Monday, July 19, 2004

Lies: Why Kling is a Liar

I've been following a discussion via Daniel Drezner's site, and Jason a commentator there had this to say:

The Washington Monthly bit poses the question, What is the market explanation for the increase in CEO pay as opposed to that of 'Joe Sixpack'?

The people who pay the CEO are either seeking to maximize shareholder value or not. If so, they apparently believe that paying for a top notch CEO will do that to a greater extent than paying higher wages at the base. If they aren't, what are they doing?

I'm reminded of the infamous Ben and Jerry's CEO search. Apparently the CEO pay of something like 7 times the lowest paid worker just could buy a guy who could keep the company afloat. They are functioning profitably now as a division of Unilever exactly because their corporate structure was a mess. They tried to pay a CEO less on the grounds that CEOs aren't really worth it, and they were nearly run into the ground.

In terms of value to the shareholder, I suspect CEO pay is too high in many cases. If I really feel that is the case, I don't buy that stock. Fund managers pretty much do the same.

The problem is that Jason ignores some facts. I left a post on Dan's site but I'll reprise and expand my comments there.
First of all Jason you're being disingenuous. No major CEO works for a mere paltry 7x their average worker's pay.

As of 1997, the multiple was more like 300x the average worker pay for major companies, and it has increased since then.
According to Business Week, the ratio of CEO pay to factory worker pay at the biggest 365 U.S. companies was 326 to 1 in 1997, up from 44 to 1 in 1965. In Japan in 1995, the equivalent ratio was 16 to 1, and in Germany, 21 to 1. Some of the biggest CEO pay raises have been awarded right after huge layoffs, leading to criticism that top executives are being rewarded for eliminating American jobs.

Furthermore this pay has often been paid out in outrageous cases of incompetence or misconduct. If all the CEO's were like Bill Gates, Jack Welch, etc. there would be a stronger argument about the "merit" of CEO or upper executive pay.

However these guys often run the company into the ground and get a bonus for it.
Fog Cutter Capital Group on Friday gave Andrew Wiederhorn, its prison-bound chief executive officer, a deal perhaps unprecedented in the post-Enron era of corporate reform: a continued position atop the company's organization chart with full salary even as he spends 18 months in federal prison.

Wiederhorn also received a $2 million "leave of absence" payment, according to documents Portland-based Fog Cutter filed Friday with the Securities and Exchange Commission. The company made the payment Wednesday. [emphasis added]

If the qualification needed to make 300+ times the average worker at a company is to make the company tread water or run it into the ground, then I don't think that the free market is at work at all in these cases.

The fact is that CEO pay has risen many multiples over the past two decades while average worker's pay stays stagnant. Meanwhile people like Kling make up myths like the "disappearing lower class".
The Disappearing Lower Class

What disappeared between 1970 and today was not the middle class but the lower class. The table below shows the percentage of households without certain basic middle-class necessities in 1970 vs. today.
Percent Lacking in 19701
Percent Lacking Now2,3

13.0 %
2.4 %

complete plumbing
6.9 %
0.6 %

17 %
0.1 %

13 %
0.3 %

color television
66.0 %
1.1 %

20.4 %
10.3 %

Today, 68.6 percent of households own their own homes. This is an all-time record, four percentage points higher than in the 1970's.

I hate fools and liars like that. Kling continues his argument by comparing cheap consumer goods and their prevelance of items like cars and electronics between then and now. Maybe he does think the present economic order is good, or whatever, but the simple fact is that as of 2000 and 2001 even before the most recent recession many households could simply not afford to buy food.
Despite a booming economy, a stock market that reached historic heights in the last decade and reports of welfare reform success, wages for many Americans have simply not risen fast enough to cover the increased cost of living. To these Americans, food has become an unaffordable luxury. In the past year, of those people seeking emergency food relief, 35% - that's more than 1 in 3 - had to choose between paying their rent and buying food.

Based on the Census Bureau survey, USDA estimates that in 2000, 10.5 million U.S. households were food insecure, meaning that they did not have access to enough food to meet their basic needs. About 33 million people lived in these households, including 20 million adults and 13 million children. Hunger in America has, and continues to be, a real problem for a significant part of our population.

Does anyone have any delusions that in the recession of 2001-2003 that the number of households having trouble buying food have actually decreased as a percentage of the population? These numbers are outdated but that's because the Census Bureau runs behind the times. The present numbers out there are undoubtedly worse. This is not to discount that many of the new jobs are of lower quality and most are part time as the oldman has blogged.

When people start talking averages about living space size, consumer electronic goods, etc. but forget that the most fundmantal need of simply being able to eat is being neglected then it truly disgusts me how out of touch or deluded or liars these people are.

There is still lunch-assistance programs in public schools because in some households the kids won't get a meal otherwise. I have nothing but contempt for those who can somehow screen out hungry kids from their utopian vision where somehow they manipulate the numbers to show that no one is poor anymore.

An honest person could argue that the present economic order is inevitable or unavoidable, and that government policy cannot stop globalization. I do not believe that there are no choices, but that is a sophisticated statement at least. I could also believe an argument that states the only real remedy is that people must adapt and we must help them adapt. I have true contempt for those who somehow feel it necessary and are so disconnected so that they argue to themselves that there are no poor people anymore and that we are not hurting anyone by the changes we are making to our society. To me that makes them a fool or a liar.

Thare are people are poor and they still struggle to buy food (and some must use food stamps to feed their kids). That's the fact. Hang your stupid numbers on that Mr. Kling.


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