Income Inequality and the Social Contract

The rich are getting richer and more politically powerful.

plutocrats

Income inequality has bubbled to the top of the national conversation again, at least briefly, in the wake of the sequester, the general austerity debate, and the jobless recovery.

Business Insider CEO Henry Blodget notes that “we have reached a point where corporate profit margins are at all-time highs and corporate wages are at all-time lows as a percent of the economy” and argues that this is a violation of an unwritten social contract.

Paying employees more simply means sharing more of the vast wealth that corporations generate with the people who generate it. It means investing in your people, so they don’t have to work full time for you and yet still be poor (hello, Walmart). It means investing in the economy and your customers. It means creating value for all four constituencies that great companies serve:

  • Customers
  • Shareholders
  • Employees
  • Society

[…]

Great companies do this not just because they are forced to by unions or taxation, but because it’s the right thing to do. It’s the right thing for employees, customers, shareholders, and the broader economy. And, for companies with a long-term focus, it’s the right thing to do for the companies themselves.

This strikes me as perfectly reasonable in theory, if difficult in application.

Most obviously, the four constituencies have conflicting interests. Doing the right thing for one’s employees tends to also benefit society but often at the expense of the customers and almost always at the expense of shareholders, at least in the short term.

Customers for many products and services, especially those they perceive as commodities, are incredibly price sensitive. Generally speaking, then, they’re only willing to pay higher prices if they perceive a direct benefit in terms of quality of service. Starbucks can pay their baristas more than McDonald’s or Duncan Donuts pay their countermen because they sell a luxury good. In industries where both the margins and the perceived difference in products or services are low, it’s hard to see how an employer could get by paying more than the industry prevailing wage.

Indeed, income inequality is largely driven by the fact that those in certain industries are perceived as much more individually valuable than others. It simply matters more who the CEO is than who’s ringing up the orders.

Still, Blodget’s larger point remains: If the company is raking in record profits, it seems only right that the cashier gets some benefit from it. Or, at the very least, that the company not try to ratchet profits up a bit higher by dividing the cashier’s job into three positions, none of which carry benefits. Or do away with cashiers altogether and have customers handle their own orders and payments. Alas, companies are constantly doing exactly that, even in flush times.

Presumably, that’s a function of the the CEO seeing his primary fealty to the shareholders—i.e., the company’s owners—who naturally wish to maximize the return on their investment.

Meanwhile, longtime Republican economic strategist Bruce Bartlett argues that there’s pretty clear evidence that the wealthy have disproportionate political power and that “his is a powerful reason for the federal government to take active measures to reduce income and wealth inequality — even if it comes at an economic cost to the nation.”

new study by the political scientists Benjamin I. Page, Larry M. Bartels and Jason Seawright presents strong evidence that the wealthy are more aggressive and more successful than the poor at influencing the political system in their favor. This study is based on interviews with 83 wealthy people in Chicago.

The authors contrast the views of those in their survey with those of the general public based on national public opinion polls. They find that the wealthy are much more concerned than the general public about budget deficits, much more in favor of cutting social welfare programs, much less in favor of government jobs programs and much more opposed to government regulation, among other things.

Professors Page, Bartels and Seawright were unwilling to draw firm conclusions about whether the wealthy have disproportionate influence in American politics, owing to the small size of their survey sample. But it is at least obvious that the economic policy preferences of the wealthy strongly overlap with those of the Republican Party.

On the other hand, research by the political scientist Martin Gilens in his book “Affluence and Influence: Economic Inequality and Political Power in America” shows that the wealthy tend to be more liberal than the Republican Party on social issues. By and large, the wealthy are not religious, favor abortion rights and support gay rights.

It seems much less clear what, if anything, ought be done about this. That the wealthy, educated, and older cohorts are more interested in politics and devote more of their time, energy, and effort into informing themselves about and seeking to influence its outcomes isn’t particularly worrisome on its face. The problem is the degree to which the influential class is static and self-perpetuating and/or seeks to rig the rules of the game to keep it that way.

Bartlett points to things like registration requirements and long voting lines, which disproportionately impact low income, hourly workers. Fixing those would be relatively simple, if we had the notion to do so. Most obviously, we could move voting from a workday to the weekend, declare Election Day a national holiday, or extend voting over several days.

Otherwise, attempts over the last four decades to “take the money out of politics” have proven futile. If anything, they’ve backfired. Even aside from Citizens United, the simple fact is that the wealthy and powerful have teams of lawyers who will find loopholes in any set of rules and exploit them until they’re closed. At which point they’ll find new loopholes. We live in a massive regulatory state—and while I decry it on the margins, it’s largely necessary given the nature of the modern society and economy—and it’s simply worth a lot of time and energy to shape it to their benefit.

