his argument makes no sense.
And I do find it rather amusing when very rich people (like John Edwards and John Kerry) bemoan rising inequality, when they themselves could immediately address that inequality by giving their own money away. But of course they don't. They want to take our money and give that away.
Why has CEO pay increased so much?
Read Gabaix+Landier, Quarterly Journal of Economics 2008. Their conclusion: "The six-fold rise in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period."
Rwe,
That's true, and it's unfortunate that Buffett would let his political biases tarnish his reputation for integrity at this point in his storied career. Buffett is an accounting genius. Of course he knows the nonsense about his secretary was complete horse shit (hint: your effective tax rate is not the same as your highest marginal rate).
Continuum,
Namely, that in general, most Board of Directors' Executive Compensation Committees exhibit the same independence, fidelity and integrity as that of Enron's audit committee.
OK--take that as stipulated.
What is different now than in 1975? Were executive compensation committees more independent then? We are trying to explain a change--it seems like board non-independence is an "it was always that way."
When one knows a bit about Buffett and what he says about taxes, the taxes he advocates increasing are the ones, if one knows a bit about his own personal situation, are the ones he doesn't and isn't going to pay. I've heard him say that he thinks the general corporate tax income tax is too, and lo and behold, he actually pays that tax! Thinking Buffett's pronouncements on tax policy are disinterested is a big mistake. He's working the system to the extent he can, which isn't necessarily very much, for his own benefit. Most things he says about public affairs, not just taxes, are like that.
SamChevre,
Read the Berkshire paragraphs I excerpted above. You've got two related factors in terms of board compensation:
1) The search for "Noah's Ark".
2) Directors for whom their director compensation is the bulk of their livelihood.
Often, for board members selected for 1), 2) applies as well.
RICKM wrote: Shorter anony-mouse: Anyone who complains about the increasing disparity between CEO pay and regular pay isn't really complaining about the increasing disparity between CEO pay and regular pay. They are just whiney and resentful.
Shorter RICKM: ...
That said, I'm open to an honest discussion of how and why CEO pay got where it is, whether this is a problem, and if it is, what can be done about it. I do not accept as first principles that it is too high and that this is a problem, just because human nature is prone to envy those with more. Human nature is a factor which cannot be excluded from the discussion; so the trick to making the discusion productive is, which arguments are making a legitimate point, and which are merely envious?
ech:
Great, so all I have to do is find 600 people who think like you do and get them all to give me $100, and I can go home and play XBox all day. But snark aside, you're right. My point is that just because it doesn't hurt you that much should not be seen as excusing the CEO getting that big compensation; and I think that's the point examined here by Megan and TFA. Why are CEO salaries so huge?
Megan:
Reminds me of the old analysis that made the rounds a few years back, as to what amount of money would be worth Bill Gates' time to pick up off the ground.
http://www.templetons.com/brad/billg.html
..which sounds like complete BS. How many Disney/Pixar animators really believe that if they just animate hard enough, they'll have a shot at being Michael Eisner one day?
Here's Michael Eisner's bio, from the Academy of Achievement:
And the rest was history. But the key here is his relationship to Barry Diller. It was Diller's "lobbying for Eisner's hire" that got him his big break; that was the "employment lottery" as Megan calls it that Michael Eisner won; he built up a good relationship with someone in authority who could pull some strings to advance his career.
At base, that's the biggest objection people like myself probably have with people like Eisner raking in gazillions. It's not that they didn't work hard to get where they are, it's that it seems they got where they are more from who they knew than what they did. Would Eisner have made it to the top of Disney if Diller hadn't "lobbied for his hire" at ABC in 1966? Possibly; Eisner (like Cuban and Buffett and Jobs and Gates and all of them) was a highly intelligent, hard-working, motivated person. But I think there's no question that having a Barry Diller in your corner at just the right time can be an immense help down that road. When you read stories like Eisner's and look at sites like They Rule and see how this "old boys' club" seems to exist in the upper strata of society, how can it not breed resentment in those who have no hope of winning that lottery?
Even so, I wouldn't mind them winning that lottery so much if they put that wealth at the disposal of society as the need arose. I know there are all sorts of arguments and evidence that in fact they do, through charities and endowments and such; and there's no question that those efforts are positive and worthwhile. Dennis Leary is financing the rebuilding of firehouses in New Orleans, and Brad Pitt is bankrolling a residential rebuilding project there as well; these are good things. But what is Carl Icahn doing? What is Warren Buffett doing, specifically, to help rebuild New Orleans? I don't have any information on their efforts, and even if I did, that's great, what are all the rest of the multi-millionaires and billionaires doing to help rebuild New Orleans? There is a specific and glaring need there, and only a relative handful of the wealthy are actually doing anything to address it. For the rest, they either have other interests that take priority or they are not interested at all for whatever reason. And that's just one single issue where the response is spotty and incomplete; I bet there is no single issue you can name that has united sufficient numbers of wealthy contributors to fully address the issue.
That's why I turn to government to address those problems. Only government, as the representative of ALL the people, can muster the focus to fully address the largest issues faced by society. To finance that government and give it the resources to address those issues, we levy taxes. When powerful interest groups and anti-tax advocates argue against taxation, they are arguing against addressing the nation's problems in what I see as the only feasible way. That's why I argue so strongly in favor of increased taxation on those most able to afford it, which includes these fantastically compensated CEOs.
Ha ha, Rob Lyman. Got me again. You're a card.
Greg Mankiw discussed Buffett's claim about taxes here.
Bottom line: Contrary to what Buffett implied, the U.S. federal tax system is highly progressive. The total effective federal tax rate on the top quintile of households by income is around 5 times the rate on the bottom quintile (25% vs 5%). The rate on the top 1% of households is higher still--around 30%.
If Buffett meant to imply only that his personal tax rate is lower than his secretary's, that can only be because he takes advantage of various tax avoidance strategies (not realizing capital gains, donating appreciated assets to charity, etc.) that would not be affected by raising tax rates on the wealthy, anyway.
I went to high school with a bunch of rich kids and they and their families all did a significant amount of charity work and gave significant amounts of money to charity.
I'd be a lot more sympathetic to raising taxes to address the country's problems if we weren't already spending tax money on lots of really stupid stuff. I suspect that if Congress really prioritized, they could find the money for the important stuff without raising taxes. Heck, they could probably reduce them.
It's not like we don't already have huge entitlement programs in place at the Federal, State, and local level. I bet some of those could be made more efficient.
Giving Congress more money is like giving money to an alcoholic... he might spend it on food or clothes for his kids... but I wouldn't bet on it. I'd like to see more discipline from Congress to convince me they can be trusted with the money we give them.
Oh, and rich people don't stick their money in mattresses. They generally invest them. That investment money is what companies borrow to build capital. Poor and middle class people spend most of their money. So rich people pay more in taxes than the rest of us AND invest more than the rest of us.
liberalrob, if you were hoping to make some grand point about the need for government to step in following natural disasters, why would you pick the most pristine possible example of an area wasted by decades of bureacratic incompetence and fiduciary waste?
"That's why I turn to government to address those problems."-liberalrob
Liberalrob, are there any problems you don't want the governent to address?
I'm curious why you think the Soviet Union failed. Really, I would like to know. What's your explanation? Is there, perhaps, a danger in too much government control over the economy? Is it possible that the government can damage the economy when it tries to equalize incomes?
Because that was not my grand point. The grand point was that sitting back hoping that the wealthy will pony up the dough to take care of natural disasters or similarly large, national problems doesn't work, QED. If government wastes money on bureaucratic incompetence and malfeasance, that can be addressed through oversight and reform. But without taxation, how are you going to force the wealthy to contribute? And if you don't raise their taxes, and you don't force them to contribute, how will national problems EVER get addressed?
The grand point was that sitting back hoping that the wealthy will pony up the dough to take care of natural disasters or similarly large, national problems doesn't work, QED.
We've got a system that does that now. What exactly was your point, then?
Never mind, I just "got" it:
how are you going to force the wealthy to contribute....if you don't raise their taxes
In short, you want the wealthy to pay more than they do now, because you perceive an insufficient number of your policy goals to be fully funded as yet.
Unfortunately, in past discussions along that road, you have not demonstrated any more wisdome than a Soviet central planner, so I think I'll wait and see what you come up with to deflate rwe's quip.
> I wish someone had a better answer to the question of why large institutional investors aren’t more active in corporate governance.
From time to time pension funds make noises about this sort of thing. But not very often and they don't push it very far. For most public companies the largest institutional shareholders are mutual funds. Mutual funds certainly have an incentive to see the value of their investments go up. It increases the value of assets under management and then their management fees go up. However most fund companies concentrate on increasing assets under management through advertising and marketing through financial planners and such. It's just easier and faster to increase assets under management that way. To top it off a lot of funds have high turnover. Investors are always chasing some new-fangled fund or sector that was hot last year. So if fund investors aren't terribly long term focused fund managers don't have an incentive to be either.
Liberalrob - I see a huge flaw in the logic of your statement:
"Only government, as the representative of ALL the people, can muster the focus to fully address the largest issues faced by society." While the theory that the government represents ALL the people should be true - the fact is that the government does not do a very good job of representing ALL the people very well - but rather is often run in such a way as to be rather inept at producing market driven, cost effective and truly caring ways of addressing the largest issues facing the people being governed. Far more effective are non-profit humanitarian (often philanthropically funded) organizations who achieve far more on the dollar of an impact that actually produces positive change. When people are sitting around waiting for the government to do something they typically don't solve problems themselves and don't bond together as a community or group to effect real positive change. True grassroots efforts typically result from seeing a real need and addressing it in either an anti-government or anti-establishment type movement - or more passively just because people care. The biggest effectors and contributors of good in the short term and the long term to major catastrophies and minor ones are good neighbors who help because they care. The religious and volunteer groups that immediately came to aid in New Orleans with food, shelter, clothing, medical care and supplies were vital in the beginning stages of recovery from this disaster. While the government worked to do their part - there were some obvious problems with implementation - in part because of the inefficiencies of a big entity that didn't really get that it was about the people.
In short - the people are the ones who can and should organize - in part via goverment, but government should never be big enough to be viewed as being the only responsible solution. To do so saps the true strength - which even in the presence of a voted government still remains in the hands of the committed and caring individual citizen. I would rephrase your liberal friends comment of it takes a village to raise a child to it takes a group of individual committed, caring individuals to raise a child. This way no one sits around blaming the village elders that the child got neglected - instead they see the need and fill it themselves with their friends and neighbors.
The magnitude of corporate pay may be determined by the compensation of traders in the financial markets. That is the more Warren Buffet makes, the higher the payoff needed in the employment lottery. People judge their wealth compared to a peer group, even the very rich. To see the relative compensation in the US see
http://www.visualizingeconomics.com/2007/02/15/2005-us-income-distribution-part-3/
"The six-fold rise in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period."
