Ezra Klein: Inequality Watch

March 15, 2007

Inequality Watch

If you're surprised to learn that, in 2005, inequality increased yet again, you've not been paying attention. What is surprising is that incomes for everyone but the top 1 percent stagnated. According to Emmanuel Saez, who routinely does the lord's work collating the IRS data, "2005 shows a very large increase in income concentration: the top 1% gains 14% in real terms from 2004 while the bottom 99% gains less than 1% (when including capital gains). The [previous] record peak of 2000 is surpassed even though 2005 is less of a high capital gains, high stock option year than 2000. By 2005, it looks like top incomes are showing strongly along all components: wages, business income, dividends, and capital gains."

That last bit means the underlying drivers of inequality are growing more robust. It's not just stock options and capital gains any more, it's wage increases and income and all the rest.

Also at Tapped

March 15, 2007 in Inequality | Permalink

Comments

If the income distributions were flatter, it would probably mean that there is little technological advancement. Technology provides opportunities for those who see it and have the means to invest to increase their share.

While I agree with you that we should implement policies that would grow the middle class for political stability, there is no guarantee of "equality" (read egalitariansim). There is an implied guarantee of opportunity, which I believe is more important.

Posted by: Fred Jones | Mar 15, 2007 11:37:40 AM

Brazilification.

Call it whatever you want, it's the trend and will continue to be as long as we have a system that is specifically designed to consolitdate wealth and stooges such as fred to enable it.

Posted by: ice weasel | Mar 15, 2007 12:04:03 PM

I got a raise last year. Does that mean I'm in the top 1%?

Posted by: Chris | Mar 15, 2007 12:15:43 PM

Listen, I came from a poor family in a poor neighborhood. My parents were not college educated nor wealthy. However, they took the responsibility to instill the values of education and hard work into all of their kids. All but one of their five children have at least an undergraduate degree.

With these tools and the fertile economic opportunities available in the US, I make a fuckin' *great* living as a professional. I own properties. I'm also thinking abou starting a hospice business that within a couple of years, I believe, could raise my income exponentially.

Selling education and the work ethic, instead of the hip-hop-fuckwhitey-gimme-gimme-gimme-the government-owes-me culture to the young is the real answer.

Posted by: Fred Jones | Mar 15, 2007 12:17:51 PM

While I agree with you that we should implement policies that would grow the middle class for political stability

Like policies more favorable to unions.

Posted by: Sanpete | Mar 15, 2007 1:18:03 PM

Well at least fred's finally come of the closet as to what is bothering him about this country...

"the hip-hop-fuckwhitey-gimme-gimme-gimme-the government-owes-me culture"

Why don't you just say the word fred? Aren't you man enough? If you're right, you're right, right? Then say it.

Otherwise the rest of us have no problem with your dog and pony, I gre up as a poor child story. And you're an "independent" too I'll wager.

Now, compare this paragraph to what fred said above...

"But it wasn't until December 2005 that the four bank regulatory agencies were able to hash out their differences and offer for public comment some "guidance" for what they politely called "nontraditional mortgages." Months ensued as the mortgage bankers fought the proposed rules with all the usual bogus arguments, accusing the agencies of "regulatory overreach," "stifling innovation" and substituting the judgment of bureaucrats for the collective wisdom of thousands of experienced lenders and millions of sophisticated investors. And they warned that any tightening of standards would trigger a credit crunch and burst the housing bubble that their loosey-goosey lending had helped spawn."

That was from a brilliant piece from Rick Perstein in the WaPo. Note some similarities to the way fred described?

Posted by: ice weasel | Mar 15, 2007 1:31:11 PM

I got a raise last year. Does that mean I'm in the top 1%?

Posted by: Chris

No, but it probably means you got an F in Stat 101...

Posted by: Cyrus | Mar 15, 2007 3:04:51 PM

I'd be interested to see how this breaks down by region. Also, is land included? I read somewhere - I think on DeLong's blog - that it is. If memory serves, property values where strong in 2005. In NorCal, they continued to rise at their ridiculous pace.

