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April 23, 2007
"Harry Potter and the Mystery of Inequality"
Alex Tabbarok has a wonderfully titled post using J.K Rowling's reported billion dollars to illuminate the economics of superstars. And it's true, as he says, that "Homer...told great stories but could earn no more in a night than say 50 people might pay for an evening's entertainment. Shakespeare did a little better...The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn...[but] Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling's words, images, and products are translated, transmitted and transported everywhere."
So sure, folks can become global brands and make a lot of money these days. But that doesn't solve the mystery of inequality. After all, inequality is nearing its 1920s-era levels. And there was much less in the way of globalization and branded sippy-cups and McDonald's tie-ins back then. Great concentrations of wealth are always possible within capitalism. There's nothing unique about the current moment in that respect. But in the past, government policy has been leveraged to even out the distribution. For instance:
So yes, pre-tax income inequality has increased, and the reasons are a bit opaque. But even as pre-tax income inequality has increased, tax burdens on the rich have fallen. So it's not exactly a mystery why the country has grown far more unequal...
April 23, 2007 in Inequality | Permalink
Comments
"So yes, pre-tax income inequality has increased, and the reasons are a bit opaque."
Really? I have to admit, I'm surprised at this. I thought the reasons, at least some of the factors were fairly obvious.
-The general shift in the economy away from one of production wherein the most financially productive sectors is the financial business. Shorter: It gets better and better if all you do is use money to make money. Making "stuff", not so much.
-The wane of unions.
-The increased costs to those who cannot participate in the economy above a certain level. I'll offer a few examples. You don't have a bank account (and lots of folks don't), so you have to pay a percentage of your paycheck to cash it. You don't have a lot of money to leave in a bank account, your fees are higher. You don't have a lot of income, so you automatically pay higher interest rates on loans and credit cards. All this stuff adds up very quickly and of course, impacts most heavily the people at the bottom.
-Aggressive "right to work" laws.
Those are a just a few that come to mind. Though, I'm not all that bright and I am sure someone can come up with some theoritical economic arguments that say none of those things mean anything.
Posted by: ice weasel | Apr 23, 2007 10:38:39 AM
hey Ezra,
A few months ago, I was really hard on you for making basic mistakes about economics, and well...you've improved. Lots. I've been watching - you did your homework one way or another.
Take the next step with this line of reasoning on inequality. The major argument is that these low tax rates on the upper classes spur the best and most motivated to work harder - increasing economic growth for everyone. It should be pretty trivial to show this to be false. Just superimpose the graph you have above with a nominal GDP YoY growth chart, and its pretty damn clear, this massive boon to the upper classes HAS NOT changed the amount of economic growth we are experiencing.
Posted by: mickslam | Apr 23, 2007 11:03:54 AM
"So yes, pre-tax income inequality has increased, and the reasons are a bit opaque."
Aren't the beneficiaries of this-as-system....
the 'Gamer-scammer-schemer' crowd, the financialators and Wall Street stir-masters....
And don't most of us find that kind of machination unrewarding?
Posted by: has_te | Apr 23, 2007 11:12:11 AM
Poor people don't invest. Poor people don't start businesses.
Why would anyone expect poor people to reap the rewards?
Posted by: Fred Jones | Apr 23, 2007 11:25:27 AM
Investors and entrepeneurs don't make any money without distribution pipes.
Actually, Tabarrok is on to something very important here. Rowling wrote something that perfectly fit the distribution system. It created a lot of rents in various tributaries. Why Rowling and not Madeliene L'Engle?
Walt Disney did much the same thing in the 50s. Disneyland, "Walt Disney Presents", deals with toy-makers. I had my own imitation coonskin cap.
It is about rents rather than productivity or creativity. Instead of competing with Rowling or Lucas or Star Trek, all the big pipes want a piece of a sure thing. This builds the synergy that builds the buzz that increases the value of the rents.
People are still buying RE in San Diego because people are buying RE in San Diego.
Posted by: bob mcmanus | Apr 23, 2007 1:16:58 PM
Because, Fred,
1)investment and businesses rest on the backs of the middle and working classes. Do you think all the work gets done by itself - that the glorious CEO waves his hand and legions of magically-animated mops chop wood and carry water?