So what? What's the magic in this correlation? This is one of those extremely rare occasions where I agree with Megan. Much of CEO compenstion is based on pure cronyism.
Sure there are. I don't think there's a whole lot the government can do about my receding hairline, or the fact that there are people who simply refuse to understand what I'm saying.
Here I am a Communist again. Maybe I'll do a blog post on that sometime. Been a while since I did one.
It's offtopic here, and irrelevant.
I'm not advocating that. I do think there is a role in regulating the economy in the public interest; but that's not the same as dictating all incomes and outcomes, which is what you want to accuse me of. Government should set boundaries and penalties for exceeding those boundaries. Within the boundaries, hands off. Income inequality is a symptom, not the disease. The disease is over-reliance on the private sector to act in the best interests of society as a whole, which it is manifestly ill-equipped to do and in fact has incentives that are just the opposite.
What's that got to do with CEO pay? I'm not asking 100% confiscation of all compensation above 200k, though I daresay that would finance a heckuva lot of worthwhile projects. I'm saying that when I "whine" about CEOs getting huge salaries, it's not merely because I wish I had that money instead of them; it's because I know they won't spend it on things I consider important, not only for my own benefit but for the country as a whole. Dennis Leary shouldn't HAVE to finance the rebuilding of firehouses out of his own pocket, and society shouldn't expect him to do it or wait for him to do it; firehouses benefit all of society, and government, as society's agent, should have rebuilt them. If government doesn't have the resources, it should be given them. If it has the resources but wastes them, it should be reformed.
You asked:
I'm not entirely sure what you mean by "better" answer, but there is a clear answer. I argued in Shareholder Activism and Institutional Investors that:
Put bluntly, passivity is inherent in the nature of the beast.
Actually, CEO pay is extremely LOW.
I remember reading that the median Fortune 500 CEO pay was somewhere around $4 million a year. Obviously that's a lot of gumballs, but if you compare that to the pay of partners at law firms or consulting firms (without even going into finance), it's extremely low.
A partner at a good firm makes $1-2 mil a year. This is less, but these guys have great job safety, compared with always shorter tenures for CEOs of public companies. And obviously, there's a much larger chance if you join a firm as a junior that you'll rise to partner than becoming CEO.
This is actually an important issue, that poses a credible threat to the strength of companies, and therefore the economy, because unless you have substantial equity interests, corporate leadership is unattractive. It seems to me that a smart, talented, experienced businessman creates more value for the economy as CEO of a large company than as a top consultant, yet most elite college graduates rarely aspire to the former.
It's not enough to say that CEO pay isn't too high. It's actually too low.
(Here's an idea: shouldn't CEOs unionize?)
I don't think there's a whole lot the government can do about my receding hairline
And here I thought you were for universal health care, which probably could do something about it.
I'm not asking 100% confiscation of all compensation above 200k, though I daresay that would finance a heckuva lot of worthwhile projects.
No it wouldn't. There would be no income over 200k. Why would any sane company pay the government for your time?
it's not merely because I wish I had that money instead of them
Not "merely"? More support for my thesis.
"The six-fold rise in CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large companies during that period."
So what? What's the magic in this correlation?
Think stock options.
"The disease is over-reliance on the private sector to act in the best interests of society as a whole, which it is manifestly ill-equipped to do and in fact has incentives that are just the opposite."-liberalrob
And what about the incentives politicians and bureaucrats face? Have you thought about that? It is typical on the left to assume that people in the private sector are greedy corporate vultures, while their public sector counterparts are altruistic saints. Does that seem realistic? Have you ever heard of Public Choice Theory (for which James Buchanan won a Nobel Prize)?
"Here I am a Communist again. Maybe I'll do a blog post on that sometime. Been a while since I did one."-liberalrob, again
No, I've never accused you being a communist. I do accuse you of a failure to reflect deeply enough on the underlying causes of the Soviet Union's collapse. And your evident inability to answer a reasonable question ("why did the Soviet Union fail?") seems to confirm the accusation.
If you are interested in an honest intellectual discussion about economic policy, then I would be glad to have it with you. But you can't just dodge questions. If you refuse to answer questions, then it will be impossible to have a fruitful conversation with you.
I doubt that.
Why would any sane company give Michael Eisner $800 million?
I'm sure it's a doozy.
Jody,
Think stock options?! How do stock options change market capitalization, exactly?
"I'm not asking 100% confiscation of all compensation above 200k, though I daresay that would finance a heckuva lot of worthwhile projects."-liberalrob
Rob Lyman is right. The quote above illustrates that liberalrob doesn't understand basic economics. At a 100% marginal tax rate, people would just stop working (except under the table) and there would be little or no revenue.
That quote just shows exactly why liberalrob believes what he does. He doesn't understand incentives. He fails to see that higher tax rates discourage work. It's no wonder he can't explain why the Soviet Union failed.
Im not much of an economist but if CEO pay went up 6 times because the value of their companies went up 6 times does it also follow that those employees salaries would increase 6 times also?
Is it possible that those lawyers making 2 million a year are overpaid making the comparison invalid?
Steve
"When American companies take over companies abroad, suddenly their IT operation seems to improve dramatically. These differences may go a long way towards explaining the growth differentials between the two regions."
This is a very interesting theory, are there any articles or studies that have looked into this?
If you've regurgitated Harford's thesis correctly, I believe that Schumpeter made a very similar point.
As for what's different about today's CEOs, I'd chime in that the ability of the stock market to lop off a healthy chunk of market cap fairly quickly puts a high premium on communications management. Ask Jerry Yang.
Yancey Ward:
Buffet's point is that he pays more than almost any company. His point is that being part of a greater whole(the USA in this case) means that you pay your fair share in taxes.
Fred:
You are clueless about Buffet. His success is dependent upon being dispassionate. Just because he might have progressive/liberal meanings doesn't mean he lets it get in the way(After all, The Terminator was going to appoint Buffet as Calif. State Treasurer until CA state Republicans went nuts).
"What is Warren Buffett doing, specifically, to help rebuild New Orleans?"
I'm not sure why Buffett is obligated to help, "specifically", that one long-benighted town, but consider this.
1) Despite Buffett's lamentations about not paying enough in personal taxes, he rightfully brags about the amount of taxes his company Berkshire pays:
Sounds like Buffett's company is paying its "fair share", no?
2) Buffett has donated literally thousands of times more money to charity than have Brad Pitt or Dennis Leary. He just gives it all to the Gates foundation, which would rather spend it in Africa than Louisiana.
"You are clueless about Buffet."
Considering you don't even know how his last name is spelled, I'd venture I know a little more about him than you. Buffett's decision to avoid the capital gains tax on his donations to the Gates Foundation has nothing to do with his success or being dispassionate. It's just a little bit of hypocrisy: despite his worries about not paying enough in taxes, he deliberately avoids paying taxes on these donations because he clearly thinks Bill and Melinda Gates will do a better job of spending his money than the Federal Government will.
That quote just shows exactly why liberalrob believes what he does. He doesn't understand incentives. He fails to see that higher tax rates discourage work. It's no wonder he can't explain why the Soviet Union failed.
Do you have any clue about what the history of tax rates in this country are? Especially the last 60 or so years. The high rates sure didn't effect prosperity during the 50's, did it(and don't assume I think 70% rates are a good thing)?
Mispelling his name has no bearing on whether you or I know more about him(through reading books, the WSJ or what have you). Nice try at redirect though. As has been pointed out elsewhere in the comment section, Buffett takes delight in the amount of taxes Berkshire Hathaway pays. He pays what he considers fair. Obviously he doesn't think other CEO's and corporate titans are paying their "fair share". I do have a question for you, and the other Megan fans here. What exactly do you think constitues fair? Given that you want to be part of this country, you have a duty to contribute to the welfare of said country. Or do you think you shouldn't have to contribute anything at all? You do realize the debt the Republicans ran up on the US's tab from George Bush's election in Novemeber 2000 until the Republicans lost control of Congress in the fall of 2006, right? How are you going to pay that off? Also, you do realize that your Randian hero, Greenspan, is partially responsible for the mess the economy is now going through, right?
Misspelling his name has no bearing on whether you or I know more about him(through reading books, the WSJ or what have you). Nice try at redirect though. As has been pointed out elsewhere in the comment section, Buffett takes delight in the amount of taxes Berkshire Hathaway pays. He pays what he considers fair. Obviously he doesn't think other CEO's and corporate titans are paying their "fair share". I do have a question for you, and the other Megan fans here. What exactly do you think constitutes fair? Given that you want to be part of this country, you have a duty to contribute to the welfare of said country. Or do you think you shouldn't have to contribute anything at all? You do realize the debt the Republicans ran up on the US's tab from George Bush's election in November 2000 until the Republicans lost control of Congress in the fall of 2006, right? How are you going to pay that off? Also, you do realize that your Randian hero, Greenspan, is partially responsible for the mess the economy is now going through, right?
"Do you have any clue about what the history of tax rates in this country are? Especially the last 60 or so years. The high rates sure didn't effect prosperity during the 50's, did it(and don't assume I think 70% rates are a good thing)?"-JKC
Well, JKC, you seem to think you are better informed about economics than I am. We'll see.
When you say that the high tax rates of the 1950's didn't "affect prosperity" I infer that you think that the elasticity of the labor supply is zero. Is that right? Is that really the proposition you wish to defend?
RWE:
No. The point I wish to defend is that Bill Gates, or whatever CEO you want to pick, is not going to give up his job because he's only making 25 million instead of 50 million.
JKC, but if the elasticity of the labor supply is greater than zero, as you seem to be conceding, then workers, including CEO's, will indeed reduce their work effort--right?
Either the elasticity is zero, or it is greater than zero. If greater, then high marginal tax rates will discourage work and reduce national income. I'm sure you follow me, since you evidently know all about "the history of tax rates in this country" as well as the effects of those tax rates.
So I ask again, is that something you want to defend, that the elasticity of the labor supply is zero?
Joe Klein's c- The high rates sure didn't effect prosperity during the 50's, did it
Now if we could only figure out how to bomb the factories of the rest of the industrialized world into oblivion like they were right after WWII, we'd have it made. The 1950s are a uniquely bad example, since policies which worked when the US had no serious international economic competition work far less well in a competitive global economy.
Yes, the 1950's were relatively prosperous. But that's not a controlled experiment. It doesn't address how things work when one country competes with another, and it doesn't address what the US could have been if its policies had been different. Check out Sweden's policies vs. other countries when emerging from the Great Depression, for instance. That was before Sweden went mostly socialist. There's a fair argument to be made that the tax hikes of Herbert Hoover post-market crash helped elongate America's "Great Depression."
"Misspelling his name has no bearing on whether you or I know more about him(through reading books, the WSJ or what have you)."
