Government Policy and Income Inequality Yet Again Again

Paul Krugman emails:

I think it's really important to realize that we have only a modest amount of direct evidence that technological change is driving increased income inequality. That is, while there have been a few studies showing some connection between increased use of IT and changes in the wage structure, very little of the conventional wisdom that technology is the culpritis based on those studies.

So why is technology given the credit? Basically because it's the residual category - and as Bob Solow said about the role of technology in growth, the residual is the measure of our ignorance. We estimate the effects ofthe stuff whose effects we know how to measure - taxes and globalization, mainly - and then attribute the rest to technology.

The point is that it's all too possible that we're attributing to technology rising inequality that may be largely due to hard-to-quantify political and institutional change.

There are several reasons to think that politics plays a big role. One is the broad correlation between the political climate and trends in inequality, which I pointed out in the Times. (By the way, Larry Bartels in Princeton's politics department shows that there's a strong correlation between party control of the White House and inequality trends even in the short run; see http://www.princeton.edu/~bartels/income.pdf. It's kind of a mysterious result, but worth pursuing.)

Another piece of evidence is the wide difference in inequality trends between the US and to a lesser extent the UK, on one side, and everyone else.

Yet another piece of evidence, which I think is very suggestive, is the discontinuous nature of the Great Compression. If you go back to the original Goldin and Margo paper, http://www.nber.org/papers/W3817, they found that there was a drastic reduction in wage inequality over the course of just 5 or 6 years in the 40s, which then stuck for another 30 years. In the paper, they struggle to reconcile this with a supply-and-demand framework, but it sure looks like a change in norms which had sustained effects on market outcomes.

So what are the mechanisms? Unions are probably top of the list; I believe that there's a qualitative difference between wage bargaining in an economy with 11 percent of workers unionized, which is what we had in the early 30s, and one with 35 percent unionization, which is what emerged from World War II. That's discontinuous change, partly driven by a change in political regime. And the process went in reverse under Reagan.

An overall climate of public scrutiny may matter too, especially at the top of the scale.

And don't forget that some taxes affect the pre-personal-tax distribution of income. Taxes on corporate profits went from a minor inconvenience before FDR, to a major source of revenue under Eisenhower, and back again.

The bottom line is that the view thatrising inequality reflectforces beyond the reach of politicians may sound sensible, but it's actually a supposition based on very little evidence, and there's a lot of evidence on the other side.

Comments

[Ken Jarboe]

I have to agree with Paul on this one. The history of technological change shows that inequality is not necessarily the result of the introduction of new production technologies. There are too many other factors, including institutional and political, that are part of the equation as to how the gains from the resulting increased productivity is distributed.

Remember also that "technololgy" is really a shorthand for Solow's residual. It is what is left over when you account for increased inputs of labor and capital. Thus it is a broader category of knowledge/innovation - any change including organizational changes that increase productivity. In the debate, those other institutional factors simply get lumped into the "technology" category.

[ejf]

Perhaps a lot of the correlation arises from the Democrats being in charge during the Depression, World War II and the early Cold War. These events effectively reversed the openness of the global economy through tariff walls and reductions in factor mobility for both capital and labor. Through Stolper-Samuelson type effects, this raised the return to labor, the relatively scarce factor in the US.

[eyelessgame]

I wonder also if the social climate might have something to do with it. Reagan didn't just change policy. Remember the '80s buzzphrase "greed is good"...

Since I don't believe that supply-and-demand really operates much in setting CEO salaries (aren't a lot of CEOs friends of the board? they're not exactly competing for the position, nor is the board competing with other companies for that CEO) -- so I think one can make a case that social climate has quite a bit to do (as much as economic policy, perhaps) with the salaries chosen by CEOs. They're paid what they, and the board, believe they can be paid without undue damage to the morale of the company. A social climate that believes 'greed is good' leads to a workforce more willing to tolerate enormous CEO pay.

[Movie Guy]

Where is the consideration and discussion regarding the factor influence of advanced global trade initiatives on growing income inequality in the USA?

[anne]

There is not the slightest doubt in my mind that public policy drives income equality or inequality, and that Paul Krugman is correct beyond my having to wonder why the arguments are so fierce against the relation. Think carefully to Brazil, Sweden, South Africa and America, and the relation between policy and income and wealth equality is obviously there.

[Randolph Fritz]

It seems to me that technology is, in the long term, affecting the distribution and nature of wealth, largely by making capital equipment smaller and less expensive--increasingly, large-scale industrial facilities (with some important exceptions) are anachronisms. In addition, some desires which have been satisfied by industrial production of objects--recorded entertainment, for instance--can now be satisfied by services. I would expect these changes, however, to reduce income inequity; indeed, if they go far enough they will be the end of capitalism though not, I think, inequity.

[Laertes]

I make video games. I did a football game once and had to set up varying levels of difficulty. The first attempt focused on ball control, mostly--tweaks to the probability of interceptions and fumbles and such. This was far too clumsy and players found it annoying.

So we tried something more subtle. There are dozens of small interactions going on every second--rushers struggling with blockers, receivers struggling with cornerbacks, passes landing more or less accurately, and so on.

We made very small adjustments to every single interaction. When we wanted to make the game harder for the player, we'd tilt each on of these interactions a percentage point or so against him. The result was amazing.

With big changes to a few inputs it was just annoying. You could tell the game was messing with you, and you could see exactly where it was happening and it felt like you were being cheated. With very small changes to a vast number of inputs, it just got lots harder. You couldn't point to any one thing and say that that's what's doing you in, but you couldn't miss the fact that your life had gotten a lot more difficult. We always got the results we wanted. When we wanted the player to win, he won 90% of the time. We wanted close games so that every last play counted, and we almost always got it.

I figure control of the government has to have a similar effect on working folks. Maybe you can't point to one or two policies that are screwing you, but there are countless inputs to the system. Tiny adjustments to each of these knobs--more industry control over regulation-writing, more labor-hostile judges, less enforcement of labor law, and on and on and on and on, all adds up to a tremendous effect.

