Democracy And Free Markets: Is That All?

Income Distribution, Economic Standards, and Growing Discrepancies

Douglass Carmichael May I suggest a new topic on money and campaigns?

Has anyone read "How Democratic Is the American Constitution?" by Robert Dahl, a Yale professor of history?

John, you keep sticking with the argument that what the rich do has no impact on me.

When I moved to Washington DC I was able to buy a five bedroom Tudor right off of Rock Creek Park for 10k down and 1k per month. My income was about 60k and the house cost 69k, about a year's salary. Today that house is worth over 1 million. To find an equivalent today I would need to go way outside the beltway, or try an apartment. But the house raised three children and contained my private practice. The general increase in the population is about 30% but the inflation a factor 0f 15. It’s curious that the hourly rates of therapists have hardly doubled in that time (1970 to present). there is a tremendous interaction between the distribution of wealth and options open to those slightly down the curve.

Don, I still don't see how "who picks the issues" happens in your model. If we were to start today what would be the issues?

(Participant) John, I do not want citizens to become DIRECT legislators. The programs that I have been interested in facilitate citizens to deliberate on policies and then submit their conclusions to the legislators or others who have the responsibility of taking effective action.

One of the more recent examples was a citizen group of 5,000 citizens who were a statistical sample of the residents of lower Manhattan. Their task was to critique the plans for rehabilitating ground zero following 9/11. Their judgment was that the existing plans were not to their liking, and they submitted broad policies that they preferred. These policies were accepted by the city officials and are now being implemented by leaders, architects and other experts.

I believe that experiments with similar citizen discussions might find ways to replace existing referenda.

I also believe (without any hard evidence) that a pole of citizens in such programs would have opposed the Iraq war.

I agree that making campaign contributors and voters one and the same is a good idea. In fact, if we continue the discussion you have begun here, I think that finding new ways for involving the citizens in their related tasks would be a worth considering.

(Participant) Doug: I have used all of Robert Dahl’s books in classes on democracy. He is one of the best in this field. But he has not been involved in the newer programs that we have been discussing.

If you want to get a more authoritative idea on how they work, who picks the issues, etc. I suggest you look into, if you have not already done so, http://www.americaspeaks.org

(Participant) Doug, the reason for the significant increases in real estate prices is low interest rates. As a result, real estate at all levels has had similar increases. The wealthy as defined by those with liquid net worth over $1 million number only about 2 million. In affluent neighborhoods the average home is over $1 million. The homes of the wealthy cost considerably more. Low interest rates combined with all the mortgage programs has encouraged people to buy up not down.

Don, thank you for your clarification and I apologize for my misunderstanding. We certainly do agree.

Douglass Carmichael John, you can't be serious. There is no way the difference between 69k and 1.2 million is based on an interest rate difference of 2%. I am looking at interdependencies and you are looking with a model of independence. You ignore the simple fact that thirty years ago as a young therapist/professor I could fairly easily buy a home in one of the best neighborhoods in Washington. If it were just interest rates, by your analysis, I could buy that home today. Even with 200k down I couldn't do it.

Don, remember we had the America speaks conversation early on. I've been to some of the events and think that we she is doing is one of he god experiments.

I still think you are not addressing the issue of "what issues" get discussed.

(Participant) Doug, you are looking at the issue from your own personal circumstances. Many neighborhoods that therapist/professors and other medical professionals used to afford, they no longer can. This has to do as much with the declines in their relative incomes as the increase in real estate values. This also accounts for why the number of people entering those professions has been steadily declining.

Over the past thirty years increases in population, inflation, higher real income and more recently sustained low interest rates are responsible for the increase in property values.

Doug, with all due respect you have a blind spot when it comes to the wealthy. I could sympathize when I was in the lower middle class but now that I am the enemy I have a different perspective. Your comments about their trips to Venice and single malt scotches are an example. What’s wrong with enjoying, if you can afford it, the nicer things in life? Also, where do you draw the line? How is your lifestyle, relative to those in the lower income groups any less extravagant and alien? Why shouldn’t the wealthy want to preserve their way of life any more than the middle class or anyone else? If they have an unfair advantage in protecting their way of life, isn’t that advantage based on money and don’t we level the playing field somewhat if we get the money out of politics?

Don, why couldn't we work through groups like America Speaks to initiate policy rather than comment? Why couldn't they if they agreed through their process present to our elected officials our collective desire for campaign reform?

(Participant) Doug: As you know, America Speaks is a process, not a pressure group. My long range interest in it is to have something similar to its format to replace the current yes/no choice and sound-bite propaganda for educating the voters. The "issues to discuss" is, in my mind, NOT AN ISSUE.

John: America Speaks is a process owned by Carolyn Lukensmeyer, the former top technical person on electronic discussions for VP Gore in his program to improve democracy. She left him after about 6 months feeling that he wasn't getting anywhere and set up her own consulting firm to test and improve her "invention" for large-scale meetings involving individuals discussing issues around tables of not more than 10 people. Each table has a facilitator and a recorder with a lap top. The recorders are linked to a central office which can track communications from an almost unlimited number of tables and even in different locations. I won't try to explain it more—it really has to be experienced to believe what I consider may become a new breakthrough for citizen non-adversarial discussions. I am sure that there are a number of similar programs sprouting up and have heard of a few but have not experienced them myself. Actually, I am experimenting with a modest version of this here on Mt. Desert Island without all of the top electronic capabilities and the results have been promising.

