Friday, December 23, 2011

Why Someone Else Being Wealthier Actually Makes Me Poorer: Debunking a Suspect Claim

I found that the assertion stayed naggingly with me after I heard it expressed by one of the conservative talking heads appearing one night on Bill Maher’s Real Time HBO program: “Just because someone else is wealthier than I am doesn’t mean that it makes me poorer.”

I didn’t believe the statement when I heard it expressed but the way it seems to relinquish any envy gives it an attractive quality, making it sound admirably virtuous, as if it bespeaks a magnanimity of spirit even though it’s a statement wielded by the sort of spokespersons who also espouse such theories as “trickle down” economics. Somewhat inconsistently, “trickle down” economics proposes a world where another man’s accumulation of wealth can indeed be counted upon to affect your own but, optimistically, only for the better: Those who have less are expected to be satisfied by all the extra crumbs that will spill off the table with overflowing wealth. (The math behind this involves a prediction that the overall pie will always be bigger by more than the amount the wealthy themselves take.) These are the same sort of folk who now speak about the 1% Club as munificent “job creators.” Those espousing such theories can be counted upon to argue against measures such as a progressive income tax structure in order to to reduce the gap between the rich and the poor by having the wealthy pay higher income taxes.

“Just because someone else is richer doesn’t make me poorer”: Does this kind of statement really need debunking? Isn’t it just obviously wrong when you think about it? Maybe only to some and what might not be so obvious is just how many ways the statement is wrong. Let me count some ways:
1. Compensation to top executives in the United States is now paid at absurd multiples of other employees’ salaries. Ben and Jerry’s may no longer limit compensation of its highest paid employees to seven times that of entry level employees but the fact that it once did puts in perspective the kind of huge differentials now prevalent. Exact reliable figures about the ratio of top executive pay to bottom level employee pay or average employee pay level for given years is not easy to come by and the figures depend upon which group of companies one is selecting to derive one’s statistics, but whether one is looking at a ratio of 531 average employees’ salaries to1 highly compensated CEO’s, 525 or 263 to 1, 185 to 1, or 325-to-1 (the last ratio involving executives getting paid an average of $10.8 million each), each of those multiples represent corporate resources that could be redirected into hiring more employees or paying other lower-paid employees more. And isn’t it reasonable to expect that in the face of a more progressive income tax system we would likely see that kind of redistribution as the attraction of high salaries waned just as was the case when taxes were once more progressive?

2. Further, as focus shifts away from jobs being chased and held just for the sake of very high salaries mightn’t the quality of corporate management improve as a result? This is something we’d perhaps be more apt to believe if, along with Warren Buffett, we believe that executive compensation for U.S. executives is too often “ridiculously out of line with performance” and that a cooperation’s board’s ability to rein in such excessive compensation is a critical test of proper corporate governance. These then are two ways in which wealth lavished excessively on select individuals means the impoverishment others.

3. After another man is paid so many multiples more than his fellows the amount he is likely to invest should predictably be much greater than the rest of the populace and that investment will, in turn, spin off even more income. A fair amount of his wealth will probably be invested where so many of us inevitably think to invest: in stocks. Much of the nation’s wealth is owned through corporations. Ownership and control over a corporation is represented by its stock. The wealth of all of the nation’s investors intermingles in its ownership of the stock of those corporations but the intermingling is not equal in terms of ownership of the decision-making process because when it comes to corporate governance majority rules, the preferences of the minority must bend to the decisions of the majority. That majority is not added up in terms of stockholders as individuals; majority is counted up in terms of the majority of individual shares of stock. Which is to say the calculation involved is sheerly a measure of total wealth. As so much of the nation’s wealth is owned through corporations much of the nation’s policy is consequently set by the demands of those corporations but in the setting of such policy the voice of any minority ownership is lost as the corporate governance structure acts as a lens to focus the corporation’s influence behind the interests of aggregating wealth, much like a magnifying glass can bend the diffuse rays of the sun to focus on one concentrated incinerating point. Maybe I want my local environment kept clean and pure but maybe the corporations don’t, and maybe the wealthy will fly away to vacation in remote spots beyond my means where devastations to the environment will matter less to them.

