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.