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July 18, 2007

What Say You, Super-Rich?

Some have commented on the remarkable New York Times article from last weekend profiling some of the country's mega-rich, but mostly to note what a bunch of assholes the plutocrats portray themselves as. It's astonishing that Leo Hindery didn't pause before comparing himself to Derek Jeter and musing that, "I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear." It's a real testament to the laziness and relative comfort of the country that this comment didn't result in riots on sheer aesthetic grounds.

Less attention, though, has been given to the psychology of the subjects, which is actually fairly interesting. How, after all, do you mentally justify an income that gives you, an individual, a measurable and even substantial share of the national income in the wealthiest country in the world? And how do you do it when, 40 years ago, CEOs like yourself made far less money, and yet growth was similarly rapid and much more of its gains accrued to the median American? Answer: You construct a new mythology for yourself and your gains:

The new tycoons describe a history that gives them a heroic role. The American economy, they acknowledge, did grow more rapidly on average in the decades immediately after World War II than it is growing today. Incomes rose faster than inflation for most Americans and the spread between rich and poor was much less. But the United States was far and away the dominant economy, and government played a strong supporting role. In such a world, the new tycoons argue, business leaders needed only to be good managers.

Then, with globalization, with America competing once again for first place as strenuously as it had in the first Gilded Age, the need grew for a different type of business leader — one more entrepreneurial, more daring, more willing to take risks, more like the rough and tumble tycoons of the first Gilded Age. Lew Frankfort, chairman and chief executive of Coach, the manufacturer and retailer of trendy upscale handbags, who was among the nation’s highest paid chief executives last year, recaps the argument.

“The professional class that developed in business in the ’50s and ’60s,” he said, “was able as America grew at very steady rates to become industry leaders and move their organizations forward in most categories: steel, autos, housing, roads.”

That changed with the arrival of “the technological age,” in Mr. Frankfort’s view. Innovation became a requirement, in addition to good management skills — and innovation has played a role in Coach’s marketing success. “To be successful,” Mr. Frankfort said, “you now needed vision, lateral thinking, courage and an ability to see things, not the way they were but how they might be.”

But if these CEOs believe their superhuman capacity for "lateral thinking" justifies their salaries, their own words puncture the rationale for allowing them such great gains:

Not that money is the only goal. Mr. Hindery, the cable television entrepreneur, said he would have worked just as hard for a much smaller payoff, and others among the very wealthy agreed. “I worked because I loved what I was doing,” Mr. Weill said, insisting that not until he retired did “I have a chance to sit back and count up what was on the table.” And Kenneth C. Griffin, who received more than $1 billion last year as chairman of a hedge fund, the Citadel Investment Group, declared: “The money is a byproduct of a passionate endeavor.”

Mr. Griffin, 38, argued that those who focus on the money — and there is always a get-rich crowd — “soon discover that wealth is not a particularly satisfying outcome.” His own team at Citadel, he said, “loves the problems they work on and the challenges inherent to their business.”

That doesn't make it sound like slightly hire tax rates would destroy their motivation for productive endeavors. But wait!

The new tycoons oppose raising taxes on their fortunes. Unlike Mr. Crandall, neither Mr. Weill nor Mr. Griffin nor most of the dozen others who were interviewed favor tax rates higher than they are today, although a few would go along with a return to the levels of the Clinton administration. The marginal tax on income then was 39.6 percent, and on capital gains, 20 percent. That was still far below the 70 percent and 39 percent in the late 1970s. Those top rates, in the Bush years, are now 35 percent and 15 percent, respectively.

“The income distribution has to stand,” Mr. Griffin said, adding that by trying to alter it with a more progressive income tax, “you end up in problematic circumstances. In the current world, there will be people who will move from one tax area to another. I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard.”

"I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

If I were writing an economic history of the past thirty years, that quote would open my book. It explains just about everything. The way patriotism has become entangled with economic individualism and untrammeled wealth. The way the rich have stood solid and united against higher taxes, arguing that they would harm their economic output even as they denied their work was anything but an expression of virtue and internal drive. The way we've become blase about such sentiments, and so a quote like that can pass virtually unnoticed, rather than becoming the only thing any Democrats says for the next three weeks.

