The Washington Post leads off its new series on inequality with a killer anecdote:
It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.
Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.
The Post uses Dean Foods to illustrate the story of how skyrocketing executive compensation has been the primary cause—at the top, anyway—of the fast-growing gap between rich and poor over the last three or four decades. That gap has the U.S. closer to the third world than to its rich peers in inequality.
Peter Whoriskey backs this all up by relying on academic research out last year that examined tax filings by those in the top 0.1 percent of earners to find out how they made their money—something that apparently hadn’t been studied. It found that about 60 percent were executives or managers.
The Post misses a bit by not telling us how much or whether that percentage is up. In fact, it’s not different. In 2005, 61 percent of top one-thousandth of earners were executives or managers, barely changed from 60 percent in 1979, according to the paper by Jon Bakija, Adam Cole and Bradley T. Heim. But in keeping with the financialization of the economy since then, today’s best-paid executives are much more likely to be in the financial industry. Non-finance execs and managers in the top 0.1 percent decreased from 49 percent in 1979 to 43 percent in 2005, while finance execs and managers jumped from 11 percent to 18 percent.
The flipside of the compensation eruption at the top is what’s happened to those executives’ workers. The Post notes that income has gone nowhere for 90 percent of the country and shows it through the workers at Dean Foods:
Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.
That’s smart reporting to go digging through union records to figure out how much workers have made over the years.
The paper sets aside room to go to 30,000 feet too:
Inequality, economists have noted, is an essential part of capitalism. At least in theory, “the invisible hand,” or market system, sets compensation levels to lead workers into pursuits that are the most productive to society. This produces inequality but leads to a more efficient economy.
As a result, economists have noted, there is an inherent tension in market-oriented democracies because while society aims to endow each person with equal political rights, it allows very unequal economic outcomes.
A couple of angles that could be explored is how wall street pressure has created an anti-worker, anti-customer, pro-executive (and shareholder) culture. For example, look at the way wall street sees a company like costco:
http://www.businessweek.com/magazine/content/04_15/b3878084_mz021.htm
"The market's view of Costco speaks volumes about the so-called Wal-Martization of the U.S. economy. True, the Bentonville (Ark.) retailer has taken a public-relations pounding recently for paying poverty-level wages and shouldering health insurance for fewer than half of its 1.2 million U.S. workers. Still, it remains the darling of the Street, which, like Wal-Mart and many other companies, believes that shareholders are best served if employers do all they can to hold down costs, including the cost of labor.
Surprisingly, however, Costco's high-wage approach actually beats Wal-Mart at its own game on many measures. BusinessWeek ran through the numbers from each company to compare Costco and Sam's Club, the Wal-Mart warehouse unit that competes directly with Costco. We found that by compensating employees generously to motivate and retain good workers, one-fifth of whom are unionized, Costco gets lower turnover and higher productivity. ...Put another way, the 102,000 Sam's employees in the U.S. generated some $35 billion in sales last year, while Costco did $34 billion with one-third fewer employees.
Bottom line: Costco pulled in $13,647 in U.S. operating profit per hourly employee last year, vs. $11,039 at Sam's. Over the past five years, Costco's operating income grew at an average of 10.1% annually, slightly besting Sam's 9.8%. Most of Wall Street doesn't see the broader picture, though, and only focuses on the up-front savings Costco would gain if it paid workers less. But a few analysts concede that Costco suffers from the Street's bias toward the low-wage model."
PS. How much did Costco CEO, James Sinegal rake in for himself in 2010? He got a 30% raise, which put him up to 3.5 million, much of that in stock value. His salary + bonus was $350,000 and $190,400 respectively.
The other aspect that could be explored is why a ceo from the 1970's would put a high value on morale in 1970. Maybe it was because executives were better people back then (takes a cynical breath) or maybe it was because labor unions and labor laws were respected back then. Executive opulence came at a price in demands for higher wages, benefits, and potential strikes back in 1970.
