LOU DOBBS MONEYLINE, June 5, 2002: Interview with Paul Krugman

SYNOPSIS: Krugman and Lou Dobbs ask how to correct the perverse incentives that stock options have given to CEOs

DOBBS: Corporate greed has become a focus of this broadcast. No one on Wall Street is above scrutiny, whether analysts or executives. But my guest tonight says corporate leaders are no worse than they have always been. Only the incentives have changed. Here now, Paul Krugman, who's a "New York Times" columnist and MONEYLINE regular contributor. Paul, good to have you with us.


DOBBS: The incentives have changed? By that you mean just the amazing stock options, packages?

KRUGMAN: Yes. Corporate compensation, executive compensation, used to be a salary, basically. Twenty years ago it was a salary. Now it's very much geared to the stock price. That was supposed to create incentives to be efficient. It creates some other incentives, too. And we're seeing the results of that.

DOBBS: And investors were perfectly delighted for the CEO of the company of which stock they owned. As it was going up 20 percent a year, for that CEO to make $100 million a year. With that stock going down, they're not quite as comfortable with that.

KRUGMAN: Yes, we missed -- I have to say, I blame myself. We missed the red flag. We should have been looking. We should have said, you know, those corporate profit statements, if you add them up, are growing a whole lot faster than the profit figure of the national income accounts -- there's something wrong here. But we didn't see it. And now we suddenly say, what are we paying these guys? We used to pay them 40 times the average salary. Now we pay them 500 times the average salary -- for what?

DOBBS: And for what indeed. Most of the companies, with declining profits, I have seen about 50 percent declines in profits on average. I've seen executive pay drop by 2 percent.

KRUGMAN: You know, I read the academic literature, which is very matter-of-fact on this stuff. And they talk quite matter-of-factly about the camouflage principle and the outrage constraint. And the basic view of the people who are really researching on this is, it's a scam at all of the major companies.

DOBBS: That doesn't sound like it's a "value neutral," a scam?

KRUGMAN: Well, you know, look...

DOBBS: By economic standards, my gosh, that's passion...

KRUGMAN: Oh, they don't say scam. That's my word. They talk about alternative models.

DOBBS: Is it a scam?

KRUGMAN: Let's put it -- there's an awful lot of self dealing. We created a system...

DOBBS: It's a scam!

KRUGMAN: Yes, yes.

DOBBS: If it's self dealing and you're working with the shareholders and the board, it's a scam.

KRUGMAN: We created a system that unfortunately rewards bad behavior. People are no worse than we used to be.

DOBBS: What's the solution? How are we going to fix it? Because I agree with you 100 percent.

KRUGMAN: Well, some of it is government policy. Some of it -- not much, but you can say at least we've got to say that the accounting standards say the stock options are at cost. Mostly -- and I hate to say this -- I think mostly it's the private sector. It's shareholder activism. And people have got to say...

DOBBS: Shareholder, Paul, I don't know if you agree with me or not, but the shareholder today is more impotent than he or she has ever been.

KRUGMAN: There are big, institutional shareholders.

DOBBS: They've been awfully quiet, because the heads of those institutions' shareholders are participating fully in this egregious...

KRUGMAN: You're telling me we need a revolution.

DOBBS: I am saying that what we need is reform. Aren't you?


DOBBS: Where is it going to come from?

KRUGMAN: That's -- I have to say, I don't have an answer on that. I'm kind of pessimistic. The last time we got through an era of corporate excesses, it was -- we cleaned ourselves up in reaction to the Great Depression and World War II. I'm not recommending a repeat.

DOBBS: We did the same thing in the '80s, coming out of the insider trading scandal, coming out of the Savings & Loan crisis.

KRUGMAN: That's the trick. We did not actually clean it up. What happened was that the corporations became their own creditors. They internalized. You didn't need Gordon Gekko, because the CEO was already doing his job.

DOBBS: Gordon Gekko. Greed ain't so good anymore.

KRUGMAN: Watch the movie again. It's a great movie.

DOBBS: Paul, thank you very much, as always. Paul Krugman, good to have you here. Coming up next, success at the last for shuttle Endeavor, beating the weather, on its way to the international space station. A rendezvous with history coming up next. Stay with us.

Originally broadcast, 6.5.02