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Tuesday, July 17, 2007

Riding the Crest of Economic Populism

There were a couple of interesting articles in the New York Times, one yesterday, July 16, and one the day before, which provide a study in contrasts.

The first piece, by Louis Utichelli, focused on the new gilded age and the wealthy tycoons, who have been riding the crest of a wave of fabulous wealth and increasing wage inequality the likes of which haven’t been seen since the 1920s.

And if you listen to some of these newly minted moguls, they compare themselves proudly to the robber barons and captains of industry from that era. Here’s what Sanford Weill, founder of Citigroup had to say.

“People can look at the last 25 years and say this is an incredibly unique period of time,” Mr. Weill said. “We didn’t rely on somebody else to build what we built, and we shouldn’t rely on somebody else to provide all the services our society needs.”
And other tycoons back up his assessment and rate themselves as uniquely deserving of extravagant compensation while the wages of their employees remain flat.

Other very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter“unique talent” for baseball, as Leo J. Hindery Jr. put it. “I think there are people, including myself at certain times in my career,” Mr. Hindery said, “who because of their uniqueness warrant whatever the market will bear.”

He counts himself as a talented entrepreneur, having assembled from scratch a cable television sports network, the YES Network, that he sold in 1999 for $200 million. “Jeter makes an unbelievable amount of money,” said Mr. Hindery, who now manages a private equity fund, “but you look at him and you say, ‘Wow, I cannot find another ballplayer with that same set of skills.’ ”
You can almost see and hear the old Saturday Night Live character, the Church Lady, with her crooked smirk, saying, “Well, isn’t that special? We really like ourselves don’t we?”

Pride may goeth before a fall. But skepticism springs eternal at such arrogance and bragging.

Indeed other, equally successful businessmen aren’t buying these self-laudatory assessments of these tycoons with over inflated egos.

A handful of critics among the new elite, or close to it, are scornful of such self-appraisal. “I don’t see a relationship between the extremes of income now and the performance of the economy,” Paul A. Volcker, a former Federal Reserve Board chairman, said in an interview, challenging the contentions of the very rich that they are, more than others, the driving force of a robust economy.

The great fortunes today are largely a result of the long bull market in stocks, Mr. Volcker said. Without rising stock prices, stock options would not have become a major source of riches for financiers and chief executives. Stock prices rise for a lot of reasons, Mr. Volcker said, including ones that have nothing to do with the actions of these people.

“The market did not go up because businessmen got so much smarter,” he said, adding that the 1950s and 1960s, which the new tycoons denigrate as bureaucratic and uninspiring, “were very good economic times and no one was making what they are making now.”

James D. Sinegal, chief executive of Costco, the discount retailer, echoes that sentiment. “Obscene salaries send the wrong message through a company,” he said. “The message is that all brilliance emanates from the top; that the worker on the floor of the store or the factory is insignificant.”

A legendary chief executive from an earlier era is similarly critical. He is Robert L. Crandall, 71, who as president and then chairman and chief executive, led American Airlines through the early years of deregulation and pioneered the development of the hub-and-spoke system for managing airline routes. He retired in 1997, never having made more than $5 million a year, in the days before upper-end incomes really took off.

He is speaking out now, he said, because he no longer has to worry that his “radical views” might damage the reputation of American or that of the companies he served until recently as a director. The nation’s corporate chiefs would be living far less affluent lives, Mr. Crandall said, if fate had put them in, say, Uzbekistan instead of the United States, “where they are the beneficiaries of a market system that rewards a few people in extraordinary ways and leaves others behind.”

“The way our society equalizes incomes,” he argued, “is through much higher taxes than we have today. There is no other way.”

It actually sounds like these older and more down to earth business executives are saying those emperors have no clothes. Or at least they are far less deserving than they think. They've probably sold their boards of directors and stockholders a bill of goods and rigged the market for CEOs in their own favor.

There's another key point that emerges from Louis Utichelle's article.

