The clueless chuckleheads contaminating the public greens and airwaves for the past several weeks seem to be losing the patience of mainstream America to tolerate much more of their silliness. They are reminiscent of the flower children of 40 years ago who may have spawned some of these dropouts. Their railing against the same economic system that supplied them with their Androids, iPods, and designer jeans is comical. And their protest against “economic inequality” is equivalent to protesting the sun’s rising in the east.
There has been economic inequality as long as humans have lived in societies and it has been the strongest motive factor for each generation to better itself. In fact, Sir Dudley North writing 300 years ago observed this fact in his Discourses Upon Trade:
The main spur to Trade, or rather to Industry and Ingenuity, is the exorbitant Appetites of Men, which they will take pains to gratifie, and so be disposed to work, when nothing else will incline them to it; for did Men content themselves with bare Necessaries, we should have a poor World.
About 90% of the millionaires and billionaires so despised by the Occupy Wall Street crowd and the Left are self-made as North predicted; only 10% inherited that status – thanks in part to federal estate and inheritance break-up taxes. Therefore, it’s curious why someone should be the object of OWS wrath simply because he or she is extraordinarily successful. Hard work and sacrifice for years and often decades produced their economic success. But the OWS crowd wants to reverse that process. They want a society in which the riches of those successful people are shared with them without them doing anything to earn it. Note to OWS: the only place where success and wealth come before work is in a dictionary.
What also seems to have escaped their twisted logic is that these geese are the ones laying the golden eggs – aka jobs – which they and the present administration, notably the White House incumbent, covet.
Take Steve Jobs, for example.
While these modern day Robespierres were literally calling for the beheading of the rich and demanding that the hated bankers forgive their debts, Jobs lost his long struggle with cancer. No government program will ever replace what he accomplished in his short but productive life. Since he was a bored college dropout (like Bill Gates), he didn’t have a “good old boy” network of college chums to open doors for him like Obama did. He didn’t have any college debt to protest for forgiveness on the public square. His parents abandoned him before he was born and his adoptive parents had no college education or wealth and connections to help him.
Yet Jobs created companies that employed 30,000 Americans and many more in other countries. It’s estimated that the economic impact of his work was worth $30 billion in additional American wealth – annually. Moreover, after he returned to run Apple in 1997, he drove the market value of the company from $2 billion to $350 billion. That did more to bring hope and change to the shareholders of Apple than did the Obama-Pelosi-Reid triumvirate, who were busy wasting $1 trillion in “stimulus” payoffs to their cronies and implementing policies that “un-employed” nearly 14 million job-holders.
Jobs was worth over $7 billion at his death. Does it really matter how much he paid in taxes? Americans benefited far more from what he didn’t pay in taxes. It doesn’t make much sense to take money from someone with a proven track record at creating jobs and give it to someone who has never held one outside of the taxpayer-funded public sector. Yet an amazing number of otherwise sensible people believe with Obama that government makes a better society than private enterprise and that more private wealth should be transferred to the government in order for jobs to be created by a rookie.
In an article published last year, Robert Reich, former Labor Secretary in the Clinton Administration, recalled an old Russian parable about a poor peasant whose neighbor was a rich and well-connected man. When the neighbor bought a cow, something the peasant would never be able to afford, the peasant prayed to God for help. God responded and asked what the peasant wanted from Him. “Kill the cow!” the peasant replied.
A “kill the cow” mindset often leads society into self-destructive social behavior, as Reich demonstrated in a classroom experiment he has conducted for years as a Harvard professor. He asks students to pair up with a classmate – presumably most choose a friend – and he gives one person on each team a “play money” $1,000 bill. He then asks each team’s recipient to write on a slip of paper how much of their new-found money they would share with their teammate. The kicker is that the teammate has to agree to the amount shared or else neither of them gets anything. Once the shared amount is written on the slip of paper, it is passed to the teammate. The offer is “take it or leave it.” There is no negotiation.
Rationally, a teammate should accept even as little as $1. It may not seem fair or generous, but it’s more than he had before his partner’s “inheritance.” And indeed, some students settle for $1. But most refuse anything less than $250, and a surprising number hold out for $500, knowing that the refusal prevents either party from receiving anything.
Reich’s experiment reveals an embarrassing quality in the human experience. Inequality makes some people vindictive and envious to the point of interfering with their rational thinking. When questioned why they would engage in such self-defeating behavior, the students said it was worth their loss to prevent their partner’s gain.
