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Jan 6th 2007

How the Middle Class Is Getting Screwed

I was talking to friend yesterday about the Home Depot CEO who is walking away with $210 million (most of which was agreed upon before he resigned). An article in New York Magazine pointed out a possible solution, which I think is a great idea:

We could enact de facto compensation caps for top executives, either by limiting the tax deductibility of CEO pay or, as in Britain, by making CEO pay subject to a shareholder vote every year.

Actually, the entire article is pretty good.

…during the past two decades we’ve not only let economic uncertainty and unfairness grow to grotesque extremes, we’ve also inured ourselves to the spectacle. As America has become a lot more like Pottersville than Bedford Falls, those of us closer to the top of the heap have shrugged and moved on.

The asymmetry between the Goldman boss’s compensation and that of his average employee—85 times as big—is virtually Ben-and-Jerry’s-like these days: An average CEO now gets paid several hundred times the salary of his average worker, a gap that’s an order of magnitude larger than it was in the seventies. In Japan, the ratio is just 11-to-1, and in Britain 22-to-1.

This is not the America in which we grew up.

Where’s George Bailey when we need him?

7 Responses to “How the Middle Class Is Getting Screwed”

  1. How does this prove that the middle class is getting screwed? To me it sounds similar to the argument against outsourcing jobs – some people call it “exploitation” of the 3rd world worker because the pompous Americans are profiting from the cheap labor. Other people, though, call it a good job for those 3rd world workers they wouldn’t have otherwise had. It’s a win-win situation.

    Executive pay is a byproduct of the creation of the corporation, which is a tool for increasing productivity and generating cash that wouldn’t have otherwise been available without the corporation. So you see the corporation as exploitation of the middle class worker, to line the pockets of the executives. I say that without corporations, many people would not have the nice jobs that they have, the standard of living in general would be lower, and would not enjoy the same level of incomes they current do. Executive pay may be too high, but I don’t see how it screws the middle class. I say it helps them.

    Take a simple example: look at the salaries in the NBA. When Michael Jordan entered the league, and became the marketing icon he did, he received ridiculously huge sums of money for his contributions. The average bench warmer could look at that and say that he’s getting screwed because Michael Jordan got paid so much, when in actuality the pay of even the least talented in the NBA was increased dramatically as a result. Relative to Michael Jordan’s salary, a bench warmer may be worse off, but relative to himself he’s doing much better. Why is that a bad thing?

  2. doug

    Brad, thanks for commenting. ;)

    To me two of the most interesting stats were the relationship of CEO-to-worker pay over time, as well as the comparison of the American ratio to Japan and Britain.

    You say:

    I say that without corporations, many people would not have the nice jobs that they have, the standard of living in general would be lower, and would not enjoy the same level of incomes they current do.

    Let them eat cake!

    The problem is, a lot of people don’t have “nice jobs”. That’s the point of the article. People are not enjoying a higher standard of living. People are not enjoying higher levels of income.

    The old saying that “a rising tide lifts all boats” has not been true for the past several years. The rising tide is only lifting the yachts. The smaller boats are sinking, along with their middle class occupants.

    You say:

    Executive pay may be too high, but I don’t see how it screws the middle class. I say it helps them.

    I’m not sure how that obscene difference in pay has helped the middle class, since:

    Starting in the late eighties, however, the piece of the income pie taken each year by the rich has once again become as hugely disproportionate as it was in the twenties. Meanwhile, the median household income has gone up a measly 15 percent during the past quarter-century—and for the last five years it has actually dropped.

    It used to be that when the economy thrived and productivity grew, pay for working people rose accordingly. Yet as the Times reported this past summer, the first six years of the 21st century look to be “the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers.”

    As for the NBA analogy, it’s flawed.

    Michael Jordan didn’t have a CEO/worker relationship with the bench warmers around the league. He had the same position as a bench warmer: professional basketball player.

    Assuming that Jordan’s compensation actually did pull other players’ salaries up, then the example is only analogous among CEOs. In other words, the huge compensation package of Robert Nardelli (the CEO of Home Depot) doesn’t help the middle class, or even Home Depot’s own employees, but it may help pull other CEO salaries up.

    Or, put even more simply, the salaries of bench warmers in NBA may be up thanks to His Airness, but the guy cleaning the toilets or selling tickets at the MCI Center isn’t making twice as much as he was a few years ago.

  3. Doug, thanks for letting me comment on your site.

    I see the issue completely differently than you do, I think. I’m thinking of it on a macroeconomic level, where you’re thinking of it on the individual firm level. On those terms, the NBA analogy holds up and works well because all are workers in the world economy. I said that executive compensation is a byproduct of the invention of the corporation. Compare middle class workers’ wages now with what they were before the corporation was invented. Also, I don’t believe that there is a finite supply of cash, like say $10 Trillion, to be divvied up amongst each participant in the economy, that’s the beauty of it. Just because someone is making a lot of money, does not necessarily mean that the person next to them is making less.

    You talk about the trend over the past several years of middle class wages remaining stagnant. What else has happened in the last several years? America has entered a world economy that is more and more competitive. Has the middle class been developing the skills necessary to keep their jobs relevant in a changing world? It’s so easy to point fingers at those who are successful and wish we could have a piece of their pie, but what are we doing to improve our own station in life? I think this is a more complex issue than CEO compensation, although that is an easy, and popular, issue to claim fault to. I think doing so misses the broader point.

  4. doug

    I’m thinking of it on a macroeconomic level, where you’re thinking of it on the individual firm level. On those terms, the NBA analogy holds up and works well because all are workers in the world economy.

    I’m thinking macro, as well, which is why the NBA analogy doesn’t work (see: my example of Jordan and MCI Center employees).

    Compare middle class workers’ wages now with what they were before the corporation was invented.

    My beef isn’t with the corporation, I doubt anyone (aside from hardline Communists) would ever say that corporations should be eliminated.

    Has the middle class been developing the skills necessary to keep their jobs relevant in a changing world? It’s so easy to point fingers at those who are successful and wish we could have a piece of their pie, but what are we doing to improve our own station in life?

    Boooo… ;)

    Of course it’s easy to point fingers, when the culprits are obvious. This nonsense about “it’s the fault of the middle class” sounds like a little kid who, caught with his hand in the cookie jar, says,

    Oh, c’mon mom, your cookie jar is easier to open than the cookie jars at other houses. Don’t be angry with me, the situation is very complicated.

    Now, obviously the only problem isn’t CEO compensation. But it is a glaring one. As the article points out, the American economy has grown by leaps and bounds over the past few years, but the middle class isn’t benefitting. Workers are more productive, but they make less money. Yet (miracle of miracles!!) the CEOs of these workers are seeing their salaries rise.

    Listen here to the deputy Washington bureau chief of The Wall Street Journal explain how with productivity gains and economic growth, CEO salaries are up, while the normal worker is making less money (oh, the mysteries of life…).

  5. It’s your site. I’ll let you have your day…

    We’re just arguing the same points back and forth, and you’re immaturely belittling it into a little kid’s argument.

  6. Doug, I’d stick to politics, where your immature rhetoric fits right in.

  7. doug

    Alright. Point taken.

    Here’s my thoughts, in one paragraph sans belittling-speak :):

    I think if productivity is up and the economy is growing, then all workers, over the space of a few years anyway, should see wage growth…not just CEOs, sports stars, or the highly educated (like the Wall Street Journal guy was saying in the NPR piece)

    In any case, I suppose we’ll just have to agree to disagree.