Arnold Kling  

Minimum Wage and CEO Pay

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The Two Labor Market Surveys... Productivity and Unemployment...

Marc Brazeau asks (see Steve Antler's site),


Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren't these issues raised in relation to executive compensation?

I think that the conventional wisdom is that inflation is determined primarily by monetary policy. I do not think that contemporary economists would be inclined to blame inflation on increases in the minimum wage. The entire "cost-push" model of inflation has fallen out of favor.

Most economists continue to believe that a higher minimum wage reduces employment. It is a straightforward consequence of the laws of supply and demand.

CEO compensation does not affect inflation or unemployment, because CEO compensation is not artificially set above market-clearing levels. That is, CEO compensation is set by the consent of shareholders, whether that consent is granted in wisdom or folly. In theory, shareholders set compensation so that they maximize the quality of management relative to what they spend. In theory, CEO compensation serves to provide the incentive for the best CEO's to go to the companies where they can make the most difference, rather than wasting their talents on companies that cannot afford to pay them the highest compensation.

Personally, I believe that if CEO's were paid less, then the quality of management would decline very little, if at all. From a shareholder's perspective, I think I would be willing to lower CEO pay and risk losing the CEO of a company to a higher bidder.

I suspect that there is an opportunity for shareholders to increase profits by implementing stronger corporate governance that limits CEO compensation. However, the cost of establishing such stronger corporate governance might very well exceed the benefits.

For Discussion. How would you answer Brazeau's question?



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The author at Asymmetrical Information in a related article titled How is CEO pay like the minimum wage? writes:
    Via Arnold Kling comes this question from Marc Brazeau: Two common arguments against raising the minimum wage are possible inflationary [Tracked on September 19, 2003 10:26 AM]
COMMENTS (44 to date)
Brad Hutchings writes:

CEO and upper management compensation is also indirectly subject to consent of other stakeholders of the company. Take the American Airlines fiasco from earlier this year as an example. If management is asking unions for concessions while at the same time covering its own collective butt, the business is gonna find it has a problem.

In a discussion of CEO compensation, I also think it is important to differentiate between professional CEOs and entrepreneur CEOs. I would imagine that Larry Ellison, Scott McNeally, Steve Balmer, Steve Jobs have a more legitimate claim to their respective compensation packages in the eyes of their shareholders and stakeholders than do Jack Welch, Lou Gerstner, or Al Dunlop (to name some prominent has-beens).

-Brad

Don Lloyd writes:

Shareholders should always be willing to pay as much as is required, limited by ability to pay, to hire the CEO that is deemed best suited to maximize the future value of their ownership shares.

The huge degree of variation in actual results that is likely to occur from choosing the highest ranked candidate over the second best, to the degree that the ranking has discrimination value, makes economizing on CEO pay an irrational act indeed. The process will always be a speculation, so the rankings will include down-ratings for excessive greed and questionable integrity.

Regards, Don

David Thomson writes:

“Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren't these issues raised in relation to executive compensation?”

Let’s get to the nitty-gritty: top CEOs probably comprise less than .00001% of the total American population. Their pay packages, however large, have little impact on our overall national economy. Alas, those who barely earn minimum wages number in the millions! Thus, any raise they receive will definitely have a major impact.

The vices of envy and bitterness often cloud one’s judgment and common sense. It is virtually illogical to speak about the very wealthy when dealing with national policies. The money will always come out of the pockets of the middle class. The very poor don’t have much money---and the super rich are too few. Taxing Bill Gates, for instance, at the 100% rate is essentially meaningless in a trillion dollar economy.

To some extent the blame (or credit) for excessive CEO pay has to go the media, which has created and fostered the cult of the CEO as stars. In reality, very few CEOs are absolutely pivotal in their company's performance -- but it makes better copy to tout an individual than a faceless team.

Michael Johnston writes:

RE: "Alas, those who barely earn minimum wages number in the millions! Thus, any raise they receive will definitely have a major impact."

