Monday, March 20, 2006

Microeconomics 101 by John Snow

Billmon quotes a gem from John Snow:

Confronting critics of the Bush administration's economic record, Treasury Secretary John Snow said the widening gap between high-paid and low-paid Americans reflects a labor market efficiently rewarding more productive people . . . Mr. Snow said the same phenominon explains why compensation for corporate chief executives has climbed so sharply.

"In an aggregate sense, it reflects the marginal productivity of CEOs. Do I trust the market for CEOs to work efficiently? Yes. Until we can find a better way to compensate CEOs, I'm going to trust the marketplace."

A little morality tale, there. The productive people are getting the money, the lazy good-for-nothings are getting very little of it. And it's all just economics, marginal productivity and so on.

How exactly are the "more productive" people found to be more productive? How does Snow separate their labor input from the labor inputs of the lazy ones, given that most production is a combined effort where the actual contribution of, say, one manager is really indistinguishable from the work of this manager's staff, all of whom get paid a lot less? And what about the impact of outsourcing so many jobs on the pay of those supposedly lazy ones?

I don't know why I bother. Someone seriously arguing that "marginal productivity of CEOs" justifies their humongously enormous pay packets... The marginal productivity refers to the first derivative of the production function with respect to an infinitesimally small change in the labor input of the CEO, holding all other inputs constant. How does Snow measure this concept in practice? And does he really believe his own twaddle? Never mind the lack of empathy that it reveals; it also reveals someone who fell in love with Microeconomics 101 and never grew up.