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Go Home Bainie Hearts Inequality

TIMOTHY NOAH MAY 3, 2012

Bainie Hearts Inequality

BY TIMOTHY NOAH

Edward Conard's forthcoming book, Unintended Consequences: Why Everything You've Been Told About The Economy Is Wrong apparently argues (among other things) that income inequality is good and that we need more of it. Conard is a former partner and protege of Mitt Romney at Bain Capital, which makes his argument especially piquant to the press. (Romney is taking care neither to associate nor disassociate himself from Conard's provocations.) I have not read Unintended Consequences, so I can't comment on the book in any comprehensive way. But I have read an Adam Davidson column about the book in the May 5 New York Times Magazine. I have also read the book's introduction and first chapter, which are posted on Conard's Web site. What I see doesn't persuade me. Let's go through some of Conard's arguments.

1.) Income concentration at the top is good because rich people invest. Like a lot of people who argue in favor of income inequality, Conard portrays his opponents as opposing capitalism itself, which--no argument here--depends on a certain amount of income inequality in order to function. You have to reward effort and skill. But the question (for those of us who support capitalism but decry income inequality) is not whether there should be any inequality, but rather how much inequality we need to tolerate, and most especially whether a long-term trend toward growing inequality is good for the economy or the health of society. We can argue about how much inequality is necessary, but almost no one thinks that ever-growing income inequality is a social or economic good.

Conard says that the more investment you have, the cheaper the stuff that the 99 percent buy will become. This argument (which I think of as the "Who Needs Good Jobs?" argument) presumes that Americans will consume even when they can't actually afford to, and data on the current recovery provide some evidence that may be true. But I'm not sure it's a model for a healthy recovery, based on the evidence of the 2008 crash. (Conard blames that unpleasantness, incidentally, not on overly-clever derivatives or excessive leverage or predatory mortgages but on panicky bank customers who created a run for no apparent reason.)

Also, it isn't always true that prices come down when investment and competition increase. Food and clothing and consumer electronics are all cheaper than they once were, factoring in inflation, but cars and houses and health care and higher education are all much more expensive.

2.) The U.S. economy is phenomenally productive! Between 1995 and 2004, for instance, growth in output per worker in the U.S.  (2 percent) outpaced growth in output per worker in Germany, France, and Japan (1.1 percent, 1.5 percent, 1.3 percent). Most people would use this as an argument against income inequality, because the U.S.'s rise in productivity is not translating into higher wages for the average worker, as it always has in the past. During the past decade productivity increases have been especially steep while the median income has declined slightly. Rising productivity is great, but why isn't it shared? Conard says it's because the workforce includes a lot of rifraff who have "below-average productivity"--young people, the "marginally employed," "near-retirees," women who will later drop out to raise children. But (even if you accept Conard's claim that these workers are less productive than average, which I'm inclined to doubt) the U.S. workforce has always included these categories of worker. Yet previously when productivity went up median income went up too.

Conard also makes much of the fact that if you go all the way back to 1979, when the Great Divergence began, the median income has risen, and it's risen even more when you factor in employee benefits and government transfers. This is a straw man. When people talk about the "stagnation" of incomes at the median what they mean is a.) stagnation relative to increases during the postwar years in the U.S.; and b.) stagnation relative to increases for the affluent and super-rich. No amount of statistical manipulation can make these two depressing trends go away.

3.) Forget the Great Compression. The postwar era, when U.S. incomes became more equal while the economy boomed, can't be used as an object lesson because it was a fluke:

World War II destroyed Europe's and Japan's infrastructure. This weakened their ability to compete with the United States, and it took decades for these advanced economies to catch up.... The United States was essentially a closed economy.

There's some truth to this, but not nearly as much as Conard supposes. Europe's economy in fact rebounded pretty quickly, thanks in part to the Marshall Plan; the economist Mancur Olson has argued that Europe's up-from-the-ground postwar economy was an advantage rather than a disadvantage relative to the U.S., because in remaking itself Europe was unburdened by any long-term accretion of special-interest market distortions. But the larger point is that it wasn't only the U.S. that prospered at midcentury as incomes became more equal. The same thing was happening throughout the world in industrialized democracies, including those in Europe. It was because of this that the Nobel prizewinning economist Simon Kuznets formulated a theory of income distribution that said advanced industrialized democracies inclined toward greater income equality as a matter of course. He was right about that until the late 1970s.

I could go on, but I won't. I haven't read the book, but what I've seen of it does not make me glad that incomes are becoming more unequal. You shouldn't be, either.

Update, May 14: I debated Conard today on NPR's "On Point." (I come in at 20:45.)

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106 comments

Noah-nothing -- you still don't understand how income inequality is created? Income inequality is a direct function of income/wages which is a direct function of the labor market, a market which rewards productivity. Productivity (output/unit time) driven by skills, nature of job, experience, etc.. Simplistically, to decrease inequality either a) improve the productivity of the less productive or b) take away the earnings of the more productive. I am a fan of a) ; no doubt you are a fan of b) --- a) is the best strategy unless you are a public sector parasites

- mr_rationale

May 3, 2012 at 2:46pm

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Mr-notsorational (see what I did there?) In case you haven't read, the American economy is in fact very productive, Conrad even admits it himself. And yet.......I don't see income becoming more equal now do you? So obviously, there is a very fatal reasoning in your logic.

- ARealHero

May 3, 2012 at 3:06pm

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Income inequality is an important topic. It is the fork in the road for tax policy and fiscal policy. If the majority in control of government propounds a belief in more inequality that can't be contradicted, we will move to the right on that issue. In the same way we needed clear information because Bush invaded Iraq for suspicious reasons that might have more to do with an attempted assasination of his own father, Romney may be advocating low tax rates and spending cutbacks for suspicious reasons that have more to do with his own wealth. We need firm clarity on this issue.

- Nusholtz

May 3, 2012 at 3:46pm

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Has the acronym GIGO ever fit anyone more perfectly than it has rationale?

- liberalref

May 3, 2012 at 4:13pm

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"a market which rewards productivity." I'm amazed that anyone can think about this issue for more than about 2 or 3 seconds and not realize how ridiculous this claim is. How about stay at home moms? The market rewards them nothing, so does that mean their productivity is 'zero'? Of course not. The only way to make such an assertion defensible is if you make it into a tautology: "The market rewards productivity, and productivity is that which the market rewards."

- Fishpeddler

May 3, 2012 at 4:38pm

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Most of the decline in the income share of the bottom in the "Great Divergence" took place in the short period of 1980 to 1986. All efforts to find some "productivity" justification for this phenomenon have failed. What did happen in those years was a swing from roughly a 1% trade surplus excluding oil to a 2% trade deficit excluding oil. Doesn't sound like much, but compared to the total income share of the bottom half as a percent of GDP, that's huge. The trade deficit stabilized for a time after 1986 and we even went briefly to a non-oil surplus in the early 90s. The income share of the bottom followed suit. Since then, the deficit has gotten considerably worse. Mr. Rat's fantasies that the market is allocated income according to productivity is just that, pure fantasy. If wages and employment are devastated in a sector by foreign competition, they go down. Prices go down. Then the Mr. Rat's say, "See, the productivity of these workers is low." It is pure tautology at best or reverses cause and effect. The allocation of GDP between capital and labor is not based on the productivity of capital and labor because the income shares have an essentially arbitrary relationship to productivity OR business adopts from amongst available means those methods of production that productivities of which most closely follow the income shares. It is income share that drives productivity, not the other way around.

- roidubouloi

May 3, 2012 at 4:39pm

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An investment banker is worth more to society than a general practice physician or a research engineer? Hardly. What you get paid has little bearing on what you're worth to society. Let's see how horridly we get along with no investment bankers as compared to no engineers, doctors, school teachers or even custodial staff. One group funnels the money so of course it's easy for them to skim off the top for little in return. And I'd quibble about the price of cars not having come down. You can't compare a 1970 compact to what is being built today. They're cheaper today in constant dollars if you remove the added content and in particular factor in the vastly higher reliability of everything in them (meaning vastly lower repair costs) and superior fuel efficiency. And we don't neglect how much safer they are today. A stripped-down compact or midsize of today has more content than a fully-loaded comparable vehicle of 1970.

- tmmats

May 3, 2012 at 4:48pm

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There is also clear evidence that GDP growth, productivity growth, and wage growth are all consistently higher under Democratic than Republican administrations. In the fantasy ideological world of Conard, this is completely inexplicable. But, if pro-labor policies increase labor income, forcing capital to find more productive means in order to sustain profits, and higher labor share increases demand, generating higher growth, there is a simple explanation. Conard simply denies the existence of economic rents when these are the entire reason for real investment. If not for the hope of achieving economic rents, it would be much easier and less risky to buy a diversified portfolio of marketable securities. The question that Mr. Noah asks, in a slightly different form, is, how high do the rents have to be, high long do they need to be allowed to persist, and how much can we reduce them through progressive taxation without excessively reducing market incentives. The answer is, plenty, as evidenced by the Great Compression. Conard not only has to deny the existence of rents, he has to pretend that the economic boom contemporaneous with the Great Compression was some how due to the economic weakness of other countries. But why and how could that possibly be the case even if we assume his assessment of the rest of the world were accurate. This is the sort of thing that the right just declares as if it is self-evident in order to dismiss clear, unambiguous evidence that its economic claims are completely unfounded. The holes in the thesis are met with ad hoc claims that are as or more unfounded, because there are no answers. Conard's theories are trash, pure and simple.

- roidubouloi

May 3, 2012 at 5:04pm

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Karl is treading water as usual when it comes to economics. Statistics from the US Census Bureau show the 20th percentile increasing its income all throughout the 1980s and then declining somewhat in the early 1990s and then again in the early 21st century. KR is great at unfounded ad hoc claims, so it is amusing that he opposes them here.

- liberalref

May 3, 2012 at 5:50pm

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The latter part of my first comment should read "than it does rationale?"

- liberalref

May 3, 2012 at 5:52pm

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I read that NYTimes article as well and found this part hilarious: He has spent the last four years writing a book that he hopes will forever change the way we view the superrich’s role in our society. How much do you want to bet this guy has a huge framed photograph of himself in his living room?

- blackton

May 3, 2012 at 6:41pm

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What shall we do here with the forever economically ignorant who cannot so much as tread water but drown in the bathtub in not more than an inch of water? If the subject is economic equality and inequality, it is income share that it is relevant, not absolute income. Income share, which become much more equal at the beginning of the 1940s and remained quite stable up until 1980, began to diverge again in that year. Most of the divergence since 1980 (as affects the bottom half, not the top 10% and 1%) occurred in the years 1980-1986. See, well-known paper by Card (highly regarded Berkeley economist) and DiNardo (Univ of Michigan economist) that was unable to find much evidence for the thesis of "skill biased technical change" that had attempted to attribute the income divergence to changes in relative productivity. Some people like to bloviate on economics even though they know not a thing about it (or much of anything else for that matter). Very amusing. One might even say unintentionally hilarious.

- roidubouloi

May 3, 2012 at 6:50pm

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Libref, do you mean to defend the arguments of Conard's that roidubouloi criticizes? If so, on what grounds? If not, why inject yourself into a conversation to which you have nothing to contribute?

- AaronW

May 3, 2012 at 7:06pm

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As ever, it is stated that I have nothing to contribute because I am not part of the circle jerk. I have experienced this for four years now. No comment is too inane to be criticized if the circle jerkers approve of the commenter. No comment is too rude, or too foul, either, if you are only ideologically correct. What a bunch of frauds, as I have written before. When I was writing my comment above, I almost added that my comment in no way implies that I am in favor of the ludicrous Ed Conrad, but I decided against it, because I thought that nobody here would be fatuous enough - not even rationale, who is pretty fatuous - to think that I would in any way sign of on Conrad's tripe. Well, I was wrong, obviously.

- liberalref

May 3, 2012 at 11:36pm

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That should read "sign off on."

- liberalref

May 3, 2012 at 11:38pm

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You poor thing. The problem, lib, is that you insist on pretending that you know something about economics when it is perfectly obvious to anyone who does that you don't. This then makes it difficult to figure out what your point might be, or if there is one. As usual, when it is pointed out in various ways that you are clueless, you get all huffy and pretend that you are misunderstood. Your ignorance is compounded by your belligerence. Bad enough that you don't know what you are talking about, you attempt to criticize people who do by saying unintentionally hilarious things that serve only to evidence your confusion. Think of it like this: You are endlessly replaying the scene from "My Cousin Vinnie" in which the judge repeatedly sustains objections to Vinnie asking "leading questions." Vinnie says to the judge, "Your honor, I don't understand. I am asking a simple yes or no question," which is of course the very definition of a leading question. Given that you know nothing of the subject, your attempts to appear knowledgeable and to criticize comically reveal both your grandiosity and your ignorance.

- roidubouloi

May 3, 2012 at 11:51pm

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I didn't write that I was set on four ago here in order to elicit sympathy but you are just fatuous enough to believe that. And you are even battier than usual - I have written more than once here that I am substantially on board with the economics of St Paul Krugman, so therefore by definition, I have to know quite a bit of economics. KR contradicts KR. Again. I know that markets are far from perfect and that they won't self-correct when something really goes wrong, that we need x amount of regulation, that inequality is too damn great in America, that it is the height of stupidity to do nothing during recessions. So what in the way of economics do I have wrong here, you retrominget varmint?

- liberalref

May 4, 2012 at 12:18am

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I didn't say that you (LR) had nothing to contribute. I merely suggested that thus far you had contributed nothing. If you have something to contribute, why don't you? If, on the other hand, you consider the discussion being held here a "circle jerk" and not worth your time, then why on earth do you post here at all?

- AaronW

May 4, 2012 at 2:59am

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And if your blanket dismissal of roi's post does not mean that you support Conard's theses, what then does it mean? That you think Conard's assessment is wrong but for reasons at odds with roidubouloi's? It is logically possible to take a position at odds both with Conard and roidubouloi, I'll give you that much, but until you deign to state your position on any matter whatsoever other than your opinion as to your own and other posters' relative intelligence, I'll stick by my position that, as they say in my hometown of Hampton, Virginia, you're just running your mouth.

- AaronW

May 4, 2012 at 3:15am

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More unintentional hilarity, lib. If I am "substantially on board with the physics of Einstein," do I, by definition, know quite a bit of economics? You think your following paragraph evinces a knowledge of economics? Puh-leese. That doesn't even rise to the level of, say, David Brooks. And it is no mean feat to know less than David Brooks.