Regardless, the forces which make income inequality so stark would seem to be growing. There’s more money to be made by those at the very top of the pyramid and less for those even slightly further down. And the demand for unskilled labor is at an all-time low.

FILED UNDER: *FEATURED, Economics and Business, US Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Console says:

    Typically as a laborer, your tension is with management. The only way to have power vis-a-vis management is to be in a union.

    As long as american’s keep believing ideological opposition to unions is more important than their working conditions, then the american worker will keep getting looted.

  2. Moosebreath says:

    “Bartlett points to things like registration requirements and long voting lines, which disproportionately impact low income, hourly workers. Fixing those would be relatively simple, if we had the notion to do so.”

    I would suggest that the reason we don’t have the notion to do so is that the people who would be more likely to vote if these were corrected tend to vote Democratic, and their participation is not welcomed by the wealthy who support Republican policies.

    I would also note that the problem is getting worse, not better:

    “From 2009 to 2011, average real income per family grew modestly by
    1.7% (Table 1) but the gains were very uneven. Top 1% incomes grew by
    11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1%
    captured 121% of the income gains in the first two years of the recovery.” cite

  3. stonetools says:

    The conservative Republican high command:

    By the decree of the angels, and by the command of the holy men, we excommunicate, expel, curse and damn Bruce Bartlett, with the consent of God, Blessed be He, and with the consent of all the Holy Republican Congregation…. Cursed be he by day and cursed be he by night; cursed be he when he lies down, and cursed be he when he rises up; cursed be he when he goes out, and cursed be he when he comes in…. We order that no one should communicate with him orally or in writing, or show him any favor, or stay with him under the same roof, or within four ells of him, or read anything composed or written by him.

    All joking aside, I don’t think Bruce Bartlett can really be considered Republican any longer, if he holds that the federal government should act to reduce income inequality. The entire raison’d’etre of the modern Republican Party is about preventing the federal government from acting to reduce inequality or to help the poor and the weak.

  4. James Joyner says:

    @stonetools: He’s in an increasingly large boat of longtime Republicans, including those who served in the Reagan and Bush 41 administrations, whose views are not in accord with the current party. I don’t know whether he still considers himself a Republican, but he’s certainly a “longtime Republican economic strategist” even if it’s former.

  5. There is currently $1.7 trillion in supplements to wages and salaries not included or accounted for in Blodget’s all time low percentage wage and salary headline that were close to zero during the beginning of his comparison period. Indirect compensation in the form of benefits, matching contributions and non-cash compensation has increased dramatically over the years. Too bad these guys can’t work the data to be fair and balanced.

  6. anjin-san says:

    Too bad these guys can’t work the data to be fair and balanced.

    I notice that you did not provide any data to support your position.

  7. wr says:

    “Indeed, income inequality is largely driven by the fact that those in certain industries are perceived as much more individually valuable than others. It simply matters more who the CEO is than who’s ringing up the orders.”

    This, of course, has nothing to do with the fact that the people who are doing the “perceiving” are all members of the CEO class.

  8. wr says:

    “Even aside from Citizens United, the simple fact is that the wealthy and powerful have teams of lawyers who will find loopholes in any set of rules and exploit them until they’re closed. At which point they’ll find new loopholes.”

    And here it is, the same old excuse for doing nothing. We can’t raise taxes on the rich — they’ll just hire lawyers to find loopholes. We can’t keep them from buying elections — they’ll just get lawyers to find ways around those laws.

    Why don’t we just say that the laws of the nation simply don’t apply to anyone with a net worth over $10 million?

    Or, alternatively, we could pass laws and enforce them against both poor and rich. And if the rich fight back, fight harder.

  9. legion says:

    This is one major failing of moving too far from a regulated market system toward a totally free-market system. All it takes is for a few companies in a given industry to become fixated on burning everything else for short-term profits. Such companies will rapidly run long-term thinkers out of the industry, either by competition or takeover. At that point, your well is poisoned – no company in that industry can ever be competitive without also focusing on short-term profits, because it’s become the de facto standard return. Increases in profits will be reinvested in the company (via bonuses, wage increases, plant upgrades that aren’t absolutely necessary to improve the short-term bottom line) in smaller and smaller percentages – rather, those profits will be taken out of the company altogether in the form of dividends and executive compensation. It’s a death spiral on an industry-wide – or even economy-wide – scale.

  10. anjin-san says:

    It simply matters more who the CEO is than who’s ringing up the orders.

    Well yes. And you would think that CEOs would be held to a higher standard. But even under/poorly performing CEOs seem to enjoy vast compensation and diamond encrusted parachutes at the end of their tenure.

  11. grumpy realist says:

    Which is why I’m for massively progressive tax rates and treating income from capital the same as income from wages. And estate taxes.

