When the gods dance...

Monday, July 25, 2011

Assaulting Joe the Machinist



The still unfolding federal debt ceiling battle has one of America’s most sober pundits, E. J. Dionne Jr., losing his patience. Washington, Dionne writes, is looking more and more “like a lunatic asylum.” But the lunacy — our political system’s absolute inability to tax the rich — has spread way beyond Washington.

In Minnesota last week, a governor who dared to try that taxing ended up surrendering after lawmaker friends of the fortunate forced the longest state government shutdown in U.S. history. The surrender deal will chop $22 million out of programs for abused and neglected kids. The 7,700 Minnesotans making over $1 million a year will pay, under the deal, not a penny more in taxes.

Down in Texas, a state where the governor is hoping to ride his rich people-friendly credentials into the White House, families in one Fort Worth suburb learned last Monday that public school bus rides will cost them $185 this year for their first child, $135 for each additional. In Central Falls, Rhode Island, a state official 
 retired city workers Tuesday to accept 50 percent pension cuts.

Amid all this, one of America’s few billionaires willing to pay more in taxes, investor Warren Buffett, noted at a plush resort in Idaho’s Sun Valley that “my friends here” are “paying lower tax rates than the people who are serving us the food.” Lunatic asylum? We have more on the lunacy in this week’s Too Much.


Thirty top Wall Street financial firms have spent, since the start of 2010, $242.2 million lobbying Congress on financial reform, says a new Public Citizen report, enough to blanket Capitol Hill with 712 lobbyists. Imagine how much the Wall Streeters would be spending if they faced lawmakers as gutsy as Australia’s? The Dodd-Frank reform bill the U.S. Congress passed last summer gives shareholders the right to vote on CEO pay packages. But these “say on pay” votes carry only “advisory” weight. Corporate boards can ignore them. Australia’s new “say on pay” law, in effect since July 1, carries quite a bit more bite. If 25 percent of Aussie shareholder votes go against a company’s CEO pay plan two years in a row, the company's corporate directors must resign and stand for re-election . . .

The folks who run the Simon Property Group, America’s biggest shopping mall company, must really like their CEO. Earlier this month, to retain that CEO’s services over the next ten years, Simon Property’s directors handed their chief exec a special $120 million “retention” stock award — on top of his annual pay, a not insignificant sum that last year totaled $23.1 million in salary and incentives. Simon Property’s directors, with this “retention” deal set, can start breathing a little easier. Simon Property CEO David Simon, the 49-year-old son and nephew of Simon Property’s co-founders, now won’t likely be exiting for greener corporate pastures elsewhere for years to come . . .

Working for the super rich can be a cushy gig. Infuriating, too. Just ask Christopher Burge, the world-class Christie’s auctioneer who has hammered home four of the most expensive paintings ever to sell at auction. A just-aired BBC documentary asked Burge if he enjoys dealing with Christie’s wealthy clients. Those clients, blurted back Burge, have treated him like “a seal bouncing balls on his nose.” His career's worst moment? That came in 1990 after Burge auctioned off a Van Gogh for $82.5 million, then a world record. The assembled bidders applauded for five straight minutes. Remembers Burge: “I seriously thought about walking off, because they weren’t applauding for Van Gogh, and they weren’t applauding the work of art. They were applauding for money.”

We can all stop worrying about Tony Hayward, the BP CEO axed after last year’s Gulf of Mexico oil spill unpleasantness. He’s now flying high again — as a global energy investment fund executive. How high? Hayward just helped celebrate his fund partner’s 40th birthday at a hot new billionaire resort in Montenegro, one of Europe’s poorest countries. The bash cost $1.6 million. Why so much? A hundred local workers, before the party started, had to use a crane to drop palm trees around the party pool. Also busy of late with heavy equipment: Hamad Bin Hamdan Al Ahyan, a billionaire in Abu Dhabi's ruling family. The 63-year-old had his name “Hamad” dug into the sand of a Persian Gulf island he owns in letters so large — they stretch two miles long — astronauts can see them from space . . .

Is the Oscar-winning songwriter of Short People about to have us all humming about rich people? Could be. The 68-year-old composer Randy Newman told an interviewer earlier this month that “we’ve been complaining since the '60s about corporate America and how we're in the hands of a plutocracy, but it's really truer now than it ever has been.” With the “poor getting poorer,” noted Newman before his most recent concert, the “banks and those people with tremendous economic weight” are doing just fine. Added the pop composer: “It doesn't seem right. So that seems like there will be some kind of song. I've written about it before, but I'm still angry.”


