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40 responses to “Inequality: what price a banker?”

  1. BigBob

    The old chestnut about being highly paid for performing and delivering ‘value’ has been well and truly roasted in the last few years as well.

    As Obama looks like dropping his dacks over the high income tax cuts, it still appears life is good for those at the top of the food chain.

  2. MikeM

    It will be interesting to see how the two strikes rule works out here in curbing executive excess. (In a nutshell, it provides that if there is a substantial shareholder vote against the remuneration report at two consecutive AGMs, the board must resign in toto, presumably so the directors can stand again and be subject individually to the wrath of shareholders.)

    The problem is one of social attitude and entitlement belief that can only be changed by a shift in public sentiment – although the two strikes rule provides a powerful way for that sentiment to be expressed.

    Back in 2002, Paul Krugman described in a feature in The New York Times Magazine, how social attitudes had changed since the start of the 20th century:

    For Richer

    I.The Disappearing Middle

    When I was a teenager growing up on Long Island, one of my favorite excursions was a trip to see the great Gilded Age mansions of the North Shore. Those mansions weren’t just pieces of architectural history. They were monuments to a bygone social era, one in which the rich could afford the armies of servants needed to maintain a house the size of a European palace. By the time I saw them, of course, that era was long past. Almost none of the Long Island mansions were still private residences. Those that hadn’t been turned into museums were occupied by nursing homes or private schools.

    For the America I grew up in — the America of the 1950′s and 1960′s — was a middle-class society, both in reality and in feel. The vast income and wealth inequalities of the Gilded Age had disappeared. Yes, of course, there was the poverty of the underclass — but the conventional wisdom of the time viewed that as a social rather than an economic problem. Yes, of course, some wealthy businessmen and heirs to large fortunes lived far better than the average American. But they weren’t rich the way the robber barons who built the mansions had been rich, and there weren’t that many of them. The days when plutocrats were a force to be reckoned with in American society, economically or politically, seemed long past.

    Daily experience confirmed the sense of a fairly equal society. The economic disparities you were conscious of were quite muted. Highly educated professionals — middle managers, college teachers, even lawyers — often claimed that they earned less than unionized blue-collar workers. Those considered very well off lived in split-levels, had a housecleaner come in once a week and took summer vacations in Europe. But they sent their kids to public schools and drove themselves to work, just like everyone else.

    But that was long ago. The middle-class America of my youth was another country.

    We are now living in a new Gilded Age, as extravagant as the original. Mansions have made a comeback. Back in 1999 this magazine profiled Thierry Despont, the ”eminence of excess,” an architect who specializes in designing houses for the superrich. His creations typically range from 20,000 to 60,000 square feet; houses at the upper end of his range are not much smaller than the White House. Needless to say, the armies of servants are back, too. So are the yachts. Still, even J.P. Morgan didn’t have a Gulfstream. [...]

    In the eight years since then, top end pay packets – especially in the finance sector – have become even more gargantuan. It is time that general society was revolting.

  3. Russell

    I believe the report mentioned here makes the point that Australia’s education system is a contibutor to growing inequality. Peter Garrett sounded woeful when asked about it this morning.

  4. sheep weather alert

    Is the issue on of envy?

  5. John Quiggin

    Where did the salary numbers come from? They don’t seem to be in the article and I find it hard to believe that they have been adjusted for inflation.

    Prices have tripled since 1980, which would wipe out all the wage growth for cleaners and most of it for teachers

    http://safalra.com/other/historical-uk-inflation-price-conversion/

    Real GDP has approximately doubled over the same period.

  6. wilful

    It’s mostly the bankers, but it’s not jsut the bankers. Major law firm partners are touching $1M annual income. Some of these people are deeply unimpressive.

  7. hannah's dad

    I have posted here previously at various times, with nary a ripple in the LP pond surface, reports that show:

    - the rate of poverty in Oz increased up to 11% [poverty defined, from memory, as less than half the median, might have been average, household income] in Oz in the latter years of the Howard Coalition govt.

    -increases in income for the 5 quintiles of Oz income were, over a period of a few/several years of the Howard COALition government, confined to the very very top group only with others showing neutral to negative trends [guess who came off worse?].
    In other words income inequality increased.

    -there was a massive transfer of income from the lower income households to the upper income households via tax deforms [yes I spelt that correctly], guess when?
    My memory suspects that this was from an Andrew Leigh article.

