Crawl Across the Ocean

Saturday, January 20, 2007

Editors of 'The Economist' are Deeply Concerned About Inequality - Can You Guess Why?

I see that the Economist had a recent cover story entitled: "Rich Man, Poor Man: The Winners and Losers from globalisation." And it does seem that The Economist is worried about inequality. More specifically, the Economist seems to be concerned that, given fast-growing inequality, given millions of middle-class workers making no progress, given millions and millions more stuck in poverty while a few at the top make massive gains there is a very real risk that there could be a backlash which attempts to limit the exorbitant pay of CEO's.

To that end, the Economist has a full article, "Executives have enjoyed an astonishing pay bonanza. Edward Carr explains why most of them deserved it," with reasoning so weak it is laughable, including the assertion that only CEO's paid hundreds of millions will go through with downsizing, merely paying millions leaves companies unable to attract someone willing to make cutbacks.

But they don't stop there. The article, "A poisonous mix of inequality and sluggish wages threatens globalisation," is even more on point. First it lays out the problem:

"GLUERS and sawyers from the furniture factories in Galax near the mountains of Virginia lost their jobs last year when American retailers decided they could find a better supplier in China. At the other end of the furniture industry Robert Nardelli lost his job this month when Home Depot decided it could find a better chief executive in his deputy. But any likeness ends there. Mr Nardelli's exit was as extravagantly rewarded as his occupation of the corner office had been. Next to his $210m severance pay, the redundant woodworkers' packages were mean to the point of provocation.

That's the way it goes all over the rich world. Since 2001 the pay of the typical worker in the United States has been stuck, with real wages growing less than half as fast as productivity. By contrast, the executive types gathering for the World Economic Forum in Davos in Switzerland next week have enjoyed a Beckhamesque bonanza. If you look back 20 years, the total pay of the typical top American manager has increased from roughly 40 times the average—the level for four decades—to 110 times the average now."

Then it gets closer to the *real* problem:

"Signs of a backlash abound. Stephen Roach, the chief economist at Morgan Stanley, has counted 27 pieces of anti-China legislation in Congress since early 2005. The German Marshall Fund found last year that, although most people still say they favour trade, more than half of Americans want to protect companies from foreign competition even if that slows growth. In a hint of labour's possible resurgence, the House of Representatives has just voted to raise the federal minimum wage for the first time in a decade. Even Japan is alarmed about inequality, stagnant wages and jobs going to China. Europe has tied itself in knots trying to “manage” trade in Chinese textiles. The Doha round of trade talks is dying.

What is to be done about this poisonous mix? If globalisation depends upon voters who, as workers, no longer think they gain from it, how long before democracies start to put up barriers to trade? If all the riches go to the summit of society and that summit seems beyond everybody else's reach, are the wealth-creators under threat?"

Did you catch that last line? Unless I misread it, in the course of a single sentence, the people at the summit of society were magically transformed into 'the wealth creators' (I guess anyone making less than 10 mil' just sits on their ass all day.)

And then we get to the *real* problem:

"The first rule is to avoid harming the very miracle that generates so much wealth. Take for instance the arguments about high executive pay. ... The abuses of companies such as Home Depot obscure how most high pay has been caused not by powerful bosses fixing their own wages, but by the changing job of the chief executive, the growth of large companies and the competitive market for talent. Executive-pay restrictions would not put that horse back in its box, but they would harm companies.

If the winners are difficult to curb without doing damage to your economy,..."

So there you have it. The whole point is not that people are suffering or falling behind, or even that there might be a backlash - the point is that there is a risk that people might get so upset that they may invoke executive pay restrictions. Paying CEO's less would 'harm the very miracle that generates so much wealth.'

Luckily the Economist is here to employ every pitifully feeble argument they can muster to help keep the barbarians away from the gates - from the same article, "High pay is, by and large, the price needed to attract and motivate gifted managers, as our special report argues in this issue." Sure, because there are hundreds of millions of people around the world so desperate that they will work for a couple dollars a day, but offering $5 million/year instead of $10 million leads to a shortage of applicants who will be motivated!

There were a couple more articles in the Economist's survey, "Does economics need a new theory of offshoring?" which I found incoherent, and "Hard truths about helping the losers from globalisation" which was actually pretty worthwhile. A bit more on that article in the next post (or previous post depending on the order you see them in, I suppose).


  • It's so comforting that they care. I'm surprised they don't argue that CEOs deserve their multimillions since they "bring value" to shareholders (never mind that CEOs who fail in that capacity are no less handsomely rewarded).

    By Blogger Josh Gould, at 8:25 PM  

  • Oh I think they did make that argument, and yes they ignored the lack of connection between pay and results. They tried out pretty much any rationalization they could think of, but didn't really back any of it up.

    By Blogger Declan, at 12:00 AM  

  • My favorite aspect of the Economic Dreamers Club is the terminology they use, to wit:

    "The first rule is to avoid harming the very miracle that generates so much wealth."

    Glory Be! It's a miracle! Who knows HOW this wealth got here! Better if you don't think about it, or it might vanish *poof* into fairy dust in the morning...

    By Blogger Thursday, at 1:26 AM  

  • yeah, that cracked me up too...

    By Blogger Declan, at 8:29 PM  

  • Do they realise how ridiculous they sound? That is one thing about the The Economist - when their position is weak, it invariably sounds weak, equivocal, and strained - and unintentionally funny that they'd still try to argue that the war in Iraq was kinda sorta maybe-if-the-execution-had-been-better a good idea.

    By Blogger Josh Gould, at 9:12 PM  

Post a Comment

<< Home