Out-of-Town Speeders

At the beginning of the year, there was a test question that asked you to discuss the economics behind the decision to speed on the highway. Well, a study cited in The Atlantic Monthly reveals another aspect that should be added to the marginal analysis. They confirm what many suspect, which is that people from out-of-town get speeding tickets more often than locals.

An out-of-town driver stopped by a police officer in any given area has a 51 percent chance of getting slapped with a fine, versus 30 percent for a local, and the average fine for an out-of-towner is $5 higher.

In fact,

The poorer the town (in terms of property-tax receipts), the more likely its cops are to target drivers passing through; fines also increase the farther away drivers live, since distance makes them less likely to contest the ticket.

Any guesses at the reasons for this?
(Source: Cafe Hayek)

Timbaland can teach you Economics

There is a new blog that discusses teaching economics through music. They take music from popular song lyrics and then ask questions on the economics behind the song lyrics.

Here are links to a few interesting ones:
Luxurious by Gwen Stefani
The Way It Is / Changes by Tupac Shakur (sampling Bruce Hornsby)
Taxman by The Beatles (relevant to the Laffer curve discussion to continue with our theme in the last few posts)
And because it's Weezer -- Beverly Hills by Weezer

Are there any songs you're currently listening to on your iPod that include some economics in the lyrics? Bonus points for good song suggestions with the relevant lyrics listed.

(Source: Tim Schilling)

The Current State of Supple-Side Economics

In a recent NY Times article, Bruce Bartlett discusses how the ideas of supply-side economics have become more and more popular. However, he also argues that the ideas are being taken too far:

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.

A particularly interesting part of the article shows how high the marginal rates were in the 1950s - 1970s:

Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.

Another interesting note is that supply-side economists of the 1970s and 1980s did not believe that tax revenue would actually increase when taxes were cut, they just believed that the loss of tax revenue would be smaller because of the greater incentive to work:

Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior.

(Source: Greg Mankiw's Blog)

Another perspective on CEO pay

There are two posts on Free Exchange that give another perspective on why CEOs are paid so much.

The first discusses how CEOs may not have been paid as much in the 1960s and 1970s, but that was because they gained the benefit of huge expense accounts. So when you account for the lack of the extravagant expense accounts now, the compensation has not gone up, it has just changed forms. As a bonus, the post includes discussion of the Laffer curve, which we just finished talking about.

The second discusses some reasons for the increased CEO pay:

Better explanations have to do with changes in the tax code, the rise of stock-based compensation, foreign competition (which makes the choice of CEO seem much more important), and the massive increase in the market capitalisation of the biggest firms, which roughly tracks the increase in CEO pay.

Make sure you include these considerations in your answer to the previous post.
(Source: Free Exchange)

High CEO Pay

In recent years, there has been a lot of criticism concerning the salaries of Fortune 500 CEOs. The graph below from The Economist shows how much CEO compensation how grown relative to the average wage in the United States:

As you can see, the compensation for executives in major US corporations was around 30-40 times the wages of the average worker up until the late 1980s. Now, executives make over 100 times the average wage. You could also look at the largest compensation packages for US CEOs on this Forbes site, noting that the highest paid CEOs make a couple hundred million dollars for the year (this of course includes bonuses and stock compensation).

Some are particularly aghast at what CEOs make when their performance is poor. For example,

The Corporate Library, an American corporate-governance consultancy, last year identified 11 large and well known but poorly governed companies, including AT&T, Merck and Time Warner, where the chief executive had been paid at least $15m a year for two successive years even as the company's shares had underperformed. Robert Nardelli received a $210m pay-off when he lost his job earlier this month even though the shares of his company, Home Depot, fell slightly during his six years in charge. Carly Fiorina, ejected from Hewlett-Packard almost $180m better off—including a severance payment of $21.6m—after a lacklustre tenure as chief executive

What do you think about the increase in executive pay? Is it an outrage or is it fair? Should there be restrictions on how much a CEO can be paid? You may want to remember our discussion of labor markets and how marginal revenue product was the basis for how much someone should be paid.