- roidubouloi

May 4, 2012 at 8:19am

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Fishpeddler rights: " How about stay at home moms? The market rewards them nothing" Are you kidding? The stay-at-home mom receives compensation in the form of knowing her child is more likely to graduate, more likely to stay out of trouble, more likely to do well in school, more likely to go to college. the market is not someone handing you a paycheck. it's much bigger than that. The mom forgoes a paycheck and in return she receives payment in the form of a child that will likely make fewer missteps in their youth and be more successful as an adult. THAT is her payment. tmmats writes: "An investment banker is worth more to society than a general practice physician or a research engineer? Hardly. What you get paid has little bearing on what you're worth to society." Not really. If society values a role, then they pay to make sure it keeps getting done. They might not pay the price YOU think it's worth, but they will pay the price SOMEONE thinks its worth. If an investment banker wasn't worth their high salary, then everyone would find a cheaper investment banker who could do the same job just as well. And the higher-priced guy would be forced to drop his rates. You and I might not need investment bankers, but to someone who does, I assume they are not just wasting money. They didn't get where they are by wasting money. Look at who comprises the top 1%, you'll see it is full of a large cross section of society. There are 1.4M "1 %" households. As the NYTimes piece shows, the top 1% is full of all sorts of jobs, yes including secretaries, scientist, police/fire, teachers...Finance is there, but much smaller than most think. www.nytimes.com/packages/html/newsgraphics/2012/0115-one-percent-occupations/index.html don't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the link

- seattleeng

May 4, 2012 at 11:36am

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Remind me Seattle, how does "peace of mind" pay the bills and put food on the table?

- GSpinks

May 4, 2012 at 12:20pm

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"the market is not someone handing you a paycheck. it's much bigger than that. The mom forgoes a paycheck and in return she receives payment in the form of a child that will likely make fewer missteps in their youth and be more successful as an adult. THAT is her payment." What about the stay-at-home father of a profoundly intellectually disabled child? Or the carer for a demented parent or spouse? Or what about the autodidact mathematician who locks himself in his bedroom for ten years and eventually solves the Poincare conjecture and the other equally talented mathematician who makes an identical effort but solves nothing? What about every person who mows her own lawn or cooks his own meal? Or to take another tack, how do you account for the fact that in 1991 CEO compensation averaged 140x average worker salary whereas in 2007 the multiple was up to 500x? Were the modern CEOs really more productive? Seattle, you simply have no answer to the claim that the relationship between productivity and pay is imperfect. Presented with an example of unpaid productivity--the stay-at-home mom--you redefine "pay" as an expectation for some kind of poorly specified future benefit. You could employ the same logic to explain any observed uncoupling of productivity and compensation. In other words, you remain trapped in tautology. "The market efficiently allocates rewards for productivity. If a worker isn't paid more, it's because he isn't productive enough." But what about example X of obviously valuable production that attracts no wages? "The market rewards that form of production by other means: kudos, vague promises of future success, life-time achievement awards, pats on the back, etc."

- AaronW

May 4, 2012 at 12:52pm

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More projection, Karl. It is you who is unintentionally hilarious. You even stole that phrase from me, you are so original. I have encountered that a lot out here in the four years since I first came here. Original people take my words and try to turn them against me. Two more things; David Brooks is a hell of lot smarter than you are and I was pitching to your level, anyway. We could talk about, say, the Stolper-Samuelson theorem if you would like. Go ahead, look it up, I will give you a day, assuming that you don't wind up back in Bellevue, and are gone for your usual weeks at a time. You are great at cherry-picking bits of information to mold to your batty Weltanschaaung, so I just bet you would like S-S, though I doubt whether you are even familiar with it. It has been refuted by empirical evidence across the decades, as Jagdish Bhagwati has noted. And speaking of Bhagwati, you distorted his views on trade a few months back. More generally, you don't even seem to know that there is robust and broad agreement among professional economists on the benefits of trade. Regarding trade and wages, B. writes, the consensus in the economics profession is that free trade has had a minimal impact on wages in America, but the work he has done has shown that trade has actually had somewhat of an upward effect on domestic wages. B. is one of the world's leading authorities on trade and he very well might win a Nobel Prize in economics one of these years, or he should if he doesn't. I recall that a few months back, you wrote that of course international trade depresses wages. Of course the earth is at the center of everything, just look around you. Or maybe not. Now, who doesn't know economics, pipsqueak? Lets see, KR versus JB, who is more likely to be right? Yes, just like Jeremy Lin playing Harry the Jock one on one, the mediocre high school basketball player down the street. I wonder who is better. I don't spend a lot of time debating economics here because it would be a blanking waste of time. Me debating economics with KR on a regular basis. What a colossal waste. I only read a small amount of what you write most of the time, but you leave me in stitches when I do read you on economics. Thanks for the free entertainment. And what is even funnier is that you are regarded as a sage by not an inconsiderable number of mushers out here. As you well know, I don't think much of your intellect, but I until today, I did't think you were so damn dumb as to mistake my brief comments on economics for a lack of knowledge. Well, now I know better. Lastly, you haven't had a roidrage episode lately. No swearing at me at all for some time. Are you being coached, or are you exerting an uncommon amount of self-control, or are you looped out on meds?

- liberalref

May 4, 2012 at 1:16pm

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Gspinks, if the stay-at-home mom saves 10% of her salary in 30 years she'll be a millionaire. Or at least hope her child becomes one.

- singlspeed

May 4, 2012 at 1:28pm

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Everyone here is smarter than you, lib. One ought not so much as mention the word "intellect" in the same breath as you. You are a clown. Having taken graduate level international trade in the course of studying for a doctorate in economics, I am more than familiar with Stolper-Samuelson. You are not. You merely drop names. Whenever you actually try to do more than drop names, it is perfectly evident that you do not actually understand the first little thing about the subject. One need not mistake your brief comments on economics for a lack of knowledge, as you suggest. Your complete ignorance of the subject matter is evident to anyone who knows anything about it. Indeed, every time you venture a substantive comment (something you are typically too intimidated to do, hiding behind the pompous claim that you cannot stoop to debate) it is apparent then you don't know anything. Even wikipedia economics is way ahead of you: "The original Heckscher–Ohlin model was a two factor model with a labour market specified by a single number. Therefore, the early versions of the theorem could make no predictions about the effect on the unskilled labour force in a high income country under trade liberalization. However, more sophisticated models with multiple classes of worker productivity have been shown to produce the Stolper–Samuelson effect within each class of labour: Unskilled workers producing traded goods in a high-skill country will be worse off as international trade increases, because, relative to the world market in the good they produce, an unskilled first world production-line worker is a less abundant factor of production than capital." And here is something in language simple enough for even you to understand: "Among many applications, the Stolper-Samuelson theory has been used to address the "trade and wages" debate. This asks to what extent globalisation in general, and increased imports from low-wage countries in particular, are responsible for widening the differential between skilled and unskilled wages in developed countries. With the two factors reinterpreted as skilled and unskilled labor, the simple version of the model is consistent with a widening differential, and Leamer (1998) presents some evidence in favour of a Stolper- Samuelson chain of causation, though most authors have preferred to explain the fall in demand for unskilled labor by skill-biased technological progress. However, technology and trade are interlinked. Feenstra (1998) and Jones (2000) develop a theory which is consistent with the empirical evidence and has a strong Stolper-Samuelson flavour. Improved communications have allowed large firms to fragment their operations, moving more unskilled-labor-intensive stages of production to countries where unskilled wages are low, so lowering unskilled wages in developed countries while simultaneously raising skilled wages in developing countries." THE STOLPER-SAMUELSON THEOREM Prepared for Encyclopedia of World Trade Since 1450, ed. J.J. McCusker et al., New York: Macmillan Reference J. Peter Neary University College Dublin and CEPR February 6, 2004 ________________________ So you see, lib, other than dropping the name, you really don't have the foggiest notion what you are talking about.

- roidubouloi

May 4, 2012 at 2:20pm

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Roid -- thanks for proving my point..... 'Mr. Rat's fantasies that the market is allocated income according to productivity is just that, pure fantasy. If wages and employment are devastated in a sector by foreign competition, they go down. Prices go down. Then the Mr. Rat's say, "See, the productivity of these workers is low." It is pure tautology at best or reverses cause and effect.' The foreign competition is more productive. The market rewards productivity. You can't really be this stupid can you? This is not political, basic econ. Go to salary.com -- the market rewards productivity. Talk to blockbuster, then Red Box -- the market reward productivity Do you understand how a market based economy works? Have you ever had a job in the private sector?

- mr_rationale

May 4, 2012 at 4:38pm

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Fishpeddler -- are you really this stupid You don't even know the definition of a market. The market for a stay at home mom would be modeled based on what you would pay an au-pair/stay at home nanny to provide the exact same level of love and education as a loving stay-at-home mom. For some moms that would approach $100-500K. You are saving $100K - $500K. The market reward. "a market which rewards productivity." I'm amazed that anyone can think about this issue for more than about 2 or 3 seconds and not realize how ridiculous this claim is. How about stay at home moms? The market rewards them nothing, so does that mean their productivity is 'zero'? Of course not. The only way to make such an assertion defensible is if you make it into a tautology: "The market rewards productivity, and productivity is that which the market rewards."

- mr_rationale

May 4, 2012 at 4:45pm

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To summarize: I am arguing that wages are driven by labor productivity -- a economic premise so basic and fundamental that no one even debates this point. Yet, liberals at TNR disagree with me. Are all liberals this stupid. At a cross-road with my participation on the blog -- while fun (and easy) to refute the bloggers -- the quality of subscriber comments so low as make continued participation useless Winning economic arguments with mentally deficient not that much fun. Some one with a brain please contribute

- mr_rationale

May 4, 2012 at 5:31pm

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Rat, your understanding of economics wouldn't be enough to run a lemonade stand successfully. I don't generally bother with you, because you are a moron. But in this case the opportunity to illustrate simply what an ignoramus you are is too delicious to pass up. According to your benighted definition of labor productivity, if the United States restricts the import of cars, the price of cars produced domestically goes up as a result of the reduced competition, and unions then negotiate up the price of labor to capture the oligopoly rents, the income of auto workers is higher, hence they are more productive. Thus, all we have to do to increase productivity is reduce imports and empower unions. As a result of these price changes, did the process of production change whatsoever? No, only the price changed for reasons exogenous to the workers and the production of automobiles. Yet, according to you, their productivity is higher (or lower if we run the opposite scenario). Foreign workers would be more productive if their real output per unit of labor were higher. It is generally the case that American workers are the most productive in the world. Third World labor is, however, cheaper, much cheaper. And head-to-head competition with them therefore reduces price, the opposite effect of my example above, and puts downward pressure on American wage income. But it does not render American workers either more or less productive as a result, unless and until the process of production changes in some manner. I don't really need to ask, rat, whether you are this stupid. I know you are this stupid. It is quite obvious. ___________________ As for me, I have had a four-year career was a Wall Street lawyer, followed by a successful 10-year run as a merchant banker, buying businesses, overseeing them, and selling them for handsome profits (kind of a Bain Capital thing), followed by a successful 20-year career running and owning a hedge fund engaged in statistical arbitrage. Never a down year! Now I am retired and studying for a doctorate in economics. Don't even bother arguing with me, rat. You are so far over-matched that it would be, for me, about like stepping on ants. What is remarkable is that you, like a certain doppelgänger of yours around here, manage to have an extraordinarily inflated view of both your own intellect and knowledge. Yet, you are a dolt and a dummy, all at once. So, try to behave. While you don't know anything and are none too bright, ordinary polite behavior is within the reach of most six-year olds. It should be within yours.

- roidubouloi

May 4, 2012 at 5:57pm

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Actually, rat, change in labor productivity is driven by wages. And price is driven by wages. Only under certain idealized conditions of partial equilibrium might one claim with some accuracy that wages are driven by labor productivity. You really have no idea at all what you are talking about. When you claim to be articulating a "basic and fundamental economic premise," you succeed only in illustrating that you do not understand the words "basic," "fundamental," "economic", or "premise." A true basic and fundamental economic premise is that wages are the PRODUCT of labor productivity and labor share of output. That is two independent variables, not one, and, for any given labor productivity, wages can in theory be anywhere from zero to the 100% of labor productivity. The actual outcome depends on labor and capital markets. Are all libertarian economist wannabes this stupid? Why I do believe the answer is, yes, they are.

- roidubouloi

May 4, 2012 at 6:05pm

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You forgot the schoolmarm stint on your CV, Karl. In fact, that is what I think your actual occupation was. Schoolmarms tell people how to behave. You are the real doppelganger of the Heritage staffer, but you are too clueless to apprehend that. You both tell people - one from the right, one from the left - that your opponents don't know what they are taking about. I would recommend Psych 101 as a remedial, but I don't think that this would vouchsafe you an iota more of self-knowledge. You highly resemble the rat too in your bragging. She really got under your skin - the bubble boy thin-skinned KR is fuming above, saying I was this and I was that. I make fun of the ridiculous rat, which is the way to go, but she really got to you. And as ever, you telling people how to behave is so risible that there should be a neologism for it. You swear blue streaks at people and then tell others how to behave. Priceless. How old are you, 60-something going on 14?

- liberalref

May 4, 2012 at 7:59pm

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I reserve imprecations for putzes like you, lib, who make a point of talking about posters rather than about the subject matter. You get exactly what you deserve. For those here who manage to behave like civilized people, something you certainly do not do, there is no need. I smack around absuive morons like you who need to be smacked around. With everyone else, I don't need to resort to personal attacks and I don't. You, on the other hand, do little else here and then mewl and whine when it comes back at you. As for telling people they don't know what they are talking about, I reserve that for people like you and rat who (1) do not in fact have the slightest idea what they are talking about and (2) are so incredibly pompous in their incredible ignorance that they actually have the chutzpah to refer to other posters as stupid or ignorant. Whether you believe it or not, lib, the things you write here about economics reveal you to be a complete ignoramus. And I can tell, because it is a subject that in fact know a lot about. Not enough, yet, but more than enough to know that you are clueless. Rat is pretty clueless too, but, as between the two of you, rat has you beat by a country mile. Bragging? Not hardly. Rat asked whether I had ever had a job in the private sector. I responded with the jobs I have had in the private sector, no doubt rather more demanding than anything rat has ever done or dreamt of doing. And, having actually accomplished more than a few things in my lifetime, I am not reduced, like some people here, to pitiful boasting about how many books they have read since January. So, do try to behave yourself, lib. If you can manage to stick to discussing what people say in their posts rather than commenting on the posters, there will no longer be the need to show you up for a fool. But if you insist on being made to look foolish, I am happy to oblige. It's not as if it is hard to do.

