So what’s really going on? Something much simpler: asset managers are just managing much more money than they used to, because there’s much more capital in the markets than there once was. As recently as 1990, hedge funds managed a total of $38.9 billion. Today, it’s closer to $3 trillion. Mutual funds in the US had $1.6 trillion in assets in 1992. Today, it’s more than $16 trillion. And that means that an asset manager today can get paid far better than an asset manager was twenty years ago, even without doing a better job.
Here is some context for anyone else who is curious.
A 1990 dollar is worth 1.84 dollars today because of inflation.
There are about 3 times as many goods and services sold since 1990.(adjusted for inflation) [0]
But real wealth has increased by 4.25x not adjusted for inflation[1]($20 trillion in 1990 to $85 trillion today)
So it looks like there is 2.3x as much wealth, its valued 1.8x as highly, mutual funds manage a 2.7x larger share of net worth.(which is 18% of the household net-worth of $85 trillion) and hedge funds manage a 18x larger share of net worht.(which is 3.5% of house net-worth).
It would also be interesting to see how much of this shift is due to larger amounts of wealth inequality. Specifically the wealthy have less of their net-worth in real estate, a larger share in the mutual funds, and astronomically larger share in hedge funds compared to the poor.
And that wealth is nicely tied in the top tier of society with no chances of it trickling down to the masses. And they wonder why no one is buying anything or willing to pay for anything. It's like DMX said, stop being greedy.
I find it hard to believe that there are 2 orders of magnitude more goods and services being bought and sold in the economy that 25 years ago. Rather, the complexity of financial instruments is the one that has gone up and up, but there's not that much more real wealth to back it up.
If that is the case, the short answer would be "because of inflation".
I don't. In fact, I find it very easy to believe. Now that the Internet has made it possible for anyone with an net connection to do business, goods and services can be completely made up out of whole cloth. Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not.
All that has to happen for it to be a good or service is for money to change hands. I'd say between the internationalization of capital markets, the deepening of transportation services, and just the fact that many many more emerging economies are buying stuff now, two orders of magnitude difference might well be an understatement, it could well be three or even four.
>Someone goes out and makes a brand new media franchise, call it "Bleachuto." It's a tv series about dead ninjas. This new media property can easily launch an entire cottage industry of blogs, physical goods, some of which might be affiliated with the creators, some not.
And yet the anime industry is continually going out of business?
If people have been making profits for the last 25 years and investing them, the amount of money in the markets will increase regardless of the instruments involved. Wealth is accumulating, but people don't really know what to do with it besides giving it to someone else to invest.
If you cut down a tree, cut it in boards, cut the boards and nail the pieces into a bunch of chairs, that is value added. It did create wealth.
Same, if you write a bunch of code that did not exist before, and the code is compiled and linked into a program that allows users to do stuff they could not do before (or could, but much more slowly) then there is value added. Wealth was created, even if there is no physical representation of that wealth... but it has real effects on the real world.
But when people just place bets, and double-down bets, and triple-dare-you bets on whether or not some random guy is going to write a program that might or might not go viral and get a billion or eyeballs... that's not wealth creation. That is just toying with numbers. You just produce noise in the economy so that the real prices of real stuff cannot be discovered anymore.
If those did what they claim to do, sure: They would help to allocate resources to invest in projects that created the most goods and services to raise everyone's standard of living. There is certainly value in that, since we all would get more and better capital goods for the same amount of investment.
Sadly, this is no longer the case. I don't really know about finances, but I have seen first hand great engineering companies that got bought by assholes that did not have any money themselves, but used their dark wizardry financial tricks to leverage themselves to the ears.
Then, they proceed to cut costs like there is no tomorrow, again, making the numbers in the accounting books look much better than the real health of the company, all this at the cost of gutting the mid-to-long term feasibility of the business. Finally, they go and use their lies and numbers to find a bigger sucker, and sell the company by a price even bigger than what they paid in the first place.
