Help me formulate egalitarian legislation

Great Debates
1

I’ve been mulling over this for a couple of days now. I heard a statistic about top corporate officers making some outrageous amount of money–something like the ratio of highest-paid-worker to lowest-paid-worker has gone up 400 times what it was 40 years ago.

In my opinion, what the company with such a huge ratio is doing is externalizing costs on society. Currently, there is no incentive for a company to pay its unskilled workers anything other than what the market will bear. Therefore, there is no reason for a company to pay a less-than-living wage to its workers. It is then the government that must take up the slack and provide those workers with food stamps, tax breaks, Medicaid, etc.

My idea is to change this with tax legislation. What if a law was enacted that forced companies to pay a penalty of 1% for every ratio point over 1? If all employees were paid the same compensation, then there would be no penalty. If the ratio was 200:1, the company would have to pay 199% of its income for that year (lets see the CEO talk his way out of that one to the stockholders). I would guess that the income raised through this tax would allow regular income tax to be lowered, therefore making a company with, say, a 10:1 ration pay the same total taxes under this scheme as with income tax alone. If shareholders wanted to pay a top executive $10 Million/year, then they would have to pay their lowest workers at least $100,000/year so not to be penalized 100% of their income.

So what are your thoughts? Would this work? Should we immediately get together and form a grass roots campaign to get this enacted?

When you are thinking about this, also think about how to define a worker for this statute. If it were too loosely defined, all companies would immediately fire their lowest paid workers and then hire them through temp agencies or contractors. In the other direction, if a company regularly used UPS to deliver packages, that companies taxes would be based on the lowest-paid UPS worker.

2

There is only one problem with that tax plan. capitalism.

I’m not trying to slam you because you have clearly thought a decent theory(and i propose no solution), however, that system simply could not work in this society, or any other society that i can think of.

Should the mail clerk working in the basement make the same as an executive secretary? Should the secretary make more than the 40 hour a week laborer? Should the laborer make the same as the ceo? Granted, the ratio that we have today may be atrocious but communism has already died. capitalism may not be perfect but it is the best system we have.

3

Japan, which one can hardly accuse of being teeming hotbed of commies, has a law that the highest paid employee of a corporation cannot make any more than 12 times the salary of the lowest-paid.

4

BillyT, the problem is that many of these corporations are about as economically healthy as Cuba or North Korea. What’s the capitalist line on a board of directors voting themselves eight figure incomes when their company is a billion dollars in debt? That’s not capitalism, that’s looting and pillaging. As Matt pointed out, capitalism is alive and well in Japan, but executive prestige there is measured by the health of your company not by the amount of money you took out of it.

5

A board of directors can’t vote themselves an income that the shareholders (the owners of the company) disapprove of. They’re paid what the shareholders think they’re worth.

Often, the pay structure for a corporate president is to get a significant portion of his pay as an incentive, or commission, on how his company performs on a measure such as Return on Assets (a common one). Also, they’re given bonuses in the form of stock options, which with the stock market performance lately tend to inflate the numbers. But they could have gone the other way.

So would someone suggest that the top basketball player in the league be paid only ten times what the guy makes who wipes the sweat off the floor? Or that Tom Cruise can only make ten times what the kid who dishes out popcorn makes?

You idea assumes that near-egalitarianism is a good thing, which I strongly disagree with, and that the corporate executives make more than they should, which their bosses (the stockholders) disagree with. Besides not being workable, your plan doesn’t have a philosophical leg to stand on.

6

I’m with CurtC. What do you care what the CEO is paid? CEOs are paid the market rate for CEOs as it should be, just like engineers and janitors are paid the market wages for their occupations. Nobody forces you to hire a CEO or an engineer or a janitor. If the stockholders believe the guy is worth it, why should you care? A CEO’s salary does not come out of your money, it comes out of the shareholders’ pockets and they invested voluntarily. (When the stockholders believe they were duped they can and do sue the officials of the corporation).

