Yes, I felt that discussing the relative strength of Unions as a factor affecting age equality would be a no brainer, but if he does it isn't here. In the UK, the largely successful efforts of the Thatcher government to break the power of the industrial unions coincided nicely with the beginning of the move away from relative pay equality. Was this pure synchronicity?
You could compare Germany, where worker representation on corporate boards is legally required, with the US, where as I understand it, collective bargaining is actually illegal in some states even if the employer wants to do it. Which has greater inequality?
Collective bargaining isn't illegal anywhere in the US -- 'right to work' states are states where a union can't make a contract requiring all covered employees to pay union dues. With no incentive not to free-ride, it makes organizing a workplace almost impossible.
(And you're on for 12.)
Some states now ban collective bargaining for public employees though, right?
Lots of states ban striking by public employees -- I don't think anyplace literally bans collective bargaining.
Chris Y may be thinking of the situation in Tennessee with the UAW and VW, where the legislature leaned heavily on VW not to allow them to organise, even though VW (pushed by its German employees) was willing.
It looks like in Wisconsin, they just hamstrung collective bargaining (no mandatory dues collection from anyone, all contracts lasting 1 year and not to increase more than an index, annual union recertification votes), although these kinds of laws have been summarized as "banning" collective bargaining.
Moving along: one question is, if "supermanagers" continue their role, and their descendants disproportionately do as well, is it mathematically inevitable that the top 0.1% will use their accumulated salaries and inheritances to turn into a rentier class?
On the plus side, each new unaccountable, wealthy heir is a small tick upward in the chances of Batman becoming real.
9. I think Piketty is working up to that. His bottom line, as I understand it, is that high inequality, from whatever cause, breeds a rentier class if you don't intervene to stop it.
I kinda wish he had talked about other cultural and institutional issues, in particular the ability of low- and moderate-income wage earners to organize and assert class power. Maybe later in the book?
I'm a couple of chapters ahead, and he adds nothing beyond what he's already said - that the world wars changed things not just because capital got blown up, but because policy changed, too.
It's a common criticism of the book, though, that he doesn't provide practical solutions. Seems to me that this isn't really his job - that's up to his readers.
Moving along: one question is, if "supermanagers" continue their role, and their descendants disproportionately do as well, is it mathematically inevitable that the top 0.1% will use their accumulated salaries and inheritances to turn into a rentier class?
That's pretty much the conclusion of chapter 11, "Merit and Inheritance in the Long Run." He suspects that you will see more people who are hybrid rentier/managers. He also thinks you will see this more in the middle class, creating a role of "petite rentier." Also, the claim by the rentiers the they do important work managing might wind up being about as specious as the claim that the rentiers of the world of Austin and Balzac did important work managing their tenant farmers.
Actually, I think we are already seeing a lot of rentiers masquerading as managers. Are the Koch brothers rentiers or managers? They inherited their wealth and their corporations. They seem to do work managing them, but it is hardly work designed to promote the productivity of the company. They are just trying to maximize the value of their shares.
13: One thing that has been frustrating me is that he never sorts out the strength of the various causes for his various U shaped curves. At one point in chapter 10 it really seems like the wars weren't the big factor at all for the wealth inequality curves at all. It was the tax policies in place after the wars.
You can also put the question chronologically. Which period was more important: 1914-1945, and the attendant disruptions, or 1945-1980 and the policies of nationalization, taxation, "capitalism without capitalists" and "the euthanasia of the rentiers"?
If it is the second period that is more important, we've got cause for optimism. The economic forces the brought prosperity and equality in the second half of the 20th century are actually under direct democratic control.
I'd actually like to sit down with each U-curve and compare their shapes and the forces driving them. But that would be a lot of work.
Are there enough degrees of freedom to pull that apart?
15: But it seems like part of his argument is that you never would have had such tax policies without the wars; taxing income at rates above a few percent was unthinkable before the first World War. So even the causes that aren't the wars directly are still ultimately the wars.
15: "direct democratic control" is a result of 1914-45, just as, so say I, 1914-45 was a result of the Gilded Age of Imperialism. They are not separable.
It took a lot of fuck-up to achieve an effective level of fed-up, and fed-up in itself is not adequate unless the assholes are deprived of resources
"I can pay 1/2 of the proletariat to kill the other half" saith one historical rich fuck.
My favorite explanation for why capitalism first moderated itself and then reverted to form was that starting in 1917 (not 1914), there seemed to be an alternative, and then by 1989 there wasn't. (In other words: competition improved service.) Unfortunately for this theory the reversion-to-form began around 1980 if not earlier, so I'm reduced to special pleading about how Brezhnevism wasn't a credible threat.
