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January 28, 2008 |
| This Week | |
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We seem to be living in tumultuous times. Last week’s deeply unnerving stock exchange roller-coaster rides had politicians worldwide burning the midnight oil, desperately searching for stimuli that can somehow avert a major economic collapse.
In this week’s Too Much, we take a look at one contribution to that power-suit wisdom, the single most important report released this year at Davos, a landmark document that examines the private equity industry — and complicates life for our global greedy. |
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| Greed at a Glance: Delphi Double-Dipping | |
Over half the Americans making at least $500,000 a year, the Harrison market research group found last year, don’t feel they “have a lot of money.” One reason Eli Lilly, the Indiana-based pharmaceutical power, last week announced cutbacks in retirement and health care benefits that will force some of company’s 22,000 employees to work several more years than they had originally planned — and hike the share of insurance premiums many retirees pay by over 50 percent. Company CEO Sidney Taurel will himself soon be joining the ranks of Lilly retired. The estimated value of his retirement package: over $30 million. CEO Taurel, who took home $11.8 million in Lilly’s latest reported fiscal year, has some fires to put out before his March exit. The prestigious New England Journal of Medicine last week charged that Eli Lilly has suppressed negative clinical trial data for some of the company’s most profitable products, including Prozac, the world’s most widely prescribed antidepressant . . . Back in 2005, auto parts giant Delphi filed for the largest industrial bankruptcy in U.S. history. Last week, a federal judge approved a management plan that will usher the company out of bankruptcy this March — The “bursting of the housing bubble” has helped shove over half of U.S. state budgets deep into the red zone, says a new Center for Budget and Policy Priorities analysis. In Kentucky, a typical hard-hit state, some lawmakers see casino gambling as the answer to gaping budget shortfalls. But not Jim Wayne, a rep from Louisville. Wayne and the Kentucky Economic Justice Alliance are calling for tax code changes that would shift Kentucky’s tax burden onto the state’s most affluent. Kentucky working families, Wayne noted last week, now pay 30 percent more of their income in state and local taxes than “our very rich.” Wayne’s proposals would restore Kentucky’s estate tax, make the state income tax more progressive, and start taxing services that cater to the state’s well-off. Ordinary families, Wayne points out, pay a sales tax when they take their kids to local amusement parks, “but the wealthy who play a round of golf at Valhalla Country Club pay no tax for their fun.” Local governments in the UK are facing the same sorts of fiscal strains as their U.S. counterparts, and many towns, in response, are jacking up taxes and fees to dodge service cutbacks. Last week, a British think tank that specializes in town hall governance proposed a substantial tax hike on the wealthy as the first step toward lightening the tax burden on average-income families. Under the proposal, the British income tax rate on income over £200,000, the equivalent of about $400,000, would jump to 50 percent, a 10-point increase. This tax hike on the UK’s richest 1 percent would raise enough revenue to save the average British household close to $410 in local taxes. The UK’s wealthiest will likely not have much difficulty handling this higher tax rate. In the decade since 1997, the Sunday Times reports, the total wealth of Britain’s 1,000 richest has bounced up 263 percent. |
Quote of the Week “Amid the mayhem on world financial markets, it is becoming clear that capitalism's most dangerous enemies are capitalists. No one can have watched the 'subprime mortgage' debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it.”
New Wisdom Julian Joyce, Rise and fall, BBC News, January 23, 2008. The greater the gap between incomes at the top and bottom, this survey of recent research suggests, the greater the levels of social prejudice. Chuck Collins, Want to Stimulate the Economy? Tax the Wealthy, AlterNet, January 24, 2008. Ivy League-Legacy, A Billionaire's Guide to the Candidates. To help voters choose the “best president that money can buy,” the Billionaires for Bush troupe is now rating candidates from both sides of the aisle on Comedy Central's “Indecision 2008.” |
| In Focus: Executives and Innovation | |
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Whitman and her fellow chief execs at high-tech companies make up a hefty chunk of the annual Forbes 400 list. In fact, on the current list, six of America's 11 richest owe their fortunes to silicon chips. Computers and the Internet have worked absolute wonders for the denizens of America’s executive suites. And those billions that have gone into the pockets of high-tech executives have worked wonders for average Americans, too, or so Silicon Valley's finest hasten to assure us. Huge pay packages for computer industry executives, we’re told, serve as an incentive to innovation. Top execs deliver top-notch high-tech products and services to U.S. consumers, the argument goes, because they know they’ll be amply rewarded if they do. So don’t begrudge tech execs their good fortune. That good fortune benefits us all. Well, not exactly. If astoundingly lucrative rewards automatically generated innovation, then the United States — the nation with the world’s highest-paid high-tech executives — ought to be the world’s most technologically advanced nation. That may have been true once, but not anymore. Take, as a prime example, broadband Internet connections. The United States, back in 2000, ranked fourth in the world in broadband subscribers per capita. We now rank 15th, according to figures released by the Organization for Economic Cooperation and Development this past November. In the United States, a little over one in five homes have a broadband connection. In Denmark, over one in three. In Japan, households routinely download off the Internet at 93.7 millions of bits per second. In France and South Korea, households average over 43Mbps. The average download speed in the U.S.: 8.9Mbps. Overall, on average speed, the United States ranks 19th. To add insult to injury, Americans pay more per bit than Internet surfers elsewhere in the developed world. In other high-tech product areas, notes Information Technology and Innovation Foundation president Robert Atkinson, the story runs much the same. Other nations have “leapfrogged” past the United States, Atkinson points out, “not just in broadband, but in a host of digital applications: Japan in mobile commerce; the Netherlands in health IT; Korea in telematics (applying IT to transportation); Belgium for smart IDs; Germany for smart cards.” Real innovation, these realities suggest, just may take more than stuffing stock options in executive pockets. |
