Snow Says High CEO Compensation Justified by High Productivity

According to John Snow, CEOs and other "superstars" are paid according to the value they add to the marketplace, i.e. the market is efficiently rewarding them for their high productivity. In addition, he says most Americans are benefiting from the economic expansion:

Snow Defends President's Handling of Economy, by Greg Ip, WSJ: Confronting criticism 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. But he insisted most Americans are benefiting from the economic expansion.

"What's been happening in the United States for about 20 years is [a] long-term trend to differentiate compensation," Mr. Snow said... "Look at the Harvard economics faculty, look at doctors over here at George Washington University...look at baseball players, look at football players. We've moved into a star system... Across virtually all professions, there have been growing gaps."

Mr. Snow said the same phenomenon explains why compensation for corporate chief executive officers 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."

Since the 1970s, CEO compensation has gone from 40 times to more than 300 times the average worker's salary... Mr. Snow ... said the administration intends to publicly challenge perceptions that typical workers and families haven't benefited much from the economic expansion. The extent to which the expansion has been broadly shared is "the new sort of battle line in the political arena," he said. ...

Mr. Snow distributed a fact sheet that showed after-tax income per person, adjusted for inflation, rose 8.2% from January 2001, when George W. Bush took office as president, through January 2006. The sheet also showed that per-person net worth ... rose 2.4%, unadjusted for inflation, from early 2001 to the end of 2005. "People have more money in their pocket" and in their bank accounts, he said.

Mr. Snow's case relies on averages, which can be skewed by big gains among the wealthiest. Other data suggest the typical family has seen little advance in income or net worth since Mr. Bush took office. Census Bureau data show median family income ... fell 3.6% from 2000 through 2004. Incomes for the poorest families fell even further. The only group to gain was the family at the 95th percentile -- that is, richer than 95% of all families. ...

As for net worth, a triennial Federal Reserve survey found that the net worth of the median family rose 1.5%, after inflation, from 2001 through 2004. That is far less than the 17% increase from 1995 to 1998 and the 10% increase from 1998 to 2001. ...

Robert Gordon, an economist at Northwestern University, says the past few years represent the continuation of a 35-year trend in which a growing share of all labor income goes to a small group of "superstars: professional athletes, CEOs and top corporate officers." On top of this trend, income on capital -- such as interest, dividends, rent and capital gains -- has taken a growing share of national income from labor, and it "goes mainly to a small slice of the population at the very top."

Mr. Snow said inequality at "one philosophical level...is troubling. ... We as a society have made two determinations. We're going to let more productive people have higher incomes and we're going to tax them more" through a progressive-tax system. Mr. Snow argued the administration's tax cuts have made the tax code more progressive, because the rich now pay a larger share of total individual taxes. Some scholars counter that the tax cuts still widened the gap between the after-tax incomes of rich and poor Americans. The Tax Policy Center, a joint venture of the Brookings Institution and Urban Institute think tanks, estimates that after-tax incomes of the richest 1% of taxpayers were 4.6% higher in 2005 than they would have been without the tax cuts. Incomes of the middle 20% were 2.6% higher, and incomes of the bottom 20% were 0.3% higher.

As Greg Ip notes and documents, the statistics do not support the administration's claims.