Poverty in America can be understood only within the context of wealth in America. Being poor is hard enough; but it is made many times more difficult when the poor are bombarded daily with images of enormous wealth. The perception of wealth in this country generates enormous resentment among those who are not wealthy. This resentment is aggravated by the assumption that many, if not most, of the wealthy have not "earned" their wealth. In addition, many Americans assume that if the wealthy were willing to share a relatively small share of their wealth, they could easily end poverty in America. These assumptions require examination. How difficult would it be to transfer $230 billion each year from the wealthy to the poor in order to end poverty - whether through voluntary charity, tax reform, or a combination of the two?
To begin with, it may help to clarify the meaning of "million," "billion," and "trillion" by considering the chart below. Conceiving "one million," which equals one thousand thousand, is not easy. Understanding "one billion" and "one trillion" is even harder. The graphic below demonstrates how enormous these sums are. One thousand stars are presented. If each star represents one dollar, then the entire block represents $1,000. If each star represents $1,000, the entire block represents one million dollars. If each star represents one million dollars, the entire block represents one billion dollars. If each star represents one billion dollars, then the entire block represents one trillion dollars.
It's important to become accustomed to these terms. To say that $230 billion a year can wipe out poverty may appear overwhelming at first. But within the context of the total U.S. economy, $230 billion is only 4 percent of total personal income. Thus, we could eliminate poverty if every American gave four of every hundred dollars they receive in personal income to the poor (or somewhat more to compensate for the fact that the poor would not be giving money to themselves).
Most Americans, however, would have difficulty losing 4 percent of their personal income. So the next question is: Who are the wealthy, how wealthy are they, and could they lose $230 billion without too much hardship in order to guarantee economic security for all Americans?
In 1990, according to the Congressional Budget Office, based on personal reports to the Internal Revenue Service, about 250 millions Americans lived in approximately 100 million households. Combined, these households averaged $41,000 in annual pretax personal income, for a total of about $4,000 billion, or $4 trillion. The one million households with the highest annual incomes, the top 1 percent, took 13 percent of the nation's total personal income - more than the bottom 40 percent combined. After allowing for total federal taxes paid, the top 1 percent, who averaged $550,000 in annual pre-tax income, averaged $400,000 in after-tax income.
In 1996, only 3.5 percent of full-time workers made more than $100,000. Of these, 79 percent were white males, 12 percent were white females, 2 percent were African-American males, 1 percent were African-American females, 2 percent were Hispanic males, and less than 1 percent were Hispanic females.
The nation now has more than one million millionaires.
Of 170 billionaires, the richest is Microsoft founder Bill Gates, whose wealth doubled from 1996 to 1997 to a total of forty billion dollars.
Wealth is even more concentrated than income. The Federal Reserve reported that in 1995 the top 1 percent owned 35 percent of the nation's net worth, 42 percent of all stocks, and 56 percent of all bonds. The bottom 90 percent held only 31.5 percent of all net worth. Other recent studies found that the bottom 40 percent owned just 1 percent of total wealth.
Concerning whether the wealthy "earn" their money, those who have enough money, to a large extent, simply let their money make money for them - at little or no risk. For the super-rich, the dream of wealth without work is a reality. Bonds, certificates of deposit, and other financial investments generate enormous incomes for the wealthy. In The New York Times, Thomas Friedman described the financial markets as follows:
In fact, with high-speed computerized buying and selling of stocks, bonds, commodities, currencies and such, the wealthy are now able to make enormous guaranteed profits. In Las Vegas, the odds are the same for all players. The same is not the case in what is incorrectly called the "casino economy." In the financial markets, the big boys have enormous advantages, which enable them to win consistently, especially over time. For them, casino-like risks are restricted to real casinos and, perhaps, the lottery.
"Arbitrage" is one example of how the wealthy, and only the wealthy, are able to make guaranteed profits on the financial markets. As The New York Times defined it, "The classic example of arbitrage would be buying gold in London and selling it at a higher price in New York." The difference in prices in these situations is typically small, too small to mean anything to the ordinary citizen. But the small percentages add up quickly for those who have large sums of money to play with, especially since they can borrow to "leverage" their own funds so they can invest more than they own. With computers, these transactions at slightly different prices can be conducted simultaneously or almost simultaneously, thus guaranteeing profits. The profit is guaranteed or virtually guaranteed because the only risk generally involved is if a seller backs out on a promise to sell, which is virtually unheard of because it would ruin one's reputation to do so. An estimated 20 percent or more of the profits made on the bond market are generated by arbitrage.