Then what happened?
http://motherjones.com/politics/2011/02/income-inequality-labor-union-decline
"Organized labor requires government support to thrive—things like the right to organize workplaces, rules that prevent retaliation against union leaders, and requirements that management negotiate in good faith—and in America, that support traditionally came from the Democratic Party...
The real harm was the eventual disaffection of the Democratic Party from the labor cause. Two years after the debacle in Miami, Nixon was gone and Democrats won a landslide victory in the 1974 midterm election. But the newly minted members of Congress, among them former McGovern campaign manager Gary Hart, weren't especially loyal to big labor. They'd seen how labor had treated McGovern, despite his lifetime of support for their issues.
The results were catastrophic. Business groups, simultaneously alarmed at the expansion of federal regulations during the '60s and newly emboldened by the obvious fault lines on the left, started hiring lobbyists and launching political action committees at a torrid pace. At the same time, corporations began to realize that ... They needed to band together to push aggressively for a broadly pro-business legislat
#1 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 06:51 AM
"They'd seen how labor ..."
had treated McGovern, despite his lifetime of support for their issues.
The results were catastrophic. Business groups, simultaneously alarmed at the expansion of federal regulations during the '60s and newly emboldened by the obvious fault lines on the left, started hiring lobbyists and launching political action committees at a torrid pace. At the same time, corporations began to realize that ... They needed to band together to push aggressively for a broadly pro-business legislative environment. In 1971, future Supreme Court justice Lewis Powell wrote his now-famous memo urging the business community to fight back"
Labor cannot rely on the better angels of executives to protect their interests. Not every company is a Costco.
Since I've got another 600 words and a link to spare in this post, another damning quote:
"Second, American politicians don't care much about voters with moderate incomes. Princeton political scientist Larry Bartels studied the voting behavior of US senators in the early '90s and discovered that they respond far more to the desires of high-income groups than to anyone else. By itself, that's not a surprise. He also found that Republicans don't respond at all to the desires of voters with modest incomes. Maybe that's not a surprise, either. But this should be: Bartels found that Democratic senators don't respond to the desires of these voters, either. At all."
Why is that? Look at this picture of who funds the senate..
http://motherjones.com/politics/2010/09/congress-corporate-sponsors
This is not a principled motivated political environment. The government is paymaster motivated, and, until the campaign and graft models change, neither of the parties will not represent their constituents. At all.
Other things are on their minds:
http://www.harpers.org/archive/2009/12/0082740
#2 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 07:03 AM
Got it.
Corporate greed is at the heart of all of America's inequity.
It isn't the welfare dependency that has created a permanent underclass. It isn't the the crappy education system that spews out ignorant graduates by the millions from our government schools. It isn't the stifling corporate taxes that send manufacturing jobs overseas. Or the ever-growing pile of regulations.
It's all due to greedy CEO's who steal wages from the hapless proletariat .
You know what's missing here that would have been interesting?
A check into the union's compensation of its executives:
http://www.jsonline.com/news/statepolitics/117290533.html
#3 Posted by padikiller, CJR on Tue 21 Jun 2011 at 07:35 AM
An interesting Ezra Klein take.
http://www.washingtonpost.com/blogs/ezra-klein/post/why-the-rich-want-to-get-richer/2011/06/20/AG7gtccH_blog.html
"The economics of superstars is real, and it's certainly been an accelerant for CEO pay. But it doesn't explain the phenomenon that Peter Whoriskey nicely gets at in this article --something I will call the the economics of starters.
It's clear enough why the head of a firm that was once national and is now international is making an extraordinary amount of money. But what about the CEOs whose firms have not gone global?...
Study after study shows that people would prefer a medium-sized house in a neighborhood of small houses to a big house in a neighborhood of much bigger houses. What people really want isn't to have a big house, in other words, but to have a bigger house than their peers. Economists call products driven by this sort of status competition "positional goods." The less-technical term for this sort of behavior is "keeping up with the Joneses," and we all do it...
So when the players at the tippy-top saw their incomes explode, it's not as if the executives one rung below them -- or one company over from them -- suddenly began to starve. But they did start to demand pay raises. After all, they weren't worth less than those guys! And then the guys one rung beneath them demanded pay raises to keep up with their peers. And on and on it went.
