7 ms·

The growing size of firms may help to explain rising inequality

51 points by sebgr 12y ago

deleted 12y ago
[deleted]
PaulHoule 12y ago
I've wondered if 401k plans and IRAs have held back small businesses because people could have spent the money to start their own businesses; it is horribly difficult to beat an S&P 500 index fund, but the popularity of those funds mean a lot of people are spraying money at them.
- maxerickson 12y ago
  Do you think they've displaced a significant amount of savings? (They've displaced things like pension programs, but those are even less flexible)
  - bcg1 12y ago
    The hidden fees of 401k plans have been displaced to Wall St firms unbeknownst to most participants because they don't show up on statements, and because the balance that people see on their statements give an inflated sense of how much they have saved, even though they still need to pay taxes when they withdraw. It also diverts money away from more conservative long term investments in tangible wealth like real estate and into the stock market, so people are less diversified and lose out when the markets go down. 401k's really only let you take long positions, while financial firms can take either side of the trade... you can reason out who the winner will be in that situation.
    - Consultant32452 12y ago
      Those things aren't significantly different compared to pensions. In a pension your pension fund will be paying wall street fees. You have even less control to be able to do things like invest in real estate with a pension. At least in a 401k plan you can potentially invest in mutual funds that are proxies for real estate. I have an IRA through my employer (which happens to be my own company, but that's irrelevant). I can bet against the market via ETFs if I want in my IRA. Your employer just chooses a plan for you with crap flexibility. I think the biggest change has really been the social acceptance of massive consumer debt. I cringe so hard every time I hear someone say something like, "I paid down my credit card a bit so I could buy that new XBox." People didn't used to live that way and the removal of pensions had nothing to do with that. I would still put a lot of blame on Wall Street there, but not because of fees on retirement plans.
      - bcg1 12y ago
        I agree with you... my statements were actually specifically about 401k's, and whether or not they contribute to capital misallocation. Almost all 401k plans are much more restrictive than IRA accounts. Personally I think that a self-directed IRA is a fantastic vehicle where you can buy actual real estate etc, but they are so far outside the norm that they almost don't exist when speaking in generalities. I also agree about the social acceptance of consumer debt. They say you learn from your mistakes, and boy have I done a lot of learning. Resolving to get and stay out of debt is a life changing decision for sure.
- sliverstorm 12y ago
  401k's and IRA's are not obligatory. If you wanted to invest your money to start your own business, no one is forcing you to put that seed money in a retirement account. Plus Roth IRA's can be withdrawn from at any time... And, even if retirement accounts do impinge a bit on things like small businesses, do remember that stable retirement prospects are a social good.
  - PaulHoule 12y ago
    In theory, but in practice the tax deferred retirement plans are doing very little for the median American.
- AceJohnny2 12y ago
  As I understand, this is exactly what manipluating the federal interest rate is about targeting: they're changing the incentives on different investment types. When federal interest rates are low, this pushes people to search for other (riskier) investments. Also, I wonder if 401ks and IRAs have that much weight in the grander view of "invested" money saved away, considering their tax-deductability, and thus appeal as a savings plan, is limited and constrained (this year: $18k for a 401k, $5.5K ($6.5K if you're over 50) for IRAs).
littletimmy 12y ago
There is one piece of received wisdom in this article which is particularly problematic: "But managing a multinational firm such as Walmart requires a different—and much rarer—set of skills than that required to run a corner store." This is simply not true. Executive skill is very highly overrated. There is no "magic" these overpaid executives have that uniquely enables them to run large companies. This received wisdom probably comes from the efficient-market hypothesis, in the sense that if executives are paid so highly it must be that there skills are amazing and valuable. This need not be true. It may very well be due to a mix of cronyism, posturing, and self-promotion. Let's end this nonsense of executives being the crème de la crème of intellectual superiority.
- vannevar 12y ago
  Yes, this is an excellent point which has application in many contexts. We simply don't know how rare the skills are, because the positions are so rare. There might be 100 million people who could do the job at Walmart, but there are not 100 million Walmarts. There aren't even 100 million paths to get to the CEO position, and while there is certainly some economic Darwinism at play in determining who gets on those paths, I suspect that it's overwhelmed by noise as people carom around the socio-economic network like the balls in a lottery machine.
- PaulHoule 12y ago
