Tuesday, January 30, 2007

Executive Pay

“When I graduated from college, the average corporate CEO made 20 times what the average worker did; today, it's nearly 400 times. In other words, it takes the average worker more than a year to make the money that his or her boss makes in one day.”
- from the Democratic response to President Bush's State of the Union address, as delivered by Sen. Jim Webb, D-Va.

i’m not really sure why executive pay would pop up on a politician’s radar. short of outright wage controls, there doesn’t seem to be much the government can do to change what a CEO makes. the libertarian in me thinks that if politicians stuck to doing their job, they might actually get a few things accomplished. of course, the libertarian in me also thinks the less politicians actually get done, the better off things will be. so, maybe i shouldn’t look a gift horse in the mouth. nonetheless, there is a point of view in webb’s comments that i find particularly disturbing.

perhaps i am being too literal and sen. webb mentions executive pay not because he has any designs on government regulation of private salaries, but rather to make a point about growing inequality and the decline in wages among the middle class.

if that is the case, then i would ask webb just why it is that i ought to care what my “boss” makes in a year or even in one day. this is a curious class of argument, in that there really is no argument. all webb does is state a fact: CEOs used to make x times more money, now they make y times more. nathan smith makes this point in an article on TCSDaily. as smith puts it, webb’s argument concerns relative wealth and does not address whether there has been a real increase in worker’s salaries. since i am not the sort of person who would think less of my own cadillac just because my neighbor got a porsche, it makes much more sense to focus on my own earning power rather than somebody else’s.

this might be a good time to make a baseball analogy. at one point players basically belonged to the team that signed them. they could be traded by the team, but had no real freedom to negotiate a contract with any other team. as a result, they made relatively modest salaries. teams enjoyed a monopoly when negotiating with their own players. after free agency, teams were forced to compete with one another to sign players not under a present contract. off to the races went player salaries.

the relative question to ask is this: if a-rod didn’t make $25 million a year, would a peanut vendor at yankee stadium be making more money? probably not. it seems more likely that the peanut vendor’s salary has much more to do with the price of peanuts and the number of people who come to the ballpark. the more fans and the cheaper a bag of peanuts, the more peanuts he will tend to sell.

now, you could argue that if the yankees paid a-rod less and lowered ticket prices then more people would come to the stadium and our peanut guy would make more money. however, this is only true if ticket price is the only variable that contributes to attendance. it’s not, and there’s no definitive way you could argue that more people would show up at the stadium to pay $10 and watch a team of utility veterans and young talent than would be willing to pay $20 to watch a team of all-stars. likewise, i don’t see how you can make a definitive argument that if CEOs made less money then workers would make more, in terms of real dollars.

there is still a dimension to webb’s argument that may ring true. if large numbers of corporate executives are being overpaid for shoddy work, you could argue that workers, and shareholders, are losing out on the basis of opportunity costs. that is to say, if CEOs were paid sparingly and according to performance then companies, and consequently our economy, would perform better.

so, are executives being paid more than they are worth? i am neither an economist nor an expert on management, so i won’t even pretend to offer a definitive answer on this. the economist just did a special report on executive pay and it seems to imply that big corporate profits have indeed followed from increased executive pay. of course, there are always those cases where executives are paid huge sums of money for performance that can be quantitatively judged as sub par. the home depot’s departing CEO offers the latest example. in terms of the baseball analogy: a-rod sucks, nobody wants to see him play and his $25 million salary is a waste of money.

there are two problems with that approach. the first is that it implies salaries have but one purpose: to reward people for a job already done. that is only one part of the function that a salary fulfills. in a sense, it is a secondary function. for the most part, people negotiate their pay before ever actually performing the job in question. salary is as much an enticement to take a job as it is compensation for fulfilling your duties. unless you work purely on commission, your salary will tend to be more of a reflection on what your employer thinks you can do then on what you have already done.

the other problem lies in the particular comparison that sen. webb makes. for political purposes, it may make sense to compare a CEOs salary to the lowest paid worker in that firm, but it’s a rather meaningless relationship. that is because when companies look for a CEO, they rarely look among the ranks of the lowest paid. a security guard’s salary will tend to reflect more on the market for security guards and less on whether he works for an investment bank or at the gap. i would expect that the only significant differences might arise from the tendency of the investment bank to hire guards with more corporate security experience, whereas the gap may have lower standards for employment.