4. When we think of influencing policy in the United States we think about appealing to our politicians and electing those we think will represent our interests, but every politician thinks of him or herself as having two constituencies: a.) Those individuals capable of voting for them, and b.) Their money constituency. The first is a finite constituency tied to a locality. In the United States every individual must decide where he will vote and there he will get to vote only once in each election. The monied constituency is free to cross lines. Those wealthy enough can support candidates anywhere no matter whether they live or vote where a candidate is running. They can even support candidates running against each other in the same election, and do. The amount of support supplied this way is limited only by one’s wealth and the will to deploy it. In the United States political spending in the form of contributions to political candidates is almost entirely the provenance of the very wealthy. Most of the money for the nation's political campaigns comes from .5% of the population,which means that it is really the .5% vs. the 99.5% that Occupy Wall Street ought to be talking about and 1 percent of the 1 percent account for almost a quarter of all individual campaign contributions to federal political campaigns in 2010. That means we have a government where it is going to be very difficult for ordinary citizens to get the attention of their political representatives because those representatives will spend most of their time preoccupied thinking about the donating elite. Unequal access to those entrusted with governing the nation leads, quite justifiably, to distrust of the system by those without access.

5. One reason that distrust of the system may now be very sensibly coming to the fore is that, as argued by Glenn Greenwald, the author of “With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful,” we have seen a two-tier justice system emerge, one for the nation’s uppermost class, another for the less politically powerful. Normatively, the idea that the same rules apply to all ought to supply a check and balance against draconian abuses in the legal system and against violations of the law. With a two-tier system liberties are no longer protected by this check and balance. So yes, when others become a lot wealthier than the rest of us we poorer souls all become still poorer because even our life and liberty are put in jeopardy.

6. Others being wealthier also makes us poorer when we are competing in the market for the same limited resources. This is really classic supply and demand economics. More money chasing a limited supply drives prices up. Since real estate is unique and can’t be duplicated it is very easy to see how the rules apply. In 2004 when apartment prices in New York were rapidly rising the New York Times ran an article about “gazumping” which, technically, is the acceptance of higher offer from a different buyer after a handshake deal on a lower apartment price was reached. With the market awash in new cash, offers significantly trumping already accepted offers for which contracts weren't yet executed were becoming commonplace. It created a lot of pressure to close deals rapidly. A “gazumping” buyer can be particularly effective in persuading a seller to accept an offer (in the bidding practice that is considered less than entirely ethical) if they offer cash and a substantial deferential in price. Sellers may appreciate the higher prices the wealthy pay but say, for instance, you have a property that has been in a family for many years: Members of the extended family who want to buy it and keep it in the extended family (essentially maintain the status quo) may be “gazumped” out of their opportunity to do so by those who have become disproportionally wealthy. Another example involving real estate would be a neighborhood townhouse providing homes to perhaps nine renting families which is then purchased by a bet-winning hedge fund entrepreneur who, with his newly minted wealth intends to occupy the entire building after he evicts all the long-term tenants. Those tenants will have to move elsewhere. Shifting wealth will subtract from their other choices and the prices they will pay will accordingly be higher. These examples involve real estate but the same rules apply whenever there is competition for commodities that are limited.

