Reinhart-Rogoff and the Austerians

 

April 29, 2013

THIS WEEK

Ed Stack, the CEO of Dick’s Sporting Goods, has a rather unique claim to fame. A few years back, Stack invented “the stupid list.” He asked his managers and employees to list the three things Dick’s does “that make no sense.”

We have a suggestion for the Dick’s “stupid list”: the windfalls Dick's is stuffing into the pockets of Ed Stack. In 2012, news reports last week informed us, CEO Stack grabbed an astonishing $137 million cashing out stock options, on top of $10.7 million in his regular annual compensation.

How much more did Stack take home last year than his workers? We don’t know. Under the 2010 Dodd-Frank Act, firms like Dick’s must reveal the gap between their CEO and median worker pay. But the Securities and Exchange Commission has so far made no move to enforce the Dodd-Frank mandate.

Two dozen national citizen groups have just asked the new SEC chair, Mary Jo White, to stop the foot-dragging and start requiring CEO-worker pay disclosure. We need her to listen. More on the reasons why in this week’s Too Much.

GREED AT A GLANCE

America’s fourth- and ninth-biggest dailies, the Los Angeles Times and Chicago Tribune, may soon become the property of Koch Industries, the privately held corporation that fuels the fortune of America's two most notorious right-wing billionaires, Charles and David Koch. The two papers stand as the crown jewels of an eight-daily chain that also includes high-profile papers in Baltimore and Orlando. The likely cost of the total package: $623 million, pocket change for the Koch brothers. Their personal net worths now total, Bloomberg estimates, $45 billion each. A Koch Industries flack is telling reporters that the Kochs would not mettle with the “independence” of any media that might fall into the Koch camp. But a new Columbia Journalism Review analysis of a media property already under Koch control shows a tendency to “blur reporting and opinion.”

Caterpillar CEO Doug Oberhelman has spent billions the last few years buying up heavy equipment rivals. But that buy-up spree hasn't juiced up company earnings. So Oberhelman has tried squeezing a closer-to-home asset: his workers. He threw 700 employees out of work at a Cat plant in Canada after workers there rejected a 50 percent wage cut. Then, charges the United Steelworkers, Oberhelman bullied 800 workers at an Illinois plant into major pay concessions. In Wisconsin, the company threatened to axe 40 percent of one plant's workforce just days before bargaining began on a new contract. Oberhelman’s strategy appears to be working — for Oberhelman. His take-home last year jumped by $5.5 million. Oberhelman's 2012 $22.4 million, Caterpillar noted last week, reflects the company’s “pay-for-performance philosophy.”

Cara David, the top marketing exec at American Express, has some great news to report — for the businesses that service America’s rich. The latest Amex Survey of Affluence and Wealth in America, co-authored with the Harrison Group, is estimating that luxury sales will grow 3.4 percent this year, over twice the growth forecast for national GDP. America’s top 1 percent, says David, have maneuvered themselves into “a better position to spend on luxury.” Gushes Harrison's Jim Taylor: “Lessons learned from the recession — resourcefulness, self-reliance, and a deep sense of financial responsibility — continue to dominate purchasing strategies in the country’s most successful households.”

Quote of the Week

“We used to be a country with a rich heart. Now we’re the land of the heartless rich.”
Pam Martens, Koch Brothers' Wealth Grew By $33 Billion . . . as America’s Schools Report 1 Million Homeless Kids, Wall Street on Parade, April 24, 2013

PETULANT PLUTOCRAT OF THE WEEK

Mark Bertolini, the CEO at health insurer giant Aetna, has been loudly warning Americans to beware next January 1, the date Obamacare finally goes into near full effect. Consumers, says Bertolini, will be facing “rate shock” when they see how much their insurance premiums are going to be costing. But he’s not saying why. Aetna and other insurers, industry whistle-blower Wendell Potter points out, have been making big bucks selling low-premium policies that lead consumers to believe they’re buying much more coverage than they actually get. Obamacare bans this junk insurance, and firms like Aetna will have to offer policies that provide real coverage. Expect Aetna to charge dearly for these policies. How else will the insurer be able to continue paying Bertolini his going rate? He pulled in $36.4 million last year.

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PROGRESS AND PROMISE

Know Where Your Premiums Are Going?

Only one state in America, Vermont, has so far moved to shove giant health insurers and their lavishly paid execs out of their central role in American health care. Vermont lawmakers two years passed legislation that puts the state on track to creating a “single-payer” health care system. But single-payer remains years away. In the meantime, Vermont is moving to up the heat on health insurer CEOs. State legislation enacted last year requires insurers to reveal to consumers exactly how much they spend on lobbying and advertising, how often they deny consumer claims, and how much they pay their CEOs.

Take Action
on Inequality

Urge your rep in Congress to back the Inclusive Prosperity Act, the new bill that would set a financial transactions tax on Wall Street speculation. More at the Robin Hood campaign.

IMAGES OF INEQUALITY

The property in London’s 10 most exclusive boroughs, we learned earlier this year, now holds more value than all the property combined in Scotland, Wales, and Northern Ireland. Insatiable global billionaire demand for London addresses now appears poised to drive that gap even wider. The second largest manse in London has just gone on the market for €250 million, about $382 million. The sale, if completed at the asking price, will make the “palatial Regency mansion” at 18 Carlton House Terrace the developed world’s most expensive abode.