When my friends ask me why I'm reflexively on the side of labor in any dispute with management, I say that it's because in the last 30 years or so, corporate profit and worker productivity are way up, and wages are essentially flat. I don't know the fair way to split these gains between shareholders and workers, but I know that shareholders getting all of it and workers getting none of it isn't it.

To a game guy who writes difficulty-tuning code, this kind of result, with one side utterly defeating the other when both are highly-motivated, is clear evidence that some structural changes are called for.

[David Yaseen]

I lean toward Paul as well.

Obviously, it's impossible to measure, but what effect might the 'bully pulpit' of the presidency have on wages? Under Reagan, Clinton, and the Bushes, collective action was deligitimized. After Patco, workers no longer felt secure in the excercise of their leverage against employers.

Perhaps knowing the government was not on their side had a chilling effect on workers' demands. Perhaps knowing the government was not on the workers' side encouraged management to try to secure bigger and bigger slices of the pie for itself.

[Alex Tolley]

In Britain I well remember the 60's Labour government squeezing the rich ("until the pips squeak") taxing both income and wealth, while trying to control capital flight and tax exiles. At the same time, union power exemplified by "I'm all right, Jack" attitudes and almost extortionary tactics by nationalized industry unions, was overreaching. This all turned around during the Thatcher years with union showdowns that broke union power in many industries and a reduced tax regime to encourage wealth creation.
This seems to have nothing to do with technology, but rather political ideals which became the zeitgeist.

It seems to me that if politics is more influential than technology, then this should show up at different times in different countries, whereas "technology" should diffuse more or less consistently around the world.

If income distributions are at least about the power of different groups over the cutting of the economic pie, then it seems at least reasonable that the actions of these groups may be more or less legitimized in myriad ways by the political leadership.

[joan]

The Bartels result may be just showing that in an economy when average incomes are are rising rapidly, the low income groups benefit more than the higher income groups. Since WWII, with the exception of Eisenhower, no Republican was president when the average income was rising rapidly. See plot at

http://www.visualizingeconomics.com/
wp-content/uploads/avg_income_book_big.gif

[James Galbraith]

To give myself a bit of credit, in *1998* I published an entire book -- Created Unequal -- which thoroughly debunked the claim that technological change drives *wage* inequality. In that immortal text, I showed among other things that (a) the timing was wrong; and (b) pattern of sectoral effects were wrong. Most of the rise in wage inequality in the 1980s occurred before the great wave of technical change associated with computerization, and most of it was in manufacturing, which computerized less than services did.

[I realize that some writers on this deny that in speaking of technological change they mean "computerization," but so far as I know, no one has specifically pointed to anything else of comparable importance.]

The actual effect of technology on wages is usually the opposite of that claimed by this hypothesis. Technology does not raise the wages of the skilled, it is introduced to devalue the wages of the skilled by allowing their jobs to be done by people with less skill, and at lower relative pay.

Further, direct measurement of inequality in the wage structure is not only possible, it is relatively easy. And having done it, one finds that there isn't that much of a residual to explain. Most of the change in pay inequalities is traceable to fluctuations in aggregate demand and employment. It's really very simple: when times are tough, low-wage people work fewer hours, earn less overtime, and inequality rises; this is less true of high-wage workers whose income streams are generally more stable.

Clear implication: The rise of inequality we observe has *very* little to do with changes in hypothetical hourly wage rates, which are hard to observe but so far as one can observe them, in fact change very little in relative terms.

Further, the technology sector *did* have an important influence on *income* inequality in the late 1990s, due to the bubble in technology stocks. This had everything to do with the madness of the capital markets, nothing whatever to do with "skill-bias" in technical change, which by that time was already being discarded as a conceptual category by observant mainstream economists, including Robert Lawrence and David Card.

I wish I could say that Robert and David were influenced by a prior reading of my book but there is no evidence of that.

Finally, Tom Ferguson and I published an article in Research in Economic History back in 1999 which completely deconstructs the change in wage structures during the period 1920 to 1946. We find this was mainly due to the flux of demand (55%, by the eigenvalue), next to labor agitation and minimum wages (20%), and third to exchange rate changes (15%). Taking these three forces together, there is simply nothing left for the Goldin-Margo hypothesis to explain. There is also very little to be explain by the fudge-word "norms": what happened was entirely related to demand, politics and relative prices (exchange rates).

If esteemed colleagues would stop quoting each other for a few minutes and actually examine the evidence I have been trying to lay before you for many years, you might possibly learn something.

Much of this information is freely accessible at

Yours in hope and irritation,

James Galbraith

[joan]

Looking at the plot I just recommended, it occured to me that both the average income and the relationship beteen high and low income groups would be effected by demographic changes. If a large number of unskilled workers enter the work force (in the 1970,s the baby boom generation and women, and more reciently emigrants) both the average income and the bottom 20% relative to the top would fall. Has anyone looked at this effect?

[anne]

http://www.nytimes.com/books/98/11/01/reviews/981101.01nussbat.html

November 1, 1998

Other People's Money
By BRUCE NUSSBAUM

CREATED UNEQUAL
The Crisis in American Pay.
By James K. Galbraith.

t has come to this. On the cusp of the 21st century, after years of buoyant growth, wealth creation and optimism, the global economy is poised on the knife-edge of disaster. If there is a slogan for this gloomy end-of-the-century period it is, ''Lack of demand is the problem, stupid.'' And if there is a answer, then it is ''easy money.''

The truth is, at this moment in time, there is nothing more important than monetary policy. Mistakes are bringing the world to the brink of the most threatening recession since the Great Depression. For over a year, serious but contained economic problems in Asia have been mistakenly treated with tight money medicine prescribed by the International Monetary Fund. The result? The impoverishment of millions of middle-class people, riots and pogroms against Chinese minorities and the unleashing of a savage deflationary recession that is sweeping the globe. Russia's fragile market democracy is being undermined, Latin America's economic progress is being squeezed and now the United States is being hit.

