|EXPLORING THE GAP|
September 3, 1999
MARGARET WARNER: Usually a falling unemployment rate, like the one issued today, means bad news for the market, which fears any sign of inflation. But analysts say the markets reacted positively today, because the report showed such modest growth in new jobs and wages. Hourly wages rose just 0.2 percent in August, half of what economists had projected. A private study on wages released this week, however, showed dramatic wage increases for one group: Top corporate executives. The result, the report said, is that the average U.S. C.E.O. now makes more than 400 times what the average worker does. To talk about wages, work, and the financial markets, we're joined by, Frederic Mishkin, a professor at Columbia University Business School, and former executive vice president and research director at the Federal Reserve Bank of New York; John Cavanagh, director of the Institute for Policy Studies, the Washington think tank that co-authored the new wage gap study; Charles Peck, an executive compensation specialist at the Conference Board, a New York research organization supported by business; and author and commentator Kevin Phillips. His most recent book is The Cousin's Wars: Religion, Politics and the Triumph of Anglo-America. Welcome, gentlemen. Professor Mishkin, make sense for us of what the market did today: Unemployment down, yet the market soars.
FREDERIC MISHKIN, Columbia University: Well, the key here is that having low inflation is something that's very good for the economy and good for the markets. And in particular, if you have indications that inflation is not going to rear its ugly head, that's good news and in fact, the market reacted exactly in that way.
MARGARET WARNER: And the evidence was what?
FREDERIC MISHKIN: Well, that we saw that job growth slowed down and, in particular, that wage growth had also slowed down, and in fact was more moderate than people expected. And that was good news in the inflation front.
MARGARET WARNER: Kevin Phillips, does this make sense to you?
KEVIN PHILLIPS, Author: Well, it does if you use the conventional measurements of inflation. But the concept that fascinates me and I suspect it's at least somewhere in Alan Greenspan's thought process, too, is that there are two kinds of inflation. There's wage inflation that goes to people who are in the labor market. And then there's the kind of inflation, which has just been going out of sight recently. CEO compensation is one part of it. But the stock market is another. Currency trading is yet another. This is financial inflation. And financial inflation has been soaring. And you can fairly say what difference does that make? But it makes a lot of difference if you're in a bubble, in a speculative bubble. And Alan Greenspan has expressed concern two years ago and then just again quite recently that that may be there, and if he's thinking about that, then he may have this other inflation on his mind and it's a lollapalooza level.
MARGARET WARNER: Professor Mishkin, do you think the Fed should be paying more attention to the financial inflation as Kevin Phillips describes it, that is in the stock market and in the wages, the CEO Wages?
FREDERIC MISHKIN: I think the Federal Reserve should always worry about what's happening to asset prices because it affects the state of the health of the economy. And, in particular, if asset prices collapse, that actually can have an impact in terms of weakening the economy. So, yes, the Fed should pay attention to it. But I think, on the other hand, it's very dangerous for government policy makers to think that they know what is a better market price than the markets do. And in that sense, I think that policy makers should not try to determine what the correct price is.
MARGARET WARNER: But do you agree with or do you see merit in what Kevin Phillips is saying, that, in fact, these may not be traditional measurements of inflation but they may prove to be inflationary?
FREDERIC MISHKIN: It is true that when you have an increased in asset prices, that that does feed into demand in the in economy and can lead to inflation. And so in that sense it can be something that you have to take account of. But, on the other hand, we really can't say that at this particular point in time, that these prices are, you know, at lollapalooza levels, that they're astronomical. We really don't know and, in fact, we have to be somewhat humble and realize that we cannot be sure of exactly what's going on with these asset prices.
MARGARET WARNER: Kevin Phillips?
KEVIN PHILLIPS: Well, the problem I have with that is that the last time this really swum into view as a big decision for the Fed, which was far more decentralized 70 years ago -- but that's the parallel. 1928-29, basically they didn't want to crack down. Inflation, the normal kind, was running at a very low level like it is today. But the assets inflation, the financial inflation, the cow jumping over the Moon in that sense was enormous. And finally when the Fed did act, it was really too late to keep the bubble, which was huge, from bursting.
MARGARET WARNER: All right. John Cavanagh. Tell us -- you did this study one part of this financial inflation, as Kevin Phillips described it, the CEO wages or salaries going up. Explain it and explain why it's happening.
JOHN CAVANAGH, Institute for Policy Studies: Well, we've been looking at CEO salaries and also average worker salaries at the Institute for Policy Studies and United for a Fair Economy for six years. This year - and we put out an annual report each year -- this year we almost fell off our chairs. The CEO pay has been going up and up and up but this past year it went up 37 percent. The average CEO made 37 percent more, led by Michael Eisner with an astounding figure that I think most people can't even begin to fathom with $576 million. Whereas, the average worker only got an increase of 2.7 percent. The economy is doing well, but one group is benefiting enormously, another group not at all -- in a sense, the emergence of two Americas.
MARGARET WARNER: Charles Peck, how do you explain that -- this dramatic growth in CEO salaries or compensation as compared to workers?
CHARLES PECK: Well, CEO compensation is increasingly tied to the performance of the company. And it has been accepted as one indicator of company performance, is stock price performance. So a lot of the very dramatic increases in CEO compensation have to do with the use of stock options, which is capitalizing on a very favorable stock market. It's interesting in that generally the top paid CEO is somebody different each year, and that means that a different person each year had either the luck or acumen to time the exercise of his or her stock option to reap maximum favorability?