In short, to answer your question, America Speaks could indeed do what your suggest IF THEY WERE ASKED TO DO SO AND IF THERE WERE MONEY TO MAKE IT POSSIBLE. Carolyn is a lone entrepreneur and researcher, but is still confined to experimenting only when there is outside money.

It might be worth while for you to click on to

http://www.americaspeaks.org

(Participant) Doug, my point wasn’t how housing has performed as an investment but that in real dollars the increase in price from when you purchased is modest.

According to the Census Bureau, 2002 had the highest percentage of Americans who own their own home (67.9%) ever and the absolute number also is a record (74.4 million). Gains were also made by minority groups with record ownership by Hispanics.

Also, the average family house today has 30% more square footage than 30 years ago.

(Participant) Doug: My recent focus has been on the process of improving citizen participation and on the role that citizens should play today. The issues will depend on what are the current questions needing a decision, and whether they are national, state, or small community. The selection of issues will also vary accordingly.

I have said, but can't find the place, that I think citizens should be involved in broad policy issues and not in the details which often involve specialized information. I also tried to express this in 26.20 30 and 42, and in 29/15 and 19. But I guess I wasn't, and perhaps am still not, clear.

Douglass Carmichael This from slate today are a new federal reserve paper.

A fundamental principle of American life is this: Anyone can rise from poverty to wealth. That's a promise that the United States has fulfilled better than any other country, in part because the government has given that mobility a helping hand. The spread of universal public education, expansive immigration policies, and rigorous patent and intellectual-property protection have given successive generations the tools and incentives to create wealth. Meanwhile, the abolition of primogeniture, antitrust policies, and estate taxes has ensured that fortunes and status gained in one generation aren't handed down in perpetuity. As a result, fortunes large and small have continually been made and lost in the United States. In the words of Joseph Schumpeter, the rare economist with a penchant for bons mots, "The upper strata of society are like hotels which are indeed always full of people, but people who are forever changing."

Modern conservative economists love this mobility, and they often cite it as a reason why income inequality isn't troubling. A college student has virtually no income today—and thus is counted poor—but in 15 years will assuredly rank as comparatively wealthy. High-wage-earners, upon retirement, may descend the income ladder as they live off of their pensions and Social Security. As a result, "the effect of the tax system on an individual taxpayer is not well represented by a one-year static snapshot of his or her income," as R. Glenn Hubbard, the personable former chairman of the Council of Economic Advisers, put it in the 2003 President's Economic Report. And that's why many economists object to the sort of analyses issued by the Center for Budget and Policy Priorities, which notes that a select few will benefit disproportionately from tax cuts. The critics assume that the only people who benefit from a tax cut are those in a tax bracket at the moment of the cut. In fact, as Hubbard argues, today's top 1 percent receiving the best of the Bush tax benefits will differ significantly from the top 1 percent in 2010, who will also receive the benefits. A table in Hubbard's report shows how taxpayers would have moved among brackets between 1987 and 1996—assuming the 2001 tax cuts were in effect then. More than half the taxpayers changed brackets by the end of the period, with 28 percent having moved to a higher tax bracket and 26 percent of taxpayers moving to a lower bracket.

But what if people are less and less likely to move up or down the income ladder? This paper by Jane Katz and Katharine Bradbury, economists at the Federal Reserve Bank of Boston, confronts this question and finds a troubling set of answers.

After analyzing the performance of all U.S. households based on their standing by quintiles in the 1970s, 1980s, and 1990s, Katz and Bradbury conclude that while mobility stayed steady in the first two decades, it "declined noticeably" in the 1990s. "Overall, about 40 percent of families ended the 1990s where they began, as compared with 36 and 37 percent in the 1970s and 1980s, respectively."

The slowing mobility was evident at both the bottom and the top. In the 1970s, 49.4 percent of those in the poorest quintile were stuck there at the end of the decade, while 24.5 percent had moved up to the second-poorest quintile. But in the 1988-1998 decade, 53.3 percent of the bottom quintile stayed put while 23.6 percent rose one quintile. Among those in the top income quintile at the beginning of the 1970s, 49.1 percent remained there at the end of the decade; in the 1990s, 53.2 percent did. Of the richest fifth in the 1970s, 72.8 percent ended up in the top two income quintiles; in the 1990s, 79 percent did.

When inequality rises—as everyone concedes it has—and mobility falls, American society becomes much less fluid, much more stratified. As a result, "Compared to 30 years ago, families at the bottom are poorer relative to families at the top and also a bit more stuck there," Katz and Bradbury conclude.

Keep in mind that inequality rose and mobility decreased in the 1990s, when taxes were raised on the wealthiest. Bush administration policies—sharply reduced marginal rates, a gradual abolition of the estate tax, a reduction in the dividend tax—will surely amplify the trend. To borrow another phrase from Schumpeter, our bias in recent years has switched from creative destruction toward creative preservation. The rich have figured out how to use the federal government to help them stay that way.

Douglass Carmichael Inflation in the US.

Click her for Report

Now, from another perspective. Once, through marriage, I did enjoy some of the fruits of a fortune I saw go from 40m in 1982 to 400m in 1990, through no effort on the owner's part, just sheer stock inflation and about ten percent in real estate.

To me the important parts were not Venice and the single malts, but the paintings in the house: Sargent, Hassam, and access to sociability with folks not otherwise available, twice the whole supreme court to dinner, a visit in Tuscany to count debroglio, but without it, years later I did end up skiing with the royals and dinner with the Cartier sisters, a few afternoons in the Soros office watching operations, and some other bizarre encounters…

Glad to have done it. I find it inessential now. To me, the key is what makes a society that works, touches the genius such as it is of every human heart.

