The Market and High Incomes

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I think – but would be happy to be corrected – that one of the weaknesses with the Left is a shortage of ambitious and feasible policy ideas to change a key source of inequality in Western economies: the scale of the inequality in the income that those who are in employment receive for their labour.

Too often it appears that those who of us describe themselves as egalitarians have accepted that the ideal of ‘the redistribution of wealth’ boils down to developing policies to implement a version of that other cliché on what the Left is about: ‘tax and spend’. This does not mean that all tax and spend proposals are unradical. For example, the proposal for a basic income – an income unconditionally granted to all on an individual basis, without means test or work requirement – has been around for some time but is little implemented, and I suspect one of the reasons is that it is seen as a step too far for many. (If my memory is correct, it was a policy backed by Young Fine Gael about 25 years ago when Chris O’Malley was at the helm of the party’s youth wing.)

Or another example: The US economist John Roemer has suggested “the creation of two kinds of money: one used for the purchase of goods and the other, referred to as ‘coupons’, for buying shares in companies.” The radical element of his proposal is that all citizens are given coupons through which they derive ownership rights in companies, including dividends and voting for the board, but cannot sell those coupons for ‘ordinary’ money. (This last is one of a number of proposals explored in the Real Utopias Project at the University of Wisconsin. Some of other books from the RU project have other suggestions that I would classify as tax and spend.) And nor does my worry with the extent of the focus on tax and spend policies mean that I think they should be abandoned. You only have to read the article by Brendan Hayes, the ‘refusnik’ on the Commission on Taxation, in the September issue of The Union Post to see why they are sorely needed.

However, the problem that I see with relying only on ‘tax and spend’ policies is that they do not deal with what happens inside the market. Some of them – like investment to combat educational disadvantage or Roemer’s coupons – are designed to give everybody an equal chance as they enter the labour market, but leave the big divergences that occur over the course of different people’s working lives untouched. Other tax and spend policies, like increased social welfare or the basic income, are an attempt to reduce the size of the differences that arise from market processes on an ongoing basis (although no social welfare proposal I have ever heard of would give a sustained income that is anything like that enjoyed by even middle managers, never mind senior executives).

There are two reasons why what happens inside the market should be scrutinised by egalitarians. The first is empirical: the divergence in salaries and other pay for work since the 1970s is the root of the increased inequality in western economies. The second is ideological and, for me, the more important: if we do not examine the inequalities in the market, we give them a credence and contribute to the view that they are somehow ‘normal’, that the natural order of things is for huge inequalities to exist.

Of course, it is not true to say that the only approaches to dealing with economic inequality have been versions of tax and spend. To illustrate: two Irish groupings on the Left have set out policy objectives that go deeper than tax and spend. John Baker and his colleagues at UCD (in Equality: From Theory to Action) have identified the reduction in the inequalities in pay as central to achieving an egalitarian society. And Mary Murphy (a former Labour member of Dublin City Council) and her colleagues in an ad hoc group named Is Feidir Linn (which doesn’t quite have the rhetorical pizzazz of Barak Obama’s original ‘Yes we can’) have gone further and named a specific numerical outcome to be aimed for:

Highest income earners should have no more than ten times the income of the lowest earners.

However, a problem, as I see it, is that all of the discussion is a long way from giving us the content of practical proposals that a policy maker from the Left could table in, say, talks on forming the next government or in negotiations on the programme of the next European Commission.

A comprehensive approach would require looking at the entire range of incomes and how they arise, but my particular interest is the high end of the income scale, and how it has pulled away from the average in the last thirty to forty years. (And for the purposes of this post, I deal only the pay of business executives: it would take too much space to deal with the pay elite of sports-people, rock stars, and ‘celebrity’ broadcasters.).

While I would dearly love to see ideas of the UCD team and Is Feidir Linn further developed, I am glad that they have not rushed ahead with more specific proposals that are poorly grounded, a virtue that cannot be attributed to the British think-tank Compass to justify its campaign for a Commission on High Pay. The Chair of Compass, Neal Lawson, said at the launch of their campaign in August

It’s time the government took action on excessive pay, it’s absolutely right that we now reign in the bonus bandits that created the economic crisis.

The more substantial briefing paper that Compass published expands on this as a key reason for establishing a High Pay Commission:

There is now a clear public interest in exploring the link between high pay, excessive risk taking and the stability of the national economy. That is why Compass is calling for the establishment of a High Pay Commission so that the threat of meltdown and the reality of recession are never repeated because of excessive rewards.

Somebody needs to tell Compass – whose tagline is “Direction for the Democratic Left” – that the logic of this is not particularly of the Left. Applying Compass’s reasoning, if the bandits had not created the crisis, then the level of their pay should not be an issue. Or, could it be that Compass thinks that if those who had created the crisis had not been highly paid, there would be no need to examine their behaviour – that it is OK if medium or low paid workers create global chaos. (For fairness, I should point out that others who provided quotations for Compass’s press statement did offer sounder rationales for examining high pay.)

