Increasing Inequality in Not a Statistical Illusion

Alan Reynolds continues the discussion he has been having with Paul Krugman here and elsewhere over inequality, this time in an op-ed in the Washington Times. If you have been following along, Reynolds wrote an op-ed in the Wall Street Journal that challenged the idea accepted by almost every reputable analyst that inequality has been increasing in recent years.

That led to a debate over whether Reynolds had repeated errors he has made in the past in collecting and interpreting data and whether his position holds up to closer scrutiny. Krugman argues, and I think he is correct, that it does not. But you should see for yourself.

Here are the posts Reynolds is referring to in today's op-ed. The last two posts listed, which are posts of email from Paul Krugman on this issue, are probably the best summaries (also see the follow-up in the comments to the two posts by Reynolds, Krugman, and others):

• The Top 1% . . . of What? (Reynolds WSJ op-ed)
• Reynolds' Rap on Inequality
• Follow-Up on Inequality
• Poverty Rates in Recent Years
• Intellectual Garbage Collection: The Unreliability of Alan Reynolds (Brad DeLong)
• Settling the Score on Census Top-Coding of Income Data
• "The Chewbacca Defense"
• [Update: Piketty and Saez respond]

Here's Reynold's latest. It starts with a description of the claims that are in dispute, followed by (his version of) the dispute itself. At one point, he mentions some of your comments:

A 15-year debate on wealth, by Alan Reynolds, The Washington Times: I wrote a Wall Street Journal op-ed in December showing the top 1 percent did not receive 16.1 percent of personal income in 2004, but just 10.6 percent. Most of the post-1980 increase in that number happened between 1986 and 1988, when tax rates fell. Any apparent rise since then is due to business income shifted from the corporate tax to the individual tax. and investment income of middle-income taxpayers shifted from taxable to nontaxable savings.

Two "liberal" blogs went predictably apoplectic, but in ways that had absolutely nothing to do with what I had written. Berkeley professor Brad DeLong initially said there is never any point in paying attention to anything on the Wall Street Journal editorial page. Someone balked at that, so he tried describing two clear, consistent and distinctly separate statements from my article as "three-card monte."

Such amusing irrelevancies led to the usual swapping of links between like-minded cheerleaders at another blog run by Mark Thoma of the University of Oregon. He somehow imagined my article relied mainly on Census Data, and therefore borrowed some curious comments from a New York Times column by Paul Krugman.

Mr. Krugman complained that Census estimates are from a "limited sample" (as if IRS estimates are not) and wrote "the questionnaire is 'top-coded': if the individual interviewed has earnings higher than $999,999, those earnings are recorded simply as $999,999." Someone thought those words were mine, and posted an angry but correct rebuttal. Top-coding is almost entirely confined to "public use" files, censored for privacy. Census officials use internal data with the missing details, including incomes far above $1 million.

In the process of changing the subject -- away from his own error and from everyone's inability to find any fault in my article -- Mr. Krugman posted a link back to Mr. DeLong's blog. Mr. DeLong, in turn, had harvested two "demonstrably false accusations" from the hundreds of articles I have written. One dates back to 1992.

My only "false accusation" since 1992 involved a careless but irrelevant mistake last March, which I acknowledged at the time on Mr. DeLong's blog. It concerned a column in The Washington Post that claimed "the Internal Revenue Service" had reported that the top 10 percent of households earned 44 percent of all pretax income in 2003. The source was a short paper by three statisticians, two of whom -- Michael Strudler and Tom Petska -- work for the IRS. But that does not make it official IRS data.

My column showed their estimated 44 percent is much higher than any official source. The authors exclude Social Security and other transfer payments from the denominator (total income), then pump up top incomes with such indefensible items as accelerated business deprecation and nontaxable IRA rollovers.

When I described the much smaller estimates of the top 10 percent's income from Census and the Congressional Budget Office, Mr. DeLong discovered: "Reynolds is wrong. CBO estimated that for all households the income of the top tenth in 2003 was 37.2 percent. ... Reynolds' 38.3 percent came not from Table 1: All Households, but instead from Table 3: Elderly Households." That is true. I missed that fine print when the spreadsheet popped up on my monitor.

How does the fact that the correct figure is even smaller than I said (37.2 percent, not 38.3 percent) debunk my skepticism about that bloated 44 percent figure? It is true the corrected CBO figure did rise significantly at the time of the 1986-88 tax reform. Top incomes and capital gains also boomed with the stock market in 1998-2000. Yet the CBO estimate of the top 10 percent's share of after-tax income ended up unchanged from 1988 (33.1 percent) to 2003 (33 percent). How does that contradict what I wrote in the Wall Street Journal?

The other reason Mr. Krugman and Mr. DeLong advise people to ignore what I wrote last month is because of something I wrote in 1992. At that time, Mr. Krugman objected to what he called my "main" argument. I argued that short-term changes in the estimated wealth of the top 1 percent could be distorted by a small handful of people ("outliers") with huge windfalls. Think of the two founders of Google getting $12 billion apiece when the firm went public. If they show up in a sample, how meaningful is the average going to be?

Mr. Krugman replied that the working paper -- by Arthur Kennickell of the Fed and Louise Woodburn of Ernst & Young -- had oversampled high incomes from tax return data. He said 400 people had been picked to represent the wealthiest 1 percent. A larger sample certainly helps, but it does not solve the "outlier" problem, because a few huge windfalls can still make the statistical average in a single year appear much higher than typical (median) wealth of any small group with no ceiling on wealth.

Mr. Krugman feigned indignation in 1992 that I had not read the relevant footnote in that unpublished working paper. He could be entirely confident about that, because 1992 was long before you could find such obscure papers online. The only way I could possibly have read an unpublished draft would be if the authors had sent me a copy when they sent one to Mr. Krugman. I did eventually obtain the paper by snail mail, too late to meet the deadline. I had no choice but to comment on what Mr. Krugman had written about the report -- in the supposedly disreputable Wall Street Journal.

Fortunately, a much-improved August 1997 revision of the "preliminary" Kennickell-Woodburn paper is now online. The authors revised their weighting scheme and reversed their previous conclusion. Their original 1992 study found no change in overall wealth inequality between 1983 and 1989, or in the wealth share of the top 10 percent.