    -ditto via changes to superannuation, the details of which eluded me at the time.

    Now these trends may have been reversed somewhat.
    I know the ALP government, to give them some credit, have increased pensions, increased tax free low income tax thresholds, increased payments for child care and maybe a few other initiatives that the media didn’t scream from the rooftops.

  8. Guy

    BigBob, funny old system when value isn’t what is rewarded, eh?

    John, the numbers came from some graphics in the hard copy of the article. There is no mention of whether they were adjusted for inflation or not, but I think you’re probably right, it seems likely that they haven’t been adjusted.

    wilful, indeed. In law it seems its often a case of working your arse off to make partner, and then coasting.

    Hannah’s Dad, I think we’re agreed that more could be done in relation to tax reform in this area. There probably are a few initiatives pushed by the current government that aid inequality – but I get the sense Federal Labor are loathe to mention the word, given the teetering on the centre-right divide that they believe they need to do politically.

  9. Peter Whiteford

    Hannah’s Dad

    The ABS 2007-08 income survey shows that while inequality rose between 1996-97 (which is roughly the start of the Howard Government) and 2007-08 (roughly the end) that real incomes rose for all groups – 38% for the first quintile, 48% for the middle three quintiles and 70% for the richest. The ABS changed the methodology for the most recent year, which may make the trend appear a little worse than it actually was, which means that inequality was probably higher in earlier years.

    The analysis I’ve seen suggests that the main factor behind rising inequality was trends in wages rather than changes in taxes.

    On the ALP government my understanding is that the increase in the tax threshold through the Low Income Tax Offset was part of the promised Howard tax cuts as well. The increases in pensions, however, have been very large and could be expected to be very progressive. (Shame they didn’t do the same for the unemployed! See http://inside.org.au/why-unemployment-benefits-need-to-be-increased/)

  10. Peter Whiteford
  11. hannah's dad

    http://www.theage.com.au/business/rich-got-richer-in-howard-years-20090820-es2v.html

    Peter,
    Yes, sort of.
    The figures you quote are the subject of the Age article above.
    But their interpretation varies a bit…

    “In a marked revision of its earlier figures, the bureau estimates that average incomes among the richest 20 per cent rose 74 per cent between 1995/96 and 2007/08, whereas those of low-income earners rose less than half.”

    Thus greater inequaliity
    and ..

    “The top 20 per cent of income earners, after adjustment for family size, increased their share of the nation’s income from 37.3 per cent to 40.5 per cent – more than the total earnings of the bottom 60 per cent. All other income groups saw their share of the nation’s pie shrink.”

    More inequality
    and also …

    “Most of that shift happened in the Howard government’s last five years, when it gave big tax cuts to those on high incomes, who were also getting the biggest increases in incomes.”

    Because of tax cuts.

    http://www.onlineopinion.com.au/view.asp?article=4500

    This 2006 article in OLO by Andrew Leigh [with an internal link to a full study] makes statements like this:

    “The income share of the richest groups in 2002 was higher than it had been at any point since the Korean War in the early 1950 ……..
    Taxes seem to matter too
    Over the past three decades, Australia’s top marginal tax rates have steadily fallen: from 69 per cent in 1970 to just 47 per cent today. In the Anglo-Saxon countries, the evidence suggests that cutting the top marginal rate increases the income share of the very richest.”

  12. Peter Whiteford

    Hannah’s Dad

    The ABS do say “Estimates presented for 2007-08 are not directly comparable with estimates for previous cycles due to the improvements made to measuring income introduced in 2007-08″ – which is that they included bonuses and non-cash employee benefits. The ABS point out that if they had done the same as in previous surveys, the Gini coefficient would have been 0.317 rather than 0.331.

    Now 0.331 is the better estimate, but it exaggerates the trend since the latest figures include income sources that weren’t included in the previous surveys.

    Also there is no doubt that inequality increased just not to the extent that the Age article suggests. Also the statement that “The top 20 per cent of income earners, after adjustment for family size, increased their share of the nation’s income from 37.3 per cent to 40.5 per cent – more than the total earnings of the bottom 60 per cent.” gives a rather harsh picture of what happened – if you look at the original data in 1995-96 the bottom 60% of households had 38.8% of income and the top 20% had 37.3% of income. As the article says these numbers then went to 36.8% and 40.5%, respectively – so the richest 20% went from having a little bit less than the bottom 60% to having a little bit more. A negative trend for inequality, and bad if it continued, but not a wholesale shift in the distribution.