- roidubouloi

May 4, 2012 at 11:49pm

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GSpinks writes: "Remind me Seattle, how does "peace of mind" pay the bills and put food on the table?" Whether you have one or two parents working is largely a choice. Not always, but usually it is. People DECIDE to have two incomes because they want a nicer house, nicer car, etc. Kids usually suffer as a result. Aaron writes: "Seattle, you simply have no answer to the claim that the relationship between productivity and pay is imperfect. Presented with an example of unpaid productivity--the stay-at-home mom--you redefine "pay" as an expectation for some kind of poorly specified future benefit. " Of course it's imperfect. But it's not as imperfect as you believe it is. You seem obsessed with faulting those that chase money as their #1 aim in life, and then you complain when someone who prioritizes leisure as their #1 pursuit in life gets less money. Kind of odd to complain about, isn't it? Aaron writes: "Or to take another tack, how do you account for the fact that in 1991 CEO compensation averaged 140x average worker salary whereas in 2007 the multiple was up to 500x? Were the modern CEOs really more productive?" These studies always need to be examined. Politifact has looked as these claims. Dig to the source and you'll see they are populist crap. It comes from a study called the "Hay/Wallstreet" study on CEO compensation. They looked at 350 top CEOs of companies that generated from as little as $6B in revenue all the way up to hundresd of billions of revenue. They found the MEDIAN, not mean, but MEDIAN, compensation was $9.2M. Out of a country of 300M, the top 350 people that are running our largest companies, make a median $9M salary. Is that unreasonable? Considering we way NBA players $25M/year, and a singer/dancer like Lady Gaga can make clear $50M/year? Sure, the top 50 might be making too much. But who cares. Their pay doesn't impact me or you or mainstreet. It's just your envy getting to you. Aaron writes: "But what about example X of obviously valuable production that attracts no wages?" People trade leisure for wages all the time. Why not trade other pursuits for wages too? These are choices one can make. I might accept less from an employer if my commute is cut in half. Or I might accept less if I don't have to move. People on unemployment routinely make this trade off. They would rather have $250/week and 40 hours of free time versus $450/week and 40 hours of misery at a monotonous job they hate. In this case, a person gains just $200/cash for 40 hours of labor, or $5/hour. They decide "that's crap" and they watch TV instead. Larry Summers wrote a very good paper on unemployment examining this--the "reservation wage" which is the minimum wage a person will accept before they will work. A stay and home mom might be looked at the same way. If a stay at home mom could earn $500,000, then probably she'd opt to work and then pay someone (several) to nurture/school her kids. But if her skills mean she could only gain $30K from being employed, and daycare will cost $15K/year, then she might decide "I can do a much better job of nurturing/educating my kids than daycare and public school can" and she might opt to do it herself and forego the $15K. Very rational and sane tradeoff. It's all what you care about and prioritize.

- seattleeng

May 5, 2012 at 12:23pm

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"Whether you have one or two parents working is largely a choice." If you believe that, seattle, you'll doubtless be one of those who believed Bill Clinton when he said that he put the joint to his lips but didn't inhale. If you don't believe it, but believe that we are likely to believe it, then you run the risk of irritating people who aren't hostile to fairy tales per se, but want to hear at least a modestly plausible one.

- ironyroad

May 5, 2012 at 12:45pm

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The libertarian lie rests on one gross over-simplification repeated ad nauseum, truly to the point of nausea. It is this: That the example of a handful of unique individuals, Michael Jordan, Lady Gaga, Derek Jeter, whose economic rewards are the direct result of unique talents, is somehow representative of the general workings of the economy. This is complete nonsense. The underlying fallacy of economic libertarianism is the confusion between microeconomics and macroeconomics, that descriptions (idealized to be sure) of macroeconomic phenomena, such as the demand for a unique set of abilities and the market clearing price for them, generalizes to mass of people. But macroeconomic phenomena are not well-described by analogizing mass phenomena to small-scale phenomena. In the case of a unique individual, you have a singularity, the distinction between macro and micro collapses because you have a class of one. But that does not at all imply that if the class again grows large the realities that apply to Derek Jeter are those that apply to masses of working people. There is no empirical evidence for this fiction, as indeed there is no empirical evidence for any of the fictions of libertarianism. They just repeat, repeat, repeat, repeat as if the lies are self-evident. If they are confronted with contrary evidence, they pause momentarily and then return to the endless repetition of the nonsense as if nothing whatever as happened. As a perfect example, see seattle above on the subject of CEO compensation. The huge growth of CEO income compared to worker income has been documented endlessly. Does this prevent seattle from simply responding to an inconvenient (for his theology) truth? Nope. He just flat-out, shamelessly denies reality. When caught in Chicago with another women in your bed, deny that there is any woman, and then, for good measure, deny that you were ever in Chicago. Then move one. If is of absolutely no relevance or importance to the general question of distribution, the sharing out of economic rewards, what a Derek Jeter is able to negotiate. About as relevant as the lives of martians. Pure Randian inanity. The flipside of the libertarian crapfest is the dumping on the poor. It is simply not the case that the opportunities available to any given person are some direct correlate of their skills or willingness ability to work. We have six people lining up for every job no matter how ill-paid. The economy, at the macro-level, is managed to maintain a certain level of unemployment in order to prevent inflation -- because inflation is disadvantageous to capital and people of means. This is our monetary policy, relentlessly implemented by the Federal reserve. It is a macro policy, totally beyond the control of working people having nothing whatsoever to do with their productivity. The result of the policy is that there are always too many people competing for available jobs, even without recession. This keeps wages low. So, as a result of deliberate economic policy imposed for the benefit of those with more, many of those with less have no opportunity to earn a decent living or can just hang on. The European economies that seattle deplores address this problem with public services, transportation, education, childcare, healthcare, pension, that make it possible for someone to live decently on a low income, because they don't have to carry the fully weight of sustenance out of low wages. This is what we would do if we really believed in the virtue of work touted by the libertarians, if we indeed wanted every able-bodied person to have to contribute labor to society. But we don't. This is another of those libertarian myths. We prefer to maintain unemployment, for macroeconomic reasons, and then spend the minimum necessary on welfare to prevent policy-driven unemployment from producing a level of desperation that results in violent revolution or rampant crime. The libertarian fantasists like to imagine that if we simply starve the poor, they will willingly starve in the service of the system. Why? Because libertarianism declares that any behavior other then violence and crime is permitted (certainly including the rich buying the policies they want). Since libertarianism declares something, it must be reality. Ergo, those that society condemns to starve amidst abundance will do so. The plutocrats, for whom libertarians are merely amusing shills and beards, useful idiots, know better. They understand that in order to sustain radical inequality without social collapse that might just take them down they have to throw some breadcrusts in the direction of the poor. But being vicious and rapacious, they want to spend as little as possible for this purpose. Make no mistake about it, what we provide as subsidy to the bottom is a fraction of what they pay in Europe for social services, the very minimum that the plutocrats think they can get away with. Actually structuring the economy to allow full employment at living wages would not be in their interest. State services at a level that would allow people to live on much lower wages would not be in their interest. Maintaining a large number of people on barely more than subsistence and the structurally unemployed "excess" on bare subsistence maximizes the wealth, the income share, of the wealthiest. So, that is what we do. It is not largesse or some misguided liberalism that maintains our system as it is. It is just what the wealthiest want and they are reaping the rewards of the macro policies that they control in their own interests. Another part of the libertarian economic myth is that labor is mobile and that if people will invest in skills, they will be rewarded. Thus, in yet another way, attention is directed away from the man behind the curtain to the bootstrap myth. This has induced millions to sacrifice in order to obtain higher education. And what do they now find? There are far too few opportunities for their skills. Is this due to their own lack of productivity, as the libertarian myth peddled by seattle would have it? Of course not. They have faithfully followed the libertarian prescription and now are faced with the lie, the numbers induced by the lie to obtain the education now far outstrips the available opportunities. So, we have people with college degrees who are lucky to make coffee at Starbucks. The next libertarian fraud is that we need an unrestrained Olympic system, in which many compete for lottery-like rewards, to maintain the system for the support of the many. Even if we allow that such Olympic-style competition has benefits, is there any empirical support whatsoever for the notion that anything short of the largest amount the market will award is sub-optimal? No, there is not. Not a single shred of empirical evidence. Pure libertarian bullshit. We are to believe that only the prospect of $10 billion is enough. If you get $10 billion and have to give over $6 billion of it in taxes (or similar taxes on all the income which amounts to the same thing), you, the genius, will sit home instead or perhaps mow the lawn rather than apply your genius to the creation of wealth. Libertarianism lives and dies on the Laffer curve, the empirically false claim that higher taxes reduce effort and output. Yes, 100% taxes will eliminate effort. Yes, at some point short of 100% taxation, taxes will reduce effort. Is there support for the claim that anything more than zero reduces effort? Nope. None. Is there empirical evidence that when taxes are too low and income too unequal demand and growth suffer? The entire history of the last 32 years. Does it matter that history is just to the contrary of the libertarian myth. No, it does not. Libertarians care nothing for facts. Every time seattle attempts to support his theology with facts, he as to invent them, falsify them, or grossly misinterpret them. Because all the empirical evidence is that libertarian economics is a lie. Libertarian economics is ultimately a description of a fantasy world that does not exist and has never existed. The world that it describes is the invention of a novelist, Ayn Rand. Nothing more. That we actually attempt in large measure, at least since Reagan, to structure the US economy based on the fantasies of a novelist is astonishing. The results of attempting to manage in response to libertarian fantasies have been nothing short of disastrous for thirty years: reduced grwoth, reduced growth in productivity, widening inequality, the hollowing out of physical and human infrastructure, and widespread immiseration. None of this matters to them. Like every other sort of religious nut, from the Iranian mullahs to the messianic Jews, to the millennial Christian fundamentalist, to the Catotonic libertarians, these people will believe whatever absurd thing they want to believe because they want to. Reality is irrelevant. It will never be permitted to intrude. It is easy to attribute this to stupidity, and libertarians are, in my opinion, a pretty dim lot, repeating endlessly the same inanities impervious to facts. However, the libertarian nuts are not really in control. The wealthy are, and libertarian myths are useful pseudo-philosophical drapery for what in the end is nothing other than insatiable greed and rapacity. The problem is not envy of the wealthy, as the libertarians insist, blaming the victims of a rigged system. Rather it is the opposite, the rapacity and predatory behavior of the wealthy, aided and abetted by libertarian court jesters. The maldistribution of wealth is not a blessing, it is a curse. All the evidence of the past 30 years says so. The maldistribution is not the result of wealth creation, but of a system that protects economic rents at all costs. We could make different decisions through the exercise of democratic governance, telling the libertarians to take their faith-based economics and shove it, but the plutocracy that is the beneficiary of this intellectual garbage is not about to let that happen. It has too its paid Supreme Court justices who will, at need, appoint a president or declare corporations to have human rights so that the ability of wealth to buy power and policy will be subject to no restraint. The fix is clearly in.

- roidubouloi

May 5, 2012 at 1:59pm

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"The underlying fallacy of economic libertarianism is the confusion between microeconomics and macroeconomics, that descriptions (idealized to be sure) of microeconomic phenomena, such as the demand for a unique set of abilities and the market clearing price for them, generalizes to mass of people." Sorry, I mis-typed and wrote "macroeconomic phenomena" rather than the opposite, eviscerating my own meaning.

- roidubouloi

May 5, 2012 at 2:02pm

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Irony writes: "If you believe that, seattle, you'll doubtless be one of those who believed Bill Clinton when he said that he put the joint to his lips but didn't inhale." Of course it is largely a choice whether one or two parents work. Notice in the census data linked below, the poorer you are, the more likely you are to have a single earner in the family. And the wealthier you are, the more likely you are to have two earners. And it gets even MORE TRUE at levels that obviously don't need the extra money. The ratio of single earners to dual earners is ~8:1 at the bottom 20%, 1:1 at the middle 20%, 1:3 at the top 20%, and 1:4 at the top 5%. In other words, our wealthiest families are those that rely on dual earners the most. And yes, for our top 20%, it is a choice. Middle 20%, it's a toss up. Bottom 20%, they really aren't relying on dual earners much at all. Maybe that is why they are poor. But that is another discussion. But no question, for our top 20%, they woudl probably be better off having one parent stay home and raise the kid. Statistically speaking, anyway. www.census.gov/hhes/www/cpstables/032010/hhinc/new05_000.htm don't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the linkdon't eat the link

- seattleeng

May 5, 2012 at 5:39pm

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Roid writes: "That the example of a handful of unique individuals, Michael Jordan, Lady Gaga, Derek Jeter, whose economic rewards are the direct result of unique talents" These are mostly separate cases you are talking about. Michael Jordan and other athletes in popular sports are indeed unique quantities. We know this because if someone could do what Jordan could do, he'd be hired immediately by the NBA to help them win. Lady Gaga, however, is mostly a product of marketing. Absent the marketing, she is a very competent singer/songwriter/performer. There are any number of people that could step into her shoes and do almost as well. We especially know this after American Idol, where we have seen several relatively small populations of contestants produce grammy and/or oscar winners. Think about that: Take 20,000 people from the general population, and likely you have a grammy winner in that group. That is not too rare at all, or exceptionally rare depending on how you look at it. If you are trying to argue that 1% of people can do her job, you are wrong. But if you are trying to argue that 1 out of 20,000 could do her job, then I'd probably agree. CEOs are not that rare within a company either. Each CEO (if they are responsible) should have several almost-CEO's waiting in the wings in case they drop dead from a heart attack or similar. Considering we have about 500 CEOs of biggish companies (larger than a few billion), and if each CEO had 10 people in the company that could do a reasonable job of replacing him, then that's about 5000 CEO candidates out of 100M workers, or about one person out of 20,000. Roughly the same odds as finding a Gaga or Grammy winner. But make no mistake, the average person could not step off the street and do what Jordan, Gaga or Gates does. The top 1% could not step off the street and do what they do. Nor coudl the top 0.1%. But the top 0.005% could. Again, that is about one in 20,000. These skills are in fact pretty rare. Roid, what % of the population do you think could step in and do what Jordan, Gaga, or Gates does?

