Greg Mankiw says that the rich have gotten richer since 1970 because their parents are richer:
The recent paper by Chetty et al. finds that the regression of kids’ income rank on parents’ income rank has a coefficient of 0.3. (See Figure 1.) That implies an R2 for the regression of 0.09. In other words, 91 percent of the variance is unexplained by parents’ income.
I would be willing venture a guess, based on adoption studies, that a lot of that 9 percent is genetics rather than environment. That is, talented parents have talented kids partly because of good genes. Conservatively, let’s say half is genetics. That leaves only 4.5 percent of the variance attributed directly to parents’ income.
I see a problem with his conclusion:
Even a highly successful policy intervention that neutralized the effects of differing parental incomes would reduce the gap between rich and poor by only about 2 percent.
I don’t think he’s looking at parental incomes critically enough. Bankers and physicians don’t have higher incomes due to market forces. They have higher incomes due to regulations and subsidies. If the banks hadn’t been bailed out in 2008 and 2009, a lot of bankers who are presently earning six and seven figure incomes would have earned no incomes because their banks would have gone out of business. or, at least, that’s what we were told at the time.
There’s no essential connection between ensuring that banks continue to operate and preserving the incomes of bankers. The fact that’s the way it worked out does make you wonder what the actual objective was.
We protect the jobs of some workers through licensing, barriers to entry, and other regulations. We don’t protects the jobs of others. That’s not genetic.
It’s like the system is rigged, or something.
Why did bankers earn higher incomes in 1989, 1993, 1998, 2002, 2005, before the bailout, and during times when banking was so competitive the industry was forced to consolidate?
And why do professors of poetry or engineering, residing in an industry where the paying customers tuition costs are subsidized by the government, make relatively little?
And why do the top 200 professional golfers, a brutally competitive and unsubsidized endeavor, make millions of dollars a year, but the also rans can barely scrape by?
Golfers first. Because there are only 200 of the top 200 professional golfers.
Why did bankers earn higher incomes? Because the industry is highly regulated and the way it’s regulated leads to bigger banks and bigger banks lead to higher incomes.
Remember, unlike steve, who despite the enormous rent-seeking on the part of those in the top 10% of income earners compared with the relatively small political contributions of those in the top .1% of income earners is only concerned about the political influence of the top .1%, I’m more concerned about the the next tier down who are much more highly involved in rent-seeking. Here are the top 10 political contributors of from 1989 to the present:
The next ten on the list include several unions, JP Morgan, and Citicorp. the top individual political contributors are really small potatoes by comparison (I recognize that link just shows one year—it’s still small potatoes).
The wonderful thing is that, once NYC starts universal pre-kindergarten childcare, we won’t need parents and their awful influences anymore. Together with in vitro fertilization and NYC socialism, we could realize a Brave New World.
” If the banks hadn’t been bailed out in 2008 and 2009, a lot of bankers who are presently earning six and seven figure incomes would have earned no incomes because their banks would have gone out of business. or, at least, that’s why we were told at the time.”
If you’re talking justice, as for some of them, hard to earn banker’s salary in, even minimum security prison.
What is the alternative to writing regulations for the banking industry? No regulation at all? What’s the alternative to licensing doctors or anesthesiologists? Is someone going to go to a hospital with unlicensed doctors? I’m not. And weren’t the banks bailed out because failing to do so would have caused greater harm to a greater number of people? I mean, I get the rent-seeking accusation, but as a practical matter, what are we to do instead?
Here’s an example. The government wrote regulations for car safety. Worked like a charm, and contra the various prognostications of the time when executives claimed seat belts would destroy the auto industry, car makers now compete ferociously on safety.
The result is better cars, far safer cars, a bunch of people not dead who otherwise would be. Of course this funneled money to makers of airbags. They got rich. But we were safer. What’s the better alternative to that approach?
I’m not arguing against regulation. It is possible to preserve the banks without preserving the bankers. That’s not the decision that was made. When Sweden faced its banking crisis several years back they handled it differently.
BTW, Michael, I’m curious as to why you think that bank regulation in the form that is has taken over the last 7-8 years has resulted in stronger banks? Not regulation in the abstract but the form that is has actually taken.
Quite to the contrary my impression is that we now have a smaller number of larger banks that as a complete system are actually less stable than the system was before.
Dave:
I am not making a case for banking regulation per se either present or past. I have no opinion on whether banks are stronger now or weaker now, and indeed I wouldn’t know how to begin to judge such a thing.
No, I’m wondering – honestly, and not just to argue for the hell of it — what the alternative is. I gather from what you’re saying that the alternative is not “no regs” but “smarter regs.” Of course once money enters politics it will be used to ensure the most industry-favorable regs.
