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What if growth had been equal?

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I spent my lunch break reading "Winner-Take-All Politics," and suggest you do the same. It's time well spent. I'll probably be doing a fair amount of blogging from this book over the next few days, but let's start with some graphs.

I talked earlier about "the Conehead economy," the idea that if the economy were a person, its growth over the past few decades would've turned it from a normal-looking individual into a conehead. Jacob Hacker and Paul Pierson get at this idea slightly differently. They've got a table showing how incomes would look if growth had been equally shared from 1979 to 2006 -- much as it was in the decades before 1979. My first thought was to turn their table into a graph. Tables are always better than graphs, right? Well, here's what happened:

if_growth_had_been_shared_equally,_including_top_1%.png

You can't even see what's going on with the middle class. For the record, there are real changes in that graph: If growth had been equally shared, the middle quintile would be making $64,395 today. Instead, they're making $52,100. That's a 23 percent raise those folks didn't get -- and that I'm sure they would've noticed.

But you can't even see it on this graph, which is stretching to accommodate the change in the top 1 percent. As it is, that group made, on average, $1,200,300 in 2006. If growth had been equally shared in the three decades before that, however, their incomes would've been cut by more than half, down to $506,002.

That's real, serious money we're talking about. The top 1 percent now accounts for 23.5 percent of the national income if you include capital gains. In 1979, they only had 9.8 percent of the nation's earnings. During that same period, tax rates on the richest Americans have actually dropped. So as the economy went one way -- toward more money going to the rich -- the tax system went the other.

Hacker and Pierson ran some of the numbers on this: In 2000 the top 0.1 percent had 7.3 percent of the income after taxes. But if taxes had remained at their 1970 rates, they would've only had 4.5 percent. That's a big change in income distribution -- $3 out of every $100 paid out in this country -- and it's entirely attributable to tax policy on the top 0.1 percent of earners. So though there are a lot of pieces to the inequality puzzle, one, undoubtedly, is tax policy.

Now, taxes affect growth, so the discussion is more complicated than just restoring tax rates from the 1970s. There's also the related question of how much of this is zero-sum. The answer, quite clearly, is some, but not all. But the discussion also needs to catch up to amount of income pooling at the top of the economy, which I think is understandably difficult for people to grasp.

Photo credit: Luis Perez/Flickr.

By Ezra Klein  |  September 13, 2010; 3:31 PM ET
Categories:  Inequality  
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Comments

One small correction: the top percentile's share of income was 20.95 percent for 2008, the most recent year in which the IRS data are available. The top percentile's share was 23.5 percent in 2007. In either case, it is a huge proportion of income.

Source: http://elsa.berkeley.edu/~saez/TabFig2008.xls

Posted by: DJM5 | September 13, 2010 3:58 PM | Report abuse

You sound like you think that the "national income" is some sort of a static, given thing, there for the redistributionists to allocate according to their own notion of how things ought to be.

The unspoken premise is that the portion of the "national income" that went to the wealthy would have gone to the less wealthy, had the wealthy not, by some nefarious means, grabbed it all up before anybody else could get their hands on it. This entirely ignores that fact that many of the wealthy actually increased the "national income" through the products, processes, and innovations they created.

Posted by: bgmma50 | September 13, 2010 4:11 PM | Report abuse

I mean, where do you think the growth comes from, anyway?

Posted by: bgmma50 | September 13, 2010 4:15 PM | Report abuse

Ezra, thanks for the heads-up on the book.

"Tables are always better than graphs, right?" reminded me of "getting information from a table is like extracting sunlight from a cucumber."

(Taken from Howard Wainer's new book, "Picturing the Uncertain World." Wainer attributes the cucumber quote to the 19th century brother economists, A. & H. Fahrquhar.)

Posted by: FrankdeLibero | September 13, 2010 4:43 PM | Report abuse

Old quote:

"Mathematics consists in proving the most obvious thing in the least obvious way."

I think you're doing something similar here regarding the notion that if you slash the rich people's tax rates, they become even richer.

Posted by: Nylund154 | September 13, 2010 4:54 PM | Report abuse

A log-socale for the income-axis could provide a more interesting visual.

Posted by: pneogy | September 13, 2010 5:19 PM | Report abuse

What about Slate's Timothy Noah's point in his series on inequality that the effective tax rates actually haven't moved that much? We could raise taxes and make them more effective to help also increase the effective tax rate, but according to Noah's research at least the reduction in effective tax rates on the rich hasn't been a deciding factor in the increase in inequality.

Posted by: goodepicwashpost | September 13, 2010 7:38 PM | Report abuse

As the saying goes, "it takes money to make money." Or put another way, the more money you have, the easier it is to make. The secret to the top's "productivity" is compound interest. And for that, they consider themselves geniuses.

Posted by: cce1976 | September 13, 2010 9:34 PM | Report abuse

I agree with pneogy. That distribution screams "Log scale the y-axis!"

Posted by: zosima | September 13, 2010 10:25 PM | Report abuse

bgamma has half a point. It's true that there's no a priori reason to think that total income would stay the same under some kind of enforced reshaping of the income curve.

That's the half of the point that's valid.

bgamma implies that we need to allow the ultra-rich to take an increasingly large slice of the pie in the name of maximizing the growth of the pie.

