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A
weekly commentary on excess and inequality
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This Issue: |
August
15, 2006 |
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Why
the Wealthy Make for Lousy Investors
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Greed
at a Glance: Gimme (Lots of Tax) Shelter
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Stat
of the Week: Time for Pay Limits
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The
American Economic Model: A Runway Turkey?
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Quote
of the Week: Rationalizing Excess
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A
New York State judge will decide this fall
whether $200 million for four years work
amounts to “reasonable” compensation. Three
summers ago, Richard Grasso, then the New York
Stock Exchange CEO, became the poster boy for
executive pay excess after news reports revealed
he had been awarded what eventually added
up to $119.8 million in retirement benefits
on top of, since 1998, an already generous $80.6
million in pay. In 2004, New York attorney
general Eliot
Spitzer sued Grasso and demanded at least
$100 million in restitution. On what grounds?
New York State law requires nonprofit
organizations to meet a reasonableness standard
in compensation, and the New York Stock Exchange
had been, until reorganized after Grasso's 2003
ouster, a nonprofit . . .
Bill Gates,
America's wealthiest man, and Silvio Berlusconi,
the richest Italian, are fighting mad these days
— at the president of Sardinia, the picturesque
island off Italy's west coast that's currently
home to 400,000 vacation villas. Sardinia's
president, Renato Soru, has
upped taxes on both second homes and the
yachts and private planes that bring many of
their owners onto the Mediterranean island.
Gates, the Times
of London reports, has “cancelled his annual
trip” to Sardinia rather than pay the new
$28,500 mooring tax on yachts over 200 feet
long. Berlusconi, now facing a $70,000 tax hike
on his Sardinian villa, last week lent his
support to a “gala VIP protest party” held at
the island ’s top nightclub, The Billionaire.
President Soru is so far resisting demands for a
tax rollback. Asks Soru: “Who else are we going
to tax to fund our development — the
unemployed?”
The three top executives of
the corporation popularly known as the Rolling
Stones have earned $458 million in royalties
over the past 20 years and paid just 1.6
percent of that in taxes. Sir Mick Jagger,
Charlie Watts, and Keith Richards, the Daily
Mail reports, have systematically exploited
a variety of offshore tax havens. Meanwhile,
Irish papers last week headlined the news that
U2 lead singer Bono and company, following the
Rolling Stones lead, have
begun shifting their $871 million fortune to
the Netherlands, where royalties face no direct
tax. Bono, a world-famous anti-poverty
campaigner, had been pressing the Irish
government to up its contributions to the
world's poor nations. That task becomes more
difficult, says Irish Labor Party finance expert
Joan Burton, when “everyone is not willing to be
part of the social contract that stipulates that
everybody should pay their fair share in what is
a low-tax country.”
The wider the gap
between a society's rich and poor, health
researchers have noted over recent years, the
greater the social stress. In Nanjing, capital
of China's Jiangsu province, a former migrant
worker is doing his best to make that stress
pay. This past April, the 29-year-old Wu Gong
opened China's first “anger
release bar.” Patrons at the Rising Sun pay
up to $38 to beat up on specially padded male
models dressed to look like corporate movers and
shakers. China's “rapid rise in wealth,”
observes British journalist Clifford Coonan,
“has brought with it deep social changes.” As
one Rising Sun customer explained to Coonan: “We
get no place to vent anger. The idea of beating
someone decorated as your boss seems
attractive.” Globally, China now ranks
third in luxury good sales. But about 200
million Chinese, says the World Bank, live on
less than $1 a day.
Vertu, the
four-year-old luxury phone subsidiary of Nokia,
is trumpeting a
tripling of sales over the past year.
Vertu's $900 model 8800 features, the company
exults, the same glass “used in luxury
timepieces.” But Vertu's biggest seller remains
the $5,700 Ascent pink leather edition.
Motorola, a key rival to Vertu's parent company,
last month opened a low-end front in the battle
for luxury phone market share. Motorola's new
limited-edition RAZR V3i comes with “a
distinctive liquid gold finish” and a video clip
illustrating
the history of Dolce & Gabbana, the
Milan-based, high-end fashion house that
designed the $600 apparatus.