  One area where executives are exceptional is in social skills. You have to know how to get instant trust from just about anybody, and when they are talking with anyone they can make that person feel important. You also need to never decompensate under pressure. Other than that there aren't any specific job requirements, you could be the CEO of a company like General Motors and not know a lot about cars because you've got plenty of people around you.
  - jessaustin 12y ago
    You might be right, but the social skills you've described don't sound all that valuable to either the firm or society as a whole. We would benefit from a model for the organization of investment that doesn't promote these particular individuals to the top.
zeidrich 12y ago
I think this makes a lot of simple sense. Say you are a service company. You have 20 employees, and one manager. The manager makes twice as much as the employees, because customarily managers make more than their subordinates. In a small business, the manager is the owner, and his salary is twice as much as the average worker. Now say you are a bigger business, and you have multiple outlets in the region. Your regional manager manages 20 outlet managers, the 20 managers each manage 20 employees. Your regional manager makes twice as much as the outlet managers because managers make more than their subordinates. Now say you are a national business, and you have 20 regions each with 20 outlets per region. Your national manager manages 20 regional managers. Your national manager gets paid twice as much as the regional managers. And say you're an international business, and you have a presence in 20 countries each with multiple regions with multiple outlets. You manage all of the national managers, and so you get paid twice as much as them. The small business has a situation where the business owner makes twice as much as the employees. The international business has a situation where the top of the management chain makes 32 times as much as the employees. That's using a really simplified model, but the larger the business, the more layers of management will likely exist, and we have a system where management expects to get proportionally more money than those they manage. That's discounting any human or sociological factors that might contribute. I think the biggest change that could correct this issue would be to do away with the idea that your boss makes more money that you is just a given.
- notahacker 12y ago
  With public companies it's more a case of what a remuneration committee - itself composed of multimillionaires - has to take all this into account when approving the salary package when their preferred candidate for CEO has requested an additional $X million If the less preferred CEO candidate is marginally less efficient in maximising profit it costs the firm $XX million. A botched acquisition costs $XX-XXX million. Misguided strategic changes could cost $Xbillion over the next few years and be irreversible. If the markets disapprove of the less-preferred CEO candidate their appointment might even wipe $XX million off the share price overnight, before they've even had a chance to act. How much the lower echelons of staff able only to affect the performance of their own department earn doesn't even enter the calculus, except perhaps to note that the new CEO can certainly justify $X million more if he's really good about identifying which areas those staff need to be cut.
zsombor 12y ago
Someone from the top 5% is more likely to hold their a wealth in equities, then the Average Joe from of the 50%. The top percentiles may be paid more, but they are likely to make far more in the long term on their investments anyways. In this sense inequality is unavoidable fact of life. Much the same as some people are gifted with genes making them more likely winners in a long distance running contest. Unequal but hardly unfair as long as a fulfilling life is possible regardless of such deficiencies. The problem should be phrased in terms of opportunities and social mobility, instead of inequality.
bcg1 12y ago
Well duh... is it really a surprise that the consolidation of wealth and the consolidation of firms owned by the wealthy is correlated? Next you're going to try to tell me that this is correlated to their undue influence over the political system... It is ironic that a publication owned by the Rothschild family is espousing these views.
stolio 12y ago
Well. If the average size of firms has gone up so has market concentration. Market concentration brings market power, market power brings arrangements that favor those who hold that power. In general, markets with low concentration are defined by competition while markets with high concentration are defined by power. For measures of concentration see the HHI or the concentration ratios. [0] - http://en.wikipedia.org/wiki/Herfindahl_index http://en.wikipedia.org/wiki/Herfindahl_index [1] - http://en.wikipedia.org/wiki/Concentration_ratio http://en.wikipedia.org/wiki/Concentration_ratio
ErikRogneby 12y ago
I find it enormously ironic that when I went to this link it popped a modal with a Rolex ad.
prawn 12y ago
I often wonder if the world would be a better or worse place if (somehow) companies were limited to something like 5,000 employees. Is there a threshold which allows diversity and efficiency but restricts dominance?

