America's New Robber Barons

With early Tuesday’s abrupt evacuation of Zuccotti Park, the City of New York has managed—for the moment—to dislodge protesters from Wall Street. But it will be much harder to turn attention away from the financial excesses of the very rich—the problems that have given Occupy Wall Street such traction. Data on who is in the top 1 percent of earners further reinforces their point. Here’s why.

Though the situation is often described as a problem of inequality, this is not quite the real concern. The issue is runaway incomes at the very top—people earning a million and a half dollars or more according to the most recent data. And much of that runaway income comes from financial investments, stock options, and other special financial benefits available to the exceptionally rich—much of which is taxed at very low capital gains rates. Meanwhile, there has been something closer to stagnation for almost everyone else—including even for many people in the top 20 percent of earners.

This may seem counterintuitive at first. After all, analysts have long painted a picture of growing inequality over the past few decades in which the top quintile’s share of the national income has risen while the share of the other 80 percent has fallen. But almost all the gains for the top 20 percent was for the top 1 percent. And half of that is accounted for by a tiny group within the top percent—those earners in the top 0.1 percent. Meanwhile, for the four quintiles below the 80 percent level, the share of total income fell significantly. For those from the 80th to the 99th percentile, the share rose only slightly (a little more rapidly as you go higher up).

In other words, Occupy Wall Street’s claim that “We are the 99 percent” is dead on right.

So it’s worth knowing who is in that group of very rich with runaway incomes. Several news reports in recent weeks have cited a seminal 2010 study that usesIRS tax returns to find out who belongs to the top 0.1 percent. The authors deserve mention because they are often left out when their results are cited: Jon Bakija of Williams College, Adam Cole of the US Treasury, and Bradley Heim of Indiana University. This was not a Treasury study, however, but a private if scholarly one.

One key finding of the study is that three out of five of those in the top 0.1 percent of tax filers are executives or managers of financial and non-financial companies. Overall, more are from non-financial companies. Does this partly exonerate Wall Street, suggesting it is really Main Street where the problem lies?

In fact Bakija, Cole and Heim’s analysis shows the opposite: it turns out that much of the increase in wealth of non-financial executives was also tied to the rise in stock prices. Keeping in mind that stocks options appear as wages in the data, it seems Wall Street itself was often a main source of income growth for “non-financial” managers as well. (Lawyers were another large category of tax payers in the top 0.1 percent, and though there is not direct data for this, one can fairly assume that many of those in corporate firms made a lot of money from the booming business on Wall Street.)

Next, think about how these executives managed their businesses. If they wanted a big pay check they had to orient their strategies to push up their stock prices—that is, often to appeal to the financial fads and fashions of the day. These strategies typically have included cutting labor costs and R&D in order to boost short-term profits. This delighted their advisers on the Street. Stock investors soon loved nothing better than consistent increases in quarterly profits, and not coincidentally, stock options accounted for an ever-growing proportion of executive pay over the past thirty years. We used to say once that Wall Street worked for business, but over the past thirty years business has come to work for Wall Street.

It is just as interesting to explore the factors that the authors found out probably did not cause the surge at the top. Economists typically posit sophisticated technologies (often related to digitalization) as a source of growing inequality: because these technologies require better educated and smarter workers, those who have mastered them are rewarded handsomely. But there was no surge at the very top in other nations like Japan or in Western Europe, which also adopted the same technologies.

Similarly, some have argued that globalization led to higher incomes at the top because skilled workers can sell themselves globally at ever higher salaries. Again, however, such skilled workers have not seen a surge at the very top in Europe or Japan.

One reason for the discrepancy between the US and other countries is that boards of directors in the US are especially willing to give their CEOs and other high level executives big raises and generous stock options. Lucian Bebchuk of Harvard has done a lot of research on this so-called “governance” issue. Meantime, as Bebchuk’s work shows, shareholder influence over executive compensation is far too weak. And there is also the issue of culture itself. America—with its admiration for the self-made man—tolerates high remuneration for the men and women at the top and lower wages in the middle and the bottom. Culture likely matters.

