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Where Will President Obama lead American Capitalism? February 23, 2009

Posted by Suzanne Robinson in politics.
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A good review in The Nation of Paul Krugman’s book, The Return, which he recently updated and republished, tells us that he argues now, as he did before the crisis we find ourselves in befell us, that “any financial institution we dare not let fail we also dare not leave unregulated.” And, too, he argues, that the federal government has an obligation to use its powers – to spend and invest – particularly when doing so would promote growth after the free markets of American capitalism have failed us. I wholeheartedly agree.

In reinventing our economic system now that it has fallen apart, it is essential that we infuse American Capitalism with some new values, new priorities. Besides earning a profit and providing us goods and services, our businesses serve us by creating jobs, but they don’t serve us well when they fail to provide jobs that allow us all to sustain ourselves, jobs that build a strong and vibrant working and middle class. Now is the time to lessen the gap between those who are paid very poorly and those who are compensated beyond belief. Ours is not a divine system handed down from above. It was conceived of by man, it is imperfect, and it can be improved on in ways that make our country a more just, more secure, happier and healthier place. Democracy flourishes with a large, stable middle class, our government has an obligation to govern in the interests of all its people, and justice demands we refuse to ask people to work for poverty wages.

We can bring a new balance without asking any with riches to live without all the wealth they require to do as they please while on this earth – and to leave their children multi-millionaires when they depart. Beyond a certain amount, money provides us just power and prestige. But adjusting the wage scale toward fairness doesn’t diminish the power of the very wealthy. They will remain very wealth. And they gain something. By accepting a substantial cut in labor income in the service of others, they gain a proud place in history, with its telling of how they helped bring profound change to an America that had lost its way. How they collectively, while being proud of much they had accomplished in their careers, took responsibility for errors of the past and brought a new day. They could know that their sacrifice — and we would ask them to sacrifice — furthered the cause of equality in a deeply meaningful way. They could help revitalize the economy and the American dream.

I’m not naive. I think the vast majority of the very wealthy will voice strong concern at the idea of losing millions of dollars each year in salaries and bonuses. But, as Abraham Lincoln and Franklin Roosevelt believed and practiced, part of a democratic leader’s responsibility is to educate. A leader must tell and remind the people what they need hear, even when doing so is uncomfortable. And what must now be said is that this system has long failed to meet the needs of many and has now come close to failing all together. The time is right to make some changes. And we have a leader who says that’s what he’s here to do. So, I suggest four measures to redistribute the fruits of our labor and bring more Americans into the fold.

Raise the minimum wage and index it to inflation. As we work to restore our economy, we should revise our economic system to significantly reduce the current astronomical gap between the very rich and the very poor, and bring a new balance to the pay scale of all of us who work between the two extremes. As part of FDR’s New Deal, he imposed a minimum wage intended to prevent poverty among the gainfully employed and to put enough money in worker’s pockets to make them better consumers. But, because he didn’t link it to inflation or any other economic measure, it has remained a political issue and, as a result, has at times paid less and less, for example sitting at $5.15 for a decade until Congress raised it in 2007.

The official poverty line in the United States is $10,400 for a single person, $14,000 for a family of two, and$17,600 for a family of three. And, sadly, according to facts gathered at Wikipedia , the US has a disturbing record on addressing income inequality relative to other developed nations. Here, President Obama promises change. Since the late 1980s the poverty rate has hovered around or around 12.6% – leaving roughly 37 million Americans in poverty. In 2007, when Congress voted to raise the minimum wage from $5.15 to $7.25 an hour over two years, John McCain voted to limit the increase to $6.25 and to do away with overtime pay. President Obama has promised to raise the minimum wage to $9.50 per hour by 2011, index it to inflation, and, of course, to continue to make employers pay hourly employees overtime wages. What a difference an election makes.

Let’s look at a single working mother of two working for minimum wage. Assuming she’s able to work 40 hours every week (many service employees are scheduled to work several hours fewer than the point at which overtime kicks in), she earns $15,080. Tax adjustments, including an Earned Income Tax Credit of $4820, leaves her with $15,760, quite a bit more than she had two years ago. The government approximates that a family of three spends 1/3 of their after tax income on food. So, she will spend $4,525 on food this year. If she pays 1/3 of her take home pay on shelter (1/3 is the average), she spends $5,020. If she pays 40% for shelter, she’ll pay $6,300 (the poor pay a higher percent of their income on shelter). She now has approximately $425 per month to pay for electricity, heating costs, water, childcare, healthcare, gas to get to work, car insurance, maintenance and repairs, sundry items, clothing for their growing kids — and so on. Even now, she struggles and worries every month about how she’s going to juggle. It’s a heavy burden.

If, on top of this, she qualifies for any government assistance, she must go to the welfare office, the food stamp office, the medicaid office and be made to wait, to come back, often to be condescended to, and in the end, maybe to be turned down. What’s infuriating about this is that we aren’t really subsidizing her. The government uses our tax dollars to subsidize companies that make profits by paying poverty wages through the circuitous route of giving ‘entitlements’ to their employees. The burden shouldn’t be on the working mother to jump through demeaning hoops, rather the government might temporarily subsidize small businesses that would be forced to shut their doors if they were held to a duty to pay their employees the increased wage, giving them time to adjust. (Paul Krugman and others have conducted studies indicating that increasing the minimum wage creates, rather than destroys jobs, but my post is already too long, so I will summarize and post it separately. A fee of $5 is required to download the study.)

