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Go Home An Honest Conservative Take on Income Inequality

TIMOTHY NOAH NOVEMBER 14, 2011

An Honest Conservative Take on Income Inequality

BY TIMOTHY NOAH

The most honest conservative commentary I've seen lately on the topic of income inequality was Matthew Continetti's "About Inequality" in the Nov. 14 Weekly Standard. The usual conservative approach to income inequality (besides simply ignoring it) is to try to argue that it doesn't really exist, or to argue that if it does exist, it's mooted by upward mobility, or to argue that it's good for you. The trouble with these responses is that they're in conflict with the facts. Income inequality has been growing for 32 years, upward mobility in the U.S. lags behind upward mobility in western Europe, and while a certain amount of income inequality is necessary to make a capitalist economy work, no sensible person thinks that a continual and unceasing increase in income inequality is good for anybody.

Continetti takes a different tack. He concedes that the inequality trend is probably real, and that it's a nasty business. He just doesn't think it's the government's place to do anything about it:

"The way out is to reject the assumption that government’s purpose is to redress inequalities of income. Inequalities of condition are a fact of life. Some people will always be poorer than others. So too, human altruism will always seek to alleviate the suffering of the destitute. There is a place for reasonable and prudent actions to improve well-being. But that does not mean the entire structure of our polity should be designed to achieve an egalitarian ideal. Such a goal is fantastic, utopian even, and one would think that the trillions of dollars the United States has spent in vain over the last 50 years to promote 'equality as a fact and equality as a result' would give the egalitarians pause."

What's admirable about Continetti's piece is that it states what I suspect most conservatives, deep down, really think about income inequality. Yes, it exists. Yes, it's a problem. But it's a problem I don't feel like trying to address.

Of course "the entire structure of our policy" shouldn't be "designed to achieve an egalitarian ideal." But in the non-utopian world it is possible to experience ever-greater income equality rather than ever-greater inequality. For instance, while it's certainly true that many industrialized democracies have, like the U.S., seen a growth in income inequality over the past three decades, some have not. France, Austria, Greece, Ireland, Spain and Turkey have all seen income inequality decline since the mid-1980s. Greece, Ireland, and Spain's economies are in rotten shape at the moment, but that isn't because these countries have too little income inequality. It's because they have too much debt. Another counterexample to the current income inequality trend is the U.S. during the five decades from the early 1930s to the late 1970s. During this period incomes either became more equal or remained stable even as the economy boomed.

Continetti seems to think that past attempts by the U.S. government to reduce income inequality came to naught. But according to the recent Congressional Budget Office report on income inequality, the combined impact of all federal taxes and transfer payments is to reduce income inequality (as measured by the Gini index) by about 17 percent, which isn't too shabby. The combined impact of all federal taxes and transfer payments in 1979 was to reduce income inequality by 23 percent, which is even better. The decline in the relative progressivity of federal taxation and benefits didn't create the inequality boom. We know that because before-tax incomes are much more unequal today than in 1979. But what can't be disputed is that the government is doing less than it did three decades ago to reduce income inequality. Which I guess Continetti would say is as it should be.

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91 comments

Well at least he's honest. That's something. In fact one slur against Obama from the Right is that he is seen as "wanting to make everybody in America equal," like this is wrong. What are people so afraid of?

- Sophia

November 14, 2011 at 2:57pm

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It's a Libertarian straw-man that the Government "is trying to guarantee equal outcomes for everyone", which is usually followed by the "and after trillions of dollars of expenditure, failing", so they can conclude "Therefore the Government should do nothing." Which is a classic attempt to make a false dichotomy. Trying to make opportunities in the system "more equal" is not guaranteeing "equal outcomes". Trying to reduce the tendency of the system toward inequality is again not trying to guarantee "equal outcomes". There ARE no "egalitarians" pursuing a "Utopia". What we CAN point out is that Reaganomics, and Supply Side Economics, have had the impact of increasing disparity between the wealthy and the middle-class. And that this is a bad thing -- it takes a healthy middle-class to support America's standard of living.

- AllanL5

November 14, 2011 at 3:07pm

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But Barack Obama is nowhere near a radical egalitarian.

- liberalref

November 14, 2011 at 3:16pm

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From 1928 to 2007 the percentage of income received by the top 1% looks like a bowl when plotted on a graph, with steep sides and a long, flat bottom. In other words, after the 1929 crash income inequality declined very rapidly and held steady for a long period following WWI up until the late 1970s, when it turned sharply upward (with a few bumps between the late 1970s and the 2008 crash) at almost the same rate as the rate when it declined after the 1929 crash. If the period following the 1929 crash is a guide, income inequality is self-correcting - although the economic pain suffered during the correction is severe and not evenly shared. Whether self-correction is attributable to the laws of economics or the laws of politics is debatable, most likely it's attributable to both. To the extent its attributable to politics, is it any wonder that defenders of income inequality would do all that's in their political power to prevent the correction.

- rayward

November 14, 2011 at 4:06pm

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i expect there to be a correlation between income inequality and GDP in some sort of curve where some inequality promotes growth and too much inhibits it. I expect inequality would inhibit growth when it begins to reduce aggregate consumption. (That's what I think we have right now.) If increasing GDP warrants larger deficits from lower tax rates for capital gains and dividends, for instance, why wouldn't inequality be something that government should address?

- Nusholtz

November 14, 2011 at 4:09pm

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I suspect there's a large correlation between the cancelling of the New Deal banking regulations (begun in 1979) and the up-tick in the top 1% income percentage. I wouldn't say these things are "self-correcting". Instead I'd say the New Deal legislation corrected the worst abuses of the American Capitalist system. And after having them in place 50 years, the Republicans finally succeeded in revoking them from 1980 through 2008. The resulting economic crisis could be seen as inevitable. Not because the economy is inherently cyclic -- the New Deal legislation prevented the enormouse cycles we saw up until 1929. Instead it's because by revoking those rules, the Republicans made a 1929-style depression almost inevitable. It's only the remaining pieces of the New Deal they haven't got around to revoking yet -- Fannie-Mae, FHA mortgages, the FDIC, the Federal Reserve Board -- that provided enough resources to avoid Great Depression II.

- AllanL5

November 14, 2011 at 4:38pm

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But Continetti targets a straw argument: that liberals want to ensure equality of "conditions" or "facts" or "results"--i.e. equality of outcomes. We liberals (including the esteemed Noah) are left arguing about policies (like tax policies) that reduce inequality instead of articulating a positive vision for policies that increase equal opportunity. Liberalism would be much stronger if it rested on simple philosophical premises about equal opportunity rather than technical arguments about the hard-to-measure benefits of a flatter income distribution...or the percentage point decline in income inequality resulting from federal tax and transfer policy.

- polcereal

November 14, 2011 at 5:12pm

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At first, I thought you had written that you suspect there is a correlation between inequality and the GOP, nush. Ha ha. You had me laughing there for a moment, until I realized that it was my mistake. Your take was once Michael Kinsley's orientation, too, polce, but somewhere about a generation ago, Kinsley realized that aiming for equal opportunity wasn't getting the job done, that there has to be some greater measure of equality of outcome. That is more true now then it was then, given widening inequality and a constriction of economic class mobility. I want to say that rayward's posts have been especially thoughtful and well-written, as of late.

- liberalref

November 14, 2011 at 5:29pm

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I read Nush's 'GDP' as 'GOP,' too, and had to go back over it.

- ironyroad

November 14, 2011 at 5:51pm

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Rising income inequality means our economy is dependent on an ever smaller consumer base. Today the top 5% of earners account for close to 40% of all domestic consumer spending. An economy with a shrinking pool of people with real disposable income is one in which real opportunity is shrinking also.

- esmense

November 14, 2011 at 7:31pm

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Rising income inequality is believed to be one of the causes of the Great Depression. Business inventories quadrupled between the beginning of 1928 and the summer of 1929. People generally did not have money to spend to buy all the goods industry produced. The rich either saved the money, which would have been good if there was a need for capital goods, or speculated in the stock market. Workers were laid off since more production was not needed, which further reduced demand in a vicious cycle. We face the same problem today. How many flat screen TVs does one billionaire need? Not as many as 99 ordinary people. To a liberal the solution is fairly obvious: governmental action including higher taxes on the rich and spending on badly needed infrastructure, which create more good paying jobs and raise demand. A conservative denies there is any problem requiring governmental action or, if there is, then the action required is to lower taxes, which will raise investment in capital goods and thus stimulate the economy. Problem is that there is no need to invest in capital goods, since business can't sell what it makes now.

- Vekert

November 14, 2011 at 8:02pm

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I guess what happens if you make some jokes and some not jokes, it all gets confused.

- Nusholtz

November 14, 2011 at 9:25pm

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until TNR stops these automatic ad embeds that use up buffer memory, y'all have fun wondering what happened to the post-industrial service economy that was promised by all those Harvard MBAs and lawyers and politicians in the mid-1970's, when Japan started to flood the US auto market. Man, those visions were straight out of Edward Bellamy's "Looking Backward" from 1887. Wrong then, wrong in 1977, and still wrong today. Manufacturing matters. ZERO excuse for why Americans have to import all their fancy tvs. Even my Toto bathroom sink was made in Indonesia, although Toto did make my new toilet in Georgia. Cut my water bill in half! But, you will never reverse the income inequality without re-industrialization. NO MORE HARVARD MBAs or lawyers in the WH!!!!!

- K2K

November 15, 2011 at 2:09am

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Conservatives, being ideologues themselves, always translate into ideological terms (redesigning our polity "to achieve an egalitarian ideal") those measures by the government that are in reality utilitarian attempts to make the economy more efficient by re-establishing an equalibrium between supply and demand by taxing unproductive capital that's coagulated at the top and putting it back into circulation to spur demand. Not long ago in these pages, Damon Linker showed pursuasively that conservatives equate "American exceptionalism" with the right wing conservative worldview so as to give their own prejuduces a patriotic coloration. Continetti plays the same sort of word game when he talks of the "fantastic, utopian even" efforts to change the whole structure of "our polity" so as to equalize income. The "polity" in Continetti's imagination is the same one promoted by the Wall Street Journal in its editorial pages -- the linear, cause and effect duality they say exists between Ayn Rand's "makers" and "takers," the "producers" and "parasites," where all economic activity is generated by a small class of wealthy and virtuous "job creators" whose investments at one end of the pipe are the single cause of the jobs produced at the other. As a model for "our polity" you'd be hard pressed to find a better one to promote the interests of the rich, which is why Continetti just assums that such a model is in fact "ours." But the truth is that economies aren't linear, they're circular. Economies are less straight-line cause and effect and more like ecosystems that thrive when kept in balance -- where, for exampole, supply matches demand, and in ways that don't drive consumers dangerously into debt. But looking at economies in utilitarian terms puts conservatives at a disadvantage and so they try to reframe the discussion into the vague abstractions of ideology or theology so as to accuse liberal reformers of bad faith in wanting a different distribution of national wealth just because they are "envious" of the rich or long for "Big Government" for its own sake or are "contemptuous" of the "freedoms" enjoyed by the wealth-creating entrepreneur and want to erect a society where they are in control.

- TedFrier

November 15, 2011 at 6:34am

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"re-establishing an equalibrium between supply and demand by taxing unproductive capital that's coagulated at the top and putting it back into circulation to spur demand." Man, that's brilliant. Well said.

- AllanL5

November 15, 2011 at 8:33am

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"The way out is to reject the assumption that government’s purpose is to redress inequalities of income." This is a hilarious statement. Continetti plainly founds his argument in the notion that there needs to be a way out to justify plutocracy. I keep passing the Cato Institute on my way to the DC convention center. I'm pretty sure Cato the Elder would say INSTITUTO CATO DELENDA EST every time he walked past it.

- chaitless

November 15, 2011 at 8:36am

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based on the back of my hand calculations (which aren't long because my hand isn't big) we should feel luck that we live in such a great country where America's "poor" enjoy such a great standard of living when compared to the Somalian pirate's second cousin third wife's brother who is a subsistent dung beetle rancher. Today's "poor" has luxuries that their "poor" great grandparents could only imagine as science fiction in 1910. Things like TVs, Toto toilets, Xboxs, cell phones, squeezable go-gurt and 32oz. bottles of coke for only .99, 5-day work weeks and get this...free public education! I wish people would stop whining about income disparity because really the bottom 10% of the bottom 99% have it so much better than we had back during the Robber Baron era. Maybe if people would compare themselves to that dung beetle rancher they might think twice about confiscating the wealth I've acquired in my short time. Wealth like 4 pairs of black and brown dress shoes. A "dress" pair of jeans and clean underwear, this soft-bristle toothbrush with polishing toothpaste, and this 6 year old Dell laptop. Heck...I still have to use dial-up!