A rare insight into the world of arbitrage, which
is seldom discussed in the mainstream media, was revealed following
the dramatic collapse of the prestigious Barings Bank
in Great Britain in 1995. In covering the events
that led to Nicholas W. Leeson, a 23-year-old
trader, engaging in gambles in Singapore that led to the bank's
bankruptcy, The New York Times reported that in 1989:
To make any significant money, it meant taking huge positions, since the profit margin was so low. But because each purchase was effectively offset by a more or less simultaneous sale, Mr. Leeson would rarely have had an open position that could result in a loss in the futures he was dealing with. The arbitrage he did was mostly on the futures contract for the Nikkei index of 225 leading stocks in the Tokyo market.
Because his trading was deemed to be so low-risk, he was allowed a freedom that was particularly unusual: he could both execute and settle his own trades, meaning he was in charge of the paperwork to account for the buying and selling he was doing.
But Mr. Leeson showed every sign of rewarding the firm's faith in him. Press reports in Singapore said that documents filed by the company with the Government showed that the after-tax profits of Baring Futures (Singapore) rose from 2.7 million Singapore dollars in 1992 to 20.3 million Singapore dollars in 1993, the most recent year for which figures are available.
For Mr. Leeson, the success meant a larger salary and substantial bonuses, reportedly more than $1 million a year in the last few years.
Another lucrative method used by the super-rich on Wall Street is the manipulation of "hedge funds." In 1994, the House Banking Committee held hearings on the growing use of hedge funds by some 700 businesses operating on Wall Street, including a dozen or so who managed half of the money involved. The reporting on the committee's hearing revealed some startling statistics. From 1987 to 1993, managers of these hedge funds employed a variety of techniques, including but not limited to arbitrage, to generate an average annual return of about 20 percent - after paying the fund managers 20 percent of the profits. Only investors able to put up a million dollars could participate. In 1993 alone, the total sum of capital invested in hedge funds doubled, from $35 billion to $75 billion, which generated more than $15 billion in profits for the year. Some of the large funds were able to produce return rates in excess of 50 percent.
Economics writer Thom Calandra cites another example of what he calls "no-lose propositions." In the early 1980s, Salomon Brothers, the nation's largest investment house, took low-rate mortgages from savings-and-loans institutions and used those assets to sell higher-rate mortgage-backed securities. With such methods, Salomon's mortgage department made $100 million a year.
The relative certainty that large investors will make money in financial markets is reflected in the reliability of profits from currency trading. The Bank of America reported losing money overall in 1986 and 1987, but it made money every quarter in currency trading. Currency profits increased from 13 percent of the bank's total net income in 1989 to 22 percent in 1991, amounting to $246 million.
The importance of low-effort, risk-free income to the wealthy is reflected in the growing importance of interest income. In 1960, only 6 percent of the nation's total personal income consisted of interest income from investments in bonds and savings accounts. By the early 1990s, close to 15 percent of the total, some $700 billion a year, consisted of interest income. Total interest income is now more than five times greater than total dividend income from investments in stocks. In addition, the global currency markets alone trade one trillion dollars worth of U.S. dollars every day, not counting transactions in other currencies. The super-rich are thus increasingly expanding their wealth in the world of finance.
The Congressional Budget Office reported that in 1988 about 15 percent of total family income consisted of "capital income" from net rents, interest, dividends, and capital gains. About 36 percent of this capital income went to the top 1 percent and about 60 percent went to the top 10 percent. The top 1 percent got almost half of their income from capital investments. Thus, the wealth owned by just the top 1 percent generates more than $300 billion a year in capital income - more than enough to eliminate poverty. Of the nation's total privately owned net wealth, 57 percent is financial wealth; 43 percent is "tangible wealth" - owner-occupied real estate or consumer durables.
