- General Discussion
Bradford DeLong wondered whether inequality mattered less today for life expectancy, health status, access to culture, and human capital development than it did in the "first gilded age." Similarly, Lawrence Katz observed that rising inequality today is not caused by poorer people becoming worse off, but by poor people becoming better off at a slower pace than rich people. Reported job satisfaction and subjective well-being display similar trends.
Lawrence Summers questioned the idea that corporate governance problems are leading to CEOs being paid more than their market value. He suggested that leveraged buyout firms presumably do not pay more than necessary to attract the CEOs they want, and yet more CEOs seem to want to move from public firms to these privately held firms than vice versa. Summers also noted a variety of difficulties in correctly measuring the incomes of highly paid individuals. For example, the increasing money income of CEOs may overstate the true rise in their compensation, as declining tax rates would have induced substitution from fringe benefits to money income. In addition, a substantial amount of hedge fund managers' compensation is invested in the fund and recorded as labor income on a deferred basis only when the investment is sold. Moreover, successful entrepreneurs can choose how to structure their compensation—as labor income or as capital income—and this choice is probably sensitive to income tax laws.
Alan Krueger referred to the work of Kevin Hallock regarding managerial compensation and overlapping boards. Hallock found no evidence that having overlapping compensation committees raises executive pay. Krueger also suggested removing payments to retired workers from calculations of earnings inequality. Data on earnings often include employer outlays for pensions and retiree health care, the latter of which have been rising rapidly. However, those particular increases may not reflect increases [End Page 191] in the marginal product of current workers or be perceived by current workers as increases in compensation.
William Nordhaus said that compensation in the financial sector seems to involve various inefficiencies and that these inefficiencies may take a long time to erode. He drew an analogy with the high fees of many mutual funds, which have outraged analysts for as long as he could remember but persist to this day.
Martin Baily proposed two hypotheses for the dramatic increase in executive compensation. One is that markets are failing: boards are not adequately monitoring CEO behavior. Another is that markets are being revealed: CEOs are paid what they are worth, which is more than they were worth before. Baily thought that the truth probably contains elements of both hypotheses. Since its early years the United States has evolved from a highly entrepreneurial economy to a more institutional economy in which it is more difficult to run a successful corporation. As a result, the value of a CEO is perhaps higher today, which is why CEOs are paid more. In Europe, by contrast, there is less capital and labor mobility, and the marginal product of CEOs is lower; in addition, unions are much stronger in Europe, so marginal products are not fully reflected in compensation. The United States can either institute stronger tax and transfer programs to curb inequality, or accept the outcome the market has produced. [End Page 192]