Thursday, April 24, 2014

Reich gets it wrong again.

Reich gets it wrong again.
This is a commentary on "Raising Taxes on Corporations that Pay Their CEOs Royally and Treat Their Workers Like Serfs".  Firstly it should be obvious that even the title is absurd.  There are no corporations that force workers to pay them before they can quit their jobs or do any of the things that serfs were actually forced to do, like fight wars.  But I expected no better from a man fundamentally ignorant of every subject I've ever heard him talk about.

"This growing divergence between CEO pay and that of the typical American worker isn’t just wildly unfair. "
Of course he doesn't actually support that claim.  What would a "fair" ratio of CEO pay to worker pay consist of?  I don't know.  He hasn't defined what he means by "fair" in this (or any other) context.  Nor has he included any information about the productivity or effort of either group or if and how these have changed.  Certainly there's no information about how and why the efforts of either group might have changed in relative value.  So in short this claim is pulled out of his fundament.

" It’s also bad for the economy. It means most workers these days lack the purchasing power to buy what the economy is capable of producing — contributing to the slowest recovery on record. "
There's no reason to believe that CEOs are less likely to spend and invest, thus creating demand, than other people.  Transferring money doesn't make it better for the economy.

"Meanwhile, CEOs and other top executives use their fortunes to fuel speculative booms followed by busts."
Oh god does this idiot actually think that executive salaries, rather than government money creation, are the main source of speculative funds?  Or that other people DON'T fuel the speculative booms?  Do you think CEOs bought all those homes?  Serious Reich you are pig-ignorant.

"Anyone who believes CEOs deserve this astronomical pay hasn’t been paying attention. The entire stock market has risen to record highs. Most CEOs have done little more than ride the wave."
Most is not all.  Even assuming many or even almost all CEOs don't deserve their salary, what does this have to do with workers pay?  It is shareholders, not workers who are worse off when CEOs are overpaid.

" but this week I’ll be testifying in favor of a bill introduce  d in the California legislature that ... sets corporate taxes according to the ratio of CEO pay to the pay of the company’s typical worker. Corporations with low pay ratios get a tax break.Those with high ratios get a tax increase."*

So then  workers in corporations with highly paid CEOs get  a pay rise, while workers whose CEOs are less well paid will not.  So workers have and incentive to work for high-CEO-pay firms, regardless of whether they create more value in those firms.  On the other hand firms with highly paid CEOs have an incentive to fire their low-skilled workers and hire ones more skilled workers who demand higher pay.  Bear in mind this is from a bill that he claims "at least creates the right incentives.".  Yet even the most basic economic analysis shows the exact opposite.  While the free market encourages entrepreneurs to find the resources least useful to others and use those, this does the exact opposite.  Those whose labor is highly sought after find that it's even more so, those who labor is not will find it even less so.  The incentive is to ignore the most efficient way to produce something and find the way that justifies the lower tax rate.  This is about as far from "getting the incentives right" as it is possible to get.  

For example take an extreme case.  Suppose there was a CEO whose brother was mildly intellectually handicapped.  As a result he has an interest in getting mildly intellectually handicapped people into the workforce and over the years became skilled at using their labor in place of non-handicapped people.  Their labor is still not as useful as a "normal" persons, being worth only, say $8 an hour, compared to say, $12 an hour for others in the same job.  This CEO would suffer a serious pay cut because he did this under the proposed legislation.  While of course he might choose to pay the intellectually disabled the same rate as normal people ($12) but how can this be justified to the shareholders, whose money it is?  How is it their responsibility as shareholders to provide extra money to the disabled?  While it could be argued that taxpayers, citizens or even "the rich" should provide help there is no reason why owning particular shares makes you responsible.

But let's look at it from the other angle.   This encourages shareholders to pay their CEO or highest paid employee less.  Is this a good thing?  Not necessarily, even if the effect was uniform across all firms, which it wouldn't be.   By encouraging firms to pay people less than they would in a free market they encourage those people to quit and form their own companies, becoming self-employed and thus not subject to any limit on compensation.  While there is nothing wrong with people doing this if it's justified by consumer demand, this isn't the case here.  These executives would be starting a new firm not because they believe their actions would be most productive that way, but because they believe that they would be least taxed that way.  Again, this is the exact opposite of "creates the right incentives.".

