Sunday, July 22, 2007

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The public aims at the wrong bogeymen


What you see above you is the result of a Financial Times/Harris poll among various OECD countries about globalization (note, by the way, that the FT wierdly flip-flops the categories halfway through the graph). The associated story sums it up as follows:

The depth of anti-globalisation feeling in the FT/Harris poll, which surveyed more than 1,000 people online in each of the six countries, will dismay policy-makers and corporate executives. Their view that opening economies to freer trade is beneficial to poor and rich countries alike is not shared by the citizens of rich countries, regardless of how liberal their economic traditions.
Indeed, as the poll shows, there's either majority or plurality enthusiasm for "setting pay caps for the heads of companies." The breadth of support surprises Mark Thoma.

For a pro-globalization type like me, there's not a lot that's funny about this kind of public sentiment. There is something ironic, however, about the extent to which publics believe that this kind of measure will reduce income inequality. On this point, I click over to Marginal Revolution and find the following:

We consider how much of the top end of the income distribution can be attributed to four sectors -- top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%)....

...we do not find that the top brackets are dominated by CEOs and top executives who arguably have the greatest influence over their own pay. In fact, on an ex ante basis, we find that the representation of CEOs and top executives in the top brackets has remained constant since 1994. Our evidence, therefore, suggests that poor corporate governance or managerial power over shareholders cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution. We also discuss the claim that CEOs and top executives are not paid for performance relative to other groups. Contrary to this claim, we find that realized CEO pay is highly related to firm industry-adjusted stock performance. Our evidence also is hard to reconcile with the arguments in Piketty and Saez (2006a) and Levy and Temin (2007) that the increase in pay at the top is driven by the recent removal of social norms regarding pay inequality. Levy and Temin (2007) emphasize the importance of Federal government policies towards unions, income taxation and the minimum wage. While top executive pay has increased, so has the pay of other groups, particularly Wall Street groups, who are and have been less subject to disclosure and social norms over a long period of time. In addition, the compensation arrangements at hedge funds, VC funds, and PE funds have not changed much, if at all, in the last twenty-five or thirty years (see Sahlman (1990) and Metrick and Yasuda (2007)). Furthermore, it is not clear how greater unionization would have suppressed the pay of those on Wall Street. In other words, there is no evidence of a change in social norms on Wall Street. What has changed is the amount of money managed and the concomitant amount of pay.

Oh, and there's no apparent correlation between higher pay and the openness of a sector to international trade.

To be fair, I suspect publics would support capping the income of Wall Street groups if they were asked. CEOs might simply be a proxy for "evil capitalist pg-dogs." That said, CEOs do tend to be the first target whenever this kind of sentiment is translated into political action.

I can't dispute the rising resentment about rising inequality -- but that doesn't mean that the resentment has acquired the correct target (I don't think there is a clear target, but that's a topic for another day). There is support, clearly, for some really stupid policies.

posted by Dan on 07.22.07 at 11:51 PM


I wish FT/Harris had set up those graphs in a better way. The color scheme, the switching "Not sure" with "No," and other factors make it difficult to quickly get a sense of the data.

I thought the most interesting trends were Germans' impression of globalization and UK & US' sense on opportunity (at least relative to everyone else).

posted by: Jason on 07.22.07 at 11:51 PM [permalink]

"There is support, clearly, for some really stupid policies."

Yes. Although even in the U.S. at least those who believe globalisation is having a negative effect (~40%) are still a minority.

And given the tendency to demagogue over high gas prices, will politicians really think voters will be happy with anti-trade policies that raise the cost of Toyotas and goods and Walmart? Or will politicians rail against globalization, offshoring, fat-cat CEOs, etc but then enact only symbolic measures and leave well enough alone on trade? It's looking like that's about the best we can hope for.

posted by: Slocum on 07.22.07 at 11:51 PM [permalink]

The focus of public attention on CEO pay is further evidence that the "left/right" division in developed countries today is not between labor and capital, but between labor and management -- the triumph, I suppose, of Djilas over Marx.

posted by: mr punch on 07.22.07 at 11:51 PM [permalink]

Dear Dan, sometimes when I read your blog I feel humbled by your understanding of "how the world works." At other times I disagree, but get your point. Reading this entry, I could not believe that you appear so out of step with what you call public sentiment. The gross incomes of "evil capitalist pig-dogs" are not ammunition for leftist dreamers. They are not manufactured into Marxist metaphors. They are actual representations of a greed that is culturally destructive. In short I think you have ivory towered yourself into a defense of "evil capitalist pig-dogs" who when finished with you will grind your bones for their children's birthday cake. ben

posted by: ben on 07.22.07 at 11:51 PM [permalink]

Wooof !

posted by: Roland on 07.22.07 at 11:51 PM [permalink]

Sadly, Dan seems to be joining the "peasants are stupid" school of economics.

