Starting Off on Income Inequality
Joe Schuman is the Founder and Editor-in-Chief of Divided We Fall.
I am excited for our conversation on income inequality. I look forward to hearing your perspective on this issue and, I hope, to disagreeing civilly. I hope our conversation will add some much-needed perspective to this complex issue.
I would love to start by understanding your perspective. How do you define income inequality? Do you think income inequality in the United States is a problem? If so, what should be done about it? How should we think about relative inequality versus absolute poverty? What might be the non-financial implications of income inequality?
To front my hand, I do believe that income inequality is a problem in 21st century America. At the same time, I do not believe that it is discussed with sufficient nuance in today’s discourse. Inequality is relative–the USA might be in the top 20-30 most unequal countries in the world, but has low levels of poverty, especially absolute poverty. There are many more nuances to explore and they are critical to unpack, as I believe we cannot solve these problems until we properly identify them. I hope our conversation is helpful in that regard. I look forward to your response and learning your perspective on these issues.
CEOs and Their Income
Janice Shade is the Founder of The Initiative for Local Capital and author of “Moving Mountains: The Power of Main Street Americans to Change Our Economy” and “Community Investment Funds: A How-To Guide for Building Local Wealth, Equity, and Justice.”
I’m really excited to engage with you in this conversation about income inequality. You brought up the nuance (some might say audacity) of examining income inequality in 21st century America when bigger issues exist in other parts of the world. This reminds me of a recent conversation that went something like this: A family proudly related to me how they spent three weeks in Kenya building a well for a rural village that eliminated the need for villagers to cart water from another well miles away. When I asked if they’d ever consider volunteering for similar work to bring clean drinking water to the people of Flint, Michigan, I was met with blank stares. Don’t get me wrong, building wells in Kenya is important work. Unfortunately, Flint is a less exotic “volun-cation” destination than Kenya, so it doesn’t get attention it deserves. My point is that we’ve still got plenty of problems here in our rich, developed nation. And if we can’t maintain a strong economic foundation and social fabric here, how can we hope to help others?
So, on to income inequality in the U.S. It’s about more than righteous anger at the fact that the average CEO pay is 271 times greater than the average annual salary of typical American workers according to Economic Policy Institute. Income inequality must be discussed in broader terms; because income translates to where you can afford to live, what kind of health care you can access (or not), where your kids go to school, and even to whether or not your municipality can maintain safe water systems and other infrastructure. All of this has the potential of stacking a tough deck against folks who are trying to achieve the American Dream through hard work, determination, and initiative, especially when it’s been ingrained in families across generations. It means that many Americans have much longer bootstraps to pull themselves up by than those raised in places where access to healthy food, safe housing, good education, and adequate health care are taken for granted.
I will pause there for now. Look forward to your thoughts.
High Income v. Low Income: Statistics
Thank you for your response. Let’s discuss your contention regarding the CEO-to-worker pay gap. On its face, this statistic clearly seems unjust. It appears to be incontrovertible proof of a great travesty in the United States. It purports to be a terrible moral failure in our country.
But we ought to remember that the average income in the United States is $65,000/year, which is 9th in the entire world and first among large, developed nations. Eighty-eight percent of Americans are considered “upper-middle class” or “high income” when compared globally, and even those classified as “poor” by the U.S. government are considered “middle income” globally. We have very low levels of absolute poverty. There is work to be done, no doubt. But overall, things are relatively good here.
We also should remember that one of the drivers of our inequality is our incredible economic growth and dynamism. The United States has one of the largest economies in the world, the second most Fortune 500 companies, and the second most billionaires in the world. Any proposed solutions should recognize this miracle and, more importantly, that continued prosperity is not a guarantee. We can, as some propose, take from the rich and give to the poor. Clearly, that would reduce income inequality. But to what extent? At what cost? Is there a way that we can continue to unleash the innovative and entrepreneurial American spirit while still giving everyone a fair chance and preserving the American dream?