But there's more.  Suppose that a CEO or other highest earner learns that the shareholders through the Board of Directors, will cut their pay from say, $5M to $1.25M because the medium wage of his workers is $5oK.  He asks the Board members individually or in groups, if they really think he's not worth $5M.  They all say "No we believe that you're worth the money, but the extra taxes we'd have to pay are a lot more than the extra value you give us, so we're going to cut your pay regardless.".  The logical response to this is to say "Fine, but I'm going to steal the difference from the company and if you try to find out how I'm stealing it, I'll quit.".  Notice the incentives here.  The board know that the CEO is worth $5M, but that they can't pay him that.  The CEO knows that he can't openly and legally get the money he's worth.  They both know that if he takes the money covertly and illegally it's in neither of their interests to stop him.  Of course the benefits need not be in direct theft.  The age-old tradition of nepotism could get a real revival as a result of this.  Why begrudge a man worth $3M more than paying him a few jobs for his nephews.   Of course since the nephews aren't being employed for actual productivity they won't be put in the roles where they would create most value in the economy.  Or even any value in the economy.  So their potential labor value is wasted too.   Of course he could employ female "friends" instead.  It's just a bad incentive extravaganza here.

But let me get back to something I mentioned before, " even if the effect was uniform across all firms, which it wouldn't be. ".  Firms differ in the average pay of their employees.  This is not because some firms are run by generous, openhearted George Bailey types and some by Ebenezer Scrouge types.  It's because some require lots of highly skilled labor and some require a lot of low-skilled labor.  Because the labor of a worker with low skills can be substituted for by many other worker's labors their pay is low.  Because the labor of a worker with high skills cannot be substituted for by many other worker's labor their pay is high.  

Under this legislation CEOs and others who might become the most highly paid workers of a firm have an incentive to work for firms that mostly use high-value labor.   This is not a good thing.  There is nothing inherently better about the best management managing small numbers of high-paid workers as opposed to large number of low-paid workers.  Walmart and McDonalds both need good managers just as much as Apple or Google.   This legislation will result in those who management skills would be most useful to low-skill companies going to work for high-skill companies instead.  As a result bad decisions will be made at the low-skill companies, resulted in wasted resources, less production, production less suited to what consumers actually want and even possibly the bankruptcy of the company or it's exit from the jurisdiction where this law applies.

"What about CEO’s gaming the system? Can’t they simply eliminate low-paying jobs by subcontracting them to another company – thereby avoiding large pay disparities while keeping their own compensation in the stratosphere?
No. The proposed law controls for that. Corporations that begin subcontracting more of their low-paying jobs will have to pay a higher tax.  "

Note that the law only increases the taxes for decreases of 10% or more of full-time equivalent workers.  This really shows how little thought went into this bill.  I mean really who can't figure out that this will mean 9.8%-9.9% cuts in full-time equivalent year on year is an idiot.  Which doesn't mean I'm surprised Robert Reich didn't figure it out.   Note of course that the increase for firms that do decrease their direct employees by 10% is 50% of the previous tax rate.  Note that this is regardless of whether firing these people pushes average pay of direct employees up, down, or nowhere.  So far from being designed to plug a potential loophole in the legislation this clause is merely creates a tax on outsourcing.   Of course even in this it's flawed.  It's supposed to discourage substituting outsourced labor for direct employees.  But what it actually does is discourage hiring indirect employees at the same time as firing a certain amount of direct employees.  So if a company subcontracts for some people in industry A at the same time as shutting down an unprofitable plant in industry B they can get hit with the tax increase, even though the indirect employees are not substitutes for the direct employees, and may not even be paid less than them.  The sheer lack of thought in this bill is astounding.

"For the last thirty years, almost all the incentives operating on companies have been to lower the pay of their workers while increasing the pay of their CEOs and other top executives."
Which incentives are these and incentives for who?  As usual Reich states the simplest possible position and doesn't justify it.  That's because his job is to have certain attitudes, not to actually deduce or explain facts or theories.

However some things have occurred that indirect do create and incentive for increasing CEO pay.  The value of the CEO to the company can be expressed as a simple equation:
CEO value of company = (Capital of company * ( percentage return(CEO) - percentage return( best alternative CEO)) + cost of employing best alternate CEO
Best in this context means the alternative CEO with the highest value to the company.

So the larger the company the more worthwhile it is to pay for a better CEO.  This is pretty obvious when you think about it, no matter how good a manager someone is it's not worth paying them $10M to manager a $20M business.   So what has led to big companies?  In a word government.  Regulation is less costly to comply with per dollar of revenue for big companies, and regulatory rules have multiplied for decades.  There are of course direct encouragements of scale like "Too Big To Fail" which is still worth about $83 Billion dollars** or about 3% of the US Federal tax take for 2013.    Think about that.  For ONE INDUSTRY the subsidy for being big equals 3% of what you pay to the government.  And that's from ONE market distortion "Too Big To Fail".  That Reich doesn't mention this means that he either doesn't want to, or can't, explain these distortions.

But there is something more than ignorance in the support of this bill by Reich and others.  There is sheer evil.  That seems like a strong term, so it's probably best to define it.  I define evil as the willingness to inflict suffering on others for the sole reason of being allowed to do things that would not be justified if that suffering and the goals that suffering served were taken into account.  So what suffering am I talking about, why wouldn't it be justified and what goals are being served?   Well I hope I've explained the suffering.  

