Tag Archives: Economics

Reflections on a Semester of Blogging

Before this semester, I had flirted with the Econ/Finance blogosphere in the past. Since my freshmen year I have subscribed to either the Wall Street Journal or the Financial Times, in order to learn about finance, economics, and general current events. My favorite blogs were the Financial Times’s FT Alphaville, which provided a look at many interesting topics in finance and NYT’s DealBook, which has a more specific investment banking focus (which is the industry I will be working in after graduation). Through my initial interest in these sites, I branched out to occasionally read economics blogs such as Greg Mankiw’s blog, Paul Krugman’s NYT column, or Marginal Revolution. Even while I was exposed somewhat to the finance/economics blogosphere prior to entering the class, a semester in Econ 411 gave me a greater understanding and appreciation for the communications medium of economic blogging.

From a reader’s perspective, it is clear that we are in a golden age of economic discourse thanks to blogging. Prominent economists, like Krugman and Mankiw can post lengthy analysis posts or quick rebuttals to posts by others. Economists from smaller schools like Scott Sumner from Bentley who writes The Money Illusion or Tyler Cowen of George Mason University at Marginal Revolution can develop big followings. Blogging provides a great medium for economists of all schools of thought to provide analysis and commentary on modern economic ideas and argue their points against another. It is less formal and work intensive than writing economic papers, and is capable of reaching a wider, less academic audience. The financial crisis left many average, college educated Americans wondering about how macroeconomics worked and in search of answers – the economics blogosphere seems to have risen to meet this demand.

From a writers perspective, I found blogging to be rewarding, although at times very challenging and laborious. The class requirement to write three posts a week proved to be relatively time consuming. At times, I was willing to sacrifice the quality of my post in order to get one done on time. I personally think the blogging component of the class would’ve been better if we had more time to do less blog posts. Perhaps a requirement of four posts a month would have been sufficient to allow us to write better long form posts that were heavier on analysis rather than quick news commentary. I did really enjoy following the news and other blogs closely. I discovered Aswath Damadoran’s Musings on Markets, a corporate finance blog, Professor Kimball’s Supply Side Economics blog, and Noah Smith’s Noahpinion blog, all of which I will certainly continue to follow. It has not always been easy, but the experience of learning to blog and voice an opinion on important economic matters is one that I will carry with me as I begin my professional career.

Lessons from Economics at U of M

Last week, a 2007 Berkley graduation speech by Nobel prize winner Thomas Sargent made the rounds on the blogosphere. Ezra Klein at Vox was one of the first to share. Dr. Sargent’s concise speech – it was less than 300 words – summarized what he felt are some of the most important lessons economics teaches. While there has been some criticism from commentators like Paul Krugman and Noah Smith, I wanted to look at Dr. Sargent’s lessons and see how they aligned with the lessons I am taking away after receiving Economics and Business degrees from the University of Michigan.

Dr. Sargets first two points, from my perspective, are some of some of the most important basic lessons in economics:

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

These are lessons learned in Economics 101 and 102. I remember the first week of Economics 101 with Professor Malone, we learned the concept of opportunity cost. In a world of limited resources, like the one we live in, there are trade offs and desirable outcomes that are just not feasible. These lessons were hammered home in 102, and taken as a basic assumption in upper level courses, but learning them was an important point in my economics education.

The next point that I feel my Michigan Economics education hammered home was:

5. There are tradeoffs between equality and efficiency.

My favorite economics class taken at the University was Econ 482 – Government Revenues with Professor Jim Hines. The class was almost entirely about the economics of taxation, and Professor Hines was a passionate and incredibly knowledgeable instructor in the subject. This class, more than any other, gave me an understanding of the difficult trade off policy makers face when designing a tax system. On the one hand, taxes are distortionary and cause deadweight loss, so in order to minimize the cost to society of taxation, policy makers should look for the most efficient forms of tax. The trade off here is that the most efficient forms of tax – like a propery tax, or a tax on a life saving drug – also typically are the most regressive and have the worst equality properties. Other classes, such as Government Regulation have dealt with this issue as well.

The last of Dr. Sargent’s points that I want to discuss is:

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

As a business student with an interest in finance and a future investment banker, this point is especially important. In Finance 300 and this class – Econ 411 – we learned about the Efficient Markets Hypothesis. Beating the market is incredibly difficult to do, as discussed in a Random Walk Down Wall Street, because in financial markets information is disseminated immediately and reflected in the price of an asset. In order for a trader or an investor to have abnormal returns, they must rely on analysis that no one else is doing or have information others do not have. Insider trading is illegal and independent analysis can be right or wrong, so beating the market is incredibly difficult to do, even though countless friends and colleagues will attempt to do so for the rest of their careers.