Thus, we have arrived at the quintessential question: What should we do about it? It is always easier to burn down a barn than it is to build one up, in my opinion. So, the burden of proof is on the side of the proposition. What is an appropriate level of income inequality? To use your statistic, historically we had CEO-to-worker pay ratios of 60:1 (1989) to 20:1 (1965). More equal, but not equality. I assume you believe that is better, but is that sufficient? Where do we draw the line? Perhaps we could baseline at a certain year and look at growth, where CEO compensation has grown 940% since 1978 whereas typical worker compensation has only grown 12%. Or, we could talk in absolute terms about raising the minimum wage, providing basic service like healthcare and education, etc. The devil is in the details. But I look forward to hearing your proposals.
Great points and intriguing proposals. Before I get to my ideas on how to address them, I’m going to challenge your assertion that “overall, things are relatively good here” with regards to poverty levels in the U.S.
When we dive deeper into the data in the Pew Research Center article, we find that, while indeed 88 percent of Americans are considered upper-middle class or high income by global standards, this hardly reflects reality at ground level. The study’s definition of high income is someone who earns more than $50/day. That means a family of four with two working members and combined annual income of $37,000 would fall in the high-income category. It’s cold comfort to this family — who are living a mere $11,000 above the Federal Poverty Level— to learn they’re considered high income by global standards. It’s a stark illustration of how difficult — and misleading — it is to try to quantify the difference between absolute and relative poverty on a global scale.
Now, to your question of “what should we do about it.” An attempt to legislate a national standard for the ratio of CEO-to-worker pay is enticing but, I believe, ultimately futile, and really only addresses a symptom of income inequality, not the cause. For real systemic change, we first must tackle the concept of “enough.” How much does a person really need to achieve a comfortable, happy, successful existence? There are scads of studies on this question, including one widely touted report which states that above $75,000, more money does not lead to commensurate increases in happiness.
I think “how much is enough” will likely be answered differently by different people, but the biggest problem is that no one is asking the question in the first place. Instead, we’ve allowed the American Dream to become bastardized into a myopic focus on wealth accumulation rather than life, liberty, and the pursuit of happiness. When success is so narrowly defined in monetary terms, we’ve systematized a zero-sum game where “winners take all” at the expense of the vast majority.
What Attracts Good Employees?
I don’t buy the argument that companies need to offer exorbitant salaries to attract the best talent for their CEOs. In fact, if the only way to attract someone to a job is to pay them boatloads of money, I’d say you’ve got bigger problems. Shouldn’t the challenge, the team and work environment, and the opportunities for self-actualization play as much (or more) of a role in attracting good talent? Look at Tom Brady, arguably the Greatest Football Player Of All Time but never the highest paid football player, who eschewed a higher salary so that the Patriots could put money toward hiring more high caliber players. Why? Presumably because he loved his job and likes to win — and he recognized that both of these are dependent on having a team of happy, motivated players around him.
This is an example that translates easily into the corporate world and could happen today with no legislative/regulatory action required. I challenge CEOs and their fellow high-paid C-suite managers to rethink their budgets with an eye toward reasonable compensation for all. Call it noblesse oblige or the more modern “pay it forward,” but at the root level, acknowledge the privilege that brought you to this level of success and don’t be ashamed of it; do something about it. In fact, if you want to get really radical, give your employees a voice in the matter. Employee ownership models are becoming more popular in the U.S., especially as the “silver tsunami” of retiring Baby Boomer founders look for equitable ways to exit their companies. In addition to addressing wealth inequality, employee ownership offers benefits in employee motivation and retention, ensuring company legacy, and even tax advantages. That’s a big win all around.
Tag, you’re it.
Life, Liberty, and the Pursuit of Happiness
Thanks for the response. I must start by responding to the comments on Tom Brady as I am a proud—albeit, often disappointed—New York Giants fan. I will not dispute Tom Brady’s football abilities, even if Eli Manning and the Giants beat him in the Super Bowl twice, nor will I question Brady’s motivations. However, even he admits that his “wife makes a lot of money” and that she is worth up to $400 million, which allows him to take a pay cut for his team. It’s not exactly financial hardship he’s going through.
Now, back to the business at hand. You argue that in order to come to some sort of consensus on wealth, poverty, and inequality, we need to determine “how much is enough.” You ask: “How much does a person really need to achieve a comfortable, happy, successful existence?” This standard is invented and subjective. I would avoid it. I think you are closer to the mark when you argue that “enough” could be defined as “life, liberty, and the pursuit of happiness.”