So what is the goal of the legislation?   We can dismiss the idea that it's goals are what it stated since it doesn't efficiently achieve those goals.   So either the legislation has other goals that are concealed or the writers of the bill do not wish to examine how their bill would work.  If the latter then the true goal of the legislation is to allow the writers of this bill and their supporters to pretend they are solving the problem rather than actually solve it.  So the actual goal is to avoid the effort of thought an actual solution would require.   There are a number of possible concealed goals and I think each requires it's own paragraph.

Firstly this bill would make it harder for big business compared to small and medium sized business.  It's much less of a burden to pay your employees 1/25 of the bosses pay when the boss only manages 100 people compared to if he manages 10,000.    So the bill can be thought of as essentially a subsidy for smaller businesses.  But that doesn't explain why they sought this means to get an advantage.  Why not simply target the many and various ways that large scale is advantaged?  Because these various government programs have been promoted with various false justifications for years, and it's hard to attack the entrenched propaganda.    Additionally the justification that the bill raises workers wages is more acceptable than that it raises the profits of a type of entrepreneurs.   The bill also seeks to claim that the costs will be on CEOs who are unpopular, rather than shareholders in big business, who are not so unpopular (and include the pension funds of many voters).

Secondly this bill would benefit high skilled workers over low-skilled ones.  Employing low-skilled workers would impose additional tax costs under this bill for many (although not all) firms.  That means that some firms will be willing to pay more for high-skilled workers to substitute for larger numbers of low-skilled workers.

Thirdly and most importantly this bill diverts attention from the failure of regulators and other government employees to prevent the problems afflicting American workers.  By focusing attention on the actions and incomes of employees the authors of this bill implicitly excuse anyone else of being the main cause of the workers distress.  This is important as regulation has been increasing substantially for as long as anyone can remember.  There will of course be many people who claim that regulation has reduced in the past decades.  To them I ask by what measure?  What measure of regulation actually decreased in the last, say 30 years?   Pages of regulations?  Estimated cost of regulations?  Cost to start a new business?  What?  I've asked this several times of various people who claim the economy was deregulated and have never got an answer.

But even without being evil this bill would be grossly unfair.  Consider the effect on the wages of two workers, identical in all ways except that one works at a big firm with a highly paid CEO and another works at a small firm with a lower paid CEO.  Why does the former deserve a raise and the latter not?  I've already mentioned the CEO who employs intellectually disabled people at lower rates of pay, how does he deserve a pay cut for employing the previously unemployable?   And it's not just intellectually disabled, but physically disabled, recent immigrants whose language skills aren't great, the long-term unemployed, former convicts and many others are less productive than other potential employees.  Hiring them at the wages their productivity justifies can serve both the shareholders and them, but it costs the CEO, how is that fair?

Of course the response might be "These people aren't at fault for their lower productivity***, why should they deserve less money that more productive people.".   But business isn't about who deserves things but who can produce net value.  Suppose that Klaus wanted to be a pilot, saved his money for courses and studied hard.  The night before his final qualification exam he comes across some skinheads beating a Jewish girl, he intervenes and saves her, but gets "curb party" which loses him his right eye.   With one eye nobody wants to hire him as a pilot and he has to take lower paid work.  So does he deserve less money?  Of course not.  But his potential employers don't deserve to be the ones to pay the difference between what deserves and what his labor is worth.  While there might be a case for government taxing people to reimburse Klaus for the difference, it's certainly not justifiable to slap it all on the firms that do employ him.  So the argument that these people (might) deserve more is not a valid argument for making their employers pay them more.  It's an argument for them being the subject of some sort of charity, or if necessary, government aid****.

Even more unjust than the differential effects on pay is the differential effect on employment.  Low-skilled workers will lose jobs under this legislation, even though they are ostensibly one of those supposed to benefit.  Why should they lose a job just so someone with more skills, who could have gotten another job anyway, can do their work?  This is the biggest hypocrisy to me, the brutal abandonment of the very disadvantaged for the better paid workers.  This is true sociopathy and it disgusts me.

*  Full quote of two paragraphs so I won't be accused of taking it out of context.
"There’s no easy answer for reversing this trend, but this week I’ll be testifying in favor of a bill introduced in the California legislature that at least creates the right incentives. Other states would do well to take a close look.
The proposed legislation, SB 1372, sets corporate taxes according to the ratio of CEO pay to the pay of the company’s typical worker. Corporations with low pay ratios get a tax break. Those with high ratios get a tax increase."
**   Source via
*** This is not true all the time but it's true some of the time.
**** I do not in fact favor government aid, but at least it would be better than sticking the costs on random employers.