it might be more useful to compare the pay of CEOs to those who fall directly below them on the chain of command. after all, that is the pool from which new CEOs are most likely drawn.

i read an article in the nytimes a few weeks ago about how fewer and fewer police officers are taking the sergeant’s exam. it turns out that sergeant’s only make a little bit more money than police officers, but they have to deal with the headache’s of being a supervisor. as a result, fewer and fewer officers wish to be sergeants. it’s a perfectly rational decision. why deal with the hassle of being management and make $55,000 a year, when I can make $50,000, work significantly fewer hours and have a lot less pressure on me?

i cannot say anything for certan about the relationship between CEO pay and what other executives make, but i assume they address the above-mentioned phenomenon. if CEOs made only marginally more money than excutive vice presidents, then who in their right mind would want to be a CEO? if there is any truth to what i’ve just written, then exponentially rising CEO pay makes perfect sense. it’s the only way to consistently attract good talent. so, a board of directors may not know for certain that they are getting their money’s worth, but they do know that if they refuse to pay what the market demands they have much less of a chance at hiring a good CEO.

the bottom line is this: if CEOs were paid according to what everyone else thinks they ought to be paid, then we would likely end up with an overabundance of CEOs obsessed more with their public image and less with running their companies well. there’s a word for those types of people… politicians.

Wednesday, January 24, 2007

Economic Populism

this is the expanded version of an essay i wrote for one of my grad school applications. the topic is economic populism; it's something i've been thinking a lot about lately. the next few posts will most likely be variations on this theme.

Economic Populism and the Threat to the World Economy

In 1930 Congress passed, and President Hoover signed, the Smoot-Hawley Tariff Act. It was meant to alleviate rapidly escalating unemployment and rapidly deflating prices by making competing goods more expensive. Other countries followed suit with their own protectionist policies and by some accounts real international trade decreased by fourteen percent. What was meant to combat the oncoming Great Depression may have, in fact, exacerbated it and assured its hold on the world economy.

Most policy makers and politicians today understand the negative effects that old-fashioned protectionism can have, not only on world trade, but on the national economy. That being said, there never seems to be a shortage of those who propose a little bit of protectionism as a means to fix supposed inequalities and inefficiencies in the economy. Today, there are those who speak in the euphemism of “Fair Trade” and claim they are sticking up for the working man against big business and global competition.

In fact, it seems that this sort of Economic Populism has become the Democratic Party’s new big idea. They have taken a lesson from Karl Rove and the Republican Party’s former hold on the so-called “values voters” and found their own set of issues and policy initiatives to exploit. That is not to imply that the threat comes solely from Democrats. The real threat is that politicians on both sides of the aisle may rush to “out-populist” their opponents.

This is a particularly ripe era for the message of Economic Populism. Our parents worked for one or two employers their whole lives and those employers provided healthcare and pensions. Now we see that the average person will switch jobs numerous times and that our healthcare and retirement expenses are no longer automatic. Also, our economy seems to be primarily fueled by consumer spending on goods that are increasingly being produced elsewhere. Some argue that free trade, and in particular the spread of discount big box stores like Wal Mart, is gutting us of our manufacturing base and leaving us with low-paying “Mcjobs” in their place. The language of Economic Populism speaks directly to those fears.

Fear can be an extremely powerful human motivator and, as such, can cut both ways. A middle-aged man who has a heart attack might be scared into better eating habits at the thought of dying young and leaving behind a widowed wife and orphaned children. Unfortunately, fear also has the power, at times, to circumvent our rational thought process. The sort of fear that fuels Economic Populism does exactly that; it prevents us from seeing the forest for the trees and is grounded in certain false economic assumptions.

These false economic assumptions manifest themselves in a number of ways. The first problem lies in the characterization of the global economy as global competition. Economic populists portray the global economy as a zero sum game. If the Indian technology sector or Chinese manufacturing is booming, then it must be at the expense of American jobs. If working conditions in Chinese factories are not up to our standards, then it must be that the American consumer’s greed for cheap products is maintaining those conditions. An extension of that problem, lies in applying this zero sum mentality to the domestic economy. If some other guy is getting richer, then it must be because I’m getting poorer. And if I’m getting poorer, it must be because something isn’t fair. That’s where the invisible hand of the marketplace is usurped by the all-to-conspicuous hand of politicians.