7. Others having wealth substantially exceeding my own makes life more expensive in other ways. Sometimes the cost of living gets established as a community package. Say I live in co-op or condominium building where the expense of maintenance and operation are handled communally. If everyone in the building has resources similar to mine we are all apt to have similar notions about the value of certain expenditures and the need to make careful resource-conserving choices. But if others in the building become far wealthier than I am then they may want to hire extra doormen and porters, multiplying expenses. They may also care less about close oversight of the the wisdom with which each community dollar is spent. They may be more inclined to delegate such oversight to hired professionals at extra expense. In their view the lobby might need to be grander. The wintertime heat in the building might be ratcheted up profligately allowing windows to be flung open. The building may become unaffordable to the less affluent but because the expenditures are communally undertaken and enforced those expenses must be paid by all who stay. Those who need to move as a result will bear an extra expense but those who don’t, won’t.

8. The community-determined expenses discussed above which are enforced are presented conceptually with the example of a residential co-op or condo, but the very same sort of situation can occur when government in a locality decides to provide a higher level of more expensive services, better roads, more frequent trash pick-ups, a more ostentatious Town Hall, etc. Or it can work similarly but in reverse: As an area fills with wealthier residents there may be fewer among them who feel the need for the services of a good public library open at convenient hours throughout the week. As a result these services may be cut back.

9. Besides communally undertaken and enforced expenses there are expenses associated with living alongside wealthier people that are not enforced but nevertheless hard to avoid. Those with fewer resources appreciate some of the changes that come with a gentrifying neighborhood (renovations, cleanliness, policing may improve and some new stores may be appreciated) but one of the complaints such residents often have is that many of the stores selling merchandise at price points geared to their own incomes disappear and are replaced by stores selling merchandise at price points they can’t afford. A Starbucks may have a certain novel cachet but the Starbucks coffee can be a lot more expensive than the alternatives.

10. Looking for a new home one might also find one’s choices of apartments circumscribed by the wealth and more affluent life style of others when one encounters apartments that are available only if one pays unaffordable “amenity fees.” The amenity fees may boost the cost of renting more for those looking to save money by doubling up when they are required to be paid on a per person basis. Developers have been packing new New York City buildings with amenities like swimming pools, party and entertainment rooms, screening rooms, roof decks, etc. - There is no free lunch (although amenities sometimes include ostensibly-free regularly-served breakfasts) so these would be paid for in increased prices somehow but now developers make a practice of charging overtly for these amenities by required fees imposed in addition to the rent.

11. The very best schools, particularly colleges, are also likely to exceed the reach of the less wealthy for a variety of cumulative reasons: a.) tuition b.) higher SAT scores by virtue of hired tutors and prep c.) preference for legacy admissions based on prior family member attendance d.) Attendance at better feeder schools, and e.) donations from the family to the school. Whether or not one succeeds in sending one’s children to the nation’s select set of very top schools would not be such an significant issue (many schools are very good and more than sufficient for providing excellent educations) were it not for the fact that attendance and socializing at premier schools significantly eases the entry of the next generation into a privileged club whereby they can expect better opportunities in terms of earning wealth. Ultimately it becomes a self-perpetuating system.
The above list can no doubt easily be expanded. I invite readers to suggest additions by commenting on this post. I know the list is not all-inclusive.

I originally thought to write this article months ago back when I first mused about what had been said on Bill Maher’s show. Since that time there was an influential article in the May 2011 edition of Vanity Fair by Joseph E. Stiglitz that makes similar and related points even if its theme is not exactly the same. On point Stiglitz makes that could be added to the above list is that the nation’s decisions with respect to war are affected when there is a class wealthy enough not to send any of its children to war. Surely we are poorer when another disinvolved individual makes a decision to send our children to war. I strongly suggest that if you have appreciated this National Notice article and haven’t yet read Mr. Stiglitz’s, you read it: Of the 1%, by the 1%, for the 1%.

A final point to mention: After acknowledging that another man’s wealth can, indeed, make me poorer in all the ways mentioned, there is another economic truism to remember. . . The value of a dollar is greater to a poor person than it is to a rich person. Ergo, when a wealthy man’s wealth makes a less wealthy man poorer, the significance in the shift is greater to the poorer individual. To the extent that the shift reflects an injustice, that injustice is consequently greater.

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