May 7, 2007
How would you feel if a good bit of every dollar you gave a highway toll collector went straight into the pockets of some billionaire private equity fund manager? That's a question you — and every other motorist in the United States — may soon have to face. We have the story in this week’s Too Much.
Also in this week's issue: One of the most respected public intellectuals of our time, writing in the world’s most prestigious global affairs journal, is calling for a cap on the income any one individual can take home in a year. The details below.
Northwest Airlines CEO Doug Steenland, by U.S. CEO standards, doesn't make very much. Steenland, the airline disclosed last week, took home a mere $1.8 million in 2006. Why so little? Northwest spent last year under bankruptcy protection, a status that won’t end until later this spring. Northwest employees are actually asking a different question: Why so much? To help Northwest out of bankruptcy, points out pilot leader Wade Blaufuss, union workers at the airline have taken 40 percent pay cuts and are now working 25 percent more hours. Executives, retorts Northwest, “have made sacrifices, too.” Steenland, the company notes, last year saw his base salary drop 10 percent, to $516,384. He may not have noticed that shortfall. Northwest, for the year, handed him $994,146 in cash incentives . . .
Add Angelo Mozilo to the list of CEOs in a “sacrificing” mood. Mozilo has just agreed to a $1 million cut in his $2.9 base salary from Countrywide Financial, America’s biggest independent mortgage lender, and a $10 million cap on his annual “incentive award.” In 2006, Mozilo waltzed off with $39.5 million in incentive award dollars and took home overall, counting stock option earnings, $121.9 million. The year before, Mozilo took home $141 million. Profits from Countrywide’s enormously lucrative “subprime” loans — the company’s high-interest lending to families in precarious financial straits — have been fueling Mozilo’s paycheck windfalls. But rising default rates have turned the subprime market sour, and Countrywide profits are sinking. Mozilo, in response, has started laying off Countrywide employees, and he’s apparently hoping his personal pay cut will appease the giant lender's critics. Says the 68-year-old exec: “I don’t want to be the lightning rod that casts any negativity on the company.”
Think calculating just how much CEOs make is easy? Researchers from Forbes magazine, to prepare their newly released annual CEO pay survey, had to slog through “60 pages of complex tables and long-winded sentences” to decipher the federally mandated executive pay disclosures filed by Sprint Nextel. The company’s CEO, Forbes ended up concluding, cleared $15.8 million in 2006, just a tad more than the $15.2 million CEO pay average at the 500 biggest U.S. publicly traded corporations. The year's top CEO income-earner: Apple’s Steve Jobs, at $646.6 million. Overall, says Forbes, eight CEOs last year took home at least $114 million. Want to compare all this year’s CEO pay reports? Check our Too Much Executive Pay Scoreboard . . .
If lawmakers ever chose to really raise taxes on the rich, friends of the fortunate often argue, the rich would simply stash their dollars offshore to avoid the higher tax rates. But the rich today, a U.S. Senate hearing last week revealed, are already stashing billions of dollars offshore to avoid taxes — despite the lowest tax rates on high incomes in over 70 years. The federal government, notes the University of Michigan’s Reuven Avi-Yonah, may be losing as much as $50 billion a year in unpaid taxes on income parked overseas. Arbitrary time limits on IRS investigators, adds a new GAO report, make recovering these lost billions next to impossible. Why won’t Congress let IRS agents do their jobs? Some of the biggest tax dodgers, the Los Angeles Times reported last week, turn out to be major campaign contributors. California billionaire Maim Saban, a Hillary Clinton backer, has used offshore shell companies to avoid $300 million in taxes. Sam and Charles Wyly, Texas billionaires now boosting John McCain, have sheltered $190 million offshore . . .Trend watch: Basements are going big-time, mainly, notes the UK’s Daily Telegraph, because the rich “have nowhere to go but down.” In London, ultra-affluents who’ve already had their lofts worked over are now adding mini-cinemas and swimming pools to their cellars. The London Basement Company, the hottest name in down-under remodeling, typically charges about $1.6 million per project. Who can afford a million-dollar basement? This past winter, in London’s financial district, over 3,000 executives, bankers, and traders took home bonuses of at least $2 million. Meanwhile, says a new study, firefighters and nurses can afford to buy a first home in only 30 percent of Britain’s towns, down from 64 percent five years ago.
Quote of the Week
“On a long-term basis, the distribution of income in the U.S. has increasingly tilted in favor of the highest strata and we see no signs of a slowdown any time soon.”
Tatjana Meerman, managing editor, Packaged Facts, a marketresearch.com division, May 2, 2007
New Wisdom
on Wealth
Carol Rosenberg, State Individual Income Tax Progressivity. Tax Policy Center. A comprehensive new survey that details how few states levy taxes at rates that appreciably limit wealth concentration.
Can our contemporary world be saved — from the problems that ail us, from climate change and oil dependency, from AIDS and religious extremism, from poverty and inequality?
Foreign Policy, the world’s most prestigious global affairs journal, is tackling this weighty question head on, in a new issue that asks 21 of our earth’s most thoughtful observers to suggest the “one solution that would make the world a better place.”
That “one solution," suggests Howard Gardner, the Harvard-based psychologist whose widely acclaimed books on human intelligence have been translated into 26 languages, ought to be a cap on the income and wealth that any one individual can accumulate.
