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EXPLAINING INEQUALITY.
Economists Ian Dew-Becker and Robert Gordon are responsible for one of the foundational findings in the inequality literature, namely that only the top decile of the income distribution has seen productivity growth show up as wage growth. The bottom 90 percent have basically seen stagnant wages and little in the way of productivity gains. they make another interesting point today when they argue that you essentially have to understand the economy as having two regions: The top ten percent, and the bottom 90 percent. Each region is seeing massive inequality, but for different reasons.
For the bottom 90 percent, you've got skills premiums (though it's not really towards technology so much as towards managerial skill. "During 1979–97 fully half of the growth in the college wage premium can be attributed to the increased relative wage of the group called 'managers,' and only 17 percent to the computer-related occupational groups," they say), declines in unionization and the minimum wage, outsourcing, global competition, and a slowdown in the rate of growth of the relative supply of college-educated workers (as a proportion of the total workforce).
For the top ten percent, you have to delineate between the "superstar effect," wherein public figures (actors, musicians, sports stars) now have a much wider world of possible consumers, and so can become global figures with all the associated gains. This, they say, reflects "market forces." Conversely, for CEO pay, "there is strong evidence that incomes have been driven by non-market forces," including peer effects and cozy board relationships. That requires legislation.
It's provocative stuff, though probably only part of the story. The increasing financialization of the economy, for instance, really erupted after the late-90s, which may be why it plays such a small role in their story, but hedge fund managers and i-bankers have a real role in top decile inequality, and it's not explained by either CEO pay or superstar effects. In the bottom 90 percent, there's been a real tilt in public policy, not to mention tax rates, towards upward redistribution and reduced worker bargaining power. In the aggregate, what we're basically seeing is that there are a ton of factors contributing to inequality. Changing them in the economy would be almost impossible. Redressing them through the tax and social policy systems would be considerably easier.
COMMENTS (10)
Here's a weird idea: bring back the 50% and higher tax brackets, but at income levels where few would argue with them.
For instance, something like this:
Bracket Income
40% >$1 million
50% >$10 million
60% >$50 million
70% >$100 million
80% >$500 million
90% >$1 billion
Sure, the right-wing flacks will probably yammer a bit, but how many voters would object to those brackets?
Posted by: low-tech cyclist | June 20, 2008 3:41 PM
Changing them in the economy would be almost impossible. Redressing them through the tax and social policy systems would be considerably easier.
Marx really liked egalitarianism, too. Can't have high producers being rewarded.
Posted by: El Viajero | June 20, 2008 3:50 PM
Who pays higher taxes (i.e. if there was a 50%+ tax bracket)? Mostly professionals like lawyers, engineers, and doctors. Capitalist pay 15% capital gains on most of their income. Compare this with Russia 13% and HK 16%. If US capital gains tax were to rise (given our globalized world) don't expect rich capitalist Americans to stay around because of I don't know patriotism.
America has always been protected by either being the only rich economy in the world (1950-1970) or by having some of the lowest global tax rates. Perhaps there is a reason (i.e. tax competition) why countries like Brazil and Mexico don't fix their inequality through taxation. Anyways quixotic liberals should be a little more pragmatic in their attempt to rid the wealthy of their riches. Two words: tax harmonization. Or of course there is Obama-style protectionism (patriot employer act) but that is really messy and harmful to everyone.
Posted by: Gordon Gekko | June 20, 2008 4:56 PM
Why can't the superstar effect explain high pay for hedge fund managers and other finance professionals? The best of the best attract lots of investors and control very large asset pools. Finance is an industry where a single person's role can scale up easily. That's the basic criterion for an industry with superstar effects.
Posted by: FXKLM | June 20, 2008 4:57 PM
FXKLM: Quite. Hedgies are indeed exhibiting "superstar" type pay.
Posted by: Tim Worstall | June 21, 2008 6:33 AM
For us semi-wonks, can someone please define "financialization of the economy"?
Posted by: GK | June 21, 2008 8:52 AM
"If US capital gains tax were to rise (given our globalized world) don't expect rich capitalist Americans to stay around because of I don't know patriotism."
Go for it, Gecko. These "capitalists" will find out REAL quick that they need us a lot more than we need them. Do you really think they'll abandon the US market because of high tax rates?
Really?
Posted by: Herb | June 22, 2008 3:03 AM
They already have, Herb.
Where do you think LTCM was legally based? Why? You haven't a clue where most hedge funds and other capital firms are based, and even the big ones are rapidly moving to London.
I know Wall Street is the "bad guy" despite paying the freight for all of New York State, but it is losing business at an alarming rate. But who needs 'em, right?
Posted by: James Feldman | June 22, 2008 6:54 PM
We are now getting closer to the real underlying cause of income inequality: the explosion of high incomes in the financial services sector. Caused by market failure: these people are being overpaid with other people's money.
Think fund managers, investment bankers, elite lawyers. People not really creating any wealth (refer sub prime crisis) but being lavishly rewarded with ordinarys savers lazily managed capital.
Solution: ordinary investors to take control of their 'lazy' money.
Posted by: Dave | June 22, 2008 11:51 PM
We've already done the experiment. Multi-millionaires are more than glad to put up with 90% tax rates in exchange for U.S. government benefits, and the economy grew quite nicely. It even produced lots of millionaires back in the 1950s, 60s & 70s. The rich always want the lion's share, and if you've read Aesop's fable, the lion's share isn't most, it's ALL. Look it up.
This isn't surprising when you consider that base sources of wealth in our economy, agriculture, mining and manufacturing, are increasingly automated. Even if we didn't import a thing, we'd have barely 20% of the work force in those sectors leaving 80% in generally "optional" jobs. (The kind pure Marxists and capitalists would eliminate). That leaves a lot of surplus to be captured, and the lions are always hungry.
(Of course, we do have to blame American workers too. They are all too ready to feed their children to the lions if it keeps them from finding out about the cabbage patch).
Posted by: Kaleberg | June 24, 2008 7:58 PM