Tuesday, February 28, 2006

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Where's the income beef?

Brad DeLong has a post up about the dizzyingly unequal distribution of income in the United States. He quotes Paul Krugman:

So who are the winners from rising inequality? It's not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that. A new research paper by Ian Dew-Becker and Robert Gordon of Northwestern University, "Where Did the Productivity Growth Go?," gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint.

Just to give you a sense of who we're talking about: the nonpartisan Tax Policy Center estimates that this year the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The center doesn't give a number for the 99.99th percentile, but it's probably well over $6 million a year.... The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that's the real story. Should we be worried about the increasingly oligarchic nature of American society?

I'll confess those numbers even give me some pause -- and I've historically been unfazed by income inequality. And yet, there is surprisingly little grumbling about this within the mainstream political discourse about this, with the partial exception of rising protectionist sentiment. Why?

I'd offer three possible reasons -- all of which could be at work:

1) Those on the bottom of the income spectrum are increasingly tuning out politics -- call this the Hacker-Pierson thesis;

2) Those at the bottom of the income spectrum believe that they will eventually rise to the top of the income spectrum, and therefore see no reason to complain -- call this the David Brooks thesis;

3) Income is not the only measure that counts in evaluating Americans' well-being, and on other factors, the distribution of gains is far more even. I can think of two economic benefits in particular:

a) Asset prices. Americans have done well the past decade not through income gains but capital gains, in the form of their stock and housing portfolios (not to mention intergenerational wealth transfers). These gains have been impressive even given the bubble-like quality of some of the rise. While I have no hard data on this, and will gladly welcome empirical falsification, my hunch is that these gains might be more evenly distributed than rises in income;

b) Leisure. I've blogged about this before, but Virginia Postrel has an excellent New York Times summary from last week. The key point -- the gains in leisure are particularly strong at the bottom of the income spectrum.

c) Consumption. Inequality in consumption is not as stark as inequality in income. Furthermore, in many areas productivity gains have drastically lowered prices. Daniel Gross touches on this point in his Slate column on Chipotle and other restaurant IPOs:

[T]he restaurant industry has done a Wal-Mart. Through tight control of sourcing, a focus on logistics, and a firm rein on labor costs, it has managed to keep a lid on inflation. Yes, a Big Mac costs more than it used to. But virtually every fast-food joint still has a 99-cent menu. And it's not just fast food that's cheap. As noted in this space in 2004, between 1982 and 2004, according to figures provided by the ever-expanding Zagat survey, the average cost at the same restaurant rose from $29.23 to $50.32, a 2.62 percent annual rateósubstantially below the rate of inflation in that period.
Even if incomes are stagnant, there is a large category of goods for which more can be purchased for less.
Call this the Drezner thesis -- unless I'm wrong, in which case call it typical half-assed blog analysis.
I'll be happy to entertain other hypotheses.

UPDATE: One additional hypothesis that is clearly emerging from the comments is that the growth in income inequality does not generate resentment because of the changing sources of that income. The rich are no longer rich because of inheritances, but because of their own effort. To explain, let me quote from Rajan and Zingales, Saving Capitalism from the Capitalists, page 92 yet again:

One statistic best sums up the changes that have taken place: in 1929, 70 percent of the income of the top .01 percent of income earners in the United States came from holding of capital -- income such as dividends, interest, and rents. The rich were truly the idle rich. In 1998, wages and entrepreneurial income made up 80 percent of the income of the top .01 percent of income earners in the United States, and only 20 percent came from capital. Seen another way, in the 1890s the richest 10 percent of the population worked fewer hours than the poorest 10 percent. Today, the reverse is true. The idle rich have become the working rich!

Instead of an aristocracy of the merely rich, we are moving to an aristocracy of the capable and the rich.

ANOTHER UPDATE: James Joyner still wants someone to show him the money.

posted by Dan on 02.28.06 at 10:12 AM


Take a look at Bush's poll numbers and then try again.

People are getting angry every time they go to the gas pump or pay a natural gas bill (retail gasoline prices bounced up 40 cents this week in this region, at every station).

Take a look at pension implosions, business bankruptcies, etc.

Perhaps academia is a little to sheltered these days :-))

posted by: save_the_rustbelt on 02.28.06 at 10:12 AM [permalink]

True enough, STR, but higher gas prices and natural gas bills are not things people ought to be angry about -- unless you think they should be angry at tree pollen and cloudy days too. They are the product of rising demand and limited supply, and from a policy standpoint one could make an argument that the only thing government has done wrong is to not push up energy prices through taxation long ago.

Inequality of income, by itself, is not something that concerns me. As physical labor became less useful as a means of producing wealth -- and it has for decades now -- the great mass of people who had mostly physical labor to offer were bound to be disadvantaged economically. There is only so much anyone can do about that. But it seems to me that there is at least one obvious policy implication of the increasing concentration of wealth.

This involves taxation. Federal deficits, to the extent that they cannot be addressed through spending reductions, have to be addressed through tax increases. These in turn will have to be applied primarily to the income and assets of the relatively small part of the population with very high income and very large assets. If federal deficits were not as enormous as they are now -- and if they were not dwarfed by the near-term future obligations connected with the aging baby boomers -- the issue might appear differently. But from an accounting standpoint the course we will have to follow seems pretty clear. If this course has some implications for income inequality, or wealth inequality, over time, well, then it does, but the reason for it is to fund the government rather than to reengineer the society.

posted by: Zathras on 02.28.06 at 10:12 AM [permalink]

What do these 300,000 (99.99%) people do?

Are they consistently the same people every year?

posted by: Chad on 02.28.06 at 10:12 AM [permalink]

The explosive growth of income at the highest end seems to be due to rewards for labor, not capital, i.e., they earned it. People know this and so don't complain.

The explanation I've read is that big winners got that way by taking successful risks as well as being highly competent in their fields - it's as much attitude and behavior as skill sets.