It's usually a pretty good indicator of someone's ignorance of a person when they don't know how to spell that person's name. But perhaps that was just sloppiness on your part. Have you read Buffett's collected essays? Have you read the version of his mentor Ben Graham's The Intelligent Investor, to which Buffett added his forward and also material for the appendix? If you haven't read either of those, for starters, than you probably know less about Buffett than I do.
"I do have a question for you, and the other Megan fans here. What exactly do you think constitues fair?"
Calling me a "Megan fan" is probably a stretch. I spend more time on Yglesias's blog and I agree with his posts far less often. I'll tell you what I think constitutes "fair", but first I'll make this meta-point: it's a stupid question. A tax structure should be designed not with "fairness" in mind, because that is a subjective and often impractical goal, but to raise the funds needed by government in a way that is sustainable and puts the least possible drag on the economy. But since you asked me what would be fair, here's my take. Of the percentage of government revenues provided by income taxes (i.e., not corporate taxes, duties, etc.), everyone should pay an equal amount.
Let's say that $2.1 trillion of this year's $3 trillion budget comes from income taxes. It would be fair to split that up equally, so that every American paid $7k (if you have kids, you would pay $7k for each of them too). Of course that would be impractical, because most Americans couldn't afford it. But then most Americans aren't paying their "fair share", right? I mean, if five people go out to dinner and the tab is $100, would it be fair for one person to pay $80, another to pay $15, a third to pay $5, and the other two to get paid $5 to warm their chairs? That's roughly how our income quintiles breakdown when it comes to income taxes (and don't pretend that the payroll tax equalizes anything: the benefits of Social Security are progressive and the payroll tax covers less than half of Medicaid and Medicare at this point).
RWE:
Higher marginal tax rates for whom? Stephen Schwarzman or Warren Buffett aren't going to work any less whether they make 25 million or 50 million(or in Buffett's case $100,000/yr .. which is Buffett's actual take home pay). That was/is my point. I am not talking about the $45,000/yr. factory worker. To a factory worker, or most office workers for that matter, of course higher tax rates will lead to less work but that is not what original post by Megan was all about, was it? It was about the rich and what they get paid and the taxes they pay, not the little guy.
I was going to invoke Buffet, but Fred beat me to it. Many, if not most CEOs make their money via theft or collusion with their board of directors. And Eisner? What a toad that man was, Disney is so much better off with out him. How's Yahoo done under Terry Semel? How were they doing before he came along? How did Google do in the meantime? Uh huh.
Or ask Carl Icahn about CEO pay and performance.
And no, I'm not someone who does not know such people or what they do. I know exactly whereof I speak.
What a lousy piece this was.
I was going to invoke Buffet, but Fred beat me to it. Many, if not most CEOs make their money via theft or collusion with their board of directors. And Eisner? What a toad that man was, Disney is so much better off with out him. How's Yahoo done under Terry Semel? How were they doing before he came along? How did Google do in the meantime? Uh huh.
Or ask Carl Icahn about CEO pay and performance.
And no, I'm not someone who does not know such people or what they do. I know exactly whereof I speak.
What a lousy piece this was.
"Similarly, CEO pay is often brought up in the context of stagnating median wages, even though the pay of most CEOs, distributed across thousands of workers, would boost their paychecks by only a small amount."
So????
Perhaps someone can explain why the CEO deserves a big bump and the "thousands of workers" don't deserve their little bump...
JKC, actually, research indicates that the elasticity of the labor supply tends to be higher the further you go up the income scale. That makes some intuitive sense, doesn't it?
If someone is already rich, he might not like paying confiscatory tax rates (they were actually as high as 90% in the 1950's). He might retire early, rather than slaving away for 10 cents on the dollar. He can afford to retire, whereas the average factory worker cannot.
Getting back to CEO pay, one of the reasons GE offered Jack Welsh so much money was because he was a very successful CEO and also very rich. They had to pay him a lot to induce him to keep working rather than retire to Martha's Vineyard.
Moreover, high income workers face significantly higher marginal tax rates, and will therefore be more responsive to cuts in those rates. The distortions caused by a tax rise in proportion with the square of the tax. So a 30% tax rate causes much more distortion than a 15% rate.
People respond to incentives, including the wealthy. If I had 1 million dollars, I would like to have 2 million. If I had 2 million, I would like to have 3 million, and so on. Wealth might offer diminishing marginal utility--but it certainly offers positive marginal utlity in any economic model I'm familiar with.
I haven't read all those posts, but as far as I can tell nobody has noticed that Fred posts a letter talking about director salaries... in a thread about CEO compensation. CEOs are officers.
And Warren isn't on the compensation committees of his companies because he's not an independent director. That makes it against the law. Thank-you Sarbanes-Oxley!
And really, the two things have nothing to do with each other. If the shareholders decide to hire a new CEO who costs half as much as their old one, it isn't like they're saying "swell, we can use those savings to pay more than we have to for accounting and marketing!"
MichaelB,
You seem to be confused. Buffett's point about director salaries is directly related to his point about CEO compensation (follow the link I posted above). An "independent" director who depends on a board seat for the bulk of his livelihood is not really independent, and thus can't be relied on to do what's best for shareholders (e.g, reject an excessive CEO comp plan), because it means he might not get re-nominated for the board seat. Buffett doesn't mind directors getting paid, he just wants the directors to be people for whom this isn't the bulk of their income.
When Buffett wrote about not being on compensation committees, he was referring to the boards of publicly-traded companies on which he sits, not "his" (Berkshire's) operating companies. Buffett himself sets the CEO compensation for those.
The argument about labor supply elasticity and CEO pay seems off kilter. There's no reason to believe that elasticity is constant at different income levels.
More importantly, the idea that doubling CEO pay would lead the CEO to spend double the amount of time/effort in the job is just stupid. The ostensible purpose of higher pay would be to attract a better CEO or to retain a current one who has alternative offers, not for the current one to work more hours. I haven't seen the research that supports that this is how the market for CEOs works in practice, but then I haven't seen the evidence that supports MM's contention that American takeovers of foeign corporations lead to sudden dramatic IT productivity improvements, nor does it account for the success of Korean, Taiwanese & Japanese firms with entirely different executive pay structures.
Using market capitalization figures to justify CEO compensation would seem to require (1) an EVA (economic value added) analysis of CEO role, (2) controlling for all external factors (e.g., exogenous rises in the stock market), and (3) some type of counter-factual of how the company would have performed under the next-best CEO inorder to determine the marginal contributionof the incumbent CEO. Good luck with all that.
My own personal view is that companies have the right to pay CEOs what the cronies on the board decide, just like the voters have the right to set tax rates at, say 110% of all compensation above about $2 million. Since CEOs would have no place else to go (in terms of higher compensation), many would probably work justr as hard and just as productively as they do today. As for the ones who would prefer leisure, you vcan be certain that there would be dozens of very capable Type As at the just under CEO level chomping at the bit to take their places. I think both firms and the economy would do just fine.
It seems that the goalposts are by nature not just running, but fleeing at half the speed of light down the field.
So lets say we fix them in place, hmmmm?
By what criteria would one dub a CEO's pay 'excessive'? How can one tell when one of these Boskonians is actually making more than he's worth?
Or is this yet another unfalsifiable bit of lore? If someone is unwilling to concede that any level of pay is not 'too much', then he should either say so up front or just leave.
As usual, I don't see a lot of facts, little reasoning, and very few actual cites - fewer still that have any relevance.
rwe:
I can answer the question. I simply don't see its relevance to the topic. What does it matter?
Not only do I fail to see that, I actively deny that it is the case. Deny, dispute, reject, pick your descriptive term. If that puts me at odds with the entire field of economics, then so be it. I simply don't accept that position. I have consistently said so every time it has come up.
Fred:
Fred, you're so far off the point you're in another time zone. I completely agree that Buffett is not obligated to help anyone or anything, and I completely agree also that he and his organization have given vast sums to various causes. My point was, there are many many national problems that he and his partnership did NOT give money to, for whatever reason, and if we structured society in such a way that we relied on the Buffetts of the nation to address big problems like natural disasters those problems would not be addressed, precisely because there is no mandate that they be addressed. That's why we give that job to government, and why we must use taxes on the Buffetts to finance those programs; because otherwise they pretty much don't get done.
Gene,
"Since CEOs would have no place else to go..."
Right. Because there are no other first world countries that would welcome businesses and businessmen with less onerous tax rates. America isn't the only game in the world anymore. Why chase business away? How much a CEO gets paid isn't anyone's business but the shareholders. The one Democrat that had a reasonable idea on this was Barney Frank, who proposed letting shareholders vote on CEO compensation directly.
Liberal Rob,
Did you read the quote where Buffett pointed out how much Berkshire Hathaway paid in taxes last year? Between the billions of dollars in taxes and the billions of dollars in charitable contributions, I'm not sure what your issue is.
"Since CEOs would have no place else to go (in terms of higher compensation), many would probably work justr as hard and just as productively as they do today."-gene
Gene, you too seem to be contending that raising the top marginal tax rate to very high levels would have no adverse economic consequences. And you are implying that the elasticity of the labor supply is zero, or close to it. The evidence just doesn't support that.
A) Charles Stuart did a famous study in 1981 entitled "Swedish Tax Rates" that concluded that as the top marginal tax rate in Sweden rose from 50% to 80%, "the estimated long-run effects are sufficient to explain up to 75 percent of the recent decline in the measured growth rate of the Swedish GNP." Swedish economic growth slowed considerably during that period (1959-1981), largely due to the rising marginal tax rates. Indeed, the tax rates were so high that they were bringing in less revenue at 80% than they were at 70%. That study is available through JSTOR.
B) Nobel Laureate Ed Prescott studied the differences in labor suppy between the United States and Europe and found that Americans work about 50% more than the French (for example) chiefly due to differences in tax rates. Americans are taxed at much lower rates and work much more. Look here and here if you are interested.
C) And finally, the reduction in the top marginal rate from 70% to 50% in the early part of the Reagan administration led to an increase in tax revenues from those in that bracket. See Robert Barro's Macroeconomics (5th ed, pg. 496). Clearly then the 70% tax rate was causing large distortions, so large that it was bringing in less revenue than the lower rate.
For liberalrob the tax issue is essentially a religious one--not decided by evidence but by faith. To those of us who believe in evidence and reason it should be clear enough that the labor supply (including not only hours worked but also entreprenuership, human capital accumulation, etc...) is fairly responsive to tax rates. And the implication is clear: if we follow the Europeans into higher taxes on income, we'll follow them into lower growth as well.
Not until now. Looking over your link, it seems mostly to embody skepticism about the public sector's ability to police itself. We have plenty of evidence supporting skepticism of government's true incentives to act in the public interest as opposed to special interests. There are very few "altruistic saints" (myself excepted, of course). But I stand by my position: if government has a problem with graft and malfeasance, it can be solved by oversight and reform. The alternative, handing over responsibility to a feckless private sector that makes not even a gesture towards accountability (and in fact turns its considerable resources towards removing that accountability), makes even less sense to me.
