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When we consider all US ‘chief executives,’ the ‘CEO-to-worker pay ratio’ falls from 331:1 to below 4:1
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Every time that CEO salaries of large companies are reported, there’s always a lot of hand-wringing, criticism of “excessive CEO compensation,” and the inevitable comparisons of rising CEO salaries to stagnant pay for average workers and how that fuels rising income inequality, etc. It must be that time of year again – “CEO bashing season” – because there have been a number of recent news reports about CEO pay in 2014, with the typical comparisons to average worker pay. For example, the Financial Times reported this yesterday:
The average US chief executive earned 295.9 times as much as a typical American worker in 2013, compared with 20 times as much in 1965. The AFL-CIO, the US trade union federation, says that while the chief executive-to-worker average pay ratio is higher in the US than anywhere else in the developed world, countries such as Canada, Germany, France and Sweden have even bigger gaps than the UK.
The ballooning of top-level remuneration has help fuel the debate about growing inequality. Donald Hambrick, professor of management at Pennsylvania State University, says executive pay has created “anger on Main Street that affects capitalism in general.”
A few weeks ago, Hillary Clinton launched her presidential campaign with a populist/progressive attack on CEO pay and lamented that American families face financial hardships at a time “when the average CEO makes about 300 times what the average worker makes.” And Marketplace reported this week that “CEO pay is one of those issues that really gets people’s blood boiling.”
A closer look at the national data on CEO suggests that the American people needn’t get so upset, and politicians, the media and progressives should stop promoting what is clearly a “statistical fallacy.”
While the huge multi-million pay packages of a few hundred CEOs get all of the media attention, what usually receives much less attention is the small number of CEOs represented in the annual salary surveys, especially compared to the total number of CEOs in the US. For example, the WSJ’s executive compenstation survey last year included only 300 CEOs at large, U.S.-traded public companies, and the AP analyzed compensation figures for only 337 companies in the S&P 500 last year. The AFL-CIO did an analysis of the CEOs of 350 companies in the S&P 500 in 2013 and then computed a “CEO-to-worker pay ratio” of 331 times, up from a ratio of 300 ten years ago and 200 twenty years ago.
Although these samples of 300-350 CEOs are representative of large, publicly-traded, multinational US companies, they certainly aren’t very representative of the average US company or the average US CEO. According to both the BLS and the Census Bureau, there are more than 7 million private firms in the US, so the samples of 300-350 firms for CEO pay represent only one of about every 21,500 private firms in the US, or about 1/200 of 1% of the total number of US firms. And yet the AFL-CIO, Financial Times, AP, the WSJ and others compare the average annual wages of hundreds of millions of full-time employees working at the more than 7 million US companies to the CEO pay of executives at only several hundred companies, which is hardly a fair comparison.
We can get a more accurate and complete picture of CEO compensation in the US by looking at wage data released recently by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2014. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups, 94 minor occupational groups, 458 broad occupations, and 821 detailed occupations,” including the occupational category “chief executives.” In 2014, the BLS reports that the average pay for America’s 246,240 chief executives was only $180,700. The CEOs of the 300-350 S&P 500 firms that supposedly represent typical CEO compensation represent only one out of about every 820 firms in the country (or 1/7 of 1%) that have a CEO at the head. The larger sample of almost a quarter-million CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”
For the larger sample of CEOs reported by the BLS, their average pay of $180,700 last year was an increase of only 1.3% from the average CEO pay of $178,400 in 2013. In contrast, the BLS reports that the average pay of all workers increased by 1.7% last year to $47,230 from $46,440 in 2013. That’s right, the average worker last year saw an increase in their pay that was more than 30% greater than the increase in pay for the average US CEO.
And the “CEO-to-worker pay ratio” for the average CEO compared to the average worker was only 3.83 times last year (see chart above), nowhere close to the pay ratio of 331X reported by the AFL-CIO using the 350 highest-paid CEOs in the country. Call it a “statistical falsehood-to-truth ratio” of 87-to-1 for the AFL-CIO’s exaggerated, bogus ratio. The chart above also shows that the real CEO-to-worker pay ratio has not been increasing as is frequently reported, but instead has been remarkably constant over the last 13 years, averaging 3.8-to-1 in a tight range between a maximum of 3.89-to-1 in 2004 and a minimum of 3.69-to-1 in both 2005 and 2006. The ratio of 3.83-to-1 in the most recent year (2014) was actually the lowest CEO-to-worker ratio in six years, since 2008.
