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What next, after outrage?COMMENTARY | March 84, 2009Top U.S. executives at the largest companies typically earn about 400 times as much as their average workers—and despite the economic meltdown, many of them still feel entitled. That’s outrageous, Martin Lobel writes, but few have questioned it until now, and it’s the press’s job to report how we got here and what needs to be done to prevent further meltdowns. By Martin Lobel The media need to put the public outrage over the AIG bonuses in perspective if we are ever to reform our economic system. For more than 40 years there has been a massive shift of income from the middle class to the top one tenth of one percent of Americans. Much of that income came in the form of compensation to top executives and individuals involved in finance. No one seemed to question whether top U.S. executives were worth about 400 times the median income of their employees while British executives were only worth about 40 times the median income of their employees. There was a total failure of the boards of these companies to protect the interest of the shareholders, as opposed to management. The boards consisted by and large of those who “understood” the needs of management because they had been appointed by management. The shareholders, even the largest pension funds, either could not or would not intervene. It is no accident that we didn’t see the really risky behavior on Wall Street when the investment banks were partnerships and management had to risk their own money. Along with this huge shift of funds came a sense of entitlement. How else can you explain the belief that an individual who ran the unit that caused the downfall of AIG was “entitled” to a one-million-dollar a month consulting fee after he was forced out? Or to take an earlier example, how else can you explain the behavior of the heads of the big three automakers who climbed out of their private jets, tin cups in hand, to ask Congress for $25 billion without any plan of how it would be used? Indeed, this sense of entitlement was fostered by the government because management regularly got the government to protect them from competition and to fund their needs with subsidies or tax breaks. Apparently this sense of entitlement still exists among those running our companies even though they are dependent on taxpayer dollars to survive. But, while President Obama understands that we are going to have to reform our economic system so that capitalism can thrive again, his message is getting muddled. The media need to take a step back from the day-to-day crises and explain why the system has to change. We need more responsive corporate management. We need to close totally unregulated markets that provide enormous compensation to management but put our economy at risk. We need to make sure that capitalism has the required transparency, accurate information and a policeman on the beat it needs to work efficiently. We also need to recognize that we can no longer live beyond our means as individuals and as a nation. This means that we must reform our tax code by simplifying it and making it fairer. We can no longer allow hedge fund managers to treat Greenwich Connecticut as part of the Cayman Islands and pretend that their income is earned abroad and tax it only when brought back to the United States and only at a 15 percent rate. Nor should we continue to put our domestic companies at a disadvantage by allowing the multinational corporations to shelter their income from taxation by allocating it to foreign tax havens. Indeed, we probably should tax income from investments at the rate as income from labor. These reforms need to be done while the public outrage is focused on the kind of abuses that people can understand. If not, the huge sums of money that are available to blanket the political system to benefit short-term interests will prevent needed long-term reforms. The obstructionism and economic illiteracy of the Republican leadership is likely to contribute to a showdown which will result in the imposition of measures that impose unnecessary constraints on capitalism. Rather than work towards some solutions that are clearly needed, the Republican leadership has staked its future on the belief that Obama’s economic policy will not have shown enough improvement by midterm elections so that the public will vote Republican. They may be right, because of the depth of the economic hole Bush left him in. Unless, of course, reporters and editors do their job and explain how we got here and what needs to be done to prevent further meltdowns.
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