Monday, July 14, 2014

Mind the gap

A few years ago, I wrote an article to propose progressive taxation not based on wages alone, but based on the gap between CEO and and worker pay. Apparently, I'm not the only who noticed the problem and proposed a solution. The Truth-Out website is running an article to show that there is a lot of citizen activism happening to start reigning in CEO pay.

It is interesting to note that the debate on minimum wage has been framed to exclude discussion of this gap. Why is it OK for the gap between CEO and worker to be left out of the debate? Probably because its easier to justify holding down the minimum wage without bringing CEO pay into the debate.

As the debate has moved to CEO pay, people are trying to pin down the exact ratio between CEO pay and worker pay. There is a meme floating around suggesting that CEO to worker pay is 475 to 1. I don't recall seeing that number anywhere else. Politifact has done a good job of fact-checking that number and suggests that the most likely ratio is somewhere around 300 to 1. That is still a very high ratio, even when not compared to most other countries where the ratio is no higher than 50 to 1.

Even at 300 to 1, I doubt any economist would say that ratio is sustainable. CEO pay, when left unchecked, leads to flat or sideways stocks, lower pay for workers, lower enthusiasm for the work to be done and a sense of unfairness and unease. Is there anyone who would seriously contend that one man can be 300 times more efficient than another?

The populist movement to reign in CEO pay while regulators do nothing is indicative that the government has forgotten who they work for. The action at the state level is telling, and it's only getting started.

The lax attitude on taxation and on regulation are based on wishful thinking, a false premise of, "Gee, that could be me there. *I* could be raking in the dough, so why would I want to do damage to a position I want to attain someday?"

Here's why. Try to think of the economy as an ecology. Now imagine an ecology where there is balance. There is no dominant species. Everything finds a place to live, something to eat. Sure, you'll have extinctions here and there, but in general, everything that dies at the top of the food chain feeds the bottom. That's the tax on the 1%.

The number on the check is now disconnected from the labor or performance of the CEO. This is because CEO pay is largely a matter between friends. The pay of the programmer for the company is not decided by friends of the programmer. The pay of the programmer is decided in an adversarial process known as the traditional hiring process. Interview, research and offer a salary if the market decides that is right for the company. A deal among friends cannot contemplate market forces - it is socialism, but you won't hear a CEO say that.

That is what people are complaining about. It is economically sustainable for CEO pay to be decided by his buddies when everyone else has to perform according to expectations in the market. We saw that in the collapse of the housing bubble in 2008. With a lot more oversight and citizen activism, we can restore some balance to our economy.
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