Previously, we showed that paying the CEO’s too much results in the contraction of revenue of businesses, particularly in the case of the Universal Corporation, but in general to any economy.
This is somewhat dated, but it shows CEO pay has far outpaced even the profits of the corporations they manage. In fact, their increase in compensation has tripled the increase in corporate profits. However, it is the combination of the top three lines which we are interested in, since each, and their sum, is far higher than the increase in production worker's pay, and these combine to provide the compensation of the wealthy.
Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the Institute for Policy Studies and United for a Fair Economy.
Corporate profits are interesting, as our thesis is that these will eventually decline and turn negative, as consumers are increasingly reduced to subsistence and impoverished, because all of the money is ending up in the hands of the wealthy. Meanwhile, as with overfishing, until the stocks are depleted, there is the appearance of abundance, and, as with overfishing, the justification of over-exploiting the worker. Of course this won't happen for all corporations at once. As the middle is hollowed out, those corporations servicing the middle be the first to suffer losses, while those that service the high end and the lower end of the income distribution may even experience an increase in profits: The higher end will prosper because of the increased income of its members. Those corporations servicing the lower end will prosper because formerly middle income households will become their customers as they join the ranks of the poor. Thus we would expect companies like JC Penney and Sears to experience difficulties, while companies like Dollar General and Walmart, and at the high end, Apple, prosper. But this is a transition, and not a stable state.
We also showed that an excess of savings leads to a contraction of revenue in an economy. Thus, since the wealthy save more, the greater the concentration of wealth, the greater the rate of savings, and the greater shortfall in revenue. With the existence of a financial sector, we can close the system: Money saved goes into banks, where it is lent back to expand demand, in the short term. Unfortunately, lending it back into the economy carries the expectation that it will be repaid to the banks, which means on the net, over the medium to long term, it has no effect on demand. And actually, if we include interest, which takes more money out of the economy than is lent into it, lending by banks has the effect, over the medium to long term, of reducing demand in an economy. And the revenue of business is equal to the demand, that is, the money spent by consumers. So lending by banks, which reduces demand, and thus revenue, in the larger economy, has the long term effect of discouraging investment.
And the greater the debt, the greater this effect is. With total debt of the non-financial sector equal to almost 3 times GDP, interest payments alone are equal to about 8% GDP. This is money owed the wealthy, since they are the ones with money to save and lend, by those with less money, since they tend to borrow, and at the least, save less. As long as the non-financial sector can carry the debt, the transition state persists. When the debt can no longer be carried, it is called in, and the market collapses as money goes to paying off debt instead of buying production, and sustaining the revenue of industries.
The problem for an economy, a civilization, and indeed the wealthy themselves, is that when there is excess concentration of power, there is no check on the self-serving of the powerful. It is a case of the Tragedy of the Commons: The survival of civilization requires the restraint of all the wealthy, but it is in the interests of each to pursue the maximum gain, for himself. And this is what happens. Each pursues his maximum gain,
and together they destroy the commonwealth on which all depend. They have bought off the policeman, and now there is no one to restrain them in their depredations.
Because of debt, the transition to the steady state, instead of being smooth, can be catastrophic.