    I tell the rich: think of it as insurance against revolutions and getting strung up on lampposts. Which is what the whole system will slither down to if the balance gets too much out of whack.

  12. rudderpedals says:

    A weakness in the analysis is its failure to deal with the disaster that is corporate governance. A fifth constituency is serviced ahead of all the others – it’s the directors and officers who are supposed to answer to the directors who are supposed to answer to the shareholders. As the firm grows and the personalities develop interlocking relationships with people at other firms and boards, an organization’s board becomes a rubber stamp for whatever in the world of one hand washes the other.

    Couple no internal control with the death of shareholder derivative actions and what’s left is essentially an immortal entity answerable to no one. Why should we be surprised when it acts in ways apparently at odds with shareholders, customers, and line employees?

  13. @anjin-san:

    “I notice that you did not provide any data to support your position.”

    Actually, $1.7 billion is data from BEA. It’s available on the same St. Louis Fed website that Blodget used (which I could identify only by deciphering codes since Blodgett never actually said what data source he was using). I think you would have to have been living in a hole to not notice that non-cash, benefit and indirect compensation have increased dramatically during recent decades. This failure to account for total compensation infects and invalidates virtually every income inequality study relied on by the left.

    Also, Blodgett’s corporate data are skewed by the reality that just about everyone and everything is a now corporate (or corporate like since BEA has a very broad definition of corporation) — your lawyer, your doctor, your grocer, your mechanic, your local charities and churches and your candlestick maker included. Didn’t use to be that way, skewing trends. Also, a very high percentage of GDP defined corporate profits is now generated by foreign ownership (again, didn’t used to be that way) — good luck on using the long arm of the US government to control that.

    These observations don’t mean that any of Blodgett’s data are wrong — they do mean his interpretations are greatly exaggerated or plain wrong.

  14. HelloWorld! says:

    @grumpy realist: Also, taxing capital would cause CEO’s to hire more, rather than pay the tax. This in turn would help them run better companies.

  15. James Joyner says:

    @wr: There’s a reason a handful of movie actors command epic salaries while the vast bulk of their highly talented peers make peanuts or have to wait tables for a living. Your project’s just far more likely to be a success if you can get a bankable star. Ditto producers, directors, etc. The less differentiation between the value-added for a replacement player, the lower the salary.

    @rudderpedals: I’ve written about that before and, yes, it’s a mess. But even in a perfect system, the conflicts I outline in the post above would exist.

    @wr: I’m not arguing against any regulation; I’m arguing that keeping money out of politics is very difficult because the outcomes matter so much.

  16. Tyrell says:

    @grumpy realist: Estate taxes: why should my children have to pay taxes on something that I have paid taxes on time and time again? We are not talking about millions here, just a hundred or two hundred thousand.

  17. JKB says:

    Funny, everyone is on this “social contract” kick when supposedly the flow is from owners to the other groups. But when times are hard, profits are down, sales are lagging, suddenly the customers move to lower cost providers, the employees rebel against wage cuts or find other jobs and society has not interest. Whose left, the owners (shareholders) who yes, should be benefiting from the profits in good times but also bear the losses in bad time. Let the good times roll and its all talk about windfall profits but let hard times come and nobody knows nothin’.

    And, yes, government croneyism did lead to bailouts but that is for the connected. Those who use their cash from good times to buy themselves some politicians either directly in Goldman Sachs tradition or through union action in the UAW tradition.

    And oh the ignorance on display here. Corporations while they function independently are not the owners of the wealth. All the cash in their coffers belongs to the shareholders as does all the capital equipment, stock and real property. So when you talk of “taxing capital” you are talking about taking from the thousands of investors who are the owners. Some wealthy, yes, but a lot just have their retirement accounts.

    And keep this in mind, the wealth and success of the first world is in no small part due to enforceable property rights. Start official stealing and watch how well the social contract works in a world with the rule of law.

  18. Moosebreath says:

    @Let’s Be Free:

    “I think you would have to have been living in a hole to not notice that non-cash, benefit and indirect compensation have increased dramatically during recent decades.”

    The only type of indirect compensation which has been rapidly increasing is medical insurance. And that is because medical care has been getting more expensive, not because employees are getting better insurance. To the contrary, their insurance has gotten progressively worse, so that they pay a larger percentage of premiums, larger co-payments and larger deductibles, all of which means they are paying more for their medical care. So no, indirect compensation is not making workers better off.

  19. JKB says:

    @JKB:

    …without the rule of law

  20. stonetools says:

    @Let’s Be Free:

    These observations don’t mean that any of Blodgett’s data are wrong — they do mean his interpretations are greatly exaggerated or plain wrong.

