Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Our elites work hard to cover up for each other even if it means an almost Trumpian denial of reality. We got another taste of this effort in a New York Times piece on Joe Biden’s actions with regard to China over the years. The piece talks about the massive job loss of manufacturing jobs due to trade in China and then tells us the problem of the Great Recession was about the financial system:

“From 1999 to 2011, competition from China cost the United States more than two million factory jobs, according to academic research. In the midst of that, flaws in the U.S. financial system set off a global economic crisis. In 2008 and 2009, as Mr. Biden took the reins of the second most powerful office in the United States, the major G.M. and Chrysler plants in his state shuttered.”

In fact, the housing bubble had been driving the economy since 2002. It led a to massive construction boom, which collapsed when the bubble burst. It also led to a massive surge in consumption, as people spent based on their bubble created equity. When the bubble burst, there was nothing to replace a loss of annual demand in excess of 6.0 percent of GDP ($1.2 trillion in today’s economy). If the story was actually the financial crisis then the economy should have been close to normal by 2010 when most aspects of the financial system were operating just fine.

It is useful to policy types to perpetuate the myth that the problem was the financial crisis because finance can be complicated. We have all sorts of exotic financial instruments, many of which are not publicly recorded anywhere. Our policy elite decided that they could be forgiven for not keeping track of such a complex system.

By contrast, the housing bubble and its impact on the economy was easy to see. We saw an unprecedented run up in house prices, with no remotely corresponding increase in rents. Vacancy rates were hitting record highs. And, it was apparent from the GDP data, which is released every quarter, that this bubble was driving the economy.

It was 100 percent predictable that the bubble would burst and lead to a serious recession when it did. Unfortunately, this point is almost never made in polite circles because there is a great interest in pretending the story is complicated to excuse such an enormous policy failure.

Our elites work hard to cover up for each other even if it means an almost Trumpian denial of reality. We got another taste of this effort in a New York Times piece on Joe Biden’s actions with regard to China over the years. The piece talks about the massive job loss of manufacturing jobs due to trade in China and then tells us the problem of the Great Recession was about the financial system:

“From 1999 to 2011, competition from China cost the United States more than two million factory jobs, according to academic research. In the midst of that, flaws in the U.S. financial system set off a global economic crisis. In 2008 and 2009, as Mr. Biden took the reins of the second most powerful office in the United States, the major G.M. and Chrysler plants in his state shuttered.”

In fact, the housing bubble had been driving the economy since 2002. It led a to massive construction boom, which collapsed when the bubble burst. It also led to a massive surge in consumption, as people spent based on their bubble created equity. When the bubble burst, there was nothing to replace a loss of annual demand in excess of 6.0 percent of GDP ($1.2 trillion in today’s economy). If the story was actually the financial crisis then the economy should have been close to normal by 2010 when most aspects of the financial system were operating just fine.

It is useful to policy types to perpetuate the myth that the problem was the financial crisis because finance can be complicated. We have all sorts of exotic financial instruments, many of which are not publicly recorded anywhere. Our policy elite decided that they could be forgiven for not keeping track of such a complex system.

By contrast, the housing bubble and its impact on the economy was easy to see. We saw an unprecedented run up in house prices, with no remotely corresponding increase in rents. Vacancy rates were hitting record highs. And, it was apparent from the GDP data, which is released every quarter, that this bubble was driving the economy.

It was 100 percent predictable that the bubble would burst and lead to a serious recession when it did. Unfortunately, this point is almost never made in polite circles because there is a great interest in pretending the story is complicated to excuse such an enormous policy failure.

Washington Post reporter Heather Long has a series of useful charts comparing the economy’s performance under Presidents Obama and Trump. Most of the discussion is quite good, but one item that raised my eyebrow was in the section on deficits, where it told readers:

“Many economists say the bulge in spending after the Great Recession and pandemic recession were necessary and unavoidable, but they fault Obama and Trump for not doing more to right the federal budget during the good economic years.”

I’m sure many economists do fault Obama and Trump for not having lower deficits, but many also feel that at least Obama, was too aggressive in reducing the deficit. The problem of an excessive budget deficit is that it creates too much demand in the labor market, leading to rapidly rising wages, which then leads to spiraling inflation. Alternatively, if the Fed raises rates to prevent excessive demand, then we would see high-interest rates, which would reduce investment and net exports.

Inflation remained low in the Obama years as did interest rates. There is no evidence that the economy was suffering the harmful effects predicted from excessive budget deficits. The fact that Trump was able to substantially increase the budget deficit with his tax cuts, and still not trigger any problem with inflation, suggests that the deficits were too low under Obama, not too high.

As a result of deficits that were too small, job growth and wage growth was less than it could have been. If Obama had run larger deficits, we would have seen lower unemployment and more rapid wage growth.

There is of course an issue of what the money is used for. If we had run larger deficits to fund child care or clean energy we would have lasting economic and social benefits. By contrast, the increase in the deficits due to the Trump tax cuts, which went disproportionately to the rich, will have little lasting benefit to the economy.

