It’s time to banish the absurd idea that people are paid what they’re “worth”

ROBERT REICH DEC 22, 2023 (robertreich@substack.com)

“We renew our resolve that America will never be a socialist country,” Donald Trump has said.

Someone should alert him that America is already a hotbed of socialism. But it’s socialism for the rich. Everyone else is treated to harsh capitalism.

In the conservative mind, socialism means getting something for doing nothing. This pretty much describes General Motors’ receipt of $600 million in federal contracts, plus $500 million in tax breaks, after Trump took office in 2017.

Some of this corporate welfare has gone into the pockets of GM executives. Since then, Chairman and CEO Mary Barra has raked in some $20 million a year in total compensation.

But GM employees are subject to harsh capitalism. (Hopefully, the recent agreement between GM and the UAW will reduce this harshness somewhat.)

The nation’s largest banks have saved an estimated $21 billion a year since Trump’s tax cuts went into effect in 2018, some of which went into massive bonuses for bank executives.

On the other hand, thousands of lower-level bank employees got a big dose of harsh capitalism. They lost their jobs.

Banks that are too big to fail — courtesy of the 2008 bank bailout — enjoy a hidden subsidy of tens of billions a year because they have the backing of the federal government. This hidden subsidy gives Wall Street’s giant banks a huge advantage because everyone dealing with them is guaranteed against loss.

Take away this hidden subsidy, and Wall Street’s bonus pool disappears, along with most profits.

When he was in business, Trump perfected the art of using bankruptcy to shield himself from the consequences of bad decisions — socialism for the rich at its worst — while leaving employees twisting in the wind.

Now, all over America, executives who run their companies into the ground are getting gold-plated exit packages while their workers get pink slips.

Under socialism for the rich, you can screw up big time and still reap big rewards. Equifax’s Richard Smith retired in 2017 with an $18 million pension in the wake of a security breach that exposed the personal information of 145 million customers to hackers.

Wells Fargo’s Carrie Tolstedt departed with a $125 million exit package after being in charge of the unit that opened more than 2 million unauthorized customer accounts.

Whatever happened to the idea of an economic system that allows everyone to get ahead through hard work, and allocates economic gains only to those who deserve them?  

Around 60 percent of America’s wealth is now inherited. Many of today’s super-rich have never done a day’s work in their lives.

Trump’s response was to expand this free lunch by cutting the estate tax to apply only to estates valued at over $22 million per couple.

To the conservative mind, the specter of socialism conjures up a society in which no one is held accountable and no one has to work for what they receive. Yet this is exactly the society Trump and his Republican allies have promoted for the rich.

Meanwhile, most Americans are subject to an increasingly relentless and arbitrary capitalism.

They need stronger safety nets, and they deserve a bigger piece of the economic pie.

If you want to call this socialism, fine. I call it fair.

A FEW YEARS AGO, I was invited to speak to a group of workers at a power plant in northern California who were considering whether to form a union.

One young man who intended to vote against forming a union told me he was “worth” no more than the $14 an hour he was then paid. “I say for these people making their millions, that’s fantastic. I could have done the same thing if I went to school and had the brains for it. I do not, so I’m a laborer.”

The young man apparently had no knowledge of the 1950s, when over 30 percent of the nation’s private-sector workforce was unionized. That gave the nation’s blue-collar workers, like him, enough bargaining power to summon the equivalent (on average, and in today’s dollars) of $30 an hour — even though many hadn’t finished high school.

It wasn’t their brains that accomplished this. It was their bargaining power. But the power of trade unions to negotiate good wages for hourly workers has declined markedly since then. That’s why the young man I met was “worth” no more than $14 an hour.

Yet the notion that you’re paid what you’re “worth” is by now so deeply engrained in the public conscious that many who earn very little assume it’s their own fault. They may even feel ashamed of what they see as a personal failure — a lack of “brains” or a deficiency of character.

The same mythology allows those who earn vast sums to believe they must be extraordinarily clever, daring, and superior. Otherwise, they wouldn’t be doing so well. This reassuring conviction seemingly justifies not only their great wealth but also their high status in society.

They would prefer not to view their money as winnings in an economic contest over whose rules they and others like them have disproportionate influence. And they would prefer the public not see it that way, either.

A decade ago, the hedge fund manager Steven A. Cohen earned $2.3 billion. During his 20 years at the helm of S.A.C. Capital Advisors, he had amassed a fortune estimated to be around $11 billion.

Was he really worth it? In the trivial, tautological sense, he must have been, because that’s what he earned. “[P]rivate hedge fund people only make money because others voluntarily decide that it’s worth it to invest their money with them,” noted Dan Mitchell of the right-wing Cato Institute, in response to my public questioning of Cohen’s pay. 

