The Executive to Minimum Compensation Ratio: How to Curb Super-Salaries and the Widening Income Gap

A straight across minimum wage of $11 an hour would put the US on the fast track to poverty as millions of jobs would be cut by small businesses.

However, I think the minimum wage should be tiered to reflect the differences between businesses and their available resources. The small business with 50 employees or less should be able to remain at the current levels, as long as that business owner's compensation does not exceed 150 times that of the minimum paid worker. 

But the large businesses should be required to pay $11 an hour or even $15 an hour as a minimum depending on their executive to minimum compensation ratio. If their CEO is getting paid over 150 times or more than what the minimum wage worker is currently making, they have to boost the minimum wage at that company to $11 an hour, and face higher corporate taxes -or- reduce the executive pay to a level below the 150 times minimum compensation mark to avoid this. 

If the CEO is making over 250 times what the minimum wage worker is currently making, they have to pay $15 an hour, and face higher corporate taxes -or- reduce the executive pay to a level below the 150 times minimum compensation mark to avoid this. This would entice boards, shareholders, and executives to ensure that ratio doesn't go higher than the 150 times level, and protects small businesses from having to do something they don't have the resources to do.

Thomas Piketty has pointed out some intriguing data on this problem, lets use logic to solve it.  In the scenario above, I believe, everyone wins.

Reid v. Romney

A few months ago I stated that I hate the argument that if you don't release something, or don't allow an unwarranted search, that you must be hiding something. 

That was the accusation the Republicans were making at the time vs. Obama in regards to the faster and Furious discussion.

Now Reid & Co. are using the same argument against Romney.

So I propose that Romney make a deal with Obama that he'll release the 10 years of returns if Obama will release the FaF documents.

Since both are equally as interesting to the public and likely somewhat damning to both of the candidates, I think it would be a fair trade.

The Fed's Money Printing and Quantitative Easing

I've heard a lot of complaints over the spending bills, bailouts, etc. from the recent Tea Parties and most of it I agree with.  However, I disagree with the popular idea of Tea Party participants

that the Federal Reserve's Quantitative Easing policy is the problem - hardly so.  Quantitative Easing, or "Printing Money" in simplistic terms, is doing two things for the economy that investors and businessmen LOVE.  Just like a tax cut, QE reduces the interest rate, and thereby distributes wealth from the powerful banks and investment institutions to the businessmen and entrepreneurs.  Or should I put it differently as diverting wealth from the powerful banks and investment institutions and into the businesses they own. Lower interest thereby reduces the expenses on businesses and consumers.  It also reduces inflation - in the short term - by keeping prices moderated (businesses don't feel the need to increase prices when their expenses have been reduced), but at the same time stems deflation - which is absolutely the end all of economic disasters. 

You may wonder how QE policy can put the spending power in the hands of businesses rather than banks.  Steve will know the answer to this one.  Businesses and businessmen look at the interest rate as an opportunity cost standard for whether a business should simply earn interest on a bond investment, or whether they should make a capital investment and wait for a future return.  By reducing the interest rate (called "Printing Money"), the opportunity cost of capital investment is reduced, and the incentive to invest in a bond for future interest payments is reduced.  Therefore businesses would rather spend money upgrading.  It also has to do with present value of money.  By reducing the interest rate to zero as the Fed has done, the future value of money in nominal terms will be the same as the present value.  This is based on the equation Pv=S(1+r)N Where Pv is present value, S is the principle amount invested, n is the time in years, and r is the current interest rate.

Here's an example.  The value of 10,000 dollars in three years at a 5% interest rate is:

=10000((1+.05)^3)

=11600

So in 3 years at a 5% interest rate, the value of 10,000 is 11600.  So if your expected ROI on a 3 year investment is less than 11600, you should just put it in a bond at 5% and forget investing in capital.  Also, this means that if 10,000 is worth 11600 in 3 years, it will theoretically take 11,600 to buy something that was worth 10,000 in today's current money value.  But if the interest rate is closer to zero as it is now, 10,000 today is still 10,000 tomorrow, both in quantity and money value.  This theoretically gives enormous incentive for investment in capital goods.  And capital goods are the core drivers of our economy.

So this easing policy is much like a tax cut, but from the Fed rather than the government.  However, the government should also be reducing taxes and expenditures while the Fed does this over the long term.  Short term it may make sense for the government to spend more, since they can get cheaper bonds.  The problem is the government already had enormous debt BEFORE the crisis.  So spending any money they don't have is dangerous.

The only caveat to Quantitative Easing is that you have to be very good at judging when inflation is back to normal from zero, or when GDP is positive from negative.  If you don't time it right, inflation will be more than normal.  This is based on the Fed's money calculation MV=PQ.  Increases in GDP raise the PQ side, and therefore to remain proportional, the Fed needs to increase the money site proportionally.  V is a constant velocity of money, and P for prices in the economy normally should stay the same to avoid inflation.  However, if GDP (prices or quantity) are decreasing, the fed can theoretically increase MV to force an increase in PQ.  It is leaving the large amount of money on the table for too long that increases P too much, causing inflation.

