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||April 4, 2011|
Dr. Jeffrey Ritterman, the chief of cardiology at Northern California’s Kaiser Richmond Medical Center, is going down a road that’s going to give somebody heart failure. A corporate chief executive maybe. Or a hedge fund billionaire.
Dr. Ritterman has an editorial in the new April issue of the American Journal of Medicine. America’s physicians could “greatly improve” our nation’s health, his editorial powerfully emphasizes, “by advocating and working toward a fairer distribution of wealth and income.”
The good doctor from California understands what our nation’s political leaders in Washington do not: that widening economic gaps are shredding the social fabric that shields us from disease and dysfunction, deforming our social environment into an ever more stressful “Hobbesian struggle of all against all.”
The “winners” in that struggle? This week, in Too Much, we look at two new shocking scorecards, on CEO pay and hedge fund manager compensation.
Too Much online
|GREED AT A GLANCE|
The “genius” label tends to get tossed around quite a bit when cheerleaders for concentrated wealth fawn over the fortunes of Internet billionaires like Facebook’s Mark Zuckerberg. But does any one individual really merit super-sized rewards for high-tech progress? The death late last month of one of the Internet's true “inventors,” the electrical engineer Paul Baran, offers a window into the answer. Baran wrote his first papers on “packet switching,” a basic key to the online world’s emergence, back in the early 1960s. But Baran, 84 at his passing in Palo Alto, always stressed that technical progress only unfolds as a social endeavor, with new people laying down blocks on old foundations. Noted Baran in one interview: “If you are not careful, you can con yourself into believing that you did the most important part.”
Just north of Palo Alto, in San Francisco, Paul Baran’s wisdom hasn’t registered much on execs at Twitter and Zynga, the hot Internet gaming company. Those execs are angling for an out from San Francisco’s 1.5 percent city payroll tax on stock option windfalls. The soon-to-go-public Twitter, notes San Francisco Examiner tech analyst Mark Albertson, wants “to be exempt from payroll taxes when all those stock options become a gold mine of wealth.” And Zynga is threatening to exit San Francisco if the firm doesn’t get the same tax relief that some city lawmakers are now proposing to give Twitter. Local labor activists are opposing that proposal. Asks public employee leader Roxanne Sanchez: “Where are you going to draw the line on these corporate handouts?” San Francisco's Board of Supervisors will consider the high-tech tax-relief demands tomorrow . . .
You don’t, of course, have to be a high-tech superstar to demand corporate tax breaks. Over in Illinois, where lawmakers recently raised the corporate income tax rate from 4.8 to 7 percent, the CEO at the Peoria-based Caterpillar is strongly “suggesting” his Fortune 500 firm may exit the state. Says chief exec Doug Oberhelman: “I have to do what’s right for Caterpillar.” And maybe himself, too. In 2009, a year that saw only three U.S. corporations lay off more workers than Caterpillar, Oberhelman took home just under $3 million. Caterpillar seems to exploit tax loopholes as rigorously as workers. From 2004 to 2009, the company paid in Illinois income tax only 1.04 percent of its $30.4 billion in earnings . . .
Why do we have murders? The “police procedurals” that dominate prime-time TV almost invariably end up blaming deranged delinquents. But the global academic “near consensus,” notes the just-released first Research Digest from Britain’s Equality Trust, blames inequality. To prevent murder and manslaughter, the new digest relates, we need to be looking at the distribution of wealth, not just poverty. Grand income divides, investigators note, impact homicide rates far more forcefully than low incomes. Wide divides, as one researcher explains, leave people “more sensitive to experiences of inferiority,” to “disrespect, loss of face, and humiliation,” the most common violence triggers . . .
In this life, the old saw goes, we can only count on two things, death and taxes. Make that three. If the calendar says April, we can count on the conservative Tax Foundation to push out its annual “Tax Freedom Day” canard. Americans, this canard contends, have to work over three months — until April 12, supposedly, this year — to earn enough to pay off all their taxes. In fact, the Center for Budget and Policy Priorities points out, the Tax Foundation’s “average” tax figure “merely measures tax revenues as a share of the economy.” Eighty percent of U.S. households pay federal taxes at a lower rate than the Tax Foundation’s estimated “average” suggests. Real “average” Americans, the 20 percent of households in the exact income middle, pay 14.3 percent of their incomes in federal taxes, not the 21.6 percent the Tax Foundation so misleadingly claims.
