My Take On ‘Income Inequality’

Comments: 6 Comments
Published on: 2014.11.19

The phrase “income inequality” has risen to prominence in the past few years, including President Barack Obama labeling it “the defining challenge of our time” and Pope Francis questioning: “How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?”

◊ Poor Phrasing

First, I think the phrase “income inequality” was a poor choice of words, because it implies that the ideal is for incomes to be equal. Almost no one involved in this debate believes that. Even Obama, if you read his remarks in context, is talking about increasing income inequality and the widening gap, not the inequality itself or the gap itself.

Almost everyone — at least in our nation — agrees that those who work harder should be paid more, so much so that we almost don’t even think about it. It’s assumed in our system that those with more valuable skills will rise higher, be paid more, and be retained longer. It stands to reason that the floor-sweeper is more easily replaceable than the decision-maker.

But Obama and the rest of the left continue to use a phrase that plays into the hands of the opposition. Words matter, especially in political debate and in public relations. This phrase makes it too easy for the embattled right to cry “Socialism!” — long one of their favorite derogatory remarks about Obama.

◊ So, What’s The Problem?

Forgive me for quoting Obama again, but this time it’s the younger Senator Obama, the one who hadn’t yet disappointed most of his supporters:

“I admire many Americans of great wealth and don’t begrudge their success in the least. I know that many if not most have earned it through hard work… [but] at a certain point one has enough, that you can derive as much pleasure from a Picasso hanging in a museum as from one that’s hanging in your den, that you can get an awfully good meal in a restaurant for less than twenty dollars, and that once your drapes cost more than the average American’s yearly salary, then you can afford to pay a bit more in taxes.”

There’s not much argument that the “wealth gap” is widening and has been for some time. On a chart of who owns what in our country, “The middle class is barely above the poor and the poor are barely visible.” The average worker has to labor more than a month to earn what the CEO earns in an hour.

“But it is also important to realize that the lower half of that top 1% has far less than those in the top half; in fact, both wealth and income are super-concentrated in the top 0.1%, which is just one in a thousand.” (Source)

Again, the problem isn’t that a gap exists, but that the gap is growing wider, and that the pace of the widening increases during unstable economic times — which usually hurt the poor and middle class more than the rich. From 1990 to 2005, paychecks to CEOs rose almost 300% (adjusted for inflation), while there was only a 4.3% increase for workers (Ibid). The median income for all CEOs (as of 2010) was about $3.9 million; for those companies listed in the S&P’s 500, it’s $10.6 million, and for the CEOs of the companies listed in the Dow-Jones Industrial Average, the median compensation is something like $20 million.

Compare this to the median worker’s pay of $36,000.

In 2011, in the middle of the so-called Great Recession, U.S. companies saw profits rise at the fastest quarterly rate in 60 years, and CEO income at the top 200 companies shot up 12.9% over a two-year period — while many of those companies weren’t hiring and their worker salary remained steady.

Worldwide, 250 people control about one-third of the world’s investable wealth — that’s 0.00000357% of the population with 33% of the wealth.

◊ But Really, What’s The Problem?

All these numbers raise the underlying question: Why is this a problem? On a global, or even national or regional scale, what’s the harm if the rich get richer?

Apparently, according to some rich experts, it’s “destabilizing” to have a huge income gap. As Lloyd Blankfen, the current CEO of Goldman Sachs, said recently: “Income inequality is a very destabilizing thing in the country. It’s a very big issue and one that has to be dealt with.” He didn’t elaborate with numbers, but explained briefly:

“The economic system has to do two things. You have to grow a pie and you have to distribute it in a proper way. Both contribute to the stability of society.”

U.S. News & World report recently argued:

“Any systematic exclusion of large percentages of the population from the instruments of success — particularly education — hobbles an entire society.”

Even the world’s richest people recognize that it’s a problem, at least enough to pretend they’re concerned about it.

And, from a somewhat unlikely source, a NASA-funded study insisted that increased income inequality was one of several factors that played “a central role in the character or in the process of the collapse” in all civilization collapses over “the last five thousand years.” It concluded that a general societal collapse is only decades away without immediate and significant changes in our civilization.

All fear-mongering aside, won’t the market correct itself? That’s the mantra of free-market capitalists (who’ve lost their ability to convince me), that an inefficient or unstable market will, by its very nature, correct itself. What they don’t often mention is that this “correction” is often a huge collapse that ruins thousands of lives, or in a few cases is so bad that the entire system “corrects” by ending itself.

◊ How Small Should The Gap Be?

Clearly, any attempt to regulate this gap will be (and has been) met with resistance. But just for the sake of argument, what if it could be enforced? What should the limit be?

Currently, to be in the “top 1%” you only need to earn $343,000 per year, which isn’t “rich” by most people’s definitions. That just gets you a bigger house and nicer cars and a fancier wardrobe. It’s the “top 0.1%” that should be looked at, with a starting salary of $1.7 million — average salary: $5.6 million, which is 180 times higher than the average salary of the bottom 90%.

So, if the CEO-to-worker salary ratio is about 300:1 and the ratio of the 0.1% to the 90% is 180:1, what should it be?

One expert, Peter Drucker, has suggested it should be 20:1:

“I have often advised managers that a 20-to-one salary ratio is the limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies.”

That’s about the same ratio the U.S. saw in the 1960s. Or should it be higher, like some of the other ratios we’ve seen over the years?

  • 20:1 in 1965
  • 22:1 in 1973
  • 29:1 in 1978
  • 59:1 in 1989
  • 123:1 in 1995
  • 383:1 in 2000 (peak)

Or should it be similar to those in other countries?

