|10-02-2012, 02:55 PM||Topic Starter|
Make America Great Again
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Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened
Somebody cut these guys' taxes!
Seriously though -- income inequality is one of the greatest threats to this country.
Top 1% Got 93% of Income Growth as Rich-Poor Gap Widened
By Peter Robison
Oct 2, 2012 9:01 AM CT
Since 2009, Anita Reyes’ wages have been as frozen as Lake Minnetonka in January.
While the U.S. economy was recovering from the Great Recession, Reyes, 52, a casino dealer from Minneapolis, was dining on $1.67 cans of soup and searching for a way to keep her house, which was foreclosed on last October.
“I went backwards,” Reyes said. “Two years ago, three years ago, I didn’t know I’d be looking at being homeless.”
Stephen Hemsley’s salary has been frozen too. His income hasn’t.
The chief executive officer of Minnetonka, Minnesota-based health insurer UnitedHealth Group Inc. (UNH) earned $1.3 million in salary every year since 2007. Still, as the economic recovery took hold from 2009 to 2011, Hemsley, 60, exercised stock options worth more than $170 million and made at least $51 million from share sales, making him the object of an “Occupy Lake Minnetonka” protest on the ice outside his lakeside home each winter.
The divergent fortunes of Reyes and Hemsley show that the U.S. has gone through two recoveries. The 1.2 million households whose incomes put them in the top 1 percent of the U.S. saw their earnings increase 5.5 percent last year, according to estimates released last month by the U.S. Census Bureau. Earnings fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than $101,583.
The recovery that officially began in mid-2009 hasn’t arrived in most Americans’ paychecks. In 2010, the top 1 percent of U.S. families captured as much as 93 percent of the nation’s income growth, according to a March paper by Emmanuel Saez, a University of California at Berkeley economist who studied Internal Revenue Service data.
The earnings gap between rich and poor Americans was the widest in more than four decades in 2011, Census data show, surpassing income inequality previously reported in Uganda and Kazakhstan. The notion that each generation does better than the last -- one aspect of the American Dream -- has been challenged by evidence that average family incomes fell last decade for the first time since World War II.
In this recovery it’s proved better to own stock than a house. For stockholders like Hemsley, the value of all outstanding shares has soared $6 trillion to $17 trillion since June 2009, the recession’s end. Even after a recent rebound, the value of owner-occupied housing, the chief asset of most middle- income families, has dropped $41 billion in the same period, part of a $5.8 trillion loss in home values since 2006.
“Income inequality of the scale we have today is destroying our democracy,” retired American Airlines CEO Bob Crandall said in an interview. Crandall, 76, says he became so frustrated at what he sees as selfishness among his peers that he started writing a blog on his Lenovo laptop. “Anyone else willing?” he titled his first entry in August 2011, which argued that people should pay higher taxes.
While the Census income numbers don’t count benefits from some safety-net programs, such as food stamps, which tend to reduce inequality, the income gap has drawn enough attention to become a battleground in the presidential election. Both candidates say they’ll do more to protect the shrinking middle class.
President Barack Obama’s administration has attributed the growth in inequality under his watch to “a deep recession and dramatic fluctuations in equity prices.” Obama advocates the “Buffett rule,” legislation named for billionaire investor Warren Buffett that would levy a minimum 30 percent income tax rate on anyone making $1 million or more a year.
Republican nominee Mitt Romney, who was governor of Massachusetts from 2003 to 2007, has said Obama is “dividing America based on 99 percent versus 1 percent.” He calls for cutting government spending and taxes to stimulate job growth, reducing marginal tax rates for all brackets and eliminating the Alternative Minimum Tax and the estate tax.
“The best way to bring more prosperity to more Americans is through economic growth and job creation,” said Andrea Saul, a Romney spokeswoman.
Even as a mending economy generated 4.6 million private- sector jobs since February 2010, almost 40 percent of them were in fields such as hospitality and temporary staffing where the average wage is $15 an hour, according to a report last month by Wells Fargo Securities LLC senior economist Mark Vitner. A broken middle class isn’t just an economic challenge -- it also erodes political stability, said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. in Chicago.
“What is China focused on more than anything? Growing the middle class,” she said.
The income gap between rural households in China under a commonly used gauge known as the Gini coefficient reached 0.3949 last year, nearing a “danger level” of 0.40 set by the United Nations for potential social unrest, according to a study released in August by the state-backed Center for Chinese Rural Studies at Central China Normal University. The figure was 0.47 in the U.S. last year, the highest since at least 1967, the Census bureau estimated.
The patterns reflected by the two recoveries may consign the U.S. to slow growth for years, said Nobel Prize-winning economist Joseph Stiglitz, who explored the income gap in his 2012 book, “The Price of Inequality.” Depressed earnings lead to lower consumption, which stems job growth and keeps the risk of recession high, he said.
“We’re all in the same boat,” Stiglitz said. “If our economy doesn’t go well, the 1 percent will suffer.”
So far, the boat has been leaving some in its wake. Fewer Americans own individual stocks than before the recession began, so many have missed the chance for income from the market’s rebound. About 11.7 percent of middle-income families owned stock in 2010, down from 14 percent in 2007, according to the Federal Reserve. Almost half of the wealthiest 10 percent of American families owned stock in 2007 and 2010, the Fed says.