David, this isn't necessarily true. It's hard to respond, however, as you haven't been clear about what will be affected. Presumably you're talking about the unemployment rate. While it's probably safe to posit that it will affect a large number of people, the degree to which this effect is shared in terms of unemployment figures and higher aggregate wages for those on the bottom of the distribution is unclear. More information is needed about elasticities (i.e., a price elasticity of labor units for unskilled labor) in this neighborhood before speculations can be made regarding "major impacts." I'm not a labor economist, but I think you've oversimplified things (again).

David Thomson writes:

“More information is needed about elasticities (i.e., a price elasticity of labor units for unskilled labor) in this neighborhood before speculations can be made regarding "major impacts." I'm not a labor economist, but I think you've oversimplified things (again). “

Oh gosh, am I perhaps being over simplistic? We are already seeing in California the negative effect of mandated minimum wage pay of around $10 an hour. The overwhelming evidence is that many restaurants have had to close down, and fewer new ones are opening. The only real question is where the serious damage starts. Is it at $5, $6, $7, or is it a somewhat higher figure? Millions of workers are barely able to command an hourly figure in the minimum wage range. These are our grass cutters, dishwashers, house cleaners and chicken pluckers. And yes, the impact can be major if the government “protects” them. How many executives receive at least a million dollars annually? Is it even ten thousand?

Now it’s time for me to throw a wicked curve ball over the plate. Just because I said that executive pay represents a very small fraction of our overall country’s wealth---does not mean that I believe that most of these people deserve their unbelievably generous compensation packages! How do they get away with this nonsense? The typical investor may only own a few shares of the company’s stock. It therefore does not behoove them to spend an enormous sum of money and time to fight against the establishment over a financial sum representing a mere few pennies of their stock portfolio. The members of the company’s board, however, often have a reason to play “you scratch my back and I’ll scratch yours.” Moreover, I argue that the nation’s economy will improve more when the company chiefs earn less. One cannot avoid the importance of symbolism. They simply are not generally that important to the bottom line. Their pay demeans the efforts of the employees who are lower on the pecking order.

Michael Johnston writes:

Well, it's an empmirical question, that's all. It's more than just saying "there are a lot of people here so any change will have a major impact."

And on this note, anyone care to share with us their list of journal articles on the subject?

Matt Young writes:

The primary cause of income disparity is big government. Income disparity decreased from 1947 to 1967, at which time big government expansion began. Income disparity rose as big governmnt expanded until Clinton (and Gingrich) began a government contraction. With the Bush expansion of government, income disparity will show a marked rise.

When government consumes 40% of the economy, private sector naturally seeks to expand and redress the ratio. The fastest route to expansion is immigration, outsourcing, and depressed wages.

David Thomson writes:

"he fastest route to expansion is immigration, outsourcing, and depressed wages."

A high minimum wage (especially in the $10 range) inevitably encourages employers to purchase more efficient dishwashers, new inventions to pluck chickens, and many of us will decide to clean our own homes and cut our own grass. Restaurants will offer more buffets and other self service alternatives. Only the wealthy will go to full service eateries. Many jobs in the manufacturing sector will be exported out of the country. The few executives who earn a few million dollar annually in a multibillion dollar company barely cause a ripple.

Mcwop writes:

From a governmnet revenue perspective, high CEO pay benfits it more than a $1 increase in the minimum wage. Mush of CEO pay is taxed at 35% plus medicare at the Federal Level, which pushed it close to forty. Higher if the AMT is assessed. Someone earning min wage probably falls into the 10-15% bracket, and if they have kids may be getting money back from the governmet.

High CEO pay is great election rhetoric, but if politicians want more tax revenues under a porgressive system, then CEO's need to earn lots of money.

vinod writes:

"CEO compensation does not affect inflation or unemployment, because CEO compensation is not artificially set above market-clearing levels. "

I'd actually say that it's because 1) CEO's are a tiny % of the economy and 2) CEO jobs are NOT a particularly liquid market. Thus these salaries aren't set by a strict supply & demand curve intersection (I'm not denying the S/D curves exist; simply that at the stratospheric levels of CEO-ness, the relationship b/t input and 'price' is far less linear)

By contrast, minimum wage jobs are perhaps the MOST liquid of all professions and thus most subject to basic supply/demand curves.