It’s also worth mentioning that the pattern of wage growth is slightly different than indicated in the piece. It had been accelerating towards the end of  Obama’s term, hitting 2.7 percent at the end of 2016. It slowed slightly in 2017 and then began to accelerate again in 2018, peaking at 3.5 percent in 2019. It then began to slow again and had fallen back to 3.0 percent just before the pandemic hit.

In short, there is not much of a story of wage growth being better under Trump than under Obama. The acceleration under Obama continued, albeit unevenly, into the Trump years until it was reversed in the half year prior to the impact of the pandemic.

 

Addendum

Since inflation was lower in the last two years of the Obama administration than in the first three years of the Trump administration, real wages were actually rising more rapidly under Obama than under Trump.

Washington Post reporter Heather Long has a series of useful charts comparing the economy’s performance under Presidents Obama and Trump. Most of the discussion is quite good, but one item that raised my eyebrow was in the section on deficits, where it told readers:

“Many economists say the bulge in spending after the Great Recession and pandemic recession were necessary and unavoidable, but they fault Obama and Trump for not doing more to right the federal budget during the good economic years.”

I’m sure many economists do fault Obama and Trump for not having lower deficits, but many also feel that at least Obama, was too aggressive in reducing the deficit. The problem of an excessive budget deficit is that it creates too much demand in the labor market, leading to rapidly rising wages, which then leads to spiraling inflation. Alternatively, if the Fed raises rates to prevent excessive demand, then we would see high-interest rates, which would reduce investment and net exports.

Inflation remained low in the Obama years as did interest rates. There is no evidence that the economy was suffering the harmful effects predicted from excessive budget deficits. The fact that Trump was able to substantially increase the budget deficit with his tax cuts, and still not trigger any problem with inflation, suggests that the deficits were too low under Obama, not too high.

As a result of deficits that were too small, job growth and wage growth was less than it could have been. If Obama had run larger deficits, we would have seen lower unemployment and more rapid wage growth.

There is of course an issue of what the money is used for. If we had run larger deficits to fund child care or clean energy we would have lasting economic and social benefits. By contrast, the increase in the deficits due to the Trump tax cuts, which went disproportionately to the rich, will have little lasting benefit to the economy.

It’s also worth mentioning that the pattern of wage growth is slightly different than indicated in the piece. It had been accelerating towards the end of  Obama’s term, hitting 2.7 percent at the end of 2016. It slowed slightly in 2017 and then began to accelerate again in 2018, peaking at 3.5 percent in 2019. It then began to slow again and had fallen back to 3.0 percent just before the pandemic hit.

In short, there is not much of a story of wage growth being better under Trump than under Obama. The acceleration under Obama continued, albeit unevenly, into the Trump years until it was reversed in the half year prior to the impact of the pandemic.

 

Addendum

Since inflation was lower in the last two years of the Obama administration than in the first three years of the Trump administration, real wages were actually rising more rapidly under Obama than under Trump.

Of course that would be having open research that was freely shared. That would immediately make theft impossible, since there would be nothing to steal.

This simple and obvious point is not mentioned once in a piece describing efforts by Russia and China to gain access to vaccine research being done at U.S. universities and private companies. Since the whole world is struggling to get a vaccine as quickly as possible to bring the pandemic under control, it might have made sense to have a cooperative effort, where all research would be freely shared and any vaccines that are developed could be produced by any manufacturer with the capability to make it.

Instead, we went the route of restricting research access, which is both likely to slow down the development of effective vaccines and also lead to otherwise pointless security costs. It also is likely to mean that any vaccines that are developed will be expensive, since the producers will own patent monopolies that allow them to restrict access.

 

Of course that would be having open research that was freely shared. That would immediately make theft impossible, since there would be nothing to steal.

This simple and obvious point is not mentioned once in a piece describing efforts by Russia and China to gain access to vaccine research being done at U.S. universities and private companies. Since the whole world is struggling to get a vaccine as quickly as possible to bring the pandemic under control, it might have made sense to have a cooperative effort, where all research would be freely shared and any vaccines that are developed could be produced by any manufacturer with the capability to make it.

Instead, we went the route of restricting research access, which is both likely to slow down the development of effective vaccines and also lead to otherwise pointless security costs. It also is likely to mean that any vaccines that are developed will be expensive, since the producers will own patent monopolies that allow them to restrict access.

 

Donald Trump routinely says outlandish things and then when he is called on them, he or his staff insist he was just joking. To take some recent favorites, people may recall his “joke” about injecting people with disinfectant at a press conference a few months back. And then there was the joke about telling his aides to slow down testing so that there would be fewer reported infections with the coronavirus. Just this week, we heard Trump quite explicitly tell his supporters in North Carolina to vote by mail and then go in and try to vote in person, in other words, commit election fraud.

In these three cases, and many others, Trump and/or his staff insisted he didn’t really mean the things he said. Now we are getting the same game with Trump’s plan to end the payroll tax.

Donald Trump said quite explicitly that he wants to end the payroll tax that supports the Social Security program. He said that it would mean $5,000 in savings to a typical worker, which is roughly correct. Of course, if we had no money coming into Social Security then the program could not pay benefits, under current law.

