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.

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

A story on All Things Considered last night told listeners:

“In the early ’90s, President Bill Clinton’s administration was troubled by this looming problem. Year after year, both government deficits and interest rates were going up. Here’s one of his top economic advisers, Laura Tyson.

“LAURA TYSON: ‘And then he said, oh, my goodness, if we don’t get a hold of this federal deficit going forward, then those rates will continue upward. That was a very significant concern.'”

That’s actually not what happened in the early 1990s when Bill Clinton was president. Here’s the picture for the interest rate on 10-year Treasury bonds.

As can be seen, interest rates were falling sharply through the whole period from the third quarter of 1990 to the fourth quarter of 1993. Bill Clinton passed his big deficit reduction package in the third quarter of 1993. Interest rates did start to rise in 1994, but the most obvious explanation was that Alan Greenspan began raising short-term interest rates, as the unemployment rate was falling towards the 6.0 percent range, the level at the time generally believed by economists to be the non-accelerating inflation rate of unemployment. (He raised the overnight interest rate from 3.0 percent to 6.0 percent between February of 1994 and March of 2005.)

Budget deficits were actually falling through this whole period, so the link between rising budget deficits and rising interest rates told in this piece is completely at odds with the data.

A story on All Things Considered last night told listeners:

“In the early ’90s, President Bill Clinton’s administration was troubled by this looming problem. Year after year, both government deficits and interest rates were going up. Here’s one of his top economic advisers, Laura Tyson.

“LAURA TYSON: ‘And then he said, oh, my goodness, if we don’t get a hold of this federal deficit going forward, then those rates will continue upward. That was a very significant concern.'”

That’s actually not what happened in the early 1990s when Bill Clinton was president. Here’s the picture for the interest rate on 10-year Treasury bonds.

As can be seen, interest rates were falling sharply through the whole period from the third quarter of 1990 to the fourth quarter of 1993. Bill Clinton passed his big deficit reduction package in the third quarter of 1993. Interest rates did start to rise in 1994, but the most obvious explanation was that Alan Greenspan began raising short-term interest rates, as the unemployment rate was falling towards the 6.0 percent range, the level at the time generally believed by economists to be the non-accelerating inflation rate of unemployment. (He raised the overnight interest rate from 3.0 percent to 6.0 percent between February of 1994 and March of 2005.)

Budget deficits were actually falling through this whole period, so the link between rising budget deficits and rising interest rates told in this piece is completely at odds with the data.

The Interview Continues

You can get more of my thoughts here.

You can get more of my thoughts here.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

The Washington Post had an article on concerns among unions about job loss due to various measures from the Biden administration to promote clean energy. The article noted concerns that Biden’s agenda may lead to the loss of good-paying jobs in the fossil fuel sector.

It would have been helpful to point out how many jobs are potentially at stake. According to the Bureau of Labor Statistics, fossil fuel-powered electric plants and the pipeline industry, the two sectors discussed in the piece employ 78,700 and 48,200 workers, respectively.

The workers employed in fossil fuel power generation are a bit more than 0.05 percent of total employment, while employment in the pipeline industry is just over 0.03 percent. Employment in fossil fuel power generation was already falling rapidly under the Trump administration, declining by 16,800, or 18.0 percent, over the last four years.

It is also worth noting that in a typical (pre-pandemic) month, roughly 1.8 million workers lose their jobs. Over the course of a year, this would come to 27 million. (Some workers lose a job more than once in a year, so this does not mean 27 million workers lose their job.) The job loss in these industries due to the promotion of clean energy would presumably take place over many years, not all at once.

The fact that other workers frequently lose their jobs does not reduce the hardship for workers losing relatively good-paying jobs in the fossil fuel industry. But it is important to place the potential size of the job loss in some context. And, in the case of the fossil fuel power generation sector, it is important to note that there was already substantial job loss under Trump, so job loss is not a new problem that will be created by Biden’s policies, even if it may be accelerated.

The Washington Post had an article on concerns among unions about job loss due to various measures from the Biden administration to promote clean energy. The article noted concerns that Biden’s agenda may lead to the loss of good-paying jobs in the fossil fuel sector.

It would have been helpful to point out how many jobs are potentially at stake. According to the Bureau of Labor Statistics, fossil fuel-powered electric plants and the pipeline industry, the two sectors discussed in the piece employ 78,700 and 48,200 workers, respectively.

The workers employed in fossil fuel power generation are a bit more than 0.05 percent of total employment, while employment in the pipeline industry is just over 0.03 percent. Employment in fossil fuel power generation was already falling rapidly under the Trump administration, declining by 16,800, or 18.0 percent, over the last four years.

