In an op-ed in the Wall Street Journal Allan Meltzer, a professor of public policy at Carnegie Mellon, intermingles important facts with conjecture and fantasies. Here’s a fact:
In a 2006 study titled “The Evolution of Top Incomes in an Egalitarian Society,” Swedish economists Jesper Roine and Daniel Waldenström compared the income share of the top 1% of earners in seven countries from the early 1900s to 2004. Those countries—the U.S., Sweden, France, Australia, Britain, Canada and the Netherlands—all practice some type of democratic capitalism but also a fair amount of redistribution.
As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can’t be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.
Here’s a conjecture:
The big error made by those on the left is to believe that redistribution permits the 99% or 90% to gain at the expense of top earners. In much current political discussion, this is taken as an unchallenged truth. It should not be. The lasting opportunity for the poor is better jobs produced by investments, many of which are financed by those who earn high incomes. It makes little sense to applaud the contribution to all of us made by the late Steve Jobs while favoring policies that reduce incentives for innovators and investors.
And here’s a fantasy:
But the top 1% have another advantage. Many of them have unique skills that are difficult to replicate. Our top earners include entrepreneurs, rock stars, professional athletes, surgeons and lawyers. Also included are the managers of large international corporations and, yes, bankers and financiers. (Interestingly, the Occupy movement seldom criticizes athletes or rock stars.)
or, more politely, an exaggeration. This is a fallacy of aggregation. Let’s take lawyers, for example. As I’ve mentioned before incomes in the practice of law occur in a bimodal distribution. The peaks of the distribution are at around $35,000 and $85,000. Those in the upper part of the distribution are graduates of the top 20 law schools, president of law review, work for large law firms, frequently with financial sector and major corporate clients. They are a minority of lawyers. Most lawyers are in the lower part of the distribution—they don’t make it into the top 10% of income earners let alone the top 1%.
Additionally, combining those in the top .1% of income earners, e.g. rock stars, professional athletes, and top management in large international companies, with, for example, a married couple both of whom are physicians make more than $180,000 per year (about the average for physicians), putting them into the top 1% of income earners, gives a very false picture of the entire group. Are the skills of top managers in large international companies really “difficult to replicate”? I think there are probably dozens of people within their own companies who have their skills—they’re just at the top. There can be only one. I suppose that’s argumentative but it has certainly been my experience. The guys who make the most money in the largest companies aren’t always the most competent, they’re just the guys at the top. One tiny piece of supportive evidence: if these guys are so smart and so skilled how come their companies get into so much trouble? Think BP, GM, Chrysler, Citibank, Bank of America, and so on and so on.
Let me provide an alternative explanation for the observed phenomenon. Isn’t it just barely possible that the reason that income inequality is growing is that those in the top deciles of income exploit their influence and power to ensure that’s the case? The AMA isn’t #16 among the all-time highest political donors out of a simple sense of civic-mindedness. It’s securing the incomes of its membership. It’s no coincidence that Goldman Sachs and Citigroup are both in the top 20 (along with a lot of labor organizations including public employees’ labor organizations and the teachers’ labor organizations). Income inequality isn’t growing despite the system; it’s growing because of the system.
Seems to me the fallacy of aggregation is just as incorrect as the fallacy of generalization.
There is a reason a garage band is a garage band, and Mick Jagger and Kieth Richards reportedly have net worths of $500mm each, and it isn’t because they have powerful Washington lobbyists. And try as I might, I never could get Nike to give me the same shoe deal they gave Michael Jordan.
You get my point. Gotta go now.
This approaches my point. Mick Jagger and Keith Richards didn’t become bigtime rockers because they had lobbyists but being bigtime rockers enables them to retain lobbyists to ensure that they stay at the top and retain more of their earnings. Note that both Jagger and Richards are notoriously tax refugees.
I might add that I’m a lot more worried about the 10%, many, many more of whom are government clients, are much less unique, and are much more replaceable, than I am about the .1%. Perhaps I should have developed that part of my critique a bit more.
Note, too, how well the 10% are represented among top donors.
Oh Drew, you are so predictable.
Okay, so lets accept this as a fact (an empirical fact). So, why are those that make the big salaries there? Luck? Connections? Nepotism? All or some of these? Or is there something that, on average, separates them from the average lawyer/law student?
And your point is also true of many athletes. The typical pay in the NBA is nice, but not great. Only a select few will make the mega bucks. Why? I’d guess it does have something to do with talent.
Now business is not as clear cut as sports. There you can have nepotism and just plain old bequests of wealth. There are those who are in the 1% or even the 0.1% who got there because of Daddy or even Granddaddy. Are they special? Probably not. And there is the rent seeking aspect of it all as well. Businesses can often benefit tremendously from rent seeking. The entire military-industrial complex is a fine example. But I think it is also the case that some of those people who have made lots of money are not like the average person.
In short Dave, I think you are committing a fallacy as well. Just because some of the very wealthy are not responsible for their wealth does not mean that others are not as well. A trust fund kid is not deserving of any more respect or admiration as the next person. However, a person who built an empire pretty much from the ground up on the other hand is not like the typical person.
Selective data mining anyone? Lets pick companies that aren’t in trouble and compare the two lists. And lets look at what happens inside those companies as well. And this is where the rent seeking comes in as well.
Here is an idea, the top managers at those companies that get into trouble are allowed to stay because they get bailed out. If they didn’t get bailed out my guess is quite a few of those top managers wouldn’t be top managers. Look at your list too:
All of them benefited from government intervention. All of them. Yes even BP. By having the government step in and take over money disbursements it took a huge burden off of BP’s hands. All BP had to do was write a big enough check. Now all the issues of how to split that money fairly becomes an issue for the government and not BP.