    I agree that taxes do matter – just not as much as wages.

  13. hannah's dad

    Peter
    So we are agreed that under the Howard mob Australia became less equitable ["also there is no doubt that inequality increased"] partly, at least, because of COALition tax policy ["I agree that taxes do matter – just not as much as wages"].

  14. Anthony

    Yes inequality increased. I’m just not sure that Hannah’s Dad’s comment that there was “a massive transfer of income from the lower income households to the upper income households” is defensible. This implies a rich-got-richer and the poor-got-poorer scenario. The poor actually achieved real increases in disposable income. The point is that the rich scored much greater increases: gains in national income are going disproportionately to the rich.

    Again, I think market earnings play the key role here. Although I recall ABS data from a few years ago showing that between 1998/9 and 2003/4, the richest fifth of the population actually got an increased share of government benefits and contributed a substantially reduced share of total taxes.

  15. Peter Whiteford

    Hannah’s Dad

    The article by Andrew Leigh refers to changes over the past 30 years, not just the period since 1996. I haven’t seen any study that looked specifically at the effects of tax changes since 1996, so being cautious I’d prefer to hold my judgement. The cuts in top marginal rates mainly occurred pre-Howard, and since 1996, the main changes have to been push out the income range where the top rate cuts in. I think the superannuation tax changes are likely to be more of a culprit.

  16. hannah's dad

    “11.7 per cent of all Australians (or more than one in nine Australians) were living in poverty in 2006.”

    http://www.aph.gov.au/library/pubs/rp/2008-09/09rp27.pdf

    Research by NATSEM

  17. Guy

    Certainly one of the things that the Hutton Fair Pay Review in the UK has flagged as a potential recommendation is a cap on executive salaries at a particular multiple of the average wage (e.g. 20:1). As mentioned in the article, some big organisations in the UK do have such caps in place, but I presume for the few that do there would be barely any who would enforce as low a multiple as 20:1.

    Perhaps one option might be for the government to introduce a tax incentive for companies to enforce a reasonable degree of equity in the salary ranges that they pay. The carrot of higher profits might be the only thing that is sellable to the business community and that could actually induce corporations to act.

    Of course it is very, very difficult to see the conservative coalition pursuing any related recommendation with any vigour.

  18. FDB

    H’s D – as much as I love equality, I always find studies using relative poverty measures a bit unsatisfying. Partly because someone earning <50% of the median Australian income would be rightly mocked for crying poor by Haitians, Sudanese, Bangladeshis etc. and partly because it lumps the genuine, absolutely poor people in with folks on the dole.

    'Income inequality' is a perfectly adequate term to describe a real problem, without bringing poverty into it (carrying with it notions like not having a place to live, not having enough food to subsist, not having access to health care). As I say, there are people in this position in Australia, and defining poverty so as lump them in with people able to feed, house and clothe themselves risks marginalising them further.

  19. Anthony

    I think Peter Drucker once argued for a 20:1 ratio. George Orwell on the other hand argued for a 10:1 ratio

  20. hannah's dad

    FDB

    Do you know how demeaning that relativity trick is to those persons who live in poverty?
    “You are not poor cos there is someone else poorer somewhere else”.

    And that can then be used as an excuse to accept/deny/ignore the poverty of 1 in 11 people in Australia.

  21. FDB

    Okay fine, let’s hand the word ‘poverty’ over to relativism.

    Having done so, we’ll need a new word for those who actually can’t afford food and shelter.

    Any suggestions?

  22. hannah's dad

    Yeah.
    “Poor”.

    Like some of the people here in Australia who can’t afford food and shelter.

    By the ‘relativist’ standard there is only one person in the world who is poor and all the rest are ‘less poor’, or ‘comparatively affluent’, and can be ignored because they are not as poor as him or her [probably her].

    Rather than put the burden onto me what do you suggest we do about the 1 in 11 people in Oz who are poor?
    Or have you no empathy?

  23. hannah's dad

    http://acoss.org.au/images/uploads/ACOSS_poverty_report_October_2010.pdf

    ACOSS report into poverty in Oz.

