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Sunday, March 04, 2007

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

    Posted by on Sunday, March 4, 2007 at 02:23 PM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (11)


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