If we could take time out from the breathless journalism about the Chinese stock market, which some people may have heard of before this week, it’s crash should be seen through the lens that Anna Schwartz developed in 1987 of a pseudo financial crisis and a financial crisis.
Her paper is written at the same time as the 1987 stock market crash. On financial crises, Anna Schwartz said:
As for those pseudo financial crises, she said:
Schwartz’s principal concern with regard to pseudo financial crisis was:
proposals to deal with pseudo-financial crises is the perpetuation of policies that promote inflation and waste of economic resources
As we are talking about the Chinese stock market, Anna Schwartz also wrote about the concepts of real systemic international risk and and pseudo international systemic risk.
Once again, and as with pseudo financial crises and real financial crises, what distinguishes real systemic international risk and pseudo international systemic risk is a threat to the payment system. The threat of bank runs, which can easily be eliminated through lender of last resort facilities:
As always it is about the security of the payments system – of avoiding bank runs, not private losses:
The lesson for the day is that when people start panicking about the economy or the stock market or international markets, don’t go to a macroeconomist for advice, go to a monetary historian. They have seen it all before.
Greece is a tiny part of the European economies so it doesn’t matter that much to the rest of the European Union what happens to Greece. The only people will notice the sovereign default of Greece once the breathless journalism has died down are Greeks themselves as they rebuild their banking and monetary system against a background of a government run by coffee shop Marxists.
Defenders have also pointed to the pay of pro ballplayers or Hollywood stars, but they do not determine their own pay (as CEOs do) and are paid based on performance. Once they begin to fail, they are dumped. By contrast, CEO pay isn’t tied to performance in any meaningful way.
It’s a big concession to say that athletes and celebrities earn their pay but top CEOs don’t. Most of all, that concession changes the case against the top 1% from inequality to just desert – a big shift in theories of distributive justice. It’s also a big risk to base the argument for greater equality and a 80% top tax rate not only on the excesses of CEOs but on the very specific and testable hypothesis that these CEOs determine their own pay.
if we are to look at CEOs, top athletes and Hollywood celebrities, it is the athletes and celebrities who benefited the most from the windfall of been able to service huge markets through the global media market.
CEOs actually have to run large complex companies to earn their pay, which is why their compensation tracks the share market relatively closely. Athletes and celebrities don’t do that what they do any better than in the past. They simply do it in front of a global media market. Since the late 1970s, the ratio of average pay of CEOs of large public companies to the average market value of those companies has stayed relatively constant: CEO pay grew hand in hand with corporations.
While top CEO pay has increased, so has the pay of private company executives and hedge fund and private equity investors;
ICT advances increase the pay of many – of professional athletes (technology increases their marginal product by allowing them to reach more consumers), Wall Street investors (technology allows them to acquire information and trade large amounts more easily), CEOs and technology entrepreneurs in the Forbes 400; and
Technology allows top executives and financiers to manage larger organizations and asset pools – a loosening of social norms and a lack of independent control of CEO pacesetting does not explain similar increases in pay for private companies– technology explains it;
If the reason for growth of incomes at the very top is, say, managerial power in publicly owned companies, then one would expect the increases in income at the top levels to be much larger for that group.
But the breadth of the occupations that have seen a rise in top income levels is much more consistent with the argument that the increase in “superstar” pay (or pay at the top) has been driven by the growth of information and communications technology, and the ways this technology allows individuals with particular skills that are in high demand to expand the scale of their performance.
As for the turnover argument, that underperforming athletes and celebrities are dropped, prior to the GFC, CEO turnover was already on the rise:
Turnover is 14.9% from 1992 to 2005, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.5%, implying an average tenure of just over six years.
Internal turnover is significantly related to three components of firm performance – performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market.
Only 21.3% of CEOs in 1992 remained in that role in 1999; only 16.35% of CEOS on the job in 2000 were there in 2007. In any given year, one out of six Fortune 500 CEOs loses their jobs, compared to one out of 10 in the 1970s.
CEOs are significantly more likely to be dismissed from their jobs after bad industry and, to a lesser extent, after bad market performance. A decline in industry performance from the 90th to the 10thpercentile doubles the probability of a forced CEO turnover.
In another study, Kaplan found that average CEO pay increased substantially during the 1990s, but declined by more than 30% from peak levels reached around 2000.