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| In Review: A New Private Equity Primer | |
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The Global Economic Impact of Private Equity. A World Economic Forum report. Edited by Josh Lerner and Anuradha Gurung. 168 pp. Before last spring, few Americans knew much of anything about private equity, that murky high-finance world where high-powered partnerships — bankrolled by the super-rich and institutional investors — borrow billions to take over companies they then make over and sell, at a significant profit. As private partnerships, these private equity groups operate under the radar screen. They don’t have to declare, in publicly available annual reports, basic information about how they do business. One example: Companies that trade their shares publicly on Wall Street must disclose how much they pay their top executives. Private equity companies, by contrast, can keep that information secret, so long as they don’t sell their stock to the general public. Last June, the biggest player on the private equity block, the Blackstone Group, opted to go that public stock route. The Blackstone boys offered the general investing public a chance to buy a minority stake in their wheeling-and-dealing operation. In the process, Blackstone’s top five executives had to divulge how many dollars that operation was stuffing into their pockets. The private equity industry has been playing public relations catch-up ever since. Industry flacks have been working feverishly to rebut charges that private equity kingpins owe their astounding windfalls to job, benefit, and pension cuts at the companies they take over. How feverishly? In 2007, private equity groups started breaking Capitol Hill records for spending on lobbyists. Two weeks ago, the industry trade association, the Private Equity Council, released a flashy new study designed to show that private equity groups deserve credit, not censure, for their impact on employment. Private equity ownership, the report contended, is creating jobs by the bucketful. The industry released this claim, not so coincidentally, right on the eve of the 2008 World Economic Forum. Organizers billed this year’s forum, held last week in Davos, “as a platform to enrich dialogue and decision-making on public policy governing private equity.” The centerpiece of that dialogue: the release of a World Economic Forum report on private equity, an effort “touted as the most comprehensive look at the effects of the buyout business.” That report appeared this past Friday. The private equity industry quickly hailed it as “a significant new contribution” that validates “what we’ve been saying all along.” Actually, the World Economic Forum study — conducted by an independent research team led by the Harvard Business School’s Josh Lerner — validated nothing of the sort. The Private Equity Council had claimed, in its own report, an 8.4 percent job increase at companies run by private equity groups. The World Economic Forum study, after scrutinizing 5,000 private equity transactions, found a 1 percent net job decrease. The evidence, the World Economic Forum study went on to conclude, “supports neither the apocalyptic claims of extensive job destruction nor arguments that private equity funds create huge amounts of domestic employment.” So should we all stop worrying? Stephen Lerner, the director of a labor private equity watchdog project, doesn't think so. “When all the studies are said and done,” says Lerner, “the buyout business remains at its core a vehicle for the spectacular accumulation of wealth by the few without regard for the impact on others.” We have more on why the World Economic Forum private equity researchers may yet come to the same conclusion. |
Stat of the Week The federal government, notes a new report from the New York-based Demos think tank, is spending $367 billion a year to help households own homes and accumulate other household security-building assets. Nearly half of that total, 45 percent, is going to households with incomes over $1 million, relates the new report entitled In the Red or In the Black? Understanding the Relationship Between Household Debt and Assets.
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| About Too Much | |
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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And where, through 
why: The super-rich — those swells with net worths that reach into the many millions — are simply racing away from everyone else. The South Florida Sun-Sentinel last week profiled these super-rich in a 
so long as Delphi slices the plan’s $87.9 million in executive bonuses down to $16.5 million. But the judge’s ruling only covers cash bonuses. The court left in place a stock bonus program that could hand top Delphi execs as many as 1.5 million shares of stock each. UAW union officials are calling the bonuses “a massive transfer to senior executives of wealth generated in large part by the sacrifice of Delphi's rank and file,” and U.S. Senator Sherrod Brown from Ohio says Congress needs to start placing limits on executive pay at companies in bankruptcy. Actually, Congress already has. Senator Edward Kennedy slipped into the 2005 bankruptcy act 
Meg Whitman has just announced she'll shortly be stepping down as the CEO of eBay, the online auction retailer. Whitman had a good run. She’s exiting with a personal fortune that Forbes estimates at $1.4 billion, enough to rank her the 361st richest individual in the entire United States.
The answer: $770 million over the previous year, a colossal sum that almost immediately thrust the private equity phenomenon onto America’s front pages.