Quote of the Week
“Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.”
Stat of the Week
The federal government appears is hurtling toward shutdown because GOP leaders in Congress are insisting on $61.5 billion in immediate cuts to programs that range from early childhood education to food safety inspections. If enacted, economist Andrew Fieldhouse notes, these cuts will “not even recoup” the cost of the tax cuts passed last year for America's wealthiest 2 percent. These tax breaks — for taxpayers making over $250,000 — will cost the federal treasury $69.5 billion this year.
|inequality by the numbers|
America's Billion-Dollar-a-Year Men
Hedge fund honchos bet on stocks. They bet on gold. They bet on lawsuits. Most of all, they bet that the rest of us will never wise up to the awesome giveaway our current tax code ladles on them.
Only in America can someone make $85 million in a year and feel underpaid.
This past Friday, USA Today’s annual corporate CEO pay survey — the first major national report so far this year on 2010 executive pay — revealed that Viacom chief Philippe Dauman earned $84.5 million last year.
But Friday also brought new numbers on annual “top 25” hedge fund manager compensation from AR magazine, the hedge fund industry’s trade journal. The hedge fund earnings needed in 2010 to make this exalted top 25: $210 million, well over double the four-score millions that went to Viacom's Dauman.
Last year’s top hedge fund kingpin, John Paulson, walked off with an astounding $4.9 billion in 2010 from his hedge fund labors. Paulson made more in a week than Dauman made for his entire year.
A decade ago, by contrast, corporate CEOs and hedge fund managers were still rubbing elbows at paycheck time. In 2002, a hedge fund manager only needed $30 million to make the industry’s top 25, almost exactly the entry ante for that year’s corporate CEO top 25.
Since then, hedge fund manager earnings have exploded spectacularly. The total compensation for the hedgie top 25 stood at $2.8 billion in 2003. This total quintupled over the next three years, to $14 billion in 2006, then soared to $22.3 billion in 2007, just before the financial industry meltdown.
That unpleasantness did put a bit of a crimp into hedge fund rewards, but only for a moment. Last year's hedge fund manager top 25 total: $22.03 billion. Six of last year's top 25 pulled in over $1 billion each. America may not yet have recovered from the Great Recession. Hedge fund managers certainly have.
How can hedge fund managers be doing so over-the-top well? Running hedge funds essentially gives these “financial wizards” a license to print money.
Hedge funds, in effect, operate as mutual funds for deep-pocket investors — and deep pockets only. The hoi polloi can’t invest in hedge funds, and this closed, private status frees hedge funds from those pesky government regulations that open-to-the-general-public mutual funds have to face.
Hedge fund managers, without regulators looking over their shoulders, can invest the dollars they grab from investors anyway they choose. Actually, “bet” might be a better word choice here. Hedge funds have zilch interest in making investments that create real economic value. Their goal instead: Find and exploit marketplace “inefficiencies” that offer the potential for quick — and enormous — killings.
Hedge fund managers make some of these killings the old-fashioned way, gambling on stocks. Sometimes they bet that particular stocks, or other financial assets, will rise. Sometimes they sell particular stocks “short,” betting they’ll sink.
John Paulson, 2010’s top hedge fund earner, placed his biggest bets last year on gold. Other hedge fund managers are chasing after far more unconventional windfall opportunities — in lawsuits, for instance.
In these lawsuit bets, hedge funds advance millions of dollars to law firms handling promising medical malpractice claims or big-time class actions against misbehaving corporations. The hedge funds then charge these law firms interest, at sky-high rates, on the mega-million-dollar loans.
The law firms, in turn, pass the interest charges onto their clients. The interest charges can add up. Clients who “win” their cases can end up owing money.
Hedge fund managers don’t have to win all their bets to hit their personal jackpots. They don’t even have to win any. The reason: Investors pay hedge fund managers fees for the privilege of managing their money, usually 2 percent of the total invested. Hedgie superstars can charge more, 3 percent and up.
These superstars do, of course, have to deliver big returns every so often, to justify those fees, and these big returns provide hedge fund managers an even more lucrative income stream. Hedge fund managers routinely rake off 20 percent of whatever investment profits they generate.
The superstars rake even higher shares. Last year, for instance, Moore Capital Management’s Louis Bacon charged investors 3 percent of the money they gave him as a management fee and claimed 25 percent of his investment profits as a “performance fee.” Bacon, for the year, scored a $230 million personal payday.