And you know what, the whole financial industry exist to enable those fuckers to go around dishing chaos and destruction, because earning an honest profit by servicing happy customers is almost never as profitable as dilapidating in months stores of wealth that took decades to build up in the first place. It does not matter if they sell below the real value, since they did not personally invest any time or effort in accumulating the wealth, getting pennies on the dollar suits just fine.
Asset prices have gone up 2 orders of magnitude; real inflation for "real" things (not financial instruments) hasn't gone up as much (80% or so).
In part this is because profits have been up, therefore equities are up. Profits are up because companies aren't investing in the real economy as much since the 2008 crash. As to whether this is sustainable... PE ratios are trending higher but no where near the dot-com era levels. So it's not like equities are completely out of whack with reality.
You also have to factor in QE. Low interest rates make bonds considerably less attractive, so a lot of the money that used to be in bonds has moved into the stock market chasing returns high enough to cover inflation.
Pardon my ignorance of economics, but does US/FED policy and trillion dollar deficits have anything to do with this? Along with other countries printing more money?
I remember reading Zimbabwe had the best performing stock market, but it was fueled through the "printing press". And they had no choice but to stop printing more.
Not specifically, though indirectly. The FEDs activities are intended to counter balance the lack of economic activity and investment capital coming out of the banks after the 2008 crises left them having to unwind their debt positions globally. Someone has to keep the fuel spigot on - usually that's the government but most did the opposite (austerity) due to politics.
What you're witnessing is a LOT of unused capital sitting around trying to find low risk returns. Interest rates are low so money is cheap, and there are only so many places to park capital, thus... Prices go up. Post 2008 Companies aren't investing as much in the real economy: wages, productive capital, etc. are stagnant. they're profit taking and retaining the profits. What's important to know is that while assets are trending higher historically , these are all mostly paper assets - they're indirectly tied to the real economy, and haven't completely become unhinged yet like in 2000.
Zimbabwe was a case of hyperinflation. Which is what eventually happens when you have more money than productive capacity - prices of "real stuff" go up fast. But real inflation in the U.S. and Europe is very low by historical standards. We are not going to become Zimbabwe.
I think they should keep doing what they're doing - don't raise rates or reduce the monetary base (the $ trillions they keep on the books since the crisis) until real inflation is clearly setting in. Asset prices can keep inching up so long as they're not into bubble territory (which arguably they're not yet).
The economy is in a much better position but it's still underperforming and the labor participation rate is still historically down as so many exited the labor force during the 2008 crisis and ensuing layoffs. Once some inflation sets in, it's a sign the world is returning to "normal" (after 8 years!), but .. no guarantees given instability in Europe, Middle East, Oil Glut, etc.
Usual disclaimers: I am not an economist, but minored in it & follow it; the economics profession has a wide diversity of opinions, though I think my views aren't particularly radical.
I also think the government should be ready to invest in our crumbling infrastructure for the next downturn/crisis. The 2009 stimulus helped but was not well allocated and was too small. That said it's unlikely congress will pass any such thing for many years due to current politics.
You're mixing up assets and yearly output. You're also ignoring the fact that real assets that always existed may be shifting from other asset classes to hedge funds.
I confess I am ignorant, so I don't know what you are talking about.
But, I do not see that many more hard assets (I mean physical... I am sure finance has a technical definition that has nothing to do with what the intuition of lay people like myself would think) created. It does not matter if there are trillions, quadrillions or quintillions of dollars; if they had to spend it all, they would end up owning the whole planet and still not run out of money.
So, it is just a matter of stroking egos and playing con games with using K-9 level math, but with much higher numbers. Ultimately, the only thing that much money is worth is to show that you have much more of it than the next person. It is all about social posturing (or if you are cynical, about manipulating other people by triggering emotional responses to the huge numbers involved).