First, there's no intuitive reason to think that this should be the case. While a change in the income shape would probably lead to a change in the size of the pie, we shouldn't necessarily think the pie would shrink if more wealth were going to the middle class. Indeed, a perusal of economic history would suggest the opposite. The strongest economies we have seen are those with large, healthy middle classes, not those with concentration of the wealth in a small number of hands.

There are so many examples of this tendency throughout history that one has to be suspicious of anybody who argues the opposite. No, having a small number of people sitting on a large pile of wealth does not imply the greatest total growth.

Compare and contrast, for example, how Norway and Saudi Arabia have parceled out their oil wealth.

If we want a test of the theory, we can compare growth of the American economy in the 1990s with the growth in the 2000s, the latter of which featured a tax system far friendlier to the richest. Seems to me that the economy did far better under the former system.

(And before anybody argues that the wars of the past decade are somehow suppressing economic growth, I would argue that this type of excessive, pointless military spending is a central feature of the aristocratic, militaristic mentality, not a historical accident.)

Posted by: rick_desper | September 13, 2010 11:32 PM | Report abuse

Couldn't you have truncated the scale for the "top 1%" data series? The idea with using a chart is that we're able to share a view of the data and then check to make sure our conclusions match yours. And I can't do that when 7/8 of it is illegible.

Posted by: rusty_spatula | September 14, 2010 9:17 AM | Report abuse

rick_desper If I had intended to say that we need to allow the ultra-rich to take an increasingly large slice of the pie in the name of maximizing the growth of the pie, I would have said so, not implied it. But thank you for granting the validity of the point I did make, which was entirely missing from Ezra's discussion, and which is something that should always be taken into account.

Posted by: bgmma50 | September 14, 2010 10:16 AM | Report abuse

"If we want a test of the theory, we can compare growth of the American economy in the 1990s with the growth in the 2000s, the latter of which featured a tax system far friendlier to the richest. Seems to me that the economy did far better under the former system."

The tax liability for the bottom 50% fell from $38 billion in 2000 to $32 billion in 2007, roughly $271 per capita in 2000 to $213 in 2007 (assuming 140 million and 150 million in those years, respectively). As a percent of AGI, that's a decline of 4.6% to 3.0% over those same years.

The top 1% paid $367 billion in 2000 and $451 billion in 2007, or an increase from $131,000 to $150,000 per capita. As a percent of AGI, the decline was from 27.4% to 22.5%.

While the tax rate on the rich did come down, the tax burden in terms of dollars and in terms of percentage paid incresed for the top 1% during 2000-2007. In 2000, they paid 9.7x as many tax dollars as the bottom 50% (while earning 1.6x as much), in 2007 they paid 14.1x as many tax dollars (earning 1.86x as much).

But isn't that what the theory predicts? Lower tax rates boosts income (earned and reported), for the highest earners?

http://www.taxfoundation.org/news/show/250.html

By the way, the 1990s and the 2000s aren't the only decades we can compare. There are the 1950s and the 1960s. Or we could go further back, to before the income tax took effect, back to the Gilded Age.

From 1871-1912, real GNP averaged 4.7% annual growth, or 2.5% on a per capita basis.

From 1990 to 2000, real GDP averaged 3.6% annual growth, or 2.3% on an annual basis. Not bad, but not quite Gilded age growth - note that there were two Depressions during the Gilded Age, versus one mild recession in the early 1990s.

What if we just look at the booming Clinton years of 1993-2000? Average real GDP growth of 4.0% and 2.8% per capita. No question about it, these were great years.

But to be fair, we then have to look at the boom years of the Gilded Age. Take 1871-1880. Average real GNP growth was 7.4%, per capita 4.6%. By the way, those years include the panic of 1873.

Not just one booming decade, but forty years of rapid average growth.

http://www.bea.gov/national/nipaweb/SelectTable.asp?Selected=Y

http://books.google.com/books?id=a0SESIMXPcwC&lpg=PA788&pg=PA781#v=onepage&q&f=false

http://data.iowadatacenter.org/datatables/UnitedStates/usstpopulation17902000.pdf
(population data interpolated where data unavailable)

"And before anybody argues that the wars of the past decade are somehow suppressing economic growth"

While the wars were indeed a fantastic waste of money (and lives), I suggest the slow growth of the 2000s vis-a-vis the 1990s was primarily due to two factors:

a) Credit/asset bubbles which burst in 2000 and 2006-2008
b) The internet boom powered the 1990s and was largely a done deal by the 2000s.

Posted by: justin84 | September 14, 2010 10:34 AM | Report abuse

It's really annoying when Klein pretends to be economically illiterate to confuse those who are. The whole pie is growing, people have a lot more space and stuff than they did in the 70s, the world is a better place. It's possible for people to get fabulously wealthy.

Of course, Klein continues to use language that implies the top 1% in 1979 are the same people that are there today. Simply not true.

We have wage pressure from a billion Chinese and a billion Indians throwing off Socialism and entering the global marketplace. The worldwide increase in labor quality and quantity is amazing. The loss of our comparative advantage over the rest of the world is the driving factor, and there is almost nothing to be done about it.

You can overtax the financial engine of the economy and drive away the entrepreneurship that still gives us a leg up on Europe, but that would be stupid.

Posted by: staticvars | September 15, 2010 12:46 AM | Report abuse

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