Bottom Line: Discussions about “excessive CEO pay” and comparisons to average worker pay are distorted by looking at only an outlier group of the 300-350 CEOs of America’s largest, multinational companies, out of a total of almost 250,000 chief executives nationwide. Of course, many younger, risk-taking CEOs are running early stage startups and tech companies, and probably make even less than the average CEO reported by the BLS, as Scott Drum pointed out to me in a recent email. Further, he commented that “The startup CEOs are usually not in it for the salary in the early years. They’re in it for the big payoff in the long run if things go exceptionally well. If we reduce or limit the size of the Big Payoff, don’t we reduce the number of people trying to get there?”
The fact that there are almost 250,000 ambitious CEOs making less than $200,000 today on average who are trying to someday be listed by the AFL-CIO or the Wall Street Journal as one of the top 300-350 highest-paid CEOs is a sign of a dynamic, wealth-generating, job-creating economy. We should applaud the richest 300-350 CEOs as a group of the most successful American business professionals, and not vilify them. And we should keep in mind that the CEO compensation surveys that generate all the media attention are always based on a tiny, elite outlier group, and not representative of the average CEO in America – who earns about as much as the average dentist and less than four times more than the average worker.
Creative destruction: Newspaper ad revenue continued its precipitous free fall in 2014, and it’s likely to continue
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For the last several years, I’ve been regularly posting charts like the one above showing the history of US newspaper advertising revenue back to 1950, based on data from the Newspaper Association of America. Those charts have been noteworthy for several reasons.
First, more than any of the hundreds of charts and graphs that I’ve created and posted on Carpe Diem over the last seven years, the newspaper ad revenue charts have received the most attention by far. Those charts have been featured on so many other blogs and websites that a recent Reuters article referred to a recent version as a “much-reproduced chart.” If you do a Google image search for “newspaper ad revenue,” you’ll see many versions of the CD chart above. I hope this is a testament to how powerful and compelling the graphical representation of data can be!
Second, it’s possible that the attention the ad revenue charts were generating on the Internet may have contributed to the decision by the Newspaper Association of America (NAA) in 2013 to suddenly stop its long-standing practice of reporting quarterly advertising revenue data, and switch to releasing only annual data (not yet available from NAA for 2014, but available here from BIA/Kelsey). In a 2013 interview, NAA CEO Caroline Little was quoted as saying that she and the organization’s board decided it was time to stop beating themselves up four times a year with the negative numbers.”
The updated chart above shows annual data from 1950 to 2014 in inflation-adjusted (2014) dollars. The blue line represents total annual print newspaper advertising revenue (for the three categories national, retail, and classified), and appear in the chart as billions of constant 2014 dollars. Newspaper print advertising revenues of just $16.4 billion in 2014 fell to the lowest level of print advertising since the NAA started tracking industry data in 1950. In constant 2014 dollars, advertising revenues last year were $3.6 billion (and 18%) below the $20 billion spent in 1950, 62 years ago. In fact, inflation-adjusted print advertising revenues have been below the 1950 level for the last three years: 2012 ($19.5 billion), 2013 ($17.6 billion) and 2014 ($19.5 billion).
The decline in print newspaper advertising to a 64-year low in 2014 is pretty amazing by itself, but the sharp decline in recent years is stunning. Newspaper print advertising revenues decreased more than 57% in just the last six years, from $38.15 billion in 2008 to only $16.4 billion last year; and by more than 75% from the $67 billion peak in 2000 (see chart).
Here’s another perspective: It took a half century for annual newspaper print ad revenue to gradually increase from $20 billion in 1950 (adjusted for inflation in 2014 dollars) to $67 billion in 2000, and then it took only 12 years to go from $65.8 billion in ad revenues back to less than $20 billion in 2012, before falling even further in 2013 and 2014.
Even when revenues from digital advertising are added to print ad revenue (see red line in chart), the combined revenues for print and digital advertising last year were still only $19.9 billion, which was 2.5% below the 1950 level of $20.4 billion. Last year was noteworthy because it marked the first year in history that total newspaper revenue (print + digital) fell below the 1950 level in inflation-adjusted dollars.