Mark writes:

"We are already seeing in California the negative effect of mandated minimum wage pay of around $10 an hour."

When did this happen? When I moved out of CA in 2001, the state minimum wage was $5.75 per hour.

Boonton writes:

"Oh gosh, am I perhaps being over simplistic? We are already seeing in California the negative effect of mandated minimum wage pay of around $10 an hour. The overwhelming evidence is that many restaurants have had to close down, and fewer new ones are opening. The only real question is where the serious damage starts. Is it at $5, $6, $7, or is it a somewhat higher figure? "

One interesting position that I've seen argued is that small increases in the min. wage actually have the opposite effect...increasing employment. One study looked at a min. wage increase in NJ versus nearby PA which had no increase. The obviously relevant variables (local economy, income etc.) were the same for both towns yet fast food employment in NJ actually went up!

It may be the case that there exist low levels of built in inefficiences hidden in the private sector. For example, most here agree CEO's are probably overpaid but the return to stockholders in controlling them would not be enough to justify the effort. It may indeed be that 'free lunches' are possible on a small scale, increased pay, incrased employment and no decrease in profit...

Just a thought. Usually discussions of the min. wage center on extreme proposals ('well what if we had a $15/hr min wage!). It doesn't follow that the same properties would carry thru in tiny scales.

Bernard Yomtov writes:

I think CEO pay IS artificially set above market-clearing levels.

Arnold, do you doubt that there is a surplus of would-be CEO's? That is, do you doubt that there are plenty of people fully capable of heading large corporations who would be happy to do so at current pay levels or less?

Sure, it's a hard job, but let's not kid ourselves. As Prashant points out, the media have greatly exaggerated its importance and difficulty.

And if there is such a surplus can't we conclude that the pay is above market-clearing levels?

Lawrance George Lux writes:

The discussion on the elasticities of the job market must include the degree of labor saturation. Business has already downsized to the point where further labor reductions will start to erode Productivity. Management cadres are so saturated, on the other hand, are so saturated that Pay Benefits packages are held up only by cancellation of Stockholder ownership rights.

The Country could absorb a $2 per hour increase in the Minimum Wage, as replacement labor to do the grunt work previously achieved by the excessive downsized elements. This simply to run Copy machines, provide Office supplies from Storage, and distribute Packages. The surviving non-downsized would love any shortcuts eliminating excessive Overtime, which George W. Bush policy is trying to cancel payment for. Restaurants are already suffering from loss of Patronage, solely because of the absence of personal service. lgl

Eric Krieg writes:

Just got back from Seoul and have a serious case of insomnia.

I think this woman speaks for many of you:

http://www.fortune.com/fortune/articles/0,15114,487013,00.html

Myself, I don't see how so many of you economist folks can talk yourself out of the law of supply and demand! Look, if it works for widgets (and does anyone seriously argue that is doesn't), it works for burger flippers.

Rationalize it all you want. A rise in the minimum wage NECESSARILY decreases low wage employment. It can be no other way.

As for Beth Shulman, she should know better. Poverty in America is driven by out of control illegal immigration from Mexico. Mexicans in America drive down the price of labor on the low end, but more importantly, drive up the cost of housing on the low end as well. As housing is the primary cost facing low wage workers, this has a devastating effect on disposable income.

Back in the old days, trade unionists knew this. But these days they are SO desperate for members they will sell out their existing members for a chance to build the pool of potential members. They see Mexicans as being more trade union oriented than Americans (probably true, one reason that Mexico is such a hole and no better off than they were in 1994, despite NAFTA).

Paul writes:

"Personally, I believe that if CEO's were paid less, then the quality of management would decline very little, if at all"

I agree with you, and actually made this very argument last week with a colleague when the subject of Grasso's pay package came up. I'm guessing that with corporate governance and CEO behavior in the news so much over the past few years there have been a number of studies done (or currently under way) on this...curious to know what they show.

