From a recent study by three economics students; Sreedhari Desai of Harvard, Arthur Brief of the University of Utah and Jennifer George of Rice University.  The title is “When Executives Rake in Millions:  Meanness in Organizations.”

“The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies – an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.”

Beezer here.  This basic concern is a long considered one in economics and the related considerations of ethics and morality.  Even the great Adam Smith wrote about this.

From economist Maxine Udall (girl economist) blog, the following.

Adam Smith wrote about the influence of prevailing custom and fashion on moral sentiments in Theory of Moral Sentiments.

The different situations of different ages and countries are apt, in the same manner, to give different characters to the generality of those who live in them, and their sentiments concerning the particular degree of each quality, that is either blamable or praise-worthy, vary, according to that degree which is usual in their own country, and in their own times. 

Nowadays, most of us would object to what appears to be cultural or ethnic stereotyping in some of what Smith wrote. I am unable to say to what extent Smith’s views reflected then existing national and cultural heterogeneity that will have no doubt been rendered by economic development more homogeneous over time. Smith was a sound thinker and critical observer, which causes me to attribute his generalizations about different nationalities somewhat to Scots-Anglo ethnocentrism and somewhat to possible real national differences. Nevertheless, his main point seems valid: that what is “either blamable or praiseworthy” varies “according to that degree which is usual” in our own country and own times, that our moral sentiments and behavior are shaped to some extent by the culture in which we dwell.

Smith goes on to discuss “customary characters” of professions and stages of life, conjecturing that they are shaped by the moral sentiments that accompany and promote the duties of a given profession or of a specific stage in the life cycle. Thus, some professions and life stages are more reticent or staid than others. But, while Smith sees custom in the form of social and professional norms reinforcing good moral sentiments and behavior, he also sees it as something that can erode the same.

It is not therefore in the general style of conduct or behaviour that custom authorises the widest departure from what is the natural propriety of action. With regard to particular usages, its influence is often much more destructive of good morals, and it is capable of establishing, as lawful and blameless, particular actions, which shock the plainest principles of right and wrong.

His point being that just as self-interest can prevent us seeing impropriety and injustice, so too can culture and custom. A slave holder in the antebellum US South had self-interested reasons for believing slavery to be morally acceptable. A poor white worker whose wages were depressed by the availability of slave labor might still find slavery acceptable and worth fighting to preserve because the norms and customs of his culture find no impropriety in slavery.”

Beezer again.  An earlier Beezernotes post  highlighted the work of behavioural scientist Sam Bowles of the Santa Fe Institute.  Bowles has concentrated his study on the causes and effects of inequality in general and income disparity in particular.  From that article:

Those who constantly oppose the growth of government spending have a phrase “Starve The Beast,” which neatly sums up what they see as the problem, and the cure.  The thinking is straightforward and rational:  If you limit government revenue, then you limit the growth of government.

What often happens in the real world, of course, doesn’t fit into the proposed formula.   Starving the government beast often just results in deficit spending.  And then the starve the beast crowd complains about the deficits and demands more starving which increases deficits even more etc. etc. 

The fact is government expenses increase along with everything else.  Governments obviously could spend money more wisely.  And efforts to do so are pretty much made continuously.  It’s a constant battle in government, as it is in any big, complicated endeavor.

Having said all that in preamble, the point of this post isn’t that we’re starving government but that we’re starving labor.  And in our modern, international trade world, we’re beginning to starve the middle and professional classes too.  These are the beasts we’ve been starving for far too long.

In an article at economicprincipals.com, entitled “No Gold Watch” David Warsh writes:

“Another generation of US workers, at least significant numbers of them, are being forced into retirement sooner than expected and without ceremony, by the Bust. As Catherine Rampell noted in The New York Times last week, millions of people have been dismissed – file clerks, ticket agents, autoworkers and the like – who might otherwise have stopped working in more orderly fashion.

 “But because of the recession,” Rampell writes, “winter came early.”

 This has happened before, notably in the 1980-82 recession, when the steel and domestic manufacturing industries led the casualty list; and, after 1990, when banks and other financial institutions shed millions of jobs. This time clerical and administrative workers have borne the brunt – 1.7 million of them have lost their jobs since the recession began in the fourth quarter of 2007. These are people for whom there was no gold watch. Is there anything for them besides the informal respect and affection of their peers?”

Recessions always do this.  But in the past few decades we’ve had a series of recessions which are aggravating an underlying trend of widening income inequality.  The data is as clear as the nose on one’s face.

From an article at BaselineScenario:

“Fortunately, there IS some pretty good data on income stratification in the United States, and a few assumptions can help shed some light. Economists Thomas Piketty and Emmanuel Saez have made careers of studying US income inequality using IRS data, which goes back to 1913. The most recent data available (for 2007) showed that the top 14,988 households (0.01% of the population) received 6.04% of income, the highest figure for any year since the data became available. The top 1% of households received 23.5% of income (the second highest on record, after 1928), while the top 10% received 49.7% of income (the highest on record)…

The fortunate 14,988 had an average income in 2007 of $35,042,705. They had an average federal tax burden, according to Piketty and Saez, of 34.7%, leaving them after tax income of $22.9 million. If you assume a 50% savings rate among this group, you get total savings of $171.5 billion. This is nearly ONE HALF of the total savings for the entire country implied by a savings rate of 4.2% ($365 bn) reported in this month’s Bureau of Economic Analysis data.”