Economic Lesson: The dramatic decline in newspaper ad revenues since 2000 has to be one of the most significant and profound Schumpeterian gales of creative destruction in the last decade, maybe in a generation. And it’s not even close to being over. A 2011 IBISWorld report on “Dying Industries” identified newspaper publishing as one of ten industries that may be on the verge of extinction in the United States.
Energy superpower ‘Saudi America’ has been the world’s largest petroleum producer for 26 months in a row
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The Energy Information Administration (EIA) released new data today on international energy production for the months of November and December 2014, and here are some highlights of that update:
1. For the 26th month in a row starting in November 2012, “Saudi America” took the top spot again last December as the No. 1 petroleum producer in the world. Also, for the 26th straight month, total petroleum production (crude oil and other petroleum products like natural gas plant liquids, lease condensate, and refined petroleum products) in the US during the month of December at 14.83 million barrels per day (red line in chart) exceeded petroleum production in No. 2 Saudi Arabia (11.52 million barrels per day, see red line in chart).
2. During the 2004-2008 period before America’s shale oil and gas boom started, Saudi Arabia routinely produced 2–3 million more barrels of petroleum products per day than the US (see blue arrow in chart). But since America’s shale revolution started around 2009 when America’s “petropreneurs” started accessing oceans of shale oil and gas with revolutionary drilling and extraction technologies, there has been a surge of more than 60% in the supply of petroleum produced in the US, and America surpassed Saudi Arabia at the end of 2012 to become the world’s No. 1 petroleum producer. In December, production of US petroleum products (14.83 million bpd) exceeded Saudi Arabia’s output (11.52 million bpd) by 3.3 million bpd (see red arrow in chart), which is the biggest difference in favor of the US during the 20-year history of international production data from the EIA (see chart).
3. On an annual basis, America’s total petroleum production exceeded 5.1 billion barrels last year compared to Saudi Arabia’s 4.2 billion barrels of production, which means that “Saudi America” out-produced Saudi Arabia in 2014 by 857 million barrels for total oil supply.
Bottom Line: The new EIA data on international petroleum production through December provides more evidence that America’s shale energy revolution is taking the US from “resource scarcity” to a new era of “resource abundance.” The shale revolution has transformed the US into a formidable energy superpower and we now consistently produce a greater “total oil supply” than Saudi Arabia (by more than 3M bpd in both November and December) and have led the world in total petroleum production for 26 straight months. This energy bonanza in the US — described as the “energy equivalent of the Berlin Wall coming down” — would have been largely unthinkable even six years ago. But then thanks to revolutionary drilling and extraction techniques that were developed by American “petropreneurs” and are “made in the USA,” vast oceans of previously locked shale oil and gas have been accessed across the country, making the US the world’s No. 1 petroleum producer for 26 months running.
Related: Based on the international oil production data released today, Texas as a separate oil-producing country would have been the 7th largest crude oil-producing nation in the world in December at 3.46 million bpd – just behind No. 6 Canada’s production of 3.67 million bpd.
Minimum wage workers tend to be young, single, part-time workers with less than a high school diploma
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The Bureau of Labor Statistics just released its annual report on the “Characteristics of Minimum Wage Workers, 2014,” and here are some highlights:
Age. For workers ages 16 to 19 years old, only 15.3% made the minimum wage or less in 2014 (about 1 in every 6.5 workers in that age group) and almost 85% of those workers earned more than the federal minimum wage last year. For workers ages 25 and older, only 2.5% (1 in 40) earned the federal minimum wage or less last year. So even the vast majority of teenagers (more than 8 of every 10) earn more than the federal minimum wage.
Education. For workers with less than a high school diploma, 7.3% of those workers earned the minimum wage last year, compared to 3.5% (1 in 29) of high school graduates, 2.2% (1 in 45) of workers with an associate’s degree and fewer than 2% of workers (about 1 in 53) with a bachelor’s degree or higher who earned the minimum wage last year.
Marital Status. For never married workers, who tend to also be young, 6.7% of that cohort worked last year at the minimum wage, compared to only 1.9% (about 1 in 53) of married workers with a spouse present who worked at the minimum wage in 2014.