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A Tip for Joe the Machinist: Watch Your Back

Corporate America, advises one of the nation's most prestigious management consulting companies, needs to wake up and stop rewarding employee loyalty and performance. With one exception.

You work hard. You do good work. You loyally stick with your employer through good times and bad. Do you have a right to a paycheck that rises over time?

Analysts from one of America’s top management consulting firms, Booz & Co., have an answer that the Harvard Business School last week sent reverberating through Corporate America’s upper echelons. That blunt answer: No.

The notion that good workers doing valuable work deserve to see their paychecks rise over time, pronounce Booz & Co. analysts Harry Hawkes, Albert Kent, and Vikas Bhalla, no longer rates as “tenable.” America’s corporations, the three advise, need to start attacking the “exorbitant” paychecks now going to their most prized, “steady and reliable” veteran workers.

The Booz analysts offer an example of the “significantly overpaid” worker they have in mind. They call him Joe the machinist, “a stellar employee who knows the ins and outs of the organization, the result of his many years on the job.”

This Joe the machinist has been working at that job for over two decades. His “wealth of institutional knowledge” has become a valued corporate asset. But Joe is making a lot more than he used to make, especially “compared with co-workers who have been doing the same job for just two years.”

Corporate America, the Booz & Co. advice continues, now needs to “address these kinds of wage disparities.” Companies need to start “retooling labor costs” to narrow “the gap between high wages and market value.”

A “multifaceted and tailored” retooling, the Booz analysts go on to gush, could net U.S. corporations “labor savings of 15 to 20 percent.” Of course, the analysts acknowledge, Joe the machinist “might have to take pay cuts” along the way.

But what a payoff these pay cuts would produce! Firms that retool successfully, the Booz consultants confidently promise, “will end up with larger and more sustainable improvements in their [profit] margins.”

Some business leaders are already cheering the Booz analysis.

“We infantilize workers like Joe,” former Bank of America executive Marc Effron cheerily
, “by insulating them from the harsh economic realities by paying above market wages.”

But Corporate America, in fact, has been doing precious little “insulating” over recent years. Corporations have been depressing wages to fatten profit margins for some time, and Wall Street's most astute observers, 
notes American 
Prospect columnist Harold Meyerson, are actively tracking the de-insulation process.

Meyerson points to an analysis that JPMorgan Chase chief investment officer Michael Cembalest sent out earlier this month to his bank's top investors. Cembalest’s musings explore the rising corporate profit margins that U.S. companies registered between 2000 and 2007 and conclude that “reductions in wages and benefits explain the majority of the net improvement in margins.”

New research from Northeastern University’s

 Center for Labor Market Studies updates this “de-insulation” story for more recent years.

Corporate profits from 2009’s second quarter through 2011’s first, this research shows, have increased 39.6 percent. Over that same span, median weekly earnings of full-time U.S. workers have dropped 1 .0 percent.

Median pay for corporate CEOs, in the meantime, rose 23 percent in 2010 alone, the New York Times reported earlier this month.

This latest CEO pay hike continues a long-term trend. In the 1992-1995 years,calculates UMass Center for Industrial Competitiveness director William Lazonick, America’s 500 highest-paid executives annually averaged — in 2009 dollars — $9.0 million. In the 2004-2007 span, the top 500 averaged $27.2 million.

The Booz analysts — and their cheerleaders — want America's Joe the machinists to swallow ever lower paychecks to help their “established” U.S. corporate employers “keep up with intense competition” from elsewhere in the world. They demand no similar sacrifice from U.S. corporate executives.

That makes no sense, particularly for analysts who are arguing we must “narrow the gap” between exorbitant pay and actual “market value.” U.S. CEOs currently take home far more than the global “market” going rate for executive talent.

CEOs at companies with over $10 billion in annual revenue, the Wall Street Journal reported back in 2008, make twice as much in the United States as they do in Europe — and nine times more in the United States than they do in Japan.

Corporate America, in other words, definitely does need some seriously aggressive “labor cost retooling” — at the top.


The 'Optimal' Tax Rate on Ultra-High Income?

Peter Diamond and Emmanuel Saez, The Case for a Progressive Tax: From Basic Research to Policy Recommendations, July 2011. Forthcoming in theJournal of Economic Perspectives.