The forces of deflation are killing American corporate profits, scaring the stock market and eroding wealth. The wild optimism of the spring and early summer is quickly being replaced by a gloomy foreboding. Almost no one in a position of power anywhere in the world has ever lived through a deflationary recession, the kind that parents and grandparents still describe only with hushed tones and worried looks. Will the world's leaders make the right choices in policy? Have the wrong ones already determined our economic destiny?

The growing debate over monetary policy makes James K. Galbraith's ''Created Unequal'' an important book. While Galbraith, the author of ''Balancing Acts: Technology, Finance, and the American Future,'' focuses on the domestic economy, he puts his finger on the issue of the day -- monetary policy and its impact on economic growth and income around the world. Too often, he says, the Federal Reserve has battled the threat of inflation at the sacrifice of job creation and income growth. By keeping interest rates relatively high and economic growth lower than it could be, the Fed encourages chronic high unemployment. This, Galbraith argues, hurts less educated, lower-end workers harder than their college-educated counterparts and opens a wage gap that threatens the middle-class foundations of American democracy. For the past 30 years, the jobless rate has rarely fallen below the 5 percent rate of the 1950's and 60's, while the wage gap has increased throughout this period. Only in the past two years has the unemployment rate dropped into the 4-percent-plus range, and only then have real wages for the bottom half of the working population begun to rise, closing the wage gap to some extent.

Galbraith, a liberal economist, criticizes the last three Fed chairmen -- Arthur F. Burns, Paul A. Volcker and Alan Greenspan -- for promoting the monetary policy that has generated low American growth and a widening wage gap. But it is Greenspan, a conservative Republican, who has done the most to close the gap in recent years by permitting more economic growth. Greenspan has consistently fought inflation hawks who insisted inflation would rise if the unemployment rate dropped below 6 percent. Of course the unemployment rate is now below 5 percent without triggering inflation.

Greenspan has justified his policies by arguing that globalization and information technologies have tended to boost productivity and curb the pricing power of corporations, thus permitting faster growth without inflation. Over the past 24 months of what traditional economists would call ''above trend'' economic growth, tight job markets have allowed the wages of the bottom tenth of the labor market to rise faster than those of the top tenth. Galbraith's broad attack against the Fed's long obsession with fighting inflation fails to note what can only be called the heroism of Greenspan in battling conventional economic wisdom. That is a lot more than can be said for Michel Camdessus, the head of the International Monetary Fund, a man who is not a player in ''Created Unequal,'' but who would probably be the villain of any sequel that Galbraith might choose to write on the troubles of the global economy....

[anne]

http://query.nytimes.com/gst/fullpage.html?res=990DEFD91531F931A15752C1A96E958260

November 22, 1998

'Created Unequal'

To the Editor:

In his review of ''Created Unequal: The Crisis in American Pay,'' Bruce Nussbaum faults me for including criticism of the Federal Reserve's current chairman, Alan Greenspan, in my general assault on the legacy of monetarism, anti-inflation monomania and the so-called natural rate of unemployment at the Federal Reserve. But the passage he refers to is a discussion of monetary policy through 1992, a period when Greenspan had not yet broken with orthodoxy on these issues. And so Greenspan did earn a share of responsibility for the rise in inequality that recession and high unemployment produced during this time.

Since then, Greenspan has indeed changed his views, and he deserves credit especially for pushing to lower interest rates in recent months in the face of the Asian crisis. This last issue is too recent to be covered in a book that went to press in late 1997, but I have repeatedly praised Greenspan on this score this year.

James K. Galbraith
Austin, Tex.

[Cranky Observer]

> [I realize that some writers on this deny
> that in speaking of technological change
> they mean "computerization," but so far as I
> know, no one has specifically pointed to
> anything else of comparable importance.]

Biotechnology has the potential (perhaps more so than computers), but then again it has "had the potential" for at least 30 years.

Cranky

PS Has anyone else noticed that Brad's blog is now the official Krugman Column Discussion Site(tm)?

[anne]

http://utip.gov.utexas.edu/

University of Texas Inequality Project [UTIP] is a small research group concerned with measuring and explaining movements of inequality in wages and earnings and patterns of industrial change around the world.

-- James Galbraith

[Data and analysis at UTIP have long been thoroughly convincing to me that income and wealth inequality is policy driven.]

[Cyrus]

Some institutional changes are driven by supply and demand.

Sticking to the subject of unionized labor, we can't just say that wage-earners are in a poorer bargaining position because fewer of them are unionized. Unions can't create bargaining power, but only reify potential bargaining power. If, because of a large supply of labor, the amount of potential bargaining power the union has to organize into actual power is small, then the costs of labor organization (dues, having to strike when the union says strike) may well outweigh the benefits of using what little bargaining power labor has in an organized fashion. Labor becomes disorganized because, at the present time, little if any is to be gained through organization.

Private decisions like whether labor organizes itself or no adapt to the conditions of the market.

[anne]

As the 1970s closed, a change in corporate structure was about to be realized. We were to go from a corporate ownership to a corporate management culture. Management, apart from ownership, gained increasing control of corporate policy. The change was stimulated by increasing financial interests in corporations by investment houses and the rapid increase in asset ownership by mutual funds whose interests were aligned with management.

We have now not an ownership society or an employee society but a management society in which returns to employees are limited enough to have lately startled Warren Buffett, and returns to ownership have long startled John Bogle.