Let me ask this: if government cannot be trusted to act in the public interest, and the private sector also cannot be trusted to act in the public interest, what's left? Are we just screwed? Should we just chuck the whole democracy experiment and go back to the law of the jungle, might makes right?
Fred:
My issue is with people who keep saying that we need to drastically reduce the billions of dollars of taxes that Berkshire Hathaway paid last year, and not just them but all of the taxes paid by corporations and wealthy individuals across the nation, and let them keep (and presumably spend) that money however they see fit; trusting to god knows what to ensure that somehow they will spend enough of that money on projects in the public interest to take care of all national issues. These are the same people who are saying that paying CEOs outlandish compensation is no big deal and in fact is probably a good thing, because they will use that wealth in the public interest or will inspire their underlings to become wealthy themselves, which seem to me to be completely (and similarly) fatuous assertions.
The main reason the CEOs make more money is that they have their hands on the levers of power. They are not interested in steady improvement. In my experience they are looters who have to maintain a credible front. CEO changes are just the outcome of power plays and petty animosities at the top. The people who serve on boards generally represent an incestuous group of rich folks who are working the rest of us over. It is ludicrous to believe that these guys have any magical talents that make them worth the money. Harford's theory is superior, but naively generous to the pirate class.
Since WWII, standards of moral rectitude and egalitarian sympathies have diminished. There are too many cases where the CEO has done well while the company has floundered. Warren Buffett is IMO an exception. He's one of the greats. He got where he is on his own merits and I believe him to be a man of decency, integrity and patriotism. Really. He is one of us, not one of them. My only hope in this regard is that the healthy companies, like those that he controls, will gradually take over the economy and force the looters out of business.
liberalrob, I think you are overstating the problem with markets. I live on a street with two grocers and a convenience store. If I don't like one's prices or service or goods I can go to another one.
And if I don't like any of them, I can go to any one of several other markets within walking distance. So they have to serve me well, not because they are altruistic or noble, but because they are generally rational and self-interested.
I hope you will prove me wrong, above, that you are not amenable to reason or empirical evidence. You could do so by reading and reflecting on The Commanding Heights. That book would teach you how the Soviet Central Planners thought they could ignore market signals--thought they could improve on the Invisible Hand through heavy state control, setting prices and wages. And the result was ruin. I don't call you a communist, but I do think you share some of their misdunerstandings of the ways in which free markets work.
I may just do that. Yergin's book on the history of the oil industry (The Prize) was terrific.
I'm having a hard time equating the market forces which ensure you have good food service with those which will ensure that the devastation of New Orleans will be repaired in a timely manner. I think it far more likely that those market forces would look on New Orleans as a lost cause, that it should basically be "totalled out" like a car wreck and abandoned, and its erstwhile residents resign themselves to adapting to starting over in other places. Which is basically what has happened, with the slow, foot-dragging, not even half-hearted government response we have seen. It has been turned over to the private sector, and it has been largely abandoned.
Let me give you the short-form answer to your question, now that we're past 100 comments (who's going to read this far?). In my opinion the Soviet Union failed because its leadership lost sight of (or never really had) the goal of devolving political power to the people. It merely substituted one form of aristocratic, oligarchic government for another; the brutality towards the common citizenry remained as bad as it ever had been under the Tsars. (Meet the new boss, same as the old boss.) That, combined with Western obstructionism and antipathy that was only reinforced by an alternately paranoid and messianic foreign policy, doomed them to failure almost from the start. It was silly to try to compete militarily with the West, which was united and at the height of its power at the very time they decided to rattle their sabres at us; and especially so once we all acquired the means of incinerating the planet many times over, and would credibly do so if suitably cornered. I think that's something that China has basically learned, Taiwan and Korea notwithstanding.
So there you go. Yes, that was the short answer.
Tim Harford here. Sorry I am late to the party. Megan is kind to imply that the only reason I did not say much about time trends is that I didn't have space. I think the truth is that I haven't seen a good idea from anyone else and I don't have a good one myself. Megan's list sounds sensible as a starting point, but then...?
The only other comment is that the chapter is only partly about CEO pay. Really, it is about workplace pay in general. I feel that the "tournament" system of pay is a pretty compelling explanation of envy, backstabbing and office politics all the way up and down the corporate ladder. It does not, I think, explain an $800m paycheck, which is why (as Megan says) I then reach for another explanation about why it is hard for shareholders to put a leash on executives.
Post hoc, ergo propter hoc? The one claim does not follow from the other.
Religion? Evidence? There's this word that starts with an 'i', something to do with pressing clothes, I think . . .
Hey Liberalrob:
"The Commanding Heights" was also a PBS special. You can probably get it from Netflix - it was almost as good as the book.
As an example of why the Soviet Union collapsed I give Michael Dell as an example. Back in the 1980's IBM was a major manufacture of personal computers. IBM was so big and so bureaucratic that it was selling personal computers for $2000. In his dorm room Michael Dell discovered something shocking - a $2000 IBM PC contained only $1000 worth of parts. So he began buying computer parts and building PC's in his dorm room- selling custom machines for $1500 - in so doing leaving both him and customers better off. He eventually dropped out of college to start his own business - the rest as they say is history.
In the Soviet Union there must have been auto engineers who realized that the 10,000 ruble LADA was an overpriced piece of crap. And they could build a car 2x as good for 1/2 the price.
However, in the Soviet Union there was no mechanism for people to exploit inefficiency: no venture capitalists, no investment bankers, no stock market, etc. And there would be no incentive to take all that risk as any resulting profits would be confiscated by the state.
One thing that high marginal taxes rates do is reduce the incentive to exploit inefficiency. And it is this reduction in inefficiency that makes our economy so dynamic - in contrast to that of the Soviet Union.
In "The Commanding Heights" you'll get an understanding of how, while not as badly off as the Soviet Union - the West began to stumble in the 1970's as excessive taxation and regulation began to hamper this explotation of ineffeciency.
rwe
Thank you for the links. No I am not implying that labor supply elasticity is close to zero, just that it is close to zero when one is discussing super-super-high income levels. I indicated in my original post that it is doubtful that elasticity is constant, so that it might be >1 at say $1 million per year but 0 at $100 million per year
But the point I was trying to make is that labor elasticity is fundamentally irrelevant at CEO level. People strive to climb the greasy pole because it is where recognition, ego gratification, the ability to see your dreams-visions-strategies enacted, and the highest levels of compensation lie. The last of these is relative, not absolute, and I don't think that any of the contenders would try less hard/more hard to succeeed Jeffrey Immelt at GE if compensation were halved/doubled. And I think that measuring the marginal impact of a particular CEO is in most cases intractable so that ostensibly objective validation of CEO pay levels is bogus, which is a rather different discussion than arguing that aggregate labor supply is not affected by tax rates.
Thank you for the links. I read the Prescott MinnFed piece quickly. Have not been able to figure out what I think about the impact on the analysis from combining consumption and income taxes. Your point (c) above is unconvincing since it could simply be a function of switching the form of compensation. It speaks directly to the gross amount of compensation, not the level, quality or amount of effort/time by the affected individuals.
No one seems to have addressed the point that CEO's of firms owned by private equity firms are paid MORE than those of publicly held companies.
This seems to fly in the face of the captive board argument.
My explanation of why CEO pay has gone up is that in the 80's corporate take overs became more likely and CEO's were held much more accountable for corporate results. At the same time compensation was linked to more to firm performance. The CEO's job became riskier and shorter but the payout was more.
Now, this does not say wether CEO pay is too high or too low. But the fact that private companies that put their own individual money behind companies pay even more lends evidence that there is some value to having a highly paid CEO. I can assure you that private equity partners do not pay CEOs a lot because the guy is their buddy. They would throw their buddy under a bus if they thought they could make a dollar.
I'll say this for Liberalrob and Gene: they do seem open to a rational discussion fo the issue. They actually looked at the links I provided and gave them some consideration.
So they deserve credit for that. I still think they underestimate the responsiveness of labor supply to income (for high earners, at least), but they strike me as very reasonable interlocutors--my comment above about Liberalrob and faith notwithstanding.
And I agree with JMO above, the Commanding Heights documentary was also very good. It explains the reasons for the shift in economics from belief in government to belief in markets well.
Well what do you know, The Commanding Heights DVD set was already in my Netfix queue (behind Season 4 of Enterprise, Jeremiah, Season 1 of Rome, Sopranos Season 6, and Alias Season 5). I'll move it up.
Other queue highlights: Noam Chomsky's Imperial Grand Strategy, Orwell Rolls In His Grave, A Crude Awakening, and two Henry Rollins shows.
You're proceeding from an a priori assumption that command economies do not work and free markets are the only way to go, which I suppose is understandable given the examples we have. In the Soviet Union there also was a government that was primarily interested in preserving its own power and maximizing military power for foreign adventures and colonial oppression, which would roughly correspond to our own government's current relentless military spending far beyond our ability to pay and the resulting strain on our economy. Just as the Soviet Union couldn't keep up that allocation of resources, we're going to be forced to make some hard choices ourselves pretty soon.
You can choose to believe this or not.
I'm the CEO of a private company. Last year I made about $17MM, and this year, I should make about $20MM. This is mostly from selling equity in my company, so it is taxed at a federal rate of 15%, hence it is the after-tax equivalent of about $25MM - $30MM of salary per year.
Here are a few comments:
1. My father never made more than about $40K per year, and he was smarter than me and worked harder than me.
2. I have no idea if the "social value" of what I have done is less than, equal to or greater than this income.
3. I would not have gone through what it took to start and grow a business if the odds-adjusted income were 50% of this. (ie., sorry to all of the economists who think the "elasticity of labor" or whatever is zero at high incomes, but it's not.)
4. Income inequality is, in my view, a huge and growing problem in America.
I odn't know what to conclude from all of this.
Liberalrob: "If (the government) it has the resources but wastes them, it should be reformed."
"In the Soviet Union there also was a government that was primarily interested in preserving its own power and maximizing military power for foreign adventures and colonial oppression,"
It's this "reform" that I'm interested in. Knowing what we know from 5,000 years of human civilisation, i.e. the propensity for those in power to engage in all manners of ill conceived folly, what reforms could be enacted to ensure that those in power dedicate themselfes to the goals of society rather than their own personal goals?
To get any of us to go along with giving the government more power - we'd need more info on specific institutional changes that would prevent abuse of that new power.
For example, it seems far more likely that given vast new resources the government would spend them on gasoline subsidies, or massive new road building programs to ease the communtes of exurbanites than in the programs you would most likely support.
Anon, did you work any harder this year for $20 million than you did last year for $17 million? Or did you work basically the same amount, and are just paying yourself more this year because you can?