The whole principle of capitalism is you are allowed to invest in whatever you want, even if it turns out to be a bad investment. Or should the government tell me where and how I should invest my money? Not in corporations where the CEO makes too much? Maybe they should also tell me I really do not “need” a second car and I should put the money somewhere else? How about if I want to buy a second house? Nah! Nobody needs a second house! We’ll take your money from you and put it into some social program to give housing for poor people. Do you really think the government can invest your money better than you can?

>> Japan, … has a law that the highest paid employee of a corporation cannot make any more than 12 times the salary of the lowest-paid.

Matt_mcl, somehow I find that hard to believe, can you supply some support for that assertion? Then the maximum salary in Japan is under $100k/year? Even if it were technically true I am sure there are plenty of ways around it. In communist countries they had similar rules except the guys at the top got plenty of stuff that didn’t count (housing, cars, vacation etc). Technically In Cuba they are all equal.

I am not sure why Japan comes up as a better example. I cannot think you can say quality of life is better for a mid-level Japanese worker than for his American counterpart if you measure by standards like size of home, etc.

7

Most CEOs are personal friends of the boards that hire them. Most “stockholders” tend to be insurance companies and related types of business that make their money through sheer investment. None of those people have any incentive, any more, to actually look out for the needs of the corporation beyond getting a return on today’s dollar next quarter.

There have been a few stockholder uprisings in the past 20 years, but they were few and far between. I am now watching the third company in the last five years self-destruct because the board was willing to hire overpriced CEOs and CFOs who made disastrous short-term decisions, enriching themselves at the expense of the company.

There have been several reports on the basically negative effect that the institutional investors are having on several segments of U.S. industry, because they are quite willing to shift their money when a company starts to falter rather than insisting that the boards take appropriate steps to make the company solvent.

I do not think that the OP (as stated) would work and I do believe that a good CEO deserves to be rewarded. I do not have a clear solution, at this point, but it is simply not true that the current system is working. Most companies have been riding the bull market and only the most egregious errors have come to light. If the current bear market becomes a trend instead of a correction, you are going to see a lot more bloodletting at the senior management level, but it will not actually help the companies because they are not taking the long-term approach now and the “stockholders” (institutional investors) are not willing to actually invest in the companies rather than simply putting money temporarily into the companies’ stocks.

8

Large differentials in wealth tend to erode ordinary people’s ability to reciprocally set value.

From a technical perspective, Communism fails because economic decisions are concentrated in the hands of too few actual people, who lack the information processing capability to make efficient transactions. The same technical problem affects economic oligarchies; as wealth becomes concentrated, fewer people are making more and larger economic decisions.

Computer programmers such as myself are hard up against a similar problem. As computer resources become more concentrated at the mega-servers (Microsoft, AOL, Geocities, etc.) it becomes very expensive to match capacity against demand. This difficulty will become even more severe as bandwith and usage continues to rise exponentially. Indeed, the entire microcomputer revolution arose because of the concentration of information processing resources in mainframes and IT departments.

However, direct legislation is probably not the best answer. Legislation is both too narrow and too broad. Too narrow because the feedback mechanisms in law enforcement are necessarily clumsy and slow; ideally, a law should be enforced thoroughly and without exception. Too broad because, to be effective, a law must necessarily cover a wide range of behavior in a very simple way.

To counter the increasing concentration of wealth, structural adjustments to the economy are preferable. Some will occur naturally; the rise in online trading and the incredible (and transitory) growth in dot-com stocks are creating a (mostly) beneficial distribution of capital among the middle class. Globalization will (mostly) help as well; distributing economic decision making over a vast area will prevent large concentrations of wealth from becoming overwhelming. Naturally, we should not proceed willy-nilly with any structural change.

Remember too that in a 6-7 trillion dollar economy, a couple of hundred million dollars here and there is not a huge deal. And focusing on the distribution of captial rather than income probably provides a more telling picture of the overall health of the economy.

