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What Would John Adams Think? By Stephen J. Butler

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The biography of former president John Adams offers his first-hand account of the French Revolution and the extent of that society's violent overthrow of their rich and powerful. Marie Antoinette's famous "let them eat cake" comment lead to her demise, of course, but many other people were systematically eliminated. Beyond the royalty and ruling class in Paris, the revolution purged the country of the largest landowners in most villages.

Why should the French Revolution mean anything to us today? Well, an alarming body of evidence suggests that the middle class of the United States is rapidly disappearing. There is a growing gulf between the wealthy and the poor that was once filled with a more substantial middle class. Today, we have an increasing number of people below the poverty line and far wealthier people in the top 1% of the income range. Much of this change has occurred just in the last ten years. The most comprehensive collection of data can be found in Paul Krugman's article in the New York Times Magazine of October 20th. He points out that the wealthiest 0.01% of Americans (13,000 families) received as much income as the 20 million poorest families. The average annual income for these wealthy families was $17 million.

In his 1997 book, "Created Unequal," economist John Kenneth Galbraith talks about how this development can lead to the unraveling of a society. Anyone who has traveled to an underdeveloped country can see how law enforcement, for starters, becomes a "do-it-yourself" exercise with gated compounds and little satisfaction. Many of society's quality-of-life benefits we take for granted today could be gone by the time many of us begin to enjoy our retirement years.

Some of this transition is out of our control. The adverse impact of a globalized economy is obvious, and skill-based technology change is also contributing to the income gap. Blue collar jobs are moving overseas leaving just low-paying service jobs. Meanwhile, those with computer skills or a college education at least have the hope of participating in what today has become "investor capitalism." This is a new form of economic structure that is less inclusive but that offers far greater rewards to those who get to participate.

By comparison, for forty years after World War II, we had what could be termed "managerial capitalism" which kept corporate excesses in check. Back in 1967, Galbraith wrote, "Management does not go out ruthlessly to reward itself --- a sound management is expected to exercise restraint. This acts to enforce?a high standard of personal honesty as well." Today, with over ten percent of all public companies having to restate their earnings over the past few years, I think we can conclude that honesty is not what it used to be back in the sixties.

I don't mean to get started again on bloated CEO pay, but thirty years ago, the average corporate chief's pay was 39 times that of the average worker. Today, it is more than 1,000 times the average worker's salary. As investors and American voters, we have only ourselves to blame for this development. The current proposed legislation to force mutual funds to make their proxy votes public will be a step in the direction of investor control of this issue. From now on, we can bolt from any fund that endorses some egregious re-pricing of options or other form of executive excess.

For those of us wanting to take immediate action with regard to corporate governance, we can consider investing in any number of socially-conscious mutual funds. Jerry Dodson, the founder of Parnassus fund in San Francisco, says he routinely questions corporate business practices as a normal part of his screening process. A new fund from the Domini family of funds is focusing entirely on corporate governance as its primary screening criterion. By comparison, we can forget about Fidelity. The problem with many large fund companies is that they have retirement plan investment business with many of these public companies, so they don't want to annoy their client base by voting against the management that hires them. This is why the bulk of the mutual fund industry is fighting any efforts to disclose how they vote our shares.

With regard to tax policy that will only exacerbate the income gap, over half of the recent tax cut package went to the wealthiest 1% of our population. The bulk of this benefit is the reduction of the estate tax which now contributes about 1% of our national tax revenues. The average American thinks doing away with this tax is a good idea. The bill had bilateral support from both parties. I just don't get it. I would be delighted to pay estate taxes someday. They are largely voluntary and they prompt all kinds of commendable behavior like family gift giving, charitable giving, and succession planning in general. Meanwhile, we are doing away with a source of 1% of our tax revenue. Where will we make this up? If we're not careful, it will be a repeat of the "stealth taxation" of the 1980's, when we had the largest percentage increase in taxes since World War II. At that time, we dramatically increased the social security tax?a regressive tax increase that today hits every earned-wage dollar up to $84,900.

On the whole, I am optimistic about the future of American business and the direction of corporate governance. We eat an elephant one bite at a time, and last week we gobbled up Harvey Pitt, our flawed SEC chairman. Rudy Giulianni transformed New York City by enforcing simple laws like jaywalking and turnstile jumping. He applied the famous broken window theory that says when we allow one window to be broken, all that remain will be shattered within days. It's never too late to improve our legal climate and apply common sense to taxation issues. Our general well-being, after all, depends far more on the strength of our society than on the quality of our burglar-alarm systems.

John Adams and our founding fathers placed a premium on the need to develop a large, strong middle class. They specifically cited the need for a strong educational system. They gave us a great start over two hundred years ago, but to build further we should start by asking, "What do we have to lose?"