the height of inequality

topic posted Thu, August 10, 2006 - 8:51 AM by  Gerbil
The Atlantic Monthly | September 2006

The Agenda
First Principles

The Height of Inequality

America’s productivity gains have gone to giant salaries for just a few

by Clive Crook
In 1971, Jan Pen, a Dutch economist, published a celebrated treatise with a less-than-gripping title: Income Distribution. The book summoned a memorable image. This is how to think of the pattern of incomes in an economy, Pen said (he was writing about Britain, but bear with me). Suppose that every person in the economy walks by, as if in a parade. Imagine that the parade takes exactly an hour to pass, and that the marchers are arranged in order of income, with the lowest incomes at the front and the highest at the back. Also imagine that the heights of the people in the parade are proportional to what they make: those earning the average income will be of average height, those earning twice the average income will be twice the average height, and so on. We spectators, let us imagine, are also of average height.

Pen then described what the observers would see. Not a series of people of steadily increasing height—that’s far too bland a picture. The observers would see something much stranger. They would see, mostly, a parade of dwarves, and then some unbelievable giants at the very end.

As the parade begins, Pen explained, the marchers cannot be seen at all. They are walking upside down, with their heads underground—owners of loss-making businesses, most likely. Very soon, upright marchers begin to pass by, but they are tiny. For five minutes or so, the observers are peering down at people just inches high—old people and youngsters, mainly; people without regular work, who make a little from odd jobs. Ten minutes in, the full-time labor force has arrived: to begin with, mainly unskilled manual and clerical workers, burger flippers, shop assistants, and the like, standing about waist-high to the observers. And at this point things start to get dull, because there are so very many of these very small people. The minutes pass, and pass, and they keep on coming.

By about halfway through the parade, Pen wrote, the observers might expect to be looking people in the eye—people of average height ought to be in the middle. But no, the marchers are still quite small, these experienced tradespeople, skilled industrial workers, trained office staff, and so on—not yet five feet tall, many of them. On and on they come.

It takes about forty-five minutes—the parade is drawing to a close—before the marchers are as tall as the observers. Heights are visibly rising by this point, but even now not very fast. In the final six minutes, however, when people with earnings in the top 10 percent begin to arrive, things get weird again. Heights begin to surge upward at a madly accelerating rate. Doctors, lawyers, and senior civil servants twenty feet tall speed by. Moments later, successful corporate executives, bankers, stockbrokers—peering down from fifty feet, 100 feet, 500 feet. In the last few seconds you glimpse pop stars, movie stars, the most successful entrepreneurs. You can see only up to their knees (this is Britain: it’s cloudy). And if you blink, you’ll miss them altogether. At the very end of the parade (it’s 1971, recall) is John Paul Getty, heir to the Getty Oil fortune. The sole of his shoe is hundreds of feet thick.

As Garrison Keillor ironically informs his listeners, not every child can be above average. But when it comes to incomes, the great majority can very easily be below average. A comparative handful of exceptionally well-paid people pulls the average up. As a matter of arithmetic, the median income—the income of the worker halfway up the income distribution—is bound to be less than average.

This is true in every economy, but in some more than others. Back when Pen wrote his book, incomes were already more skewed in America than in Britain. Over the past thirty-five years, and especially over the past ten, that top-end skewness has greatly increased. The weirdness of the last half minute of today’s American parade—even more so the weirdness of the last few seconds, and above all the weirdness of the last fraction of a second—is vastly greater than that of the vision, bizarre as it was, described by Pen.

Lately economists have been using new data to look more closely within the top decile of American incomes. What they’ve found is startling. Here are some results from Ian Dew-Becker and Robert Gordon of Northwestern University. Between 1966 and 2001, median wage and salary income increased by just 11 percent, after inflation. Income at the 90th percentile (six minutes from the end of the hour-long parade) increased nearly six times as much—by 58 percent. At the 99th percentile (the last thirty-six seconds), the rise was 121 percent. At the 99.9th percentile (3.6 seconds before the end), it was 236 percent. And at the 99.99th percentile (0.36 seconds, representing the 13,000 highest-paid workers in the American economy), the rise was 617 percent.

That is worth repeating: Over thirty-five years, the rise in wages and salaries in the wide middle of the income distribution was 11 percent. The rise in wages and salaries at the top of the income distribution was 617 percent.

This is (pretax) wage and salary income, not investment income. Many commentators attribute rising American inequality to growth in profits at the expense of salaries and wages. That’s wrong: labor’s share of national income does not seem to be trending up or down. What has changed is how much of labor’s share goes to top earners. Since the mid-1970s, and especially since the mid-1990s, the dramatic rise in the share of national income earned by the very rich is due not to the strength of their investment portfolios but to their growing share of labor income.