My guess is its that smart phones are more valuable than the raw materials, or more valuable than a tv, a land line phone, and a hand radio are individually. So not that there are more, that they are more valuable objects.
Still, there were cell phones in the 90s. Are the current smartphones that much more valuable than those early mobiles? Remember we are talking about 2 orders of magnitude here.
There were also PCs, and with Word Perfect and Lotus 123 you could do almost everything you do today with the latest office suite. At least almost everything of what the average user knows how to do.
"So an unequal economy is less robust, productive, and stable than it otherwise would be."
Given this is true and Stiglitz is correct, the inverse may also be true: An economy that is less robust, less productive and less stable becomes more unequal. This would create a positive feedback loop, which may seem dismal. However if thats the case then strategies and actions that break the loop by improving robustness, productivity, and stability of the economies of individuals, groups and organizations may prove effective. Examples include skills training to become more robust, infrastructure investments to improve productivity, and orienting choices to improve stability could be implemented from the individual up to global scale. Simple redistribution may prove less effective.
America was set up by the elite for the elite, that's what liberal democracy more or less means protection of the minority from the majority so that they may prosper and create jobs for the masses who can then get a piece. It was a bunch of rich people who no longer wanted to pay taxes. So as they say, "good luck with that". What should be more often than not never is because the power structures keep things going a certain way and are hard to challenge unless the system is designed from its inception for that.
As the system is running, the next thing is automation which is a junction where you can challenge power but it's already seeming like that's also going to go to the wealthy. They own the capital, they make the entire machine run. They are in a word, "untouchable".
At best it seems like we'll get a compromise where we will be given a minimum income to live our menial lives with a very low level of income. But then again you don't need things to be happy. You just need time and enough resources for an relatively easy life.
The article omits some of the basic information needed for making sense of the data: What is the composition of the one-percent?
I doubt that corporate executives make up a significant percentage of the super-wealthy, despite the attention the media pays to them. If that's true, then ipso facto changes in CEO compensation cannot account for most of the structural increase in inequality over the last half century.
A more likely suspect is the influence of technology, which has interlinked global markets so that the dominant players are able to extract significantly more value than in the past. Outsourcing has suppressed wages while increasing profitability, which naturally contributes to inequality. And in an interconnected global trading system, economies of scale become more and more beneficial, which consolidates resources among the top competitors in a given field.
One interesting question is how the sharing economy will affect this phenomenon in the future. Will the creation of 'Ubers for everything' drive down wages even further by saturating labor markets with even more surplus human capital? Will it destabilize some of the entrenched social hierarchies in America by gutting the fortunes that legacy industries currently enjoy?
Another issue worth serious thought is which kinds of inequality are most harmful to society and why. Is stratification of the middle class and the hyper-rich the primary dilemma, simply because it accounts for the greatest resource disparity on paper? Or in practice is America's social cohesion damaged more by the smaller gaps between members of the other social classes?
Finally, how should concerns about inequality influence America's immigration policy? If we view the current situation as a problem, then importing more low-skilled laborers will exacerbate things. It's hardly a coincidence that the super-rich are some of the strongest advocates of comprehensive immigration reform. That may well be a desirable policy for humanitarian reasons, but we should remember the relevant externalities.
Only about your initial question: one-percent is a terrible name. It gives the right idea initially, but if you ask a logical question like you did, the problem is far smaller than 1%. America doesn't have 3 million CEOs and corporate executives. In your life, you met over 100 people - does everyone feel like they met an insanely high earner? Even here, just on HN, I expect a large number of people are in the top 1% salaries. Yet, I don't think that's what the people are really angry about.
Corporate executives account for almost 3rd of the top 1%, even if you exclude bankers. Throwing in bankers, and it's almost half.
I agree with you on that technology and automation are the main driver in increased leverage against workers. And sadly, government and regulations failed to counteract this leverage.
That is interesting, but I'm persuaded that the top one percent was way too broad of a sample. (My lapse. Sorry.)