Hours Worked. Among full-time workers only 1.8% (1 in 56) earned the minimum wage or less, compared to 9.5% (1 in 11) of part-time workers.
Bottom Line: Four important factors that will help workers earn a wage above the federal minimum wage are: 1) age (experience), 2) education, 3) marital status and 4) hours worked. Only 1-in-40 workers age 25 and above make the minimum wage, only 1-in-45 workers with an associate’s degree or higher makes the minimum wage, only 1-in-53 married workers earns the minimum wage, and only 1-in-56 workers working full-time earns the minimum wage. The evidence seems clear that the minimum wage applies only to a very small group of young, inexperienced, single, part-time workers, with a lack of education. The path to higher wages includes staying in school, getting job experience, working full-time and getting married. Raising the minimum wage will make that path to higher wages more difficult, not easier, because it will price many younger, less-educated, less experienced workers out of the labor market — and will deny them the opportunity to work, gain experience, and gain the job skills they need that paves the path to higher wages.
How about a ‘Capitalism Day’ to balance ‘Earth Day’ to remind us of what’s behind environmental improvements
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In a great editorial in 2009 (excerpts appear below), Investor’s Business Daily reminded us of the main, but unrecognized force that has driven the environmental improvements that have taken place since the first Earth Day in 1970 – capitalism, and the wealth generated by the free market. Schools all over America today will celebrate Earth Day, and students nationwide will get a heavy dose of the anti-market, pro-government message that motivates Earth Day. They’ll probably hear all about the evils of free market capitalism and its role in harming the environment, and learn that the only solutions to environmental issues are market-suppressing, heavy-handed government regulations. As Steven Landsburg observed, the messages about the environment delivered in most schools today inculcate the very dangerous substitution of biases for analysis.
To complement and offset the environmental hysteria promoted by Earth Day, IBD suggested an annual event called “Capitalism Day.” What a great idea, especially if Capitalism Day was given “equal time” in our schools nationwide to provide some academic balance for Earth Day, but whose time unfortunately will probably never come…….
Today’s airwaves, print media, cable news shows and Webosphere will be filled with nonsense about the scourge of capitalism, corporations and humanity. All of it will ignore the real truth. Buried beneath all the badgering and fear-mongering about lavish Western lifestyles is a reality that the stuck-on-green left won’t talk about and the average American isn’t aware of: The world, especially in developed nations, is a cleaner — and greener — place than it was when the environmental movement began.
We’re not saying the Earth, or even any part of it, is environmentally pristine. It’s not, it never has been and never will be. Yet there’s actually more positive news to celebrate than there are problems. Of the estimated 1 billion people who will observe Earth Day worldwide this year, few will know about the progress that has been made. Fewer still will know how it was made. The media, uninterested in looking at the real story, will simply credit the environmental movement for the improvements.
We won’t discount the movement’s contribution. Four decades ago, it helped show the world the value of global stewardship. But that movement is no longer interested in a cleaner world. Filled with extremists and anti-capitalist crusaders, its primary goals have changed. Topping the agenda of today’s environmentalist groups is the pulling down of market economies, the raising up of central planning for egalitarian goals, forced lifestyle changes and the vilification — in hopes of the elimination — of signs of wealth.
None of these advance the planet’s environmental health. But capitalism has. Through wealth generated by the free market, we have enough resources to move beyond the subsistence economies that damage the environment, enough disposable income to fund clean-up programs, enough wealth to scrub and polish industry. Only in advanced economies can the technology needed to recycle hazardous waste or to replace dirty coal-fired power plants with cleaner gas or nuclear plants be developed. That technology cannot be produced in centrally planned economies where the profit motive is squelched and lives are marshalled by the state.
There’s nothing wrong with setting aside a day to honor the Earth. In fairness, though, it should be complemented by Capitalism Day. It’s important that the world be reminded of what has driven the environmental improvements since Earth Day began in 1970.
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In the video above from their Showtime series, Penn and Teller discuss recycling (some profanity) and explain why they conclude that “recycling is bullshit.”
