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Coming apart

from David Ruccio

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American capitalism is coming apart at the seams.

Truth be told, it’s been coming apart for decades now—and that trend has only continued during the recovery from the worst crash since the 1930s.

A good indicator of the shredding of the U.S. economic and social fabric is the difference in the level of compensation of Chief Executive Officers of major American corporations compared to that of the average worker. While they labor, workers create value, some of which they receive back in the form of compensation; the rest of what they produce is the surplus, which is appropriated by the boards of directors of the enterprises that hire the workers. The boards also hire CEOs, to supervise the production of the surplus, who in turn get a cut of the surplus. In other words, the executives share in the booty created by the workers they supervise. Thus, both groups—CEOs and workers—perform labor and are compensated for their work but the source and level of their compensation couldn’t be more different.

According to the Economic Policy Institute, in 2018, average compensation (including realized capital gains) of CEOs at the top 350 American firms was $17.2 million. And for workers? It was only $56 thousand. As a result, the ratio of CEO compensation to that of workers was an astounding 278.1 to 1! In 1978, that ratio stood at 29.7 to 1. The spectacular growth in the CEO-to-average-worker-compensation ratio reflects the fact that, over that same period, CEO compensation has risen 940.3 percent while that of workers has grown only 11.9 percent.

Just in the past nine years of the so-called recovery, CEO compensation far outpaced that of workers: 52.6 percent compared to only 12.7 percent.

L share

It should come as no surprise, then, that over the 1978-2018 period, the labor share of national income has dropped precipitously, by 8.7 percent (falling 2.1 percent just since 2009). Corporate CEOs have thus done their job—extracting more surplus from workers—and been rewarded handsomely for their efforts.

And Americans are quite aware of how unfair the U.S. corporate economy has become.

CEO-2  CEO-3

According to a 2016 survey conducted by David F. LarckerNicholas E. Donatiello, and Brian Tayan for the Stanford Rock Center for Corporate Governance, 74 percent of Americans believe that CEOs are not paid the correct amount relative to the average worker; only 16 percent believe that they are. And 70 percent believe that CEO compensation in the United States is a problem; only 18 percent think it’s not. 

CEO-1

And that’s even when Americans grossly underestimate the amount of the surplus corporate CEOs manage to capture. The typical American believes a CEO earns $1 million in pay (with an average of $9.3 million), whereas median reported compensation for the CEOs of these companies was approximately $10.3 million (with an average of $12.2 million).

In other words, CEO compensation figures are much higher than the public is aware of, and for many Americans it is simply incomprehensible that anyone can earn that much money.

Moreover, Americans are not convinced corporate CEOs should be able to capture as much of the surplus as they do. For example, according to the same survey, when respondents are given a hypothetical situation in which a company’s value increases by $100 million over the course of a year, the median respondent believes that the CEO should receive only 0.5 percent ($500,000) as compensation. In other words, as Donatiello put it, “Either the public is not sold on the idea that CEOs should share in value creation to the extent that they do. Or they do not believe that CEOs play an important role in value creation.”

Clearly, the high level of exploitation—and the subsequent distribution of a large portion of the resulting surplus to CEOs—is the source of the rending of the U.S. economic and social fabric. Unless corporations are fundamentally transformed, so that workers and society as a whole have a say in the size and distribution of the surplus, American capitalism will continue to come apart at the seams.

  1. August 21, 2019 at 1:50 am

    And from that comes havoc on nature from yachts to designer clothes and etc..

  2. Ahmed Fares
    August 21, 2019 at 2:33 am

    [Quote]
    Labor advocates are also fond of appealing to their readers’ sense of fairness by arguing that CEO pay at the company proves it can afford a $15 minimum wage. But the math here also doesn’t add up. Wal-Mart CEO Doug McMillon earned a combined $19.4 million compensation package in 2015, including salary, stock options, and other perks. That makes for a dramatic sound bite. But if this money was somehow divided between all 2.3 million Wal-Mart associates, each associate would get a one-time $8.43 bonus—that’s it.
    [End Quote]

    It’s also been calculated that if you took the salaries of all the CEOs in the US and distributed them among the workers, it would only add three cents to their hourly wages.

    It’s important to have a sense of proportion…

    • Meta Capitalism
      August 21, 2019 at 5:29 am

      Please cite the source of your quotation Ahmed, as my old eyes are having trouble seeing it in above post. If it is there forgive my weak eyes. If from elsewhere provide source please.