It is never politically popular to tell people that we may be better off in the long run losing manufacturing jobs rather than propping up inefficient industries and that the rise in living standards in far-off places like China and India are positive outcomes that do not fundamentally threaten our own standard of living. In fact, by making certain goods and services cheaper they may contribute to a rise in real wages.

In a rapidly shrinking world where consumers are armed with more information, they are going to find the lowest prices whether they come from the factory next door or from one on the other side of the globe. Retailers like Wal Mart are more the reflection of that phenomenon then they are the cause of it. Likewise, in a world where people are always looking to further their education and obtain new skills it makes sense that the market for employment will be much more dynamic than in the past.

There is a real threat that economic debate will be hijacked by those looking to cash in on what is most certainly a more uncertain age. Economic Populism will be a major issue in the next few election cycles. The world is getting smaller; that is a fact. If we arm ourselves with sensible policy and do not give into fear, that phenomenon has a chance to impact the world in a number of positive ways. However, that will only happen if we continue to make trade policy based on economically sound principles and not by pandering to people’s fears.

Wednesday, January 17, 2007

Liberal Anger, Liberal Pessimism, part ii

i called this post “liberal anger, liberal pessimism”, but i don’t mean to imply that these are purely liberal phenomena. in the article on the new anger, peter worth mentions ann coulter as an example of conservative anger. this anger from the right is the result of the same sort of oppositional thinking that animates its liberal counterpart. the conservative sees herself, and other conservatives, as a pious, moral and patriotic holdout in an increasingly profane, immoral and disloyal world. the perfect example is bill o’reilly, the self-proclaimed culture warrior.

i just started reading a book called the white man’s burden. the author, william easterly, gives away his main contention with the book’s subtitle: why the west’s efforts to aid the rest have done so much ill and so little good. easterly divides those who work on issues of international economic aid into two categories: planners and searchers.

planners are those who would solve the world’s problems with big comprehensive solutions. they propose grand plans that are devised by technocrats and mandated from the top by a partnership between the UN, international agencies and the nations of the developed world. searchers eschew these big plans in favor of smaller, more pragmatic, market-based solutions that seek to address specific needs in the developing world. i propose that this planner v. searcher approach provides both a more accurate and more precise way view political anger and pessimism than the liberal v. conservative split.

for both the orthodox liberal and the orthodox conservative, issues of race are generally just battles in a larger ideological war. black americans have been the guinea pigs, or perhaps the control group, in this american experiment. take the case of the civil war. ostensibly, the civil war was fought over whether the federal government or individual states had the right to determine the slavery issue. in a larger sense, however, it was really a fight over just what sort of america this was going to be. it was a war fought to decide whether this country would move forward into the industrial age, embracing modernity and a dynamic socio-economic landscape or would remain a static and largely agrarian society dominated by a class of landed gentry whose notions of honor and chivalry were based on a highly stratified social order.

ever since the new deal, there has been another ongoing debate over what sort of place america ought to be. as with international aid, planners want socio-economic change that is animated by big government, top-down mandates, and searchers opt for decentralized, market-driven solutions. i pick on liberals in regards to race issues, because they have placed themselves firmly on the side of planners. they have chosen to view the issue of civil rights as primarily a grand social movement to be furthered through things like gerrymandered voting districts, affirmative action and government entitlement programs. at the onset of the civil rights movement, and in the face of jim crow, that may have been more appropriate. today it seems quite clear many obstacles black americans face are psychological in nature. continually waking up to a dream deferred has left many without hope, when hope is precisely what is necessary.

the writers at the ny times, and other liberals, see a fairy tale in the story of a black man waging a war on his own personal poverty as a threat because it contradicts their own idea that liberal social policies are the black man’s only salvation. they are planners. they focus on the big picture, and in doing so, completely ignore the issue of individual liberation. of course, individual liberation is precisely the point of the liberal democracy. more to the point, black americans will only experience true freedom when they are free to be individual americans.

