Legislating John Rawls?

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In his A Theory of Justice, philosopher John Rawls basically argued that a just society is one that minimizes inequalities among its citizens. In furtherance of that goal, Rawls devised his difference principle which declared that in order for any change to be accepted as an improvement, it must help the least advantaged representative person.

I suspect that Rawls would be happy to endorse the Income Equity Act of 2007, introduced by Rep. Barbara Lee (D-Calif.). The Act aims to limit the compensation of corporate executives in the name of equality. As the Progressive Democrats of America site explains the Act:

Amends the Internal Revenue Code to: (1) deny employers a tax deduction for payments of excessive compensation to any employee (i.e., more than 25 times the lowest compensation paid any other employee); and (2) require such employers to file a report on compensation paid to their employees with the Secretary of the Treasury.

But are corporate executives overpaid? Ralph Nader's Citizen Works offers a handy list detailing the pay of executives whose companies have recently lost a lot of shareholder value due to questionable activities.

On the other hand, George Mason University economist Tyler Cowen in his New York Times column cites research suggesting that executives are not overpaid. To wit:

…in a new paper, "Why Has C.E.O. Pay Increased So Much?," the economists Xavier Gabaix of the Massachusetts Institute of Technology and Augustin Landier of the Stern School of Business at New York University offer a contrarian view. They suggest that the higher salaries for chief executives can largely be explained by increases in the value of the stock market. Viewed as a whole, these salaries are a result of competitive pressures rather than the exploitation of shareholders.

Their core argument is simple. If we look at recent history, compensation for executives has risen with the market capitalization of the largest companies. For instance, from 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional sixfold matching increase (the correlation coefficients are 0.93 and 0.97, respectively; 1.0 would be a perfect match).

So how does this argument work? Better executive decisions create more economic value. If the number of big companies is greater than the number of good chief executives, competitive bidding will push up pay to reflect the value of the talent.

Whole Cowen column here.

Discuss.

NEXT: The GOP Debate: A Look Back with Love

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  1. Even if executives are “overpaid”, the government has absolutely no fucking business whatsoever regulating their pay.

  2. Why did I know before I read it that Rep. Barbara Lee would be D-Calif?

  3. Ba-ba-ba, ba-ba-bra Lee!

  4. I tend to agree that CEOs are often paid more than they are worth to the shareholders of the company, but it’s up to the shareholders (by way of voting their shares) to control this. Witness the debacle with the Home Depot CEO–shareholders up in arms regarding his high pay and lousy stock performance–he tried to squelch the comments regarding this at the annual meeting, which led to delicious coverage in the media about the shareholder’s meeting that wasn’t, which led to his resignation.
    It’s not the government’s job to control this.

  5. Why did I know that Stern Business School would argue for higher pay for its graduates? I think their contrarian report had its conclusions written down before they ever looked at a single datum. Still, the government regulating CEO pay is just laughable.

  6. The stock market is overrated as a measure of the health of the economy, and increases in stock value are overrated as measures of a company’s performance.

    Given how much of the rise in stock value resulted from pump and dump efforts by people like Ken Lay, whose compensation was tied to increasing stock values, this correlation means less than it appears.

  7. I’ve always believed that a CEO, if capable of increasing the value of a company for its shareholders, deserves the extraordinary amount
    of money he is paid. It’s a pretty simple idea. We’re talking about a handful of people who have these jobs (in relation to the number of middle manager and lower level employees). If the BoD of XYZ decides that their top executive brings enough value to the company to warrant a $125mm copmensation package, then what’s the beef with that?? There’s a very limited selection of candidates for the job in a high pressure, high risk environment, and they’re being paid out of the company’s own assets.

  8. I think Barbara Lee and her comrades are overpaid.

  9. I think their contrarian report had its conclusions written down before they ever looked at a single datum.

    So what? Are you suggesting the report is flawed? If so, say so and why.

  10. I’d be tempted to agree that Fortune 500 executives are overpaid. I’d be tempted to agree that professional atheletes are overpaid. Also movie stars, successful authors, sculptors, painters, plastic surgeons, software engineers, physical chemists, stockbrokers, ministers. prostitutes, and bar owners.

    However, the market makes these decisions far better than I, or any one else ever could. All other system for calculating “just” compensation have hindered economic growth at best, delivered universal poverty at worst.

    Those who don’t learn from history…

  11. But joe, look what happend to Ken Lay. And the penalties for committing financial fraud as a top level executive are even worse.

