Yes, the Wealthy Can Be Deserving

This is so utterly clueless: "In light of this, the most natural explanation of high C.E.O. pay is that the value of a good C.E.O. is extraordinarily high.". Can't possibly imagine another reason why people in a position to influence how much money they're paid seem to end up with higher salaries. Nope, nothing comes to mind for me.

Mankiw is arguing with a wall. I'd much prefer Downey get his cut of the wealth he worked to help create, than the heirs who lay about and collect dividend checks from Time-Warner, Disney and the others who take a cut from Downey's labors.

Mankiw erects a straw man and then tears it up.

The problem is with the heirs who expropriate surplus labor value from those of us who work. The problem is not doctors, or actors, or engineers, or people paid highly because they invested a long amount of time to train themselves. The problem is not that doctor's train for years and are then paid well, the problem is with heirs who never work, yet then live the high life off of those who do work, by expropriating their surplus labor time.

I'd argue that it's because we can see where the money comes from, and not that we can see their skills on display. If you think "hmm, LeBron makes 10% of what his Jerseys sell, 10% of the Heat ticket revenue, and whatever he gets in endorsements" then most people are OK with that. I've paid to see a basketball game and if 100% of my ticket went to the players on the court I'd be very pleased. We can understand that all Americans who enjoy entertainment pay for it, and that some fraction of the money we pay goes to the entertainers themselves.

When you talk about a high-paid finance executive, I'm not mad at their comp because I don't understand what they do, I'm mad because I don't see where they money came from. To the general public, what a hedge fund manager does is take a lot of money from rich people, play stocks all year, turn $X into $Y, and then take a cut of $Y. All of this money is in a pool that Joe the Plumber has no access to, and likely never will.

The most true statement about wealth is "it takes money to make money" which has the corollary "it's very expensive to be poor". Once you have $10M, it's not too hard to turn it into $15M if you play your cards right. The rich have access to so many profitable endeavors (that are taxed at low capital gains rates) that most of us will never get near. Meanwhile the guy with $50 in his checking account pays a $15 fee for being too poor.

Boom goes the dynamite.

(edit: For the comment below me, YES, payroll taxes are included.)

http://www.economist.com/blogs/democracyinamerica/2013/06/in...

Re: the claim that the rich take on greater risk (hence "Greater risk requires greater reward."), here's the graph:

http://i.imgur.com/llLrSZe.png

from http://scholar.princeton.edu/gkaplan/files/guvenen_kaplan_ae...

And there is a large overlap with the HF crowd and those who caused the financial crisis and the resulting 0% interest rate policy. Who has gained from 0% interest rates and quantitative easing? The HF/PE crowd. So they drive the car over the cliff, but in the end they up with new and better cars, while every else is slowly trying repair their old busted car. F them, I say. They are deserving of a black eye, or worse, certainly not their wealth.

a simple example from the PE world: Blackstone defaults on its debt, and takes the proceeds to pay of the default itself. It's not exactly that simple, but pretty close

http://dealbook.nytimes.com/2013/12/12/a-surprise-from-hilto...

If you or I pulled that shit, we'd never be allowed to borrow money again, but Blackstone can borrow at interest rates and terms the average homeowner can only dream of.

Even beyond this, I see little proof that individuals having absurd amounts of money is in any way beneficial to society, at least on any consistent basis.

To be perfectly honest, I almost feel that there should be a legislated maximum income disparity within a company to reduce the insanity that can happen. Maybe something like no employee may make more than 100 times what another employee makes in terms of net hourly compensation. 100 times is still an absolutely massive disparity, and yet this would improve things. Want to pay your CEO more? Give your janitors a raise.

   Federal Income Tax  28.0% ($89,350-$186,350 bracket)
   Self-Employment Tax 15.3% ($0-$117,000 bracket)
   CA State Income Tax  9.3% ($49,774-$254,250 bracket)
   ----------------------------------------------------
   Total Marginal Tax. 52.6% ($89,000-$117,000 bracket)

[1] - http://en.wikipedia.org/wiki/Anarchy,_State,_and_Utopia#Dist...

