As we examine the entrails of Wall Street's still rotting corpse, it doesn't take the gifts of an augur to foretell our postcrash future. It will, at least temporarily, be one of asceticism. Conspicuous consumption is the new smoking. Wealth, and the desire for it, have become character flaws. The bankers we want to see pilloried, imprisoned or disembowelled — a sentiment whose intensity, judging from the tabloids, appears to be inversely related to our incomes — have outdone themselves in their ability to make us hate them. And they just keep on outdoing themselves, as demonstrated by the $165-million (U.S.) that American International Group Inc., now a ward of the state, just paid out in retention bonuses to many of the same top executives who drove the insurance giant, and the rest of financial system, into the ground. Even the most measured among us nod at headlines such as: "Not So Fast You Greedy Bastards." This outrage, like this financial crisis, is global. In Britain, it has found its whipping boy in Sir Fred Goodwin, who "retired" at 50 as the head of the Royal Bank of Scotland in November, claiming a full pension worth more than £700,000 a year. This is the same Sir Fred whose disastrous deal-making drove the bank to a £24-billion loss in 2008 — the biggest in British corporate history — forcing Gordon Brown's government to put up billions in bailout money. "Off with his Fred," The Mirror blared. In Canada, where our banks' legendary lethargy has turned out to be their saving grace, the chief executives at the Big Six had the good sense to voluntarily forgo bonuses for 2008 lest they get us hankering for the return of capital punishment. Perhaps sensing the mob's appetite for blood, they also agreed — not all of them willingly, mind you — to submit executive compensation to non-binding shareholder votes. Giving investors a "say on pay" is, by the standards of Canadian banking, a revolution in itself.
A PRETEXT TO SOAK THE RICH
If U.S. President Barack Obama needed a pretext to soak the rich, the AIG executives and their ilk have certainly given him one. It hardly seems coincidental that such a progressive politician as Mr. Obama was elected on the heels of the most protracted rise in income inequality in the United States since the one that began with the Gilded Age in the late 19th century. That boom ended with the Depression, a cataclysm brought on in part by the same kind of financial speculation that created the current mess. Those who are still wondering why they didn't see this crash coming were probably just not looking at the right data. Instead of wondering whether stocks were overvalued, derivatives were ticking time bombs, or housing was in a bubble, they should have just looked at how skewed income distribution had become.
Just as the New Deal would likely not have been possible without the Depression as its catalyst, Mr. Obama's attack on income inequality would face a much tougher row to hoe were it not for AIG and all it represents. The era that spanned from Franklin Roosevelt to Lyndon Johnson was one of rising real wages that culminated in the most equal distribution of wealth in U.S. history. Is that history about to repeat itself?
"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favour of so few," states Mr. Obama's proposed budget, tabled last month. "We need to remember that throughout our history, the United States has grown and prospered when all Americans have shared in the opportunities created by our economy … The past eight years have discredited once and for all the philosophy of trickle-down economics — that tax breaks, income gains and wealth creation among the wealthy will eventually work their way down to the middle class. In its place, we need economic opportunity to trickle up."
Mr. Obama proposes to raise the top two marginal rates on personal income, now 33 per cent and 35 per cent, to 36 per cent and 39.6 per cent, respectively, starting in 2011. The new rates would kick in at a household income of $250,000. The "rich" would also lose their ability to deduct interest on their mortgages. Dividends and capital gains would be taxed at 20 per cent instead of 15 per cent. Mr. Obama would keep the estate tax that the previous Republican administration had proposed to eliminate next year. The Wall Street weekly Barron's called the budget "bad news for investors and affluent individuals." Given the times, it will probably only make Mr. Obama more popular.
Mr. Obama's budget paints an ugly picture of what Ronald Reagan started and George W. Bush finished. Between 1980 and 2004, the portion of national income earned by the top 1 per cent of U. S. households doubled from 10 to 22 per cent. The combined net worth of the top 1 per cent was higher than the total for the bottom 90 per cent. In constant dollars, the average income of the top 400 U.S. taxpayers quadrupled between 1992 and 2004. The middle class in particular lost ground.
