Monthly Archives: June 2008

CEO Pay and the Mechanisms of Inequality

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Like a broken record, I repeat myself: A high level of income inequality means nothing in itself. If you think there is some unfairness or injustice involved then show the mechanism that produced the pattern, and then let’s consider whether there is something unjust or unfair about it. Ian Dew-Becker and Robert Gordon’s new VoxEU op-ed is notable, and worthy of emulation, for pointing to a very possibly unjust mechanism behind the rapid rate of increase at the top of the top of the distribution.

While the demand and supply story of SBTC and Goldin and Katz can help explain the 90-10 ratio, increased skewness of incomes above the 90th percentile has been driven by a set of fundamentally different factors. To help understand the evolution of the highest incomes, we divide these workers into three categories. Superstars include the top members of any occupation that provides disproportionate rewards to the first-best as contrasted with the second-best. The superstar phenomenon has at its core the magnification of audiences, the fact that a single performance can be witnessed by an audience of one person or ten million people, depending on the perceived attraction and talent. The second category includes law partnerships, investment bankers, and hedge fund managers, where there is no obvious analogy to audience magnification but where there are steep wage premia for the very best in an occupational niche, and where it is apparent that incomes are highly market-driven.

The most contentious question regards the third category, top executives in public corporations. The core distinction is that CEO compensation is chosen by their peers in a system that gives CEOs and their hand-picked boards of directors, rather than the market, control over top incomes. The idea that managers, rather than stockholders, control directors goes back to Berle and Means (1932). This idea that the principal-agent control of stockholders should be reversed has been applied fruitfully by such authors as Bebchuk and Fried (2004). They argue that managerial power lies behind some of the outsized gains in CEO pay.

In general, we believe that better disclosure and better laws regarding corporate governance can help deal with high CEO pay. Precisely determining what counts as reasonable pay is beyond the government’s abilities. However, there is some evidence, reviewed by Dew-Becker (2008), showing that increases in mandatory disclosure lead to better corporate performance and better designed pay packages.

For some time now, I’ve seen overlapping directorates and reciprocal self-dealing by tightly socially connected corporate board members to be a plausible unjust mechanism behind the level of income inequality. Arnold Kling has a good post that outlines an alternative theory of CEO pay, but he also seems inclined to the view that there is some kind of malfeasance going on here.

Do notice, however, that the authors concede SBTC as a good explanation for much of the gap between the 10th and 90th percentiles. And, within the top 10 percent, superstar markets and the increasing value of talent in certain niches explains a lot of the gap between the 90th and 99th percentiles. It’s not clear just how much of the outsized income gains at the top of the top are due to CEO pay. So even were reforms put in place that would prevent collusive yachting buddies from making each other that much richer, the overall effect on income inequality might be small. Of those who benefit from pure market mechanisms, Dew-Becker and Gordon write,

Their earnings are an outcome of market forces, and the only policy measure available to achieve greater after-tax equality is an increase in tax rates at the top balanced by a decrease at the bottom.

That is to say, they identify nothing untoward about the institutional mechanisms that produce inequality in this way, so there is no reason to try to intervene with new policy to change them. But this of course raises the question of why, in this kind of case, greater after-tax equality is morally desirable at all, or why an equality-aiming increase in tax rates on those with justly-earned incomes would morally permissible.

Is Blog Traffic Inequality Evidence of Unfairness?

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Tim Lee continues to preach it over at TPMCafe

For reasons that aren’t clear to me, a lot of people seem to have a very different intuition when we’re talking about the distribution of dollars rather than eyeballs or Wikipedia edits. The mere existence of growing income inequality is treated as a prima facie evidence of serious flaws in the American economic system. People seem to assume that such a distribution cannot arise absent systematic distortions redistributing income upwards. Therefore, even if we can’t identify the specific mechanism that’s robbing from the poor and giving to the rich, we can infer its operation from the skewed distribution of income.

But in fact, the processes that give rise to income inequality are roughly the same as the processes that give rise to inequality online. We should expect that even in a perfectly just economic system, some people would earn a lot more money than others, and that the gap would grow over time as technological progress increases the size of the market and the potential for division of labor.

It’s not obvious to me that the mechanism that drives inequality in Wikipedia edits is the same as the one driving blog traffic inequality, but Tim’s right that both these mechanisms are in work in the broader economy. In Wikipedia, I think you see a sort of regular 80/20 effect; a minority does most of the work. But what do they get for that? Blogs seem like a pretty typical superstar market. The small minority dominating traffic don’t necessarily have a large productivity advantage. The highest traffic blogs are all high-volume, but lots of high-volume, high-quality blogs get very little traffic. People want to read what other people are reading, so the blogs that win the competition to become a focal point for attention reap most of the traffic.

Stranger-Reported Economist Happiness

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This paper from the May 2008 edition of Kyklos [ungated] just may be the best paper ever written. It investigates the happiness of economics Nobel Prize winners, non-Nobel superstar economists, and prominent happiness researchers by showing their website photographs to people on the street in Melbourne Brisbane, Australia. Thus it contains winning lines such as:

[T]he advice for young academics is: if you seek happiness, become a macro-economist and research happiness; a Nobel Prize does not make you happier; if you want to be popular with the ladies, take lessons from Edmund Phelps, Bruno Frey and Richard Easterlin; if you are looking for the ability to age like a red wine, Joseph Stiglitz and Jean Tirole have the trick, but not Richard Easterlin.

