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October 13, 2008 |
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The blame game has begun, and right-wing ideologues have emerged as the game’s most fantastically imaginative players. They’re blaming our ever-widening economic meltdown on government bureaucrats who forced banks to make mortgage loans to poor people. Here at Too Much, we blame inequality. We blame the massive redistribution of wealth — up the economic ladder — that has, over the last three decades, left average Americans drowning in debt and a fortunate few at the top awash in riches that have inflated one speculative bubble after another. How do we fix a staggeringly unequal economic system? We can start by making deep pockets pay for cleaning up the mess that made them rich. In this week’s Too Much, we look at one innovative approach to doing just that. |
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Nearly three out of every five Harvard seniors who graduated into the job market last year went to work for the financial industry. Over 20 percent alone went into investment banking. Harvard grads on Wall Street, note analysts Claudia Goldin and Lawrence Katz, have been averaging triple what their classmates earn. But Wall Street, conservative economist Alfred Tella observed last week, “no longer smells so sweet.” The “crash in big-bucks finance,” predicts Tella, will free up an “abundance of talent that, instead of creating paper wealth, can be productively employed in solid career jobs outside Wall Street, jobs that create something tangible.” Tella expects sinking high-finance salaries to help “reduce the growing inequality in the distribution of income in America — a ticking time bomb.”
Neiman Marcus, the luxury retailer that owns Manhattan’s super swanky Bergdorf Goodman, is reporting quarterly losses up more than double. Vivre, a luxury catalog store that offers mink chairs and a $45 sterling silver ice cream spoon, says sales have gone “softer.” France, so far this year, has exported 76 million fewer bottles of champagne. Does all this mean that the wealthy are finally cutting back? The latest survey data from Elite Traveler magazine and Prince & Associates suggest yes — and no. Only 1 percent of households worth between $1 million and $10 million, according to polling completed in late September, plan to spend more on luxury over the rest of 2008, and 76 percent plan to spend less. But 71 percent of households worth over $30 million say they plan no spending cutbacks at all. That may help explain why Ferrari has 6,000 customers lined up for its new $247,000 coupe-cabriolet . . . A San Diego start-up has just gone online with a service that aims to analyze “the fairness of the executive compensation programs” at America’s top publicly traded companies. Already online: grades for executive pay at the 30 companies that make up the Dow Jones Industrial Index. WhatAreTheyPaid.com has handed five of the 30 — American Express, AT&T, J.P. Morgan Chase, United Technologies, and Walt Disney — failing grades. Exxon Mobil took a D minus. Exxon last year gave CEO Rex Tillerson $16 million worth of shares that need to vest before Tillerson gets title, on top of $78 million in unvested shares he already held. The rest of Exxon’s top five execs are sitting on similar stock stashes, worth up to $52 million. Asks WhatAreTheyPaid.com: “How much more incentive do they need?” The new CEO of bailed-out insurance giant AIG is defending — against congressional critics — the $440,000 weekend bash his company hosted last month just days after taxpayers came to its rescue. The weekend’s festivities, says AIG top exec Edward Liddy, amounted to “accepted practice in the insurance business.” About 100 “high-performing” insurance agents attended the “retreat,” held at a California resort overlooking the Pacific. Did AIG actually get a bargain? Maybe. The entire room tab only came to $139,375. In Manhattan’s Four Seasons Hotel, the most popular CEO accommodation — the Ty Warner Suite — rents for $30,000 per night. The suite’s sweetest touch: The bathtub comes with lasers, a review last week noted, that “turn the water different colors.” |
Quote of the Week “Huge and growing income inequality forced millions of families to take out inadvisable loans to keep afloat. Deregulation allowed financial institutions and their executives to get rich by creating new securities based on loans to low-income families that magically appeared safe to hold. It worked as long as the housing bubble kept inflating.”