    So… is Blodgett wrong in his conclusion that income and wealth inequality has increased sharply in the last few decades? Because just about every study of the issue that I know of has come to that conclusion:

    Distribution of income in the United States has been the subject of study by scholars and institutions. Data from a number of sources [1] indicate that income inequality has grown significantly since the early 1970s, [2][3][4][5][6] after several decades of stability.[7][8] While inequality has risen among most developed countries, and especially English-speaking ones, it is highest in the United States.[9][10][11]

    My guess is that one of the reasons you haven’t cited any links is precisely because the studies are so conclusive on the issue. I also guess that you disagree that either the government or corporations should do anything to reduce inequality. Am I right on these, Mr. Let’s Be Randian?

  21. James Joyner says:

    @Tyrell: The threshold on the estate tax is currently $5,250,000. Your heirs owe nothing on amounts below that.

  22. Moosebreath says:

    @JKB:

    “Funny, everyone is on this “social contract” kick when supposedly the flow is from owners to the other groups.”

    As opposed to how owners have, in good times and bad, outsource their work, demand wage concessions, demand their employees increase their share of payments for benefits, etc.

    “But when times are hard, profits are down, sales are lagging, suddenly the customers move to lower cost providers, the employees rebel against wage cuts or find other jobs and society has not interest. Whose left, the owners (shareholders) who yes, should be benefiting from the profits in good times but also bear the losses in bad time. Let the good times roll and its all talk about windfall profits but let hard times come and nobody knows nothin’”

    Clearly, it’s only class warfare when the lower classes act in their own interest. When the upper class acts in its own interest, its the way the world works, and the lower classes should just shut up and be grateful for whatever crumbs they get.

    “Start official stealing”

    So you think taxation is theft. Sorry, but people who say this just go onto my “do not read” list.

  23. Scott says:

    @JKB: Interesting on how this flows just one way. Do shareholders take responsibility for the debts the corporation take on? Do the shareholders take responsibility for when there is a tragic accident such as happened in West, Texas? Should the loaners of that debt be able to go after the shareholders assets to make good on their losses? If we want to have a conversation about the inequality of risk and reward, then we can do that. We can then also talk about how the social contract protect the owners and shareholders by providing law and security and an stable environment in which to conduct business.

  24. legion says:

    @JKB:

    All the cash in their coffers belongs to the shareholders as does all the capital equipment, stock and real property.

    Legally, yes. Functionally, not so much. Between multinationalism, merger-mania, board member cronyism, and dual-hatted senior execs/board members, shareholders have only marginally more actual control over corporations than unions these days. At best, if the company completely tanks, they might be able to muster enough support for a shareholder lawsuit.

  25. wr says:

    @James Joyner: “Your project’s just far more likely to be a success if you can get a bankable star. Ditto producers, directors, etc.”

    Sure. And more people will buy a Big Mac because Don Thompson is McDonald’s ceo.

    Except, of course, they wont’. A star (or a star director) is part of the product being sold, just as the players on a sports team are. They are integral parts of what people are paying money for.

    CEOs simply are not, so this is a completely false analogy, although one that’s made a lot by people looking for ways to rationalize the absurd payments made to top executives.

  26. Scott F. says:

    Most obviously, the four constituencies have conflicting interests. Doing the right thing for one’s employees tends to also benefit society but often at the expense of the customers and almost always at the expense of shareholders, at least in the short term.

    I think this is arguable. It is based on the assumption that doing the right thing for employees must raise the price. But it ignores the grossly skewed distribution within a company.

    Sure, the quality of the CEO matters more to the company than the quality of the line worker. Does 50 times more valuable seem about right? That’s approximately what the average CEO to worker pay ratio was in the early ’80s. In 2013, the CEO to worker pay ratio stands at 354 to 1.

  27. wr says:

    @Tyrell: “Estate taxes: why should my children have to pay taxes on something that I have paid taxes on time and time again? We are not talking about millions here, just a hundred or two hundred thousand. ”

    If you’re talking about two hundred thousand — or five hundred thousand or even a million — your children don’t have to pay estate taxes… BECAUSE IT DOESN’T KICK IN UNTIL THE ESTATE IS WORTH FIVE MILLION DOLLARS.

    Sorry for the shouting, but how is it possible to carry on a conversation on an issue you claim to care about when you don’t actually have the first bit of information on the subject?

    Why should anyone take you seriously when you’re making moral claims that have no connection to reality?

  28. James Joyner says:

    @wr: I’m not drawing an analogy between CEOs and actors or sports stars and agree with the distinction you make. I’m simply noting that a lot of the income inequality is inherent in the system, not greed driven. The proper analogy would be between the star of the movie, the character actors, and the extras. Or between the director and the guy who makes sure the stars have green M&Ms.

  29. Tony W says:

    It is not reasonable to expect the winners to fix the system.

