Pethokoukis, Economics, U.S. Economy

The 1% are again getting richer. Should the 99% really care?

Credit:  Emmanuel Saez and Thomas Piketty

Credit: Emmanuel Saez and Thomas Piketty

America “remains in a new Gilded Age,” concludes New York Times reporter Annie Lowrey after taking a look at updated inequality data from economists Emmanuel Saez and Thomas Piketty.  (I think we are supposed to assume this is a bad thing.) Although the Great Recession temporarily depressed the top 1%’s income share, those earners saw their 2012 take “return to the same level as before both the Great Recession and the Great Depression: just above 20 percent, jumping to about 22.5 percent in 2012 from 19.7 percent in 2011.”

Now some of the increase is due to the rebounding stock market, some to wealthier Americans realizing capital gains before the 2013 investment tax hike. What’s more, the top 10% of earners took in 50.4% of income, the highest share recorded since 1917 when government began collecting the data.

Piketty and Saez

From 2009 to 2012, average real income per family grew modestly by 6.0%. Most of the gains happened in the last year when average incomes grew by 4.6% from 2011 to 2012. However, the gains were very uneven. Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery. … In 2012, top 1% incomes increased sharply by 19.6% while bottom 99% incomes grew only by 1.0%. In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover

And as the researchers explain, not only did the Great Recession fail to permanently stem widening income inequality, but “falls in income concentration due to economic downturns are temporary unless  drastic regulation and tax policy changes are implemented and prevent  income concentration from bouncing back.”

Spoiler: Piketty and Saez want huge tax hikes on the rich. Saez, in particular, has argued that a top tax rate of 73% might be optimal.

But before we start cranking up top tax rates to levels that will almost assuredly hurt economic growth, there are a few things worth considering:

1. There is a strong argument that the increase in high-end inequality is likely the result of market forces mostly, rather than greed or crony capitalism. As the University of Chicago’s Steven Kaplan  and Stanford University’s Joshua Rauh explain in a recent paper “We believe that our evidence remains more favorable toward the theories that root inequality in economic factors, especially skill-biased technological change, greater scale, and their interaction.” Technology and globalization has enabled highly talented and educated individuals to manage or perform on a larger scale, “applying their talent to greater pools of resources and reaching larger numbers of people, thus becoming more productive and higher paid.”

2. There is a strong argument that the gains of the 1% have not come at the expense of the 99%. The work of Piketty and Saez is central to President Obama’s recent claim that while “the income of the top 1% nearly quadrupled from 1979 to 2007 … the typical family’s barely budged.” But analyses from the Congressional Budget Office, economist Richard Burkhauser, and economists Bruce Meyer and James Sullivan all suggest median household incomes actually grew more like 40%.

3. There is a strong argument that income inequality is not a big factor in limiting economic mobility. The Manhattan Institute’s Scott Winship finds that even as income inequality has been soaring, men born in the early 1980s have experienced, at most, “only a bit less mobility” than those born in the 1950s. And a Equality of Opportunity Project on mobility and geography found  “a high concentration of income in  the top 1% was not highly correlated with mobility patterns.” Again Winship:

True, a careful examination of the evidence does not establish that inequality is harmless, or that it has nothing to do with our other economic problems. Economic data cannot prove a negative. But they can fail to prove a positive, and they do fail to prove the claims that underlie the left’s basic economic narrative. They reveal little basis for thinking that inequality is at the root of our economic challenges, and therefore for believing that reducing inequality would meaningfully address our lagging growth, enable greater mobility, avert future financial crises, or secure America’s democratic institutions.

4. Oh yeah, there is a strong argument that nearly doubling top tax rates is a bad idea. In their paper “Should the Top Marginal Income Tax Rate Be 73 Percent?,” AEI’s Aparna Mathur, Sita Slavov, and Michael Strain conclude that such recommendations

ignore long-term behavioral responses, assume more equality is a better social welfare function, assign no social value to the marginal dollar of consumption for the rich, and use a short-run behavioral response predicated in part on less evasion and more enforcement to compute an answer of 73 percent. Consequently, we can be pretty sure that the answer is significantly less than that. Further, we find the suggestion that the government should take more than half of a citizen’s income in taxes to be unpalatable.

The proper target for policy is increasing economic mobility (particularly for lower-income Americans), both absolute and relative, rather than directly reducing inequality.

37 thoughts on “The 1% are again getting richer. Should the 99% really care?

  1. The arguments that the middle class is better off anyway are not strong. In fact, toss out research paid for AEI or performed by Burkhauser or Winship and Mr. P has bupkis. (The CBO study looked at multiyear household income and at household consumption as better measures of economic wellbeing and found only modest improvement.)

    Nor is mobility as rosy as Mr. P wants us to believe. The Harvard study, noting a strong geographic factor in mobility, states “We found a significant correlation
    between both measures of mobility and local tax rates.”
    Those are the taxes the Rs are attacking in virtually every state.

  2. The problem with the 1% getting richer is that leftist policy has fully achieved that, thanks to ZIRP and redistributive failures.

