22.6.11

FOLLOW THE MONEY.  A recent study of income equality confirms that the nerds beat the jocks.
For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1% of earners took in more than 10% of the personal income in the United States, including capital gains, and the top 1% took in more than 20%. But economists had little idea who these people were. How many were Wall Street financiers? Sports stars? Entrepreneurs? Economists could only speculate, and debates over what is fair stalled.

Now a mounting body of economic research indicates that the rise in pay for company executives is a critical feature in the widening income gap.

The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1% of earners make about $1.7 million or more, including capital gains. Of those, 41% were executives, managers and supervisors at nonfinancial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately held firms. An additional 18% were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60% fell into one of those two categories.
The political economy of getting rich is about what you would expect.
Inequality, economists have noted, is an essential part of capitalism. At least in theory, "the invisible hand," or market system, sets compensation levels to lead workers into pursuits that are the most productive to society. This produces inequality but leads to a more efficient economy.

As a result, economists have noted, there is an inherent tension in market-oriented democracies, because while society aims to endow each person with equal political rights, it allows very unequal economic outcomes.

Americans have been uneasy about the income gap at least since the '80s, according to polls.

Repeated surveys by the National Opinion Research Center since 1987 have found that 60% or more of Americans agree or strongly agree with the statement that "differences in income in America are too large."

The uneasiness arises out of the fear that extremes of wealth can unfairly reduce the economic opportunities and political rights of everyone else, according to sociologists. The wealthy, for example, can afford better private schools for their children or acquire political might by purchasing campaign advertising or making campaign donations. Moreover, as millions struggle to find jobs in the wake of the recession, the notion that the very wealthiest are gaining ground strikes some as unfair.

"Americans think income inequality is excessive and have done so consistently for years," said Leslie McCall, a sociology professor at Northwestern University who is writing a book on the subject. "Their concerns arise when it seems that extreme incomes for some are restricting opportunities for everyone else."

Whatever people think of it, the gap between the very highest earners and everyone else has been widening significantly.
But it's not about entertainers and pro sports and lobbyists.
After executives, managers and financial professionals, the next largest groups in the top 0.1% of earners were lawyers with 6.2% and real estate professionals at 4.7%. Media and sports figures, who are often assumed to represent a large portion of very high-income earners, collectively made up only 3%.

"Basically, executives represent a much bigger share of the top incomes than a lot of people had thought," said Bakija, a professor at Williams College, who with his co-authors is continuing the research.
The charts that accompany the article also show a few salespeople, professors and scientists, and farmers and ranchers with annual incomes in excess of $1.7 million.

Evaluate the numbers carefully: the top one-tenth-of one percent begins at $1.7 million, the average over those 152,000 households is $5.6 million, and the top earner's reported income is not disclosed, but is not bounded from above.  On the other hand, the average for the bottom ninety percent is $31,244.  The incomes of those 137.2 million households are bounded from below by zero, and bounded above at about $80,000.  That last figure is not stated in the article, it's an educated guess.  Where incomes are bounded from below but not from above, statements about inequality that focus on widening gaps between top and bottom are in part artifacts of an expanding universe:  the political economy issue is really whether there are fewer private schools (or schools that come bundled with granite countertops) than there used to be.

The detailed charts suggest that the folks just above the upper middle class have also done well.  The approximately 14 million households in the ninetieth to ninety-ninth percentile show income gains.  I may have to check on Google Scholar from a work computer to see if the working paper from which this research comes is available, and if the lower percentiles are disaggregated.  That disaggregation would be instructive as to whether we're observing an economic analogue to an expanding universe, or if all percentiles up to the ninetieth have lost ground.

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