The wealth is concentrated within a narrow subsection of that group. And I don't think that many of them became rich as corporate executives, unless you are including entrepreneurs like Bill Gates, whose wealth was derived from his ownership of a business, not as compensation for his work as an executive. Actually, maybe it is reasonable to include them. But I didn't do so when I made my earlier estimations.
Ownership of the means of production is the main intergenerational conduit of capital, which naturally creates large accumulations of inherited wealth. The fact that so many self-made people are now among the world's hyper-rich is a testament to the strength of the technological forces powering startups. And in a sense, Silicon Valley has created the most merit-based process ever devised for crowning an oligarchy.
What's really interesting is to think in terms of power laws, which predict a trillionaire within our lifetime. What would that level of divergence result in? Will someone eventually create something so valuable that the equity takes over a significant percentage of the global economy? (e.g. nano or AI breakthrough)
Some good points in the article, but I am not sure I agree with all of its conclusions.
CEO pay is going through the roof because of a ratcheting-up effect that has been going for years.
The board brings a consultant to evaluate the CEOs pay. Said consultant is in tight with board, and is looking for their next consulting gig. Not a chance they are going to recommend a significant cut, or a performance plan that is aligned with long term (5+ year) shareholder interests.
I'd like to see CEOs treated like true investors. Want to make 50 million if the company does well? Cool. Company loses money? You owe $60 million. The current status quo is all upside for CEOs - they have no skin in the game.
I'd be happy with just a minimum vesting term for options, like 5 or 10 years. That way they're in the same boat as the rest of us schmucks who can't go golden-parachute job-hopping every few quarters.
Something that would motivate them to make decisions in the interest of the company's overall future, not just the next earnings report.
How many shareholders are pursuing 5 to 10-year horizons? It seems like most shareholders today are just shareflippers, and if all the shareholders care about is next quarter's earnings report, they will inevitably hire staff that mirrors their interests.
Perhaps moving long-term capital gains tax benefit from 12 months to something like 60, and taxing the rest at regular income rates would change the game.
You believe you found a problem, but your objection was addressed and dismissed in an evidence-based fashion in TFA:
"The idea that high CEO pay is ultimately due to poor corporate governance is a commonplace [...] Yet as an explanation for why CEOs get paid so much more today than they once did, Stiglitz’s argument is unsatisfying. After all, back in the 1960s and 1970s, when CEOs were paid much less, corporate governance was, by any measure, considerably worse than it is today [...]
"Shareholders, meanwhile, had fewer rights and were less active. Since then, we’ve seen a host of reforms that have given shareholders more power and made boards more diverse and independent. If CEO compensation were primarily the result of bad corporate governance, these changes should have had at least some effect. They haven’t. In fact, CEO pay has continued to rise at a brisk rate."
It makes a difference when someone is paid several orders of magnitude more than others in the company because it massively increases inequality, which affects everyone.
I've kept this thread open in a tab for days now hoping you would get a coherent answer.
Because being 'anti-poverty', I get. Extreme poverty sucks.
But being anti-inequality in a small-world networked, coupled, non-linear dynamic system just seems like being against the laws of physics or math (to me).
I'm going to close this tab now. If you ever get a (coherent) response, would you drop me a line letting me know that you have underneath this comment?
I think the popularly accepted notion of "market rates" basically leads to a social status ladder with the kind of jobs that "high class people" tend to do at the top and "low class work" at the bottom, and there might be a correlation with how much each person contributes to the bottom line of the company, but it is my belief that the within-groups variation is larger than the between-groups variation, which makes it basically a farce. The best support person is probably bringing in more revenue than the worst engineer while making less money.
This system endures because if you are in a higher class, there is no incentive to upset the popular notion of market rates. The top half of the pyramid tends to control pay, and why wouldn't they want a graduated scale based on status?