- seattleeng

May 5, 2012 at 6:00pm

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"Bottom 20%, they really aren't relying on dual earners much at all. Maybe that is why they are poor. But that is another discussion." No, it's the same discussion. If you read the figures against the economic background of the past 3-4 years, you will see three things emerging: 1) that work is difficult to come by if you are in the lower income brackets and it's very likely that many familiies are surviving on one salary now but had two at mid-decade; 2) that part-time work is much more prevalent in the lower income brackets; 3) that (and this is more speculative on my part) educational level plays a significant role in higher-earning couples being able to maintain two careers. This doesn't mean that there are no couples who choose to only have one breadwinner in the lower income brackets, of course, but the reality is that a number of economic factors in the U.S. in 2012 mean that low-salary families really need two jobs and paying jobs are precisely what has been at a premium over the last four years. I would suggest that, read in context rather than as free-floating stats somewhere in space, the figures support my position. Again, I'm not saying only upper-middle class folks exercise choice, but I am saying that there were a heck of a lot more blue-collar jobs out there 20 years ago than now, and in many fields things were better only 5-6 years ago. As the president said today, the economy was cratering during the 2008 election and 800,000 jobs disappeared the month he took office alone. Choice only exists in a context in which realistic options are available, and the opportunities for someone who e.g. worked for 15 years in the construction industry are, in many parts of the country, sparse.

- ironyroad

May 5, 2012 at 10:38pm

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As usual, seattle, you miss the point completely. Very few people, if any, could replace a Michael Jordan, Lady Gaga, or Derek Jeter. That is exactly why these examples cannot be generalized to the economy. They are unique cases in which there is no difference between microeconomics and macroeconomics because each is in a class of one. The micro and the macro are the same. You cannot address the economics of entire classes of people and the manner in which economic rewards are distributed by generalizing from such unique cases, as libertarians constantly want to do, as if a class of millions is the same as one Michael Jordan just bigger. What is fair for Michael Jordan has no bearing at all on the larger economy. Even if we conceded that Michael Jordan receives precisely his contribution of value to society, that says absolutely nothing whatsoever about the general relationship between income and productivity or opportunity and willingness and ability to work. These examples are meaningless. They are indeed stupid. That is the point.

- roidubouloi

May 5, 2012 at 11:00pm

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And very, very few of the mega wealthy have such rare skills, nor did they obtain their wealth by selling their skills and being compensated for them, as Michael Jordan did. Most obtained their wealth by access to profits, and that is far from being a matter of talent. Some ability, sometimes, but a lot to do with class, education (as in the right schools), access of various kinds, and luck. Michael Jordan is not lucky. Bill Gates was very lucky, not least because his mother maneuvered his big deal with IBM. If five equally talented people start up new businesses, no one can say which will succeed or that the question of which succeeds is anything more than luck, happening to be in the right place at the right time. That is why venture capitalists have a few successes and many failures. Winning the lottery is not an expression of exceptional ability. CEOs don't get what they get because of their skills that are hardly all that rare. They get what they get because they and a small class of people of which they are a part have control of corporate machinery and the wealth of millions of people to which they help themselves. The reason why CEO compensation has grown is not that they have "become more productive" or their skills more rare, but because the social constraints that used to limit what they were paid, what boards considered decent to award them, have vanished. As all of these people are of the same group, the scratch each others backs helping themselves to the corporate kitty. Again, the examples of people who are able to sell their skills in the marketplace for large sums, without exploiting class access, are few and of no general relevance.

- roidubouloi

May 5, 2012 at 11:12pm

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Roid writes: " They are unique cases in which there is no difference between microeconomics and macroeconomics because each is in a class of one. " But alas, a CEO like Gates or Jobs is as unique as Jordan. That is why I asked you: what % of the population could step in and do these jobs? I reckon it's about 1 in 20,000 for the generic CEO, and one in millions for someone like Jobs. There are about 450 NBA players in any year, and so if Jordan was once a decade, then he's the best out of 4500 NBA. Maybe even 10,000 if we give him two decades. If there are 3M high school graduates per year, and a 15 year window they could play ball, then that's a pool of 45M folks. So Jordan is probably much more rare than Gaga for sure. While you might not think CEO skills are rare, there are only a handful inside Microsoft that could run the company. Same with Qualcomm, same with Google. I'm sure you fancy yourself capable, but trust me, you are not. So, I'll ask teh question again: What % of the population do you think could do what Gaga does, or a top CEO of big company with sales >$5B? Roid writes: " They get what they get because they and a small class of people of which they are a part have control of corporate machinery and the wealth of millions of people to which they help themselves." Hah. You wish. It's not nearly that devious. There are perhaps 12 levels between junior engineer and CEO. If each level is an 60% increase in compensation (and takes perhaps 2 year to reach in the early years), then you are looking at a starting salary of $100K, and a CEO salary of $28M at a company like Microsoft. It's really that simple. And everyone along the way is enjoying the fat salary. The CEO is paid so well becuase he pays the folks under him so well. And so on, and so on. You can't pay a starting engineer $100K, and pay a GM $400K, and a CEO $20M. There is no incentive to stick around. The salaries are too compressed. This is compensation 101. This is what keeps people motivated and working hard. PS. DOn't forget my question: What % of the population could do what Gaga or a top CEO can do? Very important.

- seattleeng

May 5, 2012 at 11:43pm

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Roid writes: " Most obtained their wealth by access to profits, and that is far from being a matter of talent. But correctly allocating capital is indeed a rare skill. It is not common. Look how many win the lottery and are broke a decade later.

- seattleeng

May 5, 2012 at 11:45pm

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Yes, correctly allocating capital is a rare skill, so rare that there is no evidence that anyone at all can do it in any but the routine growth cases, with the exception of perhaps only Warren Buffett. The best evidence is that allocation of capital is either routine or a crapshoot, and CEOs are not the primary analytical agents even if in large cases they are the final sign-off. This is not why CEOs make what they make. This is simply more libertarian mythology, invented out of whole cloth to lend credence to libertarian economic theology. Alas, there is NOTHING about CEOs that is as rare or unique as Jordan, and their skills are not traded in anything that remotely approaches a perfect market as one might argue for a Michael Jordan. Even more mythology. The entire libertarian theology is built on myths, assumptions about the real world that are purely tautological or "prove" the libertarian economic case because they are assumed to be true despite all evidence to the contrary or the total lack of evidence. In your view, CEOs are compensated for allocating capital and hence their compensation necessarily reflects their skill at allocating capital hence their skill at allocating capital is the reason for their compensation hence it is just and efficient. All hogwash. Do you know how many cases there are of CEO compensation bearing no relationship to stock performance, or even an inverse relationship? Do you know how often stock options are "re-priced" because they are under water because the stock grossly underperformed the expectations on which the option was issued? You say, "The CEO is paid so well because he pays the folks under him so well. And so on, and so on." You are unwittingly making my point. The pay is not based on performance. The CEO is not contributing 250 times what the engineer does. There is an entire cadre of corporate employees who have their hands in the till, and the CEO pays several tiers under him compensation geared to his own so that there is not a rebellion and so that he can "justify" his own pay. "Look, I am only making x times what my CFO makes." Where do it come from that each tier is supposed to be some absurd multiple of the tier below? The CEO gets paid huge sums for doling out huge sums to others in his "court" not unlike the French kings. He his king because he raids the corporate kitty not only for himself but for patronage. Not so long ago, when corporate mores were different, the salary scale was much more compressed, irony's point. It didn't change because suddenly these people got more productive. It changed because the safeguards against helping yourself to corporate earnings changed. As for who can run large corporations successfully, there is plenty of evidence that many if not most of the people running them can't or in fact don't. Doesn't mean they don't get paid vast sums. No evidence they are better run today than when the multiple of the average salary was much lower. This is just crony capitalism, period, not evidence of justice or efficiency, except that you define it to be such. Don't be telling me how corporations work, seattle. I have bought and sold them for hundreds of millions of dollars, I have represented some of the largest. Your view from the bottom of the engineering pile bears no relationship to reality.

- roidubouloi

May 6, 2012 at 12:49am

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"You can't pay a starting engineer $100K, and pay a GM $400K, and a CEO $20M. There is no incentive to stick around. The salaries are too compressed." Don't be ridiculous. Or rather, continue being ridiculous. More nonsense pulled out of your ass. There is a salary scale, geared by the people who have the most to gain in order to gain the most. Who then gets to occupy the slots on the scale is a giant crapshoot. The scale exists quite independently of performance or the numbers available to fill slots because, if the scale didn't exist in this form, the people at the top could not fill their pockets from the corporate kitty. There is every reason to stick around once you enter the charmed circle, or to play musical chairs, and the incentives don't need to be gigantic as evidenced by the fact that they were not such not very long ago, and corporations were run no worse.

- roidubouloi

May 6, 2012 at 12:57am

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Or, seattle, to rephrase my post above as a shorter comment: if I came to you and asserted that the figures for serfdom in Russia in 1850 strongly suggest that the majority of Russians chose to be serfs, you would immediately say, "Noooo! That's bs, there were no other options for millions of people because serfdom determined the world they were in -- you can't extrapolate from the condition of an individual or a family to the assumption of a willing embrace of that condition." And I would have to say, you're right. Now, while the U.S. is not Russia at 1850 and we don't have serfdom, we certainly have a situation where the unemployment rate at the lower levels of the national salary ladder make it impossible for anyone to look at an employment pattern (single earner or dual earner) for 2009-10 and determine that that pattern is the result of choice. In fact, basic common sense dictates that it isn't.

- ironyroad

May 6, 2012 at 1:02am

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In answer to your question, that you think important and I think ridiculous, there are very few with the particular combination of talents to become mega-rock stars, as evidenced by how few do although there are no particular barriers to entry and no long apprenticeship that must be served. Lady Gaga is 26, Taylor Swift younger, and Justin Bieber even younger. There are tens of thousands of people who have the native ability to run large corporations no better or worse than the current crop of CEOs, just as there are tens of thousands who could serve in Congress and do the job better than those who do. Who gets these opportunities bears only a tenuous relationship to ability or productivity. I would guess that the ratio of people with the native ability to the number of opportunities is better than 1,000 to 1, in the neighborhood of 1%+ of the workforce. Have you ever scored at anything in the top 1/100 of 1%, seattle, in a competition with, say, more than 100,000 entrants? I have, more than once. It isn't what you imagine. It doesn't prove much. There are very rare people whose abilities push them to the top, the Michael Jordan cases, notably in endeavors that are highly competitive and have largely free entry. For the rest of the high achievers, it is a lot of serendipity allocating opportunity within the 1% pool.

- roidubouloi

May 6, 2012 at 1:41am

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"In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians." (From Freakonomics) Is there evidence that the top 1% doubled their relative "productivity" since 1980? What would it be other than the fact that they doubled their income relative to the median, which makes the point tautological?

- roidubouloi

May 6, 2012 at 1:53am

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"Have you ever scored at anything in the top 1/100 of 1%, seattle, in a competition with, say, more than 100,000 entrants?" I scored in the top tenth of 1% on my MCAT, and you're right that it doesn't mean much of anything. It helped me get into a US News top-five med school, though mainly by encouraging the admissions committee to look past my philosophy BA and trust that I wouldn't completely drop the ball in biochem and gross anatomy. And it wasn't that decisive even then. Of eight that I applied to--including three "safety" schools in my home state--that top-five school (number 3, actually, the year I matriculated) was the only school that offered me a spot. I happened to click with both the folks they tapped to interview me. It needn't have been that way, however. There were other people on the interview roster--one neurosurgeon in particular--who would have thought me a total flake. In that case I wouldn't have gotten into med school anywhere and I probably wouldn't be a doctor today--even with my 99.9th percentile MCAT score. I'll add this corollary as well: that MCAT score doesn't mean dick about how good a medico I am. I think I'm a pretty good doc--if you catch a dose of TB or Staph endocarditis or the clap, I'll sort you right out--but there are plenty who scored much lower on the test who would be just as good as me or even better.

- AaronW

May 6, 2012 at 8:54am

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I have very similar experiences, Aaron. Lots of serendipity and pretty low correlation, in both directions. Yes, someone in the bottom 10% on the MCAT is not likely to be trainable into a good doctor (although there are no doubt some in that group who would in fact be superb). But within broad ranges, the relative scores are pretty meaningless. My experience in the business world is similar. For any particular job title, including CEO, there is rather a wide range of ability amongst the occupants and there was plenty of serendipity about who ended up where. This is why the libertarians like to use the example of Michael Jordan and similar very rare individuals where it is relatively easy to say that they are superb and that their achievements are the results of their own efforts (plus some luck, there is almost always some luck involved). As if the experience of these rare few can be generalized to a principle that economic outcome tracks "productivity."

- roidubouloi

May 6, 2012 at 9:10am

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Median NBA salaries are around 3 mill. If you want to point to the guy with the 25 mill to justifiy corporate pay, why not go apples to apples?

- miceelf

May 6, 2012 at 12:12pm

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Roid writes: "Alas, there is NOTHING about CEOs that is as rare or unique as Jordan, and their skills are not traded in anything that remotely approaches a perfect market as one might argue for a Michael Jordan." I said a CEO was a one in 20,000 occurrence, and given a workforce of 100M, that's puts us at a pool of 5000 potential CEOs. That is very far away from where a Jordan might be. Roid writes: "There are tens of thousands of people who have the native ability to run large corporations no better or worse than the current crop of CEOs" So, I said we had a pool of of about 5000 CEOs in this country, you said "10's of thousands" and thus we aren't too far off this figure. So we've established it's a fairly rare skill. Roid writes: "Have you ever scored at anything in the top 1/100 of 1%, seattle, in a competition with, say, more than 100,000 entrants? I have, more than once" Goody for you. And how much money has it made you? My brother is the best origami folder in the world. He wins every contest. Not much money it it, though. The only contests I enter are that of the marketplace, where my products are on the shelf next to another product. And if I do my job right, I convince you to want it, to crave it, to buy it. And I succeed at that millions of times per year. Over and over. For nearly two decades. And yes, it has paid me a crapload of money. Roid writes: "More nonsense pulled out of your ass." Roid, Microsoft's compensation will well known. It's published in the Seattle Times. Go read MiniMSFT and after every review cycle everyone posts their level and their salary increase and compares notes. It's all there for YOU to go read. minimsft.blogspot.com/2011/08/microsoft-annual-review-2011.html blog.seattlepi.com/microsoft/2010/10/01/microsoft-executives-pay-and-performance-during-fy2010/ And yet, in light of all this evidence you can inspect yourself, YOU go and pull something out of YOUR ass and claim it's not true with your usual Olberman bluster. Spare me. Read a little and then let's talk. Verify yourself there is a very clear continuum in the salary spectrum between the lowliest engineers and the top execs. That continuum is what keeps people motivated. Roid writes: " There is a salary scale, geared by the people who have the most to gain in order to gain the most. Who then gets to occupy the slots on the scale is a giant crapshoot." You really think the lowly engineer right out of school feels he's getting screwed at Google? He does not. He's loving the money he makes. He gets a promotion, and a 50 to 60% increase, and he's thrilled again. And the cycle repeats as long as he's kicking ass. Successful companies do a very good job of shoveling the money to those that helped create it. If they did't, the employees would leave and create a competitor and keep more of the money for themselves. 1) We seem to agree that CEO's in general are fairly rare. Not as rare as Jordan, however. 2) I've think established that CEO salaries, at least in tech companies, do not exist in solitude. They guys under the CEO makes a healthy salary, the guys under them make an almost as healthy salary, all the way down to the lowly engineer, who is making a kick ass salary himself. Each step is a progression, and if you cap the CEO salary at, say, $5M, then you've also compressed salaries and advancement opportunities all the way down the line which would also limit the companies ability to be competitive.

