What role, if any, does political ideology play in rising inequality? Mark Thoma defends Paul Krugman's view that ideology matters, against Andrew Samwick, Greg Mankiw and Brad DeLong (and here). I'll chip in on Mark's side:
1. Can we construe ideology a little more widely than merely who happens to be in government? Since the early 1990s, demand for CEOs has grown, and their pay has soared, contributing greatly to increasing inequality. However, this growing demand was based upon ideology - managerialism and the cult of the CEO. Boards increasingly believed that the right man could hugely transform company fortunes, and that they had the ability to spot the next Jack Welch. Both claims are ideological, in the sense that they are not empirically obvious; they were less widely held in the 1960s, and in Japan or continental Europe. Maybe, then, ideology increases inequality not merely by determining who's in the White House, but by influencing the demand for managers.
2. The decline of trades unions - which is surely partly due to the ideological climate - can increase inequality not merely by cutting workers' pay, but by raising CEO pay. This paper shows that strong unions hold CEO pay down.
3. Is it really true that the increased pay of bosses is due merely to their increased marginal product? How would you prove this, given that the observable human capital of a $50 million a year CEOs doesn't differ much from that of less well-paid workers? Sure, there's superstar economics. However, this marvellous paper (pdf) shows that superstar-style pay can emerge with no talent at all:
It is possible to be untalented and successful; anybody may become one day a superstar, whatever his talent level.
And then, of course, there's good old-fashioned rent-seeking. This paper (pdf) by Rakesh Khurana and Mikolaj Jan Piskorski argues that the market for corporate control doesn't eliminate CEOs' ability to extract rents.
Isn't the lack of the popularity of these alternative explanations for inequality, and confidence (faith?) in market forces, an ideological development?
"As Warren Buffett said, "When you put a good manager into a bad business, it's usually the reputation of the business that remains intact.""
Just as when you put a super-coach/manager into a rubbish team, he doesn't take the cup. Then his reputation certainly takes stick.
Posted by: james higham | August 22, 2006 at 01:39 PM
Paul Klugman's standard speaking fee is $25,000. He justifies it because he claims he could save a company millions. A Marxist probably couldn't get anything for a speech because we live in a capitalistic society. It's doubtful he could save a company anything.
For those who hire Kurgman ideology and pragmatism are in play. Which counts more? Since there is no guarantee with Kurgman's advice I suspect that ideology counts more when it comes to speaking fees. What his speeches do is to reassure companies rather than guide them. It's worth $25,000 to the company's directors to have an economic star say they are right or be seen as directing them.
I see $25,000 speaking fees as obscene based on my ideology that they are bad for society. Such fees are symbolic of the activity that leads to the growing inequality between the haves and of have not's in society. Growing inequality cause both groups to feel disconnected from society.
When it comes to equality in society mine is a utilitarian philosophy that people will be happiest when they can fulfill their interests. People on the bottom have little opportunity to fulfill their interests while people on the top who have the means and the desire to spend $3,000,000 on a birthday party for their wife seem to be living beyond the bounds of social approbation. Or more correctly the approbation of one who takes a utilitarian approach to society.
If the tax code made a years worth of $5,000 speaking fees comparable in take home pay to a year's worth of $25,000 speaking fees, then one would expect a $5,000 fee to be the standard one for economic superstars. Those who weren't in such demand would be happy with a $1000 fee, plus expenses.
If this were true, and I see no reason to think otherwise since in my scenario the tax code would effect earnings in the same way no matter how economists spent their time making money, then the difference between $25,000 and $5,000 would now be rent seeking. That's so because Kurgman would be willing to do the same thing for $15,000 less.
Kurgman is right, ideology largely accounts for the growing difference in equality.
Posted by: wjd123 | August 22, 2006 at 04:55 PM
Surely trade unions add to inequality by keeping people out of work? Anyway, CEOs - they pillage the shareholders. The explanation presumably lies either in the detail of company law, or in the identity of shareholders - mainly pension schemes and the like. Since one should not be a judge in one's own cause, the power that axiomatically should not be entrusted to the CEO and his cronies is the fixing of the pay rates for that circle. Ditto MPs.
Posted by: dearieme | August 22, 2006 at 09:55 PM
Oh, and thanks for the link to that paper: marvellous indeed.
Posted by: dearieme | August 22, 2006 at 09:59 PM