August 13, 2007
Many apologists for our unequal economic order have no patience whatsoever with inequality’s critics. These apologists simply cannot understand why some people get so worked up about the presence of grand fortunes in our midst.
Why should you be bothered if some folks can afford Bentleys, these exasperated defenders of grand fortune ask, so long as you can afford a really nice Honda?
In reality, we all have ample reason to feel bothered. Places where super-rich people choose to congregate can turn out to be — for people of average means — terribly uncomfortable places. The most striking example of this discomfort: California’s Silicon Valley.
In this week's Too Much, a look at that discomfort — up and down the Silicon Valley economic ladder — and much more.
What a year the past 12 months have been for Kevin Burke, the CEO of Con Ed, the New York City electric utility. Since a summer 2006 blackout in Queens, a disaster 
that left 174,000 people sweltering in the dark “for up to a week,” Burke has had to deal with an even larger blackout — this one, in June, impacting 385,000 people — and, last month, a steam-pipe blast that shut down Manhattan streets and left one person dead. The bright side? Despite all that woe, Burke still took home $4.7 million last year. He can look forward to even more. His CEO predecessor at Con Ed, Eugene McGrath, retired last year as the company’s chairman and walked off with $12.7 million. In May, Con Ed asked regulators to okay a 11.6 percent hike in electricity rates . . .
American Express CEO Ken Chenault left a lot of blips on air traffic control radar screens last year. He took $405,375 worth of personal trips on his company's corporate jet. Multiply Chenault by the Fortune 500, and that, says the airline industry, only hints at the stress corporate jets are placing on air traffic control. Corporate jets have become nearly ten-times more plentiful since 1969. But corporate high-flyers, the airlines charge, are shirking the burden these jets create. Commercial airlines now generate two-thirds of radar-screen blips yet foot 94 percent of air traffic control costs. That's creating a situation, notes Steve Blow of the Dallas Morning-News, where “those of us sitting in cramped center seats on the airlines are helping subsidize the swells sprawled on the hand-stitched leather of their private jets.” The top lobbyist for private jets, Ed Bolen, objects to that sort of characterization. Protests Bolen: “The airlines try to make this look like a bunch of people flying around to play golf. They are trying to create class warfare.”
The latest global crisis? The world’s super yachts, the British Daily Echo reports, can’t find enough qualified sailors. The root of the problem? Super yachts aren’t just increasing in number. They’re stretching in size. Russian tycoon Roman Abramovich, for instance, will need a crew of 50 to take his new $400-million, 550-foot Eclipse, once complete, out to sea. Worldwide, 250 new super yachts will launch this year, creating spaces for an estimated extra 3,000 deck crew. Yacht crew-training schools simply can’t keep up with the demand. The UK Sailing Academy, located on the Isle of Wight, has 121 engineering vacancies ready to be filled, but only ten engineers due to graduate before year’s end. Worries Jon Ely, the academy’s top official: “The super yacht industry has been growing enormously over the past 15 years, and it isn't stopping.”
Big Oil is once again soiling snow-white Alaska. Two oil company execs have pled guilty to bribing state lawmakers, three lawmakers are facing charges they accepted bribes, and, late last month, federal agents raided the home of still another suspect, Ted Stevens, the U.S. senator long considered the oil industry’s “patron saint.” But one local political observer, Alaska Budget Report editor Gregg Erickson, is urging his fellow citizens to see this latest scandal in broader terms than oil avarice. Corruption, says Erickson, amounts to “a crime of opportunity that can occur anywhere,” but no factor, research has shown, better predicts corruption than economic inequality. And inequality, Erickson notes, is growing in Alaska. A new look at the research linking inequality and corruption, by University of Maryland political scientist Eric Uslaner, has just become available online . . .
Are the architects of the Reagan Revolution having second thoughts — about the turbo inequality their tax-cut policies ignited? At least one key contributor to Ronald Reagan’s political success, speechwriter extraordinaire Peggy Noonan, seems less than thrilled with the wealth that has piled up at America’s summit. Amid “plenty of want,” she observes in a recent Wall Street Journal column, our super-rich today “live better than kings.” Meanwhile, how the super-rich make their money has become “utterly incomprehensible.” Notes Noonan: “If you are told what someone does for a living and it makes sense to you — orthodontist, store owner, professor — that means he's not rich. But if it's a man in a suit who does something that takes him five sentences to explain and still you walk away confused, and castigating yourself as to why you couldn't understand the central facts of the acquisition of wealth in the age you live in — well, chances are you just talked to a billionaire.”
Quote of the Week
“Does growing economic inequality matter? Well, there’s a lot of evidence that it creates a more envious society, a more insecure, even more violent society. Social cohesion may be threatened. And, economically, it may undermine the cooperation necessary for high productivity.”
Frank Stilwell, University of Sydney economist, author of the just-published Who Gets What? Economic Inequality in Australia, ABC Radio, August 9, 2007
New Wisdom
on Wealth
Andrew Stephen, Born equal? New Statesman, August 9, 2007. How the increasing concentration of America’s wealth is hollowing out the American dream.
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On paper, Silicon Valley appears to be a safe and secure, even great, place to live — and not just for the rich.