    Causes, profile, remedies etc..

    Has some nasty facts eg
    -housing costs have risen triple the rate of low incomes.
    -a large chunk of lone parents [read single mums] are in poverty, along with, strangely, their kids.
    -the working poor, people who work but are still below the poverty line number about 390,000.
    -poverty is increasing [9.9% in 2004 -> 11.1% in 2006]
    -poverty in Oz can and does entail ‘deprivation’ of ‘essential’ services eg at least one substantial meal per day.

    Its a worry.

    Isn’t it?

  24. FDB

    I certainly don’t mean to minimise the suffering of those actually in (what is traditionally thought of as) poverty, H’s D. On the contrary, and as I said:

    “there are people in this position in Australia, and defining poverty so as lump them in with people able to feed, house and clothe themselves risks marginalising them further.”

    I’m just as certainly not trying to negotiate the definition down some slippery slope to meaninglessness. I hate that shit.

    I’m objecting to the use of the word ‘poverty’ (usually, and crucially, without the qualifier ‘relative’) to describe people who have fairly decent access to food, clothing, shelter, education and health care.

    If the qualifier were used more, or if another word or phrase could be substituted in a semantically painless way, that’d suit my delicate sensibilities.

    The problem is really only with the word ‘poverty’, the concept of the ‘poverty line’ and especially the phrase ‘living in poverty’. ‘Poverty’ does a lot more absolutist heavy lifting than the word ‘poor’, which has long been used in an offhand and very relative way.

    Anyhoo… I doubt we disagree much about income inequality or absolute poverty. I reckon this exchange only strengthens my case for more precision in terminology.

  25. hannah's dad

    From the ACOSS report above.

    “Poverty means more than simply a lack of sufficient income. Other measures reveal different
    groups of people living in poverty. One of these measures is deprivation, where people are asked
    whether they can’t afford items which most people regard as essentials of life. The Social Policy
    Research Centre, in 2006, surveyed people on what they regarded as essential items, asked them
    whether they had these items, and, if not, whether it was because they could not afford them.
    Twenty items were regarded by over 50% of survey respondents as essential, including:
    ? a decent and secure home;
    ? a substantial meal at least once a day;
    ? up to $500 in emergency savings;
    ? dental treatment;
    ? heating in at least one room of the house; and
    ? a separate bed for each child.
    The SPRC described as ‘multiple deprivation’ the lack of at least three out of the 20 essential
    items. Using this measure, 19% of the survey group were considered to be experiencing multiple
    deprivation.”

  26. Joe

    Relative comparison is the only way to measure these changes. One way of structuring the data, because there is a lot of it, when you try and compare the real wealth across different time periods, is to compare ‘internal’ and ‘external’ relative changes. It would be interesting to see what would happen if you normalised the figures in The Observer article instead of just looking at the amount they’ve increased, removed the figures and qualitatively labeled them, for example. But to touch on what FDB’s talking about, an external comparison is proly even more interesting. Globalisation etc. has meant that the entrepreneurs of the world are investing in developing markets and their “competitors” are other global players. This has caused OTOH a relative concentration of global capital in “relatively” fewer hands while at the same time caused the amount of capital they need to do business to increase. In other words, the pool with the sharks in it got bigger, but like a natural eco-system, it can still only support relatively the same amount of big sharks. Maybe dinosaurs is a better analogy. The other important issue is in relation to the importing of cheap goods (in particular consumer goods) from OS, which ultimately devalues the western currencies relative the developing countries — but that’s kind of what we want, because globally there’ll be more equality.

    But IMO that’s all freakenomics, or whatever it’s called, what we need to concentrate on is the effect such an economy has on the social relations in a society. Scaling up the way we do business isn’t going to make anything better, only bigger.

  27. Salient Green

    After doing a bit of research, I don’t see a need to add the qualifier ‘relative’ to poverty. There are many definitions of poverty which can just as easily apply to those disadvantaged by their own choices in rich societies as those disadvantaged by birth in poor societies.

    http://en.wikipedia.org/wiki/Poverty

    Just scroll down to Definitions by the United Nations, the World Bank, The World Summit on Social Development and the Irish Government.

  28. FDB

    I know there are lots of definitions of poverty.

    I don’t like it.

    I prefer precision where possible.

