Wednesday, May 18, 2005

Alan Reynolds at Opinion Journal

Our senior economist Alan Reynolds is once again in print with the Wall St. Journal. Check out his thoughts on the perseverance of the American Dream here.

Here's a paragraph:

To repeat, there is no evidence that it has become harder to get ahead through hard work at school and on the job. Efforts to claim otherwise appear intended to make any gaps between rich and poor appear unfair, determined by chance of birth rather than personal effort. Such efforts require both a denial that progress has been widespread and an exaggeration of income differences. To deny progress, the Times series claims that "for most workers, the only time in the last three decades when the rise in hourly pay beat inflation was during the speculative bubble of the 90's." Could anyone really believe most workers have rarely had a real raise in three decades? Real income per household member rose to $22,966 in 2003 from $16,420 in 1983 (in 2003 dollars)--a 40% gain.

12 comments:

James Elliott said...

Ignoring other very real statistics, such as the net worth of the average African-American family is $5,000, a Latino family's is $9,000, and a white family's is $88,000.

No, he's absolutely right. White people just work harder. There are no institutional barriers whatsoever.

Tlaloc said...

I love the "they just work harder" arguments. Anyone who has actually worked in a large company knows how ridiculous it is. The exectuives make many many times the money I do and generally do much less actual work. Sorry, I don't consider celebrity golf tournaments or hosting industry parties to be work. Middle management is even worse, they literally contribute nothing to the company. The exectuives don't do much but except make the occasional strategic decision but at least that's something. The middle managers (also paid substantially more) do nothing but create management fads and then write reports on why workers are too busy to actually do their jobs (could have something to do with the fads).

Wealth is by and large a matter of privelege. Bush never worked hard and certainly was never successful. The Walton's inherited their wealth. Ditto Paris.

To get an idea how disconnected from reality this american aristocracy is read this:
http://www.gnn.tv/B02427

Hunter Baker said...

You guys are both out to lunch on this one.

First, I doubt whether either of you has anything approaching the authority Alan brings to the table in this discussion.

Second, I, too, have been a corporate guy and have observed that hard work does very often pay off. People notice and the rise begins. Tlaloc, given the fact that you post to this blog more than any of us, I suspect your output may be lacking.

Finally, I've had the chance during the last few years of my life to get to know some high powered executive types. Generally speaking, I think they earn their pay. Their work lives are parceled out in 5-10 minute segments and includes a lot of social stuff you'd often just rather not deal with.

As far as institutional barriers, I think the real issue is education and family background. If you want some method of redress there, I suspect you should include the white kid who grew up in a trailer park. He's got no connections, no family history of education, etc.

Tlaloc said...

"Second, I, too, have been a corporate guy and have observed that hard work does very often pay off. People notice and the rise begins. Tlaloc, given the fact that you post to this blog more than any of us, I suspect your output may be lacking."

Actually after I got a promotion a lot less was expected of me and it pissed me off. I did a hell of a lot more for the company before that. Now I get paid more and do less and I'm still near the bottom of the totem poll. I *know* for a fact that above my boss the managers do two things: write reports for the managers above them and write requests to the emplotyees below them for reports. Period.



"Finally, I've had the chance during the last few years of my life to get to know some high powered executive types. Generally speaking, I think they earn their pay. Their work lives are parceled out in 5-10 minute segments and includes a lot of social stuff you'd often just rather not deal with."

As before, celebrity golf tournaments and throwing industry parties is not work. Work actually accomplishes something. Beyond which given the obscenely bloated executive salary it is physically impossible for them to earn their salary. Not only would they have to be actually working but they'd have to be doing the work of over 300 employees on average (average 2004 major company CEO pay was 9.8 million, average non-supervisory worker pay was 27 thousand, Pearl Meyer & Partners report). That says nothing about the perks package in addition to base pay. Do you honestly think you've met a CEO who works 300 times as hard as any of his employees? Of course not. It's absurd.



"As far as institutional barriers, I think the real issue is education and family background. If you want some method of redress there, I suspect you should include the white kid who grew up in a trailer park. He's got no connections, no family history of education, etc."

I tend to agree with you here. I don't think racism is nearly so big an issue anymore, rather it's classism and due to their history in this country minorities have often gotten shafted economically so of course they are disproportionately poor. Nobody discriminates against Powell or Rice because the only color that matters is green.

Tlaloc said...

You know things are out of control when even Buckley is criticizing the avarice of executives.

http://www.nationalreview.com/buckley/wfb200504200907.asp

Melchior Sternfels v. Fuchshaim said...