Canadians should save their indignation for their own governments. Income inequality, on both a pre- and after-tax basis, actually rose faster in Canada than in the United States in the decade between 1995 and 2005, according to an Organization for Economic Co-operation and Development study released in October. The growth differential was considerable in the latter part of the decade, a period characterized by large income-tax cuts by Ottawa and most provinces, declining real welfare benefits and tighter eligibility rules for employment insurance payments.
Still, overall, Canada has a somewhat more equal distribution of income, with a Gini coefficient (a statistical measure of income inequality) of 0.32 compared to 0.38 in the United States. We're not exactly Denmark, which registers a 0.23 on the Gini index. But we have proportionately fewer of the obscenely rich, and outside Alberta, a more progressive tax system.
If the Reagan-Bush tax cuts entrenched income inequality in the United States, how did the rich accumulate so much more pretax income in the first place? Two words: Wall Street. Much of the focus of activist shareholders' and anti-poverty advocates' wrath has been on CEO pay — noting that the average big boss now earns more than 350 times the salary of the average worker, up from 45 times three decades ago. But the real drivers of wealth accumulation in recent years have been the massive bonuses earned in the financial industry, according to a study by two University of Chicago professors, Steven Kaplan and Joshua Rauh.
Forget bank CEOs. Most of them were making whole lot less than the underlings who traded all those newfangled financial instruments. But even they were paupers compared to private-equity and hedge-fund managers, the top 50 of whom earned an average $588-million in 2007, according to the Institute for Policy Studies, a left-leaning U.S. think tank.
The bankers who underwrote subprime mortgages, packaged and peddled asset-backed securities and bought and sold credit default swaps might just be the modern-day incarnation of what the 19th- and early 20th-century economic essayist Thorstein Veblen called the "leisure class." Their "work" consisted of shifting around wealth, rather than creating it, much like the original leveraged buyout barbarians of the 1980s.
Barbarians don't produce anything. They just take things away from others. Then they show off their booty. That makes others envious. So, they try to emulate the barbarians, or at least try to look as rich as they are.
Veblen also reminds us of why any return of the pendulum, characterized by Mr. Obama's redistributive mission, is likely to be just that. Pendulums are always moving. Once the excesses are purged, and the United States feels sufficiently cleansed, the pursuit of happiness — a euphemism for property ownership — will resume. Conspicuous consumption, a term coined by Veblen, is not dead. It's just taking a breather.
"Ownership began and grew into a human institution on grounds unrelated to the subsistence minimum," he wrote. "The dominant incentive was from the outset the invidious distinction attaching to wealth, and, save temporarily and by exception, no other motive has usurped the primacy at any later stage of development."
OUR PREDATORY INSTINCTS
Our urge to keep up with the Joneses is almost primal. "The motive that lies at the root of ownership is emulation," Veblen asserted. "Property set out with being booty held as trophies of a successful raid. … As industrial activity displaced predatory activity, accumulated property more and more replaces trophies of predatory exploit as the conventional exponent of prepotence and success."
We can try to tame our predatory instincts, as Mr. Obama no doubt will do with his tax changes, but it will always be a bit like tilting at windmills. Veblen, who wrote during the Gilded Age, observed that the urge to redistribute wealth is not particularly a human trait. Or, at the very least, it is not a strong enough one to overcome "the desire of every one to excel every one else in the accumulation of goods."
Not me, you say?
Ask yourself that the next time, likely in 2010 or so, that you splurge on a new-generation wafer-thin organic light-emitting diode television, whose million-to-one contrast is wholly undetectable to the human eye. Ask yourself that the next time you salivate over that Miele W2839 washing machine. It's not because it will make your clothes any cleaner.
Mad at the bankers? Don't be. They are us.