Tag: income distribution

Imaginary Squabbles Part 4: Krugman and DeLong on the Top 1 Percent

In End This Depression Now! (pages 77-78) Paul Krugman offers the strangest arguments I have seen.   The story opens with familiar fulminations about the “top 1 percent” (those earning more than $366,623 in 2011).  As he put it in a 2011 column, “income inequality in America really is about oligarchs versus everyone else.”

“Incomes of the rich,” his book claims, “are at the heart of what has been happening to America’s economy and society.”  Yet it apparently requires great bravery to even dare to mention “the rising incomes” of the top 1 percent or top 0.1 percent:

Merely to raise the issue was to enter a political war zone: income distribution at the top is one of those areas where anyone who raises his head above the parapet will encounter fierce attacks from what amount to hired guns protecting the interests of the wealthy.  For example, a few years ago Thomas Piketty and Emmanuel Saez … found themselves under fire from Alan Reynolds of the Cato Institute, who has spent decades arguing that inequality hasn’t really increased; every time one of his arguments is thoroughly debunked, he pops up with another.

To be called a “hired gun” of the wealthy might be insulting if it was not so ridiculous.  First of all, no employer has ever tried to influence what I write.  Second, I have been a very successful investor and live quite comfortably from realized capital gains plus mandatory distributions from IRA, Keogh and 403(b) accounts that President Obama would regard as much too large.  I negotiated a token salary from Cato (smaller than my Social Security check) but return at least 40 percent of it as a charitable donation.  I am usually in the top 1 percent, at least when stocks are up, and thus not easily bribed.  I would be flabbergasted if Krugman is not also a member of that demonized bunch of oligarchs.

Krugman complains that some of my arguments changed (new ones popped up) over decades, but arguments should change after decades of new data.  I must have made a couple of mistakes since 1992, but mistakes (including Krugman’s) are not evidence of deliberate deception or corruption.

An Alleged Decline in Economic Mobility and Arthur Brooks’s ‘47 Percent Solution’

A Wall Street Journal article by Arthur C. Brooks, president of the American Enterprise Institute, urges presidential candidate Mitt Romney to acknowledge two “simple facts” about income inequality. One is that “low-income Americans are struggling,” which is surely true by definition. The second is that “economic opportunity is declining.” The author scolds the Republican convention for being too cheerful about the facts, as though Romney never mentioned shrinking median income, or high poverty and unemployment.

That second “simple fact” (declining opportunity) is not simple and not a fact. When Mr. Brooks asserts that opportunity is declining, he means “mobility” supposedly declined before 2006 according to one source—a 12-page brief by Katharine Bradbury of the Boston Fed.   But “mobility” is not at all the same as “opportunity,” because studies of this sort treat downward mobility the same as upward mobility. Bradbury is troubled by people making fewer big leaps from one fifth (quintile) to another, which Mr. Brooks likewise defines as declining opportunity; yet her data cannot distinguish ups from downs.

What is ostensibly being measured is the percentage of people in each fifth (quintile) of the income distribution who spend five or six years out of 10 in either the “same or adjacent” quintile. Bradbury compares three 10-year periods: 1976 to 1986, 1986 to 1996, and 1996 to 2006 and finds 27.4 percent remained in the poorest quintile during the earliest period and 25.9 percent in the most recent 10 years.  Since that suggests increasing mobility for the poor, she switches to emphasizing how many remained in either the same “or adjacent” quintile. This permits Bradbury to argue that those in the poorest or richest quintiles “did not move very far.”

Switching to “adjacent” quintiles means anyone in the top or bottom quintile would have to leap all the way to the middle to be counted as having moved at all. Since those at the bottom or top can only move in one direction, Bradbury therefore finds (of course) that for “those in the poorest or richest quintile… mobility is quite low.” People in other quintiles can move either up or down, so their “mobility” appears higher by this peculiar definition, particularly during severe recessions.

It is unsurprising that there was greater movement (up and down) between adjacent income groups in 1976-86, since that period included nasty inflationary recessions in 1980-82, followed by four years of 4.8 percent economic growth. The 1986-96 period, by contrast,  experienced a barely measurable slump in 1991, while 1996-2006 included the exhilarating tech boom of 1997-2000 and the perilous housing boom of 2004-2006. When the economy is rising steadily there is less risk of falling to a lower quintile, hence less movement (aka “mobility”). Since Brooks and Bradbury define income  stability as “declining opportunity,” they would presumably define 1929-33 or 2008-2009 as periods of rising opportunity.