Certainly population and technology work together to effect events. But that is the story. It takes an ear for trends, statistics, differences. I hate it when there are writings that make assertions that the writer is fighting for against what he knows is the opposite story, but does nothing to take it into account. An interesting example, which is subtle because it states the other positions fairly well, but surrounds them with I think fairly stupid assertions -

This one a review in the Wall Street Journal Monday

Click Here for Report

This kind of article, by the way, hints at a way of working I wish I could do. Analyze such articles. Take each important line, and critique it, hyperlinked. Not to just show how it's wrong, but to expand the perspectives. Keep doing this with articles of note, including those by the major columnists, and make it all available on internet and surrounded by conversations like this. Build towards a consensus of where the sticky points are, and be open to broader perspectives that put things in ever more agreeable frameworks, even hard ones.

Douglass Carmichael And this from tomorrow’s New York Times on the 400 richest paying less and less tax as earning more and more. What is important is rends and causes more than individual facts.

Click Here for Report

(Participant) The federal reserve information is interesting. It still doesn’t address the significance of relative versus absolute income. Although absolute income increased in the 90’s the relative difference in income increased at a greater rate due in large part to the boom in the stock market meaning that the threshold to the next level is much higher resulting in more stickiness within a given level. As a result the data doesn’t really address the question of opportunity; it just confirms what we know, that there has been an increase in disparity. So we go around in circles on the debate of relative versus absolute. Katz and Bradbury already start with the presumption that income disparity is more important.

I think the mobility argument by modern conservatives is as misplaced as the disparity argument and sounds very Republican to me. Where is the benefit if the same number is moving up as down and why should I care if I am not in the group moving up? It is trying to talk around the disparity issue and focuses on the benefit to a privileged few. Again, the conclusions reached seem consistent with the bias of the analyst.

I do disagree with tax policies that exacerbate the disparity. The spirit of our tax system is designed to redistribute wealth. Although, increased defense spending relative to education has the opposite effect. That is were we should focus on disparity.

(Participant) I think the conservatives were mentioning mobility not so much because they think poor people understand it, but because the idea of it makes poor people feel that they could someday be there, hence they are not dismayed at the fact that the CEO makes a thousand times what the worker does.

(Participant) I think that most people are pretty realistic about their abilities and although they may fantasize about becoming wealthy don’t really expect it to happen irrespective of opportunity. There are those few gifted individuals who are the exception but to focus on them as a justification for policy is what I meant by my Republican comment. Most people want a nice life within the constraints of their abilities.

Doug, I agree with your concerns about the tax breaks for the wealthy. I don’t have consumer spending statistics to confirm, but my guess is that if we wanted to stimulate the economy, the middle class outspends the wealthy on consumer goods that count in our economy. By count I mean that both increase revenue and job creation as opposed to works of art, expensive European vacations, single-malt scotches. Tax breaks for the wealthy should lead to more investment but at a time when we have excess capacity, that isn’t the issue. I also think over the last ten years, tax policies that would have encouraged the middle class to save and invest rather than borrow and spend would have had a greater long-term impact on both the rate of inflation and our economic health. It also would be a more democratic approach than the Fed artificially setting rates.

(Participant) Doug, you said, "The rich have figured out how to use the federal government to help them stay that way."

Is this a sudden discovery on the part of the rich, or is it that we have an administration whose policies coincide with the interests of the rich? The rich have always, like other special interests groups, tried to use government to further their interests. Depending on who is in government determines how successful they are. The irony is that the Clinton years did more to create wealth. Given the differences in tax policy, education, health care, foreign policy, etc., do you still consider there to be little difference between the parties? Bush is a pawn of his intellectual advisors due to his lack of experience and deep thinking which makes him more susceptible to whoever has his ear, in this case the neocons.

WHAT ARE OUR PROPOSALS FOR CHANGE OR IF YOU LIKE REVERSING THE TREND?

(Participant) Actually, John, there are studies showing that the expectation or hope that one will be somehow elevated to the upper ranks is widespread among Americans at all socio-economic levels. Other studies show that people are very unrealistic in evaluating their abilities with respect to others. Be careful not to believe that the reason there is no outrage at the income disparities is that people are "happy in their place", as was said about blacks and women.

(Participant) In thinking about strategies we should probably distinguish between "bottom-up" actions and "top-down" actions. The grass roots, participative strategies that Don advocates are very different from, say, taking a case to the Supreme Court, hoping to get a sound judgment that might not be popular. The death penalty ban in the seventies is an example of the latter. It could happen in seeking civil rights for children. Most people in the US still favor corporal punishment for children, but it's possible that were the case to be argued again before the Supremes, they might find that practice unconstitutional.

Many of the necessary changes we have been discussing in this conference may not be supported by the larger public, but might be brought about by top down action, the way Harry Truman, in the forties, ended Jim Crow practices in the military by executive order, long before there was popular support for such action.

Participative strategies need to be further divided into the mobilization for a particular cause, such as Move-On is doing in the vigorous attempt to unseat George Bush, and the effort to engage the public in dialogues intended to illuminate all sides of the issues, permitting people to make more informed judgments. The latter, I believe, is the position that ILF Fellows like Don and Dan Yankelovich take.

(Participant) Dick, I am not arguing that people are "happy in their place" but that because their absolute incomes had improved they were better off. Income disparity, particularly CEO salaries, didn’t really start getting much attention until the market declined and the economy went into recession because people’s absolute income started to decline. This disparity is now being further emphasized by the current tax policies.

