John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
When I used to play pickup basketball there was a rule called “winners stay.” Our economy works a lot like that and it often leads to poor results.
The winners stay rule is just what it sounds like. You play a game of 5-on-5. The winning team gets to stay out on the court for the next game. The losers have to sit it out if anyone is waiting to play.
Economists study how people behave in response to incentives. Winners stay might seem like a good incentive, but in practice it often does not work that way. The motivation is to form a strong team unlikely to lose. That way you get to keep playing.
The result is that often the games are not competitive. Having captains pick, trying to balance the teams, or even a random draw would result in better competition.
With the winners stay rule, the winners benefit. They get to play more and with better teammates. It is common for players to quit after losing a couple of times, because they have to sit out games and know the deal is stacked against them.
Competitive markets produce winners and losers. The advantages accrue to the winners. Once the winners and losers emerge, the competition may no longer be fair, or good for the economy.
In general, CEOs of big companies work hard, have a lot of pressure, and make very important decisions. When they do their job well, they deserve to be well compensated.
In the 1970s, CEOs running Standard and Poor 500 companies were paid 30 or 40 times what the average worker made. Now these winners are making 300 or 400 times as much!
They defend their wages by saying it is what the market will bear. They have convinced themselves, and other winners, that making 300 times as much as teachers and social workers is necessary to attract competent managers.
I own some Cisco Systems stock. Last year their Board of Directors paid CEO John Chambers $19 million. Perhaps that eased his pain from Forbes dropping him from their billionaire list. It does not ease my pain from the stock price dropping 15 percent in 2010.
Companies are now required to seek an advisory vote on executive compensation. According to Securities and Exchange Commission rules, executives can vote in favor of their own compensation. Mr. Chambers, who is also Chairman of the Board, owns over 11 million shares (worth about $185 million). I voted my few hundred shares against the compensation.
Chair and CEO Chambers is using his winner’s advantage to promote a huge tax break. He wants to lower the corporate tax rate on overseas profits from 35 percent to 5 percent for one year. He convinced presidential candidate Mitt Romney that his tax amnesty idea would spur growth and create jobs, despite academic studies that refute that claim.
The winners stay, and more and more the winners take all. In 1978, the top one hundredth of one percent (0.01%) of income earners received 1 percent of all income. By 2008, the same group was making 6 percent of all income! These big winners are making a minimum of $9 million per year.
Even when the winners lose, they win. The former CEO of Blue Cross Blue Shield received an $11 million severance package. It was clearly not pay for performance – it was what his contract called for.
The Board members responsible for the generous severance package were paying themselves big bucks. Blue Cross Blue Shield is a non-profit public charity.
The Chairman of the Board is Paul Guzzi. He was paid over $84 thousand for attending two meetings a month. He made another $60 thousand as a Director at Edgewater Technology.
Mr. Guzzi also has a “day job” as President and CEO of the Greater Boston Chamber of Commerce. He is good at his job. His job is promoting business interests. His standing as a winner who stays makes his job much easier.
Mr. Guzzi appears weekly on This Week in Business on New England Cable News. Almost every major news outlet in Boston is on the Board of Directors of the Chamber. If he wants to promote business interests, he has a huge advantage in getting the word out. Last year the Chamber got the word out on a set of recommendations that included lower capital gains taxes, faster business write-offs, and expanding a much criticized corporate tax loophole.
In recent months, the Chamber welcomed Governor Deval Patrick, Senate President Therese Murray, House Speaker Robert DeLeo, and many other influential players as guest speakers. It must be nice to hear from these powerful lawmakers. Even better, it must be nice to get them to hear you.
The politicians are evidently listening. In the last thirty years, the business share of state and local taxes paid in Massachusetts decreased by almost half. In the last twenty years, the share of Lowell property taxes paid by corporations has gone down by about 40 percent. The typical homeowner would be paying a few hundred dollars less in property taxes if the business share had stayed the same.
It is hard to think of someone working in a losing industry as a winner, but Lowell Sun Editor James Campanini, the self-described “conscience of The Sun,” has an advantage in getting the word out. Recently, The Sun ran a front-page article questioning the efficacy of tax incentives.
However, in the last few months The Sun has editorialized in favor of tax breaks for the film industry and the liquor industry. They also favored extending tax cuts for people making less than a million dollars. That income bracket includes very wealthy winners.
When The Sun needs someone to comment on tax policy Michael Widmer is their go-to person. The Sun recently cited him in opposing legislation that would help alleviate the Commonwealth’s very regressive tax structure.
Mr. Widmer might know more about the Massachusetts budget than anyone outside of state government. He also knows how to promote business interests. He is the President and Secretary of the Massachusetts Taxpayers Foundation. A taxpayer’s foundation sounds very inclusive – almost populist. However, the taxpayers they represent are corporations – the winners who stay.
Now that I have expressed my view, I think I will go play some basketball.