The Biden campaign picked up on this and said that Trump wants to end the Social Security program, since his plan would quickly drain the program’s trust fund. Glenn Kessler, the Washington Post’s fact-checker gave the Biden campaign four Pinocchios, saying that Trump has always promised to protect Social Security.

While the Biden campaign may be stretching things a bit, it is not a long stretch. After all, Trump is promising workers a $5,000 a person tax cut. He is not proposing any tax increase to make up for the lost revenue. So is he planning to just increase the annual budget deficit by $1 trillion  (5 percent of GDP)? You don’t have to be a deficit hawk (certified non-hawk here) to see that as a problem.

The basic story here is that Trump is making absurd and contradictory promises. He will not be able to sustain the Social Security program if he eliminates the payroll tax without some substantial offsetting tax increase. Since he has not even hinted at what such a tax could be, it is reasonable to assume that he is not proposing one and therefore he would not be able to pay for Social Security.

Donald Trump may lack the policy understanding of other presidents or candidates, but that is not an excuse to give him special treatment. The Biden campaign is perfectly reasonable in highlighting a possible implication of a policy that Trump has explicitly advocated.

Donald Trump routinely says outlandish things and then when he is called on them, he or his staff insist he was just joking. To take some recent favorites, people may recall his “joke” about injecting people with disinfectant at a press conference a few months back. And then there was the joke about telling his aides to slow down testing so that there would be fewer reported infections with the coronavirus. Just this week, we heard Trump quite explicitly tell his supporters in North Carolina to vote by mail and then go in and try to vote in person, in other words, commit election fraud.

In these three cases, and many others, Trump and/or his staff insisted he didn’t really mean the things he said. Now we are getting the same game with Trump’s plan to end the payroll tax.

Donald Trump said quite explicitly that he wants to end the payroll tax that supports the Social Security program. He said that it would mean $5,000 in savings to a typical worker, which is roughly correct. Of course, if we had no money coming into Social Security then the program could not pay benefits, under current law.

The Biden campaign picked up on this and said that Trump wants to end the Social Security program, since his plan would quickly drain the program’s trust fund. Glenn Kessler, the Washington Post’s fact-checker gave the Biden campaign four Pinocchios, saying that Trump has always promised to protect Social Security.

While the Biden campaign may be stretching things a bit, it is not a long stretch. After all, Trump is promising workers a $5,000 a person tax cut. He is not proposing any tax increase to make up for the lost revenue. So is he planning to just increase the annual budget deficit by $1 trillion  (5 percent of GDP)? You don’t have to be a deficit hawk (certified non-hawk here) to see that as a problem.

The basic story here is that Trump is making absurd and contradictory promises. He will not be able to sustain the Social Security program if he eliminates the payroll tax without some substantial offsetting tax increase. Since he has not even hinted at what such a tax could be, it is reasonable to assume that he is not proposing one and therefore he would not be able to pay for Social Security.

Donald Trump may lack the policy understanding of other presidents or candidates, but that is not an excuse to give him special treatment. The Biden campaign is perfectly reasonable in highlighting a possible implication of a policy that Trump has explicitly advocated.

I was happy to see Michael Sandel’s piece in the NYT arguing that it is still acceptable to have negative views of less-educated people because of their lack of education. Sandel makes the lonely argument that rather than focusing on improving the lives of people without college degrees, policy debates have been centered on increasing opportunities for people to become more educated:

“We should focus less on arming people for a meritocratic race and more on making life better for those who lack a diploma but who make important contributions to our society — through the work they do, the families they raise and the communities they serve. This requires renewing the dignity of work and putting it at the center of our politics.”

This argument is very well-taken. It should also be warmly embraced by anyone concerned about racial inequality because even if our most ambitious plans for improving the plights of minority children prove successful, people of color will still disproportionately hold lower-paying jobs for decades into the future.

But there is one point where I have to take serious issue with Sandel. He refers to “A global economy that outsources jobs to low-wage countries has somehow come upon us and is here to stay.” While this is presented as a mainstream viewpoint, Sandel also seems to accept that this is something that happened, rather than something we did. 

As I argued in Rigged [it’s free] and elsewhere, it was not the natural forces of globalization and technology that made the less-educated big losers, it was how we structured these forces. We made sure that our steelworkers and autoworkers had to compete against low paid workers in the developing world, with predictable results. We largely protected our doctors and dentists from the same competition. We made our patent and copyright monopolies longer and stronger to ensure that a disproportionate share of the gains from technology went to people like Bill Gates and Mark Zuckerberg, rather than the average high school grad.

In short, Sandel is exactly right, but his case is even stronger than he presents here. Not only do the elites have contempt for the less-educated, but they actively designed policies to screw them. And, they won’t tell you that in the New York Times.

I was happy to see Michael Sandel’s piece in the NYT arguing that it is still acceptable to have negative views of less-educated people because of their lack of education. Sandel makes the lonely argument that rather than focusing on improving the lives of people without college degrees, policy debates have been centered on increasing opportunities for people to become more educated:

“We should focus less on arming people for a meritocratic race and more on making life better for those who lack a diploma but who make important contributions to our society — through the work they do, the families they raise and the communities they serve. This requires renewing the dignity of work and putting it at the center of our politics.”