Arnold Kling writes:

"Arnold, do you doubt that there is a surplus of would-be CEO's?"
The fact that a lot of people would like to be CEO's does not necessarily indicate a surplus. I would like to be a professional baseball player or a rock star, but that does not mean that I am part of the supply curve in those industries.

The question is whether the CEO market functions reasonably well. I worry about "attribution errors" which might lead people to overstate the importance of the CEO to company performance. But I have no hard evidence that the market is messed up.

Boonton writes:

It is true that just counting people who would like to be a CEO is not the same as the supply of CEO's. However I can tell you exactly why Arnold is not a basketball star or a pop star; because he can't jump and he can't sing! Can we explain what makes him unsuitable to run a $100M corporation?

A better mind than mine will have to come up with a way to demonstrate that CEO's are overpaid but I have a strong feeling that they are. Perhaps a better route would be to try to prove the opposite. What benefits can be shown from hiring $100M CEO's rather than $1M ones? In other words, is it possible to demonstrate that CEO's are worth it?

Bernard Yomtov writes:

Arnold,

I understand that not everyone can be a CEO. Please read my post again. I specifically asked whether you think there are plenty of people CAPABLE OF BEING CEO's who would take the job at current pay scales.

My opinion is that the answer is yes - hence a real surplus.

Is the market messed up? Well, we've certainly seen examples of poor-performing CEO's who earned huge sums.

I think there is an almost religious tendency to think that markets can't get messed up unless the govt interferes. Are you falling prey to this?

Eric Krieg writes:

If you think that a market system for something is messed up, then it is incumbant upon you to explain the mechanism by which the market is distorted.

Generally, when the government interferes with a market, it is pretty easy to explain the mechanism that is distorting the market.

But I don't see what is causing CEO pay to be so out of line. If the market is failing, I don't see what is causing the failure. Specifically, what is different now than, say, 20 years ago?

Boonton writes:

"If you think that a market system for something is messed up, then it is incumbant upon you to explain the mechanism by which the market is distorted."

Very simple, an inefficiency is only cleaned up in the market if there is an incentive for someone to do it. Workers may abuse the 'free coffee' in the office but what incentive is there for the market to stop it? Want to try to borrow $500M and perform a hostile takeover by telling your financial backers you can pay them back by charging workers $0.25 per cup?

Likewise for many shareholders the cost of going after the CEO and top level management is too great. Even if you save tens of millions it will be a drop in the bucket of the company's revenue. So CEO's are able to abuse their position in the system of corporate governance & mostly get away with it. Likewise I'm able to modestly abuse my company's internet policy by telling you this right now ;).


"If the market is failing, I don't see what is causing the failure. Specifically, what is different now than, say, 20 years ago?"

I had a friend who went through a period in his life after his son died of shoplifting. He literally filled his house with CD's, DVD's, furniture & more. It wasn't even stuff he used, he would have 10 copies of the same DVD! He even walked out of Home Depot one day with a whole refridgerator!

One thing that period of his life demonstrated to me was that very little stands between you behaving well and behaving badly. In fact, much of the barriers are not police or technology or auditors but a shared morality that you have with your co-workers, friends and community. If that sense of common ethics breaks down then people will start abusing something that they never abused much before.

So suppose 20+ years ago CEO's had a shared ethic that they had a duty to protect the interests of the company's owner (aka stockholders) and excessive pay was abusing the trust that the stockholders put in you. If that ethic breaks down then the corporate Treasury becomes a free-for-all at the expense of stockholders.

Eric Krieg writes:

>>Likewise I'm able to modestly abuse my company's internet policy by telling you this right now ;).

HA! Nothing like that going around here!

No bull, we need to get back to work, B.

Nah, this is more fun.

>>Likewise for many shareholders the cost of going after the CEO and top level management is too great. Even if you save tens of millions it will be a drop in the bucket of the company's revenue.

If it is a drop in the bucket, not worth making an effort to stop, then I don't really see how it is a market failure.

