January 25, 2003
America's Second Gilded Age

Project Syndicate: America's Second Gilded Age: J. Bradford DeLong : November 2002

The richest Congressional district in the US is the so-called "silk-stocking" district of New York City's Upper East Side, with a per-capita income of $41,151 per year. The poorest Congressional district is a largely Hispanic-immigrant district in Los Angeles, with a per-capita income of $6,997 a year. In 1973 the poorest fifth of America's families had incomes that averaged $13,240 a year (in today's dollars); in 2000 the average incomes of the poorest fifth were the same: $13,320. By contrast, the richest 5% of America's families in 1973 had an average income of $149,150, and in 2000 the richest 5% had an average income of $254,840. The increase in inequality was large enough to give a 2/3 income boost to the well-off over a time when incomes in the middle grew by only 10% and incomes at the bottom not at all. (Statistics, however, that are sensitively dependent on how one measures consumer price inflation.)

To outsiders, the most peculiar thing about America's rising inequality is that so few Americans object. Surely a society with a skewed income distribution is worse off than one in which incomes are more equal. An extra $10,000 a year does little to raise the well-being of a multi-millionaire, while a deficiency of $10,000 a year makes a huge impact on how a middle-class family lives.

If you follow Nobel Prize-winner James Buchanan's utilitarian principle that you should evaluate a society's social welfare by imagining that you have an equal chance of being poor and rich, it is easy to judge that the more equal society has a better set of social and economic arrangements. From there it is easy to make the leap to the position that - so long as redistributive taxes don't slow economic growth - when inequality rises, it is the government's duty to tax the rich and transfer money to the poor to offset the rise.

Yet there are no calls in mainstream politics to sharply increase the progressiveness of the income tax. Indeed, even at the left end of mainstream discourse, the boldest call is for the well-off merely to contribute their "fair share" to paying for the costs of government.

One candidate for the Senate in the recent US elections, Erskine Bowles of North Carolina (a former chief of staff to President Clinton) was judged bold and foolhardy not for proposing redistributive tax increases, but simply for placing a higher priority on the federal government paying for prescription medicines than on a further cut in the highest marginal tax rate. What happened? Bowles lost.

Virtually no mainstream American politician seems opposed to eliminating the estate tax - a policy move that will further concentrate wealth for no countervailing supply-side gain. As Clinton's Assistant to the President for Economic Policy Gene Sperling once wrote, staff aides who tell Congressmen that estate tax repeal "...costing tens of billions of dollars... will benefit only a few thousand families" are answered "maybe so, but I think I met every one of them at my last fundraiser."

It's not the case that the striking increase in income inequality was necessary to deliver rapid economic growth. Most of the increase took place, after all, between 1973 and 1995 - a period during which American economic growth was slower than in any other period since

the Great Depression. It's not the case that income gains in the middle have been large enough to make mainstream voters feel generous about what is happening among their merchant princes: save for the past half-decade, income gains away from the top have been so meager that it's hard to argue that people are living much better than their parents did.

So why don't Americans feel more alarm at their country's rising income inequality? Part of the reason that they don't is that most Americans do not recognize what is going on. One poll found that 19% of Americans think their incomes put them in the top 1% of income distribution - and that 20% more hope to reach the top 1% someday.

Deep in the core of American ideology and culture is a constellation of beliefs and attitudes: belief that the future will be brighter than the present; that what you accomplish you make with your own hands; that individuals should rely on themselves, not the state; that people can cross oceans and mountains to make for themselves a better life; and that those who succeed do so not through luck and corruption but through preparation and industry. These are not beliefs conducive to social democracy. >

For two generations starting in 1933 America did look a lot like a west European-style social democracy. The shock of the Great Depression and the response of Roosevelt's New Deal probably accounts for the shockingly "un-American" attitude toward redistribution of that era. But somebody ten years old when Franklin Roosevelt was elected is now eighty. Memories of the Great Depression are dying out. So what now seems likely is that the older and more enduring - call it the Gilded Age - pattern of American ideology, culture, and political economy is reasserting itself. Inequality, it seems, is as American as apple pie. Posted by DeLong at January 25, 2003 04:36 PM | Trackback


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The Silk Stocking District has been my home for more than a decade. It includes housing projects in Queens, a slice of the old Lower East Side, some of Chinatown, a population of "lifer" hospital residents on Roosevelt Island, and Manhattan's Gold Coast of zillion dollar flats between Lexington Avenue and Central Park.


http://map01.elections.state.ny.us/mapimage/IDFGGFBCMMJLBKBCPFKGLBAL81704675.GIF

Our congresswoman, Carolyn Maloney, lives in a townhouse across the street from Woody Allen. An outspoken supporter of public school teachers' unions, her car has three stickers in its rear window: Spence, Groton, and Princeton.

Now to issues. What is the PRODUCTIVITY of those poor folks in LA at the other end of the income spectrum?

Posted by: Bucky Dent on January 25, 2003 05:31 PM

Although there is a cultural imperative at work, I think it is more than that. How many people really understand how bad things have gotten on the income and wealth distribution front? Not many - I constantly get into arguments about it even with politically aware folks.