For the top one-half of one percent, however, the first draft seemed to show "a dramatic increase from 1983 to 1989 under the original weights." In the revised version, "the point estimate of the [wealth] share of the top 0.5 percent in 1989 is lower than that in 1983." The share of wealth held by the very top group declined, from 1983 to 1989. My skepticism in 1992 proved entirely warranted.

We all make mistakes. My book, "Income and Wealth," repairs some innocent mistakes by Brad DeLong and Paul Krugman. If anyone can demonstrate I misquoted such scholars, or am mistaken about any facts in last month's Wall Street Journal piece, I will gladly correct the record just as readily as I have now corrected the record about my 1992 piece.

As this post demonstrates by quoting Martin Feldstein, Glenn Hubbard, Ben Bernanke, and Ed Lazear, all first-rate economists with impeccable conservative credentials, there is wide agreement that inequality has been increasing. Reynolds says otherwise, but few reputable economists agree. But I think rather than getting into the details of this yet again and addressing all of the ways the latest editorial mischaracterizes the debate and the data, I'll just repeat what Paul Krugman said in the last link above:

On the broader issue: Reynolds says that various statistical issues have created a false impression of rising inequality. Now, serious researchers, from CBO to the IRS to Piketty and Saez, have looked at those issues, acknowledged them, but concluded that they don't make enough difference to change the picture in any fundamental way. ...

One last point: we have a number of indicators other than government data on what's happening to very top incomes and wealth - things like estimates of executive compensation. All these indicators point to a continuing rapid rise at the top compared with the middle. So any claim that the rising inequality we see in both Census data and in tax returns is some kind of statistical illusion faces an additional credibility problem.

Update: Email says I should take a much stronger position on this one. For example:

Mark

You're way too gentle. Reynolds is still not admitting his two recent errors: his claim that the censored top income data are included in the Census income share, which is flatly false, and his accusation about the CBO data. He's misrepresenting the debate on your blog to make it seem as if my minor misunderstanding about "reporting limits" versus the questionnaire is more important than his fundamental failure to understand what the Census data do and don't show.

But maybe Brad DeLong has it right in his discussion of another columnist who can't get things right:

As one colleague said on Friday apropos of another issue: "David Brooks? You're using a tenured Harvard statistician to refute David Brooks?! You don't use a tenured statistician, you use a fly-swatter!"

Update: Piketty and Saez respond to Reynolds.

Comments

[Lafayette]

"Reynolds wrote an op-ed in the Wall Street Journal that challenged the idea accepted by almost every reputable analyst that inequality has been increasing in recent years."

And, I repeat the rudely obvious: Pickety's original work on the matter established the fact that the distribution of income is unfair. (In fact, Pickety's previous work in France had put him on the scent. His similar results in the US were subsequent.)

Whether it is more or less unfair than originally thought, I submit, is of no consequence whatsoever. There is no way in hell that Reynolds can or will prove that ABOUT 80% of the wealth generated in America goes to ABOUT 20% of the population is "fair". Maybe because of statistical errors it's really 75/25? Maybe its 82/17? Who the hell cares?

They are ALL unacceptable proportions as regards the distribution of wealth in America. More so, the largest part of this wealth is obtained not in stock-options but in a mechanism far less risky ... inheritance of not only realty values but capital instruments.

So, let us thank Katrina that the idiot idea of untaxed inheritance did not survive her passing. And, let's try to correct that unfairness in 2008.

In a nation embedded in the notion that we live by the sweat of our brow, how is it that inheritance insures that a comparative few get a free ride because they own the means of transportation?

[maria]

You say few reputable economists agree with Reynolds. Who are the "reputable economists" (excluding of course Reynolds whose reputation is dodgy) who support him? Can you name one?

[maria]

In the Washington Times, heh? That wouldn't be the neo-con arch-conservative paper that mouths the Pentagon line and other such things.....would it?

[Lafayette]

maria: "That wouldn't be the neo-con arch-conservative paper that mouths the Pentagon line and other such things.....would it?"

Yes, the Washington Times is juxtaposed with the bleeding heart liberal Washington Post - which is called journalistic diversity, as I recall.

(Voltaire: I disagree with what you say, but I would die for your right to say it.)

[pgl]

Alan Reynolds sounds like he wants to get you engaged in a Cable TV debate with the venue being Faux News hosted by Sean Hannity. It's about the only venue where he won't look like a fool.

[Lafayette]

Reynolds: "I wrote a Wall Street Journal op-ed in December showing the top 1 percent did not receive 16.1 percent of personal income in 2004, but just 10.6 percent."

BFD. That suggest what, particularly?

That we should change tax policy so that they DO obtain another 6%?

This is one big rotten Red Herring and it smells to high heaven.

[maria]

Anybody yet found a reputable economist who supports Reynolds? What about Crudlow??? LOL.

[Bruce Wilder]

Lafayette: "Yes, the Washington Times is juxtaposed with the bleeding heart liberal Washington Post - which is called journalistic diversity, as I recall."

Except, of course, that the Washington Post became a politically conservative paper nearly a generation ago. So, the nation's capital is served not by liberal and conservative papers of repute, but by dumb and dumber. Time and Newsweek and U.S. News & Report compete, apparently, to be more stupid and reactionary than the other. All three cable news networks feature prominently extreme right-wing anchors and commentators.

Alan Reynolds can find plenty of platforms for his tripe, and he's only one of hundreds employed by the Right-wing policy brothels for that very purpose.

Corporate, right-wing propaganda has a ready platform in the corporate, right-wing Media, which is pretty much all Media. And, it debases the public discourse to have liberals almost completely excluded, say, from the Sunday Morning public affairs programs.

"The" debate becomes the debate between Krugman and Reynolds, and that's a waste of time. We end up debating the reality of increasing inequality, the reality of global warming, the reality of Darwinian evolution, the reality of defeat in Iraq, and those debates are a waste of time. Those debates are all about confusing and deceiving people, about increasing the ignorance quotient. And, people like Reynolds can force those debates to happen, because he has a ready platform in the Right-wing Media, which is pretty much All Media.

John Kerry botches a joke, a Right-wing Fax machine rev's up, and, pretty soon, Katie Couric is hosting some Right-wing Republican operative, who pretends to have misunderstood the import of what Kerry said and displays all the fake outrage she can muster that her misunderstanding can justify. And, that's the evening news on CBS.