But when we put it all together, compensation tied to stock options along with unusually high profits by financial firms, much of which was passed on to their executives, seems to be the overriding factor. This is probably now the main driver of what we call income inequality in America and what we should more accurately call runaway incomes at the very top.

One other major point requires some attention. This runaway at the top is different from other periods of great inequality, like the late 1800s. Back then, the Robber Barons may have kept money due to monopoly advantages and their power over workers. All the while they were adding to GDP by building oil and steel giants, railroads, and mass production companies from chewing gum to cars.

Today’s people at the top exploit workers in somewhat different ways. There is constant pressure to keep wages down by CEOs in order to push up stock prices. This is the modern-day Robber Baron equivalent. Corporate takeover and leveraged buyouts have had the same effect: they build up cash flow by cutting expenses in order to pay off the debt they took on for their huge acquisitions. This is how Wall Street helps creates a culture in which it is considered okay for a company to fire workers while giving its CEO a giant raise.

But much else of what happens on Wall Street has nothing to do with the real economy, except to waste hundreds of billions of misdirected savings that are plowed back into useless speculation and casino-like gambling by the very rich on trades among themselves. As we have seen, it was this kind of reckless trading that fueled the credit crisis and the collapse of investment houses like Lehman in 2008. The way to deal with this is more serious regulation, including restrictions on the amount of leverage buyout artists and privatizers are allowed to take on. And since we are talking about outrageously high incomes at the very top, higher taxes on the highest earners also make very good sense because much of that income was not reflecting real contributions to the economy—in fact, it was arguably doing just the opposite.

So Occupy Wall Street is right: the financial firms are much to blame for runaway incomes at the top. Yet understanding the nature of inequality in America should place the focus where it truly belongs, on the other 99 percent. Wages have by and large stagnated in America. The real problem is that America’s job machine is broken. Wall Street is partly but not entirely responsible for this. And policies to adjust this—persistent fiscal stimulus, substantial public investment in infrastructure and industry, a lower dollar to the yen, a higher minimum wage, and direct job creating programs like the New Deal’s Works Progress Administration—are what’s needed. If we do not begin to develop such policies, we will not have only the problem of runaway incomes for the few at the very top, but a large and growing part of the population—some of which is highly skilled and educated—that is cut off from the economy altogether.

Comments (13)Add a comment

As part of an assignment for research I have to find an article with relevant information on this topic and give the teacher our opinion and the article. Your article helped me a lot.
Redwood Furniture

I am have been studying this topic for a long time. You have provided great information in you post and some things I have not seen in other content I have read by others.
horde leveling guide

Your article is very exciting and informational. I am trying to decide on a career move and this has helped me with one aspect. Thank you so much!
tobacco smoking pipe

I am glad to read this post, its an interesting one. I am always searching for quality posts and articles and this is what I found here, I hope you will be adding more in future. Thanks
Health Insurance

This post has helped me for an article which I am writing. Thank you for giving me another point of view on this topic. Now I can easily complete my article. Cheers
elevator emergency phone

Luckily, I am here again as I thought I’ve lost everything. Now, I am pretty much happy to enjoy your new posts and marvelous ideas on the topics. Here my family is joining reading me.
stock trading online

I am exploring this topic for a report I have to write. You have good content and I would like to know if you have any other posts about this? Carpet Cleaning Los Angeles

This is out of question to rely on people suggestions and news reports. According to a recent survey people are earning a million and half dollars. All this money is the indication of good growing economy.click here

Your article is very exciting and informational. I am trying to decide on a career move and this has helped me with one aspect. Thank you so much!
magic of making up

Discount prada shoes are very important for virtually every male in her way of life. Prada America‘s Cup sneakers are essential for numerous requirements.This happens to most shoes prada men sneakers & prada high top sneaker that don’t offer any lace protection, though. Prada Shoulder Bags is every popular on the market .

