Column, 645 words

Subsidizing Economic Inequality

The push to privatize the public sector through contracting out is expanding our economic divide.

Sam Pizzigati

The debate over America’s federal budget is getting stale — and getting us nowhere, as the latest government shutdown depressingly reminds us. Political obsession over budget deficits has now morphed into legislative extortion.

Today, more than ever, we need to refocus the federal “tax and spend” debate from deficits to inequality. Two researchers from the New York think tank Demos are trying. They’ve released a new report that homes in on the no-man’s-land between the public and private sector that has left hundreds of thousands of Americans poor and a lucky few fabulously rich.

pizzigati-shutdown-Daquella manera

Daquella manera/Flickr

This no-man’s-land has expanded enormously over recent years as the federal government has contracted out and privatized one public service after another.

Those janitors who clean Smithsonian museums? Those cooks at military bases? Those programmers writing software for Medicare? More and more of the workers who keep our government running work for private contractors.

And many of these workers, note Demos analysts Robert Hiltonsmith and Amy Traub, don’t make much at all in the way of compensation. About 560,000 Americans employed by contractors have jobs that pay $12 an hour or less.

Meanwhile, the executives who run these companies are doing quite well — thanks to our tax dollars. The federal government reimburses private firms for up to $763,039 of the executive compensation they lay out, a figure that will shortly rise to $950,000 under the formula current federal law sets out.

Let’s place this $763,039 in context. The President of the United States only makes $400,000. Our Vice President pulls in $230,700.

In other words, our tax dollars are compensating private contractor executives at a level three times higher than Joe Biden’s paycheck.

These dollars add up. In their new Demos study, Underwriting Executive Excess, researchers Hiltonsmith and Traub calculate that the federal government is now spending $20.8 to $23.9 billion annually, overall, for the compensation of top private contractor executives.

Out of this sizeable stash of tax dollars, the pair estimates, $6.97 to $7.65 billion is going to private contractor executive pay that exceeds $230,700 a year.

In short, Hiltonsmith and Traub note, “we are bankrolling the paychecks of already-wealthy executives instead of supporting more livable wages for American workers struggling to get by.”

We could solve this problem, the two quickly add, quite simply — by lowering the top contractor pay reimbursement level from the current $763,039 to $230,700, the current vice-presidential payout.

Taking this course would save enough tax dollars, the new Demos research indicates, to give a $6 an hour raise to the 560,000 federal contractor workers who currently make $12 or less an hour. Legislation calling for this simple step, the Commonsense Contractor Compensation Act of 2013, is already pending before Congress.

But we could go even further to leverage the power of the public purse toward a more equal America. The CEOs of the biggest federal contractors, executives like Lockheed Martin CEO Robert Stevens, don’t take the bulk of their personal pay directly from the federal government. Their subsidy comes indirectly.

The companies these executives run owe their robust profitability to federal contracts. This profitability keeps corporate share prices high. Stock options and other stock awards translate these high share prices into whopping executive windfalls. Lockheed’s Stevens took home $23.8 million last year, before passing on the company’s CEO reins to his successor.

The alternative? The federal government could deny contracts — and corporate tax breaks as well — to companies that pay their top executives over 25 or 50 times the pay of their most typical workers. America’s corporations operated quite comfortably within this range from the 1950s through the early 1980s. The CEO-worker gap has ballooned since then to a 354-fold differential.

The federal government, we ought to keep in mind, already denies our tax dollars to companies with employment practices that discriminate on the basis of race or gender. We’ve decided, as a society, not to subsidize racial or gender inequality. Why should we subsidize economic inequality?

OtherWords columnist Sam Pizzigati, an Institute for Policy Studies associate fellow, edits the inequality weekly Too Much. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org

  • Terry Lowman

    Capping pay seems like a straight forward solution, but I have a problem. Better to have an income tax that taxes everyone making huge amounts of money. And to have meaningful minimum wage and labor laws that protect unions. In other words, go back to the 40′s and 50′s with these policies that produced widespread distribution of the wealth.

    I hear grumbling about coach’s pay, but if we merely taxed everything over $1 million at 90%…allowing income averaging for those who get a one time payoff…and tax estates keeping in mind that most people do not really have one, so getting anything is a privilege. While we’re at it, reduce and tax trusts, too…so there are not slippery ways around taxes.
    After all, children of wealthy people get all sorts of privileges even if they never inherit a dime. And people, knowing they can’t leave their children money, might just give them love instead. Wouldn’t that be special!

  • Johnny Dollar

    OK, let’s all work for the government. The first problem I see though is where are we going to find the taxpayers to fund our paychecks? The second problem I see is the president and vice president are so inept that I refuse to work for them. I have principles and self respect even after the last five years of nonsense. Who’s going to take care of me?

  • aurens66

    Just getting a contract from the public purse is enough compensation, the idea that government contractors in some way have to keep up with what CEOs make in the public section is ridiculous! Who wrote these laws? Oh yeah, the 47% of Congress who are millionaires.

  • geonomist

    Bigger picture, why subsidize anything? We could forget about padding the wages for low-skilled work if instead we shared the worth of Earth. If everyone got an extra income from the value of land and resources — a la Alaska’s oil dividend or Singapore’s land dividend — then people could directly negotiate higher wages without having to have government intervene. People could also afford retraining. Or maybe even start their own business. All those futures sound brighter than being locked into an undemanding, tho’ better paying, job with a boss.

    Even better, if we not only paid ourselves a Citizen’s Dividend but also axed the counterproductive taxes on earnings, purchases, and houses, why would we subsidize anything, even schools and clinics? Costs of living would be lower and with income higher, we would have the wherewithal to choose our own teachers and doctors, again without having to have government intervene.

    Let our concern for struggling workers, and our distaste for income inequality, blossom into a campaign for geonomic justice, starting at progress.org.