The Price of Inequality: How Today's Divided Society Endangers Our Future (48 page)

88.
As we noted, different sources give slightly different numbers, but all present the same picture. One (at
http://www.ips-dc.org/reports/executive_excess_2010
) reports CEO pay of major U.S. corporations as some 263 times that of the income of the average worker. They report that, in inflation-adjusted terms, CEO pay in 2009 was nearly 8 times higher than in the 1970s. Earlier, we presented data from Mishel, Bernstein, and Shierholz,
The State of Working America
. This showed CEO compensation to that of the typical worker for large firms, up tenfold from 24 to 1 in 1965 to 243 to one in 2010. Whereas CEO compensation grew by only 0.8 precent a year from 1950 to 1975, since then it has grown more than 10 percent per year. See C. Frydman and D. Jenter, “CEO Compensation,”
Annual Review of Financial Economics
2, no. 1 (December 2010): 75–102. Frydman and Saks report “Ratio of Average Top 3 Compensation to Average Workers” between 1970 and 1979 as 33. That ratio (which should be slightly lower than that of the CEO compensation to that of the average workers) grew at a rate of 4.7 percent in the 1980s, 8.9 percent in the 1990s, and 6 percent between 2000 and 2003, rising to a level of 219 (see table 6, p. 45). C. Frydman and R. Saks, “Historical Trends in Executive Compensation 1936–2003,” working paper, November 2005, available at
http://faculty.chicagobooth.edu/workshops/AppliedEcon/archive/pdf/FrydmanSecondPaper.pdf
(accessed January 27, 2012).

89.
See Joseph E. Stiglitz,
The Roaring Nineties
(New York: Norton, 2003).

90.
See “Cheques with Balances: Why Tackling High Pay Is in the National Interest,” final report of the UK High Pay Commission, p. 24, available at
http://highpaycommission.co.uk/wp-content/uploads/2011/11/HPC_final_report_WEB.pdf
(accessed March 1, 2012).

91.
Ibid., p. 21. Even the Institute of Directors (the U.K. organization of Corporate Directors) suggests that something is out of line. See Institute of Directors press release, “The Answer to High Executive Pay Lies with Shareholders and Boards, Says IoD,” October 28, 2011, available at
http://press.iod.com/2011/10/28/the
-answer-to-high-executive-pay-lies-with-shareholders-says-iod/ (accessed March 6, 2012).

92.
OECD, “Divided We Stand.”
Among OECD countries, Turkey and Mexico both have substantially greater inequality as measured by the Gini coefficient. See the discussion of this measure below.

93.
These comparisons are based on Gini coefficient data provided by the United Nations International Human Development Indicators, but are also supported by other databases. The Gini coefficient is an imperfect measure of inequality, but is useful for general international comparisons such as this one. I discuss some of the difficulties of comparing Gini data in subsequent footnotes in this chapter.

94.
See United Nations Human Development Report statistics, available online at
http://hdr.undp.org/en/statistics
/ (accessed March 6, 2012). The only country where inequality had a larger negative effect on ranking was Colombia.

95.
See World Bank Indicators, available at
http://data.worldbank.org/indicator
.

96.
United Nations Human Development Indicators database, available at
http://hdrstats.undp.org/en/tables
/ (accessed March 6, 2012).

97.
Some caution must be used in making comparisons across countries. Data necessary for calculating the Gini coefficient are difficult to collect, especially in poor countries. Moreover, inequality in income may not adequately capture inequality in “well-being,” especially in comparing governments that provide strong safety nets and systems of social protection. Moreover, some of the inequality in larger countries (like China) may be related to geography. There are various sources for data comparing Gini coefficients across countries, including the World Bank, the United Nations, the CIA, and the Global Peace Index. See respectively
http://data.worldbank.org/indicator/SI.POV.GINI?page=2&order=wbapi_data_value_2009%20wbapi_data_value%20wbapi_data_value-last&sort=asc,
http://hdrstats.undp.org/en/indicators/67106.html
,
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2172rank.html
, and
http://www.visionofhumanity.org
/.