The increase to $9.25 an hour will lift the working mother of three out of poverty, giving her $19,750 per year. She still has to be careful, and if something goes wrong, she’ll still be in trouble, but she can pay her bills and there’s a lot less stress in her and her children’s lives.

Place wage caps on all employees receiving over $2 million a year. According to information gathered in 2007 Trends in Executive Pay on the AFL/CIO’s website, we have a lot of top executives making a lot of money. In 2006, the CEOs of large businesses, in general, averaged total compensation packages of $10.8 million. This is more than 364 times the average American employee. In 2007, CEOs at Standard & Poor’s 500 companies received total compensation packages averaging $14.2 million. And in 2008, according to a study conducted by the Economic Research Institute and the Wall Street Journal, while corporate earnings increased by just 2.8%, executive compensation grew by 20%.

PBS, on its First Measured Century Project, offers us a look at income trends in two different historical periods, examining six income groups independently. At the Economist’s View, Paul Krugman offers an overview of how these trends connect with different political eras.

1947 — 1978 (Lifting All Boats) 1978 — 2005 (Trickle-Down Economics)

The Bottom 20% +116% The Bottom 20% -1%

The Second 20% +100% The Second 20% -9%

The Middle 20% +111% The Middle 20% +15%

The Forth 20% +114% The Forth 20% +25%

The Top 20% +99% The Top 20% +53%

[7% spread] [54% spread]

The top 5% +86% The top 5% +135%

In the ‘lifting all boats’ period, with a spread of 30%, for 31 years every group made huge gains. But, in the ‘trickle-down economics era, the very wealthy raked in larger gains than the previous period and opened the spread to 136%. While the bottom 40% lost major ground and the next 40% saw some modest to gains over those 27 years, the top 5% cleaned up.

And, as we’re now witnessing, poorly designed executive compensation packages often reward decisions that are “not in the long-term interests of the company, its shareholders and employees.” Recent decisions have not been in the interest, either, of the economic system or of the country. Rather, they have left us devastated. As a result, President Obama is implementing wage caps as part of the bailout. And from these numbers it’s clear that the time to push further to reverse an unjust and unsustainable trend is now. The president should impose wage caps on all employees receiving more than $2 million a year in total annual compensation.

There are indications that President Obama will act. Barney Frank, Chairman of the House Financial Services Committee, told Financial Week earlier this month that Congress will consider legislation to extend curbs on executive pay, which now apply only to executives at those banks receiving ‘extraordinary’ federal assistance, to all financial institutions and, maybe, to all US companies. The current caps apply to a company’s CEO, CFO, and the next three top paid executives. Congressman Frank did not elaborate on the parameters of any newly imposed wage caps, but he did say that they will likely also address golden parachutes in the legislation. He added that the Committee is working on the bill “in consultation with the Obama Administration,” and that he hopes to have a general outline by early April.

Not surprisingly, Timothy Geithner doesn’t want to go so far. He prefers only lowering the tax deduction a company can take for executive pay to $500,000 per executive. The President needs to come out strong here. Limiting tax breaks is insufficient to address the severity of our economic problems. We need responsible regulation, not just adjustments in the tax code.

Wage caps are nothing new. The idea has been applied in corporate settings, it’s just always been applied to low level employees who already earn the least. Among Walmart’s bad practices was their move in 2006 to impose wage caps on all 1.39 million hourly employees, most of whom start at minimum wage, so that even those with seniority could never anticipate a decent paycheck. This while their CEO brought in $17.5 million a year. The government uses pay ranges, that cap the salaries of those in a given classification, leaving promotion being the only means for a raise once you’ve been around a while. Colleges and universities, both public and private, do the same. And sometimes, even some folks with talents that give them a lot of leverage and who make fine money accept wage caps as a means to improve competition. In some sports leagues, here and around the world, wage caps are placed on players so that the richest teams are prevented from signing all the top talent. This makes games more competitive, thus far more interesting, which leads to more fans and thus more revenues across the board. Wage caps may stimulate competition in other fields as well.

Place a targeted tax on all businesses with earnings over X to use to make the schools that teach skills to their employees. The tax rate should be low, we don’t want to punish the companies for making such great profits while being fair to the workforce, maybe 2% or 3%. The film industry, the music industry and others could help finance art programs, while NFL, NBAA, and other athletic associations could help fund sports programs. Both of these are losing funding at awful rates and, this economy, which looks may be with us for a time, will cause more and more children to lose the opportunity to develop their skills. Technology companies, on the other hand could boost learning in math and science. Big lobbying firms, who reportedly are still making huge profits, can support history and civics. You get the picture. Bring the corporate world into funding education as a matter of law. The companies and their executives have benefited from these institutions, and will those who work for them in the future. And tomorrow´s staff will know more and work smarter the better they’ve been taught and the more their learning has been nurtured.

This suggestion, as far as I’m aware, isn’t a part of our national conversation, and it requires more thought, some crunching of numbers. But President Obama is an intelligent man with an intelligent team. That change is complicated doesn’t make it unattainable.

Require long term able non-workers who depend on government assistance to work for it. There are many tasks government needs to have done, especially those states who are being forced to lay off workers due to budget shortfalls. And those receiving our tax dollars and who are able but not participating in the economy should be required to give something back. And what they have is their labor. We should raise the level of general assistance and require able recipients to work 20 hours a week. We can conceive new public works projects – some could provide data entry to help to digitize healthcare data, a measure that the president says will save millions of dollars and save lives. Moreover, the long-term unemployed out of their isolation, helping them build self-confidence through accomplishment, and teaching them on the job skills are great ways to bring them into the labor market, especially if work pays a living wage.

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