[David Carlton]

One possible factor that I don't think has been addressed is the shifting balance among US regions. One aspect of the "Great Compression" of the 1940s was a sharp income convergence among American regions. This was true most famously of the South; but the disparity between the Northeast and the Midwest also shrank dramatically, even though--much like the South--the Midwest had maintained the same income relative to US for the previous half-century or so. I don't have the numbers in front of me here; but if I recall correctly, for the Midwest the convergence was a one-time deal in the 1940s, perhaps due to rapid unionization; for the South, convergence continued at a strong pace to the 1970s, then declined and finally stalled around 1990. What this suggests to me is that the Great Compression was the result of a convergence of one-time events--including the New Deal, World War II, and the shocks that initiated and furthered [e.g. the Civil Rights movement] southern regional convergence. If so, one could argue that, once the special conditions of that era had played out, the staying power of the compression was less lasting than it appeared from the vantage of the 1950s and 1960s. In the South, for example, the rising tide didn't lift all boats, and indeed the rural and small-town South has proven particularly vulnerable to the downside of globalization, while lacking the flexibility to adapt to it. Lots of communities around the country are trapped in the same dilemma, even while the Silicon Valleys flourish.

I should add that I tend to be skeptical of policy-driven explanations, since one has to explain the environment that produced the policy. Reagan was the product of his age, more than its shaper--even though policy undoubtedly reinforces deeper structural moves. But I think some deeper structural shifts likely have driven both the increasing inequality and the policy environment that Krugman is fingering as the culprit.

[Neil']

One of the most important factors of all: the pay of many at the top is determined by committee members who aren't spending *their own* money as a true competitive market requires. They can just set the pay about as high as they want. They're all "each other's poodles" as even George Will, and Bill O'Reilly, admitted.

[Neil']

Galbraith: I have trouble believing you didn't really notice the stagnation in real wages relative to other kinds of income, or that it isn't very "hard" and/or is muddled as a sort of hypothetical, IIUC.

[A. Zarkov]

I once worked for a budge-based large employer of technical professionals. Initially management salaries were only modestly greater than staff. We got word that management wanted to increase this modest gap and they did with the help of inflation. I was part of a renegade group that tied to unionize the staff. We managed to get salary data (management tried to stop us with a law suit) and used it to show the staff how they were getting screwed as a disproportionate share of the yearly raise packages got directed to management (who rated themselves!). The modest gap later widened considerably, yet the staff was either too apathetic or scared to do anything. Divide and conquer worked.

[anne]

Though the tendency to income and wealth inequality was noticed through the 1990s, this decade has shown a marked change in revenue and wage structure in corporations and tax structure changes that have and will accentuate inequality. Corporate revenue from the short recession rose quickly to near or record levels, while wages lagged. Profits increased as a portion of GDP to startling levels from an historical perspective. Taxes became flat to regressive for the wealthy and wealthiest.

[Cal]

Prof: You are correct in wishing that Paul Krugman had an office right next door to your office, so that you could routinely discuss things with him.

[Rebecca Allen, PhD, ARNP]

I'm no economist, but I think Krugman has a definite point here. The non-policy explanation I've seen most frequently is the increasing premium put on education. That seems to me to be a reasonable explanation of the top 20% pulling away from the other 80%. However, I don't see how that explains the top 0.01% pulling away from everyone else, including the rest of the top 20%. In fact, I'd guess that the top 0.01% is overall LESS educated than the other 19.99% of the top 20%. That is, my guess is that most of the PhDs and MDs are in the lower 19.99%, and that the top 0.01% is made up primarily of CEOs, with probably some entertainers etc. thrown in. If my assumption is correct, than the education explanation breaks down completely at this point, and other possibilities need to be considered, including the fact that Republican policies (anti-union, anti-regulation, tax cuts for the rich, etc.) seem to benefit this group most of all. (Full disclosure: My husband and I have 8 college degrees between us, including 2 PhDs, and while we're comfortably in that top 20%, we're nowhere near that top 0.01%.)

[anne]

http://krugman.page.nytimes.com/b/a/257973.htm

August 21, 2006

King George's Crumbling Monarchy

Paul Krugman: What's really so disturbing about all this is that it's completely gratuitous. The I.R.S. is actually an effective, professional organization, which is the victim of a grossly dishonest smear campaign; you can read all about it in David Cay Johnston's book "Perfectly Legal." Add a few thousand agents and it could do the job of tax collection just fine. The U.S. military is a superb force, or was until Iraq began grinding it down. Top-level civil servants in America are, in my experience, really very good at their jobs.

But somehow political power has fallen into the hands of people who want to dismantle everything that works, and conduct business as if they were running a medieval duchy — or a third world tin-pot dictatorship. (Yes, contractors in Iraq really did receive duffel bags filled with $100 bills.) And it turns out that they can do immense damage in a very short time. Remember that FEMA was regarded as one of the best agencies in the federal government at the end of the Clinton years.

[Mr. Econotarian]

There was a big change in the definition of "family" between 1960 and 1980, so comparing "family pre-tax income" at the beginning of the period (low number of single-parent or double-worker households) and the end (many single-parent households, but also many double-parent/double-worker households) is difficult.

[Rebecca Allen, PhD, ARNP]

A follow-up to my previous comment: Josh Bivens addresses the same issue of the 99.99/0.01 split, on the MaxSpeak weblog (and with far greater expertise than I have).

[anne]

Rebecca Allen's argument has been repeatedly emphasized by the analyses of David Cay Johnston:

http://www.nytimes.com/2005/06/05/national/class/HYPER-FINAL.html?ex=1275624000&en=f1af44c9cec8c79e&ei=5090&partner=rssuserland&emc=rss

June 5, 2005

Richest Are Leaving Even the Rich Far Behind
By DAVID CAY JOHNSTON

When F. Scott Fitzgerald pronounced that the very rich "are different from you and me," Ernest Hemingway's famously dismissive response was: "Yes, they have more money." Today he might well add: much, much, much more money.

The people at the top of America's money pyramid have so prospered in recent years that they have pulled far ahead of the rest of the population, an analysis of tax records and other government data by The New York Times shows. They have even left behind people making hundreds of thousands of dollars a year.

Call them the hyper-rich....

[save_the_rustbelt]

"...The I.R.S. is actually an effective, professional organization,..."

The IRS has some fine people, but the organization is a wreck, and even if the organization worked there is no effecient means of operation with a totally screwy IR Code.

