More millionaires than ever in an ever poorer state
“The U.S. economy is creating new millionaires at an astonishing rate… more than five times the growth rate of the population” and Connecticut is at the forefront of this trend. Since 2004 the number of state tax filers reporting annual income over one million has grown by over 3,000 and we have more billionaires than ever.
Encouraging as this may seem, all the new wealth has not reversed a decade of economic contraction. Higher paying manufacturing jobs have been outsourced, replaced by jobs paying much less, and this exchange has taken its toll. Connecticut has a smaller economy today than it did in 2004.
State revenue also continues to shrink. Annual revenue growth averaging 10 percent has been edging lower for over a generation. Last year it bottomed out. What is the reason for the contracting economy and shrinking revenue? In large part it’s the same business model of “extracting value” which has led to the rise of millionaires and billionaires.
CEO’s, hedge and private equity fund managers can earn outrageous incomes in the short term by “extracting value.” Once in control of a company, they slash expenses to maximize profit. They cut research and development, cut wages and benefits and outsource jobs. Less profitable locations are closed and new equipment is scaled back. The managers may take out big loans, reward themselves with huge bonuses and pay high fees to themselves and shareholders.
Ever since CEO compensation was tied to stock price, profits have been diverted from wage increases to stock buybacks. This raises the worth of CEO stock options and the value of all outstanding shares. After the CEO or hedge fund manager cashes out and pays the shareholders, the stripped company is often left weakened, saddled with debt and teetering on bankruptcy.
Just recently, Toys’R’Us announced it was closing all stores, including Babies’R’Us. Before being taken over by Bain Capital and two other private equity firms, it employed 97,000 people and was doing well financially. After taking huge bonuses, the private equity fund managers fired one-third of the work force and started closing stores to pay off a $6.6 billion loan they took to buy the business. By 2017 the business was $8 billion in debt and the fund managers declared bankruptcy, leaving 33,000 remaining workers without jobs or severance pay.
Connecticut has the third largest U.S. concentration of hedge and private equity funds busily “extracting value” to create wealth. But for every job cut or outsourced there is corresponding income that won’t be spent and tax revenue that won’t be collected. Whether it is research and development, benefits or jobs, every time costs are cut to maximize profit another ripple of contraction shudders through the real economy.
Fairfield County, which includes Bridgeport, is home to nearly all of the state’s hedge funds. Since at least 2004, income earned in Fairfield County has accounted for between 41 to 43 percent of all Connecticut’s Adjusted Gross Income and a nearly equal proportion of income tax revenue. This is more than double the corresponding amounts of the second- and third-highest income counties, Hartford and New Haven. Connecticut leads the nation in the uneven way income is distributed, both within and among its eight counties.
State officials keep a solicitous eye on top income residents, viewing them as the “golden geese” of the state’s economy. Aside from what business practices they may use, what they do with their after-tax income should be of concern. They are raking in at least 80 percent of all new income. They don’t raise wages or create jobs, they just accumulate more wealth. According to Adair Turner, chairman of the Institute for New Economic Thinking, “...a mere 15 percent of all financial flows now go into projects in the real economy. The rest simply stays inside the financial system …” It’s a giant game of “keep away,” where profits are shuffled back and forth between investors, fund managers and Wall Street in a closed loop.
Extreme wealth is being generated at an extraordinary pace, but it’s based on a business model which erodes the state’s revenue and chokes off consumer spending. If over 80 percent of new income goes to those at the very top, but only 15 percent of that is returned to the real economy, how can the state’s economy possibly grow? Surrounding states’ economies have grown, but Connecticut’s extreme income inequality has pushed it past a tipping point. The shrinking Gross State Product tells us we can either have an economy that enriches the few or one that works for all, but not both.
William Buhler of Cromwell is the retired co-chairman of legislative action for CSEA. Paul L. Altieri, Ph.D., is emeritus professor of economics at Central Connecticut State University.