JFE, I'd like to know the source of your figures. You may well be right, but I'd like to know how these numbers were arrived at.

Also, I'd be curious to know how you respond to the following assertions:

To stay out of poverty in America, it's necessary to do three simple things, social scientists have found: finish high school, don't have kids until you marry, and wait until you are at least 20 to marry. Do those three things, and the odds against your becoming impoverished are less than one in ten. Nearly 80 percent of everyone who fails to do those three things winds up poor. (Steven Malanga, "The Myth of the Working Poor", City Journal Autumn 2004).

Do you dispute these assertions? Are not the three things to do to avoid poverty chiefly matters of personal, and not social, responsibility?

James Elliott said...

Source. Should be the 2000 Census. Might be the 2003 HHS poverty stats. I'll have to double check.

You can check my archives (http://lospunditos.blogspot.com) for some posts on poverty. They should be among the first.

As to your proposed dilemma, I would have to say that it ignores a myriad of other systems at work. The number one indicator of whether or not one will be poor is if their parents were poor. "Impoverished" is a subjective phrase. For example, the federal poverty guidelines list a single earner's income as $9,000 to qualify as poor. This ignores cost of living requirements. For example, in Santa Clara County, California, in 2003, the minimum necessary income to make ends meet for a single person was $24,000. The average 2002 U.S. college graduate made $18,000 in 2003.

Marriage helps lift people out of poverty because with childless expenses, dual-income families require less to live on. In 2003, for a childless, married couple in Santa Clara County required only $36,000 to make ends meet. That means two college grads (the over 20s), making the average grad salary, meets minimum income standards. Now consider that only 25% of Americans will graduate college before the age of 36.

Speaking as one of those who made that average income his first year out of college, it's not much of a life, even at twice the federal poverty limit for a single person. No health insurance, for starters.

Personal responsibility arguments always ignore the fact that no person exists in a vacuum or a microcosm. There are myriad systems at work in people's lives. See one of my back posts for info on how federal poverty lines are calculated (here's a hint, they're about 9 months out of date by the time they're released and there's no variation for cost of living in different states or counties).

Alan Reynolds said...

The figures often cited on CEO compensation are even worse than those used in income distribution debates. I have chapter on the topic in a forthcoming book edited by Bill Niskanen. In the meantime, there was a short primer on the topic in my column "CEO Pay Parade":

http://www.cato.org/research/articles/reynolds-040411.html

Tlaloc said...

Read your article on CEO pay parade.

1) stock option values- sure they are measuring in different ways but the difference is nowhere near enough to make up for the huge difference in pay. So maybe 250x instead of 300x the pay of actual workers. Either way it's far in excess.

2) Your "lesson 3" was purely disingenuous. You compare selling stock to selling a home saying "selling off assets is no different than selling a home -- it does not make an executive wealthier, and it should not be counted as income." Sure. EXCEPT THAT IN THIS CASE THE COMPANY GAVE THE HOUSE TO THE CEO IN THE FIRST PLACE. See how that just slightly changes things? It most definitely is income to recieve a gift which you then sell.

3) "Another report described another executive's loan repaid with interest as "stealth pay." Loans aren't pay, either." Are you really sure that loan wasn't at better than market rates because if it was then yes it certainly is compensation.

4) ""Pay for performance" does not mean tying future pay to last year's stock performance." Fine. Who cares? The issue is the exhorbinant pay as compared to the rest of the company, not based on how the company did.

5) "It will be amusing to watch how those who specialize in griping about CEO pay every year now manage to bravely revise their stories to say CEO pay should fall whether stocks rise or not." CEO pay should be independent of stock price. It should be dependent on the pay everyone else in the company receives. It's not like the CEO makes that big a difference to the stock price in most companies. When they pretend to be more than a figure head the company is in trouble.

Alan Reynolds said...

Tlaloc writes: “ 1) stock option values- sure they are measuring in different ways but the difference is nowhere near enough to make up for the huge difference in pay.”

Impressions about CEO pay are not facts. It is flatly false to count an estimate of the value of options to pay in the year they were granted and then to also double-count the actual value again in the year in which they are exercised. It is also wrong to treat either figure as one year’s pay. The May 8 issue of Forbes counts as 2004 compensation “the value realized by exercised options.” That is compensation, to be sure, but it is not compensation for work done in 2004. Options are often earned over several years and usually have to be held at least four years before they are exercised.