- singlspeed

November 15, 2011 at 8:52am

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Ditto nush:"I expect there to be a correlation between income inequality and GDP in some sort of curve where some inequality promotes growth and too much inhibits it." Fans of government accuse libertarians of using straw men in implying that they advocate "re-designing our polity to achieve an egalitarian ideal". Libertarians accuse fans of government of using straw men when they imply that we would destroy the entire government and revert to an Iron Age society. In fact we'd like to see a government that encourages paying for the government we need fairly, but not buying so much of it that it does more harm than good. Let's skip the bullshit and design optimal policies based on data.

- Robert Powell

November 15, 2011 at 9:02am

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K2K As I see it, we can't compete globally for unskilled manufacturing jobs because the only factor of selection is hourly wage cost. If I am right, then the only manufacturing we can get is skilled labor. So, to say we need re-industrialization, if that means at the business level and not at the employee level, I don't see it happening and won't happen unless government invests in the education of workers to transform the labor force.

- Nusholtz

November 15, 2011 at 10:17am

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I remember a young, rich guy on Oprah saying, quite honestly, back in the Eighties that "for me to be rich, someone else has to be poor." That's true, but that someone else doesn't have to be getting progressively poorer. Maybe he or she could be getting a bit richer. That used to be the American way. The only way to reverse income inequality in the U.S. is to start producing meaningful products again. Right now our main export is money, and poisoned money at that. I just heard that China was one of the countries that bought masses of subprime mortgage products from Wall Street before the crash in 2008. Communists own the mortgages of Americans in bundles of 10,000. Can American capitalism sink any lower? I wouldn't bet against it. Greed comes from fear, and Wall Street money manufacturers are one fearful lot.

- magboy47.

November 15, 2011 at 10:48am

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nush and k2k are right with regards to rebuilding/retooling the manufacturing sector of America. China is quickly positioning itself to move away from the cheap, disposable consumer goods and moving on to high-tech, high end manufacturing. But the U.S. needs to be strategic and encourage domestic small and medium scale manufacturing sectors that focus on technologies and products that contribute to the infrastructure rebuilding that needs to occur. There is no reason two should be exclusive to each other. Unfortunately when you have corporations whose sole focus is the bottom line and maximization of profits regardless of who makes or buys their products you won't see much encouragement from the private sector (unless you have the right CEO and board). Plenty of Americans are willing to pay a bit extra for American products knowing that they're supporting such companies that choose to make things in the US. With the increasing shipping and fuel prices to ship from abroad many companies are finding that manufacturing domestically for the domestic market is cheaper or equal in some regards. It just takes a willingness and some encouragement policy wise and consumer wise to push the US manufacturing sector in that direction. The second aspect is skilled labor. It's hard to find skilled labor to do anything these days. A quality plumber? A skilled woodworker? A skilled machinist? You pay for that skill but in our collective effort to crap out useless MBA we've forgotten about the folks that might actually prefer to use their hands to make things vs. pushing email all day.

- singlspeed

November 15, 2011 at 10:57am

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Magboy writes: "I remember a young, rich guy on Oprah saying, quite honestly, back in the Eighties that "for me to be rich, someone else has to be poor." That's absolutely not true. The rich do not take from the middle class. We now this because the middle class has more than what they had 20, 50, etc, years ago. It's very clear in the CBO data. What the rich "take" is a disproportionate share of the new wealth. But they also create a disproportionate share of the new wealth. I've asked the question several times, and nobody has replied in the affirmative that a janitor in Denver is entitled to any of the the $100B in wealth that facebook created. So, given that, how do you stop someone with a good idea and a will to thrive from taking all the new wealth when they are put up against someone who just doesn't give a shit about doing any more than the bare minimums?

- seattleeng

November 15, 2011 at 12:33pm

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Oh great we are back to the poor in America are lucky because they aren't poor in Somalia. That's true but so what. Are we suggesting that it would be more fair if poor people in the US were as poor as the poor in Somalia? Or, are we looking at the awful costs of income disparity in the US? In the first place, believe me if you didn't have money you'd never write something this dumb and this offensive. Also, there is more to this than money and that's power. When too much money belongs to too few people it's more than a matter of rich vs poor, it's a matter of powerful vs powerless. This is the opposite of a democratic system.

- Sophia

November 15, 2011 at 1:11pm

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I'm going to call bs on the idea that the rich create a disproportionate amount of wealth. SINCE WHEN. What money does, past a certain point, is simply earn money on its own. That's not the same as people creating wealth or opportunity for other people. What money does do, and I'll repeat my point above, is allow a very few people and/or corporate entities - same thing these days I guess - to be more powerful even than some governments. Look at the Euro crisis. Look at the situation here in the US, where the people are at the mercy of the few and their apparently unlimited ability to influence the marketplace - but also the marketplace of ideas. People with money say who is and who isn't successful, regardless of their abilities, their hard work and their drive. Rich and powerful people say who gets fired, what department continues to exist, which person is replaced by what machine. And of course, especially since corporations are people, big bucks influence supposedly democratic elections. This is so bad.

- Sophia

November 15, 2011 at 1:17pm

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Also, it isn't the poor, the working class or even the middle class which decides to play games with the sub-prime market, take the country to war, crash our economy for the sake of creative destruction, or send our jobs overseas.

- Sophia

November 15, 2011 at 1:19pm

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seattleeng, What have you got against janitors? I've been a janitor most of my life. In fact, in 1981, when I started my own building maintenance business, I was the head janitor for 28 years, until I retired. I did way more than the minimum, even when I was a janitor-employee before that. I increased the property value of all the buildings that I maintained, and I was told that repeatedly by the owners. I increased wealth by swinging a broom and slinging a mop. I even got a gold mop and broom from two of the buildings I took care of when I retired. And, yes, I came up with a lot of good ideas to increase the value of property in my care. All of building owners that I worked for say they wish I still worked on their property. You are the perfect example of the elitists on the Right who are convinced they are superior beings who deserve what they have more than anyone else. Stop worshiping Ayn Rand. I admire her drive and focus, but she was one of the stupidest people to ever breathe on this earth. She had a desperate need to be superior, and it shows in everything she wrote. Her neediness was beyond sad. It's no wonder her baby, John Galt, ended up in a cave in the Rockies. He belonged there. And, yes, for every rich person there has to be a poor person, or inflation would run amok. It's a law of nature, one of the few that apply to economics.

- magboy47.

November 15, 2011 at 3:41pm

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The economy of a big, complicated place like the US is not a zero-sum game. It is categorically untrue that for someone to get rich, others must be made poor. You don't have to be the brother in law of a Somali pirate to improve your situation by moving to the US. Ask the millions trying to do so by hook or by crook. Can we do better? Sure. But let's start from a base-line definition of "poverty" that factors in our mostly shared values. Creating a government plantation for the less fortunate to serf on doesn't fit our pragmatic national character, or the needs of the poor.

- Robert Powell

November 15, 2011 at 4:08pm

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Robert Powell, I didn't say someone getting rich means someone has to BECOME poor, just stay that way. You're right in one sense. Many American "wealth creators" are making people in the Third World richer by employing them instead of Americans, who are becoming poorer as the rich get richer. Corporate America now has over $2 trillion in the bank, while more and more middle-class Americans are going on food stamps. At least in these times, there is a poor person for every rich person.

- magboy47.

November 15, 2011 at 4:30pm

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Sophia writes: "Oh great we are back to the poor in America are lucky because they aren't poor in Somalia." You are aware that someone earning about $40,000 is in the top 1% of earners world wide? How is that NOT fortunate? In fact, someone earning $40,000/year is earning more than 99.999% of all humans have ever earned? They are among the wealthiest in the world. They own machines that even billionaires couldn't afford just 30 years ago. Why are so greedy? You are never happy with having enough. You always want more, more more. Think, for once, about what other don't have instead of what you have. You'll be a better person for it.

- seattleeng

November 15, 2011 at 4:40pm

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that's right Seattle. Someone making $40,000K a year shouldn't be complaining about how rich they are compared to the Somalian dirt farmer. Same goes for those making millions of dollars a year contributing little to society except for cashing in on their fame. Why won't they be happy with their $40 million dollars instead of being so greedy? They always want more, more more.

- singlspeed

November 15, 2011 at 4:50pm

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Singlespeed, you hit the bullseye.

- seattleeng

November 15, 2011 at 9:26pm

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Magboy, writes: "I didn't say someone getting rich means someone has to BECOME poor, just stay that way" Not true either. What is critical is equal opportunity. And we have more of that than any country in the world. We know this because immigrant in the US do better in the US than anyplace else in the world. If you look at the numbers, the middle class sees their income rise about 1% above inflation each year. The top decile or so sees their income rise about 2% above inflation. What do you want it to be? 2% for everyone? Hah. It'll never happen. Those with in-demand skills will always command a premium. As the CBO report recently noted, our inequality gap is largely a skills gap. Yes, a janitor is a valuable contributor to society. But let's not pretend he is as valuable as Steve Jobs to society. He is not. Therein lies the rub. Given the ability to accumulate resources, Steve Jobs can create industries worth billions. He can change the way people think. The way they work. The way they spend their money. He can motivate them to work harder so that they can afford his wares. His value to society, and those like him, are incalculable. The janitor that goes to work every day and does a good job has a very tangible, but limited contribution. So, should the janitor get the same raise each year as Steve Jobs in terms of a %? No he should not. Should the janitor get the same raise as the person who figures out how to build a next-gen microprocessor? Or who figures out how to create a skyscraper with 1/3 less materials? Or who figures out how to eliminate our dependency on oil? No. The janitor is doing a job that many can do. Those that I listed are doing a job very few can do. And if you agree with that, then you have just decided that those with more skills will see bigger returns each year, and you have just decided that the rich will get richer. It's really that simple.

- seattleeng

November 15, 2011 at 9:40pm

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seattleeng: "And if you agree with that, then you have just decided that those with more skills will see bigger returns each year, and you have just decided that the rich will get richer." But you're not including those without skills who get bigger returns, like CEOs who get eight figures for failure (in addition to their usual absurd compensation). The idea that CEO pay is the result of some fair market system is laughable. I don't see boards putting those positions out to bid for the person who will do the best job at the lowest price. So yes, there are some deserving inventors who justifiably make a lot. But there are many undeserving people who make a lot too simply because the system is screwed up and there's a lot of money walking in the door. Pay-for-failure is only the most egregious example of unjustifiable compensation. Nor do you include those who have no skills but happen to have a lot of capital to invest (perhaps from a wealthy family)--and then have their profits taxed at a lower rate than those who actually work. They get richer too, but it's not because they have any personal skills to contribute to society. So let's get over this notion that if someone is rich, it's because they somehow deserve it. Yes, sometimes. But hardly always--except in some fantasy land.

- dsimon

November 16, 2011 at 12:22am

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Of ffs. Seattle go jump in a lake. "Valuable to society" is not measurable in terms of wealth. It just isn't. Good heavens now I know what happened to the Politburo.

- Sophia

November 16, 2011 at 12:25am

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seattleeng: "you have just decided that those with more skills will see bigger returns each year, and you have just decided that the rich will get richer." Except that that didn't happen for substantial stretches in our nation's history. For instance, after WWII the portion of our national income made by the top 1% declined or was flat, rising again only in the 1980s. http://rwer.wordpress.com/2011/09/25/top-1-income-share-in-usa-from-1913-2008/ So was there just no demand for people with exceptional skills for those decades? Plus there's no accounting for why our disparity is so much greater than those in our peer nations. Don't they value exceptional skills just as much as we do? If not, why not? When facts conflict with the theory, I think it's usually time to adjust the theory....but hey, that's just my crazy talk again....