The sad truth is that almost 80% of the working population has seen virtually no rise in their incomes since the early 1980s, whereas the top 20% (particularly the top 5%) have seen not only a rise in their incomes, but a dramatic rise in their income as a share of the nation’s total income.  And it’s probably not a coincidence that the last time this gap was so wide came just prior to the Great Depression of the 1930s.

So while we’re busy trying to starve the government beast, we’ve effectively been doing a better job at starving the majority of our own citizens.  They’re the beast we’ve made hungry.

There’s yet another sharp irony in all this.  Those who complain about taxes derive much of their intellectual capital from the works of economist Adam Smith  who is credited with the concept of the “invisible hand.”  This concept has morphed over the years to justify opposition to almost any government effort to regulate economic activity, or to raise tax rates progressively.

The truth is Smith was in favor of progressive taxes on wealth, not just income.  This is what Smith actually wrote about justifiable taxes.    

“The proportion of the expense of house-rent to the whole expense of living is different in the different degrees of fortune. It is perhaps highest in the highest degree, and it diminishes gradually through the inferior degrees, so as in general to be lowest in the lowest degree. The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Another observation:  Just because a country installs progressive tax rates, doesn’t mean that government necessarily grows any faster.  The reality may be that government is less likely to run up ever larger deficits.

But would progressive tax rates mitigate income inequality?  Income inequality may be more a function of poor rates of productive economic growth.  And there could be other factors more important than tax rates here.  Things like strong foreign trade agreements.  Or installing tariffs to protect higher paying jobs in America.  Or strong population growth.  Or tremendous innovation.  It’s a long list that may be more important to reducing income inequality than progressive tax rates.

Or the government could simply take the increase in its revenue and send it back out the door to the 80% “beast” of population in rebates of one sort or another.   With so many folks having more money, that might be a key that turns the innovative lock. 

One thing is certain.  This upward flow of funds to the wealthiest among us will turn out badly if not reversed.

Once again, thanks to economist’s view for spurring this train of thought here at beezernotes.

If you think about it, free markets are obviously not always right.  Our current recession is just the most recent example of free markets getting it seriously wrong.  In point of fact, during the past 30 years free markets have suffered serious collapses seven times in the US alone.

It wasn’t always so, by the way.  After the regulations imposed during the Great Depression (another problem caused by free markets not getting it right) America enjoyed more than 40 years of avoiding financial collapses. 

But starting with the Reagan Presidency, Adam Smith’s “invisible hand” insight morphed into what I call “Capitalism On Steroids.”  The lessons of the Great Depression were forgotten (as well as what Smith had in mind when he coined the “invisible hand” concept) and out of that memory hole came the idea that free markets would always come up with the best possible solution to a problem.  The flip side to this goofy idea was another, equally goofy one, that government’s can’t really do anything good.

Goofy or not, a lot of people believe it to be so.  That history clearly shows it isn’t true seems to be an irrelevant observation for these folks.

It’s as though someone pointed to the West one morning and remarked “let’s enjoy the sunrise” as the sun obviously rose in the East.  And a lot of people did look to the West, as recommended, murmuring “ahh what a beautiful sunrise” into their own shadows.

But enough of that.  What is true is that free markets have strengths and weaknesses as do governments.  When things work well it’s often because they are working in tandem.  On the same page, if you like.

From my perspective, governments are best that wisely govern or regulate markets.  Governments set the ground rules within which markets can perform not only efficiently, but in a way that does not undermine the safety and health of the nation.

Many if not most of the obvious problems now pestering our country could not have occurred without the “free markets” always get things right faith.  

Our financial system is on the rocks because of weakened regulations and regulators who were looking West for the sunrise. 

Our agricultural system has turned against its own citizens, producing shadow food that is often toxic.  Again with the help of regulators who believe, if only we let these companies alone, they will provide the best answers to our food problems.  Same philosphy at work here, and you can count on this, the same lousy result will evolve.

And the flip side of this goofy idea is at work as well.  Obviously, if you believe the government can’t do anything good, then you certainly don’t want to pay taxes.  So you come up with the nostrum that tax cuts are always the right thing to do, because the free markets will have more money to figure out their solutions to our problems. 

History shows that the only thing across the board tax cuts are sure to create is deficits.  In the US, periods of strong income and job growth have been just as frequent when tax rates were strongly progressive as when they weren’t. 

I’d say “look it up if you don’t believe me,” but I’m talking to a group of folks who have suspended their belief in history.   Which means inevitably, we’re all going to repeat our mistakes.

If there’s one thing I can count on it’s that this new “philosophy” about the invincibility of free markets will give us another whiz bang of a financial meltdown as well as create a multitude of other problems in every aspect of our economy.

In a previous post I cited several sections of Franklin Delano Roosevelt’s 1932 inaugural address.  I want to emphasize one part of that citation.

“Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.”

Can you imagine anyone today making such a statement?  Not even President Obama dare to speak such unholy words.  The cries of “class warfare,” and “Socialist” would echo from post to beam.  Beginning of course on Fox and CNBC.

One needs no other clue to recognize why the self serving philosophy of Adam Smith results in financial collapse.  Competition without community is a certain path to implosion.