Dateline: November 17, 2008 | [print_link]
This Week | ExtremeInequality.org
Over a million people picked up a New York Times last Wednesday and discovered, to their surprise, that Congress had just enacted a “maximum wage” that will “limit top salaries to fifteen times the minimum wage.” The front page also amazingly proclaimed the end of hostilities in Iraq and Big Oil’s nationalization.
Too good to be true? Of course. Those readers had picked up an elaborate fake Times produced, says Reuters, by a pack of prank-happy progressive journalists who, in their day jobs, toil for assorted mainstream dailies.
The fake Times called the new “maximum wage” an echo of a “similar effort” pushed by President Franklin D. Roosevelt in 1942, a piece of history many readers probably considered part of the prank. But FDR in 1942 really did NY Timespropose an income cap , at $25,000 a year, about $315,000 after adjusting for inflation.
More to the point: FDR’s spirit still lives. A British think tank has just published a global economic crisis fix-it plan that includes a call for capping incomes. In this week’s Too Much, we have that story — and lots more.
Greed at a Glance
Another consulting firm has come out with an estimate on how much in end-of-the-year bonuses will be flowing to power-suits at bailed-out banks. The Manhattan-based Johnson Associates is predicting that bank bonuses overall will drop by 70 percent this year over last. But despite that drop, notes analyst Alan Johnson, the industry will see “thousands of people who make millions.” Bank officials are claiming that their bailed-out institutions will suffer a “brain drain” of talented execs if they nix this year’s holiday bonuses. Asks a skeptical Mark Whitling, an Ohio steel company chief financial officer: “If these guys were so talented, how did this problem happen anyway?”
Mack WhittleThe bank bailout enacted earlier this fall doesn’t forbid CEO bonus windfalls. But the legislation does include some limits on “golden parachutes” for departing executives. Not a problem for South Financial, a South Carolina-based banking giant worth $13.7 billion. In September, South Financial announced the retirement of CEO Mack Whittle effective the end of the year. Then last month, out of the blue, the bank announced Whittle would be retiring two months ahead of schedule. Why the haste? With the hurry-up, South Financial could apply for bailout dollars without jeopardizing CEO Whittle’s $18-million getaway package. South Carolina Governor Mark Sanford last week called on Treasury Secretary Henry Paulson to look into the matter — and see “if there is anything that can be done to keep each one of the taxpayers I represent from in essence having this $18 million, or other millions like it, plucked from their respective pocketbooks and wallets.”
The chairman of the global group that purports to champion “good corporate governance worldwide” last week urged policy makers not to place any “arbitrary limits” on executive pay. Nations must not, the International Corporate Governance Network’s Peter Montagnon warned in the Financial Times, “give in to outrage and mob rule.” Policy makers need to recognize, he added, “that market-based solutions work best.” Meanwhile, in San Francisco last week, another top business leader — former Hewlett-Packard CEO and McCain campaign adviser Carly Fiorina — was urging financial industry leaders to fixate less, not more, on marketplace verdicts. Noted Fiorina: “A chief executive’s job isn’t just to serve shareholders. A CEO’s job is to balance the needs of shareholders, customers, employees, and communities.” The remarks represent something of a remarkable change of heart for Fiorina. She left H-P with $42.5 million in severance after axing over 20,000 jobs . . .
Back in the 1980s, they called Steve Ross, the CEO of Warner Communications, the “prince of pay.” Ross eminently deserved that tag. He pocketed, between 1973 and 1989, a crisp $275 million. His widow may soon pocket even more. Last month, Manhattan’s highest-brow realtor began taking bids for her 32-room duplex on Park Avenue. The broker, Edward Lee Cave, wouldn’t reveal the price, but did tell a reporter the unit would “be the most expensive apartment ever sold in New York” — at “over $60 million.” Cave may have to up that asking price to win New York’s most-expensive apartment honors. Last week, a 78th-floor penthouse at the Time Warner Center went on the market for $65 million. The buyer will also have to pony up a $13,361 monthly maintenance fee . . .
At the Yellowstone Club, a 13,000-acre “part resort and part residential community for the super-rich” in Montana’s Big Sky country, homeowners only pay $10,000 annual dues for an entire year. They also have to pay, of course, a $250,000 initiation fee. That gets them the right to buy a lot for $2 million — and a chance to have Dan Quayle and Bill Gates as neighbors. Unfortunately, only about 350 deep pockets have so far signed up. Last week, the club’s owner filed for bankruptcy. But the club’s ski slopes, assures club chief Edra Blixseth, will stay open all winter.
Quote of the Week
“Where is it written in stone that bankers and traders have to be paid millions of dollars for their services? The gibberish about needing to pay that much just to keep superstars from fleeing to private-equity firms or hedge funds is just another Wall Street myth. The truth is most of them are lucky to have a job at all and they know it.”
William Cohan, Wall Street historian, Our Risk, Wall Street’s Reward, New York Times, November 16, 2008
New Wisdom on Wealth
Manas Chakravarty, Why couldn’t the theories predict the current crisis? Wall Street Journal, November 13, 2008. Mainstream economists don’t understand much about the origin of our current crisis, in income inequality, so “how can they know an awful lot about its solution?”
Rosa Brooks, If Dubai sneezes, who gets a cold? Los Angeles Times, November 13, 2008. Conspicuous consumption by the super rich in the most populous United Arab Emirates city has become “repulsive enough to make most ordinary mortals start rooting for the collapse of global capitalism.”