Who, according to the good people of Melbourne Brisbane, is the happiest economist? Well, who do you think? [Click for full size.]

Nobelists, Superstars, and Happiness Researchers

That’s right, Edmund Phelps. That man is clearly loving life.

Congratulations to the authors for this exemplary piece of social science!

Strategic Opinions

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Robin Hanson sez:

Our opinions are part of this dominance/submission signaling system.  The higher we feel in status the more we feel free to express distinctive opinions and expect others to agree, or at least not greatly disagree.  Which is why we are so reluctant to agree with others we compete with, even when they make good points.

I eagerly admit that this is a good point. But! I don’t think everybody plays this game. There is an opinion elite heterodoxy game and there is a hoi polloi orthodoxy game. In some groups, contrariness is an effective strategy of marginalization, not elevation. But this is a game I’m sure Robin and I, in our different ways, are playing. I guess that’s one reason why I sort of pity people who are rigidly doctrinaire or partisan: it’s so intellectually submissive. Unless, of course, you pioneered the doctrine.

Contingency + Love = No Regrets?

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Bryan Caplan’s argument in his post on “Parenthood as the Trump of All Past Regret” proves both too much and too little. The general form of the argument has nothing to do with children, but applies to anything contingent one has come to value highly. Bryan’s argument has the same form as this: “If I hadn’t murdered those six toddlers with a hacksaw, I never would have met my cherished wife, the public defender, so I don’t regret it.” But that’s just silly. If you think the unintelligibility of regret follows from the fact of a world in which there is both contingency and deeply-held values (i.e., follows from from the actual world), then you are probably making a mistake. I’d say the mistake is assuming that what you are doing when you regret having done X is wishing that all the events conditional on X hadn’t occurred. Regret is more forward-looking than that.

Technology and the Status Game

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Over at TPMCafe Book Club, Internet guru Clay Shirky and tech policy wizard Tim Lee are discussing the old debate between Henry Farrell and me about the proliferation of status dimensions enabled by wealth and the development of new technology, and whether or not there is some kind of meta-ranking of status dimensions.

To Henry’s attempt at a sort of comic reductio in the example of a “level 75 Night Elf Rogue who Kicks Serious Ass!”, Clay responds:

Now this example is designed to be an absurd extreme, and Henry says as much, but even in its seemingly absurd form, I’m not on board with it. As I write this, Tiger Woods may be making some sort of golf history, burnishing further his already highly burnished reputation & c., and yet, given the choice, I’d much rather have dinner with the elf. I don’t care about golf, but I do care about Warcraft, and someone with that degree of expertise is a big deal in my book.

One obvious objection is that I am simply a pallid, pencil-necked geek who doesn’t understand the implicit meta-ranking of golf over WoW, but in fact, I am a pallid, pencil-necked geek who understands the implicit meta-ranking of golf over WoW perfectly well. The NY Times never puts serious Warcraft players on the front page of the sports section, much less the front page over all, so the general social importance of golf is hardly lost on me.

I simply don’t care. That most of my fellow citizens prefer golf to WoW doesn’t make me feel bad that I don’t, which I take to be Wilkinson’s point.

Yup.

Tim does an outstanding job of explaining why new technology makes the existence of a meta-ranking more and more unlikely.

What I think lends Farrell’s claim of “implicit meta-rankings” some plausibility is the fact that, until recently, the national media provided something like a uniform yardstick for status. In 1970, whoever appeared on national television and in national magazines on a regular basis was a celebrity by definition. And because there were only three television networks and a dozen or so national magazines, the top end of the status hierarchy really was close to zero-sum. If you appeared on Johnny Carson, you displaced somebody else.

But as the Internet removes the artificial scarcity of soapboxes, it is becoming increasingly implausible to suggest that everyone’s fighting for a spot on a fixed national pecking order. Case in point: I just got back home from a road trip with my fiancée, and she brought along her iPod stocked with knitting podcasts. I wasn’t aware of it until recently, but there is, apparently, a vibrant online community devoted to swapping knitting tips, complete with its own blogs, forums, podcasts, and minor celebrities. I’m sure there were a few famous authors in 1970 who wrote about knitting, but the national conversation around knitting is incomparably larger and more participatory than it was in 1970. The rise of an online knitting subculture has created a whole new status hierarchy for knitting enthusiasts to compete over.

Later, in an IM, Tim pointed out that because knitting is “done mostly by women it’s harder to place on the male-dominated Night-Elf to Football quarterback spectrum that seems to be what people have in mind when they’re positing a monolithic pecking order.” I think that’s a great observation.

More Tiny Humans for the Glory of Our Kind!

