dismantles Obama’s “1% vs. 99%” inequality argument
Posted in the Minneapolis Forum
#1 Aug 21, 2013
Stunning new study dismantles Obama’s “1% vs. 99%” inequality argument
“This growing inequality,” President Obama said during his recent Knox College speech,“is not just morally wrong, it’s bad economics.”
A strong statement — but one not supported by data, suggests a blockbuster new study by economists Steven Kaplan (University of Chicago) and Joshua Rauh (Stanford University). They examine two possible explanations for the rise in top-end inequality in their paper “It’s the Market: The Broad-Based Rise in the Return to Top Talent”:
#2 Aug 21, 2013
1. The Superstar Syndrome. Technology and globalization has enabled highly talented and educated individuals to manage or perform on a larger scale, “applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid.”
#3 Aug 21, 2013
2. The “Greed is Good” Syndrome. Then again, maybe compliant corporate boards overpay CEOs, social norms against “exorbitant pay levels have broken down, or tax policy affects the distribution of surpluses between employers and employees.”
In their paper, Kaplan and Rauh conclude “it’s the market” rather than some class-wafaresque malfeasance at play. Here’s why:
1.The increase in pay at the highest income levels is broad-based: Public company executives, private company executives, hedge fund and private equity investors, Wall Street bankers, lawyers, and pro athletes have all experienced big jumps in pay over the past few decades. The researchers:
If the reason for growth of incomes at the very top is, say, managerial power in publicly owned companies, then one would expect the increases in income at the top levels to be much larger for that group. But the breadth of the occupations that have seen a rise in top income levels is much more consistent with the argument that the increase in “superstar” pay (or pay at the top) has been driven by the growth of information and communications technology, and the ways this technology allows individuals with particular skills that are in high demand to expand the scale of their performance.
2. Typical measures of high-end income inequality are incomplete. Inequality alarmists typically point to data from Thomas Piketty and Emmanel Saez which show the share of taxable income accruing to the top 1% up markedly since 1980 and at levels not seen since the Roaring ’20s. Yet once you add back transfer and taxes, as the Congressional Budget Office does in its analysis, you find that government policy — including the tax code — has already been restraining the rise inequality. Kaplan and Rauh:“In the most recent data from 2009, the aftertax, after-transfer income share of the top 1 percent was around the same level as in 1987–1988, 1996, and 2001.”
#4 Aug 21, 2013
3. The superrich are getting that way through effort and education — particularly in industries where tech and globalization play a big role — rather than through inheritance:
Credit: Steven Kaplan and Joshua Rauh
Credit: Steven Kaplan and Joshua Rauh
The researchers also find “a trend in the Forbes 400 list away from people who grew up wealthy and inherited businesses towards those who grew up with more modest wealth in the family and started their own businesses.”
The researchers conclude:
Our evidence is not obviously consistent with those who suggest that the increase in pay at the top is driven by a recent removal of social norms regarding pay inequality. While top executive pay has increased, so has the pay of other groups, who are and were less subject to disclosure and, arguably, less subject to social norms. This is particularly true of private company executives and hedge fund and private equity investors.
Overall, we believe that our evidence remains more favorable toward the theories that root inequality in economic factors, especially skill-biased technological change, greater scale, and their interaction. Skill-biased technological change predicts that inequality will increase if technological progress raises the productivity of skilled workers relative to unskilled workers and/or raises the price of goods made by skilled workers relative to those made by unskilled workers. For example, computers and advances in information technology may complement skilled labor and substitute for unskilled labor. This seems likely to provide part, or even much, of the explanation for the increase in pay of professional athletes (technology increases their marginal product by allowing them to reach more consumers), Wall Street investors (technology allows them to acquire information and trade large amounts more easily) and executives, as well as the surge in technology entrepreneurs in the Forbes 400. Globalization may have contributed to greater scale, but globalization cannot drive the increase in inequality at the top levels given the breadth of the phenomenon across the occupations we study.
Also keep in mind that Obama is almost certainly wrong in his Knox College claim that the “link between higher productivity and people’s wages and salaries was severed – the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.” As the Washington Post points out:
The CBO finds that, before taking taxes and transfers (like Social Security or the Earned Income Tax Credit) into account, real median household incomes grew 19.9 percent between 1979 and 2007; after taking transfers but not taxes into account, they grew 30 percent; and after taxes, they grew 38.2 percent … real median household incomes in America are growing, and it’s inaccurate of Obama to suggest otherwise.
So high-end inequality is likely a) being mainly driven by market forces and b) not having an obvious impact on the economic well being of the American middle-class. And keep in mind inequality is only a 1% vs. 99% thing. As Northwestern University economist Robert Gordon has pointed out, there’s been “no increase of inequality after 1993 in the bottom 99 percent of the population, and the remaining increase of inequality can be entirely explained by the behavior of incomes in the top 1 percent.”
In other words, the core thesis of Obamanomics — the rich have immorally gaffed all the income gains of the past 30 years and its time to redistribute — doesn’t seem to hold up. Rather than attacking the 1% or 0.1% or 0.01%, Washington should be focusing on boosting growth and economic mobility through education reform and improving innovation-driven productivity.
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