I'm re-reading Robert Reich's recent NYT piece, which sits open on my computer:
By 2007, financial companies accounted for over 40% of American corporate profits and almost as great a percentage of pay, up from 10% during the Great Prosperity.
The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class. The spending of the richest 5% alone will not lead to a virtuous cycle of more jobs and higher living standards.
If you've seen the film "Inside Job" -- and even if you haven't -- you are probably at least somewhat aware of the extent to which the FIRE sector is, in the immortal words of someone I worked for years ago, "eating our lunch."
A recent column by David Cay Johnston provided an interesting graphic showing officer compensation as a percentage of corporate profits. In recent years, that percentage has ranged from a low of about 23% in 2005 to a high of about 67% in 2002, with the most recent year, 2008, being about 48%. So for 2008, it is "1 for 'us,' 2 for the shareholders." Now his study extends far beyond the top corporate executives; he's looking at an IRS database that includes nearly 1 million corporate officers, and it may well be that the top, say, 2% of that rarified universe takes a hugely disproportionate share of the total compensation. However, DCJ raises a very important question, which I take to be a challenge that someone in Congress should ask the Congressional Budget Office to look into, to determine whether companies -- particularly nonpublic ones -- are understating officer pay by not filing Schedule E. And he says,
Existing IRS corporate tax reports have for years shown us that fewer than 2,600 megafirms own 81% of all U.S. corporate assets. Another 21,000 firms control most of the rest, leaving just 5.6% of corporate assets that are divvied up among the more than 5.8 million remaining corporations.
The 2008 data show that while almost three million corporate officers show up on company tax returns, only 990,077 Social Security numbers do and of those only 838,551 show up as being paid. That may suggest some owners took no pay in the Great Recession year of 2008, but it also hints at how many officers serve multiple corporations.
The officer pay data show huge variations. Just 70 officers of 1,660 Real Estate Investment Trusts averaged $5.2 million in 2008, while 832 officers of 7,670 property and casualty insurers averaged $3.8 million. At the other end, more than 2.1 million officers of S Corporations averaged just $107,403, though many of them must be officers of multiple corporations.
The FIRE sector. Finance, Insurance and Real Estate. Most Americans, even those who were economics majors in college, don't know the mechanisms by which these parts of the economy get to be such amazing sponges. For the most part, the economics majors learned their economics from instructors whose own education was primarily in neoclassical economics, which only sees two main inputs to production -- Labor and Capital -- and somehow tuck Land in as a minor subset of Capital, rather than recognizing, as the classical economists did, that Land -- locations, natural resources and like things -- is unique and vital. The common wisdom knows "Buy land: they aren't making more of it" but doesn't realize the monstrous and far-reaching corollaries. Who does know? Those whose adult reading experience includes the ideas of Henry George, particularly "Progress and Poverty" and "Social Problems." And "The Science of Political Economy" has a lot to say about vested interests and their effects on economics. (You're likely to find some very quotable material!) All three are online.
Joe Stiglitz, last summer at a talk in Queensland, Australia, made remarks that were reported as follows:
The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40% of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it.
"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."