It is also worth noting that in a typical (pre-pandemic) month, roughly 1.8 million workers lose their jobs. Over the course of a year, this would come to 27 million. (Some workers lose a job more than once in a year, so this does not mean 27 million workers lose their job.) The job loss in these industries due to the promotion of clean energy would presumably take place over many years, not all at once.

The fact that other workers frequently lose their jobs does not reduce the hardship for workers losing relatively good-paying jobs in the fossil fuel industry. But it is important to place the potential size of the job loss in some context. And, in the case of the fossil fuel power generation sector, it is important to note that there was already substantial job loss under Trump, so job loss is not a new problem that will be created by Biden’s policies, even if it may be accelerated.

I guess it is hard to get news at the world’s leading newspapers, but this lengthy podcast on Bill Gates and his efforts to make vaccines available to the developing world never once mentioned the vaccines developed by China or Russia. This is more than a bit incredible because at this point, far more of the Russian and Chinese vaccines are going to developing countries than the vaccines supplied by Western countries through COVAX, the international consortium set up the WHO and supported by the Gates Foundation.

Are New York Times reporters prohibited from talking about the Chinese and Russian vaccines? 

This piece is also incredible in that it explicitly says that because Gates doesn’t want the government-granted patent monopoly system of financing from being challenged, there is no alternative. That could well be true, but it speaks to the incredible corruption of our politics and our economy, that because one incredibly rich person is opposed to having a corrupt, inefficient, and antiquated system reformed, it will not be reformed.

I guess it is hard to get news at the world’s leading newspapers, but this lengthy podcast on Bill Gates and his efforts to make vaccines available to the developing world never once mentioned the vaccines developed by China or Russia. This is more than a bit incredible because at this point, far more of the Russian and Chinese vaccines are going to developing countries than the vaccines supplied by Western countries through COVAX, the international consortium set up the WHO and supported by the Gates Foundation.

Are New York Times reporters prohibited from talking about the Chinese and Russian vaccines? 

This piece is also incredible in that it explicitly says that because Gates doesn’t want the government-granted patent monopoly system of financing from being challenged, there is no alternative. That could well be true, but it speaks to the incredible corruption of our politics and our economy, that because one incredibly rich person is opposed to having a corrupt, inefficient, and antiquated system reformed, it will not be reformed.

Washington Post columnist Steven Pearlstein had his final column today, and it is quite explicitly an attack on current progressive economic priorities. I will make three points, but first let me say that I have appreciated Pearlstein’s columns over the years. I have often criticized them, but I have also learned from them. And, I will give Pearlstein credit for talking to a diverse range of voices and not just repeating centrist claptrap, like some other economic commentators.

Okay, so getting to the beef:

  • Pearlstein ignores the political context for the big Biden ask;
  • The $15 minimum wage target is based on solid economic analysis;
  • The financial bubbles that worry Pearlstein do not threaten the economy.

Political Context of the Pandemic Recovery Package
Starting with political context, any serious person must recognize that the Republican Party is now committed to obstruction of anything Democrats do, regardless of its cost to the economy and the country. This is not a question of ideological differences, the Republicans simply want to regain power and are happy to see people lose their jobs, their businesses, and even their lives if it will advance that goal.

We saw the indifference to the country’s economic well-being in the Obama presidency where they did everything they could to slow the economy and limit job gains so that they would be better positioned in challenging Obama and the Democrats. The indifference to human lives has been clear in their response to the pandemic. They have vigorously fought efforts to limit the pandemic’s spread in order to get talking points that apparently sell with their base.

In this context, the risks for Biden and the Democrats of going too low hugely outweigh the risks of going too high. We know with absolute certainty that if the Biden recovery package is inadequate enough to restore strong growth, the Republicans will do everything they can to prevent Biden from having another bite at the apple. Like most economists, I recognize that the package may be too large and lead to inflationary pressures, but we have the tools to contain inflation, if it proves to be a problem. We don’t have any tools to overcome deliberate economic sabotage by Republicans if they end up with a majority of either house.

The $15 Minimum Wage Is Based on Solid Analysis
The $15 minimum wage target did originate as an alliteration (Fight for $15), not a carefully thought out economic analysis, but time has brought the two together. Back in 2015, John Schmitt from CEPR and Larry Mishel and David Cooper from EPI, carefully reviewed the evidence to determine a plausible minimum wage target for 2020. They concluded that a $12.00 minimum wage for 2020 would allow for substantial improvements in living standards for low wage workers, with little risk of large-scale job loss.

If we look out to 2025, the combined impact of inflation and productivity growth would imply a minimum wage target that is roughly 20 percent higher than the $12 target for 2020. That would put as $14.40 an hour, a stone’s throw away from the $15 target proposed by Biden.

