Social Norms, Business Practices, Government Policy, and Inequality

The reasons that have been given for changes in inequality in recent decades can be placed into four categories: technology, globalization, sociology, and public policy. Much of the debate over inequality has revolved around which of these is the most important factor. Technology, in particular skill-based technical change, is often cited but this explanation is hard to reconcile with some aspects of growing inequality, particularly the fact that much of the growth has been at the very top of the income distribution rather than more generally across educated workers.

In addition, the actual evidence that skill-based technical change explains the majority of the change inequality is based largely upon examination of the Solow residual - what's left over after we take away everything we know about - and this residual term will contain any hard to quantify variables relating to political and institutional change, not just the technical change we are hoping to measure. So it's entirely possible that previous estimates confound technical change with other factors on the list of explanations.

The point is that there remains a great deal of uncertainty about why inequality has been rising in recent decades. In the following, Robert Samuelson describes work by Frank Levy and Peter Temin of MIT. They focus on the sociology and public policy explanations of rising inequality, in particular, shifts in social norms, business practices, and government policy as reflected in the interaction between the "United Auto Workers and the Big Three U.S. automakers":

The Equality Quagmire, by Robert J. Samuelson, Commentary, Washington Post: You have almost certainly never heard of the Treaty of Detroit... The Treaty of Detroit is a ... label describing a series of landmark labor agreements between the United Auto Workers and the Big Three U.S. automakers. Starting with a 1948 contract at General Motors, the agreements guaranteed annual wage increases, job security and generous fringe benefits. As Detroit's present turmoil attests, the treaty is in tatters.

Now come economists Frank Levy and Peter Temin of the Massachusetts Institute of Technology, who resurrect the label and say it explains something much greater: the rise of economic inequality. .. . Until now, most economists have blamed the growing pay gap on skill differences caused by the explosion of computer technologies. Levy and Temin contend ... that this is too simple; they also blame a shift in social norms and business practices.

First, some historical background. In late 1945 President Truman summoned 36 business, union and government leaders to a conference. The aim: to forge an understanding between labor and capital... It failed; the postwar era began badly. In 1946 there were 4,985 strikes, involving 4.6 million workers (11 percent of all workers). Autoworkers, railroad workers, steelworkers all struck.

The Treaty of Detroit fashioned a crude truce that spread elsewhere. Between major contracts, the automakers got labor peace. In return workers got job security (reminder: in the 1930s, unemployment averaged 18 percent) and higher incomes. The treaty influenced other unionized industries, where ... similar contracts ... became common. Many nonunion companies embraced comparable norms: Workers should receive wage gains beyond inflation, job security and good fringe benefits.

The result, say Levy and Temin, was that "market outcomes" in pay were "strongly moderated by institutional factors" -- business practices shaped by social values and government policies. After World War II, many executives strove to refurbish the image of Big Business, badly battered in the Depression. ...[But]... By the 1980s this generation of business leaders had mostly retired. Companies increasingly paid what the market would bear or they could afford.

Pay gains diverged. In early postwar decades, compensation increases crudely paralleled productivity gains -- improvements in efficiency. From 1950 to 1973, productivity rose 97 percent. Over the same period, median compensation of male high school graduates aged 35-44 rose 95 percent (after inflation); for college graduates 35-44, the increase was 106 percent. Those in the top one-half of 1 percent received only a 37 percent gain. From 1980 to 2005, productivity increased 71 percent. Median compensation for high school graduates dropped 4 percent, and compensation for college graduates rose only 24 percent. For those in the top one-half of 1 percent, it jumped 89 percent.

Samuelson has already cited the retirement of image-conscious executives as one reason why things changed around 1980 and inequality began rising, and he now goes on to expand the list:

Comparisons such as these evoke images of greedy CEOs and hedge fund managers. But the story is more complicated. On the whole, the economy that produces these growing inequalities outperforms the one that created more statistical equality.

I need to break in. There's no evidence for the claim that the U.S. would have grown slower after 1980 if inequality had, say, remained stable instead of expanding.

He continues:

The norms and practices highlighted by Levy and Temin collapsed mainly because they no longer worked. The idea that everyone's wages should reflect inflation plus a few percentage points worsened both inflation and stability. There were four recessions between 1969 and 1981; by then, inflation was 10 percent and mortgage rates 15 percent. Productivity growth had plunged.

Hang on again. He's blaming both inflation and instability (business cycles) on the arrangements between labor and big business.