  12. Worse now. Ugh.

  13. …and increases in stock value are overrated as measures of a company’s performance.

    You mistakenly hit on something here joe. Stock value is not an indication of a company’s performance; it’s an indication of its future value discounted to today’s dollars.

  14. Joe, do you support Rep. Lee’s bill?

    Would you encourage your congresscritter to support it?

  15. “The stock market is overrated as a measure of the health of the economy,”

    QFMFT!!!!!

  16. I tend to agree that CEOs are often paid more than they are worth to the shareholders of the company, but it’s up to the shareholders (by way of voting their shares) to control this.

    Well put. Even worse, many of the politicians who complain about CEO pay are major stockholders and board members themselves. They will take the opportunity to pander while simultaneously voting for CEO pay hikes to protect their own stock.

  17. I can see it now, “contract out all jobs that make less than a twenty-fifth of what the CEO wants to make”.

  18. x.y,

    It’s ESTIMATED future value, which is often based more on speculation than actual performance, and is subject to such gimmickery as slashing payrolls and putting out estimates that assume the same sales and production won’to take a hit from the cost-cutting.

    Ska,

    There is plenty of room for stock-inflating skullduggery before one is in danger of getting busted for a felony.

  19. CEOs may be overpaid, but the shareholders and the Board of Directors have more right to decide what to pay CEOs than politicians (or philosophers)*. I recognise that part of the problem is cronyism between the CEOs and the boards – which may be a reason to have better rules on the selection of boardmembers.

    *Most modern philosophers are VASTLY overpaid.

  20. But joe, look what happend to Ken Lay. And the penalties for committing financial fraud as a top level executive are even worse.

    Isn’t that why we have the much-despised Sarbanes-Oxley? And does anyone really believe that anything more than a tiny fraction of fraud is actually discovered? Frankly, I think paying an executive based on hypothetical future value *is* fraud.

    That said, this law is crap. Stratospheric executive pay is largely a cultural phenomenon. You don’t see nearly as much of it outside America.

  21. This is terrible legisation for the moral reasons noted above, i.e., that the government has no business dictating the limits of what people earn.

    Other issues (just off the top of my head):

    1. How to define “employee.” I’m sure some creative attorneys could make CEOs and other high-paid employees “independent contractors.” Not sure how that would fly with the SEC et al., but you get the gist of what I’m saying.

    2. Let’s say a janitor at Kellog’s makes $25,000 per year. So the CEO can only make $625,000?

    3. How to define “compensation.” Do we include options, stock grants, dividends, perquisites, etc.?

    4. How would this affect partnerships, limited liability companies, and other alternative business entities? Many owners are not paid a salary, i.e., they are paid from company profits/losses. Say they have a good year. What happens to those “excess” profits, er, compensation?

    5. In many (probably most) cases, shareholders can already control this problem by voting their shares. It’s self-regulating.

  22. Joe, of course, sees through the gimmicks and skullduggery. Must be making a fortune on the market!

  23. Ayn Randian,

    I don’t really know enough about tax law to have an opinion about the specifics.

    In general, I only support tax breaks when they promote activities that are 1) worth the foregone funds and 2) wouldn’t have happened otherwise.

    I’m not sure allowing corporations to avail themselves of employee-salary tax benefits for salaries of $100 million qualify.

  24. The feds could simply do the same thing that they do to the states where no company can get government contracts unless the CEO makes less than 25 times what the lowest paid worker makes. And withhold state aid if states don’t enact the same policy.

    But they’re not that stupid, right?

  25. joe – while this is very true (if I find the report I read about the number of public companies that have comitted financial fraud in the last 8 years – and it’s a staggering number), reducing the CEO’s pay does not address this issue at all.

  26. Just to clear up some confusion, this bill doesn’t dictate to anyone what they can pay their CEOs.

    It eliminates a tax deduction for salaries above a certain limit.

  27. Ska,

    I didn’t offer that comment as a justification for the law, but to refute the point that these high CEO salaries must be worth it, because stocks have gone up.

  28. It’s ESTIMATED future value, which is often based more on speculation than actual performance, and is subject to such gimmickery as slashing payrolls and putting out estimates that assume the same sales and production won’to take a hit from the cost-cutting.

    Yes, joe, I know it’s “ESTIMATED.” That’s why I said stock price at any give time is an “indication” of its future value in today’s dollars. And even if I accept your *correction*, you’ve just admitted that your previous explanation of what stock price represents is wrong.