  • 206:1 — Canada
  • 148:1 — Switzerland
  • 147:1 — Germany
  • 127:1 — Spain
  • 110:1 — Czech Republic
  • 104:1 — France
  • 93:1 — Australia
  • 84:1 — UK
  • 76:1 — Netherlands
  • 67:1 — Japan
  • 58:1 — Norway
  • 53:1 — Portugal
  • 36:1 — Austia
  • 28:1 — Poland
  • Let’s say the median pay for workers stays at $36,000 or so. Using Poland’s ratio of 28:1 still gives the CEO a salary of over a million dollars, still well into the top 1% by today’s standards. While it’s true that a million dollars doesn’t buy what it used to, a million per year isn’t shabby either. We’ve all known people making less than that who can afford a big house, new cars, a lawn service, a housekeeper, and just about anything their kids ask for.

    Japans 67:1 ratio would give U.S. CEOs a salary of $2.4 million per year.

    Others have suggested leaving CEO salary as-is, but legally binding minimum wage to the average of the top 200 CEOs.

    For reference, the AFL-CIO lists some of the highest-paid CEOs in the country, with the surprising front-runner Lawrence J. Ellison of Oracle, at $78.4 million. There are companies you’ve never heard of paying their CEOs 30, 40, and 50 million dollars. Some of those companies are losing money. At least one of them (Tesla) only became profitable last year.

    ◊ What I Would Do

    What do I think should be done — and why?

    The why is easy for me, now that I’ve thought it through. Do we want a return to the days when almost everyone was a serf and an elite few were policy-makers and nobility? Because that’s where we’re heading. Or do we want to have world where most of us can be in the middle class — work hard but be rewarded with everything we need and much of what we want?

    The how is much more difficult.

    French economist Thomas Piketty has proposed a “global wealth tax” and a progressive income tax similar to the rates seen in the U.S. in the 1950s and ’60s.

    Others have suggested campaign finance reform might do some good — if big money can have less influence on who’s elected, then the elected officials will have less of an obligation to scratch the back that fed them (to badly mix metaphors). Instead of being beholden to their Party, their Donors, and only lastly the lowly voters, elected officials could move Voters to the front of the line.

    It seems reasonable that there’s no cure-all for this, but perhaps a combination of factors can bring the whole thing back into balance.

    • Raise the minimum wage, but tie it to the cost of living per region
    • Reform political spending, perhaps with a Constitutional amendment
    • Limit or prohibit CEO bonuses after massive layoffs or pay cuts
    • Close the high-income tax loopholes enjoyed by the likes of Mitt Romney
    • Nations work together to tax multinational corporations on a sliding, progressive scale
    • Corporations pay student loan debts (since they’re the primary benefactors)
    • Cap the CEO-to-worker pay ratio within companies

    I’d love to hear other suggestions.

    And no, I don’t see any of this as socialism, because it in no way fits the description. Instead, it’s finding a way to keep capitalism from becoming a modern, corporate version of feudalism.

6 Comments
  1. Actually, the problem is one of circulation. Historically, those that had monies, felt socially responsible and hired and patronized those that didn’t. As late as the fifties, millionaires had armies of attendant, chauffeurs, valets, designers, biographers, etc. The mantra has since become one of money making money. Hoard as much as you can and more will follow. In recent news, it’s taken billionaires challenging other billionaires to spend part of their fortune before that money gets back in circulation.

    • Wil C. Fry says:

      Yes, circulation is part of the root problem — where the money goes and what it’s used for, and what it’s invested in. Property used to be a very large store of wealth for the rich: land, mansions, business interests, etc. — all of which required “circulation” of the money for upkeep. Now much of the wealth is stored as ones and zeroes in the computers of banks and stock markets, where very little circulation is required for upkeep.

  2. Shari says:

    Another interesting topic. You obviously have too much time on your hands. (Joking)

    Have you heard of “the just third way”? I have a Catholic friend who’s always touting it, though I admit the little I’ve read baffles me.

    • Wil C. Fry says:

      Ha. Interestingly, I typed this entry over the course of several days (which might account for any appearance of discontinuity), and then assumed I’d posted it. I found it sitting in my Drafts folder, unpublished, for a few weeks. So I proofread it, hopefully with some success, and posted it. :-)

      I had not heard of “the just third way” (Wikipedia: http://en.wikipedia.org/wiki/Third_Way ), but it sounds a lot like what Western governments, especially in Europe, have been trying to do anyway — continue to prop up and protect capitalism while skimming off the top to help those in need of it.

      One thing I’ve suggested above that I haven’t seen anywhere else is to force corporations to pay off student loans of those they hire. I want to make a separate entry for that, but basically: who benefits most from earning higher degrees? The students benefit a little: they get (on average) better jobs and higher pay, but are saddled with 20+ years of debt. The nation benefits with a more educated workforce and a stronger economy (which is why almost all nations subsidize lower education and why a few are starting to pay for higher ed). But I came to the conclusion that the employers benefit the most — for example, Google wouldn’t pay more for a higher-degreed employee unless there was a sound benefit for them.

      There would obviously have to be some kind of tradeoff — an employment contract that keeps the degreed employee in place for a few years, to make it worth the company’s while. (Like graduates of the Air Force Academy are obligated to serve for five years before they can take a higher-paying job elsewhere with their free degree.)

      • Zane says:

        The income gap is the most important political issue of the day.

        I think corporations paying for college tuition is a brilliant idea. However, the process of implementing something like that would be interesting.

        • Wil C. Fry says:

          “the process of implementing something like that would be interesting”

          Impossible, perhaps. The cool thing about thinking about stuff is it doesn’t have to be possible, or at least obviously possible. :-)

          Maybe an incentive program would get a few big corporations on board and then others would follow. Or, more darkly, they might wait until college is once again a playground for the rich and think of it on their own when they don’t have enough qualified employees.

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