To be clear, the job loss from a $15 an hour minimum wage in 2025 will not be zero. Some businesses will cut back employment. And, small businesses go under every day of the week. In some cases, paying workers more could be the straw that broke the camel’s back. But a great deal of recent research indicates that we will not see large-scale job loss from a $15 minimum wage. (It’s also worth noting that if the minimum wage had kept pace with productivity growth since 1968, as it did in the three decades prior to 1968, it would be close to $30 an hour by 2025.)

In short, it is Pearlstein, not progressive advocates of a $15 minimum wage, who is being sloppy. The research indicates that a wage hike of this size will have enormous benefits for low-wage workers and their families. It will not lead to substantial job loss.

Not All Bubbles Are Created Equal
I was one of the few economists warning about the risks to the economy from the housing bubble from 2002 until it started to deflate in the second half of 2006. I also warned about the risks of the stock bubble in the prior decade. In both cases, the collapse of the bubble led to recessions. The recession was the worst since the Great Depression in the case of the housing bubble.

From a labor market perspective, the stock crash recession was also severe. We didn’t get back the jobs lost in the recession, which began in March of 2001, until January of 2005. At the time, this was the longest period without positive job growth since the Great Depression.

I am saying this just to make the point that I take asset bubbles seriously. However, I think Pearlstein is off the mark in arguing that current bubbles in the stock market and bond market pose a major threat to the economy.

The history of the Great Recession has been rewritten to make it a story of the financial crisis. While the financial crisis undoubtedly worsened the recession, the real story of the Great Recession was simply that the bubble that had been driving the economy in the years 2002-2007 had deflated. Residential construction fell from a peak of 6.7 percent of GDP to less than 2.0 percent of GDP. Consumption had boomed as people spent based on the bubble-generated equity in their homes. Soaring consumption pushed the savings rate to a record low 2.0 percent in 2006. After the collapse, it rose to a more normal 8.0 percent.

The combined impact of the lost construction and consumption was more than 8.0 percentage points of GDP, which would come to around $1.7 trillion in lost annual demand in today’s economy. This huge loss of demand would have led to a severe recession even if the financial system was operating perfectly.

This is all straightforward arithmetic. It is also supported by the obvious fact that by 2010, the financial system was pretty much back to normal, but the unemployment rate remained high and the economy was operating well below its potential.

Like many other analysts, Pearlstein has fallen into the trap of obsessing on the financial side of the story and ignoring the real side. I agree completely that the stock market is extraordinarily high by almost any measure. But suppose it falls by 20 or 30 percent, what bad thing will happen?

Unlike the 1990s stock bubble, the high stock market has not led to any investment boom. In fact, companies are spending far more money buying back shares than they are getting from issuing new shares. The high stock prices also have not led to any consumption boom, unlike in the 1990s when the savings rate was hitting then record lows. Saving rates were at very normal levels even before the pandemic hit. In short, unlike the earlier stock bubble or the housing bubble, this stock market is not driving the economy.

The same is true for what is arguably a bond bubble. Suppose the bond market loses $2-$4 trillion in value as bond prices tumble and some bonds default. We would have some very unhappy investors and perhaps some bankrupt hedge funds, but why would this sink the economy? The same is true for other bubbles, like Bitcoin and baseball cards. The collapse of these bubbles can leave a lot of people unhappy, but it is hard to see the economic disaster story.

In short, Pearlstein is right to worry about bubbles, but we have to focus on the bubbles that are actually driving the economy. The bubbles that have concerned him in recent years are clearly not driving the economy, even if their collapse will cause serious pain to true believers.

Anyhow, I wish Pearlstein a long and productive retirement.

Washington Post columnist Steven Pearlstein had his final column today, and it is quite explicitly an attack on current progressive economic priorities. I will make three points, but first let me say that I have appreciated Pearlstein’s columns over the years. I have often criticized them, but I have also learned from them. And, I will give Pearlstein credit for talking to a diverse range of voices and not just repeating centrist claptrap, like some other economic commentators.

Okay, so getting to the beef:

  • Pearlstein ignores the political context for the big Biden ask;
  • The $15 minimum wage target is based on solid economic analysis;
  • The financial bubbles that worry Pearlstein do not threaten the economy.

Political Context of the Pandemic Recovery Package
Starting with political context, any serious person must recognize that the Republican Party is now committed to obstruction of anything Democrats do, regardless of its cost to the economy and the country. This is not a question of ideological differences, the Republicans simply want to regain power and are happy to see people lose their jobs, their businesses, and even their lives if it will advance that goal.

We saw the indifference to the country’s economic well-being in the Obama presidency where they did everything they could to slow the economy and limit job gains so that they would be better positioned in challenging Obama and the Democrats. The indifference to human lives has been clear in their response to the pandemic. They have vigorously fought efforts to limit the pandemic’s spread in order to get talking points that apparently sell with their base.