Overall, it is not a perfect list, but some of Dr. Sargent’s points really hit home for me as I near the end of my economics and business education. I hope to keep these points in mind as I begin my professional career and realize the true value of an economics degree.


Are big events a really big bucks for host cities?(revised under new title)

Given Michigan’s run to the elite 8 in the NCAA Tournament, I couldn’t help but check out ticket prices to the Final Four.  With a parking pass costing almost $75/game, I think I might be better off saving my money.  But it got me thinking about the economic consequences of events like march madness.  I’m not talking about the billion dollar bounty Warren Buffet placed on a perfect bracket, or to the more then half a billion dollars the tournament generates for the NCAA, or the revenue for the schools themselves, but rather the economic boost for the cities that host these events. Reports put the amount that the Final Four host city can expect at around 70 million.  However, there is research that says these numbers need to be reduced by as much as 90%. It is argued that due to the events size, a great deal of economic activity is displaced, and it must be replaced before actual gains can be realized.  I believe the effects of this “tourism displacement” have been exaggerated.

In order to better study the economic effects of a large sporting event on the host city, data for the Super Bowl will be used.  This is for a few reasons.  Even though the Super Bowl is an order of magnitude larger, since more teams attend the NCAA Tournament, as well as it occupying more nights gives reason to believe that there should be similar levels of displacement.  It is also permissible since we are examining a percentage as opposed to an actual number.  Finally, statistics are much more readily available for the Super Bowl due to its size and the spectacle it has become.

Research by Baade and Matheson argue that the benefit of hosting such a mega event is actually between 0 and 25% of what is reported.  They cited displaced tourism as the main cause.  In a report on the Super Bowl held in Indianapolis in 2012, displaced tourism wasn’t neat the drain Baade has made it out to be.  They found that after adjusting for displaced spending of 46.9 million, the super bowl only accounted for 337.2 million.  This is not the large share that was predicted.  However, tourism is not big business in Indiana in February, so lets look at some actual numbers for Scottsdale.  Instead of using the reported numbers from 2008, which are considered too generous by some, we will compare data generated in Scottsdale itself.

In order to estimate the possible effect of displaced tourism in Scottsdale, the host of this year’s Super Bowl, I will consider spending per-person, per-day for each type of consumer.  According to data from Scottsdale, the average visitor staying in a hotel spends about $206 dollars per person per day, and the average day visitor spends just over $41 per person per day.  Similarly, using data from the Bureau of Labor and Statistics on consumer spending in the Phoenix area that could be displaced by a Super Bowl sized event (based on annual Food away from home, alcohol, apparel and services, and entertainment expenses) show residents spend about $24.50 per person per day.  According to data from the 2012 Super Bowl in Indianapolis there was spending of $571 per person per day.  Even though the previous super bowl in Scottsdale made almost $200 million more then the Indianapolis Super Bowl, we will chalk that up to host city being larger and able to accommodate more people.  Because of this, as well as the economy being in the bottom of a recession in 2008, I will consider the Indianapolis spending level as a lower bound. Using these numbers, we see that displaced tourism only eats away at most 36% (206/571) of the Super Bowl spending, assuming all tourism was done at a rate of 206, the scenario where the most local activity could be displaced, since all visitors would be staying in hotels, eating out for every meal, etc.  By assuming full occupancy in both cases, we can compare the per-person, per-day amounts directly.  This assumption is not trivial, as there is no guarantee that the city would be fully occupied with out the Super Bowl. Even with these generous assumptions, the Super Bowl resulted in attracting tourists spending 2.77 times what their local counterparts would.  This is a far cry from the predicted drop off of 75% or more.

This rough analysis has shown that the benefits of hosting a large, high profile event can provide a tangible increase in economic activity.  This is before any hard to quantify benefits like marketing from having such events are accounted for.  The strength of the effect is dependent on the amount by which the fans attending the game(s) spend per day verses the amount spent by the locals per day, which can be most logically attributed to lodging and increased food costs, as ticket revenue isn’t shared with host cities.  Even though tourism displacement is not the over powering force it was made out to be, the boost in activity is temporary, and as such is maybe a questionable use of public dollars.




Turmoil in Chinese market

Last week in China, Shanghai Chaori Solar Energy Science & Technology Co. Ltd-one of the Chinese solar company confessed its inability to repay $14.6 million interest to the investors. This happened to be the first corporate bond default that occurred in the China mainland.

