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Too Much

THIS WEEK

The vast majority of us experience life at the local level. We care most deeply about things that affect our local surroundings. That reality has always bedeviled analysts and activists who worry about maldistributions of income and wealth — and how these maldistributions are so weighing us down and tearing us up.

The basic problem: Talk about inequality too often comes across as terribly abstract — and distant. To shove inequality onto political center stage, we need to close that distance. But how?

Richard Wilkinson and Kate Pickett have an answer. Last year these two eminent British scholars released an amazing book, The Spirit Level: Why Greater Equality Makes Us Stronger, that explores how and why nations do better when they share their wealth. Now they’ve just released an amazing new report that takes inequality all the way down to street level.

We have the details on this imaginative new perspective on inequality — and a great deal more — this week in Too Much.

 

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GREED AT A GLANCE

David TepperWho has the bank bailout benefited the most? We now know: hedge fund managers. In 2009, the trade journal AR reported last week, the hedge fund industry’s top 25 execs averaged over $1 billion each in earnings, $25.3 billion in all. That total smashed the previous $22.3 billion top 25 record set in 2007. Leading the 2009 pack: former Goldman Sachs junk-bond trader David Tepper of Appaloosa Management. Early in 2009, Tepper bet big that the feds would not let Bank of America and AIG go under. That bet proved a winner and returned Tepper a $4 billion payday. Managers of hedge funds — unregulated investment pools open only to investors with deep pockets — had to make at least $825 million in 2009 to enter the industry’s top 10 . . .

How can hedge fund managers repay U.S. taxpayers for bailing out the nation's tottering big banks? They could, for starters, stop evading taxes. Hedge fund kingpins ought to be paying tax on their winning bets at a 35 percent rate, the current top federal tax rate. But a tax code clause known as the “carried interest” loophole lets hedgies claim their workplace windfalls as capital gains subject to a mere 15 percent tax. In Congress, House lawmakers have passed legislation that erases this loophole. But the Senate has been stalling. To help keep the Senate stalling, the hedge fund industry doubled its lobbying outlays in 2009’s fourth quarter. Some lawmakers, explains hedge fund trade group CEO Richard Baker, “have taken a rather narrow, punitive approach to our industry.” Overall, the financial industry spent over $465 million on lobbying Congress in 2009 . . .

The gap between the rich and everyone else in France is widening, according to newly released government data, and many French don’t like that at all. They’re now pressing hard against the current tax rule — put in place by French president Nicolas Sarkozy — that limits the overall effective tax rate on any très wealthy French taxpayer to 50 percent. What exactly has the French so upset? New data from the French statistical agency INSEE have revealed a 40 percent uptick, between 2004 and 2007, in the income of France’s richest 0.01 percent. France’s bottom 90 percent saw their incomes rise, over that same span, only 9 percent. Imagine how upset average French might be if they lived in the United States. Between 2004 and 2007, the incomes of America’s top 0.01 percent shot up 54.4 percent. The income jump for America's bottom 90 percent: 4.1 percent. In 2007, America’s 400 highest-earning taxpayers paid out just 16.6 percent of their incomes in federal income tax, just a third of the tax burden on France's rich . . .

NewWest columnist Bill Schneider, a veteran Montana publisher, has grown a bit weary of all the media attention the right-wing Tea Party crowd has been getting. Last week, on April 1 eve, Schneider offered up an alternative: the “Microbrew Party.” Activists in this new political formation, says Schneider, never get mean-spirited, even when they’re raging at big banks and health insurance companies. The party’s first platform, Schneider hopefully reports, will soon be complete. Among the key planks: a minimum wage set at $12 an hour and a maximum wage set at the salary of whatever President is sitting in the White House . . .

