A New Economic Elite

Washington think tank informs us that the average annual compensation of the top 100 chief executives amounts to an astonishing $37.5 million, which is 1000 times the pay of an average worker. The top one percent of households reportedly earns 20 percent of all incomes and owns 33.4 percent of all net worth. The most astonishing feature of such concentration of wealth in the hands of a tiny elite is the utter lack of concern and comment by the American media. They apparently find nothing wrong with such glaring inequality.

We may readily agree with the media as long as the great chasm of income and wealth stems from great differences in economic productivity. Surely, we cannot fault the great American entrepreneurs who in ages past built famous enterprises employing thousands of workers and serving millions of consumers. They discovered new methods of production, opened new markets, and developed new sources of raw materials throughout the world. They succeeded by serving and pleasing consumers. Their talents of enterprise actually raised American standards of living to one of the highest in the world. And their labors bridged the wide legal, social, and economic gulf that separated the social classes throughout the ages.

The economic order that developed gradually during the 20th century gave life to yet another economic and social elite which does not seek new methods of production and does not give employment to thousands of workers; it shrewdly speculates on the effects of various government policies, such as inflation, credit expansion, and new regulations and controls. An economist who visits the new elite may actually discern three distinct branches that cooperate as readily as they feud with each other.

A large branch does not create new enterprises nor give employment to a single worker. It opens no markets nor develops new products. Its members thrive on boom-and-bust cycles which afford great opportunities to traders who observe and understand the portentous policies of the Federal Reserve and the U.S. Treasury. They may manage investment trusts holding corporate stock worth billions of dollars or merely look after their own accounts. They weigh and appraise political intention and government intervention, always gauging the consequences, acting in anticipation, and profiting immensely from political moves. While many businessmen suffer painful losses during a business cycle, they succeed in increasing their funds throughout it all.

These speculators actually render an important service. The Federal Reserve and the U.S. Treasury frequently intrude on and disrupt the smooth performance of markets, which then must readjust; they actually facilitate the adjustment. They anticipate future price movements, assume market price risk, and add liquidity and capital to the markets. Theirs is a necessary and productive activity.

A remarkable feature of this new elite is its frequent disagreements and altercations with the other branches of the business elite. Its members may find frequent fault with and cast aspersions on the elite that actually manages the production. They prefer to support and consort with the political powers that shape the economic policies, seeking the company of well-known politicians who in turn feel at ease with generous nouveaux riches.

Another branch of the new elite consists of chief executives whose compensation usually comprises a base salary and incentive options. They earn million-dollar lucre whenever the Federal Reserve blows stock market bubbles and corporate share prices soar to lofty price-earnings ratios. During the 1990s-bubble they pocketed hundred-million-dollar profits without any particular efforts of their own. They created no new industries and opened no new markets. The corporations they managed did not grow and corporate profits stagnated or even declined. But stock prices soared and CEOs reaped much lucre at the expense of their own stock holders. For every bubble profit taken is total worth consumed. It waters the stock and diminishes the property of all other stockholders. To remedy the situation, the corporation must henceforth increase its assets without increasing its outstanding shares or reduce outstanding shares without reducing assets. CEOs probably are aware of these implications, but few, if any, have ever returned their bubble lucre to losing stockholders.

The most powerful elite is yet another; it springs from political power that holds authority over the body politic. It is the natural extension of the new economic order known by various labels such as the New Deal, the Great Society, and other Democratic and Republican Deals. They made politics an important vocation and elevated politicians to positions of importance and eminence. Surely, politicians have to be ever mindful of public opinion which is shaped by the elite of education and communication. Many master the art of political communication and thus manage to perpetuate themselves in office. In their footsteps their children are laboring to forge a self-perpetuating political elite.

This country is not about to degenerate into a class-based society led by a ruling elite. Competition is a time-honored practice, a cultural custom followed from generation to generation. But, under the influence of collectivist ideologies, many politicians and journalists are ever eager to strike at successful entrepreneurs who earn much more than they do. It is difficult to ascertain their motives; it can be simple envy which consumes many men, or it can be economic ignorance. After all, market economics is barred from most universities and is unknown to leading politicians and journalists. It may explain why most politicians are ever eager to regulate industrial and commercial activity and strike at the economic elite with confiscatory taxation. Unfortunately, regulation and taxation tend to hamper economic activity, inhibit productivity, and depress levels of living. But they create ever-new profit opportunities for the new economic elite.

February 3, 2005