Immature twenty-something college students aren’t the only ones afflicted with this disorder.
When he was on the campaign trail as candidate Obama, an interviewer sat down with him to get his views on taxes and wealth redistribution shortly after the “Joe the Plumber” encounter. The interviewer explained that the top 1% of Americans earns 17% of the nation’s income but pays 37% of the federal taxes, and the top 10% of Americans earns 43% but pays over 70% of federal taxes. The interviewer then asked Obama why he thought those taxpayers should pay more. After thinking for a moment, Obama replied “fairness.” In other words, kill the cow.
Notwithstanding the negative impact that confiscatory taxes have on investmet and job creation, people on the Left including Obama and Pelosi (who is a billionaire) think that because such taxes hurt the rich more than other taxpayers they want them increased. As long as those at the top lose, the Left is willing to inflict hardships on the economy and the unemployed. Kill the cow.
To people who are not extraordinarily successful (or even ordinarily successful) the rewards of extraordinary success seem unfair. Does Peyton Manning deserve an annual income of $38 million? How about Rush Limbaugh at $37 million per year? Oprah at $275 million? That’s earning over $30,000 per hour compared to less than $8 an hour for a hamburger flipper at McDonald’s. CEO Bob Iger earns $53 million from Walt Disney, CEO John Hammergren of McKesson Corp. makes $131 million, and $14 million each is paid to CEOs John Chambers of Cisco and Paul Otellini of Intel.
To put these incomes in perspective, the top 5% of incomes begins at $155,000 and the top 1% begins at $344,000. That means the salaries of the people mentioned are in the stratosphere of the top 1% in income rankings. That’s an important point that I’ll come back to.
Are these people worth those incomes? The answer is yes. Why? Because someone is willing to pay it.
That’s not a flip answer. Here’s why.
Rush Limbaugh would not be paid what Clear Channel Communications is paying him unless he was bringing in advertising revenues far in excess of his $37 million cut. Likewise, the Colts wouldn’t pay Peyton Manning his astronomical salary unless his performance on the football field generated revenues from fans and advertisers that the Colts owners considered Manning’s cut a fair share. This is the principle of Reich’s classroom experiment.
However, the fact that a top performer in sports, entertainment, and business contributes millions to the employer's bottom line isn’t the sole explanation for justifying an extraordinary share of that bottom line. There also must be competition from others for that person’s services in order to give the person the leverage to bargain for a share of the value they produce. Absent competition, a dissatisfied high performer has no alternative except to withdraw his services. This would be equivalent to the lose/lose irrational behavior in the Reich experiment. By preventing negotiation between teammates, Reich made “take it or leave it” the only possible outcome, which happens when there is no competition.
Before free agency injected competition into professional sports, for example, top performers earned only a fraction of their current salaries, despite producing the same economic value for their owners then as now. Today, a dissatisfied top athlete can move to another team that is competing for his services and is willing to pay a higher salary.
Similarly, in bygone years, business executives were promoted from within. Faced with no competition for their senior executives and rising stars, businesses paid a small fraction of what they now pay to their management team. Enter competition between companies and industries. Executive mobility became the norm as high performers were pirated away to more lucrative salaries and perks.
Like it or not, we live in a “winner take all” world in which money gravitates to the star performers. In the 2010 Augusta Masters golf tournament, Phil Mickelson walked away the winner with $1.35 million for four days of work. Second place went to Lee Westwood, three strokes back for $810,000 in prize money – $540,000 less than Michelson or $180,000 per stroke. Third place money was $510,000, which was won by Anthony Kim who finished one stroke back from Westwood. That one stroke cost him $300,000. Nathan Green placed last in a field of 48. He was +14 over par for the tournament versus Michelson’s -16, and won $21,750 for the same four days of work that the winner put in, but he went home a lot poorer.
The winners of the 2010 Super Bowl received $83,000 per player and losers each took home $42,000. The 2011 winner of the Indianapolis 500, Dan Wheldon, received $2,567,255 for beating J.R. Hildebrand in the last seconds of the race. Hildebrand received $1,064,895, not a bad day’s pay but a very expensive penalty for crossing the finish line seconds later. The owners of the winner of this year’s Kentucky Derby – Animal Kingdom – got $1.1 million; the owners of the runner-up, Nehro, got half that figure for losing by 2 ¾ lengths.