- dsimon

November 16, 2011 at 12:38am

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dsimon writes: "But you're not including those without skills who get bigger returns, like CEOs who get eight figures for failure (in addition to their usual absurd compensation). The idea that CEO pay is the result of some fair market system is laughable" DSimon, whether or not YOU believe someone has skills worth a certain amount is irrelevant. A CEO making $10M has found a willing buyer of his skills. You might not see the value in those skills, but someone else has. That is the definition of free market. DSimon writes: "Except that that didn't happen for substantial stretches in our nation's history." If you took 100% of the money earned and owned by the top 1%, and gave it to the bottom 50%, the study you cite would show the same level of inequality. That study is garbage. Take a look at the recent CBO study. Most interesting in there was that labor income has made up an increasing share of the top earner income. Compared to 50 years ago, the top earners are not trust fund babies. They are people out there making and selling things. The recent report on "Who is the top 1%" bears this out too. The top 1% is not made up of just of bankers. 31% are managers, 5% are engineers, 16% are doctors, 14% are in finance, 8% are lawyers and 2% are in sports. It's made of up people who get out of bed each day and go to work. They all have bosses. Their bosses are well paid, but then so are all the employees. The report by Bakija et al noting this also noted what they called the "superstar" effect, where the top performers are paid much, much better than good or average performers. 50 years ago, that would not be true. In an areas I'm familiar with, companies are more than willing to pay killer salaries to their best employees. West coast is hring kids out of great schools (engineers) at more than $100K base salary. Getting a VP level engineering manager or CTO on the west coast will cost $600K to $800K a year. These guys are all at the top of their game. They can do things others cannot do. The CBO study noted this same phenomenon too. There are a group of folks that are amassing skills at a rate normal folks would not imagine possible. When I first got to Microsoft, there were 30 year old VPs that had shipped products that made billions and billions of dollars. They dreamed up the products, managed the teams that delivered the products, supported these products. And guess what? They were worth the millions and millions of $ they made. They did things few at Microsoft could do. Which means they did things that the general population can't even fathom. In fact, the general population cannot even do 8th grade math. The root issue is the general population have very little in the of skills that anyone would pay for. That is a big problem. Hating on a CEO that makes $50M, with a SVP that makes $10M, and a VP that makes $1M, and an engineering manager that makes $500K, and a kid right out of college that makes $100K is silly. They are all well paid becuase they make buckets of money for their company and shareholders. and they do this by creating things people cannot wait to buy.

- seattleeng

November 16, 2011 at 3:30am

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Sophia writes: " "Valuable to society" is not measurable in terms of wealth. It just isn't." OK, then how do you want to measure it? A guy like Steve Jobs can do amazing things I cannot do. He is worth more than me to society. Is that a shocking statement for me to make? I think not. Now, to my family, I hope they value me more than they value Steve Jobs. But to society, I could drop dead tomorrow and nothign would change, no article would be written. Magazines wouldn't delay deadlines and nobody would write about the way I changed my industry. Do you really believe we are all equal in terms of our contribution to society? Do you treat the guy that takes your money as the supermarket with the same reverence you'd treat President Obama if he stopped by your house for tea? Probably not. So you in fact don't see everyone as really equal. But go ahead, elaborate. PS. This is where liberalism falls silent. When asked to actually make a tradeoff, there is never one to be made. It always starts with the argument "but this isn't fair" and never seems to make it to the next level.

- seattleeng

November 16, 2011 at 3:40am

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seattle, When you channel Ayn Rand, you leave human nature out of economic formulas. When Rand found that a real human society didn't fit her fantasized formulas, she had John Galt take his toys and go home. The CEO who makes $10 million a year without working for it, or even while destroying his company, got that job, not because some Invisible Hand market force was at work, but because a very visible hand was there, slapping cash in somebody else's hand. Nepotism and inefficiency are rampant in the market, like they are everywhere else. I remember you said once that, if criminals were involved in the subprime mortgage collapse (which they were, big time), they would be in jail. What you were saying, basically, is that there are no criminals outside jail. That's a jaw-dropper. There are millions of economic criminals alone running free in America. Like Steve Allen once said, "When you have millions of dollars floating by in front of your face, somebody's going to take it."

- magboy47.

November 16, 2011 at 9:51am

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seattleng: "A CEO making $10M has found a willing buyer of his skills. You might not see the value in those skills, but someone else has. That is the definition of free market. " seattleeng, why assume that there is a "free market" in CEO pay? Where are the Boards accepting applications and putting people through a competitive process? These are not arm's length, disinterested negotiations. For the most part, they just rehire their executives, who are often their own Board chairmen. They come up with complicated formula with arbitrarily chosen "peer groups" and often set compensation at above the median--which, if everyone else does so, will lead to an upward spiral having nothing to do with real value. Most pertinent of all, they pay tens of millions of dollars for someone to leave who has failed miserably. There is no rational market explanation for that. You seem to assume that whatever someone gets paid is the result of a market-based process. Have you heard of crony capitalism? And there are substantial conflicts of interest. Board members often sit on multiple boards with other CEOs and other board members. Their positions are often dependent on CEOs. Instead of concluding that executive pay is the consequence of a market system, the sheer ridiculousness of the results should call into question whether there is a truly competitive free market system to begin with. Really, is there any management job someone would do for $5 million that the person wouldn't do equally well for $2.5 million? And if someone gets paid $10 million to leave, I'd think that doesn't provide a good incentive to stay. Instead of concluding that if someone gets that deal, they must be worth it, an absurd result should prompt the question of whether the system is operating properly to begin with. You disparage the study I found by making an irrelevant comment about redistributing the incomes of top earners. You said that that the income at the top will always go up faster than the rest. That point seems to conflict with the data, and whether or not redistribution would alleviate the situation doesn't address the claim about growth in the slightest. Also, the "high-skilled" argument is flawed because it looks at supply but not at demand. Say there are 100 people with a certain skill. That's certainly rare. But there are only 10 positions that require it. Those people should not be able to command high compensation, rare as they may be. Now, there may be people with super duper management skills, but I find it hard to believe that management is so esoteric that it justifies what so many people in such jobs are getting paid. I think the results (especially pay-for-failure) justify my skepticism, and though I admit it's hard to evaluate, I think it's foolish not to have some skepticism. Nor do you address any of the other examples where people get far richer than everyone else without having any significant skills to contribute. Or the international comparisons. It must be nice to ignore data that conflicts with one's theory. It also makes further discussion pointless. Addendum: you want to measure value to society solely by wealth? I guess Martin Luther King wasn't valuable, since he wasn't really wealthy. And I guess Paris Hilton is very valuable, since she is very wealthy. But I suppose that's just more data for the free market fundamentalists to ignore (or another absurd result to embrace in order to avoid questioning the theory). Liberalism isn't against inequality of result. That's a straw man argument. Some of us are just pointing out that results are not always the inevitable result of some unquestionable merit-based system. And it's not unfair to require those who have the most and make the most to contribute somewhat disproportionately to the functioning of society so that others can have some reasonable opportunity to achieve that they have had. This is in contrast to the Randian view that if you can't make it on your own, it must always be your own fault. Anyway, if you want to justify eight figure compensation for abject failure, I'm all ears.

- dsimon

November 16, 2011 at 10:08am

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dsimon, You said what I was trying to say, but much better.

- magboy47.

November 16, 2011 at 10:41am

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seattleeng thinks the market is so magical and marvelous that it's operation is flawless. But as soon as you drop flawed human beings into the formula, you get, well, reality. Ayn Rand was a dreamer. Dreamers on the Right muck up things just as much as dreamers on the Left.

- magboy47.

November 16, 2011 at 10:49am

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correction: "its operation"

- magboy47.

November 16, 2011 at 10:54am

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Flawed human being here.

- magboy47.

November 16, 2011 at 10:55am

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magboy47: thanks seattleeng: "This is where liberalism falls silent. When asked to actually make a tradeoff, there is never one to be made. It always starts with the argument 'but this isn't fair' and never seems to make it to the next level." I think "liberalism" (which seattleeng never defines) has lots of answers, depending on what you mean by it. To me, liberalism embraces markets where they get the results we like (which is more often than not), but is willing to look at situations where markets don't work and other approaches are justified. Many conservatives see markets as inherently good in and of themselves, and so are unwilling to abandon or regulate them because they believe that whatever the results they produce must be good for society, whatever those results may be. But look at professional sports. The advent of free agency has allowed players to have their worth determined by market forces. Good for them; the older system almost certainly undervalued those with exceptional skills. The problem is that player salaries would rise so high that only big-market (or other wealthy) teams could afford the best players. That means that other teams could not compete. Fan interest in the league would drop as smaller market teams folded and the same wealthier teams won year after year. That would lead to a smaller national audience and lower revenues, if not the collapse of the entire league. So what do both the owners and players agree to? Salary caps. Revenue sharing. "Luxury" taxes. All of the major leagues have these non-free market devices which divert income and expenditures and enable smaller market teams to compete. They don't lead to equality of outcome--the larger market teams can still dominate--but they give more teams more of a shot and produce a result that more of us want (more interesting games). And because the league is more competitive, more people make more money--including the big market teams. Markets may be a good answer for most things. But they're not an answer for everything. Where they're not, we should not be afraid to say so.

- dsimon

November 16, 2011 at 11:03am

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Right again, dsimon. The natural tendency in any major economy is towards monopoly. In many areas, like pro sports, if we don't tinker with the economy, we get monopoly. If the "free market" were in full operation in MLB, for instance, there would eventually be only two teams left--the Yankees and the Red Sox. ESPN seems to think that's already happened. They probably televise more Yankees-Red Sox games than all other teams combined. That's another thing that Randians leave out of their dreamy formula: monopoly. The free market does not always produce competition, like they seem to believe it does.

- magboy47.

November 16, 2011 at 11:39am

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My current example of Most Appalling in the category of monopolistic practices is the NCAA. "Student athletes" make billions for the organization and their members while being subjected to waiver of due process, and even the most basic fairness, that is reminiscent of the Soviet Union. One of the most cogent arguments concerning the role of the state in alternately destroying free-market competition by favoring one group over another, and supporting the market by acting against monopolistic, anti-competitive practices, is in Hayek's "Road to Serfdom". Contrary to some beliefs on the Left, this is one of the most liberal books of recent times, and one of the best. Others I'm afraid think it's a book about the Beach Boys.

- Robert Powell

November 16, 2011 at 12:14pm

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Magboy writes: "The CEO who makes $10 million a year without working for it, or even while destroying his company, got that job, not because some Invisible Hand market force was at work, but because a very visible hand was there, slapping cash in somebody else's hand. " False premise. The CEOs I know do indeed work 60+ hour weeks, they are very hands on, and they are are on the road 2 months out of the year. And yes, they make buckets of money. But they have also left an indelible mark on the company in terms of their strategic direction. If a CEO is able to take a company that is a no-name manufacturer, build a brand and after 10 years drive brand awareness into the top 50, while doubling sales for 5 years, is he worth a few million a year? Yes. If a CEO is able to look at the landscape in 2004 and decide that his company will NOT participate in anything having to do with subprime, and he manages to make solid returns instead by catering to other under-served segments of market, is he worth a few million a year? Yes. And on and on. This idea of a CEO that lives on the golf course, never works and is buddies with the board is silly. I'm sure those guys exist, but it's not common. There was a big silicon valley CEO a few years back that allegedly flew on the corp jet with hookers and blow and built an underground lair. But friends that know him said he was a brilliant engineer that just got paranoid and weird as a result of the drugs. Yes, he was a billionaire. And very deserving of it too, given his impact on company before the drugs.

- seattleeng

November 16, 2011 at 12:45pm

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dsimon writes: "but is willing to look at situations where markets don't work and other approaches are justified. " Ah, yes, and who decides when markets are not working?