All in all, I’m unsure of what to make of the “inequities” discussion. I naturally fall into Fred’s camp: what’s gained is gained through hard work, so why is this an issue? I’d be interested to hear from the more left leaning people on this board why this is, in fact, an issue. What is the real effect of inequities? Does this really mean anything to the bottom 99%? What if the inequality is due to the economy rewarding education or skill more?

Being someone who lives in NorCal the concept of the top 1% is interesting to me. I may be in it, but I sure don’t feel like it since I too live paycheck to paycheck in some ways. I image some people in NYC feel the same way.

Posted by: DM | Mar 15, 2007 4:09:33 PM

What if the inequality is due to the economy rewarding education or skill more?

You mean the 1% of those with education and skill? The inequality numbers suggest that workers, whose productivity has gone up, aren't sharing fairly in the fruits of their labors, and that the poor are being left further behind.

Posted by: Sanpete | Mar 15, 2007 6:15:51 PM

Sanpete,

No, I was thinking in terms beyond just 2005 and beyond just the top 1%. I was thinking about the general concept of "inequities". Frankly, in an economy as complex and dynamic as ours, I'm not all that interested in 1 years worth of data.

Posted by: DM | Mar 15, 2007 6:24:36 PM

This data is representative of a trend over several years now. It isn't only true of this year. Ezra's written several posts about this, which might be worth googling if you have the time. The interpretation of the numbers isn't uncontested, but the general trends are broadly accepted.

Posted by: Sanpete | Mar 15, 2007 6:37:28 PM

I've caught most of this, from Ezra, from Marginal Revolution from The Economist. What I was interested in hearing was an answer to "why this is an issue?” from your perspective. Is this having a real effect the other 99%? If the pie as a hole is growing, why does it matter that one segment's slice is larger? How much of this is regional? What if this, the larger trend, is driven by the economy paying more for higher skills and higher education?

Most of this stuff's probably been addressed before. So disregard if this is uninteresting.

Posted by: DM | Mar 15, 2007 7:09:29 PM

DM, inequality by itself doesn't mean the other 99% aren't doing well. But the stagnation of wages, despite the growth in productivity, while the economy grows and the richest get richer, all that taken together suggest the workers aren't getting what they deserve, while the richest are getting ever more, in turn suggesting an increasing disconnect between earners of wealth and those who get the greatest benefits. It's not only unfair, but it's inefficient distribution of incentives.

This isn't a matter of higher skills being rewarded in any consistent way. Obviously there are gradations of skill in the 99%, and there's no reason to think the top 1% are getting an increased share because of increases in their skills. It's mostly a matter of them that have already being rewarded for already being rich. The income of the richest 1%, and especially the very richest, isn't primarily from wages. It's from investments, from others working for them.

I don't know anything about the regional differences.

Posted by: Sanpete | Mar 15, 2007 9:51:40 PM

You state that workers aren't getting what they deserve. I would state that, baring any corruption, workers are getting what they’ve earned. You state that the top 1% is deriving their income from investments. This seems fair to me given the investor bares the financial risk. The rich are getting richer because a) they have a mountain of assets already and b) those assets are working for them, especially through higher risk, higher return investments.

But, these are things logical people can disagree on. I see this as fair; you see this as unequal. That’s fine. In fact, as mentioned before, I’m not very interested in this bit of data – a very blunt instrument without the granularity one would like) as much as the greater issue. Looking at the graph, inequities are trending up. But, what does this mean to the real world? Does my buddy Joe Bush (real guy) the handyman really care? Do his incentives change? (Probably not, he doesn’t care that the guy that runs Cisco just bought his 15th Porsche.) What’s the suggested resolution to this problem? What is an acceptable level of inequity?

Posted by: DM | Mar 16, 2007 11:35:33 AM

DM, you're just citing libertarian dogma, not explaining anything. Explain how it is that worker productivity is going up and the richest are getting richer because of it, yet workers' wages are stagnant, can mean that the workers are getting what they deserve. How does that work? I think you'll find you just just assume that whatever workers will settle for is therefore what they deserve, which is manifestly false. Those aren't the same ideas, and they aren't the same in practice. Desert isn't simply a market notion.