That's key to what the tax-cutters and Laffer enthusiasts are saying governs people's choices. If only we would cut the capital gains tax from 15% to 10% (or even better, drop it entirely), you would work even harder than you did to bump your income from $17M to $20M. You might double your hours worked, double your company's profits and pay yourself $50M! My contention is that you wouldn't necessarily work any harder, but you would certainly take as much money out of your company as you could; and that's money that could have gone to your employees, either as direct compensation or as forced investment in the company, while the lost tax revenues would impact government's ability to serve the people at large.
liberalrob,
You don't ask anon the flip-side, if we jacked up his tax rats to 30%, would he simply walk away? I think, given his initial response, he would either jack up his income to maintain the same after tax value if possible or retire and find other things to do with his time.
Also, you seem to think that it's wrong to take the compensation himself, though paying other people or reinvesting is preferable. If we need more taxes to pay for your awesome government programs, then reinvesting seems like a net negative. I also don't see the "greater good" in paying other people versus him, since individuals are helpless to affect positive change in society, and it wouldn't necessarily raise tax revenues.
If you think that managers and executives are doing less work, or less important work than laborers, then say so. If you think they simply shouldn't be paid more than laborers, then say so.
If you think we should cap income at a fixed amount and tax 100% after, as you said it would pay for a lot of stuff, you are simply delusional. The difference between a 70 or 90% tax and a 100% tax is that the employee still receives something for his efforts. An agreement whereby the employer pays money and the employee receives none of it has no benefit to either party. We would simply revert back to other forms of compensation like housing, insurance, travel, vacations and such to make the extra stress, visibility and risk seem worth it.
rwe said: "I don't call you a communist, but I do think you share some of their misdunerstandings of the ways in which free markets work."
And you, sir, I don't call an idiot, but you seem to share some of the misunderstandings of the ways in which free markets don't work.
Stolen from wikipedia, just a few problems with capitalism: "unfair and inefficient distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism, various forms of economic exploitation; and phenomena such as social alienation, inequality, unemployment, and economic instability."
With that said, I'm more into capitalism than, say, communism, but I'm not so blind in my devotion to pretend that free market capitalism is an absolute good with zero downside.
The reason CEO pay rose so much from 1980 to 2000 is largely because the CEO pay package was shifted from primarily cash (salary) in the early 1980s to largely stock options. This was dome for three reasons. One, the tax rate on the capital gains from stock options is much lower than the tax rate on personal income from salary. Two, to drive home that the CEO's number one job was to maximize shareholder value-- stock price. Three, stock options did not have to be included as a current expense in the books, so it looked like free money.
The consequence is that the CEO has collected much of the economic rent generated by Volcker lowering inflation and interest so that the market PE -- an expression of the present value of future earnings (dividends)-- rose sharply. It is no coincident that CEO pay has risen by the same percent as stock market capitalization. CEO's are responsible for the corporate profits share of stock market valuation, but not the rise in the overall stock market PE.
The interesting development will be to see what happens to CEO pay now that the great 1980s-1990s bull market is over and stock gains return to the historic norm.
Huh? This seems entirely subjective, and the the efficiency claim is the one communists have long used, but never been able to implement. Reed Hayek for why capitalism does produce a fairly efficient distribution of capital.
Though we have specific laws against that, so it's kind of a moot point here, except in cases where government corruption allows for sidestepping those laws.
I'm not sure either of these are true in any sense. Capitalism in no way implies imperialism, just as communism in no way implies isolationism. And for economic exploitation, lets just look at the gulags...
social alienation??? really, this is just getting farcical.
Inequality, unemployment, and economic instability are simply factors of ALL economies. Yes, there may be some mythical system with unicorns and fairies where everything you want is provided and everyone is able to work at their dream job only as hard as they like and vacation at rivers made of chocolate, but such things are not functional in the real world. Ask all of the 'employed' in Russia what happened when the economics of the USSR collapsed under it's own central planning. Ask them about Party members and equality.
It sounds more like these are claims against having any structured society above hunter gatherers.
Not only do I fail to see that, I actively deny that it is the case. Deny, dispute, reject, pick your descriptive term. If that puts me at odds with the entire field of economics, then so be it. I simply don't accept that position. I have consistently said so every time it has come up
The "position" being that increased taxes lead to decreased effort, as workers decline to work for the benefit of the government.
But I take it, liberalrob, that you'd be more willing to paint my house for $500 rather than $50, right? And doubly or triply so if you were doing pretty well already and you'd have to miss your kid's soccer game to do the job.
We're not talking about complicated economics here, we're talking about the marginal utility of money vs. the marginal utility of leisure time. Simply put, rich people get less out of an exta dollar than poor people do; they need it less and they enjoy it less. Plus, they have the ability to spend their leisure time doing whatever they want rather than watching TV in the single-wide. So you have to pay them more to get them off their butts and into the office. High marginal tax rates decrease the amount of compensation available to compensate for lost leisure. This is not complicated or difficult. There may be some stray issues such as ego gratification which come from being CEO, yet somehow we never see the #2 or #3 at a company being paid more than the CEO to compensate for the ego hit required in that position.
(The issue, BTW, isn't whether a CEO will stay after 5:00 to put in some overtime, thereby doubling profits. Overtime and attempts to double profits come with the territory. The question is whether the CEO candidate will take the job at all or just spend more time golfing)
As another aside, I do think a lot of those $2 million/year lawyers are overpaid, but they operate in a market which is informationally opaque, and exploit the need of corporate officers to CYA by saying "We hired the best legal team money could buy!" Price often serves as a stand-in for quality, which is very hard to measure and differentiate.
Welcome to 1787. The framers of the Constitution struggled with these exact same questions. I think they hit very close to the mark; the Federalist Papers are their detailed analysis of why they thought their solution was likely to succeed. To a large degree, it has.
You don't "prevent" abuses of power. What you do is make it very very hard to keep abuse of power a secret, and you provide effective means of reversing abuses if they do occur. Secrecy is the greatest enemy of civil society. Wherever secrecy is standard operating procedure, there you will find abuse of power. The founders relied on an adversarial press given absolute freedom of expression to find secrecy and expose abuse. Then the people at large could force redress through their elected representatives.
Maybe I do support massive new road building programs or gasoline subsidies. I only have one vote, I don't set policy. All I can do is vote for representatives who say they will support the things I support, and oppose the things I oppose, and try to vote them out of office if they don't follow through. That's the system we have.
So, back to reforms. What reform would I like to see enacted to prevent waste, fraud and abuse? Full public disclosure of all and I mean all financial transactions undertaken by the government. That's the starting point; "follow the money" led to the exposure of what ultimately came to be known as Watergate. No more "black budgets" and secret sweetheart deals. I would also like to see declassification of secret documents reformed, with the goal of declassifying more quickly and completely so the public can know what the government is doing in their name. You can't redress an abuse unless you know it has occurred. Transcripts of all "closed-door" and "executive session" meetings should be released within a reasonable period of time; and all such meetings should be recorded, preferably with video as well as audio. If you're worried about privacy, you shouldn't be going into government service. Oversight is how you keep waste, fraud and abuse from running amok, the more intrusive the oversight, the better. The public sector should be an open book for anyone who cares to take the time to read.
Liberalrob - "That's the system we have."
Given that the system we have, has not- thus far - seen fit to expend resources on those projects you favor, why do you favor allowing them to extract more resources?
Your positions only seem to make sense if there was some way to restrict power to those who agree with you....
Also, all that legislation that includes all those sweatheart deals is all in the public record. It doesn't seem to stop all that waste. We still end up with the Robert Bird memorial overpass to nowhere.
Oversight is how you keep waste, fraud and abuse from running amok, the more intrusive the oversight, the better.
While I don't necessarily disagree with this for the public sector, it is a blueprint for inefficiency. That's not inherently a bad thing, but it ought to be recognized.
liberalrob, do you believe inequality to be a lesser or greater evil than poverty? In other words, would you prefer a poorer but highly equal distribution of wealth over a wealthier society with a more inequality? I recognize there's degrees of wealth and degrees of inequality, but in general which troubles you more?
"And you, sir, I don't call an idiot, but you seem to share some of the misunderstandings of the ways in which free markets don't work. Stolen from wikipedia, just a few problems with capitalism..."-Joe from Colorodo
I rather enjoyed the exchange with Liberalrob and Gene, but then I get an ignoramus like this guy obtruding himself into the discussion. That's the problem with blog discussions. Any fool with an internet connection can air his views, however ill-informed.
I am well aware of the various market failures, and don't need to refer to wikipedia to inform me about them. I might prefer my graduate economics texts, though the undergrad ones would do fine.
My other critics here were quite reasonable in the objections they raised, but this guy is just a bonehead. I doubt very much whether he's taken a single economics course in his life. If he has, he learned little or nothing from it.
If he wants to insult me further, he is welcome to. I won't read it, but if it gives him pleasure let him indulge himself. I'm going to ignore fools like this completely in future.
Liberal Rob,
"My issue is with people who keep saying that we need to drastically reduce the billions of dollars of taxes that Berkshire Hathaway paid last year"
I'm not sure who you are referring to. As a (tiny) shareholder of Berkshire Hathaway, I don't lose sleep at night worrying about how much it paid in taxes last year. I do think that corporate income taxes should be lower generally though. Even Charlie Rangel agrees with that. We have among the highest corporate income taxes in the world. All things being equal, lower corporate income taxes would encourage more international companies to do business here, which would lead to more jobs here.
Liberalrob, incidentally, the burden of taxation doesn't always fall the way the Congress intends it to. You have to consider the incidence of taxation.
Corporate taxes are borne chiefly by workers. See here, if you are interested.
Someone just above asked who would be reading this far down into the comments. Answer- me.
Congrats to most everyone that contributed to the last two thirds of this discussion. It was conducted at a high level.
Rob Lyman:
So why do they fight so hard to keep from giving it up in taxes? Why do you help them?
But the tax rate choices we make don't just involve CEOs; the theory is that it doesn't matter if you're a CEO or a ditch-digger, higher marginal tax rates reduce your incentive to work and lower rates will result in your working harder and being more productive. Your side has presented all kinds of macro-level evidence in support of this concept, showing where productivity has increased when taxes were cut. My objection is that at a micro level, using myself as evidence, that doesn't hold true; and if it doesn't hold true for any one individual then the entire theory has to be in question. There may in fact be some other explanation for why productivity happened to go up at the same time marginal tax rates were cut. Your theory cannot explain why marginal tax cuts taken in isolation have no effect on my productivity (you could reduce my marginal tax rate to zero tomorrow, and I would not necessarily be any more productive). Marginal tax cut theory asserts an effect that just isn't necessarily there, and assumes people will make choices that they might not actually make (or even be able to make). That's why I find it so hard to accept the validity of that theory, and your argument.