This is the American dream - success depends on who you are rather than what you are. The lack of envy here is due far less to expectations that you too can rise to the top of the heap than a requirement that the envious first reject the American dream - to themselves be something other than Americans.

posted by: Tom Holsinger on 02.28.06 at 10:12 AM [permalink]

What it comes down to is that most Americans are blithely unaware of the degree of income inequality, combined with the fact that while a lot of people aren't happy with their incomes, the degree of income redistribution that we do have keeps most of those at the bottom from being as badly off as those at the bottom in times past.

Even the worst American slums can't match the horrible awfulness of late nineteenth century slums, for example.

posted by: John Biles on 02.28.06 at 10:12 AM [permalink]

Re Chad's question, I think you would have to measure income for an individual over several years to have a meaningful comparison. Incomes at the top of the scale often fluctuate a lot from year to year (as a result of asset sales, for example) and so do those at the other end (due to temporary unemployment)

If single years are being used for comparison, any increases in inequality would be much exaggerated by these factors.

posted by: David Foster on 02.28.06 at 10:12 AM [permalink]

This is where marginal tax rates have a labor market effect. It's Reagan's (the actor) famous quip that he wouldn't make a movie in December. The top half of one percent is responsive to changes in marginal tax rates, while most of us are not - save second earners in married households. Robert Lawson (division of labor blog) has also written about this, though I don't have a citation right now. This is a neglected area of research

posted by: anon on 02.28.06 at 10:12 AM [permalink]

The key point -- the gains in leisure are particularly strong at the bottom of the income spectrum.

You did NOT just write that. My god, you're channelling Andrew Mellon.

Unemployment gives you lots of free time!

But the working people I know "at the bottom of the income spectrum" are working 2 or 3 minimum-wage jobs, just to keep it together.

The best explanation is ideology. As long as we can hate the blacks, the Arabs, the Democrats, etc., then we don't hate the people on top. Oldest trick in the book. Look here for an example, if you need one, of how passions beat out economic interests.

posted by: Anderson on 02.28.06 at 10:12 AM [permalink]

Me, I'm a believer in "trickle up" economics, at least in a well-developed economy: if the bottom 40% or so are doing okay, then the top 60% will do fine, as money follows its natural tendency to flow up the chain. Inequality only matters if the bottom 40% aren't doing okay. As for "okay", well, perceptions matter. Are those in the bottom 40% able to tell themselves, "Yes, I'm better off than I was a few years ago"?

It is increasingly difficult for them to make that statement. Consistent higher-than-CPI increases in health care and higher education costs hit hard. Erosion of benefits at work make them nervous. Once it becomes more difficult for them to think that they'll be better off in the future than they are now, then inequality will start to matter much more. There will be a tipping point.

posted by: Michael Cain on 02.28.06 at 10:12 AM [permalink]

The unfailing inability of most Americans to spend time worrying about the things that Liberal Academics think they should be worrying about leads Academics to wonder what's the matter with Kansas. I call this the Kansas syndrome.

What the Kansas syndrome really demonstrates is that Liberal Academics are clueless and out of touch with their countrymen. Most Americans know that envy is a vice, and they are grateful to God for allowing them to live in the most prosperous, freest, most moral and greatest nation in the history of the world.

Liberal Academics, OTOH, are atheists who are grateful to no one, and they are consumed with envy because, even though they have cushy jobs with decent pay, great benefits and excellent job security, they think they are smarter than everybody else, and they should be running the world and reaping the rewards thereof. They think they are smarter because they did the best in school. That of course, and four dollars, will get you a cup of coffee at Starbucks.

The truth is that life is not an IQ test, success, wealth and power do not accrue to the best in school, but rather to those who can achieve results for their customers, clients or constituents. Liberal Academics who spend their time engaging in the essentially masturbatory activity of showing other Liberal Academics how smart they are, will never reach the peaks of our society, although they probably get paid a lot more than their marginal product. Knowing this produces envy and resentment, which are the basis of Bush Derangement Syndrome, Kansas Syndrome and Liberal politics in general.

I doubt seriously that the denouement of the current situation will be that Liberal Academics will be acknowledged as the saviors of the nation and empowered. It is much more likely that there will be a tax payer revolt against an isolated and unproductive class of drones.

posted by: Robert Schwartz on 02.28.06 at 10:12 AM [permalink]

Come on, guys. Of COURSE it's not the same set of people every year, and it may be that these are particularly volatile incomes (which you would expect to see more often at the extremes) - but that just explains why the streets aren't running with the capitalists' blood.

That doesn't change the problem that even if (utterly implausibly) everyone makes it to the 90th percentile in income at some point in their lives, they are living in a mediocre economy.

posted by: Matt on 02.28.06 at 10:12 AM [permalink]

My personal hypothesis is that the US is so segregated that people don't notice. People in working-class neighborhoods don't see conspicuous consumption except on TV -and for a variety of reasons seeing something on TV doesn't affect you in the same way as seeing things up close. The only poor people who see conspicuous consumption up close -like maids- are immigrants and they don't have much of a voice.

posted by: Virgule82 on 02.28.06 at 10:12 AM [permalink]


It's actually less than 300,000 in the top .01%. The percentiles are defined by tax returns with wage income, which means it's only about 115,000 returns. They're mostly CEO's and executives since this income is just wage and salary income, the stuff you seen on your W-2.

the interesting thing is that if you just look at the top .01%, regardless of the source of income, much more of the income of that group now comes from wages than in the past. Capital income, i.e. returns to wealth like owning a company or stock, has actually moved down the income distribution somewhat. But the bigger effect is just that those with a lot of capital income also now have enormous amounts of labor income.

posted by: Ian D-B on 02.28.06 at 10:12 AM [permalink]

I think Virgule is correct. This is why most of the anger directed at the 99.999th percentile comes from people in the 90-99th percentiles (people like Brad DeLong or Paul Krugman for example). We are the people who rub against the ultra rich and they piss us off. We are the ones who recoil in horror when someone builds a megamansion in a leafy tasteful suburb or clogs up the parking lot at Whole Foods in a ridiculous Porsche SUV. People living in say Jamestown, NY or Prairie du Chien, WI don't really see the ultrarich, or if they do don't distinguish them from anyone else in the upper 90s.

posted by: Vanya on 02.28.06 at 10:12 AM [permalink]

"The explosive growth of income at the highest end seems to be due to rewards for labor, not capital, i.e., they earned it. People know this and so don't complain."

