A version of this article appeared in the Philadelphia Daily News in October, 2008

Bailouts for Billionaires

By Mark Price, PhD

Wall Street is now the beneficiary of the largest government bailout in American history. In the past decade, at the same time that financial engineers were concocting new and exciting financial products, now worth so little that taxpayers have  to buy them, the newest standard in Wall Street compensation was being set—the billion dollar salary. 

Over the past 25 years, each new peak in Wall Street paychecks set a new standard, which then rippled out all across the country as CEO’s and other top managers more and more began pointing to “Wall Street salaries” to justify increases in their own pay.  

Consider former Secretary of the Treasury Robert Rubin, whose government salary was just under $152,000 when he left office in July 1999. In October of that same year, Rubin joined Citigroup and for three months of work in 1999 earned nearly $21.5 million. In an effort to minimize his role in the current financial troubles at Citigroup, Rubin has maintained that he didn’t have operating responsibility at the firm. It is hard to imagine a better example than this of how out-of-control executive compensation has become: a high level executive making nearly $45,000 an hour claiming he is not responsible for the troubles his firm now faces!

Exploding executive pay trends explain in part why noted economists Emmanuel Saez and Thomas Piketty find that the top 10% of U.S. families went from earning just over a third of all income in 1973 to earning just under half in 2006. According to the Saez and Piketty data, the share of income flowing to the top 10% in 2006 was the highest it has been since 1917. The more frightening fact is that the previous high was in 1928, the year before the great stock market crash of 1929.

In the wake of that crash, the federal government actually made things worse by neglecting to take steps to prevent the collapse of the banking system. Nearly a third of all banks in the United States failed.

Today, Federal Reserve Bank Chairman Ben Bernanke, guided by the lessons of history, is working to prevent bank failures.  But there are more lessons from the Great Depression that our leaders should look to.

Measures were taken back then to raise the incomes of families on “Main Street” so that the economy would never again spiral out of control because of rising joblessness and falling wages and consumption.

Perhaps the most important step, one that helped millions realize the American Dream, was a 1935 law strengthening workers’ rights to join labor unions.  In addition, American courts began to display a new willingness to support these new rights. And Congress took one action after another to encourage middle-class consumption by passing the minimum wage law, Social Security, and our unemployment insurance system.

As a result of stronger rights to unionize, millions of Americans joined unions. That surge gave to American workers unprecedented bargaining power. That increased bargaining power led to steady wage increases and fueled an explosion of labor productivity that supported higher incomes for all Americans, not just those at the top. 

Then, In the 1970s, another war (in Vietnam) and the 1973 and 1979 oil price shocks introduced Americans to the dual misery of high inflation and rising unemployment.  

The solution hatched in the minds of academics was the idea that less government oversight of markets and less bargaining power for workers were needed to get the economy growing again. 

Economic growth did return, although not as rapid or as sustained as in the New Deal decades. And as time passed, more and more of the benefits of that growth flowed to the richest Americans.  

Pennsylvania has been far from immune from these trends. From 2001 to 2005, the top 1% of families in our commonwealth captured a whopping 79% of the growth in income. Meanwhile, wages for most Pennsylvania workers are stagnant, and fewer people have health insurance or a pension through their jobs.
Wall Street has failed, and the prospect that its failures might bring down our entire financial system has motivated a massive bailout. Rather than the promised “trickle down” of prosperity to typical families, our tax dollars must trickle up to save the financial system from ruin. 

The time has come to rebalance the ledger and put more power in the hands of ordinary workers. A healthy economy is one in which we all prosper—not just those fortunate enough to work on Wall Street.