Liberals like to point to a CEO and complain about how many times greater his salary is than, say, the mail clerk at his company. It makes for interesting (and inflammatory) factoids, but it's actually quite meaningless. Since everyone in Washington is scrutinizing executive compensation, maybe this is a good time to look at it.
If a CEO makes 500 times as much as another employee, the reasoning goes, then 500 people could be living on the CEO's salary instead. Accordingly, if we took only half of the CEO's pay, we could provide for 250 destitute people to live as good as a mail clerk does, and the CEO would still be the richest man around. This sort of reasoning is particularly appealing to our egalitarian useful idiot friends, because it allows them to rationalize that redistributionist policy can still preserve important economic incentives. It's also completely fallacious.
The first thing we need to understand is that while the dollar is a handy unit of measurement, it tells us nothing about why an item is valuable. Consider two identical houses on similarly-sized lots. One has an exclusive waterfront view, while the other sits between a rail yard, a bus station and a power plant. It's easy to believe that one house could be worth many times as much as the other in dollars, but in terms of providing housing utility they are the same. A lot of the rich man's money is spent on the view; it's not going to just translate into cheaper housing for poorer people. An expensive property cannot be converted into ten cheaper properties just because it may be worth ten times as many dollars.
And I think it was Thomas Sowell who prompted the question, what if the rich spent all their money on the things that poor people buy? Think about it: when a man buys one home with a very expensive view, he doesn't exactly make a dent in the housing supply. But if, on the other hand, he bought ten cheaper homes -- and if every wealthier person did the same -- it could profoundly affect housing prices for everyone else.
What if the rich decided to spend all their money on hamburger? Fortunately for the rest of us, the rich will choose a $50 dollar steak over ten pounds of $5 beef every time. Just as they choose one roll of 2-ply over three rolls of 1-ply. And just as they choose two sets of fine cotton linen over twelve sets of cheap poly-blend sheets.
My point is that a seemingly disproportionate income does not necessarily indicate wasteful consumption. A CEO making 5oo times as much as another worker does not doom 499 other people to poverty.
Redistribution isn't the sole, and I would argue that for today, isn't even the primary reason that reasonable people are arguing for reduced management wages. From my perspective, I'm perfectly comfortable with the general notion that some people will earn a lot more than others. CEOs and management *presumably* have the skill, talent, and leadership to generate more wealth for everyone involved. So yes, if the CEO of Computer Corp. promotes a business direction that generates 2,000 more jobs and and makes a shit ton more than the mail room clerk, then fine.
Keep in mind, the key policies promoted by compensating Mr. CEO is reward and incentive.
What the financial mess has exposed to all of us is how a misguided and unchecked culture of "corporate compensation" has essentially disconnected the notions of reward and incentive from compensation. For example, in a case famous in corporate law, the "Disney" derivative suit, Disney shareholders sued Disney over giving an executive a $38 million cash and $100 million stock option no-fault-termination severance package in his employment contract. Needless to say, things didn't work out, and he left a little over a year after he started. More recently, you might be able to draw the over-simplified conclusion that the heads of banks and other Wall Street institutions were clearly overpaid commensurate with the way they (poorly) managed their companies. (There are numerous other examples, Robert Nardelli at Home Depot...)
One might say that these CEOs were beneficiaries of the "corporate compensation bubble" where there was the hyped illusion that if we don't give our CEOs employment contracts with these ridiculous severance packages, then they will go elsewhere -- a refrain heard quite often today. Inevitably, a "market failure" occurred, and management salaries were not priced properly according to their skill, what value they could bring to the company, supply, etc. Thus, the effect of destroying any relationship between actual performance and compensation. Where are the incentives to do well?
For me, redistribution is still a relevant factor, but I don't believe the position is as irrational as you present it. Fundamentally, I do believe in the vehicles of incentive and reward as key motivational tools for innovation and creation. However, I also believe that for salaries, as well as most things, there are diminishing marginal returns. So given a culture where there are people similarly circumstanced, will a competent CEO be similarly incentivized by a $200 million salary versus $300 million? I would argue that they would be similar.