The best piano player in the world may capture 95% of the album sales for Schumann's Concerto in A minor, without being twenty times better than the sadly impoverished second best. Stuck with number two, the empire would hardly crumble. Some markets, including patent races, just funnel all returns to first place. Aside from first past the post effects, we also have a market containing inheritance, unregulated monopolies, and the swings of fortune to name a few others. Not all of wealth is luck, but some seem to insist it never plays any role. Thomas Gilcrease comes to mind. Great philanthropist and wonderful businessman, got his start by essentially winning an incredible lottery.

Progressive taxation can serve as a headwind to correct some of these excesses without scrutinizing desert[1] on a case by case basis (a monumental judicial task with suspect gains). The downside of a blanket solution is that you end up mixing the sheep of deserving rich in with your goats.

To protect the noble wealthy that end up unfairly persecuted by such a headwind, we should just fight to make sure that tax policy doesn't suddenly beggar anyone, make sure that the ranking of wealth isn't significantly shuffled, limit how much markets are distorted, ensure a simple code that's easy to comply with and difficult to cheat, and make sure government expenditures are constrained wherever feasible. These areas could use significantly more work even if our tax structure went largely unchanged.[2]

We can also take some comfort in the knowledge that a rich man in a progressive society is still, at the end of the day, a rich man, and may somehow muddle through. That's not to be too dismissive, I do think social justice is important for every individual. But I admittedly struggle to give equal weight to the problems of the rich when thinking of other social issues, like racial disparities in incarceration, or the treadmill to homelessness for those without access to mental health care. It's hard to rank "rich people don't have the tax rate they like" exactly among other problems we're confronting, but that's a bit of a separate discussion.

[1] http://en.wikipedia.org/wiki/Desert_(philosophy)

[2] While my ideal would include a postcard sized return with higher rates for those pulling in millions, I'd gladly take, even prefer work on these other areas first.

I can't speak for all the human race, but one of the issues is whether there actually IS some connection between pay and actions and renumeration. Some people get paid huge amounts of money not merely because of what they do, but because of who they are and manipulation of social power structures. Queens, kings, heirs, priests....CEO's?

We know that there have been relatively wealthy individuals throughout all of history, and we can also probably ascertain that many people would think that some actions should be socially more deserving of social remuneration/reward than others. There are rich people who are rich because of being rewarded due to doing great things for lots of others, and there are rich people who are rich because of nothing they did for the rest of society but because of current social structure or through random chance or through false beliefs and manipulation of those who sent money and social power their way, and there are rich people who are rich because they've done some pretty nasty shit. Some have probably done all three.

So which are the CEO's (if we must talk of them collectively)? Well, I would say to Mr Mankiw that if the easiest answer is that CEO's make millions because of merit, then their merit should be easy enough to measure. Because if its not easy enough to measure, then on what basis could the boards possibly be connecting merit to pay? They couldn't be. Perhaps it is merely a cargo cult or back scratching operation relative to the amounts of capital they have available to them? As I said, there's lots of classes that have received money through the social mechanisms that the general populace has accepted, but just because the pope sits on a throne of gold, doesn't mean he's actually communing with god or deserving of it.

Indeed, perhaps we could answer this empirically. We can take CEO pay of various public companies, and control against regular share-market index movements. Define a function to relate company size to CEO remuneration, and then define a function to relate this to company worth over time after that CEO has been hired. It should become pretty apparent, pretty quickly, that those that paid more for a CEO at a particular time had particularly better outcomes after paying high prices for said CEO after he came on board, on average, than those that paid less. If they didn't, then its pretty clear that of all the reasons people are getting paid so much money, relative merit isn't one of them and perhaps we need to look for other explanatory variables.

So out of curiosity...anyone on HN aware of any such studies?

/and by all means Mr Mankiw, people in your position bringing out the "but the rich pay more in taxes!" just reinforces my impression that harvard and higher education institutions are a complete sham.