Posts Tagged ‘CEOs’

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While Amazon let it slip last week that its Prime program—the annual membership that offers discount pricing and free 2-day shipping—now tops 100 million members, there’s another number people might be curious about: the company’s average annual wage, which Amazon revealed in compliance with a new regulation that asks companies to show a comparison between an average worker’s wage and the salary of their CEO.

Amazon has reported an average compensation for its varied, mostly warehouse (and now, with Whole Foods, grocery store), workers at $28,446 a year. The federal government defines its poverty guideline for a family of four to be $25,100. So, Amazon’s average wage falls easily within 150 percent of the poverty line—and stands at about one-half of the median household income in the United States.

No wonder, then, that Amazon is owned and run by literally the richest man in the world, Jeff Bezos. While he technically “made” only $1.7 million last year, he’s worth $127 billion.* So it means on paper, Bezos makes $59 for every dollar an average employee earns, which is actually a smaller ratio than the average of 271 to 1 for the largest 350 U.S. corporations (pdf).

While Amazon may not have been thrilled by being forced to reveal this not-so-flattering wage comparison, they do have one thing going for them: the only private employer bigger than the e-commerce giant is their retail competitor Walmart, whose workers average only $19,177 per year, putting them far under the federal poverty guidelines. Moreover, the ratio to average-worker pay of Walmart CEO Doug McMillon, who took in $22.8 million last year, was an astounding 1,188 to 1.

And the extraordinary numbers continue, across the economy. Royal Caribbean Cruises: 728-1. Regeneron Pharmaceuticals: 215-1. Netflix: 133-1. Live Nation Entertainment: 2,893-1. Honeywell International: 333-1. Fidelity National Information Services: 654-1. UnitedHealth Group: 298-1. And on and on.

Each such ratio indicates the obscene level of inequality in the United States, based on the amount of surplus pumped out of workers and distributed to those who run American corporations on behalf of their boards of directors.

While the figures of CEO-to-average-worker-pay are being reported in the business press, they have not been widely discussed in the media or by the nation’s politicians. It should come as no surprise, then, that Americans underestimate—by a wide margin—the degree of inequality in the United States.

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In a 2014 study, Sorapop Kiatpongsan and Michael Norton asked about 55,000 people around the globe, including 1,581 participants in the United States, how much money they thought corporate CEOs made compared with unskilled factory workers.** Then they asked how much more pay they thought CEOs should make. American respondents guessed that executives out-earned factory workers roughly 30-to-1—just about what that ratio was in the 1960s and exponentially lower than the actual estimate at the time of 354-to-1. They believed the ideal ratio should be about 7-to-1.

As it turns out, Americans didn’t answer the survey much differently from participants in other countries. Australians believed that roughly 8-to-1 would be a good ratio; the French settled on about 7-to-1; and the Germans settled on around 6-to-1. In every country, the CEO pay-gap ratio was far greater than people assumed. And though they didn’t concur on precisely what would be fair, both conservatives and liberals around the world also concurred that the pay gap should be smaller. People also agreed across income and education levels, as well as across age groups.

Why should this matter?

Because representations of the economy that minimize the existence of inequality or the problems associated with inequality are bound to reinforce the systematic misperceptions found by Norton and others.

That’s exactly what much mainstream economics accomplishes. It deflects attention from the existence of inequality (e.g., by focusing on growth, output, and the price level versus distribution) and from the economic and social problems created by inequality (by attributing the growing gap between the haves and have-nots to forces like globalization and technological change that are beyond our control or invoking more education as the only solution).

Mainstream economics therefore forms part of what others (such as Vladimir Gimpelson and Daniel Treisman) refer to as “ideology,” “which may predispose people to ‘see’ the level of inequality that their beliefs and values convince them must exist.” And the strength of mainstream economics in the United States—in colleges and universities as well as in the media, think tanks, and in government—and around the world is one of the main reasons Americans, like people in other countries, tend not to see the existing degree of inequality.

On the other hand, the ideology of mainstream economics is never complete. That’s why Americans and citizens around the globe do see that the degree of inequality created by existing economic arrangements is fundamentally unfair.