Now with that out of the way -- if our goal is improving and growing the economy (a key goal in today's "clusterf*** to the poor house), why is it that shaving $100 mil off for the sake of the rest of the employees beneficial? Today and in the next week or so, investors are closing watching the release of company earnings reports. Many will be watching how retailers perform and the consumer spending statistics. Why? Because as I heard on NPR this morning, 70% of our economic activity is consumer spending.
Essentially, I challenge your position that the $50 steak is equivalent to the hamburger, in fact I challenge that the point is irrelevant. Whether one rich person buys 50 hamburgers or 50 regular people is not the point. The point is that 50 hamburgers are being purchased. I argue that the 50 hamburgers would have larger propagative effects on the economy, as 50 hamburgers require more cows, more employees to feed and slaughter, more transportation, etc, etc. These people will have more money to spend on hamburgers, and so on.
I think it is fair to say that our economic well-being is more dependent (and benefits more) on a high volume of cars and hamburgers versus kobe-beef steaks and yachts.
So that lays my fundamental philosophical stand point on redistribution, but don't take this to mean I'm advocating for the USSSA Communist State. What I mean is that it appears to be in the self-interest of everyone involved, rich and poor alike, to find the proper policy balance of an incentivizing and rewarding compensation structure with that of ensuring that the economy grows and that it takes everyone with it--not just the top 1%.
Posted by: Anton | 04/08/2009 at 04:31 PM
"Redistribution isn't the sole, and I would argue that for today, isn't even the primary reason that reasonable people are arguing for reduced management wages."
To the extent that you're referring to bailout recipients receiving bonuses, I understand. However, for the past five or six years, for which I've been hearing ad nauseum about "CEOs making 500 times as much as mail clerks," I'm pretty sure that wasn't about bailouts.
"What the financial mess has exposed to all of us is how a misguided and unchecked culture of "corporate compensation" has essentially disconnected the notions of reward and incentive from compensation. For example, in a case famous in corporate law, the "Disney" derivative suit, Disney shareholders sued Disney over giving an executive a $38 million cash and $100 million stock option no-fault-termination severance package in his employment contract. Needless to say, things didn't work out, and he left a little over a year after he started. More recently, you might be able to draw the over-simplified conclusion that the heads of banks and other Wall Street institutions were clearly overpaid commensurate with the way they (poorly) managed their companies. (There are numerous other examples, Robert Nardelli at Home Depot...)"
I believe that the system gives the super rich something of an unfair advantage. However, I also believe the system chooses its rich quite fairly. If being rich looks better, then do it -- otherwise, try to contain your unjustified envy.
Money is paper -- or perhaps even less, like maybe just a number on a balance sheet in a bank somewhere. By design, money itself is worthless. In the grand scheme of things, it represents only an entitlement to consume. The actual consumption by the super rich -- the measure of how much they exercise that entitlement -- shows that their unfair advantage is not being abused. This is a central thesis of the original post, which you completely ignore in a characteristically liberal fixation on the worthless money. A CEO making 500 times as much as a mail clerk may live in a house that's only a few times more valuable than the mail clerk's, and even if that house is on a lot worth a hundred times as much as the clerk's lot, that's just because the lot is more desirable -- not because it took a hundred times more resources to develop it.
"given a culture where there are people similarly circumstanced, will a competent CEO be similarly incentivized by a $200 million salary versus $300 million? I would argue that they would be similar."
From my original post:
"Accordingly, if we took only half of the CEO's pay, we could provide for 250 destitute people to live as good as a mail clerk does, and the CEO would still be the richest man around. This sort of reasoning is particularly appealing to our egalitarian useful idiot friends, because it allows them to rationalize that redistributionist policy can still preserve important economic incentives. It's also completely fallacious."
I would be inclined to agree that the incentives are similar at $200 million and $300 million net. However, I've already explained that I'm more concerned with things like the overall size of the pie, and how much of the pie someone might consume, than I am with how many dollars he takes home. In fact, I believe a $300 million CEO consumes exactly the same quantity of pie whether you take $100 million from him or not. But, considering that the rest of us will have to squabble over the leftovers after the CEO gets his fill, it stands to reason that we benefit from the arrangement that results in the largest pie. And unlike the CEO's consumption which is constant, the size of the pie is highly dependent on what happens to the $100 million in question.