The libertarian impulse is to say that if regulation inevitably leads to rent-seeking (corruption in effect) then the solution is less government regulation. The liberal impulse is to push for new layers of regs on top of whatever corrupted layers already exist. The banker/Republican will want things to remain as they are since the current system is one they’ve figured out how to game.
I don’t find any of those satisfying. It’s the Goldilocks approach. Too many regs, too few regs, just the right amount of regs. I find the discussion frustrating when laid out along that axis from libertarian to liberal. So I’m wondering if there’s some fourth way.
@michael reynolds
What is the alternative to writing regulations for the banking industry? No regulation at all? …
What did the US do from 1932 to 1999? Glass-Steagall. Why was it repealed? Go ask: Bill Clinton, Al Gore, Phil Graham, Warren Buffett, John Corzine, Jeffrey Immelt, Hank Paulson, Jamie Dimon, etc.
Why was Dodd-Frank enacted instead of reinstating Glass-Steagall? Go ask: see above. Dodd & Frank did.
Honestly. Pick up a book, and learn a little history. Glass-Steagall was designed to prevent this exact scenario.
Wasn’t Krugman in favor of the Swedish solution to the banking crisis?
Also, I don’t see a straight-line connections among regulating healthcare, subsidizing it to the tune of something between 50% and 75% of the sector’s total revenues, and letting prices and wages in the sector be set by the “free market” (whatever that might be in healthcare).
I’m not arguing against regulations. I’m arguing against simultaneously relying on the operations of the market and prohibiting a market from working.
For the record, I don’t think Glass-Steagall was the be all and end all of banking regulations, but it was a Damned sight better than what has been inflicted since. The BI-partisan solution to banks that were too big to fail was to consolidate the industry into larger banks and then officiously declare that these newer bigger banks are NOT TBTF because … MAGIC!
Shockingly, even investment banks (at least those not deemed to be enemies if Goldman-Sachs) got bailed out. At the very least, those holding CDSs thru AIG should not have been paid off at 100 cents on the dollar.
So, Schuler, does that 4:18 comment mean you also aren’t in favor of treating concussions by bashing the victim in the head with a hammer?
While I’m on the subject, trying to address issues of income inequality while defending the systemic structures that produce income inequality is like trying to fill a bucket with a hole in it. You’ve got to take your pick. Either you don’t have a problem with income inequality or you think that we need to change the regulations that foster it.
Exactly that, Schuler. What’s frustrating arguing about income inequality with those on the right is that they assume the ONLY amelioratives to II is some form of communisn, as though regulatory schemes have no impact on who makes how much. The problem with arguing it with those on the left is pretty much exactly the same thing. It’s really quite a trick that’s been done to stifle the debate.
Let me express what I think about this another way. I don’t have a problem with bankers earning seven figure salaries. I don’t have a problem with regulating banks to limit entry, foster ever-larger banks, and reduce competition. I don’t have a problem with bailing banks out.
I do have have problem with regulating banks to limit entry, foster ever-larger banks, and reduce competition AND bank bailouts AND bankers earning seven figure salaries.
@Icepick
The next time you are whining about how bad you have it consider this: A Lawyer and Partner, and Also Bankrupt
Of course, he could always get a second job. “Would you like fries with that, sir?” I wonder what his “living wage” would be – $85/hr.
Actually there is a significant problem with bankers earning seven or eight figure salaries; potential incomes in that range are an irresistible temptation for abuse, for the abusive sort of person to enter banking and banking itself is by definition a non-producer of real wealth. At best banks help facilitate real production, but each penny of profit a bank brings in is coming from a loan against expected future wealth. Coupled with their built-in capacity for leveraging the government’s unlimited reserves creates a systemically dangerous situation when individuals can make themselves kings overnight.
1) AFSCME represents about 1.6 million people. Goldman’s contributions represent the interests of what, 50 people? How well does democracy fare when 50 people have as much influence as 1.6 million?
2) You know as well as I do that measured contributions are just the tip of the iceberg. How many Senators’ kids end up at Goldman as a reward? How many end up at the post office? Funding think tanks and endowing chairs doesn’t go into that count. 501 money gets hidden. Special discounts, vacations and trips.
Steve
The problem with regulations is that nobody regulates the regulators. If there had been regulators regulating the regulators from 1999 to 2008, the mess might not have been as big. Guess who were providing cover for the banks.
The next time you are whining about how bad you have it consider this: A Lawyer and Partner, and Also Bankrupt
TB, I’m feeling pretty good this evening. Yesterday my naighbor LET his dogs run loose. They pinned us in our house again, and later I realized they did even more damage to my car. Amongst other things, they ate off a windshield wiper and gouged the sheet metal and bent it with their teeth.
