The total compensation this year for the president of General Motors is a bit more than $14 million. A woman working on the assembly line in a GM plant making $20 an hour would have to work for 350 years to earn as much as the president of GM makes in one year.
There is another large American organization with three times as many employees as General Motors. It has headquarters in the United States but branches all over the world. It is widely considered the most efficient organization in its line of work in the world. The man or woman who heads up this organization makes about four times as much as a man or woman working in a position analogous to that of an assembly line worker in GM. Four times, not 350 times.
I am, of course, referring to the United States Army.
Just saying…
40 comments:
$14 million may be her after taxes salary. (Is the highest tax bracket that high? I doubt it.)
But her gross salary, according to news reports, is $29 million.... which she is VERY defensive about in news interviews.
But professor Wolff's basic point remains. The disparity is disgusting.
In 1950 the differential was ~10 - 1 for the military while it's ~8 - 1 today (hard to calculate because of allowances and perks - the life of an O-10 is way different then the lot of an E-3 and retirement is another world).
In 1950 the CEO to worker differential was ~20 - 1, unions were way stronger, anti-trust was taken seriously, the top marginal rate was 90% (kicked in at $400k for joint filers = ~$5M in 2023), the financial sector was ~3% of the economy (currently ~9%), and folks remembered Hoover and Mellon.
Capital never accepted the New Deal and never gave up so here we are.
I see that my argument that used private equity to show that public company CEOs are actually underpaid didn't sway anyone. So time to bring out the big guns. You can't compare incomes because money has diminishing marginal utility. You need to compare utility of incomes. A couple of economists make the case:
What's all this got to do with CEO pay? Maybe absolutely nothing. Everything that follows is purely speculation on my part. I have no evidence to support either of these hypotheses.
But I've sometimes wondered, in my own life, whether I should try for a higher-paying job. Even if I had the ability to do the job, would I really want it? I've got a very good job already, with good salary. My marginal utility of consumption diminishes rapidly. Sure, I would prefer having an Aston Martin or Lotus to an MX6, but not by that much. Would it really be worth the extra hours and hassle? The faster my marginal utility of consumption diminishes, the more money you would have to pay me to get me to volunteer. As I got richer and approached satiation, It would take an offer of all the supercars in the world to get me to volunteer for a job I didn't want to do. —Nick Rowe (retired Professor of Economics at Carleton University)
source: Soldiers of fortune, department chairs, and CEO pay
For this story (and probably other stories) to seem plausible to me, you have to invoke diminishing marginal utility to rewards. That is, the reason that I can’t just offer a bonus to my chief marketing officer to get him to perform is that he has diminishing marginal utility of income. So I have to offer a huge marginal bonus. Any way I do that is going to spread the income distribution. But one way to offer a huge marginal bonus is to say that good performance increases the probability of getting promoted to CEO and being vastly overpaid in that position.
So one of the factors in the widening income distribution is diminishing marginal utility of rewards at the top. In income terms, the high pay is unbelievably high. In marginal utility terms, the additional income is not worth so much. —Arnold Kling (Economist and scholar)
source: Trends in Relative Earnings
Prof Wolff, you've praised the US military for efficiency multiple times in recent months. But the claim that the military is efficient sounds like Department of Defense propaganda. How are you defining efficiency?
DOD has failed five consecutive audits. They cannot [refuse to] account for 60% of their assets (and that's just the on-the-books accounts).
And while the uniformed officers of the Dept of Defense are paid much lower salaries than private-sector executives, much of the defense budget is used to buy weapons and services from the private sector.
Military contractors overcharge the Pentagon on almost everything the Department of Defense buys each year, experts told 60 Minutes over the course of a six-month investigation into price gouging.
In March, Deputy Defense Secretary Kathleen Hicks announced the largest Pentagon budget ever: $842 billion. Almost half will go to defense contractors....
In the competitive environment before the companies consolidated, a shoulder-fired stinger missile cost $25,000 in 1991. With Raytheon, Assad's former employer, now the sole supplier, it costs more than $400,000 to replace each missile sent to Ukraine. Even accounting for inflation and some improvements, that's a seven-fold increase.
"For many of these weapons that are being sent over to Ukraine right now, there's only one supplier. And the companies know it," Assad [Defense Dept top contract negotiator, now retired] said....
A Pentagon study released last month found major contractors flush with "cash beyond their needs for operations or investment." They have tens of billions of excess cash from Pentagon business to hand out to shareholders.
CEOs of major defense contractors are each paid on the order of $25 million per year in total compensation. Talk about mystification. If you're just looking at Pentagon salaries, you're missing the big picture. Especially when the top officers know that there is a potential life working directly for defense contractors after they retire from active service in uniform, if they play their cards right.