I am interested in these studies you mention. Their conclusions are so inconsistent with my personal experience. Having attended 11 different schools before graduating high school and being a pretty keen observer (of course my evaluation could be unrealistic) I have been exposed to a decent population sample of the middle to lower ranks. These studies are also inconsistent with people’s actions unless people believe that one is elevated to the upper ranks by a fairy godmother or perhaps they miscalculated the odds of winning the lottery.

Of course, you might be referring to people's dreams or fantasies not their realistic expectations. There is a difference but both must be considered, but our right is to the pursuit of happiness, not happiness itself.

Douglass Carmichael OK. But so much ideology. Pursuit of happiness, but not as an illusive goal. If you read carefully my quotes from Wills, the texts Jefferson worked from said clearly that the actual felicity of the population was the measure of a governments legitimacy. I remember when Clinton said "everyone should have a shot at the American dream." A shot at a dream of reality? Like the shadows on Plato's cave.

Now, historically of course the government has been owned by the rich. But smart rich know it, and know that resentment and gross unfairness will destroy their own golden goose. Out wealthy are not very intelligent. They pass around the same language such as "the poor have nothing to blame but themselves" with mediocre mindlessness. Or things like "capitalism won" with the fall of the soviets, without thinking through what kind of responsibility that requires, just as the approx 10,000 Iraqi soldiers, each a life, that died in this last incursion. Cold hearted but aware capitalists are vastly to be preferred, because they are actually realistic. Its why I like reading fairly obscure financial advice letters, because thy do realize the right issues, oh, like if China floated the Yuan detached from the dollar.

John, on timing: When you went to those 11 schools, the belief was still there that public schools were part of a system of leveling the playing field. I think that belief has broken down since.

Let's see what else…

The boom in the stick market, which was the thing to buy in the 90's, inflating rapidly, and Greenspan saying we have no inflation.. and pumping dollars into the M1 money supply…

I like your reaction to the Fed article, firm and measured. Thanks.

On tax distribution—with cigarette and gasoline taxes, the burden overall is shifted to the poor. the rich can do a regulation correction to keep their income up, while they are also looking for how to push taxes downwards.

One of my favorite examples of what's coming is the use of GPS to monitor car movement and charge for high traffic areas. the rich can afford these easily and the poor cant, so a kind of distribution of benefits via a kind of market favors those with the extra income. this started a few years ago with talk about getting rid of HOV lanes on freeways. "my secretary can carpool, but I never know when I'm gong to work. Why should she have the advantage and not me?" the HOV lanes would become sticker based lanes, stickers for a fee.

The "ability" question is so interesting. There certainly are lots of really smart people in ghettos. But there are lots of real failures. It seems to me that a good society is decent to its weakest. The doctor marrying the nurse has given way to two doctors marrying, and this lowers mobility also, and moves towards a caste system.

John, if all business people would be as compassionate as you are showing now I would be much happier—it’s the blank-eyed justification of what we have as wonderful that seems to me so dangerous to our national life.

The psychoanalyst in me suggests that things like the war in Iraq are rooted in fear, and he fear rooted in conditions that are indeed frightening - lack of opportunity to go to the beach, or watch one's children doing well.

Don, hope you are working on an answer to my question about who chooses the issues?" I may be deluded but I think it is the key question. In William Greider's quite good book, Who will tell the People? he argues that issue making in this society is key to power, and now it is in the hands of the expert culture.

Is everyone noticing how much the topic here is moving into the center of awareness in much of the press world?

(Participant) Pursuit of happiness doesn’t imply an illusive goal. If the government provides the opportunity, a fair shot, it is still dependent on each individual to achieve happiness. Happiness isn’t defined as becoming wealthy but as something different to each individual. That is why we are concerned with more than just the opportunity to get rich, but also dropping music, art, and phys ed. from the curriculum or loss of open space. It is worth considering Jefferson’s thoughts but I would like to think we have learned a little something over the past 200 years to make our own contribution.

There was an interesting article recently comparing the business culture on the West Coast to the East Coast. Without going into detail, there is a reason why the Republicans have written off the West Coast. Anecdotally, I was talking with a very wealthy individual from Seattle who mentioned the preferred car in his neighborhood was a Ford Taurus. Some of us do get it.

On timing, this administration is breaking the spirit of the nation. It was only 4 years ago that people thought that they could become ridiculously wealthy (some actually did) before they were 40.

Inflation statistics are not based on non-essentials. The fact that we had significant gains in the stock market supposedly was factored into the Fed’s interest rate policy and should have provided a reason for not continuing to lower interest rates further stimulating an already over exuberant situation.

On tax distribution, we agree it is progressively becoming regressive. We also agree that that is unfair and stupid.

We agree that opportunity could be better for everyone not just those with ability and is getting worse. Personally, I think marriages outside of one’s own caste are more difficult but that is beside the point.

Doug, for the most part we agree that our current situation is not good and getting worse. We disagree on how we got here. We also disagree as to what extent the problem is the rich. Relative income doesn’t concern me as much as finding ways to increase absolute income. Wealth distribution could be better accomplished through more intelligently allocating government resources on education and access to education not on more taxes regardless of who pays or by artificially adjusting salaries. I have no problem with the rich paying lower taxes if the burden isn’t shifted to others by increasing their cost and reducing their opportunities. I think we have gone too far. The number one threat to our way of life, including the wealthy, is George Bush.

Doug, this discussion also highlights why the rest of the world so resents us. If you just replace our comments regarding the rich with the U.S. and the poor and middle class with the rest of the world. Your statement, "Our wealthy are not very intelligent" would now read the U.S. is not very intelligent. How ironic that our foreign policy is the work of intellectuals.