- seattleeng

May 6, 2012 at 12:24pm

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miceelf writes: "Median NBA salaries are around 3 mill. If you want to point to the guy with the 25 mill to justifiy corporate pay, why not go apples to apples?" Median CEO salary of the top 350 companies with revenue over $6B is $9M. Not too unreasonable. And again, the C-levels are probably doing $5M in compensation, the senior VPs are $2-3M, the VPs are $1M or so, the GM are at $600K, the group managers at $300K the professional individual contributor (engineer/architect/doctor/attorney) around $150K, professional support staff around $100K (marketing, planning), admin support staff around $50K. Does anyone here think these are the least bit unreasonable? They are not. This is the norm in corp america. Wringing your hands over the $100M CEO is a waste of time because he or she is so rare.

- seattleeng

May 6, 2012 at 12:35pm

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You cannot track the ball at all, seattle. I said that the native ability to be as successful q CEO as the ones we have is not particularly rare. I put it north of 1% of the workforce. That is 1.5 million people. Somehow you think this is close to 5,000. Of course, many with talent choose to do other things, thank god. The self-selection process of who is willing to put up with corporate life, politics, and rigidities makes it unlikely in my opinion (and my observation) that those who survive the process to become CEOs are the best and brightest from amongst the 1%. You also miss the point that, while CEO compensation is double what it used to be compared to the rest of the workforce, a problem indeed as this is really money stolen from shareholders and the system of corporate governance in America enables this (and don't start telling me what you know about corporate law and governance, seattle, I was a corporate lawyer with one of the best and most prestigious law firms in the world). Are we more efficient than we were before CEO compensation doubled compared to the rest of the workforce? Is this socially desirable? What if anything could we possibly lose by taking back a large chunk of this compensation in taxes to fund the human and physical capital that society and the economy need? Also, while you try to distract us with the supposed equitable distribution of earned income , the big money is in profits, not earned income. The over-paid CEOs are diverting a big share of profits into their own pockets. The shifts in income distribution are due to (1) increase in profit share which is understated because of the amount diverted into the pockets of highly-compensated employees and (2) the decline in the income of the bottom half which cannot be explained, much as right-oriented economists have tried, as attributable to skill-biased technical change. the evidence simply will not support he thesis. Decline of union power, right-to-work laws, illegal immigration, trade deficits. These all might have something to do with both phenomena while the "professions" in the middle maintain their own share. The relative output shares of labor and capital at the global leve have exactly zero, zero, nothing, nada, to do with productivity. They are the result of macro policies completely beyond the control of labor, but nicely controlled by the capitalists who control the politicians who run the government. As for google, what on earth does this have to do with anything? What does the happiness of google engineers have to do with anything? What does the pay scale of google engineers have to do with anything? You keep making these totally irrelevant references as if they are supposed to be revelatory, as if, were we only to understood how google engineers are compensated relative to google executives we would understand the macro- US economy, or that this is somehow proof of the proposition that people are paid according to productivity. If I told you to read up on baseball scores, it would have about as much to do with these issues. As explained to your doppelgänger, Mr. Rationale, labor income is the PRODUCT of two factors, labor productivity and labor share of output. Those are independent factors. Moreover, there are numerous rigidities in the labor market that prevent labor from flowing from one sector into another so as even to normalize the distribution of output within the labor sector. Who gets into which sector is highly biased by such factors as family wealth, access to education in the right places, social contacts, professional trade societies, and on and on. So, we have capital share increasing, people with access to capital grabbing more, people with access to profits grabbing more, numerous others with jobs that enjoy large barriers to entry once they are lucky enough to get them, and large numbers of people whose income has been stagnant and declining as a result. To cap it off, the wacko libertarian tax policies have compounded the problem, shifting too much income to the best off, sapping demand, and producing reduced growth in output and a reduced rate of growth in productivity. How much worse could it get? Yet you natter on about the inherent efficiency of this mess, the justice of the highly arbitrary manner in which outcomes are distributed, and imagine that either google or Michael Jordan are some sort of meaningful macro economic evidence. They are not. As for all the high incomes that you think are appropriate because the are the norm, and the norm because they are appropriate, you are always telling us how happy people are on $20,000 a year because they can afford a wide-screen TV, a cell-phone, and a toaster. Surely then we can afford to use income taxes to re-balance distribution. The top tier will still be happy because they will be able to afford TVs and toasters. ___________________ Here is a typical seattle-libertarian oxymoron: "Each step is a progression, and if you cap the CEO salary at, say, $5M, then you've also compressed salaries and advancement opportunities all the way down the line which would also limit the companies ability to be competitive." Competitive with whom? You think no one will take the CEO job if they are capped at $5 million? And why would we address the problem of income distribution in this manner? Why not allow the market to makes allocation and then use progressive taxes to reallocate? That way, the competitive problem you foresee vanishes because all amongst the top earners are taking the same hit at the same level of compensation and the net salary scale is only a bit more compressed. Everyone is happy. They can aspire to bigger bucks as CEO, they have not better job opportunities elsewhere as all are subject to income taxes, and the can afford TV.

- roidubouloi

May 6, 2012 at 2:09pm

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"Out of a country of 300M, the top 350 people that are running our largest companies, make a median $9M salary. "Is that unreasonable? Considering we way NBA players $25M/year, and a singer/dancer like Lady Gaga can make clear $50M/year?" Yes, it is unreasonable. There is no free market in CEO compensation. Boards don't have an open application process to see who might to the best job for the least amount of money. The CEO is often on the Board, if not the Board chair. And the CEO may be on other Boards. There's so much mutual back-scratching that the whole idea of a competitive market for CEO pay is laughable. The amounts that they get paid for outright failure should prove it. (I look at proxy materials and see that an element of compensation is change in pension value. Pensions for people making a median of $9 million? I thought pensions were for employees who were unlikely to make enough to be able to save for retirement. These CEOs who make $9 million for 4 years could live hyper-well after taxes just off the interest. The is no logical reason for them to be getting pensions at all.) And comparing one overvalued set of earners to another overvalued set of earners does not show that the first set is not overvalued. As Roi points out, there is nothing, nothing to show that CEOs would not be just as good at their jobs or work any less hard or have any less competition if their compensation were half of what it was. There are only so many hours in the day, so many reports than can be read, so many decisions that can be made. The ones at the biggest companies are making more due in large part to their proximity to huge amounts of money, not because the managerial skill set is so different.

- dsimon

May 6, 2012 at 3:48pm

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I have not read Conrad's book, so like Noah I too am going on the NY Times Magazine article. But it seems to me that there are some pretty essential flaws with Conrad's assumptions, which I'll try to take at face value. He argues that real innovation is tremendously risky and most attempts end in failure, so super-outsized rewards are necessary to encourage investment and to get talented "liberal arts" folks to get off the sidelines and apply themselves to something that might be productive. But that assumes that there are a substantial number of those unproductive liberal arts folks who would be motivated by those super-outsized rewards who are not motivated by today's merely ridiculously outsized rewards. Not everyone measures everything by monetary reward or who want to do the kind of work necessary to obtain those rewards. If those that are so motivated are already attracted by the amounts offered today, then increasing those amounts constitutes a windfall for those who would innovate anyway. And is there any evidence that there's a lot of money sitting on the sidelines that people would risk if only the rewards were even greater than they are today? Maybe the book has some evidence, but the article presents no data that the prospect of greater inequality would spur greater investment and innovation. And his thesis has no limiting principle, at least none presented in the article. If more inequality is good, where does it stop? When a few people have everything and most have nothing? That can't be right. The supply side theory that tax cuts pay for themselves, even if one tries to take it seriously, obviously doesn't work when you cut rates to zero. Similarly, there must be a point where offering outlandish rewards becomes counterproductive. But whether we're not there (or past there) already, or how we would know, isn't addressed in the article. As a side note, Conrad attributes the economic collapse not to bad judgment by bank managers or lack of regulation but to a "run on the banks" which was not really anybody's fault. I don't see how a collective decision by the banks to leverage themselves 30:1 and expose themselves (not to mention the global economy) to calamity in case of a downturn can be described as anything but reckless. But maybe that's just me.

- dsimon

May 6, 2012 at 4:46pm

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Not only is there zero evidence that the rewards to innovation could be substantially lower with no loss of effort: 1. There is no evidence that the people being so rewarded are the ones who have taken much financial risk. Usually not. 2. There is no evidence that the huge income shares going to the highest earners have anything whatsoever to do with having taken venture capital risks. In most cases they don't. As usual, the libertarian wackjobs point to some limited phenomenon, venture capital, Michael Jordan's salary, and then pretend that there is something that generalizes to the entirety of a $15 trillion economy. The examples they use have almost no relevance to the issue even if venture capital is receiving every penny and one more than we need it to and every genius is receiving exactly the compensation he or she deserves based on value generated. That still leaves about 99.44% of the economy, and the income distribution in that 99.44% if the economy, to be explained. The wackos try to explain the elephant based on the pimple on its ass. There is also not the slightest reason to believe that innovators would not make the attempt and Michael Jordan would not play basketball if 60% of the gross income went to taxes to maintain the society.

- roidubouloi

May 6, 2012 at 5:18pm

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Roid writes: "I said that the native ability to be as successful q CEO as the ones we have is not particularly rare. I put it north of 1% of the workforce." A CEO, like of a window washing company with 10 employees? Sure, I agree with that. A CEO of a fortune 500? No way. Most of our workforce cannot even write a cogent paragraph, let alone understand a financial report or do 8th grade math. Add to that a deep understanding of whatever strategy might be germane to a business and you way over estimate. Note many capable people that have succeeded to date but failed at being a CEO. Yes, even engineers. It's not an easy skill set to nurture. Look at Ben and Jerry. They picked a smart guy to be their CEO based on an essay. He failed. He was a mechanical engineer and had spent time at McKinsey, should have been qualified, but he just didn't get ice cream. In the end, they had to also drop their "CEO cannot make more than 7X the salary of the lowest paid employee" to get the quality they wanted. They USED to think like you. They LEARNED to change their thinking to match reality. Learn and move on. Roid writes: "The self-selection process of who is willing to put up with corporate life, politics, and rigidities makes it unlikely in my opinion (and my observation) that those who survive the process to become CEOs are the best and brightest from amongst the 1%." But if someone won't put up with corporate life, then they aren't qualified to be a CEO. Wait, do you mean, if we REMOVE A LOT OF REQUIREMENTS **THEN** can a lot of people be CEO? We'll sure. If you suck at talking to media, the no problem. And if you don't like 80 hours weeks, then no problem. And if you don't want to travel 3 weeks a month, no problem. And if financial stuff bores you, then no problem. But then you are left the same role that the company dishwasher has. You might not like it, but these are all requirements to being a CEO. And if someone isn't willing to do them, then they can't be CEO. BTW, if you remove athletic prowess from the requirements of being an NBA star, then more people could be NBA stars too. Roid writes: "You also miss the point that, while CEO compensation is double what it used to be compared to the rest of the workforce, a problem indeed as this is really money stolen from shareholders and the system of corporate governance in America enables this " If Balmer and the top 10 execs at Microsoft earn combined $100M in compensation, then their compensation is roughly $0.12 per share, or 0.3%. It is nothing to the shareholder. The greedy government is much more of a worry to the shareholder. When cap gains taxes jump soon, watch the market drop. Watch 401Ks take a huge hit. Roid writes: "The over-paid CEOs are diverting a big share of profits into their own pockets." AGain, do the math. You are just wrong. MSFT had net income of $23B. The $100M in top exec compensation is nothing. It is 0.4% of net income. Roid writes: "What does the pay scale of google engineers have to do with anything?" Because if you are going to pay the employees a boatload, you must pay the employees manager a boatload + 50%. And on and on up the chain. A well paid workforce results in a well paid CEO. Roid writes: "You think no one will take the CEO job if they are capped at $5 million?" It doesn't matter if a hobo that wreaks of alcohol would do the job for $100. If he cannot demonstrate his qualification with a 20+year track record or a brilliant idea or some other exceptional skill, he won't be considered. And again, back to the salary issue: Why be a CEO if it results in no extra pay than being a CFO? And why be a CFO if that has no more pay than being a SVP? That is the problem with compressing the salaries. At each step you are asking more and more from the person. That is why each step, from engineer to CEO, carries with it a big jump in pay. Otherwise, why would anyone take on the extra responsibility? You worked in the corporate word. You know what "the game" is. Some like, some don't. Playing "the game" is required to be CEO. It is as important as, for example, being able to deal with the media. Bitching about it won't change it. DSimon writes: " There is no free market in CEO compensation." Of course there is. Part of the market requirement is that you spend 20 years proving yourself in an adrenaline fueled environment with 80 hours weeks and endless travel. If you cannot do that, then you won't be considered. another unspoken rule is that you need more than a 6th grade education. If you ain't got it, you won't be considered either. Of course, you can short-circuit these rules and become your own CEO of a business you start. Dsimon writes: "And comparing one overvalued set of earners to another overvalued set of earners does not show that the first set is not overvalued. " Does that mean you think an engineer making $100K is overvalued? Is his boss at $150K overvalued? His boss at $250K overvalued? Lemme guess: You want the ability to decide on a case-by-case basis who is overpaid. But of course, your a lefty. Roid writes: "Not only is there zero evidence that the rewards to innovation could be substantially lower with no loss of effort:" Yes there is. Look at countries with higher tax rates where inventors cannot keep their rewards. They have less innovation. Why? Why is Faceboo, Google, Apple, Micrsoft, Qualcomm, NVidia, TI, etc, why are they almost always US companies? Wealth is VERY tightly tied to innovation. Roid writes: "There is no evidence that the people being so rewarded are the ones who have taken much financial risk. Usually not." Financial risk is not the only risk. People stay late at Google because they want to make big contributions and get big rewards. They do that too at startups, because the upside is even higher (albeit riskier). Time invested is as important as money invested. That's why they pay so much: for 80 hour weeks. Roid writes: "2. There is no evidence that the huge income shares going to the highest earners have anything whatsoever to do with having taken venture capital risks. In most cases they don't." But again, high income is not always synonymous with venture capital risks. If I work for a speculative startup for 3 years and deliver a product that impresses everyone, I will likely see huge upside. I took a risk, took a smaller salary to work for a startup with the understand there'd be upside if we hit big. Happens all the time. It really bugs you that an west coast engineer makes so much, doesn't it?

