Driving Forces Behind Rising Income Inequality: Tracking the Internet Debate

To a good neoclassical economist, the statement that the relative price of a factor of production--like the labor of the elite top 1% of America's wage and salary distribution--has risen is the same thing as the statement that the relative productivity of that factor of production has risen. But we need to distinguish between these statements in order to make sense of the ongoing argument between Andrew Samwick on the one hand and Paul Krugman and Mark Thoma on the other.

In a nutshell: Is the statement that there is a higher return to education today merely an assertion that the rich today earn more in relative terms than their counterparts in the past? Or is it also a statement that the rich today are more productive in relative terms than their counterparts in the past?

Andrew Samwick takes the first definition, and concludes that rising inequality is the result of a higher return to education. By his lights, he is clearly correct.

Paul Krugman and Mark Thoma take the second definition and conclude that that rising inequality is not primarily the result of a higher return to education but instead primarily the result of socio-political factors that have raised the relative price of what the rich and well-educated do. And they too have a strong case. Piketty and Saez's latest numbers estimate that top 13,000 American households have multiplied their relative real incomes nearly fivefold since the 1970s. Then they received some 0.6% of national income. Now they receive nearly 2.8% of national income--an average of $25 million each, compared to roughly $5 million each had the relative income distribution remained at its 1970s levels. What are the CEOs, CFOs, COOs, elite Hollywood entertainers, investment bankers, and the very highest levels of professionals doing differently now in their work lives that makes them, in relative terms, worth five times as much as their predecessors of a generation and a half ago?

Andrew Samwick writes:

Vox Baby: Paul Krugman on Inequality: Paul Krugman, a highly educated man, leaves himself out of his own column today in "Wages, Wealth, and Politics." The excerpt:

But [Treasury Secretary Paulson]... [argued] that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that “it is simply an economic reality, and it is neither fair nor useful to blame any political party.” History suggests otherwise...

[Samwick writes:] I'll even agree with [Krugman] about his (later) discussions of where Republican Eisenhower and Democrat Clinton fit in their respective eras. I'll even forgive him the seemingly obvious point that in the "New Gilded Age," the income gains do seem to be at the high end, refuting his critique of Paulson's first point (under the very reasonable assumption that the top 1 percent is on average "highly educated.")

What always puzzles me about Paul Krugman and his claims about inequality is why he doesn't seem to realize how silly he sounds... he is part of that top 1 percent... between his income from his university, his speaking engagements, his books, his columns, and his investments. Now, does Paul Krugman think that he was just a tool of the "New Gilded Age" politicos? Does he owe his income gains to the people he despises, those nasty Republicans and that ridiculously centrist Clinton? I'd like to know. I suspect that if you asked him why his income grew to the point where he's in the top 1 percent, he would give some long answer, the shorter version of which is that he's "highly educated" and he's not lazy.... [T]his explanation is... accurate. Krugman's about as highly educated as you can get. He's got plenty of skills and occasionally (though not here) a good argument. People like what he does and he gets paid for it. Good for him. But good for Secretary Paulson as well, since Paul Krugman's own experience supports both parts of Paulson's assertion.

Mark Thoma fires up his Paul Krugman emulation program and produces an answer that's very good. According to Mark, what Paul might say is:

I'm sure that I earn a lot more than James Tobin did (I use him as an example because of how modest his lifestyle was), but it's not because I'm a better economist; it's the system that has changed. And what I'm talking about is the system, not whether individuals have earned their places in it. Why is that so hard to understand?

Which leads Andrew Samwick to respond:

Vox Baby: Krugman on Paulson's Speech: Some readers, including Mark Thoma at Economist's View, misconstrued it as suggesting that if Krugman is in the top 1 percent, then he is being dishonest if he advocates policies that would reduce the income of the top 1 percent.... I am not calling Krugman dishonest. I am saying that his own experience should suggest to him how silly his argument is. Krugman begins by criticizing Treasury Secretary Paulson for "falsely implying that rising inequality is mainly a story about rising wages for the highly educated."... In order for Krugman to validate that criticism, he has to show us that "rising inequality is mainly a story about... something else." His choice for that something else is a thesis that "it matters a lot which political party, or more accurately, which political ideology rules Washington." So he's got to show us how the political ideology ruling Washington over the last 25 years has generated the following outcomes.... Here is what he says about that 25-year period:

Finally, since 1980 the U.S. political scene has been dominated by a conservative movement firmly committed to the view that what's good for the rich is good for America. Sure enough, the rich have seen their incomes soar, while working Americans have seen few if any gains.... [I]t seems likely that government policies have played a big role in America's growing economic polarization -- not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting....

He mentions the level of the minimum wage and the tacit support for union-busting. Let's just grant him that those are relevant for the 1 percent decline in real wages in manufacturing. But what is the mechanism for ideology driving outcomes in the top 1 percent?... [H]e cites no evidence to link the policies of the ruling political ideology to the income gains for the top 1 percent....

In the race between these two arguments, Paulson is way out in front of Krugman.... Krugman is a perfect example of someone whose real income is high because the returns to being educated are higher, not because the dominant political ideology has conspired to increase his earnings capacity in some pernicious way.... [T]o support Krugman's thesis rather than Paulson's, Mark would have to tell us how the dominant political ideology, rather than simply a higher return to education, has changed that system. That's the part where Krugman needs some real ghost-writing help.

For Samwick, the key thing is that people today are willing to pay Paul Krugman much more for what he does than they were willing to pay Jim Tobin for what he did--therefore Paul is richer because "the [income] returns to being educated are higher." For Paul, the key thing is that Jim Tobin was a better economist--was more productive--therefore Paul's riches cannot be the result of a higher productivity return to being educated.

---

Mark Thoma writes further:

Economist's View: The Debate over Inequality: Factors like top marginal income tax rates and social norms are connected to the political environment.... A lot of the change is driven.... [F]actors such as the New Deal's very large tax increases on the wealthy, both directly on income and indirectly on corporate profits are an important factor connected to the political environment at the time. It's an open question how much of the change in inequality that might explain by itself.

Unions are also worth taking seriously, with union membership nearly tripling to about a third of the workforce from the mid 1930s to the mid 1940s. This would affect all wages, not just those in sectors where unions are prevalent. The decline of unionization after the 70s is also a factor to consider, and there's a strong case to be made that this was made possible by a political environment that allowed union busting to occur. In any case, I don't think this is a settled question and I hope to follow up with more later...

Greg Mankiw says:

Greg Mankiw's Blog: Samwick on Krugman: I agree with Andrew that Paul is on shaky ground when trying to explain rising income inequality by politics (as opposed to technology, demography, and so on). Policy choices such as tax rates and minimum wages have not been the main causes of increasing inequality. At least that is the consensus, as I understand it, of the professional labor economists who study the issue...

Matthew Yglesias writes:

The Influence of Politics | TPMCafe: By Matthew Yglesias: Paul Krugman writes that politics matters for the income distribution, citing the long-term trends in inequality and their close correlation with long-term political trends. Brad DeLong says he thinks this is wrong, political changes can and do have a large impact on after-tax income distribution but the trends show up strongly in pre-tax income. "I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution."

I note for the edification of readers that one thing I've learned since arriving in DC is that a difference of opinion on this subject is a major divide within the progressive economic policy community. Most mainstream economists -- including most liberals -- agree with DeLong. Politics and policy affect the secondary distribution (after tax and transfer) and what happens with the primary distribution is just out there. Leftier economists tend to say this is mistaken.