    Now, before you go off throwing words like “speculation” around, perhaps you should spend some time thinking about what investment banking analysts do. It’s highly-researched and vetted speculation. Sometimes it’s right, sometimes not. But there are huge incentives for being right. So it’s not like people are randomly speculating one way or the other. If they were, I doubt very strongly these i-banks would stay in business very long.

  29. I don’t think there should be a law on CEO pay, but I also don’t like this statement:

    However, the market makes these decisions far better than I, or any one else ever could.

    The market is a bunch of fallible individuals making decisions, often for irrational reasons. In the aggregate, market processes can often lead to rational outcomes. But when you’re talking about small numbers of people who often aren’t risking their own money (they are risking the company’s money, and the company is a separate entity), and who may be operating on short time horizons, there’s no guarantee that those individuals will make terribly rational decisions.

    I’m fine with letting the excess pay problem (and it is a problem if people controlling big organizations get paid tons to perform badly) shake out in the private sector, but the idea that “the market” decides with some great genius, especially in cases like this, is just laughable. “The market” is a bunch of people.

    Interestingly, when the people making decisions are Volvo owners buying organic produce, few on this forum would make the mistake of attributing any great wisdom to them. In those cases, the individuals making economic decisions are (rightly) regarded as individuals who may not be rational and are certainly fair game for criticism. But when the individuals concerned are Board members deciding CEO pay, suddenly it’s “the market” and hence a font of wisdom.

  30. Let me rephrase: Over the long haul, “the market” does tend to converge toward better decisions than a single decision-maker could get. But let’s not point to every overpaid CEO as the wise decision of “The Market.”

  31. kdwmson | November 30, 2007, 11:42am | #

    Joe, of course, sees through the gimmicks and skullduggery.

    No, like just about everybody else, what stocks I own are in a fund whose name I can’t remember.

  32. x,y,

    I wasn’t correcting you. I was going with your idea. Easy there, big fella.

    And even if I accept your *correction*, you’ve just admitted that your previous explanation of what stock price represents is wrong. No, it doesn’t. I don’t think you even understand what I wrote.

    If you had, you would have realized that noting that investments bankers are often right about the future values of the stocks doesn’t have anything to do with the point that these future values are, themselves, increasingly driven by speculation.

    Do you actually know what the term “speculation” means when used in a discussion about stocks, or are you just applying the dictionary definition?

  33. And just so I’m clear, I’m opposed to all forms of government tax-incentives, including the status quo.

  34. Actually after reading all the comments (which shows why this post is confusing – it starts with a proposed tax law and ends with a “are CEOs paid too much?”), it just seems like a way to increase tax revenue on the companies who pay their CEOs the most. Which is pretty sketchy. The logic behind the proposed law is faulty.

  35. Sorry if I’m cranky. Yesterday afternoon I gave a seminar where the distinction between average outcomes and the outcome of a single event (in physics experiments) was a crucial point. So I’m Market forces can indeed lead to very rational and efficient outcomes, far better than any planner could give. However, we can’t point to any specific transaction as being the product of market wisdom. Lots of individual decisions are irrational and sub-optimal. The only thing that “the market” can do is set the context in which those decisions are made.

  36. Actually, it’s a tax on the companies whose payrolls are the most unbalances.

    The logic behind the law is that corporations tend to change their behavior in response to economic incentives.

  37. Fair enough, joe.

    My problem lies with this piece of socialist language:

    excessive compensation

    And then defining with some arbitrary number, like 25 x $.

    I think that Ms. Lee gets “excessive compensation”, because congresspeople should make just enough to keep them off of my street corners. And my front porch with a pizza in hand (although that would be pretty funny…no tip for you mr. rangel).

  38. Randian,

    Would it still be socialist if it was a CEO declaring that the janitors made too much, or is “excessive compensation” only a socialist term when the “excess” is in the eight digits instead of four?

  39. My mistake joe. I see that you weren’t endorsing the view that a stock’s price reflects its past performance, only that past performance is an overrated way to price stock. Now, that apology out of the way, I doubt that any serious investor — ones that can buy and sell enough shares to send market signals and change prices — actually believe past performance has much to do with a stock’s price. So I don’t understand what you mean when you say it’s “overrated.” Overrated by whom?

    And yes, I understand the different usages of specualtion (dictionary vs. investor). My guess is I’m a lot closer to the industry than you are, so you may assume I’m using words technically. I would note that you were the first person to use the word “speculation.” I merely noted that it seemed you weren’t being fair enough with your word choices because the speculation done by serious investors is backed up by copious amounts of research.

