Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Friday, June 21, 2013

Banker, CEO Pay Largely Responsible For Rising Inequality: Study

In a recent defense of the 1 percent, Harvard economist Greg Mankiw admitted it might be bad if the rich got richer by sucking cash from the economy without giving any value back. A new study suggests many of the rich -- especially bankers and CEOs -- are doing just that.

Josh Bivens and Lawrence Mishel, economists at the Economic Policy Institute, a left-leaning think tank, argue in a study responding to Mankiw that most of the rise in income inequality over the past few decades is due to the soaring pay of CEOs and Wall Street bankers who are milking money from the markets rather than generating much in the way of economic production.

"A substantial part of the extraordinary rise of top 1 percent incomes is not a result of well-functioning markets allocating pay according to value generated, but instead resulted from shifting institutional arrangements leading to shifting of rents to those at the very top," Bivens and Mishel write.

The technical term for this is "rent-seeking." Mankiw, a former economic adviser to President George W. Bush and Mitt Romney, suggested in his recent paper, "Defending The One Percent" that there wasn't much of this going on, that the 1 percent are just richer than you, and getting even richer all the time, because they are better than you.

But he does admit that rent-seeking could be a problem:

    If the top 1 percent is earning an extra $1 in some way that reduces the incomes of the middle class and the poor by $2, then many people will see that as a social problem worth addressing. For example, suppose the rising income share of the top 1 percent were largely attributable to successful rent-seeking. Imagine that the government were to favor its political allies by granting them monopoly power over certain products, favorable regulations, or restrictions on trade. Such a policy would likely lead to both inequality and inefficiency. Economists of all stripes would deplore it. I certainly would.

Unfortunately, this is pretty much what has happened in the past 30 years, as Bivens and Mishel show, with numbers.

They point out that the top 1 percent of earners now take in about 74 percent of all the nation's capital gains, up from just 58.5 percent in 1979. That means they are getting the bulk of price gains in stocks, bonds and homes, to name just a few of the ways you can get capital gains. Increasingly, this kind of income is gathering at the very top and staying there. These price gains don't necessarily represent value added to the economy, just higher profit margins, Bivens and Mishel suggest.

Meanwhile, the bulk of the gains by the 1 percent in the past few decades have been made by people who work on Wall Street and top executives of non-financial firms, say Bivens and Mishel. "Together, finance and executives accounted for 58 percent of the expansion of income for the top 1.0 percent of households and an even greater two-thirds share (67 percent) of the income growth of the top 0.1 percent of households," they write.

This wouldn't matter if bankers and CEOs were busily adding value to the economy. Instead, though, many seem to be busily doing the opposite.

There's a long history of research suggesting that CEO pay is far out of proportion to the value executives add to their companies and the economy, Bivens and Mishel write. That helps explain why CEO pay has outstripped even gains in the stock market. And, tellingly, U.S. CEOs are paid much more than their foreign counterparts -- U.S. CEOs get paid 44 times what the average worker makes, according to one estimate, compared with 19.9 times for foreign CEOs.

Meanwhile, bankers have been even more obviously squeezing the system for personal gain, in just the way Mankiw described. In the 1980s and 1990s they lobbied government policy-makers to deregulate their industry, making it easier for them to build ever-bigger banks and ever-more-complex financial instruments that they could trade for fun and profit, extracting fees from clueless investors and adding nothing of value to society. And they occasionally blow up the entire financial system, creating huge additional costs to the economy.

When they are not blowing up the economy, our biggest banks are collecting a taxpayer subsidy of some $83 billion per year in lower borrowing costs, based on one estimate, because of the widespread belief that the government will never let them fail. Bankers reap the rewards of this arrangement, while hiding the future risks to the global economy lurking on their balance sheets -- risks they get handsomely paid to take.

Bivens and Mishel admit that the case for bankers and CEOs milking rent from the economy is "not yet ironclad." But they argue that U.S. government policy has clearly given bankers and CEOs strong incentives to seek rent, by slashing tax rates for top earners and on investments. Another recent EPI study suggested that the tax code was responsible for most of the rise in income inequality. They suggest policy-makers could raise those tax rates back to where they were were decades ago without doing much damage to economic growth. Reforming pay schemes for bankers and CEOs could help, too.

Original Article
Source: huffingtonpost.com
Author: Mark Gongloff 

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