The Dark Side of Inequality

Strange scents are wafting through the air. Scents one would have thought had drifted away for good. The wind of words like Marxism, Capitalism, and Socialism have returned, anchoring here and there the distant flashbacks of troubled times.

Their frequency is on the rise, and not just in leftist literature but also in progressive and conservative platforms. This week, for example, the cover of the Hollywood Reporter features actor Bryan Cranston's upcoming film about blacklisted screenwriter Donald Trumbo, with the headline "Cranston (the communist)!" The fact that the hardliner Trumbo would make the cover, and these historically loaded words are re-emerging, are symptomatic of the times we live in. Bernie Sanders' open frontal charge on the billionaire class being the most obvious and present case in the political arena.

Echoing this tendency, early this August, in the "Week in Review" section of NYT, a title caught my attention: "Capitalists, Arise." At first, I was unsure whether this was a provocation or a clever trick to get me to read the article. Clever because no one uses the word Capitalism these days. Such a passé term. No one doubts that Capitalism has triumphed over other ideologies, and no reason exists to mention the obvious. Instead, words such as Liberalism, Globalization have become de rigueur. The title, however, sounded alarming, as if capitalism needed to be rescued because of a pending threat. I opened the paper.

The article, written by Peter Georgescu, the chairman emeritus of Young and Rubicam, dealt with inequalities in America (the premise of Mr. Georgescu's upcoming book on the death of the middle class). The article opened with the puzzling statement that top CEOs at major U.S. companies are sounding the alarm. Taking notes from his closest friends, Mr. Georgescu affirms that CEOs are scared about the growing inequalities in the nation's landscape and fear social unrest and high taxes. To prove his grasp and affinity with the problem, Mr. Georgescu describes his childhood in labor camp, his separation from his parents, the surrounding uneducated working class, and his struggle to hoist himself from their unassuming origins to the high perches of power and money. Of course, with the assumption that the man he was then is the same as the one he is now.

For all his good intentions and sincerity, Mr. Georgescu proceeds in giving a list of initiatives needed to fix the bartered economy, at least to alleviate the undermining current of inequality. He suggests investing in the value of creators, and blames shareholders' pressure, preventing boards of directors from allowing wage increases to employees. A strange claim since shareholders have the reputation to be a docile bunch that will go along with any proposal and policy a BOD recommends, especially if the initiatives are promoting profit-making. Dissension is not the norm and often isolated.

Following the same thread of thoughts, the article concludes that the government should intervene giving companies tax incentives to pay employees more. "Benefit will be huge. People would have more money to spend, and many would no longer need government's help. That would mean a reduction in entitlements."

A couple of dissonant notes emerge from this statement. On one hand, government's intervention is strangely reminiscent of the banking meltdown, when the Federal Bank bailed out banks by injecting hundreds of billions of taxpayers' money into the monetary system. We learned later that not only did these banks bounce back healthily but also used the bailout money to grant themselves generous bonuses, and even sued the government for retribution, for limiting profit-making (i.e. AIG), with the same tax payers' money. Is more government subvention really the key to erase inequality?

On the other, when the word entitlement is applied to low-income earners, it has for effect to warp even more the perception of inequality. Strange reversal. Since when did we start labeling those who have nothing "entitled"? Entitlement has always been associated with privileges, wealth and power, and the behavior that stems from belonging to the top. Somehow the word has slid down the totem pole of economy from the top to the bottom where it pegged itself on the under-earners, the have-nots, people who lost their job, their house, who cannot find work and go into debts as a result. The less they have, the more entitled they are.

The word seems to be particularly prevalent in the Republican rhetoric. And yet doesn't Donald Trump behave entitled by pushing around anyone on his way? Does not Mr. Georgescu feel entitled to ask for government intervention to quench his fear? What about the free education he received that allowed him to make his fortune. What would have happened had he not be "entitled"?

Unsurprisingly, at no point does Mr. Georgescu counterbalance his argument, which comes across as severely skewed towards the preservation of his own privileges. His program sounds like a rusty déjà-vu rhetoric. More of the same. I do not have much hope that his forthcoming book will shed light on anything new or unknown, but be a rehashing of the same hollow sermon to the converted.