Reynolds is not an intellectual, he's one metastasizing cell of a deadly cancer.

[Morgan]

Inequality does appear to be rising, but the conclusions to be drawn from that are not straightforward. For example, during the 1990s (from 1989 to 1999 - household incomes), the Gini index rose fairly dramatically, but the change reflected a small reduction in the proportion of households earning under $15,000, a large increase in the proportion of households with incomes between $40,000 and $100,000, and a fattening of the upper tail (all figures in 2000 dollars). I can't see that any of those things are objectively bad.

In the aggregagte, all boats were lifted. And yes, some were lifted more than others. But is there a straight line from that to increased plutocracy?

[Bruce Webb]

"Inequality does appear to be rising, but the conclusions to be drawn from that are not straightforward. For example, during the 1990s (from 1989 to 1999 - household incomes),.."

Ah Morgan, pointing out that "In the aggregate, all boats were lifted" during the Clinton years (who was President in 1999?) after two tax increases targeted at the top marginal rates is not I think making the case you want to make here.

If you are arguing for a return to Clinton era tax structure then I am all for it. Otherwise picking data series that end in 1999 is not exactly a rousing defense for Bush II economic policies.

[Morgan]

Bruce:

The point is that increasing inequality does not imply that somebody got poorer, and I'm not sure it necessarily means more concentration of political power. As you point out, it also doesn't imply less progressive taxation.

I was not defending Bush II era economic policies (nor Clinton era policies, for that matter). I do think that criticism of the current economic situation is overblown - unemployment really is low, incomes really are rising. But I have no idea how much (if any) of that is attributable to the current administration's policies, or whether things might be even better had Clinton's policies continued.

By the way, I chose that period because 1) inequality rose more rapidly then than during any other recent period, and 2) the census has published household income data for those two endpoints, on which I based the analysis.

[Alan Reynolds]

My Journal article said the Piketty-Saez estimates overstate top percentile shares by understating total income. The graph shows that half of the alleged increase in the top 1 percent's share happened in two years -- 1987 and 1988 -- and much but not all of that can be accounted by a rush to move business income from the corporate to the indivdiual tax form. I explained as well as possible in so little space why such data is inherently problematic for all studies -- including those from CBO -- which are based on sample of income reported on indivdiual tax returns (rather than, say, on corporate returns). What is or is not reported in various boxes of various tax returns depends on tax rates and rules. People can easily move savings from taxable to nontaxable accounts today, but could not do that in the past.

Please take a look at the reply that Emmanuel Saez posted on his site. I will respond to it in due course. Piketty and Saez do not seem to address the data break after 1986, but they do suggest that personal income is too broad a measure. Simply adding transfer payments alone would cut the top 1 percent's share by 3 percentage points, but they say that requires also subtracting taxes. The CBO and Census both do that, and that is some of the data I referred to but did not show.

The short op ed could not and did not explain why I suggested there is no clear evidence of a signficant and sustained increase in any reasonably broad measure of inequality since 1988 (or in some cases since 1985-86).
The top 1%, after all, leaves distribution within the other 99% a total mystery, even if one really believes that gains at the top are somehow subtracted from someone else (if Smith gets a raise, must Jones get a pay cut?). I'm talking about Gini coefficients for disposable income and consumption, 90/10 ratios for salaries of full-time employees, comparative growth of SCF real median income by decile and quintile -- that sort of thing. If this seems baffling, I know of a textbook I can recommend. However, a small sampler of such evidence will be online at cato.org next week, and comments are always welcome.

Piketty and Saez assert that because of sampling error and top-coding Census is missing gigantic amounts of income in the top 1% -- that is, above $265,000. But no plausible guess at the difficulties of internal censorship (which Burkhauser taught us all) begins to account for the gap between Census and Piketty-Saez estimates for the top 5%. Even if we left out all income above $5 million in Piketty and Saez -- the top one-hudreth of one percent -- that would only narrow the gap by less than one percentage point.

There is a lot of explaining left to do, so stay tuned.

[Bruce Webb]

Morgan: "The point is that increasing inequality does not imply that somebody got poorer,"

Nobody I know is making that point. It is not that anyone is getting poorer, the point is that the gains from productivity are not being distributed in an equitable fashion. You were the one who brought up the "rising tide lifts all boats" imagery. Implicit in that is that each vessel gets some equivalent lift. Your argument simply suggests that because my particular rowboat is not getting swamped I should just ignore how high in the water your yacht is riding.

If you follow the discussion on this site you will understand the distinction between size of the pie and size of the pie slice. People who want us to marvel at the size of the pie and just ignore the skimpiness of our particular pie slice are the problem. That they turn around and say "But its Pie!!" doesn't cut it.

In 1989 to 1999 income inequality may have been growing. Great, I don't have a problem with people getting rich. As long as unemployment was dropping and real wages increasing why should I care? But under Bush II both stalled while the income inequality continued to increase. Thats the nub.

[Emmanuel]

Mr. Reynolds,

This story is getting stale. If you are truly convinced that your take on inequality is more accurate, then write an article and get it published in a respectable economics journal.

Waging back-and-forth debates in op-eds and blogs will not get you much intellectual credit.

[calmo]

The scholars are reluctant to leave their trenches of finding errors in their opponents positions. 2 mistakes since 1992 is one boast, but I wonder if there aren't more.
Not exactly scholarly in the way that this is:My only "false accusation" since 1992 involved a careless but irrelevant mistake last March, which I acknowledged at the time on Mr. DeLong's blog. It concerned a column in The Washington Post that claimed "the Internal Revenue Service" had reported that the top 10 percent of households earned 44 percent of all pretax income in 2003. The source was a short paper by three statisticians, two of whom -- Michael Strudler and Tom Petska -- work for the IRS. But that does not make it official IRS data. and minimizing the damage to something that should be stamped (according to AR) "irrelevant" even if it sounds like what it is: petty, and matched by more of the same.
Or the way this is:When I described the much smaller estimates of the top 10 percent's income from Census and the Congressional Budget Office, Mr. DeLong discovered: "Reynolds is wrong. CBO estimated that for all households the income of the top tenth in 2003 was 37.2 percent. ... Reynolds' 38.3 percent came not from Table 1: All Households, but instead from Table 3: Elderly Households." That is true. I missed that fine print when the spreadsheet popped up on my monitor.