Yeah, like the executives at Delphi who are getting retention bonuses after running the company into the ground ("we have to keep our talent"). Also GM, Ford, United, Delta, K-Mart, Timken, etc. etc. etc.

In the midst of Bush's outstanding economy some states are setting records for personal bankruptcies and home foreclosures.

The 2006 election will be interesting. The 2008 election may be even more interesting.

And finally, look at Bush's poll numbers.

posted by: save_the_rustbelt on 02.28.06 at 10:12 AM [permalink]

A better metric would take a sample of say, 5 years. That having been said using, the flawed metric the US is as unequal as it has been since the 20s and to top it off "mobility" is falling as well.

As for assets explaining away the problem....50% (and rising) dont own a single share and 30% dont own a house.

Ignorance is bliss!!! The fact that supplier of body armour for our troops for operation Iraqi freedom made enough at the public trough to throw a 20 MILLION dollar birthday party for his daughter is simply lost on most of the nation.

In a meritocracy some uneveness is expected and healthy...but it is really getting crazy.

posted by: centrist on 02.28.06 at 10:12 AM [permalink]

Gosh, I must be part of the Super-Duper-EXTRA-
Super-RICH. Between 1972 and 2001 my personal
wages and salary increased by more than 14,250%!

I just knew that getting a College Degree and
working in office job was way better than not
going to college and continuing to mow lawns.

Of course, the base I'm working from in 1972
was probably a bit lower :-} than these brilliant
academics were using. But, then again, I imagine
it would have put me near the lowest percentile
of income, even back then.

As Disraeli may likely have said ...
"There are lies, damn lies, and Statistics".

posted by: Ted on 02.28.06 at 10:12 AM [permalink]

The top 1% of the income stream is essentially the top executives of the major public companies.

There was a major shift in the way they were compensated in the late 1970s, early 1980s. So that their incomes came to be determined much more by the stock market. So the big gains in the top 1% they are talking about occured during the 1990s and the share going to this population segment has been stable since 2000 because the stock market has been flat.

Interestingly the idea behind the change in the way top executives were paid was to closer aline their incentives with stock holders interest. The share of the pie going to top executives has grown massively, but there has been no shift in the long term growth rate of the part of share prices they influence. Long term earnings growth is still some 7%, what it has been since WW II. So it looks like the CEOs have taken shareholders for a ride and stock owners have a real "agent" problem.

posted by: spencer on 02.28.06 at 10:12 AM [permalink]

There were approximately 130 million tax returns for 2003. So the top 0.01% would be about 13,000 people. For 2003 these would be the people making a bit more than 5 million dollars(the number making more than 5 million is 17,294; the number making more than 10 million was 6,126).

The IRS publishes data for high income tax returns each year(`high income' meaning more than $200,000. This number was set in 1972). In addition they published a report on the top 400 returns a couple years ago that was rather interesting. You can download these from the IRS website: http://www.irs.gov/taxstats/productsandpubs/article/0,,id=130681,00.html

posted by: izzard on 02.28.06 at 10:12 AM [permalink]

Ted, don't be like that :) Even if the increase in per capita GDP was 0 during that period you would still gain in income as you gained in experience. We are abstracting from the career cycle here ... (and did you count inflation?)

posted by: Matt on 02.28.06 at 10:12 AM [permalink]

Those posters here who decry this inequality ignore the entrepenurial income earners and stock-option rich employees.

For them the truly high earners are only bureaucratic-type executives. For them the financial rewards for successful risk-taking do not exist. For them what you are is more important than who you are. It is very important for them that these beliefs be true.

Ask why.

posted by: Tom Holsinger on 02.28.06 at 10:12 AM [permalink]

Why divide by tax returns instead of total population?

posted by: Chad on 02.28.06 at 10:12 AM [permalink]

I especially love the Toms of the world, who smear anyone bothered by increasing inequality. As if the status quo couldn't possibly be leading to a non-optimal outcome. I bet I could predict Tom's views on quite a number of topics ...

posted by: Matt on 02.28.06 at 10:12 AM [permalink]

I'm glad someone else caught the math error- the top 0.01% (i.e. the 99.99th percentile) is in the neighborhood of 10,000 people. That's really not alot of people. We've probably heard of a healthy chunk of theme (maybe 10%)-Bill Gates, Dan Rather, athletes, entertainers, a few CEOs (Lee Iacocca, etc), add up all the famous people you've heard of and you are probably approaching 1,000 names. The rest are made up of CEO's, owners of companies and corporations (the owner of a local shoe chain or car dealership, etc), and old money.

Why don't people care about this? Is democracy really threatened by the fact that Tom Cruise earns $20 million per picture? Or that the most successfull car dealer in my hometown earns $6 million a year? Or that Oprah Winfrey is a hundred millionaire? Get past the populist rhetoric, and I'd say most people just don't see the threat.

Also, I believe one main reason why people don't care is because the gulf between the top 10% (or top 1%) and the those below just isn't that big-its big in raw numbers but its just not that big in terms of quality of life. I live in a $150,000 house (in the Midwest). Within 1 mile of my house are $2,000,000 houses, which I drive by every day, and $50,000 houses. I'm not sure what progressive cause I should be thinking as I drive by: "My God, how can I live in the presence of such a well groomed lawn?" or something? The knowledge that they can afford to fly more often than I can? They eat more steak? What? Ultimately, I think people aren't especially resentful of the superrich because there just aren't that many of them, and it just doesn't reallly matter whether they exist or not.


posted by: Steve on 02.28.06 at 10:12 AM [permalink]

For the larger disparity I blame Pro Sports. The number of folks who make enough money in sports to qualify to be in the top 99.9% (1.6M annually) of income earners has risen from a handful in 72 to probably better than 3000 (most MLB players earn better than that, most NFL, many NBA, most NHL, many PGA golfers, many NASCAR drivers, etc, add coaches and execs to the mix and that's a conservative estimate), acrosss all sports. Add to that the retired players who played after the mid 80s when salaries rose and you have individuals sitting on true wealth and can make this list for the rest of their lives given decent money management.