We are now working with a few facts that need to be reconciled. First, the CEO will consume the same amount either way. Second, if we take his $100 million, then no matter what we do with it, it's not going to grow the pie any greater than if we'd just allowed him to control it himself in the first place. Anyway, your goal is to give the money to someone who will consume, and that's not going to grow the economy as much as investing it -- recession or not. Now, if the CEO consumes the same amount either way, and if some welfare recipients are consuming more (by using the CEO's $100 million redistributed entitlement), then who, exactly, is consuming less? That's important, because whoever ends up consuming less in the bargain is the person who's really carrying the load of welfare. It's not the super rich -- they live exactly the same either way.
"Essentially, I challenge your position that the $50 steak is equivalent to the hamburger, in fact I challenge that the point is irrelevant. Whether one rich person buys 50 hamburgers or 50 regular people is not the point. The point is that 50 hamburgers are being purchased. I argue that the 50 hamburgers would have larger propagative effects on the economy, as 50 hamburgers require more cows, more employees to feed and slaughter, more transportation, etc, etc. These people will have more money to spend on hamburgers, and so on."
I'm not talking about whether one person buys fifty hamburgers. I'm asking what if all the rich people started buying fifty burgers each instead of one really good filet. You say it's irrelevant, but it's not. I daresay that if Bill Gates decided to spend all his money on hamburgers, then it would raise beef prices, and you'd have to pay a lot more to get just one burger for yourself.
Once you understand that, you can explain what difference it makes whether Bill Gates buys all the beef for himself, or if he buys it for poor people because the government tells him to. Either way, it seems to me that you're the one who's going to end up eating less hamburger -- not Bill Gates. That's what happens when the very poor show up to market armed with the buying power of the very rich: the middle class ends up taking a smaller slice. In your haste to focus on the money, you lose sight of the fact that redistribution makes for a smaller pie, and while you keep telling us the rich can afford it, when was the last time a liberal explained where the sacrifice really ends up being made when it's not by the rich?
Posted by: John Galt | 04/08/2009 at 11:57 PM
"To the extent that you're referring to bailout recipients receiving bonuses, I understand. However, for the past five or six years, for which I've been hearing ad nauseum about "CEOs making 500 times as much as mail clerks," I'm pretty sure that wasn't about bailouts."
Do you think the outrage is justified in the case of the bailout recipients? I ask because I don't see the difference between the problem with bailout recipients receiving bonuses and other execs receiving magnamaous termination bonuses and other corporate perks. Like I mentioned before, I don't have a problem with the principle of a CEO being compensated in a manner commensurate to the amount of growth and wealth he brings to a company. However, the examples I presented are examples where someone was given a huge salary and benefits, but didn't contribute much to the company (the Disney is a clean example, Nardelli did bring some growth, but he also oversaw Home Depot during the time Lowes came and stole away tremenous market share). The point is, these people didn't add value to the company commensurate with how they were "supposedly" incentivised.
"I believe that the system gives the super rich something of an unfair advantage. However, I also believe the system chooses its rich quite fairly. If being rich looks better, then do it -- otherwise, try to contain your unjustified envy."
I guess I don't understand your position here. From what you're saying, the system gives the privileged (I won't use "rich" because privilege comes in both forms of intangible influence and power and money, they go hand in hand often) an unfair advantage, and you say that the rich are free to use these exploits ("if being rich looks better, do it"), and that I am jealous of the massive riches the privileged were able to gather for themselves (i.e., huge termination bonuses begotten in an unfairly advantageous way). I think that's what your position is. Perhaps everyone would be a little jealous at the possibility of being legally given over $100 million just for leaving their job, but I think my criticism is a fair criticism.
If we are to take the extremes, you can either 1) support (condone) people exploiting their power and wealth in whatever ways possible in order to further that wealth--including whatever damage and destruction arises out of that pursuit. From the above, I think but am not sure this is the position you are taking. However, then you essentially condone the current economic crisis we are in--wealth was chased by those in positions of wealth and power (to put it generally) without regard to the risks.