Lawrence Solum, Distributive Justice. A useful new introduction, by a University of Illinois philosopher, to theories about the “allocation of liberties, wealth, and income.”
Congress Takes on Hedge Fund America
In the entire history of the American republic, no lawmaker in Congress had ever witnessed a scene quite like this. There last Thursday, at the witness table of a packed House hearing room, sat the nation’s — maybe the world’s — five most highly compensated individuals.
Rep. Elijah Cummings, a veteran Baltimore politico, sized the five up. John Paulson, James Simons, Philip Falcone, George Soros, and Kenneth Griffin all share a common line of work. They run hedge funds. Last year, they all made over $1 billion — each — in income.
Even more incredible: Cummings and his House colleagues had heard, earlier in the hearing, that a single tax loophole — that involves investment fund profits — will save hedge fund managers and their private equity cousins $31 billion off their personal tax bills over the next ten years.
“A school teacher or a plumber or policeman makes on the average of $4O,OOO to $5O,OOO a year, yet they have to pay 25 percent tax,” Cummings would observe to hedge fund superstar John Paulson. “You make a billion doIlars, yet your rate can be as low as 15 percent. Is that fair?”
Actually, according to the hedge fund industry trade journal Alpha, Paulson made $3.7 billion last year. Despite that fortune, he and his fellow hedge fund kingpins, as billionaire investor Warren Buffett has pointed out repeatedly over the last year, pay taxes at a lower overall rate than their office receptionists.
Fair? Certainly not. But this unfairness may actually obscure the significance of what’s really going on behind America’s financial hedges, where individuals like John Paulson are making more in one single year than normal mortals could make in over 25,000.
This astounding reality takes us far beyond questions of fairness. This reality reflects foolishness — of the highest order. Any nation that lets income concentrate to a John Paulson-like extent, as financial analyst Fabrice Taylor noted last week in the Toronto Globe and Mail, is inviting economic disaster.
None of the lawmakers at Thursday’s hearing seemed eager to explore the impact that grotesquely top-heavy distributions of income are having on our current economic situation. That’s a problem. If we don’t start focusing on income distribution, Taylor believes, recovery will remain a long way off.
“To get consumers spending,” he explains, “you obviously don’t want to concentrate income and income growth in a very small number of the population. After all, there are limits to how much a single person can spend.”
Taylor asks us to consider two scenarios: one with $100 million divided among 10 households, the other with that same $100 million divided among 1,000. How will these scenarios likely play out? The first, says Taylor, will see “more speculative financial markets.” The second will see more consumers buying cars.
At one point in Thursday’s hedge fund hearing, Rep. Cummings did seem to be on the verge of exploring the foolishness of letting billions concentrate at the top of America’s economic ladder.
“My neighbor on his way to work this morning said to me,” he noted, “how does it feel to be going before five folks who have got more money than God?”
Cummings went no further down that road. Nor did any of his fellow lawmakers.
Last week’s House Oversight Committee hearing did, to be sure, do some serious good. Witnesses like Stanford University’s Joseph Bankman and former SEC chair David Ruder made persuasive cases for closing hedge fund tax loopholes and subjecting hedge funds to meaningful federal regulation.
And billionaire George Soros aptly skewered the “market fundamentalism” — the notion that markets always know best — that has helped usher in our current crisis.
But the hearing, as introduced by Committee Chair Henry Waxman, had a broader mission: to “ask what could go wrong in the future so we can prevent damage before it occurs.”
By accepting, as a given, the legitimacy of billion-dollar incomes, the committee left that question largely unanswered — and America’s perilously intense concentration of income once again unchallenged.
A Rescue Plan for a Dysfunctional Globe
New Economics Foundation, From the ashes of the crash: 20 first steps from new economics to rebuild a better economy. London, November 2008.
Five years ago, the New Economics Foundation in London put together a Real World Economic Outlook that included contributions from the likes of Nobel Prize-winning economist Joseph Stiglitz. In blunt phrases, this volume predicted “a collapse in the credit system in the rich world, led by the United States, leading to soaring personal and corporate bankruptcies.”
Most all mainstream economists and journalists ignored this foreboding forecast. Now, one global financial meltdown later, the forecast’s authors, as New Economics Foundation policy director Andrew Simms noted last week, are “trying very hard to resist the temptation to say we told them so.”
To strengthen that resistance, analysts at the New Economics Foundation have gone down a more socially redeeming direction. They’ve just published a highly readable pamphlet, available free online, that offers 20 steps for rescuing our modern economic life, “not to shore up and rebuild the old financial system but to help build a new system that serves society instead of acting as its master.”
The 20 “first steps” you’ll find in From the ashes of the crash range from quick practical measures to visions far bolder. On the practical side: Place a moratorium on crash-related home evictions. On the more visionary: Turn local post offices “into a national banking system that delivers stable, accessible, and dependable services to the public and businesses.”
The boldest step: “Introduce a maximum pay differential, or maximum wage.”
The “distorting” impact of executive windfalls on the overall economy, the pamphlet goes on to explain, has become “now painfully obvious to all.”
Pie in the sky? The New Economics Foundation analysts think not. With the current crisis, they argue, bold ideas no longer need be “distant dreams on a hopeful wish list.”
After reading From the ashes, you just may agree.
Stat of the Week
If the world’s 1,125 billionaires constituted a country of their own, this land of billionaires would boast the world’s third-largest economy, behind only the United States and Japan, notes a just-released comprehensive new report — Who Owns Nature? — from the Canadian Action Group on Erosion, Technology, and Concentration.
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: firstname.lastname@example.org.