Worse, it happened at the company level, too. If you're a multinational company, or even a national company, and you pay your CEO much less than your competitors do, what does that say about your company? About the likely quality of your CEO? The market likes low labor costs on the worker level, but they also like the superstar CEOs who're driving labor costs up on the executive level. Perversely, paying your CEO a lot does, in a certain sense, raise fewer questions than paying him or her a little. It signals that you're taking corporate leadership seriously, that you're getting the best talent, that you're keeping up. So though we say it's the culture that changed, I suspect that it was superstar pay that changed it, even if it didn't only change for superstars...
The wages of many workers have been adversely affected by changes in the global economy. Many middle-income families, in fact, have seen their wages decline in recent years. It seems at least somewhat possible that we're seeing a reverse-positional story there, wherein the workers who could be demanding a bigger share of the profits stay their hand because the relative struggle of their peers has convinced them that they don't have the bargaining power they maybe thought they had and they should be more careful about overstepping their bounds, just as the income of the top CEOs have convinced their peers that they have much more bargaining power than they realized and should be much more demanding when setting their compensation packages."
#4 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 10:10 AM
On the topic of the reverse positional middle class dilemma, read Alan Greenspan
http://www.federalreserve.gov/boarddocs/hh/1997/february/testimony.htm
Worker insecurity. Union insecurity. Strong dollar policies (making domestic manufacturing more uncompetitive). Open trade policies (opening labor markets in repressed, impoverished, corrupt countries to American companies). Encouraging debt, instead of wages, to purchase standard consumer goods - not to mention education.
These policies are bipartisan. They benefit some elements of society vastly over the others based on the implicit promise that the increased share of the general welfare given to "the winners" will trickle down through the rest of society. It takes a sentimentalist to believe that people will do right on the behalf of others in the absence of opposition and condition.
But that is what most conservatives and neo-liberals believe. They've outsourced the common good to the Ayn Rand-John Galt worshiping masters of finance and industry in the believe that these freshly preened executives will somehow look out for middle class interests as well as they look out for their own. They trust in angels.
What we need is a return to popular movements and labor movements who were unafraid to oppose and shut the whole works down when the interests of the people were not looked after.
And when you have sick stories of piggish, unfunded executive pensions siphoning funds out of general employee pensions forcing pension cuts on workers - and not on the unfunded executives
http://www.cjr.org/the_audit/wsj_excels_on_retirement_risk.php
you really get a sense that no one is looking out for us.
#5 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 10:29 AM
The top marginal income tax rate in the US in 1975 was 70 percent. CEOs and other high-earners, being taxed, found better ways to measure their self-worth. High marginal tax rates promote civilization. Diminishingly small ones promote sociopathy.
#6 Posted by Edward Ericson Jr., CJR on Tue 21 Jun 2011 at 03:14 PM
High marginal income tax rates are fine...
As long as you eliminate capital gains taxes...
The ability to get rich promotes society - eliminating the ability to get rich stifles society.
#7 Posted by padikiller, CJR on Tue 21 Jun 2011 at 06:50 PM
Paddy just made the case for having a more equal society, like the one that existed during America's golden age of capitalism.
When you have a banana republic unequal society in which 80 percent of people will never get rich
http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph
never collect pensions, require 2 full time jobs per earner to sustain a household, have shoddy schools and shoddier public services like roads, have little protection for creditors seizing their property - legally or not, and have medical coverage costs more than their rent, then you have a stifled society.
When you withdraw opportunity from 80% of the population, you create a sick and demented society that cares more about rich people's tax cuts and feelings then it does about a stable financial system, a stable environment, a healthy population, and the common good. When your government's policy focus is on the top 20% of the population, and those members of the population who are synthetic people (corporations), you stifle society for the bottom 80% and their children.
It's shameful.
#8 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 08:06 PM
When you create a system of dependency, whereby a permanent underclass inhabits filthy government housing projects, sends their children to worthless government schools and lives to expect subsistence feeding and medical care from the government, you are committing genocide.