This argument is very well-taken. It should also be warmly embraced by anyone concerned about racial inequality because even if our most ambitious plans for improving the plights of minority children prove successful, people of color will still disproportionately hold lower-paying jobs for decades into the future.

But there is one point where I have to take serious issue with Sandel. He refers to “A global economy that outsources jobs to low-wage countries has somehow come upon us and is here to stay.” While this is presented as a mainstream viewpoint, Sandel also seems to accept that this is something that happened, rather than something we did. 

As I argued in Rigged [it’s free] and elsewhere, it was not the natural forces of globalization and technology that made the less-educated big losers, it was how we structured these forces. We made sure that our steelworkers and autoworkers had to compete against low paid workers in the developing world, with predictable results. We largely protected our doctors and dentists from the same competition. We made our patent and copyright monopolies longer and stronger to ensure that a disproportionate share of the gains from technology went to people like Bill Gates and Mark Zuckerberg, rather than the average high school grad.

In short, Sandel is exactly right, but his case is even stronger than he presents here. Not only do the elites have contempt for the less-educated, but they actively designed policies to screw them. And, they won’t tell you that in the New York Times.

That’s a theme we have been hearing for decades. Japan is a huge embarrassment for the deficit hawks. It has a debt to GDP ratio of close to 250 percent, more than twice as high as in the United States, yet it has none of the problems that the deficit hawks tell us will come from high debt.

It currently pays 0.05 percent interest on its long-term bonds. Much of its debt carries a negative interest rate so that its debt burden is currently near zero. This means that in spite of its high debt, the country neither has interest rates nor faces a crushing debt burden.

It also does not have an inflation problem. Inflation over the last year has been 0.5 percent. The country has actually been struggling to raise its inflation rate.

Nonetheless, the NYT quotes an expert telling us that Japan cannot stay on its current course:

“‘When it comes to work style change and faster introduction of digitalization, the shock that came from corona probably made a bigger impact’ than Mr. Abe’s policies, said Takuji Okubo, the North Asia director of the Economist Corporate Network.

“With the economy in crisis, Japan’s next leader ‘needs to move in a different direction,’ he said. ‘The next prime minister will not be able to use monetary policy that much. The room for further expansion, for further easing, is very limited.'”

While Japan’s economy clearly has problems, like all economies, it is not clear what limits it presently faces. Its growth in per capita GDP and labor productivity is not very different than in the United States.

When people want to hold up Japan as a country that is suffering because of high debt, it is mostly just hand waving.  There is little evidence to support this view.

 

That’s a theme we have been hearing for decades. Japan is a huge embarrassment for the deficit hawks. It has a debt to GDP ratio of close to 250 percent, more than twice as high as in the United States, yet it has none of the problems that the deficit hawks tell us will come from high debt.

It currently pays 0.05 percent interest on its long-term bonds. Much of its debt carries a negative interest rate so that its debt burden is currently near zero. This means that in spite of its high debt, the country neither has interest rates nor faces a crushing debt burden.

It also does not have an inflation problem. Inflation over the last year has been 0.5 percent. The country has actually been struggling to raise its inflation rate.

Nonetheless, the NYT quotes an expert telling us that Japan cannot stay on its current course:

“‘When it comes to work style change and faster introduction of digitalization, the shock that came from corona probably made a bigger impact’ than Mr. Abe’s policies, said Takuji Okubo, the North Asia director of the Economist Corporate Network.

“With the economy in crisis, Japan’s next leader ‘needs to move in a different direction,’ he said. ‘The next prime minister will not be able to use monetary policy that much. The room for further expansion, for further easing, is very limited.'”

While Japan’s economy clearly has problems, like all economies, it is not clear what limits it presently faces. Its growth in per capita GDP and labor productivity is not very different than in the United States.

When people want to hold up Japan as a country that is suffering because of high debt, it is mostly just hand waving.  There is little evidence to support this view.

 

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line?

This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million.

And these pay structures carry over into other sectors. It is common for university presidents to get paid in the neighborhood of $1 million a year. The same applies to the heads of major charities and foundations, including those that have combatting inequality as part of their mission.

This story would look very different if CEOs got paid 20 to 30 as much as a typical worker, as would have been the case in the 1960s or 1970s. In that case, CEOs would be getting $2-3 million a year. The CFOS and other top-level executives would presumably make $1.5 to $2 million, with the third tier likely getting high six figures. In that world, the presidents of universities and top executives of major foundations would likely earn $400 -$500 thousand a year.

More for the Top Means Less for Everyone Else

If it is not obvious, more for those at the top means less for everyone else. If their pay is not actually justified by their productivity, they are taking a larger chunk of the same pie. This means smaller slices for everyone else.

As I like to point out, if the minimum wage had kept pace with productivity growth since 1968, as it did from 1938 to 1968, it would be $24 an hour today. In that world, a full-time minimum wage worker would be earning $48,000 a year. A two minimum wage earner couple would be earning $96,000 a year.