In life, goes the old saw, we can only count on two things: death and taxes. Make that three: death, taxes, and a misleading “Tax Freedom Day” report every spring from the conservative Tax Foundation. The latest of these reports, just out, is claiming that “Americans will work well over three months” this year to pay off their taxes. Right-wing pols will be citing this claim as proof we need more across-the-board tax cuts. But the Tax Foundation, suggests the Center for Budget and Policy Priorities, is overstating the tax burden on average families to scare up support for cutting taxes on the rich. The trick to this overstating: playing statistical games with averages. If four families are paying $2,500 in taxes on $50,000 in income and one family is paying $90,000 on $300,000 in income, the Center points out, the “average” tax burden on the families will be 20 percent. But four of the five will only be paying 5 percent of their income in taxes.

 

 

 

Quote of the Week

“Great wealth is the best indicator of ability to pay. The estate tax should continue to target the very wealthy, and the largest estates should be taxed at a higher rate.”
Americans for a Fair Estate Tax, a coalition of public interest groups that's urging Congress to restore a significant tax levy on America's super rich, April 2, 2010

 

Stat of the Week

Should wealthy people pay a larger share of taxes than they do now? Early in the George W. Bush White House years, an annual UCLA national poll of first-year college students found just over 50 percent of students believing they should. The share of college freshmen who think the rich should pay more, notes Harvard political scientist Jennifer Hochschild, has now jumped to 60 percent.

 

 

 

inequality by the numbers

Top 10 income shares

 

 

IN FOCUS

Another Gangbuster Year for CEO Pay

Don’t be fooled by all the poor-mouthing around the latest annual executive pay surveys. With Washington dithering on CEO pay reform, chief execs still have plenty of reason to celebrate.

The media heavy hitters have once again begun their annual spring deluge of executive compensation surveys. The Wall Street Journal released its numbers on 2009 top executive pay last Thursday, with the New York Times following suit on Sunday. In the days and weeks to come, USA Today, Forbes, and the Associated Press will be filling out the 2009 CEO pay story.

And what will be the basic storyline be? CEOs, says the Wall Street Journal, are feeling the recession pain. The median pay of the top 200 CEOs the Journal tracks dropped 0.9 percent last year, the first time big-time CEO take-home has dropped two years in a row since the Journal started keeping score back in 1989.

But this emerging my-how-the-mighty-have-fallen take on CEO compensation — Even CEOs hit hard in '09, headlined the New York Daily News last week — hardly tells the whole story. One reason: The Wall Street Journal stats only cover CEO compensation at the 200 top companies that filed required executive pay figures before the Journal’s pay survey deadline. Many more companies have yet to file.

The slight tail-off in typical big-time CEO pay the Journal has calculated for 2009 could, by the time all companies have filed, end up showing an overall CEO pay increase. Kodak, for instance, didn’t announce CEO pay figures for 2009 until last Wednesday, after the Journal deadline. Kodak CEO Antonio Perez over doubled his pay last year, from $4.4 million to $10.2 million.

A second reason to be skeptical about the CEOs-are-feeling-our-pain narrative: Top executive pay, even after treading water in 2009, remains at stratospheric levels that far overshadow what top executives took home a generation ago.

Way back in 1970, as the Stanford Center for the Study of Poverty and Inequality neatly charts, the nation’s top 100 CEOs took home just 39 times more pay than average workers. By 1995, top 100 CEO pay was outpacing average worker pay by 343 times. By 2000, at the height of the dot-com bubble, the nation’s 100 best-paid CEOs were pocketing an incredible 1,039 times average worker pay.

That gap did drop after the dot-com bubble burst. But top CEOs have since gained back a good bit of the ground they lost. We won’t have an exact read on the 2009 pay gap between top CEOs and average workers until later this year. Top 100 CEO pay may end up multiplying worker pay by 900 times over.

Is such a wide gap just? Or fair? Or reasonable? Legally speaking, only the last question really matters. Current federal law frowns on executive pay that does not rate as “reasonable.” The tax code, for instance, only lets corporations deduct “reasonable” executive pay off their taxes.

