While we’re on the subject of income inequality, I wanted to draw your attention to the graph above, courtesy of Bruce Krasting who derived the information on which the bar chart is based from the IRS (the annotations on the chart are his).
In my discussions of income inequality I’ve made it pretty clear that I’m as concerned about the concentration of income among the top 3% of income earners as I am concentration in the top .1% of income earners. I wouldn’t consider the chart above as corroborating evidece so much as offering a potential explanation for why, although income inequality (as measure by, say, the Gini coefficient) has been increasing for the least 30 years, we’re rather suddenly hearing a new chorus of whinging about it.
The ongoing economic slowdown is unique in that many of the rich, defined as those making more than $250,000 and less than $1 million in income per year, have been touched by it. Don’t be too surprised if the proposals you hear for dealing with income inequality are more effective at redistributing form the top .1% of income earners to the next couple of percent down the ladder than they are in redistributing from the top 3% of income earners to the bottom 20%.
That looks like a pretty stunning explosion, 2004 to 2009.
I’d really like to see the previous decade, for context.
” Don’t be too surprised if the proposals you hear for dealing with income inequality are more effective at redistributing form the top .1% of income earners to the next couple of percent down the ladder than they are in redistributing from the top 3% of income earners to the bottom 20%.”
We have already done a fairly decent job of distributing to the bottom 20%. We need to find some way to increase wages in the middle groups.
You get more bang for the buck redistributing from the top income earners to the bottom. Not much change in income inequality when you redistribute from the top .1% to the next 2.9%.
The argument remains much the same: I’ll have more confidence that those who propose the policy are trying to effect greater income equality when their proposals produce greater income equality.
BTW, I took a look at before and after tax gini coefficients in the OECD and it turns out that the US is about average before taxes and transfer payments.
I interpret that data a little differently, Andy. Our Gini coefficient before taxes and transfers most closely resembles the countries whose economies and cultures are most like ours (UK, Australia) and our Gini coefficient after taxes and transfers is among the highest in the OECD. Which would seem to support the idea that the welfare systems of western European countries reduces inequality.
I think that would be possible here but it’s also possible that more taxes and transfer (if they take place mostly within the highest decile rather than between the highest decile and lower income levels) would have little effect on inequality.
“The argument remains much the same: I’ll have more confidence that those who propose the policy are trying to effect greater income equality when their proposals produce greater income equality.”
I am not sure we know how to reduce that inequality now. We did it after the Great Depression only after people suffered much worse than they do now. I think that we need to fall apart more before we do anything. I also think that growth at the very bottom is less helpful than growth of wages in the middle 60%. We get a better sustained economy, a broader tax base and a larger potential group of entrepreneurs to draw from.
“I am not sure we know how to reduce that inequality now.”
If the post-2004 explosion was a result of excess financialization (that is beyond efficient allocation of resources) then the answer would probably be a Tobin tax.
That was knocked around this last year, but never really got traction. That’s probably because those in he million+ club understand and oppose it, and those below have no idea what’s going on.
Let me fix it for you:
That looks like a pretty stunning explosion, 2003 to 2008.
Tax filings lag a year. When you file in April of year T it is for year T-1.
Financial services are mobile. Institute a Tobin tax and you could very well simply move things to a country that doesn’t have a Tobin tax.
Further, the problem isn’t the number of transactions by themselves, but the lack of transparency in our financial sector…a Tobin tax does nothing about that.
Let me fix this for you too:
That was knocked around this last year, but never really got traction. That’s probably most people have no idea what’s going on.
The idea of a Tobin tax is to reduce volatility, but the empirical studies are mixed, with most indicating that there is an increase in short term volatility after implementing such a tax.
Re: Tobin Tax. Steve nailed it.
Separately, I have a hard time with the whole income inequality debate. What is the goal here? Some analogies:
1. Should Phil Mickelson be denied his L wedge because it gains him 2 strokes a tournement, and a win? Does that make the PGA Tour, the non-winners, or society better off?