Little effort is required on the part of the wealthy to generate these profits, for brokers and fund managers do much of the work. And their efforts generally determine how much money is made, not whether there is any gain at all. Moreover, the key factor is not skill or hard work, but whether one has enough money to gain the upper hand.
One example of the advantages wielded by the wealthy
is what is known as "proprietary activity." Conservative
Republican William Safire considers these
maneuvers "legal but dishonorable - the banking equivalent
of 'honest graft' in politics." Safire described this activity,
which is facilitated by government-sanctioned secrecy concerning
financial trading, as follows:
{Investment bankers] use inside expertise gained
from companies they [support] to trade for their own accounts,
while advising investment clients to follow them along and enhance
their early positions.
In a similar vein, large investors are able to approach top-level executives to get current information about the condition of their companies and their plans for the future. Most investors could never gather this information in time for it to be useful.
The advantages that accrue to the well-heeled and well-placed are also reflected in dramatic events such as the decision by the Mexican government to devalue its currency, the peso, in late 1994. This decision was a well-guarded secret, for people who owned pesos and peso-denominated assets suffered a great loss when the value of the peso fell by half. But those who learned of the decision early because they were "close to the government," as it is said, were able to sell their assets before the peso collapsed. These insiders included large Wall Street investment firms, but did not include managers of mutual funds whose investors are more frequently middle-income.
Another important advantage is the ability to purchase expensive computer technology. Large institutions regularly spend millions of dollars on the latest and fastest software to strengthen their edge on the competition. Small investors don't have access to the critical information provided by these computers.
On a more mundane level, large investors have the advantage of volume discounts on fees charged by their brokers. The difference in the size of brokerage fees, which varies according to the size of the transaction, adds up quickly, leaving smaller investors at a distinct disadvantage. They also have the assets to ride out bad luck.
In addition to these legal means, many wealthy individuals
benefit immensely from various forms of "white-collar crime,"
including tax evasion, price-fixing, insider trading, and embezzlement.
Concerning insider trading, which involves selling knowledge
about future events that will affect stock prices, Gene Marcial,
who has written Business Week's column on Wall Street
for 13 years, wrote:
Congress has opened the door to insider trading by enacting laws that are so ambiguous that one must wonder if it is intentional. The New York Times’ stock market columnist, Floyd Norris, illustrated this point in discussing the case of James H. O’Hagan, a lawyer who learned that a client planned to takeover another corporation. Using this inside information, he made four million dollars on stocks and options. Norris commented:
But that’s not the way the judges on the United States Court of Appeals for the Eight Circuit saw it. “Such conduct is certainly unethical and immoral and must be condemned, which we make haste to do,” wrote Judge David R. Hansen. But, he added, it was not illegal.
That decision, entered last month, has shaken officials at the Securities and Exchange Commission, and it is likely to be reviewed by the Supreme Court. It is merely the latest example of the sorry state of securities law, in which poorly written statutes are now being interpreted by judges who seem determined to construe them as narrowly as possible.
...The way the judges see it, Mr. O’Hagan could not legally trade in [his client’s] stock, because he owed a duty to its shareholders. That was no problem because the money was to be made in [the other company’s] stock.
...The ruling rejects what is known as the “misappropriation” theory, which holds that if a person misappropriates information as an insider and uses it to trade in another company, that constitutes illegal insider trading.
...The [Supreme] Court split four to four the previous time it considered the issue.
...[U]nless Congress acts soon, the law throughout the land may be what Judge Hansen says it is: insider trading with advance knowledge of a merger is perfectly legal, so long as the information came from the raider, not the target.
Other examples of lucrative white collar-crime include:
As of late 1997, according to government regulators, the long-term bull market had prompted a boom in stock fraud. One Senate committee held hearings on small-stock fraud estimated to cost investors billions of dollars a year. And law enforcement officials reported that crooks were resorting to violence and the threat of violence to protect their profits. In one case, the government charged two men with soliciting the murder of rivals.
These examples are not meant to suggest that all of the wealthy are criminals. For one thing, neither Congress, the Securities and Exchange Commission, nor the Courts have enacted a clear legal definition of "insider trading," though common sense rails at the unfairness of the practice. But these examples do suggest that a considerable portion of the wealthy's assets are obtained through unscrupulous methods. When Business Week's Wall Street columnist says that criminality is ingrained in the Wall Street culture, one should take pause and give it considerable credence.