  30. anjin-san says:

    @ JKB

    Corporations while they function independently are not the owners of the wealth.

    Well, the C level guys seem to have a knack for ending up at the owners of quite a bit of company wealth. A much, much higher percentage of it then was the case when America was at the peak of its economic power. And they pay much, much lower taxes then was the case back then as well.

  31. anjin-san says:

    @ James

    Or between the director and the guy who makes sure the stars have green M&Ms.

    What is the disparity between a senior manager at Wellpoint, and the CEO? Let’s put it this way, Evel Knievel could not have jumped over it on his best day.

    Are you equating a highly educated and skilled manager in corporate America with “the guy who makes sure the stars have green M&Ms”?

  32. john personna says:

    @Let’s Be Free:

    I tried to find your $1.7 trillion number and could not. It is pretty big compared to total wages and salary though … which are $6 trillion

    @wr:

    Rather than be too hard on Tryell, we should just note that this is the way it works. Rich guys in conservative media ask if the government should take away “what you worked for” when what they really mean “what I have.”

    As to the theory for taxing inheritance though, why not? Taxes cover work and luck. Lotteries are luck, and are taxed. Las Vegas winnings are taxed. Your kid did not work to make your fortune. He’s just lucky (birth lottery) to have wealthy parents. And so why shouldn’t the kid (not the parent) pay tax?

  33. James Joyner says:

    @anjin-san: No, I’m comparing the director and the guy who brings him green M&M’s. I don’t know the salary structure at Wellpoint but I presume their senior managers, if they are “highly educated and skilled,” make a very nice living.

    I hadn’t followed the Angela Braly saga and have no clue whether she created $20.6 million in value.

  34. wr says:

    @James Joyner: Of course there is and always will be income inequality. There will always be rich people; there will always be poor people. Every society deals with this in its own way.

    But we’re looking at a society where inequality is skyrocketing because our government has been essentially captured by the super-rich. Whether or not Matt Damon gets 20 million for a picture is a sideshow, a distraction. If you want to draw a real analogy to the movie biz, it’s the writers who are essentially forced to write free draft after free draft (in direct violation of their personal contracts and the union MBA) while the CEOs of the corporations that own the studios up their salaries into the tens of millions.

    If a studio chooses to pay a star a lot of money, that affects no one. If a CEO won’t pay workers more than minimum wage so he can add another couple million to his paycheck, that can affect tens of thousands of people directly.

  35. john personna says:

    On the main topics and big picture … the first step is admitting that we have a problem.

    Solutions will be hard, but when wealth and inequality are accepted as part of “the best of all possible worlds,” we won’t really try.

  36. wr says:

    @john personna: You don’t have to convince me. I think high inheritance taxes are a major social good. We don’t need an inherited aristocracy in this country, and we’re busy building one.

    But then I think we should have a lot more brackets in the tax code, as well. Probably going up to about 97% on any income over, say, $20 million.

    And if the billionaires start squealing about how they’ll leave the country… who’s going to miss them?

  37. john personna says:

    I guess to illustrate that this is not the best of all possible worlds, I could point to those old graphs of the inequality people desire, the inequality they think they have, and the inequality they actually have: Out Of Balance

  38. john personna says:

    @wr:

    I would not go so high … but a related discussion here:

    Yet Another Proposal To Raise My Own Taxes By James Kwak

  39. Ebenezer_Arvigenius says:

    There’s a reason a handful of movie actors command epic salaries while the vast bulk of their highly talented peers make peanuts or have to wait tables for a living. Your project’s just far more likely to be a success if you can get a bankable star. Ditto producers, directors, etc. The less differentiation between the value-added for a replacement player, the lower the salary.

    While this is the standard explanation it doesn’t even come close to explaining both wage differences and developments. To take German data (because I just have the numbers on my desk) CEO pay has roughly doubled since 2003. Nobody can claim with a straight face that Managers have become equivalently better in that timeframe.

    It becomes even sillier if you note that the value of the company is largely divorced from CEO pay when you look at either historical or trans-national data.

    When shareholder value models hit Germany, CEOs – which largely kept their posts – went from earning roughly 20 times the average worker wage to 43 times the average worker wage for doing exactly the same job. Trans-nationally, VW CEO Winterkorn earns roughly 16.6 Million a year (admittedly for doing a good job) while the equally successful CEO of the larger Toyota cooperation earns roughly 500.000. Lastly we can confidently say that there is no reliable correlation between company success and CEO pay, so the reasoning also fails on that count.

  40. anjin-san says:

    @ James

    their senior managers, if they are “highly educated and skilled,” make a very nice living

    Let’s look at that, using Yahoo as an example. Close to home for me. salary.com says the upper 10% range for a marketing manager in SF is 140K+. A nice salary, but here in the bay area it is no more than a comfortable living, and not enough to really allow one to get ahead of the game.