I translate that phrase as follows: social and economic responsibilities (i.e., life), civil and political rights (i.e., liberty), and equal opportunity and the American Dream (i.e., the pursuit of happiness). Thus, when we talk about inequality and wealth, we ought to think about maximizing these rights, responsibilities, and opportunities for all Americans. Indeed, this construct shows us the important tradeoffs surrounding policy decisions around wealth and poverty. Sure, we can increase taxes on the rich and distribute that money to the poor. But that will necessarily reduce the liberty and opportunity of the rich in the short term as well as, many would argue, the liberties and opportunities of middle- and working-class Americans in the long term (as job creation grinds to a halt and employment opportunities vanish). Yes, we can provide government-funded healthcare to the entire population, which would undoubtedly help the 30 million Americans without health insurance, but at what cost to the rights and opportunities of the rest of Americans, especially the 90 percent of Americans who already have health insurance, 70-80 percent of whom rate their quality and coverage as either excellent or good. These tradeoffs ought to influence our policy prescriptions regarding what is “enough.”
I am less concerned about the number of trillion-dollar companies and billionaires in the United States than I the 40 million in poverty. Let’s talk about ways to provide them with their basic needs. I would warn against outsourcing morality to the federal government; as is all too common amongst Democrats and Progressives; as I would outsourcing morality to the market; as is often done by Conservatives and Libertarians. The right approach, a just approach, would leverage federal, state, and local government; industry and non-profits; and academia to make society fairer. It will take tough decisions and tradeoffs. Tradeoffs harder than Tom Brady’s pay cut. But I believe we can get there if we go together.
Point taken on Tom Brady, whose wife’s vastly greater income affords him the luxury (literally) of foregoing compensation in order to build a strong team around him. (Truth be told, I’m an English Premier League fan (i.e., true football).) But I will stick by my related point, however, that clearly Tom Brady does not need a superlative salary to confirm his success (or his masculinity, for that matter). There is a glimmer of a good example in that.
I agree that the question “how much is enough” is insoluble precisely because the answer is so subjective. But my goal in posing the question is simply to stop people in their tracks and make them think. The very concept of enough is foreign to a society that adheres to (glorifies?) false proverbs like “bigger is better,” “grow or die,” or even that misquoted but still revered and often co-opted example of business arrogance: “What’s good for GM is good for America.”
I’m fully on board with your deeper translations of life, liberty, and the pursuit of happiness, but you lose me when you suggest that we should focus on “maximizing rights, responsibilities, and opportunities for all Americans.” My problem is the word maximizing: A more practical approach is to focus on balancing instead of maximizing. Maximizing runs the risk of inaction as we flounder to solve a perceived zero-sum game, or it becomes a slippery slope toward lop-sided action that benefits whoever has the loudest advocates. That’s what got us into this mess to begin with.
I have a hunch you might be okay with my wordsmithing, since balancing rights, responsibilities, and opportunities for all Americans certainly supports your vital recognition of “the important tradeoffs surrounding policy decisions around wealth and poverty.” There will indeed be tradeoffs, and this is where a little introspection into our personal reactions to/discomfort with/appreciation of “how much is enough” will start to yield results. Because it opens the door to awareness that others, empirically, don’t have anywhere near enough. It brings morality down to the individual human level, where it belongs.
We’re All In This Together
I completely agree about the fallacy, indeed the danger, of outsourcing morality to either the federal government or the market. To allow institutions — corporate, governmental, religious, academic, or otherwise — to dictate who is worthy of the American Dream is an abdication of our responsibility as citizens of a democracy. Morality starts with each of us and should flow from each of us into the private, public, and nonprofit organizations that we humans create, work for, consume from, invest in, rely on, oversee, regulate, etc. It must be a bottom-up, not top-down, approach that is based in trust, respect, and a willingness to compromise with our fellow citizens. Isn’t this what the founders of our democracy were trying to set up, after all?
You said it best: “The right approach, a just approach, would leverage federal, state, and local government, industry and non-profits, and academia to make society fairer. It will take tough decisions and tradeoffs.” I couldn’t agree more. We are all in this together, and as more of us seek to find common ground with our fellow citizens, we can start to make good things happen.
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