Why hare-brained schemes to bring down inequality do more harm than good
By S.M. | NEW YORK
THE chasm between the salaries of chief executives and the wages of rank-and-file workers has been growing steadily over the past few decades. Egalitarians are right to highlight this trend as a factor in the well-reported surge of wealth inequality in America. But ideas for narrowing the gap have been scarce. So it was with cautious optimism that I turned to Douglas Smith’s op-ed piece in Monday’s New York Times, “A New Way to Rein in Fat Cats”. Unfortunately, his proposal is a study in botched logic.
For Mr Smith, it is not enough for President Obama to raise the minimum wage for employees of federal contractors. He suggests there should be a cap—or "maximum wage"—on how much top federal workers and contractors make, too. What should this cap be? Mr Smith proposes that top officials should earn not more than 20 (“or perhaps even 27”) times more than “their lowest-paid workers.” He comes to this ratio because the president's salary, at $400,000 a year, is 20 times that of a worker making the new federal minimum wage of $10.10/hour. But this means that Mr Smith’s demand is already reality for federal workers, as no one earns more than the president. The example he cites of the “city manager and other top officials” in Bell, California “pulling down high six-figure salaries” is inapposite: the scandal in the Golden State involved secret, illegal siphoning of public funds, not legitimate salaries.
The real problem comes from Mr Smith’s suggestion that the same 20-to-1 (or, at most, 27-to-1) ratio should apply to “top-paid executives of companies that do business with the federal government.” He proposes that companies would have to adjust their salary ratios if they wanted to continue to win contracts. Now, it is true that many companies with government contracts have very high CEO-to-median-worker pay ratios. For example Lockheed Martin, an aerospace engineering giant, did about $37 billion in business with the federal government in 2012. Its pay ratio, as reported by Bloomberg, is about 315-to-1, with its boss earning almost $28m in 2012. But get this: the median worker at Lockheed Martin makes $87,555 in pay and benefits. Is it really an egalitarian priority to push the median worker’s compensation to $1.4m to reach the minimum of 5% of the top boss’s earnings?
Perhaps then Lockheed Martin should cut the CEO’s salary in half to try to meet Mr Smith’s standard. They’d still have to give the median worker a 900% or so raise. Why would that be a particularly desirable state of affairs? At any rate, the worst corporate offenders in terms of wage differentials—companies like J.C. Penney (1,795-to-1), Starbucks (1,135-to-1) and Nike (1,050-to-1)—don't do a lot of official business with the federal government. They also tend to pay their lowest-level workers little more than minimum wage. By contrast, the biggest government contractors pay median salaries approaching six figures.
Also notice that while Mr Smith is targeting the ratio of highest-to-lowest salaries, the 315-to-1 figure he mentions is Lockheed Martin's ratio of highest-to-median salaries. This conflation is significant. It means that Mr Smith’s strictures are even more unrealistic than they appear.
Mr Smith gamely admits that “some chief executives of companies with monopoly-like power” may balk at his proposed payment scheme. But this caveat undermines the case he’s trying to make. Suppose Lockheed Martin fails to meet the 20-to-1 (or 27-to-1) target, which, by any realistic assessment, it will. Which companies will jump in and take over building A-10 Thunderbolt fighter jets and K-MAX helicopters, along with several tens of billions of dollars in other projects? What is the scenario for all this business transferring to other firms? And would any company be willing to radically change their pay structures to win these contracts?
While well-intentioned, Mr Smith's proposal to cap top salaries makes no sense as a path toward addressing inequality. Such hare-brained schemes will only exacerbate angst among the wealthy over ineffective, anti-business government meddling and give them more fodder to worry that an anti-1% Kristallnacht is around the corner. (Even the Swiss roundly rejected limiting CEO pay in a referendum vote last year.) But there are more promising ways forward that go beyond higher marginal tax rates for plutocrats. Taxing capital gains as ordinary income, an idea some 1-percenters endorse, is one sensible move. A more holistic approach, including education reform and health reform, could help cut inequality off at the pass. None of these ideas is a magic bullet, but all have more to recommend them than a sudden drastic shift in federal contracting rules.