The other position is one I assumed one would adopt -- that people should be compensated commensurate with the value they bring. And that's not necessarily measured in boxes lifted or toilets cleaned. Like I acknowledged in my first post, I completely recognize that a CEO that gets paid 50 times more isn't doing 50 times more manual labor -- he gets paid more because (provided that he is competent) he brings experience, knowledge, leadership to add multiple times more value to a company than the mail room clerk provides. (I thought I addressed your issue about a house being differently valued because of the view with that concession, that CEOs are paid more not because they can work more, but the value they can bring--if not, please do explain more so I may understand). My criticism is with the prior philosophy--I'm ok with CEOs earning much more if they *earn* it. However, I fail to see how a large termination bonus ("golden parachute") offers very much incentive to stick around and actually provide value to a company. It is however, exploiting privilege to the detriment of the company, its employees, and its shareholders.
[To be continued!]
Posted by: Anton | 04/09/2009 at 07:53 PM
"Do you think the outrage is justified in the case of the bailout recipients?"
Outrage at the bailouts, yes. Outrage at bonuses? That's up to shareholders, and the time to deal with it is when the contract is written, not when it's honored.
"I don't have a problem with the principle of a CEO being compensated in a manner commensurate to the amount of growth and wealth he brings to a company."
Then maybe you should get a seat on the board of directors. Until then, it's really between the CEO, the board, and the shareholders.
My point is that "privilege" is not fair. There is an "inner circle," and if you're not in it you're not privileged. But the system is fair in the sense that getting into the inner circle is very much merit based.
I don't buy your "massive riches" crap because, quite frankly, the super rich only consume a fraction of their wealth, while the part they don't actually spend creates a lot of jobs. You've heard that you can't get a job from a poor person? Well, you can get a lot of jobs from a rich person, but not if you take his money away from him. And we all live better when a rich person pays people to work than if we just gave his money to the unemployed.
"wealth was chased by those in positions of wealth and power (to put it generally) without regard to the risks."
Disagreed. Politicians created a system where individuals were insulated from risk. Those people did exactly what we should expect them to do -- "greed," as you probably call it, is not a new phenomenon. The question is why the politicians did not see it coming ...or did they?
I really don't care how big a rich man's paycheck is, as long as he's not bidding up the price of everything I want to buy. And recent history shows that these people use their money to buy a lot of things that most of us don't want anyway, like stock.
The wealthy do not consume their entire entitlement. What they leave on the table by forgoing their consumption makes everything a lot cheaper for the rest of us.
Posted by: John Galt | 04/09/2009 at 10:39 PM
(sorry I might have gunked up your comments, my first post missed an HTML tag so I didn't proceed with the Captcha)
You write:
"Outrage at the bailouts, yes. Outrage at bonuses? That's up to shareholders, and the time to deal with it is when the contract is written, not when it's honored."
Sure, the shareholders are most directly affected, and in the case of Disney, it was the shareholders that brought the derivative suit for the management's "breach of duty" and "breach of loyalty." I would just point out that the system we have developed--the publicly-held corporation, disconnects ownership and management. Technically, in incidents of management compensation, shareholders often only have retroactive power -- in the form of derivative suits or ousting management, but the problem is that this doesn't prevent bad CEOs from binding the company in a waterproof contract (see, current bonus mess with AIG).
Secondly, I would argue that despite the fact that shareholders are the ones directly implicated where there is mismanagement (in the form of egregious compensation or whatever), society as a whole suffers. Economics is about the proper allocation of limited resources, and for resources that are misallocated we suffer in terms of lost economic growth, technological development, etc. Hypothetically, if we had a pharmaceutical company that specialized in cutting-edge brain degenerative medication, and a CEO left with a 100 million leaving bonus, then that is 100 million less dollars for developing the kind of medication that would have a tremendous beneficial societal impact.
You write:
"My point is that "privilege" is not fair. There is an "inner circle," and if you're not in it you're not privileged. But the system is fair in the sense that getting into the inner circle is very much merit based."
I would disagree. I think many people achieve their positions of power and prestige through merit, but many get through on the virtue of inherited privilege, social networks, etc. If we take the Disney derivative suit, Michael Eisner surrounded himself with a board of "yes men" including the principal of his childrens' school. Ostensibly this principal didn't have the merit necessary to achieve such a position of prestige on his own, and I doubt he would ever get an offer at any other company's Board of Directors--it boiled to who he knew and how. In fact, given the ostensible qualifications of the position (the ability to unquestioningly agree with Eisner, it could have been a street hot dog vendor, and I doubt that one would say he has a meritous set of skills above you or me. We can look at other examples of power/prestige without skill, talent, and merit. Disgraced FEMA director Michael Brown?
