In a recent post, I cited a post and column written by Simon Johnson, formerly chief economist of the IMF, to the effect that income inequality was a major source of the economic problems of the United States. His focus was on those with no more than a high school education:
The distribution of income in the United States is undoubtedly becoming more unequal. Specifically, over recent decades, it has become harder for people with only a high-school education to build a secure middle-class future for their families.
Since those with high school only or less are disproportionately immigrants or the children of immigrants and since, although the studies of the impact of immigration on wages in the United States have produced ambiguous results, the studies have uniformly illustrated downwards pressure placed on wages for those with high school educations or less by competition with immigrants for those jobs, to my mind the problem of low income growth among the lowest income earners and immigration are indivisible. Unionization is unlikely to produce improved economic prospects for this group. Why pay unskilled workers in the United States more when the world is full of unskilled workers who will work for much less?
A frequent commenter has repeatedly asserted that, no, the problem is not insufficient income growth among the lowest income earners but rather too much income growth among highest .1% of income earners. I see only the most indirect of relationships between how high the incomes of the top .1% of income earners are and the failure of the incomes among the lower quintiles of income earners to grow over the last 30 years. It might reasonably be said that the two things have common causes but I do not believe that one causes the other.
I’m also skeptical that the assertion of the primacy of incomes among the top .1% of income earners passes muster from a numerical standpoint so I thought it might be helpful to put some facts about the highest income earners on the table.
According to information drawn from the Internal Revenue Service and quoted in a link from the Tax Foundation the top .1% of income earners amount to some 141,000 households which account for about $1 trillion of adjusted gross income, about 12% of the whole. The next 4.9% amount to about 50 times as many households and about twice as much income. Why is the income of the top .1% harmful and disruptive and that of the next 4.9%, a significantly larger amount, isn’t?
I have found it terribly difficult to ferret out exactly who those who are in that next 4.9% are. Their incomes start at about $200,000. Many, I suspect, are owners of small to medium sized businesses who show up all over the Bureau of Labor Statistics’s numbers. Hundred of thousands are physicians.
According to the Bureau of Labor Statistics the total number of physicians in the United States is about a half million:
| Anesthesiologists | 37,450 |
| Family and General Practitioners | 99,000 |
| Internists, General | 48,270 |
| Obstetricians and Gynecologists | 20,380 |
| Pediatricians, General | 29,460 |
| Psychiatrists | 22,210 |
| Surgeons | 44,560 |
| Physicians and Surgeons, All Other | 274,160 |
| Total | 575,490 |
Since the median income of physicians is right around that $200,000 figure, at least half of physicians are among that next 4.9% of income earners just below the ultra-rich.
The next largest identifiable chunk of people I’ve been able to identify among that next 4.9% of income earners are those in the financial services industry. They account for a much, much smaller number than physicians and have a lower median income. Lawyers don’t make the cut. There are about as many of them as there are of physicians but the median income for lawyers is about half that of physicians (and lower than the median income of GPs as well). That means that only a relative few are among those 4.9% of top income earners, perhaps tens of thousands of very wealthy lawyers and almost all, presumably, graduates of the handful of elite law schools, many of them working for top Wall Street law firms.
There are about 86,000 dentists with a median income of around $157,000. Clearly, some dentists fall within that next 4.9% of top income earners.
CEOs are clearly among the highest income earners. With just under 298,000 of them and a median income of $167,280, both their numbers and median incomes are below those of physicians but there are probably about 100,000 CEOs among that next 4.9%, a sizeable number. It may be that many of the balance of the top income earners who aren’t among the ultra-rich are management in large companies below the top management level. My experience has been that there’s a large gap between the guys at the very top and those farther down the ladder and that’s borne out by the BLS’s median income statistics for managers.
Disclosure: our household income does not put us among the ultra-rich (top .1%) or even the top 4.9% of income earners after the ultra-rich. We are upper middle class and I have never wanted anything else.
A frequent commenter has repeatedly asserted that, no, the problem is not insufficient income growth among the lowest income earners but rather too much income growth among highest .1% of income earners.
From where I stand, this viewpoint looks like it was built from a core assumption of a zero-sum game. If the high income earners earns in excess of $x, then that excess comes what the low income earner would have earned if not for the income capture of the high income earner. From this core assumption, perhaps even unstated, come layers of rationalizations to support the causal model.
How about testing the model and looking for causal linkages in the real world. If a bond trader with a good trading record is being headhunted and offered lucrative compensation to come to work for another employer, then when an employment offer is made both parties will be entering into a mutually beneficial relationship – the bond trader won’t begin working for the bank if it is against his self-interest and the bank won’t pay more in compensation than they can reap in benefits from the bond trader’s work. Now, how exactly is this process affecting the wage stagnation of low income workers? If the bond trader willingly took a pay cut or the bank imposed a wage ceiling, how would that economic value left on the table find it’s way to the immigrant fry cook at a diner on Route 66?
