Jamie Galbraith on Inequality

Brad Delong posts Jamie Galbraith's discussion of income inequality from Mother Jones' The Econoclast:

Jamie Galbraith: Technology, Construction, the Military-Industrial Complex, by Brad Delong: Jamie Galbraith:

The Econoclast: [I]ncome inequality... using tax data recorded by county... declined quite sharply after 2000. Why? Because it tracks, with uncanny precision over more than 30 years, the nasdaq stock index. After declining in the early 1970s, both indices rose almost steadily until they reached an all-time peak in 2000; both fell thereafter. In other words, income inequality in the United States has been driven by capital gains and stock options, mostly in the tech sector. This is what separates that mysterious top .01 of 1 percent from the rest of us: They're the people who run Google, Oracle, and eBay.

County data confirm this: The big income winners in the late 1990s were concentrated in just four counties--Santa Clara, San Francisco, and San Mateo in California (all in the environs of Silicon Valley), and King County in Washington (Microsoft) as well as in Manhattan, the home of the bankers who made it happen. Take the big tech counties out, and the rise in inequality between counties in the late 1990s disappears. And, of course, while these counties were big winners through 2000, they became the big losers in the Bush Bust.

Though the tech bust reduced inequality in America, it doesn't follow that only rich places lost out, still less that only poorer places gained. In fact, there was one group of counties that did exceptionally well in the first four Bush years. Guess what? They're concentrated around Washington, D.C. Of the top 10 gainers from 2000 to 2004, three are Washington neighbors (Fairfax, Montgomery, and Baltimore), and one is D.C. itself. Among the top 35 gainers, there are five more counties in the immediate vicinity. Conversely, none of the top 50 losers are near the capital.

This should remind us that the Democrats under Clinton fostered a private-sector investment boom, fueled by technological optimism and foreign money. In economic terms, Al Gore really did invent the Internet, in a way; his cheerleading (and Clinton's, and Greenspan's) steered money into that nascent boom.... [T]he tech boom was also good for most of the rest of us: We had nearly full employment, rising wages and productivity, and little inflation; we also got a lot of fiber-optic cable, cheap phone calls, and fast video games.

Bush inherited a bust. He fought it by cutting taxes, with a strong tilt toward the rich; together with low interest rates, this fostered a vast housing boom, now deflating. Much of that housing was high-end, as any visitor to the posher suburbs can tell. And though it was stronger in some places than others, it was widely diffused. Was this the right use of resources? Not in my book. But all that construction did keep the economy going when it might otherwise have tanked.

Bush's other big policy was to increase government spending, above all on the military. Who profits? Private contractors, consultants, Beltway bandits. And the epicenter was Washington and its suburbs, home to not only the Pentagon, the cia, and the National Security Agency but also, not coincidentally, defense contractors such as Lockheed Martin and General Dynamics.

Too bad for Bush: Most people don't live in the Beltway Bubble--but they can easily see the gap that separates them from those who do. It paints a grim picture that, under Bush, the government and housing are the key growth sectors since 2000. It's even worse that the capital region was the only major geographic center to show concentrated gains...

It just so happens that Jamie and I had an email exchange on this yesterday as part of another discussion we were having. Here's a bit more from the email:

Jamie Galbraith: ...I've measured two things: inequality in pay (particularly but not exclusively in manufacturing), and inequality in reported (taxable) income between counties, from the local area personal income statistics. ...[T]hey may cast some light on the underlying economic trends.

The various pay inequality series peak around 1983, rise again a bit in the early 1990s, and generally decline after 1994. That is because as overall economy improves, hours rise more rapidly at the low end of the distribution. (It has nothing to do with changes in relative hourly wage rates, which are not observed directly in the data, but which I believe to be highly stable in general.) For this reason, I have no problem believing that in general the structure of pay became more equal after around 1994.

I keep saying "in general", because a counter-trend of exploding pay develops with the internet boom in the late 1990s, entirely concentrated in the tech sectors. But this is not really a phenomenon of the wage distribution as we normally think of it: it reflects the effect of capital inflows disbursed as salaries, unique to that particular sector, and very temporary as events proved.

The measure of inequality of reported income, calculated between counties, rises to a peak in 2000 and falls thereafter. It is entirely an artifact of the tech boom, something one can confirm from the fact that the rise in relative income is heavily concentrated in the Silicon valley counties and in King County, WA, with minor effects in other predictable places. The fall in inequality afterward reflects the bust. Overall, we found that this series tracks the (log of the) NASDAQ amazingly well over 35 years or so - - a 95.5 correlation, 1969-2004. ...

My takeaway is: it's a mistake to read political messages into rising Gini coefficients or estimates of the income or wealth share earned by some top X-ile. That George Bush and Dick Cheney ran a plutocratic administration is a fact, but it has no particular implications for a Gini coefficient. And the fact that the coefficient declined on his watch does not make Bush into a progressive. It isn't even good news. The main cause was the tech bust.

For this reason, I cringe at some of the use[s] ... of inequality coefficients... I've also never liked the constant harping on CEO pay as though it were a big issue in the income distribution; it's really a corporate governance issue. I expect eventually to be given the Nobel prize for Galbraith's Law of CEO Demography, which states that the entire population of CEO's of Fortune 500 companies is never more than 500 people at any given time.

Best, Jamie

Comments

[evagrius]

"And now that Democrats have a voice, they ought to be asking: How can our policies help revive the private sector? How can we spread the growth and employment around? After the health care boom of the 1980s and the tech boom of the 1990s, after the war on terror and its military budgets, what's the next big thing?

My candidate would be climate change, and the investments in infrastructure and energy required to control it. For there is one simple index that tells you pretty much everything you need to know. But it's not an inequality measure. It's the CO2 content of the atmosphere, and if you aren't scared by that, you haven't been paying attention."