2)increasing inequality often leads to social unrest, political upheaval, etc.
and 3) - do we really want America to turn into one of those countries where abandoned children haunt vast slums, while a small number of extremely wealthy and privileged families live in heavily-guarded compounds, employing private security against the threat of kidnapping? More broadly, do we want a country deeply divided between the haves and haves-not, or one adhering to basic values of fairness, justice, opportunity - what a good country looks like.
Posted by: Dan S. | Apr 23, 2007 1:19:34 PM
"So sure, folks can become global brands and make a lot of money these days. But that doesn't solve the mystery of inequality. After all, inequality is nearing its 1920s-era levels."
And I definitely think the two eras of globalization are very comparable, without quite having the chops or time today to understand why, or how they differ from the 50s & 60s.
Chaplin, Pickford, ER Burroughs became filthy rich. But Tolkien really didn't make big money until the mass-market paperback era.
Posted by: bob mcmanus | Apr 23, 2007 1:29:34 PM
"After all, inequality is nearing its 1920s-era levels."
If this is what you are alluding to, inequality had nothing to do with the Great Depression. It was a combination of sketchy financial markets and failures by the Federal Reserve.
"And there was much less in the way of globalization and branded sippy-cups and McDonald's tie-ins back then. "
Are you kidding?
Are we forgetting that the boom during the '20s was due in part to increased globalization. If it wasn't for the Smoot-Harley tariffs, international trade wouldn't have stopped.
Posted by: Jason | Apr 23, 2007 1:42:44 PM
"it's not exactly a mystery why the country has grown far more unequal"
It's not exactly a mystery why every single American is so much more wealthier today, even if there is some inequality.
Posted by: Jason | Apr 23, 2007 1:45:47 PM
Ezra,
So sure, folks can become global brands and make a lot of money these days. But that doesn't solve the mystery of inequality. After all, inequality is nearing its 1920s-era levels. And there was much less in the way of globalization and branded sippy-cups and McDonald's tie-ins back then.
I don't think anyone argues that globalization and the "superstar effect" fully account for the (apparent) increase in inequality, but they certainly seem to be significant causes. They partly "solve the mystery of inequality." The fact that similar levels of inequality existed in the past does not in any way conflict with this.
But even as pre-tax income inequality has increased, tax burdens on the rich have fallen.
Your chart shows changes in tax rates, not tax "burdens." If tax burden is defined as share of total taxes paid then obviously the tax burden of the rich may have increased even under lower tax rates.
Posted by: Jason | Apr 23, 2007 1:49:16 PM
The general shift in the economy away from one of production wherein the most financially productive sectors is the financial business. Shorter: It gets better and better if all you do is use money to make money. Making "stuff", not so much.
The more important change in the basic nature of the economy has been the shift from manufacturing to services (not just financial services, but services in general). And the shift from manual and unskilled labor to intellectual and skilled labor. American workers who fail to adapt to these changes will continue to lose out.
Posted by: JasonR | Apr 23, 2007 2:00:39 PM
1)investment and businesses rest on the backs of the middle and working classes.
Is that Marx, or Engel?
Posted by: Fred Jones | Apr 23, 2007 2:44:52 PM
Is that Marx, or Engel?
Oh, it doesn't matter. We know it's Democrat. And you wonder why the left in this country has always had to fight the image that they snuggle up to the communist and socialist agenda......It's because they do!
Posted by: Fred Jones | Apr 23, 2007 2:49:45 PM
I've noticed that the threads that ignore fred tend to be much more interesting. Sort of like stepping over the fresh pile of poo in the yard rather than running through it, and then wondering why everyone is avoiding you.
Just sayin.
Posted by: ice weasel | Apr 23, 2007 3:45:06 PM
But in the past, government policy has been leveraged to even out the distribution.
Dear god. Tabarrok infected you with his abuse of "leverage." It's a meaningless word (well, actually it has a specific meaning, just not the one you use or the three or four he vaguely ascribes to it), and for me it has the effect of making his entire post incoherent. Is "leverage" supposed to mean progressing technology? larger scale? greater reach? When you use an undefinably vague made-up meaning for the central word in your argument, it's a sure sign that that argument is bullshit.
Posted by: Antid Oto | Apr 23, 2007 3:54:58 PM
1)investment and businesses rest on the backs of the middle and working classes.Is that Marx, or Engel?
Neither. Just good old fashioned bourgeois economics.
Posted by: W.B. Reeves | Apr 23, 2007 4:13:06 PM
Reeves,
His statement is indefensible. He blames the capitalist structure of our economy for the problems of the poor. He believes that investment and business are the tools of oppression. Let's review his statement together, shall we?
