Rhode Island's Crisis of Inequality, and a First Step to Tackle It

Douglas K. Smith, guest blogger

Introduction

I am Doug Smith, the Executive Director of Columbia Journalism School’s Sulzberger Leadership Program. I have authored a number of books on best practice for business, based on three decades of consulting experience.  I am also one of the co-founders of Econ4, a network of economists and other analysts seeking to shift the way economics is taught, understood, and practiced—away from the failed practices that produced the Great Financial Crisis and the extraordinary income and wealth inequalities that now imperil our democracy.

On May 6, I submitted written testimony to the Finance Committee of the Rhode Island Senate in support of a proposed law to help rein in rising economic inequality in the state. The law would give preference in the awarding of state-government contracts to businesses that limit the ratio of pay between their highest-paid executive and lowest full-time employee to no more than 32-to-1. The text below is based on my testimony.

For Triple Crisis readers unfamiliar with Rhode Island, it is the smallest by area of the fifty U.S. states. It is, however, also the second most densely populated, making Rhode Island’s economy essential not just to Rhode Islanders but also people across the Northeast region of the United States. Today, Rhode Island’s economy is in serious jeopardy—in large part because of the raging income and wealth inequality imperiling people across the globe—from Greece to Great Britain and, yes, from Romania to Rhode Island.

Most Americans have long since forgotten that Rhode Island was the first of Britain’s thirteen North American colonies to declare independence in 1776. Americans are even less likely to recall that what drove the Rhode Island General Assembly to take that courageous step was a conviction that Rhode Island’s economy was imperiled by mounting wealth-grabbing tax and trade policies enacted in England—policies that, like today’s proposed Trans-Pacific Partnership, dismember society in favor of markets and the oligarchies who control them.

Now, Rhode Island is poised again to act first among the U.S. states. This time, though, the threat to economic security comes not from a monarchy and aristocracy an ocean away. It arises from heavily financialized, out-of-control markets ripping through communities and societies with all the force and devastation of an endless, boundless scourge of tornadoes.

What’s at stake, then, with Rhode Island’s proposed bill is much more than a common-sense measure to use government contracts in saner ways. Governments around the globe now face a choice. Do they buckle under the blandishments and seductions of market elites and use government policy to further destroy society in favor of the “1%”?  Or, do governments act to subordinate markets to the best interests of community and society?

Rhode Island’s Crisis of Inequality

Like the rest of the United States, Rhode Island currently faces a crisis of income and wealth inequality. Between 1979 and 2007, the top 1% of Rhode Islanders captured nearly one-third of total income growth in the state. This continued a trend that, over the past thirty five years, has seen Rhode Island’s top 1% go from grabbing 10% of the state’s total income to 18%. There’s no sign this trend is changing, meaning Rhode Island is headed toward the severe income inequality—the 23% mark—that preceded the Great Depression.

Rhode Island’s economy, also like the rest of the nation’s, is substantially consumer driven—two-thirds or more of any growth comes when people buy goods and services for consumption. The top 1% in Rhode Island have ample money for spending. But studies—and common sense—indicate that the super-wealthy do not devote as high a percentage of their income to consumption as do the bottom 99%. For Rhode Island’s economy to have any chance whatsoever of real recovery and growth, at least one imperative stands out: The state must get more money into the pockets of the 99%.

Unfortunately, as Rhode Island Treasurer Gina Raimondo has detailed, this imperative is not being met. Average Rhode Islanders are losing ground:

• 63% of Rhode Islanders say they have difficulty covering expenses and paying bills, and only 38% have emergency funds set aside.

• Nearly one in ten Rhode Islanders has had to take out a loan or hardship withdrawal from a retirement account in the past year.

• Rhode Island has the nation’s third-highest state average for personal credit-card debt.

• The volume of Rhode Island “payday lending” (very short-term, extremely high-interest loans) doubled between 2008 and 2011, to $70 million.

• 22% of Rhode Islanders with mortgages have missed at least one mortgage payment.

Put differently, Rhode Island’s economic security is in jeopardy.

A First Step to Tackle Inequality

By providing state contracting and sub-contracting preferences to business enterprises whose executives earn no more than thirty-two times those enterprises’ lowest-paid workers, the proposed law—Senate Bill 2796—incentivizes businesses seeking government contracts to change the ratio of top-to-bottom pay. They can do so through some blend of reducing top executives’ pay and increasing the pay of other employees.

A lower top-to-bottom ratio would increase Rhode Island’s economic security in several ways:

• Increases in employee pay translate immediately into more consumer spending, reduced household debt, and investments in education and other economy-supporting assets.

• Decreases in top executive pay translate into some combination of higher pay for other employees, more jobs, and more earnings that, in turn, mean higher tax revenues for Rhode Island, higher dividends for shareholders, and higher retained earnings for investment in business growth and more jobs.

The proposed law actually does even more for a healthier, happier, and more sustainable Rhode Island than these outcomes suggest. The legislation promotes sound business practice that, in turn, produce greater business productivity and success.

I have spent more than thirty years working as a consultant with businesses in over fifty different industries. I have seen at first hand the deleterious effects on business productivity that inevitably arise when top executives earn hundreds of times the pay going to other employees.

This dangerous rise in top-to-bottom pay ratios fuels a cancerous spread of business strategies obsessed with cost reductions and short-term financial performance. The results: outsourcing, offshoring, tax avoidance, downsizing, and the substitution of good-paying permanent jobs with temporary, precarious employment.

In contrast, when executives maintain top-to-bottom pay ratios less than the 32-to-1 limit in the proposed legislation, everyone wins. This has been noted not just by me, but by a wide variety of business consultants and researchers—from the father of modern management science Peter Drucker to best-selling business author Jim Collins.

Steps taken to shift the balance between top and bottom pay provide good corporate citizens the chance to put service above greed in their dealings with government.

I support this legislation because it provides a common sense step toward sounder economic security for all Rhode Islanders—a step that, if not taken, condemns Rhode Island to a growing epidemic of have-nots struggling to survive in markets owned by and catering to a tiny percentage of haves.

Resources

Books by Douglas K. Smith: Taking Charge Of Change: Ten Principles for Managing People and Performance (1997), Make Success Measurable! A Mindbook-Workbook for Setting Goals and Taking Action (1999), The Wisdom of Teams: Creating the High-Performance Organization (2006), and On Value and Values: Thinking Differently about We in an Age of Me (2011).

Douglas K. Smith, “A New Way to Rein in Fat Cats,” New York Times, Feb. 2, 2014.

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