Paul Krugman and the "Monday Night Football" theory of CEO pay

A few years ago, Paul Krugman heard an explanation for rising CEO pay that he's never forgotten. It came from a businessman Krugman doesn't name, and it revolved around, of all things, Monday Night Football:

His story went like this: when games started being televised, the financial rewards to winning teams shot up, and star players began being offered big salaries. And CEOs, who watch a lot of football, noticed — and started saying to themselves, "Why not me?" If salaries were set in any kind of competitive marketplace, that wouldn’t have mattered, but they aren’t — CEOs appoint the committees that decide how much they’re worth, and are restrained only by norms about what seems like too much. Football, so my conversation partner averred, started the breakdown of those norms, and we were off to the races.

By the way, the timing is about right.

The football thing is fun, but Krugman's real point has to do with one of the ways income data potentially misleads us:

[T]he eruption of top incomes that began around 40 years ago need not have solid causes — it could be a case of contagious norms-breaking. This might also explain why movements of top incomes are so different in different countries, with the most obvious determinant being whether you speak English; think of it as an epidemic of broken windows in the United States, which spreads to countries that are culturally close to America but not so much elsewhere.

If you look at a chart of CEO pay, you can identify a fairly precise moment when it began to skyrocket:

Economic Policy Institute

It's natural to look at this chart and ask what happened in the early 1990s that let CEO pay go so nuts. What Krugman is saying is that nothing happened in the early 1990s. It wasn't some new policy or disruptive technology. Rather, the conditions that made it possible for CEO pay to skyrocket might have been around for a long time before the 1990s, but CEO pay held steady because of social norms — because paying a CEO so much money just wasn't done.

To think about the difference here, consider that for much of the post–World War II era, paying your CEO a lot of money didn't make much sense because the government would simply tax it all away. Top marginal tax rates on income were above 90 percent:

VisualizingEconomics.com

President Ronald Reagan's tax cuts sent those top rates tumbling, and so a CEO who could negotiate a much bigger salary could also keep a much bigger salary. As Josh Bivens and Larry Mishel argue in an interesting paper on this topic, this gave CEOs more incentive to fight for higher pay. But it still took about a decade for CEO pay to really take off — and that was probably because, for much of that decade, social norms kept CEO pay down.

Eventually, though, some CEO who was a bit brasher than the rest, and had a more compliant board of directors, broke the norm. And once he broke the norm, every other CEO needed to keep up. At that level, after all, money isn't about putting food on the table; it's about showing what you're worth. If you're paid less than another CEO, it means you're worth less than the other CEO. People often think CEOs are greedy, and perhaps they are — but what they're greedy for is respect and status, not just money.

It reminds me, oddly enough, of the rise of the filibuster in the US Senate:

Javier Zarracina/Vox

It would be natural to look at this chart and assume that the Senate rules changed at some point — that something happened to make filibusters dramatically easier. But there was no rule change that led the filibuster to explode starting in the 1990s. Rather, the filibuster was always there in a form that could be easily abused, but senators didn't abuse it.

Then, in the 1990s, the number of filibusters began to pick up, and once that happened it kept going up — the norm against filibusters was broken, and so there was no reason for anyone to exercise restraint. Nothing about the filibuster itself had actually changed, but everything about how members of the Senate perceived it had.

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