And so it comes. Jack Smith proposes January 2, and I expect that the final date will be not much later than that. It will be an interesting spring.
With regard to my possible course at Harvard, this is very
much in the early days yet and I have no idea whether it will actually happen.
And yet, as is my way, I have already started giving the lectures in my head.
We shall see.
Apropos, there is one feature of modern capitalism that
puzzles me and that I cannot make sense of either by thinking of it as Marx
would, or as the neoclassical economists would. That feature is the extremely
steep and seemingly permanent inequality in wages and salaries. The even
greater inequality in the distribution of wealth I can understand quite well
with the help of Marx, but not the steep pyramid of wages and salaries.
The degree of inequality differs considerably from one
advanced capitalist economy to the next, and that I think I understand. It is
common to explain the inequality in compensation by appeal to something like
the marginal productivity of individuals in the various positions, but I think
that is really wrong. I think I can make sense of the inflated compensation of top
corporate executives as a partial diversion of the corporation’s profits into
their salaries, a diversion that is made possible by the modern separation of
legal ownership of corporate wealth from practical control of it (a separation first explained
long ago by Berle and Means.)
As I prepare my possible course in my mind, this is the one
major important fact about modern capitalism for which I have no satisfactory explanation
at all.
Puzzling over “the extremely steep and seemingly permanent inequality in wages and salaries” in advance of a trip to the Harvard campus may be a bit like bringing a question about anthracite to Newcastle.
ReplyDeleteIt would be interesting to have someone from HBS explain—ahem, I mean “explain”—why the business administrators they train are paid as much as they are, and why this is fitting and proper.
I suspect the answer is, at bottom, “because we can get away with it”—but I would still enjoy seeing just how this answer is mystified.
One factor omitted from the explanations of the growing inequality under late capitalism offered so far is the power of vested economic interests to shape taxation policy. Marginal tax rates on upper income groups have gone from over 70% during the Eisenhower era to less than half that today. And this leaves out the considerably lower tax rates on non-income wealth, notably, capital gains, and the high rate of tax avoidance due to lax tax policy (and, of course, sheer tax evasion, due to low enforcement).
ReplyDeleteThese exogenous factors have been crucial in the last 45 years or so.
Never underestimate the power of capital to have its way with a compliant political system.
w/r/t David Zimmerman’s observation about changes to the tax code, I recall reading somewhere a very vivid description given by a business lobbyist working during the Carter Administration.
ReplyDeleteHe described the level of difficulty of changing the regulatory environment as being essentially zero, as if Jesse James himself were to wander into the Wells Fargo office and politely ask to “borrow” that large sack of gold: “That old thing? … well, it’s been sitting there since 1932, so it’s obviously not worth anything … so sure, take it.”
Indeed:
ReplyDeletehttps://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates
Note the rates in the 1920's - that worked out well.
Consider also the long term, poison-pill effects of Taft-Hartley (1947) and the rise of the financial sector from the 1950's on.
Marc Susselman has sent me his latest commentary on Trump's legal problems and how it has been discussed in this blog.
ReplyDeleteOnce again, I do not necessarily agree with all that Marc says.
However, if you want to read Marc's commentary, please write me at:
amosxxxx@gmail.com
People always talk about marginal tax rates, i.e., the tax on the next additional dollar of income. But for purposes of analyzing taxation's effects on inequality, it seems to me that the (apparently) mis-named "average tax rate" -- i.e., total tax paid divided by total income -- is just as important. If someone earns $500,000, one wants to know what they have to pay on $500,000 (the so-called average tax rate) -- not only the marginal tax rate, i.e., what they'd have to pay on $501,000.
ReplyDelete(The "average tax rate" seems to be mis-named because it's not an average of anything -- it's simply the level of tax on a given level of income.)
https://taxfoundation.org/taxedu/glossary/marginal-tax-rate/#:~:text=The%20marginal%20tax%20rate%20is,would%20be%20taken%20as%20tax.
My own perhaps misreading of the following
ReplyDeletehttps://www.bostonreview.net/articles/how-misreading-adam-smith-helped-spawn-deaths-of-despair/
leads me to think that, as some others have both explicitly and implicitly remarked here, that politics, including politics within the economics discipline, has had much to do with the distributions Prof. Wolff is puzzled by.