Another big boost to high income earners would have been the flight of capital from Hong Kong in the mid 80s when folks weren't so sure about China's intentions towards HK. That was a most unusual refugee crisis, given that those refugees were already multi-millionaires, some went back when it looked like China wouldn't get too redistributive on the rich in HK, but many more stayed and have become part of the wealthy in the U.S..

Small unexpected groups like these can show a big change on the appearance of wealth when comparing such different economies as 72 to 01.

(and besides my tongue may be planted in my cheek should any of these speculations prove utterly groundless, if Prof. Drezner can give himself an out in his post, I can give myself an out in the comments)

posted by: XWL on 02.28.06 at 10:12 AM [permalink]

a) Asset prices. Americans have done well the past decade not through income gains but capital gains, in the form of their stock and housing portfolios (not to mention intergenerational wealth transfers). These gains have been impressive even given the bubble-like quality of some of the rise. While I have no hard data on this, and will gladly welcome empirical falsification, my hunch is that these gains might be more evenly distributed than rises in income;

As I recall from soc. 101, wealth is distrubuted even LESS EVENLY that income. Much less evenly!

posted by: centrist on 02.28.06 at 10:12 AM [permalink]

Your comment may be true, but technically it is irrelevant: the statistics relate specifically to income (i.e. top 0.01% of income earners). Asset growth certainly contributes to the increase in wealth (of course). But its not clear whether it contributes to the increase in income.
Interesting estimate: if you are correct (that there are 3000 top earners in sports, rather than a few hundred as I estimated), then that dramatically changes my own speculation. If we can estimate that 3000 of the top earners are sports guys (plus, movie stars, musicians, producers, etc), we could conceivably say that most Americans have heard of close to half of the superrich (say 5,000 of the 10,000)-and they're just a bunch of celebrities. I just don't see American democracy being threatened by the celebrity class (the celebrity class does have impacts-many negative-on the country. But class warfare, or a political aristocracy, doesn't seem to be one of them, Barbara Streisand notwithstanding).


posted by: Steve on 02.28.06 at 10:12 AM [permalink]

Based on Krugmanís threshold of $6MM to enter the 99.99 centile and comparing it with http://www.nber.org/data-appendix/w8467/w8467-app.pdf (See data on pg 23) of a 1998 threshold of $3.62MM, isnít that about a 7.5% increase in income year after year?

Iím not sure if that qualifies as raping and pillagingÖ

posted by: Kostoglotov on 02.28.06 at 10:12 AM [permalink]

Two key point that support and expand 3a of the Drezner theory, found from a quick internet search.

1) Intergenerational Wealth Transfer. A 2003 report published by the Boston College Social Welfare Research Instiute concluded that approximately $41 trillion will be transferred from 1998 to 2052.
"$25 trillion of the $41 trillion transfer will pass from decedentsí estates to heirs. The remaining $17 trillion will go to estate taxes, charitable bequests and estate settlement expenses. It is important to understand that while $25 trillion is going to heirs, that figure is the amount of wealth that will be inherited from 1998 through 2052 by all generations, not just the boomers. Boomers may well inherit $7.2 trillion, but the majority of the inheritances will be transferred to subsequent generations, including the children and grandchildren of the boomers."

Clearly, this is a significant amount of wealth. Given that previous generations actually saved money, it is rather easy for people to be content with a lower income given that the transfer payments are significant.

2) Changings in Lending patterns: Changes in Lending patterns over the last 15 years have significantly benefitted the public, especially those to whom loans were previously unavailable. A recent Fannie Mae report found on housing markets noted that:
"government policies that promote homeownership or facilitate mortgage loans to low-income and minority households are valuable because they work toward building a society with a more even wealth distribution."
Combined with data from a 2004 Federal reserve speech that stated:
"Subprime mortgage loan originations rose by the whopping rate of 25 percent per year over the 1994-2003 period, nearly a ten-fold increase in just nine years."
And it is easy to see why the political discourse is not focused on the growing inequality. The majority of people are continuing to increase their wealth and have access to credit.

The underlying cocnern amongst all of this is not so much why people are not in an uproar, but rather when they will be in an uproar. The interest only loan environment can hardly last forever, and eventually rising levels of consumer debt will catch up to people. The political discourse will begin when the first consumer liquidity crunch hits, and people start to feel the effects.

posted by: TBU on 02.28.06 at 10:12 AM [permalink]

I would also recommend Don Boudreaux's argument that inflation-adjusted median wages aren't really stagnant because the Consumer Price Index overstates inflation.

posted by: Javier on 02.28.06 at 10:12 AM [permalink]

well, similar to the hacker-pierson thesis, but seen from a supply-side perspective of politics, it could be that politics has an inherent tendency to be hard on the anonymous masses and nice to the acquainted few. you may call this the "bounded cordiality thesis".

posted by: reformstaub on 02.28.06 at 10:12 AM [permalink]

Did Herrnstein and Murray predict something like this in the "Bell Curve?" That a super smart group of people at the very extreme end of the intelligence bell curve eventually become so rich and powerful that they'd be separate from the rest of us mopes.

Maybe no one wants to hear Murray say, "I told you so."

posted by: Greg on 02.28.06 at 10:12 AM [permalink]

It's actually less than 300,000 in the top .01%.

Well, yes. Multiply 300,000 by 10,000 and you get 3 billion. We don't have nearly that many citizens, much less taxpayers.

posted by: J Thomas on 02.28.06 at 10:12 AM [permalink]

People don't have an income disparity beef because most of us outside the academic world understand that there isn't a fixed, finite quantity of wealth in the universe so that more for someone else doesn't necessarily mean less for us. Below that .1% range, there's also less concern with income disparity because a lot of us recognized that a dollar isn't the same everywhere. I have a lot of friends in the SF area who make considerably more than I do but certainly don't live any better - the 400K house I live in in a Southeastern metro area, in fact forget the house - the lot it's built on would cost 3 to 5 million in the SF suburb I grew up in.

On the other hand, I do have an income disparity beef when execs in the top .1% get paid that kind of money even when they are demonstrably stupid and incompetent - the last CEO of my company destroyed $20B in shareholder value and the careers of about 30 thousand people and walked away with an eight figure severance package.

