Having just finished The Age of Abundance
I am reading Brink Lindsey’s “Paul Krugman’s Nostalgianomics” which is a response to Krugman’s “The Conscience of a Liberal”.
On page 9 I am tempted to remark on SBTC “Skill Based Technical Change” as an explanation of higher wages for the technically competent.
Tom O’Rourke was president of Tymshare.
The first year or two he kept a teletype prominently in his office as that was our idea of what a modern executive should have.
About 1970 he removed it explaining that those outside the company that he dealt with tended to look down on anyone who would stoop to using a keyboard—that was for secretaries.
I presume that he was right.
Younger and less-skilled workers tend to be concentrated at the low end of the pay scale, while older and highly educated workers can fan out over a much broader range.
Today there are many technical specialties that few beyond the young (who are often ‘information sponges’) master.
In the early days of computers (1955) one could reasonably master the whole field of programming.
Today the field has proliferated into hundreds of specialities each of which requires perhaps the ‘10000 hours of practice’.
In most of these specialities, the young are the masters as they get the impression that some field is the strategic information speciality.
They often put in these 10000 hours before their first job.
They may even be college drop-outs.
Where cross speciality talent is necessary, the older, with the skill to understand the significance of a specialty without mastering all of its details, are more likely to excel.
Google and a few other institutions can afford at least one specialist in each area.
It is thus an economy of scale which is new to the software industry.
It is also an opportunity for stratification which is indeed happening.
How to explain the rise of so-called “superstar” markets?
When I learned that Grasso received $800,000,000 for what some board member described as bringing NASDAQ into the modern age, I thought to myself that I had done something similar for quite a few orders of magnitude less.
Had they gone out for bids?
That and other anecdotes was when I began to think the executive pay was in thrall of something like the ‘Treaty of Detroit’ where the law of supply-and-demand had been somehow thwarted.
My suspicion remains.
Lindsey quotes Krugman quoting Galbraith:
For a generation after World War II, fear of outrage kept executive salaries in check.
Now the outrage is gone.
That is, the explosion in executive pay represents a social change … like the sexual revolution of the 1960’s—a relaxation of old strictures, a new permissiveness, but in this case the permissiveness is financial rather than sexual.
In theory, the effects of progressive rates on the decision to become an entrepreneur can cut both ways.
On the one hand, by reducing the risk of income shocks, progressive rates could act as a kind of income insurance policy that encourages potential entrepreneurs to be less risk-averse.
I don’t get this:
Perhaps the logic is that with 90% income tax and 20% capital gains tax, then the entrepreneur with $10,000,000 spare cash, who wants to start a company can invest $10,000,000 in the enterprise and pay himself $1,000,000 per year salary and be insured against losing the $1,000,000 salary should the company go bankrupt in a year.
In this case he pays $900,000 to the government in tax.
If he increases his skin in the game by paying himself nothing, then he pays $200,000 to the government in capital gains.
The latter logic assumes that the company is $1,000,000 more profitable because it paid that much less in salary.
But that logic works only in case the company does not fail.
I am still confused but this illustrates some logic for lower tax rates on capital gains since the government does not pay the investor upon capital losses (and for good reason).
It also suggests perhaps that the capital gains tax rate should depend on the risk of the investment.
But that leads to another 1000 pages of tax code.
Quote regarding Whyte’s 1956 “The Organization Man”:
Secure membership in a stable organization was more important relative to maximizing one’s individual position than it is today, and consequently the most talented employees were less vulnerable to the temptation of a better offer elsewhere.
Even if they were tempted, a strong sense of organizational loyalty made them more likely to resist and stay put.
It was also a costal difference.
On the East coast one was first of all employed by some company and only secondarily an engineer.
It was the other way round on the west coast.
In IBM the pattern was to stay with one company, perhaps moving several time due to such employment.
If a project wound down IBM would expend considerable effort to find another position for an employee, even in another city.
In Silicon Valley, one lived in the same house, but worked for several companies during one’s career.
In Poughkeepsie New York an electronics engineer worked for IBM.
On the west coast companies clustered in places like Silicon valley.
I think movement between companies around the Boston cluster was limited as well.
These changes were part of a much broader shift toward greater reliance on market competition.
Price and entry controls in the airline, trucking, and railroad industries were eliminated.
Oil and natural gas prices were deregulated.
The AT&T monopoly was broken up, and competition in long-distance telephone services was permitted.
Cable and satellite television were allowed to compete with broadcasting.
Interest rates were deregulated, limits on branch banking were lifted, and the Glass-Steagall wall between commercial and investment banking was lowered.
Barriers to international trade have continued to fall, and the trade-weighted average tariff rate now stands at under 2 percent.
Thanks! I had never seen this summarized in one place.
Lindsey reminds me (page 21) that Edward Kennedy and Ralph Nader were active in eliminating these regulations.
The dramatic change in the trend line [increasing executive salaries] seems baffling—until one considers the possibility that changes in economic policies and social norms came together by the late 1970s to inaugurate an era of something like free agency for corporate executives.
That explanation remains untested, admittedly, but its fit with the long-run pay data is striking.
Anecdote vs. anecdote I would bet that the sports free agent salaries follow supply-demand logic but some executive salaries do not.
Page 21: Lindsey quotes Krugman summarizing the recent conservative political apparatus and responds:
Alas, Krugman’s account is a crude caricature of historical analysis.
To be sure, the rise of the conservative movement has contributed in important ways to the policy and cultural shifts of recent decades.
But the real story of those shifts is more complicated, and more interesting, than Krugman lets on.
The fact is that influences from across the political spectrum have helped to shape the more competitive, more individualistic, and less equal society we now live in.
This is perhaps at the crux of the disagreement.
Not having followed the political scene closely I have only claim against claim.
I am not sure that there are reliable facts of the matter.
Lindsey does report in following pages a number of convincing events where liberal politics led to the state of affairs that Lindsey applauds and Krugman regrets.
Miscellaneous general notes:
This paper has many statistics that I frequently want and can never find when I want them.
The paper reflects my biases almost entirely.
That is a comfort for Lindsey, as a professional, is much better informed than I.
But I am conflicted about bank regulation.
I want FDIC insurance because I can't afford to spend full time studying bank behavior to avoid poor banks.
It the government is providing insurance it must clearly impose behavior restrictions whether or not such insurance is ‘free’.
With economy of scale the government can afford to do this whereas I can’t.