What Will the American Economy Look Like 26 Years From Today?

Jul 21, 2014Bo Cutter

Earlier this summer, the Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Find out what they had to say.

Participants in our recent convening speculated:

Earlier this summer, the Next American Economy project brought together 30 experts from various disciplines to envision tomorrow's economic and political challenges and develop today's solutions. Find out what they had to say.

Participants in our recent convening speculated:

“The post-WWII model of full-time, permanent employment proved itself the historical aberration we predicted: in 2040, only 12 percent of the American workforce is directly employed by corporate enterprises or government departments, and the average length of time spent on any one job is under six months.”

“New platforms and services will spring up to solve the problems of the micro-gig economy using distributed, peer-to-peer models of social insurance that will be hyper-local, but not based on geography. They will be based on the micro-niche identities that we build online -- accountants for bacon. Latinos who play Dungeons & Dragons. What have you.”  

“In the late '20s, the Know Everything Party assumed their final national political victories of mandating every American household be limited to three robots, one 3D printer, and own a minimum of three guns would be enough to secede and be left alone. After 15 years of explosive growth in income and wealth inequality, unimaginable to us in 2014, it all came to a head in our second Civil War, or what historians are calling the Bloodless War.”

Guided by the belief that we are on the precipice of fundamental and lasting economic change, the Next American Economy project gathered a group of 30 academics, business leaders, organizers, and technologists, and asked them to envision the long-term economic and political future of the United States. We gave our participants free rein to be bold in their speculations – to deviate from data, the conventional wisdom, or even their own expert opinions. The goal was not to predict the future, but to debate a series of critical questions: (a) Are we at an inflection point in the nature of innovation and technological change? (b) How will the rise of cities change the geography of economic activity? (c) How will economic trends alter the nature of work and employment? (d) Is the trend of widening income inequality likely to continue or stagnate?

What followed was a series of prescient, thoughtful, and often hilarious three- to four-minute speculations on topics ranging from the gig economy to the future of finance, from imminent civil war to the transformation of Google into a car company, and many more. Each speculation on its own could foster a day of debate and a sea of responses. For this reason, we will release one video speculation a day for the next three weeks, starting with David Autor’s description of economic polarization.

Our recent meeting was a first step toward our broader goal of identifying the trends likely to shape the future in order to identify the policy interventions needed to ensure the best possible outcome. The group identified key topics for further investigation and also found some areas of broad consensus.

  • 79 percent of participants believe “technological change will persist and will be big enough to disrupt business-as-usual."

  • 42 percent believe “a new paradigm of work is emerging and will change the nature of jobs for a large percentage of the population” and an additional 29 percent believe “a new paradigm has already emerged and you East Coast intellectuals are way behind the times.”

  • A total of 74 percent believe that even if an entrepreneurship booms leads to productivity growth it will not lead to job creation.

  • Nearly half (48 percent) believe that if inequality trends continue, the political backlash will be so extreme that our current system will change drastically in the next 25 years.

You can learn more about our project and find our forthcoming research on our website.

Roosevelt Institute Senior Fellow Bo Cutter is Director of the Next American Economy project. He was formerly a managing partner of Warburg Pincus, a major global private equity firm, and served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents.

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Daily Digest - July 16: Flawed Models for Understanding the Wage Fight

Jul 16, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

A Biased Report on the Minimum Wage? (East Bay Express)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

A Biased Report on the Minimum Wage? (East Bay Express)

Darwin BondGraham speaks to Roosevelt Institute Fellow Annette Bernhardt, who says a study criticizing plans for a $12.25 minimum wage in Oakland used bad methodology.

Obama Administration Urges Immediate Action on 'Inversions' (WSJ)

The administration has asked Congress to put an end to these reincorporations abroad for tax purposes, and called instead for "economic patriotism," reports John D. McKinnon.

House Votes to Pay for Roads With Underfunded Pensions (The Wire)

Arit John explains the latest short-term plan for funding the Highway Trust Fund, which he says involves spending future tax revenue now and will lead to more shortfalls in the long run.

Hobby Lobby: A New Tool for Crushing Workplace Unionization? (MSNBC)

Ned Resnikoff explains how the Hobby Lobby decision could play out if an employer claims religious opposition to collective bargaining, as is already permitted for religious schools.