How does the fact that the correct figure is even smaller than I said (37.2 percent, not 38.3 percent) debunk my skepticism about that bloated 44 percent figure? Definitely we can all order our numbers, so one eva-so-scholarly person has to wonder about the genuineness of this question: who is insulting whom? Especially in light of this:At that time, Mr. Krugman objected to what he called my "main" argument. I argued that short-term changes in the estimated wealth of the top 1 percent could be distorted by a small handful of people ("outliers") with huge windfalls. Think of the two founders of Google getting $12 billion apiece when the firm went public. If they show up in a sample, how meaningful is the average going to be? Clearly recognizing the problem of sampling the income distribution that occurs within the top 1% and not the top 10% of the sample.
Conceding the point for we less enthusiastic scholars, no? How can anyone (esp scholars) entertain worries about the sampling procedure for handling outliers without acknowledging the emergence of an income distribution that has outgrown the customary procedures for measuring it? (I'm sure real scholars bite in here and argue that this was not just an unfortunate oversight but something less innocent and more mendacious...but we non-scholars are incorrigible.) [Actually, we have more common instruments than the gini coefs and CBO stats that give us the picture. Ok, that picture is mostly supported/confirmed/verified by scholars who put numbers to this view, occasionally making significant adjustments to that picture. Here: the disparity of wealth and income is increasing (or not if you are Alan Reynolds).]
Now the tuff part: making this palatable for both the scholars and rest (this means you maria). Alan deserves a salute or 2 for giving us a mention in his much larger forum because I like to think we mostly raise the bar. [That would be for everybody and not just the scholars who know just how to solve this outlier problem.] So we could have even more voices here soon and mostly we all grow with that, yes?
We are informed by opinions of course and we have our favorites, not all terribly scholarly (this is one people) and some downright untrustworthy (the marketing is everywhere and making more impressions than we care to admit).
So don't expect the scholars to reshape our opinions about this issue on the basis of a very fine and well argued essay...as anne might say.

[evagrius]

Why does no one mention the rise in Food Stamps recipients?

That rise may not be a measure of inequality but it should be a concern. If more people are eligible for Food Stamps, ( and the income level for eligibility is 100% of the FPL after minimum deductions for rent and utilities), then shouldn't that also be taken into account?

[dryfly]

There is a lot of explaining left to do, so stay tuned.

I'll try not to hold my breath waiting.

BTW - the biggest single reason average Americans scoff at the suggestion 'income inequality isn't as severe as you think' is they *KNOW* better but this view isn't 'salient' yet.

Workers don't have to see the statistics to see they are falling behind - it is obvious in material ways the statistics don't always show. But it isn't so bad yet that they feel motivated to do something about it. That condition could change in a hurry.

I was at an extremely high end jewelry store over the weekend with my wife & daughter... buying a 25yr anniversary present for one & a college graduation for the other. This is the kind of place that although it is in a very nice & crime free location - they 'buzz' you through multiple levels of security. Very good security - not 'show' security.

My typical but variable income is a 'std dev or two above average' but I am by no means 'rich'. We bought what I thought were 'outrageously' expensive items on the idea that this happens once in a lifetime & when we're gone I want to leave the future family something timeless that will pin these dates in family memory. I have similar hand me downs from my family. This is the kind of place that has full trace & documentation of the stones so even if pricey you at least have some chance of future appreciation.

It was a semi-private environment but not so private we couldn't ease drop. Probably NOT an accident. There were a number of similar semi-private showings going on at the same time around us.

In one near us we heard a woman tell her friend she had bought a couple other items last weekend and just wanted to top off the set. The thing that blew my wife & daughter away was that they had looked at the same pieces earlier and each piece cost more than twice what their car cost new - way over our budget. These women bought a couple pieces from that set (rings & necklace - large highly graded diamonds) right then and there - on a whim.

And we weren't completely ignorant either, didn't just fall off the turnip truck. We had already gone to a lot of jewelry stores in the process of getting what my girls wanted - but we had seen nothing like this at any of the other stores.

My daughter mentioned that those other women must be really rich... my reply to her was 'maybe but probably not... they certainly have a lot more money than we do but if they were REALLY rich, they'd be getting completely private showings and we'd never know... the real rich are out there but are invisible to us'.

Now my daughter goes to an expensive eastern private 'engineering & b-school' university (she got awards & scholarships galore or it would have been state u for her)... so she sees the 'shadow' of money but even this took her by surprise... especially after she got home and looked up and down the street of our decidedly working class Midwest neighborhood... as a contrast. You could see the wheels turning in her head.

The people of my world know those others are out there. And as long as the people in my neighborhood continue to have 'good' blue collar & mid management jobs with pay & benefits sufficient to pay for their a modest middle class lifestyle - as long as that continues - there will be no trouble.

But God help those ladies at the jewelry store & their friends & family should things continue to erode for the workers in my neighborhood. Because they will not starve in the cold alone.

The WSJ should spend a lot less energy trying to convince people everything is 'just fine' and a lot more energy making sure we have good policy so things really remain 'just fine' - and not 'just fine' for their current 'constituency'.

The best assurance that the rich keep their heads is that the masses stay relatively well off.

Just something the WSJ Op Eds should think about - but then I'd guess many on that board haven't been in a neighborhood like mine in years - if ever.

[Lafayette]

Reynolds: "My Journal article said the Piketty-Saez estimates overstate top percentile shares by understating total income. The graph shows that half of the alleged increase in the top 1 percent's share happened in two years -- 1987 and 1988 -- and much but not all of that can be accounted by a rush to move business income from the corporate to the indivdiual tax form."

Piketty's work shows that the top 1% have obtained between as much as 20 and as low as 8% of income during a period ranging from 1915 through 2000. The lower range lasted from 1953 to 1983, before it spiked back upward.

The Picketty-Saez work also shows that total wealth over that same period (15 years less than nearly a century) has ranged from 40% down to 20% for the top 1% of the population. From 1946 onwards (to at least 2000), total wealth ranges downward from 25% to 20%. It has remained constant at the latter range steadily since 1975 – that is, for more than a quarter of a century. (Meaning over multiple periods of history in which economic factors can have varied enormously. What does this indicate? That wealth accumulation is fairly independent of time, since it is inherited.)

The only way to deny the above evidence is to attack the methodology, which you have attempted to do.