As engineers, we protect this status by releasing our tools when they are robust and easy enough for ourselves and other professional engineers but stop short of polishing our tools until an end-user could use them. We also maintain a complex set of cultural practices that need to be navigated in order to get access to additional layers of information and institutional knowledge. It's in our interest to prevent people from getting in, because under the Market Rates system, that's how you make more money.
CEOs are just another tier in that system. Like engineers, they keep their knowledge amongst themselves, and require you to work up the ladder in order to get the information and knowledge you need to access successive tiers.
I wish more people would spend more energy in actually trying to tease apart where profits are coming from and give compensation based on that. Or, even better: expect everyone to make a full-bodied human contribution and recognize that that's what is truly valuable, and no human is more valuable than any other.
I realize that's a little too woo-woo for many people, and I respect that. Maybe do the profit-assignment model then. But I really wish people would stop talking about "market rates" as if it's anything other than rent-seeking on a cultural scale.
There's no reason to limit that kind of obviously beneficial practice to just the CEO.
Imagine how beneficial it would be to apply it to all the employees. Company is earning money? You get your paycheck. Company is losing money? Cough up.
Having to cough up is, I agree, excessive. But having a CEO's compensation tied to performance is the same as all the schmucks under him have to deal with. Only, while they're on the hook for delivering, he's on the hook for providing vision. So making it take 5 years to vest or similar, so the effects of his decisions can be seen, and he has to plan long term, seems sensible. In the same way that tying a worker bee's bonuses to the delivery of a project seems sensible.
The idea behind stock option grants was to tie CEO's pay to the company's performance.Good idea, but It is not quite working out because CEOs are primarily interested in pumping up the stock price short-term, rather than in long-term health of the company.
The vesting period should be spread over 5 years or so. I would also grade company's performance relative to its peers/competitors/industry, not on just the stock price growth, which may be caused by other factors (like the Fed inflating markets through ZIRP).
Agreed. I would just like to see it go away for everyone, period. With options, it always feels like paper money, so those granting it do so in huge amount without proper consideration for its true costs to shareholders.
It's not just CEOs making obscene amount of money. Many ordinary executives are routinely granted high six, 7 figure worth of options on the backs of their employees and shareholders. 1/3rd of the top 1% are company executives.
Except that this has been observed to not happen. Wealth differences between families have been observed to not compound across generations. Wealth differences between nations also don't compound across generations.
So, there's clearly something that stops reality from matching that nice pretty math.
As proposed by Thomas Piketty in Capital in the 21st Century, when "r > g" (where r = return on capital and g = rate of economic growth) the rich (those with capital) get richer.
Apart from between 1930 and 1975 (which Piketty suggests were unique circumstances due to WW2) r has generally been greater than g.
There was an article on the projected growth of the middle class in china. If that was to hold, it would support the point.
If everyone gets some linear growth to their income, those at the bottom get the most %. So the pie shifts down. If its about leveraging existing capital, then more capital means more for you and the pie shifts up.
"... the policies that shaped the US in the postwar era: high marginal tax rates on the rich and meaningful investment in public infrastructure, education, and technology."
This is interesting in the context of the current GOP race in the States, where the candidates continually speak about how America has become weak compared to what it was in the past. It seems these kinds of policies contributed to making it strong. But these kinds of policies are anathema in GOP circles now. Ironic.
When the GOP candidates are talking about "making America strong again" they are primarily talking about foreign policy, not domestic. American foreign policy under Obama has been haphazard at best, frequently angering allies and ignoring threats. They're focusing on that.
So what’s really going on? Something much simpler: asset managers are just managing much more money than they used to, because there’s much more capital in the markets than there once was. As recently as 1990, hedge funds managed a total of $38.9 billion. Today, it’s closer to $3 trillion. Mutual funds in the US had $1.6 trillion in assets in 1992. Today, it’s more than $16 trillion. And that means that an asset manager today can get paid far better than an asset manager was twenty years ago, even without doing a better job.