A Push to Give Steadier Shifts to Part-Timers (NYT)

Steven Greenhouse looks at the momentum behind laws that aid part-time workers by requiring further advance notice, extra pay for on-call work, and preference for more hours.

New on Next New Deal

Search Models, Mass Unemployment, and the Minimum Wage

Roosevelt Institute Fellow Mike Konczal looks at what's wrong with the models some economists are using to understand high unemployment and prolonged job vacancies.

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Daily Digest - July 7: In Corporate America, Pay Comes Before Patriotism

Jul 7, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

On This Fourth of July, Meet Your Unpatriotic Corporations (The Nation)

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

On This Fourth of July, Meet Your Unpatriotic Corporations (The Nation)

Greed comes far before patriotism for companies that reincorporate abroad to avoid paying their fair share of taxes, writes Roosevelt Institute board member Katrina vanden Heuvel.

Students Joining Battle to Upend Laws on Voter ID (NYT)

In North Carolina, college students are challenging the state's strict voter ID law on the grounds of age discrimination, reports Matt Apuzzo. This is the very first case of its kind.

American CEOs: In a Class All by Themselves (Truthout)

Sam Pizzigati points out that discussions of executive pay in the U.S. tend to leave out international comparisons, which demonstrate just how extreme American CEO pay can be.

  • Roosevelt Take: White papers from William Lazonick and Roosevelt Institute Fellow and Director of Research Susan Holmberg look at the problems created by high CEO pay, and steps to fix it.

Moaning Moguls (The New Yorker)

James Surowiecki looks at why America's wealthiest complain so much about their supposed mistreatment by society, and why those complaints lack merit.

Obama Calls for a New Crackdown on Wall Street (Mother Jones)

Erika Eichelberger says that the President is calling for further reforms, but has not presented any specific plans, and it isn't clear how he would get anything through Congress.

New on Next New Deal

Where Does $2 Trillion in Subsidies for the Wealthiest Hide in Plain Sight? Capital Gains Tax Breaks.

Preferential tax rates and loopholes for investment income make economic inequality worse, writes Harry Stein, who explains the necessity of reforms proposed in Roosevelt Institute Chief Economist Joseph Stiglitz's recent white paper.

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Daily Digest - June 13: With Soaring Pay, CEOs Rise to the Top of the 1 Percent

Jun 13, 2014Rachel Goldfarb

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CEO Pay Up by 937% Since 1978. That of the Typical Worker? 10.2% (AJAM)

Click here to subscribe to Roosevelt First, our Monday through Friday morning email featuring the Daily Digest.

CEO Pay Up by 937% Since 1978. That of the Typical Worker? 10.2% (AJAM)

Peter Moskowitz looks at a new study from the Economic Policy Institute, which finds that CEO pay is even outstripping the earnings of other members of the top 0.1 percent.

  • Roosevelt Take: In his new white paper, William Lazonick explains how the explosive growth of CEO pay destabilizes the economy.

U.S. Struggles to Draw Young, Savvy Staff (WSJ)

Officials worry about government's ability to succeed in a digital world when the percentage of its employees younger than 30 has hit an eight-year low, writes Rachel Feintzeig.

How Justice Scalia Could Become the Savior of Public Employee Unions (LA Times)

Michael Hiltzik says the reliably conservative Supreme Court Justice's past statements on public sector unions show that he could be the key vote for unions in Harris v. Quinn.

The Damage of Poverty is Visible as Early as Kindergarten (Vox)

Danielle Kurtzleben writes about new research that shows an achievement gap between poor, near-poor, and middle-class kindergarteners, which can have lifelong consequences.

How Women Are Shaping the Labor Movement and Winning Big (The Nation)

Dani McClain speaks to Sheila Bapat about her new book on the rise of organizing among domestic workers, who are excluded from many basic labor protections.

Remember the Problems With Mortgage Defaults? They’re Coming Back With Student Loans (NYT)

Susan Dynarski draws parallels between the mortgage crisis and student debt, with particular concerns about loan servicers who have little incentive to prevent default.

New on Next New Deal

Teachers and Tutors Can't Fix All of Low-Income Students' Problems

Summer Academy Fellow Casey McQuillan explains how public policy failures that held back the students he tutored led him to the Campus Network.

