"CEOs and Custodians"

Duke University Professor Kenneth Dodge opines in Sunday's News & Observer (not online):

1. that CEO pay is too great and that income inequality in the U.S. is greater than it is in any other developed country;
2. and his solution is to regulate CEO pay so that it cannot be greater than one hundred times what the lowest paid employee of the firm earns.

First, might it be that the income inequality in the U.S. relative to other developed nations is a feature, not a bug, of sound economic policy. (Which we may be losing, by the way.) Looking at the list, with a Gini coefficient of 15.9, income inequality is indeed greater in the United States relative to Canada (9.4), Denmark (8.1), France (9.1), Germany (6.9), the Netherlands (9.2), Sweden (6.2) and Switzerland (9). Compare this to Argentina (40.9), Bolivia (168.1), Columbia (68.3), Central African Republic (69.2), Lesotho (105), and Venezuela (48.3). Is he implying that to much capitalism causes less income inequality? He certainly can't be boasting about the income inequality in the least free countries, could he? And then seek to make the U.S. economy less free?

Maybe the explanation for the higher income inequality in the U.S. relative to other developed nations is due to greater innovation and invention (i.e., entrepreneurship) in this country relative to the other developed nations cited above. Larry Page and Sergey Brin, Pierre Omidyar, Steve Jobs, Bill Gates, T.J. Rogers, Ben Huh, Charles Koch, and on, and on, and on for this country seems to be absent in those other countries. This seems to me a benefit of income inequality, not a curse, notwithstanding the laments by those envious of the successful.

ADDENDUM: A system based on merit will produce a lot of innovation, entrepreneurship and motivated people. A system based on egalitarianism will produce far fewer people with these traits.

On the part of CEO pay and Professor Dodge's recommendations, why is it that when a market fails there is an immediate call for more government intervention, but when government fails there is no corresponding call to rely more on markets? The question that needs to be asked prior to any legislation dictating wages is what may be causing this inequality? If the wage differential between a CEO and the firm's janitors is a function of an oversupply of janitors and an undersupply of CEO talent, then the differential seems to me efficient and any move to reduce that inequality simply makes the firm and its shareholders (and its employees, including the janitor) worse off. Show me that the market for janitors and CEOs is somehow inefficient - cries of something being unfair are unfounded and subjective. What professor Dodge is telling us is that people are too stupid to see the inefficiencies in the wages of CEOs and his plan, which is based on the enlightened intervention of highly intelligent technocrats, is superior to what people freely choosing on their own would produce.

Can there be inefficiencies? Indeed, but then you must explain how they got there. I would argue that absent competition within the firm, there must be some obstacle to competition for control of the firm outside the firm. How about the following government-induced changes that changed the corporate structure?

1. Anti-hostile takeover laws that make it difficult for outsiders to now take control of a firm that is currently run inefficiently.
2. Government protection barring or reducing competition that would prevent existing firms from becoming too big. The larger the firm, the greater the reward to the CEO heading that firm. If it's so big that the firm is operating inefficiently, including the wages paid to its CEO, then what's barring competition from making the firm smaller?
3. The increased regulatory measures that make the CEOs job less desirable and less secure, as well as requiring additional political savvy to navigate the regulatory minefield. This also includes the more prevalent and onerous legal malpractice environment that requires CEOs to now have not just business experience, but the additional skills and stomach needed to steer their firm around these obstacles.

Rather than adding another layer of government regulation on the edifice that currently exists, which likely contributes to the problem, how about increasing the level of market competition for control of the firms and its products by releasing markets from the existing regulatory stranglehold.