But at what point does executive pay turn “unreasonable”?  Last week the justices of the U.S. Supreme Court had an opportunity to settle this muddled area of the law. Instead they punted.

The case before the court involved mutual fund executives who had been, according to angry fund investors, overpaying the fund investment adviser. A federal appeals panel had thrown out the angry investor lawsuit, essentially ruling that the marketplace, all by itself, can keep executive pay rates honest.

One jurist, the libertarian-leaning Richard Posner, dissented from that ruling.

“Executive compensation in large publicly traded firms often is excessive,” Posner argued, and he would go to call the assumption that the market can prevent executive pay excess “ripe for reexamination.”

The Supreme Court last week totally dodged the challenge that Posner raised. Any action against executive pay excess, Supreme Court justice Samuel Alito noted, would have to be “a matter for Congress, not the courts” to decide.

Congress, meanwhile, remains stuck on the notion that corporate shareholders, if suitably empowered, can restore some common sense across the corporate pay landscape. The House, toward that end, has passed legislation that gives shareholders a “say on pay.” Under the legislation, shareholders would have the right to take advisory votes on top executive pay pacts.

Corporate boards, the theory goes, would start restraining executive compensation if they faced the public embarrassment of losing a shareholder vote, even just an advisory one. But Britain has had “say on pay” on the books since 2002, and that “say” hasn’t stopped UK executive pay from rising.

More to the point, we don’t expect shareholders to protect the public interest from corporations that pollute the environment. We have federal laws against corporate environmental misbehavior.  Why, then, should we rely on shareholders alone to protect the public interest from corporations that offer excessive rewards to their executives?

Those excessive rewards endanger the public interest as surely as toxic dumping. Outrageously high rewards give executives an incentive to behave outrageously. To win those rewards, they’ll do whatever they need to do. They’ll even, as Wall Street’s subprime recklessness so clearly demonstrated, crash the economy.

The White House, for its part, has handed the CEO pay ball to Kenneth Feinberg, the Treasury Department “pay czar.” Feinberg only has authority over executive pay at bailed-out enterprises that haven’t yet paid back their TARP program tax dollars. But Feinberg does have a bully pulpit, and he has been pounding that pulpit to push his pet solution to executive pay excess.

Companies, advises Feinberg, need to shift their executive pay from cash to stock awards that executives have to wait several years before cashing out. This sort of shifting, Feinberg's critics charge, only moves executive pay from one pocket to another. At the end of the day, under the Feinberg formulation, top 100 CEOs could still be taking in 1,000 times more pay than their workers.

Researchers who study what makes enterprises truly effective find that prospect chilling. Effective enterprises, these researchers understand, share rewards among everyone who contributes to enterprise success. They don’t lavish those rewards at the top of the corporate pyramid.

Peter Drucker, the founder of management science, regularly advocated for corporate pay gaps no wider than 25-to-1, and Congress does have pending some legislation that would move us in that direction. But the bills have no shot at passage anytime soon.

One of these bills would deny corporations tax deductions on any executive pay that runs over 25 times worker pay. Another would give a preference in the federal contract bidding process to companies whose top execs make less than 100 times what their workers make.

Most Americans would find these proposals “reasonable.” Why can’t Congress?


 

 

 

New Wisdom
on Wealth

Inviting Thought (about Inequality). DePaul University economist Paul Buchheit has opened a new online site that mixes poetry and plutocracy.

Christopher Malone, Finding the Forgotten Man: Tea Party populism and the return of Social Darwinism. In These Times, March 30, 2010. A look back at the rationale for the grand fortunes of the Gilded Age that still animates conservative thought today.

Katrina vanden Heuvel, Responsible Wealth, Responsible Taxes, The Nation, March 30, 2010. The story of those affluent activists working to end tax giveaways to the rich.

Inequality Affects All Kiwis, Voxy, March 31, 2010. A theologian at New Zealand's Otago University discusses why inequality can be the key to understanding why some societies are more dysfunctional than others.

