09 March 2012

The Richer Rich in the United States

The figure above comes from a column by Allan H. Metzler in today's WSJ. He argues:
Regardless of one's economic philosophy, the public deserves an accurate presentation of the reasons for the change in income distribution. The change is occurring in all the developed countries. The chart shows that policies that redistribute wealth and income have at most a modest effect on income shares.
While he is correct that gross trends are similar across countries, he underplays the rather remarkable acceleration of income share captured by the top 1% of earners in the United States, which has continued since the end of the data period shown in the graph. Is that acceleration a function of policy decisions? Of course. On that point Metzler is letting his economic philosophy speak rather than looking closely at what the graph actually suggests.

12 comments:

  1. Ian Fletcher argued last year in his HuffPost blog http://www.huffingtonpost.com/ian-fletcher/the-theory-thats-killing-_b_846452.html
    that our embrace of free trade and the "dubious assumptions" (he lists seven) of the theory of comparative advantage are ruining our economy and contributing to income inequality by driving up need for white color jobs while driving down need for blue collar jobs. Rings true to me, but I'm not an economist.

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  2. You ask if the remarkable acceleration of income share captured by the top 1% of earners in the US is a function of policy decisions, and answer in the affirmative. With the dotcom boom and crash appearing at the far right of the graph, I presume the policy you have in mind, at least for the Anglo-Saxons, is avoiding confiscatory tax rates for those at the top, enabling those who assume higher responsibilities, take on more risk, work harder, or happen to offer a skill or talent that’s in demand at a given time to keep more of their earnings.

    But in the article Metzler writes: As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can't be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%. (Emphasis added.)

    What I think it does show is that there’s no cap on income in those countries, but it tells us little about the rest of the income distribution. However wide the spread may be, just because those at the top earn more does not mean that the rest earn less.

    Billboard magazine reported today Taylor Swift is at the top of the Artists’ rankings for 2011, earning more than $35M, beating out U2, Lady Gaga, and all the others. That figure does not factor in "sponsorships, merchandise sales or synchronization deals."

    That she did well has no real effect on salaries in the NFL, wages paid at the Lordstown GM plant, McDonald’s total payroll, and so forth. Her success may have reduced U2’s and Lady Gaga’s incomes a bit, but only because they’re competing for finite entertainment dollars.

    I note too that that chart does account for the annual income of those who make their tax home in any one of the places worldwide that levy miniscule taxes on income and investment. Celebrity tax-avoiders like Bono are often criticized as hypocrites for urging nations to ship taxpayers’ funds to far-off lands while they shelter their earnings in some island nation’s bank. Geographic tax schemes attempt to limit such loopholes, but 100% success is ephemeral.

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  3. Note that Gordon Brown, the late unlamented British PM, tried to ameliorate the British budget deficit by instituting a 50% tax rate for the very wealthy. It brought in far far less than expected, because the wealthy liquidated capital holdings and took them as income before the tax went into effect, and are now structuring their incomes as unrealized capital gains in order to wait out the 50% bracket (and engaging in other sorts of tax evasion). Now some British pols want to go after them with a wealth tax. The lesson they stubbornly refuse to learn is that in a world where you can move large sums of money with a mouse-click, flat footed bureaucrats in the IRS and similar revenue-gathering agencies are hopelessly over-matched. A billion dollars gives you, above all else, the tools and the freedom to allow you to protect that billion dollars from predators.

    I fully expect reversal of the Bush tax cuts on the wealthy to have similarly disappointing results.

    An interesting point was made in Michael Lewis's Boomerang: German bankers' salaries are far less munificent than those here or in most other Western countries. The reason, according to Lewis and his sources, is primarily cultural, not policy. There is a deeply ingrained cultural prejudice in Germany against the sort of high-risk, high-reward banking practiced in some of the rest of the world. I suspect this may be true to a lesser extent in Sweden and Holland.

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  4. I think all the chart shows is that the 'rewards of innovation' are flowing to individuals rather then widely held corporations.

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  5. .

    The most relevant and unanswered question about this graph is, "So what?" Please explain how anyone would be better off if the top 1% earned less. Please explain how the US would be better off if that inequality were reduced by Bill Gates and Warren Buffet moving to another country.

    .

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  6. I'd like to see the EU27 in the graph. Their combined GDP is about the same as ours. Economic size should relate the size of opportunity to become wealthy.