98.
Calculated between 1999 and 2009 on the basis of data from the U.S. Census Bureau. See Historical Table H-4, Gini Ratios for Households, by Race and Hispanic Origin of Householder, available at
http://www.census.gov/hhes/www/income/data/historical/household/index.html
.

99.
See UN Human Development Indicators database. It should be noted that data are quite incomplete for recent years, and that the UN’s calculation of the Gini coefficient in the United States in 2000 (40.8) is different from the U.S. census calculation for that year (46.2). I attempt to make comparisons only within one dataset at a time.

100.
See Eurostat data on European Gini coefficients, available at
http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_di12&lang=en
(accessed March 5, 2012).

101.
Based on comparison of World Bank data, available at
http://data.worldbank.org/indicator/NY.GDP.PCAP.KD?page=6
(accessed February 14, 2012). The U.S. GDP per capita in 2010 in constant 2000 dollars was $35,527, and in 1980 it was $20,004.

102.
There is a standard theory in economics that consumption should reflect differences in lifetime (or permanent) income. See Milton Friedman,
A Theory of the Consumption Function
(Princeton: Princeton University Press, 1957). The large inequalities in consumption thus suggest large inequalities in lifetime incomes. Note that year-to-year variations in income can still have welfare consequences, if capital markets are imperfect (as they are) so that individuals can’t smooth consumption. Using annual earnings data from the Social Security Administration, Wojciech Kopczuk, Emmanuel Saez, and Jae Song find that “most of the increase in the variance of (log) annual earnings is due to increases in the variance of (log) permanent earnings with modest increases in the variance of transitory (log) earnings.” Thus, in fact, the increase in earnings inequality is in permanent income. Furthermore, they find that it remains difficult for someone to move up the earnings distribution (though they do find upward mobility for women in their lifetime). See their “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937,”
Quarterly Journal of Economics
125, no. 1 (2010): 91–128. To the extent that consumption inequality may have been less than income inequality before the crisis, and that it grew more slowly than did income inequality, it was partly because of unbridled borrowing. With the collapse of the housing market, the ability to consume beyond one’s income has been reduced. This provides an important critique of earlier analyses of consumption inequality, e.g., Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,”
Review of Economic Studies
73 (January 2006): 163–92.

103.
In 1995, Congress requested that a panel of experts from the National Academy of Sciences issue a report investigating revisions to the poverty threshold. National Research Council.
Measuring Poverty: A New Approach
(Washington, DC: The National Academies Press, 1995).

104.
The Heritage Foundation has recently complained, “In 2005, the typical household defined as poor by the government had a car and air conditioning. For entertainment, the household had two color televisions, cable or satellite TV, a DVD player, and a VCR. If there were children, especially boys, in the home, the family had a game system, such as an Xbox or PlayStation. In the kitchen, the household had a refrigerator, an oven and stove, and a microwave. Other household conveniences included a clothes washer, a clothes dryer, ceiling fans, a cordless phone, and a coffee maker.” R. Rector and R. Sheffield, 2011, “Air Conditioning, Cable TV, and an Xbox: What Is Poverty in the United States Today?,” July 19, 2011, available at
http://www.heritage.org/research/reports/2011/07/what-is-poverty
. Of course, selling the TV (or one of these other appliances) would not go far to provide food, medical care, housing, or access to good schools. There is another important area, exploring the relationship between consumption and happiness, going back at least to Veblen’s (1899)
Theory of the Leisure Class
, which introduced the concept of “conspicuous consumption.” More recently, Richard Wilkinson and Kate Pickett, in
The Spirit Level: Why Greater Equality Makes Societies Stronger
(New York: Bloomsbury Press, 2009), argue that more equality can improve happiness through reducing “social evaluation anxieties” and associated stresses.

105.
See U.S. Census, “The Research Supplemental Poverty Measure: 2010,” November 2011.

106.
As we’ll explain in chapter 3, there are two sides of this argument (both wrong). The first is that taxing the top at higher rates will reduce their incentives to work and save, so much that tax revenues may even fall; the second is that helping the poor will just breed more poverty—inducing those at the bottom not to work.