Posted by: Ian Welsh on January 25, 2003 05:35 PM

Bucky says: > Now to issues. What is the PRODUCTIVITY of those poor folks in LA at the other end of the income spectrum?

Gee, I wonder why Bucky brings that up? I mean, we /all/ know that poor people are unproductive and rich people /deserve/ all that money they have because, lord knows, had they been born anywhere in the world (say Ethiopia or Bangladesh) they would have made just as much money. Living in the US and having access to all the wonderful opportunities that it provides has nothing to do with their succes - they are rugged men and women who would live as well anywhere.

Yup. The rich deserve everything they've got and the poor are undeserving scum who deserve nothing.

Glad I finally understand. I'll send my donation in to the Republicans later today and encourage them to push through bankruptcy "reform" so that the poor and middle class don't keep weaseling out of their responsibilities. (Wonder if MBNA will let me refinance my debts at the low rates they gave to the bill's sponsor. Probably not, I don't deserve it - not being rich or powerful already I haven't shown my value and worthiness.)

Posted by: Ian Welsh on January 25, 2003 05:48 PM

It is misleading to talk about income distribution in isolation from the large number of unskilled immigrants coming into the country from Mexico and other Latin American countries. They are poor by US standards, but they are a lot better off than they were at home. The children of these immigrants may well move up the economic ladder, unless those who run our public education system are successful in their efforts to prevent them them from becoming educated.

It's also misleading to talk only about distribution without mentioning the fact that many people move upward in the course of their working lives. Many so-called poor are poor only temporarily.

Americans, to their credit, value freedom and opportunity over equality, and are generally free from sentiments of envy and spite toward the rich and successful.

Liberal intellectuals have much to learn on this subject from the common sense of ordinary Americans.

Posted by: Joe Willingham on January 25, 2003 06:20 PM

"Many so-called poor are poor only temporarily."

And many are part of generations of impovershed Americans. Brad, could you tackle this? I'm sure you remember the relevant statistics better than I do.

Posted by: Paul on January 25, 2003 06:47 PM

I don't know how to integrate this datum into the lucid points that Prof. DeLong makes, but Americans who make a lot of money will consistently describe themselves as "middle class" even though they are far from the middle by any objective standard.

Posted by: RPM, Esq. on January 25, 2003 07:57 PM

Mr. DeLong wonders why more Americans aren't upset about rising levels of income inequality. He suggests ignorance, and/or a belief among Americans that one day they or their children will be rich. Let me suggest a simpler explanation: we don't know what's going on. Until we understand why inequality is increasing, it's tough to figure out what to do about it.

John

Posted by: J O'Brien on January 25, 2003 08:22 PM

This was covered in more depth by Krugman in his For Richer a little while back.

As I understand it, the long term trend over the last 30 years has been for the poor to get poorer. This trend reversed temporarily during the dot com boom, but things are now back to normal (or worse). Therefore, using 2000 statistics is deceptive.

Posted by: David on January 25, 2003 09:07 PM

Why not change to read as follows, "Surely a world with a skewed income distribution is worse off than one in which incomes are more equal."?

I personally have a hard time taking seriously people who talk about redistributing income in America, when we're among the richest people in the world. What's the moral or economic argument against a broader redistribution to, say, Haiti? To me the logical outcome of the kind of argument that Mr. DeLong is making is that we should be making massive transfers to the rest of the world. And yet he seems to stop short of advocating broader transfers.

The other theoretical problem of course, is that a government that has the power to redistribute wealth also has the power to do a lot of potentially bad things to citizens. And ....the allocation decisions are shot through with collective action problems. Who's to say that the money would get to its intended recipients anyway?

I'm not arguing that there aren't injustices in America, nor am I arguing that there isn't a utilitarian argument for redistribution - there is. But (I think) many of the problems are caused by rather than solved by government action.

By the way, great blog!

Posted by: Scot Johnson on January 25, 2003 09:35 PM

According to Paul Krugman, the reason for the growth in income inequality is unknown, but the most likely suspect is the premium paid to education and skill in an inceasingly high-tech society. (Krugman shows that contrary to popular belief international trade is not the culprit.)

So long as the poverty rate is declining, and except for a slight uptick in the current slowdown, it seems to be, why worry about inequality? Is it such a bad thing that some people are very rich? Bill Gates is not going to put his billions into Swiss bank accounts. Part of it he'll invest in productive enterprises, and part of it he'll put into foundations that will award scholarships to poor students, fight AIDS, support the arts, and do all sorts of good works. Bill G. will probably do a lot more good with the money that the government would.

Posted by: Joe Willingham on January 25, 2003 10:01 PM

Those who are truly interested in the debate should read Kevin Phillips' "Wealth and Democracy". He goes over it in much more detail than Krugman. Even if you're not on the side of Krugman or Phillips (or myself) it's a necessary read if the topic interests you.

