Evaluating the Trickle Up Economy

Last updated July 8, 2009

  During the first decade of the century (the Bush administration) real wages and employment stagnated while executive salaries rose. The cost of investments (eg: housing) rose with the salaries of the wealthiest, until many citizens could no longer afford their mortgages and health care. The economy crashed. This is all history. Here we will examine how the trickle up economy contributed to the crash.

 

 

Case Study #1- Kraft Foods

In 2008, Irene Rosenfeld, the CEO of Kraft Foods was given a salary of $18,697,000. The company had 98,000 employees. By a quick ratio, Irene made $190 from each and every one of her employees. If the CEO's salary had been capped at a very high value of $2 million, and the rest of the money distributed evenly among the employees, the typical employee would have seen a raise of $170 per year. Alternatively, 270 more employees could have been hired at an annual rate of $50,000.

But actually, Kraft has a few highly salaried executives. Had each of them been limited to a generous, $1 million in total compensation, Kraft could have paid its regular workers over $200 more per year, or created over 300 new jobs at an average salary of $50,000 per year.

Most foreign companies limit the highest salary to less than 30 times the workers salaries. Had Kraft used this policy, for the top executive to get $18 million, the typical worker would be able to expect $620,000. We know they were not that well compensated. In contrast, in the typical worker were paid $45,000 ( a reasonable estimate) then the top executive would not earn more than $1.3 million - less than a tenth of what she actually received.

Although this is only one example, imagine what happens when you multiply this across all of the businesses with executives receiving millions in compensation. How many more people would have been employed? How many more would have been able to keep up with their mortgages? Let's examine that consideration below.

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The American Economy as a Whole

In 2006, approximately 140,000 Americans received incomes in excess of $2 million, pulling in a total of $910 billion between them. Again we ask the same questions. First, how much of a raise could the average American employee have received if the companies have limited those executive salaries to a very wealthy annual salary of $2 million, instead distributing the rest among the workers? Had that been done, 134 million employees could have received an average raise of more than $4500. We can also ask how many jobs could have been created had that money been used to create jobs? Over 9 million jobs at an average salary of $50,000 per year could have been created. Imagine how much more goods and services we could have with 9 million more people producing it! Naturally, some compromise between the $4500 average wage increase and 9 million jobs could have been made.

Conclusion: That's what our status based economy costs us. We could have had worker salaries high enough to pay our mortgages preventing the crash of 2008, and we could have had full employment. Instead we chose to give that money to those in positions of status.

 
 

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