Archive for the ‘Political Economy’ Category

CEO pay is scandalously high

Wednesday, May 20th, 2015

writes FT columnist Michael Skapinker.

Chief executive pay is a scandal. It is too high, too complicated and has badly damaged the image of business. Even fervent defenders of free markets think top pay is out of control.

Simon Walker, head of the UK’s Institute of Directors, whose members are rarely heard humming “The Red Flag”, has said: “What has done the most damage to the reputation of business and the free market in recent years? It hasn’t been the G20 protests or the Occupy tent cities. It has been the greed of those who demand and secure rewards for failure in far too many of our large corporations.” ….

Defenders of the current set-up may seize on Mr Walker’s jibe about rewards for failure and say: “Ah, but what about all those successful CEOs who deserve their pay?” The … riposte is that there is little evidence that performance-related pay schemes are, in fact, rewarding performance. ….

There is no need for US chief executives to earn 296 times as much as the average worker or UK bosses 120 times. [Emphasis added.]

Michael Skapinker, “CEO pay: it is time for one brave leader to ask for less“, Financial Times, 20 May 2015 (metered paywall).

When corporate management worries about the gap between executive pay and the wages of workers, we have a problem. I wondered if corporate America has voiced similar concern. The Wall Street Journal (WSJ) is the US equivalent of London-based Financial Times (FT), so I searched for WSJ columns decrying high CEO compensation. I was unsuccessful, but I did find a column arguing that the gap is small, so nothing to worry about! (See the extract below.)

I seldom read the WSJ. Can a reader please pass on to me any WSJ article or op-ed that expresses concern with the gap between executive compensation and the pay of workers? Does one exist?

[T]he AFL-CIO and its aligned think tanks have made hay of the huge difference between the pay of CEOs and employees.

One of the most widely cited measures of the “gap” comes from the AFL-CIO’s Executive Paywatch website. The nations largest federation of unions laments that “corporate CEOs have been taking a greater share of the economic pie” while wages have stagnated for the rest of us. As proof, it points to a 331-to-1 gap in compensation between Americas chief executives and the pay of the average worker.

That’s a sizable number. But don’t grab the pitchforks just yet.

The AFL-CIO calculated a pay gap based on a very small sample—350 CEOs from the S&P 500. According to the Bureau of Labor Statistics, there were 248,760 chief executives in the U.S. in 2013.

The BLS [Bureau of Labor Statistics] reports that the average annual salary for these chief executives is $178,400, which we can compare to the $35,239-per-year salary the AFL-CIO uses for the average American worker. That shrinks the executive pay gap from 331-to-1 down to a far less newsworthy number of roughly five-to-one.

Mark J. Perry and Michael Saltsman, “About That CEO/Employee Pay Gap“, Wall Street Journal, 12 October 2014 (free access).

Wow! That is impressive shrinkage of the reported wage gap. I am not convinced, though. What counts is the gap between total executive compensation and the compensation of workers (who generally receive no compensation other than wages and salary). For highly-paid CEOs, income from salaries is a fraction of total compensation, which includes bonuses and company stock. Also, few are concerned with CEO compensation in companies that employ few workers, so the S&P 500 is not an irrelevant sample of firms to examine.

Perry and Saltsman were motivated to write an op-ed by introduction in Congress of the CEO-Employee Paycheck Fairness Act, a piece of Democrat legislation referred to the House Committee on Ways and Means at the end of January 2015.

The Act, in words of Perry and Saltsman, “would prevent a public company from deducting executive compensation over $1 million unless it also gives rank-and-file employees raises that keep pace with the cost of living and labor productivity”.

Mr Perry is a resident scholar at the American Enterprise Institute and blogs at Carpe Diem. Mr Saltsman is research director at the Employment Policies Institute (EPI), a front group created by Berman and Company, a Washington, D.C. public relations organization that lobbies for the restaurant, hotel, alcoholic beverage and tobacco industries. The EPI has no employees of its own, other than Mr Saltsman, who is also economist and researcher for Berman and Company.


a Scandinavian solution for tax collection

Sunday, May 17th, 2015

No-one likes paying taxes, yet Scandinavian countries somehow succeed in collecting about 45% of their GDP in tax revenue, compared to about 25% in the US and about 35% in Germany and the UK. “The Scandinavians” writes FT ‘undercover economist’ Tim Harford, “have managed to raise large sums from their citizens without destroying their economies. How?”

[T]he answer is partly cultural.

It is also partly about the comprehensive tax reporting in Scandinavia, which makes outright evasion very difficult. Norwegian tax returns are published for all to examine. ….

Not everyone will feel delighted about an all-seeing government determined to invade privacy in the name of higher taxes. But there are other elements of Scandinavian taxation that any government might want to emulate: Scandinavian countries minimise the distortions of their tax system by avoiding the bad habits of politicians in other countries.

