How did it all start? What triggered the 1990s political corruption, its inequality in wealth and its stock market bubble? This is the decade that Kevin Phillips rails against in his historical epic of how the rich get richer and the poor get further in debt.
Arguably it all started in Silicon Valley, with a little help from the Department of Defense (which pioneered the epochal breakthroughs–transistor and Internet–that sparked the electronics revolution). Given the government’s basic research, such private companies as Hewlett-Packard, Microsoft, Apple, Intel and Cisco generated creative, profitable products using new technologies. As the intellectual property of these well-managed companies began to rise, their stock prices began to rise, as did those of their suppliers, buyers, competitors, financial consultants, management analysts, lawyers and accountants. Even the stock prices of companies unrelated to high tech began to soar.
The frenzy struck executive salaries. Top-notch high-tech managers made a lot of money because their pay was tied to stock options. As their company’s stock price skyrocketed, so did their salaries. Soon other corporate leaders–good, bad and indifferent–tied their own salaries to the price of their company’s stock. The financial markets regarded stock options as a way to make managers more “efficient” using the litmus test of stock-price performance. In practice, some managers cooked the books and inflated stock prices by making risky short-term investments and acquisitions. Long-term investments in new plant, equipment, research and intellectual property, necessary for permanent jobs, became an afterthought.
As Phillips shows, the greed of corporate America was such that in the 1960s, the pay of corporate CEOs was “only” about twenty-five times that of hourly production workers. In the 1970s, the ratio was around thirty to one. It rose from ninety-three times in 1988 to 419 times in 1999. Between 1990 and 1998, the wages of ordinary workers barely kept pace with inflation or grew at single-digit rates. Meanwhile, top executives of America’s biggest corporations enjoyed compensation increases of 481 percent! (Appalled by the eye-popping numbers on executive pay, Paul Krugman referred to Wealth and Democracy in one of his columns in the New York Times.)
With so much money sloshing around, contributions by business to politicians increased. With more campaign funding, deregulation resumed where Reagan left off, and upper-bracket tax rates mellowed. Phillips shows that the effective federal tax rate (income and FICA, or Social Security and Medicare) for the top 1 percent of families fell from 69 percent in 1970 to about 40 percent in 1993, with plenty of loopholes remaining. Over the same period, the tax rate for the median family increased from 16 percent to 25 percent. Between 1950 and 2000, corporate taxes as a percentage of total tax receipts fell from 27 percent to 10 percent while FICA (mostly paid by the middle class) jumped from 7 percent to 31 percent.