Friday, April 1, 2011

I Thought It Was an Invisible Hand Not an Invisible Backhand

In The Wealth of Nations Adam Smith famously says
“By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention."
Smith precedes his metaphor with a more direct example.  “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”

The latest jobs report shows that "[t]he average hourly wage of all employees remained $22.87, unchanged from February and up only 1.7 percent over the last year."  That 1.7 percent is less than the "2.1% [that compensation grew] in the 12 months ended December 2010

According to a Bureau of Labor Statistics report, "[t]he average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours in March."  Assuming a two-week paid vacation, the average worker can expect to earn $40,793.92 this year.

While trying to earn that $40,000 value, The average butcher, brewer and baker has produced a rather interesting end.  According to a USA Today report, "median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels. . . ."

Of course not every CEO got the 27% increase; some got a little more. "The highest paid of the CEOs analyzed by USA TODAY was Philippe Dauman, CEO of Viacom. Dauman was paid $84.5 million, which was not only a 149% increase from 2009, but 11% greater than the No. 2 on the list, Ray Irani of Occidental Petroleum."

Sticking with the averages, the difference between 27% and 2.1% is stark enough.  The unintended consequences are brought into sharper relief when the article reports
The median amount that CEOs actually took home — which includes salary and cash bonuses, as well as stock and options awarded in previous years that vested or were cashed in — was $8.6 million. That’s the most CEOs have pulled down since the median of $9.2 million in 2007, according to GovernanceMetrics’ analysis of S&P 500 companies.
The averages mean that one CEO is paid as much as 210 "average hourly" workers.  That same CEO is paid as much as 665 minimum wage employees.  Even worse than these salary and growth disparities is "the disconnect between pay and companies’ true underlying performance."  USA Today cites University of Massachusetts professor William Lazonick who points out "companies in the S&P 500 boosted profit 47% last year, much of that was due to cost-cutting and layoffs, not from the creation of businesses and growth."  In short, execs got big bonuses by firing workers.

Adam Smith contends that people who look out for their own interests benefit others even if they don't mean to.  It's difficult to see how workers benefit from the CEOs who are looking out for themselves.

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