Practices like that will eventually create a populist appeal for extremely damaging economic policies. One corrective I'd like to see is exponentially harsher treatment of officers and directors in bankruptcy, including joint and several liability for creditor losses.

posted by: J on 02.28.06 at 10:12 AM [permalink]

Did Herrnstein and Murray predict something like this in the "Bell Curve?" That a super smart group of people at the very extreme end of the intelligence bell curve eventually become so rich and powerful that they'd be separate from the rest of us mopes.

You're probably thinking of HG Wells and his brilliant early study, "The Time Machine."

Just call me Morlock.

posted by: J Thomas on 02.28.06 at 10:12 AM [permalink]

Personally I am not concerned about income inequality in itself.

I am concerned that it seems a significant proportion of Americans are losing ground. I fear the inequality may be a sign of an economy that is becoming rigid and more feudal.

I am not sure if government intervention is what reverses this, though I don't think that laws designed to make sure Paris Hilton pays little taxes are helpful. I think those that have do benefit most from our imperfect structures and if they don't like it there are many places in the third world were they will pay little or no taxes.

But even while believing we can take more from the well off, I don't think that this is in itself a solution. And as often proposed by the leftish I think it might hurt the economy by taking too much.

I expect there is going to be growing backlash against the wealthy fueled by the coddling they've recieved recently. Taxes were delayed and not cut, it is reasonable to expect them to pay the interest and the penalties.

But they are not our enemies. Some not all, contribute to social wealth. It's a complex relationship.

posted by: jane on 02.28.06 at 10:12 AM [permalink]

Folks are not upset about income inequality
simply because they are not aware that they
should be upset about income inequality.

And what would folks do about it if they were
aware and upset? Get their Winchester's out and shoot
all of the rich people?


Only 300,000 riches... Heck. America has 300,000 bullets
it can spare.

Where's my Winchester.

posted by: James on 02.28.06 at 10:12 AM [permalink]

Take a look at Victor Yakovenko Econophysics.

posted by: Thomas Esmond Knox on 02.28.06 at 10:12 AM [permalink]

Isn't it also possible that people shift into and out of the top 99th percentile? One person could experience a wealth decline, while another could experience a fantastic increase in wealth that vaults them into the top. In other words, how frequent is the churning?

posted by: Joe on 02.28.06 at 10:12 AM [permalink]

There are some fantastic comments in here, and a lot of great research questions. There are some important things I'd like to note here though. First, while Krugman may not have mentioned it, the point isn't simply how much the top .01% is making. The issue is that when we see all these numbers in the median about the fantastic performance of the economy and how great productivity growth is, it's not at all clear that most people benefit from this growth. In fact, only the top 10% of the income distribution keeps up with productivity growth.

So sure, there are a few people who do ok. Some CEO's, some celebrities, some old money. The problem is that it doesn't seem that the rest of the population shares in the success.

So here's my suggestion that some people might discuss. The standard model that we follow is that labor's share of income (i.e. labor income out of total revenue) is standard. But what if the way wages are determined is just by a conflict between owners and workers (rent sharing)? How could this explain the phenomena that Krugman sees?

I think this is an important argument (one we don't address in the paper) and it has a lot of important implications. One useful one is how globalization hould affect inequality.

posted by: Ian D-B on 02.28.06 at 10:12 AM [permalink]

"In fact, only the top 10% of the income distribution keeps up with productivity growth."

That is the key point. Productivity is going up, and that is supposed to "rise all ships," but the system has been rigged so that most of the benefits go to only those at the top.

posted by: Les Brunswick on 02.28.06 at 10:12 AM [permalink]

"In fact, only the top 10% of the income distribution keeps up with productivity growth."

It may be the key point, but I'm quite confident that its a myth. Despite the numbers, there are all kinds of real world facts that get in the way. Average house size has been growing for decades. The number of people with indoor plumbing, color television sets, two cars in the family, computers, etc etc etc has steadily increased over the last half century. I have seen the economy discussed before, and it always crops up that numbers aren't capturing 'something' -productivity, expectations, or whatever. We all know that we have more than our parents did-that our cars are safer, last longer, are more technologically complex, and so on. We all know that we have more leisure stuff (computers, sports lessons for the kids, wide screen tvs, etc) and houses big enough to keep all that stuff. What standard economic theory fails to capture, I don't know. But it simply isn't true that only 10% of the population is buying big screen tvs, SUVs, and computers.


posted by: Steve on 02.28.06 at 10:12 AM [permalink]

Steve, there's a traditional economist's mistake called "mistaking inputs for outputs". You are making that mistake to some extent.

It isn't an advantage to a consumer to drive a more technologically complex car. Technological complexity is an input, something that might possibly result in a better car. Does it? Fifty years ago if you bought a car, it had cranks to roll down the windows. Today you can buy a car with push-buttons and no cranks. It costs more. When the window breaks, down, you have no choice but take it to a mechanic for a $200-400 repair.

Cars that are safer and last longer are a plus -- other things equal people prefer safer cars, though they won't usually buy a safe unstylish car over a more dangerous stylish one. They pay money for that safety, more than they'd be willing to without legislation forcing them to.

Similar considerations apply to almost all of your claims. People are living "better" and they're paying more than they can afford for it. How does that make them better off?

The big improvement I see is cheap electronics. You have to be pretty poor before you can't get a used Gameboy for your kid.

And the prisons. We have much better prisons now, cheaper per prisoner. And more of them.

posted by: J Thomas on 02.28.06 at 10:12 AM [permalink]

I will point up the idea that the group Dan cites as being the only winners, here, were also the only winners under Jimmy Carter's redistributionist policies... a point not often raised by people complaing about how 'the rich get richer'.

posted by: Bithead on 02.28.06 at 10:12 AM [permalink]

2006 Republican platform:
We promise you more leisure
We promise to raise your credit limit
We promise not just free lunches, but breakfast and dinner as well.

"That's what I'm afraid of"

posted by: Lord on 02.28.06 at 10:12 AM [permalink]

"One additional hypothesis that is clearly emerging from the comments is that the growth in income inequality does not generate resentment because of the changing sources of that income."