I’ll echo TangoMan here. If the top whatever percent earn more does that mean the rest have to earn less? Is the economy zero-sum? I’d argue that is a difficult proposition in that individual transactions are likely positive sum. I’m getting something for at least the value I’m paying for it, likely more, and the person selling me whatever it is I’m buying values the money he is getting more than the commodity he is parting with.
I’ve seen this claim before: income inequality is bad.
Why? I’ve asked this question periodically over the course of several years. What is it about income inequality is bad? Exactly how is it bad. Is a marginal increase bad? If the Gini coefficient is 0.25 and it rises to 0.26 is that bad? Or is it only bad if it is 0.75 and goes to 0.76? Can there be a problem with an income distribution that is too equal–i.e. everyone is assured of having exactly the same income?
The work on this area, based on literature searches I’ve done over the years, has been spotty at best and inconclusive. Yet everybody runs around making these proclamations about how it is bad, toxic, no good, poopy, and so on. I have yet to see even a marginally well thought out argument on it.
I’d suggest that the people making this argument are simply unable to formulate a coherent argument. And to be clear, I’m not opposed to the idea that income inequality is bad. Clearly the extreme where the Gini coefficient is 1 is bad. One person getting 100% of the income in the economy? Okay, yeah bad outcome. But we aren’t there. We are damn far from there. I’d also argue that being at 0 has its problems too (the incentives would be all messed up–i.e. why do any work when I’m guaranteed the same income as everyone else). But when you are between those two extremes…then what? Is there a good zone, and some not-so-good zones, and even downright dangerous zones? What are they and why are they bad? What happens? None of these questions ever get answered….nor is an attempt even made.
BTW, if you are in the camp that thinks rising income inequality is bad, but doesn’t have a clue what a Gini coefficient is….GTFO. GTFO, and go take care of the ignorance that is blinding you.
If I recall my Marx, the theory of the industrial cycle is that the industrialist will always seek to increase profits and reduce labor costs, which (as labor is reduced or replaced) will result in fewer consumers to purchase products and more failed businesses, resulting in larger and larger monopolies until kaboom. I think I’ve read a number of criticisms of the U.S. economy that are essentially restatements of that theory.
I think the problem is our imagination tends to be static. Dave, keeps asking what is the next thing? We don’t know. Or if we did know we’d invest in it. But I don’t think that our lack of foresight means that change won’t continue.
I’ve seen this claim before: income inequality is bad.
Why? I’ve asked this question periodically over the course of several years. What is it about income inequality is bad? Exactly how is it bad.
You’re approaching this too rationally. There is a pretty fundamental divergence on morality between conservatives and liberals. Liberals are extremely attuned to inequality and equate it to an immoral situation that needs to be rectified. We can see this attitude play out in life and in experiments, for instance, when people can better their situation by $1 but to do so would entail allowing someone else to better their situation by $3 many people will find that unjust and will take the alternative of preventing the other person from making any gains even if this action comes with an expense. For people operating under this moral framework, the satisfaction gained from holding everyone equal, if it it makes them poorer, is greater than the satisfaction of improving their lot when doing so creates greater inequality. We saw this dynamic writ large in Senator Obama’s interview with Charles Gibson when Obama stated that he wanted to raise capital gains taxes because of “fairness” even if it meant reducing total revenues to government. That’s not an economically rational response, it’s a response rooted in a liberal moral framework.
Inequality is bad. QED.
Was away this w/e, so will reply now. I do not see it as a zero-sum game, not at all. I do not think I have ever implied that. What I do suggest is concentrating so much wealth at the top of the income brackets distorts both the market and the political process. I do not want government making all of our economic decisions. I also do not want that power concentrated into the hands of a few very wealthy people.
Wealth equals political power in this country. The very wealthy do not hesitate to use that power to influence decisions that exclude possible competition. The last thing they want is actual competition. If they cannot buy out possible competitors, they will push for rules that make it difficult for competition to emerge.
It was suggested that a rising tide would lift all boats. What we have seen by making the rich richer is very minimal change for everyone else, while the wealthy benefitted. IOW, the wealthy looked after their own self interest. Why is this surprising? Yes, the pie did get higher. This is not a zero-sum game. However, we have followed a policy that reduces the number of people who make things happen in our economy. How can people who believe in markets embrace this as a good thing?
The indirect effects of this wealth concentration should be obvious in our current financial crisis. Our investment class has been putting its money into financial instruments that amount to legalized gambling, not into innovative industry or services.