Chief among these habits is targeting a narrow tax base. The US tax system is full of ad hoc deductions and exemptions. The UK system needlessly excludes swaths of the economy from tax. ….

The simplest way to broaden the tax base is to dismantle barriers to getting a job. Scandinavian governments subsidise education, transport and care for children and the elderly, all of which help people to work who might otherwise find themselves stuck at home. As a result, even high taxes do not keep them out of the labour market. [Emphasis added.]

Tim Harford, “Tax: a Scandinavian solution“, Financial Times, 16 May 2015 (metered paywall).

Note that if subsidies for education, transport, child care and elder care are means-tested, the result is high implicit taxes on income from wages.

Mr Harford’s column is gated, but most of the information he draws on is from an AEA journal that is freely available to non-subscribers:

Henrik Jacobsen Kleven, “How Can Scandinavians Tax So Much?Journal of Economic Perspectives 28:4 (Fall 2014), pp. 77-98.

Kleven’s article is part of a symposium on “Tax Enforcement and Compliance” that includes three related articles.

Republicans’ political strategy

Sunday, May 17th, 2015

Another superb letter from an FT reader, this time from a resident of Denver, Colorado.

[FT columnist] Gillian Tett bemoans the political polarisation and fragmentation which has become the norm, but these are the deliberate policy priorities of the Republican party.

This is because the fundamentalist wing of the GOP comes to Washington not to govern but to dismantle government. Having developed the notion that “government is the problem”, anything that reinforces this idea is a success.

Hence gridlock, and the apparent inability of the federal government to accomplish anything meaningful, is a worthy outcome.

The strategy of the Republicans is to show the voters, through inaction, that the federal government, as currently sized, is a waste of money. The present levels of cynicism (with poll ratings which place the members of Congress beneath used car salesmen) shows that their scheme is well on its way to success.

Guy Wroble, “Federal gridlock on policy is deliberate scheme“, Financial Times, letter to the editor, 16 May 2015 (metered paywall).

My feeling, sadly, is that Mr Wroble’s analysis is correct. An American friend of mine, an activist in the Tea Party wing of the Republic party, frequently uses these very same words – in particular the gridlock metaphor – to explain to me his group’s political aims. In brief, government wastes resources, so less government expenditure is better. This desire to reduce the size of government does not apply, though, to the military, police, and justice system (jails), all of which are needed to protect good citizens from evil terrorists, foreign enemies and domestic criminals.

shareholders’ war on lobbying

Thursday, May 7th, 2015

Lobbying is ‘business as usual’ in the United States, and in many other countries around the world. Some shareholders of publicly traded firms, however, have begun to express concern not only with high levels of executive compensation, but also with the vast sums of investors’ money spent on political lobbying. Last week 29 percent of shareholders attending Citigroup’s annual meeting took the unusual step of supporting a resolution demanding that the company provide an annual, detailed statement of all lobbying activities. This sounds good, but means that 71 percent of Citi shareholders failed to support the effort, even though the motion was quite bland, since it called for accounting transparency rather than reduced expenditure on lobbying.


Lobbying is just one way US companies influence their country’s lawmaking. There are also political donations and the “revolving door” — former legislators, officials and political staffers becoming lobbyists.

“It’s appalling, it’s disgusting, it’s wasteful and it opens the possibility of conflicts of interests and corruption,” said Jim Himes, a Democratic congressman, former Goldman Sachs banker and, according to the New York Times, to whom he made those comments in 2013, “one of the top recipients of Wall Street donations”. An even more appalling thought is that the US has tougher controls on lobbying than most other democracies.

Michael Skapinker, “Citi investors open a new front in the war on lobbying“, Financial Times, 7 April 2015 (metered paywall).

Does this mark the beginning of an outpouring of protest by shareholders of lobbying activity – and corruption in general – in the United States? Not very likely, in my opinion. I hope that my prediction is wrong.

government competence and capital punishment

Monday, May 4th, 2015

It is an irony that those who most strenuously defend the death penalty are often the greatest sceptics of government competence. Wrongful executions by a fallible state can never be undone. More than 140 people [in the United States] have been exonerated on death row since 1973. Some of the wrongfully convicted have not been so lucky.

Edward Luce, “Dead law walking — US capital punishment“, Financial Times, 4 May 2015.

Readers may wonder why the FT columnist singles out the US for criticism. There are two reasons. First, Mr Luce (born 1968) is the newspaper’s sole Washington columnist. Second, the United States ranks surprisingly high in the capital punishment league. As Mr Luce points out, “The US ranks fifth behind China, Iran, Saudi Arabia and Iraq in the number of people it executes, according to Amnesty International. That puts it ahead of Yemen, Pakistan, North Korea and Sudan. Poor company indeed.”