  40. “Are you suggesting the report is flawed?”

    I think my statement that, “their contrarian report had its conclusions written down before they ever looked at a single datum” pretty much says that, yeah.

    They devised a model to get the conclusions they wanted, and the model fails to factor out any changes in consumer culture, globalization, technological efficiency, supply chain efficiency, and on and on.

    It assumes that the best CEOs go to larger firms without any justification for that assumption. It also assume that the best CEOs get paid the most, with weak justification.

    They make no bones about it: they say, “In our view, the rise in CEO compensation is a simple mirror of the rise in the value of large US companies since the 1980s” yet they never explore alternative explanations for the rise of those companies and whether there is causation.

  41. The sad reality about executive compensation is that it’s the product of a rigged market where top positions are usually not advertised, but instead offered to a select group of executives already working for the company or well connected outsiders. I’d love to see the day when such jobs are openly advertised and applicants would bid on them by stating their compensation requirements, and whether they’re willing to do without golden parachutes if they screw up. It’s not going to happen, but it’s nice to dream…

  42. Lamar,

    I haven’t read the report. Do the authors say there is causation? Or are they merely pointing out the correlation (which not only very strong but makes intuitive sense)? Serious question.

  43. I doubt mailroom clerks will be getting big raises and CEOs will be taking $50 million pay cuts so the company doesn’t get hosed on nondeductible wages. It ends up with companies paying more taxes, bottom line.

    If the lowest paid employee made $25K, then the deductible portion of the CEOs pay would be $625K, as per the article and an above example. CEOs aren’t going to go from $100 million pay packages to just under $1 million. Companies are just going to be paying 35% of the difference between the CEO’s pay and the multiple of the lowest paid employess. The gov’t gets more taxes, the shareholders get lower profits.

    What is the likelihood of this actually becoming law?

  44. joe, it’s socialist when the government makes such laws. If a janitor doesn’t like his wage, he is free to quit; CEOs can make decisions like that because their employees chose to work there. Trust me, I know A BIT about what socialism does to people.

  45. Still, the government regulating CEO pay is just laughable.

    If the company wants to avoid this regulation, then they should just avoid the corporate form, and especially any corporate form traded on a government regulated market. Just organize privately and you can run the business howsoever you want, and pay the CEO whatever you want.

    However, if you do avail yourself of the special government-provided benefits of the corporate form then you need to do what the government wants. Sort of analogous to how welfare recipients lose their rights against unwarranted searches.

    As we found out from one of his “disclosures” yesterday, ronnie likes to play the market. Of course, he is going to tell you that publically traded corporations are consistent with libertarianism. Doesn’t make it true. Stop yer sobbin’.

  46. QFMFT!!!!! = What?

  47. x,y,

    Ah, light breaks! Now I get it. I was using “performance” its dictionary-defition sense, to refer to how the company is doing, not in the sense of how its stock performed. Since I was making the point that those two things are, in fact, loosely related, I can see how that could cause some confusion. May bad.

    I meant that stock market performance is overrated as a measure of the economy, and stock price overrated as a measure of a company’s health by political commenters like Mr. Bailey.

    Also, I realize full-well that stock speculation is often well done. My point wasn’t that speculators do a bad job guessing what the largely-speculation-driven value of stocks will be, but that their guesses (and thus, as you show, the direction of the stock in the market) are not good measures of the “real” performance of the company, in areas like turning a profit and maintaining market share.

  48. joe,

    Would it still be socialist if it was a CEO declaring that the janitors made too much, or is “excessive compensation” only a socialist term when the “excess” is in the eight digits instead of four?

    Socialism is when the state controls the means of production. So, it is socialist when the government declares “excessive compensation” reagadless of number of digits. If the CEO does it as an employee of the owners, then it isnt, because that is the capital controlling the means of production.

    It is also socialist to declare compensation to be too low, for example, minimum wage laws.

  49. x,y:

    “They suggest that the higher salaries for chief executives can largely be explained by increases in the value of the stock market. Viewed as a whole, these salaries are a result of competitive pressures rather than the exploitation of shareholders.”

    That, of course, if from the Blog post, not the report itself. Honestly, the report itself is more algebra than position paper. I can’t claim that I entirely understand their equations. They watch too much Numb3rs.

  50. As usual, the Democrats have everything completely backwards. CEO pay should NOT be regulated. On the other hand, we could solve the illegal immigration problem without the expense of a border wall if we implemented a maximum wage for non-CEO labor.