Tuesday, January 9, 2007

Liberal Anger, Liberal Pessimism

i recently read two things that got me thinking about the same idea.

one was this article on the national review online concerning what author peter wood refers to as “the new anger”. he spends most of the article recounting an exchange that began when brink Lindsay, from the cato institute, wrote an article in the new republic proposing that liberals and libertarians would make natural electoral allies. the response from TNR editor jonathan chait was characterized, by a “withering disdain”. while this new sense of political anger can be seen on both the right and left, the author asserts that the left has embraced it to a much greater degree.

the other thing was this review of the pursuit of happyness in the ny times. i had to read one particular sentence several times, because, quite honestly, it astounded me. this is it:

How you respond to this fairy tale in realist drag may depend on whether you find Will Smith’s performances so overwhelmingly winning that you buy the idea that poverty is a function of bad luck and bad choices, and success the result of heroic toil and dreams.

it’s not? of course it is. if you took a given population of people with a wide range of incomes and then looked at their respective levels of education, i am quite certain that you would find a larger number of high school dropouts towards the bottom of that income distribution and those with advanced degrees toward the top. in other words, those people who either choose to drop out of school, or are unlucky enough to be forced out by mitigating circumstances, are definitely much more likely to find themselves in poverty. it seems so logically consistent that it’s basically a tautology.

i ran this argument through my head in a number of different variations, but trying to prove that statement definitively false seems beside the point. ultimately, one’s likeliness to agree or disagree is probably determined by one’s pre-existing world view. if you think that we are fundamentally pawns to larger societal forces then you will agree; whereas if you think people tend to succeed or fail on their own merit then you will not. furthermore, an argument between those two sides will inevitably just come down to an argument over the definitions of the words choice and luck.

the really interesting discussion - and this extends to the discussion on political anger, as well- concerns the evolution of these ideas and their respective world views. for me, the perplexing thing here is not how someone could come to agree with the above statement, but why. i do not know if the times reviewer has children. if she does, i can’t imagine her sending them off to their first day of school by saying, “now children, it really doesn’t matter how hard you work or what choices you make. certain people are born to be successful and certain people will always be kept down by society. there’s just nothing we can do about that, so don’t even bother trying.”

i don’t know if this is something that has been, or even could be, proven quantitatively, but i am willing to bet that the belief in one’s ability to overcome obstacles and “make your own luck” is probably even more directly correlated to success than is education. if you want to affect positive societal change, then one of your goals should be to foster a basic sense of self-reliance and optimism in those that have fallen victim to nihilistic self-defeatism.

for the sake of contrast i decided to check out the ny times review of menace 2 society. as i suspected, here is a movie praised for its “painful believability”. as the review puts it:

Sequences in which Caine and his posse hang out and toy with guns, drinking beer and spouting an endless litany of sullen profanities, offer a convincing close-up picture of a generation of black teen-agers lost in inner-city hell.

The movie is especially good at showing how the ubiquity of firearms, the violence of television and video games and an insanely inflated macho ethic combine with boredom and hopelessness to create a combustible atmosphere that can explode at any second.

here again is the idea that individual behavior always acts at the behest of larger societal forces. violence is not an act that one person commits against another; rather it is something that materializes from the sociological ether to ensnare both victim and perpetrator.

trying to prove this argument right or wrong will inevitably come down to the question of competing world views. and, again, the more interesting question is why certain people find this world view more compelling. to state this question in terms of the present discussion: why does the editorial and critical viewpoint of the ny times treat the idea of a young black male who takes responsibility for his child and succeeds by his own superhuman efforts as a “fairy tale”, while upholding the image of other young black males drinking malt liquor and committing random acts of violence as much more “convincing”?

the immediate response might simply be that one is truer than the other. it would be nice if all poor people could just propel themselves out of poverty, but the reality of the situation is that they can’t. so, if we ever want to bring about a better world, then we need to focus on changing society first.

the immediate response comes with an immediate problem. both movies are works of fiction, but one, the pursuit of happyness is based on a true story. there is a real life will smith, his name is chris gardner, who did in fact propel himself out of poverty. what’s more, there are many chris garnders; black men who take care of their children and work for a living. to say that the image of a responsible and entrepreneurial black man is less realistic than an irresponsible, shiftless and violent one is can only be characterized as bigoted.

so, it seems that i have come to accusing the ny times, a generally liberal newspaper, of being racist. not only that, but i have done so on the basis of two unrelated movie reviews. i admit that it seems suspect. it seems like the sort of post-structuralist methodology that i always found rather dubious as a undergrad english lit major. so, no, i am not accusing the ny times movie reviewers of being racists. i don’t think that most liberals are bigoted, but it does seem that the inherent helplessness of the black underclass – and the underclass as a whole – is a fairly popular theme in liberal thought.

in reality, race is relatively minor consideration in this particular liberal world view. the angry black man, the victimized woman, poor white trash from the wrong side of town; those are all bit parts. the star of the show is the liberal herself. it is the liberal, and liberal social policies, that hold the only true hope for bringing about justice and equality.

