Tuesday, October 23, 2007

Re-Education Camp for Harvard Economists

Provocative snippet just up in Instapundit:
Clicking the link takes you to Greg Mankiw's Blog—Greg being a Harvard economics prof. And indeed, his opening graf here reflects Glenn Reynolds' (Instapundit's) observation:
Recently, I was in downtown Wellesley, in my favorite local bookstore, Starbucks latte in hand, browsing through the new offerings, when I stumbled upon Robert Reich's new book, Supercapitalism. As I stood in the store, I did what every narcissistic Harvard professor (yes, I am being redundant) does: I looked myself up in the index.
But we read on, and things got more interesting. Mankiw goes on to find himself somewhat misquoted, at least contextually, seeming to agree with Reich's observation, viz., to put it somewhat simplistically, that if you tax the living daylights out of overpaid American CEOs, that wouldn't affect the talent pool of overpaid American CEOs. Reich, a former Clintonista and a champion of the "tax the rich" school of socialist economics, thinks this is a great idea, of course.

But economists, we have a problem. The supply of supposedly top level economists is NOT inelastic. It's just perceived that way. There's a similar problem in the rarified world of classical music where famous conductors aren't satisfied with leading just one orchestra. They tread on their names to cop contracts with two or three orchestras simultaneously, shortchanging all three in the process while earning extravagent salaries from each.

Obviously, orchestra boards are eager to generate the PR and supposed prestige that will be conferred upon them by having a superstar at the helm. But what good does it do them if the superstar is only there for one out of 4 concerts? What does their money buy them? And what kind of value does it give the ticket holders?

In the meantime, plenty of junior conductors, fully capable of leading an orchestra to greatness, or at least better ticket sales in a younger demographic, are starving somewhere in the wilderness, victims of orchestra boards who live in a fantasy that only one conductor will do. It is they who are creating the perceived inelasticity in the supply of great conductors. There is, in fact, no inelasticity at all.

Likewise in CEO land. It is a myth that there is an inelastic supply of top flight CEOs. There are plenty of unknowns who can pick up the reins at any company and help the entity to prosper. But boards feel compelled to pay extravagent salaries and perks to alleged superstars who, in reality, quite frequently fail.

"Chainsaw Al" Dunlap was a fairly recent case in point, a notorious layoff artist who built apparent corporate profitability by strewing the landscape with the heads of hapless employees. Chainsaw Al finally was exposed, essentially, as a fraud when his head-chopping and number shaving finally wrecked his last victim, the hapless appliance manufacturer, Sunbeam. And the dopes on Sunbeam's board of directors happily paid him a whole lot of money to do so. They'd have done better by the shareholders if they'd hired a younger, well-credentialed number two or number three away from another company: one with plenty of experience but with enough of an itch to prove himself that he'd come in at a lower price point.

Reich's bright idea of taxing the bejeebers out of overpaid CEOs sounds fine on the face of it. And yeah, they can take it, or move to Europe where they can...well, they can stay in America and take it. But what we're really seeing is the punitive side of the average socialist who'd much rather punish someone than solve the problem.

It's time for our economists to seriously think out of the box on this one. From Chainsaw Al; to the haughty Robert Nardelli, who ruined Home Depot, earning him a golden parachute and a new position heading up the now privately-held Chrysler; to Citigroup's Clown Prince Chuck Prince and dozens more; the landscape is increasingly littered with overpaid idiots brought in as savior CEOs who ended up ruining perfectly good companies. The damage that they do is the problem. Taxing them more will teach them nothing. Firing them will.

So let's abandon the fashionable "taxation as punishment" and "inelastic" CEO supply tropes and start hiring perfectly capable up and coming CEOs who'll eventually earn more when they accomplish more. We fail to see what all the Chainsaw Al clones and their asinine compensation packages are doing to increase American competitiveness along with their companies' and stockholders' profits. These overpaid, egotistical idiots don't need to be taxed more. THEY NEED TO BE FIRED.

How's that for transformative economics, Harvard dudes?

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