As an aside, one of the most interesting things that Phillips points out (and he has the data backing it up) is that social health indicators don't seem to track absolute or average wealth in society after a certain point - they track income inequality. So, for example income inequality has some correlation with infant mortality rates.

Interesting, no?

As for why wealth distribution has changed - one reason Phillips suggests (and again he has facts backing it up, though they aren't absolutely conclusive) that it has a lot to do with government.

If all that the trends in income inequality meant was that there were more rich people in the world - well I'd be all for it. Don't think that's all it means, though.

Posted by: Ian Welsh on January 25, 2003 11:06 PM

As an outsider from Nothern Europe I'd like to comment this. My country Finland has had one of the lowest measures of poorness no matter which method you use. It is the same with inequality measures.

US has been seen as a welfare laggard and I think it is quite clear that the trickle down theory after so many years of widening income gap and a growing amount of poor people in the US has been proved to be false. Institutionalized ways to make the things are better than merely hope for mercy.

To measure who are the poor there are several possibilities and depending which method you choose you'll get somewhat different results every time. So it's not so clear a thing at a first place to measure. The American way to measure has as far as I know been fastened to the expense of a bag of goods at 1955 price level. If it still is so, the method itself will underestimate the amount of poor.

On the other hand someone with a minimum income in the US can be rich compared to someone in Sierra Leone or Russia for example but the trick here is the diference between absolute and relative poorness. So as Amartaya Sen has noticed, it's not the amount of money but the functions and capabilities it creates for you, which is important. Also Simmel's view of money might be nice to refer here.

I'm deeply concerned, as a friend of US, that the most powerful country in the world ever is living according to a clear lack of democracy (if only 20% is voting) in one man one vote perspective, it has turned -because of the electoral system -to be one dollar one vote democracy and the pattern seems to grow with a positive multiplier. The good thing is that your system is balanced and fragmented but I still doubt that thinking tanks as Cato institute make the things blurred in their favor in the media.

The other thing is that the social democrat way of thinking has also been in move towards the "laws" of new economics and in many social democratic countries has been slight income gap widening as well, as in Finland, too.

Thinking for example South-America I hope that Brazil can turn to be success, Chileans had extremely good luck in the first place, though I doubt it's future, long run welfare can't be based on gambling with funds.

The sad thing is IMF's and WB's policy with the new "democracies", countries evolved after the former Soviet empire.
So as the US,the IMF and WB at least had adopted same kind of views of policies of new liberalism in stead of social democracy. In fact the old communist system was in reality more like new liberal system than the social democratic one. Thus the new way of organizing economy came as a present to the former rulers, I think. And the income gaps among them are the widest in the world.

With regards Jyrki.

Posted by: Jyrki Oksa on January 26, 2003 01:41 AM

It's claimed that about 20% of the population believes it's in the top 1% and another 20% hopes to be in the top 1% within the next few years. If this is true, it would explain a lot.

Seems Bucky and I have one thing in common - living in the same congressional district for more than 10 years.

Posted by: richard on January 26, 2003 05:24 AM

although I've complained to Carolyn Maloney about her vote on Iraq, while I suspect Bucky supported it.

Posted by: richard on January 26, 2003 05:32 AM

My wager: everyone who posted a comment here about income distribution HAS A JOB! (Oh, 'cept me.)

Posted by: InMarin on January 26, 2003 07:23 AM

My wager: everyone who posted a comment here about income distribution HAS A JOB! (Oh, 'cept me.)

Posted by: InMarin on January 26, 2003 07:23 AM

"And many are part of generations of impovershed Americans."

Almost certainly, poverty passed from one generation to the next is due to cultural deficiencies. These folks are usually member of a group that is indifferent, if not hostile, toward education. They are also unwilling to embrace the values of delayed gratification and a sound work ethic. Redistributing money in such circumstances only makes matters far worse.

Posted by: David Thomson on January 26, 2003 08:01 AM

"I'm deeply concerned, as a friend of US, that the most powerful country in the world ever is living according to a clear lack of democracy (if only 20% is voting) in one man one vote perspective, it has turned -because of the electoral system -to be one dollar one vote democracy and the pattern seems to grow with a positive multiplier."

The vast majority of human beings could care less about politics unless all hell is breaking loose. In other words, indifference towards voting, is in many respects, a sign of a healthy democracy. A 90% turnout on election day is often the result of a Saddam Hussein or Fidel Castro ordering all of the adult citizens out to the polls---to support their dictatorial rule.

Posted by: David Thomson on January 26, 2003 08:32 AM

I think the relative stagnation of median incomes over the last 20-25 years is the most troublesome aspect of income inequality. I suspect that this has become an increasing impediment to maximizing economic growth in this country.

Immigration, trade, labor and tax policies have certainly contributed to the stagnation in median incomes. However, freer immigration and trade policies have had a positive effect on overall national income, even if those receiving its principal benefits haven't borne many of the costs of those negatively affected by these policies.

On the other hand, the decline in the minimum wage and in the influence of organized labor in the private sector and less progressive taxation policies may be negatively affecting not only median incomes but also overall national income. In addressing income inequality, a renewed focus on progressive tax and labor policies seems especially appropriate.