107.
Mitt Romney on the
Today Show
, January 11, 2012, “I think it’s fine to talk about those things in quiet rooms . . . . It’s a very envy-oriented . . . approach and I think it’ll fail.” Available at
http://blogs.chicagotribune.com/news_columnists_ezorn/2012/01/shhhhh.html
(accessed January 25, 2012).

Chapter Two
R
ENT
S
EEKING
AND THE
M
AKING OF AN
U
NEQUAL
S
OCIETY

1.
That’s one of the reasons that good stock market performance is no longer a good indicator of a healthy economy. Stocks can do well because wages are low and the Fed, worried about the economy, keeps interest rates at near zero.

2.
Thucydides,
The Peloponnesian War
, trans. Richard Crawley (New York: Modern Library, 1951), p. 331 (book 5.89).

3.
That’s why the cases where those in power voluntarily give some of it up are so interesting. In some of them, it’s because those in power have an understanding of their own long-term interests—and the long-term interests of those they are supposed to serve. That was the case, e.g., when the king of Bhutan, in 2007, insisted on converting his country into a constitutional monarchy. He had to persuade his citizens that that was the right course for them. The elites of nineteenth-century countries that extended education must have known that there was a risk that this would over the long run weaken their dominance of the political franchise; yet the short-term economic advantages of having a more educated workplace seem to have dominated the long-term political consequences. See François Bourguignon and Sébastien Dessus, “Equity and Development: Political Economy Considerations,” pt. 1 of
No Growth without Equity?
,” ed. Santiago Levy and Michael Walton (New York: Palgrave Macmillan, 2009). Daron Acemoglu and James Robinson theorize that democratization is a way for ruling elites to commit to future redistribution, and thus avoid the extreme of revolution when faced with social unrest. If there is not sufficient strength in the rebellion, repression or temporary reform (or transfers) might suffice. Acemoglu and Robinson,
Economic Origins of Dictatorship and Democracy
(Cambridge: Cambridge University Press, 2006).

4.
See Karl Polyani,
The Great Transformation
(New York: Rinehart, 1944).
One of the theories developed in response to Marx was that of Nassau Senior, the first holder of the Drummond Chair at Oxford University, who argued that the return capitalists earned was compensation for their “abstinence” (i.e., saving, or
not consuming
).

5.
The formalization of this idea is called the “first welfare theorem of economics.” It asserts that under certain conditions—when markets work well—no one can be made better-off without making someone else worse-off. But, as we shall explain shortly, there are many instances in which markets do not work well. A recent popular analysis is Kaushik Basu,
Beyond the Invisible Hand: Groundwork for a New Economics
(Princeton: Princeton University Press, 2011). Basu uses the metaphor of a magic show to describe the way the discussion of economics on the political right draws attention to the conclusion of this theorem—that markets are efficient—and away from the very special and unrealistic conditions under which the conclusion holds—perfect markets. Like a good magician, a free-market economist succeeds by drawing spectators’ attention to what he wants them to see—the rabbit jumping out of the hat—while distracting their attention from other things—how the rabbit got into the hat in the first place.

6.
Adam Smith,
The Wealth of Nations
(1776; New York: P. F. Collier, 1902), p. 207.

7.
See Carmen Reinhart and Kenneth Rogoff,
This Time Is Different: Eight Centuries of Financial Folly
(Princeton: Princeton University Press, 2009).

8.
A derivative is just a financial instrument the return to which is
derived
on the basis of something else, e.g., the performance of a stock or the price of oil or the value of a bond. A few banks have profited enormously by keeping this market nontransparent, garnering for themselves an amount widely estimated at more than $20 billion a year.

9.
On October 31, 2011, MF Global Holdings, a brokerage firm run by Jon Corzine, filed for bankruptcy protection in New York. It was the eighth-largest corporate bankruptcy in U.S. history and the biggest failure by a securities firm since Lehman Brothers Holdings Inc. filed for Chapter 11 in September 2008.

10.
While there may be some debate about when taking advantage of information asymmetries is unethical (reflected in the maxim “caveat emptor,” putting the obligation on the buyer to beware of the possibility of information asymmetries), there is no doubt that the banks stepped over the line. See the discussion in later chapters over the large fines paid by the banks for practices that were fraudulent and deceptive.