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  7. The graph is for household income which makes historical comparisons somewhat questionable. From the census bureau:
    http://www.census.gov/prod/2009pubs/p20-561.pdf
    Sixty-eight percent of households in 2007 were family households, compared with 81 percent in 1970.
    The proportion of one-person households increased by 10 percentage points between 1970 and 2007, from 17 percent to 27 percent.
    Between 1970 and 2007, the average number of people per household declined from 3.1 to 2.6.

    In 1980 the census bureau reports there were 82,368,000 households for a population of 226,545,805. In 2010 there were 118,682,000 households for a population of 308,745,538. If the demographics of the households 2010 were the same as they were in 1980 there would be about 6.4 million less households in 2010. This would result in the bottom 5% of top 1% households dropping out of the top 1% bracket.
    I don’t think it is unreasonable to suggest that divorce and single parent households are more prevalent in the lower income brackets and that is where I would expect to see the decrease in the number of people per household.

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  8. Roger,

    You say "Is that acceleration a function of policy decisions?" Well, maybe. Make your case. Can you explain, for example, on the basis of policy why the U.S. had a huge jump in 2007 - 2008 (which seems to be the only reason the U.S. is far above other countries) and then accelerated again after 1993? Certainly Metzler seesm to be correct that the broad trends are universal, so you are left to explain only finer details based on policy. Can you do it?

    My own take is that growing income gaps would be expected in innovation-based economies, where small numbers of innovators shift the wealth balance to themselves by creating products everyone wants. The tech revolution of the '80s - '00s comes to mind. But then, that may just be MY economic philosophy coming through. ;)

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  9. -8-Brian

    Thanks ... the case has been made elsewhere pretty good, see, e.g.,

    http://whynationsfail.com/blog/2012/3/9/is-the-one-percent-the-same-everywhere.html

    http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf

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  10. Roger,

    Thanks for those helpful links. But I don't see how they make the case you're trying to make. Look at two quotes from the first link:

    "It is true that there have been important global trends — in particular, skill-biased technological change and growing international trade — increasing the demand for skills."

    and

    "it is not clear how the changes in the demand for skills explain the pay explosion for the very very rich. Have technological change and trade with China really increased the demand for the skills uniquely possessed by bond traders and Enron executives all that much?"

    There's less a case being made here than doubts being raised.

    Looking at the data in the second link, the answer to the above question seems to be yes, technological change explains it all, as I argued briefly above.

    Glance at Figure 1 from AP&S. Income share for top 10% is basically flat around 45% from 1921 - 1940. Huge upheavals and changes in policy--the Great Depression and New Deal--have NO significant effect. The share plummets during World War II. Then it stays flat at 34% from 1947 - 1978. Huge changes in policy--Great Society, anyone?--have NO discernible impact.

    The change that has occurred since 1977 shows no obvious correlation with policy, in particular the Reagan tax cuts so often criticized in this context. What I see, instead, is the increase starting in 1978 with the PC. The trend plateaus shortly after Windows is introduced, but takes off again in 1995 when the Internet explodes. A temporary crash occurs with the bursting of the tech bubble in 2001 but it moves on and continues apace. Tech explains every little detail. There's no room for policy there.

    And why would the U.S., Canada, and G.B. show the greatest change in wealth inequality? Because the tech sector started in the U.S. and spread most easily to culturally similar nations. Note that those two same nations are very different from the U.S. on policy issues, but have seen the same changes.

    It's all about tech, culture, and opportunity, not policy. Honestly, if seismic policy shifts like the New Deal couldn't budge share of income, could any of the more recent, piddling policy changes have any measureable impact? Highly unlikely.

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  11. "Please explain how anyone would be better off if the top 1% earned less. Please explain how the US would be better off if that inequality were reduced by Bill Gates and Warren Buffet moving to another country."

    I think Roger is proposing that Bill Gates and Warren Buffet be taxed more heavily. I think he'd agree that, if they left the country for that reason, we wouldn't be better off.

    It's unclear to me what their actions would be, but my guess is that neither of those two would leave the country.

    But that's just my guess at what Roger's proposing. ;-)

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  12. This graph is quite worthless because income is generally unknown. People hide their income and income is attributed to persons and other entities like corporations in different ways. My experience in dealing with European medium sized companies is that tax evasion is extremely widespread and thus much income of the upper crust is hidden. Rich Europeans commonly avoid taxes by taking up legal residence in tax free countries, something that is impossible for Americans.

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