Yes and no.

The resentment comes from the belief that the rich own the political system and the game is rigged in their favor.

For a good example, look at the clowns who took over K-Mart a few years ago, took outrageous compensation and loans while bankrupting the company, and then waltzed away.

A Chapter 11 and thousands of lost jobs later, K-Mart is back in business.

There are many more example (Delphi, Delta, etc.) playing out every day. Look at the roster of incompetents who have led GM for the past thirty years - most now enjoying fat, fat retirements.

posted by: save_the_rustbelt on 02.28.06 at 10:12 AM [permalink]

People aren't upset by people that earn it, but they are at people that steal it, and we have seen quite a bit of that.

posted by: Lord on 02.28.06 at 10:12 AM [permalink]

As more work migrates from the making of things to the making of ideas, work has become more capital intensive: we info workers work at computers. The purchasers of our computers correctly think that they deserve a return on thier IT investments. There are however no countervailing winds preventing them from taking all of the returns as though productivity has increased entirely due to capital. This is the reality we see reflected in the statistics. I own my own business so when I increase my productivity, or my employees increase theirs I see it in the bottom line and probably half of our efficiency growth comes from capital investment and half from employee learning. My employees only access to this increase is to threaten to walk ( or my own not so soft heart ). As one would expect, in high skills positions, market pressure comes to bear on me the owner sooner than in non-skill positions and as a consequence skills are more rewarded. However, the productivity growth is all down the line and the lower skill employees have no tool with which to apply pressure to me.

As a business man I like this a great deal, it seems fair. As a citizen I worry about a society in which those low skill people are replaced by keyboard workers in India within the economic sphere: to remove them from my payroll is good for me, but it does not remove them from my society. Ford recognized that he needed to pay enough for his workers to purchase his products and the success of that socio/economic arangement fueled the last century of growth. I worry that if we don't strike a similar deal for the next century, some other economy will and China and India are trying to do exactly that. Our continued success thus seems to hinge on their continued failure which does not strike me as a great long term bet.

posted by: john newman on 02.28.06 at 10:12 AM [permalink]

J. Thomas:
Your comment makes no sense. If cars and tvs and all the 'stuff' in our lives are more expensive (I assume you mean relatively more expensive), then why are there more of them? In other words, if cars were really more expensive (relative to income) today than 50 years ago, there would be fewer cars (or more cars, but fewer something else). But that's clearly not true. There's more of EVERYTHING. More cars, bigger cars, more TVs, more air conditioners, more drugs and health treatment, more and bigger houses, and on and on and on.

And qualitatively, things are much better. Safety/health is one very important thing (cars are much safer, there are more and better drugs and medical procedures, houses are safer, elevators are safer etc etc etc ad infinitum). But beyond safety, stuff is just better (with a few exceptions-fine craftsmanship furniture, perhaps). Really: is there anything you would rather do with 1950's stuff than with 2006's stuff? Drive? Ski? Watch TV? play tennis? Woodworking? Anything?


posted by: Steve on 02.28.06 at 10:12 AM [permalink]

Its to labor? So what. Why should someone whos good at reorganizing a company be worth 50 times as much per hour as someone whos good at waiting table, as opposed to say, 20 times as much per hour (i mean from the "moral" POV, not the marginal productivity POV which should influence policy, of course, but is not the same as the reaction to inequality per se)

I would say the reasons that its not a bigger deal are a combination of the following A. the Brooks hypothesis - to some extent the immigrants keep coming in at the bottom (and dont vote, BTW) and the working class rises slowly up. The members of the native working class who DONT rise up are mad as hell of course, but the ones who do (including quite a few african americans) are pleased to see someone below them, and thats more significant than the concentration at the top B. It IS a big deal, but the anger has been largely captured by protectionists and nativists, due to failure by the left to articulate its position. This latter is do in part to 1. the tendency of many on the left to be captured by cultural issue issues that alienate the working class (see the Kerry campaign, where his stance on taxes was drowned out by everything else) 2. The historic tendency on the left to focus almost exclusively on the bottom of the ladder, rather than on the working class/lower middle class (call this Lindsayism) The dems have gotten better about this, but its still there (Dean, a budget hawk who was a doc in the South Bronx, yeah thats gonna appeal in West Virginia) 3. The failure, not yet lived down, of the health care initiative in '94. That was a genuinely progressive policy, with potential impact on equality, that was mishandled politically, and has made it very scary for centrist dems to touch "justice" issues.

posted by: liberalhawk on 02.28.06 at 10:12 AM [permalink]

I think something thats missed is that the mathmatical differences between the middle class and the top end grows, but there are very fews things anymore that are the the sole domain of the wealthy. For example, coming out of college I stopped at an accura dealership and nearly bought an NSX (it would have been about the only thing I could have afforded for a couple years, but it was doable). I skipped it cause I thought "why buy a new accura when I could buy a used ferrari 355?", and then I decided it wasn't worth $90K for the 20% performance improvement over my 350HP rx7 (bought used for $4K). Thats just the world of cars, there are very few places where average, or below average earners can't aquire the same merchandise as the richest. I've known audiophile burger flippers who have top of the line car stereos that only recently were equalled in factory equipment for luxury cars. The only advantage being rich has now is the ability to have it all at once, super sized, and buy yachts and private jets. (even the jets is debatable, an obsessed friend is working towards one, and currently owns out right a twin prop cessna after trading up several times, 10 more years and he'll probably get his jet). This keeps the obsessive happy, and everyone else is too appathetic to care that they can't own top of the line in every consumer goods catagory, and, with walmart, you can own bottom of the line in every catagory.

posted by: Puff on 02.28.06 at 10:12 AM [permalink]

Steve, there's an issue here of confusing inputs with outputs.

