Income Inequality

How to drain the swamp NYT 10/26/17

Article (Opinion): "Trump Made the Swamp Worse, Here's How to Drain It"  

 Hard copy here.

> Trump won in part because of our eroding faith in our governing institutions. Long-term wage stagnation and income inequality has convinced many that the system is corrupt and rigged in favor of the elites - only an outsider like Trump can “clean it up”. The slow growth/income inequality economy that has been the norm for the last decade is a sign that powerful insiders (big business, the wealthy) are using the system to both increase their own wealth and protect themselves from competition.

> Four ways in which this is done - first, the financial sector lobbies for laws (like the mortgage interest deduction) that encourage high levels of debt which can then be securitized (and monetized). With regulations removed, the financial sector has grown too large. Next, intellectual property laws protect both media and pharmaceutical conglomerates. Third, at the state and local level, occupational licensing artificially boosts the pay of those being licensed and restricts entry. And finally, at the local level, zoning laws inflate the home values of the current owners while making it more difficult for newcomers to move in.

> High profits and wealth have been used by the incumbents to fund think tanks and policy research centers and pay for lobbyists who promote policies that support the status quo and stifle competition. Example: Big Pharma funds research that shows loosening patent laws would stifle innovation, instead of increase it. Lawmakers get only one side of the issue.  

> Reform idea - Congressional staffs need to be expanded, upgraded and professionalized so that members of Congress are no longer dependent upon lobbyists for research.

> Reform idea: at the federal level, the OMB (Office of Management and Budget) independently reviews the impact of federal regulations. No such agency exists at the state level. There should be one.

> Reform idea: private philanthropy should fund new interest groups and think-tanks that will make lawmakers aware that other points of view exist besides those of the entrenched wealthy and powerful.

> Authors Brink Lindsey and Steven Teles work for libertarian think-tank the Niskanen Center and have authored the book The Captured Economy.

Two Opposing Views on CEO Pay 6/25/16

Article: ""CEO Pay: Neither rigged nor fair"  

CEO pay was considered problematic in the 1970’s by none other than Peter Drucker when the ratio between it and the average company worker was edging up over 20-1. Now it is a staggering 150 to 350-1, depending on who you talk to. Thomas Piketty blames the disparity for the growing issue of income inequality. There are 2 camps. Pro side (Steven Kaplan of University of Chicago) says pay is market-driven and that abuses are outliers. Evidence: value of firms up 425%, CEO pay up 405%. Evidence: when shareholders have a say on pay, they rarely reject CEO compensation (1.5% rejection rate). “Tournament theory” of pay: high pay is an efficient way of incentivizing subordinates. Evidence: CEO candidates could make as much at a blue-chip law firm or consultant group with less headache, thus the pay is appropriate.

And the con side (Lucian Bebchuk at Harvard) says the market is broken as CEO pay is typically decided by boards made up of CEO peers or recommended by consultants from that same peer group. Evidence: 350-1 ratio mentioned above demonstrates conflict of interest. Evidence: no “clawback” of compensation from CEO’s who have demonstrated incompetence and damaged share prices. 

Personal note: I am reminded of the Thaler paper on NFL draft picks and this quote: “In fact, football teams almost certainly are in a better position to predict performance than most employers choosing workers. Teams get to watch their job candidates perform a very similar task at the college level and then get to administer additional tests on highly diagnostic traits such as strength and speed. Finally, once hired, performance can and is graded, with every action visible on film from multiple angles! Compare that to a company looking to hire a new CEO (or an investment bank hiring an analyst, a law firm hiring an associate, etc.). Candidates from outside the firm will have been performing much of their job out of view. Outside observers see only a portion of the choices made, and options not taken are rarely visible externally. And, even once a CEO is hired, the company’s board of directors is unlikely to be able measure his or her performance nearly as accurately as a team can evaluate its quarterback. In our judgment, there is little reason to think that the market for CEOs is more efficient than the market for football players. Perhaps innovative boards of directors should start looking for the next Tom Brady as CEO rather than Eli Manning”.