In general, spite is a bad guiding principle for tax policy. Too many pols are dogmatic on both sides of the political spectrum. On the right, there is too much obsession about the top marginal income tax rates. The world won't end if they go up from 35% to 40%. 40% isn't an uncommon marginal income tax rate in first world countries with strong economies (e.g., Australia). In any case, most entrepreneurs and senior business leaders are more affected by the capital gains tax than the income tax. Part of a reasonable compromise in taxes might include an increase in the top marginal income tax rate to something approaching 40%, with a decrease in the corporate tax rate, while maintaining the current 15% tax rate on dividends and capital gains.
Higher marginal tax rates for whom? Stephen Schwarzman or Warren Buffett aren't going to work any less whether they make 25 million or 50 million(or in Buffett's case $100,000/yr .. which is Buffett's actual take home pay). That was/is my point. I am not talking about the $45,000/yr. factory worker. To a factory worker, or most office workers for that matter, of course higher tax rates will lead to less work but that is not what original post by Megan was all about, was it? It was about the rich and what they get paid and the taxes they pay, not the little guy.
There is an entire social psychology experiment wound up in this blather. See also: False polarization; false consensus; uniqueness bias.
Wealth unquestionably changes the scope of one's opportunities, but it does not typically change motivations and responses to rewards. The rich man responds to a doubling in pay just as surely as anyone else, even at the $25-to-$50M scale of doubling (and far beyond), because it offers new trade-offs of leisure time versus affordable luxuries. At $25M/year, it may be more entertaining to just golf. At $50M/year, you can finally afford that vacation home in Tuscany and a private jet capable of accessing it as a trade-off for the lost golfing time.
This obviously comes off as excess to the person who has never been in the position to afford it, but it's no reason to pretend that the incentive is different.
My objection is that at a micro level, using myself as evidence, that doesn't hold true; and if it doesn't hold true for any one individual then the entire theory has to be in question.
This is the fallacy of assuming yourself to be the marginal case. The assertion is not that all people will respond to a cut in tax rates with increased productivity. It is that there exists some group of people who are so responsive. A finite group is all we need to get a macroeconomic effect. Some people love their jobs so much they'd do it for half what they get. Some jobs are so horrible, many of us wouldn't take them for twice the going rate. This does not mean that the "theory" that you can hire someone to do the job for the current market price is in question.
As an illustration, how much would they have to pay you to, I don't know, be a bottom in gay porn? A pretty princely sum, I'd imagine. Yet I don't suppose you'd dispute that there are people who do the job for much less, and indeed amateurs who do it for free and post the results online. The going rate in the gay porn industry is set by the price you need to offer to convinced one more guy to show up on your set. Set it higher, more will show up (but not all men), set it lower, some will leave (but some will stay).
Certainly there are some CEOs who love their work so much they'd practically do it for free. And there are some people (like you and me) for whom excessive wealth does not hold any great fascination, and thus for whom the job isn't worth the aggravation. But and pay goes up, some people who might have preferred to enjoy retirement will come out and earn some more. Because the number of jobs is finite, a deeper pool of willing applicants means (in theory) better people.
Granted, it's a theory, and in particular it maybe that the number of competent CEOs is so limited that we've pretty much mined the vein out and we're now paying huge prices to hire idiots. But the theory's validity does not depend on its effect on you, it depends on its effect on the marginal worker.
Skullberg wants me to admit to being a Marxist:
I have no idea whether they SHOULD be paid more than laborers; I simply note that they ARE paid more, much much more, and when asked to give back some of that to society in the form of taxes they fight tooth and nail against it.
If you want to go back to the feudal system, with a privileged aristocracy that occasionally allows metaphorical crumbs from its metaphorical table to fall to their serfs, then say so.
Do I personally value someone who spends an hour making something over someone who spends an hour poring over a spreadsheet? Yes, I'd have to say that in general I do. But if that spreadsheet is what determines whether someone gets a life-saving kidney transplant, is that less valuable than the most beautiful crystal dragon you've ever seen at the RenFest? You can't make blanket generalizations one way or the other.
liberalrob,
I don't care if you are a marxist. If we are discussing compensation that you deem unfair, I need to know the premises we are working from. In general, you don't value knowledge work or management as much as physical labor. Knowing this helps inform me about what points are relevant to discuss with you and what points we simply will talk past each other. As an example, it would be pointless to discuss the societal benefit of reducing the labor force through automation, since that shifts the workload to people you value less and displaces the people you value more, regardless of the externalities involved.
A good CEO can turn a failing company (one where the massive layoffs and asset sales are on the horizon) and turn it around. This can save tens or hundreds of thousands of jobs, worth multiple millions of dollars in payroll and billions of dollars in revenue. Likewise a bad one can do the reverse, but the stakes are much, much higher for the CEO than for the assemblyman. I line worked can't increase revenue, decrease costs (save taking a pay cut) or finance expansion. I'm not saying that to dismiss the unskilled or low-skilled laborer, just that comparisons of risk, economic value and potential benefit to the company and society are different.
One reason people dislike taxes, is that in America, we have a strong ownership society where the laws of several property form the basis of our social compact. Anytime you take something with the implicit threat of imprisonment or force people will resist it. We all have our own conception of what our "fair" share, when we pay more than that it feels "unfair." All people do it, not just the wealthy. Try and increase the tax rate for FICA and see if your factory workers complain.
Can you tell the criteria by which you make generalizations about CEO pay that are valid?
Are all CEO's overpaid? Are all CEO's earning over $100M? $200M?
Are all people earning over $100M overpaid? Actors? Sports figures? Spokespeople?
Is there some objective job -> value chart we can lookup these things in?
As an aside from the general thrust of this debate. Please explain to me if I'm incorrect about this, as a non-economist, but I can't see how anyone can possibly debate the objective validity of the laffer curve. It is quite clear that at 100% taxation rates, marginal or otherwise, the government will receive little to no revenue on those monies so taxed. It is also quite clear that at 0% taxation rates, the government will receive no revenue on those monies so taxed.
The rest is just a debate about _where_ the negative incentives of higher tax rates (marginal or otherwise) outweigh the positive incentives of making more money. Those things happen at different places for different people - hence, a curve.
This particular debate that has been had above about whether raising marginal tax rates for the highest bracket will necessarily increase revenue has overlooked the fact that higher marginal tax rates not only discourage further work, but they _encourage_ various methods of tax avoidance. These methods may or may not be good for the economy and society as a whole, but they are certainly distortionary.
"Your theory cannot explain why marginal tax cuts taken in isolation have no effect on my productivity (you could reduce my marginal tax rate to zero tomorrow, and I would not necessarily be any more productive). Marginal tax cut theory asserts an effect that just isn't necessarily there, and assumes people will make choices that they might not actually make (or even be able to make). That's why I find it so hard to accept the validity of that theory, and your argument."
As someone said ealier you are probably not the marginal worker then.
Let me give you and example from my life. My wife is highly skilled and well paid. We recently had a child and decided that the only way that my wife felt comforterable working was if we had in home child care. This is obviously pretty expensive and my wife still does not get to share as much time with our daughter as she would like. We ran the numbers and the amount we had left over from her wages after taxes and child care was enough to justify her continuing to work, but it was not a slam dunk. Had our tax rate been 10% higher she would have quit work instead.
My wife is the marginal worker, she is sensitive to taxes in her labor decisions.
"Your theory cannot explain why marginal tax cuts taken in isolation have no effect on my productivity (you could reduce my marginal tax rate to zero tomorrow, and I would not necessarily be any more productive). Marginal tax cut theory asserts an effect that just isn't necessarily there, and assumes people will make choices that they might not actually make (or even be able to make). That's why I find it so hard to accept the validity of that theory, and your argument."
As someone said ealier you are probably not the marginal worker then.
Let me give you and example from my life. My wife is highly skilled and well paid. We recently had a child and decided that the only way that my wife felt comforterable working was if we had in home child care. This is obviously pretty expensive and my wife still does not get to share as much time with our daughter as she would like. We ran the numbers and the amount we had left over from her wages after taxes and child care was enough to justify her continuing to work, but it was not a slam dunk. Had our tax rate been 10% higher she would have quit work instead.
My wife is the marginal worker, she is sensitive to taxes in her labor decisions.
RMH, what you wrote is correct. Every serious economist recognizes that the Laffer Curve is valid. The only debate is about where the point of optimal revenue is. Most economists would doubt, for instance, that further income tax reductions would increase revenue at present. But most would also concede that when tax rates get as high as 70%, they start to bring in less revenue.
Moreover, though there seem to be some doubters here, it isn't really contraversial in economics that high tax rates cause distortions--like a lower labor supply and verious economically inefficient tax avoidance schemes. This is the so-called Tax Wedge.
Only taxes on things that are perfectly inelastic (e. g. lump-sum taxes and the Henry George land tax) would cause no such distortions. And I don't know of any economist who considers labor supply perfectly inelastic.
But look at the reverse... if I increase your marginal tax rate to 100%, I bet you don't work overtime or look for a promotion.
I haven't seen anyone post about the reason that more CEO's compensation went into stock options. I thought it was well established that the surge in stock options came about when Congress mandated that CEO cash salaries in excess of $1 million/year would not be a legitimate business expense for tax purposes.
And maybe that's the best thing to have happened. Rebuilding the city in its current locations seems like kind of a bad idea given the geography and the climate. It might not be practical to move all the industry and infrastructure, but perhaps we should leave a smaller, more industrial city there and move the rest of the city somewhere less dangerous. If the private sector does something, then there is more likely than not a good reason for it. Prices tend to correlate strongly to resources used which also correlates to pollution/waste generated.
Just to ask a basic question, what is the alternative to letting CEO pay be whatever it is? A CEO Pay Committee? Some government agency who sets allowable compensation levels? Raising taxes is not a good way to "adjust" CEO pay.
Giving more money to the government on the theory that it would spend it better (assuming it was reformed) is a bit idealistic. The fact is that our government is not "reformed" and is wasting tons of money. I would rather see some evidence of this reform happening before giving it lots more money.
Elasticity of labor DOES NOT APPLY TO INDIVIDUALS. You can not say that pay changes to a given individual will make them work more or less in proportion to their pay. Individuals have more of a step function or series of step functions. If someone is working at a job for a given salary, there is likely a range of amounts for which they would stay at that job. Below a certain level, they might quit and find another job. Higher offers might induce them to work more. Only when you aggregate the labor pool to you see smooth curves.
Also, keep in mind that wealthy people do invest their money. It is then loaned out to others who use it to build more capital. Without money to borrow, they wouldn't be able to expand their businesses. And the markets they borrow money on and buy capital from help funnel money into useful things. It may not be perfect, but it's better than some government bureaucrat would do. Of that, I'm quite certain.
