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EYE ON THE PIE: Want a larger slice? Get a bigger pie

June 5, 2006

How much should an executive be paid? More or less than a professional athlete? How much medical care is a person entitled to receive? Does that depend on his or her age or the genetic code that she or he carries?

We love to agonize over these questions. To the pure of spirit, all people are worth the same. To the pure of thought, all are worth the value they contribute to satisfy the wants of others. Since few of us are pure in either respect, we contest these ideas in all their infinite varieties.

Should women and children be paid as much as men for doing the same job? Oh, that seems like such an easy one. But do women and children have the same employment opportunities as men? Do they have the same experience, the same skills?

We could say all passengers in coach should pay the same price for an airline ticket. But why should people who sit in the less-desirable middle seats have to pay the same price as those who have either window or aisle seats?

These questions of "equity" can consume a society. Why should a basketball or football player be paid so much more than a teacher of chemistry, music, marketing or literature? Supply and demand is the easy answer of those who are comfortable and unafflicted by moral uncertainty.

Some justify higher compensation based on some sense of sacrifice. Doctors are presumed to have put in more effort than carpenters to attain their status and are thereby deemed worthy of more pay for their services. If one spends time in school attaining a certificate or degree, that person is believed to have "earned" the right to more income, not just from day one on the job, but for a lifetime.

Students often say they "deserve" a good grade because they worked so hard, despite achieving so little. In China, before the current regime, I was told the price of a rug was equal to the wages of the two people who worked on it for a year. That is the labor theory of value in its most extreme form.

The more time we spend deciding how much compensation is appropriate for each of us, the less time we spend focused on the income available to all of us. Income-redistribution programs, in my view, follow behind income-generating programs. But there are some exceptions.

We worry that the Social Security and Medicare trust funds are drying up. To avoid this, we need to increase the income of Americans who pay into those funds. Only "earned" income is taxed for those programs. Higher stock prices and larger dividends or capital gains do not contribute to the Social Security or Medicare trust funds.

Workers have to earn more. If workers earning $20,000 to $50,000 per year could be lifted up into the $50,000 to $80,000 class, without inflation, we would have a major increase in money for our "entitlement" programs.

How can that be done? Our workers have to be able to earn more because they are worth more in a competitive global economy. Higher wages and salaries come from improvements in the skills of the worker, the quality of the equipment workers use, plus the efficiency of organizations and social infrastructure.

Higher earned income also results from producing goods and services that are difficult for others to copy. Hollywood products are rarely produced in Italy or India. They bring in billions from abroad and are one reason we are so concerned about protecting intellectual-property rights.

The way we distribute the bounty of our society is not a trivial issue. However, greater "equity" is easier to obtain with more, rather than less, wealth.



Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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