    • August 21, 2019 at 5:39 am

      Meanwhile, finance sector’s share of corporate profit reached 40% in 2008. For doing what? Managing risk? Spare me. Backing entrepreneurs? Give me a break. The banking sector and finance sector basically writes mortgages backed by real estate; that’s it. Even today their share of private profit is 25%. For doing what?

      • Craig
        August 22, 2019 at 12:27 am

        Precisely. No one here criticizes the money system/finance even though “they own the joint”.

        It’s either that they think any criticism is an “interest is the one and only problem” crank or finance backs NWER blog or they just can’t come out of their abstraction fog long enough to look at the simple but paradigm changing policies I’ve suggested here for years now.

        To paraphrase James Carville: It’s the monetary paradigm….stupid

  3. August 21, 2019 at 5:57 am

    The peak share occurred in 2002.

  4. Ahmed Fares
    August 21, 2019 at 10:42 pm

    @Rob,

    Let’s take GM as an iconic US corporation. GM’s Mary Barra makes about $22 million/year. Divided by GM’s 170k employees, that works out to $129 per employee.

    There are roughly 2,000 work hours in a year:

    $129/2,000 = 0.0645

    So that’s it, roughly 6 cents an hour in this case.

    It’s just math.

    • Rob
      August 21, 2019 at 11:26 pm

      Sorry Ahmed, your analysis is overly simplistic and ignores many, many, factors, to the point it is meaningless, in my view. It is not all “just math” and that comment is tone deaf in my view.

    • Rob
      August 21, 2019 at 11:54 pm

      2.2 Predictive power isn’t all it is cracked up to be
      .
      Nearly all textbooks claim widespread agreement among economists about non-normative economic questions. Many cite a 1992 survey for support. For example, Parkin and Bade (2006: 14) claim that ‘at least 7 out of every 10 economists broadly agree’ that: a minimum wage increases unemployment among young workers and low-skilled workers. Mankiw et al. (2002: 32) claim that this proposition was endorsed by 79 per cent of economists – a number they call ‘an overwhelming majority’. Let’s consider this purported consensus. There have been three surveys published, the results of which are contained in Table 2.3.
      .
      TABLE 2.3 Percent in agreement with the proposition: ‘minimum wages increase unemployment among young and unskilled workers’
      .
      Note: * Kearl et al. 1979; † Alston et al. 1992; ‡ Fuller and Geide-Stevenson 2003
      .
      From Table 2.3 we see that to get 79 per cent agreeing with the minimum wage proposition on the 1992 survey, one must add the ‘generally agree’ category to the ‘agree with provisos’ category. This is a bit of a liberty, isn’t it? What if the proviso is related to the size of the minimum wage increase? For example, a doubling of the minimum wage would increase youth unemployment, but a 20 per cent increase would not. If that were the proviso then the economists who ‘agreed with provisos’ would hold ‘heretical’ beliefs. They are not singing from the same hymn book as the textbooks because (as we will see in the next chapter) the textbook prediction is that any increase in minimum wages would increase unemployment. Since we really don’t know what the provisos are, we simply shouldn’t group the two categories.” (Read Here)
      .
      Comparing the results of the three surveys, we see a clear trend: a decline in the percentage of those who generally agreed and a rise in the percentage of those who disagreed. If these three surveys show anything at all, they show the breakdown of consensus with regard to the minimum wage proposition.
      .
      This breakdown of consensus almost certainly reflects the work of Card, Katz, Krueger and others, much of it published in the early 1990s, which apparently showed that minimum wage increases often have a zero or positive impact on employment. These results have been the subject of a ‘lively’ debate, discussed in Card and Krueger’s 1995 book Myth and Measurement.
      .
      Some idea of the tone of the debate can be had by noting that Valentine (1996) accused Card and Krueger (1994) of practising ‘politically correct’ economics, and of deliberately using suspect data in one of their studies. For their part, Card and Krueger present evidence of ‘publication bias’ against results contrary to textbook conventional wisdom (1995: 186). (Read Here)
      .
      (….)
      .
      The minimum wage debate became surprisingly heated given how little is at stake – a prediction of the standard textbook competitive model of the labour market, which, as we’ll see in the next chapter, requires many highly unrealistic assumptions. It is astonishing that so many economists are so committed to believing in the empirical relevance of this model that they feel extreme discomfort when its predictions are challenged. Indeed, textbook writers (or the economics professors who adopt the textbooks) apparently feel so much discomfort that they continue to assert that a consensus exists about the effect of minimum wages! It is almost as if the minimum wage proposition is believed as an article of faith and is incapable of refutation. (Read Here)
      .
      — The Economics Anti-Textbook: A Critical Thinker’s Guide to Microeconomics by Rod Hill, Professor Tony Myatt.