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CEO Performance Pay is Bad for Everyone Except CEOs

Jun 5, 2014Richard Kirsch

Executive compensation is soaring while workers and taxpayers feel the squeeze. A new Roosevelt Institute white paper explains why.

Executive compensation is soaring while workers and taxpayers feel the squeeze. A new Roosevelt Institute white paper explains why.

Americans hate the fact that CEOs of big corporations keep raking in millions while the incomes of most American households are sinking. Now a new Roosevelt Institute white paper by University of Massachusetts economist William Lazonick adds to the growing case that soaring CEO pay is not just unfair, but harmful. It’s bad for businesses, workers, and taxpayers, and it’s one of the reasons that the economy remains sluggish.

Lazonick details the myriad ways that CEOs pump up their wages, painting a picture of crony capitalism in the board room and at the SEC. CEOs pad their boards of directors with other CEOs, who are all eager to hike each other’s pay. They hire from the same pool of compensation consultants, who then recommend to all of their boards why each of them deserves to be paid more.

Almost all executive pay, which was back to its pre-recession average high of $30 million a year by 2012, is delivered in the form of stock. This exploits a policy loophole that taxes compensation of more than $1 million unless it falls into the category known as “performance pay.” Meanwhile, the CEOs and their teams of lobbyists and lawyers have gotten a compliant SEC to issue a host of rulings that invite stock price manipulation. The resulting higher prices are considered proof of better performance, and also instantly deliver millions to the CEOs through their stock options. Very neat. 

Lazonick explains that corporations’ favorite method of boosting stock prices is buying back their own stock. While a firm is required to notify the public of its intention to buy back its stock, it doesn’t have to say when it will do so, which fuels price-boosting speculation and allows the firm to time its repurchases to maximize the CEO’s gains.

The justification given by economists for stock-based performance pay is that corporations should be run to maximize shareholder value, and paying CEOs in stock aligns their performance with the purpose of their firm. But as my business school finance professor told a shocked classroom of my fellow students, the economic purpose of the firm does not have to be maximizing value for shareholders. The firm could just as easily be dedicated to maximizing the value for workers or communities or society at large.

Lazonick’s version of this fundamental critique of corporate capitalism is that it is not only shareholders who have an investment in a corporation. Taxpayers invest in corporations through the public infrastructure and educated workforce corporations depend on. Workers invest through their contributions to corporate innovation. Taxpayers and workers lose if the corporation’s core economic performance – as opposed to the price of its stock – declines. The result is fewer people working, less tax revenue, and diminished community life. But CEO pay just keeps going up regardless.

Lazonick argues that the CEO focus on stock buybacks has distracted them from investing in innovation to sustain their companies over the long run. It may also be true that in the absence of consumer demand, the CEOs see no better use for excess cash than to reward themselves and shareholders. But in fact, the stock market focus of U.S. industrial corporations, which has eroded middle-class wages and employment, is a big reason for lower domestic consumer demand. In contrast, Lazonick points out that Apple, which did minimal buybacks from 1994 through 2011, found no lack of consumer demand for its innovative products.

The alternate economic paradigm laid out by Lazonick is to reward workers and taxpayers for their investments in a firm. That would not only be more just, it would also move the economy forward. If workers got paid more, it would increase consumer demand. The government could use the taxes collected to create jobs that would enhance infrastructure, improve education, and strengthen community services, all of which would add directly to economic progress. And innovative companies would benefit from tax-supported government spending and motivated, experienced workers.

Lazonick lays out steps the SEC could take to reduce the use of buybacks to manipulate stock prices. He would also give workers significant representation on corporate boards. That makes great sense in theory, but would only work if we first dramatically strengthen labor law.

Taxpayers would benefit from legislation proposed in both the House (HR 3970) and Senate (S 1476), which would close the performance pay loophole and cap the deductibility of CEO compensation at $1 million. That would increase federal tax revenue by several billion dollars a year. But even if all that money were invested in job creation, it would not be enough to generate the kind growth we need to spur significant demand. I think it would be unlikely to decrease compensation much either. It is more likely that corporate boards would consider the taxes part of the cost of doing business rather than reduce pay for their fellow conspirators.

