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What’s the reason for the growing chasm in wealth and income?

ASK THIS | September 14, 2005

Some blame globalization but Henry Banta doesn’t buy that and points instead to the spectacular gains of corporate managers whose annual incomes exceed the budgets of some countries.

Q. Why are American corporate managers compensated far more than their foreign rivals?


By Henry Banta



By now, most everyone who reads a newspaper knows that the chasm in wealth and income has widened over the last three decades. That, for example, the top 0.01 percent of Americans have seen their income—averaging $10.8

million in 2002—increase four fold. That the overwhelming majority of Americans—all of us who live above the poverty line but below the top 10 percent—have seen our incomes stagnate.


But why? That’s a question that goes to the heart of our economic and political system.


The debate on how the super rich got that way could get really ugly. (Robber barons; class warfare, etc.) All that makes it important that we dispose of the silly and frivolous arguments so we can get it to a serious level quickly.


One popular notion in particular deserves a really quick death. Conventional wisdom blames, at least in part, globalization. Even as sophisticated an observer as Steven Rattner (Business Week, August 8, 2005) can slip into this trap. But as an explanation, it doesn't work – not even in part.


Whatever effect globalization may have had on the American economy, it did not cause the shift of income to the top. Beyond question, low wages in countries such as India and China are squeezing the wages of American workers. The flight of manufacturing to low wage countries has caused us to lose high paying jobs. But how could it have caused the shift of income to the top 0.01 percent? Cheap overseas labor squeezed lower income and even middle income wages, but how could it cause the shift of income to the top?


The evidence in the key economic studies suggests that this shift in income is not so much a matter of return on "old" money investments as it is the result of the spectacular increases in corporate management compensation. Perhaps this should not surprise us.


Stories about corporate executives being paid amounts that exceed budgets of small nations have become so common that they cease to shock. According to Forbes (April 21, 2005), last year (not a notably good year) the top management of the 500 biggest companies increased their take by 54 percent. It appears that the compensation of corporate management has become the key factor in the growing inequality of income in America


But where is the role of globalization in this? Granted, our major corporations now operate in a global environment but why must that increase management's take? If globalization so relentlessly squeezes the wages of workers, why does it not do the same to the top management? If it forces the end of pension funds and health care benefits, downsizing, and outsourcing, why is top management exempt from the pain? Is it possible that globalization has simply provided not only an excuse but an opportunity for overreaching?


How are we to deal with the evidence that American managers are far better compensated than their foreign rivals? Certainly we are not asked to believe that our management compensation reflects what is necessary to keep it from going abroad. Are we to believe that GE was so generous to Jack Welch out of fear that China might hire him away? What sinister foreign threats did the Disney board see? The truth is that while global competition may explain low wages at the bottom, it does not come close to explaining the shift to the top. 

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