The investor isn't the only one who has risk in the economy. Workers often risk more than investors do. You're overlooking the fact that the change in distribution of wealth doesn't appear to have anything to do with increased risk for owners and less risk for workers, or anything of the sort. It appears the risk has shifted more towards the workers, not less. There's no evidence for your theory.

Investments don't "work." People do. Some guy who makes a low-risk investment in other people's labor doesn't deserve the money because of the risk or his skill (which often amounts to nothing more than having money already, by whatever means). The reason we reward investment isn't because of desert; it's because it helps the economy work, despite the lack of desert of the investor class.

Maybe you're not that interested in the data on inequality because you're not interested in the ways in which it challenges your assumptions about the way the economy works. You aren't really engaging it here.

Among the ways to deal with increasing inequity are to build up unions, to make the tax structure more progressive, and to tweak trade and other policies that affect wages.

Whether Joe Bush knows it or not, he is affected by these trends. Most people are aware that their wages have been growing under the rate of inflation.

The level of inequality that's acceptable is that level that's required to produce the best results overall, with special attention to the poor. There's zero evidence for and plenty of reason to reject the view that the current levels of inequality are necessary or beneficial on the whole.

Posted by: Sanpete | Mar 16, 2007 2:08:05 PM

Sanpete,

"you're just citing libertarian dogma, not explaining anything."

While I would replace dogma with principle, you're right. And I'm not explaining anything. Frankly, I've moved from not caring at all, to be interested and inquisitive about cause, effect, potential solutions, etc. I’m not leaning left anytime soon, but I’m interesting in the opinion.

"think you'll find you just assume that whatever workers will settle for is therefore what they deserve, which is manifestly false."

Yes, one of my base, working assumptions in life is that workers are adults and capable of making a choice when they take a job and negotiate a wage. Sure, some have less room than others, but people choose to work for a wage.

"Explain how it is that worker productivity is going up and the richest are getting richer because of it, yet workers' wages are stagnant"

From personal experience as an IT consultant, this is the end goal of most IT projects: increase productivity, decrease headcount, reallocate resources to more productive roles. I suspect globalization has something to do with this as well. Plus, what I’ve seen of wage measurements do not include benefits. So while workers are getting less in wages, they value of their benefits are going up; hence, the total firms are paying for resources is going up. Just some thoughts.

"Investments don't "work." People do."

I was thinking of this in the more metaphorical form. But I believe the investor takes on more risk than the worker. I have many associates who have started small businesses here in the valley; they’re taking the risk, those investing in them are taking the risk; the DBA they hire to manage their databases is taking a much smaller risk.

But again, this is more of a philosophical argument. And I’m not sure what the “desert” reference is to.

"Maybe you're not that interested in the data on inequality"

You took my comment wrong. I’m not interested as much in 1 year’s worth of very blunt data; I’m interested in a larger, more granular set of data.

"Among the ways to deal with increasing inequity are to build up unions, to make the tax structure more progressive, and to tweak trade and other policies that affect wages."

I would strongly disagree with the gov’t doing something to push unions. I do think they need to make sure that workers can unionize if they choose to do so. To be honest, I don’t know the answers at this point. I’m very pro-free-trade, so I wouldn’t do something stupid to hinder it. I think my leaning is towards some level of social insurance for those adversely affected such as retraining programs, etc.
The level of inequality that's acceptable is that level that's required to produce the best results overall, with special attention to the poor. There's zero evidence for and plenty of reason to reject the view that the current levels of inequality are necessary or beneficial on the whole.

This is truly debatable. You’re assuming today’s levels are bad for society as a whole. I’ve not seen anything to indicating such. Realistically, aside from wages, life is better for most in every measurable way. The wage part may be offset by the increased value of other benefits.

Again, I’m entering into this banter to better understand the issue as a whole. Yes, I’m somewhat of a libertarian, but I’m interested in your opinion.