July 18, 2007 in Inequality | Permalink

Comments

Everytime someone says "lateral thinking," the Lord weeps.

Posted by: Tyro | Jul 18, 2007 1:46:03 PM

"I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

Well, you know, "I should be obscenely rich and the rest of you can bugger off" is, after all, a principle.

Posted by: Glenn | Jul 18, 2007 1:56:44 PM

How, after all, do you mentally justify an income that gives you, an individual, a measurable and even substantial share of the national income in the wealthiest country in the world?

Why do they need to justify it? If you think it's unjustified, then you need to explain why. And merely observing that CEO incomes were lower in the past in relative terms than they are today is not an argument.

Posted by: JasonR | Jul 18, 2007 1:57:10 PM

I don't get it. If his taxes were raised, and the 70 hours a week he worked would suddenly bring him less salary than before, he may decide that working those hours is no longer worth the money he's taking home now. Seriously, why is that considered so atrocious?

Posted by: JR | Jul 18, 2007 2:02:02 PM

JR, he said he'd work less on principle, not because the tradeoff wouldn't be worthwhile. Only lawyers, doctors, and other high-paid professionals who are paid by the task or by the hours can rationally make the "I will work less hours if marginal rates increase" argument. CEOs are paid on salary.

Posted by: Tyro | Jul 18, 2007 2:04:40 PM

Huh? So what if they're paid on salary? That obviously doesn't prevent them from varying the amount of work they put into the job based on how much they're taxed. And it's not just a matter of the number of hours they work, but how productive they are during those hours.

Posted by: JasonR | Jul 18, 2007 2:10:01 PM

So you're saying he's a liar, right? That's a perfectly fair position, but I just want to make sure you're understanding his comment that he'd work less on principal, not because he'd take home less money.

Posted by: Ezra | Jul 18, 2007 2:12:22 PM

JasonR, we could have this discussion if Griffin made that argument, but the fact is that he made the argument based on principle. In any case, it's hard to take seriously the argument from a CEO of a large corporation regarding this matter, because his additional work is not intimately tied up into the value he adds, and thus his marginal salary increases. He admitted as much, because he didn't make the argument that higher taxes would make the work vs. free-time tradeoff no longer worthwhile. He point blank said that the principle of the issue (35% marginal rates?) would cause him to avoid the job. But yet, from all accounts, this isn't really the case, if such a tax structure were put into place.

Posted by: Tyro | Jul 18, 2007 2:14:39 PM

The "principle" comment seems ridiculous, even for an enterpriser like me.

Posted by: DM | Jul 18, 2007 2:15:47 PM

For the record, the doctors and lawyers I know who are paid based on how much work they do have little respect for CEOs because their work isn't tied to the compensation.

Unfortunately, since those doctors and lawyers aspire to be of a higher class station than they actually are, they quickly forget that they are the part of the group Edwards talks about when he talks about those who make money through "work" vs. those who make money through "wealth."

Posted by: Tyro | Jul 18, 2007 2:19:00 PM

I submitted this letter to the editor of the New York Times. It didn’t get published, but I also noticed the same passages:

To the editor: “The richest of the rich, proud of a new gilded age,” (July 15, 2007) was a fascinating case study in the psychology of today’s oligarchs. While they are free believe they are super-heroes in an Ayn Rand novel, propound Margaret Thatcher’s maxim that “society doesn’t exist,” and advocate paying a lesser percentage of their taxes than their secretaries, I am free to disagree. But it would be nice, if they didn’t lie to us and themselves: you cannot on the one hand insist as Mr. Weill did that he didn’t have the chance to count what he had until he retired, or declare, as Kenneth Griffin did, that “The money is a byproduct of a passionate endeavor.” And on the other hand say, as Mr. Griffin did: “I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard.” Our political discourse deserves better. This sort of talk is nonsense, as their own comments prove, and only serves to blackmail politicians and scare the public, creating what Charles Lindblom called a “market prison.” Let’s have the courage to call out politicians and businessmen who would imprison us.

Posted by: David | Jul 18, 2007 2:21:31 PM

JasonR, we could have this discussion if Griffin made that argument, but the fact is that he made the argument based on principle.