You write:
"I don't buy your "massive riches" crap because, quite frankly, the super rich only consume a fraction of their wealth, while the part they don't actually spend creates a lot of jobs. You've heard that you can't get a job from a poor person? Well, you can get a lot of jobs from a rich person, but not if you take his money away from him. And we all live better when a rich person pays people to work than if we just gave his money to the unemployed."
This doesn't have to be about the rich/poor dichotomy. You write "Well, you can get a lot of jobs from a rich person, but not if you take his money away from him." I can disprove this statement with a simple hypothetical -- let's take the same aforementioned pharmaceutical company. As it has been conceded that a CEO will be similarly incentivized by $200 million and $300 million, then instead of compensating management so much, why not reinvest it into the company? We are taking away this rich guy's money, and putting it back into the company that can generate more profits, generate better research leading to better medication for society, and more jobs for scientists and other educated folk.
You write:
"Disagreed. Politicians created a system where individuals were insulated from risk. Those people did exactly what we should expect them to do -- "greed," as you probably call it, is not a new phenomenon. The question is why the politicians did not see it coming ...or did they?"
This is a very interesting response. I would agree with you that one of the contributing factors of the current economic crisis was that the "system" was improperly designed to insulate risk... but that leads to several interesting conclusions. The first is "Why?" Why was the system made this way and as you put it, "Why did the politicians [not] see it coming?" There are a number of plausible contributory theories: One plausible answer is that for the past 8-12 years, there was a systematic deregulation of financial and mortgage industries, as guided by the laissez faire philosophy that less regulation will allow markets to flourish unfettered. Another plausible theory is that key components that led to the financial disaster were unregulated to begin with—e.g., the credit default swaps that are the target of the AIG meltdown. Credit default swaps are essentially unregulated insurance policies; normal insurance is heavily regulated by state law such that a carrier must have a statutorily-set large amount of capital on hand in order to cover their claims in a hypothetical disaster circumstance. AIG clearly offered insurance for a scenario it assumed was impossible, and therefore was not capitalized to cover. A third plausible theory is that whatever regulatory institutions that existed were rendered ineffective due to disincentives stemming from the revolving door between the government and private financial world—in other words, at the SEC it was no secret that once you left government service as a securities regulator, you would then be hired by the same financial institutions you were once regulating. This is clearly a troubling perception of a conflict of interest at best, but if I understand your position correctly, they (SEC officials) may act in their own best interests through the selfish exploitation of their own power).
I’ll just recap the foundation I’ve laid –
1) People in power/privilege/etc. have an “unfair advantage” (your position is that those people are chosen fairly);
2) that your position condones people that “did exactly what we should expect them to do” or put in other words, you are okay with them exploiting their power, privilege, etc. to selfishly further said power, privilege without regard any externalities of that behavior (e.g., potential destructive consequences for their own companies, society, etc.);
3) that when a massively destructive meltdown event that occurs because of the legitimate pursuit (by your position) of the aforementioned behavior, the failure arises because of the failure of politicians… the failure of politicians when they “created a system where individuals were insulated from risk.”
4) If we acknowledge that politicians failed, what are the hypothetical lessons learned? What should they have done in response to or to prevent the market failure misallocation of risk? What were the possible political causes of the economic failure?
As you are a scholar of economics, you can probably see where I’m headed. Government intervention is necessary in the event of market failure. One tool that government has to correct market failures is regulation, and I make the argument that there were several failures of regulation. The government may also just take the market failure out of the hands of the market altogether.
In a world where people with power are allowed to exercise it in their sole self-interest, and can exact externalities on others, the only way they may be constrained is through government action. Essentially, by pointing the finger at the government, you have confirmed the necessity of government regulation, a concept that is in opposition to tenets of libertarianism and republican ideology.
You write:
"I really don't care how big a rich man's paycheck is, as long as he's not bidding up the price of everything I want to buy. And recent history shows that these people use their money to buy a lot of things that most of us don't want anyway, like stock.