Posted by: Ben Brackley on January 26, 2003 09:03 AM

The claim has been made that the rich are so much richer because they are so much more productive.

One thing I've wondered about is how true this really is.

The obvious counterexample is the pay of CEOs. In, say, the fifties, I believe that the average pay for a CEO of a major American company was roughly 40 times as much (give or take -- the exact number here is not much relevant) as that of the average worker. Today, it is in the neighborhood I believe of about 500 times as much, but in any case over an order of magnitude greater than it had been in the fifties.

These are the same kinds of firms, with essentially the same kind of profitability (or not) at those firms. There is absolutely NO reason to believe that today's CEOs differ in any relevant respect from the CEOs of the fifties in terms of productivity.

I don't know how an honest person can look at this picture and not conclude that market forces, which supposedly by some magic assign to each person a compensation commensurate with his or her productivity, are infected to the core with a deep subjectivity -- so deep that a factor of an order of magnitude can be swallowed up in it.

The question then becomes, is it a like deep subjectivity that pays maids in a motel only near minimum wage on the one hand, and successful lawyers perhaps millions a year on the other? (I don't mean to imply that maids should earn what lawyers do, but rather whether there levels of compensation may be somewhat arbitrary and subjective.) How much of the compensation for these jobs is due to the operation of real and ineluctable market forces and how much does it hang on a subjective valuation of the "importance" or "rigor" of those jobs? (Alternatively, how much does the operation of market forces at base stem from subjective perceptions of "importance"?) Are jobs that, say, women perform traditionally by that very fact valued lower?

Certainly insofar as it is subjective factors that drive the compensation levels of various jobs, the issue of great income disparities becomes far more compelling.

Posted by: frankly0 on January 26, 2003 09:04 AM

Prof. DeLong expresses amazement that more people aren't worried about inequality. Maybe not everyone is a leftist who thinks government owns all resources and can dish them out as it pleases?

Posted by: Tim on January 26, 2003 09:12 AM

Just a further point, elaborating on my last post.

It's my guess that amount of subjectivity in "productivity" is probably much greater at the upper end of compensation than at the lower end. CEOs, again, are a paradigm example of this. The pay at the lower end has been relatively stable over the decades. It is the pay at the upper end that has changed, and dramatically.

Another way to put my question is: how much is the case of CEOs an exception, and how much is it the rule, for the reasons people in the uppermost incomes are earning nowadays so much more relative to the average worker than was true in the fifties?

Almost certainly, the pay of executives below the rank of CEO has to a good degree tracked that of CEOs, and by extension, the pay of the entire higher managerial class has been likewise pulled up. I wouuld expect that these managers, and their correlates elsewhere throughout the economy who compete with them for jobs, must constitute a goodly portion of the top 1% of income earners.

Posted by: frankly0 on January 26, 2003 09:19 AM

The business of government is redistribution of wealth -- it always has been and always will be; therefore, the long term trend toward income inequality is the result of government actions. Mr. Bush, an ex-CEO, is simply trying to maximize the "business" impact of governmental decision-making.

Posted by: Andy Mayo on January 26, 2003 09:21 AM

Again those who are interested in this debate should consider doing more reading. Another suggestion is Randall Collins' "The Credential Society". It's old (77) but there is no good reason to believe the data in it has changed over the last quarter century. IIRC he has a discussion of executive compensation - but what is also interesting is his data on skill in Doctors. After all, you would think doctor productivity and skill would have a lot to do with education, wouldn't you?

With some exceptions credentials are used to control labor markets, to shut people out - not to raise skills. Those who are in the computer industries should be familiar with this, as it has occured in their industry over the past twenty years.

Posted by: Ian Welsh on January 26, 2003 10:17 AM

According to some in this thread CEOs making 1000x the average employee are by definition 1000x more productive.

Another way to look at it; by replacing the CEO with 1000 men and women we'd have essentially the same level of production and as a side benefit less unemployment. Then the CEO could go abroad and amaze Bangladeshi by pulling their pants on 1000 times better there.

I suppose in a macro sense and over many years Anglo-American style capitalism generally trends toward greater productivity, but there are too many examples like the one above; the ludicrous notion that someone no matter how gifted is 1000x more productive anwering the phone, writing memos, delegating work. (Nevermind the actual dismal track record of so many execs that belies the myth of CEO greatness-- Bush & Cheney are prime examples.)

What does a $13,000 (bottom 20%) per year income mean to the individual and society? Deprivation for the individual and a fellow citizen that is hurting such that in many big and small ways we all feel the impact. There are families trying to live on that sum and they *did* put in their 40 hours. You could ask them to put in another 40 or 80 hours, but how many employers really want that last 40 hours of someone being worked to death.

I'm a computer programmer. Prior to Bush I was a top 10% income earner (still sounds silly to me because I've always been a lot closer to homeless than Bill Gates). Perhaps because I was in that field which requires constant relearning I'm very sensitive to the plight of those whose ability to learn are limited. If they're good people willing to work hard do we just write them off anyway because they can't learn to be chemists?