Nice try, but regardless of your criticism of the methodology, there is no way to conclude that the wealth sharing achieved is "fair and reasonable". That means only a methodological error that disqualifies entirely the results can change matters.

And, that you have not proved.

Source of cited information: piketty-saezAEAPP06.pdf

[evagrius]

dryfly;

Is it your 25th wedding anniversary? If so, congratulations! If not, still congratulations!

[dryfly]

Ya, thx, it was 'our' 25th... how she stayed with a cantankerous nut like me is a mystery though.

[Lafayette]

dryfly: "The best assurance that the rich keep their heads is that the masses stay relatively well off."

Yeah, right. And, did you know that when ostriches felt threatened they put thier heads underground?

If you believe what you say, then you're not perceptive of what is happening to the lower and lower-middle classes in America today.

Not to worry, you are not alone in doing so.

[evagrius]

dryfly;

Some women like cantakerous nuts. The Best to you and your "honey", ( as an old dear friend called his since departed wife).

[wcw]

In re: email, I agree that you (and we commenters generally) have been way too gentle. Once Reynolds poked his head in here and both utterly miscast a research paper while cherrypicking a pullquote and misunderstanding a regression, I lost interest in engaging him. To see him chanting the same, tired obfuscations in comments again like some medieval flagellant is profundly depressing.

At times like this, I wish Dante were nonfiction.

[dryfly]

Yeah, right. And, did you know that when ostriches felt threatened they put thier heads underground?

If you believe what you say, then you're not perceptive of what is happening to the lower and lower-middle classes in America today.

I'm very perceptive of what's happening in lower & middle class America - that's the world I live in. I cross over both above and below my 'class status' due to the nature of my business & where I live... that used to be common in America, class mixing... not so much anymore.

Things are stable now. People are mostly complacent. That's not the same as saying it will remain that way.

[evagrius]

dryfly;

Then you're a "Bohemian" according to Paul Fusell.

My former employment exposed me to a variety of income classes. I agree with you. There's an unstated, unverbalized, (I know, that's not a true word!) recognition by quite a few working stiffs that they're being had.

As bad as it may sound, I wish Reynolds would lose his job and have to apply for Food Stamps. The eligibility worker would have a great laugh.

[dryfly]

As bad as it may sound, I wish Reynolds would lose his job and have to apply for Food Stamps. The eligibility worker would have a great laugh.

He might not be clever enough to work through the red tape. People on the street might not be educated but few are 'dumb'.

[Tia]

Stick your fingers in your ears and yell real loud. The arguments raised against Reynolds and the tactics of personal attack belong on the playground but, if that's all ya got then that's all ya got.

[evagrius]

Tia;

Could you clarify what you wrote?

[Real Person from the Real World]

The NY Tumes just had an article (1/8) about a report from the congressional budget office: "Households in the top 1 percent of earnings, which had an average income of $1.25 million, saw their effective individual tax rates drop to 19.6 percent in 2004 from 24.2 percent in 2000. The rate cut was twice as deep as for middle-income families, and it translated to an average tax cut of almost $58,000."

I commented elsewhere (discussion about ASSETS) about a radio ad in the chicago area, soliciting people with a million plus to manage, to put the money into a particular bank, and the bank would make a donation to the symphony for EVERY MILLION DOLLARS put into the account! I was amased that there could possibly be that many people out there, with the kind of income to generate that kind of wealth, that the bank could put out ads! All some other poster to the blog could say in comment, was that banks over charge for managing money! Nothing about this kind of family income being common enough for a bank to put out an ad about it! When I was a kid, just having 1 million made you wealthy, now that is not even uncommon!

Well, the congretional budget says that the Bush tax cuts let people making over 1 million take home more of
that money. Most people I know are barely scraping by. I think it is pretty obvious, that we are developing a 2 tier society, with very well-to-do people at the top, with plenty of money and health care, and people at the bottom with low incomes and no health care. Unfortunately, the ones at the top aren't interested in helping the ones at the bottom, by giving anything up, to help with health care. Health savings accounts will only provide tax shelters, to shelter more of their money for those already with enough income to buy whatever health care they need.

[kostas]

Marx argued that the laborer will forever be earning the cost of subsistence, because if he got more he would be able to multiply (make more children i guess) therefore increasing supply of labor and reducing the wages back to subsistence.

A friend of mine pointed out that his argument really doesnt apply because people have less children not more when they prosper, but i think one can substitute the "illegal immigrant" -- "indian outsourcee" -- "chinese factory worker" into his mechanism for wage adjustment. Marx strikes me as being right: the poor slobs who do all the sweating will always have nothing.

Marx also said that the laborer has no negotiating leverage because the only thing he has for sale is his labor, and neither can he hold it back if demand is slack and wage is low. He is forced to work regardless.

I have long ago decided for myself Marx was right, thats why i decided to become rich myself. As for all the leftists shedding crocodile tears for the poor slobs, i say ... go back to sipping your capuccino.

PS Just in case my rousing words stir revolutionary urge in you, consider this:
The poor slob still has nothing under communism, just the capitalist exploitation is replaced by the state machine exploitation. (Remember Soviet Union? Been to China lately?)

[dryfly]

PS Just in case my rousing words stir revolutionary urge in you, consider this:
The poor slob still has nothing under communism, just the capitalist exploitation is replaced by the state machine exploitation. (Remember Soviet Union? Been to China lately?)

Been to Scandinavia lately?

No one is advocating Soviet style or Maoist Communism... that is non-sense. However get enough inequality and you might just get it, regardless.

But instead maybe try a variant of a truly 'mixed economy' where the animal spirits of capitalism are harnessed for benefit of all to a greater degree and not just running free for the pleasure of a very few.

BTW - I have family in Norway and they do pretty well (and are decidely not on the dole, they are not idle slackers) - they love it and wouldn't trade it for anything. Get real kostas - there are options between banana republic and the culural revolution. Open your mind and your ass will follow.

[kthomas]

kostas was absolutely correct on Marx: so long as capital is free to move between borders and labor is not, workers will always be shafted. Marx was a genious.

Still, simply believing in Marxian economic theory to justify one's own greedy little view of the world just proves, once again, how morally bankrupt the nation has become.