(Participant) John, a few weeks (months?) ago, in the NY Times, conservative David Brooks wrote an op-ed piece reviewing the study that described the fact that Americans believe that they might make it to the top ranks.

I've learned that studies that go against the conventional wisdom are not only more interesting, but more to be trusted.

(Participant) Dick, do you think that goes against the conventional wisdom? My opinion is based on observation only. A recent example, when I was in high school, everyone rightly assumed that when I said that my dad was a construction worker that he was an employee. Now, if it is a plumber or carpenter doing a job at my house when I mention that my dad was a construction worker they assume that he owned the company. In other words, they assume that my circumstances are a result of some advantage. They believe without that advantage the top rank is unattainable which is easier to admit, although our rational mind knows but our ego is reluctant to accept, that someone might be more talented. But then again, plenty of people are duped by get rich quick schemes, buy real estate with no money down, etc. So maybe we all do believe it is possible if we just knew the magic formula. I would like to see a survey that asks people why they think they are not rich.

(Participant) In his classic book, The Practice of Management, written probably in the early fifties, Peter Ducker held that in healthier companies the salary gap between senior executives and those down the line was relatively small. He argued that it should be that way. I wonder now how he feels about CEO pay that is hundreds of times more, up to a thousand times.

(Participant) Yes, I do think that the conventional wisdom would be to assume that a growing discrepancy between the rich and the poor would be a source of discontent.

In understanding human affairs, don't expect consistency across opinions. For example, the workers who are doing your plumbing could doubt that you could be a self-made millionaire (most rich people have had a head start), and yet believe that they themselves could be.

(Participant) George H. W. Bush once confessed that he had never stood in a check line at a supermarket.

(Participant) My question on conventional wisdom had to do with the belief that most people think that they can become rich.

But the question you answered is interesting because, is it a contradiction that people believe that they can become wealthy but resent income disparity?

Would people be willing to have a lower standard of living if there was less disparity? Does the move to capitalism by the former Soviet Union and China provide an answer?

Perhaps the real issue isn’t disparity (contrary to conventional wisdom), but as Dick has pointed out, expectations. When we start hearing rumblings about disparity is the problem really that people feel that they are being denied the opportunity to become wealthy both because their income is declining and there is less mobility?

Understanding the difference has a significant impact on policy

Douglass Carmichael John, thanks for the comments about the rich. My real concern is with the drift in democracy toads one party and markets towards monopoly. the rich are symptomatic, not cause. But they get used by the system by becoming numb to their effects if they blind themselves to real world conditions of poverty, crime, environment - and culture.

I feel that we have moved much closer together in this discussion, and maybe can look at causes, which is the really interesting part.

I agree on the idea that the outside world looks at the US the way I am looking at differences in the US. Isn't this an accurate picture?

On a new subject, for here, I am very concerned that the Iraq situation actually turns into a rout, or vast escalation. Many of the critics of the war before it started made this argument. It will be bad for the country, and the world's morality. Bush breaking the nuclear club culture of restraint, on of the better parts of the post-WWII culture, to me, is one of the worst faults. But I fault the progressives for not doing nearly enough to clean up bureaucracy and helping to give targets to the Right.

One thing that amazes me: both the right and the left are for more humanity, less alienation, more community and less large system interference. Yet each sees the other as aligned with the big institutions. they have a common enemy, which is transparent to them, and hate each other instead.

(Participant) I actually was trying to address the question you asked. I think that the conventional wisdom would hold that the growing disparity would be a cause for discontent, but that study showed us that it isn't and the reason it isn't is because people do not feel trapped in a lesser life, they think they may make it to the top. The point is that they are not bothered by the disparity.

While the Chinese are moving rapidly toward capitalism, they didn't end abject poverty and starvation with that system.

We aren't hearing rumblings of discontent about the disparity. That's the fact that so amazes those of us who find the disparity obscene.

We have a system that allows millions of our citizens to live in squalor. We shouldn't have hungry children. It isn't that we need to take the money away from the rich people and give it to the poor, exactly, but we do need to take it out of defense and other places which the wealthy make certain doesn't happen--not because they are worried about defense, but because they want the contracts. John, you are for redistribution of resources, but I do believe that cannot be done without a re-evaluation of the role that the nation's wealthy play. Part of it can be cured by election reform, but as we know, the wealthy are good at finding ways around the legislation.

(Participant) Doug, I agree that right and left have a common enemy, and it is the system we live under, and while it should be transparent, it is instead invisible. If I could only bring about three changes, I would 1)institute radical election reform, getting the money out of politics, 2) distinguish between those practices and services that belong in the private sector and those that do not, a discipline we are currently not observing as we try to move everything into the private sector, and 3) end the foreign policy that creates an American empire. If we could accomplish those three, a lot of other problems would disappear.

Douglass Carmichael Invisible is what I meant—a better word than "transparent".

From today's NY Times:

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Krugman on a one-party government.

Here is my challenge: as we are finding ourselves more in synch about the current sad state of things, I say that proposed solutions, such as, Richard, your 1-3, are not strong enough. We have to go for root causes. I propose that money being in the political lead, privatization, and empire are part of a single process, and that Bush (and Clinton) were adapted to and used by the larger wave of things. The problem is that in the struggle between oligarchs and the rest of us (most here are at times a member of both), technology has given the edge to the oligarchs, and we have not found a way to self correct. That edge is also supported by the realities of empire, and supported by over crowding (which makes crowd control legitimate, and hence still more of an edge to tech and hierarchy and police).