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The inestimable Kerry Howley’s outstanding Reason cover piece on fertility panics is now online. Like the typical Howley production, this is a super-readable combo of fascinating facts and trenchant analysis. Kerry’s great on why talk about “desired fertility” is silly, but I think she’s most insightful on the cultural aspects of fertility policy:

For those who, with good reason, worry about the solvency of transfer programs in an age of population decline, replacement immigration looks like a partial solution, and therefore xenophobia is part of the problem. But for many if not most of the people preoccupied by fertility rates, immigration is no solution at all. The question isn’t about whether the United States, Singapore, or France will be without people in 2100; it’s about what kind of people will populate those countries: what they will look like, what they will teach in their schools, what God they will bow before. Mark Steyn’s America Alone warns that within a few generations Europe will be a Muslim continent. When Pat Buchanan discusses depopulation in The Death of the West, he does not proceed to suggest we replace children of European descent with Mexican laborers. Pro-natalist policies in Quebec, Singapore, and until recently Israel implicitly target a preferred ethnic group, attempting to fill the future with the demographics desired by the current political class.

[...]

At the heart of any fertility incentive lies an attempt to encourage a particular group of women to orient their bodies in a traditional way. Every pro-fertility policy is an effort to slow cultural transformation, to stabilize a society’s ethnic composition, to ossify a current conception of a national culture by freezing the genetic makeup of a nation. From Poland to Singapore, swollen wombs are a bulwark against change.

There is a reason we speak of “Mother Russia” and “Mother India.” Feminist sociologists such as Nira Yuval-Davis refer to women as the “boundary markers” of a state or society. While men may leave, fight, and be compromised, women represent purity and continuity. Yuval-Davis points out in her book Gender and Nation that the Hitler Youth Movement had different mottos for girls and boys. The boys’ motto was: “Live faithfully; fight bravely; die laughing.” For girls: “Be faithful; be pure; be German.” Girls simply had to be. They were the collective.

In times of great social anxiety, we see new calls for women to return to home and hearth—calls alternately cast as a return to tradition and as a progressive leap forward, but efforts, nonetheless, to enlist women in a national project while defining the boundaries of national inclusion. Depopulation is not a given, but ideologically fraught and scientifically questionable debates about gender, race, and culture will be with us no matter which way the population swings. “To know what demography is, we need to know what a population is,” the French social scientist Herve Le Bras wrote in The Invention of Populations. “That is where the trouble begins.”

Spot on! The way I see it, those obsessed with fertility are people who think the culture they desire cannot possibly win the argument against competing cultures. So, they conclude, it’s down to brute baby-making force: the culture that wins the fertility war wins the culture war. In contrast, I think liberal market culture has such immense, salient rewards (wealth, longevity, happiness, etc.) that it is not only possible to win the argument, but that we are in fact winning it. Of course, part of the winning is dynamist cultural synthesis. So if you’ve got a conservative, zoological view of cultural preservation which fixes on the importance of high-fidelity copying of inessential aspects of a culture’s history (costumes, holidays, rites, cuisine, skin colors etc.), you’re going to have a hard time of it. But if you care about the essential core of liberal modernity, you should be delighted with how things are going. You’ll eat your szechuan taco pizza and you’ll love it.

Return Migration

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Until my recent upsurge in interest in migration issues, thanks to Kerry, I had assumed that relocation was something people did for good and that people came to America to become Americans. I wasn’t aware of the large masses of Poles, Italians, Irish, etc., who came to the U.S. to work for a while, and then left again. And there’s a good reason for that: those people’s ancestors didn’t write American social studies textbooks. Anyway, most Mexicans don’t care that much to be Americans, either. But a lot of them would like to work here. And then, eventually, go home.

This story from Reuter’s about Polish immigrants to England moving back to Poland does a good job of illustrating the dynamic:

Four years after Polish graphic designer Chris Rychter headed to Britain to find work and study as a citizen of the European Union, he and his wife have returned home.

Part of a swelling tide of migration back east, they are having a house built in a suburb of the Polish capital.

“It took me just three days to find a job back in Warsaw,” Rychter, 27, told Reuters. “We never saw Britain as home… We went for the adventure and to get some professional experience.”

[...]

the Rychters show how Europe has shrunk and that — contrary to a popular view — migrant flows are not all one-way.

Economists now see a turnstile or pendulum effect of people moving between countries after quite short stints, in search of better conditions.

Statistics on migration within the 27-nation EU are not precise, but around half of an estimated one million people from eastern Europe who moved to Britain since 2004 have already returned home, according to a recent report by the Institute for Public Policy Research (IPPR), a British think-tank.

Increased labor market integration with Mexico would help improve the Mexican economy, making it relatively more attractive for Mexicans to stay or return, just like it’s doing for Poland.

Clark on Polanyi (the Bad One)

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Greg Clark’s NY Sun takedown of Karl Polanyi’s The Great Transformation is ripping good fun. This response, by a sociologist, is entertaining for other reasons. For example, I like how it starts out strong by pointing out that Sun is a neocon rag. The commenters at Mark Thoma’s, from whence comes the link, are aghast at Clark’s lack of reverence for the wrong Polanyi. Anyway, I want more new reviews of sixty year-old books!