The Barometer Online

Issue date: 5/9/07 Section: Forum

On March 13, Alan Greenspan said, "Income inequality is where the capitalist system is most vulnerable. You can't have the capitalist system if an increasing number of people think it is unjust."

It's often claimed that income inequality is a necessary incentive for members of society to work hard, educate themselves, develop their potential and rise to excellence in their schools and workplaces. Let's assume for the moment that this is true, that money is the only reliable incentive for people to work hard, and that it's a naive socialist pipe dream to believe most people would ever be willing to work primarily for altruistic goals or self-betterment rather than for increased monetary reward. If we adhere to this assumption - and it is an assumption - then two questions arise: How much income inequality is necessary to provide incentives, and how much is unjust and excessive? It's difficult to answer with complete certainty, but it helps to have some sense of the monetary inequality in the United States today, of whether it's increasing or decreasing, and of whether desirable social priorities are supported by policies increasing inequality or by different rates of pay for different jobs.

Income inequality in the U.S. is vast and has increased rapidly in recent decades. The organization United for a Fair Economy reports that in 2005, "American CEOs earned 411 times as much as average workers, up from 107 times in 1990." In a Feb. 18 International Herald Tribune article, Albert Hunt reports that this gap "is 20 times bigger than it was in 1965." Remember the opulent 19th Century "robber barons"? New York Times columnist Paul Krugman notes that in 1894, John D. Rockefeller - then the U.S.'s richest man - made 7,000 times the average worker's pay, while in 2006, the hedge fund manager James Simons made $1.7 billion, or 38,000 times the average worker's pay. This March, Harvard economics professor Lucian Bebchuk testified before the House Financial Services Committee that U.S. CEOs make twice as much as CEOs in the U.K. and Germany, and four times as much as Japanese CEOs.

These facts undermine claims that without our society's present extraordinary levels of unequal pay, people would lack incentives to succeed. Wasn't the U.S. economy often healthy during the 1960s and before? Haven't Japan and Germany achieved economic growth in recent decades without such enormous inequality? Weren't sufficient incentives already available in 1990, when U.S. CEOs made "only" 107 times the average worker's pay instead of 411 times? Are CEOs working THAT much harder? No.

Studies by Bebchuk and other researchers indicate that "bonus payments and salary increases are little correlated with managers' own performance." Warren Buffet - the noted investor and third-richest person on the planet as of April 2007, according to Forbes magazine - concurs, commenting that "too often, executive pay in the U.S. is ridiculously out of line with performance." Workers' pay is disconnected from performance in the opposite direction: the Economic Policy Institute (EPI) reports that "between 1979 and 2004, American workers raised their productivity 64 percent, while their median hourly compensation rose only 12 percent." According to the U.S. Census Bureau, the richest 5 percent of Americans saw its annual real (inflation-adjusted) incomes rise by 81 percent from 1979-2005; the poorest fifth saw its annual real incomes decline by 1 percent.

Of course, these statistics refer to before-tax income. Income taxes do help moderate inequality, since the rich pay proportionately more than the poor. According to the IRS, in 2006 the richest 5 percent of taxpayers paid 57 percent of federal income taxes, while the poorest 50 percent paid only 3 percent. But the rich use numerous loopholes; moreover, in examining ALL taxes - local, state and national - the federal Bureau of Labor Statistics found that the poorest fifth of Americans has been paying 18 percent of its income in taxes, while the wealthiest fifth paid 19 percent - hardly a socialist redistribution scheme. In 1999, the richest 1 percent (about 2.7 million people) had as much after-tax income as the bottom 100 million Americans put together, according to Pulitzer-winning journalist David Johnston - and Bush's tax cuts disproportionately benefited this 1 percent still further. Sonoma University's Project Censored notes, "Today the top 400 [U.S.] income earners make as much [annually] as the entire population of the 20 poorest countries in Africa (over 300 million people)." Maybe our society's gone overboard with incentives.

Doesn't this top-heavy wealth "trickle down" to create jobs through investment, as per conservative economic theory? Not necessarily. Reagan administration Treasury Official Gregory Ballantine has commented, "In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment]."

Policies that increase monetary inequality entail serious costs. While Bush's 2001-2003 tax cuts are scheduled to expire in 2010, many Republicans want them made permanent. The Center for Budget and Policy Priorities calculates that, if extended, Bush's tax cuts will cost the government $3.5 trillion over the next decade - money that could fund debt-reduction, universal health care or serious renewable energy subsidies. Increasing monetary inequality both expresses skewed priorities and helps skew them further.

Illustrating another connection between income inequality and questionable priorities, the Gazette-Times recently reported that OSU football coach Mike Riley has signed a contract extension giving him a salary of $850,000 during the extension's first year, rising past $1 million by its final year. According to the Oregon University System, professors at OSU made an average of $79,800 during 2005-06; associate professors averaged $59,200. Even if this disparity simply reflects higher "free market" demand for coaches in a sports-obsessed culture, Riley's contract undeniably fits a larger pattern in which society often provides far greater monetary rewards to athletic professionals (and entertainers) than to teachers. (Some might reasonably argue that coaches are important, but it's ridiculous to consider them more important than teachers).

To put it mildly, skepticism is warranted as to whether sound or fair social priorities are reflected by such disparities - or by today's vast monetary inequality in general.

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Callan Sullivan is a senior in political science. The opinions expressed in his columns, which appear every Wednesday, do not necessarily represent those of The Daily Barometer staff. Sullivan can be reached at forum@dailybarometer.com.

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