Sorry, Bernie Sanders, but Disney Doesn't Have To Apologize for Making $1.3 Billion with Avengers: Endgame

The Vermont socialist can muster a lot of emotional outrage at CEO pay, but his argument about a "moral economy" doesn't add up.

To date, the new movie Avengers: Endgame has grossed over $1.3 billion worldwide, a testament to the popularity of the superhero franchise and the ability of Disney, which owns Marvel Studios, to deliver what an audience wants at a price it's willing to pay.

But to Sen. Bernie Sanders, the Vermont independent who is running for the Democratic presidential nomination, there is only exploitation and immiseration. "What would be truly heroic is if Disney used its profits from Avengers to pay all of its workers a middle class wage, instead of paying its CEO Bob Iger $65.6 million – over 1,400 times as much as the average worker at Disney makes," he tweeted. If that sounds a bit familiar, it might be because a year ago the senator tweeted, "We need to SHAME Disney. I want to hear their moral justification that while making billions of dollars they have workers going hungry." At a June 2018 rally, he also argued, "I want to hear the moral defense of a company that makes $9 billion in profits, $400 million for their CEOs and have a 30-year worker going hungry."

Here's a thought: Disney doesn't need to make a moral justification to Bernie Sanders or anyone else about how it does business as long as it operates within the law. The purpose of a company isn't to be all things to all people, especially to politicians who can threaten onerous regulation. Disney needs to be accountable to its shareholders (along multiple dimensions, not simply in terms of making money) and its customers, and it needs to be able to attract and keep employees for its various operations, including its theme parks, which Sanders is alluding to when talking about "30-year worker[s] going hungry." An NPR report from last year included this comment from a worker at Disneyland in Anaheim, California:

"I've been 29 years with Disney. I only get $15.70 an hour," an unnamed full-time concierge who is living with a friend told [researchers for The Coalition of Labor Resort Unions]. "Sometimes I go without food."

Last summer, Disney reached an agreement to boost starting pay for most hourly workers at Disneyland to $15 an hour. It's safe to assume that management caved for a variety of reasons, including bad publicity in the wake of Sanders' comments, which came at a rally held in Anaheim. He also wrote an op-ed in The Guardian attacking Disney for being miserly in its pay. "At a time when the three wealthiest people in America own more wealth than the bottom half and corporate CEOs have seen their incomes skyrocket," wrote Sanders, "we must create a moral economy which demands that if you work 40 hours a week, you do not live in poverty."

If that is Sanders' main demand, he can already declare victory and go home. In 2016 (the latest year for which I could find data), the Bureau of Labor Statistics (BLS) reported that just "3.1 percent of those usually employed full time" reported income below the poverty line. On that rudimentary but important score, the system is working just how Sanders wants. But more than that, Sanders' rage at CEO compensation is a non sequitur. As Alex Edmans, a finance professor at the London Business School, writes,

CEOs and workers operate in very different markets, so there is no reason for their pay to be linked — just as a solo singer's pay bears no relation to a bassist's pay. This consideration explains why CEO pay has risen much more than worker pay. As an analogy, baseball player Alex Rodriguez was not clearly more talented than Babe Ruth, but he was paid far more because baseball had become a much bigger, more global industry by the time he was playing. Even if the best player is only slightly better than the next-best player at that position, the slight difference can have a huge effect on the team's fortunes and revenues.

Just as the baseball industry has gotten bigger, so have firms (also due to the global marketplace), and so it is worth paying top dollar for top talent. Average firm size in the Fortune 500 today is $20 billion. Thus, even if a CEO contributes only 1% more to firm value than the next-best alternative, this contribution is worth $200 million — much higher than the $10 million average salary. Gabaix and Landier show that the sixfold increase in CEO pay since 1980 can be explained by the sixfold increase in firm size.

You can lop off pay for the top of a company and it's not going to raise up the salaries for regular employees. At the same time, if a company keeps banking record profits and doesn't share the wealth with its workforce, employees will start to defect (this is one of the reasons why corporate profits and employee compensation generally move in the same direction over time).

More importantly, if you care about improving the quality of life and living standards over time, the essential question is always about creating broad-based, sustainable economic growth. What are the conditions that are most likely to help the economy get bigger, stronger, and more resilient? At the top of the list is a government which promulgates simple, predictable, and widely enforced rules; spends within its limits and doesn't pursue arbitrary trade wars and military interventions; and doesn't bog down the future with an ever-increasing mountain of debt that tamps down growth and freezes out investment. Near the bottom of the list is something that is part of Sanders' policy repertoire: Announcing bold new plans (Medicare for All! Free College for All!) without even pretending to know how to pay for them.