Economists rarely have contact with the IRS, if you want to know about the IRS ask a CPA or tax attorney.

"Effective" only in the sense of any other bully.

[Emma Anne]

Fascinating comment Laertes. As an engineer, your theory resonates with me. Small changes do feed into each other and add up in odd and unpredicatable ways. They add up over time. The affect things that you didn't realize they would affect.

That said, we already *know* we're being screwed by the union busting and tax cuts skewed towards the top earners. We *could* deal with those obvious factors now and see what develops. If we had any power in government, that is. . .

[monkyboy]

China is facing a rising income gap, too:

http://tinyurl.com/ryvk4

They are actually trying to do something about it there, too.

[Sonia]

Joan's comment re the importance of demographic change is well taken. However, is seems that almost anyway the data are cut there is an increase in inequality. For example using Census figures inequality in earnings for full time female workers increased over the 1974-2004 period and by some measures more than the increase for men. The increase in married professional women over the period most likely contributed to the rise in inequality of family income over the period

David Carlton points to the importance of geographical convergence in earnings in the 1940's and into the 1970s. Changes in the geographical distribution of population since then may have affected both the nominal average and the distribution of income. The growth of population in the South 19.7% over the 1990-2000 period versus 5.5% in the North East may have reduced average nominal income but it is not clear how real income was affected considering possible lower living costs in the South.

[anne]

As Emma Anne reminds us, metaphors are essential in understand process as the additive and branching and possibly cascading nature of smallish policy changes. Much to think through with these comments, but for those who think time discounts the implications of policy on inequality in 2004 Thomas Piketty and Emmanuel Saez have found a startling change.

[anne]

http://www.cbpp.org/7-10-06inc.htm#_ftn4

July 10, 2006

New Data Show Extraordinary Jump in Income Concentration in 2004
By Aviva Aron-Dine and Isaac Shapiro

Economists Thomas Piketty and Emmanuel Saez have recently made available an updated version of their groundbreaking data series on U.S. income inequality.[1] The data are unique because of the detailed information they provide regarding income gains at the top of the income spectrum, and also because they extend back to 1913. By contrast, widely used Census data on income developments do not capture income trends among the top one percent of households and go back only to the end of World War II. CBO data, which do capture income trends among the top one percent, show there was a substantial increase in income concentration between 2002 and 2003, but those data do not yet extend beyond 2003.[2]

The Piketty and Saez data offer the first real snapshot of income trends among those at the pinnacle of the income spectrum in 2004. The data show that income gains between 2003 and 2004 were particularly large for those at the very top of the income spectrum, resulting in a nearly unprecedented one-year increase in income concentration.[3] The Piketty and Saez data show:

* From 2003 to 2004, the average incomes of the bottom 99 percent of households grew by less than 3 percent, after adjusting for inflation. In contrast, the average incomes of the top one percent of households experienced a jump of almost 17 percent, after adjusting for inflation. (Census data show that real median income fell between 2003 and 2004. Average income is pulled up by gains at the top of the income spectrum; the 3 percent rise among the bottom 99 percent seems to largely reflect gains by households in the top quintile of the income spectrum. In contrast, trends in median income capture the experience of households in the middle of the income spectrum.)

* The top one percent of households garnered 36 percent of the income gains in 2004.

* This disparity produced an exceptional jump in income concentration in 2004. The share of the pre-tax income in the nation that goes to the top one percent of households increased from 17.5 percent in 2003 to 19.5 percent in 2004. Only five times since 1913 (the first year that this data set covers), and only twice since World War II has the top one percent's share risen by as much in a single year (in percentage point terms). Each percentage point of income is equivalent to $68 billion in 2004.

* The share of total U.S. income that the top one percent of households received in 2004 was greater than the share it received in any prior year since 1929, except for 1999 and 2000....

[anne]

http://select.nytimes.com/2006/07/14/opinion/14krugman.html

July 14, 2006

Left Behind Economics
By PAUL KRUGMAN

Here's what happened in 2004. The U.S. economy grew 4.2 percent, a very good number. Yet last August the Census Bureau reported that real median family income — the purchasing power of the typical family — actually fell. Meanwhile, poverty increased, as did the number of Americans without health insurance. So where did the growth go?

The answer comes from the economists Thomas Piketty and Emmanuel Saez, whose long-term estimates of income equality have become the gold standard for research on this topic, and who have recently updated their estimates to include 2004. They show that even if you exclude capital gains from a rising stock market, in 2004 the real income of the richest 1 percent of Americans surged by almost 12.5 percent. Meanwhile, the average real income of the bottom 99 percent of the population rose only 1.5 percent. In other words, a relative handful of people received most of the benefits of growth.

There are a couple of additional revelations in the 2004 data. One is that growth didn't just bypass the poor and the lower middle class, it bypassed the upper middle class too. Even people at the 95th percentile of the income distribution — that is, people richer than 19 out of 20 Americans — gained only modestly. The big increases went only to people who were already in the economic stratosphere.

The other revelation is that being highly educated was no guarantee of sharing in the benefits of economic growth. There's a persistent myth, perpetuated by economists who should know better — like Edward Lazear, the chairman of the president's Council of Economic Advisers — that rising inequality in the United States is mainly a matter of a rising gap between those with a lot of education and those without. But census data show that the real earnings of the typical college graduate actually fell in 2004.

In short, it's a great economy if you're a high-level corporate executive or someone who owns a lot of stock. For most other Americans, economic growth is a spectator sport....

But don't expect this administration or this Congress to do anything to limit the growing concentration of income. Sometimes I even feel sorry for these people and their apologists, who are prevented from acknowledging that inequality is a problem by both their political philosophy and their dependence on financial support from the wealthy. That leaves them no choice but to keep insisting that ordinary Americans — who have, in fact, been bypassed by economic growth — just don't understand how well they're doing.

[Robin]

Oddly and in a round about way, it seems sort of resurrection of the Cambridge debates, at least in the politics (class struggle) determines the returns to factors in equilibrium vs. marginal product determines distribution.

