This article, in a slightly different form, appeared originally in the December 1, 1995, issue of Commonweal magazine.
When I first went job-hunting, my uncle told me: "Remember, the harder you work, the more money you'll make." Later, economists and editorialists tried to teach me a similar lesson: the more productive workers are, the higher the real wages they earn. In its 1995 report, the Council of Economic Advisors, echoing the same point in almost the same words, reinforced it by adding: "Few propositions in economics are as well documented...or command as much support among professional economists, whatever their political persuasion."
I have long realized that my uncle's prediction was faulty. Now it turns out that even a proposition propagated by economists of all political persuasions can be flawed: this one simply does not square with modern labor market realities. Confounding conventional wisdom, the pay increases of workers in recent years have consistently lagged behind increases in productivity. To take one yardstick from U.S. Bureau of Labor Statistics data: labor productivity in nonfarm businesses between 1982 and 1994 increased at a rate nearly three times the increase in the real hourly compensation of workers in the same sector. Workers in manufacturing plants did much worse: their hourly compensation (wages and benefits combined) remained flat during that period while productivity zoomed 37 percent. In light of evidence of the same trend through late 1995, Secretary of Labor Robert Reich commented:
"There is something wrong with rising profits, rising productivity, and a soaring stock market but employee compensation heading nowhere."
My uncle was right in believing that if I worked harder and thus became more productive, I would generate more wealth, but wrong in assuming that I myself would necessarily be the beneficiary. The reward obviously could go elsewhere, to those in a better position to claim it, such as to the owners of the Chicago department store where I held my first jobs. Likewise, any overall increase in productivity, whether in a factory, in an industry, or in the nation as a whole, creates more wealth, but who gets it is another matter. It doesn't get shared mechanically by some static formula. It goes to those in the best position to claim it.
Very visibly positioned better than workers are the Chief Executive Officers of large corporations and members of their boards of directors. The total compensation of such CEOs now comes to around 150 times that of the average worker. Back in 1974, the ratio was about 35 to one. The 1994 median in salary and bonuses received by the CEOs of the 800 biggest publicly-held corporations in the U.S. was $993,000, an 11 percent jump over 1993, according to a survey by Forbes magazine. When the sale of stock options and other compensation are included, the median take of the 800 came to $1.3 million. Further, a consultancy's survey of the 200 largest industrial companies revealed that the average annual pay of members of their boards of directors (themselves mostly top corporate executives) was $68,300, or roughly $700 an hour. That same year, 1994, the earnings of non-supervisory workers in the private sector averaged $11.13 an hour.
The lowered or stagnated income of most U.S. workers since the late 1970s has caused an "alarmingly" large growth in income inequality, to quote the Council of Economic Advisors again. The real income of men with only four years of high school, for example, dropped a "stunning" 21 percent between 1979 and 1990. "In concert, the market and the government [by weakening the social safety net, for example] produced the greatest disequalization of incomes since at least before World War II, " the Council reported.
The trend toward greater inequality shows up even stronger in the distribution of wealth. This is exhaustively documented by Edward N. Wolff, professor of economics at New York University, in a report titled "Top Heavy: A Study of the Increasing Inequality of Wealth in America" (Twentieth Century Fund). During 1983-89, Wolff reveals, the top 1 percent of households increased their net worth from 34 to 39 percent of the all household wealth, while that of the bottom 80 percent dropped from 18 to 15 percent. He characterizes this growing bifurcation as "almost unprecedented." The only other period in this century with a comparable surge in the concentration of wealth was the seven-year span that preceded the Crash of 1929. The disparity trend hasn't stopped. After Wolff compiled his report, new Federal Reserve Board data showed that the top 1 percent of U.S. wealth holders increased their share from 39 percent in 1989 to 42 percent in 1992, thus reaching a 62-year high.
Not surprisingly, racial minorities have fared the worst, reversing earlier gains that had slightly narrowed a large wealth gap between them and whites. In 1983, the median white family had eleven times the wealth of the median nonwhite family. By 1989 this ratio had grown to twenty.
