Moral Hazards of Capitalism

For the upcoming generation of Americans, capitalism does not hold the same cachet as it did for prior generations. A recent survey showed that capitalism as a preferred economic system had dropped from 68% to 49%, despite the clear implosion of "socialist" Venezuela to the south. I believe that the drop in support is caused by an increasing income and wealth gap. In the 1980s, the average CEO made nearly thirty times the average worker. At the present, the spread has moved to nearly three hundred times!

A generational pushback on this seems entirely appropriate. In fact, it is unfortunate that it takes a new set of eyes to identify the unfairness. While it is true that such discrepancies regularly exist between professional sports figures, the assessment of the CEOs performance is a different issue. In professional sports, there is no factor such as the Federal Reserve, to make everyone's score better. By dropping interest rates to support the economy, interest expense goes down and stock prices rise - driving stock options up and richly benefitting CEOs.

The mantra of paying for performance has become so sacred to my generation that little effort has been made to assess how that pay should occur. Warren Buffett recognized early on that stock options had a pernicious effect as they were not recognized in financial statements. Even after they were recognized, their usage had morphed into a necessary item for C-suite compensation packages. Boards and compensation consultants worked together to create highly inflationary C-suite compensation. There is little opposition in the form of money managers and this is only worsening with the prevalence of passively managed funds - and active managers like me who view attempts to control this compensation as futile and thus, unworthy of efforts.

It is unclear to me what the solution could be - short of simply outlawing these complex instruments as a form of executive compensation. That is a radical solution, but surely better than a continuing to damage capitalism's powerful force for lifting standards of living for all.