Bernard Yomtov writes:

"If it is a drop in the bucket, not worth making an effort to stop, then I don't really see how it is a market failure. "

It may be a drop in the bucket to each individual shareholder, but a huge sum when added together.

The failure, I believe, is that boards have no incentive to be tough on CEO's. Board members, who are well-paid, generally owe their sinecures to the CEO, so they are not going to raise hell about his pay. In other words, as Boonton says, there's no incentive to do anything.

Markets are not magic. They work well under certain conditions, and there is no reason to suppose that those conditions must always be present.

David Thomson writes:

"If it is a drop in the bucket, not worth making an effort to stop, then I don't really see how it is a market failure. "

It’s almost certainly a market failure. This situation, though, is highly atypical. My guess is that the selection of a new multimillion dollar CEO only occurs about .00001% of the time. Heck, didn’t it take years for GE to replace Jack Welch?

What realistically can be done? I suggest that the board selects the candidate, but a wider body (perhaps at least 50 people) of stock owners approve the compensation package.

Eric Krieg writes:

>>Markets are not magic. They work well under certain conditions, and there is no reason to suppose that those conditions must always be present.

Um, no.

I think that is precisely the supposition you must make. Assume markets work unless proven otherwise.

And no offense, but your sense of moral outrage over CEO pay is NOT proof of market failure.

Bernard Yomtov writes:

Um, yes.

Markets are human institutions. Human institutions are imperfect. To pretend otherwise about markets is to make them the object of religious veneration rather than objective analysis.

And it's not just moral outrage, though that is surely justified. I do think there is a surplus of CEO's, in the sense I described above, and that this is pretty good evidence of market failure. I also think there are, and have been, plenty of CEO's doing lousy jobs and getting very well paid. I have painful experience with one such.

What we know, from people who have been involved in the process, is that boards base their compensation decisions on lots of non-market factors. Some are, taken together, quite silly. For example, they often want their CEO to be paid above the median of all CEO's. There has been plenty of comment from these people about the absurdity of the process.

We also know that board members are often chosen by the CEO. That hardly creates incentives for the board to bargain vigorously over CEO compensation.

Fundamentally, I don't think the board negotiates pay with the CEO in anything like the way a company tries to negotiate with other employees or vendors.

Eric Krieg writes:

>>To pretend otherwise about markets is to make them the object of religious veneration rather than objective analysis.

Maybe this borders on religious veneration, but my feeling is that more harm has been done after "objectively analysing" markets, and regulating or otherwise changing them, than has EVER been done by so called market failure.

I refer you to Arnold's post on the New Deal and how it actually prolonged the Depression for a really good example of what I'm talking about.

>>And it's not just moral outrage, though that is surely justified. I do think there is a surplus of CEO's, in the sense I described above, and that this is pretty good evidence of market failure.

I just don't think that you or anyone else has given ANY evidence, much less pretty good evidence, that there is market failure. There are some obscene salaries, yes, there is some pretty poor corporate performance in some cases. But is that evidence of market failure? I don't think so.

Look, I don't want to sound like a coporate lap dog. My experience with CEOs is no better than anyone elses. But I just think that there are more important things to be worried about.

Life is too short to be worried about what other people are paid. My compensation is fair for the amount of effort I expend doing my job, and that's all I care about.

And for those who ARE concerned with religion (including MANY complainers about CEO pay) envy is a sin.

zimran writes:

CEO pay does not hurt workers

http://www.winterspeak.com/2002_11_01_archive.html#85696240

According to Forbes, average CEO pay was $4M in 1996 and $7.5M in 2002 (it was 11% higher in 2001). (This is last year's number).

Total CEO pay in 1991 was $6B. If they were to work for free, and nothing else changed, every worker would be paid, on average, $54 more.

Big whoopee.

Moreover, if CEO pay is treated as a perp, it costs about $120B (at a 5% discount rate). That's $120B out of an organizational marketcap of about $9.1T. That's 1.6%.

Slightly bigger whoopee.

If people think reducing CEO pay will somehow make american workers richer, they have a very inflated opinion of how much $54 can buy nowadays. Or they have not done the math.