When you encourage and reward competition and innovation, while simultaneously caring for those who can't fend for themselves, then you are doing the right thing.
The commie/liberals want to lambast corporate executive compensation, but you notice that they have nothing to say about the union fat cats who have seen their salaries skyrocket in the face of declining membership and wages.
What's up with that, dudes?
#9 Posted by padikiller, CJR on Tue 21 Jun 2011 at 08:35 PM
The compensation of union executives isn't relevant to the discussion except in respect that executives from all walks of life are leveraging their so called abilities for high compensation packages in spite of their records of failure.
And yeah, genocide is exactly what people who expect high quality public schools and health care are doing. GTFO.
As Adam Smith says:
http://www.bartleby.com/10/108.html
"The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards...
Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged."
http://www.bartleby.com/10/109.html
"In reality high profits tend much more to raise the price of work than high wages...But if the profits of all the different employers of those working people should be raised five per cent. that part of the price of the commodity which resolved itself into profit, would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit...In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."
#10 Posted by Thimbles, CJR on Tue 21 Jun 2011 at 09:41 PM
Now we have Brother Thimbles preaching on Adam Smith...
Wonders never cease.
The issue is the liberals' misguided faith that bigger government can make somehow things better for the bulk of the population. The liberals insist that compelling the "rich" to donate property to the "poor" will result in equity, and that government intervention is the means to a utopian end.
Such an assertion is contrary to every scintilla of historical evidence
Government isn't good at doing anything. It is inherently inefficient and unjust - subject to political influence and corruption ab initio. It is a necessary evil - an entity that is needed to do things that have to be done and that either the private sector would never do in the free market, or that the private sector would mishandle. Like delivering mail, running a lighthouse, fighting a war, etc. In short, all of the things that Founders figured out two centuries ago.
Government schools are hideous and abject failures. Government regulation of private industry is worse. Government housing developments are crime-ridden slums. Government feeding programs have resulted in an obese and dependent underclass that waits for the first of the month like a baby waits to suckle.
We have both a DEA making felons out of addicts and also government sponsored needle exchange programs. We have the government taking over the largest US automobile manufacturer and then a few months later borrowing money from China to give away money to buy Korean and Japanese cars. We have NASA, whose failure to follow its own procedures has resulted in the explosion of two space shuttles, the installation of the wrong lens on the Hubble Space telescope, the destruction of a Mars probe because somebody used inches instead of centimeters, etc...
Show me single government program that came in on time and under budget, and I'll show you two dozen that went the other way.
How anyone who has half a brain... Even the most ardent anti-capitalist liberal.. Can possible espouse inserting the government into society as an improvement to anything... Is a mystery...
#11 Posted by padikiller, CJR on Tue 21 Jun 2011 at 10:58 PM
Who has been in charge of government and its institutions for 19 out of 27 years before they allowed historic crashes (let's see... Enron, 9-11, Katrina, the whole global banking system, am I missing any?) to give people pause and throw the incompetents out of office..
Small government Conservatives? E-Coli conservatives? Cheap Labor Conservatives? Military campaigns benefiting war profiteers fought on the "body armor" cheap borrowed money conservatives? Pro torture, pro-domestic espionage, pro-government secrecy, pro-immunity for telecoms participating in government spying, pro-hide the incompetence under the carpet conservatives?
You keep attacking the concept of government, which works well in other social democracies, for the sins of idiot conservatives (and yes, the democrats who support these anti-freedom, pro-security state, anti-labor, pro-deadly-consumer-product policies are conservative, not liberal).
And your answer to the problems caused by idiot conservatives is more idiot conservatism with a little "slander the libs with genocide" on the side. GTFO.
#12 Posted by Thimbles, CJR on Wed 22 Jun 2011 at 12:02 AM
Padi,
I agree that it's bad for a union leader to making $600,000 a year, particularly when his members are going nowhere fast. But let's get real, $600,000 is a bad joke for an executive at just about any public company—and that's the highest union package the CPI report found.
