Wealth Inequality and its Impact

Rachel Ware Stephensen*


 

Introduction

Street closures, hundreds of arrests, tear gas, and pepper-spray were not enough to quell the 99%. Around the world protestors gathered in solidarity to spread awareness of their campaign. Enough with the scandal, corruption, and politically domineering ways of the 1%; “We are the 99%” represented the slogan and basic belief of the Occupy Wall Street movement, which resonated with people around the world. From their turf in Zuccotti Park in Manhattan, they stood up for the masses against social, economic, and political inequality, or so they tried. Instead, the 1%, those comprising the top percentage of wealth in the nation, and the group largely blamed for the economic collapse beginning in 2007, demonstrated their clout by shaping media coverage of the protests.

According to an article by Brian Stelter of The New York Times (2011), in a gallant display, police held journalists back from the area as protesters were being evicted, citing safety reasons. This act sparked accusations of First Amendment violations. One news station created a ruthless depiction of the activists by erroneously reporting that the Occupy Wall Street movement planned a shutdown of the subway system, a clearly debilitating move that would most directly impact their own, the 99%. Another news station erroneously reported the attendance of hundreds of protestors, when the figure was actually in the thousandsCITATION Ste11 \l 1033  (Stelter, 2011). Difficult as it is to prove any malicious intent of the misrepresentations, efforts appeared to be directed at dissuading sympathizers, and mitigating the movement. Despite some discouragement from the archetypical oppressive response from the wealthy, the Occupy movement recently experienced a gain that should not be discounted.

On August 5, 2015, the Securities and Exchange Commission (SEC) finalized a ruling regarding Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953(b) of the Act mandates reporting of the ratio of CEO pay to median employee pay for public companies. The ruling takes effect in 2017 and gives wealth inequality activists much to anticipate (U.S. Securities and Exchange Commission, 2015). While some are not so optimistic regarding the Dodd-Frank reform measures, the attempts to change Wall Street’s status quo signifies a recognition that something is indeed in need of change. This paper will explore history and negative effects of the wealth gap, including the impact on crime rates, the far reaching implications of the new ruling, and further reform.

Consequences of the American Dream

Institutional Anomie theory is a criminological theory developed solely around explaining the high rates of crime experienced in the United States. Institutional Anomie theory expands on Robert Merton’s anomie theory by “considering the connections between core elements of the American Dream…and the interrelationships among social institutions” (Rosenfeld & Messner, 2014). The theory subscribes to the belief that “anomic tendencies inherent in the American Dream both produce and are reproduced by an institutional balance of power dominated by the economy” (Rosenfeld & Messner, 2014). This theory cites the direct and indirect implications of the American Dream as contributors to crime, which explain the nation’s disparate crime rates.

Acquisition of material wealth (cars, houses, cash) serves as a reward in a competitive environment, which objectifies the essence of the American Dream. Rosenfeld and Messner (2014) state that the United States is set apart from other nations due to an “exaggerated emphasis on monetary success and unrestrained receptivity to innovation.” Thus, the acquisition of material wealth is justified by whatever means utilized, which establishes the direct effect on crime. The Dream’s basic value orientations, based upon capitalism, favor achievement, where a person’s worth is defined by their success, individualism, where competition creates pressure to outperform (possibly by illegitimate means), universalism of goals, and the determination of success based on the accumulation of wealth. The theorists highlight the interrelation of the American Dream with the institutional balance of power.     

Four main institutions are prevalent in societies: family, education, polity, and economy. The ideals promoted by the American Dream indirectly contribute to crime by creating a balance of power that favors the economic institution. The other institutions are devalued, required to accommodate, and penetrated by the power of the economy. As such, the effectiveness of these institutions is corroded. The educational institution is only valued to the extent that it “promises economic reward” (Rosenfeld & Messner, 2014, p. 196), and thus educational structure mimics economic where competitiveness and rewards (grades) are emphasized. Education also accommodates economy by teaching citizens the intellectual or manual skills necessary to compete in a work setting. The cultural necessity of the government to adhere to the ideals of the American Dream makes the political institution a slave to the economic. This is perhaps no more famously demonstrated than in the Declaration of Independence’s original reference to life, liberty and the pursuit of property. Rosenfeld and Messner (2014) note one key component of polity, however, is not devalued: crime control. Instead, the executive function of the political institution must protect the material hoards of the citizens, and in doing so also accommodates the economic institution. The irony lies in the fact that as the economy dominates, the wealth gap widens, creating a multitude of social issues, including increased crime rates (Thorbecke & Charumilind, 2002). The relative insignificance of polity, education, and family compared to economy creates an environment whereby efforts to impart acceptable norms are thwarted.