Finally, every once in a rare while the market starts to favor all workers, even the unskilled. Labor becomes tight, wages rise. Guess who steps in to protect capital from rising wages? Couple monetary policy favoring capital with fiscal policy favoring the richest 1% we're bound to have growth in income inequality and growth in misery.

Where the current administration is particularly bad is in how determined they are to push their dogmatic view to the bitter end. They're cutting off their own noses-- destroying their own fortunes-- to...

Oh well. Forget it. I gotta get back to digging my bunker.

Posted by: Dennis Slough on January 26, 2003 10:46 AM

How "productive" are the southern African women who tend the cocoa fields or the men who mine diamonds? We do like our chocolate and rings. We do not question how productive are the companies that sell us sweets and jewels, and we do not fret about what it is to be paid a dollar or two or perhaps three a day for tending the fields and mining the stones. Ah, those African men and women must not be productive enough.

Posted by: anne on January 26, 2003 10:50 AM

Oh boy, here we go again. I hope some day we discover exactly who to credit for the saying, "Those who refuse to learn from history....".

In 1964 LBJ and friends launched The War on Poverty. In that year, the federal government took in 17.5% of GDP, and spent 18.5% (with a top marginal income tax rate of between 90% and 70%, I forget just which it was).

So, in 1973, just about the time the war would have had some effect, we, according to Brad DeLong, find that improvements in the economic well-being of the poor have come to a screeching halt. All during the seventies and eighties, when government is spending as much as 23.5% of GDP, the poor are stuck in their ruts. Gee, what a surprise.

Posted by: Patrick R. Sullivan on January 26, 2003 12:14 PM

Scot Johnson wrote, What's the moral or economic argument against a broader redistribution to, say, Haiti? Answer (pp. 39-40, Passions and Constraint: On the Theory of Liberal Democracy, Stephen Holmes, 1995): "While it is morally obligatory to secure a "bottom floor" of subsistence to all humanity, it is (unfortunately) unrealistic to attempt domestic-scale redistributions across territorial borders, not only because of scarce resources, but also because of the location of sovereign power. Although this restriction flies in the face of liberal universalism, welfare rights will in fact be limited to conationals."

Posted by: Stephen J Fromm on January 26, 2003 02:55 PM

Joe Willingham wrote, It's also misleading to talk only about distribution without mentioning the fact that many people move upward in the course of their working lives. Many so-called poor are poor only temporarily.

Certainly. However, more detailed analyses of the distribution of wealth and income take this into account.

David Thomson wrote, These folks are usually member of a group that is indifferent, if not hostile, toward education. ... Redistributing money in such circumstances only makes matters far worse. But there are other measures one can take aside from direct cash transfers that may get around the obstacle you cite--e.g., dispersing low-income housing in wealthier suburban neighborhoods.

Re Patrick Sullivan's comment: Post hoc ergo prompter hoc.

The funny thing about all the posters with a negative view of government actions to ameliorate income inequality is that they forget government behavior that worsens income inequality: namely, laws and rules that allow people to collect rents (from land ownership, professional certification, etc).


Posted by: Stephen J Fromm on January 26, 2003 03:13 PM

Kevin Phillips (in just about every one of his books) comes to virtually the same conclusions. He considers the whole thing cyclical, though.

Oh boy, here we go again. I hope some day we discover exactly who to credit for the saying, "Those who refuse to learn from history....".

In 1964 LBJ and friends launched The War on Poverty. In that year, the federal government took in 17.5% of GDP, and spent 18.5% (with a top marginal income tax rate of between 90% and 70%, I forget just which it was).

So, in 1973, just about the time the war would have had some effect, we, according to Brad DeLong, find that improvements in the economic well- being of the poor have come to a screeching halt. All during the seventies and eighties, when government is spending as much as 23.5% of GDP, the poor are stuck in their ruts. Gee, what a surprise.

Surely you don't think those GDP numbers have any real relation to actual poverty spending in the US. Medicaid is the only significant poverty program in the federal budget, and it's only about 10% of federal spending.

Posted by: Jason McCullough on January 26, 2003 03:49 PM

Phillips does consider it cyclical - but he has more than one cycle going on. The question this cycle is whether the US will pick itself back up and stay the world leader or will slide into permanent economic decline, like Britain and Holland before it.

So far it looks awfully like this is the the end of the cycle and it will slide into permanent decline. Not that it will happen overnight - the British fell for decades before it became evident beyond dispute.

Posted by: Ian Welsh on January 26, 2003 06:42 PM

I've complained to Carolyn Maloney about her vote on Iraq, while I suspect Bucky supported it.

Something about the fallout from the WTC collapse landing in her district might have had an influence on her vote. You never know.

Posted by: Bucky Dent on January 26, 2003 07:29 PM

“So, in 1973, just about the time the war would have had some effect, we, according to Brad DeLong, find that improvements in the economic well- being of the poor have come to a screeching halt. All during the seventies and eighties, when government is spending as much as 23.5% of GDP, the poor are stuck in their ruts. Gee, what a surprise.”