The wealthy do not consume their entire entitlement. What they leave on the table by forgoing their consumption makes everything a lot cheaper for the rest of us."
Your position anticipates only one avenue by which the wealthy and privileged may harm the middle class or the rest of society, and as I understand it, it is by their consuming as much as they have money, or in other words, entitlement. If they do so, it drives up the prices of middle class goods. However, given the current economic crisis, it is clear that this isn’t true. The wealthy and privileged may inflict such massive and systemic damage to the economy such that people in the middle class no longer have jobs and thus, they cannot afford goods at any price and are presumably relegated to the “poor” class. I assume, as you are articulate and well-versed, that you have a good education and a reputable vocation, but as the current economic disaster has demonstrated, people like this are not safe. A large number of managers, people in financial services, engineers, lawyers, etc. have all recently lost their jobs.
(I concede that a lot of what I’ve presented (as long as it is) is still fairly reductivist, but I think that for the purposes of testing the natural conclusions of the world-view you have presented, they are sufficient.)
Now to return back to your first response:
You write:
"I would be inclined to agree that the incentives are similar at $200 million and $300 million net. . . . In fact, I believe a $300 million CEO consumes exactly the same quantity of pie whether you take $100 million from him or not. . . ."
Great! Which is exactly the point I'm trying to make. That consumption tracks income for a while... but again you experience significant marginal decreases as you zip along to the extremes...
You write:
"Anyway, your goal is to give the money to someone who will consume, and that's not going to grow the economy as much as investing it -- recession or not."
...And this here is the lynch pin of my argument, so I believe it deserves more treatment than a single sentence dismissal. I agree that investment is important in growing the economy, but not exclusively so. As I mentioned before, it is a widely available statistic that 70% of our country's economic activity is consumer spending. If it wasn't important people wouldn't be looking to consumer spending indicators as a bellwether of the economy. (If anything we are currently "investing" more to the extent that the consumer pendulum has swung in the completely opposite way (from all spending) and people are saving and holding onto their money because of an overly insecure outlook on the economy.)
Take Japan and their “Lost Decade” for example. The reasons for Japan’s economic woes are numerous, but one that has been implicated is the lack of consumer spending. Shell shocked by insecurity about the economic, the Japanese largely saved everything they could. Their frugal lifestyle shows the problems of an economy that overemphasizes savings and investment over spending. Japan recovered in large part due to increases in consumption abroad – in the United States and China, so that their exports offset their low consumption.
Thus, consumption is key (mind you consumption on actual wealth, I’m not talking about the US overconsumption on mere credit that has gotten the country into trouble). Especially where the rich consume the same amount (to be facetious, how many yachts can one buy over a lifetime?) The wider we can cast consumption, the better it will be for the economy and everyone.
Let’s take iPods. Where we have a lot of people buying iPods that means that we increase the profits of the suppliers and involve natural resources, we open more Apple stores and employ people to staff them, we employ more people to transport iPods from the factory to the stores, etc, etc. The end result is that more people have more buying power to buy iPods for themselves and that is fundamentally how our economy grows. As I’ve said before, investment is important, but worthless without its partner “consumption” in the other hand (imagine investing in a business with no customers… and you get the dotcom bubble! Haha)
The propagative effect of the economy is why I believe that your model of the “middle class pie” and raising the price of hamburgers isn’t an applicable model for our economy. Going back to the hamburgers, your model relies upon a very narrow, isolated conception of microeconomic supply and demand; that if demand goes up because rich people (or poor people with rich people’s money) buy up all the hamburgers and consequently drives up the price of hamburgers for the middle class. First, this assumes that supply is constant. This is far from the truth because as you know, where there are no artificial barriers to entry, people will rush to enter a market where hamburgers (a cheaply produced product) are selling for a hypothetical $100 per burger! I’d leave my job and open a McDonalds tomorrow if I knew Bill Gates was coming to buy a million burgers at $100 a burger. When this happens, supply will increase and the price will come down again – behold the wonder of the market invisible hand. Resources will be allocated where there is the demand for a product. Moreover, to capture the iPod example, everyone benefits where the rich a buying up all the hamburgers. You are concerned that the middle class is harmed because they wouldn’t be able to afford hamburgers, but it’s not true – in fact because of the propagative effects I discussed before, more people will have more jobs in the hamburger supply pipeline and there will be more middle class and they will have increased buying power! Now that is a “large pie!”