In this context, the risks for Biden and the Democrats of going too low hugely outweigh the risks of going too high. We know with absolute certainty that if the Biden recovery package is inadequate enough to restore strong growth, the Republicans will do everything they can to prevent Biden from having another bite at the apple. Like most economists, I recognize that the package may be too large and lead to inflationary pressures, but we have the tools to contain inflation, if it proves to be a problem. We don’t have any tools to overcome deliberate economic sabotage by Republicans if they end up with a majority of either house.

The $15 Minimum Wage Is Based on Solid Analysis
The $15 minimum wage target did originate as an alliteration (Fight for $15), not a carefully thought out economic analysis, but time has brought the two together. Back in 2015, John Schmitt from CEPR and Larry Mishel and David Cooper from EPI, carefully reviewed the evidence to determine a plausible minimum wage target for 2020. They concluded that a $12.00 minimum wage for 2020 would allow for substantial improvements in living standards for low wage workers, with little risk of large-scale job loss.

If we look out to 2025, the combined impact of inflation and productivity growth would imply a minimum wage target that is roughly 20 percent higher than the $12 target for 2020. That would put as $14.40 an hour, a stone’s throw away from the $15 target proposed by Biden.

To be clear, the job loss from a $15 an hour minimum wage in 2025 will not be zero. Some businesses will cut back employment. And, small businesses go under every day of the week. In some cases, paying workers more could be the straw that broke the camel’s back. But a great deal of recent research indicates that we will not see large-scale job loss from a $15 minimum wage. (It’s also worth noting that if the minimum wage had kept pace with productivity growth since 1968, as it did in the three decades prior to 1968, it would be close to $30 an hour by 2025.)

In short, it is Pearlstein, not progressive advocates of a $15 minimum wage, who is being sloppy. The research indicates that a wage hike of this size will have enormous benefits for low-wage workers and their families. It will not lead to substantial job loss.

Not All Bubbles Are Created Equal
I was one of the few economists warning about the risks to the economy from the housing bubble from 2002 until it started to deflate in the second half of 2006. I also warned about the risks of the stock bubble in the prior decade. In both cases, the collapse of the bubble led to recessions. The recession was the worst since the Great Depression in the case of the housing bubble.

From a labor market perspective, the stock crash recession was also severe. We didn’t get back the jobs lost in the recession, which began in March of 2001, until January of 2005. At the time, this was the longest period without positive job growth since the Great Depression.

I am saying this just to make the point that I take asset bubbles seriously. However, I think Pearlstein is off the mark in arguing that current bubbles in the stock market and bond market pose a major threat to the economy.

The history of the Great Recession has been rewritten to make it a story of the financial crisis. While the financial crisis undoubtedly worsened the recession, the real story of the Great Recession was simply that the bubble that had been driving the economy in the years 2002-2007 had deflated. Residential construction fell from a peak of 6.7 percent of GDP to less than 2.0 percent of GDP. Consumption had boomed as people spent based on the bubble-generated equity in their homes. Soaring consumption pushed the savings rate to a record low 2.0 percent in 2006. After the collapse, it rose to a more normal 8.0 percent.

The combined impact of the lost construction and consumption was more than 8.0 percentage points of GDP, which would come to around $1.7 trillion in lost annual demand in today’s economy. This huge loss of demand would have led to a severe recession even if the financial system was operating perfectly.

This is all straightforward arithmetic. It is also supported by the obvious fact that by 2010, the financial system was pretty much back to normal, but the unemployment rate remained high and the economy was operating well below its potential.

Like many other analysts, Pearlstein has fallen into the trap of obsessing on the financial side of the story and ignoring the real side. I agree completely that the stock market is extraordinarily high by almost any measure. But suppose it falls by 20 or 30 percent, what bad thing will happen?

Unlike the 1990s stock bubble, the high stock market has not led to any investment boom. In fact, companies are spending far more money buying back shares than they are getting from issuing new shares. The high stock prices also have not led to any consumption boom, unlike in the 1990s when the savings rate was hitting then record lows. Saving rates were at very normal levels even before the pandemic hit. In short, unlike the earlier stock bubble or the housing bubble, this stock market is not driving the economy.

The same is true for what is arguably a bond bubble. Suppose the bond market loses $2-$4 trillion in value as bond prices tumble and some bonds default. We would have some very unhappy investors and perhaps some bankrupt hedge funds, but why would this sink the economy? The same is true for other bubbles, like Bitcoin and baseball cards. The collapse of these bubbles can leave a lot of people unhappy, but it is hard to see the economic disaster story.

In short, Pearlstein is right to worry about bubbles, but we have to focus on the bubbles that are actually driving the economy. The bubbles that have concerned him in recent years are clearly not driving the economy, even if their collapse will cause serious pain to true believers.

Anyhow, I wish Pearlstein a long and productive retirement.

Want to search in the archives?

¿Quieres buscar en los archivos?

Click Here Haga clic aquí