The various causes of the widening gap between the rich and the poor are almost impossible to quantify, but Lawrence Mishel and Jared Bernstein of the Economic Policy Institute have taken a whack at it anyway. Their findings are summarized in the book they co-authored, "The State of Working America 1994-1995." Focusing on wages and salaries, which make up about three-fourths of family income, the two economists attribute rising inequality primarily to three clusters of overlapping factors:
Various other factors, not quantified by the two economists, include regressive tax policies, the growth of small business, privatization of government services, contracting out of services by private companies, and the sharp increase in number of "contingent" workers, the men and especially women who hold only temporary or part-time jobs.
Two other economists, Robert H. Frank of Cornell and Philip J. Cook of Duke, have another approach to explaining the "top heavy" phenomenon. In their new book, "The Winner Take-All Society," they describe the modern U.S. economy as radically changed by the spread of "winner-take-all" markets--meaning that the superstar model of rewards long common in entertainment and sports are now common in a large and growing number of fields. Transformed into "celebrity labor markets," with a few superstars earning superhigh incomes and often becoming superwealthy, these fields cover a lot of territory: law, journalism, consulting, medicine, investment banking, corporate management, publishing, design, fashion, and even academia. At the same time, earnings have escalated for millions whom Frank and Cook call "minor league superstars"--salespeople, administrators, accountants, physicians, dentists, psychologists, and others in the labor markets of more everyday life. With "small differences in performance [turned into] large differences in economic reward," the spread of winner-take-all markets, Frank and Cook argue, has contributed most of the push to widening the economic and social distance between the rich and poor.
Besides labor markets, upon which Frank and Cook concentrate their analysis, the financial markets have a role of their own in fostering disparities in income and wealth. Take the booming stock market, in which the wealthiest 10 percent of Americans own the great bulk of the shares (estimated at around 90 percent). Each tick upward in the Dow adds substantially to the net worth of the most comfortable. Or as Forbes magazine has put it: "The tremendous increase in the stock market rubbed off nicely on the super-rich." A decade ago it required a minimum of only $150 million in wealth to gain admission to Forbes' annual list of 400 richest Americans. For 1995 the entry fee more than doubled: to $340 million.
Economist Herbert Stein of the American Enterprise Institute concedes that inequality has increased, "but I don't think that [it] calls for any policy response." Wolff, Mishel and Bernstein, and Frank and Cook think it does, and each has a set of prescriptions, as do many other experts. The major obstacle facing all reform proposals is that they would require some type of governmental action, at a time when the federal government is pictured as monstrous and federal regulation as evil. True, these images are false. Indeed, some of those responsible for this fraud are hypocrites: they themselves systematically use the government's regulatory powers and the public's tax dollars to advance their own ends, financial, political, and ideological. But somehow, the contradictions don't matter. For instance, the thoughtful case that Wolff makes for supplementing the income tax with a modest federal tax on wealth holdings, modeled after one in Switzerland, is a loser, whatever the argument in its favor. One of the arguments against it, that a wealth tax would harm economic growth, gets a greater hearing than the fact that Switzerland certainly is not suffering from impoverishment. Unfortunately, concern about widening inequality causes only an occasional blip on the radar screen of public policy.
Whatever has happened to hard criticism of gross excesses in wealth accumulation? A few years ago the media and even some conservatives would frequently pour scorn on self-enrichment in the executive suite. I have a big file of business press clippings with biting headlines like "The Wacky, Wacky World of Executive Pay" (Fortune, September 6, 1988) and "CEO Pay: Baffling, Disgraceful, Sickening, Embarrassing, Infuriating," Industry Week, April 15, 1991).
My favorite from the daily press is a column titled "Ripping Off Capitalism" by George F. Will, published on September 1, l991 in the Washington Post. From the title and the by-line, you might expect a blast against big government for ruining business. But no. Will turned his wrath against corporate America: "Perhaps Reebok's CEO was worth $14.8 million in 1990, but why, precisely? He would have done his job less well for a piddling, oh, $7 million? He would have left the company if paid less? Would the company have done worse with a $7 million--or even $1 million--replacement?" Will castigated the widening disparity between the compensation of top executives and that of ordinary workers. "The American CEO/worker [income] disparity doubled during the 1980s," he wrote, because the executives in effect raised their own salaries. "How do you distinguish between money earned and money merely taken?"
