Monday, March 12, 2007

Class Envy, Pt II: In The Current National Review: “Big-Time Pay….in a big time economy”, by Jim Manzi

This article was somewhat of a 1970’s Roller Coaster for me. It started out flat, seemingly predictable.

“The widening gap between CEO and worker pay makes these huge(CEO)paychecks even harder to swallow. The median ratio of senior-executive to work pay has grown from about 20 to 1 in 1970 to about 100 to 1 in 2005. Even worse, many workers believe that their real wage growth is slowing and their job security is low and dropping.”

My first thought was, I can see this on Katie Couric every night at 5. Why is my favorite magazine, National Review, printing this?

Then the Roller Coaster began to, suddenly, click uphill. Manzi continues a few paragraphs later.

“Think back to the bureaucratic, inward looking, and risk-averse corporate world of 30 years ago; it’s important to remember just how bad it was…there was widespread speculation throughout 1980s that the U.S. could not compete with Japan and the rest of Asia. Continental Europe was held up as a model of developed-economy success.”

Manzi continues, and soon hits an absolute home run, allowing me to breathe for the first time (bold emphasis mine).

“If the U.S. of that time wanted to escape economic stagnation, the corporation of the time had to go. As I started my business career in the mid-1980s I had a ringside seat for the titanic struggle to reform American business. While an economy is constantly evolving, there was an economic Twenty Years’ War that began in roughly 1980; by 2000 it was largely complete, and we now live in the new economy that it created. This wasn’t a pretty struggle. It was trench warfare to force corporations to be more aggressive, entrepreneurial, and risk-taking, and it was fought out one company at a time. Change was fiercely resisted by incumbent managers, who often draped their resistance in appeals to tradition, corporate loyalty, or the public interest.”

Says Manzi: “A lot of money was made by those with the wit, audacity, and stamina to force these changes… This process also created enormous financial risks and opportunities for management teams that were willing to transform companies. Ironically, by focusing on maximizing shareholder value in order to increase personal wealth, they did the hard work on the reforms that have renewed the American economy’s overall position as the envy of the world.”

At the peak of this Roller Coaster, what Manzi is saying is, the Market for Managers was willing to pay what is necessary to transform American Business into the competitive force that it has become today. Or, put better, the demand for good Managers; those willing to work the hours, commit the passion, assume the grab-your-ankles-if-you-fail risk, and most importantly, bring the natural skills that were necessary to make American Business competitive; that demand and the price for their services increased.

For full elaboration on Manzi’s thought process, I’d encourage the patron of Jeff’s Garage and Ale House to visit the print version of the magazine. Overall, Manzi does a fantastic job of illustrating that CEO’s of America’s highest paid corporations are, because of the scrutiny of those they answer to, justified.

That said, I was a little disappointed with how the Roller Coaster ended; like they all do, on a flat surface with a pimply kid urging you to move on to the next thrill.

On the last page of the article, he says, “But to say that this cure [reducing the CEO-to-worker pay gap] would be worse than the disease is not to imply that all’s well with in the new, market-based world of executive compensation. Markets are unsentimental about forcing change, and they are efficient at directing resources to their highest and best use, but for the participants they are a school for selfishness (*sigh*). Unbridled compensation markets consume a kind of social capital that any real company, or society, requires for success: solidarity with others and identification with a cause greater than self.”

Finally, Manzi’s prescription to this “problem” is the following: “Fortunately, the CEO-to-worker ratio is not a very good summary measure of what creates feelings of inequity. More important to most people are: (1) the growth rate of their income, (2) the security of their standard of living, and (3) a belief that the game is not rigged against them. A practical political program should focus on these issues.”

Get that? A political program should focus on these issues. But how? And why should a political program even exist to address these "issues"? Manzi's article is powerful and refreshing up to this point. Then, sadly, he loses me a little, because he seems to be giving a little bit of a nod to the "Zero Sum Theory" - maybe unintentionally.

This “Zero Sum Theory” of economics is misleading and dangerous in the hands of politicians who wish to prey on woefully ignorant citizens who think that the theory is valid – and that by a vote for a regulator who will reign in CEO pay, tax the wealthy at a confiscatory rate is a vote that will somehow level the playing field. This is foolish and destructive. The idea that a CEO’s multi-million dollar salary is somehow screwing the little guy is startling ignorance of how wealth is spread in a Market Economy. Just because one person has a large amount of money does not mean that another person will be a large amount in the hole.

What's more, the other three issues aside from CEO pay that Manzi references are issues that government intervention, i.e., a "political program", should be kept away from.

Upward mobility exists for all in the United States of America, and any truly modern Capitalist economy. It happens daily in our nation, and I have members of my own family to prove it. The idea that some how a “practical political program” can rectify the gap between CEO and worker pay is intrusive, politically empowering, and utterly dangerous to economic health. Bravo to Manzi for pointing out how CEO’s of today came to the earnings they enjoy. Shame on anyone who thinks that a “political program” is the solution to a straw man of inequality; that CEO’s pay is somehow holding the “little guy” down.