    Leftist economic intervention always fails, and this is yet another example.

    • Ande the fract that the rising inequality occurred during a period of rising Republican control, diminishing regulation, and rising right-wing control of media has nothing to do with it? Abnsurd!

      The arguments on this website are full of “straw men” and absent information to the contrary. There’s nothing objective about thbis guy’s argumentation. It’s designed to serve a political end.

      • during a period of rising Republican control

        Featuring those well-known Repugs Harry Reid, Nancy Piglousy, and Barak Obama?

        I recommend cutting back on the drinking before noon.

        diminishing regulation

        Factually incorrect.

        rising right-wing control of media

        Please stop drinking before noon.

    • Good point. The “job creators” are doing the opposite of creating jobs, which should show up on the job evaluations — and yet they never seem to lose their jobs.

      Kind of ironic, like Wall Street massively rewarding themselves while sinking main street, and this after collapsing the world economy; they steal from main street up and through the collapse, and then demand bailouts from these very same victims to keep their million dollar bonuses going. True meritocracy indeed.

  3. Only the 1% truly believe we are living in a meritocracy — the rest of us know better by now, at least those with half a brain or more.

    The premise that “you work hard and you get ahead (become wealthy)” is so ridiculous in the face of current facts, anyone could debunk such propaganda. For instance, 10s of millions of US workers all of sudden became lazy and immediately lost their job skills after the financial collapse so that they had to be thrown out of work and onto welfare (not become wealthy because they were not working hard enough). The opposite is of course that the “job creators” have done such a great job of creating jobs, that they deserve to take 93% of all the profits (they work 400 times harder than and are at least 500 times smarter than everyone else, so they deserve to take it all — winner take all, you know).

    Maybe, just maybe, it is really the “job creators” who have the biggest “skills gap” of all and are the laziest of all, and their propaganda is just a way to conceal such — that the truly idle, the true “takers,” are really themselves “taking” it all while contributing very little.

    • Yeah. And the superstars of the NBA are the laziest of all. I doubt they work any harder than anyone else. They’re just “taking” from those that sit on the bench or don’t make the team.

      • They sure aren’t doing anything to benefit society — just look at all the negative trends that continue to worsen no matter how well they play, in case you have not been paying attention. Really, in the grand scheme of things, who could care less that some 30-year-old adolescent can slam dunk. How does that make the world any better?

        And, yes, the “take” of the CEOs is even so much more egregious, often orders of magnitude more than NBA players, and even for far less; at least NBA players have some talent.

  4. “Should the Top Marginal Income Tax Rate be 73%”
    We have been at war for over 10 years. What was the top marginal rate during WWI and WWI?

    Historically, America experienced growth with higher (70%-94%) Top Marginal Rates. As soon as they started decreasing the rates — the nation experienced ups-and-downs leading to the current obliteration.

    If the 1% is so “rich” now — where are all the jobs for the nation’s unemployed. They are not rich — it’s called phantom wealth, #s on a balance sheet with no assets to back it up. Like the 30:1 ratio — when WS Banks loaned $30 for every 1$ they actually had.

  5. Can anyone tell me why it is considered by some that it is greedy for the high wage person to want to keep the money they have worked hard to earn but not greedy for those slackers who sit on their lazy @sses to demand that the government seizes wealth from other citizens to give them food stamps, Medicaid, free phones and other forms of welfare? Really, who is greedy here? The worker or the spoiled welfare recipient who demands more from the worker?
    My husband worked two jobs to pay his way though college. I went through college mostly in night school so I could work and pay my way. We avoided drugs and prison unlike many welfare recipients. Why exactly should we pay more of our income to support people who made poor life choices? We have our own family to support! Heck we can’t even deduct my eldest son’s college expenses… Enough with the greedy people who want to seize at the point of a gun that which others have EARNED. While they are perfectly happy to promote the truly wealthy, like the Kerrys and the Kennedys and the Pelosis and Reids… Who do not pay most of their taxes on salaries earned but rather on investments. The 1% do not pay taxes and never will. Taxing the top 1% of wage earners never touches the generational wealthy, it merely prevents others from accumulating wealth.
    Some of us have children with disabilities that we need to provide for after we pass and increasing taxes makes that more difficult. In fact, looks like hubby will have to take that overseas assignment of six weeks on, three weeks home, thanks to ORottenCare. Just another tax on struggling Americans. Spit. Sorry, rant off.

  6. How about this:

    Theft and the initiation of force are always evil. No “research” is required to know this. So, the only legitimate answer is to leave each individual alone to live their lives without theft and coercion. Voluntary association and cooperation will always produce peace and prosperity for all who will participate and take personal responsibility for their own lives and property.

    By what legitimate authority does anyone propose to steal from some and “give” to others, for any reason?

  7. There is a strong argument that certain political parties have much to gain by being able to confiscate vast amounts of wealth from people unlikely to vote you into power and redistribute it to the much larger number of people who are likely to vote you into power.

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