I agree with Robert Samuelson’s latest Washington Post editorial to the extent that I think that the increase in income inequality in the United States has many causes. Among those causes I would list excessive compensation of top management, increasing financialization of the U. S. economy, and rent-seeking—all mentioned in the column.
I think he’s too dismissive of excessive executive compensation as one of the reasons:
First — summarizing other studies — it attributes much inequality to differences between companies and not to individuals in the same firm. It’s not so much that the gap between the chief executive and the janitor at company A has widened; it’s that company A is falling behind company B, which is more profitable and pays both the CEO and the janitor better.
There has long been a sizeable gap between top managers and ordinary workers in American companies. I’m just going from memory here but IIRC 30 years ago top managers in the U. S. enjoyed incomes 17 times that of ordinary workers compared to 7 times in France and 9 times in Germany.
However, today that gap hasn’t just increased. It’s multiple orders of magnitude higher. Early in Bill Clinton’s first term as president there was a change in the tax law limiting the deductibility of top managers’ wages but not limiting the compensation that could be paid in the form of stock options. Consequently, boards of directors began paying an increasing proportion of executive compensation in the form of stock options. Foolishly in my opinion—it looked like free money.
After that it was off to the races and top managers’ total compensation is now hundreds of times that of ordinary workers.
That financialization produces income inequality can hardly be exaggerated. It’s darned hard to pay someone a billion dollars in compensation without its producing income inequality.
That rent-seeking is producing income inequality is a frequent topic here at The Glittering Eye. Consider the enormous growth in the healthcare and education sectors over the period of the last 30 years.
However, I found this very distressing:
On page 62, we learn that the growth of state and local government spending on services (schools, police, parks) has been the slowest of any recovery since World War II. One reason: Payments into underfunded pensions are draining money from services.
That’s facetious. Pensions are nothing but delayed compensation. Consequently, “payments into underfunded pensions” should be counted as an increase in services as much as paying the salaries of present police officers, firefighters, and teachers are.
Another factor that goes largely unmentioned in Mr. Samuelson’s column is our present slack labor market, promoted by legal and illegal immigration. A slack labor market vitiates the bargaining power of present workers. There are plenty more where they came from.
The government should set management compensation levels. What could go wrong??
http://www.zerohedge.com/news/2016-02-29/long-history-government-meddling-american-marketplace
The article is a re-post from The Mises Institute, but it is not endorsed by them. I mention this because they have certain positions, and the article may or may not align with them. In my opinion, the article was not well organized, and it has the same problem that most sound and/or hard money people have. They treat all dollars as equal.
It would be similar to comparing men armed with swords, but not accounting for the material used in the sword. It could be made from plastic, glass, or wood, or it could be copper, bronze, or iron. None of these are equal to each other or to a steel sword.
There are pre-Fed, post-Fed, post-Glass-Steagall, post-Nixon, and post-G-S repeal dollars that are fundamentally different, and during certain periods, the ability to create dollars is easier than others.
Most, if not all, economic theories are based upon hard, sound, or almost sound money, but unsound money does not function the same way. Unsound money does not follow the simple rules of arithmetic. One plus one does not necessarily equal two. It could equal two, or it could equal three. It could equal three today, but tomorrow, it could equal five.
The seemingly magic addition is credit, and there is no way to distinguish the real dollars from the credit dollars. Because there is no way to distinguish, they are all equally credit dollars, and in reality, the credit dollars far outnumber the real dollars by an order of magnitude or more. The credit dollars are fractional reserve dollars, and whether he understood it or not, Keynes’ economic theories requires them. For most classical economists, these would be banknotes.
In the end, the problem is that the right is no different from the left, and they refuses to prove their economic theories in Venezuela or Nigeria. If you do not like it here, pull up stakes and move. Don’t let the door hit you in the ass on the way out. Or, you can stay and stuff your mattress with all your money and watch inflation consume its value.