I would side with Krugman on this. The trend data is too striking to be ignored. If you have a phenomenon and are having trouble identifying the cause, the thing to do is to try harder to identify the cause, not assert that the phenomenon isn't happening. But what is the cause? I can think of some plausible stories.

One thing to say is that tax policy impacts pre-tax distribution. When the top income tax rate was very high -- 70 percent or above -- this not only meant that rich people paid a lot in taxes, it also meant that there were a broad range of circumstances where it didn't necessarily make much sense to offer well-compensated people even more compensation. When you have a very progressive rate structure, an employer can get a lot more bang for his buck by directing his employment budget at middle-income people than at rich people. As you flatten the tax structure, this becomes less-and-less the case.

Similarly, very high tax rates encourage high income people to engage in more leisure and less work whereas right now we have the somewhat odd situation where highly compensated people tend to work more than do the moderately compensated. All this, I think, makes a big difference. Then the other factor to note is probably unionization which is much more impacted by policy decisions than people often seem to realize.

I opined:

The problem that I have with Paul Krugman's argument here is that the shifts in income inequality seem to me to be too big to be associated with anything the government does or did. Yes, Roosevelt and company were pushing in the right direction. Yes, Reagan, Gingrich, Bush, and company have been pushing in the wrong direction. But what they did and do affects (I think) after-tax income inequality much more than the before-tax income inequality numbers, and the before-tax numbers show the trends remarkably strongly. And I can't see the mechanism by which changes in government policies bring about such huge swings in pre-tax income distribution.

In response, in comments on my weblog, we have:

PaulC: I have no idea if Krugman is right, but it seems clear to me that the effect of government over long periods of time has the potential to be that significant. First off, small effects often have multipliers, particularly in winner take all scenarios. E.g., in an olympic race, the runners are all excellent to begin with, with the actual difference in ability often fractions of a percent. But only a few get medals; they have some chance at fame. The almost-as-goods are forced back to their day jobs. I'm not saying this is a good model for the economy, but it just illustrates how even a small advantage can pay off disproportionately.

Second, if you look at government policy over time and conclude they're not doing much, I wonder what you're using as a baseline. Maybe it's only a radical government that lets inequality get out of hand by doing nothing, while a moderate one would consider it a disaster that needs action. I think there are two premises (counter-premises) that need to be considered. One is the idea that growing inequality is socially disastrous (a normal, natural situation). The other is that private wealth in a growing economy can be tapped up to a limit for public good (is absolutely sacrosanct and should only be touched as sort of a necessary evil for supporting some minimal governmental duties--e.g. defense and law enforcement).

If you look at these premises and ask what a government would do in response to trends over a long period of time, I think it is reasonable to consider that a government with conservative premises would let inequality get out of hand, while one with liberal premises would be able to change the outcome using proportionately small changes assuming multipliers.

Or to recast my previous comment as a metaphor (with unfortunate allusions to the movie Being There, but so be it) suppose I am observing two gardens: one apparently well-maintained and productive, the other overgrown with crabgrass and dandelions. I might conclude that whatever happened isn't the gardener's doing. They both planted roughly the same crops, used the same fertilizers, watered them about as much. The plots were similar in size and received the same amount of sunshine. Whatever happened is the result of some mysterious external factors. When pressed, I might add that in fact the gardener with the better results did something else, spending a little extra time each day pulling out some plants. But they were just little seedlings, barely noticeable. If were to weigh the mass of weeds against those seedlings, it would be clear to any reasonable person that there is simply no way that those small actions could account for the difference between these gardens.

Graydon: The kicker is what kinds of corporate organization are permitted, not tax policy. The relentless push for de-regulation and for restructuring law related to markets has converted a machine intended to secure the general prosperity into a machine to concentrate wealth. (This started around 1970, with the creation of the formal obligation for a corporation to maximize monetary returns to the exclusion of all other considerations.) Organizational patterns and structures matter. Tax policy is not even vaguely important compared to, frex, what banks are allowed to do, and that is often both governmental and policy set by non-legislative means. The general conflation of wealth and virtue isn't any help, but the core problem is that profit is legally regarded as an excuse to do almost anything.

Blissex: «Inequality in America starts with COMPLACENCY at the bottom» Yes, this is something that has struck me quite a bit -- the ''let's bend over'' attitude of american workers. The Economist has commented that this is due to something like 60% of Usians thinking that they will become rich before their retire, even if class mobility is actually quite low.

«polls show 50% would prefer to be in a union -- but there is no inexorable groundswell because there is fundamental understanding of the desparate need.» Perhaps there is some, but then there is terror. Employers apparently rather dislike hiring ex-union workers. In the past unionization battles were sometimes fought with rifles and explosives (both sides) and like in other countries the Army was occasionally brought in to machine gun strikers. Perhaps it could not happen again, but now that there are national databases, and big employers routinely refuse to hire people who don't have a perfect credit history nationally, it is hard to be the one who sets the ball rolling.

«I very undramatically chalk it all up to an accident of culture: we have this belief in the self-reliant individual and no information to tell us otherwise (the great compression and decades of galloping productivity misinformed us otherwise).» I agree that this is a large part of the story; the business interests are marxian to a fault (they tend to believe in most of what Marx said, reserve labor army and all, just see it from the other side :->), and seem to have understood well the gramscian concept of ''cultural hegemony''. But it is also because the unions at some point in the 70s-80s became widely perceived, and correctly, as exploitative and brutal guilds in their own right, and the left as a bunch of dreaming crazies. There is a very nice book on the subject, "The right nation", by Micklethwait and Wooldridge. The left and the union have dug themselves in a deep hole... Almost as deep as the right and the chambers of commerce dug themselves in the 1930s.

«[ ... ] never picked up even a hint that, by now, 25% of workers are earning less than the minimum wage under Lyndon Johnson, $9.50/hour even though average income doubled since that same time -- or that middle and upper middle family income has grown half as fast as average income for over 30 years -- or that the missing growth has almost all gone to the top 1%.» Well, few people talk about these things because they know which side their bread is buttered on, and talking about these things means being classified as a promoter of the politics of envy or of class hatred.

«Not that I blame the top 1% for doing what they are supposed to do in a capitalist economy: bargaining hard for the best deal.» Ah you see class warfare is when the bottom 99% want a bigger slice of the pie, but when it is the 1% doubling theirs that's justly rewarding higher productivity. :-)

«The solution is for someone to alert the bottom to the money they are missing out on and on how easily they could recoup it by modernizing labor organizing legislation and then get out of their way. All so simple if somebody would just tell us.» But that would require going up against vested interests for the sake of a few dozen million poor suckers. :-) To give you an idea of how dire the intellectual and practical situation is, some unions are trying to organize day laborers, but are afraid that their members would complain, which is beyond moronic: http://SeattlePI.NWSource.com/business/281097_daylaborunion14.html «However, Jerry Hunter, former general council for the National Labor Relations Board, said unionized construction workers might balk if their unions recruit illegal immigrants. "Members could start asking themselves, 'Whose interests are you representing?' " Hunter said.»

«Small changes for example in the climate to make hostile and asset stripping takeovers easier» Perhaps I have mentioned this already, but I think Milken and Drexel have had a far greater influence that I thought. When debt fueled hostile takeovers were rare, management had long term careers and their self interests were to pursue corporate empire building. Now that it is easy and cheap to fund with debt a takeover, management self interests are to make as much money as possible as possible in as short time as possible. Their profile has switched from a long term to a short term sharecropper, and now they work the assets they are temporarily leasing a lot harder. Which is not in the interests of shareholders either. But the incentive is there. While Milken was the enabler of the asset stripping fashion, perhaps they were not the ultimate cause; I suspect the increase in takeovers was largely based on reductions in capital gains tax, which also gave an incentive to corporations to stop distributing dividends and gross up the capital value of the company, via ''virtual'' earnings.