The US would probably place higher were it not handicapped by local restrictions. (Capital punishment is legal in only 32 states of the union.)

The US is no slouch either, when it comes to incarceration. This might soon end, however, should Hillary Clinton win the presidency and keep a campaign promise. Mr Luce, in the same column, explains:

Last week, Mrs Clinton … called for an end to the era of “mass incarceration”. With 2.2m people behind bars, the number of people the US keeps locked up is only a shade under the combined total of China and Russia. Much of that was due to her husband’s embrace of the “three strikes and you’re out” mandatory sentencing.

economists’ views on UK policy issues

Sunday, April 19th, 2015

UK political parties have issued manifestos in preparation for the upcoming general election. The politicians have had their say. What type of manifesto might we expect from professional economists? Tim Harford, FT ‘undercover economist’, interviewed seven top British economists and asked them what policies they would implement were they in charge of running the country. He found a surprising degree of consensus, possible only because he deliberately ignored economists known to have extreme political views.

My selection of economists was mainstream — no Marxists or libertarians — but arbitrary. There is no pretence of a representative survey here. But there were common threads, some of which may surprise.

Let’s start with the deficit which, if we are to judge by column inches alone, is the single most important economic issue facing the country. Yet with the chance to push any policy they wished, none of my economic advisers expressed any concern about it. ….

Economists have a reputation for being low-tax, free-market champions. Yet none of my panel fretted about red tape, proposed any tax cuts or mentioned free trade. Other untouched issues included the National Health Service, immigration and membership of the EU. Nobody suggested any changes to the way banks are regulated or taxed. ….

So what would the UK look like with my board of economists in charge? We’d have more borrowing and considerably more investment — in housing, in big infrastructure, in science and in green cities. Taxes seem unlikely to fall but they would be rationalised, with a focus on energy efficiency and a transparent taxation of income and housing wealth. Inequality would be in the spotlight.

The economists seem happy to leave the politicians to their usual arguments about the EU, immigration, the price of beer and the problem of tax-dodging. Noting that every party makes similar promises about funding the National Health Service, the economists have let it be.

Tim Harford, “The economists’ manifesto“, Financial Times, 18 April 2015 (metered paywall).

Tim Harford’s ‘board’ contains the following economists: Nick Stern (LSE), Jonathan Haskel (Imperial College, London), Gemma Tetlow (Institute for Fiscal Studies), Simon Wren-Lewis (Merton College, Oxford), Diane Coyle (University of Manchester), John van Reenen (LSE), Kate Barker (author of the 2004 Barker Review of Housing Supply). For details, read Mr Harford’s full column in today’s Financial Times.

the rise and fall of AEI

Tuesday, April 7th, 2015

Journalist David Warsh marks the recent death of conservative economist John Makin (born 1943) by reviewing his positive contribution over three decades to the American Enterprise Institute (AEI). The AEI is a privately funded, conservative ‘think tank’ founded in 1938 and based in Washington, D.C.

In 1984, AEI hired Makin, a University of Chicago PhD, as part of an effort to improve its tarnished image as a serious research institute.

A few years earlier, WSJ editorial writer Jude Wanniski had used a year in residence at AEI as a planform from which to launch his 1978 best-seller, The Way the World Works: How Economies Fail – and Succeed, one of the first in a series of works by various authors that later  would be deemed “neo-conservative.”

With its twin contentions, that personal tax cuts would pay for themselves by boosting growth, and that the Smoot-Hawley Tariff Act of 1930 had caused the Great Depression, the book caused no end of embarrassment among the traditionally conservative economists at AEI.

With the election of Ronald Reagan in 1980, the AEI moved towards the center of the economic debate, hiring Makin, among others. There began in Washington what was, in retrospect, a golden age of consensus.

Today the most peripatetic figure among the AEI’s roster of experts is probably attorney Peter Wallison ….

The basic cause of the 2008 financial crisis, he [Wallison] argued [in 2011], was simple. It was government housing policy, particularly the two giant government- sponsored enterprises, Fannie Mae and Freddie Mac,that bought mortgages from banks, savings and loan associations and other lenders,

A new book by Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again (Encounter, 2015) extends the argument that that government policies were solely to blame ….

No sensible analyst thinks that political pandering to poor people is a sufficient explanation of the crisis. Probably not since Wanniski’s The Way the World Works has the gap been so great between a non-economist writing for a think-tank and the relevant community of professionals. John Makin stayed the course, remained well within the limits of matters on which experts can be expected to legitimately disagree. AEI has gone back to cranks.

David Warsh, “Back to Cranks“, Economic Principals, 5 April 2005.

