Friday, October 07, 2011

The Top 1%


via Cafe Hayek by Russ Roberts on 10/7/11

Robert Lieberman, a political scientist at Columbia University writes in Foreign Affairs:
The U.S. economy appears to be coming apart at the seams. Unemployment remains at nearly ten percent, the highest level in almost 30 years; foreclosures have forced millions of Americans out of their homes; and real incomes have fallen faster and further than at any time since the Great Depression. Many of those laid off fear that the jobs they have lost — the secure, often unionized, industrial jobs that provided wealth, security, and opportunity — will never return. They are probably right.

And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down.
I'm not sure where he gets that statistic from. In the Census data (here, Table F-3, ) scroll down for the numbers in 2010 dollars, corrected for inflation) this is the mean income for the top 5%:
2010 Dollars
2010 14,991 37,066 60,363 91,991 187,395 313,298
2009 15,541 37,657 60,896 92,464 192,614 330,388
2008 16,107 38,607 62,361 93,326 192,809 331,064
2007 16,896 40,279 64,612 96,618 196,146 332,943
2006 16,804 39,762 63,245 95,589 202,641 358,700
2005 16,492 39,243 62,797 93,921 196,891 344,699

The first five columns are the various quintiles. The last column is the mean income of the top 5%. This is family income. Maybe Lieberman has it for individuals. But for families, the richest 5% have seen their income fall on average for the last four years. Much or maybe all of that is the people at the very top taking a hit, pulling down the mean. We don't know, but I'd like to see Lieberman justify the figure. Or maybe he means the share going to the top 5%. Lieberman continues:
This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.

This is what the political scientists Jacob Hacker and Paul Pierson call the "winner-take-all economy." It is not a picture of a healthy society. Such a level of economic inequality, not seen in the United States since the eve of the Great Depression, bespeaks a political economy in which the financial rewards are increasingly concentrated among a tiny elite and whose risks are borne by an increasingly exposed and unprotected middle class. Income inequality in the United States is higher than in any other advanced industrial democracy and by conventional measures comparable to that in countries such as Ghana, Nicaragua, and Turkmenistan. It breeds political polarization, mistrust, and resentment between the haves and the have-nots and tends to distort the workings of a democratic political system in which money increasingly confers political voice and power.
The death of Steve Jobs is a useful reminder of the fact that much wealth is not winner-take-all but winner makes everybody better off. Steve Jobs's estate is estimated to be something between $6 billion and $7 billion. About 2/3 of that is Disney stock he received when Disney acquired Pixar. The rest if Apple stock. This is clearly a fraction, maybe a small fraction of the wealth Jobs created for the rest of us.Yes, he made a lot of money. But he made it by making the rest of us better off. He didn't take it from us. He shared it with us.

One reason that the top 1% only earned 8% of the income in the 1960′s vs. 20% now is that our economy has changed in ways that are good for all of us. I pause here to mention the obvious–the bottom 99% can be better off with a smaller share of the pie if the pie is getting sufficiently bigger which is what has happened over the last 50 years. But the top 1% gets a bigger share not because they are hoarding more of the pie. The top 1% gets a bigger share because the opportunity to create a lot of wealth for everyone has changed.

Think of it this way. The IBM Selectric was a wonderful improvement in the typewriter market. The people who created it and ran IBM made a lot of money from that improvement. And that's nice. But improving the personal computer makes you a lot richer now than it did then. It creates more wealth. So the most creative people in technology today (Brin, Jobs, Page, Gates, Zuckerberg) make a lot more money than they did in 1960. That's good.

Here is another way to see it. I often point out that the top 1% is not a club with a fixed number of people. There is considerable movement in and out of the different parts of the income distribution. But the fact is that once you are in the top 1%, if you fall out, you often don't fall far. But there is a more important aspect of it not being the same people. Think of it this way. A great NBA player today earns a lot more than a great NBA player of 30 years ago. Magic Johnson, at the peak of his career made a little over $3 million dollars, annually, plus some endorsement money. LeBron James makes over $15 million and a lot more money from endorsements. Why? Because basketball, via technology and expanded wealth around the world, is a more popular sport than it was in the 1980s. That's good. That's why Lebron James captures a bigger share. He makes more people happy and they have more money to spend on basketball than people did in Magic Johnson's day.

The top 1% are different people and the share that goes to the most talented people at the top has grown.

But not everyone in the top 1% earns their money as Steve Jobs did and LeBron James does by making other people's lives better. As I have said many times, and will continue to say, the financial sector has made lots of money for executives in that sector because of government policies bailing out creditor which allows leverage to grow artificially large. That in turn, makes it easier for investment banks to profit and justifies large salaries for executives. That in turn, ratchets up earnings of people in related fields–hedge fund managers and even professors of economics who must be paid more now to keep them in academia and away from Wall Street.

Some of those gains to the financial sector are literally zero sum–bonuses paid for with my money and yours.

If we stop bailing out creditors–socializing the losses of the financial sector–the top 1% numbers will become "healthier."

If we fail to distinguish between ill-begotten gains and those gains that enrich all of us, we are headed down a very dangerous path.

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