A more serious study of income mobility by Treasury economists Gerald Auten and Geoffery Gee in the June 2009 National Tax Journal found,  “considerable income mobility in the U.S. economy over the 1987–1996 and 1996–2005 periods. Consistent with prior mobility studies, the data show that over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period. By contrast, those with the very highest incomes in the base year [the top 1 percent] were more likely to drop to a lower income group and the median real income of these taxpayers declined in each period. Economic growth resulted in rising incomes for most taxpayers over both time periods.” The largest percentage increases in real incomes were for those initially in the lowest income groups, while the most dramatic downward mobility was among those who had briefly occupied the top 1 percent.  This evidence is consistent with my own work showing that rising income shares for the top 1 percent have been associated with falling poverty rates and vice-versa.

CBO on Income and Tax Distribution

The Washington establishment loves talking about the “distribution” of income and taxes. The CBO has issued a new report on the topic that will no doubt keep the discussion rolling on.

That said, the CBO report has some interesting statistics to consider. Most important are calculations of average federal tax rates, which are total federal taxes paid as a share of income. The chart shows average tax rates by quintiles, which each contain one fifth of U.S. households grouped by income level. The households at the top are hit with the largest burdens by far. Elsewhere, I’ve discussed who some of these high-earning households are and the damage done by nailing them with such high taxes. (For example, see here and here).

Michael Lind’s Economic Philistinism

In a recently published article for the journal Democracy, Michael Lind of the New America Foundation lays out “The Case for Goliath” (registration required) – i.e., for returning to the good old days of price-and-entry regulation and cartelized industries. No, seriously.

I’ll give Lind credit for daring to go where his fellow devotees of “nostalgianomics” fear to tread.  Many on the left these days look back fondly at the ’50s and ’60s when activist government and strong unions coincided with a narrowing income distribution. What they fail to recognize, or at least admit, is that the political economy of that supposed golden age rested on a systematic muting of competition, both by circumstance and deliberate policy.  The devastation of Europe and Japan in World War II, price-and-entry controls, high trade barriers, and the threat of antitrust enforcement against industry leaders all combined to make heavy unionization and above-market wages for union workers economically viable.

This glaring oversight is understandable. There is, after all, overwhelming economic evidence that competition beats cartelization of industry hands down. When government restricts entry by new firms, the predictable result is a stifling of innovation. For example, consider this admission by former FCC chairman Michael Powell: “Because the history of the FCC is, when something happens that it doesn’t understand, kill it. We tried to kill cable. We tried to kill long-distance. When [MCI founder] Bill McGowan starting stringing out microwave towers that threatened AT&T, the FCC tried to stop him. The FCC tried to kill cable because it was going to threaten broadcasting.” (For more details on the the FCC’s lamentable track record, see here.)

The upshot is that progressive fantasies of a return to the good old days are just that – fantasies. Private-sector unions have withered and shrunk not because of changes in labor law, but because unionized firms haven’t been able to hack it in the new, more competitive marketplace (see “Auto industry, U.S.”). So the only way to get back to the days of Big Labor is by throttling the main engine of innovation and productivity: competition. And, well, that just doesn’t sound very progressive, does it?

Lind, though, grasps the nettle and chooses cartels and unions over economic progress. He does try to argue that we can have our cake and eat it too, but his case boils down to a crude post hoc ergo propter hoc fallacy: the big move toward cartelization in the ’30s was followed by good times in the ’50s and ’60s (let’s not talk about the ’70s), so therefore cartelization was good for the economy!  Yes, and the Union won the Civil War with inferior generals, so perhaps poor military leadership is a key to victory. The fact is, the strong economic performance of the early postwar decades occurred in spite of, not because of, widespread restrictions on competition.

Though the anticompetitive nostrums Lind peddles are pure poison, he nonetheless deserves commendation. By identifying correctly the link between cartelization and strong unions, Lind highlights the essentially reactionary nature of progressives’ infatuation with Big Labor. He has therefore, however unwittingly, performed a public service.