Why is this good? Because yesterday the goddamned dogs finally bit someone, which was what was necessary for them to get hauled away. Unfortunately, they didn’t eat the neighbor. Instead they jumped a fence to get at another neighbor’s dog. The woman of the house ran out to save her dog and got bit on the hand before her husband came out swinging with a baseball bat. The animal control officer I spoke with last week (THREE separate people complained about the dogs running loose and going after people on 1-17) was just up the street on another call, the husband went and got her, she called for two Sheriff’s deputies and went and confiscated the two dogs that have been running loose. They didn’t get the older dog, but I’ll take what I can get.
Of course, the neighbor is blaming ME for his dogs running loose and biting a third party in her back yard, but he is actually the stupidest person I have ever dealt with that wasn’t obviously defective.
Now, in a perfect world, he will get convicted on the hit and run in about a week and get sentenced to a mandatory five years in Raiford, and then his girlfriend will loose the house. These people have been so reckless in their behavior to their neighbors I have no problem wishing bad things upon them. (In the 1-17 incident, one of the dogs, having broken his chain, had chased two of the neighborhood boys onto the roof of their house.)
Oh, forgive me, the neighbor who got bit wasn’t too badly hurt. She was bit on the hand and had to go to an emergency room, but should recover. All because her husband was right there with a baseball bat. The dog owners of course blamed the woman for daring try to save her own dog in her own back yard from getting eaten by pit bulls. Really, they are so stupid as to be evil. Sadly, the two of them have reproduced three times together, and the man has a child from an earlier marriage.
AFSCME represents about 1.6 million people. Goldman’s contributions represent the interests of what, 50 people? How well does democracy fare when 50 people have as much influence as 1.6 million?
First off, this isn’t a democracy.
Secondly, you are missing Schuler’s point entirely.
You’re right, this isn’t a democracy. It never was, nor was it intended to be. The Founders gave us a Roman-style senatorial republic, the purpose of which was to ensure the power and privileges of the elite while creating the illusion of equality.
Ain’t you proud of America?
Ellipses, doesn’t anybody in your neighborhood own a gun for personal protection, instead using and abusing dogs for that purpose?
My guess is they do both.
Based upon some local high profile occurrences, shooting someone else’s pit bull on your own property is a non-chargeable offense. Not advocating, just observing there might be a tension between the two.
@Icepick
I am guessing that the chain is to strengthen the neck muscles and provide protection.
I am guessing that the chain is to strengthen the neck muscles and provide protection.
No, it’s because my neighbor is a stupid fucking idiot, cruel and thoughtless as well, that’s all he could come up with (in fact, I think he may have stolen that chain from my back porch), and he couldn’t even do that right.
Schuler is partly correct. There are definitely guns in the neighborhood as we’ve had some gang-related shootings lately. The Gorrillaz and Death Before Mercy have been shooting at each other a bit. (Really, a black gang calling themselves the Gorrillaz. First off, copyright and trademark infringement! Secondly, really? And of the two they’re the clever ones.)
And I’m sure a fair number of people own guns. I don’t. Not out of any conviction against them, but because I just didn’t grow up around them in my household. (Probably the first generation in my family going back to the 1600s that didn’t.) I know other families had guns when I was growing up. The guy across the street had a friggin’ arsenal and was even an instructor for SWAT teams in the area. But having been part of the culture they know how to teach their children to leave firearms alone. Not having grown up in that culture, I don’t know if I would be up to the task of keeping my daughter away from them at this age. And she’s always doing something else I didn’t think she’d be able to do, so the idea of having one myself is kind of scary.
That said, knowing that when seconds count the police are often days away (not an exaggeration: I called 911 about a large fight breaking out across the street in a neighbor’s yard a few weeks back – the police never bothered showing up), plus the wolves at the door, I have been reconsidering. However, there is still the matter of funding, as well as the safety concerns. At this point I’m just waiting to see if my neighbor gets sent to prison in a couple of weeks (third degree felony trial set for 2/3, probably facing a mandatory five year sentence if convicted), and they may well be foreclosed upon as well. I’m hoping.
But yes, some people own guns. Which actually can make you a target for thieves when you’re not home. So the alternative is to spend the time and money to get a concealed carry permit and always pack. But I don’t relish the idea of going to Monkey Joe’s or the park while packing, either.
And there are a fair number of pit bulls in the neighborhood. The people directly behind me have one that seems to bark non-stop. But he is not running around attacking people, so I don’t have much problem with that.
But there are several things to note: Roughly four kinds of people own pit bulls. Dog fighters, drug dealers, people that want others to believe they are dog fighters or drug dealers, and knuckleheads. And a neighborhood like this has a surfeit of knuckleheads.
And I suspect that if I shoot one of my neighbor’s pit bulls I would have to shoot my neighbor in short order. As it is I spent about 45 minutes around midnight tonight trying to figure out if he had been tampering with my car. I really miss having a garage.