As for inflation, in general, if wage growth equals inflation plus productivity growth, there is no inflation pressure. So wage growth in excess of inflation is not necessarily inflationary. But more directly, the source of inflation during that time period was bad monetary policy, not labor agreements.

And I don't know what evidence he has in mind when he says that the labor agreements are the source of instability in the economy. During the 1960s we had a long period of sustained growth, so that doesn't fit. In addition, the change in the variance of output in 1984, i.e. the Great Moderation, is much more sudden than the kinds of changes he is talking about. The decline in the variance of output is puzzling abrupt, while the social, institutional, and public policy changes are much more gradual (he's also pushing the evidence a bit to make his case that there have been "four recessions between 1969 and 1981," the fourth recession doesn't begin until late in 1981 and runs through 1982). I am not saying that the collapse of unions along with other social, institutional, and public policy changes have nothing to do with the inequality growth we've experienced in recent decades, just that the changes didn't occur for the reasons Samuelson cites.

He goes on:

Greater competition -- from imports, deregulation, new technologies -- also doomed pattern wage-setting. Companies with lax pay practices lost sales and profits. Consider GM, Ford and Chrysler as Exhibit A. ...

Does exhibit A show the crappy cars that well-compensated management decided to build? I sometimes wonder if globalization is an excuse as much as a cause. Finally:

In 2008, economic inequality could become a political flash point, because the income gains at the top seem so outsize and gains elsewhere are so choppy. The very uncertainty means that, even amid great prosperity, Americans feel anxious. Whether the debate becomes an empty exercise in class warfare or a genuine search for ways to reconcile economic justice and economic growth is an open question.

That the question is open is a step forward. But finding a way to share the gains from economic growth more equitably won't be easy, and confusing the issue by claiming that more equitable distributions will lower economic growth, cause more frequent recessions, and be inflationary when there's no evidence to support those claims doesn't help at all.

Comments

[dale]

"Whether the debate becomes an empty exercise in class warfare or a genuine search for ways to reconcile economic justice and economic growth is an open question."

What if a truely "genuine" search for ways to reconcile justice and growth is through the recognition of and the full exercise of class warfare? (I'll grant that an "empty exercise" is a poor substitute for the real thing) And of course, in a democracy, class warfare needn't be via armed struggle. But still a democratic struggle for recognition and redistribution is in large part class struggle or "warfare" (in a metaphorical sense).

I don't get that people think class struggle is a bad thing. I guess it's the general aversion to conflict. But constructive use of conflict is one way to promote understanding and social progress. We are somewhat reasonable beings. But the interplay of human reasonableness and human self and group interest makes overt attepmts at mutal understanding problematic. The real world clash of interests, mediated by democratic processes, and coupled with the utopian aspirations towards equality, respect for each individual, and full mutual understanding, is a genuine way to reconcile economic justice and economic growth. Perhaps the only way.

[bob mcmanus]

"Evidence supporting the lasting effects of rising income and employment expectations and aspirations can be seen in the behaviour of wage and price inflation in the mid-1970s. In 1975–76, wage and price inflation rates fell in response to restrictive policies and a decline in commodity prices, including oil. However, only a slight reduction in unemployment rates in 1977–78 led to an increase in inflation rates once again. Events of the 1980s provided further evidence of the short-lived effects of earlier restrictive policies on wage and price inflation. Restrictive policies successfully reduced inflation in the first half of the 1980s to levels little different from those of the golden age, but at a large unemployment cost. However, beginning in 1987 with a rather moderate fall in unemployment rates from existing historically high rates, inflation rates rose until the recession of 1990
...
However, the impact of prolonged high unemployment and the stagnation of real earnings on income and job expectations and aspirations eventually worked to reduce wage demands. The high unemployment cost of reducing inflation rates in the pre-1990s period can be attributed to the job and income expectations and aspirations formed in the golden age, and continued into the earlier phases of the high-unemployment episode. The ability eventually to bring down and to maintain low rates of inflation in the 1990s can be attributed to an eventual reversal of expectations and aspirations. By the recession of the early 1990s, after 13 years of unemployment rates averaging more than 21⁄2 times their golden-age rates, inflation rates fell below their golden-age levels and remained so throughout the balance of the decade. Unemployment rates fell in the second half of the 1990s, for example in the United States, but on average the recovery in employment in the G7 (and in the OECD) was modest. Stagflation had ended as inflation had been ‘conquered’ but stagnation continued through the remaining
years of the 1990s (not shown in Figure 15). No-one can predict the future but, barring the occurrence of unpredictable serious shocks or endogenous structural changes in the economy, there seems no reason to expect these trends to be reversed in the near future. The income and employment expectations and aspirations of the average citizen are likely to remain subdued."