So for example, we have far, far better healthcare now than we did in 1955. Everybody agrees. Look at how much our lifespan has increased as a result. Not very much. Life expectancy improved 5 times as much from 1900 to 1950 compared to 1950 to 2000. It improved faster from 1950 to 1970 than from 1970 to 2000. There's reason to think a lot of this was from things like improved refrigeration and fresh vegetables as opposed to canned, more than from improved medical procedures. So treatment for heart attacks has improved -- you're likely to survive more heart attacks than before but not live much longer, on average. And it's that way with a lot of things, once you're on the brink of death we now have expensive medical procedures that might snatch you back for awhile. And we do have some things like corneal surgery and improved cataract surgery that let some old people see better, and better hip replacements so fewer of them are bedridden their last years. But the results are not nearly proportionate to the expense. Basicly, nobody can afford today's medical care, and to get it you need somebody else to pay for it, you need somebody else to pay your insurance premiums.

You say if autos were more expensive there would be fewer of them. But there aren't. Maybe the question to ask here is, "What portion of your income do you spend on automotive needs?". Only no, with the public on average going deeper in debt, that needs to be "What portion of your yearly expenses go into automotive needs?".

The average household put 18% of its spending into transportation in 1998 or so, but I didn't find a comparative number from the 1950's. Modern cars last twice as long, with far-more-expensive maintenance. If you buy a new car every 6 years instead of every 3 years, is that an improvement?

So, let's say you drive a far more complicated car, and you live in a bigger house, and you use much more air conditioning, and you are going deeper into debt. Or instead of paying off your mortgage you're taking out more debt on it, but that doesn't count because you got such a great ARM. Are you better off?

There's a lot of stuff for sale that you simply could not get in 1955. But the biggest difference I see is that anybody who doesn't have bad credit yet can get a credit line. In 1955 if you wanted a loan you went to your bank and asked them, and they reviewed your income history and demanded all your collateral. Or you went to a small loan company told them your story about why you wanted it, and maybe they gave you the money or maybe they didn't -- based on their judgement about how good a risk you were. All that's gone now. It's turned into entirely your own responsibility to show that you're still a good credit risk this week. And if you're digging yourself into a hole there's nobody in particular to give you a vote of no confidence.

posted by: J Thomas on 02.28.06 at 10:12 AM [permalink]

How about a fourth hypothesis for the list:

People aren't concerned about income inequality because, as has been pointed out in so many comments here, the extremely rich can flaunt wealth better than those with less resources, but in general can't really live significantly better. The RX7 comment by Puff is a good example, as are all the other examples of technology price drops. Also, perhaps there's something in our culture that recognizes envy for what it is and turns away from the left's apoplexy that "that guy has more than me".

posted by: J on 02.28.06 at 10:12 AM [permalink]

there is surprisingly little grumbling about this within the mainstream political discourse about this. Why?

Overwhelmingly, the reason is cheap consumer credit, which (along with cheap imports) has stoked the great middle and lower middle-class consumption binge of the last few decades. This has been made even worse by the shameful binge in "submarket" lending, or what used to be called "loan sharking" before it was made respectable by Citi (cards) and CapitalOne (auto) and the rest of the vultures. The result is that we have a modern version of bread and circuses in which your average security guard or shoe saleswoman earning $25k per year can drive a Mercedes (funded by CapitalOne) or spend $10k a month on all manner of electronic hardware and bling-bling....

If the purveyors of such credit were to slam on the brakes and call in the debts of that majority of US households that a) have negative savings and b) have no hope (unlike recent grads of expensive professional schools) of ever developing significant savings from anything other than the speculative housing bubble, then you'd see a major political realignment overnight.

Could well happen anyway, if Michael Barone's "real estate moms" start to see their housing piggybanks/retirement eggs start to collapse on the east and west coasts.

posted by: thibaud on 02.28.06 at 10:12 AM [permalink]

I haven't read all of the comments, but I'd certainly like to take issue with one thing: Dan's notion that the super-wealthy have "earned" it is ba-lo-ney, unless he defines "earning" it as simply being in the highest echelons of management. I'd hardly argue that the super-wealthy management of, say, Ford has done anything really earn the money they have, other than continue the drive of a once profitable business straight into the ground.

Earning it should involve not only being place in upper level positions of management, but also having actual success. Thus, the CEOs of failed companies given multi-million dollar buyouts is hardly a situation in which they've actually earned a penny.

posted by: Sam on 02.28.06 at 10:12 AM [permalink]

I generally don't worry about income gaps - unless they are rooted in something other than market forces.

posted by: Alan K. Henderson on 02.28.06 at 10:12 AM [permalink]

To add to thibauds' last post, Jeffrey Lacilla at New York University points out in the latest Slatin Report with regard to re-financing,

"So from 1987 to 2005, housing values went up an aggregate of 280%. Did income for people buying housing grow at the same annual rate of 7.7% per year? Probably not, but the crazy mortgage products coupled with the low interest rates makes them feel as if that has happened and thus to buy anyway."

We are simulating an affluent society with Treasury Bonds of dubious value sold to foreigners who's own POLITICAL (note to AK Henderson) futures are contengent on sustaining the US consumer market who are thus obligated to buy our over-ripe T bills.

posted by: john on 02.28.06 at 10:12 AM [permalink]

"there is surprisingly little grumbling about this within the mainstream political discourse about this. Why?"

Working people are too busy with jobs and families to be talking heads. I can't remember the last time I was invited to be on Meet the Press.

Don't confuse a lack of yelling with a lack of concern.

posted by: save_the_rustbelt on 02.28.06 at 10:12 AM [permalink]

Well, think about what happens to lottery winners.


posted by: Wholesomedick on 02.28.06 at 10:12 AM [permalink]

Don't confuse a lack of yelling with a lack of concern.

There is an extraordinary amount of economic insecurity hoverng around the edges of most American lives. That the popular culture and the highbrow culture choose not to focus on it does not mean that it isn't there. The security comes from

1) the complete disappearance of job stability in the corporate world, caused by
2) intensified competition, itself caused in large measure by
3) technology dispersion and innovations in capital structuring, themselves exacerbated by
4) global information and capital flows, which reflect
5) a widening gap in earning prospects between those who have, and are born to parents who have, excellent educations.

Obviously, there's little to be done about globalization, and competition is a good, not a bad thing, so there's no hope of bringing back any job stability anytime soon, if ever. It's true that the same cutthroat competition that now dethrones industry kingpins every few years (as opposed to every 20 years) is what forces prices down, thereby saving working-class American households on average many thousands of dollars per year in real terms over what prevailed in the early 1980s.