If they think it's hurting shareholders, they are right but again, it's pretty small.

If they think that most CEOs have poor incentives to serve shareholders, they are probably right. I look forward to their corporate governance and compensation/incentive schemes. Maybe large stock grants would work better? Or index linked options? Or more active institutional shareholders (and relaxing RegFD)?

Bernard Yomtov writes:

Zamran,

"That's $120B out of an organizational marketcap of about $9.1T. That's 1.6%..... If they think it's hurting shareholders, they are right but again, it's pretty small."

I'd rather not have someone take 1.6% of my money, if it's all the same to you. And are yopusaying it's OK to steal a lot of money as long as you don't take too much from any one person? What's the moral difference between a CEO who uses his position to take $1 million he's not entitled to and a bookkkeeper who uses his to take $10,000?

As far as corporate governance schemes go I have a number of things I think would improve governance in the sense of giving shareholders more control of the company that they do, after all, own.

Start with real elections for the board, and go from there.

David Thomson writes:

“If people think reducing ceo pay will somehow make american workers richer, they have a very inflated opinion of how much $54 can buy nowadays.”

The symbolism can be far more important than the $54. Unjustifiably generous ceo compensation packages demean those lower on the pecking order. They tacitly say that the ceo is a god like figure---and everybody else is only one step ahead of being an idiot. I’m convinced that this exaggerated view of the ceo, however subtly, impacts negatively on our national economy.

How do we resolve this matter? As I stated earlier, a larger number of people should approve the pay package. The current system where only a mere handful of folks make such a decision is too easy to manipulate.

Eric Krieg writes:

>>As far as corporate governance schemes go I have a number of things I think would improve governance in the sense of giving shareholders more control of the company that they do, after all, own.

How do you ensure that the medicine isn't worse than the sickness?

>>I'd rather not have someone take 1.6% of my money, if it's all the same to you.

Some of that 1.6% is justified compensation. So the "theft" is not 1.6%, it is something less. It seems to me that there is a real risk that "reform" could end up costing more than the problem, especially if the reform is in the form of legislated regulation.

Boonton writes:

>Likewise for many shareholders the cost of going after the CEO
>and top level management is too great. Even if you save tens of
>millions it will be a drop in the bucket of the company's revenue.

"If it is a drop in the bucket, not worth making an effort to stop, then I don't really see how it is a market failure."

It's a market failure in the sense that the most efficient allocation of goods does not take place. We should acknowledge this because more than a handful of people will enter a discussion like this with an assertion to the tune of 'Of course Mr. X is worth $Y hundred million per year! He wouldn't be getting paid that if the market didn't know that was what he was worth!'

Bernard Yomtov writes:

"I just don't think that you or anyone else has given ANY evidence, much less pretty good evidence, that there is market failure. There are some obscene salaries, yes, there is some pretty poor corporate performance in some cases. But is that evidence of market failure? I don't think so."

Have you followed the literature on executive compensation? I mean the real literature, not whatever nonsense shows up in NR. If not, there is no basis whatsoever for your statement.


"How do you ensure that the medicine isn't worse than the sickness?"

Why would it be? I'm just suggesting that the peopel whow own the company, and whose money is at risk, be given more say in its operation. Do you think things work better when they are controlled by a small group of not very accountable people? I thought that was one of the libertarian objections to government. Funny that you find it OK in a corporation.


"Some of that 1.6% is justified compensation. So the "theft" is not 1.6%, it is something less."

You're right. But I'd rather not let someone steal even .8% (or.1% for that matter) of my money.


"It seems to me that there is a real risk that "reform" could end up costing more than the problem, especially if the reform is in the form of legislated regulation."

And if you cross the street you might get hit by a car. My idea of reform is not to have a compensation czar, but to let shareholders have more control over the company - a fundamentally free-market proposal that needs some legislation in order to be implemented.

Eric Krieg writes:

>>Why would it be?

Human nature. Very little in the way of "reform" actually works.