So what? If he thinks a higher tax would be unjust as a matter of principle, why's that not a legitimate reason to work less? And he's just one individual, anyway. Other CEOs may have more immediate and pragmatic reasons.

Posted by: JasonR | Jul 18, 2007 2:21:32 PM

Why do they need to justify it? If you think it's unjustified, then you need to explain why. And merely observing that CEO incomes were lower in the past in relative terms than they are today is not an argument.

JasonR, once again sporting ideological blinders, ignores the obvious. His question should logically be directed to the CEO's, since they are the ones coming up with the self justifications. Ezra is simply observing that their self justifications are contradictory and self serving.

Of course, if one's income need not be justified, then there is clearly no connection between the quality and quantity of work and its level of compensation. The CEO's in question understand this, even if Jason doesn't.

Posted by: W.B. Reeves | Jul 18, 2007 2:27:27 PM

If he thinks a higher tax would be unjust as a matter of principle, why's that not a legitimate reason to work less?

Because, personally, I think that there will be someone willing and able to fill in his shoes if he weren't willing to do it, particularly since CEO salaries far-exceed Executive Vice President salaries.

(also, I admit that I was conflating you and JR in my replies. JR made the argument explicitly that the "hours wouldn't be worth it", when such an argument doesn't apply to someone like a CEO, compared to a doctor or lawyer). I suppose it's possible that someone really would stop working on principle if his marginal rates were raised to year 2000 levels, but I simply don't think he would. CEOs are horrendously unqualified for anything else, which is why they have golden parachutes-- once they leave their CEO position, they'll likely never work again outside of the much-lower profile, much-fewer-perks private equity field.

Posted by: Tyro | Jul 18, 2007 2:31:52 PM

Prediction: If CEOs were to work less, they would make fewer foolish decisions, employee morale would soar, productivity would skyrocket and America would be restored to the pinnacle of economic power.

Let's tax them buggers.

Posted by: justawriter | Jul 18, 2007 2:39:26 PM

If a CEO creates a lot of value for shareholders as a result of a sound strategic vision, ability to make acquisitions on favorable terms and add value to them afterward, and pick and develop effective senior managers, I don't have a problem with multi-million dollar compensation (mostly via stock options and restricted stock). On the other hand, former Disney CEO, Michael Eisner, who destroyed value during the last ten years of his leadership and drove a lot of good people away yet still received huge compensation every year is outrageous. Same for the huge exit packages the Board awarded to former Pfizer CEO, Hank McKinnel and former Home Depot, CEO, Robert Nardelli. There are many other examples besides those.

But if the tax became too high, as a matter of principle I would not be working this hard

Separately, I think this sentiment goes a long way toward explaining the preference among Europeans and Canadians for much more leisure (paid vacation) as compared to Americans. If the taxpayers are paying for your education, healthcare, and ultimately providing a generous pension, but the total tax burden required to make that all happen is well north of 50% of gross income, why work hard?

Posted by: BC | Jul 18, 2007 2:44:44 PM

Separately, I think this sentiment goes a long way toward explaining the preference among Europeans and Canadians for much more leisure (paid vacation) as compared to Americans. If the taxpayers are paying for your education, healthcare, and ultimately providing a generous pension, but the total tax burden required to make that all happen is well north of 50% of gross income, why work hard?

Taking vacation has nothing to do with how hard one works while on the job. Nor does it imply a sense of laziness overall, or a lack of motivation.

It may surprise some people to learn this, but in Europe and Canada people start businesses, invent things, come up with new ideas and all the rest. That they also apparently want to have fun every once in a while just means that they want to have fun every once in a while.

If the US were to mandate that all corporations provide 15 days of PTO a year, it doesn't mean that business owners would be required to take time off. Therefore, our proud, noble group of entrepeneurs could still, if they want, work every single day. In fact, if they were required to grant PTO to their employees, then they would probably have to work even harder, which would increase, I don't know, their morality or Americanity or something. In fact, why do entrepeneurs hire other people anyway? Doesn't paying someone to do what once was your job sound really Frenchified?

Posted by: Stephen | Jul 18, 2007 4:37:43 PM

what I like about his comment is that it shows how thorougly economic theory has intermingled with free market ideology.

