End Of The Year Thoughts On Inequality And Its Remedies

Prescription drugs are the largest single chunk of this sum. Drugs are important, not only because of the money involved, but also because people’s lives and health are at stake. The drugs that sell for tens, or even hundreds, of thousands of dollars would almost invariably be cheap in a world without patent monopolies and related protections. While any price is expensive for the poor, for most people, paying for drugs would not be a big problem if they sold for ten or fifteen dollars per prescription. Doctors could freely prescribe what they view as the best drug for their patients, without regard to price. (We need to make sure that government programs pick up the tab for the poor.)

There is also the issue of the perverse incentives created by patent monopolies. Drug companies routinely misrepresent the safety and effectiveness of their drugs to maximize their sales and therefore the benefit of monopoly pricing. The most extreme case (which no one ever talks about) is the opioid crisis, which was worsened as a result of drug companies widely pushing drugs that they knew to be more addictive than claimed.

The inequality story is also straightforward. Dishwashers and custodians don’t benefit from patent monopolies. A very limited group of workers are in a position to get big gains from these policies. Bill Gates would likely still be working for a living if not for the patent and copyright monopolies on Microsoft software. When economists say that “technology” has increased the returns to education and inequality, they actually mean that patent and copyright monopolies have increased the returns to education and inequality, but it sounds much better to blame inequality on an abstract force than government policy.

The Corruption of Corporate Governance

There is a simple point here that seems to largely escape people on the left. CEOs are not worth their $20 million paychecks. That is not a moral assessment of the value of their work, that is a dollar and cents calculation about their value to the companies that employ them.

At this point there is a considerable body of research that shows the pay of CEOs is not closely related to the returns they provide to shareholders. Bebchek and Fried have a somewhat dated collection of research on the topic. I reference some more recent material in chapter 6 of Rigged. A couple of years ago, Jessica Schieder and I also contributed a piece to this literature.

The fact that CEOs are not worth their pay matters because it means that they are effectively ripping off the companies for which they work. There is a widely held view, that in recent decades, companies have been run to maximize returns to shareholders. However, if CEOs have been earning huge paychecks at the expense of the companies they work for, then it is not the case that companies are being run to maximize returns to shareholders.

The fact that returns to shareholders have not been high by historical standards over the last two decades supports the view that CEOs are not maximizing returns to shareholders. It is also worth noting that the shift of income from labor to capital only explains about 10 percent of the upward redistribution of the last four decades.

The fact that CEOs might be gaining at the expense of shareholders is not just a question of which group of rich people get the money. At the most basic level, there is reason to prefer the marginal dollar goes to shareholders, since even with the enormous skewing stock ownership, a substantial portion of shares are owned by middle class people in their 401(k)s and pension funds. By contrast, every dollar going to a CEO is going to someone in the top 0.001 percent of the income distribution.

But more importantly, the bloated pay of CEOs has a huge impact on pays scales throughout the economy. If the CEO is getting $20 million then it is likely the chief financial officer and other top tier executives are getting close to $10 million. And the third tier can be getting $2 or $3 million. By contrast, if we had the pay scales of forty years ago, the CEO would be getting $2 to $3 million. The second tier would be correspondingly lower, and the third tier may not even crack $1 million. The excess pay at the top in the corporate sector also leads to bloated pay for top executives in universities and private charities. And, with all this money going to the top, there is less for everyone else.  

Anyhow, it should be apparent both that lowering the pay for CEOs will be a huge step in reducing income inequality, and that shareholders should be allies in this battle. Changing the rules of corporate governance (these are set by the government) to give shareholders more control over CEO pay can lead to lower pay at the top and therefore less inequality.

Globalization is a Policy, not an Exogenous Event

A popular story among elite types is that we can’t have good-paying factory jobs that can support a family because of globalization. The deal is that workers earning $30 an hour, plus benefits, can’t compete with workers in places like Mexico and China, who can do the same work for less than one-tenth as much. 

This is true. But the fact that our factory workers were put in direct competition with low paid workers in the developing world was not just something that happened, it was the result of deliberate policy. Our trade deals were designed to make it as easy as possible for U.S. corporations to outsource work to developing countries and bring manufactured goods back into the United States. The massive loss of manufacturing jobs in the years from 2000 to 2007 (pre-Great Recession) was not an accident, that was the point of our trade deals.

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