CEOs and Income Inequality

      

Income Inequality 2025

 

This week the Connecticut Mirror, an online news source, reported on a study by the AFL/CIO that indicated there was a growing disparity between the income of corporate CEOs and ordinary workers. The Connecticut Mirror likes to run such stories since they seem to provide hard statistical evidence for its pet issue of inequality in Connecticut, whether it be racial, gender or economic. 

Considering that the source of this story is a large labor union, one should be careful about evaluating its results and conclusions. Actually, one only has to read a couple of paragraphs of the Mirror article to see that the AFL/CIO study is a classic, self serving case of comparing apples to oranges. 

In the first place, the study compares the average compensation of CEOs in large corporations to the median compensation of all other employees of these companies. I don’t want to bore readers with a discussion of the difference between “average” and “median” but using one or the other can be statistically significant. The “median” batting average of the NY Yankees would be the number that half the team is over, and the other half is below. Outliers like Aaron Judge with his .350 average would have little impact on the median figure, but a large impact on the team average. 

Not only does the AFL/CIO study compare the “average” compensation of CEOs to the “median” compensation of all other employees, but also, it includes the total compensation of CEOs, including stock options and bonuses, but excludes the value of benefits like health insurance and retirement contributions received by ordinary corporate employees.

Moreover, the AFL/CIO study includes part-time employees in its calculations, something that obviously drives down the median income figure.  On the other hand, it does not factor in the huge amount of income tax that would effectively reduce average CEO compensation. *

Nevertheless, the study concludes that the disparity between CEO compensation and ordinary corporate employees reached an all-time high of 285-1 in 2024, up from 268-1 in 2023. One union executive claimed that the numbers in the study “only begin to scratch the surface of how runaway executive pay is fueling economic inequality.”

The Connecticut Mirror headline agreed, “Report: Gap between CEO and worker pay is widening in US, CT.” It makes you wonder if reporters and editors read their own stuff. The article did report that median income in Connecticut is about $60,000 per year, 50% higher than the national median income of about $40,000. Apparently, half the people in Blue State Connecticut make more than $60,000 per year. 

Ironically, the AFL/CIO reported alarming income inequality in 2024, the last year of the Democratic Biden Administration. In Connecticut, Democrats have also ruled for decades.

 

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* Note: For those interested in a more professional examination of these figures, here is a Weekly Bystander post originally written during the first Trump administration.

I have long suspected that the statistics used by progressive advocates to complain about income inequality in America were either flawed or misrepresented. In the June 25 edition of the Wall Street Journal an opinion piece co-authored by Phil Gramm, a former chairman of the Senate banking committee, and Robert B. Ekelund, Jr., a professor emeritus in economics at Auburn University, bore out my suspicions.

The authors cite a new study prepared by the Cato Institute’s John F. Early, a former assistant commissioner of the Bureau of Labor Statistics that provides the “most comprehensive accounting to date of how taxes and government payments affect income distribution in the U.S. Apparently, the traditional statistics used by the Census Bureau do not take into consideration about $1 Trillion dollars in annual government spending.

The value of Medicaid, food stamps, the earned income tax credit and about 85 other Federal government programs is not included. Also, state and local income supplements are not included in calculations of income. On the other hand, reductions in income due to all sorts of taxes are not factored into income distribution statistics.

Here is the authors' conclusion. 

“The most surprising finding is the astonishing degree of equality among the bottom 60% of American earners, generated in part by the explosion of social-welfare spending and the economic and wage stagnation during the Obama era.”

In 2013 the income of the bottom 20% in this country amounted to only 2.2% of total earned income but when other forms of income and taxes are factored in, its share jumped to 12.9%, a six-fold jump in earnings. Similarly, the next 20% saw its share of the nation’s income jump from 7% to 13.9%. 

When we get to the middle class in the next 20% or third quintile, their total income was not far from their earned income. Primarily wage earners, this group took home only 15.4 % of the national income, not much more than those in the two quintiles at the bottom. 

The real inequality, however, is in the fact that this group had to work for most of its income while those in the lower quintiles did not. In fact, many of these middle income families had to work two or more jobs to just stay even with those in the lower quintiles. 

Not surprisingly, when taxes are taken into consideration, even the well to do in the top 20% saw their share drop from “57.7% of earnings to 39.3% of consumable income.” I suspect that a society in which the top 20% make only 40% of the consumable income is unprecedented in American or even world history. Even in Communist countries like the former Soviet Union, China, and Cuba, the disparity between rich and poor was much greater.

Based on these new statistics it would appear that income inequality is not the great problem that progressives make it out to be. According to the authors, a much greater problem is the discontent in people who have to work hard to have the same spendable, after tax income of people who do not work at all.

