- US income inequality, already at its worst levels since the 1920s, is likely to get worse because of President Donald Trump’s economic policies, including a tax-cut program that was heavily tilted toward the wealthy.
- A new report from the Economic Policy Institute finds the average CEO of a large US firm takes home a startling 312 times what their average worker makes.
- “CEOs are getting more because of their power to set pay, not because they are more productive or have special talents or more education,” the report says.
US inequality statistics have been so startling in recent years that they have almost ceased to shock – but they could undergird America’s next financial crisis.
That’s because consumers’ increasing reliance on debt in an environment of stagnant wages is leaving more American families financially insecure, to the point where even minor setbacks can be devastating.
A new report from the Economic Policy Institute, a liberal think tank in Washington, highlights just how startling the income gap has become.
It found the average CEO of the 350 largest US firms took home $US18.9 million in compensation (including realised stock options), a 17.6% jump from just one year earlier. In contrast, the average worker’s compensation climbed just 0.3%.
But here’s the real whopper: The average CEO now makes some 312 times what their average employee makes. That compares with a 20-1 ratio in 1965 but is still down from a peak of 344-1 in 2000, at the height of the tech bubble.
“Higher CEO pay does not reflect correspondingly higher output or better firm performance,” EPI said in the report. “Exorbitant CEO pay therefore means that the fruits of economic growth are not going to ordinary workers.”
This matters because policymakers, including top Federal Reserve officials, often blame weak productivity gains for a lack of wage growth. But if CEOs are gobbling up all the benefits of any productivity increases, then workers will have to look elsewhere for raises.
“Over the last several decades, CEO pay has grown much faster than profits, the pay of the top 0.1% of wage earners, and the wages of college graduates,” the report says. “CEOs are getting more because of their power to set pay, not because they are more productive or have special talents or more education. If CEOs earned less or were taxed more, there would be no adverse impact on output or employment.”
In theory, CEO pay is set by independent boards of directors. In reality, the relationships are often cozier and mutually beneficial. In 2011, the Securities and Exchange Commission implemented measures giving shareholders to have a “say on pay” through a vote – but that is only mandated to happen every three years, is often nonbinding, and acts more as rubberstamp than safeguard.
Several independent analysis conducted ahead of the tax plan’s passage found it overwhelmingly favoured wealthy Americans. Thus far, they have yet to spur substantial business investment or wage increases.
The good news, say EPI economist Lawrence Mishel and economic analyst Jessica Schieder, is that these policies and the negative trends they cause are eminently reversible. They recommend:
- Returning to higher marginal income tax rates at the very top of the income scale.
- Set corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation.
- Set a cap on compensation and tax anything over the cap.
- Allow greater use of “say on pay” practices that truly empower shareholders.
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