It’s that sense of unfairness, which is only partially masked by mainstream economics, that can serve as the basis for a radical rethinking and reimagining of contemporary economic and social institutions.

 

*Bezos [ht: sm] received a hostile reception from workers when he arrived in Berlin to pick up an innovation award last Tuesday. As Frank Bsirske, the head of the Verdi trade union, explained: “We have a boss who wants to impose American working conditions on the world and take us back to the 19th century.” Meanwhile, back in the United States, Amazon reported that its profits more than doubled to $1.6 billion in the first quarter of 2018, sending shares of its stock soaring to an all-time high.

**This is the second high-profile paper in which Norton discovered that Americans have a notion of economic fairness that is strikingly more equal than the current reality, and more equal even than their own underestimate of the degree of inequality.

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There was a bit of an awkward moment on Tuesday when, during the Wall Street Journal’s interview with Gary Cohn, Director of the National Economic Council and chief economic advisor to Donald Trump, John Bussey asked the assembled CEOs if they plan to increase their company’s capital investments if the GOP’s tax bill passes.

“Why aren’t the other hands up?” Gary Cohn asks.

Well, let me see if I can answer that.

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First, corporate profits (the blue line in the chart above) are already at record highs. Second, credit is very cheap and readily available.* Thus, corporate investment (the red line) is greater than profits and also at record highs.

In other words, if the people who run those corporations believed that investing in new factories or equipment that might create more jobs would result in higher profits, they would already be doing it.

That’s why most of the CEOs didn’t raise their hands. They know full well that most of the gains from the proposed corporate tax cuts will just be distributed in the form of higher CEO salaries, increased dividends to stockowners, and more mergers and acquisitions.**

And that certainly won’t create new jobs—which is why most people, when they figure out the real nature of the proposed tax cuts, will be raising their hands in unison with a very different kind of gesture.

 

*As Laurence D. Fink, the founder of BlackRock, the largest money manager in the world overseeing some $6 trillion, said at The New York Times DealBook conference last week,

If you’d asked me a year ago how would you feel, I would’ve told you I’ve got concerns in this region and that region. . .A year-and-a-half ago we were worried about China. A year ago I would’ve said I’m very worried about the eurozone stability. . .And then the other surprise is how robust the U.S. economy is—how strong corporate profits are. I would say that’s my biggest surprise, how robust corporate profitability is, even with a quite dysfunctional Washington.

**Chris Dillow, for his part, gives the lie to the idea that higher inequality leads to higher investment. Thus, in his view, “defenders of inequality must come up with something better.” Cohn and the other Republicans who are peddling the benefits for workers of the current tax plan are going to have to come up with something better, too.

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Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

But Summers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

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Kevin Hassett and the other members of the president’s Council of Economic Advisers are just like the long-haired preachers Joe Hill sang about more than a century ago. They come out every night to tell us what’s wrong and what’s right. But when asked about something to eat, they answer in voices so sweet:

You will eat, bye and bye
In that glorious land above the sky
Work and pray, live on hay
You’ll get pie in the sky when you die.
That’s a lie

With one notable exception: according to the Council (pdf), that “glorious land above the sky” lies just on the other side of the Trump administration’s proposed tax reform. And workers, whose real wages have stagnated for decades now, won’t have to die to receive their pie in the sky.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would. . .increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

There’s no other way to put it. That’s a lie.

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As is clear from this chart, both corporate profits (the red line) and investment (the blue line) have soared in recent decades. There’s simply been no shortage of investment or investment funds, either from retained earnings or in terms of money borrowed from financial institutions. At the same time, the wage share of national income (the green line in the chart) has fallen precipitously.

So, even if cutting corporate tax rates (and thus permitting higher retained earnings) did lead to more investment, there’s no guarantee workers’ wages would increase as a result. They haven’t for decades now. Why should that change in the future?

Moreover, there’s no guarantee higher retained earnings would lead to more investment. Just as likely (perhaps even more so), corporations would be able to use their profits for other purposes—including higher CEO salaries, increased dividends to stockholders, more stock buybacks, and a higher rate of mergers and acquisitions—which have nothing to do with raising workers’ wages.

The only result would be more corporate power and more obscene levels of inequality in the United States.

And that’s no lie.