- seattleeng

November 16, 2011 at 12:46pm

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Magboy writes: " If the "free market" were in full operation in MLB, for instance, there would eventually be only two teams left--the Yankees and the Red Sox" Maybe that was tongue in cheek, but it's absolutely wrong. Nobody would pay to watch those teams play over and over

- seattleeng

November 16, 2011 at 12:47pm

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DSimon writes; "Also, the "high-skilled" argument is flawed because it looks at supply but not at demand. Say there are 100 people with a certain skill. That's certainly rare. But there are only 10 positions that require it. Those people should not be able to command high compensation, rare as they may be. Now, there may be people with super duper management skills, but I find it hard to believe that management is so esoteric that it justifies what so many people in such jobs are getting paid. I think the results (especially pay-for-failure) justify my skepticism, and though I admit it's hard to evaluate, I think it's foolish not to have some skepticism. Nor do you address any of the other examples where people get far richer than everyone else without having any significant skills to contribute. Or the international comparisons. It must be nice to ignore data that conflicts with one's theory. It also makes further discussion pointless." But what is happening now is NOT what you outline. First, the engineers that are in the 1% are indeed at the top of their game. They have skills that are in demand and there aren't enough engineers to meet those demands. Thus their salary rises. Same with the doctors, same with lawyers. Same with everyone else in the top 1% I suspect. You might misunderstand management. Managers in technology companies are the engineers who are exceptional engineers, and also have the knack and ability to see the larger picture, cross domains, work with customers, plan larger features and projects, etc. Management is a skill you add on top of a base job skill. I have never known a manager who started life as a manager. It is not a job by itself. Again, in your last graf you keep suggesting there are people that have earned money absent any skills. I've just not seen this. It might seem like someone doesn't have skills. But a long time ago I learned that if a person is at a certain level they didnt' get there by luck. They got there through a very competitive vetting process. And rather than assuming the guy across the table is a total tool, it's better to instead assume that he's done some exceptional things along the way, learn what those are.

- seattleeng

November 16, 2011 at 1:18pm

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Sorry, in my 12:45 post I meant to type the CEOs were on he road for 2 weeks out of the month.

- seattleeng

November 16, 2011 at 1:20pm

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Magboy and DSimon, I guess the question boils down to this: If a person is able to create something brand new that a lot of people want and that nobody really thought of before, what do you think should be the upper bound of his compensation?

- seattleeng

November 16, 2011 at 1:22pm

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seattle, I'm generally a fairly sympathetic reader of your opinions. In this case, we're not talking about your anecdotal experience. I'm sure you know many splendid people who work hard for their money and create lots of value for shareholders and the world at large. But dsimon's basic point is untouched by all that. We know that a significant number of managers have made enormous fortunes while driving their companies into the ground. Moreover, recently lots of big-bonus failures have destroyed enough equity to solve an awful lot of our national problems. Rewards for failure fail to meet even the most basic standards of appropriate incentives. This warps the proper structure of a free market economy and the society that supports it.

- Robert Powell

November 16, 2011 at 1:41pm

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But Robert, if you want to move away from anecdotal evidence, then we need to look at the market as a whole. And the market as a whole has done very, very well the last 30 years. Meaning that CEOs have been very, very effective over the last 30 years. And globally, US companies have been dazzling over the last 30 years. Just stellar performers. So, generally, is it not fair to say that our collective executive performance over the last 30 years has been awesome by all measures? Sure there have been areas less than stellar. But as a whole, american businesses have done very, very well. Right?

- seattleeng

November 16, 2011 at 3:03pm

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seattleeng: Again, you seem to simply refuse to address arguments or counterexamples. You argue that the top earners have rare skills which are in demand and so their income will naturally rise faster. But why did the income share of the top 1% not rise for decades after WWII? Was the demand for doctors and engineers so much less than it is now? Were CEOs less skilled? Why are our CEOs paid vastly more than those in our peer nations? "who decides when markets are not working?" Who decides when they are working? Why assume that whatever result the market reaches, that result must be the one that "works"? I'd think that pay-for-failure shows that whatever system we have for CEO pay is not "working." If you think that's a market, then that market is not working. If we have a market-based system such as professional sports where a lack of regulation would lead to a collapse of the system, then the market does not "work" in that situation. And as Magboy pointed out, markets often lead to monopolies which are generally considered bad for consumers, so we don't allow the "market" to get to that result. "It might seem like someone doesn't have skills. But a long time ago I learned that if a person is at a certain level they didnt' get there by luck. They got there through a very competitive vetting process." Paris Hilton. The Situation. Skills? A competitive vetting process? Please. Birth, and chance casting. And again, tell me which companies regularly subject their executive hiring or retention methodologies to an open competitive process. "Managers in technology companies are the engineers who are exceptional engineers..." Most Fortune 500 CEOs are not engineers, much less exceptional engineers. And every year the NY Times publishes compensation tables where the pay seems to have no correlation to the success or failure of the company. Again, you can't take data that happen support your view and stop there. You also need to take data that conflict with your view and either explain it or modify your view. "If a CEO is able to take a company that is a no-name manufacturer, build a brand and after 10 years drive brand awareness into the top 50, while doubling sales for 5 years, is he worth a few million a year? Yes." Perhaps. But if there are five other people who would do the same job for one million rather than a few million, should the Board give the first person a few million? No. It sounds like you're assuming that the success of a company is tied to the unique skills of the executive. Maybe the executive stumbled into a company with a great product. Maybe the economy is doing well so that everyone in the field is doubling their sales. Maybe any other competent manager could have done the same job for far less. I really find it hard to believe that if executive compensation were cut in half across the board that there would be any serious diminution in competition for those jobs or the quality of decisionmaking for those in those jobs. Do you have any response at all to my description of how executive pay is actually determined by corporate boards? "I have never known a manager who started life as a manager." Where do all of those thousands business school grads every year wind up? There seems to be this assumption that markets are inherently good because they are markets. I like markets because they usually get good results (higher quality and lower prices). But markets won't provide education for those who can't afford whatever price the market sets. Same for health care. If we think some basic form of these services should be available to all, then we have to some extra-market actions. Plus I don't understand the assumption that whatever the market result is, it must be therefore right. It's a result. It's usually a result that we either agree with or can live with. But rightness isn't determined by an abstract process; it's a societal determination. I don't know if there should be an upper bound to compensation. I do think that the present system seems irrational in many respects. The guy who invented Post-it notes didn't get anywhere near the total profits from his ingenuity; the patent belonged to 3M, his employer. I'm sure he got some kind of bonus and recognition, but hardly the riches. The guy who invented kitty litter did amazingly well. He worked hard and deserved to be well compensated (as do many executives). But was it that brilliant an idea, or was he merely the first to stumble onto something that someone else would have thought of eventually and that a lot of people happened to need? There is a lot of chance that can happen to make someone wealthy, as well as hard work. I'm not saying that executives don't work hard and should not be well compensated. Of course they should. But when the results seem so completely out of whack, it's time to start questioning the system instead of defending its absurdities. Again, I'm still waiting for an explanation of pay-for-failure.... Do you think that unregulated free markets are the best policy solution for every problem? If not, why not? If so, how do we provide basic services for those who can't afford the market price? Isn't the concession that we need some kind of government to either provide or subsidize services and admission that markets alone don't always get a "right" result? Why have sports leagues imposed economic self-regulation if markets are always right? If "the market" will naturally divide society into a very small elite and a vastly much poorer supermajority, who will buy the products and services needed to keep the economy going? (Krugman apparently hasn't bought into the view that a strong middle class is necessary for a strong economy, but others do.) Even most of the most ardent market defenders admit that there is something called "market failure." Once that concession is made, then we're talking about differences in degree, not in kind.

- dsimon

November 16, 2011 at 3:32pm

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"And the market as a whole has done very, very well the last 30 years. Meaning that CEOs have been very, very effective over the last 30 years." It means no such thing. It may mean that these CEOs happened to have their jobs at a very good time. My portfolio did really well too, but that doesn't mean my stock-picking ability was better than anyone else's. Nor does it mean that other managers couldn't have done the same job for far less compensation. Plus if you include the economic crash, shouldn't the conclusion be that they all did terrible jobs the past few years and shouldn't get paid a dime? How about those who didn't cause the collapse but whose companies suffered collateral damage? Really, isn't it simplistic to say "the market did well, so we must have great CEOs," just as it's simplistic to say "the market did terribly, so it's the CEOs fault"?

- dsimon

November 16, 2011 at 3:38pm

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dsimon writes: "You argue that the top earners have rare skills which are in demand and so their income will naturally rise faster. But why did the income share of the top 1% not rise for decades after WWII?" The CBO (and others) have explained this. They wrote: --- "Specifically, researchers have argued that the demand for skilled workers, particularly for highly educated workers, was spurred by innovations in information and computing technology in the 1990s and 2000s. Moreover, innovations in the production process—such as new technology and organizational changes—also may have increased the productivity of higher-skilled workers more than that of lower-skilled workers. For example, some researchers have hypothesized that information technology might complement highly educated workers engaged in abstract tasks while substituting for moderately educated workers performing routine clerical, mechanical, and analytical tasks. Those researchers have also surmised that the demand for workers performing “low-skilled” service jobs has not been affected because many of those jobs—such as health aides, security guards, orderlies, cleaners, and servers—are not amenable to automation. Owing to those various changes, firms have increased their demand for highly skilled workers At the same time, changes in the relative supplies of higher- and lower-skilled workers have been more gradual. The growth in the educational attainment of the workforce has slowed, leading to slower growth in the number of higher-skilled workers compared with the number of lower-skilled workers. That change, coupled with the increasing demand for such workers, has led to the rising relative compensation observed in recent decades for skilled and educated people." --- In other words, a smart person with a computer is much more productive today than a smart person with a pencil and paper 50 years ago. 50 years ago, engineers spent much of their day checking and updating calculations rather than designing new things. Today, they spend more time designing rather than checking and updating. Computers do the checking and updating. Today, I can design in a day a processor that took 15 engineers months to design in the early 70's. And I can have it working in another day in an FPGA. It would take them many more months to get it working. Roughly, I am 1000X more effective than an engineer in 1970. How much more effective is the janitor of today compared to 1970? See the difference?

- seattleeng

November 16, 2011 at 3:53pm

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dsimon writes: "Plus if you include the economic crash, shouldn't the conclusion be that they all did terrible jobs the past few years and shouldn't get paid a dime?" What do you mean "they all"? Our economy is not just finance. There are perhaps 400 companies in the US that pay what you might terms a crazy CEO salary of $10M or more. Of those 400, perhaps 5 really screwed up in the meltdown. But most others continued to do OK through all this. And as a whole, the S&P has done OK since the reset with all things considered. Now, should we have let those that screwed up fail and left the shareholders on the hook for the losses? Probably. And then let the shareholders come in and pick the bones of the board and CEO via lawsuits for hiding deficiencies.

- seattleeng

November 16, 2011 at 4:00pm

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DSimon writes "Really, isn't it simplistic to say "the market did well, so we must have great CEOs," just as it's simplistic to say "the market did terribly, so it's the CEOs fault"? You seem to think a successful company is a happy accident. It is not. Success is sometimes due to "right place at right time", but that does not last more than 2 or 3 years as competitors will find the weakness and kill you. If a company has remained a leader in a competitive market for more than 4-5 years, it's because they are making many more right decisions than their competitors. And yes, at some point you need to start giving credit to the CEO and executive staff. As much as it pains you.