Robert Waldmann: I think prevailing ideology has direct effects in addition to affecting public policy. Heartened by the fact that you think you have discovered an intelligent sociologist (who is in fact a physicist) I'd say that social norms are critical, and that firms have to respect their workers perceptions of what is fair. It is no longer fatal to a firm for the top 5 officers to have incomes that you and I consider obscene. Thus such firms are not crippled by the anger of their other employees. More generally I think the ideas that greed is OK and that grabbing lots of money demonstrates intelligence not corruption have become stronger resulting in increased inequality. In a word Akerlof.

And Paul Krugman, in email, promises more:

There's actually a lot more behind this than I could put in the Times; it will ultimately be a chapter in my next book...

Falling value of the minimum wage. Shift in the personnel at the National Labor Relations Board and the role of that shift in the decline of unions. Loosening up on the regime that regulates Wall Street and the consequent shift from the Berle-Means technostructure corporation to the modern takeover game, plus institutional corruption via IPOs and compensation subcommittees of boards of directors. Declining marginal tax rates on the rich making it less unreasonable for your CEO to demand compensation in cash rather than in a fancy executive dining room. Trade. Immigration--which has a powerful effect on the American income distribution even if it does little to shift the income distribution among the native born.

How much bang can these politically-driven changes have? And how much is the politics the result rather than the cause of rising inequality? And what is the role of the factors identified by McCarty, Poole, and Rosenthal's Polarized America in all this?

I'm skeptical--I think it's more likely than not that politics are a reinforcing factor rather than the driving force--the moving crest of the tsunami and the froth on top of that rather than the originating earthquake, which I would see as probably in society and technology--but it's an open question, and now I have another reason to eagerly look forward to Paul Krugman's next book.

---

UPDATE: Ezra Klein says:

Ezra Klein: Whoi Is To Blame For Inequality?: There's a fun argument rushing through some blogs today sparked by a Paul Krugman column on the government's impact on inequality. Krugman argues that the correlation between conservative and progressive political periods and rising or lowering inequality is too powerful to ignore. "it seems likely," he writes, "that government policies have played a big role in America’s growing economic polarization —- not just easily measured policies like tax rates for the rich and the level of the minimum wage, but things like the shift in Labor Department policy from protection of worker rights to tacit support for union-busting....

Now, the problem Paul and Matt [Yglesias] are having is that nothing the government actually does looks able to generate such wild swings in wealth distribution. That's why Brad won't buy their argument, though he doesn't provide an accounting of what does account for the shifts.

Seems to me we have a causal problem here. Politics, after all, tends to follow societal trends, not the other way around.... [B]ecause we can see which party controlled Congress easier than we can track societal attitudes, we tend to blame the shifts on political changes without knowing exactly why.

That, of course, is not to say that there's nothing the government does. Whether tax rates encourage inequality, they can certainly discourage it, and, for a very long time, did so.... Until the Reagan era, the very richest would see the top fractions of their incomes taxed at rates of 70 (and, at times, 90) percent. That exerted a fierce check on how rich the very richest could get....

[G]overnment is far more effective as a check on inequality than as an accelerant.... What government can do is tax and redistirubte in such a way that growth is shared equally across society. During conservative moments, it doesn't even make an effort to do that, and society is the worse for it.

Comments

[shah8]

I think this is a pretty easy question to answer. Maybe this might disqualify me, as per that early 20th century presidential canidate. Anywayz...

1) The shift in the nature of the economy is the primary factor here. Some of it is the concentration of business, like what occured in agriculture, which accellerated technical changes. More of it came from lateral shifts from manufacturing to services, as per Kevin Phillips arguments about financialization.

2) The key thing to recognize is that the changes in the nature of business has been to increase leverage. This requires connections. This also requires assurances. This requires "stability". People who are near the center of power, or have been near the center of power are extremely valuable. This makes lawyers, bankers, stock brokers, CEOs more important as their jobs is to *connect* and serve as *conduits*.

And all of these jobs require degrees. And the increasing difference between people with degrees from people without college degrees are reflective of the DECREASE in the value of raw intelligence relative to social status. It was not so long ago that people who can code, for instance, but didn't have degrees, could get good at it, and get good jobs without needing a college degree. And many high technical positions were that way. College is also where you can network as well, which is why Harvard and Stanford can easily attract top canidates, students and teachers. It's easier to get that great job that way...

3) Politics enter here in the sense that the government offers garuantees. This is mostly a pretax phenomenon. They lie in making America safe for business, and *making confidential information known to the movers and shakers*. Remember the shift is in the greater use of leverage (such as increased use of just-in-time stocking) in American business. Paul Krugman makes more than Toobin because Paul Krugman used to be pretty close to the center of powers in earlier decades. This matters because some people consider him a conduit to some of the powers that be regardless of how baseless that might be. Because his job is to *connect*.

Because in the end, boiled down to gristle, it's really simple. The game has increasingly moved towards snatching the profit from the option gradient created between those individuals with information from those without. It's why the NYT and Washington Post lies to us. It's why financial papers have so many bullshit reasons why stocks/bonds/commodities went up or down on a ramdom day. It is why there is such an emphasis on various types of intellectual property regulation, or why dreams of wall gardened versions of the internet persists.

*addendum*
Is it me, or is there really very little discussion of the government creating circumstances for positive feedback cycles? I mean, DUDES! The dominant politico-economic mirage of our days is the Laffer Curve! You know, where tax cuts create positive feedback cycles that will return many times the effect of the action!

[James Wimberley]

Isn't rising inequality a worldwide trend, even if it's more marked in the USA? If that's so, it weakens the Krugman theory that it's down to government policy other than taxes.
Matt Yglesias' point about work incentives is also verifiable. Lefties don't complain about the *idle* rich any more: the slave-drivers drive themselves just as hard.
I havn't heard much about the winner-take-all aspect of the information society. You can mmake an honest living selling the second best hammer; it's much harder with the seond best word processing program or economics textbook.

[bad Jim]

Kevin Drum noted Saturday that vacations for Americans seemed to be disappearing.

http://www.washingtonmonthly.com/archives/individual/2006_08/009367.php

Most of the commenters agreed. Various reasons were given: too much work piled up while they were away, their scant allocations of free time had been used up in family obligations. Some had actually been fired for taking vacations.

Many noted that the disappearance of unions in the U.S. might have something to do with the poverty of free time that American workers typically suffer. The inelasticity of their workload might help to explain in part the productivity gains we seem to be (imperfectly) enjoying.

The preferential treatment of unearned income and the trimming of the top marginal tax rates are more the result than the cause of the acceleration of inequality and all its attendant ills. We stopped trying to level the playing field decades ago, and why should we be surprised at the results?

[RT]

If increased income inequality is largely due to the increased value of educational differences, there should be an easy way to test it: take one income stratum that would consist mostly of educated people but not enjoying much of the winner-take-all effect (the second-highest decile - the lower half of the top quintile - would do), and compare its changes over the past 30 years with those of a much less educated stratum who are actively working (say, the fourth-lowest decile, those in the bottom 40% but not in the bottom 30%).

