Carpe Diem

Maybe CEOs Like Jack Welch Are Underpaid?

Aren’t CEOs overpaid? Here’s part of George Mason economist Walter Williams’ column today:

What about complaints about CEOs earning so much more than the average worker? Before looking at CEOs, let’s look at another area of huge pay differences. According to Forbes’ Celebrity 100 list, Oprah Winfrey earned $260 million. Even if her makeup person or cameraman earned $100,000, she earns thousands of times what they earn. Among the celebrities earning hundreds or thousands of times more than the people who work with them are: Steven Spielberg ($110 million), Tiger Woods ($100 million), Jay Leno ($32 million) and Dr. Phil ($30 million). According to Forbes, the top 10 celebrities and athletes earned an average of $116 million in 2004 compared to an average of $59 million earned by the top 10 corporate CEOs.

When Jack Welch became General Electric’s CEO in 1981, the company was worth about $14 billion. Through hiring and firing, buying and selling decisions, Welch turned the company around and when he retired 20 years later, GE was worth nearly $500 billion. What’s a CEO worth for such an achievement? If Welch was paid a measly one-half of a percent of GE’s increase in value, his total compensation would have come to nearly $2.5 billion, instead of the few hundred million that he actually received.

Bottom Line: You could probably make a stronger case that Jack Welch was underpaid and exploited by his shareholders and GE’s Board of Directors than making a case that he was overpaid as a CEO.

Carpe Diem

Do U.S. Companies Overlook Labor Arbitrage Here?

Fact 1: The size of the global outsourcing market is estimated to be $310 billion in 2008, driven primarily by the endless pursuit of U.S. MNCs looking for low-cost labor any where in the world it is available and ultimately seeking greater corporate profits. Most offshore outsourcing efforts save 15-20% when all costs are considered, representing a form of “labor arbitrage” generated by the wage gap between industrialized and developing nations.

Fact 2: According to the National Organization for Women, full-time women workers in the U.S. are paid an average of 77 cents for every dollar men are paid. Women of color are short-changed even more, with African-American women paid only 71 cents and Latinas just 58 cents on men’s dollar. These wage gaps stubbornly remain despite the passage of the Equal Pay Act more than 40 years ago, and a variety of legislation prohibiting employment discrimination.

Questions: If the wage gap in the U.S. exists primarily because of discrimination and U.S. companies could immediately save 23-42% by exclusively hiring women, why would they overlook this “labor arbitrage” opportunity and profitable wage gap right in their own back yard? In other words, why would U.S. companies go to the other side of the planet to hire low-cost workers in Bangalore, to take advantage of a 15-20% wage gap and exploit labor arbitrage in India, when they could exploit labor arbitrage and a wage gap right here in the U.S.?

Carpe Diem

World Stock Market Boom 2007

According to world stock market capitalization data available from Global Financial Data and the World Federation of Exchanges, more than $9.5 trillion of stock market value was created from January-November 2007, an historical record for that period (see chart above).

Bottom Line: Despite $100 oil, a subprime crisis, a somewhat weak U.S. stock market, and constant worries about a U.S. recession, the $9.5 trillion increase in world stock market capitalization during the first 11 months of 2007 was almost as much stock market value as was added in the global bull market, Dot.com years of 1995, 1996, 1997 and 1998 COMBINED. The global economy and the global stock markets are alive and well.

Carpe Diem

2007 Bull Market in the Emerging Markets

Chart above (click to enlarge) is based on 2007 stock returns for the emerging markets, in USD, from MSCI. Note that the return for the US market was 4.1%, measured by MSCI’s US Index, and the S&P500 return with dividends was about 5.4%.

Note also that most returns of these markets, measured in local currency (not displayed here), were less than these returns above measured in US dollars. But the falling dollar (and rising foreign currencies) turned out to be another significant advantage of the weak dollar, at least for U.S. investors holding stocks or mutual funds of emerging markets with appreciating currencies.
Carpe Diem

Santa Claus Front Runner in Economics-Free Zone

Santa Claus may turn out to be the real front-runner in the primaries, judging by the way candidates are vying with one another to give away government goodies to the voters.

We now have a bipartisan tradition of the government stepping in to rescue people who engaged in risky behavior — whether by locating in the known paths of hurricanes in Florida or in areas repeatedly hit by wildfires over the years in California or by gambling in the housing market.

Why not also rescue people who gambled away their life’s savings in Las Vegas? That would at least be consistent.

After the departure of Senator Phil Gramm and House Majority Leader Dick Armey, Congress has been an economics-free zone. There is not one economist among the 535 members of Congress.

But, in an election year, that is not a political handicap. Santa Claus has won far more elections than any economist.

From Thomas Sowell’s article “Santa Claus Politics

Carpe Diem

The Coming Oil Glut and $30 Oil, $1.50 Gas?

The tripling of oil prices since the summer of 2003 has unleashed forces that within the next two or three years will bring oil prices tumbling back down to below $50 a barrel. Looking even further ahead, prices could easily fall to $30 a barrel or even lower.

With prices close to the inflation-adjusted record, energy companies and governments are investing heavily in facilities that generate crude and crude substitutes. Consumers of fuel oil and gasoline are starting to economize, and over time, these changes in behavior will shift the balance of power in their favor. When that happens, an oil glut will emerge, and the price will plummet. So before you trade in your Cadillac Escalade for a Toyota Prius, think twice: $1.50-a-gallon gas might not be gone forever.

Read more here.

(HT: Newmark’s Door)