[Blissex]

«Oddly and in a round about way, it seems sort of resurrection of the Cambridge debates,»

That is impossible: despite the later confession by Samuelson, the Sraffa, Robinson, Kahn, ... side has been totally and comprehensively defeated in USA Economics because it does not lead to the central verity of Economics, that the distribution of income is determined mathematically by productivity.

Perhaps there are neo-Ricardians and Sraffians in the USA (and I have spotted the blog of one), but if so they are probably under constant surveillance by FBI's un-American activities division. :-)

[jamzo]

we use the term bubble to describe the "irrational exuberance" of the stock market and the term "housing bubble" to describe the residential real estate market of the past few years

why not an executive compensation bubble or "the top gets more and more" bubble

a select segment of the working population has experienced compensation growth - technological change occurred in this same period

so there is an time association

i think the the income of richard grasso the former head of NYSE is a good exemplar of executive compensation growth - a career employee he joined NYSE as a clerk and ended up with a$187 million package

(as a college drop-out his case also relates to the education argument)

was his compensation growth a byproduct of of technological change?

i think we can be that madeline albright and others on the executive compensation committee of the NYSE board would include the technological changes made during his tenure at NYSE as part of their rationale for providing mr grasso with his compensation package

from ap article 8/21

He is probably the most effective leader the New York Stock Ex change has ever had," said Ken Langone, an early backer of the Home Depot, and chairman of the compensation board when it approved Grasso's contracts. "We got value and he got what he was worth, and what he deserved."

Grasso is credited with transforming what some considered an ailing out-of-step stock market into a big money machine for many Wall Street firms

[Blissex]

«There was a big change in the definition of "family" between 1960 and 1980, so comparing "family pre-tax income" at the beginning of the period (low number of single-parent or double-worker households) and the end (many single-parent households, but also many double-parent/double-worker households) is difficult.»

That is a very good point, even if «household» (for income tax return purposes) and «family» are not quite the same thing.

But we are talking about the relative share of the top 1%, and we can look at the data by quintile too, and one would have to assume that the changed composition of ''family'' has impacted the composition by ''household'' differently by quintile.

I can imagine that there have been several changes in the underlying sociology between 1913 and 2004, but that's the data we have, and it does not seem not be outlandishly wrong.

[Oskar Shapley]

http://en.wikipedia.org/wiki/Inequality_Debate_of_2006

I set up a wikipedia page, somebody help me complete that.

[greensmile]

The way we form and fund and tax corporations in the US has made for rapid growth of companies where a new technology enabled such growth. But our supply of college trained workers was roughly matched to the opporunities with a slight sellers market if you were a skilled worker. I went from being the son of a bankrupt farmer who could barely scrape together the 600 bucks a semester for tuition via steady raises to a 95th percentile income...and thats just the wages. At the end of the 60's we were way ahead of other countries with our mix of capital, people and education, lack of impediment to corporate growth and market size. We now borrow to do anything, are addicted to dwindling natural resources and do not graduate as many engineers as asian countries. Wealth distribution in those countries is now the thing to study: will they get it right? will they leverage techology for everone's benefit? As a no-longer-competative player, we aren't an economy fit to answer these questions. Healthy economies appear to be positive sum games as long as restoration of consumed natural resources is left out of the equation. Is the US even in a zero-sum game anymore? If the Chinese crack the renewables problems, they might be the first country to have an honestly positive-sum [resources accounted] economy.

I got a degree in a technical field in the late 60's. The technology seeded by two decades of DoD funded reseach and space race and a reasonable supply of capital all came toghether: Lucky me as far as timing goes. That Technology is supposed to blunt the edge of peak oil's grim reaper but the government is only weakly seeding the research and hoping tax breaks will do the rest. Friedman says the Chinese are much more committed and focused on green energy products and solutions...anybody proving him wrong? I was lucky to hit the market in the last days of cheap energy and nearly balanced budgets. The shift away from federal spending that gave commerce and intellectual infrastructures high priority is coming home to roost. Entitlements and weapons systems are not investment grade tax expenditures.

My experience is that technology is neutral in its effect on wealth distribution: it can help make money but all the usual suspects of taxes and spending priorities are to blame for how it gets distributed. What is new is that we failed to export our wage and benefit structures to trading partners, perhaps out of greed for cheap goods, and what we did as a result was to pit our labor against developing nations, effectively begining to import THEIR wage/benefit structures. [and since we wont work under those conditions, we are now importing the foriegners, without legal formalities, who WILL work under those conditions.]

[jim]

There's a spiral, surely. A group gains relative economic/political power, uses its excess to buy some government action favouring its interests, which increases its relative economic/political power which enables it to buy more government action and so on and so on.

The interest is in what is it that upsets the original equilibrium: what is it that gives some group an edge over the others which it can then leverage using government? Surely Krugman is right in that it's change in the degree of unionization that shifted the balance.

I think the shift in unionization over the last twenty years really is a product of IT developments. When I first came to this country, the proverbial penniless immigrant, I went to work for a retail chain. In those days, there was an army of data entry clerks who took the tags from sold garments that had been mailed in from the stores and got them into the mainframe. There was another army of clerks who transcribed the summaries that came out of the mainframe onto large yellow cardboard sheets in a way that was perspicuous to the buyer, so she could make reorder decisions, and to the merchandising manager, so he could make markdown decisions. These were the mainstay of the union (District 65): you need a critical mass of people who are aware of their vulnerability, their substitutability to organise a workplace. They've all gone now. POS computers in the stores talk to the home office mainframes which provide a bewildering array of views of the data to the buyer or the merchandiser. No doubt the chain is still unionized. But the union's position is much weaker: who knows if the remaining people will support it in the clutch?