Productivity growth has always been seen as perhaps the single most important indicator of rising, broad-based prosperity. But remarkable growth in top-end pay, together with the relative constancy of labor’s overall share of income, has an obvious implication: the highest earners are now capturing most of the gain in national income caused by economy-wide productivity growth.

This is quite disturbing. Historically, rising productivity has been a tide that lifted nearly all boats. For more than twenty years during the long surge of productivity growth that followed the Second World War, median incomes in the United States rose as quickly as the highest incomes. This came to be regarded as normal—and, seen from a global vantage point, it still is. The dispersed benefits of high aggregate productivity are the reason why jobs of almost every kind pay better in rich countries than in poor ones.

Mechanics and hairdressers are paid far more in America than in Mexico, even though their individual productivity may not be that different in the two places; north of the border, workers share in the economy’s higher overall productivity. A lot depends on whether this continues to be true. It is the very point that the new findings call into question.

The study by Dew-Becker and Gordon asks, “Where Did the Productivity Growth Go?” Over the past thirty-five years, that growth did not lift most boats, or even very many boats. Between 1966 and 2001, only 10 percent of American workers saw their incomes rise at least as fast as economy-wide productivity did. More astonishing still, according to the study’s authors, from 1997 to 2001, the top 1 percent captured far more of the real national gain in wage and salary income than did the bottom 50 percent. And even within that highest percentile, the gains were heavily concentrated at the top.

Such extreme skewness is new. It suggests that a huge proportion of the economy’s productivity gains are neither being passed on to consumers through lower prices—which would have the effect of raising real incomes very broadly—nor being distributed to investors as profit, nor even being used to raise the wages of most employees in industries seeing rapid productivity growth. Rather, they’re being diverted to a comparative handful of employees.

Why is this happening? Nobody is sure, but Dew-Becker and Gordon suggest a combination of two things: for one small group, sports and media celebrities, income growth has come from a perfecting of the labor market; for a different group, top corporate executives, it has come from a breaking down (or even an overthrowing) of the market. Those two segments account for most of the 13,000 people in the 99.99th percentile—with total earnings of $83 billion in 2001.

A classic 1981 study by the late economist Sherwin Rosen worked out “The Economics of Superstars” and anticipated part of what has happened. The demand for stars in the sports and entertainment industries is such that small differences in talent cause disproportionate gaps in earnings. As technology puts stars in front of bigger audiences, their incomes multiply. Rosen could not have foreseen the media innovations of the past decade, but they have plainly given stars access to far more fans.

I find it interesting that there is no popular unease over the stupendous sums paid to Tiger Woods, or Eminem, or Tom Cruise. And, you might ask, why should there be? They are worth the price of the ticket, at least in the view of their audiences. If they are in demand worldwide, good luck to them. An economist would say the market is working.

The case of fat-cat chief executives arouses different feelings—as it should. In most cases, there is no audience- multiplication factor to account for the dramatic rise in CEO pay. If a Rosen-type process were at work, you would not expect to find that CEO pay had surged only in the United States (and to a lesser extent in Britain). Numerous widely reported cases of pay for no performance are also awkward to explain. When boards give big noncontractual severance packages to bosses fired for incompetence, you have to ask whether this second stratospheric zone of the labor market, unlike the superstar zone, is working properly.

Corporate-governance reforms that would help shareholders keep CEOs in check might do some good. If I’m skeptical, it’s partly because shareholders already have some (admittedly limited) powers, and they usually let things slide. That might change if CEO pay continues to rise. At some point, the subdued “outrage constraint” that some corporate- governance activists wish to revive might kick in again. That would be a good thing.

Perhaps the CEOs’ appetites can be curbed. Maybe the superstars will find that their audiences cannot widen without limit. And perhaps, if both those things happen, productivity growth will again raise incomes broadly, as it once did, and as it is supposed to. If not, how much longer before the dwarves get restless?

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  • <That is worth repeating: Over thirty-five years, the rise in wages and salaries in the wide middle of the income distribution was 11 percent. The rise in wages and salaries at the top of the income distribution was 617 percent.>

    all men really aren't created equal.
    • Ten
      offline 1
      Anyone who believed otherwise should pick up a dictionary and make sure "gullible" is still in it.
      • i guess the founding fathers were rather gullible.
        • Ten
          offline 1
          The founding fathers [of United States where I do not live] were living in a reality where being a noble man was more of an implied duty of a man than an exceptional trait of a good-doer, and where corruption and crime were prosecuted with bullets; one where people could tell a difference between rights, duties, obligations, opportunities and abilities; one where dominating spirit of independence and liberty was common in people of all faiths and all political nominations to the point generals surrendered their armies in a honorable manner, not the dominating rot of Jesus or supreme values of human life, subpoenas and not having anal sex; and one in which TV was not the primary source of education and entertainment and one where neighbours actually KNEW each others' name.