Web Gem

Global Rich List/ See where you rate in the worldwide distribution of income.

inequality by the numbers

Stat of the Week

In the world’s top four financial hubs — New York, London, Hong Kong, and Singapore — over 300 residential properties sold for over $15.5 million in 2012, says a new report co-produced by Deutsche Bank. The total outlay for the 300 properties: over $10 billion, for an average over $33 million each.

IN FOCUS

From a Sloppy Spreadsheet, an Eternal Truth

If we let wealth continue to concentrate — and corrupt every element of our contemporary societies — we'll all end up crying '96 tears.'

Aging baby boomers may remember, from way back in 1966, a one-hit-wonder rock band that sported an all-time great of a name. That band — Question Mark and the Mysterians — may now have a worthy rival on the name front. Make way for Reinhart-Rogoff and the Austerians.

Harvard economists Carmen Reinhart and Kenneth Rogoff don’t make smash records. They write learned economic papers that make austerians happy — and help smash the life prospects of average working families.

Austerians preach the absolute necessity of whacking away at government spending for public services. We must, these champions of austerity solemnly intone, discipline ourselves to reduce government deficit and debt, no matter the pain austerity may bring us.

And austerity does bring pain. People lose access to basic services. People lose jobs. People even go hungry. But some people — extremely affluent people — don’t mind austerity at all.

These affluents don’t send their kids to public schools. They don’t spend weekend afternoons at public parks. They never step aboard public transit. These wealthy don’t need public services and resent having to pay taxes to support them.

Austerity works for these affluents. Cutbacks in public services won’t, by and large, bring any discomfort to their daily lives.

And if austerity should create some unanticipated discomfort, they can always get their friends in high places to intervene — as Americans saw last week when lawmakers rushed to undo recent austerity cutbacks in the Federal Aviation Administration budget that had affluent people cooling their heels in airports.

Austerity cutbacks, notes Center for Economic and Policy Research economist Dean Baker, promise even greater payoffs — for the rich — down the road. The austerity push for cuts in programs like Social Security, he points out, “opens the door for lowering tax rates on the wealthy in the future.”

“If these sorts of social commitments can be reduced,” Baker writes, “then the wealthy can look forward to being able to keep more of their income.”

All this may help explain why pollsters have found, as economist Paul Krugman pointed out last Friday, that wealthy Americans “by a large majority” consider budget deficits “the most important problem we face.”

America’s wealthy make their personal predilection for austerity equally plain to the politicians who seek their favor. These pols, for their part, want to be helpful to their deep-pocketed patrons. But these pols, Dean Baker reminds us, also have needs of their own. They need “evidence” they can use to show the general public that “austerity serves the general good and not just the rich.”

Three years ago, Harvard’s Reinhart and Rogoff supplied that “evidence,” via an academic paper that purported to show a clear and imminent danger whenever government debt hits a particular percent of Gross Domestic Product.

This Reinhart-Rogoff paper rushed to the “top of the charts,” in elite public policy circles. Austerians worldwide waved the paper at every opportunity. They cited Reinhart and Rogoff’s work as an unassailable justification for cutting government spending quick and cutting government spending deep.

Reinhart and Rogoff made no meaningful move to discourage the austerians. They basked instead in their global celebrity — until earlier this month when a team of unorthodox economists at the University of Massachusetts exposed the Reinhart-Rogoff paper as essentially a sloppy scholarly fraud.

This Massachusetts work quickly went viral. By last week, Reinhart and Rogoff’s Excel spreadsheet errors had become fodder for late-night TV comics.

End of story? Not quite. We have much more here than a spectacularly failed attempt to make the case for a doctrine that suits the sensibilities of the richest among us. We have powerful proof that inequality corrupts every corner of contemporary societies, even — and especially — our ivory towers.

The academic peers of Reinhart and Rogoff, the economists who hold the nation’s most prestigious endowed chairs in economics, never once made any effort to check out the Harvard pair's findings. The unraveling of their bogus case for austerity started with the digging of a skeptical grad student.

The lesson in all this? In a staggeringly unequal society, as Paul Krugman summed up last week, “what the top 1 percent wants becomes what economic science says we must do.”

The rest of us, of course, don’t have to listen, on austerity or any other front.

New Wisdom
on Wealth

Michael Peppard, Plutocracy in action: the FAA vs. National Parks, Commonweal, April 26, 2013. Gridlock in Congress magically ends — when the affluent squeal.

Sean Reardon, No Rich Child Left Behind, New York Times, April 28, 2013. A Stanford sociologist explains why rising income inequality needs to take center stage in debates over our education future.

Find out more about Too Much editor Sam Pizzigati's new book, The Rich Don't Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970.

new and notable

Why Mitt Lost: The Role Inequality Played

Larry Bartels, The Class War Gets Personal: Inequality as a Political Issue in the 2012 Election, NYU Law School Colloquium on Tax Policy
and Public Finance, April 23, 2013.

Vanderbilt political scientist Larry Bartels has written widely and wisely about inequality over recent years. Last week, he presented this new analysis of the impact of inequality on the 2012 election, a study based in significant part on specially commissioned survey data. His basic finding: Mitt Romney owes his 2012 defeat to a “widespread public perception that he cared more about wealthy people like himself than about poor and middle-class Americans.”