International Law

Income Inequality, Salaries & Greed

By Stan

Apologies in advance for a post that may, before I’m done, become a bit disorganized.

So I’m currently reading the World Bank China Report (Q3-2008). Lots of the usual stuff about the economic downturn, along with many instances of the word "balancing". Also nothing new with respect to any discussion about China’s economic development.

However, as growth here has sped up, income inequality has done so also. As we hit a downturn, that inequality becomes an even bigger problem as people lose their jobs and their ability to pay for education, health care, etc. The big stimulus package gives the government an opportunity to narrow that gap.

The other side of this comes from all the noise in the U.S. about failing companies, bailouts, and executive compensation. A great deal of the noise is also rooted in resentment and income inequality. Lots of folks are being layed off in the U.S., and they resent the hell out of executives receiving multi-million dollar salaries when these firms are running to the U.S. taxpayer for a handout.

Fair enough. But I have a problem with this sort of thing (from one of my favorite Lefty blogs, Americablog):

[L]et’s look at who lost billions and who was rewarded (and continue to be rewarded) very handsomely. The GOP needs to quit blaming the poor for this historic failure because it’s Wall Street who is killing capitalism through their greed. Of course, if they’re never held accountable, why would they not behave this way? Even now, it’s not as though Congress or Paulson are aggressively overseeing this process.

Wachovia Corp, which lost $33 billion in the last two quarters, said 10 top executives may be entitled to $98.1 million in severance pay after the bank is acquired by Wells Fargo & Co.

In a U.S. Securities and Exchange Commission filing, Wachovia said the executives would receive severance under their employment agreements if the merger closes by December 31, as expected. Wachovia said shareholders will vote on the merger on Dec 23.

I understand the sentiment, but the lawyer part of me is screaming, "Wait a minute." The executives in question have something called a contract, which specifies how much they will get paid under various circumstances. Even if they suck and get fired, they will get something from the company. Complaining at this point, after the contracts are all in place and the companies are legally obligated to make these payments, is really a waste of effort.

If you care about executive compensation, you gotta spend your time working with the corporate governance folks and making sure that companies that receive bailouts do not sign additional agreements with executives that have the same kinds of benefits.

So income inequality is a hot topic in both China and the U.S. these days. But it seems to me that the arguments are very different. So much energy is being wasted in the U.S. on a stupid issue like executive pay, while the discussion over here in China is on tax relief, health care, education and other social expenditures. The debate here, and the criticism, is that the public sector should be putting up more money and creating a better social safety net, and that’s a good debate to have.

To be fair, the U.S. is also dealing with a potentially very large stimulus package, and the issues of health care reform and middle class tax cuts have been in the news for a long time. But I worry sometimes that so much political attention is paid to how much money a few guys on Wall St. make and the fact that auto executives have private jets, that we fail to notice the big news (e.g. expenditures on food stamps in the U.S. is at a record high).

Trimming executive pay is not going to solve any problems. Reality check needed.

Full post as published by China Hearsay on December 01, 2008 (boomark / email).