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Mind the Gap: Bumper Bonuses Are Back, Yet Millions Struggle on Welfare in US
Growing inequality at the heart of the US economy is being laid bare this holiday season.
Conspicuous consumption is back on Wall Street, in anticipation of bonuses close to pre-recession levels. Some American companies have just posted the largest quarterly profits ever. Meanwhile, one in five families is relying on food stamps to get by and unemployment remains stuck at around 10%.
For three years, since massive government bailouts of the financial system, New York’s bankers, traders and hedge fund managers have been wary of flaunting their wealth – many remember the outrage that greeted revelations that Merrill Lynch chief executive John Thain had bought a $35,000 toilet, as his firm imploded. Last Christmas, Citigroup chief executive Vikram Pandit told employees: “We will be judged in the court of public opinion.”
But this year, shameless extravagance is making a comeback. One investment analyst booked hip-hop star Lil’ Kim for his Halloween party. Another paid Playboy bunnies to dance for guests behind a satin screen. A Morgan Stanley trader was sacked for hiring a dwarf for his friend’s stag night in Miami and trying to handcuff him to the groom. And business is booming at the most expensive shops – luxury jeweller Tiffany reported a 7% increase in sales worldwide.
The Japanese bank Nomura has estimated that America’s top five financial firms – Goldman Sachs, Morgan Stanley, Citigroup, Bank of America and JP Morgan Chase – have set aside almost $90 billion for bonuses. “I did not expect compensation would come back the way it has,” bonus analyst Alan Johnson told the New York Times. “I underestimated the industry’s resiliency.”
In his new account of the financial crisis, Crash Of The Titans, Greg Farrell blames Wall Street’s obsession with bonuses: “Why did Lehman Brothers go out of business? Because their people kept doing real estate deals long after the market had turned. It produced bigger bonuses for them. Why did AIG keep selling those foolhardy insurance police on CDOs? Because it was easy money and led to bigger bonuses.”
The final amounts won’t be known until January, when fourth quarter results come in. Analysts will be watching Goldman Sachs chief executive Lloyd Blankfein’s bonus with particular interest. Two years ago he took nothing, after his company benefited from a huge injection of taxpayer money. Last year, he was awarded $9 million, paid in stock – not much for the most profitable firm on Wall Street. This year, he is expected to come close to matching the record he set in 2007: $68.5m.
On Monday, the US Commerce Department reported that American businesses earned record profits in the third quarter, at an annual rate of $1.66 trillion. But few economists expect companies to start hiring soon. Most of the gains made in the last year were in productivity – doing more with fewer workers – and from multi-national corporations who benefited from an economic boom in India, China and Brazil. Taking away financial sector and “rest of world” profits paints a truer picture of the economy. The richest 1% of Americans now take in almost a quarter of all national income. In the late 1970s their share was less than 10%.
When last year’s Wall Street bonuses were announced, President Barack Obama called them “shameful” and “the height of irresponsibility”. But the tough regulation he vowed to introduce is full of loopholes and it now looks like he will also back down on his campaign promise to raise taxes for people earning more than $200,000 a year.
Republicans have signalled that they may be open to compromise, saying they’ll prolong unemployment benefits in exchange for an extension of the Bush tax cuts for the wealthy. But shortly before Congress broke up for the Thanksgiving holiday, they blocked an effort to extend benefits, meaning that two million people will not pick up a welfare cheque in December.
A failure to rein in financial industry excesses could prove costly to Democrats – even though Republicans, more closely tied to Wall Street, will be the beneficiaries.
Democratic Senator Jim Webb said: “People say, ‘What’s the difference between these two parties? Neither of them is really going to take on Wall Street. If they don’t have the guts to take them on, I’m going to vote for the other people who can at least satisfy me on other issues, like abortion. Screw you guys.’ I understand that mindset.”