What It Really Says

In his latest New York Times column David Leonhardt is on the warpath against the ultra-rich, the top .01% of income earners:

Have upper-middle-class Americans been winners in the modern economy — or victims? That question has been the subject of a debate recently among economists, writers and others.

On one side are people who argue that the bourgeois professional class — essentially, households with incomes in the low-to-mid six figures but without major wealth — is not so different from the middle class and poor. All of these groups are grappling with slow-growing incomes, high medical costs, student debt and so on.

The only real winners in today’s economy are at the very top, according to this side of the debate. When Bernie Sanders talks about “the greed of billionaires” or Thomas Piketty writes about capital accumulation, they are making a version of this case.

His proposed solution, not surprisingly, is tax increases.

The post is dominated by an eye-catching graphic, illustrating the enormous degree by which the incomes relative to GDP of the top .01% of income earners have outstripped the rest of us. It’s too big to show here; I encourage you to use the link above to see it because the rest of my remarks relate to it. A number of conclusions can be drawn from it of which only the most facile is that the ultra-rich are too rich.

The first of these additional conclusions is that there are two economies: the financial economy, the economy of money, and the real economy, the economy of goods and services. Most, nearly all, of the changes in our economy over the last 50 years are due to the divorce between the financial economy and the real one. A little noodling for yourself will show you that’s the case.

The second is that the incomes of all groups is increasing.

The third is that the more closely your income is tethered to the real economy, the more slowly your income has grown. Since the ultra-wealthy leave most of their gargantuan incomes within the financial system, it is able to grow practically without limit, leaving everyone else behind.

The fourth requires a little more insight and understanding. Look at line depicting the incomes of the top 90-99% of income earners. It is tracking per capita GDP very closely, so closely, indeed, that one might be tempted to think it is an artifact. Which it is.

What our system actually does is tax the top income earners in order to subsidize the professional class. That is why merely increasing marginal tax rates on the top income earners will accomplish very little. It will be used to increase the subsidies paid to the professional class which will go back into the financial economy and around and around.

What policy really needs to accomplish is to increase how much is being produced by the real economy. That alone will result in increasing the incomes of those who aren’t in the top 10% of income earners and it requires a much more subtle strategy. We need to de-emphasize college educations, encourage the top .01% to invest their trillions in the real domestic economy, discourage them from leaving those trillions in the financial economy, import less, refocus regulation so as not to discourage real domestic production, and hold the line on the subsidies being doled out to the professional class. That in turn will require a careful, painstaking redefinition of capital gains.

My bet is that we won’t do that but will merely use the meat-axe approach of increasing marginal tax rates and in ten years the same graph will look much, much worse. And more politicians will enter the top .01% of income earners.