New Wisdom In ways large and small, Washington coddles rich. editorial, USA Today, October 9, 2008. A look at four prime examples of how average taxpayers subsidize America's most wealthy. Inequality: The rich and the rest, editorial, Guardian (UK), October 11, 2008. A commentary that wonders whether “the obscene rewards that society has bestowed on those who gamble with other people's money” will “inspire wider reflection on the difference between what all sorts of people are paid and the value of what they do.” Joseph Stiglitz, Reversal of Fortune, Vanity Fair, November 2008. The Nobel Prize-winning Columbia University economist sees “something deeply peculiar about having rich individuals who make their money speculating on real estate or stocks paying lower taxes than middle-class Americans.”
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A 'Clawback' For the Bailout Dig deep enough into the Wall Street bailout bill enacted earlier this month and you’ll find a clause that lets a bailed-out bank recover any previously awarded executive “bonus or incentive compensation” that turns out to have been based on statements of enterprise earnings “later proven to be materially inaccurate.” In other words, if a bank CEO has cooked the books to trigger a huge personal payoff, the bank can “claw back” that windfall. “Clawbacks” have been around for some time now. The reform legislation Congress passed after the Enron debacle, the 2002 Sarbanes-Oxley Act, features a clawback. Individual corporations have also been sticking clawback provisions in the compensation contracts they cut with executives. But all these clawback clauses, with a few exceptions, have done next to nothing to put a dent on the mega millions top executives have pocketed over recent years, mainly because companies have to show significant “misconduct” on an executive’s part before they can claw back anything. That’s not easy. And, more to the point, outright legal misconduct by executives only accounts for a small portion of the immense pay packages that have been going to America’s top executives. San Diego State economist David DeBoskey, a former corporate chief financial officer, estimates that the top five executive officers alone at the banks, insurers, mortgage brokers, and other financial firms likely to benefit from the Wall Street bailout collected a combined $27 billion in compensation from 2003 through 2007. Add in the bonuses that went to power-suits below the top-five level, and this total mounts much higher. All these execs didn’t make their billions — for the most part — by cooking books. They made their fortunes taking reckless risks. The clawback provisions now on the books, unfortunately, won’t recoup a dime from any of this recklessness. Does all this make clawbacks an over-hyped deadend? Some analysts don’t think so. Appropriately reconfigured, they feel, clawbacks could be an important tool for attacking the concentration of income at America’s economic summit. One of these analysts, veteran Massachusetts attorney E. Michael Thomas, believes that clawbacks could help fund a substantial share of the Wall Street bailout. Any firm receiving bailout dollars, Thomas is proposing, should be subject to the “clawback of executive incomes, management fees, or stock options for the prior seven years.” The key to the Thomas clawback approach: a political willingness to apply the “polluter pays” principle from existing environmental law to the bailout. In the 1970s, Thomas notes, lawmakers had to decide how to pay for cleaning up the nation’s toxic waste dumps. Lawmakers decided they weren’t going to waste taxpayer dollars trying to prove individual enterprises at fault. Instead, they would work under the principle that any enterprise that derived economic benefit from dumping waste at a site would have to help pay for the clean-up. That same principle could be applied, via clawbacks, to the Wall Street bailout. These clawbacks, says Thomas, wouldn’t require “an assessment of guilt or culpability” on any one executive’s part. “Instead,” explains Thomas, a past recipient of the EPA’s top public service award, “the clawbacks would reflect the simple policy judgment that the executives who derived economic benefit from creating the conditions that necessitated the bailout should pay for it.” Such an approach to the Wall Street bailout, adds Thomas, a knowledgeable venture capital attorney, would strike many in high-finance as eminently familiar. Back during the dot.com boom, venture capital firm general partners raised billions of dollars from investors for stuffing into fledgling — and often flaky — Internet companies. Those investors often insisted on clawback clauses that gave them the right to extract refunds — if their investments went sour — out of the management fees and bonuses that went to the general partners. Many of those investments did go sour as “sure-thing” dot.com business plans failed to “monetize.” Venture capitalists ended up foregoing their management fees — and even coughing up their annual bonuses from previous years. Similar clawbacks, says Thomas, should now bankroll the Wall Street bailout. “The executives who won big in Wall Street’s conveniently unregulated casino games,” he advises, “should be made to disgorge out of their own pockets, just like venture capital general partners had to do when the dot.com bubble popped.” Treasury Secretary Henry Paulson seems to be running, as fast as he can, the other way. Financial industry executives, the New York Times reported yesterday, have “begged Mr. Paulson not to impose tough restrictions on executive pay and golden-parachute deals for executives who are fired.” Paulson, says the Times, has “heeded those pleas.” |
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Equity as an Economic Survival Strategy George Irvin, Super Rich: The Rise of Inequality in Britain and the United States. In 1999, the British economist George Irvin was waiting for a connecting flight in Detroit when a CNN newscast announced that the Dow-Jones average was about to smash past the 10,000 mark. His fellow travelers, Irvin remembers, let out “whoops of joy.” Irvin didn’t. Those travelers saw, in the record-breaking Dow, a spectacularly successful economy. He saw a frighteningly unequal one.