Now fast forward to the morning of April 23, 1995, when the Washington Post published a Will op-ed piece on a kindred subject. This column, prompted by a New York Times article based in part on Wolff's "Top Heavy" report, had a different perspective, one that looked with favor on the lop-sided accumulation of riches. "A society that values individualism, enterprise, and a market economy," Wills wrote, " is neither surprised nor scandalized when the unequal distribution of marketable skills produces large disparities in the distribution of wealth....Certainly there is today no prima facie case against the moral acceptability of increasingly large disparities of wealth." Will praised American society for valuing "equality, sensibly understood," meaning that it "offers upward mobility equally to all who accept its rewarding disciplines."
Nowadays public figures seldom challenge such deep faith in the beneficent workings of the market. Within the Clinton administration's top levels, Secretary of Labor Reich stands almost alone in trying to make fairness for workers a national issue. The only candidate in the Presidential primaries who repeatedly raised his voice against the decline in living standards among workers was Pat Buchanan, but his extremist rhetoric distorts reality, even he sides with workers. In blasting NAFTA and GATT for discriminating against American workers, for example, he ignores the fact that current international trade agreements discriminate against all workers, wherever in the world they may be, in favor of owners of capital, wherever they may be.
Among top economists, Paul Krugman, professor at Stanford University, is the rare one
who regularly expresses concern about the "crisis" in which "economic forces are more and
more tending to split society in two: between those who have good jobs and whose standards of
living continue to rise and those who are faced with either falling incomes or the prospect of
more-or-less permanent life on the dole." In the summer 1994 issue of Foreign Policy, for
example, Krugman wrote:
"Even an economist can see that such a split demoralizes those on the bottom and coarsens those on the top. The ultimate effect of growing economic disparities on our social and political health may be hard to predict, but it is unlikely to be pleasant."
Some day there may be a revulsion against market-made disparity, but meantime it prevails. When the 110-year-old Houston Post was buried last spring with a loss of 1,900 full-time and part-time jobs, the Economist (April 29) published an obituary with this insightful analysis :
"Newspaper publishing in America is a different business from what it was efore the 1960s and 1970s. Once it was enough for papers to break even or to make a modest profit for their proprietors and their families. With most larger papers now in the hands of national chains or stock market traded corporations, the pressure for steadily increasing profits is relentless. From the New York Times down, few papers, large or small, have managed to escape."
The same drive--the drive not just for profits at levels once considered reasonable, but for higher and higher profits, no matter what--afflicts many other industries, national and global: the U.S. housing construction industry, for example, to the detriment of low-income families who need affordable homes, and the international shipping industry, to the detriment of seafarers of both industrialized and developing nations, who are often victimized by new global economic pressures.
Recently, after reading an article about how "hot money" was financing much of China's economic growth, I had to consult the Penguin Dictionary of Economics to learn exactly what hot money means: "funds which flow into a country to take advantage of favorable rates of interest." When I lamented this trend, a friend of mine shook his head and said: "So what do you think your pension fund is doing? Looking for the lowest possible return?"
As I thought about it, my pension fund came to symbolize the long and impersonal reach of market forces. Me, a greedy capitalist? Couldn't be. But is my money earning profits in a joint venture with the People's Liberation Army using forced prison labor in the People's Republic of China? Is it helping finance a company that hires grade-school-age children to make garments in Bangladesh or shoes in Brazil? I have absolutely no idea. Belatedly, the manager of my pension fund is exploring the option of shifting our money into one of the new breed of "socially responsible" funds. These kinds of plans cover only a tiny portion of the whole investment market, which is expanding explosively now that even more and more middle class people are salting away their money impersonally in personal investments.
With all the current talk about personal responsibility, one would think that by now more of us would be asking a few questions about where our investment (and consumer) dollars go and about how they are used. One would think so, yes, and one might even exercise some responsibility, if one really thought about it.
Copyright 1996 Robert A. Senser
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