The power of the 1%

Simon asks why there's so little outrage about the high incomes of the top 1%. Let me deepen this question.

I suspect that one reason is that people don't see top incomes as affecting them; they don't look at Euan Sutherland's pay and think "that's coming out of my pocket".

But this lack of reaction is contestable. It's quite possible that we would be better off if the top 1% were less well-paid.

Simple maths tells us that if the income share of the top 1% could be reduced from its current 12.9% to 9.9 per cent - its level in 1992 - then the incomes of the 99% would rise 3.4%, equivalent to a gain of £72 per month for someone on £25,000 a year.

Of course, this calculation only makes sense if we assume such redistribution could occur without reducing aggregate incomes. But such an assumption is at least plausible. The idea that massive pay for the 1% has improved economic performance is - to say the least - dubious. For example, in the last 20 years - a time of a rising share for the top 1% - real GDP growth has averaged 2.3% a year. That's indistinguishable from the 2.2% seen in the previous 20 years - a period which encompassed two oil shocks, three recessions, poisonous industrial relations, high inflation and macroeconomic mismanagement - and less than we had in the more egalitarian 50s and 60s.

What's more, there are reasons to suppose that the disease of which high top pay is a symptom - the managerialist ideology which empowers CEOs to enrich themselves - is bad for the economy:

 - It encourages short-termism, as managers try to deliver financial results to justify their high pay at the expense of long-term investment and research.

 - CEOs who think of themselves as heroic leaders can become emboldened to take reckless decisions, especially if they refuse to countenance criticism and so, in Ken Boulding's phrase (pdf), end up "operating in purely imaginary worlds.“ Fred Goodwin's disastrous takeover of ABN Amro wasn't an idiosyncratic failure, but rather the result of the cult of narcissistic bosses.

 - Leader-dominated organizations can demotivate junior staff who look to the top for guidance rather than solve problems themselves. This problem can be exacerbated because staff in top-down organizations are often insufficiently well supervised and thus prone to skiving and thieving. There's reasonable evidence that organizations which empower workers (pdf) are more productive than those that don't.

It's a reasonable hypothesis, then, that the power of the 1% is bad for the economy.

However, in popular discourse, this hypothesis is not so much explictly rejected as not even considered, whereas the idea that immigration is bad for the economy is widely accepted even though it's wrong.

What can explain this? Simon blames the media.  But I'm not sure this is the whole story.

For one thing, there has been cross-party support for the 1%. New Labour rarely saw a boss it didn't cringe towards, and social democrats main gripe with power has long tended to be not that it is too concentrated but that it just happens to be in the wrong hands. And for another, we shouldn't write off false consciousness: cognitive biases can indeed help to sustain inequality.

Whatever the cause, the fact is that the lack of outrage about CEO rip-offs is itself evidence of the great power they have - the power to keep some debates off the agenda. As Steven Lukes wrote:

Is it not the supreme and most insidious use of power to prevent people, to whatever degree, from having grievances by shaping their perceptions, cognitions and preferences in such a way that they accept their role in the existing order of things, either because they can see or imagine no alternative to it, or because they see it as natural and unchangeable? (Power: A Radical View, p28)

Comments

[Socialism In One Bedroom]

When I have argued this point with people they have argued that if we taxed the rich more or brought in policies that curbed their power they would simply up sticks and move elsewhere, to a place that pandered to their every whim. So globalisation is a factor.

What this says about democracy god only knows!

Another factor is the media, because this system is built on the ideology that those at the top are simply better than the rest of us and that without them we would still be hunter/gatherers or some crap like that.

[Left Outside]

Increased turnover from dealing with bosses might also have an effect. I'm sure its been a problem plenty of places I've worked.

[TickyW]

Yeah, spot on.

Gillian Taitt says something similar to Lukes when she remarked that control of cognitive maps is a power device (not a verbatim citation but close enough, I hope).

Simon Wren-Lewis has also observed that pre-tax incomes have soared as top tax rates have been slashed. Correlation is not causation, we know, but the effect of larger post-tax incomes as a result of top rate tax cuts is likely to have incentivised those who can to award themselves higher pre-tax incomes.

