Friday 19 Jul 2019 | 18:55 | SYDNEY
Friday 19 Jul 2019 | 18:55 | SYDNEY

The rise of the oligarchs


Stephen Grenville

14 November 2011 14:57

It's been well known for decades that incomes of less-skilled workers in advanced countries have been squeezed by globalisation (they now have to compete with Chinese workers) and technology (their jobs are increasingly done by machines/computers).

In the US, hourly earnings of those who did not finish high school have fallen by one-fifth over the past three decades and those in the lowest quintile of the income distribution have had almost no increase in their after-tax income.

But something else has happened, captured in the data of a recently-released US Congressional Budget Office Report, which Paul Krugman calls the 'rise of the oligarchs'. Between 1997 and 2007 the top 1 per cent of the income distribution have taken their share of total income from 8 per cent to 17 per cent. Within this group, the top 0.1 per cent have raised their share even more sharply.

This shift does not simply reflect the rewards of education and experience: the next 20 per cent of the income distribution (which roughly corresponds to the well-off, highly-educated upper-middle class) have just managed to maintain their share of total income. Rather, top corporate executives and finance-sector workers who get bonuses have all done prodigiously well. The average CEO remuneration of the seven major US banks rose ten-fold between 1987 and 2007, going from 100 times average household income to 500 times.

This outcome might be rationalised as an appropriate reward for leading the economy in a period of good performance. But the immediate post-WWII decades had even stronger growth, while income distribution became more equal. And the bank CEOs who led their institutions into the 2008 global financial crisis don't deserve this largesse.

What has this got to do with economic policy? Isn't this either moral philosophy or class war?

Economics does have something to say on how to help those at the bottom of the income distribution. Ever since the globalisation/technology squeeze was identified, the answer has been seen in terms of more education and skill-enhancement: you have to become smarter than the Chinese and the machines.

But what can be done at the other end of the income distribution; the rise of the oligarchs? In a country where the Horatio Alger stories of rags-to-riches are embedded in the social psyche, there will be disagreement. Nevertheless, two issues are being debated: the first is taxation (addressed in an earlier post); the second is about how CEO pay is determined.

In the UK there is a suggestion that bonuses based on return-on-assets rather than return-on-equity would get the incentives in the right place (reducing the incentive to take risks) and reduce top pay levels. On this basis, the top US bank CEOs would have received earnings only 69 times average household income (instead of 500 times) and might have been less eager to leverage up their balance sheets through borrowing. In the US, one suggestion is that bonuses should be banned.

No-one has a good answer yet and there are still those who loudly defend this outcome as the proper and desirable result of 'letting the market work'.

Meanwhile, out in Zuccotti Park, the protesters claiming to represent the 'other 99 per cent' will disperse as winter sets in. It's easy to pour derision on their diverse, often-self-centred and inchoate motivation. But it's harder to justify this socially-divisive inequality: it's just one more example where the market's much-vaunted price discovery process produces results which make no economic sense.

Photo by Flickr user David_Shankbone.