Maximum Wage
For the past eight years, the average American's income has decreased slightly, thanks to inflation and mediocre growth, while the richest part of our society has seen a huge jump in income. Now that the economy's in trouble, we're all being asked to sacrifice, but our captains of industry are demonstrating, via huge bonuses for themselves, that while they're willing to take our money when they screw up, they aren't willing to chip in.
We are a relentlessly capitalistic society. So here's what I think: We're not getting our money's worth. We're paying for these people's salaries with our investments, our retirements, and now our taxes. And we've gotten s**t to show for it. As long as they can take as much of this money as they want, they have no financial incentive to improve things.
Here's my idea. For any company operating in the US, the salary of the CEO and other leaders - including stock options and such - should be capped at, say, 1000 times what the lowest-paid employee makes. So if you have minimum-wage workers, nobody at the company can make more than $13.6 million. If the CEO wants to raise his salary, he's gonna have to help the people on the bottom in order to do it. Also, any bonuses must be a percentage of total salary, and must be shared company-wide. The CEO wants an extra million, great, as long as the employees can get an extra thousand each.
I can foresee a few objections to this idea. Some might say that it's class warfare. The middle class has been getting shafted for a good long while here, while the rich get richer off of us. Isn't that class warfare? Besides, $13 mil isn't exactly the poor house. $13 thousand a year, which millions of Americans are supposed to be able to get by on, is in fact the poor house.
Some might say that this sort of plan would drive away talent. My first response would be, if what we've got on Wall Street right now is talent, then we can do with a bit less. But on a deeper level, it's a valid question. We do need smart people to run our businesses. But I suspect that $13 million a year (or more, depending on the company) could buy a certain caliber of talent. Those that wanted more money than that would leave, and those that were willing to make do with $6,000 an hour because they wanted a company to succeed would stay. And, in the long run, if the leaders who want more money go elsewhere, and the talented workers come here because things are good for workers here...I know which side I'd bet on.
I may be crazy here, but if I am, I'd appreciate someone explaining why.
It would be helpful if you could include a citation for "the average American's income has decreased slightly". This kind of thing usually has some statistical fallacy at the heart of it, such as measuring average household income without correcting for the size of households shrinking.
Posted by Andy on February 02, 2009 at 02:18 PM PST #
"...not willing to chip in" also seems completely bizarre considering the fact that the top 1% of earners pay 39% of federal income taxes. They more than "chip in".
Posted by Andy on February 02, 2009 at 02:25 PM PST #
Apart from the moral problems of your plan (Why should the federal government use force to prevent person A paying person B an amount freely agreed between the two for a job? Does America want to be known as the land of the free?), there are several obvious practical problems one of which would be subcontracting: Your cleaners are the lowest paid employees? Contract out the cleaning - have a company whose only employees are traders.
There are whole categories of companies that would be legislated out of existence. At the moment very small companies can compete with very large companies by offering incentives that might have a 1/1000 chance of being worth $100m (if the company is a massive success). Think of the founders of google getting programmers to come and work for them. The next google probably couldn't happen under such a scheme.
Posted by Andy on February 02, 2009 at 02:39 PM PST #
Andy,
You raise some good questions. Once I clock out (figuratively) I'll do some digging and respond properly.
Posted by Owen Allen on February 02, 2009 at 03:35 PM PST #
The only issue I see is this: folks will structure their companies to work around the issue.
Imagine a company of nothing but three letter executives. That company pays themselves $100m/yr and the lowest paid guy is _only_ making $10m/yr
Now this main company owns or outsources everything to another company that pays folks $5/hr....
Much like the tax code, I like it in theory but the implementation can get a bit tricky.
The only tweak I would make is to cap it at 100x and not 1000x.
Posted by John on February 02, 2009 at 03:44 PM PST #
I don't follow John... You acknowledge that it would be pointless because people could just restructure their companies to get round it, but want to tweak it in a way that doesn't eliminate the problem you've pointed out... Tweaking from 1000x to 100x just increases the number of companies who would have to restructure, increases the amount of money that has to be wasted on accountants and lawyers and increases the amount of money that has to be wasted on law enforcement to police the new laws.
And the aim of the regulations? The aim seems to be to prevent the normal operation of a free society in allowing those who through their talent and hard work seek to be justly rewarded by those who desire their services.
