Raid The Rich

Me in March on Why Track Trends?:

Tyler’s thesis is that the US has slower growth than decades ago because we’ve used up the low hanging fruits. … My grad school (Caltech) didn’t teach macro … so I’ll stay agnostic for now. But what I can speak to is how little such trend analysis or projection matters, at least for most economic policy.  … The question of which institutions will most increase economic welfare rarely depends much on the exact values of the sorts of parameters social scientists and the media track with such enthusiasm and concern.

Me 1.4 years ago on Enable Raiders!:

A robust, properly functioning market for corporate control is vital to the performance of a free-enterprise economy. …

It is hard to exaggerate how very important this is – we’d be so much richer now if it it had long been easier for raiders to take over public firms. We now put many inexcusable obstacles (listed below) before such raiders, including disclosure, super-majority, poison pill, and merging delay rules.

Today’s Post:

Growing income disparity in the United States … has reached levels not seen since the Great Depression. In 2008, … the [140,000 member] top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, … with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. …

In 1975 … the top 0.1 percent of earners garnered about 2.5 percent of the nation’s income, including capital gains. …. By 2008, that share had quadrupled and stood at 10.4 percent. … The share of the income commanded by the top 0.01 percent rose from 0.85 percent to 5.03 percent over that period. For the 15,000 families in that group, average income now stands at $27 million.

The inquiring mind is surely curious to know who exactly are today’s super-rich, and how much richer they are now than before. But good policy is mostly about good institutions, which just shouldn’t depend much on such parameters. If you worry that managers get paid more than they contribute to firm value, a robust solution is to strengthen competition for corporate control, so raiders can takeover and then fire overpaid managers. Trying to independently determine manager contribution is far far harder.

If you worry instead about how much managers respond to taxes by reducing their efforts or moving to other jurisdictions, that also probably doesn’t depend much on just how rich they are or how much that has changed in recent decades. Wanting to tax managers more because you learned that they made more money than you thought seems much more like envy than neutral efficiency analysis.

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  • marcus

    Over simplification much? So let me translate: we’ll improve our alpha dominance hierarchies by promoting more alpha-fights. Meanwhile, resource problem? What resource problem? Presumably these alpha fights will eventually be resolved by Ems, lol. You squeeze talking points so hard to fit your model dude.

  • Andrew Fischer Lees


    Regarding Raiders: Demonstrate your understanding through prediction. I’d take your statement about raiders seriously if you had made prediction about corporate profits a few years back, and we could see how you did. For example, if a poison pill procedure is introduced to a publicly-traded firm, why don’t you make predictions regarding the cash flows of the company over the next five years, and publicize these predictions?

    You don’t actually have to put money on it – just make a public statement, and we can test whether you have a practical understanding of the Betas and their magnitudes.

  • What do you think of the supposed twilight of the public corporation? I know Felix Salmon has been talking about the supplanting of IPOs with venture capital and privately owned companies, and I think McArdle discussed the implications for 401Ks in a world where growth ownership is restricted to a more select group.

  • Thanatos Savehn

    Take The Goodyear Tire & Rubber Co. as exhibit “A”. Sir James Goldsmith attempted to raid the company a quarter century ago. The company took a poison pill and then …. wound up doing exactly what Goldsmith tried to do – only it got far less for the juicy parts (aerospace, pipeline, etc.) than Goldsmith offered.

    Letting the chips fall where they may would have led to a renaissance for a great American company. Instead, thanks to a handful of executives and submissive legislators, the company stumbled on, selling assets at firesale prices, until it wound up a weak shadow of its former self.

  • John Kenneth Galbraith used to talk about how few battles there were for corporate control. Then, Mike Milken figured out various ways to fund takeovers.

    This change certainly drove up profits, but it mostly seemed to transfer money from workers to insiders, and it encouraged Cash in Quick behavior: leverage up. Is the median American better off because of Milken’s Revolution? Maybe, maybe not? The reality doesn’t seem as obvious to me as your theory predicts.

  • IVV

    I think an important consideration is the distribution of managerial talent vs. distribution of capital. If we have a model in which anyone with the talent can raid and create efficiencies that result in change in ownership of companies regardless of the distribution of capital, then yes, unfettered competition works well.

    However, if capital trumps talent, then only through control of capital can a company be taken, and there will be shuffling of the top ranks, but the income inequality will remain and be required.

  • nw

    Off topic. This comes from the same blog you cited in “Who Beats What”:

    Although this is off-topic, I’ll reach to connect it to the material in this post.

    We’re are poorer because people are more productive working for free. As our social capital (Robert Putnam) erodes, people are demanding money for work performed for free in the past.

    • I think very much on topic, and an excellent commentary.

      What rich people have done is compel other people to not work for free and extract a portion of the value-added that they have produced.

      When you liquidate the social capital that has been built up, the few who liquidate it can become wealthy, but everyone else becomes poorer, and then the safety-net of civil society provided by the social capital is gone.

      That is when the poor don’t just raid the rich, they eat them because the rich have left them with nothing else.

  • Working Teacher

    This can be turned around. For months Fox News blamed teachers and teacher unions for the problems of the economy and all the mindless watchers started to agree. The people wanted teachers to lose their right to collective bargaining and pensions. As you pointed out — wanting teachers to lose these things because you learned that you do not have them seems much more like envy than neutral efficiency analysis.