16: On technical grounds I seriously doubt it, but I'd love to be wrong.
Mid-1984 to early 1985 was a period of study improvement because Chernenko.
Steady improvement. I'm not having a good week, typing-wise.
15: Don't some of the graphs (in this or a later chapter) look at wealth in some non-warring countries, like Sweden? We could compare those with the warring.
I don't think looking at non-warring countries in a period of global war is the same thing as looking at what would have happened without a global war.
Also, isn't part of the story of the French Revolution that the state stopped integrating new money into the nobility as effectively?
Yanking some text from my notes-in-place-of-a-review, because they were a particular issue with this chapter:
The distinction between "income from labor" and "income from capital" is part of our legal system, and Piketty rests a lot of his work on it. But it seems to me an analytical mistake to describe the high compensation of a "super-manager" as income from labor. While it isn't coming from owning their corporation, it is coming from (partially) controlling it. In some ways, it's more like the income of an ancien regime tax farmer, or an Ottoman timariot, than the income of a roofer, nurse's aid, computer programmer, or even an architect. It would be very nice to see someone try to separate income from labor and income from control, but I have no clue how to do it.
24: I agree, absolutely, but you could at least tell from the comparison how much was accomplished by taxing/inflating and how much by directly blowing shit up.
27: I'm not sure you could. The value of Swedish capital would be greatly affected by how much German capital was blown up.
26: analytically, it's almost more like tolerated embezzlement; in addition to a fair salary for his labour, the supermanager is also getting as much as he and his fellow supermanagers can carry out of the gate. So really it's more like the income of an 18th century British civil servant - a small salary, supplemented by peculation and graft.
But it seems like part of his argument is that you never would have had such tax policies without the wars
But I was hoping we could reinstate those policies without more wars. And I think Piketty wants that, too. So it would be nice to disentangle the effects.
26: Yes, exactly. I have had an inarticulate version of that thought for a long time -- I remember trying to say something along those lines here when talking about Occupy, that the 99%/1% line (really, less than 1%) was about distinguishing not the poor from the comfortable, but wage-earners from people whose money came from the ownership and control of capital.
28: Right; on the one hand, not-blown-up capital presumably becomes more valuable because scarcer, but on the other, the un-blown-up country loses much of its export market when its trading partners are blown up.
But it seems to me an analytical mistake to describe the high compensation of a "super-manager" as income from labor.
That seems right to me, but does it have any real impact on his analysis? I mean, he wastes a bit of time explaining how this category of "laborers" fits into his framework, but I'm not sure it really matters to his conclusions. (Mind you, I haven't actually finished the book.)
29.last: I like that analogy too.
Prior inarticulate discussion here.
33: Doesn't it confuse the data, in terms of the capital/labor division of income? If a large portion of what appears superficially to be compensation for labor paid to supermanagers is actually conceptually more like returns to the controllers of capital, then it's going to look as if labor has a large share of national income than it 'really' (whatever exactly really means) does.
33: It probably wouldn't greatly affect the argument or the recommendations, no.
I do think it means that the share of labor in national income is substantially less than it looks. That is, a non-trivial fraction of what is showing up in the national accounts as labor income ought to be in this third category, provisionally call it "control income". One would then really want to know how the share of control income has been changing over time, why that share changes, and how it interacts with capital. (At a guess, the transition of a family from mostly labor income to the mostly-capital rentier position has mostly-control as an intermediate stage, but that's just a guess.)
the 99%/1% line (really, less than 1%) was about distinguishing not the poor from the comfortable, but wage-earners from people whose money came from the ownership and control of capital.
Recognizing that they're a small part of the overall economy, don't you also need some way to account for stars and entertainers of various sorts (sports stars and musicians, celebrities, bestselling authors, artists, etc.)?
I am also unclear at what point supermanagerial income from labor becomes income from capital. I mean, while it's true that a huge number of CEOs and hedge fund managers earn most of their money from their "labor", it's also true that they would still be fabulously wealthy if they stopped working tomorrow, and just lived purely off the income from their accumulated capital. (This is obviously also true of many people in the categories I mention above.)
35. I think it's probably impossible to unconfuse the data unless you declare that for the purpose of your analysis any income above random high figure ($500K?) will be treated as capital. You could do that, but it would be a bit of work, since remuneration to supermanagers is always declared as income from labour, even if it's $10M. And you would be subject to challenge as to where you put your random cutoff.
Also there's a question of perception. Today's supermanagers turn up at the office and do a facsimile of a day's work, probably being in situ for more hours than the grunts. The traditional "idle rich" were so called for a reason.