...investment and businesses rest on the backs of the middle and working classes.
So, he is not a capitalist (obviously) and that leads to the speculation that his heart lies somewhere between socialism and communism. While it's fashion to blow off anyone that makes these comparisons (I would make that fashionable as well, if I were of the left), his statement is damning.
Posted by: Fred Jones | Apr 23, 2007 4:44:26 PM
His statement is indefensible.
Facts don't need defending. Fact: without a middle and working class there is no basis for business or finance. It is the general productivity of a society that provides the base for all such activity. Recognizing this implies nothing about how one approaches that reality. Or are you under the false impression that Karl Marx invented the idea of social and economic classes?
I don't give a damn for fashion.
Posted by: W.B. Reeves | Apr 23, 2007 5:00:30 PM
Marx popularized these same ideas before Danny the Democrat came along. I'm under the impression that Danny-boy spouts Marxism, as many on the hard left do......and so are lots of others.
It's a jagged little pill to swallow, Mr. Reeves. Jagged, indeed.
Posted by: Fred Jones | Apr 23, 2007 5:24:16 PM
John Locke popularized the labor theory of value long before Karl Marx was born. Moron.
Posted by: Antid Oto | Apr 23, 2007 5:29:35 PM
The Census family income survey shows the top quintile supposedly getting 50% of income. But the Census doesn't count family income above one million dollars a year -- so called "top coding". (What was a sensible adjustment 40 years ago, when you didn't want a few billionaires to throw off the general picture, now hides the real story instead.)
To get a ball park guess of top quintile income I took the (un-top coded)increase in per capita income over the same span as the approximation of the overall family income gains -- worked out the gap -- and aded the gap to the top quintile: yielding 60% of income going to the top quintile by my amarture calculation -- not 50%.
Posted by: Denis Drew | Apr 23, 2007 5:34:13 PM
investment and businesses rest on the backs of the middle and working classes.
I agree with Fred. This is communist party rhetoric. Also, it ignores the benefits workers receive (jobs & wages) from risk-taking by entrepreneurs, business owners and investors, countless numbers of which "don't make it" and lose their life savings, home etc. Workers who can't or won't start their own businesses should thank their lucky stars for investors.
Do you think all the work gets done by itself - that the glorious CEO waves his hand and legions of magically-animated mops chop wood and carry water?
No. Do think managing a business is easy and that anyone has what it takes to be a CEO/business owner? Do you think CEOs gain their position by dumb luck and just boss underlings around and collect big paychecks without adding value?
Posted by: FoolsMate | Apr 23, 2007 6:00:35 PM
The Census family income survey shows the top quintile supposedly getting 50% of income.
The Census Bureau's income data doesn't count a lot of things that might reasonably be considered income, or income-equivalent, including government cash and non-cash transfer payments, capital gains (and losses), employer-provided health insurance, employer-provided pension contributions, and the EITC. Omitting these sources of income and benefits produces a very distorted picture of true income levels and distributions.
Posted by: JasonR | Apr 23, 2007 7:07:15 PM
FoolsMate: I think it's terribly funny that you think salaried employees don't "take risks". You work for a large corporation, so you don't have any first-hand experience, but taking a job with a startup is incredibly risky. Especially in the US, where healthcare is tied to jobs.
Your chance of being laid off is far higher, because the company is far more likely to go bust. You're probably working longer hours, trying to land that first sale or marketing deal - so your family life suffers. Your salary's probably lower - and if you get share options, that doesn't mean much in the short term.
For people living paycheck to paycheck, being laid off is a catastrophe - and you lose healthcare too. All that is what you're risking when you decide to leave your safe job and invest your time and labour in a startup. But no startup would succeed without skilled people willing to take that sort of risk. That's what people mean when they say that investments rest on the backs of the middle and working classes.
Posted by: ajay | Apr 23, 2007 7:31:49 PM
"investment and businesses rest on the backs of the middle and working classes. Do you think all the work gets done by itself - that the glorious CEO waves his hand and legions of magically-animated mops chop wood and carry water?"
Haha, yes, that is a Karl Marx comment.
Would the middle and working classes even have a jobs if it wasn't for entrepreneurs looking for a profit? No!
"John Locke popularized the labor theory of value long before Karl Marx was born."
So did Adam Smith.
Posted by: Jason | Apr 23, 2007 8:12:39 PM