Now considering this, having a top manager/management that can work the political process is now a valuable skill. Probably more so than being able to run a company well. Hiring a guy who is a terrible manager, but has a great Rolodex might be a good move if you are big enough.
I’m suggesting that we need to be rather careful here. We can’t just say, “Oh these guys got bailouts and such so they are terrible and not deserving of the money they have…” and then extend to everyone in that class. A guy who has a midsized company and makes enough to get into the 1% but hasn’t had a government bailout, works 60 hours a week and has built his company from the ground up? Yeah, let him keep his toys, he earned them. A guy like Ken Lay…throw him to the wolves for all I care. But FFS be discriminating here. Don’t kill the geese that lay the golden eggs to get at the cuckoos that are hiding amidst the geese.
I agree with that. That’s the point of this paragraph:
Saying “not all are” (which is what I’m doing) is not denying “there are some who are not”. By combining Michael Jordan with Ken Lay it is Mr. Meltzer who is being insufficiently discriminating not I.
I would argue that most of the 1% are people who have worked hard for their money/wealth. Most we never hear about. They run small to midsize businesses that do well. The problems are with the really big companies that can call up the President and he will stop what he is doing. And even there…I blame the system that has allowed for this. Personally I see it as an outgrowth of an increasing discretionary and activist government. The more we let government muddle around in things, the more and more businesses will want to influence government to gain a competitive advantage.
Think of it this way. Suppose you run Mega Corporation and you have $100 billion in revenues each year (more or less). You get word that your competitor over at GigantorCorp is trying to curry favor with a number of Representatives and Senators to get legislation passed that would help them and hurt you. Do you:
A. Do nothing and stand on principle?
B. Put your own lobbyists to work?
I’m thinking most would choose B, at least that is what game theory tells me. Some might choose A, but I’m thinking not many.
It is the system itself that is perverse.
As I say, I’m more concerned about the 10% than I am about the 1% or the .1%.
However, as appealing as the Horatio Alger story may be hard work is, in the final analysis, only marginally relevant to income. There are lots of people in the bottom 20% of income earners who work harder than most of the people in the top 1% of income earners. That ain’t what determines compensation. It’s determined by some combination of
1. supply and demand
2. government intervention
3. hard work
4. innate ability
5. luck
with the first two being the most important. The hardest working UPS driver makes just about the same as the laziest. The hardest working partner in a top law firm makes about the same as the partner who doesn’t work nearly as hard. Most pediatricians make about the same amount of money. The reason that pediatricians make more than UPS drivers isn’t hard work.
BTW, here’s what the 1% do for a living.
On this we’re in complete agreement. Every time I say this it gives Doug Mataconis the vapors but if I were king I’d severely restrict lobbying. Only actual constituents could lobby a Congresscritter and the lobbying must occur physically in the district.
No, not irrelevant, just one of many factors.
I mean if we are just going to be picking nits….
I don’t disagree with your list of what determines compensation. If you are lucky, have innate talent and worked hard to take advantage of that talent and whatever good luck you have then I’m good with the person keeping whatever they have acquired. If on the other hand it was largely due to number 2, then I have an issue.
Yeah, that’s why after consideration I re-phrased it to “marginally relevant”. 😉 I think we actually agree on this, Steve, I think we just phrase it differently.
Yeah…just wording really.
There are lots of people in the bottom 20% of income earners who work harder than most of the people in the top 1% of income earners.
This is mostly true only in the sense of magnitude – for instance, 40% of the bottom 20% equals “lots of people” in fact more “lots of people” than 80% of the top 1%.
So while true, I don’t see what that tells us with respect to findings like this:
By and large, the biggest leisure gains have gone precisely to those with the most stagnant incomes—that is, the least skilled and the least educated. And conversely, the smallest leisure gains have been concentrated among the most educated, the same group that’s had the biggest gains in income.
As to the issue of income distribution, once we account for rentseeking we’re still left with unequal distribution and this is where I think that the issue goes off track. In a lot of cases we’re not dealing with distribution of income or redistribution of income, instead the issue is the creation of new income. Someone is bringing something new to the market – Michael Jordan brought a spectacle of sportsmanship to the court, Steve Jobs brought a combination of innovative design and marketing and hype to his products, JK Rowling brings characters forth into the world that never existed before, James Cameron brings a fantasy to life and so on. There certainly are a lot of basketball players, there are thousands of new electronic gadgets that come to market, there is no shortage of fiction and there is no shortage of films to satisfy the market. These individuals are either lucky or they’re bringing something to the market which their competitors can’t match. They’re creating something new. And here is what I believe is the important point – people are voluntarily trading their money with these individuals and are glad to do so because their lives are bettered by parting with their money and buying the product on offer instead of foregoing the purchase of the product or substituting what they consider an inferior product.
If George Lucas never launched his Star Wars series all of the ancillary products and their “benefits” (just take a gander at how young kids beam when they dream of Star Wars – their lives are enriched) would never have been created. Lucas created new wealth for the world and he captures for himself a large share of dollar value associated with that new wealth. The money that flows to him is not redistributed in some fashion, it’s given voluntarily in free exchange.
All that said though, there is a lot wrong with Corporate America. The culture of “failing upwards,” the mostly closed network effect of interlocking board memberships where many backs are scratched leading to salary inflation and protection of individuals who are not producing value commensurate with their reward.
What strikes me though is the lumping process that characterizes this issue – the problem is a corrupt system, not the outcomes but too often it is the outcomes that drive people bonkers. I get that a large part of this due to the psychological tendency of people to want to punish those who are more successful but I think that we’d be better served to clean up rent-seeking systems and corrupt networking practices instead of legitimizing the angst produced by unequal outcomes.