A second – and potentially much more significant – possible source of change on high executive pay that I have seen discussed recently is an institution I would not have thought of as being notable for its Left stance: the US Supreme Court. Even more surprising is that the intellectual basis is an argument made by Richard Posner, a prominent US scholar and federal judge who would be described as being on the political Right  (albeit he hasn’t become a turncoat:  his rationale is not in the slightest bit egalitarian). In a dissenting opinion in a case called Jones v Harris, he says

executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation.

And after a slew of academic papers to support that point, Posner goes on:

Directors are often CEOs of other companies and naturally think that CEOs should be well paid. And often they are picked by the CEO. Compensation consulting firms, which provide cover for generous compensation packages voted by boards of directors, have a conflict of interest because they are paid not only for their compensation advice but for other services to the firm-services for which they are hired by the officers whose compensation they advised on.

That seems to me to be a pretty good definition of ‘crony capitalism’, a term I associate with Joe Higgins (in the sense, of course, that he uses that term to attack the business elite).

The subsequent appeal in Jones v Harris now means that, as the New York Times put it ‘Supreme Court to Hear Case on Executive Pay‘. (Both the jurisprudence and what might be called the judicial politics of Posner’s dissent are also interesting although they are not relevant to my discussion. Links to some of the discussion of those topics can be found here, here and here.) The importance of Posner’s dissent is that it has moved a well-established critique to executive compensation out of the relative backwater of academia into a legal-political sphere, and within that sphere an arena with some bite.

The question is whether egalitarians can provide responses to that critique, or is sophisticated analysis of that section of the labour market the preserve of the Right?

 

5 Responses

  1. Marise

    October 22, 2009 4:27 pm

    Being no expert, all and sundry are free to discount this suggestion:

    I was under the impression that corporate charters are written and granted by governments. That would mean that governments are free to rewrite corporate charters to include specifics about board-of-directors formulation, and pay ratios. And they would be free to revoke corporate status for any corporation that failed to honour these obligations?

    Another thing: I don’t know about Europe, but in US law the corporation has actually attained some “Personhood”, in a nebulous and not-well-defined kind of way. I would like to see this overturned somehow, so to exclude corporations from political donations and such. Or conversely, enshrine this personhood in law, so that laws governing persons do apply to corporations, so that if they defraud, or bully, or pollute, they would be prosecutable the same way as you or me. Then the externality principle wouldn’t be so much cheaper than doing the right thing.

    Please feel free to poke big holes in these ideas. It doesn’t do to live inside one’s own head too much.

  2. Tomboktu

    October 22, 2009 10:26 pm

    I agree that the laws on corporations and companies will need to be changed to secure a more egalitarian distribution of income. However, before that project would be embarked upon, I think the economic impact of the changes would need to be thought through.

    The idea that corporations have legal personality is quite deep, and has, I understood, been extended to the European Union. I don’t know the full implications of that, but I do know that the “human rights” of companies has been the subject of legal claims in at least one (if not both) of the European legal systems (EU and CoE). A plus for legal personality could be that it provides the possibility of companies (and not just their employees or directors) being subjected to criminal law.

  3. Marise

    October 23, 2009 4:24 pm

    Yeah, that’s what I was getting at. It may be too late to roll back personhood, but a person does have societal responsibilities. Right now, Corporations operate in a grey area, attesting to personhood when it’s beneficial, and then suddenly devolving into mere “legal entities” when it isn’t.
    The charter thing would be more difficult. In the States, corporate charters are issued at the state level, and incorporating bodies can shop for the most desirable. For example, the lion’s share incorporate in (of all places) Delaware. Their charter and fees were specifically written to attract this. Not having this income would very much affect Delaware’s exchequer. So your point about knock-on and thinking through is well-taken.

  4. Proposition Joe

    October 25, 2009 12:39 pm

    Highest income earners should have no more than ten times the income of the lowest earners.

    10 times seems a bit arbitrary, no? Why not set the threshold at 4 or 40 times instead?

    Could it be anything to do with the fact that 10 times the minimum wage just happens to be mere pocket-change higher than the salary of union leaders and senior academics?

    The problem is always with the guy who earns 10 grand north of one’s own salary.

  5. Tomboktu

    October 25, 2009 7:25 pm

    I agree that a magnitude of 10 times is arbitrary (and not just “a bit” but entirely so).

    The only time that I’ve seen a specific level justified, and primarily for analytic purposes, was in one of the papers by AB Atkinson where he split the wealth (not the income) range at sums equal to 30, 900 (i.e. 30×30) and 2700 (x30 again) of the average income. The rationale is that at the kinds of interest rates that OECD countries aspire to (before the current crisis), a capital sum of 30 times the average income would generate the average income in interest in a year (assuming you don’t get a higher interest rate for depositing a large sum).*

    (I am amused that later in that paper he notes that in Fig. 1 that Bill Gates and Warren Buffett cause visible discontinuities in the graph.)
    ______________
    *You see the paper here: hhttp://www.wider.unu.edu/publications/working-papers/research-papers/2006/en_GB/rp2006-151/