(Part of this post is repeated from an exchange between me and Anson Burlingame on his blog, but I thought it worthy of inclusion here as a subject in its own right.)
Headline, Parade magazine, p. 16, Sunday, 11 April, 2010: Income Gap Grows During Recession. “Even as the economy shrank last year, the income gap –the divide between the country’s richest and poorest citizens–kept growing. In 1978, CEOs at the largest U.S. companies earned 35 times as much as the average worker. Today, that figure is more than 300:1, according to the Harvard Business Review.” In the same issue, as an example, Parade notes that the CEO of Wells Fargo made $18.7 million last year. Wells Fargo of course was one of the first banks to receive bailout funds from the government, $25 Billion in their case. The taxpayers’ money enabled Wells Fargo to buy Wachovia at a bargain price. Then, as the economy recovered, Wells Fargo did repay the bailout, but it is clear that they could not have parlayed the financial crisis into a huge gain without it. Think of it as playing the board game, Monopoly. Is it fair that when one player runs out of money, she gets a free, huge loan from the “bank” to buy more “hotels” than anyone else at the table? Heck, even I could win at Monopoly with that kind of advantage!
All large businesses understand the significance of growth, and have for a long time. One of my basic economics texts at the Naval Academy was John Kenneth Galbraith’s “Economics and the Public Purpose” in which he powerfully makes that point. (Amazing, I still have the aging copy on my bookshelf.) The larger a business is, the larger the executive compensation that can be justified, to put it bluntly. This is commonly justified by the increase in executive “responsibility”. Unfortunately, the salary increases continue even when a business gets “too big to fail” and needs a government bailout. Growth also satisfies the insatiable stockholder hunger for immediate rather than long-term gratification, and that is the same affliction that all large corporate boards seem to have. I would feel differently if the businesses were allowed to actually fail.
Galbraith also made the point that capitalist competition works very well at the small business level because of competition, but competition has a way of morphing into “dividing up the pie” when businesses get too big. I do not recall a time in my life when these assertions seemed more true than in the last two years. I believe the lesson is that government regulation is vital for very large businesses.
I agree with Anson that Congress and the Executive need to take a breather and put a break on spending. I am not holding my breath waiting for this to happen. They are spending addicts and they have the bit in their teeth.
The problems described are profound and the solutions will not be simple, but as the Chinese philosopher said, a journey of a thousand miles begins with one step. Maybe we can try to attack some of the root causes of the problems. Here are several ideas:
Like Anson, I favor reducing the size of government. One thing I can think of that should better be left to private enterprise is first-class postal delivery. The Post Office, a “public corporation” whose employees have civil-service benefits, has long subsisted on its first-class mail monopoly, and that is now clearly doomed to failure. What made sense in the old days no longer does. The Postal Service’s proposed solution includes raising postage, and that will only accelerate its demise.
Having Congress guarding the nation’s coffers is like having the cat guarding the canary. The seniority system of chairmanships encourages pork-barrel spending and corruption. What can be done? I have opposed term limits in the past, but it occurs to me that this might be a way to reform the chairmanship situation.
How about limiting executive compensation (in any company accepting public financial help) to a percentage of a corporation’s median (not average) salary? This could be a graduated scale proportional to company size. Anson Burlingame rejected this suggestion out of hand. Apparently he feels that any government dabbling whatsoever with the profit motive would somehow corrupt our capitalistic principles. I contend that the bailout nullifies that reasoning. It is absurd to me that any one human being should be rewarded like that for taking enormous risks with other people’s money. Galbraith was right. Competition works great at the small-business level, but not when the business is “too big to fail”.
I would also like to encourage markets (and boards) to pursue long-term as opposed to short-term goals, but I admit I can’t picture how to do that by government fiat. Maybe some bright economist can.
How about a Constitutional amendment, something like this: “Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and Representatives; and, Congress shall make no law that applies to the Senators and Representatives that does not apply equally to the citizens of the United States”. This would have to be a grass-roots movement. Maybe the Libertarians could embrace it. Anson says the contentious political climate would not permit such a thing, but I say that if we could just get the issue properly publicized, the floor debate would be positively delicious! (I admit it, I enjoy fantasizing.)