While that may sound pretty good to many of us, it is not possible in an economy where the CEOs are getting $20 million, when they only add $2 million to the company’s bottom line, and the next in line get $8-$12 million, and university and foundation presidents pocket more than $1 million a year. This is a story where we would see excessive demand in the economy, leading to serious problems of inflation.

If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t.

Evidence of Whether CEOs Earn Their Keep

The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance. While this book is now somewhat dated (it was published in 2004) it compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.

A more recent study found that corporate boards seem to have stock option illusion. (This is a variation of the concept of “money illusion” which economists often argue is a problem for workers not recognizing the impact of inflation on their wages.) Corporate boards did not reduce the number of options issued to CEOs and top executives in the 1990s, even as the rising stock market caused their value to soar. Another study of a large number of companies over a ten-year period found a negative relationship between CEO pay and shareholder returns, implying that the high pay of CEOs and other top executives was coming at the expense of returns to shareholders.

A couple of years ago, Jessica Schieder and I did a study where we looked at the impact of the Affordable Care Act’s (ACA) limit on the deductibility of CEO pay for health insurance executives on their pay. Since the corporate tax rate at the time was 35 percent, the ACA’s cap on deductibility effectively raised the cost of CEO pay to the company by more than 50 percent. (Before the ACA, a dollar of additional CEO pay cost the company 65 cents. When it was no longer deductible, it cost the company $1.00.)

We tried every plausible specification for regressions, controlling for profit growth, revenue growth, stock appreciation, and anything else that might reasonably be expected to affect CEO pay. We could not find any evidence that the loss of the deduction had any negative impact at all. This means that each dollar of CEO pay cost the company 50 percent more, the companies were still paying CEOs just as much as before.

If we accept that CEOs are not producing returns to shareholders consistent with their $20 million paychecks, the question is why? After all, would we expect to see companies paying cashiers or dishwashers $200,000 a year when the going rate in other companies is one-tenth as much?

 

Why Is CEO Pay Out of Whack?

 

The problem is with the governance structure of the corporation. CEO pay is most immediately determined by corporate boards, who largely owe their jobs to top management. Furthermore, keeping their jobs depends almost entirely on keeping other board members happy. Board members who are nominated for re-election win well over 99 percent of the time. Since these jobs typically pay several hundred thousand dollars a year for a few hundred hours of work, board members generally want to keep their jobs.

One sure way of pissing off other board members is asking questions like, “can we get another CEO, who is just as good, for half the pay?” It is a safe bet that this sort of question is almost never asked in corporate board rooms, even though this is supposed to be precisely the question that they should be asking all the time.

In principle, the board’s primary responsibility is to ensure top management is not ripping off shareholders. In reality, their allegiance is instead overwhelmingly to top management, as detailed in Steven Clifford’s great book, the CEO Pay Machine. Clifford was the CEO at a mid-sized company who later sat on several corporate boards, so he has much first-hand experience of the process. 

In this story, the problem is that we have the CEO’s pay, and that of other top executives, being determined by a board that is loyal to them rather than shareholders. The most obvious remedy is to find a mechanism that will give more control of the CEO’s pay to shareholders, so that it can be brought back down to earth.

To be clear, I am not talking about fundamentally changing control of corporations. Many people, including Senator Elizabeth Warren, have proposed giving workers a substantial say on corporate boards. This is a reasonable proposal. Germany has had a system in place for decades that gives workers half the seats on corporate boards, with no obvious ill-effects for its economy.

But this is not the issue I am raising here. I am simply saying that shareholders should have more control over what the CEOs and other top executives get paid. My personal favorite is a modest change to the “Say on Pay” referendums that were put in place in the Dodd-Frank financial reform legislation.

Under this provision, the shareholders get to vote on the compensation package for their CEO every three years. This is a simple yes or no proposition. There is no direct consequence for the CEO, the board, or the pay package of losing a say on pay vote. It is non-binding. As it stands, more than 97 percent of pay packages are approved.

The rules for Say on Pay could be changed so that there are explicit consequences. Suppose the directors sacrificed their own pay if a CEO’s pay package was voted down. With the vast majority of pay packages being approved, most directors would likely think they have nothing to fear. However, when a few packages did get voted down, it is likely that directors would start to ask whether they could get away with paying their CEO less. This could put some serious downward pressure on CEO pay.

This may not be sufficient to get CEO pay back to earth, but it seems like a good place to start. From a political perspective, it seems hard to argue with the idea that shareholders should be able to determine what they pay their CEO and top management.

If this was successful in bringing down CEO pay, we would be in a very different world. As noted earlier, we would see pay scales at the top reduced across the board. Not only would the top echelons of the corporate hierarchy get paid less, but we would see lower pay at the top of other institutions as well.

It is sort of striking that conservative economists can get completely bent out of shape over the idea that some workers may get paid a dollar or two above the market wage, because of the minimum wage. But, few progressive economists seem especially troubled by CEOs getting paid many millions above the market wage because of a corrupt corporate governance structure. Paying a bit more attention to the market here might be a good idea.  