    For example, if it was illegal to pay dishwashers more than $2.00 per hour, there would be a reduced incentive for Mexicans to sneak into the country to take dishwasher jobs.

  51. Rigoberto,

    joe, it’s socialist when the government makes such laws.

    OK, but AR was calling it “socialist” just to make the observation that CEO’s are overpaid.

  52. joe,

    As a company owner, which metric determines my net worth? The stock price of the company or the “real” performance?

    The real performance is the stock price. Something is only worth what someone is willing to pay for it, whether it be eggs or Exxon stock. The value of a company is the value of a company.

  53. Mayor:

    “I meant that stock market performance is overrated as a measure of the economy”

    quoted for muther-fuqin-truth

    true dat.

    very true.

    couldn’t agree more.

    etc. 🙂

  54. robc,

    If, objectively, a CEO’s pay is not justified by the value-added he brings to the company, his pay is excessive in economic terms. It is irrational. If such a thing is occuring, then it is neither socialist, nor capitalist, nor any other ideology to call his compensation excessive.

    That’s why Ron Bailey picked up this study and wrote this blog post – to argue that the rise in CEO pay is not excessive or irrational, because it does, allegedly, produce additional value commensurate with the additional costs.

  55. Bill Pope,

    My problem isnt with the way CEOs are hired, it is the way Board of Directors are elected. If there are 9 spots, put 18 people on the ballot instead of 9. Even if all 18 are hand picked in the same way the 9 currently are, I want to pick and choose which of your 9 cronies to put on my boards.

    I realize when there is a board fight you will get 2 proxies with different boards, but I want choice even when everyone is happy.

  56. robc,

    The market value of your company is determined by its stock value.

    It’s contribution to the economy is determined by its “real” performance.

    If the government is to give out tax breaks, it should look at the effect of the behaviors it is rewarding on the real economy and society.

  57. A lot of executives are overpaid because the people at the top of a corporation obviously have an incentive to reward themselves and shareholders often don’t have a means to prevent it. (See toothless corporate boards like at Disney when Eisner was there, etc.) It’s just the way they are structured sometimes. As plenty of people here have pointed out though, its mostly the shareholders that get screwed rather than the workers.

    It is fair to wonder if all of the regulations about publicly traded companies codify some bad practices that wouldn’t otherwise be as prevalent. Though if this is true then I wonder why we don’t see a lot of companies going back to being privately held.

    The assumption that the money would get redistributed to the workers if not paid to the CEO’s is just downright odd though.

  58. joe,

    Even if it IS rational, it isnt socialist to CALL it excessive. I have called the pay of some of my CEOs excessive many times.

    It is socialist to pass a law that treats it different because it is “excessive”. That is controlling the means of production.

    He wrote the post because Lee is trying to do something stupid. I dont think he needed to make the reference to it being rational at all.

  59. joe,

    The only economy I care about is mine. The stock price contributes to MY economy. The government shouldnt be trying to affect behavior thru the tax code. Hell, there shouldnt even be a tax code.

  60. If such a thing is occuring, then it is neither socialist, nor capitalist, nor any other ideology to call his compensation excessive.

    I take that back. It is very, very marketist to declare that the value of a person’s labor is determined by the profit created by his actions.

  61. “Lots of individual decisions are irrational and sub-optimal”

    The question is then who is taking responsibility for those decisions.

    If an individual spends his own earnings and is happy with his Volvo and organic produce, you know, feels safer and healthier, who am I to take that away from him? *I* might save on regular produce and with the difference buy a Mercedes (Okay, that’s a LOT of produce). But in the former case, it’s NOT MY MONEY!

  62. The only economy I care about is mine.

    Sure, but that’s a lousy criteria for setting tax policy.

    This is not, yet, a rob-public.

  63. Illiterate J,

    You fool! That would just result in a flood of Mexicans running our companies. Is that what we really want?

  64. joe,

    Actually, it isnt. We shutting be setting fucking tax policy.

  65. shutting == shouldnt

    My brain is weird

  66. Just realized if we legalized prostitution, we could have a fucking tax.

  67. If you don’t believe in setting tax policy, robc, than stop arguing for one over another.

    Because that’s what you’re doing – arguing that tax breaks SHOULD be provided for a certain behavior, while Lee is arguing that they should not.

  68. That’s basically income tax to the proprietors of the Bunny Ranch.

    God I would love to have them as a client, just to see a general ledger from a whorehouse. That would be interesting.

  69. It is socialist to pass a law that treats it different because it is “excessive”. That is controlling the means of production.

    That’s a fairly open definition of socialism.