Against that, Piketty treats owner-occupied residential real estate as "capital" on par with any other form of wealth. This makes me uneasy, despite the arguments in favor of doing so, but that may just be my residual family history of Marxism talking.
39: I thought that CEOs and the like always did their best to get their income to count as capital gains. In the U.S., that would be a huge advantage for taxes.
If you count supermanager income as income from capital, doesn't that just strengthen all of Piketty's conclusions? Calling the salaries of supermanagers income from labor could just be a concession for the sake of argument.
41. Well if it's declared as capital gains, then P. should clearly treat it as capital in his analysis. I think in Britain supermanager income is usually divided into two parts, fees/salary, which you have to declare as income or the taxman will pay you a visit, and share options, which are capital gains when you pick them up. But I'm probably oversimplifying because it isn't a problem that affects anybody I know.
Could you use some historical multiplier of laborer:manager and declare anything above that is capital/control income? CEOs used to make 37x the average employee, now they make >300x, so something like 250x of the average employee salary is going to the manager beyond what they're doing as labor.
Of course this is just defining income inequality as being the result of income inequality, but who among us is not a fan of tautologies?
43: but the argument is that most of that fees/salary bit isn't really labour income, it's the result of the bizarre setup where supermanagers get to overpay themselves and each other without any very effective check.
Of course this is just defining income inequality as being the result of income inequality, but who among us is not a fan of tautologies?
Well, all the people who hate tautologies, for a start.
I might need to move back a chapter. I forgot I'm going to be away next week at a conference.
45. I know. I was replying to Moby's suggestion that most of supermanager income was declared as capital gains. I've already suggested a way to treat the sinecure part of it in 39. It isn't a good suggestion, but I can't think of a better one.
48: gotcha. Yes, I can't think of a better way of addressing it either; who's to say that doing a CEO's job now isn't actually more difficult than it was in 1975, so even without looting they should be getting more?
I thought that CEOs and the like always did their best to get their income to count as capital gains. In the U.S., that would be a huge advantage for taxes.
That's especially hedge-fund managers. For non-financial CEOs, there are stock options, but anecdotally a lot also seems to go into phony incentives, partly because top executives' salary above $1m is not tax-deductible for corporations unless it's an "incentive".
who's to say that doing a CEO's job now isn't actually more difficult than it was in 1975, so even without looting they should be getting more?
The idea that a more difficult job "should" be getting paid more implies that they are being paid in some sense what they are worth, or their marginal product, which is laughable in this context. Their pay is completely divorced from job fundamentals, so the difficulty of the job has no real bearing.
(Unless maybe you are suggesting there was no general looting in 1975...? That seems implausible. It may have been less, but 1975 CEO pay wasn't all earned by the sweat of the brow.)
51, 52: I think the suggestion is that it's hard to determine just how much of the pay is control income/looting, as opposed to compensation for whatever services they do in fact perform. ("Lots", or even "most", while undoubtedly true, lack precision.)
Is Katherine Heigl's mother, for example, a rentier-momager?
53 is right. Increase in pay from 1975 to now might mean more looting or more difficulty or both in unclear proportion.
Well, but income can (and almost always is) be "labor income" and not "looting" but still not be a measure of "difficulty" in being a CEO. Indeed, I doubt that any CEO pay is meaningfully thought of as a reward for "difficulty" in any but a tiny number of circumstances. Some increase in compensation since 1970 -- and I mean only some -- may be thought of as a reward for increased productivity to the company, which maybe just maybe is the result of having a good CEO, but thats not meaningfully compensation for the "difficulty" of the job. Moreover, in most cases, "looting" probably isn't the right way to think of it -- if a combination of political and cultural factors have affected the market for CEOs such that the bargaining power of CEOs is so strong that they expect ridiculously high rewards, a company can make an individual decision to hire a CEO at a "market" rate that's legitimate and not a matter of looting the company, but still represents an outsize generally improper transfer of bargaining power away from workers and towards management.
As to productivity, they're not perfect, but surely the cross-national differences in CEO compensation are a pretty good baseline measure of reward for productivity vs transfers of bargaining power/quasi-ownership to CEOs. There's no good productivity story in the world why equally productive French and Japanese corporations in 2014 should be paying their CEOs 1/8 as much as US or UK corporations in 2014 -- that additional pay to the CEO is simply a result of the political capture of bargaining power by management (again, more at a national/cultural/political level than as a matter of the mismanagement of a single corporate entity).
I agree with the general idea that there has been a cultural shift in the United States in which many seem to think top managers should have outsize compensation that reflects something more like quasi-ownership or a capital stake than simply being paid a reasonable but generous salary for their efforts. Why that is, is a really interesting story and one that Piketty doesn't really discuss.
a combination of political and cultural factors have affected the market for CEOs
The fact that CEO pay is set by boards where most of the board members are themselves CEOs whose pay is set by other CEOs whose pay the board is setting seems like a pretty good argument for the "looting" side.
