The graph above, sampled from this interesting post at Of Two Minds, illustrates a point I’ve been making around here for some time rather nicely. If your complaint is that the top 1% of income earners make too much more than the rest of us, targeting the magnitude of their income is is misdirection. Their income isn’t growing faster now than it has been over the period between the end of World War II and 1979.
What has changed since 1979 is not that the rich are getting too rich but that the remaining 99% haven’t seen their incomes rise nearly as fast as they did prior to then. This raises the question of what is normal? I think there’s a better argument to be made that the period after World War II, with many of the developed world’s economies in ruins, was not a new normal but rather an anomaly.
However, arguendo, let’s accept the old pattern as the objective. How do we get back there?
I think there are essentially three strategies:
- Protect everybody. Have a planned economy in which incomes are allocated by some sort of board. It worked so well in the Soviet Union!
- Protect nobody. Eliminate the licensing, credentialing, trade restrictions, and other measures that protect a tiny sliver of American workers. Since one chunk of those who are being protected from competition are government workers, it would be interesting to see how such a plan could actually be implemented. This may be how Arnold Kling arrived at his notion of “competitive government”.
- Introduce Pigouvian taxes to remove whatever portion of income is due to protection. This would be as impossibly complex as the first solution and as impossible politically as the first since it gores the ox of the most powerful in the country.
I think it should be noted that the selection of the ending date, presumably due to available data, understates somewhat the growth of the income of the top 1%. However, much of the enormous growth of the last five years in the incomes of the top 1% has been due to the financial sector and I think that particular situation is even now, with painful and glacial slowness, winding its way down.
To tell the truth I despair of a solution to this problem or, rather, I think the cures are worse than the disease. Barring some fundamental cultural shift I think what we’re seeing now with the strong income growth of the highest income earners, boosted in part by the protections they enjoy, and the phlegmatic income growth of the rest of us is the new normal.