Posted by: DM | Mar 16, 2007 4:42:41 PM

Yes, one of my base, working assumptions in life is that workers are adults and capable of making a choice when they take a job and negotiate a wage.

I hope you can see that, as I said, this is very different from the claim that what people "negotiate" (which is of course not what happens in most cases) is what they deserve. People take what they can get in a reasonable fashion, or even a nonreasonable fashion. The idea that there is ideal fluidity in the labor market is a farce, but even if there were, the point remains that what people ought to get for work and what they can get are topo very different things. We put up with that to a great extent for important practical reasons, which many libertarians confuse a little to readily with moral reasons.

Some measurements of inequality do take benefits into account. Globalization probably is a cause, but even the rich who own or are overseeing domestic productivity increases are sucking up far more benefit from it than the workers. You really don't explain how it could be fair for productivity and real wages not to move together for the workers but for the richest to get the benefits of that instead, for no more work or risk on their part. I don't think you're going to manage to do that.

It's a mistake to compare the average worker to the average new entrepreneur to try to determine whether workers or investors have more risk. Relatively few investors are new entrepreneurs, or have similar risks. Many workers risk just as much, in any case, and when they're fired can lose their home, security, etc. In any case, those who are raking in the dough now aren't those taking great risks by starting businesses. It's those who are already established, and whose risks are relatively low, who are doing best.

The desert reference is, as it has been all along, to what people deserve for their work. You view that in simple market terms, which would be too narrow even if the market had the fluidity required. Desert depends also on how hard one works, how necessary your work is, etc. Investing isn't rewarded because it's work, as you acknowledge.

I think a simple reform for union certification elections, one that lessens employer intimidation, would be helpful. I'm also interested in doing away with "right to work" laws, as they have a distorting free-rider effect. Retraining is good, with some moderate protectionism as we have now. Higher taxes on the rich to pay for the retraining and such are in order.

You’re assuming today’s levels are bad for society as a whole. I’ve not seen anything to indicating such.

Not exactly. I'm assuming, or rather concluding, that they're not necessary or beneficial. That being so, there is room for greater redistribution without harming the economy, and probably with some beneficial effect. This is, after all, a consumer-driven economy. Among the evidence is that poverty has been increasing even among workers. What wages buy has increased in some ways, but that's equally true for the money of the rich who are soaking up the benefits of others' labor. Adding that in doesn't alter the inequality part. Allowing people to get rich to make the whole pie grow, so everyone else can do better too is fine and good, but that isn't what's happening now.

Posted by: Sanpete | Mar 16, 2007 6:56:11 PM

You really don't explain how it could be fair for productivity and real wages not to move together for the workers but for the richest to get the benefits of that instead, for no more work or risk on their part. I don't think you're going to manage to do that.

Fair is an interesting word to use. What constitutes fair can be different for different people. You see fair as being some wage relative to the whole pie while I see it as the wage agreed to by the worker and the company. This is a fundamental difference between our views of the world.

Either way, it's been enjoyable banter. I appreciate the well thought out response.

Posted by: DM | Mar 16, 2007 7:42:19 PM

This is a fundamental difference between our views of the world.

Don't make this easier than it really is. This isn't some kind of religious faith that must be treated as a fundamental axiom. I'll bet that in many situations you see fairness differently than you do here. (I wonder, for example, what you think of innocent people plea bargaining to lesser offenses out of fear of worse things. There are strong elements of that dynamic in the employment market.) There are lots of different kinds of fairness that matter to us in life, and it would be counterproductive to focus on only one in this circumstance, to the neglect of the others. That wouldn't be fair. My view includes your view of fairness, but it recognizes the rather large distortions of the labor market and it doesn't stop at only one kind of fairness. They all matter.

Glad you enjoyed out chat. (You can see that I'll keep pushing if you let me.)

Posted by: Sanpete | Mar 16, 2007 9:48:54 PM

Sanpete

Fair comes into play when there are rules defining both process and outcome, like a basketball game. Given your specific example, provided the cops didn’t break the law, this is not an unfair outcome, but it is an unfortunate one.