Bacon's fellow hedgie, Leon Cooperman of Omega Advisors, took home $240 million last year. Cooperman “laughed” last week when the New York Times called to tell him he had made the latest hedge fund manager top 25.
“I have no idea how much I made last year,” Cooperman explained to the Times reporter. “I don’t know until it’s tax time.”
And tax time just happens to be when hedge fund managers really clean up. Corporate CEOs face a 35 percent tax rate on all compensation over $373,650 they took home in 2010. Hedge fund honchos, thanks to the infamous “carried interest” tax loophole, only pay a 15 percent tax on the hundreds of millions they pull in from their “performance fees.”
Concerned lawmakers have been trying — and failing — to close the “carried interest” loophole for the past half-dozen years. This fantastically lucrative free-pass for hedgies will this year cost the federal treasury upwards of $4 billion — from just the top 25 hedge fund managers alone.
Even so, this week on Capitol Hill, frenzied budget negotiators won’t be debating “carried interest” as they struggle to avoid a federal government shutdown. Lawmakers just won’t have the time. Negotiating away the jobs of Head Start teachers, after all, can really chew up the hours fast.
Jay Coggins, Rich are getting richer? Exactly right, Minneapolis Star Tribune, March 29, 2011. A University of Minnesota economist demolishes the latest right-wing claim that inequality in the United States doesn't amount to much of a problem.
Paul Farrell, Tax the Super Rich now or face a revolution, MarketWatch, March 29, 2011. A former Morgan Stanley banker says our top 1 percent believe they’re immune “from the unintended consequences of beating down average Americans.”
Catherine Rampelly, Inequality Is Most Extreme in Wealth, Not Income, New York Times, March 30, 2011. Two good charts that compare our greatest economic divides.
Carl Davis, The Millionaire Migration Myth, March 31, 2011. An Institute on Taxation and Economic Policy analyst exposes the right-wing argument that “wealthy taxpayers will pull up stakes” from any state that dares to tax the rich.
U.S. Wealth: A Second Opinion
Sylvia Allegretto, The State of Working America's Wealth, 2011. Economic Policy Institute, March 23, 2011
The dust has now settled from the 2008 financial crash. The money, too. The question of the day: In whose pockets?
Two sets of researchers have offered answers to that question in recent weeks. Both have based their answers on the same original source material: the surveys of American households the Federal Reserve conducts every three years, most recently in 2007. And both have attempted to update that data to 2009.
Researchers at the Fed, as we noted in last week’s Too Much, did their updating by re-interviewing in 2009 the households surveyed in 2007. The results from this re-interviewing, released the week before last, show how wealth holdings have changed since the crash for all U.S. households, the richest 10 percent included.
The Economic Policy Institute has taken a different approach. EPI’s new briefing paper, also released the week before last, builds upon the work of NYU economist Edward Wolff, the nation’s top wealth analyst.
EPI and Wolff update the 2007 Fed numbers via the Fed’s own “Flow of Funds” data, a set of tables revised quarterly that track changes in everything from bank deposits and money market funds to real estate investment trusts.
The numbers the Fed and EPI approaches generate — for wealth holdings in 2009 — don’t match up exactly. EPI, for instance, shows lower totals for both average and median net worth.
Another difference: EPI’s new briefing paper, The State of Working America's Wealth, 2011, zones in much tighter than the new Fed report on the upper reaches of America’s wealth distribution, all the way to the top 1 percent.
All wealth levels of households, both approaches agree, lost net worth between 2007 and 2009. But the “recovery” since 2007, the EPI figures indicate, has left a greater share of U.S. wealth in the pockets of the already wealthy.
Households in the nation’s richest 1 percent, says EPI, lost an average $5.2 million between 2007 and 2009, down to an average $14 million net worth. But households below that top 1 percent lost more.
The settling dust, the EPI numbers detail, left the top 1 percent with 35.6 percent of the nation’s wealth, up from 34.6 percent in 2007. That 35.6 percent, EPI notes, makes for the largest top 1 percent “share ever reported in these data.”
The middle 20 percent of American households, in the meantime, lost nearly $45,000 off their $109,600 average net worth between 2007 and 2009. The overall wealth share of America’s bottom 80 percent, adds EPI, fell from 15 percent of the nation’s bounty in 2007 to 12.8 percent two years later.
The Great Recession, sums up EPI’s Sylvia Allegretto, has “further increased an already vast wealth divide.” And how.
|About Too Much|
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