Sunday, June 17, 2007

Let Them Eat Cake

Let Them Eat Cake

By Jerome Grossman

When it comes to the distribution of America's income and wealth, the disparity between the wealthy and the rest of society is greater than at any time since the Great Depression. A free market under our capitalist system will relentlessly produce inequality of income, and when that inequality is recognized as excessive, political leadership must correct or democracy may fail under the pressure of serious upheavals from below.

Wages are weaker, workers’ share of the growing economic pie is shrinking, certainly when compared to the outrageous salaries and bonuses and stock options the top managers receive. The managers have personal relationships with the compensation committees of the board of directors and it shows in the rewards authorized. The wage earner is not an insider. The enormous imbalances demean the workers by crediting the managers for the success of the enterprises when only intense cooperation at every level guarantees improvement and performance. No one builds wealth alone. Private wealth is derived from many factors coming together at the right time under positive conditions: the risk taking entrepreneur, the worker who executes with care as well as the ripe infrastructure of libraries, transportation, education, medicine, etc.

The compensation at the top is creating an aristocracy of wealth, with the resources to buy vast tracts of land, whole cities, thousands of workers, entire political parties, universities, charitable foundations, medical research, media, etc.. In a free market system such as ours, the compensation cannot be controlled: there is no fair price, no accepted level of compensation, only what the market will bear, whatever people are willing to pay. The stockholders, the real owners, are unorganized and ineffective.

The situation seems out of control. Nevertheless, there is a growing unease about compensation and the more enlightened billionaires and corporate leaders are speaking out. Bill Gates, the richest American, alerted the Harvard Alumni Association to the problem. Federal Reserve Chairman Ben Bernanke cautioned that widening economic inequality may make Americans “less willing to accept the dynamism… so essential to economic progress”. Former Fed Chairman Alan Greenspan occasionally expressed concern about the widening compensation gaps as did Treasury Secretary Henry Paulson, Ed Lazear of Council of Economic Advisers – and even President George W. Bush.

However, we are a long way from a workable solution. No politician or economist is ever going to dictate salaries in the American economy. The most likely solution would be to recapture part of the high compensation through taxation reform, changing the rates and the exemptions that now favor the rich at the expense of the great mass of taxpayers.

Billionaire Warren Buffet told his stockholders that he was embarrassed that his secretary paid a higher tax rate (35%) than he did (15%). Robert Rubin, a former Treasury Secretary, recently made the case for private equity and hedge fund managers paying more than double the low rate in taxes they now pay. Others have called attention to the many loopholes placed in the tax code by Congress under pressure from lobbyists for corporate America and wealthy individuals. Another area of tax advantage is offshore tax -- sheltering by multinational corporations and wealthy individuals. Most rich people can arrange their income as capital gains taxed at 15%, while the wage earner pays 35%! Should the rates be reversed? Will such a change end entrepreneurship? It didn’t in other decades.

Remember the Republican Eisenhower administrations? The top tax rate then was 91% of the last dollar earned by the wealthy.Since then the lobbyists have persuaded Congress that the rich need more encouragement to manage or invest than the working stiffs. That will be difficult to change in this era when campaign contributions at every level to finance mass media appeals are so important for getting elected. A chief executive can persuade 100 friends or suppliers to donate $4600 per couple making the chief a fundraiser of $460,000, enough to enable him to make his case personally on taxation, to any senator, representative, or president.
A winner take-all economy is inherently unstable.
As Queen Marie Antoinette said when she learned that the people of Paris had no bread, “Let them eat cake.”


Odiogo allows end-users to listen to content either on their PCs or on portable devices such as iPods, MP3 players or cellular phones.