This is how I see the discussion re: labor and wages. The wages workers are getting are fair provided someone’s not breaking the law. In America’s labor markets, fair is about process, not outcome. Sure, we try to govern outcome on the lower fridge with minimum wage laws, but the vast majority of what we do is focused on process.

Posted by: DM | Mar 17, 2007 10:32:43 AM

Given your specific example, provided the cops didn’t break the law, this is not an unfair outcome, but it is an unfortunate one.

That's an astonishing claim. It's fair for someone to go to prison for a crime they didn't commit? That's just? He deserves that? I find it hard to believe you really believe that. Is it also fair to execute someone for a crime they didn't commit, as long as the rules were followed? I think you're trying too hard to reduce all fairness to one idea, following the rules, all so it will fit libertarianism. Reducing fairness that way isn't really possible, or desirable.

But if you just don't want to acknowledge what I'm sure are your own intuitions about fairness, skip the idea and focus on what you call "unfortunate." It's "unfortunate" that workers don't have the same fluidity that a dollar does and can't be treated the same way, so they often end up settling for wages that wouldn't occur in a true wage market. It's unfortunate that workers often settle for wages lower than they would in an ideal wage market because in practice employers have a good deal more bargaining power. It's unfortunate that work is rewarded as much by how many others can do it as by how well it's done and how hard it is. It's unfortunate that work is currently not rewarded with its share of the increased profits it's bringing, but that those profits go largely to people who aren't working for it at all. All of that is unfortunate, and since we can do something about it, we should.

Posted by: Sanpete | Mar 17, 2007 1:30:24 PM

Sanpete,

One’s view of fair is based on personal experience and principles. “Fair” is different for different people, that’s why it’s difficult for us to agree on what’s “fair” trade, “fair” wages, etc.

Interestingly enough, I’ve been through some of the situations you describe as “unfortunate” (read “unfair”); I took a job at a lower salary, but I also turned down a job, while unemployed, because the salary offer was too low. I didn’t bitch about it as being unfair; I lived with it as a reality and moved on.

I tend to agree that our current situation is by choice. We’ve chosen, as a society, to weaken laws protecting unions; we’ve chosen to lower tax rates at the highest levels (I say “chose” because our elected officials have implemented these changes). But there are also some benefits to this: productivity is up; skill and education are being compensated for more, which creates good incentives; we’re still competitive globally, year after year, unlike some of our European friends who have peaks and valleys; the consumer has access to more products at relatively lower prices than ever before. A vast majority of people in this country are better off today than they were 20 years ago… and yes, the rich are much better off.

Are some people worse of in this model? Sure, so we should do things to help. We are in this together. We can implement programs that help people adapt to the changes; we can address educations, etc.

You say we can fix this problem, and that’s fine. I believe you also know that by addressing the issue, you will be faced with choices and trade-offs. If you created stronger unions, you may reduce productivity and increase prices. But in the end, if your goal is equity amongst the slices of the pie, not the growth of the pie itself, then I think you’re OK with the trades. I’m not sure I am.

Posted by: DM | Mar 18, 2007 12:24:38 PM

DM, as I was saying earlier, I think the changes I've mentioned can be implemented without harming the growth of the pie, and that some of these changes will actually help the pie grow. Moderate improvements in relation to unions aren't likely to change things all that much, only to tweak the balance of power somewhat. Higher wages could have an inflationary effect if they come too fast, but that isn't all that likely, and they'll also increase consumer activity. The economy has been growing slowly enough that I think we can use and handle that. I don't think taxing the rich more will have any negative effect, as there is no great shortage of money around for investment, and the money is needed to cover tax shortfalls. These things can be done in ways that won't be disruptive. It's best to do them now rather than wait until the frustrations of workers reach a point where more disruptive measures are called for, and when restoring better balance would require more disruptive measures anyway. The rule of thumb is that when better justice can be achieved at no overall cost or some small cost, that's the time to do it.

Posted by: Sanpete | Mar 18, 2007 1:30:48 PM

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