Sure, money has a diminishing marginal utility.
In terms of lifestyle, it doesn't matter much if you're Bill Gates or Elon Musk.
However, the difference between making 20 dollars an hour and 25 million dollars a year, as outlined above, is the difference between sending you kids to the dentist or not, etc.
Sometimes your neoliberal economics, Ahmed Fares, border on the obscene.
s. wallerstein,
That's a different issue, but there's a problem there too:
What If the Compensation for All S&P 500 CEOs Were Confiscated and Redistributed to Rank-and-file Workers?
It's a wage increase of about 3 cents an hour. Sorry, the kids are still not going to the dentist.
It's not that I'm heartless. It's that some of us have done the math on this.
Fares,
The point isn't that CEO pay explains why so many workers are poorly off. The point is that the disparity between CEO pay and worker pay is emblematic of an economic system in which those at the top harbor obscene wealth while many workers struggle to achieve a decent standard of living.
AF, a world in which CEOs were limited to the 1950s 20X then the rest of the C suiters would also see 20X minus. In that world we would have more efficient marginal rates and way less profits diverted into buy backs so way more bucks for the good things we are currently denied.
BTW, limiting matters to S&P 500 and CEO pay is a red herring in that there's way more opportunity out there, e.g. an acquaintance recently died. He was a dentist with a regular practice. His estate just barely broke into nine figures. Consider also things like carried interest, private equity, and all those auto dealerships.
Eric, the U.S. military is very good at its core function - breaking things and killing people. On one hand Sherman and Grant, Jay Cooke on the other. Truman made his bones dealing with profiteering and corruption in war production. Its always been good to have stars.
The U.S. has a Gini coefficient of 41.1.
Germany has one of 28.8 and Denmark of 27.7. Both Germany and Denmark are prosperous capitalist economies, but the level of inequality, as measured by the Gini coefficient, is much lower.
I have a good friend who lives in Germany. His daughter attends the university for free and he and his wife have free medical care in their old age. I bet that all kids in Germany see a dentist when they need to and that does not occur in the U.S.A.
s. wallerstein,
The inequality in the US comes from taxing the rich. Because the rich have a low marginal propensity to consume, the extra government spending shows up as inflation, which causes the Fed to raise interest rates to constrain consumption. The higher interest rates increase the flow rate of interest payments, dividends, etc., to the rich, which returns to them the money that was taken away from them in taxes, which widens inequality. Because monetary policy is a stealth tax on the poor, a tax on the rich is actually a tax on the poor.
To reduce inequality, you need to tax the middle class.
I do see the view, from a standpoint of abstract cosmic justice, that it’s annoying to see someone like Elon Musk or Jeff Bezos get so rich without contributing more to the Treasury. So there is a case for taxing wealth or unrealized capital gains or at a minimum changing the stepped-up basis rule. But fundamentally, I do think there are profound reasons why things like VAT and payroll taxes are the workhorses of European welfare states. Musk is not employing 10,000 butlers who can be taxed away and turned into preschool teachers. Inducing him to liquidate financial assets and fork over the proceeds does not generate any real resources that are available for new use. What a Nordic-style tax system does is broadly constrain consumption in order to free up resources for more extensive consumption of health, education, and other social goods. —Matthew Yglesias
It's about resources, not money.
Here in Canada, the Gini coefficient is 0.29 which is in line with those European countries. We have a Goods and Services Tax (GST) which is equivalent to a VAT. The US needs a VAT and increased payroll taxes.
"... and increased payroll taxes."
Indeed and we should start by removing the cap which currently kicks in at $160,200 of ones income. BTW, in the U.S. there are serious taxes that are quite regressive and hit the middle and lower classes - e.g. sales taxes.
s.w., may be of interest:
https://www.ft.com/content/f16b3624-d811-4479-8e90-8cf6cad1334c
aaall,
Thanks. The article is behind a paywall, but the subject of the commemoration of the 50th anniversary of the coup has been the main topic of public discussion for over a month now here.
Wounds do not heal. Political divisions are very deep and one discovers that they are deeper in oneself than one imagined.
There's been a lot of new information in the media about the Allende years and about the process leading up to the coup. The attitude of the right has come of the closet: I'm not sure if that is positive or negative.
I've perceived that although there is a lot of hatred motivating the left, it is in no way comparable to the hatred that motivates the right.
While it's true that consumption taxes are regressive, we protect the poor from them in Canada because basics like food, medicine, etc. are zero-rated. We also send them rebates that offset the taxes we didn't exempt them from.
As for payroll taxes, they only kick in after a certain threshold is reached.