9

Well, the stockholders have voted and the proxies counted. The verdict? This thread will re-incorporate in Great Debates.

10

(1) The problem with the theory of capitalism is that it assumes perfect knowledge. There isn’t. There are MANY imperfections in the market that prevent the market from working the way it should (several posters have already mentioned a few).

(2) I don’t think a totally level pay structure is a good thing. I am still a believer in monetary incentives (capitalism). A small tax won’t stop anyone from changing their pay structure. Its only when the tax gets to be 20% or over that shareholders will take notice.

(3) I realize that most CEOs get paid a significant portion of their salaries in stock options. That was one of the issues I wanted to ferret out here. Would it make sense to include this as compensation? Why shouldn’t the mail room guy get 5% of the stock options the CEO gets (making the tax 20%).

(4) If a company makes billions of dollars in profit, why should it be able to externalize costs on the rest of society? It costs the government money to take up the slack when a worker makes a less-than living wage. The company is gaining a benefit from having access to those workers, yet it is only contributing the bare minimum of what the market will allow.

11

No it doesn’t. Whilst is true that some neoclassical models in economics assume perfect knowledge, this is not representative of economics in general, nor even of neoclassical economics. [disclaimer: I am an economist]

Dropping strong informational asumptions does not weaken the case for the general effectiveness of markets, although it does complicate them.

picmr

12

picmr,

I appreciate your response, but instead of taking a pot shot at an obviously ancillary point, why don’t you contribute to the substance of the discussion. Do you have an opinion on whether a pure free market system works? Will the market always correct itself, or are their imperfections in the market that prevent corrections from occurring?

Lets remember the goal of government is not to strengthen the economy. The goal of the government is more social in nature. Strengthening the economy is merely one method to achieve that goal. People, of course, disagree as to what other methods should be (e.g., pro-lifers believe laws against abortion will aid society, libertarians believe laws that impinge on the authority they have over their own lives are a detriment to society, etc.).

Therefore, if the proposed law would have the net affect of aiding society, then it should be enacted. I am of the opinion that an unrestrained free market will not work. Pepsi would decide that the best way to gain market share would be to purchase some nuclear weapons and blow Coke off the face of the planet. Therefore, I am a proponent of governmental restriction on the market inasmuch as such restrictions are necessary to prevent a company from harming society. Part of the harm a company can inflict on society is externalizing costs.

More fundamentally, I see nothing wrong with spreading the wealth. If the investors are making money hand over fist, and the CEO is raking in the dough, why shouldn’t the mail room boy get a piece of the action? Because the market has decided that his contribution is only worth minimum wage? Is that enough of a justification to only pay the janitor what you can get away with? What is wrong with the government giving companies an incentive to pay people more than what the market dictates their value is? As I mentioned before, the market is not always correct in its valuations.

13

billyt123:
I have answered your point, namely, I don’t believe such a tax would eliminate different salaries, it would just compress them to a more reasonable level.

CurtC:
I have answered your points as well. The philosophy behind it is outlined above

sailor:
What the hell are you talking about? I think an analogy can help: if the government can figure out exactly how much alcohol costs society in externalized costs (drunk driving accidents, liver problems, etc.) wouldn’t it then be appropriate to tax either the consumers or producers of alcohol an amount equal to those costs? This doesn’t relate directly to the original post, but neither does your tanget.

tomndebb:
yep, yep.

SingleDad:
Well, I guess the only answer is that I am an attorney, so I believe that laws should be changed to make them work. The alternative (not enacting any legislation in fear that it would be overbroad or too narrow) seems to be totally ineffective.

manhattan:
This a great debate? If you say so.

14

Sorry, I thought the context made it clear: Legislation is both too narrow and too broad to efficiently micromanage the economy. Legislation is designed to be consistent over large spans of time; markets are designed to be responsive to changing conditions in very short periods of time.

