This morning, we heard on the news that there are more Americans receiving food stamps than ever before because they cannot afford to feed their families.
Earlier this month, we learned that the really big banks that received loans from the government to bail them out of total collapse a year ago are all ready to pay back those loans. During 2009, they all have recovered extremely well and are now anxious to pay off those loans and get out from underneath the government oversight. Why? One big reason is so they can again give executive bonuses and raises. People, along with many members of our Congress, are pretty outraged about this especially since the banks recovered mostly by stock trading and still are not making credit more available, as they were asked to do as recipients of the government loans. It remains to be seen what happens next.
This situation is one example of the fact that there is a huge and growing disparity in income between people in the USA. What are the roots of this great disparity?
According to Paul Krugman in his book, Conscience of a Liberal, since about 1973, the last year of the great post war boom in the US, there has been a 'Great Divergence' in income distribution. Krugman points out that the median household income, adjusted for inflation, has made a total gain of 16% from 1973 to 2005 - pretty small! Meanwhile, the really rich have been getting even richer. Folks in the top 0.1% have made huge gains in the range of 500 to 700%!!
Who are these folks? They are CEOs and others in the highest ranks of the major companies plus sports and entertainment celebrities. Even in the '70s CEOs made much more than the average worker - about 30 times more. But today the differential is 300 times!
The differential between average worker and executive compensation has always been controversial but at a very low level. After all, the decisions on executive pay have always been made by Boards of Directors. Individual stockholders (like us) don't have the power to change these decisions. The American people, believing in capitalism, have never really supported government intervention in these decisions either - until recently.
Personally, we have always been very skeptical that those CEOs were doing such important and critical work for their companies to justify the super salaries. At the same time, we, like other average Americans are not empowered to change this situation.
So, what to do?
In our view, a better strategy than asking the government to moderate executive compensation, or expecting the companies' boards of directors to do so, is to raise the tax rate for the very wealthy. An easy first step would be to let the temporary tax cuts for the very wealthy that were passed by George W. Bush and the Republican Congress expire. In addition, the health care insurance reform legislation that is being considered includes a tax on rich people to help pay for insurance for the poor and uninsured people. Maybe these steps will help to reduce the income disparities - we hope so
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Personally, I don't care much about the high salaries (or profits rather) of investors. They risk their money, they can win or lose. It seems fair enough. Neither do I care about the super salaries of celebrities. It seems like an agreeable situation to me. These musicians, actors, media people, sports people put on a show, people want to see it, people go there or buy the recordings of their own accord, and if this makes the celebs millionaires, I don't think I have got anything to do with that. I may comment, of course, on the quality of the show, I may not like it myself, but if a lot of other people do, I think I have got to accept their high earnings as a fact of life. Now the case of executives smells more like monkey business to me. Because what happens there? The executives and the investors (or their representatives) agree behind the scenes how much they get of the income of the company, but it's all done at the expense of the large majority of the employees, who in fact carry out the work. If managers earn 30-300 times as much as ordinary employees, what must be happening is that investors and managers split a disproportionately large sum among themselves and scatter some peanuts to the "commons". In this case I think it is the trade unions that should intervene to bring the average salary reasonably closer to the top.After all, it is the engineers and the workers that "run the show" at a company and not the managers. Brian Epstein couldn't be earning 30-300 times more than the Beatles themselves!
ReplyDeleteAbout taxing the rich: it has happened already, in the 70's the British government e.g. applied a 90% tax on top incomes. It resulted in a lot of rich English people moving their businesses to France (on paper at least). And this is the danger of it nowadays too, especially with off-shore regions still existing. And then instead of the government getting at least some money from taxing the rich, it will get nothing.
Anyway, these are difficult issues, which probably cannot be solved on a national, only on a global level. But it's important to think about them so they get changed sooner or later hopefully. (Or at least we understand the world better - that's good enough for a start as well. )
I'm looking forward to your response comment!
In response to Anonymous, above, I agree we should exclude sports and entertainment celebrities and focus on CEOs and other top executives who work for compensation packages.
ReplyDeleteWho decides what these compensation packages should be? In major corporations in the US, the Board of Directors and the executives negotiate behind the scenes. Individual investors do not participate in these decisions at all. The closest that investors ever get to the compensation decision making process is when they are simply asked to vote for members of the Board of Directors (but not to nominate alternative members). So, do board members really represent the investors? Not that much!
We agree with your idea that trade unions should intervene to insist that the employees receive a greater share of the company's income since, indeed, they do contribute significantly to the value created. But over the years, union membership has decreased in the USA and their power has been reduced.
We stand by our view that raising the tax rate for the very wealthy is a good strategy. The current top tax rate in the US is 35%. Before the GWB tax breaks, the top marginal rate was 39.6%. As recently as 1986, the top rate was 50% and in 1945 it was 94% (WOW!). We agree that 94% is excessive, and 50% is probably higher than necessary. We propose a return to the pre-Bush rate of 39.6%.
For more on the fascinating evolution of tax policy in the USA, check:
http://www.taxfoundation.org/files/fed_individual_rate_history-20091231.pdf