          Not the one in which you're living now.
          • So in other words, Ten not only disagrees with one of the basic tenets of modern western civilization, he also knows nothing about 18th century America or probably any any other period of history, preferring his romantic fantasies about how much better thing were "back then".
            • Ten
              offline 1
              The tenet of modern west civilization is that all people are equal under the law, and your own Declaration of Independence says, I quote:

              "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness"

              It then goes on about how when the government is eroding any of these rights, the people have a natural right to rise up and overthrow the government. My point here is, I don't see -you- buying a sniper rifle.

              But let's get back to equality, and ignorance.

              Nothing in the Declaration of Independence suggests that people are "equal". It only says that people are created equal and endowed with some rights, implying, according to my interpretation, that the rest is in the hands of the people. It does not say, for example, that equality means the state should sponsor your education more if you are dumber than the rest of people so that you will be "equal" to them. It does not suggest that overweight people should get an extra food coupon because they 'naturally' consume more food (or if you prefer, a free weight treatment that other people aren't getting)

              For some reason, almost everyone I know discusses equality in terms of being equal in everything. This sort of equality between people, without regard to people's individual traits, abilities, luck and accidents, is called communism. In other words, whenever someone is jealous of fruits of someone else's efforts, whether these are minute stock speculations or years of painful and repetitive mind numbing labour, they come to cite how "the system" that is supposed to enforce "equality" fails at it.

              And I am not a god damn rightwinger. I don't call anyone "dirty tree hugging hippies" even though some people have a distinct appearance of one.

              You're right at one thing though; I don't know much about early american history, but I tend to consider the spirit of Mark Twain's works and the words of great generals of Civil War a reflection of that time as much as I consider Bush, the McDonalds lawsuit, SCO, the hot coffee mod and the wardrobe accidents reflections of our [shitty] time today. I find it utterly pointless taking an idea from 200 years ago, stretching it to be an universal, all-inclusive tenet of democracy and then complaining that it's being violated all the time.

              The people on the top of equality pile today are mostly ruthless and merciless assholes, but above all they are all damn smart people.

              If you want that old kind of equality, ensure that all lawyers work for free. Or, buy a sniper rifle. You're not getting the new kind though, unless you think all black people should be painted white at birth or vice versa AND you can get everyone else to agree with you.
              • If you want that old kind of equality, ensure that all lawyers work for free.
                Why should all lawyers work for free???
                would you work for free?

                Or, buy a sniper rifle.
                and then what go shoot someone thats really intelligent....
              • Here is what the Declaration quote means:

                Life, liberty, and *pursuit* of happiness is a necessary heirachy. Without life (biological), one cannot make choices that shapes one's own future (liberty), that allows one to pursue one's own happiness. (The latter two comprise biographical life.) These rights are unalienable meaning they cannot be denied by anyone person or the state (excpet by due process as retributive punishment). Happiness, as Kant argued against the utilitarians benthem and Mill, is a regulatory concept that guides individual decisions. Happiness is not an end state of affairs like running a mile in under 3 minutes.

                "Endowed by their creator" means all people are intrinsically equal but are extrinsically unequal. The state ensures equal opportunity and consideration but not equal treatment. Unequal treatment is justified only to promote equal opportunity and consideration. A mundane example to illustrate: college students with learning and certain physical disabilities are treated differently from the rest of the student body. They are allowed note takers (who are paid), extra time to take tests, in some instances a different testing format dependent upon their disability, and tutors--all for free to them. This unequal treatment is justifiable because it ensures they receive equal opportunity to the same education as everyone else.