Rather than Russian collusion or Hillary Clinton’s lackluster campaign, Senator Gramm and Professor Ekelund believe that it was this discontent in the middle class that led to Donald Trump’s victory in 2016. The headline above their article was "How Income Equality Helped Trump." The Gramm/Ekelund article was adapted from their forthcoming book, “Freedom and Inequality.” Progressives will never stop complaining about income inequality, but it was income equality that did them in in 2016. 

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Asset Inequality

  

As the Presidential race heats up I think it might be good to avoid personalities and discuss some of the issues that voters should consider. Here is part of a post I put up three years ago that still seems relevant today. ...................................

The income inequality bemoaned by progressives in this country is a myth. Statistical studies that demonstrate an increasing amount of income inequality apparently leave out over a trillion dollars of government income transfers to those in lower income brackets. These studies also do not take into consideration the substantial impact of an effective progressive income tax code on the highest earners.  

Three years ago in a Wall Street Journal op-ed, Bruce D. Meyer, a professor of public policy at the University of Chicago, and James X. Sullivan, a professor of economics at Notre Dame, claimed that “there is much less material deprivation than there was decades ago.” They cited a number of studies including the American Housing Survey that demonstrated the significant strides made in this country. They wrote,

"The poorest 20% of Americans live as the middle class did a generation ago as measured by the square footage of their homes, the number of rooms per person, and the presence of air conditioning, dishwashers, and other amenities."

Unfortunately, studies that claim that America has reached an unprecedented level of income equality are questioned by politicians and advocates on both extremes of the political spectrum. Right wingers claim that the enormous sums spent by government social programs or income transfers have largely been wasteful and ineffective. Left wingers claim that they have not gone far enough and continue to call for massive spending to finance free college education, health care, minimum wage increases and a host of other benefits. 

Left wing progressives also claim that studies that demonstrate rising income equality are a politically biased attempt to roll back or eliminate the social service safety net. As a last resort, even if they grudgingly admit some measure of income equality, progressives will then raise the issue of “asset” inequality. Even if the incomes of the poor are improving, the gap in asset ownership is greater than ever before in history and getting wider and wider.

I know that there are incredibly wealthy people in the country today. Jeff Bezos of Amazon is reputed to be the wealthiest person in the world with a fortune of $157 Billion in 2018. But my own experience leads me to believe that the gap between the very rich in this country and the rest of us is no wider than it has ever been, and that more Americans share in the benefits of the American economy than ever before.

When I started my career in the financial services industry as a mutual fund salesman in 1972, it quickly became clear to me that most Americans did not own a share in the American economy. The mutual fund business was in its infancy, and only a small percentage of the population owned shares of common stock. Moreover, there were no IRA or 401k plans with tax favored treatment of retirement savings. Many leading companies had pension plans but there was little in the way of profit sharing plans or employee stock ownership plans. There were, however, two tax-favored retirement accounts but they were only available to small businesses (Keogh plans), and school teachers (403b plans). The 403b plan was the granddaddy of these plans and it is still used to fund the retirement of most college and university professors today. 

In the past 50 years the growth of all of these plans has been phenomenal. More Americans now own tax favored retirement plans than ever before and most of them are invested in a broad cross section of the American economy. In addition to the tax advantages, most people could participate in these plans through payroll deduction, the best way to save. Incredibly, the huge amounts that Americans put into these tax favored retirement plans do not count in official government statistics as savings.

When I started in 1972 the Dow Jones Industrial Average (DJIA) was about 1000. Today it is over 34000. The baby boomers who began saving in the 1970s have become the richest generation in history. On a recent visit to Alameda California, across from San Francisco Bay, I discovered that even modest homes there could not be had for less than $1 Million largely due to its proximity to trendy San Francisco. Although San Francisco is the bluest city in the bluest state in the country, most ordinary people cannot afford to live there.

Closer to home, my wife and I enjoy sitting at the marina near Fairfield beach and watching the boats, both large and small, go in and out. It is a constant parade. Fairfield is a middle class town but a good number of its people enjoy messing around in boats, and can afford to do so. 

But what about the lower classes? Although people living on welfare have very few assets, their guaranteed welfare income and benefits makes them virtual millionaires. For example, if someone receives a monthly welfare check, subsidized medical care under Medicaid, and housing and food assistance, they could easily have the equivalent of an income of $2500 per month or $30000 per year. At 3% interest it takes a million dollars of assets to provide an income of $30000 per year. Moreover, any assistance that poorer Americans get ultimately comes from the income and profits made by other Americans.

Despite protests from both the left and the right, it would appear that the social safety net is working in America. Other countries have emigration problems but America has an immigration problem. Despite all of its so-called flaws, people still want to come here. Isn't it incredible that thousands of refugees from Somalia have been able to settle in Minneapolis in the past few decades? It is even more incredible that one of them has been elected to Congress where all she does is complain about her adopted country.

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Income Inequality: 1950-2022

                                           

William F. Buckley, Jr.

Last year marked the seventieth anniversary of the publication of William F. Buckley's God and Man at Yale, a book which some believe to have launched the conservative movement in America. Below find a brief review. 

