by Ron Forthofer
January 18, 2012
Last autumn, likely due to the Occupy movement, there was a shift of media attention from debt reduction and the cutting of vital public programs (for example, Social Security, Medicare and Medicaid) to the issue of extreme wealth and income inequality in America. Extreme inequality is of concern for many reasons, but Supreme Court Justice Louis Brandeis provided perhaps the most crucial reason when he said: “We can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.”
Many of those who support grossly unequal outcomes attempt to distract the public from the critical extreme inequality in wealth and income here by stressing equal opportunity as the key. Incredibly, they seem to think that we have equal opportunity in America. However, Paul Krugman’s January 8th column, “America’s Unlevel Field”, clearly points out that the playing field in the U.S. today is definitely not anywhere close to being level.
Despite the terribly unequal opportunities that exist, Americans have generally accepted the idea of some reasonable level of wealth and income inequality. The public’s acceptance sprang from the idea that some people have special talents or make special contributions that merit greater rewards.
However, two factors have undercut this support. First, there is a weakening of the connection between reward and merit. In addition, we have now reached an obscene level of inequality that is exemplified in a report from the Heritage Institute. Based on data from 2000, the Heritage Institute showed that CEO pay for major U.S. corporations was wildly out of line with those of our economic competitors. For example the average pay for CEOs in Japan was 10 times the average worker’s wage compared to 531 times here. Of the 26 countries in the report, Brazil had the second largest inequality with a value of 57.
The obscene rise in this inequality in the U.S. is striking, going from a value of 24 times in 1965 to 42 times in 1980 to 85 times in 1990. More recent data show that the U.S. value declined from the 531 times in 2000 to well over 300 times the typical worker’s pay in 2010. Note that the comparisons are affected by how many major corporations are included in the studies. For example, another estimate for the U.S. in 2000 was 300 times compared to the 531 times mentioned above; regardless, the U.S. is way out of line compared to our economic competitors and the change over time is appalling.
The Heritage Institute report included 2004 and 2006 quotes from Warren Buffett, chairman of Berkshire Hathaway, that address both merit and extreme inequality. According to the report, in a May 2004 letter to shareholders, Warren Buffett wrote about the inadequacy of corporate governance structures among U.S. companies. “(If) Corporate America is serious about reforming itself, CEO pay remains the acid test.” Buffett added: “The results aren’t encouraging.” Buffett criticized lavish pay packages and the “lapdog behavior” of directors, calling the situation an “epidemic of greed.”
In a 2006 shareholder report, Buffett stated: “Too often, executive compensation in the U.S. is ridiculously out of line with performance.” “Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.”
Extreme inequality is even more problematic when it results from questionable behavior and/or political connections. Consider that those in the financial sector, whose unethical and immoral practices almost collapsed the financial system, were not held accountable for their actions. Talk about the lack of a moral hazard! Instead, besides initially profiting from fraud, they became even wealthier due to the taxpayer-funded bailout of the financial sector.
Changes in the tax system played a major role in increasing the level of inequality in America over the past decades. For example, the corporate share of federal taxes went from 28% in the 1950s to an average of roughly 10% over the 2001 to 2010 period. In addition, the top marginal individual tax rate dropped from 91% in 1954 to 35% today. Cuts in the top capital gains taxes for long-term gains from 28% to 15% have primarily benefited those at the top of the wealth scale. Politicians have also greatly weakened the estate tax that worked to lessen inequality somewhat. These changes certainly have played a major role in creating the extreme inequality we see today.
Our method of financing political campaigns, some would call it legalized bribery, makes it particularly easy for large corporations and the wealthy to push for tax reductions and tax loopholes at the expense of small business competitors and the public. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill) and Perfectly Legal: The Covert Campaign to Rig Our Tax System To Benefit the Super Rich–and Cheat Everybody Else, two books by Pulitzer Prize winner David Cay Johnston, provide numerous examples of this corruption and other questionable business practices by large corporations. America: Who Really Pays the Taxes? and several other books by investigative reporters and twice Pulitzer Prize winners Donald Barlett and James Steele also address how the tax code is manipulated to the benefit of the rich and powerful. In The Tyranny of Oil, Antonia Juhasz details how huge energy and financial corporations greatly profit from their corruption of the political system, and how the public bears the cost. Among her many examples are the government’s failure to enforce anti-trust laws and its creation of the “Enron loophole”.
If compensation were indeed based on merit, Americans could accept a reasonable level of inequality. However, as shown above, besides merit, income and wealth are often linked to many other factors, including the corruption of politicians.
Given the dire straits – high levels of unemployment and underemployment, homelessness, lack of health insurance, home foreclosures, huge credit card debts and college loan debts, shortages of food – that many Americans face today, our extreme inequality is intolerable. The current situation demands a drastic overhaul of our corrupt political/economic system to end and to prevent future extreme inequality. Unless we act now, control by the wealthy and powerful will be solidified.
Ron Forthofer is a retired professor of biostatistics from the University of Texas School of Public Health in Houston and was a Green Party candidate for Congress and also for governor of Colorado.