Is This Guy Really Worth A Billion Dollars?

The Perverted Priorities of the American Economy

It was reported that Andrew J. Hall, the 58-year-old head of Phibro, a small commodities trading firm in Westport, Connecticut, is to receive a $100 million bonus from Citigroup, a company presently being bailed out of potential bankruptcy with $45 billion in public money. Legally and contractually, there is little dispute that Hall is owed the money, which supposedly constitutes his share of the profits from a year of aggressive trading in the oil market. I don’t know Mr. Hall, though I am sure he is a brilliant, skilled, and talented investor who helped his clients make an exorbitant amount of money. But even apart from the troubling thought of federal tax dollars being used to pay Hall’s bonus, I can’t help but wonder how, in a country that prides itself on the principles of political equality and equal opportunity for all, the average elementary school teacher earns an annual salary of $52,240, while someone who trades stocks "earns" $100 million because he helped a small group of already wealthy people make a lot of money from rising oil costs.

Lest we consider this an anomaly, just last week, the New York Attorney General reported that 5,000 traders and bankers at bailed-out firms received over $1 million each in year-end bonuses. That equates to over $5 billion in bonuses paid to individuals at firms that performed so poorly Uncle Sam is footing the bill. Of course, a select group of people making a lot of money from the stock market, or from trading in commodities and precious metals and other speculative endeavors, is nothing new. Any drive through Belle Haven, Connecticut; Pacific Heights, California; Jupiter Island, Florida; or countless other exclusive neighborhoods throughout the United States demonstrates that there are more than a few “winners” in the American economy. Indeed, just to be included on the Forbes list of the 400 richest people in the United States requires a net worth of $1.3 billion (Bill Gates leads the list at $57 billion).

It is not that I believe people should not be entitled to make a lot of money for work that is valued; those with special skills and highly advanced knowledge, like surgeons and biophysicists, should make more money than secretaries and garbage collectors. Income inequality encourages motivated people to commit the time and energy needed to attain the level of knowledge and expertise required of those professions. It also rewards those who are willing to take risks, such as entrepreneurs and investors, without which many of us would not be employed. This country was founded on the principles of a free market economy and I, for one, firmly believe in the merits of the free enterprise system (or at least a mixed capitalist system) over rigidly centralized economies. Although most market economies around the world have fallen far short of the competitive ideal, history has accumulated enough examples of failed economies in socialist and communist countries to put that argument to rest. And the long-term record of productivity and economic growth in the United States – despite this latest recession – has confirmed the validity of economic systems based on a market model.

But if society has any concern for fairness, ethics, and how we as a people make our mark on this planet, should we not be troubled by the widening gap between the haves and the have-nots?

A cursory glance at the May 2008 National Occupational Employment and Wage Estimates, published by the Bureau of Labor Statistics gives a pretty good idea of how the American economy values many professions and occupations, whose compensation stands in stark contrast to the Wall Street winners noted above.

Fast-Food Cooks $17,620
Maids and Housekeepers $20,290
Child Care Workers $20,350
Janitors $23,500
Nursing Aides and Orderlies $24,620
Security Guards $25,840
Medical Assistants $29,060
Police and Fire Dispatchers $35,340
Bus Drivers $35,700
Agricultural Inspectors $41,330
Clergy $45,440
Fire Fighters $45,700
Marriage/Family Therapists $46,930
Social Workers $48,180
Aircraft Mechanics $51,650
Middle School Teachers $52,570
Police Officers $52,810
Transportation Inspectors $59,200
Environmental Scientists $65,280
Health and Safety Engineers $73,830
Biochemists/Biophysicists $88,450
Aerospace Engineers $93,980

Over the last approximately 40 years, the gap between the rich and non-rich has greatly increased, in both income and wealth accumulation. According to the New York Times, at the end of 2005, the top 1% of American income earners made more than $1.1 million, and “the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.” (“The Gap Between Rich and Poor Grows in the United States,” by David Cay Johnston, The New York Times, March 29, 2007).

Of course, in this country, even the poor have dreams of one day becoming rich. Most Americans don’t begrudge the rich their fortunes and are rarely upset over reports of income inequality. But does our present economy justly and fairly reward those who are most productive, or who provide the most valued products and services? I have my doubts. As Paul Krugman of the New York Times recently noted, “Even before the crisis and the bailouts, many financial-industry high-fliers made fortunes through activities that were worthless if not destructive from a social point of view.” (“Rewarding Bad Actors,” by Paul Krugman, The New York Times, August 2, 2009). For example, the rise of high-speed trading, in which “some institutions, including Goldman Sachs, have been using superfast computers to get the jump on other investors, buying or selling stocks a tiny fraction of a second before anyone else can react. Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses.” While all of this may be good for Goldman Sachs, is this really good for America? Are things just a little out of whack when the men and women responsible for teaching our children how to read and write make less than one-half of one-tenth of a percent (i.e., 0.0005%) of what Andrew Hall made in his Christmas bonus for buying and selling oil stocks? When an aerospace engineer makes less than one-tenth of a percent what 5,000 Wall Street traders made in their year-end bonuses?

In 1974, Arthur Okun, the late Yale economics professor and former Chair of the President’s Council of Economic Advisers, gave a series of lectures at Harvard University, in which he explored the tradeoffs in American society between income equality and economic efficiency. The lectures were published in Equality and Efficiency: The Big Tradeoff (Brookings Institution Press, 1975), which remains one of the seminal works on this subject. On the first page of the book, Okun explained the American dichotomy between political equality and economic inequality:

American society proclaims the worth of every human being. All citizens are guaranteed equal justice and equal political rights. Everyone has a pledge of speedy response from the fire department and access to national monuments. As American citizens, we are all members of the same club.

Yet at the same time, our institutions say “find a job or go hungry,” “succeed or suffer.” They prod us to get ahead of our neighbors economically after telling us to stay in line socially. They award prizes that allow the big winners to feed their pets better than the losers can feed their children.

Such is the double standard of a capitalist democracy, professing and pursuing an egalitarian political and social system and simultaneously generating gaping disparities in economic well-being. . . . The contrasts among American families in living standards and in material wealth reflect a system of rewards and penalties that is intended to encourage effort and channel it into socially productive activity. To the extent that the system succeeds, it generates an efficient economy. But that pursuit of efficiency necessarily creates inequalities. And hence society faces a tradeoff between equality and efficiency.

At what point, however, does the degree of inequality become too much for a society that respects human dignity? Is everything market driven? Do we really value the work of commodities traders more than the work of our fire fighters and food inspectors, our child care workers and our military personnel? If we believe that the best and brightest of American society will migrate to where the rewards are greatest – is this because the needs of society are greatest there or simply because a condo in the Hamptons is waiting? I don’t claim to have the answers, but the questions raised have implications for how we approach the current debates over universal health care, progressive taxation, job programs, and assistance to the less fortunate. If an investment banker has to pay a slightly higher tax rate to help a poor, inner city kid afford to attend a decent college or to see a doctor, will the banker and economic efficiency really suffer? I would love to hear your thoughts.