Bridging the Income Gap: Malcolm Gladwell: Why income inequality is the next big issue

Via Forbes.com: Malcolm Gladwell On Why Income Inequality is the Next Big Issue Facing America. Excerpt:

Are we in a new Gilded Age? With income inequality at historic levels not seen since the early 1920s, author Malcolm Gladwell and Roger Martin, dean of the Rotman School of Management, recently discussed how over 80% of America’s assets ended up in the hands of 20% of the population and how this affects America’s bid to “Win the Future.”

At a gathering at the offices of Thomson Reuters, Gladwell and Martin talked about how talent compensation has run amok in America and the repercussions of what they call unmitigated greed.

Martin, whose books include Diaminds and The Design of Business, described a revolution in talent compensation that took place in the 1970s and saw CEOs, top athletes, actors and money managers earn multiples of their previous salaries. According to a recent study, CEOs during the 1960s earned on average $42 for every $1 earned by wage workers. Today, that ratio is $344:1.

How did the scales tip so far in favor of ‘talent’ and what effect has this compensation model had on U.S. income distribution?

Martin and Gladwell argue that a political and psychological shift took place in the 1970s that made it all possible. Baseball’s first free agent contract was negotiated in 1974; money managers began the practice of charging 2 and 20 on assets under management; Michael Jensen’s seminal paper on agency theory contributed to the creation of the executive stock option compensation model.

In essence, talent became aware of capital’s weakness: what they possessed was rare and what capital possessed was easily commoditized. A dollar is a dollar wherever it comes from. With the new compensation model came a shift in psychology from thinking “what’s enough” to “how much?”, says Martin.

The problem with the current talent compensation model according to Gladwell, is greed. The system is inherently flawed. He explains, “It’s like saying to talent, you can choose to maximize your income or not. Who has self-restraint? No one does!”

The ever-widening gulf between America’s top earners and the middle class is the result of that unmitigated greed and what they believe is politicians’ reluctance to impose restraint through taxation and regulation.

So it's all the fault of pro athletes. At least now we know.

January 2024