[evagrius]

I'm fascinated by the reference to the "Democracy Project". Juxtaposing Krugman and a refence to a college course, "The Phallus", is an interesting way to dismiss the entire subject of income inequality.
Interesting is the dismissal of any problems that can arise from income inequality. I notice the author does not mention health outcomes, crime, etc;etc;

[kostas]

I have lived and worked in Scandinavia too. There the problem is completely different. When i complained to my local frieds that my boss, a renowned professor was getting only about 40% more than the cleaning lady, do you know what the Danes in the room said? Well they said, the professor is doing the job he likes and the cleaning lady presumably doesnt so the pay is very fair.

Well they can do what they like in their own country, but it turns out many Danes who want to achieve more leave their supposedly prosperous country (one of the highest per capita GDP in the world) for countries with better opportunities like US, England and even Netherlands.

I left that country too, before my contract expired, because i thought my own pay was not fair for the qualification i have.

[kostas]

i just want to add that it IS morally wrong to pay good people too little, as the example of my professor shows. People like him work a lot harder that the cleaning lady: professor typically works 12hrs a day, and does a lot more than his job immediately requires. The cleaning lady works 9-5 nominally but has more or less nothing to do after doing the required morning swiping of the floors. Nobody could compell her to do more than the job description.

[Lafayette]

"A friend of mine pointed out that his argument really doesnt apply because people have less children not more when they prosper"

The arguments applied in the period in which Marx observed conditions at the end of the 19th century.

Marx did not count on massive education, the ability of serfs to be mobile (many immigrated from central Europe to either the US or the Europe), the ability of FDI to cross borders and to employ labor at increasingly higher rates (in order to attract them) ... and a host of other factors that did not correspond to Marx's vision of exploitation.

I will not diminish the exploitation of the poor by the rich, which truly existed. In fact, it exists today, and nobody is ready to undertake a revolution to change matters. Why?

Because if Marx believed that religion was the pap of the masses in the 19th century, then consumerism is the pap of that same mass in the 21st century.

All it takes is to raise people above the subsistence level, to that of a middle lower-class to a lower middle-class, and they will be perfectly happy that the returns to capital take the lion's share of revenues obtained from their labor. And they will remain blissfully ignorant of the social injustice incurred.

Give them celebrities who turned from poverty to richness and they dream it can happen to them. Give them low cost Chinese gadgets for the house and they believe that "life aint all that bad". Give their children an education and they believe their children too have a chance to become rich. Give them soap opera TV so that they have a distorted sense of reality, and they will dream along. Give them TV personalities to tell them what to buy, how to decorate their house, and what to read ... and they will look no further in their herd instinct to "be just like the Jones family next door".

It is a perversion of the American dream. That the riches accumulated by the truly rich (or filthy rich) are accessible to one and all. Nothing could be farther from the truth (of life as we know it).

When they look for values, they will find very little in the civic courses that are taught in secondary school. So, once again the couch potatoes look at the TV to find some preacher telling them in what to believe (all the while making millions preaching "the good word". Where in the bible does it say, "Go ye forth and make a mega-buck"?)

One cannot build and run a society on needs that are met by mass consumerism, whether those needs are for products or ethics or morality or even good sense. One cannot build a functioning society on simply financial metrics, where people understand quickly the art of breaking off wealth from realty manipulations (either speculation or mortgage renegotiating), in order to go off and buy the artefacts of "the good life" (whatever that means).

Marx got it wrong. But, western society's collective mistake was to believe that the demise of communism PROVED that capitalism was right all along.

This latter did not happen. Far from it.

[Lafayette]

kostas: "The cleaning lady works 9-5 nominally but has more or less nothing to do after doing the required morning swiping of the floors."

Perhaps, but the cleaning lady knows when the halls are clean. Cleanliness, or its absence, is readily observable by the naked eye

Does your professor "know" when his students have mastered properly a subject? What indicates that such has been, in fact, achieved? Final exams?

If he wrote the exam questions, then all a teacher can be assured of is the quality of regurgitation of that which they have been taught. But, is that "mastery" of a subject?

I submit that it isn't. What is necessary is that they develop the analytical skills to articulate their own notions, opinions and conclusions ... and defend them in public debate (for instance in a forum such as this one). This is called V. A. T. – value added thought.

I don't know how many "brilliant students" (according to the SAT's) have made a mess of their lives because they could not transcend "academics" and cope with "reality".

[kostas]

in the US, you meet alot of people who have a business of their own of some sort, some of these "capitalists" (myself included) make far less in this way than they would have if they worked for some corporation. That because we value the control of our own destiny more than the money. There are also plenty of people who actually would be working in a minimum-wage job if they didnt take the hard choice of starting their own business.

Indeed it is much harder to bring up a business to make say 50K a year, than to find a job paying that much. This is the reason most people will continue in their jobs, even while whining about being exploited by the evil capitalists.

So even though Marx was and is right, the answer is personal choice.

By the way, the super-rich who do not sweat as much as the small businesspeople exist also in Scandinavia. They too have their tax loopholes, and do register the capital-intensive businesses offshore. I bet if Denmark or Sweden found a way or a will to screw their own super-rich, those countries would be a lot more like north korea than what they are now.

[Lafayette]

« some of these "capitalists" (myself included) far less in this way than they would have if they worked for some corporation.”

A capitalist is anyone who ventures their own money to start a business.

I don’t know of any plumbers or electricians (in France) who have ever gone on the dole. They have large frequencies in their income, but the construction industry employs them regularly.

On the other hand, I know a great many “managers” who have not known the same serenity of long-term employment. Me included.

Each case is particular in a diverse market economy.

“There are also plenty of people who actually would be working in a minimum-wage job if they didn’t take the hard choice of starting their own business. »

You may (or may not) be touching on a transitional phenomenon as western societies traverse from the Industrial Age to the Information Age. The industrial age rewarded “brawn”, the Information Age rewards “brain”. This brawn-brain transition will take some time, but it is inevitable.

But, neither does transitioning mean that blue-collar workers will be all on the dole. It means that many of them who are in their fifties, and have never known any other work, will no longer find work for which they are most competent. They will have to satisfy themselves with service-sector jobs (that don’t require all that much brain) and are consequently low-wage paying.

Or, they will take the high-road and retrain themselves into service-sector jobs that pay well … like plumbing or electricity. The key is retraining into jobs that are “local orientated” and difficult to export. I don’t know anyone taking a flight to Peking for a haircut, for instance.