  70. “A lot of executives are overpaid because the people at the top of a corporation obviously have an incentive to reward themselves and shareholders often don’t have a means to prevent it. (See toothless corporate boards like at Disney when Eisner was there, etc.) It’s just the way they are structured sometimes. As plenty of people here have pointed out though, its mostly the shareholders that get screwed rather than the workers.”

    I think this is the way to go, to reform shareholder rights in a variety of ways. Its one thing if the management is essentially picking the Board which then picks the management, and round and round it goes and another if the investors really want to compensate some one some sick amount if they think they are worth it.

    I will say though that I am not sure that just pointing to a policy and shrieking “socialist!” settles much. If a “socialist” policy makes increases the welfare and justice in a society then so be it.

    There are all kinds of things that could make the average citizens life suck. One of those things would be knowing that some rich CEO, or worse his half assed kids, has gobs more life opportunities than I do, especially if his gobs are due more to chance factors than deserved ones.

  71. “Just realized if we legalized prostitution, we could have a fucking tax.”

    We should have a damned tax on churches too!

  72. Money equals power to a large degree. To the extent that money can, for instance, influence the government (through lobbying, campaign finance, bribes, etc) or influence the market (where every dollar spent can be a vote) then people with insanely more money than you or I are literally making the world you and I live in. That seems wrong no matter how much more “useful” that guy is than you or I or how “voluntary” the exchanges that created such a result were, but it is seems especially wrong when the guy has his wealth because of what family he happened to be born in, or that he happened to be born in a shack on top of rich mineral deposits, or because of some messed up combination (he was born into a rich family with connections that were used to get him a job as a CEO).

  73. Given how much of the rise in stock value resulted from pump and dump efforts by people like Ken Lay, whose compensation was tied to increasing stock values, this correlation means less than it appears.

    Pump and dump does increase stock value breifly, but it is generally followed by a precipitous correction. A long time scale for pump-and-dump would be probably around 5 years. The time scale over which they’re measuring pay for their top 500 companies is a 23 year period from 1980 to 2003. Any significant pump-and-dump should corrected within the time period of the study.

    Not that pump-and-dump isn’t a bad business practice, it just shouldn’t have much of an effect on the numbers that Gabaix and Landier are studying.

  74. joe,

    Because that’s what you’re doing – arguing that tax breaks SHOULD be provided for a certain behavior, while Lee is arguing that they should not.

    Bullshit. Corporate income tax is a tax on profit. Profit is revenue – expenses. Employee salary is an expense.

    Lee is trying to move part of the CEO salary out of expenses. Of course, Im arguing there shouldnt be an income tax at all, so it wouldnt matter how you categorize the salary.

    The baseline assumption is the all money spent on something is an expense. After that, the government makes rules on what counts and what doesnt. There are no tax breaks involved, we are arguing about the definition of expense, and Lee is the one trying to change the commonly held definition.

  75. That’s a fairly open definition of socialism.

    Its the definition of socialism from Mises’ Socialism.

    Socialism is the state controlling the means of production.

    Nice and easy. The degree of socialism is the degree to which the state controls the means of production. Basically you have a single scale with 100% capitalism/0% socialism on one end and vice versa on the other.

  76. Um, there is already a $1 million ceiling on the deductibility of wage expense in the Internal Revenue Code.

  77. Socialism is the state controlling the means of production.

    There is an argument to be made that a goverment’s tax policy re CEO compensation is not really controlling the means of production very much.

    In fact, arguing that it does makes a person look a little over-enthusiastic about the issue. I understand your point on the spectrum of capitalism / socialism, but I think that “regulatism” is a better fit even if it isn’t a real word. On your scale where would you rank this? I’d give it a 1-3% socialism rating myself.

    Face it, it’s not like she is proposing nationalization and command economy.

  78. Ah, light breaks! Now I get it. I was using “performance” its dictionary-defition sense, to refer to how the company is doing, not in the sense of how its stock performed. Since I was making the point that those two things are, in fact, loosely related, I can see how that could cause some confusion. May bad.

    I meant that stock market performance is overrated as a measure of the economy, and stock price overrated as a measure of a company’s health by political commenters like Mr. Bailey.

    Also, I realize full-well that stock speculation is often well done. My point wasn’t that speculators do a bad job guessing what the largely-speculation-driven value of stocks will be, but that their guesses (and thus, as you show, the direction of the stock in the market) are not good measures of the “real” performance of the company, in areas like turning a profit and maintaining market share.