All of which is to say that, as with so many issues related to the core problem facing our economy – the concentration of wealth among a select few – it will take a seismic political shift to enact the kind of policies we need not only to limit CEO pay, but to build an economy driven by broadly shared prosperity. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform.

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Daily Digest - June 5: While Executive Pay Soars, Workers Feel the Squeeze

Jun 5, 2014Rachel Goldfarb

Click here to receive the Daily Digest via email.

CEO Performance Pay is Bad for Everyone Except CEOs (Next New Deal)

Roosevelt Institute Senior Fellow Richard Kirsch agrees with William Lazonick: rewarding workers and taxpayers for a firm's success would be better for the economy than soaring CEO pay.

Click here to receive the Daily Digest via email.

CEO Performance Pay is Bad for Everyone Except CEOs (Next New Deal)

Roosevelt Institute Senior Fellow Richard Kirsch agrees with William Lazonick: rewarding workers and taxpayers for a firm's success would be better for the economy than soaring CEO pay.

Walmart Slashed Tax Bill By Giving Top Execs Big Bonuses (Forbes)

A new report points out that Walmart cut its tax bill by $104 million through deductible CEO "performance pay," writes Kelly Phillips Erb. Closing that loophole would save taxpayers billions.

  • Roosevelt Take: Roosevelt Institute Fellow and Director of Research Sue Holmberg and Campus Network alumna Lydia Austin explain the need to close the performance pay loophole in their white paper.

Workers' Wages Sink as 'Domestic Outsourcing' Grows (NBC News)

Roosevelt Institute Fellow Annette Bernhardt tells Martha C. White that it's hard to quantify how many people have been forced out of direct employment to become contract workers, usually with lower wages.

Growth Has Been Good for Decades. So Why Hasn’t Poverty Declined? (NYT)

The number of hours low-income workers put in has increased in the last few decades, but their pay hasn't, writes Neil Irwin. Economic growth doesn't reduce poverty unless it lift wages too.

Finally a Chance for Facts to Decide (NYT)

Seattle's newly passed $15-per-hour minimum wage gives economists a chance to see what happens, says Arindrajit Dube, and use its real successes or failures to help rethink national policy.

Could Minimum Wage Help Save Senate for Dems? (WaPo)

Minimum wage ballot measures in battleground states could boost Democrats' turnout in 2014, says Greg Sargent, and Arkansas Democrats are fighting to put one such initiative before voters.

If You're Born Poor, You'll Probably Stay That Way (MoJo)

Stephanie Mencimer reports on the results of a 30-year study of poverty in Baltimore from Johns Hopkins, which found that family was the strongest determining factor of a low-income child's future.

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Taking Stock: Why Executive Pay Results in an Unstable and Inequitable Economy

Jun 4, 2014

Download the paper by William Lazonick.

Download the paper by William Lazonick.

Over the past three decades, U.S. executive pay has exploded. In 2012, the 500 highest paid executives in Standard and Poor’s ExecuComp database (drawn from company proxy statements) averaged $30.3 million in total compensation, with 42 percent from stock options and 41 percent from stock awards. This amount of compensation is almost three times the level of inflation-adjusted compensation in the early 1990s, when executive pay was already excessive. Market forces did not bestow these riches on top executives; their boards of directors did. Dominated by CEOs of other companies who have a common interest in increasing executive pay, boards have stuffed senior executive pay packages with stock options and stock awards. These same boards have approved multibillion stock buyback programs that enable executives to benefit from the manipulation of their companies’ stock prices.

Key Arguments

  • The American public has long been aware of the excessive compensation of top executives, but insufficient attention has been focused on how the stock-based components of this pay have encouraged CEOs to distribute cash to shareholders at the expense of investment in innovation and provision of secure, well-paid jobs.
  • The estimated $3.6 trillion that Standard and Poor’s 500 companies have spent on buybacks since 2001, in addition to $2.4 trillion in dividends, is a major reason for the ongoing erosion of middle-class employment opportunities in the U.S.
  • Since the early 1980s, the Securities and Exchange Commission (SEC), which is supposed to protect against the manipulation of financial markets, has legalized the use of stock buybacks to manipulate the stock market.
  • The SEC must regulate rather than encourage stock-market manipulation, and boards of directors, which have permitted excessive executive pay and massive distributions to shareholders, instead must represent all economic interests – including taxpayers and workers – whose investments are at risk in the business corporation.