Think about the grandaddy of them all: Goldman Sachs. In 2007, the year the bubble burst and it was busy screwing investors left and right, it paid fifty different people $20 million apiece. I'm pretty sure you could pay all the union bosses in the country with just one of those guys' salaries.
Or if you prefer a more middling company, look at Gannett, which I wrote about earlier today. It had at least six executives making $2 million a year, including $9.4 million for the CEO. This for a company with bad newspapers, that's bleeding revenue and laying off hundreds.
And then you have Andy Stern, head of a 1.8 million-member union, making $300,000 in total comp (including benefits).
Context matters.
#13 Posted by Ryan Chittum, CJR on Wed 22 Jun 2011 at 12:56 AM
Thimbles--lots of good thoughts there. And I'd missed that chart of who owns Congress. Good stuff.
#14 Posted by Ryan Chittum, CJR on Wed 22 Jun 2011 at 12:59 AM
Ryan wrote: And then you have Andy Stern, head of a 1.8 million-member union, making $300,000 in total comp (including benefits).
padikiller notes: Yeah...
Let's talk about Andy Stern:
"The FBI and the U.S. Labor Department are investigating prominent labor leader Andy Stern in their probe of corruption at the Service Employees International Union, according to two people who have been interviewed by federal agents.
The two organized labor officials met with federal agents this summer to answer questions about a six-figure book contract that Stern landed in 2006 and his role in approving money to pay the salary of an SEIU leader in California who allegedly performed no work."
http://www.cbsnews.com/stories/2010/09/28/national/main6907828.shtml
So who should decide how much to pay corporate executives?
Shareholders (through their elected directors)?
Or the government?
Thimbles wrote: You keep attacking the concept of government, which works well in other social democracies,
padikiller responds: Social democracies work well if:
1. Your country is a developed, industrial country.
2. You have a homogeneous population - i.e. no underclass.
3. You can sustain social policies.
The poster child of social democracies, Denmark, has nos. 1 and 2 above, but is now losing grasp of number 3 - the best and brightest are fleeing Denmark's taxation to take jobs where they can make money:
http://www.nytimes.com/2007/12/05/business/worldbusiness/05iht-labor.4.8603880.html
#15 Posted by padikiller, CJR on Wed 22 Jun 2011 at 08:32 AM
"Thimbles--lots of good thoughts there. And I'd missed that chart of who owns Congress. Good stuff."
Thanks. I realize I turned the fire hose on a bit strong here so thanks for the indulgence..
#16 Posted by Thimbles, CJR on Wed 22 Jun 2011 at 11:55 AM
Padistepper says social democracy can work only if "2. You have a homogeneous population - i.e. no underclass."
What does that mean, brah? homogeneous in what way?
#17 Posted by Edward Ericson Jr., CJR on Wed 22 Jun 2011 at 12:09 PM
Just had an insight while I was chewing on another bone, that Adam Smith quote which was talking about how the pursuit of profits creates compound costs throughout the system:
http://www.bartleby.com/10/109.html
"But if the profits of all the different employers of those working people should be raised five per cent. that part of the price of the commodity which resolved itself into profit, would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit. The employer of the flax-dressers would in selling his flax require an additional five per cent. upon the whole value of the materials and wages would be advanced to his workmen. The employer of the spinners would require an additional five per cent. both upon the advanced price of the flax and upon the wages of the spinners. And the employer of the weavers would require a like five per cent. both upon the advanced price of the linen yarn and upon the wages of the weavers. In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."
Dead on describes the cost pressures working within American health care. Trade out flax for drugs and weavers for surgeons and you've got a health care commodity inflation problem.
Insurance, drugs, procedures and tests are commodities that wall street puts high profit expectations upon. They are often dependent on one another (you need insurance to afford the drugs which you'll be taking before surgery) and cost increases to one part of the system increase the costs (and bills) to the whole.
Not to side track but I thought it was an interesting diagnosis.
#18 Posted by Thimbles, CJR on Wed 22 Jun 2011 at 01:21 PM