June 14, 2002
From the desk of Jane Galt:KrugmanWatch We're inaugurating a new
KrugmanWatch
We're inaugurating a new format for Krugmanwatch.It's gotten kind of petty. I mean, he's partisan, but hey, so am I, at least until the Bush administration does one more protectionist thing, at which point I'll be joining the Kruggy brigade as we light up the torches and head for the castle. So I'm not going to pick on the cheap shots or petty partisanship, or dissect the column line by line; I'm going to present the highlights (things I liked) and the lowlights (unspinning the spin). Then I'm going to assess predictive validity on the following scale:
0 Does not single out Republicans or the Bush administration for ridicule over Democrats
.5 Blames Republicans and/or conservatives for a substantial portion of ills in our society, but does not name names
1 Singles out specific Republican politicians or the Administration to blame for a substantial portion of ills in our society, while wholly or partially absolving Democrats from similar sins.
We also have
- .5 Blames Democrats and/or liberals for a substantial portion of ills in our society, but does not name names
- 1 Singles out specific Democrat politicians to blame for a substantial portion of ills in our society, while wholly or partially absolving Republicans from similar sins.
But since this hasn't happened in the history of the column, I wouldn't bother to remember it.
Now, onto the column.
Summary
Inequality is increasing in our society. We should be worried.
Highlights
It's an interesting topic, and certainly, it could be worriesome.
Lowlights
-- Where's the beef? The whole article is a complaint about the inflation of CEO pay, based on the pay of the top 10 CEO's from 1980 to now. But there's no sense of whether this is a class-wide phenomenon, or simply a couple of guys who got very lucky. The top CEO's he cites have an annual income not that much greater than Michael Jordan's. Is Michael Jordan the harbinger of a new plutocracy?
Perhaps, but there's no other data. It's like deciding that society is doomed because the income gap on your block has widened; on the one hand, Bill Gates now lives on your street, and on the other hand, your neighbor's brother Bob is out of rehab and living in the Gazebo. Does this portend a crisis, or a statistical anomaly? Who knows.
-- What about inflation? CEO pay, if left unchanged from its $3,500,000 height, would be over $7,000,000 today -- which is not $154 mil, but not chicken feed either. Likewise, if left unchanged until 1988, it would have been $4,825,000. These are not inconsiderable gains.
-- What about growth? I couldn't, in my quick scan of the net, find a good chain-weighted measure of the change in median income, but per capita GDP has increased by about 50%. So even if our CEO had gotten no net increase except inflation and GDP growth, he'd be making around $10,500,000. So the correct inflator is not 43 times (and doesn't 4300% sound so much scarier than 43x?) but around 10 times.
-- Most of that extra income is in stock. Those CEO's did well because their companies did well.
And of course, now some of those companies aren't and the CEO's are parachuting away. And it's tempting to say "there ought to be a law". But fer goshsakes, what law? No estate tax is going to make these CEO's any less feckless, nor can you pass a law against bad judgement; you'd freeze the economy in its tracks, as everyone refused to take any risk or make any decisions. And a law telling CEO's not to be such screw-ups wouldn't prevent these golden parachutes they've written themselves.
What would? Who are these yahoos hurting? The shareholders. Who could have prevented them from writing themselves sweetheart deals with captive boards? The shareholders. And why didn't they? Because the little shareholders don't have a clue, and don't know that they don't have one, and the large shareholders are often short-timers. The institutional investors that hold these stocks could get serious and start demanding some long term value from the CEO's.
But how do you make them do it? Mutual funds and pensions are already some of the most regulated entities this side of kiddie porn. It hasn't made them any more sensible either, at least not to judge from my last Fidelity statement. And again, the law would be worse than the problem it's designed to replace; telling mutual fund advisors "If you don't do the right thing -- no, we don't know now what the right thing is, but you can be sure we will, after you've made your decision and we see what happens" would paralyze the capital markets.
-- "First we will hear that vast fortunes are justified because they are the reward for vast achievement. Here's where that table comes in handy, because it tells you what achievements actually get rewarded. Only one of the 10, Tyco's Dennis Kozlowski, has actually been indicted."
The implication being that the rest are but one bad stock trade from the pokey. But I don't know of any evidence to that effect. Neither, it seems, does Paul Krugman; he moves quickly on.
"But of the rest, three — four, if you count John Chambers of Cisco — were Andy Warhol C.E.O.'s: their companies were famous for 15 minutes, just long enough for the executives to cash in their stock options. The list also includes Gerald Levin, who engineered Time Warner's merger with AOL at the top of the Internet bubble; even at the time it seemed obvious that he was trading half his original shareholders' birthright for a mess of cyber-pottage. "
Cisco's not exactly in the same class as Global Crossing, and Gerald Levin did actually run Time Warner for many years before the merger, and in fact, built it up quite a bit before then. The merger was a capitally bad idea, but he was hardly the only person in America to buy into the peak of the internet bubble. Of course, the golden parachute's upsetting -- but that's discussed above.