Read: "Taking Stock: Why Executive Pay Results in an Unstable and Inequitable Economy," by William Lazonick.

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No More Sterlings: It's Time for Communities to Take Ownership of Their Sports Teams

May 2, 2014Alan Smith

Community-owned sports franchises can become institutions that truly reward the pride and devotion of their fans.

During game five of the Clippers-Warriors series earlier this week, basketball fans saw an impressive public outpouring of solidarity. The Clippers fans wore black, and stadium advertisements were covered in black as well. Fans chanted "We Are One" together during time outs. Countless signs read things like "this is our team" and "standing together against racism".

Community-owned sports franchises can become institutions that truly reward the pride and devotion of their fans.

During game five of the Clippers-Warriors series earlier this week, basketball fans saw an impressive public outpouring of solidarity. The Clippers fans wore black, and stadium advertisements were covered in black as well. Fans chanted "We Are One" together during time outs. Countless signs read things like "this is our team" and "standing together against racism".

There has been a Wikipedia's worth (can we make that a measurement now?) of public condemnation of Donald Sterling and his horrible statements about race. People have penned endless debates about what we should do, and how we should feel, in the wake of a racist old man being shamed and then sanctioned by the NBA.

But now, two Clippers fans have given us a logical and clear plan to make the solidarity and "our team" sentiments into something real and tangible: by crowdsourcing $600 million and buying the team. They've got a platform, they've started the journey, and they're getting some good press.

Before you laugh or roll your eyes, let's think this through together. As it happens, I've been talking about this exact problem for years: as a sports nerd and social justice advocate, I've been looking at the ownership model of professional sports with an eye to how the Baltimore Orioles could be purchased and converted to a non-profit serving the city of Baltimore. That's why I can tell you that this makes sense, and that it can work. Sports teams can be community anchors, driving local economic development and giving back to the communities that support them with everything from ticket sales and merchandise to time, passion, and love.

Recently I've written a lot about anchor institutions, which I define as places that, due to infrastructure or mission, can't get up and leave. Traditionally, anchor institutions are things like universities, hospitals, or community foundations. Right now, sports stadiums fit that definition, but sports teams don't. The Staples Center isn't going anywhere, but the Clippers could skip town as soon as their lease runs up. But why shouldn't we expect more from these teams, given that they are already so much a part of our cultural fabric? The constant competition between cities to woo teams like the Sacramento Kings or the Milwaukee Bucks reminds me of other race-to-the-bottom development strategies, in which cities bend over backwards to incentivize businesses to move, only to pay out more in benefits than they recoup in taxes.

We've been told again and again that sports teams provide huge financial benefits to their cities, but that's not usually born out in the bottom line. Professional sports owners have been holding cities hostage, demanding millions and millions of dollars in taxpayer money for new stadiums and new perks to keep their team where they are, and causing millions and millions of tears when they pick up a team like the Seattle Supersonics and move them to Oklahoma City. And jobs that are connected to a stadium or franchise are often low-wage positions, like working the hot dog stand. The potential mobility of franchises keeps them from truly serving as the anchor institutions they can and should be. 

Imagine instead what could happen when an entity like the Clippers changes its focus. If the team is anchored to the community that it serves, it can help support local vendors for the food it serves and the merchandise it sells. It can have an honest and open discussion about stadiums and ticket sales, and find better ways to get a larger swath of the city to support the team. The final step of the plan is to take all the “profits” from the organization and give them back to the community – to charity groups or the public education system depending on how the owners collectively vote. This would reflect pride in our homes and communities -- the reasons we all support a sports team to begin with! 

What's more, this crazy plan to root a team in its community is not unprecedented. The Green Bay Packers are owned by a community foundation, and they have more league championships than any other team in the NFL. Many European soccer teams, including perennial best-team-on-earth contender Barcelona, are owned by the fans.

I'm not suggesting that the community-owned Clippers would be softer, or expect handouts. They'll still be trying to win the title, and still doing it against 29 other teams that are trying to out-brand, out-compete, and out-pay their players. Chris Paul will still be the best point guard in the game, and want to be paid as such. They will still need to scout, game plan, and work the salary cap. But instead of doing that to benefit one person, why not do it to benefit the community that supports the team? 

