CEO pay during the boom

“In every economic boom and bust, there are winners and losers. Never before in American history, or any other history, have the winners won so much.

The big winners were in the financial industry. They profited enormously from the expansion of the money supply from August 1982 until March 2000. …
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In 1976, the total compensation for the average CEO in the United States was about 36 times the compensation of the average worker in their companies. This moved up steadily until 1993. In 1993, the average CEO was paid 131 times what the average worker was paid. At that point, the Securities and Exchange Commission issued a new rule. The new rule specified that companies release figures on what their CEOs were paid. The belief of the SEC bureaucrats was this: as soon as the disparity was visible to shareholders, CEOs would not continue to receive these high salaries and bonus packages. As with almost everything the government does, the result was exactly the opposite. Compensation for CEOs began to shoot upward. It became a matter of pride of a company that it paid its CEO more than some other company paid its CEO. By 2007, the average CEO made 369 times what the average worker made.
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Today, however, there is outrage concerning the compensation packages that were given to the CEOs who led their companies into bankruptcy, merger, or government bailout. There are several of them who have received considerable attention. I intend to give them even more attention. But the reality is this: the reason why these men were given such outrageously high compensation is because the Federal Reserve System had pumped in so much money, and financial services had become wildly profitable because of this subsidy. CEOs began to be paid enormous amounts of money to supervise ever more arcane and complicated systems of debt-based finance that were cooked up by their high-paid economists. The Federal Reserve System was subsidizing financial services by providing fiat money at interest rates that were lower than the free market would have established, had there been no fiat money. The CEOs in the financial services industry saw their opportunities, and they took them.”

Gary North, “Blind Men Bluffed, and Won. We Lost.”, LewRockwell.com (1 October 2008).

http://www.lewrockwell.com/north/north658.html

Gary North is a financial advisor and commentator on economic and financial matters. He is an adjunct scholar of the Mises Institute and author of Mises on Money and An Economic Commentary on the Bible, among other works He received the Rothbard Medal at the Ludwig von Mises Institute in 2004.

The U.S. economy experienced a long-term boom from the early 1980s to the mid-2000s, with output rising well over 3 per cent on average each year for a quarter of a century. The boom lifted the income of the average American from $22,200 in 1980 to $38,000, when measured in the prices of the year 2000. Both private consumption expenditure and the pace of capital formation rose even faster than overall GDP as the country went deeply into debt at home and abroad. The rise in external debt was particularly rapid as the imports needed to support the faster rise in domestic spending than domestic production flooded into the economy, in some cases displacing domestic production because of an artificially high dollar.

The excesses of the past were evident in many ways: Unwise government policies and regulations promoting consumption and debt, imprudent lending practices by financial institutions, failures by commercial firms to invest in ways that maintained their productivity, efforts by the Treasury and the Federal Reserve to prop up the dollar that left the country uncompetitive on international markets, exotic financial instruments that no one understood, and a monetary policy that created a bubble in the financial services sector, among many other irresponsible practices. In this Tdj, North points to one of the most stupid and reckless things we did: Allowed an explosion in the compensation of the few at the expense of the many. We just didn’t seem to care about the absurdity and unsustainability of it all. We lived for today and forgot about tomorrow.

What is disheartening is the $700,000,000,000 bailout bill passed by the Senate and now being considered by the House does nothing whatsoever to address the fundamental causes of the financial crash we are now experiencing. While it does contain some useful elements to deal with the financial crisis, it nonetheless makes the situation before the country even worse. It is hard to believe that a bill of this importance has been loaded with hundreds of billions in spending on trivia and pork at the very time the country is experiencing a financial meltdown precisely because of overspending by government and the rest of the country.

The American public deserves better.

Thanks to Stephen Halbrook for the Tdj.