- seattleeng

May 6, 2012 at 9:31pm

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Dsimon writes: " If more inequality is good, where does it stop? When a few people have everything and most have nothing? That can't be right." Consider the middle class and the top 1%. Case #1: The middle class and top 1% grow income at 1%/year Case #2: The middle class grows income at 2%, and the top 1% grows income at 3% per year. Case #1 is post WWII. Case #2 is Clinton late 90's. It is also massive inequality. Rich or poor, I'd prefer Case #2 Et tu?

- seattleeng

May 6, 2012 at 9:38pm

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seattleng: Your hypothetical does nothing, nothing to counter the observation that Conrad's assertion has no limiting principle. Please stick to the issue that you are claiming to address. "DSimon writes: 'There is no free market in CEO compensation.' Of course there is. Part of the market requirement is that you spend 20 years proving yourself in an adrenaline fueled environment with 80 hours weeks and endless travel. If you cannot do that, then you won't be considered." That does nothing to show there is a free market. As I wrote, there are no open cattle calls. There are not arm's-length negotiations when determining pay. The relationships between Boards and CEOs are incestuous. Those who think otherwise are, I think, simply not recognizing reality. The fact that not everyone will be hired does not mean that there is a truly competitive free market for the position, so to say that someone who never went to high school won't be considered is yet another non sequitur. "You want the ability to decide on a case-by-case basis who is overpaid. But of course, your a lefty." You seem to believe that whatever people are being paid is what they're worth, even though you have not shown that there is a free market making that determination. But of course, you are a fundamentalist who doesn't seem to be able to accept any evidence to the contrary--even the clear evidence that there's no free market in the area in which you are a fundamentalist. I try to stay away from addressing people personally and just go after the arguments, but you make it very difficult.

- dsimon

May 6, 2012 at 11:11pm

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And, seattleeng, you don't bother with the uncomfortable facts that CEOs have often been paid eight figures for outright failure, and that they receive pensions that seemingly serve no purpose since they're clearly not needed for those making a median pay of $9 million a year. Nor do you address the question of whether a CEO making $10 million a year would really do a worse job for $5 million, or whether competition for those jobs would be adversely affected. If you still think these are truly market-based transactions, there's really nothing left to argue about.

- dsimon

May 6, 2012 at 11:36pm

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Seattle wrote: "Case #1: The middle class and top 1% grow income at 1%/year Case #2: The middle class grows income at 2%, and the top 1% grows income at 3% per year. Case #1 is post WWII. Case #2 is Clinton late 90's. It is also massive inequality." Middle class incomes in the 90's grew at double the rate they did during the post-war boom? Color me skeptical. I'd appreciate a link to your source.

- Fishpeddler

May 7, 2012 at 10:29am

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Hello, does anyone at TNR follow, you know, the news? Socialist candidate Francois Hollande just won the presidential election in France yesterday with potentially major consequences for both the European economy and transatlantic relations; Greece's political system went into meltdown also. It's now Monday lunchtime and nobody can be found at TNR to post even a short blog comment?

- ironyroad

May 7, 2012 at 11:27am

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"Fishpeddler -- are you really this stupid" Yes, for bothering to reply, but here goes... "You don't even know the definition of a market. The market for a stay at home mom would be modeled based on what you would pay an au-pair/stay at home nanny to provide the exact same level of love and education as a loving stay-at-home mom. For some moms that would approach $100-500K. You are saving $100K - $500K. The market reward." This was wonderful, Rat. I'm used to be able to count on you to miss everyone's points, and you of course accomplished that mission here -- the point was that conservatives tend to use income as shorthand for productivity even though a person can have zero income and be spectacularly productive. In this post, though, you even managed to betray your own fellow conservatives. A friend of mine who is prone to uttering Mr. Rat-like foolishness also happens to run a small business that provides him with a personal income of about $60K/year. He will be pleased to hear from you that an unemployed mother who receives steady welfare checks has a net productivity not only greater than his own, but possibly many times greater. Great stuff.

- Fishpeddler

May 7, 2012 at 1:55pm

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DSimon writes: "Your hypothetical does nothing, nothing to counter the observation that Conrad's assertion has no limiting principle. Please stick to the issue that you are claiming to address." Find an existence proof of a country who is growing the entire population at a healthy clip. You cannot. Thus, your assertion is just as unfounded as Conrad's. The fact is, it's better to be middle class in the US than the EU. Case #2 is why. Clinton's economy ROCKED for the wealthy. But it was DAMN good for the middle class too. Dsimon writes: "That does nothing to show there is a free market. As I wrote, there are no open cattle calls. " Yes there are. Microsoft is hiring RIGHT NOW for a junior engineer position. Take that job and then do it very, very well for 20 years, and you might be considered for CEO. What do you want? They make a posting on Craig's List and everyone comes in for an interview? That isn't how it works. Nor would that improve the quality of the hires. DSimon writes: "And, seattleeng, you don't bother with the uncomfortable facts that CEOs have often been paid eight figures for outright failure, and that they receive pensions that seemingly serve no purpose since they're clearly not needed for those making a median pay of $9 million a year." Yes, I did deal with those. They are too infrequent to matter. That happens perhaps 4 or 5 times per year. About the same frequency that someone wins powerball. It's not worth worrying over. It does not impact what main street earns. If 5 CEOs each earn $100M, and there are $100M workers, that is $5/worker. It's nothing. It's up there with powerball. As I always note, libs get so wrapped up in the envy they forget to worry about things that actually matter. DSimon writes: "If you still think these are truly market-based transactions, there's really nothing left to argue about." Just curious, but how much deep expertise do you think it takes to be CEO of a company like NVIdia, who makes graphic chips for PCs. Perhaps you think someone that only has a background in finance could run that company and that is where our disconnect lies. But make no mistake, that CEO needs to be a very experienced industry veteran. That person will be promoted from within NVidia, or TI or Qualcomm. It is a very, very small pool of expertise. I'm not sure why you think any number of folks could take that position and succeed.

- seattleeng

May 7, 2012 at 4:43pm

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Fishpeddler wrote: "Middle class incomes in the 90's grew at double the rate they did during the post-war boom? Color me skeptical. I'd appreciate a link to your source." No, I picked nonsensical numbers there so you'd focus on the ratios, not the absolutes. If anyone thinks we can ever return to the 1950's wage growth again for the general population, they are fools. We cannot. Our population isn't skilled enough to do so anymore. And thus, absent that, the question becomes: Is it better to do the Clinton model (the top 1% drag everyone else along) or is it better to do the Obama model (it sucks for everyone, but especially for the middle class). Note that under both models, the rich get richer. It never sucks to be rich. Ever. But Roid and DSimon and others keep hoping for a time when it sucks to be rich. They will be waiting a long time I suspect. Personally, the Clinton model is preferred (which is the thesis of the book being reviewed, I think).

- seattleeng

May 7, 2012 at 5:00pm

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The Obama model isn't the Obama model, it's the slipstream of the Bush model.

- ironyroad

May 7, 2012 at 5:58pm

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seattleeng: "Thus, your assertion is just as unfounded as Conrad's." That's another non sequitur. The claim is that Conrad's assertion--that more inequality is "better"--has no limiting principle. That claim is true or not regardless of whether I come up with something or not. (And Conrad's assertion is clearly wrong in the extreme case. Few people if any think we can have a healthy economy where a few own just about everything and most people have very little.) Just about no one thinks inequality per se is a bad thing. I certainly don't, and neither does Noah. The issue at hand is how much of it do we need to spur innovation and development. Conrad seems to be arguing the more, the better. But there has to be some data to support that claim. My posts tried to point how unsupported the claim seems to be. Perhaps there's more to come in his book. "Microsoft is hiring RIGHT NOW for a junior engineer position. Take that job and then do it very, very well for 20 years, and you might be considered for CEO." Come on, seatteeng. There are no cattle calls for CEOs. There is no serious yearly threat that the current CEO might be replaced unless there's some debacle (and even then that CEO is likely to walk away with millions more). And again (I'm tired of repeating myself), that some candidates are screened out does not mean that there is a true market for those who are qualified. Nor does it mean that their pay packages are the result of a market-based system. I've repeatedly shown how boards are not independent actors. You have done nothing to refute that assertion. "They are too infrequent to matter. That happens perhaps 4 or 5 times per year. About the same frequency that someone wins powerball. It's not worth worrying over. It does not impact what main street earns." Again, another non sequitur. The fact is that pay for failure demonstrates an irrational outcome. And it may be in a lot of CEO contracts even if it doesn't come to pass. It's either market failure, or it's not a market-based arm's-length transaction. (And all of the proxies I've seen have huge pensions for executives. If they can manage such huge companies, then they should be able to manage their own retirements especially given their outsized compensation packages.) "If 5 CEOs each earn $100M, and there are $100M workers, that is $5/worker. It's nothing. It's up there with powerball." Another non sequitur. And it proves too much, since it would justify paying CEOs even greater multiples of what they earn today, because it would still be "nothing" by comparison. (And how many companies have 100 million workers?) "I'm not sure why you think any number of folks could take that position and succeed." A lot of folks seem to take that position and fail, which would indicate that their pay does not correlate well with their ability. Indeed, there are plenty of studies that show that CEO pay has not correlated well with performance. And there is still no answer to the question as to whether performance would suffer in the slightest if all their pay were cut in half. Do you really think that CEO pay is determined by true market processes? Do you really think Boards dispassionately consider most qualified candidates, require real competition, and consider whether they're overpaying (especially when the CEO is not only a Board member but often the chair)? It's all the invisible hand at work, despite the blatantly incestuous nature of these relationships? We've been through this CEO pay argument before. I presented lots of evidence as to why current pay doesn't make sense and how it's not the product of a market, and even if it was it would be evidence of market failure. I also brought up that it's a phenomenon not shared nearly to the same extent by our peer nations, which as I recall went unrefuted. But I get the sense that there is no set of facts that would change a world view that seems unshakable. It's useless to try to have a discussion with someone who refuses to answer facts and arguments that are deemed inconvenient, even after repeated requests, so I'm going to try to stop after this post. By the way, statements like "But of course, your a lefty" do nothing to advance the discussion. Most people believe what they believe because they are persuaded by facts and argument. That the result may align them with a certain political point of view does not enhance or diminish the validity of those facts or arguments, which must be addressed on their own terms.

- dsimon

May 7, 2012 at 6:15pm

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Irony writes: "Hello, does anyone at TNR follow, you know, the news? Socialist candidate Francois Hollande just won the presidential election in France yesterday with potentially major consequences for both the European economy and transatlantic relations; Greece's political system went into meltdown also." Hoohaa! I was thinking the same thing! What is AWESOME about this is we finally get to learn if Krugman et al are right for once and all. My prediction is France hoses themselves royally on this. Krugman is already thinking this will be great for France. And either way, we'll know in two years. I cannot wait.

- seattleeng

May 7, 2012 at 7:08pm

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irony writes: "The Obama model isn't the Obama model, it's the slipstream of the Bush model." Please. The first year that'd be true. The second year, maybe. 3rd year? No way. Even Obama believes that. This guy has promised things would be better in 12 months since he took office. He himself said if it wasn't better in 3 years he'd be out. Now we see why someone who is smart cannot uniquely rely on that to be CEO. Experience matters. Just being smart is but one of many qualifications. There are fewer working today than when Obama took office. That cannot be spun. At this point in Reagan'sterm, employment had improved almost 9%. That would be 10M more working today. You think it's an accident that our two most left leaning presidents, FDR and Obama, have commanded two of the most pathetic recoveries ever? You think it's an accident that Reagan's economy snapped back, and Bush's post-9/11 economy snapped back? These are not accidents. Had Obama taken the helm of either of those economies, the evidence is increasingly showing that he'd have caused those to worsen too. Tax rates matter. Uncertainty matters. Creating busy-work for employers matters. It all adds up. Can't wait to see what happens in France. Do you want to make a friendly wager as to whether or not they'll leave their funk much later or much sooner than the US? If Krugman is to believed, they should change course and beat us all to nirvana.

- seattleeng

May 7, 2012 at 7:23pm

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DSimon writes: "But there has to be some data to support that claim. My posts tried to point how unsupported the claim seems to be. Perhaps there's more to come in his book." But I asked you how has the US managed to spawn so much innovation, and to cite a more equitable economy that also has tons of sustained, mind-blowing innovation. I did not see an answer. That would be a first step in refuting his assertion, wouldn't it? Re: CEO pay. That is the #1 thing you need to explain: If a deep understanding of the technology and business is required to be CEO, and if that knowledge takes 10 years to learn, then how can anyone except those that are in the business do it? To assert that 1% of the population could step into the role of Intel's CEO, without any understanding of the business is silly.

- seattleeng

May 7, 2012 at 7:42pm

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As usual, seattle must invent his own reality, one that is in accord with his libertarian religion, in order to try and make a case. At the beginning of WWII, income inequality declined rapidly. The only plausible explanation for this is high labor demand, but leave the cause aside. Income shares remained quite stable for the next 40 years, until 1980. This was also the period of fastest economic growth since about the beginning of the 20th century to date. Because the income shares remained stable, all the income tiers were growing at this same highest rate. In 1980, income shares began to diverge again, recently reaching their highest level since 1929. During exactly that same period, growth slowed distinctly form the period 1940 to 1980 and has remained lower. Thus, such historical evidence exists directly and absolutely contradicts the libertarian narrative that income inequality is necessary for high growth that lifts all boats. Indeed, such historical evidence as exists directly contradicts the libertarian narrative and strongly suggests that income inequality is adverse to high growth. Does seattle care that the facts actually completely contradict his little narrative? No, he does not. As usual, he simply ignores the facts and pretends that his little narrative describes the world. It does not. It describes only a fantasy world concocted expressly to make the libertarian narrative work. It is a lie. If that is not enough, we have the additional short-term evidence that growth and employment both do much better during Democratic than Republican administrations, going back again at least 100 years. Is this just a coincidence? Or is it but more evidence that policies that favor labor, and hence also favor greater income equality, are better for growth than policies that favor capital and hence greater income inequality? The answer seems pretty obvious, but even if you do not accept that, it is simply the case that ALL historical evidence flatly contradicts the libertarian economic view. Now, you can say that the evidence does not prove the opposite if you like, but no honest accounting can say that there is evidence for the seattle view of economic life. No, the evidence is just the other way.