John Cornwall, article "Stagflation", Elgar Companion to Post-Keynesian Economics 2003

[bob mcmanus]

Sorry for the formatting. Looked ok in preview. Only discouraging article in a book I am otherwise enjoying.

[I tried to fix it - Mark]

[ndd]

I was all set to write a comment about, this is why economists don't get the respect they desire. Then, I decided to check Samuelson's resume, and I found out this:

"Mr. Samuelson graduated from Harvard University in 1967 with a bachelor of arts degree in government."

Oh. Never mind.

(Somehow I doubt that Samuelson wrote a column about class warfare as to Bush's 2001 tax cuts, though).

[anne]

"I don't get that people think class struggle is a bad thing. I guess it's the general aversion to conflict."

No; what you don't get is that there has been continual class struggle for a couple decades with a gradual relative loss of middle class economic security, no class conflict involved though.

[reason]

I wonder why people never look at demography? Could it be the massive increase in the labour supply starting in the 1970s had something to do with what happened?

[reason]

I'm not into grand unifying theories. I think it was a number of different factors working together.

But Mark is right, he is using the now standard journalistic practice of taking as given, ideas that are popular meme's but are actually empirically rather shaky.

[bakho]

Is the argument being framed backward? Historically, income inequality has been the norm for very wealthy cultures, from the Babylonians, through Egyptians, Romans, Mongols, Turks, Victorians and modern day. Is the better question, "Why was income inequality greatly reduced in the US during the period of 1940 - 1980"?

Regardless of the myriad reasons for income inequality and the many ways that individuals can acquire great wealth (read Kevin Phillips) taxing the wealthy and income redistribution is always a corrective for income disparity.

[kharris]

"On the whole, the economy that produces these growing inequalities outperforms the one that created more statistical equality."

"There's no evidence for the claim that the U.S. would have grown slower after 1980 if inequality had, say, remained stable instead of expanding."

Who was it recently that posted the egregious view that democracy inhibits growth because it leads to social welfare programs? Samuelson is at best one level up from that. He has a strong set of biases, and an even stronger need to produce essays that draw strong, critical conclusions. He apparently has not need to base either his biases or his writing on knowledge of economics or history.

[baileyman]

You gotta love these jingoistic economic analyses, I mean, folks who focus on one country as if national borders mean anything in the problem. Look around. Basically every western country has had decades of rising Gini's. Why?

Why do we now have a global housing slump? Why did we have a global commercial real estate crash in the late 80's. How are these markets connected? There are lots of problems where taking the head out of the sand is the first order of business.

[ken melvin]

I understand why some wouldn't like it, but I think a little class warfare is long past due.

[anne]

K Harris:

"Who was it recently that posted the egregious view that democracy inhibits growth because it leads to social welfare programs?"

Darn; where was this "advantage of dictatorship" discussed, either on DeLong or Thoma?

[bakho]

Income inequality can be explained by a very simple model.
The wealthy receive most of their income from investments. The poor receive most of their income from wages. The balance between wage increases and after taxinvestment income increases will determine whether the gap is widening or shrinking.

Those with the lowest incomes have very little savings or investments. They spend all their income. Therefore, they are unable to accumulate wealth to any substantial degree. Their ability to keep pace depends on wages primarily and to a lesser extent government redistribution programs such as EITC. EITC increases, the minimum wage increase and other programs under Clinton were enough to allow the poorest paid workers to keep pace in spite of the enormous gains at the top.

Overall from 1980-present, Labor policy has acted to reduce wage gains. The 10 year gap of minimum wage erosion. The anti-union policies of corporations and their legal enforcement. Corporate labor policies that minimize compensation paid to workers. Productivity gains that have decreased the numbers of workers needed. Monetary policy that finds 4% unemployment (by today’s calculation methods) acceptable. An increase in the labor participation rate from 59% in the early 60s to 66% today have all eroded the wage demands of labor.

As incomes increase the proportion of income devoted to savings AND investment continually increases. While savings is weakly correlated with income, Savings plus Investment is better correlated. Between 1920 and 1980 the return on investment in stocks was weak compared to the period from 1980 to present.