2. Should the best drivers at the Indianapolis 500 be required to have a throttle put on their car, so the also rans can compete? Is this fair? Does it maximize effort; technology advancement?
3. Should Michael Jordan have been required to play with one arm tied behind his back? Should he have been required to fork over his income if the Bulls won the NBA Championship? Would this have encouraged his excellence?
4. Should gifted students in school be required to run laps, as a penalty to academic excellence? Should they be required to abandon their own efforts to succeed and advance, and tutor the lower third of the class, out of “fairness?”
I think sane people would scoff at these notions. Yet when it comes to money, and politics, people put aside their common sense notions and convince themselves that its in society’s best interests to penalize the most successful, and steal, er, “redistribute” their income. Its bizarre. All objectives should point toward efforts to make the less successful more successful, not to hand them, without strings attached, a check, and the efforts, of those who have shown the best ability to create wealth. Else we create a lazy, parasitic culture; and we are well on the way.
Your analogy would be stronger if Phil Mickelson were receiving a government subsidy whenever he failed to place in the money.
My concern isn’t about inequality as such but how the inequality happened. To the extent that it’s a consequence of rent-seeking, I think it’s a Bad Thing.
Wait a minute, we might move the kind of crazed derivatives trading that took down the economy offshore? Is that a bug or a feature.
Seriously, a small Tobin tax is not going to affect any of us. It is going to affect the entities that make thousands of trades a day (be they in “real” or synthetic vehicles).
I don’t think an “investor” making a thousand Apple trades in 24 hours is really necessary for price discovery or efficient allocation of resources.
“Your analogy would be stronger if Phil Mickelson were receiving a government subsidy whenever he failed to place in the money.
My concern isn’t about inequality as such but how the inequality happened. To the extent that it’s a consequence of rent-seeking, I think it’s a Bad Thing.”
Of course, but with all due respect, that’s not very perceptive or informative. As I’ve pointed out numerous times, I’m no supporter of subsidy. Second, invoking subsidy at every instance of economic success, or as a major source of economic success is a weak reed. Yes, Goldman Sachs’ partners may be a beneficiary, but in my world – which is a much broader world of wealth creation – subsidy is a minor, minor source. As such, the usual menu of redistributionist policies invoked a/c the Goldman’s of the world is just shooting our collective johnson’s off.
BTW – any wonder the PGA tour votes overwhelmingly Republican?
“Separately, I have a hard time with the whole income inequality debate. What is the goal here?”
How about if one person controlled 90% of the nation’s income and wealth? Is that ok, or would it just be evidence that he was our most productive citizen?
Yeah, like the current recession is only in the U.S. Finance is world wide, and it isn’t the derivatives per se, but the lack of transparency and periodic bailouts. For example, corn futures are a type of derivative…want to get rid of them despite the fact that they are probably the single largest factor in reducing the boom-bust cycle in commodity markets?
Small spread over trillions of transactions is serious money…so yeah it very well might. Unemployment is already down, do we need to further slam the finance sector? Maybe they need to shed more jobs, but doing it via a tax strikes me as wrongheaded policy.
How do you know? What if it helps the market? I don’t understand all the theoretical crap surrounding gravity, but I’m not about to discount its effect on our lives. Ignorance should never be a substitute for thought, research and such.
For example, a guy buying a selling stocks today likely benefits from high frequency trades. Such trading has reduced spreads, reduced commissions, and has added liquidity to the market. And even that guy making a 1,000 trades will be speeding up price discovery and keeping spreads low as well for other investors. As for volatility is might be that high frequency trading lowers it.
But yeah, by all means lets kill it before we really understand it.
Especially if there is some sort of positive feed back loop. I would argue that more and more rent seeking could lead to greater income inequality and also move the U.S. economy closer to a corporatist economy. That is where Michael Reynolds worries about corporations and their negative impact on liberty has some traction. A government of the corporations, by the corporations and for the corporations…is probably not a very good government for the individuals.