(Note, on anything remotely political, Wikipedia leans Left/Liberal/Democratic)
Um... nobody likes to give up money they don't have to and many people prefer not to give money to the government.
And using yourself as some kind of evidence of how people in general behave is silly and not proves nothing. I suspect that you (liberalrob) are not typical.
I've known people who were promotoed from worker (admittedly, they were already office workers - engineers) to manager. The job of manager is very difficult and stressful. They don't just "pore over spreadsheets", they must assign work to their people to meet goals set by their bosses. They have to schedule the work, deal with problems, both technical and personal, protect their people from interference, facilitate the work of all of their people, etc... It's a lot of work and it's fairly abstract. A good manager can make a huge difference. On the other hand, the guys who work in our shop are also valuable. They are skilled and do work that I could never do (I'm an engineer). On the other hand, they need our guidance so they know what to do. We are responsible for the overall design of the equipment and when they run into manufacturing or assembly problems, we generally have to figure out how to solve them. A smart engineer listens to the shop guys and takes their advice, but we are ultimately responsible. And our manager is responsible for our work.
The job of manager is very difficult and stressful.
I actually won lunch for 2 from a radio call-in game whose question was something like "75% of people say you couldn't pay them enough to do this job. What job is it?"
The answer was "My boss' job." And my explanation was that it takes your idiot coworkers and makes them your idiot subordinates.
Sigh. 100+ posts, and zero attempts at a rational defense, just a lot of religion from the supply-siders.
This is typical:
Really? Every serious economist? Or is this just another bit of religon, the 'no true Scotsman' argument, i.e., if one questions the validity, they're not 'serious'.
Research, folks, research. This took me maybe 20 seconds to find:
http://en.wikipedia.org/wiki/Laffer_curve
Here's a bit that appeals to me:
Look at the graph of the real-life data.
As noted, the 'mathematics' this curve is based on is absurd. Hey, let me make a simple function that is shows zero revenue collected at zero percent and 100 percent:
f(x)=[x(100-x)]*(sin[1/(x-20])^2*[1/(x-20)]
Anybody want to tell me where the optimal rate is?
And of course, it's not just the overall tax rate, it's what type of taxes are being collected, and what the revenue is going towards. And again, this is discussed in the very first article I linked to.
So much for the idea of 'no serious economist' discounts the Laffer curve. In fact, such ignorance leads me to wonder where people get their notions of 'economics'.
Scent,
The Laffer curve isn't necessarily germaine to this discussion, as this isn't a revenue maximizing question. It's a nive tangent to pursue, but please try to keep it on track and address the 'unfairness' of the pay of people who make more than others.
A realistic tax curve would most certainly not resemble a smooth parabola or even any other simple function, but rather a very complex curve with many peaks, valleys, and multiple local maxima.
It's probably path-dependent, too, and thus no actual "curve" exists. But the relevant questions are whether any of these wiggles are large compared to the broad shape of the curve itself, and whether any discussions we're having about this or that tax cut will move us any significant distance along it. I'd guess the answers are no and no, but I have no data to back that up.
Hey, Skullberg, _I_ wasn't the one who brought it up. Care to acknowledge that? Or is this something you're going to let slide? I merely pointed out the ignorance displayed by blanding averring that 'no serious economist' questioned it.
Now, if this is not to be a religious discussion, you'd first have to either a)state the conditions under which certain pay levels for certain occupations (in this case, CEO's) would be in your opinion 'too much', and why. Or b) just cut to the chase and say that no level is too high.
If you or anyone else wants to respond with a reply to a), by all means, we can talk about that. But if it's something along the lines of b), then this is really just old recycled rhetoric. Just come out and say so, and that way nobody's time will be wasted.
state the conditions under which certain pay levels for certain occupations (in this case, CEO's) would be in your opinion 'too much', and why.
I'll state that I have no solid idea, although it does seem like you don't deserve more than a couple of million at most to preside over a big decline in shareholder value. But, I haven't seen the "it's too high!" crowd give good criteria either; maybe they should come out and say that they don't think anyone, anywhere is ever worth more than $X.
Both sides are vaguely handwaving here.
All that book learning and such a thin skin. Sorry if I offended you and your degrees, RWE. Out here in CO, when we think we're getting too big for our britches, we just look up and see the Rocky Mountains towering over us. Keeps things in perspective...
Here's hoping you have similar environs to keep your humility in check.
SoV, wikipdia is your idea of research? I thought you had higher standards.
If you can find an economist at a respected university (say anyone in the top 60 economics departments) who thinks the insights underlying Laffer Curve (that doubling tax rates will less than double tax revenues, and that at some point higher tax rates will bring in less revenues) is fundamentally wrong, I'd be vey interested in reading his reasoning (Martin Gardner is a mathematician, not an economist, and his parody is amusing, but has no economic importance that I can think of).
I'm serious though. If you know of an economist who thinks there is any portion of the curve that has an increasing slope, I'd love to learn why.
Here's hoping you have similar environs to keep your humility in check
Whenever I feel my humility getting out of control, I go yell at invertebrates about their inferior nervous systems. I feel much better afterwards.
SoV, wikipdia is your idea of research? I thought you had higher standards.
Well, there was no Cato logo, so...
(I'm kidding SoV, OK? But the question, not answered that I can see, is whether the Laffer curve's wiggles are important or are kind of like the Brownian motion attributable to a falling anvil--sure, it's not a smooth velocity curve, but who cares?)
A salary is fair if it meets the following:
1. was negotiated in good faith by both parties
2. is in a mostly free market for labor
To the extent that a salary is set by fraud, cheating, collusion, or in a market with a monopoly on either side, then the salary isn't fair.
Thus, IMO, wages negotiated by powerful labor unions are probably less fair thatn most CEO salaries (not the really huge ones, but the more average ones).
Oh, and government alteration of wages automatically makes them unfair as it would only be by coincidence that the government set rate would be the same as the theoretical efficient market rate.
By the way, SOV, if by "supply-sider" you mean someone who believes tax cuts generally increase revenues, I most certainly am not a supply-sider.
I have never espoused that view. indeed I agree with Mankiw, who called those who do espouse it "charlatans" and "cranks."
Scent,
I know you didn't bring it up, and I know it has been discussed. Neither of those points refute anything statements about CEO pay, per se. If peple choose to go there, let them and refute them, but that doesn't mean the rest of us are unworthy of discussion.
As for my feelings, I think whole swath of pay are out of line: some CEO's, some factory workers, most public transit workers, a lot of Athletes, some Actors. That being said, I don't much care what they make, I just feel bad for the idiots paying them. That being said, high compensation levels do not equate to "out of line", each situation is different. I think Tiger Woods is worth every penny he gets in endorsements, even when it's upwards of $100M.
I also think looking at year to year compensation can be misleading, as differences in compensation schedules, triggers and such can make that wildly variable.
I don't begrudge people their financial success, so long as it comes without fraud or force.
In reference to corruption in compensation committees, I'm not a fan of it, but I'm not 100% sure what can be done about it. I think the solution there would be worse than the problem. I'm very wary of people saying X employee should make no more than Y, especially the federal government who has shown time after time that no matter what you do, the corrupt win.
Skullberg,
I'm not sure how well you have followed the discussion. The Laffer Curve is not wholly irrelevant. The original post was about why CEOs get such high pay. One natural response is that it helps to incentivize the executives. That led to a discussion of how much these executives actually respond to higher pay with increased work effort. And this is of course closely related to questions concerning the elasticity of the labor supply and the Laffer Curve effect of diminishing marginal tax revenues.
As for whether CEO pay is "excessive," it seems to me, as I suggested above, that the key is to compare publicly traded companies with private ones. If, as seems to be the case, privately held companies are paying equal or higher salaries (ceteris paribus, of course), then the case that boards of publicly traded companies are basically tools of the CEO is substantially weakened.
Out here in CO, when we think we're getting too big for our britches, we just look up and see the Rocky Mountains towering over us. Keeps things in perspective...
Who is this "we", little man? I got all my book learnin' here in Colorado and stare at them fine Rocky Mountains daily out my office window. One thing they teach us here in this state is how to properly read and vet sources.
In relation to the criticisms you received regarding your Wikipedia cite, it is sufficient to note that:
1. Wikipedia is not a strictly authoritative source;
2. Wikipedia attempts to maintain an objective voice, which is why the section you quoted as "the problems with capitalism" is actually lead by the phrase, "Some problems claimed to be associated with capitalism include:" (my emphasis).
Puts a different precession on your spin, methinks.
rwe,
Whether it is true or not is somewhat irrelevant. Whether there is elasticity in the labor supply is relevant, and I'm actually amazed there is debate about it. Whether that holds true int he Laffer sense, i.e. whether adjusting tax rates produces mroe taxes, is somewhat of a sideline issue. Whether CEO pay were federally capped, taxed away or changed in another sense does not change the effect of labor elasticity but does eliminate discussions of the Laffer curve.
Skullberg, if there is a somewhat elastic labor supply then marginal revenues will decline with higher marginal tax rates, so it is related.
It's fine though. I agree that it is somewhat of a distraction from the central question of CEO pay. I didn't bring it up. I was just responding to RMH's question. And then SoV challenged what I wrote--which I still believe to be correct.
Anyway, I've had enough. Good night.
"Now, if this is not to be a religious discussion, you'd first have to either a)state the conditions under which certain pay levels for certain occupations (in this case, CEO's) would be in your opinion 'too much', and why. Or b) just cut to the chase and say that no level is too high."
I'll bite on these.
I guess it depends on what you mean by too much.
Does it mean a level at which I would not be willing to pay as a shareholder
or
A level that I as a non-share holder think salaries should be limited to.
In the first case yes there is a limit, it is when I think that I could get more or the same by paying someone less.
In the second case I am fine with any level of pay because it is none of my business. I don't have a dog in the fight.
I may think it is too much, but it is really none of my business. I may also think that 20k is too much to spend for a car or that Kobe Bryant's contract is too big, but I don't buy cars more than 20k and I don't watch the NBA so it does not affect me at all.
Read Good to Great, one of the most influential business books of the last ten years. Collins shows rather convincingly that pay is more closely correlated with charisma than performance, and that charisma in turn has little correlation with performance, especially over the long haul (i.e. through multiple generations of CEOs). This would explain the Joe Nacchios, Bernie Ebbers and Jeff Skillings of the world.
Well, no. Or rather, it depends. I'm a firm believer in the notion that if you happen to believe a particular fact or theory, you had better be able to _show_ why, not just tell. Now, here, I don't demand a lot, and it's suited to the medium - I don't cite books or references that aren't generally available for quick look-up, because that's an easy way to cheat. Back in the bad old days in the 80's with LISTSERV, that happened a lot.
