December 4, 2006

Some income-earners in the United States can make more in a morning than the rest of us can make in a year. So what's wrong with that? This week's Too Much highlights one seldom-discussed consequence of our growing income inequality: the impact of America's gross gaps on the career choices our young people are making.

In Germany, meanwhile, prosecutors have been doing their part to restore some sense of social decency to income distribution. They actually brought criminal charges against corporate directors who had blessed a lollapalooza of a CEO pay package. What happened next? We explain below.

Greed at a Glance: A Not-Quite Platonic Relationship

Locals in Nashville like to call their hometown the “Athens of the South.” But workers and their student supporters at the city’s premier university, Vanderbilt, see precious little of Plato in the school’s current pay policies. In the ideal republic, Plato once philosophized, the wealthiest citizens would hold no more than four times the wealth of the poorest. At Vanderbilt, chancellor E. Gordon Gee is now pulling in about 75 times the pay of the university’s $7.79-per-hour grounds workers. Gee's current take-home, nearly $1.2 million a year, makes him the third highest-paid executive in American higher ed. His grounds workers make $3 per hour less than the national average. How can Vanderbilt justify that gap? Any big institution, says Vanderbilt flack Michael Schoenfeld, “is going to have to make an almost infinite number of decisions about how to expend resources.”

Over 200 residential “wellness communities” — with offerings that run the gamut from therapeutic spas to meditation gardens —  are now marketing homesteads to fitness-oriented households all across the United States. But if you want to become healthy in one of these new wellness communities, Forbes reported last week, you better be at least a little bit wealthy. How wealthy? The Tucson-based Miraval Life in Balance Resort is now completing a 41-story wellness tower community on Manhattan’s Upper East Side. Three-bedrooms in the new luxury development will run from $1.4 million to $3.65 million, with monthly maintenance charges almost twice the Manhattan high-rise average . . .

In Indiana, the public interest group Families USA notes, annual premiums for family health insurance coverage have soared 77 percent over the past six years. But in Indianapolis, at the Monument Circle national headquarters of the health care giant now known as WellPoint, top executives seem to be having some trouble feeling any sense of crisis. Over the past two years, ever since the $20.8-billion merger that created the new WellPoint, 31 company insiders have cleared over $150 million selling shares of company stock from their own personal stashes. A company spokesman, Jim Kappel, says WellPoint’s executives deserve credit for “delivering more benefit” to members and “helping to hold down the rising costs of health care.”

Is overpaying CEOs a crime? A five-judge panel in Germany last Wednesday punted on that question, accepting a settlement in the first case ever to bring criminal charges against corporate directors for lavishing excessive pay on company executives. Under the deal, Deutsche Bank CEO Josef Ackermann, Germany’s most powerful banker, will now fork over — out of his own pocket — a $4.2 million fine, without having to plead guilty to charges that he helped engineer a $31 million bonus six years ago for Klaus Esser, the top executive at Mannesmann, a German mobile phone company. Ackermann and other directors at Mannesmann, prosecutors charged, had violated their fiduciary duty to watch out for shareholders. Ackermann, if convicted, could have faced 10 years in jail . . .

The more wealth concentrates, the more businesses concentrate on society’s wealthiest. The latest example: the insurance industry. Major insurance companies worldwide, Reuters reports, are rushing to set up special divisions that cater to deep-pockets. Agents for these divisions typically do home visits and offer coverage options that mass-market “good-hands” agents could never imagine. High-end insurers, for instance, will cover art collections “from the moment the hammer comes down in a New York auction room.” No more than 15 percent of the awesomely affluent, notes the British insurer Chubb, are currently working with wealth-centric insurers. Observes one top Chubb official, John Simms: “The growth potential in the high net worth market is huge.”

New Numbers on America's Tilt to the Top

Who makes how much in the United States today — and how has this income picture shifted since from yesterday? For statisticians, these can be terribly frustrating questions.

Tax returns, many experts agree, offer the most reliable income data we have. But tax laws change, over time, and the changes can alter, sometimes substantially, what gets counted as “Adjusted Gross Income,” the most commonly used IRS income measure.