So to make a difference we would have to find a leverage point, **and we have not yet identified it**. All half measures are good in that they remind us of the possibility of civilized motives, but are not going to prevent as going trough a wrenching time (which we are certainly already in).

If we look back fifteen years, who knew that we were in trouble? We need to understand what kind of mind could see it, and what we can learn from them now.

For three principles, how about

1. Making sure we are helping the very weakest (which means dealing with rats and drugs and fast food and gangs)

2. Designing education around Erikson's eight stages of man.

3. Moving towards local and regional initiatives

4. Looking for the fritz of technology by having national appeals on how tech can benefit us, create aisure, aesthetics, omseadian parks, and jobs that are fun and produce the things we really want, and replace advertising (voluntarily) with internet discussion groups led by consumer reports.

5. Making not being busy a goal, rather than a negative identity.

6. Building a multilateral policy based on invitations to the world to follow suit (rather than inviting elites to join the alliances to harvest the spoils, as it is now).

(Was that 3?)

Douglass Carmichael I highly recommend

http://www.agonist.org/silkroad/

…for daily observations of the harder parts of the world.

(Participant) Bush has set a dangerous precedent with his policy of preemptive strike particularly when threat is arbitrarily defined and not supported by the world community. We have become a rogue state.

Dick, thanks for the clarification. By rumblings, I refer to the increased attention on the subject by the media. I think that we agree that the problem at least in the eyes of the public, is expectations more than the actual disparity.

The difficulty with redistribution of wealth is given the amount of taxes and investment capital contributed by the wealthy, how would we replace this? There is an optimum level of redistribution but my guess is that would still leave us with significant disparity. Also it would seem to be attacking a problem that the public doesn’t seem to care about. I like a more market oriented solution to redistribution that requires the assistance of government. Better equip people to rise to the upper ranks (education). A greater supply of potential CEO’s and new businesses should lower salaries and stock prices. This addresses the public’s real concern, expectations.

Dick, if we solve the election reform issue we stand a much better chance of the system providing us with satisfactory solutions to your nos. 2 and 3.

I go back to my original proposal of a manifesto. I agree with Doug that it would be difficult although I would love to hear the arguments of those who are in support of big money politics. At the very least, our Document for Democracy could bring more attention to the issue as well as the ILF if that is desirable.

(Participant) Sorry, Doug, if my last entry is unresponsive to your 29:41 but it was written before I saw your contribution.

Douglass Carmichael Thanks, John.

On redistribution: I don’t think more education would make any difference. It is a network effect, and the larger the enterprise the more finding the right candidate is important—and right is not skill but connections. It is working the game in entertainment and professional sports. The right person is worth 100m—it is a question of size. Smaller organizations would help, but by my analysis the actual trend is towards bigness, which means higher, not lower salaries.

I sense that as we get into more of a real conversation, I need to actually pay more attention, not less, to what is said and what I say.

Business is highly dependent on the state, for regulation, contracts, charters, finance rules, money, etc. I love the libertarians who think the whole thing could be free market with no government. So since we have regulation, setting compensation guidelines would not be so terrible. How may CEO's would not do the same work for 30% of what they get now, if all CEO jobs were reduced to 30%? I think very few—it’s too much fun, too much status, too much ego reward. Besides, I think having people run things because they want to rather than because they are driven by money would be better. The losers might be the trophy wives who really have trophy husbands and, by my ear, actually are key drivers on the status side for house, travel, community, and children's education.

Business is a great way for society to get its needs met - but that means that business is part of the general well being, not a private game preserve. I am following two venture capital funds here in Seattle, and there is not a hint of social responsibility, but a high instinct for what tech will pay off quickly.

(Participant) I came across an interesting quote recently.

"Whoever shall cast love aside, shall lose everything. For by love, laws are made, kingdoms governed, cities ordered and the state of the commonwealth is brought to its proper goal."

(Participant) Doug, the bigness question isn’t so simple. Fewer companies are generating more revenue but don’t forget, only 1 in 14 persons works for a Fortune 500 company today as opposed to 1 in 4 a few decades ago. Going to work for a large company no longer has the attraction of security and a good pension and is considered a stultifying environment. Wealth creation over the past decade was perceived to be from start ups by entrepreneurs. Connections help but that is nothing new. Until the decline in the stock market, money was up for grabs even if the idea wasn’t that great but ended with dotcom. I like the idea of empowering more people to be entrepreneurs but without the proper skills (education) it won’t happen as quickly or pervasively as we would like.

Wage and salary caps and price fixing never works. Besides, the significant disparity is from incentive compensation. In-the-money option amounts increased significantly due to increases in stock prices. It is exactly what the shareholders asked for. Incentive compensation was shareholder driven. With many start-ups, options were used in lieu of competitive market salaries and in the cases of ridiculous market valuations, outsized compensation resulted along with large windfall gains to investors. I am in favor of incentive compensation but prefer programs tied to increases in net worth or real value for which management is directly responsible. But why do we care if income disparity isn’t an issue with the public and is in fact an incentive?

Does a company or business have a social responsibility other than playing by the rules established by society? The owners have a social responsibility as to how they use their dividend income or capital gains but how that is exercised is a personal matter. I can’t condemn the Seattle venture firms, if they are playing by the rules, anymore than the criminal defense attorney who provides the best defense possible for a guilty client.

Douglass Carmichael I spent last evening with a very well known consultant guru type talking about the mafia control of so much of Seattle business, from bakeries that run fake competition to real estate companies whose books are done in Las Vegas. he said "the only thing that preserves America’s greatness is denial." he had story after story, including things he did with his grad students with companies like Geneen's ITT...