51 points by sebgr 12y ago

deleted 12y ago

[deleted]

I've wondered if 401k plans and IRAs have held back small businesses because people could have spent the money to start their own businesses; it is horribly difficult to beat an S&P 500 index fund, but the popularity of those funds mean a lot of people are spraying money at them.

maxerickson 12y ago
Do you think they've displaced a significant amount of savings? (They've displaced things like pension programs, but those are even less flexible)
- bcg1 12y ago
  The hidden fees of 401k plans have been displaced to Wall St firms unbeknownst to most participants because they don't show up on statements, and because the balance that people see on their statements give an inflated sense of how much they have saved, even though they still need to pay taxes when they withdraw. It also diverts money away from more conservative long term investments in tangible wealth like real estate and into the stock market, so people are less diversified and lose out when the markets go down. 401k's really only let you take long positions, while financial firms can take either side of the trade... you can reason out who the winner will be in that situation.
  - Consultant32452 12y ago
    Those things aren't significantly different compared to pensions. In a pension your pension fund will be paying wall street fees. You have even less control to be able to do things like invest in real estate with a pension. At least in a 401k plan you can potentially invest in mutual funds that are proxies for real estate. I have an IRA through my employer (which happens to be my own company, but that's irrelevant). I can bet against the market via ETFs if I want in my IRA. Your employer just chooses a plan for you with crap flexibility. I think the biggest change has really been the social acceptance of massive consumer debt. I cringe so hard every time I hear someone say something like, "I paid down my credit card a bit so I could buy that new XBox." People didn't used to live that way and the removal of pensions had nothing to do with that. I would still put a lot of blame on Wall Street there, but not because of fees on retirement plans.
    - bcg1 12y ago
      I agree with you... my statements were actually specifically about 401k's, and whether or not they contribute to capital misallocation. Almost all 401k plans are much more restrictive than IRA accounts. Personally I think that a self-directed IRA is a fantastic vehicle where you can buy actual real estate etc, but they are so far outside the norm that they almost don't exist when speaking in generalities. I also agree about the social acceptance of consumer debt. They say you learn from your mistakes, and boy have I done a lot of learning. Resolving to get and stay out of debt is a life changing decision for sure.
sliverstorm 12y ago
401k's and IRA's are not obligatory. If you wanted to invest your money to start your own business, no one is forcing you to put that seed money in a retirement account. Plus Roth IRA's can be withdrawn from at any time... And, even if retirement accounts do impinge a bit on things like small businesses, do remember that stable retirement prospects are a social good.
- PaulHoule 12y ago
  In theory, but in practice the tax deferred retirement plans are doing very little for the median American.
AceJohnny2 12y ago
As I understand, this is exactly what manipluating the federal interest rate is about targeting: they're changing the incentives on different investment types. When federal interest rates are low, this pushes people to search for other (riskier) investments. Also, I wonder if 401ks and IRAs have that much weight in the grander view of "invested" money saved away, considering their tax-deductability, and thus appeal as a savings plan, is limited and constrained (this year: $18k for a 401k, $5.5K ($6.5K if you're over 50) for IRAs).

littletimmy 12y ago

There is one piece of received wisdom in this article which is particularly problematic: "But managing a multinational firm such as Walmart requires a different—and much rarer—set of skills than that required to run a corner store." This is simply not true. Executive skill is very highly overrated. There is no "magic" these overpaid executives have that uniquely enables them to run large companies. This received wisdom probably comes from the efficient-market hypothesis, in the sense that if executives are paid so highly it must be that there skills are amazing and valuable. This need not be true. It may very well be due to a mix of cronyism, posturing, and self-promotion. Let's end this nonsense of executives being the crème de la crème of intellectual superiority.

