Redistribution of Wealth Part II

One of the unintended or unforeseen circumstances of lowering the tax rates so drastically on the upper income levels was the astronomical increase in compensation that CEO’s of large corporations set aside for themselves. In 1980 the average CEO made some 1.4 million dollars a year. In 2008 that number was up some 743% to 11.8 million. Much of this increase was in the form of stock dividends that were not taxable so between that and the lower income tax rates virtually none of this increase showed up in governmental tax coffers. During this same time period the average worker’s income increased less than 5% and if adjusted for inflation it fell dramatically. Throughout the 1960’s and 1970’s the ratio between CEO and average median income of worker was some 44-1. In other words if the average worker made ten dollars an hour the average CEO made 440 dollars an hour or $17,600 a week. It is of course questionable if there is a 44-1 ratio in effectiveness as far as profit is concerned but we will leave that be for the time being. In 2001 the ratio was 525-1. Using the same math if the average worker makes 10 dollars an hour that means the average CEO makes 5250 dollars an hour or $210,000 a week. This is a difference of some $209,600 a week between what the average worker makes and what the CEO of the company makes. I would defy anyone to explain how this is cost effective. Judging from the number of corporate collapses we see all around the country today we might be better off to put the median average employee in charge of the corporations and triple his pay. We could immediately cut a huge amount of overhead while probably losing little in the way of expertise.

One of the reasons the rich are getting richer is our government’s overweening concern with the stock market and financial institutions. The recent bailout of the whole financial system with taxpayer and Federal Reserve money is a case in point. Many Americans are now invested in the stocks and bond markets through their 401 K policies which are most Americans sole source of savings outside of the equity in their homes. Therefore it seems reasonable that the government should be concerned with such problems as it affects a large number of citizens when collapses occur. It is worth looking at the actual numbers here in order to see if this is truly a widespread problem or not. The top 1% of wealthiest Americans own 46% of all the stocks and mutual funds in this country. The next 9% of wealthiest Americans own the next 33% of all the stocks and mutual funds in this country. In other words the top 10% of the wealthiest Americans own 79% of the stocks and mutual funds traded in this country. Think about that the next time we have a financial collapse that threatens our economy. Who is actually getting bailed out with massive injections of taxpayer money and unending Federal Reserve loans made with dollars created out of thin air?

Where are most American’s savings? Most Americans have the vast majority of their savings invested in their homes. 66% of Americans have virtually all of their savings in their principal residence. The top 1% wealthiest Americans have some 7% of their savings in their principal residence while the rest of the top 10% wealthiest Americans have around 17% of their savings in this same principal residence. This means that when housing prices drop some 20% as most have done in the last two years most Americans see 20% of their savings disappear while the richest Americans see theirs fall only about 1.4%. Bearing this in mind it is a little hard to explain why the government is bailing out financial institutions and letting homeowners not only eat the loss of equity but pay for the bailouts with their tax money. Most middle class Americans are caught in this squeeze and don’t even recognize its source. A recent study estimated that the total debt in this country is overwhelmingly absorbed in the middle class. The top 10% of wealthiest Americans owe some 29% of the total debt while the lower 90% owe 71% of it. If we break this down even further we see that the lower 35% of earners actually owe very little of this debt so what it really amounts to is that the middle 45% of earners in this country owe 70% of the debt. We have become a nation owned and controlled by bankers and corporations. It isn’t hard to see how they have managed to buy control of the government but it is amazing to me who they have managed to do it with the support of much of the same working class that is bearing the brunt of the loss of income and buying power. The same middle class that is losing their ability to exist and turning to higher ratios of debt to survive is the base of the Republican Party that has orchestrated this whole fiasco with their deregulation of financial institutions and worship of the almighty corporation.

In my recent reading of Adam Smith’s Wealth of Nations I found an interesting section concerning the relative interests of classes of people and how they correspond to government. We must remember that Smith’s book is the bible of free traders. It is often quoted and used extensively in support of the free market philosophy that Reagan supposedly espoused. Unfortunately, free markets in this country disappeared a long time ago and have been replaced with monopolies that pull the strings that run everything; but that is a discussion for a later post. Let me get back to what Smith wrote. At the end of Book I Smith is discussing the three basic classes of people who make up civilized societies. He breaks them down as follows; those who own land and make their money from rent, those who make their living off of wages, and those who make their money off of profit from investment. Smith goes on to explain that both of the first two classes interests are always tied directly to the interest of society as a whole; that what is good for these two classes of people is always good for society at large. He explains that laborers prosper most when demand for their labor is highest as in the economy is growing such that there is more demand than there is labor. He further explains that renters prosper most when there is demand for their property; as in the economy is growing and there is more demand than there is property. It is basic common sense really but both of these two classes of people have their interest intertwined with the common well being of the community at large. One can carry this analogy a little further and suggest that these two classes of people would make the best elected leaders as their interests are aligned with the interests of society at large. Looking back one can see that these two classes of people were always the source of our best leaders since the founding of this country, no doubt in large part because their personal interests were seldom divergent from the interest of the people at large.

Smith then goes on to warn against the influence of the third class of people; those who make their money from profit. Smith defines these people as Merchants and Master Manufacturers. In his day these were a very narrow and small class but extremely wealthy. I cannot imagine what he would think of their progeny in our world today. Corporate leaders who control the vast majority of income and wealth in this country and now control the government as well. However, let me get back to what Smith wrote about this class in his time:

Merchants and master manufacturers are, in this order, the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of society, their judgment, even when given the greatest candor (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter. Their superiority over the country gentlemen is not so much in the knowledge of the public interest, as in their better knowledge of their own interest than he has of his. It is by superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest of that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Amazingly prescient was Mr. Smith. Of the three classes of people that make up civilized society there is one that has interests opposed to those of the public according to Mr. Smith. He warns that we should be exceedingly careful in dealing with this class of people for this very reason. I would suggest that he is exactly right. I would also suggest that we have ignored this advice to our peril. We now elect them to office and expect them to rule according to the interest of the public without recognizing it is against their very nature to do so. There is an old saying that you should never put a fox in charge of a henhouse. I would suggest that you also should not put anyone who works for a fox in charge of a henhouse. The next time you hear some Republican or conservative foaming at the mouth and warning against the dangers of the redistribution of wealth I hope you will remember that it has already happened in a clear cut and concise way. The best we can hope for now is a recognition of the fact and a slow, grinding effort to get back to equilibrium. Until that happens we will continue to see the destruction of our economy and the disappearance of the middle class while the class Mr. Smith warned us against continues to accumulate all the wealth and power in this country at our expense.