The peasants may not have PhDs but certainly have a lot of common sense and the ability to understand when the game is rigged.

The real problem is that a relatively few people own the government, and the increase is income equality shows I'm a Reagan Republican, not some whack job socialist).

Globalization will move ahead, the only question is

"how do we handle the transition?"

Sneer at the peasants long enough and the peasants will send more Sherrod Brown-types to Congress.

posted by: save_the_rustbelt on 07.22.07 at 11:51 PM [permalink]

According to Fortune Magazine, there was a sort of under the table agreement in the Blackstone IPO so that the PUBLIC shareholders will pay the capital gains taxes for some of the senior execs.

Any ethics questions here? Or just the elite getting their due?

posted by: save_the_rustbelt on 07.22.07 at 11:51 PM [permalink]

So the best response to the public support for "really stupid policies" is to vote for the party most likely to enact those really stupid policies? This doesn't make any sense to me, but I'm not a professor.

posted by: y81 on 07.22.07 at 11:51 PM [permalink]

Dan -- openness to int. trade may be the wrong measure. private equity took advantage of global demand for debt to fund their big equity purchases, so they have been among the big winners of the particular kind of globalization that we have experienced (one increasingly defined by big financial flows from EM governments to the US and Europe). Hedge funds have also profited from a series of trends linked to the emergence of EM governments as a supplier of global liquidity. So it strikes me at least that looking only at goods and services trade misses the point. EM government demand for debt has at least as significant impact on the global economy, and on the size of the paychecks of certain winners.

posted by: brad.setser on 07.22.07 at 11:51 PM [permalink]

So, blue collar, anti-trade rust-belters are right because they say they're right? Since when has public opinion been so accurate and fact-based?

Or, are they perhaps suffering from imperfect information to such an extent that it leads to (gasp) "policy failure"?

You're right. It's inconceivable. Most blue collar people I know have the in's and out's of international economics pretty much down pat.

posted by: Sorry S_T_R, Populism isn't a Science. on 07.22.07 at 11:51 PM [permalink]

Actually, ben, Drezner's remarks are a good reflection of the level of understanding he brings to pretty much *every* issue he discusses, which is why I practically never bother to visit this blog.

posted by: sglover on 07.22.07 at 11:51 PM [permalink]

"I can't dispute the rising resentment about rising inequality -- but that doesn't mean that the resentment has acquired the correct target (I don't think there is a clear target, but that's a topic for another day). There is support, clearly, for some really stupid policies."

So instead of resenting those who benefit from and support inequality, they should be getting upset at whom? The people who oppose it? The sky gods?

posted by: faux facsimile on 07.22.07 at 11:51 PM [permalink]

Those who benefit from inequality are politicians. In "faux facsimile"'s mind, CEOs meet in Masonic lodges, brandy in hand, laughing through their oiled moustaches over how next to screw over Stalwart Worker. It just ain't so.

The CEOs, as a rule, are non-political rich who don't benefit from inequality as such. If they are THAT rich then they can afford to pay the household help. Some CEOs rely a bit more upon cheap labour but even those CEOs know that machines are better. In the long term even they'd benefit from less inequality. Look what washing machines did for women.

Also, remember that power and adulation are substitutes for wealth; if you shake down the CEOs for cash then they will become advocates for trendy causes, ranging from the silly to the destructive.

Lastly, we're not going to get rid of income inequality as long as IQ remains (1) genetic and (2) permanent. (1) has been true since the first worm evolved a brain. (2) will remain true for perhaps a decade and then we will have genomic and computational solutions. Until then, get used to this: 50% of the population is below average.

posted by: David Ross on 07.22.07 at 11:51 PM [permalink]

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