John I really disagree about social responsibility. The corporation only exists to meet social needs. That is why it was chartered.

On the drop in fortune 500 employment, I think those are only domestic figures. Worldwide, the figures ad up to more people, not less.

How can the share price be the driver if when they came down exec compensation stayed high? There was some down side but nothing like the upside. John, I think you could be as eloquent about the failure of the exec compensation issue. What I would encourage you to do is, when you are in a conversation with several sides, and you know them, that you let both out and rise strategically to the new level defined by the possibility that the various 'sides' are all true, and that then the interesting conversation, the exploration and discovery, can begin...

More later today, and we need to think about that kind of retard at the end of a piece of music, that graceful letting go ... till we figure out what is next...

(Participant) Doug, on employment for the Global 500 the number would be even lower and this number doesn’t include the 160 million unemployed or the 500 million who make less than $1 per day, almost entirely in the developing world. Two-thirds of the estimated 460 million new job seekers entering the workforce over the next decade will be in Asia with only 3% in Europe and North America (source: International Labour Organization World Employment Report 2001). Also, only 11 Chinese companies are on the list. Typically, Chinese companies are much less efficient, for example oil giant Sinopec (No. 86) needs 937,000 employees to generate $40 billion in revenues, while Exxon’s 97,900 employees bring in $192 billion (Source: Fortune).

Here’s an interesting excerpt from the ILO report (emphasis added): "Globalization had already spurred an internal transformation of the enterprise, resulting in changes in the organization of work toward FLATTER HIERARCHIES and project-based teams. The need for a more rapid response to volatile product markets and declining product life cycles has also been behind the TREND TOWARD GREATER OUTSOURCING. The emerging era of "digital globalization" is accelerating these organizational changes. Enterprises in the most globally competitive industries have experienced both a decline in the time devoted to strategy formulation and a qualitative change in the nature of competitive advantage. "time-to-market" has arisen as a critical competitive asset. This in turn COMPELS COMPANIES TO RELY ON THE CREATIVITY, KNOWLEDGE, AND ABILITY TO ACQUIRE NEW KNOWLEDGE OF THEIR CORE EMPLOYEES.

Evidence shows that major gains in enterprise performance only occur where the use of the new technologies has been combined with wide-ranging changes in work organization. Evidence also shows that the most widespread use of the new technologies exists in enterprises that have adopted the most thorough range of work organization changes, such as the DECENTRALIZATION OF DECISION-MAKING, AND THE ORGANIZATION OF WORK INTO SEMI-AUTONOMOUS, TASK-ORIENTED TEAMS.

THE FAST PACE OF COMPETITION MEANS THAT, FOR SOME HIGHLY SKILLED ACTIVITIES, COMPANIES ARE RELYING ON THE EXTERNAL LABOUR MARKET FOR INPUTS OF TEMPORARY DURATION. THE TECHNOLOGIES, MEANWHILE, ALLOW COMPANIES TO SOURCE WORK INDEPENDENTLY OF LOCATION. The outsourcing of needed inputs is accelerated both by the enabling technologies, as well as by competitive pressures. Locations (in both industrialized and developing countries) that have the adequate infrastructure and skills in their labour markets can benefit by participation in new global value chains, in "intangible" product markets such as software development or data processing."

The convergence of "carrier" and "content" industries has resulted in mergers between large firms. AT THE SAME TIME, THERE ARE LOWER BARRIERS TO ENTRY IN A PERIOD OF RAPIDLY EVOLVING TECHNOLOGIES, IN WHICH CREATIVITY AND INNOVATION MATTER MORE THAN PHYSICAL PLANT, PHYSICAL RAW MATERIALS, AND INVESTMENT CAPITAL. BUSINESS START-UPS ARE ON THE RISE."

Doug, the paradox might be that even with fewer companies generating more revenue, industrial reorganization is resulting in a trend toward more regional and local economies made possible by technology.

And this from the same report: "Education matters most of all. The report emphasizes that literacy and education cannot be leapfrogged, yet both are vital for reaping the greatest advantages from the emerging digital era. The promotion of education and literacy generally, and digital literacy in particular, is a challenge facing all countries. Educational differences underlie the different rates of penetration of ICT and Internet usage."

On executive compensation, stock options continue to be the largest component of CEO pay (source: AFL-CIO, 2002 Trends in Executive Pay). As share prices declined, CEOs have continued to receive annual grants of new stock options at lower exercise prices, a practice which I don’t agree with. According to The New York Times, compensation of the most richly rewarded CEOs declined around 20% but the median salary for CEO’s of major corporations is up 6%. Even though the median salary has increased the hourly worker to CEO pay ratios have improved by 22.5% (source: Business Week). Much of the difference between hourly and executive is stock options, which hourly workers typically don’t receive. Part of the improvement in the ratio is because of lower share prices over all combined with increases in compensation for hourly workers.

Although I don’t agree with certain aspects of executive compensation, as a member of various compensation committees, I have had to accept market realities. If other companies are offering attractive option packages and salaries to your key people the responsibility to society argument will echo off the back of your employees heads as they are walking out the door. I do think that we will see less option based compensation in the future as shareholders are now starting to change their opinion as to its desirability and with Sarbanes-Oxley, actually exercising options will prove more difficult as well as the expensing of those options.

Doug you said, "John I really disagree about social responsibility. The corporation only exists to meet social needs. That’s why it’s chartered."

The corporation does meet social needs by doing its job just like the defense attorney defending to the utmost of his/her ability a guilty client.