Our nation’s capital remains awash with powerful people who believe that civilization as we know it will take a terrible tumble if we dare raise taxes on the richest among us. For these powerful people, outside keeping taxes low on high incomes, nothing else really matters — not even, as the debt ceiling battle demonstrates, the full faith and credit of the U.S. government.

History, of course, lends no support whatsoever to the claim that disaster awaits any nation that taxes its rich at significant levels. The United States, in the years after World War II, taxed top-bracket income at rates that never dropped below 70 percent — double today’s top marginal rate — and survived quite nicely.

Powerful people committed to not taxing the rich simply ignore this history. They rely on theoretical constructs instead. Taxing the rich, they assert, will undermine incentives to work and save and, down the road, leave everybody, rich and poor alike, worse off.

This theoretical claim has lots of fans in academia. A small army of analysts have fashioned quite comfortable careers developing intricate mathematical models that they say affirm the folly of subjecting rich people to high taxes.

Economists Peter Diamond of MIT and Emmanuel Saez of the University of California at Berkeley, two leading global experts on taxation and high incomes, have never enlisted in this army. And now they’ve explained why — in a just-released new paper that goes mano a mano with the don't-dare-tax-rich-people-mathematical model crowd.

Their goal in this new paper: to present “the case for tax progressivity based on recent results in optimal tax theory.” Their conclusion: The federal government ought to be taxing income at the top at much higher rates than the federal government does now.

The top federal income tax rate on income in the highest tax bracket currently sits at 35 percent. The optimal rate, the Diamond and Saez calculations suggest, could go all the way up to 76 percent.

Diamond, a Nobel Prize winner, and Saez, a 2010 MacArthur “genius” fellow, haven’t written this new paper for the faint of heart mathematically. Their many equations and charts can make for tough sledding. But the two researchers do pause to offer a variety of easily digestible statistical nuggets along the way.

One example: In 2007, Diamond and Saez point out, the average federal tax rate on the nation’s highest-earning 1 percent averaged 22.4 percent. If the rate had been about double that — say 43.5 percent — the top 1 percent share of our national after-tax income in 2007 would still have been twice as high as the top 1 percent’s after-tax income share back in 1970.

We’ve come a long way, in the wrong direction, in the four decades since 1970. The top marginal tax rate on our richest has been halved, from 70 to 35 percent, and our rich have become phenomenally richer. Getting that top tax rate back up, Diamond and Saez remind us, makes as much sense in theory as in real life.

Quote of the Week

“I may live to see an uprising over the widening gap between rich and poor in North America. After all, that’s the cause of the regime change this year in North Africa and the Middle East.”
David Olive, business columnist, Widening income gap hurts us all,Toronto Star, July 22, 2011

Stat of the Week

If top U.S. 1 percent income had increased only as fast as national productivity since 1980, notes economic analyst Paul Buchheit, the nation’s top 1 percent would now be taking about $1 trillion less out of the U.S. economy.

New Wisdom
on Wealth

Scott Klinger and Holly Sklar, Real patriots pay taxesSanta Monica Daily Press, July 7, 2011. Two Business for Shared Prosperity leaders show how U.S. CEOs are using tax havens to shift tax burdens from big business to small.

Douglas K. Smith, The Maximum Wage, Naked Capitalism, July 12, 2011. A veteran management consultant out of McKinsey offers a visionary antidote to CEO pay excess: Deny our tax dollars to any firms that pay top execs over 25 times worker pay.

Sam Pizzigati,Deconstructing the 'Federal Debt Crisis.' Roots Action, July 18, 2011. On our plutocracy and the debt ceiling battle.

David Korten, How to Liberate America from Wall Street Rule, July 19, 2011. A New Economy Working Group report shows how “one vote democracy is almost inevitably trumped by a one dollar, one vote plutocracy” whenever “financial power is highly concentrated.”

Chance favors the concentration of wealth, U of M study shows, University of Minnesota, July 21, 2011. Pure luck, not entrepreneurial talent, will drive society’s wealth into ever fewer hands, says a new research effort, unless society takes steps to counter “the innate tendency for economies to concentrate wealth.”

Steffen Schmidt, Are we headed back to the future? Des Moines Register, July 21, 2011. Exploring the “eerie retro mentality” claim that the super rich create jobs.

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