Transcendental Bloviation

Politics, Space, Japan

Thursday, December 14, 2006

The Great Wealth Transfer

How the richer are getting richer, as Paul Krugman explains it.

I remain sympathetic to the argument that what we've got here is a combination of trends, only one of which is governmental. (If only because singular events are usually the result of multiple, independent factors, where our bias is to seek out a single cause.)

Take jobs. (Just don't take mine!) Krugman is a free-trader, so he has to know that China, among other developing nations, was going to start soaking up manufacturing jobs. Indeed, he argued in an essay, "In Praise of Cheap Labor: Bad Jobs at Bad Wages are Better than No Jobs at All", that to try to protect against that phenomenon would be counterproductive and miserly. Boy, did he get a lot of hate mail for that one.

Then there's the argument by Brad DeLong et al. that IT, among other things, has given us more of a winner-take-all economy. Perhaps there are fewer rainbows, fewer pots of gold at their endpoints. But there is beaucoup booty for those who get to those pots of gold first -- whether by way of talent, luck or unsustainably intense effort (with the biggest pots going to those who manage a trifecta). Perhaps the employees of Goldman Sachs would agree -- salaries, bonuses and benefits will amount to an average of $622,00 per employee this year. Meanwhile, the 120 workers on contract to clean Goldman Sachs offices in London are mulling a strike, with their workloads having been increased recenty by staff cutbacks. Well, that shows up what Krugman is talking about rather starkly, doesn't it? (The cleaners in the new York offices probably don't even belong to a union.)

The income disparities at the highest end are probably best explained by a market failure in executive compensation. One of the better explanations I've heard for this blames the rise of CEO head-hunting, which arguably marketized executive recruiting far beyond any precedent. That's paradoxical. The question is: should it have been marketized? Time was, most top executives arrived at their positions through internal promotions -- so when you got up there at the top, you actually knew something about your company. As Robert Townsend put it, it's better to hire from within even if your best internal candidate only looks like half of what you need -- "He'll grow the other half." Someone coming in from outside might fumble around for a year and half, and still not know which end is up. "Vision" in the sense of "seeing how your company really works" is not the kind of expertise that can be easily commodified. By liquefying the market for CEO bodies, executive recruiting actually made in-house wisdom scarcer, and also made the game of winning as a CEO considerably more of a crap shoot. What happens when you make something scarcer? The price goes up. And what happens when you make a job more like gambling? Less blame on the gambler when things go wrong -- thus a failure of market signals.

Krugman argues from the government side, and lays the blame on Reagan and Bush. Well, that's probably part of the picture. But I don't think it's the whole story.


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