    I accept defeat yet again in this case.

  29. FDB

    Although I will add, following from Joe’s fleshing out of my concerns, that it’s very strange for the OECD poverty line (used in the study H’s D links to) to be nation-specific.

    The OECD is all about nations collaborating towards common goals, so what’s with that?

  30. hannah's dad

    FDB

    Whilst standing by the essence of what I said originally in #20/22, I think I misinterpreted your responses, taking them as unsympathetic when they were not so.
    Sorry.

    Nevertheless [I don't want to give away too much here, don't you know] I reckon ‘poverty’, whatever, is a problem in this country which as the post points out, has received far too little attention.

  31. FDB

    No worries H’s D. I often get into trouble wading in with some linguistic point of order and giving all kinds of false readings on people’s issue-radar. The issues, as you say, are plenty real.

    That there are fewer people in absolute, abject poverty here than in other places is no reason not to care about them as much. In fact it gives us a unique chance to look at the causes of poverty that persist even in an affluent country with a pretty well-wrought safety net. Why have they fallen through it? How could it be improved?

    That’s one of the main reasons I’d prefer that we avoid conflating these people with folks who are merely less well off than those around them. Income inequality is a problem too, but a very different kind of problem.

  32. Mercurius

    Couldn’t let this one go through to the keeper…

    sheep weather alert says:
    Is the issue one of envy?

    Is the issue one of pink unicorns in tutus dancing on a dragon’s egg? The failure of the sheeple on the Left to discuss the unicorn issue just shows how unwilling they are to deal with reality.

    The real problem is that people sleeping in cardboard boxes are envious. Don’t they know how much the quality and warmth-retaining properties of cardboard have improved in recent decades, thanks to the ceaseless good provided by the merciful engines of capitalism?

    To their crime of being poor, we can also charge them with being ungrateful bastards.

  33. Jenny

    I think the salaries paid to top execs are ridiculous in terms of what the execs can actually do but possibly make sense from the point of view of the impact on share price of having a celebrity figurehead. But in any event, if shareholders want to give vast sums of their own money to executives, it’s no concern of mine.

  34. Joe

    Hey Jenny, great point. I almost forgot my dearest enemy: The Corporation! The remuneration some of these execs get is absolutely grotesque. Especially looked at in relation to how they earn it. Just like during feudalism high earners have unparalleled (economic) power compared with most.

    http://en.wikipedia.org/wiki/List_of_countries_by_income_equality

    (and fiddle around with the first two columns.)

  35. Incurious and Unread

    Jenny @33,

    if shareholders want to give vast sums of their own money to executives, it’s no concern of mine.

    Unless you are envious.

  36. Joe

    Envious?

    Colourless green ideas sleep furiously.

    You’re going to have to help me out here? Do you mean, having lots of money and power makes Jack a dull boy? Or that envy is one of the seven deadly sins? Or you’re concerned, but you’re feeling a bit bad about it?

  37. sheep weather alert

    I personally do not think concern a bout inequality is simply envy, but the Right often say it is, so it’s an argument that has to be rebutted.

  38. dropBear

    @sheep weather alert

    the issue of envy is not an argument at all, but a cheap rhetorical trick.
    What do my personal feelings matter? I may be green with envy, but that has nothing whatsoever to do with the arguments that are being brought forward in a rational discussion.

    As a rhetorical tool it is quite unsophisticated (hence the popularity with right w(h)ingers) and quite dated.

    Surprisingly it still works to derail discussions. Maybe because being a non sequitur of the highest order it can’t really be rebutted using a direct rational defense.

  39. Joe
  40. Mercurius

    Or that envy is one of the seven deadly sins?

    Oooh, good point. Let’s ask ourselves…

    Is the issue the envy of the poor..?

    …Or the greed of the rich in always wanting more?
    Or the gluttony of the rich in consuming more, More, MORE!?
    Or the sloth of the rich in making their wealth off the backs of others?
    Or the lust of the rich in their pursuit of ever more?
    Or the pride of the rich in their riches..?

    …Or the wrath of the rich in being called out on the above?
    —-

    Dunno. Being a non-Christian, I always thought of the seven deadly sins as rather quaint. But it’s useful to see how cultural markers can be invoked to pull a discussion out of the realm of the rational and factual and into the world of signs and portents…