I’m not in complete disagreement with your point of view. Economic efficiency is not (at least in my view) the be-all end-all of human existence. There are certainly cases where absolute efficiency conflicts with non-economic values, and some form of negotiation must take place, its outcome made consistent through legislation and enforcement. Nor do I disagree that at some levels, both economic and non-economic, a concentration of wealth and income has negative consequences.

Rather I merely point out that I don’t find income disparity are necessarily as large as you seem to find them, and that I don’t feel that direct legislation is the appropriate manner to address the issue.

15

SingleDad said:

If you are correct, and the problem is overstated, what is the harm? My guess is that the majority of companies would have the same tax burden under both the proposed system and the current system. If the average income ratio was 20:1, then regular income tax could be lowered by about 20%.

16

Day One: It began to snow last night.

Day Two: I offer to shovel my neighbor’s driveway for $5.00

Day Three: Word has spread of the quality of my services. I now clear ten driveways per day. At a little over an hour per driveway, this is the most I can do.

Day Four: The snow stops, spring begins and the grass grows.

Day Five: I offer to cut my neighbor’s grass for $5.00.

Day Six: Word has spread of the quality of my services. I now mow ten lawns per day. At a little over an hour per lawn, this is the most I can do.

**Day Seven:**I have worked hard enough and sacrificed (i.e. saved) enough to put a down payment on a second shovel. I choose to buy a shovel because I am forward thinking and anticipate another harsh winter.

Day Eight: Spring ends, the winter snows begin again.

Day Nine: I now make arrangements to shovel twenty driveways. I provide a list of ten appointments and my second shovel to my next door neighbor. I charge my neighbor $0.50 for each driveway he shovels. He keeps the remaining $4.50.

**Day Ten:**I continue to work and save as before, and with the added income of my employee I am able to buy a second lawnmower.

Day Eleven: Spring begins anew, and I make the same arrangements with my employee for the spring. I provide a lawnmower and appointments and charge $0.50 for each lawn he cuts. He keeps the remaining $4.50

**Day Twelve:**I buy a third shovel.

Day Thirteen: I am too busy to write out my daily log, and switch back to a more comfortable writing style. I spend less time clearing driveways on my own now, and more time finding new customers and new employees. I had a few painful lessons, but I learned a lot about salesmanship and economics. I learned, for instance, that every hour I spend looking for work I need to get at least ten people to commit just to be the equivalent of my own shoveling / mowing. This does not include how much I need for gas (to find the customers) printing, etc., or the time I spend at night working on bills. Eventually, I agree to rent a shovel to one of the people working for me for $0.25 per driveway, on the condition that he spends part of his time managing other workers.

Not counting people in a supervisory role (the revenue from them goes to the accountants, assayers, utility companies, etc) I now have one hundred people working for me shoveling driveways / mowing lawns. They all clear ten driveways/lawns per day and each take home forty-five dollars per day. I collect five dollars (ten percent of the fifty dollars collected from their customers) per day from each of them. This gives me a salary of five hundred dollars per day. They declare a salary of $11,700 per year, I declare a salary of $130,000. Next year I am planning on expanding.

17

Rhythmdvl,

No offense, but you didn’t spend a lot of time with that hypothetical, did you? You are all over the place, talking about phantom supervisors that have no effect on your yearly salary and mentioning time that is required, but not saying how much time is put in.

If I understand you correctly, your hypothetical suggested a multi-level marketing system, and you want to know why the person at the top of the pyramid should or should not make however much he makes.

All of my previous posts clearly states that (1) the proposed tax would only be assessed on profits and (2) having access to cheap labor is externalizing costs on society, since society then must bear the burden of taking care of people who, in your example, make less-than-minimum wage.

I’m not sure what else I can contribute. Do you want me to comment on what I think of Ponzi schemes?