-- There's the standard Paul Krugman plaint about the estate tax. And maybe this is the argument that will change my mind about the tax -- I, for one, had no idea that the estate tax could be used to prevent companies from paying their CEO's nine-figure salaries. The mechanism is unclear from the article, but it's certainly an exciting development.
More to the point, for all his maundering about the estate tax, it hasn't done anything to break up the great fortunes of our era.
You are confused. You know that the estate tax did break up many of the robber baron fortunes, or at least make them more modest.
Actually, inflation did a lot of that, and the 1929 crash. The estate tax helped, but it's a one-trick pony. Before the estate tax, there were no estate planning services. Why would there be such a thing? Oh, there were trust and will departments, but there were not legions of accountants who did nothing but sit around all day thinking up clever ways to cheat the tax man out of his death duty. Now that there are, it isn't going away. The only people you get significant estate tax out of are people who are either too ignorant or too illiquid to plan around it. You can change the tax around all you want, but the instant you do the financial planners will be on it like white on rice.
Oh, the superrich pay something. But Krugman offers a datum that is misleading in the extreme: "I've even been assured by some correspondents that inheritance taxes on the very rich are impractical, that they will always be evaded — this in spite of the fact that in 1999 the estate tax raised about $15 billion from estates worth more than $5 million."
Hold on there. The estate tax raises about $50 billion a year. By my estimates, that means that $35 billion is raised from estates under $5 million; I don't think Ken Lay or Gerald Levin qualifies. In other words, the majority of the revenue from the estate tax comes not from the superrich but from moderately high-income savers with small businesses or appreciated assets. The owner of your local 7-11 is paying this thing while Jon Corzine's heirs toss some pocket change at the tax man and stroll away.
But the net effect is not to break up the estates; it's to put them into irrevocable trusts beyond the tax man's reach. The lives of the heirs may have been made marginally more inconvenient, their holdings more illiquid; they may even have to show up at a charity office once a week to justify their six-or-seven figure annual salary. But they are not impoverished by it. The estate tax is much more effective at gutting the upper middle class than the ultra-wealthy. And I don't think that Krugman is trying to get us hysterical about the coming rule of the lawyer-and-accountant aristocracy; even if he buys it, those folks are his readers.
Howlers
" But the Gilded Age looked positively egalitarian compared with the concentration of wealth now emerging in America. Pretty soon denial will no longer be possible. What will the apologists say next? "
On the contrary, we live in the most egalitarian age in history. Think about it: how much better is Bill Gates' life than Andrew Carnegie's?
He's healthier and will probably live longer. But is his house more comfy? His art better? His life more convenient? His clothing better quality? His food tastier and better prepared?
Nope. Healthcare and Gadgets aside, Bill Gates and Andrew Carnegie have little between them.
Now compare the worst paid guy in Carnegie's empire to the worst paid guy in Bill's.
The worst paid guy in Carnegie's empire lives in a couple of rooms with his wife, several children, and extended family. He eats meat once or twice a week. He owns one or two sets of work clothing and a good suit, probably the one he was married in. He has an ordinary hat, a good hat, and some seasonal apparel. He works twelve hours a day. He has no personal transportation; he walks or takes a horsecar. He does not vacation. He cannot afford books, plays, or other entertainment. His entertainment is church, conversation, and possibly music. He probably cannot read.
In human terms, it may be a rich life. In material terms, it wouldn't do a modern welfare mother for a camping weekend.
I don't think I need to itemize the fate of Bill Gates' mail boy for you to see the difference.
The rich were comfortable then and are comfortable now; the improvements are strictly marginal. The poor, on the other hand, have improved their lot immensely. Plutocracy, my Aunt Fanny.
Now, in fact, I am under the impression that inequality is increasing broadly. The problem is that Krugman knows as well as I do why that is: technology puts a higher premium on skilled than unskilled labor. If all you're good for is your muscle power, a machine will work cheaper and quicker and won't unionize. Bye bye human draft horses.
Neither the estate tax nor any other law man can make will remedy this. Only three things might: a subsidy to employers to hired unskilled labor, which is massively unproductive and distortionary, and would involve rolling back productivity increases in some industries; training, which has a dismal record last time I looked; or a negative income tax combined with a repeal of the minimum wage, enabling workers to labor with dignity at a price they are worth. As you can see from the spin, that last is my prescription.
PV He singled out a Bush adminstration guy; that should be a 1, but on the other hand, he's an economist, which is fair game; but on another hand entirely, he didn't treat his analysis all that fairly (it's flawed, but not that flawed). The kicker is, he mentioned that this guy was associated with the last Bush administration, which is irrelevant. .5 on the bias watch (hey, it's subjective.) PV now stands at 7 out of 9, or 78%.
Posted by Jane Galt at June 14, 2002 04:40 PM | TrackBack | Technorati inbound links