Chuck Marr and Gillian Brunet, High-Income Tax Cuts Should Expire on Schedule, Center on Budget and Policy Priorities, April 1, 2010. Extending the Bush tax cuts for wealthy taxpayers would cost the federal treasury $826 billion over the next ten years.

 

 

 

In Review

Inequality, the Ultimate 'Social Pollutant'

Richard Wilkinson and Kate Pickett, The impact of income inequalities on sustainable development in London: A report for the London Sustainable Development Commission. Greater London Authority, March 2010. 52 pp.

If you lived in a society as equal as the world’s most equal developed nation, what would life in your community be like?

Say you lived in the United States or Britain, the world's two most unequal major developed nations. If incomes in the metro area where you live were suddenly to narrow, would you relish life any more than you do now? Would the air you breathe be any cleaner? Would you be less fearful about your family’s future?

Over in London, an official city agency, the Sustainable Development Commission, recently put questions like these to Richard Wilkinson and Kate Pickett, the two British scholars who just may be the world’s most insightful experts on how inequality affects us.

Wilkinson and Pickett have just responded to the London Commission's queries, in an intriguing plain-spoken report only a few dozen pages long.

Londoners today, the two scholars note, live in one of the developed world’s most unequal cities. If they lived instead in a society where income gaps had narrowed — to the developed world average — the number of violent or mentally ill people around them “would dramatically reduce.”

If Londoners lived in a society where income gaps had shrunk to their level in today’s most equal nations — Japan, Sweden, Norway, and Finland — the impact would be even more striking. London, note Wilkinson and Pickett, “would be transformed not just for the poor, but for the vast majority of the population.”

In that much more equal London, the Wilkinson-Pickett study details, a typical middle class family would find its local community “more cohesive” and less violent. The parents would live longer and healthier, with less obesity. Their children would be less likely to become teen parents or drug users.

We’re not talking “slightly less” or “slightly more” here. We’re talking, the Wilkinson and Pickett data make clear, king-size changes.

One example: Mental illness affects 17.9 percent of today’s Londoners. If London’s income gaps were to narrow to Japanese or Nordic levels, that rate would likely drop by more than two-thirds, to 5.6 percent. Obesity would drop by more than half, teenage births by three-quarters.

But the most striking change — were London to suddenly become much more equal — would probably come in simple, basic interpersonal relationships. On the streets of London today, less than a quarter of Londoners, 23 percent, say they trust other people. If Londoners trusted each other at Japanese and Nordic levels, that trust rate would nearly double, to 42.6 percent.

Why do narrow gaps in income usher in safer, healthier, more cohesive societies? Wilkinson and Pickett take the time, in these pages, to dive into inequality’s dynamics. They probe into everything from why people in unequal societies tend to be so much more sensitive to slights — and trigger-happy — to why business leaders in more equal nations look more kindly on environmental regulations.

Amid all the data and dynamics, Wilkinson and Pickett take care to never lose sight of their paper's underlying purpose: to show how narrowing income gaps would improve the lives of Londoners at every income level.

The two scholars have achieved, in the process, something of even broader importance. They have created an analytic model that can be applied to any deeply unequal locale. They have given the world outside London a tool for turning inequality from a vague abstraction into an easily recognizable — and challengeable — “social pollutant.”

“If income differences can widen,” Wilkinson and Pickett note at one point, “they can also narrow.”

After reading these pages, you’ll want to help start that narrowing along.

 

 

 

Inequality Links

Working Group
on Extreme Inequality

Common
Security Clubs

United for a
Fair Economy

The Equality Trust

Wealth for the
Common Good

New Economy
Working Group

Class Action

 

 

 

 

About Too Much

Too Much is published by the Institute for Policy Studies: Ideas into action for peace, justice, and the environment. 1112 16th St. NW, Suite 600, Washington, DC 20036. (202) 234-9382. E-mail: editor@toomuchonline.org. Unsubscribe.

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