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Goldman Sachs, the investment bank, paid out over $16 billion in 2006 “bonuses” to its employees, with over $50 million going to its Chairman alone. Pfizer, the drug company, paid a “severance package” of $200 million to its just-resigned chief executive. Many other large corporations acted similarly. All this is legal, given the laws and rules that corporations win from their political “allies.” Indeed, the latest ruling by the Securities and Exchange Commission (SEC) allows corporations to obscure what they pay top executives (the New York Times, December 27, 2006, page C1, called it “a victory for corporations”).
The real costs of such executive payouts are immense. One such cost is suggested by what the executives themselves say when they explain their opposition to workers’ wage increases. Then they argue that, if wages were raised, it would inevitably require the prices of what those workers produce to also rise, thereby hurting consumers in the end. The executives position themselves as guardians of consumers’ interests against the workers’ “unreasonable demands” for wage increases. If one accepts this logic, it must then apply as well to executives’ pay packages. The billions paid out to executives will likewise “inevitably require prices to rise.” Put simply, the companies that pay billions to top executives will do everything they can to recoup those payouts by charging more to their customers and thus ultimately to consumers. We all pay for those executives’ money grabs.
Yet we pay in more ways than just higher prices. When the companies that hire an investment bank like Goldman Sachs have to pay huge fees (needed to enable the “bonuses”), it hurts those companies’ profits. They will respond by trying not only to raise their prices to consumers but also to save on their other costs. Similarly, companies like Pfizer will try to offset the cost of their huge executive payouts by not only raising their prices but also saving on their production costs. Cost reductions have been achieved by shifting from full to part-time work, from regular to “temp” employees, from union to non-union workforces, and from US to foreign workers. Thus, high executive payouts mean, for most of the rest of us, lower incomes and fewer jobs as well as higher prices.
We also suffer the consequences of high executive payouts in still other ways. The billions paid out by corporations in bonuses and severance packages for top executives are billions not spent on other things. For example, those billions could have been spent to improve technology, invent new products, provide training to raise workers’ productivity, and in other ways grow these corporations and make them more globally competitive. One reason why most capitalist corporations in other countries do not pay their executives as much as US corporations do is that they are more focused on competitive growth. In the long run, such trends also threaten US workers as a whole.
The costs of huge executive payouts are neither corrected nor compensated by our political system, as the SEC decision mentioned above shows. Where once the top income tax bracket — that affected chiefly the sorts of huge incomes now grabbed by executives — was 91%, in recent decades it has been more like 35 %. The rich got the tax laws changed to allow them to keep more of the payouts they arrange for themselves. Changed tax laws have thus been an immense incentive for executives to grab as much as possible now before mass opposition might once again drive the top tax brackets back up to where they once were.
The executives learned from US history. In the final decades of the nineteenth century, leaders of corporations took huge payouts to establish huge fortunes. One reaction was the passage of an income tax law in 1910 aimed exclusively at only the richest Americans. Those richest Americans quickly developed a counter-strategy to change the new income tax law. They succeeded and thereby spread the burden of the income tax across the entire population, which eventually undermined popular support for the income tax. In a burst of income tax opposition around the time of Reagan’s presidency, the richest Americans got another tax law change — tax cuts — giving them by far the biggest tax break. And so, very predictably, the zoom-up in executive pay packages took off to reach the record 2006 numbers.
All of which makes one wonder which of the following three scenarios will best describe what happens in the next few years. Perhaps the divisions separating the rich from the middle and poor will expand even further, with all the social consequences that flow from growing inequalities. It is worth pondering the implications of having 15 million Americans who earned the minimum wage of $5.15 per hour for 40 hours per week in 2006 struggling alongside the “bonus” of Goldman, Sachs chairman which works out to be $6,096 per hour for 24 hours a day, 7 days per week (the New York Times, December 24, 2006). As a second possibility, the Democratic gains last November might revive demands to limit executive grabs by new tax and other laws. As a third conceivable scenario, Americans may learn from history to suspect that a new set of laws will be as easily undone or evaded by corporations and their executives as the last set was. Then they will have to consider more basic changes in how enterprises are organized and run, who makes the basic decisions, and what are the ultimate goals for the production of goods and services and the incomes generated from that production.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).