- seattleeng

November 16, 2011 at 4:06pm

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Dsimon writes: "Most Fortune 500 CEOs are not engineers, much less exceptional engineers." No, but most all CEOs at technology companies are engineers. And I suspect most CEOs in other fields are similarly experienced. "Paris Hilton. The Situation. Skills? A competitive vetting process? " Those are the lottery winners in life. I am no more upset by them than I am the guy who won powerball in Illinois. Thankfully, these are a small percentage of our 1%. So small we don't even need to worry about them. "Perhaps. But if there are five other people who would do the same job for one million rather than a few million, should the Board give the first person a few million? " Understand the board is not giving the CEO the specific job. A CEO comes to the board with a vision of where to take the company. He might say "I really see this company shifting to services" or "I think this company needs to focus less on low-margin digital products and shift to high-margin analog products" Thus, when a board approves a CEO, they are approving a direction the CEO has advocated. The CEO's ability to sell this depends a lot on his personal abilities. Can he sell it to the managers? To the workers? To the investers? To wall street? The board is not hiring someone to paint their house. They listened to dozens of candidates give a pitch on where to go. Your belief that there's a guy who could do the same for much less is odd, since if there was a person that could do all that, he'd simply go get a job at a new place for the higher price. "Where do all of those thousands business school grads every year wind up?" Well, at Microsoft then arrive and start doing somethign like product management. They work on competitive positioning, finding weaknesses in other products. Then after 4-5 years, the best are picked to lead a team of 3-4 people. And the best of those best are picked to manage larger team. And soon they might be running planning for all of Microsoft Office, with a team of 40 or 50. Do you really think someone graduates from school and is placed into managing 200 people? Never happens anyplace I've been. "Of course they should. But when the results seem so completely out of whack, it's time to start questioning the system instead of defending its absurdities. Again, I'm still waiting for an explanation of pay-for-failure...." What might seem like pay-for-failure might just be poor execution. An exec will not come to a company without a decent package. This package might say something like "I will be guaranteed 3 years of salary, and one year of bonus no matter what. And in return, I promise not to work for a competitor for 3 years" That is a pretty common arrangement. Now, 6 months into it, if two members on the board absolutely positively cannot stand the guy, and if rumors are bubbling up from vice presidents that the new CEO is really hurting the company, and if 6 months into it the new strategy isn't working and stocks are down because the CEO wasn't able to convince wall street this was good, then the board might well decide to boot the new CEO. And the CEO walks with 3 years of salary and/or whatever he got as part of the package. That's just the way it is. When the stakes are high, failures cost a lot. But they are a small part of the larger picture. You can call that pay for failure if you want. Think of it this way: If I'm a CEO making $1M a year, why would I leave my comfy job right now and go to place with a shaky future where i MIGHT make $3M a year or I MIGHT make nothing? So, to entice the CEO over, the shaky company needs to really sweeten things. And they do. "Do you think that unregulated free markets are the best policy solution for every problem? If not, why not? If so, how do we provide basic services for those who can't afford the market price? " No, they are not. For example, I like the gov decided where to build roads, and when to repair roads. But most problems should be left to markets for the reasons you mentioned. For things like health care, I think we let people pay their own way UNTIL they encounter expenses that exceed a certain % of their income. Obamacare has provisions for this, and I think it's smart.

- seattleeng

November 16, 2011 at 5:09pm

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"I have never known a manager who started life as a manager."
I can think of one off the top of my head. His childhood bff was a VP at this Fortune 100 company I worked for, created a job and hired him for it. BA in Business Administration, MBA, and no technical skills to speak of. He was more than happy to share that information, along with the fact that he didn't care what happened to the business unit because he'd always have a job there because of his friend.
"It is not a job by itself. "
Actually, in every Fortune 100/500 and otherwise large company I've worked for, that's exactly how management is treated. I've never seen someone with applicable skills rise above the level of middle management, and I've only seen two or three of those.
"Again, in your last graf you keep suggesting there are people that have earned money absent any skills. I've just not seen this."
Open your eyes?
"It might seem like someone doesn't have skills. But a long time ago I learned that if a person is at a certain level they didnt' get there by luck. They got there through a very competitive vetting process."
I know a guy who is now CTO of a mid-sized IT company whose technical skills involve photography, power point, buzz words like Service Oriented Architecture, spelling words like WSDL (I don't think he knows how to actually pronounce it, though), and conning managers who don't know anything but how to manage into believing that he knows technology and can make things happen. So yeah, maybe not luck, and maybe there was a competetive vetting process, but that doesn't really mean anything. His primary skill is convincing people who don't understand IT that he does. Now he's making 250k-ish.
"You seem to think a successful company is a happy accident. It is not."
It is not a happy accident, but in my experience in large and "successful" companies it is actually the result of the heroic efforts of the peons you disregard that bring about success in spite of, not because of, the management. In the smaller companies and start-ups, it is certainly true that success is a measure of hard work and competency. But, and I'm watching another company mine deals with go through this right now, there's a point where that becomes no longer the case. Incompetence starts creeping in as the upper management staff grows and the one person who got the thing started can no longer oversee every aspect of the company. They hire VPs and managers they think are qualified to manage various aspects, like HR, or accounting, without supervision. That's when competence breaks down: an HR director who doesn't know how to identify qualified technical staff but demands tight control over interviews and hiring, an accountant who's great at balancing budgets but doesn't understand what it means to upgrade infrastructure in an IT company, can't be bothered to process travel reimbursements in a timely fashion or even follow their own reimbursal policy for direct deposits vs. cutting a check, to name a few of the problems roiling through the company these days.
"Success is sometimes due to "right place at right time", but that does not last more than 2 or 3 years as competitors will find the weakness and kill you."
If that was true, the Fortune 100 & 500 companies I've worked for would have gone out of business years ago. The fact is, "success" tends to breed success. I worked for a fortune 500 company whose only real talent was buying up and integrating profitable small businesses in the health care industry. None of the business units coordinated efforts, or anything like that. There was no need because the products and services were so disparate. Better yet, the board of directors, with their nose for profitability, eventually sold off the company for millions of dollars a piece, but not after gutting the company of it's most talented (read: expensive) employees (like myself), and replacing them with half-priced, underqualified replacements to make the company look even more profitable on the books. Of course, they had to make the sale quickly because the underqualified replacements wouldn't be able to sustain the operations for long, which they did. The new owner ended up hiring 4 people to replace me. I can only imagine what they were thinking about this great deal they thought they were getting.
"If a company has remained a leader in a competitive market for more than 4-5 years, it's because they are making many more right decisions than their competitors."
Again, not true. Foremost, you don't have to be a leader in a competetive market to qualify as a success. Or would you say Apple is not a success because Microsoft is the leader in personal computing? You just need to be able to pull in enough of the market share to remain profitable, and that doesn't even require having a successful product if you have really good salesmen and marketing campaigns. And while most markets require continued innovation of one sort or another to remain competetive, that innovation is almost nearly automatic in any market requiring it. For instance, CEO's don't innovate automotive technology, it's the peons you scoff at who love their jobs and are smart enough to find ways to do their jobs better, or improve their product's performance. And more often than not it's either the government or the marketplace that directs those innovations: people want cars that don't require so much expensive maintenance, or are more fuel efficient, laser guided cruise control, etc. And in some industries, like IT, the innovation happens outside the company all together, in the marketplace or government (DARPA Net, what?), and it's the company's responsibility to keep up with the times, master the new technology, and provide the best services to customers, which happens with the peons you scoff at, not the CEOs.
All of which is to say, Seattle, reality disagrees with your theories.

- GSpinks

November 16, 2011 at 7:06pm

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Yes, Robert Powell. Government has a hand in hampering free market competition, but it also enables it. Monopolists hamper the free market, too. My favorite monopoly is the health care industry. They have captive consumers--the sick, the injured, and the dying--and they stick 'em. I'm talking about hospitals, doctors, and nursing homes, not the insurance companies. I actually feel a bit sorry for the insurance companies, having to deal with the outrageous bills they get. Michael Moore got it wrong in Sicko, when he focused solely on the insurance companies as the problem. Your "Road to Serfdom" pun was so bad, it was almost good. Does Hayek discuss the government's dual role with respect to the free market in this book, or does he focus on the government as simply a counterproductive meddler?

- magboy47.

November 16, 2011 at 8:20pm

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GSpinks, the summary of what you argue is this; 1) Totally incompetent people are running the show 2) The really competent people are getting paid nothing and cover for the mistakes of the uppers. 3) The companies that are making a ton of money are doing it by accident, and in spite of the managers. If this were true, then why don't the "peons" go and start their own company and kill their old company who is currently the leader? Venture cap firms will give millions to start something like this. A guy in his mid 30's named Elon Musk built an entire car company. From scratch. The money is just waiting to be loaned. Why, GSpinks, why???

- seattleeng

November 16, 2011 at 9:31pm

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People have basic needs. The thirsty, starving, freezing person can only think about staying alive. Much of the world functions at that level. People have psychological needs. The watered, fed, warm person seeks meaning. Meaning may come from posting a comment to the TNR board, writing a novel, composing music, painting pictures, or building Microsoft/Apple into a company (Bill Gates/Steve Jobs), or falling in love & screwing, making babies, and sending them to college (a large percentage of human beings, especially in our culture). Now Bill Gates has everything money can buy and as much power to boss people around as any sensible person wants, so he sets up a foundation to make an unfair world a little fairer. Singlspeed 1:50 pm comment nails it. Psychological needs are comparative. The person who doesn't have a computer, fast car, or big screen tv doesn't know s/he needs one. The person who has one of those items which is five years old and lives next door to a person with the latest, is now deprived.

- skahn

November 16, 2011 at 11:17pm

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seattleeng: "The CBO (and others) have explained this...." They explain what happened in the past few decades, but that wasn't the question. The question was why those with top skills apparently did not capture so much more income in the decades following WWII. That would seem to contradict your thesis that those with exceptional skills will always see disproportionate income growth compared with the other 99%. Was there not demand for specialized skills during that time? Were there not technological innovations then--aerospace, communications? Did we not need highly skilled doctors, engineers, managers? And if the recent increase is due to technological change that made these people more productive, then it's not inevitable that specialized skills will always result in disproportionate pay increases; it will depend on the state of technology, so your thesis would be incorrect. Nor do you explain why things seem to be so different in our peer nations, which live in the same technological world that we do. "What do you mean "they all"? Our economy is not just finance." Agreed. But you're the one who asserted that since American companies did well, the CEOs must all be doing great jobs. So when they do badly--as almost all did after the fiscal crash--they were doing terrible jobs? You seem to attribute success and failure to the doings of the CEO. While that can be the case, I pointed out multiple reasons why it often may not be. You haven't really disputed those cases. I'm willing to give some CEOs credit, but it seems to me that you want to give them all the credit regardless of circumstances. I don't think you've adequately explained pay-for-failure. Many of these people get generous severance packages regardless of performance. HP CEO Leo Apotheker got a "severance package" of over $7 million for less than 11 months of work. "you keep suggesting there are people that have earned money absent any skills. I've just not seen this." Yes you have; you now say that there are "lottery winners" such as Paris Hilton and The Situation. So then you shouldn't be making such blanket, absolutist statements. "'Where do all of those thousands business school grads every year wind up?' "Well, at Microsoft then arrive and start doing somethign like product management. They work on competitive positioning, finding weaknesses in other products." But you previously wrote: "Managers in technology companies are the engineers who are exceptional engineers." Which is it? "If I'm a CEO making $1M a year, why would I leave my comfy job right now and go to place with a shaky future where i MIGHT make $3M a year or I MIGHT make nothing? So, to entice the CEO over, the shaky company needs to really sweeten things." If I'm a Board member responsible to the shareholders, and I really sweeten things, how do I motivate a CEO when failure essentially sets that person up for life and leaves little incentive to actually succeed? Don't we need that "shaky future" to get people to actually work? "That is a pretty common arrangement." That it is common does not mean it is proper. It may be an example of how pervasively cronyism has expanded in this area. "Thus, when a board approves a CEO, they are approving a direction the CEO has advocated." But I've never seen a Board challenge a sitting CEO to others who might advocate the same direction but do it for less. They just approve the sitting CEOs pay package year after year. How can that be considered a competitive market? I've described how compensation is actually determined, and the numerous conflicts of interest involved. You haven't addressed them in the slightest. "'Do you think that unregulated free markets are the best policy solution for every problem? If not, why not?' "No, they are not." When are they not? Do you think we should judge markets based on the results that they give us instead of using them just because they are markets? That if we don't like the results, then other methods are therefore not only appropriate but recommended? It seems clear to me that little will break through the free market fundamentalist ideology, so it's really not worth continuing the discussion.

- dsimon

November 16, 2011 at 11:54pm

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If the federal minimum wage from 1968 was indexed for inflation, it would be worth $10.41 today. Having the federal government pay an Earned Income Tax Credit to low-wage workers is really a subsidy to companies that underpay their workers. Increasing the federal minimum wage from the current $7.25 an hour to $10 an hour and indexing it for inflation would be a good first step towards realigning wage gains with productivity gains in America. Allowing companies to pay people so little for full-time work that they need government subsidies to survive is inhuman and immoral.

- Earlybird1

November 17, 2011 at 4:08am

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Sorry magboy, thought this was sufficiently clear: "One of the most cogent arguments concerning the role of the state in alternately destroying free-market competition by favoring one group over another, and supporting the market by acting against monopolistic, anti-competitive practices, is in Hayek's "Road to Serfdom". Yes, Hayek discusses in compelling language the need for government to support the market by acting against monopolistic and anti-competitive practices. This is an absolutely seminal text, and reading it is not only easy and fun, but a great antidote to the kind of distortions it has been subjected too by those on the left who have read about it without actually reading it, much as the Social Darwinists bastardized "Origin of the Species". You're dead right about the healthcare industry. It's a perfect example of how monopolies always resort to Free Market rhetoric to disguise their anti-market practices.

