Reports from the Economic Front

a blog by Marty Hart-Landsberg

Fighting Inequality

The following post by the economist Michael Taft appeared in the Irish Left Review.    Although Taft is addressing an Irish audience, I think his discussion of Swiss initiatives against inequality should be of interest to many Americans as well.

As the [Irish] Government does its post-mortem on the Seanad referendum [to abolish the upper house of the Irish parliament], Switzerland is gearing up for a vote in November on a referendum that is truly reforming.  It’s called the 1:12 initiative. It proposes that monthly senior executive salaries cannot exceed 12 times the pay of the lowest paid in a firm.  And it proposes that this be put into law.  This is pretty heavy in a country which is home to major financial institutions and multinationals.

Imagine the impact here.  In the Bank of Ireland, the CEO Richie Boucher has a salary of €843,000 (no, that’s not a typo).  A bank clerk on starting pay is approximately €22,000.  Under this law one of two things would have to happen:  either Richie’s salary would have to fall by three-quarters – to €264,000 a year. Or the starting pay would have to rise to €70,250.  I leave you to decide which is more likely to happen, if either.

But there is more going on in Switzerland than just a pay ratio debate.  Earlier this year, the people voted on a referendum that put controls on executive pay and gave shareholders’ more rights over executive compensation.  There has been growing anger over excessive salaries and the bonus culture among Swiss companies.  The referendum passed overwhelmingly despite the fact that opposing business lobbies outspent the ‘yes’ side by 40-1.

Now there are three more referenda coming down the line.  First, there is a proposal to increase the minimum wage to approximately €18 per hour.  Even in an economy with high living costs this is a hefty rise.  Proportionately, for Ireland, this would amount to somewhere between €11 and €12 per hour (using the median wage as the comparison).

There is a referendum on a basic income – guaranteeing every adult a basic income of €24,500 a year.   Again, even factoring in living standard difference, this is hefty sum, designed to ensure a safety net for everyone.

And then there’s that 1:12 initiative – designed to do two things:  put upward pressure on low-pay and downward pressure on excessive pay.  As you can imagine, the business lobbies and the Government are predicting all manner of plagues and pestilence if this referendum succeeds.  First off, there is the claim that businesses will leave Switzerland if this is passed.  There is something in that.  Multi-national capital can be relatively mobile and many companies can punish a people for taking democratic decisions that companies don’t like.  This is not the case for all companies, though but the blackmail threat permeates the body politic.

A second argument put forward by the business lobbies is that they will just avoid the law by breaking up their companies into smaller units.  In this scenario, all the low-paid will be put into one sub-company and the high-paid into another.  This will mean that each sub-company can maintain the 1:12 ratio.  There is no doubting that companies get up to all sorts of activities to avoid democratic interventions  (the ever-vigilant WorldbyStorm highlight Ryanair’s byzantine employment contracts to prevent employees from collective bargaining).  However, this threat could be easily dealt with by legislation that treats sub-companies that sell exclusively into a main company as part of the main company itself.

Could such an initiative work here?  Eventually, but as always we must treat all such initiatives as part of a process that must be rooted in today’s reality.  We have an extremely poor indigenous sector and an over-reliance on foreign capital for value-added employment and participation in the global market.  A 1:12 initiative would immediately become hostage to multinational blackmail (this will cost jobs, etc.) and with the economy still in a domestic-demand recession such an initiative would understandably raise fears.

However, this is not to say we put this on some shelf to be dealt with sometime in some future (like Seanad reform).  A first step would be to require all companies to publish their company accounts – profits, executive pay, etc.  Publicly-listed companies are already required to do this but many private unlimited companies (Dunnes Stores) and foreign branches (Tesco) don’t have to.  There is no rationale why some companies are required to publish and others are not.  Freedom of economic information would be a first step in creating a more informed public and efficient market relationships.

Second, we could take up the idea put forward by ICTU sometime ago – that wages that exceed a certain ratio should not be deductible for income tax purposes.  If, for instance, there was a 1:12 pay ratio in a company, then the company would have to pay corporate tax on incomes that exceed the upper threshold.  Taking the Richie Boucher example, Bank of Ireland would have to pay tax on that portion of his salary that exceeded €264,000.  We may not be in a position now to stop excessive pay, but we certainly don’t have to subsidise it with taxpayer money.

So we could take positive concrete steps.  However, let’s not lose the overall sight of what’s happening in Switzerland.  There is a democratic revolt against high pay and low pay:  limitations on executive pay, increased minimum wage, and a basic income.  There is a lively debate about equality and inequality.  There are concrete proposals and there will be votes.  But even if the 1:12 initiative fails, that’s not the end of it.

Of the many issues that we will need to address on the other side of austerity (and there are many:  employment, investment, indigenous enterprise development, universal public services, social protection, etc.) there is the issue of reducing inequality, creating strong social protection floors and raising income floors.

What the Swiss are debating is how to raise that floor while toppling a few golden towers.  This is what we should start debating.  And the sooner the better.

Interesting Note:  Despite all the blackmail threats and warnings of doom about the 1:12 initiative, recent polls show it is too close to call:  36% for yes, 38% for no, with the rest undecided.

 

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