(Participant) Doug, something I don’t understand with your theory toward monopolization is how it accounts for the shifting fortunes of the top companies and the impact this has on their march to monopoly. Despite a company’s best efforts (or worst, depending on your perspective) to become a monopoly, their fortunes will in large measure be decided by their domestic economies. The domestic economy will also affect the amount of influence a particular government has globally. It wasn’t that long ago that the Japanese were preaching to us about changes we needed to make in our society to be more successful economically. Now of course George Bush wants to do more than just preach but shove our ideology down the rest of the world’s throat. The tide will turn and so much the worse for us. Resentment has a long memory.

From Fortune magazine: "In 1995 the four biggest companies on the list were Japanese--Mitsubishi, Mitsui, Itochu, and Sumitomo--as were six of the top ten. In a reversal of fortune, the top three positions are held by American firms--Wal-Mart, Exxon Mobil, and General Motors."

The changes aren't only at the top. The Global 500 has proved a faithful mirror of broad economic trends. Take Japan, which has suffered several recessions since 1995, innumerable political changes, and the loss of some of its best baseball talent to the U.S. No wonder the number of Japanese companies on the list has fallen from 149 to 88. In 1995, Japanese firms accounted for more than a third of all Global 500 revenues; now it's about a fifth.

As Japan has declined, America has risen. The number of U.S. firms in the Global 500 increased from 151 in 1995 to 197 this year. In the same period, U.S. companies increased their share of total revenues from 29% to 42%. With the advent of the euro, which is likely to reduce business costs, Europe should fare even better in coming years. "There is no inherent reason," says David Hale, chief economist at Zurich Financial Services in Chicago, "that Europe couldn't catch up with the U.S." One of the biggest changes since 1995 has been the emergence of China. Only three Chinese companies made the list that year. But as economic reform deepened and Chinese companies improved their accounting standards, their presence grew steadily."

Douglass Carmichael John, thanks for the time and effort that took. I will read carefully this afternoon, as I get ready for a final post in this series.

Here are some first thoughts after back from the beach and tai chi where I lead a little local group, and it was harder this morning because some of us went to Seattle for a concert last night (the extraordinary world music group, Children of the Revolution—Mexico, Iraq, Nicaragua, Israel, Greece, Macedonia, Slovenia…) so got the midnight ferry.

I certainly agree that the model of top-middle-bottom is to replace the middle level managers with technology and pass leadership to low hierarchy teams, keeping the salaries at the lower level as constant as possible, despite increased responsibility, and bringing in top talent that is willing to run the system, and that is already master of the extensive outside network of clients, lawyers, regulators, congressmen…

But I recall—and this may be three years old—total world employment for the top 400 or 500 world corporations had gone up, while the US total had gone down. Also the difference between outsourcing (let others manage the slaves do we don’t have to deal with the ugly HR issues) and subsidiaries is hard to track. I certainly know of some cases where outsourcing was real (but thugs were he managers in the new organization, pushing low wages and no benefits), but also where apparently independent companies were not at all independent. How to create clean management and accounting among competitive businesses is hard, and I don’t know the answer. Seems to me if we could show that clean management and accounting is much more efficient, high morale, and leaves the organization free to work on product, integration and service, we would be in better shape. The MBA’s are taught not to care.

Why outside relationships and a certain "style" are important - I remember once doing some research in HP and asking about military clients. "total is 18% military sales" I was told, but within an afternoon of meetings I found that two of their largest clients were the Israeli defense department and AT&T for responders for tanks—and these were not treated as military clients. The total by the end of the day was 47% of total sales was to the military (1978).

It is important to watch out for large numbers such as shifts in average salary, because salary includes managers in most calculations, so to say average salaries have gone up x%, they can actually have gone down (in constant dollar terms) for a majority, or more, of the workforce. I do wish there was a place that took these numbers for what they are, and try to unscramble them before getting emotional. I would love to participate in such a effort. One of the most misused is "productivity increase". Productivity is simply defined as output per man hour. Hence getting rid of customer service, design teams, even quality management, raises productivity because the same output is produced by fewer workers. I’d love to see some productivity per CEO dollar graphs over the last three decades.

On monopoly and changing players at the top. It is like feudalism, the big guys are looking at each other and jostling for position, but woe to those lower down who try to get in the game. A few can, but not many. And among those shifting players at the top, shared boards, lateral executive moves, moves in and out of government - esp. the military - weave a slowly tightening web of control. We know that monarchies always turn the second their into folks constantly kissing up, and watching out for lateral attacks. Remember, I talk of monopoly as a trend, not as a black and white. And I suggest that such trends weave together at the top of government, and that is really dangerous.

One counter trend is black market or gray market. To the extent people are surviving outside the paper trails, real value owned at the center is not as high as it appears. In fact traditional societies collapse when official property is 98% owned at the center by a small group, and the real economy, where people live and eat, is unowned. - look, an exercise we used to do. Draw a circle on a map around an inner city and plot out and sum the total rent, and then plot out and sum the total legitimate income earned. The legit income does not even meet the rental costs, much less the rest of life. And at the top, much is illusion. What do I do with the fact that some of my friends are on Prozac, some on Caman island accounts, and maintaining a happy face with Viagra? A friend at the Fed ten years ago told me that half the funds transfers across the US border were off the books transactions. So when you get a gray market at both the top and the bottom, the monopoly folks are really threatened, because they don't really know where things are, or who owns what. That ranch in Montana looks increasingly attractive!

I once was part of an anthropology session at the AAA organized by Laura Nader (Ralph’s sister), called "studying upwards". We need more of it, just with real curiosity to understand the system and faith that better understanding more broadly shared can help (the enlightenment hope).

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