It's not that he would work less because of the negative *incentive* of taxation (the so-called "substitution effect"), but it has become a moral imperative for this man.

He has to make sure the incentives work as his political ideology would predict! It's become a matter of individual responsibility.

just great.... (of course, to each his own, but I think this quote is symptomatic of something larger)

Posted by: eli | Jul 18, 2007 4:52:00 PM

Tyro,

Because, personally, I think that there will be someone willing and able to fill in his shoes if he weren't willing to do it, particularly since CEO salaries far-exceed Executive Vice President salaries.

Then his company can threaten to replace him with that someone and he can decide whether his principle is worth losing his job over.

I suppose it's possible that someone really would stop working on principle if his marginal rates were raised to year 2000 levels, but I simply don't think he would.

I don't, either. More likely, there would be a reduction in work because of the reduced net compensation. I'm sure there's a lot of elasticity, but in general higher taxes reduce the incentive to work.

Posted by: JasonR | Jul 18, 2007 4:53:37 PM

First, while I don't want to sound like some Lucianne commentor (although I am one... long story), this is a New York Times article, so one has to assume that the quotes selected were done so to make a point. The whole topic - of taxes, the wealthy, and the people at the very top - probably deserves more exploration. I'd say there's been remarkably little attention (which no doubt is the way they like it), but I do yearn for a piece that isn't mostly puffy interviews, and is mostly investigative in nature.

Second, like Jason, I'm not sure what the point of railing against Griffin is; he's got a view, he's entitled to it. I don't think it does one whit to help one decide whether or not to raise taxes on the highest bracket - if they say it will serve as a disincentive to working, fine; I'd bet thousands of others - probably younger - won't have nearly such qualms. Are high taxes a disincentive to certain sorts of income? To certain people, clearly yes - which is why we need to tax hedge fund bankers at a rate that evens out their absurd gains over a loophole. To some extent this will always be whack a mole - people who want to use every loophole to avoid taxes and keep considerable wealth will keep trying to get around the rules. What's not going to happen, and progressive lefties need to also adjust some expectations, I think, is that we will still have people of fantastic wealth in our midst. Not taxes, nor general disapproval of "gilded age" type antics will stop those who want great wealth. And I think the politics of treating the very wealthy as enemies just sets up trouble. Not every plutocrat fails to understand that others need help.

Posted by: weboy | Jul 18, 2007 5:24:58 PM

Taking vacation has nothing to do with how hard one works while on the job. Nor does it imply a sense of laziness overall, or a lack of motivation.
It may surprise some people to learn this, but in Europe and Canada people start businesses, invent things, come up with new ideas and all the rest. That they also apparently want to have fun every once in a while just means that they want to have fun every once in a while


Of course those other countries have entrepreneurs and inventors. However, people I've spoken with who grew up in Canada and Germany, to name two countries, tell me that culturally and on average, there is less interest in materialism and wealth accumulation than in the U.S. As long as they have enough to "get by" as they define it, they prefer more leisure to more income. It doesn't make them lazy; it's part of the culture, and I suspect that high rates of taxation and the comprehensive social safety net have at least something to do with it.

Even in America, many of us, once we hit our mid to late 40's and early 50's and realize that there are probably no more promotions in our future become less driven that we might have been earlier. Such things as family, hobbies, community service, the church or synagogue become higher priorities. Looking across the population, however, I think most people would view Americans as more materialistic, achievement oriented and interested in wealth accumulation than our European and Canadian counterparts. Perhaps others on the blog who either live or have lived in some of those countries might want to weigh in on this. I would be interested in your perspective.

Posted by: BC | Jul 18, 2007 6:20:03 PM

Yes, weboy. Not only are vast inequalities of income and wealth inevitable in a free society with a market-based economy (even Sweden has billionaires), but there is relatively little governments can do about it, short of draconian interventions that aren't remotely politically feasible. Economic inequality has been gradually increasing in the United States for decades, at least as measured by official income and wealth data. This trend has continued under both Republican and Democratic control of the government. It has continued under fluctuating marginal income tax rates. In fact, one the fastest periods of growth in economic inequality occurred during the 1990s, under the Clinton Administration. Whatever influence the government has, it amounts to fiddling around at the edges. The basic economic forces driving inequality--ever-greater trade and globalization, the increasing premium of intellectual labor over manual labor, the "superstar" effect, the differential impact of technological advances--are going to continue regardless of which party is in power.

