Ignorant Yet Richer?

Recently, Newsweek ran a story entitled “How Ignorant Are Americans”. The article discusses how Newsweek gave over 1,000 people a quiz and found that 38% failed (or 62% passed). So what questions were asked? Questions like reasons why the Cold War was fought, defining the Bill of Rights, and other civics questions. I am all for educated people but is this really the right kind of education?

My larger point comes from Dr. Bryan Caplan making the case against education. Do employers value civic knowledge? The only people that would really need this knowledge are perhaps people that teach civics, historians, and maybe people in government. Other than that what job would require this knowledge? Also given that that brain is only so large and if we could store skills that were useful storing this type of knowledge may be harmful since hardly anyone values it. I think people have the following thought process… “If you don’t know history, you don’t have knowledge, which means you won’t be able to add value”. Again technical knowledge is much more important than general knowledge since that is what employers are paying for. Someone could have make the argument even 20 years ago that knowing storing information was important but that argument today is very weak with the internet.

My main point however is that we really can’t be that dumb since GDP per capita has been growing since 1969 (in 2005 dollars). GDP per capita in 2010 is double what it was 1969! This means individuals in America are becoming more valuable. The bigger issue is that general education isn’t important what is important is the right kind of education that employers and the market values.

Source: ERS International Macroeconomic Data Set (Dr. Matthew Shane)

CEO vs. Hollywood

So lately I have been thinking about the difference why people complain about how much corporate executives make but rarely if ever complain about how much actors, actresses, or athletes. Let’s examine the data before making any conclusions. Below are what some people earned last year.

Highest Paid CEO’s
Larry Ellison (Oracle) $84.5 million
Ray Elliott (Boston Scientific) $33.4 million
Ray Irani (Occidental Petroleum) $31.4 million
Mark Hurd (Hewlett-Packard) $24.2 million

And now Hollywood…
Oprah $275 million
George Lucas $170 million
Steven Spielberg $150 million
Madonna $110 million

In 2009, the average pay of a CEO that worked one of the 500 largest companies (S&P 500) was only $9.25 million. I would be interested in a survey that asked average people what they believed the average pay of a CEO was. According to Hollywood Economics 78% of movies lose money and only 22% are profitable. I am curious as to why movie studios or financers would keep giving people money to make movies if the odds are slim. This is interesting considering every year all companies in the S&P 500 report a profit.

Another interesting point is that people in Hollywood are not paid on how many people come to see their movies. If actors and actresses were given movie rights and their pay was based off the performance of a movie I have a feeling Hollywood would be turning from blue to red. Actors and actresses would have an incentive to make sure the movie made money. Actors and actresses make their movies over a short period of time and then move on to the next project. Movie stars don’t have to worry about the movie making a profit and loss but just making sure their check clears.

Corporate CEO’s on the other hand are paid with stock options. Employees usually have to work years before they are even illegible for stock options and when stock options are awarded employees can’t usually cash them in until years after they are awarded to make sure employees take a long term approach and not take short cuts.

If a CEO is paid even $9 million and saves or makes the company $1 billion in additional revenue the cost of the CEO would still be less than 1%. This is a bargain considering the CEO is in charge of managing hundreds of not thousands of employees. I think it’s important to remember that businesses do have value.

John Allison on Financial Crisis

BB&T CEO John Allison on the Financial Crisis from BBT Economics on Vimeo.