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Thursday, November 3, 2011

Do the top 1% "deserve" it?

Yes, I know the title is ambiguous. I'm talking about whether they "deserve" their wealth and/or income.  Again, from before, there are no good statistics on who the top 1% are. But let's use the third-hand income statistics that David Brooks used:

31% "started or manage nonfinancial businesses"
16% doctors
14% "in finance"
8% lawyers
5% engineers
2% sports, entertainment or the media.

According to CNN Money, that first 31% is "executives, managers and supervisors."  In other words, people who "started" nonfinancial businesses are probably a very small fraction of this 31%; we're mostly talking about  people who have done well enough in the corporate hierarchy to get a paycheck in the $500K range.  And as previously observed, these numbers add up to 76%, so there are 24% of "earners" that no one wants to put a label on.  As previously suggested, a good chunk of these may well be people living off of inherited wealth.  But I don't know.

Remember again that we are looking at income here.  The top 1% by net worth is going to be a different, though doubtless overlapping, group of people.  We don't have any information (at least I haven't found any) that attempts to break that group down in terms of profession.

Before we go through each one, let's get a sense of how much these people are making per hour.

The $516K floor for the top 1 percent is household income.  Let's just assume that typically, this means that at least one of the earners is making at least $400K.  Not always true, but 400K is a nice round number.  Let's say that these people work 2000 hours per year (that's 40 hours a week plus two weeks vacation).  That means that for every hour they put in, they are making $200.  Not bad for an hour's work, even better if you get that for every hour you work.

The question is whether that is a "real wage" that somehow reflects the person's just deserts, or whether it represents something else.  In the old, pre-industrial revolution days, you could judge most workers by the hour -- they would be able to "earn" whatever they could make in an hour, minus the material costs of making it.  I.e. a shoemaker starts with some leather and some metal parts and makes a shoe.  His hourly wage depends on how fast he can make shoes and how much he can sell them for, minus the cost of materials.

Even in the pre-industrial age we had bankers and merchants.  These were people who dealt in large sums of money -- and often large numbers of people, or a few very rich people -- and paid themselves by skimming something off the top.  Already, one can ask the question whether they "deserved" that money.  Yes, they had the drive and the initiative to set up the bank or the business, and that should be encouraged.  That's capitalism.  But we can observe that the rewards were not really related to the effort or time put in.  Instead, the rewards derived from an imperfection in the market -- the merchants and bankers were able to sell their goods or services to a lot of people, while paying themselves a "percentage" as opposed to an hourly wage.

I'm leaving the hereditary aristocracy out of the analysis for now, on the assumption that nearly everyone can now agree that their gains were "ill-gotten."

With the industrial age came industrialists, who were able to put people to work on assembly lines, and then simply "skim" off the profits of the enterprise.  In other words, if the industrialist was able to get ten people together to make 100 shoes per hour, it was no longer the case that those "shoemakers" would get the benefit of their labor in the sense that the old shoemaker did.  How much the shoemakers now made depended solely on the labor market -- how little could the capitalist get away with paying his shoemakers?  That number -- labor cost -- now simply became another input (along with raw materials and rent) into the shoe production business.  The capitalist is now the shoemaker, and he gets to keep for himself the differential between the costs of production (materials, labor, and rent) and the sales.  Of course, he also makes decisions on whether investing in marketing will result in the ability to sell more shoes or charge higher prices for the shoes he sells.

For shoes, this is not necessarily a bad thing.  The capitalist provides cheap shoes (by the miracle of the assembly line) and provides jobs to people who otherwise might not be able to get them.  The capitalist is also taking risks, although nowadays, you can buy insurance to cover any risk, so that's theoretically just another cost of production.
So we can agree that we need a capitalist to manage the risks.  But that only really means we need one person per business, right?  Not anymore.  As the business grows, we need more and more "managers" to deal with all the decisions that have to be made in all of the aspects of the business.  While these people get paid salaries, and thus might seem to be "wage earners" in the sense that the assembly line workers are, there is an important distinction.  They are not actually producing the product.  They are reacting to market conditions and making decisions that presumably help the business stay competitive and maximize profits, but their "hourly" output is not shoes, it's "profit."  In other words, these people contribute to the enterprise's ability to maintain a high differential between costs of production and sales.  They are partaking in the capitalists profits.

And it's the higher ranking ones of these that get paid the most.  The bigger the company, the greater the gross sales, and the easier it is to skim hundreds of thousands or millions of dollars here and there to pay these "mini-capitalists."

(I've never read Das Kapital.  I wonder if I am accidentally simply reconstructing it?)

So that's the 31% -- these are people who are skimming corporate profits.  Nice work if you can get it.  And of course, the "invisible hand" may well be determining how much these people take.  Presumably, the capitalists at the very top would like to pay everyone below them as little as possible, but they need good people.  Perhaps these high earners ARE that good, in the sense that they are able, through their good decisions and policies, to cause the company to make additional profits over and above their wages.  Theoretically, if a given company is overpaying these people, or has too many of them on the payroll, its competitors will be able to undercut their prices in the marketplace.

But the question for the rest of us is how much should we tax these people?  I.e. they are big fat targets because of their incomes.  And their incomes are not proportionate to their actual "labor" in any sense; they derive from corporate profits, which in turn, come from us -- the consumers.  Would taxing them somehow distort the economy?  Would they stop doing what they are doing? If they did, would this be a bad thing?

Take marketing, for instance.  If a marketing "whiz" simply won't work if he doesn't get to keep his entire $500K per year, should we the public care?  Maybe not.  Maybe we would actually benefit, if we were free from his manipulations.

So the question for any of the 1% is whether the money these people make reflects the operation of a truly free market, or whether it derives from market perturbations.

To be continued . . . .

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