Although one person’s income may be a hundred or a thousand times greater than another’s, it is of course very doubtful that one person is a hundred or a thousand times more intelligent or works a hundred or a thousand times as hard. But, again, input is not the measure of value. Results are. In a multibillion dollar corporation, one person’s business decisions can easily make a difference of millions – or even billions – of dollars, compared to someone else’s decisions.
ReplyDelete—Thomas Sowell (Economic Facts and Fallacies)
SW
ReplyDeleteI posted Marc's latest response beneath the original letter of his I posted.
M.L.
ReplyDeleteSince your web site doesn't seem to be reachable (at least on my devices), it would appear to be a moot point...
LFC
ReplyDeleteClick on my name on my post here. Then click on webpage on my profile page.
AF, Sowell's calculus too often rationalizes decisions that are profitable in the short term but have poor long term results. Private equity is sort of based on that. Then there are the golden parachutes e.g. Carly Fiorina. Win or lose C suiters make bank, workers NSM. It might help to put ten or so year restrictions on stock compensation.
ReplyDeleteIt might be better for the everyone to spread low propensity to consume compensation amongst folks with a higher propensity to consume.
aaall,
ReplyDeleteIt might be better for the everyone to spread low propensity to consume compensation amongst folks with a higher propensity to consume.
It happens already through monetary policy. As the following article shows, increased inequality leads to lower interest rates, which decreases the flow of interest payments from borrowers to lenders. From the prospective of borrowers, it's no different from a tax transfer.
Some Say Low Interest Rates Cause Inequality. What if It’s the Reverse?
With an increasing share of the world’s wealth in the hands of its top earners, a savings glut is pushing asset prices up and interest rates down.
It’s an article of faith among many in the financial world: The Federal Reserve’s low interest rate policies and other steps meant to boost the economy are driving the value of stocks and other assets to the moon, and thus are a major cause of high wealth inequality.
That idea can be heard in documentaries, newspaper opinion articles and many segments on cable financial news. It may also be backward.
New evidence suggests high inequality is the cause, not the result, of the low interest rates and high asset prices evident in recent years. That is a provocative implication of new research presented on Friday at the Federal Reserve Bank of Kansas City’s annual Jackson Hole economic symposium (which was conducted virtually because of the pandemic).
In effect, a global glut of savings has caused a decline in the “natural rate” of interest, also known as r* (and pronounced r-star): the rate that neither stimulates nor slows the economy.
The paper, by Atif Mian of Princeton, Ludwig Straub of Harvard and Amir Sufi of the University of Chicago, looks at two leading explanations: the demographic effects of the baby boom generation’s accumulation of retirement savings, and the effects of higher inequality, given the fact that rich people save a larger share of their income than the middle class and the poor.
source: Some Say Low Interest Rates Cause Inequality. What if It’s the Reverse?
There is a more basic problem with the Sowell quote: the fact that someone's decisions might be highly profitable for a company doesn't explain why it's rational for a board of directors to give that person a salary that amounts to $86,000 per minute (or something in that range).
ReplyDeleteBut once a set of expectations is established, the expectations can be hard to break. The directors of X company believe they have to pay their CEO 50 million a year (let's say) because that's what other companies in their "sector" and of their size are doing. Putting aside the normative (i.e., moral) questions, which have istm obvious answers (though not everyone will agree), I don't see any rational justification for this. Is a CEO really going to work less hard (or "shirk") because he or she's "only" making 15 or 20 million a year instead of 50 million? What can possibly be so valuable (on any definition of that word) about someone's work efforts that every second of his or her time has to be compensated with tens of thousands of dollars? What that means in practice is that a CEO is being paid 20,000 or 30,000 or 80,000 dollars to blow his nose or go to the bathroom. That may be crudely put, but to an outsider to the business world at any rate, that does seem to be what's going on. And you can call it a diversion of some of the corporation's profits or whatever, but that doesn't make it less irrational.
The point is not necessarily restricted to executives. The salaries of the very highest paid movie stars, for example, are arguably almost as bonkers; their less exalted colleagues are on strike (and the top stars are thus on strike also, even though they clearly, just as individuals, would not have a reason to be).
