Friday, January 31, 2003

Wrong economics in action

In yesterday's post, I pointed to a piece by Arnold Kling where he wonders why people are so bad at economics. I encourage you to read the comments under that post, as well as the comments on JaneGalt on the same topic. The two most salient details are, I think, 1) people get very emotional and 2) no one changes their mind. It's difficult to get someone to change the way they see themselves, but it's pretty easy to get them to act in their own best interest. A staunch environmentalist will buy a Jetta because it's shiny. (Also, to be quite clear, I think that people acting in their own best interests is a tremendous feature, not a bug. It's much better than ideology at getting people to do the sensible thing).

Here's a Slate article that has more bad economics on display. Today's object of scorn: CEOs with salaries of $1. It must be very tough to be a CEO -- you're criticized for making too much money AND criticized if you make only a buck. Clearly the crime here is being a CEO at all.

The argument says that low CEO salaries are phony because most of the compensation package is in options, which can get really big. This is true, but isn't a rising stock price a good thing -- so good in fact that we want our CEOs to be focused on nothing else? Anybody who criticized Bush's tax plan as being not stimulative enough must certainly think so because the real economy is OK (not great, just OK), only the stock market is in the doldrums, and therefore the only thing that needs stimulating. I'd wager that the 50% of Americans who own equities want CEOs to focus on raising the stock price, not buying ivory backscratchers.

Now there are lots of good arguments about expensing options, repricing options, fraud, corporate governance etc., particularly in the wake of recent corporate scandals, and I agree that figuring out how best to fix the agency problem in public companies is important, tricky, and far from perfected. But saying that CEO compensation should be less tied to how a company does is bad for employees, CEOs, and shareholders (well, maybe not CEOs who like ivory backscratchers more than increasing the worth of companies they are in charge of). The only way you can think it's a good idea is if you think wages should be determined by Communal Sharing (everyone gets whatever they want) or Equality Matching (everyone gets the same). And why would someone think that?


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