Bob,
I agree that the tax code is far too accommodating to rich corporate CEOs and to hedge-fund managers. One of the pleasures of reading Paul Krugman’s new book, The Conscience of a Liberal, is to be reminded that during the Eisenhower years the U.S. economy enjoyed explosive growth even though the top income-tax rate was 91 percent! (The tax cut that made John F. Kennedy a hero to supply-side zealots brought that top rate down to 70 percent, or twice what it is today.) In his April 2007 Washington Monthly column, “Tilting at Windmills,” our mutual friend Charles Peters demolished Republican claims that Bush’s tax cuts were responsible for bringing the unemployment rate down to 4.6 percent:
In the twenty-two years since the end of World War II that unemployment has been less than 5 percent, taxes have been higher than they are now twenty-one times. In thirteen of those years, the top rate was 70 percent or higher. In nine, it was 90 percent. That’s right, unemployment less than 5 percent and a tax rate of 90 percent. Actually, in four of those years the unemployment rate was under 4 percent, the lowest it has been.
The economy of that earlier era, as you note in Supercapitalism, was very different from the economy of today—more oligopolistic, more dominated by labor, and more closely regulated by government—but there’s no reason to believe that today’s super rich would deprive us of their profit-generating talents if we required them to pay more in taxes. The purpose of raising their taxes would not be to punish them for making too much money but rather to make them pay their fair share to fund necessary and vital functions of government. They have more to spare and therefore should pay more.
Since we appear to agree on this point, I won’t dwell on it further.
Where we disagree is on the question of whether stratospheric CEO compensation reflects CEOs’ true value in the economic sphere. You think that CEO pay is “outrageous,” but only from the standpoint of social justice. From a market perspective, you don’t think CEO pay is outrageous at all. You think it’s economically rational and reflects the CEOs’ true value to shareholders. In that sense, the headline that the Wall Street Journal’s editorial page slapped on your op-ed—”CEOs Deserve Their Pay” (subscription required)—was perfectly accurate.
In the old days, you write in Supercapitalism, a CEO “did not have to be especially clever or even particularly bright” because the U.S. economy was more plodding and predictable. Today’s CEO finds himself in “a different situation.”
Rivals are impinging all the time—threatening to lure away consumers all too willing to be lured by a better deal, threatening to hijack investors eager to jump ship at the slightest hint of an upturn in a rival’s share price. The modern CEO must therefore be sufficiently ruthless and driven to find and pull the levers that will deliver competitive advantage. There are no standard textbook moves, no well-established strategies to draw upon. … Boards of directors well understand this, which is one reason why executive talent is in such high demand.
That’s true, but only up to a point. Even in today’s relentlessly competitive global economy, the modern CEO is something less than the Nietzchean superman you describe here. Even when he does his job well, his performance is only one determinant of his corporation’s success or failure—a very important determinant, to be sure, but not necessarily the deciding factor. Corporations are complex social organisms, and the factors that make them succeed involve all sorts of human interactions up and down the hierarchy, along with externalities that have nothing to do with corporate personnel at all. This is a reality that the business press, with its relentless focus on any given corporate chairman’s personal dynamism (or lack thereof), is reluctant to face.
To whatever extent the CEO’s performance is intrinsic to the success or failure of his corporation, that is seldom reflected in his level of compensation. In my earlier column, I cited Graef Crystal’s discussion of a business review article arguing that giving the big boss an excess of stock options can actually hurt a corporation by encouraging the boss to take too many risks, the downside of which punish the stockholders more than the boss himself. In a Nov. 12 column, TheNew Yorker’s James Surowiecki applied this logic to the subprime mortgage meltdown. Crystal, as I’m sure you know, has made a career out of cataloging the many, many ways that corporate boards routinely undermine the principle that CEO pay should bear some relationship to the quality of a CEO’s performance. Crystal’s concern isn’t social justice; it’s market efficiency. CEO pay, he argues, seldom makes economic sense.
In your response to my column, you argued that no reforms in corporate governance have thus far had any impact on the growth in CEO pay. The whole effort, you suggest, is futile. I invite you to stop short of that question, at least for now, to reconsider a more immediate question: Does CEO pay really make economic sense? Is it a logical allocation of resources? Does it impose economic costs (if nothing else, on employee morale)? I know you’ve given these questions a lot of thought—certainly more thought than I have—and I just can’t believe you see no market distortions here. Again: Let’s not worry just yet about whether we can figure out the proper recourse for frustrated stockholders. Is the market in CEO salaries behaving rationally?
Tim