If those two groups diverged over the past 30 years in a way that reflects the overall increase of income inequality in this country, then there's your explanation. If their divergence is much smaller than the increase in income inequality generally, then look elsewhere.

[RT]

Robert Waldmann mentions the effects of changes in prevailing ideology. One of the less-noted changes in our society during the past few decades was the Reagan-era abolishing of the Fairness Doctrine.

The idea used to be that scarce broadcast spectrum was owned by we, the people, not by the licensees, so the licensees weren't free to use that spectrum to push their own views; if they did so, they had to give equal time to speakers with opposing views.

When Reagan and his FCC chief, Mark Fowler, ditched the Fairness Doctrine, it opened up a new world where the views of those rich enough to own broadcast licenses could drown out the voices of those who weren't that rich.

This has substantially shifted the debate in terms of what is and isn't seen as fair in our society.

To what extent that's affected the power relationships between those who own the gold and make the rules, and the rest of us, is a more complicated discussion. But my off-the-cuff sentiment is that it has done a great deal to affect those relationships. To the extent that upward shifts in income and wealth are invisible because nobody's talking about them, there's going to be no opposition to those shifts.

[RT]

One big, obvious thing that has seemingly gone unmentioned in this discussion is Reagan's breaking of the PATCO (air-traffic controllers') strike in 1981.

The business world took that as an announcement from the Reagan Administration that pretty much any anti-union tactics were fair game, and they took full advantage of the invitation to move against unions.

The losers were a pretty wide swath of Americans. The winners were those with large chunks of corporate stock (a thin stratum), and the CEOs who got richly rewarded for improving their corporations' bottom lines at the expense of their workers.

[Robert]

I'm not at all sure that Brad's statement of what a good neoclassical economist believes is accurate. I was already preparing to blog on this aspect of economic theory later in the week.

[cranque editeur]

The origin of this inequality rise may well reside in leverage, that leverage in turn originating in technology and the shift between sector of the economy. So no politics there, walk away.

But politics/Zeitgeist matters when it comes to how you reward those 20 thousands winners, manufacturing then or knowledge economy now.
I would be curious to see if the value of their residences, or of their favorite toys (yachts, art pieces...), or of a vacation in a palace grew faster or slower than their slice of the income.
But anyway I assume the games ends with the same competivive people having the biggest yacht or the residence at the hamptons, and not a ounce happier than the previous generation. There is only so many biggest house (1, one) on a certain beach, and so many slots in the prime time.
But as a result, you need much more money now for creating this ranking, which I pretend is all what matters for the society as a whole.
That means you are using much more ressources, which could be used at making a lot of others in the society happier. Over 2% of national income more now than it used to be in the 60s makes a lot of money spent for low income or health if you want to increase the wellbeing of the nation now, or for education or public infrastructure if you want to increase it later.
And avoiding some nasty side effect like creating disproportionate inherited wealth and freezing social mobility by the shred inerty of such accumulation could also be a worthy aim.

So in short: you have to prove the race at the top is more productive today, that the society ends with better CEOS, better entertainers and hedge fund managers, before I accept that the resulting selection is 2%, soon 3% of the national incom more worth than a generation ago. Good luck.
And if you are at it, you could explain me why nobody will work hard enough anymore for becoming as good an economist and a columnist for the MSM as Krugman if it doesn't mean million dollars more than the tenure income of James Tobin. I never got that argument from the high-tax foes. Funny, when Krugman started, he just had Tobin-like reward in mind.

In short: I believe that politics play a role in regulating the income distribution. You can and have to find a middle ground between USSR (the old one, Kroutchev not Jeltsin, incentive for coming at the top: a dacha and the fascination of power) and Nigeria (the oil revenue, what, 10% of national income for the 0,1%? more?) for having a functioning economy.
For the time being, the great generation way seem to have been a lot more efficient one than the nigerian way, so why should we give it up as a goal?
And coming back to the question if politics play a role in income inequality. Ad absurdum, what determines if I live in a bielorussia-like or a nigerian-like society, if not politics? Sorry, but I don't don't need an economic model or theory certified by economists for doubting that it is mainly the leverage effect in a knowledge economy.
If you don't know how politic impacts the statistics, or how it should react to a changed environment, no problem. I don't know for sure either. But I would say, as a economist you are the one with the burden to find what is missing. You can't just simply dismiss it.

[anne]

http://economistsview.typepad.com/economistsview/2006/08/paul_krugman_ta.html#comment-21328230

August 21, 2006

Paul Krugman: Tax Farmers, Mercenaries and Viceroys
Edited by Mark Thoma

Back to a bad old future:

Tax Farmers, Mercenaries and Viceroys, by Paul Krugman, A Monarchy Commentary, NY Times: Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.

It's an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what's really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920's, but the Bush administration seemingly wants to go back to the 16th century.

And privatized tax collection is only part of the great march backward. In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private "tax farmers," who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.

Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn't like these innovations, preferring to govern as if he were King Louis XII.

So the tax farmers are coming back, and the mercenaries already have. There are about 20,000 armed "security contractors" in Iraq, and they have been assigned critical tasks, from guarding top officials to training the Iraqi Army.

Like the mercenaries of old, today's corporate mercenaries have discipline problems. "They shoot people, and someone else has to deal with the aftermath," declared a U.S. officer... And armed men operating outside the military chain of command have caused at least one catastrophe. ...

To whom are such contractors accountable? Last week a judge threw out a jury's $10 million verdict against Custer Battles, ... a symbol of the mix of cronyism, corruption and sheer amateurishness that doomed the Iraq adventure — and the judge didn't challenge the jury's finding that the company engaged in blatant fraud.

But he ruled that the civil fraud suit ... lacked a legal basis, because ... the Coalition Provisional Authority ... wasn't "an instrumentality of the U.S. government." It wasn't created by an act of Congress; it wasn't a branch of ... any ... established agency.

So what was it? Any premodern monarch would have recognized the arrangement: in effect, the authority was a personal fief run by a viceroy answering only to the ruler. And since the fief operated outside all the usual rules of government, the viceroy was free to hire a staff of political loyalists lacking any relevant qualifications for their jobs, and to hand out duffel bags filled with $100 bills to contractors with the right connections.

Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who've spent their political careers denouncing government as the root of all evil can't grasp the idea of governing well. Or maybe it's cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.

But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.

[anne]

That we chose a "Viceroy" to govern Iraq, and that there was rarely a hint in the press of the colonial-classist lunacy of having an American viceroy tells me that domestic policy has continually encouraged inequity in America.

[anne]

http://www.nytimes.com/2006/07/27/opinion/27thu3.html?ex=1311652800&en=284755ccc7e5720b&ei=5090&partner=rssuserland&emc=rss

July 27, 2006

More Hope for the Truly Rich

For the past five years, Congress has passed every tax cut championed by President Bush — except one. A handful of Senate Republicans and most Senate Democrats have, to their credit, blocked four attempts since 2001 to repeal the estate tax on America's wealthiest families.

But the heirs to America's mightiest fortunes may be shielded from taxes anyway. This week, David Cay Johnston reported in The Times that the government is on the verge of eliminating the jobs of nearly half of the Internal Revenue Service lawyers who audit estate-tax returns — 157 of the agency's 345 estate-tax auditors. The I.R.S. says the layoffs are warranted because the Bush tax cuts mean fewer people are obliged to pay estate taxes.

That's not very reassuring. Fewer smaller estates — currently, those worth up to $2 million are exempt — are subject to the tax today than when Mr. Bush first took office. But large estates are still taxed, and with inequalities in income and wealth producing ever more billionaires and millionaires, there's ever more gold in those hills for auditors to mine.