Aaall, if military efficiency is defined in conventional terms of costs to perform tasks ("breaking things and killing people"), the US military doesn't seem very efficient because the costs are astronomical.
Ahmed Fares,
You write: "Inequality in the U.S. comes from taxing the rich." No it does not: the rich in the U.S. are under-taxed compared to the rich in most other developed countries.
Also, the Fed does not raise interest rates to "constrain consumption." The Fed only cares about consumption if it contributes to significantly higher inflation, which consumption only does when the inflation is the traditional "demand-pull" variety (too much money chasing too few goods and services). And inflation is often, as it is currently, a bit more complex than that.
The Fed kept interest rates basically at zero coming out of the last financial crisis and until relatively recently. It's been raising them lately in an effort to control inflation; it's a fairly blunt tool but it's what the Fed has.
I don't quarrel with taxing the middle class, but the rich should be taxed too. As for Yglesias in the quoted passage, he wants to maintain a distinction betw. money and resources that doesn't make a great deal of sense. On the one hand, he says that taxing wealth won't free up new resources (why not?) but reducing middle-class consumption will free up new resources. This is a weird statement because in both cases what is being "freed up" is money that the govt can then use (one hopes in constructive ways, though alas that's not at all a foregone conclusion).
LFC,
You should tax the rich to limit their political power and then throw the money away. The problem comes from trying to spend that money, which, as I explained, boomerangs back to them through monetary policy.
The Man Who Can’t Be Taxed
Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.
Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.
Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.
Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?
You can try to tax him, but any attempt to tax him turns into a tax-in-disguise on somebody else. And the reason for this is not ultimately to be found in the laws of economics; it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero. —Economist Steven Landsburg
source: The Man Who Can’t Be Taxed
AF, K does in fact consume all sorts of goods, public and private. When several million dollars of art and antiques were stolen from his home in the Presidio Heights (read $$$$$) section of San Francisco, the police aided the recovery and the DA prosecuted the culprits. The fire dept. was there should it be needed. Then there are streets, trash, water. I'm sure his PG&E bill was impressive. Besides food and other necessities folks like him have others that do the mundane things of life. Anyway there was some discussion on this example back in the day:
https://archive.nytimes.com/krugman.blogs.nytimes.com/2011/04/21/what-are-taxes-for/
IMO Krugman, DeLong, and Smith have the correct views on this somewhat wacky concept. All three are linked above.
Using how Canada does things as a counter-example is rather inapt when dealing with how taxes work in the U.S.
Ahmed Fares,
Your "explanation" depends on the assumption that the govt spends the money taxed from the rich and that this spending contributes to inflation. It need not do so, however. A lot depends on how and under what macro-economic circumstances the money is spent.
Hell, a govt might even, hypothetically, decide to spend a portion of the money to reduce the deficit that fiscal conservatives profess to be so concerned about. That wouldn't increase inflation, hence wouldn't result in higher interest rates, and hence no "boomerang." Or the govt cd increase certain transfers, e.g. in the form of extending the child tax credit. Same result: no "boomerang."
If the economy worked like Newton's laws of physics, a proposition that the tone of your comments suggests you believe is true, then there would be no disagreement among professional economists about anything. However, economists do frequently disagree; hence, the economy does not work like Newton's laws of physics; hence, the supremely self-confident tone of your comments is unwarranted.
The notion that only you and certain commenters whom you favor are in possession of The Truth about economics and economic policy, and that everyone else wallows in ignorance and bias, is a notion that I am inclined to reject.
See next box for my comment on Steven Landsburg.
According to the quote from Steven Landsburg that you provide, specifically the second-to-last paragraph, when the government spends money it always "consumes more goods."
This statement is false. Let's say, for example, the government decides to spend more money by hiring more IRS agents, or more FBI agents, or more border patrol agents, or decides to increase the staff of the Federal Reserve, just hypothetically.
In all these cases the government is spending more money. What additional "goods" is it "consuming"? Almost zero. It might have to buy a little more food for government cafeterias, that's about it. Would the govt be consuming additional services? Possibly. But services and goods are not the same.
Landsburg's confusion, or one of his misconceptions, seems to be his belief that govt spending must involve the consumption of additional goods and services. No, not necessarily. Anyway, Kendrick does consume, as aaall notes. If Kendrick didn't consume, he'd starve to death. So when the govt raises taxes on Kendrick, what consumption of his might it reduce? Might he decide to buy fewer bottles of expensive wine? Maybe.
This idea that the ultra-rich don't consume is weird. Bezos has an enormous yacht somewhere in Europe, I believe. When he invites guests for a cruise, you don't think he orders something on board for them to eat and drink? Last I checked, that's called consumption.
