The Why Is Not The What

Matt hits one of my favored hobby horses in the inequality debate today, arguing, completely correctly, that the "why" doesn't much matter. Whether inequality is a result of skills-biased technological change or low marginal tax rates or Wall Street or the inequality gnomes is really neither here nor there. The fix to the problem is very unlikely to have anything to do with the root cause. If inequality really were a function of higher returns to education -- and, sorry folks, but it's not -- we wouldn't respond by demanding everybody get dumber. We'd change the tax code around a bit, institute some progressive social programs, put seed money into asset programs for the poor and working class, and so forth.

Indeed, you sort of see this with the constant invocation of education. Saying this is about skills -- as if hedge fund managers have been studying since 1690 -- is a way of justifying it. Saying we need more and better education is a way of doing nothing, as that's much too grant a task to undertake as a response to inequality and, in any case, it wouldn't work. College graduates have seen their wages stagnate for the last six years. This is about distribution. And distribution can be rejiggered without digging deep into the everyday workings of the economy.

$1 For Me, 64 Cents For All of You; $1 For Me...

While it's true that Al Gore won the Nobel Prize today, his dominance of both the Swedes and Sundance is not the most impressive record being set. Not even near it. So don't be humble, don't be shy -- c'mon rich people, come out and take a bow:

The richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

To think of this a bit more concretely, if you took a representative 100 Americans and split $5 of income between them, here's how it would look: One guy would get $1.06, forcing the other 99 to split the remaining $3.94, while the bottom 50 would split 64 cents among themselves. The leftover $3.30 would be divvied up among the remaining 49 folks.

That's a remarkable level of inequality. If income really was apportioned in such a public way, the guy taking that $1.06 would get lynched. But, in fact, it turns out that he's doing nothing wrong. He's just got a whole lot more education and skills than everyone else in society. Asked about this data, George W. Bush said, "First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps. And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids."

It would be nice if the President knew what he was talking about. But he isn't even close.

The Great Divergence (And The Krog!)

The demise of TIme Select also marks the birth of the new Paul Krugman blog, The Conscience of a Liberal. I would've preferred "Krog," but still: Exciting! Krugman starts things off with a graph of the top 10 percent's share of the country's income over the past century or so, and sections it off into four key periods in American economic life:

We're in the Great Divergence now, a period when the incomes of the rich are rocketing away from those of the rest of us. As Krugman writes:

Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s. It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

In some ways, the conversation over whether inequality is being driven by impersonal, technical forces or government policy is neither here nor there (at least on a policy level -- politically, people use it to justify inequality as something organic, inevitable, and even beautiful -- like the tides). We live in a regulated economy governed by both public and private institutions, so there's no such thing as "natural" forces. Even if superstar CEOs are taking home billions, they're still reliant on our system of contracts, and limited liability, and stock market regulation. In other words, what public policy giveth, public policy can taketh away. Few doubt that we have the tools -- using something called "the tax code" -- to engage in some redistribution. The question is whether we have the will.

School Lunch and Breakfast Programs

By Randy Paul of Beautiful Horizons

Today I had a medical procedure performed in the morning that necessitated my fasting from Sunday night at 9 p.m. until after the procedure at about 10:30 Tuesday morning. Instead of taking a day off yesterday, I decided to go to work as I figured it would keep my mind off of hunger.

Hah! Fat chance that! I was alright at work until about noon. I filled myself with fluids until I had to make the long walk to down the hallway that I refer to as the "Bladder Causeway" that leads to the bathroom. About 2 p.m. I was getting cranky. My usual cheery self was snapping at people, I found that I couldn't concentrate as well as normal and those trips up and down the stairs that I make with elan between the two floors my employer takes up were being punctuated with Lurch-like sighs and significantly slower ascents. The bagel I had to break my fast was positively ambrosial.

I can only imagine then, how difficult it must have been for needy children to have accomplished much of anything before the advent of both the National School Lunch Act, and the Child Nutrition Act of 1966, which provided for subsidized lunches and breakfasts, respectively, for needy children. The former was signed into law by Harry Truman and the latter by Lyndon Johnson. Let's hope their need to exist will someday disappear.

Several Steps in the Right Direction

By Randy Paul of Beautiful Horizons

Brazilian President Luis Inacio Lula da Silva has unveiled his program to fight crime in Brazil. There are plenty of good ideas here:

Brazil's prisons suffer from chronic overcrowding and as part of the plan160 new ones will be built with special facilities to provide jobs and education.