Yeah, but "looting" generally means active corporate mismanagement. If the market for CEOs is set by a general conspiracy to inflate the price of compensating a CEO, that's not "looting" at the level of the individual corporation -- that's a systematic social and institutional increase in the power of the rich.
It's not looting if everybody does it?
59: I thought that's what made it looting. Just one person doing it is called shoplifting.
Do you ever wonder if the Koch brothers actually work hard? Do they spend long days at the office, sweating away at manipulating energy markets and undermining democracy?
I mean, it shouldn't make a difference. If someone's job actually causes harm to people, you want them to be lazy. Still, I have internalized enough of the protestant work ethic that I feel like I could look down on them more if I spent more time at the office than they do.
In corporate-governance talk "looting" is taking the assets of the corporation, and the victims of "looting" are the capitalist shareholders who have ultimate ownership of the corporation (who, on this theory, are constantly vulnerable to the predations of greedy managers and greedy labor trying to take their capital away). The separation of ownership and control at the individual level of the corporation is seen as the problem, because management and labor can "loot" the company. The solution is to give the shareholders more power, so that the company's assets aren't squandered by management.
I don't think that this "looting" story about the separation of ownership and control is a realistic story at all about the explosive growth of CEO income or about US corporate governance generally. The better story is one of economy-wide collusion between wealthy capital owners and top-level managers (driven by the explosion of Wall Street) to transfer wealth to themselves across the board, not just at the level of an individual corporation, and away from labor. Efforts to increase shareholder control in the US to prevent "looting" have made the problem worse, not better.
As "looter" is Randoid-speak for a government official, I enjoy using it as a term for the economy-wide collusion between various types of wealthy people.
Reading 19th century railroad correspondence has shown me that while it can take a lot of work to loot a company, that workload may not be shared evenly across the inside executives.
I have to admit that I haven't finished the chapter yet because I am stuck in the middle of Emma. However, I keep telling myself that reading Austen is pretty much the same thing as Piketty.
Fortunately, I can't make a joke out of "stuck in the middle of Emma" in the serious book thread.
Maybe we can use the word "pillage" for the way CEO's inflate each other's wages.
So here's another Piketty question: can we get useful data on these topics from imperial China? I've heard about imperial Chinese debates over government intervention in the economy that parallel debates in the West.
There's some really interesting quantitative history research showing Qing dynasty social mobility was much higher than early modern Europe. It's based on city and university records. Don't know of a good online overview but one of the senior researchers is James Lee at HKUST. Seems like some books surveying the last few decades of work are about to come out.
http://www.shss.ust.hk/school/cv.html
Not sure about the historic wealth or macroeconomic data though.
I don't think it's relevant if overpaid managers spend long exhausting days in the office, since being part of (say) the prerevolutionary French court also required long exhausting days. Work's not valuable for the harm it does the worker.
It would be very nice to see someone try to separate income from labor and income from control, but I have no clue how to do it.
If the manager isn't worse off if the endeavor they control fails, they aren't being paid for labor. (I don't see how to pick this out of lumped annual income data.)
70: Wasn't that, or a component thereof, looking at the ranks held by successive generations of the same families over centuries, showing it was normal for high status not to be maintained?
71.last: If the manager isn't worse off if the endeavor they control fails, they aren't being paid for labor.
I'm not sure that's right. If Mr. Bastard, CEO, gets paid $40 million a year because he's stacked the compensation committee with his cronies, etc., and the company tanks, he's still worse off by $40 million a year.
I don't see how to pick this out of lumped annual income data.
That's really the sort of thing I had in mind.
Mote's history of Imperial China has a rough rotation between effective meritocratic bureaucracy, meritocratic bureaucracy seemingly captured by a useless measure of merit, outright inherited place, and invasions.
73.2: This crony still has $40M for each year he propped the company up, though -- he's not like an actual owner who was getting richer largely in increased value of the company itself, and can be actually poor if the company vanishes. Any class of ownership that gets paid before invoices or labor partakes a little in this.
72: Yes. It was possible because the class and educational status of the parents and grandparents had strong enough social meaning to be captured in the same records. It's not quite fair to say nothing is online - I know it through the mooc they ran, dunno how much is still online.
Supermanager compensation isn't primarily cash. Stock, vested stock, options etc are usually a major component. Since that is literally ownership, why not just track that?
Piketty doesn't so he can be most consistent internationally and over time, and err on the the side of caution, I think.
