Long term gains in worker productivity are the source of stratospheric hedge fund compensation.
By Les Leopold
In order to make huge sums of money in the hedge fund game, you need access to huge sums of money. That's how you can place bigger and bigger bets. Where does all that money come from?
Comparison Of U.S. Productivity And Weekly Wages
To find answers we need to look at the following chart -- the comparison of U.S. productivity and weekly wages.
Productivity is one way to measure the wealth of any nation. It's not perfect by any means but it gives us a fairly good idea of the overall level of our collective skills, technology, knowledge and work organization. Productivity is calculated by adding up the total amount of goods and services our economy produces in the private sector and dividing it by the number of hours it takes to produce it all. As the top line (red) below shows, we've been producing more and more per hour since World War II.
The blue line shows average weekly wages (after factoring out inflation) for non-supervisory workers (who comprise about 85 percent of the workforce.)
From World War II to the mid-1970s, those two lines danced together. As productivity rose, so did the standard of living of working people. But something big happened in the mid-1970s -- the government adopted a new economic philosophy based on deregulation and tax cuts.
The combination was supposed to lead to an enormous investment boom to make all boats rise. But most boats took on water. The average weekly wage stalled and then declined even as productivity continued to rise.
Where Did The Money Go?
The gap between those two lines represents an enormous amount of money -- more than $3 trillion for 2012, for example. Where did it go?
As finance became more and more deregulated, Wall Street incomes began to skyrocket. The chart below is remarkable in two respects. First, its shape virtually mirrors the productivity/wage chart. Second, it shows that during the era of tight regulations, incomes on Wall Street were no different than the rest of the economy.
Oh, did that change.
As CEOs watched Wall Street salaries mushroom, they also got into the act. Thanks to deregulation, they could move their factories all over the globe at will, thereby neutering the power of labor to maintain high worker wages. Wall Street also taught corporations how to extract more money from their firms through mergers and piling on debt. It worked ... for CEOs and Wall Street.
Comparing CEO to Worker Compensation
The chart below compares the compensation packages of the top 100 CEOs to the average worker. In 1970 for example, for every dollar earned by a worker the top CEOs averaged $45 each. By 2006, the ratio had jumped to $1,723 to $1!
Overall, there was a remarkable jump in the percentage of our national income that went to the top 1 percent. In the early 1970s, less than 9 percent flowed to the top 1 percent. By 2007, it was nearly 24 percent.
There's your casino money. There's the money that flows into hedge funds.
It's the gap between the productivity and average worker wage lines. The bankroll that stakes the high rollers comes from the productivity bonus you're no longer earning.
Step 3: Rip off Entire Countries Because That's Where The Money Is
Step 2: Take, Don't Make
Step 1: How To Make A Million Dollars An Hour In Twelve Easy Steps