- Robert Powell

November 17, 2011 at 6:01am

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Dsimon writes: "The question was why those with top skills apparently did not capture so much more income in the decades following WWII" Again, assume an engineer was 3X more valuable than a janitor in 1950 in terms of money earned. As I noted, the engineer of today is perhaps 500-1000X more productive than the engineer of 1950. He can do the work of that many engineers today. How much more productive is today's janitor compared to 1950? About the same. See the difference?

- seattleeng

November 17, 2011 at 11:11am

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"GSpinks, the summary of what you argue is this; 1) Totally incompetent people are running the show 2) The really competent people are getting paid nothing and cover for the mistakes of the uppers. 3) The companies that are making a ton of money are doing it by accident, and in spite of the managers."
That is a terrible summary of what I wrote, and as such your "question" makes very little sense except in a literal sense. And, I think skahn does a good job of answering it.
How about we pick up this conversation when you can exhibit a nuanced understanding of what I wrote?

- GSpinks

November 17, 2011 at 12:09pm

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"How much more productive is today's janitor compared to 1950? About the same"
Certainly engineers and skilled laborers are much more productive now than in the 1950's. But how much more productive is today's CEO? About the same. So why does the CEO, who manages from on high, and couldn't do the engineer's job to save their soul, get paid so much more than the most gifted and productive engineers? He probably hasn't created ANY jobs. In fact, in the last 20 years, he's probably ELIMINATED jobs over all: cf Mitt Romney and Herman Cain, axe men who made companies profitable by eliminating jobs, the same goes for Delta Airlines, where the management ran the company into bankruptcy, and used bankruptcy court to nullify all the union agreements, eliminated 10000 jobs in western PA, reduce salaries and benefits on the remaining jobs, restructure some debt, and then got a $5m bonus check for his efforts? Explain.

- GSpinks

November 17, 2011 at 12:18pm

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Robert Powell, Thanks for the heads up on Hayek's Road to Serfdom. I'll put it on my reading list. But I'm not sure Hayek's ideas apply completely to contemporary or future America. Remember Hayek was living right in the middle of two totalitarian revolutions, and his reactions to Bolshevism and Nazism are defined by that proximity. I've been studying Russian and German history since the early Fifties (my interest in Nazism and Bolshevism began when I was 11 years old--I later did my grad work in Soviet History, with a minor in American Intellectual History) and I don't see the centralized extremism in America that defined Bolshevism and Nazism. We Americans are not an extremist people. We've never been hemmed in by traditional enemies nor regularly attacked, like Germany and Russia have been in the past. We are, indeed, the last best hope of the world, partly because we would never allow the central government to take complete control of any meaningful part of our lives. I remember many people were terrified that Obama would take away everybody's guns in America, but it didn't happen (I support gun rights, without being obsessed about it). And we are not a socialist country. like some say. The government owns no means of production in any industry in America that I know of. So I think that Hayek, who was justifiably alarmed by the totalitarianism that he experienced in Europe, is not completely relevant in today's America. He was right, however, about the fact that socialism was a major component of Nazism. That's why Hitler's party was called the National Socialist German Workers Party. Ayn Rand is another example of overreaction in her writings. Her family owned a successful business in Russia when she was a teenager. She had a very comfortable existence, until the Bolsheviks confiscated her family business. She was enraged about that the rest of her life, and she transplanted her anger and fear to America and tried to apply what happened to her at the hands of the Bolsheviks to what was happening to her and everyone else in America at the hands of the government. But America is not Russia, and neither is it Austria, where Hayek was from. There are probably some minor exceptions, but I can't think of any means of production that the government, national or local, owns in America. And government ownership of the means of production is the definition of socialism. But I will read Road to Serfdom. It will at least put me in the mindset of someone trapped in Europe during the rise of totalitarianism. In a very significant way, it will be relevant to my field of study. And it sounds like fun reading. But it's a bit down my reading list. Right now I'm reading the latest bio of Eva Braun and a book about Berlin in 1961, where and when I was stationed with the Air Force. And, yes, I was there when the Wall went up--an ugly by-product of socialism. Thanks again.

- magboy47.

November 17, 2011 at 12:29pm

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PS, remember, too that demand for labor, skilled or not, was sky high post WWII. People would pay for a strong back that could manage a task. As I've noted previously, those jobs are all gone. They are done by machines and computers now. They will never come back. So, being a diligent and eager low-skilled worker meant you were employable in the 50's. Today that is not true. The job waiting for you is cashier at 7-11. And since there's a long line of folks that can and will do that job, that job will not pay a premium. "But you're the one who asserted that since American companies did well, the CEOs must all be doing great jobs. So when they do badly--as almost all did after the fiscal crash--they were doing terrible jobs? " Not all did terribly after the crash. Not as good, for sure. But consider stocks like QCOM and APL are at or exceeding all-time high levels. Lots of sectors saw a small hiccup and just kept going. "HP CEO Leo Apotheker got a "severance package" of over $7 million for less than 11 months of work." Do you know the terms of the severance? No. Likely that included an inducement NOT to work for a competitor. It also included a clause that he will not sue, and potentially air embarrassing mails related to strategic blunders out in the open. "Yes you have; you now say that there are "lottery winners" such as Paris Hilton and The Situation. So then you shouldn't be making such blanket, absolutist statements." I meant in exec ranks I've not seen anyone getting shoveled buckets of money without skills. "But you previously wrote: "Managers in technology companies are the engineers who are exceptional engineers." Which is it?" It's all part of the vetting process. People are given more and more responsibility as they rise to the top. They rise to the top because they are judged to be better than the guy in the next cubicle. In some cases, a non-tech guy rises to the top (Steve Balmer). In other cases, a technical guy rises to the top. "If I'm a Board member responsible to the shareholders, and I really sweeten things, how do I motivate a CEO when failure essentially sets that person up for life and leaves little incentive to actually succeed?" There are a dozen people with more than $5M in the bank that I know that still work. They love the daily interaction, the schedule grind, the pace. These people you do not have to motivate to work everday. But if you want them to do an impossible task at a new company (such as beat apple at the ipad), then you will pay dearly to get those people. When HP hired Apotheker, he had a cushy gig at SAP. He'd been there a long time, and had probably capped out in terms of what he was going to do next. HP likely contacted him, said "We have a huge vision: We want to beat Apple and others in the connected device segment, and we want to win the corp market for these devices" Apotheker probably said "I'll come, but I want to make sure that HP can and will invest $300M a year in total R&D, because that is what it will take to beat Apple. And I also want to earn 2X my current salary because I think this is risky, and if you decide to shut down the program or fire me, I want a minimum of 3 years of pay since I walked away from this great job I have today. In return, I will help you learn how to win at services in the enterprise" A very simple agreement. A very common agreement. He arrived, realized that HP was NOT spending what was needed to beat apple, and things devolved from there. Not an unreasonable agreement at all. And it explains easily how he makes a bucket of money for 11 months of work. I'm speculating in the case of Apotheker, but I'm very familiar with these types of employment agreements. "That it is common does not mean it is proper. It may be an example of how pervasively cronyism has expanded in this area." There is nothing improper at all about these arrangements. Anytime to ask someone to shoulder more risk, you must also compensate them for that risk. Leaving a good job for a shaky job is more risk. But execs do it all the time because they want the challenge AND they want the reward. that has motivated humans since the beginning of time. "But I've never seen a Board challenge a sitting CEO to others who might advocate the same direction but do it for less. " This stuff isn't done in public. Never has been, never will be. And it's not done because a company will very closely guard their strategic directions. Do you think Apple posted a job for a guy who an design a great tablet product in 2007? Hell no. They hired the bits and pieces in secret, in the background. They studied who had done great things in other companies, and had head hunters reach out to each of them. "Do you think we should judge markets based on the results that they give us instead of using them just because they are markets? " Yes. But to me, the proof is that the US has KILLED the rest of the world in terms of productivity growth. The Whole Foods CEO wrote a great piece yesterday in WSJ on this. 200 years ago, we were one of the poorest nations, responsible for 1% of the world GDP. Today we are the richest, with 23% of the world GDP, and our GDP is twice as large as the second on the list, China. We are here because of economic freedom. To say there isn't enough gov intervention is silly. "It seems clear to me that little will break through the free market fundamentalist ideology, so it's really not worth continuing the discussion." Sure you will. I'm very responsive to existence proofs. Find proof points that show the last 50 years have been better for the middle class earner in, say, Sweden, rather than, say the US. Roid has tried, Roid has failed. Like it or not, the last 10 years, 20 years, 50 years, 100 years have been better for the a middle class earner in the US than anyplace else in the world. Have our wealthy made great gains? Sure. But isn't a good goal to make sure the middle class gains in the US are better than everyplace else in the world? Isn't a good goal to make sure that there is equal opportunity for everyone, especially immigrants? We kick ass on both metrics.

- seattleeng

November 17, 2011 at 12:45pm

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Robert Powell, One more thing. I agree with conservatives when they say that America is becoming a nanny state. But that's not socialism. Private enterprise in America is making obscene profits off the nanny state. I know a teen who is taking a designer drug for ADD. And the drug company is sticking the taxpayers to the tune of $600 a MONTH for that one drug! Beyond creepy.

- magboy47.

November 17, 2011 at 12:49pm

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GSpinks writes: "Certainly engineers and skilled laborers are much more productive now than in the 1950's. But how much more productive is today's CEO? About the same." CEOs set strategic direction. They don't do work as you know it. A typical week in the tech industry might involve approving marketing campaigns (since these are such a big part of spending), shaping product directions, meeting with customers, growing senior leadership (both directly and indirectly), meeting with media/shareholders/banks. It's a very 1:1 activity and very focused on personal relationships. They are no more productive at doing this today than they were 50 years ago. However, their responsibility has grown considerably. A CEO at a big company in the 70's largely worried about the US market. A CEO at a big company today worries about a global market. GE's split-adjusted share price was about $1 in the 60's and 70's. Today it is 15. It's been as high as $60. So, the CEO of GE today has somewhere between 15 and 60 times more accountability than the CEO of GE in the 60 and 70's.

- seattleeng

November 17, 2011 at 1:07pm

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PS. Forbes reports that CEO compensation has risen from $2.4M in 1989 to about $9M in 2011, with peaks in 2000 ($13.8M) and 2007 ($16.5M). This is constant 2011 dollars. Not too unreasonable, but probably on the edge. But as others have noted, since CEO compensation is very stock-heavy, it will indeed track market performance. Thus the peak in 2000 and 2007.