The United States needs an income cap, Gardner posits in the new Foreign Policy, that limits the amount of money a single individual can annually take home to no more than “100 times as much money as the average worker in a society earns in a year.”
“If the average worker makes $40,000,” Gardner proposes, “the top compensated individual may keep $4 million a year.”
Gardner’s Foreign Policy contribution also advocates a cap on wealth, proposing that “no individual should be allowed to accumulate an estate more than 50 times the allowed annual income.”
If that allowed annual income were $4 million, then Gardner's proposal would allow no one, at death, to bequest a fortune greater than $200 million. Any individual wealth above that would have to “be contributed to charity or donated to the government.”
What’s driving Gardner, a psychologist, to an economic prescription?
“Most people in the United States cannot even envision a society that doesn’t revolve around an untrammeled market,” Gardner writes, noting the “widespread assumption,” particularly among today’s young people, “that the most accurate measure of success is how much money you have accumulated, indeed that general merit can best be gauged by one’s net worth.”
These assumptions, says the Harvard psychologist, have nurtured a society where accumulation “has gone way too far,” where a “hedge fund manager can take home a sum reminiscent of the gross national product of a small country.”
A cap on income and riches, Gardner adds, would raise billions, even trillions, “to begin to solve the problems about which others are writing in this collection of solutions to save the world.”
Attacks on Gardner’s proposal are already emerging. One nationally syndicated critique — from foundation president Clifford May — labeled Gardner’s antidote to inequality “preposterous.” Gardner's Foreign Policy piece anticipates that sort of outraged reaction.
“To those who would scream ‘foul’ to such limits on personal wealth,” Gardner notes, “I would remind them that just 50 years ago, this proposal would have seemed reasonable, even generous.”
Sums up the Harvard scholar: “Our standards of ‘enough’ have become irrationally greedy. Were these proposals enacted, I predict that they would be accepted with amazing speed, and individuals would wonder why they had not always been in effect.”
Fifty years ago, almost all major corporations and wealthy individuals in the United States paid a hefty chunk of their income in local, state, and federal taxes. Those tax dollars, in turn, helped build and maintain roads and bridges, sewers and schools, airports and harbors — what economists call our “public infrastructure.”
This tax-and-spend cycle helped keep America both relatively equal and efficient. The taxes on high incomes discouraged grand accumulations of private wealth. The spending on infrastructure encouraged economic growth and opportunity.
In today’s United States, unfortunately, this cycle no longer spins. The wealthy no longer pay hefty taxes. Local, state, and federal governments no longer invest in infrastructure. Yesterday’s United States built bridges. Today’s builds fortunes.
And now those private fortunes are taking aim at America’s public infrastructure. Wall Street bankers and investment firms, Business Week reports in a thoroughly unnerving cover story, are rushing to raise cash for public infrastructure buyouts.
“Investors can’t get in fast enough,” Business Week notes. “They recently deluged Goldman Sachs with $6.5 billion for its new infrastructure fund, more than twice the $3 billion it was seeking.”
The buyout artists at outfits like Goldman Sachs, Business Week estimates, will soon have $500 billion to wave before governors and lawmakers “scrambling for cash to solve short-term fiscal problems.”
These governors and lawmakers, unwilling to tax the rich to maintain America’s roads, are now taking bids to sell these roads to the rich.
In Harrisburg, for instance, Democratic Governor Edward Rendell is busy privatizing the 537-mile Pennsylvania Turnpike. Last year, in Indiana, state lawmakers cut a $3.8 billion deal that gives private investors a 75-year lease to run the Indiana Toll Road.
In all, $7 billion worth of public infrastructure has gone private over the last two years. The next two years, Business Week predicts, could see “$100 billion worth of public property” turn private.
Why the investor rush to public infrastructure? Leases to run toll roads and bridges amount to licenses to print money. Governments need to win public approval before they can raise tolls. Private road managements can charge whatever tolls the market can bear.
Tolls on the Chicago Skyway stood at $2 in 2005, the year the road became the first modern thoroughfare to go private. The Skyway toll, investors expect, will hit $5 by 2017.
Private investors have, of course, other ways to squeeze earnings out of infrastructure. They can skimp on maintenance — or attack worker wages. Toll-takers on the Chicago Skyway, Business Week points out, “used to be full-time city employees with rich benefits.” The Skyway’s new private operators now run their show with a mostly part-time, no-benefit workforce.
Higher tolls, cheaper workforces. Do the math. Wall Street analysts certainly have. They now see infrastructure, notes Business Week, “as a separate asset class, safe like high-grade bonds but with stock market-like returns.”
In today’s America, the ultra-affluent are having an increasingly hard time getting those returns from marketing private-sector products and services to an increasingly over-indebted American middle class.
Middle class Americans, our deepest pockets have figured out, are already paying for public-sector products and services, and these affluents have convinced themselves they richly deserve a piece of this public payment pie. In a deeply unequal America, with ever-greater pools of wealth concentrating at the top, they so far seem to have the dollars — and the power — to get it.
Stat of the Week
Wall Street's top 20 hedge and private equity fund managers, notes the new Forbes annual corporate pay report, averaged $658 million in take-home last year, over four times the $145 million average pay of America's top 20 corporate CEOs.
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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E-mail: editor@toomuchonline.org.
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