In addition, private company executives have seen their pay increase by at least as much as public companies. Private company executives with fewer agency problems have increased by more than public company executives. To close with another quote from Kaplan:
The point of these comparisons is to confirm that while public company CEOs earn a great deal, they are not unique. Other groups with similar backgrounds–private company executives, corporate lawyers, hedge fund investors, private equity investors and others—have seen significant pay increases where there is a competitive market for talent and managerial power problems are absent.
Again, if one uses evidence of higher CEO pay as evidence of managerial power or capture, one must also explain why these professional groups have had a similar or even higher growth in pay. It seems more likely that a meaningful portion of the increase in CEO pay has been driven by market forces as well.
The $30 billion New Zealand Superannuation Fund is the best performing sovereign wealth fund over the past five years, generating returns of more than 17 per cent a year.
Those returns easily beat all other sovereign wealth funds that publish their figures, according to a global study by JP Morgan. In the last three years alone, the fund returned an average of 21 per cent a year.
As a general rule, deadweight losses should be included if they are of sufficient size relative to the overall costs and benefits of the proposal that they are capable of altering the decision as to whether or not to proceed with the proposal.
Having said this, deadweight losses are notoriously difficult to quantify. Estimates vary from 14% up to 50% of the revenue collected.
Treasury suggests a rate of 20% as a default deadweight loss value in the absence of an alternative evidence based value. Thus public expenditures should be multiplied by a factor of 1.2 prior to discounting to incorporate the effects of deadweight loss.
This deadweight cost of taxation includes funds contributed to New Zealand government owned investment funds. In a speech last week, the Super Fund chairman Gavin Walker warned that the recent high returns were unlikely to continue in the long-term:
The last few years are likely to have been among the best years the fund will experience for some time,” he said. “On average and over the long-term we expect to earn the rather less exciting figure of 8 per cent [per annum] – but which will still provide a handsome return to New Zealander stakeholders.
The New Zealand Superannuation Fund must beat the market every single year to make up for the deadweight cost of its funding, the usual interest rate on borrowed funds, a premium for the investment risk added to the Crown’s portfolio and the cost to New Zealand’s growth rate of higher than otherwise taxes on income, entrepreneurship and investment.
The members of the top 1% whose income increased the most between 1979 and 2005 were real estate professionals followed by financial professionals – see figure 1.
Figure 1: increase in share of national income (including capital gains) received by top 1% for each primary taxpayer occupation in top 1% between 1979 and 2005
Figure 2 shows that the fastest-growing shares among the top 1% as in figure 1 are not necessarily the largest occupational group are those income earners. Moreover, their fortunes seem largely unrelated to each other.
Figure 2: Percentage of national income (including capital gains) received by top 1%, and each primary taxpayer occupation in top 1%
The next members of the top 1% in terms of income growth were rather respectable group:professionals and scientists and arts, media and sports. The latter,arts, media and sports get a complete pass on their membership of the top 1% despite their great success in increasing their incomes since 1979 at the expense apparently on the bottom 99% if the Twitter Left is to be believed.
Figure 3: increase in share of national income (including capital gains) received by top 0.1% for each primary taxpayer occupation in top 0.1%between 1979 and 2005
Arts, media and sports superstars are one of the fastest-growing members of the top 0.1% – see figure 3. Again, the arts, media and sports superstars get a complete pass on their membership of the top 0.1% from the Twitter Left. Most of the other occupations in the top 0.1% don’t strike me as anything other than working rich – see figure 3 and figure 4.
As with the top 1%, the top 0.1% of income earners are a mixed bag of occupations – see figure 4. Their fortunes are unrelated to each other terms of the forces driving there are increased incomes.
Figure 4: Percentage of national income (including capital gains) received by top 0.1%, and each primary taxpayer occupation in top 0.1%
Why Evolution is True is a blog written by Jerry Coyne, centered on evolution and biology but also dealing with diverse topics like politics, culture, and cats.
“We do not believe any group of men adequate enough or wise enough to operate without scrutiny or without criticism. We know that the only way to avoid error is to detect it, that the only way to detect it is to be free to inquire. We know that in secrecy error undetected will flourish and subvert”. - J Robert Oppenheimer.
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