2) Your "lesson 3" was purely disingenuous. You compare selling stock to selling a home saying "selling off assets is no different than selling a home -- it does not make an executive wealthier, and it should not be counted as income." Sure. EXCEPT THAT IN THIS CASE THE COMPANY GAVE THE HOUSE TO THE CEO IN THE FIRST PLACE. See how that just slightly changes things?

If the stocks had been given to CEOs as pay (restricted stock) then it would legally have to have been counted as pay in the year when received. Many CEOs own shares because they created the company (Bill Gates) or because they were required to own shares as a condition of employment. Journalists who counted stock sales as pay did not even claim there was any capital gain at all on the stock sale. There were often big losses from stock sales.

3) "Another report described another executive's loan repaid with interest as "stealth pay." Loans aren't pay, either." Are you really sure that loan wasn't at better than market rates because if it was then yes it certainly is compensation.

It would be a crime for executives to be given or to receive loans at below-market interest rates. Loans were often granted so they could buy shares or exercise options.

4) ""Pay for performance" does not mean tying future pay to last year's stock performance." Fine. Who cares? The issue is the exhorbinant [sic] pay as compared to the rest of the company.”

For those making that particular point “the issue” was change in pay, not the level. They said pay should not have gone up if the stock price fell during the previous year. But incentive pay is about the future, not last year.

5) "It will be amusing to watch how those who specialize in griping about CEO pay every year now manage to bravely revise their stories to say CEO pay should fall whether stocks rise or not." CEO pay should be independent of stock price. It should be dependent on the pay everyone else in the company receives. It's not like the CEO makes that big a difference to the stock price in most companies. When they pretend to be more than a figure head the company is in trouble.

The claim that top executives don’t matter, and are nothing more than figureheads, is indefensible. It’s a tough job, and risky. Stock prices often fall sharply when a great CEO leaves or dies (and sometimes rise when a bad CEO gets fired).

I have a long chapter on all these topics and more (Ch 17) in William Niskanen’s excellent new anthology, After Enron (Rowman & Littlefield).

Tlaloc said...

"Impressions about CEO pay are not facts. It is flatly false to count an estimate of the value of options to pay in the year they were granted and then to also double-count the actual value again in the year in which they are exercised."

You ignore that this factor is far too small to matter. CEOs still get paid many dozens of times what the employees who do actual work do regardless of the (also excessive) stock options.



"There were often big losses from stock sales."

And? If I am dumb enough or have outside motivation to sell my house at a loss that's my choice. I still had a house to sell. The CEOs still got stock. Whether they sell it intelligently doesn't change the fact that they are recieving something from their workplace that others do not get. We call that "compensation."



"It would be a crime for executives to be given or to receive loans at below-market interest rates. Loans were often granted so they could buy shares or exercise options."

Again: And? Did the CEO get something from work that others couldnot get? Yes. Does that mean it was a form of compensation? Yes. Regardless of the form.



"The claim that top executives don’t matter, and are nothing more than figureheads, is indefensible."

That's funny cause I defend it. If you talk about some small start up then yes the CEO does stuff. If you talk about an established good sized company? Forget it. Working on the back swing in between industry schmooze parties is not work, Alan.



"It’s a tough job, and risky."

God yes those golf balls are fast. Sometimes they land near you! Puh-lease. Risky? What risks? As was recently demonstrated here in Oregon you can get sent to jail for commiting crimes and still get an obscene perk package on the way out. The risks are all taken by the people low on the totem pole. They are the ones who risk their families welfare, their homes, their livelyhood. The CEo risks whether he'll be able to take three or only two vacations this year to the Carribean.

Go reread what happened at Enron/Worldcom/Tyco and ask who risked more.



"Stock prices often fall sharply when a great CEO leaves or dies (and sometimes rise when a bad CEO gets fired). "

Indeed but stock price is based on absolutely nothing concrete. It is all perception. Many people (who have never actually worked with one) mistakenly assume the CEO matters substantially.



"I have a long chapter on all these topics and more (Ch 17) in William Niskanen’s excellent new anthology, After Enron (Rowman & Littlefield)."

I suggest you spend some more time in the real world before you write about it. Your contention that CEOs have a risky job is quite frankly disgusting and offensive. They are the most petulant coddled group of children on the planet, they hardly need you to stoke their egos while the people who actually contribute get downsized (sans golden parachute).



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Tlaloc said...

God, it still amazes me how people claiming to be christian can be so gung-ho on the rich and hate the poor.