But there was an earlier decline in unionization which can't be attributed to IT improvements. Some of that was perhaps due to businesses migrating from high-tax, high-wage (union-friendly) states to low-tax, low-wage (union-hostile) states. I do believe that Federal government actions encouraged that migration during the '60s and '70s. I don't think most of the people advocating the actions which encouraged such migration intended that result, though.

[save_the_rustbelt]

The speed up of "creative destruction" of blue collar jobs gets no mention by Krugman, perhaps because he is pro-trade and cannot admit any damage from his ideas.

Replace enough $20-an-hour jobs with $10-an-hour jobs and there has to be an impact (and shooping at Wal-Mart does not make up for it).

[David Wright]

Krugman's response has a bit of merit, but not much.

He's certainly right that, technology being exogonous to most economic models, it tends to become a catch-all for any effects that can't be explained otherwise. The direct evidence that technological change has fed income inequality is indeed weak. On the other had, the "evidence" Krugman cites that government policy is to blame is pretty weak, too.

He notes that growth in inequality is correlated with Republican presidents. Even he calls this "mysterious", which as far as I can tell, means "this doesn't take into account lag times, the contribution of Congress, or any specific policies, so I can't begin to defend it with any intellectual rigor, but it does fit well with my gut feelings."

He notes that growth in inequality is large in the U.S., less in the U.K., and even less in other first world countries. Of course, that's the ranking of overall growth, too, so that fact could equally well be used to support the idea that technology-driven productivity changes are to blame.

As for specific mechanisms, he mentions unions and corporate taxes. But union membership has been plumeting steadily since the 60s; it's hard to point to any specific goverment policies that have driven that. And even if all the money freed up by reduced corporate taxes flowed into stockholder's pockets, that's not enough to explain the tremendous gains in the income of the top 1% and 0.1%.

Finally, Krugman makes some noises about social norms that favored equality in the post-war period and a reduced "climate of scrutiny" today. This might even be true, but it is speculation without even a hint of data and it isn't even about government policy.

[anne]

http://www.nytimes.com/2005/06/06/opinion/06herbert.html?ex=1275710400&en=c03b1056decb6b77&ei=5090&partner=rssuserland&emc=rss

June 6, 2005

The Mobility Myth
By BOB HERBERT

The gap between the rich and everybody else in this country is fast becoming an unbridgeable chasm. David Cay Johnston, in the latest installment of the New York Times series "Class Matters," wrote, "It's no secret that the gap between the rich and the poor has been growing, but the extent to which the richest are leaving everybody else behind is not widely known."

Consider, for example, two separate eras in the lifetime of the baby-boom generation. For every additional dollar earned by the bottom 90 percent of the population between 1950 and 1970, those in the top 0.01 percent earned an additional $162. That gap has since skyrocketed. For every additional dollar earned by the bottom 90 percent between 1990 and 2002, Mr. Johnston wrote, each taxpayer in that top bracket brought in an extra $18,000.

It's like chasing a speedboat with a rowboat.

Put the myth of the American Dream aside. The bottom line is that it's becoming increasingly difficult for working Americans to move up in class. The rich are freezing nearly everybody else in place, and sprinting off with the nation's bounty.

Economic mobility in the United States - the extent to which individuals and families move from one social class to another - is no higher than in Britain or France, and lower than in some Scandinavian countries. Maybe we should be studying the Scandinavian dream.

As far as the Bush administration is concerned, the gap between the rich and the rest of us is not growing fast enough. An analysis by The Times showed the following:

"Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000. Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000."

The social dislocations resulting from this war that nobody mentions have been under way for some time. But the Bush economic policies have accelerated the consequences and intensified the pain.

A big problem, of course, is that American workers have been hurting badly for years. Revolutionary improvements in technology, increasingly globalized trade, the competition of low-wage workers overseas and increased immigration here at home, the decline of manufacturing, the weakening of the labor movement, outsourcing and numerous other factors have left American workers with very little leverage to use against employers....

[dale]

Krugman is neither a sociologist or philosopher, so I don't expect him to elaborate on the importance of norms or social legitimating myths. But, they are, nevertheless, of crucial importance. The background assumptions, the moral imperatives, or lack of them, set the tone for every society.

Jared Bernstein lays out two primary competing norms- Your On Your Own versus We're In This Together. That's a simplistic dicotomy, but a good example of the intersection of cultural norms and economic policy.

[anne]

Dale:

"Jared Bernstein lays out two primary competing norms - You're On Your Own versus We're In This Together. That's a simplistic dicotomy, but a good example of the intersection of cultural norms and economic policy."

Guess where we've been heading.

[anne]

http://www.nytimes.com/2005/06/05/national/class/HYPER-FINAL.html?ex=1275624000&en=f1af44c9cec8c79e&ei=5090&partner=rssuserland&emc=rss

DAVID CAY JOHNSTON:

Draw a line under the top 0.1 percent of income earners - the top one-thousandth. Above that line are about 145,000 taxpayers, each with at least $1.6 million in income and often much more.

The average income for the top 0.1 percent was $3 million in 2002, the latest year for which averages are available. That number is two and a half times the $1.2 million, adjusted for inflation, that group reported in 1980. No other income group rose nearly as fast.

The share of the nation's income earned by those in this uppermost category has more than doubled since 1980, to 7.4 percent in 2002. The share of income earned by the rest of the top 10 percent rose far less, and the share earned by the bottom 90 percent fell.

Next, examine the net worth of American households. The group with homes, investments and other assets worth more than $10 million comprised 338,400 households in 2001, the last year for which data are available. The number has grown more than 400 percent since 1980, after adjusting for inflation, while the total number of households has grown only 27 percent.

The Bush administration tax cuts stand to widen the gap between the hyper-rich and the rest of America. The merely rich, making hundreds of thousands of dollars a year, will shoulder a disproportionate share of the tax burden.

President Bush said during the third election debate last October that most of the tax cuts went to low- and middle-income Americans. In fact, most - 53 percent - will go to people with incomes in the top 10 percent over the first 15 years of the cuts, which began in 2001 and would have to be reauthorized in 2010. And more than 15 percent will go just to the top 0.1 percent, those 145,000 taxpayers.

