“Picking on” Greg Mankiw

Gregory Mankiw had a new post titled Yes, the Wealthy Can Be Deserving on NYT two days ago, I have to say that the title is quit catching because usually we think that rich people earn too much is resulted from inequality, which we should fight against with.

Mankiw argued that film stars like Robert Downey earned tons of money by playing a role in the famous films, and we are not appalled by their tremendous income because we think they “deserve” that. Just as the example given in his post, Robert Downey earned $50 million while the movie The Avengers made a revenue of $1.5 billion, so it seems to be fair enough.

However, Mankiw made two mistakes in his argument here: first, some people don’t care about Downey’s income doesn’t mean the income distribution is reasonable, maybe the people who responded to him are irrelevant in this situation. Say if you are also a film actor in that film and you played better than Mr. Stark but got way lower income, than you may care about the inequality. Second, the movie’s box office receipts were not the reason for paying so much to one single actor. The payments to players were decided even before the public show of the movie, you can’t predict the revenue of the film while you still have to pay a lot to film stars like Robert Downey. We knew a lots examples of movies played by famous film stars but received bad market responses, also movies played by nobody but brought huge profits.

The true reason why employing famous film stars cost you much is because you can’t find them everywhere. Mankiw said that “When people can see with their own eyes that a talented person made a great fortune fair and square, they tend not to resent it.” It is true in some case but not for here, even if you are as talented as Robert Downey, you may not be able to make money like he did because there is only one Robert Downey, the payment for him is not a reward for hard works, but more like a reflection of scarcity.

Mankiw is also wrong about CEOs’ pay. At first, he indicate that critics are wrong about the idea that CEOs’ are paid more than they really worth. He pointed that “the most natural explanation of high C.E.O. pay is that the value of a good C.E.O. is extraordinarily high”, and here is what he said:

A typical chief executive is overseeing billions of dollars of shareholder wealth as well as thousands of employees. The value of making the right decisions is tremendous. Just consider the role of Steve Jobs in the rise of Apple and its path-breaking products.

But actually Steve Jobs is not by his side. We all know that Jobs’ popular story of “1-dollar salary”. If his logic is correct, than Jobs is not as worthy as a hot dog. If the price paid by the board to those CEO is totally precise, than Jobs is the worthless CEO in this planet, even though he made billions of dollars to his shareholders.

Actually these “critics” are right, no matter how bad the CEO performed, he/she can always earn excessive income, and there are few cases where CEO didn’t get what they asked, that’s doesn’t mean the income for them is fair enough. Sometimes you paid high enough to your CEO even they perform very bad, in 2013, Steve Ballmer only get 79% of his target bonus but it is still too “generous” according to his performances. Actually, according to the diminishing marginal returns, higher income cannot act as an effective incentive for those CEOs to perform better.

In the end of his argument, Mankiw contributed the inequality problems to the imperfect tax system. But the true problem here is not about tax rate. Think if you are the CEO, will you ask for a stable income after tax or pretax? No doubt you will ask for the same amount of pay after tax, so even if we increase the tax rate for the rich CEOs, they will find a way to escape the “harm”. If the tax rate raises, that means CEOs will ask for higher pre-tax income, what that means? It means other employees will get less! It is typically the problem of income distribution, but Mankiw said “The solution here, however, is not to focus on the income distribution…”

I think our tax system is good enough, what’s more significant now is to put more money on solving unemployment and inequality, which means we must increase the efficiency of redistribution. And of course, it’s better to solve the income distribution inequality at first.