The importance of this theory lies in the understanding of relative deprivation. As Jacobs and Richardson (2008) point out, “resentment is more likely among the relatively deprived in an affluent society than it is among the absolutely deprived in an impoverished society” (p. 31). This further explains the concept of relative deprivation and the correlation between wealth inequality and violent crime rates in so affluent a nation as the United States. The researchers further note, “significant disparities in life chances imposed by accidents of birth lead to greater interpersonal conflict and higher homicide rates” (Jacobs & Richardson, 2008, p. 31). As highlighted in their findings, inequality and murder rates have a strong, positive relationship due to relative deprivation.

Perceived inequality results in higher criminality by providing a motivation to rectify economic injustices by engaging in property crimes, and by contributing to negative emotions, such as frustration and anger, that may lead to violent criminal acts. Most research shows the strongest correlation between economic inequality and rates of aggravated assault and murder (Fowles & Merva, 1996). In a meta-analytic review of poverty, inequality and violent crime, Hsieh and Pugh (1993) found 97-percent of the studies they examined showed a positive correlation between all violent crime and poverty or income inequality. Furthermore, 80-percent showed a correlation of moderate strength (greater than 0.25). On a global level, variances between countries show a correlation between unequal societies and crime trends.

In their book, Wilkinson and Pickett (2009) plot data from the United Nations Surveys on Crime Trends and the Operations of Criminal Justice Systems.  As inequality rises, so too does the homicide rate. In terms of both variables, the United States stands out as an exceptionally high outlier, giving credibility to the institutional anomie theory. Wilkinson and Pickett (2009) also explore the correlation between inequality childhood violence and malevolence. They use data compiled by UNICEF which measures children’s exposure conflict, through fighting, bullying, and describing their peers as unhelpful and unkind. Results again show a correlation between unequal nations and children’s exposure to conflict. Similar to the homicide rate mentioned previously, the United States stands out as an outlier in terms of inequality and increased childhood conflict. Robust evidence exists showing the link between childhood violence and later adolescent and adult violence. Several contemporary scholars in criminology find “childhood antisocial behavior is perhaps the strongest predictor of involvement in serious juvenile offending” (Cullen et al., 2014, p. 513). Apparently the social ills of inequality manifest early in life and influence childhood antisocial behavior, and in other, lethal forms of antisocial behavior later in life through murder.

Perceptions and traditions of inequality are deeply entrenched in American society and are not easily overcome. The American Dream touts equal opportunity for all, yet children from the lower-class rarely acquire the means to move to the middle-class. Tyree et al. (1979) discuss the strong inverse relationship between inequality and vertical mobility. This creates a situation of persistent inequality across generations. The differing educational opportunities available to impoverished children, especially impoverished minority children, help explain the difficulty of moving out of poverty. This leads to “a vicious cycle where initial inequality and poverty result in underinvestment in education among the poor which further exacerbate(s) inequality” (Thorbecke & Charumilind, 2002, p. 1488). Furthermore, as Imai (2009) notes, “governments in unequal societies may be reluctant to choose policies that redress such inefficiencies, thereby perpetuating the problem.” Participation in a simple exercise aids in understanding the unfairness of economic inequality.

A class is arranged so that students sit in rows and columns. Every student sits in an assigned seat and receives a ball. A bucket is placed in the center of the room at the very front. From their assigned seat, students take a shot at landing the ball into the bucket. Students who make the shot receive a passing grade, and those who do not fail. Almost instantly everyone in the class erupts in whines and moans regarding the unfairness of the exercise, everyone except the few students closest to the bucket. They did not choose their seats, the person sitting front and center has an unfair advantage, the back row does not stand a chance and cannot even see the bucket, they are not athletes, should not be penalized for their lack of athletic ability, and so on. The bucket represents the upper-class, and while some from the rear of the class may take a lucky shot, the odds are stacked against them. As Tyree et al. (1979, p. 418), state, “social origins are most powerful in determining social destinations.” Understandable are the feelings of resentment toward a situation largely outside an individual’s control.

Corporate Greed

Inequality in the United States is exacerbated by the materialism inherent in the nation’s culture. As stated in the institutional anomie theory, monetary success is supreme and little regard is given to any other institutions. Corporate America, then, is the ruler of the nation, and thus the rulers of Corporate America are too the rulers of the nation. Not surprisingly, the United States leads the pack in terms of pay gaps. In 2012, the average U.S. CEO and worker received salaries of $12,259,894 and $34,645, respectively. The nation with the next largest disparity was Switzerland with CEOs receiving $7,435,816, and workers receiving $50,242, on average.  The ratio between Chief Executive Officers and average worker pay was the highest in the U.S. at 354-to-1, compared to second highest in Switzerland at 148-to-1. This shows the United States’ pay ratio is an astonishing two times higher than the nation with the second highest pay ratio (AFL-CIO, 2015). Such notable pay disparities represent a relatively modern practice, and not a longstanding corporate tradition.