Prada Purses many Prada specialist shoppers, could know the difference a duplicate prada Baggage from your prada Carriers because of its favorite songs produces, it is usually sincerely deafening while you extendable it again, a lot better in order to expansion it as well really you could possibly damage the whole case, only a bit of expansion can do, it produces any raucous special sound experience.Prada Patent Leather Shoes Men Black is made of black treated leather,it stout leather sole with skid-resistant function

Buying our cheap prada men casual shoes which are new arrivals provide latest styles and discount price for everyone.welcome to our prada shoes on sale online store to check the series styles and colors .

Timberland Shoes retail store on the net sales Saying Timberland Roll-Top Shoes intended for Adult males. Timberland Classic 2 Eye Mens Lug Sole Boat Shoes Throw Major Shoes intended for Adult males can market including Timberland Boots sizzling cakes with your web page at all times. A method not like another.Not previously know to persuade Roger Garcia several times, but Roger Garcia did not listen. When something far, she was not too Guan Dele. But now is not the same, Roger Timberland Mens 6-Inch Premium Boots at his side, he can every day, ‘monitor’ her.

The two sisters looked at each other Timberland Men’s Chukka Boots and smiled, although they saw once a year the surface, but they did not let the two sisters become alienated. On the contrary, this dim feeling of the relationship between the two sisters is getting better and better.

A Timberland outlets Factory Outlet is really a place for individuals who adore Timberland options but have quite limited purchasing budget. Timberland 14 inches Boot styles retailer cheap Timberland Boots on the web selling Proverb Timberland Roll-Top Boot styles regarding Guys.

To girls, nothing might be better than get one pair of beautiful shoes to be proud and attractive. These discount Louboutins available with nice and easygoing design. It is very easy to wear this discount 150mm Christian Louboutin Lady Peep in daily life. You deserve to have one or more pair for collection in this season.Christian louboutin daffodile are full of fashion taste, you can wear such shoes to party,also suitable for daily life.

Check out the main on your cheap red bottom 2012 shoes runner,Christian louboutin uk footwear is recognized in relation to red business! to aid you to put money on each and every phony will present a new burgandy particular. Christian Louboutin Bianca pumps are so practical that you all should buy one .You can dress yourself up by paying more attention to choose the right cheap louboutin shoes . Every woman fanaticizes of presenting herself in the best possible manner and to look really beautiful at Christian louboutin discount shoes.

As for my part, I think this discount newest Christian Louboutin Vicky 120mm Suede booty can apply to all kinds of occasion, allowing you to show characteristics and increased self-confidence freely. It was designed meticulously and specially for you. Buy one in our store with more discount and free shipping online. Just as christian louboutin pumps is really exclusive and sexy.

Anyone can save about 49% compared with the Moncler men vests, coats, jackets, and other types of providers, a contract of sale in the den. Moncler Women Long Down Coats is not accustomed anorak.The covering is fabricated of a affable, animationable abscondce bric that is baptize and wind abideant.The discount moncler winter coats are hotsale online.The moncler clothing are well know for fashion,ease and value.

Moncler Gene Women Jackets new could be the top-level brand in the down jacket fashion globe. It is a reality that Moncler jackets are prevailing amongst a lot of superstars, practically every single superstar in Hollywood owns 1 Moncler jacket .These Moncler Clairy Two Tone Down Jackets new are packed with perfect material which could by no suggests provide your entire body a cooler affect. via these coats, you have chance to go outside, when cold breeze will be blowing. In winters, you and your loved ones would like to pick having some fun.

These days, we are referring on the Women Moncler Coats Safran Quilted High Gloss with excellent overall performance and classy design and style. Men Moncler Jackets with attractive models, they go very well with jeans and shorts simply.People are satisied with moncler winter coats , it sells well in the cold winter in our store.