    This is all irrelevant to the reseach Cowen points too in defense of executive compensation. The numbers in question are historical and over a fairly long period, over two decades. Unless Joe is arguing that there is a persistent/permanent effect to a companies stock value due to “skullduggery and gimmicks”.

  79. The $1 million limit does not apply to performance based comp. or commissions. These are used to get around the OBRA.

  80. If anyone is interested, I came across this article today that talks about many of the same things being talked aboiut on this thread.

    The article was authored by Paul Craig Roberts who is described thusly,

    Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan administration. He is credited with curing stagflation and eliminating “Phillips curve” trade-offs between employment and inflation, an achievement now on the verge of being lost by the worst economic mismanagement in US history.

    http://www.informationclearinghouse.info/article18787.htm#

  81. Fuck sorry…

    ignore that link — it should have been posted in the China thread below

  82. On your scale where would you rank this? I’d give it a 1-3% socialism rating myself.

    That sounds about right. Im not saying it is dramatic socialism but it pushes us a little bit in that direction. When you add up all the little 1-3% regulations, it gets to be a big number.

    And yet, still much smaller than many other countries.

  83. “He is credited with curing stagflation and eliminating “Phillips curve” trade-offs between employment and inflation”

    ???

  84. The stock market is overrated as a measure of the health of the economy, and increases in stock value are overrated as measures of a company’s performance

    Ditto, the stock market isn’t the economy.

    Having said that, executives are overpaid, but again, unless I’m a stockholder, that’s between the idiot in the suit and the board of directors. Not my problem. What the hell do I care if HP loses it’s leadership edge in the mid-sized laser printer business because CEO Dewey Cheatum has an overly large compensation package?

    Anyone who stays awake at night worrying about the broad concept of “executive pay” has an alarming, profound misunderstanding of a free economy.

    Now, I believe that most public officials are overpaid. That, ladies and gentlemen, should be keeping you up at night.

  85. Why should we change the shareholder rules for public companies? If the stock-buying public thinks a CEO is overpaid, that will be reflected in the stock price. The politicians, pundits, and activists have no dog in this hunt. It’s not their problem, so they should be shouted down until they go away.

  86. The gov’t gets more taxes, the shareholders get lower profits.

    Or they just fire a few mailroom clerks to help the bottom line. Way to go with the unintended consequences, Rep. Barbara Lee!

  87. Steve Vernon,

    Unless Joe is arguing that there is a persistent/permanent effect to a companies stock value due to “skullduggery and gimmicks”.

    That is precisely what I am arguing. Since the 1980s, with the rise in stock options as a means of compensating upper management and the growth of IRAs and 401ks (and their managers), there has been a persistent trend of management goosing the numbers to drive up stock values.

  88. I’m surprised that through all this, not a single person mentioned Chris Cox’s limits on shareholder rights to nominate board members. It seems that shareholders, of all people, should get to nominate board members, since they own the damn company

    Disclaimer: Government shouldn’t regulate CEO pay.

  89. That is precisely what I am arguing. Since the 1980s, with the rise in stock options as a means of compensating upper management and the growth of IRAs and 401ks (and their managers), there has been a persistent trend of management goosing the numbers to drive up stock values.

    Sure, some corporate management teams try that shit. But goosing the numbers can’t be sustained for very long.

    And, of course, we all diversify our portfolios so that, along with many other reasons, we won’t lose everything if one of the companies we’ve invested in is cooking the books, don’t we?

  90. robc

    It is socialist to pass a law that treats it different because it is “excessive”. That is controlling the means of production.

    Ironically, that’s exactly what Karl Marx argued. That is, by passing a law protecting property rights, the government coercively controls the peoples’ access to the means of production.

    After actually reading Marx, I found it very interesting how libertarian he actually is, contrasting markedly from his authoritarian followers. In fact, he’s more of a libertarian than modern ones because allows a smaller role for government. While libertarians want government to be small, but still protect property rights, Marx wanted the government to not exist at all, because all laws (including those enforcing property rights) are inherently coercive.

    The main moral difference between libertarians and Marx is that Marx doesn’t think that people inherently have property rights, while libertarians do. If this makes you furious, ask yourself why people have an inherent right to property but not an inherent right to healthcare. (also, saying that the latter requires coercion to enforce is missing the point–the former does as well). Your answer to this should hopefully give you some insight into your own beliefs, since logically, the answer to both must be the same unless you feel that moral values should be legislated.

  91. Mike Laursen

    Or they just fire a few mailroom clerks to help the bottom line.