So where does an estate worth between $500 and $4.2 mil fall on the rentier scale?
There was supposed to be a "k" in there.
Now I hate America. Folk singers shouldn't earn money. Nobody will quit if they pay them.
77 -- Which 2002 Subaru do we think Seeger drove? Gotta be an Outback, am I right? Those things hold their value nicely. The value of his estate probably depends entirely on whether and how he kept publishing.
Yes. There's no need to insult perfectly good cars.
I can't get more offended without either remembering what year my own Subaru is and/or going back to confirm that Halford was one of the people convincing me it was what I needed and deserved.
It's not just a car for lesbians, no matter what my bartender says.
What does your bartender say? And is this a french fry bar?
I've got a '98 Outback. Probably going to hold on to it to give to my younger daughter (older one prefers the '96 Corolla). This just might be the year we buy a used minivan and own a car made this century.
It's the slimming smoking bar that I didn't go to tonight because it was too smoky.
Why is "slimming" in that sentence?
I had the same question as 90, but I'm not the one who wrote it. I'm a fan of the ghost in your spellcheck!
I think he was making fun of a woman who drove a Forster.
Re: Subarus, the problem with the AWD thing is tires. If a tire gets fucked up beyond repair then you're buying four new tires, not two. And I'm getting old and get all cranky at the baseline for new tires being like $120 each.
Plus, the radio only plays folk music.
Some Melissa Etheridge and Tracy Chapman comes on as well.
I have a 2002 Subaru. I drove it away from the Seeger estate while blasting "This land is your land" on the tape player.
This car is your car
This car is my car
From the Sapphic mamas
Out to snowy Utah
From the Northeast preppies
To the aging hippies
The Outback is made for you and me
Meanwhile it will turn out that Pete Seeger's Subaru was actually a souped up 2002 customized Rex STI with a rear wing spoiler and he was really into street racing and Rallycross.
One thing that has been frustrating me is that he never sorts out the strength of the various causes for his various U shaped curves.
Yeah, the book is short on causal theories. Its strength is laying out the data, and there's certainly discussion of how the data support or don't support particular theories, usually on a small scale. But a lot of it is, look at these time series, and hey! they line up with World War I or whatever.
Presenting the data so comprehensively and carefully is a great service, though, even if we don't get a big theory at the end.
If the manager isn't worse off if the endeavor they control fails, they aren't being paid for labor. (I don't see how to pick this out of lumped annual income data.)
If the manager's contract includes a "golden parachute", they are protected against being worse of if the endeavour they control fails, unless the failure is such as to completely bankrupt the company. Therefore can we say that any manager whose contract includes such a clause isn't being paid for labour? Tempting, but I think it's a bit more complicated than that.
Fortunately, I can't make a joke out of "stuck in the middle of Emma" in the serious book thread.
Maybe we can use the word "pillage"
Chris Bertram from CT comments on FB about the government reshuffle and incidentally reminds me of the "incentives" argument for high executive pay. This argument comes in various flavours, but all the versions I'm aware of essentially justify the difference between marginal productivity and the money changing hands as commercially necessary bribery. I think this is theorised among defenders of silly money salaries at a level far beyond what Minivet touches on in 50. I call "capital", since it's an "investment" by the corporation, or presented as such.
104: Allow me to trot out another one of my crank notions, viz., it would be much better if CEO positions were for sale.
105. Almost convinced, but I'd need to see the next installment on the market efficiency of collective ownership and how they fit together first. Also, how you get from here to there without an episode of pitchforks and torches.
The more I mull it over, the more I think Cosma should send that link to Piketty for comment. He might get a joint paper out of it.
106: Enjoy. (Also, I finally updated the first post to include a link to the second.)
Also, how you get from here to there without an episode of pitchforks and torches.
I do rather assume pitchfork-wielding mob, yes. (Or at least the fear of one.)
107: I bow modesty in your general direction.
105: A couple of points: first, incentive stock options (ISOs), and most other forms of employee stock options, are generally not tradeable. The ones I've seen are only exercisable while the beneficiary remains an employee in good standing, and for a short period (30-90 days) thereafter, and can only be exercised by the employee or his/her estate. After that, unexercised options expire worthless, even if they were in the money and had a long nominal time to run. That difference affects your analysis of the current incentive structure.
Second, if CEOs (or management teams) were to purchase the position and be rewarded only through dividend equivalents, as you suggest, there would be a huge incentive to loot the company on the way out by declaring a large special dividend that left the company without enough capital for ongoing operations. That, of course, would be the problem of the next sucker who had paid for the position on the assumption that this was an ongoing operation...