18

Morgan:

Take a little bit of your own advice. Unless, of course, you are not just playing dumb to avoid any issues you would have trouble thinking about. First of all, the above has been repeated in one form or another a billion times over. It is not that complicated, it is just a basic business model, a model / development path innumerable companies follow the world over. Sorry that you think it is some variation of a Ponzi scheme. Go here for a recent thread on Ponzi schemes, and see if you can tell the difference.

I don’t want to talk down to you, but again I am not sure if you really don’t get it or you are being purposely obtuse. One person starts a business. That person’s time, ingenuity, sacrifice, etc. goes into making it a success. (S)he is both successful and prudent enough to have the ability to hire a second person. The second person earns a bit less than the first, but takes on less of the risk and does less work (they don’t have to find customers.) The owner of the business makes very little extra from having the one employee. In fact the owner can’t recklessly hire people without taking into account how much they are going to earn for him. (This was in the hypothetical, sorry if it was a bit too deep for you to understand. It was buried in the bit about needing to get ten plus commitments just to cover his cost. Again my apologies if you were just being facetious.) I even allowed for the possibility of on employee, in time, becoming a supervisor thereby rising up the socioeconomic ladder. Sorry if I made it too simple by making any revenues from their efforts equal overhead costs, but I wanted to provide for upward mobility.

So again, at what point does the owner of the company cross the ethical line you have drawn in the sand? Day one, where it is just the owner? Day two? Three? Is it unethical to make a profit off of a single employee? Ten employees? If your profit margin stays the same and you have a thousand employees, have you then crossed the line?

You want to apply a hefty tax on the owner based on profits. Now, I am not out on the libertarian fringe claiming that all taxes are wrong, and don’t think all tax-supported social services are the bane of humanity. But you have quite a burden on your shoulders to prove that by making X times more than an employee, an injustice has been done.

You’ve also been bandying about the word ‘externality.’ Can you explain what you mean by that? If business is already being taxed to support social services, and those services exist (albeit to a debatable degree) why is the business externalizing costs to society? Describing detrimental effects of the rich / poor gap is not that hard to do, but it does have some limits.

19

I think it’s interesting that the OP and much of the subsequent discussion were about ridiulous pay in corporations for the officers and board members. Now, we are doing analogies based on private business.

I’m thinking that it may be the legal structure of incorporation that is the problem. The big iniquity is that board members are taking risks with other people’s money. If the CEO’s salary were coming directly from their pockets, they would probably be a little more restrained in rewarding him/her.

Obviously, there needs to be a way for people to pool their investments; on the other hand, there needs to be more direct reaping of consequences.

What do you guys think? Do we need to reconsider the Corporation as a legal entity?

-VM

20

Sorry I’ve been a little slow in responding (slow boards, bad memory).

  1. I don’t think there could be a “pure free market”. Markets are social institutions which are sustained by rules external to them.

  2. Some markets fail, some are unstable. I think that the market overall has some tendancy towards “bubbles” but is slowly self-correcting. External shocks can be quite destabilising too. During the time taken for correction however, we may live our whole lives.

  3. The economy is only important insofar as it serves social needs. It is not an independent entity. When you speak of the government’s goal, I take it you are speaking of the goal the government should have.

To your main point, which you rightly castigated me for avoiding.To the extent to which I would do it, I would avoid changing incentive structures within markets, and focus on changing incomes through the tax system. This would make the terms of any equity/ efficiency tradeoff more favourable.

Paying stock options to mail room people is not as silly as it sounds, and should financial innovation proceed at the pace of the last ten years for a while, I would expect to see it.

To the extent to which executive compensation seems excessive, there are two problems.

First, the incentives tend to relate to short term values. This distorts decision making towards the present and allows gains to be made based on equity market conditions rather than company performance.

Second, poor performance of executives seems to be inadequately dealt with. Failed CEOs seem to walk away with a lot of loot. My guess is that this will tighten up in the next ten years as shareholders realise they’re being ripped off.

Oh and as a drummer, I should mention in solidarity that that there rhythmdvl makes some points that bear some response.

picmr