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 William F. Buckley Jr., the famed Conservative commentator, first came to nation’s attention with the publication of God and Man at Yale back in 1951. The book, a review of Buckley's years at Yale was subtitled, “The Superstitions of ‘Academic Freedom’”. 

Buckley must have had an outstanding college career before graduating in 1950. For example, one year he held the prestigious position of editor of the Yale Daily News.  He  loved his Alma Mater but found some disturbing trends. 

Here I would just like to concentrate on his lengthy chapter devoted to the teaching of economics at Yale, a chapter primarily analyzing the textbooks chosen for the basic introductory course that was taken by a large number of students. All four of the textbooks believed that the biggest problem facing America in 1950 was “income inequality”. That’s right! Income Inequality or, as he titled it, THE UNFAIR DISTRIBUTION OF INCOME. Why was income inequality such a big issue back in 1950?

I believe the answer can be found in the background of the economists who had written the textbooks. If Buckley was about 25 in 1950, then I would guess the authors of the textbooks were born before the First World War and grew up in the era marked by the subsequent Communist Revolution in Russia and the worldwide Great Depression of the 1930s. Paul Samuelson, for example, was born in 1915 and his textbook, Economics, an Introductory Analysis, was first published in 1948 and soon became one of the best-selling textbooks of all time. Samuelson’s book was one of the four reviewed by Buckley.

Samuelson and the others all believed that the experiment begun in Russia in 1917 was the wave of the future, and that the Great Depression in American had shown the inadequacies of the traditional system of free or private enterprise in dealing with modern economic issues. In the chapter on economics Buckley cited a comparison between the Soviet and American systems from one of these textbooks. The italics are Buckley’s.

compare “ the situation in our economy with that in a socialist economy, such as the Russian or Czechoslovakian. In the Russian economy the decision to produce, let us say 20 million tons of pig iron, is made by the Central Planning board, which presumably takes into account the needs and resources of the Russian economy before it comes to a decision. The same board determines how many automobiles to produce, how many pairs of socks to manufacture, and how many acres to put into wheat. In our economy, no such institution exists. No one group or person determines how much steel to produce, how many tractors to make, or how much land to plant in cotton…. In a socialist economy, important questions of output, price, employment, and so on are planned collectively. In a capitalistic economy, these decisions are made separately by individual firms…. How does the business firm determine how much it will produce? The answer to this question is to be found in the fact that the business firm in this country is privately owned…. The determination of how much to produce, or of the price to be charged for the product, is made with one interest in mind—that of the owner. The owner’s interest is to secure as large a profit as possible. [Pp. 65-66]

Just as today, it was believed that the profit motive that was the root of all evil. In the words of one text, “the state, being free from the profit motive and having the power of compulsion, is able to make its revenue fit its expenditures (within limits) rather than the reverse.” [p. 67] Of course, profit motive brings up the image of the greedy businessman as often portrayed in popular movies of the 1930s or in the figure of Mr. Monopoly from the very popular board game.

Samuelson’s text disclaimed the image but still used it.

In this connection, it is important to understand just what a monopolist is. He is not indeed,“…a fat, greedy man with a big moustache and cigar who goes around violating the law. If he were, we could put him in jail. He is anyone important enough to affect the prices of the things that he sells and buys. To some degree that means almost every businessman”… [75]

In 1950 all four textbook authors were convinced that the experiment going on in Russia was the wave of the future and that the private enterprises system was a thing of the past that had been forever discredited by the Great Depression. The textbooks, and the professors who chose them, were all advocates of central planning, a large central government, extremely high progressive income tax rates, and confiscatory inheritance tax rates. 

Writing in 1950 I don’t suppose that the young Buckley or the textbook authors could have foreseen the great economic boom that would take place in the USA in the next few decades, a boom that not only raised millions out of poverty, but also created the wealthiest country in the history of the world. Neither could they imagine that during the same period the Soviet economy would finally be exposed as a rotten failure. At the same time as we were beginning to learn about Stalin’s brutal oppression, we were learning of people lining up at Russian markets for hours to buy inferior or even non-existent necessities. 

The Soviet Union had eliminated income inequality by making everyone poor. Years later, we would learn that they had actually created a new aristocracy of Communist party members and their friends who lorded it over their subjects. As in most socialist countries members of the ruling party made up only about 10% of the population. So much for central planning and the elimination of the profit motive.

In one of history’s ironies Paul Samuelson made a fortune with his economics textbook, In true capitalist fashion he contrived to bring out a new edition every couple of years so that students could not buy older used texts. No central board or agency prevented him or his publisher from printing and selling as many copies as the market would bear. He lived a long life and received practically every award a scholar could get. In 1996, he was awarded the National Medal of Science by President Bill Clinton, another Yale graduate who now makes millions by giving speeches to fat cats all over the world while he, his wife, and "democratic socialists" or so-called progressives complain of income inequality.

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