High marginal rates would take some of the wind out of those sales:
ReplyDeletehttps://eml.berkeley.edu//~saez/diamond-saezJEP11opttax.pdf
The curve for most folks in entertainment/sports as opposed to C-suiters would seem to call for different treatment - why the tax code is so complex.
LFC,
ReplyDeletePublic company CEOs are underpaid.
How Private Equity Firms Poach C-Suite Talent From Public Companies
The compensation is better — but that’s not all.
“That tells you that firm-specific knowledge is not so important [at PE-backed companies]. What’s important is industry knowledge,” Kaplan told Institutional Investor.
The results paint a picture of an active market for C-suite talent. At firms with private equity backing, new CEOs can expect to earn much higher salaries than CEOs at similarly sized public companies. In fact, Kaplan and his co-authors found that pay for these CEOs is in line with the CEOs of the large-cap companies listed in the S&P 500 index. PE-backed companies also offer tempting incentive packages that include anywhere from a 2 to 10 percent of the equity upside.
As a result, public companies are increasingly at risk of PE-backed companies poaching their talent with promises of higher salaries, strong performance, and less regulation.
“Public companies have to be cognizant of the fact that if they have someone really good, that person can leave and get paid very well, so they’re going to have to pay a market wage to those people,” Kaplan said.
source: How Private Equity Firms Poach C-Suite Talent From Public Companies
Also, this from an article by Tim Worstall:
There is a small coda: some argue that it's the same old interlocking boards that keep raising the CEO's pay, knowing that their own will get raised in turn. The theory that the managerial class is ripping off the owners, the shareholders. It's true that this could happen, principal/agent theory is true. However, if this were true then private equity would be paying their managers considerably less than public companies do as they would not be subject to this rip off. Given that in reality, out here in the world, private equity pays very much better than public companies do then this isn't true either.
Getting it entirely wrong on fatcat CEO pay
Economist Tyler Cowen weighs in (this is a quote from his book):
ReplyDeleteAre top CEOs underpaid?
There is another lesson from the numbers: CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms. For purposes of comparison, one recent estimate suggests that workers in general are paid no more than 85 percent of their marginal product on average [Isen 2012]; that difference is attributed largely to costs of searching for workers and training them to become valuable contributors. In other words, workers actually seem to be underpaid by somewhat less than CEOs are, at least when both are judged in percentage terms. Both of those are inexact estimates, but in fact these results are what economic reasoning would lead us to expect. It may be easier to bargain the CEO down below his or her marginal product a bit more, given that the talents of the CEO would be worth much less in non-CEO endeavors.
I find the most convincing estimate of the gap between pay and marginal product to be that of Lucian A. Taylor, at the Wharton School of Business. He finds that a typical major CEO captures somewhere between 44 percent and 68 percent of the value he or she brings to the firm, with the additional qualification that the CEO’s contract offers some insurance value—that is, in bad times for the firm the pay of the CEO won’t be cut in proportion, but the CEO shares to a lesser degree on the upside. That 44–68 percent is therefore a better deal for the CEOs than it may appear at first glance. Still, you won’t find credible estimates suggesting that major CEOs, taken as a group, are capturing more than 100 percent of their value added. Here too, that is what you would expect from a competitive bidding process.
source: Are top CEOs underpaid?
AF
ReplyDeleteI read some of the comments under the Cowen link. The Wharton study he cites apparently measures a CEO's "marginal productivity" based on the company's profits plus a "latent signal," whatever that means. This seems absurd and I don't think it's what marginal productivity is supposed to mean. (I'm not an economist but something doesn't seem right here.) You can have the last word bc I don't intend to spend much more time on this.
Private equity runs most of the hospital ER's and has gobbled up an ungodly number of single family homes to use as rentals. Perhaps ending the tax and regulatory advantages that PE enjoys AND raising top marginal rates on everyone would be a better direction (and end the cap on payroll taxes).
ReplyDeletePerhaps of interest:
https://www.congress.gov/bill/117th-congress/senate-bill/3022/text
LFC, the problem with studies like AF references is that the authors assume a Gilded Age is inevitable and desirable.
ReplyDelete