Concerning the late 1920s, when middle-class investors first became fascinated with the stock market, a PBS documentary titled The Great Crash, commented, "They knew the game was rigged. But maybe next time they could beat the system." The motivation to gamble is much the same today. But at the casino and with the lottery, small-time players and high rollers face the same odds. Only Wall Street offers fat cats special odds - odds that often guarantee profits. Nevertheless, the unfairness of this discrepancy is seldom reported.
Many of the wealthy are compensated by their corporations far beyond what they deserve. Included among the wealthiest 1 percent are most if not all of the chief executive officers (CEOs) of the largest nation's corporations, who averaged more than $2 million in compensation in 1988, about five times as much as their counterparts in Europe and Japan. According to a survey released by Forbes Magazine in 1995, the average pay of the CEOs of the 800 largest publicly held companies averaged $993,000 in 1994, an 11 percent increase over 1993. The percentage that received more than one million dollars increased from 51 percent in 1991 to 65 percent in 1994. In 1990, as a recession began, more than 60,000 Americans took in more than $1 million in personal income in that year alone.
Examples of corporate largesse include:
Extravagance is not limited to explicit compensation. In 1995, The Wall Street Journal reported, "But even in this era of corporate frugality, many chief executives are still living the high life at company expense." Examples of the "high life" cited by the Journal included:
On Wall Street, slightly more than 200,000 employees, many of whom are relatively low-paid clerks, earn an average of $100,000 a year facilitating the trading of stocks and bonds. Senior-level executives start with annual base salaries around $200,000. Add to that bonuses that can be one million dollars or more, often regardless of performance. Two thousand executives on Wall Street earn at least one million dollars a year. Wall Street's pretax profits in 1991 were about $5.5 billion.
More than one million millionaires invest more than one-third of their assets in corporate stock. In 1991, sixty-four were billionaires, with a total net worth of $207 billion.
In 1989, the wealthiest 1 percent, all of them at least millionaires, owned 37 percent of the nation's total net worth (assets minus debts), or $5,700 billion - more than the bottom 90 percent combined. On average, these households held seven million dollars in net assets.
The wealthy are overwhelmingly white and the principal breadwin-ners are mostly male. The 1995 report of the nonpartisan Glass Ceiling Commission, for example, reported that 97 percent of the senior managers of Fortune 1000 industrial and Fortune 500 companies are white and 95-97 percent are male.
With money to burn, the wealthy live the American Dream to the hilt:
Perhaps the most conspicuous past-time of the wealthy, however, is the art auction, which can garner gross sales of more than $250 million in a single day. The top draw in the art world was $53.9 million for van Gogh's "Irises." At least nine other paintings have sold for more than twenty million dollars each. The glittering excesses of the wealthy tapered off a bit in the early 1990s as a mild recession affected even the wealthy. But 1993 saw a resurgence in the economy and a boom in the auction business, as new records were set in a number of categories, including $3.4 million for a silver chandelier, $21,000 for a Michael Jordan baseball jersey, and $1.7 million for a Russian spacecraft.
Although purchases at these auctions are usually
business investments, much of the extravagance of the wealthy
is posturing, as reflected in the Forbes Four Hundred "cost
of living extremely well index," an annual survey of the
cost of luxury goods and services published by Forbes 400
magazine. Following is the 1993 list of the 42 items whose cost
the magazine tracked in order to monitor the welfare of its readers:
Given that the top 1 percent - who own an average of seven million dollars in net assets and receive an average annual income of almost $600,000 - clearly have much more money than they need and get about half of their income from low-effort, low-risk capital investments, it seems reasonable to consider how much of their wealth they would have to give up in order to eliminate poverty.
Clearly, upper-income families in this country have at hand the means to end poverty and guarantee economic security for all, whether through private charity or higher taxes or some combination of the two.
As defined here, the poor in 1994 needed an additional $230 billion a year to lift themselves out of poverty. According to the Congressional Budget Office, in 1994 the top 1 percent received a total of $570 billion in personal income. Thus, the top 1 percent could have ended poverty by giving about 40 percent of their total annual income to the poor, which would have left them with annual household incomes of about $340,000.