[Stuart]

I think you're confusing income with pay. Surely most of the 1%'s wealth comes from equity and asset growth, not wages?

[Rev. Spooner]

You say: "Simple maths tells us that if the income share of the top 1% could be reduced from its current 12.9% to 9.9 per cent - its level in 1992 - then the incomes of the 99% would rise 3.4%, equivalent to a gain of £72 per month for someone on £25,000 a year."

But this requires that the amount of income available for the population is zero sum, whihc it obviously isn't. People add value ebery day by e.g. inventing smartphones, staring businesses etc - so the assertion is flawed.

[Rev. Spooner]

The Rev can't type properly - sorry about that:

"every day"... "starting businesses"... etc

[Keith]

I often wonder if most people are really brainwashed to adore the super rich or if this is just a trait of the political class and civil servants? The professional political class and civil service seems to have lost any self confidence that they can do good and want to hand over responsibility to profit making firms. Partly so they can tap them for money and jobs.

I have never encountered much enthusiasm for rich bods from ordinary people, who mainly seem to be apathetic.

[joe]

High pay disincentives.

An example was the building of the Thames Barrier in the late 70s. To avoid crippling strikes the GLC insisted that the site was to be 100% Union and pay was to be doubled so that the men were happy. They were very happy - they worked one week then took the next week off. They had to shorten their hours each week to get them to come in each week. That meant the job took even longer. If you want people to work harder, pay them less but look after their other interests (safety, training, pensions)well and reward with a 10% bonus at Christmas.

My wife's friends sons both worked as traders in the city. They got the cocaine habit. One ended up committed with schizophrenia, the other jumped off a railway bridge. Their employer meanwhile continued to pay them huge salaries that just fed their habit. They were in no fit state to actually do anything sensible at any stage.

Another is the huge disincentive it is to staff at the bottom who would need to work 300 years to have the rewards the CEO takes in a year. They see no way to bridge the gap, so become disengaged, spending the day on Facebook etc. No one cares.

I think the public believe they actually have super talented people who "make" money, say, in the City. "else they wouldn't pay them that money would they?". However, 85% of traders lose the bank's money each year. 80% of trading is by computer algorithm so why pay traders to push the buttons? Taleb showed that a monkey could trade profitably for 5 years purely by random chance. That monkey is promoted - his co-monkeys are sacked. The CEOs are happy to keep the myth going as their own salaries and bonuses are linked. As long as the poor old shareholder continues to pick up the tab they could not care less.

[Hoover]

Why are you measuring the perfoormance of the 1% by GDP?

[DJK]

The 1% are the owners of capital, whose income comes from the profit share of the economy. CEOs, whilst often obscenely overpaid, are simply hired hands whose income comes from the wage share.

Sorry Chris, agree with your conclusions but you're constructing a false arguement to reach them.

[chris]

@ Stuart, DJK - yes, the 1%'s income includes many things other than CEO pay; I was using that only as a rough & ready calculation to back up the idea that top pay might be taken out of the pockets of the 99%. My more important point is that the power of CEOs might well be economically damaging. I wasn't using GDP as a decisive measure of this, merely suggesting some mechanisms through which it could be so.
For the purposes of this post, the point is not that these arguments are correct (though I suspect they are). The point is rather that this issue is largely neglected whilst the much weaker claim that immigration hurts the economy is widely accepted even though it's false. This is surely evidence that debate is warped by ideology.

[cfaman]

The redistribution you propose would have an even greater effect on aggregate wealth.

The reason is that the untaxed income of the 1% sits in securities at face value.

Some of the same dollars circulating in the economy would become the yield on some capital assets out there, including intangible ones we usually overlook, and the cap rate on that flow could be 15 times or so.

Thus it is quite possible we would be very much wealthier if such a redistribution happened.