But there may be a reason people decided to invest their money with Steven A. Cohen that raises a deeper question about his “worth.”

According to a criminal complaint filed by the Justice Department, insider trading at S.A.C. Capital under Cohen’s leadership was “substantial, pervasive, and on a scale without known precedent in the hedge fund industry.” Nine of Cohen’s present or former employees pleaded guilty to using insider information. The firm itself entered a guilty plea and paid a $1.8 billion fine.

For years, investors had put their money into S.A.C. Capital — presumably because the firm’s trades on inside information generated huge returns. Had the firm’s insider trading been discovered and prosecuted earlier, those returns would not have been nearly as high, investors would not have put their money there, and Cohen’s wealth would never have amounted to $11 billion (minus the $1.8 billion fine).

In other words, if unions were as strong today as they were six decades ago, the worker I spoke with might well have earned (and therefore been “worth”) $30 an hour instead of $14.

And if the ban on insider trading had been stronger and fully enforced, Steven A. Cohen would not have accumulated (and been “worth”) $11 billion, and his clients would not have “voluntarily decided it was worth it” to invest their money with him.

PEOPLE ARE “WORTH” what they’re paid in the market in the trivial sense that if the market rewards them a certain amount of money, they are assumed to be worth it. Some confuse this tautology for a moral claim that people deserve what they are paid — that America is a “meritocracy.”

The term “meritocracy” was coined by British sociologist Michael Young in his 1958 satirical essay “The Rise of the Meritocracy” to depict a society so wedded to standard measures of intelligence that it ignored many gifted and talented people while overlooking character flaws in those who tested well.

Since then, the term’s meaning has changed to become a positive description of a society in which anyone can make it based on individual merit — through qualities such as natural intelligence, hard work, ambition, and courage — and in which financial rewards are directly proportional to individual effort and ability.

But a moment’s thought reveals factors other than individual “merit” that play a larger role in determining earnings — inheritance, connections, luck, or discrimination in favor of or against someone because of how they look. It turns out that the most important determinant of someone’s future earnings is the earnings of the family they’re born into.

Unless one assumes that these outcomes are just, it does not follow that people deserve what they are paid in any moral sense.

IF THE RULES GOVERNING HOW THE MARKET IS ORGANIZED took full account of the benefits to society of various roles and occupations, some people would be paid far more — and others, far less.

Social work, teaching, nursing, and caring for the elderly or for children are among the lowest-paid professions. Yet evidence suggests that talented and dedicated people in these positions generate societal benefits far out of proportion to their pay.

One such study found that good teachers increase the average present value of their students’ lifetime income by $250,000 per classroom, for example. Presumably, if teaching jobs paid better, they would attract many more such teachers. 

On the other hand, the worth to society of many CEOs, hedge-fund managers, investment bankers, “high-frequency” traders, lobbyists, and high-end corporate lawyers is likely to be far less than they command in the market.

Much of what they do entails taking money out of one set of pockets and putting it into another, in escalating zero-sum activity.

High-frequency traders, for example, profit by getting information a fraction of a second earlier than other traders, necessitating ever-greater investments in electronic systems that give them that tiny edge.

Similarly, squadrons of corporate lawyers are paid substantial sums by their clients because squadrons of corporate lawyers on the other side are paid vast sums to attack them and defend their own clients.

PEOPLE IN THESE PROFESSIONS do not generate discoveries that transform society or create works of art that enrich and deepen human consciousness. Their innovations are financial and tactical — finding new ways to squeeze more money out of a given set of assets, including employees, or to expropriate the assets and incomes of others.

Such contests also use up the time and energies of some of the nation’s most educated young people, whose talents could, one supposes, be put to more socially beneficial uses.

According to research by sociologist Lauren Rivera, some 70 percent of Harvard’s senior class routinely submits résumés to Wall Street and corporate consulting firms. The percentages are similar at other Ivy League colleges.

The hefty endowments of such elite institutions are swollen with the tax-subsidized donations of wealthy alumni, many of whom seek to increase the odds that their own kids will be admitted so they too can become enormously wealthy financiers, management consultants, and corporate executives.

Personally, I could think of a better way for taxpayers to subsidize occupations with more social merit: Forgive the student debts of graduates who choose social work, child care, elder care, nursing, and teaching.  

THE ENORMOUS pay going to the richest members of society is not necessary to get them to do the work they do. Nor does it reflect the societal value of their work. More often than not, their pay is way out of line with the common good.

Meanwhile, the current pay going to the working class is inadequate to provide people the standard of living they desire. It, too, is out of line with the common good.