Look, it was brought up that CEO pay is 400% higher today than it was in 1980 (or whatever the actual numbers are, its not important). But look at how much corporate America has improved since 1980. We have collectively gone from being an economic basket case to the most vibrant economy on earth. The Dow has increased 10 fold from then to now. While executive compensation is excessive, it hasn't has much of an impact on our economic performance.

I just think that the risk of reform is not being factored into the discussion. Don't kill the goose that laid the golden egg.

David Thomson writes:

“How do you ensure that the medicine isn't worse than the sickness?”

Once again, we do not live in a risk free universe. My suggestion is not exactly draconian. I merely believe that a higher number of stock owner should vote on the executive pay of the top executives. Currently the vote is limited to those who have an interest in perpetuating a milieu of “I’ll scratch your back and you scratch mine.”

"It seems to me that there is a real risk that "reform" could end up costing more than the problem, especially if the reform is in the form of legislated regulation.”

That’s right. There is indeed some risk of adverse unintended consequences. Still, some reforms in our nation’s history like our child labor laws and those protecting the physical safety of worker on the job did a great deal of good. I strongly recommend that some of us reread Upton Sinclair’s “The Jungle” written almost a hundred years ago.

PS: Wasn't Sinclair something of a socialist? Yes, and so what? We should only be concerned with the accuracy of his book. Argument ad homine ad hominem criticisms are not worthy of our time.

Eric Krieg writes:

I would think that every economist would have the Law of Unintended Consequences tatooed on their psyche, if not their bicep.

Boonton writes:

Economic basketcase in 1980 to best economy in the world today? All because we finally started paying CEO's the ideal amount?

By what measure was our economy a basketcase in 1980 and what other nation on Earth was doing better than the US back then?

Boonton writes:

More to the point, if the cost for shareholders to control CEO pay is lowered the market incentive would only be to use this power when it made sense. If the $100M CEO is really worth it, shareholders would refrain from using their power to cut his pay.

Eric Krieg writes:

>>By what measure was our economy a basketcase in 1980 and what other nation on Earth was doing better than the US back then?

Japan and Germany.

Do you recall the "misery index"? It was all the rage in 1980. When is the last time that you heard it mentioned?

No, I don't think that CEO pay is responsible for the US renaissance. I give Ronald Reagan credit for that. But CEO pay certainly didn't stop the renaissance. Thus, if CEO pay is a market failure, it isn't much of an impediment.

Boonton writes:

"Japan and Germany"

What measures made Japan and Germany stronger than the US in 1980? GDP per capita? GDP overall?

The 'misery index' is a useful measure but not a fundamental one. One part of it, unemployment, is really two different variables (those in the labor force and those out of work). Inflation is a better measure but the 'misery index' simplifies the whole thing by making it always equal to unemployment. An economy with 1% unemployment and 5% inflation is just as 'miserable' as an economy with 6% unemployment and 0% inflation.

Eric Krieg writes:

>>What measures made Japan and Germany stronger than the US in 1980?

Economic growth rates. Growth in Japan and Germany survived the 1970s much better than we did.

I have no comment as to the efficacy of the misery index. All I'm saying is that it was a popular measure of non-wellbeing in the 1970s, but one that was purged from our economic vocabulary by the startling good performance of the US economy since 1980.

Boonton writes:

True but let's be careful. I'd rather make $50K per year with 5% raises than $12K per year with 7% raises.

Eric Krieg writes:

>>True but let's be careful. I'd rather make $50K per year with 5% raises than $12K per year with 7% raises.

To a certain extent. There is no doubt that in developing countries a great deal of the impressive looking economic growth rates are due to nothing more than the small base from which their economies are building. 10%, or 100%, or 1000% of zero is still zero. It is harder for large, mature economies to achieve impressive growth rates.

But Japan and Germany were large, mature economies in the 1970s. Japanese and German incomes approached those of Americans, especially at the median (rather than the mean, since both Japan and Germany are more egalitarian societies than the US, reflecting their homogenious racial demographics).

So maybe it was 10% of $35,000, instead of 5% of $50,000, or something like that.

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