    Incoming Yahoo CEO Marissa Mayer has a first year compensation of roughly 60 million. Mind you, she has not proven her value as the leader of Yahoo in any way. In spite of this, she has basically won the lottery. She can work for a little while, and retire to the South of France in style if she chooses. Her compensation, right out of the gate, is more that 400x that of the senior manager.

  41. James Joyner says:

    @anjin-san: I concede that some of the CEO salaries strike me as absurd. But $60 million is only three times Kobe Bryant’s annual salary–which he’ll make even as he sits out the playoffs and all of next season. If Mayer saves Yahoo from the abyss, she’s worth every penny of that.

  42. john personna says:

    @James Joyner:

    Maybe you should back up and recalibrate from “drop dead money.”

    Surely drop-dead money in 2013 is well, well, below the annual salaries you are throwing about. After that it’s mega-yachts as fashion accessories.

  43. john personna says:

    (I’d also suggest that when your annual salary is beyond drop-dead [], money has long since stopped being the determinate of your happiness.)

  44. gVOR08 says:

    Doing the right thing for one’s employees tends to also benefit society but often at the expense of the customers and almost always at the expense of shareholders, at least in the short term.

    Right there is the key point, James. There was a time when at least some CEOs had a long term vision and a loyalty to the company as an institution, George Romney for example. Now the whole focus is on share price next quarter and the CEO knows he’ll be gone before the stuff hits the fan. How do we change things so the compensation committee is no longer a gang looting the corporation?

    In the long term, the employees I’m screwing are your customers and the employees you’re screwing are my customers. Eventually, an ebbing tide lowers all boats.

  45. anjin-san says:

    @ James

    A. What do Kolbe Bryant and Matt Daemon have to do with this discussion?

    B. Is what you are saying “Give Mayer more than 400x as much as a senior manager because she might be worth it”? We are basing major business decisions on maybes?

    Why not pay her 3 million a year, which is a damn good salary, and structure her contract so she gets the big payout after she has actually accomplished something?

  46. anjin-san says:

    @ gVOR08

    Now the whole focus is on share price next quarter

    In the Yahoo example, Meyer does not even have to focus on that. She won, game, set, and match, the first day she showed up for work. Set for life before achieving a single thing.

  47. john personna says:

    @anjin-san:

    Yeah, when companies offer a package with beyond “drop dead” parachute, they are really saying that they believe the CEO does not have rational priorities. A fine start 😉

  48. Ben says:

    @James Joyner:

    Except that your analogy falls apart because as insane as Kobe Bryant’s salary sounds, he’s actually only making about 20 times the minimum salary, and only about 5 times the average salary of his labor market. Compare that to CEOs nowadays.

  49. C. Clavin says:

    “…I think you would have to have been living in a hole to not notice that non-cash, benefit and indirect compensation have increased dramatically during recent decades. This failure to account for total compensation infects and invalidates virtually every income inequality study relied on by the left…”

    Oh that’s just nonsensical.
    Proof please?

  50. anjin-san says:

    @ James

    It’s worth noting that while Mayer is a successful, accomplished executive, she has no experience at the C level, much less as a CEO. No track record of turning struggling companies around whatsoever.

  51. Rob in CT says:

    First off, pretty solid post overall, James. I do agree with the others that CEOs and star athletes really aren’t the same. Maybe Steve Jobs, because of his reality distortion field superpower.

    As JP says, step one is acknowledging the problem. Step 2 is harder: finding good solutions.

    As for non-wage compensation, that’s mostly healthcare insurance is it not? Yet another reason to go single-payer nationalized. No need for companies to worry about it anymore. No need for them to have to constantly complain that people aren’t looking at “total comp.”

    😉

  52. wr says:

    @Ben: “Except that your analogy falls apart because as insane as Kobe Bryant’s salary sounds, he’s actually only making about 20 times the minimum salary”

    And because all the money that comes into the Lakers organization is coming in because people are willing to pay to see Kobe (and the other players).

    You keep bringing up these distractions, and then saying you’re not drawing comparisons… and then you draw the comparisons again.

  53. Mikey says:

    @anjin-san: This article has the details on Mayer’s compensation package: Mayer to Get Close to $60 Million (And Maybe More) in Overall Compensation for Yahoo’s Top Job

    A lot of it is tied to performance, but holy crap, the woman had never been higher than VP at Google.

    On the other hand, Yahoo’s stock is up 40% since her hiring, so maybe she’ll end up being worth it.

  54. john personna says:

    @wr:

    And because all the money that comes into the Lakers organization is coming in because people are willing to pay to see Kobe (and the other players).