The Congressional Budget Office reports that the next 4 percent just below the top 1 percent, which it refers to as the "96-99 percent," averaged $135,000 in income in 1994, for a total of $540 billion. Households with incomes in this range presumably could also help end poverty without suffering a severe personal sacrifice. Looking at the two groups together, the top 5 percent, their total income was $1,110 billion. Therefore, the top 5 percent could have lifted the poor out of poverty by giving them 20 percent of their total personal income.
The next income group reported on by the Congressional Budget Office, the next 5 percent, "the 91-95 percent," averaged $88,000 in 1994, totaling $440 billion. It seems that these families could also assist somewhat in the eradication of poverty, assuming that the wealthiest contributed a higher portion of the effort, based on ability. If so, the top 10 percent could end poverty by redistributing 15 percent of their total $1,550 billion annual income to the poor.
From another perspective, four-and-a-half million taxpayers, 4 percent of the total, reported incomes of $100,000or more in 1993. They averaged $200,000 income for the year and paid an average of $56,000 in taxes, leaving them with $144,000 after taxes. Combined, this top 4 percent earned $900 billion dollars (one-fourth of the nation's total income), paid $225 billion in taxes, and took home $675 billion after taxes. This group of affluent household thus could abolish poverty with one-third of their after-tax income, which would leave them with $100,000 annual after-tax income.
These numbers demonstrate that the resources to establish economic security for all are at hand. We should do all we can to promote private charity to help move in this direction. But the wealthy are unlikely to suddenly give the poor what they need to avoid poverty. Increasing taxes on the wealthy will almost certainly be necessary, unless an enormous religious awakening sweeps the land. In addition to eliminating the income deficit, however, additional costs will be involved in establishing economic security. These additional costs will add to the political resistance to doing what is necessary to guarantee economic security. Deciding how best to overcome this resistance will require understanding the political forces that have created and maintained poverty. Our analysis of these factors will influence our conclusions concerning strategy. Toward this end, the next chapter addresses the history of poverty.
Economic Report of the President: 1995, U.S. Government Printing Office, Table B-26.
Committee on Ways and Means of the U.S. House of Representatives
"Tax Progressivity and Income Distribution," U.S. Government Printing Office, 1990.
David E. Rosenbaum, "Tax Bill Benefit Is a Matter of Perspective," The New York Times, 7 April 1995, A11.
Dan Blake, "Bill Gates Named World's Richest by Forbes Magazine," San Francisco Chronicle, 5 July 1995, A1/A7.
Thomas L. Friedman, "It's a Mad, Mad, Mad, Mad World Money Market," The New York Times, The Week in Review, 8 May 1994, 5.
Bernard Kaplan, "'Global Floating Crap Game,'" San Francisco Examiner, 2 April 1995, B1/B4.
Saul Hansell, "Hush-Hush and for the Rich: Hedge Fund Under Scrutiny," The New York Times, 14 April 1994, A2/C5.
Based in part on a personal conversation on March 31,1994 with Thomas P. Collins, a Kidder, Peabody & Co. bond broker and a colleague, another bond broker.
Richard W. Stevenson, "Big Gambles, Lost Bets Sank a Venerable Firm," The New York Times, 3 March 1995, A1/C13.
Saul Hansell, "Hush-Hush and for the Rich: Hedge Funds Under Scrutiny," The New York Times, April 13, 1994, A1/C5.
Thom Calandra, "Wall Street Book Finds No glory in Greed," San Francisco Examiner, 6 June 1993, E1/E6.
Louis Trager, "Profits in Pesetas," San Francisco Examiner, 27 September 1992, E1/E4.
Economic Report to the President: 1994, U.S. Government Printing Office, Table B-26.
Thomas L. Friedman
, "When Money Talks, Governments Listen," The New York Times, 24 July 1994, The Week In Review, 3.
The Changing Distribution of Federal Taxes: 1975-1990, Congressional Budget Office, 1987, Tables A-2,A-3,A-4,A-5.
Economic Report of the President: 1995, U.S. Government Printing Office, Table B-115.
William Safire, "Singapore Sling," The New York Times, 2 March 1995, A17.
Quoted in: Time Gartner, "The Lucrative Lure of Insider Trading," San Francisco Chronicle, 28 February 1995, E4.