We embarked on this course of enabling the wealthy in 1980. Has the economy functioned better since we did that?
Steve
As to the salaries of physicians, I don’t think we can directly distort the economy the way some determined billionaires are able to do. That said, health care costs are a drag on the whole economy. As you surely realize, I have argued here for reducing health care spending. We disagree on how to accomplish that, but I do argue in good faith that we need to reduce spending in that sector. I understand fully that I am arguing for what will probably result in lower physician salaries.
Steve
I find this hard to believe after your support for health care reform which moved even more of economic activities under the auspices of government control.
Really? You are going to blame it on income inequality? Really? All the talk of public risks/private profits…gone. Nope its income inequality.
See its responses like this that just drive me to drink. If I weren’t at work, I’d go get a vodka and slug it right down. You write,
Are we there yet? How much inequality is too much? Is there a danger point? What about too little inequality?
Significantly, from my point of view, I see no policy alternatives on the table that would alter income inequality. The most ambitious I’ve seen would just redistribute income from the highest-earning .1% to the next 4.9% (for the good of the remaining 95%, of course). How is that better?
What I do suggest is concentrating so much wealth at the top of the income brackets distorts both the market and the political process.
What I take you to be arguing here is that income inequality in itself isn’t a bad thing, it’s the effects that it creates that are the bad things. Why not institute reforms on market transparency and political rules so that wealth concentration can’t distort the market and political process?
If person A and person B come to a mutually satisfactory market transaction and as a result person A is making boatloads of money how do you aid efficient, and I presume equitable, market operation as well as political fairness by having government coerce money from person A and then have government distribute that money to persons C through Z? First off, you’re making a presumption that the high income earner, person A, is guilty of market skullduggery and of corrupting the political process and you’re imposing punishment on person A for something that they might do. Secondly, rather than working to insure that the market and political processes become less prone to corruption and rent seeking your approach appears to keep the operations of these two realms inviolable and instead seeks to impose the “gun control” solution, that is, if people don’t have guns then they can’t commit crimes with guns, or in this case, if people don’t have wealth then they can’t use wealth in corrupting ways.
“Really? You are going to blame it on income inequality?”
Sorry, that was lazy on my part. Mea culpa. No, it was not the only cause. I see the crisis coming from many causes and steps. This is one of them though.
“I find this hard to believe after your support for health care reform which moved even more of economic activities under the auspices of government control.”
You need to remember that I believe in positive liberty as well as negative. I think that if we have reliable health care available, people will be less tied to their current jobs. People will be more willing to take risks. At present, who are our risk takers? If you are the next Tesla and your kid has asthma or something worse, do you leave your current job?
Dave-Aye. I keep batting ideas around. I am not sure what we do that is practical and legal. I would also like to leave the incentive for becoming wealthy for those who do create real innovation, not just finding another way to bet on someone else’s financial instrument. I think the first step is to limit the size of financial firms. Smaller firms, smaller salaries. Beyond that, I am stymied. I would certainly oppose any future tax cuts that target the wealthy.
Steve
Tango- Yes, I am not so worried about inequality per se. To a certain extent, it is good. It means that people are rewarded for effort or innovation or something. At some point though, if the inequality is large enough, I believe it distorts our markets as surely as government can, partially because that much money lets you buy the policies you want.
I had not suggested a solution prior to your post. I offer a partial one in response to Dave. I would actually like to leave incentives intact for those who are taking risks and investing in the economy in such a way that has real social value, not the gambling we saw in the 2000s.
Steve
Tango- Yes, I am not so worried about inequality per se. To a certain extent, it is good. It means that people are rewarded for effort or innovation or something. At some point though, if the inequality is large enough, I believe it distorts our markets as surely as government can, partially because that much money lets you buy the policies you want.
I had not suggested a solution prior to your post. I offer a partial one in response to Dave. I would actually like to leave incentives intact for those who are taking risks and investing in the economy in such a way that has real social value, not the gambling we saw in the 2000s.
Steve
Tango- Yes, I am not so worried about inequality per se. To a certain extent, it is good. It means that people are rewarded for effort or innovation or something. At some point though, if the inequality is large enough, I believe it distorts our markets as surely as government can, partially because that much money lets you buy the policies you want.
I had not suggested a solution prior to your post. I offer a partial one in response to Dave. I would actually like to leave incentives intact for those who are taking risks and investing in the economy in such a way that has real social value, not the gambling we saw in the 2000s.
Steve
I see…in other words you like subsidies. I’d argue it is precisely this kind of thinking that got us on the unsustainable path. I’d also argue you can’t have your cake and eat it too. You need to pick one, not both.