Posted by: Anton | 04/11/2009 at 01:22 PM
"current bonus mess with AIG"
As I understand it, a lot of those people had nothing to do with the "mess" part of AIG, they were just entitled to a bonus. Some of them were taking no salary -- for them this bonus was their entire take.
"Hypothetically, if we had a pharmaceutical company that specialized in cutting-edge brain degenerative medication, and a CEO left with a 100 million leaving bonus, then that is 100 million less dollars for developing the kind of medication that would have a tremendous beneficial societal impact."
You're applying the same fallacy in reverse. Just as the CEO's lifestyle is the same with $200M or $300M, you cannot say that the company is ten percent more likely to develop a drug on $1.1B as they are with only $1B. You need to take your eyes off the money, or you will never actually see.
"I think many people achieve their positions of power and prestige through merit, but many get through on the virtue of inherited privilege, social networks, etc."
Even if you were right (and I think you're exaggerating), what's important is not whether everyone with privilege deserves it, but rather whether anyone who deserves the privilege is excluded. It's still not a zero-sum game. And I'm not about to convict anyone who deserves to be rich simply for being in the company of someone who doesn't. This country was founded on principles that say a hundred guilty men will get away with it if that's the cost of ensuring that no innocent man is punished unjustly.
"As it has been conceded that a CEO will be similarly incentivized by $200 million and $300 million, then instead of compensating management so much, why not reinvest it into the company?"
I'm sure he has that option if he determines it is the most profitable. Otherwise he must be investing it somewhere else, since we all agree that he's not actually consuming that portion of his compensation. Since he's a CEO, I'm sure he's better at deciding where that money will be most valued than the rest of us, including our politicians.
"The question is why the politicians did not see it coming ...or did they?"
Interesting response to this. I did not see "the moral hazard" in your reply. When the government engineers loopholes, I don't call that deregulation. And we should not be surprised to see money pour through them. And we sure as hell shouldn't be blaming those with easily foreseeable incentives to do what's most profitable for taking advantage of those loopholes. Who created the loopholes, and why?
"Government intervention is necessary in the event of market failure."
I saw an interesting quote the other day, and I'm compelled to use it here:
I disagree that markets fail. Market failure is a political concept that assumes that those who trade are somehow responsible for society.
"In a world where people with power are allowed to exercise it in their sole self-interest..."
That is "freedom."
"...and can exact externalities on others..."
Both libertarians and Republicans recognize the government's role in addressing externalities. But government corrects an externality by seeing to it that the externalized cost is paid by the players, and that the proceeds are used to cover that cost. And it helps a lot to identify real costs. None of this applies to much of what is done by government under the guise of externalities today.
"The wealthy and privileged may inflict such massive and systemic damage to the economy such that people in the middle class no longer have jobs and thus, they cannot afford goods at any price and are presumably relegated to the “poor” class."
Some wealthy and privileged, perhaps. Not the wealthy and privileged.
And I could name a hundred ways government makes it harder than necessary for individuals to work for themselves, or to insure themselves. I'm a long way from calling for more government to help unemployed "victims". It's only because of government that individuals are so dependent on the wealthy and privileged for employment in the first place.
I respect the rest of your position and do not necessarily disagree. But I will point out that my own position works in more than one way:
My original thesis stands: The dollar value of everything in the economy as it is distributed does not directly translate into a different distribution of items that may be more beneficial or moral. That's all I said, and everything else has been very interesting and a lot of fun, but it's also been typically normative and irrelevant to the original point.
Forfeiture of a rich person's $100 million yacht does not translate into 100 million one-dollar value-menu items. But it will successfully injure a bunch of yacht building workers who might have liked to buy a ten dollar steak, if only they still had a job.
Are you saying they should be working at the drive-thru at Wendy's, pushing items from the value menu instead?
The rich are not everything. But they are not bad guys, or even some sort of evil force that needs to be contained.
Posted by: John Galt | 04/11/2009 at 05:55 PM
I really enjoyed reading this whole discussion, thanks guys.
Now I feel like I REALLY need to start school...
Posted by: Ben | 04/21/2011 at 02:50 PM