The world of business has similar disparities. According to the Tax Foundation, from 1945 to the late 1970s, the richest 10% of Americans accounted for about 35% of total income. By 2009, their share was about 43%. The top 10% of incomes start at $112,000 – not a kingly sum unless you’re part of the Left. Most of the gain in this bracket went to the richest 1%, whose share rose from 8.5% in 1980 to 16.9% in 2009. But the Left conveniently forgets to say that the richest 1% saw their share peak in 2007 at 22.8% and then fall to 16.9% due to the recession since much of their income comes from invested wealth rather than labor. Remember that the top 1% starts at $344,000 but it goes up astronomically from that figure because this bracket includes the incomes for Manning, Limbaugh, and Oprah who are in the top 1/10th of 1%. That is what is overlooked in comparing income levels – all brackets are moderately heterogeneous and the top of every bracket is the bottom of the next – except the top bracket, which is wildly heterogeneous and has no cap. The top bracket is “everyone else.”
Income disparity is a global phenomenon. The Organization for Economic Cooperation and Development found that the average spread between the richest 10% and the poorest 10% has increased in 17 out of 22 countries over the last 20 years and currently averages about 9:1. This ranges from 5:1 for Sweden and Denmark, 14:1 for the U.S., and 27:1 for Mexico, which has the greatest disparity. Mexico, like most third world countries, has a large lower class that work for subsistence wages, a modest middle class, and a small but powerful upper class. Carlos Slim, a Mexican, has been the richest man in the world for 2010 and 2011. He is also one of the world’s most philanthropic entrepreneurs with two foundations, one of which has a corpus presently valued at $4 billion.
Is it fair that there is so much disparity between the economic payoff to winners, runners-up, and also-rans? I’m not really into debating the fairness of incomes any more than I’d debate the fairness of the sun rising in the east. It is the way it is. The market decides what it wants and what that is worth. But it is the scarcity of talent and the competition for it that causes income to bunch up at the top. It is not a sinister plot by the rich to exploit low income earners – unless basing people’s pay on the market value of their talent is perfidious.
The world is changing rapidly with globalization – for the good in my opinion. In the U.S. we have emerged from an agricultural economy to an industrial, then service, then technology and information economy. The unskilled, poorly skilled, and less educated will be less and less in demand as this economic shift continues. Yet our government continues to spend trillions on schools that don’t educate students for a modern world. This administration in particular has been more interested in protecting teacher unions than producing students that can compete their way up the income pyramid like a poor kid in San Francisco did 40 years ago.
If the whiny OWS crowd wants to protest the crime of the century, protest that.
There has been economic inequality as long as humans have lived in societies and it has been the strongest motive factor for each generation to better itself. In fact, Sir Dudley North writing 300 years ago observed this fact in his Discourses Upon Trade:
The main spur to Trade, or rather to Industry and Ingenuity, is the exorbitant Appetites of Men, which they will take pains to gratifie, and so be disposed to work, when nothing else will incline them to it; for did Men content themselves with bare Necessaries, we should have a poor World.
About 90% of the millionaires and billionaires so despised by the Occupy Wall Street crowd and the Left are self-made as North predicted; only 10% inherited that status – thanks in part to federal estate and inheritance break-up taxes. Therefore, it’s curious why someone should be the object of OWS wrath simply because he or she is extraordinarily successful. Hard work and sacrifice for years and often decades produced their economic success. But the OWS crowd wants to reverse that process. They want a society in which the riches of those successful people are shared with them without them doing anything to earn it. Note to OWS: the only place where success and wealth come before work is in a dictionary.
What also seems to have escaped their twisted logic is that these geese are the ones laying the golden eggs – aka jobs – which they and the present administration, notably the White House incumbent, covet.
Take Steve Jobs, for example.
While these modern day Robespierres were literally calling for the beheading of the rich and demanding that the hated bankers forgive their debts, Jobs lost his long struggle with cancer. No government program will ever replace what he accomplished in his short but productive life. Since he was a bored college dropout (like Bill Gates), he didn’t have a “good old boy” network of college chums to open doors for him like Obama did. He didn’t have any college debt to protest for forgiveness on the public square. His parents abandoned him before he was born and his adoptive parents had no college education or wealth and connections to help him.
Yet Jobs created companies that employed 30,000 Americans and many more in other countries. It’s estimated that the economic impact of his work was worth $30 billion in additional American wealth – annually. Moreover, after he returned to run Apple in 1997, he drove the market value of the company from $2 billion to $350 billion. That did more to bring hope and change to the shareholders of Apple than did the Obama-Pelosi-Reid triumvirate, who were busy wasting $1 trillion in “stimulus” payoffs to their cronies and implementing policies that “un-employed” nearly 14 million job-holders.