    I learned something interesting this year. Pro sports are primarily funded by cable television and they compose the biggest driver of cable fees.

    As a non-viewer of pro sports, I canceled cable shortly after understanding this. Netflix is $8/mo, precisely because it does not have basketball.

  55. anjin-san says:

    @ James

    Since NBA salaries are somehow relevant in your mind, can I go to my boss and argue that my pay should be comparable to say, a second tier sixth man on an NBA team?

  56. Ben says:

    @wr:

    Good point. In pro sports (as well as in movies), the employees ARE the product. That is why it is a complete non-sequitur when we are discussing corporate executive salaries.

  57. anjin-san says:

    @ Ben

    Good point. In pro sports (as well as in movies), the employees ARE the product.

    More like the players are the product. A trainer or director of corporate sponsorship makes good money, but nothing within light years of crazy money.

  58. stonetools says:

    @James Joyner:

    He’s in an increasingly large boat of longtime Republicans, including those who served in the Reagan and Bush 41 administrations, whose views are not in accord with the current party.

    If only there was another American political party, whch has long championed programs aimed at reducing and ameliorating income equality-programs like universal health insurance, a higher minimum wage, equal pay for equal work, a more progressive tax code, greater protection of worker and consumer rights, and a stronger social safety net, over all. I think there might be such a party, name begins with D… I’m sure it’ll come to me

  59. wr says:

    @stonetools: “If only there was another American political party, whch has long championed programs aimed at reducing and ameliorating income equality-programs like universal health insurance, a higher minimum wage, equal pay for equal work, a more progressive tax code, greater protection of worker and consumer rights, and a stronger social safety net, over all. I think there might be such a party, name begins with D… I’m sure it’ll come to me ”

    If you think of the name, please let me know. I’ll happily leave the Democratic Party to join this new one.

  60. Rafer Janders says:

    @James Joyner:

    But $60 million is only three times Kobe Bryant’s annual salary–which he’ll make even as he sits out the playoffs and all of next season. If Mayer saves Yahoo from the abyss, she’s worth every penny of that.

    Um, but James:

    (i) first, Bryant actually creates quantifiable value for fans and his team right out of the bat, as proven by the fact that people buy tickets to the games and pay for cable packages to watch them on TV.

    (ii) Mayer, by contrast, has not yet created any quantifiable value, and will be paid $60 million even if she leaves Yahoo a smoking crater. Sure, if she saves Yahoo, she’s earned it, but if she doesn’t save Yahoo, she’ll still get the money. Her pay, therefore, is not tied at all to her performance.

  61. Rafer Janders says:

    @anjin-san:

    A. What do Kolbe Bryant and Matt Daemon have to do with this discussion?

    Absolutely nothing. They are employees.

  62. stonetools says:

    @wr:

    If you think of the name, please let me know. I’ll happily leave the Democratic Party to join this new one.

    You go with the liberal party you have, not the one you wish you had….

  63. anjin-san says:

    Her pay, therefore, is not tied at all to her performance.

    Kind of reminds me of the conservative beef with unions – pay not tied to performance.

    Why is it when the poor and working class claim entitlement to crumbs, the right vilifies them, while at the same time defending the entitlements of the wealthy to millions as something sacred?

  64. James Joyner says:

    @anjin-san: I brought up movie stars to illustrate to someone in the entertainment business that his industry is similarly skewed. A commenter brought up Yahoo’s CEO.

    @wr: My narrow point is that, as absurdly high as her salary sounds, it’s only 3 times Kobe’s. That makes it less crazy in my mind, even though I agree that there’s different bases for their pay.

    @anjin-san: Sure, go right ahead.

    @Rafer Janders: But they’re both speculative. Kobe will create next to zero value next year, since he’s injured, but he’ll get paid regardless. (Technically, the Lakers could amnesty him under the terms of the CBA; they almost certainly won’t.) Mayer is running the place.

    Now, I have no idea why they thought a mere VP at Google was the right person for the job. But they did. And they presumably paid what it took to get her. But, again, Kobe’s pay isn’t tied to his performance either, but to his past performance.

    @wr: But Kobe is making many multiples more than that of what the beer and hot dog vendors, janitors, and other low level employees make. You’re comparing him to the other stars.

  65. john personna says:

    @James Joyner:

    The Justin Timberlake effect, which I’ve mentioned a few times over the years, explains why both kinds of salaries, stars and CEOs, get mega-high. It has to do with how their work scales with population and wealth, rather than their skill in the job.

    A hot dog vendor can only serve so many patrons per hour. The number today is probably not that much higher than in 1900. A janitor has some labor saving tools, but he has physical limits.