- seattleeng

November 17, 2011 at 1:14pm

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seattleeng: "As I noted, the engineer of today is perhaps 500-1000X more productive than the engineer of 1950. He can do the work of that many engineers today." Even if that's true (you provide no data), it doesn't explain why CEO pay has more than tripled since 1989, as you yourself cite. Sounds like some people were in the right place as others became more productive. Saying that they're concerned with global rather than local markets doesn't resolve the issue; it doesn't seem like a substantially different skill set, or a skill set that's particularly rarer (since one assumes the market would adjust for such things and more people would acquire that skill set), or longer hours. I doubt that they're three times more "productive" than they were before; there are only so many hours in the day to exercise oversight make decisions. And again, it doesn't explain why this seems to be a predominantly American phenomenon. All of your speculation about Apothaker is just that: speculation. Not a single fact to base it on. And again, there is no addressing the multiple conflicts of interest that I've described. These are simply not arm's-length transactions between the potential CEO and the Board. Or do you think they are? "Leaving a good job for a shaky job is more risk." Leaving a good job that you're tired of for a job that pays you seven figures for waking away isn't more risk; it's no risk. "I'm very responsive to existence proofs." Apparently not. If the free market is always right, why do all professional sports leagues have salary caps, revenue sharing, and/or luxury taxes? Those are not free market mechanisms. The fact is that markets do not always lead to lower prices and higher quality. They can in some instances lead to higher prices with no increase in productivity. In addition to the sports example (I don't see ticket prices coming down due to competition, do you?), there is higher education. Schools compete by building cushier dorms, providing better food, modern athletic facilities, more expensive "star" faculty. But that doesn't make for a more efficient production of education. Faculty aren't more productive, as student-teacher ratios remain unchanged. All it does is bid up the price of what they're offering. And the same applies to health care. Other countries cover everyone, spend far less as a percentage of GDP, and get the same or better results than we do. So there's plenty of evidence that markets don't work best all the time everywhere. "We are here because of economic freedom. To say there isn't enough gov intervention is silly." Yes, economic freedom is generally a good thing. As I have written repeatedly, markets usually do a good job getting results that we want as a society. But rampant economic freedom can collapse the entire system, so the free market fundamentalists are wrong to insist that unfettered markets are always better. Let's not conflate correlation with causation. To go back 200 years, when most of the resources of this nation were untapped (and not even a part of this nation) is silly. To ignore at what happened when we relaxed government regulation over the past 20 years and had an economic catastrophe is silly. To ignore the boom-and-bust cycles that were endemic before we had regulation is silly. Yes, there can be counterproductive regulation. But it's silly to ignore the importance of regulation that helps make the system work instead of self-destructing. When unfettered markets lead to bad results, it's time to try something else. "Like it or not, the last 10 years, 20 years, 50 years, 100 years have been better for the a middle class earner in the US than anyplace else in the world." I think the past 10 and 20 years have been better in Scandinavia for the middle class earner, though I'm looking for data on that. Here, the median income has barely budged. Roi didn't fail. I just see a retreat to speculation instead of addressing inconvenient facts, and selective non-responses to arguments that conflict with one's ideology. That's not Roi's fault or responsibility.

- dsimon

November 17, 2011 at 2:25pm

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I did provide data. Go look again. Another data point is that I can create the equivalent of ENIAC on my desktop in a few hours. I could have it working in another few hours in an FPGA. Let's look at this from the bottom up. If a top programmer is getting hired out of school at $100K (not including stock) by Microsoft or Google, how much is the general manager worth that manages a team of 80 of these guys? Seattle Times ran an article a few years ago so you can refer to that. But I'll summarize here: $500K. And a VP is around a million. And a senior VP is $3-$5M, some are seeing $15M These CEO salaries are not in isolation. The entire company is making serious, serious money. Any company with a CEO making $10M or more is also paying the top employees really, really well. If they aren't, the employees will leave. "All of your speculation about Apothaker is just that: speculation. Not a single fact to base it on." Of course, I said so. But I can tell the agreements I outlined are very, very common. Search on "executive non-compete" and you'll read volumes about this topic. And very quickly you'll see the easiest way to ensure your employee doesn't run off an work for a competitor it is to pay the guy not to work. Otherwise, the judge will declare guy has a right to make a living, and you risk your secrets spilling over to the competitor. These non-competes are pretty common for engineers too, but it's tougher to get a cash guarantee. "Even if that's true (you provide no data), it doesn't explain why CEO pay has more than tripled since 1989, as you yourself cite" CEO salaries track the market, since their compensation is very heavily tied to corp performance. The CBO report notes that too. The market has done very well since then. "To ignore at what happened when we relaxed government regulation over the past 20 years and had an economic catastrophe is silly." We have not seen regulations decrease. We have more laws than ever. Especially with sarbox. Do you have data indicating fines and/or jail time has decreased? I'd be suprised if they had. "I think the past 10 and 20 years have been better in Scandinavia for the middle class earner, though I'm looking for data on that. Here, the median income has barely budged." Roid has posted data. But he didn't want to use PPP data. If you use PPP data, your statement cannot be supported. It is better to be middle class in the US than middle class in Scandinavia. At a minimum, you have much more disposable income. Sickening amounts more. Please don't bring up health care. Most females arrive to the age of 65 not needing more than 3 days in the hospital. Most males arrive not needing any.

- seattleeng

November 17, 2011 at 8:27pm

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"The entire company is making serious, serious money." That's irrelevant to how much the CEO should get. Maybe that money should be going to shareholders. Or to other employees (like engineers whose productivity you say have soared). Again, to say that because the company is doing well that the CEO should be paid eight figures is simply a lapse in logic. And again, and for the last time, this isn't how it works for most companies in our peer nations. "I can tell the agreements I outlined are very, very common." Again, commonality does not mean correct, or proper, or even legal. That a bunch of people engage commonly corrupt practices does not justify the practice. Again, you don't address at all the mutual backscratching and multiple conflicts of interests with Boards and CEOs. That few of them are arm's length transactions does not somehow convert them into a true competitive market. Do you really think these are disinterested negotiations? Would any outcomes be different if CEO pay was halved? You just don't answer these (repeatedly asked) questions. "We have not seen regulations decrease." What? Glass-Steagall? Many laws regulating finance were rolled back. Please. A quick search brings up this list of deregulatory measures since 1980. http://www.marketoracle.co.uk/Article8210.html You say you are open to "existence proofs," but then you ignore them when they are brought up. I specifically noted examples of markets which would fail (or are failing) in that they do not produce higher quality at lower cost. (You dismiss the overwhelming health care data; I thought you read T.R. Reid's The Healing Of America, which says that we don't do any better than our peer countries while spending tons more regardless of what metric you use. Instead, you just talk about hospital stays as if that were the sum total of health care costs, treatments, and outcomes.) That sounds to me like rejecting what is inconvenient rather than adjusting one's view to the facts. A good lawyer knows its better to moderate one's position rather than defend absurd outcomes. These outcomes are absurd by any objective measure, and attempts to defend them only serve to show the deep flaws in the position. When a math formula gets a ridiculous result, a few people will hold onto the result in the belief that the formula must always be right; most people will conclude that even if the formula works most of the time, it is also somehow flawed in some circumstances. As I wrote, it appears that no result, no matter how absurd (pay-for-failure), and no amount of data or examples will break through some people's free market fundamentalism. So it's no longer a good use of my time to try to do so.

- dsimon

November 18, 2011 at 12:52pm

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Some final points. Yes, there may be some non-compete compensation. But tens of millions? How much is necessary so that a judge will not void it on the grounds that the ex-CEO can't "make a living"? Heck, most CEOs should be able to live off the interest of what they've already earned. Again, when the results are absurd, it's usually reasonable to assume that there's a problem with the process instead of assuming the process is reasonable. And the "the market is always right" mantra ignores bubbles. Why did housing prices drop so dramatically? Nothing changed in the physical nature of houses or the demographics of the nation to justify such a sharp decline in such a short of time. Yet according to market fundamentalists, they're worth whatever the market says. So their inherent worth can drop by 40% despite no real changes in circumstance? We can believe that absurd result if we want, or we can say that "the market" doesn't always determine inherent worth. Same goes for CEO pay. I think it's likely that these folks are getting paid more just because the other folks are getting paid more, creating a bubble that is not based on inherent value. If all their compensation were cut in half, I doubt there would be any change in competition for their jobs or the quality of their performance. If so, then there's really little justification for the tripling of their pay since 1990.

- dsimon

November 18, 2011 at 2:47pm

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And an additional comment on that non-compete issue. Are CEO skills so specialized that the only reasonable way that they can "make a living" is by going to work for a business in the same field? Their spectacular management skills can't be used by other companies that don't directly compete with the one they drove into the ground? I find the proposition pretty darn unlikely, in which case these huge severance packages become very hard to justify on that ground. And as I wrote earlier, the justification that they're needed to attract people to "high risk" position fails when pay-for-failure turns it into a no-risk position.

- dsimon

November 18, 2011 at 4:07pm

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DSimon writes: " Again, to say that because the company is doing well that the CEO should be paid eight figures is simply a lapse in logic. And again, and for the last time, this isn't how it works for most companies in our peer nations." And so what, a CEO should make less than a senior vice president? Hint: Generally in a big company there is a doubling of salary between the different levels. That is what motivates people to get to the next level. And no, other countries aren't any better. Nokia's paid their new CEO a $6M signing bonus. That's $3M for doing one day of work, and another $3M for doing 364 more days of work. That is on top of $1M base salary. And god only knows what kind of bonus he will see. The predecessor, Jorma Ollila, recevieved total compensation of EU$8.2M. And look what I found: German company SAP paid Apothekar $6M Euros in 2006, EU$4M in 2007, UE$4M in 2008, EU$6.7M in 2009. In markets where Europe is competitive, they are paying competitive CEO salaries. And those salaries are on par with US exec salaries. Give this one up, DSimon. You've lost this point. "That a bunch of people engage commonly corrupt practices does not justify the practice." You've not identified anything corrupt, other than the fact that you dont' like two people agreeing on a wage. At all. You have made that clear. "What? Glass-Steagall? Many laws regulating finance were rolled back" GS would not have prevented this. And if these laws were so critical, then why didn't they get restored by Obama? Instead we get Dodd Frank, which is kind of like letting the criminals write their own laws, isn't it? The primary reason the meltdown happned is because the government permitted taxpayer money to be loaned to those that coudl not pay it back. Period. Even if GS were in place, the fact that the gov voluntarily relaxed lending limits to the point that taxpayer money was being loaned to those that were very likely to default is a big, big problem. " I thought you read T.R. Reid's The Healing Of America, which says that we don't do any better than our peer countries while spending tons more regardless of what metric you use. Instead, you just talk about hospital stays as if that were the sum total of health care costs, treatments, and outcomes.) That sounds to me like rejecting what is inconvenient rather than adjusting one's view to the facts." Reid's book loved to talk about runaway costs, but failed to break those down. He hyped insurance profits, but failed to notice just how small those are relative to the total annual spend. Same with drug profits. His perspective was interesting, but it was far from exhaustive. It was a topical and anecdotal treatment that centered around his bum shoulder. "Heck, most CEOs should be able to live off the interest of what they've already earned" You fail to understand these people. They love the game. They don't love the money. Money keeps score. Why did Steve Jobs keep working??? Why did Bill Gates? Becuase they love the daily jousting with smart people that challenged them mentally. You are right, if it was about money, they would have quit a long time ago. Why do you and I type her anonymously? Nobody views you or me as any smarter for this. There might be two others reading. We do it because it helps us solidify, refine and challenge our own beliefs. It's a mental pursuit. "Same goes for CEO pay. I think it's likely that these folks are getting paid more just because the other folks are getting paid more, creating a bubble that is not based on inherent value" But who are you to decide what anyone is worth? When a kid graduates from Stanford and Google and Microsoft get into a bidding war over him, isn't it his prerogative to pick and chose? What do you say to the person thinks $100K is too high of a starting salary and wants to regulate that? See the problem? "Are CEO skills so specialized that the only reasonable way that they can "make a living" is by going to work for a business in the same field? Their spectacular management skills can't be used by other companies that don't directly compete with the one they drove into the ground?" Doesn't matter where the CEO *can* go. It matters where the CEO *wants* to go. And if he *wants* to go to a competitor, he can make a lot of trouble for the first employer. You solve that by paying the guy not to work. Again, a voluntary agreement among to private parties. Surely you don't want to police those, do you?

- seattleeng

November 19, 2011 at 1:40am

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Magboy-- You're more than welcome. Sorry for the lag--on the road, hope you're still here. Yes, "Road to Serfdom" was written in 1944 in Britain, so your anachronisms caveat is valid. I would just say that they are easy to mentally compensate for, and in themselves provide some useful information in context, footnotes, etc. It's a little known fact that JM Keynes read it on the way to Breton Woods, and his positive letter to Hayek in response is in the latest edition, edited by Bruce Caldwell and available in paperback. Definitely worth the time. Most of the philosophy holds up very well in terms of current issues. Bob

- Robert Powell

November 19, 2011 at 10:24am

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To parachute in, GSpinks is right on the merits--current system deeply flawed no matter who else is doing it, and we should improve it. Problem is, what's the mechanism to change the system? I think we should rule out executive fiat by the White House along with a wage-and-price controls bill passed by Congress as fantasy. Short of that I don't see any way to compel businesses to adjust their decisions to be congruent with a technocratic analysis. In my view The State should target anti-competitive, monopolistic practices effectively, and otherwise pretty much stay out of the way.

- Robert Powell

November 19, 2011 at 10:45am

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In hopes of being more clear, if anyone's still here, I think empowering shareholders is something that should get legislative support as an effective and democratic way to meet the state's obligation to oppose anti-social monopolistic practices.