The I.R.S. also says that it's confident it is catching estate-tax cheats because a mere 10 percent of estate audits brings in 80 percent of the additional taxes. The logic is that auditing a greater percentage would yield diminishing results.

Maybe. But six years ago, the I.R.S. said that most of the taxable gifts it audited had shortchanged the government, and it pledged to hire more lawyers to audit big gifts.

The underlying fact of the matter is that the I.R.S. hasn't released the data that would allow researchers — and the public — to verify whether cutting back on estate-tax audits represents sound tax enforcement. A research organization at Syracuse University, called Trac, used to routinely request and receive comprehensive I.R.S. audit figures — by size of the estate, the number of hours spent and the amount of extra recommended tax.

Researchers analyzed the data and posted it on the organization's Web site, so the public had a continuing sense of the I.R.S's fairness, efficiency and effectiveness. But in 2004, the I.R.S. stopped giving Trac the data. In 2006, a federal court ordered the agency to provide the requested records. But the information released since then has not been comprehensive....

[Ginger Yellow]

"[H]e cites no evidence to link the policies of the ruling political ideology to the income gains for the top 1 percent...."

Is he serious? We're talking about Paul Krugman, the guy who has written, oh, maybe a bajillion columns on how the benefits of the Bush tax cuts go disproportionately to the top 1%.

[JRoth]

It is odd to me that economists would argue that tax policy only affects post-tax income. I mean, isn't the whole reason that we even discuss taxes as a public policy issue - rather than a mere technocratic exercise in balancing income and expense - that everyone understands that what you tax, and how, and how much, all have disproportionate impacts on economic activity. So while it's trivially true to say that if NJ taxes yacht construction 20% more, yacht construction in NJ will go down 100%, it's somehow a vast mystery that tilting every aspect of the tax code in favor of malefactors of great wealth would increase their fortunes. What is wrong with you people?

Furthermore, Brad, a member of the Order of the Shrill but still, ultimately, a pretty conservative economist (just ask Max), lists a dozen factors unrelated to taxation that originate in ideological politics and have unquestionable first order effects on national income distribution, then says, "I don't buy it, those factors are too small to create the effect we see, so we must not be seeing it." And since the sun is so far away, it can't possibly be the cause of all this light and warmth. Must be something else.

[joan]

"What is the mechanism for ideology driving outcomes in the top 1 percent?"

There are many rules and regulation made by congress and government agencies that determine winners and losers. There is a huge industry in Washington being paid large amounts of money to effect decisions that never come to the public attention. It is safe to assume that the lobbyists are earning their money. Which positions end up as policy have a large ideological component.
One example: More that half the mutual savings and loans that survived the scandals of the 80's have since gone public by a process that transfers the jointly owned equity of the depositors, to the stockholders, and in particular, to the bank officers. In the last few years credit unions are trying to follow the same path. The inevitable result of this is either higher fees or less service to depositors, usually both. There was a brief dust up last fall when the NCUA tried to deny approval to 2 Dallas CU's application to go public. Congress intervened and their IPO's will soon start trading, and several new millionaires will be created.

[CapitalistImperialistPig]

What we are talking about here is weakness in the classical economist's model. The premium on education theory is silly - otherwise Paul Krugman would earn a lot more than Bill Gates or Warren Buffett. Most of the rich make their money from rents - Gates from his OS, Krugman from his testbooks, Jo Rowling from the Harry Potter franchise, CEO's from the companies they control, dictators from their countries.

A system a nomeclature which makes Milosevich and Saddam thousands of times more productive than Tim Berners-Lee does too much violence to common sense to be very useful.

[kharris]

Who sets CEO pay? Isn't it generally a bunch of guys that the CEO has some hand in choosing? Samwick wants to argue for Classical outcomes, so I think it is fair to assume he starts from Classical assumptions. To do so, though, is pretty obviously wrong at the very top. Don't we also assume that greater reward entails greater risk? Now, I realize that contrast between risk and reward is not meant to compare CEO pay to that of a broom pusher, but earning tens of millions a year while holding on to a guarantee of life-long health care and a big check if you should fail utterly at running the company does not seem to me to be something that is likely to result from a Classical world. Looks like a case of back scratching elites. Cranque's point is a very good one. We cannot expect that those with their hands on the controls of both economic and political power will exercise that power in a way that is perfectly obvious. We need to look. Refusing to consider the possibility that those at the top are tending to their own interests above all else, and to go from there and look for the mechanism, seems naive or worse.

Samwick's argument relies far more on rhetorical ploys than fact and logic. His priors go unstated. This is often the problems when Samwick gets involved in what are at bottom partisan debates. Too much time watching TV gasbags to be able to hold a useful discussion, perhaps? Brad's opening paragraphs do more to make the grounds of the debate clear than Samwick's entire diatribe. And what else can we call writing the main point to which is to call his opponent silly?

[ryan]

i suspect that when Krugman wrote his column on inequality, he had in mind some recent work by Lucian Bebchuk and Jesse Fried on CEO compensation. after all, anyone who has looked at the Piketty-Saez data from tax records alongside data on CEO compensation (from the SEC reports) must have noticed that those pictures look very much alike. for precisely that reason, Piketty-Saez conjecture that executive compensation -- and, specifically, the spread of option pay -- drove the sharp spike in the incomes of the top 1% that we see in the IRS data. and what explains the behavior of CEO compensation in the 1990s? Bebchuk-Fried argue that executives were able to obtain generous option pay from their largely docile boards and that there was little outrage from shareholders since share prices just seemed to go up and up (even if the executive of the firm was only average). Krugman would probably also add that the outrage constraint, as Bebchuk-Fried call it, has been signficantly weakened by the complacency of the political establishment. to put it differently, if FDR were in power, would CEOs expect to reward themselves so well and not face a sharp denunciation from the White House and the threat of legislative action?

[Dan K]

So the fact that Scandinavian countries are fairly egalitarian is not an effect of policies? It must be something in the water, then.

It is exactly this kind of absurdities that makes me think that the Bank of Sweden's prize in Economic Sciences in memory of Alfred Nobel is a very bad idea.

[joshb]

Brad

I'd add Dean Baker's new book (available for free download at: www.conservativenannystate.org)to your discussion here - it's entirely about how the rules set by government aid the rich. Whether you think he's on to something or not (i strongly do), he's addressing the issue of government aiding the very rich much more directly than anybody else here.

I would just add that Mankiw's invocation of professional labor economists saying that only economic/technical/demographic factors are usually indicted as driving inequality isn't quite right. Dinardo, Fortin, and Lemeiux have a now-old but still great paper on labor market institutions and inequality, and, these guys are awfully professional labor economists. i can't find a free copy, but, it appeared at the link below and in econometrica.

http://papers.nber.org/papers/w5093

Lastly, Robert Gordon and Ian Dew-Becker have looked at this and decided that they think a bunch of the income of the super-rich is pure rent.

http://www.brookings.edu/es/commentary/journals/bpea_macro/forum/200509bpea_gordon.pdf#search=%22gordon%20and%20dew-becker%22

joshb

[Blissex]

«I'm skeptical--I think it's more likely than not that politics are a reinforcing factor rather than the driving force--the moving crest of the tsunami and the froth on top of that rather than the originating earthquake, which I would see as probably in society and technology»

Surely technology has helped, and I would conflate society and politics in the general notion of ''political climate''.

But my impressions is that it is political climate that matters, and that expresses itself in a lot of small details that add up.