    Who’s gonna work the mail? They would have to raise their wage or lower the CEOs.

  92. eliminating “Phillips curve” trade-offs between employment and inflation, an achievement now on the verge of being lost by the worst economic mismanagement in US history.

    Whoever wrote these words obviously has no understanding of macroeconomics. You can’t change whether or not there is a Phillips curve anymore than you can change whether or not there is a demand curve (i.e. people buy less of a good if the price goes up).

    Besides the person who argued that the Phillips curve is not a stable relationship is Robert Lucas, whose work on the subject came out about 5 years before Reagan was elected.

    Further, although this may be an ad hominem, the man who wrote that article is a 9/11 truther: http://en.wikipedia.org/wiki/Paul_Craig_Roberts#September_11.2C_2001_attacks

  93. Easy. They increase the hours for the remaining mailroom clerks. They’ll have to pay them a little more, but not as much as it would cost them to keep another employee. And it possibly has the nice side effect of upping the limit on the CEO’s compensation by a factor of 25 times the new mailroom clerk compensation level.

    Rep. Barbara Lee’s problem is that she is such a good, altruistic, and non-materialistic leader of society that she can’t anticipate the dodges that the devious mind of an evil capitalist CEO can come up with.

  94. Mike Laursen | December 1, 2007, 3:43pm | #

    Easy. They increase the hours for the remaining mailroom clerks. They’ll have to pay them a little more, but not as much as it would cost them to keep another employee.

    Good point, but here are two counterpoints:

    1) In a free market no one company can increase the hours of their workers (ceteris paribus). If they did, their workers would just go to work for another company–maybe one that isn’t incorporated, which still gets the benefit of the tax subsidy (the one that this bill is hoping to eliminate).

    2) The bill could (not sure if it does) base the 25x figure on hourly earnings–not yearly earnings.

  95. Brian, I’m afraid we have an impedance mismatch in our conversation. I was just kidding around, and didn’t realize you are looking for serious conversation.

    When you say “Marx doesn’t think that people inherently have property rights, while libertarians do” above, please define what you mean by the word, “inherently”. Like, God-given?

    I’m a libertarian, but I don’t believe humans have anything inherently, except for relatively big brains with a facility for symbolic reasoning, opposable thumbs, and some genetically-programmed basic personality traits. Property rights is an idea that was invented, and they are ultimately only as inherent as your ability to defend them.

  96. “especially if his (CE0’s) gobs are due more to chance factors than deserved ones.”

    There’s no such thing as chance as everything has a cause, preceding events, etc. But the opposite of that remark does not equate to the notion that CEO’s ‘deserve’ what pay they are getting.

  97. After reading this post, I have to believe that Mr. Bailey has not read A Theory of Justice or Justice as Fairness or chose to ingore them altogether.
    Anyone who has any familiarity with Rawls would realize that that the difference principle is to be applied only after satisfying his liberty principle.
    This is surely the most basic aspect of Rawls complex liberalism — one that a wikipedia search would quickly reveal.
    Mr. Bailey’s scientific expertise could hardly be questioned. His grasp of basic philosophy leaves much to be desired.

  98. Is it true that Rawls’ political philosophy was all built on a foundation of the social contract theory? It’s pretty easy to show that one can’t take the idea that our government is based on a social contract too literally — the commenters here at Hit & Run have shot the idea full of holes in several commenting threads.

  99. In his A Theory of Justice, philosopher John Rawls basically argued that a just society is one that minimizes inequalities among its citizens.

    What is a citizen? Enlargening the EU to include Eastern Europe increased the inequality within the EU – would Rawls object?

    Colonial America was richer than contempory Britain – that was why people moved there. Should it have been taxed to benefit the average Englishman?

    If so, what does that say about declaring independence?

  100. This legislation doesn’t regulate executive pay — it merely limits the taxpayer subsidy afforded that pay to 2500% the amount paid to the lowliest employee. If the company is prosperous and pays all of its employees well across the board, the taxpayer subsidy for executive pay will increase. If the company does poorly, the nation’s taxpayers will continue to subsidize the executive’s pay — provided he or she is not paid 2500% more than the lowest paid employee. Corporations, moreover, remain perfectly free to pay their executives more than 2500% of the amount paid to the lowest-paid employee — but any amount the corporation decides to pay beyond that will not be subsidized by the nation’s taxpayers. The legislation is obviously to support the middle class and bring the pay of the highest and least-paid employees closer to the historical range. It’s good legislation that makes a lot of sense.

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