February 14, 2007
When Giant Embezzlers Ruled the Earth

Before World War II the enormous inequality in American incomes was due to what were then called coupon-clippers: the nonworking rich whose income came from money-lending, stock gambling, and rents. Economists call this capital income.

This capital income dropped during the upheavals of the World Wars and the Great Depression, and the wage gap between top and bottom stayed smaller until the 1970s. Then wealth at the top began to be replaced by wage income — the working rich — who were theoretically employed by their stockholders.

The above is my summary of a summary of a National Bureau of Economic Research paper published last year by Thomas Piketty and Emmanuel Saez. The bureau’s summary continues:

Over the last thirty years, top income shares have increased substantially in English speaking countries, while not at all in the continental European countries or Japan. This increase is attributable to an unprecedented surge in top wage incomes that began in the 1970s and accelerated in the 1990s. As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries …

This rise in top income shares is not due to the revival of top capital incomes, but rather to the very large increases in top wages (especially top executive compensation). As a consequence, top executives (the “working rich”) have replaced top capital owners at the top of the income hierarchy over the course of the twentieth century …

Understanding why top wages have surged in English speaking countries in recent decades, but not in continental Europe or Japan, remains controversial, with three broad points of view.

The free-market view claims that technological progress has made managerial skills more general and less firm-specific, hence increasing competition for the best executives from segregated, within-firm markets to a single economy-wide market. While this view can possibly account for U.S. trends, it cannot explain why executive pay has not changed in other countries, such as Japan or France, which have gone through similar technological changes.

A second view claims that impediments to free markets attributable to labor market regulations, unions, or social norms regarding pay inequality, can keep executive pay below market. Such impediments have been largely removed in the United States but still exist in Europe or Japan, explaining the trends. Under this view, the surge in executive compensation actually represents valuable efficiency gains.

A third view claims that the surge in top compensation in the United States is attributable to an increased ability of executives to set their own pay and to extract rents at the expense of shareholders.
The first explanation requires us to believe that there has come into being a world-wide pool of executive geniuses, all fighting for a limited number of jobs running the biggest corporations. As this depends on the the theory that humanity is organized on the same principle as raw milk, with the cream rising to the top, it may be immediately rejected. My authority for this is Ecclesiastes 9:11:

I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.
The second explanation, union-busting, is demolished by the authors themselves. We are thus left with the third — that the present savage imbalance of wealth in America results primarily from a form of embezzlement which has not yet been made illegal.

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Posted by Jerome Doolittle at February 14, 2007 10:31 AM
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Presumably, we should anticipate a re-population of the USA coupon clippers, as the children, nieces, nephews, grandchildren, great-grandchildren of the current-surge "working-rich" are delivered their tax-free inheritances.

Posted by: Hoffmann on February 14, 2007 11:31 AM

There's a huge moneylending working sector. Perhaps that part of the equation has changed. The credit card companies are charging exorbitant rates of interest that a few short years ago would have been highly illegal. All thanks to a Supreme Court decision in Marquette vs. First Omaha Services in 1978 and more recently, the Smiley decision. http://www.demos.org/pub125.cfm

Then there are the third tier lenders.

I visited a small town down South that I grew up near recently and was struck by that fact that where what used to be stores owned by small business people in the community, those building now housed by payday lending companies and similar entities. The names of some of these corporate entities, for those not familiar: World Acceptance Corp, Cash America, EZCORP and a host of others. All are publicly traded corporations.

There is huge cash extraction going on from middle and lower class America. You have states that have built empires that house credit card company operations. Delaware, South Dakota and some others more recently.

I don't think this is exactly the embezzling you are talking about in this post. I think you are talking about executive compensation (which tends to hurt investors and workers, but not consumers). However, I don't think these issues are completely separate.

What I don't understand why corporations that sell things, including Wal-Mart, haven't caught on to the fact that the huge wealth extraction from these predatory moneylenders hurt their bottom lines in the long run. Oh wait! I forgot. Wal-Mart wants to start a bank. And you can get a credit card from most of the big box stores. I suppose it's a sharing arrangement.


Posted by: Buck on February 14, 2007 1:26 PM

It’s simple. France has an “impôt sur la richesse” and we don’t.
Furthermore, the people of Europe and Japan haven’t got brainwashed by some of local Ronald Reagan who would have scared them cold from socialism by amalgamating it with communism. In the USA , I’m sure 75% or more Americans can’t even make this distinction.

Another thing, it’s no wonder that English speaking countries are so enamoured by their market economy: Wall Street is a child of the British Empire, born at the time where the United States and the British Empire where the two biggest producers of raw materials in the world. The US, until WWII, quenched 70% of the world’s thirst for oil. The British Empire, on the other hand, provided everything else, from bauxite to rubber to precious metals from the Canadian underground.

But today, if the erstwhile Wall Street was making itself rich by the sweat and blood from the American steel, oil and manufacturing workers, modern Wall Street gets infinitely richer by exporting our job overseas. And this is why this Market system is so outdated and absolutely broken, because it is no more the pumping heart of the American prosperity anymore. It is nothing more than a evil computerized Robin Hood that steals from the poor, the middle-class and the rich, for the super-rich.

Today's American economy is H.G. Wells meeting Karl Marx.

Another great argument I heard from Jerome:
“The second explanation, union-busting, is demolished by the authors themselves. We are thus left with the third — that the present savage imbalance of wealth in America results primarily from a form of embezzlement which has not yet been made illegal.”

Yes indeed. This reminds me of a great passage of Adam Smith, in “the Wealth of Nations” which at the time applied to the British Empire, but which could easily be applied to present days America:

“To found a great Empire for the sole purpose of raising up a people of customers may, at first sight, appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced [lobbied] by shopkeepers.”


Posted by: Dante lee on February 14, 2007 1:52 PM

I think the solution is going to be difficult to swallow, but we should start discussing it anyhow. Money is going to be transformed away soon. Invest in karma, the dividends are better.

Posted by: whig on February 15, 2007 1:04 AM
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