Wednesday, August 5, 2009

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.


  1. Mark,

    Do not give Hall that much credit or blame. He was a trader, not an investor. The kind that makes money using high speed computers. The kind that may have been one of the speculators that caused oil to jump last summer.

    Putting aside issues of income distribution, the problem here is that he can make that much money doing something basically useless to society.

    Krugman gets it right when he talks about it being an issue of heads I win tails I don't for these compensation plans. Hall gets a bonus if he makes money but no penalty if he loses money. This encourages excessive risk taking which put us where we are today.

    And, taxpayers did not pay his bonus, it was paid by his profits.

    Income distribution itself does not upset me. Rather, I want to be sure that the winners do something for us all, like Bill Gates, who created a massive company employing tens of thousands of people (and I do not even like it or him) instead of trading oil, raising oil prices and bankrupting us by taking excessive risks.

  2. Mike,

    I agree that the system of bonuses is inherently flawed to encourage excessive risk taking, which puts our entire economy at risk; when things go terribly wrong - as happened this past year -- unemployment and economic suffering increase, while the risk takers always seem to walk away with multi-million bonuses and payouts. I also agree that some of the super-rich, like Bill Gates, do an awful lot of good for society -- and it is not limited to philanthropy, as you note, but to creating hundreds of thousands of decent paying jobs.

    I am less enamored, however, of the extremely high level of inequality that exists in this country between the rich and poor (and middle class), particularly when many of the "winners" are making their money in socially unproductive ways.

  3. This comment comes from Rich R. (condensed version -- blog restricted length):

    ...You mention an exorbitant amount of money. In a capitalist system there is no such thing. If there is, who is to decide what rates as exorbitant? Will that be the responsibility of the next czar? ...

    Uncle Sam is not footing bills for firms because they performed poorly, but because Uncle Sam chooses to foot the bill. Those firms should have failed along with the banks and car companies. Your use of “winners” harkens back to the bonehead politician who years ago described the rich as the winners of “life’s lottery.” But you’re right that there are more than a few winners in the American economy and that’s the beauty of our system: there is no limit to the number of possible winners... Your beleaguered schoolteacher should consider herself a winner ...because she is doing what she wanted to do, which is the real measure of success, and she obviously factored in the salary she would make before she decided to enter the teaching field.

    It is nice that you believe people should be entitled to make a lot of money for work that is “valued,” but who will be the judge of what is valued? Another czar perhaps? Or maybe the marketplace?

    And then the old “widening gap” argument. One reason for a widening gap is the ever-expanding entitlement mentality, which crushes incentive and dulls ambition. [Y]ou list a bunch of occupations and how much they make....I can count at least three of those occupations as past jobs that I myself had, starting with fast-food cook. I could have stopped there and spent my life begrudging the evil rich, but...I decided to work hard and slowly work my way up the ladder. I chose not to remain a cook and I make a good living ... doing much more important work than Andrew Hall, while not making an exorbitant amount of money. And yet I don’t resent Hall his millions or billions because I know I’m having a hell of a lot more fun earning my check than he does his. The point is, of course, that everyone on your list gets paid exactly, to the penny, what they are worth. Anyone can learn to cook a burger, few can understand, let alone make money in commodities trading. Being a firefighter may be more important than a pro-football quarterback, but a whole lot more people can learn to fight fires than to learn to throw a pass while facing down 300 pound men intent on knocking the life out of you. So your list proves nothing other than that a bus driver is worth exactly $35,700 a year. If he thinks he deserves more, he should work harder and get into management or attend night school.

    You talk about who earns what, without mentioning that the richest pay almost all the taxes, while the bottom half pay practically nothing. Look those stats up, it’s shocking.

    ... it’s not out of whack that 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 of what Andrew Hall made in his Christmas bonus for buying and selling oil stocks. Again, if a teacher wants to learn how to do what Hall does, he or she can.

    You seem to want to choose who to demonize and what professions to dismiss. I value Paris Hilton much less than a commodities trader but I don’t think she should be denied her exorbitant income, because she earns exactly, to the penny, what she is worth....

    Getting the hang of this whole capitalist thing? This system has produced a higher standard of living for the entire world and it should be celebrated, not debased as the current administration is doing with their selective bailouts and obscene spending. FDR turned a recession into a depression and then turned a depression great by doing the exact same things that President Obama is doing. It’s madness.