Much of the income gains by the wealthy come from investments and stocks (read Kevin Phillips). During periods when capital gains taxes are low (1981-1986, 1997-2000; 20%) or super low 2003-present (15%) stock prices have greatly increased and investors have had far less of their investment income redistributed.

A change in the tax rate of 5% of $1 million in investment income is $50,000, more than the median income. In the mid 90s when the tax rate was 28%, a decrease in capital gains tax to 15% today (13%) is an extra $130,000 per year. When those tax cuts are being invested, compounding makes them even more valuable. Government policy from 1980 to present has acted in ways to increase investment income.

There are numerous policy changes that could address the income gap, almost all of them opposed by corporate interests and politicians that dominated the federal government for much of the period from 1980 to present. There is no one simple policy that will magically increase wages or magically balance return on investment and capital gains revenue. There are a number of complex policy choices that applied over time will reduce the gap. It means going up against very powerful, greedy and wealthy special interests.

[reason]

Baileyman,
has a point. Many of these changes have been international.

Not all at the same rate or to the same extent however. But some of the influences are cultural (birth rates, participation rates, educational acchievement), some intellectual (ideas have consequences - particularly monetary and fiscal policy), some technological and some institutional (WTO, fall of communism). Americans do sometimes seem to treat the rest of the world as though it doesn't exist. (World Series anybody).

[robertdfeinman]

Of the four factors listed above, three of them should have affected other developed countries just the same. They are also subjected to technology, globalization and social policy.

What differs is public policy. The US has decreased taxes on the wealthy and has made social services harder to obtain or more expensive. The EU hasn't.

The result is that inequality in the developed countries with a high level of social programs and union power is much less than in the US. Why is it that American pundits are unwilling to look beyond our borders. They make sweeping generalizations without examining the facts.

Perhaps it's because selective use of facts allows them to continue to flog their libertarian ideas.

[Objectivist]

The four recessions between 1969 and 1982 were caused by poor monetary policy, plunging annual productivity gains, and the combination of the balooning workforce of baby boomers combined with massive offshoring of manufacturing jobs. This stuff all hit at once. That economic growth during the period overall was only a little below the average potential rate of growth was impressive, and should have been mentioned. That being said, the economy is simply not what it once was. During the post-war period from 1947-1973, the US had little to no competition in manufacturing and producing goods. Everyone else was buying. As such, income gains could be distributed widely and would not hurt. Currently, income gains can only be distributed either where supply and demand warrent (among the highly educated and productive at the margins), or among positions that are not competitive, usually by cartel or interdependence (such as cartelism among investment banks on Wall Street and else where, or CEOs and their compensation boards arranging each other's pay). As such, income inequality really cannot return like it existed before. If one tries to increase tax progressivity and unionization to the levels necessary to return equitable gains, all corporations will simply leave, rather than face the higher costs. They will all go the way of the Big Three. There cannot be any stemming of the inequality tide, unless there is an international agreement. Basically, you need one world government to sort it out.

[James Kroeger]

Class Warfare. One poorly understood truth about the class war that has evolved gradually in America is that the first 'side' to develop a sense of class identity was the wealthy. You might know these people as Wealthy Republicans. It took a while for members of the underprivileged classes to recognize the game of class warfare. With their growing class consciousness, the wealthy have tended to see themselves as a distinct class, the members of which ought to be using their resources and their education to gain effective control of the government. With that power, they'd be able to pass laws that would enhance the circumstances of wealthy people in general, i.e., make them even wealthier, and theoretically more secure.

Yes, it is a pathetically simplistic perception of reality that has caused unnecessary friction between the upper and lower classes. Incredibly, they don't even realize that they have nothing to fear from using their money resources to optimize the welfare of The Poor and the Working Class. Even if they were to tax themselves heavily---so long as they do so in a way that preserves all of their rankings within the hierarchy of disposable incomes---they would still lose nothing in real terms, in terms of their purchasing power, in their claim on the scarcest privileges that society has to offer, and in terms of their actual real possessions.