- Robert Powell

November 19, 2011 at 10:51am

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Yes, the correct path in all this is indeed the shareholder. But, if it is a blowout good year for the shareholder, then they will not blink about paying a CEO $30M, and top $10-$15M for the next layer down, and $5M for the next layer down. Apple made $25B in NET profit. If they are paying their exec staff $100M in compensation (spread among perhaps 10-20 people), another way to look at his is "is it worth paying the top guys 0.4% of all the profit if they are driving the profit up by 10% per year?" The answer is a resounding "yes" That is why shareholders won't ever care too much when things are going well. Also note that most execs are paid in stock. So what might be a $3M bonus when awarded (which all would agree is reasonable for a top exec at a large company), if the company is doing really well it could double, and double again into a $12M bonus in a 4-5 year time horizon. And suddenly, that reasonable award is getting unreasonable...because the company did well...Which is odd logic....

- seattleeng

November 19, 2011 at 11:59am

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I don't have any problem with rewarding success, although I'm a lot more comfortable with the decision being made with a lot of shareholders' input than by incestuous crony boards. As dsimon seems to be, I am principally concerned about rewarding failure. We have been complaining about the short-term bias in business for a long time, and like rewarding failed CEO's with outrageous golden parachutes it's all about a broken system of incentives.

- Robert Powell

November 20, 2011 at 6:36am

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seattleeng, your own statements are contradictory. First you wrote that managers came up with other skills. Then you wrote that those B-School grads didn't, that they get assigned to groups and move up the ranks. You write that eight figures are necessary to attract good people. Then you write that "if it was about money, they would have quit a long time ago." Enough with the inconsistency to fit the inconvenient argument of the moment. "CEO should make less than a senior vice president? Hint: Generally in a big company there is a doubling of salary between the different levels. That is what motivates people to get to the next level." First, where did I write that a CEO should make less than a senior VP? Maybe they could all make somewhat less without sacrificing anything in quality. Second, why should compensation double from level to level? What is inherent in that system? There is no natural justification for it except your assertion. Surely increases in compensation can be a motivator, but a doubling formula is arbitrary. Why isn't some other increase sufficient? Third, don't you then write that it's not about the money? Which is it? "You've not identified anything corrupt, other than the fact that you dont' like two people agreeing on a wage. At all. You have made that clear." The only thing that's clear is that you don't really read what I write. First, the "corruption" comment was not to claim that there was something illegal going on; it was to refute your assertion that just because something was common, that it was therefore justified. Obviously corrupt practices are not justified even if they are common. Second, I have no problem with disinterested parties reaching a commercial agreement. But I have repeatedly explained how much CEO pay is not the result of disinterested arm's length transactions. You have repeatedly refused to address it. And just because it's common that these negotiations are not disinterested does not justify them or their results. "GS would not have prevented this." Again, you miss the point. You claimed that we had more regulation. I pointed out the repeal of GS and referred you to an article that discusses the plethora of deregulation since 1980; it's even called "How Deregulation Fueled the Financial Crisis." That you don't bother reading the supporting evidence is not my problem. And the asserted inadequacy of Dodd-Frank--due in part to the efforts of free market fundamentalists and problems in our current political system--isn't pertinent to the issue of whether there was or was not substantial deregulation. I was contesting your assertion that we had more regulation. That question is irrelevant to their role in the financial collapse. "Reid's book....was a topical and anecdotal treatment that centered around his bum shoulder." The book had lots of statistics, metrics, and studies. They're there regardless of the additional descriptions about his shoulder. I don't know why you dismiss the data just because there are also anecdotes. Again, just about all of our peer nations cover everyone, get comparable results, and spend a third less than half as much for medical care. Why should Reid's "failure" to break down costs have any bearing on that fundamental data? "But who are you to decide what anyone is worth?" If things are always, always, always worth whatever someone is willing to pay, why didn't you invest in the housing industry at the height of their supposed value? Surely there comes a time when the results that "the market" is coming up with obviously have no bearing on reality. Or do you not believe in bubbles? If you do, how do you explain them? How is it that housing prices dropped so far so fast? What change in the market justified those wild fluctuations if the market is always right? "Doesn't matter where the CEO *can* go. It matters where the CEO *wants* to go. And if he *wants* to go to a competitor, he can make a lot of trouble for the first employer. You solve that by paying the guy not to work.' "Again, a voluntary agreement among to private parties. Surely you don't want to police those, do you?" And again, you miss the point. My understanding is that you argued that non-compete clauses had to leave the executive with a means to "make a living" or they would be struck down by the courts, and that's why Boards had to offer such outlandish termination agreements that amount to pay-for-failure. I wrote that you could have a non-compete clause that left CEOs plenty of opportunities to make a living that did not require the absurd termination compensation that one sees today and explained why. You don't have to pay exorbitant amounts for someone not to work for a competitor; it can easily just be a condition of competing for and winning the job sought. And I wrote nothing about regulating such agreements; I only showed how it was an example of unjustified and excessive compensation that is very difficult to rationalize through what should be disinterested arm's length transactions and so does not justify pay-for-failure. Again, it doesn't help the argument to try to justify absurd results. "But, if it is a blowout good year for the shareholder, then they will not blink about paying a CEO $30M, and top $10-$15M for the next layer down, and $5M for the next layer down. And your support for this statement is....? I think lots of shareholders would blink. But I'm not going to assert it as fact without some data. "note that most execs are paid in stock.... And suddenly, that reasonable award is getting unreasonable...because the company did well...Which is odd logic...." The odd logic is that the company's success is all due to the CEO. If the CEO wants stock, the CEO could buy it. And there are studies that conclude that executive pay in general and an incentive pay in stock in particular do not correlate with better results. http://online.wsj.com/public/resources/documents/CEOperformance122509.pdf, http://www.businessweek.com/magazine/content/10_20/b4178070113216.htm There may be studies on the other side as well, but without clear data to back it up the odd logic is why Boards dole out executive compensation this way in the first place. Nor does it explain why so much stock is doled out. The assertion that a $3 million bonus is something "all would agree as reasonable" has no data to back it up. It may be common, but that doesn't make it reasonable. I wonder what the answer would be if we polled the question "a $3 million bonus is reasonable" to those making median household incomes, or those making two or three times that amount, or even the employees of those companies doling out $3 million bonuses. Heck, I'd even be willing to poll the shareholders on it. But I'm done here. Too many repeated refusals to answer inconvenient points (repeated examples of where markets fail--sports, higher ed, health care), too much misinterpretation of what is written, too many non sequiturs that fail to address the issue at hand, too many assumed and unsupported assertions. "Existence proofs" are requested, then ignored when provided. So there's no point in trying to break through the free market fundamentalist ideology.

- dsimon

November 20, 2011 at 11:39am

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seattleeng: "In markets where Europe is competitive, they are paying competitive CEO salaries. And those salaries are on par with US exec salaries.' "Give this one up, DSimon. You've lost this point." You say T.R. Reid is arguing by anecdote even though his book has copious amounts of data, then you make your points solely by anecdote and don't provide a single study. Here are some for your edification. http://www.economist.com/node/11543665, http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx, http://www.fpif.org/articles/executive_pay_debate_raging_in_europe_and_the_united_states Maybe you should reconsider who has "lost" this point, unless you define "lost" as a refusal to have the person on the other side of the discussion consider any data that refutes preexisting assumptions. You seem to assume (1) whatever markets put out is "correct" in some meaning of the term, and (2) CEO pay is the product of a "market"-based transaction. I think (1) is true most of the time in terms of the results it gets, but absurd results should make us question whether it's true all the time. You seem to defend it regardless of the results. And I've described how (2) is not the case in practice, and even if it were, the results should make us question whether it's an exception to (1). But as long as one adheres to the assumption--and it is an assumption--that markets are always "right," we can't get anywhere on either issue.

- dsimon

November 20, 2011 at 1:20pm

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Dropping in late here, but I have to observe that Seattle seems to work at some place that reaches levels of meritocracy that I've never enjoyed in Corporate US or Australia. The top performers are all rewarded, people rise by merit alone, and those that don't get frustrated and leave, leading to a virtuous cycle of constant improvement. My experience has more being that top engineers get perhaps a few % more than everyone else, and it's typically the top performers who leave seekin (often futilely) better appreciation. And don't get me started on the hero-worship for managers and executives. But I feel this is all missing a more important point. While I fail to see why today's executives are worth so much more than their predecessors (modern profits are after all a confluence of many factors, precisely none of which are correlated with exec performance at a macro level), it's here to stay for the foreseeable future. Thus the question becomes not whether the income inequality is right, but whether it represents a good society and if not, what to do about it. Otherwise the window of opportunity for people to become rich by their own efforts as opposed to inheriting portfolios will close, at least in the US. This is an inevitable result in the concentration of wealth at the top, whether deserved or not. And that's assumin the backlash doesn't produce something worse than just greatly diminished opportunity. After all the economic system is a means to an end (improve the lives of the citizenry) rather than an end in itself. And the solution would clearly be more and steeper tax brackets and the removal of tax preferences for certain types of income. By all means earn absurd amounts that aren't commensurate to anything you offer today that your predecessors didn't (see finance, executives). But be happy to contribute to the society that allowed that to happen, so that these opportunities continue to be available (through a healthy, broad based consumption economy).

- Nari224

November 20, 2011 at 2:33pm

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Dropping in late here, but I have to observe that Seattle seems to work at some place that reaches levels of meritocracy that I've never enjoyed in Corporate US or Australia. The top performers are all rewarded, people rise by merit alone, and those that don't get frustrated and leave, leading to a virtuous cycle of constant improvement. My experience has more being that top engineers get perhaps a few % more than everyone else, and it's typically the top performers who leave seekin (often futilely) better appreciation. And don't get me started on the hero-worship for managers and executives. But I feel this is all missing a more important point. While I fail to see why today's executives are worth so much more than their predecessors (modern profits are after all a confluence of many factors, precisely none of which are correlated with exec performance at a macro level), it's here to stay for the foreseeable future. Thus the question becomes not whether the income inequality is right, but whether it represents a good society and if not, what to do about it. Otherwise the window of opportunity for people to become rich by their own efforts as opposed to inheriting portfolios will close, at least in the US. This is an inevitable result in the concentration of wealth at the top, whether deserved or not. And that's assumin the backlash doesn't produce something worse than just greatly diminished opportunity. After all the economic system is a means to an end (improve the lives of the citizenry) rather than an end in itself. And the solution would clearly be more and steeper tax brackets and the removal of tax preferences for certain types of income. By all means earn absurd amounts that aren't commensurate to anything you offer today that your predecessors didn't (see finance, executives). But be happy to contribute to the society that allowed that to happen, so that these opportunities continue to be available (through a healthy, broad based consumption economy).

- Nari224

November 20, 2011 at 2:33pm

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Damn, TNR cut off my post again. The other links are http://articles.moneycentral.msn.com/Investing/CompanyFocus/EuropeanCEOsMakeHalfThePay.aspx and http://www.fpif.org/articles/executive_pay_debate_raging_in_europe_and_the_united_states So I've "lost this point" only if by "lost" one means an inability to have someone on the other side of the argument acknowledge evidence that undermines that person's preconceived world view. seattleeng, you seem to assume that (1) markets are always the best way of determining valuations and (2) CEO pay is the result of a disinterested market transaction. I've pointed out why (2) is not the case because of all sorts of conflicts of interest, which you haven't really addressed at all. But even if it (2) were true, I've also argued that the outlandish results should make us question (1). But it seems to me that no result, no matter how absurd, will shake the belief that markets always arrive at the "right" outcome. If that's the case, if there's no room to change one's mind, then there's no use for discussion, and I wish I had been told that at the outset. Nari224 has it right: an economic system is a means to an end. I generally like markets because they get good results. But others seem to think markets are an inherent good in themselves. When markets don't get good results, pragmatists will find other ways to achieve them (assuming that there are other ways, since not every problem may have a solution). But free market ideologues will not. And if that view predominates, then it becomes very hard to solve real world problems. I think that explains why Congress can't pass anything right now: there is a bloc of ideologues who insist on enforcing their ideology over the evidence. And until enough of them are voted out of office, we won't be able to overcome our present political stalemate.

- dsimon

November 21, 2011 at 11:56am

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