                As I argued in the "minimum wage in context" thread, since all persons are intrinsically equal but are born extrinsically unequal--i.e. born into a socio-economic class, religious affiliation, differing learning abilities, etc.--then those with more have a duty to aid those with less as neither intrinsically deserves the luck of their draw. (I am paraphrasing my arguments which come from John Rawl's Theory of Justice and Rousseau's The Social Contract. Go read the other thread for more details.)
                • Unsu...
                  <Life, liberty, and *pursuit* of happiness is a necessary heirachy. Without life (biological), one cannot make choices that shapes one's own future (liberty), that allows one to pursue one's own happiness. (The latter two comprise biographical life.) These rights are unalienable meaning they cannot be denied by anyone person or the state (excpet by due process as retributive punishment). Happiness, as Kant argued against the utilitarians benthem and Mill, is a regulatory concept that guides individual decisions. Happiness is not an end state of affairs like running a mile in under 3 minutes.
                  Does that mean you no longer support embryonic stem cell research or does the right to life extend only to those that have made the mystical journey through the birth canal?
                  • This is the maximum depth. Additional responses will not be threaded.
                    Neither. Biographical life takes primacy over biological life. In most cases the two are coupled together. But look at when it breaks down--Terry Shiavo e.g. (euthanasia). It is possible to have a biological life (heart beat, blood pressure, breathing, digestion) but no biographical life (dreams, goals, projects, hopes, desires, loves). Stem cells are the same; they lack a biographical life and have the most basic biological life--cellular division--which cancer tumors also have to the exact same degree. Ergo, membership in the moral community consists of having a biographical life not a biological life. More specifically, membership in the moral community requires the capacity to suffer and cognitive states (what amount and type is the next question). Even plants have a biological life that is more complex than stem cells but we would not put them in the moral community (except Janis (sp?) Buddhists).

                    My view does have certain difficulties that I own up to. Let us see if you can figure them out. I would rather do so in a seperate thread.
              • Unsu...
                <And I am not a god damn rightwinger. I don't call anyone "dirty tree hugging hippies" even though some people have a distinct appearance of one.

                If that was a shot at Gerbil, he did agree to get a shave and a haircut if the donations for his computer exceeded 1500.00. Maybe we should insist he throws in a bath as well?
                • check my photo already shaved and trimmed.

                  booyah! but not for you. for my sister's wedding.
                  • This is the maximum depth. Additional responses will not be threaded.
                    <booyah! but not for you. for my sister's wedding. >

                    did you trim the pubs too? I know you hippie types like to go to weddings in the nude. On second thought I really don't want to know.
    NEW YORK – America likes to think of itself as a land of opportunity, and others view it in much the same light. But, while we can all think of examples of Americans who rose to the top on their own, what really matters are the statistics: to what extent do an individual’s life chances depend on the income and education of his or her parents?

    Nowadays, these numbers show that the American dream is a myth. There is less equality of opportunity in the United States today than there is in Europe – or, indeed, in any advanced industrial country for which there are data.

    This is one of the reasons that America has the highest level of inequality of any of the advanced countries – and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth. Other inequality indicators – like wealth, health, and life expectancy – are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

    It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses.

    A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence – either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).

    Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices. Those at the top, in such cases, are enriched at the direct expense of those at the bottom.

    It might not be so bad if there were even a grain of truth to trickle-down economics – the quaint notion that everyone benefits from enriching those at the top. But most Americans today are worse off – with lower real (inflation-adjusted) incomes – than they were in 1997, a decade and a half ago. All of the benefits of growth have gone to the top.

    Defenders of America’s inequality argue that the poor and those in the middle shouldn’t complain. While they may be getting a smaller share of the pie than they did in the past, the pie is growing so much, thanks to the contributions of the rich and superrich, that the size of their slice is actually larger. The evidence, again, flatly contradicts this. Indeed, America grew far faster in the decades after World War II, when it was growing together, than it has since 1980, when it began growing apart.

    This shouldn’t come as a surprise, once one understands the sources of inequality. Rent-seeking distorts the economy. Market forces, of course, play a role, too, but markets are shaped by politics; and, in America, with its quasi-corrupt system of campaign finance and its revolving doors between government and industry, politics is shaped by money.

    For example, a bankruptcy law that privileges derivatives over all else, but does not allow the discharge of student debt, no matter how inadequate the education provided, enriches bankers and impoverishes many at the bottom. In a country where money trumps democracy, such legislation has become predictably frequent.

    But growing inequality is not inevitable. There are market economies that are doing better, both in terms of both GDP growth and rising living standards for most citizens. Some are even reducing inequalities.

    America is paying a high price for continuing in the opposite direction. Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.

    The Great Recession has exacerbated inequality, with cutbacks in basic social expenditures and with high unemployment putting downward pressure on wages. Moreover, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, investigating the causes of the Great Recession, and the International Monetary Fund have both warned that inequality leads to economic instability.

    But, most importantly, America’s inequality is undermining its values and identity. With inequality reaching such extremes, it is not surprising that its effects are manifest in every public decision, from the conduct of monetary policy to budgetary allocations. America has become a country not “with justice for all,” but rather with favoritism for the rich and justice for those who can afford it – so evident in the foreclosure crisis, in which the big banks believed that they were too big not only to fail, but also to be held accountable.

    America can no longer regard itself as the land of opportunity that it once was. But it does not have to be this way: it is not too late for the American dream to be restored.

    Read more from our "America's Precarious Recovery" Focal Point.

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