Game seven is this weekend. For the Clippers, it's win or go home. A win, and they are still on track – and in a month they could not only be NBA champions, but also a team owned by the very people who will be dancing in the streets and celebrating their victory. And you don't need Donald Sterling money to be a part of that community -- with a just a small donation, you can channel all that outrage into making something positive happen.

Alan Smith is the Roosevelt Institute's Associate Director of Networked Initiatives.

Images via Thinkstock

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The Pay's the Thing: How America's CEOs Are Getting Rich Off Taxpayers

Apr 16, 2014Susan Holmberg

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

Income inequality will continue to rise unless we close the performance pay loophole and curb the growth of executive compensation. For more, see "Fixing a Hole: How the Tax Code for Executive Pay Distorts Economic Incentives and Burdens Taxpayers," by Susan Holmberg and Lydia Austin.

It’s proxy season again, and we will soon be deluged with news profiles of CEOs living in high style as our ongoing debate on CEO pay ramps up. Last week, the floodgates opened when the New York Times released its annual survey of the 100 top-earning CEOs. Lawrence Ellison from Oracle Corporation led the list again with over $78 million in mostly stock options and valued perks, an 18 percent drop in pay from last year. Poor Larry.

Rising CEO pay has been a hugely contested issue in the U.S. since the early 20th century, particularly in the midst of economic downturns and rising inequality (these two often go together). Because the numbers are just so staggering, most of the current debate focuses on the rapid rise in CEO pay over the past four decades. While executive pay remained below $1 million (in 2000 dollars) between 1940 and 1970, since 1978 it has risen 725 percent, more than 127 times faster than worker compensation over the same period.

With any luck, ascendant French economist Thomas Piketty and the English-language release of his book Capital in the Twenty-First Century will build much-needed momentum in D.C. to institute reforms that address our CEO pay problem. This is a major driver of America’s rising income inequality, which is the central focus of Piketty’s magnum opus. One reform in particular that is critical to slowing down the growth of CEO pay and its costly impact on our economy is closing the performance pay tax loophole.

Inspired by compensation guru Graef Crystal’s bestseller on corporate excesses and skyrocketing executive pay, then-presidential candidate Bill Clinton elevated CEO pay as a core issue of his 1992 campaign with a pledge to eliminate corporate tax deductions for executive pay that topped $1 million. Clinton was successful only in part; his policy did become part of the U.S. tax code  as Section 162(m), but it came with a few unfortunate qualifiers, namely the exception for pay that rewarded targeted performance goals, or “performance pay.”

The logic of performance pay comes from Chicago-school economists Michael C. Jensen and Kevin J. Murphy, who published a hugely influential piece in the Harvard Business Review in the early 1990s that argued executive pay should align CEO interests with what shareholders care about, which is higher stock prices. Otherwise known as agency theory, this idea has profoundly shaped the executive pay debate and is arguably the primary reason the performance pay loophole made it into the tax code.

Once Section 162(m) became law, what do you suppose happened next? Predictably, companies started dispensing more compensation that qualified as performance pay, particularly stock options. Median executive compensation levels for S&P 500 Industrial companies almost tripled in the 1990s, mainly driven by a dramatic growth in stock options, which doubled in frequency.

Most of us think of skyrocketing CEO pay as simply a moral problem. However, economists like Piketty and my Roosevelt Institute colleague Joseph Stiglitz have been expounding about the havoc that rising income inequality wreaks on our economy (and democracy). When middle-class wages stagnate, consumer demand diminishes, which has tremendous spillover effects in terms of investment, job creation, tax revenue, and so forth. That particular set of problems relates to how much CEOs are paid. But there are also costly problems with the structure of CEO pay, i.e. what they’re paid with.

Performance pay can (and has) made executives very wealthy, very quickly, which creates incentives for shortsighted, excessively high-risk, and occasionally fraudulent decisions in order to boost stock prices. What kind of effect does this behavior have on the economy at large? Think mortgage crisis and subsequent global financial meltdown. Performance pay also diminishes long-term business investments. According to William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often use free cash flow for stock buybacks rather than spending on research and development, capital investment, and increased wages and new hiring. 

