The Obfuscation Report

Income inequality has increased in the United States over the last three decades, Bernanke said. Income at the 90th percentile of wage earners -- those close to the top -- rose 34 percent between 1979 and 2006, while the wage at the 10th percentile rose a scant 4 percent in that period, he said.

The percentage of total income for the top 1% doubled over that period, going from 8% to 16%, and making it a larger portion of overall income than in any period this side of the Great Depression. This inequity is becoming so severe, that the folks in charge of the economy are now worried that it's making our economy inflexible and leading to instability. Of course, Bernanke is right on top of the causes for this rising inequity.

The chairman, now in his second year, was careful to avoid prescriptions for solving income inequality or concluding that its causes result from any one problem such as executive pay, which he discussed.

"Understanding the sources of the long-term tendency toward greater inequality remains a major challenge for economists and policy makers," Bernanke said.

Um, okay. So the chairman of the Federal Reserve is willing to point to income inequity as a rising problem for the economy, and recognizes this as a concern for more than three quarters of Americans. However, he just can't put his finger on the reason for the rising inequality. Since the nation's chief economic detective seems to be baffled by this mystery, let's pull out the magnifying glass, clamp on a deerstalker cap, and see what evidence we can discover.

Hmm, look over here! It seems that corporations are paying less in salary to workers than every before.

Wages and salaries as a share of the cash corporations generated by producing a good or a service stood at 50.2 percent last year, the lowest in the post-war period.

And over here! Just look at this. Americans are working harder, and being more productive, but they're seeing no reward for their effort.

The U.S. labor force is working smarter and faster with the help of technology, keeping output per hour at a 3 percent average growth rate during the expansion which began in the final quarter of 2001. Still, the productivity gains are not showing up in bigger paychecks.

And what's that behind this huge sack of money? Could it be rising CEO pay?

In the 1970s, corporate chief executives earned 30 times as much as the average worker. Ten years ago, CEO compensation was 116 times the average. CEOs now earn close to 300 times as much as the average worker.

Hmmm, baffling. We've got flat rates of pay for most workers even though they're putting in more effort and productivity is up. We've got corporations being more stingy with salaries than any time in the past sixty years. And we have executive pay going up ten times while everyone else stays flat.

We just can't figure out what could possibly be causing that inequity, Mr. Bernanke. Could you put the clues together for us?

On executive pay, Bernanke noted research that says the economic value of skilled leadership has increased as firms have grown larger. He also discussed the franchise value of star athletes, which has boosted their compensation, citing the 2004 $22.5 million pay package for Manny Ramirez of Major League Baseball's Boston Red Sox. At the same time, he noted research that points to weak corporate governance as a source of high executive compensation.

Ahh! So executives are paid more because their increasing contribution to corporations justifies it, while the increasing productivity of workers is worthless. And besides, baseball players make tons of money. And oh, executives keep rewarding each other with bigger and bigger paychecks because, darn it, they just can't help themselves.

Case closed. We'll all sleep better now.