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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: bentway who wrote (858105)	5/18/2015 1:04:50 PM
From: TimF	Respond to of 1574053

Where Krugman Goes Wrong About Monday Night Football And CEO Pay That Paul Krugman is a better economist than I am I readily admit (given that I’m not an economist this is pretty easy). That he’s a better essayist than I am I will also readily acknowlege, even if the green eyed God does take over sometimes. However, these two facts do not mean, as Brad Delong oft insists, that Paul Krugman is right about everything. And so it is with his invocation of Monday Night Football as an explanation for soaring CEO pay. He himself agrees that it’s a fairly kookie explanation anyway, but the thing is he’s taken the wrong lesson from the near absurd explanation itself. He also uses a chart from the EPI which is, as usual, entirely correct and horribly misleading. It’s not that the EPI lies to us about numbers or anything, it’s that the way they construct and explain them hides something, often the most important part, of their true meaning. Here’s that chart: That chart is not CEO to worker compensation. That chart is “top CEO” to worker compensation. As Mark Perry keeps reminding us there’s millions of corporations and businesses in America each of which has a CEO. And the average (median) compensation of a CEO is some $220,000 a year or so. Yes, good money and I wouldn’t mind making it myself. It’s also of the order of what Paul Krugman will be getting when he joins CUNY fully in the summer. That’s before his NY Times pay, book revenues and so on: and why not, superstars should be making super money. The usual trick here is to take the pay of CEOs of publicly listed companies, perhaps the S&P 500 say, maybe one of the Russell indexes, and then claim that that’s the average pay of all American CEOs. This simply isn’t true. This is the pay of the top CEOs. At which point Krugman mentions the Monday Night Football idea: Quite a few of the businesspeople themselves thought that pay had grown excessive, but what has remained with me was the explanation one guy offered, more or less seriously: it’s all the fault of Monday Night Football. His story went like this: when games started being televised, the financial rewards to winning teams shot up, and star players began being offered big salaries. And CEOs, who watch a lot of football, noticed — and started saying to themselves, “Why not me?” If salaries were set in any kind of competitive marketplace, that wouldn’t have mattered, but they aren’t — CEOs appoint the committees that decide how much they’re worth, and are restrained only by norms about what seems like too much. Football, so my conversation partner averred, started the breakdown of those norms, and we were off to the races. No, neither Krugman nor myself say this is anything other than an idea very tenuously based in our reality. However, it’s the wrong interpretation of the story anyway. The introduction of Monday Night Football brought a lot more money into the game. The skills required to be an NFL player are vanishingly scarce: it’s not all that much of an exaggeration to say that all of those who can do it are already doing it. The rivers of cash flowing through a structure that uses exceedingly rare skills increase? Those skills are going to get more cash. That’s just the way these things work. Which brings us to CEOs. The largest American companies are very much larger than they were a generation or two ago. Both in simple size and also in relation to the size of the economy. There’s very much larger rivers of cash flowing through those structures. And the talents required to be a good CEO are indeed rare. We can see this by how many of them manage to get it wrong. So, more money flowing through a system employing rare talent? That talent is going to get more money. This is just the way things work. That’s the story to be drawn from the comparison of Monday Night Football and CEO pay. In both cases there’s rare talent, a rare talent that has gone up in value as the value of the underlying activity has increased. This does, of course, assume that CEO pay is set in some form of a competitive market. The explanation Krugman offers there, that it’s all backscratching at the expense of shareholders among the managerial class, is a common one. It could even be true. But if it were true then we would see private equity paying their CEOs less than public companies pay theirs. Because at a private equity owned company the shareholders (if there are even more than one) have a great deal more power than the dispersed shareholder register of a public company. So, do we see private equity paying less than public companies? Do we heck. Therefore the original thesis leading to the conclusion that we ought to must be wrong. CEO pay might be affected by all sorts of imperfections but that private equity pays more than public companies does show that the ability to be a CEO is indeed a rare talent (or at least is perceived as such) and also that, whatever the principal:agent problem at public companies, it’s still a competitive market. forbes.com