"Demonizing the Wealthy"

Sydney M. Williams

Thought of the Day

“Demonizing the Wealthy”

April 13, 2011

Demonizing the rich has become recreation for the populist mind. In yet another condemnation of the “rich”, the current issue of Vanity Fair has an article entitled, in a bastardization of Abraham Lincoln’s Gettysburg Address, “Of the 1%, by the 1% for the 1%.” The article is written by Joseph Stiglitz, professor of economics at Columbia and a Nobel winner.

There is no question that the income gap has been widening, as has the wealth gap. An article in the February 21, 2000 issue of U.S. News and World Report reported that the income from the richest five percent of families in 1979 was ten times that of the poorest twenty percent. Twenty years later that multiple had enlarged to nineteen times. It as ironic, though, that while we applaud the success of our children and friends, we become upset when that success translates into wealth.

The widening income and wealth gaps have two components – the gap between CEO pay and average worker compensation, and the explosive growth in entrepreneurship over the past several years. In 1980 the typical CEO took home 42 times what his average worker did. That ratio peaked in 2000 at 525 times – thanks to the munificent offerings of options during a roaring bull market. (The bull market masked the dilution those options were imposing on existing shareholders, so never drew the criticism it deserved.) During the decade of the 2000s that ratio gradually fell, unsurprisingly as managements discovered that options were less attractive in down or flat markets. By 2008, the average CEO’s pay for the 292 S&P 500 companies surveyed averaged $9.25 million, or a still-too-high 319 multiple of their average employee’s wage. I have long thought that many of those who run public companies treat them as personal ATMs rather than focusing on benefitting their shareholders. When I first entered this business, returns to labor were generally subordinate to returns to capital. (Labor then meant factory workers.) That was a time when most stocks were owned directly by individuals, rather than institutions. Today, capital is advantaged by labor; by this I mean the labor performed by CEOs.

But, the world is changing. Large companies continue to lose ground as the nation’s primary employers. According to a website www.newgeography.com, during the past decade the share of U.S. workers employed by large companies (those with over 500 employees) declined from 34% to 26%. Small business owners are increasing their dominance as the nation’s premier employers.

In 2009, according to The Hill, more entrepreneurs launched businesses than at any time in the last fourteen years. This is a double edged sword; for the risk of bankruptcy is high, but private businesses are also the best path to wealth. Many of these start-ups are in the service economy, a sector where wages tend to be lower – accentuating the trends toward widening income and wealth gaps. There has also been an almost three-fold increase in the number of self-employed, from 2.5% of the workforce in 1993 to 7% today – a function of businesses downsizing and a growing sense of being one’s own boss. These are not trends that are likely to reverse any time soon. In fact we should applaud the initiative shown by fledging entrepreneurs, for those are the ones likely to keep our country on the cutting edge of innovation. There will be, as there always have been, failures, but the characteristics of success – intelligence, drive, hard work and perseverance – are the same today, as they were 200 years ago, at the start of the Industrial Revolution.

Professor Stiglitz suggests a conspiracy – lax enforcement of anti-trust laws, manipulation of the financial system, regulators turning blind eyes, and a small coterie of people from CEOs to US Senators to executive-branch policy makers – that essentially presents a closed system. Such risks should always be taken seriously. Both the French and Russian revolutions were in large part revolts against concentration of wealth and power. Today’s situation does not come close to those examples, nor does it to the restrictive period in the United States during the last part of the 19th Century through the mid part of the 20th Century. During those years WASPs from the Northeast controlled much of banking, industry and Washington. In fact, our country has given rise to growing numbers of entrepreneurs building businesses that no one could conceive a couple of decades ago. How can one criticize such creativity, or the wealth it creates?

The more important questions are the ones of the future. Manufacturing companies have improved their productivity out of necessity in an environment in which competition – for employees and markets – is global. It is generally expected that S&P 500 earnings this year will exceed the record set in 2007, but they will do it with 8 million fewer employees. Would those who criticize wealth and income disparities prefer our manufacturing sector to employ more people and be unprofitable? Business is undergoing radical and dynamic change, with a combination of technology and global forces causing that change. We are in a transitional period when a few innovators will succeed, while the majority, those who cling to the past, will not. It may not be ideal, but it is the world as it is.

Government can play a role. In fact it already is. Stephen Moore, writing recently in the Wall Street Journal, stated: “Today, in America, there are nearly twice as many people working for the government (22.5 million) than in all manufacturing (11.5 million.”) Fifty years ago those numbers were reversed. More important, though, government can provide the foundation for better education. One of the saddest examples of the lack of opportunity are the barriers erected by teacher’s unions to hamper the expansion of charter schools, voucher programs and keeping teachers based on seniority, not merit. It is dispiriting to watch thousands of children participate in a lottery system for a limited number of places in charter schools. If these schools are as bad as the unions and “liberal” politicians say they are, why do the lotteries attract so many? Why did it take a “conservative” Republican John Boehner, during the recent budget meetings, to negotiate the funding of a popular voucher program in Washington, DC that a “liberal” President Obama had axed in 2009? Government cannot, however, legislate equal outcomes and remain a democracy. Free trade and a modernization of the immigration system are other areas in which the government can be (and should be) more proactive.

As a society, do we want to discourage entrepreneurship? Do we want to stifle creativity? I have long had problems with what seem to me gross overpayments to managers of large public companies, for their compensation comes from the shareholders who have been, in too many cases, ill treated. But to the extent that the income gap derives from entrepreneurs, I say God bless them. We all have equal rights, but intelligence, aspiration and a willingness to work hard cannot be guaranteed. All youth look to the future. The best we can do is provide opportunity. A dynamic economy favors the young and creative. When wealth follows success, it is a thing to rejoice, not demonize.