- roidubouloi

May 7, 2012 at 7:43pm

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seattle, please! Gimme a break here! Ike was a more left-leaning president than Obama is. I'm up for a friendly wager, although we'd have to agree on conditions (elections are much easier, although I'll bet there were a few unpaid dinner promises in 2000 -- "No, he didn't "win" the election!"). One thing though, it strikes me that I've been reading about the unwieldy French model and the constraints on business and the size of the public sector and all the rest of it since the 1980s at least. Whenever I'm there, however, I see some of that but I also see a country that's the fifth largest economy in the world, has an excellent public transport system, the longest life expectancy in Europe (and that with its ethnic diversity), and a good health care system. So is this just one of those stories that keep appearing? You know, French economic decline, young people irritating older people with taste in music, silhouette of Christ in doughnut, that kind of thing.

- ironyroad

May 7, 2012 at 7:45pm

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"To assert that 1% of the population could step into the role of Intel's CEO, without any understanding of the business is silly." I never said any such thing. I said 1% of the population has the native ability. Many choose to do other things, fortunately for society, and hence are not in the pool. There is a long period of grooming and who gets to be groomed has not too much to do with native ability and a lot to do with corporate politics. There is then lots of evidence that carefully groomed CEOs who have played the game and gotten the shot at the brass ring often fail miserably. What is ridiculous is comparing CEOs to basketball players at the professional level who mostly do not get where they are through politics, although that may play some role in whether they get to show their skills. Professional athletes get measured by performance in every game they appear. The "measurement" of executives as the rise through the ranks bears no relationship to this whatsoever. If you have ever read personnel reports, you know that they are mostly bullshit and that getting along with colleagues has more to do with corporate success than anything else. Rarely are executives in any position where their individual contributions are even capable of being measured. Nor do CEOs allocate capital, nor do they display any peculiar acumen in doing so (Buffett aside). That isn't even the job of the CEO. Not unlike president of the US, it is more a political position than anything else, and bears to no surprise more resemblance to royal politics than democratic politics. There is a king, there is a court, there is patronage to be handed out to maintain the loyalty of the nobility. If anyone sticks his head up, you cut it off.

- roidubouloi

May 7, 2012 at 7:52pm

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Roid, I'd agree with you then if you want to claim 1% has the native ability. So, now, tell me: How many in this country are qualified to be CEO of Intel in your estimation?

- seattleeng

May 7, 2012 at 8:37pm

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100,000

- roidubouloi

May 7, 2012 at 8:42pm

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irony, there is a really good book called Au Revoir to All That that you might like. On the cover it purports to be about the decline of food and wine in France. But it goes much deeper. I haven't read it since it came out, but it was quite a good read. I might re-read it in light of their new leader since the book as I recall, held Mitterrand partially responsible for the gastronomic decline as I recall. In any case, a friendly wager it is. I told my brother this morning that if France does an about face and snaps out things ahead of Germany that we have some soul searching to do. But in any case, as far a lab experiments, this is about as exciting as it gets. We should all be very excited to watch this play out. I was a bit surprised today that Krugman didn't temper his spend spend spent message. Instead he seemed to double down. Which is good.

- seattleeng

May 7, 2012 at 8:45pm

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But only a small fraction are politically positioned to get the job. That is because, as described above, the relationships amongst boards and senior executives in major corporations are incestuous. You have to get admitted to the guild to be eligible. Like all guild system, its major function is to protect guild members from competition. Which is why the compensation is not the result of productivity but largely economic rent. The rest of the guild members, those who are not CEOs, also get paid off out of the corporate till. So, it is really just a matter of a particular largely self-perpetuating guild being in control of these economic enterprises. The idea that the guild members are especially capable or generally do a good job in running corporations is, frankly, ridiculous. Just look at the results. The idea that they are compensated for performance is also ridiculous. Many receive enormous pay-offs when their companies are tanking. You have a little fantasy world, seattle, that conforms to what you read in Ayn Rand. And since it is Ayn Rand's fantasy world, of course it operates the way Ayn Rand fantasized it to operate. But it has nothing at all to do with the real world in which we live. That is why, for example, the actual history of the relationship of economic growth and inequality is the exact opposite of Rand-world.

- roidubouloi

May 7, 2012 at 8:48pm

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If they, France, spend, spend, spend, they will spend themselves out of recession -- unless, that is, there is a big drain from imports, in which case the spending stimulates other economies. They have to spend on domestic content and may even have to find some way to manage trade to get the kick out of the spending.

- roidubouloi

May 7, 2012 at 8:50pm

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100,000? You think that many people have the ability to lead a company of that size, have a deep understanding of multi-billion dollars fabs? Submicron roadmaps? Know how to lead massive development teams and prioritize R&D? Understand the PC business? Understand the phone business? The mobile business? And a deep understanding of their competitive space? You do understand that Otellini understand all this? He's not an engineer (an economist!), but his 40 years in the business are actually crucial to doing the job. How long do you think it would take to learn all the domain specific stuff Otellini knows that is needed to be CEO?

- seattleeng

May 7, 2012 at 8:50pm

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"One thing though, it strikes me that I've been reading about the unwieldy French model . . ." The Netherlands is in many ways even better. I would live in either Paris or Amsterdam over any place in the US in a heartbeat, and will again the moment my family circumstances permit.

- roidubouloi

May 7, 2012 at 8:53pm

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seattleeng: "But I asked you how has the US managed to spawn so much innovation, and to cite a more equitable economy that also has tons of sustained, mind-blowing innovation." Again, it's changing the subject. The question is whether there was a limiting principle. None has been offered. Again, I'm tired of repeating myself. And, repeating myself one last time, I will note that there is still no response to the multitude of other points and questions that I've requested responses to multiple times. I'm done here, based on the evidence that further requests will likely be useless.

- dsimon

May 7, 2012 at 8:57pm

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100,000. You don't need to know every aspect of a business to be CEO, seattle. That's not the job. Most of it you will never see. Have you not noticed that CEOs also move between industries? How do they do this? As far as I can tell, those who shift industries are not notably more or less successful than those who rise within an industry. What you have to know is how to manage an organization, and there are a lot of people with the brains, ability, and experience to do that, many of whom will never get near a CEO position. You are fantasizing about what CEOs do. Have you ever run a company? I have. Got airdropped into running a 30 million dollar manufacturing business at the age of 34 with exactly zero prior experience even working in a manufacturing business or anyplace other than eight years on Wall Street (four of those as a corporate lawyer no less) and washing dishes in college. Did a very good job, figured it out in about a year. Of course, that's a different scale from a multi-billion dollar business, but it gives one a sense of what being a CEO is. Ten years of experience and promotions to larger organizations or sub-organizations and I could have run anything in the world. It is not rocket science, as they say. Also had responsibility for reorganizing a $150 million company. Was one of only 2% in the industry successfully to emerge from Chapter 11.

- roidubouloi

May 7, 2012 at 9:02pm

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seattleeng: "But I asked you how has the US managed to spawn so much innovation, and to cite a more equitable economy that also has tons of sustained, mind-blowing innovation." Even granting the premise, there is nothing at all that causally links an ever increasing level of income inequality to innovation. The overwhelming quantity of the income of high earners has exactly zero to do with innovating anything. This is another example of the fallacy of generalizing from a relatively rare phenomenon to the economy as a whole is if the rare is somehow an exemplar. It isn't, precisely because it is rare.

- roidubouloi

May 7, 2012 at 9:05pm

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seattle, did you think about my question as to whether we haven't been hearing this multi-part jeremiad about France for an age now? Also, I have to say, I hadn't noticed a gastronomic decline in France when I've been there. Actually, there's probably been a notable rise in the quality of French wine over the last 20 years and it's Americans who brought that about (especially the guy whose name I can't recall, but who got the legion d'honneur around 10 years ago, well known writer on wine). I'm not against a friendly wager but it won't work with vague criteria that we could both hide behind.

- ironyroad

May 7, 2012 at 11:11pm

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Roid writes: "You don't need to know every aspect of a business to be CEO, seattle" Generally, yes, you do. Otherwise, you don't understand how the pieces fit together. I can assure you the CEOs are intimately familiar with most every aspect of the businesses they run (having done most of the jobs on the way up), and they understand the business and their customers like you cannot imagine. There are a few exceptions, but they are very rare. And while someone COULD learn this, nobody has the time to wait for them to learn it. "You are fantasizing about what CEOs do. Have you ever run a company? I have. Got airdropped into running a 30 million dollar manufacturing business at the age of 34 with exactly zero prior experience even working in a manufacturing business or anyplace other than eight years on Wall Street (four of those as a corporate lawyer no less) and washing dishes in college. Did a very good job, figured it out in about a year. Of course, that's a different scale from a multi-billion dollar business, but it gives one a sense of what being a CEO is. I'm not going to go into detail about my history, other than to say I've held C-level titles and driven development teams well north of 100 people. I have a healthy respect for what CEOs do. Not all, but most I've met. And I've met a lot. The fortune 500 list at $4.3B in revenue. No question that 1% of the population could run a $30M business. That's a guy that owns 10 McDonald's. A $30M business is tiny, but the frame of reference helps. How did sales grow under your tenure? Quality? Net margins? But my original question about about the top 350 CEOs. We apparently aren't talking about the same thing. If you believe that a deep understanding of the business isn't required by a top 350 CEO, then we disconnect there too. Theoretically I agree that if given the time to learn, a lot of folks COULD do it, but time is not a luxury in aggressive business settings. You get 6 months to put a new strategy into place, 2 years to execute on it and if not working you are done. Taking a year to learn the business isn't an option. It's kind of like saying I could be a great VP if Obama would just give me a year of on-the-job training as his right-hand man. But why should he? If I wanted that training, I would have gotten into politics 20 years ago. I'm sure you'd agree that a lot COULD be VP, but Obama isn't going to pick a welder from Akron and give him on the job training for his first 2 years as VP. The pool is very limited in scope and defined by largely what you've done to date, not what you could do

- seattleeng

May 7, 2012 at 11:15pm

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Roid writes: "The overwhelming quantity of the income of high earners has exactly zero to do with innovating anything." Imagine a graph, with the X axis being innovation. And the Y axis being "amount innovator gets to keep". How much innovation would their be if we all earned the exact same amount, regardless of contribution? Very good: Very near zero. Draw that point. How much innovation would their be if an invention was met with immediate wealth, alarm bells going off, followed by a truck driving up with a $5000 check? Lots and lots. Draw that point. Connect the line. The trend is clear. And absent your ability to find an innovative country with a more more reasonable distribution of wealth, you are spouting nothing but a pet theory that ignores reality.

- seattleeng

May 7, 2012 at 11:23pm

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I just read Adam Davidson's profile of Conard. What struck me was, one, his dismissive survey of the shaggy-haired, hipster "art history majors" surrounding him at a cafe and his conviction that if you doubled compensation at the top end, more of them would be convinced to become "innovators". Where is the evidence for this? Conard himself, argues that to be an "innovator" on his terms--which one gets the feeling means being an investment banker--one must work until 11PM at the expense of time with one's children. Could it be that the art history majors have made the entirely rational choice to avoid such dollar-driven hell at all costs and that no amount of money would encourage them to enter that morass? A friend of mine from med school had finished a 7-year post-graduate training program in general surgery when he decided he didn't want to be a surgeon. (Actually, he only wanted to be a heart surgeon, but he recognized that the market for heart surgery is in serious decline. The medicine obviating the need for coronary bypass is too good.) He did a crash MBA while working for McKensey, and now is a partner in a venture capital fund focussing on medical devices. I don't know, for sure, but I bet he's taking home 4 or 5 times what I earn. Would doubling the pay for a position like his encourage someone like me to drop what I'm doing--the non-innovative job of taking care of sick people and maybe once a year making a life-saving call that another doctor might have missed--and join a VC firm? Of course not. If $1M a year doesn't pull me, would $2M? Hardly. My friend left surgery not for the money, but because he foresaw that to work as a heart surgeon he'd have to move someplace like Wichita Falls, TX and operate mostly on 85-year-old women (a constant technical pain in the ass as compared to the 55-year-old man who was the typical patient in the 1980s), and because he didn't like all the shit, literally, that goes with being a general surgeon who operates on bowel. I believe that at the top end of the skill ladder, career choices are most often based on factors other than salary: what seems interesting, what jobs are available in places one cares to live, how much time one desires to leave open for family and non-work interests and what offers get made.

- AaronW

May 7, 2012 at 11:37pm

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DSimon writes: "Again, it's changing the subject. The question is whether there was a limiting principle." We've been through this a million times. If the middle class gets a 1% increase over inflation each year, and the top 1% gets a 1.1% increase over inflation each year, then the wealth diverges. Full stop. You will NEVER find a system in which those that like leisure gain as much as those that like work.

- seattleeng

May 8, 2012 at 12:15am

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Now you are completely making it up, seattle. America has the greatest inland waterway in the world. Absent your ability to find an innovative country with a better system of inland water transportation, you are spouting nothing but a pet theory. Come on seattle, give us one little statistic on the portion of the 50% of GDP that goes to the top 10% of earners that has anything whatsoever to do with innovation -- or cut the bullshit.

- roidubouloi

May 8, 2012 at 12:18am

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What does the leisure-labor trade-off have to do with the divergence of income? Nothing. Got any evidence that CEO's doubled their hours relative to everyone else to explain the doubling of their relative income? Plus, the middle class has not benefited from the income divergence. The loss of income share has been in the bottom and the gains have gone almost exclusively to the very top. Another theory of yours shot to hell by reality, seattle. You continue to describe a world of your Randian imagination that bears no resemblance to the world we actually live in. Your claims are typical libertarian wingnut nonsense, manufacture on wingnut websites and talk shows and repeated by you here.

- roidubouloi

May 8, 2012 at 12:22am

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Aaron writes: "Would doubling the pay for a position like his encourage someone like me to drop what I'm doing--the non-innovative job of taking care of sick people and maybe once a year making a life-saving call that another doctor might have missed--and join a VC firm? Of course not. If $1M a year doesn't pull me, would $2M?" But out of 100 doctors, would the $2M pull one of them? Probably more than a few I'd guess. So, the trend is clear. The author's argument is that innovation takes time, and the more we have working on innovation the faster we will innovate. So, if it takes 100 doctors sorting through a pile of small companies to find one to invest in that will ultimately cure X, then if you join your friend the investment will happen sooner and the cure will come faster. It's a very good book so far.

