Why Is the U.S.’s 1 Percent So Much Richer Than Everywhere Else?
It’s been nearly two years since Occupy Wall Street took over Zuccotti Park, and the academic establishment is still chewing through questions it raised about how to understand the 1 percent in America. In particular, how did they get so darn rich? And what would happen if we took some of their money away?
That’s the focus of this month’s Journal of Economic Perspectives, which features several papers arguing a few sides of the debate, offering some fascinating windows into the nature of extreme wealth. Increasing income inequality is not disputed. The question of why the divide is widening, though, splits economists into two broad camps. One believes that people at the top have used their positions of influence to lock in excessive earnings. The other thinks that people with scarce and unique talents have simply been able to command a premium in markets that have gotten bigger over time.
In the first corner, we have Larry Mishel and Josh Bivens of the Economic Policy Institute, which put out a shorter paper along similar lines in June. They argue that unique features of corporate governance in the U.S. have contributed to pay for CEOs that’s significantly above their foreign counterparts, and hold up the financial sector as an area where managers have commanded outlandish salaries out of step even with returns to their shareholders.
A separate paper, by Facundo Alvaredo, Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, drives home the international comparison:
There is also a very clear correlation between an increasing share of wealth held by the top 1 percent and a decrease in the top marginal tax rate:
These guys conclude that the rich are getting richer because of declining top marginal tax rates, as well as a greater individualization of income that incentivizes managers to spend more time increasing their own pay rather than focusing on employment and economic growth. Under that analysis, it wouldn’t hurt economic growth to tax the rich more, since productivity doesn’t have much to do with compensation anyway.
That’s not the end of explanations for the U.S.’s mounting income inequality. Adam Bonica, Nolan McCarty, Keith T. Poole, and Howard Rosenthal find that it correlates with political polarization:
Polarization leads to gridlock, under which policies needing adjustment–like the minimum wage–tend not to get fixed. Also, without legislative oversight, agencies have more authority and are more subject to industry lobbying, which led to the quiet deregulation of the financial industry.
Even so, the authors note that neither Democrats nor Republicans have done much in recent years to address inequality through policy. There are a few reasons for that: One, the American public’s ire at the super-rich seems largely aimed at “cheaters” in the financial sector, not titans of industry like Bill Gates and Warren Buffett. Two, the lower classes don’t vote as much, in part because they have more immigrants who can’t vote. And three, the economic elite has been more willing to shell out for campaign contributions, making politicians–even supposedly populist Democrats–more sympathetic to their interests:
In the other corner, we have Steven Rauh and Joshua Kaplan. They respond that managerial power and rent-seeking can’t be the dominant cause of the rise in incomes of people in power, because it’s happened across professions with different mechanisms for determining compensation, including law firms, hedge funds, public and private companies, and professional athletics. They also look at the background of people on the Forbes 400 list for the past four decades, and find that a greater share of the wealth is owned by people who didn’t come from money:
Coding industries by whether they have a strong technology component, they find that tech has been a bigger factor in creating super-wealth in the U.S. than in other countries, where energy and natural resources have been most important (they argue that differences in technology investment trumps taxation in explaining why inequality is increasing faster in the U.S.). Finally, they find that while income inequality has increased, wealth inequality has stayed fairly constant, which suggests that increased consumption among top earners–as well as taxation–is keeping them from accumulating too much.
So, economists disagree about the reasons why the top 1 percent are running away with a bigger slice of the pie. Either way, though, the more important question is this: Should we care? And if so, what can we do about it?
Miles Corak offers a compelling reason why we should: It seems that a country’s degree of economic inequality correlates with the ability of its citizens to move up through the ranks.
That probably has a lot to do with education, since higher-income families are better able to invest in expensive opportunities that allow their children entry into the same economic class. America already spends more per student on public education than most other developed countries–but much more of it goes to higher education, rather than grade school, which hampers kids at a formative stage.
At the same time, the top fifth of the economic spectrum still thinks it can make it into the top 100th. “For them,” Corak writes, “the ‘American Dream’ lives on, and as a result they are likely not predisposed, with their considerable political and cultural influence are likely not predisposed, to support the recasting of American public policy to meet its most pressing need, the upward mobility of those at the bottom.”
Finally, the journal turns to Greg Mankiw for a riposte, appropriately titled “Defending the One Percent.” Unsatisfied that income inequality is economically inefficient (i.e., that it leads to less productivity overall) or that it stems primarily from inequality of opportunity, he concludes that we have to decide whether inequality of outcome is itself undesirable. He then disregards the Left’s arguments for income redistribution, saying the U.S.’s tax system is already fairly progressive, CEOs are probably compensated in proportion to their economic contributions rather than because of leveraging their positions, and the growth in government spending has more to do with transfer payments to the poor than infrastructure used by the rich anyway.
In the end, Mankiw says, the question of redistribution is more one of morals and political philosophy than absolute utility. “Economists can turn to empirical methods to estimate key parameters, but no amount of applied econometrics can bridge this philosophical divide,” he writes.
He’s right, at least in saying that public policy is unlikely to be determined by conclusive economic evidence. Both sides have built cases around different metrics, and deride the other side’s methodology as inadequate or incomplete (they’re also not mutually exclusive–both sides are probably a little bit right). But now that we’ve recognized that inequality is real and getting worse, it’s better to have a debate about what to do about it with more information rather than less.