[jonny bakho]

The wealthy control the media and the substantial outrage that exists is not reported unless it is misdirected to immigrants or directed against government in general. Occupy Wall Street was outrage. Many more support the agenda who are too busy working to participate. Plus OWS had poor organization and little leadership. They were up against the guantlet of media disinformation and the media is controlled by wealthy special interests. OWS was unlikely to accomplish much with the wealthy special interests controlling the power. Even Obama appointed Republican Wall Street interests to run economic policy from Treasury and the Fed.

Congress polls abysmally low. Congress ignores issues that poll well with the voters. There is majority support for raising the MinWage, expanding Social Security and Expanding Medicare. You need to ask why the MSM is ignoring these issues and not asking those blocking these initiatives to defend their position. Congress is controlled by wealthy special interests. The wealthy can shift campaign donations to torpedo a candidate in the primary who does not vote with the special interests against the public. They use their money to buy lockstep votes against the wishes of the public. They public wants money out of politics and hates negative ads, but the Supreme Court intervened to allow the wealthy to flood the media with paid messages.

The correct question is not, Why is there so little outrage? but Why is existing outrage not reported?

[Dan]

This whole topic is so poorly defined. Beginning with the word equality.
The issue is one of fairness, not of equality.
No one expects equality, people do expect a crude approximation of fairness.
The problem with the current system is not that we have the 1% - won't we always have the 1%... - but that the further you get from the top the less fair the system is for you.
And the examples are ridiculous - who cares if some dude makes a ton of money? we only care if we have the similar opportunity. and as a simple matter of fact, Horatio Alger is long dead.
Its also confused because people who are very successful look around and say, well what's the problem I worked hard and made it.
Well to the successful people - you fools, you aren't part of the 1% - but your hard work and industriousness makes the 1% a lot of money...

[Eddy]

'However, 85% of traders lose the bank's money each year.'
Citation please.

[An Alien Visitor (Resistance is futile)]

“The issue is one of fairness, not of equality.”

I disagree

“No one expects equality, people do expect a crude approximation of fairness.”

I disagree

“The problem with the current system is not that we have the 1% - won't we always have the 1%”

I disagree

“but that the further you get from the top the less fair the system is for you.”

I disagree

“And the examples are ridiculous - who cares if some dude makes a ton of money? we only care if we have the similar opportunity. and as a simple matter of fact, Horatio Alger is long dead.”

I disagree

“Its also confused because people who are very successful look around and say, well what's the problem I worked hard and made it. “

I disagree up to a point

“Well to the successful people - you fools, you aren't part of the 1% - but your hard work and industriousness makes the 1% a lot of money”

I disagree up to a point

[Andrew]

You seem to regard ideology as causative:

"What's more, there are reasons to suppose that the disease of which high top pay is a symptom - the managerialist ideology which empowers CEOs to enrich themselves"

Again we have an "ism" identified as a root cause rather than a description of a state of social affairs.

This is natural for someone who appears to believe that the adoption of a new system of ideology is a solution to some of society's problems, but gives little idea of how such ideology became prevalent.

I doubt that ideology such as managerialism has a causative role here, and suspect it follows, as post-hoc justification, after the structural causes of high pay have worked their magic.

[djb]

"this calculation only makes sense if we assume such redistribution could occur without reducing aggregate incomes"

god, its amazing how economists have completely forgotten Keynes if they ever knew it at all

aggregate income equals investment plus consumption

consumption is increased when people with the income spend a larger percentage of it

this is accomplished by investment in the macro sense where a percentage of the money supply goes from a low multiplier place (think rich people) to a high multiplier place think poor and middle class

so yea its possible

[greg]

Great income disparity leads to high unemployment. I make the calculation in:

http://anamecon.blogspot.com/2011/09/unemployment-average-wage-and.html

The figures are for the US, where the 1% enjoy a much greater share of national income, now about 23%. I estimate a reduction in income share of the top 1% to about 15% will lead to full employment.

[theyenguy]

Wealth inequality was by the express design and purpose of God, and came through the hand of Jesus Christ driving the creature from Jekyll Island to its achieve its maximum credit intervention to drive up stock market values and reward shrewd executives