- seattleeng

May 8, 2012 at 12:40am

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So, those who value work will earn more than those with similar skills who value leisure. No surprise there and no disagreement from yours truly. I could earn a lot more than I do if I were willing to work more. Fortunately I live in Australia where it is much more feasible than in the US for a doctor to sacrifice income for free time--in America if you try to make that trade, you'll frequently find that your income goes to zero. But this doesn't explain why the income gap between lovers of work and lovers of leisure needs to expand. Nor does it explain why we should believe that skilled workers who favor more leisure over more $$$ can be persuaded to rethink their choice if you increase the number of $$$ on offer. And make no mistake, such is exactly what Conard suggests is the case.

- AaronW

May 8, 2012 at 1:07am

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"But out of 100 doctors, would the $2M pull one of them? Probably more than a few I'd guess." I seriously doubt it. $1M is already double or more than most MDs earn. If doubling one's income isn't sufficient incentive to make a risky career jump, would the prospect of quadrupling one's income make much difference? The truth is that most doctors of my acquaintance are doctors because they enjoy the work. There are plenty who are quite mercenary and do everything they can within the bounds of professional ethics to earn a buck, but even they generally get value from the work itself and would be loath to abandon it even if it meant taking a cut in pay. Of course, I don't have any way to know this for sure. 1% seems way high to me, but maybe at some lower rate the extra million would pull doctors out of medicine. A correlary question is whether the docs that money would pull would be worth it. My guess is they wouldn't. The most dedicated, innovative players in medicine are the academics, in other words people who have already opted for lower pay than they can command in private practice. Money might draw them to industry sometimes, but in my experience the bigger draw is the chance to make a name for oneself, to publish in New England Journal and Nature Medicine, and the folks for whom money would be the primary draw are lesser lights.

- AaronW

May 8, 2012 at 1:30am

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This is all from your deep knowledge of CEOs, seattle, and what they do? Meaning what, you met one? Have you ever even attended a board meeting? What exactly have you ever observed a CEO doing? Deep knowledge of every aspect of the business? If that were the requirement, then why pay CEOs so much? Each would have pretty much no where else to go, no other job at which they could command anything approaching an extraordinary salary. They, and quite a few others in their company, would be so specialized that the couldn't even work anywhere else. So, let's say that 350 CEOs earn an average of $10 million per year and deserve every penny. That's $3.5 billion a year. What is this supposed to tell us about the 50% of a $15 trillion economy that goes into the pockets of the top 10%? All nonsense, seattle. Invented facts to justify your libertarian religion. You don't really know a blessed thing about how large companies operate at the top, how much capital is invested in any given year in innovation, what part of the economy and its economic rewards flow to innovation. You are simply so certain that the libertarian faith is god's truth that you assume that the economy must work in accordance with the tenets of libertarianism. And so you just keep insisting that it must as if this is self-proving.

- roidubouloi

May 8, 2012 at 1:52am

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Of course you think it is a very good book. The author is possessed of exactly the same theology as you are and ignores all the evidence of the real world in just the way you do. This is about like a minister reading the bible and saying, "It's a really good book so far."

- roidubouloi

May 8, 2012 at 7:17am

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Seattle wrote: "No, I picked nonsensical numbers there so you'd focus on the ratios, not the absolutes." Whose focused on ratios? Me, because I mentioned the ratio? Seattle, you need to learn to argue like an adult. I was willing to assume you simply didn't bother to substantiate your claim. Now I'm willing to assume you were simply lying. Surprise, surprise.

- Fishpeddler

May 8, 2012 at 9:02am

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And don't bother giving me crap for spelling 'who's' as 'whose'. It's early.

- Fishpeddler

May 8, 2012 at 9:03am

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Interesting, seattle, that you think financial incentives can alter the supply of doctors but not the supply of engineers. Seems like you are pretty much just shilling for capital. According to you, markets work, or not, as you find necessary to concoct a rationale for greater income inequality -- higher profits and higher income for those closest to the profit stream, owners of capital, executives and such. Then you season your concoction with the fiction that everyone else is benefiting from this -- the fundamental Randian Ur-myth -- even though the actual historical evidence is quite to the contrary. What should we say about this? How do you suppose we ought to characterize this style of argument? Tea party?

- roidubouloi

May 8, 2012 at 9:48am

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Roid writes: "This is all from your deep knowledge of CEOs, seattle, and what they do? Meaning what, you met one? Have you ever even attended a board meeting? What exactly have you ever observed a CEO doing? Deep knowledge of every aspect of the business? If that were the requirement, then why pay CEOs so much? Each would have pretty much no where else to go, no other job at which they could command anything approaching an extraordinary salary. They, and quite a few others in their company, would be so specialized that the couldn't even work anywhere else." of course, I've met and presented to countless CEOs in many hours of meetings, including many of whom you've seen on the cover of magazines. I've attended board meetings, I've presented at board meetings. I'm on a board right now. I note all this to re-iterate the poitn: You have not a clue how strong of an understanding of the business and technology these guys have. These guys are generally quite exceptional. They have done most jobs at the company they run. And to argue that a deep understanding of the business is NOT needed is silly. Roid writes: "If that were the requirement, then why pay CEOs so much?" Becuase the guy under the CEO makes a lot. And the guy under that guy makes a lot. WE've covered this. Tech companies are a meritocracy, and there's a big incentive ($$$) to make it o the next level. That is why the pay is structured as it is. If I make $100K, and the CEO makes $500K, and there are 10 levels between us, then getting to the next level isn't that exciting. But if I make $100K, adn the CEO makes $25M, and there are 10 levels between us, then the drive to the get to the next level is huge. Again, we've covered this. Roid writes: "You don't really know a blessed thing about how large companies operate at the top" Considering I've only worked at large companies, yes, I do. You are the guy that is pretending running a $30M company is an accomplishment. That is the development budget of an engineering manager. But I'm sure you did great at it. Roid writes: "Interesting, seattle, that you think financial incentives can alter the supply of doctors but not the supply of engineers." Of course it alters the supply of engineers. Never said it wouldn't. Aaron writes: "If doubling one's income isn't sufficient incentive to make a risky career jump, would the prospect of quadrupling one's income make much difference? " Sure, precisely for the reason you note: it's risky. Your buddy did it. To think another 1 out of 100 wouldn't be snagged by doubling the pot is ignoring reality.

- seattleeng

May 8, 2012 at 9:54pm

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That would be $50 million in today's dollars, as it was nearly 30 years ago. And a standalone $50 million business that has to do everything from marketing to design to production to shipping and must actually compete head-to-head in the market place is not at all the same thing as a team of development engineers, no matter how large, within a still larger corporate structure. But the real point, seattle, is not that running a $50 million business (in current dollars) is so important, but that I was able to do it, at the ripe age of 34, despite having no prior experience whatsoever, not as a manager, not even as a peon in a manufacturing business. All I had was the mandate of the owners to straighten out a mess that was turning into a disaster. But figuring out what was wrong and what decisions had to be made, understanding the always relatively limited range of options, and then making the calls was not that intellectually difficult. And I pulled it off, including the day I fired 20 people and called each one into my office to tell them face to face, the respect I thought I owed them. Of course, it was a kind of gigantic accident that I was thrust into that position because the company was melting down and there was no one else to do it; I certainly would never have been hired for the job without anything relevant on my resume. But it wasn't quantum physics, that's for sure. You don't even realize that you contradict yourself. You started out claiming that these unique individuals earn their own marginal contribution, their own productivity (as if that were measurable). Now you are acknowledging that CEO pay is not attributable to output but is essentially political, it is the "top dog" compensation needed to stabilize a political hierarchy. Just as I described, the entire "court" is participating in taking as much from the corporation as possible, with the approval of boards who are part of the very same management guild and are busy trading board seats for which they are highly compensated for support for management and its compensation. And if the entire court made less? There would be no issue of compression. And if the reason they make less is because we tax away 50% of their gross in order to provide for society and reduce income inequality, there is still no issue of compression. You also now acknowledge that these people don't have many opportunities. Hence, if there really were a perfect or near perfect market for their abilities, they would be in a weak negotiating position. The could get paid for performance, but the evidence is rather overwhelming that they are not paid for performance. Why is it that people whom you claim have such extraordinary abilities are generally not paid based on the results they obtain for the company as a whole, including zero in the years they manage to lose money? You have no evidence at all for the proposition that there is no motivation or insufficient motivation to "get to the next level" unless there is a 40% salary increase per level, compounding over 10 levels. You have no explanation for how corporations functioned successfully not very long ago when CEO compensation relative to the median was half what it is today. As with everything, you simply assert what you want to be truth as if it were self-evident truth. You insist that more inequality is better for growth but have no explanation for the empirical reality that growth was much higher when incomes were more equal and the decline in growth and in productivity growth coincides precisely with increasing inequality. You have no explanation for the fact that the middle class has not done better as a result of this inequality but has just maintained its share of a more slowly growing pie. Because your libertarian theology tells you that this lifting of all boats is both the moral justification for and the necessary result of the inequality, you simply claim that all boats have been lifted even though nothing of the kind has in fact occurred. Then you say, "Isn't this a great outcome? Doesn't it justify the inequality? Shouldn't we prefer this great outcome to the alternative?" The only problem with your narrative is that it was not in fact the outcome. You just pretend it was and move straight into telling us what a good thing that is. You did indeed deny both that the price for engineers would rise if we could not import them and that that would then induce more Americans to obtain the necessary skills resulting in more and better paying jobs for Americans. In short, you deny that the market functions as a market when the result of the pretense is more money for the people at whose feet you clearly worship. Likewise, you pretend that there is both a market and a measurable output for CEOs when the result is more money for the people at whose feet you clearly worship. You contradict yourself left and right; the only consistent claim you make is that more money for those with the most money is the best possible outcome for society as a whole. Whatever facts you need to invent, whatever objective reality you need to deny, to make that claim, that is what you will do. So, seattle, since you know what CEOs in big companies do, tell me about the typical day, week, year of a CEO in a Fortune 500 company. We know they go to meetings, we know they talk on the phone, but what is it they will personally accomplish, or fail to accomplish, that is the essence of the job. While you are at it, see if you can explain just why it is important for them to know every aspect of the business, as you say. Operationally, how do they cash in that knowledge? And don't bother with the "allocate capital" nonsense, because I know perfectly well that is not what they do.

- roidubouloi

May 8, 2012 at 10:52pm

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If there are your 10 tiers, and the jump at each level is 29%, the chief executive makes 12.5 times the salary of the manager ten tiers down. If the jump at each level is 38%, the chief executive makes 25 times the manager ten tiers down. That doubling is the difference between CEO compensation today and three decades or so ago. So, your thesis is that unless the jump in salary for a promotion to the next level is 38% rather 29%, there is insufficient motivation to strive to be promoted. Right? That is what we are all supposed to believe? Do you think that is even plausible?

- roidubouloi

May 8, 2012 at 11:02pm

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Here's the bottom line, seattle. You make the fallacious argument, along with Conard, that because zero inequality, perfect income equality, would be bad for output due to lack of incentive (a proposition we can accept for the sake of argument), that more inequality is better than less inequality. Plainly this cannot be the case. The opposite extreme of perfect equality is that one person gets all the income. Then, of course, no one works. So the optimum must lie somewhere between perfect equality and perfect inequality. You were asked for some limiting principle, so that we can understand where the optimum is and, of course, you cannot provide any. Nor can Conard. There is no theory to explain even about where such an optimum would lie. All we have is empirical observation to guide us. Empirical observation says that the more equal income distribution from 1940 to 1980 was better than the less equal distribution we have today. Faced with this inconvenient truth (for the claim that more inequality is better), Conard dismisses it by saying we had not world competition, we had a de facto closed economy. There is no explanation at all as to how and why a more open economy needs greater income inequality to function. There is, however, a clear nexus if you look at the causality the other way, that an open economy produces greater income inequality. Is there any theoretical basis, other then libertarians pounding the table, for believing that this is a desirable outcome, other in terms of justice or economic growth? Conard offers none. You offer none. On the other hand, we can construct a good narrative as to why flatter income distribution is better for growth: stronger demand leading to higher employment leading to wage pressure leading to capital labor substitution and faster growth in productivity. In the absence of any coherent countervailing narrative -- the one that neither you nor Conard is able to offer beyond the invention of mythical benefits -- this would be reason enough to mitigate the adverse effects of an open economy by using taxes to achieve income distribution more like that of 1980. However, we can also observe that, historically, income distribution such as we have now leads to financial fragility and crash. That is but more reason. The only thing we hear from the other side are anecdotes about the benefits of inequality, and not even anecdotes with any grounding in reality. They are not historical accounts but little fables in which stunningly high compensation for executives magically unleashes innovation and hence growth. But we don't see the growth, because the little story is just a libertarian fairy tale concocted to reach its conclusion.

- roidubouloi

May 8, 2012 at 11:32pm

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seattleeng: "I've attended board meetings, I've presented at board meetings. I'm on a board right now." In a nutshell, this explains everything. "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

- zardoz67

May 9, 2012 at 10:34am

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Roid writes: "Now you are acknowledging that CEO pay is not attributable to output but is essentially political, it is the "top dog" compensation needed to stabilize a political hierarchy." No, I'm saying that if EVERYONE is paid REALLY REALLY WELL then the CEO will also be paid really well. The problem is that because you once ran something that didn't require a lot of domain expertise to run, you assume that ALL businesses are equally simplistic. They are not. There are a host of companies out there that exist solely because what they do is very technical and they can do the technical better than anyone else. And in order to do the technical stuff better than anyone else, it means that EVERYONE understand the technical details very well. From the junior engineer to the CEO. And a solid grasp of these moving parts is critical to making the right decisions. Roid writes: "And if the entire court made less? There would be no issue of compression. " But if the salary of a junior engineer paid as much as the salary of an art major, then there'd be no reason to become an engineer. Which is kind of the point of the book being discussed. Engineering salaries are high because it's hard, and because the good ones make their employer a lot of money. Employers keep engineers working 80 hour weeks by giving them a huge boost in pay if they make it to the next level. It is that eternal desire to get to the next level that causes engineers to work that much. And if the base salary is high, and if promotions are a big boost in pay, then it's easy to understand how CEO pay is so high. If you tax away incentive to innovate, then you are left with no innovation. Why is Europe sucking at 4G chipsets? Why is Europe sucking at the internet? Why has Europe had no google? No facebook? The author's point is very valid. The US economy grew 60% since the early 1990's, during which time EU and Japan only grew 20 to 30%. These are staggering differences.

- seattleeng

May 10, 2012 at 1:22pm

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