Income distribution during pandemic

By Chang Se-moon

COVID-19 has brought into stark visibility a very ugly issue: the worsening distribution of income between the rich, the ultra-rich, and the poor. In the United States, more than half (52 percent) of “adults ages of 18 to 29 were living with their parents in July, passing the previously recorded peak at the end of the Great Depression.” (American Association of Retired Persons (AARP) Bulletin, November, 2020, p.12)

If you ask whether there is a limit to how much a person can make in a market economy, the answer is likely “no.” In theory, a person will be making as much as he or she contributes to the production of the goods or services in which the person is working. Economists call this the marginal productivity theory of income distribution.

If you ask whether there should be a limit to how much a person can make in a market economy, the answer may not be that simple.

For instance, the stock market has broken all records during the pandemic, while thousands of wage earners in the retail and service industries lost their jobs. This happened worldwide.

“In the U.S., for example, 52 percent of Americans own stock, usually through their retirement plans,” according to Oct. 5 edition of the Washington Post. This figure appears to suggest that at least half of Americans are benefitting from the booming stock market. “The reality is that 84 percent of all stock is owned by the top 10 percent of income earners,” it said.

The question then relates to whether the rising stock prices reflect increasing marginal productivity of stockholders or their assets. Two issues need to be addressed.

First is the low interest rate policy of the global central banks that fueled rising stock prices. Secondly, the central bank policy of purchasing corporate debt, especially of large and profitable corporations, to calm the financial market also helped raise stock prices.

When stock prices pick up owing significantly to these policies of central banks, should all the capital gains, net of taxes, go to stock holders?

Let me give you a specific example of the pay issue during this pandemic based on an excellent article by Steven Pearlstein in Jan. 4, 2019, issue of the Washington Post. The article is titled “The $786 million question: Does Steve Schwarzman ― or anyone ― deserve to make that much?”

In 2018, Stephen Schwarzman received $786.5 million from the Blackstone Group, a leading private-equity firm. He ran the firm for more than 30 years. This amount was the sum of his salary, bonus, incentive fees, and dividends from his holdings. The article cautions that this amount is not out of line with earnings of a number of other corporate leaders.

Those who support the market economy with no qualifications may argue that the pay is “a proper reward for his talent, hard work, ingenuity and willingness to take risk over many years.” This is the view from the marginal productivity theory of income distribution.

Pearlstein counters the marginal productivity theory by suggesting that “it is not enough to inquire whether someone has earned his income by playing by the rules. We must also look at the distribution of income and ask whether the rules themselves are fair and just.”

Pearlstein cites a number of factors to support his view, which include the market dominance of large firms that can set the level of executive compensation, weakening of antitrust enforcement and regulations, bankruptcy rules that favor bondholders over workers, and low interest rates that boosted valuations for the many real estate investments that Blackstone has made.

The point is that the amount that many corporate leaders earn in the marketplace is determined in large extent by “rules and norms that govern market competition.” Further, companies spend a large amount of money “on lobbying and electing friendly politicians who are in a position to shape them.”

Under different sets of rules and norms, Pearlstein states that “the market might have valued Schwarzman's economic contribution last year at a measly $393 million” rather than $786 million.

Pearlstein suggests two remedies: “pre-distribution” and “redistribution.” In pre-distribution, some of the rules that govern market competition should be changed. In redistribution, those rules may remain the same but the distribution may be changed through the tax and spending policies of the government after the market has delivered its judgment.

Chang Se-moon (changsemoon@yahoo.com) is the director of the Gulf Coast Center for Impact Studies.