110.1 is right and I should have caught it - I did have a sort of "hmm" moment when I read that bit - but I don't think it changes the conclusion markedly.
110.2 might not get past the board of directors, who would, in this setup, still be in place and representing shareholders as in the current situation.
110.1: Ah, right, that does reduce the incentives for sheer volatility somewhat. My bad.
110.2: Wouldn't the same incentives face any group of large share-holders? (For that matter, under the current system, why not arrange for a massive spike in executive compensation just before quitting?) I see the issue but I'm not sure how it's made any worse.
Alternately: Dividends just declared once a year, and the day after, the board of directors rolls a fair die; if it comes up "6" the bidding for control is re-opened. That way the expected tenure of the CEO is 6 years, but they can't know when it will end and so they can't time that sort of looting.
If it comes up "1", off with their heads! Just to make things interesting.
Could use a revolver instead of a die. One chamber has a shell with a bullet, one shell is a blank that indicates bidding for control is re-opened, and four empty chambers.
113: to encourage the others.
112.2: A massive spike in executive compensation just before quitting is a lot more likely to get challenged as an obvious failure of fiduciary duty to the shareholders. A dividend that is shared with those shareholders could be argued as a reasonable business judgement.
It's less likely that a large random group of shareholders would do the same thing, since they can't all dump their stock at once afterwards without tanking the price. The "management on their way out" is more likely to do so, because as you have set things up, they have no interest in the residual value of the shares, just the dividends they produce.
Boards always have to approve all dividends. So that's not a valid concern. The concern is the reverse: why would any CEO buy into this if the board could just not declare any dividends and then the CEO makes nothing? So some sort of agreed dividend level would have to be negotiated up front. 8% of annual profits will be paid out each year, or something like that. Which would only work in relatively mature industries--a growth company that wanted to reinvest all of its profits would need to work out some other arrangement. But presumably something suitable could be structured.
116: I was trying to modify it so they could never know whether they were on their way out. Perhaps, in addition to the dice (or revolver), we reserve the dividends from another block (smaller but still non-trivial) of shares for the previous management team, after their departure. They then have a stake in the on-going profitability of the enterprise, after their departure.
We need to hide their compensation under a Rawlsian veil of ignorance.
117: why would any CEO buy into this if the board could just not declare any dividends and then the CEO makes nothing?
Wouldn't that board have a very hard time hiring the net CEO? And wouldn't the CEO have a lot of opportunity to sabotage the value of the stock, if crossed like that?
I dream of a day when boards of directors have to apply for H1B status to fill CEO positions and statisticians earn millions even when they put off explaining to reviewers why they didn't adjust for multiple comparisons.
The die and the reserved shares are sort of like entail backwards, which is a neat trick. Don't know if entail was useful in preserving anything but timber, really.
Therefore can we say that any manager whose contract includes such a clause isn't being paid for labour? Tempting, but I think it's a bit more complicated than that.I'm sure the processes are much more detailed and full of captured good intentions and ideology-wrapped, like the systematic `looting' Halford summarizes, but how is the result different?
third para shouldn't be in block quote, sorry.
I think whenever the question in economics is "Is it legitimate to add A and B together?" the answer is always no, but humans do it anyway because the its only way to manage to complexity. Managers are grossly overpaid, but the payment to managers is not much like the payment to capital. Managers can be fired, they can be forced out, they can be sued for breach of contract. You become a CEO through a relatively meritocratic process of succeeding at as a manager at lower levels. Shareholders, on the other hand, get to be shareholders simply by having money. All a shareholder has to do to get dividend checks is open the mail. An ambitious shareholder, an activist shareholder, will make the important contribution of complaining about how the company is wasting money on R&D when it could be writing bigger checks.
I've been thinking about Cosma's plan, which is a brilliant thought experiment, but I wonder about the following questions:
1) I know that the current CEO can bid when the position is open, but if the CEO actually shifts every five years that's a lot of turn-over (and the proposal in general creates challenges for CEOs working out plans in advance to handle transitions).
2) If the plan is mandated, rather than optional, it potentially creates another incentive for companies to avoid going public.
3) Following on (1), is the board required to accept the highest bid? If not then I could imagine a situation in which the incumbent CEO bids $1, and somebody else bids $1M, and the board opts to keep the incumbent, believing that continuity is worth more than $1M (which might be true, but also brings cronyism back into the picture). If the are required to accept the highest bid it gives activist investors a lot of potential power. Rather than attempting a hostile takeover, an investor (or fund) could buy up a substantial minority of stock and then financially support their candidate for CEO in the bidding.
