America The Lopsided

Increasing inequality of income, assets, opportunities has been a fact for a generation, exacerbated by the long downturn beginning in 2008. It is widely expected to be a dominant issue in the elections of 2016. The one percent vs.the 99 percent, the billionaires vs. the declining middle class. When Republican candidates start paying lip service to such a subject, you can be sure it is preoccupying many disaffected voters.

How much inequality is too much and what to do about it? Some Democrats are all for the obvious solution of a more progressive tax system and would also want to address the unfairness of taxing wages differently from capital gains and hedge fund managers more favorably than blue collar workers.

This would have the effect of redistributing wealth, but would not address the paucity of well-paying jobs due to many structural factors including globalization, technological change and an outdated educational system. Republicans tend to favor nostrums that begin at the top rather than the bottom of the income ladder, such as tax cuts allegedly aimed at encouraging business. But earlier trickle down schemes have had the opposite effect, concentrating more and more wealth above and leaving all others bereft.

Many states and localities, noticing the federal government is not on the job, have moved to raise the minimum wage, but while that may keep some from penury it will vault no one into the middle class. In the same vein the CEO of Aetna Insurance has decided his company should pay no one less than $16 an hour, which is fine as far as it goes. But a gigantic gap still separates workers at that level — $32,800 a year — and those prosperous enough to fuel a booming consumer economy.

Many years ago, pioneering management scholar Peter Drucker addressed the issue of unequal corporate rewards. He suggested that when companies paid top managers more than twenty times the wage of the average unskilled worker it tended to ”create resentment and decrease morale.” By the time Drucker died in 2005, the gap in American corporations between CEO and average worker was double that — 40 to 1.

A study in the Harvard Business Review (Sept. 2014) looked at CEO pay vs. average worker pay around the world, but they also asked workers what they thought a fair ratio would be and to guess what the actual ratio was.

Interestingly, workers around the world tended to think roughly the same thing about how much CEOs should make compared to the average unskilled worker. The Scandinavians were the most egalitarian, thinking CEOs should only make two or three times as much as workers. The Japanese, French, Germans and Americans all thought 6 to 7 times as much would be ideal.

When asked how much more CEOs actually made than their workers, people were wildly off the mark, thinking the top dogs made ten to 20 times as much as the unskilled worker. In fact, the gap is much larger.
In France, the CEO makes 104 times as much as the worker, in the UK 84 times as much, in Scandinavia 40 or 50 times as much. America is the outlier in this measure of social inequality. CEOs average $12 million a year and unskilled workers $34,000 for a ratio of 354 to one, the highest in the world and more than double that of the next most lopsided — Germany and Switzerland at 147 and 148 times as much.

One reason for the imbalance is that average CEO pay in America is twice that in Germany, three times as much as the UK, Spain, and France, six times that in Denmark, Israel and Japan. Conversely, if the CEOs are more richly rewarded in America than anywhere else, the workers are paid less. Average workers earn more in Australia, Austria, Denmark, France, Norway, the UK, Switzerland, Sweden. Workers earn less only in Portugal, Poland, Israel and the Czech Republic.

So, not only is income inequality in the United States vast, it is extreme in both directions — the management class hugely overpaid and the workers underpaid compared to their counterparts in almost all developed countries around the world. The authors of the HBR article puckishly suggest that if CEO pay were held constant in America, for the average worker to be paid the ideal ratio of one-seventh as much as the CEO they would have to be paid $1.2 million.

We often hear that America is an exceptional country. But is this the kind of exceptionalism we should be proud of? The plutocratic few and the plebeian many? More and more people across the political spectrum, from Tea Party to Occupy Wall Street, appear to have noticed this is out of line, have gotten mad as hell and disinclined to take it any longer. Studies like this one suggest they aren’t imagining things.

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