America has, over the past century, fixated on the “lowest cost option”. This means, as Galbraith noted in “The Affluent Society” in the sixties, that craftsmanship become devalued and finally the art of craftsmanship is lost. Galbraith used this reasoning to typify America’s thirst for European products that were, at the time, a source of its current account deficit.

If people want dining room sets in wood and there are no carpenters willing to make them except at higher prices, then the product will come from abroad where the labor price is right. And, carpentry craftsmanship will reduce considerably.

But, how about those carpenters who find a “niche” market for genuine products that Americans want? They succeed. (I hope.)

If Americans persistently insist on cheap, cheap, cheap ... that is precisely what the world will supply. At the same time, the pressure will continue on segments of American employment that cannot sustain the onslaught from cheaper prices abroad.

In fact, it's up to Americans to decide ... but what is illogical is to think that they can have high-paying jobs that allow them to pay for cheap products from abroad. That will simply no longer work, neither in America nor in Europe.

“I bet if Denmark or Sweden found a way or a will to screw their own super-rich »

But they DO screw their rich. The rich put up with it for as long as they can, and when they have that nest-egg abroad, they jump ship, only to be replaced by another entrepreneur looking to create his/her nest-egg.

Life goes on … nothing really changes. Except in Sweden, where the rich are rightly taxed to return to the community what the communal market economy allowed them to obtain, their riches.

It’s all a question of how many zeros are on your aggregation of net worth. That a Gates or a Buffet have all those zeroes does not impress me in the least. It simply means that marginal taxation rates are not high enough and not sufficiently broadly applied.

Does that mean, for instance, that no Bill Gates will come around to found Microsoft and offer the world MS-DOS, then Windows? Well, if he doesn’t, then Linus Torvalds will come up with Linux and make it an Open Source product – free, gratis and for nothing.

These two juxtapositions, Gates (American) and Torvalds (Finnish) cannot give a better example of the conceptional difference regarding entrepreneurial activity and wealth accumulation between America and the US.

[hmmmm]

"established the fact that the distribution of income is unfair"

this is hilarious, established a fact that something is -insert subjective adjective here-? ah the good ole US, where people are fleeing to other countries because of the unfairness of our income distribution, our businesses are failing and our middle class is starving in the streets. Aren't you the 'reality' based community?

[Lafayette]

hm: "Aren't you the 'reality' based community?"

That depends upon from where you observe the reality:
- A poor blackman in his New Orlean's house looking at a dike six feet above his head?
- A young couple, no HS diplomas, wife pregnant, no job so no health insurance, looking for a pediatrician in a small community where the general hospital is in a major town 75 miles away?
- A young mother, unmarried, drug addict, pregnant, prostitutes for her addiction, has a stillborn baby?
- An elderly couple, spouse takes seriously sick with an illness, loses his job, wife must look after him and can't work, and their house is repossessed.

Wherefrom is YOUR point-of-view on America? From far higher-up evidently.

[kostas]

> Except in Sweden, where the rich are rightly taxed to return to the community what the communal market economy allowed them to obtain, their riches.

We need to go back to Marx here. Marx explains that as long as the means of production are in the hands of the capitalist, the laborer will not own anything but his shirt. At issue really is this matter of principle, which is ownership of productive assets. From this point of view, the exact ratio of the number of chinese toys that the top 1% of the rich can buy versus the bottom 10% is completely irrelevant. So tax or not tax seems like a moot point: does it really make a difference to the poor whether Gates has 10 billion or 100?

However, it can be argued that clearly there has been some progress since then. The modern society has achieved that middle-class people are able to sock up some savings into mutual funds, blurring the line between laborer and capitalist somewhat. There are also businesses that allow the bonuses to depend on the profits of the enterprise. Other people above have mentioned the niche freelance professions, the role of mass education in social mobility, etc...

Of all these nice things only education benefits from higher taxes, but perversely we are discussing not how to spend tax money but how and whether to use taxation to "reduce" inequality.

[Movie Guy]

kostas - "Of all these nice things only education benefits from higher taxes, but perversely we are discussing not how to spend tax money but how and whether to use taxation to "reduce" inequality."

Kostas, what do you recommend?

[Lafayette]

kostas: "From this point of view, the exact ratio of the number of chinese toys that the top 1% of the rich can buy versus the bottom 10% is completely irrelevant."

Well, whatever else point of view are they.

We are not debating the purchasing power parity as regards Chinese toys, but in a larger sense the distribution of corporate dividends.

If you are a businessman that owns a company, you have the right to enjoy full entitlement to its profits. That is clear.

What is complicated, however, is when you decide to leave the cosy confines of a private company to go public. You do that to obtain capital (from the stock market) in order to hire and expand operations.

Two obligations are therefore founded: The first is to your employees and the second to your co-owners (shareholders). Both have participated in the advancement of your company, the former with their work, the latter with their capital.

But, wait, only the shareholders (including yourself) partake in the profits? Why? Is it correct and justified that ONLY shareholders partake in the profits? I have made the argument above (elsewhere in this forum) that it is not correct.

Why not open the shareholder base as part of their compensation to employees. There are a number of ways to do this. The only questions are (1) what percentage of their compensation should be in stocks (and at a cost of 0 or some percentage of its market value) and (2) are there other metrics that would qualify their engagement (such as cost, or productivity, etc.)

But, that is not yet the hard part. Which is this: Whilst you are majority or even minority owner of your company, one day you will no longer work there.

You will either sell your holdings or you will transfer them as an inheritance. Now the moral dilemma is more obvious. Yes, it is your right to do with the equity value as you see fit.

But, what right have your inheritors to live off the labor of others and contribute nothing to the effort? All the right in world, some would say; because the stock ownership belongs to them.

Others (myself included) will say that company ownership gives a necessary but a quantifiable right to share in the profits. In fact, there is a value-weighted judgement as regards the share in the profits that is a function of the contribution made. Employees contribute their labor, but non-employee stock owners simply assume the risk of holding the stock.

Which class of ownership deserves more the profit value generated, the employees committed to the company or the passive stock-owners with no personal involvement. They are market speculators (since they assumed a risk in purchasing stocks), but only spectators to the mechanism of generating profits.

And, when it comes to top-level remuneration, what is the mechanism that keeps top compensation in a tight relationship with, at least, the average compensation in the company. What right does top management have to obtain compensation that is complete disproportionate to other employees who also contribute their effort to profit making?

