Quote Of The Day

“Kaplan also points out that the pay of those at the top of other highly-paid occupations has grown dramatically as well, like lawyers, athletes, and hedge fund managers. Here’s a figure showing the pay of top hedge fund managers relative to that of CEOs in the last decade. Kaplan writes: “The top 25 hedge fund managers as a group regularly earn more than all 500 CEOs in the S&P 500. In other words, while public company CEOs are highly paid, other groups with similar backgrounds and talents have done at least equally well over the last fifteen years to twenty years. If one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why the other professional groups have had a similar or even higher growth in pay. A more natural interpretation is that the market for talent has driven a meaningful portion of the increase in pay at the top.” — Economist Tim Taylor

40 Responses to “Quote Of The Day”

  • Why can’t both CEO’s and hedge fund managers capture more pay due to power rather than performance?

    I saw a show on PBS, maybe it was Frontline, talking about the 2008 collapse. Part of it involved Bank of America acquiring Merrill Lynch. The deal I think had to go through. It was in the early stages of the collapse and this was an effort to forestall Merrill Lynch’s fall which would have potential started the dominoes falling, collapsing our economy. The acquisition is an attempt to stop that. So it’s a totally failing company, but this CEO of Merrill Lynch at the 12 o’clock hour springs these demands for huge bonuses on Bank of America. And it worked. He got the money and the money for his friends on the top at Merrill Lynch. They took millions for their failures, extracted millions more just before the total collapse, then of course the tax payer had to come in with a couple of trillion as similar things were happening all over. This is not compensation for good performance. The performance was awful from the perspective of the overall economy. This is doing huge harm to the overall economy. On the other hand the performance was good if you look at it from the perspective of earning compensation for the people at the top. The hedge fund managers that orchestrated the destruction.

    Who are these people that dedicate their lives to justifying the extravagant compensation of these people that just leave a train of wreckage wherever they go?

    These are the same people that try to justify Mitt Romney’s behavior. As one example he looks at KB Toys and sees they are struggling. Now with their stock price low he can borrow $300 million and acquire them. Then he saddles them with that debt. They have to fire scores of people just to service the interest on that debt. He then demands that they take out another $66 million in debt to pay him and his friends “consulting fees.” Romney was consulting on who to fire. Also consulting them to offer zero severance. That’s tough work. So he takes the $66 million and walks away saying “What a crappy company. They have all this debt they can’t afford to pay for. Bankruptcy looks to be the best option.” And the right wing steps in and talks about how this is all for the best and he deserves the millions because it’s “creative destruction.”

    The former kings had lackeys that ran around justifying their wealth as a divine right. They have not just the bludgeon, but also the propaganda apparatus. Today we have economists at the University of Chicago. And elsewhere.

  • The studies point is that what happened with CEO pay is NOT unique to CEO’s, or corporations, or any other conspiracy theory that only looks at corporations – it’s an across the board affect that includes hedge fund managers AND lawyers, and athletes, and…other high paid professions.

    Which makes the economic explanation, which is, “..that the market for talent has driven a meaningful portion of the increase in pay at the top” much more likely than the heresay, conspiracy, non-economic arguments that tend to focus specifically on corporations.

  • In athletics it’s pretty obvious that better performance pays. What about people in finance, like Merrill Lynch or Mitt Romney? Again, they performed well in the sense that they accumulated lots of money for their investors, but in terms of the value they bring to the economy, which is ostensibly the reason we are supposed to regard their compensation as justified, it’s pretty bad. They actually cause a lot of harm.

    I think the whole point here is to say “Don’t be upset by CEO and hedge fund manager compensation, because it’s pay for performance.” Maybe it’s pay for performance, but performance in this case is not what the population wants. I want Romney to fail. That way people at KB Toys can keep their jobs. Paying Romney tons of money is like paying a defensive end to never take a hit and never make a tackle. I suppose it’s good for him. Maybe his goal is to never feel any pain. But it’s not good for the team.

  • I should say Romney made money for investors. Merrill Lynch performed in the sense that they acquired money for other members of the Merrill Lynch board. It didn’t help the investors, but it was good for them. And none of it was good for our economy.

  • Let me spell it out differently, since you are missing the point.

    Fact 1: There was a BIG jump in pay for CEO’s over the last 15 to 20 years. I think on this we could agree.

    The study shows that said jump in pay was comparable to a jump in pay for other high paid professions as well. In other words, athletes ALSO saw a jump in pay. So did lawyers, so did doctors, so did most other high paying jobs.

    So when you write, “In athletics it’s pretty obvious that better performance pays.”..you are acknowledging that atleast in certain fields, the higher pay is a sign of a dramatic rise in demand for talent.

    The point of the article is to say that that is a better explanation for CEO pay as well, than the alternatives – after all, they all saw a jump in pay, pretty universally. Why single CEO’s out?

    No need to get into further leftist “economics” to atleast see this point.