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Slowly,
ever so slowly, Americans are beginning to
recognize that people elsewhere in the world may
actually have better ideas about how to run a
modern economy than we do.
A new report,
just released by the Washington, D.C.-based
Center for Economic and Policy Research, figures
to speed this recognition along, via a
fascinating comparison of life and labor in the
United States and Europe.
Boosters of the
“American model” — low taxes on the rich, lax
regulations on business, meager protections for
workers, and a flimsy social safety net for the
poor — like to claim that the “European model”
of higher taxes, tougher regulations, job
security, and a cradle-to-grave safety net
simply can't generate enough dynamism to deliver
job growth and upward mobility.
In fact ,
the new CEPR report from economists John Schmitt
and Ben Zipperer shows plainly, the U.S. model
is generating not much more than higher
inequality and an off-the-charts prison
population.
Schmitt and Zipperer compare
the world's mature developed economies on a wide
variety of measures, everything from poverty and
life expectancy to crime and employment rates.
Their basic finding: The United States
leads the developed world only in those
categories — like murder rates — that no
self-respecting society should lead the world
in.
And in those two areas where
cheerleaders for the American model most like to
claim clear and positive economic superiority —
employment and social mobility — the United
States turns out to either trail the rest of the
developed world or barely keep up.
The
American model, Schmitt and Zipperer help us
understand, has definitely not nurtured a mobile
society where people can easily rise up the
economic ladder.
Indeed, their new
report details, “the U.S. economy consistently
affords a lower level of economic mobility, both
in the short-term (from one year to the next)
and in the longer-term (across generations),
than all the continental European countries for
which data are available.”
And jobs,
overall, have become no more plentiful in the
business-friendly United States than in the
highly regulated economies of Europe.
The United States, Schmitt and Zipperer
show, “does manage to incorporate more of the
population into jobs” than some European
countries. But other European countries that
reject the American model — Sweden and Norway,
for instance — have higher employment rates than
the United States.
Want to read more? The
Center for Economic and Policy Research has
posted the complete new Schmitt and Zipperer
study — Is the U.S. a Good Model for
Reducing Social Exclusion in Europe? — online
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The
“American model,” as practiced by the Bush White
House, boils down to one simple maxim: Do
everything possible to encourage rich people to
accumulate. The more they accumulate, the more
they'll save. The more they save, the more
dollars will be available for investment. The
more investment, the more jobs, prosperity, and
good times for everybody.
So what
happened to the good times? Why haven't the vast
fortunes accumulated over recent years
translated into prosperity?
One answer:
The rich aren't saving. Instead, notes a
new survey of the economic evidence by
New York Times analyst Anna Bernasek,
they've “been buying such things as high-end
real estate, yachts, and luxury goods like
jewelry.”
Sales of real estate
properties worth at least $3 million, for
instance, have surged 135 percent over the most
recent five-year period tracked. The most recent
data available on sales by luxury retailers
shows a decade of annual increases that have
averaged, even after inflation, 11 percent a
year.
Some business commentators, like
Mark Zandi of Economy.com, believe that younger
rich people today are spending significantly
more lavishly on luxuries than their older
counterparts.
That may be true, note
other economists, but the problem with depending
on rich people lies elsewhere. The basic
problem, these economists contend, remains the
American model's assumption that dollars in rich
people's pockets translate into common-sense,
prosperity-producing investment.
Great
wealth, explains economist Polly Cleveland,
necessarily makes rich people poor investors. A
person with a pile of money will always get a
lower return on investment — and contribute less
to growth — than would a group of middle class
individuals who together invest the same total.
“Why do the rich get lower returns?”
asks Cleveland. “Because their capital is cheap
and their time is valuable. So they invest
carelessly or questionably. Or they can pay a
portion of their returns to brokers or
investment advisors, who may rip them off.”
“That's quite apart from money invested
in tax shelters, which contribute nothing to the
economy,” adds the New York-based economist. “By
contrast, middle class investors place their
money close to home where they can watch it, in
their education, their houses, and their
businesses.”
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