Let#'s look at both USA history and what is happening internationally.

The share of the top 1% declined as much in 1930-1945 as it increased in 1990-2005. To me that sounds like the political climate could have been responsible for both; it is hard to imagine that relative productivity, whatever that is, of the top 1% halved in 1930-1945 and then doubled in 1990-2005, after having been roughly constant in 1945-1990.

Also, apparently middle/lowend labor productivity did rise significantly in 1990-2005, but very little of those increases flowed to middle/lowend labor. Which seems to me to indicate that what matters in the end is pricing power and leverage, not ''productivity''.

Also look internationally: in some other countries there has been a significant increased in the share of pre-tax income going to the top 1%, but not in many others. If there is a pattern there the most obvious one to me is that it has happened in countries governed by (in name or in effect) conservative parties.

I think currently that there have been four big shifts that might explain this:

* The defeat of the URSS in the Cold War has removed much incentive for the elites in many western countries to keep the home front happy.

* The addition of a lot of spare capacity in China and India to the USA trading system, most of which is spare capacity in labor, thus making assets relatively scarcer. Including intangible assets like a Harvard degree.

* Alan Greenspan effectively removing most downside risk from speculation in financial and real assets (the ''Greenspan Put''), a very large present to asset owners.

* The excesses of the left and of unions in the 1980s, which resulted in the crushing of the air controller strike in the USA and of the miners strike in the UK, and the resulting shift in perception.

All four factors are essentially political. Sure, technology has made it easier to exploit such factors by for example making it somewhat easier to offshore work, but that comes after I think.

As to the Greenspan Put, I'll repeat here one of my recent favourite quotes:

http:/WWW.beearly.com/pdfFiles/PIMCO092005.pdf
http://WWW.PIMCO.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm
«[6] I attempted to put a value on the Greenspan Put in the February 2000 Fed Focus, "Me and Morgan le Fay", writing that without the Put, the P/E for the S+P 500 should be 18, not 32.»

Given the extent to which the compensation of the top 1% is driven by stock valuations, directly and indirectly, the Greenspan Put might account for a large part of the increase in the incomes of the top 1%...

[robert e]

This debate on inequality becomes more reasoned and reasonable in proportion to how equitably it examines both ends of the inequality scale, rather than focusing on the top 1% as it seemed to do initially. Mr. Tobin may have earned a fraction of Mr. Krugman's income at the same age, but he also paid a fraction of Mr. Krugman's costs for a vacation home, a car, health care, college, steaks, etc. But what of the people who clean their offices? I'm told that their real incomes have declined considerably.

I'm surprised that globalization/protectionism, especially re labor, hasn't gotten more prominent billing in this production. Can we not make the case that over the last 30 years, income inequality in the global sense has been globalized--i.e., absorbed within the borders of capitalist nations? Forcing labor to compete globally may be technology-driven, but it is also politically enabled. The decline of unions is only a part of this bigger story. And perhaps that story in turn is merely the latest chapter in capitalism's gradual subversion of state power. But isn't that general trend, too, a politically enabled one? Isn't it still up to public policy to shape and pace the character of the trend and its impact on local economies and populations?

The whole "return on education" theory smells like a red herring to me.

[no name]

My mousewheel just died.

[JK]

Well if we go to the very top then whatever it is that's generating the returns I think it's peculiar to call it education.

The top twenty Forbes Global rich list is readily available. They look to me like old fashioned businessmen. The new economy entries (Gates, Allen, Balmer, Ellison, Dell) all dropped out of college (maybe returns to "smarts", but not to education). Amongst the others many were businessmen or former nomenklatura who took advantage of privatisations and government connections (India, Russia, Mexico, Hong Kong). The likes of Ingvar Kamprad (founder of Ikea) are absolutely classic self-made businessmen.

In the UK (living here I'm more familiar) it looks like the same story. Amongst our top capitalists Branson, Sugar, Ecclestone, the Hindujas, Philip Green, Lawrence Graff - none of them have degrees.

(We also have a few cases of left over aristocratic world class wealth - Queen Elizabeth, Duke of Westminster.)

What you need to make a lot of money is to be hard nosed, people savvy, work like a demon (I can't see many of this crowd hanging around blog comments), and a good dose of luck - very good if you want to make the Forbes rich list.

The "education" theory is mostly a fantasy of the educated. It has grown alongside the ranks of lawyers, brand managers, insurance salesmen and other educated financial intermediaries, flattering them with the idea that their activities amount to more than skimming off rents from productive activity elsewhere. (In case you care, I'm criticising the system, not the individuals.)

The dynamic is even more laughably obvious when you see the wealth of entertainers counted alongside returns from "education" on the grounds that this is all "symbolic analyst" work to do with manipulating semiotics. Economics professors not only get to believe that education is rewarded, but they get to imagine themselves alongside Britney Spears and Madonna in the celebrity pages.

[Blissex]

«Who sets CEO pay? Isn't it generally a bunch of guys that the CEO has some hand in choosing?»

Well the answer is of course ''the market sets CEO pay'', except that there is a very big difference between the market for fast food associates and that for CEOs...

Overall the ''market'' for CEOs is made up of a really small number of directors, which often appear on multiple boards, and many of whom are CEOs, ex-CEOs or very good friends thereof. As you write, but it is still a ''market''.

«The whole "return on education" theory smells like a red herring to me.»

There is a largish easily measured education effect on salaries, so far, so don't dismiss it so easily. But it is also a red herring.

When certain professional, well paid, prevaricators and dissemblers say that CEO pay is set by the market, and that in general pay depends on education, they are stating nothing less than the truth, the half truth, and nothing but an half truth.

And that seems to work pretty well... :-)

[Ginger Yellow]

"The dynamic is even more laughably obvious when you see the wealth of entertainers counted alongside returns from "education" on the grounds that this is all "symbolic analyst" work to do with manipulating semiotic."

Good point. A relevant example from the UK would be the huge explosion of wealth among professional footballers in the last decade, which obviously has absolutely nothing to do with education. They've gone from being reasonably well paid during their sporting careers but with litte to fall back on after they quit the game, to being among the richest people in the country. These days even someone in the lowest rung of the professional game will be earning at least £500 a week. It doesn't have much to do with government actions either, although it did have a lot to do with the FA, a quasi-governmental body, allowing the top clubs to break away from the Football League.

[anne]

Dan K:

"So the fact that Scandinavian countries are fairly egalitarian is not an effect of policies? It must be something in the water, then.

"It is exactly this kind of absurdities that makes me think that the Bank of Sweden's prize in Economic Sciences in memory of Alfred Nobel is a very bad idea."

A terrific insight :)

[aaron]

The rich get richer. Its a natural state of affairs. And the vast middle of this country have only one force that pushes back against that trend: government. Just not when Republicans run it.

[Sonia]

Has any one looked at the change in the distribution of income over e.g. the last 20 years versus the change in the distribution of income in the post civil war 19th century?

At the very top both periods of time are marked by individuals generally not especially highly educated creating new ways of doing things. Do these periods of great wealth opportunity create the opportunity for the next tier of managers and advisors who capture some of the entreprenurial returns?

There seem to be a lot of explanations for the changes in the distribution of income and not many explanations for the relative apathy of those on the losing end.

At the lower end of the income distribution voting participation appears to be rather low. Increases and expansion of the earned income credit and some sort of universal health care funded through a progressive tax structure would seem to be attractive to lower wage workers but there does not seem to be much push for these.

