Indiana Economic Digest | Indiana
Advanced Search

• Most Recent

home : most recent : most recent May 24, 2016

4/30/2012 7:06:00 PM
OPINION: Compensation levels did not cause the recession

Morton J. Marcus is an economist formerly with the Kelley School of Business, Indiana University. His column appears in numerous Indiana newspapers.

          America is still fascinated with “The Price is Right”. We watch HGTV to discover the right price of real estate. For many generations economists have searched for the right price, the just price.

          How much rent should the landlord be paid by the farmer of his land? How much is a loaf of bread worth? The proper compensation for a farm worker is the subject of a biblical parable. These, in their many forms, are perennial questions.

          Therefore it is no wonder that today we ask how much is an outstanding athlete worth? Kobe Bryant, Alex Rodriguez, Andrew Luck -- are they worth what their clubs are willing to pay them? How about teachers, administrators, basketball coaches -- are they paid appropriately?

What is the right compensation for a wholesaler or a retailer who operates between the manufacturer and the consumer?

          We have a suspicion of middle-men, particularly when the commodity in question is money. Hence, we easily question the rewards paid to bankers, brokers, and bond sellers. Our society still operates with the ignorance and prejudice of the middle ages against money and services.

          This biased thinking refuses to recognize the contributions to our lives generated by activities beyond agriculture, mining, and manufacturing. Even construction has to battle for recognition and respect.

          In economic development, if our efforts do not result in tangible products that can be shipped, they are not called “goods”.  The idea is not accepted that a community could benefit from another restaurant, barber shop, electrician, accountant or attorney. Just look at what types of firms get property tax abatements. 

          Contemporary thinking has people who trade money (modern money changers) painted as parasites. Wall Street types who invent new means to lower transactions costs are evil do-ers. The general public does not understand swapping risk, although that same public is easily enticed into betting on fantasy sports teams, Powerball numbers, and playing black-jack.

          The extensive discontent with compensation for executives, particularly those in the financial services industry, is largely because we do not take the time to understand the function of money and the role of insurance. That is how we come to see other people’s rewards as “obscene” and “unnecessary”.

          Economics has taught us: compensation is that sum necessary to bring forth the services of a worker of a given skill level. If you want an hour of work from an expert plumber, you will pay more than you would for an hour from a novice plumber. How much should you pay for someone’s advice on how to manage your money? Should you pay on the basis of past performance for advice to someone else or defer payment for two years until you see how successful his/her advice proved to be for you?

          Outrage is natural when so many of us have seen the values of our homes decrease, our jobs disappear, and our pensions erode. We want to blame someone. We don’t know what a hedge fund is, so a hedge fund manager is a good target.

          The truth is that we all contributed to the housing bubble. It was not solely the builders, the bankers, the mortgage brokers, or the federal housing agencies. It was generations of believing the American dream could be realized best by universal home ownership and that wars could be pursued without costs to our society.

Editor, John C. DePrez Jr.; Executive Editor, Carol Rogers; Publishers: IBRC and IAR

Software © 1998-2016 1up! Software, All Rights Reserved