In response to the mass protests following the police killing of George Floyd, there has been a renewed interest in opening doors to Blacks and other disadvantaged groups so that they have more opportunities to get higher paying and higher prestige jobs. While these efforts are important, seeing the little progress we have made in the last half-century, it is hard to believe that longstanding barriers will be eliminated any time soon.

As much as we need to eliminate racism and other forms of discrimination, the consequences will be much less in a world where the university president is getting $400,000 a year and the custodian is getting $48,000 a year than the world we have today. There is certainly no excuse for rigging the market in ways that redistribute money from everyone else to those at the top. This disproportionately hurts Blacks and other victims of discrimination now, but even if we managed to somehow eradicate racism there is no reason to rig the system so that it needlessly forces so many people to live miserable lives.

 

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line?

This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million.

And these pay structures carry over into other sectors. It is common for university presidents to get paid in the neighborhood of $1 million a year. The same applies to the heads of major charities and foundations, including those that have combatting inequality as part of their mission.

This story would look very different if CEOs got paid 20 to 30 as much as a typical worker, as would have been the case in the 1960s or 1970s. In that case, CEOs would be getting $2-3 million a year. The CFOS and other top-level executives would presumably make $1.5 to $2 million, with the third tier likely getting high six figures. In that world, the presidents of universities and top executives of major foundations would likely earn $400 -$500 thousand a year.

More for the Top Means Less for Everyone Else

If it is not obvious, more for those at the top means less for everyone else. If their pay is not actually justified by their productivity, they are taking a larger chunk of the same pie. This means smaller slices for everyone else.

As I like to point out, if the minimum wage had kept pace with productivity growth since 1968, as it did from 1938 to 1968, it would be $24 an hour today. In that world, a full-time minimum wage worker would be earning $48,000 a year. A two minimum wage earner couple would be earning $96,000 a year.

While that may sound pretty good to many of us, it is not possible in an economy where the CEOs are getting $20 million, when they only add $2 million to the company’s bottom line, and the next in line get $8-$12 million, and university and foundation presidents pocket more than $1 million a year. This is a story where we would see excessive demand in the economy, leading to serious problems of inflation.

If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t.

Evidence of Whether CEOs Earn Their Keep

The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance. While this book is now somewhat dated (it was published in 2004) it compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.

A more recent study found that corporate boards seem to have stock option illusion. (This is a variation of the concept of “money illusion” which economists often argue is a problem for workers not recognizing the impact of inflation on their wages.) Corporate boards did not reduce the number of options issued to CEOs and top executives in the 1990s, even as the rising stock market caused their value to soar. Another study of a large number of companies over a ten-year period found a negative relationship between CEO pay and shareholder returns, implying that the high pay of CEOs and other top executives was coming at the expense of returns to shareholders.

A couple of years ago, Jessica Schieder and I did a study where we looked at the impact of the Affordable Care Act’s (ACA) limit on the deductibility of CEO pay for health insurance executives on their pay. Since the corporate tax rate at the time was 35 percent, the ACA’s cap on deductibility effectively raised the cost of CEO pay to the company by more than 50 percent. (Before the ACA, a dollar of additional CEO pay cost the company 65 cents. When it was no longer deductible, it cost the company $1.00.)

We tried every plausible specification for regressions, controlling for profit growth, revenue growth, stock appreciation, and anything else that might reasonably be expected to affect CEO pay. We could not find any evidence that the loss of the deduction had any negative impact at all. This means that each dollar of CEO pay cost the company 50 percent more, the companies were still paying CEOs just as much as before.

If we accept that CEOs are not producing returns to shareholders consistent with their $20 million paychecks, the question is why? After all, would we expect to see companies paying cashiers or dishwashers $200,000 a year when the going rate in other companies is one-tenth as much?

 

Why Is CEO Pay Out of Whack?

 

The problem is with the governance structure of the corporation. CEO pay is most immediately determined by corporate boards, who largely owe their jobs to top management. Furthermore, keeping their jobs depends almost entirely on keeping other board members happy. Board members who are nominated for re-election win well over 99 percent of the time. Since these jobs typically pay several hundred thousand dollars a year for a few hundred hours of work, board members generally want to keep their jobs.

One sure way of pissing off other board members is asking questions like, “can we get another CEO, who is just as good, for half the pay?” It is a safe bet that this sort of question is almost never asked in corporate board rooms, even though this is supposed to be precisely the question that they should be asking all the time.

In principle, the board’s primary responsibility is to ensure top management is not ripping off shareholders. In reality, their allegiance is instead overwhelmingly to top management, as detailed in Steven Clifford’s great book, the CEO Pay Machine. Clifford was the CEO at a mid-sized company who later sat on several corporate boards, so he has much first-hand experience of the process. 

In this story, the problem is that we have the CEO’s pay, and that of other top executives, being determined by a board that is loyal to them rather than shareholders. The most obvious remedy is to find a mechanism that will give more control of the CEO’s pay to shareholders, so that it can be brought back down to earth.

To be clear, I am not talking about fundamentally changing control of corporations. Many people, including Senator Elizabeth Warren, have proposed giving workers a substantial say on corporate boards. This is a reasonable proposal. Germany has had a system in place for decades that gives workers half the seats on corporate boards, with no obvious ill-effects for its economy.