Posted by: JasonR | Jul 18, 2007 6:23:01 PM

The point, weboy,is that people such as JasonR assume that these CEO's are rational or don't make absurd comments. It's no big deal if you assume they are people too who make just as many mistakes as the rest of us.

They are at the top of the heap because they deserve it. What happens to that belief when we realize they are humans just like the rest of us who don't necessarily deserve it?

Also, you do love attacking strawmen arguments that you make up about the left. For example, this comment strikes me as representative of your thinking despite your claim to be of the liberal bent, "What's not going to happen, and progressive lefties need to also adjust some expectations, I think, is that we will still have people of fantastic wealth in our midst."

It's very much the late early 1990s Rubineque thinking that says- lets do thing in reaction to the right rather than think about whats happening to our country systemically.

It reminds me quite frankly of how Sanpete does the same thing. Basically, I believe like him you are a 'liberal' suffering from battered wife syndrome. You assume what we think based on conservative frames of what we think.

Since this is a discussion of economic value (the real conversation) the problem is whether or not these executives are worth what they are worth? The question as has been discussed here is whether for example shareholders have the ability to control executive compensation. If not, who does? The question goes to the basic concept of what you consider capitalism to be? If your view is that it's whatever you get- so that you can rig the process - then you are right- we should accept it. If not, you may question securities law, tax law and other approaches designed to favor the super rich.

If they are willing to leave the US based on this- I say bye- thanks for playing. The thing is- i don't believe them.

Posted by: akaison | Jul 18, 2007 6:28:01 PM

This would all be a little more believable if the US taxpayer hadn't bailed out every major industry during my lifetime, provided all the infrastructure and major financing for the airlines and trucking companies, kept the economy going by building and junking enough military equipment to arm the world several times over, and issued a $500 billion get-out-of-jail card for the S&L crooks.

And there really isn't any big mystery how those CEOs got where they are today. Born rich, white and male, most of them had fathers who had attended big-name schools and got their sons in with an affirmative action program for the rich.

Heck, even JasonR is just practicing his ass-kissing skills here because he knows that lots of Republicans recently have made lots of money because they were suck-ups. If he really wanted to do anything worthwhile he would be too busy to post exty-zillion comments on so many subjects.

The reason to put a choke-collar on these big eaters is the same as it always was- to protect society from idiots with too much money for anyone's good. Letting these morons buy the Presidency for George Bush was a really bad idea, and letting them make fortunes from the disgrace and defeat of America is even worse.

As we will soon find out.

Posted by: serial catowner | Jul 18, 2007 7:16:09 PM

akaison, I'd argue with you, but I'm not sure where you're going with your point. I agree that growing inequality is a problem... I'm just not sure what you do about it. I'm firmly in favor of increased taxes for the highest bracket, ending the hedge fund inequality and probably reexamining capital gains; what I'm not convinced of is that you'll be able to substantially stanch the problem under that method. To the extent you ask, no, I don't think shareholders do have a lot of control over executive compensation, and again, I'm in favor of the SEC pushing boards to have more independent members and encourage better behavior on compensation... but again, will that stanch the larger problem of runaway compensation? I have my doubts. I think there's an anti-wealthy approach on the left that's just unrealistic. And personally, no, I don't think there's necessarily something inherently wrong with being rich or wanting to be wealthy, but I think a good number of progressives do.

I think it's easy to look at all that's happened in the past 7 years of Bush, and see things as bad getting worse. I just see things as bad and in need of correction. We can make the corrections, and I think there is a yearning to appeal to people to be better, come together, and do more for one another. We're not, as Democrats going to get everything we want. If that's going to make you angry, I don't know that there's a way to solve that. Although I think Jason is right that certain trends mean inequality will likely grow, I don't take that to mean we shouldn't try. I do think we should be realistic about what can be accomplished.

Posted by: weboy | Jul 18, 2007 8:21:14 PM

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