First, in the 50s and 60s when corporate chiefs didn’t make nearly as much money, the economy was just as robust and so was the economic condition of the average worker. The compensation gap wasn’t as steep and Americans enjoyed a record level of genuine prosperity and financial security that has been unmatched in any other era before or since. Here’s the telling quote (emphasis is mine)

The new tycoons describe a history that gives them a heroic role. The American economy, they acknowledge, did grow more rapidly on average in the decades immediately after World War II than it is growing today. Incomes rose faster than inflation for most Americans and the spread between rich and poor was much less. But the United States was far and away the dominant economy, and government played a strong supporting role
In addition to the historical fact that the economy was actually better when there was less of a gap between the compensation of the top executives and the average worker, the sheer audacity of these vainglorious men’s’ claims that they are somehow so special that they are entitled to the obscene amounts of wealth they are accumulating at both the expense of their workers and their investors does not hold up to the light of examination.

Indeed, just as in the last Gilded Age, the intense concentration of wealth in the hand of a few and the reckless investment risks that they took was the leading edge of disaster.

Such talk alarms Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, who started on Wall Street years ago as a partner with Mr. Weill in a stock brokerage firm...

...Mr. Levitt is skeptical. “I view a gilded age as an age in which warning flags are flying and are seen by very few people,” he said, referring to the potential for a Wall Street firm to fail or markets to crash in a world of too much deregulation. “I think this is a time of great prosperity and a time of great danger.”
The simple truth is that all this excess, both the arrogance of these corporate chiefs and the concentration of wealth at the top, benefits neither workers nor investors. It sets up the economy for too great a risk for investors and leads to an extreme class system with a few very wealthy CEOs teetering at the top of a narrow pyramid and too many people sinking from the middle class back into poverty at the broad bottom with not much in between.

The small wealthy class at the pinnacle and a large underclass of underemployed impoverished workers also sets the stage for a destabilized society with a higher crime rate, greater drug and alcohol abuse, child and spouse abuse, and the disintegration of the family. Can we as a society really afford the fall out from the harsh new economy of the Second Gilded Age? Go back and study the novels of Dickens and others to find out what social conditions were really like in Victorian England and America at that time.

Alcoholism, prostitution, lack of stable family was the norm for the working class. Family life, as we know it now, was practically non-existent among the blue collar workers in the an urban environment. It was only with the advent of the middle class that we truly got a large number of people in stable nuclear families, which we now take for granted.

We should be going forward, not sliding back.

But I think a backlash is coming. There is a groundswell of discontent rising from an increasingly anxious middle class, and Democrats are more and more attuned to it.

And that brings me to the second New York Times piece. According to yesterday’s article, Nancy Pelosi has given Democrats their marching orders. As Robin Toner reported, Pelosi gave this blunt assessment, "The American people want to know what we’re doing about their economic security.” So Congress will be taking up economic issues including the negative effects of free trade and globalization on workers and communities.
On Capitol Hill and on the presidential campaign trail, Democrats are increasingly moving toward a full-throated populist critique of the current economy.

Clearly influenced by some of their most successful candidates in last year’s Congressional elections, Democrats are talking more and more about the anemic growth in American wages and the negative effects of trade and a globalized economy on American jobs and communities. They deplore what they call a growing gap between the middle class, which is struggling to adjust to a changing job market, and the affluent elites who have prospered in the new economy. Senator Hillary Rodham Clinton, Democrat of New York, calls it “trickle-down economics without the trickle.”

But the latest populist resurgence is deeply rooted in a view that current economic conditions are difficult and deteriorating for many people, analysts say, and it is now framing debates over tax policy, education, trade, energy and health care. Last week, Senate Democrats held hearings on proposals to raise taxes on some of the highest fliers on Wall Street, the people at the top of private equity and hedge fund firms.
An interesting counterpoint to the laissez faire capitalists and anything goes free traders who would drag the middle class backwards for the sake of their own greed.

I think the party that says "enough" to the corporate greed that is bleeding the middle class dry - both investors and workers - will be the one that dominates the elections. The party that speaks to the concerns of the average voter will ride the wave of economic populism into the new century and, hopefully, return us to the prosperity of the fifties and sixties when unions were stronger, corporations felt a sense of loyalty to their workers, and ordinary people were able to sleep securely at night, knowing they and their families were covered by adequate health insurance, they could save for their children's educations and still have enoug left over to retire with dignity and be independent in their last years. Modest ambitions, compared to the robber barons of the new gilded age.

But perhaps that's why we've got to challenge the greedy whose emphasis is on robber, not just baron.

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