  • I guess I’m just trying to emphasize that it’s important to remember what performance means. For a running back it’s easy. More rushing yards. For Mitt Romney it’s making money for the investors. That DOESN’T mean he’s doing something that is good for the world generally. He doesn’t in the least care about doing what is good for the world generally, whereas the football player is interested in doing what is good for his team.

    There is pay for performance too. And as Bryan Caplan said when we demonize the rich we make their jobs more lucrative. If some people are shamed out of doing this kind of work, that just reduces the supply of people that are available (only those that completely lack shame). Caplan’s solution is to sing songs about the rich and kiss their asses as much as possible. He’s certainly practicing what he preaches.

    Romney may be a sociopath. A man worth a couple of hundred million walks up to a bunch of elderly people and just takes their pension away from them so he can stuff his wallet a little more. It’s not like he needs the money so he can be happier. It’s just that he can, so he will. And he sleeps like a baby I’m sure. That’s how it works for people that don’t have empathy. Not everyone is like that, so I suppose you have to pay a lot to find someone like that.

  • I remember a (made up) story about Milton Friedman coming upon a group of unionized workers using shovels to clear the dirt on a project they were working on. Friedman, always focusing on efficiency, informs them that there are now machines that will do that at 1000x the efficiency. The union bosses then inform Friedman that while that is true, it would cause alot of job losses. In other words, using shovels is a way to save jobs.

    Friedman immediately retorts that if creating jobs is your goal, and you are not focused on efficiency, the union bosses should require the employees to use spoons instead of shovels.

    I love this analogy as it shows the idiotic ends the non-economist impulse of focusing solely on jobs as an end in itself would do to the economy(What Bryan Caplan rightly calls the “Make work bias”, see here). Focus on jobs over efficiency, and in the end you have neither.

    Frankly, I dont want to get into the economics of this with you. I have found that its a waste of both of our time (so many irreconcilable fundamental differences – and even appealing to economic consensus doesnt work, you are off in the weeds with your beliefs). My point here is that you can’t simply assume what you believe is true. There are many different explanations for what is going on. And this study, by showing that ALL high paid professions saw a bump in their salary 15 or 20 years ago, argues that the other explanations – the ones that dont simply focus on CEO’s – have more merit.

  • I love this analogy as it shows the idiotic ends the non-economist impulse of focusing solely on jobs as an end in itself would do to the economy

    So I suppose Paul Krugman is not an economist? See, you just hear a right wing argument and conclude that this is the only position held by economists. It’s not. Remember how Krugman talked about if we mistakenly thought an alien invasion was pending and we prepared for it and then discovered it was a hoax this would do the economy a lot of good?

    That’s not very efficient, right? But it would do the economy a lot of good in the sense that unemployment and suffering would decline.

    Or take University of Maryland professor Peter Morici, who I discussed here:


    This is all pretty old hat really. Everybody knows WWII ended the Great Depression. Why? Wealth concentrated and resources were underutilized. Under these conditions building ships and sinking them spurs the economy. On capitalism. That’s another reason capitalism is so inefficient. Waste is necessary on capitalism along with ever increasing consumption.

    Let’s suppose tomorrow we can do a lot more with a lot less. We can produce the same output while firing half of the working people. We got little to no welfare state. We’re still producing the exact same amount of goods. We can provide everyone with everything they need as before. But now it all goes to a tiny wealthy minority. Children start starving. Families are eating each other. But Romney, who used to make $20 million per year doing nothing now makes $100 million per year doing nothing. We’re more efficient. We do more with less. Does that sound good to you? It doesn’t to me.

    So yeah, I’ll say what other respected economists like Krugman or Morici would say. I’d rather be efficient. But if we must choose between having 1000 people digging with spoons or having 1000 people starve I’ll take the spoons. Sure, it would be better to just have them do nothing. Stay home and redistribute some of the wealth from the Mitt Romney’s to the otherwise starving people. But you don’t want a safety net. You want to make them work to get money. If efficiency means there is no work, then yeah, give them inefficient work. It’s not that I like the situation. I think it’s better than the alternative.

  • I disagree with the fiscal keynesian view – for example, after WWII fiscal policy drastically contracted, yet the economy grew tremendously.

    But although I disagree, I think it’s a reasonable view. In fact, I hold a similar view, although my preference is monetary policy. But it is also not the view I am attacking here.

    (Here goes more economic explanations…)To say that in certain economic circumstances, say a depression, or a liquidity trap, or other unique economic circumstances, the economy will do better with a shot of artificial demand created by government is fundamentally different than choosing jobs as an ends in itself over efficiency in normal circumstances.

    In fact, I bet Krugman, Morici, et al could present a STRONG case that their fiscal pump into the economy is necessary on efficiency grounds as well. In other words, they are not pitting jobs against efficiency – in these unique circumstances, I am sure they would argue, focusing on jobs improves efficiency.

    Fundamentally different things here. You should know this.

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