[kostas]

There are many companies are run mostly for the benefit of their employees. For example, Goldman Sachs distributes billions of its profits as bonuses. Intuit gives so many stock options to its employees that that there nothing left to pay a dividend, shareholders have to rely entirely on long-term revenue growth for gains. General Motors and Ford are "owned" by their retireees, since the entire value of their stock equity is dwarfed by their pension and health care obligation that they legally owe to the employees. United Airlines gave its employees 60% share ownership of the company in 1994 (?), but unfortunately the trade unions did not feel that it was worth something, and demanded all the wage increases they could get to the detriment of the corporation, which as you well know led eventually to bankruptcy.

I knew a guy at Medtronic who was entitled to buy restricted stock at 20% discount to market value, but didnt buy any because he thought it too risky. He was a fool, but we can now see why it is the shareholders, regardless of whether they are the founders, employees or heirs of the super-rich who are righly entitled to the profits. This is because it is only the shareholders who are taking any risk, and if risk-taking does not pay, the world will stop turning. In the case of high-tech companies where the employees are taking a career risk by joining a startup, they are usually renumerated with cheap stock.

So anyway, capitalism evolves and becomes more complex over time, and the middle-class as a described above are getting alot of the benefits of the capitalist system these days.

Now, going back to the subject, noone doubts that there is inequality, I involve Marx to point out that it is the natural state of things. I am also making the case that broad sections of society are now benefiting from capitalist system unlike say even 50 years ago. Noone doubts also that over time the poor are also better off in the absolute sense when the economy grows. But then the shrill voices are crying out that the "inequality is increasing" (in the realative sense), well if you couple that with the assumption that inequality is bad, then you logically arrive at the conclusion that things were better before than they are now. I say that is preposterous.

[Lafayette]

kostas: "So anyway, capitalism evolves and becomes more complex over time, and the middle-class as a described above are getting alot of the benefits of the capitalist system these days."

If you wish to content yourself with a personal observation of the circumstance, then you are obviously free to do so.

I will remind you nonetheless that the germ for this thread, if you care to read it, concerns the "inequality" of income distribution and its consequence, wealth distribution. That 20% of the Americans declaring income taxes should obtain 80% of the wealth generated speaks wonders to anyone willing to believe it. I do.

You think that all is well in the best of all possible worlds? Fine. The cases you report are a few examples of adequate corporate governance. They are by no means the norm, and far from it.

This past week's reports as regards the indecent severance compensation of Nardelli at HomeDepot is more like what is happening at a good number of companies. Top directors are skimming shareholder value and walking out the door. Worse, it is perfectly legal. They are the 21st century pirates of business.

Or, top directors are relegating to themselves inordinate amounts of "performance" stock-options as if they alone walked on water to generate corporate profits. The grunts did what? Just show up for a 40-hour week?

You are stuck in the rut of "conventional wisdom". In America this devolves to "well, it's been that way since the dawn of time" and since it generates so much wealth for so many people it can't be all bad.

When one scratches the surface, however, one realizes that all is not well in the profit kingdom. Also, other countries (the EU for example) have shown that they can have BOTH economic growth and a decent social-services structure that permits all its citizens to live with a modicum of personal dignity.

And, it is time Congress stepped in to reinstitute fairness. The responsibility of Board members is inadequately defined in law, and the manner in which shareholders review performance of a company is laughable to the extreme. The voting procedure is perfectly manipulable by public corporations.

The King is naked.

[Jim O'Sullivan]

That's right! Why bother with details when we can just say that we all disagree with him, and therefore we must be right!! See, he's wrong!! That's it!!

[Tim Henrich]

Maybe this is why he put it in a book rather than in peer reviewed articles.

[Real Person from the Real World]

When you are paid a salary of $11/hr or less, and have no access to health care, and you see people arguing about getting $120k per year, when a company is offering only $110k and generous benefits, that screams inequity. I am in that situation. And the person arguing about the $110k was whining about "quality of life" issues. Bah Humbug! People making over $80k per year all seem to live in a fantasy world, with little understanding of those of us who have little. Quality of life, INDEED! BS.

[Lafayette]

NE: "What Else Could We Do with $300 Million a Day?"

This question is a useful legacy for Americans who, the next time they want to elect a Republican from a state that contributes heavily to armed forces enlistment and officer corps, should deliberate the answer.

[Lafayette]

kostas: "I involve Marx to point out that it (inequality) is the natural state of things."

Marx was historically accurate as regards the problem but his solution was deeply flawed.

Inequality of what? Yes, income. But, abilities as well. The human species is a marvellously diverse organism especially as regards skill and competence. Add to that complexity a touch of chance (randomness) and we arrive at inequality of incomes. (Add a dash of cronyism and the cake is baked - we have malfeasance at both top government and corporate levels for purely personal gain.)

Accumulating riches is a well-ingrained notion in America. We feel that if it results from the sweat of our brow, then we deserve all that our efforts will obtain. It is a sort of birthright in an individualistic society.

That's fine, as a perspective from the top. But, from the bottom, Marx's perspective, the view is different. From below, the notion of community values prevail and inequality becomes not only cumbersome but an oppression.

The two views must be reconciled in a functioning democracy. Achievement is surely based upon the human will to succeed. But, does success necessarily and automatically give us an inalienable right to accumulate riches?

Methinks not. Limitless riches are beyond anyone’s real need. Personal net asset value becomes a scorecard in the game of life, as if the economy were a sport and only winners mattered. And the other players, especially those that come in last? What of them? Are they merely road-kill?

The truth regarding the distribution of wealth in America is somewhere between too much and far too little ... along with fairness, another cornerstone of a democracy which - despite its failings - remains a model for others.

A model, not THE model.

[Lawrence Franko]

It amazes me that so many people have so much time to spend envying others their income and wealth. If you are so bitter about others' wealth, go think of some way to earn more money! Killing others' cows so that every one can be equal and have no cows was tried in the Soviet Union. Look where that got them! We might do a lot better were people to remember the 10th Commandment (the one that says Thou Shalt not Covet) and the 8th (Thou Shalt not Steal.) Only in Marxism is there something holy about everyone being equally miserable. Why not try to uplift the poor for a change, rather than attack your neighbors who might, or might not, be better off than you are?