Blame India Watch points out a study at Institute for Policy Studies and United for a Fair Economy titled Executive Excess’ Report: CEO Pay Soars at Companies That Send Jobs Overseas. It’s a polemic arguing that CEOs get “perverse incentives to destroy communities” by shipping jobs abroad and as such offers the usual lefty case against globalization (including the China race-to-bottom canard, which I’ll have to address at a later point).
BIW writes,
Though the pro-Civil Rights/”fair traders” are likely to be dismissed with today’s en vogue anti-left epithet of “tranzis”, their findings are useful. Unfortunately, they take a turn through “India” to get to them, as evidenced by the opening cartoon. A narrative baloon hangs over the image of three CEO types at the desk of a board member who quacks, by now predictably, “Sorry, the board is outsourcing your job to a guy in India who’ll be a CEO for a tenth of your salary.”
Sadly, I got the feeling that half of the study was just quantitative dressing for that cartoon’s point. In any case, BIW is being too charitable by calling its findings useful. Yes, CEO pay is high and growing higher. Yes, outsourcing is growing in many sectors. But correlation doesn’t equal causation. The inclusion of Oracle’s Larry Ellison in the study should be a warning flag; do the authors really think that the board sat down and voted on an astronomical compensation package because Elliott caved in and outsourced? The more likely scenario is that an insular dot-com holdout sees him as a superstar. More broadly, financial firms are represented in the study, but it’s hard to rule out that CEO pay was rising in finance for reasons other than outsourcing. In fact, one of the best cases to make against the rising CEO pays is that it’s disconnected from the company’s bottom line. It’s an imperfect principal-agent setup: CEOs get raises regardless of company performance and get rewarded as if they take risks they in fact do not. Yet the study’s authors proceed as if CEOs are the owners, not another fixed labor cost themselves (admittedly a special case of labor costs).
But of the broader outsourcing issue, what we have is Press Release policy writing at its worst. The purpose of the study is not to illuminate an issue, but simply to provide a meme that will be picked up by news outlets (BIW quotes Reuters), who will frame the issue in similar ways. But conceptually, the two issues are separate; high CEO pay would be a problem whether firms outsourced or not, and lower-paid CEOs in the European model might still make decisions to maximize profit through cutting labor costs. In my mind the real progressive issue should be twofold: 1) the management of the US business cycle to ensure maximum employment possible, within constraints - the proportion of white collar jobs is not going down after all; and 2) the deployment of government human services - education, health care, and child care. Not to wish outsourcing on anyone’s job, we should nonetheless welcome a chance for India and other countries to develop beyond import-export substitution. The study’s authors sneer at the “relative handful” of jobs created, but I can guarantee it’s more than created by the US importing fair trade handbags.
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