LFC,
It's the spending of the agents that the government hires that increase consumption in the economy.
As for the rich, they have a low average and marginal propensity to consume. When talking about increasing taxes on them, it's the marginal propensity to consume that you look at. It's around and about zero.
LFC,
The notion that only you and certain commenters whom you favor are in possession of The Truth about economics and economic policy, and that everyone else wallows in ignorance and bias, is a notion that I am inclined to reject.
It's possible that I'm wrong, except when I use accounting identities, in which case I am absolutely 100% right. That's because identities are incontestable.
Macroeconomists often start their analysis from an accounting identity or set of identities. Since identities are true by definition, they can provide a good framework for analysis, including a way to detect any errors in logic or inconsistent conclusions. A theory that conforms to an identity is not necessarily correct but is at least potentially correct. To constitute a theory, though, it is necessary to do more than just invoke identities. This is because identities in themselves tell us nothing about causation.
Once we begin to make behavioral assumptions, the ground becomes contestable. Identities are incontestable, at least if we accept the principles of double-entry book keeping, whereas behavioral assumptions are not. —heteconomist (Peter Cooper, BEc PhD)
Why, just the other day, I used accounting identities to show that Profits equal Investment and that the profit share for the economy as a whole had absolutely nothing to do with worker bargaining power.
I also tried to show the same thing with statistics. The statistics could however be wrong. Sometimes, there's a measurement problem, etc.
But accounting identities are never wrong, which is why I always start there.
Just speaking for myself...
I find Ahmed Fares's Reaganite ramblings about zombie economics much more annoying than anything Marc Susselman ever said on this site.
David Zimmerman,
The central issue isn't which of them I find more annoying and in any case, that varies according to my moods and scores of other factors.
I don't believe that either of them should be excluded from these conversations.
To SW:
I agree... It was not a post about exclusion... but about annoyance.
I am allowed to be annoyed and to say so....Please don't cancel me, world.
David Zimmerman,
That's cool.
@ Ahmed Fares
CEOs work for status not marginal utility
I am in sympathy with those who find a certain commenter a bit annoying. But unlike DZ, for one, I find this particular annoyance less annoying than the previous one who just couldn't stop vilifying those he disagreed with even while he turned every conversation into one about himself and his concerns. Therefore, unlike sw I think there was good reason to block the former bad guy while tolerating this new bad guy.
To anon. @ 10:52:
I am not for banning anyone.... though that decision is solely up to Professor Wolff, and I would not presume to question his decisions in this matter.
I was just expressing my extreme annoyance at the spewing of ridiculous ideas about economics on this site....
Anonymous,
CEOs work for status not marginal utility
The two are not mutually exclusive. We know this because headhunters poach CEOs all the time by offering them higher pay. It's nice to have the status AND the higher pay.
There are two not unrelated questions: one, inequality of wealth and two, social cohesion. I'd bet that we're less unequal than the middle ages yet I'm not sure they had less cohesion than we do, though of course how would that be measured?
Yes Ahmed they are hard to tease apart.
But we are getting into psychology. It is what money means to them, which is a way to keep score, which is status- therefore I say it's not what money does for them, and I know people in that level of wealth, but what it means- conspicuous earning you might say
I love Professor Wolff's exploration of Marx. Very thought-provoking!
I studied Marx in college in the 1980s--my college professor put this quote from Das Kapital on the blackboard every class.
"Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks. The time during which the labourer works, is the time during which the capitalist consumes the labour-power he has purchased of him" (Marx, Capital, vol.1 chapter 10).
Fergus,
What did your college professor suggest as an alternative? Collective ownership of the means of production?
The kibbutz has long been celebrated as the one experiment that shows that socialism can indeed be successful. Well, not quite. As one member admitted, his kibbutz was "paradise for parasites" (p. 333). Another said, "People like me who started as socialists concluded that you can work hard and get nothing while others don't work hard. It is so unfair." This could be overlooked, another individual explained, because of "the pride people took in being kibbutzniks" (p. 334), the sense that they were, in Muravchik's words, "rebuilding a country, rescuing a people" (p. 337). But only for so long.
The kibbutzim have gradually but systematically abandoned socialist practices as the price of keeping people—especially the best and most economically productive people—from abandoning the kibbutz. Thus, children moved back in with their parents; meals were taken in private homes; wages for work were adjusted according to skill and performance. The Israeli government stepped in with loans and subsidies if needed. Now, even privatization of communal assets (titles to dwellings, shares in the enterprises) is on the table!
"Only once" in history, Muravchik writes, "did democratic socialists manage to create socialism. That was the kibbutz. And after they had experienced it, they chose democratically to abolish it" (p. 344).
source: The Parasites' Paradise
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