Someone is overlooking the harsh fact that the educational demands for the better paying jobs dramatically increased during that time period. Many of those in the poorer classes lacked the cultural values necessary to value a education beyond the high school level. Males often despised advanced schooling as emasculating and something only nerds should do. Today, numerous black youths are still beaten up for “acting white.” Attaining good grades is supposedly evidence of selling out to the white establishment.

Posted by: David Thomson on January 26, 2003 07:57 PM

"will slide into permanent economic decline, like Britain and Holland before it"

Say what? Surely you must mean "slide into somewhat lesser growth rates, thanks to lower TFP." Permanent economic decline IS NOT the same as going from 2.5% annual real per capita GDP growth to 2.0% or 1.5%.

Sloppy rhetoric, however, is indicative of sloppy thinking.

Posted by: Paul on January 26, 2003 08:07 PM

Stephen J. Fromm wrote, "Scot Johnson wrote, What's the moral or economic argument against a broader redistribution to, say, Haiti? Answer (pp. 39-40, Passions and Constraint: On the Theory of Liberal Democracy, Stephen Holmes, 1995): "While it is morally obligatory to secure a "bottom floor" of subsistence to all humanity, it is (unfortunately) unrealistic to attempt domestic-scale redistributions across territorial borders, not only because of scarce resources, but also because of the location of sovereign power. Although this restriction flies in the face of liberal universalism, welfare rights will in fact be limited to conationals."

This is nice, but it doesn't answer my point. I asked for a moral or economic argument against trans-national income transfers. This is simply a cop-out. Gee, we have a moral obligation to transfer income but, oh well, it's too hard to do, so we won't do it. Never mind the fact that the disparities among Haitians and Americans is far greater than among Americans alone.

Given this cop-out, where does the imperative to transfer income among Amercans come from?

He also wrote, "The funny thing about all the posters with a negative view of government actions to ameliorate income inequality is that they forget government behavior that worsens income inequality: namely, laws and rules that allow people to collect rents (from land ownership, professional certification, etc)."

How did I forget that? I wrote, "And ....the allocation decisions are shot through with collective action problems. Who's to say that the money would get to its intended recipients anyway?" That was my point. Sure, a theoretically perfect government could manage a utilitarian redistribution. But bring in the public choice assumptions and it's quite possible that a government that can redistribute will make us worse off.

Posted by: Scot Johnson on January 26, 2003 08:22 PM

Putting foreign countries on the dole is an extraordinarily poor idea. For example, if you flood a country with free food you bankrupt its farmers by depressing agricultural prices and turn its people into beggars dependent on handouts.

The idea that we owe massive aid to other countries is based on a misplaced sense of guilt, and on the fallacious belief that there is a fixed amount or wealth in the world, so that our prosperity must have come at someone else's expense.

The best thing we can do to help other countries is to lower trade barriers and allow them to sell into our markets, while insisting that they keep their markets open as well. We should also encourage democracy and the rule of law, and market oriented economic policies, all of which are essential for long term prosperity.

Posted by: Joe Willingham on January 27, 2003 06:55 AM

Very interesting discussion. I have one comment that makes me recall that old saw about an economist knowing the price of everything but the value of nothing (BTW, a paraphrase of Oscar Wilde): luxury goods cost so much more than mass-market goods that the dollars and the effort involved in making those dollars would strike many people as not worth the cost. For example, you can spend $15k on a perfectly good, comfortable car or you could spend $50k on a luxury model that does what the $15k version does with a few extra amenities and some social cachet. The economists here (accept my generalization for now) would automatically react that the extra $35k must be providing some kind of service which makes it worthwhile, but I think many Americans would think that there is too little difference between the ordinary and the luxury good to make it so. Why spend that extra money? And why work for it? (This idea and example do not apply to real estate but would apply to many mass-produced items.)

My point: that extra money the upper percentiles are making may seem huge in numerical terms but the extra services these figures buy may seem like not worth the effort. That may help explain why concern about income inequality among the US middle classes is highly attenuated.

Posted by: JT on January 27, 2003 08:20 AM

focus on immigration, rather the illegal kind...

legal immigration tends to be broadly based (income wise) and outside of rent seeking by professional associations (which are kept in place primarily by liberal regulation freaks: see FDA, Nader, lawsuits... but who's contributions and scare tactics keep the repubs on the reservation) skews higher on the income scale (h1b people get very good money, though maybe not as much as a local wood)

when the vast majority of immigrants every year are illegal, who will be by necessity forced to the lowest paid industries (a management consultant won't be hopping across the rio grande...), you get persistent pull down on income equality...

also, what everyone is neglecting is the qualittive improvements that are especially important to people on the bottom end (which inflation doesn't track well at all)

take your 13k (real) 1970 salary and see what you can buy and how long it lasts... then see what happens with the 2003 version. You get much better quality in goods, more variety, and more choice... for someone in the top range, quality and selection hasn't improved much (taking out of course the fact that you don't buy 70's style disco and brown crap anymore, as that's just taste) so that's some reverse judo

as for mobility not taken into account... the article is about income inequities, so we talk about inequities, you want to bring some mobiity studies, bring them...

