Steven Pearlstein Doesn't Understand Market Economies

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Wednesday, 13 October 2010 07:11

In a confused column today, Steven Pearlstein touted the need for wages in the United States to fall. He focused on the wages of autoworkers, but implied that the wages of less-educated workers more generally must fall. At the end of the column Pearlstein told readers:

"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."

Well no, it is not the case that a "market economy" led to the high salaries of investment bankers, corporate executives, and newspaper columnists, while forcing wage cuts on auto workers. In fact, there are a wide variety of government interventions that created this situation.

For example, there was the government bailout of the banks two years ago. By offering trillions of dollars in loans and guarantees the government kept Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and other Wall Street giants in business. In a market economy, the top executives of these companies would be walking the unemployment lines right now instead of getting bonus checks in the tens of millions of dollars.

The executives of these banks also benefit from the "too big to fail" subsidy. This means that creditors will lend to these banks at lower interest rates because they know the government will bail them out if the bank gets into trouble.

Corporate executives get ridiculously high pay in the United States (as opposed to Europe, Japan, or South Korea) because the government's rules of corporate governance allow corporate executives to essentially run companies in their own interest. The CEOs largely appoint the board of directors (a ridiculously plush sinecure) who in turn decide the CEOs' pay. In systems where the corporations are more directly subject to shareholder control, CEOs get paid far lower salaries.

Finally the pay of columnists and highly educated workers is inflated as a result of the fact that these workers are largely shielded from international competition. The laws make it difficult for companies to bring in foreign professionals to undercut the pay of doctors, lawyers, columnists, even if they are every bit as competent as the native born workers they would be replacing.

By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law.

In short, the inequality that Pearlstein notes has nothing to do with the dictates of a market economy. It is the result of the people at the top rigging the rules to their benefit. They got the government to stack the deck in their favor and then hired people like Pearlstein to tell everyone that it was just the natural workings of the market.