However, the growing inequality of educational opportunity is an area where policy, or state intervention generally, can and should make a difference, as is the case regarding equal access to affordable helath insurance regardless on one's employment situation. Re. education, note that the relatively scarce high-quality school districts in this nation all command premium, in many cases, exorbitant, residential real estate prices, which only propels the vicious cycle faster and faster.

For ex., if the only good schools in the South Bay area of the Bay Area are in Palo Alto, Sunnyvale/Cupertino, Los Altos and Saratoga, then those districts will see their (already-scarce) residential housing soar even further into the stratosphere, which means that any household earning less than $200k per year will have no hope of buying a house, hence placing their kids, in those districts. Ditto for every major metro area of this country: wherever you find decent schools, you will also find sky-high, ie inaccessible to anyone but two-income yuppie couples, housing prices.

This is a national problem. It demands a national solution. The American mantra about local control of education must go, since it breeds nothing more than ridiculously bloated school admin and PPE spending that does not find its way into the classroom and does not improve educational opportunities for the 90% of Americans who can't afford to live in Fairfax County, VA or Palo Alto or Brookline MA or Great Neck NY or Highland Park TX or Bloomfield Hills MI or Lake Forest IL. Nationalize the educational curriculum, consolidate school districts across the country and free up 40% of the school budget for smaller classes and higher teacher salaries.

posted by: thibaud on 02.28.06 at 10:12 AM [permalink]

From the Federal Reserve Board's Survey of Consumer Finances, as reported in WaPo:

"[T]he typical American family... has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance...."

A nation of piss-poor, house-rich debtors. Thank your lucky stars that the European politicians and central bankers are so incompetent and the Asian central bankers so generous.

posted by: thibaud on 02.28.06 at 10:12 AM [permalink]

"lies, damned lies, and statistics" Churchill, actually. All of this discussion is interesting, but remember one thing- it will not become pointed publicly until the bill for Bush's recklessness comes due- which it will. God help us all at that point- I hope the American people will have the sanity to figure out a reasonable working off of our liabilities, but I do wonder whether entertainment has corrupted our judgment.

posted by: Severin deMonterey on 02.28.06 at 10:12 AM [permalink]

How about a fourth thesis: ignorance.

Bush et al have been mis-stating the reality of cui bono in terms of their tax and other economic policies since the 2000 campaign, and the media - which could have ameliorated the problem is divided into three camps.

Those that think financial analysis is excessively dry and technical and will not attract readers/viewers. Call this The NBC/CBS/ABC approach.

Those that wrongly but touchingly believe they can disarm the howling conservative media/political axis by being "evenhanded" to a fault; i.e., if the Republicans claim two and two equals five and the Democrats claim it equals four, the story will be headed "Controversy heats up over addition methodology". Call this the NY Times Approach. It must make Karl Rove giggle joyfully to contemplate.

Lastly there is the media arm of the Republican party, Fox News, Rush Limbaugh etc, who simply shout that two plus two equals five and any reports to the contrary come from freedom hating left wing propagandists.

Do you really think that large numbers of the people who would potentially care about rising income inequality are reading Paul Krugman? Or that - given the Big Lie blitzkrieg they've been subjected to for years - they would believe him if they did?

posted by: Len Safhay on 02.28.06 at 10:12 AM [permalink]

It isn't the opulence but the security--that's where the real disparity is between the few at the long thin top tail and the rest of us.

I've got all the stuff I could possibly want. But I don't have a fixed pension. I sock the max into my 403b and IRA, and save every cent I can. I've never even owned a new car--or wanted to. But I'm still concerned that that I won't have enough to provide a secure income for retirement.

Given the absence of safety nets the reason why one wants high income is to sock it away to provide some security. That's what the ultra-rich have that the rest of us don't have.

posted by: LogicGuru on 02.28.06 at 10:12 AM [permalink]

I think the rising stink over CEO salaries shows that people care about income distribution. And, as in the past (say, the French revolution), it isn't necessarily the poorest who care the most. In a winner-take-all economy, it is the middle class that is squeezed and also more likely to have a good understanding of what, exactly, they are missing out on.

posted by: tim on 02.28.06 at 10:12 AM [permalink]

The underlying causes are complex and intertwined, but the general structural engine responsible for the disparity is easy to see. Technology and automation have increased productivity, but at the same time we have passed the point where they increase the value of an hour of labor, which is now in decline. Combine that with the fact that technology now enables us to cross-connect our economy (where the average value of an hour of labor in material terms is X) with economies where the value is a small fraction of X. (See Friedman's book "The World is Flat".) Companies (i.e. owners of capital) scramble to compete with foreign firms or lower their costs through outsourcing, etc. The inevitable result is strong downward wage pressure. But these effects are obscured by the rise of two-wage-earner families and by the fact that the real price of commodities has decreased. In other words, many do not perceive themselves as having slipped as far as they have. But the margins earned by the owners of capital (the managerial class and the few % at the top who have sizable portfolios) have remained the same or increased. Thus, increasing disparity.

But then something worse happens. The combination of foreign liquidity (invested in U.S. securities), government spending and tax policy, Federal Reserve policy, and increased investor assets support a vast expansion of the consumer credit market. So, the folks who moved jobs overseas and forced wages down a notch now loan money to the workering class so that they can maintain their material standard of living. But that amounts to a sizable ongoing wealth transfer.

As long as foreign investors continue to balance our trade deficits, this can go on for a long time -- until the lower- and "middle"-class borrowers are so far in debt that it is no longer conceivable that they can ever achieve a positive net worth. At that point you'd better be living on a self-sufficient farm or holding a lot of really tangible assets.

We have unwittingly built an economic structure that is unsustainable and heading for catastrophy. But there are no easy solutions. The subtlety of any solution set able to disentangle and address these structural issues escapes our government and the ideologies of both the left and the right.

I, for one, am learning how to grow my own food.

posted by: Cotterman on 02.28.06 at 10:12 AM [permalink]

not that GOD

posted by: HARRY DERVOS on 02.28.06 at 10:12 AM [permalink]

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