    In an information age the number of people an entertainer can serve grows freely with population. Even better, if the population is wealthy, it may not fight an ever-growing cable bill. Money flows become rivers. It is similar for CEOs. The number of big car companies (etc.) has not grown in the last 50 years, but the population and their growth have grown. As long as they don’t mess up too bad, the “top companies” reap ever-larger sales. See also, Intel, and billion computers with “Intel Inside.”

    Now the interesting thing about the Justin Timberlake effect is that the star or the CEO does not have to be the best. The dynamics of the market will select someone, no matter what.

    That is the key. It is not whether Ms X is worth her millions. They key question is why Yahoo would pay an executive yet-to-be-named that much. It is really a dynamic independent of their choice.

  66. john personna says:

    Oh, note that in entertainment, “popularity” has a feedback loop propelling “someone” with sufficient talent upward … but that the system cannot support too many people at once. We have a national attention limit that can’t accept more than say a dozen “top stars” at one time.

  67. Rafer Janders says:

    @James Joyner:

    Kobe will create next to zero value next year, since he’s injured, but he’ll get paid regardless. (Technically, the Lakers could amnesty him under the terms of the CBA; they almost certainly won’t.)

    Well, no. Kobe has already created most of the value, injury or not, since season tickets and cable television deals are sold ahead of time. The most that will be lost is some people not buying one-off tickets to Lakers games, but that accounts for only a fraction of the value. The real money is in the TV and advertising deals, and those are already negotiated and signed for.

  68. anjin-san says:

    @ bill

    of course the elephant in the room here is that blacks are fairing worse under our first black president, discuss!

    Well, first, what exactly does “faring worse” mean? Be specific and produce data to support your argument. This is not “Fair and balanced and fact free”. Don’t waste everyone’s time with vaugue ramblings.

  69. john personna says:

    @bill:

    So .. if Obama had 87% approval among blacks your answer would be?

  70. Scott O says:

    @bill: What steps would you like to see Obama to take to reduce black unemployment?

  71. anjin-san says:

    @ bill

    Your taking that stuff seriously explains a lot about you.

  72. john personna says:

    A new piece at Time starts thus:

    Wealthy Americans don’t really think that good times are here again for the economy. But they’re going on shopping sprees anyway, with increasing sales seen for luxury hotel stays, high-end automobiles, and more.

    Unless we take this seriously, we could be heading for a Guilded Age.

  73. grumpy realist says:

    @Tyrell: Because there’s a high probability that you in fact have NOT been taxed on what you have in your estate. If a large percentage of your estate is due to unrealized capital gains on stock that you bought 20 years ago, then that increase does not get taxed when the estate passes to your heirs in the normal course of events because the basis is now the value of the stock at the time of the decedent’s death.

    That’s why we have estate taxes. Because of the step-up in basis.

    Of course, if you want, we can get rid of estate taxes, treat the transfer of stock as a transformation event, and simply insist that your heirs pay on any unrealized capital gains of any stock that they get. Of course, if they can’t prove what you bought the stock at or at what date, we’ll have to assume that it was originally acquired at the lowest historic price.

    Are you sure you want to do this? .

  74. john personna says:

    @grumpy realist:

    We probably should stop calling it “estate tax” and totally define it as “income tax” on heirs.

    Then, as I really should have done, we can recast my comment above:

    Rather than be too hard on Tryell, we should just note that this is the way it works. Rich guys in conservative media ask if the government should take away “what you worked for” when what they really mean “what I give to my shiftless son.”

  75. rudderpedals says:

    @grumpy realist: During the 10 years of the estate tax phase out ISTR the right was trying to get rid of the basis step-up even though it was the way the 99% of the rest of us got some tax advantage in inheritance. Is basis step-up for inherited property the law again? (genuine question)

  76. Barry says:

    James: “Otherwise, attempts over the last four decades to “take the money out of politics” have proven futile. If anything, they’ve backfired. Even aside from Citizens United, the simple fact is that the wealthy and powerful have teams of lawyers who will find loopholes in any set of rules and exploit them until they’re closed. At which point they’ll find new loopholes. We live in a massive regulatory state—and while I decry it on the margins, it’s largely necessary given the nature of the modern society and economy—and it’s simply worth a lot of time and energy to shape it to their benefit.”

    I don’t see the ‘backfire’; I see the failure or limitations on most efforts. This is probably because as the 1% (and the 1% of the 1%) has a larger share of wealth and income, it’s proportionately far easier to financially manipulate any system. Money leads to power leads to money…..

    And as for the ‘modern regulatory state’, the rich has *always* used state power when they’ve been able, and frequently used it lavishly. Back in the 1800’s, when the theoretical government was far closer to the libertarian ideal, the rich used the police as private armies, the judges as their private courts, etc. When they wanted the government to do something for them, the fact that the government didn’t theoretically have that power was a mere theoretical problem.