Mankiw: deserving rich? don't believe it

[dano]

http://www.nytimes.com/2014/02/16/business/yes-the-wealthy-can-be-deserving.html

Greg Mankiw wants us to have sympathy for the very rich, and wants us to
think they deserve every penny of their wealth. Don't believe it.

First, he appeals to movies stars, trying to get us to think "oh, that's
okay that they make huge amounts" and then wants to apply that to other CEO
types.

But movies stars operate in a distorted market where celebrity is its own
reward. And nobody thinks that rich movies stars shouldn't contribute back
to society, and when they behave badly we don't have much sympathy for them
at all.

Mankiw writes: "Those who work in banking, venture capital and other
financial firms are in charge of allocating the economy's investment
resources. They decide, in a decentralized and competitive way, which
companies and industries will shrink and which will grow. It makes sense
that a nation would allocate many of its most talented and thus highly
compensated individuals to the task. In addition, recent research
establishes that those working in finance face particularly risky incomes.
Greater risk requires greater reward."

Except that the perverse incentives in that industry led directly to the
crash of 2008 and the Great Recession that followed, and few if any of
these "talented" individuals were penalized for risking our economy with
any risk to their personal upside. Mankiw argues that high risk should
have high reward, but I'd point out: only if those being rewarded for
success also have skin in the game for failure, especially failure that
multiplies to others outside of their firm, like the whole rest of the
economy.


If we want to talk about movies, let's talk about one of the most striking
fictional movie characters: "Master-Blaster" from Mad Max and the
Thunderdome.

http://madmax.wikia.com/wiki/Master_Blaster

Here is an archetypal example of division of labor: management and labor
personified in two individuals.

Interestingly, Master has a deeply caring relationship with Blaster,
because he knows that without Blaster he is just a little weakling who
can't protect himself from coercion (just as the developmentally disabled
Blaster is incapacitated without Master to give him direction). And this
is born out in the plot when Blaster is killed, due essentially to Master's
overreach in accumulating power in his Bartertown domain. Master becomes
subject to the whims of the competing power figure in Bartertown. And it's
his own damned fault for wanting too much.


It's a good lesson for managers the world over. Mankiw writes: "A typical
chief executive is overseeing billions of dollars of shareholder wealth as
well as thousands of employees. The value of making the right decisions is
tremendous. Just consider the role of Steve Jobs in the rise of Apple and
its path-breaking products."

But this puts too much value on the CEO individually. What a successful
CEO does, in making successful decisions, is increase the value of the
labor of the employees, who therefore should share proportionately in the
wealth that accrues from the collective effort. The CEO does not create
the products single-handedly, Jobs didn't even design his own products, he
simply filtered which designs to move forward with. He set priorities and
direction, but he did not move the ship himself -- the oarsmen did.
Without his Blaster, the Master could not have succeeded. Tim Cook may do
quite well -- the cult of personality is not necessary to be a good
manager. But the cult of personality is what drives celebrity markets like
movie stars, and so it makes sense that Mankiw uses that in making his
flawed argument -- trying to get us to make the leap in tricky little steps.

You can extend this metaphor by understanding that without customers with
the disposable income to purchase the products, the company will not
thrive, either. Corporate leaders have a responsibility to contributing
keeping the economy healthy, if only because demand drives sales.

When CEOs thrive at the expense of their employees, this creates an
adversarial relationship that is ultimately dysfunctional. If these CEOs
concentrate on bringing up the incomes of their employees, and reducing the
disparity of income in their own organizations, then they perform a
synergistic function worthy of compensation.

They ought to then support policies that bring up the income of lower
classes generally, not just among their own employees. When the disparity
of wealth is too large, it harms the overall economy, and creates a
shrinking pie of demand for capitalists to fight over, in a potential death
spiral if they are thinking only about their narrow benefits.

Society gives these CEOs the platform they stand on, by providing corporate
limited liability which may be the single most important government
regulation (enforced by the coercive power of the state) that enables
investment to proceed broadly. Without limited liability there is no stock
market, because no one in their right mind would risk their entire assets
on the behavior of strangers on one's behalf.

Through this powerful tool, capitalism gets its feet, and in the process
there is a dynamic to concentrate great masses of wealth in the hands of an
elite few. But that concentration -- the original "redistribution of
wealth" from the bottom to the top -- overshoots the mark, thus meriting a
"re-redistribution of wealth" back down the power-law curve to the rest of
us.

Mankiw also does a slick misdirect when he uses the top 0.1 percent instead
of the top 0.01 percent to make his point about progressive taxation. (And
he's hiding behind Urban-Brookings on this -- we need to get U-B to add the
0.01 percent bracket on their tax distribution table!) He's trying to make
us think that this is progressive enough, already. But he's getting us to
look away from the truly exponential pin-head of the curve here.

It's those plutocrats who are trying to take over the political system and
to become the New Royalty in our society.

Don't let 'em. Don't believe 'em.