For the fourth consecutive year, the Star Tribune reported last month, Stephen Hemsley, CEO of Minnetonka’s UnitedHealth Group, saw his total compensation decline in 2013.
Hemsley’s shrunken rewards, the paper reported in the deadpan tone of its “CEO Pay Watch” feature, totaled $28 million.
C.S. Lewis said that a young atheist can never be too careful about his reading — meaning that encounters with great religious writers can undermine the most determined unbelief.
These days, an aging believer in the rationality of the free-market economy can hardly be careful enough to avoid doubt-inducing suggestions that something has recently gone haywire in the extreme concentration of income and wealth among the rich.
The “CEO Pay Watch” regularly delivers disorienting glimpses through the looking glass and into the wonderland of the super-wealthy, where Hemsley’s kingly pay is notable but not unheard of.
Even worse, impeccably reliable reports from the Congressional Budget Office and credible economists confirm that inequality has been growing dramatically since roughly the late 1970s. Economic gains have been flowing overwhelmingly to the well-to-do and even more strikingly to the elite of the elite — the top 1 percent of the income distribution, even the top half-percent.
This trend appears to be a fact, even if Barack Obama believes it (along with Paul Krugman and the Occupy Wall Street crowd). Conservatives and libertarians, the free market’s loyalists, may soon have to engage the growing debate over inequality more constructively. Covering our eyes and decrying “class warfare” may not suffice politically for long.
Besides, our era’s remarkable increase in inequality is, like all facts, interesting.
“So what?” is of course the orthodox free marketeer response to rumors of rising inequality. If the market is making high achievers richer compared with everyone else, it must be for the best, inspiring effort and creativity and ultimately more prosperity for all, and it must be justified, with individuals’ rewards reflecting actual economic contributions.
There’s truth in all that, but if it’s your only response, you had best not read one of the most-discussed books of the year, French economist Thomas Piketty’s “Capital in the Twenty-First Century.”
It goes without saying that Piketty is a man of the left — did I mention he is a French economist? But his book is a data-rich and thought-provoking history of income distribution that makes it hard not to worry about the path today’s economy is on.
Much simplified, Piketty’s story is that inequality was enormous at the start of the 20th century — everywhere, but especially in Europe, with its entrenched aristocracies. Then, for roughly half a century between 1930 and 1980, inequality significantly narrowed. Piketty says this came about through the ravages of two world wars and the advent of many redistributionist policies, ranging from expanded education to high taxes on the rich.
But since about 1980, inequality has grown once again — everywhere, but especially in the United States, where things are just about back to where they were a century ago.
Also distinctive about the American situation, Piketty writes, is that the growth of inequality here is mainly due not to inherited wealth but to the appearance of unprecedented inequality in income from labor. See the “CEO Pay Watch.”
Piketty makes two arguments that are particularly discomforting to a defender of the unfettered market. First, that today’s trend is not the way it was supposed to be according to free-market devotees; and second, that this trend is nonetheless perfectly natural, even inevitable in the absence of extreme events like the world wars and all that followed from them.
It’s true that the traditional promise of a dynamic capitalist economy was that it would produce not equality but a broader distribution of wealth than was known in stagnant aristocratic societies. Today’s trajectory raises questions about that.
As for the naturalness of rising inequality, Piketty has an intriguing theory about the inevitable concentration of accumulated wealth. But America’s special situation — where soaring pay among the elite, particularly soaring executive pay, plays a dominant role in increasing inequality — sends one back to pondering Hemsley’s $28 million payday.
There is, after all, a certain logic in a CEO’s pay rising to dizzying heights, given the huge scale of today’s business enterprises. UnitedHealth Group reported net earnings last year of $5.6 billion. Hemsley’s total eye-popping compensation, in short, is just one-half of 1 percent of what’s at stake under his leadership. Paying it may make sense for shareholders.
But big corporations are not new. Why has competition for executive talent caused top pay to soar so wildly in recent decades? Why wasn’t it as outlandish years ago?
Piketty’s answer is that in large part top incomes were restrained in the middle decades of the 20th century by America’s then-confiscatory top marginal income tax rates.
As recently as 1981, the U.S. tax rate was 70 percent on joint incomes much above $500,000 in today’s dollars, and the very top rates had been above 90 percent in the 1940s and ’50s. Such punishing rates, Piketty argues, never raised much revenue but were the functional equivalent of outlawing compensation above a certain level, since no one had much incentive to seek, or to provide, pay that would flow so heavily to the government.
Since then, beginning with the Reagan-era tax cuts, top tax rates have been sharply lower (they’re about 40 percent at the federal level today). And top incomes have taken off.
It’s not altogether that simple (one hopes). There’s more to the broader inequality story, as Piketty acknowledges — elements many friends of the free market might prefer to discuss, like the effects of technology and education and globalization and family structure and more.
But Piketty’s warning that ever greater (and ever more destabilizing) inequality may be our fate unless forceful new policies intervene is, as I said, interesting, and unsettling — and worth the risk of thoughtful consideration.
D.J. Tice is at Doug.Tice@startribune.com.