The gap between executive pay and average worker pay has increased markedly in recent years. A look at Walt Disney Company provides a specific and typical example. In 1984, Disney’s CEO received a salary of $750,000, which was 37.5-times more than the salary of a typical employee. Thirty years later, in 2014, the CEO of the company made 974-times more than the typical employee by receiving a salary of $34,300,000 (The Associated Press, 2014). Disney’s compensation practices are not extreme, and fall in line with the average growth rates. Between 1978 and 2013 CEO’s received a 937-percent increase in compensation, whereas the average workers received a mere 10.2-percent increase, all after adjusting for inflation. The increase in CEO compensation outpaced the stock market at a rate of more than double during this same time frame. In 2000, CEO to worker compensation ratio hit a record ratio of 383.4-to-1. In 1978 this rate was 29.9-to-1 (Mishel & Davis, 2014). Critics of reform suggest capitalism promotes economic growth, and deny any detriment of increasing inequality, however, some research tends to disagree.

Rifkin highlights the differences embedded in the two cultures. The American Dream idolizes self-reliance achieved though accumulation of wealth, and the security and autonomy it provides. In contrast, the European dream idolizes interdependency and embeddedness. Whereas Americans value the work ethic, Europeans value leisure. Rifkin furthers, “(t)he American Dream puts an emphasis on economic growth, personal wealth, and independence” (2004, p. 13). Recall in Rosenfeld and Messner’s Institutional Anomie Theory (2014) they similarly report individualism as a basic value orientation of the American Dream. Wilkinson and Pickett (2009) also note inequality, inherent in the United States, creates dominant and submissive feelings, which in turn creates social distance. The new European Dream “focuses more on sustainable development, quality of life, and interdependence” (Rifkin, 2004, pp. 13-14). While he notes Europe is not free from all social ills, Rifkin successfully juxtaposes common American values with those of another developed society to emphasize the dramatic differences and prove prosperity is possible in a more communitarian society. Latin America, plagued with widespread inequality, recently experienced large advances in moving toward a society that embraces more of a European style.

Brazil’s former president, Luiz Inácio Lula da Silva, transformed a nation who suffered greatly from inordinate economic inequality. According to Jane Imai of George Washington University (2009), under Lula’s income redistribution programs, the country’s percentage of the population living in poverty decreased from 28.5-percent to 16-percent, which equates to a difference of 20 million people. Additionally, the income of the bottom 10-percent of the population in terms of wealth has increased 8-percent in recent years, whereas the income of the upper 10-percent has only increased by 1.5-percent. During his presidency, minimum wage increased by 2.5-times, workers saw the creation of new jobs, social programs for the poor received increased support, and the average worker’s educational experience increased from 6.1 years in 1995 to 8.3 years in 2010. Evidence also disproves the belief that lowering inequality stunts economic growth. Imai notes Brazil decreased its poverty levels by half in “10 years with a 3 percent growth rate and a reduction in income inequality of 5 percent (as measured by the Gini coefficient)” (Imai, 2009). The latter portion of President Lula’s term, which ran from 2003-2011, shows a decline in the homicide rate (The International Security Sector Advisory Team, 2015). However, some accounts of Brazil’s crime trends show persistent crime rates. These researchers suggest Brazil still encounters the problem of “the mega-rich live close to youths who lack educational and professional opportunities, and that increases the risk of crime” (Bevins, 2015).

 

    

 

 

 

 

 

            Several reform measures took place under Lula, but one stood out as particularly interesting. In an effort to eliminate corruption and create a more stable judicial system, Brazil’s National Council of Justice took measures which forced “judges to become more transparent about their salaries” and thereby pushed “several corrupt officials out of office” (The International Security Sector Advisory Team, 2015). The disclosure of salaries resonates with the reforms enacted by the SEC, mentioned earlier, and expanded on later. Lula’s presidency was not free from all controversy, however.

Lula recently came under scrutiny for corruption charges himself. He, along with a number of other Brazilian politicians, is suspected of receiving kickbacks from a petroleum company (Watts, 2015). The allegations create feelings of disappointment of the leader who made such great strides at improving the lives of so many Brazilians and who was a champion for the impoverished. If rightfully accused, this illegal scheme sadly illustrates a classic example of the open-ended pursuit of wealth and power by the wealthy and powerful. This is not to say strides toward equality must always end in this fashion. Faith in a more equitable society will continue fostering knowledge of the negative consequences of inequality, and encouraging new methods of change, such as those seen in the Dodd-Frank reforms.

Compensation Reforms

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010 by the 111th Congress with the aim to:"promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes" (111th Congress, 2010).