This time, the government and state-owned banks gave up their previous policy of bailouts and debt extension to ease defaults. According to the article on WSJ, the absence of actual defaults is leading to more risky lending practices and could cause more wasteful investments in industries that have already suffered overcapacity. To put restrictions on the shadow banking system in China, it is necessary for the government to stop supporting unregulated risky investment activities and lay the economy on the right track.

Yesterday, copper prices skidded to their lowest level since June 2010, also the prices of iron ore fell to its lowest level on Monday since 2012. This is because of several reasons.

First, the default last week brought down the faith of Chinese economy, some investors may expect more defaults after this first one.

Second, the slack of the growth speed of GDP leaded to the worries about the decline in demand of copper and iron. Mostly consumed by China each year, copper and iron prices are bellwethers of the Chinese economy.

Third, the pressure on the copper financing forced selloff of copper. Regulated by the strict lending standard, many companies used copper as collateral to get funding and use that either to import more copper or invest in high-earning assets. However, the fear of default and curb of demand transfer those copper from collateral into market, then the raise of supply pull the copper price down.

Those unwanted extra metal in the market has leaded to more worries about the large commodity such as oil. Brent crude for April delivery on London’s ICE Futures exchange was down 69 cents, or 0.6%, at $107.86 a barrel. On the New York Mercantile Exchange, light, sweet crude futures for delivery in April were down $1.40, or 1.4%, at $98.63 a barrel. This is because that China is the main force in emerging market countries that were hoped to increase demand for oil, according to the recent report from OPEC. On the contrary, gold price rose to a five-month high today due to the investor’s increasing demand for safe assets.

As approaching to the burst of the bubble in Chinese house market, those news showed that the government is starting its regulation over the unhealthy economy. In the short run, we may experience more turmoil in Chinese economy.

US’s outlook for Natural gas exporting

The conflict in Ukraine is one of the current hot topics. Several days ago, in order to weak the counter force from EU countries, Putin played his trump card: raise the natural gas price in Ukraine. As a big country that riches in all kinds of natural resources especially energy, Russia has been holding the pipelines that transfer natural gas into EU and making the later alter strategy in this game.

So far the west have threated to commit sanctions on Russia’s action of occupying the Crimea region, however due to the problem of natural gas, those commitments are more like to be non-credible threatens. The head countries in EU like UK and German are bounded by such a concern, and the graph below from NYT can shows that major buyers of the Gazprom – Russia’s largest state-owned natural gas company.


We can see that German and Britain are in the list. Actually according to this article in WSJ, Six countries in Europe import 100% of their gas from Russia, and an additional seven rely on it for at least half. It is beyond doubt that Russia has its considerable influence on the attitudes of the EU countries on this affair. U.K. Foreign Secretary William Hague said European nations may need to “recast their approach” to Russian energy purchases if the crisis isn’t resolved.

Also reported in WSJ, Obama’s government is taking measures to curb the Russia’s stranglehold over EU’s natural gas supply. US is currently one of the biggest natural gas production nations in the world due to one of its most advancing tech in this field names fracking. The strategy is increasing natural gas exporting to EU from US thus undercut natural gas imported from Russia. Compare to Russia, US has big cost advantage. As the graph from BP’s official site showed below, natural gas price keeps falling over recent years in North America. The price in US is far lower than that of Asia and Europe.

In this strategy of US, big oil and gas production firms like ExxonMobil benefit a lot from it, while environmentalists and small natural gas companies strongly oppose such a claim. In my point of view, it is unstoppable for US government to apply this strategy not only because it can set a restriction on Russia, but also it is a good opportunity to develop natural gas exporting industrial, which is just on its start-up.

Overall, the US strategy is a good news for the reason that it may help a lot to the establishment of the global natural gas market, which will benefit the people around the world and accelerate the process of clear energy movement. I hope that the US government can take this chance to do something really helpful for the economy, but not just a change to strike its main opponent.

Is Yuan going to raise?

Chinese Yuan raises again. Starting from mid-February, the dollar-Yuan exchange rate increased from below 6.06 to 6.10. I think that this change reflects the trends of Yuan and dollar in the future, Yuan will depreciate while dollar will appreciate. This changes in the exchange rate is backed by several reasons.