But this is not the issue I am raising here. I am simply saying that shareholders should have more control over what the CEOs and other top executives get paid. My personal favorite is a modest change to the “Say on Pay” referendums that were put in place in the Dodd-Frank financial reform legislation.

Under this provision, the shareholders get to vote on the compensation package for their CEO every three years. This is a simple yes or no proposition. There is no direct consequence for the CEO, the board, or the pay package of losing a say on pay vote. It is non-binding. As it stands, more than 97 percent of pay packages are approved.

The rules for Say on Pay could be changed so that there are explicit consequences. Suppose the directors sacrificed their own pay if a CEO’s pay package was voted down. With the vast majority of pay packages being approved, most directors would likely think they have nothing to fear. However, when a few packages did get voted down, it is likely that directors would start to ask whether they could get away with paying their CEO less. This could put some serious downward pressure on CEO pay.

This may not be sufficient to get CEO pay back to earth, but it seems like a good place to start. From a political perspective, it seems hard to argue with the idea that shareholders should be able to determine what they pay their CEO and top management.

If this was successful in bringing down CEO pay, we would be in a very different world. As noted earlier, we would see pay scales at the top reduced across the board. Not only would the top echelons of the corporate hierarchy get paid less, but we would see lower pay at the top of other institutions as well.

It is sort of striking that conservative economists can get completely bent out of shape over the idea that some workers may get paid a dollar or two above the market wage, because of the minimum wage. But, few progressive economists seem especially troubled by CEOs getting paid many millions above the market wage because of a corrupt corporate governance structure. Paying a bit more attention to the market here might be a good idea.  

In response to the mass protests following the police killing of George Floyd, there has been a renewed interest in opening doors to Blacks and other disadvantaged groups so that they have more opportunities to get higher paying and higher prestige jobs. While these efforts are important, seeing the little progress we have made in the last half-century, it is hard to believe that longstanding barriers will be eliminated any time soon.

As much as we need to eliminate racism and other forms of discrimination, the consequences will be much less in a world where the university president is getting $400,000 a year and the custodian is getting $48,000 a year than the world we have today. There is certainly no excuse for rigging the market in ways that redistribute money from everyone else to those at the top. This disproportionately hurts Blacks and other victims of discrimination now, but even if we managed to somehow eradicate racism there is no reason to rig the system so that it needlessly forces so many people to live miserable lives.

 

Yep, that’s its big story for the day, although people probably saw the number $62 million in the headline. The program spent a total of $525 billion to keep small businesses alive and workers being paid in the period where the economy was largely shutdown. It was a rushed program that was completely improvised, since nothing had ever been done like this before.

It was inevitable that there would be some fraud, since the safeguards were obviously far from perfect. In fact, we can be sure that the $62 million uncovered by the Justice Department to date is just the tip of the iceberg. However, rather than implying to readers that this figure is evidence of widespread fraud, it actually is the opposite. It is a very small amount of fraud given the size of the program and the rush to get money out the door. Even if the final tally for fraud ends up being one hundred times this amount, it would be pretty good for a huge program  that was put together from scratch.

Yep, that’s its big story for the day, although people probably saw the number $62 million in the headline. The program spent a total of $525 billion to keep small businesses alive and workers being paid in the period where the economy was largely shutdown. It was a rushed program that was completely improvised, since nothing had ever been done like this before.

It was inevitable that there would be some fraud, since the safeguards were obviously far from perfect. In fact, we can be sure that the $62 million uncovered by the Justice Department to date is just the tip of the iceberg. However, rather than implying to readers that this figure is evidence of widespread fraud, it actually is the opposite. It is a very small amount of fraud given the size of the program and the rush to get money out the door. Even if the final tally for fraud ends up being one hundred times this amount, it would be pretty good for a huge program  that was put together from scratch.

Donald Trump’s re-election campaign has been touting that he is tough on the drug companies, unlike the wimpy Joe Biden. Perhaps in Trumpland this is true, but not in the real world. Spending on prescription drugs has actually increased somewhat more rapidly under Trump than Obama-Biden, rising at a 6.3 percent annual rate under Trump compared to a 5.5 percent rate under Obama-Biden.

Here’s the picture showing year over year increases.

As can be seen, spending grew relatively slowly through Obama’s first term, hitting a low of just 1.9 percent in the first quarter of 2013. It then sped up over the next year before downward again at the start of 2015. In the last quarter of the administration, the fourth quarter of 2016, spending rose by 3.3 percent.

The general direction in the Trump years has been upward, with a peak of 9.7 percent in the first quarter of 2020, then a drop to 4.4 percent in the second quarter. This falloff is a direct result of the pandemic, as many people put off doctors’ visits, which meant that they would be prescribed fewer drugs. So, before the pandemic, drug spending was rising at a rapid and accelerating pace.

These data are taken from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U, Line 121.