The reason they don't understand this is because they don't understand markets. Markets are 'mechanisms' that auction off the scarcest 'experience opportunities' to the highest bidders. Those who have more disposable money wealth are able to outbid those who have less. In most markets in our economy, sellers set their prices at a level that they hope will attract enough successful bidders to their auction. Potential bidders will only sumbmit their bids if they believe they can meet the asking price the retailer says she will accept

If the wealthy were to arrange to have their disposable incomes reduced by the government in such a way that all of them maintain their 'bidding advantages' relative to each other, then none of them would actually lose out because prices would drop to levels that all of them could afford. Smaller incomes would buy just as much as larger incomes could have purchased previously. This is all to say that it really wouldn't impose any real sacrifice on them if they were to accept steeply progressive income taxes and allowed the government to pour that money into real economic investments in infrastructure, pollution/blight cleanup, human capital development (more teachers/classrooms), humane health care for all, etc., etc.

They could be using their resources to help the Working Class and The Poor in a big, big way and it wouldn't really cost them anything to do so. They are idiots for not seizing this opportunity that actually exists for them. Poor them. Poor us. Poor America...

[bullbust]

Despite claims of poverty whenever pressed to offer better services, these AT&T execs are privately gloating over more than $35 billion in gross profits over the last 12 months. Moreover, Whitacre (and now Stephenson) are pressuring Congress to allow them to provide privileged Web access to their customers to companies that pay them a special fee.

The phone and cable companies claim that this sort of discriminatory “double dipping” — charging both consumers and content providers — is necessary to provide the high-speed services that Americans demand. But it’s a fundamental shift in the neutral way the Internet has always worked. In essence, it takes away user choice — the most basic tenet of the Internet — and hands it to AT&T.

“Will Congress let us do it?” Whitacre asks his colleagues. “You bet they will — cuz we don’t call it cashin’ in. We call it ‘deregulation.’

Set up toll booths. Extract rents. This is the American free market now. All this is considered perfectly normal, that the vast majority does not even see anything wrong in this! Most even think that this is what enterprise is, and admire those who get rich this way. The wealth obtained this way is just rewards, and the way to get ahead is to get in on one these "enterprises".

No wonder.

[bakho]

People died in US labor strikes through the 1940s. Relative labor peace cannot be understood without understanding the historic level of violence.

[ki]

"Pay gains diverged. In early postwar decades, compensation increases crudely paralleled productivity gains -- improvements in efficiency. From 1950 to 1973, productivity rose 97 percent. Over the same period, median compensation of male high school graduates aged 35-44 rose 95 percent (after inflation); for college graduates 35-44, the increase was 106 percent. Those in the top one-half of 1 percent received only a 37 percent gain. From 1980 to 2005, productivity increased 71 percent. Median compensation for high school graduates dropped 4 percent, and compensation for college graduates rose only 24 percent. For those in the top one-half of 1 percent, it jumped 89 percent."

Could it be that so many more people are going to college, that the value of the degree has declined. Maybe then, the way to get ahead was to go to college and go further in education, but now that everyone is doing it, it has lost its magical glitter. And what was true 50 years ago is not so now.

I also think that many people may actually like that we are lenient with those who are, because they wish that they will someday also be.
And sadly a lot of people do not really understand what the legislative actions really mean. Maybe we should teach kids how to be active in politics, and how to actually know what is going on.
Sadly, when I was in high school I thought that the tax cuts that Bush imposed would go to all equally. It is only now that I am starting to think for myself and understand that these things are not unilatteral by any means.

[robertdfeinman]

James Kroeger:
I like your take on comparative wealth, but you need to cover three other factors.

1. Sunk costs. The person who just paid $13 million for a Modigliani statue isn't going to be very happy when it comes time to sell if he can only get $5 million. The fact that he could exchange it for another item that has also declined won't seem like a bargain to him. This is why we always have inflation. People like to feel that they are getting something for nothing when the nominal value of things they own goes up.

2. Foreign competition. If the US raises taxes on the wealthy and they have less to spend they will be at a disadvantage with respect to those elsewhere who don't suffer the same fate. It seems unlikely that all the countries of the world would put wealth equalization plans into effect at the same time.

3. Capital mobility. It is too easy for people (and firms) to shift assets to lower taxed areas. Whole "countries" like Bermuda exist just to facilitate this. Putting a stop to this is not in the interests of those currently hiding their wealth, so change seems unlikely. If Switzerland didn't have Swiss banks they would be a third world country. Chocolate and watches aren't enough. Hiding wealth is very profitable.