Kenneth N. Gilpin, "17 Cited in Insider Trading," The New York Times, 10 February 1995, C1.
Floyd Norris, "The Labyrinth of 2 Insider Cases," The New York Times, 8 March 1995, C1.
Ibid., C1.
Tom Hayden, "Orange County Could Use Some Role Models," San Francisco Chronicle,21 December 1994, A23.
"Fraud Found in 60% of Seized S&Ls," San Francisco Chronicle, 28 February 1990, C1.
Kurt Eichenwald, "Crimes, Lies and Prudential-Bache," The New York Times, 10 October 1993, 1.
William Greider," Why The Mighty GE Can't Strike Out," Rolling Stone, 21 April 1994, 36.
Dean Baquet (with Diana B. Henriques), "Agriculture Companies Still Get Federal Business Despite Abuses," The New York Times, 12 October 1993, A1.
James H. Rubin, "Bank Fraud Cases Let Go," San Francisco Examiner, 19 October 1992, D1.
Floyd Norris, "Insider Trading: A Law In Disarray," The New York Times, 27 August 1995, Money & Business, 1.
The Great Crash, Judy Crichton, Executive Producer, WGBH Boston, 1990.
Holly Sklar, ""The Truly Greedy," Z Magazine, July/August 1990, 57.
"'94 CEO Pay Jumps 11%," San Francisco Examiner, 8 May 1995, B1.
Paul Farhi, "The Rising Upper Crust," San Francisco Chronicle, July 26, 1992, Sunday Punch, 6.
Richard Cohen, "Selfish at the Top," Washington Post National Weekly Edition, December 30, 1991-January 5, 1992, 28.
Peter Passell, "Those Big Executive Salaries May Mask a Bigger Problem, The New York Times, April 20, 1992, A1.
"In a Cost-Cutting Era, Many CEO's Enjoy Imperial Perks," The Wall Street Journal, 7 March 1995, B1/B2.
Jim Luther, "1.6% in U.S. Hold 28.5% of Wealth, IRS Study Says," San Francisco Chronicle, August 23, 1990, A1. Another report (Paul Farhi, "The Rising Upper Crust," San Francisco Chronicle, Sunday Punch, July 26, 1992, 6) found that "PSI, which surveys consumers for major financial institutions, estimates that the number of millionaire households (was) 2.1 million last year."
James E. Roper, "Millionaires Double in U.S. in Four Years," San Francisco Examiner, August 21, 1990, A6.
"A new richest of rich," San Francisco Examiner, July 8, 1991, C1.
Sylvia Nasar, "Fed Report Gives New Data on Gains by Richest in 80s," The New York Times, April 21, 1992, A1.
Kathleen Sullivan, "White Men Still on Top," San Francisco Examiner, E1.
Pat Steger, "Prying the Lid Off the Opera Boxes," San Francisco Chronicle, October 27, 1993, E1.
Louis Trager, "Cashmere: the Lure of Luxury," San Francisco Examiner, December 6, 1989, D1.
Blaise Simpson, "Movie Theaters of the Rich and Famous," San Francisco Chronicle, Datebook, June 7, 1992, 37.
NBC News, May 10, 1989.
"Two Cars for the Rich and Famous Unveiled," San Francisco Chronicle, January 5, 1990, C16.
Indira A.R. Lakshmanan, "Cowboy Sport Lures the Rich," San Francisco Chronicle, 17 December 1992, D6.
Barbara Rosen, "Picasso Sold for $40.7 Million," San Francisco Chronicle, 16 November 1989, E1.
Rita Reif, "Art Prices Still High, But Fervor Levels Off," The New York Times, 6 December 1989, B1.
Rita Reif, "Sober 90's? Not at Auctions," The New York Times, February 24, 1994, B1.
James M. Clash, "Reversal of Fortunates," Forbes 400, October 18, 1993.
Congressional Budget Office, "An Economic Analysis of the Revenue Provisions of OBRA-93," January 1994, Table 6. This table shows the top 1 percent with $408,157 "income after taxes" and "$158,719" in "all federal taxes," for a total of $566,876 per family. With approximately one million families, that equals $570 in total income for the top 1 percent.
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