George Irvin explains what happened in his most timely new book, Super Rich. With clarity and empathy — for those who would normally recoil from any book on economics — he traces a transatlantic tale of times good and then greedy. The good times, in both Britain and the United States, came in the quarter-century right after World War II. In both countries, average working families experienced an unprecedented swelling of income and economic security. Both nations entered the 1970s far more equal than they had ever been. Both nations would go on to exit the decade headed in the exact opposite direction. Average families, ever since, have been sinking in debt and insecurity while those at the top have been accumulating piles of wealth that would have been considered grotesque — and unimaginable — in the 1950s and 1960s. So what happened in the 1970s? Why did the United States and the UK lurch into an anti-egalitarian reverse? The short answer: Their elites panicked. In the 1970s, Corporate America and Corporate Britain both found themselves in a new — and far more difficult — competitive environment. The nations of continental Europe and Japan, all devastated by World War II, had rebuilt and modernized their infrastructures. The United States and Britain, both spared the war’s devastation, had not. The easy-profit salad days, for British and American business, had clearly ended. Corporate movers and shakers, in both Britain and the United States, came up with the same response. They demanded “freedom” — from the government regulations and taxes they claimed were stifling the entrepreneurial spirit. This power-suit pushback against government “intervention” in the “free market” would gain unstoppable political momentum with Margaret Thatcher's 1979 election in the UK and Ronald Reagan's 1980 election in the United States. The Great Greed Grab had now begun. Wealth concentrated. Safety nets shriveled. Speculators frolicked. Huge swatches of the economy went off-limits to unions — and decent wages. None of this, George Irvin shows, had to happen. Nothing like this did happen in other developed nations. The nations of continental Europe and Japan have, by and large, maintained distributions of income and wealth significantly more equal than the United States and Britain. Indeed, the Nordic nations have demonstrated that societies only thrive economically, in our contemporary post-industrial Information Age, when they “tax and spend” — tax the rich and spend on programs that give all their people a real chance to contribute and succeed. Author Irvin, in Super Rich, laces his exposition with fascinating digressions into everything from happiness research to the history of economic ideas. He wrote this book, obviously, before the crushing financial market collapse of the past month. But a sense of impending collapse pervades his pages. “We are drifting,” he writes at one point, “into a financial crisis of global proportions.” A sense of solution pervades these pages, too. Let’s go one step at a time, Irvin urges. His suggested initial goal: getting the transatlantic world back to the levels of equality that we last saw back in the 1970s. Reaching this goal will demand a considerably more ambitious course of action than either the Labor Party in the UK or the Democratic Party in the United States is now promoting. Top Democrats, for instance, only want to lift the 35 percent current tax rate on income in the top tax bracket to 39.6 percent, the rate in place in 2000, just before George W. Bush became President. The tax rate on top-bracket income in 1980, just before Ronald Reagan took office? That stood at 70 percent. |
Stat of the Week The top 1 percent of American earners, former U.S. Labor Secretary Robert Reich noted last week, “now take home about 20 percent of total national income,” over double the 8 percent they took home in 1980. You have to go back to 1928, the year before the Great Depression began, to find the last time the top 1 percent took home 20 percent of the nation's total income.
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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