Sorry for the more rambling than usual comment, but it is rather late, and the relief I felt Saturday has been replaced with concern about what my idiot neighbor might do for revenge. Which is really funny, because none of my complaints had anything to do with the dogs getting taken away, but these folks are really incredibly stupid. The dumb fuck just bought a boat this weekend while he is going to trial in about seven days with a public defender as his attorney. I wonder what they would think of that?
TB, the neighbor has tried several configurations with the chain. I really don’t think he has anything in mind other than not having the money to buy a proper collar (you know, he needed that boat, and all the cans of spray paint to paint it gold) and thinking that maybe he should do something.
I’m having a hard time seeing the connection between the rent seeking issue and the generational income effects.
Let’s say your grandfather (or great-grandfather) obtained certain benefits via rent-seeking and your mother ensures that those benefits continue via rent-seeking. Since the studies only consider the effects from generation to generation those benefits will appear to be the consequence of genetic heritage.
They’re hereditary all right but it’s the wealth and influence that are inherited.
@Icepick
For many years people have been having guns and children. A gun would put food on the table and protect the homestead, but if you are uncomfortable with having a weapon, then do not get one.
If you were to get something, I would suggest a shotgun, and you can mount it above the fireplace. A tactical version is better, but you could go duck hunting with a regular one. You would need the money either way.
Even in my younger days, there were not too many occasions where I really needed a concealed weapon. If you are going to need a weapon, you want to have an unconcealed weapon.
I do not know if your neighbor is in a gang or not, but this is how a lot of gangs get control. Somebody in your situation or much worse would turn to a gang for protection.
I wish more people understood your situation and others like yours.
I guess I took Dave’s original post to assume that it might be possible that intelligence, personality, propensity for chemical dependency might be significantly inheritable, but these are not income. The relationship between these traits and income is the subject of the economy and policy.
For example, when a regulation is passed that assumes a number of jobs will be lost in manufacturing, but additional jobs will be gained in the area of regulatory compliance, the trade-off is not necessarily neutral across the human population. Nor is it neutral btw/ established business and prospective market entrants.
That is a very good and insightful summary of my point.
… a number of jobs will be lost in manufacturing, but additional jobs will be gained in the area of regulatory compliance …
The manufacturing jobs produced value. The regulatory compliance jobs do not.
Planes flying into the US are required to adhere to certain US regulations, and it seems to work. Once again, reality trumps theory.
The value, like all value, is subjective. I think the problem is the deadweight loss.
He’s not in a gang. Honestly, I don’t know what gang would want him. He’s that obviously a liability.
Thanks for the explanation. I guess I’m being dense but I’m still not quite getting the connection. It seems at most tangential to Mankiw’s argument; as I understood it he centered on the distinction between financial resources and DNA. How the parents gained the material resources doesn’t seem to enter into that equation, does it?
I do see your point and agree that certain professions are boosted and protected but it doesn’t seem like a vertical generational effect specifically.
Whatever, one can assume that whoever has great wealth now will have their descendants running the country for the next several generations. The Rockerfeller influence has only just dissipated (or I think it has), and that was based off a fortune from the Nineteenth Century. So look for the family that has a lot of wealth and a lot of descendents, and soon they’ll be moving and shaking things. The Walton brood jumps to mind, as collectively they’re probably the most wealthy family on the planet that doesn’t base their wealth off of running a country.
Golfers first. Because there are only 200 of the top 200 professional golfers.”
No, Dave. Because although I agree with you that industries do rent seek, its not the be all and end all, to the exclusion of market forces. I picked that example for a reason – they all operate under the exact same rules. No subsidy, no rent seeking. But they stratify due to talent and productivity, including endorsements. So Tiger makes more than Phil, who makes more than Keegan Bradley, who makes more than Hunter Mahan……who makes more than KJ Choi………and so it goes. There is no bright line cutoff at 200. Pure market forces.
And you really didn’t deal with the banks. Yes, they are regulated, and lord knows – now especially – that they rent seek. But you didn’t deal with the fact that they have above average wage structures in differing degrees of competitive environments and differing regulatory regimes, and that not all bankers make the same amount of money, even in similarly sized banks. There is more going on than just rent seeking.
And so on…….
Let me try to explain my answer a bit more. What I was referring to is what’s called the “long tail phenomenon”. The top golfers are the end of the tail of a large number of pro golfers, only the last hundred or so of whom make a great deal of money. Out of the thousands of members of Actors Equity only a few hundred earn a living wage from their stage earnings. Of the millions of programmers only a few make it into the top 1% of income earners. It’s probably true of writers but Michael could probably address that authoritatively. I think that’s typical of many fields.
However, in banking there are quite literally tens of thousands who earn more than $300,000 and there are hundreds of thousands of docs who do. That’s a fat tail rather than a long tail.