Hooray For Income Inequality

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Posted: Feb 04, 2020 11:10 AM
Hooray For Income Inequality

Source: AP Photo/Jessica Hill

Wouldn’t it be nice if everyone had the same natural abilities, desires, and income? Actually – it would be a disaster!

Different abilities and preferences power the modern economies that enable the marvelous advances we enjoy today. Different abilities are a foundation to specialization – which in turn enables societies to become increasingly efficient and to thrive. Different preferences means that different people can pursue those careers that they prefer – such as farming, medical work, teaching, construction, law enforcement, and so forth – while meeting the various needs and desires of different consumers.

The value of people having diverse natural abilities and desires is demonstrated continuously in successful sports teams, rock bands, and, very importantly, firms. But the left argues that even if we have different abilities, different preferences, and different levels of ambition, we should all receive equal incomes. That too would be disastrous.

Income inequality provides incentives for people to develop skills, be productive, and cooperate with each other. Removing incentives is the surest path to decline and failure. Communal living on a large scale fails miserably.

The poster children of the left’s campaign for socialism is the income inequality between labor and CEOs. But why are CEOs the target of attacks on income inequality? There are many people who are very highly paid when they are in the top of their profession: Attorneys, recording artists, movie stars, TV stars, and athletes.

Let’s take a close look at the compensation of professional athletes v. CEOs. Forbes reports[1] that Roger Federer earned $93 million in 2019 for playing games (tennis). Nine American professional athletes (all male) made more than $70 million in 2019[2]. Internationally several soccer players earned in excess of $100 million. Among Americans, only five CEOs made more than $70 million in total compensation in 2019, one of whom is a woman.[3]

The above statistics understate the overwhelmingly higher pay that entertainers receive relative to CEOs because CEO compensation in a particular year sometimes includes exercising of stock options. Therefore, a successful CEO’s total compensation spikes from time-to-time to reflect the exercise of valuable stock options and that is when they appear on the list of the “Top Paid CEOs”. When proceeds of option exercises are excluded - or at least smoothed - there are hundreds of entertainers making more money than most major CEOs.

The salaries for professional athletes in just the U.S. are stunning compared to the salaries of most CEOs. The teams of the NBA and MLB combined pay athletes over $7 billion per year. The NFL pays over $6 billion. Yet the leftists only complain about the CEOs. Why not attack the salaries of entertainers? One reason is that leftists hate commerce and love stars. Another reason is because it’s obvious why athletes and other entertainers are highly paid: they are able to draw huge crowds willing to pay top dollar to see the best. But the skills and accomplishments of CEOs are not easily seen.

Most people have no idea how CEOs add value to an economy. Great CEOs can do amazing things. The highest paid CEO in 2018[4] was Elon Musk. Under his leadership there are a lot of all-electric Teslas on our highways and lots of SpaceX launches soaring into space to provide world-wide internet coverage.

Leftists argue that economic inequality comes from a corrupt system. They have increasingly persuaded gullible voters to support socialism by hammering away at high CEO compensation. In a 2019 report[5] entitled “Reining in CEO compensation and curbing the rise of inequality” three economists at the Economic Policy Institute (EPI) opine:[6]

“We should end the corruption of a corporate governance system that fails to subject CEO pay to the same labor market pressures everyone else is subject to.”

An equally ridiculous argument would be this:

“We should end the corruption of a professional sports system that fails to subject the pay of athletes to the same labor market pressures everyone else is subject to.”

Finally, note that the left does not whine about the high compensation of liberal politicians despite their enormous wealth and privilege. According to the NY Times[7], “Biden and his wife, Jill, reported an adjusted gross income of about $11 million in 2017 and $4.6 million in 2018” for giving speeches and writing books. According to Forbes “Bill and Hillary Clinton made $240 million in the last 15 years”[8] and Obama “… earned $20 million.”[9] But the income-equality leftists never point fingers towards themselves. The hypocrisy is overwhelming.

[1] see https://www.forbes.com/profile/roger-federer/ accessed January 2020

[2] see  https://en.wikipedia.org/wiki/Forbes%27_list_of_the_world%27s_highest-paid_athletes#2019_list accessed January 2020

[3] see https://www.equilar.com/reports/64-equilar-new-york-times-top-200-highest-paid-ceos-2019.html accessed January 2020

[4]  see https://www.equilar.com/reports/64-equilar-new-york-times-top-200-highest-paid-ceos-2019.html accessed January 2020

[5] see https://www.epi.org/publication/reining-in-ceo-compensation-and-curbing-the-rise-of-inequality/ accessed January 2020

[6] ibid.

[7] see https://www.nytimes.com/2019/07/09/us/politics/joe-biden-net-worth.html accessed January 2020

[9] see https://www.forbes.com/sites/danalexander/2017/01/20/how-barack-obama-has-made-20-million-since-arriving-in-washington/ accessed February 2020