First, expected real estate market collapse in China. It is well known that China’s real estate market has a problem ever since 2008, the over investment leaded by the government and pushed by lots of big real-estate developers raised the price of Chinese houses rapidly and made them unaffordable to ordinary people. The demand for high-price houses is far lower than the supply, the bubble was already formed and kept increasing over time. At the end of 2013, LI Ka-shing, the richest tycoon in Hong Kong surprisingly withdraw from the Chinese property market, which is interpreted by some investors as the signal for the bubble to burst. The crashing down of the Chinese real estate market will bring China’s economy into big recession, which will lead to the dramatic depreciation of Chinese Yuan. So it is possible for international investors to quit Chinese market and waiting for the day.

Second, the tapering in US leads to capital withdrawal from developing countries and return to the US, which means more demand for dollar in US. And this will definitely appreciate dollar and make it relatively expensive compares to Chinese Yuan. The market is estimating that Fed will raise the rate in the foreseeable future, no matter what, the signal sent by the Fed will change the investors’ actions, which means the demand for US dollar will raise in the near future and this appreciates dollar in terms of Yuan. According to this WSJ article, tapering could lead to the stop of increasing in Hong Kong’s property prices. Once the prices of property in Hong Kong stop increasing, it will also change the price estimation in the China mainland, and then makes the investment in China not so promising. Eventually, investors will quit investment in China and depreciate Yuan.

And there is another reason why the raising in Yuan could be reasonable. China’s center bank is known to manipulate its exchange rate in order for Yuan to keep a relative advantage to increase the country’s export. In the past few years, China is required by US to appreciate its currency in order to inverse the trade decifit of US. However, China is always want to depreciate Yuan. According to this article in the WSJ, Chinese center bank catches the opportunity when the dollar is raising, it depreciated Yuan in order to increase export and improve the GDP.

Anyway, the market determined that dollar should raise and Yuan should be depreciated in the future, we can expect further news about this.

The Economic Costs of Mexico’s War on Drugs

Earlier this week, online rumors surfaced about a raid on a Mexican drug cartel member’s home where $22 billion in cash was found, as well as exotic animals, an underground hot tub, and millions of dollars of stolen art. This news was perpetuated today as the Mexican government announced that it was successful in its Navy-marine raid of capturing Joaquin “El Chapo” Guzman, Mexico’s most notorious drug cartel leader. The billionaire cartel leader is famous for his storied rise from peasant farmer to head of the famous Sinaloa cartel. Many believe that the capture of El Chapo is huge news for Mexican President Enrique Pena Nieto of the PRI Party. The PRI party had long ruled Mexico until it lost power in 2000. Many criticize the party for its policies in the 1980s and 1990s that cemented drug cartels into the fabric of Mexico.

The successful capture of El Chapo signaled to many analysts the success of President Nieto’s anti-cartel efforts. Despite this, many citizens are still skeptical. Jose Careano, a 35 year old office worker responded to the news of the capture of El Chapo by saying, “They finally got him? It would be good for the country, but kind of doubt it. And if they have got him, they’ll let him go away. He’s untouchable.” (WSJ – Mexico’s Most Wanted Drug Lord Captured) The skepticism regarding the capture of El Chapo comes from previous occurrences where El Chapo was either captured and released by corrupt officials or barely escaped as military raids were suspiciously delayed by hours or days. This as well as El Chapo’s successful escape from a high security prison in a laundry cart make many Mexican citizens believe that he is untouchable.

Only time will tell if the capture of El Chapo proves to actually be a success, but what we do know is that the violence brought on by El Chapo and other cartel leaders has had grave economic costs on the Mexican economy. Violence in Mexico, has increased since the Felipe Calderon administration declared war on drug cartels. In 2011, there was over 50,000 drug related deaths in Mexico. The increased violence and uncertainty in the stability of the country has led to many businesses halting or pulling out investments.

In 2011, Mexico’s GDP grew at a rate of 1.84%, which was the lowest growth in over 20 years. It is hard to state the direct effects that the violence had on Mexico’s economy because 2011 was in the midst of a global recession. Despite the confounding variables, a study conducted by the World Bank stated that a reduction of 10 homicides per 100,000 produces an increase in GDP per capita between 0.7% and 2.9%. Another study showed that in 2000 violence in Latin America contributed to an overall loss of 14.2% of the regional GDP. Furthermore, an instrumental variable regression analysis conducted by Stanford showed that the increase in violence in Mexico contributed to a small decrease in average labor income and a decline in small business revenue. (Stanford – The Economic Consequences of Drug Trafficking Violence in Mexico) With all of this data, we can state the violence in Mexico has had profound impacts on Mexico’s economy. The successful capture of El Chapo would show that Mexico’s effort on the war on drugs is becoming more effective, and as shown by the data from multiple studies less cartel violence will ultimately lead to a more successful Mexican economy.


