Mind the Gap!

Photo: Clicsouris / WIKIMEDIA COMMONS

The London Underground Railway System (lovingly known as The Tube) opened in 1863 and soon carried about 25,000 passengers a day. It now carries more than 1 billion passengers per year. During World War II, Londoners used the underground stations as bomb shelters. Trains and stations have been modernized over the years, but the shape of the platforms and the shape of the trains have not always fit perfectly. In many stations there is a slight gap between the train and the platform. At those stations you will see signs and hear announcements warning you to “Mind the Gap.”

I thought of this warning when talking to two friends recently. I think they might describe themselves as Rockefeller Republicans — fiscally conservative and socially moderate. At least one of them would have trouble fitting comfortably in today’s Republican Party. After a good meal and a few glasses of wine, I did what my wife always warns me against doing. I asked a controversial question. I asked if they thought that the boards of directors and management of major international companies have any responsibilities other than maximizing profit and share value. They looked at me with that special look reserved for the intellectually challenged and said “Of course not.”

I have written previously in this column of a major U.S. company moving 100,000 jobs to India in seven years, and filing a patent application for a method to identify jobs to outsource offshore. I have written of the chairman of the President’s Council on Jobs and the Economy heading a company that has paid no U.S. taxes in five years. I have written of Microsoft transferring intellectual property rights to Singapore, Ireland, and Puerto Rico to reduce taxes in the United States. I have written of the $2 trillion in profits that U.S. corporations have parked in offshore tax havens. I am sure my friends would agree that these are all legal actions of responsible directors and management that will maximize shareholder value. They remain legal because the companies spend millions on lobbyists and political contributions to make sure the tax loopholes do not get closed.

An October 2011 paper prepared by the Congressional Budget Office was entitled “Trends in Distribution of Household Income Between 1979 and 2007.” The paper looked at how household income had grown from 1979 to 2007, after adjusting for inflation. The average household income grew by 62 percent, after taxes. The top 1 percent had income growth of 275 percent, while the lowest 20 percent grew their income by 18 percent. Between 2005 and 2007 the income of the top 20 percent was more than all the remaining 80 percent. In 1980 the average CEO earned 42 times the income of the average worker. By 2010 that ratio had grown to 325 times.

One of the most significant factors in the widening gap is the way in which people in the top 1 percent earn their income. A major portion of the income of the top 1 percent comes from capital gains. Senior executives in companies derive more and more of their income from stock options and less from salary. For example, when Andrew Mason was fired as CEO of Groupon, his severance package was $378.36 – which was six months’ salary. However, he left with more than $200 million in stock. With capital gain tax rates at 15 percent, the inequality in after-tax earnings grew at a faster rate than pre-tax earnings.

We heard a lot from both parties in the recent election about their concern for the middle class, but I am beginning to wonder how long we will have a middle class. When I told my friends that I worry about good paying jobs being lost to China or India, they told me not to worry. As soon as the standard of living in China rises enough their wage rates will go up, U.S. wage rates will be competitive again, and the jobs will come home. My worry is if there will be a home for them to come to, and if there will be any workers left to do the jobs.

If a company has no responsibility to provide work for its employees and no responsibility to pay a fair share of taxes in the country where it is headquartered, then I guess my friends are right. Its only responsibility is to its shareholders. Of course the company wants to stay headquartered in the United States and be listed on the New York Stock Exchange so that it can be protected by U.S. securities laws. It wants to register its patents here to be protected by U.S. intellectual property laws. Its management like living in Manhattan because local taxes keep the streets clean and safe. But that is about the extent of its commitment.

This reminds me of a column I wrote several months ago in which I questioned whether trickle-down economics really worked. I received an irate e-mail from a reader. That shocked me, not because the reader was irate, but because I did not think anyone but my wife read my column. The reader questioned my knowledge of economics and asked if I realized that without the people at the top earning good money, there would be no jobs for manicurists or gardeners. That reader summarized my current concern much better than I could. Manicurists and gardeners may be good, honest, hard-working citizens, but I worry about a future country that consists just of hedge fund managers and hedge trimmers. That will really be a time when we should “Mind the Gap.”

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