 

This Act “represents the most comprehensive financial regulatory reform measures taken since the Great Depression” (Morrison & Foerster). Part of the Act targeted corporate compensation practices. ‘Say-on-Pay’ requirements mandate companies to hold a shareholder vote to approve their executive compensation packages. Additionally, the Act requires public companies to disclose their ratio of CEO pay to median employee pay, as previously mentioned. Some remain hopeful for the impacts of the Act, while some regard the Act with pessimism.

Jesse Eisinger (2013) declares say-on-pay a “bust”. He notes that 72-percent of companies’ compensation packages received 90-percent approval from shareholders. He calls the Act “toothless” since the shareholders voting represent “one overpaid class reward(ing) another.” Evidence of the shareholders’ ineffective role as a corporate watchman is evidenced by the rise of CEO pay by 6.5-times from 2011 to 2012 (Eisinger, 2013). The say-on-pay vote is also non-binding, so companies are not required to make changes due to vote results.  However, not all share Eisinger’s pessimism.

Thomas, Palmiter, and Cotter (2012) conducted an analysis of the years immediately preceding Dodd-Frank and the beginning years of reform. They hypothesize support for compensation packages will remain high if company earnings are high, and support will wane if the company’s earnings drop. Their research supports this hypothesis, and confirms the overwhelming shareholder approval, as mentioned by Eisinger (2013). However, shareholder votes on compensation may have more of an impact than is readily discernable. “A number of companies either changed the company’s pay practices in response to the possibility of an unfavorable shareholder vote, or offered additional disclosure explaining pay practices” (Thomas et al.,2012, p. 1265). This shows some evidence of the influence of a third-party vote on executive compensation, while it may not be as much as what some anticipated, given CEO pay growth still far surpassed inflation (Eisinger, 2013).  

The SEC did not comment on the particular goals in mind for the disclosure of the pay ratio, but companies can expect the public and others to utilize the information in a number of ways (Cooley LLP, 2015). First, the ruling creates more informed shareholders who may then apply that knowledge when casting their say-on-pay votes. According to a corporate advisor, companies should remain cognizant of the opinions of key shareholders, and should avoid compensation packages that constitute a “problematic pay practice” (Gregory, 2015). Second, consumers may utilize pay ratios to make informed decisions on which companies to patronize. A Harvard Business School study found “to achieve as favorable a rate of purchase as a hypothetical company with a low pay ratio offering a product at full price, a hypothetical company with a high pay ratio had to offer a 50% price discount” (Mohan, Norton, & Deshpande, 2015). Clearly, pay equity comprises an important issue for buyers. Third, companies should expect current employees to gauge their personal standing based on the pay ratio. Since the ratio utilizes median employee ratio, some may see their pay falls below the median, which can impact morale (Richman, Hermsen, Gray, & Liebl, 2015).

          In addition to federal reform measures, a few states and localities also have enacted laws, or attempted to enact laws aimed at pay discrepancies. In 2014, Rhode Island Senate passed a bill to give preference to state contractors with a low CEO-worker pay ratio. The bill failed in the House, but the sponsor was not dissuaded and intends to try again (Johnston, 2014). Sam Pizzigati of Inequality.org (2015) believes the SEC’s rule regarding reporting of CEO-worker pay ratios will help the increase momentum for the bill, as the public’s awareness of the issue increases. New York successfully implemented a similar reform with the use of an executive order, signed by Governor Cuomo. The Order regulates the amount of executive compensation for agencies receiving state funding (New York State, 2012). In California, lawmakers rejected a bill that would have used CEO pay to determine a corporation’s tax rate. The failed bill proposed a corporate tax scale ranging from 7-percent for corporations with a CEO salary of less than 25-times average worker salary, up to 13-percent for corporations with a CEO salary of more than 400-times average worker salary. California’s current corporate tax rate is 8.84-percent (The Associated Press, 2014). While not always successful, the state bills at least highlight an interest in addressing and correcting the disparate compensation practices, and may attract more attention once the SEC reforms take effect.

Conclusion

While they face a powerful opponent, the 99% percent represents a constituency that far outnumbers the 1%. From 1965 to the present, the CEO-to-average employee pay ratio increased from 20-to-1 to over 300-to-1. This increase did not come without consequences, as “higher wages for top earners in corporate America had been among the main drivers of the widening income differences in the U.S.” (Eavis, 2015). While not proven entirely causative, the correlations between crime and inequality cannot be ignored. The new Dodd-Frank reforms, particularly the disclosure of pay ratios, benefits investors, consumers, and society as a whole. By keeping faith and fueling their momentum with the new publicly available information, equality activists, such as the Occupy protestors, may further knowledge of and action against inequality to see rewarding changes for the majority of humanity.

 

* Rachel Ware Stephensen is a graduate student in the Criminal Justice Department, University of Nevada-Las Vegas.  This was a research paper for a graduate seminar in the administration of justice.


 

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