4) Following on (1), to the extent that this acts as a term limit for CEOs I wonder if will just end up giving more power to the bureaucrats who will be more valuable as the source of institutional memory and also in a position where they may be able to stall and effectively filibuster plans by the CEO and wait them out until somebody else takes power.
5) I wonder if psychologically treating the CEO position as a financial investment (or gamble, depending on your outlook) would weaken the CEO's emotional ties to the company. You might put the CEO in the position of a venture capitalist who would prefer big gambles that fail or pay off quickly to building something over time.
[Note: I don't have a good intuition for how often companies change management. I'm starting with the assumption that this would increase turnover, but that may be incorrect.]
Cosma, could you get the same effect by paying vested stock instead of options? Or making a new CEO pay a bond by buying $x of company stock and legally agreeing to hold it for y years, which achieves ownership / management alignment without actually offering these things for sale. I believe these things happen in pockets today already.
You could even design a guillotine options instrument by making an incoming CEO write a PUT option to the board / shareholders at $z below the price on day one of their tenure and a multi-decade expiry. If the CEO drives the corporation over a cliff, the shareholders exercise their right of sale and recover some expenses. Maybe the board should be able to buy back the shares immediately at market prices. Maybe make the sale automatically triggers, don't give the board a choice.
Admittedly these Girondist suggestions are more boring that open auctions and revolvers on the board table.
I guess the difference vs yours is the lack of competition and therefore price pressure, so they may better align incentives, but they may not put any downward pressure on pay.
Again for Cosma - the national mutual fund idea sounds a lot like the way national investment corporations work, but much bigger?
Reminds me of this Jacobin article where all firms are compulsorily acquired by the state after passing a certain market cap. Talks about some of the same surprisingly productive disconnection between ownership and management.
https://www.jacobinmag.com/2012/12/the-red-and-the-black/
127: But if you tie the size of the guillotine to the size of the comp in some standard way, it should moderate the CEO compensation.
My inspiration for the national mutual fund was two parts John Roemer to three parts Alec Nove to one part Miller (as described in the post). I'm pretty sure Ackerman was also drawing on Roemer and Nove. Nove particularly advocated nationalizing all companies above a certain size; I think I had a reason for departing from that, but after a decade I can't remember what it was.
127: I like the idea of the put option, but I also like the finality and sheer ritualism of the revolver.
125: This is why I want a third category, rather than including managers' income as either capital or labor compensation.
126.2: As I said in another comment, I think I had a reason for excepting privately-held companies, but after ten years I have no idea what it was. Certainly I can't come up with any real reason not to force the plan on any company exceeding certain limits in terms of number of employees, market share, or market capitalization.
126.3: Accepting the lowest-cost bid no matter what seems essential to the plan and is certainly what I envisaged. Making hostile takeovers easier is part of the point.
126.4 and 126.5: Domination of transient titular leaders by a permanent bureaucracy is certainly a possibility (call it the "Yes, Minister" scenario), but one thing writers like Khurana document is how often CEOs of major corporations are brought in from other firms already. This would create the same dynamics w.r.t. institutional memory and lack of commitment as my plan, without even the cost savings. (And to the extent the corporate bureaucracy's interests are tied to that company, and not diversified, their domination of he CEO might even be a feature.)
ObDisclaimer: Four beers.
99: hey! they line up with World War I or whatever.
Lead led to relative income equality. Or maybe the other way around.
Making hostile takeovers easier is part of the point.
Is that good? I thought the general wisdom was that hostile takeovers destroyed value, on average.
I'd understand if you said that you thought the value of the plan was in (a) limiting the leverage of people who manage to sell themselves as superstar executives and (b) force the board to respond to executive pay as a deciding factor, and that making hostile takeovers easier was a necessary cost of that plan (and I might be convinced), but I have a harder time seeing that as a selling point.
More importantly, however, I found a citation that I'd been thinking of when you asked the question earlier about whether the return on capital should converge to match the discount rate. It will probably get burried here at the end of a dead thread, but I'll post it anyway. From Natural Capitalism
Once managers do start paying attention, how do they determine how much energy efficiency is worth buying? Many supposedly sophisticated firms, it turns out, don't decide very carefully. They make all routine, "small" purchases based on initial cost alone. Thus 90 percent of the 1.5 million electric distribution transformers bought every year, including the ones placed on utility poles, are bought on the basis of lowest first cost. Buying the less expensive and less efficient transformers passes up an opportunity to earn an after-tax return on investment of at least 14 percent a year plus many operational advantages. Nationwide, it also misallocates $1 billion a year. Every first-year business student knows that the correct way to allocate capital is to compare investments' results over the long run, not choose the option that requires the least initial investment . . .