vannevar 12y ago
Yes, this is an excellent point which has application in many contexts. We simply don't know how rare the skills are, because the positions are so rare. There might be 100 million people who could do the job at Walmart, but there are not 100 million Walmarts. There aren't even 100 million paths to get to the CEO position, and while there is certainly some economic Darwinism at play in determining who gets on those paths, I suspect that it's overwhelmed by noise as people carom around the socio-economic network like the balls in a lottery machine.
PaulHoule 12y ago
One area where executives are exceptional is in social skills. You have to know how to get instant trust from just about anybody, and when they are talking with anyone they can make that person feel important. You also need to never decompensate under pressure. Other than that there aren't any specific job requirements, you could be the CEO of a company like General Motors and not know a lot about cars because you've got plenty of people around you.
- jessaustin 12y ago
  You might be right, but the social skills you've described don't sound all that valuable to either the firm or society as a whole. We would benefit from a model for the organization of investment that doesn't promote these particular individuals to the top.

zeidrich 12y ago

I think this makes a lot of simple sense. Say you are a service company. You have 20 employees, and one manager. The manager makes twice as much as the employees, because customarily managers make more than their subordinates. In a small business, the manager is the owner, and his salary is twice as much as the average worker. Now say you are a bigger business, and you have multiple outlets in the region. Your regional manager manages 20 outlet managers, the 20 managers each manage 20 employees. Your regional manager makes twice as much as the outlet managers because managers make more than their subordinates. Now say you are a national business, and you have 20 regions each with 20 outlets per region. Your national manager manages 20 regional managers. Your national manager gets paid twice as much as the regional managers. And say you're an international business, and you have a presence in 20 countries each with multiple regions with multiple outlets. You manage all of the national managers, and so you get paid twice as much as them. The small business has a situation where the business owner makes twice as much as the employees. The international business has a situation where the top of the management chain makes 32 times as much as the employees. That's using a really simplified model, but the larger the business, the more layers of management will likely exist, and we have a system where management expects to get proportionally more money than those they manage. That's discounting any human or sociological factors that might contribute. I think the biggest change that could correct this issue would be to do away with the idea that your boss makes more money that you is just a given.

notahacker 12y ago
With public companies it's more a case of what a remuneration committee - itself composed of multimillionaires - has to take all this into account when approving the salary package when their preferred candidate for CEO has requested an additional $X million If the less preferred CEO candidate is marginally less efficient in maximising profit it costs the firm $XX million. A botched acquisition costs $XX-XXX million. Misguided strategic changes could cost $Xbillion over the next few years and be irreversible. If the markets disapprove of the less-preferred CEO candidate their appointment might even wipe $XX million off the share price overnight, before they've even had a chance to act. How much the lower echelons of staff able only to affect the performance of their own department earn doesn't even enter the calculus, except perhaps to note that the new CEO can certainly justify $X million more if he's really good about identifying which areas those staff need to be cut.

zsombor 12y ago

Someone from the top 5% is more likely to hold their a wealth in equities, then the Average Joe from of the 50%. The top percentiles may be paid more, but they are likely to make far more in the long term on their investments anyways. In this sense inequality is unavoidable fact of life. Much the same as some people are gifted with genes making them more likely winners in a long distance running contest. Unequal but hardly unfair as long as a fulfilling life is possible regardless of such deficiencies. The problem should be phrased in terms of opportunities and social mobility, instead of inequality.

bcg1 12y ago

Well duh... is it really a surprise that the consolidation of wealth and the consolidation of firms owned by the wealthy is correlated? Next you're going to try to tell me that this is correlated to their undue influence over the political system... It is ironic that a publication owned by the Rothschild family is espousing these views.

stolio 12y ago

Well. If the average size of firms has gone up so has market concentration. Market concentration brings market power, market power brings arrangements that favor those who hold that power. In general, markets with low concentration are defined by competition while markets with high concentration are defined by power. For measures of concentration see the HHI or the concentration ratios. [0] - http://en.wikipedia.org/wiki/Herfindahl_index http://en.wikipedia.org/wiki/Herfindahl_index [1] - http://en.wikipedia.org/wiki/Concentration_ratio http://en.wikipedia.org/wiki/Concentration_ratio

ErikRogneby 12y ago

I find it enormously ironic that when I went to this link it popped a modal with a Rolex ad.

prawn 12y ago

I often wonder if the world would be a better or worse place if (somehow) companies were limited to something like 5,000 employees. Is there a threshold which allows diversity and efficiency but restricts dominance?