[jamzo]

a - if i respond to cause of inequaltiy argument RE: the effect of shifts in social norms, business practices, and government policy then i am compelled to point out 2 missing governemtn policy and social norm factoids -

(source: wikipedia)

1. U.S. President Richard Nixon imposed price controls on August 15, 1971 - The 90 day freeze became nearly 1,000 days of measures known as Phases One, Two, Three, and Four, ending in 1973. In these phases, the controls were applied almost entirely to the biggest corporations and labor unions, which were seen as having price-setting power.....

2. On August 5, 1981, Reagan fired 11,359 striking air traffic controllers who had ignored his order to return to work, notwithstanding the fact that the strike was illegal under federal law....Reagan's handling of the strike proved to be a political coup for him when public opinion turned against the controllers and the union, who were perceived as being concerned more with money than with public safety.

The breaking of the strike also had a significant impact on labor-management relations in the private sector. Although private employers nominally had the right to permanently replace striking workers under the National Labor Relations Act, that option was rarely used prior to 1981, but much more frequently thereafter. Some, including Alan Greenspan, have credited Reagan's action restoring flexibility to the business environment that had prevented American companies from hiring and held back the economy.

b. i caould offer another important factor - times change and when harry truman engineered the so-called detroit treaty the us industrial sector was "king of the mountain", europe, japan, china, and russia were in ruins and us was able to thrive on a combination of domestic markets and exports

by the 1970s europe and japan had rebuilt their industrial sectors

by the 1980s, the post-wwII based us industrial sector was outdated and did not fit the increasingly international trade world, it needed to be adapted, while third-world nations were proving to be a source of cheap labor, china offerred opportunities beyond the dreams of any entrereneur who did not have to worry about cross-border barrriers to transfer of production labor

[cm]

robertdfeinman: "The US has decreased taxes on the wealthy and has made social services harder to obtain or more expensive. The EU hasn't."

Not entirely true. In Germany, the wealth tax (a general property tax levied on assessed assets) was removed in the 90's, and recently unemployment benefits have been "reformed", supposedly to get all those bums and welfare queens to get up in the morning and look for jobs. The net result has been substantially lower benefits (surprise), and introduction of a minimum wage has to be considered.

[cm]

robertdfeinman: And Switzerland has far more than just it's financial industry and accessories of fine taste. Allocation is in good part a matter of opportunity -- when one thing doesn't work, you will focus your potential on other things. If something works well, you keep doing that. That holds for individuals as well as for aggregate societies.

[James Kroeger]

The fact that he could exchange it for another item that has also declined won't seem like a bargain to him. This is why we always have inflation.
There can be little doubt that the only way America's wealthy class is going to start acting rationally is if economists everywhere were to start preaching loudly the realities of money illusion as it relates to tax policy. Yes, as educational challenges go, it would be formidible, but certainly no more difficult than it has been for economists to preach the realities of comparative advantage. That's the job of economists, isn't it? To teach the public about economic realities that may not be altogether obvious?

More on this and your other points tomorrow...

[ken melvin]

Today, labor strikes would have no effect other as a means to rally political support; 'tis in the political arena that the battle will be won or lost.

[wood turtle]

Assuming the pair, Samuelson and Thoma, are using the same neoclassical economic toolkit, why do they come up with such different answers?

says...

"Who was it recently that posted the egregious view that democracy inhibits growth because it leads to social welfare programs?"

Kevin Hassett of AEI, co-athor of Dow 36,000. (This was mentioned in the latest TRB by J Chait. AEI is rather off democracy at the moment, LOL.)

[Nancy Irving]

oops, the above was from me.

[anne]

Thank you, Nancy. No wonder I had forgotten. Years ago, Paul Krugman had argued fruitlessly with Kevin Hassett about an absurd mistake that Hassett had made on reasonable stock market valuations. Krugman suggested patience for Hassett, who was young and could yet learn. No; Hassett was never about to learn and has only aged to become more absurd.

[anne]

What is coming from American Enterprise Institute, from the supposed think tanks in general, is startlingly mean-spirited even after expecting mean-spiritedness. Brookings on international affairs, by the way, has joined in the AEI anti-democratic lunacies. The pattern is to assert what you wish to assert and know that it will be echoed often enough to be conventional thought.

[Robert Waldmann]

Mark your a good economist, but you just don't understand the big picture as well as Samuelson. He is making a very simple point which is even clearer when one edits.

"From 1950 to 1973, productivity rose 97 percent. [snip] From 1980 to 2005, productivity increased 71 percent.
[snip]
the economy that produces these growing inequalities outperforms the one that created more statistical equality."