The most interesting aspect of Mr. Georgescu's call for help is precisely that it reveals a faulty schism between perception and solution. A broken two-way mirror reflecting the blindness of the people at the top. Looking down from the top, things appear differently than the do from looking up from the bottom. People at the top do not understand the people at the bottom. They are very good at pointing fingers, at what they see are the problems needed to be fixed. But they never view themselves as a problem or something that needs to be fixed. That is their lack of responsibility and own exoneration, for the blatant inequalities that they also have helped to create.

Inequality is not the problem. Inequality is the consequence of a problem. The best way to understand the predicament of the present is to go back to the first cause. Nothing gets fixed without locating the first cause. Trying to fix the consequences amount to a band-aid strategy. Deploying more police officers in troubled districts makes the environment looks nice and clean. The manifestation of the troubles may recede, but the problem itself remains.

Inequality implies a growing gap between the top and bottom earners. Bottom earners and their wages need to be raised. Have no doubt. It is paramount that in order to close the gap in inequality that the wages must increase. But not for the top earners. This is where Mr. Georgescu's premise falls flat. Because at no time, in the entire article does he talks about lowering the massive compensation packages of the people at the top. This conversation never takes place. This absence presupposes that the people at the top should make no adjustment. Isn't this a sign of entitlement?

What about reducing the ask-no questions package compensation, and creative severances, at the top? Mr. Georgescu does not take a look at himself or his peers. Instead he finds it more convenient to spread fear: "deal with inequality or risk intolerable taxes or social unrest," he warns. Like his friends, Ken Langone (Home Depot's CEO, and Paul Tudor Jones), he is afraid. This is indeed a new tone in the economic landscape. He is sensing that something is not right, as the people at the bottom, making less than $10 per hour, have been sensing for a long time. You may now ask why wages for these latter are not going up? Competition? It's a weak argument.

An easy, quick, and effective way to reduce inequality would be the slam on the brakes of CEO's compensations, which, perhaps, the new SEC's rule for wages disclosures may contribute. Take for example, David Zaslav, CEO of Discovery, who received $156 Million in 2014, that's $13 Million a month, or $3.25 Million a week. One may say there is nothing essentially wrong with making so much money. But there is something disproportionately wrong when all the income and resources of a company are geared towards the fulfillment of compensations for a handful of individuals.

Think about what a company has to do to create such a level of wealth, profit making in terms of sales, marketing strategies, wages reductions, spiraling cost cutting, outsourcing and so on, to meet the bloated demands of a CEO's wage package. In the US, corporations' elaborate business strategies are designed towards this fulfillment. The dark side of this philosophy is that its repercussions cascade and ripples out and down all the way to the bottom of the ladder. Ever longer working hours for ever shrinking wages.

An HR executive, now retired who worked in several Fortune 500, explained to me that the entire US corporate economy is rigged around executive packages: entry and exit bonuses, high wages, parachute stock options, reimbursements, and so on. Corporations are just passive platforms for achieving this goal. The more corporate compensation goes up, the more the inequality will grow.

Initiating a government intervention will not help reduce inequality as it will benefit the small interest groups and their shareholders, since the same CEOs and members of BODs often happen to be the main shareholders. The expectations that the bottom earner should make more without readjustments from the top earners will not decrease significantly inequalities. Is it then surprising that Bernie Sanders is leading the charge against the top 1% with the red flag of old high-flying 60s'ideology?

Mr. Georgescu's proposal does not fall far from the old conservative tree. He never refers to himself and his friends as having participated in a system that deregulates the compensation system. At no point does he even hint that the problem could come from the top.
Contrary to his claims that BODs are have their hands tied, they certainly appear to have a free hand at signing up for massive compensation package for the top players. CEOs know that being at the top is a one shot deal, 3-5 years maximum, before performance does not reflect shareholders' demands, and someone else takes over. The short musical-chair lifespan of CEOs thus demands high compensations.

Have no fear. Socialism and Communism are not coming back. Even Bryan Cranston's portrayal of Donald Trumbo is a meek pastiche. Trumbo was a wealthy man who believed in socialist ideas. Hollywood has good flair and knows how to milk new trends, even if inequality is the new buzz subject. All is safe and entertaining. Dario Fo, the Italian Nobel-prize winner for Literature, in the meantime, has come up with a genuine solution to cure inequality: "The best way to eradicate poverty is just to make everyone poor."