Brazilian prisons are notorious for corruption and especially for overcrowding and it has been festering for years, culminating in the massacre at Carandiru prison, resulting in the deaths of 111 prisoners. Prison guards are poorly paid, making them easy targets for drug dealers to compromise them. Torture and abuse of prisoners is endemic to the system. While this may please some with the impression that the authorities are being tough on crime, it is essential to remember that no one in Brazil serves more than thirty years in jail no matter the crime. Those who are treated badly will be back on the streets again with years of resentment and rage at Brazilian society - and precious little in the way of hope.

The proposals also aim to confront some of the problems faced by poorly paid police officers who have in the past often been accused of corruption. Grants are to be made available for training and housing aimed at officers working in the most violent areas.

This is an excellent idea and has taken far too long to implement. Police in Brazil are very poorly paid and are expected to risk their lives for wages that often is barely above subsistence. Moreover, the poor pay and poor training often fails to attract those with the skills necessary to be effective and humane police oficers.

More than 400,000 young people, including former convicts, will  receive job training and financial aid.

It is virtually an article of faith that those on the lower rungs of Brazilian society have litle reason to be optimistic about their future. While much more needs to be done in this area, this seems like a good start.

I agree with the comment from Viva Rio's director that the question is whether this can be implemented and Lula's comment that this is "not enough to compensate for centuries of inequality that gave rise to violence," but it is a start. While I would like to see other issues being addressed more directly, including torture committed by police and impunity for these acts, I'm glad to see that crime is being addressed in Brazil on a national level with more than just an iron fist and that the root causes are being addressed.

Is CEO Pay a Positional Good? (or Money Talks)

Costco CEO James Sinegal certainly thinks so:

“I think that most of the people running companies today are motivated and pay is a small portion of the motivation,” Mr. Sinegal said. So why so much pressure for ever higher pay?

“Because everyone else is getting it,” he said. “It is as simple as that. If somehow a proclamation were made that C.E.O.’s could only make a maximum of $300,000 a year, you would not have any shortage of very qualified men and women seeking the jobs.”

If all the other CEOs are making $10 million, and you're making $5 million, it's not that your salary is insufficient, but that the status it confers is insufficient. If your income is supposed to speak to your value, then it can, at a point, cease being about the money and begin being about what the money says. Hence skyrocketing CEO pay: You can't go to a new job, even a better new job, if the specifics of the deal (your salary and options) will harm your status. So CEO's constantly need better deals in order to retain their relative position, which means all the other CEOs need better deals to retain their relative position, and so on, until the pay is utterly obscene and, in fact, completely beside the point.

Update: In comments, Tyro adds three important points:

Note that many corporations also probably regard their own status as being insufficient if they are paying their CEO less. Who wants to be the one to say, "yes, our CEO is worth less than the average for the industry" ?

Also, in an environment full of hostile takeovers and cut-throat competition, ever-escalating salaries for CEOs are regarded as signals of corporate strength. Paying them less then their competitors could be regarded as an outward sign of weakness.

If CEOs were paid more based on their managerial added value, we'd see salaries for executive vice presidents spiraling upwards at the same rate, but we don't. The only difference between the two is their public profile, and the public profile for CEOs is much higher than for the people directly under him.

I've not seen data for lower-level executives, but it would be interesting to examine how it tracks changes in CEO pay. As for the other points, Tyro is right on: CEO pay is not merely positional among CEOs, but among firms.

What Say You, Super-Rich?

Some have commented on the remarkable New York Times article from last weekend profiling some of the country's mega-rich, but mostly to note what a bunch of assholes the plutocrats portray themselves as. It's astonishing that Leo Hindery didn't pause before comparing himself to Derek Jeter and musing that, "I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear." It's a real testament to the laziness and relative comfort of the country that this comment didn't result in riots on sheer aesthetic grounds.

Less attention, though, has been given to the psychology of the subjects, which is actually fairly interesting. How, after all, do you mentally justify an income that gives you, an individual, a measurable and even substantial share of the national income in the wealthiest country in the world? And how do you do it when, 40 years ago, CEOs like yourself made far less money, and yet growth was similarly rapid and much more of its gains accrued to the median American? Answer: You construct a new mythology for yourself and your gains:

The new tycoons describe a history that gives them a heroic role. The American economy, they acknowledge, did grow more rapidly on average in the decades immediately after World War II than it is growing today. Incomes rose faster than inflation for most Americans and the spread between rich and poor was much less. But the United States was far and away the dominant economy, and government played a strong supporting role. In such a world, the new tycoons argue, business leaders needed only to be good managers.