At the higher end of the income distribution why are share holders willing to allow executive compensation to be so unrelated to performance. If (as seems likely) share prices fail to achieve expected gains will share holders continue to accept outsize management compensation?

[lessthanamused]

You could say that the gov't is driving the getaway car.

[Walt]

Dan K: The fact that Paul Krugman, probable future Nobel laureate, agrees with you is evidence that the economic Nobel is a bad idea?

[Paul G. Brown]

Note to modern Republicans and their fellow travellers: this is how debate happens in the Reality Based Community.

Data, hypothesis, logic, mutual respect.

[TwentyOne]

I'd add a social anthropolgy factor. What would Jared Diamond say here? Economic structures have become more complex; perhaps without a matching increase of sophistication of social structures. Be it globalization, or increase of reach for markets, or increasing sophistication of targeting marketing, or computers making it easler for a few individuals to control an organization. I don't know what, others know much better; but I suspect there is some dynamic making it easier for those in controlling positions to capture a larger portion of a larger pie.

But in times past, eventually there has been a revolt against that sort of control; while the zeitgeist now is that it is just the natural, right way - laissez faire, free markets, individual effort.

Perhaps what is missing is a revolt by the bourgeoisie against the petty nobility. The people at the 80th, 90th, 85th, 99th percentile have generally been complacent to the notion that their relative wealth and incomes have been falling.

Going back to Jared Diamond, see Montana. Will it ever bug doctors and lawyers if they can't visit Montana unless they stay at the equivalent of a Motel 6, because a few rich families control all of the pristine, desirable land?

Or one near and dear to my heart. Maho Bay campground in the USVI leased 14 acres in the 1970s and more or less invented eco-tourism. The lease runs out in a few years, and the land is now way too profitable for zillion-dollar villas to justify purchase for middle-class campers. That's a by-product of the real-estate bubble - the land probably couldn't support the prices being paid if used for any sort of rental, either. But will the middle class and near-wealthy ever notice that they're losing control?

[JimW]

Here's a phenomenon that might account for some of the increase in pre-tax inequality--The financial technology enabling leveraged buyouts emerged in the 1980's. Hence, the typical CEO had the option of managing his company poorly, allowing the stock price to languish, and participating in an LBO, which would make him or her very rich. To deter that behavior, corporate boards had to offer CEO's and other top executives more generous performance based compensation packages.

[andres]

"Note to modern Republicans and their fellow travellers: this is how debate happens in the Reality Based Community.

Data, hypothesis, logic, mutual respect."

Ah, you're too noble and good-hearted, Paul ;-) The reason for the low heat level in this thread is that the debate is really about causes/means, not about ends. Don Luskin wannabe trolls don't really want to take the side of Samwick, given the right-wing view that the distribution of income is irrelevant, which is clearly not Samwick's position.

If I were to troll in right-wing blogs I'd probably turn into a raving lunatic myself. So judge not...

[Sharon]

Well, this must mean that Paris Hilton is a genius.

[Sharon]

Well, this must mean that Paris Hilton is a genius.

[KMB]

Brad,

What about the effects of taxing labor (and effectively taxing labor with requirements for healthcare benefits etc) rather than taxing resource usage or capital? This could lead to overdeployment of capital and underdeployment of labor, thus pushing benefits to those controlling large structures of capital.

[Kenneth Fair]

This is a fascinating discussion and set of arguments. I have some intuitions about the effects of marginal tax rates on inequality that are not well-formed--for instance, I suspect there is more to say here about both the diminishing marginal utility of money and status-seeking behavior through conspicuous acquisition and consumption--so I'm very glad to see this debate summarized in one place, as it helps crystallize my thoughts.

[robd]

You all talk about the US but as soon as you make international comparisons you see that culture is an important factor.
Are professors in the US better educated than in the EU and Japan?
Are the CEO's of Ford and GM more productive or better educated than those of Toyota?
Self-made men like I. Kreuger, Gates or Branson make their own fortune, but for those who are PAID
the US-corporate culture is more generous.

[Sam Taylor]

Many great comments. Krugman continues to be one of the few public intellectuals who really seems interested in the welfare of the public.

All too many seem caught up in the social darwinist "meme" that seems to have become prevalent since the early 1980's. (Did it start this time with popularity of "The Selfish Gene" title? Few seem to actually read the book but the title's "meme" has certainly caught on.)

Someone mentioned Scandinavia in a post. My wife and I just returned from 3 week visiting friends and traveling throughout these three delightful countries. I believe their Gini index averages agout .25 while the US is currently .46, having risen steadily from about .40 in 1980. Yes, I am aware of the differences and excuses, but it is still nice to be reminded that a much more egalitarian society is not impossible.

Is it really true that there is a Nobel prize in economics because Nobel's wife had an affair with a mathematician? If not, it should be and I intend to continue to repeat the story as too good not to be true.

[Sebastian Holsclaw]

I'm out of my depth on a lot of the discussion, but isn't the answer to this:

For Samwick, the key thing is that people today are willing to pay Paul Krugman much more for what he does than they were willing to pay Jim Tobin for what he did--therefore Paul is richer because "the [income] returns to being educated are higher." For Paul, the key thing is that Jim Tobin was a better economist--was more productive--therefore Paul's riches cannot be the result of a higher productivity return to being educated."

fairly straightforward?

In some respects they are both right. It seems the answer is (unclearly) stated in the question.

Jim Tobin was a better economist AND the value of being a good economist is much better recognized now than it was then.

Therefore even bright but not-as-bright-as-Tobin economists can do very well (better than Tobin historically did).

[piotr]

About Scandinavia: they have their horrors too.

My cousin who lives in Sweden was recapping the recent cuts in various benefits and concluded: pretty soon it will be as bad as in Austria.

She actually knew pretty well what she was talking about, as she spend her previous vacations with a friend from highschool years that works in Austria, but from perspective of American social Darwinism it sounded pretty sweet.

A question to economists here: how one can ascribe productivity to individuals? On the level of manual labor, clearly there is a component that comes from skill, and technological component. A carpenter today has a lot of tools that are much better than 40 years ago and performs similar tasks much faster. Because many of carpenter's task are very comparable to those performed 40 years ago we can measure the increase in productivity. But which part of productivity "belongs" to the person of the carpenter, which to the tools and which to the management?

My impression was that one cannot separate these factors so the productivity is simply added value divided by the number of employees. If so, the notion that the top manager is more productive cannot be even defined in economic terms.

Did anyone measure unit labor cost for the management?

[JK]

Careful piotr. You might land up as a Marxist, and what would you do then?

[Cranky Observer]

> The financial technology enabling
> leveraged buyouts emerged in the 1980's.

I take it you have never heard of Samuell Insull? Andrew Carnegie? Henry Clay Frick?

Cranky

[Chris]

Slightly OT, but is there some well-known explanation why I often cannot load this page on weekends, and today is the first time I've been able to access in probably two weeks? I use Firefox but seem to recall the same problem with IE.

Please direct responses to my email:
c_powe2000@yahoo.com

Thanks!

[Antonio Manetti]

Somehow, this seems pretty straightforward to me.

A corporation is an entity that generates wealth (by hook or by crook). That wealth accrues to those at the top (aka 'senior management'), to the owners of capitol and thence to their acolytes in academia and right-wing think tanks, cronies in congress and those who in some other way are seen to contribute to the well-being of the wealth-generating entity.

In this system, those at the bottom are, by definition, the most fungible and hence are rewarded accordingly.

What am I missing here?

[meno]

It seems to me the people Brad quotes are often conflating two issues.