You shoulda put this in.

Having lived and worked in three of the counties mentioned, I would argue that the income inequality was due not just to the "high-tech" boom but to the structural ( tax-wise) economic and cultural bias that favors those who are well-placed to take advantage of such booms.

If there is to be a "boom" in climate change, then it should be anticipated. The tax structure should be reformed so that the benefits are spread throughout all income groups, not just the top.

Of course, that's a pipe dream.

[Bruce Wilder]

Of course, CEO's are merely the pinnacle of a process of tournaments and social networking involving, depending on definitions, an expansive number of people. And, to keep the system of pillage going, and expand support for it among the supporting cast, CEO tenure has been reduced, even while the terms of compensation been extended into "retirement".

So, many Fortune 500 companies, though they have only one CEO (or sometimes two or three "top" executives) at any one time, they are often paying at least a half-dozen more, while motivating a still larger number to aspire, and, of course, acquiring smaller and lesser enterprises, whose executives must also be handsomely compensated.

Ah, the mysterious .01 of 1% -- how many is that?

[Robinia]

Fascinating. Consistently, many of the Manhatten FIRE workforce seem to be among that "mysterious .01 of 1%" -- giving NYS both the highest level of income inequality on a regular basis, and also a state income tax levy volatility that makes the reasonable projection of state revenues perennially a point of contention. Using the NASDAQ as an indicator might be an approach worth considering....

[James Killus]

Ah, if only the problem of excessive executive pay was confined to the CEO's of Fortune 500 companies.

If only "control fraud" was also so limited.

[James Galbraith]

In quick response to several comments:

No question, the number of people receiving excessive executive pay is greater than the 500 CEOs, and the problem of "control fraud" -- an excellent coinage due to the economist-lawyer-criminologist William K. Black -- is much more extensive.

A very good recent paper by William Lazonick, "The U.S. Stock Market and the Governance of Innovative Enterprise" details the concentration of technology sector stock options in the hands of a handful of top dogs in each company. More than one, but not usually a large number. Sorry I don't have a citation right to hand.

I made the remark, though, because the commonly cited ratio of "CEO pay to average worker pay" is (so far as I'm aware) calculated from the 500 at the Fortune 500. This ratio is going to be heavily influenced by a handful of individuals at the very top of the corporate executive pay distribution. The point being, it is not a very meaningful measure of change in the U.S. income distribution as a whole.

I regard the executive pay question as, instead, a serious problem of corporate governance.

JG

[Arne (not anne)]

If JG is correct and the cited numbers for CEO pay are based on the top N companies, then it IS a useless number. It would not represent the distribution of companies equivalently now and 30 years ago.

[Winslow R.]

Interesting.

I really have little against consolidated income as long as the income is earned in a competitive environment with open opportunity.

I have a problem with consolidated wealth as too often the people that have it needed no opportunity to earn it. Taxed properly, the 'problem' dissappears. Wealth requires protection, the more wealth the more protection. Taxes pay for the protection.

"as well as in Manhattan, the home of the bankers who made it happen."

These guys have a monopoly with little competition. I would guess Manhattan's position would be tied more closely to the yield curve than to the nasdaq stock index. With the curve inverted, they should be starting to hurt. With the nasdaq falling they are hurting just that much more.

I would also guess Manhattan ranks at the top more often than any other county.

[owen paine]

winslow brings up wealth ie net worth per household
itself not stable obviously for the same reasons the cap gains are not
they dance as paper assets will
atop stock market moves

as to real estate

buildng those big houses was not the crime

turning house lots in to beany babies and elvis plates
then injecting sectoral credit by lax standards
flow in and send the spiral gallop up

the value of locations is purely relative

zoning blockages add a very feeble supply response

making that bubble was policy
that was a crime

i believe the tulip mania was a few centuries ago
as well as the dutch lot boom
so
these things are very well understood

it was a way to get a lot of weebles into hock
and upshot job supplying households
will now offer more job hours more desperately

-----------------

ps when will academic economists
treat jobbler households
like familly farms

jobholders need their collective actions
ie their gubmint in this case
to protect themselves
from their own part whole contradictions

job households sell hours
like farm households sell corn

if they are in debt
they supply more job hours more desperately
i'll leave it at that ....

[Meh]

This is really the conflation of a bunch of issues. I think we need to understand that many people don't have a big problem with "income inequality" per se as much as "wealth inequality" and many more people don't have a problem with that per se as much as "power inequality" and/or "basic quality of life inequality."

There are a whole bunch of statistical correlations that suggest each of these is a proxy for the next one down. Still, that doesn't mean to say that because "income inequality" is a small phenomenon, "power inequality" is also.

[Lafayette]

meh: "Still, that doesn't mean to say that because "income inequality" is a small phenomenon, "power inequality" is also."

Power inequality is difficult for most people to sense, since it is assumed and rarely apparent. Which does not make it any less real, admittedly.

Wealth inequality, however, is very visible, almost tangible - which is why people react more quickly to its unfairness.

Besides, most are quite prepared to accept a fair amount of inequality because we understand inherent abilities differ greatly amongst us all. But, that even the most brilliant should obtain such an exaggerated amount of wealth is a difficult pill to swallow.

And, when they are not brilliant but just cronies playing an "insider's game", it is a provocation to act.

[Lafayette]

WR: "as well as in Manhattan, the home of the bankers who made it happen."

And, the SEC office that let it happen, some will say, with insufficient oversight.

Let's not forget that the SEC commissioners are presently all appointees of lead-head in the MB. Even the SEC's brilliant Chairman Christopher Cox.

Chris, when did all begin to go wrong? When lawyers like you instead of economists started messing about with the SEC?