At the same time, at least 176 companies lit a “sleeping time bomb” of stock-market wealth in 2009 by awarding “mega” grants of stock options to executives, said Paul Hodgson, chief research analyst at GMI Ratings, a New York corporate governance firm. A mega-grant confers 500,000 shares or more, according to GMI’s reports.
Seagate Technology Plc (STX) gave CEO Stephen Luczo options to buy 3.5 million shares of the computer disk drive maker in January 2009, when the price had plummeted to less than $4 from $20 about six months earlier. That same month, the company, which is run from Scotts Valley, California, and formally based in Dublin, said it would eliminate 2,950 jobs -- or 6 percent of its workforce -- and reduce salaries by as much as 25 percent.
The CEO’s salary was cut 25 percent -- yet Luczo’s options could be exercised starting at $4.05, a price they exceeded within a week of the grant. The options began vesting in 2010 once “specified performance criteria” were met, according to corporate filings. This year, Seagate shares have had an average price of $27.13, and Luczo has sold more than $110 million worth, including some from the 2009 options grant, the disclosures say.
“Awarding stock option grants at record lows allows executives to profit handsomely from a market recovery with which they have nothing to do,” Hodgson said. “It divorces pay from performance even more spectacularly.”
Brian Ziel, a spokesman for Seagate, declined to comment.
The GMI report also cited Richard Fairbank, CEO of McLean, Virginia-based Capital One Financial Corp. (COF), who got options on 970,403 shares in January 2009. The company valued them at $4 million at the time; they would be worth more than $38 million now.
Fairbank receives no cash bonus or salary and hasn’t yet exercised the options, said Capital One spokeswoman Julie Rakes. “Bottom line, Rich only gets paid if Capital One shareholders get paid,” she said.
Crandall, the former American Airlines CEO, said that while his blog isn’t a “burning success” -- he’s heard from 50 readers -- he feels compelled to write about income inequality, taxes and CEO pay. “I wake up every morning and read the newspapers and fly into a rage,” he said. Growing up in Rhode Island during the Great Depression and World War II, he felt a sense of collective effort that’s missing now, he said.
“The whole notion of responsibility kind of went away,” Crandall said. “If the boss is going to get a bonus, then everybody in the company ought to get a profit-sharing check.”
Caterpillar Inc. (CAT) made headlines this year for resisting wage demands at a plant in Joliet, Illinois, after reporting a record $1.7 billion in second-quarter profit. Machinist Kathy Keifer, 56, started there in 1994 after a friend in a geometry class at Joliet Junior College raved about the opportunities. She said she was trained in welding, machining and assembly, and by 2007, was making $25 an hour, enough to support a daughter as a single parent. After a career detour as a real estate agent, she said she returned in 2010 to a changed employer.
Joliet machinists, who make $14.74 to $25.88 an hour, in August accepted a six-year contract that provided no pay increase for those hired before May 2005. Workers hired later receive a one-time 3 percent pay raise or “market-based” increases, whichever is higher. Employees also got a $3,100 signing bonus.
Compensation for Caterpillar’s CEO, the 37-year company veteran Douglas Oberhelman, rose 60 percent to $16.9 million last year. Keifer said that over the next six years, the most she can expect is a 55-cent increase from $17.39 an hour.
“At $25, I was feeling pretty good, definitely middle class,” she said. “Now it’s like the bottom’s giving out.” As the strike depleted her savings, Keifer put off plans to buy a two-story frame house for $99,000 in Joliet.
“I don’t see what good it does our country if companies are hiring at minimum wage,” she said.
Caterpillar takes a “market-based approach” for all employees, and comparing a production worker’s pay to the CEO’s isn’t valid, said Rusty Dunn, a spokesman for the Peoria, Illinois-based company. The contract is fair and necessary to keep the company competitive globally, he said.
“It is not in anyone’s best interests to have the type of labor agreement suited to something you would see years ago,” he said.
Keifer’s postponed home purchase helps explain one factor limiting job growth: Americans don’t have the income to spend as much as they used to. Although U.S. consumer spending climbed to its highest level in four years in August, according to Gallup surveys, it still lags 2008 levels by more than 20 percent. Most of the spending came from higher-income households.
Easy credit in the last decade propped up consumer spending, masking long-term forces that had been pummeling workers -- among them global competition, increased automation and falling educational attainment, said University of Chicago finance professor Raghuram Rajan. His 2010 book, “Fault Lines,” argued that the financial crisis was caused in part by excessive borrowing to make up for falling incomes.
“Now that people can’t borrow, they look at their paycheck and say, ‘What happened?”’ said Rajan, a former chief economist for the International Monetary Fund who was named top adviser to India’s Finance Ministry in August.
From 1979 to 2007, about $1.1 trillion in annual income shifted to the top 1 percent of Americans -- more than the entire earnings of the bottom 40 percent, according to Alan Krueger, chairman of Obama’s Council of Economic Advisers and an economics professor at Princeton University. If income were distributed as it was in 1979, there might be $440 billion in additional spending each year -- a 5 percent boost to consumption, he said in January.
[to be continued...]