Posted by Andy on February 02, 2009 at 05:56 PM PST #
Andy,
In reference to your first question, about the average American's income, the U.S. Census Bureau has some pretty thorough numbers (Income site is here: http://www.census.gov/hhes/www/income/income.html). Their 2007 report (http://www.census.gov/prod/2007pubs/p60-233.pdf) shows that household incomes peaked in 1999 and haven't yet returned to that peak. Their per capita chart (http://www.census.gov/hhes/www/income/histinc/p01AR.html) shows that individual average income has fallen as well. During that time, health care costs have been increasing by 8% or so a year (http://news.thomasnet.com/IMT/archives/2008/09/2009-health-care-cost-increase-the-lowest-in-years-pwc-aon-mercer-reports.html), and college costs have gone up some 52% in the past few years (http://dpc.senate.gov/dpc-new.cfm?doc_name=fs-109-2-151). For normal people, life is more expensive now than it was eight years ago.
When I say that the wealthy seem to be unwilling to chip in, I should elaborate. In the economic stagnation of the past few years, most of the growth has been at the top. The family income table (http://www.census.gov/hhes/www/income/histinc/f01AR.html) shows that the families who make more money than 95% of other families have gained about five thousand dollars in real terms since 2000. Those statistics don't count capital gains, either (http://www.census.gov/hhes/www/income/histinc/redefs.html). So while most people's income has been mostly unchanged, the richest have been getting richer. And now, as we're all being asked to sacrifice a lot of money (a couple thousand dollars apiece) for a second recovery package, the bankers and executives who we're bailing out are giving themselves enormous bonuses. It seems that, no matter what the economy is doing, the top 1% take home a greater and greater share of the nation's income. They chip in, but whether the economy is good or bad they still end up with more.
Posted by Owen Alllen on February 02, 2009 at 07:05 PM PST #
(Continued - jeez, I'm long-winded.)
The morality of my proposal is also a valid question. However, we've been placing restrictions on companies for centuries for the good of the public. We banned child labor, instituted overtime pay, created a minimum wage, and created a variety of workplace safety regulations. You could argue that these laws make us less free, since they take away choices, but I think we're nonetheless better off this way. The past year has shown us pretty clearly that powerful corporations need the government to regulate their behavior. What I'm proposing is simply one possible way to regulate our economy. As long as it's possible to come to America, work hard, and make a good living for yourself, I think we're still economically free.
Subcontracting is indeed an issue, and I'm sure that a lot of CEOs would concoct many an ingenious way to weasel out of this. Perhaps contract employees would count as well. Just as there are tax shenanigans and loopholes today, I'm sure that it would be an ongoing battle.
I don't see how this would hamstring startups like Google, though. Would engineers have refused to work long hours and endure hardship because their eventual payoff would be capped at 'only' $13 million a year? It seems unlikely.
The overall point of the regulation would be to prevent those who already have a great deal of power and money from taking more than their 'just' share. CEOs like Robert Nardelli have been paid hundreds of millions of dollars in recent years, often despite mediocre or poor track records. Bank managers have also ended up in hot water recently for giving themselves billions of dollars in bonuses while their companies narrowly skirt bankruptcy and they demand federal bailouts. Are those 'just' rewards, or is it that no one at their companies is powerful enough to argue?
Posted by Owen Allen on February 02, 2009 at 07:35 PM PST #
John,
As I said to Andy, you're certainly right that the devil would be in the details. Perhaps, rather than being per-company, it should be national. That would make the loopholes a lot trickier. I suspect that a number of CEOs would sooner give up their citizenship than give up such a portion of their earnings, if it came to that. But, in theory, with the US as large a consumer as it is, we could do it if we wanted to.
I suppose that the multiplier is a bit arbitrary. I suppose I picked a thousand because I think that some jobs are worth more than ten million. I know how stressed I'd be if thousands of employees were depending on me. But then again, the President of the US only makes $400,000 a year, and there's no shortage of people who want that job.
Posted by Owen Allen on February 02, 2009 at 07:45 PM PST #
Owen, you cite household income and gdp per capita to claim falling incomes, but these are obviously bogus measures because the average size of households has been falling for decades (http://www.msnbc.msn.com/id/14942047/), as has the proportion of the population working (ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt).