Jobs was worth over $7 billion at his death. Does it really matter how much he paid in taxes? Americans benefited far more from what he didn’t pay in taxes. It doesn’t make much sense to take money from someone with a proven track record at creating jobs and give it to someone who has never held one outside of the taxpayer-funded public sector. Yet an amazing number of otherwise sensible people believe with Obama that government makes a better society than private enterprise and that more private wealth should be transferred to the government in order for jobs to be created by a rookie.
In an article published last year, Robert Reich, former Labor Secretary in the Clinton Administration, recalled an old Russian parable about a poor peasant whose neighbor was a rich and well-connected man. When the neighbor bought a cow, something the peasant would never be able to afford, the peasant prayed to God for help. God responded and asked what the peasant wanted from Him. “Kill the cow!” the peasant replied.
A “kill the cow” mindset often leads society into self-destructive social behavior, as Reich demonstrated in a classroom experiment he has conducted for years as a Harvard professor. He asks students to pair up with a classmate – presumably most choose a friend – and he gives one person on each team a “play money” $1,000 bill. He then asks each team’s recipient to write on a slip of paper how much of their new-found money they would share with their teammate. The kicker is that the teammate has to agree to the amount shared or else neither of them gets anything. Once the shared amount is written on the slip of paper, it is passed to the teammate. The offer is “take it or leave it.” There is no negotiation.
Rationally, a teammate should accept even as little as $1. It may not seem fair or generous, but it’s more than he had before his partner’s “inheritance.” And indeed, some students settle for $1. But most refuse anything less than $250, and a surprising number hold out for $500, knowing that the refusal prevents either party from receiving anything.
Reich’s experiment reveals an embarrassing quality in the human experience. Inequality makes some people vindictive and envious to the point of interfering with their rational thinking. When questioned why they would engage in such self-defeating behavior, the students said it was worth their loss to prevent their partner’s gain.
Immature twenty-something college students aren’t the only ones afflicted with this disorder.
When he was on the campaign trail as candidate Obama, an interviewer sat down with him to get his views on taxes and wealth redistribution shortly after the “Joe the Plumber” encounter. The interviewer explained that the top 1% of Americans earns 17% of the nation’s income but pays 37% of the federal taxes, and the top 10% of Americans earns 43% but pays over 70% of federal taxes. The interviewer then asked Obama why he thought those taxpayers should pay more. After thinking for a moment, Obama replied “fairness.” In other words, kill the cow.
Notwithstanding the negative impact that confiscatory taxes have on investmet and job creation, people on the Left including Obama and Pelosi (who is a billionaire) think that because such taxes hurt the rich more than other taxpayers they want them increased. As long as those at the top lose, the Left is willing to inflict hardships on the economy and the unemployed. Kill the cow.
To people who are not extraordinarily successful (or even ordinarily successful) the rewards of extraordinary success seem unfair. Does Peyton Manning deserve an annual income of $38 million? How about Rush Limbaugh at $37 million per year? Oprah at $275 million? That’s earning over $30,000 per hour compared to less than $8 an hour for a hamburger flipper at McDonald’s. CEO Bob Iger earns $53 million from Walt Disney, CEO John Hammergren of McKesson Corp. makes $131 million, and $14 million each is paid to CEOs John Chambers of Cisco and Paul Otellini of Intel.
To put these incomes in perspective, the top 5% of incomes begins at $155,000 and the top 1% begins at $344,000. That means the salaries of the people mentioned are in the stratosphere of the top 1% in income rankings. That’s an important point that I’ll come back to.
Are these people worth those incomes? The answer is yes. Why? Because someone is willing to pay it.
That’s not a flip answer. Here’s why.
Rush Limbaugh would not be paid what Clear Channel Communications is paying him unless he was bringing in advertising revenues far in excess of his $37 million cut. Likewise, the Colts wouldn’t pay Peyton Manning his astronomical salary unless his performance on the football field generated revenues from fans and advertisers that the Colts owners considered Manning’s cut a fair share. This is the principle of Reich’s classroom experiment.
However, the fact that a top performer in sports, entertainment, and business contributes millions to the employer's bottom line isn’t the sole explanation for justifying an extraordinary share of that bottom line. There also must be competition from others for that person’s services in order to give the person the leverage to bargain for a share of the value they produce. Absent competition, a dissatisfied high performer has no alternative except to withdraw his services. This would be equivalent to the lose/lose irrational behavior in the Reich experiment. By preventing negotiation between teammates, Reich made “take it or leave it” the only possible outcome, which happens when there is no competition.