1) The rise in relative income of the top 1% is not matched by a rise in relative productivity.

Restatement of 1) This rise in relative income is not a rational move by the markets, but instead is driven by other socio-political forces.

2) Govt policy is the cause of (or at leats an important part of) these other socio-political forces.

Restatement of (2): The govt is making income more unequal.

Brad frames this as a debate about (1). But actually some of his quotes debate (1) and some debate (2).

[Jonathan Goldberg]

Someone please tell me how so high a share of gains going to the top 1% can be a return to education. If I had a list of the various educational accomplishments of the top 1% and the second 1% could they really be told apart statistically? And the third 1%? Yet we know how skewed the income differential is.

I have seen one neo-classical economic explanation for the rise in CEO pay: it tracks the rise in corporate capitalization. The idea is that the larger chunk of capital that is hypothetically made more productive by a star CEO makes it rational for corporations to pay extra for the last increment in CEO talent.

I'd feel better about this if I thought that there actually were very many star CEOs. The data I've seen on that is not encouraging.

Topic change.

In answer to:

Is it really true that there is a Nobel prize in economics because Nobel's wife had an affair with a mathematician?

You are conflating stories. Noble's wife's hypothetical affair with a matnematician is given as an explatation of the lack of a Noble prize for mathematics. I say hypothetical because Noble was a life-long bachelor.

The really isn't a Noble prize in Economics. There is a "Bank of Sweden Prize in Economic Sciences in Memory of Alfred Noble", established long after Noble's death, whose winners are decided on by the Swedish Academy, as the Noble Prizes established by Noble are. It was intended to be confused with the original Prizes, and it pretty much has been. Whether that's justified is left as an excercise for the reader.

[reason]

Can somebody remove the SPAM?

The CEO argument is strange to me, because it assumes the productivity difference between CEO's is significant and known. If not then the supply side of the market should dominate not the demand side. (Information economics strikes again!) I think the real answer is a combination of three things:
1. market failure (i.e. boards of CEOs setting their salaries of their own group);
2. risk aversion (boards of very large firms) need someone who has proved themselves in another VLF in case something goes wrong, and so artificially reduce the supply of "talent";
3. class warfare - making sure CEOs have no social point of contact with their employees so they can be fearlessly ruthless.

But I like JimW's point. Personally, I am against leveraged takeovers, because it reduces the freedom of public firms to employ unusual strategies. How do we learn what will work long time, if different strategies are not allowed to be followed? Utimately, the limiting factor on their behaviour should be their own shareholders, not other shareholders or bankers.

[robert e]

"Isn't rising inequality a worldwide trend, even if it's more marked in the USA? If that's so, it weakens the Krugman theory that it's down to government policy other than taxes."

Only if government policy has no effect on inequality outside its borders. For example, our massive agricultural subsidies have had profound impact both at home and worldwide.

"I havn't heard much about the winner-take-all aspect of the information society. You can make an honest living selling the second best hammer; it's much harder with the seond best word processing program or economics textbook."

On the other side, the market for word processing programs in the information society is as accessible as it is large, in theory. The market(s) for hammers, whether best or second, is dependent on physical and social infrastructures accessible to a much smaller number of people. So shouldn't elites find it easier to manipulate the latter?

I hope the experts are looking for the evolutionary process, not merely one-shot events or perennial equilibria. It seems a given that the elite get to change tax and commerce policy, more or less as the political climate, reason, personal morality, and social mores allow. But any success in that regard, especially when won through compromise, changes the landscape in predictable and unpredictable ways, incentivizing new behaviors and changing the desirability of specific policies. The next success at policy change thus has a different character, and creates yet another environment, with different penalties, rewards, policy targets, etc. To put it simplistically.

[Blissex]

«I think currently that there have been four big shifts that might explain this:»

Oops I forgot another two factors that I usually mention:

* Increasing levels of home and stock ownership deliberately favoured by conservative governments in various countries as home and stock ownership correlates highly with conservative voting.

* Increasingly older, and thus increasingly authoritarian and asset owning and with a vested interests in low labor costs percentages of voters in various countries.

I was reminded of these two factors by this comment:

«It seems a given that the elite get to change tax and commerce policy, more or less as the political climate, reason, personal morality, and social mores allow.»

But clever elites can change the political climate and social mores. After a UK think tank discovered that conservative voting was associated with home (and car) ownership (and age), conservative governments have helped many voters gain a vested interests in conservative, labor-hostile climates.

Usually by massively subsidising the acquisition of small assets either via obscenely generous tax deductions, or in the case of the UK via shameless handouts of property and shares.

Hey, as recently as this year Grover Norquist has stated that one goal of turning SS into share accounts is to ensure a massive political shift:

http://economistsview.typepad.com/economistsview/2006/07/grover_norquist.html
«The modern Democratic Party cannot survive if everyone in the country is going to be saving 10 percent of their income and retiring on that income, the party of trial lawyers and labor unions is finished.»
«Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that" [ ... ] "We're sorry about the seals and everything but we really got to get the stock market up."»

[Blissex]

«Hey, as recently as this year Grover Norquist has stated that one goal of turning SS into share accounts is to ensure a massive political shift:»

Norquist has done a very clear, very straight speech and it was reported on his organization's web site:

http://WWW.ATR.org/content/html/2005/oct/101505spch-dllslcr.html
«The biggest demographic shift in the last 25 years in America is the number of Americans who own stock directly: not through their pension plans, not through their insurance, but directly. When Reagan was elected, 20% of Americans owned stock directly. Today, it is 60% of adults; it is 70% of all voters. Okay? This changes the world.»
«There is some very good polling data on this that Scott Rasmussen at Rasmussenpolls.com put out, and that demonstrates that if you own $5,000 worth of stock, directly, you are 18% more Republican and less Democrat. Every demographic gets better: all income groups, employed, unemployed. African Americans who own no stock: 6% Republican. African Americans with $5,000 worth of stock: 18% Republican.»
«Every demographic group gets better with one exception. The group that’s already fairly Republican who gets no better who share ownership, this is women who earn more than $75,000 a year. So if you know any women like this, don’t get them any stock because it just doesn’t do any good at all, but if you buy them a gun, it helps.»
«Look, if you go from a country where we have 60% of Americans owning some stock to one where a 100% of Americans at age 18 can look ahead and recognize that they will retire with hundreds of thousands of dollars of stock even if they have a low-income job their entire life. This does not require you to invest wisely or have a high-paying job. Simply, if you take your FICA taxes and put them in a personal savings account that you own and not the politicians. If you do that, it changes the world. The party of trial lawyers, and labor unions, and big city political machines cannot compete if every American is looking forward to serious share ownership. End of discussion. The other teams finished.»

Note that I said clear and straightforward, not ''intellectually honest'', as that would be a bit of stretch in particular as to «they will retire with hundreds of thousands of dollars of stock even if they have a low-income job their entire life.»

[robert e]

"But clever elites can change the political climate and social mores."

Right on. I didn't have the time or energy to get into details, and anyway I was thinking more of mass culture and media ownership, but Blissex gives solid examples of policies that change hearts and minds and pave the way for more substantial policy changes. It's that "ownership society" Bush wanted so much. Here in the US I suppose the gradual replacement of defined benefits with 401k's was one of the ways the ball really got rolling. Propaganda plays its part as well.

As Blissex and other commenters have shown, it's more than mere indifference or ignorance on the part of the lower 80% or 99.9% that has allowed income inequity to increase--many of us are, in fact, true believers. One need not be elite to be elitist.