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A great Dilbert cartoon for Earth Day, with some wisdom from Dogbert, as Ben Zycher pointed out today in his article for AEI titled “Earth Day and the Celebration of Suffering,” here’s the opening:
In honor of this 45th anniversary of the first Earth Day, let us recall the wisdom of Dogbert, that noted political philosopher and sage observer of the human condition: “You can’t save the earth unless you’re willing to make other people sacrifice.”
As the old saying goes, truer words were never spoken. Earth Day brings each year a worldwide religious celebration at which large masses of people both right-thinking and affluent proclaim their devotion to Gaia and their love of humanity, while displaying their contempt for the lives and well-being of actual people, the poorest among them in particular.
The whole article is worth reading, you’ll find it here.
Recommended reading for Earth Day: ‘Recycling is garbage’ from the NYTimes in 1996; it set the record for hate mail
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Today is Earth Day and to recognize that annual environmental holy day, I recommend reading the classic 1996 New York Times Magazine article titled “Recycling is Garbage” by New York Times science columnist John Tierney, especially if you’re one of the millions of Americans who suffer from “garbage guilt” — one of the religious components of recycling according to Tierney.
Tierney’s controversial argument that he made back in 1996 is this: recycling may be the most wasteful activity in modern America. “Rinsing out tuna cans and tying up newspapers may make you feel virtuous, but it’s a waste of time and money, a waste of human and natural resources.” Now you can understand why Tierney’s article set the all-time record for the greatest volume of hate mail in the history of the New York Times Magazine. Here are some excerpts of the John Tierney classic “Recycling is Garbage“:
On recycling as a religious experience:
…. the public’s obsession wouldn’t have lasted this long unless recycling met some emotional need. Americans have embraced recycling as a transcendental experience, an act of moral redemption. We’re not just reusing our garbage; we’re performing a rite of atonement for the sin of excess.
On resource scarcity:
We’re [supposedly] squandering irreplaceable natural resources. Yes, a lot of trees have been cut down to make today’s newspaper. But even more trees will probably be planted in their place. America’s supply of timber has been increasing for decades, and the nation’s forests have three times more wood today than in 1920. “We’re not running out of wood, so why do we worry so much about recycling paper?” asks Jerry Taylor, the director of natural resource studies at the Cato Institute. “Paper is an agricultural product, made from trees grown specifically for paper production. Acting to conserve trees by recycling paper is like acting to conserve cornstalks by cutting back on corn consumption.”
Some resources, of course, don’t grow back, and it may seem prudent to worry about depleting the earth’s finite stores of metals and fossil fuels. It certainly seemed so during the oil shortages of the 1970s, when the modern recycling philosophy developed. But the oil scare was temporary, just like all previous scares about resource shortages. The costs of natural resources, both renewable and nonrenewable, have been declining for thousands of years. They’ve become less scarce over time because humans have continually found new supplies or devised new technologies. Fifty years ago, for instance, tin and copper were said to be in danger of depletion, and conservationists urged mandatory recycling and rationing of these vital metals so that future generations wouldn’t be deprived of food containers and telephone wires. But today tin and copper are cheaper than ever. Most food containers don’t use any tin. Phone calls travel through fiber-optic cables of glass, which is made from sand — and should the world ever run out of sand, we could dispense with wires altogether by using cellular phones.
On “human time” as a precious, non-renewable, scarce resource:
The only resource that has been getting consistently more expensive is human time: the cost of labor has been rising for centuries. An hour of labor today buys a larger quantity of energy or raw materials than ever before. To economists, it’s wasteful to expend human labor to save raw materials that are cheap today and will probably be cheaper tomorrow. Even the Worldwatch Institute, an environmental group that strongly favors recycling and has often issued warnings about the earth’s dwindling resources, has been persuaded that there are no foreseeable shortages of most minerals. “In retrospect,” a Worldwatch report notes, “the question of scarcity may never have been the most important one.”
On the enduring myth that “it is better to recycle than to throw away“:
That enduring myth remains popular even among those who don’t believe in the garbage crisis anymore. By now, many experts and public officials acknowledge that America could simply bury its garbage, but they object to this option because it diverts trash from recycling programs. Recycling, which was originally justified as the only solution to a desperate national problem, has become a goal in itself — a goal so important that we must preserve the original problem. Why is it better to recycle? The usual justifications are that it saves money and protects the environment. These sound reasonable until you actually start handling garbage.