Recovery on hold with profits overseas (revised)

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, these profits have not translated into growth.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.


Many think that the economy isn’t recovering like is has in the past because there is money just sitting on the sidelines.  One way to get that money working would be to institute an electronic currency, removing the zero lower bound on interest rates by removing 0% interest on paper money, and instituting negative interest rates to draw the money out.  Unfortunately, the paradigm shift needed on the part of the public for this to take place isn’t going to occur anytime soon.  I personally think that such a shift will most likely come from a popular cry for relief from inflation as opposed to breaking the zero lower bound, since the change would be more appealing to the public then.  With electronic money and the removal of the zero lower bound firmly in the future, the United States is in need of something that can help now.  Companies like Apple, Google, and Exxon Mobile are hoarding their profits overseas (an estimated 1.9 trillion in May 2013).  The federal government should incentivize this money to come back to the US where it can work for Americans.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  Since the money is taxed as soon as it is brought into the country, there will be over a third less of it when it gets here.  Further eroding these mountains of cash is the debts taken out in order to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them.  The companies themselves would prefer the money was in the US, but current fiscal policy discourage this.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.  Apple told them as much in 2013.   In order to stimulate the growth that the United States desperately needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to taxing the profits at a lesser rate, say 10%, but also in hundreds of billions of dollars returning to the United States.  How could this be a bad thing for an economy needing further stimulation?  Opponents to this idea argue that it was tried in 2004 and didn’t lead to any tangible benefits.  While there is no guarantee the companies won’t pay healthy dividends to shareholders or pay down debt, companies will also invest some of the money in acquisitions and research.  There is a lot more money overseas now then there was in 2004, and the country wasn’t struggling to add jobs in 2004.  While opponents say it has the potential to cost the government billions in lost revenue, so does a lack luster recovery.  In addition, the analysis of the 2004 policy was done in 2011, and many positive ramifications of the investments would have been wiped out by the recession.

The money American companies are keeping overseas represent prosperity that has already been earned. The federal government may hate the idea of letting that much money in with such a small slice going in its coffers, but if the United States is going to have one of the highest corporate tax rates the world, how much of this cash does it make sense for companies even to bring back?  The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the money they are currently keeping over seas.  The existing policies should also be modified to make America competitive again with regard to corporate tax rates.  It is only driving money away from our shores (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.

“Fight” between Mankiw and Krugman

Greg Mankiw posted a blog defending the 1 percent richest people four days ago, and Paul Krugman obviously had a disagreement with that, he then wrote a post against Mankiw’s avocation.

Actually this is not the first time those two greatest economists disagree with each other on the equality problem. On June 8, 2013 Mankiw published his article Defending the One Percent, claimed that inequality problem is not that serious and the fixing the inequality is so hard and may result in the unfairness for those rich people. He argued that the reason why some people are richer is simply because they are better (in every possible way). And he also said the absolute equality is actually inequality, and actually rich people had contributed for the economy more than others in US. Basically, Mankiw’s idea is to control intervention toward equality in order to maximize efficiency.

In opposite, Krugman proposed that “We live in a society that allocates rights to intellectual property in a way that yields huge rewards to a select few, that taxes top incomes at a historically low rate”. Also on the other hand, Mankiw neglect the inequality of opportunity, which is vital to decide whether the resource will be allocated in a fair way, for this, Krugman said that children from rich families are more likely to remain their top position. Finally, he found it absurd for Mankiw to think that solving inequality would lead to absolute equality.

Now this “war” has been updated.

Mankiw’s new blog Yes, the Wealthy Can Be Deserving once again insisted on the rightness for rich people to own huge amount of money. Mankiw gave an example about Robert Downey’s income through the film The Avengers and argued that those incomes are totally legitimate and the player himself deserved the money, thus there should be no doubt toward the inequality. In addition, he believed that financial systems are “allocating the economy’s investment resources” fair enough to make the country work effectively.

One days later, Krugman agian wrote a blog to comment on Mankiw’s article. First he noted that film stars are not representative in terms of the “upper tiers of the income distribution”, executives from finance, corporate and real estate are actually what we are referring to as top 1 percent. And he strongly disagree with Mankiw’s statement about fair distribution, he pointed that our financial crisis was caused by the rich-dominated financial systems. So there is no such effectiveness addressed by Mankiw.

For me, I agree almost with Krugman, however, I also think it is great for Mankiw to think from the way of economic efficiency and dear to fight against main stream idea as long as he thought it is unreasonable.

I’d like to see this to continue and learn more from it.

“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.