Typically energy-saving devices are chosen by engineers at the firm's operating level, using a rule-of-thumb procedure called "simple payback," which calculates how many years of savings it takes to repay the investment in better efficiency and start earning clear profits. Four-fifths of the American firms that even think about future savings (instead of just the initial capital cost) use this method. Moreover, they do so with the expectation of extremely quick paybacks -- a median of 1.9 years. Most corporate officers are so immersed in discounted-cash-flow measures of profitability that they don't know how to translate between their own financial language and the engineers language of simple payback. They therefore may not realize that a 1.9-year simple payback is equivalent to a 71 percent real after-tax rate of return per year, or around six times the cost of additional capital.
Most firms are therefore not purchasing nearly enough efficiency. They invest every day in ways to increase production or sales that don't return anywhere near 71 percent a year after tax; yet they continue to insist, often unknowingly, that energy efficiency leap this lofty hurdle. One remedy is to teach the energy engineers how to speak financial language. When the engineer goes to the comptroller and says, "Wow, have I got a deal for you -- a risk-free return of 27 percent after tax!," he or she'll almost certainly get the capital that wouldn't have been obtained has the savings been expressed as a 3.4 year payback.
There are a couple of ways to interpret that. One is the interpretation that the passage offers -- that there is massive allocation of capital simply because firms can't be bothered to calculate the best solution. If this is true it certainly places an empirical barrier to markets converging to a theoretical maximum efficiency. But there are a couple of the possibilities. First is that the discount rate for capital projects should reflect some degree of risks. I think there are more ways for a capital project to fail to generate the predicted returns than to exceed the predicted returns, so firms could rationally put their rate threshold for investment decision significantly above the interest rate. Secondly there's the question of opportunity cost. If you buy energy efficient component with a 5 year payback you are, in part, betting that there won't be a significantly more efficient replacement to come out within the next five years. Buying something that's more expensive up front means that you have to throw away a more expensive component if you decide to upgrade (I realize that's more of a concern for consumer purchases than many capital projects, but still an issue) that would also be a reason to want higher returns than you could get from a more liquid investment.
I don't have any particular insight into the theoretical issue here, but the quote in 134 is great and totally true IME. It's surprisingly difficult to sell businesses on energy efficiency upgrades even though the business case for them is often so strong.
Thanks. Despite offering alternate interpretations, I find the passage basically convincing and that's why I remembered it.
Yeah, your alternate interpretations are plausible, but I think the interpretation of the original passage is generally the most accurate.
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Instructive. People who cite the mean as a helpful indicator in any political or social argument should be ignored on every subject forever.
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134: I have a lot of time for that book, though negawatts always seemed a bit silly to me.
I think this is just an example of unexploited business opportunity, though. These are around all over the place. The efficient market hypothesis assumes them away, because if he market was efficient, they would already be doing it. In the world, there is always a time lag. Economically, it's like no one realizing there was a market for a big chain of premium coffee stores until Starbucks built one.
I think this is usually abstracted away, economically, these opportunity costs and risks. Or at least in the kind of macroeconomic data P looks at in this chapter. He looks a bit a different rates of return later.
Intuitively, and inexpertly, I get how the efficient market hypothesis might apply to a stock exchange, but across slow moving markets or the allocation of capital and labour, reaching equilibrium in the long term might mean multi decade periods, and some model for the interim would be good. Trying to be fair, all models abstract something, and the volume of data to do something more fine grained empirically might be unavailable or unmanageable at the moment. Piketty flushes out some very useful points without having to screw with the model too much - that in itself is interesting.
138 is pretty amazing and something I don't think I'd ever seen stated so starkly. Median net worth is higher in Taiwan than the United States, and we're 19/20 industrialized nations for median net worth. We suck!
This is the sort of thing one might be able to mine for evidence that we have a class of people who aren't paid for what they produce because they get paid even when they produce nothing.
*Dammit*. Caught the wrong link, although that one is... parseable into the same logic. I meant the cases about fired executives getting their performance bonuses.
Probably somewhere-pwned but I thought this from uncle Kunkel was interesting:
Leaving aside the enormous quotient of speculation in 'data' for societies with far less developed markets or bookkeeping - a suspension of his usual statistical scruples - Piketty's aggrandisement of the historical domain of his second law severely undermines its claim to explain industrial capitalism, which is his principal concern. If industrial capitalism as an international phenomenon is approximately 180 years old, a full third of its lifespan (from 1914 to 1974) evades r&greatherthan;g altogether: an interregnum that Piketty finds in no other epoch. In other words, this law of capitalism is obeyed by capitalism least of all: a remarkable defect.
http://www.lrb.co.uk/v36/n13/benjamin-kunkel/paupers-and-richlings