this idea also holds the key liberal anger. it seems quite appropriate that chait would respond to a fairly innocuous intellectual olive branch with such vitriol. in my experience, nothing gets liberals quite as flustered as interacting with libertarians; not even an exchange with the most right-wing of right-wing conservatives. perhaps that is because no matter how much they may disagree with conservatives, they need that conservative position to make sense of their own. the liberal imagines her own intellect, compassion and open-mindedness in opposition to the ignorance, indifference and closed-mindedness of the conservative. the particular object of discussion matters much less than the chance to posit liberal ideals in the face of the conservative enemy. it’s a self-continuing process of mutual opposition, and it has very little to do with ending poverty or promoting racial justice.

Tuesday, January 2, 2007

Random Thoughts in the Midst of Other Random Thoughts

i'm in the midst of wrapping up the global warming post, but i'm also finishing grad school applications this week. so, part 2 will have to wait. unfortunately other random ideas keep popping into my head, and i find it more useful just to write about them then to let them linger and distract me from the applications.

in particular, i've been thinking about the idea of price; price as a mechanism within marketplaces. in specific, i've been thinking about how price works in the healthcare and education marketplace. i've always been in favor or market reforms to healthcare and school choice and vouchers as a means of reforming our public school system. however, these views were mostly just reflections of my general bent towards free market policies.

a few weeks ago i read an article in the ny times (i would link to it, but it's been placed in that wonderful "lockbox" called times select) about how some colleges raised their prices and subsequently raised the number of applicants. around the same time i learned something new from a doctor friend of mine: most medical fees are based on what medicaid pays. i realized that i knew nothing about the price of healthcare. i know what a bottle of aspirin costs in the drug store and i know roughly what a night in a new york hotel costs, but as for an aspirin administered in a hospital or a night's stay in that same hospital... i haven't a clue, nor do i know where to begin to look for such information.

in both the case of healthcare and education, there seems to be something fundamentally wrong with the pricing mechanism. i'm not sure how that affects my views. that part is a work in progress.

in the meantime here is post i wrote on slate.com's reader forum in response to this and this (both articles in favor of socialized medicine):

krugman, wells and noah seem to imply that national healthcare is the obvious answer to a question that's only being obfuscated by special interests and libertarian ideologues:

"In particular, the Bush administration is under the influence of both industry lobbyists, especially those representing the drug companies, and a free-market ideology that is wholly inappropriate to health care issues."

in regards to the latter argument, perhaps healthcare is not a system that translates exactly to the market for cars, lawn care, widgets or whatever other goods or services people need. but that is a long way from "wholly inappropriate", which implies that the marketplace has nothing whatsoever to contribute to the debate. this sort of hubris and blind faith in government bureaucracy is as dangerous as blind-faith in free markets.

and that danger can be seen in the former argument, a claim that really perplexes me. how does switching to single payer system make these industry lobbyists go away? are the nurses and hospital workers unions just going to accept what government technocrats decide to pay them? will medical associations acquiesce to the diminished salary and standing physicians might play in this new healthcare system? and what about healthcare and drug companies? with socialized medicine they essentially become government contractors. well, that's good news because we know government contracts are only given out in the most fair and efficient manner and the process almost never involves wasting money…

look at the role that teacher's unions play in deciding education policy or haliburton in defense spending. i just don't see how congressman beseeched by special interests or government bureaucrats insulated from voters are automatically better suited than market forces to decide how healthcare resources get allocated.

critics of the iraq war most often blame bush for failing to either envisage or admit to the unintended costs, in lives, money and america's diplomatic standing, of invading iraq. yet, here timothy noah makes the same sort of argument for steaming full steam ahead into socialized medicine.

just because something works in another country, doesn't necessarily mean that it's going to be successful here. it's very easy to see that doctors in taiwan, a culture where perhaps there is a greater willingness to do what's best for the group at your own expense, might accept less money and prestige, while their American counterparts will balk. and for the english, forming a proper queue is almost a source of national pride. that doesn't mean that we'll stand for it here.

here's an idea: how about we move the burden to the states. let each state decide how it's going to deal with rising healthcare costs. some may adopt single payer systems and others may opt for a consumer-driven model. they won't all work or be viable in the long-run, but at least we'll have as many as fifty different approaches being tried. and once certain models prove to be more effective then those states with failing models can switch.