Inequality in the US: (5) Where Great Wealth Comes From

It should be made clear at the outset that wealth per se is not the problem. It is true that people should be justly rewarded for their talents, ingenuity, and hard work, and earned wealth is one way to provide these rewards. Without such reward you get Cuban communism, where everybody is equal and poor and there is not much reason to excel.

But extreme wealth is a different animal altogether. Even with millions of us in the US still in dire financial straits since the 2008 crash, the wealth of the rich long ago recovered and reached new heights.

The sources of great wealth today are quite different from past centuries. Most great fortunes then were inherited fortunes based on land ownership, the original owner long deceased, the current heirs freed from any necessity to earn an income for their entire lives. The largest fortunes today are far more likely to be new, or at least not centuries old, and based on sky high salary and stock market investments.

Inheritance is becoming more and more important. Building great wealth takes many years, and the years of our lives have definite limits. The trend, therefore, is for more and more great fortunes to be inherited, especially since our laws favor passing on such wealth largely intact.

Wealth per se is not the problem.

Extreme wealth is never actually earned in any case. Today, extreme wealth comes from stratospheric pay as much as established wealth or inheritance. There are no conditions under which top managers, whose total compensation is the nation’s highest, can actually earn their mega-salaries. No matter how talented they might be, much of their income is determined by factors that have nothing to do with their managerial skills.

Often the income of top managers is determined by sheer luck, because top managers are universally well rewarded when the market goes up, no matter what they do. Some call it “pay for luck”. In many cases they are equally rewarded when their company loses money in a down market, and are frequently blessed with severance pay of tens of millions when they leave, even if they were on the job only a month or two.

Extreme wealth is never actually earned.

Other factors determining mega-salaries include a high-level “old boy network”. Top executive incomes are set by corporate boards, which consist largely of executives who also earn ultra-elevated salaries. The executive whose salary is being established likely sits on several of these boards that determine the salary of other executives in his price range. Naturally, they all approve of stratospheric compensation. 

Extreme wealth provides its owners with nothing they actually need, and has decided negative effects on the country. To appreciate just what these outsized incomes mean to the nation, consider this: The 2013 year-end bonuses of Wall Street bankers were equivalent to the entire annual earnings of every poor person in the country. This vast amount of money does absolutely nothing positive for the national wellbeing, but contributes heavily toward worsening inequality.

Even though these salary figures are amoral on top of being obscene, the money involved in mega-salaries of managers is not as great a threat to equality as established wealth.

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2 CommentsLeave a comment

  1. You forgot the extreme wealth of Hollywood and the sports world. At least managers of industry produce clothing, food, medical supplies, and yes crap like pet rocks. Stuff we need for the most part. Like you once said in a blog, it’s not easy coordinating the production of a product. (In this case you were advocating a worker-shared ownership.) Playing a game is still just a game. And despite what Gweneth says, most jobs are more taxing than acting.

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    • I find it hard to understand what the top managers produce that they couldn’t produce for 25% of what they earn. That’s what, for example, Japanese and Korean managers make. Hollywood and sports millionaires always pissed me off, but my understanding is that their total earnings are small compared to the biggest managers.

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