Branko Milanovic on Adam Smith on inequality

Sunday, April 5th, 2015

Serbian-American economist Branko Milanovic has written a very interesting blog on Adam Smith’s opinion of those who occupied the top of the food chain in the 18th century. (Spoiler alert: Smith, unlike many of his professed admirers today, was no friend of the wealthy.)

[In Adam Smith’s 1776 treatise] “The Wealth of Nations” …, not only are the rich taken to task for their vanity, conceit, and concern with “trinkets, baubles and trifles”, as they were in [his earlier book] “The Theory of Moral Sentiments”, but … the origins of their fortunes are exposed and often found in spoliation, monopoly and “conspiracy against the public”, as in the famous passage:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary. (WoN, Book I, Chapter X)

Just think of Davos, Bilderberg and the Trilateral Commission.

Similarly, the rich civil servants never forget to overpay themselves,

The emoluments of offices are not … regulated by the free competition of the market, and do not, therefore always bear a just proportion to what the nature of the employment requires. They are, perhaps in most countries, higher than it requires; the persons who have the administration of government being generally disposed to reward both themselves and their immediate  dependents rather more than enough. (WoN, Book V, Chapter 2)

Now think of many governments across the world, from Azerbaijan to Zimbabwe, and international organizations from the World Bank to World Trade Organization.

And what is government?

Civil government … is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all. (WoN, Book V, Chapter 1)

The last statement … is so similar to Marx and Engels’ one from the “Communist Manifesto” (government as “a committee for managing the common affairs of the bourgeoisie”) to be  practically undistinguishable.

Branko Milanovic, “Adam Smith, income inequality and the rich“, Global Inequality, 30 March 2015.

Branko Milanovic (born 1953) is currently visiting professor at City University of New York Graduate Center. He was formerly lead economist in the World Bank’s research department.

Milanovic’s blog post was stimulated by a 2010 publication of Harvard economist Amartya Sen:

Amartya Sen, “Adam Smith and the contemporary world“, Erasmus Journal for Philosophy and Economics 3:1 (Spring 2010), pp. 50-67.

I read Sen’s paper with great interest, and hope to blog on it sometime in the near future.

modern dictators

Sunday, March 22nd, 2015

Economist Sergei Guriev and his co-author, political scientist Daniel Treisman, examine new forms of dictatorship that are based on manipulation of information rather than mass violence. The full Working Paper “How Modern Dictators Survive: Cooptation, Censorship, Propaganda, and Repression” (March 2015) can be downloaded here. A summary can be viewed at the link below. Both versions are ungated, so can be accessed without registration or payment of fees.

Dictatorships are not what they used to be. The totalitarian tyrants of the past – such as Hitler, Stalin, Mao, or Pol Pot – employed terror, indoctrination, and isolation to monopolise power. Although less ideological, many 20th-century military regimes also relied on mass violence to intimidate dissidents. ….

However, in recent decades new types of authoritarianism have emerged that seem better adapted to a world of open borders, global media, and knowledge-based economies. From the Peru of Alberto Fujimori to the Hungary of Viktor Orban, illiberal regimes have managed to consolidate power without fencing off their countries or resorting to mass murder. Some bloody military regimes and totalitarian states remain – such as Syria and North Korea – but the balance has shifted.

The new autocracies often simulate democracy, holding elections that the incumbents almost always win, bribing and censoring the private press rather than abolishing it, and replacing comprehensive political ideologies with an amorphous resentment of the West. Their leaders often enjoy genuine popularity – at least after eliminating any plausible rivals. State propaganda aims not to ‘engineer human souls’ but to boost the dictator’s ratings. Political opponents are harassed and defamed, charged with fabricated crimes, and encouraged to emigrate, rather than being murdered en masse.

Sergei Guriev and Daniel Treisman, “The new authoritarianism“, VoxEU, 21 March 2015.

Sergei Guriev is Professor of Economics at Sciences Po-Paris. Daniel Treisman is Professor of Political Science at UCLA.

return of Luddite anxiety

Saturday, March 14th, 2015

FT ‘undercover economist’ Tim Harford has written an excellent column on resurgence of ‘Luddite anxiety’. The Luddites were English textile workers who protested from 1811-17 by smashing new power looms that threatened to destroy skilled jobs.

The full column is recommended reading. Here are two excerpts that caught my eye:

[W]e can all see … that technology has made us richer while employment is as high as ever. (The least appreciated job-creating invention may well have been the washing machine, which helped turn housewives into women with salaries.)


[T]he Luddites weren’t idiots who thought that machines would destroy jobs in general; they were skilled workers who thought that machines would devalue their specific jobs and their specific skills. They were right about that, and sufficiently determined that stopping them required more than 10,000 troops at a time when the British army might have preferred to focus on Napoleon.

Tim Harford, “Man v machine (again)“, Financial Times,14 March 2015 (metered paywall).