Donald Trump’s re-election campaign has been touting that he is tough on the drug companies, unlike the wimpy Joe Biden. Perhaps in Trumpland this is true, but not in the real world. Spending on prescription drugs has actually increased somewhat more rapidly under Trump than Obama-Biden, rising at a 6.3 percent annual rate under Trump compared to a 5.5 percent rate under Obama-Biden.

Here’s the picture showing year over year increases.

As can be seen, spending grew relatively slowly through Obama’s first term, hitting a low of just 1.9 percent in the first quarter of 2013. It then sped up over the next year before downward again at the start of 2015. In the last quarter of the administration, the fourth quarter of 2016, spending rose by 3.3 percent.

The general direction in the Trump years has been upward, with a peak of 9.7 percent in the first quarter of 2020, then a drop to 4.4 percent in the second quarter. This falloff is a direct result of the pandemic, as many people put off doctors’ visits, which meant that they would be prescribed fewer drugs. So, before the pandemic, drug spending was rising at a rapid and accelerating pace.

These data are taken from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U, Line 121.

We know that Donald Trump has no interest in reality, but just in case anyone might be tempted to take his boasts about bringing back manufacturing jobs seriously, it is worth a quick visit to the actual numbers. In 2016 Trump focused his campaign on a series of Midwestern swing states that had been hard hit by the loss of manufacturing jobs due to trade. He insisted that he would bring back these jobs as a result of his great skills as a deal maker. He would negotiate new trade deals so that we would get back the jobs we had lost.

Let’s take a quick look at the picture as of January 2020. I’m deliberately ending the period before the pandemic began to have an impact on the economy.

Source: Bureau of Labor Statistics.

As can be seen in three of the five states, there were actually more manufacturing jobs created in the last three years of the Obama administration than in the first three years of the Trump administration. (I took January of each year as the start and endpoint.) The largest difference by far is in Michigan, where the state added 59,800 manufacturing jobs in the last three years of the Obama administration, compared to 11,600 jobs in the first three years of the Trump administration.

In the case of both Minnesota and Ohio, the last three years of the Obama administration produced more manufacturing jobs than the first three years of the Trump administration. In the case of Pennsylvania and Wisconsin, the gap goes the other way. Pennsylvania lost 5,800 manufacturing jobs in the last three years of the Obama administration but gained 13,100 manufacturing jobs in the first three years of the Trump administration. In Wisconsin, the performance under Trump is 15,500 new manufacturing jobs, compared to 5,000 manufacturing jobs in the last three years of the Obama administration.

Even in these two states, we are not likely to get to real world MAGA Land at this rate any time soon. Pennsylvania lost 308,000 manufacturing jobs between 2000 and 2010. Wisconsin lost 172,000 jobs over this period. This means that at the pre-pandemic Trump rate of manufacturing job growth it would take Pennsylvania almost 60 years to get back to the number of manufacturing jobs it had in 2000. Wisconsin, with a smaller number of lost jobs, can get back to its 2000 level by 2053 at its Trump pace of job growth.

The basic story is that Trump may have rebuilt our manufacturing base and brought back the jobs lost to trade in his head, but he did not do it in the real world.

We know that Donald Trump has no interest in reality, but just in case anyone might be tempted to take his boasts about bringing back manufacturing jobs seriously, it is worth a quick visit to the actual numbers. In 2016 Trump focused his campaign on a series of Midwestern swing states that had been hard hit by the loss of manufacturing jobs due to trade. He insisted that he would bring back these jobs as a result of his great skills as a deal maker. He would negotiate new trade deals so that we would get back the jobs we had lost.

Let’s take a quick look at the picture as of January 2020. I’m deliberately ending the period before the pandemic began to have an impact on the economy.

Source: Bureau of Labor Statistics.

As can be seen in three of the five states, there were actually more manufacturing jobs created in the last three years of the Obama administration than in the first three years of the Trump administration. (I took January of each year as the start and endpoint.) The largest difference by far is in Michigan, where the state added 59,800 manufacturing jobs in the last three years of the Obama administration, compared to 11,600 jobs in the first three years of the Trump administration.

In the case of both Minnesota and Ohio, the last three years of the Obama administration produced more manufacturing jobs than the first three years of the Trump administration. In the case of Pennsylvania and Wisconsin, the gap goes the other way. Pennsylvania lost 5,800 manufacturing jobs in the last three years of the Obama administration but gained 13,100 manufacturing jobs in the first three years of the Trump administration. In Wisconsin, the performance under Trump is 15,500 new manufacturing jobs, compared to 5,000 manufacturing jobs in the last three years of the Obama administration.

Even in these two states, we are not likely to get to real world MAGA Land at this rate any time soon. Pennsylvania lost 308,000 manufacturing jobs between 2000 and 2010. Wisconsin lost 172,000 jobs over this period. This means that at the pre-pandemic Trump rate of manufacturing job growth it would take Pennsylvania almost 60 years to get back to the number of manufacturing jobs it had in 2000. Wisconsin, with a smaller number of lost jobs, can get back to its 2000 level by 2053 at its Trump pace of job growth.

The basic story is that Trump may have rebuilt our manufacturing base and brought back the jobs lost to trade in his head, but he did not do it in the real world.

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