  4. Rich,

    Thank you for your comments and I admire your passion, however misguided and misplaced it may be. My commentary was not intended to defend government bailouts or to suggest that we should have an income czar overseeing the American economy. It was, however, meant to suggest that, as good as our economy and most market based economies are at producing goods and services efficiently and at a high level, some of the results are simply unfair and hard to justify from a moral or ethical viewpoint. I do not begrudge Andrew Hall his $100 million bonus (though I would feel a lot better if you told me that he plans to use a large portion of it to support worthy causes -- and, yes, what is a worthy cause is wholly subjective), but I do not believe that his receiving a $100 million for what I percieve to be socially unproductive work is a good result, nor does it truly reflect his level of skill and work effort compared to that of a school teacher, or aerospace engineer, or short-order cook. Should Hall make more than these folks -- probably, and I don't doubt he has certain skills that I neither have nor want -- but $100 million versus $52,000 for the school teacher? I don't buy that this is strictly the market at work. If it is, then the market is highly flawed and needs some adjustment. American capitalism is a great system, and I would not fundamentally change it, but it is inherently flawed in ways that often require government intervention -- e.g., environmental regulation; unemployment compensation; contributions to infrastructure, etc. As I indicated, I don't claim to know precisely how to fix what I perceive to be an egregious inequity, but I do believe it raises legitimate questions about the fairness of our present economic structures.

  5. Mark,

    Ask yourself this about Hall’s 100 million: who would spend it better, Hall or the government? Hall might buy lake front property and build a summer cottage, providing income to real estate agents, general contractors, plumbers, electricians, landscapers, interior designers, and that guy that that seems to have the market cornered providing porta-potties. And all these businesses hire college kids, poor people, ex-cons, and anyone else struggling to make ends meet. Hall might buy a yacht and send a few boat makers’ kids through Yale (which is the opposite of what government accomplished years ago with its luxury tax. Remember? Declining yacht sales, people out of work, fewer tax payers to gouge…). Maybe he would lend some money to his cousin Vinny to start that pizzeria. Or establish a charitable foundation to provide intervention counseling for recovering Liberals.

    Now if the government had that 100M, how much would be used for good (and who would define good?) and how much would go to pay bueracrats and buy desks and computers for those bueracrats?

    The bottom line: It is not your place, my place or the government’s place to decide what work is justified or socially productive. If it is legal work, whether it be trading stocks, selling cigerettes, publishing Hustler or running a soup kitchen, then its value is between employor, employee and the marketplace. You may disaprove of Hall and what he chooses to do for a living, but that must be where it ends, because if it doesn’t, then someday a government employee may decide, after monitoring the excessive time you and I have spent blogging – Oh Dear God, is that what I’m doing?! – that what we are engaged in constitutes unproductive work and he will issue us a warning to be followed by more serious adjustments. Silly? Some would say that this government intervention would not be a fundamental change considering the excessive regulations of the EPA and about a bizillion other government agencies not authorized by the Constitution, or the government’s encouragement of laziness with welfare and unemployemnt compensation.

    Remember what the president’s wife said: “Barack Obama will require you to work. He is going to demand that you shed your cynicism. That you put down your divisions. That you come out of your isolation, that you move out of your comfort zones. That you push yourselves to be better. And that you engage. Barack will never allow you to go back to your lives as usual, uninvolved, uninformed.”

    And this from the White House web site: “There is a lot of disinformation about health insurance reform out there, spanning from control of personal finances to end of life care. These rumors often travel just below the surface via chain emails or through casual conversation. Since we can’t keep track of all of them here at the White House, we’re asking for your help. If you get an email or see something on the web about health insurance reform that seems fishy, send it to flag” (“Since we can’t keep track of all of them…” Emails and casual conversation? I thought warrantless wire tapping went out with Bush? WTF!)

    So, do you support a new government agency that decides worthy employment and the payscale that goes with it, or are you just saying between Hall and a schoolteacher, you’d rather have a beer with the teacher?

    Jeez Mark, look what you’ve done to me. It’s almost 1am!

    Rich R.

  6. Mark,

    Another perspective from "National Review" August 24, 2009:

    It sounds like a far-fetched Ayn Rand story line (is there any other kind?): Andrew J. Hall, the head of Phibro, a small commodities-trading firm based in Connecticut, is being set up as a candidate for public crucifixion. That is because Hall has done a particularly good job this year for one client--Citigroup.

    He is an oil trader, and, under the terms of his contract with the struggling financial giant, he is entitled to a percentage of the profit he produced for the bank this year--and that number comes out to about $100 million. Citigroup, recall, was bailed out with $45 billion in taxpayers' money, and the Washington "pay czar"--dreadful phrase to read, isn't it?--has been snooping around and may try to block the payout. Yes, $100 million is a lot of money, and financial-industry compensation can be mind-boggling to those of us in less rarefied tax brackets. But consider this: Hall has made Citigroup about $2 billion in the past five years, so his big payday is equal to about 5 percent of what he's produced. If every Citigroup operation performed as well as Hall's, there'd have been no bailout. Hall and Phibro, the New York Times reports, are so disgusted by bailout politics that they are looking to end their relationship with Citigroup. And there you have Bailout Nation in a nutshell: The failed and failing are propped up while the profitable are forced from the field. Surely this, and not a sudden decline in literary taste, explains the surging sales of Atlas Shrugged.

    Rich R.