All this and Americans get the bill. Beyond the innumerable costs we’ve borne from the recent economic crisis, the Economic Policy Institute calculated that taxpayers have subsidized $30 billion to corporations for the performance pay loophole between 2007 and 2010. According to a recent Public Citizen report, the top 20 highest-paid CEOs received salaries totaling $28 million, but had deductible performance-based compensation totaling over $738 million. Assuming a 35 percent tax rate, that’s a $235 million unpaid tax bill. The Institute for Policy Studies calculated that during the past two years, the CEOs of the top six publicly held fast food chains “pocketed more than $183 million in performance pay, lowering their companies’ IRS bills by an estimated $64 million.”

Congress is long overdue to close the performance pay loophole. The Supreme Court just made that harder. Thanks to Citizens United and now the McCutcheon decision, the same CEOs who are benefitting from the loophole are much freer to draw upon the corporate coffers to donate big money to politicians to maintain these loopholes.

Nevertheless, there is potential for getting it done. Senators Blumenthal (CT) and Reed (RI) have introduced the Stop Subsidizing Multi-Million Dollar Corporate Bonuses Act (S. 1476), which would finally end taxpayers’ subsidies to CEOs by closing the performance pay loophole and capping the tax deductibility of executive pay at $1 million. In the House, Rep. Lloyd Doggett (D-Texas) has introduced a companion bill, HR 3970.

There are many policy ideas for how to curb skyrocketing CEO pay. Piketty and his colleague Emmanuel Saez argue for a much higher income tax rate for top incomes. (The growth rate of CEO pay was at its lowest when the U.S. had confiscatory tax rates for the very rich.) In the current political climate, a more viable step toward slowing the growth of CEO pay and the damage it does to our economy is to, at long last, close the performance pay loophole. It should never have been there in the first place.

Susan Holmberg is a Fellow and Director of Research at the Roosevelt Institute.

Image via Thinkstock

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Daily Digest - April 16: The Ideas Generation

Apr 16, 2014Tim Price

Click here to receive the Daily Digest via email.

That '70s Show, Starring Ted Cruz (New Republic)

Despite conservatives' tendency to compare Barack Obama to Jimmy Carter, today's economic challenges are the opposite of those the U.S. faced in the 1970s, writes Roosevelt Institute Fellow Mike Konczal.

Click here to receive the Daily Digest via email.

That '70s Show, Starring Ted Cruz (New Republic)

Despite conservatives' tendency to compare Barack Obama to Jimmy Carter, today's economic challenges are the opposite of those the U.S. faced in the 1970s, writes Roosevelt Institute Fellow Mike Konczal.

When Tax Refunds Aren't Just a Bonus, But a Lifeline (ThinkProgress)

Twenty-eight million low-income families depend on the Earned Income Tax Credit to make ends meet, writes Bryce Covert, but not all poor parents qualify for it, and tax preparers' fees can hurt those who do.

In Many Cities, Rent Is Rising Out of Reach of Middle Class (NYT)

A new analysis finds 90 U.S. cities where the median rent excluding utilities is more than 30 percent of the median gross income, writes Shaila Dewan, and it's putting the squeeze on renters and the recovery.

The Sad, Slow Death of America's Retail Workforce (The Atlantic)

The retail sector's sales and jobs numbers are up, writes Derek Thompson, but as business becomes more efficient and moves online, the workforce is increasingly concentrated in low-paying superstore jobs.

3 big things to look for in Yellen's first monetary policy speech (WaPo)

Federal Reserve Chair Janet Yellen is likely to discuss labor market strength, inflation expectations, and the need for financial regulation in today's address to the Economic Club of New York, reports Ylan Q. Mui.

New on Next New Deal

Millennials Are Shifting the Public Debate with the Power of Their Ideas

Taylor Jo Isenberg, the Roosevelt Institute's Vice President of Networks, introduces the Campus Network's 2014 10 Ideas journals, collecting top student policy proposals on economic development, health care, education, equal justice, energy and the environment, and defense and diplomacy.

The Pay's the Thing: How America's CEOs Are Getting Rich Off Taxpayers

Roosevelt Institute Fellow and Director of Research Susan Holmberg explains why we must close the CEO performance pay tax loophole in order to curb the rise of income inequality in the U.S.

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