The Times set out to create a financial portrait of the very richest Americans, how their incomes have changed over the decades and how the tax cuts will affect them. It is no secret that the gap between the rich and the poor has grown, but the extent to which the richest are leaving everyone else behind is not widely known.

The Treasury Department uses a computer model to examine the effects of tax cuts on various income groups but does not look in detail fine enough to differentiate among those within the top 1 percent. To determine those differences, The Times relied on a computer model based on the Treasury's. Experts at organizations representing a range of views, including the Heritage Foundation, the Cato Institute and Citizens for Tax Justice, reviewed the projections and said they were reasonable, and the Treasury Department said through a spokesman that the model was reliable.

The analysis also found the following:

¶Under the Bush tax cuts, the 400 taxpayers with the highest incomes - a minimum of $87 million in 2000, the last year for which the government will release such data - now pay income, Medicare and Social Security taxes amounting to virtually the same percentage of their incomes as people making $50,000 to $75,000.

¶Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000....

[anne]

DAVID CAY JOHNSTON:

One way to understand the growing gap is to compare earnings increases over time by the vast majority of taxpayers - say, everyone in the lower 90 percent - with those at the top, say, in the uppermost 0.01 percent (now about 14,000 households, each with $5.5 million or more in income last year).

From 1950 to 1970, for example, for every additional dollar earned by the bottom 90 percent, those in the top 0.01 percent earned an additional $162, according to the Times analysis. From 1990 to 2002, for every extra dollar earned by those in the bottom 90 percent, each taxpayer at the top brought in an extra $18,000....

[Jared Bernstein]

Back in the 1990s, Larry Mishel and I started writing articles (also with John Schmidt) that challenged the skill-bias technology explanation for growing wage inequality.

Our argument was simple: advances in capital and tech have long been an important force in our economy. And they've been highly complementary with skill--ie, along with the evolution of technology, we've added many more college educated workers, doubling the share in a generation.

What we couldn't find was an acceleration of tech-induced skill demands over the period where inequality increased. It sounds arcane, but we thought, and think, it's fundamental.

You can't just cite the existence of skill-bias technology--something that's gone on forever--as the cause of something new: the surge in inequality beginning in the late 1970s.

To make that case, you have to show that the rate of skill-bias tech change increased at around the same time wage inequality began to grow. And no one has convincingly done so.

Here's a cite to an academic paper we published:
"Technology and the Wage Structure: Has Technology's Impact Accelerated Since the 1970s?" (with Lawrence Mishel). Research in Labor Economics, Volume 17, JAI Press: Greenwich, CT. 1998.

[Cyrus]

How longitudinal are these increases in income among the very, very rich? If the top 0.1% of incomes are experiencing runaway growth, but the number of years in a lifetime a person spends there is correspondingly dropping, then this says little about social mobility. One feature of the present economy is companies that experience huge growth for a few years, only to stagnate or get bought when their marketplace niche vanishes or becomes competitive. Marc Andreessen had a very large income for a couple years. How much of the top 0.1% is corporate executives, and how much successful-for-now entrepreneurs? (And I'll include top entertainers in the latter class.)

[dobedo]

The rise in the pay of CEO's and other top corporate officers has fueled the rise in the amount of income going to the top .1 of earners. This rise occurred during a period when the amount of money being invested in mutual funds and 401K plans was also increasing rapidly.

A recent study (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=667625) suggests that there may be some connection between these three growth curves. This study shows that the more pension business (including 401K plan management business) a mutual fund company has the more it votes with management.

So it may be that by creating a 401K system that has incentives for mutual fund companies to vote their shares on behalf of management (including voting for directors who vote for large managerial compensation packages), the government has created a system that promotes income inequality.

[Cyrus]

In discussions about inequality, I have to ask the question, if we desire to compensate for inequality through government interventions, why income taxes are invariably discussed, while property taxes are ignored.

It strikes me that property taxes are inherently harder to avoid (you can't hide your property from the government; if the government doesn't know you own the property, then you don't own it in any legally enforceable sense) and until they become so oppressive that land ownership is a net liability, carry little to no deadweight loss (the supply of land is, after all, highly inelastic).

[andres]

Cyrus: property taxes are highly regressive in terms of both wealth and income, given that a house is the single largest slice of wealth that a middle-class family has, in contrast to richer households who own much more in terms of financial assets. If you really want to address inequality through non-income taxation, you need to start talking about a tax on _wealth_, not property. Of course, any politician who mentions such a thing will be lynched, but that's where we're at.

As happens so often, I'm entering into this debate late, in part because I have little to add to what James Galbraith and Jared Bernstein wrote (and they were of this opinion way before Krugman looked into the matter; btw, being strongly associated with EPI or being a self-proclaimed post-Keynesian is not a way to be taken seriously by the mainstream of the economics profession--it's their loss, but also the US public's as well).

One thing that Galbraith and Bernstein should have mentioned, however, is that one cause of the surge in inequality in the early 1980's was the _combination_ of tight monetary policy and larger budget deficits that led to a surge in the value of the dollar and a serious decline in the price competitiveness of US manufactured goods. Even after the dollar started falling again after 1985, its absolute value remained too high and may well be too high even today.

In order to maintain some degree of competitiveness, US manufacturing had to cut labor costs in any way they could, which led to increased anti-union tactics, stagnating wages, and eventually culminated in pension obligations now being tossed to the Federal government. Also, this may have been a driving factor in the move towards outsourcing: the growth of Mexican maquiladoras, and the resulting downward pressure on manufacturing wages took off precisely in the early 1980's when the dollar was strong and competitiveness weak.

It's also possible to conclude that because of this pressure on manufacturing, the movement of the economy towards computerized services requiring college degrees may actually have helped to ameliorate rather than to increase overall income inequality, though it did little for wage inequality.

[anne]

Nice response, Andres, but Cyrus still poses an interesting structural question to think even more closely about.