Then, with globalization, with America competing once again for first place as strenuously as it had in the first Gilded Age, the need grew for a different type of business leader — one more entrepreneurial, more daring, more willing to take risks, more like the rough and tumble tycoons of the first Gilded Age. Lew Frankfort, chairman and chief executive of Coach, the manufacturer and retailer of trendy upscale handbags, who was among the nation’s highest paid chief executives last year, recaps the argument.

“The professional class that developed in business in the ’50s and ’60s,” he said, “was able as America grew at very steady rates to become industry leaders and move their organizations forward in most categories: steel, autos, housing, roads.”

That changed with the arrival of “the technological age,” in Mr. Frankfort’s view. Innovation became a requirement, in addition to good management skills — and innovation has played a role in Coach’s marketing success. “To be successful,” Mr. Frankfort said, “you now needed vision, lateral thinking, courage and an ability to see things, not the way they were but how they might be.”

But if these CEOs believe their superhuman capacity for "lateral thinking" justifies their salaries, their own words puncture the rationale for allowing them such great gains:

Not that money is the only goal. Mr. Hindery, the cable television entrepreneur, said he would have worked just as hard for a much smaller payoff, and others among the very wealthy agreed. “I worked because I loved what I was doing,” Mr. Weill said, insisting that not until he retired did “I have a chance to sit back and count up what was on the table.” And Kenneth C. Griffin, who received more than $1 billion last year as chairman of a hedge fund, the Citadel Investment Group, declared: “The money is a byproduct of a passionate endeavor.”

Mr. Griffin, 38, argued that those who focus on the money — and there is always a get-rich crowd — “soon discover that wealth is not a particularly satisfying outcome.” His own team at Citadel, he said, “loves the problems they work on and the challenges inherent to their business.”

That doesn't make it sound like slightly hire tax rates would destroy their motivation for productive endeavors. But wait!

The new tycoons oppose raising taxes on their fortunes. Unlike Mr. Crandall, neither Mr. Weill nor Mr. Griffin nor most of the dozen others who were interviewed favor tax rates higher than they are today, although a few would go along with a return to the levels of the Clinton administration. The marginal tax on income then was 39.6 percent, and on capital gains, 20 percent. That was still far below the 70 percent and 39 percent in the late 1970s. Those top rates, in the Bush years, are now 35 percent and 15 percent, respectively.

“The income distribution has to stand,” Mr. Griffin said, adding that by trying to alter it with a more progressive income tax, “you end up in problematic circumstances. In the current world, there will be people who will move from one tax area to another. I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard.”

"I am proud to be an American. But if the tax became too high, as a matter of principle I would not be working this hard."

If I were writing an economic history of the past thirty years, that quote would open my book. It explains just about everything. The way patriotism has become entangled with economic individualism and untrammeled wealth. The way the rich have stood solid and united against higher taxes, arguing that they would harm their economic output even as they denied their work was anything but an expression of virtue and internal drive. The way we've become blase about such sentiments, and so a quote like that can pass virtually unnoticed, rather than becoming the only thing any Democrats says for the next three weeks.

More From the Inequality Files

Robert Frank (the Wall Street Journal columnist, not the economist) profiles "YAWNS," the young, and wealthy, but normal, strain of rich folk. "They are men and women in their 30s and 40s who have become multimillionaires and billionaires during the wealth boom of the past decade. Yet rather than spending their money on yachts, boats and jets, yawns live modestly and spend most of their money on philanthropy." They sound peachy! But my lord:

Yawns spend substantial amounts of money and time trying to be normal. Natasha Pearl, founder of Aston Pearl, a New York-based concierge firm, says one of her yawn clients recently hired her to find a summer camp for his daughter that wouldn't be filled with other rich kids. She found him one in New England that was "very low-key." The client paid her $15,000 for the effort, even though the camp itself cost only $5,000 for the summer.

"It was worth it to him to send his child to a camp where the kids didn't arrive in private jets," Ms. Pearl says.

$15,000 to find a summer camp not packed with the spawn of the rich. And to think, every day, millions and millions of Americans locate summer camps that have resisted these hordes of monied tykes for free!