So I just give cites that are easily checked, at least marginally reputable, and have a good chance of citing other, more authoritative links that have more weight. I cited wikipedia because a) while not the most authoritative source, it at least gets the general details right, generally, b) most people accept it as fairly non-partisan, and c) it happened to be the very first link when I did a keyword search on 'Laffer curve . . . ' (I forget the rest of the search string.)
That would be difficult to do, given your particulars. If the curve is bell-shaped, for example, there can indeed be a points where higher tax rates can bring in _more_ revenue than you would expect. There can also be multiple inflection points where a local maxima is reached, where the revenues decline briefly before rising again, or go up briefly before falling again. Even if they are by very small amounts, and I don't know of any economist that _doesn't_ think that quite plausible. I suspect you're looking for a more probabilistic macro behaviour, but I can't tell. (Martin Gardner btw, is something of a role model for me. I should add that his depiction of the Laffer curve you see at that page is modelled upon actual economic data, so it's hardly a hypothetical. And indeed, most economists think it really does look as snarled as that, though the amplitudes may be considerably smaller.)
Well, here's a couple of extra cites you might like to peruse:
http://gregmankiw.blogspot.com/2006/12/supply-side-economics.html
Here are a couple of remarks that seem germane from the actual entry:
This goes to plausibility arguments, and the second big notion pushed by Wanniski, et. al., that is, where the 'maximal point'(or rather, region) lies, and if actual tax rates are to the left or right of it. We can concede for the sake of argument that revenue is lower at either extreme of taxation, at least in the United States, and that revenue will vary monotonically at these extremes. But what about the area of interest? There seems to be some indications that the 'maximal rate' is somewhat over seventy percent, and perhaps nearer to eighty. The tax cut experiments of recent decades certainly haven't refuted this, and you yourself claim to believe that we are to the left of the sweet spot. And of course, Mankiw says as much:
Finally, he has this to say about the simple-mindedness of an aggregate rate (and this is in part what Gardner's curve alludes to):
There is no debate, however, about the general lesson: How much revenue the government gains or loses from a tax change cannot be computed just by looking at tax rates. It also depends on how the tax change affects people's behavior.
There are other people, of course, but you seemed to like Mankiw. Here's another from Austan Goolsbee:
http://faculty.chicagogsb.edu/austan.goolsbee/research/laf.pdf
And the same, more or less, in a popular column:
http://www.nytimes.com/2008/01/20/business/20view.html?scp=1&sq=goolsbee
Here's a nice quote that would seem to go directly to the topic:
But you haven't said _why_ they are out of line. What is your metric? Why is one compensation package okay, but another is out of line? Surely you have some reason for thinking so, other than the raw amount of money being paid?
Iow, pure cant, dogma, religion. Which is okay, I guess. But doesn't really answer the question meaningfully. And since this sort of neo-classicsism seems to be on the way out for all but the hard-core political types, not really indicative of mainstream (ecomomic) thinking.
SoV,
I think people whose performance at their job relative to other people with the same job, either in the same company or industry, does not line up with their compensation is out of line. That's the only metric I have.
A lot of union workers, not all, fall into that category, as their pay does not correlate with performance. Plenty of athletes get paid out of proportion to their sill / success, as do actors who fail to bring in large audiences. And I know of middle managers, accountants and other office employees whose compensation was out of line with their performance for reasons such as nepotism or cronyism.
That's the criteria I use...
SoV, what is your metric for determing if someone is paid too much?
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Don’t believe one optimistic word from any public figure about the economy or humanity in general. They are all part of the problem. Its like a game of Monopoly. In America, the richest 1% now hold 1/2 OF ALL UNITED STATES WEALTH. Unlike ‘lesser’ estimates, this includes all stocks, bonds, cash, and material assets held by America’s richest 1%. Even that filthy pig Oprah acknowledged that it was at about 50% in 2006. Naturally, she put her own ‘humanitarian’ spin on it. Calling attention to her own ‘good will’. WHAT A DISGUSTING HYPOCRITE SLOB. THE RICHEST 1% HAVE LITERALLY MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. Don’t fall for all of their ‘humanitarian’ CRAP. ITS A SHAM. THESE PEOPLE ARE CAUSING THE SAME PROBLEMS THEY PRETEND TO CARE ABOUT. Ask any professor of economics. Money does not grow on trees. The government can’t just print up more on a whim. At any given time, there is a relative limit to the wealth within ANY economy of ANY size. So when too much wealth accumulates at the top, the middle class slip further into debt and the lower class further into poverty. A similar rule applies worldwide. The world’s richest 1% now own over 40% of ALL WORLD WEALTH. This is EVEN AFTER you account for all of this ‘good will’ ‘humanitarian’ BS from celebrities and executives. ITS A SHAM. As they get richer and richer, less wealth is left circulating beneath them. This is the single greatest underlying cause for the current US recession. The middle class can no longer afford to sustain their share of the economy. Their wealth has been gradually transfered to the richest 1%. One way or another, we suffer because of their incredible greed. We are talking about TRILLIONS of dollars. Transfered FROM US TO THEM. Over a period of about 27 years. Thats Reaganomics for you. The wealth does not ‘trickle down’ as we were told it would. It just accumulates at the top. Shrinking the middle class and expanding the lower class. Causing a domino effect of socio-economic problems. But the rich will never stop. They will never settle for a reasonable share of ANYTHING. They will do whatever it takes to get even richer. Leaving even less of the pie for the other 99% of us to share. At the same time, they throw back a few tax deductable crumbs and call themselves ‘humanitarians’. IT CAN’T WORK THIS WAY. This is going to end just like a game of Monopoly. The current US recession will drag on for years and lead into the worst US depression of all time. The richest 1% will live like royalty while the rest of us fight over jobs, food, and gasoline. Crime, poverty, and suicide will skyrocket. So don’t fall for all of this PR CRAP from Hollywood, Pro Sports, and Wall Street PIGS. ITS A SHAM. Remember: They are filthy rich EVEN AFTER their tax deductable contributions. Greedy pigs. Now, we are headed for the worst economic and cultural crisis of all time. SEND A “THANK YOU” NOTE TO YOUR FAVORITE MILLIONAIRE. ITS THEIR FAULT. I’m not discounting other factors like China, sub-prime, or gas prices. But all of those factors combined still pale in comparison to that HUGE transfer of wealth to the rich. Anyway, those other factors are all related and further aggrivated because of GREED. If it weren’t for the OBSCENE distribution of wealth within our country, there never would have been such a market for sub-prime to begin with. Which by the way, was another trick whipped up by greedy bankers and executives. IT MAKES THEM RICHER. The credit industry has been ENDORSED by people like Oprah, Ellen, Dr Phil, and many other celebrities. IT MAKES THEM RICHER. So don’t fall for their ‘good will’ BS. ITS A LIE. If you fall for it, then you’re a fool. If you see any real difference between the moral character of a celebrity, politician, attorney, or executive, then you’re a fool. WAKE UP PEOPLE. The 1% club will always say or do whatever it takes to get as rich as possible. Without the slightest regard for anything or anyone but themselves. Vioxx. Their idea. Sub-prime. Their idea. NAFTA. Their idea. Outsourcing. Their idea. The commercial lobbyist. Their idea. The multi-million dollar lawsuit. Their idea. $200 cell phone bills. Their idea. $200 basketball shoes. Their idea. $30 late fees. Their idea. $30 NSF fees. Their idea. $20 DVDs. Their idea. Subliminal advertising. Their idea. The MASSIVE campaign to turn every American into a brainwashed credit card, pharmaceutical, love-sick, celebrity junkie. Their idea. All of which concentrate the world’s wealth and resources and wreak havok on society. All of which have been CREATED AND ENDORSED by celebrities, athletes, and executives. IT MAKES THEM RICHER. So don’t fall for their ‘ good will’ ‘humanitarian’ BS. ITS A SHAM. NOTHING BUT TAX DEDUCTABLE PR CRAP. Bottom line: The richest 1% will soon tank the largest economy in the world. It will be like nothing we’ve ever seen before. and thats just the beginning. Greed will eventually tank every major economy in the world. Causing millions to suffer and die. Oprah, Angelina, Brad, Bono, and Bill are not part of the solution. They are part of the problem. EXTREME WEALTH HAS MADE WORLD PROSPERITY ABSOLUTELY IMPOSSIBLE. WITHOUT WORLD PROSPERITY, THERE WILL NEVER BE WORLD PEACE OR ANYTHING EVEN CLOSE. GREED KILLS. IT WILL BE OUR DOWNFALL. Of course, the rich will throw a fit and call me a madman. Of course, their ignorant fans will do the same. You have to expect that. But I speak the truth. If you don’t believe me, then copy this entry and run it by any professor of economics or socio-economics. Then tell a friend. Call the local radio station. Re-post this entry or put it in your own words. Be one of the first to predict the worst economic and cultural crisis of all time and explain its cause. WE ARE IN BIG TROUBLE.
About the 1% club 'tax revenue' defense. ITS A SHAM. If the middle and lower classes had a greater share of the pie, they could easily cover a greater share of the federal tax revenue. They are held down in many ways because of greed. Wages remain stagnant for millions because the executives, celebrities, athletes, attorneys, and entrepreneurs, are paid millions. They over-sell, over-charge, under-pay, outsource, cut jobs, and benefits to increase their bottom line. As their profits rise, so do the stock values. Which means more money for the upper class who own a giant share of the market. My problem really isn't with the upper class in general. But as more United States wealth rises to the top, the middle and lower classes inevitably suffer. This reduces the potential tax reveue drawn from those brackets. At the same time, it wreaks havok on middle and lower class communities and increases the need for financial aid. Not to mention the spike in crime because of it. There is a dominoe effect to consider. So when people forgive the rich for all of the above and then praise them for paying a greater share of the FEDERAL income taxes, its like nails on a chalk board. If these filthy pigs want to be over-paid, then they should be over-taxed as well. Remember: They STILL own 1/2 of all United States wealth EVEN AFTER taxes, charity, and PR CRAP. A similar rule applies worldwide. There is nothing anyone can say to justify that. Anyway, there is usually a higher state and local burden on the middle class. They get little or nothing without a local tax increase. Otherwise, the red inks flows like a waterfall. Service cuts and lay-offs follow. Again, because of the OBSCENE distribution of bottom line wealth in this country. I can not accept any theory that our economy would suffer in any way with a more reasonable distribution of wealth. Afterall, it was more reasonable 30 years ago. Before Reaganomics came along. Before GREED became such an epidemic. Before we had an army of over-paid executives, celebrities, athletes, attorneys, investors, entrepreneurs, developers, and sold-out politicians to kiss their asses. As a nation, we were in much better shape. Lower crime rate, more widespread prosperity, stable job market, free and clear assets, lower deficit, ect. Bottom line: Top heavy economies always destabilize and eventually collapse. Middle heavy economies remain stable and propsperous indefinately. WITHOUT LOANS FROM CHINA.