the one thing that I haven't seen in mobility studies is how they accout for the dramatic increase in the number of years people spend out of the economy. people in university and grad school start to get counted as non-dependents very rapidly (especially at grad school) and would tend to be counted as poor (very poor, with minimal incomes, likely at near minimum wage for much less than fulltime hours). They stay poor for a very long time (almost a decade in some cases) and their ranks are growing every day...

but, someone with a grad school degree is most likely going to be in the top percentiles (assuming they get a useful degree or get an academic position... a phd in social work will never make any money...)

as for the ceo salary injustice: you people seem rather divorced from the real world...

ceo's job is sales and management, you pay for manners, behaviour, relationships... you can take tens of thousands of people and not be as effective as a given ceo (if he's effective) because none of them would have the experience and the relationships that makes things happen. the job is generally very physically demanding, difficult on relationships, and requires a special appetite. ceo's are frequently in the 100k plus miles a year club, work 100 hours weeks (if not more), tend to have alcohol problems, are unfit, and esentially always jet lagged. most people don't want or like those lives, and that's what ceo's get paid for: do the job that most people can't handle physically or emotionally.

you have to pay so much because if someone who is so productive isn't going to dramatically scale back their hours (as they would be wont to do) yet still make a comfortable life, nor start their own firm where they have total control and ownership of profits, you must reward them very very very well.

sam walton employed hundreds of thousands of people at very close to minimum wage... his average compensation from founding walmart (taking into account capital gains) was something like 100k to 1 million times that of his lowest paid employee... yet the shareholders and employees of walmart would never have wanted to try using thousands of either people because of one word: Kmart

y'all are so smart and righteous, and are sure that you'd do much better (or at least no worse) than using 1k minimumm wage people to do the job of a ceo... so start a company, but only employ minimum wage people for the top job... and we'll see how productive you are!

ps a main accelerator of inequality over the last decade has been the non-deductability of salaries over $1M. This has pushed more compensation towards stocks, which resulted in massive outsize compensation gains over the bul market... this is a significant contributing factor in increasing inequality, as people received stock options that no one would have paid for in cash (mike eisner's 800m payday, being one of them..)

it's your own damn fault kids.. though don't expect you to trust me on this

Posted by: Libertarian Uber Alles on January 27, 2003 09:02 AM

Some writers contend that the CPI exaggerates the rate of inflation, so that wages at the low end haven't really fallen as much as the numbers would indicate. Any truth to that theory?

Posted by: Joe Willingham on January 27, 2003 11:02 AM

These occasions never pass without someone erroneously invoking Bill Gates' presumed "view from the top". Let me suggest the official Study Guide to Wealth and Our Commonwealth (Why America Should Tax Accumulated Fortunes) by Wm. H Gates, Sr. and Chuck Collins.

Among Gates' concerns are undemocratic and diseconomic consequences of concentrated wealth. Sincere discussants would do well to acquaint themselves with these arguments as developed at length in this slim (140 pp primary text) high-density book.

Posted by: RonK, Seattle on January 27, 2003 11:07 AM

Oh spare me. Plenty of people did the CEO job for a lot less than the current ridiculously inflated salaries and would again. The job is catnip to certain personalities - if you don't understand why you don't understand power. CEO's get the ridiculous salaries because they have the Boards in the palms of their hands and they choose how much to pay themselves, in effect.

Too damn much selfishness going around here and in this society. Even Adam Smith didn't think selfishness was an unmitigated blessing to society - as those who have actually read him know.

Posted by: Ian Welsh on January 27, 2003 11:12 AM

Too damn much selfishness going around here

Selfishness: Characteristic attributed to people who earn income via voluntary private exchange, and wish to keep most of it.

Social Justice: The rationale for seizing private property, used by or for those who can't or won't earn money in voluntary exchange.

Posted by: BuckyDent on January 27, 2003 11:55 AM

I think Ian has a point about CEO's. Aren't the executives supposed to serve the shareholders, rather than the other way 'round?

Selfishness is not such a bad thing, so long as is people play by agreed upon rules. Barring fraud and other forms of criminality, I would prefer to deal with people who are looking out for their own interests rather than people who want to do me good. The latter's idea of good may not be the same as mine.

Posted by: Joe Willingham on January 27, 2003 12:08 PM

//
Too damn much selfishness going around here

Selfishness: Characteristic attributed to people who earn income via voluntary private exchange, and wish to keep most of it.
//

As if most economic transactions were genuinely voluntary...

//
Social Justice: The rationale for seizing private property, used by or for those who can't or won't earn money in voluntary exchange.
//

Private property is what? Commons appropriated by violence?

DSW

Posted by: Antoni Jaume on January 27, 2003 12:54 PM

As if most economic transactions were genuinely voluntary

Well, I've not been to Spain, where your address indicates you live, but here in the United States, there is pretty much only one class of economic transactions that is wholly involuntary. I'll leave it to you to figure out the category.