Dreaming About Class

Rebecca Traister remembers The Silver Palate, the cookbook which democratized fine dining:

"The Silver Palate" wasn't just about the ingredients. It was about a kind of life, a life that was comfortable and full of bounty. Rosso and Lukins didn't just print recipes, they composed menus of their food, suggesting dishes for a "country weekend lunch," or a "Mediterranean supper menu." Sometimes they pointed out that a given recipe could be served warm or cold, perfect for picnics. A note about Julee's original sour cream coffee cake read, "This elegant cake is just so scrumptious served to a large brunch party, and it's perfect, too, with late-afternoon coffee and a good book." Country weekends! Picnics! Brunches! Late-afternoon coffees and good books! With "The Silver Palate" in hand, I felt confident that I was embarking on an adulthood that would contain, as Rosso and Lukins might (and did) put it, "pesto possibilities!"

I surely didn't realize that I was, of course, fantasizing about class. I understand now that this was a book of recipes that allowed harried middle-class families to wean themselves from the Shake 'N Bake pouch and eat more like wealthy people. This kind of food -- the noodle salads and cold soups and skewered shrimp -- was more urbane and elegant than what we'd been eating in suburban Philadelphia. It's not that it was simply "rich people's food"; though there was a whole chapter on caviar, there were also soda breads and potato salads. It's just that Rosso and Lukins had begun to take labor-intensive methods and high-quality ingredients consumed by fancier people than we and translate them from the original "unattainable" into the modern "practical." Not to mention tasty.

One odd cross-indicator of rising income inequality has been the determined democratization of culture in this country. Containers of garlic hummus and free range eggs that would have been judged luxury items a few decades ago now dot the shelves at Safeway, mega-bookstores of the kind only available in wealth urban centers now populate every shopping mall, espresso drinks that could only have been procured at fine Italian and French restaurants are now offered on every street corner, the multiplicity of news sources once accessible only by the geographically advantaged is exponentially surpassed by those available to anyone with a computer, and so on.

There's no doubt that wealth inequality has increased in this country, and that primary expenses ranging from housing to fuel to health have rapidly increased in cost. But there's simultaneously been, I'd argue, a drop in consumptive inequality, and a significant convergence in the experiences of the rich and, if not the poor, the middle. Traister once required a cookbook to imagine what it was like to eat as the wealthy do. Now all you need is a nearby Whole Foods, or Trader Joes, or even Giant. Doesn't mean you can eat as the rich do, but the ingredients are near, and tangible, and part of your world. Or so goes my impression. We know that consumption-based measures show much rosier pictures of the economy than poverty or income based measures, but how you'd test if we've seen a convergence in consumption patterns (types of goods bought) is beyond me.

Phased Recessions

Matt gives a quick primer on the Employment-to-Population measure, an important metric that indicates how much of the population is participating in the workforce, either by working or looking for work (folks forget that our unemployment data doesn't count those who've given up on the job market and ceased searching). Brad DeLong, for his part, notes that "the employment-to-population ratio is usually a lagging indicator--it doesn't start to decline significantly until after a recession is well under way," and, as you may have guessed, we're all talking about this because it's been declining.

So is there a recession underway? Sort of. As a labor economist I was listening to on the radio the other day put it, low-income workers have been experiencing what looks like a recession for awhile now, middle income workers are beginning to, and high income workers simply aren't. This is, in other words, a phased recession, and one reason you don't hear that much about it is it's not something you see if you're, say, an affluent journalist, television personality, or newspaper columnist and mainly know others within your class.

This is, it should be noted, a direct effect of inequality. Think of the income distribution as a long staircase. Income inequality lengthens it, not only by adding more steps, but by increasing the horizontal plane between steps. And in this case, the implicit imagery of trickle down economics -- money as water -- is helpful. Economic growth starts at the top, and the longer it has to travel, the more likely it runs out of momentum fairly high up. That's why you see gains pooling in the top few percent, while the bottom four quintiles get next to nothing, and in fact have seen some losses.

Recessions (particularly those not based in stock market bubbles) start at the bottom and travel upwards. And inequality does its magic again, this time concentrating their effects at the base and making it harder and slower for them to travel all the way up to the top. This is very good for the rich, but very bad for the poor, who'll not only suffer more, but will have to wait longer for any national action, as those who control the agenda won't feel the effects for quite some time.