To put it even more briefly, but not, I think to distort Samuelson's claim: 71>97. It's simple math.

p.s. What a wanker.

[anne]

Robert Waldmann is a wonder.

[real person from the real world]

Someone above says that the wealthy are wealthy because of investments. Real Estate did make quick money; bank Cds are max at around 4 or 5%, hardly enough to live on; then take a look at the stock market.... like a casino. Day trading was a fad, and now there is other software, but are these people really getting wealthy? Only someone with the money of a Gates who can hire the best managers can get a good return.

On the other hand take a look at who makes what. Rock stars, CEOs, and cronies on corporate boards get billions in bonuses, despite stockholder disapproval. Stockholders are virtually powerless, unless they hold a major percentage of stock, and I am not sure if even then they would have much power. The wealthy are the well paid at the top of the corporate food chain, and have relatively little competition for their jobs. At the bottom rung, you have workers including clerical and office making $10/hr. For IT programming, you have an army of visa slaves working for Vendor Employer middle men who are bleeding off their cuts, or the company offshores to workers over "there" at considerable savings. The Visa guys, btw, make comparatively little. a guy may get $30/hr, while various layers all bleed off up to $20 a piece, while at the top, the US Company gets the guy at the low end of the market range, not exactly a huge savings, but they did get someone who they did not have to pay to train and the Visa guy gets better than average pay. A menchanic may make $80/90 hr, but he has tools, and other expenses.... not going to get super wealthy on that, but he will live better than the $10/hr worker.

Ultimately, the guys getting the obscene money are the guys with the power, at the top of the corporate (or political) pyramid. It's always been like this, just that perhaps now, they skim off more than they use to.

[James Kroeger]

Re: your comments above, RF...

1.The person who just paid $13 million for a Modigliani statue isn't going to be very happy when it comes time to sell if he can only get $5 million.If the Modigliani dropped in market value so precipitously because all art of similar quality had dropped precipitously, then the owner shouldn't be too upset. That is when he can rest assured that he is not going to be hurt in real terms, any more than rich people during the Great Depression were hurt. Most people do not realize that there was just as much 'real wealth' around throughout the entire length of the Great Depression as there was at the end of the Roaring Twenties. Money incomes and wealth accumulations declined, but none of the mansions, yachts, or beachfront property disappeared. Everything the rich bought before The Crash was purchased after The Crash, just at lower prices. Some individual rich individuals lost everything, but the things they would have bought with the wealth they lost were still bought, only by other people.

Yes, on a 'natural' level, most people are not consciously aware of the Big Picture. Few understand that certain kinds of money gains/losses in our economy are utterly deceiving. Whether or not you gain in real terms from an increase in income depends on what happens to everyone else. If your household income increases substantially---and no one else's does---then you gain in real terms because the extra disposable income enables you to outbid others for relatively scarce luxury goods/services. But if your income increases only modestly at a time when everyone else's incomes increases more, then you have actually lost purchasing power within the hierarchy of all income earners. Even if you experience a drop in household income in a particular year, you will nevertheless gain in reals terms if eveyone else loses even more.

2.It seems unlikely that all the countries of the world would put wealth equalization plans into effect at the same time.It may not be likely, but it would be a good idea for the U.S. to use its reputation and its raw economic/political power to try to persuade the rich of other countries to do their Poor & Working Class a favor by emulating the behavior of America's Smart Rich. It should be possible to negate the advantage that the rich people of other countries would otherwise gain by manipulating the official rate of exchange between their currency and the U.S. dollar. Ultimately, whether or not our rich people would lose out in some small way vis-a-vis the rich of other countries should be the very last of our concerns. Relative to each other, they would be in the same boat, hardly struggling with their lofty positions of privilege at the top of America's economic ladder. They have to purchase slightly less exclusive privileges, but they'd also be gaining something for the price they'd be paying, wouldn't they? Think of all the gains in real public wealth that they'd be able to enjoy. What a bargain!

3.It is too easy for people (and firms) to shift assets to lower taxed areas.That is true, today, only because our Stupid Rich have fought any legislative attempts to end tax evasive loopholes like this. I assume that if we could rally enough political support from among the rich for a higher tax regime, we would possess the wisdom to also eliminate all current loopholes...

[bakho]

CTJ has the tax rates on Capital Gains and the top rates since 1916:

http://www.ctj.org/pdf/regcg.pdf

Tax rates for the wealthy have been MUCH lower since 1980.