The SEC and the fiction of fiat money
NARITA, Japan, Aug. 7, 2015 — Five years after the passage of the Dodd-Frank financial system reforms, the Securities and Exchange Commission (SEC) has finally ruled that wage ratios be published by publicly traded companies. In their most basic form, these ratios will show how much CEOs are paid relative to median-wage workers in their firms. The New York Times points out that this ratio has gone from roughly 20:1 — a CEO receives 20 times the wage of a typical employee — 50 years ago to about 300:1 today.
The reaction has split on predictable lines. Liberals cheer the resulting exposure of income inequality while conservatives rail against an anti-business, burdensome regulation. This reflects the 3-2 SEC vote, with both Republican commissioners voting against the rule.
I believe that conservatives should be cheering together with liberals. But we misunderstand the “conservative” and “liberal” labels. The labels that really matter — and contrary to “moderate” belief, labels do matter — are “conservative,” “corporatist” and “progressive.”
Much of what falls under the political rubric of “pro-business” isn’t conservatism, but corporatism. Corporatists hijack the narrative of economic freedom that is genuine conservatism. Corporatism pairs politically favored corporations with progressive politics in an effort to promote political goals.
This occurs under both major parties. The goals of political interests that dominate under Republican leadership usually coalesce around defense-related industries (“guns”), while the goals of political interests dominant under the Democrats coalesce around social programs (“butter”). In either case, politically favored corporations seek economic rents — profits obtained by political means rather than through market activity — as the foundation of their business model.
To be clear on economic rents, if a business is able to charge a higher price for its product because your lobbying arm succeeded in bending legislation or regulations to your advantage, the difference between that higher price and what it otherwise would have received in a competitive market is called “economic rent.”
A business might pin its success on genuine innovation. If it can charge a higher price for its product because it is measurably better than competing products in ways that matter to the buying public, its business model is rooted in innovation rather than rent-seeking.
This is the essence of conservative economics: Our economy should be structured to incentivize innovation and improvement, not obtaining economic rents.
Progressives, however, view corporations as a means of achieving political goals. Those corporations whose views align with the political party in power — whichever party that is — receive economic rents as a way of furthering these political goals. Campaign contributions then arise from those rents. This explains why an unrestrained money supply is so important to progressive corporatists: More money means more rents, which mean more campaign cash.
(As an aside, those who are upset about Citizens United should ask, Where does all the money come from to begin with?)
Republican progressives corporatists pair corporations with the state to buy “guns”; Democrat progressives corporatists pair them to buy “butter.” It is as possible to find Republican progressives (e.g., Chris Christie) as it is to find Democratic progressives (e.g. President Obama). This has been going on for decades and has distorted our economy decisively toward rent-seeking rather than genuine innovation.
We can do, and deserve, much better.
Salary inflation is an indicator of monetary dysfunction. True conservatives should join liberals in cheering the SEC’s new regulation because it will provide a compelling data point to help us better explain conservative monetary policy.
“Conservative monetary policy” simply means that conservatives view money as a utility contrived by civil society to facilitate everyday commerce. Progressive monetary policy — like that espoused by Princeton professor Paul Krugman — views money as a tool of the state to impose the conscience of the cultural elite on everyone else. See Krugman’s blog, The Conscience of a Liberal, for an example.
This new data point on executive compensation bears with it the promise of exposing the truth about income inequality: It is not, nor has it ever been, a function of fiscal (tax) policy. Rather, income inequality is, and always has been, a function of monetary policy.
When you allow the banking system to hijack the money supply — as the Federal Reserve System has done — and to remove all constraints on it, the people who are nearest to the money supply — those in the financial and political sectors combined — will benefit disproportionately from the lack of restraint.
In order to test this hypothesis, we need data points. The ratio of executive pay to the salaries of ordinary employees is a perfect place to start. Here is what I predict we will see: If we look at the income side of the books of publicly traded companies, and we look specifically for income generated by: 1) financial products such as derivatives and; 2) government contracts, we will see a correlation. The greater percentage of revenue earned from financial products and government contracts will correlate with a higher ratio of executive-to-employee compensation.
The New York Times refers to Whole Foods Market, a grocery store chain, as an example of the historic multiple of 20:1 — the CEO makes 19 times the salary of the median employee. But as a grocer, Whole Foods is distant from the financial sector and the political sector, so this should not be surprising.
General Electric, which is selling its significant “GE Capital” financial sector business, is a perfect counterpoint. It has not reported its ratio, but with its CEO making $37.3 million, it is likely to fall closer to the 300:1 ratio.
What the data will likely tell us is simple: 1) Money has to go somewhere; and 2) Those closest to the expansion of the money supply will enjoy its rewards disproportionately to those more distant. Executive compensation, or “salary inflation,” will likely confirm this. And so those who champion genuine conservatism — a properly restrained money supply — should be cheering on the SEC.
Restraining the money supply is the only solution to the problem of income disparity. The liberal solution is always tax policy: Increase taxes on the highest incomes and then redistribute that by way of the earned income tax credit. Yet all this will do, in reality, is further incentivize tax avoidance; we will only further “Hellenize” our economy — make ourselves more like Greece.
The corporatist — progressive — solution is the Fed’s approach: Pursue the dovish policy of spiking the punch bowl with ever-lower interest rates in order to keep the statist fiction that is fiat money alive. Both major political parties favor that approach; Progressives can be in either Democrat or Republican form.
The genuinely conservative solution is to monetize natural resources like oil and natural gas by way of royalties, in order to calibrate a gradual return to a gold/silver standard, as I have proposed here. With a properly restrained money supply, salaries have to be calibrated toward those who actually make things work in the real economy.
Less money will go to executive salaries and more to the everyday employee who executes the mundane details of a company’s business plan. The CEO will still make significantly more than the line employee, but not by a historically anomalous multiple of 300:1.
From an even broader perspective, a restrained money supply forces a preference for innovation and improvement, also known as wealth creation. An unrestrained money supply results in an economy where one can borrow money for free and then make 20 percent card-counting at the blackjack table of the commodities market. With that kind of return, why would anyone bother trying to create new wealth?
A restrained money supply also caps the extent to which politicians can make promises which otherwise cannot possibly be kept. What is left over and against speculation and political preferences is actual production and innovation in the economy. Free money has allowed politicians to make ridiculous promises and the financial sector to build a derivatives house of cards. Every dollar used by government and bet at the blackjack table of derivative markets is a dollar not deployed toward innovation and production, and with it job creation.
These new SEC regulations bear with them the promise of exposing this whole charade. True conservatives should join liberals in cheering them on.