I can't find the exact numbers for the household size, but between 2000 & 2007, the percentage of the US population in employment fell from 67.1% to 66.0%.
Posted by Andy on February 03, 2009 at 01:59 AM PST #
Apart from the familiar problem that comparing household income across percentiles doesn't correct for the varying sizes over the percentiles, its obviously broken to compare how the top 5% did in 2000 with how the top 5% did in 2008 and say "the top 5% have done much better" because it will be a different set of people in the top 5%.
Posted by Andy on February 03, 2009 at 02:06 AM PST #
Andy,
I know that household size has shrunk to some extent. I'll see if I can find some numbers on that.
Do your numbers on employment count people who are looking for work? The unemployment rate rose from 4% to 5% between 2000 and 2007, and it's above 7% now. If the average salary drops because work is harder to find and people are losing their jobs, then it's reasonable to say that people are making less.
If, in real terms, the salaries of the quintiles (20%, 40%, 60%, 80%) stay largely the same whereas the salary of the 95% cutoff goes up, it tells us that the top is the only place that's seeing real growth. In essence, that's what my argument is about. I think that every socioeconomic group has been working over the past few years, but the added benefits have been very concentrated.
Posted by Owen Allen on February 03, 2009 at 03:32 PM PST #
The numbers on employment were at this link, posted earlier:
ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt
In 2000, the numbers are:
non-institutional population: 212,577,000
employed: 142,583,000 (67.1%)
unemployed (ie people looking for work): 5,692,000 (4%)
The latest year, 2007, has:
non-institutional population: 231,867,000
employed: 153,124,000 (66.0%)
unemployed (ie people looking for work): 7,078,000 (4.6%)
You have an aging population, all those baby-boomers are retiring, so numbers comparing per-capita income without correcting for working population are going to give a pessimistic view of what is happening.
Posted by Andy on February 03, 2009 at 07:05 PM PST #
I don't think it is valid to compare income quintiles over time because they are different people in the quintiles. Last years top 5% might have had a lot of oil men and bankers in. This year it will probably be a far different mosaic. How can you turn round and say "the top 5% is where the growth is" when the income of last years top 5% might have fallen by 50%?
There are studies that track peoples income over time as they move between the quintiles. People start their employment lives in the bottom quintile when they are students, they move up the quintiles throughout their employment and then they fall through the quintiles in their retirement. All perfectly natural. The majority of those in the bottom quintile this year will be in the top quintile at some point over the next 25 years.
There was a study published by the Federal Reserve Bank of Dallas in its 1995 annual report that showed that less than 1% of people in the bottom quintile remain permanently in the bottom quintile.
The question of who gets to decide where the "added benefits" of increased productivity go is to me a moral one. If it is a politician doing the deciding, then I think you have an inherently immoral and unjust system.
Posted by Andy on February 03, 2009 at 07:59 PM PST #
Andy,
First off, sorry it took me so long to respond. I was away all weekend for a friend's wedding (see my other post for sappy details.)
Second, you're right that the increasing number of retirees will deflate the per-capita income numbers. Balance that against the per-capita drop in income since 2000, and the average might come out in the black. I think there are also some issues with the CPI - as I noted above, health care and college have jumped in cost during the past few years, while the consumer price index for both categories shows small increases. (The CPI also says that transportation costs on the whole have barely increased since 2000 - I've been paying for gas and I'm skeptical of that one.) The bottom line is, there's room for argument, but you'd be hard-pressed to argue that we've seen any significant improvement.
It's reasonable to believe that there is movement between quintiles, yes. But it's not a random distribution. People will move through them to some extent, but you can't tell the people who can't afford health insurance that it's okay because someday they'll probably make more money. If the bottom quintile is unlivable, that's a problem, even if people cycle through it.
Finally, you say that if politicians decide where the added benefits of a society's effort go, then the system is inherently immoral and unjust. Our politicians are democratically elected, though. Our Constitution gives them the authority to regulate national commerce. The Constitution gives us all individual rights, as well, but unlimited income isn't in there. So if this was what the majority of Americans wanted, why would it be immoral?
Posted by Owen Allen on February 10, 2009 at 10:25 AM PST #