So how can statisticians avoid comparing apples with oranges? Three analysts from the IRS, joined by a statistician from the Ernst and Young accounting firm, have been working on that problem over recent years. The four have just published what may be the most accurate numbers yet on who gets what in America.

Their new paper explores what has happened, over the last quarter-century, “to the distribution of individual income, the shares of taxes paid, and average taxes by the various income-size classes.”

To conduct this exploration, the four researchers — Michael Strudler, Tom Petska, Lori Hentz, and Ryan Petska — developed a “a consistent and comprehensive measure of income” and then applied this concept to data available from tax returns for the years 1979 through 2004. And what did they find? Plenty of confirmation that America’s distribution of income has tilted enormously to the top over the past two and a half decades.

Two sets of numbers in the new data dramatize that tilt. The first tracks the income minimums needed to step onto the highest rungs of the American income ladder. Back in 1979, an affluent American taxpayer only needed to take home $79,679 to enter the ranks of the richest 1 percent of American income-earners. In that same year, a mere $233,539 placed a taxpaper in the rarified air of the top tenth of 1 percent.

By 2004, things had changed considerably. In that year, a taxpayer needed $363,905 to enter the top 1 percent — and a whopping $1,639,047 to rate in the top 0.1 percent, an over 600 percent increase above the 1979 threshold.

Some of that increase, of course, represents inflation, and the Strudler research team has done calculations that factor in inflated dollars. These don’t change the basic story line. Between 1979 and 2004, after taking inflation into account, the threshold for entering the top 0.1 percent rose twice as fast as the threshold for entering the top 1 percent.

Over those same years, not surprisingly, the share of nation’s income going to the top 0.1 percent more than tripled, from 3.28 percent in 1979 to 10.49 percent in 2004.

David Cay Johnston, the Pulitzer Prize-winning New York Times journalist, last week added some compelling numbers to this data mix. In 2004, his analysis of IRS data shows, the 130,500 U.S. taxpaying households that made up the top one-tenth of 1 percent averaged about $4.9 million each in income.

The 300,000 Americans in these top 0.1 percent households, notes Johnston, took home “significantly more pretax income combined than the poorest 120 million Americans.” In 1979, by contrast, the 120 million Americans at the bottom took home three times more than the 300,000 at the top.

Overpaid Professions: Our Dangerous Talent Magnet

Why are Americans at the top of America’s income distribution raking in so much more income today than they did a generation ago?

Certain lines of work, business journalist Louis Uchitelle notes in an analysis published late last month, simply pay far more than they once did.

“Three decades ago,” points out Uchitelle, “compensation among occupations differed far less than it does today” — and today’s much larger pay gaps, he adds, are having a powerful impact on the career choices young professionals are making.

One example: The American Bar Association reports that “fewer law school graduates are going into public-interest law or government jobs.” In medicine, where doctors can now make millions evaluating drugs for bio-tech start-ups, the Medical Group Management Association “says the nation lacks enough doctors in family practice, where the median income last year was $161,000.”

The same patterns show up in academia. Cancer researchers are becoming health care management consultants.

“The bigger the prize, the greater the effort that people are making to get it,” sums up New York University economist Edward Wolff. “That effort is draining people away from more useful work.”

Stat of the Week: The Right Ratio?

Corporate enterprises that pay their top executives over 14 times what their employees receive, concludes a recent survey of human resources professionals in the UK, are inviting low employee morale. Above 14 to 1, observes an analysis of the survey data by Nick Isles of the British Work Foundation, organizational effectiveness starts to erode as employees start to consider their company’s rewards “unfair.”

Quote of the Week: Smoothing Wealthy Foreheads

“Neither policymakers nor society at large need sympathize with the longing of millionaires to become billionaires. But we do need to worry about the effects on society as a whole when members of the educated elite think they are grossly underpaid. The more they feel as if they are losing ground against their peers, the more likely they are to ditch professions in which the pay is only good — like delivering babies — in favor of less useful careers in which the compensation is off the charts — like eliminating lines from wealthy people’s foreheads.”
Editorial, When the Joneses Can't Keep Up, New York Times, December 1, 2006

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