Before free agency injected competition into professional sports, for example, top performers earned only a fraction of their current salaries, despite producing the same economic value for their owners then as now. Today, a dissatisfied top athlete can move to another team that is competing for his services and is willing to pay a higher salary.
Similarly, in bygone years, business executives were promoted from within. Faced with no competition for their senior executives and rising stars, businesses paid a small fraction of what they now pay to their management team. Enter competition between companies and industries. Executive mobility became the norm as high performers were pirated away to more lucrative salaries and perks.
Like it or not, we live in a “winner take all” world in which money gravitates to the star performers. In the 2010 Augusta Masters golf tournament, Phil Mickelson walked away the winner with $1.35 million for four days of work. Second place went to Lee Westwood, three strokes back for $810,000 in prize money – $540,000 less than Michelson or $180,000 per stroke. Third place money was $510,000, which was won by Anthony Kim who finished one stroke back from Westwood. That one stroke cost him $300,000. Nathan Green placed last in a field of 48. He was +14 over par for the tournament versus Michelson’s -16, and won $21,750 for the same four days of work that the winner put in, but he went home a lot poorer.
The winners of the 2010 Super Bowl received $83,000 per player and losers each took home $42,000. The 2011 winner of the Indianapolis 500, Dan Wheldon, received $2,567,255 for beating J.R. Hildebrand in the last seconds of the race. Hildebrand received $1,064,895, not a bad day’s pay but a very expensive penalty for crossing the finish line seconds later. The owners of the winner of this year’s Kentucky Derby – Animal Kingdom – got $1.1 million; the owners of the runner-up, Nehro, got half that figure for losing by 2 ¾ lengths.
The world of business has similar disparities. According to the Tax Foundation, from 1945 to the late 1970s, the richest 10% of Americans accounted for about 35% of total income. By 2009, their share was about 43%. The top 10% of incomes start at $112,000 – not a kingly sum unless you’re part of the Left. Most of the gain in this bracket went to the richest 1%, whose share rose from 8.5% in 1980 to 16.9% in 2009. But the Left conveniently forgets to say that the richest 1% saw their share peak in 2007 at 22.8% and then fall to 16.9% due to the recession since much of their income comes from invested wealth rather than labor. Remember that the top 1% starts at $344,000 but it goes up astronomically from that figure because this bracket includes the incomes for Manning, Limbaugh, and Oprah who are in the top 1/10th of 1%. That is what is overlooked in comparing income levels – all brackets are moderately heterogeneous and the top of every bracket is the bottom of the next – except the top bracket, which is wildly heterogeneous and has no cap. The top bracket is “everyone else.”
Income disparity is a global phenomenon. The Organization for Economic Cooperation and Development found that the average spread between the richest 10% and the poorest 10% has increased in 17 out of 22 countries over the last 20 years and currently averages about 9:1. This ranges from 5:1 for Sweden and Denmark, 14:1 for the U.S., and 27:1 for Mexico, which has the greatest disparity. Mexico, like most third world countries, has a large lower class that work for subsistence wages, a modest middle class, and a small but powerful upper class. Carlos Slim, a Mexican, has been the richest man in the world for 2010 and 2011. He is also one of the world’s most philanthropic entrepreneurs with two foundations, one of which has a corpus presently valued at $4 billion.
Is it fair that there is so much disparity between the economic payoff to winners, runners-up, and also-rans? I’m not really into debating the fairness of incomes any more than I’d debate the fairness of the sun rising in the east. It is the way it is. The market decides what it wants and what that is worth. But it is the scarcity of talent and the competition for it that causes income to bunch up at the top. It is not a sinister plot by the rich to exploit low income earners – unless basing people’s pay on the market value of their talent is perfidious.
The world is changing rapidly with globalization – for the good in my opinion. In the U.S. we have emerged from an agricultural economy to an industrial, then service, then technology and information economy. The unskilled, poorly skilled, and less educated will be less and less in demand as this economic shift continues. Yet our government continues to spend trillions on schools that don’t educate students for a modern world. This administration in particular has been more interested in protecting teacher unions than producing students that can compete their way up the income pyramid like a poor kid in San Francisco did 40 years ago.
If the whiny OWS crowd wants to protest the crime of the century, protest that.
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