Also, one has to take into account Gregory Mankiw's new theorem (Mankiw is a conservative economist at Harvard) that inflation is only a problem if it outpaces average raises in wages.  Think of this:  Businesses normally don't give raises based on performance.  They have bonuses and promotions for that.  Most raises are usually "in line" with or a bit above the interest rate.  This means from year to year, the average worker maintains the same buying power, while GDP increases the quantity of selection as more and better products and services enter the market.  This means that you have more to purchase tomorrow or next year with the same purchasing power (because the quantity of dollars available to you increased through a raise). 

Currently, raises (if your company hasn't suspended them yet) are still outpacing inflation, which is somewhere near zero, or even slightly negative.  Even if you got no raise, it is still in line with inflation since it is at zero. Once the economy recovers, most companies will give raises that are larger than normal to "make up" for the previous suspension, while hopefully the inflation rate stays below or around 4%, which will maintain a slight increase in purchasing power that we have been used to since Reagan. 

Maintaining a 4% or lower inflation is the trick the Fed has to ensure.

Check out Mankiw's blog: http://gregmankiw.blogspot.com/ or this other blog by James Hamilton http://www.econbrowser.com/archives/2009/03/quantitative_ea_1.html

Now I want your dissertations and dissentions!

Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com

Blogs:
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The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.

A Commentary on the Election that I agree with

Not Moderates but GOP Wimps

A Commentary By Debra J. Saunders
Tuesday, October 28, 2008 Email to a FriendAdvertisement
I've long considered myself a bad Republican. During the Bush administration, for example, I've felt free to whack George W. and Republicans in Congress for passing big-spending bills, such as their pork-rich 2002 farm bill, the underfunded prescription-drug bill and earmark spending. But in 2008, I find that I'm a piker in the bad Republican department.

Enter Christopher Buckley, the satirical novelist and GOP legacy prince who wrote a piece in the New York Times in February excoriating Rush Limbaugh and other conservatives for not supporting John McCain for president, despite McCain's conservative credentials and unassailable character. This month, Buckley announced he would vote for Democrat Barack Obama for president, as McCain's campaign had rendered the former P.O.W. "inauthentic."

Republicans Colin Powell, William Weld and Scott McClellan also have endorsed Obama. On Friday, Limbaugh lashed out at Buckley and company, as he asked, "What the hell happened to your theory that only John McCain could enlarge this party, that we had to get moderates and independents?"

"Good riddance," Limbaugh said, to GOP moderates. In an e-mail Monday, Limbaugh wrote, "What I meant to imply is that moderates leading a conservative revival will doom it. I'm happy to have them -- but not as definers and leaders."

Limbaugh should ease off on the "moderate" bashing. Buckley, Powell, Weld and McClellan don't represent moderate Republicans so much as they represent themselves -- and a small universe of New York and Beltway conservatives who have not retreated to the middle, but simply bolted for the nearest exit.

They had spent the last eight years in a contentious marriage marred by a circular argument revolving around George W. Bush. McCain appeared as the man who might offer a chance for happiness. But when they found themselves trapped in the same ceaseless argument that plagued their last unhappy marriage, they announced they were leaving home to buy a pack of cigarettes.

William Ayers? Everyone knows that if McCain had held a campaign event at the home of someone who founded a violent anti-abortion group, it would be an issue. McCampaign seemed out of touch in bringing up in the midst of an economic crisis Ayers, an education professor who helped found the terrorist Weather Underground in the 1960s. When GOP vice presidential candidate Sarah Palin hit Obama's "socialist" tax policies, here again, the campaign seemed not so much too conservative, as too 1950s.

They were still arguing about style, as McCampaign had morphed into a style-crime road show. The factor here is not moderate versus conservative Republicans, but the cool guy versus the old guy.

Buckley did not claim that Obama's policies are better. Indeed, he wrote that he will "pray, secularly" for Obama to betray the traditional left-wing politics he espouses. Powell told NBC's "Meet the Press" that he supported Obama "because of his ability to inspire, because of the inclusive nature of his campaign, because he is reaching out all across America" -- not because of Obama's position papers.

When Obamacons explain why they are deserting the GOP nominee, you don't hear them arguing that Obama will do better by U.S. troops in Iraq and Afghanistan. They don't say that Obama has the best ideas for the economy. They instead lean on the belief that Obama can bring people together.

They gloss over the fact that McCain will settle for nothing short of a successful military policy in Iraq and Afghanistan. Or that Obama sees Iraq as a place where the U.S. government spends $10 billion a month that could go to social programs at home. They count on Obama to do what is expedient, not what he has pledged to do.

They tend to agree more with McCain's emphasis on limiting taxation to encourage job creation than Obama's zeal to spread around affluent people's wealth. So they don't dwell on the policy questions.

They don't care that McCain has a history of working with Democrats, while Obama has a history of talking about working with Republicans. Because they have lined up behind the Democrat, they have determined that Obama will bring people together.

This isn't about ideology -- moderate or conservative. It's a personality contest.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

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"We should be too big to take offense, and too noble to give it"
Abraham Lincoln.