Posted by: BuckyDent on January 27, 2003 01:12 PM

>> According to Paul Krugman, the reason for the growth in income inequality is unknown, but the most likely suspect is the premium paid to education and skill in an inceasingly high-tech society... <<

And Gary Becker has pointed out that if you want to move from an uneducated to an educated society in a mere 100 years or so, then this inequality is good, not bad. It's the incentive for people to get educated. And the higher are the returns to education -- and resulting inequality -- the faster larger numbers of people will get educated.

There's a difference between looking at things statically and dynamically.

Posted by: Jim Glass on January 27, 2003 01:49 PM

ps a main accelerator of inequality over the last decade has been the non-deductability of salaries over $1M.

I'm not following how changing the compensation method of the rich increases their compensation; it should be determined by the market for executive labor, same as before.

Posted by: Jason McCullough on January 27, 2003 06:08 PM

Jason: It's the Law of Unintended Consequences. With large cash payments made diseconomic, boards elected to pay execs with options, which got a more favorable accounting treatment. Ooops.

Posted by: Bucky Dent on January 27, 2003 07:11 PM

>more favorable accounting treatment

Plus the option holders made a lot of money in the bull market.

Posted by: Joe Willingham on January 27, 2003 07:15 PM

Just so I'm following:

1) Back when executive compensation was fully deductible, the market for executive labor came to an equilibrium annual salary.

2) Deductability for salaries above 1 million was then removed. This makes cash compensation more expensive compared to the alternatives.

3) Companies naturally move to non-cash compensation such as stock options and services (maids, jets, whatever).

In a vacuum, you'd think that the market for executive labor should come to the same equilibrium price, regardless of the mechanism for the compensation (cash, stock options, whatever). However, effective cost to the company (accounting treatment, whatever) would change things.

Problem: if the accounting treatment of options is so nice, why weren't they paying options back when salaries were fully deductable? For options to be a cause of higher exec salaries, they'd need to be strictly better than fully-deductable cash compensation - otherwise they'd have been paid more back then, wouldn't they?

Posted by: Jason McCullough on January 27, 2003 08:41 PM

Options are so complex they make equilibiria hard to calculate. They dramatically alter the risk-reward matrix for receiving executives, and can be "free" from the point of view of the board. Think crack vs. coke.

Posted by: Bucky Dent on January 28, 2003 03:19 AM

if the accounting treatment of options is so nice, why weren't they paying options back when salaries were fully deductable?

The complexity and moral hazard issues kept such grants at bay. The tax code change was a compensation "tipping point" in the decision-making process.

Posted by: Bucky Dent on January 28, 2003 06:34 AM

That's a pretty seat-of-the-pants explanation for such a large claim. I'd want to see some math; effectively, for options to increase *average* compensation they'd have to decrease the cost to corporations of executive compensation. I can see 10-20%, maybe, but enough to cover a 400% jump in executive to worker pay ratios?

Posted by: Jason McCullough on January 28, 2003 04:37 PM

Combine a stock bubble with large options grants giving away one-way leveraged bets on the bull, and the orders of magnitude make sense.

The detail you request is beyond my ability to generate, but the gross outline seems pretty straightforward.

Posted by: Bucky Dent on January 28, 2003 05:14 PM

3) Companies naturally move to non-cash compensation such as stock options and services (maids, jets, whatever).

Cash and non-cash income are treated the same. (With some exceptions, such as health insurance.) It's the contingent nature of options that garners the favored treatment under the IRC.

Posted by: David Nieporent on January 28, 2003 08:46 PM

Executive salaries above a million apparently aren't deductible.

The detail you request is beyond my ability to generate, but the gross outline seems pretty straightforward.

And if the one-way bull market nature of it all was behind rising executive salaries, they should be falling through the floor now, right? Like from 40x to 20x or something, seeing how the S&P 500 dropped by half?

Posted by: Jason McCullough on January 29, 2003 03:47 AM

And if the one-way bull market nature of it all was behind rising executive salaries, they should be falling through the floor now, right? Like from 40x to 20x or something, seeing how the S&P 500 dropped by half?

Is the data even complete for the post bubble years?

Posted by: Bucky Dent on January 29, 2003 03:49 AM

One explanation for the rise in income inequality could be the "presumed" shift in our society over the past 50 years towards a "meritocracy".

As we increasingly use quantitive measures (tests) to allocate "opportunities", it becomes easier to argue (and believe) that success is achieved purely by "merit" (luck and such playing no role).

Once we make that shift, the we increasingly start to believe the converse ... if merit is the path to success, than "clearly" those who do not succeed didn't have sufficient "merit", and thus "didn't deserve" to succeed, and thus do not now "deserve" the "generocity" of the "meritous" wealthy.

One example of this attitude was the rapid defeat a few years back of Yale's plan to offer free tuition in exchange for a share of the recipents future earnings.

Perhaps we need to look again at the various factors that contribute to "success" ... then people like Bucky may be less tempted to question the "PRODUCTIVITY" of the poor.

Posted by: Sam B on January 31, 2003 05:24 PM
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