      .
      The idea that when it comes to economic questions “It’s just math” is a gross oversimplification of complex social issues. Salary is only one (usually small) part of CEO compensation. CEO compensation is subject to the same kind of issues as minimum wage. It is simply not all about the math, which of course, can be manipulated to support any position one wants depending on what is included or excluded form such simplistic calculations.

    • Rob
      August 21, 2019 at 11:57 pm

      You simplistic (meaningless) calculation ignores that fact that when Amazon pays such a low wage to employees that they must use government welfare there is an “external” social cost to such low wages not accounted for in your calculations. You also ignore the fact that $1 to a billionaire is nothing, but to a struggling worker it may well be the difference between choosing between paying the rent or putting food on the table for one’s children. As I said, such oversimplification is tone deaf.

      • Rob
        August 22, 2019 at 12:50 am

        And more importantly, how one determines what is “proportional” is not merely a matter of doing the math, but what values determine what goes into making such social calculations. It certainly about overly simplistic math.

  5. Ken Zimmerman
    August 23, 2019 at 11:54 am

    American colonial culture, according to historian Charles A. Beard, “In its origins it was derivative: the whole conventional heritage, from its noblest ideals to its grossest vulgarities, was European, in a strict sense, English. Like the culture of every other age, it was contingent upon the prevailing economic order, the modes of securing a livelihood, the disposition of classes, the accumulation of riches, the development of patronage and leisure, the concentration of population, and the diversification of practical experience. Of necessity also it was bent to the laws of change, affected in every sphere by transformations in the character and weight of economic classes, the growth of secular concerns, and the impact of fresh currents’, of opinion from abroad” (The Rise of American Civilization). When the troubles that would eventually end with the American Revolution began, it was not unexpected when many Americans turned to British law for protection. The claims the Americans made were consistent with the contemporary understandings of that law. Which held that English constitutional law protected all subjects (at home and abroad) from tyranny, and that the king and Parliament had to act within these laws. Notable among English liberties were the protection from internal taxation without representation in Parliament and safeguards against illegal threats to life, liberty, and property. Many Americans declared void any acts of Parliament that violated natural equity or the British constitution.

    The greatest threat to this understanding of American culture thus far came during the period 1929 to 1945. After Hitler seized power in 1933 Americans began to worry that the New Deal might lead to American fascism, or American communism. During the first two decades of the 20th century many Americans disparaged or lost faith in American civilization. But with the depression, and then Hitler, and then the Russian Revolution, as the 1930’s wore on, American beliefs tended more and more to move away from the critical attitudes of the 1920’s toward a greater appreciation of American life and a revival of a kind of “old” patriotism. Some critics and expatriates of the 1920’s had fled from American life, but the Americanists of the 1930’s rushed back to it and embraced it with unbounded enthusiasm. This revived Americanism also refocused the nation’s concerns on the common American, with their sufferings, courage, struggles, and virtues. By the 1950s this had created a more conservative America; first culturally and then politically. Conservative in the traditional sense, that did not involve economics. But also, in the 1950s American economic conservatives (prominently including economists) began changing the direction of American culture toward not just economic conservatism, but radical economic conservatism. We see the results of those efforts (many surreptitious) over that period and today with such changes as extreme economic inequality, declines in political and religious conservatism (including warping Christianity), a culture of money and economic fascism, the spreading Orwellian use of language, denigration of the founding documents and principles of the US, vilification of the working- and middle-class, attacks on republican democracy, dysfunction in American institutions at all levels, and the rise of the CEO President. The CEO to worker compensation ratio is just one small, though notorious part of these changes. It’s impossible to fix the problem with the ratio without also fixing the many broader and more basic changes created in American society by radical economic conservatives over the last 75 years. America has turned back similar attacks on its cultural foundations before. Let’s hope this one can be turned back as well.

    • Craig
      August 23, 2019 at 7:13 pm

      Cultures die hard and long….but when they’re dead and don’t quite know it yet LIKE NOW, it’s extremely dangerous to not have a new culture/pattern/paradigm to satisfactorily replace it.

      For your own and for your progeny’s sake consider the new mega paradigm of Abundantly Direct and Reciprocal Monetary Gifting.

      • Ken Zimmerman
        August 24, 2019 at 9:23 am

        Craig, I’m not the person you need to convince. You’ll need money and political support for your proposal. And you’ll need popular support for it. Both difficult jobs. I suggest you get that going rather than giving me more details.

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