MARGARET WARNER: So, Mr. Cavanagh, what is wrong with that, tying it to the company's performance?
JOHN CAVANAGH: Well, it's wrong for a number of reasons, but let's start with the economic reasons, the business reasons. One thing it does when you're a CEO, and now 80 percent of your salary on average comes from stock options, is it ties your own personal fate to the stock price of your company. And many studies have shown it's led C.E.O.'s to take decisions which are good in their short-term stock price interests but not good in the long-term interests of the country, the economy, the community. For example, if you slash your work force by 10,000 workers, the stock market likes that. It shows you're cutting costs. The stock price goes up. It may be -- and this often is the case after six months or a year -- bad for the company; it's certainly bad for the community; it's bad for the tax base, but by being paid through stock options, you have that incentive. I should also say it has shown in many companies morale goes down as the CEOs salary goes up through the roof, not only among lower wage workers but among managers and the government is also hurting from this because companies deduct CEO pay. As it goes up through the roof, the share that corporations pay to our tax base goes down.
MARGARET WARNER: Charles Peck, is there something to that point that these kinds of huge compensations that are tied to performance drive kind of short-term decision-making or short sighted decision making?
CHARLES PECK: Well, it has always been a debate and there's never been any resolution about what is the appropriate measure of corporate performance. I have seen a lot of changes, earnings per share, stock price performance, utilization of capital. It happens at this present time, that the large institution institutional shareholder groups which have a lot of influence on a company compensation of policies believe that a good indicator of company performance is stock price performance. Whether that is the true measure or not I can can't say and neither can anyone else.
MARGARET WARNER: You said you had other objections to this.
CHARLES PECK: Well, the other objections are social as well. You've got... here we are the richest country in the world, and yet people who make a minimum wage in this country, people at the bottom end... we see problems both at skyrocketing CEO pay, but also the stagnation at the bottom, that a worker making the minimum wage today, a minimum wage that was created to keep people out of poverty, is now 40 percent below the poverty line for a family of four. So there's a terrible social story we're seeing evolve as this gap widens between the Americans who feel left out and are left out and have terrible choices, economic choices they face from this, and watching at the same time people who they feel are not working any harder than they are at the top of the company making enormous amounts. I'll say one other thing. For young kids leaving college, thinking of what career they want to go into, I think it's very bad for the country that the public service, the public sector is paying salaries which aren't bad, I think, for most people, but right beside that you look at these exorbitant nine-figure salaries, and it's going to take a lot of the best talent in the society and shift it towards the private sector and away from the public sector.
MARGARET WARNER: Kevin Phillips, how concerned are you about this from the sort of societal impact?
KEVIN PHILLIPS: Well, I think there's another point that should be thrown in that bears on that, and it's really this: That it's a double whammy situation for the average person to have this going on. And that's because the first stage of is when the wages to labor are suppressed in this very benign environment for capital. But as capital has its inflation building up towards an assets bubble that then gets pricked, which is what you get out of assets inflation ultimately, then what you get is the second part of the double whammy. And that's when financial inflation, the inflation of assets, becomes deflationary when the assets bubble pops. And you just know Alan Greenspan is thinking about this. It's the last year of his tenure we assume. He doesn't want to go out with that as his memory.
MARGARET WARNER: Professor Mishkin, what's your view of this wage gap and what impact it's having and whether it's something we should be concerned about?
FREDERIC MISHKIN: Well, there are issues of concern, particularly if income distribution gets more unequal. But one of the problems here is that we're not exactly sure why this is occurring. Indeed, if it's market forces and particular changes in technology that are making the economy more efficient, in the long run, it will make the economy better off, but in the short run it actually hurts workers at the lower end of the scale. So the problem here is that it's not easy to decide on what would be appropriate government policies to deal with this. You might actually make things much worse by trying to raise wages at the lower end without really knowing the true underlying cause of the problem.
MARGARET WARNER: Is that possible?
JOHN CAVANAGH: I don't think it's possible at all. The minimum wage... keep in mind government's purpose in the economy is to help those that are left out by market forces or hurt by market forces. They created a minimum wage explicitly to keep people out of poverty. And it should be a national shame that millions of Americans work at a minimum wage that is set now so far below the poverty line. Will it push people ... what will it do if y u increase the minimum wage? Yes, companies will have to pay less to their C.E.O.'s. Yes, there's some competitiveness issues, but I think as a society, what we're seeing is the emergence of a debate over whether our values, the values of fairness, should govern public policy in this respect. And I think on the other side, something that should be easy to do in the next five years is limit the deductibility of CEO pay so that in a sense corporations are not rewarded for these exorbitant salaries.
MARGARET WARNER: Charles Peck, do you hear from the business executives you deal with all the time any thought that some of this is true, any concern out this widening gap? Do you see any impetus coming from business to narrow the gap?
CHARLES PECK: Well, when you look at the social implications ever it, it's a symbolic implication . If there was to be a cap on executive compensation and the excess was to be distributed among the poor, it would have no effect at all. Executive compensation is dramatic because it's very large and also because it's very exceptional. But when you talk about things like societal inequality and the below minimum wage people, the curbing of executive pay would have no real impact.
MARGARET WARNER: So Kevin Phillips, very briefly, you're a long time observer of the Washington scene. Do you see any prospect of the gap being narrowed?
KEVIN PHILLIPS: No. I think what it takes to narrow the gap is for
the assets bubble to get as big as it's going to get and pop and create
forces for reform, across the board, politically and otherwise.