The rich in Silicon Valley, to be sure, are doing quite well. Households making at least $1 million saw their incomes jump 38 percent in 2005, the latest year with data. But the numbers seem to tell a jolly story for average folks as well. The region’s typical household is making $76,810 — $30,000 over the U.S. median income — and unemployment locally is running below the national average.
So what could be bad? Plenty, says Working Partnerships USA, a San Jose research institute. Average homeowners in Silicon Valley's Santa Clara County, the institute reports, are facing a “perfect storm” of economic troubles, with their expenses for housing, health care, child care, energy, and education up 10 times faster than their incomes since 2001.
“Santa Clara County,” observes the institute report Life in the Valley Economy, “ranks high among the best places to live in the country — if you can afford it.”
But fewer families, in an increasingly unequal Silicon Valley, can do that affording. The same economic dynamics that are making king-sized fortunes for Silicon Valley’s elite — outsourcing, contracting out, temporary employment — are squeezing families out of Santa Clara County’s middle class.
The share of Silicon Valley households making $50,000 to $99,999 — what the institute calls the “secure middle class” — dropped by 4.4 percent in the five years after 2000, after adjusting for inflation, with the share of households making under $50,000 up by 38 percent.
The share of county households making over $200,000 a year, at the same time, has increased, by just under 20 percent, to 12 percent of the country’s 580,000 households.
One consequence of this income shifting: With wealthy households bidding up the cost of local housing, the share of Silicon Valley households spending over 30 percent of their incomes on housing has soared, from 34 to 48 percent.
In Silicon Valley, a New York Times report noted last week, even families that would be considered affluent elsewhere live squeezed existences.
“People around here, if they have $2 or $3 million, they don’t feel secure,” David Hettig, a local estate planner, told the Times.
What's getting these low-level millionaires on edge? Mere single-digit millionaires in Silicon Valley, the Times notes, “do not think of themselves as particularly fortunate, in part because they are surrounded by people with more wealth — often a lot more.”
“Here, the top 1 percent chases the top one-tenth of 1 percent, and the top one-tenth of 1 percent chases the top one-one-hundredth of 1 percent,” explains Umberto Milletti, a local worth $5 million. “You try not to get caught up in it, but it’s hard not to.”
Old, failed CEOs, these days, never seem to fade away. They just morph into private equity major domos.
Last week, the new private equity owner of carmaker Chrysler, Cerberus Capital Management, named Robert Nardelli, an executive with no auto industry experience, to the Chrysler chief executive slot.
Nardelli qualifies as a two-time loser. A long-time General Electric executive, Nardelli failed to win the CEO job at G.E. after celebrity CEO Jack Welch retired. He promptly departed G.E. to become the CEO at Home Depot, where he eventually was ushered out the door, after a stormy and unsuccessful tenure, with $210 million in severance.
Nardelli’s waltz into private equity land came just a week after Kevin Rollins, the ousted CEO at Dell computers, joined private equity powerhouse TPG Capital as a “senior adviser.” Rollins only qualifies as a one-time loser. During his tenure at Dell, the company lost its number one status in the computer industry and, after a few too many laptop battery explosions, had to suffer the indignity of “the biggest-ever consumer electronics recall.”
Rollins departed from Dell with $48.5 million for his expired stock options.
All this recycling of failed CEOs into private equity circles carries a rich irony. Private equity firms, after all, stake their claim to fame on their ability to “fix” troubled publicly traded companies like Dell and Home Depot.
Really turning around a failed company, management science experts note, can take many years. You need to invest in research and development and worker retraining. You need to build an enterprise-wide sense of teamwork. You need to rebuild consumer confidence.
Private equity firms, once they take over a company, don’t have time for any of this. They operate under a three-step business model that's totally tied to making a quick turnaround — and quick exit.
Step one: Gain control of an “underperforming” company by buying up its stock, then stop stock market trading of the company's shares. Step two: Spend a couple years fattening the company’s bottom line. Step three: Take the now “performing” company back to the stock market, sell it at a big profit, and go on to the next deal.
The more deals, the more windfalls for private equity executives, who typically pocket 20 percent of the gains their deals make for their investors. Last year, this brand of rapid-fire deal making handed over three-quarters of a billion dollars to five executives at just one private equity firm alone, the Blackstone Group.
What do private equity companies actually do, in the brief interlude between deals, where they actually have management responsibility for the companies they’ve taken over? They gravitate to quick-fix changes, the only sorts of changes that can pump up a bottom line in a limited time span. They shortchange R & D, gut pension benefits, and trim away jobs.
You don’t need a management genius, of course, to do all that. A Robert Nardelli will suffice quite nicely.
Stat of the Week
The tax rate cuts on dividend and capital gains income that President George W. Bush signed into law in 2003 saved Americans who made over $10 million in 2005 an average of $1,876,280 off their taxes. Nearly three-quarters of that year’s dividend and capital gains tax cut savings — 73.4 percent — went to America’s most affluent 0.6 percent, taxpayers who reported at least $500,000 in 2005 income, notes a new Citizens for Tax Justice analysis of just-released IRS data.
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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